As filed with the Securities and Exchange Commission on April 30, 20182019

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form20-F

 

 

(Mark One)

☐

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

☒

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 20172018

OR

 

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                    

OR

 

☐

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)

 

(Jurisdiction of

incorporation or organization)

 

 

20, Sejong-daero9-gil,Jung-gu

Seoul 04513, Korea

(Address of principal executive offices)

 

 

Yu Sunghun,Park Cheolwoo, +822 6360 3071(T)3129 (T), irshy@shinhan.com,cheol.park@shinhan.com, +822 6360 3098 (F), 20, Sejong-daero9-gil,Jung-gu, Seoul 04513, 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*Exchange*
American depositary shares 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: 474,199,587470,650,928 shares of common stock, par value of Won 5,000 per share.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:Yes   ☒    No  ☐

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:Yes  ☐    No  ☒

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.Yes  ☒    No  ☐

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 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule12b-2 of the Exchange Act.

 

Large accelerated filer

 ☒     Accelerated filer ☐ 

Non-accelerated filer

 ☐     Emerging growth company ☐ 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.☐

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP  ☐  

International Financial Reporting Standards as issued

by the International Accounting Standards Board  ☒

  Other  ☐

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 17  ☐    Item 18  ☐

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act):Yes  ☐    No  ☒

(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:Yes  ☐    No  ☐

 

 

 

TABLE OF CONTENTS

 

          Page 

PART I

      
 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS   3 
 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE   3 
 ITEM 3. KEY INFORMATION   3 
  ITEM 3.A.  Selected Financial Data   3 
  ITEM 3.B.  Capitalization and Indebtedness   910 
  ITEM 3.C.  Reasons for the Offer and Use of Proceeds   10 
  ITEM 3.D.  Risk Factors   10 
 ITEM 4. INFORMATION ON THE COMPANY   4346 
  ITEM 4.A.  History and Development of the Company   4346 
  ITEM 4.B.  Business Overview   4751 
  ITEM 4.C.  Organizational Structure   179190 
  ITEM 4.D.  Properties   180191 
 ITEM 4A. UNRESOLVED STAFF COMMENTS   181192 
 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS   181192 
  ITEM 5.A.  Operating Results   181192 
  ITEM 5.B.  Liquidity and Capital Resources   228235 
  ITEM 5.C.  Research and Development, Patents and Licenses, etcetc..   233240 
  ITEM 5.D.  Trend Information   233240 
  ITEM 5.E.  Off-Balance Sheet Arrangements   234240 
  ITEM 5.F.  Tabular Disclosure of Contractual Obligations   234241 
 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES   234241 
  ITEM 6.A.  Directors and Senior Management   234241 
  ITEM 6.B.  Compensation   238245 
  ITEM 6.C.  Board Practices   239246 
  ITEM 6.D.  Employees   241249 
  ITEM 6.E.  Share Ownership   242249 
 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS   243250 
  ITEM 7.A.  Major Shareholders   243250 
  ITEM 7.B.  Related Party Transactions   243250 
  ITEM 7.C.  Interests of Experts and Counsel   244251 
 ITEM 8. FINANCIAL INFORMATION   244251 
  ITEM 8.A.  Consolidated Statements and Other Financial Information   244251 
  ITEM 8.B.  Significant Changes   245252 
 ITEM 9. THE OFFER AND LISTING   245253 
  ITEM 9.A.  Offer and Listing Details   245253 
  ITEM 9.B.  Plan of Distribution   246253 
  ITEM 9.C.  Markets   246253 
  ITEM 9.D.  Selling Shareholders   253260 
  ITEM 9.E.  Dilution   253260 
  ITEM 9.F.  Expenses of the Issue   254261 
 ITEM 10. ADDITIONAL INFORMATION   254261 
  ITEM 10.A.  Share Capital   254261 
  ITEM 10.B.  Memorandum and Articles of Incorporation   254261 
  ITEM 10.C.  Material Contracts   261268 
  ITEM 10.D.  Exchange Controls   261268 
  ITEM 10.E.  Taxation   262269 
  ITEM 10.F.  Dividends and Paying Agents   270277 
  ITEM 10.G.  Statements by Experts   270277 

 

i

          Page 
  ITEM 10.H.  Documents on Display   271278 
  ITEM 10.I.  Subsidiary Information   271278 
 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   271278 
 

ITEM 12.

 DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES   271278 
  

ITEM 12.A.

  Debt Securities   271278 
  

ITEM 12.B.

  Warrants and Rights   271278 
  

ITEM 12.C.

  Other Securities   271278 
  

ITEM 12.D.

  American Depositary Shares   272278 

PART II

  
 

ITEM 13.

 DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES   273280 
 

ITEM 14.

 MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS   274280 
 

ITEM 15.

 CONTROLS AND PROCEDURES   274280 
 

ITEM 16.

 [RESERVED]   275281 
 

ITEM 16A.

 AUDIT COMMITTEE FINANCIAL EXPERT   275281 
 

ITEM 16B.

 CODE OF ETHICS   275282 
 

ITEM 16C.

 PRINCIPAL ACCOUNTANT FEES AND SERVICES   275282 
 

ITEM 16D.

 EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES   276283 
 

ITEM 16E.

 PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS   276283 
 

ITEM 16F.

 CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT   276283 
 

ITEM 16G.

 CORPORATE GOVERNANCE   276283 
 

ITEM 16H.

 MINE SAFETY DISCLOSURE   281288 

PART III

  
 

ITEM 17.

 FINANCIAL STATEMENTS   281288 
 

ITEM 18.

 FINANCIAL STATEMENTS   281288 
 

ITEM 19.

 EXHIBITS   281288 

INDEX OF EXHIBITS

   282289 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

   F-1 

 

ii

CERTAIN DEFINED TERMS, CONVENTIONS AND CURRENCY OF PRESENTATION

Unless otherwise specified or the context otherwise requires:

 

the terms “we,” “us,” “our,” “Shinhan Financial Group,” “SFG” and the “Group” mean Shinhan Financial Group Co., Ltd. and its consolidated subsidiaries; and

 

the terms “Shinhan Financial Group Co., Ltd.,” “our company” and “our holding company” mean Shinhan Financial Group Co., Ltd.

All references to “Korea” or the “Republic” contained in this annual report are to the Republic of Korea. All references to the “Government” are to the government of the Republic of Korea. References to the “Financial Services Commission” are to the Financial Services Commission of Korea, and references to the “Financial Supervisory Service” are to the Financial Supervisory Service of Korea, the executive body of the Financial Services Commission.

The fiscal year for us and our subsidiaries ends on December 31 of each year. Unless otherwise specified or the context otherwise requires, 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 the 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 atW1,067.41,112.9 to US$1.00, which was the noon buying rate in the City of New York on December 29, 201731, 2018 for cable transfers according to the H.10 statistical release of the Federal Reserve Board (the “Noon Buying Rate”). On April 13, 2018,19, 2019, the Noon Buying Rate wasW1,070.61,135.4 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 annual report has been prepared on a consolidated basis in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

Any discrepancies in the tables included herein between totals and sums of the amounts listed are due to rounding.

FORWARD LOOKING STATEMENTS

This annual 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 annual 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 annual report discloses, under the caption “Item 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.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 and/or regulatory developments. We caution you not to place undue reliance on the forward-looking statements, which speak only as of the date of this 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.

ITEM 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

 

ITEM 2.

OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

 

ITEM 3.

KEY INFORMATION

 

ITEM 3.A.

Selected Financial Data

The selected consolidated income statement and balance sheet data set forth below for the years ended December 31, 2013, 2014, 2015, 2016, 2017 and 20172018 have been derived from our consolidated financial statements which have been prepared in accordance with IFRS as issued by the IASB. Our consolidated financial statements as of and for the years ended December 31, 2013, 2014, 2015, 2016, 2017 and 20172018 have been audited by independent registered public accounting firm KPMG Samjong Accounting Corp. Beginning on January 1, 2018, we have adopted IFRS 9 ‘Financial Instruments’ and IFRS 15 ‘Revenue from Contracts with Customers’. In accordance with the guidance in IFRS 9 and IFRS 15, an entity that adopts the classification and measurement requirements of these standards need not restate prior periods. For further details regarding these changes and the transition effects of the adoption of these new standards, see “Item 5.A. Operating Results — Critical Accounting Policies — Recently Adopted Standards and Interpretations — IFRS 9, ‘Financial Instruments’ and IFRS 15, ‘Revenue from Contracts with Customers’” and Note 60 of the notes to our consolidated financial statements included in this report. As the restatement of prior periods is not required, certain of our historical financial information as of and for the years ended December 31, 2016 and 2017 is not directly comparable against that of our financial information after January 1, 2018.

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.” Historical results are not necessarily indicative of future results.

Consolidated Income Statement Data

 

  Year Ended December 31, 
  2013  2014  2015  2016  2017  2017(1) 
  (In billions of Won and millions of US$, except per common share data) 

Interest income

 W12,591  W12,061  W11,130  W11,236  W11,799  $11,054 

Interest expense

  (5,986)   (5,271)   (4,437)   (4,031)   (3,956)   (3,706) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net interest income

  6,605   6,790   6,693   7,205   7,843   7,348 

Fees and commission income

  3,490   3,561   3,897   3,804   4,045   3,790 

Fees and commission expense

  (2,103)   (2,091)   (2,276)   (2,238)   (2,334)   (2,187) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net fees and commission income

  1,387   1,469   1,621   1,566   1,711   1,603 

Net insurance loss

  (383)   (413)   (432)   (419)   (460)   (431) 

Dividend income

  156   176   308   282   257   241 

Net trading income (loss)

  75   262   (344)   370   963   902 

Net foreign currency transaction gain

  296   224   78   462   364   341 

Net gain (loss) on financial instruments designated at fair value through profit or loss

  (122)   (361)   460   (502)   (1,060)   (993) 

Net gain on sale ofavailable-for-sale financial assets

  701   681   772   648   499   468 

Impairment losses on financial assets

  (1,340)   (1,174)   (1,264)   (1,196)   (1,015)   (951) 

General and administrative expenses

  (4,203)   (4,463)   (4,475)   (4,509)   (4,811)   (4,507) 

Net other operating expenses

  (540)   (536)   (444)   (798)   (462)   (434) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Operating income

  2,632   2,655   2,973   3,109   3,829   3,587 

Equity method income

  7   31   21   10   20   19 

Othernon-operating income (loss), net

  37   182   147   52   (53)   (49) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Profit before income taxes

  2,676   2,868   3,141   3,171   3,796   3,557 

Income tax expense

  (621)   (668)   (695)   (346)   (848)   (795) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Profit for the year

 W2,055  W2,200  W2,446  W2,825  W2,948  $2,762 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
   Year Ended December 31, 
   2014  2015  2016  2017  2018  2018(1) 
   (In billions of Won and millions of US$, except per common share data) 

Interest income

  W12,061  W11,130  W11,236  W11,799  W13,572  $12,196 

Interest expense

   (5,271)   (4,437)   (4,031)   (3,956)   (4,992)   (4,486) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net interest income

   6,790   6,693   7,205   7,843   8,580   7,710 

Fees and commission income

   3,561   3,897   3,804   4,045   3,295   2,961 

Fees and commission expense

   (2,091)   (2,276)   (2,238)   (2,334)   (1,356)   (1,219) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net fees and commission income

   1,469   1,621   1,566   1,711   1,939   1,742 

Net insurance loss

   (413)   (432)   (419)   (460)   (472)   (424) 

Dividend income

   176   308   282   257   88   79 

Net gain on financial instruments at fair value through profit or loss

   —   —   —   —   420   377 

Net gain on financial instruments at fair value through profit or loss (overlay approach)

   —   —   —   —   75   67 

Net trading income (loss)

   262   (344)   370   963   —   — 

Net loss on financial instruments designated at fair value through profit or loss (IFRS 9)

   —   —   —   —   (27)   (24) 

Net gain (loss) on financial instruments designated at fair value through profit or loss (IAS 39)

   (361)   460   (502)   (1,060)   —   — 

Net foreign currency transaction gain

   224   78   462   364   194   174 

Net gain on disposal of financial asset at fair value through other comprehensive income

   —   —   —   —   21   18 

 Year Ended December 31,   Year Ended December 31, 
 2013 2014 2015 2016 2017 2017(1)   2014 2015 2016 2017 2018 2018(1) 
 (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) 

Net gain on disposal ofavailable-for-sale financial assets

   681  772  648  499   —   — 

Provision for credit loss allowance

   —   —   —   —  (748)  (672) 

Impairment loss on financial assets

   (1,174)  (1,264)  (1,196)  (1,014)   —   — 

General and administrative expense

   (4,463)  (4,475)  (4,509)  (4,811)  (4,742)  (4,261) 

Net other operating expenses

   (536)  (444)  (798)  (462)  (829)  (744) 
  

 

  

 

  

 

  

 

  

 

  

 

 

Operating income

   2,655   2,973   3,109   3,830   4,499   4,042 

Equity method income

   31  21  10  20  17  16 

Othernon-operating income (expense), net

   182  147  52  (53)  (50)  (44) 
  

 

  

 

  

 

  

 

  

 

  

 

 

Profit before income taxes

   2,868   3,141   3,171   3,797   4,466   4,014 

Income tax expense

   (668)  (695)  (346)  (848)  (1,268)  (1,140) 
  

 

  

 

  

 

  

 

  

 

  

 

 

Profit for the year

  W2,200  W2,446  W2,825  W2,949  W3,198  $2,874 
  

 

  

 

  

 

  

 

  

 

  

 

 

Other comprehensive income (loss) for the year, net of income tax

             

Items that are or may be reclassified to profit or loss:

             

Gain on financial asset at fair value through other comprehensive income

  W—  W—  W—  W—  W161  $145 

Loss on financial instruments at fair value through profit or loss (overlay approach)

   —   —   —   —  (54)  (49) 

Gain (loss) onavailable-for-sale financial assets

   136  (266)  (434)  (323)   —   — 

Equity in other comprehensive income (loss) of associates

   6  12  3  (23)  7  7 

Foreign currency translation adjustments for foreign operations

 W(58)  W(13)  W(6)  W12  W(194)  $(182)    (13)  (6)  12  (194)  20  18 

Net change in unrealized fair value ofavailable-for-sale financial assets

 (269)  136  (266)  (434)  (323)  (303) 

Equity in other comprehensive income (loss) of associates

 (5)  6  12  3  (23)  (21) 

Net change in unrealized fair value of cash flow hedges

 6  (16)  3  (1)  16  15    (16)  3  (1)  16  (20)  (18) 

Other comprehensive income (loss) of separate account

 (2)  6  2  (4)  (9)  (9)    6  2  (4)  (9)  9  7 
 

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 
 (328)  119  (255)  (424)  (533)  (500)    119  (255)  (424)  (533)  123  110 
 

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Items that will never be reclassified to profit or loss:

             

Remeasurements of defined benefit liability

 19  (154)  (82)  15  103  97 

Equity in other comprehensive income (loss) of associates

  —   —   —   —  1  1 

Remeasurements of the defined benefit liability

   (154)  (82)  15  103  (93)  (84) 

Equity in other comprehensive income of associates

   —   —   —  1   —   — 

Valuation gain on financial asset at fair value through other comprehensive income

   —   —   —   —  23  20 

Loss on disposal of financial asset at fair value through other comprehensive income

   —   —   —   —  (3)  (2) 

Changes in own credit risk on financial liabilities designated at fair value through profit of loss

   —   —   —   —  2  2 
 

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 
 19  (154)  (82)  15  104  98    (154)  (82)  15  104  (71)  (64) 
 

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Total other comprehensive loss, net of income tax

 (309)  (36)  (337)  (409)  (429)  (402) 

Total other comprehensive income (loss), net of income tax

   (36)  (337)  (409)  (429)  52  46 
 

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Total comprehensive income for the year

 W1,746  W2,164  W2,109  W2,416  W2,519  $2,360   W2,164  W2,109  W2,416  W2,520  W3,250  $2,920 
 

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Net income attributable to:

      

Profit for the year attributable to:

       

Equity holders of the Group

 W1,898  W2,081  W2,367  W2,775  W2,918  $2,733   W2,081  W2,367  W2,775  W2,919  W3,156  $2,837 

Non-controlling interest

 157  119  79  50  30  29    119  79  50  30  42  37 

Total comprehensive income attributable to:

             

Equity holders of the Group

 1,591  2,046  2,034  2,367  2,490  2,333    2,046  2,034  2,367  2,491  3,208  2,882 

Non-controlling interest

 155  118  75  49  29  27    118  75  49  29  42  38 

Earnings per share:

      

Basic earnings per share in Won and US$(2)

 3,810  4,195  4,789  5,736  6,116  5.73 

Dilutive earnings per share in Won and US$(3)

 3,810  4,195  4,789  5,736  6,116  5.73 

   Year Ended December 31, 
   2014   2015   2016   2017   2018   2018(1) 
   (In billions of Won and millions of US$, except per common share data) 

Earnings per share:

            

Basic earnings per share in Won and US$(2)

   4,195    4,789    5,736    6,118    6,579    5.91 

Dilutive earnings per share in Won and US$(3)

   4,195    4,789    5,736    6,118    6,579    5.91 

 

Notes:

 

(1)

Won amounts are expressed in U.S. Dollar at the rate ofW1,067.41,112.9 to US$1.00, the Noon Buying Rate in effect on December 29, 201731, 2018 for the convenience of readers. No representation is made that the Won or U.S. Dollar amounts referred to above could have been or could be converted into U.S. Dollars or Won, as the case may be, at any particular rate or at all.

(2)

Basic earnings per share are calculated by dividing net incomeprofit for the year available to holders of our common shares by the weighted average number of common shares issued and outstanding for the relevant period.

(3)

Dilutive earnings per share are calculated in a manner consistent with 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. Common shares issuable upon conversion of redeemable convertible preferred shares are potentially dilutive.

Consolidated Balance Sheet Data

 

  2013  2014  2015  2016  2017  2017(1) 
  (In billions of Won and millions of US$, except per common share data) 

Assets

      

Cash and due from banks

 W16,473  W20,585  W22,024  W19,181  W22,669  $21,237 

Trading assets

  18,033   24,362   22,638   26,696   28,464   26,667 

Financial assets designated at fair value through profit or loss

  3,361   2,737   3,244   3,416   3,579   3,353 

Derivative assets

  1,717   1,568   1,995   3,003   3,400   3,185 

Loans, net

  205,723   221,618   246,441   259,011   275,566   258,165 

Available-for-sale financial assets

  33,597   31,418   33,966   37,663   42,117   39,458 

Held-to-maturity financial assets

  11,031   13,373   16,192   19,805   24,991   23,413 

Property and equipment, net

  3,214   3,147   3,055   3,146   3,022   2,831 

Intangible assets, net

  4,226   4,153   4,266   4,227   4,272   4,002 

Investments in associates

  329   342   393   354   631   591 

Current tax receivable

  6   11   10   13   25   23 

Deferred tax assets

  196   228   164   641   592   555 

Investment properties, net

  690   268   209   353   418   392 

Other assets, net

  12,451   14,203   15,947   18,167   16,552   15,508 

Assets held for sale

  243   9   4   4   8   7 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total assets

 W311,290  W338,022  W370,548  W395,680  W426,306  $399,387 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Liabilities

     

Deposits

 W178,810  W193,710  W217,676  W235,138  W249,419  $233,670 

Trading liabilities

  1,258   2,689   2,135   1,977   1,848   1,732 

Financial liabilities designated at fair value through profit or loss

  5,909   8,996   8,916   9,234   8,298   7,774 

Derivative liabilities

  2,019   1,718   2,599   3,528   3,488   3,267 

Borrowings

  20,143   22,974   21,734   25,294   27,587   25,845 

Debt securities issued

  37,491   37,335   41,221   44,327   51,341   48,099 

Liability for defined benefit obligations

  118   309   226   131   7   7 

Provisions

  750   694   699   729   429   402 

Current tax payable

  239   257   142   273   349   327 

Deferred tax liabilities

  15   10   16   11   10   9 

Liabilities under insurance contracts

  15,662   17,776   20,058   22,377   24,515   22,967 

Other liabilities

  19,021   21,040  ��23,313   20,916   25,312   23,714 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total liabilities

 W281,435  W307,507  W338,735  W363,935  W392,603  $367,813 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  As of December 31, 
  2014  2015  2016  2017  2018  2018(1) 
  (In billions of Won and millions of US$, except per common share data) 

Assets

      

Cash and due from banks at amortized cost

 W—  W—  W—  W—  W17,349  $15,589 

Cash and due from banks

  20,585   22,024   19,181   22,669   —   — 

Financial assets at fair value through profit or loss

  —   —   —   —   43,535   39,118 

Trading assets

  24,362   22,638   26,696   28,464   —   — 

Financial assets designated at fair value through profit or loss (IAS 39)

  2,737   3,244   3,416   3,579   —   — 

Derivative assets

  1,568   1,995   3,003   3,400   1,794   1,612 

Securities at fair value through other comprehensive income

  —   —   —   —   38,314   34,427 

Available-for-sale financial assets

  31,418   33,966   37,663   42,117   —   — 

Securities at amortized cost

  —   —   —   —   28,478   25,589 

Held-to-maturity financial assets

  13,373   16,192   19,805   24,991   —   — 

Loans at amortized cost

  —   —   —   —   299,609   269,215 

Loans

  221,618   246,441   259,011   275,566   —   — 

Property and equipment

  3,147   3,055   3,146   3,022   3,004   2,699 

Intangible assets

  4,153   4,266   4,227   4,273   4,320   3,882 

Investments in associates

  342   393   354   631   671   603 

Current tax receivable

  11   10   13   25   45   41 

Deferred tax assets

  228   164   641   592   427   384 

Investment property

  268   209   353   418   475   427 

Other assets

  14,203   15,947   18,167   16,552   21,572   19,383 

Assets held for sale

  9   4   4   8   8   7 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total assets

 W338,022  W370,548  W395,680  W426,307  W459,601  $412,976 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Liabilities

     

Deposits

 W193,710  W217,676  W235,138  W249,419  W265,000  $238,117 

 2013 2014 2015 2016 2017 2017(1)  As of December 31, 
 (In billions of Won and millions of US$, except per common share data)  2014 2015 2016 2017 2018 2018(1) 
 (In billions of Won and millions of US$, except per common share data) 

Financial liabilities at fair value through profit or loss

  —   —   —   —  1,420  1,276 

Trading liabilities

 2,689  2,135  1,977  1,848   —   — 

Financial liabilities designated at fair value through profit or loss (IFRS 9)

  —   —   —   —  8,536  7,670 

Financial liabilities designated at fair value through profit or loss (IAS 39)

 8,996  8,916  9,234  8,298   —   — 

Derivative liabilities

 1,718  2,599  3,528  3,488  2,440  2,192 

Borrowings

 22,974  21,734  25,294  27,587  29,819  26,794 

Debt securities issued

 37,335  41,221  44,327  51,341  63,228  56,813 

Liability for defined benefit obligations

 309  226  131  7  127  114 

Provisions

 694  699  729  429  508  457 

Current tax payable

 257  142  273  349  430  387 

Deferred tax liabilities

 10  16  11  10  22  20 

Liabilities under insurance contracts

 17,776  20,058  22,377  24,515  26,219  23,559 

Other liabilities

 21,040  23,313  20,916  25,312  25,200  22,643 
 

 

  

 

  

 

  

 

  

 

  

 

 

Total liabilities

 W307,507  W338,735  W363,935  W392,603  W422,949  $380,042 
 

 

  

 

  

 

  

 

  

 

  

 

 

Equity

          

Capital stock

 W2,645  W2,645  W2,645  W2,645  W2,645  $2,478  W2,645  W2,645  W2,645  W2,645  W2,645  $2,377 

Hybrid bond

 537  537  737  498  424  397 

Hybrid bonds

 537  737  498  424  1,532  1,376 

Capital surplus

 9,887  9,887  9,887  9,887  9,887  9,263  9,887  9,887  9,887  9,887  9,896  8,893 

Capital adjustments

 (393)  (393)  (424)  (458)  (398)  (373)  (393)  (424)  (458)  (398)  (553)  (497) 

Accumulated other comprehensive income

 673  638  305  (102)  (530)  (496) 

Accumulated other comprehensive income(loss)

 638  305  (102)  (530)  (753)  (677) 

Retained earnings

 14,189  15,869  17,690  18,640  20,791  19,478  15,869  17,690  18,640  20,792  22,959  20,630 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total equity attributable to equity holders of the Group

 27,538  29,184  30,840  31,110  32,819  30,747  29,184  30,840  31,110  32,820  35,726  32,102 

Non-controlling interest

 2,317  1,331  973  635  884  827 

Non-controlling interests

 1,331  973  635  884  926  832 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total equity

 W29,855  W30,515  W31,813  W31,745  W33,703  $31,574  W30,515  W31,813  W31,745  W33,704  W36,652  $32,934 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total liabilities and equity

 W311,290  W338,022  W370,548  W395,680  W426,306  $399,387  W338,022  W370,548  W395,680  W426,307  W459,601  $412,976 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

 

Note:

 

(1)

Won amounts are expressed in U.S. Dollar at the rate ofW1,067.41,112.9 to US$1.00, the Noon Buying Rate in effect on December 29, 201731, 2018 for the convenience of readers. No representation is made that the Won or U.S. Dollar amounts referred to above could have been or could be converted into U.S. Dollars or Won, as the case may be, at any particular rate or at all.

Dividends

 

  Year Ended December 31,   Year Ended December 31, 
  2013   2014   2015   2016   2017   2014   2015   2016   2017   2018 
  (In Won and US$)   (In Won and US$) 

Cash dividends per share of common stock:

                    

In Korean Won

  W650   W950   W1,200   W1,450   W1,450   W950   W1,200   W1,450   W1,450   W1,600 

In U.S. Dollars(1)

  $0.62   $0.87   $1.03   $1.20   $1.36   $0.87   $1.03   $1.20   $1.36   $1.44 

Cash dividends per share of preferred stock:

                    

In Korean Won

  W5,580   W5,580   W5,580   WN/A   WN/A   W5,580   W5,580   WN/A   WN/A   WN/A 

In U.S. Dollars(1)

  $5.29   $5.12   $4.77   $N/A   $N/A   $5.12   $4.77   $N/A   $N/A   $N/A 

 

N/A = not available

Note:

 

(1)

Won amounts for 2013, 2014, 2015, 2016, 2017 and 20172018 are expressed in U.S. Dollar at the rate ofW1,055.3,W1,090.9,W1,169.3,W1,203.7,W1,067.4 andW1,067.4,1,112.9, respectively, to US$1.00, the Noon Buying Rate in effect on December 31, 2013, 2014, 2015, 2016, 2017 and 2017,2018, respectively, for the convenience of readers. No representation is made that the Won or U.S. Dollar amounts referred to above could have been or could be converted into U.S. Dollars or Won, as the case may be, at any particular rate or at all.

Selected Statistical Information

Profitability Ratios and Other Data

 

  Year Ended December 31,   Year Ended December 31, 
  2013 2014 2015 2016 2017   2014 2015 2016 2017 2018 
  (Percentages)   (Percentages) 

Net income attributable to the Group as a percentage of:

            

Average total assets(1)

   0.66%  0.68%  0.69%  0.73%  0.72%    0.68%  0.69%  0.73%  0.72%  0.72% 

Average total Group stockholders’ equity(1)

   7.03  7.25  7.87  8.97  8.94    7.25  7.87  8.97  8.94  9.23 

Dividend payout ratio(2)

   19.47  24.66  27.21  25.62  23.92    24.66  27.21  25.62  23.92  24.81 

Net interest spread(3)

   1.95  1.93  1.78  1.83  1.94    1.93  1.78  1.83  1.94  1.91 

Net interest margin(4)

   2.36  2.31  2.08  2.06  2.13    2.31  2.08  2.06  2.13  2.14 

Efficiency ratio(5)

   88.25  87.31  88.15  88.73  89.04    87.31  88.15  88.73  89.04  85.36 

Cost-to-income ratio(6)

   52.41  55.32  52.74  51.34  52.39    55.32  52.74  51.34  52.39  47.51 

Cost-to-average assets ratio(1)(7)

   6.48  6.09  6.56  6.45  7.48    6.09  6.56  6.45  7.48  5.84 

Equity to average asset ratio(1)(8)

   9.43  9.36  8.72  8.14  8.00    9.36  8.72  8.14  8.00  7.77 

 

Notes:

 

(1)

Average total assets (including average interest-earning assets), liabilities (including average interest-bearing liabilities) and stockholder’s equity are based on (a) daily balances for Shinhan Bank and (b) quarterly balances for other subsidiaries.

(2)

Represents the ratio of total dividends declared on common and preferred stock and hybrid bonds as a percentage of net income attributable to the Group.

(3)

Represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(4)

Represents the ratio of net interest income to average interest-earning assets.

(5)

Represents the ratio ofnon-interest expense to the sum of net interest income andnon-interest income. Efficiency ratio is used as 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, 
  2013 2014 2015 2016 2017   2014 2015 2016 2017 2018 
  (In billions of Won, except percentages)   (In billions of Won, except percentages) 

Non-interest expense (A)

  W20,100  W19,733  W23,368  W24,957  W30,831   W19,733  W23,368  W24,957  W30,831  W26,042 

Divided by

            

The sum of net interest income andnon-interest income (B)

   22,776  22,601  26,509  28,127  34,627    22,601  26,509  28,127  34,627  30,508 

Net interest income

   6,605  6,790  6,693  7,205  7,843    6,790  6,693  7,205  7,843  8,580 

Non-interest income

   16,171  15,811  19,816  20,922  26,784    15,811  19,816  20,922  26,784  21,928 

Efficiency ratio ((A) as a percentage of (B))

   88.25%  87.31%  88.15%  88.73%  89.04%    87.31%  88.15%  88.73%  89.04%  85.36% 

 

(6)

Represents the ratio of general and administrative expenses to the sum of net interest income, net fee and commission income, net gain on financial assets and liabilities at fair value through profit or loss and net other operating income.

(7)

Represents the ratio ofnon-interest expense to average total assets.

(8)

Represents the ratio of average stockholders’ equity to average total assets.

Asset Quality Ratios

 

  As of December 31,   As of December 31, 
  2013 2014 2015 2016 2017   2014 2015 2016 2017 2018 
  (In billions of Won, except percentages)   (In billions of Won, except percentages) 

Total gross loans

  W207,987  W223,879  W248,429  W261,004  W277,489   W223,879  W248,429  W261,004  W277,489  W303,070 

Total allowance for loan losses

  W2,476  W2,501  W2,318  W2,361  W2,311   W2,501  W2,318  W2,361  W2,311  W2,725 

Allowance for loan losses as a percentage of total loans

   1.19%  1.12%  0.93%  0.90%  0.83%    1.12%  0.93%  0.90%  0.83%  0.90% 

Impaired loans(1)

  W2,386  W2,127  W1,902  W1,804  W1,793   W2,127  W1,902  W1,804  W1,793  W1,697 

Impaired loans as a percentage of total loans

   1.15%  0.95%  0.77%  0.69%  0.65%    0.95%  0.77%  0.69%  0.65%  0.56% 

Allowance as a percentage of impaired loans

   103.77%  117.58%  121.87%  130.88%  128.89%    117.58%  121.87%  130.88%  128.89%  160.58% 

Totalnon-performing loans(2)

  W1,197  W1,286  W1,333  W1,174  W1,075   W1,286  W1,333  W1,174  W1,075  W1,090 

Non-performing loans as a percentage of total loans

   0.58%  0.57%  0.54%  0.45%  0.39%    0.57%  0.54%  0.45%  0.39%  0.36% 

Allowance as a percentage of total assets

   0.80%  0.74%  0.63%  0.60%  0.54%    0.74%  0.63%  0.60%  0.54%  0.59% 

 

Notes:

 

(1)

Impaired loans include (i) loans for which the borrower has defaulted under Basel standards applicable during the relevant period and (ii) loans that qualify as “troubled debt restructurings” applicable during the relevant period.

(2)

Non-performing loans are defined as loans, whether corporate or retail, that are past due more than 90 days.

Capital Ratios

 

  As of December 31,   As of December 31, 
  2013 2014 2015 2016 2017   2014 2015 2016 2017 2018 
  (Percentages)   (Percentages) 

Group BIS ratio(1)

   13.43%  13.05%  13.39%  15.00%  14.78%    13.05%  13.39%  15.00%  14.78%  14.87% 

Total capital adequacy ratio of Shinhan Bank

   16.29  15.43  14.75  15.70  15.59    15.43  14.75  15.70  15.59  16.03 

Adjusted equity capital ratio of Shinhan Card(2)

   30.41  29.69  28.88  26.23  24.52    29.69  28.88  26.23  24.52  21.69 

Solvency ratio for Shinhan Life Insurance(3)

   253.06  230.69  204.19  178.28  175.41    230.69  204.19  178.28  175.41  238.67 

 

Notes:

 

(1)

Under the guidelines of the Financial Services Commission applicable to financial holding companies, the minimum requisite capital ratio applicable to us is the Bank for International Settlement (“BIS”) ratio of 8%. This computation is based on our consolidated financial statements in accordance with IFRS. See “Item 4.B. Business Overview — Supervision and Regulation — Principal Regulations Applicable to Financial Holding Companies — Capital Adequacy.”

(2)

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 guidelines, a credit card company is required to maintain a minimum adjusted equity capital ratio of 8%. This computation is based on the consolidated financial statements of the credit card company prepared in accordance with IFRS. See “Item 4.B. Business Overview — Supervision and Regulation — Principal Regulations Applicable to Credit Card Companies — Capital Adequacy.”

(3)

Solvency ratio is the ratio of the solvency margin to the standard amount of solvency margin as defined and computed in accordance with the guidelines issued by the Financial Services Commission for life insurance companies. Under these guidelines, Shinhan Life Insurance is required to maintain a minimum solvency ratio of 100%. See “Item 4.B. Business Overview — Supervision and Regulation — Principal Regulations Applicable to Insurance Companies — Capital Adequacy.”

The Financial Services Commission regulations require that capital ratios be computed based on our consolidated financial statements under IFRS and regulatory guidelines. The following table sets forth our capital ratios computed on the basis of our consolidated financial statements under IFRS and the regulatory guidelines of the Financial Services Commission.

 

  As of December 31,   As of December 31, 
  2015 2016 2017   2016 2017 2018 
  (In millions of Won, except percentages)   (In millions of Won, except percentages) 

Risk-weighted assets

  W203,274,542  W198,642,643  W207,768,636   W198,642,643  W207,768,636  W228,678,105 

Total risk-adjusted capital

  W27,216,448  W29,786,515  W30,713,464   W29,786,515  W30,713,464  W33,993,061 

Tier I capital

  W23,194,191  W26,210,420  W27,672,892   W26,210,420  W27,672,891  W30,677,876 

Tier I common equity capital

  W21,882,816  W25,325,054  W26,756,509   W25,325,054  W26,756,509  W28,696,267 

Capital adequacy ratio (%)

   13.39%  15.00%  14.78%    15.00%  14.78%  14.87% 

Tier I capital adequacy ratio (%)

   11.41%  13.19%  13.32%    13.19%  13.32%  13.42% 

Common equity capital adequacy ratio (%)

   10.77%  12.75%  12.88%    12.75%  12.88%  12.55% 

Exchange 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.

 

Year Ended December 31,

  At End of Period   Average(1)   High   Low   At End of Period   Average(1)   High   Low 
  (Won per US$1.00)   (Won per US$1.00) 

2013

   1,055.3    1,094.6    1,161.3    1,050.1 

2014

   1,090.9    1,054.0    1,117.7    1,008.9    1,090.9    1,054.0    1,117.7    1,008.9 

2015

   1,169.3    1,133.7    1,196.4    1,063.0    1,169.3    1,133.7    1,196.4    1,063.0 

2016

   1,203.7    1,160.5    1,242.6    1,090.3    1,203.7    1,160.5    1,242.6    1,090.3 

2017

   1,067.4    1,141.6    1,207.2    1,067.4    1,067.4    1,141.6    1,207.2    1,067.4 

2018

   1,112.9    1,099.3    1,141.7    1,054.6 

October

   1,115.7    1,130.9    1,146.5    1,115.7    1,140.8    1,131.6    1,141.7    1,112.4 

November

   1,084.8    1,099.8    1,120.0    1,079.3    1,118.6    1,125.3    1,132.3    1,117.5 

December

   1,067.4    1,082.9    1,094.6    1,067.4    1,112.9    1,122.5    1,133.2    1,108.8 

2018 (through April 13)

   1,070.6    1,070.1    1,093.0    1,054.6 

2019 (through April 19)

   1,135.4    1,127.1    1,143.3    1,111.8 

January

   1,068.3    1,065.6    1,073.6    1,057.6    1,111.8    1,120.3    1,129.5    1,111.8 

February

   1,082.1    1,078.5    1,093.0    1,065.3    1,124.7    1,121.8    1,128.0    1,116.1 

March

   1,061.0    1,069.9    1,081.3    1,060.3    1,136.3    1,131.6    1,138.1    1,126.5 

April (through April 13)

   1,070.6    1,063.9    1,070.6    1,054.6 

April (through April 19)

   1,135.4    1,136.3    1,143.3    1,131.7 

 

Source: Federal Reserve Board

Note:

 

(1)

The average rate for annual and interim periods were calculated by taking the simple average of the Noon Buying Rates on the last day of each month during the relevant period. The average rates for the monthly periods (or portion thereof) were calculated by taking the simple average of the daily Noon Buying Rates during the relevant month (or portion thereof).

We have translated certain amounts in Korean Won, which appear in this annual report, into U.S. 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 29, 2017,31, 2018, which wasW1,067.41,112.9 to US$1.00. On April 13, 2018,19, 2019, the Noon Buying Rate in effect wasW1,070.61,135.4 to US$1.00.

 

ITEM 3.B.

Capitalization and Indebtedness

Not applicable.

ITEM 3.C.

Reasons for the Offer and Use of Proceeds

Not applicable.

 

ITEM 3.D.

Risk Factors

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 annual report, in evaluating us and our business.

Risks Relating to Our Overall Business

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 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. In light of the ongoing general uncertainty about economic and political conditions in Europe (particularly amid Brexit), signs of cooling economy for China, and the continuing geopolitical and social instability in various parts of the Middle East, including Iraq, Syria and Yemen, as well as in the former republics of the Soviet Union, including Russia and Ukraine, and potential escalation of the ongoing trade war between the U.S. and China as each country introduces tariffs on goods traded with the other, among others, significant uncertainty remains as to the global economic prospects in general and has adversely affected, and may continue to adversely affect, the Korean economy. In addition, as the Korean economy matures, it is increasingly exposed to the risk of a “scissor effect,” namely being pursued by competitors in less advanced economies while not having fully caught up with competitors in advanced economies, which risk is amplified by the fact that Korean economy is heavily dependent on exports. The Korean economy also continues to face other difficulties, including sluggishness in domestic consumption and investment, volatility in the real estate market, rising household debt, potential declines in productivity due to aging demographics and low birth rates, and a rise in youth unemployment. Any future deterioration of the global and Korean economies could adversely affect our business, financial condition and results of operations.

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. For example, in 2011 and 2012, the continuing slump in the real estate market and the shipbuilding industry led to increased delinquency among our corporate borrowers in the construction, real estate leasing, shipbuilding and shipping industries, and in certain cases, even insolvency, workouts, recovery proceedings and/or voluntary arrangements with creditors, as was the case for the current and former member companies of the STX Group, Keangnam Enterprises Co., Ltd., Dongbu Steel Co., Ltd., Sambu Construction Co., Ltd. and Hanjin Heavy Industries & Construction Co., Ltd. During the same period, the sustained slump in the real estate market also led to increased delinquency among our retail borrowers, and in particular, borrowers with collective loans forpre-sale of newly constructed apartment units.

Accordingly, Shinhan Bank’s delinquency ratio (based on delinquency of one or more month and net of charge-offs and loan sales) increased from 0.48% as of December 31, 2010 to 0.60% as of December 31, 2011 and 0.61% as of December 31, 2012. However, primarily due to a modest rebound in the housing market and Shinhan Bank’s active efforts to reduce its exposure to such troubled industries and otherat-risk borrowers through preemptive risk management policies and increased lending to borrowers with high-quality credit

profiles as part of Shinhan Bank’s strategic initiative to improve its asset quality, Shinhan Bank’s delinquency ratio has steadily decreased or remained stable since then, to 0.39% as of December 31, 2013, and 0.31% as of December 31, 2014, remained stable at 0.33% as of December 31, 2015, and further decreased to 0.28% as of December 31, 2016, and 0.23% as of December 31, 2017.2017 and 0.25% as of December 31, 2018. There is no assurance, however, that Shinhan Bank will not experience further loan losses from borrowers, particularly those in the troubled industries, since the quality of loans to such borrowers may further deteriorate due to increases in base interest rate by the Bank of Korea, a continued slump in these industries or for other reasons. As for Shinhan Card, its delinquency ratio under the Financial Services Commission guidelines decreasedincreased slightly from 2.64% as of December 31, 2012 to 2.15%, 2.18%, 1.69%, 1.68% and 1.49% as of December 31, 2013 to 2.18% as of December 31, 2014, before stabilizing and decreasing to 1.69%, 1.68%, 1.49% and 1.53% as of December 31, 2015, 2016, 2017 and 2017,2018, respectively, largely as a result of its enhanced preemptive risk management and controlled asset growth as well as the sale of largenon-performing loans to improve its asset quality.

Moreover, as was the case during the global financial crisis of 2008-2009, 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 operations and/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 renewed economic 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 materialized, may have a material adverse effect on our business, liquidity, financial condition and results of operations.

Competition in the Korean financial services industry is intense, and may further intensify.

Competition in the Korean financial services industry is, and is likely to remain, intense, including as a result of the sustained low interest rate environment (which narrows opportunities to make profit based on the spread between lending rates and funding rates), the continuing sluggishness in the general economy, the growing maturation and saturation of the industry as a whole, the entry of new market participants and deregulation, among others.

In the banking sector, Shinhan Bank competes principally with other national commercial banks in Korea, but also faces competition from a number of additional banking institutions, including branches and subsidiaries of foreign banks operating in Korea, regional banks, Internet-only banks, government-owned development banks and Korea’s specialized banks, such as Korea Development Bank, Industrial Bank of Korea and the National Federation of Fisheries Cooperatives, as well as various other types of financial service providers, including savings institutions (such as mutual savings and finance companies, credit unions and credit cooperatives), investment companies (such as securities brokerage firms, merchant banking corporations and asset management companies) and life insurance companies. As of December 31, 2017,2018, Korea had six major nationwide domestic commercial banks (including Citibank Korea Inc. and Standard Chartered Bank Korea Limited, both of which are domestic commercial banks acquired by global financial institutions), six regional commercial banks, two Internet-only banks and branches and subsidiaries of 38 foreign banks. Foreign financial institutions, many of which have greater experiences and resources than we do, may 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.

In the small- andmedium-sized enterprise and retail banking segments, which have been Shinhan Bank’s traditional core businesses, competition is expected to increase further. In recent years, Korean banks, including Shinhan Bank, have increasingly focused on stable asset growth based on quality credit, such as corporate borrowers with high credit ratings, loans to “small office, home office” (“SOHO”) with high levels of collateralization, and mortgage and home equity loans within the limits of the prescribedloan-to-value ratios anddebt-to-income ratios. This common shift in focus toward stable growth based on less risky assets has intensified

competition as banks compete for the same limited pool of quality credit by engaging in price competition or by other means although Shinhan Bank has traditionally focused, and will continue to focus, on enhancing profitability rather than increasing asset size or market share, and has avoided, to the extent practicable, engaging in price competition by way of lowering lending rates. In addition, such competition may result in lower net interest margin and reduced overall profitability, especially if the low interest rate environment were to continue for a significant period of time. Although Shinhan Bank’s net interest margin has improved slightly in 2018 compared to 2017 due to, at least partly, increases in base interest rate by the Bank of Korea from 1.25% to 1.50% in November 2017 and from 1.50% to 1.75% in November 2018 and may improve further if the base interest rate is increased again during 2018,2019, the effect on Shinhan Bank’sits results of operations may be less beneficial due to increased volatility of market interest rates and tighter regulations regarding SOHO loans, including the implementation of additional credit review guidelines for individual businesses. Therefore, if competing financial institutions seek to expand market share by lowering their lending rates, Shinhan Bank may suffer customer loss,

especially among customers who select their lenders principally on the basis of lending rates. In response thereto or for other strategic reasons, Shinhan Bank may subsequently lower its lending rates to stay competitive, which could lead to a decrease in its net interest margins and outweigh any potential positive impact on the net interest margin from a general rise in market interest rates. Any future decline in Shinhan Bank’s customer base or its net interest margins could have an adverse effect on our results of operations and financial condition.

In the credit card sector, Shinhan Card competes principally with existing “monoline” credit card companies, credit card divisions of commercial banks, consumer finance companies, other financial institutions and, recently, credit card service providers allied with mobile telecommunications service providers in Korea. Competition has been historically intense in this sector and the market has shown signs of saturation as existing and new credit card service providers make significant investments and engage in aggressive marketing campaigns and promotions to acquire new customers and target customers with high credit quality. While competition has subsided somewhat recently due to stricter government regulations, such as curbs on excessive marketing expenses, competition remains intense and credit card issuers may continue to compete with Shinhan Card for customers by offering lower interest rates and fees, higher credit limits, more attractive promotions and incentives and alternative products such as phone cards,credit card reward points, gift cards andlow-interest consumer loan products. As a result, Shinhan Card may lose customers or service opportunities to competing credit card issuers and/or incur higher marketing expenses. In addition,Also, over the years, the Government has implemented regulations lowering certain merchant fees chargeable by credit card companies. In 2012, the Government adopted in 2012regulations mandating lower merchant fees chargeable to small- andmedium-sized enterprises, (which are subject to revision every three years) and the Government guidelines issued in 2013 suggesting lower standard interest rates for cash advances and card loans have reduced, and are likely to continue to limit, the revenues of credit card companies, including Shinhan Card. Beginningbeginning January 31, 2016, a further reduction in the merchant fees chargeable to small- andmedium-sized enterprises went into effect. The Enforcement Decree of the Specialized Credit Finance Business Act was amended in July 2017 and January 2019 to further expand the range of small- andmedium-sized enterprises subject to lower merchant fees, and additional amendments to regulations requiring further downward adjustments to merchant fees may come into force in the future. For further details on the Government’s regulations on merchant fees chargeable by credit card companies, See “— Risks Relating to Our Credit Card Business — Future changes in market conditions as well as other factors, such as stricter regulation, may lead to reduced revenues and deterioration in the asset quality of credit card receivables.” In addition, due tosince the implementation of the Improper Solicitation and Graft Act onin September 28, 2016, revenue growth for corporate cards and service related industries such as dining, floral and entertainment have shown signs of decline. In July 2017, the Enforcement Decree of the Specialized Credit Finance Business Act was amended to expand the range of small-decline, andmedium-sized enterprises subject to lower merchant fees. Additional additional regulations on loans reducing maximum interest rates chargeable from 27.9% to 24% came into effect in February 2018, placing2018. These developments have put further downward pressure on the results of operations for credit card companies, for 2018 and beyond, and amendments to regulations requiring further downward adjustments to merchant fees are expected to continue in the near future.including Shinhan Card. Furthermore, the Government’s recent guidelines to bolster consumer protection and protect customers’ personal data in the aftermath of data leaks at certain credit companies (not including Shinhan Card) may result in additional compliance costs for Shinhan Card. Customer attrition, together with any further lowering of fees or reduction in base and market interest rates and/or additional expenses from more extensive marketing and promotional campaigns that Shinhan Card might implement to acquire and retain customers, could reduce its revenues and earnings. Furthermore, the average credit quality of Shinhan Card’s customers may deteriorate if customers with higher credit quality borrow from our competitors rather than Shinhan Card and it may become more difficult for Shinhan Card to attract and maintain quality customers. In general, the growth, market share and profitability of Shinhan Card’s operations may decline or become negative as a result of market saturation in this sector, interest rate competition, pressure to lower fee rates and incur higher marketing expenses, as well as Government regulation and social and economic developments in Korea that are beyond our control, such as changes in consumer confidence levels, spending patterns or public perception of credit card usage and consumer debt. If Shinhan Card fails to maintain

or attract new cardholders or increase the card usage by existing customers or experiences deterioration in its asset quality and a rise in delinquency, our business, financial condition and results of operations may be adversely affected.

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.

Consolidation among our rival institutions and the Government’s privatization efforts may also add competition in the markets in which we and our subsidiaries conduct business. A number of significant mergers and acquisitions in the industry have taken place in Korea over the past decade,recently, including the acquisition of Hanmi Bank by an affiliate of Citibank in 2004, Standard Chartered Bank’s acquisition of Korea First Bank in 2005, Chohung Bank’s merger with Shinhan Bank in 2006 and Hana Financial Group’s acquisition of Korea Exchange Bank in 2012 and the resulting merger of Hana Bank and Korea Exchange Bank in September 2015. Moreover, in 2014, pursuant to the implementation of the Government’s privatization plan with respect to Woori Finance Holdings (now merged into Woori Bank) and its former subsidiaries, Woori Financial, Woori Asset Management and Woori F&I were acquired by KB Financial Group, Kiwoom Securities and Daishin Securities, respectively, and Woori Investment & Securities, Woori Aviva Life Insurance and Woori FG Savings Bank were acquired by NongHyup Financial Group. In addition, in October 2014, the Government’s ownership interest in the holding companies of Kwangju Bank and Kyongnam Bank were acquired by JB Financial Group and BS Financial Group (now BNK Financial Group), respectively. In 2015, the Government decided to sell a 30% to 40% interest in Woori Bank to multiple investors in separate blocks ranging from 4% to 10% each. Since December 2016, Korea Deposit Insurance Corporation has consummated sales transactions with seven institutional investors including Kiwoom Securities, Korea Investment and Securities, Hanwha Life Insurance, Tongyang Life Insurance, Eugene Asset Management, Mirae Asset Global Investments and IMM Private Equity for the sale of an aggregate 29.7% interest in Woori Bank in separate blocks. In the securities brokerage sector, Mirae Asset acquired KDB Daewoo Securities in 2016, creating the largest brokerage company in Korea by assets. Onassets, and on June 1, 2016, KB Financial Group completed its acquisition of Hyundai Securities and merged it with its existing brokerage unit, KB Investment & Securities Co, creating the fifth largest brokerage company in Korea by assets. Any of these developments may place us at a competitive disadvantage and outweigh any potential benefit to us in the form of opportunities to acquire new customers who are displeased with the level of services at the newly reorganized entities or to provide credit facilities to corporate customers who wish to maintain relationships with a wide range of banks in order to diversify their sources of funding. In September 2018, we announced the acquisition of a 59.15% interest in Orange Life Insurance, Ltd., the former Korean unit of ING Life Insurance, as part of our efforts to diversify and enhance ournon-banking businesses. The acquisition was approved by the Financial Services Commission on January 16, 2019 and closed on February 1, 2019. We expect that such consolidation and other structural changes in the financial industry will continue. Other financial institutions may seek to acquire or merge with other entities, and the financial institutions resulting from such consolidation may, by virtue of their increased size and business scope, provide greater competition for us. Increased competition and continuing consolidation may lead to decreased margins, resulting in a material adverse impact on our future profitability.

Regulatory reforms and the general modernization of business practices in Korea have also led to increased competition among financial institutions in Korea. Since July 2015, the Financial Services Commission has provided, through the Korea Financial Telecommunications and Clearings Institute, the integrated automatic payment transfer management service, which allows account holders to search for, terminate or modify automatic payments they have set up with financial institutions participating in such service (currently including banks, securities companies and other financial institutions such as The Post Office, Korean Federation of Community Credit Cooperatives, National Credit Union Federation of Korea, Mutual Savings Bank and National Forestry Cooperative Federation). In addition, the Financial Services Commission began providing the integrated account management service from December 2016, which allows account holders to search for detailed information of their bank accounts opened in banks participating in such service, closesmall-sum inactive accounts (i.e., accounts with no transaction activity during the previous one year period and with a balance of less thanW500,000) and transfer the balance in such accounts to other accounts. Moreover, in December 2017, the Financial Services Commission introduced the “my account at a glance” system, which enables consumers to

view their key financial account information online, including information on banks, insurances, mutual finance, loan and card issuances on one page. The “my account at a glance” system is expected to becomebecame available on mobile channels in February 2016 and expandexpanded its scope of services to include savings banks and securities within 2018.companies. Since their introduction, the integrated automatic payment transfer management andservice, integrated account management servicesservice and “my account at a glance” system have gained widespread acceptance, evidenced by the fact that, as of September 30, 2017, these services have been used by approximately 17.6 million and 8.0 million users, respectively.acceptance. As the reform of the financial sector continues, competition may become more intense among existing banks, insurance companies, securities companies and other financial organizations, and may lead to significant changes in the

current Korean financial market. AsMoreover, the Regulation on the Supervision of the Banking Business was amended on July 12, 2018 to provide that, beginning on January 1, 2020, in calculating loan to deposit ratio, retail loans and corporate loans will be weighed differently, with retail loans subject to a multiple of 115% and corporate loans (excluding loans to SOHOs) subject to a multiple of 85%, thereby increasing the impact of retail loans and reducing the impact of corporate loans in calculating such ratio. This may further intensify competition for corporate loans and deposits among commercial banks and, as a result, Shinhan Bank may face difficulties in increasing or retaining its corporate loans and deposits, which in turn may result in an increase in its cost of funding and a decrease in its settlement and remittance service fee revenue.funding.

Furthermore, as the Korean economy further develops and new business opportunities arise, more competitors may enter the financial services industry. For example, as online service providers and technology companies with large-scale user networks, such as Kakao Corp., NAVER and Samsung Electronics, recently make significant inroads in providing virtual payment services through a system based on a growing convergence of financial services and technology commonly referred to as “fintech,” competition for online customers is growing not just among commercial banks, but also from online and mobile payment service providers. Also, widespread consumer acceptance of mobile phone payment services in lieu of credit card services could add to the competitive threat faced by existing credit card service providers, including our credit card subsidiary. In 2015, the Government announced its plans to allow Internet-only banks to operate in Korea. KT consortium’sK-Bank and Kakao consortium’s Kakao Bank commenced operations in April 2017 and July 2017, respectively. Internet-only banks may have advantages over traditional banks as the former can pass savings in labor and overhead costs to their customers by offering higher interest rates on deposit accounts, lower loan costs and reduced service fees. Accordingly, commercial banks will likely face increasing pressure to upgrade their service platforms to attract and maintain online users, which represents a growing customer base compared to traditional customers who have primarily conducted bankingin-person at physical banking branches.

Recently, following the 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 (including a requirement to maintain a certain ratio of core capital to total risk exposure, which was introduced in January 2018 in order to control excessive leverage), which has had a dampening effect on competition. The Financial Services Commission implemented the capital requirements of Basel III, whose minimum requirements were phased in sequentially from December 1, 2013 through full implementation by January 1, 2015, based on the guidelines set forth in the amended Regulation on the Supervision of the Banking Business and the Detailed Regulation on the Supervision of the Banking Business. In addition, the Financial Services Commission is currently implementinghas implemented the Basel III requirements relating to liquidity coverage ratio and capital conservation buffer, each of which will behave been fully phased in byas of January 1, 2019. As of January 1, 2016, the Financial Services Commission implemented Basel III requirements relating to accumulation of additional capital for systemically important banks and bank holding companies and countercyclical capital buffer requirements. Each year, the Financial Services Commission may designate banks with significant influence (based on size and connectivity with other financial institutions) on the domestic financial system as a domestic systemically important bank and require the accumulation of additional capital in accordance with the highest of: (i) ratio of common equity capital to risk-weighted assets, ranging from 0.0% to 2.0%, depending on the systematic importance evaluation score, (ii) if the bank’s holding company is a domestic systemically important bank holding company, the capital ratio corresponding to the additional capital required for the bank holding company under the Financial Holding Company Supervision Regulations, or (iii) if the bank is also a global systemically important bank, as defined by the Basel Committee on Banking Supervision (the “Basel Committee”), the capital ratio as required by the Basel Committee. According to the instructions of the Financial Services Commission, domestic systematically important banks including Shinhan Bank arehave been required to maintain an additional capital buffer of 0.25% since January 1, 2016, with such buffer to increaseincreased by 0.25% annually to reach 1.00% byas of January 1, 2019. The Financial Services Commission may also, upon quarterly review, determine and require banks to accumulate a required level of countercyclical capital buffer within the range of

0% to 2.5% of risk-weighted assets, taking into account factors such as the degree of increase in credit relative to the gross domestic product. However, there is no assurance that these measures will have the

effect of curbing competition or that the Government will not reverse or reduce such measures or introduce other deregulatory measures, which may further intensify competition in the Korean financial services industry. For further details on the capital requirements applicable to us, see “Item 4.B. Business Overview — Supervision and Regulation — Principal Regulations Applicable to Financial Holding Companies — Capital Adequacy.”

If, despite our efforts to adapt to the changing macroeconomic environment and comply with new regulations, we are unable to compete effectively in the changing business and regulatory environment, our profit margin and market share may erode and our future growth opportunities may become limited, which could adversely affect our business, financial condition and results of operations.

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, since January 1, 2015, we and our banking subsidiaries in Korea are required to maintain a minimum common equity Tier I capital adequacy ratio of 4.5%, a Tier I capital adequacy ratio of 6.0% and a total capital (BIS) ratio of 8.0%. These ratios measure the respective 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, as further described below, Shinhan Bank is also required to maintain a capital conservation buffer and additional capital as a domestic systemically important bank and may be required to maintain a countercyclical capital buffer. Also, our subsidiaries Shinhan Card, Shinhan Life Insurance and Shinhan Investment are each required to maintain a consolidated adjusted equity capital ratio of 8.0%, a solvency ratio of 100% and a net equitycapital ratio of 100%, 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 portfolios, 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 upon which the guidelines of the Financial Services Commission are based, or other adverse developments affecting our asset quality or equity capital.

In December 2010, the Basel Committee issued final rules in respect of (i) a global regulatory framework for more resilient banks and banking systems and (ii) an international framework for liquidity risk measurement, standards and monitoring, which together are commonly referred to as “Basel III.” Under Basel III, Tier I capital is defined to include common equity Tier I and additional Tier I capital. Common equity Tier I capital is a new category of capital primarily consisting of common stock, capital surplus, retained earnings and other comprehensive income (progressively phased into the capital ratio calculation over several years). The new minimum capital requirements, including the minimum common equity Tier I requirement of 4.5% and additional mandatory capital conservation buffer requirement of 2.5%, are currently beinghave been fully implemented in phases untilas of January 1, 2019. Additional discretionary countercyclical capital buffer requirements are also expected to be phased in, which will range at the discretion of national regulators between 0% and 2.5% of risk-weighted assets. Basel III also introduces a minimum leverage ratio requirement. On December 7, 2017, the Basel Committee finalized several key methodologies for measuring risk-weighted assets. The revisions include a standardized approach for credit risk, standardized approach for operational risk, revisions to the credit valuation adjustment (CVA) risk framework and constraints on the use of internal models. The Basel Committee had also previously finalized a revised standardized model for counterparty credit risk, revisions to the securitization framework and its fundamental review of the trading book, which updates both modeled and standardized approaches for market risk measurement. The revisions also include a capital floor set at 72.5% of total risk-weighted assets based on

the revised standardized approaches to limit the extent to which banks can reduce risk-weighted asset levels through the use of internal models.

In order to implement the capital requirements under Basel III in Korea, the Regulation on the Supervision of the Banking Business was amended, effective December 1, 2013. Under the amended Regulation on the Supervision of the Banking Business, effective from January 1, 2015, commercial banks in Korea are required to maintain a minimum common equity Tier I ratio of 4.5%, a minimum Tier I capital ratio of 6.0% and a minimum total capital (BIS) ratio of 8.0%. The Regulation on the Supervision of the Banking Business was further amended on December 26, 2014, to implement the liquidity coverage ratio requirements under Basel III in increments of 5% annually, from 80% as of January 1, 2015 to 100% as of January 1, 2019. Capital conservation buffer requirements arehave also beingbeen phased in from January 1, 2016 in increments of 0.625% annually, to the effect that commercial banks in Korea will beare required to maintain a capital conservation buffer of 2.5% as of January 1, 2019. If a commercial bank fails to maintain such capital conservation buffer requirements, such bank will be subject to certain restrictions relating to its use of income, such as distributing dividends and purchasing treasury stock. As of January 1, 2016, the Financial Services Commission implemented Basel III requirements relating to accumulation of additional capital for systemically important banks and bank holding companies and countercyclical capital buffer requirements. Each year, the Financial Services Commission may designate banks with significant influence (based on size and connectivity with other financial institutions) on the domestic financial system as a domestic systemically important bank and require the accumulation of additional capital in accordance with the highest of: (i) ratio of common equity capital to risk-weighted assets, ranging from 0.0% to 2.0%, depending on the systematic importance evaluation score, (ii) if the bank’s holding company is a domestic systemically important bank holding company, the capital ratio corresponding to the additional capital required for the bank holding company under the Financial Holding Company Supervision Regulations, or (iii) if the bank is also a global systemically important bank, as defined by the Basel Committee, the capital ratio as required by the Basel Committee. Shinhan Financial Group, Shinhan Bank and Jeju Bank were selected as a domestic systemically important bank holding company and domestic systemically important bank, respectively, for 2017.from 2016 through 2019. According to the instructions of the Financial Services Commission, domestic systematically important banks including theShinhan Bank arehave been required to maintain an additional capital buffer of 0.25% since January 1, 2016, with such buffer to increaseincreased by 0.25% annually to reach 1.00% byas of January 1, 2019. The Financial Services Commission may also, upon quarterly review, determine and require banks to accumulate a required level of countercyclical capital buffer within the range of 0% to 2.5% of risk-weighted assets, taking into account factors such as the degree of increase in credit relative to the gross domestic product. Since March 2016, the Financial Services Commission has maintained countercyclical capital buffer requirements at 0%, and the Financial Supervisory Service is expected to maintainhas maintained the countercyclical capital buffer requirement at 0% for the first quarter of 2018.2019. In addition, the Regulation on the Supervision of the Banking Business is expected to be amended during 2019 such that the countercyclical capital buffer requirement also takes into account the increase of credit in the retail sector. The Detailed Regulation on the Supervision of the Banking Business was also amended on June 30, 2018 to add “concentration of risk in the retail sector” as an additional criteria when the Financial Supervisory Service evaluates the risk management systems of Korean banks.

We and our banking subsidiaries are currently, and have been, in full compliance with Basel III requirements as implemented in Korea since its introduction in December 2013.However, there is no assurance that we will continue to be able to be in compliance with Basel III requirements. New requirements under Basel III may require an increase in the credit risk capital requirements in the future, which may require us or our subsidiaries to either improve asset quality or raise additional capital. In addition, if the capital adequacy ratios of us or our subsidiaries were to fall below the required levels, the Financial Services Commission might 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 near future to satisfy liquidity needs, meet regulatory requirements, enhance our capital levels or fund the growth of our operations as opportunities arise.

For example, Basel III includes an international framework for liquidity risk measurement, standards and monitoring, as noted above, including a new minimum liquidity standard, known as the liquidity coverage ratio, which is designed to ensure that banks have an adequate stock of unencumbered high quality liquid assets (“HQLA”) that can be easily and speedily converted into cash in the private marketplace to survive a significant stress scenario lasting 30 calendar days. The liquidity coverage ratio is computed as (a) the value of a banking organization’s HQLA, divided by (b) its total expected net cash outflows over the next 30 calendar days under stress scenarios. The minimum liquidity coverage ratio is 100%. In January 2013, the Basel Committee released a revised formulation of the liquidity coverage ratio, one of two quantitative liquidity measures approved in December 2010 as part of Basel III. The Basel Committee extended the timetable for fullphase-in of the liquidity coverage ratio to the effect that the minimum liquidity coverage ratio was set at 60% as of January 1, 2015 and thereafter riseswas increased in annual increments of 10% so that the minimum liquidity coverage ratio will beis 100% as of January 1, 2019. In December 2014, the Financial Services Commission promulgated regulations to implement the liquidity requirements of Basel III, including raising the minimum liquidity coverage ratio to 80% as of January 1, 2015 and thereafter by annual increments of 5% so that the minimum liquidity coverage ratio for commercial banks in Korea will beis 100% as of January 1, 2019.

A substantial part of the liquidity and funding requirements for our banking subsidiaries is met through short-term customer deposits, which typically roll over upon maturity. While the volume of our customer deposits has generally been stable over time, customer deposits have from time to time declined substantially due to the popularity of other, higher-yielding investment opportunities, namely stocks and mutual funds, for example, during times of bullish stock markets. During such times, our banking subsidiaries were required to obtain alternative funding at higher costs. There is no assurance that a similar development will not occur in the future. In addition, in recent years, we have faced increasing pricing competition from our competitors with respect to our deposit products. If we do not continue to offer competitive interest rates to our deposit customers, we may lose their business, which has traditionally provided a stable andlow-cost source of funding. In addition, even if we are able to match our competitors’ pricing, doing so may result in an increase in our funding costs, which may have an adverse impact on our results of operations.

We and our subsidiaries also raise funds in capital markets and borrow from other financial institutions, the cost of which depends on 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. While we and 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 whatever reason, 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 and the Korean economy in general. There can be no assurance that the rating agencies will maintain our current ratings or outlooks. There is no assurance that Shinhan Bank, Shinhan Card, any of our other 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 entity. Any downgrades in the credit ratings and outlooks of us and our subsidiaries will likely increase our cost of funding, limit our access to capital markets and other borrowings, or require us to provide additional credit enhancement in financial transactions, any of which could adversely affect our liquidity, net interest margins and profitability, and in turn, our business, financial condition and results of operations.

Changes in interest rates, foreign exchange rates, bond and equity prices, and other market factors have affected and will continue to affect our business, results of operations and financial condition.

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 foreign currency exchange rates, particularly in the Korean Won to U.S. Dollar exchange rates, affect the value of our assets and liabilities denominated in foreign currencies, the reported earnings of ournon-Korean subsidiaries and income from foreign exchange dealings, and substantial and rapid fluctuations in exchange rates may cause difficulty in obtaining foreign currency-denominated financing in the international financial markets on commercial terms acceptable to us or at all. 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 and risk thresholds 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 operations.

Of particular importance is the change in the base and market interest rates. Since 2009, Korea, like many other countries, has experienced a low interest rate environment despite some marginal fluctuations, in part due to the Government’s policy to stimulate the economy through active rate-lowering measures. Between 2009 and 2014, the base interest rate set by the Bank of Korea remained within the band between 2.00% and 3.25%. In an effort to support Korea’s economy in light of the recent slowdown in Korea’s growth and uncertain global economic prospects, the Bank of Korea reduced the base interest rate to 1.75% in March 2015, 1.50% in June 2015, and further reduced such rate to the historic low of 1.25% in June 2016. In November 2017, the Bank of Korea raised the base interest rate to 1.50%, marking the first time it has increased the base interest rate since 2011.2011, and further raised such rate to 1.75% in November 2018. Interest rate movements, in terms of magnitude and timing as well as their relative impact on our assets and liabilities, have a significant impact on our net interest margin and profitability, particularly with respect to our financial products that are sensitive to such movements. For example, if the interest rates applicable to our loans (which are recorded as assets) increase at a slower pace or by a thinner margin than the interest rates applicable to our deposits (which are recorded as liabilities), our net interest margin will shrink and our profitability will be negatively affected. In addition, the relative size and composition of our variable rate loans and deposits (as compared to our fixed rate loans and deposits) may also impact our net interest margin. Furthermore, the difference in the average termrepricing frequency of our interest-earning assets (primarily loans) compared to our interest-bearing liabilities (primarily deposits) may also impact our net interest margin. For example, since our deposits tend to have longer terms, on average, than those 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, a decrease in the base interest rates tends to decrease our net interest margin while an increase in the base interest rates tends to have the opposite effect. While we continually manage our assets and liabilities to minimize our exposure to interest rate volatility, such efforts by us may not mitigate the impact of interest rate volatility in a timely or effective manner, and our net interest margin, and in turn our financial condition and results of operations, could suffer significantly.

We cannot assure you when and to what extent the Government will in the future adjust the base interest rate, to which the market interest rate correlates. A decision to adjust the base interest rate is subject to many policy considerations as well as market factors, including the general economic cycle, inflationary levels, interest rates in other economies and foreign currency exchange rates, among others. In general, a decrease in interest rates adversely affects our interest income due to the different maturity structure for our assets and liabilities as discussed above. In contrast, if there were to be a significant or sustained increase in interest rates, all else being equal, such movement would lead to a decline in the value of traded debt securities and could also raise our funding costs, while reducing loan demand, especially among retail customers. Rising interest rates may therefore require us tore-balance our assets and liabilities in order to minimize the risk of potential mismatches in our asset liability management and to maintain our profitability. In addition, rising interest rates 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 deterioration of asset quality for 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 rates will increase the funding costs of our borrowers and may adversely affect their ability to make payments on their outstanding loans. See “Item 5.A. Operating Results — Interest Rates.”

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 entering 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 tonon-delivery by the counterparty or systems failure by clearing agents, exchanges, clearing houses or other financial intermediaries. Any realization of counterparty risk may adversely affect our business, operations and financial condition.

Risks Relating to Our Banking Business

We have significant exposure to small- andmedium-sized enterprises, and financial difficulties experienced by such enterprises may result in a deterioration of our asset quality.

Our banking activities are conducted primarily through our wholly-owned subsidiary, Shinhan Bank. One of our core banking businesses has historically been and continues to be lending to small- andmedium-sized enterprises (as defined in “Item 4.B. Business Overview — Our Principal Activities — Corporate Banking Services — Small- andMedium-sized Enterprises Banking”). OurShinhan Bank’s loans (before allowance for loan losses and deferred loan origination costs and fees) to such enterprises amounted toW67,336 billion as of December 31, 2015,W71,757 billion as of December 31, 2016, andW78,556 billion as of December 31, 2017 andW84,972 billion as of December 31, 2018, representing 27.1%27.5%, 27.5%28.3% and 28.3%28.0%, respectively, of our total loan portfolio as of such dates.

Compared to loans to large corporations, which tend to be better capitalized and better able to weather business downturns, 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- andmedium-sized enterprises have historically had a relatively higher delinquency ratio. Many small- andmedium-sized enterprises represent sole proprietorships or small businesses dependent on a relatively limited number of suppliers or customers and tend to be affected to a greater extent than large corporate borrowers by fluctuations in the Korean and global economy. In addition, small- andmedium-sized enterprises often maintain less sophisticated financial records than large corporate borrowers. Therefore, it is generally more difficult for banks to judge the level of risk inherent in lending to such enterprises, as compared to large corporations. In addition, many small- andmedium-sized enterprises are dependent on business relationships with large corporations in Korea, primarily as suppliers. Any difficulties encountered by those large corporations would likely have not only an adverse effect onhurt the liquidity and financial condition of related small- andmedium-sized enterprises, including those to which we have exposure, but also resultresulting in an impairment of their ability to repay loans. As large Korean corporations continue to expand into China, Southeast Asia and other countries with lower labor costs and other expenses by relocating their production plants and facilities to such countries, such development may have a material adverse impact on such small- andmedium-sized enterprises.

Financial difficulties experienced by small- andmedium-sized enterprises as a result of, among other things, recent economic difficulties in Korea and globally and aggressive marketing and intense competition among banks to lend to this segment in recent years, coupled with our efforts to counter asset quality deterioration through conservative lending policy, have led to a fluctuation in the asset quality of our loans to this segment. As of December 31, 2015, 2016, 2017 and 2017,2018, Shinhan Bank’s delinquent loans to small- andmedium-sized enterprises wereW308362 billion,W362303 billion andW303299 billion, respectively, representing delinquency ratios (net of charge-offs and loan sales) of 0.46%, 0.51%, 0.39% and 0.35% respectively. If the ongoing difficulties in the Korean or global economy were to continue or aggravate, the delinquency ratio for our loans to small- andmedium-sized enterprises may rise.

Of particular concern is our significant exposure to enterprises in the real estate and leasing and construction industries. As of December 31, 2017,2018, Shinhan Bank had outstanding loans (before allowance for loan losses and deferred loan origination costs and fees) to enterprises in the real estate and leasing and construction industries

(many (many of which are small- andmedium-sized enterprises) ofW21,49025,454 billion andW2,5503,009 billion, respectively, representing 9.2%10.1% and 1.1%1.2%, respectively, of its total loan portfolio as of such date. We also have other exposure to borrowers in these sectors of the Korean economy, including extending guarantees for the benefit of such companies and holding debt and equity securities issued by such companies. In addition, Shinhan Bank has exposure to borrowers in the shipbuilding and shipping industries, which have yet to stage a meaningful turnaround.

The enterprises in the real estate development and construction industries in Korea, which are heavily concentrated in the housing market, continue to experience difficulties amid slowing real estate demand despite a moderate recovery in recent years, largely due to a combination of factors including the Government’s policy measures to stabilize the real estate market, oversupply of residential property, ongoing economic sluggishness in Korea and globally and the demographic changes in the Korean population. We also have 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 ofpre-sales, the proceeds from which the construction companies primarily rely on as a key source for liquidity and cash flow.

Any of the foregoing developments may result in deterioration in the asset quality of our banking subsidiaries. See “Item 4.B. Business Overview — Description of Assets and Liabilities — Credit Exposures to Companies in Workout and Recovery Proceedings.” We have been taking active steps to curtail delinquency among our small- andmedium-sized enterprise customers, including by way of strengthening loan application review processes and closely monitoring borrowers in troubled sectors. Despite such efforts, there is no assurance that the delinquency ratio for our loans to small- andmedium-sized enterprises will not rise in the future, especially if the Korean economy were to face renewed difficulties and, as a result, the liquidity and cash flow of these borrowers deteriorate. A significant rise in the delinquency ratios among these borrowers would lead to increased charge-offs and higher provisioning and reduced interest and fee income, which would have a material adverse effect on our business, financial condition and results of operations.

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.

Most of our mortgage and home equity loans are secured by borrowers’ homes, other real estate, other securities and guarantees (which are principally provided by the Government and other financial institutions), and a substantial portion of our corporate loans are also secured, including by real estate. As of December 31, 2017,2018, the secured portion of Shinhan Bank’s loans (before allowance for loan losses and deferred loan origination costs and fees) amounted toW106,503112,236 billion, representing 49.8%48.7% of its total loans. No assurance can be given that the collateral value will not materially decline in the future. Shinhan Bank’s general policy for mortgage and home equity loans is to lend up to 40%45% to 70%82% of the appraised value of the collateral, but subject to the maximumloan-to-value ratio,debt-to-income ratio and debt service ratio requirements for mortgage loans implemented by the Government, and to periodicallyre-appraise such collateral. However,In order to mitigate our loss in the event of a decrease in the value of collateral, we have made effort to increase the proportion of installment principal repayment-based loans and manage the loan-to-value ratio of loans. As of December 31, 2018, installment principal repayment-based housing loans accounted for 49.1% of the housing loans extended by Shinhan Bank, and the loan-to-value ratio of mortgage and home equity loans of Shinhan Bank was 49.9%. Despite these efforts however, if the real estate market in Korea experiences a downturn, the value of the collateral may fall below the outstanding principal balance of relatedthe underlying mortgage loans. Borrowers of such under-collateralized mortgages or loans may be forced to pay back all or a portion of such mortgage loans or, if unable to meet the collateral requirement through such repayment, sell the underlying collateral, which sales may lead to a further decline in the price of real estate in general and set off a chain reaction for other borrowers due to the further decline in the value of collateral. Declines in real estate prices reduce the value of the collateral values

securing our mortgage and home equity loans, and such reductionsreduction in the value of collateral values may result in 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 inability to obtain additional collateral in the event of such decline, may result in the deterioration of our asset quality and require us to make additional loan loss provisions. In Korea, foreclosure on collateral generally requires a written petition to a Korean court. Foreclosure procedures in Korea generally take 10 to 14 months from initiation to collection depending on the nature of the collateral, and foreclosure applications may be subject to delays and administrative requirements, which may result in a decrease in the recovery value of such collateral. No assurance can be given 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 and general declines in collateral value. Our failure to recover the expected value of collateral could expose us to significant losses.

Guarantees 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 real estate development projects, which are concentrated largely in the construction of residential 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 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. Shinhan Bank has actively managed and reduced its real estate project financing-related exposure, particularly during sustained downturns in the Korean real estate market. As of December 31, 2017,2018, the total outstanding amount of Shinhan Bank’s real estate project financing-related exposure wasW1.7 trillion, which represents a decrease over the years as Shinhan Bank has actively reduced new exposures in this area in light of the sustained downturn in the Korean real estate market.2.2 trillion. However, if defaults were to significantly increase under our existing loans to real estate development projects and the general contractors fail to pay the guaranteed amount necessary to cover the amount of our financings, this may have an 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 Shinhan Bank’s 10 largest corporate exposures as of December 31, 2017,2018, two were companies for which Shinhan Bank was a main creditor bank. All of the 10 companies are or were members of the main debtor groups as identified by the Governor of the Financial Supervisory Service, which are mostly comprised of the largest Korean commercial conglomerates known as“chaebols.” As of such date, the total amount of Shinhan Bank’s exposures to the 10 companies wasW18,05318,905 billion, or 11.5%11.1%, of its total exposures. As of that date, Shinhan Bank’s single largest outstanding exposure to a main debtor group amounted toW4,3284,239 billion, or 2.8%2.5%, of its total exposures. Largely due to the continued stagnation in the shipbuilding industry, current and former member companies of the STX Group, one of the leading conglomerates in Korea, entered into voluntary arrangements in 2013 with their creditors (including Shinhan Bank) to improve their credit situation, and STX Offshore & Shipbuilding and STX Heavy Industries, two of the STX Group’s member companies, recently filed for court receivership in May 2016 and July 2016, respectively. Due to stagnation in the construction industry, Keangnam Enterprises Co., Ltd., a large construction company in Korea, also entered into workout proceedings in 2013 and subsequently filed for recovery proceedings in March 2015. Dongbu Steel Co., Ltd. and Sambu Construction Co., Ltd. also experienced significant hardship and entered into workout or recovery proceedings in 2015. Additionally, in October 2015, creditors of Daewoo Shipbuilding & Marine Engineering Co., Ltd., led by Korea Development Bank, announced a restructuring plan that included cash injection and additional loans totalingW4.2 trillion and extensive streamlining measures, and in November 2016, Korea Development Bank agreed to swapW1.8 trillion of debt to equity and the Export-Import Bank of Korea agreed to issueW1 trillion of perpetual bonds. AmidstAmid continued deterioration of Daewoo Shipbuilding & Marine Engineering Co., Ltd.’s financial conditions, in March 2017, Korea Development Bank and the Export-Import Bank of Korea further agreed to provide an additionalW2.9 trillion in loans and swapW1.6 trillion of debt to equity, provided that

other creditors and bondholders agree to certaindebt-to-equity swaps and extension of maturities. In January 2016, Hanjin Heavy Industries & Construction Co., Ltd. entered into voluntary restructuring agreements with its creditors due to liquidity shortage in the wake of prolonged industry slowdown. As partPartly as a result of its active past efforts to reduce exposure to the shipbuilding and construction sectors, Shinhan Bank currently has limited exposure to the aforementioned troubled companies. However, if the credit quality of Shinhan Bank’s exposure to large corporations, including those in the main debtor groups, declines, Shinhan Bank may be required to record additional loan loss provisions in respect of loans and impairment losses in respect of securities, which would adversely affect its financial condition, results of operations and capital adequacy. No assurance can be given that the allowances it has recognizedestablished against these exposures will be sufficient to cover all future losses arising from such exposures, especially in the case of a prolonged or renewed economic downturn.

A limited number of the main debtor groups to which Shinhan Bank has credit exposure are subject to restructuring programs or are otherwise making significant efforts to improve their financial conditions, such as by obtaining intragroup loans and entering into agreements forto further improvement ofimprove their capital structures. No assurance can be given that there will not be future restructuring with Shinhan Bank’s major corporate customers or that such restructuring will not result in significant losses to Shinhan Bank with less than full recovery. In addition, if the Government decides to pursue an aggressive restructuring policy with respect to distressed companies, Korean commercial banks, including Shinhan Bank, may face a temporary rise in delinquencies and intensified pressure for additional provisioning. Furthermore, bankruptcies or financial difficulties of large corporations, includingchaebolgroups, may have an adverse ripple effect of triggering delinquencies and impairment of Shinhan Bank’s loans to small- andmedium-sized enterprises that supply parts or labor to such corporations. If Shinhan Bank experiences future losses from its exposure to large corporations, includingchaebolgroups, it may have a material adverse effect on Shinhan Bank’s business, financial condition and results of operations. Seeoperations.See “Item 4.B. Business Overview — Description of Assets and Liabilities — Loans — Loan Portfolio — Exposure to Main Debtor Groups.”

The asset quality of our retail loan portfolio may deteriorate.

In recent years, consumer debt, including lending to households and small unincorporated businesses, has continued to increase in Korea. Shinhan Bank’s portfolio of retail loans is comprised of two principal product types, namely secured retail loans (which are primarily comprised of mortgage and home equity loans secured by real estate) and general purpose loans (which are unsecured loans and tend to carry a higher credit risk). As of December 31, 2017,2018, Shinhan Bank’s retail loan portfolio (before allowance for loan losses and deferred loan origination costs and fees) wasW103,724112,594 billion, representing 44.6%44.5% of its total loans outstanding. As of December 31, 2015, 2016, 2017 and 2017,2018, Shinhan Bank’snon-performing retail loans wereW148157 billion,W157215 billion andW215238 billion, respectively, representingnon-performing loan ratios (net of charge-offs and loan sales) of 0.16%, 0.16%0.21% and 0.21%, respectively.

Our large exposure to consumer debt means that we are exposed to changes in economic conditions affecting Korean consumers. For example, a rise in unemployment, an increase in interest rates or a decline in housing prices in Korea could adversely affect the ability of consumers to make payments and increase the likelihood of potential defaults. Economic difficulties in Korea that may burdenhurt consumers could result in increasing delinquencies and a decline in the asset quality of the our household loan portfolio, which may in turn require us to record higher provisions for credit loss and charge-offs and may materially and adversely affect our financial condition and results of operations.

Any deterioration in the asset quality of our guarantees and acceptances will likely have a material adverse effect on our financial condition and results of operations.

In the normal course of banking activities, we make various commitments and incur certain contingent liabilities in the form of guarantees and acceptances. Financial guarantees, which are contracts that require us to make specified payments to reimburse the beneficiary of the guarantee for a loss such beneficiary incurs because

the debtor in respect of which the guarantee is given fails to make payments when due in accordance with the terms of the relevant debt instrument, are recognized initially at fair value, and such initial fair value is amortized over the life of the financial guarantee. Other guarantees are recorded asoff-balance sheet items in the notes to our financial statements and those guarantees that we have confirmed to make payments are recorded on the statements of financial position. As of December 31, 2017,2018, we had aggregate guarantees and acceptances ofW12,88215,522 billion, for which we provided allowances for losses ofW79.8105.5 billion. If there is significant deterioration in the quality of assets underlying our guarantees and acceptances, our allowances may be insufficient to cover actual losses resulting in respect of these liabilities.

Risks Relating to Our Credit Card Business

Future changes in market conditions as well as other factors, such as stricter regulation, may lead to reduced revenues and deterioration in the asset quality of credit card receivables.

As of December 31, 2015, 2016, 2017 and 2017,2018, Shinhan Card’s interest-earning credit card assets amounted toW21,32322,765 billion,W22,76525,250 billion andW25,25028,311 billion, respectively. 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. For example, a rise in unemployment, an increase in interest rates, a downturn in the real estate market, or a general contraction or other difficulties affecting the Korean economy may lead Korean consumers to reduce spending (a substantial portion of which is conducted through credit card transactions), which in turn leads to reduced earnings for our credit card business, as well as to higher default rates on credit card loans, deterioration in the quality of our credit card assets and increased difficulties in recoveringwritten-off assets from which a significant portion of Shinhan Card’s revenues is derived. Any of these developments could have a material adverse effect on our business, financial condition and results of operations.

Increasing consumer and corporate spending and borrowing on our card products and growth in card lending balances depend 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, as well as the level of discretionary income among our cardholders, which is largely affected by macroeconomic factors beyond our control. In addition, credit card companies in Korea, including Shinhan Card, may not be able to enjoy any rapid growth in revenue over the long term due to the maturing nature of the credit card industry, in part due to oversaturation of credit card service providers. Shinhan Card’s future earnings and profitability also depend on its ability to attract 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 manage and expand cardholder benefits in a cost-effective manner or contain the growth of marketing, promotion and reward expenses to a commercially reasonable level. If Shinhan Card is not successful in increasing customer spending, maintaining or expanding its market position and asset growth, or containing costs or cardholder benefits, its financial condition, results of operations and cash flow could be negatively affected.

KT consortium’sK-Bank and Kakao consortium’s Kakao Bank commenced operations in April 2017 and July 2017, respectively. Internet-only banks are expected to become major competitors to Shinhan Card in various business areas, particularly in themid-term interest loan market. In addition, with the rapid growth of online service providers and technology companies providing virtual payment services, more competitors are entering the financial payments industry, creating a new paradigm in the payments market and changing the competitive landscape. New competitors, including Kakao Corp., NAVER and Samsung Electronics, have introduced new payment methods which are now competing with Shinhan Card’s payment model AppCard. In 2018, Kakao Bank is expected to compete with credit card service providers by launchinglaunched its own credit card business, and expanding itsmid-range interest rate loan offerings.offerings and competing with the existing credit card service providers. Shinhan Card is currently making efforts to enhance its AppCard payment model and cooperating with other credit card service providers to promote its joint NFC (near field communication) payment network.

In addition, Government policies and regulations aimed at protecting small- andmedium-sized enterprises, such as the reduction of fees chargeable to small- andmedium-sized merchants, may have a material adverse

effect on our revenues from Shinhan Card. In January 2012, the Government expanded the definition of a small- andmedium-sized merchant to include those with annual sales of up toW200 million and, effective September 2012, lowered fees chargeable to such merchants from 1.8% to 1.5% with respect to credit cards. In January 2015, the Government further expanded the definition of a small- andmedium-sized merchant to include those with annual sales of more thanW200 million and up toW300 million, and imposed a cap on fees chargeable to such merchants at 2.0% with respect to credit cards. In November 2015, the Government announced a further reduction in the merchant fees chargeable to small- andmedium-sized enterprises with respect to credit cards, effective January 31, 2016, from 2.0% to 1.3% for merchants with annual sales of more thanW200 million and up toW300 million, and from 1.5% to 0.8% for merchants with annual sales of up toW200 million. In July

2017, the Enforcement Decree of the Specialized Credit Finance Business Act was amended to expand the range of small- andmedium-sized enterprises subject to lower merchant fees. Upon the amendment, merchants with annual sales of more thanW300 million and up toW500 million are subject to merchant fees chargeable with respect to credit cards of 1.3%, and merchants with annual sales of up toW300 million are subject to merchant fees chargeable with respect to credit cards of 0.8%. In January 2019, the government further expanded the definition of a small- andmedium-sized merchant to include those with annual sales of more thanW500 million and up toW3 billion. Upon the amendment, merchants with annual sales of more thanW500 million and up toW1 billion are subject to merchant fees chargeable with respect to credit cards of 1.4%, and merchants with annual sales of more thanW1 billion and up toW3 billion are subject to merchant fees chargeable with respect to credit cards of 1.6%. Pursuant to the Specialized Credit Financial Business Act, the rates of fees chargeable to merchants are subject to review and revision every three years, starting from 2012, and the rates of fees chargeable may be further adjusted due to changes in relevant regulations or Government policy. AmendmentsAdditionally, during 2018, the Seoul metropolitan and other regional governments have launched “Zero Pay”, a government sponsored QR code-based mobile payment platform charging little to no transaction fees (up to 0.5% depending on volume of sales) and aimed at reducing transaction fees small businesses pay to credit card companies. The Financial Services Commission also announced its plans to establish an open banking system that would provide fintech firms access to banks’ payment systems at lower costs. Additional amendments to regulations requiring further downward adjustments to merchant fees are expectedor Government policies aimed at reducing transaction fees paid to continuecredit card companies may be implemented in the near future.future, placing further downward pressure on the results of operations for credit card companies, including Shinhan Card.

In 2013, the Government also implemented measures regulating marketing costs in order to control excessive marketing campaigns and curtail undue marketing expenses, which had the effect of impeding revenue growth for credit card companies but also reduced or slowed the growth in their marketing expenses. In addition, effectiveEffective December 2013, the Government also introduced guidelines to curb the interest rates that credit card companies, including Shinhan Card, may charge on card loans and cash advances. Furthermore, the Government also provides tax incentives, among others, for the use of check cards (where the amounts paid with check cards are instantly debited from the customer’s bank accounts) to encourage the use of check cards in lieu of credit cards in an attempt to preempt a potential rise in delinquency among credit card users, and if check cards are widely used in lieu of credit cards, this would reduce interest income from credit cards, which generally have a longer repayment period than that of check cards, and may have an adverse impact on Shinhan Card’s revenues and results of operations. On November 26, 2018, the Financial Services Commission introduced additional guidelines aimed at curtailing excessive marketing expenses for credit card companies, for example by limiting the benefits credit card companies may offer to large corporate credit card clients or merchants as well as requiring a reasonable level of annual service fees for credit card holders. Although these and similar Government initiatives and measures may result in a reduction in marketing expenses, which in turn may help reduce the overall expenses of our credit card business, there is no assurance that Government measures will achieve their intended results, and such measures may result in a decline in the volume of credit card transactions or otherwise adversely affect our business, financial condition and results of operations.

Risks Relating to Our Other Businesses

We may experience significant losses from our investments and, to a lesser extent, trading activities due to market fluctuations.

We enter into and maintain large investment positions in fixed income products, primarily through our treasury and investment operations. These activities are described in “Item 4.B. Business Overview — Our Principal Activities — Other Banking Services.” We also maintain smaller trading positions, including equity and equity-linked securities and derivative financial instruments as part of our 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 beyond our control. When we own assets such as debt or equity securities, a decline in market prices, for example, as a result of fluctuating market interest rates or stock market indices, can expose us to trading and valuation losses. If market prices move in a way that we have not anticipated, we may experience losses. In addition, when markets are volatile and subject to rapid changes in price directions, 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 losses from our brokerage and other commission- andfee-based business.

We, through our investment and other subsidiaries, currently provide, and seek to expand the offerings of, brokerage and other commission- andfee-based services. Downturns in stock markets typically lead to a decline in the volume of transactions that we execute for our customers and, therefore, a decline in ournon-interest revenues. In addition, because the fees that we charge for managing our clients’ portfolios are often based on the size of the assets under management, a downturn in the stock market, which has the effect of reducing the value of our clients’ portfolios or increasing the amount of withdrawals, also generally reduces the fees 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 management subsidiaries may result in increased withdrawals and reduced cash inflows, which would reduce the revenue we receive from these businesses. In addition, protracted declines in 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.

Prolonged periods of declining or low interest rates may reduce or turn negative our investment margin on savings insurance products and result in an increase in the valuation of our liabilities associated with these products.

We, principally through Shinhan Life Insurance, offer fixed rate insurance policies such as savings insurance products that include guaranteed benefits. These products expose us to the risk that changes in interest rates will reduce our investment margin, which is the difference between the amounts that we are required to pay under the contracts and the rate of return we earn on investments intended to support obligations under such contracts. During periods of declining or low interest rates, we may have to invest insurance cash flows and reinvest the cash flows we received as interest or return of principal on our investments in lower yielding instruments. In addition, during periods of declining or low interest rates, fixed rate policies may become relatively more attractive investments to consumers. This could result in an increase in payments we are required to pay on such products and higher percentage of such products remainingin-force from year to year, during a period when our new investments carry lower returns. During periods of sustained lower interest rates, our reserves for policy liabilities may not be sufficient to meet future policy obligations and may need to be strengthened.

Significantly lower or negative investment margins may cause us to accelerate amortization, thereby reducing net income in the affected reporting period and potentially negatively affecting our credit instrument covenants or rating agency assessment of our financial condition. In addition, under IFRS 17, which is expected

to become effective beginning 2021,2022, insurance contract liabilities will be calculated in terms of market value (as the present value of future insurance cash flows with a provision for risk) instead of book value. As the discount rate will reflect current interest rates rather than book yields, we may have a significantly higher debt balance under IFRS 17 due to higher insurance liabilities, thereby resulting in a decrease in our risk-based capital.

We may fail to realize the anticipated benefits of and encounter significant risks in connection with mergers and acquisitions.

We continue to seek and evaluate opportunities for diversification and growth of our business, including through strategic acquisitions, and have experienced substantial growth through several mergers and acquisitions. Most notably, our acquisition of Chohung Bank in 2003 has enabled us to have the second largest banking operations in Korea. In addition, our acquisition in March 2007 of LG Card, the then largest credit card company in Korea, has enabled us to have the largest credit card operations in Korea and significantly expand ournon-banking business capacity so as to achieve a balanced business portfolio. In September 2018, we announced the acquisition of a 59.15% interest in Orange Life Insurance, Ltd., the former Korean unit of ING Life Insurance, as part of our efforts to diversify and enhance ournon-banking businesses. The acquisition was approved by the Financial Services Commission on January 16, 2019 and closed on February 1, 2019. In addition to Orange Life Insurance, Ltd., on October 31, 2018, we agreed to acquire Asia Trust Co., Ltd. in order to expand our real estate business capacity and have also acquired certainsmall-sized overseas financial service companies and asset management companies. We expect to integrate these and any future acquisitions with our existing businesses and generate synergies and expand our business capabilities. However, we may encounter significant risks, including difficulty in successfully integrating acquired businesses, increased expenses such as working capital requirements or capital expenditures, regulatory risks and financial risks such as potential liabilities of the businesses we acquire. In addition, evaluating potential acquisitions may require us to incur significant expenses or divert management’s attention away from other business issues. As such, no assurance can be given that any completed or contemplated acquisitions will not have a negative effect on our business, financial condition and results of operations that outweigh any potential benefits.

Other Risks Relating to Us as the Holding Company

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’spaid-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 of 1950, as amended (the “Banking Act”), a bank 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 totalpaid-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 our or our subsidiaries’ capital adequacy ratios 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 to 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), cyber or other security breaches, litigation, compliance failures, corporate governance issues, 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 operations.

Our risk management policies and procedures may not be fully effective at all times.

In the course of our operations, we must manage a number of risks, such as credit risks, market risks and operational risks. We seek to monitor and manage our risk exposures through a comprehensive risk management platform, encompassing centralized risk management organization and credit evaluation systems, reporting and monitoring systems, early warning systems and other risk management infrastructure, using a variety of risk management strategies and techniques. See “Item 4.B. Business Overview — Risk Management.” Although we devote significant resources to developing and improving our risk management policies and procedures and expect to continue to do so in the future, our risk management practices may not be fully effective at all times in eliminating or 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,in the past, a limited number of our and our subsidiaries’ personnel 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 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 face.

We may experience disruptions, delays and other difficulties relating to our information technology systems.

We rely on our information technology systems to seamlessly provide our wide-ranging financial services as well as for our daily operations, including billing, online and offline financial transactions settlement and record keeping. We continually upgrade, and make substantial expenditures to upgrade, our group-wide information technology system, including in relation to customer data-sharing and other customer relations management systems, particularly in light of the heightened cyber security risks from advances in technology. Despite our best efforts, however, we may experience disruptions, delays, cyber or other security breaches or other difficulties relating to our information technology systems, and may not timely upgrade our systems as currently planned. Any of these developments may have an adverse effect on our business, particularly if our customers perceive us to not be providing thebest-in-class cyber security systems and failing to timely and fully rectify any glitches in our information technology systems.

Our activities are subject to cyber security risk.

Our activities have been, and will continue to be, subject to an increasing risk of cyber-attacks, the nature of which is continually evolving. Cyber security risks include unauthorized access, through system-wide “hacking” or other means, to privileged and sensitive customer information, including passwords and account information, and illegal use thereof. Cyber security risk is generally on the rise as a growing number of our customers increasingly rely on our Internet- and mobile phone-based banking services for various types of financial

transactions. While we vigilantly protect customer data through encryption and other security programs and have made substantial investments to build and upgrade our systems and defenses to address the growing threats from cyber-attacks, there is no assurance that such data will not be subject to future security breaches. In addition, there can be no assurance that we will not experience a leakage of customer information or other security breaches as a result of illegal activities by our employees, outside consultants or hackers, or otherwise.

For example, in March 2013, we experienced a temporary interruption in providing online financial services due to large-scale cyber-attacks by unidentified sources on the security systems of major broadcasting networks and financial institutions in Korea. The interruption of our online financial services lasted approximately 90 minutes, after which our online system resumed without further malfunction. The Financial Supervisory Service conducted an investigation into the incident and found that Shinhan Bank and Jeju Bank had not properly maintained their information technology administrator accounts and vaccine servers. As a result, in December 2013, the Financial Supervisory Service notified Shinhan Bank and Jeju Bank of an institutional caution (which does not give rise to significant sanctions unlike in the case of repeated institutional warnings) and imposed disciplinary actions against five of Shinhan Bank’s employees and three of Jeju Bank’s employees. We do not believe such incident resulted in any material loss or leakage of customer information or other sensitive data.

Major financial institutions in Korea and around the world have also fallen victim to large-scale data leakage in the past. In December 2013, it was reported that there was a leakage of personal information of approximately 130,000 customers of Standard Chartered Bank and Citibank in Korea, which leakage was attributed to a third partysub-contractor in the case of Standard Chartered Bank, and an employee in the case of Citibank. In addition, in January 2014, it was reported that there was a leakage of personal information of approximately 100 million customers of NH Card, Lotte Card and KB Card in Korea due to illegal access to such information by an employee of a third party credit information company in the course of developing information technology programs for these three credit card companies. In 2017, Equifax Inc., a U.S. credit reporting company, was reported to have suffered a breach of personal information of over 143 million people.

Other than the cyber security attack in March 2013 as discussed above, we have not experienced any material security breaches in the past, including any similar large scale leakage of customer information. In order to minimize the risk of security breaches related to customer and our other proprietary information, we have taken a series of group-wide preventive measures, such as the adoption and implementation of abest-in-class information security system and reinforcement of internal control measures. We are fully committed to maintaining the highest standards of cyber security and consumer protection measures and upgrading them continually. We have implemented the ISO 27001-certified security management system for us and all our subsidiaries, and we have obtained the Information Security Management System certification for most of our subsidiaries. Our JointIntegrated Security Control Center’s McAfee security management system enables us to continuously monitor for signs of potential cyber-attacks and provides us with advance warnings that will allow us to promptly respond to such attacks. We believe such certifications represent third-party validations that we are in compliance withbest-in-class international standards on matters of information security. Our security management system continuously monitors for signs of potential cyber-attacks and is designed to provide early warning alerts to enable prompt action by us. In order to prevent intentional and accidental security issues by our employees, we have created a violation monitoring system, reinforcing our security measures by preemptively identifying various scenarios of threats and by collecting and analyzing different types of data that allows us to quickly identify any potential security violations. Moreover, we established a new information security lab to build a continuous security research and development system to respond to hacking and other cyber threats. Through these measures, we are developing technical capabilities necessary to respond to the latest security threats. We also provide intensive employee training to our information technology staff and other employees on cyber security and have adopted advanced security infrastructure (including through hiring a highly competent team of information security experts) for online financial services such as mandatory website certification and keyboard security functions. In addition, reviews of our system are conducted, across all of our subsidiaries, through periodic audits and simulation reviews by external experts. In addition, in compliance with applicable regulations we currently carry insurance to cover cyber security breaches up toW10 billion in relation to our banking

business and up toW3 billion in the aggregate and up toW1 billion per incident for our securities investment business and have set

aside a reserve ofW1 billion for our credit card business. In addition, in light of the growing use of smart phones and other mobile devices to access financial services, we have implemented security measures (including encryptions and service terminal monitoring) to provide a secure mobile banking service as well as to prevent illegal leakage or sharing of customer data and otherwise enhance customer privacy. We are also keenly aware of the litigation and regulatory sanctions risks that may arise from security breaches and are aggressively reinforcing a group-wide culture that stresses safety and good custodianship as among our highest priorities. Furthermore, we are actively taking steps to implement preventive and other steps recommended or required by the regulatory authorities in relation to actual and potential financial scams. However, given the unpredictable and continually evolving nature of cyber security threats due to advances in technology or other reasons, there is no assurance that, notwithstanding our best efforts at maintaining thebest-in-class cyber security systems, we will not be vulnerable to major cyber security attacks in the future.

The public is developing heightened awareness about the importance of keeping their personal data private, and the financial regulators are placing greater emphasis on data protection by financial service providers. For example, under the Personal Information Protection Act, as last amended in October 2017, financial institutions, as personal information manager, may not collect, store, maintain, utilize or provide resident registration numbers of their customers, unless other laws or regulations specifically request or permit the management of resident registration numbers. Further, under the Use and Protection of Credit Information Act, as last amended in November 2017 with effect from MayDecember 2018, a financial institution has a higher duty to protect credit information, meaning information necessary to assess the creditworthiness of the counterparty to financial transactions and other commercial transactions. Such regulations have considerably restricted a financial institution’s ability to transfer or provide the information to its affiliate or holding company, and treble damages can be imposed on a financial institution for a leakage of such information. In addition, under the Electronic Financial Transaction Act, as last amended in April 2017 with effect from October 2017, a financial institution is primarily responsible for compensating its customers harmed by the financial institution’s cyber security breach, even if the breach is not directly attributable to the financial institution. We maintain an integrated system that closely monitors customer information to ensure compliance with data protection laws and regulations.

If a cyber or other security breach were to happen with respect to us or any of our subsidiaries, it may result in litigation by affected customers or other third parties (including class actions), compensation for any losses suffered by victims of cyber security attacks, reputational damage, loss of customers, heightened regulatory scrutiny and related sanctions, more stringent compliance with the present and future regulatory restrictions, and other costs related to damage control, reparation and reinforcement of information security systems, any of which may have a material adverse effect on our business, results of operations and financial condition.

Our customers may become victims to “voice phishing” or other financial scams, for which we may be required to make monetary compensation and suffer damage to our business and reputation.

In recent years, financial scams known as voice phishing have been on the rise in Korea. While voice phishing takes many forms and has evolved over time in terms of sophistication, it typically involves the scammer making a phone call to a victim under false pretenses (for example, the scammer pretending to be a member of law enforcement, an employee of a financial institution or even an abductor of the victim’s child) and luring the victim to transfer money to an untraceable account controlled by the scammer. More recently, voice phishing has increasingly taken the form of the scammer “hacking” or otherwise wrongfully obtaining personal financial information of the victim (such as credit card numbers or Internet banking login information) over the telephone or other means and illegally using such information to obtain credit card loans or cash advances through automated telephone banking or Internet banking. Reportedly, a substantial number of such scammers belong to international criminal syndicates with bases overseas, such as China, with operatives in Korea.

In response to the growing incidents of voice phishing, regulatory authorities have undertaken a number of steps to protect consumers against voice phishing and other financial scams. There is no assurance, however, that

the regulatory activities will have the desired effect of substantially eradicating or even containing the incidents

of voice phishing or other financial scams. For example, following an investigation in November and December 2011 of major credit card companies, including Shinhan Card, as to their compliance with regulations on card loan-related voice phishing and the scope of damage suffered by customers as a result of voice phishing, the Financial Supervisory Service issued a number of guidelines for credit companies to comply with in order to minimize damage from voice phishing, including, among others, (i) strengthening identity verification procedures for card loan applications that are made online or through the automated response system, (ii) delaying the timing of loan payout by a few hours following the approval of card loan application, and (iii) giving an option to customers to block card loan applications. In May 2012, Shinhan Card completed all necessary steps to fully comply with these additional guidelines and has been in full compliance since then.

Although the financial institutions are often not legally at fault for the damage suffered by victims of voice phishing, the compensation scheme was adopted largely in consideration of social responsibility among financial institutions and that the financial institutions were not required to, and therefore in many instances did not, confirm the personal identity of the card loan or cash advance applicants prior to the adoption of such scheme. On December 8, 2011, Shinhan Card began implementing a mandatory outcall procedure to verify the personal identity of applicants for card loans and cash advances if not requested in person. In January 2012, financial institutions, the Financial Supervisory Service, the police and other related institutions formed a joint committee to prevent voice phishing incidents and implemented preventive measures such as enforcing a 10 minute delay for withdrawal of credit card loans ofW3 million or more from an automated teller machine. In addition, Shinhan Card and our other subsidiaries have established a fraud detection system that identifies any questionable transactions based on deviations from a customer’s conventional transaction patterns.

Partly as a result of these efforts, Shinhan Card did not receive any claims in 20172018 in relation to voice phishing. Accordingly, we do not believe that any currently outstanding claims in relation to voice phishing will have a material adverse impact on our business, financial condition or results of operations. Additionally, other than voice phishing incidents and the recent cyber security attacks as discussed above, we have not experienced any material security breaches in the past. However, given continual advances in technology and the increasing sophistication of the financial scammers, there is no assurance that we will be able to prevent future financial scams or that the frequency and scope of financial scams will not rise. If financial scams involving us and our subsidiaries were to continue or to become more prevalent, it may result in compensation for any losses suffered by victims thereof, reputational damage, loss of customers, heightened regulatory scrutiny and related sanctions, compliance with the present and future regulatory restrictions, and other costs related to damage control, reparation and reinforcement of our preventive measures, any of which may have a material adverse effect on our business, results of operations and financial condition.

Legal claims and regulatory risks arise in the conduct of our business.

In the ordinary course of our business, we are subject to regulatory oversight and potential legal and administrative liability risk. We are also subject to a variety of other claims, disputes, legal proceedings and government investigations in Korea and other jurisdictions where we are active. See “Item 8.A. Consolidated Statements and Other Financial Information — Legal Proceedings.” These types of proceedings may expose us to substantial monetary and/or reputational damages and legal defense costs, injunctive relief, criminal and civil penalties and the potential for regulatory restrictions on our businesses. The outcome of these matters cannot be predicted and they could adversely affect our future business.

While we plan to rigorously defend our positions in the lawsuits or other regulatory proceedings against us, it is difficult to predict the final outcome of such cases. The total amount in dispute may increase during the course of litigation and other lawsuits may be brought against us based on similar allegations. Accordingly, these lawsuits and other proceedings may have a material adverse effect on our business, financial condition and results of operations.

Risks Relating to Law, Regulation and Government Policy

We are a heavily regulated entity and operate in a legal and regulatory environment that is subject to change, and 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 risk exposure. These regulations may limit our activities, and changes in these regulations may increase our costs of doing business. Regulatory agencies frequently review regulations relating to our business and implement new regulatory measures, including increasing the minimum required provisioning levels 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 in regulations applicable to us, our subsidiaries and our or their business or changes in the implementation or interpretation of such regulations could affect us and our subsidiaries in unpredictable ways and could adversely affect our business, results of operations and financial condition.

Upon implementation of the Government-proposed Financial Consumer Protection Act (currently pending at the National Assembly’s subcommittee for review of the bill), banks as financial instrument distributors will be subject to heightened investor and consumer protection measures, including stricter distribution guidelines, improved financial dispute resolution system, increased liability for damages borne by direct financial instrument distributors and newly imposed penalty surcharges. We may also become subject to other restrictions on our operations as a result of future changes in laws and regulations, including more stringent liquidity and capital requirements under Basel III, which are being adopted in phases in Korea in consideration of, among others, the pace and scope of international adoption of such requirements. Any of these regulatory developments may have a material adverse effect on our ability to expand operations or adequately manage our risks and liabilities. For further details on the principal laws and regulations applicable to us as a holding company and our principal subsidiaries, see “Item 4.B. Business Overview — Supervision and Regulation.”

In addition, violations of law and regulations could expose us to significant liabilities and sanctions. For example, the Financial Supervisory Service conducts periodic audits on us and, from time to time, we have received institutional warnings from the Financial Supervisory Service. If the Financial Supervisory Service determines as part of such audit or otherwise that our financial condition, including the financial conditions of our operating subsidiaries, is unsound or that we have violated applicable law or regulations, including Financial Services Commission orders, or if we or our operating subsidiaries 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 Supervisory Service may ask the Financial Services Commission to order, among other things, cancellations of authorization, permission or registration of the business, suspensions of a part or all of the business, closures of branch offices, recommendations for dismissal of officers or suspensions of officers from performing their duties, or may order, among other things, institutional warnings, institutional cautions, reprimanding warnings on officers, cautionary warnings on officers or cautions on officers. From time to time, our subsidiaries, including Shinhan Bank and Shinhan Card, have been subject to investigations and/or sanctions from the Financial Supervisory Service. See “Item 8.A. Consolidated Statements and Other Financial Information — Legal Proceedings.” If any such measures are imposed on us or our subsidiaries as a result of unsound financial condition or failure to comply with minimum capital adequacy requirements or for other reasons, it will have a material adverse effect on us and our subsidiaries’ business, financial condition and results of operations.

The Government may encourage targeted lending to certain sectors in furtherance of policy objectives, and we may take this factor into account.

The Government has encouraged and may in the future encourage targeted lending to certain types of enterprises and individuals in furtherance of government initiatives. The Government, through its regulatory bodies such as the Financial Services Commission, from time to time announces lending policies to encourage Korean banks and financial institutions, including us and our subsidiaries, to lend to particular industries,

business groups 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.

For example, the Government has taken and is taking various initiatives to support small- andmedium-sized enterprises andlow-income individuals, who were disproportionately affected by the downturn in the Korean and global economy in the late 2000s and have yet to fully recover. As part of these initiatives, the Financial Supervisory Service has recently encouraged banks in Korea to increase lending to small- andmedium-sized enterprises in order to ease the financial burden on such enterprises amid sluggish economic recovery, and in February 2016, the Bank of Korea announced that it would increase support for loans to small- andmedium-sized enterprises byW9 trillion in anticipation of growing liquidity difficulties among such enterprises in light of the sustained sluggishness of the general economy and to stimulate trade exports, infrastructure investments and entrepreneurial efforts. The financial regulators have also adopted several measures designed to improve certain lending practices of the commercial banks which practices were perceived as having an unduly prohibitive effect on extending loans to small- tomedium-sized enterprises.

In addition, as a way of supporting the Government’s initiative to assist promisingstart-ups and venture companies, startups,in February 2015, the financial regulators announced that they would encourage the banks in Korea to increase lending to technology companies in the small- tomedium-sized enterprise segment by an annual target ofW20 trillion and to enhance technology-related credit review capabilities. Pursuant to these initiatives, the total lending to technology companies in the small- tomedium-sized enterprise segment, on a cumulative basis, reachedW32.6 trillion in 2015,W58.4 trillion in 2016,W82.0 trillion in 2017 andW84.097.0 trillion in 2017. In January 2017, the Financial Services Commission announced that it would further encourage lending to technology companies with a goal of reaching total lending, on a cumulative basis, ofW80 trillion by the end of 2017.2018. As of December 31, 2017,2018, Shinhan Bank’s total lending to technology companies reached, on a cumulative basis,W12.315.3 trillion.

Furthermore, in response to an increasing level of consumer debt and amid concerns over the debt-servicing capacity of retail borrowers if interest rates were to rise, the Financial Services Commission announced in February 2014 that it plans to increase the proportion of fixed interest rate loans and installment principal repayment-based loans within the total housing loans extended by commercial banks (which loans have historically been, for the most part, variable interest rate loans with the entire principal being repaid at maturity, which is usually rolled over on an annual basis). According to this plan, the target proportion for fixed interest rate loans was set at 20%, 35%, 37.5% and 40% and the target proportion for installment principal repayment-based housing loans was set at 20%, 35%, 40% and 45%, each by the end of 2014, 2015, 2016 and 2017, respectively. Amid concerns about increasing household debt, in May 2016 the target proportion for fixed interest rate loans and installment principal repayment-based housing loans for 2016 were increased to 40% and 45%, respectively, and in February 2017 the target proportion for fixed interest rate loans and installment principal repayment-based housing loans for 2017 were increased to 45% and 55%, respectively. In April 2018, the Financial Services Commission announced that the target proportion for fixed interest rate loans for 2016, 2017 and 2018 were increased to 40%, 45% andwould be set at 47.5%, respectively, and the target proportion for installment principal repayment-based housing loans for 2016 and 2017 were increased to 45% and 55%, respectively, and maintained at 55% for 2018.. In addition, an expanded tax deduction limit for interest repayment is granted for loans with maturity of 10 years or more (compared to 15 years or more prior to this plan). The Financial Services Commission announced that it would examine whether banks meet their targets on an annual basis.

In furtherance of the policy to expand the proportion of fixed rate housing loans, the Financial Services Commission implemented “Relief Debt Conversion” program from March 24 to March 27, 2015 and from March 30 to April 3, 2015, respectively, under which borrowers of eligible housing loans (namely, loans that have been in existence for one year or more since the original loan date, with no delinquency in the past six months, with principal amounts ofW500 million or less and for houses valued atW900 million or less that are on a floating rate basis and/or an interest payment only basis) might convert such loans to new fixed rate loans in respect of which the borrowers would be required to repay the principal and interest in installment for a term of 10, 15, 20 or 30 years without a grace period, provided that the new loans pass the maximumloan-to-value ratio of 70% (irrespective of the location of the property) and the maximumdebt-to-income ratio of 60% (only in respect of apartment units located in the greater Seoul metropolitan area, subject to certain exceptions). The borrowers were allowed to convert the original loans only at the banks that extended such loans. The banks holding the newly converted fixed rate loans are required to sell such loans to Korea Housing Finance

Corporation, a government-controlled entity, which will then securitize such loans and issue mortgage-backed securities (backed by such loans) to be purchased by the banks who sold the loans in proportion to the amounts of the loans sold, and the banks will be required to hold such securities for a period of one year, after which the bank can sell or dispose of such securities in the market or otherwise. According to the Financial Services Commission, under this program, approximately 327,000 borrowers converted loans in the aggregate amount ofW31.7 trillion to fixed rate loans, of which Shinhan Bank accounted for approximately 13.5%. Due in large part to such initiatives, fixed interest rate loans and installment principal repayment-based loans accounted for 44.6%44.2% and 49.1%51.0%, respectively, of the total housing loans extended by commercial banks in Korea as of September 2017,June 30, 2018, according to data published by the Government in November 2017.December 2018. Fixed interest rate and installment principal repayment-based housing loans accounted for 44.9%43.8% and 49.1%, respectively, of the housing loans extended by Shinhan Bank as of December 31, 2017.2018.

In the event that market interest rates increase from those applicable during this program’s implementation in March and April 2015, we may experience valuation or realization losses on the mortgage-backed securities to be held by Shinhan Bank. Due to the prevailing interest rate environment and other market conditions, we also may not be able to sell or otherwise dispose of the mortgage backed securities in the market or otherwise in amounts or at prices commercially reasonable to us. In addition, as a result of this program we may incur additional costs from recalibrating our asset portfolio and asset-liability management policy. Any of these developments could adversely affect our results of operations and financial condition.

We, on a voluntary basis, may factor the existence of the Government’s policies and encouragements into consideration in making loans although the ultimate decision whether to make loans remains with us and is made based on our internal credit approval procedures and risk management systems independently of Government policies. In addition, in tandem with providing additional loans to small- andmedium-sized enterprises andlow-income individuals, Shinhan Bank takes active steps to mitigate the potential adverse impacts from making bad loans to enterprises or individuals with high risk profiles as a result of such arrangement, such as by strengthening its loan review and post-lending monitoring processes. However, we cannot assure you that such arrangement did not or will not, or similar or othergovernment-led initiatives in the future will not, result in a suboptimal allocation of our loan portfolio from a risk-reward perspective compared to what we would have allocated based on purely commercial decisions in the absence of such initiatives. The Government may implement similar or other initiatives in the future to spur the overall economy or encourage the growth of targeted industries or relief to certain segments of the population. Specifically, the Government may introduce lending-related initiatives or enforce existing ones in a heightened fashion during times when small- andmedium-sized enterprises orlow-income households on average are facing an increased level of financial distress or vulnerability due to an economic downturn, which makes lending to them in the volume and the manner suggested by the Government even riskier and less commercially desirable. Accordingly, such policy-driven lending may create enhanced difficulties for us in terms of risk management, deterioration of our asset quality and reduced earnings, compared to what would have been in the absence of such initiatives, which may have an adverse effect on our business, financial condition and results of operations.

The Government may also encourage investments in certain institutions in furtherance of policy objectives, and we may not recoup our investments therein in a timely or otherwise commercially reasonable manner.

In addition to targeted lending, the Government may from time to time encourage or request the financial institutions in Korea, including us and our subsidiaries, to make investments in, or provide other forms of financial support to, certain institutions in furtherance of the Government’s policy objectives. In response thereto, we have made and will continue to make the ultimate decision on whether, how and to what extent we will comply with such encouragements or requests based on our internal risk assessment and in accordance with our risk management systems and policies. At the same time, as a leading member of the financial service industry in Korea and as a responsible corporate citizen we will also fully give due consideration to such encouragements or requests from the Government, especially in relation to the long-term benefit arising from furthering the policy objective of maintaining a sound financial system, even if complying with such requests may involve additional short-term costs and risks to a limited extent.

For example, to deal with a growing number ofnon-performing loans in the wake of the global financial crisis of 2008-2009, the Government sponsored the establishment of United Asset Management Company Ltd. (“UAMCO”) in October 2009 through capital contributions from six major policy and commercial banks, namely Shinhan Bank, Kookmin Bank, KEB Hana Bank, Industrial Bank of Korea, Woori Bank and Nonghyup Bank. The Government originally planned to dispose of UAMCO during 2015 and establish a new company that specializes in corporate restructuring, but the Government scrapped such plans and instead decided to reorganize UAMCO and expand its restructuring business. As part of an effort to strengthen its balance sheet, UAMCO received additional capital contributions in May 2016 from two new shareholders, Korea Development Bank and the Export-Import Bank of Korea, and two of its existing shareholders, Woori Bank and Nonghyup Bank. Shinhan Bank has committed to contributeW175 billion of capital to UAMCO, of whichW85 billion has been contributed to date. As of the date hereof, Shinhan Bank holds a 14% equity interest in UAMCO, while seven other policy and commercial banks each hold interests ranging from 2% to 14%.

UAMCO seeks to achieve financial improvement of struggling companies through a wide range of restructuring programs, including debt restructuring, capital injection, asset sales, corporate reorganization, workouts and liquidation and bankruptcy proceedings and is the largest purchaser in Korea ofnon-performing financial assets generally. Shinhan Bank soldnon-performing assets to UAMCO in the amount ofW39.1103.5 billion,W103.5118.2 billion andW118.2131.7 billion in 2015, 2016, 2017 and 2017,2018, respectively. With an enlarged capital base following the recent capital contributions mentioned above, it is expected that UAMCO will play a more active role in the restructuring of the Korean corporate sector. The Government is also considering an amendment of the Financial Investment Services and Capital Markets Act of Korea to facilitate the business activities of UAMCO.

If UAMCO is successful in its expanded restructuring activities, it is anticipated that financial institutions including us will be able to further enhance their financial soundness by transferring morenon-performing loans to UAMCO rather than directly engaging in the restructuring activities of the troubled borrowers. However, Shinhan Bank or other banks may be requested by the Government to make additional capital contributions or loans to UAMCO, which may entail unanticipated costs. Additionally, given the generally poor quality of ournon-performing assets, there is no assurance that we will be able to sell such assets held by us to UAMCO on commercially reasonable terms and on a timely basis. Furthermore, there is no assurance that in furtherance of similar or other policy objectives, the Government may not request or otherwise encourage us or our subsidiaries to provide similar or other investments or provide other financial support for which we are not duly compensated or otherwise take up additional risk that we would not normally have undertaken, which may have an adverse effect on our business, financial condition and results of operations.

The level and scope of government oversight of our retail lending business, particularly regarding mortgage and home equity loans, may change depending on the economic or political climate.

Real estate comprises the most significant asset for a substantial number of households in Korea, and movements of housing prices have generally had a significant impact on the domestic economy. Accordingly, regulating housing prices, either in terms of attempting to stem actual or anticipated excessive speculation during times of a suspected housing price bubble and spur the pricing and/or volume of real estate transactions during times of a depressed real estate market by way of tax subsidy, guidelines to lending institutions or otherwise, has been a key policy initiative for the Government.

For example, during the early tomid-2000s, the Government adopted several regulatory measures, including in relation to retail banking, to stem a rise in speculation in real estate investments generally and in select areas. 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 a high level of 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 addition, amid a prolonged slump in the housing market in Korea, in April 2013, the Government

announced a Real Estate Comprehensive Countermeasure,real estate comprehensive countermeasure, which provides, among other things, for (i) reduced capital gains tax and (ii) exemption of acquisition tax for first-time homebuyers. In addition, in November 2013, the Government announced a permanent reduction in acquisition tax, with retrospective application from August 2013. Prior to such reduction, acquisition tax was assessed on a differentiated scale based on whether the homebuyer was purchasing a primary home or a secondary home, with the former being assessed an acquisition tax of 2% for the purchase of homes underW900 million and 4% for homes exceedingW900 million, and the latter being assessed an acquisition tax of 4% regardless of the price of the home. Under the new regulatory structure, the differentiated tax scale for primary homes and secondary homes is eliminated, and all homebuyers are assessed an acquisition tax of 1% for the purchase of homes underW600 million, 2% for homes exceedingW600 million but less thanW900 million and 3% for homes exceedingW900 million. Furthermore, in February 2014, the Financial Services Commission announced plans to increase the proportion of fixed interest rate loans and installment principal repayment-based loans within the total housing loans extended by commercial banks. See “— The Government may encourage targeted lending to certain sectors in furtherance of policy objectives, and we may take this factor into account.” In addition, in order to rationalize the regulations on the housing loans, the Financial Services Commission and the Financial Supervisory Service provided administrative instructions in July 2014 with effect from August 1, 2014, which have been extended and amended several times, that all financial institutions including banks under the Banking Act are subject to the maximumloan-to-value ratio of 70% (irrespective of the location of the property, subject to certain exceptions) and the maximumdebt-to-income ratio of 60% (only in respect of apartment units located in the greater Seoul metropolitan area, subject to certain exceptions). The above administrative instructions have been replaced by the Regulation on the Supervision of the Banking Business and the Detailed Regulation on the Supervision of the Banking Business reflecting the tightened measures as discussed below. Furthermore, in December 2014, the National Assembly also passed several bills that were designed to stimulate the real estate market. In November 2016, amid concerns about increasing household debt, the Government announced another Real Estate Comprehensive Countermeasurereal estate comprehensive countermeasure requiring property buyers in Seoul to retain ownership for a longer period of time and increasing down payments to be made on the property. In January 2017, in order to modernize credit review methods and stabilize the management of household debt, the Financial Services Commission announced the planned introduction of a debt service ratio and a newdebt-to-income ratio. The newdebt-to-income ratio, which has been implemented beginning January 31, 2018 reflects (i) both principal and interest payments on the applicable mortgage and home equity loan and existing mortgage and home equity loans and (ii) interest payments on other loans. Previously,debt-to-income ratio had only reflected (i) both principal and interest payments on the applicable mortgage and home equity loan and (ii) interest payments on existing mortgage and home equity loans. Debt service ratios reflect principal and interest payments on both the applicable loan and other loans and are expected to bewere introduced on a trial basis as a self-regulatory reference index beginning on March 26, 2018 with full implementation expected to take placeand were fully implemented in October 2018. The newdebt-to-income ratios will be used as the primary reference index in the evaluation and approval process for mortgage and home equity loans, and debt service ratios once fully implemented, are expected towill be used as a supplementary reference index providing additional limits on mortgage and home equity loans. Since October 2018, loans to rental businesses are subject to arent-to-interest ratio (calculated as the borrower’s aggregate annual rental income from rental properties over its aggregate annual payment amount of interest on loans secured by such rental properties) of at least 1.25 for residential rental businesses and as least 1.50 fornon-residential rental businesses.

On August 2, 2017, the Government unveiled a tighter set of real estate market measures aimed at taming speculation and deterring the rise of housing prices. Pursuant to the measures, beginning August 3, 2017, Seoul, Sejong Special Self-Governing City and Gwacheon were named “overheated speculative districts,” with the loan limits of those buying homes there to be tightened to 40% of their property value from 60%. The maximumdebt-to-income ratio will be capped at 40% from 50%. Eleven districts in Seoul and Sejong Special Self-Governing City have also been designated “speculative districts” subject to higher taxes and tougher regulations. The August 2, 2017 measures come after President MoonJae-in administration’s first countermeasures, unveiled on June 19, 2017, which were designed to prevent the resale of home purchasing rights of real estate assets in Seoul while tightening the bars for maximumloan-to-value ratio for home buyers to 60% from 70% and

maximumdebt-to-income ratio to 50% from 60% in the regions designated as “adjustment targeted areas” (comprised of Seoul, Sejong Special Self-Governing City, seven cities in Gyeonggi Province and seven boroughs in Busan Metropolitan City). However, the new lending limits, which became effective on July 3, 2017, failed to halt the surge in housing prices, thus leading to the more stringent measures announced on August 2, 2017. Currently,loan-to-value ratios and newdebt-to-income ratios in “overheated speculative districts,” “speculative districts,” “adjustment targeted areas” and other regions are regulated by the Regulation on the Supervision of the

Banking Business and the Detailed Regulation on the Supervision of the Banking Business. These renewed measures are expected to lead to a decline in the overall volume of home mortgage loans but may result in an increase in long-term deposits loans required for house rentals and lending to borrowers with high credit profiles.

As housing prices in the greater Seoul metropolitan area continued to rise despite the above measures, on September 13, 2018, the Government announced a more robust policy to curb housing prices. Effective from September 14, 2018, these measures include, among other things, tighter regulations on maximumloan-to-value ratios in “overheated speculative districts,” “speculative districts” and “adjustment targeted areas” (collectively, the “regulated areas”), under which the maximumloan-to-value ratio applicable to owners of single or multiple residential units attempting to purchase an additional residential unit located in any of the regulated areas using a mortgage loan will be nil with certain exceptions applicable only to owners of a single residential unit attempting to purchase an additional residential unit. The maximumloan-to-value ratio will be also nil, with certain exceptions, in the case of purchases of high value residential units (for which the declared value is more thanW900 million) located in any of the regulated areas not being made for the purpose of actual residence. These renewed measures are expected to lead to a decline in the overall volume of home mortgage loans but may result in an increase in long-term deposit loans required for house rentals and lending to borrowers with high credit profiles.

Pursuant to the Regulation on the Supervision of the Banking Business, theShinhan Bank must maintain a loan to deposit ratio of no more than 100%. Currently, in calculating the loan to deposit ratio, there is no differentiation between retail loans and corporate loans. However, the Regulation on the Supervision of the Banking Business is expected to bewas amended during the first quarter ofon July 12, 2018 to provide that, beginning from the second half of 2018,January 1, 2020, in calculating such loan to deposit ratio, retail loans and corporate loans will be weighed differently, with retail loans subject to a multiple of 115% and corporate loans (excluding loans to SOHOs) subject to a multiple of 85%, thereby increasing the impact of retail loans and reducing the impact of corporate loans in calculating such ratio. Additionally, the Detailed Regulation on the Supervision of the Banking Business is also expected to bewas amended during the first quarter ofon June 30, 2018 to provide for a weighted multiple to be applied to mortgage and home equity loans where theloan-to-value ratio exceeds 60% in determining required minimum total capital (BIS) ratio. Further, the Regulation on the Supervision of the Banking Business is expected to be amended during 2019 such that the second half of 2018 to introduce an additional countercyclical capital buffer requirement that specifically addressesalso takes into account the increase inof credit in the retail sector. This is in addition to and separate from the existing general countercyclical capital buffer requirements that take into account the degree of increase in credit generally relative to the gross domestic product. The Detailed Regulation on the Supervision of the Banking Business iswas also expected to be amended during the second half ofon June 30, 2018 to add “concentration of risk in the retail sector” as an additional criteria when the FSSFinancial Supervisory Service evaluates the risk management systems of Korean banks.

There is no assurance that Government measures will achieve their intended results. While any Government measure that is designed to stimulate growth in the real estate sector may result in growth of, and improved profitability for, our retail lending business (particularly with respect to mortgage and home equity loans) at least for the short term, such measure could also result in unintended consequences, including potentially excessive speculation resulting in a “bubble” for the Korean real estate market and a subsequent market crash. In contrast, any Government measure changing the direction of its stimulative measures (for example, in order to preemptively curtail an actual or anticipated bubble in the real estate market) may result in a contraction of the real estate market, a decline in real estate prices and consequently, a reduction in the growth of, and profitability for, our retail and/or other lending businesses, as well as otherwise have an adverse effect on our business, financial condition and results of operations or profitability. 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.”

We engage in limited settlement transactions involving Iran which may subject us to legal or reputational risks.

The U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) administers and enforces certain laws and regulations (“OFAC Sanctions”) that impose restrictions upon U.S. persons with respect to dealings with or related to certain countries, governments, entities and individuals that are the subject of OFAC Sanctions, including Iran, and maintains a list of specially designated nationals (the “SDN List”), whose assets are blocked and with whom U.S. persons are generally prohibited from dealing. Some OFAC Sanctions require a U.S. nexus in order to apply (“Primary Sanctions”) while other OFAC Sanctions on certain dealings with or related to Iran, North Korea, and Russia apply even in the absence of a U.S. nexus (“Secondary Sanctions”).Non-U.S. persons are subject to Secondary Sanctions and can also be held liable for violations of OFACPrimary Sanctions on various legal grounds, such as causing violations by U.S. persons by engaging in transactions completed in part in the United States. The European Union also enforces certain laws and regulations that impose restrictions upon nationals and entities of, and business conducted in, member states with respect to activities or transactions with certain countries, governments, entities and individuals that are the subject of such laws and regulations. The United Nations Security Council and other governmental entities also impose similar sanctions.

In August 2016, the government of South Korea authorized Shinhan Bank to act as a settlement bank for Euro-denominated transactions between South Korean and Iranian businesses. Prior to the granting of this

permission, payments for business activities were settled only in Korean Won and we did not participate in such settlements. As of December 31,From August 2016 through August 2017, Shinhan Bank has processed ten such transactions that has resulted in a minimal amount of revenue. We expect that the volume of these transactions and any revenue gained from them, if any, will continue to be minimal for the foreseeable future. Since August 2017, Shinhan Bank has ceased processing any such transactions.transactions and has no intention to process any such transactions in the future. We are committed to engaging only in lawful activities and in obeying all relevant OFAC Sanctions and European Union sanctions but cannot guarantee that actions taken by our employees will not violate such sanctions. Moreover,On May 8, 2018, U.S. President Donald Trump announced his decision to terminate the relaxationparticipation of US and European Union sanctions undertaken pursuant tothe United States in the Joint Comprehensive Plan of Action (“JCPOA”(the “JCPOA”) may “snap-back” into place in, pursuant to which certain relief of OFAC Sanctions relating to Iran had been provided. Following two wind down periods, one that ended on August 6, 2018 and that ended on November 4, 2018, all Iran-related Secondary Sanctions that had been waived pursuant to the event that Iran failsJCPOA werere-imposed andnon-U.S. persons now face risk of Secondary Sanctions for dealing with certain key sectors of the Iranian economy or for providing associated services related to comply with its commitments under the JCPOA.targeted activities. As such, we cannot predict with a reasonable degree of certainty whether our Euro-denominated,any Iran-related settlement businessactivities may become sanctionable. Additionally, changes in U.S. policy regarding Iran may also result in our dealings with Iran becoming sanctionable. Consequently, our activities relatedsubject us to Iran subject usOFAC Sanctions and to potential legal or reputational risks.

The implementation of IFRS 9 with effect from January 1, 2018 renders certain of our historical financial information as of and for the years ended December 31, 2014, 2015, 2016 and 2017 not directly comparable with that of our financial information after January 1, 2018.

With effect from January 1, 2018, IFRS 9 ‘Financial Instruments’ has replaced in entirety previous guidance in IAS 39. Following the adoption of IFRS 9, we are required tore-classify andre-measure (including impairment measurement) certain of our financial instruments from January 1, 2018 without requiring any restatement of the corresponding figures of the prior period. Based on the method of adoption allowed under IFRS 9, we are permitted to adjust our shareholder equity from January 1, 2018 without requiring any restatement of the corresponding figures of the prior period where the difference between the new carrying amount and original carrying amount recognized in retained earnings. The difference between the new carrying amount and original carrying amount amounted toW344 billion as of January 1, 2018. As we are not required to restate affected financial figures with the implementation of IFRS 9, certain of our historical financial information as of and for the years ended December 31, 2014, 2015, 2016 and 2017 is not directly comparable against that of our financial information after January 1, 2018. Investors must therefore exercise caution when making comparisons of any financial figures after January 1, 2018 against our historical financial figures prior to January 1, 2018 and when evaluating our financial condition, results of operations and results. For further information regarding the adoption of IFRS 9, see “Item 5.A. Operating Results — Critical Accounting Policies — Recently Adopted Standards and Interpretations — IFRS 9, ‘Financial Instruments’” and Note 60 of the notes to our consolidated financial statements included in this annual report.

The implementation of IFRS 9 has caused us to increase our allowance for impairment losses to cover expected credit loss on our loan portfolio and other financial instruments and may increase volatility in our profit or loss.

Following the adoption of IFRS 9, the “incurred loss” model under the previous guidance for loans, debt instruments, lease receivables, contractual assets and financial guarantee contracts has been replaced with a forward-looking “expected credit loss” model, and therefore impairment losses are likely to be recognized earlier, on a more forward-looking basis and on a broader scope of financial instruments than using the incurred loss model under the previous guidance. Accordingly, as of January 1, 2018, we increased our credit loss allowance fromW2,579 billion toW3,226 billion as a result of adopting IFRS 9. IFRS 9 also introduces additional requirements for a financial asset to be measured at amortized costs or fair value through other comprehensive income compared to the previous guidance and therefore would potentially increase the proportion of financial assets that are measured at fair value through profit or loss, thereby increasing volatility in our profit or loss. For further information regarding the adoption of IFRS 9, see “Item 5.A. Operating Results — Critical Accounting Policies — Recently Adopted Standards and Interpretations — IFRS 9, ‘Financial Instruments’” and Note 60 of the notes to our consolidated financial statements included in this annual report.

Risks Relating to Korea

Unfavorable financial and economic conditions in Korea and globally may have a material adverse impact on our asset quality, liquidity and financial performance.

We are incorporated in Korea, where most of our assets are located and most of our income is generated. As a result, we are subject to political, economic, legal and regulatory risks specific to Korea, and our business, results of operations 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 investors’ reactions to developments in one country can have adverse effects on the securities price of companies in other countries, we are also subject to the fluctuations of the global economy and financial markets. Factors that determine economic and business cycles in the Korean or global economy are for the most part beyond our control and inherently uncertain. In addition to discussions of recent developments regarding the global economic and market uncertainties and the risks relating to us as provided elsewhere in this section, factors that could have an adverse impact on Korea’s economy in the future include, among others:

 

continued volatility or deterioration in Korea’s credit and capital markets;

 

difficulties in the financial sectors in Europe, China and elsewhere and increased sovereign default risks in select countries and the resulting adverse effects on the global financial markets;

 

declines in consumer confidence and a slowdown in consumer spending and corporate investments;

 

adverse changes or volatility in foreign currency reserve levels, commodity prices (including oil prices), exchange rates (including fluctuation of the U.S. Dollar, the Euro or the Japanese Yen exchange rates or revaluation of the Chinese Renminbi and the overall impact of the referendum in the United Kingdom in June 2016, in which the majority of voters voted in favor of an exit from the European Union (“Brexit”) on the value of the Korean Won), interest rates, inflation rates or stock markets;

 

increasing levels of household debt;

 

increasing delinquencies and credit defaults by retail and small- andmedium-sized enterprise borrowers;

 

continuing adverse conditions in the economies of countries and regions that are important export markets for Korea, such as the United States, Europe, Japan and China, or in emerging market economies in Asia or elsewhere, as well as increased uncertainty in the wake of Brexit;

 

the economic impact of any pending or future free trade agreements;

potential escalation of the ongoing trade war between the U.S. and China as each country introduces tariffs on goods traded with the other;

 

social and labor unrest;

 

decreases in the market prices of Korean real estate;

a decrease in tax revenue and a substantial increase in the Government’s expenditures for fiscal stimulus measures, unemployment compensation and other economic and social programs that, together, would lead to an increased government budget deficit;

 

financial problems or lack of progress in the restructuring of Korean business groups, other large troubled companies, their suppliers or the financial sector;

 

loss of investor confidence arising from corporate accounting irregularities and corporate governance issues concerning certain Korean business groups;

 

increases in social expenditures to support an aging population in Korea or decreases in economic productivity due to the declining population size in Korea;

 

geopolitical uncertainty and risk of further attacks by terrorist groups around the world, including the actions of theso-called “Islamic State”;

 

the occurrence of severe health epidemics in Korea and other parts of the world, including the recent Ebola, Middle East Respiratory Syndrome (MERS) and Zika virus outbreaks;

 

deterioration in economic or diplomatic relations between Korea and its trading partners or allies, including deterioration resulting from territorial or trade disputes or disagreements in foreign policy such as the recent diplomatic tension between Korea and China with respect to the deployment of the Terminal High Altitude Area Defense (THAAD) system in Korea and trade disputes between Korea and the United States with respect to the imposition of anti-dumping duties on Korean steel, washing machines, transformers and solar panels;;

 

political uncertainty, or increasing strife among or within political parties in Korea, and political gridlock within the government or in the legislature, which prevents or disrupts timely and effective policy making;

 

hostilities or political or social tensions involvingoil-producing countries in the Middle East and North Africa and any material disruption in the global supply of oil or sudden increase in the price of oil;

 

political or social tensions involving Russia and any resulting adverse effects on the global supply of oil or the global financial markets;

 

the occurrence of natural orman-made disasters in Korea (such as the sinking of the Sewol ferry in April 2014, which significantly dampened consumer sentiment in Korea for months) and other parts of the world, particularly in trading partners of Korea; and

 

an increase in the level of tensions or an outbreak of hostilities between North Korea and Korea or the United States.

Any future deterioration of the Korean economy could have an adverse effect on our business, financial condition and results of operations.

Tensions with North Korea could have an adverse effect on us, the price of our common shares and our American depositary shares.

Relations between Korea and North Korea have been tense throughout Korea’s modern history. The level of tension between the two KoreasKorea and North Korea has fluctuated and may increase abruptly as a result of current and future events. In particular, since the death of KimJong-il in December 2011, there has been increased uncertainty with

respect to the future of North Korea’s political leadership and concern regarding its implications for political and economic stability in the region. Although KimJong-il’s third son, KimJong-eunJong-un has assumed power as his father’s designated successor, the long-term outcome of such leadership transition remains uncertain. In February 2017, KimJong-eun’sJong-un’s half-brother, KimJong-nam, was reported to have been assassinated in an international airport in Malaysia.

In addition, there continues to be heightened security tension in the region stemming from North Korea’s hostile military and diplomatic actions, including in respect of its nuclear weapons and long-range missile programs. Some examples from recent years include the following:

 

North Korea renounced its obligations under the NuclearNon-Proliferation Treaty in January 2003 and conducted three rounds of nuclear tests between October 2006 to February 2013, which increased tensions in the region and elicited strong objections worldwide. On January 6, 2016, North Korea announced that it had successfully conducted its first hydrogen bomb test, hours after international monitors detected a 5.1 magnitude earthquake near a known nuclear testing site in the country. The alleged test followed a statement made in the previous month by KimJong-un, who claimed that North Korea had developed a hydrogen bomb. On February 7, 2016, North Korea launched a rocket, claimed by them to be carrying a satellite intended for scientific observation. The launch was widely suspected by the international community to be a cover for testing a long-range missile capable of carrying a nuclear warhead. On February 18, 2016, U.S. President Barack Obama signed into law mandatory sanctions on North Korea to punish it for its recent nuclear and missile tests, human rights violations and cyber crimes.cybercrimes. The bill, which marks the first measure by the United States to exclusively target North Korea, is intended to seize the assets of anyone engaging in business related to North Korea’s weapons program, and authorizes US$50 million over five years to transmit radio broadcasts into the country and support humanitarian assistance projects. On March 2, 2016, the United Nations Security Council voted unanimously to adopt a resolution to impose sanctions against North Korea, which include inspection of all cargo going to and from North Korea, a ban on all weapons trade and the expulsion of North Korean diplomats who engage in “illicit activities.” Also, on March 4, 2016, the European Union announced that it would expand its sanctions on North Korea, adding additional companies and individuals to its list of sanction targets. In September 2016, North Korea announced that it had successfully tested a nuclear warhead that could be mounted on ballistic missiles. In response, the Government condemned the test, and on November 30 2016, the United Nations Security Council unanimously passed a resolution imposing additional sanctions on North Korea including an annual cap on North Korea’s exports of coal and a prohibition on exports ofnon-ferrous metals such as copper, nickel, silver and zinc. In March 2017, North Korea launched four midrange missiles aimed at the U.S. military bases in Japan, which landed off the east coast of the Korean peninsula. The United Nations Security Council condemned the launches and expressed its plan to adopt additional measures against the regime. On April 4, 2017, one day before the first meeting between U.S. President Donald Trump and Chinese President Xi Jinping, North Korea launched a ballistic missile which landed off the east coast of the Korean peninsula. In addition to the United Nations Security Council’s condemnation, representatives of the Government and China expressed their plan to impose stronger sanctions on North Korea. On April 15, 2017, North Korea launched another missile which failed when it exploded immediately after liftoff. In response, the Government condemned the launch as a violation of the resolution of the United Nations Security Council and warned that North Korea would have to face punitive consequences if this leads to a future nuclear experiment or launch of an intercontinental ballistic missile. In July 2017, North Korea conducted two intercontinental ballistic missile tests which displayed further development of its long-range ballistic missile capabilities that potentially enable it to target certain areas of the United States as well as other neighboring countries in the Asia-Pacific region. In response, the United Nations Security Council unanimously adopted stronger sanctions against North Korea. In August 2017, North Korea announced its plan to launch four ballistic missiles targeting Guam, resulting in heightened diplomatic tensions between North Korea and the United States. In September 2017, North Korea detonated a sixth nuclear bomb, the most powerful weapon that North Korea has ever tested. Such detonation further heightened diplomatic tensions between North Korea and other nations. Each of the United Nations, the United States and the European Union adopted additional sanctions against North Korea. Spain, Mexico, Peru and Kuwait expelled from their respective territories the ambassadors of North Korea. In November 2017, North Korea conducted a test launch of another intercontinental ballistic missile, which, due to its improved size, power and range of distance, may potentially enable North Korea to target the United States mainland.

that North Korea has ever tested. Such detonation further heightened diplomatic tensions between North Korea and other nations. Each of the United Nations, the United States and the European Union adopted additional sanctions against North Korea. Spain, Mexico, Peru and Kuwait expelled from their respective territories the ambassadors of North Korea. In November 2017, North Korea conducted a test launch of another intercontinental ballistic missile, which, due to its improved size, power and range of distance, may potentially enable North Korea to target the United States mainland.

In August 2015, two Korean soldiers were injured in a landmine explosion while on routine patrol of the southern side of the demilitarized zone. Claiming the landmines were set by North Koreans, the Korean armyre-initiated its propaganda program toward North Korea utilizing loudspeakers near the demilitarized zone. In retaliation, the North Korean army fired artillery rounds on the loudspeakers, resulting in the highest level of military readiness for both sides. High-ranking officials from North Korea and Korea subsequently met for discussions intending to diffuse military tensions and released a joint statement whereby, among other things, North Korea expressed regret over the landmine explosions that wounded the Korean soldiers.

 

From time to time, North Korea has fired short- to medium-range missiles from the coast of the Korean peninsula into the sea. Recently in March 2015, North Korea fired sevensurface-to-air missiles into waters off its east coast in apparent protest of annual joint military exercises being held by Korea and the United States.

 

In December 2013, Jang Sung-taek, a relative of KimJong-un, who was widely speculated to be the second in command after KimJong-un, was executed on charges of sedition. There are reports that such development may cause further political and social instability in North Korea and/or adoption of more hostile policies that could engender further friction with North Korea and the rest of the world.

 

In April 2013, North Korea blocked Koreans from entering the industrial complex in the border city of Kaesong. In the same month, the United States deployed nuclear-capable carriers in the Korean air and sea space. In September 2013, however, Korea and North Korea reached an agreement and resumed operation of the Kaesong Industrial Complex. In February 2014, the U.S. Congressional Research Service reported that Korea’s approach toward the expansion and internationalization of the Kaesong Industrial Complex could conflict with U.S. legislative efforts to expand its sanctions on North Korea. On February 10, 2016, in retaliation of North Korea’s recent launch of a long-range rocket, Korea announced that it would halt its operations of the Kaesong Industrial Complex to impede North Korea’s utilization of funds from the industrial complex to finance its nuclear and missile programs. In response, North Korea announced on February 11, 2016 that it would expel all Korean employees from the industrial complex and freeze all Korean assets in the complex. All 280 Korean workers present at Kaesong left hours after the announcement by North Korea, and the complex remains closed as of the date hereof.

 

In March 2013, North Korea stated that it had entered “a state of war” with Korea, declaring the 1953 armistice invalid, and put its artillery at the highest level of combat readiness to protest the Korea-United States allies’ military drills and additional sanctions imposed on North Korea for its missile and nuclear tests.

North Korea’s economy also faces severe challenges, including severe inflation and food shortages, which may further aggravate social and political tensions within North Korea. In addition, reunification of Korea and North Korea could occur in the future, which would entail significant economic commitment and expenditure by Korea that may outweigh any resulting economic benefits of reunification. On April 27, 2018, May 26, 2018 and September 18, 2018, President MoonJae-in met KimJong-un in a summit to discuss, among other matters, denuclearization of the Korean peninsula. On June 12, 2018, U.S. President Donald Trump and KimJong-un in turn had an official summit in Singapore, the first ever meeting between leaders of the United States and North Korea. Subsequent to the Singapore summit, they signed a joint statement, which stated, among others, new peaceful relations and the denuclearization of the Korean peninsula. The second official summit between U.S.

There

President Donald Trump and KimJong-un was held in Vietnam on February 27, 2019 and February 28, 2019. On the night of February 27, 2019, the U.S. White House announced that U.S. President Donald Trump and KimJong-un would sign a joint agreement the next afternoon. However, on February 28, 2019, the U.S. White House announced that the summit was cut short and that no agreement was reached. In the aftermath of the two summits, there remains significant uncertainty regarding peace talks and the denuclearization of the Korean peninsula. As such, there can be no assurance that the level of tension on the Korean peninsula will not escalate in the future or that the political regime in North Korea may not suddenly collapse. Any further increase in tension or uncertainty relating to the military, political or economic stability in the Korean peninsula, including a breakdown of diplomatic negotiations over the North Korean nuclear program, occurrence of military hostilities, heightened concerns about the stability of North Korea’s political leadership or its actual collapse, a leadership crisis, a breakdown of high-level contacts or accelerated reunification could have a material adverse effect on our business, financial condition and results of operations, as well as the price of our common shares and our American depositary shares.

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. 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 40,432,628. 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.

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 Government and the Korea Deposit Insurance Corporation are exempt from this limit. Furthermore, certainnon-financial business group companies (i.e., (i) any same shareholder group with aggregate net assets of allnon-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 allnon-financial business companies belonging to such group of not less thanW2 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 suchnon-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 suchnon-financial business group companies will not exercise voting rights in respect of such shares in excess of the 4% limit. See “Item 4.B. Business Overview — Supervision and Regulation — Principal Regulations

Applicable to Financial Holding Companies — Restrictions 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 toW50 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 our 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 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:

 

a registration statement filed by us under the U.S. Securities Act of 1933, as amended, is in effect with respect to those shares; or

 

the offering and sale of those shares is exempt from or is not subject to the registration requirements of the U.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.

Holders of our ADSs will not be able to exercise dissent and appraisal rights unless they have withdrawn the underlying shares of our common stock and become our direct stockholders.

Under Korean law, in some limited circumstances, including the transfer of the whole or any significant part of our business and the merger or consolidation of us with another company, dissenting stockholders have the right to require us to purchase their shares under Korean law. However, under our deposit agreement, holders of our American depositary shares do not have, and may not instruct the depositary as to the exercise of, any dissenter’s rights provided to the holders of our common shares under Korean law. Therefore, if holders of our American depositary shares wish to exercise dissenting rights, they must withdraw the underlying common stock from the American depositary shares facility (and incur charges relating to that withdrawal) and become our direct stockholders prior to the record date of the stockholders’shareholders’ meeting at which the relevant transaction is to be approved, in order to exercise dissent and appraisal rights.

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 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 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 ADSs will be affected by fluctuations in the exchange rate between the U.S. 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 U.S. Dollars, subject to certain conditions. Accordingly, fluctuations in the exchange rate between the Won and the U.S. 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 U.S. 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 Government deems that certain emergency circumstances are likely to occur, it may impose restrictions such as requiring foreign investors to obtain prior Government approval for the acquisition of Korean securities or 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:

 

sudden fluctuations in interest rates or exchange rates;

 

extreme difficulty in stabilizing the balance of payments; and

 

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 Government deems that there are emergency circumstances in the Korean financial markets.

Other Risks

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 16G. Corporate Governance.” There may also be less publicly available information about Korean companies, such as us, than is regularly made available by public ornon-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.

You may not be able to enforce a judgment of a foreign court against us.

We are a corporation with limited liability organized under the laws of Korea. All or substantially all of our directors and officers and other persons named in this annual report reside in Korea, and all or a substantial portion of the assets of our directors and officers and other persons named in this annual 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 assets and valuation of our assets, including goodwill, we do not believe that we were a PFIC for 2017,2018, and we do not expect to be a PFIC in 20182019 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 willmay 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 asnon-passive income. See “Item 10.E. Taxation — Certain United States Federal Income Tax Consequences — Passive Foreign Investment Company Rules.” We cannot assure you that we will not be a PFIC for 20182019 or any future taxable year.

 

ITEM 4.

INFORMATION ON THE COMPANY

 

ITEM 4.A.

History and Development of the Company

Introduction

We 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 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 aimed to deliver comprehensive financial solutions to clients through a convenientone-portal network. According to reports by the Financial Supervisory Service, we are the second largest financial services provider in Korea (as measured by consolidated total assets as of December 31, 2017)September 30, 2018) and operate the second largest banking business (as measured by consolidated total bank assets as of December 31, 2017)September 30, 2018) and the largest credit card business (as measured by the total credit purchase volume in 2017)2018) 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 the second largest banking operations in Korea. In

addition, our acquisition in March 2007 of LG Card, the then largest credit card company in Korea, has enabled us to have the largest credit card operations in Korea and significantly expand ournon-banking business capacity so as to achieve a balanced business portfolio. In September 2018, we announced the acquisition of a 59.15% interest in Orange Life Insurance, Ltd., the former Korean unit of ING Life Insurance, as part of our efforts to diversify and enhance ournon-banking businesses. The acquisition was approved by the Financial Services Commission on January 16, 2019 and closed on February 1, 2019.

We currentlyAs of March 31, 2019, we have 1415 direct subsidiaries and 2526 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 18.619 million active customers, which we believe is the largest customer base in Korea, through approximately 26,44322,012 employees at approximately 1,4351,268 network branches group-wide. While substantially allover 80% of our revenues have been historically derived from Korea, we aim to serve the needs of our customers through a global network of 178188 offices in the

United States, Canada, the United Kingdom, Japan, the People’s Republic of China, Germany, India, Australia, Hong Kong, Vietnam, Cambodia, Kazakhstan, Singapore, Mexico, Uzbekistan, Myanmar, Poland, Indonesia, the Philippines and the United Arab Emirates.

Our registered office and corporate headquarters are located at 20, Sejong-daero9-gil,Jung-gu, Jung-gu, Seoul, Korea 04513 and our telephone number is +822 6360 3000.

Our Strategy

Since our inception in 2001 we have pursuedstrived to become Asia’s leading financial group by establishing a foundation for sustainable growth. In furtherance of this goal, we implemented the following objectives as the core“2020 SMART Project” in 2017, which consists of our long-term strategy: (i)four strategic pillars — (1) balanced growth, in our banking(2) glocalization, (3) digital transformation andnon-banking businesses, (ii) continued creation (4) upholding the Shinhan culture — to ensure a high level of value by identifying new business opportunities and gaining a competitive edge through differentiating our business model from that of our competitors, and (iii) becoming the market leader in Korea and a world-class financial holding company through enhancement of our management systems and core competencies.

Following the global financial crisis that beganconsistency in the second half of 2008, a new set of challenges for financial service providers such as us and our subsidiaries has emergedstrategic directions the Group announces each year, to continuously upgrade the strategic tasks in the form of a “new normal” in the business environment with the following general trends: (i) demographic changes due to declining birth rates and increasingly aging population, (ii) prolonged periods of low growth and low interest rates, (iii) rapid innovation in the financial industry as a result of advancements in information and communication technology (ICT) and digital finance technologies, and (iv) amplifying effects of challenges and opportunities globally. Constant changes in the global markets demand that financial service providers consistently develop new financial trends, ensure customer satisfaction by offering competitive products and services in the continuedlow-interest rate environment, maintain a sound infrastructure that can withstand external shocks, and enhance social responsibility and accountability.

In recognitionfurtherance of these trends in our business environmentdirectives and to maintain and improve upon the speed upon we undertake such initiatives.

We have also adopted the “One Shinhan” strategy as an additional initiative on top of the 2020 SMART Project in order to realizeefficiently utilize the entire range of the Group’s resources and provide comprehensive financial solutions for our long-term visioncustomers. Pursuant to the “One Shinhan” strategy, we continue to strengthen our matrix organizational structure, diversifying business lines and enhancing synergies with our existing businesses. Through the tireless execution of these initiatives, we continue to pursue our ultimate goal of implementing sustainable financial management and cultivating areas of continuous growth and earning potential, thereby maintaining and building upon a consistent strategic direction toward becoming a world-class financial group, we have recently adopted a near term mission, the “2020 SMART Project,” of (i) solidifying our position as aKorea’s leading financial group in Korea and (ii) building the foundation for success in the Asian market. We aim to become Korea’s number one financial brand and ata world class financial group.

We have specifically focused on the same time, achieve meaningful growth in overseas markets by expanding into regions with high growth potential.

More specifically, our keyfollowing four strategic priorities currently include the following:areas and have made significant progress through 2018.

 

A.•Diversification of future

Maximizing our value through balanced growth strategies.By implementing our organic and inorganic growth strategies together, we will strive to strengthen the competitiveness of our group’s strategic businesses including global investment banking, wealth management, investment trusts and real estate, as well as expand ournon-banking and global business portfolio.

We recorded total net income ofW3,157 billion, the highest since our inception, mainly through robust organic growth of our existing subsidiaries. We have also experienced inorganic growth, including through establishing new entities such as Shinhan REITs Management and acquiring businesses such as Orange Life Insurance, Ltd. and Asia Trust Co., Ltd in an attempt to strengthen ournon-banking business lines. We have tried to maintain a balanced business across our business portfolio without disproportionately focusing on certain companies, geographical regions or areas of business.

•Lead value creation through creative innovation.By generating new ideas that drive global trends, we will strive for a synergy that increases value for both our customers and the Group. In particular, we plan to implement innovative approaches in emerging business sectors such as digital finance, retirement planning and real estate portfolio management, so that we can increase the value of our customers’ assets and develop new drivers of growth for the future.

•Accelerate our digital transformation.By offering a distinct customer experience through innovative channels and enhancing the competitiveness of our digital products and services, we will strive to further develop our digital competitiveness in all value chain areas. In addition, we will apply our digital technology in increasing the efficiency and automation of our operation processes. We will strategically respond to disruptive digital business models in our markets and cultivate and collaborate with innovative domestic and overseas startups to build cutting edge digital ecosystems and platforms.

B.•Secure new opportunities for growth with global operations. We will continue to expand into global high growth markets to procure a strong source of growth. To pursue meaningful advancement and move beyond a simple survey of opportunities, we plan to explore various new market entry strategies while establishing a firm presence in local markets. We will continue to grow ournon-banking business portfolio, increase the profitability of our overseas banking entities and expand our presence in key markets.

Accelerating glocalization

•Implement integration and build “One Shinhan” system by reforming the Group’s operating system.We will reform our operating system to (i) provide our customers with a single portal that integrates multiple business lines and (ii) continue developing integrated financial products and services. Through such strategies, we intend to enhance the group’s operational efficiency and proactively accommodate customers’ needs regarding total financial service packages.

•Optimize risk management preemptively in preparationWe aim for low economic growth and external shock.In order to attain sustainable growth in an environment where risk factors are amplified and the threat of financial crises lingers, we plan to take precautionary measures to address negative external factors before they arise. Moreover, we will enhance our risk management system and credit review models through the use of big data and a proactive crisis response system to prepare for potential volatility, uncertainty, complexity and ambiguity.

•Establish a strong organizational culture based on the “Shinhan Way.”We will further upgrade our policies and operating system according to our value of “future-oriented compassionate finance.” We aim to further invigorate the group’s creative and proactive culture while nurturing a new generation of leaders based on the “Shinhan Way.”

At the subsidiary level,simultaneous pursuit of both expansion of our global presence and localization based on tailored strategies for our global businesses, thereby strengthening the synergies from our matrix organizational structure. As part of our efforts, we planacquired ANZ Bank (Vietnam) Limited’s retail division in 2017 and Prudential Vietnam Finance Company Limited and PT Archipelago Asset Management, an Indonesian asset management firm, in 2018. We have also created a Global Business Group and adopted a country head system, enabling us to implementeffectively coordinate the following strategiesdecision process across multiple subsidiaries within a country and allowing us to maximize synergy between our global businesses. We have also focused on strengthening our local business capabilities through the development of products and services better tailored to meet the needs of local customers as well as through increasing the hiring of local personnel who are familiar with respect to our corethe local business lines:environment.

 

C.•in commercial banking, our primary objective is

Upgrading to challenge ourselves to reach a new level of excellence and solidifying our position as a leading bank. Commercial banking is our principal business line and has the highest level of profitability in Korea based on its strong risk management capacity. Equipped with an extensive branch network and a broad customer base, our commercial banking business serves as the key sales and distribution channel for the various financial products and services we provide. In 2018, we seek to solidify our brand and market position in a highly competitive commercial banking market by strengthening our competitiveness in areas of core competencies by further investing in Shinhan Bank’s “digital transformation” initiative, creating country-specific models as part of our glocalization efforts, enhancing organizational capacity and strategic partnerships withnon-banking companies through our client focused “One Shinhan” strategy, strategically reducing costs, rationalizing our distribution of resources including channels and personnel and seeking new sources of profit for sustainable growth. Our plan is to further optimize risk management to address the volatility of the business environment and to continue reinforcing our commercial banking operations’ high profitability and central role in strengthening group-wide synergy.‘Digital Shinhan’

We have upgraded our digital platforms such as SOL and Shinhan PayFAN as part of a group-wide initiative to streamline our operations and create a digital-friendly business platform. Particularly in response to the changing competitive landscape, including virtual payment services and new mobile based payment methods introduced by competitors such as online service providers, technology companies and Internet-only banks, we have focused our efforts on creating a platform featuring new technology that is more customer oriented and user friendly. In order to effectively adapt to the new business environment and foster the digital ecosystem, we have also launched a program called Shinhan Future’s Lab, which is dedicated to the “fintech” business by actively pursuing technology development, and formed strategic alliances with key partners as well as additional teams focusing on innovation and creating new sources of value for our clients through the development of promising future technologies such as artificial intelligence, block chain, open application programming interfaces and innovative digital platforms.

 

D.•in the credit card business,

Promoting our primary objective is to focus on establishing a business model that can respond and adapt to trends and changes in the future. With such goals, we will strive to preemptively address rapid developments in the technology environment such as “fintech,” mobile payment services and Internet-only banks and overcome the industry’s low structural growth and weakened profitability. To this end, we plan to implement changes to our core business operations by strengthening our risk management capabilities and enhancing the capabilities of our personnel and organization in order to achieve a leading position in the credit card industry and accelerate our “Digital First” initiative. We also plan to boost our competitiveness in the mobile payment service market and increase strategic alliances based on our mobile platform. Additionally, through an overall expansion of our credit card business, we aim to diversify revenue models and become even more active in entering overseas markets. We also seek to bolster our customer service by solidifying our industry leadership in the credit card industry and improve profitability by utilizing our resources strategically.corporate culture

We believe our culture emphasizing flexibility, productivity and creativity has allowed us to continue our growth as an organization. In addition to streamlining our internal decision making and approval processes and systems, we have emphasized a group-wide “S.A.Q. (speed, agility and quickness) transformation” in order to enhance our ability to swiftly adapt to the rapidly changing business environment. We have also continued our efforts for social sustainability, for example, through our “ Society of Hope Project” carrying out social initiatives such as support for financially underprivileged families, career-discontinued women and households in crisis, our “ECO Transformation 2020” initiative emphasizing environment friendly business practices andco-implementing the Principles for Responsible Banking as promulgated by the UN Environment Finance Initiative with 28 other banks around the world.

In 2019, in order to attain sustainable growth, as part of the second phase of the 2020 SMART Project, we have established a management plan around our “One Shinhan” initiative and have identified the following as our particular areas of emphasis in order to enhance our innovation and leadership in the financial sector through creativity and execution.

1.

Creating a “One Shinhan” value chain across the Group

We have recently expanded and strengthened our matrix organizational structure, particularly with regards to our global investment banking, global markets and securities, and platform-based marketing structure. We plan to continue expanding our business offerings and increasing the synergy between our new and existing businesses. We plan to further strengthen our core business such as retirement pension services and services for corporate and institutional clients and improve upon our main product lines and service offerings, as well as our supporting systems for such business offerings.

2.•

Expanding our portfolio of future growth sources

We have strived to expand our portfolio of what we believe to be future growth areas of business. In 2018, we were designated as the primary bank for the Seoul metropolitan government, successfully listed shares of Shinhan Alpha REIT on the KRX KOSPI Market, led the consortium that was selected as the preferred bidder for the Seoul GTX project (a planned high-speed commuter rail network in the Seoul metropolitan area) and also completed several acquisitions. We plan to further grow our new lines of business and also renew our wealth management model, which is the core source of ournon-interest income. We will also work to optimize the allocation of our resources, including capital and employees, in order to maximize our operational efficiency and performance.

3.

Procuring high-quality global growth opportunities

Our global businesses have been an area of focus and growth for us, and as a result the proportion of our global assets and income derived from our global businesses have increased significantly during the past few years. We aim to solidify the profitability and soundness of our global businesses and enhance the localization level of our core capabilities in such markets in order to create a sustainable global business. We plan to maximize synergy among our subsidiaries and businesses and expand our global business network with local partners so that we can take advantage of local business opportunities and enhance our global business capabilities.

4.in the securities business, our primary objective is to provide the best financial solutions, innovative products and services to our customers. We seek to solidify our position as a comprehensive financial investment service provider, providing leading brokerage and financial advisory services in Korea by continuing organic growth and fostering collaboration among group subsidiaries. In addition, we will continue to cultivate a customer-centric corporate culture. We will actively invest in channel innovation by incorporating our group collaboration efforts including the expansion of branches offering multiple services and accelerating

Improving our digital transition efforts. We will also enhance our specialized financial market capabilities by increasing our supply of trendsetting market products and strengthening our investment banking capabilities. Furthermore, to ensure reliable assetplatforms through digital transformation

We have recently launched and upgraded a variety of digital platforms including SOL, Shinhan PayFAN and Shinhan PLUS, a group-wide marketing platform to promote cross selling within the group, and we have also launched Shinhan Future’s Lab and Vietnam Future’s Lab, which provide support for fintech startup companies. We plan to continue our digital technology innovation efforts to enhance the competitiveness and efficiency of our existing business platforms while also proactively responding to new technology and platforms introduced by new competitors such as online service providers, technology companies and Internet-only banks. In addition, to the extent we believe feasible and beneficial, we also intend to expand globally our business platforms that have been successful domestically and also explore new business opportunities in collaboration with global digital businesses.

5.

Establishing a sustainable management for our customers, we plan to steadily updateframework

We have been included in the Dow Jones Sustainability World Index for six consecutive years and, in 2018, weco-implemented the Principles for Responsible Banking as promulgated by the UN Environment Finance Initiative with 28 other banks around the world. In furtherance of establishing a business model of sustainable growth and development, a recent area of focus for us has been contributing towards a sustainable and inclusive financial business. We have implemented the “ECO Transformation 2020” initiative emphasizing environment friendly business practices, and we plan to continue our “Society of Hope Project” and nurture a healthy ecosystem for social enterprises.

6.

Heightening our risk management and customer profit and wealth management capabilities including hedge funds.

We plan to further enhance our risk management capabilities in preparation for rapid changes in the economy, society, government policies and regulatory environment and streamline the risk management processes of our newly developing businesses and global network. We have establishednon-financial risk management systems (such as for environmental, social and operational risks) and have upgraded our crisis management system which also oversees our global businesses. We plan to monitor and managenon-financial risks such as compliance, environmental and social risks. In addition, we are also committed to enhancing the stability of our information and communications technology infrastructure as well as enhancing cybersecurity

and customer information protection measures in the face of rapid changes in technology and the digital environment.

 

7.•in the life insurance business,

Cultivating and developing our primary objective is to attain key competitive capabilities to pioneer the new market order. To establish our life insurance program as the standard for the industry, we aim to broaden the reach of our operations to all business sectors and strengthen our execution capacity. Our strategy is to become a leader in the life insurance industry in terms of products, services and profits by offering a differentiated and unique product portfolio, implementing a digital transformation focused business model, strategically reducing costs and rationalizing our distribution of resources including channels and personnel. In 2018, we will focus on profit-based product offerings, optimizing our wealth management capabilities and implementing changes to our operations system in preparation of the implementation of IFRS 17, which is expected to become effective beginning 2021.corporate culture

We plan to continue fostering our culture of flexibility, productivity and creativity, while simultaneously further increasing our ability to successfully adapt and innovate in response to the rapidly changing environment, including through an emphasis on a group-wide “S.A.Q. (speed, agility and quickness) transformation,” In addition, we aim to implement a nurturing environment to develop and grow future management leaders (including more female leaders) and improve our talent development and retention systems in order to better develop and retain talent who will lead our core business lines in the future.

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, establishing subsidiaries or formation of joint ventures. Our key acquisitions, capital contributions and joint venture formations are described as below:

 

Date of Acquisition

  

Entity

  

Principal Activities

  

Method of Establishment

April 2002

  Jeju Bank  Regional banking  

Acquisition from Korea Deposit

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  Commercial banking  

Acquisition from

creditors

December 2005

  Shinhan Life Insurance  Life insurance services  

Acquisition from

shareholders

March 2007

  LG Card  Credit card services  

Acquisition from

creditors

January 2012

  Tomato Mutual Savings Bank(3)  Savings bank  Purchase and assumption of assets and liabilities from creditors

January 2013

  Yehanbyoul Savings Bank(4)  Savings bank  Acquisition from Korea Deposit Insurance Corporation

Date of Acquisition

Entity

Principal Activities

Method of Establishment

October 2017

Shinhan REITs ManagementReal estate asset managementNewly established

February 2019

Orange Life Insurance(5)Life insurance servicesAcquisition from majority shareholders

 

Notes:

 

(1)

Renamed as Shinhan Investment Corp. from Goodmorning Shinhan Securities Co., Ltd. effective August 2009.

(2)

In January 2009, SH Asset Management Co., Ltd. and Shinhan BNP Paribas Investment Trust Management merged to form Shinhan BNP Paribas Asset Management Co., Ltd.

(3)

Shinhan Hope Co., Ltd. was established on December 12, 2011, to purchase and assume certain assets and liabilities of Tomato Mutual Savings Bank. On December 28, 2011, Shinhan Hope Co., Ltd. obtained a savings bank license, changed its name to Shinhan Savings Bank and became our direct subsidiary.

(4)

In January 2013, we entered into a share purchase agreement with Korea Deposit Insurance Corporation for the acquisition of Yehanbyoul Savings Bank, a savings bank located in Korea, forW45.3 billion,and received regulatory approval to merge Yehanbyoul Savings Bank into our existing subsidiary Shinhan Saving Bank. On April 1, 2013, Shinhan Savings Bank and Yehanbyoul Savings Bank merged into a single entity, with Yehanbyoul Savings Bank being the surviving entity and the newly merged bank being named Shinhan Savings Bank.

(5)

In September 2018, we announced the acquisition of a 59.15% interest in Orange Life Insurance, Ltd., the former Korean unit of ING Life Insurance. The acquisition was approved by the Financial Services Commission on January 16, 2019 and closed on February 1, 2019. Upon closing, Orange Life Insurance became our direct subsidiary.

 

ITEM 4.B.

Business Overview

Unless otherwise specifically mentioned, the following business overview is presented on a consolidated basis under IFRS.

Our Principal Activities

We provide comprehensive financial services, principally consisting of the following:

 

commercial banking services, consisting of:

 

retail banking, which primarily focuses on making loans to or receiving deposits from individual customers (including highnet-worth individuals and families) and, to a lesser extent,not-for-profit institutions such as hospitals, airports and schools;

 

corporate banking, which primarily focuses on making loans to or receiving deposits fromfor-profit corporations, including small- andmedium-sized enterprises, and providing investment banking services to corporate clients;

 

international banking, which primarily focuses on management of overseas subsidiaries and branch operations and other international businesses; and

 

other banking, which consists of treasury business (including internal asset and liability management and othernon-deposit funding activities), securities investing and trading and derivatives trading, as well as administration of the overall banking operations.

 

credit card services;

 

securities brokerage services;

 

life insurance services;

asset management services, including brokerage and trading of various securities, related margin lending and deposit and trust services, and other asset management services; and

 

other services, including leasing and equipment financing, savings banking services, loan collection and credit reporting, collective investment administrative services and financial system development services as well as engaging in private equityalternative investments through formation of private equity funds on a private placement basis.

In addition to the above-mentioned business activities, we, at the holding company level, have the wealth management planning office and corporate & investment banking business department, whose primary function is to support cross-divisional management with respect to these specific functional areas.

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 profiles. 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 14.6%16.1%, 16.1%16.6% and 16.6%16.1% of our total deposits as of December 31, 2015, 2016, 2017 and 2017,2018, respectively. Demand deposits paid average interest of 0.44%0.37%, 0.37%0.36% and 0.36%0.39% in 2015, 2016, 2017 and 2017,2018, respectively.

 

 • 

Savings deposits.Savings deposits allow the customer to depositTime 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. Savings deposits constituted approximately 28.6%, 28.3% and 30.1% of our total

deposits as of December 31, 2015, 2016 and 2017, respectively, and paid average interest of 0.70%, 0.59% and 0.51% in 2015, 2016 and 2017, respectively.

•Timesavings deposits. 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 Cost“cost of Funds Index (“COFIX”)funds index,” or COFIX, published by the Korean Federation of Banks.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. Time deposits constituted approximately 54.8%52.8%, 52.8%50.3% and 50.3%51.3% of our total deposits as of December 31, 2015, 2016, 2017 and 2017,2018, respectively, and paid average interest of 2.03%1.64%, 1.64%1.55% and 1.55%1.81% in 2015, 2016, 2017 and 2018, respectively. 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. Savings deposits constituted 28.3%, 30.1% and 29.1% of our total deposits as of December 31, 2016, 2017 and 2018, respectively, and paid average interest of 0.59%, 0.51% and 0.56% in 2016, 2017 and 2018, respectively.

 

 • 

Other deposits. Other deposits consist mainly of certificates of deposit. Certificates of deposit typically have maturities from 30 days to two 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 2.1%2.8%, 2.8%3.0% and 3.0%3.5% of our total deposits as of December 31, 2015, 2016, 2017 and 2017,2018, respectively and paid average interest of 1.20%1.47%, 1.47%1.57% and 1.57%1.96% in 2015, 2016, 2017 and 2017,2018, respectively.

We also offer deposits which provide the customer with preferential rights to housing subscriptions under the Housing Law and Rules on Housing Supply (the “Housing Law”), and eligibility for mortgage and home equity loans. As a result of an amendment to the Housing Law in June 2015, new subscriptions to housing subscription savings accounts, housing subscription time deposits accounts and housing subscription installment

savings accounts became no longer available after September 1, 2015. Instead, general housing subscription savings accounts (which combine all of the functions of the aforementioned three accounts) presently remain available to all. The contribution period is from the subscription date to the date on which the account holder is selected as the purchaser of a house, and the required monthly contribution amount is from a minimum ofW20,000 to a maximum ofW500,000. The interests accrued on general housing subscription savings accounts are paid in lump sum upon termination of the account, and such interests shall be calculated at the interest rate determined and announced by the Ministry of Land, Infrastructure and Transport. Those who have a general housing subscription savings account and meet certain other criteria are granted a preferential subscription right for the purchase of a house. In the case of privately funded houses, the aggregate amount of contributions made to the account must be at least the applicable deposit threshold amount for the location and area of the relevant house (fromW2 million up toW15 million). It is impossible to change the account holder name of a general housing subscription savings account except in the case of inheritance by the death of the original account holder. 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.”

The rate of interest payable on our deposit products may vary significantly, depending on average funding costs, the rate of return on our interest-earning assets, prevailing market interest rates among financial institutions and other major financial indicators.

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 (by approximately 0.5% per annum) and amounted toW6,4805,656 billion,W5,6565,639 billion andW5,6395,645 billion as of December 31, 2015, 2016, 2017 and 2017,2018, respectively.

The Monetary Policy Committee of the Bank of Korea imposes a reserve requirement on Won currency deposits at commercial banks at rates ranging from 0% to 7%, based generally on 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 under which the Korea Deposit Insurance Corporation guarantees repayment of eligible bank deposits to depositors up toW50 million per depositor andW50 million per insured under the defined contribution retirement pension 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. Our retail loans, before allowance for loan losses and deferred loan origination costs and fees and excluding credit card receivables, amounted toW111,590120,832 billion as of December 31, 2017.2018.

Retail banking services include mortgage and home equity lending and retail lending as well as demand, savings and fixed deposit-taking, checking account services, electronic banking and automatic teller machines (“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 offee-based income. Accordingly, 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 focused on sales. The retail segment places an emphasis on targeting high net worthnet-worth individuals.

Retail Lending Activities

We offer various retail loan products, consisting principally of loans to individuals and households. Our retail loan products target different segments of the population with features tailored to each segment’s financial profile and other characteristics, including customer’s occupation, age, loan purpose, collateral requirements and the duration of the customer’s relationship with Shinhan Bank. Our retail loans consist principally of the following:

 

 • 

Mortgage and home equity loans,which aremostly comprised of mortgage loans that are used to finance home purchases and are generally secured by the housing unit 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 by a third party. Other retail loans also include advance loans extended on an unsecured basis to retail borrowers the use of proceeds for which is restricted to financing of home purchases prior to the completion of the construction.

As of December 31, 2017,2018, our mortgage and home equity loans and other retail loans accounted for 52.9%51.6% and 47.1%48.4% of our totalWon-denominated retail loans, (excluding credit card loans), respectively.

For secured loans, our policy is to lend up to 4040% to 100% of the appraisal value of the collateral, after taking into account the value of any lien or other security interest that has priority over our security interest (other than petty claims). For mortgage and home equity loans, our general policy is to lend up to 45% to 82% of the appraisal value of the collateral, but subject to the maximumloan-to-value ratio,debt-to-income ratio and debt service ratio requirements for mortgage loans implemented by the Government. Theloan-to-value ratio of secured loans, including mortgage and home equity loans, is updated on a monthly basis using the most recent appraisal value of the collateral. For mortgagecollateral, and home equity loans, our policy is to lend up to 70%maximumloan-to-value ratios are further adjusted based on factors such as the location of the appraisal valuesecured property, nature and purpose of the collateral.loans and level of competition in the market. Since January 11, 2019, maximumloan-to-value ratios are determined and may be adjusted in increments of 1% (as opposed to increments of 5%, which was the case prior to January 11, 2019), allowing us to set more precise and tailored maximumloan-to-value ratios for our secured loans. As of December 31, 2017,2018, theloan-to-value ratio of mortgage and home equity loans of Shinhan Bank was approximately 51.8%49.9%. As of December 31, 2017,2018, substantially all of ourits mortgage and home equity loans were secured by residential property.

Under the administrative instructions of the Financial Supervisory Commission and the Financial Supervisory Service effective August 1, 2014 (which have been extended and amended several times, but have been replaced by the Regulation on the Supervision of the Banking Business and are effective until July 2, 2018)the Detailed Regulation on the Supervision of the Banking Business reflecting the tightened measures as discussed below), our banking subsidiaries (i) arewere subject to, a limit onwhen extending mortgage and home equity loans, to the maximumloan-to-value ratio of 70% when extending home mortgage loans; (ii) are required(irrespective of the location of the property, subject to comply with a limit oncertain exceptions) and the maximumdebt-to-income ratio of 60% (only in extendingrespect of apartment units located in the greater Seoul metropolitan area, subject to certain exceptions).

On August 2, 2017, the Government unveiled a more robust set of real estate market measures aimed at deterring speculation and mitigating the rise of housing prices. Pursuant to the measures, beginning on August 3, 2017, Seoul, Sejong Special Self-Governing City and Gwacheon were named “overheated speculative districts,” with the loan limits of those buying homes there to be tightened to 40% of their property value from 60%. The maximumdebt-to-income ratio was capped at 40% from 50%. Eleven districts in Seoul and Sejong Special Self-

Governing City were designated as “speculative districts” and became subject to higher taxes and tougher regulations. These measures came after President MoonJae-in administration’s first countermeasures, unveiled on June 19, 2017, which were designed to prevent the resale of home purchasing rights of real estate assets in Seoul while lowering the maximumloan-to-value ratio for home buyers to 60% from 70% and maximumdebt-to-income ratio to 50% from 60% in the regions designated as “adjustment targeted areas” (comprised of Seoul, Sejong Special Self-Governing City, seven cities in Gyeonggi Province and seven boroughs in Busan Metropolitan City). However, the new lending limits, which became effective on July 3, 2017, failed to halt the surge in housing prices, thus leading to the more stringent measures announced on August 2, 2017. Currently,loan-to-value ratios and newdebt-to-income ratios in “overheated speculative districts,” “speculative districts,” “adjustment targeted areas” and other regions are regulated by the Regulation on the Supervision of the Banking Business and the Detailed Regulation on the Supervision of the Banking Business.

On January 31, 2018, the existingdebt-to-income requirement was replaced by the newdebt-to-income ratio requirement, which reflects (i) both principal and interest payments on the applicable mortgage and home equity loan and existing mortgage and home equity loans (amountingand (ii) interest payments on other loans. The previousdebt-to-income requirement had only reflected (i) both principal and interest payments on the applicable mortgage and home equity loan and (ii) interest payments on existing mortgage and home equity loans.

As housing prices in the greater Seoul metropolitan area continued to rise despite the above measures, on September 13, 2018, the Government announced a more robust policy to curb housing prices. Effective from September 14, 2018, these measures include, among other things, tighter regulations on maximumloan-to-value ratios in “overheated speculative districts,” “speculative districts” and “adjustment targeted areas” (collectively, the “regulated areas”), under which the maximumloan-to-value ratio applicable to owners of single or multiple residential units attempting to purchase an additional residential unit located in any of the regulated areas using a mortgage loan will be nil with certain exceptions applicable only to owners of a single residential unit attempting to purchase an additional residential unit. The maximumloan-to-value ratio will be also nil, with certain exceptions, in the case of purchases of high value residential units (for which the declared value is more thanW100900 million) located in any of the regulated areas not being made for the purchasepurpose of apartments that are secured by such apartments if they are located in the Seoul metropolitan area, excluding some areas such as island areas; and (iii) are required to apply greater flexibility in determining thedebt-to-income ratio by considering the expected earnings potential. actual residence.

In addition, the supervising authorities in Korea from time to time issue administrative instructions to Korean banks, which have the effect of regulating the access of borrowers to housing loans and, as such, demand for real estate properties. For example, the Financial Supervisory Service issued administrative instructions to financial institutions to (except in limited circumstances) verify the borrower’s ability to repay based on proof of income prior to making a mortgage and home equity loan regardless of the type or value of the collateral or the location of the property, which has had the effect of practically barring the grant of any new mortgage and home equity loans to borrowers without verifiable income.

Our banking subsidiaries extend mortgage and home equity loans in compliance with the applicable regulations and administrative instructions by the relevant supervising authorities.

The following table sets forth a breakdown of our retail loans.

 

  As of December 31,   As of December 31, 
  2015 2016 2017   2016 2017 2018 
  (In billions of Won, except percentages)   (In billions of Won, except percentages) 

Retail loans(1)

        

Mortgage and home-equity loans

  W54,983  W56,235  W59,078   W56,235  W59,078  W62,394 

Other retail loans

   41,035  47,949  52,512    47,949  52,512  58,438 

Percentage of retail loans to total gross loans

   38.7%  39.9%  40.2%    39.9%  40.2%  39.9% 

 

Note:

 

(1)

Before allowance for loan losses and deferred loan origination costs and fees and excludes credit card receivables.

The total mortgage and home equity loans amounted toW59,07862,394 billion as of December 31, 2017,2018, and as of such date, consisted of amortizing loans (whose principal is repaid by part of the installment payments) in the amount ofW52,87145,573 billion andnon-amortizing loans in the amount ofW6,20716,821 billion. In addition, as of December 31, 2017,2018, we also provided lines of credit in the aggregate outstanding amount ofW705648 billion fornon-amortizing loans.

Pricing

The interest rates payable on Shinhan Bank’s retail loans are either periodically adjusted floating rates (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 market cost of funding, as adjusted to account for expenses related to lending and the profit margin of the relevant loan products) or fixed rates that reflect the market cost of funding, as adjusted to account for expenses related to lending and the profit margin. Fixed rate loans are offered only on a limited basis and at a premium to floating rate loans. For unsecured loans, which Shinhan Bank provides on a floating or fixed rate basis, interest rates thereon reflect a margin based on, among other things, the borrower’s credit score as determined during its loan approval process. For secured loans, the credit limit is based on the type of collateral, priority with respect to the collateral and theloan-to-value ratio. Shinhan Bank may adjust the pricing of these loans to reflect the borrower’s current and/or expected future contribution to Shinhan Bank’s profitability. The interest rate on Shinhan Bank’s loan products may become adjusted at the time the loan is extended. If a loan is terminatedrepaid within three years following the date of the loan, the borrower is required to pay

an early terminationrepayment fee, which is typically 0.8% to 1.4% of the outstanding principal amount of and accrued and unpaid interest on the loan, multiplied by a fraction the numerator of which is the number of the remaining days on the loan until maturity and the denominator of which is the number of days comprising the term of the loan or three years, whichever is greater. In January 2019, the Financial Services Commission announced plans to lower such early repayment fees for repayment of loans within three years following the date of the loan, which may further intensify competition for household loans.

As of December 31, 2017,2018, Shinhan Bank’s three-month,six-month and twelve-month base rates were approximately 1.66%1.92%, 1.83%1.95% and 1.98%, respectively. As of December 31, 2017,2018, Shinhan Bank’s fixed rates for mortgage and home equity loans with a maturity of five years were approximately 4.88%4.83%. Shinhan Bank’s fixed rates for other retail loans with a maturity of one year ranged from 4.17%4.45% to 14.00%, depending on the credit scores of its customers.

As of December 31, 2017, 76.3%2018, 94.0% of Shinhan Bank’s total retail loans were floating rate loans and 23.7%6.0% were fixed rate loans. As of the same date, 68.9%96.5% of Shinhan Bank’s retail loans with maturity of more than one year were floating rate loans and 31.1%3.5% were fixed rate loans.

The interest rate charged to customers by our banking subsidiaries is based, in part, on the “cost of funds index,” or COFIX, which is published by the Korean Federation of Banks. COFIX 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 seniornon-convertible financial debentures) of eight major Korean banks (comprised of Shinhan Bank, Kookmin Bank, Woori Bank, KEB Hana Bank, Nonghyup Bank, Industrial Bank of Korea, Citibank Korea Inc. and Standard Chartered Bank Korea Limited). Each bank then independently determines the interest rate applicable to its respective customers 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. These interest rates are typically adjusted on a monthly basis. In January 2019, the Financial Services Commission announced plans to reflect rates for short term deposits such as demand deposits when computing the “cost of funds index,” or COFIX, which is expected to result in lower interest rates for household loans compared to the previous COFIX rate.

Private Banking

Historically, we have focused on customers with high net worth.net-worth. Our retail banking services include providing private banking services to high net worthnet-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 highnet-worth clients by offering them customized wealth management solutions and comprehensive financial services including asset portfolio and fund management, tax consulting, real estate management and family office services, among others. Since the end of 2011, in order to preemptively respond to evolving customer needs and promote asset growth by inducing greater synergy between commercial banking and investment advisory services offered by Shinhan Investment, Shinhan Bank launched private wealth management centers which combine certain branches of Shinhan Bank with those of Shinhan Investment located in the same area. Shinhan Bank’s strength in private banking has been widely recognized by a number of significant industry awards in recent years, including the “Best Wealth Manager in Korea” (awarded sixseven consecutive years) and “Best Private Bank in Korea” (awarded threefour consecutive years) awards by The Asset magazine in 2017 and the “Best PrivateWealth Management Bank in Korea” (awarded four consecutive years), “Investment Product of the Year” and “Best Wealth Management Service Quality” by The Asian Banker in 2017.2018.

As of December 31, 2017,2018, Shinhan Bank operated 27 private wealth management service centers nationwide, including 18 in Seoul, three in the suburbs of Seoul and six in cities located in other regions in Korea. As of December 31, 2017,2018, Shinhan Bank had approximately 7,5747,461 private banking customers, who typically are required to have a minimum ofW500 million in assets under managementdeposits with usShinhan Bank to qualify for its private banking services.

Corporate Banking Services

Overview

We provide corporate banking services, primarily through Shinhan Bank, to small- andmedium-sized enterprises, including enterprises known as SOHO (standing for “small office, home office”), 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.

The following table sets forth the balances and percentage of our total loans (before allowance for loan losses and deferred loan origination costs and fees) attributable to each category of our corporate lending business as of the dates indicated.

 

  As of December 31,   As of December 31, 
  2015 2016 2017   2016 2017 2018 
  (In billions of Won, except percentages)   (In billions of Won, except percentages) 

Small- andmedium-sized enterprises loans(1)

  W67,336    27.1%  W71,757    27.5%  W78,556    28.3%   W71,757    27.5%  W78,556    28.3%  W84,972    28.0% 

Large corporate loans

   33,742    13.6  34,131    13.1  35,664    12.9    34,131    13.1  35,664    12.9  35,428    11.7 

Others(2)

   32,796    13.2  31,482    12.0  31,038    11.1    31,482    12.0  31,038    11.1  39,390    13.0 
  

 

   

 

  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

   

 

 

Total corporate loans

  W133,874    53.9%  W137,370    52.6%  W145,258    52.3%   W137,370    52.6%  W145,258    52.3%  W159,790    52.7% 
  

 

   

 

  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

   

 

 

 

Notes:

 

(1)

Represents the principal amount of loans extended to corporations meeting the definition of small- andmedium-sized enterprises under the Basic Act on Small- andMedium-sized Enterprises and its Presidential Decree.

(2)

Includes loans to governmental agencies, loans to banks and other corporate loans, including loans originated by subsidiaries other than Shinhan Bank which are classified as corporate loans for purposes of financial reporting.

Small- andMedium-sized Enterprises Banking

Under the Basic Act on Small- andMedium-sized Enterprises (the “SME Basic Act”) and the related Presidential Decree, as amended and effective from January 27, 2016, in order to qualify as a small- andmedium-sized enterprise, (i) the enterprise’s total assets at the end of the immediately preceding fiscal year must be less thanW500 billion, (ii) the enterprise must meet the standards prescribed by the Presidential Decree in relation to the average and total annual sales revenues applicable to the type of its main business, and (iii) the enterprise must meet the standards of management independence from ownership as prescribed by the Presidential Decree, includingnon-membership in a conglomerate as defined in the Monopoly Regulations and Fair Trade Act. However, if any entity which was a small- andmedium-sized enterprise as defined in the SME Basic Act prior to the latest amendment no longer meets such definition following such amendment, such entity will be deemed a small- andmedium-sized enterprise for purposes of the SME Basic Act.Non-profit enterprises that satisfy certain requirements prescribed in the SME Basic Act and its Presidential Decree may qualify as a small- andmedium-sized enterprise. Furthermore, cooperatives and federations of cooperatives as prescribed by the Presidential Decree are deemed as small- andmedium-sized enterprises, effective from April 15, 2014. As of December 31, 2017,2018, we made loans to 270,660284,911 small- andmedium-sized enterprises for an aggregate amount ofW78,55684,972 billion (before allowance for loan losses and deferred loan origination costs and fees).

We believe that Shinhan Bank, whose traditional focus has been on small- andmedium-sized enterprises lending, is well-positioned to succeed in the small- andmedium-sized enterprises market in light of its marketing capabilities (which we believe have provided Shinhan Bank with significant customer loyalty) and its prudent risk management practices, including conservative credit rating systems for credit approval. To maintain or increase its market share of small- andmedium-sized enterprises lending, Shinhan Bank:

 

 • 

has accumulated a market-leading expertise and familiarity as to customers and products. We believe Shinhan Bank has anin-depth understanding of the credit risks embedded in this market segment, allowing Shinhan Bank to develop loan and other products specifically tailored to the needs of this market segment;

 • 

operates a relationship management system to provide customer service that is tailored tosmall-andmedium-sizedenterprises. Shinhan Bank currently has relationship management teams in 184185 banking branches, of which 49 are corporate banking branches and 135136 are hybrid banking branches designed to serve both retail customers and, to a limited extent, corporate customers.These relationship management teams market products, and review and approve smaller loans with less credit risks; and

 

 • 

continues to focus on cross-selling loan products with otherproducts. For example, when Shinhan Bank lends to small- andmedium-sized enterprises, it also explores opportunities to cross-sell retail loans or deposit products to the employees of these enterprises or to provide financial advisory services.

Large Corporate Banking

Large corporate customers consist primarily of member companies ofchaebolsand financial institutions. Our large corporate loans amounted toW35,66435,428 billion (before allowance for loan losses and deferred loan origination costs and fees) as of December 31, 2017.2018. Large corporate customers tend to have better credit profiles than small- andmedium-sized enterprises, and accordingly, Shinhan Bank has expanded its focus on these customers as part of its risk management policy.

Shinhan Bank aims to be aone-stop financial solution provider that also partners with its corporate clients in their corporate expansion and growth endeavors. To that end, Shinhan Bank provides a wide range of corporate banking services, including investment banking, real estate financing, overseas real estate project financing, large development project financing, infrastructure financing, structured financing, equity investments/venture investments, mergers and acquisitions consulting, securitization and derivatives services, including securities and derivative products and foreign exchange trading. Shinhan Bank, through Shinhan Asia Limited, a subsidiary in

Hong Kong, also arranges financing for, and offers consulting services to, Korean companies expanding their business overseas, particularly in Asia.

Electronic Corporate Banking

Shinhan Bank offers to corporate customers aweb-based total cash management service known as “Shinhan Bizbank.” Shinhan Bizbank supports substantially all types of banking transactions ranging 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,business-to-business settlement service, sweeping, pooling, ERP interface service,host-to-host banking solutions, SWIFT SCORE service and global cash and liquidity management service. In addition, Shinhan Bank provides customers with integrated and advanced access to its financial services through its “Inside Bank” program, which combines Internet banking, capital management services and enterprise resource planning to better serve corporate customers. The Inside Bank program also seeks to provide customized financial services to meet the comprehensive needs of target corporate customers ranging from conglomerates to small enterprises in various industries, with the goal of enhancing convenience to our corporate customers in accessing our financial services as well as assisting them to strategically manage their funds. In line with Shinhan Bank’s efforts to facilitatenon-face-to-face online transactions for corporate transactions, in 2018, Shinhan Bank upgraded its virtual account-based corporate fund management service, known as “Shinhan Damoa Service”, making it available on mobile channels. In addition, Shinhan Bank has made the fund transfers via phone number service (allowing customers to make fund transfers without the recipients’ account number), which was previously only available for personal banking customers, available for corporate banking customers as well.

Corporate Lending Activities

Our principal loan products for corporate customers 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, 2017,2018, working capital loans and facilities loans amounted toW59,74454,702 billion andW48,99851,411 billion, respectively, representing 54.9%48.2% and 45.1%45.3% of our totalWon-denominated corporate loans. 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 have a maximum maturity of 15 years, are typically repaid in semiannual installments per annum and may be entitled to a grace period not exceedingone-third of the loan term with respect to the first repayment; facilities loans with a term of three years or less may be paid in full at maturity.

Loans to corporations may be unsecured or secured by real estate, deposits or guaranty certificates. As of December 31, 2017,2018, secured loans and guaranteed loans (including loans secured by guaranty certificates issued by credit guarantee insurance funds) accounted for 58.7%59.6% and 12.6%, respectively, of ourWon-denominated loans to small- andmedium-sized enterprises. As of December 31, 2017, 49.5%2018, 50.7% of the corporate loans were secured by real estate.

When evaluating whether to extend loans to corporate customers, Shinhan Bank reviews their creditworthiness, credit score, value of any collateral and/or third party guarantee. The value of collateral is computed using a formula that takes into account the appraised value of the collateral, any prior liens or other claims against the collateral 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. Shinhan Bank revalues collateral when a secured loan is renewed or if a trigger event occurs with respect to the loan in question.

Pricing

Shinhan Bank determines the price for its corporate loan products based principally on their respective cost of funding and the expected loss rate based on the borrower’s credit risk. As of December 31, 2017, 45.4%2018, 61.7% of Shinhan Bank’s corporate loans with outstanding maturities of one year or more had variable interest rates as determined by the applicable market rates.

More specifically, interest rates on Shinhan Bank’s corporate loans are generally determined as follows:

Interest rate = (Shinhan Bank’s periodic market floating rateor reference rate)plus transaction costplus credit spreadplus risk premiumplus or minus discretionary adjustment.

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 determining the interest rate for the borrower. As of December 31, 2017,2018, Shinhan Bank’s periodic market floating rates (which are based on a base rate determined for a three-month,six-month,one-year,two-year, three-year or five-year period, as applicable, as derived using Shinhan Bank’s market rate system) were 1.66%1.92% for three months, 1.83%1.95% for six months, 1.98% for one year, 2.26%2.01% for two years, 2.36%2.03% for three years and 2.58%2.07% for five years. As of the same date, Shinhan Bank’s reference rate was 4.75%. The reference rate refers to the base lending rate used by Shinhan Bank and is determined annually by Shinhan Bank’s Asset & Liability Management Committee based on, among others, Shinhan Bank’s funding costs, cost efficiency ratio and discretionary margin.

Transaction cost reflects 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 0.36%0.22% of all loans (excluding certain loans such as facility 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 which takes into account the potential of unexpected loss that may exceed 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 current and/or future contribution to Shinhan Bank’s profitability. If additional credit is provided by way of a guarantee, the adjustment rate is subtracted 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 to compete more effectively with other banks.

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 banking operations through its overseas branches and subsidiaries.Shinhan Bank aims to become a leading bank in Asia and expand its international business 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.

Other Banking Services

Other banking businesses carried on by Shinhan Bank include treasury business (including internal asset and liability management and othernon-deposit funding activities), trading of, and investment in, debt securities and, to a lesser extent, equity securities for its own accounts, derivative trading activities, as well as managing back-office functions.

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 the Japanese Yen and the 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 a minimum transaction amount ofW100 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 to generate interest income, 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, debt securities issued by financial institutions and equity securities listed on 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.”

Derivatives Trading

Shinhan Bank provides to its customers, and to a limited extent, trades for its proprietary accounts, a broad range of derivatives products, which include:

 

interest rate swaps, options, and futures relating to Korean Won interest rate risks and LIBOR risks, respectively;

 

cross-currency swaps, largely for Korean Won against U.S. Dollars, Japanese Yen and Euros;

 

equity and equity-linked options;

 

foreign currency forwards, options and swaps;

 

commodity forwards, swaps and options;

 

credit derivatives; and

 

KOSPI 200 indexed equity options.

Shinhan Bank’s outstanding derivatives commitments in terms of notional amount wereW132,785174,866 billion,W174,866183,457 billion andW183,457 billionin 2015,233,655 billion in 2016, 2017 and 2017,2018, respectively. Such derivative operations generally focus on addressing the needs of Shinhan Bank’s corporate clients to enter into derivatives contracts to hedge their risk exposure and entering intoback-to-back derivatives 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 that arise from its own assets and liabilities. In addition, to a limited extent, Shinhan Bank engages in the proprietary trading of derivatives within its regulated open position limits. See “— Description of Assets and Liabilities — Derivatives.”

Trust Account Management Services

Overview

Shinhan Bank’s trust account management services involve 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 governing 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, in recent years, due to the ongoing low interest environment, 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(consisting principally of debt securities and beneficiary certificate for real estate financing)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, the Financial Investment Services and Capital Markets Act and the Trust Act, assets in trust accounts are required to be segregated from other assets of the trustee bank and are unavailable to satisfy the claims of the depositors or other creditors of such bank. Accordingly, trust accounts that are not guaranteed as to principal (or as to both principal and interest) 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 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.

As of December 31, 2015, 2016, 2017 and 2017,2018, Shinhan Bank had total trust assets ofW37,304,45,058 billion,W45,05858,536 billion andW58,53676,161 billion respectively, comprised principally of securities investments ofW7,68810,885 billion,W10,88516,870 billion andW16,87022,479 billion respectively; real property investments ofW7,5768,914 billion,W8,91412,053 billion andW12,05314,154 billion, respectively; and loans with an aggregate principal amount ofW454472 billion,W472469 billion andW469528 billion, respectively. Securities investments consisted of corporate bonds, government-related bonds and other securities, primarily commercial paper. As of December 31, 2015, 2016, 2017 and 2017,2018, debt securities accounted for 19.2%22.9%, 22.9%27.3% and 27.3%28.5%, respectively, and equity securities constituted 1.4%1.3%, 1.3%1.5% and 1.5%1.1%, respectively, of Shinhan Bank’s total trust assets. 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, 2015, 2016, 2017 and 2017, approximately 53.3%2018, 52.1%, 52.1%57.1% and 57.1%57.8%, 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 set forth, among other things, company-, industry- and security-specific limitations.

Trust Products

In Korea, trust products typically take the form of money trusts, which are discretionary trusts over which (except in the case of a specified money trust) the trustees 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 how their trust assets should be invested.

Money trusts managed by Shinhan Bank’s trust account business amounted toW24,09329,476 billion,W29,47637,700 billion andW37,70044,290 billion as of December 31, 2015, 2016, 2017 and 2017,2018, respectively.

Shinhan Bank offers variable rate trust products through its retail branch network. As of December 31, 2015, 2016, 2017 and 2017,2018, Shinhan Bank’s variable rate trust accounts amounted toW20,44325,634 billion,W25,63433,720 billion andW33,72040,270 billion, respectively, of which principal guaranteed variable rate trust accounts amounted toW3,6493,841 billion,W3,8413,979 billion andW3,9794,019 billion, respectively. Variable rate trust accounts offer their holders variable rates of return on the principal amount of the deposits in the trust accounts and do not offer a guaranteed return on the principal of deposits, except in the limited cases of principal guaranteed variable rate trust accounts, for which payment of the principal amount is guaranteed. 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.Shinhan Bank also offers an insignificant amount of guaranteed fixed rate trust products (amounting toW1.0 billion,W1.0 billion andW1.0 billion as of December 31, 2015, 2016, 2017 and 2017,2018, respectively), which provide to its holders a guaranteed return of the principal as well as a guaranteed fixed rate of return. These products are carry-overs from past offerings, and Shinhan Bank no longer offers guaranteed fixed rate trust products.

Credit Card Services

Products and Services

We currently provide our credit card services principally through our credit card subsidiary, Shinhan Card, and to a limited extent, Jeju Bank.

Shinhan Card offers a wide range of credit card and other services, principally consisting of the following:

 

 • 

credit card services, which involve providing cardholders with credit up to a preset limit to purchase products and services. Repayment for credit card purchases may be made either (i) on alump-sum basis, namely, in full at the end of a monthly billing cycle or (ii) on a revolving basis subject to a minimum monthly payment. The minimum monthly payment for holders of credit cards issued before December 30, 2014 is the greater of (x) 5% to 20% of the amount outstanding (depending on the cardholder’s credit) or (y)W30,000. The minimum monthly payment for holders of credit cards issued on or after December 30, 2014 is the greater of (x) 10% to 20% of the amount outstanding (depending on the cardholder’s credit) or (y)W50,000. Currently, the outstanding credit card balance subject to the revolving basis payments generally accrues interest at the effective annual rates of approximately 5.4% to 24.0%23.9%.

 

 • 

cash advances, which enable the cardholders to withdraw cash subject to a preset limit from an ATM machine or a bank branch. Repayments for cash advances may be made either on alump-sum basis or, in the case of credit cards issued before December 30, 2014, on a revolving basis. Currently, thelump-sum cash advances generally accrue interest at the effective annual rates of approximately 6.1% to 24.0%23.9% and the revolving cash advances generally accrue interest at a minimum rate of 5% to 20% of the outstanding balance (depending on the cardholder’s credit).

 • 

installment purchases, which provide customers with an option to purchase products and services from select merchants on an installment basis for which repayments must be made in equal amounts over a fixed term generally ranging from two to 24 months, and for certain limited types of cards, up to 36 months. Currently, the outstanding installment purchase balances generally accrue interest at the effective annual rates of approximately 9.5% to 20.9%.

 

 • 

card loans, which enable cardholders to receive, up to a preset limit, a loan which is generally unsecured. Repayment of card loans is made generally by (i) repaying principal and interest in equal amounts on an installment basis over a fixed term of two to 36 months, (ii) repaying the principal and interest amounts in full at maturity, or (iii) making interest-only payments during the initial grace period of either three months or six months and repaying the principal and interest amounts on a monthly installment basis over the remaining period of typically two to 36 months. Currently, the outstanding card loan balances generally accrue interest at the effective annual rates of approximately 6.16% to 23.9%. Delinquent credit card receivables can also be restructured into loans, which we classify as card loans, and these loans generally accrue interest at the effective annual rates of approximately 11.9% to 19.5% over a fixed term whose maximum is 72 months.

Shinhan Card derives revenues from annual membership fees paid by credit cardholders, interest charged on credit card balances, fees and interest charged on cash advances and card loans, interest charged on late and deferred payments and merchant fees paid by retail and service establishments. Merchant fees and interest on cash advances constitute the largest source of revenue.

The annual membership fees for credit cards vary depending on the type of credit card and the benefits offered thereunder. For standard credit cards and most of the affinity andco-branded cards, Shinhan Card charges an annual membership fee ranging fromW2,000 toW1,000,000 per credit card, depending on the type of the card and the cardholder profile. Certain government affinity cards have no annual membership fee. If Shinhan Card’s customers make cash advances using ATMs of a financial institution other than Shinhan Card, Shinhan Card also charges a usage fee for such cash advances in an amount equivalent to the fees charged by such financial institution for the use of its ATM plus costs to cover Shinhan Card’s related administration expenses.

Any accounts that are unpaid when due are deemed to be delinquent accounts, for which Shinhan Card levies a late charge in lieu of the interest rates applicable prior to default. The late charge rate currently ranges from 22.4%8.4% to 24.0% per annum. Beginning inSince the first half of 2018, instead of levying a late charge in lieu of interest rates prior to default, Shinhan Card will maintainmaintains the interest rates prior to default but addadds a late charge rate of 3% in addition to the interest rates prior to default.

Merchant discount fees, which are processing fees Shinhan Card charges to merchants, can be up to the regulatory limit of 2.5%2.3% of the purchased amount depending on the merchant used, with the average charge for credit cards being 1.61%1.6% in 2017.2018. For small- andmedium-sized merchants, the applicable regulations impose reduced fee rates of 0.8% (in the case of merchants with annual sales ofW300 million or less) and 1.3% (in the case of merchants with annual sales of more thanW300 million and up toW500 million), respectively, of the purchased amount.

Although making payments on a revolving basis is more common in many other countries, this payment method is still in its early stages of development in Korea. Cardholders in Korea are generally required to repay their purchases within approximately 14 to 44 days of purchase depending on their payment cycle, except in the case of installment purchases where the repayment term is typically three to sixmonths. Accounts that remain unpaid after this period are deemed to be delinquent, and Shinhan Card levies late charges on and closely monitors such accounts. For purchases made on an installment basis, 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 terms of the credit cards they hold. Cardholders are required to select the monthly settlement date when they open the credit card account

and may subsequently change the settlement date but no more than once every 60 days. Settlement dates at or around the end of each month are the most popular since salaries are typically paid at the end of the month.

In addition to credit card services, Shinhan Card also offers check cards, which are similar to debit cards in the United States and many other countries, to retail and 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. Check cards have a low risk of default and involve minimal funding costs. 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 between 0.50% and 2.50%, depending on the type of business, which is lower than the corresponding fee charged for credit card use.

Credit Card Products

Shinhan Card offers a wide range of credit card products tailored for credit cardholders’ lives and to satisfy their preferences and needs. Credit card products offered by Shinhan Card include:

 

cards that provide additional benefits such as frequent flyer miles and reward program points that can be redeemed by the customer for complementary services, prices or cash;

platinum cards and other preferred membership cards, which have higher credit limits and provide additional services in return for higher annual membership fees;

 

cards with additional features to preferred customers, such as revolving credit cards, travel services and insurance;

 

cards with fraud detection and security systems to prevent the misuse of credit cards and to encourage the use of credit cards over the Internet;

 

corporate and affinity cards that are issued to employees or members of particular companies or organizations; and

 

•mobile phone cards allowing customers to conduct wireless credit card transactions through their mobile phones.

mobile phone cards allowing customers to conduct wireless credit card transactions through their mobile phones.

Customers and Merchants

In addition to internal growth through cross-selling, we seek to enhance our market position by selectively targeting new customers with high net worthnet-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. We also seek to provide a wide variety of differentiated products and services tailored to our customers’ individualized needs through precision analysis and customer segmentation based on the “big data” we have compiled on our approximately 22 million customers. We have also formed a team dedicated to the “fintech” business by actively pursuing technology developments and strategic alliances with key partners as well as additional teams focused on innovation and creating new sources of value for our clients through the development of big data and digital platforms. For example, Shinhan Card has an “AI Lab” team devoted to integrating artificial intelligence technology to its servicesplatforms and channels.provision of big data-based consulting services.

The following table sets forth the number of customers of Shinhan Card and the number of merchants at which Shinhan Card can be used for purchases as of the dates indicated.

 

  As of December 31,   As of December 31, 
  2015 2016 2017   2016 2017 2018 
  (In thousands, except percentages)   (In thousands, except percentages) 

Shinhan Card:

        

Number of credit card holders(1)

   12,163  12,216  12.424    12,216  12,424  12,701 

Personal accounts

   12,052  12,097  12.295    12,097  12,295  12,495 

Corporate accounts

   111  119  129    119  129  206 

Active ratio(2)

   97.9%  97.3%  96.3%    97.3%  96.3%  96.1% 

Number of merchants

   2,513  2,626  2.724    2,626  2,724  2,810 

 

Notes:

 

(1)

Represents the number of cardholders whose card use is not subject to suspension or termination as of the relevant date.

(2)

Represents the ratio of accounts used at least once within the last six months to the total accounts as ofyear-end.

Installment Finance

Shinhan Card provides installment finance services to customers to facilitate purchases of durable consumer goods such as new and used cars, appliances, computers and other home electronics products. Revenues from installment finance operations accounted for 2.08%2.91% of Shinhan Card’s total operating revenue in 2017.2018. Shinhan Card pays the merchants when Shinhan Card’s customers purchase such goods, and the customers remit monthly installment payments to Shinhan Card over a number of months, generally up to 36 months (and, in the case of

installment financings for automobile purchases, up to 72 months), as agreed with the customers. For installment finance products for new cars, Shinhan Card historically charged, in addition to interest, an initial financing fee of up to 9.9% of the purchase price, depending on the customer’s credit score, the installment period and installment amount. Initial financing fees charged in connection with installment finance products for new cars, however, were abolished effective March 2, 2013 pursuant to the Financial Consumer Report (Automobile Financings) issued by the Financial Supervisory Service on January 29, 2013. Shinhan Card has installment financing arrangements with over 10,000 merchants in Korea, including major car dealers, manufacturers and large retailers with nationwide networks, such as electronics goods stores.

Shinhan Card promptly processes installment financing applications and, based on the extensive credit information it possesses or can access, it is able to offer flexible installment payment terms tailored to individual needs of the customers. Shinhan Card also devotes significant efforts to developing and maintaining its relationships with merchants, which are the most important source of referrals for installment finance customers. Shinhan Card makes prompt payments to merchants for goods purchased by the installment finance customers.

Auto Lease

Shinhan Card currently provides auto leasing financing to retail customers and corporations. Revenues from auto lease operations accounted for 1.15%, 1.39% and 3.37% of Shinhan Card’s total operating revenue in 2017.2016, 2017 and 2018, respectively.

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 services, investment advice and financial

planning services, and investment banking services such as underwriting and M&Amergers and acquisitions advisory services.Subject to market conditions, Shinhan Investment also engages in equity- and stock index-linked derivatives sales and brokerage, proprietary trading and brokerage services for futures involving interest rates, currency and commodities as well as foreign exchange margin trading.

As of December 31, 2017,2018, according to internal data, Shinhan Investment’s annual market share of Korean equity brokerage market was 5.07%5.89% (consisting of 2.43%2.36% in the retail segment, 0.61%0.71% in the institutional segment and 2.03%2.82% in the international segment) in terms of total brokerage volume, ranking thirdeighth among securities firms in Korea. As of the same date, according to internal data, Shinhan Investment held the ninthseventh largest annual market share in the options brokerage segment and the seventhsecond largest annual market share in the KOSPI 200 futures segment of 6.91%6.82% and 5.92%9.60%, respectively, in terms of total brokerage volume with respect to these products.

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 worthnet-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: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 approximately 7869 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, mergers and acquisitions 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 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 offering its customers opportunities to purchase stocks in a wide range of countries (currently more than 28 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 concentrates on equity capital markets, debt capital markets, project finance and mergers and acquisitions. To a limited extent, Shinhan Investment also engages in private equity investments through formation of private equity funds by soliciting investors on a private placement basis. To better serve its international customers, Shinhan Investment has established four overseas service centers in Hong Kong, New York, Vietnam and Indonesia. In July 2015, we acquired a 100% stake in Nam An Securities (subsequently launched as Shinhan Securities Vietnam Co., Ltd.), a Vietnamese

securities services firm that provides investment banking and asset management services. In addition, in order to seizecapitalize on the rapid growth opportunity and as part of its expansion efforts in Indonesia, Shinhan Investment acquired a 99% stake in PT Makinta Securities, an Indonesian investment banking firm in July 2016 and subsequently launched it as an overseas subsidiary offering investment banking and brokerage services under the name PT Shinhan Sekuritas Indonesia in December 2016. To further expand and stabilize our global businesses, we made further capital investments totallingtotaling US$62 million in December 2017 in our subsidiaries located in Hong Kong, New York, Vietnam and Indonesia.Indonesia.In 2018, we acquired PT Archipelago Asset Management, the first acquisition of an Indonesian asset management firm by a Korean financial group, which we believe will strengthen our business portfolio in Indonesia and enhance our competitiveness in the Asian financial markets.

Life Insurance Services

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 December 31, 2015, 2016 and 2017, Shinhan Life Insurance had total assets ofW24,54527,500 billion,W27,50029,719 billion andW29,71931,824 billion as of December 31, 2016, 2017 and 2018, respectively, and net profits ofW100151 billion,W151121 billion andW121131 billion for the years ended December 31, 2016, 2017 and 2018, respectively.

Other Services

Through our other subsidiaries, we also provide asset management, leasing and equipment financing, savings banking, loan collection and credit reporting, collective investment administration and financial system development services. Through Shinhan Private EquityAlternative Investment Management (in addition to Shinhan Investment), we are also engaged in private equityalternative investments through formation of private equity funds by soliciting investors on a private placement basis.

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 Asset Management Holding, of which we and BNP Paribas Asset Management Holding hold 65:35 interests, respectively. Shinhan BNP Paribas Asset Management ranked fifth among asset managers in Korea in terms of assets under management as of December 31, 2017,2018, 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 Asset Management Holding, we believe Shinhan BNP Paribas Asset Management derives significant benefits from BNP Paribas’s global network of investment professionals and expertise in the asset management industry. As of December 31, 2017,2018, Shinhan BNP Paribas Asset Management had assets under management amounting to approximatelyW40,96245,992 billion. To a limited extent, Shinhan Investment also provides asset management services for discretionary accounts, see “— Securities Brokerage Services.”

Leasing and Equipment Financing

We provide leasing and equipment financing services to our corporate customers mainly through Shinhan Capital. 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 it also offers other leasing and financing services, such as corporate restructuring services for financially troubled companies, project financing for real estate and infrastructure development, corporate leasing and equipment financing.

Savings Banking

Through Shinhan Savings Bank, we provide savings banking services in accordance with the Mutual Savings Bank Act to customers that generally would not, due to their credit profile, qualify for our commercial

banking services or who seek higher returns on their deposits than those offered by our commercial banking subsidiaries. Established in December 2011, Shinhan Savings Bank offers savings and other deposit products with relatively higher interest rates and loans (usually in relatively small amounts and on customer-tailored terms and including loans for which we receive credit support from the Government) primarily to small- tomedium-sized enterprises and low income households who would not generally qualify for our commercial banking services. Shinhan Savings Bank has assumed the assets and liabilities of Tomato Savings Bank, which we acquired in January 2012, and has merged into Yehanbyoul Savings Bank, which we acquired in March 2013, with Yehanbyoul Savings Bank as the surviving entity with its name changed to Shinhan Savings Bank. Both Tomato Savings Bank and Yehanbyoul Savings Bank were facing liquidity troubles due to difficulties in the real estate project financing business as a result of the prolonged slump in the Korean real estate market at the time we acquired them. We closely monitor the business activities and product offerings of Shinhan Savings Bank to ensure its financial soundness.

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. Shinhan Credit Information’s services include debt collection, credit inquiries, credit reporting, civil application/petition services and process agent services, among others. Shinhan Credit Information also manages participants in credit recovery programs and provides support to the Kookmin Happy Fund, which is a Government-established fund that supports retail borrowers with low credit scores by purchasing defaulted loans from creditors or providing credit guarantees to enable such borrowers to refinance at lower rates.

Collective Investment Administration Services

We provide integrated collective investment administration services through Shinhan AITAS Co., Ltd. Shinhan AITAS provides general management service, asset management systems, accounting systems and trading systems to asset management companies and institutional investors. The target customers for these collective investment administration services are asset managers, investment advisors and institutional investors, and Shinhan AITAS seeks to provide a comprehensive service package including the computation of the reference value for funds, evaluation of fund performance, provision of trading systems and fund-related legal administrative services.

Private EquityAlternative Investments

To a limited extent, through Shinhan Alternative Investment Management, we are also engaged in private equity investments through formation of private equity funds. The private equity funds receive funding from investors on a private placement basis, which funds are then invested in alternative assets and equity securities in companies for a variety of reasons, including management control, business turnaround or corporate governance improvements.

Financial System Development Services

We provide financial system development services through Shinhan Data Systems,DS, which offers system integration, system management, IT outsourcing, business process outsourcing and IT consulting services.

Real Estate Investment Trust (REIT) Asset Management

Through our wholly owned subsidiary, Shinhan REITs Management Co., Ltd., we provide real estate investment and management services to real estate investment trusts.

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, 2017.2018.

 

   Shinhan
Bank		   Jeju Bank   Shinhan
Card		   Shinhan
Investment		   Shinhan
Life
Insurance		   Total 

Distribution Channels in Korea(1)

Seoul metropolitan

   351    2    7    54    51    465 

Gyeonggi province

   192    —    4    19    32    247 

Six major cities:

   168    1    6    22    48    245 

Incheon

   59    —    1    3    13    76 

Busan

   38    1    1    6    15    61 

Gwangju

   13    —    1    3    6    23 

Daegu

   24    —    1    4    5    34 

Ulsan

   14    —    1    3    2    20 

Daejeon

   20    —    1    3    7    31 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

   711    3    17    95    131    957 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Others

   154    35    6    19    50    264 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   865    38    23    114    181    1,221 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Note:

 

(1)

Includes our main office and those of our subsidiaries.

Banking Service Channels

Our banking services are primarily provided through an extensive branch network, specializing in retail and corporate banking services, as complemented by self-service terminals and electronic banking, as well as an overseas services network.

As of December 31, 2017,2018, Shinhan Bank’s branch network in Korea comprised of 865876 service centers, consisting of our headquarters, 672679 retail banking service centers, nine12 large corporate banking service centers, primarily designed to serve large49 corporate customersbanking services centers and 184136 hybrid banking branches designed to serve retail as well as small-business corporate customers. Shinhan Bank’s banking branches are designed to provideone-stop banking services tailored to their respective target customers. Recently, Shinhan Bank has been actively adopting digital technology to improve operational efficiency of its banking service channels. For example, Shinhan Bank introduced digital kiosks to banking branches, established ‘Paperless Banking’ by replacing paper applications with electronic documents, implemented a “robotic process automation system” for the automation of certain tasks and processes and increased the volume of client communications throughnon-face-to-face platforms.

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. An extensive retail branch network has traditionally played an important role as the main platform for a wide range of banking transactions. However, a growing number of customers are turning to other service channels to meet their banking needs, such as Internet banking, mobile banking and other forms ofnon-face-to-face platforms. In response to such changes, Shinhan Bank has recently focused on reorganizing its retail branch network, including shifting, merger or closure of certain branches that are considered redundant.

Recently, one of the key initiatives at Shinhan Bank has been to target high net worthnet-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. Small- andmedium-sized enterprises have traditionally been Shinhan Bank’s core corporate customers and we plan to continue to maintain Shinhan Bank’s strengthvis-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. In December 2015, Shinhan Bank introduced digital kiosks, a new generation of automated self-service machines called “digital kiosks,” which are currently beingtest-run at 17 branches in the Seoul metropolitan area. These digital kiosks featurearea featuring biometric authentication technology and canthe ability to perform a wide range of services that are unavailablewere not available through traditional ATMs, such as opening new accounts, issuance of debit and check cards, foreign currency exchange and overseas remittance of foreign currency. These digital kiosks are currently being operated at 41 branches in the Seoul metropolitan area. As of December 31, 2017,2018, Shinhan Bank had 6,0765,810 ATMs, nine13 cash dispensers and 3546 digital kiosks. Shinhan Bank has actively promoted 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 2017,2018, automated banking machine transactions accounted for a substantial portion of total deposit 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 offers mobile banking services in order to enable customers to make speedy, convenient and secure banking transactions using mobile phones. As of December 31, 2017,2018, Shinhan Bank had approximately 17,002,65718,376,152 subscribers to its Internet banking services and approximately 12,757,34613,994,499 users of its smart banking applications,apps, representing an increase of 5.1%8.1% and 9.6%9.7%, respectively, compared to December 31, 2016.2017. Shinhan Bank continues to experience a rise in the number of online and mobile banking users. Shinhan Bank began offering online and mobile banking initially with a view to saving costs rather than increasing revenues, but is currently exploring ways to leverage the possibility of increase revenues through online and mobile banking given that these services offer customers with easier and more convenient access to banking services without limitations of time and space as well as offer tailored and customized service to each customer. In September 2017, Shinhan Bank launched “Shinhan Tong,” a new mobile and web based platform that is more user friendly and easier to access than previous platforms and does not require additional applications or certifications. Shinhan Tong utilizes mobile identification andnon-face-to-face identity authentication technology, which allows users to open new bank accounts, exchange currencies and use other services such as credit card application services without having to visit a physical bank branch. In February 2018, Shinhan Bank launched “SOL”, a new mobile banking application integrating Shinhan Bank’s six previously existing mobile applications such as the Shinhan S Bank and Sunny Bank applications. SOL is the cumulation of Shinhan Bank’s efforts to provide a customer oriented and user friendly mobile banking platform and features, among others,easy-to-use biometric andnon-face-to-face identity authentication technology.

Overseas Distribution Network

The table below sets forth Shinhan Bank’s overseas banking subsidiaries and branches as of December 31, 2017.2018.

 

Business Unit

  

Location

  Year Established
or
Acquired		 

Subsidiaries

    

Shinhan Asia Ltd.

  Hong Kong SAR, China   1982 

Shinhan Bank Europe GmbH(1)

  Frankfurt, Germany   1994 

Shinhan Bank America

  New York, U.S.A.   20031990 

Shinhan Bank (China) Limited

  Beijing, China   2008 

Shinhan Khmer Bank PLC

  Phnom Penh, Cambodia   2007 

Shinhan Bank Kazakhstan Limited

  Almaty, Kazakhstan   2008 

Shinhan Bank Canada

  Toronto, Canada   2009 

Shinhan Bank Japan(2)

  Tokyo, Japan   2009 

Shinhan Bank Vietnam Ltd.(3)

  Ho Chi Minh City, Vietnam   2011 

Banco Shinhan de Mexico(4)

  Mexico City, Mexico   2015 

PT Bank Shinhan Indonesia(5)

  Jakarta, Indonesia   2016 

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 

Kancheepuram

  India   20142010 

Pune

  India   2014 

Manila

  Philippines   2015 

Dubai

  United Arab Emirates   2015 

Sydney

  Australia   2016 

Yangon

  Myanmar   2016 

Ahmedabad

  India   2016 

Ranga Reddy

  India   2016 

Representative Offices(6)

    

Mexico

  Mexico City, Mexico   2008 

Uzbekistan

  Tashkent, Uzbekistan   2009 

Myanmar

Yangon, Myanmar2013

Poland(1)

  Wroclaw, Poland   2014 

 

Notes:

 

(1)

Shinhan Bank Europe GmbH established a representative office in Poland in 2014.

(2)

While Shinhan Bank established the subsidiary in Japan in 2009, Shinhan Bank has provided banking services in Japan through a branch structure since 1986.

(3)

Prior to the establishment of this subsidiary in 2011, Shinhan Bank provided banking services in Vietnam through a branch since 1995.

(4)

Banco Shinhan de Mexico obtained a preliminary licensecommenced operations in August 2015. In December 2017, Banco Shinhan de Mexico obtained a full business license.March 2018.

(5)

Shinhan Bank acquired a 98.01% stake in Bank Metro Express and a 100% stake in Centratama Nasional Bank, two banks in Indonesia, in November 2015 and December 2016, respectively. On February 17,March 3, 2016,

Bank Metro Express obtained a license to conduct business activities in the name of PT Shinhan Bank Shinhan Indonesia. Centratama Nasional Bank was merged with PT Bank Shinhan Indonesia on December 6, 2016.
(6)

Shinhan Bank’s representative office in Myanmar was closed as of June 8, 2018.

Currently, our overseas subsidiaries and branches are primarily engaged in trade financing and local currency funding for Korean companies and Korean nationals in the overseas markets, as well as providing foreign exchange services in conjunction with Shinhan Bank’s headquarters. On a limited basis, these overseas branches and subsidiaries also engage in investment and trading of securities of foreign issuers.In the future, 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 and in 2011 merged two of our Vietnam banking subsidiaries in order to enhance our presence and enable greater flexibility in its service offerings in these markets. We plan to maintain our focus on organic growth, while we may selectively pursue acquisitions in markets where it is difficult to obtain local banking licenses through greenfield entry. In furtherance of this objective, Shinhan Bank acquired a 98.01% stake in Bank Metro Express and a 100% stake in Centratama Nasional Bank, two banks in Indonesia, in November 2015 and December 2016, respectively. The Bank completed the merger of the two banks in December 2016. The Bank also opened additional branches in Australia, Myanmar and India in the second half of 2016. In April 2017, Shinhan Bank Vietnam Co., Ltd. acquired ANZ Bank (Vietnam) Limited’s retail division. In 2017, Shinhan Bank became the first Korean Bank to obtain a license to set up a local subsidiary in Mexico and started local business in Mexico in March 2018. We plan to continue our efforts to expand our overseas banking service network and global operations.

Credit Card Distribution Channels

Shinhan Card primarily uses threefour 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.vendors and (iv) digital platforms such as Shinhan PayFAN.

The branch network for our credit card operations consisted of 865branches876branches as of December 31, 2017of2018of Shinhan Bank and 23 card sales branches of Shinhan Card. The use of the established distribution network of Shinhan Bank is part of the group-wide cross-selling efforts of selling credit card products to existing banking customers. In 2017,2018, the number of new cardholders acquired through our banking distribution network accounted for approximately 23.9%24.9% of the total number of new cardholders. We believe that the banking distribution network will continue to provide a stable andlow-cost venue for acquiring high-quality credit cardholders.

The sales agents represented the most significant source of Shinhan Card’s new cardholders in 2017,2018, and the number of new cardholders acquired through sales agents accounted for approximately 47.3%44.8% of the total number of Shinhan Card’s new cardholders in 2017.2018. As of December 31, 2017,2018, Shinhan Card had 3,0662,455 sales agents, who were independent contractors. These sales agents assist prospective customers with the application process and customer service. Compensation of these sales agents is generally tied to the transaction volume of the customers introduced by them, and we believe this system helps to 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. Shinhan Card plans to continue to leverage its alliances with such vendors to attract new cardholders.

As part of a group-wide initiative to streamline our operations and create a digital-friendly business platform, Shinhan Card has strategically expanded its digital platforms. Shinhan Card launched Shinhan FAN, a mobile application providing consolidated financial services including strategic alliances, online and offline payment services, financing services such as installment financings for automobile purchases and a group-wide integrated customer reward program, and subsequently upgraded the application to Shinhan PayFan in October

2018 in order to better provide customized financial services aimed at meeting the comprehensive needs of customers and ultimately lead the mobile payment industry in Korea. In addition to providing traditional payment services, Shinhan PayFan utilizes digital technology such as artificial intelligence and big data to provide real-time customized services tailored to individual users and integrated access across services provided by various merchants and affiliates. Shinhan PayFan is able to provide most of the services provided through traditional customer service means such as call centers and website applications.

In November 2014, as an initial step to exploring potential opportunities overseas, Shinhan Card established its first overseas subsidiary in Kazakhstan, LLP MFO Shinhan Finance, as Kazakhstan was deemed to have relatively low entry barriers to foreign financial institutions, high growth potential for retail operations and the possibility of leveraging Shinhan Bank’s network. LLP MFO Shinhan Finance obtained its business license in the first half of 2015 and commenced operations in July 2015, including installment financing and credit loans. In 2018, LLP MFO Shinhan Finance is planningexpanded its sales channels and introduced new credit loan products. In 2019, LLP MFO Shinhan Finance plans to further expand its marketing channels and improve profitability by diversifyingsales coverage while enhancing its loan product offerings.risk management capabilities.

In December 2015, Shinhan Card acquired a majority stake in PT Swadharma Indotama Finance, a multi finance company in Indonesia, and changed its legal name to PT Shinhan Indo Finance. PT Shinhan Indo Finance engages in corporate and retail operations, including installment financing and financial leases, and began offering credit card services in January 2017 after obtaining its credit card business license in December 2016. It is currently focusing on expanding its client base by utilizing the Shinhan Bank network as well as employees and clients of its affiliate company, the Salim Group. In order to expand its retail operations, in 2018, PT Shinhan Indo Finance is planningbegan to expand its car sales network through partnerships withretail business across Indonesia while maintaining a conservative approach for its credit card business given the high level of competition in the local car dealers.market. In addition, it is planning2019, PT Shinhan Indo Finance plans to improvefocus on further expanding its profit structure by reducing operating costsretail business and enhancing the quality ofimproving its assets.financial performance.

In March 2016, to accelerate our global business expansion, we established Shinhan Microfinance, a local subsidiary in Myanmar. Shinhan Microfinance obtained its microfinance business license in July 2016 and launched operations in September 2016. In 2017, it expanded its business operations from Yangon to nearby Bago. In 2018, Shinhan Microfinance is planning to increaseincreased its assets and profit volume by diversifying the range of microfinance products it offers. In 2019, Shinhan Microfinance plans to actively expand its sales network and seek long term growth opportunities.

In January 2018, Shinhan Card acquired Prudential Vietnam Finance Company Limited to enter the consumer finance market in Vietnam. The acquisition is expectedwas approved by the Vietnamese government in January 2019. As a result of the acquisition, Shinhan Card expects to be completed during the second half of 2018 and enablegain a stronger presence in Vietnam and plans to strive for increased synergy with Shinhan Bank and Shinhan Investment, both of which currentlyalready have operations in Vietnam.

Securities Brokerage Distribution Channels

Our securities brokerage services are conducted principally through Shinhan Investment. As of December 31, 2017,2018, Shinhan Investment had 114118 service centers nationwide, and four overseas subsidiaries based in Hong Kong, New York, Vietnam and Indonesia to service our corporate customers.

Approximately 50%48% of our brokerage branches are located in the Seoul metropolitan area with a focus on attracting high net worthnet-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, 2017,2018, Shinhan Life Insurance had 181155 branches and 108 customer support centers. These branches are staffed by financial planners, telemarketers, agent marketers and bancassurance to meet the various needs of our insurance and lendingcustomers. Our group-wide 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 dedicate substantial resources to maintaining a sophisticated information technology system to support our operations management and provide high quality customer service. Our information and technology system is operated at a group-wide level based on comprehensive group-wide information collection and processing. We also operate a single group-wide enterprise information technology system known as “enterprise data warehouse” for customer relations management capabilities, risk management systems and data processing. We continually upgrade our group-wide information technology system in order to apply thebest-in-class technology to our risk management systems to reflect the changes in our business environment as well as enhance differentiation from our competitors.

In 2013, we completed the construction of the Integrated Data Center, which is responsible for comprehensive management of information technology systems for our subsidiaries on a group-wide basis. This center ensures a stable use of a central information processing facilities for at least 15 years and is designed to maximize operational and cost efficiency as well as enhance information security by combining the various data centers previously used by our subsidiaries. All of our subsidiaries have completed relocation of their information management capabilities to this center by the first half of 2014.

In order to enhance security and trustworthiness of the financial services provided by us, we continually seek to enhance a group-wide set of standards for information security and upgrade the related systems. In 2008, we established group-wide information systems and policies, which have since been continually updated and upgraded. In 2014, we further upgraded the group-wide information security control tower to abest-in-class level and replaced most of our internal information security staff with highly qualified outside experts in order to reinforce our security defense capabilities in the event of cyber breaches. In addition, we have a team within our group to provide specialized data protection and related support services to our smaller operating subsidiaries, and we take active measures to preemptively forestall any security breaches through mock trials.

At the subsidiary level, we also continue to upgrade the information technology infrastructure and services for each of our subsidiaries to enhance the quality of our customer service specific to such subsidiary and thereby bolster their respective competitiveness, including with respect to electronic and mobile banking, (including by means of smartphones), online consultation, expanded sales services and customized informational services. In addition, we have recently strengthened our indirect service channels through a major upgrade of the corporate online banking services and expansion of mobile phone-based product offerings and sales and service networks, such as the launch of Shinhan Bank’s banking application SOL and upgrades to Shinhan Investment’s Shinhan iAlpha application system, in light of the growing base of customers who increasingly access financial services through their mobile phones. We also established in April 2015 a new credit evaluation system with enhanced precision in assessing the creditworthiness of our corporate customers, which has enabled us to manage our credit risk more effectively. On a group-wide level, we are enhancing the efficiency of the information technology operations of our subsidiaries through cloud computing and are planning to build a platform based on blockchain, open application programming interface and big data technology. Furthermore, we have expanded, and will continue to expand, our information technology systems to support the sales and operational capabilities of our overseas subsidiaries and branches through a global customer management system as well as provide country-specific financial services.

The information technology system for each of our subsidiaries is currently backed up on a real-time basis. In 2014, we converted thepre-existing data center to aback-up and disaster recovery center for all our subsidiaries’ operations in order to provide customer services in a continued seamless manner even in the case of an interruption at Shinhan Data Center. We believe that our centralizedback-up systems enable more efficientback-up at a higher level of security.

Competition

Competition in the Korean financial services industry is, and is likely to remain, intense, including as a result of the sustained low interest rate environment (which narrows opportunities to make profit based on the spread between lending rates and funding rates), the continuing sluggishness in the general economy, the growing maturation and saturation of the industry as a whole, the entry of new market participants and deregulation, among others.

In the banking sector, Shinhan Bank competes principally with other national commercial banks in Korea, but also faces competition from a number of additional banking institutions, including branches and subsidiaries of foreign banks operating in Korea, regional banks, Internet-only banks, government-owned development banks and Korea’s specialized banks, such as Korea Development Bank, Industrial Bank of Korea and the National Federation of Fisheries Cooperatives, as well as various other types of financial service providers, including savings

institutions (such as mutual savings and finance companies, credit unions and credit cooperatives), investment companies (such as securities brokerage firms, merchant banking corporations and asset management companies) and life insurance companies. As of December 31, 2017,2018, Korea had six major nationwide domestic commercial banks (including Citibank Korea Inc. and Standard Chartered Bank Korea Limited, both of which are domestic commercial banks acquired by global financial institutions), six regional commercial banks, two Internet-only banks and branches and subsidiaries of 38 foreign banks. Foreign financial institutions, many of which have greater experiences and resources than we do, may 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.

In the small- andmedium-sized enterprise and retail banking segments, which have been Shinhan Bank’s traditional core businesses, competition is expected to increase further. In recent years, Korean banks, including Shinhan Bank, have increasingly focused on stable asset growth based on quality credit, such as corporate borrowers with high credit ratings, loans to SOHO with high levels of collateralization, and mortgage and home equity loans within the limits of the prescribedloan-to-value ratios anddebt-to-income ratios. This common shift in focus toward stable growth based on less risky assets has intensified competition as banks compete for the same limited pool of quality credit by engaging in price competition or by other means although Shinhan Bank has traditionally focused, and will continue to focus, on enhancing profitability rather than increasing asset size or market share, and has avoided, to the extent practicable, engaging in price competition by way of lowering lending rates. In addition, such competition may result in lower net interest margin and reduced overall profitability, especially if the low interest rate environment were to continue for a significant period of time. Although Shinhan Bank’s net interest margin has improved slightly in 2018 compared to 2017 due to, at least partly, increases in base interest rate by the Bank of Korea from 1.25% to 1.50% in November 2017 and from 1.50% to 1.75% in November 2018 and may improve further if the base interest rate is increased again during 2018,2019, the effect on Shinhan Bank’sits results of operations may be less beneficial due to increased volatility of market interest rates and tighter regulations regarding SOHO loans, including the implementation of additional credit review guidelines for individual businesses. Therefore, if competing financial institutions seek to expand market share by lowering their lending rates, Shinhan Bank may suffer customer loss, especially among customers who select their lenders principally on the basis of lending rates. In response thereto or for other strategic reasons, Shinhan Bank may subsequently lower its lending rates to stay competitive, which could lead to a decrease in its net interest margins and outweigh any potential positive impact on the net interest margin from a general rise in market interest rates. Any future decline in Shinhan Bank’s customer base or its net interest margins could have an adverse effect on our results of operations and financial condition.

In the credit card sector, Shinhan Card competes principally with existing “monoline” credit card companies, credit card divisions of commercial banks, consumer finance companies, other financial institutions and, recently, credit card service providers allied with mobile telecommunications service providers in Korea. Competition has been historically intense in this sector and the market has shown signs of saturation as existing and new credit card service providers make significant investments and engage in aggressive marketing campaigns and promotions to acquire new customers and target customers with high credit quality. While competition has subsided somewhat recently due to stricter government regulations, such as curbs on excessive marketing expenses, competition remains intense and credit card issuers may continue to compete with Shinhan Card for customers by offering lower interest rates and fees, higher credit limits, more attractive promotions and incentives and alternative products such as phone cards,credit card reward points, gift cards andlow-interest consumer loan products. As a result, Shinhan Card may lose customers or service opportunities to competing credit card issuers and/or incur higher marketing expenses. In addition,Also, over the years, the Government has implemented regulations lowering certain merchant fees chargeable by credit card companies. In 2012, the Government adopted in 2012regulations mandating lower merchant fees chargeable to small- andmedium-sized enterprises, (which are subject to revision every three years) and the Government guidelines issued in 2013 suggesting lower standard interest rates for cash advances and card loans have reduced, and are likely to continue to limit, the revenues of credit card companies, including Shinhan Card. Beginningbeginning January 31, 2016, a further reduction in the merchant fees chargeable to small- andmedium-sized enterprises went into effect. The Enforcement Decree of the Specialized Credit Finance Business Act was amended in July 2017 and January 2019 to further expand the range of small- andmedium-sized enterprises subject to lower merchant fees, and additional amendments to regulations requiring further downward adjustments to merchant fees may come into force in the future. For further details on the Government’s regulations on merchant fees chargeable by credit card companies, See “Item 3.D. Risk Factors — Risks Relating to Our Credit Card Business — Future changes in market conditions as well as other factors, such as stricter regulation, may lead to reduced revenues and deterioration in the asset quality of credit card receivables.” In addition, due tosince the implementation of the Improper Solicitation and Graft Act onin September 28, 2016, revenue growth for corporate cards and service related industries such as dining, floral and entertainment have shown signs of decline. In July 2017, the Enforcement Decree of the Specialized Credit Finance Business Act was amended to expand the range of small-decline, andmedium-sized enterprises subject to lower merchant fees. Additional additional regulations on loans reducing maximum interest rates chargeable from 27.9% to 24%

came into effect in February 2018, placing2018. These developments have put further downward pressure on the results of operations for credit card companies, for 2018 and beyond, and amendments to regulations requiring further downward adjustments to merchant fees are expected to continue in the near future.including Shinhan Card. Furthermore, the Government’s recent guidelines to bolster consumer protection and protect customers’ personal data in the aftermath of data leaks at certain credit companies (not including Shinhan Card) may result in additional compliance costs for Shinhan Card. Customer attrition, together with any further lowering of fees or reduction in base and market interest rates and/or additional expenses from more extensive marketing and promotional campaigns that Shinhan Card might implement to acquire and retain customers, could reduce its revenues and earnings. Furthermore, the average credit quality of Shinhan Card’s customers may deteriorate if customers with higher credit quality borrow from our competitors rather than Shinhan Card and it may become more difficult for Shinhan Card to attract and maintain quality customers. In general, the growth, market share and profitability of Shinhan Card’s operations may decline or become negative as a result of market saturation in this sector, interest rate competition, pressure to lower fee rates and incur higher marketing expenses, as well as Government regulation and social and economic developments in Korea that are beyond our control, such as changes in consumer confidence levels, spending patterns or public perception of credit card usage and consumer debt. If Shinhan Card fails to maintain or attract new cardholders or increase the card usage by existing customers or experiences deterioration in its asset quality and a rise in delinquency, our business, financial condition and results of operations may be adversely affected.

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.

Consolidation among our rival institutions and the Government’s privatization efforts may also add competition in the markets in which we and our subsidiaries conduct business. A number of significant mergers and acquisitions in the industry have taken place in Korea over the past decade,recently, including the acquisition of Hanmi Bank by an affiliate of Citibank in 2004, Standard Chartered Bank’s acquisition of Korea First Bank in 2005, Chohung Bank’s merger with Shinhan Bank in 2006 and Hana Financial Group’s acquisition of Korea Exchange Bank in 2012 and the resulting merger of Hana Bank and Korea Exchange Bank in September 2015. Moreover, in 2014, pursuant to the implementation of the Government’s privatization plan with respect to Woori Finance Holdings (now merged into Woori Bank) and its former subsidiaries, Woori Financial,

Woori Asset Management and Woori F&I were acquired by KB Financial Group, Kiwoom Securities and Daishin Securities, respectively, and Woori Investment & Securities, Woori Aviva Life Insurance and Woori FG Savings Bank were acquired by NongHyup Financial Group. In addition, in October 2014, the Government’s ownership interest in the holding companies of Kwangju Bank and Kyongnam Bank were acquired by JB Financial Group and BS Financial Group (now BNK Financial Group), respectively. In 2015, the Government decided to sell a 30% to 40% interest in Woori Bank to multiple investors in separate blocks ranging from 4% to 10% each. Since December 2016, Korea Deposit Insurance Corporation has consummated sales transactions with seven institutional investors including Kiwoom Securities, Korea Investment and Securities, Hanwha Life Insurance, Tongyang Life Insurance, Eugene Asset Management, Mirae Asset Global Investments and IMM Private Equity for the sale of an aggregate 29.7% interest in Woori Bank in separate blocks. In the securities brokerage sector, Mirae Asset acquired KDB Daewoo Securities in 2016, creating the largest brokerage company in Korea by assets. Onassets, and on June 1, 2016, KB Financial Group completed its acquisition of Hyundai Securities and merged it with its existing brokerage unit, KB Investment & Securities Co, creating the fifth largest brokerage company in Korea by assets. Any of these developments may place us at a competitive disadvantage and outweigh any potential benefit to us in the form of opportunities to acquire new customers who are displeased with the level of services at the newly reorganized entities or to provide credit facilities to corporate customers who wish to maintain relationships with a wide range of banks in order to diversify their sources of funding. In September 2018, we announced the acquisition of a 59.15% interest in Orange Life Insurance, Ltd., the former Korean unit of ING Life Insurance, as part of our efforts to diversify and enhance ournon-banking businesses. The acquisition was approved by the Financial Services Commission on January 16, 2019 and closed on February 1, 2019. We expect that such consolidation and other structural changes in the financial industry will continue. Other financial institutions may seek to acquire or merge with other entities, and the financial institutions resulting from such consolidation may, by virtue of their increased size and business scope, provide greater competition for us. Increased

competition and continuing consolidation may lead to decreased margins, resulting in a material adverse impact on our future profitability.

Regulatory reforms and the general modernization of business practices in Korea have also led to increased competition among financial institutions in Korea. Since July 2015, the Financial Services Commission has provided, through the Korea Financial Telecommunications and Clearings Institute, the integrated automatic payment transfer management service, which allows account holders to search for, terminate or modify automatic payments they have set up with financial institutions participating in such service (currently including banks, securities companies and other financial institutions such as The Post Office, Korean Federation of Community Credit Cooperatives, National Credit Union Federation of Korea, Mutual Savings Bank and National Forestry Cooperative Federation). In addition, the Financial Services Commission began providing the integrated account management service from December 2016, which allows account holders to search for detailed information of their bank accounts opened in banks participating in such service, closesmall-sum inactive accounts (i.e., accounts with no transaction activity during the previous one year period and with a balance of less thanW500,000) and transfer the balance in such accounts to other accounts. Moreover, in December 2017, the Financial Services Commission introduced the “my account at a glance” system, which enables consumers to view their key financial account information online, including information on banks, insurances, mutual finance, loan and card issuances on one page. The “my account at a glance” system is expected to becomebecame available on mobile channels in February 2016 and expandexpanded its scope of services to include savings banks and securities within 2018.companies. Since their introduction, the integrated automatic payment transfer management andservice, integrated account management servicesservice and “my account at a glance” system have gained widespread acceptance, evidenced by the fact that, as of September 30, 2017, these services have been used by approximately 17.6 million and 8.0 million users, respectively.acceptance. As the reform of the financial sector continues, competition may become more intense among existing banks, insurance companies, securities companies and other financial organizations, and may lead to significant changes in the current Korean financial market. AsMoreover, the Regulation on the Supervision of the Banking Business was amended on July 12, 2018 to provide that, beginning on January 1, 2020, in calculating loan to deposit ratio, retail loans and corporate loans will be weighed differently, with retail loans subject to a multiple of 115% and corporate loans (excluding loans to SOHOs) subject to a multiple of 85%, thereby increasing the impact of retail loans and reducing the impact of corporate loans in calculating such ratio. This may further intensify competition for corporate loans and deposits among commercial banks and, as a result, Shinhan Bank may face difficulties in

increasing or retaining its corporate loans and deposits, which in turn may result in an increase in its cost of funding and a decrease in its settlement and remittance service fee revenue.funding.

Furthermore, as the Korean economy further develops and new business opportunities arise, more competitors may enter the financial services industry. For example, as online service providers and technology companies with large-scale user networks, such as Kakao Corp., NAVER and Samsung Electronics, recently make significant inroads in providing virtual payment services through a system based on a growing convergence of financial services and technology commonly referred to as “fintech,” competition for online customers is growing not just among commercial banks, but also from online and mobile payment service providers. Also, widespread consumer acceptance of mobile phone payment services in lieu of credit card services could add to the competitive threat faced by existing credit card service providers, including our credit card subsidiary. In 2015, the Government announced its plans to allow Internet-only banks to operate in Korea. KT consortium’sK-Bank and Kakao consortium’s Kakao Bank commenced operations in April 2017 and July 2017, respectively. Internet-only banks may have advantages over traditional banks as the former can pass savings in labor and overhead costs to their customers by offering higher interest rates on deposit accounts, lower loan costs and reduced service fees. Accordingly, commercial banks will likely face increasing pressure to upgrade their service platforms to attract and maintain online users, which represents a growing customer base compared to traditional customers who have primarily conducted bankingin-person at physical banking branches.

Recently, following the 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 (including a requirement to maintain a certain ratio of core capital to total risk exposure, which was introduced in January 2018 in order to control excessive leverage), which has had a dampening effect on competition. The Financial Services Commission implemented the capital requirements of Basel III, whose minimum requirements were phased in sequentially from December 1, 2013 through full implementation by January 1, 2015, based on the guidelines set forth in the amended Regulation on the Supervision of the Banking Business and the Detailed Regulation on the Supervision of the Banking Business. In addition, the Financial Services Commission is currently implementinghas implemented the Basel III requirements relating to

liquidity coverage ratio and capital conservation buffer, each of which will behave been fully phased in byas of January 1, 2019. As of January 1, 2016, the Financial Services Commission implemented Basel III requirements relating to accumulation of additional capital for systemically important banks and bank holding companies and countercyclical capital buffer requirements. Each year, the Financial Services Commission may designate banks with significant influence (based on size and connectivity with other financial institutions) on the domestic financial system as a domestic systemically important bank and require the accumulation of additional capital in accordance with the highest of: (i) ratio of common equity capital to risk-weighted assets, ranging from 0.0% to 2.0%, depending on the systematic importance evaluation score, (ii) if the bank’s holding company is a domestic systemically important bank holding company, the capital ratio corresponding to the additional capital required for the bank holding company under the Financial Holding Company Supervision Regulations, or (iii) if the bank is also a global systemically important bank, as defined by the Basel Committee, the capital ratio as required by the Basel Committee. According to the instructions of the Financial Services Commission, domestic systematically important banks including Shinhan Bank arehave been required to maintain an additional capital buffer of 0.25% since January 1, 2016, with such buffer to increaseincreased by 0.25% annually to reach 1.00% byas of January 1, 2019. The Financial Services Commission may also, upon quarterly review, determine and require banks to accumulate a required level of countercyclical capital buffer within the range of 0% to 2.5% of risk-weighted assets, taking into account factors such as the degree of increase in credit relative to the gross domestic product. However, there is no assurance that these measures will have the effect of curbing competition or that the Government will not reverse or reduce such measures or introduce other deregulatory measures, which may further intensify competition in the Korean financial services industry. For further details on the capital requirements applicable to us, see “— Supervision and Regulation — Principal Regulations Applicable to Financial Holding Companies — Capital Adequacy.”

If, despite our efforts to adapt to the changing macroeconomic environment and comply with new regulations, we are unable to compete effectively in the changing business and regulatory environment, our profit margin and market share may erode and our future growth opportunities may become limited, which could adversely affect our business, financial condition and results of operations. See “Item 3.D. Risk Factors — Risks Relating to Our Overall Business — Competition in the Korean financial services industry is intense, and may further intensify” and “Item 4.B. Business Overview —“— Supervision and Regulation — Financial Investment Services and Capital Markets Act.Regulation.”

Description of Assets and Liabilities

Loans

As of December 31, 2017,2018, our total gross loan portfolio wasW277,489303,070 billion, which represented an increase of 6.3%9.2% fromW261,004277,489 billion at December 31, 2016.2017. The increase in our portfolio primarily reflects a 5.7%10.0% increase in corporate loans and an 7.1%8.3% increase in retail loans.

Loan Types

The following table presents our loans by type foras of the periodsdates 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, 
  2013   2014   2015   2016   2017   2014   2015   2016   2017   2018(6) 
  (In billions of Won)   (In billions of Won) 

Corporate

                    

Corporate loans(1)

  W102,823   W112,145   W125,155   W128,672   W138,277   W112,145   W125,155   W128,672   W138,277   W151,647 

Public and other(2)

   2,525    2,135    2,191    2,154    2,298    2,135    2,191    2,154    2,298    2,831 

Loans to banks(3)

   6,103    4,684    4,653    4,730    2,970    4,684    4,653    4,730    2,970    3,586 

Lease financing

   1,721    1,844    1,875    1,814    1,713    1,844    1,875    1,814    1,713    1,726 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total — Corporate

   113,172    120,808    133,874    137,370    145,258    120,808    133,874    137,370    145,258    159,790 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Retail

                    

Mortgages and home equity

   46,908    50,652    54,983    56,235    59,078    50,652    54,983    56,235    59,078    62,394 

Other retail(4)

   30,242    34,278    41,035    47,949    52,512    34,278    41,035    47,949    52,512    58,438 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total — Retail

   77,150    84,930    96,018    104,184    111,590    84,930    96,018    104,184    111,590    120,832 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Credit cards

   17,665    18,141    18,537    19,450    20,641    18,141    18,537    19,450    20,641    22,448 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total loans(5)

  W207,987   W223,879   W248,429   W261,004   W277,489   W223,879   W248,429   W261,004   W277,489   W303,070 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

Notes:

 

(1)

Consists primarily of working capital loans, general purpose loans, bills purchased and trade-related notes and excludes loans to public institutions and commercial banks.

(2)

Consists of working capital loans and loan facilities to public institutions andnon-profit organizations.

(3)

Consists of interbank loans and call loans.

(4)

Consists of general unsecured loans and loans secured by collateral other than housing to retail customers.

(5)

As of December 31, 2013, 2014, 2015, 2016, 2017 and 2017, approximately 90.0%,2018, 89.1%, 89.4%, 88.9%, 88.2% and 88.2%88.9% of our total gross loans, respectively, wereWon-denominated.

(6)

Loan amounts as of December 31, 2018 include loans at amortized cost and loans at fair value classified in accordance with IFRS 9. Corporate loans include loans at fair value in the amount ofW1,209 billion.

Loan Portfolio

The total exposure of us or our banking 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”).

Twenty Largest Exposures by Individual Borrower

As of December 31, 2017,2018, our 20 largest exposures, consisting of loans, securities and guarantees and acceptances, totaledW55,19556,906.2 billion. The following table sets forth our total exposures to these top 20 borrowers as of December 31, 2017.2018.

 

  Loans in
Won
Currency		   Loans in
Foreign
Currency		   Securities   Guarantees
and
Acceptances		   Others   Total
Exposure		   Impaired
Loans and
Guarantees
and
Acceptances		  As of December 31, 2018 
  (In billions of Won)  Loans in
Won
Currency		 Loans in
Foreign
Currency		 Securities Guarantees
and
Acceptances		 Others Total
Exposure		 Impaired
Loans and
Guarantees
and
Acceptances		 

Ministry of Strategy and Finance

  W0   W —   W15,183   W—   W—   W15,183   W— 

The Bank of Korea

   980    —    6,524    0    —    7,504    — 

Korea Housing Finance Corporation.

   0    —    5,517    —    —    5,517    — 
 (In billions of Won) 

Ministry of Economy and Finance

 W 0.0  W —  W17,848.0  W —  W—  W17,848.0  W— 

Korea Housing Finance Corporation

 0.0   —  6,870.3   —   —  6,870.3   — 

The Bank of Korea.

 40.0   —  5,608.9  0.1   —  5,649.0   — 

Korea Development Bank

   14    6    4,802    —    —    4,821    —  10.9  11.2  5,176.5   —   —  5,198.7   — 

Industrial Bank of Korea.

   637    —    2,295    —    —    2,932    —  651.8   —  3,127.4   —   —  3,779.1   — 

Export-Import Bank of Korea

   —    —    2,170    54    —    2,224    —   —  11.2  2,431.3   —   —  2,442.5   — 

Samsung Electronics Co., Ltd.

 0.0  1,432.5   —   —  0.0  1,432.5   — 

Korea Deposit Insurance Corporation.

  —   —  1,355.9   —   —  1,355.9   — 

KB Investment & Securities Co., Ltd.

 1,100.0   —  229.1   —   —  1,329.1   — 

Woori Bank.

 381.1  84.1  839.8   —   —  1,305.0   — 

Kookmin Bank

 723.4   —  532.6  31.2   —  1,287.3   — 

Korea Securities Finance Corporation.

   756    —    1,459    —    —    2,215    —  716.3   —  503.8   —   —  1,220.1   — 

Korea Deposit Insurance Corporation.

   —    —    2,198    —    —    2,198    — 

Samsung Electronics Co., Ltd.

   —    1,920    25    —    0    1,944    — 

Nonghyup Bank.

   543    8    817    2    —    1,371    —  627.1  10.6  536.8  15.5   —  1,190.0   — 

Korea Land & Housing Corporation

   —    —    1,279    —    —    1,279    —  0.0   —  1,106.9   —   —  1,107.0   — 

Woori Bank.

   94    195    978    —    —    1,268    — 

Kookmin Bank.

   477    —    771    0    —    1,247    — 

Mirae Asset Daewoo Co., Ltd.

 870.7   —  191.7   —   —  1,062.5   — 

KEB Hana Bank

 139.6  225.2  501.1  2.1   —  868.1   — 

Korea Electric Power Corporation.

 2.4   —  760.2  88.3   —  851.0   — 

Small & Medium Business Corporations.

 0.0   —  722.9   —   —  722.9   — 

Korea Investment & Securities Co., Ltd.

   919    —    30    —    —    949    —  631.3   —  67.9   —   —  699.2   — 

Small& Medium Business Corporations

   0    —    893    —    —    893    — 

KEB Hana Bank

   127    129    618    3    —    878    — 

LG Electronics Inc.

   105    73    209    417    —    805    — 

Hotel Lotte Co., Ltd.

   170    284    30    205    —    689    — 

Korea Student Aid Foundation

   —    —    652    —    —    652    — 

KB Kookmin Card Co., Ltd.

   68    —    559    —    —    628    —  27.4   —  662.8   —   —  688.2   — 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total

  W4,891   W2,614   W47,008   W681   W0   W55,195   W—  W5,922.1  W1,774.9  W49,071.9  W137.3  W0.0  W56,906.2  W— 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Exposure to Main Debtor Groups

As of December 31, 2017,2018, our total exposure to the main debtor groups as identified by the Governor of the Financial Supervisory ServiceamountedService amounted toW26,56827,330.9 billion. The main debtor groups are largely comprised ofchaebols.The following table shows, as of December 31, 2017,2018, our total exposures to the ten main debtor groups to which we have the largest exposure.

 

 As of December 31, 2018 

Main Debtor Groups

  Loans in
Won
Currency		   Loans in
Foreign
Currency		   Securities   Guarantees
and
Acceptances		   Others   Total
Exposure		   Amounts of
Impaired
Loans and
Guarantees
and
Acceptances		  Loans in
Won
Currency		 Loans in
Foreign
Currency		 Securities Guarantees
and
Acceptances		 Others Total
Exposure		 Amounts of
Impaired
Loans and
Guarantees
and
Acceptances		 
  (In billions of Won)  (In billions of Won) 

Samsung

  W302   W2,491   W844   W849   W0   W4,486   W—  W 545.2  W2,001.3  W1,023.7  W 967.9  W0.1  W 4,538.1  W— 

Hyundai Motors

   1,112    1,625    921    309    0    3,968    —  845.8  1,808.6  1,029.3  331.9  0.7  4,016.3   — 

SK

 836.6  378.2  786.5  803.9  0.0  2,805.1   — 

Lotte

   407    712    1,013    461    0    2,592    —  327.8  718.0  925.6  339.4  1.6  2,312.4   — 

LG

   521    206    457    641    0    1,825    —  460.5  255.7  603.5  536.9  0.0  1,856.6   — 

SK

   542    243    585    373    0    1,743    — 

Hanwha

   549    229    476    299    0    1,552    —  341.1  264.6  571.8  328.3  0.2  1,505.9   — 

Hyundai Heavy Industries

   158    107    35    1,085    —    1,385    —  158.2  170.7  75.6  1,073.9   —  1,478.4   — 

LS

   133    377    266    591    —    1,367    —  78.2  388.0  250.0  627.2   —  1,343.4   — 

Hyosung

 186.4  452.9  59.7  139.2  0.0  838.1   — 

GS

   344    114    334    113    0    906    —  55.7  198.0  216.8  193.3  0.0  663.8   — 

Hyosung

   161    408    72    129    0    770    — 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total

  W4,229   W6,512   W5,003   W4,850   W0   W20,594   W—  W3,835.4  W6,635.9  W5,542.4  W5,341.9  W2.6  W21,358.2  W— 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Loan Concentration by Industry

The following table shows the aggregate balance of our corporate loans by industry concentration as of December 31, 2017.2018.

 

  As of December 31, 2018 

Industry

  Aggregate Loan
Balance		   Percentage
of Total
Corporate
Loan
Balance		   Aggregate Loan
Balance		   Percentage
of Total
Corporate
Loan
Balance		 
  (In billions of Won)   (Percentages)   (In billions of Won)   (Percentages) 

Manufacturing

  W42,241    29.1%   W46,392    29.0% 

Real estate, leasing and service

   25,032    17.2    29,077    18.2 

Retail and wholesale

   19,325    13.3    20,704    13.0 

Finance and insurance

   11,420    7.9    18,338    11.5 

Transportation, storage and communication

   3,837    2.6    4,951    3.1 

Hotel and leisure

   3,728    2.6    7,184    4.5 

Construction

   3,185    2.2    3,618    2.3 

Other service(1)

   13,860    9.5    16,411    10.3 

Other(2)

   22,630    15.6    13,115    8.1 
  

 

   

 

   

 

   

 

 

Total

  W145,258    100.0%   W159,790    100.0 % 
  

 

   

 

   

 

   

 

 

 

Notes:

 

(1)

Includes other service industries such as publication, media and education.

(2)

Includes other industries such as agriculture, forestry, mining, electricity and gas.

Maturity Analysis

The following table sets out the scheduled maturities (presented in terms of time remaining until maturity) of our loan portfolio as of December 31, 2017.2018. The amounts below are before deduction of attributableallowance for loan loss

reserves.losses and deferred loan origination costs and fees. In the case of installment payment loans, maturities have been adjusted to take into account the timing of installment payments.

 

  As of December 31, 2017   As of December 31, 2018 
  1 Year or
Less		   Over 1
Year but
Not More
Than 5
Years		   Over
5 Years(1)		   Total   1 Year or
Less		   Over 1
Year but
Not More
Than 5
Years		   Over 5
Years(1)		   Total 
  (In billions of Won)   (In billions of Won) 

Corporate:

                

Corporate loans

  W96,642   W36,388   W5,247   W138,277   W103,337   W42,194   W6,116   W151,647 

Public and other

   1,419    733    146    2,298    1,478    978    375    2,831 

Loans to banks

   2,287    556    127    2,970    2,920    551    115    3,586 

Lease financing

   670    1,037    6    1,713    603    1,116    7    1,726 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total corporate

  W101,018   W38,714   W5,526   W145,258   W108,338   W44,839   W6,613   W159,790 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Retail:

                

Mortgage and home equity

  W9,540   W15,128   W34,410   W59,078   W10,419   W16,644   W35,331   W62,394 

Other retail

   34,333    10,919    7,260    52,512    35,989    13,196    9,253    58,438 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total retail

  W43,873   W26,047   W41,670   W111,590   W46,408   W29,840   W44,584   W120,832 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Credit cards

  W18,171   W2,270   W200   W20,641   W19,756   W2,479   W213   W22,448 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total loans

  W163,062   W67,031   W47,396   W277,489   W174,502   W77,158   W51,410   W303,070 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

Note:

 

(1)

Includes overdue loans.

We may roll over our corporate loans (primarily consisting of working capital loans and facility loans) and retail loans (to the extent not payable in installments) after we conduct our standard loan reviews in accordance with our loan review procedures. Working capital loans may generally be extended on an annual basis for an aggregate term of up to five years. Facilities loans, which are generally secured, may generally be extended on an annual basis for a maximum of 15 years from the originationinitial loan date. Retail loans may be extended for additional terms of up to 12 months for an aggregate term of ten years from the originationinitial loan date for both unsecured loans and secured loans.

Interest Rate Sensitivity

The following table presents a breakdown of our loans in terms of interest rate sensitivity as of December 31, 2017.2018.

 

  As of December 31, 2017   As of December 31, 2018 
  Due Within
1 Year(1)		   Due After 1
Year		   Total   Due Within
1 Year(1)		   Due After 1
Year		   Total 
  (In billions of Won)   (In billions of Won) 

Fixed rate loans(1)

  W84,785   W46,828   W131,613   W74,001   W27,735   W101,736 

Variable rate loans(2)

   78,277    67,599    145,876    100,501    100,833    201,334 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total loans

  W163,062   W114,427   W277,489   W174,502   W128,568   W303,070 
  

 

   

 

   

 

   

 

   

 

   

 

 

 

Notes:

 

(1)

Fixed rate loans are loans for which the interest rate is fixed for the entire term of the loan.

(2)

Variable or adjustable rate loans are for which the interest rate is not fixed for the entire 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 recognize interest income on nonaccrual loans using the rate of interest used to discount the future cash flows of such loans for the purpose of measuring impairment loss. Generally, we discontinue accruing of interest on loans (other than repurchased loans) when payment of interest and/or principal becomes past due by 90 days. Loans (other than repurchased loans) are not reclassified as accruing until interest and principal payments are brought current.

We generally do not request borrowers to make immediate repayment of the whole outstanding principal balances and related accrued interest on loans whose interest payments are past due for one to 14 days in the case of commercial loans and one to 30 days in the case of retail loans.

Interest foregone is interest due on nonaccrual loans that has not been accrued in our books of account. In 2013, 2014, 2015, 2016, 2017 and 2017,2018, we would have recorded gross interest income ofW119 billion,W113 billion,W79 billion,W91 billion,W96 billion andW9666 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 in 2013, 2014, 2015, 2016, 2017 and 20172018 wereW58 billion,W53 billion,W39 billion,W38 billion,W42 billion andW4236 billion, respectively.

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. The term “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.

 

  As of December 31,   As of December 31, 
  2013   2014   2015   2016   2017   2014   2015   2016   2017   2018 
  (In billions of Won)   (In billions of Won) 

Loans accounted for on a nonaccrual basis(1)

                    

Corporate

  W1,660   W1,358   W1,235   W1,102   W1,035   W1,358   W1,235   W1,102   W1,035   W897 

Retail

   217    233    228    243    311    233    228    243    311    358 

Credit cards

   108    152    93    86    67    152    93    86    67    92 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Sub-total

   1,985    1,743    1,556    1,431    1,413    1,743    1,556    1,431    1,413    1,347 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Accruing loans which are contractually past due one day or more as to principal or interest

                    

Corporate

   194    183    176    234    199    183    176    234    199    199 

Retail

   436    374    316    313    440    374    316    313    440    706 

Credit cards

   524    466    399    369    509    466    399    369    509    558 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Sub-total

   1,154    1,023    891    916    1,148    1,023    891    916    1,148    1,463 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  W3,139   W2,766   W2,447   W2,347   W2,561   W2,766   W2,447   W2,347   W2,561   W2,810 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

Note:

 

(1)

Represents either loans that are “troubled debt restructuring” or loans for which payment of interest and/or principal became past due by 90 days or more (adjusting for any overlap due to loans that satisfy both prongs so as to avoid double counting).

Troubled Debt Restructurings

The following table presents, at the dates indicated, our loans which are “troubled debt restructurings.” These loans mainly consist of corporate loans that have been restructured through the process of workout and recovery proceedings. See “— Credit Exposures to Companies in Workout and Recovery Proceedings.” 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,   As of December 31, 
  2013   2014   2015   2016   2017   2014   2015   2016   2017   2018 
  (In billions of Won)   (In billions of Won) 

Loans classified as “troubled debt restructurings” (excluding nonaccrual and past due loans)

  W71   W173   W244   W133   W10   W173   W244   W133   W10   W12 

Loans classified as “troubled debt restructurings” (including nonaccrual and past due loans)

  W756   W635   W714   W526   W502   W635   W714   W526   W502   W440 

The following table presents, for the periods indicated and with respect to the restructured loans, the amounts that would have been recorded as our interest income under the original contract terms of the restructured loans, and the amounts that were actually recorded as our interest income for such loans under the restructured contractual terms of such loans.

 

  For the year ended December 31, 
  2013   2014   2015   2016   2017   2014   2015   2016   2017   2018 
  (In billions of Won)   (In billions of Won) 

Interest income under the original contractual terms of the restructured loans(1)

  W68   W21   W22   W17   W15   W21   W22   W17   W15   W19 

Interest income under the restructured contractual terms of the restructured loans(1)

  W15   W12   W6   W8   W11   W12   W6   W8   W11   W7 

 

Note:

 

(1)

Includes nonaccrual and past due loans.

The following table presents a breakdown of the outstanding balance and specific allowance for loan losses as of December 31, 2013, 2014, 2015, 2016, 2017 and 20172018 of corporate loans classified as “troubled debt restructurings” (including nonaccrual and past due loans) by the type of restructuring to which such loans are subject.

 

 As of December 31,  As of December 31, 
 2013 2014 2015 2016 2017  2014 2015 2016 2017 2018 
 Outstanding
Balance		 Allowance Outstanding
Balance		 Allowance Outstanding
Balance		 Allowance Outstanding
Balance		 Allowance Outstanding
Balance		 Allowance  Outstanding
Balance		 Allowance Outstanding
Balance		 Allowance Outstanding
Balance		 Allowance Outstanding
Balance		 Allowance Outstanding
Balance		 Allowance 
 (In billions of Won)  (In billions of Won) 

Workout

 W571  W266  W476  W471  W506  W215  W410  W214  W387  W275  W476  W471  W506  W215  W410  W214  W387  W275  W331  W237 

Recovery Proceedings

 185  75  159  144  208  63  113  32  109  36  159  144  208  63  113  32  109  36  98  34 

Others(1)

  —   —   —   —   —   —  3  2  6  5   —   —   —   —  3  2  6  5  11  5 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total

 W756  W341  W635  W615  W714  W278  W526  W248  W502  W316  W635  W615  W714  W278  W526  W248  W502  W316  W440  W276 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

 

Note:

 

(1)

Principally consists of loans subject to corporate turnaround or corporate reorganization pursuant to the Debtor Rehabilitation and Bankruptcy Act (also known as the Consolidated Insolvency Act).

The following table presents the outstanding balance and specific allowance for loan losses as of December 31, 2013, 2014, 2015, 2016, 2017 and 20172018 of retail loans (including nonaccrual and past due loans) subject to credit rehabilitation programs for retail borrowers. All such loans became modified under credit rehabilitation programs and became beneficiaries of maturity extension and interest rate reductions, while a substantially limited portion of such loans also became beneficiaries of debt forgiveness and deferral.Fordeferral. For more information on the credit rehabilitation program, see “— Credit Exposures to Companies in Workout and Recovery Proceedings — Credit Rehabilitation Programs for Delinquent Consumer and Small- andMedium-sized Enterprise Borrowers.”

 

  As of December 31, 
  2013  2014  2015  2016  2017 
  Outstanding
Balance		  Allowance  Outstanding
Balance		  Allowance  Outstanding
Balance		  Allowance  Outstanding
Balance		  Allowance  Outstanding
Balance		  Allowance 
  (In billions of Won) 

Retail loans subject to credit rehabilitation programs(1):

 W41  W30  W45  W27  W61  W40  W84  W49  W118  W70 
  As of December 31, 
  2014  2015  2016  2017  2018 
  Outstanding
Balance		  Allowance  Outstanding
Balance		  Allowance  Outstanding
Balance		  Allowance  Outstanding
Balance		  Allowance  Outstanding
Balance		  Allowance 
  (In billions of Won) 

Retail loans subject to credit rehabilitation programs(1):

 W45  W27  W61  W40  W84  W49  W118  W70  W84  W46 

 

Note:

 

(1)

Includes nonaccrual and past due loans.

The following table presents, as of the dates indicated and with respect to corporate loans, the amounts of restructured loans that were considered impaired and classified as nonaccrual pursuant to our general interest accrual policy as described in “— Accrual Policy for Restructured Loans.” The table also presents, for the periods indicated and with respect to corporate loans, the amounts of totalcharge-off on restructured loans and the amounts ofcharge-off as part ofdebt-to-equity conversions.

 

  As of and for the year ended December 31,   As of and for the year ended December 31, 
  2013   2014   2015   2016   2017   2014   2015   2016   2017   2018 
  (In billions of Won)   (In billions of Won) 

Impaired and nonaccrual restructured loans

  W685   W462   W470   W393   W492   W462   W470   W393   W492   W428 

Totalcharge-off of restructured loans

  W153   W55   W259   W118   W89   W55   W259   W118   W89   W59 

Charge-off as part ofdebt-to-equity conversion

  W29   W32   W51   W22   W68   W32   W51   W22   W68   W67 

Credit Exposures to Companies in Workout and Recovery Proceedings

Our credit exposures to restructuring are monitored and managed by our Corporate Credit Support Department. As of December 31, 2017, 0.18%2018, 0.15% of our total loans, orW502440 billion (of whichW492428 billion was classified as nonaccrual andW1012 billion was classified as accruing), was under restructuring. Restructuring of our credit exposures generally takes the form of workout and recovery proceedings.

Workout

Under the oldThe original Corporate Restructuring Promotion Act which(Act No. 6504) was enacted on August 14, 2001 in order to facilitate theout-of-court restructuring of insolvent companies. This law expired on December 31, 2015, all creditors that are financial institutions were required to participate in a creditors’ committee. The old2005, and new Corporate Restructuring Promotion Act was mandatorily applicableActs were enacted on August 3, 2007 (expired on December 31, 2010), May 19, 2011 (expired on December 31, 2013), January 1, 2014 (expired on December 31, 2015), March 18, 2016 (expired on June 30, 2018) and October 16, 2018 (to be expired on October 15, 2023, the new CRPA enacted and implemented on October 16, 2018 is hereinafter referred to a wide range of financial institutions in Korea, including commercial banks, insurance companies, asset management companies, securities companies, merchant banks,as the Korea Deposit Insurance Corporation and“CRPA”).

If the Korea Asset Management Corporation. Under this act, the approval of financial institution creditors holding not less than 75% of the total debt outstanding‘main Creditor Financial Institution’ of a borrower was required forFailing Company provided notice of convening a Creditor Committee (defined below) on or before October 15, 2023, any proceedings commenced by such borrower’s restructuring plan, including debt restructuringCreditor Committee will remain subject to the CRPA even after October 15, 2023 unless and provision of additional funds, which plan would be binding on all the financial institution creditors of the borrower, provided that any financial institution creditor that disagrees with the final restructuring plan approved by the creditors’ committee has the right to request the creditors’ committee to purchase its claims at a mutually agreed price. Inuntil such proceedings are completed or discontinued.

The following is a summary of the event thatkey provisions of the creditors’ committee and the dissentingCRPA. The CRPA applies to a financial institution creditor fail(the “Financial Creditor”) who has financial claims against a debtor company by ‘providing credit’ to come to an agreement, the act provided that a mediation committee consistingsuch debtor company or other third parties. “Provision of seven experts be formed to resolve the matter.

The above-mentioned old Corporate Restructuring Promotion Act expired on December 31, 2015, and a new Corporate Restructuring Promotion Act, which modified and expanded the old act in several respects, was passedCredit” is defined in the National AssemblyCRPA as any transaction determined by the Financial Supervisory Commission to fall under any of Koreathe following:

loans;

purchase of promissory notes and debentures or bonds;

equipment leasing;

payment guarantees;

providing advance payments on March 3, 2016. acceptances and guarantees under a payment guarantee;

any direct or indirect financial transaction which may cause a loss to a counterparty as a consequence of a payment failure by a debtor company; or

any transaction other than the transactions set out above which may have in substance the same effect as the transactions set out above.

The new Corporate Restructuring Promotion Act expanded“debtor company” is defined under the definition of “borrower” subject to the act from any enterprise whose total amount of credit granted from financial institution creditors is at leastW50 billion to any enterprise that isCRPA as a corporationcompany established under the Korean Commercial Code or any other entityperson performing commercialprofit-making activities. The new Corporate Restructuring Promotion Act also expandedFailing Company means a debtor company deemed, through a credit evaluation carried out in the manner set out in the CRPA, by its ‘main Creditor Financial Institution’ as having difficulty to repay debts to its financial creditor without external financial support or an additional loan (excluding loans obtained in the course of conducting normal financial transactions).

Once the debtor company is notified by the main Creditor Financial Institution to fall under the definition of “creditor” whoFailing Company, such company may participate insubmit its business restructuring plan and the list of its Financial Creditors, and apply to such main Creditor Financial Institution for commencement of the management procedure to be assumed by a creditors’ committee from financial institution creditors to all creditors who have claims to the borrower through granting of credit.Financial Creditors (the “Creditor Committee”) or such main Creditor Financial Institution.

Under the new act,CRPA, the creditors that constitute the creditors’ committee shall be determined at the committee’s initial assembly based on the approvalmain Creditor Financial Institution of creditors that hold 75%a Failing Company is required to take or morearrange one of the total debt outstanding held by creditors notified of such initial assembly. Although creditorsfollowing actions if it determines that are notthere is a possibility that the financial institutions or possess less than 1%condition of the total amountFailing Company may be rehabilitated or brought back to normal in accordance with its business restructuring plan:

convocation of claimsthe first meeting of the Creditor Committee to decide whether to commence the borrower are notmanagement of the Failing Company by the Creditor Committee; or

assumption of management of the Failing Company by the main Creditor Financial Institution.

Under the CRPA, in order to call for the first meeting of the Creditor Committee, the main Creditor Financial Institution is required to be notifiednotify the Financial Creditors, the Failing Company and the Financial Supervisory Service. However, the main Creditor Financial Institution may omit the notification to some extent of the assembly ofFinancial Creditors who are set out in the creditors’ committee,CRPA such creditors shallas a Financial Creditor who does not perform the financial business or a Financial Creditor who has only small claims against the Failing Company. The Financial Creditors who do not receive the notification from the main Creditor Financial Institution will be excluded from the committeeCreditor Committee; provided that if they wishnevertheless want to participate. Resolutionsattend the meeting, the main Creditor Financial Institution may not exclude such Financial Creditors. When the main Creditor Financial Institution calls for the first meeting of the creditors’ committeeCreditor Committee, it may require the Financial Creditors to grant a moratorium on the enforcement of claims (including the enforcement of security interests) until the end of the first meeting of the Creditor Committee. In addition, at the first meeting of the Creditor Committee, the Financial Creditors may resolve to declare a moratorium for up to one month (or three months if an investigation of the Failing Company’s financial status is necessary) from the commencement date of the management procedure (which may be extended by one additional month by resolutions of the Creditor Committee).

The Financial Creditors who attend the first meeting of the Creditor Committee may resolve, among other things: (i) commencement of the management procedure, (ii) composition of the Financial Creditors who will participate in such management procedure and (iii) declaration of moratorium mentioned above.

Once the management procedure commences, the main Creditor Financial Institution is required to prepare the corporate restructuring plan of the Failing Company considering the investigation results of the Failing Company’s financial status and submit such plan to the Creditor Committee for approval thereof. The corporate restructuring plan may include, among other things, the matters regarding rescheduling of debt owed by the Failing Company, provision of new credit and the business restructuring plan of the Failing Company. If the corporate restructuring plan is not approved by the date the moratorium period ends, the Creditor Committee’s management of the Failing Company shall be adopteddeemed to have terminated.

The resolution at the Creditor Committee is generally passed by thean approval of creditors holding 75% or morethe Financial Creditors representing at least 75 per cent. of the total debt outstanding credit to the creditorsFailing Company of the committee. However,Financial Creditors who constitute the Creditor Committee; provided that if a single creditorFinancial Creditor holds 75% or moreat least 75 per cent. of the total debt outstanding tocredit, the creditors of the committee, resolutionsresolution shall be adoptedpassed by a votean approval of 40% or morenot less than 40 per cent. of the total number of creditors of the committee,Financial Creditors who constitute the Creditor Committee, including such single creditor. In addition, a resolutionFinancial Creditor. An additional approval of the creditors’ committee on debt restructuring shall be effective only with the consent of creditorsFinancial Creditors holding at least 75%interests in 75 per cent. or more of the total amount of the secured claims owned by the Financial Creditors constituting the Creditor Committee against the Failing Company is required with respect to the debt rescheduling of the creditorsFailing Company.

A Financial Creditor which has opposed the resolutions of the committee.Creditor Committee in respect of the commencement of management of the Failing Company by the Creditor Committee, establishment of or amendment to the corporate restructuring plan, extension of management procedure, the rescheduling of claims or provision of new credit (the “Opposing Financial Creditor”) may, within seven days of such resolutions, request the main Creditor Financial Institutions to purchase its outstanding claims against the Failing Company, stating the type and number of claims. The new Corporate Restructuring Promotion Act is set to expire on June 30, 2018.Financial Creditors that have approved such resolutions (the “Approving Financial Creditors”) shall jointly purchase such claims within six months of such request.

The total loan amount currently undergoing workout aspurchase price and terms of December 31, 2017 wasW387 billion.such purchase shall be determined by mutual agreement of the Approving Financial Creditors and the Opposing Financial Creditor. Pending the agreement of such matters, the payments shall be made at a provisional price, and adjusting payments made once an agreement has been reached. If no such agreement is reached, then such matters shall be determined by the coordination committee established under the CRPA.

Recovery Proceedings

Under the Debtor Rehabilitation and Bankruptcy Act, which took effect on April 1, 2006, court receiverships have been replaced with recovery proceedings. In a recovery proceeding, unlike court receivership proceedings where the management of the debtor company was vested in a court appointed receiver, the existing 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 gross negligence of such chief executive officer, and (iii) no creditors’ meeting was convened to request, based on reasonable cause, a court-appointed receiver to replace such chief executive officer. Recovery proceeding may be commenced by any insolvent debtor. Furthermore, in an effort to meet global standards, international bankruptcy procedures have been introduced in Korea under which a receiver of a foreign bankruptcy proceeding may, upon receiving Korean court approval of the ongoing foreign bankruptcy proceeding, apply for or participate in a Korean bankruptcy proceeding. 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.

As of December 31, 2017,2018, the total loan amount subject to recovery proceedings wasW10998 billion. No loan amount was subject to court receivership or composition proceedings.

Loans in the process of workout and recovery proceedingsare reported as nonaccrual loans on our statements of financial position as described in “— Nonaccrual Loans and Past Due Accruing Loans” above since generally, they are past due by more than 90 days and interest does not accrue on such loans. Restructured loans that meet the definition of a troubled debt restructuring are reported as troubled debt restructurings as described above in “— Troubled Debt Restructurings.” Such restructured loans are reported as either loans or

securities on our statements of financial position depending on the type of instrument we receive as a result of the restructuring.

Credit Rehabilitation Programs for Delinquent Consumer and Small- andMedium-sized Enterprise Borrowers

In light of the gradual increase in delinquencies in credit card and other consumer 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.

The Credit Counseling and Recovery Service offers two programs for individual debtors, thepre-workout program and the individual workout program, both of which are available to individuals with total debt amounts ofW1.5 billion or less (secured debt amount ofW1 billion or less and unsecured debt amount ofW500 million or less). Thepre-workout program is offered to individuals whose delinquency period is between 31 days and 89 days (including those whose delinquency period is between one day and 30 days but with annual income ofW40 million or less and cumulative delinquency period of 30 days or more within the year immediately preceding the application date), and the individual workout program is offered to individuals whose delinquency period is three months or more. When an individual debtor applies for thepre-workout or individual workout program, the Credit Counseling and Recovery Service will deliberate and resolve on a debt restructuring plan, and once the creditor financial institution that is in a credit recovery support agreement with the Credit Counseling and Recovery Service and holding the majority of each of the unsecured claims and secured claims to the relevant individual debtor agrees to such debt restructuring plan, the plan will be finalized and debt restructuring measures, such as extension of maturity, adjustment of interest rates or reduction of debt, will be taken according to thepre-workout program or individual workout program applied for.

Under the Debtor Rehabilitation and Bankruptcy Act, a qualified individual debtor with outstanding debts in an aggregate amount not exceeding threshold amounts ofW500 million of unsecured debt and/orW1 billion of secured debt may restructure his or her debts through a court-supervised debt restructuring that is binding on creditors.

We may provideOnce a borrower is deemed to be eligible to participate in thepre-workout program, by restructuringwe promptly sell the collateral underlying such borrower’s secured loans in the following ways to prevent a borrower, whose debt is expected to be long overdue, to become a financial defaulter:mitigate our losses, and we may restructure such borrower’s unsecured loans (regardless of their type) as follows:

 

 • 

Extension of maturity: Based on considerations of the type of loan, type of collateral,the total loan amount, the repayment amount and the probability of repayment, and credit records, the maturity of unsecured loans may be extended by up to 10 years and maturity of secured loans may be extended by up to 20 years with a grace period not exceeding three years.

 

 • 

Interest rate adjustment: The interest rate of the loan may be adjusted by up to 50%70% of the original interest rate within a range ofor 5% to 10%;per annum, whichever is higher; provided that if the original interest rate is less than 5% per annum, no adjustment applies. However, for loans to vulnerable social groups as defined by the Credit Counseling and Recovery Service, the interest rate may be adjusted by up to 65% of the original interest rate. The adjusted interest rate applies to the principal amount following any adjustment thereto as part of thepre-workout program.program, and no interest accrues on the interest already accrued or fees payable.

 

 • 

Debt forgiveness: Debt forgiveness under thepre-workout program is limited to overdue(i) the default interest accrued prior to the application for thepre-workout program and is not applicable to principal,(ii) the regular and default interest or expenses.accrued following such application but before the approval of the program.

 • 

Deferral: Based on considerationsIf the foregoing three measures are deemed to be insufficient in terms of the probability of repayment and credit records,providing meaningful assistance to a qualifying borrower due to layoff, unemployment, business closure, disaster or earnings loss, loan repayment may be deferred on a semi-annual basis for a maximum of two years. However, aone year, provided that thepre-workout committee may extend such deferral period of more than one yearevery six months, for a period not to exceed six months, upon the borrower’s application. The deferral period is only available to borrowers whose total number of principalnot counted toward the repayment period, and interest payments are more than 12 times. In the case of deferring repayment of principal, interest accrues at 3% per annum during the deferral period.

In 2017,2018, the aggregate amount of our retail credit (including credit card receivables) provided by Shinhan Bank which became subject to thepre-workout program wasW11884 billion. We believe that our participation in

suchpre-workout program has not had a material impact on the overall asset quality of our retail loans and credit card portfolio or on our results of operations and financial condition to date.

Under the guidelines of the Financial Supervisory Commission, Korean banks, including Shinhan Bank, operated since 2008 a fast track program which was a liquidity support program for small- andmedium-sized companies. As the fast track program ended as of December 31, 2016, the Financial Supervisory Service implemented a swift financial assistance program for small- andmedium-sized companies for a period of five years beginning on January 1, 2017. Banks and other financial institutions participating in the program will, based on an evaluation of credit risks, provide financial assistance (including extension of maturity on existing obligations and lower interest rates) to small- andmedium-sized companies that are experiencing temporary liquidity crises but have a credit rating exceeding a certain threshold. In principle, the application of the swift financial assistance program to companies will be limited to three years, but such application may be extended, in consultation with the creditor financial institutions concerned, one time for an additional period of up to one year.

Loan Modification Programs for Loans under Troubled Debt Restructuring

We generally offer the following types of concessions in relation to restructured loans: reduction of interest rate, forgiveness of overdue interest, extension of the term for repayment of principal, conversion of debt into equity or a combination of the foregoing. The nature and degree of such concessions vary depending on, among other things, the creditworthiness of the borrower, the size of loans being restructured, the existing terms of the loans and other factors deemed relevant by the relevant creditors’ committee.We generally do not restructure an existing loan into multiple new loans.

The following table presents a breakdown of the gross amount of loans under restructuring as of December 31, 2013, 2014, 2015, 2016, 2017 and 20172018 by our loan modification programs, as further categorized according to the loan category and performing versusnon-performing status at each fiscal year end.

 

December 31, 2013

 

Modification Programs

  Non-Performing   Performing   Total 
   (In billions of Won) 

Extension of due date for principal and interest

  W2   W81   W83 

Reduction of interest rate

   54    283    337 

Forgiveness of principal

   —    —    — 

Equity conversion

   —    —    — 

Additional lending(1)

   27    169    196 

Others(2)

   37    103    140 
  

 

 

   

 

 

   

 

 

 

Total

  W120   W636   W756 
  

 

 

   

 

 

   

 

 

 

December 31, 2014

 

As of December 31, 2014

As of December 31, 2014

 

Modification Programs

  Non-Performing   Performing   Total   Non-Performing   Performing   Total 
  (In billions of Won)   (In billions of Won) 

Extension of due date for principal and interest

  W4   W3   W7   W4   W3   W7 

Reduction of interest rate

   52    260    312    52    260    312 

Forgiveness of principal

   10    —    10    10    —    10 

Equity conversion

   —    —    —    —    —    — 

Additional lending(1)

   1    198    199    1    198    199 

Others(2)

   61    46    107    61    46    107 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total

  W128   W507   W635   W128   W507   W635 
  

 

   

 

   

 

   

 

   

 

   

 

 

December 31, 2015

 

As of December 31, 2015

As of December 31, 2015

 

Modification Programs

  Non-Performing   Performing   Total   Non-Performing   Performing   Total 
  (In billions of Won)   (In billions of Won) 

Extension of due date for principal and interest

  W —   W87   W87   W—   W87   W87 

Reduction of interest rate

   119    368    487    119    368    487 

Forgiveness of principal

   —    —    —    —    —    — 

Equity conversion

   —    —    —    —    —    — 

Additional lending(1)

   4    19    23    4    19    23 

Others(2)

   87    30    117    87    30    117 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total

  W210   W504   W714   W210   W504   W714 
  

 

   

 

   

 

   

 

   

 

   

 

 

 

December 31, 2016

 

As of December 31, 2016

As of December 31, 2016

 

Modification Programs

  Non-Performing   Performing   Total   Non-Performing   Performing   Total 
  (In billions of Won)   (In billions of Won) 

Extension of due date for principal and interest

  W —   W92   W92   W—   W92   W92 

Reduction of interest rate

   3    234    237    3    234    237 

Forgiveness of principal

   —    —    —    —    —    — 

Equity conversion

   —    —    —    —    —    — 

Additional lending(1)

   —    37    37    —    37    37 

Others(2)

   116    44    160    116    44    160 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total

  W119   W407   W526   W119   W407   W526 
  

 

   

 

   

 

   

 

   

 

   

 

 

 

December 31, 2017

 

As of December 31, 2017

As of December 31, 2017

 

Modification Programs

  Non-Performing   Performing   Total   Non-Performing   Performing   Total 
  (In billions of Won)   (In billions of Won) 

Extension of due date for principal and interest

  W3   W82   W85   W3   W82   W85 

Reduction of interest rate

   9    299    308    9    299    308 

Forgiveness of principal

   —    —    —    —    —    — 

Equity conversion

   —    —    —    —    —    — 

Additional lending(1)

   —    —    —    —    —    — 

Others(2)

   70    39    109    70    39    109 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total

  W82   W420   W502   W82   W420   W502 
  

 

   

 

   

 

   

 

   

 

   

 

 

As of December 31, 2018

 

Modification Programs

  Non-Performing   Performing   Total 
   (In billions of Won) 

Extension of due date for principal and interest

  W3   W79   W82 

Reduction of interest rate

   8    250    258 

Forgiveness of principal

   —    —    — 

Equity conversion

   —    —    — 

Additional lending(1)

   —    —    — 

Others(2)

   43    57    100 
  

 

 

   

 

 

   

 

 

 

Total

  W54   W386   W440 
  

 

 

   

 

 

   

 

 

 

 

Notes:

 

(1)

Represents additional loans provided to the borrower at favorable terms as part of the restructuring package, which may include extension of the due date or reduction of interest rate, among others.

(2)

Principally consists of restructured loans whose restructuring terms were not determined as of the date indicated. A loan is deemed to be subject to restructuring upon the commencement of the recovery proceedings or when the relevant creditors’ committee or our credit officer determines that the borrower

will be subject to workout, and in many cases the restructuring terms for such loans are not determined at the time such loans are deemed to be subject to restructuring.

Debt-to-equity Conversion

We distinguish between loans that we consider to be collectible under modified terms and loans that we consider to be uncollectible regardless of any modification of terms. With respect to loans in the latter category, we convert a portion of such loans into equity securities following negotiation with the borrowers and charge off the remainder of such loans as further described below. The equity securities so converted are recorded at fair value, based on the market value of such securities if available or the appraisal value of such securities by an outside appraiser if a market value is unavailable. In 2017,2018, our loans restructured into equity securities amounted toW6838 billion, which was subsequently charged off.

Debt-to-equity conversion generally has two primary benefits. One, thedebt-to-equity conversion reduces the amount of loans and related interest expenses of the borrower, resulting in lesser debt burden and greater liquidity for the borrower, a greater likelihood of its exit from restructuring and the repayment of its obligations to us. Two, in the case of a successful turnaround of the borrower, we are entitled to the upside gains from the increase in the value of the equity securities so converted. Notwithstanding these benefits, however, the resulting impact from thedebt-to-equity conversion on our interest income is generally not material as the loans being converted as part of restructuring are generally deemed to be uncollectible regardless any modification of terms. As for the impact on our asset classification, we generally apply the same asset classification standards to bothnon-restructured and restructured loans. As for restructured loans, we also consider additional factors such as the borrower’s adherence to its business plans and execution of the self-help measures, among others, to the extent applicable. In consideration of such criteria, we generally classify loans subject to workout as “precautionary.” For a general discussion of our loan classifications, see “— Supervision and Regulation — Principal Regulations Applicable to Financial Holding Companies — Capital Adequacy.”

Evaluation of Loan Modification Programs

We currently do not conduct a systematic or quantitative evaluation of the success of any particular concession by type, whether historically, relative to each other or relative to other financial institutions in Korea, although we do monitor on an individual basis the compliance by the borrower with the modified terms of the restructured loans. This is principally due to the following reasons.

One, in the case of large corporations subject to or about to be subject to restructuring, which represents the most significant restructuring cases in Korea, the restructuring process is generally not driven by us, but by a creditors’ committee involving several large creditor financial institutions, and in the case of very large corporations or corporations that are members of large business conglomerates, the process frequently involves the guidance of the Government in light of the potential ripple effects of the restructuring on the general economy. Hence, it is difficult for us to collect data that would help us to evaluate the success of a particular concession based on the credit profile of the borrower and the type of concessions offered.

Two, the unavailability of systematic analysis notwithstanding, our general sense is that the restructuring cases in Korea have, to a large part, been successful as measured in terms of the ability of the borrowers to exit restructuring programs relatively quickly and further that the failed cases have not been particularly material. As a result, to date, we have not found it particularly necessary or helpful to expend the time and resources required to conduct a systematic analysis for purposes of evaluating the success of concessions by the type of a particular concession offered.

We do, however, measure the success of concessions in limited ways, that is, principally in terms of how well the borrower complies with the terms and conditions of the restructuring plan as agreed between the borrower and its creditor institutions. A restructuring plan typically includes a business plan and self-help

measures to be undertaken by the borrower. We monitor the borrower’s compliance with the restructuring plan on a periodic basis (namely, annual, semiannual or quarterly in accordance with the terms of the restructuring plan) and evaluate the success thereof principally in terms of three attributes: (i) the progress in the execution of the business plan, (ii) the progress in the execution of the self-help measures and (iii) other qualitative factors such as major developments in the general economy, the regulatory environment, the competitive landscape, the quality of senior management and personnel, and transparency in management. We also closely monitor the cash inflows and outflows of the borrower, and the creditors’ committee typically has the right to participate in decision-making related to major spending and borrowings by the borrower.

Accrual Policy for Restructured Loans

For purposes of our accrual policy, we classify restructured loans principally into (i) loans subject to workout pursuant to the Corporate Restructuring Promotion Act and (ii) loans subject to recovery proceedings

pursuant to the Debtor Rehabilitation and Bankruptcy Act, which is the comprehensive bankruptcy-related law in Korea. See “— Credit Exposures to Companies in Workout and Recovery Proceedings.” As for loans subject to workout, our general policy is to discontinue accruing interest on a loan when payment of principal and/or interest thereon becomes past due by 90 days or more, as described above in “— Nonaccrual Loans and Past Due Accruing Loans”. Interest is recognized on these loans on a cash basis (i.e., when collected) from the date such loan is reclassified asnon-accruing, and such loans are not reclassified as accruing until the overdue principal and/or interest amounts are paid in full. This general policy also applies to loans subject to workout even if such loans are restructured loans. In the case of loans subject to recovery proceedings, we discontinue accruing interest immediately upon the borrowers becoming subject to recovery proceedings (even if such loans are not yet delinquent) in light of the heightened uncertainty regarding the borrower’s ability to repay. Interest on such loans are recognized on a cash basis and such loans are not reclassified as accruing until the borrower exits recovery proceedings. Accordingly, under our accrual policy, the number of payments made on a nonaccrual restructured loan is not a relevant factor in determining whether to reinstate such loan to the accrual status.

Determination of Performance of Restructured Loans

In determining whether a borrower has satisfactorily performed its obligations under the existing loan terms, we principally review the payment history of the borrower, namely whether the borrower has been delinquent by one day or more pursuant to our general interest accrual policy. In determining whether a borrower has shown the capacity to continue to perform under the restructured terms, we primarily rely upon the assessment of our credit officers (or the creditors’ committee in the case of large corporate borrowers with significant outstanding loans) of the likelihood of the borrower’s ability to repay under the restructured terms, which assessment takes into account the size of the loans in question, the credit profile of the borrower, the original terms of the loans and other factors deemed relevant by the relevant credit officers. Depending on various factors such as the size of the loans in question and the credit profile of the borrower, we or the relevant creditors’ committee, as the case may be, sometimes engage an outside advisory firm to perform further due diligence in order to supplement the aforementioned assessment. In certain cases, the borrowers also submit self-help proposals to facilitate obtaining the approval for restructuring, which measures are then also taken into consideration by our credit officers or the relevant creditors’ committees, as the case may be, in determining their future capacity to continue to perform under the restructured terms.

Charge-off of Restructured Loans

As for loans that we consider to be collectible under modified terms (for example, by extending the due date for the payment of principal and/or interest or reducing the interest rate below the applicable interest rate to a rate below the prevailing market rate, or a combination of the foregoing), we generally restructure such loans under the modified terms and do not charge off any portion of such loans.

As for loans that we consider to be uncollectible regardless of any modification of terms, we negotiate with the borrower to have a portion of such loans converted into equity securities (usually common stock) of the

borrower in consideration, among others, of (i) the degree to which such conversion will alleviate the debt burdens and liquidity concerns of the borrower, (ii) our potential upside from the gain in the value of the equity securities compared to the likelihood of collection if the loans were not converted into equity securities, and (iii) the borrower’s concerns regarding its shareholding structure subsequent to such conversion. We then charge off the remainder of the loans not converted into equity securities. The value of the equity securities so converted is recorded at fair value, based on the market value of such securities if available or the appraisal value of such securities by an outside appraiser if a market value is unavailable.

Since we generally do not accrue interest on loans subject to recovery proceedings while we generally accrue interest on loans subject to workout unless past due by 90 days or more,charge-off is not a relevant factor we consider when determining the accrual status of a particular restructured loan.

We continue to accrue interest on restructured loans if we conclude that repayment of interest and principal contractually due on the entire debt is reasonably assured. Such conclusion is reached only after we have carefully reviewed the borrower’s ability to repay based on an assessment, among others, of various factors such as the size of the loans in question and the credit quality of the borrower by our credit officer or the relevant creditors’ committee as supplemented by the due diligence by outside advisory firms, as the case may be.

Potential Problem Loans

We operate an “early warning system” in order to enable a more systematic and real-time monitoring of loans with significant potential of default. This system assists our management in making decisions by identifying loans which have serious doubt as to the ability of the borrowers to comply with their respective loan repayment terms as well as loans with significant potential ofnon-repayment.

We classify potential problem loans as loans that are designated as “early warning loans” and reported to the Financial Supervisory Service. The “early warning loans” designation applies to borrowers that have been (i) identified by our early warning system as exhibiting signs of credit risk based on the relevant borrower’s financial data, credit information and/or transactions with banks and, following such identification and (ii) designated by our loan officers as potential problem loans on their evaluation of known information about such borrowers’ possible credit problems. Such loans are required to be reported on a quarterly basis to the Financial Supervisory Service. If a borrower’s loans are designated as “early warning loans” pursuant to the process described above and included in our quarterly report to the Financial Supervisory Service, we consider this to be an indication of serious doubt as to such borrower’s ability to comply with repayment terms in the near future. As of December 31, 2017,2018, we hadW979965 billion of potential problem loans.

Provisioning Policy

Loans

We conduct periodic and systematic detailed reviews of our loan portfolios to identify credit risks and to establish the overall allowance for loan losses. Our management believes the allowance for loan losses reflects the best estimate of the probable loanexpected credit losses incurred as of the date of each statement of financial position.

We first

At each reporting date, we assess whether objective evidencethe credit risk on a financial instrument has increased significantly since initial recognition. When making the assessment, we use the change in the risk of impairment exists individuallya default occurring over the expected life of the financial instrument instead of the change in the amount of expected credit losses. Upon assessment, each asset is classified as in one of the following three stages, which is used as the basis of calculating the loss allowances at the12-month expected credit losses (“ECL”) or the lifetime ECL, depending on the stage.

Category

Provision for credit loss allowance

Stage 1

When credit risk has not increased significantly since the initial recognition12-months ECL: The ECL associated with the probability of default events occurring within the next 12 months

Stage 2

When credit risk has increased significantly since the initial recognitionLifetime ECL: A lifetime ECL associated with the probability of default events occurring over the remaining lifetime

Stage 3

When assets are impaired

To make that assessment, we compare the risk of default of the financial instrument as at the reporting date with such risk of default as at the date of initial recognition, taking into account reasonable supporting information that is available without undue cost or effort and is indicative of significant increases in credit risk since initial recognition. Supporting information also includes historical default data held by us and analysis conducted by internal credit risk rating specialists.

We assign an internal credit risk rating to each individual exposure based on observable data and historical experiences that have been found to have a reasonable correlation with the risk of default. The internal credit risk rating is determined by considering both qualitative and quantitative factors that indicate the risk of default, which may vary depending on the nature of the exposure and the type of borrower.

We accumulate information after analyzing the information regarding exposure to credit risk and default information by the type of product and borrower as well as results of internal credit risk assessment. For some portfolios, we use information obtained from external credit rating agencies when performing these analyses.

We apply statistical techniques to estimate (i) the probability of default for loansthe remaining life of the exposure from the accumulated data and receivables that are individually(ii) the changes in the estimated probability of default over time.

We use the indicators defined as per portfolio to determine the significant increase in credit risk. Such indicators generally consist of changes in the risk of default estimated from changes in the internal credit risk rating, qualitative factors, days of delinquency and individuallyothers.

We consider a financial asset to be in default if it meets one or collectively for financial assets that are not individually significant. Ifmore of the following conditions:

if a borrower is overdue 90 days or more from the contractual payment date, or

if we determine that no objective evidence of impairment exists for an individually assessed financial asset, whether significant orit is not we includepossible to recover principal and interest without enforcing the asset in a group of financial assets with similar credit risk characteristics and collectively assess them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment.

If there is objective evidence thatcollateral on a financial asset, such asasset.

We use the following indicators when determining whether a loan or receivable,borrower is in default:

qualitative factors (e.g., breach of contract terms),

quantitative factors (e.g., if the same borrower does not perform more than one payment obligations to us, the number of days past due per payment obligation. However, in the case of a specific portfolio, we use the number of days past due for each financial instrument), and

internal and external data.

The definition of default applied by us generally conforms to the definition of default defined for regulatory capital management purposes. However, depending on the situation, the information used to determine whether default has suffered impairment loss, the amount of the impairment loss is measured as the difference between the asset’s carrying amountincurred and the present value of estimated future cash flow (excluding anticipated future credit losses) discounted at the financial asset’s original effective interest rate (i.e., the effective interest rate computed at initial recognition).

If the financial asset in question is a loan or receivable with a floating rate, the discount rate used to evaluate impairment loss is the current effective interest rate defined in the relevant transaction agreement. The present value of estimated future cash flows of secured financial assets is calculated by including cash flows from collateral after deducting costs to acquire and sell the collateral, regardless of the probability of realization of such collateral.

In assessing collective impairment, we rate and classify financial assets based on credit risk assessment or credit rating assessment process that takes into account asset type, industry, regional location, collateral type, delinquency and other relevant factors.extent thereof may vary.

Future cash flowWe measure expected credit losses on a forward-looking basis, and expected credit losses reflects information presented by internal experts based on a variety of financial assets applicablesources. For purposes of estimating such forward-looking information, we utilize economic outlook and projections published by domestic and overseas research institutes or government and public agencies.

We reflect future macroeconomic conditions anticipated from a bias-free, neutral standpoint in measuring expected credit losses. Expected credit losses in this respect reflect conditions that are most likely to collective impairment assessment isoccur and are based on the same assumptions that we use in our business plan and management strategy.

Key variables used in measuring expected credit losses are as follows:

Probability of default (PD)

Loss given default (LGD)

Exposure at default (EAD)

These variables have been estimated from historical experience data by using statistical modelingtechniques developed internally by Shinhan Bank and have been adjusted to reflect forward-looking information. When measuring expected credit losses on financial assets, Shinhan Bank reflects a period of historical trendsexpected credit loss measurement based on a contractual maturity. The Bank takes into consideration the extension rights held by a borrower when deciding the contractual maturity.

Risk factors such as PD, LGD and EAD are collectively estimated according to the following criteria:

Type of products,

Internal credit risk rating,

Type of collateral,

Loan-to-value ratio,

Industry that the borrower belongs to,

Location of the probabilityborrower or collateral, and

Days of default, timingdelinquency.

The criteria for classification of recoveriesgroups are periodically reviewed to maintain homogeneity of the group and are adjusted if necessary. We use external benchmark information to supplement internal information for a particular portfolio that does not have sufficient internal data accumulated from the amount of loss incurred, as adjusted for management’s judgment as to whether current economic and credit conditions are such that the impairment losses are likely to be greater or less than suggested by historical modeling. When adjusting future cash flow based on historical modeling, we ensure that such adjustments are in line with changes and trends of observable data. Methodologies and assumptions used to estimate future cash flow are evaluated on a regular basis in order to reduce any discrepancy between impairment loss estimation and actual loss.past experience. See “Item 5.A. Operating Results — Critical Accounting Policies — Impairment of Financial Assets — Allowance for Loan Losses.”

Corporate Loans

We review corporate loans annually for potential impairment through a formal credit review. In addition, our loan officers consider the credits for impairment throughout the year if there is an indication that an impairment event has occurred.

Under IFRS, a loan is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and if the loss event had a negative effect on the estimated future cash flows of that asset and can be estimated reliably. We consider, among others, the following loans to be impaired:

loans whose principal or interest amount is more than 90 days past due;

loans that by reason ofnon-performance becomes subject towrite-off,charge-off, debt restructuring (including recovery proceedings and workout) or bankruptcy;

loans to customers whose credit record shows past instances of delinquency, enforcement of guarantee or subrogation; and

loans to customers who become finally insolvent by an order to suspend settlement of personal checks, corporate checks or promissory note.

Loan loss allowances for corporate loans are established based on whether a particular loan is impaired. Corporate loans with relatively small balances are evaluated collectively for impairment as they are managed collectively.

— Loans individually identified for review and considered impaired

Consistent with the internal credit risk monitoring policies, we evaluate impaired loans with relatively large balances (typically more thanW3 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.

We establish allowances for impaired corporate loans when the discounted cash flow of the loan is lower than its carrying amount. The allowance is equal to the difference between the discounted cash flow amount of the loan and its carrying amount.

We may also measure impairment by reference to the loan’s observable market price; however this information is not commonly available in Korea.

— Loans collectively evaluated for impairment

We also establish allowances for impaired corporate loans with relatively small balances (typicallyW3 billion or less). We manage these loans on a portfolio basis and therefore collectively evaluate them for

impairment since it is impractical to analyze each such loan on an individual basis. The allowance for such loans is determined based on loss factors taking into consideration past performance of the portfolio, previous loan loss history andcharge-off information.

We identify loss factors based on the discounted cash flow (“DCF”) model using a statistical tool with look-back periods longer than a year. For impaired corporate loans whose amounts are relatively small, we use the collective DCF model, under which cash flow projections for the relevant loans are not individually computed for each borrower, but are collectively computed for a group of loans sharing similar characteristics (for example, retail versus corporate, secured versus unsecured, and so forth), except that, when we discount the projected cash flow at the present value, we apply the interest rate effective prior to impairment specific to each borrower.

— Loans not specifically identified as impaired

We establish allowances collectively fornon-impaired corporate loans to reflect losses incurred within the portfolio which have not yet been specifically identified as impaired. We use the probability of default / loss given default method, also known as the Advanced Internal Rating-Based (“AIRB”) approach under Basel II, to calculate the historical loss rate on migration analysis based on measurable long-term risk factors such as probability of default from risk grading and loss given default based on the Basel II framework.

As for the probability of default-based loan grouping, corporate loans are grouped into different risk classes based on the credit rating assigned by the relevant credit evaluation model, and retail loans are grouped into different risk classes based on the type of the loan, maturity structure and the duration of delinquency.

As for the loss given default-based loan grouping, secured loans are grouped into different risk classes based on the type of collateral, the location of the collateral and theloan-to-value ratio to which they are subject, and unsecured loans are grouped into different risk classes based on the type of the loan.

Retail Loans

We consider the following retail loans to be impaired for an individual assessment of impairment:

loans whose principal or interest amount is more than 90 days past due;

loans that by reason ofnon-performance becomes subject towrite-off,charge-off, debt restructuring (including recovery proceedings and workout) or bankruptcy;

loans to customers whose credit record shows past instances of delinquency, enforcement of guarantee or subrogation; and

loans to customers who become finally insolvent by an order to suspend settlement of personal checks, corporate checks or promissory note.

The provisioning policy for retail loans is similar to that for corporate loans, except that different groupings are used for retail loans for purposes of determining probability of default and loss given default in that all retail loans, regardless of their size, are collectively (rather than individually) assessed due to difficulties in obtaining personal information, such as personal income and assets.

For loan losses for retail loans, we also establish allowances based on loss factors taking into consideration the historical performance of the portfolio, previous loan loss history andcharge-off information over a nine-year look-back period for loans secured by real estate and a four-year look-back period for unsecured loans and other secured loans.

We further adjust the loss factors based on factors that may impact loss recognition which have not been adequately captured by our historical analysis. These factors include:

changes in economic and business conditions such as levels of unemployment and housing price;

changes in the nature and volume of the portfolio, including any concentration of credits; and

external factors such as regulatory or government requirements.

Credit Cards

Prior to 2017, we established 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 a five-year look-back period. BASEL II requires a minimum of nine years of data collection (consisting of a minimum five-year observation period for defaults and a minimum four-year observation period for post-default recoveries) as a necessary condition to using the internal model approach. After its merger with LG Card in 2007, Shinhan Card has worked to establish a risk management system and met the BASEL II nine-year data collection requirement in October 2016. Through the operation of a credit review system and risk management system based on Basel II requirements, we have gained the necessary data to create internal models that can calculate PD/LGD and credit conversion factors for different groups of borrowers of financial assets.

At the end of December 2016, the Financial Supervisory Service granted Shinhan Card final approval to use the internal model approach. During the first quarter of 2017, Shinhan Card completed the establishment of the IFRS loan loss calculation system, for example, by replacing BASEL II risk components with risk components for financial reporting in accordance with IAS 39, and Shinhan Card revised the calculation methodology of loan losses from a roll-rate model to an internal model approach.

The internal model approach calculates separate default rates and loss given default for different groups of customers, differentiated based on the characteristics of both the customers and the products that they use. The internal model approach disaggregates customers into more than twice the number of groups than does the roll-rate model. Whereas the roll-rate model does not distinguish between customers with high and low risks of default when calculating roll rates, the internal model approach allows for a more sophisticated calculation of loan loss that reflects the customers’ credit ratings.

Our general policy is to be proactive in our collection procedures, and we therefore emphasize collections at an early stage of delinquency, although we increase the level of collection efforts as the 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 credit support centers at Shinhan Card.

For card accounts with balances that are more than 30 days past due, we generally assign collection to our collection branches. During the first two months of their appointment, these collection branches rely on postal or telephone notice and take measures to locate and provisionally attach accounts receivables or other properties of the delinquent cardholders. For card accounts that are charged off, we outsource collection to external collection centers such as Shinhan Credit Information, which is our subsidiary, Mirae Credit Information Services Corp. and Koryo Credit Information.

Loan Aging Schedule

The following table shows our loan aging schedule (excluding accrued interest) for all loans as of the dates indicated.

 

  Current   Past Due
Up to 3 Months		   Past Due
3-6 Months		   Past Due More
Than 6 Months		   Total   Current   Past Due
Up to 3 Months		   Past Due
3-6 Months		   Past Due More
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) 

2013

  W205,282    98.70   W1,508    0.73   W420    0.20   W777    0.37   W207,987 

2014

   221,273    98.84    1,320    0.59    706    0.32    580    0.26    223,879   W221,273    98.84   W1,320    0.59   W706    0.32   W580    0.26   W223,879 

2015

   245,997    99.02    1,098    0.44    781    0.31    553    0.22    248,429    245,997    99.02    1,098    0.44    781    0.31    553    0.22    248,429 

2016

   258,650    99.10    1,180    0.45    643    0.25    531    0.20    261,004    258,650    99.10    1,180    0.45    643    0.25    531    0.20    261,004 

2017

   274,935    99.08    1,479    0.53    616    0.22    459    0.17    277,489    274,935    99.08    1,479    0.53    616    0.22    459    0.17    277,489 

2018

   300,324    99.09    1,656    0.55    684    0.23    406    0.13    303,070 

Non-Performing Loans

Non-performing loans are defined as loans past due by more than 90 days. The following table shows, as of the dates indicated, the amount of the totalnon-performing loan portfolio and as a percentage of our total loans.

 

  As of December 31,   As of December 31, 
  2013 2014 2015 2016 2017   2014 2015 2016 2017 2018 
  (In billions of Won, except percentages)   (In billions of Won, except percentages) 

Totalnon-performing loans

  W1,197  W1,286  W1,333  W1,174  W1,075   W1,286  W1,333  W1,174  W1,075  W1,090 

As a percentage of total loans

   0.58%  0.57%  0.54%  0.45%  0.39%    0.57%  0.54%  0.45%  0.39%  0.36% 

Analysis ofNon-Performing Loans

The following table sets forth, for the periods indicated, the totalnon-performing loans by the borrower type.

 

 As of December 31,  As of December 31, 
 2013 2014 2015 2016 2017  2014 2015 2016 2017 2018 
 Total
Loans		 Non-
Performing
Loans(1)		 Ratio of
Non-
Performing
Loans		 Total
Loans		 Non-
Performing
Loans(1)		 Ratio of
Non-
Performing
Loans		 Total
Loans		 Non-
Performing
Loans(1)		 Ratio of
Non-
Performing
Loans		 Total
Loans		 Non-
Performing
Loans(1)		 Ratio of
Non-
Performing
Loans		 Total
Loans		 Non-
Performing
Loans(1)		 Ratio of
Non-
Performing
Loans		  Total
Loans		 Non-
Performing
Loans(1)		 Ratio of
Non-
Performing
Loans		 Total
Loans		 Non-
Performing
Loans(1)		 Ratio of
Non-
Performing
Loans		 Total
Loans		 Non-
Performing
Loans(1)		 Ratio of
Non-
Performing
Loans		 Total
Loans		 Non-
Performing
Loans(1)		 Ratio of
Non-
Performing
Loans		 Total
Loans		 Non-
Performing
Loans(1)		 Ratio of
Non-
Performing
Loans		 
 (In billions of Won, except percentages)  (In billions of Won, except percentages) 
Corporate                                                              

Corporate loans

 W102,823  W529  0.51%  W112,145  W551  0.49%  W125,155  W664  0.53%  W128,672  W480  0.37%  W138,277  W325  0.24%  W112,145  W551  0.49%  W125,155  W664  0.53%  W128,672  W480  0.37%  W138,277  W325  0.24%  W151,647  W278  0.18% 

Public and other(2)

 2,525   —   —  2,135   —   —  2,191  1  0.05  2,154   —   —  2,298  1  0.04  2,135   —   —  2,191  1  0.05  2,154   —   —  2,298  1  0.04  2,831   —  0.00 

Loans to banks

 6,103   —   —  4,684   —   —  4,653   —   —  4,730   —   —  2,970   —   —  4,684   —   —  4,653   —   —  4,730   —   —  2,970   —   —  3,586   —  0.00 

Lease financing

 1,721  11  0.64  1,844  15  0.81  1,875  16  0.85  1,814  20  1.10  1,713  15  0.88  1,844  15  0.81  1,875  16  0.85  1,814  20  1.10  1,713  15  0.88  1,726  16  0.93 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total corporate

 113,172  540  0.48  120,808  566  0.47  133,874  680  0.51  137,370  500  0.36  145,258  341  0.23  120,808  566  0.47  133,874  680  0.51  137,370  500  0.36  145,258  341  0.23  159,790  294  0.18 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Retail

                              

Mortgage and home equity

 46,908  41  0.09  50,652  56  0.11  54,983  45  0.08  56,235  33  0.06  59,078  45  0.08  50,652  56  0.11  54,983  45  0.08  56,235  33  0.06  59,078  45  0.08  62,394  45  0.07 

Other retail

 30,242  174  0.58  34,278  173  0.50  41,035  193  0.47  47,949  222  0.46  52,512  296  0.56  34,278  173  0.50  41,035  193  0.47  47,949  222  0.46  52,512  296  0.56  58,438  332  0.57 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total retail

 77,150  215  0.28  84,930  229  0.27  96,018  238  0.25  104,184  255  0.24  111,590  341  0.31  84,930  229  0.27  96,018  238  0.25  104,184  255  0.24  111,590  341  0.31  120,832  377  0.31 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Credit cards

 17,665  442  2.50  18,141  491  2.71  18,537  415  2.24  19,450  419  2.15  20,641  393  1.90  18,141  491  2.71  18,537  415  2.24  19,450  419  2.15  20,641  393  1.90  22,448  419  1.87 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total

 W207,987  W1,197  0.58%  W223,879  W1,286  0.57%  W248,429  W1,333  0.54%  W261,004  W1,174  0.45%  W277,489  W1,075  0.39%  W223,879  W1,286  0.57%  W248,429  W1,333  0.54%  W261,004  W1,174  0.45%  W277,489  W1,075  0.39%  W303,070  W1,090  0.36% 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

 

Note:Notes:

 

(1)

The number of days past due of restructured credit card loans is calculated from the first date ofnon-payment regardless of subsequent modification of terms.

(2)

Includes debtors such as local and regional authorities, state-owned enterprises andnon-profit organizations.

Non-Performing Loans by Industry

The following table sets forth a breakdown of ournon-performing corporate loans by industry as of December 31, 2017.2018.

 

  As of December 31, 2018 

Industry

  Aggregate
Non-Performing
Corporate Loan Balance		   Percentage of Total
Non-Performing
Corporate Loan
Balance		   Aggregate
Non-Performing
Corporate Loan Balance		   Percentage of Total
Non-Performing
Corporate Loan
Balance		 
  (In billions of Won)   (Percentages)   (In billions of Won)   (Percentages) 

Construction

  W22    6.5%   W7    2.4% 

Manufacturing

   145    42.5    111    37.8 

Real estate, leasing and service

   33    9.7    37    12.6 

Retail and wholesale

   49    14.4    42    14.3 

Finance and insurance

   1    0.3    1    0.3 

Hotel and leisure

   15    4.4    20    6.8 

Transportation, storage and communication

   12    3.5    16    5.4 

Other service(1)

   23    6.7    41    13.9 

Other(2)

   41    12.0    19    6.5 
  

 

   

 

   

 

   

 

 

Total

  W341    100.0%   W294    100.0% 
  

 

   

 

   

 

   

 

 

 

Notes:

 

(1)

Includes other service industries such as publication, media and education.

(2)

Includes other industries such as agriculture, forestry, mining, electricity and gas.

Top 20Non-Performing Loans

As of December 31, 2017,2018, our 20 largestnon-performing loans accounted 11.6%11.2% of our totalnon-performing loan portfolio. The following table shows, at the date indicated, certain information regarding our 20 largestnon-performing loans.

 

     

As of December 31, 2017

 
     

Industry

  Gross
Principal
Outstanding		   Allowance
for Loan
Losses		 
     (In billions of Won) 
1 Borrower A  Construction  W18   W2 
2 Borrower B  Other service   15    6 
3 Borrower C  Retail and wholesale   12    12 
4 Borrower D  Manufacturing   11    6 
5 Borrower E  Manufacturing   9    9 
6 Borrower F  Real estate, leasing and service   8    — 
7 Borrower G  Manufacturing   5    2 
8 Borrower H  Other service   4    — 
9 Borrower I  Real estate, leasing and service   4    — 
10 Borrower J  Manufacturing   4    1 
11 Borrower K  Manufacturing   4    4 
12 Borrower L  Manufacturing   4    2 
13 Borrower M  Manufacturing   4    4 
14 Borrower N  Real estate, leasing and service   4    1 
15 Borrower O  Other service   4    2 
16 Borrower P  Manufacturing   3    1 
17 Borrower Q  Manufacturing   3    3 
18 Borrower R  Manufacturing   3    — 
19 Borrower S  Transportation, storage, and communication   3    1 
20 Borrower T  Real estate, leasing and service   3    — 
     

 

 

   

 

 

 
     W125   W56 
     

 

 

   

 

 

 

     

As of December 31, 2018

 
     

Industry

  Gross Principal
Outstanding		   Allowance for
Loan Losses		 
     (In billions of Won) 
1 Borrower A  Manufacturing  W21   W7 
2 Borrower B  Other service   16    4 
3 Borrower C  Retail and wholesale   12    12 
4 Borrower D  Manufacturing   11    4 
5 Borrower E  Manufacturing   9    9 
6 Borrower F  Real estate, leasing and service   8    — 
7 Borrower G  Transportation, storage, and communication   5    1 
8 Borrower H  Real estate, leasing and service   5    2 
9 Borrower I  Real estate, leasing and service   4    1 
10 Borrower J  Other service   4    2 
11 Borrower K  Real estate, leasing and service   3    — 
12 Borrower L  Manufacturing   3    3 
13 Borrower M  Transportation, storage, and communication   3    — 
14 Borrower N  Other service   3    — 
15 Borrower O  Other service   3    3 
16 Borrower P  Real estate, leasing and service   3    — 
17 Borrower Q  Real estate, leasing and service   3    1 
18 Borrower R  Other service   2    2 
19 Borrower S  Other service   2    2 
20 Borrower T  Transportation, storage, and communication   2    2 
     

 

 

   

 

 

 
     W122   W55 
     

 

 

   

 

 

 

Non-Performing Loan Strategy

One of our primary objectives is to prevent our loans from becomingnon-performing. Through our corporate credit rating system, which is designed to prevent our loan officers from extending new loans to borrowers with high credit risks based on the borrower’s credit rating, we seek to reduce credit risk related to futurenon-performing loans. Our early warning system is designed to bring any sudden increase in a borrower’s credit risk to the attention of our loan officers, who then closely monitor such loans.

If a loan becomesnon-performing notwithstanding such preventive mechanism, an officer at the branch level responsible for monitoringnon-performing loans will commence due diligence on the borrower’s assets, send a notice demanding payment or a notice that we will take or prepare for legal action.

At the same time, we also initiate ournon-performing loan management process, which 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 suchnon-performing loans;

 

identifying loans subject tocharge-off based on the estimated recovery value of collateral, if any, for suchnon-performing loans and the estimated rate of recovery of unsecured loans; and

to a limited extent, identifying commercial loans subject to normalization efforts based on the cash-flow situation of the borrower.

Once the details of anon-performing loan are identified, we pursue early solutions for recovery. Actual recovery efforts fornon-performing loans are handled by the relevant department, depending on the nature of such loans and the borrower, among others. The officers or agents of the responsible departments and units use a variety of methods to resolvenon-performing loans, including:

 

making phone calls and paying visits to the borrower to request payment;

 

continuing to assess and evaluate assets of our borrowers; and

 

if necessary, initiating legal action such as foreclosures, attachment and litigation.

In order to promote speedy recovery on loans subject to foreclosures and litigation, the branch responsible for handling these loans may transfer them to the relevant unit at headquarters.

Our policy is to commence legal action within one month after default on promissory notes and four months after delinquency of payment on other types of 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 actions regardless of the grace period.

In addition to making efforts to collect on thesenon-performing loans, we take other measures to reduce the level of ournon-performing loans, including:

 

sellingnon-performing loans to third parties including the Korea Asset Management Corporation;

 

entering into asset-backed securitization transactions with respect tonon-performing loans;

 

managing retail loans that are three months or more past due through Shinhan Credit Information under an agency agreement; and

 

using third-party collection agencies including credit information companies.

In 2017,2018, we soldnon-performing loans in the amount ofW14631 billion to third parties, includingW3119 billion transferred to Meritz Securities Co.Hana F&I Inc., Ltd., a merchant banking corporation.an investment management company. Loans transferred to third parties meet the criteria of true sale and are derecognized accordingly.

The following table presents a roll-forward of ournon-performing loans in 2017.2018.

 

   (In billions of Won) 

Non-performing loans as of December 31, 20162017

  W1,1741,153 
  

 

 

 

Additionalnon-performing loans due to delinquency

   545298 

Loans sold

   (14631) 

Loans charged off

   (378223) 

Loans modified and returned to performing

   (4239) 

Other adjustments(1)

   (7868) 
  

 

 

 

Non-performing loans as of December 31, 20172018

  W1,0751,090 
  

 

 

 

 

Note:

 

(1)

Represents loans paid down or paid off and loans returned to performing other than as a result of modification. We do not separately collect and analyze data relating tonon-performing loans other than those that were sold, charged off, modified and returned to performing, or transferred toheld-for-sale investment portfolio.

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. The table as of December 31, 2018 has been presented separately due to the adoption of IFRS 9 from January 1, 2018.

 

  As of December 31, 
 As of December 31,   2018 
 2013 2014 2015 2016 2017   (In billions of Won, except percentages) 
 (In billions of Won, except percentages)   12-month
expected
credit
Losses		   Lifetime expected credit losses         
 Amount Loans %
of Total
Loans		 Amount Loans %
of Total
Loans		 Amount Loans %
of Total
Loans		 Amount Loans %
of Total
Loans		 Amount Loans %
of Total
Loans		   Not-
impaired		   Impaired   Total   % of Total
Allowances		 

Corporate

                    

Corporate loans

 W1,576  63.7%  W1,502  60.1%  W1,357  58.5%  W1,312  55.6%  W1,285  55.6%   W419   W568   W482   W1,469    53.9% 

Public and other

 10  0.4  11  0.4  8  0.4  8  0.3  5  0.2    4    5    10    19    0.7 

Loan to banks

 5  0.2  12  0.5  10  0.4  8  0.3  9  0.4    6    —    —    6    0.2 

Lease financing

 21  0.9  26  1.0  29  1.3  34  1.4  50  2.2    9    9    32    50    1.8 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

 

Total corporate

 1,612  65.1  1,551  62.0  1,404  60.6  1,362  57.7  1,349  58.4    438    582    524    1,544    56.6 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Retail

                    

Mortgages and home equity

 26  1.1  31  1.2  33  1.4  29  1.2  27  1.2    2    6    2    10    0.4 

Other retail

 190  7.7  198  7.9  206  8.9  267  11.3  331  14.3    216    200    368    784    28.8 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

 

Total retail

 216  8.7  229  9.2  239  10.3  296  12.5  358  15.5    218    206    370    794    29.2 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Credit cards

 648  26.2  721  28.8  675  29.1  703  29.8  604  26.1    75    240    72    387    14.2 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total allowance for loan losses

 W2,476  100.0%  W2,501  100.0%  W2,318  100.0%  W2,361  100.0%  W2,311  100.0%   W731   W1,028   W966   W2,725    100.0% 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

 

  As of December 31, 
  2014  2015  2016  2017 
  (In billions of Won, except percentages) 
  Amount  % of
Total
Allowances		  Amount  % of
Total
Allowances		  Amount  % of
Total
Allowances		  Amount  % of
Total
Allowances		 

Corporate

        

Corporate loans

 W1,502   60.1%  W1,357   58.5%  W1,312   55.6%  W1,285   55.6% 

Public and other

  11   0.4   8   0.4   8   0.3   5   0.2 

Loan to banks

  12   0.5   10   0.4   8   0.3   9   0.4 

Lease financing

  26   1   29   1.3   34   1.4   50   2.2 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total corporate

  1,551   62   1,404   60.6   1,362   57.7   1,349   58.4 

Retail

        

Mortgages and home equity

  31   1.2   33   1.4   29   1.2   27   1.2 

Other retail

  198   7.9   206   8.9   267   11.3   331   14.3 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total retail

  229   9.2   239   10.3   296   12.5   358   15.5 

Credit cards

  721   28.8   675   29.1   703   29.8   604   26.1 

Total allowance for loan losses

 W2,501   100.0%  W2,318   100.0%  W2,361   100.0%  W2,311   100.0% 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Our total allowance for loan losses increased byW414 billion, or 17.9%, toW2,725 billion as of December 31, 2018 fromW2,311 billion as of December 31, 2017, primarily due to the replacement of the model for impairment loss from the “incurred loss” model under the previous guidance to the “expected credit loss” model under IFRS 9 adopted from January 1, 2018, which requires us to recognize impairment loss earlier and on a more forward-looking basis.

Our total allowance for loan losses decreased byW50 billion, or 2.1%, toW2,311 billion as of December 31, 2017 fromW2,361 billion as of December 31, 2016, primarily due to an increase in reversal of allowances for credit card loan losses as a result of changing the allowance model of Shinhan Card from a roll-rate model in 2016 to an internal model approach in 2017, which was partially offset by an increase in allowance for retail loan losses due to an increase in exposure to retail customers during 2017.

Our total allowance for loan losses increased byW43 billion, or 1.9%, toW2,361 billion as of December 31, 2016 fromW2,318 billion as of December 31, 2015, primarily due to an increase in exposure to retail customers during 2016 as well as a decrease incharge-off fornon-performing loans compared to 2015.

Analysis of Allowance for Loan Losses

The following table presentstables present an analysis of our loan loss experience for each of the years indicated. The table for 2018 has been presented separately due to the adoption of IFRS 9 from January 1, 2018.

 

  2018 
  (In billions of Won, except percentages) 
  2013 2014 2015 2016 2017   12-month
expected credit
losses		  Lifetime expected credit losses  Total 
  (In billions of Won, except percentages)  Not-impaired Impaired 

Balance at the beginning of the period

  W2,800  W2,476  W2,501  W2,318  W2,361   W731  W1,088  W1,053  W2,872 

Stage Transfer

   52  (52)   —   — 

Amounts charged against income

   1,082  895  1,022  1,103  801    24  160  521  705 

Gross charge-offs:

           

Corporate:

           

Corporate loans

   (799)  (515)  (731)  (758)  (376)    (1)   —  (365)  (366) 

Public and other

   —   —  (2)  (1)  (1)    —   —  (5)  (5) 

Loan to banks

   —   —   —   —   —    —   —   —   — 

Lease financing

   (33)  (16)  (60)  (42)  (4)    —   —  (5)  (5) 

Retail:

           

Mortgage and home equity

   (4)  (3)   —   —  (2)    —   —  (4)  (4) 

Other retail

   (242)  (153)  (128)  (130)  (137)    —   —  (361)  (361) 

Credit cards

   (657)  (500)  (520)  (462)  (540)    —   —  (192)  (192) 
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total gross charge-offs

   (1,735)  (1,187)  (1,441)  (1,393)  (1,060)    (1)   —  (932)  (933) 
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Recoveries:

           

Corporate:

           

Corporate loans

   150  177  88  125  81    —   —  68  68 

Public and other

   —  11   —   —   —    —   —  1  1 

Loan to banks

   —   —   —   —   —    —   —   —   — 

Lease financing

   1  2  1  1  1    —   —  2  2 

Retail:

           

Mortgage and home equity

   —   —  3   —  1    —   —   —   — 

Other retail

   28  19  24  35  43    —   —  130  130 

Credit cards

   217  182  171  176  185    —   —  110  110 
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total recoveries

   396  391  287  337  311    —   —  311  311 
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Other

   (67)  (74)  (51)  (4)  (102)    (74)  (168)  12  (230) 
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Net charge-offs

   (1,406)  (870)  (1,205)  (1,060)  (851)    (75)  (168)  (609)  (852) 
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Balance at the end of the period

  W2,476  W2,501  W2,318  W2,361  W2,311   W732  W1,028  W965  W2,725 
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Ratio of net charge-offs during the period to average loans outstanding during the period

   0.68%  0.41%  0.51%  0.42%  0.32%    0.02%  0.06%  0.21%  0.29% 
  

 

  

 

  

 

  

 

 

   2014  2015  2016�� 2017 
   (In billions of Won, except percentages) 

Balance at the beginning of the period

  W2,476  W2,501  W2,318  W2,361 

Amounts charged against income

   895   1,022   1,103   800 

Gross charge-offs:

     

Corporate:

     

Corporate loans

   (515)   (731)   (758)   (376) 

Public and other

   —   (2)   (1)   (1) 

Loan to banks

   —   —   —   — 

Lease financing

   (16)   (60)   (42)   (4) 

Retail:

     

Mortgage and home equity

   (3)   —   —   (2) 

Other retail

   (153)   (128)   (130)   (137) 

Credit cards

   (500)   (520)   (462)   (540) 
  

 

 

  

 

 

  

 

 

  

 

 

 

Total gross charge-offs

   (1,187)   (1,441)   (1,393)   (1,060) 
  

 

 

  

 

 

  

 

 

  

 

 

 

Recoveries:

     

Corporate:

     

Corporate loans

   177   88   125   81 

Public and other

   11   —   —   — 

Loan to banks

   —   —   —   — 

Lease financing

   2   1   1   1 

Retail:

     

Mortgage and home equity

   —   3   —   1 

Other retail

   19   24   35   43 

Credit cards

   182   171   176   185 
  

 

 

  

 

 

  

 

 

  

 

 

 

Total recoveries

   391   287   337   311 
  

 

 

  

 

 

  

 

 

  

 

 

 

Other

   (74)   (51)   (4)   (101) 
  

 

 

  

 

 

  

 

 

  

 

 

 

Net charge-offs

   (870)   (1,205)   (1,060)   (850) 
  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at the end of the period

  W2,501  W2,318  W2,361  W2,311 
  

 

 

  

 

 

  

 

 

  

 

 

 

Ratio of net charge-offs during the period to average loans outstanding during the period

   0.41%   0.51%   0.42%   0.32% 

Loan Charge-offs

Our gross charge-offs decreased by 13.9% fromW1,060 billion in 2017 toW913 billion in 2018, primarily due to a decrease in the amount of charge-offs for credit cards in 2018 compared to 2017. Our gross charge-offs decreased by 23.9% fromW1,393 billion in 2016 toW1,060 billion in 2017, primarily due to a decrease in the amount of charge-offs for corporate loans in 2017 compared to 2016. Our gross charge-offs decreased by 3.3% fromW1,441 billion in 2015 toW1,393 billion in 2016, primarily due to a decrease in the amount of charge-offs for credit card loans compared to 2015. Our gross charge-offs increased fromW1,187 billion in 2014 toW1,441 billion in 2015, primarily due to our ongoing efforts to improve asset quality.

In 2017,2018, thecharge-off on restructured loans amounted toW8959 billion, of whichW6867 billion was related to loans converted into equity securities as part of restructuring. With respect to a loan that we consider to be

uncollectible regardless of any modification of terms, we convert a portion of such loan into equity securities following negotiation with the borrower and charge off the remainder of such loan as previously discussed in “— Troubled Debt Restructurings —Charge-off of Loans Subject to Restructuring.” The equity securities so converted are recorded at fair value, based on the market value of such securities if available or the appraisal value of such securities by an outside appraiser if a market value is unavailable.

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. Forcharge-off of restructured loans, see “— Loan Modification Programs for Loans under Restructuring —Charge-off of Restructured Loans” above.

Loans to beCharged-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 termination of the debtor’s business;

 

loans for which collection is not foreseeable due to the death or disappearance of debtors;

 

loans for which collection expenses exceed the collectable amount;

 

loans for which collection is not possible through legal or any other means;

 

payments in arrears in respect of credit cards that are overdue for more than six months;

 

payments outstanding on unsecured retail loans that are overdue for more than nine12 months;

 

payments in arrears in respect of leases that are overdue for more than 12 months;

 

the portion of loans classified as “estimated loss,” net of any recovery from collateral, which is deemed to be uncollectible;or

 

domestic loans that are required by the Financial Supervisory Service to becharged-off, or loans held by our foreign subsidiaries or branches for which acharge-off or special provisioning is required by the relevant regulatory authority.

Timeline forCharge-off

Shinhan Bank’s loans to becharged-off must becharged-off within one year of the month they are deemed to be uncollectible. If such loans are notcharged-off within one year, the reason for the delay must be reported to Shinhan Bank’s Audit Department.

Procedure forCharge-off Approval

An application for Shinhan Bank’s loans to becharged-off is submitted by the relevant branch or department to the Credit Collection Department. The Credit Collection Department refers the application to the Audit Department for their review to ensure compliance with the Bank’s internal procedures for charge-offs. The Credit Collection Department, after reviewing the application to confirm that it meets relevant requirements, seeks approval from the Financial Supervisory Service for the charge-offs, which is typically granted. Once the Financial Supervisory Service approves (except for household loans with estimated losses ofW10 million or less, whosecharge-off is considered automatically approved by the Financial Supervisory Service), loans arecharged-off upon approval by 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 LoansCharged-off

Once loans are charged off, they are derecognized from our statements of financial position and are classified ascharged-off loans. We continue collection efforts in respect of these loans through third-party collection agencies, including the Korea Asset Management Corporation, and Shinhan Credit Information, which is our subsidiary. The General Manager of the Credit Collection Department must report to the Financial Supervisory Service the amounts of loans permanently written off or recovered during each reporting period.

Treatment of Collateral

When wedetermine that a loan collateralized by real estate cannot be recovered through normal collection channels, we generally 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 procedure does not apply to companies under restructuring, recovery proceedings, workout or other court proceedings where there are restrictions on such auction procedures. Filing of such 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 sell the collateral and recover the principal amount and interest accrued up to the sales price, net of expenses incurred from the auction. Foreclosure proceedings under the laws and regulations of Korea typically take nineseven months to one year from initiation to collection depending on the nature of the collateral.

Financial Statement Presentation

Our financial statements generally report as charges-offscharge-offs all unsecured retail loans that are overdue for more than 12 months. Leases are charged 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.

Investment Portfolio

Investment Policy

We invest in and tradeWon-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.

When making an investment decision with respect to particular securities, we consider macroeconomic trends, industry analysis and credit evaluation, among others.

Our securities investment activities are subject to a number of regulatory guidelines, including limitations prescribed under the Financial Holding Companies Act and the Banking Act. Generally, a financial holding company is prohibited from acquiring more than 5% of the total issued and outstanding shares of another finance-related 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 100.0% of the sum of Tier I and Tier II capital (less any deductions) of Shinhan Bank. 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 and Regulation — Principal Regulations Applicable to Banks — Restrictions on Investments in Property,” “— Principal Regulations Applicable to Banks — 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.”

Book Value and Fair Value

The following table setstables set out the book value and fair value of investments in our investment portfolio as of the dates indicated. The table as of December 31, 2018 has been presented separately due to the adoption of IFRS 9 from January 1, 2018.

 

 As of
December 31, 2015		 As of
December 31, 2016		 As of
December 31, 2017		   As of
December 31, 2018		 
 Book
Value		 Fair
Value		 Book
Value		 Fair
Value		 Book
Value		 Fair
Value		   Book
Value		   Fair
Value		 
 (In billions of Won)   (In billions of Won) 

Financial assets designated at fair value

      

Marketable equity securities

 W1,364  W1,364  W1,508  W1,508  W1,468  W1,468 

Debt securities:

      

Korean treasury and governmental agencies

 104  104  334  334  530  530 

Debt securities issued by financial institutions

 837  837  794  794  716  716 

Corporate debt securities

 937  937  780  780  856  856 

Debt securities issued by foreign government

  —   —   —   —  9  9 

Mortgage-backed and asset-backed securities

 2  2   —   —   —   — 

Others

  —   —   —   —   —   — 
 

 

  

 

  

 

  

 

  

 

  

 

 

Total — Fair Value Through Profit and Loss

 W3,244  W3,244  W3,416  W3,416  W3,579  W3,579 
 

 

  

 

  

 

  

 

  

 

  

 

 

Available-for-sale securities

      

Marketable equity securities

 W4,929  W4,929  W4,841  W4,841  W4,930  W4,930 

Securities at fair value through other comprehensive income

    

Equity securities

  W636   W636 

Debt securities:

          

Korean treasury and governmental agencies

 3,606  3,606  4,198  4,198  6,497  6,497    7,756    7,756 

Debt securities issued by financial institutions

 15,594  15,594  17,225  17,225  17,650  17,650    17,341    17,341 

Corporate debt securities

 6,723  6,723  7,937  7,937  9,602  9,602    9,183    9,183 

Debt securities issued by foreign government

 676  676  1,110  1,110  1,073  1,073    1,220    1,220 

Mortgage-backed and asset-backed securities

 2,438  2,438  2,352  2,352  2,365  2,365    2,178    2,178 
 

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

 

Total —Available-for-sale

 W33,966  W33,966  W37,663  W37,663  W42,117  W42,117 

Total — Securities at fair value through other comprehensive income

  W38,314   W38,314 
 

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

 

Held-to-maturity securities

      

Securities at amortized cost

    

Debt securities:

          

Korean treasury and governmental agencies

 W9,432  W10,413  W10,894  W11,742  W14,495  W14,913   W17,143   W18,139 

Debt securities issued by financial institutions

 1,264  1,315  2,092  2,073  2,708  2,694    2,247    2,271 

Corporate debt securities

 2,902  3,136  3,505  3,661  3,859  3,897    3,955    4,108 

Debt securities issued by foreign government

 97  97  621  565  669  643    857    835 

Mortgage-backed and asset-backed securities

 2,497  2,528  2,693  2,691  3,260  3,243    4,276    4,324 
 

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

 

Total —Held-to-maturity

 W16,192  W17,489  W19,805  W20,732  W24,991  W25,390 

Total — Securities at amortized cost

  W28,478   W29,677 
 

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

 

Trading Securities

      

Marketable equity securities

 W3,043  W3,043  W4,058  W4,058  W4,634  W4,634 

Financial assets at fair value through profit or loss

    

Equity securities

  W1,165   W1,165 

Debt securities:

          

Korean treasury and governmental agencies

 3,255  3,255  4,236  4,236  3,178  3,178    2,734    2,734 

Financial institutions

 6,776  6,776  7,461  7,461  8,014  8,014 

Corporations

 9,304  9,304  10,244  10,244  11,863  11,863 

Debt securities issued by financial institutions

   9,593    9,593 

Corporate debt securities

   15,722    15,722 

Debt securities issued by foreign governments

   31    31 

Mortgage-backed and asset-backed securities

 106  106  348  348  509  509    435    435 

Debt securities issued by foreign governments

 5  5  101  101  77  77 

Other trading assets

 149  149  248  248  189  189 

Other debt securities(1)

   11,620    11,620 
 

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

 

Total — Trading

 W22,638  W22,638  W26,696  W26,696  W28,464  W28,464 

Sub-total — Securities at fair value

  W41,300   W41,300 
 

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

 

Total securities

 W76,040  W77,337  W87,580  W88,507  W99,151  W99,550 

Others:

    

Loans at fair value

   1,209    1,209 

Due from banks at fair value

   871    871 

Gold/Silver deposits

   155    155 
 

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

 

Total — Financial assets at fair value through profit or loss

  W43,535   W43,535 
  

 

   

 

 

   As of
December 31, 2016		   As of
December 31, 2017		 
   Book
Value		   Fair
Value		   Book
Value		   Fair
Value		 
   (In billions of Won) 

Financial assets designated at fair value

        

Marketable equity securities

  W1,508   W1,508   W1,468   W1,468 

Debt securities:

        

Korean treasury and governmental agencies

   334    334    530    530 

Debt securities issued by financial institutions

   794    794    716    716 

Corporate debt securities

   780    780    856    856 

Debt securities issued by foreign government

   —    —    9    9 

Mortgage-backed and asset-backed securities

   —    —    —    — 

Others

   —    —    —    — 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total — Fair Value Through Profit and Loss

  W3,416   W3,416   W3,579   W3,579 
  

 

 

   

 

 

   

 

 

   

 

 

 

Available-for-sale securities

        

Marketable equity securities

  W4,841   W4,841   W4,930   W4,930 

Debt securities:

        

Korean treasury and governmental agencies

   4,198    4,198    6,497    6,497 

Debt securities issued by financial institutions

   17,225    17,225    17,650    17,650 

Corporate debt securities

   7,937    7,937    9,602    9,602 

Debt securities issued by foreign government

   1,110    1,110    1,073    1,073 

Mortgage-backed and asset-backed securities

   2,352    2,352    2,365    2,365 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total —Available-for-sale

  W37,663   W37,663   W42,117   W42,117 
  

 

 

   

 

 

   

 

 

   

 

 

 

Held-to-maturity securities

        

Debt securities:

        

Korean treasury and governmental agencies

  W10,894   W11,742   W14,495   W14,913 

Debt securities issued by financial institutions

   2,092    2,073    2,708    2,694 

Corporate debt securities

   3,505    3,661    3,859    3,897 

Debt securities issued by foreign government

   621    565    669    643 

Mortgage-backed and asset-backed securities

   2,693    2,691    3,260    3,243 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total —Held-to-maturity

  W19,805   W20,732   W24,991   W25,390 
  

 

 

   

 

 

   

 

 

   

 

 

 

Trading Securities

        

Marketable equity securities

  W4,058   W4,058   W4,634   W4,634 

Debt securities:

        

Korean treasury and governmental agencies

   4,236    4,236    3,178    3,178 

Financial institutions

   7,461    7,461    8,014    8,014 

Corporations

   10,244    10,244    11,863    11,863 

Mortgage-backed and asset-backed securities

   348    348    509    509 

Debt securities issued by foreign governments

   101    101    77    77 

Other trading assets

   248    248    189    189 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total — Trading

  W26,696   W26,696   W28,464   W28,464 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total securities

  W87,580   W88,507   W99,151   W99,550 
  

 

 

   

 

 

   

 

 

   

 

 

 

Note:

(1)

Other debt securities included puttable equity investment, beneficiary certificates and restricted reserve for claims of customers’ deposits (trusts) classified as debt instruments in accordance with IFRS 9.

Maturity Analysis

The following table categorizes our securities by maturity and weighted average yield as of December 31, 2017.2018.

 

 As of December 31, 2017  As of December 31, 2018 
 1 Year or Less Over 1 but within
5 Years		 Over 5 but within
10 Years		 Over 10 Years Total  1 Year or Less Over 1 but within
5 Years		 Over 5 but within
10 Years		 Over 10 Years Total 
 Carrying
Amount		 Weighted
Average
Yield(1)		 Carrying
Amount		 Weighted
Average
Yield(1)		 Carrying
Amount		 Weighted
Average
Yield(1)		 Carrying
Amount		 Weighted
Average
Yield(1)		 Carrying
Amount		 Weighted
Average
Yield(1)		  Carrying
Amount		 Weighted
Average
Yield(1)		 Carrying
Amount		 Weighted
Average
Yield(1)		 Carrying
Amount		 Weighted
Average
Yield(1)		 Carrying
Amount		 Weighted
Average
Yield(1)		 Carrying
Amount		 Weighted
Average
Yield(1)		 
 (In billions of Won, except percentages)  (In billions of Won, except percentages) 

Financial assets designated at fair value:

          

Securities at fair value through other comprehensive income:

          

Korean treasury securities and government agencies

 W —  —%  W219  2.26%  W147  2.47%  W164  2.46%  W530  2.38%  W1,230  1.76%  W5,532  1.85%  W717  2.00%  W277  2.27%  W7,756  1.87% 

Debt securities issued by financial institutions

 66  2.14%  495  2.83%  155  3.59%   —  —%  716  2.93%  9,791  1.83%  7,285  2.45%  253  3.09%  12  5.90%  17,341  2.11% 

Corporate debt securities

 206  1.85%  443  2.49%  127  2.98%  80  5.13%  856  2.66%  2,582  2.02%  5,323  2.48%  892  2.52%  386  2.78%  9,183  2.36% 

Debt securities issued by foreign governments

 9  —%   —  —%   —  —%   —  —%  9  —%  838  3.48%  224  5.35%  106  5.71%  52  5.68%  1,220  4.11% 

Mortgage-backed securities and asset-backed securities

  —  —%   —  —%   —  —%   —  —%   —  —%  596  1.83%  1,401  2.14%  101  2.29%  80  3.54%  2,178  2.12% 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total

 W281  1.86%  W1,157  2.59%  W429  3.03%  W244  3.34%  W2,111  2.67%  W15,037  1.95%  W19,765  2.30%  W2,069  2.56%  W807  2.92%  W37,678  2.19% 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Available-for-sale securities:

          

Securities at amortized cost:

          

Korean treasury securities and government agencies

 W581  1.47%  W4,298  1.70%  W209  2.12%  W1,409  1.95%  W6,497  1.75%  W2,053  2.96%  W9,161  2.17%  W1,161  3.79%  W4,768  2.78%  W17,143  2.55% 

Debt securities issued by financial institutions

 9,418  1.55%  6,788  1.97%  183  3.79%  1,261  0.45%  17,650  1.66%  673  2.38%  563  3.55%  137  3.57%  874  3.32%  2,247  3.11% 

Corporate debt securities

 2,750  1.64%  4,479  2.08%  103  0.70%  2,270  0.70%  9,602  1.62%  668  2.48%  862  3.06%  548  3.53%  1,877  2.66%  3,955  2.84% 

Debt securities issued by foreign governments

 534  3.35%  302  4.55%  157  6.31%  80  5.80%  1,073  4.31%  50  6.48%  252  4.21%  57  8.01%  498  4.15%  857  4.56% 

Mortgage-backed securities and asset-backed securities

 372  1.83%  1,036  1.94%   —  —%  957  0.94%  2,365  1.51%   —  —%  2,671  2.36%  1,063  2.61%  542  2.66%  4,276  2.46% 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total

 W13,655  1.64%  W16,903  1.98%  W652  3.37%  W5,977  1.05%  W37,187  1.73%  W3,444  2.81%  W13,509  2.36%  W2,966  3.39%  W8,559  2.88%  W28,478  2.68% 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Held-to-maturity securities:

          

Financial assets at fair value through profit or loss:

          

Korean treasury securities and government agencies

 W846  4.65%  W8,439  2.31%  W127  3.03%  W5,083  2.69%  W14,495  2.59%  W194  3.13%  W1,547  2.00%  W828  2.21%  W165  3.76%  W2,734  2.25% 

Debt securities issued by financial institutions

 489  1.75%  625  1.88%  74  4.79%  1,520  5.01%  2,708  3.69%  5,219  2.03%  3,729  2.35%  136  4.03%  509  3.94%  9,593  2.29% 

Corporate debt securities

 217  2.53%  925  2.15%  146  3.60%  2,571  2.57%  3,859  2.51%  12,153  2.24%  2,775  2.14%  341  3.00%  453  3.13%  15,722  2.27% 

Debt securities issued by foreign governments

 26  6.10%  113  5.01%  121  6.80%  409  3.89%  669  4.69%  31  2.21%   —  —%   —  —%   —  —%  31  2.21% 

Mortgage-backed securities and asset-backed securities

  —  —%  2,279  2.33%  186  2.52%  795  0.64%  3,260  1.93%  172  2.04%  220  2.81%  10  1.59%  33  3.39%  435  2.52% 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total

 W1,578  3.48%  W12,381  2.30%  W654  3.91%  W10,378  2.89%  W24,991  2.66% 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Trading securities:

          

Korean treasury securities and government agencies

 W348  1.78%  W1,723  2.09%  W1,085  2.36%  W22  2.46%  W3,178  2.15% 

Debt securities issued by financial institutions

 4,620  1.65%  3,314  2.07%  8  2.88%  72  2.68%  8,014  1.83% 

Corporate debt securities

 9,779  1.90%  1,992  2.94%  53  2.73%  39  1.05%  11,863  2.08% 

Debt securities issued by foreign governments

  —  —%  58  0.54%  19  1.05%   —  —%  77  0.67% 

Mortgage-backed securities and asset-backed securities

 212  2.14%  275  2.15%  19  1.61%  3  —%  509  2.11% 

Other debt securities

 11,620  —%   —  —%   —  —%   —  —%  11,620  —% 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total

 W14,959  1.82%  W7,362  2.30%  W1,184  2.35%  W136  2.12%  W23,641  2.00%  W29,389  1.32%  W8,271  2.23%  W1,315  2.60%  W1,160  3.58%  W40,135  1.62% 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total

 W30,473   W37,803   W2,919   W16,735   W87,930   W47,870   W41,545   W6,350   W10,526   W106,291  
 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

Note:

 

(1)

The weighted-average yield for the portfolio represents the yield to maturity for each individual security, weighted using its amortized cost.

Concentrations of Risk

The following table presents securities held by us whose aggregate book value exceeded 10% of our stockholders’ equity as of December 31, 2017.2018. As of December 31, 2017,2018, 10% of our stockholders’ equity wasW3,3703,665 billion.

 

   As of December 31, 20172018 
   Book Value   Fair Value 
   (In billions of Won) 

Name of issuer:

    

Ministry of Strategy and Finance

  W23,28727,179   W23,94528,160 

The Korea Development Bank

  W4,8574,712   W4,8674,723 

The Bank of Korea

  W9,6635,972   W9,9795,973 

The Korea Housing Finance Corp

  W5,3606,726   W5,3376,781 

All of the above entities are either an agency of the Korean government or an entity controlled 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 letters 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, 
  2015   2016   2017   2016   2017   2018 
  (In billions of Won)   (In billions of Won) 

Commitments to extend credit

  W75,443   W74,541   W73,373   W74,541   W73,373   W89,873 

Commercial letters of credit

   2,377    2,777    2,744    2,777    2,744    3,162 

Other(1)

   22,327    21,826    21,530 

Others(1)

   83,011    85,276    93,960 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total

  W100,147   W99,144   W97,647   W160,329   W161,393   W186,995 
  

 

   

 

   

 

   

 

   

 

   

 

 

 

Note:

 

(1)

Consists of financial guarantees, performance guarantees, liquidity facilities to special purpose entities, acceptances, guarantee on trust accounts, endorsed bills and endorsed bills.unused credit limits on credit cards.

We have credit-related commitments that are not reflected on our statements of financial position, 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 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 make drawdowns up to a stipulated amount under specific terms and conditions. They are generally short-term and collateralized by the underlying shipments of goods to which they relate.

We also have guarantees that are recorded on our statements of financial position at their fair value at inception which are amortized over the life of the guarantees. Such guarantees generally include standby letters

of credit, other financial and performance guarantees and liquidity facilities to 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 collateral, including trade-related documents. Other financial and performance guarantees are irrevocable assurances that we will pay beneficiaries if our customers fail to perform their obligations under certain contracts. Liquidity facilities to special purpose entities are irrevocable commitments to provide contingent liquidity credit lines to special 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 — Other Banking Services — Derivatives Trading” 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 arenon-trading derivatives that do not qualify for hedge accounting treatment.

The following shows, as of December 31, 2017,2018, the gross notional or contractual amounts of derivatives held or issued for (i) trading and(ii) non-trading that qualify for hedge accounting.

 

  As of December 31, 2017   As of December 31, 2018 
  Underlying
Notional
Amount(1)		   Estimated
Fair
Value
Assets		   Estimated
Fair
Value
Liabilities		   Underlying
Notional
Amount(1)		   Estimated
Fair
Value
Assets		   Estimated
Fair
Value
Liabilities		 
  (In billions of Won)   (In billions of Won) 

Trading:

            

Foreign exchange derivatives:

            

Future and forward contracts

  W101,987   W1,896   W1,638   W140,241   W913   W871 

Swaps

   30,270    855    865    31,795    394    373 

Options

   1,178    12    12    1,940    7    12 
  

 

   

 

   

 

   

 

   

 

   

 

 

Sub-total

   133,435    2,763    2,515    173,976    1,314    1,256 
  

 

   

 

   

 

   

 

   

 

   

 

 

Interest rate derivatives:

            

Future and forward contracts

   1,546    2    —    1,740    1    2 

Swaps

   83,895    204    209    88,090    251    172 

Options

   310    —    2    294    —    5 
  

 

   

 

   

 

   

 

   

 

   

 

 

Sub-total

   85,751    206    211    90,124    252    179 
  

 

   

 

   

 

   

 

   

 

   

 

 

Credit derivatives:

            

Swaps

   2,443    63    11    3,094    38    15 
  

 

   

 

   

 

   

 

   

 

   

 

 

Sub-total

   2,443    63    11    3,094    38    15 
  

 

   

 

   

 

   

 

   

 

   

 

 

Equity derivatives:

            

Swaps and forward contracts

   4,223    112    14    5,150    52    206 

Options

   4,469    115    30    3,355    40    112 

Future contracts

   527    —    1    630    16    1 
  

 

   

 

   

 

   

 

   

 

   

 

 

Sub-total

   9,219    227    45    9,135    108    319 
  

 

   

 

   

 

   

 

   

 

   

 

 

  As of December 31, 2017   As of December 31, 2018 
  Underlying
Notional
Amount(1)		   Estimated
Fair
Value
Assets		   Estimated
Fair
Value
Liabilities		   Underlying
Notional
Amount(1)		   Estimated
Fair
Value
Assets		   Estimated
Fair
Value
Liabilities		 
  (In billions of Won)   (In billions of Won) 

Commodity derivatives:

            

Swaps and forward contracts

   932    16    23    1,062    8    74 

Options

   5    —    —    5    —    — 

Future contracts

   122    6    —    246    8    4 
  

 

   

 

   

 

   

 

   

 

   

 

 

Sub-total

   1,059    22    23    1,313    16    78 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total

  W231,907   W3,281   W2,805   W277,642   W1,728   W1,847 
  

 

   

 

   

 

   

 

   

 

   

 

 

Non-trading:

            

Hedge accounting:

            

Foreign exchange derivatives:

            

Swaps

  W3,866   W59   W162   W4,144   W22   W79 

Future and forward contracts

   1,227    50    2    1,522    9    31 

Interest rate derivatives:

            

Swaps

   8,088    10    519    10,148    35    483 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total

  W13,181   W119   W683   W15,814   W66   W593 
  

 

   

 

   

 

   

 

   

 

   

 

 

 

Note:

 

(1)

Notional amounts in foreign currencies were converted into Won at prevailing exchange rates as of December 29, 2017.31, 2018.

Funding

We obtain funding from a variety 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. In addition, our subsidiaries acquire funding through call money, borrowings from the Bank of Korea, other short-term borrowings, corporate debentures and other long-term debt, including debt and equity securities issuances, asset-backed securitizations and repurchase transactions, to complement, or if necessary, replace funding through customer deposits. For further details relating to funding by us and our subsidiaries, see “Item 5.B. Liquidity and Capital Resources.”

Deposits

Although the majority of our bank deposits are short-term, the majority of our depositors have 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.

 

   2015  2016  2017 
   Average
Balance(1)		   Average
Rate
Paid		  Average
Balance(1)		   Average
Rate
Paid		  Average
Balance(1)		   Average
Rate
Paid		 
   (In billions of Won, except percentages) 

Interest-bearing deposits:

          

Demand deposits

  W26,365    0.44%  W30,865    0.37%  W35,978    0.36% 

Savings deposits

   56,083    0.70   63,061    0.59   69,671    0.51 

Time deposits

   113,932    2.03   123,716    1.64   121,050    1.55 

Other deposits

   3,555    1.20   4,744    1.47   8,164    1.57 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total interest-bearing deposits

  W199,935    1.43%  W222,386    1.16%  W234,863    1.06% 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

   2016  2017  2018 
   Average
Balance(1)		   Average
Rate
Paid		  Average
Balance(1)		   Average
Rate
Paid		  Average
Balance(1)		   Average
Rate
Paid		 
   (In billions of Won, except percentages) 

Interest-bearing deposits:

          

Demand deposits

  W30,865    0.37%  W35,978    0.36%  W37,714    0.39% 

Savings deposits

   63,061    0.59   69,671    0.51   74,467    0.56 

Time deposits

   123,716    1.64   121,050    1.55   130,846    1.81 

Other deposits

   4,744    1.47   8,164    1.57   8,525    1.96 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total interest-bearing deposits

  W222,386    1.16%  W234,863    1.06%  W251,552    1.23% 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

 

Note:

 

(1)

Average balances are based on (a) daily balances of Shinhan Bank and (b) quarterly balances for other subsidiaries.

For a breakdown of deposit products, see “— Our Principal Activities — Deposit-taking Activities,” except that cover bills sold are recorded on short-term borrowings and securities sold under repurchase agreements are recorded as secured borrowings.

Certificates of Deposit and Other Time Deposits

The following table presents the certificates of deposit and other time deposits in excess ofW100 million by remaining maturities as of December 31, 2017.2018.

 

  As of December 31, 2017   As of December 31, 2018 
  Certificates
of Deposit		   Other
Time
Deposits		   Total   Certificates
of Deposit		   Other
Time
Deposits		   Total 
  (In billions of Won)   (In billions of Won) 

Maturing within three months

  W2,853   W26,239   W29,092   W4,121   W27,691   W31,812 

After three but within six months

   2,045    21,102    23,147    2,309    21,410    23,719 

After six but within 12 months

   1,876    34,129    36,005    1,985    37,812    39,797 

After 12 months

   330    5,868    6,198    451    6,527    6,978 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total

  W7,104   W87,338   W94,442   W8,866   W93,440   W102,306 
  

 

   

 

   

 

   

 

   

 

   

 

 

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.

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.

 

 2015 2016 2017  2016 2017 2018 
 Balance
Outstanding		 Average
Balance
Outstanding(1)		 Highest
Balances
at Any
Month-end		 Weighted
Average
Interest
Rate(2)		 Year-end
Interest
Rate		 Balance
Outstanding		 Average
Balance
Outstanding(1)		 Highest
Balances
at Any
Month-end		 Weighted
Average
Interest
Rate(2)		 Year-end
Interest
Rate		 Balance
Outstanding		 Average
Balance
Outstanding(1)		 Highest
Balances
at Any
Month-end		 Weighted
Average
Interest
Rate(2)		 Year-end
Interest
Rate		  Balance
Outstanding		 Average
Balance
Outstanding(1)		 Highest
Balances
at Any
Month-end		 Weighted
Average
Interest
Rate(2)		 Year-end
Interest
Rate		 Balance
Outstanding		 Average
Balance
Outstanding(1)		 Highest
Balances
at Any
Month-end		 Weighted
Average
Interest
Rate(2)		 Year-end
Interest
Rate		 Balance
Outstanding		 Average
Balance
Outstanding(1)		 Highest
Balances
at Any
Month-end		 Weighted
Average
Interest
Rate(2)		 Year-end
Interest
Rate		 
 (In billions of Won, except for percentages)  (In billions of Won, except for percentages) 

Borrowings from The Bank of Korea(3)

 W2,073  W1,712  W2,107  0.67%  0.10 - 0.75%  W2,669  W2,451  W2,689  0.65%  0.50 - 0.75%  W2,913  W2,903  W2,977  0.67%  0.50 - 0.75%  W2,669  W2,451  W2,689  0.65%  0.50  - 0.75%  W2,913  W2,903  W2,977  0.67%  0.50 - 0.75%  W2,330  W2,603  W2,853  0.66%  0.50 - 0.75% 

Call money

 643  2,368  5,736  1.58  0.32 - 7.00  1,130  1,582  2,699  1.35  0.10 - 10.00  857  1,892  4,006  1.69  0.00 - 6.20  1,130  1,582  2,699  1.35  0.10 - 10.00  857  1,892  4,006  1.69  0.00 - 6.20  1,425  1,977  5,255  2.29  0.00 - 6.85 

Other short-term borrowings(4)

 11,463  8,010  13,149  0.96  0.00 - 7.95  11,146  11,180  13,084  0.75  0.00 - 4.60  14,375  13,047  14,478  0.74  0.00 - 12.50  11,146  11,180  13,084  0.75  0.00 - 4.60  14,375  13,047  14,478  0.74  0.00 - 12.50  21,884  18,900  21,884  1.23  0.00 - 12.00 
 

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  
 W14,179  W12,090  W20,992  1.04%   W14,945  W15,213  W18,472  0.80%   W18,145  W17,842  W21,461  0.83%   W14,945  W15,213  W18,472  0.80%   W18,145  W17,842  W21,461  0.83%   W25,639  W23,480  W29,992  1.26%  
 

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

Notes:

 

(1)

Average balances are based on (a) daily balances of Shinhan Bank and (b) quarterly balances for other subsidiaries.

(2)

Weighted-average interest rates are calculated by dividing the total interest expenses by the average amount borrowed.

(3)

Borrowings from the Bank of Korea generally mature within one month for borrowings in Won and six months for borrowings in foreign currencies.

(4)

Other short-term borrowings included borrowings from trust accounts, bills sold, and borrowings in domestic and foreign currencies.

Our short-term borrowings have maturities of less than one year whichand are generally unsecured with the exception of borrowings from the Bank of Korea, which are generally secured with securities at fair value through other comprehensive income or at amortized cost (previously classified asavailable-for-sale orheld-to-maturity securities under IAS 39) held by us.

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, interest rate 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 and implemented at the subsidiary level through a carefully stratifiedchecks-and-balances system.

We 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 global financial crisis of 2008 and 2009, we believe our risk management 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, and we are carefully upgrading and refining our risk management system in the face of current and potential economic difficulties at global, regional and domestic levels.

Our group-wide risk management philosophy is to instill a culture of effective risk management and awareness at all levels of our organization and pursue a proper balance between risk and return in our business activities in order to achieve a sustainable growth. In particular, our group-wide risk management is guided by the following core principles:

 

carrying out all business activities within prescribed risk tolerance levels and prudently balancing profitability and risk management;

 

standardizing the risk management process and monitoring compliance at a group-wide level;

 

operating a prudent risk management decision making system backed by active participation by management;

 

creating and operating a risk management organization independent of business activities;

 

operating a performance management system that enhances clear and prompt identification of risks when making business decisions;

 

aiming to achieve preemptive and practical risk management; and

 

prudent preparation for known and unknown contingencies.

We take the following steps to implement the foregoing risk management principles:

 

 • 

risk capital management — Risk capital refers to capital necessary to compensate for losses in case of a potential risk being realized, and risk capital management refers to the process of asset management based on considerations of risk exposure and risk appetite for our total assets so that we can maintain an appropriate level of risk capital. As part of our risk capital management, we and our subsidiaries have adopted and maintain various risk planning processes and reflect such risk planning in our business and financial planning. We also maintain a risk limit management system to ensure that risks in our business do not exceed prescribed limits.

 

 • 

risk monitoring — We proactively, preemptively and periodically review risks that may impact our overall operations, including through a multidimensional risk monitoring system. Currently, each of our subsidiaries is required to report to the holding company any factors that could have a material impact on group-wide risk management, and the holding company reports to our chief risk officer and other members of our senior management the results of risk monitoring weekly, monthly and on anad hoc basis as needed. In addition, we perform preemptive risk management through a “risk dashboard

 

system” under which we closely monitor any increase in asset size, risk levels and sensitivity to external factors with respect to the major asset portfolios of each of our subsidiaries, and to the extent such monitoring yields any warning signals, we promptly analyze the causes and, if necessary, formulate and implement actions in response thereto.

 

 • 

risk review — Prior to entering any new business, offering any new products or changing any major policies, we review any relevant risk factors based on a prescribed risk management checklist and, in the case of changes for which assessment of risk factors is difficult, perform reasonable decision-making in order to avoid taking any unduly risky action. The risk management departments of all our subsidiaries are required to review all new businesses, products and services prior to their launch and closely monitor the development of any related risks following their launch, and in the case of any action that involves more than one subsidiary, the relevant risk management departments are required to consult with the risk management team at the holding company level prior to making any independent risk reviews.

 

 • 

crisis management — We maintain a group-wide risk management system to detect the early warnings signals of any crisis and, in the event of a crisis actually happening, to respond on a timely, efficient and flexible basis so as to ensure our survival as a going concern. Each of our subsidiaries maintains crisis planning for three levels of contingencies, namely, “alert,” “imminent crisis” and “crisis,” determination of which is made based on quantitative and qualitative monitoring and consequence analysis, and upon the occurrence of any such contingency, is required to respond according to a prescribed contingency plan. At the holding company level, we maintain and install a crisis detection and response system which is applied consistently group-wide, and upon the occurrence of an “imminent crisis” or “crisis” event at a subsidiary level, we directly take charge of the situation at the holding company level so that we manage it on a concerted group-wide basis.

Organization

Our risk management system is organized along the following hierarchy (from top to bottom): at the holding company level, the Group Risk Management Committee, the Group Risk Management Council, the Group Chief Risk Officer and the Group Risk Management Team, and at the subsidiary level, the Risk Management Committee, the Chief Risk Officer and the Risk Management Team of the relevant subsidiary. The Group Risk Management Committee, which is under the supervision of our holding company’s board of directors, sets the basic group-wide risk management policies and strategies. Our Group Chief Risk Officer reports to the Group Risk Management Committee, and the Group Risk Management Council coordinates the risk management policies and strategies at the group level as well as at the subsidiary level among each of our subsidiaries. Each of our subsidiaries also has a separate Risk Management Committee, Risk Management Working Committee and Risk Management Team, whose tasks are to implement the group-wide risk management policies and strategies at the subsidiary level as well as to set risk management policies and strategies specific to such subsidiary in line with the group-wide guidelines. We also have the Group Risk Management Team, which supports our Chief Risk Officer in his or her risk management and supervisory role.

In order to maintain the group-wide risk at an appropriate level, we use a hierarchical risk limit system under which the Group Risk Management Committee assigns reasonable risk limits for the entire group and each of our subsidiaries, and the Risk Management Committee and the Risk Management Working Committee of each of our subsidiaries manage the subsidiary-specific risks by establishing and managing risk limits in more detail by type of risk and type of product for each department and division within such subsidiary. Further details follow.

At the holding company level:

 

 • 

Group Risk Management Committee — The Group Risk Management Committee consists of fourthree outside directors of our holding company. The Group Risk Management Committee convenes at least

 

quarterly and 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 reasonable risk limits for the entire group and each of our subsidiaries, (iii) approve appropriate investment limits or permissible loss limits, (iv) enact and amend risk management regulations, and (v) decide other risk management-related issues the board of directors or the Group Risk Management Committee sees 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.

 

 • 

Group Risk Management Council — Comprised of the Group Chief Risk Officer and Chief 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 group-wide risk management guidelines and strategy in order to maintain consistency in the group-wide risk policies and strategies.

 

 • 

Group Chief Risk Officer — The Group Chief Risk Officer assists the Group Risk Management Committee by implementing the risk policies and strategies as well as ensuring consistency in the risk management systems of our subsidiaries. Furthermore, the Group Chief Risk Officer evaluates the Chief Risk Officer of each subsidiary in addition to monitoring the risk management practices of each subsidiary.

 

 • 

Group Risk Management Team — This team provides support and assistance to the Group Chief Risk Officer in carrying out his or her responsibilities.

At the subsidiary level:

 

 • 

Risk Management Committee — In order to maintain group-wide 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.

 

 • 

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.

The following is a flowchart of our risk management system at the holding company level and the subsidiary level.

 

LOGOLOGO

Credit Risk Management

Credit risk, which is the risk of loss from default by borrowers, other obligors or other counterparties to the transactions that we have entered into, is the greatest risk we face. Our credit risk management encompasses all areas of credit that may result in potential economic loss, including not just transactions that are recorded on our balance sheets, but alsooff-balance-sheet transactions such as guarantees, loan commitments and derivatives transactions. A substantial majority of our credit risk relates 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:

 

achieve a profit level corresponding to the level of risks involved;

 

improve asset quality and achieve an optimal mix of asset portfolios;

 

avoid excessive loan concentration in a particular borrower or sector;

 

closely monitor the borrower’s ability to repay the debt; and

 

provide financial support to advance the growth of select customers.

Major policies for Shinhan Bank’s credit risk management, including Shinhan Bank’s overall credit risk management plan and credit policy guidelines, are determined by the Risk Policy Committee of Shinhan Bank, the executive decision-making body for management of credit risk. The Risk Policy Committee is headed by the Chief Risk Officer, and also comprises of the Chief Credit Officer and the heads of each business unit. In order to separate the loan approval functions from credit policy decision-making, Shinhan Bank has a Credit Review Committee that performs credit review evaluations with a focus on improving the asset quality of and profitability from the loans being made, and operates separately from the Risk Policy Committee. Both the Risk Policy Committee and the Credit Review Committee make decisions by a vote oftwo-thirds or more of the attending members of the respective committees, which must constitute at leasttwo-thirds of the respective committee members to satisfy the respective quorum.

Shinhan Bank complies 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:

 

credit evaluation and approval;

 

credit review and monitoring; and

 

credit risk assessment and control.

Credit Evaluation and Approval

All loan applicants and guarantors are subject to credit evaluation before approval of any loans. Credit evaluation of loan applicants are carried out by senior officers of Shinhan Bank specifically charged with granting loan approvals. Loan evaluation is carried out by a group rather than by an individual reviewer through an objective and deliberative process. Credit ratings of loan applicants and guarantors influence loan interest rates, the level of internal approval required, credit exposure limits, calculation of potential losses and estimated cost of capital, and therefore are determined objectively and independently by the relevant business unit. Shinhan Bank uses a credit scoring system for retail loans and a credit-risk rating system for corporate loans.

Each of Shinhan Bank’s borrowers is assigned a credit rating, which is based on a comprehensive internal credit evaluation system that considers a variety of criteria. For retail borrowers, the credit rating takes into account the borrower’s biographic details, past dealings with Shinhan Bank and external credit rating information, among other things. For corporate borrowers, the credit rating takes into account financial indicators as well asnon-financial indicators such as industry risk, operational risk and management risk, among other things. The credit rating, once assigned, serves as the fundamental instrument for Shinhan Bank’s credit risk management, and is applied to a wide range of credit risk management processes, including credit approval, credit limit management, loan pricing and computation of allowance for loan losses. Shinhan Bank has separate credit evaluation systems for retail customers, SOHO customers and corporate customers, which are further segmented and refined to meet Basel II requirements, which requirements have not changed under Basel III. See “Item 5.A. Operating Results — Critical Accounting Policies — Impairment of Financial Assets — Allowance for Loan Losses.”

Retail Loans

Loan applications for retail loans are reviewed in accordance with Shinhan Bank’s credit scoring system and the objective statistics models for secured and unsecured loans maintained and operated by Shinhan Bank’s Retail Banking Division. Shinhan Bank’s credit scoring system is an automated credit approval system used to evaluate loan applications and determine the appropriate pricing for the loan, 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 assigned a score, which is used to determine (i) whether to approve the applicant’s loan, (ii) the amount of loan to be granted, and (iii) the interest rates thereon. 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 headquarter level, makes a reassessment based on qualitative as well as quantitative factors, such as credit history, occupation and past relationship with Shinhan Bank.

For mortgage and home equity loans and loans secured by real estate, Shinhan Bank evaluates the value of the real estate offered as collateral using a proprietary database, which contains information about real estate values throughout Korea. In addition, Shinhan Bank usesup-to-date information provided by third parties regarding the real estate market and property values in Korea. While Shinhan Bank uses internal staff from the processing centers to appraise the value of the real estate collateral, Shinhan Bank also hires certified appraisers

to review andco-sign the appraisal value of real estate collateral that have an appraisal value exceedingW3 billion, as initially determined by the processing centers. Shinhan Bank also reevaluates internally, on a summary basis, the appraisal value of collateral at least every year.

For loans secured by securities, deposits or other assets other than real estate, Shinhan Bank requires borrowers to observe specified collateral ratios in respect of secured obligations.

Corporate Loans

Shinhan Bank rates all of its corporate borrowers using internally developed credit evaluation systems. These systems consider a variety of criteria (quantitative, qualitative, financial andnon-financial) in order to standardize credit decisions and focus on the quality of borrowers rather than the size of loans. The quantitative considerations include the borrower’s financial and other data, while the qualitative considerations are based on the judgment of Shinhan Bank’s credit officers as to the borrower’s ability to repay. Financial considerations include financial variables and ratios based on customer’s financial statements, such as return on assets and cash flow to total debt ratios, andnon-financial considerations include, among other things, the industry to which the borrower’s businesses belong, the borrower’s competitive position in its industry, its operating and funding capabilities, the quality of its management and controlling stockholders (based in part on interviews with its officers and employees), technological capabilities and labor relations.

In addition, in order to enhance the accuracy of its internal credit reviews, Shinhan Bank also considers reports prepared by external credit rating services, such as Nice Information Service and Korea Enterprise Data, and 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 23 grades (from the highest of AAA to the lowest ofD3). Grades AA through B are further broken down into “+,” “0” or��“-.” Grades AAA throughB- are classified as normal, grade CCC precautionary, and grades CC through D3non-performing. The credit risk-rating model is further differentiated by the size of the corporate borrower and the type of credit facilities.

Loan Approval Process

Loans are generally approved after evaluations and approvals by the relationship manager at the branch level as well as the committee of the applicable business unit at Shinhan Bank. The approval limit for retail loans is made based on Shinhan Bank’s automated credit scoring system. In the case of large corporate loans, approval limits are also reviewed and approved by a Credit Officer at the headquarter level. Depending on the size and the importance of the loan, the approval process is further reviewed by the Credit Officer Committee or the Master Credit Officer Committee. If the loan is considered significant or the amount exceeds the discretion limit of the Master Credit Officer Committee, further evaluation is made by the Credit Review 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 as determined by Shinhan Bank’s internal credit rating system. For example, for borrowers with a credit rating ofB-, the Credit Review Committee evaluates and approves unsecured loans in excess ofW10 billion and secured loans in excess ofW15 billion, whereas for borrowers with a credit rating of AAA, the Credit Review Committee evaluates and approves unsecured loans in excess ofW40 billion and secured loans in excess ofW90 billion. The Credit Review Committee holds at least two meetings a week to approve applications forlarge-sized loans whose principal amounts exceed prescribed levels set by it.

The chart below summarizes the credit approval process of our banking operation. The Master Credit Officer and the Head of Business Division do not make individual decisions on loan approval, but are part of the decision-making process at the group level.

 

LOGOLOGO

The reviewer 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 takes into account the total amount of loans extended to the borrower, the credit level of the applicant based on credit review, the existence and value of collateral and the level of credit risk established by the credit rating system. The discretionary loan amount approval limit ranges fromW15 million for unsecured retail loans with a credit rating ofB-,which are subject to approvals by the retail branch manager, toW90 billion for securedloans with a credit rating of AAA, which are subject to approvals by the Master Credit Officer Committee. Any loans exceeding the maximum discretionary loan amount approval limit must be approved by the Credit Review Committee.

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 206 financial andnon-financial factors, and the branch manager and the credit officer must conduct periodic loan review and report to an independent Credit Review Department which analyzes in detail the results and adjusts credit ratings accordingly. Based on these reviews, Shinhan Bank adjusts a borrower’s credit rating, credit limit 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 of the largest Korean commercial conglomerates known as “chaebols”, as identified by the Governor of the Financial Supervisory Service based on their outstanding credit exposures, of which 6360 were identified as such as of December 31, 2017.2018. Shinhan Bank also continually reviews other factors, such as industry-specific conditions for the borrower’s business and its domestic and overseas asset base and operations, in order to ensure that the assigned ratings are appropriate. The Credit Review Department provides credit review reports, independent of underwriting, to the Chief Risk Officer on a monthly basis.

The early warning system performs automatic daily checks for borrowers to whom Shinhan Bank has more thanW1 billion of total exposure (which represents the total outstanding amount due from a borrower, net of collateral for deposit, installment savings, guarantees and import guarantee money) orW500 million of netexception for credit exposure (which represents total exposure net of effective collateral). When the early warning systems detects a warning signal, such signal and other findings from the monitoring are reviewed by the Credit Review Department in the case of a borrower to whom Shinhan Bank has more thanW2 billion of exposure, and by the relationshipbranch manager and the Credit Officer in the case of a borrower to whom Shinhan Bank hasW2 billion or less of exposure. In addition, Shinhan Bank carries out a preemptivetimeless credit review of each borrower in accordance with changes in credit risk factors based on changes in the economic environment. The results of such preemptivecredit review are continually reported to the Chief Risk Officer of Shinhan Bank.

Depending on the nature of the signals detected by the early warning system, a borrower may be classified as “deteriorating“worsening credit” and become subject to evaluation for a possible downgrade in credit rating, or may be initially classified as “showing early warning signs” or become reinstated to the “normal borrower” status. For borrowers classified as “showing early warning signs,” the relevant relationshipbranch manager gathers information and conducts a review of the borrower to determine whether the borrower should be classified as a deterioratingworsening credit or whether to impose management improvement warnings or implement joint creditors’ management. If the borrower becomesnon-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.

Pursuant to the foregoing credit review and monitoring procedures and in order to promptly prevent deterioration of loan qualities, Shinhan Bank classifies potentially problematic borrowers into (i) borrowers that show early warning signals, (ii) borrowers that require precaution, (iii) borrowers that require observation and (iv) normal borrowers, and treats them differentially accordingly.

In order to curtail delinquency among its corporate customers, Shinhan Bank takes primarily the following measures: (i) systematic monitoring of borrowers with sizable outstanding loans, and (ii) heightened monitoring of borrowers with bad credit history and/or belonging to troubled industries.industries and (iii) assignment of industry-specific lending caps, as adjusted for whether specific industries are particularly sensitive to general business cycles and/or are troubled at a given time.

Systematic monitoring of borrowers with sizable outstanding loans. Shinhan Bank currently applies a heightened monitoring system to corporate borrowers with outstanding loans (other than guaranteed loans and loans secured by specified types of collaterals such as deposits with us or letters of credit) in the aggregate amount ofW1 billion or more and borrowers with net outstanding loans (i.e., the outstanding loan amount minus the fair value of collaterals (other than as aforesaid) securing such loans) in the aggregate amount ofW500 million or more. Under this monitoring system, each such borrower is assigned one of the following ratings:

 

“Normal borrower” — a borrower who is determined to have a low probability of insolvency with a credit rating ofabove CCCB-(sub-borrower or above that are deemed to carry a low risk of default;rating applicable);

 

“Borrower that requires observation” — a borrower that carries some risk of potential defaultaffecting the corporate insolvency in the future and therefore requires periodic monitoringis subject to consistent observation to detect any elevationchange of such risk;

 

“Borrower that requires precaution” — a borrower with a possibility of insolvency due to an elevatedincrease in risk of default and therefore requires detailed reassessmentinspection of the credit quality of such borrower and precaution in extending any further loans;

 

“Borrower with early warning signs” — a borrower with a high levelpossibility of default risk;insolvency; and

 

“Problematic or reorganized borrower” — a borrower currently in default and either subject toundergoing rehabilitation procedures, such as management improvement plans, workout or restructuringcorporate recovery or showing no signs of recovery.

Shinhan Bank conducts systematic monitoring of the foregoing borrowers at intervals depending on the borrower’s credit rating (for example, every 12 months for “normal” borrowers with a credit rating of AAA to A, every nine months for “normal” borrowers with a credit rating ofA- to BBB+, every six months for a credit rating of BBB toB- and every three months for borrowers with a credit rating of CCC or below and borrowers not deemed to be “normal”). In addition, the loan reviewer may request more frequent monitoring if the borrower is showing signs of deteriorating credit quality. For borrowers with outstanding loan amounts ofW2 billion or more, Shinhan Bank also monitors the revenues and earnings of such borrower on a quarterly basis within 10 weeks following the end of each quarter.

Heightened monitoring of borrowers with bad credit history and/or belonging to troubled industries. In addition to the systematic monitoring discussed above, Shinhan Bank also carries out additional monitoring for

borrowers that, among others, (i) are rated as “requiring observation,” “requiring precaution” or “with early

warning signs” as noted above, (ii) have prior history of delinquency or restructuring or (iii) have borrowings that are classified as substandard or below. Based on the heightened monitoring of these borrowers, Shinhan Bank adjusts contingency planning as to how the overall asset quality of a specific industry should change for each phase of the business cycle, how Shinhan Bank should limit or reduce its exposure to such borrowers, and how our group-wide delinquency andnon-performing ratio would change, among other things.

Credit Risk Assessment and Control

In order to assess credit risk in a systematic manner, Shinhan Bank has developed and upgraded systems designed to quantify credit risk based on selection and monitoring of various 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: portfolio level and individual loan account level. In order to maintain portfolio-level credit risk at an appropriate level, Shinhan Bank manages its loans usingvalue-at-risk (“VaR”) limits for the entire bank as well as for each of its business units. In order to prevent concentration of risk in a particular borrower or borrower class, Shinhan Bank also manages credit risk by borrower, industry, country and other detailed categories.

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 allocating 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 accordingly. Shinhan Bank makes provisioning at a level which is the higher of the Financial Supervisory Service requirement or Shinhan Bank’s internal calculation. Unexpected loss is predicted based on VaR, which is used to determine compliance with the aggregate credit risk limit for Shinhan Bank as well as the credit risk limit for the relevant department within Shinhan Bank. Shinhan Bank uses the AIRB method as proposed by the Basel Committee to compute VaR at the account-specific level as well as to measure risk adjusted performance.

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 headed by the Chief Risk Officer, and also comprises of the heads of each business unit, supporting unit and relevant department at Shinhan Card. 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 threeNon-Standing Directors. Shinhan Card’s Risk Management Committee convenes at least once every quarter and may also convene on anad hocbasis as needed.

The risk of loss from default by the cardholders or credit card loan borrowers is Shinhan Card’s greatest credit risk. Shinhan Card manages its credit risk based on the following principles:

 

achieve profit at a level corresponding to the level of risks involved;

 

improve asset quality and achieve an optimal mix of asset portfolios; and

 

closely monitor borrower’s ability to repay the debt.

Credit Card Approval Process

Shinhan Card uses an automated credit scoring system to approve credit card applications or credit card authorizations. The credit scoring system is divided into twosub-systems: the behavior scoring system and the

application scoring system. The behavior scoring system is based largely on the credit history of the cardholder or borrower, and the application scoring system is based largely on personal information of the applicant. For credit card applicants with whom we have an existing relationship, Shinhan Card’s credit scoring system considers internally gathered information such as the ability to repay, total assets, the length of the existing relationship and the applicant’s contribution to Shinhan Card’s profitability. The credit scoring system also automatically conducts credit checks on all credit card applicants. Shinhan Card gathers information about the applicant’s 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. and Korea Credit Bureau. These credit checks reveal a list of the delinquent customers of all credit card issuers in Korea.

If a credit score assigned to an applicant is above the minimum threshold, the application is approved unless overridden based on other considerations such as delinquencies with other credit card companies. For a credit card application by a long-standing customer with a good credit history, Shinhan Card may, on a discretionary basis, approve the application notwithstanding the assigned credit score unless overridden by other considerations. All of these factors also serve as the basis for setting a credit limit for approved applications.

The following describes the process of how Shinhan Card sets credit limits for credit cards, cash advances and card loans:

 

 • 

Credit purchase and cash advance limits — These limits are set based on the applicant’s limit request and Shinhan Card’s credit screening criteria. Unless a cardholder requests a reduction in the credit purchase and/or cash advance limit, Shinhan Card is required to provide prior notice to the cardholder for any reduction in such cardholder’s limit. However, if the accountholder defaults or the cardholder’s credit limit is reduced according to the terms of the card agreement, Shinhan Card may lower the credit limit before notifying the accountholder.

 

 • 

Card loan limit — This limit is set monthly by Shinhan Card based on the cardholder’s credit rating and transaction history. The card loan limit can be adjusted monthly based on the cardholder’s credit standing without prior notification.

Monitoring

Shinhan Card continually monitors all cardholders and accounts using a behavior scoring system. The behavior scoring system predicts a cardholder’s 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 cardholder. Shinhan Card also uses the scoring system to monitor its overall risk exposure and to modify its credit risk management strategy.

Loan Application Review andOn-going Credit Review

When reviewing new applications and conducting an ongoing credit review for retail loans, installment purchase loans and personal leases, Shinhan Card uses criteria substantially similar to those used in the credit underwriting system and the credit review system for cardholders. For retail loans, installment purchase loans and personal leases to existing cardholders, Shinhan Card reviews their card usage history in addition to other factors such as their income, occupation and assets.

Fraud Loss Prevention

Shinhan Card seeks to minimize losses from the fraudulent use of credit cards issued by it. Shinhan Card focuses on preventing fraudulent uses and, following the occurrence of a fraudulent use, 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-related losses. Through its fraud loss prevention system, Shinhan 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 endorse the card, or whether the relevant merchant was 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 (i) when, as a result of ongoing monitoring, fraudulent use or loss of the card is suspected based on the accountholder’s credit score, or (ii) at the request of the accountholder.

Approximately 94%of Shinhan Card’s cardholders consent to Shinhan Card’s 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 afee-based texting 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 notification 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, acquisition financings 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 Group Corporate Credit Rating System. 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 probability of default and also conducts more advanced stress tests from time to time, the results of which are then reported to its management as well as the Group Chief Risk Officer to support group-wide credit risk management.

Credit Risk Management of Shinhan Life Insurance

Shinhan Life Insurance also assesses credit risks for all of its credit-related transactions, including provision of loans and acquisitions of financial instruments. Shinhan Life Insurance conducts additional risk reviews for new types of investments and financial instruments, such as those denominated in currencies it previously did not deal with. In assessing the credit risk of corporate customers, Shinhan Life Insurance considers such corporation’s credit rating obtained from Shinhan Group Corporate Credit Rating System. Through its risk management system Shinhan Life Insurance conducts credit risk monitoring based on the credit history of debtors. Furthermore, in the retail business, Shinhan Life Insurance operates its own credit-scoring system to assess credit risk and update customers’ behavior scores.

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, foreign exchange and equity price risk. These risks stem from our trading andnon-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 fromnon-trading activities.

Our market risks arise primarily from Shinhan Bank, and to a lesser extent, Shinhan Investment, our securities trading and brokerage subsidiary, which faces market risk relating to its trading activities.

Shinhan Bank’s Risk Management Committee establishes overall market risk management principles for both the trading andnon-trading activities of Shinhan Bank. Based on these principles, the Risk Policy Committee acts as the executive decision-making body in relation to Shinhan Bank’s market risks in terms of setting its risk management policies and risk limits in relation to market risks and assets and controlling market risks arising from trading andnon-trading activities of Shinhan Bank. The Risk Policy Committee consists of deputy presidents in charge of Shinhan Bank’s seven business groups and Shinhan Bank’s Chief Risk Officer and the Chief Financial Officer. At least on a monthly basis, the Risk Policy Committee reviews and approves reports relating to, among others, the position and 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

non-trading activities. In addition, Shinhan Bank’s Risk Engineering Department comprehensively manages market risks on an independent basis from Shinhan Bank’s operating departments, and functions as the middle office of Shinhan Bank. Shinhan Bank measures market risk with respect to all assets and liabilities in bank accounts and trust accounts in accordance with the regulations promulgated by the Financial Services Commission.

Shinhan Investment 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 Risk Management Working Committee. Shinhan Investment’s Risk Management Working Committee is the executive decision-making body for managing market risks related to Shinhan Investment, and determines, among other things, Shinhan Investment’s overall market risk management policies and strategies, and assesses and approves trading activities and limits. In addition, Shinhan Investment’s Risk Management Department manages various market risk limits and monitors operating conditions on an independent basis from Shinhan Investment’s operating departments. Shinhan Investment 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 Service as well as an internally developed 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 trading activities and foreign exchange positions. Shinhan Life Insurance assesses the market risk amount and theten-day VaR, a procedure based on the delta-normal method, and manages market risk by setting aten-day VaR limit. Shinhan Life Insurance assessed the adequacy of these limits at least annually and implements back tests on market risk determinations by comparing daily profit and loss againstone-day VaR in 2017.

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.

We use financial information prepared on a separate basis according to IFRS for the market risk management of our subsidiaries and, unless otherwise specified herein, financial information in this annual report presented for quantitative market risk disclosure relating to our subsidiaries have been prepared in accordance with IFRS on a separate basis.basis.

Market Risk Exposure from Trading Activities

Shinhan Bank’s trading activities principally consist of:

 

trading activities to realize short-term profits from trading in the equity and debt securities markets and the foreign currency 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 trust accounts of Shinhan Bank’s customers; and

trading activities primarily to realize profits from arbitrage transactions involving derivatives such as swaps, forwards, futures and options, and, to a lesser extent, to sell derivative products to Shinhan Bank’s customers and to cover market risk associated with 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 stock prices, stock indexes, interest rates, foreign currency exchange rates and commodity prices.

As a result of these trading activities, Shinhan Bank is exposed principally to interest rate risk, foreign currency exchange rate 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 fromWon-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 Currency Exchange Rate Risk

Shinhan Bank’s exposure to foreign currency exchange rate risk mainly relates to its assets and liabilities, including derivatives such as foreign currency forwards and futures and currency swaps, which are denominated in currencies other than the Won. Shinhan Bank manages foreign currency exchange rate risk, including the corresponding risks faced by its overseas branches, on a consolidated basis by covering all of its foreign exchange spot and forward positions in both trading andnon-trading accounts.

Shinhan Bank’s net foreign currency open position represents the difference between its foreign currency assets and liabilities as offset against forward foreign currency positions, and is Shinhan Bank’s principal exposure to foreign currency exchange rate risk. The Risk Policy Committee oversees Shinhan Bank’s foreign currency exposure for both trading andnon-trading activities by establishing limits for the net foreign currency open position, loss limits and VaR limits. Shinhan Bank centrally monitors and manages its foreign exchange positions through its Financial Engineering Center. Dealers in the Financial Engineering Center manage Shinhan Bank’s consolidated position within preset limits through spot trading, forward contracts, currency options, futures and swaps and foreign currency swaps. Shinhan Bank sets a limit for net open positions by currency. The limits for currencies other than the U.S. Dollar, Japanese Yen, Euro and Chinese Yuan are set in a conservative manner in order to minimize trading in such currencies.

Shinhan Investment faces foreign currency exchange rate risk in relation to the following product offerings: currency forwards, currency swaps and currency futures. Shinhan Investment centrally monitors and manages transactions involving such products through its Fixed Income, Currency & Commodities Departments. Shinhan Investment’s Risk Management Working Committee, which is delegated with the authority to approve foreign currency-related transactions and limits on the related open positions, manages the related foreign exchange risk

by setting nominal limits on the amounts of foreign exchange-related products and monitoring compliance with such limits on a daily basis. As of December 31, 2017,2018, Shinhan Investment’s net open position related to foreign currency-related products was US$759.6845.4 million, and its open positions related to the sale ofWon-U.S. Dollar forwards andWon-U.S. Dollar futures were US$(1,509.6)331.2 million and US$1,096.652 million, respectively.

Shinhan Capital faces considerablemanages its foreign exchange risk resulting from the difference in its foreign currency exchange rate exposure in respect of its leasing business, butassets and liabilities through derivative transactions such as forwards or swaps and maintains its net exposure belowat US$24.5 million by hedging its foreign exchange positions using forwards and currency swaps.11.3 million.

The net open foreign currency positions held by our other subsidiaries are insignificant.

The following table shows Shinhan Bank’s net foreign currency open positions as of December 31, 2015, 2016, 2017 and 2017.2018. Positive amounts represent long exposures and negative amounts represent short exposures.

 

  As of December 31,   As of December 31, 

Currency

  2015   2016   2017   2016   2017   2018 
  (In millions of US$)   (In millions of US$) 

U.S. Dollars

  $(24.2)   $(125.0)   $47.3   $(125.0)   $47.3   $38.9 

Japanese Yen

   9.6    (9.2)    (3.9)    (9.2)    (3.9)    (9.6) 

Euro

   (1.2)    (4.6)    3.4    (4.6)    3.4    0.9 

Others

   784.2    886.4    1,113.9    886.4    1,113.9    1,104.1 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $768.5   $747.6   $1,160.8   $747.6   $1,160.8   $1,134.3 
  

 

   

 

   

 

   

 

   

 

   

 

 

Equity Risk

Shinhan Bank’s equity risk related to trading activities mainly involves trading equity portfolios of Korean companies and Korea Stock Price Index futures and options. The trading equity portfolio consists of stocks listed on the KRX 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. Shinhan Bank maintains strict scrutiny of these activities in light of the volatility in the Korean stock market and closely monitors the loss limits and the observance thereof. 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, 2015, 2016, 2017 and 2017,2018, Shinhan Bank heldW76.8192.9 billion,W192.9219.0 billion andW219.0184.2 billion respectively, of equity securities in its trading accounts (including the trust accounts).

Shinhan Investment’s equity risk related to trading activities also mainly involves the trading of equity portfolio of Korean companies and Korea Stock Price Index futures and options. As of December 31, 2015, 2016, 2017 and 2017,2018, the total amount of equity securities at risk held by Shinhan Investment wasW30.136.7 billion,W36.722.8 billion andW22.831.3 billion, respectively.

Equity positions held by our other subsidiaries are insignificant.

Management of Market Risk from Trading Activities

The following table presents an overview of market risk, measured by VaR, from trading activities of Shinhan Bank and Shinhan Investment, respectively, as of and for the year ended December 31, 2017.2018. For market risk management purposes, Shinhan Bank includes in the computation of total VaR its trading portfolio in bank accounts and assets in trust accounts, in each case, for which it guarantees principal or fixed return in accordance with the Financial Services Commission regulations.

 

   Trading Portfolio VaR for the Year 2017 
   Average   Minimum   Maximum   As of
December 31, 2017		 
   (In billions of Won) 

Shinhan Bank:(1)

        

Interest rate

  W 38.4   W 22.2   W 50.2   W 25.1 

Foreign exchange(2)

   43.8    41.6    46.2    41.9 

Equities

   4.1    3.0    5.6    4.7 

Option volatility(3)

   0.1    0.0    0.1    0.1 

Commodity

   0.0    0.0    0.0    0.0 

Less: portfolio diversification(4)

   (36.5)    (24.8)    (46.0)    (26.4) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total VaR(5)

  W 49.9   W 42.0   W 56.1   W 45.4 
  

 

 

   

 

 

   

 

 

   

 

 

 

  Trading Portfolio VaR for the Year 2017   Trading Portfolio VaR for the Year 2018 
  Average   Minimum   Maximum   As of
December 31, 2017		   Average   Minimum   Maximum   As of
December 31, 2018		 
  (In billions of Won) 

Shinhan Bank:(1)

        

Interest rate

  W22.6   W16.2   W29.8   W18.8 

Foreign exchange(2)

   39.3    34.1    45.7    34.3 

Equities

   12.1    2.0    25.7    22.2 

Option volatility(3)

   0.1    0.03    0.6    0.3 

Commodity

   0.0    0.0    0.0    0.0 

Less: portfolio diversification(4)

   (30.1)    (14.3)    (44.3)    (21.3) 
  

 

   

 

   

 

   

 

 

Total VaR(5)

  W44.0   W38.0   W57.5   W54.3 
  (In billions of Won)   

 

   

 

   

 

   

 

 

Shinhan Investment:(1)

                

Interest rate

  W9.9   W7.3   W18.1   W11.2   W7.6   W3.7   W14.3   W7.3 

Equities

   12.0    7.0    22.5    10.8    64.1    6.2    103.9    43.8 

Foreign exchange

   7.1    2.8    12.6    5.5    6.0    0.2    13.8    0.2 

Option volatility(3)

   3.4    2.7    4.5    3.2    9.2    2.2    31.8    31.8 

Less: portfolio diversification(4)

   (10.3)    (6.9)    (23.2)    (9.6)    (12.0)    (1.0)    (35.5)    (1.4) 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total VaR

  W22.1   W12.9   W34.5   W21.1   W74.8   W11.2   W128.3   W81.7 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

Notes:

 

(1)

Shinhan Bank and Shinhan Investment’sten-day VaR is based on a 99.9% confidence level.

(2)

Includes both trading andnon-trading accounts as Shinhan Bank and Shinhan Investment manage foreign exchange risk on a total position basis.

(3)

Volatility implied from the option price using the Black-Scholes or a similar model.

(4)

Calculation of portfolio diversification effects is conducted on different days’ scenarios for different risk components. Total VaRs are less than the simple sum of the risk component VaRs due to offsets resulting from portfolio diversification.

(5)

Includes trading portfolios in Shinhan Bank’s bank accounts and assets in trust accounts, in each case, for which it guarantees principal or fixed return.

Shinhan Bank generally manages its market risk from the trading activities of its portfolios on an aggregated basis. To control its trading portfolio market risk, Shinhan Bank uses position limits, VaR limits, stop loss limits, Greek limits and stressed loss limits. In addition, it establishes separate limits for investment securities. Shinhan Bank maintains risk control and management guidelines for derivative trading based on the regulations and guidelines promulgated by the Financial Services Commission, and measures market risk from trading activities to monitor and control the risk of its operating divisions and teams that perform trading activities. Shinhan Bank manages VaR measurements and limits on a daily basis based on automatic interfacing of its trading positions into its market risk measurement system. In addition, Shinhan Bank presets limits on loss, sensitivity, investment and stress for its trading departments and desks and monitors such limits and observance thereof on a daily basis.

Value-at-risk analysis. Shinhan Bank usesten-day andone-day VaRs to measure its market risk. Shinhan Bank calculates(i) ten-day VaRs on a daily basis based on data for the previous 12 months for the holding

periods of ten days and(ii) one-day VaRs on a daily basis based on data for the previous 12 months for the holding periods of one day. Aten-day VaR andone-day VaR are statistically estimated maximum amounts of loss that can occur for ten days and one day, respectively, under normal market conditions. If a VaR is measured using a 99% confidence level, the actual amount of loss may exceed the expected VaR, on average, once out of every 100 business days, while if a VaR is measured using a 99.9% confidence level, the actual amount of loss may exceed the expected VaR, on average, once out of 1,000 business days.

Shinhan Bank currently uses theten-day 99% confidence level-based VaR and stressed VaR for purposes of calculating the regulatory capital used in reporting to the Financial Supervisory Service. Stressed VaR reflects the potential significant loss in the current trading portfolio based on scenarios derived from a crisis simulation during the preceding 12 months. Shinhan Bank also uses the more conservativeten-day 99.9% confidence level-based VaR for purposes of calculating its “economic” capital used for internal management purposes, which is a concept used in determining the amount of Shinhan Bank’s requisite capital in light of the market risk. In addition, Shinhan Bank uses theone-day 99% confidence level-based VaR on a supplemental basis for purposes of setting and managing risk limits specific to each desk or team in its operating units as well as for back-testing purposes. For Shinhan Bank, the amount of losses (either actual or virtual) exceeded theone-day 99% confidence

level-based VaR amount four times in 2015, once in 2016 and three times in 2017. The most recent2017, and there were no such instances in 2018. Most recently, losses exceeded theone-day 99% confidence level-based VaR amount by 6.2% on October 10, 2017. The VaR exceptions referred to above were all due to the amount of virtual losses exceeding the VaR amount. Virtual losses represent the potential changes in the value of a portfolio when simulating the same portfolio with market variables of the next trading day.

Shinhan Investment currently uses the sameten-day 99.9% confidence level-based historical VaR for purposes of calculating its “economic” capital used for internal management purposes, although such model is not subject to regulatory review or reporting requirements. In addition, Shinhan Investment applies this VaR as a risk limit for the entire company as well as individual departments and products, and the adequacy of such VaR is reviewed by way of daily back-testing. When computing VaR,Shinhan Investment does not assume any particular probability distribution and calculates it through a simulation of the “full valuation” methodbased on changes of market variables such as stock prices, interest rates and foreign exchange rates in the past one year. For Shinhan Investment, the amount of losses (either actual or virtual) exceeded theone-day 99% confidence level-based VaR amount six times in 2015, once in 2016 and two times in 2017. The increased frequency of2017, and there were no such instances in which the amount of losses exceeded the VaR amount in 2015 was primarily because the stock market experienced unusually high volatility when such instances occurred.2018. The VaR exceptions referred to above were all due to the amount of virtual losses exceeding the VaR amount. Most recently, losses exceeded theone-day 99% confidence level-based VaR amount by 175% on May 19, 2017.

Value-at-risk is a commonly used market risk management technique. However, VaR models have the following shortcomings:

 

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 reliable indicator of future events, particularly those that are extreme in nature;

 

VaR may underestimate the probability of extreme market movements;

 

Shinhan Bank’s VaR models assume that a holding period of generally one to ten days is sufficient prior to liquidating the underlying positions, but such assumption regarding the length of the holding period may actually prove to be inadequate;

 

The 99.9% confidence level does not take into account or provide indication of any losses that might occur beyond this confidence level; and

 

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 Shinhan Investment 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’sWon-denominated and foreign-denominated accounts. This system uses historical simulation to measure both linear risks arising from products such 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 information and to perform sensitivity analysis and back testing in order to check the validity of the models on a daily basis. Shinhan Life Insurance also measures market risks based on a VaR analysis.

Stress test. In addition to VaR, Shinhan Bank performs stress tests to measure market risk. As VaR assumes normal market situations, Shinhan Bank assesses its market risk exposure to unlikely abnormal market fluctuations through the stress test. Stress test is a valuable supplement to 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 seven relatively simple but fundamental scenarios for stress test by taking into account four market risk components: foreign currency exchange rates, stock prices, andWon-denominated interest rates and foreign currency-denominated interest rates. For the worst case scenario, Shinhan Bank assumes instantaneous and simultaneous movements in four market risk components: appreciation of Won by 20%, a decrease in Korea Exchange Composite Index by 30% and increases inWon-denominated and U.S. Dollar-denominated interest rates by 200 basis points each, respectively. Under this worst-case scenario, the market value of Shinhan Bank’s trading portfolio would have declined byW346337 billion as of December 31, 2017.2018. Shinhan Bank performs stress test on a daily basis and reports the results to its Risk Policy Committee on a monthly basis and its Risk Management Committee on a quarterly basis.

Shinhan Investment uses nine scenarios for stress tests by taking into account four market risk components: stock prices (both in terms of stock market indices and ß-based individual stock prices), interest rates forWon-denominated loans, foreign currency exchange rates and historical volatility. As of December 31, 2017,2018, under the worst case scenario assuming a 1% point increase in the three-year government bond yield, the market value of Shinhan Investment’s trading portfolio would have fluctuated byW32.532.1 billion for one day.

Shinhan Bank sets limits on stress testing for its overall operations. Shinhan Investment sets limits on stress testing for its overall operations as well as at its department level. Although Shinhan Life Insurance does not set any limits on stress testing, it monitors the impact of market turmoil or other abnormalities. In the case of Shinhan Bank, Shinhan Investment and Shinhan Life Insurance, if the potential impact is large, their respective head of Risk Management will notify such impact and may request a portfolio restructuring or other proper action.

Hedging and Derivative Market Risk

The principal objective of our group-wide hedging strategy is to manage market risk within established limits. We use derivative instruments to hedge our market risk as well as to make profits by trading derivative products within preset 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 by nature involve market risk since we take trading positions for the purpose of making profits. These activities consist primarily of the following:

 

arbitrage transactions to make profits from short-term discrepancies between the spot and derivative markets or within the derivative markets;

 

sales of tailor-made derivative products that meet various needs of our corporate customers, principally of Shinhan Bank and Shinhan Investment, and related transactions to reduce their exposure resulting from those sales;

taking positions in limited cases when we expect short-swing profits based on our market forecasts; and

 

trading to hedge our interest rate and foreign currency risk exposure as described above.

In relation to our adoption ofaccordance with accounting requirements under IFRS 9, “Financial instruments”, which has replaced IAS 39, “Financial Instruments: Recognition and Measurement,” since January 1, 2018, 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:

 

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);

computation of the market value as obtained from an outside credit evaluation company; and

 

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 consensus.

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 Note 3of the notes to our consolidated financial statements included in this annual report.

Market risk from derivatives is not significant since derivative trading activities of Shinhan Bank and Shinhan Investment are primarily driven by arbitrage and customer deals with highly 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 preset 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 forNon-trading Activities

Interest Rate Risk

Interest rate risk represents Shinhan Bank’s principal market risk fromnon-trading activities. 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 primarily relates to the differences between the timing of rate changes for interest-earning assets and that for interest-bearing liabilities.

Interest rate risk affects Shinhan Bank’s earnings and the economic value of Shinhan Bank’s net assets as follows:

 

 • 

Earnings: interest rate fluctuations have an effect on Shinhan Bank’s net interest income by affecting its interest-sensitive operating income and expenses.

 

 • 

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 fornon-trading activities by taking into account the effects of interest rate changes on both its income and net asset value. Shinhan Bank measures and manages interest rate risk on a daily and 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 principally interest rate swaps entered into for the purpose of hedging) and in trust accounts, except that Shinhan Bank 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. Through its asset and liability management system, Shinhan Bank monitors and manages its interest rate risk based on various analytical measures such as interest rate gap, duration gap and net present value and net interest income simulations, and monitors on a monthly basis its interest rate VaR limits, interest rate earnings at risk (“EaR”) limits and interest rate gap ratio limits. Shinhan Bank measures its interest rate VaR and interest rate EaR based on simulated estimation of the maximum decrease in net asset value and net interest income in aone-year period based on various scenario analyses of historical interest rates. The Risk Policy Committee sets the interest rate risk limits for Shinhan Bank’sWon-denominated and foreign currency-denominatednon-trading accounts and trust accounts, and the Risk Management Committee sets Shinhan Bank’s overall interest rate risk limit, in both cases, at least annually. The Risk Management Department monitors Shinhan Bank’s compliance with these limits and reports the monitoring results to the Risk Policy Committee on a monthly basis and the Risk Management Committee on a quarterly basis. Shinhan Bank uses interest rate swaps to control its interest rate exposure limits.

Interest rate VaR represents the maximum anticipated loss in a net present value calculation (computed as the present value of interest-earning assets minus the present value of interest-bearing liabilities), whereas interest rate EaR represents the maximum anticipated loss in a net earnings calculation (computed as interest income minus interest expenses) for the immediately followingone-year period, in each case, as a result of negative movements in interest rates. Therefore, interest rate VaR is a more expansive concept than interest rate EaR in that the former covers all interest-earning assets and all interest-bearing liabilities, whereas the latter covers only those interest-earning assets and interest-bearing liabilities that are exposed to interest rate volatility for aone-year period.

Hence, for interest rate VaRs, the duration gap (namely, the weighted average duration of all interest-earning assets minus the weighted average duration of all interest-bearing liabilities) can be a more critical factor than the relative sizes of the relevant assets and liabilities in influencing interest rate VaRs. In comparison, for interest rate EaRs, the relative sizes of the relevant assets and liabilities in the form of the “one year or less interest rate” gap (namely, the volume of interest-earning assets with maturities of less than one year minus the volume of interest-bearing liabilities with maturities of less than one year) is the most critical factor in influencing the interest rate EaRs.

The interest rate VaR limits are set as the sum ofdifference between (i) the average of the monthlynon-trading interest rate VaRs asanticipated loss in a percentagenet present value calculation (computed based on the average of interest-bearing assets over a period of one year2,000 scenarios) and (ii) the standard deviation at the 99%99.9% confidence level (namely, 2.33 times the standard deviation of the monthlynon-trading interest rate VaRs as a percentage of interest-bearing assets).level.

The interest rate EaR limits are set at the maximum decrease in net interest income by (i) assuming that the estimated interest rate gap will expand to the maximum level of manageable (tolerable) situations and (ii) applying the interest rate shock scenario to the annual volatility of interest rates using past10-year market interest rates.

On a monthly basis, we monitor whether thenon-trading positions for interest rate VaR and EaR exceed their respective limits as described above.

Interest rate VaR cannot be meaningfully compared to theten-day 99% confidence level based VaR (“market risk VaR”) for managing trading risk principally because (i) the underlying assets are different (namely,non-trading interest-bearing assets as well as liabilities in the case of the interest rate VaR, compared to trading assets only in the case of the market risk VaR), and (ii) interest rate VaR is sensitive to interest rate movements only while the market risk VaR is sensitive to interest rate movements as well as other factors such as foreign currency exchange rates, stock market prices and option volatility.

Even if comparison were to be made between the interest rate VaR and the interest rate portion only of the market risk VaR, we do not believe such comparison would be meaningful since the interest rate VaR examines the impact of interest rate movements on both assets and liabilities (which will likely have offsetting effects), whereas the interest rate portion of the market VaR examines the impact of interest rate movements on assets only.

Shinhan Bank uses various analytical methodologies to measure and manage its interest rate risk fornon-trading activities on a daily and monthly basis, including the following analyses:

 

Interest rate gap analysis;

 

Duration gap analysis;

 

Market value analysis; and

 

Net interest income simulation analysis.

Interest Rate Gap Analysis

Shinhan Bank performs an interest gap analysis to measure the difference between the amount of interest-earning assets and that of interest-bearing liabilities at each maturity andre-pricing date for specific time intervals by preparing interest rate gap tables in which Shinhan Bank’s interest-earning assets and interest-bearing liabilities are allocated to the applicable time intervals based on the expected cash flows andre-pricing dates.

On a daily basis, Shinhan Bank performs interest rate gap analysis forWon- and foreign currency-denominated assets and liabilities in its bank and trust accounts. Shinhan Bank’s gap analysis includesWon-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), which are managed centrally at the Financial Engineering Center. 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, Shinhan Bank assumes and uses the following maturities for different types of assets and liabilities:

 

With respect to the maturities andre-pricing dates of Shinhan Bank’s assets, Shinhan Bank assumes that the maturity of Shinhan Bank’s prime rate-linked loans is the same as that of its fixed-rate loans. Shinhan Bank excludes equity securities from interest-earning assets.

 

With respect to the maturities andre-pricing of Shinhan Bank’s liabilities, Shinhan 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 bothWon-denominated accounts and foreign currency-denominated accounts.

Commission guidelines have a maturity of one month or less for bothWon-denominated accounts and foreign currency-denominated accounts.

 

With respect to “core” demand deposits under the Financial Services Commission guidelines, Shinhan 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, 20172018 for(i) Won-denominatednon-trading bank accounts, including derivatives entered into for the purpose of hedging and (ii) foreign currency-denominatednon-trading bank accounts, including derivatives entered into for the purpose of hedging.

Won-denominatednon-trading bank accounts(1)

 

  As of December 31, 2017   As of December 31, 2018 
  0-3
Months		 3-6
Months		 6-12
Months		 1-2
Years		 2-3
Years		 Over 3
Years		 Total   0-3
Months		 3-6
Months		 6-12
Months		 1-2
Years		 2-3
Years		 Over 3
Years		 Total 
  (In billions of Won, except percentages)   (In billions of Won, except percentages) 

Interest-earning assets

  W101,556  W56,277  W25,850  W20,753  W19,813  W22,436  W246,686   W121,433  W57,702  W28,158  W23,618  W16,779  W19,477  W267,167 

Fixed rates

   27,249  13,236  16,667  15,992  10,878  10,679  94,701    18,277  12,900  17,804  15,869  10,519  10,966  86,334 

Floating rates

   73,228  42,111  7,153  4,501  8,935  11,717  147,645    101,816  43,723  8,264  7,749  6,229  8,502  176,283 

Interest rate swaps

   1,080  930  2,030  260  0  40  4,340    1,340  1,080  2,090  0  30  10  4,550 

Interest-bearing liabilities

  W94,748  W39,519  W58,987  W18,105  W13,853  W23,229  W248,441   W103,635  W43,398  W65,910  W20,402  W13,141  W24,386  W270,873 

Fixed liabilities

   60,562  39,158  58,871  18,089  13,839  22,533  213,052    44,625  32,092  54,261  10,205  2,844  3,298  147,326 

Floating liabilities

   29,846  361  116  16  14  696  31,049    54,460  11,306  11,649  10,197  10,297  21,088  118,997 

Interest rate swaps

   4,340  0  0  0  0  0  4,340    4,550  0  0  0  0  0  4,550 

Sensitivity gap

   6,809  16,758  (33,137)  2,648  5,961  (793)  (1,755)    17,798  14,304  (37,752)  3,215  3,638  (4,909)  (3,706) 

Cumulative gap

   6,809  23,567  (9,570)  (6,922)  (962)  (1,755)  (1,755)    17,798  32,102  (5,650)  (2,435)  1,203  (3,706)  (3,706) 

% of total assets

   2.76%  9.55%  (3.88)%  (2.81)%  (0.39)%  (0.71)%  (0.71)%    6.66%  12.02%  (2.11)%  (0.91)%  0.45%  (1.39)%  (1.39)% 

Foreign currency-denominatednon-trading bank accounts(1)

 

  As of December 31, 2017   As of December 31, 2018 
  0-3
Months		 3-6
Months		 6-12
Months		 1-3
Years		 Over 3
Years		 Total   0-3
Months		 3-6
Months		 6-12
Months		 1-3
Years		 Over 3
Years		 Total 
  (In millions of US$, except percentages)   (In millions of US$, except percentages) 

Interest-earning assets

  $22,046  $7,066  $3,009  $3,496  $2,954  $38,571   $23,491  $7,333  $2,677  $3,669  $4,676  $41,847 

Interest-bearing liabilities

   21,670  3,683  4,536  6,222  4,154  40,265    21,750  4,312  4,869  6,554  5,715  43,200 

Sensitivity gap

   376  3,383  (1,527)  (2,726)  (1,200)  (1,694)    1,741  3,021  (2,191)  (2,886)  (1,038)  (1,354) 

Cumulative gap

   376  3,759  2,232  (494)  (1,694)  (1,694)    1,741  4,762  2,570  (315)  (1,354)  (1,354) 

% of total assets

   0.97%  9.75%  5.79%  (1.28)%  (4.39)%  (4.39)%    4.16%  11.38%  6.14%  (0.75)%  (3.23)%  (3.23)% 

 

Note:

 

(1)

Includes merchant banking accounts.

Duration Gap Analysis

Shinhan Bank performs a duration gap analysis to measure the differential effects of interest rate risk on the market value of its assets and liabilities by examining the difference between the durations of Shinhan Bank’s interest-earning assets and those of its interest-bearing liabilities, which durations represent their respective weighted average maturities calculated based on their respective discounted cash flows using applicable yield curves. These measurements are done on a daily basis and for each operating department, account, product and currency, the respective durations of interest-earning assets and interest-bearing liabilities.

The following tables show duration gaps and market values of Shinhan Bank’sWon-denominated interest-earning assets and interest-bearing liabilities in itsnon-trading accounts as of December 31, 20172018 and changes in these market values when interest rate increases by one percentage point.

Duration as of December 31, 20172018 (fornon-tradingWon-denominated bank accounts(1))

 

   Duration as of
December 31, 2017
2018		 
   (In months) 

Interest-earning assets

   10.8010.29 

Interest-bearing liabilities

   10.7610.83 

Gap

   0.22(0.54) 

 

Note:

 

(1)

Includes merchant banking accounts and derivatives for the purpose of hedging.

Market Value Analysis

Shinhan Bank performs a market value analysis to measure changes in the market value of Shinhan Bank’s interest-earning assets compared to that of its interest-bearing liabilities based on the assumption of parallel shifts in interest rates. These measurements are done on a dailymonthly basis.

Market Value as of December 31, 20172018 (fornon-tradingWon-denominated bank accounts(1))

 

  Market Value as of December 31, 2017   Market Value as of December 31, 2018 
  Actual   1% Point
Increase		   Changes   Actual   1% Point
Increase		   Changes 
  (In billions of Won)   (In billions of Won) 

Interest-earning assets

  W250,424   W248,248   W(2,176)   W282,971   W280,706   W(2,265) 

Interest-bearing liabilities

   248,298    246,337    (1,962)    275,808    273,468    (2,340) 

Gap

   2,126    1,911    (214)    7,163    7,238    75 

 

Note:

 

(1)

Includes merchant 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 uses the deterministic analysis methodology to measure 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 (assuming parallel shifts) and funding requirements. For simulations involving interest rate changes, based on the assumption that there is no change in funding requirements, 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.

The following table illustrates by way of an example the simulated changes in Shinhan Bank’s annual net interest income for 20172018 with respect toWon-denominated interest-earning assets and interest-bearing liabilities, using Shinhan Bank’s net interest income simulation model, assuming (a) the maturity structure and funding requirement of Shinhan Bank as of December 31, 20172018 and (b) the same interest rates as of December 31, 20172018 and a 1% point increase or decrease in the interest rates.

 

  Simulated Net Interest Income for 2018 
  Simulated Net Interest Income for 2017
(ForNon-TradingWon-Denominated Bank Accounts(1))		   (ForNon-TradingWon-Denominated Bank Accounts(1)) 
  Assumed Interest Rates   Change in Net Interest
Income		 Change in Net Interest
Income		   Assumed Interest Rates   Change in Net
Interest Income		 Change in Net
Interest Income		 
  No
Change		   1% Point
Increase		   1% Point
Decrease		   Amount
(1% Point
Increase)		   % Change
(1% Point
Increase)		 Amount
(1% Point
Decrease)		 % Change
(1% Point
Decrease)		   No
Change		   1% Point
Increase		   1% Point
Decrease		   Amount
(1%
Point
Increase)		   %
Change
(1%
Point
Increase)		 Amount
(1%
Point
Decrease)		 %
Change
(1%
Point
Decrease)		 
  (In billions of Won, except percentages)   (In billions of Won, except percentages) 

Simulated interest income

  W7,887   W9,234   W6,540   W1,347    17.08%  W(1347)  (17.08)%   W9,044   W10,615   W7,473   W1,571    17.37%  W(1571)  (17.37)% 

Simulated interest expense

   3,557    4,564    2,551    1,006    28.29%  (1006)  (28.29)%    3,949    4,957    2,941    1,008    25.53%  (1008)  (25.53)% 

Net interest income

   4,330    4,670    3,989    341    7.87%  (341)  (7.87)%    5,095    5,658    4,532    563    11.05%  (563)  (11.05)% 

 

Note:

 

(1)

Includes merchant banking accounts and derivatives entered into for the purpose of hedging.

Shinhan Bank’sWon-denominated interest-earning assets and interest-bearing liabilities innon-trading accounts have a maturity structure that benefits from an increase in interest rates, because there-pricing periods for interest-earning assets in Shinhan Bank’snon-trading accounts are, on average, shorter than those of the interest-bearing liabilities in these accounts. This is primarily due to a sustained low interest rate environment in the recent years in Korea, which resulted in a significant increase in demand for floating rate loans (which tend to have shorter maturities orre-pricing periods than fixed rate loans) as a portion of Shinhan Bank’s overall loans, which in turn led to the shortening, on average, of the maturities orre-pricing periods of Shinhan Bank’s loans on an aggregate basis. As a result, Shinhan Bank’s net interest income tends to decrease during times of a decrease in the market interest rates while the opposite is generally true during times of an increase in the market interest rates.

Interest Rate VaRs forNon-trading Assets and Liabilities

Shinhan Bank measures VaRs for interest rate risk fromnon-trading activities on a monthly basis. The following table shows, as of and for the year ended December 31, 2017,2018, the VaRs of interest rate mismatch risk for other assets and liabilities, which arises from mismatches between there-pricing dates for Shinhan Bank’snon-trading interest-earning assets (includingavailable-for-sale investment securities) and those for its interest-bearing liabilities. Under the regulations of the Financial Services Commission, 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 20172018(1) 
   Average   Minimum   Maximum   As of
December 31		 
   (In billions of Won) 

Interest rate mismatch —non-trading assets and liabilities

  W248203   W157164   W387278   W293164 

 

Note:

 

(1)

One-year VaR results with a 99.9% confidence level. Computed based on Shinhan Bank’s internal model. Under the internal model,non-trading assets and liabilities VaR is computed based on historical simulation

at the 99.9% confidence level, namely by computing the average net present value based on the net present value distribution under historical interest rate scenarios and subtracting from such average net present value the net present value at the 0.1% percentile.

Interest Rate Risk for Other Subsidiaries

Shinhan Card monitors and manages its interest rate risk for all its interest-bearing assets and liabilities (includingoff-balance sheet items) in terms of the impact on its earnings and net asset value from changes in interest rates. Shinhan Card primarily uses interest rate VaR and EaR analyses to measure its interest rate risk.

The interest rate VaR analysis used by Shinhan Card principally focuses on the maximum impact on its net asset value from adverse movements in interest rates and consists of (i) historical interest rate VaR analysis and (ii) interest rate gap analysis. The historical interest rate VaR analysis is made through simulation of net asset value based on the interest rate volatility over a fixed past period to produce expected future interest rate scenarios and computes the maximum value at risk at a 99.9% confidence level by analyzing the net present value distribution under each such scenario. As for interest rate gap analysis, Shinhan Card computes the value at risk based on the duration proxies and interest rate shocks for each time interval as recommended under the Basel Accord.

The interest rate EaR analysis used by Shinhan Card computes the maximum loss in net interest income for aone-year period following adverse movements in interest rates, based on an interest rate gap analysis using the time intervals and the “middle of time band” as recommended under the Basel Accord.

Shinhan Investment uses historical interest rate VaR analysis based on its internal model to monitor and manage its interest rate risk. The historical interest rate VaR analysis is made through simulation of net asset value based on the interest rate volatility over the past three years to compute the maximum value at risk at a 99.9% confidence level.

Shinhan Life Insurance monitors and manages its interest rate risk for its investment assets and liabilities based on simulations of its asset-liability management system. These simulations typically involve subjecting Shinhan Life Insurance’s current and future assets and liabilities to more than 2,000 market scenarios based on varying assumptions, such as new debt purchases and current investment portfolios, so as to derive its net asset value forecast for the next one year at a 99.9% confidence level.

Interest rate risk for our other subsidiaries is insignificant.

Equity Risk

Substantially all of Shinhan Bank’s equity risk relates to its portfolio of common stock in Korean companies. As of December 31, 2017,2018, Shinhan Bank held an aggregate amount ofW186153.7 billion of equity interest in unlisted foreign companies (includingW651.2 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 KRX KOSPI Market or the KRX KOSDAQ Market of the Korea Exchange and certainnon-listed stocks. Shinhan Bank sets exposure limits for most of these equity securities to manage their related risk. As of December 31, 2017,2018, Shinhan Bank held equity securities in an aggregate amount ofW977552.5 billion in itsnon-trading accounts, including equity securities in the amount ofW151156.6 billion that it held, among other reasons, for management control purposes and 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, 2017,2018, Shinhan Bank heldWon-denominated convertible bonds in an aggregate amount ofW110237.2 billion and did not hold anyWon-denominated exchangeable bonds orWon-denominated bonds with

warrants in itsnon-trading accounts. Shinhan Bank does not measure equity risk with respect to convertible bonds, exchangeable bonds or bonds with warrants, and the interest rate risk of these equity-linked securities 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.

Liquidity Risk Management

Liquidity risk is the risk of insolvency, default or loss due to disparity between inflow and outflow of funds, including the risk of having to obtain funds at a high price or to dispose of securities at an unfavorable price due to lack of available funds. Each of our subsidiaries seeks to minimize liquidity risk through early detection of risk factors related to the sourcing and managing of funds that may cause volatility in liquidity and by ensuring that it maintains an appropriate level of liquidity through systematic management. At the group-wide level, we manage our liquidity risk by conducting monthly stress tests that compare liquidity requirements under normal situations against those under three types of stress situations, namely, our group-specific internal crisis, crisis in the external market and a combination of internal and external crisis. In addition, in order to preemptively and comprehensively manage liquidity risk, we measure and monitor liquidity risk management using various indices, including the “limit management index,” “early warning index” and “monitoring index.”

Shinhan Bank applies the following basic principles for liquidity risk management:

 

raise funds in sufficient amounts, at the optimal time at reasonable costs;

 

maintain liquidity risk at appropriate levels and preemptively manage them through a prescribed risk limit system and an early warning signal detection system;

 

secure stable sources of revenue and minimize actual losses by implementing an effective asset-liability management system based on diversified sources of funding with varying maturities;

 

monitor and manage daily and intra-daily liquidity positions and risk exposures for timely payment and settlement of financial obligations due under both normal and crisis situations;

 

conduct periodic contingency analysisliquidity stress test in anticipation of any potential liquidity crisis and establish and implement emergencycontingency funding plans in case of an actual crisis; and

 

consider liquidity-related costs, benefits of and risks in determining the pricing of our products and services, employee performance evaluations and approval of launching of new products and services.

Each of our subsidiaries manages liquidity risk in accordance with the risk limits and guidelines established internally and 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 level, are required to maintain a liquidity coverage ratio and a foreign currency liquidity coverage ratio. These ratios require us to maintain the relevant ratios 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 implemented a minimum liquidity coverage ratio requirement for Korean banks, including Shinhan Bank, of at least 90.0% as of January 1, 2017, 95.0% as of January 1, 2018 and 100.0% as of January 1, 2019. The Financial Services Commission defines liquidity coverage ratio as high quality liquid assets that can be easilyimmediately converted tointo cash with little or no loss in value, as divided by the net amount of cash outflow for the next 30 day period, under the stress level established according to the liquidity coverage ratio, pursuant to the Regulation on the Supervision of the Banking Business, which was amended as of June 28, 2016 to implement the liquidity coverage ratio requirements under Basel III. In addition to the liquidity coverage ratio, the Financial Supervisory Commission introduced the net stable funding ratio into the Regulation on the Supervision of the Banking Business that came in effect in January 2018. Whereas liquidity coverage ratio is aimed at measuring liquidity for the next30-day period, net stable funding ratio, calculated as the ratio of available stable funding to required

stable funding, is aimed at measuring liquidity for the nextone-year period. A bank’s available stable funding is the portion of its capital and liabilities that are safely expected to remain with the bank for more than one year. A bank’s required stable funding is the amount of stable funding that it is required to hold given the liquidity characteristics and residual maturities of its assets and the contingent liquidity risk arising from itsoff-balance sheet exposures. Shinhan Bank is required by the Financial Services Commission to maintain a net stable funding ratio of at least 100%.

With respect to foreign currency liquidity coverage ratio, the Regulation on the Supervision of the Banking Business requires that financial institutions dealing with foreign exchange affairs (i.e., banks) whose foreign-currency denominated liabilities are equal to or greater than US$500 million or 5% of its total liabilities, as of the end of the immediately preceding half-year period, maintain a foreign currency liquidity coverage ratio of 60% or higher beginning January 1, 2017, 70% or higher beginning January 1, 2018 and 80% or higher beginning January 1, 2019. The term “foreign currency liquidity coverage ratio” means the ratio of high-liquidity assets to the net cash outflow in respect of foreign-currency denominated assets and liabilities for the next 30 days. In the case of financial institutions dealing with foreign exchange affairs whose foreign-currency denominated

liabilities are less than US$500 million and less than 5% of its total liabilities, as of the end of the immediately preceding half-year period, the following ratios shall be maintained and foreign-currency denominated assets and liabilities shall be categorized and managed according to such different remaining maturities: (i) the ratio of assets for which remaining maturities are less than three months to liabilities for which remaining maturities are less than three months shall be at least 85%, and (ii) the assets for which remaining maturities are less than one month shall not exceeded liabilities for which the remaining maturities are less than one month by more than 10%.

Shinhan 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 Shinhan Bank’s Asset and Liability Committee for 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. Shinhan Bank’s Risk Engineering Department measures Shinhan Bank’s liquidity coverage ratio on a daily basis and liquidity gapnet stable funding ratio on a dailymonthly basis and reports whether they are in compliance with the respective limits to Shinhan Bank’s Risk Policy Committee, which sets and monitors Shinhan Bank’s liquidity coverage ratio and liquidity gapnet stable funding ratio on a monthly basis.

The following tables show Shinhan Bank’s (i) average liquidity coverage ratio, and (ii) average foreign currency liquidity coverage ratio, and (iii) net stable funding ratio, each for the month of December 20172018 in accordance with the regulations of the Financial Services Commission.

Shinhan Bank’s Average Liquidity Coverage Ratio for the Month of December 20172018

 

   For the Month of December 20172018 
   (in billions of Won, except percentages) 

High quality liquid assets (A)

  W47,42152,736 

Net cash outflows over the next 30 days (B)

   50,58053,988 

Cash outflow

   80,92284,835 

Cash inflow

   30,34230,847 

Liquidity coverage ratio (A/B)

   93.7597.68% 

Shinhan Bank’s Average Foreign Currency Liquidity Coverage Ratio for the Month of December 20172018

 

   For the Month of December 20172018 
   (in billionsmillions of Won,US$, except percentages) 

High quality liquid assets (A)

  W2,9883,583 

Net cash outflows over the next 30 days (B)

   2,8793,044 

Cash outflow

   10,36710,618 

Cash inflow

   7,4887,574 

Liquidity coverage ratio (A/B)

   103.75117.71% 

Shinhan Bank’s Net Stable Funding Ratio for the Month of December 2018

For the Month of December 2018
(in billions of Won, except percentages)

Available stable funding (A)

W2,170,955

Required stable funding (B)

1,928,511

Net stable funding ratio (A/B)

112.57% 

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) provide a sufficient volume of necessary funding in a timely manner at a reasonable cost, (ii) establish an overall liquidity risk management strategy, including in respect of liquidity management targets, policy and internal control systems, and (iii) manage its liquidity risk in conjunction with other risks based on a comprehensive understanding of the interaction among the various risks. As for any potential liquidity shortage at or near the end of each month, Shinhan Card maintains liquidity at a level sufficient to withstand credit shortage for three months.

In addition, Shinhan Card manages liquidity risk by setting and complying with specific guidelines for various measures of liquidity, including the breakdown of contractual payment obligations by maturity, overseas funding, the ratio of asset-backed securitized borrowings to the total borrowing, the ratio of requisite liquidity to reserve liquidity, and the ratio of fixed interest rate borrowings to floating interest rate borrowings. Furthermore, Shinhan Card closely monitors various indicators of a potential liquidity crisis, such as the actual liquidity gap ratio (in relation to the different maturities for assets as compared to liabilities), the liquidity buffer ratio. Shinhan Card also has contingency plans in place in case of any emergency or crisis. In managing its liquidity risk, 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. When entering into asset-backed securitizations, Shinhan Card provides sufficient credit enhancements to avoid triggering early amortization events. In addition, prior to entering into any funding transaction and related derivative transaction, Shinhan Card conductspre-transaction risk analyses, including in respect of counterparty credit risk and its total exposure limit by country and by financial institution.

Shinhan Card also manages its liquidity risk within the limits set on Won accounts in accordance with the regulations of the Financial Services Commission. Under the Specialized Credit Financial Business Act and the regulations thereunder, credit card companies in Korea are required to maintain a Won liquidity ratio of at least 100.0%.

The following tables show Shinhan Card’s liquidity status and limits forWon-denominated accounts as of December 31, 20172018 in accordance with the regulations of the Financial Services Commission.

Shinhan Card’sWon-denominated accounts

 

  As of December 31, 2018 

Won-Denominated Accounts

  7 Days
or Less		   1 Month
or Less		   3 Months
or Less		 6 Months
or Less		   1 Year
or Less		   Over
1 Year		   Total   7 Days
or Less		   1 Month
or Less		   3 Months
or Less		 6 Months
or Less		   1 Year or
Less		   Over
1 Year		   Total 
  (In billions of Won, except percentages)   (In billions of Won, except percentages) 

Assets

  W2,443   W10,822   W15,769  W18,627   W21,682   W5,215   W26,897   W2,692   W11,922   W17,426  W20,588   W24,027   W6,138   W30,165 

Liabilities

   860    3,820    4,236  5,280    7,132    12,615    19,747    837    3,719    4,569  5,633    7,437    15,562    22,999 

Liquidity ratio

       372.3%               381.4%        

Shinhan Investment manages its liquidity risk for itsWon-denominated accounts by setting a limit ofW300 billion on each of itsseven-day andone-month liquidity gap, a limit of 110% on itsone-month and three-months liquidity ratios and a limit ofW8 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 theone-week andone-month maturity mismatch ratios to be 0% and-10% or less, respectively, and the three months liquidity ratio to be 80%85% or higher.

Our other subsidiaries 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 to liquidity risk management under the normal market situations, we have contingency 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: namely, “alert stage,” “imminent-crisis stage” and “crisis stage,” based on the following liquidity indices:

 

indices that reflect the market movements such as interest rates and stock prices;

 

indices that reflect financial market sentiments, an example being the size of money market funds; and

 

indices that reflect our internal liquidity 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,non-adherence to policy and procedures, fraud, inadequate internal controls and procedures or environmental changes and resulting in financial andnon-financial loss. We monitor and assess operational risks related to our business operations, including administrative risk, information technology risk (including cyber security risk), managerial risk and legal risk, with a view to minimizing such losses.

Our holding company’s Audit Committee, which consists of three outside directors, one of whom is an accounting or financial expert as required by internal control regulations under the Act on Corporate Governance of Financial Holding Company Act,Companies, oversees and monitors our operational compliance with legal and regulatory

requirements. The Audit Committee also oversees management’s operations and may, at any time it deems appropriate, demand additional operations-related reporting from management and inspects our asset condition. 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 Department at our holding company, which reports to our Audit Committee, continuously monitors the integrity of our subsidiaries’ operational risk management system. Our holding company’s board of directors and the Group Risk Management Committee establish our basic policies for operational risk management at the group level. The Group Internal Audit Department at our holding company is directly responsible for overseeing our operational risk management with a focus on legal, regulatory, operational and reputational risks. The Group Internal Audit Department audits both our and our subsidiaries’ operations and asset condition in accordance to our annual audit plan, which is approved by the Audit Committee, and submits regular reports to the Audit Committee pursuant to our internal reporting system. If the Group Internal Audit Department discovers anynon-compliance with operational risk procedures or areas of weaknesses, it promptly alerts the business department in respect of which suchnon-compliance was discovered and demands implementation of corrective measures. Implementation of such corrective measures is subsequently reviewed by the Group Internal Audit Department.

To monitor and manage operational risks,risk, 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 analysis and operational risk capital measurement. Shinhan Bank operates several educational and awareness programs designed to have all of its employees to be familiar with this system. In addition, Shinhan Bank has a designated operational risk manager

at each of its departments and branch offices, who serves as a coordinator between the operational risk team at the headquarters and the employees in the front office and seeking to provide centralized feedback to further improve the operational risk management system.

As of December 31, 2017,2018, Shinhan Bank has conducted 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 211186 key risk indicators.

The Audit Committee of Shinhan Bank, which consists of one standing auditordirector and 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 its Audit Department, which assists Shinhan Bank’s Audit Committee. Shinhan 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.

Shinhan Bank’s Audit Committee, Audit Department and AuditCompliance Department supervise and perform the following audits:duties:

 

general audits, including full-scale audits performed annually for the overall operations, sectional audits of selected operations performed as needed, and periodic and irregular spot audits;

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;

 

day-to-day audits, performed by the standing auditormember of Shinhan Bank’s Audit Committee for material transactions or operations that are subject to approval by the heads of Shinhan Bank’s operational departments or senior executives;

 

real-time monitoring audits, performed by the computerized audit system to identify any irregular transactions and take any necessary actions; and

 

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, Shinhan 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. Shinhan Bank’s Risk Management 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 operational 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. Shinhan Investment, through its operational risk management system, also 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 risk management department, as well as a risk management officer in each of Shinhan Investment’s departments.

Shinhan Card’s audit committee reviews whether the internal policy and procedures of Shinhan Card are effective and implements measures to improve such policies as needed. Shinhan Card’s audit committee also

contributes to work efficiency, financial risk minimization and management rationalization. Shinhan Card is expected to develop an operational risk management system once the Financial Supervisory Service announces its oversight guidelines regarding operational risk measurement.

Shinhan Life Insurance’s Risk Management Department and Compliance Department reviews whether the internal policy and procedures of Shinhan Life Insurance are being effectively complied with. Shinhan Life Insurance implemented an operational risk management process in 2018 by setting up key risk indicators in each department and utilizes it to assess operational risk, collect data and manage key indicators. Furthermore, Shinhan Life Insurance established a standard roadmap to improve its operational risk assessment capabilities.

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 our and 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 issues 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, the Financial Supervisory Service conducted a comprehensive audit of Shinhan Bank from November to December

2012, and in July 2013 notified Shinhan Bank of an institutional caution (which does not give rise to significant sanctions unlike in the case of repeated institutional warnings), imposed disciplinary actions against 65 Shinhan Bank employees and assessed a fine ofW87.5 million after finding that Shinhan Bank had illegally monitored customer accounts without proper authorization, breached confidentiality with respect to certain financial transactions and violated its obligation to disclose and report to the Financial Supervisory Service an investment in an affiliated company of Shinhan Bank. Furthermore, in March 2013 the Financial Supervisory Service conducted a special audit of Shinhan Bank as to incidents of alleged malfunctioning of its financial computer network and in December 2013, notified Shinhan Bank of an institutional caution and imposed disciplinary actions against five Shinhan Bank employees after finding that Shinhan Bank did not properly maintain its information technology administrator account and vaccine server. From October 2013 to November 2014, the Financial Supervisory Service also conducted a series of special audits of Shinhan Bank as to incidents of alleged illegalunauthorized monitoring of customer accounts, and in February 2014, the Prosecutors’ Office in Korea also commenced an investigation of Shinhan Bank with respect to same. In December 2015, the Financial Supervisory Service notified Shinhan Bank of an institutional caution and imposed disciplinary actions against two former Shinhan Bank officers after finding that Shinhan Bank had illegally monitored customer accounts without proper authorization, whereas in April 2016, the Prosecutors’ Office determined not to prosecute the former officers of Shinhan Bank because of insufficient evidence. In addition, the Financial Supervisory Service conducted a periodic audit of Shinhan Bank from April to May 2015 and notified Shinhan Bank of five items requiring management’s attention and three items for improvement in June 2016 in connection with such audit. The Financial Supervisory Service conducted an additional audit in April 2017 and notified Shinhan Bank of 11 items requiring a management attention and 18 items for improvement in connection with such audit.

The Financial Supervisory Service also conducted a special audit of Shinhan Card, together with BC Card and KB Kookmin Card, from June to July 2013, in relation to alleged imperfect sales of insurance products, and in March 2014, issued an institutional warning against each of the three credit card companies based on a finding that card customers were provided inadequate or misleading disclosures regarding the risks relating to such products at the time of sale. The Financial Supervisory Service also imposed disciplinary actions against three Shinhan Card employees and assessed a fine ofW10 million against Shinhan Card as well as similar sanctions against BC Card and KB Kookmin Card. In addition, the Financial Supervisory Service conducted a comprehensive audit of Shinhan Card, together with Samsung Card and Hyundai Card, in September 2014, and in November 2015, issued an institutional warning against each of the three credit card companies based on a finding that they had illegally provided personal credit information of potential new cardholders to their credit

card sales agents. The Financial Supervisory Service also imposed disciplinary actions against six Shinhan Card employees and assessed a fine ofW6 million against Shinhan Card as well as similar sanctions against Samsung Card and Hyundai Card. In December 2014, the Financial Supervisory Service also issued institutional cautions against Shinhan Life Insurance for selling insurance products without adequate disclosure and for incomplete payments of agency fees, together with a fine ofW338 million in relation to the former case.

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 changes 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 Financial Group’s compliance system. This system is designed to ensure that all employees of Shinhan Financial Group and its subsidiaries comply with the relevant laws and regulations. The compliance system’s main function is to monitor the degree of improvement in compliance with the relevant laws and regulations, maintain internal controls (including ensuring that each department has established proper internal policies and that it complies with those policies) and educate employees about observance of the relevant laws and regulations. The Compliance Department also supervises the management, execution and performance of self-audits.

Upgrades of Risk Management System

Our recent material upgrades in relation to risk management systems are as follows.

Shinhan Financial Group

In May 2015, we developed and implemented a credit review system to unify our corporate credit review and risk measurements, allowing us and our subsidiaries to utilize a uniform and consistent credit review system with respect to each borrower. In addition, in preparation of full implementation of Basel III requirements relating to liquidity coverage ratios for bank holding companies and to enhance our liquidity risk management capabilities, we have implemented a Basel III liquidity coverage ratio risk management system by which we calculate our liquidity coverage ratio each month.

Shinhan Bank

In order to strengthen risk management of its overseas subsidiaries and effectively comply with local and domestic regulations, Shinhan Bank is in the process of laying out a global risk management system network, which records the risk data of its overseas subsidiaries. Shinhan Bank seeks to leverage the development of this system for further overseas expansion and stable growth of existing overseas subsidiaries. To date, Shinhan Bank has completed the development of such system for its subsidiaries in China, Japan, Vietnam, the United States, Canada, India, Europe and Mexico. Shinhan Bank also plans to expand the application of this system to its other overseas subsidiaries.

Shinhan Bank has also completed development of a system to calculate stressed VaR based on Basel II standards in order to prepare for stress situations such as the global financial crisis in 2008. Shinhan Bank has received approval for such system from the Financial Supervisory Service and has been implemented since 2012.

In 2012, Shinhan Bank developed a system for improving collection and recovery of bad assets through enhanced loss given default data processing. In addition, in 2012, Shinhan Bank received approvals from the Financial Supervisory Service for upgrades to its credit evaluation modeling for risk assessment of small- tomedium-sized enterprises that are not required to be audited by outside accounting firms and for SOHOs, which

upgrades related to factoring in the credit profile of the head of such enterprises and SOHOs. In 2014, Shinhan Bank further upgraded the credit evaluation modeling for risk assessment of small- andmedium-size enterprises that are not required to be audited by outside accounting firmsbyfirms by entirely revamping the modeling for enterprises subject to outside audits, enterprises that are not subject to outside auditors and enterprise heads.Suchheads. Such upgraded modeling was approved by the Financial Supervisory Service, and Shinhan Bank began implementation of the upgraded system since 2014. In 2014, Shinhan Bank reclassified its credit evaluation models for risk assessment of enterprises into the following four categories: (i) IFRS (enterprises subject to external audits under Korean IFRS), (ii) GAAP (enterprises subject to external audits under Generally Accepted Accounting Principles), (iii) small- andmedium-size enterprises and (iv) SOHO. Such reclassification was approved by the Financial Supervisory Service, and Shinhan Bank began to implement the system in 2015.

In addition, in 2013, Shinhan Bank obtained approval from the Financial Supervisory Service to use an internal evaluation model with respect to Basel II credit risks related to Shinhan Bank’s retail SOHO exposures. In 2016, Shinhan Bank developed a new internal evaluation model and obtained approval from the Financial Supervisory ServicetoService to use the new model with respect to Basel II credit risks related to Shinhan Bank’s retail exposures. In addition, Shinhan Bank received another approval in 2016 for loss given default data processing using the AIRB approach in order to reflect changes in economic conditions such as prolonged recovery periods and low interest rates, and the newly approved loss given default data processing will replace existing loss given default data processing for both retail and SOHO exposures.

Shinhan Bank also upgraded the asset and liability management system in 2012 in order to timely comply with Basel III, IFRS and other regulatory requirements as well as to upgrade the quality of risk-related data. In

2014, Shinhan Bank upgraded the liquidity coverage ratio and net stable funding ratio systems under Basel III in order to facilitate daily measurement and efficient management.

Following the approval by the Financial Supervisory Service of the advanced measurement approach for risk management, Shinhan Bank hasre-established the operational risk management system in order to further enhance its operational risk management capabilities.

Shinhan Card

In 2012, Shinhan Card completed further upgrades to its credit risk measurement system in satisfaction of the Basel II standards, as well as other regulatory requirements and internal needs in order to address the ongoing volatility in the economic and regulatory environment. In December 2016, Shinhan Card obtained approval from the Financial Supervisory Service to use a new internal evaluation model with respect to Basel III credit risks related to its retail and SOHO exposures.

Shinhan Investment

In 2016, Shinhan Investment established a Risk Engineering Team and updated its market risk management system to increase its value assessment capabilities forover-the-counter derivatives, strengthen its VaR risk analysis capabilities and improve various simulation functions. Beginning in 2017, the Risk Engineering Team conducts value assessment and reviewsover-the-counter derivatives directly using various enhanced simulation functions such as updated stress tests in order to stabilize financial accounting prices and enhance the risk management ofover-the-counter derivatives. In January 2019, the Risk Engineering Team was elevated to a department, becoming the Risk Engineering Department, expanding the scope of products reviewed by the department and strengthening its simulation analysis capabilities.

Shinhan Life Insurance

In 2017, Shinhan Life Insurance completed further upgrades to its interest rate risk measurement system, called the ALM system, in anticipation ofKorea-ICS, a new insurance liability market valuation system designed to replace the existing risk based capital system, and IFRS 17, which isboth expected to become effective beginning 2021. The2022. In 2018, the new asset liability management system is expected to implementimplemented an interest rate risk management system in 2018 based on the Europe Solvency II standard. The asset liability management system can measure both asset and liability based on marking to market valuation. In addition, Shinhan Life Insurance also updated its interest rate risk management system to control net income margin volatility resulting from market interest rate changes.changes and has tailored its business scheme to this system in order to better manage risk and profits and match the duration of its assets and liabilities.

Supervision 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 April 18, 2017,December 31, 2018, Law No. 14817)16182). 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.

Pursuant to the Financial Holding Companies Act, the Financial Services Commission regulates various activities of financial holding companies. 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 other regulations relating to the supervision of financial holding companies.

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 for financial holding companies and reporting requirements pursuant 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 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:

 

financially supporting its subsidiaries and the subsidiaries of its subsidiaries (the “direct and indirect subsidiaries”), including lending properties with economic values such as monies and securities, guaranteeing obligation performance and other direct or indirect transactions involving transactional credit risk;

 

raising capital necessary for the investment in subsidiaries or providing financial support to its direct and indirect subsidiaries;

 

supporting the business of its direct and indirect subsidiaries for the joint development and marketing of new products;

 

supporting the operations of its direct and indirect subsidiaries by providing access to data processing, legal and accounting resources; and

 

pursuing any other activities 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 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:

 

when there is a change of its largest shareholder;

when there is a change of principal shareholders of a bank holding company;

 

when the shareholding of the largest shareholder or a principal shareholder as prescribed under the Financial Holding Companies Act or a person who is in a special relationship with such largest 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;

 

when there is a change of its name;

 

when there is a cause for dissolution; and

 

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 minimumpaid-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 itspaid-in capital.

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 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.

For regulatory reporting purposes, we maintain allowances for credit losses on the following loan classifications that classify corporate and retail loans as required by the Financial Services Commission. In making these classifications, we take into account a number of factors, including the financial position, profitability and transaction history of the borrower, the value of any collateral or guarantee taken as security for the extension of credit, probability of default and loss amount in the event of default. This classification method, and our related provisioning policy, is intended to reflect the borrower’s capacity to repay. To the extent there is any conflict between the Financial Services Commission guidelines and our internal analysis in such classifications, we adopt whichever is more conservative.

The following table sets forth loan classifications according to the guidelines of the Financial Services Commission.

 

Loan Classification

  

Loan Characteristics

Normal

  Loans extended to customers that, based on our consideration of their business, financial position and future cash flows, do not raise concerns regarding their ability to repay the loans.

Precautionary

  Loans extended to customers that (i) based on our consideration of their business, financial position and future cash flows, show potential risks with respect to their ability to repay the loans, although showing no immediate default risk or (ii) are in arrears for one month or more but less than three months.

Loan Classification

Loan Characteristics

Substandard

  

(i) Loans extended to customers that, based on our consideration of their business, financial position and future cash flows, are judged to have incurred considerable default risks as their ability to repay has deteriorated; or

 

(ii) the portion that we expect to collect of total loans (a) extended to customers that have been in arrears for three months or more, (b) extended to customers that have incurred serious default risks due to the occurrence of, among other things, final refusal to pay their debt instruments, entry into liquidation or bankruptcy proceedings or closure of their businesses, or (c) extended to customers who have outstanding loans that are classified as “doubtful” or “estimated loss.”

Doubtful

  

Loans exceeding the amount that we expect to collect of total loans to customers that:

 

(i) based on our consideration of their business, financial position and future cash flows, have incurred serious default risks due to noticeable deterioration in their ability to repay; or

 

(ii) have been in arrears for three months or more but less than twelve months.

Estimated loss

  

Loans exceeding the amount that we expect to collect of total loans to customers that:

 

(i) based on our consideration of their business, financial position and future cash flows, are judged to be accounted as a loss because the inability to repay became certain due to serious deterioration in their ability to repay;

 

(ii) have been in arrears for twelve months or more; or

 

(iii) have incurred serious risks of default in repayment due to the occurrence of, among other things, final refusal to pay their debt instruments, liquidation or bankruptcy proceedings or closure of their business.

In accordance with the Regulations for the Supervision of Financial Institutions, we establish regulatory reserve for loan loss in the amount of the difference between allowance for credit losses as calculated pursuant to our provisioning policy in accordance with IFRS and allowance for credit losses based on the loan classifications set forth above as required by the Financial Services Commission. In determining consolidated equity capital ratio, we deduct regulatory reserve for loan loss from equity capital.

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:

 

maintain a Won liquidity ratio (defined as Won assets due within one month, including marketable securities, divided by Won liabilities due within three months) of not less than 100%;

 

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%;

 

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

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%.

Financial Exposure to Any Single Customer and Major Shareholders

Subject to certain exceptions, the total sum of credit (as defined in the Presidential Decree of the Financial Holding Companies Act, the Bank Act, the Presidential Decree of the Financial Investment Services and Capital Markets Act, the Insurance Act, the Mutual Savings Bank Act and the Specialized Credit Financial Business 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.

“Net Total Equity Capital”for the purpose of the calculation of financial exposure to any single customer and Major Shareholder (as defined below) as applicable to us and our subsidiaries is defined under the Presidential Decree of the Financial Holding Companies Act as

 

 (a)

the sum of:

 

 (i)

in the case of a financial holding company, the shareholders’ equity as defined under Article24-3, Section 7(2) of the Presidential Decree of the Financial Holding Companies Act, which represents the difference between the total assets less total liabilities on the balance sheet as of the end of the most recent quarter;

 

 (ii)

in the case of a bank, the shareholders’ equity as defined under Article 2, Section 1(5) of the Bank Act, which represents the sum of Tier I and Tier II capital amounts determined according to the standards set by the BIS;

 

 (iii)

in the case of a merchant bank, the capital amount as defined in Article 342, Section (1) of the Financial Investment Services and Capital Markets Act;

 

 (iv)

in the case of a financial investment company, the shareholders’ equity as defined under Article 37, Section 3 of the Presidential Decree of the Financial Investment Services and Capital Markets Act, which represents the total shareholders’ equity as adjusted as determined by the Financial Services Commission, such as the amount of increase or decrease inpaid-in capital after the end of the most recent fiscal year;

 

 (v)

in the case of an insurance company, the shareholders’ equity as defined under Article 2, Section 15 of the Insurance Act, which represents the sum of items designated by the Presidential Decree, such aspaid-in-capital, capital surplus, earned surplus and any equivalent items, less the value of good will and other equivalent items;

 (vi)

in the case of a mutual savings bank, the shareholders’ equity as defined under Article 2, Section 4 of the Mutual Savings Bank Act, which represents the sum of Tier I and Tier II capital amounts determined in accordance with the standards set by the Bank for International Settlements; and

 

 (vii)

in the case of a credit card company or a specialty credit provider, the shareholders’ equity as defined under Article 2, Section 19 of the Specialized Credit Financial Business Act, which represents the sum of the items designated by the Presidential Decree, such aspaid-in-capital, capital surplus, earned surplus and any equivalent items;

(b) less the sum of:

(b)less the sum of:

 

 (i)

the amount of shares in direct and indirect subsidiaries held by the financial holding company;

 (ii)

the amount of shares in the direct and indirect subsidiaries that are cross-held by such subsidiaries; and

 

 (iii)

the amount of shares in the financial holding company held by its direct and indirect subsidiaries.

The Financial Holding Company Total Credit to a single individual or legal entity may not exceed 20% of the Net Total Equity Capital.

Furthermore, the total sum of credits (as defined under the Financial Holding Companies Act, the Banking Act and the Financial Investment Services and Capital Markets Act, respectively) of a bank holding company and its direct and indirect subsidiaries (“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) generally may not 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, subject to certain exceptions.

“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 onnon-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 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 bank holding company’s Major Shareholder may not exceed 25% of the Net Total Equity Capital. Furthermore, the bank holding company and its direct and indirect subsidiaries that intend to extend the Bank Holding Company Total Credit to the bank 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 (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 or 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 stockholders’ equity and to any other direct and indirect subsidiaries of the financial holding company in excess of 20% of its 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

 

 (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. However, a direct or indirect subsidiary of a financial holding company may invest as a limited partner in a private equity fund that is a direct or indirect subsidiary of the same financial holding company. 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, 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, (iii) the transfer orin-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.

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 anynon-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.

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 (for example, 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 holding company as prescribed by the Presidential Decree of the Financial Holding Companies Act (e.g. finance-related research company, finance-related information technology company, etc.). 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.

An 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 years after becoming an indirect subsidiary of a financial holding company.

A subsidiary of a financial holding company may 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.

In addition, a private equity fund established in accordance with the Financial Investment Services 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 bank holding company and its direct and indirect subsidiaries are prohibited from acquiring (including acquisition by a trust account of its subsidiary bank) shares issued by such bank holding company’s Major Shareholder in excess of 1% of the Net Total Equity 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 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 acquisition, must file a report with the Financial Services Commission and publicly disclose the filing of such report (for example, through a website).

Restrictions on Financial Holding Company Ownership

Under the Financial Holding Companies Act, foreign financial institutions are permitted to establish financial holding companies in Korea. Pursuant to the Presidential Decree of the Financial Holding Companies Act, 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 relationship 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 (or 15% in the case of a financial holding company controlling regional banks 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 bank holding company in excess of 4% of such financial holding company’s outstanding voting shares, provided that suchnon-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 suchnon-financial business group companies will not exercise voting rights in respect of such shares in excess of the 4% limit. In addition, any person (whether a Korean national or a foreigner), with the exception ofnon-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 regional banks only), 25% or 33% of the total voting shares issued and outstanding of such bank holding company.

“Non-financial business group companies”are defined under the Financial Holding Companies Act as companies, which include:

 

 (i)

any same shareholder group with aggregate net assets of allnon-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 allnon-financial business companies belonging to such group of not less thanW2 trillion;

 

 (iii)

any mutual fund in which a same shareholder group identified in item (i) or (ii) above holds more than 4% of the total shares issued and outstanding of such mutual fund;

 

 (iv)

any private equity fund (x) which has a partner with limited liability that falls under item (i), (ii) or (iii) above and holds equity equivalent to 10% or greater of the total amount invested by the private equity fund, (y) which has a partner with unlimited liability that falls under item (i), (ii) or (iii) above or (z) whose affiliates belonging to an enterprise group subject to limitation on mutual investment hold in aggregate equity equivalent to 30% or greater of the total amount invested by such private equity fund; or

 

 (v)

any investment purpose company in which a private equity fund that falls under item (iv) above acquires and holds no less than 4% of such company’s shares or equity or exercisesde-facto influence on such company’s significant managerial matters.

The Act on Corporate Governance of Financial Companies

The Act on Corporate Governance of Financial Companies came into effect as of August 1, 2016. The Act was enacted to address calls for strengthened regulations on corporate governance of financial companies and to serve as a uniform regulation on corporate governance matters applicable to all financial companies in place of the separate regulations for each sector that existed. The Act contains several key measures, including, but not limited, to (i) condition of eligibility of officers of financial companies and standards for determining whether financial companies’ officers may hold concurrent positions in other companies, (ii) standards for composition and operation of board of directors, (iii) standards for establishment, composition and operation of committees of the board of directors, (iv) internal control and risk management, (v) requirements and procedures for the approval of a change of major shareholders and (vi) special regulations for rights of minority shareholders of financial companies.

Financial Investment Services and Capital Markets Act

General

The Financial Investment Services and Capital Markets Act categorizes capital markets-related business into six different functions, as follows:

 

dealing (trading and underwriting of “financial investment products” (as defined below));

brokerage (brokerage of financial investment products);

 

collective investment (establishment of collective investment schemes and the management thereof);

 

investment advice;

 

discretionary investment management; and

 

trusts (together with the five business set forth above, the “Financial Investment Businesses”).

Accordingly, all financial business relating to financial investment products are reclassified as one or more of the Financial Investment Businesses described above, and financial institutions are subject to the regulations applicable to their relevant Financial Investment Businesses, irrespective of the type of the financial institution it is. For example, under the 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 Financial Investment Services and Capital Markets Act, at least in principle.

The banking business and insurance business are not subject to the Financial Investment Services and Capital Markets Act and will continue to be regulated under separate laws; provided, however, that they may become 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 Financial 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 (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 Financial Investment Services and Capital Markets Act, securities companies, asset management companies, futures companies and other entities engaging in any Financial Investment Business are classified as “Financial Investment Companies.”

License System

Financial Investment Companies are 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 (namely, general investors or professional investors). Licenses will be issued under the specific businesssub-categories described 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 professional investors.

Expanded Business Scope of Financial Investment Companies

Under the previous regulatory regime in Korea, it was 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 could not engage in the asset management business. In contrast, under the 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 is permitted to engage in all types of Financial Investment Businesses, subject to compliance 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 Financial Investment Services and Capital Markets Act generally allows a Financial Investment Company to freely engage in such incidental businesses by shifting away from the previous system of permitting only the listed activities towards a more comprehensive system. In addition, a Financial Investment Company is permitted (i) to outsource marketing activities by contracting with “introducing brokers” that are individuals but not employees of the Financial Investment Company, (ii) to engage in foreign exchange business related to their Financial Investment Business and (iii) to participate in the settlement network, pursuant to an agreement among the settlement network participants.

Improvement in Investor Protection Mechanism

While the Financial 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 is imposed upon Financial Investment Companies dealing in financial investment products. The Financial Investment Services and Capital Markets Act makes a distinction between general investors and sophisticated investors and provides new or enhanced protections to general investors. For instance, the Financial Investment Services and Capital Markets Act expressly provides for strict know-your-customer rules for general investors and imposes an obligation on Financial Investment Companies that they should market financial investment products suitable to each general investor considering his or her personal attributes, including investment objective, net worth, and investment experience. Under the Financial Investment Services and Capital Markets Act, a Financial Investment Company can be held liable if a general investor proves (i) damages or losses relating to such general investor’s investment in financial investment products solicited by such Financial Investment Company and (ii) absence of explanation, 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 Financial 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 Financial Investment Services and Capital Markets Act brought changes to various rules in securities regulations including those relating to public disclosure, insider trading and proxy contests, which had previously been governed by the Securities and Exchange Act. For example, the 5% and 10% reporting obligations under the Securities and Exchange Act have become more stringent under the Financial Investment Services and Capital Markets Act. For instance, the numbers of events requiring an investor to update its 5% report have increased under the 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) could trigger the obligation to update the 5% report. The Government has issued detailed regulations stipulating additional events requiring updates to 5% reports, such as the change in the type of 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 previous law. The due date for reporting a subsequent change after the initial 10% report filing has 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 previous law, there had been a limitation on the type of investment vehicles that could be used in a collective investment scheme (namely, to trusts and corporations), the type of funds that could be used for collective investments, and the types of assets and investment securities a fund could invest in. However, the Financial Investment Services and Capital Markets Act significantly liberalizes 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 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 as the Financial Supervisory Commission and later changed its name to the Financial Services Commission on March 3, 2008, regulates commercial banks pursuant to the Banking Act, including establishing guidelines on capital adequacy of commercial banks, and promulgates 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 establishes reporting requirements pursuant 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 andnon-performing loans, including write-offs, and management of problem companies and plans for the settlement of bad loans.

Under the Banking Act, approval 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 frompaid-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 approval from the Financial Services Commission. Approval 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 Financial Services Commission 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 Financial Services Commission may order, among others,:

 

capital increases or reductions;

suspension of officers’ performance of their duties and appointment of custodians;

 

stock cancellations or consolidations;

 

transfers of a part or all of business;

 

sale of assets and bar on acquisition of high-risk assets;

 

closures or downsizing of branch offices or workforce;

 

mergers or becoming a subsidiary under the Financial Holding Companies Act of a financial holding company;

 

acquisition of a bank by a third party;

 

suspensions of a part or all of business operation; or

 

assignments of contractual rights and obligations relating to financial transactions.

Capital Adequacy

The Banking Act requires nationwide banks to maintain a minimumpaid-in capital ofW100 billion and regional banks to maintain a minimumpaid-in capital ofW25 billion.

In addition to minimum capital requirements, all banks including foreign bank branches in Korea are required to maintain a prescribed solvency position. A bank must also set aside as its legal reserve an amount equal to at least 10% of its net profits after tax each time it pays dividends on net profits earned until such time when the reserve equals the amount of its totalpaid-in capital.

Under the Banking Act, the capital of a bank is divided into two categories: Tier I and Tier II capital. Tier I capital (typically referred to as “Core Capital”) consists of (i) the capital that can absorb losses incurred by a bank such as capital, capital surplus and earned surplus generated from the issuance of common shares (collectively, “Common Stock Capital”), and (ii) the capital that can absorb the losses of a bank after depletion of the Common Stock Capital such as capital and capital surplus generated from the issuance of Tier I capital instruments satisfying the requirements designated by the Financial Supervisory Service (collectively, “Other Core Capital”). Tier II capital (typically referred to as “Supplementary Capital”) represents the capital which is equivalent to, but not included in, the Core Capital and can absorb losses incurred upon the liquidation of a bank such as capital and capital surplus generated from the issuance of Tier II capital instruments satisfying the requirements designated by the Financial Supervisory Service and allowance for bad debts set aside for loans classified as “normal” or “precautionary.”

Under the Detailed Regulations on the Supervision of the Banking Business, Tier I capital instruments must satisfy, among others, the following requirements in order to be recognized as Other Core Capital:

 

 (i)

the price for such instruments shall have been fully paid through the procedure for issuance, and the instruments shall be in a perpetual form with no cause triggering astep-up or redemption;

 

 (ii)

such instruments shall be bound by a special agreement on being subordinate to depositors, general creditors and subordinated debt of the bank (referring to a special agreement under which subordinated creditors’ right to claim payment shall take effect only after unsubordinated creditors’ claims are fully paid, when bankruptcy or any similar incident occurs; hereinafter the same shall apply) but shall not fall within liabilities exceeding assets at the time when bankruptcy is declared under the Debtor Rehabilitation and Bankruptcy Act;

 (iii)

the payment of dividends or interests shall be suspended from the date when the bank is designated as a “insolvent financial institution” under the Act on Structural Improvement of the Financial Industry of Korea or under the Depositor Protection act of Korea as applicable, or the Financial Supervisory

Service takes measures under the Regulations on the Supervision of the Banking Business such as the managerial improvement recommendation, the managerial improvement request, the managerial improvement order and the emergency measures against the bank to the date when the above-mentioned event is removed;

 

 (iv)

the payment of dividends or interests shall not be determined in connection with the credit rating of the bank;

 

 (v)

the dividends may only be paid out of distributable income;

 

 (vi)

the bank shall be able to revoke in its sole discretion the payment of dividends or interests at any time;

 

 (vii)

the cancellation of paying dividends must not impose restrictions on the bank except in relation to dividends to common stockholders;

 

 (viii)

the revocation of the payment of dividends or interests shall not be deemed as the event of defaults, and the bank shall be able to use in its sole discretion the amount which was revoked to pay as dividends or interests to redeem any other debts of the bank then due and payable;

 

 (ix)

such instruments shall not be redeemed within five years from the issuance date and the bank shall be able to determine in its sole discretion whether it redeems such instruments even after five years from the issuance date, and the instruments shall not be subject to any condition that arouse investors’ expectation to have the instruments redeemed or any condition that imposes a burden of redemption upon the issuing bank in fact;

 

 (x)

the requirements prescribed in Appendix3-5 (Trigger Events for Contingent Capital Securities) of the Detailed Enforcement Rules of Regulation on Supervision of Banking Business shall be satisfied;

 

 (xi)

the bank or the person who has de facto control over the bank shall not purchase capital instruments or provide a purchaser of such securities with funds for the purchase by providing a collateral or guarantee for payment or by lending a loan, shall not raise the priority of its claims, legally or economically, for the price paid for the securities, and shall not provide a collateral or guarantee to the purchasers of the securities directly or via a related company; and

 

 (xii)

such capital instruments shall have no condition that hinders the issuing bank’s procurement or expansion of capital in the future.

Under the Detailed Regulations on the Supervision of the Banking Business, Tier II capital instruments must satisfy, among others, the following requirements in order to be recognized as Supplementary Capital:

 

 (i)

the procedure for issuance shall have been completed, the price for such capital instruments shall have been fully paid, and the capital instruments shall be bound by a special agreement of subordination to deposits and ordinary debts;

 

 (ii)

the maturity shall not be less than five years from the issuance date, and Tier II capital instruments shall not be redeemed within five years from the issuance date;

 

 (iii)

there is no condition to promote the bank to redeem such capital instruments such as astep-up provision, and the bank shall be able to determine in its sole discretion whether to redeem such instruments prior to the maturity date, and the instruments shall not be subject to any condition that arouse investors’ expectation to have the instruments redeemed or any condition that imposes a burden of redemption upon the issuing bank in fact;

 

 (iv)

other than the case where the bank is subject to the bankruptcy or liquidation, the holder of Tier II capital instruments shall not have the right to require bank to pay the principal or interests of such instruments earlier than the original due date thereof;

 (v)

the payment of dividends or interests shall not be determined in connection with the credit rating of the bank;

 (vi)

the requirements prescribed in Appendix3-5 (Trigger Events for Contingent Capital Securities) of the Detailed Enforcement Rules of Regulation on Supervision of Banking Business shall be satisfied;

 

 (vii)

the bank or any person or entity over which the bank exercises substantial control shall not purchase the capital instruments issued by such bank nor provide, directly or indirectly, the funds to acquire the capital instruments by providing any collateral or guaranty or loan in favor of the person or entity which tries to acquire such instruments; and

 

 (viii)

the bank shall not enhance, legally or economically, the payment priority of the capital instruments, nor provide, directly or indirectly through its affiliated company, any collateral or guaranty in favor of the person or entity which acquires such instruments.

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 the BIS Standards. These standards were adopted and became effective in 1996. Under these regulations, all domestic banks and foreign bank branches are required to meet the minimum ratio of Tier I and Tier II capital (less any capital deductions) to risk-weighted assets of 8%.

Furthermore, as Basel III was adopted and is being implemented in stages in Korea since December 1, 2013, all banks in Korea are required to meet minimum ratios of common stock capital (less any capital deductions) and core capital (less any capital deductions) to risk-weighted assets as set out in the Regulation on the Supervision of the Banking Business. The required minimum ratio of common stock capital (less any capital deductions) to risk-weighted assets is 4.5%, and the required minimum ratio of core capital (less any capital deductions) to risk-weighted assets is 6.0%. In addition, additional capital conservation buffer requirements are beinghave been implemented in stages from January 1, 2016 to January 1, 2019. Under such requirements, all banks in Korea are required to maintain a capital conservation buffer of 0.625% from January 1, 2016, which will bewas gradually increased to 1.25% on January 1, 2017, 1.875% on January 1, 2018 and 2.5% on January 1, 2019.

Under the Regulation on the Supervision of the Banking Business and the Detailed Regulations promulgated thereunder, Korean banks apply the following risk-weight ratios in respect of their home mortgage loans:

 

 (1)(i)

for those banks adopting a standardized approach for calculating credit risk-weighted assets, the risk-weight ratio of 35% (only in the case where the loan is fully secured by a first ranking mortgage); and

 

 (2)(ii)

for those banks adopting an internal ratings-based approach for calculating credit risk-weighted assets, a risk-weight ratio calculated with reference to the probability of default, loss given default and exposure at default, each as defined in the Detailed Regulations on the Supervision of the Banking Business.

In Korea, Basel II, a 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, is taken into account in calculating the risk-weighted assets, in addition to maintaining the capital adequacy ratio of 8% for banks. Under Basel II, the capital requirements for credit risk can be calculated by the internal rating based (IRB) approach or the standardized approach.

Under the standardized approach, a home mortgage loan fully secured by a first ranking mortgage over the residential property is risk-weighted at 35%., but certain home mortgage loans withloan-to-value ratio exceeding 60% are risk weighted at 50% pursuant to an amendment of the Detailed Regulation on the Supervision of the Banking Business on December 31, 2018.

Under the Regulation on the Supervision of the Banking Business, banks shall set aside allowances for bad debts for each class of soundness in accordance with theK-IFRS.IFRS as adopted by Korea. If the amount for each class of soundness

soundness calculated in accordance with the following criteria exceeds the allowances for bad debts set aside, the excess amount shall, at the time of each settlement of accounts, be set aside as regulatory reserve for credit losses.

 

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, 1.0% in the case of normal credits comprising loans to individuals and households, 2.5% in the case of normal credits comprising credit card loans and 1.1% in the case of normal credits comprising other credit card receivables);

 

7% of precautionary credits (or 10% in the case of precautionary credits comprising loans to individuals and households, 50% in the case of precautionary credits comprising credit card loans and 40% in the case of precautionary credits comprising other credit card receivables);

 

20% of substandard credits (or 10% in the case of substandard credits comprising assets for which the bank has the right to receive payment in priority pursuant to the Corporate Restructuring Promotion Act of Korea or Paragraph 180, Subparagraph 2 of the Debtor Rehabilitation and Bankruptcy Act of Korea (the “Priority Assets”), 65% in the case of substandard credits comprising credit card loans and 60% in the case of substandard credits comprising other credit card receivables);

 

50% of doubtful credits (or 25% in the case of doubtful credits comprising Priority Assets, 55% in the case of doubtful credits comprising loans to individuals and households and 75% in the case of doubtful credits comprising credit card loans and other credit card receivables); and

 

100% of estimated loss credits (or 50% in the case of estimated loss credits comprising of Priority Assets).

Furthermore, under the Regulation on the Supervision of the Banking Business, banks must maintain allowances for bad debts and regulatory reserve for credit losses in respect of their confirmed guarantees (including confirmed acceptances) and outstandingnon-used credit lines in an aggregate amount calculated at the same rates applicable to normal, precautionary, substandard, doubtful and estimated loss credits comprising their outstanding loans and other credits as set forth above.

As of January 1, 2016, the Financial Services Commission implemented Basel III requirements relating to accumulation of additional capital for systemically important banks and countercyclical capital buffer requirements. Each year, the Financial Services Commission may designate banks with significant influence (based on size and connectivity with other financial institutions) on the domestic financial system as a domestic systemically important bank and require the accumulation of additional capital in accordance with the highest of: (i) ratio of common equity capital to risk-weighted assets, ranging from 0.0% to 2.0%, depending on the systematic importance evaluation score, (ii) if the bank’s holding company is a domestic systemically important bank holding company, the capital ratio corresponding to the additional capital required for the bank holding company under the Financial Holding Company Supervision Regulations, or (iii) if the bank is also a global systemically important bank, as defined by the Basel Committee, the capital ratio as required by the Basel Committee. Shinhan Financial Group and Shinhan Bank were selected as a domestic systemically important bank holding company and domestic systemically important bank, respectively, for 2017.from 2016 through 2019. According to the instructions of the Financial Services Commission, domestic systematically important banks including Shinhan Bank arehave been required to maintain an additional capital buffer of 0.25% since January 1, 2016, with such buffer to increaseincreased by 0.25% annually to reach 1.00% byas of January 1, 2019. The Financial Services Commission may also, upon quarterly review, determine and require banks to accumulate a required level of countercyclical capital buffer within the range of 0% to 2.5% of risk-weighted assets, taking into account factors such as the degree of increase in credit relative to the gross domestic product. Since March 2016, the Financial Services Commission has maintained countercyclical capital buffer requirements at 0%, and the Financial Services Commission is expected to maintainSupervisory Service has maintained the countercyclical capital buffer requirement at 0% for the first quarter of 2017.2019. In addition, the Regulation on the Supervision of the Banking Business is expected to be amended during

2019 such that the countercyclical capital buffer requirement also takes into account the increase of credit in the retail sector. The Detailed Regulation on the Supervision of the Banking Business was also amended on June 30, 2018 to add “concentration of risk in the retail sector” as an additional criteria when the Financial Supervisory Service evaluates the risk management systems of Korean banks.

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 100% 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.

The Financial Services Commission requires Korean banks to maintain a liquidity coverage ratio of at least 90.0% as of January 1, 2017, 95.0% as of January 1, 2018 and 100.0% as of January 1, 2019. The Financial Services Commission defines liquidity coverage ratio as high quality liquid assets that can be easilyimmediately converted tointo cash with little or no loss in value, as divided by the net amount of cash outflow for the next 30 day period, under the stress level established according to the liquidity coverage ratio, pursuant to the Regulation on the Supervision of the Banking Business, which was amended as of June 28, 2016 to implement the liquidity coverage ratio requirements under Basel III.

With respect to foreign currency liquidity coverage ratio, the Regulation on the Supervision of the Banking Business requires that financial institutions dealing with foreign exchange affairs (i.e., banks) whose foreign-currency denominated liabilities are equal to or greater than US$500 million or 5% of its total liabilities, as of the end of the immediately preceding half-year period, maintain a foreign currency liquidity coverage ratio of 60% or higher beginning January 1, 2017, 70% or higher beginning January 1, 2018 and 80% or higher beginning January 1, 2019. The term “foreign currency liquidity coverage ratio” means the ratio of high-liquidity assets to the net cash outflow in respect of foreign-currency denominated assets and liabilities for the next 30 days. In the case of financial institutions dealing with foreign exchange affairs whose foreign-currency denominated liabilities are less than US$500 million and less than 5% of its total liabilities, as of the end of the immediately preceding half-year period, the following ratios shall be maintained and foreign-currency denominated assets and liabilities shall be categorized and managed according to such different remaining maturities: (i) the ratio of assets for which remaining maturities are less than three months to liabilities for which remaining maturities are less than three months shall be at least 85%, and (ii) the assets for which remaining maturities are less than one month shall not exceeded liabilities for which the remaining maturities are less than one month by more than 10%.

The Monetary Policy Committee of the Bank of Korea 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 forWon-denominated demand deposits outstanding, 0.0% of average balances forWon-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 forWon-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 demand deposits, while a 1.0% minimum reserve ratio is applied for offshore accounts, immigrant accounts and resident accounts opened by foreign exchange banks.

Loan-to-Deposit Ratio

In December 2009, the Financial Supervisory Service announced that it would introduce a new set of regulations on theloan-to-deposit ratio by amending the Regulation on the Supervision of the Banking Business

upon its determination that the overall liquidity of banks in Korea had become unstable due to the ongoing increase in theloan-to-deposit ratio resulting from banks expanding their asset size too competitively by granting mortgages on houses and loans to small- andmedium-sized enterprises over the last couple of years. The Regulation on the Supervision of the Banking Business, which was amended as of August 19, 2010 and December 26, 2014 and took effect on January 1, 2014 and January 1, 2015, respectively, requires banks with

Won-denominated loans of not less thanW2 trillion in value as of the last month of the immediately preceding quarter to maintain a ratio ofWon-denominated loans (excluding certain types of loans using funds borrowed from Korea Development Bank or the Korean government or loans made under certain operational rules of Korea Federation of Banks) toWon-denominated deposits (excluding certificates of deposit) and the balance of the covered bonds under the Act on Issuance of Covered Bonds, the maturity of which is not less than five years (only in case when such financing from the issuance of covered bonds is used in Won currency and up to 1% ofWon-denominated deposits) not more than 1:1. Shinhan Bank’sloan-to-deposit ratio as of December 31, 20172018 was 99.3%99.2%, based on monthly average balances.

Currently, in calculating the loan to deposit ratio, there is no differentiation between retail loans and corporate loans. However, the Regulation on the Supervision of the Banking Business is expected to bewas amended during the first quarter ofon July 12, 2018 to provide that, beginning from the second half of 2018,on January 1, 2020, in calculating such loan to deposit ratio, retail loans and corporate loans will be weighed differently, with retail loans subject to a multiple of 115% and corporate loans (excluding loans to SOHOs) subject to a multiple of 85%, thereby increasing the impact of retail loans and reducing the impact of corporate loans in calculating such ratio. Additionally, the Detailed Regulation on the Supervision of the Banking Business is also expected to be amended during the first quarter of 2018 to provide for a weighted multiple to be applied to mortgage and home equity loans where theloan-to-value exceeds 60% in determining required minimum total capital (BIS) ratio. Further, the Regulation on the Supervision of the Banking Business is expected to be amended during the second half of 2018 to introduce an additional countercyclical capital buffer requirement that specifically addresses the increase in credit in the retail sector. This is in addition to and separate from the existing general countercyclical capital buffer requirements that take into account the degree of increase in credit generally relative to the gross domestic product. The Detailed Regulation on the Supervision of the Banking Business is also expected to be amended during the second half of 2018 to add “concentration of risk in the retail sector” as an additional criteria when the FSS evaluates the risk management systems of Korean banks.

Financial Exposure to Any Single Customer and Major Shareholders

Under the Banking Act, the sum of material credit exposures by a bank, namely, the total sum of its credits to single individuals, legal entities or persons sharing credit risk with such individuals or legal entities such as companies belonging to the same enterprise groups as defined under the Monopoly Regulation and Fair Trade Act 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. Subject 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 an 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 individuals, legal entities and companies that belong to the same enterprise group as defined in the Monopoly Regulations and Fair Trade Act.

Under the Banking Act, certain restrictions apply to extending credits to a major shareholder. The definition of a “major shareholder” is as follows:

 

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

 

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 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.

Under the Banking Act, 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) and (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).

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 24.0% per annum on interest rates under the Act on Lending Business.

Lending to Small- andMedium-sized Enterprises

When commercial banks (including Shinhan Bank) makeWon-denominated loans to certainstart-up, startup, venture, innovative and other strategic small- andmedium-sized enterprises specially designated by the Bank of Korea as “priority borrowers,” the Bank of Korea generally provides the underlying funding to these banks at concessionary rates for up to 50% of all such loans made to the priority borrowers subject to a monthly-adjusted limit prescribed by the Bank of Korea (currentlyW5.9trillion) provided that if such loans to priority borrowers made by all commercial banks exceed the prescribed limit for a given month, the concessionary funding for the following month will be allocated to each commercial bank in proportion to such bank’s lending to priority borrowers two months prior to the time of such allocation, which has the effect that, if a particular bank lags other banks in making loans to priority borrowers, the amount of funding such bank can receive from the Bank of Korea at concessionary rates will be proportionately reduced.

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:

 

 • 

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 pursuant to the criteria under the Detailed Regulations promulgated under the Regulation on the Supervision of the Banking Business), except where the loan exposure to a single business group is not more thanW4 billion; and

 

 • 

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 thanW1 billion.

Restrictions on Lending

According to the Banking Act, commercial banks are prohibited from making any of the following categories of loans:

 

loans made directly or indirectly on the pledge of a bank’s own shares;

loans made directly or indirectly to enable a natural or a legal person to buy the bank’s own shares; and

 

 • 

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;

credit (including loans) secured by a pledge of shares of a subsidiary corporation of the bank or to enable a natural or juridical person to buy shares of a subsidiary corporation of the bank; and

 

 • 

loans to any officers or employees of a subsidiary corporation of the bank, other than general loans of up toW20 million or general and housing loans of up toW50 million in the aggregate.

Recent Regulations Relating to Retail Household Loans

The Financial Services Commission implemented a number of changes in recent years to the mechanisms by which a bank evaluates and report its retail household loan balances and has proposed implementing further changes. Due to a rapid increase in the volume of loans secured by homes and other forms of housing, the Financial Services Commission and the Financial Supervisory Service implemented regulations designed to curtail extension of new or refinanced loans secured by housing, including the following:

as to loans secured by collateral of housing (including apartments) located nationwide, theloan-to-value ratio (the aggregate principal amount of loans secured by such collateral over the appraised value of the collateral) shall not exceed 70%;

•as to loans secured by collateral of housing (including apartments) located in areas of excessive investment or housing (excluding apartments) located in areas of high speculation, in each case, as designated by the government, theloan-to-value ratio for loans should not exceed 40%, except that theloan-to-value ratio for low income households with an annual income of less thanW70 million (andW80 million for first home buyers) or buyers of low price housing valued at less thanW600 million shall not exceed 50%;

as to any new loans secured by collateral of housing to be extended to a household, any member of which has already received one or more loans secured by collateral of housing, the maximumloan-to-value ratio is 10% lower than the applicableloan-to-value ratio described above;

•as to loans secured by collateral of housing (including apartments) located in areas of high speculation, areas requiring high levels of investment or areas of expensive housing (including apartments), in each case, as designated by the Government, the borrower’sdebt-to-income ratio (calculated as (i) the aggregate annual total payment amount of (x) the principal of and interest on loans secured by such housing and (y) the interest on other debts of the borrower over (ii) the borrower’s annual income) shall not exceed 40%, except that thedebt-to-income ratio for first home buyers with an annual income of less thanW80 million) and buyers of low price housing valued at less thanW600 million shall not exceed 50%;

as to any new loans secured by collateral of housing to be extended to a household, any member of which has already received one or more loans secured by collateral of housing, the maximumdebt-to-income ratio is 10% lower than the applicabledebt-to-income ratio described above;

as to apartments located in areas of high speculation as designated by the government, a household is permitted to have only one new loan secured by such apartment; and

where a household has two or more loans secured by apartments located in areas of high speculation as designated by the Government, the loan with the earliest maturity date must be repaid first and the number of loans must be eventually reduced to one.

Notwithstanding the foregoing, inIn order to rationalize the regulations on the housing loans, the Financial Services Commission and the Financial Supervisory Service provided administrative instructions in July 2014 as lastwith effect from August 1, 2014, which have been extended and amended in July 2017,several times, that all

financial institutions including banks under the Banking Act arewere subject to the maximumloan-to-value ratio of 70% (irrespective of the location of the property, subject to certain exceptions) and the maximumdebt-to-income ratio of 60% (only in respect of apartment units located in the greater Seoul metropolitan area, subject to certain areasexceptions). However, due to a rapid increase in the volume of loans secured by homes and other forms of housing, the Financial Services Commission and the Financial Supervisory Service implemented the following regulations designed to curtail extension of new or refinanced loans secured by housing by respectively amending the Regulation on the Supervision of the Banking Business and the Detailed Regulation on the Supervision of the Banking Business to replace the above administrative instructions in August 2017:

as to loans secured by collateral of housing located nationwide, theloan-to-value ratio (the aggregate principal amount of loans secured by such collateral over the appraised value of the collateral) shall not exceed 70%;

as to loans secured by collateral of housing located in “adjustment targeted areas”, as designated by the government, subjecttheloan-to-value ratio for loans should not exceed 60%;

as to loans secured by collateral of housing located in “overheated speculative districts” or “speculative districts”, as designated by the government, theloan-to-value ratio for loans should not exceed 40%;

•

as to loans secured by collateral of housing to be extended to a low income household satisfying certain requirements such as (i) in respect of the housing located in “adjustment targeted areas,” the annual income of households being less thanW60 million (andW70 million for first home buyers) and the value of housing being less thanW500 million, and (ii) in respect of the housing located in “overheated speculative districts” or “speculative districts,” the annual income of households being less thanW70 million (andW80 million for first home buyers) and the value of housing being less thanW600 million, the maximumloan-to-value ratio is 10% higher than the applicableloan-to-value ratios of 60% in “adjustment targeted areas” and 40% in “overheated speculative districts” or “speculative districts” described above;

as to loans secured by collateral of housing to be extended to a household which has already received one or more loans secured by collateral of housing, the maximumloan-to-value ratio is 10% lower than the applicableloan-to-value ratios of 60% in “adjustment targeted areas” and 40% in “overheated speculative districts” or “speculative districts” described above;

as to loans secured by collateral of housing (limited to an apartment) located in the greater Seoul metropolitan area, the borrower’sdebt-to-income ratio (calculated as (i) the aggregate annual total payment amount of (x) the principal of and interest on loans secured by such housing and existing mortgage and home equity loans and (y) the interest on other loans of the borrower over (ii) the borrower’s annual income) shall not exceed 60%;

as to loans secured by collateral of housing (limited to an apartment) located in “adjustment targeted areas”, as designated by the government, the borrower’sdebt-to-income ratio shall not exceed 50%;

as to loans secured by collateral of housing located in “overheated speculative districts” or “speculative districts”, as designated by the government, the borrower’sdebt-to-income ratio shall not exceed 40%;

as to loans secured by collateral of housing to be extended to a low income household, the maximumdebt-to-income ratio is 10% higher than the applicabledebt-to-income ratios of 50% in “adjustment targeted areas” and 40% in “overheated speculative districts” or “speculative districts” described above;

as to loans secured by collateral of housing to be extended to a household which has already received one or more loans secured by collateral of housing, the maximumdebt-to-income ratio is 10% lower than the applicabledebt-to-income ratios of 50% in “adjustment targeted areas” and 40% in “overheated speculative districts” or “speculative districts” described above;

as to apartments located in “speculative districts”, as designated by the government, a household is permitted to have only one new loan secured by such apartment; and

where a household has two or more loans secured by apartments located in “speculative districts”, as designated by the government, the loan with the earliest maturity date must be repaid first and the number of loans must be eventually reduced to one.

As housing prices in the greater Seoul metropolitan area continued to rise despite the above measures, on September 13, 2018, the Government announced a more robust policy to curb housing prices. Effective from September 14, 2018, these measures include, among other things, tighter regulations on maximumloan-to-value ratios in “overheated speculative districts,” “speculative districts” and “adjustment targeted areas” (collectively, the “regulated areas”), under which the maximumloan-to-value ratio applicable to owners of single or multiple residential units attempting to purchase an additional residential unit located in any of the regulated areas using a mortgage loan will be nil with certain exceptions).exceptions applicable only to owners of a single residential unit attempting to purchase an additional residential unit. The administrative instructions have been extended several times and are effective until July 2, 2018.maximumloan-to-value ratio will be also nil, with certain exceptions, in the case of purchases of high value residential units (for which the declared value is more thanW900 million) located in any of the regulated areas not being made for the purpose of actual residence.

Restrictions on Investments in Property

A bank may possess real estate property only to the extent necessary for conducting 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 three years, unless otherwise provided by the regulations thereunder.

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:

 

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 companies which business purpose is to own equity interests in private equity funds); or

 

the acquisition of shares by the bank is necessary for corporate restructuring of such company and is approved by the Financial Services Commission.

In the above cases, a bank must satisfy either of the following requirements:

 

the total investment in companies in which the bank owns more than 15% of the outstanding shares with voting rights does not exceed 20% of the sum of Tier I and Tier II capital (less any capital deductions); or

the total investment in companies in which the bank owns more than 15% of the outstanding shares with voting rights does not exceed 30% of the sum of Tier I and Tier II capital (less any capital deductions) where the acquisition satisfies the requirements determined by the Financial Services Commission.

The Banking Act 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 the Banking Act, 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 — namely, (1) any same shareholder group with an aggregate net assets of allnon-financial companies belonging to such group of not less than 25% of the aggregate net assets of all corporations that are members of such group; (2) any group with aggregate assets of allnon-financial companies belonging to such group of not less thanW2 trillion; (3) any mutual fund in which a same shareholder group, as described in items (1) and (2) above, owns more than 4% of the total shares issued and 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 10% 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 30% 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 4% 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 suchnon-financial business group companies may acquire beneficial ownership of:

 

up to 10% of a national bank’s outstanding voting shares with the approval of the Financial Services Commission under the condition that suchnon-financial group companies will not exercise voting rights in respect of such shares in excess of the 4% limit; and

 

in the event that a foreigner, as defined in the Foreign Investment Promotion Act, owns not less than 10% 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 ofnon-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 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 not exceed 0.5% of the bank’s insurable deposits in any given year. The current insurance premium is 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 ofW50 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.

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 Financial Investment Services and Capital Markets Act. Banks engaged in the banking business and trust business are subject to certain legal and accounting procedures requirements, including the following:

 

under the Banking Act, the Financial Investment Services and Capital Markets Act and the Trust 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

 

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.

In the event that a bank qualifies and operates as a collective investment business entity, a trustee, a custodian or a general office administrator under the Financial Investment Services 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 collective investment business, the trustee or custodian business and general office administration. These measures include:

 

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 Financial Investment Services and Capital Markets Act or (2) serving in a trustee business or a custodian business and simultaneously serving in a general office administrator business in accordance with the Financial Investment Services and Capital Markets Act;

 

prohibitions against the joint use or sharing of computer equipment or office equipment; and

 

prohibitions against the sharing of information by and among officers, directors and employees engaged in the different business operations.

A bank which qualifies and operates as a collective investment business entity 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:

 

acting as trustee of an investment trust managed by such bank;

 

purchasing with such bank’s own funds beneficiary certificates of an investment trust managed by such bank;

 

using in its sales activities of other collective investment securities information relating to the trust property of an investment trust managed by such bank;

 

selling through other banks established under the Banking Act beneficiary certificates of an investment trust managed by such bank;

establishing a short-term financial collective investment vehicle; and

 

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 approval of the Financial Services Commission. The securities business is governed by regulations under the Financial Investment Services and Capital 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.

Recently, regulatory authorities are encouraging financial institutions to lower the ATM usage fees in order to decrease the financial expense burden on consumers. Further, in light of the increasing household debt, regulatory authorities are encouraging financial institutions to gradually increase the proportion of the principal of retail loans that are subject to the fixed interest rates from 14% in 2012 to 45% by 2017.

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 regulates 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 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, (for example, providing cash advance loans to existing credit card holders, issuing and settling of debit cards and issuing, selling and settling ofpre-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. Under the Specialized Credit Financial Business Act, a credit card company’s scope of business 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, supply of payment settlement system, loan brokerage and brokerage of collective investment securities.

A credit card company’s average balance of claim amounts arising from the advance of loans to credit card holders (excluding such claims arising from there-advance of loans to credit card holders following a change in the maturity or interest rate of such loans as part of a debt restructuring) as of the end of each quarter may not exceed the sum of the following amounts:

 

Average balance of claims during a quarter arising from the purchase of goods or services by credit card holders with credit cards; and

 

Amount of debit card usage during a quarter by debit card members.

Capital Adequacy

The Specialized Credit Financial Business Act provides for a minimumpaid-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 card assets would be 1.1% (or 2.5%, in the case of card loan assets and revolving assets) of normal assets, 40% (or 50%, in the case of card loan assets and revolving assets) of precautionary assets, 60% (or 65%, in the case of card loan assets and revolving assets) of substandard assets, 75% 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 thereunder, a credit card company must maintain a Won liquidity ratio(Won-denominated currentassets/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 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) borrowing and issuing foreign currency securities after registering itself as a foreign exchange business institutions under the Foreign Exchange Transactions Law, (vi) transferring claims held by the credit card company in connection with its businesses, or (vii) issuing securities backed by the claims held by the credit card company relating to its businesses.

Furthermore, 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.

A credit card company must ensure that its total asset does not exceed six times the amount of its equity capital. However, if the credit card company cannot comply with such limit due to the occurrence of unavoidable events such as drastic changes in the domestic and global financial markets, such limit of its total assets

compared to the equity capital may be adjusted by a resolution of the Financial Services Commission. Anon-credit card company must ensure that its total asset does not exceed ten times the amount of its equity capital.

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 50% 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 may 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 Financial Investment Services and Capital 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 also 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 may 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.

Restrictions on Shareholding in Other Companies

Under the Specialized Credit Financial Business Act and the Act on the Structural Improvement of the 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.

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, profits and losses, corporate governance, competence 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. In addition, a credit card company is required to disclose on anon-going basis certain matters such as the occurrence ofnon-performing loans, a financial incident or losses exceeding certain amounts. In addition, under the regulations issued by the Financial Services Commission, a credit card company or a licensed bank engaging

in the credit card business must submit such report as required by the Governor of the 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 to 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 to 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, a credit card company or a licensed bank engaged 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 the 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 or his/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 engaged 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 andpre-paid cards. However, a credit card company or a licensed bank engaged 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 engaged 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 orpre-paid cards; 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 related to the risk of loss arising from unauthorized use due to lost, stolen, forged or altered credit cards, debit cards orpre-paid cards.

Under the Specialized Credit Financial Business Act, the Financial Services Commission may take necessary measures to maintain credit order and protect consumers by establishing standards to be complied with by credit card companies relating to:

 

maximum limits for cash advances on credit cards;

 

restrictions on debit cards with respect to per day or per transaction usage;

 

aggregate issuance limits and maximum limits on the amount per card onpre-paid cards;

 

calculation and determination of credit limits;

determination of the amount limit of credit cards;

 

provisions included in credit card agreements;

 

management of credit card merchants;

 

collection on claims; or

 

classification of credit card holders for purposes of determining the fees applicable to such holders.

Lending Ratio in Ancillary Business

Pursuant to the Presidential Decree of the Specialized Credit Financial Business Act, as amended in October 2017,January 2019, a credit card company must maintain a quarterly average balance of receivables arising from cash advances to credit card holders (excluding cash advances incurred byre-lending to a credit card holder after modifying the terms and conditions, such as maturity or interest rate, of the original cash advance for debt rescheduling purposes) no greater than its aggregate quarterly average balance of receivables arising from credit card holders’ purchase of goods and services (excluding the amount of receivables arising from the purchase of goods and services using an exclusive use card for business purposes) plus its aggregate quarterly amount of payments made by members using their debit cards.

Issuance of New Cards and Solicitation of New Card Holders

The Presidential Decree of the Specialized Credit Financial Business Act establishes the conditions under which a credit card company or a licensed bank engaged 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 that meet all of the following criteria: (i) age of 19 years or more as defined in the Korean Civil Code, or age of 18 years or more with evidence of employment as of the date of the credit card application; (ii) satisfaction of a minimum credit score as publicly announced by the Financial Services Commission, provided that the minimum personal credit score requirement will not apply in the case where (a) the credit card company can confirm through objective

evidence that an applicant is sufficiently capable of paying for his or her credit card use or such applicant can provide objective evidence therefor, or (b) a credit card function is added to an existing debit card for added convenience to the card holder and the credit card function is subject to limits determined by the Financial Services Commission; (iii) satisfaction of the application scoring system for the relevant credit; and (iv) verification of personal identity.

In addition, a credit card company or a licensed bank engaged in the credit card business, as the case may be, may not engage in the following methods of soliciting credit card holders: (i) providing economic benefits or conditioning such benefits in excess of 10% of the annual credit card fee (in the case ofno-annual fee credit cards, the average annual fees will beW10,000) in connection with issuance of credit cards; (ii) solicitation on streets and private roads as prescribed under the Road Act and Private Road Act, public place and 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.

In 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 owed to any other credit card company or other financial institutions which the applicant is unable to repay, and also 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.

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 engaged in the credit card business are prohibited from collecting its claims by way of:

 

exerting violence or threat of violence;

 

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;

 

providing false information relating to the debtor’s obligation to the debtor or his or her Related Party;

 

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 to his/her capacity to make payment;

 

visiting or telephoning the debtor during late hours between 9:00 p.m. and 8:00 a.m.; and

 

utilizing other uncustomary methods to collect the receivables thereby invading the privacy or the peacefulness in the workplace of the debtor or his or her Related Party.

Principal Regulations Applicable to Financial Investment Companies

General

The securities business is regulated and governed by the Financial Investment Services and Capital Markets Act. Financial 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 Financial Investment Services and Capital Markets Act, a financial investment company may engage in dealing, brokerage, collective investment, investment advice, discretionary investment management or trust businesses if it has obtained relevant licenses from the Financial Services Commission.

A financial investment company may also engage in certain businesses ancillary to the primary business or certain other additional businesses by submitting a report to the Financial Services Commission 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 financial investment company’s financial condition to be unsound or if a financial investment company fails to meet the applicable Net Operating Equity Ratio (as defined below), the government may order 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.

Regulations on Financial Soundness — Capital Adequacy

The Financial Investment Services and Capital Markets Act sets forth various types of brokerage and/or dealing business licenses based on (i) the scope of products and services that may be provided by each type of the brokerage and/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 minimumpaid-in capital ofW53 billion in order to obtain a license for such brokerage, dealing and underwriting businesses.

Under the Financial Investment Service Regulations, as amended and effective as of December 29, 2017,January 31, 2019, the soundness requirement of financial investment companies changed from the previous net operating equity

ratio requirement to a net equity ratio requirement. The net equity ratio is calculated according to the following formula:

Net Equity Ratio = (Net Operating Equity —– Total Risk) / Equity Capital Maintenance Requirement for Each Service Unit

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 Equity, the Total Risk and the Equity Capital Maintenance Requirement for Each Service Unit are to be calculated according to the following formula:

Net Operating Equity = Net assets (total assets - total liabilities) - the total of items that may be deducted + the total of items that may be added;

Total Risk = market risk + counterparty risk + management risk; and

Equity Capital Maintenance Requirement for Each Service Unit = Mandatory Equity Capital to be Required for Each Licensed Service Unit × 70%

The regulations of the Financial Services Commission requires, among other things, financial investment companies to maintain the net equity ratio at a level equal to or higher than 100% at the end of the each quarter of the fiscal year.

In addition, all Korean companies, including financial 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 the stated capital.

Under the Financial Investment Services and Capital 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.

Other Provisions on Financial Soundness

The Financial Investment Services and Capital Markets Act, the Presidential Decree of the Financial Investment Services and Capital Markets Act and the regulations of the Financial Services Commission also include certain provisions which are designed to regulate certain types of activities relating to the management of the assets of a securities company, subject to certain exceptions. Such provisions include:

 

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 Financial Investment Services and Capital Markets Act) of such securities company; and

 

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.

Principal Regulations Applicable to Insurance Companies

General

Insurance companies are regulated and governed by the Insurance Business Act (the “Insurance Business Act”). In addition, 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, approval 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 type 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 type insurance business means an insurance business which deals with injury insurance policies, health insurance policies or nursing care insurance policies. Under the Insurance Business Act, insurance companies are not allowed to engage in both a life insurance business and anon-life insurance business, subject to certain exceptions.

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 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.

Capital Adequacy

The Insurance Business Act requires a minimumpaid-in capital ofW30 billion for an insurance company; provided, that, the insurance company which intends to engage in only certain types of insurance policies may have a lowerpaid-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 ofpaid-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 Margin for life insurance companies is defined under the regulation of the Financial Services Commission and is 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. Instead, the reinsurance company is required to appropriate such policy reserve for the reinsured contracts. However, 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 disalloweddisregarded 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. The Insurance Business Act was amended on January 24, 2011 to classify the insurance products into two categories: (i) reportable insurance products and (ii) voluntary insurance products. Under this amendment, only the changes to the terms and conditions of the reportable insurance products require a prior report and approval from the Financial Supervisory Service and the voluntary insurance products can be sold without prior approval from the Financial Supervisory Service. The policy reserve needs to be appropriated in accordance with the policy reserve calculation method for each insurance product as stipulated in amended Insurance Business Act.

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 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, 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, retail loans, housing loans, and other forms of retail loans extended to individuals not registered for business), is increased to 1% of normal credits, 10% of precautionary credits and 55% of doubtful credits. Furthermore, the regulations on insurance companies became more stringent in September 2010 by adding a requirement that insurance companies maintain allowance for bad debts in connection with real estate project financing loans in excess of 0.9% of normal credits and 7% of precautionary credits.

Variable Insurance and Bancassurance Agents

Variable insurance is regulated pursuant to the Insurance Business Act and the Financial Investment Services and Capital Markets Act. In order for an insurance company to sell variable insurance to a policyholder and operate such variable insurance, the insurance company must obtain a 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 Financial Investment Services 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 Financial Investment Services and Capital Markets Act.

According to the Financial Investment Services 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 collective investment securities, thereby allowing all of the particular variable insurance assets to be outsourced.

The Insurance Business Act 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”), who are currently permitted to sell all types of life andnon-life insurance products, except for protection type insurance products, such as whole life insurance, critical illness insurance and automobile insurance.

Restrictions on Investment of Assets

According to the Insurance Business Act, insurance companies are prohibited from making any of the following investment of assets:

 

owning any real estate (excluding any real estate owned as a result of enforcing their own security interest) other than real estate for conducting 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 25% of its Total Assets, provided that investment in real estate for a separate account is limited to 15% of the assets of such separate account;

loans made for the purpose of speculation in commodities or securities;

 

loans made directly or indirectly to enable a natural or legal person to buy their own shares;

 

loans made directly or indirectly to finance political campaigns and other similar activities; and

 

 • 

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 of a general loan plus a housing loan, or (3) W60 million in the aggregate for general loans and housing loans.

In addition, insurance companies are not allowed to exceed the following limits in making the following investments:

 

with respect to holding foreign currency under the Foreign Exchange Transaction Act or owning offshore real estate, 30% of its Total Assets; and

 

with respect to the sum of margins for a futures exchange designated by the Presidential Decree or a foreign futures exchange, and commitment amounts ofover-the-counter derivatives must not exceed 6% of its Total Assets, provided that theover-the-counter derivative trades are limited to 3%. The derivatives trades of a separate account are limited to 6% of the assets of separate account, provided that theover-the-counter derivatives trades are limited to 3%.

Regulations on Class Actions Regarding Securities

The Law on Class Actions Regarding Securities was enacted as of January 20, 2004 and last amended on May 28, 2013. The Law on Class Actions Regarding Securities governs class actions suits instituted by one or

more representative plaintiff(s) on behalf of 50 or more persons who claim to have been damaged in a capital markets transaction involving securities issued by a listed company in Korea.

Applicable causes of action with respect to such suits include:

 

claims for damages caused by misleading information contained in a securities statement;

 

claims for damages caused by the filing of a misleading business report, semi-annual report, or quarterly report;

 

claims for damages caused by insider trading or market manipulation; and

 

claims instituted against auditors for damages caused by accounting irregularities.

Any such class action may be instituted upon approval from the presiding court and the outcome of such class action will have a binding effect on all potential plaintiffs who have not joined the action, with the exception of those who have filed an opt out notice with such court.

U.S. Regulations

As a substantial majority of our and our subsidiaries’, operations are in Korea, we are primarily subject to the regulations and supervision of the Financial Services Commission and the Financial Supervisory Service. Our subsidiaries, however, have limited operations in the United States, and we own a bank in the United States. Therefore, we and our U.S. operations are subject to U.S. supervision, regulation and enforcement by relevant authorities in the United States with regard to our U.S. operations.

U.S. Banking Regulations

Our operations in the United States are subject to a variety of regulatory regimes. Shinhan Bank maintains an uninsured branch in New York, which is licensed by the New York State Department of Financial Services

(“the Department”) and registered with the banking authority of Korea.Shinhan Bank’s New York branch is subject to regulation and examination by the Department under its licensing authority. In addition, the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) exercises examination and regulatory authority over Shinhan Bank’s U.S. branch. We also own anon-member state chartered bank, Shinhan Bank America, which is regulated by the Department, as its chartering authority, and by the Federal Deposit Insurance Corporation (“FDIC”), as its primary federal banking regulator and as the insurer of its deposits. Our U.S. branch and U.S. bank subsidiary are subject to restrictions on their respective activities, as well as prudential restrictions, such as limits on extensions of credit to a single borrower, and restrictions on transactions with affiliates, among other things. We are also a financial holding company and a bank holding company under U.S. banking laws and our U.S. operations are subject to regulation, supervision and enforcement by the Federal Reserve Board.

Shinhan Bank’s U.S. Branch

The Department, as the licensing authority of Shinhan Bank’s U.S. branch, has the authority, in certain circumstances, to take possession of the business and property of Shinhan Bank located in New York. Such circumstances generally include violations of law, unsafe business practices and insolvency. If the Department exercised this authority over the New York branch of Shinhan Bank, all assets of Shinhan Bank located in New York would generally be applied first to satisfy creditors of the New York branch. Any remaining assets would be applied to satisfy creditors of other U.S. offices of Shinhan Bank, after which any residual assets of the New York branch would be returned to the principal office of Shinhan Bank, and made available for application pursuant to any Korean insolvency proceeding.

Financial Holding Company

In addition to the direct regulation of Shinhan Bank’s U.S. branch by the Department and the Federal Reserve Board, because we operate a U.S. branch and have a subsidiary bank in the U.S., our nonbanking

activities in the United States are subject to regulation by the Federal Reserve Board pursuant to the International Banking Act of 1978, the Bank Holding Company Act of 1956 (the “BHC Act”), and other laws. We have elected to be a “financial holding company” under the BHC Act. Financial holding companies may engage in a broader spectrum of activities than bank holding companies or foreign banking organizations that are not financial holding companies, including underwriting and dealing in securities. To maintain our financial holding company status, (i) we and our U.S. subsidiary bank located in New York are required to be “well capitalized” and “well managed,” (ii) our U.S. branch and our U.S. subsidiary bank located in New York areis required to meet certain examination ratings, and (iii) our subsidiary bank in New York is required to maintain a rating of at least “satisfactory” under the Community Reinvestment Act of 1977 (the “CRA”).

A major focus of U.S. governmental policy relating to financial institutions in recent years has been aimed at fighting money laundering and terrorist financing. Regulations applicable to us and our subsidiaries impose obligations to maintain effective policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identities of clients. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing could have serious consequences for the firm, both in legal terms and in terms of our reputation.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which was enacted on July 21, 2010 in response to the financial crisis, impacts the financial services industry by addressing, among other issues, systemic risk oversight, bank capital standards, the liquidation of failing systemically important institutions,over-the-counter and cleared derivatives, the ability of banking entities, includingnon-U.S. banks with branches in the U.S., like us, to engage in proprietary trading activities and invest in hedge funds and private equity (theso-called Volcker rule), consumer and investor protection, hedge fund registration, securitization, investment advisors, shareholder “say on pay,” the role of credit-rating agencies, and more. The Dodd-Frank Act requires various federal banking and financial regulatory authorities to adopt a broad range of implementing rules and regulations. Such authorities have significant discretion in drafting the implementing rules and regulations.

The Dodd-Frank Act provides regulators with tools to impose greater capital, leverage and liquidity requirements and other prudential standards, particularly for financial institutions that pose significant systemic risk and bank holding companies with greater than US$50 billion in assets.risk. Pursuant to the Dodd-Frank Act, the Federal Reserve Board has implemented rules that establish enhanced prudential standards for the U.S. operations of foreign banking organizations (“FBOs”) such as us. In imposing such heightened prudential standards onnon-U.S. banks such as us, the Federal Reserve Board is directed to take into account the principle of national treatment and equality of competitive opportunity, and the extent to which the foreign bank holding company is subject to comparable home country standards.

Our combined U.S. operations are currently and may continue to be subject to certain enhanced prudential standards.

In February 2014, the Federal Reserve Board issued final rules applyingparticular, enhanced prudential standards currently applicable to foreign banking organizations, or FBOs, like us with US$50 billion or more in total global consolidated assets. The final rules represent significant changes to the way that the U.S. operations of FBOs are supervised by the Federal Reserve Board within the United States. In particular, the final rules:FBOs:

 

require an FBO with both US$50 billion or more insignificant total global consolidated assets and combinedsignificant U.S. assets (excluding the total assets of each U.S. branch and agency) of US$50 billion or more to establish a U.S.top-tier intermediate holding company (“IHC”) over all U.S. bank and nonbank subsidiaries subject to the proposal;

 

subject an FBO’s IHC to the same capital adequacy standards, including minimum risk based capital and leverage requirements, as those applicable to U.S. bank holding companies;

 

require an FBO with significant combined U.S. assets of US$50 billion or more to have its U.S. operations satisfy certain liquidity risk management standards, conduct liquidity stress tests, and maintain a buffer of highly liquid assets over specified time horizons, and an FBO with less significant combined U.S. assets of less than US$50 billion would be required to conduct an internal liquidity stress test and report the results to the Federal Reserve Board on an annual basis; and

subject the largest FBOs with the most significant U.S. operations (i.e., those FBOs with US$50 billion or more in total global consolidated assets and US$50 billion or more in combined U.S. assets, excluding the assets of their U.S. branch and agency networks) to heightened compliance obligations with respect to capital plans, capital and leverage standards, capital stress testing, liquidity stress testing and risk management.management, as well as single counterparty credit limits.

The final rulescurrently applicable enhanced prudential standards also include requirements relating to overall risk management anddebt-to-equity limits for the U.S. operations of FBOs. Implementation of the final rules began June 1, 2014 with the most significant requirements having taken effect on July 1, 2016. Rules imposing single counterparty credit limits and early remediation requirements on FBOs have yet to be finalized. We continue to assess the full impact of these enhanced prudential requirements on our business, as well as legislative and administrative amendments that may be enacted to change various asset or other thresholds for the application of enhanced prudential standards and other requirements.

The current regulatory environment in the United States may be impacted by future legislative developments, such as amendments to key provisions of the Dodd-Frank Act. On January 20, 2017, Mr. Donald J. Trump became President of the United States. On February 3, 2017, U.S. President Donald Trump signed an executive order calling for a review of U.S. financial laws and regulations in order to determine their consistency with a set of core principles identified in the order. The full scope of President Trump’s short-term legislative agenda is not yet fully known, but it may include certain deregulatory measures for the U.S. financial services industry, including changes to key aspects of the Dodd-Frank Act, such as modifying the Volcker Rule and lowering the threshold for applying enhanced prudential standards from US$50 billion to US$250 billion. One such proposal, calledOn May 24, 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Reform Act”) was passedsigned into law. Among other regulatory changes, the Reform Act amends various sections of the Dodd-Frank Act, including by modifying the Volcker Rule to exempt certain depository institutions and by raising the asset threshold for U.S. banking organizations to become subject to enhanced prudential standards. The ultimate consequences of the Reform Act and its potential impact on us remain uncertain.

The Reform Act raised the threshold for automatic application of enhanced prudential standards to FBOs under the Dodd-Frank Act from $50 billion in total global consolidated assets to $250 billion. The bill exempted FBOs with total global consolidated assets of less than $100 billion from these enhanced prudential standards effective immediately upon enactment of the bill. FBOs with total global consolidated assets between $100 billion to $250 billion will be exempt from these enhanced prudential standards following an 18-month period unless the Federal Reserve Board determines to apply some or all of these standards to some or all such FBOs or to subject such FBOs to less stringent versions of these standards. In October 2018, the Federal Reserve Board issued a proposed rule that would implement the Reform Act’s changes to the application of enhanced prudential standards with respect to U.S. bank holding companies, and in April 2019 the Federal Reserve Board issued a proposed rule that would implement Reform Act’s changes to the application of enhanced prudential standards with respect to FBOs (the “FBO Tailoring Proposal”). The FBO Tailoring Proposal would delineate three categories of enhanced prudential standards applicable to FBOs based on an FBO’s asset size and other factors such as the degree of the cross-jurisdictional activity, reliance on short-term wholesale funding, nonbank assets, and off-balance sheet exposures of an FBO’s U.S. operations. The FBO Tailoring Proposal generally would determine the stringency of enhanced prudential standards applicable to FBOs based on the risk profile of the FBO’s U.S. operations, rather than its global footprint, with most enhanced prudential standards applying only to FBOs with combined U.S. assets of at least $100 billion. FBOs with global assets of $100 billion or more and a relatively limited U.S. presence, such as us, would be subject to certain minimum standards, with the Federal Reserve Board relying primarily on compliance with comparable home-country prudential standards with respect to such FBOs.

In addition, as an FBO with more than $100 billion in total consolidated assets, we are currently required to submit annually to the Federal Reserve Board and FDIC a resolution plan for the orderly resolution of our U.S. operations under the U.S. SenateBankruptcy Code or other applicable insolvency laws in a rapid and orderly fashion in the event of future material financial distress or failure. If the Federal Reserve Board and the FDIC jointly determine that the resolution plan is not credible and the deficiencies are not cured in a timely manner, they may jointly impose more stringent capital, leverage or liquidity requirements or restrictions on March 14, 2018, but remains subjectour growth, activities or operations. If we were to passage byfail to address the U.S. Housedeficiencies in the resolution plan when required, we could eventually be required to divest certain assets or operations.

In April 2019, the Federal Reserve Board and FDIC issued a proposed rule addressing the applicability of Representatives.resolution planning requirements for FBOs (the “FBO Resolution Plan Proposal”). The FBO Resolution Plan

Proposal would apply reduced resolution plan filing requirements to FBOs that have $250 billion or more in total global consolidated assets and that do not otherwise meet certain category thresholds identified in the FBO Tailoring Proposal, such as us, requiring such FBOs to submit a reduced content resolution plan every three years. It remains unclear whether the Federal Reserve Board will adopt final rules amending the enhanced prudential standards or resolution planning requirements currently applicable to us and, if such rules were to be adopted, we cannot predict at this time the extent to which the scope of such final rules would resemble the FBO Tailoring Proposal or FBO Resolution Plan Proposal. It also remains unclear whether any other particular legislative or regulatory proposals will be enacted or adopted. In addition, it is not possible to determine the full extent of any impact on us of any such potential financial reform legislation or rulemaking, or whether any such proposalproposed legislation or rulemaking will become law.

enacted or adopted.

Shinhan Bank America

Shinhan Bank America, a state chartered bank that is located in New York and is not a member of the Federal Reserve Board, is subject to extensive regulation and examination by the Department, as its chartering authority, and by the FDIC, as the insurer of its deposits and as its primary federal banking regulator. The federal and state laws and regulations which are applicable to banks regulate, among other things, the activities in which they may engage and the locations at which they may engage in them, their investments, their reserves against deposits, the timing of the availability of deposited funds and transactions with affiliates, among other things. Shinhan Bank America must file reports with the Department and the FDIC concerning its activities and financial condition, in addition to obtaining regulatory approvals prior to entering into certain transactions, such as establishing branches and mergers with, or acquisitions of, other depository institutions. The Department and the FDIC periodically examine the bank to test Shinhan Bank America’s safety and soundness and its compliance with various regulatory requirements. This comprehensive regulatory and supervisory framework restricts the activities in which a bank can engage and is intended primarily for the protection of the FDIC insurance fund and the bank’s depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves. Any change in such regulations, whether by the Department, the FDIC or as a result of the enactment of legislation, could have a material adverse impact on Shinhan Bank America and its operations.

Capital Requirements. The FDIC imposes capital adequacy standards on state-chartered banks like Shinhan Bank America. In order to be considered “adequately capitalized,” the FDIC’s current capital regulations require a minimum 3.0% Tier I leverage capital requirement for the most highly-rated state-chartered,non-member banks, with an additional cushion of at least 100 basis points required for all other state-chartered, non-member banks, which effectively will increase the minimum Tier I leverage ratio for such other banks to 4.0%. Under the FDIC’s regulation, the highest-rated banks are those that the FDIC determines are not anticipating or experiencing significant growth and have well diversified risk, including no undue interest rate risk exposure, excellent asset quality, high liquidity, good earnings and, in general, which are considered a strong banking organization and are rated composite 1 under the Uniform Financial Institutions Rating System. Tier I or core capital is defined as the sum of common stockholders’ equity (including retained earnings),non-cumulative perpetual preferred stock and related surplus, and minority interests in consolidated subsidiaries, minus all intangible assets other than certain qualifying supervisory goodwill and certain mortgage servicing rights.

The FDIC also requires that banks meet a risk-based capital standard. The current risk-based capital standard for banks requires, in order to be “adequately capitalized,” the maintenance of a ratio of total capital (which is defined as Tier I capital and supplementary capital) to risk-weighted assets of 8.0% and Tier I capital to risk-weighted assets of 4%. In determining the amount of risk-weighted assets, all assets, plus certainoff-balance sheet assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in the type of asset or item. The components of Tier I capital are the same as for the leverage capital standard. The components of supplementary capital include certain perpetual preferred stock, certain mandatory convertible securities, certain subordinated debt and intermediate preferred stock and general allowances for loan and lease losses. Allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of capital counted toward supplementary capital cannot exceed 100% of core capital.

In order for our U.S. bank subsidiary to be classified as “well capitalized,” which is necessary in order for us to maintain our financial holding company status, it must have a Tier I leverage ratio of at least 5%, a Tier Irisk-based capital ratio of at least 6% and a total risk-based capital ratio of at least 10%. Furthermore, banks are generally encouraged to maintain even higher levels of capital during the current period of economic difficulty. In addition, the “prompt corrective action” framework under the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), provides, among other things, for expanded regulation of insured depository institutions, including banks, and their parent holding companies. As required by FDICIA, the federal

banking agencies have established five capital tiers ranging from “well capitalized” to “critically undercapitalized” for insured depository institutions. OurIn order for our U.S. bank subsidiary to be classified as “well capitalized,” which is necessary in order for us to maintain our financial holding company status, it must maintain a minimum 5% Tier I leverage ratio, a 6.5% common equity Tier I capital ratio, a 8% Tier I risk-based capital ratio and a 10% total risk-based capital ratioratio.

In order for Shinhan Bank America to meet the definition of “wellbe classified as “adequately capitalized” under FDICIA’s prompt corrective action requirements.standards, which is necessary in order for Shinhan Bank America to avoid certain restrictions under FDICIA, it must maintain a minimum 4% Tier I leverage ratio, a 4.5% common equity Tier I capital ratio, a 6% Tier I risk-based capital ratio and a 8% total risk-based capital ratio.

As of December 31, 2017,2018, Shinhan Bank America exceeded all of the capital ratio standards for a well capitalized bank with a Tier I leverage ratio of 11.64%14.61%, a common equity Tier I risk-based capital ratio of 15.50%19.12%, a Tier I risk-based capital ratio of 15.50%19.12% and a total risk-based capital ratio of 16.36%19.88%.

The current FDIC capital adequacy guidelines have been modified in accordance with “Basel III.” In July 2013, the Federal Reserve Board, the FDIC and the Office of the Comptroller of the Currency issued final rules (the “Final Rules”) that substantially revise the federal banking agencies’ current capital rules and implement Basel III. The Final Rules, among other things, narrow the definition of capital, and increase capital requirements for specific exposures. They also include higher capital ratio requirements. In addition, consistent with the Dodd-Frank Act, they remove references to, or requirements of reliance on, credit ratings in the capital rules and replace them with alternative standards of creditworthiness. Shinhan Bank America’s current capital ratios satisfy the requirements set forth in the Final Rules.

Activities and Investments of New York-Chartered Banks. Shinhan Bank America derives its lending, investment and other authority primarily from the applicable provisions of New York State Banking Law and the

regulations of the Department, as well as FDIC regulations and other federal laws and regulations. See “—Activities and Investments of FDIC-Insured State-Chartered Banks” below. These New York laws and regulations authorize Shinhan Bank America to invest in real estate mortgages, consumer and commercial loans, certain types of debt securities, including certain corporate debt securities and obligations of federal, State and local governments and agencies, and certain other assets. A bank’s aggregate lending powers are not subject to percentage of asset limitations, but, as discussed below, there are limits on the amount of credit exposure that a bank may have to a single borrower or group of related borrowers. A New York-chartered bank may also exercise trust powers upon approval of the Department. Shinhan Bank America does not have trust powers.

With certain limited exceptions, Shinhan Bank America may not make loans or extend credit for commercial, corporate or business purposes (including lease financing) to a single borrower, the aggregate amount of which would be in excess of 15% of Shinhan Bank America’s net worth, on an unsecured basis, and 25% of the net worth if the excess is collateralized by readily marketable collateral or collateral otherwise having a value equal to the amount by which the loan exceeds 15% of Shinhan Bank America’s net worth. In calculating the amount of outstanding loans or credit to a particular borrower for this purpose, Shinhan Bank America must include its credit exposure arising from derivative transactions with the borrower.

Activities and Investments of FDIC-Insured State-Chartered Banks. The activities and equity investments of FDIC-insured, state-chartered banks are generally limited to those that are permissible for national banks. Under regulations dealing with equity investments, an insured state bank generally may not directly or indirectly acquire or retain any equity investment of a type, or in an amount, that is not permissible for a national bank. An insured state bank may, among other things, (i) acquire or retain a majority interest in a subsidiary that is engaged in activities that are permissible for the bank itself to engage in, (ii) invest as a limited partner in a partnership the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2% of the bank’s total assets, and (iii) acquire up to 10% of the voting stock of a company that solely provides or reinsures directors’, trustees’ and officers’ liability insurance coverage or bankers’ blanket bond group insurance coverage for insured depository institutions. In addition, an FDIC-insured state-chartered bank may not directly, or indirectly through a subsidiary, engage as “principal” in any activity that is not permissible for a national bank unless the FDIC has determined that such activities would pose no risk to the insurance fund of which it is a member and the bank is in compliance with applicable regulatory capital requirements.

Regulatory Enforcement Authority. Applicable banking laws include substantial enforcement powers available to federal banking regulators. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issuecease-and-desist or removal orders and to initiate injunctive actions against banking organizations and institution-affiliated parties, as defined. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities. On June 12, 2017, Shinhan Bank America entered into a consent order with the FDIC with respect to certain weaknesses relating to its anti-money laundering compliance program. Shinhan Bank America has taken corrective measures and provides periodic reports to the FDIC with regard to such matters.

Under the New York State Banking Law, the Department may issue an order to a New York-chartered banking institution to appear and explain an apparent violation of law, to discontinue unauthorized or unsafe practices and to keep prescribed books and accounts. Upon a finding by the Department that any director, trustee or officer of any banking organization has violated any law, or has continued unauthorized or unsafe practices in conducting the business of the banking organization after having been notified by the Department to discontinue such practices, such director, trustee or officer may be removed from office by the Department after notice and an opportunity to be heard. The Department also may take possession of a banking organization under specified statutory criteria.

Prompt Corrective Action. Section 38 of the Federal Deposit Insurance Act (“FDIA”) provides the federal banking regulators with broad power to take “prompt corrective action” to resolve the problems of undercapitalized

institutions. The extent of the regulators’ powers depends on whether the institution in question is “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” A bank is deemed to be (i) “well capitalized” if it has total risk-based capital ratio of 10.0% or greater, has a Tier I risk-based capital ratio of 8.0% or greater, has a common equity Tier I capital ratio of 6.5% or greater, has a Tier I leverage capital ratio of 5.0% or greater, and is not subject to specified requirements to meet and maintain a specific capital level for any capital measure, (ii) “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, has a Tier I risk-based capital ratio of 6.0% or greater, has a common equity Tier I capital ratio of 4.5% or greater, has a Tier I leverage capital ratio of 4.0% or greater and does not meet the definition of “well capitalized,” (iii) “undercapitalized” if it has a total risk-based capital ratio that is less than 8.0%, has a Tier I risk-based capital ratio that is less than 6.0%, has a common equity Tier I capital ratio of less than 4.5%, or has a Tier I leverage capital ratio that is less than 4.0%, (iv) “significantly undercapitalized” if it has a total risk-based capital ratio that is less than 6.0%, has a Tier I risk-based capital ratio that is less than 4.0%, has a common equity Tier I capital ratio that is less than 3.0%, or has or a Tier I leverage capital ratio that is less than 3.0%, and (v) “critically undercapitalized” if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. The regulations also provide that a federal banking regulator may, after notice and an opportunity for a hearing, reclassify a “well capitalized” institution as “adequately capitalized” and may require an “adequately capitalized” institution or an “undercapitalized” institution to comply with supervisory actions as if it were in the next lower category if the institution is in an unsafe or unsound condition or engaging in an unsafe or unsound practice. The federal banking regulator may not, however, reclassify a “significantly undercapitalized” institution as “critically undercapitalized.”

An institution generally must file a written capital restoration plan which meets specified requirements, as well as a performance guaranty by each company that controls the institution, with an appropriate federal banking regulator within 45 days of the date that the institution receives notice or is deemed to have notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Immediately upon becoming undercapitalized, an institution becomes subject to statutory provisions, which, among other things, set forth various mandatory and discretionary restrictions on the operations of such an institution.

FDIC Insurance. Shinhan Bank America’s deposits are insured by the FDIC. As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the FDIC.

InDuring the past several years,2008-2009 financial crisis, there have beenwere many failures and near-failures among financial institutions. The FDIC insurance fund reserve ratio, representing the ratio of the fund to the level of insured deposits, declined due to losses caused by bank failures and the FDIC then increased its deposit insurance premiums on remaining institutions in order to replenish the insurance fund. The FDIC insurance fund balance increased throughout 2010 and turned positive in 2011. The Dodd-Frank Act requires the FDIC to increase the ratio of the FDIC insurance fund to estimated total insured deposits (“Reserve Ratio”) to 1.35% by September 30, 2020. If bank failures in the future are more costly than the FDIC currently anticipates, then the FDIC willmay be required to continue to impose higher insurance premiums. Such anAny such increase would increase ournon-interest expense. Thus, despite the prudent steps Shinhan Bank America may take to avoid the mistakes made by other banks, its costs of operations may increase as a result of those mistakes by others.

As required by the Dodd-Frank Act, the FDIC revised its deposit insurance premium assessment rates in 2011. In general,2016, the rates are appliedFDIC adopted a rule in accordance with provisions of the Dodd-Frank Act that requires large institutions to a bank’s total assets less tangible capital,bear the burden of raising the Reserve Ratio from 1.15% to 1.35% through assessment surcharges for such large institutions. The Reserve Ratio exceeded 1.35% in contrast to the former rule which applied the assessment rate to a bank’s amount of deposits. The FDIC believes that while the largest banks will face higher assessments under the new system than they would under the former system, most banks, including Shinhan Bank America, will pay a lower total assessment under the new system than they would have paid under the former system.September 2018.

As a result of the Dodd-Frank Act, the increase in the standard FDIC insurance limit from US$100,000 to US$250,000 was made permanent. As theThe Dodd-Frank Act also removed the prohibition on banks paying interest on commercial demand deposits, commercial depositors currently must choose between earning interest on their demand deposits or having the benefit of unlimited deposit insurance coverage.deposits.

The FDIC may terminate the deposit insurance of any insured depository institution, including Shinhan Bank America, if it determines, after a hearing, that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. Management is aware of no existing circumstances that would result in termination of Shinhan Bank America’s deposit insurance.

Brokered Deposits. Under federal law and applicable regulations, (i) a well capitalized bank may solicit and accept, renew or roll over any brokered deposit without restriction, (ii) an adequately capitalized bank may not accept, renew or roll over any brokered deposit unless it has applied for and been granted a waiver of this prohibition by the FDIC and (iii) an undercapitalized bank may not (x) accept, renew or roll over any brokered deposit or (y) solicit deposits by offering an effective yield that exceeds by more than 75 basis points the prevailing effective yields on insured deposits of comparable maturity in such institution’s normal market area or in the market area in which such deposits are being solicited. The term “undercapitalized insured depository institution” is defined to mean any insured depository institution that fails to meet the minimum regulatory capital requirement prescribed by its appropriate federal banking agency. The FDIC may, on acase-by-case basis and upon application by an adequately capitalized insured depository institution, waive the restriction on brokered deposits upon a finding that the acceptance of brokered deposits does not constitute an unsafe or unsound practice with respect to such institution. In December 2018, the FDIC sought public comment on aspects of FDIC’s brokered deposit and interest rate regulations. The outcome of this request for comment on the FDIC’s regulations in the future is uncertain. Shinhan Bank America had an aggregate amount of US$8035.61 million of brokered deposits outstanding atas of December 31, 2017.2018.

Community Reinvestment and Consumer Protection Laws. In connection with its lending activities, Shinhan Bank America is subject to a variety of federal laws designed to protect borrowers and promote lending to various sectors of the economy and population. Included among these are the Home Mortgage Disclosure Act, Real Estate Settlement Procedures Act,Truth-in-Lending Act, Equal Credit Opportunity Act, Fair Credit Reporting Act and CRA.

The CRA requires FDIC insured banks to define the assessment areas that they serve, identify the credit needs of those assessment areas and take actions that respond to the credit needs of the community. The FDIC must conduct regular CRA examinations of Shinhan Bank America and assign it a CRA rating of “outstanding,” “satisfactory,” “needs improvement” or “unsatisfactory.” Shinhan Bank America is also subject to provisions of the New York State Banking Law which impose similar obligations to serve the credit needs of its assessment areas. The Department and the FDIC each periodically assess a bank’s compliance, and makes the assessment available to the public. Federal and New York State laws both require consideration of these ratings when reviewing a bank’s application to engage in certain transactions, including mergers, asset purchases and the establishment of branch offices. A negative assessment may serve as a basis for the denial of any such application. Shinhan Bank America has received “satisfactory” ratings from both the Department and the FDIC.

The Dodd-Frank Act created the Consumer Financial Protection Bureau (“Bureau”(the “Bureau”) with broad authority to regulate and enforce consumer protection laws. The Bureau has the authority to adopt regulations under numerous existing federal consumer protection statutes. The Bureau may also decide that a particular consumer financial product or service, or the manner in which it is offered, is an unfair, deceptive, or abusive act or practice. If the Bureau so decides, it has the authority to outlaw such act or practice. The FDIC enforces the regulations of the Bureau with regard to Shinhan Bank America.

Limitations on Dividends. The payment of dividends by Shinhan Bank America is subject to various regulatory requirements. Under New York State Banking Law, a New York-chartered stock bank may declare and pay dividends out of its net profits, unless there is an impairment of capital, but approval of the

Superintendent of Banks is required if the total of all dividends declared in a calendar year would exceed the total of its net profits for that year combined with its retained net profits of the preceding two years, subject to certain adjustments.

Assessments. Banking institutions are required to pay assessments to both the FDIC and the Department to fund the operations of those agencies. The assessments are based upon the amount of Shinhan Bank America’s total assets. Shinhan Bank America must also pay an examination fee to the Department when it conducts an examination.

Transactions with Related Parties. Shinhan Bank America’s authority to engage in transactions with related parties or “affiliates” (i.e., any entity that controls or is under common control with an institution) or to make loans to certain insiders is limited by Sections 23A and 23B of the Federal Reserve Act. Section 23A limits the aggregate amount of transactions with any individual affiliate to 10% of the capital and surplus of the institution and also limits the aggregate amount of transactions with all affiliates to 20% of the institution’s capital and surplus. The term “affiliate” includes, for this purpose, us and any company that we control other than Shinhan Bank America and its subsidiaries.

Loans to affiliates must be secured by collateral with a value that depends on the nature of the collateral. The purchase of low quality assets from affiliates is generally prohibited. Loans and asset purchases with affiliates must be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the institution as those prevailing at the time for comparable transactions with nonaffiliated companies. In the absence of comparable transactions, such transactions may only occur under terms and circumstances, including credit standards that in good faith would be offered to or would apply to nonaffiliated companies. Shinhan Bank America’s authority to extend credit to executive officers, directors and 10% shareholders, as well as entities controlled by such persons, is currently governed by Regulation O of the Federal Reserve Board. Regulation O generally requires such loans to be made on terms substantially similar to those offered to unaffiliated individuals (except for preferential loans made in accordance with broad based employee benefit plans), places limits on the amount of loans Shinhan Bank America may make to such persons based, in part, on Shinhan Bank America’s capital position, and requires certain approval procedures to be followed.

Standards for Safety and Soundness. FDIC regulations require that Shinhan Bank America adopt procedures and systems designed to foster safe and sound operations in the areas of internal controls, information systems, internal and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings and compensation, fees and benefits. Among other things, these regulations prohibit compensation and benefits and arrangements that are excessive or that could lead to a material financial loss. If Shinhan Bank America fails to meet any of these standards, it will be required to submit to the FDIC a plan specifying the steps that will be taken to cure the deficiency. If it fails to submit an acceptable plan or fails to implement the plan, the FDIC will require it to correct the deficiency and until corrected, may impose restrictions on it.

The FDIC has also adopted regulations that require Shinhan Bank America to adopt written loan policies and procedures that are consistent with safe and sound operation, are appropriate for its size, and must be reviewed by its board of directors annually. Shinhan Bank America has adopted such policies and procedures, the material provisions of which are discussed above as part of the discussion of our lending operations.

U.S. Regulation of Other U.S. Operations

In the United States, Shinhan Investment America Inc., our U.S.-registered broker-dealer subsidiary, is subject to regulations that cover all aspects of the securities business, including, sales methods, trade practices among broker-dealers, use and safekeeping of clients’ funds and securities, capital structure; record-keeping, the financing of clients’ purchases, and the conduct of directors, officers and employees.

Shinhan Investment America Inc. is regulated by a number of different government agencies and self-regulatory organizations, including the SEC and the Financial Industry Regulatory Authority (“FINRA”). Our

U.S. subsidiaries are also regulated by some or all of the NYSE, the Municipal Securities Rulemaking Board, the U.S. Department of the Treasury, the Federal Reserve Board and the Commodities Futures Trading Commission. In addition, the U.S. states, provinces and territories have local securities commissions that regulate and monitor activities in the interest of investor protection. These regulators have a variety of sanctions available, including the authority to conduct administrative proceedings that can result in censure, fines, the issuance ofcease-and-desist orders or the suspension or expulsion of the broker-dealer or its directors, officers or employees.

FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA covers a broad spectrum of securities businesses, including, registering and educating industry participants, examining securities firms, writing rules, enforcing those rules and the federal securities laws, informing and educating the investing public, providing trade reporting and other industry utilities, and administering a dispute resolution forum for investors and registered firms. It also performs market regulation under contract for the NASDAQ Stock Market, the American Stock Exchange and the Chicago Climate Exchange.

Many of the provisions of the Dodd-Frank Act discussed above will affect the operation of Shinhan Investment America, as well as our U.S. banking operations. Again, the impact of this statute on our operations will depend on the final regulations ultimately adopted by various agencies and oversight boards in coming years.

ITEM 4.C.

Organizational Structure

As of the date hereof, weWe currently have 1415 direct and 2526 indirect subsidiaries. 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:

 

LOGOLOGO

 

1)

Currently in liquidation proceedings.

2)We and our subsidiaries currently own 36.7% in the aggregate.

3)We and our subsidiaries currently own 32.6% in the aggregate.

3)4)

We and our subsidiaries currently own 34.6% in the aggregate.

4)5)

We and our subsidiaries currently own 1.8% in the aggregate.

5)6)

We and our subsidiaries currently own 18.9% in the aggregate.

6)

We and our subsidiaries currently own 25.27% in the aggregate.

All of our subsidiaries are incorporated in Korea, except for the following:

 

Shinhan Asia Limited (incorporated in Hong Kong);

 

Shinhan Bank America (incorporated in the United States);

 

Shinhan Bank Canada (incorporated in Canada);

Shinhan Bank (China) Limited (incorporated in the People’s Republic of China);

 

Shinhan Bank Europe GmbH (incorporated in Germany);

 

Shinhan Bank Kazakhstan Limited (incorporated in Kazakhstan);

 

Shinhan Bank Japan (incorporated in Japan);

 

Shinhan Khmer Bank PLC (incorporated in Cambodia);

 

Shinhan Bank Vietnam Ltd. (incorporated in Vietnam);

 

PT Bank Shinhan Indonesia (incorporated in Indonesia);

 

Banco Shinhan de Mexico (incorporated in Mexico);

 

LLP MFO Shinhan Finance (incorporated in Kazakhstan);

 

PT Shinhan Indo Finance (incorporated in Indonesia);

 

Shinhan Microfinance Co., Ltd. (incorporated in Myanmar);

 

Shinhan Investment Corp., USA Inc. (incorporated in the United States);

 

Shinhan Investment Corp., Asia Ltd. (incorporated in Hong Kong);

 

Shinhan Securities Vietnam Co., Ltd. (incorporated in Vietnam);

 

PT Shinhan Sekuritas Indonesia (incorporated in Indonesia);

 

Shinhan Asset Management Indonesia (incorporated in Indonesia);

Shinhan BNP Paribas Asset Management (Hong Kong) Limited (incorporated in Hong Kong); and

Shinhan DS Vietnam Co. Limited (incorporated in Vietnam).

 

ITEM 4.D.

Properties

The following table provides information regarding certain of our properties in Korea.

 

 Area
(In square meters)		  Area
(In square meters)		 

Type of Facility

 

Location

 Building Site (If
Different)		  

Location

 Building Site (If
Different)		 

Registered office and corporate headquarters

 20, Sejong-daero 9-gil, Jung-gu, Seoul, Korea 04513 59,519  5,418  20, Sejong-daero9-gil,Jung-gu, Seoul, Korea 04513  59,519   5,418 

Shinhan Investment Corp.

 70, Yeoui-daero,Yeoungdeungpo-gu, Seoul, Korea 07325 70,170  4,765  70, Yeoui-daero,Yeoungdeungpo-gu, Seoul, Korea 07325  70,170   4,765 

Shinhan Centennial Building

 29,Namdaemun-ro10-gil,Jung-gu, Seoul, Korea 04540 19,697  1,389  29,Namdaemun-ro10-gil,Jung-gu, Seoul, Korea 04540  19,697   1,389 

Shinhan Bank Gwanggyo Branch

 54, Cheonggyecheon-ro,Jung-gu, Seoul, Korea 04540 16,727  6,783  54,Cheonggyecheon-ro,Jung-gu, Seoul, Korea 04540  16,727   6,783 

Shinhan Myongdong Branch

 43,Myeongdong-gil,Jung-gu, Seoul, Korea 04534 8,936  1,017  43,Myeongdong-gil,Jung-gu, Seoul, Korea 04534  8,936   1,017 

Shinhan Youngdungpo Branch

 27,Yeongjung-ro,Yeoungdeungpo-gu, Seoul, Korea 07301 6,171  1,983  27,Yeongjung-ro,Yeoungdeungpo-gu, Seoul, Korea 07301  6,171   1,983 

Shinhan Back Office Support Center

 1311,Jungang-ro, Ilsandong-gu,Goyang-si,Gyeonggi-do, Korea 10401 25,238  5,856  1311,Jungang-ro,Ilsandong-gu,Goyang-si,Gyeonggi-do, Korea 10401  25,238   5,856 

Shinhan Bank Back Office and Call Center

 251, Yeoksam-ro,Gangnam-gu, Seoul, Korea 06225 40,806  7,964  251,Yeoksam-ro,Gangnam-gu, Seoul, Korea 06225  40,806   7,964 

Shinhan Bank Back Office and Storage Center

 1221,1sunwhan-ro,Sangdang-gu,Cheongju-Si,Chungcheongbuk-do, Korea 28777 6,019  5,376  1221,1sunwhan-ro,Sangdang-gu,Cheongju-Si,Chungcheongbuk-do, Korea 28777  6,019   5,376 

Shinhan Card Yoksam-Dong Building

 176, Yeoksam-ro,Gangnam-gu, Seoul, Korea 06248 7,348  1,185 

Shinhan Data Center

 67, DigitalValley-ro, Suji-gu,Yongin-si, Gyeonggi-do, Korea 16878 45,277  9,114 

Shinhan Life Insurance headquarters

 358, Samil-daero,Jung-gu, Seoul, Korea 04542 30,822  2,173 

    Area
(In square meters)		 

Type of Facility

 

Location

 Building  Site (If
Different)		 

Shinhan Card Yoksam-Dong Building

 176,Yeoksam-ro,Gangnam-gu, Seoul, Korea 06248  7,348   1,185 

Shinhan Data Center

 67, DigitalValley-ro,Suji-gu,Yongin-si, Gyeonggi-do, Korea 16878  45,277   9,114 

Shinhan Life Insurance headquarters

 358, Samil-daero,Jung-gu, Seoul, Korea 04542  30,833   1,978 

Our subsidiaries own or lease various land and buildings for their branches and sales offices.

As of December 31, 2017,2018, Shinhan Bank had a countrywide network of 865876 branches. Approximately 19.9%22.1% of these facilities were housed in buildings owned by us, while the remaining branches were leased properties. Lease terms are generally frombetween two to three years and generally do not exceed five years. As of December 31, 2017,2018, Jeju Bank had 38 branches of which we own 18 of the buildings in which the facilities are located, representing 47.4% of its total branches. Lease terms are generally frombetween one to two years and seldom exceed five years.

As of December 31, 2017,2018, Shinhan Card had 23 branches, all but one of which was leased. Lease terms are generally frombetween one to two years. We also lease Shinhan Card’s headquarters for a term of five years. As of December 31, 2017,2018, Shinhan Investment had a nationwide network of 114118 branches of which we own five of the buildings in which the facilities are located, representing 4.4%4.24% of its total branches in Korea. Lease terms are generally frombetween one to two years. As of December 31, 2017,2018, Shinhan Life Insurance had 181155 branches which we leased for a term of generally one to two years.

The net book value of all the properties owned by us at December 31, 20172018 wasW2,7032,680 billion. We do not own any material properties outside of Korea.

 

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.

 

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 annual report. The following discussion is based on our consolidated financial statements, which have been prepared in accordance with IFRS.

 

ITEM 5.A.

Operating Results

Overview

We 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 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 aimed to deliver comprehensive financial solutions to clients through a convenientone-portal network. According to reports by the Financial Supervisory Service, we are the second largest financial services provider in Korea (as measured by consolidated total assets as of December 31, 2017)2018) and operate the second largest banking business (as measured by consolidated total bank assets as of December 31, 2017)2018) and the largest credit card business (as measured by the total credit purchase volume in 2017)2018) in Korea.

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 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 adverse conditions and volatility, which also had an adverse impact on the Korean economy and in turn on our business and profitability. See “Item 3.D. Risk Factors — Risks Relating to our BankingOur Overall Business — Difficult conditions and turbulence in the Korean and global economy and financial markets may adversely affect our business, asset quality, capital adequacy and earnings.”

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.

In 2016, the average volume of retail loans increased by 13.1% from 2015, primarily as a result of continued increase in the demand of home rental long-term deposits loans and lending to borrowers with high credit profiles. In addition, the Bank of Korea maintained the base interest rate at historically low levels and further reduced such rate to the historic low of 1.25% in June 2016, and government policies to stimulate the real estate market continued during the first half of 2016. The increase in retail loans slowed during the second half of 2016 as the Government, amid concerns about increasing household debt, announced policies and measures designed to curb the rapid growth in the volume of mortgage and home equity loans in August and November of 2016. In 2016, the average volume of corporate loans increased by 5.6% from 2015, primarily as a result of low market interest rates throughout 2016 and increased demands from SOHO and small- and medium sized enterprises, particularly from those in the manufacturing industry.

In 2017, the average volume of retail loans increased by 4.9% from 2016, primarily as a result of continued increase in the demand of home rental long-term deposits loans. The increase in retail loans continued to slow during 2017 as the Government, amid concerns about increasing household debt, continued its policies and measures designed to curb the rapid growth in the volume of mortgage and home equity loans in 2017. In 2017, the average volume of corporate loans increased by 5.3% from 2016, primarily as a result of increased demands from SOHO and small- and medium sized enterprises, particularly from those in the manufacturing industry.

From 2015 to 2016, bothIn 2018, the average yield on interest-earning assets andvolume of retail loans increased by 9.1% from 2017, primarily as a result of continued increase in home rental long-term deposits loans. In 2018, the average rate on interest-bearing liabilities decreased further (with the latter decreasing more than the former duevolume of corporate loans increased by 7.8% from 2017, primarily as a result of increased loans to the difference in relative maturity profiles), primarily due to the additional decreaseSOHO and small- and medium sized enterprises in the base interest rate by the Bank of Korea in June 2016, while the average balance increased for both interest-earning assetsmanufacturing, real estate and interest-bearing liabilities. Largely due to the greater decrease in the average rate on interest-bearing liabilities compared to the decrease in the average yield on interest-earning assets, Shinhan Bank’s net interest income increased by 8.1% fromW4,165 billion in 2015 toW4,504 billion in 2016. Net interest income after provision for loan losses amounted toW3,572 billion andW3,848 billion in 2015 and 2016, respectively. Shinhan Bank’s operating income increased by 13.0% fromW1,734 billion in 2015 toW1,959 billion in 2016.service industries.

From 2016 to 2017, the average yield on both retail loans and corporate loans increased primarily due to the increase in the base interest rate by the Bank of Korea in November 2017, while the average rate on deposits decreased since our deposits generally have a longer maturity profileprofiles than our retail and corporate loans and are therefore less sensitive to movements in base and market interest rates and also due to an increase in the proportion of low cost funding deposits such as liquidity core deposits. Shinhan Bank’s net interest income increased by 10.8% fromW4,504 billion in 2016 toW4,992 billion in 2017. Net interest income after provision for loan losses amounted toW3,848 billion andW4,5114,508 billion in 2016 and 2017, respectively. Shinhan Bank’s operating income increased by 12.5%12.6% fromW1,959 billion in 2016 toW2,2042,206 billion in 2017.

From 2017 to 2018, the average yield on both retail loans and corporate loans and the average rate on deposits increased primarily due to the increase in the base interest rate by the Bank of Korea in November 2017 and November 2018. Meanwhile, the increase in the average yield rate on retail and corporate loans was higher than that of deposits since our deposits generally have longer maturity profiles than our retail and corporate loans and are therefore less sensitive to movements in the base and market interest rates. Shinhan Bank’s net interest income increased by 11.9% fromW4,992 billion in 2017 toW5,586 billion in 2018. Net interest income after provision for loan losses amounted toW4,508 billion andW5,340 billion in 2017 and 2018, respectively. Shinhan Bank’s operating income increased by 43.5% fromW2,206 billion in 2017 toW3,165 billion in 2018.

As for Shinhan Card, its operating revenue 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 enjoys more diversified sources of funding, including 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 the overall trends of the general Korean economy, such as general consumer spending patterns in

Korea. Shinhan Card’s operating revenues decreased by 1.4% fromW4,740 billion in 2015 toW4,673 billion in 2016, primarily due to the decrease in the applicable rate of merchant fees for small- andmedium-sized enterprises mandated by the Korean government in early 2016 and a decrease in factoring receivables management fee income as Shinhan Card ceased such services during 2016. Operating revenues increased by 11.2% fromW4,673 billion in 2016 toW5,197 billion in 2017, largely due to an increase in reversal of allowances for credit card loan losses. Shinhan Card’s operating revenues decreased by 27.8% fromW5,197 billion in 2017 toW3,752 billion in 2018, largely due to a decrease in fees and commission income increased primarily dueas a result of the application of IFRS 15. Consideration payables to an increase in debitcustomers, which had previously been recognized as fees and commission expense, are now recognized as reductions of fees and commission income under IFRS 15. In addition, fees and commission income was further decreased as a result of the Government’s policies to lower credit card merchant fees, and annual fees resulting from increased debit card transaction volume and the number of effective cardholders, which was partially offset by a decreasean increase in credit card merchant fees and commission income duefrom lease operations resulting from Shinhan Card’s efforts to amendmentsdiversify its revenue sources in response to the Enforcement Decree of the Specialized Credit Finance Business Act in July 2017 expanding the range of small- andmedium-sized enterprises subject to lower merchant fees.such Government policies.

The following provides a discussion of the major trends surrounding the general economy and the financial services sector in Korea in 20172018 and our current outlook for 20182019 as they relate to our core businesses. The following discussion represents the subjective view of our management and may significantly differ from the actual results for 2018.2019.

Trends in the Korean Economy

In 2017,During the first half of 2018, the global economy displayedshowed continued signs of recovering economic growth primarily driven by corporate investmentsrecovery, but momentum weakened during the second half of 2018. During the first half of 2018, major economies implemented quantitative easing and fiscal expansion policies, resulting in infrastructure and inventory. In addition, increased liquidity dueand the consequent rise in asset prices, driving strong to moderate growth and continued recovery for both major and emerging economies. During the first half of the year, major economies including the United States continued to experience strong growth, and China and India led the moderate growth of Asian economies. Economies relying primarily on raw material exports such as Russia and Brazil also began to shake off sluggishness. However, during the latter half of 2018, concerns over a general global economic slowdown arose amid slowing signs of growth in major economies, U.S. interest rate hikes and potential escalation and/or prolonging of the trade war between the U.S. and China as each country introduced tariffs on goods traded with the other. In particular, monetary tightening in major economies, such as the Federal Reserve Board’s decision to increase interest rates and the European Central Bank’s quantitative easing policies of the major economieshas had a dampening effect on asset prices, including stock prices and an improving global trade marketreal estate assets, which has contributed to a general recoverythe weakening of the global markets. The International Monetary Fund expects the global economic growth rate to increase to 3.9% as a result of a continued trend of recovery in the global markets as both developedconsumer and developing countries experience a simultaneous recovery with market recoveries occurring in resource rich countries due to rallying oil prices.investor sentiment.

In 2017,2018, the Korean economy experiencedrecorded a moderategrowth rate of 2.7% compared to a growth rate of 3.1% in 2017 due to continued investments in corporate infrastructure andsluggish economic growth in the construction industry as a result of an active real estate market, as well as rising levelsa decline in consumer sentiment during 2018 compared to 2017. Korea’s annual growth rate of exportsgross domestic product was 2.8% in the first quarter of 2018, 2.8% in the second quarter of 2018, 2.0% in the third quarter of 2018 and 3.1% in the fourth quarter of 2018. Exports continued to grow steadily in 2018, partly driven by an increase in exports of semiconductors. Korea’s annual growth rate of gross domestic product was 2.9% in the first quarter of 2017, 2.8% in the second quarter of 2017, 3.8% in the third quarter of 2017 and 2.8% in the fourth quarter of 2017. In 2018, the Korean economy is expected to experience sluggish economic growth due toHowever, stronger regulations on household debt by the Government and reductions to the social overhead capital budget which may negatively affectaffected the construction industry. Investments in infrastructure, outsideindustry, and global and domestic demand for traditional manufacturing businesses including the automotive industry showed signs of investments in semiconductors and the information technology sector, are also expecteddecline which led to experience weaker levels of growth. However,production and investments in infrastructure. Despite the Government’s income based growth and employment policies, among others,job creation levels dropped and unemployment rates rose to historic levels since the financial crisis, adversely affecting private consumption and consumer sentiment in the Korean economy. In 2019, the overall sluggishness in the Korean economy is expected to continue as investments in infrastructure are expected to remain weak and as exports and domestic consumption levels are expected to show signs of slowing. The growth in exports for semiconductors, which has been the main driver of exports in recent years, are expected to slow slightly due to an increase in supply from China, and a lower level of investments in infrastructure is expected to have a further dampening effect on investor sentiment surrounding the Korean economy. However, Government efforts to stimulate the economy, particularly policies towards increasing social overhead capital budget are expected to contribute to a recovery in consumer spendingthe Korean economy and act as a buffer against dramatic economic declines. Although signs of economic recovery and increased global trade volumes are expected to continue in 2018, the growth in exports are expected to be slight slower than that in 2017 due to the possible renegotiation of the Korea-United States Free Trade Agreement and protectionism policies of the United States, as well as a possible decrease in demand for semiconductors as a result of market cycles.

In 2018,2019, we consider the following as potential risks to the Korean economy: (i) a prolonged slump in the Korean economy resulting from slowing of job creation and exacerbation of unemployment issues, particularly a

rise in youth unemployment; (ii) China’s slowing growth and the possibility of a hard landing for China; (iii) potential decline in productivity due to aging demographics and low birth rates; (iv) concerns within the financial sectors due to high levels of household debt; (v) uncertainty and volatility regarding the political and economic policies, including growing protectionism, of the United States and other major economies; (ii) concerns within the financial sectors due to high levels of debt; (iii)(vi) the possibility of more rapid than expected increases in interest rates by the major economies; (iv) China’s slowing growth and the possibility of a hard landing for China; (v)(vii) the increased volatility of foreign exchange markets due to the varying monetary policies of the global economies including increases in base interest rates; (vi)and (viii) political risks including political instability due to North Korea, (vii) restructuring of domestic corporations, and (viii) an aging population.Korea.

As for interest rate movements, since 2009, Korea, like many other countries, has experienced a low interest rate environment despite some marginal fluctuations, in part due to the Government’s policy to stimulate the

economy through active rate-lowering measures. Between 2009 and 2014, the base interest rate set by the Bank of Korea remained within the band between 2.00% and 3.25%. In an effort to support Korea’s economy in light of the recent slowdown in Korea’s growth and uncertain global economic prospects, the Bank of Korea reduced the base interest rate to 1.75% in March 2015, 1.50% in June 2015 and further reduced such rate to the historic low of 1.25% in June 2016. In November 2017, the Bank of Korea raised the base interest rate to 1.50%, marking the first time it has increased the base interest rate since 2011. The2011, and in November 2018 further raised the base interest rate from 1.50% to 1.75%, citing concerns over household debt in the aggregate exceedingW1,500 trillion and potential outflow of funds due to the widening interest rate differential between the base interest rate of the Bank of Korea and the benchmark interest rate of the Federal Reserve Board. After increasing its benchmark interest rate three times during 2017, the Federal Reserve Board increased its benchmark interest rate threefour times during 2017,2018, most recently to a range of 1.25%2.25% to 1.50%2.50% in December 2017, and announced2018 when it signaled that it expectsexpected to keep raisingraise the benchmark interest rate at the same incremental paceanother two times during 2018.2019. The Bank of Korea’s policy path of interest rates in 20182019 and for the foreseeable future remains uncertain.uncertain and will be affected in part by the policy path of the Federal Reserve Board, which also remains uncertain for the foreseeable future.

Recent Developments and Outlook for the Korean Financial Sector

Commercial Banking

In 2017,2018, major commercial banks in Korea generally experiencedcontinued to experience modest growth in terms of assets, principally due to continued growth in the demand for loans from both corporate and retail customers, particularly small- andmedium-sized enterprises and corporate customers.other personal retail loans, despite weakened demand for mortgage loans due to Government measures including real estate measures aimed at curbing household debt. Asset quality also improvedcontinued to a limited extentimprove in terms of delinquency andnon-performing loan ratio. Net interest margin for commercial banks generally increased, largely due to a decreasean increase in allowance for loan losses amidst a lowmarket interest market environment and a relatively stable real estate market.

Currently, certain major regulatory developments and Government policies to stabilize the real estate market, prevent furtherrates in 2017 resulting from increases in base interest rate by the Bank of Korea in November 2017 and November 2018.

In 2019, the Government is expected to further tighten regulations aimed at curbing household debt levels and support small- andmedium-sized enterprisesloans, which may havepose as a material adverse effectpotential limiting factor on the commercial banking industry in Korea and present limited opportunities forgrowth of commercial banks to generate profit by taking advantagein Korea. In addition, the acceleration of differences between deposits and loans and fuel intense competition among major commercial banks for quality customers. Furthermore, withdigitalization, including as a result of the growing popularityrapid growth of online financial service platforms,new competitors such as online service providers, and technology companies and Internet-only banks introducing and operating financial platforms that did not exist in the past, have dismantled many of the traditional barriers among players in the financial industry and, together with large-scale user networks,social issues such as Kakao Corp., NAVERsluggish growth amid an aging population and Samsung Electronicslow birthrates, have further intensified competition faced by commercial banks. The resulting competition is also intensified theexpected to be more complex and go beyond traditional price based competition, by making significant inroadsrequiring banks to focus on integrating their services with new and existing financial platforms in providing virtual payment services through a system basedorder to provide differentiated value. Government policies focusing on a growing convergenceprotection of financial servicesconsumers and technology commonly referredencouraging inclusive financial policies are also expected to lead to further competition among banks for relevant businesses such as “fintech.” In addition, Internet-only banks, which commenced operations duringbusinesses to support the first halfmiddle class, socially disadvantaged classes, small businesses and startups. As there is increased risk of 2017(K-Banka decline in asset quality, particularly in an higher interest rate environment, we believe increased risk management capabilities will become increasingly important and Kakao Bank began operations in April 2017 and July 2017, respectively), may introduce new services and offer promotions to attract customershave a more direct impact on the financial performance of the existing commercial banks. Accordingly, commercial banks will likely face increasing pressure to upgrade their service platforms to attract and maintain online users, which represents a growing customer base compared to traditional customers who have primarily conducted bankingin-person at physical banking branches.

Credit Cards

In 2017,2018, despite a steady increase in the total amount of card usage, credit card companies in Korea generally experienced a decline in net profits due to regulations such as decreases in the applicable rate of merchant fees for small- andmedium-sized enterprises and reductions to the interest rates for loans. In addition, there were increasingly competitive offerings from Internet-only banks through accounts with lower merchant fees compared to conventional checking accounts.

In 2018,2019, following the widespread usage of fintech, increased competition with Internet communications technology companies and other fintech related competitors is expected to continue. AdditionalGovernment regulations on loansaimed at reducing maximum interest ratesmerchant fees chargeable from 27.9%by credit card companies are expected to 24% came into effect in February 2018, placingput further downward pressure on the results of operations for credit card companies, for 2018 and beyond,government initiatives including the launch of Zero Pay and amendmentsplans to regulations requiring further downward adjustments to merchant feesestablish an open banking system are also expected to continuelimit the growth potential for credit card companies in the near future.2019. We believe that strengthening ourthe competitiveness inof our existing areas andbusinesses, continuing to develop new sources of growth through the cultivation of new business opportunities, such as big data-related businesses, and expansion ofexpanding our businesses in global markets will be essential in an increasingly competitive market.

Securities

In 2017,During the first half of 2018, the securities industry in Korea reported an increase in net profits due to an increase in commission fee revenuesfees and commissions resulting from a general rebound in the global stock markets. AccordingHowever, the volume of domestic transactions decreased during the second half of 2018 amid concerns over a general global economic slowdown, leading to data from the Financial Supervisory Service, return on equitya gradual decrease in brokerage commissions and hence revenue for the industry increased to 7.7% for 2017 from 4.6%securities firms in 2016.Korea.

In 2018,2019, we expect various groups of competition to emerge as the scope of businesses security firms are permitted to take on become different according to the amount of available capital. Investment companies, which are classified into financial investment business entities and comprehensive financial investment business entities depending on the amount of available capital, are expected to differentiate their main business models according to the scope of business they are licensed to conduct. Due to increasing economic uncertainty and market volatility, it is expected that demand for asset management services will increase and, as such, wealth management capabilities will become increasingly important.

In order to enhance the competitiveness of Korea’s capital market, the Government is implementing changes such as the liberalization of lending by financial investment companies, deregulation of private equity funds and introduction of the individual savings account (ISA) system. The Government is also planning to strengthen the capital market’s international competitiveness through a restructuring of the Korea Exchange, including its transformation into a holding company. On the competitive side, we expect competition to remain intense as the securities brokerage industry is already overcrowded with relatively low barriers of entry, although the industry is showing some signs of consolidation (such as the sale of Woori Investment & Securities to NH Securities, the acquisition of IM Investment & Securities by Meritz Securities, the acquisition of KDB Daewoo Securities by Mirae Asset and the acquisition of Hyundai Securities by KB Financial Group). We expect that mergers and acquisitions and partnerships between banks and financial investment companies will continue to play a significant role in shaping the competitive landscape for the securities industry in Korea.

Due to low entry barriers, limited differentiation and standardized product offerings, competition in the securities industry is intense. The Government is working to implement measures to develop large scale financial investment companies in order to increase competitiveness and expand the number of potential growth opportunities for securities companies, and securities companies have been moving quickly to seize opportunities of consolidation and expansion. In order to improve profitability, it is becoming increasingly important for companies in the securities industry to develop new profit models and product offerings that will allow differentiation and utilization of the company’s unique strengths.

Life Insurance

In 2017,2018, the life insurance industry’s overall revenue increased slightly due to a decrease in provisions for insurances reserves anddespite an increase in interest income and gains on investments resultingloss from favorable stock market conditions in 2017 andinsurance businesses, due to an increase in base interest rates in 2017.gains on investments.

In 2018,2019, the life insurance industry’s overall revenue is expected to remain stable or increasedecrease slightly as thefactors such as slowing economic growth, aging population and low birthrates are expected to be mostly offset by a steady increase in demand for whole life insurance products, variable savingshealth insurance products and retirement pension insurance products are expected to grow, and investment margins are expected to improvean increase in gains on investments following the trend of increasing interest rates. However, underUnder IFRS 17, which is expected to become effective beginning 2021,2022, insurance contract liabilities will be calculated in terms of market value instead of book value, and life insurance companies may have significantly higher debt balances due to higher insurance liabilities, thereby resulting in a decrease in risk-based capital and the need for capital expansion. Competition is expected to remain intense as the life insurance industry in Korea is mature and saturated, and the ability to offer differentiated services in order to attract the growing population of the elderly and the retirees’ products will continue to be an ever important competitive factor.

Asset Management

In 2017, the asset management industry experienced growth in assets under management, with2018, the total amount of managed assets surpassingunder management increased by 7.3% fromW952949.6 trillion accordingin 2017 to data from the Financial Supervisory Service. Operating profits increasedW1,018.7 trillion in 2018, primarily due to thean increase in managed assets, the growth of which was partly stalled due to continued decline in investments in public funds. Investments in private equity funds, including real estate funds and special asset funds. Operating profits increased slightly by 4.2% toW814.5 billion in 2018 due to investors’ interestan increase in high yield products,fees and total investments in private equity funds continued to surpass total investments in public funds.

In 2018, we expect market uncertainty to increase and,commissions primarily as a result of the expected rateincrease in the total amount of return to decline andassets under management, which was partially offset by a decrease innon-operating income.

In 2019, we expect the demand for indirect investment products to remain relatively stable. The overall volume of the asset management industry is expected to continue to grow, mainly driven by an expansion of the private fund market including pension funds and institutional investors, which is expected to continue to outpace the growth of the public fund market. Investments in bonds are expected to decrease amid ongoing expectations of potential interest rate increases, resulting in increased investments in alternative assets and asset allocation funds.

The asset management industry is highly volatile and sensitive to the general trends in the overall cycles in the general economy and financial markets. Competition for this industryGlobal market volatility is likely to remain intense given the relatively low barriersgeopolitical risks such as the ongoing trade disputes and Brexit. Investment in medium-risk, medium-return funds is expected to increase as retail investors tend to avoid high risk investments while the private fund market focusing on highnet-worth clients is expected to continue to grow amid income polarization. Whereas the retail public fund market focusing on retail investors is shrinking, the demand for long-term investment funds such as individual pension trust and retirement pension trust is expected to continue to grow. In addition, socially responsible or environmental, social and governance investments are expected to grow amid implementation of entrythe Korea Stewardship Code and similar initiatives and the difficulty to differentiate services.resulting trend of increasing payouts by companies.

Specialized Credit

The specialized credit business was introduced in Korea in August 1997. The specialized credit business cannot accept customer deposits and generally involves providing a combination of four types of financing: equipment and facilities leasing, installment finance, new technology finance and credit card services, and sources funding primarily by issuing debentures and commercial papers. The specialized credit business generally targets customers with higher risk profile in return for higher return compared to customers of commercial banks, which makes risk management (including customer screening) a particularly key factor for commercial success of this business.

Due, in part, to the variety of services being offered and the broad range of potential customers, specialized credit providers often find it relatively easy to develop new customer segments and provide niche offerings. Due to the relatively low barriers of entry, however, competition is intense and is expected to further intensify as a result of the commencement of automobile loan offerings by commercial banks and the expanded entry into personal loan markets by micro lenders. In addition, on September 30, 2015, the National Assembly of Korea

passed an amendment to the Credit Finance Business Act, which, among other things, aims at alleviating restrictions on entry into the credit finance industry by lowering the minimum capital requirements for new entrants. WeIn line with recent Government policies emphasizing productive finance, we expect that specialized credit providers will continue to focus their efforts on finding new business opportunities, including by expanding the new technology finance segment and selective overseas expansions.

Interest Rates

Interest rate movements, in terms of magnitude and timing as well as their relative impact on our assets and liabilities, have a significant impact on our net interest margins and profitability, particularly with respect to its financial products that are sensitive to such movements. For example, if the interest rates applicable to Shinhan Bank’s loans (which are recorded as our assets) decrease at a faster pace or by a wider margin, 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), Shinhan Bank’s net interest margin will shrink and its profitability will be negatively affected. In addition, the relative size and composition of Shinhan Bank’s variable rate loans and deposits (as compared to our fixed rate loans and deposits) may also impact Shinhan Bank’s net interest margin. Furthermore, the difference in the average termrepricing frequency of Shinhan Bank’s interest-earning assets (primarily loans) compared to its interest-bearing liabilities (primarily deposits) may also impact its net interest margin. For example, since

Shinhan Bank’s deposits currently have a longer term, on average, than that of its loans, its deposits are on average less sensitive to movements in the base interest rates on which its deposits and loans tend to be pegged, and therefore, an increase in the base interest rates tends to increase its net interest margin while a decrease in the base interest rates tends to have the opposite effect. Since Shinhan Bank is one of our principal operating subsidiaries, its net interest margin and profitability have a substantial effect on our overall net interest margin and profitability. While we continually manage our assets and liabilities to minimize our exposure to the interest rate volatility, such efforts by us may not mitigate the impact of interest rate volatility in a timely or effective manner.

The interest rate charged to customers by our banking subsidiaries is based, in part, on the “cost of funds index,” or COFIX, which is published by the Korean Federation of Banks. COFIX 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 seniornon-convertible financial debentures) of eight major Korean banks (comprised of Shinhan Bank, Kookmin Bank, Woori Bank, KEB Hana Bank, Nonghyup Bank, Industrial Bank of Korea, Citibank Korea and Standard Chartered Bank Korea). Each bank then independently determines the interest rate applicable to its respective customers 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. These interest rates are typically adjusted on a monthly basis. In January 2019, the Financial Services Commission announced plans to reflect rates for short term deposits such as demand deposits when computing the “cost of funds index,” or COFIX, which is expected to result in lower interest rates for household loans compared to the previous COFIX rate.

The following table shows certain benchmarkWon-denominated borrowing interest rates as of the dates indicated.

 

  Corporate
Bond Rates(1)		   Treasury
Bond Rates(2)		   Certificate of
Deposit Rates(3)		   COFIX
Balance-Based(4)		   COFIX New
Borrowing-Based(5)		   Corporate
Bond Rates(1)		   Treasury
Bond Rates(2)		   Certificate of
Deposit Rates(3)		   COFIX
Balance-Based(4)		   COFIX New
Borrowing-Based(5)		 

June 30, 2013

   3.31    2.88    2.69    3.17    2.66 

December 31, 2013

   3.29    2.86    2.66    2.91    2.60 

June 30, 2014

   3.10    2.68    2.65    2.78    2.58    3.10    2.68    2.65    2.78    2.58 

December 31, 2014

   2.43    2.10    2.13    2.58    2.10    2.43    2.10    2.13    2.58    2.10 

June 30, 2015

   2.01    1.79    1.65    2.22    1.75    2.01    1.79    1.65    2.22    1.75 

December 31, 2015

   2.11    1.66    1.67    1.90    1.66    2.11    1.66    1.67    1.90    1.66 

June 30, 2016

   1.69    1.25    1.37    1.75    1.54    1.69    1.25    1.37    1.75    1.54 

December 31, 2016

   2.13    1.64    1.52    1.62    1.51    2.13    1.64    1.52    1.62    1.51 

June 30, 2017

   2.24    1.70    1.38    1.58    1.47    2.24    1.70    1.38    1.58    1.47 

December 31, 2017

   2.68    2.14    1.66    1.66    1.77    2.68    2.14    1.66    1.66    1.77 

June 30, 2018

   2.77    2.12    1.65    1.83    1.82 

December 31, 2018

   2.29    1.82    1.93    1.95    1.96 

 

Source: Korea Securities DealersFinancial Investment Association Bond Information Service

Notes:

 

(1)

Measured by the yield on three-yearAA- 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).

(4)

Measured based on the weighted average of the borrowing rates for the monthly ending balances of the funding made by the commercial banks that are subject of the COFIX reporting.

��

(5)

Measured based on the weighted average of the borrowing rates for new funding for each month made by the commercial banks that are subject of the COFIX reporting.

Critical Accounting Policies

The notes to our consolidated financial statements contain a summary of our significant accounting policies, including a discussion of recently issued accounting pronouncements. Certain of these policies are critical to the

portrayal of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. We discuss these critical accounting policies below. The accounting policies set out below have been applied consistently to all periods presented in our consolidated financial statements included in this annual report, unless otherwise indicated.

Operating Segments

An operating segment is a component of our business that engages in business activities from which we may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the other segments. Discrete financial information is available for each operating segment, and all operating segments’ operating results are reviewed regularly by our chief executive officer to make decisions about resources to be allocated to the segment and assess its performance.

Segment results that are reported to our chief executive officer include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Currently, we have five reportable segments: banking, credit cards, securities, life insurance and others.

Basis of Consolidation

Subsidiaries

Subsidiaries are entities that we control. We control an entity when we are exposed to, or have rights to, variable returns from our involvement with the entity and have the ability to affect such returns through our control over the entity. The financial statements of our subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The accounting policies of our subsidiaries have been changed when necessary to align them with the policies we have adopted.

Structured Entities

We have established or invested in various structure entities. A structured entity is an entity designed so that its activities are not governed by way of voting rights. When assessing control of a structured entity, we consider factors such as the purpose and the design of the investee; our practical ability to direct the relevant activities of the investee; the nature of our relationship with the investee; and the size of our exposure to the variability of returns of the investee. We do not recognize anynon-controlling interests in the consolidated statements of financial position since our interests in these entities are recognized as liabilities of us.

Investments in Associates and Joint Ventures (Collectively, “Associates”)

Associates are those entities in which we have significant influence, but not control, over the financial and operating policies. Significant influence is presumed to exist when we hold between 20% and 50% of the voting power of another entity or in excess of 15% if the other entity is classified as a subsidiary under the Banking Act. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.

Investments in associates are accounted for using the equity method and are recognized initially at cost. Our investment includes goodwill identified on acquisition, net of any accumulated impairment losses. The consolidated financial statements include our share of the income and expenses and equity movements of associates, after adjustments to align their accounting policies with ours, from the date that significant influence or joint control commences until the date that significant influence or joint control ceases. When our share of losses exceeds our interest in an equity accounted investee, the carrying amount of that interest, including any

long-term investments, is reduced to nil, and the recognition of further losses is discontinued except to the extent that we have an obligation or are otherwise required to make payments on behalf of the investee for further losses.

Transactions Eliminated on Consolidation

Intra-group balances, transactions, and any unrealized income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealized gains arising from transactions with associates are eliminated against the investment to the extent of our interest in the investee. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment.

Non-derivative Financial Assets

Classification, measurement and impairment ofnon-derivative financial assets has been amended due to the adoption of IFRS 9 ‘Financial Instruments’ which became effective from January 1, 2018. As this report exhibits comparative financial statements prior to and after the adoption of the new standard, the critical accounting policies presented herein include information with regard to both IAS 39 and IFRS 9.

Non-derivative financial Assets — classification and measurement policy applicable before January 1, 2018 under IAS 39

Financial assets are classified into financialfour categories. (i) Financial assets at fair value through profit or loss loans and receivables,available-for-sale(“FVTPL”) are financial assets andheld-to-maturity financial assets. Financial assets are recognized in the consolidated financial statements when we become a party to the contractual provisions of the instrument.

A financial asset is measured initially at its fair value plus, for an item not at fair value through profit or loss, transaction costs that are directly attributable to its acquisition of the financial asset.

Financial Assets at Fair Value through Profit or Loss

A financial asset is classified as held for trading or designated at fair value through profit or loss upon initial recognition. These financial assets are measured at fair value after initial recognition and the changes in the fair value are recognized through profit or loss of the period. Costs attributable to the acquisition are immediately expensed in the period.

Held-to-maturity Financial Assets

(ii) Held-to-maturity financial assets arenon-derivative assets with fixed or determinable payments and fixed maturity that we have the positive intent and ability to hold to maturity. They

are carried at amortized cost using the effective interest method after their initial recognition.

Loans and Receivables

(iii) Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, loans and receivables are measured at amortized cost using the effective interest method, less any impairment losses.

Fornon-collateral dependent loans, impairment is measured using a discount cash flow analysis under which allowances are established when the discounted cash flow of the loan is lower than its carrying amount. The allowance is equal to the difference between the discounted cash flow amount of the loan and its carrying amount. With respect to collateral dependent loans, our discount cash flow analysis considers, among other things, 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. 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.

As a general rule, we obtain updated appraisal on an annual basis for all collateral dependent loans and therefore, adjust the appraisal value of loans every 12 months. We estimate the fair value of collateral with outdated appraisal value primarily on the basis of the publicly available standard reference prices as officially published by the government (or (x) in the case of collateral in the form of apartment units, the real estate market price database maintained by Kookmin Bank for apartment units, (y) in the case of collateral in the form of other communal housing units, the publicly available standard reference prices as officially published by the Ministry of Land, Infrastructure and Transport or (z) in the case of commercial buildings, the publicly available standard reference prices as officially published by the National Tax Service), except that (i) if there are bid prices for such collateral, we use as the fair value the lowest bid price deemed to be credible as to the bidder’s intent to purchase based on the written bid submitted by such purchaser and (ii) in the circumstances where we deem that the aforesaid reference prices do not accurately reflect the true value of such land, for example, due to a downturn in the relevant real estate market, we hire an outside appraiser to obtain an independent valuation, which valuation is typically derived from 90% or lower of the lowest of two or more sale prices from recent sales of similar types of collateral in the vicinity, and we use such valuation as the fair value for such collateral. Other than in the case of a bid price which is higher than the original appraisal value, we design our fair value estimation system so that the adjusted fair value does not exceed the original appraisal value and hence, in the absence of a higher bid price, the adjustments made have the effect of assigning a fair value lower than the original appraisal value. Since the magnitude of adjustments is principally dependent on reference prices maintained by the Government or bid prices, which are in turn dependent on the market prices, it varies case by case and is therefore difficult to compute the average adjustments made to outdated appraisals. After making such adjustments, we also internally appraise each collateral at least annually in order to ensure that the adjusted value is fair and reasonable.

We implement the following procedures to minimize the potential for outdated appraisal values being reflected in allowance for loan losses: (i) the date of appraisal is assigned next to the appraisal value to facilitate identification of an appraisal value as being outdated, (ii) our internal audit department constantly monitors the status of appraisal values, and (iii) theloan-to-value ratio, usually 60%, is strictly enforced when making the original loan so that the value of collateral typically stays above the outstanding loan amount during the life of the loan even in the case of an adjustment to the original appraisal value. If in the limited circumstances where the adjusted fair value of collateral falls below the outstanding loan amount, if the loan is impaired, we promptly set aside allowance for loan losses for such difference in amount.

(iv) Available-for-sale Financial Assets

Available-for-sale(“AFS”) financial assets are thenon-derivative financial assets that are designated asavailable-for-sale or are not classified as financial assets at fair value through profit or loss,held-to-maturity investments or loans and receivables. They are measured at fair value after their initial recognition.

Derecognition of FinancialNon-derivative financial Assets — classification and measurement policy applicable from January 1, 2018 under IFRS 9

We derecognize aUnder IFRS 9,non-derivative financial assets are classified and measured at fair value through profit or loss with the changes in fair value recognized in profit and loss as they arise, unless restrictive criteria are met for classifying and measuring the asset at either amortized cost (“AC”) or fair value through other comprehensive income (“FVOCI”). A financial asset whenshall be measured at FVOCI or at AC if both of the contractual rightsfollowing conditions are met:

the objective of our business model is to thehold assets only to collect cash flows, from or to collect cash flows and to sell (“the asset expire, or we transfer the rights to receive Business Model test”); and

the contractual cash flows of an asset give rise to payments on specified dates that are solely payments of principal and interest (“SPPI”) on the principal amount outstanding (“the SPPI test”).

Despite meeting both criteria of the Business Model test and the SPPI test, we may, at initial recognition, irrevocably designate a financial asset as measured at fair value through profit or loss if doing so eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an ‘accounting mismatch’). Hybrid financial instruments which do not meet the criteria of contractual cash flow characteristics such as convertible bonds, equity-linked securities and structured deposits were classified as FVTPL regardless of its business model because the accounting to bifurcate embedded derivatives from the host contract is not allowed under IFRS 9.

Also, a special designation for equity instruments is allowed at initial recognition that would otherwise be measured at fair value through profit or loss to present subsequent changes in fair value in other comprehensive income. It becomes important to distinguish these equity investments from other financial assets. IFRS 9 defines an equity investment as one meeting the definition of an equity instrument in IAS 32,Financial Instruments: Presentation — i.e., any contract that evidences a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Anyresidual interest in transferred financialthe assets that we create or retain is recognizedof an entity after deducting all of its liabilities. Under IFRS 9, puttable instruments, which were previously classified as a separate asset or liability.equity instruments in accordance with the exemption of IAS 32, are no longer qualified to be classified as equity instruments from the investor’s perspective. Some equity stocks, equity investments and beneficiary certificates which had been included inavailable-for-sale equity instruments under IAS 39 werere-classified into FVTPL because of their puttable characteristics upon adoption of IFRS 9.

Offsetting Between Financial Assets and Financial Liabilities

Financial assets and liabilities are offset and the net amount presented in the consolidated statements of financial position when, and only when, we have a legal right to offset the amounts and intend either to settle on a net basis or to realize the asset and settle the liability simultaneously.

Valuation of Financial Assets and Liabilities

All financial assets are measured at fair value except held-to-maturity financial assets and loans and receivables under IAS 39 and financial assets at amortized cost under IFRS 9. The fair value of financial instruments being traded in an active market are determined by the published market prices at the end of each period. The published market prices of financial instruments being held by us are based on notifications by trading agencies. Where the market for a financial instrument is not active, such as in the case ofover-the-counter market derivatives, fair value is determined by using either a valuation technique or an independent third-party valuation service.

We use various valuation techniques and set rational assumptions based on the present market situations. Such valuation techniques may include using recent arm’s length market transactions between knowledgeable

and willing parties, if available, reference to the current fair value of another instrument that is substantially the same, discounted cash flow analysis or option pricing models. The main assumptions and estimates which our management considers when applying a model with valuation techniques are:

 

The likelihood and expected timing of future cash flows on the instrument. These cash flows are usually governed by the terms of the instrument, although judgment may be required when the ability of the counterparty to service the instrument in accordance with the contractual terms is in doubt. Future cash flows may be sensitive to changes in market rates.

 

Selecting an appropriate discount rate for the instrument. The determination of this rate is based on an assessment of what a market participant would regard as the appropriate spread of the rate for the instrument over the appropriate risk-free rate.

 

Judgment to determine what model should be used to calculate fair value in areas where the choice of valuation model is particularly subjective (for example, valuation of complex derivative products).

We classify and disclose fair value of financial instruments into the following three-level of IFRS fair value hierarchy:

 

Level 1: Financial instruments measured at quoted prices from active markets are classified as level 1.

 

Level 2: Financial instruments measured using valuation techniques where all significant inputs are observable market data are classified as level 2.

 

Level 3: Financial instruments measured using valuation techniques where one or more significant inputs are not based on observable market data are classified as level 3.

Impairment of Financial Assets

We assess atUnder IAS 39, a financial asset (or in aggregate thereof) as of the end of eachthe reporting period whetherwas considered to be impaired only when there is any objective evidence that a financial asset or group of financial assets (except for financial assets at fair value through profit or loss) is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred if, and only if, there iswas objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has a negativean impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. However, lossesLosses expected as a result of future events, regardlessno matter how likely, were not recognized under IAS 39. However, after the adoption of likelihood, are not recognized.IFRS 9, we changed our impairment policy to recognized loss allowance for expected credit loss, and therefore we have been recognizing impairment loss on a more forward-looking basis and in a more timely manner than we did previously.

If thereAs IFRS 9 is objective evidence that financial assets are impaired, impairment losses should be measured and recognized. Objective evidence that financial assets are impaired includes significant financial difficulty ofbased on expected credit loss, we evaluate whether the issuer or obligor, a breach of contract such as a default or delinquency in interest or principal payments, restructuring of a loan or a concession granted by us which we would not otherwise consider, indications that a borrower or issuer will enter bankruptcy or other financial reorganization, disappearance of an active market forcredit risk on a financial asset becausehas increased significantly since initial recognition at the end of financial difficulties, or observable dataeach reporting period. When making such as an increased number of delayed payments indicating that there is a measurable decreaseassessment, we use the change in the risk of a default occurring over the expected life of the financial asset instead of the change in the amount of expected credit losses. In order to make this assessment, we compare the risk of a default occurring on the financial asset as at the end of the reporting period with the risk of a default occurring on the financial asset as at the date of initial recognition, considering reasonable and supportable information that is available without undue cost or effort and that demonstrates significant increases in credit risk since initial recognition. We consider changes in the risk of default estimated from changes in internal credit rating, qualitative factors, days of delinquency, and others as part of the evaluation criteria for significant increases in credit risk. For details, see Note 4 of the notes to our consolidated financial statements included in this annual report. Impairment losses under IAS 39 on the other hand were estimated on the basis of historical loss experience, and estimated future cash flows from a group offor financial assets, sinceassessed collectively, were calculated based on impairment history of other similar financial assets with similar credit risk characteristics.

As for measurement model, IAS 39 determined whether to use an individual or collective assessment basis depending on the initial recognitionindividual significance and the existence of those assets.objective evidence of impairment. However, IFRS 9 has three types of measurement models – general approach, impairment approach, or simplified approach,

depending on whether the financial asset was already impaired at the date of initial recognition and the classification of financial asset. We apply the general approach to most of our loans at amortized cost. The general approach requires recognition of lifetime expected credit losses for all financial assets for which there have been significant increases in credit risk since initial recognition — whether assessed on an individual or collective basis — considering all reasonable and supportable information, including that which is forward-looking.

As for measurement items, impairment standards of IAS 39 were applied to loans and receivables,available-for-sale securities andheld-to-maturity securities, respectively. However, expected credit losses under IFRS 9 are recognized on debt instruments at FVOCI or at AC, loan commitments and financial guarantee contracts regardless of whether the type of financial instrument is securities or loans or whether it ison-balance oroff-balance.In addition, for an investmentas all equity instruments under IFRS 9 are measured at FVTPL or at FVOCI and the amount recognized in another comprehensive income shall not be subsequently transferred to profit or loss, impairment standards of IFRS 9 are not applied to equity security,instruments. In contrast, under IAS 39, a significant or prolonged decline in its fair value of anavailable-for-sale equity security below its cost is objective evidence of impairment. We consider the decline in the fair value of more than 30% against the original costwas considered as a “significant decline.” Also, we determine that there was a “prolonged decline” if the market price of an equity investment remains below the carrying amount for six consecutive months.

Loans and Receivables

We first assess whether objective evidence of impairment, existsand the cumulative other comprehensive gain or loss was realized to profit or loss.

Allowance for Loan Losses

Loans are classified as financial assets at amortized cost except certain loans whose contractual cash flows do not consist solely of payments of principal and interest on the principal amount outstanding. Under IAS 39, loans were only permitted to be classified as loans and receivables. Loans at amortized cost under IFRS 9 are and loans and receivables under IAS 39 were subject to the application of impairment standards. The allowance for loan losses has increased due to the adoption of IFRS 9 and the subsequent application of the new impairment model — expected credit loss model (whereas IAS 39 previously applied the incurred loss model). The allowance for loan losses for the comparative financial statements as at the end of the period prior to adoption of the new standard were not restated, and the transition impact upon the initial adoption of IFRS 9 was recognized in retained earnings as of January 1, 2018.

The methodology for determining allowance for loan losses is as follows and is mainly focused on Shinhan Bank which holds the majority of our loan assets.

- Allowance for loan losses assessed individually

Allowance for loan losses assessed individually is based on the management’s best estimate derived from present value of future cash flows that are expected to be collected from debt instruments subject to assessment. When forecasting these cash flows, we utilize all relevant information and financial circumstances available such as net realizable value of relevant collateral and operating cash flows of counterparties. Based on the individual significance, Shinhan Bank determines whether to apply individual or collective assessment — collective assessment is applied for loans and receivablesthat are not individually significant or loans that are individually significant but do not have significant increases in credit risk. Individual assessment is applied for loans that have relatively large balances and individuallywhich have had significant increase in credit risk or collectively forhave become impaired. Under IAS 39, Shinhan Bank evaluated impaired loans with relatively large balances individually. Shinhan Bank classifies credit-impaired borrowers with loan amounts of overW3 billion as subject to individual assessment (quantitative criteria) and also considers certain other factors such as asset quality, financial assets thatratios, audit opinions and signs of insolvency (qualitative criteria).

Meanwhile, retail loans are not individually significant. If we determine that no objective evidencesubject to individual assessment as they are not significant in amount from Shinhan Bank’s overall credit risk management perspective.

- Allowance for loan losses assessed collectively

Allowance for loan losses assessed collectively uses estimation model based on experience loss ratio in order to measure expected credit loss (incurred loss under IAS 39) embedded in portfolios. This model considers

various factors such as the type of impairment exists for an individually assessedborrower, credit rating and maturity in order to apply Probability of Default (“PD”) of each financial asset whether significant or not,(or in the aggregate), recovery rate per loan and collateral, as well as Loss Given Default (“LGD”). Additionally, we includemodelize the assetmeasurement of inherent loss and apply consistent assumptions in a group of financial assets with similar credit risk characteristics and collectively assess them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continuesorder to be recognized are not included in a collective assessment of impairment.

If there is objective evidence that an impairment loss on loans and receivables has been incurred,determine the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (i.e., the effective interest rate computed at initial recognition).

If the interest rate of loans and receivables is a floating rate, the discount rate used to evaluate impairment loss is the current effective interest rate defined in an agreement. The present value of estimated future cash flows of secured financial assets is calculated by including cash flows from collateral after deducting costs to acquire and sell the collateral, regardless of the probability of realization of such collateral.

In assessing collective impairment, we rate and classify financial assets,input variables based on current circumstances and historical and forward-looking information. For forward-looking information, we utilize economic outlooks published by domestic and overseas research institutes or government and public agencies. We also reflect estimates of future macroeconomic conditions that we believe have been prepared without bias from a neutral viewpoint in measuring expected credit risk assessment or credit rating assessment process that takes into account asset type, industry, regional location, collateral type, delinquency and other relative factors.

Future cash flow of financial assets applicable to collective impairment assessment is estimated by using statistical modeling of historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management’s judgment as to whether current economic and credit conditions are such that the impairment losses are likely to be greater or less than suggested by historical modeling. In adjusting the future cash flow by historical modeling, the result has to be in line with changes and trends of observable data (e.g., impairment loss of collective assets and unemployment rate, asset price, commodity price, payment status and other variables representing the size of implement loss). Methodologieslosses. The methodology and assumptions used to estimate future cash flowin this model are reviewed on a regular basis in order to narrow down discrepancyminimize the difference between impairment loss estimation and actual loss.

Impairment losses are recognized in profit or loss and reflected in an allowance account against loans and receivables. When a subsequent event causes the amount of impairment loss to decrease, and the decrease can be related objectively to an event occurring after the impairment was recognized, the decrease in impairment loss is reversed through profit or loss of the period.

Allowance for Loan Losses

Our methodology for determiningestimated allowance for loan losses has changed in 2011.loss and actual loan loss.

Under bothShinhan Bank uses a PD/LGD model for collective assessment using three risk components — Exposure At Default (“EAD”), PD and LGD. EAD refers to the previous and current methodology, determining allowance for loan losses involves determination bothexpected exposure at the individual leveltime of default. EAD of financial assets are equal to the total carrying amount of such asset, and EAD of loan commitments or financial guarantee contracts are calculated as the sum of the amount already used and the amount expected to be used in the future.

As for measurement of PD by loan type, we estimate PD for corporate credit exposure based on internal credit ratings and PD for retail credit exposure based on Behavior Scoring System (BSS) ratings (which are largely based on the aggregate basis. Whilecredit history of retail loan borrowers and predict such borrowers’ payment patterns) and product type. If there is no material difference between our previous and current methodologyhasn’t been a significant increase in determining allowance for loan losses at the individual level except for differences in itscredit risk since initial recognition, of loan losses as a result of subsequent events, there are certain differences when determining the allowance on the aggregate basis.

When determining allowance for loan losses, under the previous methodology, Shinhan Bank, which accounts for the substantial majority of loans held by Shinhan Financial Group, used a migration model, while under the current methodology, Shinhan Bank used awe use probability of default / loss given default (“PD/LGD”) model. Certain differences may ariseevents occurring within the next 12 months. However if there has been a significant increase in allowances for loan losses calculated under the previous migration model and the current PD/LGD model.

Under the previous migration model, when determining allowance for loan losses, Shinhan Bank, which accounts for the substantial majority of loans held by Shinhan Financial Group, applied a migration model based on loan classifications. Shinhan Bank identified thecredit risk, we use probability of default for corporate loans through a migration model, which uses a statistical tool to monitorevents occurring over the progression of loans through nine different classifications over recent one year, while retail loans uses five different classifications over recent one year and are segmented into the two product types for the purposes of credit risk evaluation, namely, mortgage and home equity loans, and other retail loans (consisting of unsecured and secured retail loans). Loss given default for corporate loans is derived by the loss rate of individually evaluated impaired loans, while retail loans is derived by the historicalcharge-off and recovery informationremaining lifetime of the portfolio.loan.

UnderLGD refers to the current PD/expected loss if a borrower defaults. We calculate LGD, model, Shinhan Bank calculates the aggregate allowance for loan losses by multiplying (x) the probability of default for each class of borrowers that have been assigned the same credit rating by (y) the loss given default for such class of borrowers. A particular credit rating is assigned individually to each borrower based on (i) the borrower type (namely, household, corporate, SOHOs or high-risk borrowers) and (ii) its particular risk and credit profile within such type, using our proprietary credit evaluation model.

Our current PD/where LGD model determines the probability of default for each class of borrowers having the same credit rating as follows. First, we determine the projected probability of default for such class of borrowers using the longer look-back periods under IFRS. However, at least annually (and more frequently during times of heightened systemic risks)= (1 – RR), we test such projected probability of default against the actual rate of default among such class of borrowers in the12-months period immediately preceding such testing date. If based on such test the actual rate of default exceeds the mean or the maximum value of projected probability of default, we reassess, on an individual basis and using more conservative metrics, the credit rating assigned to each borrower within such class. Such credit rating reassessment generally has the effect of lowering the credit rating for a substantial number of borrowers that initially belonged to such class, which in turn has the effect of increasing the allowance of losses on an aggregate basis since the pool of borrowers having high credit ratings will have shrunk (and the pool of borrowers having lower credit ratings will have expanded) as the result of the individualized credit rating reassessment. Hence, such recalibration has the effect of reflecting the effects of current conditions in our final determination of the probability of default.

The migration and PD/LGD methods described above also have other differences. Under the previous migration method, the historical loss rate on migration analysis is calculated from a transition matrix table based on asset quality classification and takes into consideration historical loss rates and recovery rates aftercharge-off, whereas the current PD/LGD method (sophisticated approach), also known as the AIRB approach under Basel II, is calculated via measurable long-term risk factors such as probability of default from risk grading and loss given default based on the Basel II framework.

We believe that our current PD/Recovery Rate (“RR”) measured from past default exposures. The model for measuring LGD model hasis developed to reflect type of collateral, seniority of collateral, type of borrower and cost of recovery. In particular, LGD for retail loan products useloan-to-value ratio as a key variable. The recovery rate reflected in the following advantages compared toLGD calculation is based on the previous migration model:present value of recovery amount, discounted at the effective interest rate.

•Statistically more robust while reflecting effects of current condition. From a statistical perspective, we believe our current PD/LGD model enables a more robust and reliable analysis by adopting a longer look-back periodbased on the Continuous Time Marcov Chain Rating Transition Approach than theone-year migration model does. While adopting a longer look-back period may have the effect of undervaluing the effects of current conditions, our model largely compensates for such potential undervaluation through the annual calibration process discussed above.

•Analytically more fine-tuned. Our previous migration model analyzed the probability of default based on the following criteria only: retail vs. corporate and secured vs. unsecured. Under our current PD/LGD model, we examine the probability of default based on more granular classification as follows: households, corporate, small-office/home-office (SOHOs) and special high-risk borrowers. In addition, our current PD/LGD model also analyzes loss given default in greater detail, including location, types of collateral,loan-to-value ratios and (in the case of unsecured loans) types of loans.

•More versatile use and improved reliability through greater internal scrutiny. The previous migration model was used only for the purpose of determining the probability of default in connection of computing allowance for losses based on asset classification. In comparison, our current PD/LGD model is being used for substantially all areas of our credit risk evaluation, including credit ratings, loan review and computation of capital adequacy. Given the more versatile use of our current PD/LGD model and the greater impact on system-wide risk arising from its misuse, we devote greater resources to ensuring the accuracy of this model through heightened scrutiny over its design, implementation and evaluation.

We believe that the accounting estimates related to impairment of loans and receivablesat amortized cost and our allowance for loan losses are a “critical accounting policy”policies” because: (1) they are highly susceptible to change from period to period since they require us to make assumptions about future default rates and losses relating to our loan portfolio; and (2) any significant difference between our estimated losses on loans and receivables (as reflected in our allowance for loan losses) and actual losses on loans and receivables could require us to record additional provisions for loan losses which, if significant, could have a material impact on our profit. Our assumptions about estimated losses require significant judgment because actual losses have fluctuated in the past and are expected to continue to do so, based on a variety of factors.

Available-for-sale Financial Assets

When a decline in the fair value of anavailable-for-sale financial asset has been recognized in other comprehensive income and there is objective evidence that the asset is impaired, the cumulative loss that had been recognized in other comprehensive income is reclassified from equity to profit or loss as a reclassification adjustment even though the financial asset has not been derecognized. Impairment losses recognized in profit or loss for an investment in an equity instrument classified asavailable-for-sale are not reversed through profit or loss. If, in a subsequent period, the fair value of a debt instrument classified asavailable-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss is reversed, with the amount of the reversal recognized in profit or loss.

Held-to-maturity Financial Assets

An impairment loss in respect ofheld-to-maturity financial assets measured at amortized cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate and is recognized in profit or loss. Interest on the impaired asset continues to be recognized through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss.

Derivative Financial Instruments

Derivatives are recognized initially at fair value and attributable transaction costs are recognized in profit or loss as incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are accounted for as described below.

Hedge Accounting

We hold derivative financial instruments to hedge our foreign currency and interest rate risk exposures. On initial designation of the hedge, we formally document the relationship between the hedging instrument(s) and

hedged item(s), including the risk management objectives and strategy in undertaking the hedge transaction, together with the methods that will be used to assess the effectiveness of the hedging relationship. We make an assessment, both at the inception of the hedge relationship as well as on an ongoing basis, whether the hedging instruments are expected to be “highly effective” in offsetting the changes in the fair value or cash flows of the respective hedged items during the period for which the hedge is designated, and whether the actual results of

each hedge are within a range of80-125%. For a cash flow hedge of a forecast transaction, the transaction should be highly probable to occur and should present an exposure to variations in cash flows that could ultimately affect reported net income.

IFRS 9 maintains the mechanics of hedge accounting (three types of hedge accounting) as defined in IAS 39 but modifies it such that it becomes less complex and more aligned with the actual way risks are managed as compared to IAS 39. Previous hedging relationships which hedge accounting had been applied under IAS 39 therefore still remain effective after adoption of IFRS 9.

Fair Value Hedges

When a derivative is designated as the hedging instrument in a hedge of the change in fair value of a recognized asset or liability or a firm commitment that could affect profit or loss, changes in the fair value of the derivative are recognized immediately in profit or loss together with changes in the fair value of the hedged item that are attributable to the hedged risk (in the same line item in the consolidated statements of comprehensive income as the hedged item).

If the hedging derivative expires or is sold, terminated or exercised, or the hedge no longer meets the criteria for fair value hedge accounting, or the hedge designation is revoked, hedge accounting is discontinued prospectively. Any adjustment arising from gain or loss on the hedged item attributable to the hedged risk is amortized to profit or loss from the date the hedge accounting is discontinued.

Cash Flow Hedges

When a derivative is designated as the hedging instrument in a hedge of the variability in cash flows attributable to a particular risk associated with a recognized asset or liability or a highly probable forecast transaction that could affect profit or loss, the effective portion of changes in the fair value of the derivative is recognized in other comprehensive income, net of tax, and presented in the hedging reserve in equity. The amount recognized in other comprehensive income is removed and included in profit or loss in the same period as the hedged cash flows affect profit or loss under the same line item in the consolidated statements of comprehensive income as the hedged item. Any ineffective portion of changes in the fair value of the derivative is recognized immediately in profit or loss.

If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated or exercised, or the designation is revoked, then hedge accounting is discontinued prospectively. The cumulative gain or loss on the hedging instrument that has been recognized in other comprehensive income from the period when the hedge was effective remains separately in equity until the forecast transaction occurs. When the transaction occurs, the related cumulative gain or loss on the hedging instrument recognized in other comprehensive income is reclassified from equity to profit or loss as a reclassification adjustment in the same period that the hedged item affects profit or loss. If the forecast transaction is no longer expected to occur, the cumulative gains or losses that had been recognized in other comprehensive income are immediately reclassified to profit or loss.

Net Investment in a Foreign Operation

Hedges of a net investment in a foreign operation, including a hedge of a monetary item that is accounted for as part of the net investment are recognized in other comprehensive income to the extent that the hedge is effective. To the extent that the hedge is ineffective, such differences are recognized in profit or loss. When the hedged part of a net investment is disposed of, in whole or in part, the gain or loss on hedging instrument relating to the effective portion of the hedge that has been recognized in other comprehensive income is reclassified from equity to profit or loss in accordance with IAS 21 ‘The Effects of Changes in Foreign Exchange Rates’.

Separable Embedded Derivatives

Embedded derivatives are separated from the host contract and accounted for separately if the economic characteristics and risks of the host contract and the embedded derivative are not closely related, a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative, and the combined instrument is not measured at fair value through profit or loss. Changes in the fair value of separable embedded derivatives are recognized immediately in profit or loss.

OtherNon-trading Derivatives

When a derivative financial instrument is not held for trading, and is not designated in a qualifying hedge relationship, all changes in its fair value are recognized immediately in profit or loss.

Intangible Assets

Goodwill

Goodwill that arises upon the acquisition of subsidiaries is included in intangible assets. Goodwill is measured at cost less accumulated impairment losses. In respect of associates, the carrying amount of goodwill is included in the carrying amount of the investment, and an impairment loss on such an investment is not allocated to any asset, including goodwill, that forms part of the carrying amount of the equity method accounted investee.

Impairment ofNon-financial Assets

The carrying amounts of ournon-financial assets, other than assets arising from employee benefits, deferred tax assets and assets held for sale, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. For goodwill, and intangible assets that have indefinite useful lives or that are not yet available for use, the recoverable amount is estimated each year at the same time.

The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using apre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the “cash-generating unit,” or “CGU”).

An impairment loss is recognized if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. Impairment losses are recognized in profit or loss. Impairment losses recognized in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the units, and then to reduce the carrying amounts of the other assets in the unit (group of units) on a pro rata basis.

An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.

Goodwill that forms part of the carrying amount of an investment in an associate is not recognized separately, and therefore is not tested for impairment separately. Instead, the entire amount of the investment in an associate is tested for impairment as a single asset when there is objective evidence that the investment in an associate may be impaired.

Non-Derivative Financial Liabilities

Depending on commitments in a contract and definition of financial liabilities, thenon-derivative financial liabilities are categorized as either at fair value through profit or loss or other financial liabilities.

Our equity-linked securities are hybrid financial products that combine features of debt securities and equity options. Their returns are based on the interest earned on the debt securities plus the gains or losses from the equity options. Equity-linked securities can be offered in Korea only by specially licensed brokers dealing inover-the-counter derivative products, and we offer these products through Shinhan Investment.

Under the accounting principle of fair value option, we measure the fair value of the equity-linked securities and reflect the changes in such fair value in net income. We compute the fair value of these securities primarily internally based on the Black and Scholes’ option pricing model, except that in the case of overseas stocks, overseas stock indexes or other underlying assets, we use the average of valuations by two outside valuation firms hired by us.

Financial Liabilities at Fair Value through Profit or Loss

The financial liabilities at fair value through profit or loss include a financial liability held for trading or designated at fair value through profit or loss upon initial recognition. These financial liabilities are measured at fair value after initial recognition and changes in the fair value are recognized through profit or loss of the period. Costs attributable to the issuance or acquisition are immediately expensed in the period.

Other Financial Liabilities

The financial liabilities not classified as at fair value through profit or loss are classified into other financial liabilities. The liabilities are measured at a fair value minus cost relating to issuance upon initial recognition. Then, they are carried at amortized cost, using the effective interest rate method.

Only when financial liabilities become extinct, or obligations in a contract are cancelled or terminated, are they derecognized from our consolidated statements of financial position.

Employee Benefits

Short-term Employee Benefits

Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided.

A liability is recognized for the amount expected to be paid under short-term cash bonus or profit-sharing plans if we have a present legal or constructive obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably.

Other Long-term Employee Benefits

Our net obligation in respect of long-term employee benefits other than pension plans is the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit

is discounted to determine its present value, and the fair value of any related assets is deducted. The discount rate is the yield at the reporting date on AA credit-rated bonds that have maturity dates approximating the terms of our obligations. The calculation is performed using the projected unit credit method. Any actuarial gains and losses are recognized in profit or loss in the period in which they arise.

Defined Benefit Plans

A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. Our net obligation in respect of defined benefit plans is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value. The fair value of plan assets is deducted. The calculation is performed annually by an independent actuary using the projected unit credit method.

Remeasurements of the net defined benefit liability, which comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognized immediately in other comprehensive income. We determine the net interest expense (income) on the net defined benefit liability (asset) for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to thethen-net defined benefit liability (asset), taking into account any changes in the net defined benefit liability (asset) during the period as a result of contributions and benefit payments. Net interest expense and other expenses related to defined benefit plans are recognized in personnel expenses in profit or loss.

The discount rate is the yield at the reporting date on high-quality corporate bonds that have maturity dates approximating the terms of our obligations and that are denominated in the same currency in which the benefits are expected to be paid. We recognize service cost and net interest on the net defined benefit liability (asset) in profit or loss and remeasurement of the net defined benefit liability (asset) in other comprehensive income.

When the benefits of a plan are changed or when a plan is curtailed, the resulting change in benefit that relates to past service or the gain or loss on curtailment is recognized immediately in profit or loss. We recognize gains and losses on the settlement of a defined benefit plan when the settlement occurs.

Defined Contribution Plans

A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans are recognized as an employee benefit expense in profit or loss in the periods during which services are rendered by employees. Prepaid contributions are recognized as an asset to the extent that a cash refund or a reduction in future payments is available.

Termination Benefits

Termination benefits are recognized as an expense when we are committed demonstrably, without realistic possibility of withdrawal, to a formal detailed plan to either terminate employment before the normal retirement date, or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits for voluntary redundancies are recognized as an expense if we have made an offer of voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably. If benefits are payable more than 12 months after the reporting period, then they are discounted to their present value.

Share-based Payment Transactions

The grant date fair value of share-based payment awards granted to employees is recognized as an employee expense, with a corresponding increase in equity, over the period that the employees unconditionally become

entitled to the awards. The amount recognized as an expense is adjusted to reflect the number of awards for which the related service andnon-market vesting conditions are expected to be met, such that the amount ultimately recognized as an expense is based on the number of awards that do meet the related service andnon-market performance conditions at the vesting date. For share-based payment awards withnon-vesting conditions, the grant date fair value of the share-based payment is measured to reflect such conditions and there is notrue-up for differences between expected and actual outcomes.

The fair value of the amount payable to employees in respect of share appreciation rights, which are settled in cash, is recognized as an expense with a corresponding increase in liabilities, over the period that the employees unconditionally become entitled to payment. The liability is remeasured at each reporting date and at settlement date. Any changes in the fair value of the liability are recognized as personnel expense in profit or loss.

Provisions

A provision is recognized if, as a result of a past event, we have a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at apre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability.

Provisions are reviewed at the end of each reporting period and adjusted to reflect the current best estimate. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision is reversed.

Financial Guarantee Contract

Financial guarantees are contracts that require us to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument. Financial guarantee liabilities are recognized initially at their fair value, and the initial fair value is amortized over the life of the financial guarantee. The financial guarantee liability is subsequently carried at the higher of such amortized amount and the present value of any expected payment when a payment under the guarantee has become probable. Financial guarantees are included within other liabilities.

Financial Income and Expense

Interest

Interest income and expense are recognized in profit or loss using the effective interest method. The effective interest rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability (or, where appropriate, a shorter period) to the carrying amount of the financial asset or liability. When calculating the effective interest rate, we estimate future cash flows considering all contractual terms of the financial instrument, but not future credit losses.

The calculation of the effective interest rate includes all fees and points paid or received that are an integral part of the effective interest rate. Transaction costs include incremental costs that are directly attributable to the acquisition or issue of a financial asset or liability.

Recognition of Interest Income on Impairment Losses

Once an impairment loss has been recognized on a loan, although the accrual of interest in accordance with the contractual terms of the instrument is discontinued, interest income is recognized at the rate of interest that was used to discount estimated future cash flows for the purpose of measuring the impairment loss.

Fees and Commission

Fees and commission income and expense that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate.

Fees and commission income, including account servicing fees, investment management fees, sales commission, placement fees and syndication fees, are recognized as the related services are performed. When a loan commitment is not expected to result in the draw-down of a loan, the related loan commitment fees are recognized on a straight-line basis over the commitment period.

Fees and commission expense relate mainly to transaction and service fees, which are expensed as the services are received.

Dividends

Dividend income is recognized when the right to receive income is established.

Customer Loyalty Program

For customer loyalty programs, the fair value of the consideration received or receivable in respect of the initial sale is allocated between award credits (“points”) and other components of the fee and commission income. The Group provides awards, in the form of price discounts and by offering a variety of gifts. The fair value allocated to the points is estimated by reference to the fair value of the monetary and/ornon-monetary benefits for which they could be redeemed. The fair value of the benefits is estimated taking into account the expected redemption rate and the timing of such expected redemptions. Such amount is deferred and recognized as unearned revenue. Unearned revenue is recognized only when the points are redeemed and the Group has fulfilled its obligations to provide the benefits. The amount of revenue recognized in those circumstances is based on the number of points that have been redeemed in exchange for benefits, relative to the total number of points that are expected to be redeemed. A provision for onerous contracts is recognized when the expected benefits to be derived by us from customer loyalty programs are lower than the unavoidable cost of meeting our obligations under the programs.

Income Tax

Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in profit or loss except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income.

Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Taxable profit is different from accounting profit for the period since taxable profit excludes temporary differences (which will be taxable or deductible in determining taxable profit (tax loss) of future periods) andnon-taxable ornon-deductible items from accounting profit.

Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. A deferred tax liability is recognized for all taxable temporary differences. A deferred tax asset is recognized for all deductible temporary differences to the extent that it is probable that there will be taxable profit against which such deductible temporary differences can be utilized. However, deferred tax is not recognized for the following temporary differences: (i) taxable temporary differences arising from the initial recognition of goodwill, (ii) the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss, and (iii) differences associated with investments in subsidiaries, associates, and interests in joint ventures, to the extent that we are able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.

A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized.

Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.

We file our national income tax return with the Korean tax authorities under the consolidated corporate tax system, which allows us to make national income tax payments based on our and our wholly owned domestic subsidiaries’ consolidated profits or losses. Deferred taxes are measured based on the future tax benefits expected to be realized in consideration of the expected profits or losses of eligible companies in accordance with the consolidated corporate tax system. Consolidated corporate tax amounts, once determined, are allocated to each of our subsidiaries and are used as a basis for the income taxes to be recorded in their separate financial statements.

NewRecently Adopted Standards and Interpretations Not Yet Adopted

IFRS 9, ‘Financial Instruments’

IFRS 9, published on September 25, 2015, is effective for annual periods beginning on or after January 1, 2018, with earlier adoption permitted. It replaces existing guidance in IAS 39, Financial Instruments: Recognition and Measurement. We have adopted IFRS 9 for the year beginning afteron January 1, 2018 and will recognizehave recognized the accumulated effect resulting from the initial application of IFRS 9 starting January 1, 2018, the date of initial application.

Key features of the new standard, IFRS 9, are (i) classification and measurement of financial assets that reflects the business model in which the assets are managed and their cash flow characteristics, (ii) impairment methodology that reflects the “expected credit loss” model for financial assets and (iii) expanded scope of hedged items and hedging instruments which qualify for hedgerelated to our management accounting and changes in assessment method for effect of hedging relationships.

IFRS 9 introduces additional requirements for a financial asset to be classified as measured at amortized costs or fair value through other comprehensive income comparedestimates due to the existing guidance in IAS 39change of this accounting standard are described above, and the transition effects of the adoption of IFRS 9 would potentially increase the proportion of financial assets thatthis new standard are measured at fair value through profit or loss, thereby increasing volatilityincluded in our profit or loss. IFRS 9 also replaces the “incurred loss” model in the existing standard with a forward-looking “expected credit loss” model for loans, debt instruments, lease receivables, contractual assets and financial guarantee contracts, and therefore impairment losses are likely to be recognized earlier than using the incurred loss model under the existing guidance. In addition, under IFRS 9, which provides principle-based and less complex guidance in determining the scope of hedged items and hedging instruments that quality for hedge accounting, more hedged items and hedging instruments would qualify for hedge accounting.

IFRS 9 will require us to assess the financial impact from application of IFRS 9 and revise our accounting processes and internal controls related to financial instruments. Actual impact of adopting IFRS 9 will be dependent on the financial instruments we hold and economic conditions at that time as well as accounting policy elections and judgment that it will make in the future. For further details, see Note 360 of the notes to our consolidated financial statements included in this annual report. The implementation of IFRS 9 with effect from January 1, 2018 renders certain of our historical financial information as of and for the years ended December 31, 2015, 2016 and 2017 not directly comparable with that of our financial information after January 1, 2018.

IFRS 15, ‘Revenue from Contracts with Customers’

IFRS 15, published on November 6, 2015, is a new accounting standard on revenue recognition and is effective for annual reporting periods beginning on or after January 1, 2018, with earlier application permitted. IFRS 15 replaces existing revenue recognition standards, including IAS 18, ‘Revenue’, IAS 11, ‘Construction Contracts’,SIC-31, ‘Revenue-Barter Transactions Involving Advertising Services’, IFRIC 13, ‘Customer Loyalty Programmes’, IFRIC 15, ‘Agreements for the Construction of Real Estate’ and IFRIC 18, ‘Transfers of Assets from Customers’.

We have adopted IFRS 15 from January 1, 2018 using the cumulative effect method, and the effect of initially applying this standard is recognized at January 1, 2018, the date of initial application.

The existing standards suggest revenue recognition guidance by type of transactions such as sale of goods, rendering of services, interest revenue, royalty revenue, dividends revenue and construction contracts. However, according to IFRS 15, all types of contracts recognize revenue through a five-step revenue recognition model: (i) identifying the contract, (ii) identifying performance obligations, (iii) determining the transaction price, (iv) allocating the transaction price to performance obligations and (v) recognizing the revenue by satisfying performance obligations.

AsEffects on equity as a result of the analysis of financial impact based on the current situation and available information as of December 31, 2017, we do not expect theinitial application of IFRS 15 to have a material impact on our consolidated financial statements. For further details, seeare included in Note 360 of the notes to our consolidated financial statements included in this annual report.

New Standards and Interpretations Not Yet Adopted

IFRS 16, ‘Lease’

IFRS 16, enacted on May 22, 2017, is effective for annual reporting periods beginning on or after January 1, 2019 and may not be applied earlier. IFRS 16 replaces existing lease standards, including IAS 17 ‘Leases’, IFRIC 4, ‘Determining whether an arrangement contains a lease’,SIC-15 ‘Operating lease: Incentive’ andSIC-27, ‘Evaluating the substances of transactions involving the legal form of a lease.’

At the inception of a contract, an entity shall assess whether the contract is, or contains, a lease. However, as a practical expedient, for contracts previously identified either as leases or not leases, an entity is not required to reassess whether the contract is, or contains, a lease at the date of initial application. For a contract that is, or contains, a lease, a lessee or a lessor shall account for each lease component within the contract as a lease separately fromnon-lease components of the contract.

A lessee shall recognize aright-of-use asset, which indicates an asset that represents a lessee’s right to use an underlying asset for the lease term, and a lease liability, which indicates an obligation to make lease payments. However, a lessee may elect not to apply the requirements to short-term leases and leases for which the underlying asset is of low value. Also, as a practical expedient, a lessee may elect, by class of underlying asset, not to separatenon-lease components from lease components and instead account for each lease component and any associatednon-lease components as a single lease component. There has not been a material change in the accounting treatment for a lessor under IFRS 16 as compared to that under the existing standard IAS 17.

Average Balance Sheet and Volume and Rate Analysis

Average Balances 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, in 2015, 2016, 2017 and 2017.2018.

 

 Year Ended December 31,  Year Ended December 31, 
 2015 2016 2017  2016 2017 2018 
 Average
Balance(1)		 Interest
Income/
Expense		 Yield / Rate Average
Balance(1)		 Interest
Income/
Expense		 Yield / Rate Average
Balance(1)		 Interest
Income/
Expense		 Yield / Rate  Average
Balance(1)		 Interest
Income/
Expense		 Yield / Rate Average
Balance(1)		 Interest
Income/
Expense		 Yield / Rate Average
Balance(1)		 Interest
Income/
Expense		 Yield / Rate 
 (In billions of Won, except percentages)  (In billions of Won, except percentages) 

Assets:

                                                            

Interest-earning assets

                  

Due from banks(2)

 W18,137  W 226  1.24%  W17,552  W186  1.06%  W10,726  W168  1.56%  W17,552  W186  1.06%  W10,726  W168  1.56%  W10,747  W189  1.76% 

Trading assets

 26,160  559  2.14  28,967  497  1.72  31,618  548  1.73 

Loans(2)

         

Loans(3)

         

Retail loans

 89,393  3,126  3.50  101,092  3,236  3.20  105,998  3,416  3.22  101,092  3,236  3.20  105,998  3,416  3.22  115,622  4,029  3.48 

Corporate loans

 120,180  4,095  3.41  126,891  4,117  3.24  133,602  4,395  3.29  126,891  4,117  3.24  133,602  4,395  3.29  144,063  5,154  3.58 

Public and other loans

 2,139  76  3.56  2,261  73  3.23  2,126  70  3.30  2,261  73  3.23  2,126  70  3.30  2,486  87  3.49 

Loans to banks

 4,593  92  2.00  5,898  96  1.64  5,430  112  2.05  5,898  96  1.64  5,430  112  2.05  4,915  122  2.48 

Credit card loans

 17,820  1,636  9.18  18,804  1,708  9.09  19,943  1,681  8.43  18,804  1,708  9.09  19,943  1,681  8.43  21,527  1,790  8.32 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total loans

 234,125  9,025  3.85  254,946  9,230  3.62  267,099  9,674  3.62  254,946  9,230  3.62  267,099  9,674  3.62  288,613  11,182  3.87 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Securities(3)

         

Available-for-sale financial assets

 28,925  666  2.30  32,851  633  1.93  37,444  672  1.79 

Held-to-maturity financial assets

 14,961  539  3.60  17,274  562  3.25  22,153  651  2.94 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total securities

 43,886  1,205  2.75  50,125  1,195  2.38  59,597  1,323  2.22 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Securities(4)

 79,092  1,692  2.14  91,215  1,871  2.05  101,614  2,113  2.08 

Other interest-earning assets

  —  115   —   —  128   —   —  86   —   —  128   —   —  86   —   —  88   — 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total interest-earning assets

 W322,308  W11,130  3.45%  W351,590  W11,236  3.20%  W369,040  W11,799  3.20%  W351,590  W11,236  3.20%  W369,040  W11,799  3.20%  W400,974  W13,572  3.38% 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Non-interest-earning assets

                  

Cash and due from banks

 W3,856    W3,367    W10,844    W3,367    W10,844    W11,409   

Derivative assets

 1,916    2,207    2,020    2,207    2,020    2,263   

Available-for-sale financial assets

 2,919    2,589    2,077   

Property and equipment and intangible assets

 7,288    7,319    7,293    7,319    7,293    7,313   

Othernon-interest-earning assets

 17,892    19,950    21,012    22,539    23,089    24,328   
 

 

    

 

    

 

    

 

    

 

    

 

   

Totalnon-interest-earning assets

 W33,871    W35,432    W43,246    W35,432    W43,246    W45,313   
 

 

    

 

    

 

    

 

    

 

    

 

   

Total assets

 W356,179  W11,130   W387,022  W11,236   W412,286  W11,799   W387,022  W11,236   W412,286  W11,799   W446,287  W13,572  
 

 

  

 

   

 

  

 

   

 

  

 

   

 

  

 

   

 

  

 

   

 

  

 

  

Liabilities:

         

Interest-bearing liabilities

         

Deposits

         

Demand deposits

 W30,865  W113  0.37%  W35,978  W129  0.36%  W37,714  W148  0.39% 

Savings deposits

 63,061  374  0.59  69,671  353  0.51  74,467  415  0.56 

Time deposits

 123,716  2,030  1.64  121,050  1,873  1.55  130,846  2,362  1.81 

Other deposits

 4,744  70  1.47  8,164  127  1.57  8,525  167  1.96 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total interest-bearing deposits

 222,386  2,587  1.16  234,863  2,482  1.06  251,552  3,092  1.23 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Trading Liabilities

 10   —   —  2   —   —   —   —   — 

Borrowings

 24,832  301  1.21  28,158  352  1.25  29,364  468  1.59 

  Year Ended December 31, 
  2015  2016  2017 
  Average
Balance(1)		  Interest
Income/
Expense		  Yield / Rate  Average
Balance(1)		  Interest
Income/
Expense		  Yield / Rate  Average
Balance(1)		  Interest
Income/
Expense		  Yield / Rate 
  (In billions of Won, except percentages) 

Liabilities:

         

Interest-bearing liabilities

         

Deposits

         

Demand deposits

 W26,365  W117   0.44%  W30,865  W113   0.37%  W35,978  W129   0.36% 

Savings deposits

  56,083   394   0.70   63,061   374   0.59   69,671   353   0.51 

Time deposits

  113,932   2,308   2.03   123,716   2,030   1.64   121,050   1,873   1.55 

Other deposits

  3,555   42   1.20   4,744   70   1.47   8,164   127   1.57 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total interest-bearing deposits

  199,935   2,861   1.43   222,386   2,587   1.16   234,863   2,482   1.06 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Trading Liabilities

  11   —   —   10   —   —   2   —   — 

Borrowings

  23,576   326   1.38   24,832   301   1.21   28,158   352   1.25 

Debt securities issued

  39,335   1,184   3.01   42,578   1,086   2.55   47,151   1,085   2.30 

Other interest-bearing liabilities

  2,166   66   3.07   2,897   57   1.99   3,276   37   1.09 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total interest-bearing liabilities

 W265,023  W4,437   1.67%  W292,703  W4,031   1.38%  W313,450  W3,956   1.26% 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Non-interest-bearing liabilities

         

Non-interest-bearing deposits

 W3,532    W3,336    W3,574   

Derivatives liabilities

  2,307     2,676     2,228   

Insurance liabilities

  18,900     21,201     23,453   

Othernon-interest-bearing liabilities

  35,354     35,503     36,595   
 

 

 

    

 

 

    

 

 

   

Totalnon-interest-bearing liabilities

 W60,093    W62,716    W65,850   
 

 

 

    

 

 

    

 

 

   

Total liabilities

 W325,116  W 4,437   W355,419  W4,031   W379,300  W3,956  
 

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

  

Total equity attributable to equity holder of the Group

  29,986     30,764     32,210   

Non-controlling interest

  1,077     839     776   
 

 

 

    

 

 

    

 

 

   

Total liabilities and equity

 W356,179  W 4,437   W387,022  W 4,031   W412,286  W3,956  
 

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

  

Net interest spread(4)

    1.78%     1.82%     1.94% 

Net interest margin(5)

    2.08%     2.05%     2.13% 

Average asset liability ratio(6)

    121.62%     120.12%     117.73% 
  Year Ended December 31, 
  2016  2017  2018 
  Average
Balance(1)		  Interest
Income/
Expense		  Yield /Rate  Average
Balance(1)		  Interest
Income/
Expense		  Yield /Rate  Average
Balance(1)		  Interest
Income/
Expense		  Yield /Rate 
  (In billions of Won, except percentages) 

Debt securities issued

  42,578   1,086   2.55   47,151   1,085   2.30   55,931   1,337   2.39 

Other interest-bearing liabilities

  2,897   57   1.99   3,276   37   1.09   3,213   95   2.98 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total interest-bearing liabilities

 W292,703  W4,031   1.38%  W313,450  W3,956   1.26%  W340,060  W4,992   1.47% 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Non-interest-bearing liabilities

         

Non-interest-bearing deposits

 W3,336    W3,574    W3,547   

Derivatives liabilities

  2,676     2,228     2,889   

Insurance liabilities

  21,201     23,453     25,388   

Othernon-interest-bearing liabilities

  35,503     36,595     39,739   
 

 

 

    

 

 

    

 

 

   

Totalnon-interest-bearing liabilities

 W62,716    W65,850    W71,563   
 

 

 

    

 

 

    

 

 

   

Total liabilities

 W355,419  W4,031   W379,300  W3,956   W411,623  W4,992  
 

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

  

Total equity attributable to equity holder of the Group

  30,764     32,210     33,876   

Non-controlling interests

  839     776     788   
 

 

 

    

 

 

    

 

 

   

Total liabilities and equity

 W387,022  W4,031   W412,286  W3,956   W446,287  W4,992  
 

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

  

Net interest spread(5)

    1.82%     1.94%     1.91% 

Net interest margin(6)

    2.05%     2.13%     2.14% 

Average asset liability ratio(7)

    120.12%     117.73%     117.91% 

 

Notes:

 

(1)

Average balances are based on (a) daily balances for Shinhan Bank and (b) quarterly balances for other subsidiaries.

(2)

Due from banks as of December 31, 2018 consists of due from banks at amortized cost and due from banks at fair value through profit or loss.

(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. Loans as of December 31, 2018 consist of loans at amortized cost and loans at fair value through profit or loss.

(3)(4)

Average balance of and yield on securities are based on book value. Securities as of December 31, 2018 consist of securities at fair value through profit or loss, securities at fair value through other comprehensive income and securities at amortized cost.

(4)(5)

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.

(5)(6)

Represents the ratio of net interest income to average interest-earning assets.

(6)(7)

Represents the ratio of average interest-earning assets to average interest-bearing liabilities.

Analysis of Changes in Net Interest Income — Volume and Rate Analysis

The following table provides an analysis of changes in interest income, interest expense and net interest income between changes in volume and changes in rates for (i) 2018 compared to 2017 and (ii) 2017 compared to 2016 and (ii) 2016 compared to 2015.2016. 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.

 

  From 2016 to 2017
Interest Increase (Decrease) Due to Change in		   From 2017 to 2018
Interest Increase (Decrease) Due to Change in		 
        Volume               Rate               Change         Volume   Rate   Change 
  (In billions of Won)   (In billions of Won) 

Increase (decrease) in interest income

            

Due from banks

  W(88)   W70   W(18)   W—   W21   W21 

Trading assets

   46    5    51 

Loans:

            

Retail loans

   158    22    180    323    290    613 

Corporate loans

   220    58    278    358    401    759 

Public and other loans

   (4)    1    (3)    12    5    17 

Loans to banks

   (8)    24    16    (11)    21    10 

Credit card loans

   100    (127)    (27)    132    (23)    109 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total loans

   466    (22)    444    814    694    1,508 
  

 

   

 

   

 

   

 

   

 

   

 

 

Securities:

      

Available-for-sale financial assets

   84    (45)    39 

Held-to-maturity financial assets

   147    (58)    89 
  

 

   

 

   

 

 

Total securities

   231    (103)    128 
  

 

   

 

   

 

 

Securities

   216    26    242 

Other interest-earning assets

   —    (42)    (42)    —    2    2 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total interest income

  W655   W(92)   W563   W1,030   W743   W1,773 
  

 

   

 

   

 

   

 

   

 

   

 

 

Increase (decrease) in interest expense

            

Deposits:

            

Demand deposits

  W18   W(2)   W16   W6   W13   W19 

Savings deposits

   37    (58)    (21)    25    37    62 

Time deposits

   (43)    (114)    (157)    160    329    489 

Other deposits

   53    4    57    6    34    40 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total interest-bearing deposits

   65    (170)    (105)    197    413    610 
  

 

   

 

   

 

   

 

   

 

   

 

 

Borrowings

   41    10    51    16    100    116 

Debt securities issued

   111    (112)    (1)    209    43    252 

Other interest-bearing liabilities

   7    (27)    (20)    (1)    59    58 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total interest expense

  W224   W(299)   W(75)   W421   W615   W1,036 
  

 

   

 

   

 

   

 

   

 

   

 

 

Net increase (decrease) in net interest

  W431   W207   W638   W609   W128   W737 
  

 

   

 

   

 

   

 

   

 

   

 

 

  From 2015 to 2016
Interest Increase (Decrease) Due to Change in		   From 2016 to 2017
Interest Increase (Decrease) Due to Change in		 
        Volume               Rate               Change         Volume   Rate   Change 
  (In billions of Won)   (In billions of Won) 

Increase (decrease) in interest income

            

Due from banks

  W(7)   W(33)   W(40)   W(88)   W70   W(18) 

Trading assets

   56    (118)    (62)    46    5    51 

Loans:

            

Retail loans

   388    (278)    110    158    22    180 

Corporate loans

   223    (201)    22    220    58    278 

Public and other loans

   4    (7)    (3)    (4)    1    (3) 

Loans to banks

   23    (19)    4    (8)    24    16 

Credit card loans

   90    (18)    72    100    (127)    (27) 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total loans

   728    (523)    205    466    (22)    444 
  

 

   

 

   

 

   

 

   

 

   

 

 

Securities:

            

Available-for-sale financial assets

   84    (117)    (33)    84    (45)    39 

Held-to-maturity financial assets

   78    (55)    23    147    (58)    89 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total securities

   162    (172)    (10)    231    (103)    128 
  

 

   

 

   

 

   

 

   

 

   

 

 

Other interest-earning assets

   —    13    13    —    (42)    (42) 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total interest income

  W939   W(833)   W106   W655   W(92)   W563 
  

 

   

 

   

 

   

 

   

 

   

 

 

Increase (decrease) in interest expense

            

Deposits:

            

Demand deposits

  W18   W(22)   W(4)   W18   W(2)   W16 

Savings deposits

   46    (66)    (20)    37    (58)    (21) 

Time deposits

   186    (464)    (278)    (43)    (114)    (157) 

Other deposits

   16    12    28    53    4    57 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total interest-bearing deposits

   266    (540)    (274)    65    (170)    (105) 
  

 

   

 

   

 

   

 

   

 

   

 

 

Borrowings

   17    (42)    (25)    41    10    51 

Debt securities issued

   92    (190)    (98)    111    (112)    (1) 

Other interest-bearing liabilities

   19    (28)    (9)    7    (27)    (20) 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total interest expense

  W394   W(800)   W(406)   W224   W(299)   W(75) 
  

 

   

 

   

 

   

 

   

 

   

 

 

Net increase (decrease) in net interest

  W545   W(33)   W512   W431   W207   W638 
  

 

   

 

   

 

   

 

   

 

   

 

 

Results of Operations

20172018 Compared to 20162017

The following table sets forth, for the periods indicated, the principal components of our operating income.

 

  Year Ended December 31,   Year Ended December 31, 
  2016   2017   % Change   2017   2018   % Change 
  (In billions of Won, except percentages)   (In billions of Won, except percentages) 

Net interest income

  W7,205   W7,843    8.9%   W7,843   W8,580    9.4% 

Net fees and commission income

   1,566    1,711    9.3    1,711    1,939    13.3 

Net other operating income (expense)

   (5,662)    (5,725)    1.1    (5,724)    (6,020)    5.2 
  

 

   

 

   

 

   

 

   

 

   

 

 

Operating income

  W3,109   W3,829    23.2%   W3,830   W4,499    17.5% 
  

 

   

 

   

 

   

 

   

 

   

 

 

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, 
  2016 2017 % Change   2017 2018 % Change 
  (In billions of Won, except percentages)   (In billions of Won, except percentages) 

Interest income:

        

Cash and due from banks

  W186  W168  (9.7)%   W168  W189  12.5% 

Trading assets

   454  490  7.9 

Financial assets designated at fair value through profit or loss

   43  58  34.9 

Loans

   9,230  9,674  4.8    9,674  11,182  15.6 

Available-for-sale financial assets

   633  672  6.2 

Held-to-maturity financial assets

   562  651  15.8 

Securities

   1,871  2,113  12.9 

Other interest income

   128  86  (32.8)    86  88  2.3 
  

 

  

 

  

 

   

 

  

 

  

 

 

Total interest income

  W11,236  W11,799  5.0%   W11,799  W13,572  15.0% 
  

 

  

 

  

 

   

 

  

 

  

 

 

Interest expense:

        

Deposits

  W2,587  W2,482  (4.1)%   W2,482  W3,092  24.6% 

Borrowings

   301  352  16.9    352  468  33.0 

Debt securities issued

   1,086  1,085  (0.1)    1,085  1,337  23.2 

Other interest expense

   57  37  (35.1)    37  95  156.8 
  

 

  

 

  

 

   

 

  

 

  

 

 

Total interest expense

  W4,031  W3,956  (1.9)%   W3,956  W4,992  26.2% 
  

 

  

 

  

 

   

 

  

 

  

 

 

Net interest income

  W7,205  W7,843  8.9%   W7,843  W8,580  9.4% 
  

 

  

 

  

 

   

 

  

 

  

 

 

Net interest margin(1)

   2.05%  2.13%     2.13%  2.14%  

 

Note:

 

(1)

Represents the ratio of net interest income to average interest-earning assets. See “— Average Balance Sheet and Volume and Rate Analysis — Average Balances and Related Interest.”

Interest income. Interest income increased by 15.0% fromW11,799 billion in 2017 toW13,572 billion in 2018 primarily due to an increase in interest on loans and, to a lesser extent, an increase in interest on securities resulting from an increase in the average balance of government and public bonds. Interest on loans increased by 15.6% fromW9,674 billion in 2017 toW11,182 billion in 2018 primarily as a result of increases in the average balances of and average lending rates on both retail loans and corporate loans as further described below.

Interest on retail loans increased by 17.9% fromW3,416 billion in 2017 toW4,029 billion in 2018, primarily due to a 9.1% increase in the average balance of retail loans fromW105,998 billion in 2017 toW115,622 billion in 2018 as well as an increase in the average lending rate for retail loans from 3.22% in 2017 to 3.48% in 2018. The average balance of retail loans increased primarily as a result of the relatively low interest rate environment and increased demand in the housing market despite stricter regulations on maximumdebt-to-income andloan-to-value ratios implemented by the Government on mortgage loans. In particular, the volume of mortgage and home equity loans increased as more households chose to purchase homes due to a continued increase in the amounts of long-term deposits required for housing rentals and a decrease in the supply of homes available for long-term deposit leases. The average lending rate for retail loans increased primarily as a result of the general increase in market interest rates largely driven by the increases in base interest rate by the Bank of Korea from 1.25% to 1.50% in November 2017 and from 1.50% to 1.75% in November 2018. The base rate set by the Bank of Korea largely determines the market rates for certificates of deposit, which in turn largely determines our lending rates for a substantial majority of our retail loans.

Interest income from corporate loans increased by 17.3% fromW4,395 billion in 2017 toW5,154 billion in 2018, primarily due to a 7.8% increase in the average balance of such loans fromW133,602 billion in 2017 toW144,063 billion in 2018, as well as an increase in the average lending rate for corporate loans from 3.29% in 2017 to 3.58% in 2018. The average balance of corporate loans increased principally as a result of increased loan

demand from SOHOs and small- andmedium-sized enterprises amid the Government’s policy initiatives to promote the growth of such enterprises. The average lending rate for corporate loans increased largely as a result of the general increase in market interest rates as described above.

Interest expense.Interest expense increased by 26.2% fromW3,956 billion in 2017 toW4,992 billion in 2018, due primarily to a 24.6% increase in interest expense on deposits fromW2,482 billion in 2017 toW3,092 billion in 2018, as well as a 23.2% increase in interest expense on debt securities issued fromW1,085 billion in 2017 toW1,337 billion in 2018.

The increase in interest expense on deposits was due to an increase in the average interest rate payable on deposits from 1.06% in 2017 to 1.23% in 2018 as well as an a 7.1% increase in the average balance of deposits fromW234,863 billion in 2017 toW251,552 billion in 2018. The increase in the average interest rate payable on deposits resulted mainly from an increase in the average interest rate payable on time deposits from 1.55% in 2017 to 1.81% in 2018, as well as an increase in the average interest rate payable on savings deposits from 0.51% in 2017 to 0.56% in 2018. The average interest rate payable on time and savings deposits increased largely as a result of a general increase in market interest rates reflecting the increase in the base interest rate set by the Bank of Korea. The increase in the average balance of deposits was primarily due to an 8.1% increase in the average balance of time deposits and a 6.9% increase in the average balance of saving deposits, which was largely a result of customers’ preference forlow-risk investments in light of the continuing uncertainty in financial markets.

The increase in interest expense on debt securities issued was due primarily to a 18.6% increase in the average balance of debt securities issued from W47,151 billion in 2017 to W55,931 billion in 2018 as well as an increase in the average interest rate payable on debt securities from by 9 basis points to 2.39% in 2018 from 2.30% in 2017. The average interest rate payable on debt securities issued increased largely due to the general increase in market interest rates in 2018.

Net interest margin.Net interest margin represents the ratio of net interest income to the average balance of interest-earning assets. Our overall net interest margin increased by 1 basis points from 2.13% in 2017 to 2.14% in 2018 largely due to the increase in net interest income described above outpacing the increase in the average volume of interest-earning assets as a result of the general increase in market interest rates largely driven by the increase in base interest rate by the Bank of Korea from 1.25% to 1.50% in November 2017 and 1.50% to 1.75% in November 2018.

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 by 3 basis points from 1.94% in 2017 to 1.91% in 2018 primarily due to a 21 basis point increase in the average rate of interest on interest-bearing liabilities and an 18 basis point increase in the average rate of interest on interest-earning assets. Although our interest-bearing liabilities have, on average, longer maturity profiles than our interest-earning assets do and are therefore less sensitive to movements in base and market interest rates, the average rate of interest on interest-bearing liabilities outpaced that of interest-earning assets primarily due to an 11 basis point decrease in the average interest rate on credit card receivables resulting from the effect of promotion providing lower interest rates as part of revenue diversification strategy of Shinhan Card. The average volume of interest-earning assets increased by 8.7% toW400,974 billion in 2018 fromW369,040 billion in 2017 largely as a result of an increase in the volume of retail and corporate loans. The average volume of interest-bearing liabilities increased by 8.5% toW340,060 billion in 2018 fromW313,450 billion in 2017 largely as a result of an increase in deposits, primarily driven by customers’ preference forlow-risk investments in light of the continuing uncertainty in financial markets and our effort to attract more low cost deposits.

Fees and Commission Income (Expense), Net

The following table shows, for the periods indicated, the principal components of our net fees and commission income.

   Year Ended December 31, 
   2017   2018   % Change 
   (In billions of Won, except percentages) 

Fees and commission income:

      

Credit placement fees

  W59   W63    6.8% 

Commission received as electronic charge receipt

   143    146    2.1 

Brokerage fees

   373    412    10.5 

Commission received as agency

   129    121    (6.2) 

Investment banking fees

   66    91    37.9 

Commission received in foreign exchange activities

   198    214    8.1 

Asset management fees

   191    235    23.0 

Credit card fees

   2,370    1,360    (42.6) 

Others

   516    653    26.6 
  

 

 

   

 

 

   

 

 

 

Total fees and commission income

  W4,045   W3,295    (18.5)% 
  

 

 

   

 

 

   

 

 

 

Fees and commission expense:

      

Credit-related fees

  W36   W37    2.8% 

Credit card fees

   1,989    945    (52.5) 

Others

   309    374    21.0 
  

 

 

   

 

 

   

 

 

 

Total fees and commission expense

  W2,334   W1,356    (41.9)% 
  

 

 

   

 

 

   

 

 

 

Net fees and commission income

  W1,711   W1,939    13.3% 
  

 

 

   

 

 

   

 

 

 

Net fees and commission income increased by 13.3% fromW1,711 billion in 2017 toW1,939 billion in 2018 primarily as a result of a 23.0% increase in asset management fees income fromW191 billion in 2017 toW235 billion in 2018. The increase in asset management fees income was primarily due to an increase in management fees received from specified money and real estate related trust accounts of Shinhan Bank.

Credit card fees expense decreased by 52.5% fromW1,989 billion in 2017 toW945 billion in 2018, and credit card fees income decreased by 42.6% fromW2,370 billion in 2017 toW1,360 billion in 2018. Such decrease in credit card fees income and expense was due to the application of IFRS 15. Under IFRS 15, amounts allocated to credit card points are considered payables to the customers and recognized as a reduction of fees and commission income, estimated as the fair value of the monetary benefits, taking into account the expected redemption rate. In addition, cardholder service fees paid to customers, which had previously been recognized as fees and commission expense, are recognized as reductions of fees and commission income under IFRS 15. However, these changes do not have a material effect on net fees and commission income as any such decrease in fees and commission income are offset by a corresponding decrease in fees and commission expense. For further details, see Note 60 of the notes to our consolidated financial statements included in this annual report.

Other Operating Income (Expense), Net

The following table shows, for the periods indicated, the principal components of our net operating expense.

   Year Ended December 31, 
   2017  2018  % Change 
   (In billions of Won, except percentages) 

Net insurance loss

  W(460)  W(472)   2.6% 

Dividend income

   257   88   (65.8) 

Net gain on financial instruments at fair value through profit or loss

   —   420   — 

Net gain on financial instruments at fair value through profit or loss (overlay approach)

   —   75   — 

Net trading income (loss)

   963   —   — 

Net loss on financial instruments designated at fair value through profit or loss (IFRS 9)

   —   (27)   — 

Net loss on financial instruments designated at fair value through profit or loss (IAS 39)

   (1,060)   —   — 

Net foreign currency transaction gain

   364   194   (46.7) 

Net gain on disposal of financial asset at fair value through other comprehensive income

   —   21   — 

Net gain on disposal ofavailable-for-sale financial assets

   499   —   — 

Provision for credit loss allowance

   —   (748)   — 

Impairment loss on financial assets

   (1,014)   —   — 

General and administrative expenses

   (4,811)   (4,742)   (1.4) 

Others

   (462)   (829)   79.4 
  

 

 

  

 

 

  

 

 

 

Other operating income (expense)

  W(5,724)  W(6,020)   5.2% 
  

 

 

  

 

 

  

 

 

 

Net other operating expenses increased by 5.2% toW6,020 billion in 2018 fromW5,724 billion in 2017, primarily as a result of a 79.4% increase in others toW829 billion in 2018 fromW462 billion in 2017 and a 65.8% decrease in dividend income toW88 billion in 2018 fromW257 billion in 2017. Changes other than those mentioned are mainly due to changes in classification criteria of financial instruments as a result of the adoption of IFRS 9.

Others increased largely due to a decrease in loss allowances for unused credit limits of Shinhan Card. Dividend income decreased due to the change of classification criteria of debt instruments and equity instruments. IFRS 9 requires to classify puttable instruments such as beneficiary certificates as debt instruments which had been classified as equity instruments under previous IAS 39 and the income resulted from those financial instruments has been recognized as interest income accordingly, not dividend.

As a result of the adoption of IFRS 9, gains or losses on securities, which had previously recognized as (i) trading income or loss, (ii) gain or loss on financial instruments designated at FVTPL or (iii) gain or loss on sale of AFS securities, are now recognized as (i) valuation and disposal gain or loss on financial instruments at FVTPL, (ii) valuation and disposal gain or loss on financial instruments designated at FVTPL or (iii) valuation and disposal gain or loss on financial instruments at FVOCI. Following the adoption of IFRS 9, measurement model and measurement items specified in the impairment standard were changed. Allowance for expected credit losses are required to be recognized for all debt instruments except those classified as financial assets at FVTPL, regardless of loans or securities. Equity instruments, on the other hand, are no longer subject to impairment assessment. As such, we recognized provision for credit loss allowance for loans at AC and debt securities at AC or FVOCI measured based on the expected credit loss model whereas we had previously recognized impairment loss for loans and equity instruments based on the incurred loss model. For further information, see Notes 2 and 60 of the notes to our consolidated financial statements included in this annual report.

Impairment Loss on Financial Assets and Provision for Credit Loss Allowance on Financial Assets

The following table sets forth for the periods indicated the impairment loss by type of financial asset. The table for the year ended December 31, 2018 has been presented separately due to the adoption of IFRS 9 from January 1, 2018.

Year Ended December 31,
2018
(In billions of Won, except percentages)

Loans:

Retail

W383

Corporate

104

Credit card

202

Others

16

Subtotal

705

Securities(1)

14

Others

29

Total provision for credit loss allowance on financial assets

W748

Note:

(1)

Consist of securities at amortized cost and securities at fair value through other comprehensive income.

Year Ended December 31,
2017
(In billions of Won, except percentages)

Loans:

Retail

W146

Corporate

403

Credit card

252

Others

(1) 

Subtotal

800

Securities(1)

198

Others

16

Total impairment loss on financial assets

W1,014

Note:

(1)

Consist ofavailable-for-sale financial assets.

We recognized provision for credit loss allowance ofW748 billion in 2018 compared to net impairment loss on financial assets ofW1,014 billion in 2017. For loans, we recognized provision for credit loss allowance for loans ofW705 billion in 2018 compared to net impairment loss on loans ofW800 billion in 2017. As of January 1, 2018, we increased our credit loss allowance for loans byW561 billion, fromW2,311 billion toW2,872 billion, which was a result of the measurement model being changed from the “incurred loss” model under the previous guidance to a more forward-looking “expected credit loss” model upon adopting IFRS 9. The effect of such increase in credit loss allowance for loans was recorded in our retained earnings as of January 1, 2018. While the provision for credit loss allowance for loans in 2018 decreased compared to the net impairment loss on loans in 2017, which was mainly due to the reversal of impairment loss on certain corporate borrowers during 2018, credit loss allowance for loans increased toW2,725 billion as of December 31, 2018 under IFRS 9 fromW2,311 billion as of December 31, 2017 under the previous guidance of IAS 39. For further information on the financial impact of IFRS 9 on our credit loss allowance, see “Item 3.D. Risk Factors — Risks Relating to Law, Regulation and Government Policy — The implementation of IFRS 9 has caused us to increase our

allowance for impairment losses to cover expected credit loss on our loan portfolio and other financial instruments and may increase volatility in our profit or loss.” We also recognized provision for credit loss allowance for securities ofW14 billion in 2018 compared to net impairment loss on securities ofW198 billion in 2017, which was principally due to impairment loss onavailable-for-sale equity instruments, including, a significant decline in the fair value ofW131 billion in Shinhan Bank’s investments in Kookmin Cable Investment Inc. during 2017, which was the largest portion of impairment loss on securities, no longer being subject to impairment assessment upon the implementation of IFRS 9.

Income Tax Expense

Income tax expense increased by 49.5% fromW848 billion in 2017 toW1,268 billion in 2018 primarily as a result of an increase in profit before income taxes by 17.6% toW4,466 billion in 2018 fromW3,797 billion in 2017 as well as an increase in the corporate tax rate from 24.2% to 27.5%. Our effective rate of income tax increased to 28.4% in 2018 from 22.3% in 2017.

Net Income for the Period

As a result of the foregoing, our net income for the period increased by 8.4% fromW2,949 billion in 2017 toW3,198 billion in 2018.

Other Comprehensive Income (loss) for the Period

   Year Ended December 31, 
   2017  2018  % Change 
   (In billions of Won, except percentages) 

Items that are or may be reclassified to profit or loss:

    

Valuation gain on financial asset at fair value through other comprehensive income

  W—  W161   —% 

Loss on financial instruments at fair value through profit or loss (overlay approach)

   —   (54)   — 

Loss onavailable-for-sale financial assets

   (323)   —   — 

Equity in other comprehensive income (loss) of associates

   (23)   7   N/M 

Foreign currency translation adjustments for foreign operations

   (194)   20   N/M 

Net change in unrealized fair value of cash flow hedges

   16   (20)   N/M 

Other comprehensive income (loss) of separate account

   (9)   9   N/M 
  

 

 

  

 

 

  

 

 

 
   (533)   123   N/M 

Items that will never be reclassified to profit or loss:

    

Remeasurements of defined benefit liability

   103   (93)   N/M 

Equity in other comprehensive income of associates

   1   —   — 

Valuation gain on financial asset at fair value through other comprehensive income

   —   23   — 

Loss on disposal of financial asset at fair value through other comprehensive income

   —   (3)   — 

Changes in own credit risk on financial liabilities designated at fair value through profit of loss

   —   2   — 
  

 

 

  

 

 

  

 

 

 
   104   (71)   N/M 
  

 

 

  

 

 

  

 

 

 

Total other comprehensive income (loss), net of income tax

  W(429)  W52   N/M% 
  

 

 

  

 

 

  

 

 

 

N/M = not meaningful

We recorded other comprehensive income ofW52 billion in 2018 compared to other comprehensive loss ofW429 billion in 2017. The items recognized in other comprehensive income were changed due to the adoption of

IFRS 9, particularly related to classification and measurement of securities. We recognized valuation gain on financial asset at fair value through other comprehensive income ofW184 billion in 2018 compared to loss onavailable-for-sale financial assets ofW323 billion in 2017. We recognized gain on foreign currency translation adjustments for foreign operations ofW20 billion in 2018 compared to loss on foreign currency translation adjustments for foreign operations ofW194 billion in 2017, primarily due to an increase in exchange rates in 2018.

2017 Compared to 2016

The following table sets forth, for the periods indicated, the principal components of our operating income.

   Year Ended December 31, 
   2016   2017   % Change 
   (In billions of Won, except percentages) 

Net interest income

  W7,205   W7,843    8.9% 

Net fees and commission income

   1,566    1,711    9.3 

Net other operating income (expense)

   (5,662)    (5,724)    1.1 
  

 

 

   

 

 

   

 

 

 

Operating income

  W3,109   W3,830    23.2% 
  

 

 

   

 

 

   

 

 

 

Net Interest Income

The following table shows, for the periods indicated, the principal components of our net interest income.

   Year Ended December 31, 
   2016  2017  % Change 
   (In billions of Won, except
percentages)		 

Interest income:

    

Cash and due from banks

  W186  W168   (9.7)% 

Trading assets

   454   490   7.9 

Financial assets designated at fair value through profit or loss

   43   58   34.9 

Loans

   9,230   9,674   4.8 

Available-for-sale financial assets

   633   672   6.2 

Held-to-maturity financial assets

   562   651   15.8 

Other interest income

   128   86   (32.8) 
  

 

 

  

 

 

  

 

 

 

Total interest income

  W11,236  W11,799   5.0% 
  

 

 

  

 

 

  

 

 

 

Interest expense:

    

Deposits

  W2,587  W2,482   (4.1)% 

Borrowings

   301   352   16.9 

Debt securities issued

   1,086   1,085   (0.1) 

Other interest expense

   57   37   (35.1) 
  

 

 

  

 

 

  

 

 

 

Total interest expense

  W4,031  W3,956   (1.9)% 
  

 

 

  

 

 

  

 

 

 

Net interest income

  W7,205  W7,843   8.9% 
  

 

 

  

 

 

  

 

 

 

Net interest margin(1)

   2.05%   2.13%  

Note:

(1)

Represents the ratio of net interest income to average interest-earning assets. See “— Average Balance Sheet and Volume and Rate Analysis — Average Balances and Related Interest.”

Interest income.The 5.0% increase in interest income was due primarily to an increase in interest on loans. Interest on loans increased by 4.8% fromW9,230 billion in 2016 toW9,674 billion in 2017 primarily as a result

of increases in the average balances of and average lending rates on both retail loans and corporate loans as further described below, which was partially offset by a 32.8% decrease in other interest income fromW128 billion in 2016 toW86 billion in 2017.

Interest on retail loans increased by 5.6% fromW3,236 billion in 2016 toW3,416 billion in 2017, primarily due to a 4.9% increase in the in the average balance of retail loans fromW101,092 billion in 2016 toW105,998 billion in 2017 as well as an increase in the average lending rate for retail loans from 3.20% in 2016 to 3.22% in 2017. The average balance of retail loans increased primarily as a result of a continued increase in demand for home rental long-term deposits loans following increased house prices in the domestic market. The average lending rate for retail loans increased primarily as a result of the general increase in market interest rates largely driven by the increase in the base interest rate set by the Bank of Korea to 1.50% in 2017 from 1.25% in 2016. The base rate set by the Bank of Korea largely determines the market rates for certificates of deposit, which in turn largely determines our lending rates for a substantial majority of our retail loans.

Interest income from corporate loans increased by 6.8% fromW4,117 billion in 2016 toW4,395 billion in 2017, primarily due to a 5.3% increase in the average balance of such loans fromW126,891 billion in 2016 toW133,602 billion in 2017, as well as an increase in the average lending rate for corporate loans from 3.24% in 2016 to 3.29% in 2017. The average balance of corporate loans increased principally as a result of increased loan demand from SOHOs and small- andmedium-sized enterprises, which have recently become an increasing

source of demand for our corporate loans. The average lending rate for corporate loans increased largely as a result of the general increase in market interest rates, as well as our efforts to diversify income structure, such as by developing products that provide a moderate interest rate while bearing relatively low risk.

Interest expense.Interest expense decreased by 1.9% fromW4,031 billion in 2016 toW3,956 billion in 2017, due primarily to a 4.1% decrease in interest expense on deposits fromW2,587 billion in 2016 toW2,482 billion in 2017, which was partially offset by a 16.9% increase in interest expense on borrowings fromW301 billion in 2016 toW352 billion in 2017.

The decrease in interest expense on deposits was due to a decrease in the average interest rate payable on deposits from 1.16% in 2016 to 1.09% in 2017, which was partially offset by a 5.6% increase in the average balance of deposits fromW222,386 billion in 2016 toW234,863 billion in 2017. The decrease in the average interest rate payable on deposits resulted mainly from a decrease in the average interest rate payable on time deposits from 1.64% in 2016 to 1.55% in 2017, as well as a decrease in the average interest rate payable on savings deposits from 0.59% in 2016 to 0.51% in 2017, largely reflecting a general decrease in market interest rates attributable to the decrease in the base interest rate set by the Bank of Korea in 2016, as well as an increase in the proportion of low cost funding deposits, namely liquidity core deposits, which are deposits with low interest rates. The average interest rate payable on time and savings deposits in 2017 was largely affected by the base interest rate set by the Bank of Korea in 2016 due to their longer maturity profiles. The increase in the average balance of deposits was primarily due to a 16.6% increase in the average balance of demand deposits, largely resulting from an increase in liquidity core deposits.

The increase in interest expense on borrowings was due to an increase in the average interest rate payable on borrowings from 1.21% in 2016 to 1.25% in 2017, as well as a 13.4% increase in the average balance of borrowings fromW24,832 billion in 2016 toW28,158 billion in 2017. The average interest rate payable on borrowings increased largely due to the general increase in market interest rates in 2017. The average balance of borrowings increased due to an increase in borrowings from policy institutions as a result of an increase in demand for loans with government funds.

Net interest margin.Net interest margin represents the ratio of net interest income to the average balance of interest-earning assets. Our overall net interest margin increased by 8 basis points from 2.05% in 2016 to 2.13% in 2017 primarily due to a decrease in the average rate of interest on interest-bearing liabilities by 12 basis points from 1.38% in 2016 to 1.26% in 2017 as further explained below, which was partially offset by an increase in the

average volume of interest-earning assets by 5.0% fromW351,590 billion in 2016 toW369,040 billion in 2017 while the average rate of interest receivable on interest-earning assets remained stable.

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, increased by 12 basis points from 2016 to 2017 primarily due to a 12 basis point decrease in the average rate of interest payable on interest-bearing liabilities, principally consisting of deposits and debt securities issued, from 1.38% in 2016 to 1.26% in 2017, which was largely attributable to lower funding costs associated withWon-denominated debt securities issued and otherWon-denominated funding sources due to favorable market conditions, which allowed us to raise capital at lower interest rates, while the average rate of interest receivable on interest-earning assets, which primarily consist ofWon-denominated loans and securities held by us, remained stable. In general, an increase in the base rates set by the Bank of Korea tends to increase our net interest margin since our deposits (on which we pay interest) have, on average, a longer maturity profile than our loans (from which we receive interest) do and are therefore less sensitive to movements in base and market interest rates. See “— Overview — Interest Rates.”

Fees and Commission Income (Expense), Net

The following table shows, for the periods indicated, the principal components of our net fees and commission income.

 

  Year Ended December 31,   Year Ended December 31, 
  2016   2017   % Change   2016   2017   % Change 
  (In billions of Won, except percentages)   (In billions of Won, except percentages) 

Fees and commission income:

            

Credit placement fees

  W74   W59    (20.3)%   W74   W59    (20.3)% 

Commission received as electronic charge receipt

   137    143    4.4    137    143    4.4 

Brokerage fees

   334    373    11.7    334    373    11.7 

Commission received as agency

   131    129    (1.5)    131    129    (1.5) 

Investment banking fees

   66    66    —    66    66    — 

Commission received in foreign exchange activities

   183    198    8.2    183    198    8.2 

Asset management fees

   116    191    64.7    116    191    64.7 

Credit card fees

   2,343    2,370    1.2    2,343    2,370    1.2 

Others

   420    516    22.9    420    516    22.9 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total fees and commission income

  W3,804   W4,045    6.3%   W3,804   W4,045    6.3% 
  

 

   

 

   

 

   

 

   

 

   

 

 

Fees and commission expense:

            

Credit-related fees

  W32   W36    12.5%   W32   W36    12.5% 

Credit card fees

   1,899    1,989    4.7    1,899    1,989    4.7 

Others

   307    309    0.7    307    309    0.7 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total fees and commission expense

  W2,238   W2,334    4.3%   W2,238   W2,334    4.3% 
  

 

   

 

   

 

   

 

   

 

   

 

 

Net fees and commission income

  W1,566   W1,711    9.3%   W1,566   W1,711    9.3% 
  

 

   

 

   

 

   

 

   

 

   

 

 

Net fees and commission income increased by 9.3% fromW1,566 billion in 2016 toW1,711 billion in 2017, primarily as a result of a 64.7% increase in asset management fees income fromW116 billion in 2016 toW191 billion in 2017 and a 11.7% increase in brokerage fees income fromW334 billion in 2016 toW373 billion in 2017, which were partially offset by a 4.7% increase in credit card fees expenses.

The increase in asset management fees income was primarily due to an increase in trust fees and commissions received from trust accounts as a result of an increase in the volume of trust accounts of Shinhan Bank. The increase in brokerage fees income was primarily due to an increase in sales of collective investment products of Shinhan Bank and Shinhan Investment,as well as an increase in brokerage fees primarily due to increased daily average stock trading volume due to favorable stock market conditions in 2017.

The increase in credit card fees expense was principally attributable to an increase in membership service fees and card member recruitment fees of Shinhan Card as part of its enhanced marketing efforts.

Other Operating Income (Expense), Net

The following table shows, for the periods indicated, the principal components of our net operating expense.

 

  Year Ended December 31,   Year Ended December 31, 
  2016 2017 % Change   2016 2017 % Change 
  (In billions of Won, except percentages)   (In billions of Won, except percentages) 

Net insurance loss

  W(419)  W(460)  9.8%   W(419)  W(460)  9.8% 

Dividend income

   282  257  (8.9)    282  257  (8.9) 

Net trading income (loss)

   370  963  160.3    370  963  160.3 

Net foreign currency transaction gain

   462  364  (21.2)    462  364  (21.2) 

Net gain (loss) on financial instruments designated at fair value through profit or loss

   (502)  (1,060)  111.2    (502)  (1,060)  111.2 

Net gain on sale ofavailable-for-sale financial assets

   648  499  (23.0) 

Net gain on disposal ofavailable-for-sale financial assets

   648  499  (23.0) 

Impairment loss on financial assets

   (1,196)  (1,015)  (15.1)    (1,196)  (1,015)  (15.1) 

General and administrative expenses

   (4,509)  (4,811)  6.7 

General and administrative expense

   (4,509)  (4,811)  6.7 

Others

   (798)  (462)  (42.1)    (798)  (462)  (42.1) 
  

 

  

 

  

 

   

 

  

 

  

 

 

Other operating income (expense)

  W(5,662)  W(5,725)  1.1%   W(5,662)  W(5,725)  1.1% 
  

 

  

 

  

 

   

 

  

 

  

 

 

Net other operating expenses increased by 1.1% toW5,725 billion in 2017 fromW5,662 billion in 2016, primarily as a result of a 111.2% increase in net loss on financial instruments designated at fair value through profit or loss toW1,060 billion in 2017 fromW502 billion in 2016 and a 6.7% increase in general and administrative expense toW4,811 billion in 2017 fromW4,509 billion in 2016, which were partially offset by a 160.3% increase in net trading income toW963 billion in 2017 fromW370 billion in 2016, as well as a 42.1% decrease in other expense toW462 billion in 2017 fromW798 billion in 2016.

The increase in net loss on financial instruments designated at fair value through profit or loss was largely due to an increase in disposal loss from financial instruments designated at fair value through profit or loss held by Shinhan Investment. General and administrative expense increased primarily due to an increase in retirement allowances paid to early retirees of Shinhan Bank and Shinhan Card.

The increase in net trading income was primarily due to an increase in net gain on transactions and valuation of derivatives. The decrease in other expense was primarily due to an increase in reversal of allowances for credit card loan losses.

Impairment Loss on Financial Assets

The following table sets forth for the periods indicated the impairment loss by type of financial asset.

 

  Year Ended December 31,   Year Ended December 31, 
  2016 2017 % Change   2016 2017 % Change 
  (In billions of Won, except percentages)   (In billions of Won, except percentages) 

Loans:

        

Retail

  W135  W147  8.9%   W135  W146  8.1% 

Corporate

   656  403  (38.6)    656  403  (38.6) 

Credit card

   313  252  (19.5)    313  252  (19.5) 

Others

   (1)  (1)   —    (1)  (1)   — 
  

 

  

 

  

 

   

 

  

 

  

 

 

Subtotal

   1,103  801  (27.4)    1,103  800  (27.5) 

Securities(1)

   88  198  125.0    88  198  125.0 

Others

   5  16  220.0    5  16  220.0 
  

 

  

 

  

 

   

 

  

 

  

 

 

Total impairment loss on financial assets

  W1,196  W1,015  (15.1)%   W1,196  W1,014  (15.2)% 
  

 

  

 

  

 

   

 

  

 

  

 

 

 

Note:

(1)

Consist ofavailable-for-sale financial assets.

Impairment loss on financial assets decreased by 15.1%15.2% fromW1,196 billion in 2016 toW1,0151,014 billion in 2017 principally due to a 27.4%27.5% decrease in impairment loss on loans fromW1,103 billion in 2016 toW801800 billion in 2017, which was partially offset by a 125% increase in impairment on securities fromW88 billion in 2016 toW198 billion in 2017.

Our impairment loss on loans decreased primarily due to a 38.6% decrease in impairment loss on corporate loans fromW656 billion in 2016 toW403 billion in 2017 and a 19.5% decrease in impairment loss on credit card loans fromW313 billion in 2016 toW252 billion in 2017, which was partially offset by a 8.9%8.1% increase in impairment loss on retail loans fromW135 billion in 2016 toW146 billion in 2017. The decrease in impairment loss on corporate loans was principally due to an improvement in the quality of corporate loans largely resulting from write-offs ofnon-performing loans with higher allowance rates during 2016. The decrease in impairment loss on credit card loans was principally due to an increase in reversal of allowances for credit card loan losses as a result of changing the allowance model of Shinhan Card from a roll-rate model in 2016 to an internal model approach in 2017. The increase in impairment loss on retail loans was principally due to increased exposure as a result of an increase in the volume of retail loans.

Substantially all of our impairment losses recorded onavailable-for-sale financial assets were related to the impairments of ouravailable-for-sale equity investments primarily resulting from the decline in the market price or fair value of such investments. We recognized impairment losses onavailable-for-sale financial assets ofW202,360 million in 2017, of whichW147,630 million, or approximately 73.0%, was due to a significant decline in our investment in Kookmin Cable Investment Inc. We recognized impairment losses onavailable-for-sale financial assets ofW96,381 million in 2016, of whichW29,032 million, or approximately 30%, was due to a significant decline in our investment in Samsung C&T Corporation. To a limited extent, we have also recognized impairment losses due to liquidation, bankruptcy proceedings,de-listing and other qualitative factors.

Income Tax Expense

Income tax expense increased by 145.1% fromW346 billion in 2016 toW848 billion in 2017 primarily due to a decrease in tax income from recognition of deferred tax assets relatedas we recognized significant deferred tax assets in 2016 relating to expired unused tax losses as well as a result of thedue to an increase in our taxable income.income in 2017 compared to 2016. Our effective rate of income tax increased to 22.3% in 2017 from 10.9% in 2016. In 2016, based on new tax interpretation issued by the Korea National Tax Service allowing utilization of expired and unused tax losses against profit resulting from elimination or expiration of deposit and insurance liabilities, Shinhan Bank recognized deferred tax assets relating to expired unused tax losses after factoring in expected future taxable profits and expected future elimination or expiration of deposit and insurance liabilities.

Net Income for the Period

As a result of the foregoing, our net income for the period increased by 4.4% fromW2,825 billion in 2016 toW2,9482,949 billion in 2017.

Other Comprehensive Income for the Period

 

  Year Ended December 31,   Year Ended December 31, 
  2016 2017 % Change   2016 2017 % Change 
  (In billions of Won, except percentages)   (In billions of Won, except percentages) 

Items that will be reclassified to profit or loss:

    

Foreign currency translation differences for foreign operations

  W12  W(194)   N/M% 

Net change in fair value ofavailable-for-sale financial assets

   (434)  (323)   (25.6) 

Items that are or may be reclassified to profit or loss:

    

Foreign currency translation adjustments for foreign operations

  W12  W(194)  N/M% 

Gain (loss) onavailable-for-sale financial assets

   (434)  (323)  (25.6) 

Equity in other comprehensive income (loss) of associates

   3  (23)   N/M    3  (23)  N/M 

Net change in unrealized fair value of cash flow hedges

   (1)  16   N/M    (1)  16  N/M 

Other Comprehensive income (loss) of separate account

   (4)  (9)   125.0 

Other comprehensive income (loss) of separate account

   (4)  (9)  125.0 
  

 

  

 

  

 

   

 

  

 

  

 

 
   (424)  (533)   25.7    (424)  (533)  25.7 

Items that will not be reclassified to profit or loss:

    
  

 

  

 

  

 

 

Items that will never be reclassified to profit or loss:

    

Remeasurements of defined benefit liability

   15  103   586.7    15  103  586.7 

Equity in other comprehensive income (loss) of associates

   —  1   N/M 

Equity in other comprehensive income of associates

   —  1  N/M 
  

 

  

 

  

 

   

 

  

 

  

 

 
   15  104   593.3    15  104  593.3 
  

 

  

 

  

 

   

 

  

 

  

 

 

Total other comprehensive loss, net of income tax

  W(409)  W(429)   4.9%   W(409)  W(429)  4.9% 
  

 

  

 

  

 

   

 

  

 

  

 

 

 

N/M = not meaningful

Other comprehensive loss increased by 4.9% fromW409 billion in 2016 toW429 billion in 2017, primarily due to a change in foreign currency translation differences for foreign operations from a net gain ofW12 billion in 2016 to a net loss ofW194 billion in 2017, which was partially offset by a 25.6% decrease in net loss arising from net change in fair value ofavailable-for-sale financial assets fromW434 billion in 2016 toW323 billion in 2017. The change in foreign currency translation differences for foreign operations from a net gain to a net loss was largely due to decreases in the exchange rates in 2017. The decrease in net loss on fair value ofavailable-for-sale financial assets was largely due to fluctuations in interest rates and stock prices, as well as a decrease of adjustment amount reclassified from equity to profit or loss due to recognition of impairment losses and disposal.

2016 Compared to 2015

The following table sets forth, for the periods indicated, the principal components of our operating income.

   Year Ended December 31, 
   2015   2016       % Change     
   (In billions of Won, except percentages) 

Net interest income

  W6,693   W7,205    7.6% 

Net fees and commission income

   1,621    1,566    (3.4) 

Net other operating income (expense)

   (5,341)    (5,662)    6.0 
  

 

 

   

 

 

   

 

 

 

Operating income

  W2,973   W3,109    4.6% 
  

 

 

   

 

 

   

 

 

 

Net Interest Income

The following table shows, for the periods indicated, the principal components of our net interest income.

   Year Ended December 31, 
   2015  2016  % Change 
   (In billions of Won, except percentages) 

Interest income:

    

Cash and due from banks

  W226  W186   (17.7)% 

Trading assets

   511   454   (11.2) 

Financial assets designated at fair value through profit or loss

   48   43   (10.4) 

Loans

   9,025   9,230   2.3 

Available-for-sale financial assets

   666   633   (5.0) 

Held-to-maturity financial assets

   539   562   4.3 

Other interest income

   115   128   11.3 
  

 

 

  

 

 

  

 

 

 

Total interest income

  W11,130  W11,236   1.0% 
  

 

 

  

 

 

  

 

 

 

Interest expense:

    

Deposits

  W2,861  W2,587   (9.6)% 

Borrowings

   326   301   (7.7) 

Debt securities issued

   1,184   1,086   (8.3) 

Other interest expense

   66   57   (13.6) 
  

 

 

  

 

 

  

 

 

 

Total interest expense

  W4,437  W4,031   (9.2)% 
  

 

 

  

 

 

  

 

 

 

Net interest income

  W6,693  W7,205   7.6% 
  

 

 

  

 

 

  

 

 

 

Net interest margin(1)

   2.08%   2.05%  

Note:

(1)Represents 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 income.The 1.0% increase in interest income was due primarily to an increase in interest on loans. Interest on loans increased by 2.3% fromW9,025 billion in 2015 toW9,230 billion in 2016, primarily as a result of a 8.9% increase in the average balance of total loans fromW234,125 billion in 2015 toW254,946 billion in 2016 due to increases in the average balances of retail loans and corporate loans as further described below, which was partially offset by a decrease in the average lending rate from 3.85% in 2015 to 3.62% in 2016 as a result of a general decrease in market interest rates driven by the decrease in the base interest rate set by the Bank of Korea.

Interest on retail loans increased by 3.5% fromW3,126 billion in 2015 toW3,236 billion in 2016, primarily due to a 13.1% increase in the in the average balance of retail loans fromW89,393 billion in 2015 toW101,092 billion in 2016, which was partially offset by a decrease in the average lending rate for retail loans from 3.50% in 2015 to 3.20% in 2016. The average balance of retail loans increased primarily as a result of the general decrease in market interest rates and a continued increase in demand for housing loans following the implementation of government policies designed to stimulate the real estate market, including the loosening of maximumdebt-to-income andloan-to-value ratios. In addition, the volume of mortgage and home equity loans increased as more households chose to purchase homes due to a continued increase in the amounts of home rental long-term deposits loans and a decrease in the supply of homes rented on long-term deposit leases. Such trends slightly slowed during the fourth quarter of 2016 due to the Korean government’s tightening of mortgage regulations to address concerns about the increasing volume of mortgage and home equity loans. The average lending rate for retail loans decreased primarily as a result of the general decrease in market interest rates largely driven by the decrease in the base interest rate set by the Bank of Korea to 1.25% in 2016 from 1.50% in 2015. The base rate set by the Bank of Korea largely determines the market rates for certificates of deposit, which in turn largely determines our lending rates for a substantial majority of our retail loans.

Interest income from corporate loans increased by 0.5% fromW4,095 billion in 2015 toW4,117 billion in 2016, primarily due to a 5.6% increase in the average balance of such loans fromW120,180 billion in 2015 toW126,891 billion in 2016, which was partially offset by a decrease in the average lending rate for corporate loans from 3.41% in 2015 to 3.24% in 2016. The average balance of corporate loans increased principally as a result of the general decrease in market interest rates and increased loan demand from SOHOs and small- andmedium-sized enterprises on the back of the Government’s policy initiatives to promote the growth of such enterprises. The average lending rate for corporate loans decreased largely as a result of the general decrease in market interest rates, as well as continued increasing competition among commercial banks for high-quality corporate loans in the midst of an increase in general market liquidity for corporate borrowers.

Interest expense.Interest expense decreased by 9.2% fromW4,437 billion in 2015 toW4,031 billion in 2016, due primarily to a 9.6% decrease in interest expense on deposits fromW2,861 billion in 2015 toW2,587 billion in 2016 and a 8.3% decrease in interest expense on debt securities issued fromW1,184 billion in 2015 toW1,086 billion in 2016.

The decrease in interest expense on deposits was due to a decrease in the average interest rate payable on deposits from 1.43% in 2015 to 1.16% in 2016, which was partially offset by an 11.2% increase in the average balance of deposits fromW199,935 billion in 2015 toW222,386 billion in 2016. The decrease in the average interest rate payable on deposits resulted mainly from a decrease in the average interest rate payable on time deposits from 2.03% in 2015 to 1.64% in 2016, largely reflecting a general decrease in market interest rates attributable to the decrease in the base interest rate set by the Bank of Korea as well as ample liquidity in the Korean financial sector. The increase in the average balance of deposits was primarily due to a 8.6% increase in the average balance of time deposits, which represent the substantial majority of deposits, as well as and a 12.4% increase in the average balance of savings deposits fromW56,083 billion in 2015 toW63,061 billion in 2016. The increase in the average balance of time and savings deposits was largely due to customers’ preference forlow-risk investments in light of the continuing uncertainty in financial markets.

The decrease in interest expense on debt securities issued was due to a decrease in the average interest rate payable on debt securities from 3.01% in 2015 to 2.55% in 2016, which was partially offset by an 8.2% increase in the average balance of debt securities fromW39,335 billion in 2015 toW42,578 billion in 2016. The average interest rate payable on debt securities issued decreased largely due to the general decrease in market interest rates in 2016 and our active efforts to refinance debt securities carrying high interest rates. The average balance of debt securities issued increased largely due to favorable market conditions which allowed us to raise capital at lower interest rates, as well as the issuance of subordinated debt securities by Shinhan Bank in order to increase our regulatory capital.

Net interest margin.Net interest margin represents the ratio of net interest income to the average balance of interest-earning assets. Our overall net interest margin decreased by 3 basis points from 2.08% in 2015 to 2.05% in 2016 due to a decrease of the average rate of interest receivable on interest-earning assets by 25 basis points to 3.20% in 2016 from 3.45% in 2015 and an increase of the average volume of interest-bearing assets by 10.4% toW292,703 billion in 2016 fromW265,023 billion in 2015.

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, increased by 4 basis points from 2015 to 2016 primarily due to a 29 basis point decrease in the average rate of interest payable on interest-bearing liabilities, principally consisting of deposits and debt securities issued, from 1.67% in 2015 to 1.38% in 2016, which was largely attributable to lower funding costs associated withWon-denominated debt securities issued and otherWon-denominated funding sources due to the decrease in the base interest rate set by the Bank of Korea, which more than offset a decrease in the average interest rate receivable on interest-earning assets, which primarily consist ofWon-denominated loans and securities held by us, as explained above. In general, as was the case in 2015, a decrease in the base rates set by the Bank of Korea tends to decrease our net interest margin since our deposits (on which we pay interest) have, on average, a longer maturity profile than our loans (from which we receive interest) do and are therefore less sensitive to movements in base and market interest rates. See “— Overview — Interest Rates.”

Fees and Commission Income (Expense), Net

The following table shows, for the periods indicated, the principal components of our net fees and commission income.

   Year Ended December 31, 
   2015   2016   % Change 
   (In billions of Won, except percentages) 

Fees and commission income:

      

Credit placement fees

  W75   W74    (1.3)% 

Commission received as electronic charge receipt

   137    137    — 

Brokerage fees

   411    334    (18.7) 

Commission received as agency

   167    131    (21.6) 

Investment banking fees

   80    66    (17.5) 

Commission received in foreign exchange activities

   163    183    12.3 

Asset management fees

   86    116    34.9 

Credit card fees

   2,351    2,343    (0.3) 

Others

   427    420    (1.6) 
  

 

 

   

 

 

   

 

 

 

Total fees and commission income

  W3,897   W3,804    (2.4)% 
  

 

 

   

 

 

   

 

 

 

Fees and commission expense:

      

Credit-related fees

  W43   W32    (25.6)% 

Credit card fees

   1,849    1,899    2.7 

Others

   384    307    (20.1) 
  

 

 

   

 

 

   

 

 

 

Total fees and commission expense

  W 2,276   W2,238    (1.7)% 
  

 

 

   

 

 

   

 

 

 

Net fees and commission income

  W1,621   W1,566    (3.4)% 
  

 

 

   

 

 

   

 

 

 

Net fees and commission income decreased by 3.4% fromW1,621 billion in 2015 toW1,566 billion in 2016, primarily as a result of a 18.7% decrease in brokerage fees income fromW411 billion in 2015 toW334 billion in 2016 and a 2.7% increase in credit card fees expenses fromW1,849 billion in 2015 toW1,899 billion in 2016, which were partially offset by a 20.1% decrease in other expenses.

The decrease in brokerage fees income was primarily due to a decrease in the daily average stock trading volume as a result of unfavorable stock market performance in 2016. The increase in credit card fees expenses was principally attributable to an increase in the use of membership points by Shinhan Card’s credit card customers, as well as an increase in the fees paid to banks. The decrease in credit card fees income was principally attributable to a decrease in the rate of merchant fees we charge on small- andmedium-sized enterprises and a resulting decrease in annual merchant fees, which was partially offset by an increase in average credit card balances.

Other Operating Income (Expense), Net

The following table shows, for the periods indicated, the principal components of our net operating expense.

   Year Ended December 31, 
   2015  2016  % Change 
   (In billions of Won, except percentages) 

Net insurance loss

  W(432)  W(419)   (3.0)% 

Dividend income

   308   282   (8.4) 

Net trading income (loss)

   (344)   370   N/M 

Net foreign currency transaction gain

   78   462   492.3 

Net gain (loss) on financial instruments designated at fair value through profit or loss

   460   (502)   N/M 

Net gain on sale ofavailable-for-sale financial assets

   772   648   (16.1) 

Impairment loss on financial assets

   (1,264)   (1,196)   (5.4) 

General and administrative expenses

   (4,475)   (4,509)   0.8 

Others

   (444)   (798)   79.7 
  

 

 

  

 

 

  

 

 

 

Other operating income (expense)

  W(5,341)  W(5,662)   6.0% 
  

 

 

  

 

 

  

 

 

 

N/M = not meaningful

Net other operating expenses increased by 6.0% toW5,662 billion in 2016 fromW5,341 billion in 2015, primarily as a result of a net loss on financial instruments designated at fair value through profit or loss ofW502 billion we recorded in 2016 compared to a net gain ofW460 billion in 2015 and a 79.7% increase in other expense fromW444 billion in 2015 toW798 billion in 2016, which were partially offset by a net trading income ofW370 billion in 2016 compared to net trading loss ofW344 billion in 2015 as well as a 492.3% increase in net foreign currency transaction gain fromW78 billion in 2015 toW462 billion in 2016.

We recorded a net loss on financial instruments designated at fair value through profit or loss largely as a result of an increase in valuation loss from financial liabilities designated at fair value through profit or loss held by Shinhan Investment. Other expense increased primarily due to an increase in net loss related to risk hedging account derivatives in Shinhan bank and Shinhan Card.

The change in net trading income to a gain from a loss was largely due to valuation gains on certain derivative instruments. Foreign currency transaction gain increased primarily due to an increase in net valuation gain on foreign-currency denominated assets and liabilities as a result of volatile fluctuations in the relevant foreign currencies during 2016.

Impairment Loss on Financial Assets

The following table sets forth for the periods indicated the impairment loss by type of financial asset.

   Year Ended December 31, 
   2015  2016  %
Change		 
   (In billions of Won, except percentages) 

Loans:

    

Retail

  W122  W135   10.7% 

Corporate

   602   656   9.0 

Credit card

   300   313   4.3 

Others

   (2)   (1)   (50.0) 
  

 

 

  

 

 

  

 

 

 

Subtotal

   1,022   1,103   7.9 

Securities(1)

   242   88   (63.6) 

Others

   —   5   N/M 
  

 

 

  

 

 

  

 

 

 

Total impairment loss on financial assets

  W1,264  W1,196   (5.4)% 
  

 

 

  

 

 

  

 

 

 

N/M = not meaningful

Note:

(1)Consist ofavailable-for-sale financial assets.

Impairment loss on financial assets decreased by 5.4% fromW1,264 billion in 2015 toW1,196 billion in 2016 principally due to a 63.6% decrease in impairment on securities fromW242 billion in 2015 toW88 billion in 2016, which was partially offset by a 7.9% increase in impairment loss on loans fromW1,022 billion in 2015 toW1,103 billion in 2016.

Substantially all of our impairment losses recorded onavailable-for-sale financial assets were related to the impairments of ouravailable-for-sale equity investments primarily resulting from the decline in the market price or fair value of such investments. We recognized impairment losses onavailable-for-sale financial assets ofW96,381 million in 2016, of whichW29,032 million, or approximately 30%, was due to a significant decline in our investment in Samsung C&T Corporation. We recognized impairment losses onavailable-for-sale financial assets ofW254,883 million in 2015, of whichW98,583 million, or approximately 39%, was due to a prolonged decline in our investment in POSCO andW58,994 million, or approximately 23%, was due to a significant decline in our investment in Macquarie Korea Opportunities Management Ltd. To a limited extent, we have also recognized impairment losses due to liquidation, bankruptcy proceedings,de-listing and other qualitative factors.

Our impairment loss on loans increased primarily due to a 10.7% increase in impairment loss on retail loans fromW122 billion in 2015 toW135 billion in 2016 principally due to increased exposure as a result of an increase in the volume of retail loans; a 9% increase in impairment loss on corporate loans fromW602 billion in 2015 toW656 billion in 2016 principally due to an increase in allowance for corporate loan losses during the first half of 2016 as certain of our corporate borrowers in the construction, shipbuilding and shipping industries underwent restructuring; and a 4.3% increase in impairment loss on credit card loans fromW300 billion in 2015 toW313 billion in 2016 principally due to increased exposure as a result of an increase in the volume of credit card loans.

Income Tax Expense

Income tax expense decreased by 50.2% fromW695 billion in 2015 toW346 billion in 2016 primarily as a result of the recognition of deferred tax assets, which amounted toW336 billion, based on loss carry-forward, partially offset by the increase in Shinhan Bank’s taxable income. Our effective rate of income tax decreased to 10.9% in 2016 from 22.1% in 2015. We had not previously recognized deferred tax assets relating to expired and unused tax losses as the utilization of expired and unused tax losses had been assessed remote. In 2016, however, based on new tax interpretation issued by the Korea National Tax Service allowing utilization of expired and unused tax losses against profit resulting from elimination or expiration of deposit and insurance liabilities, Shinhan Bank recognized deferred tax assets relating to expired unused tax losses after factoring in expected future taxable profits and expected future elimination or expiration of deposit and insurance liabilities.

Net Income for the Period

As a result of the foregoing, our net income for the period increased by 15.5% fromW2,446 billion in 2015 toW2,825 billion in 2016.

Other Comprehensive Income for the Period

   Year Ended December 31, 
   2015  2016  % Change 
   (In billions of Won, except percentages) 

Items that will be reclassified to profit or loss:

    

Foreign currency translation differences for foreign operations

  W(6)  W12   N/M% 

Net change in fair value ofavailable-for-sale financial assets

   (266)   (434)   63.2 

Equity in other comprehensive income of associates

   12   3   (75.0) 

Net change in unrealized fair value of cash flow hedges

   3   (1)   N/M 

Other Comprehensive income (loss) of separate account

   2   (4)   N/M 
  

 

 

  

 

 

  

 

 

 
   (255)   (424)   66.3 

Items that will not be reclassified to profit or loss:

    

Remeasurements of defined benefit liability

   (82)   15   N/M 
  

 

 

  

 

 

  

 

 

 
   (82)   15   N/M 
  

 

 

  

 

 

  

 

 

 

Total other comprehensive loss, net of income tax

  W(337)  W(409)   21.4% 
  

 

 

  

 

 

  

 

 

 

N/M = not meaningful

Other comprehensive loss increased by 21.4% fromW337 billion in 2015 toW409 billion in 2016, principally due to a 63.2% increase in net loss on net change in fair value ofavailable-for-sale financial assets fromW266 billion in 2015 toW434 billion in 2016, which was partially offset by a change in remeasurement of defined benefit lability from a net loss ofW82 billion in 2015 to a net gain ofW15 billion in 2016. The increase in net loss on fair value ofavailable-for-sale financial assets was largely due to fluctuations in interest rates and stock prices, as well as an increase of reclassification of changes in fair value ofavailable-for-sale financial assets due to recognition of impairment losses and disposal. The change in remeasurement of defined benefit lability was largely due to changes in financial assumptions, including discount rates and wage growth.

Results by Principal Business Segment

As of December 31, 2017,2018, we were organized into five major business segments as follows:

 

commercial banking services, which are principally provided by Shinhan Bank:

 

credit card services, which are principally provided by Shinhan Card;

 

securities brokerage services, which are provided by Shinhan Investment;

 

life insurance services, which are provided by Shinhan Life Insurance; and

 

other.

We report our segment information in accordance with the provisions of IFRS 8 (Operating Segments). We previously categorized our operating segments according to the legal entities of our subsidiaries. In order to actively adapt to the changing business environment and increase synergy, under our channel integration strategy called “One Portal,” we have focused on increasing crossover across different businesses and entities in the Group, including increasing crossover between our retail and corporate banking businesses, expanding our

network of hybrid branches, expanding the traditional businesses of individual legal entities and developing combined products and services. In line with these changes, we realigned our reporting segments during 2016 from the previous legal entity based approach to a business based approach, and prior years’ reportable segment information has been restated accordingly. There has been no change in our total consolidated financial condition or results of operations previously reported as a result of the change in our segment structure. See Note 7 of the notes to our consolidated financial statements included in this annual report.

Operating Income by Principal Business Segment

The table below provides the income statement data for our principal business segments for the periods indicated.

 

  Year Ended December 31, % Change   Year Ended December 31, % Change 
  2015 2016 2017 2015/2016 2016/2017   2016 2017 2018 2016/2017 2017/2018 
  (In billions of Won, except percentages)   (In billions of Won, except percentages) 

Banking

  W1,649  W1,860  W2,088  12.8%  12.3%   W1,860  W2,089  W3,047  12.3%  45.9% 

Credit card

   968  1,041  1,304  7.5  25.3    1,041  1,304  873  25.3  (33.1) 

Securities

   262  143  253  (45.4)  76.9    143  253  333  76.9  31.6 

Life insurance

   132  160  160  21.2   —    160  160  181   —  13.1 

Others

   (33)  (75)  32  127.3  N/M    (75)  32  102  N/M  218.8 

Consolidation adjustment(1)

   (5)  (20)  (8)  300.0  (60.0)    (20)  (8)  (37)  (60.0)  362.5 
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Total operating income

  W2,973  W3,109  W3,829  4.6%  23.2%   W3,109  W3,830  W4,499  23.2%  17.5% 
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

 

N/M = not meaningful

Note:

 

(1)

Consolidation adjustment consists of adjustments for inter-segment transactions.

Banking Services

The banking services segment offers commercial banking and related services and includes: (i) retail banking, which consists of banking and other services provided primarily through the retail branches of Shinhan Bank and Jeju Bank to individuals and households; (ii) corporate banking, which consists of corporate banking products and services provided through Shinhan Bank’s corporate banking branches to its corporate customers, most of which are small- andmedium-sized enterprises and large corporations, including members of thechaebolgroups; (iii) international banking, which primarily consists of the operations of Shinhan Bank’s overseas subsidiaries and branches; and (iv) other banking, which primarily consists of treasury business for our banking business (including internal asset and liability management and othernon-deposit funding activities), securities investing and trading and derivatives trading, as well as administration of our overall banking operations.

The table below provides the income statement data for our banking services segment for the periods indicated.

 

  Year Ended December 31, % Change   Year Ended December 31, % Change 
  2015 2016 2017 2015/2016 2016/2017   2016 2017 2018 2016/2017 2017/2018 
  (In billions of Won, except percentages)   (In billions of Won, except percentages) 

Net interest income (expense)

  W4,246  W4,605  W5,108  8.5%  10.9%   W4,605  W5,108  W5,708  10.9%  11.7% 

Net fees and commission income (expense)

   689  717  817  4.1  13.9    717  817  851  13.9  4.2 

Net other income (expense)

   (3,286)  (3,462)  (3,837)  5.4  10.8    (3,462)  (3,836)  (3,512)  10.8  (8.4) 
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Operating income (expense)

  W1,649  W1,860  W2,088  12.8%  12.3%   W1,860  W2,089  W3,047  12.3%  45.9% 
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Comparison of 2018 to 2017

Operating income for banking services increased by 45.9% fromW2,089 billion in 2017 toW3,047 billion in 2018.

Net interest income (expense).Net interest income increased by 11.7% fromW5,108 billion in 2017 toW5,708 billion in 2018 primarily due to increases in net interest income for retail banking, corporate banking, and international banking which was partially offset by a decrease in net interest income for other banking services. More specifically:

•

Net interest income for retail banking increased by 11.7% fromW2,940 billion in 2017 toW3,285 billion in 2018 primarily due to an increase in Shinhan Bank’s net interest margin as well as an increase in the average volume of retail loans. The increase in Shinhan Bank’s net interest margin was largely due to the general increase in market interest rates largely driven by the increase in the base interest rate set by the Bank of Korea. The average volume of retail loans increased largely due to an increase in home mortgage loans.

•

Net interest income for corporate banking increased by 14.8% fromW1,418 billion in 2017 toW1,628 billion in 2018 primarily due to increases in the average balance and the average lending rate of corporate loans. The average balance of corporate loans increased principally as a result of increased loan demand from SOHOs and small- andmedium-sized enterprises amid the Government’s policy initiatives to promote the growth of such enterprises. The average lending rate for corporate loans increased largely as a result of the general increase in market interest rates as described above.

•

Net interest income for international banking increased by 35.9% fromW463 billion in 2017 toW629 billion in 2018 primarily due to an increase in the average balance of loans extended by Shinhan Bank’s overseas subsidiaries, especially its subsidiaries in Vietnam.

•

Net interest income for other banking services decreased by 42.2% fromW287 billion in 2017 toW166 billion in 2018.

Net fees and commission income (expense). Net fees and commission income increased by 4.2% fromW817 billion in 2017 toW851 billion in 2018 primarily due to an increase in net fees and commission income for corporate banking and international banking services, which was partially offset by a decrease in net fees and commissions for other banking services. Net fees and commission income for corporate banking increased primarily due to an increase in investment banking fees and commissions principally resulting from an increased volume of mergers and acquisitions, SOC (social overhead capital) projects and other corporate transactions. Net fees and commission income for international banking services increased primarily due to an increase in credit cards fees and commissions charged by Shinhan Bank Vietnam. Net fees and commission income for other banking decreased primarily due to a decrease in fees and commissions related to beneficiary certificates.

Net other income (expense). Net other expense decreased by 8.4% fromW3,836 billion in 2017 toW3,512 billion in 2018 due primarily to a decrease in net other expense for other banking services, which was partially offset by increases in net other expense for retail banking and international banking. Net other expense for other banking services decreased primarily as we recorded net gain on financial instruments at fair value through profit or loss in 2018 compared to net trading loss in 2017, which was partially offset by a decrease in income from foreign currency transactions due to the decline in foreign currency exchange rates amid stronger valuation of the Won. Net other expense for retail banking and international banking increased primarily due to an increase in rental expenses due to an overall increase in rental fees and an increase in expenses related to the expansion of Shinhan Bank’s overseas network.

Comparison of 2017 to 2016

Operating income for banking services increased by 12.3% fromW1,860 billion in 2016 toW2,0882,089 billion in 2017.

Net interest income (expense).Net interest income increased by 10.9% fromW4,605 billion in 2016 toW5,108 billion in 2017 primarily due to increases in net interest income for retail banking, corporate banking, international banking and other banking services. More specifically:

 

 • 

Net interest income for retail banking increased by 3.0% fromW2,854 billion in 2016 toW2,940 billion in 2017 primarily due to an increase in the average volume of retail loans in addition to a widening of the Bank’s net interest margin. The average volume of retail loans increased largely due to an increase in home rental long-term deposit loans and mortgage loans for new home purchases. The widening of net interest margin was largely due to an increase in liquidity core deposits, which are deposits with low interest rates, and the increase in market interest rates reflecting the increase in the base interest rate set by the Bank of Korea in 2017, which was increased from 1.25% in June 2016 to 1.50% in November 2017. The changes in the base interest rate generally have a greater impact on the average interest rate on loans relative to that of deposits due to the difference in relative maturity profiles.

 

 • 

Net interest income for corporate banking increased by 27.6% fromW1,111 billion in 2016 toW1,418 billion in 2017 primarily due to an increase in the average balance of corporate loans. The increase in the average balance of corporate loans was largely due to the general increase in market interest rates and increased loan demand from SOHOs and small- andmedium-sized enterprises, which have recently become an increasing source of demand for our corporate loans. The widening of the net interest margin was largely due to the increase in the market interest rates reflecting the increase in the base interest rates set by the Bank of Korea in 2017, as described above.

 

 • 

Net interest income for international banking increased by 26.5% fromW366 billion in 2016 toW463 billion in 2017 primarily due to an increase in the average balance of loans extended by the Shinhan Bank’s overseas subsidiaries, especially its subsidiaries in China and Vietnam.

 

 • 

Net interest income for other banking services increased by 4.7% fromW274 billion in 2016 toW287 billion in 2017 primarily due to the increase in the general level of interest rates.

Net fees and commission income (expense). Net fees and commission income increased by 13.9% fromW717 billion in 2016 toW817 billion in 2017 primarily due to an increase in net fees and commission income for corporate banking and other banking services, which was partially offset by a decrease in net fees and commissions for retail banking services. Net fees and commission income for corporate banking increased primarily due to an increase in fees and commissions charged in relation to credit fees, brokerage and consulting fees. Net fees and commission income for other banking services increased primarily due to adjustments in internal fee allocation. Net fees and commission income for retail banking decreased primarily due to a decrease in fees and commission received onnon-face-to-face transactions (online channels).

Net other income (expense). Net other expense increased by 10.8% fromW3,462 billion in 2016 toW3,8373,836 billion in 2017 due primarily to an increase in net other expense for other banking services, which was partially offset by decreases in net other expense for retail banking and international banking. Net other expense for other banking services increased primarily due to a decrease in gains on disposal of equity and debt securities and an increase in retirement allowances paid to early retirees. Net other expense for retail banking and international banking decreased primarily due to an increase in net foreign currency transaction gain, which was primarily driven by an increase in net valuation gain on foreign-currency denominated assets and liabilities resulting from currency fluctuations during 2017.

Comparison of 2016 to 2015

Operating income for banking services increased by 12.8% fromW1,649 billion in 2015 toW1,860 billion in 2016.

Net interest income (expense).Net interest income increased by 8.5% fromW4,246 billion in 2015 toW4,605 billion in 2016 primarily due to increases in net interest income for retail banking, corporate banking and international banking, which more than offset a decrease in net interest income from other banking services. More specifically:

•Net interest income for retail banking increased by 8.8% fromW2,624 billion in 2015 toW2,854 billion in 2016 primarily due to an increase in the average volume of retail loans which was partially offset by a narrowing of the Bank’s net interest margin. The average volume of retail loans increased largely due to an increase in home rental long-term deposit loans and mortgage loans for new home purchases and increased lending to customers with high credit profiles. The narrowing of net interest margin was largely due to the decrease in the market interest rates reflecting the decrease in the base interest rate set by the Bank of Korea in 2016, which was reduced from 1.75% in March 2015 to 1.50% in June 2015 and further to 1.25% in June 2016. The changes in the base interest rate generally have a greater impact on the average interest rate on loans relative to that on deposits due to the difference in relative maturity profiles.

•Net interest income for corporate banking increased by 11.0% fromW1,001 billion in 2015 toW1,111 billion in 2016 primarily due to an increase in the average balance of corporate loans, which was partially offset by the narrowing of the net interest margin. The increase in the average balance of corporate loans was largely due to the general decrease in market interest rates and increased loan demand from SOHOs and small- andmedium-sized enterprises, particularly those in the manufacturing industry. The narrowing of the net interest margin was largely due to the decrease in the market interest rates reflecting the decrease in the base interest rates set by the Bank of Korea in 2016, as described above.

•Net interest income for international banking increased by 10.6% fromW331 billion in 2015 toW366 billion in 2016 primarily due to an increase in the average balance of loans extended by the Shinhan Bank’s overseas subsidiaries, especially its subsidiaries in Vietnam and Indonesia.

•Net interest income for other banking services decreased by 5.5% fromW290 billion in 2015 toW274 billion in 2016 primarily due to the decrease in the general level of interest rates.

Net fees and commission income (expense).Net fees and commission income increased by 4.1% fromW689 billion in 2015 toW717 billion in 2016 primarily due to an increase in net fees and commission income for international banking and other banking services, which outweighed a decrease in net fees and commissions for retail banking. Net fees and commission income for international banking increased primarily due to an increase in fees and commissions charge in relation to loans originating from overseas subsidiaries and branches. Net fees and commissions for other banking services increased primarily due to adjustments in internal fee allocation. Net fees and commission income for retail banking decreased primarily due to a decrease in fees earned from the sale of investment and bancassurance products.

Net other income (expense).Net other expense increased by 5.4% fromW3,286 billion in 2015 toW3,462 billion in 2016 due primarily to increases in net other expense for international banking and other banking services, which more than offset a decrease in net other expenses for corporate banking. Net other expense for international banking increased primarily due to an increase in general and administrative expense as a result of our overseas network expansion. Net other expense for other banking services increased primarily due to a decrease in gains on sale of equity and debt securities, an increase in voluntary departure of employees, and an increase in provisions for credit losses. Net other income for corporate banking decreased primarily due to an increase in exchange rate margins on Shinhan Bank’s foreign exchange services.

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.

 

  Year Ended December 31, % Change   Year Ended December 31, % Change 
  2015 2016 2017 2015/2016 2016/2017   2016 2017 2018 2016/2017 2017/2018 
  (In billions of Won, except percentages)   (In billions of Won, except percentages) 

Income statement data

            

Net interest income (expense)

  W1,351  W1,485  W1,501  9.9%  1.1%   W1,485  W1,501  W1,583  1.1%  5.5% 

Net fees and commission income (expense)

   433  409  359  (5.5)  (12.2)    409  359  433  (12.2)  20.6 

Net other income (expense)

   (816)  (853)  (556)  4.5  (34.8)    (853)  (556)  (1,143)  (34.8)  105.6 
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Operating income (expense)

  W968  W1,041  W1,304  7.5%  25.3%   W1,041  W1,304  W873  25.3%  (33.1)% 
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Comparison of 2018 to 2017

Operating income for the credit card business decreased by 33.1% fromW1,304 billion in 2017 toW873 billion in 2018.

Net interest income increased by 5.5% primarily due to an increase in interest income resulting from an increase in the average balance of credit card receivables, which was partially offset by an increase in interest expense on borrowings and bonds resulting from increases in the average balances of such liabilities amid increased need for working capital following asset growth. The average balance of credit card receivables increased in accordance with our strategy of diversifying our revenue structure to promote credit card loans and cash advances in response to decreased merchant fee rates resulting from Government policies lowering merchant fees chargeable by credit card companies.

Net fees and commission income increased by 20.6% primarily as a result of an increase in fees and commission income from lease operations as part of the revenue diversification strategy described above.

Net other expense increased by 105.6% primarily due to an increase in provision for credit loss allowance. Provision for credit loss allowance increased primarily as a result of an increase in the balance of credit card receivables as well as an increase in the proportion of assets with relatively high allowance rates, such as card loans and cash advances.

Comparison of 2017 to 2016

Operating income for the credit card business increased by 25.3% fromW1,041 billion in 2016 toW1,304 billion in 2017.

Net interest income increased by 1.1% primarily due to a decrease in interest expense resulting from a decrease in the average borrowing rate, which was partially offset by the decrease in the average balance of cash advances and an increase in the usage of interest-free installment payment programs (under which no interest is charged on credit card purchases for a limited duration, typically up to three months).

Net fees and commission income decreased by 12.2% primarily as a result of an increase in fees and commission expense due to an increase in membership service fees and card member recruitment fees as part of Shinhan Card’s enhanced marketing efforts, which was partially offset by an increase in fees and commission income due to an increase in debit card merchant fees and annual fees.

Net other expense decreased by 34.8% primarily as a result of an increase in reversal of allowances for credit card loan losses and an increase in gains from net foreign currency transactions, which was partially offset by an increase in general administrative expenses such as payroll expenses, bonuses and retirement allowances paid to early retirees.

Comparison of 2016 to 2015

Operating income for the credit card business increased by 7.5% fromW968 billion in 2015 toW1,041 billion in 2016.

Net interest income increased by 9.9% largely as a result of an increase in the average balance of credit card receivables which was partially offset by the decrease in the average lending rate for credit card loans attributable to the decrease in the market interest rates following the reduction of the base interest rate by the Bank of Korea and the continued popularity of interest-free installment payment programs (under which no interest is charged on credit card purchases for limited duration, usually up to three months).

Net fees and commission income decreased by 5.5% primarily as a result of an increase in fees and commissions payable due to an increase in the use of membership points by credit card customers as part of Shinhan Card’s enhanced marketing efforts and a decrease in commission received as agency due to decline in the applicable rate of merchant fees as explained above, which was partially offset by a decrease in other fees and commission expense due to a decrease in factoring receivables management fee payable as Shinhan Card ceased such services during 2016.

Net other expense increased by 4.5% primarily as a result of an increase in valuation loss on financial instruments designated at fair value through profit or loss and a decrease in gain from disposal ofavailable-for-sale financial assets, which was partially offset by a decrease in general administrative expenses, particularly payroll expenses, bonuses and employ benefit expenses.

Securities Brokerage Services

Securities brokerage services segment primarily reflects securities brokerage and dealing services on behalf of customers, which is conducted by Shinhan Investment, our principal securities brokerage subsidiary.

 

  Year Ended December 31, % Change   Year Ended December 31, % Change 
  2015 2016 2017 2015/2016 2016/2017   2016 2017 2018 2016/2017 2017/2018 
  (In billions of Won, except percentages)   (In billions of Won, except percentages) 

Income statement data

            

Net interest income (expense)

  W444  W391  W433  (11.9)%  10.7%   W391  W433  W429  10.7%  (0.9)% 

Net fees and commission income (expense)

   267  249  298  (6.7)  19.7    249  298  389  19.7  30.5 

Net other income (expense)

   (449)  (497)  (478)  10.7  (3.8)    (497)  (478)  (485)  (3.8)  1.5 
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Operating income (expense)

  W262  W143  W253  (45.4)%  76.9%   W143  W253  W333  76.9%  31.6% 
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Comparison of 2018 to 2017

Operating income for securities brokerage services increased by 31.6% fromW253 billion in 2017 toW333 billion in 2018.

Net interest income decreased by 0.9% due primarily to an increase in the average volume of debt securities issued resulting from the issuance of unguaranteed corporate bonds and subordinated bonds, which was partially offset by an increase in the average volume of beneficiary certificates resulting from an increase in investments in fund of funds.

Net fees and commission income increased by 30.5% due primarily to an increase in brokerage fees income resulting from increased daily average stock trading volume amid favorable stock market performance in 2018, as well as an increase in fees and commission income related to investment banking business such as financial guarantee fees and underwriting fees as a result of an expansion of our investment banking business.

Net other expense increased by 1.5% due primarily to an increase in employee costs such as performance-linked incentives resulting from an increase in operating income as compared to the prior year.

Comparison of 2017 to 2016

Operating income for securities brokerage services increased by 76.9% fromW143 billion in 2016 toW253 billion in 2017.

Net interest income increased by 10.7% due primarily to an increase in the volume of loans due to Shinhan Investment’s new qualification as a comprehensive financial investment business entity, allowing Shinhan Investment to make loans directly to corporate customers.

Net fees and commission income increased by 19.7% due primarily to an increase in brokerage fees income resulting from an increase in sales of foreign bonds and collective investment funds as well as increased daily average stock trading volume as a result of favorable stock market performance in 2017.

Net other expense decreased by 3.8% due primarily to an increase in net gain on transactions and valuation of derivatives, which was partially offset by an increase in net loss on financial instruments designated at fair value through profit or loss.

Comparison of 2016 to 2015

Operating income for securities brokerage services decreased by 45.4% fromW262 billion in 2015 toW143 billion in 2016.

Net interest income decreased by 11.9% due primarily to a decrease in net interest spread largely resulting from the decrease in the base and market interest rates in Korea, which more than offset an increase in the volume ofWon-denominated loans collateralized by securities.

Net fees and commission income decreased by 6.7% due primarily to a decrease in the daily average stock trading volume as a result of unfavorable stock market performance throughout 2016.

Net other expense increased by 10.7% due primarily to an increase in net loss on financial instruments designated at fair value through profit or loss largely as a result of an increase in valuation loss from financial liabilities designated at fair value through profit or loss, which was partially offset by an increase in net income on valuations of derivatives related to risk hedging.

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 
  2015 2016 2017 2015/2016 2016/2017   2016 2017 2018 2016/2017 2017/2018 
  (In billions of Won, except percentages)   (In billions of Won, except percentages) 

Income statement data

            

Net interest income (expense)

  W676  W704  W728  4.1%  3.4%   W704  W728  W762  3.4%  4.7% 

Net fees and commission income (expense)

   32  19  53  (40.6)  178.9    19  53  70  178.9  32.1 

Net other income (expense)

   (576)  (563)  (621)  (2.3)  10.3    (563)  (621)  (651)  10.3  4.8 
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Operating income (expense)

  W132  W160  W160  21.2%  —%   W160  W160  W181  —%  13.1% 
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Comparison of 2018 to 2017

Operating income for life insurance services increased by 13.1% fromW160 billion in 2017 toW181 billion in 2018.

Net interest income increased by 4.7% due primarily to an increase in interest income from investments on government and public bonds resulting from an increase in the average volume of such assets. Our purchases of long-term government bonds increased in accordance with our strategy to extend asset duration.

Net fees and commission income increased by 32.1% due primarily to an increase in fees and commission related to contracts transferred from separate accounts to general accounts. Where a beneficiary reaches the eligible age for receiving pension payments, balances in the separate accounts are transferred to general accounts and we recognize such balance as fees and commission income.

Net other expense increased by 4.8% fromW621 billion in 2017 toW651 billion in 2018 primarily due to an increase in insurance contract cancellations as well as a decrease in premiums received for new contracts underwritten, which was partially offset by a decrease in provisions for insurance reserves resulting from such changes.

Comparison of 2017 to 2016

Operating income for life insurance services remained stable fromW160 billion in 2016 toW160 billion in 2017.

Net interest income increased by 3.4% due primarily to an increase in interest income from investments of held to maturityheld-to-maturity overseas finance debentures as the average volume of such assets increased during the year.

Net fees and commission income increased by 178.9% due primarily to an increase in fee income earned from our management of separate accounts resulting from an increase in the volume of separate accounts.

Net other expense increased by 10.3% fromW563 billion in 2016 toW621 billion in 2017 primarily due to an increase in insurance contract cancellations, which was partially offset by a decrease in provisions for insurances reserves resulting from such increase in insurance contract cancellations.

Comparison of 2016 to 2015

Operating income for life insurance services increased by 21.2% fromW132 billion in 2015 toW160 billion in 2016.

Net interest income increased by 4.1% due primarily to an increase in interest income from investments of held to maturity government and public bonds as the average volume of such assets increased during the year.

Net fees and commission income decreased by 40.6% due primarily to a decrease in fee income earned from our management of separate accounts.

Net other expense decreased by 2.3% fromW576 billion in 2015 toW563 billion in 2016 due primarily to a decrease in impairment losses onavailable-for-sale financial assets and a decrease in loss on sale of trading assets, which was partially offset by an increase in general administrative expenses, particularly retirement allowances paid to early retirees.

Others

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 Shinhan Capital, Shinhan Credit Information,

Shinhan BNP Paribas Asset Management, Shinhan Private Equity,Alternative Investment Management, Shinhan Savings Bank, Shinhan REITs Management and back-office functions maintained at the holding company.

 

  Year Ended December 31, % Change   Year Ended December 31, % Change 
  2015 2016 2017 2015/2016 2016/2017   2016 2017 2018 2016/2017 2017/2018 
  (In billions of Won, except percentages)   (In billions of Won, except percentages) 

Net interest income (expense)

  W(32)  W13  W69  N/M%  430.8%   W13  W69  W96  430.8%  39.1% 

Net fees and commission income (expense)

   195  169  181  (13.3)  7.1    169  181  199  7.1  9.9 

Net other income (expense)

   (196)  (257)  (218)  31.1  (15.2)    (257)  (218)  (193)  (15.2)  (11.5) 
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Operating income (expense)

  W(33)  W(75)  W32  127.3%  N/M%   W(75)  W32  W102  N/M%  218.8% 
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

 

N/M = not meaningful

Comparison of 2018 to 2017

Operating income for others increased by 218.8% fromW32 billion in 2017 toW102 billion in 2018.

Net interest income increased by 39.1% fromW69 billion in 2017 toW96 billion in 2018 primarily due to an increase in interest income from consolidated structured entities resulting from an increase in the number of consolidated structured entities, and, to a lesser extent, an increase in interest income from Shinhan Savings Bank due to an increase in its average balance of total loans.

Net fees and commission income increased by 9.9% primarily due to increased fees and commission income recognized by Shinhan REITs Management, which was incorporated in October 2017.

Net other expense decreased by 11.5% fromW218 billion in 2017 toW193 billion in 2018, primarily due to a decrease in provision for credit loss allowance of loans by Shinhan Capital resulting from a decrease in the volume of loans provided for the financing of shipment projects.

Comparison of 2017 to 2016

We recorded operating income for others ofW32 billion in 2017 compared to operating expense ofW75 billion in 2016.

Net interest income increased by 430.8% fromW69 billion in 2017 toW13 billion in 2016 primarily due to an increase in interest income received from trading government and public bonds and corporate bonds of consolidated structured entities as the average volume of such assets increased during the year, and, to a lesser extent, an increase in interest income from Shinhan Savings Bank due to an increase in its average balance of total loans.

Net fees and commission income increased by 7.1% primarily due to an increase in asset management fees from Shinhan BNP Paribas Asset Management as a result of an increase in the average volume of assets under management.

Net other expense decreased by 15.2% fromW257 billion in 2016 toW218 billion in 2017, primarily due to a decrease in recognition of provisions for loan losses from Shinhan Capital resulting from a decrease in the volume of loans provided for the financing of shipment projects, which was partially offset by an increase in recognition of provision for loan losses of Shinhan Savings Bank.

Comparison of 2016 to 2015

Operating expense for others increased by 127.3% fromW33 billion in 2015 toW75 billion in 2016.

We recorded net interest income ofW13 billion in 2016 compared to net interest expense ofW32 billion in 2015 primarily due to a decrease in interest expenses for debentures issued as a result of the decrease in market interest rates and an increase in interest income received from consolidated investment funds, which was partially offset by a decrease in net interest income from Shinhan Capital due to the narrowing of the net interest margin.

Net fees and commission income decreased by 13.3% primarily due to a decrease in brand-related income as a result of a decrease in corporate identity royalties received from our subsidiaries.

Net other expense increased by 31.1% fromW196 billion in 2015 toW257 billion in 2016, primarily due to the disposal of a subsidiary in 2016 which had generated other income ofW328 billion in 2015, which was partially offset by a decrease in recognition of provision for loan losses on lease receivables in Shinhan capital.

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 
  2015   2016   2017   2015/2016 2016/2017   2016   2017   2018   2016/2017 2017/2018 
  (In billions of Won, except percentages)   (In billions of Won, except percentages) 

Cash and due from banks at amortized cost

  W—   W—   W17,349    —%  —% 

Cash and due from banks

  W22,024   W19,181   W22,669    (12.9)%  18.2%    19,181    22,669    —    18.2   — 

Financial assets at fair value through profit or loss

   —    —    43,535    —   — 

Trading assets

   22,638    26,696    28,464    17.9  6.6    26,696    28,464    —    6.6   — 

Financial assets designated at fair value through profit or loss

   3,244    3,416    3,579    5.3  4.8 

Financial assets designated at fair value through profit or loss(IAS 39)

   3,416    3,579    —    4.8   — 

Derivative assets

   1,995    3,003    3,400    50.5  13.2    3,003    3,400    1,794    13.2  (47.2) 

Securities at fair value through other comprehensive income

   —    —    38,314    —   — 

Available-for-sale financial assets

   37,663    42,117    —    11.8   — 

Securities at amortized cost

   —    —    28,478    —   — 

Held-to-maturity financial assets

   19,805    24,991    —    26.2   — 

Loans at amortized cost

   —    —    299,609    —   — 

Loans

   246,441    259,011    275,566    5.1  6.4    259,011    275,566    —    6.4   — 

Available-for-sale financial assets

   33,966    37,663    42,117    10.9  11.8 

Held-to-maturity financial assets

   16,192    19,805    24,991    22.3  26.2 

Property and equipment

   3,055    3,146    3,022    3.0  (3.9)    3,146    3,022    3,004    (3.9)  (0.6) 

Intangible assets

   4,266    4,227    4,272    (0.9)  1.1    4,227    4,273    4,320    1.1  1.1 

Investments in associates

   393    354    631    (9.9)  78.2    354    631    671    78.2  6.3 

Current tax receivables

   10    13    25    30.0  92.3    13    25    45    92.3  80.0 

Deferred tax assets

   164    641    592    290.9  (7.6)    641    592    427    (7.6)  (27.9) 

Investment property

   209    353    418    68.9  18.4    353    418    475    18.4  13.6 

Other assets

   18,167    16,552    21,572    (8.9)  30.3 

Assets held for sale

   4    4    8    —  100.0    4    8    8    100.0   — 

Other assets

   15,947    18,167    16,552    13.9  (8.9) 
  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

  

 

 

Total assets

  W370,548   W395,680   W426,306    6.8%  7.7%   W395,680   W426,307   W459,601    7.7%  7.8% 
  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

  

 

 

2018 Compared to 2017

Our assets increased by 7.8% fromW426,307 billion as of December 31, 2017 toW459,601 billion as of December 31, 2018, principally due to increases in loans at amortized cost and, to a lesser extent, an increase in securities at fair value through other comprehensive income and securities at amortized cost based on IFRS 9.

We had loans ofW275,566 billion as of December 31, 2017. As a result of adopting IFRS 9, on January 1, 2018,W274,819 billion andW747 billion of net loans as of December 31, 2017 were transferred to loans at net amortized cost and loans at fair value through profit or loss, respectively. Our loans at amortized cost increased by 9.2% toW299,609 billion as of December 31, 2018 fromW274,254 billion as of January 1, 2018, due primarily to an increase in retail loans and corporate loans.

We hadavailable-for-sale financial assets ofW42,117 billion as of December 31, 2017. As a result of adopting IFRS 9, on January 1, 2018,W37,248 billion andW4,869 billion ofavailable-for-sale financial assets as of December 31, 2017 were transferred to securities at fair value through other comprehensive income and securities at fair value through profit or loss, respectively. Our securities at fair value through other comprehensive income increased by 2.9% toW38,314 billion as of December 31, 2018 fromW37,248 billion as of January 1, 2018, due primarily to an increase in government bonds.

We hadheld-to-maturity financial assets ofW24,991 billion as of December 31, 2017. As a result of adopting IFRS 9, on January 1, 2018,W24,425 billion andW566 billion ofheld-to-maturity financial assets as of December 31, 2017 (which constituted all of ourheld-to-maturity financial assets as of December 31, 2017) were transferred to securities at amortized cost and securities at fair value through profit or loss, respectively. Our securities at amortized cost increased by 16.6% toW28,478 billion as of December 31, 2018 fromW24,416 billion as of January 1, 2018 due primarily to an increase in government bonds.

For further information on a comparison between our assets as at December 31, 2018 and as at December 31, 2017, see Note 60 of the notes to our consolidated financial statements included in this annual report.

2017 Compared to 2016

Our assets increased by 7.7% fromW395,680 billion as of December 31, 2016 toW426,306426,307 billion as of December 31, 2017, principally due to increases in loans and, to a lesser extent,held-to-maturity financial assets,available-for-sale financial assets and cash and due from banks, which was partially offset by a decrease in other assets.

Our loans increased by 6.4% fromW259,011 billion as of December 31, 2016 toW275,566 billion as of December 31, 2017, principally as a result of increases in general purpose loans to individuals and households, mortgage loans and home equity loans, as well as loans to SOHO and small- andmedium-sized enterprise borrowers as discussed above.

Ourheld-to-maturity financial assets increased by 26.2% fromW19,805 billion as of December 31, 2016 toW24,991 billion as of December 31, 2017, principally due to our continued efforts to find stable sources of interest income outside of our core lending activities and the increased necessity ofheld-to-maturity financial assets for duration matching purposes under our asset and liability management system.

Ouravailable-for-sale financial assets increased by 11.8% fromW37,663 billion as of December 31, 2016 toW42,117 billion as of December 31, 2017, largely reflecting our strategy to acquire additional highly liquid assets in light of the increased minimum liquidity coverage ratio requirements applicable to banks since January 2015.

Our cash and due from banks increased by 18.2% fromW19,181 billion as of December 31, 2016 toW22,669 billion as of December 31, 2017, principally due to an increase in additional required reserve deposits with the Bank of Korea resulting from an increase in short term deposits such as demand deposits.

Our other assets decreased by 8.9% fromW18,167 billion as of December 31, 2016 toW16,552 billion as of December 31, 2017, primarily due to a decrease in the balance of domestic exchange settlement accounts which fluctuate on a daily basis.

2016 Compared to 2015

Our assets increased by 6.8% fromW370,548 billion as of December 31, 2015 toW395,680 billion as of December 31, 2016, principally due to increases in loans and, to a lesser extent, trading assets,available-for-sale financial assets andheld-to-maturity financial assets, which was partially offset by a decrease in cash and due from banks.

Our loans increased by 5.1% fromW246,441 billion as of December 31, 2015 toW259,011 billion as of December 31, 2016, principally as a result of increases in general purpose loans to individuals and households, mortgage loans and home equity loans, as well as loans to SOHO and small- andmedium-sized enterprise borrowers as discussed above.

Our trading assets increased by 17.9% fromW22,638 billion as of December 31, 2015 toW26,696 billion as of December 31, 2016, principally due to increases in bonds and debentures held by us.

Ouravailable-for-sale financial assets increased by 10.9% fromW33,966 billion as of December 31, 2015 toW37,663 billion as of December 31, 2016, largely reflecting our strategy to acquire additional highly liquid assets in light of the implementation of the minimum liquidity coverage ratio requirements applicable to banks in January 2015.

Ourheld-to-maturity financial assets increased by 22.3% fromW16,192 billion as of December 31, 2015 toW19,805 billion as of December 31, 2016, principally due to our continued efforts to find stable sources of interest income outside of our core lending activities and the increased necessity ofheld-to-maturity financial assets for duration matching purposes under our asset and liability management system.

Our cash and due from banks decreased by 12.9% fromW22,024 billion as of December 31, 2015 toW19,181 billion as of December 31, 2016, principally due to a decrease of due from the Bank of Korea, which fluctuates on a daily basis.

Liabilities and 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 
  2015   2016   2017   2015/2016 2016/2017   2016   2017   2018   2016/2017 2017/2018 
  (In billions of Won, except percentages)   (In billions of Won, except percentages) 

Deposits

  W217,676   W235,138   W249,419    8.0%  6.1%   W235,138   W249,419   W265,000    6.1%  6.2% 

Financial liabilities at fair value through profit or loss

   —    —    1,420    —   — 

Trading liabilities

   2,135    1,977    1,848    (7.4)  (6.5)    1,977    1,848    —    (6.5)   — 

Financial liabilities designated at fair value through profit or loss

   8,916    9,234    8,298    3.6  (10.1) 

Financial liabilities designated at fair value through profit or loss (IFRS 9)

   —    —    8,536    —   — 

Financial liabilities designated at fair value through profit or loss(IAS 39)

   9,234    8,298    —    (10.1)   — 

Derivative liabilities

   2,599    3,528    3,488    35.7  (1.1)    3,528    3,488    2,440    (1.1)  (30.0) 

Borrowings

   21,734    25,294    27,587    16.4  9.1    25,294    27,587    29,819    9.1  8.1 

Debt securities issued

   41,221    44,327    51,341    7.5  15.8    44,327    51,341    63,228    15.8  23.2 

Liability for defined benefit obligations

   226    131    7    (42.0)  (94.7)    131    7    127    (94.7)  1714.3 

Provisions

   699    729    429    4.3  (41.2)    729    429    508    (41.2)  18.4 

Current tax liabilities

   142    273    349    92.3  27.8 

Current tax payable

   273    349    430    27.8  23.2 

Deferred tax liabilities

   16    11    10    (31.3)  (9.1)    11    10    22    (9.1)  120.0 

Liabilities under insurance contracts

   20,058    22,377    24,515    11.6  9.6    22,377    24,515    26,219    9.6  7.0 

Other liabilities

   23,313    20,916    25,312    (10.3)  21.0    20,916    25,312    25,200    21.0  (0.4) 
  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

  

 

 

Total liabilities

   338,735    363,935    392,603    7.4  7.9    363,935    392,603    422,949    7.9  7.7 
  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

  

 

 

Total equity attributable to equity holder of the Group

   30,840    31,110    32,819    0.9  5.5 

Non-controlling interest

   973    635    884    (34.7)  39.2 

Total equity attributable to equity holders of the Group

   31,110    32,820    35,726    5.5  8.9 

Non-controlling interests

   635    884    926    39.2  4.8 
  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

  

 

 

Total equity

   31,813    31,745    33,703    (0.2)  6.2    31,745    33,704    36,652    6.2  8.7 
  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

  

 

 

Total liabilities and equity

  W370,548   W395,680   W426,306    6.8%  7.7%   W395,680   W426,307   W459,601    7.7%  7.8% 
  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

  

 

 

2018 Compared to 2017

Our total liabilities increased by 7.7% fromW392,603 billion as of December 31, 2017 toW422,949 billion as of December 31, 2018, primarily due to an increase in deposits (which principally consist of customer deposits) and, to a lesser extent, an increase in debt securities issued.

Our deposits increased by 6.2% fromW249,419 billion as of December 31, 2017 toW265,000 billion as of December 31, 2018, primarily due to an increase in time and savings deposits largely resulting from customers’ preference forlow-risk investments in light of the continuing uncertainty in financial markets.

Our debt securities issued increased by 23.2% fromW51,341 billion as of December 31, 2017 toW63,228 billion as of December 31, 2018, primarily due to an increase in debentures issued by Shinhan Card and Shinhan Capital.

Total equity increased by 8.7% fromW33,704 billion as of December 31, 2017 toW36,652 billion as of December 31, 2018, largely due to an increase in retained earnings from profit for the year and, to a lesser extent, the issuance of hybrid bonds.

2017 Compared to 2016

Our total liabilities increased by 7.9% fromW363,935 billion as of December 31, 2016 toW392,603 billion as of December 31, 2017 primarily due to an increase in deposits (which principally consist of customer deposits) and, to a lesser extent, an increase in debt securities issued and borrowings.

Our deposits increased by 6.1% fromW235,138 billion as of December 31, 2016 toW249,149 billion as of December 31, 2017, primarily due to an increase in customer deposits largely resulting from an increase in liquidity core deposits of Shinhan Bank.

Our debt securities issued increased by 15.8% fromW44,327 billion as of December 31, 2016 toW51,341 billion as of December 31, 2017, primarily due to Shinhan Bank’s increased minimum liquidity coverage ratio requirements since January 2015 and an increase in loan assets, as well as an increase in debentures issued by Shinhan Investment and Shinhan Card for general corporate purposes.

Our borrowings increased by 9.1% fromW25,294 billion as of December 31, 2016 toW27,587 billion as of December 31, 2017, primarily due to an increase in borrowings from policy institutions such as Korea Finance Corporation and The Export-Import Bank of Korea resulting from an increase in the demand for loans with government funds and an increase in short-term borrowings such as repurchase transactions and borrowings from the Bank of Korea as part of our liquidity management policy.

Total equity increased by 6.2% fromW31,745 billion as of December 31, 2016 toW33,70333,704 billion as of December 31, 2017, largely due to a net income ofW2,918 billion, which more than offset a dividend payout ofW688 billion in 2017 and a decrease in accumulated other comprehensive loss ofW429 billion in 2017.

2016 Compared to 2015

Our total liabilities increased by 7.4% fromW338,735 billion as of December 31, 2015 toW363,935 billion as of December 31, 2016 primarily due to an increase in deposits (which principally consist of customer deposits) and, to a lesser extent, an increase in borrowings and debt securities issued.

Our deposits increased by 8.0% fromW217,676 billion as of December 31, 2015 toW235,138 billion as of December 31, 2016, primarily due to an increase in customer deposits, largely as a result of customers’ preference forlow-risk investments in light of the continuing uncertainty in financial markets.

Our borrowings increased by 16.4% fromW21,734 billion as of December 31, 2015 toW25,294 billion as of December 31, 2016, primarily due to an increase in short-term borrowings such as borrowings form the Bank of Korea, repurchase transactions and call money as part of our liquidity management policy.

Our debt securities issued increased by 7.5% fromW41,221 billion as of December 31, 2015 toW44,327 billion as of December 31, 2016, primarily due to Shinhan Bank’s issuance of subordinated debt securities in order to increase its regulatory capital, as well as an increase in the issuances of debentures by Shinhan Bank and Shinhan Card for general corporate purposes.

Total equity decreased by 0.2% fromW31,813 billion as of December 31, 2015 toW31,745 billion as of December 31, 2016, largely due to redemption of preferred stock in the amount ofW1,126 billion and a dividend payout ofW631 billion, which more than offset an increase in net income attributable to equity holders in the amount ofW2,775 billion in 2016.

 

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.B. Business Overview — Risk Management — Market Risk Management — Market Risk Management forNon-trading Activities — Liquidity Risk Management.” In our opinion, the working capital is sufficient for our present requirements.

The following table sets forth our capital resources as of December 31, 2017.2018.

 

   As of December 31, 20172018 
   (In billions of Won) 

Deposits

  W249,419265,000 

Long-term debt

   53,14060,753 

Call money

   8571,425 

Borrowings from the Bank of Korea

   2,9132,330 

Other short-term borrowings

   14,37521,884 

Asset securitizations

   9,0567,615 

Stockholders’ equity(1)

   12,56413,672 
  

 

 

 

Total

  W342,324372,679 
  

 

 

 

 

Note:

 

(1)

Includes capital stock, share premium, and hybrid bonds issued. Previously, stockholders’ equity included only capital stock and did not include share premium and hybrid bonds. Accordingly, the ratio of customer deposits and secondary funding sources to total funding as of December 31, 2015 provided below have also been revised.

We obtain funding from a variety 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. 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 been to achievelow-cost funding by increasing the average balances oflow-cost retail customer deposits. Customer deposits accounted for 73.7% of our total funding as of December 31, 2015, 73.7% of our total funding as of December 31, 2016, and 72.9% of our total funding as of December 31, 2017.2017 and 71.1% of our total funding as of December 31, 2018. Historically, except in limited circumstances, largely due to the lack of alternative investment opportunities for individuals and households in Korea, especially in light of a 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, in the face of attractive alternative investment opportunities such as during a bullish run of the stock market, customers may transfer a significant amount of bank deposits to alternative investment products in search of higher returns, which may result in temporary difficulties in finding sufficient funding on commercial terms favorable to us. In addition, in recent years, we have faced increasing pricing competition from our competitors with respect to our deposit products. If we do not continue to offer competitive interest rates to our deposit customers, we may lose their business, which has traditionally provided a stable andlow-cost source of funding. Even if we are able to match our competitors’ pricing, doing so may result in an increase in our funding costs, which may have an adverse impact on our results of operations.

While our banking subsidiaries generally have not faced, and currently are not facing, liquidity difficulties in 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.business, results of operations and financial condition.”

As of December 31, 2015, 2016, 2017 and 2017,W6,480 billion,2018,W5,656 billion, andW5,639 billion andW5,645 billion, or 3.0%2.5%, 2.5%2.3% and 2.3%2.2%, respectively, of Shinhan Bank’s total deposits 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 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 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 ratings 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 is 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 par with our funding costs on deposits. In addition, Shinhan Bank may also issue long-term debt securities denominated in foreign currencies in overseas markets and has a global medium term notes program under which foreign currency-denominated notes may be issued with an aggregate program limit of US$6 billion. As of December 31, 2015, 2016, 2017 and 2017,2018, our long-term debt amounted toW43,83448,084 billion,W48,08453,140 billion andW53,14060,753 billion, respectively.

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, commercial papers (including call money), borrowings from the holding company and third-parties, which amounted toW13,96016,692 billion,W1,0901,625 billion,W600700 billion andW27490 billion, or 87.7%87.4%, 6.8%8.5%, 3.8%3.7% and 1.7%

0.4%, respectively, of the funding for our credit card activities, as of December 31, 2017.2018. 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 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.

There can be no assurance that we or our subsidiaries will maintain our current credit ratings if, among other reasons, the global or Korean economy were to face another downturn, there are any changes in our corporate governance or our businesses significantly deteriorate. 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.

Secondary funding sources also include call money, borrowings from the Bank of Korea and other short-term borrowings which amounted toW14,17914,945 billion,W14,94518,145 billion andW18,14525,639 billion, as of December 31, 2015, 2016, 2017 and 2017,2018, respectively, each representing 4.8%4.7%, 4.7%5.3% and 5.3%6.9%, respectively, of our total funding as of such dates.

We may also from time to time obtain funding through issuance of equity securities. For example, in the first quarter of 2009, we conducted a rights offering in the face of an expanding global credit crisis in order to enhance our capital position to prepare for potential contingencies, despite having fully met the required capital adequacy ratios required under applicable laws and regulations and not facing any significant liquidity constraints or financial distress. As a result of such offering, which was substantially fully subscribed and resulted in a capital increase of approximately 16.4%, we raised approximatelyW1,310 billion (before underwriting commissions and other offering expenses).

In limited situations, we may also issue convertible and/or preferred shares. For example, in August 2003, in order to partly fund our acquisition of Chohung Bank, we raised a total ofW2,552 billion through domestic private placements of redeemable preferred shares and redeemable convertible preferred shares to domestic financial institutions and governmental entities in Korea, all of which shares have since been redeemed or converted. In addition, in January 2007, partly to fund the acquisition of LG Card, we raised a total ofW3,750 billion through domestic private placements of redeemable preferred shares and redeemable convertible preferred shares, all of which have been redeemed as of the date hereof. In April 2011, we issued redeemable preferred shares to fund redemption of such securities, and in April 2016, we redeemed the redeemable preferred shares issued in April 2011. Since April 2016, we have not issued additional preferred shares. For further details, see “Item 10.B. Memorandum and Articles of Incorporation — Description of Preferred Stock.”

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. At this time, we expect that cash from our future operations would be adequate to provide us with sufficient capital resources to enable us to redeem our preferred stock on or prior to their scheduled 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 corporate debentures or further preferred stock and/or the use of our other secondary funding sources.

We generally may not acquire our own shares except in certain limited circumstances such as a capital reduction. However, pursuant to the Financial Investment Services and Capital Markets Act and regulations under the Financial Holding Companies Act, we may purchase our own shares on the KRX KOSPI Market 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 Financial Investment Services and Capital 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. In addition, pursuant to the Financial Investment Services and Capital Markets Act, in certain limited circumstances, dissenting holders of shares have the right to require us to purchase their shares.

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, 2017.2018.

 

  As of December 31, 2017
Payments Due by Period(1)		   As of December 31, 2018
Payments Due by Period(1)		 
  Less than
1 Month		   1-3
Months		   3-6
Months		   6-12
Months		   1-5 Years   More than
5 Years		   Total   Less than
1 Month		   1-3 Months   3-6 Months   6-12 Months   1-5 Years   More than
5 Years		   Total 
  (In billions of Won)   (In billions of Won) 

Deposits

  W130,916   W21,725   W31,483   W52,440   W16,138   W1,941   W254,643   W123,166   W24,737   W34,096   W56,061   W28,317   W2,880   W269,257 

Borrowings

   15,286    2,544    1,656    2,824    3,659    1,844    27,813    13,542    2,880    2,208    2,965    5,854    2,553    30,002 

Debt securities issued

   2,261    3,717    3,652    10,565    30,391    4,224    54,810    3,780    5,433    5,633    10,468    36,694    5,292    67,300 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  W148,463   W27,986   W36,791   W65,829   W50,188   W8,009   W337,266   W140,488   W33,050   W41,937   W69,494   W70,865   W10,725   W366,559 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

Note:

 

(1)

Reflects all estimated contractual interest payments due on our interest-bearing deposits, borrowings and debt securities issued, and the estimated contractual interest payments on borrowings and debt securities that are on a floating rate basis as of December 31, 20172018 were computed as if the interest rate used on the last applicable date (for example, the interest payment date for such floating rate loans immediately preceding the determination date) were the interest rate applicable throughout the remainder of the term.

Commitments and Guarantees

In the normal course of business, our subsidiaries 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 counterparty draws down the commitment or we should fulfill our obligation under the guarantee and the

counterparty fails to perform under the contract. See “Item 4.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, 2017.2018. These commitments, apart from certain guarantees and acceptances, are not included within our consolidated statements of financial position.

 

  As of December 31, 2017
Commitment Expiration by Period		   As of December 31, 2018
Commitment Expiration by Period		 
  Less than
1 Year		   1-5 Years   More than
5 Years		   Total   Less than
1 Year		   1-5 Years   More than
5 Years		   Total 
  (In billions of Won)   (In billions of Won) 

Commitments to extend credit(1)

  W68,330   W4,337   W706   W73,373   W68,816   W10,756   W10,301   W89,873 

Commercial letters of credit(2)

   2,680    64    —    2,744    3,141    21    —    3,162 

Financial guarantees(3)

   874    405    13    1,292    1,731    557    21    2,309 

Performance guarantees(4)

   4,021    2,345    192    6,558    4,662    2,913    95    7,670 

Liquidity facilities to SPEs(5)

   1,547    731    205    2,483    1,229    691    164    2,084 

Acceptances(6)

   274    3    —    277    283    —    —    283 

Endorsed bills(7)

   7,896    —    —    7,896    7,796    —    —    7,796 

Unused credit limits on credit cards

   71,897    —    —    71,897 

Other

   2,330    83    611    3,024    775    171    975    1,921 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  W87,952   W7,968   W1,727   W97,647   W160,330   W15,109   W11,556   W186,995 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

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. 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.

(2)

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.

(3)

Financial guarantees are contracts that require us to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument. Financial guarantee liabilities are recognized initially at their fair value, and the initial fair value is amortized over the life of the financial guarantee. The financial guarantee liability is subsequently carried at the higher of this amortized amount and the present value of any expected payment when a payment under the guarantee has become probable. Financial guarantees are included within other liabilities.

(4)

Performance 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.

(5)

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.

(6)

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.

(7)

Endorsed bills represent notes transferred to third parties by us. We are obligated to fulfill the duty of payment if the person primarily liable does not honor the bill on the due date.

See also Note 4453 of the notes to our consolidated financial statements included in this annual report.

Capital Adequacy

The following table sets forth a summary of our capital and capital adequacy ratios as of December 31, 2015, 2016, 2017 and 20172018 based on Basel III.

 

  As of December 31,   As of December 31, 
  2015 2016 2017   2016 2017 2018 
  (In millions of Won, except percentages)   (In millions of Won, except percentages) 

Tier I Capital:

        

Tier I CE Capital

  W21,882,816  W25,325,054  W26,756,509   W25,325,054  W26,756,509  W28,696,267 

Paid-in capital

   2,589,553  2,645,053  2,645,053    2,645,053  2,645,053  2,645,053 

Capital reserve

   8,442,542  9,494,769  9,494,769    9,494,769  9,494,769  9,494,769 

Retained earnings

   15,524,284  18,640,038  20,790,599    18,640,038  20,790,599  22,959,440 

Non-controlling interest in consolidated subsidiaries

   78,385  85,524  83,996 

Non-controlling interests in consolidated subsidiaries

   85,524  83,996  77,847 

Others

   (4,751,948)  (5,540,330)  (6,257,908)    (5,540,330)  (6,257,908)  (6,480,842) 

Additional Tier I Capital

   1,311,375  885,366  916,383    885,366  916,383  1,981,609 
  

 

  

 

  

 

   

 

  

 

  

 

 

Total Tier I Capital

  W23,194,191  W26,210,420  W27,672,892   W26,210,420  W27,672,891  W30,677,876 
  

 

  

 

  

 

   

 

  

 

  

 

 

Tier II Capital:

        

Allowances for credit losses

   1,662,751  463,018  372,621    463,018  372,621  599,913 

Subordinated debt

   245,000  210,000  175,000    210,000  175,000  140,000 

Others

   2,114,506  2,903,077  2,492,951    2,903,077  2,492,951  2,575,272 
  

 

  

 

  

 

   

 

  

 

  

 

 

Total Tier II capital

  W4,022,257  W3,576,095  W3,040,572   W3,576,095  W3,040,572  W3,315,185 
  

 

  

 

  

 

   

 

  

 

  

 

 

Total Capital

  W27,216,448  W29,786,515  W30,713,464   W29,786,515  W30,713,464  W33,993,061 
  

 

  

 

  

 

   

 

  

 

  

 

 

Risk-weighted assets

        

Credit risk

  W181,242,693  W175,175,755  W182,783,263   W175,175,755  W182,783,264  W201,623,530 

Market risk

   7,574,953  8,656,295  9,404,775    8,656,295  9,404,768  9,995,964 

Operational risk

   14,456,896  14,810,593  15,580,598    14,810,593  15,580,603  17,058,611 
  

 

  

 

  

 

   

 

  

 

  

 

 

Total risk-weighted assets

  W203,274,542  W198,642,643  W207,768,636   W198,642,643  W207,768,636  W228,678,105 
  

 

  

 

  

 

   

 

  

 

  

 

 

Capital adequacy ratio

   13.39%  15.00%  14.78%    15.00%  14.78%  14.87% 

Tier I capital adequacy ratio

   11.41%  13.19%  13.32%    13.19%  13.32%  13.42% 

Common equity capital adequacy ratio

   10.77%  12.75%  12.88%    12.75%  12.88%  12.55% 

 

ITEM 5.C.

Research and Development, Patents and Licenses, etc.

Not applicable.

 

ITEM 5.D.

Trend Information

These matters are discussed under Items 4.B., 5.A. and 5.B. above where relevant.

ITEM 5.E.

Off-Balance Sheet Arrangements

We have several types ofoff-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 letters 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 ouroff-balance sheet arrangements are provided in Note 4453 of the notes to our consolidated financial statements included in this annual report.

 

ITEM 5.F.

Tabular Disclosure of Contractual Obligations

See “Item 5.B. Liquidity and Capital Resources — Contractual Obligations, Commitments and Guarantees.”

 

ITEM 6.

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

ITEM 6.A.

Directors and Senior Management

Executive Directors

Our executive director is as follows:

 

Name

  Age   

Position

  Director Since   Date Term
Ends(1)		 

Cho Yong-byoung

   6062   Chairman and Chief Executive Officer   March 23, 2017    March 2020 

 

Note:

 

(1)

The date on which the term will end will be the date of the general stockholders’shareholders’ meeting in the relevant year.

Cho Yong-byoungis our Chairman and Chief Executive Officer. Prior to being elected to his current position on March 23, 2017, Mr. Cho served as the president and chief executive officer of Shinhan Bank from 2015. Mr. Cho also served as the chief executive officer of Shinhan BNP Paribas Asset Management in 2013 and as the deputy president of Shinhan Bank in 2011. Mr. Cho received a bachelor’s degree in law from Korea University.

Non-Executive and Outside Directors

Non-executive directors are directors who are not our employees and do not hold executive officer positions with us. Outside directors arenon-executive directors who also satisfy the requirements set forth under the Financial Investment Services and Capital Markets Act to be independent of our major shareholders, affiliates and management. Ournon-executive directors are selected based on the candidates’ talents and skills in diverse areas, such as law, finance, economics, management and accounting. Currently, 1112non-executive directors are in office, all of whom were nominated by our board of directors. directors and approved at a general meeting of shareholders.

Ournon-executive and outside directors are as follows:

 

Name

  Age   

Position

  Director Since  Date Term
Ends(1)

WiJinSung-hoOk-dong

   5958   Non-Executive Director  March 23, 2017  March 20192021

Park AnsoonCheul

   73   Outside Director  March 23, 2017March 2019

Park Cheul

72Outside DirectorMarch 25, 2015  March 2019

Lee Manwoo

63Outside DirectorMarch 26, 2014March 2019

Lee Steven Sung-ryang

62Outside DirectorMarch 24, 2016March 2019

Joo Jaeseong

62Outside DirectorMarch 23, 2017March 20192020

KimHwa-nam

   7274   Outside Director  March 22, 2018  March 2020

ParkByoung-dae Ansoon

   6074   Outside Director  March 22, 201823, 2017  March 2020

ByeonYang-ho

  65Outside DirectorMarch 27, 2019March 2021

SungJae-ho

59Outside DirectorMarch 27, 2019March 2021

Lee Manwoo

65Outside DirectorMarch 26, 2014March 2019

LeeYoon-jae

69Outside DirectorMarch 27, 2019March 2021

ChoiKyong-rok

   5153   Outside Director  March 22, 2018  March 2020

HuhYong-hak

61Outside Director  March 202027, 2019  March 2021

Philippe Avril

59Outside DirectorMarch 25, 2015March 2019

Yuki Hirakawa

   5759   Outside Director  March 25, 2015  March 2019

Philippe Avril

58Outside DirectorMarch 25, 2015March 2019

 

Note:

 

(1)

The date on which each term will end will be the date of the general stockholders’shareholders’ meeting in the relevant year.

Wi Sung-hoJinOk-donghas beenournon-executive director since March 23, 2017.27, 2019. Mr. WiJin is currently the chief executive officer of Shinhan Bank and previously served as the chief executive officer of Shinhan Card from 2013 to 2017, the deputy president and head of WM Group for Shinhan Bank and Shinhan Investment from 2011 to 2013 and the deputy president of Shinhan Financial Group from 20082017 to 2011. Mr. Wi received a bachelor’s degree2018, the deputy president of Shinhan Bank in economics from Korea University.

Park Ansoonhas been our outside director since March 23, 2017. Mr. Park currently serves as the chairman of Taisei Group Co., Ltd.2017 and the vice chairman of the Korean Residents Union in Japan. Mr. Park served as the chief executive officer of Shinhan Bank Japan from 19932015 to 2012 and held various executive roles at Taisei Group Co., Ltd. from 1968 to 2017.2016. Mr. ParkJin received a bachelor’smaster’s degree in philosophybusiness administration from WasedaChung Ang University.

Park Cheulhas been our outside director since March 25, 2015. Mr. Park is currently the chairman of our board of directors. Mr. Park served as the chairman and chief executive officer of Leading Investment & Securities Co., Ltd. from 2006 to 2013, an outside director of the Korea Development Bank from 2003 to 2006, a committee member of the National Economy Advisory Council in 2004 and the senior deputy governor of the Bank of Korea from 2000 to 2003. Mr. Park received a master’s degree in economics from New York University.

Lee Manwoohas been our outside director since March 26, 2014. Mr. Lee is currently a professor at Korea University Business School. Mr. Lee served as the chairman of the Korean Accounting Association from 2007 to 2008, the chairman of the Korean Academic Society of Taxation from 2006 to 2007 and a member of the Securities Listing Committee of the Korea Exchange from 2001 to 2007. Mr. Lee received a Ph.D. in business administration from the University of Georgia.

Lee Steven Sung-ryanghas been our outside director since March 24, 2016. Mr. Lee is currently a professor at the School of Economics of Dongguk University and also serves as the director of the Research Institute of Social Science at Dongguk University. Mr. Lee received a Ph.D. in economics from Columbia University.

Joo Jaeseonghas been our outside director since March 23, 2017. Mr. Joo currently serves as a senior advisor at Kim & Chang. Mr. Joo previously served as the chief executive officer of Woori Finance Research Institute from 2013 to 2016 and the senior deputy governor of the banking andnon-banking sector of the Financial Supervisory Service from 2011 to 2013. Mr. Joo also worked in the bank restructuring department of the World Bank from 2011 to 2004. Mr. Joo received a master’s degree in business administration from the University of Illinois Urbana-Champaign.

KimHwa-nam has been our outside director since March 22, 2018. Mr. Kim currently serves as the chief executive officer of Gimhae Corporation Co., Ltd. Mr. Kim previously served as the chairman of the World Federation of Korea Association of Commerce in Japan from 2013 to 2016. He also served as an outside director at Shinhan Life Insurance from 2006 to 2010 and Shinhan Investment Corp. from 1999 to 2002. Mr. Kim received a bachelor’s degree in economics from Rikkyo University.

Park Ansoonhas been our outside director since March 23, 2017. Mr. Park currently serves as the chairman of Taisei Group Co., Ltd. and the chairman of the Korean Residents Union in Japan. Mr. Park served as the chief executive officer from 1993 to 2012 and held various executive roles at Taisei Group Co., Ltd. from 1968 to 2018. Mr. Park received a bachelor’s degree in philosophy from Waseda University.

ByeonByoung-daeYang-hohas been our outside director since March 27, 2019. Mr. Byeon is currently a company advisor at VIG Partners and also served as thenon-executive director of Tong Yang Life Insurance. Mr. Byeon received a Ph.D. in economics from Northern Illinois University.

SungJae-hohas been our outside director since March 27, 2019. Mr. Sung currently is currently a professor at Sung Kyun Kwan University School of Law. Mr. Sung previously served as an outside director of NICE Holdings from 2018 to 2019 and Shinhan Card from 2015 to 2019, and chairman of Korea Council of International Law. Mr. Sung received a Ph.D in Law from Sung Kyun Kwan University.

Lee Manwoohas been our outside director since March 26, 2014. Mr. Lee is currently a professor at Korea University Business School. Mr. Lee served as the chairman of the Korean Accounting Association from 2007 to 2008, the chairman of the Korean Academic Society of Taxation from 2006 to 2007 and a member of the Securities Listing Committee of the Korea Exchange from 2001 to 2007. Mr. Lee received a Ph.D. in business administration from the University of Georgia.

LeeYoon-jae has been our outside director since March 22, 2018.27, 2019. Mr. Park currently serves as a chair professor at Sungkyunkwan University Law School. Mr. Park previouslyLee served as an outside director in various Korean companies, such as LG, KT&G andS-Oil from 2006 to 2015. In addition he held the Minister of the National Court Administrationchief executive officer position at KorEI from 20142001 to 2016 and Justice of the Supreme Court of Korea from 2011 to 2017.2010. Mr. ParkLee received a bachelor’s degree in law from Seoul National University and a master’s degree in lawbusiness administration from Cornell Law School.Stanford Graduate School of Business.

ChoiKyong-rok has been our outside director since March 22, 2018. Mr. Choi currently serves as the chief executive officer of CYS Corporation. Mr. Choi served as an outside director of Shinhan Life Insurance from 2010 to 2015. Mr. Choi received a master’s degree in computational science from Keio University.

HuhYong-hakhas been our outside director since March 27, 2019. Mr. Huh currently serves as the chief executive officer of First Bridge Strategy Ltd since 2015. Mr. Huh served as the chief investment officer of alternative investment in Hong Kong Monetary Authority from 2008 to 2014. Mr. Huh received a master’s degree in international affairs from Columbia University.

Philippe Avrilhas been our outside director since March 25, 2015. Mr. Avril currently serves as the chief executive officer and representative director of BNP Paribas Securities (Japan) Ltd. and the chief country officer of BNP Paribas, Tokyo Branch. Mr. Avril received a master’s degree in economics from Université Paris-Dauphine.

Yuki Hirakawahas been our outside director since March 25, 2015. Mr. Hirakawa currently serves as the chief executive officer of Level River Co., Ltd. Mr. Hirakawa served as the chief executive officer of Hirakawa Industry Co., Ltd. from 1994 to 2012. Mr. Hirakawa received a bachelor’s degree in Spanish from Osaka University.

Philippe Avrilhas been our outside director since March 25, 2015. Mr. Avril currently serves as the chief executive officer and representative director of BNP Paribas Securities (Japan) Ltd. and the chief country officer of BNP Paribas, Tokyo Branch. Mr. Avril received a master’s degree in economics from Université Paris-Dauphine.

Any director wishing to enter into a transaction with Shinhan Financial Group or any of its 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.

Executive Officers

In addition to the executive directors who are also our executive officers, we currently have the following executive officers.

 

Name

  Age   

Position

  

In Charge of

Lee Dong-hwanParkWoo-hyuk

   58Deputy PresidentGroup & Global Investment Banking Business Department

Woo Young-woong

5856   Deputy President and Chief Strategic Officer  

Strategic Planning Team

Investor Relations Team

Future Strategy Research Institute

DigitalOne Shinhan Strategy Team

One ShinhanDigital Strategy Team

Platform Marketing Team

Jin OkdongYuSung-hun

   5754   Deputy President and Chief Financial Officer  

Brand StrategyFinance Management Team

Management SupportAccounting Team

Human ResourceInvestor Relations Team

Shinhan Culture & Leadership Center

Corporate Social ResponsibilityInternal Control on Financial Reporting Team

KimLee Byeong-cheol

   56Deputy President and Chief Public Relations OfficerBrand Strategy Division

JangDong-ki

55   Deputy President  Global Markets & Securities Planning OfficeBusiness Group

Heo Young-taegJeongWoon-jin

55Deputy PresidentGlobal Investment Banking Business Group

WangMi-hwa

55Deputy PresidentWealth Management Planning Group

Jeong Jiho

   56   Deputy President  Global Business Planning OfficeManagement Group

LeeKimChang-gooIm-geun

   5756   Deputy President and Chief Risk Officer  Wealth

Risk Management Planning OfficeTeam

Risk Model Validation Team

Credit Review Team

JangWangDong-kiHo-min

   5455   Executive Vice PresidentManaging Director and Chief FinancialCompliance Officer  Compliance Team

Finance LeeEen-kyoon

52Managing Director and Chief Operating Officer

Shinhan Leadership Center

Management Support Team

Accounting Team

Global Business & Capital MarketManagement Innovation Team

None of the executive officers have any significant activities outside Shinhan Financial Group.

Lee Dong-hwanParkWoo-hyukhas been our deputy president since July 6, 2017.January 1, 2019. Mr. LeePark previously served as the chief executive officer of Shinhan Data SystemBank America and deputy president and head of the corporate investment bankingmanagement support group and trust & pension management group of Shinhan Bank. Mr. LeePark received a master’sbachelor’s degree in business administrationeconomics from DukeKyung Hee University.

Woo Young-woongYuSung-hunhas been our deputy president and Chief StrategicFinancial Officer since January 23, 2017.1, 2019. Mr. WooYu previously served as our executive vice president and executive vice presidentthe managing director of Shinhan Financial Group and head of the corporate investment banking group of Shinhan Bank.Investor Relations Team. Mr. Woo received a master’s degree in international business from Waseda University.

Jin Okdonghas been our deputy president since March 23, 2017. Mr. Jin previously served as the executive vice president of Shinhan Bank, the chief executive officer of SBJ Bank and the chief executive officer of SH Capital. Mr. Jin received a master’s degree in business administration fromChung-Ang University.

Kim Byeong-cheol has been our deputy president since January 24, 2018. Mr. Kim previously served as deputy president and head of the sales and trading group of Shinhan Investment Corp. Mr. Kim received a master’s degree in economics from Seoul National University.

Heo Young-taeg has been our deputy president since July 6, 2017. Mr. Heo previously served as executive vice president and head of the global business group of Shinhan Bank and president and chief executive officer of Shinhan Bank Vietnam. Mr. HeoYu received a bachelor’s degree in business administrationEnglish linguistics from Korea University.Hankuk University of Foreign Studies.

LeeChang-goo Byeong-cheolhas been our deputy president and head of the wealth management group of Shinhan BankChief Public Relations Officer since January 1, 2016.2019. Mr. Lee previously served as head of the wealth management division of Shinhan Bank and general manager of the Seongsu-dong brancha managing director of Shinhan Bank. Mr. Lee received a bachelor’s degree in accountinglaw from HanyangKorea National Open University.

JangDong-ki has been our executive vicedeputy president and Chief Financial Officer since January 1, 2018. Mr. Jang previously served as managing directorChief Financial Officer of Shinhan Financial Group and head of our finance management team and managing director and head of the capital market and trading division of Shinhan Bank. Mr. Jang received a bachelor’s degree in economics from Seoul National University.

JeongWoon-jinhas been our deputy president since January 1, 2019. Mr. Jeong previously served as the deputy president and head of management planning group of Shinhan Bank. Mr. Jeong received a bachelor’s degree in economics from Seoul National University.

WangMi-hwahas been our deputy president since January 1, 2019. Ms. Wang previously served as the managing director, head of wealth management department and head of Shinhan Gangnam private banking center of Shinhan Bank. Ms. Wang graduated from Busanjin Girl’s Commercial High School.

Jeong Jihohas been our deputy president since January 1, 2019. Mr. Jeong previously served as the managing director and head of global business department of Shinhan Bank and chief executive officer of Shinhan Bank Kazakhstan Ltd. Mr. Jeong received a bachelor’s degree in business administration from Korea University.

KimIm-geunhas been our deputy president since January 1, 2019. Mr. Kim previously served as the managing director and Chief Risk Officer of Shinhan Financial Group and head of risk management department of Shinhan Bank. Mr. Kim received a bachelor’s degree in statistics from Korea University.

WangHo-minhas been our managing director since January 1, 2019. Mr. Wang previously served as the branch manager of SouthernJam-sil branch, Seoul southern district court branch and head of corporate culture development team. Mr. Wang received a bachelor’s degree in law from Hankuk University of Foreign Studies.

LeeEen-kyoonhas been our managing director since January 1, 2019. Mr. Lee previously served as the head of management support team and head of secretary’s office of Shinhan Bank. Mr. Lee received a bachelor’s degree in English literature from Hanyang University.

There are no family relationships among our directors and/or executive officers.

 

ITEM 6.B.

Compensation

The aggregate remuneration andbenefits-in-kind paid by us to our chairman, our executive directors, ournon-executive directors and our executive officers for the year ended December 31, 20172018 wasW2.83.5 billion, consisting ofW2.42.6 billion in salaries and wages andW0.40.9 billion in bonus payments.

We do not have service contracts with any of our directors or executive officers providing for benefits upon termination of their employment with us. We do not pay any severance payment to our chairman or directors upon their retirement, but we pay fixed sums of severance payment to other members of senior management pursuant to internal guidelines on severance payments to members of senior management. In 2017,2018, we accruedW0.1 billion for retirement bonus.

Prior to April 1, 2010, we granted stock options to our chairman, our president and chief executive officer and other directors and executive officers. Effective April 1, 2010, we ceased granting stock options. On March 18, 2015, the exercise period for all outstanding stock options expired, except for a limited number of stock options for which exercise of such stock options (and hence the expiration of the exercise period as well) were suspended by a resolution of the board of directors in December 2010. In May 2017 and September 2017, by a resolution of the board of directors, we lifted such suspension for a portion of the stock options. As of December 31, 2017,2018, stock options for 9,466 of our shares remain unexercisable. We did not record any accrued expense for stock options in 2017.2018.

During the period from March 20, 2007 to December 31, 2013, we granted “performance units” to certain high-ranking officers of select group companies. These performance units are performance-based cash compensation, theper-unit value of which is initially determined at the time of grant subject to adjustment after a fixed number of years based on the operating and financial performance of the relevant group company over the

same or another fixed term, at the end of which a cash amount equal to the adjusted number of the performance units is paid out. For performance units granted prior to April 1, 2010, the performance review period was three years, and the payout was made at the end of the three-year term. For performance units granted on or after April 1, 2010 until December 31, 2013, the applicable performance review period is generally four years (and to a limited extent, five years), and the payment is made at the end of such four- or five-year term. We ceased granting performance units since January 1, 2014.

Since April 1, 2010, we have also granted “performance shares” to certain high-ranking officers of select group companies. The performance shares are conceptually similar to the performance units granted since April 1, 2010, in that the number of performance shares is based on the operating and financial performance of the relevant group company, except that the number of performance shares granted is adjusted on the basis of movements in the market price of our shares. The aggregate amount of performance shares granted to a given grantee is generally equal to the expected incentive compensation payable to such grantee for three years (in the case of performance shares granted prior to January 1, 2014) and one year (in the case of performance shares granted since January 1, 2014) of service starting from the grant date, which initial amount is computed based on the expected performance of the grantee’s company and the expected price movements of our shares over the applicable adjustment period, which is generally four years (and to a limited extent, five years). The performance shares are paid out in cash at the end of the applicable adjustment period (even if employment is terminated prior to such date), and the grantee is contractually and in accordance with our internal regulations required to use the payout solely to purchase our shares in the market at the then-prevailing market price (in the case of performance shares granted prior to January 1, 2014).

Neither performance units nor performance shares have been granted to outside directors. In 2017,2018, we recognized no accrued expenses for performance units andW2.12.0 billion as accrued expenses for performance shares.

Under the Financial Supervisory Service’s standards for preparing corporate disclosure forms, which standards were amended in December 2016, we are required to disclose in our Korean annual report the individual annual compensation (including stock options) paid by us to our directors and statutory auditors if the individual annual compensation for such persons isW500 million or greater.

In 2017,2018, Cho Yong-byoung, our Chairman and Chief Executive Officer, receivedW6201,149 million, consisting of salary and wages. In addition, in 20172018 Mr. Cho was granted 15,19618,200 performance shares. The exercisability of these performance shares will be determined based on a review of our business performance and share price movements during a four-year period beginning with the fiscal year in which such shares were granted.

In 2017, Han Dongwoo, our former Chairman and Chief Executive Officer, receivedW589 million, consisting ofW183 million in salaries and wages andW406 million in bonuses. In addition, in 2015, 2016 and 2017, Mr. Han was granted 18,900, 22,000 and 4,403 performance shares, respectively.The exercisability of these performance shares will be determined based on a review of our business performance and share price movements during a four-year period beginning with the fiscal year in which such shares were granted.

 

ITEM 6.C.

Board Practices

Board of Directors

Our board of directors, which currently consists of one executive director, onenon-executive director and teneleven 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, the number of outside directors must be more than 50% of the total number of directors, and we must maintain at least three outside directors. All directors are elected for a term not exceeding three years as determined by the shareholders’ meeting, except that outside directors are elected for a term not exceeding two years, provided that the term ofre-election shall not exceed one year and the term cannot be extended in excess of six years. The aggregate term served as an outside director of us or any of our subsidiaries shall not exceed nine years.

Terms are renewable and are subject to the Korean Commercial Code, the Financial Holding Companies Act, the Act on Corporate Governance of Financial Companies 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 chairman 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 eight management committees that serve under the board:

 

the Board Steering Committee;

 

the Risk Management Committee;

the Audit Committee;

 

the Remuneration Committee;

 

the Outside Director Recommendation Committee;

 

the Audit Committee Member Recommendation Committee;

 

the Corporate Governance and Chief Executive Officer Recommendation Committee; and

 

the Corporate Social Responsibility 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 shareholders.

Board Steering Committee

The Board Steering Committee currently consists of five directors, namely Cho Yong-byoung, Park Ansoon, Lee Manwoo, Lee StevenCheul, ByeonSun-ryangYang-ho, SungJae-ho and ChoiKyong-rok. 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.

Risk Management Committee

The Risk Management Committee currently consists of four outside directors, namely Joo Jaeseong, Park Cheul,ByeonYang-ho, ChoiKyong-rok, and Philippe Avril.TheAvril andHuh-Yong-hak.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 Lee Manwoo, ParkSungByoung-dae,Jae-ho Lee Steven Sung-ryang and Joo Jaeseong.LeeYoon-jae. 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.

Remuneration Committee

The Remuneration Committee currently consists of three outside directors, namely ParkHuhByoung-dae,Yong-hak, Park Cheul and Joo Jaseong.Lee Manwoo. At leastone-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.

Outside Director Recommendation Committee

The Outside Director Recommendation Committee currently consists of five outside directors, namely SungJae-ho, KimHwa-nam, Lee Manwoo, LeeYoon-jae and ChoiKyong-rok.Members of this committee will be appointed by our board of directors only to the extent necessary to recommend and nominate 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. This committee is responsible and authorized for: (i) establishment, review and reinforcement of policies for outside director selection, (ii) recommendation of outside director candidates for approval at the general shareholders’ meeting and (iii) continual recruitment and screening of potential outside director candidates.

Audit Committee Member Recommendation Committee

The Audit Committee Member Recommendation Committee consists of only outside directors. Members of this committee must be outside directors and will be appointed by our board of directors on anas-needed basis to 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 atwo-thirds vote of the members present.

Corporate Governance and Chief Executive Officer Recommendation Committee

The Corporate Governance and Chief Executive Officer (CEO) Recommendation Committee was established in March 2012 and currently consists of sixseven directors, namely Cho Yong-byoung, ParkByoung-dae,Lee Manwoo, KimHwa-nam, Park Cheul, ByeonYang-ho, SungJae-ho, Yuki Hirakawa and Philippe Avril. This committee is responsible for reviewing and making recommendations in relation to the overall corporate governance of our group (including any aspects of corporate governance relating to code of ethics and other code of behavior, size of the board of directors and other matters necessary for improving our overall corporate governance structure), as well as recommendation of the nominees for the president and/or chief executive officer of our group and development, operation and review of our management succession plan, including setting the qualifications for the CEO, evaluating CEO candidate pool and recommending CEO candidates. The chairperson of the committee must be an outside director, and the incumbent CEO may be restricted from participating and voting on matters related to the CEO selection.

Corporate Social Responsibility Committee

The Corporate Social Reasonability Committee was established in March 2015 and currently consists of five directors, namely Cho Yong-byoung, Lee Steven Sung-ryang,Yoon-jae, Park Ansoon, Lee ManwooByeonYang-ho and Yuki Hirakawa. This committee is responsible for setting the general corporate policy and discussing specific business agenda in relation to enhancing our role as a responsible corporate citizen.

ITEM 6.D.

Employees

At the holding company level, we had 145, 147, 143 and 143156 regular employees as of December 31, 2015, 2016, 2017 and 2017,2018, respectively, almost all of whom are employed within Korea. Our subsidiaries had 21,715, 21,542, 21,262 and 21,26220,971 regular employees as of December 31, 2015, 2016, 2017 and 2017,2018, respectively, almost all of whom are employed within Korea. In addition, we had seven, five, six and sixsevennon-regular employees at the holding company level as of December 31, 2015, 2016, 2017 and 2017,2018, respectively, and 1,833, 1,693, 1,540 and 1,5401,490non-regular employees at the subsidiary level as of December 31, 2015, 2016, 2017 and 2017,2018, respectively. Of the total number of regular andnon-regular employees at both the holding company and subsidiaries, approximately 0.3%0.37% were managerial or executive employees.

9,9809,984 employees of Shinhan Bank and 328336 employees of Jeju Bank were members of the Korean Financial Industry Union as of December 31, 2017. 2,3602018. 2,160 employees of Shinhan Card were members of the Korean Federation of Clerical and Financial Labor Union as of December 31, 2017. 1,4912018. 1,576 employees of Shinhan Investment and 1,2951,087 employees of Shinhan Life Insurance were members of the Korea Finance & Service Workers’ Union as of December 31, 2017.2018.

Under Korean law, we may not terminate full time employees except under limited circumstances.

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.

Under the Korean National Pension Law, we annually contribute an amount equal to 4.5% of employee wages, and each employee contributes 4.5% of his or her wages, to the National Pension Management Corporation. In addition, pursuant to the Employee Retirement Security Act, we operate a retirement pension system under which we make annual contributions to pension funds managed by financial institutions (which replaced our former retirement pension system under which we managed the pension fundin-house) that provide employees both regular pension payments and a lump sum payment upon termination of employment. We believe that our retirement pension system confers the following benefits: (1) insulation of employees from the risk of default on their pension payments as the pension funds are deposited with large financial institutions; (2) offer of varied forms of payment, i.e., regular pension payments and a lump sum payment, upon termination of employment; (3) offer to employees the option to make investment decisions for his or her individual pension account and (4) elimination of the ability of employees to cash in his or her retirement fund prematurely, thereby guaranteeing such employee a lump sum payment upon termination of employment. Under this retirement pension system, we and our subsidiaries can opt for either a defined benefit plan or a defined contribution plan, or a combination of both. Under the defined benefit plan, the amount of pension payable upon an employee’s retirement is fixed in advance, and the employer is responsible for making the requisite payments to the pension fund and making investment decisions in relation to the fund assets. Under the defined contribution plan, the employee sets aside a fixed percentage or amount of his salaries to the pension fund and exercises investment decisions for his or her individual pension account. As of December 31, 2015, 2016, 2017 and 2017,2018, we recognized liabilities for defined benefit obligations ofW226131 billion,W1317 billion andW7127 billion, respectively. See Note 2632 of the notes to our consolidated financial statements included in this annual report.

 

ITEM 6.E.

Share Ownership

As of April 3, 2018,2019, the persons who are currently our directors or executive officers, as a group, beneficially held an aggregate of 1,128,1231,091,744 shares of our common stock, representing approximately 0.24%0.23% 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.

Members of the employee stock ownership association have certainpre-emptive rights in relation to our shares that are publicly offered under the Financial Investment Services and Capital Markets Act. As of December 31, 2017,2018, the employee stock ownership association owned 22,324,02722,179,229 shares of our common stock.

Prior to April 1, 2010, we granted stock options to our chairman, our president and chief executive officer and other directors and executive officers. Effective April 1, 2010, we ceased granting stock options. On March 18, 2015, the exercise period for all outstanding stock options expired, except for a limited number of stock options for which exercise of such stock options (and hence the expiration of the exercise period as well) were suspended by a resolution of the board of directors in December 2010. In May 2017 and September 2017, by a resolution of the board of directors, we lifted such suspension for a portion of the stock options. As of December 31, 2017,2018, stock options for 9,466 of our shares remain unexercisable.

ITEM 7.

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

 

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, 2017.2018.

 

Name of Shareholder

  Number of Common
Shares Beneficially Owned		   Beneficial
Ownership (%)		   Number of Common
Shares Beneficially Owned		   Beneficial
Ownership (%)		 

National Pension Service

   45,285,762    9.55%    44,497,838    9.38% 

BlackRock Fund Advisors(1)

   24,320,723    5.13    25,225,925    5.32 

Shinhan Financial Group Employee Stock Ownership Association(2)

   22,324,027    4.71    22,179,229    4.68 

BNP Paribas SA

   16,826,276    3.55    16,826,276    3.55 

Citibank, N.A. (ADR Department)

   14,503,452    3.06    14,223,838    3.00 

The Government of Singapore

   10,737,500    2.26    11,972,346    2.52 

Norges Bank

   6,348,963    1.34    8,062,776    1.70 

Vanguard Total International Stock Index.

   5,225,294    1.10 

Samsung Asset Management

   5,214,188    1.10 

First State Investments ICVC-STEWART INV

   4,933,492    1.04 

Stichting Depositary APG Emerging Market

   4,829,230    1.02 

Samsung Asset Management.

   7,034,053    1.48 

Vanguard Total International Stock Index

   6,237,149    1.32 

Peoples Bank of China

   5,095,455    1.07 

Lazard Fund Inc.

   5,006,452    1.06 

Others

   313,650,680    66.14%    307,838,250    64.92% 
  

 

   

 

   

 

   

 

 

Total(3)

   474,199,587    100.00%    474,199,587    100.00% 
  

 

   

 

   

 

   

 

 

 

Note:Notes:

 

(1)

Based on Form SC 13G filed by BlackRock, Inc. on February 8, 2019.

(2)

According to the filing of share ownership dated October 20, 2016April 22, 2019, available through the Financial Supervisory Service’s Data Analysis, Retrieval and Transfer System (DART)., as of April 19, 2019, Shinhan Financial Group Employee Stock Ownership Association beneficially owns 24,036,170 common shares, or 5.07% beneficial ownership of the total number of shares issued as of April 19, 2019.

(3)

Total number of shares issued.

Other than those listed above, no other person or entity known by us, jointly or severally, directly or indirectly own more than 1% of our issued and outstanding voting securities or otherwise exercise control or could exercise control over us. None of our shareholders have different voting rights.

As of the date hereof, our total authorized share capital is 1,000,000,000 shares, par valueW5,000 per share.

As of December 31, 2017,2018, the latest date on which we closed our shareholders’ registry, 599614 shareholders of record were notated as U.S. persons, holding in the aggregate 25.66%25.00% of our then total outstanding shares (including Citibank, N.A., as the depositary for our American depositary shares, each representing one share of our common stock effective October 15, 2012, prior to which each American depositary share represented two common shares).

 

ITEM 7.B.

Related Party Transactions

Since the beginning of the preceding three financial years, none of our directors or officers has or had any transactions with us that are or were unusual in their nature or conditions or significant to our business, other than as set forth below and also described in Note 4655 of the notes 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 approximatelyW155 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, 2017,2018, BNP Paribas held 16,826,276 shares, or 3.55%, of our total common stock.

As of December 31, 2015, 2016, 2017 and 2017,2018, we had principal loans outstanding to our directors, executive officers and their affiliates in the principal amount ofW3.41.9 billion,W1.93.2 billion andW3.23.3 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 collectability or present other unfavorable features.

 

ITEM 7.C.

Interests of Experts and Counsel

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.

Legal Proceedings

We and our subsidiaries are involved in various legal actions and regulatory proceedings arising from the normal course of business. As of December 31, 2017,2018, we and our subsidiaries were defendants in pending lawsuits (including any government proceedings) in the aggregate claim amount ofW124104 billion, for which we recorded a provision ofW3326 billion.

The Financial Supervisory Service conducted a comprehensive audit of Shinhan Bank from November to December 2012, and in July 2013 notified Shinhan Bank of an institutional caution (which does not give rise to significant sanctions unlike in the case of repeated institutional warnings), imposed disciplinary actions against 65 Shinhan Bank employees and assessed a fine ofW87.5 million after finding that Shinhan Bank had illegally monitored customer accounts without proper authorization, breached confidentiality with respect to certain financial transactions and violated its obligation to disclose and report to the Financial Supervisory Service an investment in an affiliated company of Shinhan Bank. Furthermore, in March 2013 the Financial Supervisory Service conducted a special audit of Shinhan Bank as to incidents of alleged malfunctioning of its financial computer network and in December 2013, notified Shinhan Bank of an institutional caution and imposed disciplinary actions against five Shinhan Bank employees after finding that Shinhan Bank did not properly maintain its information technology administrator account and vaccine server. From October 2013 to November 2014, the Financial Supervisory Service also conducted a series of special audits of Shinhan Bank as to incidents of alleged illegalunauthorized monitoring of customer accounts, and in February 2014, the Prosecutors’ Office in Korea also commenced an investigation of Shinhan Bank with respect to same. In December 2015, the Financial Supervisory Service notified Shinhan Bank of an institutional caution and imposed disciplinary actions against two former Shinhan Bank officers after finding that Shinhan Bank had illegally monitored customer accounts without proper authorization, whereas in April 2016, the Prosecutors’ Office determined not to prosecute the former

officers of Shinhan Bank because of insufficient evidence. In addition, the Financial Supervisory Service conducted a periodic audit of Shinhan Bank from April to May 2015 and notified Shinhan Bank of five items requiring management’s attention and three items for improvement in June 2016 in connection with such audit. The Financial Supervisory Service conducted an additional audit in April 2017 and notified Shinhan Bank of 11 items requiring an institutional caution and 18 items for improvement in connection with such audit.

The Financial Supervisory Service also conducted a special audit of Shinhan Card, together with BC Card and KB Kookmin Card, from June to July 2013, in relation to alleged imperfect sales of insurance products, and

in March 2014, issued an institutional warning against each of the three credit card companies based on a finding that card customers were provided inadequate or misleading disclosures regarding the risks relating to such products at the time of sale. The Financial Supervisory Service also imposed disciplinary actions against three Shinhan Card employees and assessed a fine ofW10 million against Shinhan Card as well as similar sanctions against BC Card and KB Kookmin Card. In addition, the Financial Supervisory Service conducted a comprehensive audit of Shinhan Card, together with Samsung Card and Hyundai Card, in September 2014, and in November 2015, issued an institutional warning against each of the three credit card companies based on a finding that they had illegally provided personal credit information of potential new cardholders to their credit card sales agents. The Financial Supervisory Service also imposed disciplinary actions against six Shinhan Card employees and assessed a fine ofW6 million against Shinhan Card as well as similar sanctions against Samsung Card and Hyundai Card. In December 2014, the Financial Supervisory Service also issued institutional cautions against Shinhan Life Insurance for selling insurance products without adequate disclosure and for incomplete payments of agency fees, together with a fine ofW338 million in relation to the former case.

It has been reported in the press that certain employees of Shinhan Bank have been indicted by the Prosecutors’ Office for allegedly illegally influencing the hiring process of new employees and manipulating hiring standards for certain candidates. As of the date hereof, six current and former employees of Shinhan Bank, each of whom had occupied positions within Shinhan Bank’s recruiting department between 2013 and 2016, have been indicted for alleged illegal hiring activities while they occupied such positions at Shinhan Bank, and Shinhan Bank has also been indicted for gender discrimination under the Equal Employment Opportunity and Work-Family Balance Assistance Act. In addition to these indictments, on September 17, 2018, the Prosecutors’ Office also indicted our Chairman and Chief Executive Officer, who previously served as Shinhan Bank’s president, chief executive officer and executive director from March 2015 through March 2017, for alleged illegal hiring activities while he occupied such position at Shinhan Bank. The trials for these individuals are currently pending at the Seoul Eastern District Court. We believe that we have robust and fair internal procedures for hiring new employees. As part of Shinhan Bank’s efforts to enhance fairness and transparency of its hiring practices, Shinhan Bank recently adopted the model hiring procedures promulgated by the Korea Federation of Banks, and beginning in 2018 has established a hiring committee consisting of third-party human resources experts and internal compliance officers. However, it is difficult to predict the results of these proceedings and the potential impact they may have on us, Shinhan Bank or the price of our common stock, ADSs or other securities. Accordingly we cannot assure you that these proceedings and related events will not have an adverse effect on us, Shinhan Bank or the price of our common stock, ADSs or other securities.

Our management believes that these lawsuits will not have a material adverse effect on our financial condition, equity or results of operations. For further details of these and other litigations, see Note 4453 of the notes to our consolidated financial statements.

Dividend Policy

For a detailed description on the dividend policy, please see “Item 10.B. Memorandum and Articles of Incorporation — Description of Share Capital — Dividends.”

 

ITEM 8.B.

Significant Changes

Not applicable.

ITEM 9.

THE OFFER AND LISTING

 

ITEM 9.A.

Offer and Listing Details

Market Prices of Common Stock and American Depositary Shares

The principal trading market for our common shares is the KRX KOSPI Market Division of the Korea Exchange, where our common shares were 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 2012,2014, 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 2012.2014.

 

  Korea Exchange   New York Stock Exchange   Korea Exchange   New York Stock Exchange 
  Closing Price per
Common Stock		   Average
Daily
Trading
Volume		   

 

Closing Price per ADS

   Average
Daily
Trading
Volume		   Closing Price per
Common Stock		   Average
Daily
Trading
Volume		   Closing Price per ADS   Average
Daily
Trading
Volume		 
      High           Low           (Shares)           High           Low           (ADSs)       High   Low   (Shares)   High   Low   (ADSs) 

2013

   48,650    35,950    969,961    45.70    30.82    66,410 

2014

   53,400    42,000    852,730    52.44    39.44    51,257    53,400    42,000    852,730    52.44    39.44    51,257 

2015

   46,650    39,000    968,985    42.83    32.13    84,145    46,650    39,000    968,985    42.83    32.13    84,145 

2016

   47,700    36,100    839,260    40.88    29.66    84,952 

2017

   55,400    44,800    998,487    48.76    36.81    85,658 

First Quarter

   46,650    40,850    1,090,768    42.83    36.54    67,724    49,750    44,800    1,102,971    43.68    36.81    78,489 

Second Quarter

   46,000    39,300    1,027,097    42.67    35.85    95,693    50,800    45,600    941,348    45.35    40.20    85,487 

Third Quarter

   43,000    39,000    1,006,900    37.11    32.13    84,088    55,400    48,000    912,026    48.76    42.50    82,087 

Fourth Quarter

   44,300    39,550    757,897    39.52    33.59    88,486    51,700    47,100    1,042,064    46.80    43.12    76,535 

2016

   47,700    36,100    839,260    40.88    29.66    84,952 

First Quarter

   41,900    36,100    881,559    36.14    29.66    103,917 

Second Quarter

   42,900    37,050    841,259    38.23    30.66    113,600 

Third Quarter

   41,500    37,300    643,205    37.70    31.82    54,817 

Fourth Quarter

   47,700    39,950    989,985    40.88    35.87    68,101 

2017

   55,400    44,800    998,487    48.76    36.81    85,658 

2018

   53,400    39,050    1,024,181    50.35    34.78    101,168 

First Quarter

   49,750    44,800    1,102,971    43.68    36.81    78,489    53,400    44,550    1,031,010    45.20    38.14    98,021 

Second Quarter

   50,800    45,600    941,348    45.35    40.20    85,487    48,400    43,000    947,591    45.35    45.35    86,258 

Third Quarter

   55,400    48,000    912,026    48.76    42.50    82,087    45,710    41,450    1,010,829    40.43    36.58    84,538 

Fourth Quarter

   51,700    47,100    1,042,064    46.80    43.12    76,535    46,150    39,050    1,104,717    40.68    34.78    136,552 

October

   51,700    49,400    863,109    45.98    43.60    72,095    46,150    42,350    1,214,032    40.68    37.01    87,043 

November

   51,000    47,650    1,159,869    45.64    43.12    91,205    43,400    41,200    901,313    38.71    37.01    97,767 

December

   50,900    47,100    1,056,358    46.80    43.60    66,015    42,250    39,050    1,219,416    37.64    34.78    238,537 

2018 (through April 16)

   53,400    43,950    1,023,871    50.35    40.55    96,824 

2019 (through April 19)

   45,800    38,350    1,033,035    40.54    34.41    97,532 

January

   53,400    49,400    947,937    50.35    46.80    102,657    43,200    38,350    1,186,060    38.48    34.41    117,738 

February

   52,800    46,950    906,978    48.90    42.79    84,157    44,250    42,450    1,054,474    39.21    37.60    83,589 

March

   46,450    44,550    1,094,783    43.14    40.55    97,967    44,200    42,000    1,025,203    38.95    37.14    105,781 

April (through April 16)

   45,650    43,950    984,286    42.79    41.92    90,082 

April (through April 19)

   45,800    43,750    794,746    40.54    39.16    73,771 

 

Source: Korea Exchange; New York Stock Exchange.

Korea Exchange; New York Stock Exchange.

 

ITEM 9.B.

Plan of Distribution

Not applicable.

 

ITEM 9.C.

Markets

The Korea Exchange

Pursuant to the Korea Stock and Futures Exchange Act, as of January 27, 2005, the Korea Stock Exchange, which began its operations in 1956, the KRX KOSDAQ, which began its operation in July 1, 1996, and the Korea Futures Exchange (as an exchange operating futures market and options market), which began its operation in February 1, 1999, were unified to form the Korea Exchange.

The Korea Exchange was established in a form of a limited liability stock company in accordance with the Korean Commercial Code with the minimumpaid-in capital ofW100 billion in accordance with the Financial

Investment Services and Capital Markets Act. Historically, the Korea Exchange was the only exchange authorized under the Financial Investment Services and Capital Markets Act. On May 28, 2013, however, the Financial Investment Services and Capital Markets Act was amended to implement a license system under which a license may be granted to an exchange upon satisfaction of certain requirements. In addition, the Financial Services Commission has authorized the establishment of alternative trading systems that engage in the trading of listed beneficial certificates, among other things, for a multiple number of parties through electronic means. Notwithstanding the foregoing regulatory developments, the Korea Exchange is presently the only duly licensed exchange in Korea and there have been no definitive developments regarding newly licensed exchanges or alternative trading systems in Korea. The Korea Exchange operates and supervises four market divisions, the KRX KOSPI Market Division, the KRX KOSDAQ Market Division, the KRX Futures Market Division and the KRX KONEX Market Division. It has its principal office in Busan.

As of December 31, 2017,2018, the aggregate market value of equity securities listed on the KOSPI was approximatelyW1,6061,344 trillion. The average daily trading volume of equity securities for 20172018 was approximately 340398 million shares with an average transaction value ofW5,3266,549 billion.

Even though the Financial Investment Services and Capital 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 Financial Investment Services and Capital Markets Act has placed restrictions on the ownership and operation of the Korea Exchange and any newly established exchanges approved by the Financial Services Commission 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 Financial Investment Services and Capital Markets Act, or the Korean government. However, more than 5% ownership in Korea Exchange is permitted if necessary for forming a strategic alliance with a foreign stock or futures exchange and such amount of ownership is approved by the Financial Services Commission on grounds that such ownership may contribute to the efficiency and soundness of capital markets and the distribution of shares held by shareholders;

 

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 Financial Services Commission; and

 

In the event the Financial Services Commission determines that the chief executive officer of the Korea Exchange is not appropriate for the position, the Financial 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.

The Korea Exchange has the power in some circumstances to suspend trading in the shares of a given company or tode-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 of the Korean economy and its actions may depress or boost 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.

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. Historical movements in KOSPI are set out in the following.

 

  Opening(1)   High   Low   Closing   Opening(1)   High   Low   Closing 

2001

   503.31    715.93    463.54    693.70    503.31    715.93    463.54    693.70 

2002

   698.00    943.54    576.49    627.55    698.00    943.54    576.49    627.55 

2003

   633.03    824.26    512.30    810.71    633.03    824.26    512.30    810.71 

2004

   821.26    939.52    713.99    895.92    821.26    939.52    713.99    895.92 

2005

   893.71    1,383.14    866.17    1,379.37    893.71    1,383.14    866.17    1,379.37 

2006

   1,389.27    1,464.70    1,192.09    1,434.46    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    1,435.26    2,085.45    1,345.08    1,897.13 

2008

   1,853.45    1,901.13    892.16    1,124.47    1,853.45    1,901.13    892.16    1,124.47 

2009

   1,157.40    1,723.17    992.69    1,682.77    1,157.40    1,723.17    992.69    1,682.77 

2010

   1,696.14    2,051.00    1,552.79    2,051.00    1,696.14    2,051.00    1,552.79    2,051.00 

2011

   2,070.08    2,228.96    1,652.71    1,825.74    2,070.08    2,228.96    1,652.71    1,825.74 

2012

   1,826.37    2,049.28    1,769.31    1,997.05    1,826.37    2,049.28    1,769.31    1,997.05 

2013

   2,031.10    2,059.58    1,780.63    2,011.34    2,031.10    2,059.58    1,780.63    2,011.34 

2014

   1,967.19    2,082.61    1,886.85    1,915.59    1,967.19    2,082.61    1,886.85    1,915.59 

2015

   1,926.44    2,173.41    1,829.81    1,961.31    1,926.44    2,173.41    1,829.81    1,961.31 

2016

   1,918.76    2,068.72    1,835.28    2,026.46    1,918.76    2,068.72    1,835.28    2,026.46 

2017

   2,026.16    2,557.97    2,026.16    2,467.49    2,026.16    2,557.97    2,026.16    2,467.49 

2018 (through April 16)

   2,479.65    2,598.19    2,363.77    2,457.49 

2018

   2,479.65    2,598.19    1,996.05    2,041.04 

2019 (through April 19)

   2,041.04    2,248.63    1,993.70    2,216.15 

 

Source: 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” 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.

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 30% of the previous day’s closing price of the shares, rounded down as set out below:

 

Previous Day’s Closing Price

  Rounded Down to Won 

Less than 1,000

   1 

1,000 to 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 financial investment companies with brokerage licenses. In addition, abeginning on June 3, 2019, the securities transaction tax offor shares listed on the KRX KOSPI Market and KRX KOSDAQ Market will each be lowered by 0.05%, from 0.15% ofto 0.10% for shares listed on the sales priceKRX KOSPI Market and from 0.30% to 0.25% for shares listed on the KRX KOSDAQ Market. The securities transaction tax 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 the sales prices willis also be imposed on the transfer of these shares and securities on the Korea Exchange.KRX KOSPI Market (but not on transfers on the KRX KOSDAQ Market). See “Item 10.E. Taxation — Korean Taxation.”

The number of companies listed on the 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.

 

      Total Market Capitalization   Average Daily Trading Volume, Value    Total Market Capitalization Average Daily Trading Volume, Value 

Year

  Number of
Listed
Companies		   (Millions of
Won)		   (Thousands of
Dollars)(1)		   Thousands of
Share		   (Millions of
Won)		   (Thousands of
Dollars)(1)		  Number of
Listed
Companies		 (Millions of
Won)		 (Thousands of
Dollars)(1)		 Thousands
of Shares		 (Millions of
Won)		 (Thousands
of Dollars)(1)		 

2000

   704   W188,041,490   $148,414,751    306,163   W2,602,211   $2,053,837  704  W188,041,490  $148,414,751  306,163  W2,602,211  $2,053,837 

2001

   689    255,850,070    194,784,979    473,241    1,997,420    1,520,685  689  255,850,070  194,784,979  473,241  1,997,420  1,520,685 

2002

   683    258,680,756    218,056,778    857,245    3,041,598    2,563,937  683  258,680,756  218,056,778  857,245  3,041,598  2,563,937 

2003

   684    355,362,626    298,123,008    542,010    2,216,636    1,859,594  684  355,362,626  298,123,008  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    655,074,595    648,588,708    467,629    3,157,662    3,126,398  702  655,074,595  648,588,708  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

   746    951,917,907    1,017,223,666    363,846    5,540,151    5,920,229  746  951,917,907  1,017,223,666  363,846  5,540,151  5,920,229 

2008

   765    576,927,703    457,153,489    355,440    5,190,180    4,112,663  765  576,927,703  457,153,489  355,440  5,190,180  4,112,663 

2009

   770    887,935,183    763,060,356    485,657    5,795,552    4,980,495  770  887,935,183  763,060,356  485,657  5,795,552  4,980,495 

2010

   777    1,141,885,458    1,009,981,831    380,859    5,619,768    4,970,607  777  1,141,885,458  1,009,981,831  380,859  5,619,768  4,970,607 

2011

   791    1,041,999,162    899,438,206    353,760    6,863,146    5,924,166  791  1,041,999,162  899,438,206  353,760  6,863,146  5,924,166 

2012

   784    1,154,294,167    1,085,638,395    486,480    4,823,643    4,536,739  784  1,154,294,167  1,085,638,395  486,480  4,823,643  4,536,739 

2013

   777    1,185,973,724    1,123,826,139    328,325    3,993,422    3,784,158  777  1,185,973,724  1,123,826,139  328,325  3,993,422  3,784,158 

2014

   773    1,192,252,867    1,092,907,569    278,082    3,983,580    3,651,646  773  1,192,252,867  1,092,907,569  278,082  3,983,580  3,651,646 

2015

   770    1,242,832,089    1,062,885,563    455,256    5,351,734    4,576,870  770  1,242,832,089  1,062,885,563  455,256  5,351,734  4,576,870 

2016

   779    1,308,440,374    1,087,015,348    376,773    4,523,044    3,757,617  779  1,308,440,374  1,087,015,348  376,773  4,523,044  3,757,617 

2017

   774    1,605,820,912    1,504,422,814    340,457    5,325,760    4,989,470  774  1,605,820,912  1,504,422,814  340,457  5,325,760  4,989,470 

2018 (through April 16)

   777    1,638,625,626    1,530,639,042    393,456    7,031,950    6,568,540 

2018

 788  1,343,971,858  1,207,630,387  397,972  6,548,622  5,884,286 

2019 (through April 19)

 791  1,468,420,930  1,293,307,143  398,857  5,375,499  4,734,454 

 

Source: Korea Exchange

Note:

 

(1)

Converted at the Noon Buying Rate at the end of the periods indicated.

The Korean securities markets are principally regulated by the Financial Services Commission and the Financial Investment Services and Capital Markets Act. 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.

Protection of Customer’s Interest in Case of Insolvency of Financial Investment Companies

Under Korean law, the relationship between a customer and a financial 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 financial investment company, the customer of the financial investment company is entitled to the proceeds of the securities sold by the financial investment company. In addition, the Financial Investment Services and Capital Markets Act recognizes the ownership of a customer in securities held by a financial investment company in such customer’s account.

When a customer places a sell order with a financial investment company which is not a member of the Korea Exchange and this financial investment company places a sell order with another financial investment company which is a member of the Korea Exchange, the customer is still entitled to the proceeds of the securities sold received by thenon-member company from the member company regardless of the bankruptcy or reorganization of thenon-member company. Likewise, when a customer places a buy order with anon-member company and thenon-member company places a buy order with a member company, the customer has the legal right to the securities received by thenon-member company from the member company because the purchased securities are regarded as belonging to the customer in so far as the customer and thenon-member company’s creditors are concerned.

In addition, under the Financial Investment Services and Capital 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 financial 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 financial investment company is regarded as belonging to the financial investment company, which is liable to return the same at the request of its customer, the customer cannot take back deposited cash from the financial investment company if a bankruptcy or reorganization procedure is instituted against the financial 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 toW50 million per financial institution in case of the financial investment company’s bankruptcy, liquidation, cancellation of securities business license or other insolvency events. The premiums related to this insurance are paid by financial investment companies. Pursuant to the Financial Investment Services and Capital Markets Act, a 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 Financial Investment Services and Capital 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 financial 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 40,432,628 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 intending 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 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 administrative sanctions, fines, imprisonment and/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 of his/her shareholding to the Korea Securities Futures Commission and the Korea Exchange within five days after he/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, provided that the obligation to report such change shall be exempt if the number shares that changed in ownership is less than 1,000 shares and the aggregate amount of such shares that changed in ownership is less thanW10 million. 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 ofnon-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

Under the Foreign Exchange Transaction Laws and Financial Services Commission regulations, as amended (collectively, the “Investment Rules”), 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:

 

odd-lot trading of shares;

 

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;

 

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;

 

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

 

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 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 anon-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.

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. 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.”

 

ITEM 9.D.

Selling Shareholders

Not applicable.

 

ITEM 9.E.

Dilution

Not applicable.

ITEM 9.F.

Expenses of the Issue

Not applicable.

 

ITEM 10.

ADDITIONAL INFORMATION

 

ITEM 10.A.

Share Capital

Not applicable.

 

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.

Our articles of incorporation, which was last amended on March 23, 2017 to reflect the Act on Corporate Governance of Financial Companies,27, 2019, is annexed to this annual report as Exhibit 1.1.

Description of Share Capital

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 Financial Investment Services and Capital 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 Financial Investment Services and Capital Markets Act, the Korean Commercial Code, and certain other related laws of Korea.

General

As of December 31, 20172018 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 toone-half of all of the issued and outstanding 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. As of December 31, 20172018 and as of the date hereof, the number of our issued and outstanding common shares was 474,199,587.

On January 25, 2007, we issued 28,990,000 Series 10 redeemable preferred shares and 14,721,000 Series 11 redeemable convertible preferred shares as part of our funding for the acquisition of LG Card, all of which were redeemed on January 25, 2012.

On April 21, 2011, as part of funding for partial redemption of the Series 10 redeemable preferred stock and the Series 11 redeemable convertible preferred stock, we issued 11,100,000 shares of the Series 12non-voting redeemable preferred stock, all of which were redeemed on April 21, 2016. See “— Description of Preferred Stock.” There are no preferred shares authorized, issued or outstanding as of the date hereof.

All of the issued and outstanding shares are fully-paid andnon-assessable, and are in registered form. As of the date hereof, our authorized but unissued share capital consists of 373,684,849 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 “— Distribution of Free Shares.” Share certificates are issued in denominations of one, five, ten, 50, 100, 500, 1,000 and 10,000 shares. The par value of our common shares per share isW5,000.

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 (“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. Once declared, the annual dividend must be paid to the stockholders of record as of the end of the preceding fiscal year within one month after the annual general meeting unless otherwise resolved thereby. Annual dividends may be distributed either in (i) cash or (ii) 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 exceedone-half of the total annual dividends (including dividends in shares). In addition to the annual dividend, we may also distribute cash dividends to the stockholders of record as of the end of March, June and September of each year upon a resolution by the board of directors. 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, we may pay interim dividends once during each fiscal year (in addition to the 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 may 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 of shareholders, and (v) amount of legal reserve that should be set aside for the current fiscal period following the interim dividend payment.

Under the Financial Holding Companies Act and the regulations thereunder, a financial holding company may not pay an annual dividend unless it has set aside as its legal reserve an amount equal to at leastone-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 Stock,” 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 “—“Item 10.E. Taxation — Korean Taxation.”

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.E. Taxation — Korean Taxation — Taxation of Dividends on Shares of Common Stock or American Depositary Shares.”

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 (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 the ESOA pursuant to relevant provisions of the Financial Investment Services and Capital Markets Act; (3) issued for the purpose of issuing depositary receipts pursuant to relevant provisions of the Financial Investment Services and Capital 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 Korean Commercial Code; (5) issued to a financial investment company, a private equity fund or a special purpose company under the Financial Investment 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 Financial Investment Services and Capital Markets Act, if a listed company intends to issue new shares by way of allotment to shareholders, it must issue a certificate of preemptive right to the newly issued shares. Furthermore, the company must list the newly issued shares on the Korea Exchange for a certain period of time or designate a securities company to broker and/or deal in such newly issued shares in order to ensure that they are properly distributed. In the event certain shareholder forfeit their right to subscribe to newly issued shares, the company may allot the forfeited shares to a third party under certain conditions, including in relation to the purchase price of such shares, although in principle, the company must withdraw the forfeited shares. Under the Korean Commercial Code, when a company issues new shares by way of allotment to a third party, such company must notify its stockholders or make public notice of the conditions and other details of such new shares not less than two weeks prior to the relevant subscription payment date. Under the Financial Investment Services and Capital Markets Act, however, a listed company may substitute such notification or public notice by disclosing the material fact in a report publicly filed with the listing authorities.

Under the Financial Investment Services and Capital 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 Financial Investment Services and Capital 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 total number of shares to be newly issued and shares then outstanding. As of December 31, 2017,2018, the employee stock ownership association owned 22,324,02722,179,229 shares, or 4.71%4.68%, 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 our Audit Committee. In addition, under the Korean Commercial Code, an extraordinary general meeting of shareholders may be held at the request of the shareholders holding shares for at least six months of an aggregate of 1.5% or more of the outstanding shares with voting rights of the listed

company, subject to a board resolution or court approval. Furthermore, under the Act on the Corporate Governance of Financial Companies of Korea and itssub-regulations, an extraordinary general meeting of shareholders may be held at the request of the shareholders holding shares for at least six 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 isW5 trillion or more and (ii) who is in control of two or more subsidiaries, each with total assets ofW2 trillion or more) or more of the outstanding shares of the company, subject to a board resolution or court approval. 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 Korean Commercial Code, the meeting agenda may be proposed by the shareholders holding shares for at least six 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 isW100 billion or more) or more of the outstanding shares of the listed company. Furthermore, under the Act on the Corporate Governance of Financial Companies and itssub-regulations, the meeting agenda may be proposed by the shareholders holding shares for at least six 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 isW5 trillion or more and (ii) who is in control of two or more subsidiaries, each with total assets ofW2 trillion or more) or more of the outstanding shares of the company.0.1%. 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 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.

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 thanone-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%, in case of a company whose total assets as at the end of the latest fiscal year isW2 trillion or more) or more of the outstanding shares with voting rights to request cumulative voting 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 anon-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 leastone-fourth of the total of our issued and outstanding common shares. Holders ofnon-voting shares (other than enfranchisednon-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. The Korean Commercial Code provides that a company’s articles of incorporation may prescribe conditions for

enfranchisement ofnon-voting shares. For example, 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 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 leasttwo-thirds of those shares present or represented at such meeting and such special majority must also represent at leastone-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 leasttwo-thirds of the preferred shares present or represented at such meeting and such preferred shares also represent at leastone-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 Financial Investment Services and Capital 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 Financial Investment Services and Capital 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 KRX KOSPI Market 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 KRX KOSPI Market 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 KRX KOSPI Market of the Korea Exchange for one week prior to the date of the adoption of the relevant board of directors’ resolution. If we or the dissenting shareholder 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 office 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.

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 date and/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 ornon-retirement of directors under an age limit requirement; or (iv) the number of shares required for a director’s qualification.

Description of Preferred Stock

On January 25, 2007, as part of funding our acquisition of LG Card, we issued 28,990,000 Series 10non-voting redeemable preferred shares. On January 25, 2012, we redeemed all of the Series 10 preferred shares.

On January 25, 2007, as part of funding our acquisition of LG Card, we issued 14,721,000 Series 11non-voting redeemable convertible preferred shares. On January 25, 2012, we redeemed all of the Series 11 preferred shares.

On April 21, 2011, as part of funding for preferred stocks due to be redeemed in January 2012, we issued 11,100,000 Series 12non-voting redeemable preferred shares for the subscription price ofW100,000 per share, orW1,110 billion in the aggregate. On April 21, 2016, we redeemed all of the Series 12 redeemable preferred shares.

There is currently no outstanding preferred stock.

Annual Report

Under the Financial Investment Services and Capital Markets Act, we must file with the Financial Services Commission and the Korea Exchange an annual business report (containing audit report and audited annual nonconsolidated and consolidated financial statements) within 90 days after the end of our fiscal year as well as a semiannual business report within 45 days after the end of the first six months of our fiscal year and quarterly business reports within 45 days after the end of the first three months and nine months of our fiscal year, respectively (in each case, containing review report and reviewed interim nonconsolidated and consolidated financial statements). Copies of such reports are available for public inspection at the websites of 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 registerregistry 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 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, 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 ornon-Koreans. See “Item 10.D. Exchange Controls.” 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.B. Business Overview — Supervision and Regulation — Principal Regulations Applicable to Financial Holding Companies — Restrictions on Financial Holding Company Ownership.”

Acquisition of Treasury Shares

Under the Korean Commercial Code, we may acquire our own shares upon a resolution of the general meeting of the shareholders by either (i) purchasing them on a stock exchange or (ii) purchasing a number of shares, other than the redeemable shares as set forth in Article 345, Paragraph (1) of the Korean Commercial Code, from each shareholder in proportion to its existing shareholding ratio through the methods set forth in the Presidential Decree, provided that the total purchase price does not exceed the amount of our profit that may be distributed as dividends in respect of the immediately preceding fiscal year.

In addition, pursuant to the Financial Investment Services and Capital Markets Act and regulations under the Financial Holding Companies Act, we may purchase our own shares on the KRX KOSPI Market 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 Financial Investment Services and Capital 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. 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.

 

ITEM 10.C.

Material Contracts

None.

 

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 Financial Investment Services and Capital 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 temporarily suspend payment, receipt or the whole or part of transactions to which the Foreign Exchange Transaction Laws apply, or impose an obligation to 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.

Restrictions Applicable to Shares

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 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 dealing 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.

Financial investment companies with 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 dealing, 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.

 

ITEM 10.E.

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 as of the date of this annual report, and is subject to any change in Korean or United States 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 or other tax consequences of the purchase, ownership and disposition of such securities, including the effect of any national, state or local tax laws.

Korean Taxation

The following summary of Korean tax considerations applies to you so long as you are not:

 

a resident of Korea;

 

a corporation having its head office, principal place of business, or place of effective management in Korea (a Korean corporation); or

 

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 22% (including local income surtax). If you are a qualified resident and a beneficial owner of the dividends 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 intopaid-in capital, such distribution may be subject to a Korean withholding tax.

Taxation of Capital Gains from Transfer of Common Shares or American Depositary Shares

As a general rule, capital gains earned bynon-residents upon transfer of our common shares or American depositary shares (“ADSs”) are subject to a Korean withholding tax at the lower of (1) 11% (including local income surtax) of the gross proceeds realized or (2) 22% (including local income surtax) of the net realized gain, subject to the production of satisfactory evidence of acquisition costs and certain direct transaction costs associated with common shares or ADSs, unless exempt from Korean income taxation under an applicable tax treaty between Korea and the country of your tax residence. See “— Tax Treaties” below for a discussion on treaty benefits. Even if you do not qualify for the exemption under a tax treaty, you will not be subject to the foregoing withholding tax on capital gains if you meet certain requirements for the exemption under Korean domestic tax laws discussed in the following paragraphs.

You will not be subject to the Korean income taxation on capital gains realized upon a transfer of our common shares through the Korea Exchange if you (1) have no permanent establishment in Korea and (2) do not own and have never owned (together with any shares owned by any entity with which you have a special relationship and possibly including the shares represented by the 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 ADSs on or after January 1, 2008, ADSs are viewed as shares of stock for capital gains tax purposes. Accordingly, capital gains from sale or disposition of ADSs 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 ADSs outside Korea will generally 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 ADSs 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 ADSs after conversion of the underlying shares into ADSs, 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 ADSs after conversion of the underlying shares of stock into ADSs, such person is obligated to file corporate income tax returns and pay tax unless a purchaser or a financial investment company with a brokerage license, as applicable, withholds and pays the tax on capital gains derived from transfer of ADSs, as discussed below.

If you are subject to tax on capital gains with respect to a sale of common shares or ADSs, the purchaser or, in the case of a sale of common shares on the Korea Exchange or through a financial investment company with a brokerage license in Korea, the financial investment company is required to withhold Korean tax from the sales proceeds in an amount equal to 11% (including local income surtax) of the gross realization proceeds and to remit 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 costs and certain direct transaction costs associated with common shares or ADSs. See the discussion under “— Tax Treaties” below for an 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 the income derived by residents of such treaty countries. For example, under theKorea-U.S. income tax treaty, reduced rates of Korean withholding tax on dividends of 16.5% or 11.0%, respectively (including local income 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 or Holding Companies) of theKorea-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 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 theKorea-U.S. income tax treaty, the exemption on capital gains does not apply if (a) you have a permanent establishment in Korea and any shares of common stock in which you hold an interest and which gives rise to capital gains are effectively connected with such permanent establishment, (b) you are an individual and you maintain a fixed base in Korea for a period or periods aggregating 183 days or more during the taxable year and your common shares or ADSs giving rise to capital gains are effectively connected with such fixed base or (c) you are an individual and 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 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 case may be, must withhold tax at the normal rates. Furthermore, in order for you to claim the benefit of a tax rate reduction or tax exemption on certain Korean source income (e.g., dividends or capital gains) under an applicable tax treaty as the beneficial owner of such Korean source income, Korean tax law requires you (or your agent) to submit an application (in the case for reduced withholding tax rate, an “application for entitlement to reduced tax rate,” and in the case for exemption from withholding tax, an “application for tax exemption”) with a certificate of your tax residency issued by the competent authority of your country of tax residence, subject to certain exceptions (together, the “BO application”). For example, a U.S. resident would be required to provide a Form 6166 as a certificate of tax residency with the application for entitlement to reduced tax rate or the application for tax exemption, as the case may be. Subject to certain exceptions, where the relevant income is paid to an overseas investment vehicle that is not the beneficial owner of such income (an “OIV”), a beneficial owner claiming the benefit of an applicable tax treaty with respect to such income must submit its BO application to such OIV, which in turn must submit an OIV report and a schedule of beneficial owners to the withholding agent prior to the payment date of such income. In the case of a tax exemption application, the withholding agent is required to submit such application (together with the applicable OIV report in the event the income will be paid to an OIV) to the relevant district tax office by the ninth day of the month following the date of the payment of such income.

Inheritance Tax and Gift Tax

If you die while holding an ADS or donate an ADS, it is unclear whether, for Korean inheritance and gift tax purposes, you would be treated as the owner of the shares of common stock underlying the 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, which ranges from 10% to 50% recently, assessable based on the value of the ADSs or shares of common stock and the identity of the individual against whom the tax is assessed.

If you die while holding a common share or donate a subscription right or a common 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 through the Korea Exchange, you will be subject to a securities transaction tax at the rate of 0.15% (which will be decreased to 0.1% beginning on June 3, 2019 pursuant to an amendment to the Enforcement Decree of the Securities Transaction Tax Act) and an agriculture and fishery special surtax at the rate of 0.15% of the sales price of common shares. If your transfer of common shares is not made through the Korea Exchange, subject to certain exceptions, you will be subject to a securities transaction tax at the rate of 0.5% but will not be subject to an agriculture and fishery special surtax.

Depositary receipts, which the ADSs constitute, are included in the scope of securities transfer subject to securities transaction tax effective starting with transfers occurring on or after January 1, 2011.tax. Nonetheless, transfer of depositary receipts listed on a foreign securities exchange similar to the Korea Exchange (e.g., the New York Stock Exchange, the NASDAQ National Market) will not be subject to the securities transaction tax.

In principle, the securities transaction tax, if applicable, must be paid by a transferor of common shares. When a transfer is affectedeffected through a securities settlement company, such settlement company is generally required to withhold and remit the tax to the tax authorities. When such transfer is made through a financial

investment company only, such financial investment company is required to withhold and remit the tax. Where a transfer is affected by anon-resident who has no permanent establishment in Korea by a method other than through a securities settlement company or a financial 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 60% of thenon-reported or 10% to 60% of underreported tax amount and a failure to timely pay securities transaction tax due will result in penalties of 10.95%9.125% 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 Federal Income Tax Consequences

The following summary describes certain U.S. federal income tax considerations for beneficial owners of our common shares or ADSs that hold the common shares or ADSs 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 individual citizen or 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 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 ADSs are not, for purposes of the Treaty, effectively connected with a permanent establishment in Korea and you otherwise qualify for the full benefits of the 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 part on representations by the ADS depositary 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, and does not address the Medicare tax on net investment income or 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:

 

a bank;

 

a dealer in securities or currencies;

 

an insurance company or one of certain financial institutions;

 

a regulated investment company;

 

a real estate investment trust;

 

atax-exempt entity;

a trader in securities that has elected to use amark-to-market method of accounting for your securities holdings;

 

a person holding common shares or ADSs as part of a hedging, conversion, constructive sale or integrated transaction or a straddle;

 

a person liable for the alternative minimum tax;

 

a partnership or other pass-through entity for U.S. federal income tax purposes;

 

a person who owns or is deemed to own 10% or more of our stock (by vote or value);

 

a person required to accelerate the recognition of any item of gross income with respect to our common shares or ADSs as a result of such income being recognized on an applicable financial statement; or

 

a person whose functional currency is not the U.S. Dollar.

If a partnership (or other entity treated as a partnership for U.S. federal income tax purposes) holds our common shares or 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 ADSs, you are urged to consult your tax advisor.

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 ADSs, as well as any consequences arising under the laws of any other taxing jurisdiction.

American Depositary Shares

If you hold ADSs, for U.S. federal income tax purposes, you generally will be treated as the owner of the underlying common shares that are represented by such ADSs. Accordingly, deposits or withdrawals of common shares for ADSs will not be subject to U.S. federal income tax.

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 ADSs (including amounts withheld to reflect Korean withholding tax) will be taxable as dividends to the extent paid out of our current or 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 actually or constructively receive it, in the case of our common shares, or the day actually or constructively received by the ADS depositary, in the case of ADSs. Such dividends will not be eligible for the dividends-received deduction allowed to corporations under the Code.

With respect tonon-corporate U.S. holders, certain dividends received 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 Treaty meets these requirements, and we believe we are eligible for the benefits of the Treaty. A foreign corporation is also treated as a qualified foreign corporation with respect to dividends paid by that corporation on shares (or ADSs 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 ADSs, which are listed on the New York Stock Exchange, are treated as readily tradable on an established securities market in the United States for these purposes. There can be no assurance that our ADSs will be considered readily tradable on an established securities market in later years.Non-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 anon-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, in the case of ADSs, regardless of whether the Korean Won are converted into U.S. Dollars. If the Korean Won received as a dividend are converted into U.S. Dollars on the date they are received, you generally will not be required to recognize foreign currency gain or loss in respect of the dividend income. 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 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) 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”Tax Treaties” for a discussion of the Treaty rate. Korean taxes withheld in excess of the rate provided in the Treaty 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 Internal Revenue Service. For purposes of the foreign tax credit, dividends paid on our common shares or ADSs will be treated as income from sources outside 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 ADSs 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 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 atax-free return of capital, causing a reduction of your adjusted basis in our common shares or ADSs (thereby increasing the amount of gain, or decreasing the amount of loss, to be recognized by you on a subsequent disposition of our common shares or ADSs), and the balance in excess of adjusted basis will be taxed as capital gain recognized on a sale or exchange. However, we do not expect to determine 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 or ADSs or rights to subscribe for our common shares or ADSs 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 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 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.

Disposition of Common Shares or American Depositary Shares

For U.S. federal income tax purposes, you will recognize capital gain or loss upon the sale, exchange or other disposition of our common shares or ADSs in an amount 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 ADSs, as the case may be. Subject to the discussion below under “— Passive Foreign Investment Company Rules,” upon the sale, exchangesuch gain or other disposition of our common shares or ADSs, suchloss will generally be capital gain or loss and will generally be long-term capital gain or loss if at the time of sale, exchange or other disposition, our common shares or ADSs have been held for more than one year. CapitalLong-term capital gains ofnon-corporate U.S. holders (including 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 ADSs will generally be treated as 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 ADSs 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 upon the past and projected composition of our income and assets and valuation of our assets, including goodwill, we do not believe that we were a PFIC for 2017,2018, and we do not expect to be a PFIC in 20182019 or to become one in the foreseeable future, although there can be no assurance in this regard. However, PFIC status is a factual determination that is made annually. Accordingly, it is possible that we may become a PFIC in the current or any future taxable year due to changes in valuation or composition of our income or assets or valuation of our assets. Because we have valued our goodwill based on the market value of our common shares and ADSs, a decrease in the price of our common shares and ADSs may also result in our becoming a PFICPFIC.

In general, we will be considered a PFIC for any taxable year in which:

 

at least 75% of our gross income is passive income; or

 

at least 50% of the value (determined based on a quarterly average) of our assets is attributable to assets that produce or are held for the production of passive income.

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). Certain 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 certain income earned by anon-U.S. corporation engaged in the active conduct of a banking business asnon-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 corporation’s stock, we will be treated, for purposes of the PFIC rules, as owning our proportionate share of the assets and receiving our proportionate share of the income of that corporation.

If we are a PFIC for any taxable year during which you hold our common shares or ADSs (and you do not make a timelymark-to-market election, as described below), 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 ADSs. These special tax rules generally will apply even if we cease to be a PFIC 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 your holding period for our common shares or ADSs will be treated as excess distributions. Under these special tax rules:

 

the excess distribution or gain will be allocated ratably over your holding period for our common shares or ADSs;

 

the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we are a PFIC, will be treated as ordinary income; and

 

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 special rules discussed above, you will include gain on our common shares or ADSs on amark-to-market basis as ordinary income, provided that our common shares or ADSs 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 ADSs are currently listed on the New York Stock Exchange, which constitutes a qualified exchange, although there can be no assurance that the ADSs are or will be “regularly traded.” If you make a validmark-to-market election, for each year that we are a PFIC you will include in each year as ordinary income the excess of the fair market value of your common shares or ADSs at the end of the year over your adjusted tax basis in the common shares or ADSs. You will be entitled to deduct as an ordinary loss in each such year the excess of your adjusted tax basis in the common shares or ADSs 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, in each year that we are a PFIC any gain you recognize upon the sale or other disposition of your common shares or ADSs 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 ADSs 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 ADSs are no longer regularly traded on a qualified exchange or other market 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 PFIC 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 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 we are a PFIC for any taxable year during which you hold our common shares or ADSs and any of ournon-U.S. subsidiaries is also a PFIC, you will be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC for purposes of the application of the PFIC rules. You are urged to consult your tax advisors about the application of the PFIC rules to any of our subsidiaries.

If you hold our common shares or ADSs in any year in which we are classified as a PFIC, you wouldwill generally 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 if we are a PFIC 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 PFIC status and the U.S. federal income tax consequences of holding our common shares or ADSs if we are considered a PFIC in any taxable year.

Information Reporting and Backup Withholding

In general, information reporting will apply to dividends in respect of our common shares or ADSs and the proceeds from the sale, exchange or other disposition of our common shares or ADSs that are paid to you within the United States (and in certain cases, outside the United States), unless you are an exempt recipient. A backup withholding tax may apply to such payments if you fail to provide a taxpayer identification number or certification of 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 the required information is timely furnished to the Internal Revenue Service.

FATCA

Under Sections 1471 through 1474 of the Code (such Sections commonly referred to as “FATCA”), certain entities in a broadly defined class of foreign financial institutions (“FFIs”) may be subject to a 30% United States withholding tax on certain United States source payments made to the FFI, (and beginning in 2019, a 30% withholding tax on gross proceeds from the sale of United States stocks and securities), unless the FFI is a “participating FFI,” which is generally defined as an FFI that (i) enters into an agreement with the Internal Revenue Service pursuant to which it agrees to comply with a complicated and expansive reporting regime or (ii) complies with the requirements of an intergovernmental agreement entered into by the United States and another jurisdiction regarding the implementation of FATCA (an “IGA”), or (iii)the FFI is otherwise deemed compliant with or exempt from FATCA.

The FATCA legislation also contains complex provisions requiring certain participating FFIs to withhold on certain “foreign passthru payments” made to FFIs that are not participating FFIs or otherwise exempt from FATCA withholding and to holders that fail to provide the information required by FATCA. Although the definition of a “foreign passthru payment” is still reserved under current regulations, the term generally refers to payments that are fromnon-United States sources but that are “attributable to” certain United States payments and gross proceeds described above. If applicable,Pursuant to proposed U.S. Treasury regulations (upon which taxpayers may rely until final regulations are issued), withholding on foreign passthru payments, if applicable, would not be required with respect to payments made before January 1, 2019.the date that is two years after the date of publication of final regulations defining the term foreign passthru payment. It is unclear whether or to what extent payments on our common shares or ADSs would be considered foreign passthru payments that are subject to withholding under FATCA.

On June 10, 2015, the United States and Korea entered into an IGA to implement the foregoing requirements. The IGA is intended to result in the automatic exchange of tax information through reporting by FFIs to the Internal Revenue Service. Prospective investors should consult their tax advisors regarding the application of the FATCA rules to an investment in our common shares.

 

ITEM 10.F.

Dividends and Paying Agents

Not applicable.

 

ITEM 10.G.

Statements by Experts

Not applicable.

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 on Form20-F, and other information with the U.S. Securities and Exchange Commission. You may inspect and copy these materials, including this annual report and 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.

 

ITEM 10.I.

Subsidiary Information

Not applicable.

 

ITEM 11.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See “Item 4.B. Business Overview — Risk Management” for quantitative and qualitative disclosures about market risk.

 

ITEM 12.

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

 

ITEM 12.A.

Debt Securities

Not applicable.

 

ITEM 12.B.

Warrants and Rights

Not applicable.

 

ITEM 12.C.

Other Securities

Not applicable.

ITEM 12.D.

American Depositary Shares

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:

 

Item

  

Services

  

Fees

  

Paid by

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

Item

Services

Fees

Paid by

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;

 

 (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 orun-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 banks.

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 mayset- 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 20172018

In 2017,2018, we received the following payments from Citibank, N.A., acting as depositary for our ADSs:

 

Reimbursement of settlement infrastructure fees (including DTC fees)

  US$— 

Reimbursement of proxy process expenses (printing, postage and distribution)

  US$63,719.6952,387.21 

Legal expenses

  US$— 

Contributions towards our investor relations efforts (i.e.non-deal roadshows, investor conferences and IR agency fees) and legal expenses incurred in connection to the preparation of our Form20-F for the fiscal year 20162017

  US$444,698.31178,205.37 
  

 

 

 

Total:

  US$ 508,418.00230,592.58 

 

Note:

Note: The amounts provided above are after deduction of applicable of U.S. taxes.

 

ITEM 13.

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

Not applicable.

ITEM 14.

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

Not applicable.

 

ITEM 15.

CONTROLS AND PROCEDURES

Disclosure Control

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 the design and operation of our disclosure

controls and procedures (as defined in Rule13a-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of December 31, 2017.2018. There are inherent limitations to the effectiveness of any system of disclosure controls and 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 assurance of achieving their control objectives. Based upon our evaluation, our chief executive officer and chief financial officer concluded that the design and operation of our disclosure controls and procedures as of December 31, 20172018 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 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 in Rules13a-15(f) and15d-15(f) under the Exchange Act, 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, 20172018 based on the framework established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Internal Control-Integrated Framework (2013) suspended the original framework issued by COSO in 1992 on December 15, 2014. We adopted the 2013 Framework on December 15, 2014. Further details of the changes made are set out below. 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. Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2017.2018. The effectiveness of our 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, 2017.2018. KPMG Samjong has issued an attestation report on the effectiveness of our internal control over financial reporting under Auditing Standard No. 5 of the Public Company Accounting Oversight Board, which is included herein.

Attestation Report of the Independent Registered Public Accounting Firm

KPMG Samjong’s attestation report on the effectiveness of internal control over financial reporting can be found on pageF-2 of this annual report.

 

ITEM 16.

[RESERVED]

 

ITEM 16A.

AUDIT COMMITTEE FINANCIAL EXPERT

Our Audit Committee currently consists of fourthree outside directors, namely Lee Manwoo, ParkSungByoung-dae,Jae-ho Lee Steven Sung-ryang and Joo Jaeseong.LeeYoon-jae. Our board of directors has determined that Lee Manwoo, the chairman of our Audit Committee is

an “audit committee financial expert,” 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. Lee Manwoo, ParkSungByoung-dae,Jae-ho Lee Steven Sung-ryang and Joo JaeseongLeeYoon-jae are independent as such term is defined in Section 303A.02 of the NYSE Listed Company Manual, Rule10A-3 under the Exchange Act and the Korea Stock Exchange listing standards.

 

ITEM 16B.

CODE OF ETHICS

We have adopted a code of ethics for our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions as required under Section 406 of the Sarbanes-Oxley Act of 2002, together with an insider reporting system in compliance with Section 301 of the Sarbanes-Oxley Act. 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. As a further detailed guideline to the code of ethics, we have also adopted a code of ethics applicable to all the officers and employees of our holding company and our subsidiaries and established a supplemental code of behavior for all officers and employees of our holding company and our subsidiaries in order to provide additional guideline for the performance of their work-related duties as well as their daily behavior. Our code of ethics is available on our websitewww.shinhangroup.com. www.shinhangroup.com.

 

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, 2015, 2016, 2017 and 2017,2018, our principal accountants for the respective period, depending on the various types of services and a brief description of the nature of such services.

 

Type of Services

  Aggregate Fees Billed During the
Year Ended December 31,		   

Nature of Services

  Aggregate Fees Billed During the
Year Ended December 31,		   

Nature of Services

2015   2016   2017    2016   2017   2018 
  (In millions of Won)      (In millions of Won)    

Audit fees

  W6,066   W6,447   W7,572   Audit service for Shinhan Financial Group and its subsidiaries.  W6,447   W7,572   W8,009   Audit service for Shinhan Financial Group and its subsidiaries.

Audit related fees

   —    —    40   Due diligence services rendered in the ordinary course of our business

Tax fees

   213    288    265   Tax return and consulting advisory service.   288    265    209   Tax return and consulting advisory service.

All other fees

   —    —    —   All other services which do not meet the two categories above.(1)   —    —    —   All other services which do not meet the two categories above.(1)
  

 

   

 

   

 

     

 

   

 

   

 

   

Total

  W6,279   W6,735   W7,837     W6,735   W7,837   W8,258   
  

 

   

 

   

 

     

 

   

 

   

 

   

 

Note:

 

(1)

Due diligence service fee.

Our Audit Committee generallypre-approves all engagements of our principal accountants pursuant to policies and procedures adopted by it. Our Audit Committee has adopted the following policies and procedures for consideration and approval of requests to engage our principal accountants to perform audit andnon-audit services. Engagement requests must in the first instance be submitted as follows: (i) in the case of audit andnon-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 andnon-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 permittednon-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) permittednon-audit services to our holding company, (ii) audit services to our subsidiaries and (iii) permittednon-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 Lee Manwoo, the chairman of our Audit Committee, and he 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.

Any other audit or permittednon-audit service must bepre-approved by the Audit Committee on acase-by-case basis. Our Audit Committee did notpre-approve anynon-audit services under the de minimis exception of Rule 2.01(c)(7)(i)(C) of RegulationS-X as promulgated by the Securities and Exchange Commission.

 

ITEM 16D.

EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

Not applicable.

 

ITEM 16E.

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

Neither we nor any “affiliated purchaser,” as defined in Rule10b-18(a)(3) of the Exchange Act, purchased any of our equity securities during the period covered by this annual report.

 

ITEM 16F.

CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

Not applicable.

 

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 Act on Corporate Governance of Financial Companies, 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 and the Act on Corporate Governance of Financial Companies. Also, our subsidiaries that are financial institutions must comply with the respective corporate governance provisions under the Act on Corporate Governance of Financial Companies and relevant laws under which they were established.

The Act on Corporate Governance of Financial Companies came into effect as of August 1, 2016. The Act was enacted to address calls for strengthened regulations on corporate governance of financial companies and to serve as a uniform regulation on corporate governance matters applicable to all financial companies in place of the separate regulations for each sector that existed. The Act contains several key measures, including, but not limited, to (i) condition of eligibility of officers of financial companies and standards for determining whether financial companies’ officers may hold concurrent positions in other companies, (ii) standards for composition

and operation of board of directors, (iii) standards for establishment, composition and operation of committees of the board of directors, (iv) internal control and risk management, (v) requirements and procedures for the approval of a change of major shareholders and (vi) special regulations for rights of minority shareholders of financial companies.

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 a foreign private issuer 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 directors satisfying the requirements of “independence” as set forth in Rule10A-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 1213 directors, of which teneleven directors satisfy the requirements of “independence” as set forth in Rule10A-3 under the Exchange Act. TenEleven of our directors are also “outside directors” as defined in the Financial Holding Companies Act of Korea. An “outside director” for purposes of the Act on Corporate Governance of Financial Companies 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 leastone-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 provided that there must be at least three 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. There is no such requirement under Korean law or listing standards or our internal regulations.

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 and Rule10A-3 under the Exchange Act. We are in compliance with this requirement as our Audit Committee is comprised of three outside directorsmeeting the requirements of independence set forth in Section 303A.02 of the NYSE Listed Company Manual and Rule10A-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 leasttwo-thirds of its members must be outside directors and whose chairman must be an outside director. In addition, under the Act on Corporate Governance of Financial Companies, 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 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 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 leastone-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. Our outside director nominating committee is formed on an ad hoc basis prior to a general shareholders’ meeting if the agenda for such meeting includes appointment of an outside director. The composition of the committee is in compliance with the relevant provisions under the Korean Commercial Code and the Act on Corporate Governance of Financial Companies, and the chairman of the committee must be an outside director pursuant to the Act on Corporate Governance of Financial Companies.

Although a corporate governance committee is not required under Korean law, in March 2012, we established the Corporate Governance and Chief Executive Officer Recommendation Committee, which is responsible for reviewing and making recommendations in relation to the overall corporate governance of our group (including any aspects of corporate governance relating to code of ethics and other code of behavior, size of the board of directors and other matters necessary for improving our overall corporate governance structure), as well as recommendation of the nominees for the president and/or chief executive officer of our group and development, operation and review of our management succession plan, including setting the qualifications for the CEO, evaluating CEO candidate pool and recommending CEO candidates. The chairperson of the committee must be an outside director, and the incumbent CEO may be restricted from participating and voting on matters related to the CEO selection.

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. In January 2013, the SEC approved amendments to the listing rules of NYSE and NASDAQ regarding the independence of compensation committee members and the appointment, payment and oversight of compensation consultants. The listing rules were adopted as required by Section 952 of the Dodd-Frank Act and rule10C-1 of the Securities Exchange Act of 1934, as amended, which direct the national securities exchanges to prohibit the listing of any equity security of a company that is not in compliance with the rule’s compensation committee director and advisor independence requirements. Certain elements of the listing rules became effective on July 1, 2013 and companies listed on the NYSE must comply with such listing rules by the earlier of the company’s first annual meeting after January 15, 2014, or October 31, 2014.

Under the Act on Corporate Governance of Financial Companies, financial institutions including financial holding companies must establish a compensation committee of which at leastone-half of its members must be outside directors and whose chairman must be an outside director.

We currently have a remuneration committee, which is responsible for reviewing and approving the management’s evaluation and compensation programs. The committee consists of three members, all of whom are outside directors and satisfy the independent director requirements as set forth in Rule10A-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. In Korea, the Financial Services Commission implemented the Standard Corporate Governance Guidelines for Financial Service Companies in December 2014, and accordingly, we have adopted in February 2015 and are currently complying with international regulators on corporate governance modeled after the standard guidelines implemented by the Financial Services Commission,

Pursuant to the requirements of the Sarbanes-Oxley Act, we have adopted a code of ethics applicable to all the officers and employees of our holding company and our subsidiaries, including all financial, accounting and

other officers and employees that are involved in the preparation and disclosure of Shinhan Financial Group’s consolidated financial statements and internal control of financial reporting. As a further detailed guideline to the code of ethics, we have also established a supplemental code of behavior for all officers and employees of our holding company and our subsidiaries in order to provide additional guideline for the performance of their work-related duties as well as their daily behavior. We have also adopted an insider reporting system in compliance with Section 301 of the Sarbanes-Oxley Act. The above-mentioned code of ethics and the code of behavior are available on our websitewww.shinhangroup.com.

On May 25, 2011, the SEC adopted final rules to implement whistleblower provisions of the Dodd-Frank Act, which are applicable to foreign private issuers with securities registered under the U.S. securities laws. The final rules provide that any eligible whistleblower who voluntarily provides the SEC with original information that leads to the successful enforcement of an action brought by the SEC under U.S. securities laws must receive an award of between 10 and 30 percent of the total monetary sanctions collected if the sanctions exceed US$1,000,000. An eligible whistleblower is defined as someone who provides information about a possible violation of the securities laws that he or she reasonably believes has occurred, is ongoing, or is about to occur. The possible violation does not need to be material, probably or even likely, but the information must have a “facially plausible relationship to some securities law violation”; frivolous submissions would not qualify. The final rules also prohibit retaliation against the whistleblower. While the final rules do not require employees to first report allegations of wrongdoing through a company’s corporate compliance system, they do seek to incentivize whistleblowers to utilize internal corporate compliance first by, among other things, (i) giving employees who first report information internally the benefit of the internal reporting date for purposes of the SEC program so long as the whistleblower submits the same information to the SEC within 120 days of the initial disclosure; (ii) clarifying that the SEC will consider, as part of the criteria for determining the amount of a whistleblower’s award, whether the whistleblower effectively utilized the company’s corporate compliance program or hindered the function of the program; and (iii) crediting a whistleblower who reports internally first and whose company passes the information along to the SEC, which would mean the whistleblower could receive a potentially higher award for information gathered in an internal investigation initiated as a result of the whistleblower’s internal report.

In addition, the final rules address concerns that the whistleblower rules incentivize officers, directors and those with legal, audit, compliance or similar responsibilities to abuse these positions by making whistleblower complaints to the SEC with respect to information they obtained in these roles by generally providing that information obtained through a communication subject to attorney-client privilege or as a result of legal representation would not be eligible for a whistleblower award unless disclosure would be permitted by attorney conduct rules. Accordingly, officers and directors, auditors and compliance personnel and other persons in similar roles would not be eligible to receive awards for information received in these positions unless (x) they have a reasonable basis to believe that (1) disclosure of the information is necessary to prevent the entity from engaging in conduct that is likely to cause substantial injury to the financial interests of the entity or investors; or (2) the entity is engaging in conduct that will impede an investigation of the misconduct, for example, destroying documents or improperly influencing witnesses; or (y) 120 days have passed since the whistleblower provided the information to senior responsible persons at the entity or 120 days have passed since the whistleblower received the information at a time when these people were already aware of the information.

In Korea, the Act on the Protection of Public Interest Whistleblowers (the “Act on Whistleblowers”) was enacted in March 29, 2011 and became effective on September 30, 2011, and was last amended on July 25, 2015.

April 17, 2018. Under the Act on Whistleblowers, a “conduct detrimental to the public interest” means any conduct falling under the penalty provisions of certain acts or any conduct subject to administrative measures such as cancellation or suspension of an approval or a permit. As the Financial Holding Companies Act is included in the “certain acts” above, any conduct falling under the penalty provisions or subject to administrative measures for a violation of the Financial Holding Companies Act constitutes a “conduct detrimental to the public interest.” Any person deeming that a conduct detrimental to the public interest has been, or is likely to be, committed may make a public interest report to a representative of the organization involved or a relevant investigative agency. The

personal information of a public interest whistleblower shall be kept in confidence, and the measures necessary for personal protection of a public interest whistleblower shall be taken. In addition, any disadvantageous measures against a public interest whistleblower, including discriminatory treatment and delayed payment of wage, are prohibited, and where a public interest report leads to a recovery of, or increase in, revenues of the Government, the public interest whistleblower may be entitled to compensation by the Anti-Corruption and Civil Rights Commission of Korea.

We established a group-wide whistleblower policy in July 2005 and maintain related policies and programs for most of our subsidiaries. For example, Shinhan Bank maintains a whistleblower program named “Shinhan Jikimi,” through which any employee, vendor or customer can raise concerns and report suspicious circumstances in confidence using a variety of channels including the Internet, email, postal mail, facsimile and mobile phones. In addition, Shinhan Bank distributes to its employees a quarterly email notice intended to raise awareness of the whistleblower program and posts relevant informative materials on the company bulletin board. At Shinhan Card and Shinhan Investment, we strive to maintain transparency in every aspect of business activities and provide secure and accessible channels for all related parties to raise concerns and report violations.

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.

Under Korean law, if a company issues stock options amounting to 10% or more of its issued and outstanding shares, only a board of director resolution is required for such issuance if permitted by such company’s articles of incorporation.Under our articles of incorporation, we may also grant stock options, but since April 1, 2010, we have not granted any stock options.

We currently have two equity compensation plans, consisting of a performance share plan for directors and key employees and an employee stock ownership plan for all employees under the Framework Act on Labor Welfare.

In accordance with our internal regulations, performance shares granted to directors are granted pursuant to a resolution by the board of director, subject to the limit amount set by a resolution at the shareholders’ meeting while performance shares granted to key employees are granted pursuant to a resolution by the board of director, without any requirement that the limit amount be approved at the shareholders’ meeting. There are no requirements relating to the granting of performance shares under applicable Korean laws and our articles of incorporation.

Under the Framework Act on Labor Welfare, a Korean company may issue stock options up to 20% of its issued and outstanding shares by a resolution at the shareholders’ meeting, if permitted by the articles of incorporation. Our articles of incorporation does not contain such provision. The equity compensation scheme for the employee stock ownership association is governed by its internal regulations, over which we have no control under Korean law.

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 on Form20-F. We have been in compliance with this requirement in all material respects and plan to submit such affirmation within the prescribed timeline.

 

ITEM 16H.

MINE SAFETY DISCLOSURE

Not applicable.

 

ITEM 17.

FINANCIAL STATEMENTS

We have responded to Item 18 in lieu of responding to this item.

 

ITEM 18.

FINANCIAL STATEMENTS

Reference is made to Item 19(b)19(a) for a list of all financial statements filed as part of this annual report.

 

ITEM 19.

EXHIBITS

 

(a)

Exhibits filed as part of this Annual Report:

See Exhibit Index beginning on page 282288 of this annual report.

 

(b)

Financial Statements filed as part of this Annual Report:

See Index to Financial Statements on pageF-1 of this annual report.

INDEX OF EXHIBITS

 

  1.1  Articles of Incorporation, last amended as of March 23, 2017 27, 2019 (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) of RegulationS-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, 2003, 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, 2007, 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 by Rule13a-14(a) of the Exchange Act
12.2  Certifications of our Chief Financial Officer required by Rule13a-14(a) of the Exchange Act
13.1  Certifications of our Chief Executive Officer required by Rule13a-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 by Rule13a-14(b) and Section 1350 of Chapter 63 of the United States Code (18 U.S.C. 1350)
101  Interactive Data Files (XBRL-Related Documents)

 

†

A fair and accurate translation from Korean into English.

*Incorporated by reference to the registrant’s previous filing on Form20-F (No.001-31798), filed on April 28, 2017.
**

Incorporated by reference to the registrant’s previous filing on Form20-F (No.001-31798), filed on September 15, 2003.

***

Incorporated by reference to the registrant’s previous filing on Form20-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 on Form20-F (No.001-31798), filed on June 30, 2006.

*****

Incorporated by reference to the registrant’s previous filing on Form20-F (No.001-31798), filed on June 29, 2007.

******

Incorporated by reference to registrant’s previous filing on Form20-F (No.001-31798), filed on June 30, 2008.

SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

Date: April 30, 20182019

 

Shinhan Financial Group Co., Ltd.

By:     

/s/ Cho Yong-byoung

 Name: Cho Yong-byoung
 Title:   Chairman and Chief Executive Officer

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

   Page 

Index to Consolidated Financial Statements

   F-1 

Report of Independent Registered Public Accounting Firm

   F-2 

Consolidated Statements of Financial Position

   F-4 

Consolidated Statements of Comprehensive Income

   F-5 

Consolidated Statements of Changes in Equity

   F-7 

Consolidated Statements of Cash Flows

   F-10 

Notes to the Consolidated Financial Statements

   F-12F-14 

LOGO

KPMG Samjong Accounting Corp.

  Gangnam Finance Center 27th Floor,

  152, Teheran-ro, Gangnam-gu, Seoul 06236

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMReport of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

Shinhan Financial Group Co., Ltd.:

Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting

We have audited the accompanying consolidated statements of financial position of Shinhan Financial Group Co., Ltd. and subsidiaries (the “Group”) as of December 31, 20162017 and 2017,2018, the related consolidated statements of comprehensive income, changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2017,2018, and the related notes (collectively, the “consolidated financial statements”). We also have audited the Group’s internal control over financial reporting as of December 31, 2017,2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Group as of December 31, 20162017 and 2017,2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017,2018, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, the Group maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2018 based on criteria established in Internal Control —– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Adoption of IFRS 9 ‘Financial Instruments’

As discussed in Note 2 to the consolidated financial statements, the Group has changed its method of accounting for financial assets and financial liabilities in 2018 due to the adoption of IFRS 9‘Financial Instruments’.

Basis for Opinions

The Group’s management is responsible for these consolidated financial statements, 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 consolidated financial statements and an opinion on the Group’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB) and are required to be independent with respect to the Group in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether theconsolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting 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 audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control Over Financial Reporting

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.

/s/ KPMG Samjong Accounting Corp.

We have served as the Group’s auditor since 2002.

/s/ KPMG Samjong Accounting Corp.

Seoul, Korea

April 30, 20182019

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Consolidated Statements of Financial Position

As of December 31, 20162017 and 20172018

 

(In millions of won)  Note   2016 2017   Note   2017 2018 

Assets

          

Cash and due from banks at amortized cost

   4,8,24,60   W—    17,348,626 

Cash and due from banks

   4,8,20   W19,181,165  22,668,598    4,9,24,60    22,668,598   —   

Financial assets at fair value through profit or loss

   4,10,24,60    —    43,534,766 

Trading assets

   4,9,20    26,695,953  28,464,296    4,11,24,60    28,464,296   —   

Financial assets designated at fair value through profit or loss

   4,10,20    3,416,102  3,579,057 

Financial assets designated at fair value through profit or loss (IAS 39)

   4,12,24,60    3,579,057   —   

Derivative assets

   4,11    3,002,859  3,400,178    4,13,60    3,400,178  1,793,613 

Securities at fair value through other comprehensive income

   4,16,24,60    —    38,314,170 

Available-for-sale financial assets

   4,17,24,60    42,116,937   —   

Securities at amortized cost

   4,16,24,60    —    28,478,136 

Held-to-maturity financial assets

   4,17,24,60    24,990,680   —   

Loans at amortized cost

   4,14,24,60    —    299,609,472 

Loans

   4,12,20    259,010,575  275,565,766    4,15,24,60    275,565,766   —   

Available-for-sale financial assets

   4,13,20    37,662,691  42,116,937 

Held-to-maturity financial assets

   4,13,20    19,805,084  24,990,680 

Property and equipment

   14,20    3,145,613  3,021,772    18,24    3,021,772  3,003,886 

Intangible assets

   15    4,226,512  4,271,969    19,58    4,273,321  4,320,134 

Investments in associates

   16    353,600  631,294    20    631,294  671,330 

Current tax receivable

     12,587  25,015      25,015  45,100 

Deferred tax assets

   42    641,061  592,283    51    592,283  426,965 

Investment property

   17    353,175  418,303    21    418,303  474,820 

Other assets

   4,18,20    18,168,408  16,551,958    4,22,60    16,551,958  21,571,918 

Assets held for sale

     4,939  7,550      7,550  7,574 
    

 

  

 

     

 

  

 

 

Total assets

    W395,680,324  426,305,656     W426,307,008  459,600,510 
    

 

  

 

     

 

  

 

 

Liabilities

          

Deposits

   4,21   W235,137,958  249,419,224    4,25,60   W249,419,224  265,000,190 

Financial liabilities at fair value through profit or loss

   4,26,60    —    1,420,306 

Trading liabilities

   4,22    1,976,760  1,848,490    4,27,60    1,848,490   —   

Financial liabilities designated at fair value through profit or loss

   4,23    9,233,642  8,297,609 

Financial liabilities designated at fair value through profit or loss (IFRS 9)

   4,28,60    —    8,535,800 

Financial liabilities designated at fair value through profit or loss (IAS 39)

   4,29,60    8,297,609   —   

Derivative liabilities

   4,11    3,528,244  3,487,661    4,13,60    3,487,661  2,439,892 

Borrowings

   4,24    25,294,241  27,586,610    4,30,60    27,586,610  29,818,542 

Debt securities issued

   4,25    44,326,785  51,340,821    4,31,60    51,340,821  63,227,699 

Liabilities for defined benefit obligations

   26    130,879  7,144    32    7,144  127,348 

Provisions

   27    728,888  428,958    33    428,958  508,416 

Current tax payable

     272,728  348,830      348,830  430,306 

Deferred tax liabilities

   42    10,638  9,712    51    9,982  22,020 

Liabilities under insurance contracts

   28    22,377,434  24,515,288    34    24,515,288  26,218,882 

Other liabilities

   4,29    20,917,147  25,312,773    4,35,60    25,312,773  25,199,679 
    

 

  

 

     

 

  

 

 

Total liabilities

     363,935,344  392,603,120     W392,603,390  422,949,080 
    

 

  

 

     

 

  

 

 

Equity

   30       36    

Capital stock

     2,645,053  2,645,053     W2,645,053  2,645,053 

Hybrid bonds

     498,316  423,921      423,921  1,531,759 

Capital surplus

     9,887,335  9,887,335      9,887,335  9,895,488 

Capital adjustments

     (458,461)  (398,035)      (398,035)  (552,895) 

Accumulated other comprehensive loss

     (102,583)  (529,734)    60    (529,734)  (753,220) 

Retained earnings

     18,640,038  20,790,599    57,60    20,791,681  22,959,440 
    

 

  

 

     

 

  

 

 

Total equity attributable to equity holders of Shinhan Financial Group Co., Ltd.

     31,109,698  32,819,139      32,820,221  35,725,625 

Non-controlling interests

     635,282  883,397      883,397  925,805 
    

 

  

 

     

 

  

 

 

Total equity

     31,744,980  33,702,536      33,703,618  36,651,430 
    

 

  

 

     

 

  

 

 

Total liabilities and equity

    W395,680,324  426,305,656     W426,307,008  459,600,510 
    

 

  

 

     

 

  

 

 

See accompanying notes to the consolidated financial statements.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

For the years ended December 31, 2015, 2016, 2017 and 20172018

 

(In millions of won)  Notes   2015 2016 2017  Notes   2016 2017 2018 

Interest income

    W11,129,704  11,236,302  11,798,654    W11,236,302  11,798,654  13,572,456 

Interest expense

     (4,436,771)  (4,030,936)  (3,955,701)     (4,030,936)  (3,955,701)  (4,992,367) 
    

 

  

 

  

 

    

 

  

 

  

 

 

Net interest income

   32    6,692,933  7,205,366  7,842,953  38    7,205,366  7,842,953  8,580,089 
    

 

  

 

  

 

    

 

  

 

  

 

 

Fees and commission income

     3,896,529  3,803,596  4,044,955     3,803,596  4,044,955  3,295,256 

Fees and commission expense

     (2,275,550)  (2,238,057)  (2,334,001)     (2,238,057)  (2,334,001)  (1,356,259) 
    

 

  

 

  

 

    

 

  

 

  

 

 

Net fees and commission income

   33    1,620,979  1,565,539  1,710,954  39    1,565,539  1,710,954  1,938,997 
    

 

  

 

  

 

    

 

  

 

  

 

 

Insurance income

     4,447,828  4,586,098  4,599,808     4,586,098  4,599,808  4,398,738 

Insurance expenses

     (4,879,989)  (5,004,602)  (5,059,847)     (5,004,602)  (5,059,847)  (4,870,437) 
    

 

  

 

  

 

    

 

  

 

  

 

 

Net insurance loss

   28    (432,161)  (418,504)  (460,039)  34    (418,504)  (460,039)  (471,699) 
    

 

  

 

  

 

    

 

  

 

  

 

 

Dividend income

   34    308,277  281,623  257,306  40    281,623  257,306  87,826 

Net trading income (loss)

   35    (344,098)  369,510  963,223 

Net gain on financial instruments at fair value through profit or loss

 41    —     —    420,026 

Net gain on financial instruments at fair value through profit or loss (overlay approach)

 10    —     —    74,944 

Net trading income

 42    369,510  963,223   —   

Net loss on financial instruments designated at fair value through profit or loss

 43    —     —    (26,643) 

Net gain (loss) on financial instruments designated at fair value through profit or loss

 44    (501,955)  (1,059,826)   —   

Net foreign currency transaction gain

     78,236  461,671  364,006     461,671  364,006  194,136 

Net gain (loss) on financial instruments designated at fair value through profit or loss

   36    459,765  (501,955)  (1,059,826) 

Net gain on disposal of financial asset at fair value through other comprehensive income

 16    —     —    20,554 

Net gain on disposal ofavailable-for-sale financial assets

   13    772,474  647,541  499,187  17    647,541  499,187   —   

Impairment losses on financial assets

   37    (1,264,053)  (1,195,663)  (1,014,899) 

General and administrative expenses

   38    (4,475,068)  (4,508,575)  (4,811,198) 

Net loss on disposal of securities at amortized cost

 16    —     —    (9) 

Provision for credit loss allowance

 45    —     —    (747,877) 

Impairment loss on financial assets

 46    (1,195,663)  (1,013,548)   —   

General and administrative expense

 47    (4,508,575)  (4,811,198)  (4,741,575) 

Other operating expenses, net

   40    (444,143)  (797,911)  (462,992)  49    (797,911)  (462,992)  (829,355) 
    

 

  

 

  

 

    

 

  

 

  

 

 

Operating income

     2,973,141  3,108,642  3,828,675     3,108,642  3,830,026  4,499,414 

Equity method income

   16    20,971  9,995  20,393  20    9,995  20,393  17,488 

Othernon-operating income (loss), net

   41    146,465  51,835  (52,811) 

Othernon-operating income (expense), net

 50    51,835  (52,811)  (50,292) 
    

 

  

 

  

 

    

 

  

 

  

 

 

Profit before income taxes

     3,140,577  3,170,472  3,796,257     3,170,472  3,797,608  4,466,610 
    

 

  

 

  

 

    

 

  

 

  

 

 

Income tax expense

   42    694,619  345,553  848,133  51    345,553  848,403  1,268,345 
    

 

  

 

  

 

    

 

  

 

  

 

 

Profit for the year

    W2,445,958  2,824,919  2,948,124    W2,824,919  2,949,205  3,198,265 
    

 

  

 

  

 

    

 

  

 

  

 

 

 

See accompanying notes to the consolidated financial statements.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Continued)

For the years ended December 31, 2015, 2016, 2017 and 20172018

 

(In millions of won, except earnings per share)  Notes   2015  2016  2017 

Other comprehensive income (loss) for the year, net of income tax

      

Items that are or may be reclassified to profit or loss:

      

Foreign currency translation adjustments for foreign operations

    W(6,469)   12,103   (194,172) 

Net change in unrealized fair value ofavailable-for-sale financial assets

     (265,990)   (433,657)   (323,127) 

Equity in other comprehensive income (loss) of associates

     11,854   2,691   (22,813) 

Net change in unrealized fair value of cash flow hedges

     2,932   (1,262)   15,904 

Other comprehensive income (loss) of separate account

     3,092   (4,330)   (9,278) 
    

 

 

  

 

 

  

 

 

 
     (254,581)   (424,455)   (533,486) 

Items that will never be reclassified to profit or loss:

      

Remeasurements of the defined benefit liability

     (81,813)   15,307   103,525 

Equity in other comprehensive income (loss) of associates

     (230)   (2)   847 
    

 

 

  

 

 

  

 

 

 
     (82,043)   15,305   104,372 
    

 

 

  

 

 

  

 

 

 

Total other comprehensive loss, net of income tax

   30    (336,624)   (409,150)   (429,114) 
    

 

 

  

 

 

  

 

 

 

Total comprehensive income for the year

    W2,109,334   2,415,769   2,519,010 
    

 

 

  

 

 

  

 

 

 

Profit for the year attributable to:

      

Equity holders of Shinhan Financial Group Co., Ltd.

   30,43   W2,367,171   2,774,778   2,917,735 

Non-controlling interest

     78,787   50,141   30,389 
    

 

 

  

 

 

  

 

 

 
    W2,445,958   2,824,919   2,948,124 
    

 

 

  

 

 

  

 

 

 

Total comprehensive income attributable to:

      

Equity holders of Shinhan Financial Group Co., Ltd.

    W2,034,048   2,367,062   2,490,170 

Non-controlling interest

     75,286   48,707   28,840 
    

 

 

  

 

 

  

 

 

 
    W2,109,334   2,415,769   2,519,010 
    

 

 

  

 

 

  

 

 

 

Earnings per share:

   30,43     

Basic and diluted earnings per share in won

    W4,789   5,736   6,116 
    

 

 

  

 

 

  

 

 

 

See accompanying notes to the consolidated financial statements.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Consolidated Statements of Changes in Equity

For the year ended December 31, 2015, 2016 and 2017

(In millions of won) Equity attributable to equity holders of Shinhan Financial Group Co., Ltd.  Non-
controlling
interests		  Total 
  Capital
stock		  Hybrid
bonds		  Capital
surplus		  Capital
adjustments		  Accumulated
other compre-
hensive income		  Retained
earnings		  Sub-total   

Balance at January 1, 2015

 W2,645,053   537,443   9,887,335   (393,405)   637,894   15,869,779   29,184,099   1,330,809   30,514,908 

Total comprehensive income for the year

         

Profit for the year

  —     —     —     —     —     2,367,171   2,367,171   78,787   2,445,958 

Other comprehensive income (loss), net of income tax:

         

Foreign currency translation adjustments

  —     —     —     —     (5,630)   —     (5,630)   (839)   (6,469) 

Net change in unrealized fair value ofavailable-for-sale financial assets

  —     —     —     —     (265,910)   —     (265,910)   (80)   (265,990) 

Equity in other comprehensive income of associates

  —     —     —     —     11,624   —     11,624   —     11,624 

Net change in unrealized fair value of cash flow hedges

  —     —     —     —     2,932   —     2,932   —     2,932 

Other comprehensive income of separate account

  —     —     —     —     3,092   —     3,092   —     3,092 

Remeasurements of defined benefit plans

  —     —     —     —     (79,231)   —     (79,231)   (2,582)   (81,813) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total other comprehensive loss

  —     —     —     —     (333,123)   —     (333,123)   (3,501)   (336,624) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total comprehensive income (loss)

  —     —     —     —     (333,123)   2,367,171   2,034,048   75,286   2,109,334 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Other changes in equity

         

Dividends

  —     —     —     —     —     (512,428)   (512,428)   —     (512,428) 

Dividends to hybrid bonds

  —     —     —     —     —     (34,488)   (34,488)   —     (34,488) 

Issuance of hybrid bonds

  —     199,455   —     —     —     —     199,455   —     199,455 

Change in other capital adjustments

  —     —     —     (30,131)   —     (900)   (31,031)   —     (31,031) 

Redemption of subsidiary’s hybrid bond and other change innon-controlling interests

  —     —     —     —     —     —     —     (432,694)   (432,694) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  —     199,455   —     (30,131)   —     (547,816)   (378,492)   (432,694)   (811,186) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at December 31, 2015

 W2,645,053   736,898   9,887,335   (423,536)   304,771   17,689,134   30,839,655   973,401   31,813,056 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(In millions of won, except earnings per share) Notes   2016  2017  2018 

Other comprehensive income (loss) for the year, net of income tax

     

Items that are or may be reclassified to profit or loss:

     

Gain on financial asset at fair value through other comprehensive income

   W—     —     161,008 

Loss on financial instruments at fair value through profit or loss (overlay approach)

  10    —     —     (54,333) 

Gain (loss) onavailable-for-sale financial assets

    (433,657)   (323,127)   —   

Equity in other comprehensive income (loss) of associates

    2,691   (22,813)   7,407 

Foreign currency translation adjustments for foreign operations

    12,103   (194,172)   19,983 

Net change in unrealized fair value of cash flow hedges

    (1,262)   15,904   (20,192) 

Other comprehensive income (loss) of separate account

    (4,330)   (9,278)   8,676 
   

 

 

  

 

 

  

 

 

 
    (424,455)   (533,486)   122,549 

Items that will never be reclassified to profit or loss:

     

Remeasurements of the defined benefit liability

    15,307   103,525   (93,098) 

Equity in other comprehensive income (loss) of associates

    (2)   847   28 

Valuation gain on financial asset at fair value through other comprehensive income

    —     —     22,725 

Loss on disposal of financial asset at fair value through other comprehensive income

    —     —     (2,635) 

Changes in own credit risk on financial liabilities designated at fair value through profit of loss

    —     —     1,723 
   

 

 

  

 

 

  

 

 

 
    15,305   104,372   (71,257) 
   

 

 

  

 

 

  

 

 

 

Total other comprehensive loss, net of income tax

  36    (409,150)   (429,114)   51,292 
   

 

 

  

 

 

  

 

 

 

Total comprehensive income for the year

   W2,415,769   2,520,091   3,249,557 
   

 

 

  

 

 

  

 

 

 

Profit for the year attributable to:

     

Equity holders of Shinhan Financial Group Co., Ltd.

  36,52   W2,774,778   2,918,816   3,156,722 

Non-controlling interest

    50,141   30,389   41,543 
   

 

 

  

 

 

  

 

 

 
   W2,824,919   2,949,205   3,198,265 
   

 

 

  

 

 

  

 

 

 

Total comprehensive income attributable to:

     

Equity holders of Shinhan Financial Group Co., Ltd.

   W2,367,062   2,491,251   3,207,602 

Non-controlling interest

    48,707   28,840   41,955 
   

 

 

  

 

 

  

 

 

 
   W2,415,769   2,520,091   3,249,557 
   

 

 

  

 

 

  

 

 

 

Earnings per share:

  36,52     

Basic and diluted earnings per share in won

   W5,736   6,118   6,579 
   

 

 

  

 

 

  

 

 

 

See accompanying notes to the consolidated financial statements.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Consolidated Statements of Changes in Equity (Continued)

For the yearyears ended December 31, 2015, 2016, 2017 and 20172018

 

(In millions of won) Equity attributable to equity holders of Shinhan Financial Group Co., Ltd. Non-
controlling
interests		  Total  Equity attributable to equity holders of Shinhan Financial Group Co., Ltd.     
 Capital
stock		 Hybrid
bonds		 Capital
surplus		 Capital
adjustments		 Accumulated
other compre-
hensive income		 Retained
earnings		 Sub-total  Capital
stock		 Hybrid
bonds		 Capital
surplus		 Capital
adjustments		 Accumulated
other compre-
hensive income		 Retained
earnings		 Sub-total Non-
controlling
interests		 Total 

Balance at January 1, 2016

 W2,645,053  736,898  9,887,335  (423,536)  304,771  17,689,134  30,839,655  973,401  31,813,056  W2,645,053  736,898  9,887,335  (423,536)  304,771  17,689,134  30,839,655  973,401  31,813,056 

Total comprehensive income for the year

                  

Profit for the year

  —     —     —     —     —    2,774,778  2,774,778  50,141  2,824,919   —     —     —     —     —    2,774,778  2,774,778  50,141  2,824,919 

Other comprehensive income (loss), net of income tax:

                  

Foreign currency translation adjustments

  —     —     —     —    12,012   —    12,012  91  12,103   —     —     —     —    12,012   —    12,012  91  12,103 

Net change in unrealized fair value ofavailable-for-sale financial assets

  —     —     —     —    (432,530)   —    (432,530)  (1,127)  (433,657)   —     —     —     —    (432,530)   —    (432,530)  (1,127)  (433,657) 

Equity in other comprehensive income of associates

  —     —     —     —    2,689   —    2,689   —    2,689   —     —     —     —    2,689   —    2,689   —    2,689 

Net change in unrealized fair value of cash flow hedges

  —     —     —     —    (1,262)   —    (1,262)   —    (1,262)   —     —     —     —    (1,262)   —    (1,262)   —    (1,262) 

Other comprehensive income of separate account

  —     —     —     —    (4,330)   —    (4,330)   —    (4,330)   —     —     —     —    (4,330)   —    (4,330)   —    (4,330) 

Remeasurements of defined benefit plans

  —     —     —     —    15,705   —    15,705  (398)  15,307   —     —     —     —    15,705   —    15,705  (398)  15,307 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total other comprehensive loss

  —     —     —     —    (407,716)   —    (407,716)  (1,434)  (409,150)   —     —     —     —    (407,716)   —    (407,716)  (1,434)  (409,150) 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total comprehensive income (loss)

  —     —     —     —    (407,716)  2,774,778  2,367,062  48,707  2,415,769   —     —     —     —    (407,716)  2,774,778  2,367,062  48,707  2,415,769 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Other changes in equity

                  

Dividends

  —     —     —     —     —    (630,978)  (630,978)   —    (630,978)   —     —     —     —     —    (630,978)  (630,978)   —    (630,978) 

Dividends to hybrid bonds

  —     —     —     —     —    (36,091)  (36,091)   —    (36,091)   —     —     —     —     —    (36,091)  (36,091)   —    (36,091) 

Redemption of hybrid bonds

  —    (238,582)   —    (1,418)   —     —    (240,000)   —    (240,000)   —    (238,582)   —    (1,418)   —     —    (240,000)   —    (240,000) 

Redemption of preferred stock

  —     —     —     —     —    (1,125,906)  (1,125,906)   —    (1,125,906)   —     —     —     —     —    (1,125,906)  (1,125,906)   —    (1,125,906) 

Change in other capital adjustments

  —     —     —    (33,507)  362  (30,899)  (64,044)   —    (64,044)   —     —     —    (33,507)  362  (30,899)  (64,044)   —    (64,044) 

Redemption of subsidiary’s hybrid bond and other change innon-controlling interests

  —     —     —     —     —     —     —    (386,826)  (386,826)   —     —     —     —     —     —     —    (386,826)  (386,826) 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 
  —    (238,582)   —    (34,925)  362  (1,823,874)  (2,097,019)  (386,826)  (2,483,845)   —    (238,582)   —    (34,925)  362  (1,823,874)  (2,097,019)  (386,826)  (2,483,845) 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Balance at December 31, 2016

 W2,645,053  498,316  9,887,335  (458,461)  (102,583)  18,640,038  31,109,698  635,282  31,744,980 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

 

See accompanying notes to the consolidated financial statements

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Consolidated Statements of Changes in Equity (Continued)

For the yearyears ended December 31, 2015, 2016, 2017 and 20172018

 

(In millions of won) Equity attributable to equity holders of Shinhan Financial Group Co., Ltd. Non-
controlling
interests		  Total  Equity attributable to equity holders of Shinhan Financial Group Co., Ltd.     
 Capital
stock		 Hybrid
bonds		 Capital
surplus		 Capital
adjustments		 Accumulated
other compre-
hensive income		 Retained
earnings		 Sub-total Non-
controlling
interests		 Total 

Balance at December 31, 2016

 W2,645,053  498,316  9,887,335  (458,461)  (102,583)  18,640,038  31,109,698  635,282  31,744,980 
 Capital
stock		 Hybrid
bonds		 Capital
surplus		 Capital
adjustments		 Accumulated
other compre-
hensive income		 Retained
earnings		 Sub-total Non-
controlling
interests		  Total  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Balance at January 1, 2017

 W2,645,053  498,316  9,887,335  (458,461)  (102,583)  18,640,038  31,109,698   W2,645,053  498,316  9,887,335  (458,461)  (102,583)  18,640,038  31,109,698  635,282  31,744,980 

Total comprehensive income for the period

                  

Profit for the year

  —     —     —     —     —    2,917,735  2,917,735  30,389  2,948,124   —     —     —     —     —    2,918,816  2,918,816  30,389  2,949,205 

Other comprehensive income (loss),net of income tax:

                  

Foreign currency translation adjustments

  —     —     —     —    (193,474)   —    (193,474)  (698)  (194,172)   —     —     —     —    (193,474)   —    (193,474)  (698)  (194,172) 

Net change in unrealized fair value ofavailable-for-sale financial assets

  —     —     —     —    (322,056)   —    (322,056)  (1,071)  (323,127)   —     —     —     —    (322,056)   —    (322,056)  (1,071)  (323,127) 

Equity in other comprehensive loss of associates

  —     —     —     —    (21,552)  (414)  (21,966)   —    (21,966)   —     —     —     —    (21,552)  (414)  (21,966)   —    (21,966) 

Net change in unrealized fair value of cash flow hedges

  —     —     —     —    15,904   —    15,904   —    15,904   —     —     —     —    15,904   —    15,904   —    15,904 

Other comprehensive income of separate account

  —     —     —     —    (9,278)   —    (9,278)   —    (9,278)   —     —     —     —    (9,278)   —    (9,278)   —    (9,278) 

Remeasurements of defined benefit plans

  —     —     —     —    103,305   —    103,305  220  103,525   —     —     —     —    103,305   —    103,305  220  103,525 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total other comprehensive loss

  —     —     —     —    (427,151)  (414)  (427,565)  (1,549)  (429,114)   —     —     —     —    (427,151)  (414)  (427,565)  (1,549)  (429,114) 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total comprehensive income (loss)

  —     —     —     —    (427,151)  2,917,321  2,490,170  28,840  2,519,010   —     —     —     —    (427,151)  2,918,402  2,491,251  28,840  2,520,091 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Other changes in equity

                  

Dividends

  —     —     —     —     —    (687,589)  (687,589)   —    (687,589)   —     —     —     —     —    (687,589)  (687,589)   —    (687,589) 

Dividends to hybrid bonds

  —     —     —     —     —    (17,678)  (17,678)   —    (17,678)   —     —     —     —     —    (17,678)  (17,678)   —    (17,678) 

Issuance of hybrid bonds

  —    224,466   —     —     —     —    224,466   —    224,466   —    224,466   —     —     —     —    224,466   —    224,466 

Redemption of hybrid bond

  —    (298,861)   —    (1,139)   —     —    (300,000)   —    (300,000)   —    (298,861)   —    (1,139)   —     —    (300,000)   —    (300,000) 

Change in other capital adjustments

  —     —     —    61,565   —    (61,493)  72   —    72   —     —     —    61,565   —    (61,493)  72   —    72 

Change in othernon-controlling interests

  —     —     —     —     —     —     —    219,275  219,275   —     —     —     —     —     —     —    219,275  219,275 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 
  —    (74,395)   —    60,426   —    (766,760)  (780,729)  219,275  (561,454)   —    (74,395)   —    60,426   —    (766,760)  (780,729)  219,275  (561,454) 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Balance at December 31, 2017

 W2,645,053  423,921  9,887,335  (398,035)  (529,734)  20,790,599  32,819,139  883,397  33,702,536 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

See accompanying notes to the consolidated financial statements

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Consolidated Statements of Changes in Equity (Continued)

For the years ended December 31, 2016, 2017 and 2018

(In millions of won) Equity attributable to equity holders of Shinhan Financial Group Co., Ltd.       
  Capital
stock		  Hybrid
bonds		  Capital
surplus		  Capital
adjustments		  Accumulated
other compre-
hensive income		  Retained
earnings		  Sub-total  Non-
controlling
interests		  Total 

Balance at December 31, 2017

 W2,645,053   423,921   9,887,335   (398,035)   (529,734)   20,791,680   32,820,220   883,397   33,703,617 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at January 1, 2018

 W2,645,053   423,921   9,887,335   (398,035)   (529,734)   20,791,680   32,820,220   883,397   33,703,617 

Adoption effect of IFRS 9 and 15, net of tax (Note 60)

  —     —     —     —     (277,011)   (251,854)   (528,865)   (3,155)   (532,020) 

Balance at January 1, 2018 (adjusted)

  2,645,053   423,921   9,887,335   (398,035)   (806,745)   20,539,826   32,291,355   880,242   33,171,597 

Total comprehensive income for the year

         

Profit for the year

  —     —     —     —     —     3,156,722   3,156,722   41,543   3,198,265 

Other comprehensive income (loss), net of income tax:

         

Gain on financial asset at fair value through other comprehensive income

  —     —     —     —     179,793   —     179,793   1,305   181,098 

Loss on financial instrument at fair value through profit or loss (overlay approach)

  —     —     —     —     (54,333)   —     (54,333)   —     (54,333) 

Foreign currency translation adjustments

  —     —     —     —     20,465   —     20,465   (482)   19,983 

Equity in other comprehensive income of associates

  —     —     —     —     7,435   —     7,435   —     7,435 

Net change in unrealized fair value of cash flow hedges

  —     —     —     —     (20,192)   —     (20,192)   —     (20,192) 

Other comprehensive income of separate account

  —     —     —     —     8,676   —     8,676   —     8,676 

Remeasurements of defined benefit plans

  —     —     —     —     (92,687)   —     (92,687)   (411)   (93,098) 

Changes in own credit risk on financial liabilities designated at fair value through profit or loss

  —     —     —     —     1,723   —     1,723   —     1,723 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total other comprehensive loss

  —     —     —     —     50,880   —     50,880   412   51,292 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total comprehensive income (loss)

 W—     —     —     —     50,880   3,156,722   3,207,602   41,955   3,249,557 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Other changes in equity

         

Dividends

 W—     —     —     —     —     (687,589)   (687,589)   —     (687,589) 

Dividends to hybrid bonds

  —     —     —     —     —     (40,357)   (40,357)   —     (40,357) 

Issuance of hybrid bonds

  —     1,107,838   —     —     —     —     1,107,838   —     1,107,838 

Acquisition of treasury stock

  —     —     —     (155,923)   —     —     (155,923)   —     (155,923) 

Change in other capital adjustments

  —     —     8,153   1,063   —     (6,517)   2,699   —     2,699 

Change in othernon-controlling interests

  —     —     —     —     —     —     —     3,608   3,608 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  —     1,107,838   8,153   (154,860)   —     (734,463)   226,668   3,608   230,276 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Reclassification of OCI retained earnings

  —     —     —     —     2,645   (2,645)   —     —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at December 31, 2018

 W2,645,053   1,531,759   9,895,488   (552,895)   (753,220)   22,959,440   35,725,625   925,805   36,651,430 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

See accompanying notes to the consolidated financial statements.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the years ended December 31, 2015, 2016, 2017 and 20172018

 

(In millions of won)  Notes   2015 2016 2017   Notes   2016 2017 2018 

Cash flows from operating activities

            

Profit before income taxes

    W3,140,577  3,170,472  3,796,257     W3,170,472  3,797,608  4,466,610 

Adjustments for:

            

Interest income

   32    (11,129,704)  (11,236,302)  (11,798,654)    38    (11,236,302)  (11,798,654)  (13,572,456) 

Interest expense

   32    4,436,771  4,030,936  3,955,701    39    4,030,936  3,955,701  4,992,367 

Dividend income

   34    (308,277)  (281,623)  (257,306)    40    (281,623)  (257,306)  (87,826) 

Net fees and commission expense

     168,313  166,216  169,640      166,216  169,640  176,932 

Net insurance loss

     2,714,061  2,779,710  2,571,094      2,779,710  2,571,094  2,080,509 

Net loss on financial instruments at fair value through profit or loss

   41    —     —    66,455 

Net gain on financial instruments at fair value through profit or loss (overlay approach)

   10    —     —    (74,944) 

Net trading loss (gain)

   35    751,811  48,363  (334,133)    42    48,363  (334,133)   —   

Net foreign currency translation loss (gain)

     163,417  (248,844)  (87,384)      (248,844)  (87,384)  377,632 

Net loss (gain) on financial instruments designated at fair value through profit or loss

   36    (748,959)  147,813  231,772 

Net gain on financial instrument designated at fair value through profit or loss

   43    —     —    (382,667) 

Net loss on financial instruments designated at fair value through profit or loss

   44    147,813  231,772   —   

Net gain on disposal of financial asset at fair value through other comprehensive income

   16    —     —    (20,554) 

Net gain on disposal ofavailable-for-sale financial assets

   13    (772,474)  (647,541)  (499,187)    17    (647,541)  (499,187)   —   

Net loss on disposal of securities at amortized cost

   16    —     —    9 

Provision for credit loss allowance

   45    —     —    747,877 

Provision for credit losses

   37    1,021,711  1,107,633  816,600    46    1,107,633  815,249   —   

Impairment losses on other financial assets

   37    242,342  88,030  198,299    46    88,030  198,299   —   

Employee costs

     185,222  203,639  232,709      203,639  232,709  155,672 

Depreciation and amortization

   38    278,882  259,941  253,344    47    259,941  253,344  301,916 

Other operating expense (income)

     (623,639)  70,236  602,027      70,236  602,027  (278,274) 

Equity method income, net

   16    (20,971)  (9,995)  (20,393)    20    (9,995)  (20,393)  (17,488) 

Othernon-operating expense (income), net

     (18,463)  598  (29,080)      598  (29,080)  3,147 
    

 

  

 

  

 

     

 

  

 

  

 

 
     (3,659,957)  (3,521,190)  (3,994,951)     W(3,521,190)  (3,996,302)  (5,531,693) 
    

 

  

 

  

 

     

 

  

 

  

 

 

Changes in assets and liabilities:

      

Due from banks

     (1,926,814)  3,937,005  (3,347,818) 

Trading assets and liabilities

     1,583,631  (4,343,206)  (1,706,990) 

Financial instruments designated at fair value through profit or loss

     210,582  (2,439)  (1,300,760) 

Derivative instruments

     (382,276)  (340,831)  (488,706) 

Loans

     (24,731,045)  (11,351,121)  (19,232,732) 

Other assets

     (3,562,267)  (4,627,748)  (250,806) 

Deposits

     23,246,539  16,771,470  15,632,957 

Liabilities for defined benefit obligations

     (347,926)  (261,550)  (178,054) 

Provisions

     (71,272)  (77,514)  (69,584) 

Other liabilities

     3,578,899  (2,333,634)  4,845,053 
    

 

  

 

  

 

 
     (2,401,949)  (2,629,568)  (6,097,440) 
    

 

  

 

  

 

 

Income taxes paid

     (640,393)  (561,604)  (664,286) 

Interest received

     10,921,869  11,109,313  11,425,960 

Interest paid

     (4,700,685)  (4,080,122)  (3,710,093) 

Dividends received

     310,852  309,876  265,887 
    

 

  

 

  

 

 

Net cash provided by operating activities

    W2,970,314  3,797,177  1,021,334 
    

 

  

 

  

 

 

 

See accompanying notes to the consolidated financial statements.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Continued)

For the years ended December 31, 2015, 2016, 2017 and 20172018

 

(In millions of won)  Notes   2015  2016  2017 

Cash flows from investing activities

      

Proceeds from disposal ofavailable-for-sale financial assets

    W31,592,380   29,242,921   29,638,281 

Acquisition ofavailable-for-sale financial assets

     (33,755,811)   (32,844,558)   (34,703,066) 

Proceeds from disposal ofheld-to-maturity financial assets

     2,414,031   1,839,275   1,712,326 

Acquisition ofheld-to-maturity financial assets

     (5,150,329)   (5,277,451)   (7,033,310) 

Proceeds from disposal of property and equipment

   14,41    8,760   5,793   11,459 

Acquisition of property and equipment

   14    (124,844)   (252,084)   (155,186) 

Proceeds from disposal of intangible assets

   15,41    5,463   8,268   9,286 

Acquisition of intangible assets

   15    (132,636)   (88,876)   (111,257) 

Proceeds from disposal of investments in associates

     35,396   67,082   163,649 

Acquisition of investments in associates

     (30,927)   (145,119)   (380,213) 

Proceeds from disposal of investment property

   17,41    16,171   22,900   4,869 

Acquisition of investment property

   17    (10,296)   (176,204)   (2,125) 

Proceeds from disposal of assets held for sale

     88,235   2,213   10,466 

Proceeds from settlement of hedging derivative financial instruments foravailable-for-sale financial assets

     5,000   27,265   85,616 

Payment for settlement of hedging derivative financial instruments foravailable-for-sale financial assets

     (63,847)   (69,175)   (27,629) 

Business combination, net of cash acquired (used)

   49    (163,172)   (4,280)   83,631 

Other, net

     (22,173)   48,156   (10,435) 
    

 

 

  

 

 

  

 

 

 

Net cash used in investing activities

     (5,288,599)   (7,593,874)   (10,703,638) 
    

 

 

  

 

 

  

 

 

 

Cash flows from financing activities

      

Issuance of hybrid bonds

     199,455   —     224,466 

Redemption of hybrid bonds

     —     (240,000)   (300,000) 

Net increase (decrease) in borrowings

     (1,557,883)   3,389,832   3,047,844 

Proceeds from debt securities issued

     16,512,720   15,916,866   20,006,957 

Repayments of debt securities issued

     (12,867,244)   (11,988,965)   (12,222,815) 

Dividends paid

     (546,160)   (669,103)   (706,565) 

Proceeds from settlement of hedging derivative financial instruments for debt securities issued

     23,270   15,414   65,220 

Payment for settlement of hedging derivative financial instruments for debt securities issued

     (17,342)   (1,486)   (6,509) 

Redemption of preferred stock

     —     (1,125,906)   —   

Increase (decrease) innon-controlling interests

     (426,808)   (451,208)   215,357 

Other, net

     (7,258)   (824)   8,498 
    

 

 

  

 

 

  

 

 

 

Net cash provided by financing activities

     1,312,750   4,844,620   10,332,453 
    

 

 

  

 

 

  

 

 

 

Effect of exchange rate fluctuations on cash and cash equivalents held

     8,375   (22,638)   (46,035) 
    

 

 

  

 

 

  

 

 

 

Increase (decrease) in cash and cash equivalents

     (997,160)   1,025,285   604,114 
    

 

 

  

 

 

  

 

 

 

Cash and cash equivalents at beginning of year

   45    5,604,411   4,607,251   5,632,536 
    

 

 

  

 

 

  

 

 

 

Cash and cash equivalents at end of year

   45   W4,607,251   5,632,536   6,236,650 
    

 

 

  

 

 

  

 

 

 
(In millions of won)  Notes   2016  2017  2018 

Changes in assets and liabilities:

      

Cash and due from banks at amortized cost

    W—     —     6,024,743 

Due from banks

     3,937,005   (3,347,818)   —   

Securities at fair value through profit or loss

     —     —     (3,082,516) 

Due from banks at fair value through profit or loss

     —     —     (82,014) 

Loans at fair value through profit or loss

     —     —     (422,326) 

Trading assets and liabilities

     (4,343,206)   (1,706,990)   —   

Financial asset designated at fair value through profit or loss (IFRS 9)

     —     —     723,037 

Financial instruments designated at fair value through profit or loss (IAS 39)

     (2,439)   (1,300,760)   —   

Derivative instruments

     (340,831)   (488,706)   203,006 

Loans at amortized cost

     —     —     (27,547,413) 

Loans

     (11,351,121)   (19,232,732)   —   

Other assets

     (4,627,748)   (250,806)   (5,177,725) 

Deposits

     16,771,470   15,632,957   16,699,467 

Liabilities for defined benefit obligations

     (261,550)   (178,054)   (145,639) 

Provisions

     (77,514)   (69,584)   14,542 

Other liabilities

     (2,333,634)   4,845,053   174,590 
    

 

 

  

 

 

  

 

 

 
     (2,629,568)   (6,097,440)   (12,618,248) 
    

 

 

  

 

 

  

 

 

 

Income taxes paid

     (561,604)   (664,286)   (850,696) 

Interest received

     11,109,313   11,425,960   13,208,601 

Interest paid

     (4,080,122)   (3,710,093)   (5,058,596) 

Dividends received

     309,876   265,887   63,826 
    

 

 

  

 

 

  

 

 

 

Net cash provided by operating activities

    W3,797,177   1,021,334   (6,320,196) 
    

 

 

  

 

 

  

 

 

 

See accompanying notes to the consolidated financial statements.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Continued)

For the years ended December 31, 2016, 2017 and 2018

(In millions of won)  Notes   2016  2017  2018 

Cash flows from investing activities

      

Decrease in financial instruments at fair value through profit or loss

    W—     —     2,150,860 

Increase in financial instruments at fair value through profit or loss

     —     —     (3,290,960) 

Proceeds from disposal of financial assets at fair value through other comprehensive income

     —     —     27,074,948 

Acquisition of financial assets at fair value through other comprehensive income

     —     —     (27,037,290) 

Proceeds from disposal ofavailable-for-sale financial assets

     29,242,921   29,638,281   —   

Acquisition ofavailable-for-sale financial assets

     (32,844,558)   (34,703,066)   —   

Proceeds from disposal of financial assets at amortized cost

     —     —     2,093,506 

Acquisition of financial assets at amortized cost

     —     —     (5,836,342) 

Proceeds from disposal ofheld-to-maturity financial assets

     1,839,275   1,712,326   —   

Acquisition ofheld-to-maturity financial assets

     (5,277,451)   (7,033,310)   —   

Proceeds from disposal of property and equipment

   18,50    5,793   11,459   39,202 

Acquisition of property and equipment

   18    (252,084)   (155,186)   (142,933) 

Proceeds from disposal of intangible assets

   19,50    8,268   9,286   3,638 

Acquisition of intangible assets

   19    (88,876)   (111,257)   (157,160) 

Proceeds from disposal of investments in associates

     67,082   163,649   189,118 

Acquisition of investments in associates

     (145,119)   (380,213)   (227,914) 

Proceeds from disposal of investment property

   21,50    22,900   4,869   15,433 

Acquisition of investment property

   21    (176,204)   (2,125)   (115,333) 

Proceeds from disposal of assets held for sale

     2,213   10,466   4,498 

Proceeds from settlement of hedging derivative financial instruments foravailable-for-sale financial assets

     27,265   85,616   67,039 

Payment for settlement of hedging derivative financial instruments foravailable-for-sale financial assets

     (69,175)   (27,629)   (26,653) 

Business combination, net of cash acquired (used)

   57,58    (4,280)   83,631   (4,498) 

Other, net

     48,156   (10,435)   (311,744) 
    

 

 

  

 

 

  

 

 

 

Net cash used in investing activities

    W(7,593,874)   (10,703,638)   (5,512,585) 
    

 

 

  

 

 

  

 

 

 

See accompanying notes to the consolidated financial statements.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Continued)

For the years ended December 31, 2016, 2017 and 2018

(In millions of won)  Notes   2016  2017  2018 

Cash flows from financing activities

      

Issuance of hybrid bonds

    W—     224,466   1,107,838 

Redemption of hybrid bonds

     (240,000)   (300,000)   —   

Net increase (decrease) in borrowings

     3,389,832   3,047,844   1,772,203 

Proceeds from debt securities issued

     15,916,866   20,006,957   26,487,712 

Repayments of debt securities issued

     (11,988,965)   (12,222,815)   (14,689,246) 

Dividends paid

     (669,103)   (706,565)   (714,705) 

Proceeds from settlement of hedging derivative financial instruments for debt securities issued

     15,414   65,220   10,675 

Payment for settlement of hedging derivative financial instruments for debt securities issued

     (1,486)   (6,509)   (16,832) 

Acquisition of treasury stock

     —     —     (151,993) 

Redemption of preferred stock

     (1,125,906)   —     —   

Increase (decrease) innon-controlling interests

     (451,208)   215,357   347 

Other, net

     (824)   8,498   528 
    

 

 

  

 

 

  

 

 

 

Net cash provided by financing activities

     4,844,620   10,332,453   13,806,527 
    

 

 

  

 

 

  

 

 

 

Effect of exchange rate fluctuations on cash and cash equivalents held

     (22,638)   (46,035)   (30,640) 
    

 

 

  

 

 

  

 

 

 

Increase (decrease) in cash and cash equivalents

     1,025,285   604,114   1,943,106 
    

 

 

  

 

 

  

 

 

 

Cash and cash equivalents at beginning of year

   54    4,607,251   5,632,536   6,236,650 
    

 

 

  

 

 

  

 

 

 

Cash and cash equivalents at end of year

   54   W5,632,536   6,236,650   8,179,756 
    

 

 

  

 

 

  

 

 

 

See accompanying notes to the consolidated financial statements.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

1.

Reporting entity

Shinhan Financial Group Co., Ltd., the controlling company, and its subsidiaries included in consolidation (collectively the “Group”) are summarized as follows:

 

 (a)

Controlling company

Shinhan Financial Group Co., Ltd. (the “Shinhan Financial Group”), a controlling company, was incorporated on September 1, 2001.2001 for the main purposes of Shinhan Bank, Shinhan Securities Co., Ltd., Shinhan Capital Co., Ltd., and Shinhan BNP Asset Management Co., Ltd. with a stock transfer. The total capital stock amounted toW1,461,721 million. Also, Shinhan Financial Group’s shares has been listed on the Korea Exchange since September 10, 2001 and Shinhan Financial Group’s American DepositoryDepositary Shares were listed on the New York Stock Exchange since September 16, 2003.

 

 (b)

Ownership of Shinhan Financial Group and its major consolidated subsidiaries as of December 31, 20162017 and 20172018 are as follows:

 

   Date of financial
information		  Ownership (%)         Date of financial
information		  Ownership (%) 

Investor

  

Investee (*1)

 Location   2016   2017   

Investee

  

Location

  2017   2018 

Shinhan Financial Group
Co., Ltd.

  Shinhan Bank Korea December 31   100.0    100.0   Shinhan Bank  Korea  December 31   100.0    100.0 

”

  Shinhan Card Co., Ltd. ” ”   100.0    100.0   Shinhan Card Co., Ltd.  ”  ”   100.0    100.0 

”

  Shinhan Investment Corp. ” ”   100.0    100.0   Shinhan Investment Corp.  ”  ”   100.0    100.0 

”

  Shinhan Life Insurance Co., Ltd. ” ”   100.0    100.0   Shinhan Life Insurance Co., Ltd.  ”  ”   100.0    100.0 

”

  Shinhan Capital Co., Ltd. ” ”   100.0    100.0   Shinhan Capital Co., Ltd.  ”  ”   100.0    100.0 

”

  Jeju Bank ” ”   68.9    68.9   Jeju Bank (*1)  ”  ”   68.9    71.9 

”

  

Shinhan Credit Information Co., Ltd.

 ” ”   100.0    100.0   

Shinhan Credit Information Co., Ltd.

  ”  ”   100.0    100.0 

”

  

Shinhan Alternative Investment Management Inc (*3)

 ” ”   100.0    100.0   

Shinhan Alternative Investment Management Inc.

  ”  ”   100.0    100.0 

”

  

Shinhan BNP Paribas Asset Management Co., Ltd.

 ” ”   65.0    65.0   

Shinhan BNP Paribas Asset Management Co., Ltd.

  ”  ”   65.0    65.0 

”

  SHC Management Co., Ltd. ” ”   100.0    100.0   SHC Management Co., Ltd.  ”  ”   100.0    100.0 

”

  Shinhan Data System ” ”   100.0    100.0   Shinhan DS (*2)  ”  ”   100.0    100.0 

”

  Shinhan Savings Bank ” ”   100.0    100.0   Shinhan Savings Bank  ”  ”   100.0    100.0 

”

  Shinhan AITAS Co., Ltd. ” ”   99.8    99.8   Shinhan AITAS Co., Ltd.  ”  ”   99.8    99.8 

”

  

Shinhan REITs Management Co., Ltd. (*4)

 ” ”   —      100.0   Shinhan REITs Management Co., Ltd.  ”  ”   100.0    100.0 

Shinhan Bank

  Shinhan Asia Limited Hong Kong ”   99.9    99.9   Shinhan Asia Limited  Hong Kong  ”   99.9    99.9 

”

  Shinhan Bank America USA ”   100.0    100.0   Shinhan Bank America  USA  ”   100.0    100.0 

”

  Shinhan Bank Europe GmbH Germany ”   100.0    100.0   Shinhan Bank Europe GmbH  Germany  ”   100.0    100.0 

”

  Shinhan Khmer Bank PLC (*2) Cambodia ”   90.0    97.5   Shinhan Bank Cambodia (*3)  Cambodia  ”   97.5    97.5 

”

  Shinhan Bank Kazakhstan Limited Kazakhstan ”   100.0    100.0   Shinhan Bank Kazakhstan Limited  Kazakhstan  ”   100.0    100.0 

”

  Shinhan Bank Canada Canada ”   100.0    100.0   Shinhan Bank Canada  Canada  ”   100.0    100.0 

”

  Shinhan Bank (China) Limited China ”   100.0    100.0 

”

  Shinhan Bank Japan Japan ”   100.0    100.0 

”

  Shinhan Bank Vietnam Ltd. Vietnam ”   100.0    100.0 

”

  Banco Shinhan de Mexico Mexico ”   99.9    99.9 

”

  PT Bank Shinhan Indonesia (*2) Indonesia ”   98.98    99.0 

Shinhan Card Co., Ltd.

  LLP MFO Shinhan Finance Kazakhstan ”   100.0    100.0 

”

  PT. Shinhan Indo Finance Indonesia ”   50.0    50.0 

”

  Shinhan Microfinance Co., Ltd. Myanmar ”   100.0    100.0 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

1.

Reporting entity (continued)

 

   Date of financial
information		  Ownership (%)         Date of financial
information		  Ownership (%) 

Investor

  

Investee (*1)

 Location   2016   2017   

Investee

  

Location

  2017   2018 

Shinhan Investment Corp.

  Shinhan Investment Corp. USA Inc. USA ”   100.0    100.0 

”

  Shinhan Bank (China) Limited  China  ”   100.0    100.0 

”

  Shinhan Bank Japan  Japan  ”   100.0    100.0 

”

  Shinhan Bank Vietnam Ltd.  Vietnam  ”   100.0    100.0 

”

  Banco Shinhan de Mexico  Mexico  ”   100.0    100.0 

”

  PT Bank Shinhan Indonesia  Indonesia  ”   99.0    99.0 

Shinhan Card Co., Ltd.

  LLP MFO Shinhan Finance  Kazakhstan  ”   100.0    100.0 

”

  Shinhan Investment Corp. Asia Ltd. Hong Kong ”   100.0    100.0 �� PT. Shinhan Indo Finance  Indonesia  ”   50.0    50.0 

”

  

Shinhan Securities Vietnam Co., Ltd.

 Vietnam ”   100.0    100.0   Shinhan Microfinance Co., Ltd.  Myanmar  ”   100.0    100.0 

Shinhan Investment Corp.

  PT. Shinhan Sekuritas Indonesia Indonesia December 31   99.0    99.0   Shinhan Investment Corp. USA Inc.  USA  ”   100.0    100.0 

”

  Shinhan Investment Corp. Asia Ltd.  Hong Kong  ”   100.0    100.0 

Shinhan Investment Corp.

  SHINHAN SECURITIES VIETNAM CO., LTD.  Vietnam  December 31   100.0    100.0 

”

  PT. Shinhan Sekuritas Indonesia  Indonesia  ”   99.0    99.0 

PT. Shinhan Sekuritas Indonesia

  

PT Shinhan Asset Management Indonesia

  ”     —      75.0 

Shinhan BNP Paribas Asset Management Co., Ltd.

  

Shinhan BNP Paribas Asset Management (Hong Kong) Limited

 Hong Kong ”   100.0    100.0   Shinhan BNP Paribas Asset Management (Hong Kong) Limited  Hong Kong  ”
   100.0    100.0 

Shinhan DS

  

SHINHAN DS VIETNAM CO., LTD.

  Vietnam     —      100.0 

 

 (*1)Subsidiaries such as trust, beneficiary certificate, corporate restructuring fund and private equity fund which are not actually operating their own business are excluded.

The Group participated in the capital increase of Jeju Bank by acquisition of 7,854,600 shares. (W5,000 per share)

 

 (*2)As a result of unequal

Shinhan Data System changed its name into Shinhan DS for the year ended December 31, 2018 and the Group participated in the capital increase the equity interestofW3 billion in Shinhan Khmer Bank PLC and the equity interest in PT Bank Shinhan Indonesia was changed.October 2018.

 

 (*3)In 2017,

Shinhan Private Equity Inc.Khmer Bank PLC changed its name tointo Shinhan Alternative Investment Management Inc.

(*4)In 2017,Bank Cambodia for the Group invested in the newly established company, which became in a subsidiary of the Group.period ended December 31, 2018.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

1.

Reporting entity (continued)

 

 (c)

Consolidated structured entities

Consolidated structured entities are as follows:

 

Category

  

Consolidated structured entities

  

Description

Trust  

18 trusts managed by Shinhan Bank including development trust

  A trust is consolidated when the Group as a trustee is exposed to variable returns, for example, if principle or interest amounts of the entrusted properties falls below guaranteed amount, the Group should compensate it; and the Group has the ability to affect those returns.

Asset-Backed Securitization

  

MPC Yulchon Green I and 89130 others

  An entity for asset backed securitization is consolidated when the Group has the ability to dispose assets or change the conditions of the assets, is exposed to variable returns and has the ability to affect the variable returns providing credit enhancement and purchases of subordinated securities.
Structured Financing  

SHPE Holdings One Co., Ltd. and 2 others

  An entity established for structured financing relating to real estate, shipping, or mergers and acquisitions is consolidated, when the Group has granted credit to the entity, has sole decision-making authority of these entities due to the entities default, and is exposed to, or has rights to related variable returns.
Investment Fund  

KoFC Shinhan Frontier Champ2010-4 PEF and 73 others

  An investment fund is consolidated, when the Group manages or invests assets of the investment funds on behalf of other investors, or has the ability to dismiss the manager of the investment funds, and is exposed to, or has rights to, the variable returns.

As of December 31, 2017, the Group provides credit enhancement for the consolidated structured entities providing ABCP purchase commitment amounting toW1,900,646 million for the purpose of credit enhancement of the structure entities.

(*)

The Group provides ABPC purchase agreements ofW1,397,717 million for the purpose of credit enhancement of structured companies.

 

2.

Basis of preparation

 

 (a)

Statement of compliance

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). IFRS are the standards and related interpretations issued by the International Accounting Standards Board (“IASB”).

The consolidated financial statements were authorized for issue by the Board of Directors on February 7, 2018,12, 2019, which will be submitted for approval to the shareholders’stockholder’s meeting to be held on March 22, 2018.27, 2019.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

2.

Basis of preparation (continued)

 

 (b)

Basis of measurement

The consolidated financial statements have been prepared on the historical cost basis, except for the following material items in the statement of financial position.position:

 

derivative financial instruments are measured at fair value

 

financial instruments at fair value through profit or loss are measured at fair value

 

available-for-sale financial assets are measured at fair value

 

other comprehensive income at fair values are measured at fair value

financial instruments through profit or loss are measured at fair value

liabilities for cash-settled share-based payment arrangements are measured at fair value

 

financial liabilities designated as hedged items in a fair value hedge accounting of which changes in fair value attributable to the hedged risk are recognized in profit or loss

 

liabilities for defined benefit plans that are recognized at the net of the total present value of defined benefit obligations less the fair value of plan assets

 

 (c)

Functional and presentation currency

The financial statements of the parent and each subsidiary are prepared in functional currency of the respective operation. These consolidated financial statements are presented in Korean won, which is the ParentControlling Company’s functional currency and the currency of the primary economic environment in which the Group operates.

 

 (d)

Use of estimates and judgmentsjudgements

The preparation of the consolidated financial statements in conformity with IFRS requires management to maketomake judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are evaluatedreviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future yearsperiods affected.

In preparingInformation about critical judgements in applying accounting policies that have a significant effect on the theseamounts recognized in the consolidated financial statements and information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the significant judgments made by managementnext financial year are described in applyingNote 5.

Management’s assessment of the application of the Group’s accounting policies and the key sources of estimation uncertainty were the same as those that applied totheir estimates used in the consolidated financial statements as ofis based on the same accounting policies and assumptions used in the consolidated financial statements for the year ended December 31, 2016, except2017.

Credit loss allowance

The Group recognizes credit loss allowance for the changes below.

During 2017, theexpected credit card segment oflosses on debt instruments, loans and receivables that are measured at amortized cost, loan commitments and financial guarantee contracts in accordance with IFRS 9 ‘Financial Instruments.’ The allowance is determined by techniques, assumptions and input variables used by the Group had accumulated sufficient experience to properly calculate probabilitymeasure expected future cash flows of default, loss given default and credit conversion factors by considering the characteristics of borrowers, or its homogeneous borrowing groups, with credit evaluation system and risk evaluation system based on BASEL II; and based on this newly accumulated experience, the calculation methodology of loan losses has been changed from roll rate analysis model to internal model approach. As a result of changes in accounting estimates described above, allowances for loan losses and provision for unused credit lines decreased byW129,377 million andW316,692 million, respectively, as of December 31, 2017. The effects of the changes in accounting estimates were recognized prospectively in 2017.

(e)Changes in accounting policies

The Group applied for the first time certain standards and amendments, which are effective for annual periods beginning on or after January 1, 2017.individual financial

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

2.

Basis of preparation (continued)

 

1) Amendmentsinstruments and to IAS 7, ‘Statement of Cash Flows’

The Group applied amendments to IAS 7, ‘Statement of Cash Flows’, which are effective for annual periods beginning on or after January 1, 2017. The amendments to IAS 7 require changes in liability arising from the financing activities of the Group to be disclosed as follows; fluctuations in financing cash flows, changes in the acquisition or loss of control on subsidiaries or other business, the effect of exchange rate changes, changes in fair value and other changes. The amendments does not have a significant impact on the Group’s consolidated financial statements (Note 45).

2) Amendments to IAS 12, ‘Income Taxes’

The Group applied amendments to IAS 12, ‘Income Taxes’, which are effective for annual periods beginning on or after January 1, 2017. Amendments to IAS 12 clarify that temporary differences exist when there is a difference between the carrying amount and tax based amount of the debt instruments which are measured at fair value, regardless of themeasure expected recovery method (sale or retention). In assessing future taxable income, the Group shall include assets to be recovered in excess of its carrying amount and exclude the tax deductions resulting from those deductible temporary differences. The amendments does not have a significant impact on the Group’s consolidated financial statements.

3) Amendments to IFRS 12, ‘Disclosure of Interests in Other Entities’

The Group applied amendments to IFRS 12, ‘Disclosure of Interests in Other Entities’, which are effective for annual periods beginning on or after January 1, 2017. The amendments to IFRS 12 require disclosure of interests in other entities should also be applied to interests that are classified as held for sale or distribution. The amendments does not have a significant impact on the Group’s consolidated financial statements.

3.Significant accounting policies

The significant accounting policies applied by the Group in preparation of its consolidated financial statements are included below. The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, except for the changes in accounting policies described in2-(e).

(a)Operating segments

An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components. All operating segments’ operating results are reviewed regularly by the Group’s CEO to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available.

Segment results that are reported to the CEO include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. The Group’s reportable segments consist of banking, credit card, securities, life insurance, and others.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.Significant accounting policies (continued)

(b)Basis of consolidation

i) Subsidiaries

Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date on which control ceases.

If a member of the Group uses accounting policies other than those adopted in the consolidated financial statements for the same transactions and events in similar circumstances, appropriate adjustments are made to its financial statements in preparing the consolidated financial statements.

ii) Structured entity

The Group establishes or invests in various structured entities. A structured entity is an entity designed so that its activities are not governed by way of voting rights. When assessing control of a structured entity, the Group considers factors such as the purpose and the design of the investee; its practical ability to direct the relevant activities of the investee; the nature of its relationship with the investee; and the size of its exposure to the variability of returns of the investee. The Group does not recognize anynon-controlling interests in the consolidated statements of financial position since the Group’s interests in these entities are recognized as liabilities of the Group.

iii) Intra-group transactions

Intra-group balances and transactions, and any unrealized income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Intra-group losses are recognized as expense if intra-group losses indicate an impairment that requires recognition in the consolidated financial statements.

iv)Non-controlling interests

Non-controlling interests in a subsidiarycollective manner. The details of techniques, assumptions and input variables used to measure the credit loss allowance for expected credit losses as of December 31, 2018 are accounted for separately from the parent’s ownership interestsdescribed in a subsidiary. Each component of net profit or loss and other comprehensive income is attributed to the owners of the parent andnon-controlling interest holders, even when the allocation reduces thenon-controlling interest balance below zero.

(c)Business combinations

i) Business combinations

A business combination is accounted for by applying the acquisition method, unless it is a combination involving entities or businesses under common control.

Each identifiable asset and liability is measured at its acquisition-date fair value except for below:

Leases and insurance contracts are required to be classified on the basis of the contractual terms and other factors

Only those contingent liabilities assumed in a business combination that are a present obligation and can be measured reliably are recognized

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.Significant accounting policies (continued)

•Deferred tax assets or liabilities are recognized and measured in accordance with IAS 12Income Taxes

•Employee benefit arrangements are recognized and measured in accordance with IAS 19Employee Benefits

Indemnification assets are recognized and measured on the same basis as the indemnified liability or asset

Reacquired rights are measured on the basis of the remaining contractual terms of the related contract

•Liabilities or equity instruments related to share-based payment transactions are measured in accordance with the method in IFRS 2Share-based Payment

•Assets held for sale are measured at fair value less costs to sell in accordance with IFRS 5Non-current Assets Held for Sale

As of the acquisition date,non-controlling interests in the acquiree are measured as thenon-controlling interests’ proportionate share of the acquiree’s identifiable net assets.

The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition-date fair values of the assets transferred by the acquirer, the liabilities incurred by the acquirer to former owners of the acquiree and the equity interests issued by the acquirer. However, any portion of the acquirer’s share-based payment awards exchanged for awards held by the acquiree’s employees that are included in consideration transferred in the business combination shall be measured in accordance with the method described above rather than at fair value.

Acquisition-related costs are costs the acquirer incurs to effect a business combination. Those costs include finder’s fees; advisory, legal, accounting, valuation and other professional or consulting fees; general administrative costs, including the costs of maintaining an internal acquisitions department; and costs of registering and issuing debt and equity securities. Acquisition-related costs, other than those associated with the issue of debt or equity securities, are expensed in the periods in which the costs are incurred and the services are received. The costs to issue debt or equity securities are recognized in accordance with IAS 32Financial Instruments: Presentation and IAS 39Financial Instruments: Recognition and Measurement.

ii) Goodwill

The Group measures goodwill at the acquisition date as:

the fair value of the consideration transferred; plus

the recognized amount of anynon-controlling interests in the acquiree; plus

if the business combination is achieved in stages, the fair value of thepre-existing equity interest in the acquiree; less

the net recognized amount (generally fair value) of the identifiable assets acquired and liabilities assumed.

When the excess is negative, bargain purchase gain is recognized immediately in profit or loss.

When the Group additionally acquiresnon-controlling interest, the Group does not recognize goodwill since the transaction is regarded as equity transaction.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.Significant accounting policies (continued)

(d)Investments in associates and joint ventures

An associate is an entity in which the Group has significant influence, but not control, over the entity’s financial and operating policies. Significant influence is presumed to exist when the Group holds between 20 and 50 percent of the voting power of another entity.

A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.

The investment in an associate and a joint venture is initially recognized at cost, and the carrying amount is increased or decreased to recognize the Group’s share of the profit or loss and changes in equity of the associate and the joint venture after the date of acquisition. Intra-group balances and transactions, and any unrealized income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Intra-group losses are recognized as expense if intra-group losses indicate an impairment that requires recognition in the consolidated financial statements.

If an associate or a joint venture uses accounting policies different from those of the Group for like transactions and events in similar circumstances, appropriate adjustments are made to its financial statements in applying the equity method.

When the Group’s share of losses exceeds its interest in an equity accounted investee, the carrying amount of that interest, including any long-term investments, is reduced to nil and the recognition of further losses is discontinued except to the extent that the Group has an obligation or has to make payments on behalf of the investee for further losses.Note 4.

 

 (e)Cash and cash equivalents

Cash and cash equivalents comprise cash balances and demand deposits with maturities of three months or less from the acquisition date that are subject to an insignificant risk of changes in their fair value, and are used by the Group in the management of its short-term commitments.

Change in accounting policy

(f)Non-derivative financial assets

The Group recognizes and measuresnon-derivative financial assets byhas adopted the following four categories: financial assets at fair value through profit or loss,held-to-maturity investments, loans and receivables andavailable-for-sale financial assets. The Group recognizes financial assets insame accounting policies for the consolidated statement of financial position whenyear ended December 31, 2018, except for the Group becomes a party to the contractual provisionsapplication of the instrument.

Upon initial recognition,non-derivative financial assets are measured at their fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the asset’s acquisition or issuance.first amendment standard, effective from January 1, 2018, as explained below.

i) Financial assets at fair value through profit or lossIFRS 15, ‘Revenue from Contracts with Customers’

A financial asset is classified as at fair value through profit or loss if it is held for trading or is designated at fair value through profit or loss. Upon initial recognition, transaction costs are recognized in profit or loss when incurred. Financial assets at fair value through profit or loss are measured at fair value, and changes therein are recognized in profit or loss.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.Significant accounting policies (continued)

A financial asset other than a financial asset held for trading may be designated as at fair value through profit or loss (“FVTPL”) upon initial recognition if:

such designation eliminates or significantly reduces a recognition or measurement inconsistency that would otherwise arise; or

the financial asset forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group’s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or

it forms part of a contract containing one or more embedded derivatives that would be required to be separated from the host contract.

ii)Held-to-maturity financial assets

Anon-derivative financial asset with a fixed or determinable payment and fixed maturity, for whichEffective January 1, 2018 the Group has the positive intention and ability to hold to maturity, are classified asheld-to-maturity investments. Subsequent to initial recognition,held-to-maturity investments are measured at amortized cost using the effective interest method.

iii) Loans and receivables

Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Subsequent to initial recognition, loans and receivables are measured at amortized cost using the effective interest method.

iv)Available-for-sale financial assets

Available-for-sale financial assets are thosenon-derivative financial assets that are designated asavailable-for-sale or are not classified as financial assets at fair value through profit or loss,held-to-maturity investments or loans and receivables. Subsequent to initial recognition, they are measured at fair value, which changes in fair value, net of any tax effect, recorded in other comprehensive income in equity. Investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured and derivatives that are linked to and must be settled by delivery of such unquoted equity instruments are measured at cost.

v)De-recognition of financial assets

The Group derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognized as a separate asset or liability.

If the Group retains substantially all the risks and rewards of ownership of the transferred financial assets, the Group continues to recognize the transferred financial assets and recognizes financial liabilities for the consideration received.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.Significant accounting policies (continued)

vi) Offsetting between financial assets and financial liabilities

Financial assets and financial liabilities are offset and the net amount is presented in the consolidated statement of financial position only when the Group currently has a legally enforceable right to offset the recognized amounts, and there is the intention to settle on a net basis or to realize the asset and settle the liability simultaneously.

(g)Derivative financial instruments including hedge accounting

Derivatives are initially recognized at fair value. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are accounted for as described below.

i) Hedge accounting

The Group holds forward exchange contracts, interest rate swaps, currency swaps and other derivative contracts to manage interest rate risk and foreign exchange risk. The Group designated derivatives as hedging instruments to hedge the risk of changes in the fair value of assets, liabilities or firm commitments (a fair value hedge) and foreign currency risk of highly probable forecasted transactions or firm commitments (a cash flow hedge).

On initial designation of the hedge, the Group formally documents the relationship between the hedging instrument(s) and hedged item(s), including the risk management objectives and strategy in undertaking the hedge transaction, together with the methods that will be used to assess the effectiveness of the hedging relationship.

•Fair value hedge – Changes in the fair value of a derivative hedging instrument designated as a fair value hedge are recognized in profit or loss. The gain or loss from remeasuring the hedging instrument at fair value for a derivative hedging instrument and the gain or loss on the hedged item attributable to the hedged risk are recognized in profit or loss in the same line item of the consolidated statement of comprehensive income. The Group discontinues fair value hedge accounting if the hedging instrument expires or is sold, terminated or exercised, or if the hedge no longer meets the criteria for hedge accounting. Any adjustment arising from gain or loss on the hedged item attributable to the hedged risk is amortized to profit or loss from the date the hedge accounting is discontinued.

•Cash flow hedge–When a derivative is designated to hedge the variability in cash flows attributable to a particular risk associated with a recognized asset or liability or a highly probable forecasted transaction that could affect profit or loss, the effective portion of changes in the fair value of the derivative is recognized in other comprehensive income, net of tax, and presented in the hedging reserve in equity. Any ineffective portion of changes in the fair value of the derivative is recognized immediately in profit or loss. If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated, exercised, or the designation is revoked, then hedge accounting is discontinued prospectively. The cumulative gain or loss on the hedging instrument that has been recognized in other comprehensive income is reclassified to profit or loss in the periods during which the forecasted transaction occurs. If the forecasted transaction is no longer expected to occur, then the balance in other comprehensive income is recognized immediately in profit or loss.

•

Hedge of net investment–Foreign currency differences arising on the retranslation of a derivative designated as a hedge of a net investment in a foreign operation are recognized in other comprehensive

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.Significant accounting policies (continued)

income to the extent that the hedge is effective. To the extent that the hedge is ineffective, such differences are recognized in profit or loss. When the hedged part of a net investment is disposed of, the relevant amount in the accumulated other comprehensive income is transferred to profit or loss as part of the profit or loss on disposal in accordance with IAS 21, ‘The Effects of Changes in Foreign Exchange Rates’.

ii) Separable embedded derivatives

Embedded derivatives are separated from the host contract and accounted for separately only if the following criteria has been met: (a) the economic characteristics and risks of the embedded derivative are not closely related to those of the host contract; (b) a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and (c) the hybrid instrument is not measured at fair value with changes in fair value recognized in profit or loss. Changes in the fair value of separable embedded derivatives are recognized immediately in profit or loss.

iii) Other derivative financial instruments

Changes in the fair value of other derivative financial instrument not designated as a hedging instrument are recognized immediately in profit or loss.

iv) Unobservable valuation differences at initial recognition

Any difference between the fair value of over the counter derivatives at initial recognition and the amount that would be determined at that date using a valuation technique in a situation in which the valuation is dependent on unobservable parameters is not recognized in profit or loss but is recognized on a straight-line basis over the life of the instrument or immediately when the fair value becomes observable.

(h)Impairment of financial assets

A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably. However, losses expected as a result of future events, regardless of likelihood, are not recognized.

In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment.

If financial assets have objective evidence that they are impaired, impairment losses should be measured and recognized.

Objective evidence that a financial asset or group of assets is impaired includes observable data that comes to the attention of the holder of the asset about the following loss events:

significant financial difficulty of the issuer or obligor

a breach of contract, such as a default or delinquency in interest or principal payments;

the lender, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.Significant accounting policies (continued)

it becoming probable that the borrower will enter bankruptcy or other financial reorganization

the disappearance of an active market for that financial asset because of financial difficulties

observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the group.

i) Loans and receivables

The Group first assesses whether objective evidence of impairment exists individually for loans and receivables that are individually significant, and individually or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment.

If there is objective evidence that an impairment loss on loans and receivables has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (i.e., the effective interest rate computed at initial recognition).

If the interest rate of a loan or receivable is a floating rate, the discount rate used to evaluate impairment loss is the current effective interest rate defined in the loan agreement. The present value of estimated future cash flows of secured financial assets is calculated by including cash flows from collateral after deducting costs to acquire and sell the collateral.

In assessing collective impairment, the Group rates and classifies financial assets, based on credit risk assessment or credit rating assessment process that takes into account asset type, industry, regional location, collateral type, delinquency and other relative factors.

Future cash flow of financial assets applicable to collective impairment assessment is estimated by using statistical modeling of historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management’s judgment as to whether current economic and credit conditions are such that the impairment losses are likely to be greater or less than suggested by historical modeling. In adjusting the future cash flow by historical modeling, the result has to be in line with changes and trends of observable data. Methodologies and assumptions used to estimate future cash flow are evaluated on a regular basis in order to reduce any discrepancy between impairment loss estimation and actual loss.

Impairment losses are recognized in profit or loss and reflected in an allowance account against loans and receivables. When a subsequent event causes the amount of impairment loss to decrease, and the decrease can be related objectively to an event occurring after the impairment was recognized, the decrease in impairment loss is reversed through profit or loss of the year.

ii)Available-for-sale financial assets

When a decline in the fair value of anavailable-for-sale financial asset has been recognized in other comprehensive income and there is objective evidence that the asset is impaired, the cumulative loss that

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.Significant accounting policies (continued)

had been recognized in other comprehensive income is reclassified from equity to profit or loss as a reclassification adjustment even though the financial asset has not been derecognized. Impairment losses recognized in profit or loss for an investment in an equity instrument classified asavailable-for-sale are not reversed through profit or loss. If, in a subsequent period, the fair value of a debt instrument classified asavailable-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss is recognized in profit or loss, the impairment loss is reversed, with the amount of the reversal recognized in profit or loss.

iii)Held-to-maturity financial assets

An impairment loss in respect ofheld-to-maturity financial assets measured at amortized cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate and is recognized in profit or loss. Interest on the impaired asset continues to be recognized through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss.

(i)Property and equipment

Property and equipment are initially measured at cost and after initial recognition, are carried at cost less accumulated depreciation and accumulated impairment losses. The cost of property and equipment includes expenditures arising directly from the construction or acquisition of the asset, any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management and the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located.

Items of property and equipment are measured at cost less accumulated depreciation and accumulated impairment losses.

The cost of replacing a part of an item of property or equipment is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Group and its cost can be measured reliably, where the carrying amount of the replaced part is derecognized. The cost of the day to day servicing of property and equipment are recognized in profit or loss as incurred.    

Property and equipment are depreciated on a straight-line basis over the estimated useful lives, which most closely reflect the expected pattern of consumption of the future economic benefits embodied in the asset. Leased assets under finance lease are depreciated over the shorter of the lease term and their useful lives.

The estimated useful lives for the current and comparative years are as follows:

Descriptions

Depreciation method

Useful lives

Buildings

Straight-line40 years

Other properties

Straight-line4~5 years

Depreciation methods, useful lives and residual value are reassessed at each fiscalyear-end and any adjustment is accounted for as a change in accounting estimate.

(j)Intangible assets

Intangible assets are measured initially at cost and, subsequently, are carried at cost less accumulated amortization and accumulated impairment losses.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.Significant accounting policies (continued)

Amortization of intangible assets except for goodwill is calculated on a straight-line basis over the estimated useful lives of intangible assets from the date that they are available for use. The residual value of intangible assets is zero. However, as there are no foreseeable limits to the periods over which club memberships are expected to be available for use, this intangible asset is determined as having indefinite useful lives and not amortized.

Descriptions

Useful lives

Software, capitalized development cost

5 years

Other intangible assets

5 years or contract periods

Amortization periods and the amortization methods for intangible assets with finite useful lives are reviewed at the end of each reporting period. The useful lives of intangible assets that are not being amortized are reviewed at the end of each reporting period to determine whether events and circumstances continue to support indefinite useful life assessments for those assets. Changes are accounted for as changes in accounting estimates.

i) Research and development

Expenditures on research activities, undertaken with the prospect of gaining new technical knowledge and understanding, are recognized in profit or loss as incurred. Development expenditures are capitalized only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and the Group intends to and has sufficient resources to complete development and to use or sell the asset. Other development expenditures are recognized in profit or loss as incurred.

ii) Subsequent expenditures

Subsequent expenditures are capitalized only when they increase the future economic benefits embodied in the specific asset to which it relates. All other expenditures, including expenditures on internally generated goodwill and brands, are recognized in profit or loss as incurred.

(k)Investment property

Property held for the purpose of earning rentals or benefiting from capital appreciation is classified as investment property. Investment property is measured initially at its cost. Transaction costs are included in the initial measurement. Subsequently, investment property is carried at depreciated cost less any accumulated impairment losses.

The estimated useful lives for the current and comparative years are as follows:

Descriptions

Depreciation method

Useful lives

Buildings

Straight-line40 years

(l)Leased assets

i) Classification of a lease

The Group classifies and accounts for leases as either a finance or operating lease, depending on the terms. Leases where the lessee assumes substantially all of the risks and rewards of ownership are classified as finance leases. All other leases are classified as operating leases.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.Significant accounting policies (continued)

ii) Lessee

Under a finance lease, the lessee recognizes the leased asset and a liability for future lease payments. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset.

Under an operating lease, the lessee recognizes the lease payments as expense over the lease term and does not recognize the leased asset in its statement of financial position.

iii) Lessor

Under a finance lease, the lessor recognizes a finance lease receivable. Over the lease term the lessor accrues interest income on the net investment. The receipts under the lease are allocated between reducing the net investment and recognizing finance income, so as to produce a constant rate of return on the net investment.

Under an operating lease, the lessor recognizes the lease payments as income over the lease term and the leased asset in its statement of financial position.

(m)Assets held for sale

Non-current assets, or disposal groups comprising assets and liabilities, that are expected to be recovered primarily through sale rather than through continuing use, are classified as held for sale. In order to be classified as held for sale, the asset (or disposal group) must be available for immediate sale in its present condition and its sale must be highly probable. The assets or disposal group that are classified asnon-current assets held for sale are measured at the lower of their carrying amount and fair value less cost to sell.

The Group recognizes an impairment loss for any initial or subsequent write-down of an asset (or disposal group) to fair value less costs to sell, and a gain for any subsequent increase in fair value less costs to sell, up to the cumulative impairment loss previously recognized in accordance with IAS 36Impairment of Assets.

An asset that is classified as held for sale or part of a disposal group classified as held for sale is not depreciated (or amortized).

(n)Impairment ofnon-financial assets

The carrying amounts of the Group’snon-financial assets, other than assets arising from employee benefits, deferred tax assets and assets held for sale, are reviewed at the end of the reporting period to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. Goodwill and intangible assets that have indefinite useful lives or that are not yet available for use, irrespective of whether there is any indication of impairment, are tested for impairment annually by comparing their recoverable amount to their carrying amount.

The Group estimates the recoverable amount of an individual asset. If it is impossible to measure the individual recoverable amount of an asset, then the Group estimates the recoverable amount of cash-generating unit (“CGU”). A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. The recoverable amount of

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.Significant accounting policies (continued)

an asset or CGU is the greater of its value in use and its fair value less costs to sell. The value in use is estimated by applying apre-tax discount rate that reflect current market assessments of the time value of money and the risks specific to the asset or CGU for which estimated future cash flows have not been adjusted, to the estimated future cash flows expected to be generated by the asset or CGU.

An impairment loss is recognized if the carrying amount of an asset or a CGU exceeds its recoverable amount. Impairment losses are recognized in profit or loss.

Goodwill acquired in a business combination is allocated to each CGU that is expected to benefit from the synergies arising from the goodwill acquired. Any impairment identified at the CGU level will first reduce the carrying value of goodwill and then be used to reduce the carrying amount of the other assets in the CGU on a pro rata basis. Except for impairment losses in respect of goodwill which are never reversed, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.

(o)Non-derivative financial liabilities

The Group classifiesnon-derivative financial liabilities into financial liabilities at fair value through profit or loss or other financial liabilities in accordance with the substance of the contractual arrangement and the definitions of financial liabilities. The Group recognizes financial liabilities in the consolidated statement of financial position when the Group becomes a party to the contractual provisions of the financial liability.

i) Financial liabilities at fair value through profit or loss

Financial liabilities at fair value through profit or loss include financial liabilities held for trading or designated as such upon initial recognition. Subsequent to initial recognition, financial liabilities at fair value through profit or loss are measured at fair value, and changes therein are recognized in profit or loss. Upon initial recognition, transaction costs that are directly attributable to the acquisition are recognized in profit or loss as incurred.

The criteria for designation of financial liabilities at FVTPL upon initial recognition are the same as those of financial assets at FVTPL.

ii) Other financial liabilities

Non-derivative financial liabilities other than financial liabilities at fair value through profit or loss are classified as other financial liabilities. At the date of initial recognition, other financial liabilities are measured at fair value minus transaction costs that are directly attributable to the acquisition. Subsequent to initial recognition, other financial liabilities are measured at amortized cost using the effective interest method.

The Group derecognizes a financial liability from the consolidated statement of financial position when it is extinguished (i.e. when the obligation specified in the contract is discharged, cancelled or expires).

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.Significant accounting policies (continued)

(p)Foreign currency

i) Foreign currency transactions

Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortized cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortized cost in foreign currency translated at the exchange rate at the end of the reporting period.Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value is determined.

Foreign currency differences arising on translation are recognized in profit or loss, except for differences arising on the translation ofavailable-for-sale equity instruments, a financial liability designated as a hedge of the net investment in a foreign operation (see iii) below), or in a qualifying cash flow hedge, which are recognized in other comprehensive income.Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction.

ii) Foreign operations

If the presentation currency of the Group is different from a foreign operation’s functional currency, the financial statements of the foreign operation are translated into the presentation currency using the following methods:

The assets and liabilities of foreign operations, whose functional currency is not the currency of a hyperinflationary economy, are translated to presentation currency at exchange rates at the reporting date. The income and expenses of foreign operations are translated to functional currency at exchange rates at the dates of the transactions. Foreign currency differences are recognized in other comprehensive income.

Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of that foreign operation is treated as assets and liabilities of the foreign operation. Thus they are expressed in the functional currency of the foreign operation and translated at the closing rate.

When a foreign operation is disposed of, the relevant amount in the translation is transferred to profit or loss as part of the profit or loss on disposal. In any other partial disposal of a foreign operation, the relevant proportion is reclassified to profit or loss.

Foreign exchange gains or losses arising from a monetary item receivable from or payable to a foreign operation, the settlement of which is neither planned nor likely to occur in the foreseeable future and which in substance is considered to form part of the net investment in the foreign operation, are recognized in other comprehensive income in the translation reserve.

iii) Net investment in a foreign operation

If the settlement of a monetary item receivable from or payable to a foreign operation is neither planned nor likely to occur in the foreseeable future, then foreign currency difference arising on the item which in substance is considered to form part of the net investment in the foreign operation, are recognized in the other comprehensive income and shall be reclassified to profit or loss on disposal of the investment.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.Significant accounting policies (continued)

(q)Equity

i) Capital stock

Ordinary shares are classified as equity. Incremental costs directly attributable to the issuance of ordinary shares and share options are recognized as a deduction from equity, net of any tax effects.

Preference share capital is classified as equity if it isnon-redeemable, or redeemable only at the Group’s option, and any dividends are discretionary. Dividends thereon are recognized as distributions within equity upon approval by the Group’s shareholders.

Preference share capital is classified as a liability if it is redeemable on a specific date or at the option of the shareholders, or if dividend payments are not discretionary. Dividends thereon are recognized as interest expense in profit or loss as accrued.

ii) Hybrid bonds

The Group classifies issued financial instruments, or their component parts, as a financial liability or an equity instrument depending on the substance of the contractual arrangement of such financial instruments. Hybrid bonds where the Group has an unconditional right to avoid delivering cash or another financial asset to settle a contractual obligation are classified as equity instruments and presented in equity.

iii) Capital adjustments

Changes in ownership interests in a subsidiary that do not result in a loss of control, such as the subsequent purchase or sale by a parent of a subsidiary’s equity instruments, are accounted for as equity transactions in capital adjustments.

(r)Employee benefits

i) Short-term employee benefits

Short-term employee benefits are employee benefits that are due to be settled within 12 months after the end of the period in which the employees render the related service. When an employee has rendered service to the Group during an accounting period, the Group recognizes the undiscounted amount of short-term employee benefits expected to be paid in exchange for that service.

ii) Other long-term employee benefits

Other long-term employee benefits include employee benefits that are settled beyond 12 months after the end of the period in which the employees render the related service, and are calculated at the present value of the amount of future benefit that employees have earned in return for their service in the current and prior periods, less the fair value of any related assets. The present value is determined by discounting the expected future cash flows using the interest rate of corporate bonds that have maturity dates approximating the terms of the Group’s obligations and that are denominated in the same currency in which the benefits are expected to be paid. Any actuarial gains and losses are recognized in profit or loss in the period in which they arise.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.Significant accounting policies (continued)

iii) Retirement benefits: defined contribution plans

When an employee has rendered service to the Group during a period, the Group recognizes the contribution payable to a defined contribution plan in exchange for that service as a liability (accrued expense), after deducting any contribution already paid. If the contribution already paid exceeds the contribution due for service before the end of the reporting period, the Group recognizes that excess as an asset (prepaid expense) to the extent that the prepayment will lead to a reduction in future payments or a cash refund.

iv) Retirement benefits: defined benefit plans

A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. The Group’s net obligation in respect of defined benefit plans is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value. The fair value of plan assets is deducted. The calculation is performed annually by an independent actuary using the projected unit credit method.

Remeasurements of the net defined benefit liability, which comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognized immediately in other comprehensive income. The Group determines the net interest expense (income) on the net defined benefit liability (asset) for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to thethen-net defined benefit liability (asset), taking into account any changes in the net defined benefit liability (asset) during the period as a result of contributions and benefit payments. Net interest expense and other expenses related to defined benefit plans are recognized in personnel expenses in profit or loss.

The discount rate is the yield at the reporting date on high-quality corporate bonds that have maturity dates approximating the terms of the Group’s obligations and that are denominated in the same currency in which the benefits are expected to be paid. The Group recognizes service cost and net interest on the net defined benefit liability (asset) in profit or loss and remeasurement of the net defined benefit liability (asset) in other comprehensive income.

When the benefits of a plan are changed or when a plan is curtailed, the resulting change in benefit that relates to past service or the gain or loss on curtailment is recognized immediately in profit or loss. The Group recognizes gains and losses on the settlement of a defined benefit plan when the settlement occurs.

v) Termination benefits

Termination benefits are recognized as an expense when the Group is committed demonstrably, without realistic possibility of withdrawal, to a formal detailed plan to either terminate employment before the normal retirement date, or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits for voluntary redundancies are recognized as an expense if the Group has made an offer of voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably. If benefits are payable more than 12 months after the reporting period, then they are discounted to their present value.

(s)Share-based payment transactions

The grant date fair value of share-based payment awards granted to employees is recognized as an employee expense, with a corresponding increase in equity, over the period that the employees unconditionally

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.Significant accounting policies (continued)

become entitled to the awards. The amount recognized as an expense is adjusted to reflect the number of awards for which the related service andnon-market vesting conditions are expected to be met, such that the amount ultimately recognized as an expense is based on the number of awards that do meet the related service andnon-market performance conditions at the vesting date. For share-based payment awards withnon-vesting conditions, the grant date fair value of the share-based payment is measured to reflect such conditions and there is notrue-up for differences between expected and actual outcomes.

The fair value of the amount payable to employees in respect of share appreciation rights, which are settled in cash, is recognized as an expense with a corresponding increase in liabilities, over the period that the employees unconditionally become entitled to payment. The liability is remeasured at each reporting date and at settlement date. Any changes in the fair value of the liability are recognized as personnel expense in profit or loss.

(t)Provisions

A provision is recognized if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation.

The risks and uncertainties that inevitably surround many events and circumstances are taken into account in reaching the best estimate of a provision. Where the effect of the time value of money is material, provisions are determined at the present value of the expected future cash flows.

Provisions are reviewed at the end of each reporting period and adjusted to reflect the current best estimate. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision is reversed.

Provision shall be used only for expenditures for which the provision was originally recognized.

(u)Financial guarantee contract

A financial guarantee contract is a contract that requires the issuer (the Group) to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due in accordance with the original or modified terms of a debt instrument.

Financial guarantee contracts are initially measured at their fair values and, if not designated as at fair value through profit or loss, are subsequently measured at the higher of:

•The amount determined in accordance with IAS 37Provisions, Contingent Liabilities and Contingent Assets and

•The initial amount recognized, less, when appropriate, cumulative amortization recognized in accordance with IAS 18.Revenue

(v)Insurance contracts

Insurance contracts are defined as “a contract under which one party (the insurer) accepts significant insurance risk from another party by agreeing to compensate the policyholder if a specified uncertain future event adversely affects the policyholder”. A contract that qualifies as an insurance contract remains an insurance contract until all rights and obligations are extinguished or expire. Such a contract that does not

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.Significant accounting policies (continued)

contain significant insurance risk is classified as an investment contract and is within the scope of IAS 39,Financial Instruments,Recognition and Measurement to the extent that it gives rise to a financial asset or financial liability, except if the investment contract contains a Discretionary Participation Features (“DPF”). If the contract has a DPF, the contract is subject to IFRS 4,Insurance Contracts.

i) Reserves for insurance contracts

The Group accounts for insurance contracts based on the Insurance Business Law and other related Insurance Supervisory Regulation. These insurance contracts are calculated based on insurance terms, premium and policy reserves approved by the Financial Supervisory Commission, as follows:

•Premium reserve – Premium reserve is a liability to prepare for the future claims on the valid contracts. Premium reserve is calculated by deducting discounted net premium from the discounted claims expected to be paid in the future period.

•Unearned premium reserve – Unearned premium reserve represents the portion of premiums written which is applicable to the unexpired portion of policies in force.

•Guarantee reserve – At the end of reporting period, the Group is required to make reserve on the outstanding insurance contracts to guarantee a certain level of benefit payments for the amount equal to the average amount of net losses of the worst 30% of cases forecasted by scenarios or the standard reserve amount, as defined by Financial Supervisory Service, by insurance type and the lowest insured amount, whichever is greater.

•Reserve for outstanding claims – Reserve for outstanding claims is an estimate of loss for insured events that have occurred prior to the date of the statement of financial position but for which a fixed value cannot be determined, which includes the following:

Estimated amount: The expenses to be incurred in the course of settlement of the insured event, such as lawsuit or arbitration (if partial amount is settled, the remainder is recognized)

Reserve for ineffective contracts: Reserve for ineffective contracts due to default in premium payment (Partial amount of surrender value)

Unpaid claims: The amount of claims, surrender value and dividend to be paid is determined but not paid yet

IBNR (Incurred But Not Reported): Estimated amount using a statistical method considering the company’s experience rate

•Reserve for participating policyholder���s dividend – In accordance with regulations and policy terms, reserves for participating policyholder’s dividend are provided for dividend to be paid to the policyholders and comprise the current reserve for policyholder’s dividend and the future reserve for policyholder’s dividend. The current reserve for policyholder’s dividend is the fixed payable dividend amount declared but not paid at the end of the reporting period and the future reserve for policyholder’s dividend is the calculated policyholder’s dividend amount factoring in estimated policy termination rates for the valid insurance policy as at the end of the reporting period.

ii) Policyholders’ equity adjustment

At year end, unrealized holding gains and losses onavailable-for-sale securities are allocated to policyholders’ equity adjustment by the ratio of the average policy reserve of the participating and

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.Significant accounting policies (continued)

non-participating contracts or the ratio of the investment source at the new acquisition year based on the date of acquisition.

iii) Liability adequacy test (the “LAT”)

Liability adequacy tests are performed by the Group in order to ensure the adequacy of the contract liabilities, net of related deferred acquisition costs and deferred policyholders’ participation liability or asset.

iv) Reinsurance contracts

According to IFRS 4, “Insurance Contracts”, the Group does not offset:

1) reinsurance assets against the related insurance liabilities; or

2) income or expense from reinsurance contracts against the expense or income from the related insurance contracts.

If reinsurance assets are determined to be impaired, impairment loss is recognized in the profit and loss for the current period.

v) Deferred acquisition costs (the “DAC”)

Policy acquisition costs, which include commissions, certain direct and incremental underwriting and agency expenses associated with acquiring insurance policies, are deferred and amortized using the straight-line method over the contract year, up to seven years. Actual acquisition costs incurred in excess of estimated acquisition costs are expensed.

(w)Financial income and expense

i) Interest

Interest income and expense are recognized in profit or loss using the effective interest method. The effective interest rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability (or, where appropriate, a shorter year) to the carrying amount of the financial asset or liability. When calculating the effective interest rate, the Group estimates future cash flows considering all contractual terms of the financial instrument, but not future credit losses.

The calculation of the effective interest rate includes all fees and points paid or received that are an integral part of the effective interest rate. Transaction costs include incremental costs that are directly attributable to the acquisition or issue of a financial asset or liability.

Once an impairment loss has been recognized on a loan, although the accrual of interest in accordance with the contractual terms of the instrument is discontinued, interest income is recognized at the rate of interest that was used to discount estimated future cash flows for the purpose of measuring the impairment loss.

ii) Fees and commission

Fees and commission income and expense that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.Significant accounting policies (continued)

Fees and commission income, including account servicing fees, investment management fees, sales commission, placement fees and syndication fees, are recognized as the related services are performed. When a loan commitment is not expected to result in the draw-down of a loan, the related loan commitment fees are recognized on a straight-line basis over the commitment period.

Fees and commission expense relate mainly to transaction and service fees, which are expensed as the services are received.

iii) Insurance Income

The Group recognizes insurance income for the insurance premium paid of which the payment date arrived by the premium payment methods of the insurance contract; and recognizes advance receipts for the insurance premium paid of which the payment date has not arrived at the end of the reporting period.

iv) Dividends

Dividend income is recognized when the right to receive income is established.

(x)Customer loyalty program

For customer loyalty programmes, the fair value of the consideration received or receivable in respect of the initial sale is allocated between award credits (“points”) and other components of the fee and commission income. The Group provides awards, in the form of price discounts and by offering a variety of gifts. The fair value allocated to the points is estimated by reference to the fair value of the monetary and/ornon-monetary benefits for which they could be redeemed. The fair value of the benefits is estimated taking into account the expected redemption rate and the timing of such expected redemptions. Such amount is deferred and recognized as unearned revenue. Unearned revenue is recognized only when the points are redeemed and the Group has fulfilled its obligations to provide the benefits. The amount of revenue recognized in those circumstances is based on the number of points that have been redeemed in exchange for benefits, relative to the total number of points that are expected to be redeemed.

A provision for onerous contracts is recognized when the expected benefits to be derived by the Group from customer loyalty programmes are lower than the unavoidable cost of meeting its obligations under the programmes.

(y)Income tax

Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in profit or loss except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income.

i) Current tax

Current tax is the expected tax payable or receivable on the taxable profit or loss for the year, using tax rates enacted or substantively enacted at the end of the reporting period and any adjustment to tax payable in respect of previous years. The taxable profit is different from the accounting profit for the period since the taxable profit is calculated excluding the temporary differences, which will be taxable or deductible in determining taxable profit (tax loss) of future periods, andnon-taxable ornon-deductible items from the accounting profit.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.Significant accounting policies (continued)

ii) Deferred tax

Deferred tax is recognized, using the asset-liability method, in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. A deferred tax liability is recognized for all taxable temporary differences. A deferred tax asset is recognized for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which they can be utilized. However, deferred tax is not recognized for the following temporary differences: taxable temporary differences arising on the initial recognition of goodwill, or the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting profit or loss nor taxable income.

The Group files its national income tax return with the Korean tax authorities under the consolidated corporate tax system, which allows it to make national income tax payments based on the combined profits or losses of the Controlling Company and its wholly owned domestic subsidiaries. Deferred taxes are measured based on the future tax benefits expected to be realized in consideration of the expected combined profits or losses of eligible companies in accordance with the consolidated corporate tax system. Consolidated corporate tax amounts, once determined, are allocated to each of the subsidiaries and are used as a basis for the income taxes to be recorded in their separate financial statements.

The Group recognizes a deferred tax liability for all taxable temporary differences associated with investments in subsidiaries, associates, and interests in joint ventures, except to the extent that the Group is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The Group recognizes a deferred tax asset for all deductible temporary differences arising from investments in subsidiaries and associates, to the extent that it is probable that the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilized.

The carrying amount of a deferred tax asset is reviewed at the end of each reporting period and reduces the carrying amount to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilized.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and deferred tax assets reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting period to recover or settle the carrying amount of its assets and liabilities.

Deferred tax assets and liabilities are offset only if the Group has a legally enforceable right to set off current tax assets against current tax liabilities, and the deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same taxation authority on either: the same taxable entity; or different taxable entities which intend either to settle current tax liabilities and assets on a net basis, or to realize the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered.

(z)Accounting for trust accounts

The Group accounts for trust accounts separately from its group accounts under the Financial Investment Services and Capital Markets Act and thus the trust accounts are not included in the consolidated financial statements except Guaranteed Fixed Rate Money Trusts controlled by the Group, based on an evaluation of

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.Significant accounting policies (continued)

the substance of its relationship with the Group and the SPE’s risks and rewards. Funds transferred between Group account and trust accounts are recognized as borrowings from trust accounts in other liabilities with fees for managing the accounts recognized asnon-interest income by the Group.

(aa)Earnings per share

The Group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Group by the weighted average number of ordinary shares outstanding during the period, adjusted for own shares held. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding, adjusted for own shares held, for the effects of all dilutive potential ordinary shares, which comprise convertible notes and share options granted to employees.

(ab)New standards and interpretations not yet adopted

The following new standards and amendments to existing standards have been published and are mandatory for the Group to adopt for annual periods beginning on or after January 1, 2018, and the Group has not early adopted them.

i) IFRS 9, Financial Instruments

IFRS 9,Financial Instruments which was published on September 25, 2015, is effective for periods beginning on or after January 1, 2018, with early adoption permitted. IFRS 9 will replace the current IAS 39,Financial Instruments: recognition and measurement. The Group plans to adopt IFRS 9 for the year beginning on January 1, 2018 and will recognize the accumulated effect resulting from initial application of IFRS 9 on the date of initial application, which is January 1, 2018.

IFRS 9 will generally be applied retrospectively; however, the Group plans to take advantage of the exemption allowing it not to restate the comparative information for prior periods with respect to classification and measurement (including impairment) changes. For hedge accounting, the new standard will be applied prospectively except for certain cases such as accounting for the time value of options.

Main characteristics of IFRS 9 are the followings; 1) classification and measurement of financial instruments based on characteristics of contractual cash flows and business model for financial instrument management, 2) impairment model based on expected credit losses, and 3) expanded scope of hedged items and hedging instruments which qualify for hedge accounting and changes in assessment method for effect of hedging relationships.

For the application of IFRS 9, the Group implemented changes in its accounting processes and internal controls related to financial instruments. The Group assessed the potential financial impact of the initial adoption of IFRS 9 based on the circumstances and available information as of December 31, 2017 as follows:

1)Classification and measurement of financial assets

The Group classifies financial assets as subsequently measured at amortized cost, fair value through other comprehensive income or fair value through profit or loss on the basis of both the Group’s business model

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.Significant accounting policies (continued)

for managing the financial assets and the contractual cash flow characteristics of the financial assets as shown in the below table when the new standard IFRS 9 is adopted. Furthermore, if a hybrid contract contains a host that is an asset within the scope of this standard, an embedded derivative shall not be separated from the host and the hybrid contract is accounted as a financial asset.

Contractual cash flow characteristics

Business model objectives

Principal and interest

Others

Collection of the contractual cash flows

Measured at amortized cost (*1)(“AC”)

Fair value through profit or loss (*2)

Collection of the contractual cash flows and to sale of assets

Measured at fair value through other comprehensive income (*1)(“FVOCI”)

sale of assets and others

Measured at fair value through profit or loss (“FVPL”)

(*1)The Group may irrevocably designate a financial asset as measured at fair value through profit or loss to eliminate or significantly reduce accounting mismatch.
(*2)The Group may make an irrevocable election for equity instruments that are not held for trading as measured at fair value through other comprehensive income.

As there are additional requirements for a financial asset to be classified as measured at amortized costs or at fair value through other comprehensive income under IFRS 9 compared to the existing IAS 39, the adoption of IFRS 9 would potentially increase the proportion of financial assets that are measured at fair value through profit or loss, increasing volatility in the Group’s profit or loss.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.Significant accounting policies (continued)

The expected impacts on the classification and measurement of financial assets as of December 31, 2017 based on the information from the revised accounting system are as follows:

Classification by

  Amount by 

IAS 39

  IFRS 9  IAS 39 (*1)   IFRS 9 (*1) 

Due from banks

  Loans and receivables  FVPL  W902,124    833,942 
    AC   19,988,001    19,988,001 

Loans

  Loans and receivables  FVPL   750,342    778,985 
    AC   277,126,028    277,126,028 

Other financial assets

  Loans and receivables  AC   12,090,983    12,090,983 

Trading assets (debt securities)

  

Fair value through profit or loss

  FVPL   23,451,755    23,451,755 

Trading assets (equity securities)

  

Fair value through profit or loss

  FVPL   4,823,244    4,823,244 

Trading assets (gold deposits)

  

Fair value through profit or loss

  FVPL   189,297    189,297 

Fair value through profit or loss (debt securities)

  

Fair value through profit or loss

  FVPL   2,030,522    2,030,522 
    Designated at FVPL   80,288    80,288 

Fair value through profit or loss (equity securities)

  

Fair value through profit or loss

  FVPL   1,162,553    1,162,553 
    Designated at FVPL   71,803    71,803 

Fair value through profit or loss (hybrid financial assets)

  

Fair value through profit or loss

  FVPL   233,892    233,892 

Available-for-sale (debt securities)

  Available-for-sale  FVPL   528,745    533,452 
    FVOCI   36,657,807    36,657,807 

Available-for-sale (equity securities)

  Available-for-sale  FVPL   4,339,979    4,350,969 
    FVOCI   590,405    590,405 

Held-to-maturity (debt securities)

  Held-to-maturity  FVPL   565,813    529,906 
    AC   24,424,867    24,424,867 
      

 

 

   

 

 

 

Total

  W410,008,448    409,948,699 
      

 

 

   

 

 

 

(*1)Allowance for credit losses was excluded in the carrying amount.
(*2)Based on IFRS 4, the Group applies the overlay approach method for financial assets related to insurance contract (Due from banks in the amount ofW902,124 millions,Available-for-sale (equity security) in the amount ofW1,972,577 millions,Available-for-sale (debt security) in the amount ofW400,978 millions,Held-to-maturity in the amount ofW565,813 millions).

Upon adoption of IFRS 9, the Group expects to make reclassification adjustments between profit or loss and other comprehensive income on the date of initial application an amount which is equal to the difference between i) the amount reported in profit or loss for the designated financial assets applying IFRS 9; and ii) the amount that would have been reported in profit or loss for the designated financial assets if the insurer had applied IAS 39.

Based on management’s evaluation to date, upon adoption of IFRS 9 as of January 1, 2018, financial assets amounting toW2,142,833 million among the loans and receivables andheld-to-maturity securities,W4,884,421 million among theavailable-for-sale securities are expected to be classified as assets measured at fair value through profit or loss. The portion of assets measured at fair value through profit or loss

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.Significant accounting policies (continued)

increases to 9.53% under IFRS 9 as of January 1, 2018 from 7.82% under IAS 39 as of December 31, 2017; and the volatility of profit or loss is expected to increase due to the changes in the fair value of financial assets.

2)Classification and measurement of financial liabilities

In accordance with the new standard IFRS 9, the amount of change in the fair value of the financial liability designated as measured at fair value through profit or loss that is attributable to changes in the credit risk of that liability will be presented in other comprehensive income, not profit or loss. Amounts presented in other comprehensive income shall not be subsequently transferred to profit or loss. However, when the treatment of the effects of changes in the liability’s credit risk would create or enlarge an accounting mismatch, the related change in the fair value can be presented in profit or loss.

As some portion of the changes in fair value of the financial liability that is designated at fair value through profit or loss, which was recognized as profit or loss under IAS 39, will be presented as other comprehensive income, the profit or loss related to fair value of financial liability may decrease.

The Group designated liabilities amounting toW8,297,609 million from the total financial liabilities ofW362,185,727 million as measured at fair value through profit or loss as of December 31, 2017. On the date of initial application of IFRS 9, the loss recorded in opening retained earnings amounting toW100,685 million for these financial liabilities will be changed byW2,141 million related to the change in fair value as a result of change in credit risk of the financial liabilities.

3)Impairment: Financial assets and contract assets

Under the current standard IAS 39, impairment is recognized based on incurred loss model only when there is an objective evidence of impairment. However, under the new standard IFRS 9, impairment is recognized based on expected credit loss impairment model for the debt instruments, lease receivable, contract assets, loan commitments, and financial guarantee contracts measured at amortized cost or financial assets that are measured at fair value through other comprehensive income.

Unlike the current standard IAS 39 which is based on incurred loss model, credit losses may be recognized earlier under IFRS 9. As shown below, this standard requires to measure the amount for loss allowance in 3 stages based on the12-month expected credit losses or lifetime expected credit losses depending on the degree of increase in credit risk of the financial assets since initial recognition.

Stages

Loss allowance

Stage 1Credit risk has not increased significantly since initial recognition (*1)12-month expected credit losses: the expected credit losses that result from default events on a financial instrument that are possible within the 12 months after the reporting date.
Stage 2Credit risk has increased significantly since initial recognitionLifetime expected credit losses: the expected credit losses that result from all possible default events over the expected life of a financial instrument.
Stage 3Credit-impaired

(*1)The Group may assume that the credit risk on a financial instrument has not increased significantly since initial recognition if the credit risk is low at the reporting date.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.Significant accounting policies (continued)

According to IFRS 9, the Group will only recognize the cumulative changes in lifetime expected credit losses since initial recognition as a loss allowance for financial assets impaired at its initial recognition.

Under IFRS 9, the Group will apply the simplified approach for which the Group will consider a debt security to have low credit risk when its credit risk rating is equivalent to the definition of ‘investment-grade’.

Based on management’s evaluation to date using the information from the revised accounting system as of December 31, 2017, the expected impacts on the allowance for loan losses are as follows:

Classification Under

  Amount Under 

IAS 39

  IFRS 9  IAS 39   IFRS 9 

Allowance for loan losses

      

Loans and receivables

      

Due from banks

  AC  W14,054    15,062 

Loans

  AC   2,307,276    2,871,986 
  FVPL   3,328    —   

Other financial assets

  AC   49,679    51,818 

Available-for-sale assets

      

Debt securities

  FVOCI   —      18,711 

Held-to-maturity assets

      

Debt securities

  AC   —      8,824 
    

 

 

   

 

 

 
    W2,374,337    2,966,401 
    

 

 

   

 

 

 

Contingent liabilities

      

Financial guarantee contract

  Financial guarantee
contract		  W36,506    37,288 

Allowances for unused
loan commitments and
other credit risk

  Allowances for unused
loan commitments
and other credit risk		   168,006    222,499 
    

 

 

   

 

 

 
    W204,512    259,787 
    

 

 

   

 

 

 

4)Hedge accounting

New standard IFRS 9 retains the mechanics of hedge accounting (fair value hedge, cash flow hedge, and hedge of a net investment in a foreign operation) of current standard IAS 39. However, this standard mitigated IAS 39 by amending the complex and rule-based requirements related to hedge accounting under IAS 39 to principle-based requirements to align hedge accounting more closely with risk management. Furthermore, this standard expanded the eligible hedged items and the hedging instruments and eased the requirement for the hedge accounting by removing quantitative threshold (80~125%) and changing hedge effectiveness test method.

When applying hedge accounting under IFRS 9, the hedge accounting can be applied to certain transactions that do not meet the requirements for hedge accounting under IAS 39 and volatility of the profit or loss can be decreased.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.Significant accounting policies (continued)

The Group will adopt IFRS 9 hedge accounting requirements and plans to apply hedge accounting for the risk management activities if the hedge accounting requirements can be met.

As December 31, 2017, no hedge accounting is applied under IFRS 9 for risk management activities for which no hedge accounting has been applied under the existing IAS 39.

ii) IFRS 15, ‘Revenue from Contracts with CustomersCustomers’

IFRS 15, published on November 6, 2015, is a new accounting standard about revenue recognition, is effective for annual reporting periods beginning on or after January 1, 2018, with earlier application permitted.

It, which replaces existing revenue recognition standards,guidance, including IAS 18, ‘RevenueRevenue’’, IAS 11, ‘Construction ContractsContracts’’,SIC-31, ‘Revenue-Barter Transactions Involving Advertising ServicesServices’’, IFRIC 13,‘Customer Loyalty ProgrammesProgrammes’’., IFRIC 15, ’Agreements‘Agreement for the Construction of Real EstateEstate’’, and IFRIC 18, ‘Transfers of Assets from Customers.’.

The Group adopts IFRS 15 from January 1, 2018 using the cumulative effect methodIAS 18 and the effect of initially applying this standard is recognized at the date of initial application (i.e. January 1, 2018). As a result, the Group will not apply the requirements of IFRS 15 to the comparative period presented.

The existingother standards suggestoutlined revenue recognition guidance by typefor different types of transactions such as salesales of goods rendering ofand services, interest revenue, royalty revenue, dividends revenueincome, loyalty programs, dividend income and construction contracts. However,contracts; however, according to IFRS 15, all types of contracts recognize revenue through five-step revenue recognition model (① ‘Identifying the contract’g ② ‘Identifying performance obligations’g ③ ‘Determining the transaction price’g ④ ‘Allocating the transaction price to performance obligations’g ⑤ ‘Recognizing the revenue by satisfying performance obligations’).

Since the second halfEffects on equity as a result of 2017, the Group has formed a separate Task Force Team to prepare for the adoptioninitial application of IFRS 15 and set up the relating accounting policies and processes. The Group assessed the impact of the new standard by evaluating contracts, identifying relating performance obligations, determining when the performance obligations were met to recognize revenue and assessing the revenue amount to be recognized. As a result of the assessment, there are no significant impacts from the adoption of IFRS 15included in relation to the timing of when the Group recognizes or when revenue should be recognized gross as a principal or net as an agent.Note 60.

iii) Amendments toii) IFRS 2, Classification and Measurement of Share-based Payment Transactions‘Share-based Payment’

The amendments clarifiedStandard has been amended to clarify that measuringmeasurement of cash-settled share-based payment shouldtransactions shall reflect theboth vesting conditions andnon-vesting conditions like measuringwith the same approach as equity-settled share-based payment;payment transactions, and the case whereto clarify classification of share-based payment transactions with a net settlement feature for withholding tax obligations should be classified as equity-settled share-based payments. This amendments are effective for annual reporting period beginning on or afterobligations.

iii) IAS 40, ‘Investment property’

Effective January 1, 2018 and after, the Group does not expecthas adopted the amendments to IAS 40 Investment Property. The amendment clarifies that it meets the definition of an investment property and, if there is evidence of change in use, it is possible to substitute an investment property. We have significant impactalso clarified that real estate under construction is included in the scope. The effect of the amendment on the consolidated financial statements is not significant.

iv) IFRS 9, ‘Financial Instruments’

The Group has applied IFRS 9 ‘Financial Instruments’, which was published on September 25, 2015, from the year starting on January 1, 2018. IFRS 9 replaced IAS 39, ‘Financial Instruments: Recognition and Measurement.’

The main characteristics of IFRS 9 are: classification and measurement of financial instruments based on characteristics of contractual cash flows and business model, impairment model based on expected credit

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

2.

Basis of preparation (continued)

losses, the expansion of the types of qualifying hedging instruments and hedged items, and changes in hedge effectiveness tests, etc.

In principle, IFRS 9 should be applied retrospectively. However, there are exemptions for restating the comparative information with respect to classification, measurement of financial instruments, and impairment. In addition, for hedge accounting, the new standard will be applied prospectively except for certain cases such as accounting for the time value of options. As permitted by the transition requirements of IFRS 9, comparative periods have not been restated. The effects of the first application of IFRS 9 on equity items, the reconciliation of the carrying amount of financial assets and financial liabilities, and the adjustment of loss provisions under IAS 39 are included in note 60.

3.

Significant accounting policies

Except for the new standards and the amendment to the following standard, which are applied from January 1, 2018, the accounting policies applied by the Group in these consolidated financial statements are the same as those applied by the Group in its consolidated financial statements as of and for the year ended December 31, 2018 and have mentioned on the note 2.

(a)

Operating segments

An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components, whose operating results are reviewed regularly by the chief operating decision maker to make decisions about resources allocated to each segment and assess its performance, and for which discrete financial information is available.

The segment reporting to a chief executive officer includes items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly general expenses and income tax assets and liabilities. The Group considers the Chief Executive Officer (“CEO”) of the Bank as the chief operating decision maker.

It is CEO’s responsible for evaluating the resources to be distributed to the business and the performance of the business, and makes strategic decisions.

(b)

Basis of consolidation

i) Subsidiaries

Subsidiaries are investees controlled by the Group. The Group controls an investee when it is exposed to, or has rights to, variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.

If a member of the Group uses accounting policies other than those adopted in the consolidated financial statements for the same transactions and events in similar circumstances, appropriate adjustments are made to its financial statements in preparing the consolidated financial statements.

iv) IFRS 16, Leasesii) Structured entity

IFRS 16, ‘Leases’ which was published on May 25, 2017,The Group establishes or invests in various structured entities. A structured entity is effective for periods beginning on or after January 1, 2019, with early adoption permitted. IFRS 16 will replacean entity designed so that its activities are not governed by way of voting rights. When assessing control of a structured entity, the current IAS 17, ‘Leases’, IFRIC 4, ‘Determining whether an Arrangement Contains a Lease’. Companies applying the IFRS 15 ‘Revenue from Contracts with Customers’ can adopt IFRS 16 early.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

3.

Significant accounting policies (continued)

Group considers factors such as the purpose and the design of the investee; its practical ability to direct the relevant activities of the investee; the nature of its relationship with the investee; and the size of its exposure to the variability of returns of the investee. The Group does not recognize anynon-controlling interests as equity in relation to structured entities in the consolidated statements of financial position since thenon-controlling interests in these entities are recognized as liabilities of the Group.

iii) Intra-group transactions eliminated on consolidation

Intra-group balances, transactions, and any unrealized income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Intra-group losses are recognized as expense if intra-group losses indicate an impairment that requires recognition in the consolidated financial statements.

iv)Non-controlling interests

Non-controlling interests in a subsidiary are accounted for separately from the parent’s ownership interests in a subsidiary. Each component of net profit or loss and other comprehensive income is attributed to the owners of the parent andnon-controlling interest holders, even when the allocation reduces thenon-controlling interests balance below zero.

(c)

Business combinations

i) Business combinations

A business combination is accounted for by applying the acquisition method, unless it is a combination involving entities or businesses under common control.

Each identifiable asset and liability is measured at its acquisition-date fair value except for below:

Leases and insurance contracts are required to be classified on the basis of the contractual terms and other factors

Only those contingent liabilities assumed in a business combination that are a present obligation and can be measured reliably are recognized

Deferred tax assets or liabilities are recognized and measured in accordance with IAS 12, ‘Income Taxes’

Employee benefit arrangements are recognized and measured in accordance with IAS 19, ‘Employee Benefits’

Indemnification assets are recognized and measured on the same basis as the indemnified liability or asset

Reacquired rights are measured in accordance with special provisions

Liabilities or equity instruments related to share-based payment transactions are measured in accordance with the method in IFRS 2, ‘Share-based Payment’

Non-current assets held for sale are measured at fair value less costs to sell in accordance with IFRS 5,‘Non-current Assets Held for Sale and Discontinued Operations’

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.

Significant accounting policies (continued)

As of the acquisition date,non-controlling interests in the acquirer are measured as thenon-controlling interests’ proportionate share of the acquirer’s identifiable net assets.

The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition-date fair values of the assets transferred by the acquirer, the liabilities incurred by the acquirer to former owners of the acquirer and the equity interests issued by the acquirer. However, any portion of the acquirer’s share-based payment awards exchanged for awards held by the acquirer’s employee that is included in consideration transferred in the business combination shall be measured in accordance with the method described above rather than at fair value.

Acquisition-related costs are costs the acquirer incurs to effect a business combination. Those costs include finder’s fees; advisory, legal, accounting, valuation and other professional or consulting fees; general administrative costs, including the costs of maintaining an internal acquisitions department; and costs of registering and issuing debt and equity securities. Acquisition-related costs, other than those associated with the issue of debt or equity securities, which are recognized in accordance with IAS 32 and IFRS 9, are expensed in the periods in which the costs are incurred and the services are received.

ii) Goodwill

The Group measures goodwill at the acquisition date as:

the fair value of the consideration transferred; plus

the recognized amount of anynon-controlling interests in the acquiree; plus

if the business combination is achieved in stages, the fair value of thepre-existing equity interest in the acquiree; less

the net recognized amount (generally fair value) of the identifiable assets acquired and liabilities assumed.

When the excess is negative, a bargain purchase gain is recognized immediately in profit or loss.

When the Group additionally acquiresnon-controlling interest, the Group does not recognize goodwill since the transaction is regarded as equity transaction.

(d)

Investments in associates

An associate is an entity in which the Group has significant influence, but not control, over the entity’s financial and operating policies. Significant influence is presumed to exist when the Group holds between 20 and 50 percent of the voting power of another entity.

A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.

The investment in an associate and a joint venture is initially recognized at cost, and the carrying amount is increased or decreased to recognize the Group’s share of the profit or loss and changes in equity of the associate and the joint venture after the date of acquisition. Intra-group balances and transactions, and any unrealized income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Intra-group losses are recognized as expense if intra-group losses indicate an impairment that requires recognition in the consolidated financial statements.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.

Significant accounting policies (continued)

If an associate or a joint venture uses accounting policies different from those of the Group for like transactions and events in similar circumstances, appropriate adjustments are made to its financial statements in applying the equity method.

When the Group’s share of losses exceeds its interest in an equity accounted investee, the carrying amount of that interest, including any long-term investments, is reduced to nil and the recognition of further losses is discontinued except to the extent that the Group has an obligation or has to make payments on behalf of the investee for further losses.

(e)

Cash and cash equivalents

Cash and cash equivalents comprise cash balances and call deposits with original maturities of three months or less from the acquisition date that are subject to an insignificant risk of changes in their fair value, and are used by the Group in the management of its short-term commitments. Equity instruments are excluded from cash equivalents unless they are, in substance, cash equivalents, for example in the case of preferred shares acquired within a short period of their maturity and with a specified redemption date. However, the Group’s account overdraft is included in borrowings.

(f)

Non-derivative financial assets – policy applicable from January 1, 2018

Financial assets are recognized when the Group becomes a party to the contractual provisions of the instrument. In addition, a regular way purchase or sale (a purchase or sale of a financial asset under a contract whose terms require delivery of the asset within the time frame established generally by regulation or convention in the market concerned) is recognized on the trade date.

A financial asset is measured initially at its fair value plus, for an item not at Fair Value Through Profit or Loss (“FVTPL”), transaction costs that are directly attributable to its acquisition of the financial asset. Transaction costs on the financial assets at FVTPL that are directly attributable to the acquisition are recognized in profit or loss as incurred.

i) Financial assets designated at FVTPL

Financial assets can be irrevocably designated as measured at FVTPL despite of classification standards stated below, if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise from measuring assets or liabilities or recognizing the gains or losses on them on different bases.

ii) Equity instruments

For the equity instruments that are not held for trading, at initial recognition, the Group may make an irrevocable election to present subsequent changes in fair value in other comprehensive income. Equity instruments that are not classified as financial assets at Fair Value through Other Comprehensive Income (“FVOCI”) are classified as financial assets at FVTPL.

The Group subsequently measures all equity investments at fair value. Valuation gains or losses of the equity instruments that are classified as financial assets at FVOCI previously recognized as other comprehensive income is not reclassified as profit or loss on derecognition. The Group recognizes dividends in profit or loss when the Group’s right to receive payments of the dividend is established.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.

Significant accounting policies (continued)

Valuation gains or losses due to changes in fair value of the financial assets at FVTPL are recognized as gains or losses on financial assets at FVTPL. Impairment loss (reversal) on equity instruments at FVOCI is not recognized separately.

iii) Debt instruments

Subsequent measurement of debt instruments depends on the Group’s business model in which the asset is managed and the contractual cash flow characteristics of the asset. Debt instruments are classified as financial assets at amortized cost, at FVOCI, or at FVTPL. Debt instruments are reclassified only when the Group’s business model changes.

a)

Financial assets at amortized cost

Assets that are held within a business model whose objective is to hold assets to collect contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortized cost. Impairment losses, and gains or losses on derecognition of the financial assets at amortized cost are recognized in profit or loss. Interest income on the effective interest method is included in the ‘Interest income’ in the consolidated statement of comprehensive income.

b)

Financial assets at FVOCI

Assets that are held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets, where the assets’ cash flows represent solely payments of principal and interest, are measured at FVOCI. Other than impairment losses, interest income amortized using effective interest method and foreign exchange differences, gains or losses of the financial assets at FVOCI are recognized as other comprehensive income in equity. On derecognition, gains or losses accumulated in other comprehensive income are reclassified to profit or loss. The interest income on the effective interest method is included in the ‘Interest income’ in the consolidated statement of comprehensive income. Foreign exchange differences and impairment losses are included in the ‘Net foreign currency transaction gain’ and ‘Provision for credit loss allowance’ in the consolidated statement of comprehensive income, respectively.

c)

Financial assets at FVTPL

Debt securities other than financial assets at amortized costs or FVOCI are classified at FVTPL. Unless hedge accounting is applied, gains or losses from financial assets at FVTPL are recognized as profit or loss and are included in ‘Net gain on financial assets at fair value through profit or loss’ in the consolidated statement of comprehensive income.

iv) Embedded derivatives

Financial assets with embedded derivatives are classified regarding the entire hybrid contract, and the embedded derivatives are not separately recognized. The entire hybrid contract is considered when it is determined whether the contractual cash flows represent solely payments of principal and interest.

v) Derecognition of financial assets

The Group derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.

Significant accounting policies (continued)

substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognized as a separate asset or liability.

If the Group retains substantially all the risks and rewards of ownership of the transferred financial assets, the Group continues to recognize the transferred financial assets and recognizes financial liabilities for the consideration received.

vi) Offsetting

Financial assets and financial liabilities are offset and the net amount is presented in the consolidated statement of financial position only when the Group currently has a legally enforceable right to set off the recognized amounts, and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously.

(g)

Non-derivative financial assets – policy applicable before January 1, 2018

The Group recognizes and measuresnon-derivative financial assets by the following four categories: financial assets at fair value through profit or loss,held-to-maturity investments, loans and receivables andavailable-for-sale financial assets. The group recognizes financial assets in the separate statement of financial position when the group becomes a party to the contractual provisions of the instrument.

Upon initial recognition,non-derivative financial assets are measured at their fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the asset’s acquisition or issuance.

i) Financial assets at fair value through profit or loss

A financial asset is classified as at fair value through profit or loss if it is held for trading or is designated at fair value through profit or loss. Upon initial recognition, transaction costs are recognized in profit or loss when incurred. Financial assets at fair value through profit or loss are measured at fair value, and changes therein are recognized in profit or loss.

A financial asset other than a financial asset held for trading may be designated as at FVTPL upon initial recognition if:

such designation eliminates or significantly reduces a recognition or measurement inconsistency that would otherwise arise; or

the financial asset forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group’s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or

it forms part of a contract containing one or more embedded derivatives that would be required to be separated from the host contract.

ii)Held-to-maturity financial assets(“HTM”)

Anon-derivative financial asset with a fixed or determinable payment and fixed maturity, for which the Group has the positive intention and ability to hold to maturity, are classified asheld-to-maturity

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.

Significant accounting policies (continued)

investments. Subsequent to initial recognition,held-to-maturity investments are measured at amortized cost using the effective interest method.

iii) Loans and receivables

Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Subsequent to initial recognition, loans and receivables are measured at amortized cost using the effective interest method.

iv)Available-for-sale financial assets(“AFS”)

Available-for-sale financial assets are thosenon-derivative financial assets that are designated asavailable-for-sale or are not classified as financial assets at fair value through profit or loss,held-to-maturity investments or loans and receivables. Subsequent to initial recognition, they are measured at fair value, which changes in fair value, net of any tax effect, recorded in other comprehensive income in equity. Investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured and derivatives that are linked to and must be settled by delivery of such unquoted equity instruments are measured at cost.

v)De-recognition of financial assets

The Group derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognized as a separate asset or liability.

If the Group retains substantially all the risks and rewards of ownership of the transferred financial assets, the Group continues to recognize the transferred financial assets and recognizes financial liabilities for the consideration received.

vi) Offsetting between financial assets and financial liabilities

Financial assets and financial liabilities are offset and the net amount is presented in the consolidated statement of financial position only when the Group currently has a legally enforceable right to offset the recognized amounts, and there is the intention to settle on a net basis or to realize the asset and settle the liability simultaneously.

(h)

Derivative financial instruments – policy applicable from January 1, 2018

Derivatives are initially recognized at fair value. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are accounted for as described below.

i) Hedge accounting

The Group holds forward exchange contracts, interest rate swaps, currency swaps and other derivative contracts to manage interest rate risk and foreign exchange risk. The Group designated derivatives as

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.

Significant accounting policies (continued)

hedging instruments to hedge the risk of changes in the fair value of assets, liabilities or firm commitments (a fair value hedge) and foreign currency risk of highly probable forecasted transactions or firm commitments (a cash flow hedge).

On initial designation of the hedge, the Group formally documents the relationship between the hedging instrument(s) and hedged item(s), including the risk management objectives and strategy in undertaking the hedge transaction, together with the methods that will be used to assess the effectiveness of the hedging relationship.

Fair value hedge

Changes in the fair value of a derivative hedging instrument designated as a fair value hedge are recognized in profit or loss. The gain or loss from remeasuring the hedging instrument at fair value for a derivative hedging instrument and the gain or loss on the hedged item attributable to the hedged risk are recognized in profit or loss in the same line item of the separate statement of comprehensive income.

The Group discontinues fair value hedge accounting if the hedging instrument expires or is sold, terminated or exercised, or if the hedge no longer meets the criteria. Any adjustment arising from G/L on the hedged item attributable to the hedged risk is amortized to profit or loss from the date the hedge accounting is discontinued.

Cash flow hedge

When a derivative is designated to hedge the variability in cash flows attributable to a particular risk associated with a recognized asset or liability or a highly probable forecasted transaction that could affect profit or loss, the effective portion of changes in the fair value of the derivative is recognized in other comprehensive income, net of tax, and presented in the hedging reserve in equity. Any ineffective portion of changes in the fair value of the derivative is recognized immediately in profit or loss.

If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated, exercised, or the designation is revoked, then hedge accounting is discontinued prospectively. The cumulative gain or loss on the hedging instrument that has been recognized in other comprehensive income is reclassified to profit or loss in the periods during which the forecasted transaction occurs. If the forecasted transaction is no longer expected to occur, then the balance in other comprehensive income is recognized immediately in profit or loss.

Net investment hedge

The portion of the change in fair value of a financial instrument designated as a hedging instrument that meets the requirements for hedge accounting for a net investment in a foreign operation is recognized in other comprehensive income and the ineffective portion of the hedge is recognized in profit or loss Recognize. The portion recognized as other comprehensive income that is effective as a hedge is recognized in the statement of comprehensive income as a result of reclassification adjustments in accordance with IAS 21, “Effect of Changes in Foreign Exchange Rates” at the time of disposing of its overseas operations or disposing of a portion of its overseas operations to profit or loss.

Other derivative financial instruments

Changes in the fair value of other derivative financial instrument not designated as a hedging instrument are recognized immediately in profit or loss.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.

Significant accounting policies (continued)

Unobservable valuation differences at initial recognition

Any difference between the fair value of over the counter derivatives at initial recognition and the amount that would be determined at that date using a valuation technique in a situation in which the valuation is dependent on unobservable parameters is not recognized in profit or loss but is recognized on a straight-line basis over the life of the instrument or immediately when the fair value becomes observable.

(i)

Derivative financial instruments – policy applicable before January 1, 2018

Derivatives are initially recognized at fair value. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are accounted for as described below.

i) Hedge accounting

The Group holds forward exchange contracts, interest rate swaps, currency swaps and other derivative contracts to manage interest rate risk and foreign exchange risk. The Group designated derivatives as hedging instruments to hedge the risk of changes in the fair value of assets, liabilities or firm commitments (a fair value hedge) and foreign currency risk of highly probable forecasted transactions or firm commitments (a cash flow hedge).

On initial designation of the hedge, the Group formally documents the relationship between the hedging instrument(s) and hedged item(s), including the risk management objectives and strategy in undertaking the hedge transaction, together with the methods that will be used to assess the effectiveness of the hedging relationship.

•

Fair value hedge – Changes in the fair value of a derivative hedging instrument designated as a fair value hedge are recognized in profit or loss. The gain or loss from remeasuring the hedging instrument at fair value for a derivative hedging instrument and the gain or loss on the hedged item attributable to the hedged risk are recognized in profit or loss in the same line item of the consolidated statement of comprehensive income. The Group discontinues fair value hedge accounting if the hedging instrument expires or is sold, terminated or exercised, or if the hedge no longer meets the criteria for hedge accounting. Any adjustment arising from gain or loss on the hedged item attributable to the hedged risk is amortized to profit or loss from the date the hedge accounting is discontinued.

•

Cash flow hedge–When a derivative is designated to hedge the variability in cash flows attributable to a particular risk associated with a recognized asset or liability or a highly probable forecasted transaction that could affect profit or loss, the effective portion of changes in the fair value of the derivative is recognized in other comprehensive income, net of tax, and presented in the hedging reserve in equity. Any ineffective portion of changes in the fair value of the derivative is recognized immediately in profit or loss. If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated, exercised, or the designation is revoked, then hedge accounting is discontinued prospectively. The cumulative gain or loss on the hedging instrument that has been recognized in other comprehensive income is reclassified to profit or loss in the periods during which the forecasted transaction occurs. If the forecasted transaction is no longer expected to occur, then the balance in other comprehensive income is recognized immediately in profit or loss.

•

Hedge of net investment–Foreign currency differences arising on the retranslation of a financial liability designated as a hedge of a net investment in a foreign operation are recognized in other comprehensive income to the extent that the hedge is effective. To the extent that the hedge is

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.

Significant accounting policies (continued)

ineffective, such differences are recognized in profit or loss. When the hedged part of a net investment is disposed of, the relevant amount in the accumulated other comprehensive income is transferred to profit or loss as part of the profit or loss on disposal in accordance with IAS 21, ‘The Effects of Changes in Foreign Exchange Rates’.

ii) Separable embedded derivatives

Embedded derivatives are separated from the host contract and accounted for separately only if the following criteria has been met: (a) the economic characteristics and risks of the embedded derivative are not closely related to those of the host contract; (b) a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and (c) the hybrid instrument is not measured at fair value with changes in fair value recognized in profit or loss. Changes in the fair value of separable embedded derivatives are recognized immediately in profit or loss.

iii) Other derivative financial instruments

Changes in the fair value of other derivative financial instrument not designated as a hedging instrument are recognized immediately in profit or loss.

iv) Unobservable valuation differences at initial recognition

Any difference between the fair value of over the counter derivatives at initial recognition and the amount that would be determined at that date using a valuation technique in a situation in which the valuation is dependent on unobservable parameters is not recognized in profit or loss but is recognized on a straight-line basis over the life of the instrument or immediately when the fair value becomes observable.

(j)

Impairment: Financial assets and contract assets – policy applicable from January 1, 2018

The Group recognize provision for credit loss allowance for debt instruments measured at amortized cost and fair value through other comprehensive income, and lease receivable, loan commitments and financial guarantee contracts using the expected credit loss impairment model. Financial assets migrate through the following three stages based on the change in credit risk since initial recognition and loss allowances for the financial assets are measured at the12-month expected credit losses (“ECL”) or the lifetime ECL, depending on the stage.

Category

Provision for credit loss allowance

STAGE 1

When credit risk has not increased

significantly since the initial

recognition

12-months ECL: the ECL associated with the probability of default events occurring within the next 12 months
STAGE 2

When credit risk has increased

significantly since the initial

recognition

Lifetime ECL: a lifetime ECL associated with the probability of default events occurring over the remaining lifetime
STAGE 3When assets are impairedSame as above

The Group, meanwhile, only recognizes the cumulative changes in lifetime expected credit losses since the initial recognition as a loss allowance for purchased or originated credit-impaired financial assets. The total period refers to the expected life span of the financial instrument up to the contract expiration date.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.

Significant accounting policies (continued)

Reflection of forward-looking information

The Group reflects forward-looking information presented by internal experts based on a variety of information when measuring expected credit losses. For the purpose of estimating these forward-looking information, the Group utilizes the economic outlook published by domestic and overseas research institutes or government and public agencies.

The Group reflects future macroeconomic conditions anticipated from a neutral standpoint that is free from bias in measuring expected credit losses. Expected credit losses in this respect reflect conditions that are most likely to occur and are based on the same assumptions that the Group used in its business plan and management strategy.

Measurement of amortization cost regarding the expected credit loss of financial assets

The expected credit loss of an amortized financial asset is measured as the difference between the present value of the cash flows expected to be received and the cash flow expected to be received. For this purpose, we calculate expected cash flows for individually significant financial assets.

Fornon-individual significant financial assets, the financial assets collectively include expected credit losses as part of a set of financial assets with similar credit risk characteristics.

Expected credit losses are deducted using the allowance for doubtful accounts and are amortized as if the financial assets were not recoverable. The allowance of bad debts is increased when the loan receivables are subsequently recovered and the changes in the credit loss allowance are recognized in profit or loss.

Measurement of estimated credit loss of financial assets at FVOCI

The calculation of expected credit losses is the same as for financial assets measured at amortized cost, but changes in credit loss allowance are recognized in other comprehensive income. In the case of disposal and redemption of other comprehensive income – fair value, the credit loss allowance is reclassified from other comprehensive income to profit or loss and recognized in profit or loss.

(k)

Impairment: Financial assets and contract assets – policy applicable before January 1, 2018

A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably. However, losses expected as a result of future events, regardless of likelihood, are not recognized.

In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment.

If financial assets have objective evidence that they are impaired, impairment losses should be measured and recognized.

Objective evidence that a financial asset or group of assets is impaired includes observable data that comes to the attention of the holder of the asset about the following loss events:

significant financial difficulty of the issuer or obligor

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.

Significant accounting policies (continued)

a breach of contract, such as a default or delinquency in interest or principal payments;

the lender, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider

it becoming probable that the borrower will enter bankruptcy or other financial reorganization

the disappearance of an active market for that financial asset because of financial difficulties

observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the group.

i) Loans and receivables

The Group first assesses whether objective evidence of impairment exists individually for loans and receivables that are individually significant, and individually or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment.

If there is objective evidence that an impairment loss on loans and receivables has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (i.e., the effective interest rate computed at initial recognition).

If the interest rate of a loan or receivable is a floating rate, the discount rate used to evaluate impairment loss is the current effective interest rate defined in the loan agreement. The present value of estimated future cash flows of secured financial assets is calculated by including cash flows from collateral after deducting costs to acquire and sell the collateral.

In assessing collective impairment, the Group rates and classifies financial assets, based on credit risk assessment or credit rating assessment process that takes into account asset type, industry, regional location, collateral type, delinquency and other relative factors.

Future cash flow of financial assets applicable to collective impairment assessment is estimated by using statistical modelling of historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management’s judgment as to whether current economic and credit conditions are such that the impairment losses are likely to be greater or less than suggested by historical modelling. In adjusting the future cash flow by historical modelling, the result has to be in line with changes and trends of observable data. Methodologies and assumptions used to estimate future cash flow are evaluated on a regular basis in order to reduce any discrepancy between impairment loss estimation and actual loss.

Impairment losses are recognized in profit or loss and reflected in an allowance account against loans and receivables. When a subsequent event causes the amount of impairment loss to decrease, and the decrease can be related objectively to an event occurring after the impairment was recognized, the decrease in impairment loss is reversed through profit or loss of the year.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.

Significant accounting policies (continued)

ii)Available-for-sale financial assets

When a decline in the fair value of anavailable-for-sale financial asset has been recognized in other comprehensive income and there is objective evidence that the asset is impaired, the cumulative loss that had been recognized in other comprehensive income is reclassified from equity to profit or loss as a reclassification adjustment even though the financial asset has not been derecognized. Impairment losses recognized in profit or loss for an investment in an equity instrument classified asavailable-for-sale are not reversed through profit or loss. If, in a subsequent period, the fair value of a debt instrument classified asavailable-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss is recognized in profit or loss, the impairment loss is reversed, with the amount of the reversal recognized in profit or loss.

iii)Held-to-maturity financial assets

An impairment loss in respect ofheld-to-maturity financial assets measured at amortized cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate and is recognized in profit or loss. Interest on the impaired asset continues to be recognized through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss.

(l)

Property and equipment

Property and equipment are initially measured at cost and after initial recognition. The cost of property and equipment includes expenditures arising directly from the construction or acquisition of the asset, any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management and the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located.

Property and equipment are carried at cost less accumulated depreciation and accumulated impairment losses. Certain land and buildings are measured at fair value at the date of transition to IFRS, which is deemed cost, in accordance with IFRS 1, ‘First-time Adoption of IFRS’. Dividend from relevant revaluation surplus is prohibited in accordance with the resolution of the board of directors.

The Group recognizes in the carrying amount of an item of property and equipment the cost of replacing part of property and equipment when that cost is incurred if it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of those parts that are replaced is derecognized. The costs of theday-to-day servicing of property and equipment are recognized in profit or loss as incurred.

Land is not depreciated. Other property and equipment are depreciated on a straight-line basis over the estimated useful lives, which most closely reflect the expected pattern of consumption of the future economic benefits embodied in the asset. Leased assets under finance leases are depreciated over the shorter of the lease term and their useful lives. The estimated useful lives for the current and comparative periods are as follows:

Descriptions

Useful lives

Buildings

40 years

Other properties

4~5 years

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.

Significant accounting policies (continued)

 

The gain or loss arising from the derecognition of an item of property and equipment, which is included in profit or loss, is determined as the difference between the net disposal proceeds, if any, and the carrying amount of the item. Depreciation methods, useful lives and residual values are reassessed at each fiscalyear-end and any adjustment is accounted for as a change in accounting estimate.

(m)

Intangible assets

Intangible assets are measured initially at cost and, subsequently, are carried at cost less accumulated amortization and accumulated impairment losses.

Amortization of intangible assets except for goodwill is calculated on a straight-line basis over the estimated useful lives of intangible assets as below from the date that they are available for use. The residual value of intangible assets is zero. However, as there are no foreseeable limits to the periods over which club memberships are expected to be available for use, this intangible asset is determined as having indefinite useful lives and not amortized.

Descriptions

Useful lives

Software and capitalized development cost

5 years

Other intangible assets

5 years or contract periods, whichever the shorter

Amortization periods and the amortization methods for intangible assets with finite useful lives are reviewed at the end of each reporting period. The useful lives of intangible assets that are not being amortized are reviewed at the end of each reporting period to determine whether events and circumstances continue to support indefinite useful life assessments for those assets. Changes are accounted for as changes in accounting estimates.

Expenditures on research activities, undertaken with the prospect of gaining new technical knowledge and understanding, are recognized in profit or loss as incurred. Development expenditures are capitalized only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and the Group intends to and has sufficient resources to complete development and to use or sell the asset. Other development expenditures are recognized in profit or loss as incurred.

(n)

Investment properties

Investment property is property held either to earn rental income or for capital appreciation or both. An investment property is initially recognized at cost including any directly attributable expenditure. Subsequent to initial recognition, the asset is measured at cost less accumulated depreciation and accumulated impairment losses, if any.

The depreciation method and the estimated useful lives for the current and comparative periods were as follows:

Descriptions

Depreciation method

Useful lives

Buildings

Straight-line40 years

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.

Significant accounting policies (continued)

Subsequent costs are recognized in the carrying amount of investment property at cost or, if appropriate, as separate items if it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized. The costs of theday-to-day servicing are recognized in profit or loss as incurred.

Depreciation methods, useful lives and residual values are reviewed at the end of each reporting date and adjusted, if appropriate. The change is accounted for as changes in accounting estimates.

(o)

Leased assets

The Group classifies and accounts for leases as either a finance or operating lease, depending on the terms. Leases where the Group assumes substantially all of the risks and rewards of ownership are classified as finance leases. All other leases are classified as operating leases.

i) Finance leases

At the commencement of the lease term, the Group recognizes as finance assets and finance liabilities in its consolidated statements of financial position, the lower amount of the fair value of the leased property and the present value of the minimum lease payments, each determined at the inception of the lease. Any initial direct costs are added to the amount recognized as an asset.

Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Contingent rents are charged as expenses in the periods in which they are incurred.

The depreciable amount of a leased asset is allocated to each accounting period during the period of expected use on a systematic basis consistent with the depreciation policy the lessee adopts for depreciable assets that are owned. If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease term, the asset is fully depreciated over the shorter of the lease term and its useful life. The Group reviews to determine whether the leased asset may be impaired.

ii) Operating leases

Payments made under operating leases are recognized in profit or loss on a straight-line basis over the period of the lease.

iii) Lessor

Under a finance lease, the lessor recognizes a finance lease receivable. Over the lease term the lessor accrues interest income on the net investment. The receipts under the lease are allocated between reducing the net investment and recognizing finance income, so as to produce a constant rate of return on the net investment.

Under an operating lease, the lessor recognizes the lease payments as income over the lease term and the leased asset in its statement of financial position.

(p)

Assets held for sale

Non-current assets, or disposal groups comprising assets and liabilities, that are expected to be recovered primarily through sale rather than through continuing use, are classified as held for sale. In order to be

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.

Significant accounting policies (continued)

classified as held for sale, the asset (or disposal group) must be available for immediate sale in its present condition and its sale must be highly probable. The assets or disposal group that are classified asnon-current assets held for sale are measured at the lower of their carrying amount and fair value less cost to sell.

The Group recognizes an impairment loss for any initial or subsequent write-down of an asset (or disposal group) to fair value less costs to sell, and a gain for any subsequent increase in fair value less costs to sell, up to the cumulative impairment loss previously recognized in accordance with IAS 36, ‘Impairment of Assets’.

An asset that is classified as held for sale or part of a disposal group classified as held for sale is not depreciated (or amortized).

(q)

Impairment ofnon-financial assets

The carrying amounts of the Group’snon-financial assets, other than assets arising from employee benefits, deferred tax assets andnon-current assets held for sale, are reviewed at the end of the reporting period to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated.

Goodwill and intangible assets that have indefinite useful lives or that are not yet available for use, irrespective of whether there is any indication of impairment, are tested for impairment annually by comparing their recoverable amount to their carrying amount.

The Group estimates the recoverable amount of an individual asset, if it is impossible to measure the individual recoverable amount of an asset, then the Group estimates the recoverable amount of cash-generating unit (“CGU”). A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or group of assets. The recoverable amount of an asset or a CGU is the greater of its value in use and its fair value less costs to sell. The value in use is estimated by applying apre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or the CGU for which estimated future cash flows have not been adjusted, to the estimated future cash flows expected to be generated by the asset or the CGU.

An impairment loss is recognized if the carrying amount of an asset or a CGU exceeds its recoverable amount. Impairment losses are recognized in profit or loss.

Goodwill acquired in a business combination is allocated to each CGU that is expected to benefit from the synergies arising from the goodwill acquired. Any impairment identified at the CGU level will first reduce the carrying value of goodwill and then be used to reduce the carrying amount of the other assets in the CGU on a pro rata basis. Except for impairment losses in respect of goodwill which are never reversed, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.

(r)

Non-derivative financial liabilities – policy applicable from January 1, 2018

The Group recognizes financial liabilities in the consolidated statement of financial position when the Group becomes a party to the contractual provisions of the financial liability in accordance with the substance of the contractual arrangement and the definitions of financial liabilities.

Transaction costs on the financial liabilities at FVTPL are recognized in profit or loss as incurred.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.

Significant accounting policies (continued)

i) Financial liabilities designated at FVTPL

Financial liabilities can be irrevocably designated as measured at FVTPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise from measuring assets or liabilities or recognizing the gains and losses on them on different bases, or a group of financial instruments is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy. The amount of change in the fair value of the financial liabilities designated at FVTPL that is attributable to changes in the credit risk of that liabilities shall be presented in other comprehensive income.

ii) Financial liabilities at FVTPL

Since initial recognition, financial liabilities at FVTPL is measured at fair value, and changes in the fair value are recognized as profit or loss.

iii) Other financial liabilities

Non-derivative financial liabilities other than financial liabilities at fair value through profit or loss are classified as other financial liabilities. At the date of initial recognition, other financial liabilities are measured at fair value minus transaction costs that are directly attributable to the acquisition. Subsequent to initial recognition, other financial liabilities are measured at amortized cost using the effective interest method.

The Group derecognizes a financial liability from the consolidated statement of financial position when it is extinguished (i.e. when the obligation specified in the contract is discharged, cancelled or expires).

(s)

Non-derivative financial liabilities – policy applicable before January 1, 2018

The Group classifiesnon-derivative financial liabilities into financial liabilities at fair value through profit or loss or other financial liabilities in accordance with the substance of the contractual arrangement and the definitions of financial liabilities. The Group recognizes financial liabilities in the consolidated statement of financial position when the Group becomes a party to the contractual provisions of the financial liability.

i) Financial liabilities at fair value through profit or loss

Financial liabilities at fair value through profit or loss include financial liabilities held for trading or designated as such upon initial recognition. Subsequent to initial recognition, financial liabilities at fair value through profit or loss are measured at fair value, and changes therein are recognized in profit or loss. Upon initial recognition, transaction costs that are directly attributable to the acquisition are recognized in profit or loss as incurred.

The criteria for designation of financial liabilities at FVTPL upon initial recognition are the same as those of financial assets at FVTPL.

ii) Other financial liabilities

Non-derivative financial liabilities other than financial liabilities at fair value through profit or loss are classified as other financial liabilities. At the date of initial recognition, other financial liabilities are

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.

Significant accounting policies (continued)

measured at fair value minus transaction costs that are directly attributable to the acquisition. Subsequent to initial recognition, other financial liabilities are measured at amortized cost using the effective interest method.

The Group derecognizes a financial liability from the consolidated statement of financial position when it is extinguished (i.e. when the obligation specified in the contract is discharged, cancelled or expires).

(t)

Foreign currencies

i) Foreign currency transactions

Transactions in foreign currencies are translated to the respective functional currencies of the Group at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency using the reporting date’s exchange rate. The foreign currency gain or loss on monetary items is the difference between amortized cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortized cost in foreign currency translated at the exchange rate at the end of the reporting period.Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined.

ii) Foreign operations

If the presentation currency of the Group is different from a foreign operation’s functional currency, the financial statements of the foreign operation are translated into the presentation currency using the following methods:

The assets and liabilities of foreign operations, whose functional currency is not the currency of a hyperinflationary economy, are translated to presentation currency at exchange rates at the reporting date. The income and expenses of foreign operations are translated to functional currency at exchange rates at the dates of the transactions. Foreign currency differences are recognized in other comprehensive income.

Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of that foreign operation are treated as assets and liabilities of the foreign operation and are translated using the exchange rate at the reporting date.

iii) Net investment in a foreign operation

If the settlement of a monetary item receivable from or payable to a foreign operation is neither planned nor likely in the foreseeable future, then foreign currency differences arising on the item form part of the net investment in the foreign operation and are recognized in other comprehensive income and reclassified from equity to profit or loss on disposal of the net investment.

(u)

Equity capital

i) Capital stock

Capital stock is classified as equity. Incremental costs directly attributable to the transaction of stock are deducted from equity, net of any tax effects.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.

Significant accounting policies (continued)

Preferred stocks are classified as equity if they do not need to be repaid or are repaid only at the option of the Group and if payment is determined by the Group’s discretion, and dividends are recognized when the shareholders’ meeting approves the dividends. Preferred stocks that are eligible for reimbursement of a defined or determinable amount on or after a certain date are classified as liabilities. The related dividend is recognized in profit or loss at the time of occurrence as interest expense.

ii) Hybrid bonds

The Group classifies an issued financial instrument, or its component parts, as a financial liability or an equity instrument depending on the substance of the contractual arrangement of such financial instrument. Hybrid bonds where the Group has an unconditional right to avoid delivering cash or another financial asset to settle a contractual obligation are classified as an equity instrument and presented in equity.

iii) Capital structure

The effect of changes in ownership interests in subsidiaries that do not lose control over the equity attributable to owners of the parent is included in capital adjustments.

(v)

Employee benefits

i) Short-term employee benefits

Short-term employee benefits are employee benefits that are due to be settled within 12 months after the end of the period in which the employees render the related service. When an employee has rendered service to the Group during an accounting period, the Group recognizes the undiscounted amount of short-term employee benefits expected to be paid in exchange for that service.

ii) Other long-term employee benefits

The Group’s net obligation in respect of other long-term employee benefits that are not expected to be settled wholly before 12 months after the end of the annual reporting period in which the employees render the related service, is the amount of future benefit that employees have earned in return for their service in the current and prior periods. That benefit is discounted to determine its present value. Remeasurements are recognized in profit or loss in the period in which they arise.

iii) Retirement benefits: defined benefit plans

A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. The Group’s net obligation in respect of defined benefit plans is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value. The fair value of plan assets is deducted. The calculation is performed annually by an independent actuary using the projected unit credit method.

The discount rate is the yield at the reporting date on high-quality corporate bonds that have maturity dates approximating the terms of the Group’s obligations and that are denominated in the same currency in which the benefits are expected to be paid. The Group recognizes service cost and net interest on the net defined benefit liability (asset) in profit or loss and remeasurements of the net defined benefit liability (asset) in other comprehensive income.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.

Significant accounting policies (continued)

iv) Retirement benefits: defined contribution plans

The Group recognizes the contribution expense as an account of severance payments in profit or loss in the period according to the defined contribution plans.

Defined benefit liabilities are calculated annually by independent actuaries using the predicted unit credit method. If the net present value of the defined benefit obligation less the fair value of the plan assets is an asset then the present value of the economic benefits available to the entity in the form of a refund from the plan or a reduction in future contributions to the plan.

The remeasurement component of net defined benefit liability is the change in the effect of the asset except for the amount included in the net interest income of plan assets and net revenues of plan assets excluding actuarial gains and losses to the net of defined benefit liabilities. It is immediately recognized in other comprehensive income. The Group determines the net interest on the net defined benefit obligation (asset) by multiplying the net defined benefit obligation (asset) by the discount rate determined at the beginning of the annual reporting period and is the net present value of the net defined benefit obligation. It is determined by taking into consideration the fluctuations. Net interest expense and other expenses related to defined benefit plans are recognized in profit or loss.

When an amendment or reduction of the system occurs, the gain or loss resulting from the change or decrease in the benefits to the past service is immediately recognized in profit or loss. The Group recognizes gains or losses on settlement when the defined benefit plan is settled.

v) Termination benefits

Termination benefits are recognized as an expense when the Group is committed demonstrably, without realistic possibility of withdrawal, to a formal detailed plan to either terminate employment before the normal retirement date, or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits for voluntary redundancies are recognized as an expense if the Group has made an offer of voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably. If benefits are payable more than 12 months after the reporting period, then they are discounted to their present value.

(w)

Share-based payment transactions

The grant date fair value of share-based payment awards granted to employees is recognized as an employee expense, with a corresponding increase in equity, over the period that the employees unconditionally become entitled to the awards. The amount recognized as an expense is adjusted to reflect the number of awards for which the related service andnon-market vesting conditions are expected to be met, such that the amount ultimately recognized as an expense is based on the number of awards that do meet the related service andnon-market performance conditions at the vesting date. For share-based payment awards withnon-vesting conditions, the grant date fair value of the share-based payment is measured to reflect such conditions and there is notrue-up for differences between expected and actual outcomes.

The fair value of the amount payable to employees in respect of share appreciation rights, which are settled in cash, is recognized as an expense with a corresponding increase in liabilities, over the period that the employees unconditionally become entitled to payment. The liability is remeasured at each reporting date and at settlement date. Any changes in the fair value of the liability are recognized as personnel expense in profit or loss.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.

Significant accounting policies (continued)

(x)

Provisions

Provisions are recognized when the Group has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.

The risks and uncertainties that inevitably surround many events and circumstances are taken into account in reaching the best estimate of a provision. Where the effect of the time value of money is material, provisions are determined at the present value of the expected future cash flows.

Provisions are reviewed at the end of each reporting period and adjusted to reflect the current best estimate. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision is reversed.

Provisions shall be used only for expenditures for which the provisions are originally recognized.

(y)

Financial guarantee contract – policy applicable from January 1, 2018

A financial guarantee contract is a contract that requires the Group to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument.

Financial guarantee contracts are recognized initially at their fair value, and the initial fair value is amortized over the life of the financial guarantee contract. The financial guarantee liability is subsequently measured at the higher of the amount of the best estimate of the expenditure required to settle the present obligation at the end of reporting period; and the amount initially recognized less, cumulative amortization recognized on a straight-line basis over the guarantee period. Financial guarantee liabilities are included within other liabilities.

After initial recognition, financial guarantee contracts are measured at the higher of:

•

Loss allowance in accordance with IFRS 9, ‘Financial Instruments’

•

The amount initially recognized less, when appropriate, the cumulative amount of income recognized in accordance with the principles of IFRS 15, ‘Revenue from Contracts with Customers’

(z)

Financial guarantee contract – policy applicable before January 1, 2018

A financial guarantee contract is a contract that requires the issuer (the Group) to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due in accordance with the original or modified terms of a debt instrument.

Financial guarantee contracts are initially measured at their fair values and, if not designated as at fair value through profit or loss, are subsequently measured at the higher of:

•

The amount determined in accordance with IAS 37Provisions, Contingent Liabilities and Contingent Assets and

•

The initial amount recognized, less, when appropriate, cumulative amortization recognized in accordance with IAS 18, ‘Revenue’

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.

Significant accounting policies (continued)

(aa)

Insurance contracts

1) Investment contract liabilities, including insurance contract liabilities and discretionary dividend factors

The group establishes liability reserves in accordance with the Insurance Business Law and the related regulations. The reserves are calculated according to the insurance policy, insurance premiums and liability reserve calculation method. The main contents are as follows.

1-1) Premium reserves

The present value of the premiums payable to the policy holders after the balance sheet date is the present value of the net premium to be paid after the end of the reporting period. The amount is deducted from the value.

1-2) Unpaid premium reserves

As of the end of the reporting period, premiums that have paid due are calculated based on premiums and the liability reserve calculation method.

1-3) Guarantee reserves

The total amount of reserve for variable minimum guarantee (①) and reserve for general account guarantee (②) is provided as guarantee reserve.

① Variable minimum guarantee reserve

This reserve is the amount that must be accumulated to guarantee insurance premiums above a certain level for contracts maintained as of the end of the reporting period, and is measured at the higher of:

i)

the average amount of the top 30% of net loss expected in the future

ii)

the minimum required amount by insurance types, minimum guarantees and limits of stock investment portion

② General account guarantee reserve

As of the end of the reporting period, the amount of reserve for insurance contracts that are insured under general account is required to be paid to guarantee the level of refunds,

i)

Average of the amount deducted from the appropriateness of the liability reserve calculated by excluding the guarantee option from the appropriateness evaluation of the liability reserve calculated by including the guarantee option for each interest rate scenario

ii)

The amount of compensation (including annulment contract) against the guarantee received from the policy holder by the rate applied at the premium calculation in the insurance premium and liability reserve calculation method

1-4) Reserve for outstanding claims

As of the end of the reporting period, the Group has accrued the amount for which the reason for the payment of insurance claims, etc. has been incurred and the amount of the claim payment has not been paid yet due to the dispute or lawsuit related to the insurance settlement. In addition, the Group recognizes unrecognized losses based on historical experience.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.

Significant accounting policies (continued)

1-5) Reserves for participating policyholders’ dividends

The reserve is provided for the purpose of contributing to the policyholder dividend according to the laws and regulations and the reserve for dividend reserve for the policyholder and the dividend reserve for the subsequent business year.

The policyholder dividend reserve is the amount that is not paid as of the end of the reporting period for the settlement amount and the reserve for dividend policy for the next fiscal year is based on the policyholder dividend calculated on the insurance contract effective as of the end of the reporting period.

① Excess crediting rate reserve

In the case of a dividend insurance contract which has been maintained for more than one year as of the end of the reporting period among contracts signed before October 1, 1997, the difference between the planned interest rate and theone-year maturity deposit rate shall be preserved.

② Mortality dividend reserve

Dividends arising from contracts that are maintained for more than one year at the end of the reporting period are used to offset the expected mortality and actual mortality rates applied to premiums.

③ Interest dividend reserve

For the contracts that have been maintained for more than one year as of the end of the reporting period, the amount calculated by applying the interest dividend reserve rate to the net written premium reserve less the unearned acquisition costs. However, the insurance sold before October 1, 1997 is applied to the amount deducted from the net premium in the event that the planned interest rate by the insurance product is less than the dividend standard.

④ Reserves for long-term special dividends

For the effective dividend policy agreement that has been maintained for 6 years or more, the amount calculated by applying the long-term special dividend rate to the amount deducted from the net premiums for the end of the year.

However, insurance sold before October 1, 1997 is applied to the deduction of unearned premiums at the end of the year when the expected interest rate by the insurance product is less than the dividend standard rate.

1-6) Reserve for interest dividends

In order to cover the policyholder dividend in the future, the amount is accumulated in accordance with the laws and regulations and the insurance contracts.

1-7) Reserve for dividend insurance loss reserve

In accordance with the regulations set by the supervisory authority, dividend insurance profit is accumulated within 30/100 of the contractor’s stake. The reserve loss for dividend insurance shall be preserved at the end of the reporting period and shall be used as the policyholder dividend source for the individual contractor.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.

Significant accounting policies (continued)

2) Contractor’s equity adjustment

The Group classifies the gains and losses onavailable-for-sale financial assets as of the end of the reporting period as contractor’s equity and shareholder’s equity based on the ratio of the average liability reserves of the dividend andnon-dividend policies for the fiscal year.

3) Evaluation of debt appropriateness

At the end of each reporting period, the group assesses whether the recognized insurance liability is appropriate using the current estimates of future cash flows of the policy, and if the carrying amount of the insurance liability is deemed to be inappropriate in terms of the estimated future cash flows. The reserve for premiums is added to the profit or loss by the amount corresponding to the deficiency.

4) Reinsurance assets

The group presents the recoverable amount of reinsurance assets. The group assesses at the end of each reporting period whether there is objective evidence that a reinsurance asset is impaired. If there is objective evidence that the entity will not be able to collect all amounts under the terms of the agreement as a result of an event that occurred after the initial recognition and if the event has a reliable and measurable impact on the amount to be received. If reinsurance assets are determined to be impaired, impairment loss is recognized in the profit and loss for the current period.

5) Deferred acquisition cost

The group recognizes unrealized gains and losses arising from long-term insurance contracts as assets and amortizes the premiums over the life of the insurance contracts equally. If the contribution period exceeds 7 years, the amortization period is 7 years if there is an unrecognized balance at the date of the cancellation, the entire amount of the cancellation is amortized in the fiscal year to which the cancellation date belongs. But, if the ratio of additional premiums is higher at the early stage of the insurance period for the purpose of recovering the excess of the unearned premiums and the early settlement costs, the new settlement expenses are treated as the period expense.

(ab)

Recognition of revenues and expenses

Other than revenues under the scope of IAS 17, ‘Leases’, IAS 28, ‘Investments in Associates and Joint Ventures’, IFRS 9, ‘Financial Instruments’, IFRS 10, ‘Consolidated Financial Statements’, and IFRS 11, ‘Joint Arrangements’, the Group’s revenues are recognized using five-step revenue recognition model as follows: ① ‘Identifying the contract’g ② ‘Identifying performance obligations’g ③ ‘Determining the transaction price’g ④ ‘Allocating the transaction price to performance obligations’g ⑤ ‘Recognizing the revenue by satisfying performance obligations’.

i) Interest income and expense

Interest income and expense are recognized in profit or loss using the effective interest method. The effective interest rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability or, where appropriate, a shorter period to the net carrying amount of the financial asset or liability. When calculating the effective interest rate, the Group

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.

Significant accounting policies (continued)

estimates cash flows considering all contractual terms of the financial instrument, but does not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, and all other premiums or discounts. When it is not possible to estimate reliably the cash flows or the expected life of a financial instrument, the Group uses the contractual cash flows over the full contractual term of the financial instrument.

Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is thereafter recognized using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.

ii) Fees and commission

The recognition of revenue for financial service fees depends on the purposes for which the fees are assessed and the basis of accounting for any associated financial instrument.

a)

Fees that are an integral part of the effective interest rate of a financial instrument

Such fees are generally treated as an adjustment to the effective interest rate. Such fees may include compensation for activities such as evaluating the borrower’s financial condition, evaluating and recording guarantees, collateral and other security arrangements, preparing and processing documents, closing the transaction and the origination fees received on issuing financial liabilities. However, when the financial instrument is measured at fair value with the change in fair value recognized in profit or loss, the fees are recognized as revenue when the instrument is initially recognized.

b)

Fees earned as services are provided

Fees and commission income, including investment management fees, sales commission, and account servicing fees, are recognized as the related services are provided.

c)

Fees that are earned on the execution of a significant act

The fees that are earned on the execution of a significant act including commission on the allotment of shares or other securities to a client, placement fee for arranging a loan between a borrower and an investor and sales commission, are recognized as revenue when the significant act has been completed.

iii) Insurance income

The Group recognizes insurance income for the insurance premium paid of which the payment date arrived by the premium payment methods of the insurance contract; and recognizes advance receipts for the insurance premium paid of which the payment date has not arrived at the end of the reporting period.

iv) Dividends

Dividends income is recognized when the shareholder’s right to receive payment is established. Usually this is theex-dividend date for equity securities. The Group provides compensation in various forms such as payment discounts and gifts.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.

Significant accounting policies (continued)

(ac)

Revenue from Contracts with Customers – policy applicable from January 1, 2018

The fair value of the consideration received or receivable in exchange for the initial transaction is allocated to the reward points (“points”) and the remainder of the fee income. The consideration to be allocated to the points is estimated based on the fair value of the monetary benefits to be provided in consideration of the expected recovery rate of points awarded in accordance with the customer loyalty program and the expected time of recovery. Points for distribution through the cost paid by the customer is recognized by deducting from the revenue from fees.

(ad)

Customer loyalty system – policy applicable before January 1, 2018

Under the Customer Loyalty system, the fair value of the consideration received or receivable in exchange for the initial transaction is allocated to the reward points (“points”) and the remainder of the fee income. The Group provides compensation in various forms such as payment discounts and gifts. The consideration allocated to the points is based on the fair value of the monetary benefits to be provided for the points to be recovered. The fair value of the benefits provided for the points reclaimed in accordance with the customer loyalty program is estimated taking into account the expected recovery rate and the expected recovery time. The consideration to be allocated to the points is estimated based on the fair value of the monetary benefits to be provided in consideration of the expected recovery rate of points awarded in accordance with the customer loyalty program and the expected time of recovery. Revenue recognition is measured based on the relative size of the points recovered and exchanged for monetary consideration at the total points expected to be recovered.

In addition, if the unavoidable costs incurred to fulfill the compensation obligation in connection with the customer loyalty system are expected to exceed the amount not recognized as revenue allocated to the compensation score at the time of initial sale, the excess amount is recognized as provision.

(ae)

Income tax

Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in profit or loss except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income.

i) Current tax

Current tax is the expected tax payable or receivable on the taxable profit or loss for the year, using tax rates enacted or substantively enacted at the end of the reporting period and any adjustment to tax payable in respect of previous years. The taxable profit is different from the accounting profit for the period since the taxable profit is calculated excluding the temporary differences, which will be taxable or deductible in determining taxable profit (tax loss) of future periods, andnon-taxable ornon-deductible items from the accounting profit.

ii) Deferred tax

Deferred tax is recognized, using the asset-liability method, in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. A deferred tax liability is recognized for all taxable temporary differences. A deferred tax asset is

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.

Significant accounting policies (continued)

recognized for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which they can be utilized. However, deferred tax is not recognized for the following temporary differences: taxable temporary differences arising on the initial recognition of goodwill, or the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting profit or loss nor taxable income.

The Group recognizes deferred tax liabilities for all taxable temporary differences associated with investments in subsidiaries, associates, and interests in joint ventures, except to the extent that the Group is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The Group recognizes deferred tax assets for all deductible temporary differences arising from investments in subsidiaries and associates, to the extent that it is probable that the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilized.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and deferred tax assets reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting period to recover or settle the carrying amount of its assets and liabilities.

The carrying amount of a deferred tax asset is reviewed at the end of each reporting period and reduced the carrying amount to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilized.

Deferred tax assets and liabilities are offset only if there is a legally enforceable right to offset the related current tax liabilities and assets, and they relate to income taxes levied by the same tax authority and they intend to settle current tax liabilities and assets on a net basis.

If any additional income tax expense exists by payment of dividends, the Group recognizes it when the liability relating to the payment is recognized.

(af)

Accounting for trust accounts

The Group accounts for trust accounts separately from its bank accounts under the Financial Investment Services and Capital Markets Act and thus the trust accounts are not included in the accompanying consolidated financial statements. Borrowings from trust accounts are included in other liabilities. Trust fees and commissions in relation to the service provided to trust accounts by the Group are recognized as fees and commission income.

(ag)

Earnings per share

The Group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to the ordinary shareholder of the Group by the weighted average number of common shares outstanding during the period, adjusted for own shares held. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding, adjusted for own shares held, for the effects of all dilutive potential ordinary shares, which comprise share options granted to employees.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.

Significant accounting policies (continued)

(ah)

New standards and interpretations not yet adopted

The following new standards and amendments to existing standards have been published and are mandatory for the Group to adopt for annual periods beginning on or after January 1, 2018, and the Group has not early adopted them.

i) IFRS 16 “Lease”

IFRS 16, “Leases”, which was enacted on May 22, 2017, is effective for annual periods beginning on or after January 1, 2019, but may be applied early.

The Standard is based on current IAS 17 “Leases”, IFRIC 4, “Determining whether an arrangement contains a lease”, IFRIC 15 “Operating lease: Incentive” It will replace IFRIC 27, “Evaluating the substances of transactions involving the legal form of a lease”.

At the date of commitment, the Group determines whether the contract itself is a lease or the contract involves a lease at the point of lease commencement date and distinguishes whether the contract itself isincludes a lease, and identifies whether the contract includes a lease or the contract involves a lease based on IFRS 16. However, the Group may choose as its accounting policy not to reassess all the contracts before the date of initial application, as a practical expedient.

IFRS 16 ‘Lease’ presents that ain accordance with this standard. The lessee may elect not to separatenon-lease components from lease components, and instead,lessor must account for each lease component and any associatedelement of the lease as a lease, separate from thenon-lease components aselement in an agreement that includes a single lease component, as a practical expedient. or lease.

The lessee is required to recognize theright-of-use assets and lease liabilities representingan asset that represents the right to occupyuse the underlying assetsasset and a liability that represents the dutyobligation to makepay the lease payments, respectively.payments. However, asin the casescase of short-term lease and small asset lease, the low value assetslessee is not required to separate the exemption is applicable. non-lease component from the lease component in accordance with the simplified method, and can apply the method of accounting for each lease component and relatednon-lease component as one lease component.

The accounting fortreatment of lessor hasis not significantly changeddifferent from the accounting treatment of the current IAS 17.

< Accounting treatment as a lessee >

①

Application method of IFRS 16 “Lease”

The lessee recognizes the cumulative effect of applying the retrospective application (full retroactive method) to each past reporting period presented in accordance with IAS 8, “Accounting Policies, Changes in Accounting Estimates and Errors “ (Cumulative Effect Batch Reconciliation Action).

The Group plans to apply IFRS 16 for the first time by applying cumulative effect and cumulative temporary adjustment measures as of January 1, 2019. Accordingly, the cumulative effect of applying IFRS 16 is adjusted in the processretained earnings (or, where appropriate, other components of evaluating whether there willequity) at the date of initial application and the comparative financial statements are not going to be a significantrestated.

②

Financial effect of IFRS 16 “Lease”

We assessed the impact on the Group’s consolidated financial statements duefor the year 2019 based on the information and available information as of January 1, 2019, in order to assess the financial impact of the initial adoption of IFRS 16.

The aggregate amount of the minimum lease payments prior to the present value discount of the assets currently used as operating leases isW610,091 million and the discount amount isW591,714 million at the incremental borrowing rate of the lessee. However, the Group will account for each lease element and associatednon-lease element as a single lease element, using the simplified method of accounting for contracts that include all or part of the lease or lease.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.

Significant accounting policies (continued)

As a result of a detailed analysis of the effect on the financial statements, the Group expects the assets and liabilities to be pledged as of January 1, 2019 to increase byW581,925 million andW536,831 million, respectively.

< Accounting treatment as a lessor >

①

Application method and financial impact of IFRS 16 “Lease”

As a lessor, the Group has specifically assessed the effect of accounting for the identification of lease contracts, separation of lease components on the financial statements in accordance with IFRS 16. There is no impact on finance lease payment receivables as of January 1, 2019.

If the Group is a medium-term lease contractor, it is classified as an operating lease before the initial application date. The lease is classified as operating lease or finance lease according to IFRS 16. If the lease is classified as a finance lease, it is accounted for as a new finance lease at the date of initial application. As a result of assessing the specific financial impact based on the context and available information as of January 1, 2019, we have not been accounted for as a new finance lease. However, the financial impact assessment may change depending on additional information available in the future.

ii) Amendment of IFRS 9 “Financial instruments”

Financial assets that are redeemable with reimbursable financial assets are remeasured to be measured at amortized cost. When the financial liabilities measured at amortized cost are changed but not eliminated, the effect of the change should be recognized in profit or loss. These amendments will be effective from the fiscal year beginning on or after January 1, 2019 and are subject to early adoption.

iii) Amendment of IAS 19 “Employee benefits”

If the change in the defined benefit plan results in the revision, reduction or settlement of the plan, the assumptions used in remeasurement of the net defined benefit obligation (asset) to estimate the current service cost and net interest for the remaining period of the period after the adjustments in the plan. In addition, the decrease in excess of the amount of unrecognized actuarial gain or loss is reflected in profit or loss as a part of past service cost or settlement profit or loss. The amendments are applied prospectively to the amendment, reduction, and settlement of systems that have occurred since the fiscal year beginning on or after January 1, 2019.

iv) Amendment of IAS 28 “Investment in associates and joint ventures”

The clarification has been conducted that other financial instruments (financial instruments that do not apply the equity method) to the related companies or joint ventures are subject to IFRS 9, and that the long-term investment interests that form part of the net investment in the related companies or joint ventures was revised accordingly with the IFRS 9. These amendments will be effective from the fiscal year beginning on or after January 1, 2019 and are subject to early adoption. In addition, the first-time adoption of this standard does not require reclassification of comparative information by applying the transitional provisions of 9, and the effect of retroactive application is reflected in the beginning retained earnings (or other appropriate capital elements) at the date of initial application.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

3.

Significant accounting policies (continued)

v) Establishment of IFRIC 23 “Uncertainty over income tax treatments”

The interpretation is applied to the recognition and measurement of deferred tax and deferred income tax if there is uncertainty about whether or not the tax treatment applied by the entity will be recognized by the taxing authority. Guidance on accounting units of uncertainty in taxation and circumstances requiring reevaluation Includes. The interpretation is effective from January 1, 2019, and it can choose between retroactively reclassifying comparative financial statements or reflect the effect of the change on the basis of the first year of adoption.

vi) Annual amendments through year 2015 – 2017

vi-i) IFRS 3 “Business combination”

The business combination that is held in stages to acquire control over the joint business (meeting the definition of the business) while retaining the rights and liabilities for the assets related to the joint business. Therefore, remeasurement should be conducted for all underlying assets and liabilities. The amendments are effective for annual periods beginning on or after January 1, 2019, or reflect the effect of the change on the basis of the first year of adoption.

vi-ii) IFRS 11 “Joint arrangements”

If a jointly controlled entity that participates in a joint venture but does not have joint control obtains joint control over the joint venture, the previously held equity interest in the joint venture is not remeasured. This amendment is effective for transactions beginning after January 1, 2019 and beginning after the fiscal year beginning onor reflect the effect of the change on the basis of the first year of adoption.

vi-iii) IAS 12 “Income taxes”

The provisions of paragraph 57A of IAS 12 (defining the timing and recognition of dividend tax effects) apply to all income tax effects of dividends and are recognized in profit or loss, other comprehensive income or capital. This amendment is effective for fiscal years beginning on or after January 1, 2019, but may be applied early.

vi-iv) IAS 23 “Borrowing costs”

If most of the necessary activities to enable us to use (or sell) our qualifying assets has been completed, it will include the funds borrowed for specific purposes in ordinary borrowings to acquire those assets. This amendment applies to borrowing costs incurred subsequent to the first year of the application of the amendment and may be applied early in the financial year beginning after January 1, 2019.

 

4.

Financial risk management

 

 (a)

Overview

As a financial services provider, Shinhan Financial Group Co., Ltd. and its subsidiaries (collectively the Group is“Group”) are exposed to various risks relating to lending, credit card, insurance, securities investment, and trading and leasing businesses, its deposit taking and borrowing activities in addition to the operating environment.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

4.

Financial risk management (continued)

The principal risks to which the Group is exposed are credit risk, market risk, interest rate risk, liquidity risk and operational risk. These risks are recognized, measured and reported in accordance with risk management guidelines established at the controlling companyGroup level and implemented at the subsidiary level through a carefully stratifiedchecks-and-balances system.

i) Risk management principles

The Group risk management is guided by the following core principles:

 

identifying and managing all inherent risks;

 

standardizing risk management process and methodology;

 

ensuring supervision and control of risk management independent of business activities;

 

continuously assessing risk preference;

 

preventing risk concentration;

 

operating a precise and comprehensive risk management system including statistical models; and

 

balancing profitability and risk management through risk-adjusted profit management.

ii) Risk management organization

The Group risk management system is organized along with the following hierarchy: from the top and at the controlling companyGroup 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.

The Group Risk

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

4.Financial risk management (continued)

Management Committee, which is under the supervision of the controlling company’s boardBoard of directors,Directors, sets the basic group wide risk management policies and strategies. The controlling company’s Chief Risk Officer reports to the Group Risk Management Committee, and the Group Risk Management Council, whose members consist of the controlling company’s Chief Risk Officer and the risk management team heads of each of subsidiaries, coordinates the risk management policies and strategies at the group level as well as at the subsidiary level among each of subsidiaries.

Each of subsidiaries also has a separate Risk Management Committee, Risk Management Working Committee and Risk Management Team, whose tasks are to implement the group wide risk management policies and strategies at the subsidiary level as well as to set risk management policies and strategies specific to such subsidiary in line with the Groupgroup wide guidelines. The Group also has the Group Risk Management Team, which supports the controlling company’s Chief Risk Officer in his or her risk management and supervisory role.

In order to maintain the group wide risk at an appropriate level, the Group use a hierarchical risk limit system under which the Group Risk Management Committee assigns reasonable risk limits for the entire group and each subsidiary,of subsidiaries, and the Risk Management Committee and the Risk Management Council of each subsidiaryof subsidiaries manage the subsidiary-specific risks by establishing and managing risk limits in more detaildetails by type of risk and type of product for each department and division within such subsidiary.

The Group Risk Management Committee consists of directors of the controlling company. The Group Risk Management Committee convenes at least once every quarter and may also convene on an ad hoc basis as needed. Specifically, the Group Risk Management Committee does the following: (i) establish the overall risk management policies consistent with management strategies, (ii) set reasonable risk limits for the entire group and each of subsidiaries, (iii) approve appropriate investment limits or allowed loss limits, (iv) enact and amend risk management regulations, and (v) decide on other risk management-related issues the Board of Directors or the Group Risk Management Committee sees fit to discuss. The results of the Group Risk Management Committee meetings are reported to the Board of Directors of the controlling company. The Group Risk Management Committee makes decisions through affirmative votes by a majority of the committee members.

The Group Risk Management Council is comprised of the controlling company’s chief risk officer, head of risk management team, and risk officers from each subsidiary. The Group Risk Management Council holds meetings for risk management executives from each subsidiary to discuss the Group’s group wide risk management guidelines and strategy in order to maintain consistency in the group wide risk policies and strategies.

iii) Risk management framework

The Group takes the following steps to implement the foregoing risk management principles:

 

 • Risk capital management –Risk capital refers to capital necessary to compensate for losses in case of a potential risk being realized, and risk capital management refers to the process of asset management based on considerations of risk exposure and risk appetite among total assets so that the Group can maintain an appropriate level of risk capital. As part of the Group’s risk capital management, the Group has adopted and maintains various risk planning processes and reflect such risk planning in the Group’s business and financial planning. The Group also has adopted and maintains a risk limit management system to ensure that risks in the Group’s business do not exceed prescribed limits.

•

Risk monitoring –The Group proactively, preemptively and periodically review risks that may impact its overall operations, including through a multidimensional risk monitoring system. Currently, each of

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

4.Financial risk management (continued)

subsidiaries is required to report to the controlling company any factors that could have a material impact on the group-wide risk management, and the controlling company reports to the Group’s chief risk officer and other members of the Group’s senior management the results of risk monitoring on a weekly, monthly and on an ad hoc basis as needed. In addition, the Group perform preemptive risk management through a “risk dashboard system” under which the Group closely monitor any increase in asset size, risk levels and sensitivity to external factors with respect to the major asset portfolios of each of subsidiaries, and to the extent such monitoring yields any warning signals, the Group promptly analyze the causes and, if necessary, formulate and implement actions in response to these warning signals.

•Risk review –Prior to entering any new business, offering any new products or changing any major policies, the Group reviews relevant risk factors based on a prescribed risk management checklist and, in the case of changes for which assessment of risk factors is difficult, supports reasonable decision-making in order to avoid taking any unduly risky action. The risk management departments of all subsidiaries are required to review all new businesses, products and services prior to their launch and closely monitor the development of any related risks following their launch, and in the case of any action that involves more than one subsidiary, the relevant risk management departments are required to consult with the risk management team at the controlling company level prior to making any independent risk reviews.

•Risk management –The Group maintain a group wide risk management system to detect the signals of any risk crisis and, in the event of a crisis actually happening, to respond on a timely, efficient and

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

4.

Financial risk management (continued)

flexible basis so as to ensure the Group’s survival as a going concern. Each subsidiary maintains crisis planning for three levels of contingencies, namely, “alert”, “imminent crisis” and “crisis”, determination of which is made based on quantitative and qualitative monitoring and consequence analysis, and upon the happening of any such contingency, is required to respond according to a prescribed contingency plan. At the controlling company level, the Group maintains and installs crisis detection and response system which is applied consistently group wide, and upon the happening of any contingency at two or more subsidiary level, the Group directly takes charge of the situation so that the Group manages it on a concerted group wide basis.

 

 (b)

Credit risk

i) Credit risk management

Credit risk is the risk of financialpotential economic loss to the Groupthat may be caused if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s receivables from customers and investment securities.largest risk which the Group is facing. The Group’s credit risk management encompasses all areas of credit that may result in potential economic loss, including not just transactions that are recorded on statements of financial position,balance sheets, but alsooff-balanceoff-balance-sheet transactions such as guarantees, loan commitments and derivativesderivative transactions.

 

 • 

Credit Risk Management of Shinhan Bank

Major policies for Shinhan Bank’s credit risk management, including Shinhan Bank’s overall credit risk management plan and credit policy guidelines, are determined by the Risk Policy Committee of Shinhan Bank, the executive decision-making body for management of credit risk. The Risk Policy Committee is headed by the Chief Risk Officer, and also comprises of the Chief Credit Officer, the heads of each business

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

4.Financial risk management (continued)

unit and the head of the Risk Management Department. In order to separate the loan approval functions from credit policy decision-making, Shinhan Bank has a Credit Review Committee that performs credit review evaluations, which focus on improving the asset quality and profitability from the loans being made, and operates separately from the Risk Policy Committee.

Shinhan Bank complies 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:

 

credit evaluation and approval;

 

credit review and monitoring; and

 

credit risk assessment and control

Each of Shinhan Bank’s borrowers is assigned a credit rating, which is based on a comprehensive internal credit evaluation system that considers a variety of criteria. For retail borrowers, the credit rating takes into account the borrower’s past dealings with Shinhan Bank and external credit rating information, among others. For corporate borrowers, the credit rating takes into account financial indicators as well asnon-financial indicators such as industry risk, operational risk and management risk, among others. The credit rating, once assigned, serves as the fundamental instrument in Shinhan Bank’s credit risk management, and is applied in a wide range of credit risk management processes, including credit approval, credit limit management, loan pricing and computation of allowance for loan losses.credit loss allowance. Shinhan Bank has separate credit evaluation systems for retail customers, SOHO customers and corporate customers, which are further segmented and refined to meet Basel III requirements.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

4.

Financial risk management (continued)

Loans are generally approved after evaluations and approvals by the manager at the branch level as well as the committee of the applicable business unit at Shinhan Bank. The approval limit for retail loans is made based on Shinhan Bank’s automated credit scoring system. In the case of large corporate loans, approval limits are also reviewed and approved by a Credit Officer at the headquarter level. Depending on the size and the importance of the loan, the approval process is further reviewed by the Credit Officer Committee or the Master Credit Officer Committee. If the loan is considered, further evaluation is made by the Credit Review Committee, which is Shinhan Bank’s highest decision-making body in relation to credit approval.

Pursuant to the foregoing credit review and monitoring procedures and in order to promptly prevent deterioration of loan qualities, Shinhan Bank classifies potentially problematic borrowers into (i) borrowers that show early warning signals, (ii) borrowers that require close monitoring and (iii) normal borrowers, and treats them differentially accordingly.

In order to maintain portfolio-level credit risk at an appropriate level, Shinhan Bank manages its loans usingvalue-at-risk (“VaR”) limits for the entire bank as well as for each of its business units. In order to prevent concentration of risk in a particular borrower or borrower class, Shinhan Bank also manages credit risk by borrower, industry, country and other detailed categories.

 

 • 

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 headed by the Chief Risk Officer, and also comprises of the heads of each business unit, supporting unit and relevant department at Shinhan Card. In order to separate

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

4.Financial risk management (continued)

credit policy decision-making from credit evaluation functions, Shinhan Card also has a Risk Management Committee, which evaluates applications for corporate loans exceeding a certain amount and other loans deemed important. Shinhan Card uses an automated credit scoring 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 behaviorbehaviour scoring system. The behaviorbehaviour scoring system is based largely on the credit history, and the application scoring system is based largely on personal information of the applicant. For credit card applicants with whom the Shinhan Card has an existing relationship, Shinhan Card’s credit scoring system considers 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.

If a credit score awarded to an applicant is above a minimum threshold, the application is approved unless overridden based on other considerations such as delinquencies with other credit card companies.

Shinhan Card continually monitors all accountholders and accounts using a behaviorbehaviour scoring system. The behaviorbehaviour scoring system predicts a cardholder’s payment pattern by evaluating the cardholder’s credit history, card usage and amounts, payment status and other relevant data. The behaviorbehaviour score is recalculated each month and is used to manage the accounts and approval of additional loans and other products to the cardholder. Shinhan Card also uses the scoring system to monitor its overall risk exposure and to modify its credit risk management strategy.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

4.

Financial risk management (continued)

ii) Maximumi) Techniques, assumptions and input variables used to measure impairment

i-1) Determining significant increases in credit risk since initial recognition

At each reporting date, the Group assesses whether the credit risk on a financial instrument has increased significantly since initial recognition. When making the assessment, the Group uses the change in the risk of a default occurring over the expected life of the financial instrument instead of the change in the amount of expected credit losses. To make that assessment, the Group compares the risk of a default occurring on the financial instrument as at the reporting date with the risk of a default occurring on the financial instrument as at the date of initial recognition and consider reasonable and supportable information, that is available without undue cost or effort, that is indicative of significant increases in credit risk since initial recognition.

i-1-1) Measuring the risk of default

The Group assigns an internal credit risk rating to each individual exposure based on observable data and historical experiences that have been found to have a reasonable correlation with the risk of default. The internal credit risk rating is determined by considering both qualitative and quantitative factors that indicate the risk of default, which may vary depending on the nature of the exposure and the type of borrower.

i-1-2) Measuring term structure of probability of default

The Group accumulates information after analyzing the information regarding exposure to credit risk and default information by the type of product and borrower and results of internal credit risk assessment. For some portfolios, the Group uses information obtained from external credit rating agencies when performing these analyses. The Group applies statistical techniques to estimate the probability of default for the remaining life of the exposure from the accumulated data and to estimate changes in the estimated probability of default over time.

i-1-3) Significant increases in credit risk

The Group’s maximum exposureGroup uses the indicators defined as per portfolio to determine the significant increase in credit risk without taking accountand such indicators generally consist of any collateral held or otherchanges in the risk of default estimated from changes in the internal credit enhancements asrisk rating, qualitative factors, days of December 31, 2016delinquency, and 2017 areothers. The method used to determine whether credit risk of financial instruments has significantly increased after the initial recognitions is summarized as follows:

 

   2016   2017 

Due from banks and loans (*1)(*3):

    

Banks

  W13,922,969    13,373,140 

Retail

   115,972,280    124,868,554 

Government

   11,776,346    14,442,747 

Corporations

   116,001,132    123,637,882 

Card receivable

   18,704,516    20,119,514 
  

 

 

   

 

 

 
   276,377,243    296,441,837 
  

 

 

   

 

 

 

Trading assets

   22,638,409    23,829,943 

Financial assets designated at FVTPL (*5)

   2,228,186    2,344,701 

AFS financial assets (*6)

   32,822,071    37,186,552 

HTM financial assets (*7)

   19,805,084    24,990,680 

Derivative assets

   3,002,859    3,400,178 

Other financial assets (*1)(*2)

   13,975,889    12,041,304 

Financial guarantee contracts

   3,424,022    3,267,707 

Loan commitments and other credit liabilities

   76,055,306    75,518,079 
  

 

 

   

 

 

 
  W450,329,069    479,020,981 
  

 

 

   

 

 

 

Corporate exposures

 (*1)

Retail exposures

The maximum exposure amounts for

Card exposures

Significant change in credit ratingsSignificant change in credit ratingsSignificant change in credit ratings
Continued past due from banks, loansmore than 30 daysContinued past due more than 30 daysContinued past due more than 7 days (personal card)
Loan classification of and other financial assets are measured as netbelow precautionaryLoan classification of allowances.and below precautionaryLoan classification of and below precautionary
Borrower with early warning signalsBorrower with early warning signalsSpecific pool segment

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

4.

Financial risk management (continued)

Corporate exposures

Retail exposures

Card exposures

Negative net assetsSpecific pool segment
Adverse audit opinion or disclaimer of opinionLoans relating to constructor whose collective loans are insolvent
Interest coverage ratios of below 1 for consecutive three years
Negative cash flows from operating activities for consecutive two years

The Group considers the credit risk of financial instrument has been significantly increased since initial recognition if a specific exposure is past due more than 30 days (however, for a specific portfolio if it is past due more than 7 days). The Group counts the number of days past due from the earliest date on which the Group has not fully received the contractual payments from the borrower and does not consider the grace period granted to the borrower.

The Group regularly reviews the criteria for determining if there have been significant increases in credit risk from the following perspective.

A significant increase in credit risk shall be identified prior to the occurrence of default.

The criteria established to judge the significant increase in credit risk shall have a more predictive power than the criteria for days of delinquency.

As a result of applying the judgment criteria, financial instruments shall not be to move too frequently between the12-months expected credit losses measurement and the lifetime expected credit losses measurement.

i-2) Modified financial assets

If the contractual cash flows on a financial asset have been renegotiated or modified and the financial asset was not derecognized, the Group assesses whether there has been a significant increase in the credit risk of the financial instrument by comparing the risk of a default occurring at initial recognition based on the original, unmodified contractual terms and the risk of a default occurring at the reporting date based on the modified contractual terms.

The Group may adjust the contractual cash flows of loans to customers who are in financial difficulties in order to manage the risk of default and enhance the collectability (hereinafter referred to as ‘debt restructuring’). These adjustments generally involve extension of maturity, changes in interest payment schedule, and changes in other contractual terms.

Debt restructuring is a qualitative indicator of a significant increase in credit risk and the Group recognizes lifetime expected credit losses for the exposure expected to be the subject of such adjustments. If a borrower faithfully makes payments of contractual cash flows that were modified in accordance with the debt restructuring or if the borrower’s internal credit rating has recovered to the level prior to the recognition of the lifetime expected credit losses, the Group recognizes the12-months expected credit losses for that exposure again.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

4.

Financial risk management (continued)

i-3) Risk of default

The Group considers a financial asset to be in default if it meets one or more of the following conditions:

If a borrower is overdue 90 days or more from the contractual payment date,

If the Group judges that it is not possible to recover principal and interest without enforcing the collateral on a financial asset

The Group uses the following indicators when determining whether a borrower is in default:

Qualitative factors (e.g. breach of contract terms),

Quantitative factors (e.g. if the same borrower does not perform more than one payment obligations to the Group, the number of days past due per payment obligation. However, in the case of a specific portfolio, the Group uses the number of days past due for each financial instrument)

Internal data and external data

The definition of default applied by the Group generally conforms to the definition of default defined for regulatory capital management purposes; however, depending on the situations, the information used to determine whether a default has incurred and the extent thereof may vary.

i-4) Reflection of forward-looking information

The Group reflects forward-looking information presented by internal experts based on a variety of information when measuring expected credit losses. For the purpose of estimating these forward-looking information, the Group utilizes the economic outlook published by domestic and overseas research institutes or government and public agencies.

The Group reflects future macroeconomic conditions anticipated from a neutral standpoint that is free from bias in measuring expected credit losses. Expected credit losses in this respect reflect conditions that are most likely to occur and are based on the same assumptions that the Group used in its business plan and management strategy.

The Group identified the key macroeconomic variables needed to forecast credit risk and credit losses for each portfolio as follows by analyzing past experience data and drew correlations across credit risk for each variable.

Key macroeconomic variables

Correlation with credit risk

Economic growth

Negative

Consumer price index

Negative

Benchmark rate

Positive

10-year Korea Treasury Bond

Positive

3-year Corporate Bond

Positive

KOSPI

Negative

The predicted correlations between the macroeconomic variables and the risk of default, used by the Group, were derived based on data from the past nine years.

i-5) Measurement of expected credit losses

Key variables used in measuring expected credit losses are as follows:

Probability of default (“PD”)

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

4.

Financial risk management (continued)

Loss given default (“LGD”)

Exposure at default (“EAD”)

These variables have been estimated from historical experience data by using the statistical techniques developed internally by the Group and have been adjusted to reflect forward-looking information.

Estimates of PD over a specified period are estimated by reflecting characteristics of counterparties and their exposure, based on a statistical model at a specific point of time. The Group uses its own information to develop a statistical credit assessment model used for the estimation, and additional information observed in the market is considered for some portfolios such as a group of large corporates. When a counterparty or exposure is concentrated in specific grades, the method of measuring PD for that grades would be adjusted, and the PD by grade is estimated by considering contract expiration of the exposure.

LGD refers to the expected loss if a borrower defaults. The Group calculates LGD based on the experience recovery rate measured from past default exposures. The model for measuring LGD is developed to reflect type of collateral, seniority of collateral, type of borrower, and cost of recovery. In particular, LGD for retail loan products uses loan to value (LTV) as a key variable. The recovery rate reflected in the LGD calculation is based on the present value of recovery amount, discounted at the effective interest rate.

EAD refers to the expected exposure at the time of default. The Group derives EAD reflecting a rate at which the current exposure is expected to be used additionally up to the point of default within the contractual limit. EAD of financial assets is equal to the total carrying amount of the asset, and EAD of loan commitments or financial guarantee contracts is calculated as the sum of the amount expected to be used in the future.

When measuring expected credit losses on financial assets, the Group reflects a period of expected credit loss measurement based on a contractual maturity. The Group takes into consideration of the extension rights held by a borrower when deciding the contractual maturity.

Risk factors of PD, LGD and EAD are collectively estimated according to the following criteria:

Type of products

Internal credit risk rating

Type of collateral

Loan to value (LTV)

Industry that the borrower belongs to

Location of the borrower or collateral

Days of delinquency

The criteria classifying groups is periodically reviewed to maintain homogeneity of the group and adjusted if necessary. The Group uses external benchmark information to supplement internal information for a particular portfolio that did not have sufficient internal data accumulated from the past experience.

i-6)Write-off of financial assets

The Group writes off a portion of or entire loan or debt security that is not expected to receive its principal and interest. In general, the Group conductswrite-off when it is deemed that the borrower has no sufficient

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

4.

Financial risk management (continued)

resources or income to repay the principal and interest. Such determination onwrite-off is carried out in accordance with the internal rules of the Group and is carried out with the approval of an external institution, if necessary. Apart fromwrite-off, the Group may continue to exercise its right of collection under its own recovery policy even after thewrite-off of financial assets.

ii) Maximum exposure to credit risk

Exposure to credit risk is the exposure related to due from banks, loans, investments in debt securities, derivative transactions,off-balance sheet accounts such as loan commitment. The exposures of due from banks and loans were classified into government, bank, corporation, or retail based on the exposure classification criteria of BASEL III credit risk weights.

The Group’s maximum exposure to credit risk without taking into account of any collateral held or other credit enhancements as of December 31, 2017 and December 31, 2018 are as follows:

2017

Due from banks and loans (*1)(*3):

Banks

W13,373,140

Retail

124,868,554

Government

14,442,747

Corporations

123,637,882

Card receivable

20,119,514

296,441,837

Trading assets

23,829,943

Financial assets designated at FVTPL

2,344,701

AFS financial assets

37,186,552

HTM financial assets

24,990,680

Derivative assets

3,400,178

Other financial assets (*1)(*2)

12,041,304

Financial guarantee contracts

3,267,707

Loan commitments and other credit liabilities

139,264,031

W542,766,933

 

 (*2)1)

The credit quality ofmaximum exposure amounts for due from banks, loans and other financial assets are not included in the detailsrecorded as net of the Group’s main credit quality disclosures as otherallowances.

(*2)

Other financial assets mainly comprise brokerage, securities and spot transaction related receivables, accrued interest receivables, secured key money deposits and domestic exchange settlement debit settled in a day.

 (*3)

Due from banks and loans were classified as similar credit risk group when calculating the BIS ratio under new Basel Capital Accord (Basel III).

(*4)As of December 31, 2016 and 2017, the maximum exposure to credit risk caused by unused credit commitments amounted toW61,184,914 million,W63,745,952 million , respectively.
(*5)FVTPL: fair value through profit or loss
(*6)AFS :available-for-sale
(*7)HTM :held-to-maturity

iii) Due from banks and loans by past due or impairment

Due from banks and loans as of December 31, 2016 and 2017 are as follows:

  2016 
  Banks  Retail  Government  Corporations  Card  Total 

Neither past due nor impaired

 W13,946,898   115,668,247   11,778,472   115,911,309   18,590,689   275,895,615 

Past due but not impaired

  —     392,002   270   264,354   397,417   1,054,043 

Impaired

  —     285,929   —     1,098,081   420,079   1,804,089 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  13,946,898   116,346,178   11,778,742   117,273,744   19,408,185   278,753,747 

Less : allowance

  (23,929)   (373,898)   (2,396)   (1,272,612)   (703,669)   (2,376,504) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
 W13,922,969   115,972,280   11,776,346   116,001,132   18,704,516   276,377,243 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

  2017 
  Banks  Retail  Government  Corporations  Card  Total 

Neither past due nor impaired

 W13,390,271   124,361,480   14,447,016   123,667,242   19,788,015   295,654,024 

Past due but not impaired

  —     581,977   —     194,132   543,303   1,319,412 

Impaired

  —     362,707   —     1,010,036   420,316   1,793,059 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  13,390,271   125,306,164   14,447,016   124,871,410   20,751,634   298,766,495 

Less : allowance

  (17,131)   (437,610)   (4,269)   (1,233,528)   (632,120)   (2,324,658) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
 W13,373,140   124,868,554   14,442,747   123,637,882   20,119,514   296,441,837 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Credit quality of due from banks and loans that are neither past due nor impaired as of December 31, 2016 and 2017 are as follows:

  2016 
  Banks  Retail  Government  Corporations  Card  Total 

Grade 1 (*1)

 W13,946,898   108,798,683   11,778,472   78,556,918   15,156,750   228,237,721 

Grade 2 (*1)

  —     6,869,564   —     37,354,391   3,433,939   47,657,894 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  13,946,898   115,668,247   11,778,472   115,911,309   18,590,689   275,895,615 

Less : allowance

  (23,929)   (205,135)   (2,395)   (740,349)   (374,708)   (1,346,516) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
 W13,922,969   115,463,112   11,776,077   115,170,960   18,215,981   274,549,099 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Mitigation of credit risk due to collateral (*2)

 W35,581   76,943,059   —     59,271,190   6,200   136,256,030 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

4.

Financial risk management (continued)

 

  2017 
  Banks  Retail  Government  Corporations  Card  Total 

Grade 1 (*1)

 W13,382,414   116,304,917   14,447,016   86,831,895   16,314,189   247,280,431 

Grade 2 (*1)

  7,857   8,056,563   —     36,835,347   3,473,826   48,373,593 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  13,390,271   124,361,480   14,447,016   123,667,242   19,788,015   295,654,024 

Less : allowance

  (17,131)   (212,502)   (4,269)   (647,694)   (288,362)   (1,169,958) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
 W13,373,140   124,148,978   14,442,747   123,019,548   19,499,653   294,484,066 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Mitigation of credit risk due to collateral (*2)

 W96,835   80,354,889   —     64,018,607   6,358   144,476,689 
2018

Due from banks and loans at amortized cost (*1)(*3):

Banks

W17,935,816

Retail

136,499,558

Government

6,517,215

Corporations

131,795,992

Card receivable

21,592,287

314,340,868

Deposits and loans at FVTPL (*1)(*3)

Bank

890,660

Corporations

1,189,190

2,079,850

Securities at FVTPL

40,289,846

Securities measured at fair value – OCI

37,677,646

Securities measured at amortized cost

28,478,136

Derivative assets

1,793,613

Other financial assets (*1)(*2)

16,837,141

Financial guarantee contracts

4,413,874

Loan commitments and other credit liabilities

165,399,937

W611,310,911

(*1)

The maximum exposure amounts for due from banks, loans and other financial assets at amortized cost are recorded as net of allowances.

(*2)

Other financial assets mainly comprise brokerage, securities and spot transaction related receivables, accrued interest receivables, secured key money deposits and domestic exchange settlement debit settled in a day.

(*3)

Due from banks and loans were classified as similar credit risk group when calculating the BIS ratio under new Basel Capital Accord (Basel III).

iii) The maximum amount of exposure to credit risk by type of collateral of held financial instruments as of December 31, 2018 is as follows:

   12 months
Expected credit loss		   Life time expected credit loss   Total 

Classification

  Not recognized   Recognized 

Guarantee

  W13,608,254    3,870,047    61,623    17,539,924 

Deposits and Savings

   1,016,391    241,567    1,379    1,259,337 

Property and equipment

   1,051,573    244,571    18,766    1,314,910 

Real estate

   119,174,347    13,856,638    281,943    133,312,928 

Securities

   3,460,263    105,397    —      3,565,660 

Other

   2,593,792    28    218    2,594,038 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  W140,904,620    18,318,248    363,929    159,586,797 
  

 

 

   

 

 

   

 

 

   

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

4.

Financial risk management (continued)

iv) Impairment information by credit risk of financial assets

Credit loss allowances of financial assets as of December 31, 2018 are as follows:

  12-month expected credit loss  Life time expected credit loss  Total  Allowances  Net  Mitigation of
credit risk
due to
collateral		 
  Grade 1 (*1)  Grade 2 (*1)  Grade 1 (*1)  Grade 2 (*1)  Impaired 

Due from banks and loans at amortized cost:

         

Banks

 W16,873,064   980,673   94,866   11,493   —     17,960,096   (24,280)   17,935,816   55,008 

Retail

  122,318,451   6,122,202   4,991,709   3,103,779   402,975   136,939,116   (439,558)   136,499,558   81,216,489 

Government

  6,474,219   2,399   45,871   —     —     6,522,489   (5,274)   6,517,215   17,050 

Corporations

  82,476,923   28,445,914   9,800,260   11,659,375   882,394   133,264,866   (1,468,874)   131,795,992   74,069,579 

Card receivable

  16,129,536   2,022,525   1,791,147   2,039,390   411,595   22,394,193   (801,906)   21,592,287   7,599 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  244,272,193   37,573,713   16,723,853   16,814,037   1,696,964   317,080,760   (2,739,892)   314,340,868   155,365,725 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Securities at fair value through other comprehensive income (*2)

  30,705,879   6,865,937   —     105,830   —     37,677,646   —     37,677,646   —   

Securities at amortized cost

  27,661,749   803,174   22,474   —     —     28,487,397   (9,261)   28,478,136   —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Ending balance

 W302,639,821   45,242,824   16,746,327   16,919,867   1,696,964   383,245,803   (2,749,153)   380,496,650   155,365,725 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

4.

Financial risk management (continued)

 

(*1)

Credit quality of due from banks and loans was classified based on the internal credit rating as follows:

 

Type of Borrower

  

Grade 1

  

Grade 2

Banks and governments (*)  OECD sovereign credit rating of 6 or above (as applied to the nationality of the banks and governments)  OECD sovereign credit rating of below 6 (as applied to the nationality of the banks and governments)
Retail  Pool of retail loans with probability of default of less than 2.25%  Pool of retail loans with probability of default of 2.25% or more
Corporations  Internal credit rating of BBB+ or above  

Internal credit rating of below BBB+

(Probability of default for loans with internal credit rating of BBB is 2.25%)

Credit cards  

For individual card holders, score of 7 or higher in Shinhan Card’s internal behavior scoring system

 

For corporate cardholders, same as corporate loans

  

For individual card holders, score of below 7 in Shinhan Card’s internal behavior scoring system

 

For corporate cardholders, same as corporate loans

 

(*)2)In the case

Provision for credit loss allowance for securities at fair value through other comprehensive income amounted toW26,084 million.

Credit quality of due from banks and loans that are neither past due nor impaired as of December 31, 2017 are as follows:

  2017 
  Banks  Retail  Government  Corporations  Card  Total 

Grade 1 (*3)

 W13,382,414   116,304,917   14,447,016   86,831,895   16,314,189   247,280,431 

Grade 2 (*3)

  7,857   8,056,563   —     36,835,347   3,473,826   48,373,593 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  13,390,271   124,361,480   14,447,016   123,667,242   19,788,015   295,654,024 

Less: allowance (collective)

  (17,131)   (212,502)   (4,269)   (647,694)   (288,362)   (1,169,958) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
 W 13,373,140   124,148,978   14,442,747   123,019,548   19,499,653   294,484,066 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Mitigation of credit risk

due to collateral (*2)

 W96,835   80,354,889   —     64,018,607   6,358   144,476,689 

(*1)

Credit quality of deposits and loans to banks and governments that are neither past due nor impaired, Shinhan Bankis classified loans with a sovereign rating of 6 or above as Grade 1 and those with a sovereign rating of below 6 as Grade 2. Under the guidelines set forth by the Financial Supervisory Commission of Korea, all major commercial banks in Korea, including Shinhan Bank, follow the standardized approach under Basel III for purposes of computing Bank of International Settlement (BIS) ratios for risk classifications of loansaccording to banks and governments. Under this standardized approach under Basel III, risk classification for loans to banks and governments are determined on the basis of sovereign credit ratings, and not internal credit ratings assigned byrating.

(*2)

The credit risk mitigation effect of the lending bank that are specific to the individual banks and governments. More specifically, this approach involves classifying loans to banks and governments in a given jurisdiction as either Grade 1 or Grade 2collateral was estimated based on the sovereign credit ratings for the government of such jurisdiction as determined by the Organization for EconomicCo-operation and Development (“OECD”). As for our subsidiaries other than Shinhan Bank, risk classification of loans to banks and governments is made based on their respective internal credit ratings as these subsidiaries are not subject to the aforesaid guidelinesfair value of the Financial Supervisory Commission relating to Basel III risk classification.collateral.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

4.

Financial risk management (continued)

 

(*2)3)The Group holds collateral against

Credit quality of due from banks and loans to customers in the form of mortgage interests over property, other registered securities over assets, and guarantees. Estimates of quantification of the extent to which collateral mitigate credit risk arewas classified based on the fair valueinternal credit rating as follows:

Type of collateral.Borrower

Grade 1

Grade 2

Banks and governmentsOECD sovereign credit rating of 6 or above (as applied to the nationality of the banks and governments)OECD sovereign credit rating of below 6 (as applied to the nationality of the banks and governments)
RetailPool of retail loans with probability of default of less than 2.25%Pool of retail loans with probability of default of 2.25% or more
CorporationsInternal credit rating of BBB+ or above

Internal credit rating of below BBB+

(Probability of default for loans with internal credit rating of BBB is 2.25%)

Credit cards

For individual card holders, score of 7 or higher in Shinhan Card’s internal behavior scoring system

For corporate cardholders, same as corporate loans

For individual card holders, score of below 7 in Shinhan Card’s internal behavior scoring system

For corporate cardholders, same as corporate loans

 

Aging analyses of due from banks and loans that are past due but not impaired as of December 31, 2016 and 2017 are as follows:

 

   2016 
   Banks   Retail  Government  Corporations  Card  Total 

Less than 30 days

  W—      297,889   270   190,133   321,913   810,205 

30 days ~ less than 60 days

   —      49,582   —     50,881   53,379   153,842 

60 days ~ less than 90 days

   —      31,072   —     20,305   21,899   73,276 

90 days or more

   —      13,459   —     3,035   226   16,720 
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
   —      392,002   270   264,354   397,417   1,054,043 

Less : allowance (collective)

   —      (35,627)   (1)   (12,377)   (66,413)   (114,418) 
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  W—      356,375   269   251,977   331,004   939,625 
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Mitigation of credit risk due to collateral (*)

  W—      249,309   —     101,334   112   350,755 

  2017   2017 
  Banks   Retail Government   Corporations Card Total   Banks   Retail Government   Corporations Card Total 

Less than 30 days

  W—      458,968   —      131,624  446,658  1,037,250   W—      458,968   —      131,624  446,658  1,037,250 

30 days ~ less than 60 days

   —      65,152   —      33,749  58,283  157,184    —      65,152   —      33,749  58,283  157,184 

60 days ~ less than 90 days

   —      42,427   —      16,972  37,972  97,371    —      42,427   —      16,972  37,972  97,371 

90 days or more

   —      15,430   —      11,787  390  27,607    —      15,430   —      11,787  390  27,607 
  

 

   

 

  

 

   

 

  

 

  

 

   

 

   

 

  

 

   

 

  

 

  

 

 
   —      581,977   —      194,132  543,303  1,319,412    —      581,977   —      194,132  543,303  1,319,412 

Less : allowance (collective)

   —      (56,774)   —      (8,898)  (81,990)  (147,662) 

Less: allowance

   —      (56,774)   —      (8,898)  (81,990)  (147,662) 
  

 

   

 

  

 

   

 

  

 

  

 

   

 

   

 

  

 

   

 

  

 

  

 

 
  W—      525,203   —      185,234  461,313  1,171,750   W—      525,203   —      185,234  461,313  1,171,750 
  

 

   

 

  

 

   

 

  

 

  

 

   

 

   

 

  

 

   

 

  

 

  

 

 

Mitigation of credit risk due to collateral (*)

  W—      325,631   —      94,388  90  420,109 

Mitigation of credit risk due to collateral

  W—      325,631   —      94,388  90  420,109 

 

Due from banks and loans that are impaired as of December 31, 2016 and 2017 are as follows:

 

  2016 
  Banks  Retail  Government  Corporations  Card  Total 

Impaired

 W—     285,929   —     1,098,081   420,079   1,804,089 

Less : allowance

  —     (133,136)   —     (519,886)   (262,548)   (915,570) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
 W—     152,793   —     578,195   157,531   888,519 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Mitigation of credit risk due to collateral (*)

 W—     101,730   —     437,891   3   539,624 
  2017 
  Banks  Retail  Government  Corporations  Card  Total 

Impaired

 W—     362,707   —     1,010,036   420,316   1,793,059 

Less: allowance

  —     (168,334)   —     (576,936)   (261,768)   (1,007,038) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
 W—     194,373   —     433,100   158,548   786,021 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Mitigation of credit risk due to collateral

 W—     128,906   —     384,815   12   513,733 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

4.

Financial risk management (continued)

 

   2017 
   Banks   Retail  Government   Corporations  Card  Total 

Impaired

  W—      362,707   —      1,010,036   420,316   1,793,059 

Less : allowance

   —      (168,334)   —      (576,936)   (261,768)   (1,007,038) 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 
  W—      194,373   —      433,100   158,548   786,021 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

Mitigation of credit risk due to collateral (*)

  W—      128,906   —      384,815   12   513,733 

v) Credit risk exposures per credit grade ofoff-balance items

Credit risk exposures per credit grade ofoff-balance items as of December 31, 2018 are as follows:

   2018 
   Grade 1 (*1)   Grade 2 (*1)   Impaired   Total 

Financial guarantee:

        

12-month expected credit loss

  W2,137,695    1,975,877    —      4,113,572 

Life time expected credit loss

   146,236    152,277    —      298,513 

Impaired

   —      —      1,789    1,789 
  

 

 

   

 

 

   

 

 

   

 

 

 
   2,283,931    2,128,154    1,789    4,413,874 
  

 

 

   

 

 

   

 

 

   

 

 

 

Loan commitment and other credit line:

        

12-month expected credit loss

   137,920,323    19,044,745    —      156,965,068 

Life time expected credit loss

   6,636,365    1,787,965    —      8,424,330 

Impaired

   —      —      10,539    10,539 
  

 

 

   

 

 

   

 

 

   

 

 

 
   144,556,688    20,832,710    10,539    165,399,937 
  

 

 

   

 

 

   

 

 

   

 

 

 
  W146,840,619    22,960,864    12,328    169,813,811 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(*)1)The Group holds collateral against due from banks and loans to customers in the form of mortgage interests over property, other registered securities over assets, and guarantees. Estimates of quantification of the extent to which collateral mitigate

Grade 1: BBB+ or above per internal credit risk are based on the fair value of collateral.rating

Grade 2: Below BBB+ per internal credit rating

iv)vi) Credit ratingratings of debt securities

 

Credit ratings of debt securities as of December 31, 2016 and 2017 are as follows:

 

   2016 
   Trading assets   Financial assets
designated at
FVTPL		   Available–for-
sale financial
assets		   Held-to-maturity
financial assets		   Total 

AAA

  W9,777,845    535,684    19,781,580    16,188,459    46,283,568 

AA- to AA+

   4,075,181    402,946    5,561,165    2,584,304    12,623,596 

A- to A+

   5,310,796    1,097,395    4,257,161    535,889    11,201,241 

BBB- to BBB+

   1,441,783    192,161    1,348,073    137,240    3,119,257 

Lower than BBB-

   144,612    —      469,615    148,894    763,121 

Unrated

   1,640,347    —      1,404,477    210,298    3,255,122 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  W22,390,564    2,228,186    32,822,071    19,805,084    77,245,905 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

   2017 
   Trading assets   Financial assets
designated at
FVTPL		   Available–for-
sale financial
assets		   Held-to-maturity
financial assets		   Total 

AAA

  W8,837,093    630,247    23,949,843    20,057,480    53,474,663 

AA- to AA+

   5,193,659    589,193    5,582,125    3,956,290    15,321,267 

A- to A+

   5,442,892    792,715    4,300,764    444,711    10,981,082 

BBB- to BBB+

   1,614,012    252,258    1,508,224    166,906    3,541,400 

Lower than BBB-

   275,200    —      435,651    177,840    888,691 

Unrated

   2,277,790    80,288    1,409,945    187,453    3,955,476 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  W23,640,646    2,344,701    37,186,552    24,990,680    88,162,579 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

4.Financial risk management (continued)
   2017 
   Trading assets   Financial assets
designated at
FVTPL		   Available–for-
sale financial
assets		   Held-to-maturity
financial assets		   Total 

AAA

  W8,837,093    630,247    23,949,843    20,057,480    53,474,663 

AA- to AA+

   5,193,659    589,193    5,582,125    3,956,290    15,321,267 

A- to A+

   5,442,892    792,715    4,300,764    444,711    10,981,082 

BBB- to BBB+

   1,614,012    252,258    1,508,224    166,906    3,541,400 

Lower than BBB-

   275,200    —      435,651    177,840    888,691 

Unrated

   2,277,790    80,288    1,409,945    187,453    3,955,476 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  W23,640,646    2,344,701    37,186,552    24,990,680    88,162,579 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

The credit quality of securities (debt securities) according to the credit ratings by external rating agencies is as follows:

 

Internal credit ratings

 

KIS (*1)

 

KR (*2)

 

S&P

 

Fitch

 

Moody’s

AAA

 —   —   AAA AAA Aaa

AA- to AA+

 AAA AAA AA- to AA+ AA- to AA+ Aa3 to Aa1

A- to A+

 AA- to AA+ AA- to AA+ A- to A+ A- to A+ A3 to A1

BBB- to BBB+

 BBB- to A BBB- to A BBB- to BBB+ BBB- to BBB+ Baa3 to Baa1

Lower than BBB-

 Lower than BBB- Lower than BBB- Lower than BBB- Lower than BBB- Lower than Baa3

Unrated

 Unrated Unrated Unrated Unrated Unrated

(*1)KIS : Korea Investors Service
(*2)KR : Korea Ratings

Credit status of debt securities as of December 31, 2016 and 2017 are as follows:

   2016   2017 

Neither past due nor impaired

  W77,244,537    88,160,626 

Impaired

   1,368    1,953 
  

 

 

   

 

 

 
  W77,245,905    88,162,579 
  

 

 

   

 

 

 

Credit quality of derivative assets as of December 31, 2016 and 2017 are as follows:

   2016   2017 

Grade 1 (*1)(*2)

  W2,944,814    3,290,638 

Grade 2 (*1)(*2)

   58,045    109,540 
  

 

 

   

 

 

 
  W3,002,859    3,400,178 
  

 

 

   

 

 

 

(*1)Credit qualities of derivative assets were classified based on the internal credit ratings of counterparties.
(*2)Grade 1: Internal credit rating of BBB+ or above, Grade 2: Internal credit rating of below BBB+

v)Assets acquired through foreclosures amounting toW658 million are classified as assets held for sale(non-business purpose property) as of December 31, 2016.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

4.

Financial risk management (continued)

 

(*1)

KIS: Korea Investors Service

(*2)

KR: Korea Ratings

Credit status of debt securities as of December 31, 2017 are as follows:

2017

Neither past due nor impaired

W88,160,626

Impaired

1,953

W88,162,579

Credit quality of derivative assets as of December 31, 2017 and 2018 are as follows:

   2017   2018 

Grade 1 (*1)(*2)

  W3,290,638    1,687,005 

Grade 2 (*1)(*2)

   109,540    106,608 
  

 

 

   

 

 

 
  W3,400,178    1,793,613 
  

 

 

   

 

 

 

(*1)

Credit qualities of derivative assets were classified based on the internal credit ratings of counterparties.

(*2)

Grade 1: Internal credit rating of BBB+ or above, Grade 2: Internal credit rating of below BBB+

vi)vii) Concentration by geographic location

An analysis of concentration by geographic location for financial instrument, net of allowance, as of December 31, 20162017 and 20172018 are as follows:

 

  2016 
  Korea  USA  Japan  Vietnam  China  Other  Total 

Due from banks and loans:

       

Banks

 W5,681,266   1,675,781   328,700   465,998   3,982,074   1,789,150   13,922,969 

Retail

  112,391,835   337,751   2,270,133   294,777   277,447   400,337   115,972,280 

Government

  9,799,087   321,516   717,922   109,943   696,051   131,827   11,776,346 

Corporations

  103,409,204   2,254,649   2,083,445   1,630,829   2,272,447   4,350,558   116,001,132 

Card

  18,660,696   7,116   2,114   13,213   10,684   10,693   18,704,516 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  249,942,088   4,596,813   5,402,314   2,514,760   7,238,703   6,682,565   276,377,243 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Trading assets

  22,220,290   130,576   1,072   5,417   32,490   248,564   22,638,409 

Financial assets designated at FVTPL(*1)

  2,144,830   —     —     —     60,201   23,155   2,228,186 

AFS financial assets(*2)

  29,739,647   1,363,047   112,381   484,002   588,334   534,660   32,822,071 

HTM financial assets(*3)

  17,871,709   1,410,721   56,196   155,916   166,560   143,982   19,805,084 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
 W321,918,564   7,501,157   5,571,963   3,160,095   8,086,288   7,632,926   353,870,993 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

  2017 
  Korea  USA  Japan  Vietnam  China  Other  Total 

Due from banks and loans:

       

Banks

 W6,315,655   1,186,576   268,533   583,094   3,420,223   1,599,059   13,373,140 

Retail

  119,993,323   346,746   2,695,890   745,725   615,079   471,791   124,868,554 

Government

  12,887,534   130,553   388,142   35,786   664,030   336,702   14,442,747 

Corporations

  110,025,699   2,371,400   2,169,445   1,613,022   2,530,507   4,927,809   123,637,882 

Card

  20,002,457   7,434   2,208   76,608   16,806   14,001   20,119,514 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  269,224,668   4,042,709   5,524,218   3,054,235   7,246,645   7,349,362   296,441,837 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Trading assets

  23,294,062   235,474   985   5,074   60,037   234,311   23,829,943 

Financial assets designated at FVTPL(*1)

  2,262,222   82,479   —     —     —     —     2,344,701 

AFS financial assets(*2)

  34,323,438   1,242,570   163,652   474,134   510,678   472,080   37,186,552 

HTM financial assets(*3)

  22,458,896   1,466,037   34,487   237,641   37,096   756,523   24,990,680 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
 W351,563,286   7,069,269   5,723,342   3,771,084   7,854,456   8,812,276   384,793,713 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(*1)FVTPL : fair value through profit or loss
(*2)AFS :available-for-sale
(*3)HTM :held-to-maturity
  2017 
  Korea  USA  England  Japan  Germany  Vietnam  China  Other  Total 

Due from banks and loans:

         

Banks

 W6,315,655   1,186,576   205,705   268,533   144,382   583,094   3,420,223   1,248,972   13,373,140 

Retail

  119,993,323   346,746   3,811   2,695,890   2,057   745,725   615,079   465,923   124,868,554 

Government

  12,887,534   130,553   —     388,142   134,011   35,786   664,030   202,691   14,442,747 

Corporations

  110,025,699   2,371,400   175,038   2,169,445   73,998   1,613,022   2,530,507   4,678,773   123,637,882 

Card

  20,002,457   7,434   282   2,208   174   76,608   16,806   13,545   20,119,514 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  269,224,668   4,042,709   384,836   5,524,218   354,622   3,054,235   7,246,645   6,609,904   296,441,837 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Trading assets

  23,294,062   235,474   189,297   985   8,704   5,074   60,037   36,310   23,829,943 

Financial assets designated at FVTPL

  2,262,222   82,479   —     —     —     —     —     —     2,344,701 

AFS financial assets

  34,323,438   1,242,570   14,517   163,652   32,148   474,134   510,678   425,415   37,186,552 

HTM financial assets

  22,458,896   1,466,037   —     34,487   —     237,641   37,096   756,523   24,990,680 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
 W351,563,286   7,069,269   588,650   5,723,342   395,474   3,771,084   7,854,456   7,828,152   384,793,713 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

4.

Financial risk management (continued)

 

vii) Concentration by industry sector

An analysis of concentration by industry sector of financial instrument, as of December 31, 2016 and 2017 are as follows:

  2016 
  Finance and
insurance		  Manu-
facturing		  Retail and
wholesale		  Real estate
and service		  Other  Retail
customers		  Total 

Due from banks and loans:

       

Banks

 W10,875,077   68   —     110,443   2,937,381   —     13,922,969 

Retail

  —     —     —     —     —     115,972,280   115,972,280 

Government

  10,906,097   3,991   —     3,315   862,943   —     11,776,346 

Corporations

  5,094,455   40,544,250   15,560,280   20,460,662   34,341,485   —     116,001,132 

Card

  38,574   194,630   131,956   37,495   371,497   17,930,364   18,704,516 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  26,914,203   40,742,939   15,692,236   20,611,915   38,513,306   133,902,644   276,377,243 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Trading assets

  14,783,780   1,262,042   1,079,631   307,115   5,205,841   —     22,638,409 

Financial assets designated at FVTPL(*1)

  1,450,512   144,019   26,385   20,000   587,270   —     2,228,186 

AFS financial assets(*2)

  22,615,359   1,009,045   129,261   613,265   8,455,141   —     32,822,071 

HTM financial assets(*3)

  5,261,874   44,915   —     786,345   13,711,950   —     19,805,084 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
 W71,025,728   43,202,960   16,927,513   22,338,640   66,473,508   133,902,644   353,870,993 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

  2017 
  Finance and
insurance		  Manu-
facturing		  Retail and
wholesale		  Real estate
and service		  Other  Retail
customers		  Total 

Due from banks and loans:

       

Banks

 W11,094,855   1,592   —     56,744   2,219,949   —     13,373,140 

Retail

  —     —     —     —     —     124,868,554   124,868,554 

Government

  13,381,461   1,314   —     —     1,059,972   —     14,442,747 

Corporations

  5,474,353   40,364,768   16,563,849   23,005,675   38,229,237   —     123,637,882 

Card

  41,825   295,290   140,117   37,801   445,982   19,158,499   20,119,514 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  29,992,494   40,662,964   16,703,966   23,100,220   41,955,140   144,027,053   296,441,837 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Trading assets

  17,183,669   1,139,609   1,206,133   176,273   4,124,259   —     23,829,943 

Financial assets designated at FVTPL(*1)

  1,201,464   202,906   36,112   45,178   859,041   —     2,344,701 

AFS financial assets(*2)

  23,384,608   1,409,017   227,289   632,410   11,533,228   —     37,186,552 

HTM financial assets(*3)

  5,975,448   48,981   —     785,859   18,180,392   —     24,990,680 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
 W77,737,683   43,463,477   18,173,500   24,739,940   76,652,060   144,027,053   384,793,713 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(*1)FVTPL : fair value through profit or loss
(*2)AFS :available-for-sale
(*3)HTM :held-to-maturity
  2018 
  Korea  USA  England  Japan  Germany  Vietnam  China  Other  Total 

Due from banks and loans at amortized cost:

         

Banks

 W8,996,272   1,712,675   462,540   640,895   213,399   947,315   3,221,442   1,741,278   17,935,816 

Retail

  130,034,683   359,668   4,432   3,440,623   2,151   1,031,299   974,568   652,134   136,499,558 

Government

  4,257,877   499,742   —     750,676   108,667   182,822   546,597   170,834   6,517,215 

Corporations

  116,621,693   2,707,273   109,295   2,578,989   96,468   1,846,470   2,621,744   5,214,060   131,795,992 

Card

  21,453,128   8,435   301   2,107   208   92,992   20,785   14,331   21,592,287 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  281,363,653   5,287,793   576,568   7,413,290   420,893   4,100,898   7,385,136   7,792,637   314,340,868 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Deposits and loans at FVTPL:

         

Bank

  186,465   704,195   —     —     —     —     —     —     890,660 

Corporations

  1,189,190   —     —     —     —     —     —     —     1,189,190 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  1,375,655   704,195   —     —     —     —     —     —     2,079,850 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Securities measured at FVTPL

  38,782,201   973,716   163,658   28,062   11,507   20,740   104,853   205,109   40,289,846 

Securities at FVOCI

  34,667,702   1,209,756   21,749   197,234   46,417   392,668   616,143   525,977   37,677,646 

Securities at amortized cost

  26,053,245   1,048,909   —     68,594   —     360,953   34,923   911,512   28,478,136 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
 W382,242,456   9,224,369   761,975   7,707,180   478,817   4,875,259   8,141,055   9,435,235   422,866,346 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

4.

Financial risk management (continued)

viii) Concentration by industry sector

An analysis of concentration by industry sector of financial instrument, net of allowance, as of December 31, 2017 and 2018 are as follows:

  2017 
  Finance and
insurance		  Manu-
facturing		  Retail and
wholesale		  Real estate
and service		  Construction
service		  Hotel and food
service		  Other  Retail
customers		  Total 

Due from banks and loans at amortized cost:

         

Banks

 W11,094,855   1,592   —     56,744   —     —     2,219,949   —     13,373,140 

Retail

  —     —     —     —     —     —     —     124,868,554   124,868,554 

Government

  13,381,461   1,314   —     —     —     —     1,059,972   —     14,442,747 

Corporations

  5,474,353   40,364,768   16,563,849   23,005,675   2,880,851   2,413,929   32,934,457   —     123,637,882 

Card receivable

  41,825   295,290   140,117   37,801   38,580   12,257   395,145   19,158,499   20,119,514 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  29,992,494   40,662,964   16,703,966   23,100,220   2,919,431   2,426,186   36,609,523   144,027,053   296,441,837 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Trading assets

  17,183,669   1,139,609   1,206,133   176,273   112,409   71,656   3,940,194   —     23,829,943 

Financial asset designated at fair value through profit or loss

  1,201,464   202,906   36,112   45,178   27,678   —     831,363   —     2,344,701 

AFS financial assets

  23,384,608   1,409,017   227,289   632,410   348,269   —     11,184,959   —     37,186,552 

HTM financial assets

  5,975,448   48,981   —     785,859   557,591   —     17,622,801   —     24,990,680 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
 W77,737,683   43,463,477   18,173,500   24,739,940   3,965,378   2,497,842   70,188,840   144,027,053   384,793,713 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

4.

Financial risk management (continued)

   2018 
   Finance and
insurance		   Manu-
facturing		   Retail and
wholesale		   Real estate
and service		   Construction
service		   Hotel and food
service		   Other   Retail customers   Total 

Due from banks and loans at amortized cost:

                  

Banks

  W17,579,099    2,219    —      300    —      —      354,198    —      17,935,816 

Retail

   —      —      —      —      —      —      —      136,499,558    136,499,558 

Government

   6,385,776    —      —      2,795    —      —      128,644    —      6,517,215 

Corporations

   8,456,599    43,957,565    17,420,532    27,009,286    3,272,406    5,610,146    26,066,753    2,705    131,795,992 

Card receivable

   36,343    210,324    169,070    43,236    42,209    23,506    20,968,820    98,779    21,592,287 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   32,457,817    44,170,108    17,589,602    27,055,617    3,314,615    5,633,652    47,518,415    136,601,042    314,340,868 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deposits and loans at FVTPL:

                  

Bank

   870,656    —      —      20,004    —      —      —      —      890,660 

Corporations

   554,832    213,715    209,631    2,593    1,621    900    205,898    —      1,189,190 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   1,425,488    213,715    209,631    22,597    1,621    900    205,898    —      2,079,850 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Securities measured at FVTPL

   25,067,491    1,646,132    1,185,571    342,124    208,455    60,829    11,779,244    —      40,289,846 

Securities at FVOCI

   22,436,768    1,695,624    302,789    480,979    480,585    —      12,280,901    —      37,677,646 

Securities at amortized cost

   6,634,975    99,437    —      775,580    595,334    —      20,372,810    —      28,478,136 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  W 88,022,539    47,825,016    19,287,593    28,676,897    4,600,610    5,695,381    92,157,268    136,601,042    422,866,346 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

4.

Financial risk management (continued)

 

 (c)

Market risk

Market risk from trading positions is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Group’s income or the value of its holdings of financial instruments.

Interest rate risk fromnon-non-trading trading positions is the risk of loss resulting from interest rate fluctuations that adversely affect the financial condition and results of operations of the Group and affects the earnings and the economic value of net assets of the Group.

Foreign exchange risk arises from the Group’s assets and liabilities which are denominated in currencies other than Korean won.

The Group’s market risks arise primarily from Shinhan Bank, and to a lesser extent, Shinhan Investment, which incurs market risk relating to its trading activities.

Shinhan Bank’s Risk Policy Committee acts as the executive decision making body in relation to market risks setting the risk management policies and risk limits and controlling market risks arising from trading andnon-trading activities. In addition, Shinhan Bank’s Risk Management Department comprehensively manages market risks on an independent basis from Shinhan Bank’s operating departments, and functions as the middle office of Shinhan Bank.

Shinhan Investment’s Risk Management Working Committee is the executive decision-making body for managing market risks related to Shinhan Investment, and determines, among other things, Shinhan Investment’s overall market risk management policies and strategies, and assesses and approves trading activities and limits. In addition, Shinhan Investment’s Risk Management Department manages various market risk limits and monitors operating conditions on an independent basis from Shinhan Investment’s operating departments.

i) Market risk management from trading positions

Trading activities are to realize short-term trading profits in debt and stock markets and foreign exchange markets based on short-term forecast of changes in market situation and profits from arbitrage transactions in derivatives such as swap, forward, futures and option transactions. The Group manages market risk related to its trading positions using VaR, market value-based tool.

Shinhan Bank currently usesten-day 99.9% confidence level-based VaR for purposes of calculating its “economic” capital used for internal management purposes, which is a concept used in determining the amount of Shinhan Bank’s requisite capital in light of the market risk. Shinhan Bank manages VaR measurements and limits on a daily basis based on an automatic interfacing of its trading positions into its market risk measurement system. In addition, Shinhan Bank establishespre-set loss, sensitivity, investment and stress limits for its trading departments and desks and monitors such limits daily.

Shinhan Investment currently uses theten-day 99.9% confidence level-based historical VaR for purposes of calculating its “economic” capital used for internal management purposes. When computing the VaR, Shinhan Investment does not assume any particular probability distribution and calculates it through a simulation of the “full valuation” method based on changes of market variables such as stock prices, interest rates, and foreign exchange rates in the past one year. In addition, Shinhan Investment applies this VaR as a risk limit for the entire company as well as individual departments and products, and the adequacy of such VaR is reviewed by way of daily back-testing.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

4.

Financial risk management (continued)

 

Value-at-risk is a commonly used market risk management technique. However, VaR models have the following shortcomings:

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 reliable indicator of future events, particularly those that are extreme in nature;

VaR may underestimate the probability of extreme market movements;

Shinhan Bank’s VaR models assume that a holding period of generally one to ten days is sufficient prior to liquidating the underlying positions, but such assumption regarding the length of the holding period may prove to be inadequate;

The 99.9% confidence level does not take into account or provide indication of any losses that might occur beyond this confidence level; and

VaR does not capture all complex effects of various risk factors on the value of positions and portfolios and could underestimate potential losses

In order to streamline such differences and use a consistent VaR among operating subsidiaries, the Group has adopted starting in 2013 a unified group-wide market risk measurement methodology, which uses theten-day 99.9% confidence level for calculating the VaR.

An analysis of the Group’s requisite capital in light of the market risk for trading positions as of and for the years ended December 31, 20162017 and 20172018 based on the standard guidelines for risk management promulgated by the Financial Supervisory Service, was as follows:

 

  2016   2017 
  Average   Maximum   Minimum   December 31   Average   Maximum   Minimum   December 31 

Interest rate

  W376,486    422,592    348,686    422,592   W431,065    463,340    414,689    415,139 

Stock price

   159,555    191,957    134,595    134,595    186,652    225,553    157,730    199,041 

Foreign exchange

   132,802    139,694    124,046    132,225    113,208    121,041    105,823    121,041 

Commodity

   11,395    22,366    4,562    4,562 

Option volatility

   6,078    9,214    2,707    9,215    10,405    12,599    7,809    12,599 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 
  W674,921    763,457    610,034    698,627   W 752,725    844,899    690,613    752,382 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

   2017 
   Average   Maximum   Minimum   December 31 

Interest rate

  W431,065    463,340    414,689    415,139 

Stock price

   186,652    225,553    157,730    199,041 

Foreign exchange

   113,208    121,041    105,823    121,041 

Option volatility

   10,405    12,599    7,809    12,599 
  

 

 

   

 

 

   

 

 

   

 

 

 
  W741,330    822,533    686,051    747,820 
  

 

 

   

 

 

   

 

 

   

 

 

 

Shinhan Life Insurance was excluded when the Group estimated the market risk, because insurance company was not included in the Group’s subsidiaries for the consolidated BIS capital ratio.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

4.Financial risk management (continued)

An analysis of market risk for trading positions of the major subsidiaries as of and for the years ended December 31, 2016 and 2017 are as follows:

   2018 
   Average   Maximum   Minimum   December 31 

Interest rate

  W425,235    453,644    403,195    453,644 

Stock price

   201,408    227,167    143,238    143,238 

Foreign exchange

   143,202    174,702    124,292    139,617 

Commodity

   6,250    9,026    4,501    6,343 

Option volatility

   34,334    56,834    22,045    56,834 
  

 

 

   

 

 

   

 

 

   

 

 

 
  W 810,429    921,373    697,271    799,676 
  

 

 

   

 

 

   

 

 

   

 

 

 

i-1) Shinhan Bank

The analyses of theten-day 99.9% confidence level-based VaR for managing market risk for trading positions of Shinhan Bank as of and for the years ended December 31, 20162017 and 20172018 are as follows:

 

   2016 
   Average   Maximum   Minimum   December 31 

Interest rate

  W33,246    48,851    18,764    44,447 

Stock price

   5,161    5,787    4,815    5,484 

Foreign exchange(*)

   56,089    61,389    53,678    60,088 

Option volatility

   149    256    101    221 

Commodity

   13    35    —      21 

Portfolio diversification

         (49,278) 
  

 

 

   

 

 

   

 

 

   

 

 

 
  W55,981    61,648    53,086    60,983 
  

 

 

   

 

 

   

 

 

   

 

 

 

   2017 
   Average   Maximum   Minimum   December 31 

Interest rate

  W38,370    50,206    22,226    25,071 

Stock price

   4,051    5,622    3,040    4,675 

Foreign exchange(*)

   43,827    46,108    41,562    41,947 

Option volatility

   70    124    43    66 

Commodity

   22    46    —      14 

Portfolio diversification

         (26,367) 
  

 

 

   

 

 

   

 

 

   

 

 

 
  W49,943    56,103    42,031    45,406 
  

 

 

   

 

 

   

 

 

   

 

 

 

(*)Both trading andnon-trading accounts are included since Shinhan Bank manages foreign exchange risk on a total position basis.

i-2)Shinhan Card

The analyses of Shinhan Card’s requisite capital in light of the market risk for trading positions as of and for the years ended December 31, 2016 and 2017, based on the standard guidelines for risk management promulgated by the Financial Supervisory Service, are as follows:

   2016 
   Average   Maximum   Minimum   December 31 

Interest rate

  W875    1,700    550    1,700 

   2017 
   Average   Maximum   Minimum   December 31 

Interest rate

  W1,809    2,550    1,050    1,800 
   2017 
   Average   Maximum   Minimum   December 31 

Interest rate

  W38,370    50,206    22,226    25,071 

Stock price

   4,051    5,622    3,040    4,675 

Foreign exchange (*)

   43,827    46,108    41,562    41,947 

Option volatility

   70    124    43    66 

Commodity

   22    46    —      14 

Portfolio diversification

   —      —      —      (26,367) 
  

 

 

   

 

 

   

 

 

   

 

 

 
  W 49,943    56,103    42,031    45,406 
  

 

 

   

 

 

   

 

 

   

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

4.

Financial risk management (continued)

 

Shinhan Card fully hedges all the cash flows from foreign currency liabilities by swap transactions and is narrowly exposed to foreign exchange risk relating to foreign currency equity securities held fornon-trading purposes.

   2018 
   Average   Maximum   Minimum   December 31 

Interest rate

  W22,559    29,748    16,194    18,797 

Stock price

   12,118    25,701    1,976    22,212 

Foreign exchange (*)

   39,282    45,738    34,162    34,294 

Option volatility

   131    511    30    261 

Commodity

   17    61    —      24 

Portfolio diversification

   —      —      —      (21,298) 
  

 

 

   

 

 

   

 

 

   

 

 

 
  W 43,957    57,462    38,026    54,290 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 i-3)(*)

Both trading andnon-trading accounts are included since Shinhan InvestmentBank manages foreign exchange risk on a total position basis.

i-2) Shinhan Card

The analyses of Shinhan Card’s requisite capital in light of the market risk for trading positions as of and for the years ended December 31 2017, and 2018, based on the standard guidelines for risk management promulgated by the Financial Supervisory Service, are as follows:

   2017 
   Average   Maximum   Minimum   December 31 

Interest rate

  W1,809    2,550    1,050    1,800 

   2018 
   Average   Maximum   Minimum   December 31 

Interest rate

  W1,257    1,972    768    1,269 

(*)

The subsidiaries that are located overseas are excluded from the calculation.

i-3) Shinhan Investment

The analyses of theten-day 99.9% confidence level-based VaR for managing market risk for trading positions of Shinhan Investment as of and for the years ended December 31, 20162017 and 20172018 are as follows:

 

  2016   2017 
  Average   Maximum   Minimum   December 31   Average   Maximum   Minimum   December 31 

Interest rate

  W9,040    18,149    5,380    15,491   W9,939    18,090    7,329    11,232 

Stock price

   13,339    24,276    6,413    7,403    12,015    22,496    7,068    10,830 

Foreign exchange

   6,849    19,976    1,017    7,001    7,140    12,604    2,760    5,506 

Option volatility

   6,564    18,680    1,477    7,799    3,404    4,536    2,710    3,216 

Portfolio diversification

         (14,569)          (9,583) 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 
  W24,393    34,546    16,679    23,125   W22,221    34,564    12,980    21,201 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

   2017 
   Average   Maximum   Minimum   December 31 

Interest rate

  W9,939    18,090    7,329    11,232 

Stock price

   12,015    22,496    7,068    10,830 

Foreign exchange

   7,140    12,604    2,760    5,506 

Option volatility

   3,404    4,536    2,710    3,216 

Portfolio diversification

         (9,583) 
  

 

 

   

 

 

   

 

 

   

 

 

 
  W22,221    34,564    12,980    21,201 
  

 

 

   

 

 

   

 

 

   

 

 

 
4.

Financial risk management (continued)

   2018 
   Average   Maximum   Minimum   December 31 

Interest rate

  W7,563    14,314    3,656    7,321 

Stock price

   64,107    103,846    6,202    43,748 

Foreign exchange

   5,992    13,798    154    154 

Option volatility

   9,200    31,810    2,195    31,810 

Portfolio diversification

         (1,375) 
  

 

 

   

 

 

   

 

 

   

 

 

 
  W74,821    128,261    11,174    81,658 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 i-4)

Shinhan Life Insurance

The analyses of theten-day 99.9% confidence level-based VaR for managing market risk for trading positions of Shinhan Life Insurance as of and for the yearsyear ended December 31, 20162017 and 20172018 are as follows:

 

   2016 
   Average   Maximum   Minimum   December 31 

Interest rate

  W483    1,114    213    800 

Stock price

   231    1,585    —      130 

Foreign exchange

   1,278    2,238    54    1,221 

Option volatility

   1,115    3,044    71    3,044 
  

 

 

   

 

 

   

 

 

   

 

 

 
  W3,107    7,981    338    5,195 
  

 

 

   

 

 

   

 

 

   

 

 

 
   2017 
   Average   Maximum   Minimum   December 31 

Interest rate

  W3,838    16,598    85    3,848 

Stock price

   1,195    3,368    —      3,178 

Foreign exchange

   1,213    3,569    3    1,924 

Option volatility

   5,083    7,423    2,777    3,809 
  

 

 

   

 

 

   

 

 

   

 

 

 
  W 11,329    30,958    2,865    12,759 
  

 

 

   

 

 

   

 

 

   

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

   2018 
   Average   Maximum   Minimum   December 31 

Interest rate

  W2,994    6,410    260    293 

Stock price

   4,084    4,933    2,030    4,793 

Foreign exchange

   1,111    2,825    40    352 

Option volatility

   824    4,916    89    106 
  

 

 

   

 

 

   

 

 

   

 

 

 
  W 9,013    19,084    2,419    5,544 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

4.Financial risk management (continued)ii)

   2017 
   Average   Maximum   Minimum   December 31 

Interest rate

  W3,838    16,598    85    3,848 

Stock price

   1,195    3,368    —      3,178 

Foreign exchange

   1,213    3,569    3    1,924 

Option volatility

   5,083    7,423    2,777    3,809 
  

 

 

   

 

 

   

 

 

   

 

 

 
  W11,329    30,958    2,865    12,759 
  

 

 

   

 

 

   

 

 

   

 

 

 

ii) Interest rate risk management fromnon-trading positions

Principal market risk fromnon-trading activities of the Group is interest rate risk, which affects the Group’s earnings and the economic value of the Group’s net assets:

 

 • 

Earnings: interest rate fluctuations have an effect on the Group’s net interest income by affecting its interest-sensitive operating income and expenses and EaR (Earnings at Risk) is a commonly used risk management technique.

 

 • 

Economic value of net assets: interest rate fluctuations influence the Group’s net worth by affecting the present value of cash flows from the assets, liabilities and other transactions of the Group and VaR is a commonly used risk management technique.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

4.

Financial risk management (continued)

Interest rate VaR represents the maximum anticipated loss in a net present value calculation, whereas interest rate EaR represents the maximum anticipated loss in a net earnings calculation for the immediately followingone-year period, in each case, as a result of negative movements in interest rates.

Accordingly, the Group measures and manages interest rate risk fornon-trading activities by taking into account effects of interest rate changes on both its income and net asset value.

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. Through its asset and liability management system, Shinhan Bank measures and manages its interest rate risk based on various analytical measures such as interest rate gap, duration gap and net present value and net interest income simulations, and monitors on a monthly basis its interest rate VaR limits, interest rate earnings at risk (“EaR”) limits and interest rate gap ratio limits. Shinhan Bank measures its interest rate VaR and interest rate EaR based on a simulated estimation of the maximum decrease in net asset value and net interest income in aone-year period based on various scenario analyses of historical interest rates.

Shinhan Card and Shinhan Life Insurance also monitors and manages its interest rate risk limits for all its interest-bearing assets and liabilities (includingoff-balance sheet items) in terms of impact on its earnings and net asset value from changes in interest rates. The interest rate VaR analysis used by Shinhan Card and Shinhan Life Insurance principally focuses on the maximum impact on its net asset value from adverse movement in interest rates.

Non-trading positions for interest rate VaR and EaR as of December 31, 20162017 and 20172018 are as follows:

ii-1) Shinhan Bank

 

  2016   2017   2017   2018 

VaR (*1)

  W231,133    293,355   W293,355    164,393 

EaR (*2)

   58,091    131,135    174,262    316,718 

ii-2) Shinhan Card

   2017   2018 

VaR (*1)

  W147,932    163,804 

EaR (*2)

   32,081    28,267 

ii-3) Shinhan Investment

   2017   2018 

VaR (*1)

  W44,505    31,274 

EaR (*2)

   108,866    112,093 

ii-4) Shinhan Life Insurance

   2017   2018 

VaR (*1)

  W319,689    442,008 

EaR (*2)

   70,434    61,942 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

4.

Financial risk management (continued)

ii-2) Shinhan Card

   2016   2017 

VaR (*1)

  W89,348    147,932 

EaR (*2)

   11,905    32,081 

ii-3) Shinhan Investment

   2016   2017 

VaR (*1)

  W27,822    44,505 

EaR (*2)

   104,423    108,866 

ii-4) Shinhan Life Insurance

   2016   2017 

VaR (*1)

  W287,912    319,689 

EaR (*2)

   58,062    70,434 

 

 (*1)

The interest rate VaR represents the maximum anticipated loss in a net asset value in one year under confidence level of 99.9% and is measured by the internal model with one year look-back period.

 (*2)

The interest rate EaR was calculated by the Financial Supervisory Service regulations based on the “middle of time band ofband” and interest rate changes” and standard interest rate shocks by 200 basis points for each time bucket as recommended under the Basel Accord.

iii) Foreign exchange risk

Exposure to foreign exchange risk can be defined as the difference (net position) between assets and liabilities presented in foreign currency, including derivative financial instruments linked to foreign exchange rate. Foreign exchange risk arises becauseis a factor that causes market risk of the Group’s net foreign currency opentrading position whichand is managed by the difference between its foreign currency assets and liabilities, including derivatives.

The Group manages foreign exchangeunder the market risk on an overall position basis, including its overseas branches, by covering all of its foreign exchange spot and forward positions in both trading andnon-trading accounts.

The Risk Policy Committee oversees Shinhan Bank’s foreign exchange exposure for both trading andnon-trading activities by establishing limits for the net foreign currency open position, loss limits and VaR limits.management system.

The management of 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 a limit for net open positions by currency and the limits for currencies other than the U.S. dollars, Japanese yen, Euros and Chinese yuan are set in order to minimize exposures from the other foreign exchange trading.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

4.

Financial risk management (continued)

 

Foreign currency denominated assets and liabilities as of December 31, 20162017 and 20172018 are as follows:

 

   2016 
   USD   JPY  EUR  CNY   Other  Total 

Assets:

         

Cash and due from banks

  W2,880,095    1,160,173   255,718   2,705,235    1,174,199   8,175,420 

Trading assets

   666,578    1,072   49,476   182    364,033   1,081,341 

Financial assets designated at FVTPL (*1)

   802,596    —     —     —      29   802,625 

Derivative assets

   212,583    515   47   4,088    400   217,633 

Loans

   15,640,280    5,524,003   1,270,320   2,566,910    4,101,549   29,103,062 

AFS financial assets (*2)

   2,713,442    68,920   4,178   427,871    669,899   3,884,310 

HTM financial assets (*3)

   1,403,860    187,039   —     166,560    306,729   2,064,188 

Other financial assets

   1,756,890    396,927   117,139   376,208    164,631   2,811,795 
  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 
  W26,076,324    7,338,649   1,696,878   6,247,054    6,781,469   48,140,374 
  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Liabilities:

         

Deposits

  W11,019,450    6,002,935   619,086   4,427,939    4,023,859   26,093,269 

Trading liabilities

   1,155    —     —     —      485,995   487,150 

Financial liabilities designated at FVTPL (*1)

   669,064    2,631   —     —      —     671,695 

Derivative liabilities

   110,863    3,171   100   2,061    295   116,490 

Borrowings

   5,196,005    527,120   318,600   812,980    228,969   7,083,674 

Debt securities issued

   6,207,756    103,681   152,112   207,912    34,438   6,705,899 

Other financial liabilities

   2,020,655    493,288   181,810   558,932    209,265   3,463,950 
  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 
  W25,224,948    7,132,826   1,271,708   6,009,824    4,982,821   44,622,127 
  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Net assets

  W851,376    205,823   425,170   237,230    1,798,648   3,518,247 

Off-balance derivative exposure

   359,812    (44,696)   (351,267)   64,432    (775,111)   (746,830) 
  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Net position

  W1,211,188    161,127   73,903   301,662    1,023,537   2,771,417 
  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

(*1)FVTPL : fair value through profit or loss
(*2)AFS :available-for-sale
(*3)HTM :held-to-maturity
   2017 
   USD   JPY   EUR  CNY   Other  Total 

Assets:

          

Cash and due from banks

  W3,589,642    983,260    324,246   1,940,542    1,652,631   8,490,321 

Trading assets

   1,911,537    6,314    181,023   —      233,924   2,332,798 

Financial assets designated at FVTPL

   884,946    —      —     —      197   885,143 

Derivative assets

   74,083    4    766   203    1,455   76,511 

Loans

   14,967,502    5,741,854    1,196,346   2,774,264    5,059,707   29,739,673 

AFS financial assets

   2,725,039    113,239    52,583   395,150    666,486   3,952,497 

HTM financial assets

   1,513,025    137,100    —     37,096    1,000,064   2,687,285 

Other financial assets

   1,646,688    288,243    154,853   458,166    289,715   2,837,665 
  

 

 

   

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 
  W 27,312,462    7,270,014    1,909,817   5,605,421    8,904,179   51,001,893 
  

 

 

   

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

Liabilities:

          

Deposits

  W12,367,273    6,307,142    759,380   4,289,224    4,930,479   28,653,498 

Trading liabilities

   2,602    —      —     —      434,586   437,188 

Financial liabilities designated at FVTPL

   983,382    —      —     —      —     983,382 

Derivative liabilities

   105,141    195    631   4,734    713   111,414 

Borrowings

   5,385,706    294,000    231,539   407,678    68,988   6,387,911 

Debt securities issued

   4,913,896    249,616    31,981   196,380    1,018,628   6,410,501 

Other financial liabilities

   2,612,191    208,516    208,665   472,207    278,181   3,779,760 
  

 

 

   

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 
  W 26,370,191    7,059,469    1,232,196   5,370,223    6,731,575   46,763,654 
  

 

 

   

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

Net assets

  W942,271    210,545    677,621   235,198    2,172,604   4,238,239 

Off-balance derivative exposure

   130,976    6,094    (586,904)   80,183    (623,648)   (993,299) 
  

 

 

   

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

Net position

  W1,073,247    216,639    90,717   315,381    1,548,956   3,244,940 
  

 

 

   

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

4.

Financial risk management (continued)

 

   2017 
   USD   JPY   EUR  CNY   Other  Total 

Assets:

          

Cash and due from banks

  W3,589,642    983,260    324,246   1,940,542    1,652,631   8,490,321 

Trading assets

   1,911,537    6,314    181,023   —      233,924   2,332,798 

Financial assets designated at FVTPL (*1)

   884,946    —      —     —      197   885,143 

Derivative assets

   74,083    4    766   203    1,455   76,511 

Loans

   14,967,502    5,741,854    1,196,346   2,774,264    5,059,707   29,739,673 

AFS financial assets (*2)

   2,725,039    113,239    52,583   395,150    666,486   3,952,497 

HTM financial assets (*3)

   1,513,025    137,100    —     37,096    1,000,064   2,687,285 

Other financial assets

   1,646,688    288,243    154,853   458,166    289,715   2,837,665 
  

 

 

   

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 
  W27,312,462    7,270,014    1,909,817   5,605,421    8,904,179   51,001,893 
  

 

 

   

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

Liabilities:

          

Deposits

  W12,367,273    6,307,142    759,380   4,289,224    4,930,479   28,653,498 

Trading liabilities

   2,602    —      —     —      434,586   437,188 

Financial liabilities designated at FVTPL (*1)

   983,382    —      —     —      —     983,382 

Derivative liabilities

   105,141    195    631   4,734    713   111,414 

Borrowings

   5,385,706    294,000    231,539   407,678    68,988   6,387,911 

Debt securities issued

   4,913,896    249,616    31,981   196,380    1,018,628   6,410,501 

Other financial liabilities

   2,612,191    208,516    208,665   472,207    278,181   3,779,760 
  

 

 

   

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 
  W26,370,191    7,059,469    1,232,196   5,370,223    6,731,575   46,763,654 
  

 

 

   

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

Net assets

  W942,271    210,545    677,621   235,198    2,172,604   4,238,239 

Off-balance derivative exposure

   130,976    6,094    (586,904)   80,183    (623,648)   (993,299) 
  

 

 

   

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

Net position

  W1,073,247    216,639    90,717   315,381    1,548,956   3,244,940 
  

 

 

   

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

(*1)FVTPL : fair value through profit or loss
(*2)AFS :available-for-sale
(*3)HTM :held-to-maturity
   2018 
   USD  JPY  EUR  CNY  Other  Total 

Assets:

       

Cash and due from banks at amortized cost

  W4,797,714   1,216,221   259,631   1,595,799   1,654,668   9,524,033 

Due from banks at FVTPL

   704,195   —     —     —     —     704,195 

Loan receivables measured at FVTPL

   347,966   3,430   4,127   —     —     355,523 

Loan at amortized cost

   16,301,367   6,862,146   1,275,174   3,496,937   5,934,670   33,870,294 

Securities at FVTPL

   3,812,541   998   81,300   —     313,750   4,208,589 

Derivative assets

   133,197   285   2,299   406   11,875   148,062 

Securities at FVOCI

   3,209,293   125,512   —     357,682   728,456   4,420,943 

Securities at amortized cost

   1,405,775   128,512   —     34,955   1,175,733   2,744,975 

Other financial assets

   2,958,609   135,984   70,321   456,405   357,856   3,979,175 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  W33,670,657   8,473,088   1,692,852   5,942,184   10,177,008   59,955,789 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Liabilities:

       

Deposits

  W13,333,500   7,217,318   727,291   4,565,067   5,232,529   31,075,705 

Financial liabilities at FVTPL

   4,389   —     —     —     458,934   463,323 

Derivative liabilities

   172,556   —     1,914   2,089   4,892   181,451 

Borrowings

   6,287,797   446,102   280,949   395,719   173,731   7,584,298 

Debt securities issued

   6,517,415   317,125   293,708   —     1,715,780   8,844,028 

Financial liabilities designated at FVTPL

   1,168,024   —     —     —     —     1,168,024 

Other financial liabilities

   2,684,717   192,161   125,434   573,544   548,754   4,124,610 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  W30,168,398   8,172,706   1,429,296   5,536,419   8,134,620   53,441,439 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net assets

  W3,502,259   300,382   263,556   405,765   2,042,388   6,514,350 

Off-balance derivative exposure

   (2,056,586)   (157,445)   (217,232)   (34,986)   (164,797)   (2,631,046) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net position

  W1,445,673   142,937   46,324   370,779   1,877,591   3,883,304 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 (d)

Liquidity risk

Liquidity risk is the risk that the Group will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset.

Each subsidiary seeks to minimize liquidity risk through early detection of risk factors related to the sourcing and managing of funding that may cause volatility in liquidity and by ensuring that it maintains an appropriate level of liquidity through systematic management. At the group level, the Group manages liquidity risk by conducting monthly stress tests that compare liquidity requirements under normal situations against those under three types of stress situations, namely, the group-specific internal crisis, crisis in the external market and a combination of internal and external crisis. In addition, in order to preemptively and comprehensively manage liquidity risk, the Group measure and monitor liquidity risk management using various indices, including the “limit management index”, “early warning index” and “monitoring index”.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

4.

Financial risk management (continued)

 

Shinhan Bank applies the following basic principles for liquidity risk management:

 

raise funding in sufficient amounts, at the optimal time at reasonable costs;

 

maintain risk at appropriate levels and preemptively manage them through a prescribed risk limit system and an early warning signal detection system;

 

secure stable sources of revenue and minimize actual losses by implementing an effective asset-liability management system based on diversified sources of funding with varying maturities;

 

monitor and manage daily and intra-daily liquidity positions and risk exposures for timely payment and settlement of financial obligations due under both normal and crisis situations;

 

conduct periodic contingency analysis in anticipation of any potential liquidity crisis and establish and implement emergency plans in case of a crisis actually happening; and

 

consider liquidity-related costs, benefits of and risks in determining the pricing of the Group’s products and services, employee performance evaluations and approval of launching of new products and services.

As for any potential liquidity shortage at or near the end of each month, Shinhan Card maintains liquidity at a level sufficient to withstand credit shortage for three months. In addition, Shinhan Card manages liquidity risk by defining and managing various indicators of liquidity risk, such as the actual liquidity gap ratio (in relation to the different maturities for assets as compared to liabilities), the liquidity buffer ratio, the maturity repayment ratio, the ratio of actual funding compared to budgeted funding and the ratio of asset-backed securities to total borrowings, at different risk levels of “caution”, “unstable” and “at risk”, and the Group also has contingency plans in place in case of any emergency or crisis.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

4.

Financial risk management (continued)

 

Contractual maturities for financial instruments including cash flows of principal and interest and off balance as of December 31, 20162017 and 20172018 are as follows:

 

 2016  2017 
 Less than
1 month		 1~3
months		 3~6
months		 6 months
~ 1 year		 1~5
years		 More than
5 years		 Total  Less than 1
month		 1~3
months		 3~6
months		 6 months
~ 1 year		 1~5
years		 More than
5 years		 Total 

Non-derivative financial instruments:

              

Assets:

              

Cash and due from banks

 W15,619,847  1,282,950  1,065,296  1,219,959  37,590  38,481  19,264,123  W19,576,010  868,907  945,027  1,290,451  8,320  49,767  22,738,482 

Trading assets (*2)

 26,496,604  30,052  42,351  70,706  36,226  20,014  26,695,953 

Trading assets (*3)

 27,327,076  627,936  247,905  54,631  183,577  31,862  28,472,987 

Financial assets designated at fair value through profit or loss

 2,481,122  1,029  21,342   —    606,257  306,534  3,416,284  2,819,112  35,001  91,487  20,097  364,898  248,609  3,579,204 

Loans

 30,017,816  32,259,593  40,491,876  57,580,253  72,248,194  53,783,871  286,381,603  29,831,671  34,176,546  43,120,328  63,496,597  76,247,244  59,983,675  306,856,061 

Available-for-sale financial assets (*2)

 31,847,430  1,286,987   —    1,515,705  68,025  2,956,893  37,675,040 

Available-for-sale financial assets (*3)

 37,273,740  352,098  20,013  2,472,184  408,106  1,598,529  42,124,670 

Held-to-maturity financial assets

 185,988  260,512  180,403  1,513,782  10,755,027  12,824,191  25,719,903  153,833  178,514  309,115  1,672,095  15,018,937  14,954,247  32,286,741 

Other financial assets

 12,434,933  15,915  17,036  359,283  1,159,021  92,494  14,078,682  10,457,000  13,915  22,999  401,431  1,151,508  104,097  12,150,950 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 
 W119,083,740  35,137,038  41,818,304  62,259,688  84,910,340  70,022,478  413,231,588  W127,438,442  36,252,917  44,756,874  69,407,486  93,382,590  76,970,786  448,209,095 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Liabilities:

              

Deposits (*3)

 W121,707,981  22,583,391  29,620,700  49,624,644  14,144,690  3,032,191  240,713,597 

Trading liabilities

 1,976,760   —     —     —     —     —    1,976,760 

Deposits (*2)

 W130,916,019  21,725,284  31,482,983  52,440,287  16,137,734  1,940,194  254,642,501 

Trading liabilities (*3)

 1,848,490   —     —     —     —     —    1,848,490 

Financial liabilities designated at fair value through profit or loss

 429,578  452,306  475,221  1,380,011  5,412,373  1,084,419  9,233,908  303,065  324,807  548,868  916,388  5,106,209  1,098,518  8,297,855 

Borrowings

 13,697,990  1,914,573  1,293,030  2,715,323  4,191,730  1,692,283  25,504,929  15,286,424  2,543,847  1,655,662  2,823,721  3,658,670  1,844,417  27,812,741 

Debt securities issued

 1,394,163  2,435,353  4,597,809  7,371,729  26,138,646  5,492,930  47,430,630  2,261,028  3,717,185  3,651,503  10,565,098  30,391,156  4,224,471  54,810,441 

Other financial liabilities

 15,926,502  42,045  307,056  126,355  367,888  59,365  16,829,211  19,387,718  42,948  137,810  335,104  363,245  59,188  20,326,013 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 
 W155,132,974  27,427,668  36,293,816  61,218,062  50,255,327  11,361,188  341,689,035  W170,002,744  28,354,071  37,476,826  67,080,598  55,657,014  9,166,788  367,738,041 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Off balance (*4):

              

Finance guarantee contracts

 W3,424,022   —     —     —     —     —    3,424,022  W3,267,707   —     —     —     —     —    3,267,707 

Loan commitments and other

 76,173,506   —     —     —     —     —    76,173,506  140,675,467   —     —     —     —     —    140,675,467 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 
 W79,597,528   —     —     —     —     —    79,597,528  W143,943,174   —     —     —     —     —    143,943,174 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Derivatives (*5):

       

Derivatives:

       

Cash inflows

 W2,952,185  514,990  819,654  1,979,609  1,361,541  117,374  7,745,353  W3,735,274  790,313  829,659  1,411,010  2,684,189  143,032  9,593,477 

Cash outflows

 (3,161,870)  (513,356)  (798,321)  (1,884,914)  (1,128,730)  (26,054)  (7,513,245)  (3,324,459)  (498,396)  (727,887)  (1,321,939)  (2,594,372)  (60,717)  (8,527,770) 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 
 W(209,685)  1,634  21,333  94,695  232,811  91,320  232,108  W 410,815  291,917  101,772  89,071  89,817  82,315  1,065,707 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

4.

Financial risk management (continued)

 

 2017  2018 
 Less than
1 month		 1~3
months		 3~6
months		 6 months
~ 1 year		 1~5
years		 More than
5 years		 Total  Less than 1
month		 1~3
months		 3~6
months		 6 months
~ 1 year		 1~5
years		 More than
5 years		 Total 

Non-derivative financial instruments:

              

Assets:

              

Cash and due from banks

 W19,576,010  868,907  945,027  1,290,451  8,320  49,767  22,738,482 

Trading assets (*2)

 27,327,076  627,936  247,905  54,631  183,577  31,862  28,472,987 

Financial assets designated at fair value through profit or loss

 2,819,112  35,001  91,487  20,097  364,898  248,609  3,579,204 

Loans

 29,831,671  34,176,546  43,120,328  63,496,597  76,247,244  59,983,675  306,856,061 

Available-for-sale financial assets (*2)

 37,273,740  352,098  20,013  2,472,184  408,106  1,598,529  42,124,670 

Held-to-maturity financial assets

 153,833  178,514  309,115  1,672,095  15,018,937  14,954,247  32,286,741 

Cash and due from banks at amortized cost

 W14,451,366  796,510  905,259  1,196,790  1,526  57,259  17,408,710 

Due from banks at fair value through profit or loss

 115,476  131,712  518,109  105,359  6,053   —    876,709 

Loans at fair value through profit or loss

 290,724  388,218  42,550  201,591  257,873  48,982  1,229,938 

Loans at amortized cost

 34,025,588  34,254,065  45,151,571  68,239,781  87,760,434  66,889,553  336,320,992 

Securities at fair value through profit or loss

 36,043,891  41,287  35,677  403,849  1,572,268  3,351,681  41,448,653 

Securities at fair value through other comprehensive income

 37,519,813  12,093  5,145  20,291  255,091  507,920  38,320,353 

Securities at amortized cost

 505,417  1,378,525  481,193  2,270,447  15,067,164  16,896,833  36,599,579 

Other financial assets

 10,457,000  13,915  22,999  401,431  1,151,508  104,097  12,150,950  15,130,599  5,629  19,173  433,060  92,753  1,215,953  16,897,167 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 
 W127,438,442  36,252,917  44,756,874  69,407,486  93,382,590  76,970,786  448,209,095  W138,082,874  37,008,039  47,158,677  72,871,168  105,013,162  88,968,181  489,102,101 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Liabilities:

              

Deposits (*3)

 W130,916,019  21,725,284  31,482,983  52,440,287  16,137,734  1,940,194  254,642,501 

Trading liabilities

 1,848,490   —     —     —     —     —    1,848,490 

Financial liabilities designated at fair value through profit or loss

 303,065  324,807  548,868  916,388  5,106,209  1,098,518  8,297,855 

Deposits (*2)

 W123,166,403  24,736,962  34,096,334  56,060,670  28,316,319  2,880,197  269,256,885 

Financial liabilities at fair value through profit or loss

 1,402,726  193  53  10,403  10,124   —    1,423,499 

Borrowings

 15,286,424  2,543,847  1,655,662  2,823,721  3,658,670  1,844,417  27,812,741  13,542,317  2,879,693  2,207,560  2,965,132  5,854,335  2,553,162  30,002,199 

Debt securities issued

 2,261,028  3,717,185  3,651,503  10,565,098  30,391,156  4,224,471  54,810,441  3,779,407  5,433,266  5,633,286  10,468,221  36,694,200  5,291,240  67,299,620 

Financial liabilities designated at fair value through profit or loss

 332,249  303,996  171,927  1,061,443  5,552,824  1,113,361  8,535,800 

Other financial liabilities

 19,387,718  42,948  137,810  335,104  363,245  59,188  20,326,013  19,423,802  22,744  110,883  146,256  432,277  71,318  20,207,280 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 
 W170,002,744  28,354,071  37,476,826  67,080,598  55,657,014  9,166,788  367,738,041  W161,646,904  33,376,854  42,220,043  70,712,125  76,860,079  11,909,278  396,725,283 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Off balance (*4):

              

Finance guarantee contracts

 W3,267,707   —     —     —     —     —    3,267,707  W4,413,874   —     —     —     —     —    4,413,874 

Loan commitments and other

 76,929,515   —     —     —     —     —    76,929,515  166,498,542   —     —     —     —     —    166,498,542 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 
 W80,197,222   —     —     —     —     —    80,197,222  W170,912,416   —     —     —     —     —    170,912,416 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Derivatives (*5):

       

Derivatives:

       

Cash inflows

 W3,735,274  790,313  829,659  1,411,010  2,684,189  143,032  9,593,477  W2,402,504  585,267  814,009  1,110,368  6,223,707  6,746,091  17,881,946 

Cash outflows

 (3,324,459)  (498,396)  (727,887)  (1,321,939)  (2,594,372)  (60,717)  (8,527,770)  (2,854,430)  (591,008)  (840,579)  (1,116,920)  (6,261,239)  (6,756,747)  (18,420,923) 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 
 W410,815  291,917  101,772  89,071  89,817  82,315  1,065,707  W(451,926)  (5,741)  (26,570)  (6,552)  (37,532)  (10,656)  (538,977) 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

 

(*1)

These amounts include cash flows of principal and interest on financial assets and financial liabilities.

(*2)Available-for-sale financial assets and trading assets which are not restricted for sale and measured at market prices were included in the ‘Less than 1 month’ category; and the otheravailable-for-sale financial assets and trading assets are classified by the earliest maturities available for sale.
(*3)

Demand deposits amounting toW93,639,192102,928,642 million andW102,928,642106,160,833 million as of December 31, 20162017 and 2017December 31, 2018 are included in the ‘Less than 1 month’ category, respectively.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

4.(*3)Financial risk management (continued)

Short-term financial instruments that are valued at market prices are classified as the shortest within one month.

(*4)

Financial guarantees such as financial guarantee contracts and loan commitments and others provided by the Group are classified based on the earliest date at which the Group should fulfill the obligation under the guarantee when the counterparty requests payment.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

(*5)4.Derivatives held for trading are presented as less than one month because contractual maturities are not essential for an understanding of the timing of the cash flows. Derivatives entered into for the purpose of hedging are presented by maturity.
(*6)As of December 31, 2016 and 2017, unused credit commitments that the Group should fulfill the obligation immediately when the credit card members request payments amounted toW61,184,194 million andW63,745,952 million, respectively.

Financial risk management (continued)

 

 (e)

Measurement of fair value

The fair values of financial instruments being traded in an active market are determined by the published market prices of each period end. The published market prices of financial instruments being held by the Group are based on the trading agencies’ notifications. If the market for a financial instrument is not active, such as OTC (Over The Counter market) derivatives, fair value is determined either by using a valuation technique or independent third-party valuation service.

The Group uses various valuation techniques and is setting rational assumptions based on the present market situations. Such valuation techniques may include using recent arm’s length market transactions between knowledgeable, willing parties, if available, reference to the current fair value of another instrument that is substantially the same, discounted cash flow analysis and option pricing models.

The Group classifies and discloses fair value of financial instruments into the following three-level hierarchy:

 

Level 1: Financial instruments measured at quoted prices from active markets are classified as fair value level 1.

 

Level 2: Financial instruments measured using valuation techniques where all significant inputs are observable market data are classified as level 2.

 

Level 3: Financial instruments measured using valuation techniques where one or more significant inputs are not based on observable market data are classified as level 3.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

4.

Financial risk management (continued)

 

i) Financial instruments measured at fair value

 

The fair value hierarchy of financial assetsinstruments presented at their fair values in the statements of financial position as of December 31, 20162017 and 20172018 are as follows:

 

  2016   2017 
  Level 1   Level 2   Level 3   Total   Level 1   Level 2   Level 3   Total 

Financial assets

                

Trading assets:

                

Debt securities

  W8,633,933    13,721,703    34,928    22,390,564   W5,897,898    17,479,033    263,715    23,640,646 

Equity securities

   1,375,463    2,634,532    47,549    4,057,544    1,350,888    2,872,437    411,028    4,634,353 

Gold deposits

   247,845    —      —      247,845    189,297    —      —      189,297 

Financial assets designated at fair value through profit or loss:

                

Debt securities and others

   393,749    1,541,608    292,829    2,228,186    569,259    1,509,023    266,419    2,344,701 

Equity securities

   3,868    862,838    321,210    1,187,916    3,475    948,705    282,176    1,234,356 

Derivative assets:

                

Trading

   17,316    2,704,643    104,683    2,826,642    31,858    2,955,377    293,540    3,280,775 

Hedging

   —      168,551    7,666    176,217    —      117,603    1,800    119,403 

Available-for-sale financial assets:

                

Debt securities

   8,127,404    24,365,862    328,805    32,822,071    10,493,483    26,286,175    406,894    37,186,552 

Equity securities

   897,536    388,448    3,554,636    4,840,620    427,227    613,616    3,889,542    4,930,385 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 
  W19,697,114    46,388,185    4,692,306    70,777,605   W 18,963,385    52,781,969    5,815,114    77,560,468 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Financial liabilities:

                

Trading liabilities:

                

Securities sold

  W1,490,765    —      —      1,490,765   W1,413,904    —      —      1,413,904 

Gold deposits

   485,995    —      —      485,995    434,586    —      —      434,586 

Financial liabilities designated at fair value through profit or loss:

                

Deposits

   —      4,277    2,005    6,282 

Securities sold

   10,134    —      —      10,134    36,973    —      —      36,973 

Derivatives-combined securities

   —      1,644,904    7,572,322    9,217,226    —      986,882    7,273,754    8,260,636 

Derivative liabilities:

                

Trading

   14,130    2,715,327    345,357    3,074,814    20,738    2,706,249    77,847    2,804,834 

Hedging

   —      194,302    259,128    453,430    —      257,665    425,162    682,827 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 
  W2,001,024    4,558,810    8,178,812    14,738,646   W 1,906,201    3,950,796    7,776,763    13,633,760 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

4.

Financial risk management (continued)

 

  2017 
  Level 1  Level 2  Level 3  Total 

Financial assets

    

Trading assets:

    

Debt securities

 W5,897,898   17,479,033   263,715   23,640,646 

Equity securities

  1,350,888   2,872,437   411,028   4,634,353 

Gold deposits

  189,297   —     —     189,297 

Financial assets designated at fair value through profit or loss:

    

Debt securities and others

  569,259   1,509,023   266,419   2,344,701 

Equity securities

  3,475   948,705   282,176   1,234,356 

Derivative assets:

    

Trading

  31,858   2,955,377   293,540   3,280,775 

Hedging

  —     117,603   1,800   119,403 

Available-for-sale financial assets:

    

Debt securities

  10,493,483   26,286,175   406,894   37,186,552 

Equity securities

  427,227   613,616   3,889,542   4,930,385 
 

 

 

  

 

 

  

 

 

  

 

 

 
 W18,963,385   52,781,969   5,815,114   77,560,468 
 

 

 

  

 

 

  

 

 

  

 

 

 

Financial liabilities:

    

Trading liabilities:

    

Securities sold

 W1,413,904   —     —     1,413,904 

Gold deposits

  434,586   —     —     434,586 

Financial liabilities designated at fair value through profit or loss:

    

Securities sold

  36,973   —     —     36,973 

Derivatives-combined securities

  —     986,882   7,273,754   8,260,636 

Derivative liabilities:

    

Trading

  20,738   2,706,249   77,847   2,804,834 

Hedging

  —     257,665   425,162   682,827 
 

 

 

  

 

 

  

 

 

  

 

 

 
 W1,906,201   3,950,796   7,776,763   13,633,760 
 

 

 

  

 

 

  

 

 

  

 

 

 

There was no transfer between level 1 and level 2 for the years ended December 31, 2016 and 2017.
   2018 
   Level 1   Level 2   Level 3   Total 

Financial assets

        

Due from banks measured at FVTPL

  W—      57,236    813,420    870,656 

Loan receivables measured at FVTPL

   —      891,636    317,558    1,209,194 

Financial assets at FVTPL:

        

Debt securities and other securities

   5,084,767    29,552,429    5,497,769    40,134,965 

Equity securities

   528,113    143,139    493,818    1,165,070 

Gold deposits

   154,881    —      —      154,881 

Derivative assets:

        

Trading

   62,275    1,548,769    116,277    1,727,321 

Hedging

   —      61,706    4,586    66,292 

Securities measured at FVOCI:

        

Debt securities

   10,532,244    27,095,555    49,846    37,677,645 

Equity securities

   135,866    —      500,659    636,525 
  

 

 

   

 

 

   

 

 

   

 

 

 
  W16,498,146    59,350,470    7,793,933    83,642,549 
  

 

 

   

 

 

   

 

 

   

 

 

 

Financial liabilities:

        

Financial liabilities measured at FVTPL:

        

Securities sold

  W961,372    —      —      961,372 

Gold deposits

   458,934    —      —      458,934 

Financial liabilities designated at fair value through profit or loss:

        

Derivatives-combined securities

   —      1,702,063    6,833,737    8,535,800 

Derivative liabilities:

        

Trading

   116,160    1,444,545    285,965    1,846,670 

Hedging

   —      232,102    361,120    593,222 
  

 

 

   

 

 

   

 

 

   

 

 

 
  W 1,536,466    3,378,710    7,480,822    12,395,998 
  

 

 

   

 

 

   

 

 

   

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

4.

Financial risk management (continued)

 

Changes in carrying values of financial instruments classified as Level 3 for the years ended December 31, 20162017 and 20172018 are as follows:

 

  2016   2017 
  Trading
assets		 Financial assets
designated at
FVTPL		 Available-for-
sale financial
assets		 Derivative
assets and
liabilities, net		 Financial
liabilities
designated at
FVTPL		   Trading
assets		 Financial assets
designated at
FVTPL		 Available-for-sale
financial assets		 Derivative assets
and liabilities, net		 Financial
liabilities
designated at
FVTPL		 

Beginning balance

  W201,603  451,124  2,979,058  (703,841)  (6,444,621)   W82,477  614,039  3,883,441  (492,136)  (7,574,327) 

Recognized in total comprehensive income for the year:

            

Recognized in profit (loss) for the year (*1)

   5,026  6,020  28,645  141,080  (508,916)    41,127  (9,202)  (200,701)  634,438  (913,760) 

Recognized in other comprehensive income (loss) for the year

   —     —    (81,812)   —     —      —     —    (3,149)   —     —   
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 
   5,026  6,020  (53,167)  141,080  (508,916)    41,127  (9,202)  (203,850)  634,438  (913,760) 

Purchase

   76,810  337,012  1,308,840  10,226   —      589,144  210,856  1,150,904  29,333   —   

Issue

   —     —     —     —    (5,402,714)    —     —     —    4,541  (8,710,656) 

Settlement

   (200,962)  (180,117)  (359,694)  40,710  4,781,924    (139,562)  (267,098)  (565,146)  (383,873)  9,924,989 

Transfer in (*2)

   —     —    20,382  19,689   —      101,557   —    31,087  28   —   

Transfer out (*2)

   —     —    (11,978)   —     —      —     —     —     —     —   
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Ending balance

  W82,477  614,039  3,883,441  (492,136)  (7,574,327)   W674,743  548,595  4,296,436  (207,669)  (7,273,754) 
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

 

  2017   2018 
  Trading
assets		 Financial assets
designated at
FVTPL		 Available-for-
sale financial
assets		 Derivative
assets and
liabilities, net		 Financial
liabilities
designated at
FVTPL		   Financial
asset
at fair value
through profit or loss		 Financial asset
designated at fair
value through
profit or loss		 Securities
at fair value
through other
comprehensive
profit or loss		 Derivative
assets and
liabilities, net		 Financial
liabilities
designated at fair
value through
profit or loss		 

Beginning balance

  W82,477  614,039  3,883,441  (492,136)  (7,574,327)   W5,831,369  152,091  621,207  (250,662)  (7,273,754) 

Recognized in total comprehensive income for the year:

            

Recognized in profit (loss) for the year (*1)

   41,127  (9,202)  (200,701)  634,438  (913,760)    359,160  3,390  4,692  (128,816)  10,090 

Recognized in other comprehensive income (loss) for the year

   —     —    (3,149)   —     —      —     —    29,388   —    235 
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 
   41,127  (9,202)  (203,850)  634,438  (913,760)    359,160  3,390  34,080  (128,816)  10,325 

Purchase

   589,144  210,856  1,150,904  29,333   —      2,143,853   —    2,510  2,236   —   

Issue

   —     —     —    4,541  (8,710,656)    —     —     —     —    (7,127,670) 

Settlement

   (139,562)  (267,098)  (565,146)  (383,873)  9,924,989    (1,212,202)  (155,481)  (107,292)  (148,987)  7,557,362 

Transfer in (*2)

   101,557   —    31,087  28   —      1,370   —     —    6   —   

Transfer out (*2)

   —     —     —     —     —      (985)   —     —     —     —   
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Ending balance

  W674,743  548,595  4,296,436  (207,669)  (7,273,754)   W7,122,565   —    550,505  (526,223)  (6,833,737) 
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

4.

Financial risk management (continued)

 

(*1)

Recognized profit or loss of the changes in carrying value of financial instruments classified as Level 3 for the years ended December 31, 20162017 and 2017,2018 are included in the accounts of the statements of comprehensive income, of which the amounts and the related accounts are as follows:

 

   2016  2017 
   Amounts
recognized in
profit or loss		  Recognized
profit or loss
from the
financial
instruments
held as of
December 31		  Amounts
recognized in
profit or loss		  Recognized
profit or loss
from the
financial
instruments
held as of
December 31		 

Trading income

  W332,400   37,466   843,657   121,643 

Gain (loss) on financial instruments designated at FVTPL

   (502,896)   (169,424)   (922,962)   (129,654) 

Gain (loss) on disposal ofavailable-for-sale financial assets

   25,546   354   17,193   977 

Impairment losses on financial assets

   (6,685)   (5,964)   (180,206)   (180,206) 

Other operating income (expenses)

   (176,510)   (176,359)   (205,780)   (216,135) 
  

 

 

  

 

 

  

 

 

  

 

 

 
  W(328,145)   (313,927)   (448,098)   (403,375) 
  

 

 

  

 

 

  

 

 

  

 

 

 
   2017 
   Amounts recognized in
profit or loss		  Recognized profit or loss from
the financial instruments held
as of December 31		 

Trading income

  W843,657   121,643 

Loss on financial instruments designated at FVTPL

   (922,962)   (129,654) 

Gain on disposal ofavailable-for-sale financial assets

   17,193   977 

Impairment losses on financial assets

   (180,206)   (180,206) 

Other operating expenses

   (205,780)   (216,135) 
  

 

 

  

 

 

 
  W(448,098)   (403,375) 
  

 

 

  

 

 

 

   2018 
   Amounts recognized in
profit or loss		   Recognized profit or loss from
the financial instruments held
as of December 31		 

Net gain (loss) on financial assets at fair value through profit or loss

  W179,658    (14,586) 

Net gain on financial assets designated at fair value through profit or loss

   10,090    392,096 

Net gain on securities at fair value through other comprehensive income

   2,575    —   

Reversal of (provision for) credit loss allowance

   17    (28) 

Other operating expenses

   56,176    57,317 
  

 

 

   

 

 

 
  W248,516    434,799 
  

 

 

   

 

 

 

 

(*2)

Changes in levels for the financial instruments occurred due to the change in the availability of observable market data. The Group reviews the levels of financial instruments as of the end of the reporting period considering the related events and circumstances in the reporting period.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

4.

Financial risk management (continued)

 

Valuation techniques and inputs used in measuring the fair value of financial instruments classified as level 2 as of December 31, 20172018 are as follows:

 

Type of financial instrument

  Valuation
technique		   Carrying
valueValue		   

Significant inputs

Assets

      

Trading assets:Financial asset at fair value through profit or loss

      

Debt securities

   DCF (*1),   W17,479,03330,501,301   Discount rate

Equity securities

   NAV (*2)    2,872,437143,139   

Discount rate,

Price of underlying assets

    

 

 

   
     20,351,470

Financial assets designated at fair value through profit or loss:

Debt securities

DCF (*1)1,509,023Discount rate

Equity securities

NAV (*2)948,705

Discount rate,

Price of underlying assets

2,457,72830,644,440   
    

 

 

   

Derivative assets:assets

      

Trading

   

Option
model,

DCF (*1)

 

 

   2,955,3771,548,769   Discount rate, foreign exchange rate, volatility, stock price, commodity index, etc.

Hedging

  117,603

   3,072,980

Available-for-sale financial assets:

Debt securities

DCF (*1)26,286,175

Discount rate, growth rate,

Price of underlying assets

Equity securities

NAV (*2)613,616

26,899,79161,706   
    

 

 

   
    1,610,475

Securities at fair value through other comprehensive income

DCF (*1),27,095,555Discount rate, foreign exchange rate, volatility, stock price, commodity index, etc.

W52,781,96959,350,470   
    

 

 

   

Liabilities

      

Financial liabilities designated at fair value through profit or loss:

Othersloss

   DCF (*1)   W986,8821,702,063   Discount rate

Derivative liabilities:liabilities

      

Trading

   

Option
model,

DCF (*1)

 

 

   2,706,2491,444,545   Discount rate, foreign exchange rate, volatility, stock price, commodity index, etc.

Hedging

  257,665   232,102
    

 

 

   
     2,963,9141,676,647   
    

 

 

   
    W3,950,7963,378,710   
    

 

 

   

 

(*1)DCF :

DCF: Discounted cash flow

(*2)NAV :

NAV: Net asset value

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

4.

Financial risk management (continued)

 

Valuation techniques and significant inputs, but not observable, used in measuring the fair value of financial instruments classified as level 3 as of December 31, 20172018 are as follows:

 

Type of financial instrument

Valuation
technique		Carrying
value (*2)

Significant unobservable

inputs

Range

Financial assets

Trading assets:

Debt securities



DCF

Option
model (*1)



W263,715The volatility of the underlying asset3.16%~7.51%

Equity securities

NAV411,028

674,743

Financial assets designated at fair value through profit or loss:

Debt securities and other securities

DCF548,595The volatility of the underlying asset Correlations0.66%~44.4%

0.00%~89.54%

Derivative assets:

Equity and foreign exchange related


Option
model (*1)
203,028The volatility of the underlying asset Correlations1.32%~44.40%

0.00%~81.99%

Interest rates related


Option
model (*1)
35,795

The volatility of the underlying asset Regression coefficient

Correlations

0.42%~62.19%

0.42%~1.65%

0.00%~90.9%

Credit and commodity related


Option
model (*1)
56,517The volatility of the underlying asset Correlations35.8%~35.92%

0.00%~92.91%

295,340

Available-for-sale financial assets:

Debt securities

DCF406,894

Discount rate

Growth rate

1.98%~20.51%

0.00%~3.00%

Equity securities

NAV3,889,542

4,296,436

W5,815,114

(*1)Option model that the Group uses in derivative valuation includes Black-Scholes model, Hull-White model, Monte Carlo simulation, etc.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

4.Financial risk management (continued)

(*2)Valuation techniques and inputs are not disclosed when the carrying amount is a reasonable approximation of fair value.

Type of financial instrument

 Valuation
technique		  Carrying
value (*2)		  

Significant unobservable inputs

 Range

Financial assets

Financial asset at fair value through profit or loss

Debt securities



DCF,
Option
model (*1)

W6,628,747The volatility of the underlying asset Correlations16.39%~42.56%

1.26%~39.45%

0.00%

Equity securities


DCF,
NAV
493,818The volatility of the underlying asset Correlations5.80%~41.00%
0.00%~74.00%

7,122,565

Derivative assets

Equity and foreign exchange related


Option
model (*1)
43,183The volatility of the underlying asset Correlations2.20%~38.00%

12.00%~82.00%

Interest rates related


Option
model (*1)
44,848

The volatility of the underlying asset Regression coefficient

Correlations

0.00%~1.00%

0.42%~1.65%

44.93%~91.00%

Credit and commodity related


Option
model (*1)
32,832The volatility of the underlying asset Correlations1.00%~33.00%

33.00%~67.00%

120,863

Securities at fair value through other comprehensive income

Debt securities

DCF49,846Discount rate8.43%~17.40%

Equity securities

NAV500,659Growth rate0.00%~3.00%

550,505

W7,793,933

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

4.

Financial risk management (continued)

Type of financial instrument

Valuation
technique		TypeCarrying
value (*2)

Significant unobservable inputs

Range 

Financial liabilities

    

Financial liabilities designated at fair value through profit or loss:loss

    

Equity related

  
Option
model (*1)		 
 		  W7,273,7546,833,737  The volatility of the underlying asset Correlations  

0.00%~95.69%107.00%

21.14%-42.00%~100.0%93%

 

 

Derivative liabilities:liabilities

    

Equity and foreign exchange related

  
Option
model (*1)		 
 		 23,482  199,504

The volatility of the underlying asset

Correlations

  

1.32%2.20%~44.40%98.00%

0.00%-3.00%~81.92%82.00%

 

 

Interest rates related

  
Option
model (*1)		 
 		 451,034374,976  

The volatility of the underlying asset

Regression coefficient

Correlations

  

0.50%0.00%~0.85%33.00%

1.65%0.42%~2.77%

31.53%28.15%~90.99%91.00%

 

 

 

Credit and commodity related

  
Option
model (*1)		 
 		 28,493  72,605

The volatility of the underlying asset

Correlations

  

9.65%1.00%~35.92%107.00%

21.14%-20.00%~100%93.00%

 

 

  

 

 

   
  503,009647,085   
  

 

 

   
   W7,776,7637,480,822   
  

 

 

   

(*1)

Option model that the Group uses in derivative valuation includes Black-Scholes model, Hull-White model, Monte Carlo simulation, etc.

(*2)Valuation

There is no disclosure for valuation techniques and inputs are not disclosed wheninput variables related to items where the carrying amount is recognized as a reasonable approximation of fair value and the carrying amount is disclosed at fair value.

 

 • 

Sensitivity analysis for fair value measurements in Level 3

Although the Group believes that its estimates of fair value are appropriate, the use of different methodologies or assumptions could lead to different measurements of fair value.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

4.

Financial risk management (continued)

 

For level 3 fair value measurement, changing one or more of the unobservable inputs used to reasonably possible alternative assumptions would have the following effects on profit or loss, or other comprehensive income as of December 31, 20162017 and 2017.2018.

 

  2016   2017 
  Favorable
changes		   Unfavorable
changes		   Favorable
changes		   Unfavorable
changes		 

Financial assets:

        

Effects on profit or loss for the period (*1):

        

Trading assets

  W2,792    (2,742) 

Financial assets designated at fair value through profit or loss

  W2,737    (3,260)    1,843    (1,941) 

Derivative assets

   38,746    (17,927)    29,059    (28,077) 
  

 

   

 

   

 

   

 

 
   41,483    (21,187)    33,694    (32,760) 

Effects on other comprehensive income for the period:

        

Available-for-sale financial assets (*2)

   59,782    (34,830)    39,460    (25,505) 
  

 

   

 

   

 

   

 

 
  W101,265    (56,017)   W 73,154    (58,265) 
  

 

   

 

   

 

   

 

 

Financial liabilities:

        

Effects on profit or loss for the period (*1):

        

Financial liabilities designated at fair value through profit or loss

  W80,057    (108,955)   W72,063    (56,754) 

Derivative liabilities

   80,589    (49,740)    32,770    (33,343) 
  

 

   

 

   

 

   

 

 
  W160,646    (158,695)   W104,833    (90,097) 
  

 

   

 

   

 

   

 

 

 

  2017   2018 
  Favorable
changes		   Unfavorable
changes		   Favorable
changes		   Unfavorable
changes		 

Financial assets:

        

Effects on profit or loss for the period (*1):

        

Trading assets

  W2,792    (2,742) 

Financial assets designated at fair value through profit or loss

   1,843    (1,941) 

Financial asset at fair value through profit or loss

  W45,760    (20,662) 

Derivative assets

   29,059    (28,077)    28,115    (27,201) 
  

 

   

 

   

 

   

 

 
   33,694    (32,760)    73,875    (47,863) 

Effects on other comprehensive income for the period:

        

Available-for-sale financial assets (*2)

   39,460    (25,505) 

Securities at fair value through other comprehensive income (*2)

   23,885    (17,231) 
  

 

   

 

   

 

   

 

 
  W73,154    (58,265)   W 97,760    (65,094) 
  

 

   

 

   

 

   

 

 

Financial liabilities:

        

Effects on profit or loss for the period (*1):

        

Financial liabilities designated at fair value through profit or loss

  W72,063    (56,754)   W112,212    (131,080) 

Derivative liabilities

   32,770    (33,343)    103,938    (88,348) 
  

 

   

 

   

 

   

 

 
  W104,833    (90,097)   W216,150    (219,428) 
  

 

   

 

   

 

   

 

 

 

 (*1)

Fair value changes are calculated by increasing or decreasing the volatility of the underlying asset(-10~10%) or correlations(-10~10%).

 (*2)

Fair value changes are calculated by increasing or decreasing discount rate(-1~1%) or growth rate (0~1%).

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

4.

Financial risk management (continued)

 

ii) Financial instruments measured at amortized cost

 

The method of measuring the fair value of financial instruments measured at amortized cost is as follows:

 

Type

  

Measurement methods of fair value

Cash and due from banks

  The carrying amount and the fair value for cash are identical and most of deposits are floating interest rate deposits or next day deposits of a short-term instrument. For this reason, the carrying value approximates fair value.

Loans

  The fair value of the loans is measured by discounting the expected cash flow at the market interest rate and credit risk.

Held-to-maturity financial assetsSecurities measured at amortized cost

  The minimum price between the Korea Asset Pricing’s valuation, and KIS Pricing’s is used as a fair value ofheld-to-maturity financial assets is based on the published price quotations in an active market. In case there is no observable market price, it is measured by discounting the contractual cash flows at the market interest rate that takes into account the residual risk.value.

Deposits and borrowings

  The carrying amount and the fair value for demand deposits, cash management account deposits, call money as short-term instrument are identical. The fair value of others is measured by discounting the contractual cash flow at the market interest rate that takes into account the residual risk.

Debt securities issued

  Where available, the fair value of deposits and borrowings is based on the published price quotations in an active market. In case there is no data for an active market price, it is measured by discounting the contractual cash flow at the market interest rate that takes into account the residual risk.

 

The carrying value and the fair value of financial instruments measured at amortized cost as of December 31, 20162017 and 20172018 are as follows:

 

  2016   2017   2017 
  Carrying value   Fair
value		   Carrying
value		   Fair
value		   Carrying value   Fair
value		 

Assets:

            

Loans

  W259,010,575    260,900,185    275,565,766    275,988,557   W275,565,766    275,988,557 

Held-to-maturity financial assets

   19,805,084    20,732,400    24,990,680    25,390,335    24,990,680    25,390,335 

Other financial assets

   13,975,889    13,994,180    12,041,304    12,038,310    12,041,304    12,038,310 
  

 

   

 

   

 

   

 

   

 

   

 

 
  W292,791,548    295,626,765    312,597,750    313,417,202   W312,597,750    313,417,202 
  

 

   

 

   

 

   

 

   

 

   

 

 

Liabilities:

            

Deposits

  W235,137,958    235,175,778    249,419,224    249,333,154   W249,419,224    249,333,154 

Borrowings

   25,294,241    25,340,042    27,586,610    27,596,841    27,586,610    27,596,841 

Debt securities issued

   44,326,785    44,651,811    51,340,821    51,277,693    51,340,821    51,277,693 

Other financial liabilities

   16,848,941    16,813,145    20,205,312    20,179,542    20,205,312    20,179,542 
  

 

   

 

   

 

   

 

   

 

   

 

 
  W321,607,925    321,980,776    348,551,967    348,387,230   W 348,551,967    348,387,230 
  

 

   

 

   

 

   

 

   

 

   

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

4.

Financial risk management (continued)

 

The fair value hierarchy of financial assets and liabilities which are not measured at their fair values in the statements of financial position but disclosed with their fair value as of December 31, 2016 and 2017 are as follows:
   2017 
   Level 1   Level 2   Level 3   Total 

Assets:

        

Loans

  W3,065    845,567    275,139,925    275,988,557 

Held-to-maturity financial assets

   7,851,134    17,539,201    —      25,390,335 

Other financial assets

   79,889    6,832,567    5,125,854    12,038,310 
  

 

 

   

 

 

   

 

 

   

 

 

 
  W7,934,088    25,217,335    280,265,779    313,417,202 
  

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

        

Deposits

  W2,922,841    105,939,876    140,470,437    249,333,154 

Borrowings

   5,958,846    566,718    21,071,277    27,596,841 

Debt securities issued in won

   —      33,622,407    17,655,286    51,277,693 

Other financial liabilities

   84,665    5,642,143    14,452,734    20,179,542 
  

 

 

   

 

 

   

 

 

   

 

 

 
  W8,966,352    145,771,144    193,649,734    348,387,230 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

  2016   2018 
  Level 1   Level 2   Level 3   Total   Carrying value   Fair value 

Assets:

            

Loans

  W11,236    2,019,178    258,869,771    260,900,185 

Held-to-maturity financial assets

   7,658,696    13,073,704    —      20,732,400 

Deposits measured at amortized cost

  W14,471,988    14,471,920 

Loans measured at amortized cost

   299,609,472    302,089,329 

Securities measured at amortized cost

   28,478,136    29,676,691 

Other financial assets

   32,952    9,882,610    4,078,618    13,994,180    16,837,141    16,859,986 
  

 

   

 

   

 

   

 

   

 

   

 

 
  W7,702,884    24,975,492    262,948,389    295,626,765   W359,396,737    363,097,926 
  

 

   

 

   

 

   

 

   

 

   

 

 

Liabilities:

            

Deposits

  W2,584,682    95,123,504    137,467,592    235,175,778   W265,000,190    264,986,928 

Borrowings

   6,116,774    812,184    18,411,084    25,340,042    29,818,542    29,898,645 

Debt securities issued in won

   —      28,927,528    15,724,283    44,651,811 

Debt securities issued

   63,227,699    63,506,309 

Other financial liabilities

   37,061    4,741,882    12,034,202    16,813,145    20,545,181    20,233,920 
  

 

   

 

   

 

   

 

   

 

   

 

 
  W8,738,517    129,605,098    183,637,161    321,980,776   W378,591,612    378,625,802 
  

 

   

 

   

 

   

 

   

 

   

 

 

 

  2017  2018 
  Level 1   Level 2   Level 3   Total  Level 1 Level 2 Level 3 Total 

Assets:

            

Loans

  W3,065    845,567    275,139,925    275,988,557 

Held-to-maturity financial assets

   7,851,134    17,539,201    —      25,390,335 

Deposits measured at amortized cost

 W3,105,588  10,587,086  779,246  14,471,920 

Loans measured at amortized cost

 590  2,498,193  299,590,546  302,089,329 

Securities measured at amortized cost

 8,607,060  20,986,587  83,044  29,676,691 

Other financial assets

   79,889    6,832,567    5,125,854    12,038,310  74,625  11,606,369  5,178,992  16,859,986 
  

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

 
  W7,934,088    25,217,335    280,265,779    313,417,202  W11,787,863  45,678,235  305,631,828  363,097,926 
  

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

 

Liabilities:

            

Deposits

  W2,922,841    105,939,876    140,470,437    249,333,154  W2,801,700  109,083,014  153,102,214  264,986,928 

Borrowings

   5,958,846    566,718    21,071,277    27,596,841  5,708,217  1,084,036  23,106,392  29,898,645 

Debt securities issued in won

   —      33,622,407    17,655,286    51,277,693 

Debt securities issued

  —    41,894,406  21,611,903  63,506,309 

Other financial liabilities

   84,665    5,642,143    14,452,734    20,179,542  74,638  6,630,725  13,528,557  20,233,920 
  

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

 
  W8,966,352    145,771,144    193,649,734    348,387,230  W8,584,555  158,692,181  211,349,066  378,625,802 
  

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

4.

Financial risk management (continued)

 

For financial instruments not measured at fair value in the statement of financial position but for which the fair value is disclosed, information on valuation technique and inputs used in measuring fair value of financial instruments classified as level 2 or level 3 at December 31, 20162017 and 20172018 are as follows:

2016
Fair value (*2)

Valuation
technique

Inputs

Financial instruments classified as level 2 :

Assets

Loans

W2,019,178DCF (*1)

Discount rate, credit spread,

prepayment rate

Held-to-maturity financial assets

13,073,704DCF (*1)Discount rate

Other financial assets

9,882,609DCF (*1)Discount rate

24,975,491

Liabilities

Deposits

95,123,504DCF (*1)Discount rate

Borrowings

812,184DCF (*1)Discount rate

Debt securities issued

27,838,862DCF (*1)Discount rate

Other financial liabilities

4,741,881DCF (*1)Discount rate

W128,516,431

Financial instruments classified as level 3 :

Assets

Loans

W258,869,771DCF (*1)

Discount rate, credit spread,

prepayment rate

Other financial assets

4,078,168DCF (*1)Discount rate

262,947,939

Liabilities

Deposits

137,467,592DCF (*1)Discount rate

Borrowings

18,351,084DCF (*1)Discount rate

Debt securities issued

15,724,283DCF (*1)

Discount rate,

regression coefficient,

correlation coefficient

Other financial liabilities

12,033,429DCF (*1)Discount rate

W183,576,388

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

4.Financial risk management (continued)

 

   2017
   Fair value (*2)   

Valuation
technique

  

Inputs

Financial instruments classified as level 2 :2:

Assets

      

Loans

  W845,567   DCF (*1)  

Discount rate, credit spread,

prepayment rate

Held-to-maturity financial assets

   17,539,201   DCF (*1)  Discount rate

Other financial assets

   6,832,567   DCF (*1)  Discount rate
  

 

 

     
  W25,217,335     
  

 

 

     

Liabilities

      

Deposits

  W105,939,876   DCF (*1)  Discount rate

Borrowings

   566,718   DCF (*1)  Discount rate

Debt securities issued

   33,622,407   DCF (*1)  Discount rate

Other financial liabilities

   5,642,143   DCF (*1)  Discount rate
  

 

 

     
  W145,771,144     
  

 

 

     

Financial instruments classified as level 3 :3:

Assets

      

Loans

  W275,139,925   DCF (*1)  

Discount rate, credit spread,

prepayment rate

Other financial assets

   5,125,854   DCF (*1)  Discount rate
  

 

 

     
  W280,265,779     
  

 

 

     

Liabilities

      

Deposits

  W140,470,437   DCF (*1)  Discount rate

Borrowings

   21,071,277   DCF (*1)  Discount rate

Debt securities issued

   17,655,286   DCF (*1)  

Discount rate,

regression coefficient,

correlation coefficient

Other financial liabilities

   14,452,734   DCF (*1)  Discount rate
  

 

 

     
  W193,649,734     
  

 

 

     

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

4.

Financial risk management (continued)

2018
Fair value (*2)

Valuation
technique

Inputs

Financial instruments classified as level 2:

Assets

Due from banks measured at amortized cost

W10,587,086DCF (*1)Discount rate

Loans measured at amortized cost

2,498,193DCF (*1)

Discount rate, credit spread,

prepayment rate

Securities measured at amortized cost

20,986,587DCF (*1)Discount rate

Other financial assets

11,606,369DCF (*1)Discount rate

W45,678,235

Liabilities

Deposits

W109,083,014DCF (*1)Discount rate

Borrowings

1,084,036DCF (*1)Discount rate

Debt securities issued

41,894,406DCF (*1)Discount rate

Other financial liabilities

6,630,725DCF (*1)Discount rate

W158,692,181

Financial instruments classified as level 3:

Assets

Due from banks measured at amortized cost

W779,246DCF (*1)Discount rate

Loans measured at amortized cost

299,590,546DCF (*1)

Discount rate, credit spread,

prepayment rate

Securities measured at amortized cost

83,044DCF (*1)Discount rate

Other financial assets

5,178,992DCF (*1)Discount rate

W305,631,828

Liabilities

Deposits

W153,102,214DCF (*1)Discount rate

Borrowings

23,106,392DCF (*1)Discount rate

Debt securities issued

21,611,903DCF (*1)

Discount rate,

regression coefficient,

correlation coefficient

Other financial liabilities

13,528,557DCF (*1)Discount rate

W211,349,066

 

(*1)DCF :

DCF: discounted cash flow

(*2)

Valuation techniques and inputs are not disclosed when the carrying amount is a reasonable approximation of fair value

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

4.

Financial risk management (continued)

iii) Changes in the difference between the fair value at initial recognition (the transaction price) and the value using models with unobservable inputs for the years ended December 31, 20162017 and 20172018

 

   2016   2017 

Beginning balance

  W(102,016)    (89,695) 

Deferral on new transactions

   (70,948)    (108,832) 

Recognized in profit for the year

   83,269    66,063 
  

 

 

   

 

 

 

Ending balance

  W(89,695)    (132,464) 
  

 

 

   

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

4.Financial risk management (continued)
   2017   2018 

Beginning balance

  W(89,695)    (137,393) 

Deferral on new transactions

   (108,832)    (91,625) 

Recognized in profit for the year

   66,063    102,907 
  

 

 

   

 

 

 

Ending balance

  W(132,464)    (126,111) 
  

 

 

   

 

 

 

 

 (f)

Classification by categories of financial instruments

Financial assets and liabilities are measured at fair value or amortized cost. The financial instruments measured at fair value or amortized costcosts are measured in accordance with the Group’s valuation methodologies, which are described in Note 4.(e) Measurement of fair value.

The carrying amounts of each category of financial assets and financial liabilities as of December 31, 20162017 and 20172018 are as follows:

 

  2016 
  Trading
assets		  FVTPL
assets		  AFS  HTM  Loans and
receivable		  Derivatives
held for
hedging		  Total 

Assets:

       

Cash and due from banks

 W—     —     —     —     19,181,165   —     19,181,165 

Trading assets

  26,695,953   —     —     —     —     —     26,695,953 

Financial assets designated at FVTPL

  —     3,416,102   —     —     —     —     3,416,102 

Derivatives

  2,826,642   —     —     —     —     176,217   3,002,859 

Loans

  —     —     —     —     259,010,575   —     259,010,575 

AFS financial assets

  —     —     37,662,691   —     —     —     37,662,691 

HTM financial assets

  —     —     —     19,805,084   —     —     19,805,084 

Other

  —     —     —     —     13,975,889   —     13,975,889 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
 W29,522,595   3,416,102   37,662,691   19,805,084   292,167,629   176,217   382,750,318 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

   2016 
   Trading liabilities   FVTPL
liabilities		   Financial
liabilities
measured at
amortized cost		   Derivatives
held for
hedging		   Total 

Liabilities:

          

Deposits

  W—      —      235,137,958    —      235,137,958 

Trading liabilities

   1,976,760    —      —      —      1,976,760 

Financial liabilities designated at FVTPL

   —      9,233,642    —      —      9,233,642 

Derivatives

   3,074,814    —      —      453,430    3,528,244 

Borrowings

   —      —      25,294,241    —      25,294,241 

Debt securities issued

   —      —      44,326,785    —      44,326,785 

Other

   —      —      16,848,941    —      16,848,941 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  W5,051,574    9,233,642    321,607,925    453,430    336,346,571 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  2017 
  Trading
assets		  FVTPL
assets		  AFS  HTM  Loans and
receivable		  Derivatives
held for
hedging		  Total 

Assets:

       

Cash and due from banks

 W—     —     —     —     22,668,598   —     22,668,598 

Trading assets

  28,464,296   —     —     —     —     —     28,464,296 

Financial assets designated at FVTPL

  —     3,579,057   —     —     —     —     3,579,057 

Derivatives

  3,280,775   —     —     —     —     119,403   3,400,178 

Loans

  —     —     —     —     275,565,766   —     275,565,766 

AFS financial assets

  —     —     42,116,937   —     —     —     42,116,937 

HTM financial assets

  —     —     —     24,990,680   —     —     24,990,680 

Other

  —     —     —     —     12,041,304   —     12,041,304 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
 W31,745,071   3,579,057   42,116,937   24,990,680   310,275,668   119,403   412,826,816 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

4.

Financial risk management (continued)

 

  2017 
  Trading assets  FVTPL
assets		  AFS  HTM  Loans and
receivable		  Derivatives
held for
hedging		  Total 

Assets:

       

Cash and due from banks

 W—     —     —     —     22,668,598   —     22,668,598 

Trading assets

  28,464,296   —     —     —     —     —     28,464,296 

Financial assets designated at FVTPL

  —     3,579,057   —     —     —     —     3,579,057 

Derivatives

  3,280,775   —     —     —     —     119,403   3,400,178 

Loans

  —     —     —     —     275,565,766   —     275,565,766 

AFS financial assets

  —     —     42,116,937   —     —     —     42,116,937 

HTM financial assets

  —     —     —     24,990,680   —     —     24,990,680 

Other

  —     —     —     —     12,041,304   —     12,041,304 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
 W31,745,071   3,579,057   42,116,937   24,990,680   310,275,668   119,403   412,826,816 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
   2017 
   Trading liabilities   FVTPL
liabilities		   Financial
liabilities
measured at
amortized cost		  Derivatives
held for
hedging		   Total 

Liabilities:

         

Deposits

  W—      —      249,419,224   —      249,419,224 

Trading liabilities

   1,848,490    —      —     —      1,848,490 

Financial liabilities designated at FVTPL

   —      8,297,609    —     —      8,297,609 

Derivatives

   2,804,834    —      —     682,827    3,487,661 

Borrowings

   —      —      27,586,610   —      27,586,610 

Debt securities issued

   —      —      51,340,821   —      51,340,821 

Other

   —      —      20,205,312   —      20,205,312 
  

 

 

   

 

 

   

 

 

  

 

 

   

 

 

 
  W4,653,324    8,297,609    348,551,967   682,827    362,185,727 
  

 

 

   

 

 

   

 

 

  

 

 

   

 

 

 

 

   2017 
   Trading liabilities   FVTPL
liabilities		   Financial
liabilities
measured at
amortized cost		   Derivatives
held for
hedging		   Total 

Liabilities:

          

Deposits

  W—      —      249,419,224    —      249,419,224 

Trading liabilities

   1,848,490    —      —      —      1,848,490 

Financial liabilities designated at FVTPL

   —      8,297,609    —      —      8,297,609 

Derivatives

   2,804,834    —      —      682,827    3,487,661 

Borrowings

   —      —      27,586,610    —      27,586,610 

Debt securities issued

   —      —      51,340,821    —      51,340,821 

Other

   —      —      20,205,312    —      20,205,312 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  W4,653,324    8,297,609    348,551,967    682,827    362,185,727 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   2018 
   FVTPL   FVOCI   Amortized cost   Derivatives
held for
hedging		   Total 

Assets:

          

Cash and due from banks at amortized cost

  W—    —      17,348,626    —      17,348,626 

Due from banks at fair value through profit or loss

   870,656    —      —      —      870,656 

Securities at fair value through profit or loss

   41,454,916    —      —      —      41,454,916 

Loans at fair value through profit or loss

   1,209,194    —      —      —      1,209,194 

Derivatives

   1,727,321    —      —      66,292    1,793,613 

Securities at fair value through other comprehensive income

   —      38,314,170    —      —      38,314,170 

Securities at amortized cost

   —      —      28,478,136    —      28,478,136 

Loans at amortized cost

   —      —      299,609,472    —      299,609,472 

Other

   —      —      16,837,141    —      16,837,141 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  W45,262,087    38,314,170    362,273,375    66,292    445,915,924 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

4.

Financial risk management (continued)

   2018 
   FVTPL   FVTPL
liabilities
designated		   Financial
liabilities
measured at
amortized cost		   Derivatives
held for
hedging		   Total 

Liabilities:

          

Deposits

  W—    —      265,000,190    —      265,000,190 

Financial liabilities at fair value through profit or loss

   1,420,306    —      —      —      1,420,306 

Financial liabilities designated at FVTPL

   —      8,535,800    —      —      8,535,800 

Derivatives

   1,846,669    —      —      593,223    2,439,892 

Borrowings

   —      —      29,818,542    —      29,818,542 

Debt securities issued

   —      —      63,227,699    —      63,227,699 

Other

   —      —      20,545,181    —      20,545,181 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  W3,266,975    8,535,800    378,591,612    593,223    390,987,610 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 (g)

Transfer of financial instruments

i) Transfers that do not qualify for derecognition

 

Bonds sold under repurchase agreements as of December 31, 20162017 and 20172018 are as follows:

 

  2016   2017   2017   2018 

Transferred asset:

        

Financial assets at fair value through profit or loss

  W7,011,684    7,688,025   W7,688,025    —   

Available-for-sale financial assets

   1,104,923    1,240,063    1,240,063    —   

Held-to-maturity financial assets

   489,204    615,352    615,352    —   

Loans

   200    51,900    51,900    —   

Securities at FVTPL

   —      6,711,060 

Securities at FVOCI

   —      688,593 

Securities at amortized cost

   —      156,066 

Loans at FVTPL

   —      —   

Loans at amortized cost

   —      —   
  

 

   

 

   

 

   

 

 
  W8,606,011    9,595,340   W9,595,340    7,555,719 
  

 

   

 

   

 

   

 

 

Associated liabilities:

        

Bonds sold under repurchase agreements

  W8,082,626    9,057,138   W 9,057,138    7,167,364 
  

 

   

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

4.

Financial risk management (continued)

 

Securities loaned as of December 31, 20162017 and 20172018 are as follows:

 

  2016   2017   Borrowers  2017   2018   Borrowers

Government bonds

  W414,745    530,607   Korea Securities Finance Corp.,

Korea Securities Depository
and others

  W495,737    1,216,381   Korea Securities Finance Corp.,

Korea Securities Depository
and others

Financial institutions bonds

   260,014    319,581   Korea Securities Finance Corp.,

Korea Securities Depository

   319,581    409,831   Korea Securities Finance Corp.,
Korea Securities Depository

Equity securities

   10,333    —     JP MORGAN SECURITIES   34,870    6,029   Korea Securities Finance Corp.
  

 

   

 

     

 

   

 

   
  W685,092    850,188     W850,188    1,632,241   
  

 

   

 

     

 

   

 

   

ii) Financial instruments qualified for derecognition and continued involvement

There was no financial instruments which qualify for derecognition and in which the Group has continuing involvements as of December 31, 20162017, and 2017.2018.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

4.

Financial risk management (continued)

 

 (h)

Offsetting financial assets and financial liabilities

Financial assets and liabilities subject to offsetting, enforceable master netting arrangements and similar agreements as of December 31, 20162017 and 20172018 are as follows:

 

  2016   2017 
  Gross amounts of
recognized financial
assets/ liabilities		   Gross amounts of
recognized financial
liabilities set off in
the statement of
financial position		   Net amounts of
financial assets
presented in the
statement of
financial position		   Related amounts not set off in the
statement of financial position		   Net amount   Gross amounts of
recognized financial
assets/ liabilities		   Gross amounts of
recognized financial
liabilities set off in
the statement of
financial position		   Net amounts of
financial assets
presented in the
statement of
financial position		   Related amounts not set off in the
statement of financial position		   Net amount 
  Financial
instruments		   Cash collateral
received		    Financial
instruments		   Cash collateral
received		 

Assets:

                        

Derivatives (*1)

  W2,980,805    —      2,980,805    5,049,847    296,155    1,922,783   W3,219,982    —      3,219,982    5,626,795    318,813    1,650,336 

Other financial instruments (*1)

   4,904,754    616,774    4,287,980      5,911,577    1,535,615    4,375,962 

Bonds purchased under repurchase agreements (*2)

   12,005,767    —      12,005,767    11,491,811    —      513,956    12,861,514    —      12,861,514    12,312,131    —      549,383 

Securities loaned (*2)

   685,091    —      685,091    338,947    —      346,144    850,188    —      850,188    633,407    —      216,781 

Domestic exchange settlement debit (*3)

   30,589,675    24,486,360    6,103,315    27,156    —      6,076,159    33,367,006    30,367,425    2,999,581    79,882    —      2,919,699 

Receivables from disposal of securities (*4)

   1,891    495    1,396    —      —      1,396    15,568    1,152    14,416    —      —      14,416 

Insurance receivables

   4,069    —      4,069    2,450    —      1,619    6,807    —      6,807    3,376    —      3,431 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 
   51,172,052    25,103,629    26,068,423    16,910,211    296,155    8,862,057   W56,232,642    31,904,192    24,328,450    18,655,591    318,813    5,354,046 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Liabilities:

                        

Derivatives (*1)

   4,438,363    —      4,438,363    5,058,660    467,195    2,661,326   W12,625,941    —      12,625,941    6,378,052    —      9,907,534 

Other financial instruments (*1)

   4,365,592    616,774    3,748,818      5,195,260    1,535,615    3,659,645 

Bonds purchased under repurchase agreements (*2)

   8,082,626    —      8,082,626    8,082,626    —      —      9,057,138    —      9,057,138    9,057,138    —      —   

Securities borrowed (*2)

   1,490,765    —      1,490,765    1,490,765    —      —      1,450,877    —      1,450,877    1,450,877    —      —   

Domestic exchange settlement pending (*3)

   25,448,312    24,486,360    961,952    957,406    —      4,546    32,202,236    30,367,425    1,834,811    1,763,331    —      71,480 

Payable from purchase of securities (*4)

   500    495    5    5    —      —      1,519    1,152    367    326    —      41 

Insurance payables

   2,450    —      2,450    2,450    —      —      3,376    —      3,376    3,376    —      —   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 
  W43,828,608    25,103,629    18,724,979    15,591,912    467,195    2,665,872   W60,536,347    31,904,192    28,632,155    18,653,100    —      9,979,055 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

4.

Financial risk management (continued)

 

 2017   2018 
 Gross amounts of
recognized financial
assets/ liabilities		  Gross amounts of
recognized financial
liabilities set off in
the statement of
financial position		  Net amounts of
financial assets
presented in the
statement of
financial position		  Related amounts not set off in the
statement of financial position		 Net amount   Gross amounts of
recognized financial
assets/ liabilities		   Gross amounts of
recognized financial
liabilities set off in
the statement of
financial position		   Net amounts of
financial assets
presented in the
statement of
financial position		   Related amounts not set off in the
statement of financial position		   Net amount 
 Financial
instruments		 Cash collateral
received		  Financial
instruments		   Cash collateral
received		 

Assets:

                  

Derivatives (*1)

 W3,219,982   —    3,219,982   5,626,795   318,813   1,650,337   W1,730,828    —      1,730,828    6,746,640    26,638    1,165,276 

Other financial instruments (*1)

 5,911,577  1,535,614  4,375,963     7,476,505    1,268,779    6,207,726 

Bonds purchased under repurchase agreements (*2)

 12,861,514   —    12,861,514  12,312,131   —    549,383    12,945,380    —      12,945,380    12,557,025    —      388,355 

Securities loaned (*2)

 850,188   —    850,188  633,407   —    216,781    1,827,066    —      1,827,066    1,246,157    —      580,909 

Domestic exchange settlement debit (*3)

 33,367,006  30,367,425  2,999,581  79,882   —    2,919,699    32,647,367    26,502,611    6,144,756    74,552    —      6,070,204 

Receivables from disposal of securities (*4)

 15,568  1,152  14,416   —     —    14,416    22,906    519    22,387    —      —      22,387 

Insurance receivables

 6,807   —    6,807  3,376   —    3,431    8,014    —      8,014    4,872    —      3,142 
 

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

   

 

 
 56,232,642  31,904,191  24,328,451  18,655,591  318,813  5,354,047   W56,658,066    27,771,909    28,886,157    20,629,246    26,638    8,230,273 
 

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Liabilities:

                  

Derivatives (*1)

 12,625,941   —    12,625,941   6,378,052   —     9,907,535   W11,858,108    —      11,858,108    7,850,210    —      9,334,098 

Other financial instruments (*1)

 5,195,260  1,535,614  3,659,646     6,594,979    1,268,779    5,326,200 

Bonds purchased under repurchase agreements (*2)

 9,057,138   —    9,057,138  9,057,138   —     —      7,170,744    —      7,170,744    7,170,744    —      —   

Securities borrowed (*2)

 1,450,877   —    1,450,877  1,450,877   —     —      936,705    —      936,705    936,705    —      —   

Domestic exchange settlement pending (*3)

 32,202,236  30,367,425  1,834,811  1,763,331   —    71,480    27,647,185    26,502,611    1,144,574    1,090,808    —      53,766 

Payable from purchase of securities (*4)

 1,519  1,152  367  326   —    41    552    519    33    33    —      —   

Insurance payables

 3,376   —    3,376  3,376   —     —      4,984    —      4,984    4,871    —      113 
 

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

   

 

 
 W60,536,347  31,904,191  28,632,156  18,653,100   —    9,979,056   W54,213,257    27,771,909    26,441,348    17,053,371    —      9,387,977 
 

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

(*1)

The Group has certain derivative transactions subject to the ISDA (International Derivatives Swaps and Dealers Association) agreement. According to the ISDA agreement, when credit events (e.g. default) of counterparties occur, all derivative agreements are terminated and set off.

(*2)

Resale and repurchase agreement, securities borrowing and lending agreement are also similar to ISDA agreement with respect to enforceable netting agreements.

(*3)

The Group has legally enforceable right to set off and settles financial assets and liabilities on a net basis under normal business terms. Therefore, domestic exchanges settlement receivables (payables) are recorded on a net basis in the consolidated statements of financial position.

(*4)

Receivables and payables related to settlement of purchase and disposition of enlisted securities are offset and the net amount is presented in the consolidated statement of financial position because the Group currently has a legally enforceable right to set off the recognized amounts and intends to settle on a net basis.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

4.

Financial risk management (continued)

 

 (i)

Capital risk management

The controlling company, 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%.

“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 Bank of International Settlement standards. “Equity capital”, as applicable to bank holding companies, is defined as the sum of Common Equity Tier 1 capital (including common stock, share premium resulting from the issue of instruments classified as common equity Tier 1, retained earnings, etc.), Additional Tier 1 capital (with the minimum set of criteria for an instrument issued by the Group to meet, i.e. ‘perpetual’) and Tier 2 capital (to provide loss absorption on a gone-concern basis) less any deductible items (including goodwill, income tax assets, etc.), 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 capital adequacy ratio of the Group as of December 31, 20162017 and 20172018 are as follows:

 

  2016 2017   2017 2018 

Capital :

   

Capital:

   

Tier I common equity capital

  W25,325,054  26,756,509   W26,756,509  28,696,267 

Additional tier 1 capital

   885,366  916,383    916,383  1,981,609 
  

 

  

 

   

 

  

 

 

Tier I capital

   26,210,420  27,672,892    27,672,892  30,677,876 

Tier II capital

   3,576,095  3,040,572    3,040,572  3,315,185 
  

 

  

 

   

 

  

 

 

Total capital (A)

  W29,786,515  30,713,464   W30,713,464  33,993,061 
  

 

  

 

   

 

  

 

 

Total risk-weighted assets (B)

  W198,642,643  207,768,636   W207,768,636  228,678,105 

Capital adequacy ratio (A/B)

   15.00%  14.78%    14.78%  14.87% 

Tier I capital adequacy ratio

   13.19%  13.32%    13.32%  13.42% 

Common equity capital adequacy ratio

   12.75%  12.88%    12.88%  12.55% 

As of December 31, 20162017 and 2017,2018, the Group met the regulatory capital ratio above 8%.

Shinhan Life Insurance measures and manages RBC (risk based capital) ratio according to the Regulation on Supervision of Insurance Business to maintain required capital for the solvency margin.

As of December 31, 2016 and 2017, the Group’s BIS capital ratio and Shinhan Life Insurance’s RBC ratio exceed the regulatory minimum ratios.

 

5.

Significant estimateestimates and judgmentjudgments

The preparation of consolidated financial statements requires the application of certain critical accountingestimates and judgments and assumptions relative to the future. Management’s estimate of the outcomeestimated outcomes may differ from an actual outcome if managements’ estimate and assumption based on its best judgment at the reporting date are different from an actual environment.outcomes. The change in an accounting estimate is recognized prospectively in profit or loss in the yearperiod of the change, if the change affects that yearperiod only, or the yearperiod of the change and future years,periods, if the change affects both.

(a)

Estimation of impairment of goodwill

The Group reviews the goodwill annually in accordance with the accounting policy in Note 3. The recoverable amount of the cash-generating unit (group) was determined based on thevalue-in-use calculation. These calculations are based on estimates.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

5.

Significant estimateestimates and judgmentjudgments (continued)

 

 (a)Goodwill

The Group assesses annually whether any objective evidence of impairment on goodwill exists in accordance with the accounting policy as described in note 3. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. Value in use is measured based on estimates.

(b)

Income taxes

The Group is subject to tax lawlaws from various countries. WithinIn the normal course of business, process, there are various types of transactiontransactions and different accounting methodmethods that may add uncertainties to the decision of the final income taxes. DeferredThe Group has recognized current and deferred taxes that reflect tax is recognized, usingconsequences based on the asset-liability method,best estimates in respectwhich the Group expects, at the end of temporary differences betweenthe reporting period, to recover or settle the carrying amountsamount of its assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. A deferred tax liability is recognized for taxable temporary differences and a deferred tax asset is recognized for deductible temporary differences to the extent that it is probable that taxable profit will be available against which they can be utilized and the taxable profit will be created in appropriate periods.liabilities. However, actual income taxtaxes in the future may not be identical to the recognized deferred tax assets and liabilities, and this difference can affect current and deferred tax at the yearperiod when the final tax effect is finalized.determined.

 

 (c)

Fair value of financial instruments

The fair values of financial instruments which are not actively traded in the market are determined by using valuation techniques. The Group determines valuation methodmethods and assumptions based on significant market conditions at the end of each reporting year.period. Diverse valuation techniques are used to determine the fair value of financial instruments, from general market acceptedgeneric valuation modeltechniques to internally developed valuation modelmodels that incorporatesincorporate various types of assumptions and variables.

 

 (d)Allowances for loan losses,

Credit loss allowance, guarantees and unused loan commitments

The Group determines and recognizes allowances for losses on debt securities, loans through impairment testingand other receivables measured at amortized cost or FVOCI, and recognizes provisionprovisions for guarantees and unused loan commitments.commitments through impairment testing. The accuracy of allowances and provisions offor credit losses is determined by the estimation of expected cash flows for individually assessed allowances, and methodology and assumptions used for estimating expected cash flows of the borrower forcollectively assessed allowances on individual loans and collectively assessing allowancesprovisions for groups of loans, guarantees and unused loan commitments.

 

 (e)

Defined benefit obligation

The present value of a defined benefit obligation that is measured by actuarial valuation methodmethods uses various assumptions which can change according to various elements. The rate used to discount post-employment benefit obligations is determined by reference to market yields at the end of the reporting yearperiod on high quality corporate bonds. The currency and term of the corporate bonds are consistent with the currency and estimated term of the post-employment benefit obligations. Actuarial gains and losses including experience adjustments and the effects of changes in actuarial assumptions are recognized in other comprehensive income or loss.income. Other significant assumptions related to defined benefit obligationobligations are based on current market situation.situations.

(f)

Hedging relationship

The Group expects a high risk hedging effect throughout the hedging period in designating the hedging relationship and it is probable that the hedged transaction will be highly probable in the cash flow hedge.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

5.Significant estimate and judgment (continued)

(f)Impairment ofavailable-for-sale equity investments

When there is a significant or prolonged decline in the fair value of an investment in an equity instrument below its original cost, there is objective evidence thatavailable-for-sale equity investments are impaired. Accordingly, the Group generally considers the decline in the fair value of more than 30% below the original cost as “significant decline” and the status when the market price for marketable equity is less than the acquisition costs of instruments for six consecutive months as a “prolonged decline”.

(g)Hedging relationship

The hedging instruments are expected to be “highly effective” in offsetting the changes in the fair value or cash flows of the respective hedged items during the period. For a cash flow hedge of a forecasted transaction, the transaction should be highly probable to occur and should present an exposure to variations in cash flows that could ultimately affect reported net income.

6.

Investment in subsidiaries

 

 (a)Summarized

The summarized financial information of the subsidiaries

i)Condensed financial position for the controlling company and the Group’s major subsidiaries as of December 31, 20162017 and 2017 are2018 is as follows:

 

 2016 2017  2017 (*3) 2018 
 Total
assets		 Total
liabilities		 Total
equity		 Total
assets		 Total
liabilities		 Total
equity		 

Shinhan Financial Group (Separate)

 W27,195,607  6,977,746  20,217,861  27,639,783  7,447,705  20,192,078 

Investees (*1)(*2)

 Asset
balance		 Liability
balance		 Equity
balance		 Asset
balance		 Liability
balance		 Equity
balance		 

Shinhan Financial Group (separate)

 W27,639,783  7,447,705  20,192,078  30,114,232  8,464,164  21,650,068 

Shinhan Bank

 302,854,623  281,387,650  21,466,973  324,312,890  301,660,027  22,652,863  324,314,242  301,660,298  22,653,944  348,523,615  324,331,076  24,192,539 

Shinhan Card Co., Ltd.

 24,419,886  18,537,340  5,882,546  26,367,562  20,092,443  6,275,119  26,367,562  20,092,443  6,275,119  29,429,455  23,427,988  6,001,467 

Shinhan Investment Corp.

 25,554,489  22,478,057  3,076,432  28,644,288  25,391,599  3,252,689  28,644,288  25,391,599  3,252,689  29,140,427  25,767,858  3,372,569 

Shinhan Life Insurance Co., Ltd.

 27,499,836  25,814,288  1,685,548  29,719,359  27,987,427  1,731,932  29,719,359  27,987,427  1,731,932  31,823,631  30,078,522  1,745,109 

Shinhan Capital Co., Ltd.

 4,506,750  3,862,388  644,362  5,315,366  4,603,786  711,580  5,315,366  4,603,786  711,580  6,116,585  5,368,265  748,320 

Jeju Bank

 5,184,831  4,849,180  335,651  5,562,924  5,158,123  404,801  5,562,924  5,158,123  404,801  5,980,941  5,507,949  472,992 

Shinhan Credit Information
Co., Ltd.

 23,077  8,897  14,180  22,726  8,144  14,582  22,726  8,144  14,582  24,377  8,750  15,627 

Shinhan Alternative Investment Management Inc.

 114,853  103,358  11,495  86,902  76,250  10,652  86,902  76,250  10,652  102,079  92,194  9,885 

Shinhan BNP Paribas AMC

 161,161  13,354  147,807  174,839  18,286  156,553 

Shinhan BNP Paribas Asset Management Co., Ltd.

 174,839  18,286  156,553  173,964  14,841  159,123 

SHC Management Co., Ltd.

 8,474  262  8,212  9,438  190  9,248  9,438  190  9,248  9,755  198  9,557 

Shinhan Data System

 34,403  21,565  12,838  39,799  24,446  15,353 

Shinhan DS

 39,799  24,446  15,353  43,095  23,118  19,977 

Shinhan Savings Bank

 970,146  839,328  130,818  1,287,170  1,139,533  147,637  1,287,170  1,139,533  147,637  1,454,290  1,291,012  163,278 

Shinhan Aitas Co., Ltd.

 53,886  8,434  45,452  58,158  6,209  51,949 

Shinhan REITs Management

  —     —     —    29,319  71  29,248 

Shinhan AITAS Co., Ltd.

 58,158  6,209  51,949  65,725  7,367  58,358 

Shinhan REITs Management Co., Ltd.

 29,319  71  29,248  36,298  3,496  32,802 

 

(*1)Condensed

The consolidated financial informationstatements of the consolidated subsidiaries isare based on the consolidated financial information,statements, if applicable.

(*2)Subsidiaries such as trust,

Trusts, beneficiary certificate, corporate restructuring fundcertificates, securitization special limited liability companies, associates and private equity fund whichinvestment specialists that are not actually operating their own business are excluded.

(*3)

As the accounting treatment for the acquisition of ANZ Retail business by Shinhan Bank Vietnam Co. Ltd was completed, the amount was adjusted retrospectively.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

6.

Investment in subsidiaries (continued)

 ii)(b)Condensed comprehensive

The summarized income statement forinformation of the controlling company and the Group’s major subsidiaries for the years ended December 31, 2015, 2016, 2017 and 2017 were2018 is as follows:

 

 2015 2016 2017  2016 2017 (*3) 2018 
 Operating
revenue		 Net
income		 Total com-
prehensive
income		 Operating
revenue		 Net
income		 Total com-
prehensive
income		 Operating
revenue		 Net
income		 Total com-
prehensive
income		 

Shinhan Financial Group (separate)

 W1,201,949  893,041  893,328  1,739,924  1,470,250  1,469,850  1,008,868  754,727  755,018 

Investees (*1)(*2)

 Operating
Income		 Net
Income		 Comprehensive
Income		 Operating
Income		 Net
Income		 Comprehensive
Income		 Operating
Income		 Net
Income		 Comprehensive
Income		 

Shinhan Financial Group(separate)

 W1,739,924  1,470,250  1,469,850  1,008,868  754,727  755,018  1,519,197  1,234,883  1,234,044 

Shinhan Bank

 14,656,853  1,489,988  1,197,961  16,672,337  1,940,621  1,717,969  21,240,193  1,711,233  1,495,500  16,672,337  1,940,621  1,717,969  21,240,193  1,712,314  1,496,582  19,731,711  2,279,362  2,333,266 

Shinhan Card Co., Ltd.

 4,740,139  694,774  629,164  4,672,819  707,344  558,438  5,186,592  898,723  787,956  4,672,819  707,344  558,438  5,186,592  898,723  787,956  3,752,232  517,761  477,135 

Shinhan Investment Corp.

 4,734,162  215,454  225,342  4,549,941  115,440  120,238  5,558,862  211,919  195,910  4,549,941  115,440  120,238  5,558,862  211,919  195,910  5,553,118  251,268  269,058 

Shinhan Life Insurance Co., Ltd.

 5,460,671  100,221  115,083  5,693,702  150,556  109,754  5,997,997  120,642  46,062  5,693,702  150,556  109,754  5,997,997  120,642  46,062  5,633,679  131,021  150,997 

Shinhan Capital Co., Ltd.

 380,867  46,081  52,754  302,710  33,868  34,059  351,772  87,647  88,128  302,710  33,868  34,059  351,772  87,647  88,128  439,031  103,400  100,317 

Jeju Bank

 167,479  19,397  14,665  190,191  25,160  19,969  208,661  25,143  22,053  190,191  25,160  19,969  208,661  25,143  22,053  224,766  27,446  30,579 

Shinhan Credit Information Co., Ltd.

 27,279  723  610  24,975  (1,174)  (1,047)  32,836  340  377  24,975  (1,174)  (1,047)  32,836  340  377  37,616  1,392  985 

Shinhan Alternative Investment Management Inc.

 373,577  6,401  6,602  2,404  512  844  29,410  (844)  (842)  2,404  512  844  29,410  (844)  (842)  21,590  (780)  (780) 

Shinhan BNP Paribas AMC

 83,718  23,653  23,721  69,834  14,302  14,363  77,474  19,705  20,073 

Shinhan BNP Paribas Asset Management Co., Ltd.

 69,834  14,302  14,363  77,474  19,705  20,073  78,378  18,868  18,980 

SHC Management Co., Ltd.

 287  215  215  115  416  416  177  1,036  1,036  115  416  416  177  1,036  1,036  140  309  309 

Shinhan Data System

 73,096  1,046  872  79,004  1,186  2,617  79,063  1,404  2,482 

Shinhan DS

 79,004  1,186  2,617  79,063  1,404  2,482  99,279  1,314  1,525 

Shinhan Savings Bank

 60,927  8,017  5,198  64,229  12,505  11,170  78,516  16,800  16,757  64,229  12,505  11,170  78,516  16,800  16,757  94,636  19,384  18,919 

Shinhan Aitas Co., Ltd.

 32,949  6,415  6,415  37,061  7,631  7,631  40,781  6,481  6,481 

Shinhan REITs Management

  —     —     —     —     —     —    70  (752)  (752) 

Shinhan AITAS Co., Ltd.

 37,061  7,631  7,631  40,781  6,481  6,481  44,729  8,461  8,461 

Shinhan REITs Management Co., Ltd.

  —     —     —    70  (752)  (752)  7,386  3,564  3,552 

 

(*1)Condensed

The consolidated financial informationstatements of the consolidated subsidiaries isare based on the consolidated financial information,statements, if applicable.

(*2)Subsidiaries such as trust,

Trusts, beneficiary certificate, corporate restructuring fundcertificates, securitization special limited liability companies, associates and private equity fund whichinvestment specialists that are not actually operating their own business are excluded.

(*3)

As the accounting treatment for the acquisition of ANZ Retail business by Shinhan Bank Vietnam Co. Ltd was completed, the amount was adjusted retrospectively.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

6.

Investment in subsidiaries (continued)

 

 (b)(c)

Change in subsidiariesthe scope of consolidation

i)(1) Change in material consolidated subsidiaries during the year ended December 31, 2016 are as follows:

Company

Description

IncludedShinhan Microfinance Co., Ltd.Newly established subsidiary
”PT Shinhan Sekuritas IndonesiaAcquisition
ExcludedPT Centratama Nasional BankBusiness combination under common control
”HKC&T Co., Ltd.Liquidation

ii) Change in material consolidated subsidiaries duringfor the year ended December 31, 2017 are as follows:

 

   

Company

  

Description

Included (2017)

  Shinhan REITs ManagementNewly invested subsidiary

(2) Change in consolidated subsidiaries for the year ended December 31, 2018 are as follows:

Company

Description

Included (2018)

PT Shinhan Asset Management IndonesiaNewly acquired subsidiary
SHINHAN DS VIETNAM CO, LTD  Newly invested subsidiary

Subsidiaries such as trust, beneficiary certificate, corporate restructuring fund and private equity fund which are not actually operating their own business are excluded.

 

7.

Operating segments

 

 (a)

Segment information

The general descriptions forby operating segments as of December 31, 2018 are as follows:

 

Segment

  

Description

Banking  The banking segment offers commercial banking services such as lending to and receiving deposits from corporations and individuals and also includes securities investing and trading and derivatives trading primarily through domestic and overseas bank branches and subsidiaries.
Credit card  The credit card segment primarily consists of the credit card business of Shinhan Card, including its installment finance and automobile leasing businesses.
Securities  Securities segment comprise securities trading, underwriting and brokerage services.
Life insurance  Life insurance segment consists of life insurance services provided by Shinhan Life Insurance.
Others  Leasing, assets management and other businessesbusinesses.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

7.

Operating segments (continued)

 

 (b)

The following tables provide information of income and expense for each operating segment for the years ended December 31, 2015, 2016, 2017 and 2017.2018:

 

 2015  2016 
 Banking Credit card Securities Life
insurance		 Others Consolidation
adjustment		 Total  Banking Credit card Securities Life
insurance		 Others Consolidation
adjustment		 Total 

Net interest income (loss)

 W4,246,146  1,350,968  444,271  675,760  (32,274)  8,062  6,692,933 

Net interest income

 W4,605,046  1,484,697  390,761  704,489  13,028  7,345  7,205,366 

Net fees and commission income

 689,122  433,441  266,529  32,232  194,530  5,125  1,620,979  717,097  408,601  248,845  19,068  169,081  2,847  1,565,539 

Impairment losses on financial assets

 (800,893)  (305,876)  (3,353)  (31,383)  (124,534)  1,986  (1,264,053)  (746,126)  (347,179)  (8,035)  (9,559)  (85,009)  245  (1,195,663) 

General and administrative expenses

 (2,779,864)  (830,355)  (479,567)  (204,975)  (244,929)  64,622  (4,475,068)  (2,907,314)  (802,037)  (406,017)  (227,639)  (215,759)  50,191  (4,508,575) 

Other income (expense), net

 294,633  319,758  34,080  (340,012)  174,140  (84,249)  398,350  190,909  296,829  (82,480)  (326,251)  43,783  (80,815)  41,975 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Operating income

 1,649,144  967,936  261,960  131,622  (33,067)  (4,454)  2,973,141  1,859,612  1,040,911  143,074  160,108  (74,876)  (20,187)  3,108,642 

Equity method income (loss)

 13,399   —    1,478  (277)  5,601  770  20,971 

Equity method income

 8,615   —    (273)  (1,188)  4,277  (1,436)  9,995 

Income tax expense

 363,928  209,916  62,668  32,356  28,519  (2,768)  694,619  64,214  235,140  30,066  2,951  14,190  (1,008)  345,553 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Profit (loss) for the period

 W1,426,006  778,153  215,454  100,221  (59,454)  (14,422)  2,445,958  W1,866,811  806,313  115,440  150,556  (79,150)  (35,051)  2,824,919 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Controlling interest

 W1,425,672  778,153  215,454  100,221  (66,492)  (85,837)  2,367,171  W1,866,446  814,836  115,438  150,556  (79,151)  (93,347)  2,774,778 

Non-controlling interests

 334   —     —     —    7,038  71,415  78,787  365  (8,523)  2   —    1  58,296  50,141 

 

 2016  2017 (*) 
 Banking Credit card Securities Life
insurance		 Others Consolidation
adjustment		 Total  Banking Credit card Securities Life
insurance		 Others Consolidation
adjustment		 Total 

Net interest income

 W4,605,046  1,484,697  390,761  704,489  13,028  7,345  7,205,366  W5,107,888  1,501,054  433,047  727,917  69,231  3,816  7,842,953 

Net fees and commission income

 717,097  408,601  248,845  19,068  169,081  2,847  1,565,539  816,795  359,408  297,718  53,271  180,510  3,252  1,710,954 

Impairment losses on financial assets

 (746,126)  (347,179)  (8,035)  (9,559)  (85,009)  245  (1,195,663)  (674,706)  (291,694)  (15,752)  (13,162)  (36,830)  18,596  (1,013,548) 

General and administrative expenses

 (2,907,314)  (802,037)  (406,017)  (227,639)  (215,759)  50,191  (4,508,575)  (3,149,436)  (831,927)  (444,935)  (222,650)  (234,649)  72,399  (4,811,198) 

Other income (expense), net

 190,909  296,829  (82,480)  (326,251)  43,783  (80,815)  41,975  (11,556)  567,234  (17,229)  (385,226)  53,815  (106,173)  100,865 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Operating income

 1,859,612  1,040,911  143,074  160,108  (74,876)  (20,187)  3,108,642  2,088,985  1,304,075  252,849  160,150  32,077  (8,110)  3,830,026 

Equity method income

 8,615   —    (273)  (1,188)  4,277  (1,436)  9,995 

Equity method income (loss)

 1,306   —    12,081  (910)  8,796  (880)  20,393 

Income tax expense

 64,214  235,140  30,066  2,951  14,190  (1,008)  345,553  418,679  285,853  63,472  41,441  32,805  6,153  848,403 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Profit (loss) for the period

 W1,866,811  806,313  115,440  150,556  (79,150)  (35,051)  2,824,919 

Profit for the period

 W1,623,425  1,012,755  211,919  120,642  9,600  (29,136)  2,949,205 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Controlling interest

 W1,866,446  814,836  115,438  150,556  (79,151)  (93,347)  2,774,778  W1,623,184  1,027,823  211,907  120,642  9,600  (74,340)  2,918,816 

Non-controlling interests

 365  (8,523)  2   —    1  58,296  50,141  241  (15,068)  12   —     —    45,204  30,389 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

7.

Operating segments (continued)

 

 2017  2018 
 Banking Credit card Securities Life
insurance		 Others Consolidation
adjustment		 Total  Banking Credit card Securities Life
insurance		 Others Consolidation
adjustment		 Total 

Net interest income

 W5,107,888  1,501,054  433,047  727,917  69,231  3,816  7,842,953  W5,707,813  1,583,100  429,095  761,742  95,618  2,721  8,580,089 

Net fees and commission income

 816,795  359,408  297,718  53,271  180,510  3,252  1,710,954  850,646  433,043  388,944  69,780  198,828  (2,244)  1,938,997 

Impairment losses on financial assets

 (676,057)  (291,694)  (15,752)  (13,162)  (36,830)  18,596  (1,014,899) 

Reversal of (provision of) credit loss

 (250,134)  (466,447)  (9,226)  (13,400)  (10,238)  1,568  (747,877) 

General and administrative expenses

 (3,149,436)  (831,927)  (444,935)  (222,650)  (234,649)  72,399  (4,811,198)  (3,098,629)  (751,580)  (493,906)  (227,740)  (263,046)  93,326  (4,741,575) 

Other income (expense), net

 (11,556)  567,234  (17,229)  (385,226)  53,815  (106,173)  100,865  (163,104)  74,954  17,963  (409,151)  80,857  (131,739)  (530,220) 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Operating income

 2,087,634  1,304,075  252,849  160,150  32,077  (8,110)  3,828,675  3,046,592  873,070  332,870  181,231  102,019  (36,368)  4,499,414 

Equity method income (loss)

 1,306   —    12,081  (910)  8,796  (880)  20,393 

Equity method income

 (977)   —    15,228  (1,026)  6,909  (2,646)  17,488 

Income tax expense

 418,409  285,853  63,472  41,441  32,805  6,153  848,133  832,494  225,837  95,438  50,429  59,556  4,591  1,268,345 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Profit (loss) for the period

 W1,622,344  1,012,755  211,919  120,642  9,600  (29,136)  2,948,124  W2,195,263  629,307  251,268  131,021  49,168  (57,762)  3,198,265 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Controlling interest

 W1,622,103  1,027,823  211,907  120,642  9,600  (74,340)  2,917,735  W2,194,950  630,993  251,265  131,021  49,168  (100,675)  3,156,722 

Non-controlling interests

 241  (15,068)  12   —     —    45,204  30,389  313  (1,686)  3   —     —    42,913  41,543 

(*)

As the accounting treatment for the acquisition of ANZ Retail business by Shinhan Bank Vietnam Co. Ltd was completed, the amount was adjusted retrospectively.

 

 (c)

The following tables provide information of net interest income (expense) of each operating segment for the years ended December 31, 2015, 2016, 2017 and 2017.2018

   2015 
   Banking  Credit card  Securities  Life
insurance		   Others  Consolidation
adjustment		   Total 

Net interest income from:

          

External customers

  W4,253,559   1,390,469   450,019   674,708    (75,822)   —      6,692,933 

Internal transactions

   (7,413)   (39,501)   (5,748)   1,052    43,548   8,062    —   
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 
  W4,246,146   1,350,968   444,271   675,760    (32,274)   8,062    6,692,933 
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

 

   2016 
   Banking  Credit card  Securities  Life
insurance		   Others  Consolidation
adjustment		   Total 

Net interest income from:

          

External customers

  W4,610,536   1,507,748   392,973   704,188    (10,079)   —      7,205,366 

Internal transactions

   (5,490)   (23,051)   (2,212)   301    23,107   7,345    —   
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 
  W4,605,046   1,484,697   390,761   704,489    13,028   7,345    7,205,366 
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

 

   2017 
   Banking  Credit card  Securities   Life
insurance		  Others   Consolidation
adjustment		   Total 

Net interest income from:

           

External customers

  W5,113,584   1,517,399   427,888    727,975   56,107    —      7,842,953 

Internal transactions

   (5,696)   (16,345)   5,159    (58)   13,124    3,816    —   
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

   

 

 

   

 

 

 
  W5,107,888   1,501,054   433,047    727,917   69,231    3,816    7,842,953 
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

   

 

 

   

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

7.

Operating segments (continued)

   2018 
   Banking  Credit card  Securities   Life
insurance		  Others   Consolidation
adjustment		   Total 

Net interest income from:

           

External customers

  W5,714,568   1,602,849   423,156    762,978   76,538    —      8,580,089 

Internal transactions

   (6,755)   (19,749)   5,939    (1,236)   19,080    2,721    —   
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

   

 

 

   

 

 

 
  W5,707,813   1,583,100   429,095    761,742   95,618    2,721    8,580,089 
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

   

 

 

   

 

 

 

 

 (d)

The following tables provide information of net fees and commission income (expense) of each operating segment for the years ended December 31, 2015, 2016, 2017 and 2017.2018

  2015 
  Banking  Credit card  Securities  Life
insurance		  Others  Consolidation
adjustment		  Total 

Net fees and commission income from:

       

External customers

 W730,799   460,314   274,833   40,638   114,395   —     1,620,979 

Internal transactions

  (41,677)   (26,873)   (8,304)   (8,406)   80,135   5,125   —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
 W689,122   433,441   266,529   32,232   194,530   5,125   1,620,979 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

  2016 
  Banking  Credit card  Securities  Life
insurance		  Others  Consolidation
adjustment		  Total 

Net fees and commission income from:

       

External customers

 W744,464   427,592   255,999   26,769   110,715   —     1,565,539 

Internal transactions

  (27,367)   (18,991)   (7,154)   (7,701)   58,366   2,847   —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
 W717,097   408,601   248,845   19,068   169,081   2,847   1,565,539 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

  2017 
  Banking  Credit card  Securities  Life
insurance		  Others  Consolidation
adjustment		  Total 

Net fees and commission income from:

       

External customers

 W844,349   384,356   306,407   60,555   115,287   —     1,710,954 

Internal transactions

  (27,554)   (24,948)   (8,689)   (7,284)   65,223   3,252   —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
 W816,795   359,408   297,718   53,271   180,510   3,252   1,710,954 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

(e)Financial information of geographical area

The following table provides information of income from external consumers by geographical area for the years ended December 31, 2015, 2016 and 2017.

   2015   2016   2017 

Domestic

  W2,727,862    2,876,073    3,503,429 

Overseas

   245,279    232,569    325,246 
  

 

 

   

 

 

   

 

 

 
  W2,973,141    3,108,642    3,828,675 
  

 

 

   

 

 

   

 

 

 
  2018 
  Banking  Credit card  Securities  Life
insurance		  Others  Consolidation
adjustment		  Total 

Net fees and commission income from:

       

External customers

 W872,631   464,342   400,227   77,145   124,652   —     1,938,997 

Internal transactions

  (21,985)   (31,299)   (11,283)   (7,365)   74,176   (2,244)   —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
 W850,646   433,043   388,944   69,780   198,828   (2,244)   1,938,997 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

7.

Operating segments (continued)

 

(e)

Financial information of geographical area

The following table provides information of income from external consumers by geographical area for the years ended December 31, 2016, 2017 and 2018.

   2016   2017 (*2)   2018 

Domestic

  W2,876,073    3,504,780    4,023,916 

Overseas

   232,569    325,246    475,498 
  

 

 

   

 

 

   

 

 

 
  W3,108,642    3,830,026    4,499,414 
  

 

 

   

 

 

   

 

 

 

The following table provides information ofnon-current assets by geographical area as of December 31, 20162017 and 2017.2018.

 

  2016   2017   2017 (*2)   2018 

Domestic

  W7,568,195    7,513,736   W7,513,736    7,597,266 

Overseas

   157,105    198,308    199,660    201,574 
  

 

   

 

   

 

   

 

 
  W7,725,300    7,712,044   W7,713,396    7,798,840 
  

 

   

 

   

 

   

 

 

 

 Non-current(*1)

Non-currentassets comprise property and equipment, intangible assets and investment properties.

(*2)

As the accounting treatment for the acquisition of ANZ Retail business by Shinhan Bank Vietnam Co. Ltd was completed, the amount was adjusted retrospectively.

 

8.

Cash and due from banks at amortized cost

 

 (a)

Cash and due from banks at amortized cost as of December 31, 2016 and 20172018 are as follows:

 

   2016   2017 

Cash and cash equivalents

  W1,814,497    1,792,527 

Deposits in won:

    

Reserve deposits

   2,857,672    8,689,515 

Time deposits

   1,916,936    1,361,612 

Certificate of deposits

   19,897    —   

Other

   4,867,510    3,023,087 
  

 

 

   

 

 

 
   9,662,015    13,074,214 
  

 

 

   

 

 

 

Deposits in foreign currency:

    

Deposits

   3,789,527    4,064,408 

Time deposits

   3,286,152    3,053,464 

Other

   644,684    698,039 
  

 

 

   

 

 

 
   7,720,363    7,815,911 
  

 

 

   

 

 

 

Allowance for credit losses

   (15,710)    (14,054) 
  

 

 

   

 

 

 
  W19,181,165    22,668,598 
  

 

 

   

 

 

 
2018

Cash and cash equivalents

W2,617,231

Deposits in won:

Reserve deposits

2,360,416

Time deposits

1,346,015

Other

2,271,812

5,978,243

Deposits in foreign currency:

Deposits

5,045,513

Time deposits

2,791,486

Other

930,977

8,767,976

Allowance for credit losses

(14,824) 

W17,348,626

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

8.

Cash and due from banks at amortized cost (continued)

 

 (b)

Restricted due from banks at amortized cost as of December 31, 2016 and 20172018 are as follows:

 

   2016   2017 

Deposits denominated in won:

    

Reserve deposits

  W2,857,672    8,689,515 

Other (*)

   4,868,867    3,628,419 
  

 

 

   

 

 

 
   7,726,539    12,317,934 

Deposits denominated in foreign currency

   1,379,514    1,117,597 
  

 

 

   

 

 

 
  W9,106,053    13,435,531 
  

 

 

   

 

 

 
2018

Deposits denominated in won:

Reserve deposits

W2,360,416

Other (*1)

2,182,119

4,542,535

Deposits denominated in foreign currency

1,632,971

W6,175,506

 

 (*)1)

Pursuant to the Regulation on Financial Investment Business, the Group is required to deposit certain portions of customers’ deposits with the Korean Securities Finance Corporation (“KSFC”) or banks to ensure repayment of customer deposits and the deposits may not be pledged as collateral.

9.

Cash and due from banks

(a)

Cash and due from banks as of December 31, 2017 are as follows:

2017

Cash and cash equivalents

W1,792,527

Deposits in won:

Reserve deposits

8,689,515

Time deposits

1,361,612

Other

3,023,087

13,074,214

Deposits in foreign currency:

Deposits

4,064,408

Time deposits

3,053,464

Other

698,039

7,815,911

Allowance for credit losses

(14,054) 

W22,668,598

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

9.Trading assets

Cash and due from banks (continued)

Trading assets

(b)

Restricted due from banks as of December 31, 2016 and 2017 are as follows:

 

   2016   2017 

Debt securities:

    

Governments

  W4,337,224    3,254,587 

Financial institutions

   7,461,375    8,014,128 

Corporations

   4,342,496    5,097,200 

Commercial Papers

   4,350,252    3,625,436 

CMA (*)

   1,793,312    3,157,475 

Others

   105,905    491,820 
  

 

 

   

 

 

 
   22,390,564    23,640,646 
  

 

 

   

 

 

 

Equity securities:

    

Stocks

   703,467    738,666 

Beneficiary certificates

   3,233,937    3,728,027 

Others

   120,140    167,660 
  

 

 

   

 

 

 
   4,057,544    4,634,353 
  

 

 

   

 

 

 

Other:

    

Gold deposits

   247,845    189,297 
  

 

 

   

 

 

 
  W26,695,953    28,464,296 
  

 

 

   

 

 

 
2017

Deposits denominated in won:

Reserve deposits

W8,689,515

Other (*1)

3,628,419

12,317,934

Deposits denominated in foreign currency

1,117,597

W13,435,531

 

 (*)1)CMA: Cash management account

Pursuant to the Regulation on Financial Investment Business, the Group is required to deposit certain portions of customers’ deposits with the Korean Securities Finance Corporation (“KSFC”) or banks to ensure repayment of customer deposits and the deposits may not be pledged as collateral.

 

10.

Financial asset designatedassets at fair value through profit or loss

Financial assets designated at fair value through profit or loss as of December 31, 2016 and 2017

(a)

Financial assets at fair value through profit or loss as of December 31, 2018 are as follows:

 

   2016   2017   

Reason for designation

Debt securities

  W1,908,342    2,110,809   Evaluation and management on a fair value basis, accounting mismatch

Equity securities (*)

   1,187,916    1,234,356   Evaluation and management on a fair value basis, accounting mismatch

Others

   319,844    233,892   Combined instrument
  

 

 

   

 

 

   
  W3,416,102    3,579,057   
  

 

 

   

 

 

   
2018

Debt securities:

Governments

W2,765,054

Financial institutions

9,415,470

Corporations

6,664,839

Stocks with put option

381,844

Equity investment with put option

1,080,723

Beneficiary certificates

9,062,004

Commercial papers

5,535,397

CMA (*1)

3,001,831

Others (*2)

2,227,802

40,134,964

Equity securities:

Stocks

1,050,097

Equity investment

4,908

Others

110,066

1,165,071

41,300,035

Other:

Loans at fair value

1,209,194

Due from banks at fair value

870,656

Gold deposits

154,881

W43,534,766

 

 (*)1)

CMA: Cash management account deposits

(*2)

Restricted reserve for claims of customers’ deposits (trusts) as of December 31, 2016 and 20172018 areW862,837 million andW958,236 million, respectively.1,040,180 million.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

11.10.Derivatives

Financial assets at fair value through profit or loss (continued)

 

 (a)(b)The notional amounts of derivatives

Financial assets to which overlay approach were applied in accordance with IFRS 9 ‘Financial Instruments’ and IFRS 4 ‘Insurance Contracts’ as of December 31, 2016 and 20172018 are as follows:follows.

 

   2016   2017 

Foreign currency related:

    

Over the counter:

    

Currency forwards

  W92,309,997    100,806,648 

Currency swaps

   27,460,485    30,269,510 

Currency options

   1,210,658    1,178,047 
  

 

 

   

 

 

 
   120,981,140    132,254,205 

Exchange traded:

    

Currency futures

   739,186    1,179,986 
  

 

 

   

 

 

 
   121,720,326    133,434,191 
  

 

 

   

 

 

 

Interest rates related:

    

Over the counter:

    

Interest rate swaps

   37,545,356    30,269,249 

Interest rate options

   1,014,000    310,000 
  

 

 

   

 

 

 
   38,559,356    30,579,249 

Exchange traded:

    

Interest rate futures

   2,099,017    1,545,905 

Interest rate swaps(*)

   44,300,555    53,625,962 
  

 

 

   

 

 

 
   46,399,572    55,171,867 
  

 

 

   

 

 

 
   84,958,928    85,751,116 
  

 

 

   

 

 

 

Credit related:

    

Over the counter:

    

Credit swaps

   1,244,502    2,443,609 

Equity related:

    

Over the counter:

    

Equity swaps and forwards

   12,187,176    4,223,096 

Equity options

   1,228,114    1,230,635 
  

 

 

   

 

 

 
   13,415,290    5,453,731 

Exchange traded:

    

Equity futures

   492,562    526,913 

Equity options

   2,213,162    3,238,049 
  

 

 

   

 

 

 
   2,705,724    3,764,962 
  

 

 

   

 

 

 
   16,121,014    9,218,693 
  

 

 

   

 

 

 

Commodity related:

    

Over the counter:

    

Commodity swaps and forwards

   892,003    931,644 

Commodity options

   11,876    4,880 
  

 

 

   

 

 

 
   903,879    936,524 

Exchange traded:

    

Commodity futures

   114,927    122,394 
  

 

 

   

 

 

 
   1,018,806    1,058,918 
  

 

 

   

 

 

 
2018

Due from banks at fair value through profit or loss

W870,656

Securities at fair value through profit or loss

3,160,525

W4,031,181

A financial asset is eligible for designation for the overlay approach, if it is measured at fair value through profit or loss applying IFRS 9 but would not have been measured at fair value through profit or loss in its entirety applying IAS 39; and it is not held in respect of an activity that is not associated with contracts within the scope of IFRS 4.

The reclassified amounts between profit or loss and other comprehensive income due to the overlay approach as of and for the year ended December 31, 2018 are as follows:

   Profit or loss   Other comprehensive
income		 
   IFRS 9   IAS 39   Amount   Tax effect 

Net gain (loss) on valuation of financial assets at fair value through profit or loss

  W(77,179)    (4,425)    (72,754)    20,007 

Net gain (loss) on disposal of financial assets at fair value through profit or loss

   4,310    6,498    (2,188)    602 
  

 

 

   

 

 

   

 

 

   

 

 

 
  W (72,869)    2,073    (74,942)    20,609 
  

 

 

   

 

 

   

 

 

   

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

11.Derivatives (continued)
   2016   2017 

Hedge:

    

Currency forwards

  W2,036,187    1,227,354 

Currency swaps

   2,765,653    3,866,015 

Interest rate swaps

   7,631,505    8,088,422 
  

 

 

   

 

 

 
   12,433,345    13,181,791 
  

 

 

   

 

 

 
  W237,496,921    245,088,318 
  

 

 

   

 

 

 

Trading assets

(*)The notional amount of derivatives which is settled in the ‘Central Counter Party (CCP)’ system.

(b) Fair values of derivative instrumentsTrading assets as of December 31, 2016 and 2017 are as follows:

 

   2016   2017 
   Assets   Liabilities   Assets   Liabilities 

Foreign currency related:

        

Over the counter:

        

Currency forwards

  W1,722,096    1,623,325    1,895,225    1,636,715 

Currency swaps

   698,220    766,252    854,892    865,551 

Currency options

   12,347    9,422    12,023    12,070 
  

 

 

   

 

 

   

 

 

   

 

 

 
   2,432,663    2,398,999    2,762,140    2,514,336 

Exchange traded:

        

Currency futures

   —      4    415    553 
  

 

 

   

 

 

   

 

 

   

 

 

 
   2,432,663    2,399,003    2,762,555    2,514,889 
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest rates related:

        

Over the counter:

        

Interest rate swaps

   290,074    340,409    204,449    208,901 

Interest rate options

   7,807    8,367    —      1,893 
  

 

 

   

 

 

   

 

 

   

 

 

 
   297,881    348,776    204,449    210,794 

Exchange traded:

        

Interest rate futures

   1,439    212    1,771    544 
  

 

 

   

 

 

   

 

 

   

 

 

 
   299,320    348,988    206,220    211,338 
  

 

 

   

 

 

   

 

 

   

 

 

 

Credit related:

        

Over the counter:

        

Credit swaps

   13,365    6,095    63,359    10,617 

Equity related:

        

Over the counter:

        

Equity swap and forwards

   25,378    250,879    112,282    13,502 

Equity options

   38,156    6,212    91,040    12,177 
  

 

 

   

 

 

   

 

 

   

 

 

 
   63,534    257,091    203,322    25,679 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)
2017

Debt securities:

Governments

W3,254,587

Financial institutions

8,014,128

Corporations

5,097,200

Commercial papers

3,625,436

CMA (*1)

3,157,475

Others

491,820

 

11.Derivatives (continued)23,640,646

Equity securities:

Stocks

738,666

Beneficiary certificates

3,728,027

Others

167,660

4,634,353

Other

Gold deposits

189,297

W28,464,296

   2016   2017 
   Assets   Liabilities   Assets   Liabilities 

Exchange traded:

        

Equity futures

   683    57    72    805 

Equity options

   13,084    12,215    23,562    18,521 
  

 

 

   

 

 

   

 

 

   

 

 

 
   13,767    12,272    23,634    19,326 
  

 

 

   

 

 

   

 

 

   

 

 

 
   77,301    269,363    226,956    45,005 
  

 

 

   

 

 

   

 

 

   

 

 

 

Commodity related:

        

Over the counter:

        

Commodity swaps and forwards

   1,778    49,702    15,576    22,593 

Commodity options

   105    22    72    77 
  

 

 

   

 

 

   

 

 

   

 

 

 
   1,883    49,724    15,648    22,670 

Exchange traded:

        

Commodity futures

   2,110    1,641    6,037    315 
  

 

 

   

 

 

   

 

 

   

 

 

 
   3,993    51,365    21,685    22,985 
  

 

 

   

 

 

   

 

 

   

 

 

 

Hedge:

        

Currency forwards

  W5,646    81,829    50,492    1,567 

Currency swaps

   155,386    36,077    59,399    161,896 

Interest rate swaps

   15,185    335,524    9,512    519,364 
  

 

 

   

 

 

   

 

 

   

 

 

 
   176,217    453,430    119,403    682,827 
  

 

 

   

 

 

   

 

 

   

 

 

 
  W3,002,859    3,528,244    3,400,178    3,487,661 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 (c)(*1)Gain or loss on valuation of derivatives for the years ended December 31, 2015, 2016 and 2017 are as follows:

CMA: Cash management account deposits

 

   2015  2016  2017 

Foreign currency related

    

Over the counter

    

Currency forwards

  W142,086   (80,907)   85,498 

Currency swaps

   (132,226)   7,193   91,410 

Currency options

   10,540   9,704   5,422 
  

 

 

  

 

 

  

 

 

 
   20,400   (64,010)   182,330 

Exchange traded

    

Currency futures

   (272)   (33)   (137) 
  

 

 

  

 

 

  

 

 

 
   20,128   (64,043)   182,193 
  

 

 

  

 

 

  

 

 

 

Interest rates related

    

Over the counter

    

Interest rate swaps

   (65,444)   (68,490)   (17,805) 

Interest rate options

   (185)   1,116   413 
  

 

 

  

 

 

  

 

 

 
   (65,629)   (67,374)   (17,392) 

Exchange traded

    

Interest rate futures

   144   3,849   6,950 
  

 

 

  

 

 

  

 

 

 
   (65,485)   (63,525)   (10,442) 
  

 

 

  

 

 

  

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

11.12.Derivatives (continued)
   2015  2016  2017 

Credit related

    

Over the counter

    

Credit swaps

   748   10,761   46,593 

Equity related

    

Over the counter

    

Equity swap and forwards

   (653,231)   111,723   73,490 

Equity options

   5,470   11,639   36,662 
  

 

 

  

 

 

  

 

 

 
   (647,761)   123,362   110,152 
  

 

 

  

 

 

  

 

 

 

Exchange traded

    

Equity futures

   613   626   (733) 

Equity options

   (2,218)   3,420   22,315 
  

 

 

  

 

 

  

 

 

 
   (1,605)   4,046   21,582 
  

 

 

  

 

 

  

 

 

 
   (649,366)   127,408   131,734 
  

 

 

  

 

 

  

 

 

 

Commodity related

    

Over the counter

    

Commodity swaps and forwards

   (106,976)   (8,988)   13,435 

Commodity options

   (457)   (44)   (10) 
  

 

 

  

 

 

  

 

 

 
   (107,433)   (9,032)   13,425 

Exchange traded

    

Commodity futures

   (2,582)   98   5,722 
  

 

 

  

 

 

  

 

 

 
   (110,015)   (8,934)   19,147 
  

 

 

  

 

 

  

 

 

 

Hedge

    

Currency forwards

   (27,339)   (80,958)   48,050 

Currency swaps

   97,576   19,366   (143,737) 

Interest rate swaps

   (120,396)   (239,596)   (191,233) 
  

 

 

  

 

 

  

 

 

 
   (50,159)   (301,188)   (286,920) 
  

 

 

  

 

 

  

 

 

 
  W(854,149)   (299,521)   82,305 
  

 

 

  

 

 

  

 

 

 

(d)Gain or loss on

Financial asset designated at fair value hedges for the years endedthrough profit or loss

Financial asset designated at fair value through profit or loss as of December 31, 2015, 2016 and 2017 are as follows:

   2015   2016   2017 

Hedged item

  W211,951    332,197    (87,292) 

Hedging instruments

   (206,925)    (340,041)    66,620 
  

 

 

   

 

 

   

 

 

 
  W5,026    (7,844)    (20,672) 
  

 

 

   

 

 

   

 

 

 

In order to hedge changes in the fair value of investments in debt securities, structured deposits, etc. from interest rate changes, the Group designates interest swap contracts as hedging items. Additionally, the Group holds forward exchange contracts and currency swaps to hedge changes in the fair value of foreign currency deposits and investments in foreign currency debt securities from exchange rate changes.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

11.Derivatives (continued)
(e)Hedge of net investment in foreign operations

Hedge accounting is applied for a portion of net investments in foreign operations. Foreign currency translation adjustments for foreign operation by each hedging instrument for the years ended December 31, 2016 and 2017 are as follows:

 

   2016   2017 

Borrowings in foreign currency

  W(23,441)    82,565 

Debt securities issued in foreign currency

   (35,727)    8,162 

Currency forwards

   4,775    6,626 
  

 

 

   

 

 

 
  W(54,393)    97,353 
  

 

 

   

 

 

 
2017

Reason for designation

Debt securities

W2,110,809Evaluation and management on a fair value basis, accounting mismatch

Equity securities (*1)

1,234,356Evaluation and management on a fair value basis, accounting mismatch

Others

233,892Combined instrument

 

12.LoansW3,579,057

 

 (a)(*1)Loans

Restricted reserve for claims of customers’ deposits (trusts) as of December 31, 2016 and 2017 are as follows:W958,236 million.

   2016   2017 

Household loans

  W104,184,270    111,590,777 

Corporate loans

   130,485,094    139,989,642 

Public and other

   2,153,888    2,297,631 

Loans to banks

   4,729,836    2,969,784 

Card receivables

   19,450,421    20,640,857 
  

 

 

   

 

 

 
   261,003,509    277,488,691 

Discount

   (27,533)    (44,936) 

Deferred loan origination costs and fees

   395,394    432,615 
  

 

 

   

 

 

 
   261,371,370    277,876,370 

Allowance for credit losses

   (2,360,795)    (2,310,604) 
  

 

 

   

 

 

 
  W259,010,575    275,565,766 
  

 

 

   

 

 

 

(b)Changes in the allowance for credit losses for the years ended December 31, 2016 and 2017 are as follows:

   2016 
   Loans  Other (*2)  Total 
   Household  Corporate  Credit Card  Other  Subtotal   

Beginning balance

  W266,764   1,358,489   675,239   17,924   2,318,416   79,839   2,398,255 

Provision for (reversal of) allowance

   135,416   656,449   313,037   (2,121)   1,102,781   4,851   1,107,632 

Write-offs

   (126,776)   (730,027)   (433,470)   (558)   (1,290,831)   (16,204)   (1,307,035) 

Effect of discounting (*1)

   (238)   (28,372)   (8,428)   —     (37,038)   —     (37,038) 

Allowance related to loans sold

   (2,731)   (42,472)   (32,970)   (95)   (78,268)   —     (78,268) 

Recoveries

   34,705   126,102   188,703   43   349,553   2,227   351,780 

Others (*3)

   (795)   (4,778)   1,755   —     (3,818)   (3,817)   (7,635) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Ending balance

  W306,345   1,335,391   703,866   15,193   2,360,795   66,896   2,427,691 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

12.Loans (continued)
   2017 
   Loans  Other (*2)  Total 
   Household  Corporate  Credit Card  Other  Subtotal   

Beginning balance

  W306,345   1,335,391   703,866   15,193   2,360,795   66,896   2,427,691 

Provision for (reversal of) allowance

   146,757   402,528   251,870   (227)   800,928   15,672   816,600 

Write-offs

   (136,976)   (300,183)   (536,219)   (565)   (973,943)   (20,063)   (994,006) 

Effect of discounting (*1)

   (269)   (21,390)   (1,657)   —     (23,316)   —     (23,316) 

Allowance related to loans sold

   (2,042)   (58,719)   (1,928)   (402)   (63,091)   16   (63,075) 

Recoveries

   43,756   82,378   184,873   35   311,042   1,591   312,633 

Others (*3)

   455   (105,697)   3,431   —     (101,811)   (379)   (102,190) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Ending balance

  W358,026   1,334,308   604,236   14,034   2,310,604   63,733   2,374,337 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(*1)Interest income from impaired financial assets
(*2)Included allowance for due from banks and other assets
(*3)Other changes were due to debt restructuring, debt-equity swap, and foreign exchange rate, etc.

(c)Changes in deferred loan origination costs and fees for the years ended December 31, 2016 and 2017 are as follows:

   2016   2017 

Beginning balance

  W357,617    395,394 

Loan originations

   192,116    178,890 

Amortization

   (154,339)    (141,669) 
  

 

 

   

 

 

 

Ending balance

  W395,394    432,615 
  

 

 

   

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

13.Available-for-sale financial assets andheld-to-maturity financial assets

Derivatives

 

 (a)Available-for-sale financial assets andheld-to-maturity financial assets

The notional amounts of derivatives as of December 31, 20162017 and 20172018 are as follows:

 

   2016   2017 

Available-for-sale financial assets:

    

Debt securities:

    

Government bonds

  W5,308,247    7,570,104 

Financial institution bonds

   17,224,603    17,649,694 

Corporate bonds and others

   10,289,221    11,966,754 
  

 

 

   

 

 

 
   32,822,071    37,186,552 

Equity securities (*1):

    

Stocks

   1,663,951    1,026,666 

Equity investments

   625,632    749,818 

Beneficiary certificates

   2,470,555    3,126,851 

Others

   80,482    27,050 
  

 

 

   

 

 

 
   4,840,620    4,930,385 
  

 

 

   

 

 

 
   37,662,691    42,116,937 
  

 

 

   

 

 

 

Held-to-maturity financial assets:

    

Debt securities:

    

Government bonds

   11,514,671    15,164,133 

Financial institutions bonds

   2,092,476    2,708,148 

Corporate bonds

   6,197,937    7,118,399 
  

 

 

   

 

 

 
   19,805,084    24,990,680 
  

 

 

   

 

 

 
  W57,467,775    67,107,617 
  

 

 

   

 

 

 

(*1)Equity securities with no quoted market prices in active markets and for which the fair value cannot be measured reliably are recorded at cost wereW131,143 million andW126,220 million as of December 31, 2016 and 2017, respectively.

(b)Gain or loss on sale ofavailable-for-sale financial assets for the years ended December 31, 2015, 2016 and 2017 were as follows:

   2015   2016   2017 

Gain on disposal ofavailable-for-sale financial assets

  W827,968    707,134    529,411 

Loss on disposal ofavailable-for-sale financial assets

   (55,494)    (59,593)    (30,224) 
  

 

 

   

 

 

   

 

 

 
  W772,474    647,541    499,187 
  

 

 

   

 

 

   

 

 

 
   2017   2018 

Foreign currency related:

    

Over the counter:

    

Currency forwards

  W100,806,648    139,804,552 

Currency swaps

   30,269,510    31,794,900 

Currency options

   1,178,047    1,939,939 
  

 

 

   

 

 

 
   132,254,205    173,539,391 
  

 

 

   

 

 

 

Exchange traded:

    

Currency futures

   1,179,986    436,714 
  

 

 

   

 

 

 
   133,434,191    173,976,105 
  

 

 

   

 

 

 

Interest rates related:

    

Over the counter:

    

Interest rate swaps

   30,269,249    31,228,489 

Interest rate options

   310,000    294,000 
  

 

 

   

 

 

 
   30,579,249    31,522,489 
  

 

 

   

 

 

 

Exchange traded:

    

Interest rate futures

   1,545,905    1,739,697 

Interest rate swaps (*1)

   53,625,962    56,862,374 
  

 

 

   

 

 

 
   55,171,867    58,602,071 
  

 

 

   

 

 

 
   85,751,116    90,124,560 
  

 

 

   

 

 

 

Credit related:

    

Over the counter:

    

Credit swaps

   2,443,609    3,094,077 

Equity related:

    

Over the counter:

    

Equity swaps and forwards

   4,223,096    5,149,967 

Equity options

   1,230,635    645,709 
  

 

 

   

 

 

 
   5,453,731    5,795,676 
  

 

 

   

 

 

 

Exchange traded:

    

Equity futures

   526,913    630,409 

Equity options

   3,238,049    2,708,557 
  

 

 

   

 

 

 
   3,764,962    3,338,966 
  

 

 

   

 

 

 
   9,218,693    9,134,642 
  

 

 

   

 

 

 

Commodity related:

    

Over the counter:

    

Commodity swaps and forwards

   931,644    1,062,588 

Commodity options

   4,880    4,780 
  

 

 

   

 

 

 
   936,524    1,067,368 
  

 

 

   

 

 

 

Exchange traded:

    

Commodity futures and options

   122,394    245,751 
  

 

 

   

 

 

 
   1,058,918    1,313,119 
  

 

 

   

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

13.

Derivatives (continued)

   2017   2018 

Hedge:

    

Currency forwards

   1,227,354    1,522,306 

Currency swaps

   3,866,015    4,143,828 

Interest rate swaps

   8,088,422    10,147,731 
  

 

 

   

 

 

 
   13,181,791    15,813,865 
  

 

 

   

 

 

 
  W245,088,318    293,456,368 
  

 

 

   

 

 

 

(*1)

The notional amount of derivatives which is settled in the ‘Central Counter Party (CCP)’ system.

(b)

Fair values of derivative instruments as of December 31, 2017 and 2018 are as follows:

   2017   2018 
   Assets   Liabilities   Assets   Liabilities 

Foreign currency related:

        

Over the counter:

        

Currency forwards

  W1,895,225    1,636,715    912,795    870,984 

Currency swaps

   854,892    865,551    393,702    372,725 

Currency options

   12,023    12,070    7,637    12,273 
  

 

 

   

 

 

   

 

 

   

 

 

 
   2,762,140    2,514,336    1,314,134    1,255,982 
  

 

 

   

 

 

   

 

 

   

 

 

 

Exchange traded:

        

Currency futures

   416    553    11    —   
  

 

 

   

 

 

   

 

 

   

 

 

 
   2,762,556    2,514,889    1,314,145    1,255,982 
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest rates related:

        

Over the counter:

        

Interest rate swaps

   204,449    208,901    251,251    172,019 

Interest rate options

   —      1,893    —      5,347 
  

 

 

   

 

 

   

 

 

   

 

 

 
   204,449    210,794    251,251    177,366 
  

 

 

   

 

 

   

 

 

   

 

 

 

Exchange traded:

        

Interest rate futures

   1,771    544    412    1,569 
  

 

 

   

 

 

   

 

 

   

 

 

 
   206,220    211,338    251,663    178,935 
  

 

 

   

 

 

   

 

 

   

 

 

 

Credit related:

        

Over the counter:

        

Credit swaps

   63,359    10,617    37,951    14,916 

Equity related:

        

Over the counter:

        

Equity swap and forwards

   112,282    13,502    51,869    205,709 

Equity options

   91,040    12,177    2,265    2,352 
  

 

 

   

 

 

   

 

 

   

 

 

 
   203,322    25,679    54,134    208,061 
  

 

 

   

 

 

   

 

 

   

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

13.

Derivatives (continued)

   2017   2018 
   Assets   Liabilities   Assets   Liabilities 

Exchange traded:

        

Equity futures

   72    805    15,937    778 

Equity options

   23,562    18,521    37,690    109,795 
  

 

 

   

 

 

   

 

 

   

 

 

 
   23,634    19,326    53,627    110,573 
  

 

 

   

 

 

   

 

 

   

 

 

 
   226,956    45,005    107,761    318,634 
  

 

 

   

 

 

   

 

 

   

 

 

 

Commodity related:

        

Over the counter:

        

Commodity swaps and forwards

   15,576    22,593    7,548    74,158 

Commodity options

   72    77    27    29 
  

 

 

   

 

 

   

 

 

   

 

 

 
   15,648    22,670    7,575    74,187 
  

 

 

   

 

 

   

 

 

   

 

 

 

Exchange traded:

        

Commodity futures

   6,037    315    8,226    4,016 
  

 

 

   

 

 

   

 

 

   

 

 

 
  W21,685    22,985    15,801    78,203 
  

 

 

   

 

 

   

 

 

   

 

 

 

Hedge:

        

Currency forwards

  W50,492    1,567    9,185    30,497 

Currency swaps

   59,399    161,896    21,976    79,492 

Interest rate swaps

   9,511    519,364    35,131    483,233 
  

 

 

   

 

 

   

 

 

   

 

 

 
   119,402    682,827    66,292    593,222 
  

 

 

   

 

 

   

 

 

   

 

 

 
  W3,400,178    3,487,661    1,793,613    2,439,892 
  

 

 

   

 

 

   

 

 

   

 

 

 

(c)

Gain or loss on valuation of derivatives for the years ended December 31, 2016, 2017 and 2018 are as follows:

   2016  2017  2018 

Foreign currency related

    

Over the counter

    

Currency forwards

  W(80,907)   85,498   41,188 

Currency swaps

   7,193   91,410   (34,444) 

Currency options

   9,704   5,422   8,247 
  

 

 

  

 

 

  

 

 

 
   (64,010)   182,330   14,991 
  

 

 

  

 

 

  

 

 

 

Exchange traded

    

Currency futures

   (33)   (137)   11 
  

 

 

  

 

 

  

 

 

 
   (64,043)   182,193   15,002 
  

 

 

  

 

 

  

 

 

 

Interest rates related

    

Over the counter

    

Interest rate swaps

   (68,490)   (17,805)   86,675 

Interest rate options

   1,116   413   (1,459) 
  

 

 

  

 

 

  

 

 

 
   (67,374)   (17,392)   85,216 
  

 

 

  

 

 

  

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

13.

Derivatives (continued)

   2016  2017  2018 

Exchange traded

    

Interest rate futures

   3,849   6,950   (2,512) 
  

 

 

  

 

 

  

 

 

 
   (63,525)   (10,442)   82,704 
  

 

 

  

 

 

  

 

 

 

Credit related

    

Over the counter

    

Credit swaps

   10,761   46,593   (8,318) 

Equity related

    

Over the counter

    

Equity swap and forwards

   111,723   73,490   (270,929) 

Equity options

   11,639   36,662   4,326 
  

 

 

  

 

 

  

 

 

 
   123,362   110,152   (266,603) 
  

 

 

  

 

 

  

 

 

 

Exchange traded

    

Equity futures

   626   (733)   15,159 

Equity options

   3,420   22,315   (44,163) 
  

 

 

  

 

 

  

 

 

 
   4,046   21,582   (29,004) 
  

 

 

  

 

 

  

 

 

 
   127,408   131,734   (295,607) 
  

 

 

  

 

 

  

 

 

 

Commodity related

    

Over the counter

    

Commodity swaps and forwards

   (8,988)   13,435   (89,902) 

Commodity options

   (44)   (10)   33 
  

 

 

  

 

 

  

 

 

 
   (9,032)   13,425   (89,869) 
  

 

 

  

 

 

  

 

 

 

Exchange traded

    

Commodity futures

   98   5,722   4,209 
  

 

 

  

 

 

  

 

 

 
   (8,934)   19,147   (85,660) 
  

 

 

  

 

 

  

 

 

 

Hedge

    

Currency forwards

   (80,958)   48,050   (26,031) 

Currency swaps

   19,366   (143,737)   66,156 

Interest rate swaps

   (239,596)   (191,233)   38,767 
  

 

 

  

 

 

  

 

 

 
   (301,188)   (286,920)   78,892 
  

 

 

  

 

 

  

 

 

 
  W(299,521)   82,305   (212,987) 
  

 

 

  

 

 

  

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

13.

Derivatives (continued)

(d)

Impact of hedge accounting on the consolidated financial statements

i)

Gains (losses) on fair value hedged items and hedging instruments attributable to the hedged ineffectiveness for the year ended December 31, 2018 were as follows:

   Gains on
fair value hedges
(hedged items)		  Gains on
fair value hedges
(hedging
instruments)		  Hedge ineffectiveness
recognized in profit
or loss (*2)		 

Fair value hedges

    

Interest rate swaps (*1)

  W(76,573)   79,635   3,062 

Foreign exchange risk (*1)

   55,188   (60,380)   (5,192) 
  

 

 

  

 

 

  

 

 

 
  W(21,385)   19,255   (2,130) 
  

 

 

  

 

 

  

 

 

 

(*1)

The related account categories are presented as interest rate swap assets / liabilities and currency swap assets.

(*2)

Ineffective portion of hedge: The difference between hedging instruments and hedged items

ii)

Due to the ineffectiveness of hedge of cash flow risk and hedge of net investment in foreign operations during the year, the amounts recognized in the income statement and other comprehensive income are as follows.

   Gains on hedges
recognized in other
comprehensive income		  Hedge ineffectiveness
recognized in profit
or loss (*2)		  From cash flow hedge
reserve to profit or loss
Reclassified amount		 

Cash flow hedges

    

Foreign exchange risk (*1)

  W65,386   (5,188)   70,051 

Interest rate risk (*1)

   (23,186)   —     —   

Hedge of net investments

    

Foreign exchange risk (*1)

   (35,879)   (3,765)   —   
  

 

 

  

 

 

  

 

 

 
  W6,321   (8,953)   70,051 
  

 

 

  

 

 

  

 

 

 

(*1)

The related account categories are presented as interest rate swap assets / liabilities and currency swap assets / liabilities, currency forwards assets / liabilities and borrowings.

(*2)

Ineffective portion of hedge: The difference between hedging instruments and hedged items.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

13.

Derivatives (continued)

(e)

Nominal values and average hedge ratio for derivatives as of December 31, 2018 are as follows:

   2018 
   Less than
1 year		  1~2
years		  2~3
years		  3~4
years		  4~5
years		  More than
5 years		  Total 

Interest risk:

        

Nominal values:

  W190,000   737,632   723,177   707,254   1,305,584   6,484,084   10,147,731 

Average hedge ratio:

   100%   100%   100%   100%   100%   100%   100% 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Exchange risk:

        

Nominal values:

   2,731,517   1,958,746   827,158   1,038,935   302,423   —     6,858,779 

Average hedge ratio:

   100%   100%   100%   100%   100%   —     100% 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(f)

Effect of hedge accounting on financial statement, statement of comprehensive income, statement of changes in equity

i)

Purpose and strategy of risk avoidance

The Group transacts with derivative financial instruments to hedge its interest rate risk and currency risk arising from the assets and liabilities of the Group. The Group applies the fair value hedge accounting for the changes in the market interest rates of the Korean won structured notes, foreign currency generated financial debentures, structured deposits in foreign currencies, foreign currency structured deposits and foreign currency investment receivables; and cash flow hedge accounting for interest rate swaps and currency swaps to hedge cash flow risk due to interest rates and foreign exchange rates of the Korean won debt, the Korean won bonds, foreign currency bonds, etc. In addition, in order to hedge the exchange rate risk of the net investment in overseas business, the Group applies the net investment hedge accounting for foreign operations using currency forward andnon-derivative financial instruments.

ii)

Effect of derivatives on statement financial position, statement of comprehensive income, statement of changes in equity

   Nominal amount   BV of asset (*1)   BV of liabilities (*1)   Changes if fair
value in the period		 

Fair value hedges

        

Interest rate swap

  W9,377,731    35,093    467,381    55,244 

Currency swap

   33,543    433    —      (1,502) 

Cash flow hedge

        

Interest rate swap

   770,000    38    15,853    (23,186) 

Currency swap

   4,110,285    21,543    79,492    (54) 

Currency forward

   1,298,686    3,191    24,925    (33,460) 

Hedge of net investments in foreign operations

        

Currency forward

   223,620    5,994    5,572    (3,261) 

Borrowings

   1,192,645    —      1,186,792    (36,383) 

(*1)

The related account categories are presented as interest rate swap assets / liabilities and currency forwards.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

13.

Derivatives (continued)

iii)

Effect of hedging items on statement financial position, statement of comprehensive income, statement of changes in equity

   BV
of asset		   BV of
liabilities		   Assets of
Cumulative
fair value
hedge
adjustment		  Liabilities of
Cumulative
fair value
hedge
adjustment		  Changes if
fair value in
the period		  Cash flow
hedge
reserve		  Foreign
currency
conversion
reserves		 

Fair value hedges

          

Interest rate risk

  W293,215    8,873,059    (2,832)   (524,459)   (56,462)   —     —   

Foreign exchange risk

   62,406    —      —     —     2,675   —     —   

Cash flow hedge

          

Interest rate risk

   —      1,539,005    —     —     —     (10,184)   —   

Foreign exchange risk

   2,795,320    2,716,148    —     —     63,860   (2,006)   —   

Hedge of net investments in foreign operations

          

Foreign exchange risk

   —      —      —     —     (35,879)   —     138,416 

(*1)

The related account categories are presented as interest rate swap assets / liabilities and currency forwards.

14.Property and equipment, net

Loans at amortized cost

 

 (a)Property and equipment

Loans at amortized cost as of December 31, 2016 and 20172018 are as follows:

 

   2016 
   Acquisition cost   Accumulated
depreciation		   Carrying amount 

Land

  W1,885,233    —      1,885,233 

Buildings

   1,164,668    (223,625)    941,043 

Other

   1,976,152    (1,656,815)    319,337 
  

 

 

   

 

 

   

 

 

 
  W5,026,053    (1,880,440)    3,145,613 
  

 

 

   

 

 

   

 

 

 

   2017 
   Acquisition cost   Accumulated
depreciation		   Carrying amount 

Land

  W1,819,912    —      1,819,912 

Buildings

   1,158,661    (275,240)    883,421 

Other

   1,958,787    (1,640,348)    318,439 
  

 

 

   

 

 

   

 

 

 
  W4,937,360    (1,915,588)    3,021,772 
  

 

 

   

 

 

   

 

 

 

 (b)Changes in property and equipment for the years ended December 31, 2016 and 2017 are as follows:2018

   2016 
   Land   Buildings   Other   Total 

Beginning balance

  W1,795,960    926,249    333,206    3,055,415 

Acquisitions (*1)

   84,616    67,423    123,418    275,457 

Disposals (*1)

   (1,107)    (921)    (4,070)    (6,098) 

Depreciation

   —      (34,785)    (142,620)    (177,405) 

Impairment losses

   (946)    (1,258)    —      (2,204) 

Amounts transferred from (to) investment property

   6,125    (17,023)    —      (10,898) 

Amounts transferred from intangible assets

   3    76    —      79 

Amounts transferred from assets held for sale

   410    1    —      411 

Effects of foreign currency movements

   172    1,281    9,403    10,856 
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  W1,885,233    941,043    319,337    3,145,613 
  

 

 

   

 

 

   

 

 

   

 

 

 

 
(*1)

Household loans

W15,405 million of buildings increased by transfers fromconstruction-in-progress.120,832,081

Corporate loans

152,164,476

Public and other loans

2,831,026

Loans to banks

3,585,563

Credit card receivables

22,447,614

301,860,760

Discount

(23,588) 

Deferred loan origination costs and fees

497,368

302,334,540

Less: Allowance for credit loss

(2,725,068) 

W 299,609,472

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

14.Property and equipment, net

Loans at amortized cost (continued)

 

   2017 
   Land   Buildings   Other   Total 

Beginning balance

  W1,885,233    941,043    319,337    3,145,613 

Acquisitions (*1)

   1,460    24,354    129,435    155,249 

Disposals (*1)

   (5,487)    (357)    (3,163)    (9,007) 

Depreciation

   —      (44,285)    (129,256)    (173,541) 

Impairment losses

   —      —      (16)    (16) 

Amounts transferred from (to) investment property

   (59,263)    (32,519)    —      (91,782) 

Amounts transferred from assets held for sale

   (1,815)    (3,521)    —      (5,336) 

Effects of foreign currency movements

   (216)    (1,294)    2,102    592 
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  W1,819,912    883,421    318,439    3,021,772 
  

 

 

   

 

 

   

 

 

   

 

 

 
(b)

Changes in book value of Loans at amortized cost and other assets as of December 31, 2018 are as follows:

  Loans at amortized cost  Other assets (*1) 
 12 month
expected
credit loss		  Life time
expected
credit loss		  Impaired
financial
asset		  12 month
expected
credit loss		  Life time
expected
credit loss		  Impaired
financial
asset		  Total 

Beginning balance

 W245,310,809   30,030,619   1,784,601   31,599,203   456,538   23,243   309,205,013 

Transfer (from) to 12 month expected credit losses

  7,532,588   (7,527,159)   (5,429)   28,028   (28,024)   (4)   —   

Transfer (from) to lifetime expected credit losses

  (20,879,174)   20,943,897   (64,723)   (51,596)   51,607   (11)   —   

Transfer (from) to credit- impaired financial assets

  (1,948,419)   (185,166)   2,133,585   (22,162)   (2,986)   25,148   —   

Origination

  130,894,396   529,735   315,389   30,085,141   27,251   21,930   161,873,842 

Collection

  (93,938,952)   (10,682,116)   (1,008,819)   (30,207,574)   (410,559)   (4,236)   (136,252,256) 

Charge off

  —     —     (851,397)   —     —     (20,984)   (872,381) 

Disposal

  (121,915)   (19,056)   (582,491)   —     (495)   (13,083)   (737,040) 

Others (*2)

  749,646   (52,157)   (23,752)   77,654   6,129   —     757,520 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Ending balance

 W267,598,979   33,038,597   1,696,964   31,508,694   99,461   32,003   333,974,698 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 (*1)

The amortized cost includes the gross carrying amount of deposits and other assets.

(*2)

Other changes are due to bond adjustment, investment conversion, and exchange rate fluctuations.

(*3)

The amount of uncollected loans receivable (principal and interest) isW14,285 9,597,389 million, which is written off as of buildings increased by transfers fromconstruction-in-progress.December 31, 2018.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

14.

Loans at amortized cost (continued)

 

 (c)Insured

Changes in allowance for credit loss of Loans at amortized cost and other financial assets as of December 31, 20172018 are as follows:

   Loans at amortized cost  Other assets (*1) 
  12 month
expected
credit loss		  Life time
expected
credit loss		  Impaired
financial
asset		  12 month
expected
credit loss		  Life time
expected
credit loss		  Impaired
financial
asset		  Total 

Beginning balance

  W730,613   1,088,259   1,053,114   39,048   7,666   20,166   2,938,866 

Transfer (from) to 12 month expected credit losses

   115,780   (114,614)   (1,166)   581   (578)   (3)   —   

Transfer (from) to lifetime expected credit losses

   (61,415)   103,502   (42,087)   (212)   222   (10)   —   

Transfer (from) to credit- impaired financial assets

   (2,509)   (40,729)   43,238   (94)   (2,209)   2,303   —   

Provided (reversed)

   23,662   159,565   521,288   (1,998)   1,775   24,293   728,585 

Charge off

   —     —     (851,397)   —     —     (20,984)   (872,381) 

Discount

   —     —     (20,778)   —     —     —     (20,778) 

Disposal

   (636)   (374)   (59,567)   —     (7)   (2,736)   (63,320) 

Collection

   —     —     311,280   —     —     1,815   313,095 

Others (*2)

   (74,495)   (167,687)   12,221   2,602   61   (80)   (227,378) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Ending balance

  W731,000   1,027,922   966,146   39,927   6,930   24,764   2,796,689 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(*1)

The amortized cost includes the gross carrying amount of deposits and other assets.

(*2)

Other changes are due to bond adjustment, investment conversion, and exchange rate fluctuations.

(d)

Changes in deferred loan origination costs for the year ended December 31, 2018 are as follows:

 

Type of insurance

Assets insuredAmount covered   

Insurance company

2018

Comprehensive insurance for financial institutionBeginning balance (*1)

Cash and cash
equivalent
(Including ATM)		  W22,700434,746 Samsung Fire and 7 other entities

Package insuranceLoan origination

General asset risk   1,473,918235,032

Amortization

   Samsung Fire and 5 other entities(172,410) 

Fire insurance

Furniture and
fixtures		19,285Samsung Fire and 3 other entities

Directors’ and officers’ insurance

Directors’ and
officers’ liabilities		213,470MERITZ Fire and 8 other entities

Employee accident insurance

Employees17,700MERITZ Fire and 2 other entities

Pilferage insurance

Cash and securities77,785Samsung Fire and 8 other entities

Others

Securities, Fidelity
guarantee and
liability insurance
and others		26,355DB INSURANCE and 7 other entities
  

 

 

 

Ending balance

  W1,851,213497,368 
  

 

 

 

 (*1)

The beginning balance for 2018 was restated in accordance with IFRS 9.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

15.Intangible assets, net

Loans

 

 (a)Intangible assets

Loans as of December 31, 2016 and 2017 are as follows:

 

   2016   2017 

Goodwill

  W3,873,060    3,915,163 

Software

   94,261    83,829 

Development cost

   56,563    75,322 

Other

   202,628    197,655 
  

 

 

   

 

 

 
  W4,226,512    4,271,969 
  

 

 

   

 

 

 
2017

Household loans

W111,590,777

Corporate loans

139,989,642

Public and other

2,297,631

Loans to banks

2,969,784

Card receivables

20,640,857

277,488,691

Discount

(44,936) 

Deferred loan origination costs and fees

432,615

277,876,370

Allowance for credit losses

(2,310,604) 

W275,565,766

 

 (b)

Changes in intangible assetsthe allowance for credit losses for the yearsyear ended December 31, 2016 and 2017 are as follows:

 

   2016 
   Goodwill  Software  Development
cost		  Other  Total 

Beginning balance

  W3,871,482   93,914   66,843   234,100   4,266,339 

Acquisitions

   —     37,682   21,001   29,882   88,565 

Business combination

   4,427   —     —     —     4,427 

Disposals

   —     (37)   —     (10,725)   (10,762) 

Impairment (*1)

   (2,849)   —     —     (261)   (3,110) 

Amortization (*2)

   —     (37,636)   (31,281)   (50,422)   (119,339) 

Effects of foreign currency movements

   —     338   —     133   471 

Other

   —     —     —     (79)   (79) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Ending balance

  W3,873,060   94,261   56,563   202,628   4,226,512 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

   2017 
   Goodwill   Software  Development
cost		  Other  Total 

Beginning balance

  W3,873,060    94,261   56,563   202,628   4,226,512 

Acquisitions

   —      27,354   40,378   56,982   124,714 

Business combination

   42,103    —     —     —     42,103 

Disposals

   —      (21)   —     (12,901)   (12,922) 

Impairment (*1)

   —      —     (206)   26   (180) 

Amortization (*2)

   —      (38,095)   (21,413)   (48,941)   (108,449) 

Effects of foreign currency movements

   —      330   —     (139)   191 
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Ending balance

  W3,915,163    83,829   75,322   197,655   4,271,969 
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 
   2017 
   Loans   Other (*3)   Total 

Beginning balance

  W2,360,795    66,896    2,427,691 

Provision for (reversal of) allowance (*1)

   799,577    15,672    815,249 

Write-offs

   (973,943)    (20,063)    (994,006) 

Effect of discounting (*2)

   (23,316)    —      (23,316) 

Disposal

   (63,091)    16    (63,075) 

Recoveries

   311,042    1,591    312,633 

Others (*1)(*4)

   (100,460)    (379)    (100,839) 
  

 

 

   

 

 

   

 

 

 

Ending balance

  W2,310,604    63,733    2,374,337 
  

 

 

   

 

 

   

 

 

 

 

(*1)The Group recognized impairment losses from golf and condo memberships with indefinite useful lives

As the accounting for the difference between recoverable amounts and carrying amounts.acquisition of ANZ Retail business by Shinhan Bank of Vietnam was completed, the amount was adjusted retrospectively.

(*2)The Group recognized amortization of intangible asset

Interest income from impaired financial assets

(*3)

Included allowance for due from banks and other assets

(*4)

Other changes were due to debt restructuring, debt-equity swap, and foreign exchange rate, etc.

(c)

Changes in general and administrative expenses and net other operating expense.deferred loan origination costs for the year ended December 31, 2017 are as follows:

2017

Beginning balance

W395,394

Loan origination

178,890

Amortization

(141,669) 

Ending balance

W432,615

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

15.16.Intangible assets, net

Securities at fair value through other comprehensive income and securities at amortized cost

(a)

Details of securities at FVOCI and securities at amortized cost as of December 31, 2018 are as follows:

2018

Securities at FVOCI:

Debt securities:

Government bonds

W8,975,391

Financial institutions bonds

17,341,330

Corporate bonds

11,360,924

37,677,645

Equity securities (*1):

Stocks

630,010

Equity investments

6,515

636,525

38,314,170

Securities at amortized cost:

Debt securities:

Government bonds

18,000,454

Financial institutions bonds

2,171,623

Corporate bonds and others

8,306,059

28,478,136

W66,792,306

(*1)

Equity securities in the above table are classified as other comprehensive income – equity securities designated as fair value items, and other comprehensive income and fair value options were exercised for the purpose of holding as required by the policy.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

16.

Securities at fair value through other comprehensive income and securities at amortized cost (continued)

(b)

Changes in carrying value of debt securities at fair value through other comprehensive income and securities at amortized cost for the year ended December 31, 2018 are as follows:

  Securities at fair value through other
comprehensive income		  Securities at amortized cost 
  12 month
expected
credit loss		  Life time
expected
credit loss		  Total  12 month
expected
credit loss		  Life time
expected
credit loss		  Total 

Beginning allowance

 W36,641,928   15,879   36,657,807   24,403,423   21,444   24,424,867 

Transfer to 12 month expected credit loss

  —     —     —     —     —     —   

Transfer to life time expected credit loss

  (26,187)   26,187   —     —     —     —   

Transfer to impaired financial asset

  —     —     —     —     —     —   

Origination

  26,938,512   98,778   27,037,290   5,836,342   —     5,836,342 

Disposal

  (7,182,343)   (18,687)   (7,201,030)   —     —     —   

Repayment

  (19,338,938)   —     (19,338,938)   (1,607,467)   (3)   (1,607,470) 

Others (*1)

  538,842   (16,326)   522,516   (167,377)   1,034   (166,343) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Ending balance

 W37,571,814   105,831   37,677,645   28,464,921   22,475   28,487,396 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(*1)

Included the effects from changing currency rate.

 

 (c)Goodwill

Changes in allowance for credit loss of debt securities at fair value through other comprehensive income and securities at amortized cost for the year ended December 31, 2018 are as follows:

i) Goodwill allocated in

  Securities at fair value through other
comprehensive income		  Securities at amortized cost 
  12 month
expected
credit loss		  Life time
expected
credit loss		  Total  12 month
expected
credit loss		  Life time
expected
credit loss		  Total 

Beginning allowance

 W17,038   1,938   18,976   6,327   2,232   8,559 

Transfer to 12 month expected credit loss

  —     —     —     —     —     —   

Transfer to life time expected credit loss

  (234)   234   —     —     —     —   

Transfer to impaired financial asset

  —     —     —     —     —     —   

Provided (reversed)

  15,286   (3,220)   12,066   4,615   (2,215)   2,400 

Disposal

  (5,251)   (229)   (5,480)   —     —     —   

Others (*1)

  (1,117)   1,639   522   (1,699)   —     (1,699) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Ending balance

 W25,722   362   26,084   9,243   17   9,260 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(*1)

Included the effects from changing currency rate

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Group’s CGUsConsolidated Financial Statements

(In millions of won)

16.

Securities at fair value through other comprehensive income and securities at amortized cost (continued)

(d)

Gain or loss on disposal of securities at fair value through other comprehensive income and securities at amortized cost for the year ended December 31, 2018 are as follows:

2018

Gain on disposal of securities at FVOCI

W28,018

Loss on disposal of securities at FVOCI

(7,464) 

Loss on disposal of securities at amortized cost

(9) 

W20,545

(e)

Income or loss on equity securities at fair value through other comprehensive income

As of December 31, 2016 and 20172018, the Group recognizes dividends amounting toW16,871 million related to equity securities at fair value through other comprehensive income.

In addition, the disposition of equity securities at fair value through other comprehensive income are as follows:

 

   2016   2017 

Banking

  W781,859    823,962 

Credit card

   2,773,231    2,773,231 

Securities

   5,645    5,645 

Life insurance

   275,371    275,371 

Others

   36,954    36,954 
  

 

 

   

 

 

 
  W3,873,060    3,915,163 
  

 

 

   

 

 

 
2018

Fair value at the date of disposal

W3,285

Cumulative net profit at the time of disposal

(3,635) 

ii) Changes in goodwill for

17.

Available-for-sale financial assets andheld-to-maturity financial assets

(a)

Available-for-sale financial assets andheld-to-maturity financial assets as of December 31, 2017 are as follows:

2017

Available-for-sale financial assets:

Debt securities:

Government bonds

W7,570,104

Financial institution bonds

17,649,694

Corporate bonds and others

11,966,754

37,186,552

Equity securities (*1):

Stocks

1,026,666

Equity investments

749,818

Beneficiary certificates

3,126,851

Others

27,050

4,930,385

42,116,937

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the years ended December 31, 2016 and 2017Consolidated Financial Statements

(In millions of won)

 

   2016   2017 

Beginning balance

  W3,871,482    3,873,060 

Acquisitions through business combinations (*1)

   4,427    42,103 

Impairment loss (*2)

   (2,849)    —   
  

 

 

   

 

 

 

Ending balance

  W3,873,060    3,915,163 
  

 

 

   

 

 

 
17.

Available-for-sale financial assets andheld-to-maturity financial assets (continued)

2017

Held-to-maturity financial assets:

Debt securities:

Government bonds

15,164,133

Financial institutions bonds

2,708,148

Corporate bonds and others

7,118,399

24,990,680

W67,107,617

 

 (*1)The Group recognized

Equity securities with no quoted market prices in active markets and for which the goodwillfair value cannot be measured reliably are recorded at cost wereW126,220 million as of December 31, 2017.

(b)

Gain or loss on sale ofavailable-for-sale financial assets for the Shinhan Bank Vietnam Ltd.year ended December 31, 2016 and 2017 are as follows:

   2016   2017 

Gain on sale ofavailable-for-sale financial assets

  W707,134    529,411 

Loss on sale ofavailable-for-sale financial assets

   (59,593)    (30,224) 
  

 

 

   

 

 

 
  W647,541    499,187 
  

 

 

   

 

 

 

18.

Property and equipment

(a)

Details of property and equipment as of December 31, 2017 and 2018 were as follows:

   2017 
   Acquisition cost   Accumulated
depreciation		   Book value 

Land

  W1,819,912    —      1,819,912 

Buildings

   1,158,661    (275,240)    883,421 

Others

   1,958,787    (1,640,348)    318,439 
  

 

 

   

 

 

   

 

 

 
  W 4,937,360    (1,915,588)    3,021,772 
  

 

 

   

 

 

   

 

 

 

   2018 
   Acquisition cost   Accumulated
depreciation		   Book value 

Land

  W1,827,711    —      1,827,711 

Buildings

   1,173,888    (321,319)    852,569 

Others

   2,002,755    (1,679,149)    323,606 
  

 

 

   

 

 

   

 

 

 
  W 5,004,354    (2,000,468)    3,003,886 
  

 

 

   

 

 

   

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

18.

Property and equipment (continued)

(b)

Changes in 2017. (note 49)property and equipment for the years ended December 31, 2017 and 2018 were as follows:

   2017 
   Land   Buildings   Others   Total 

Beginning balance

  W1,885,233    941,043    319,337    3,145,613 

Acquisitions (*1)

   1,460    24,354    129,435    155,249 

Disposals (*1)

   (5,487)    (357)    (3,163)    (9,007) 

Depreciation

   —      (44,285)    (129,256)    (173,541) 

Impairment

   —      —      (16)    (16) 

Amounts transferred from(to) investment properties

   (59,263)    (32,519)    —      (91,782) 

Amounts transferred from(to)non-current assets held for sale

   (1,815)    (3,521)    —      (5,336) 

Effects of foreign currency movements

   (216)    (1,294)    2,102    592 
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  W1,819,912    883,421    318,439    3,021,772 
  

 

 

   

 

 

   

 

 

   

 

 

 

(*1)

W14,285 million transferred fromconstruction-in progress was included.

   2018 
   Land   Buildings   Others   Total 

Beginning balance

  W1,819,912    883,421    318,439    3,021,772 

Acquisitions (*1)

   33    14,612    136,244    150,889 

Disposals (*1)

   (17,735)    (3,282)    (9,699)    (30,716) 

Depreciation

   —      (47,207)    (124,564)    (171,771) 

Impairment

   —      —      —      —   

Amounts transferred from(to) investment property

   23,972    4,227    —      28,199 

Amounts transferred from(to)non-current assets held for sale (*2)

   (32)    (48)    —      (80) 

Effects of foreign currency movements

   1,561    846    3,186    5,593 
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  W1,827,711    852,569    323,606    3,003,886 
  

 

 

   

 

 

   

 

 

   

 

 

 

(*1)

W6,319 million transferred fromconstruction-in progress was included.

 (*2)The Group recognized full impairment on the goodwill allocated to PT. Shinhan Indo Finance in prior year.

Included buildings, land.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

18.

Property and equipment (continued)

iii) Goodwill impairment test

(c)

Insured assets and liability insurance as of December 31, 2018 were as follows:

Type of insurance

Insured assetsAmount covered

Insurance company

Comprehensive insurance for financial institutions

Cash (including
ATM)		23,200

Samsung Fire & Marine

Insurance Co., Ltd., etc.

Comprehensive Property insurance

Property Total Risk,
Machine Risk,
General Liability
Liability Collateral		1,328,969

Samsung Fire & Marine

Insurance Co., Ltd., etc.

Fire insurance

Business property
and real estate		70,351

Meritz Fire & Marine

Insurance Co., Ltd., etc.

Compensation liability insurance for officers

Officer liability50,000

Meritz Fire & Marine

Insurance Co., Ltd., etc.

Compensation liability insurance for employee accident

Executives32,743

Meritz Fire & Marine

Insurance Co., Ltd., etc.

Burglary insurance

Cash and securities18,195

Samsung Fire & Marine

Insurance Co., Ltd., etc.

Others

Personal
information liability
insurance		80,724

Samsung Fire & Marine

Insurance Co., Ltd., etc.

19.

Intangible assets

(a)

Details of intangible assets as of December 31, 2017 and 2018 were as follows:

   2017 (*1)   2018 

Goodwill

  W3,901,260    3,903,518 

Software

   83,829    102,393 

Development cost

   75,322    82,536 

Others

   212,910    231,687 
  

 

 

   

 

 

 
  W4,273,321    4,320,134 
  

 

 

   

 

 

 

(*1)

As the accounting treatment for the acquisition of ANZ Retail business by Shinhan Bank Vietnam Co. Ltd was completed, the amount was adjusted retrospectively.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

19.

Intangible assets (continued)

(b)

Changes in intangible assets for the years ended December 31, 2017 and 2018 were as follows:

   2017 
   Goodwill   Software  Development
cost		  Other  Total 

Beginning balance

  W3,873,060    94,261   56,563   202,628   4,226,512 

Acquisitions

   —      27,354   40,378   56,982   124,714 

Business combination (*1)

   28,200    —     —     15,255   43,455 

Disposals

   —      (21)   —     (12,901)   (12,922) 

Impairment (*2)

   —      —     (206)   26   (180) 

Amortization (*3)

   —      (38,095)   (21,413)   (48,941)   (108,449) 

Effects of foreign currency movements

   —      330   —     (139)   191 
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Ending balance

  W3,901,260    83,829   75,322   212,910   4,273,321 
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

(*1)

As the accounting treatment for the acquisition of ANZ Retail business by Shinhan Bank Vietnam Co. Ltd was completed, the amount was adjusted retrospectively.

(*2)

Memberships such as golf and condominium memberships are intangible assets that cannot be limited to a specific period of time. If the market value of the exchanges is less than the carrying amount at the end of the reporting period, the impairment loss is recognized.

(*3)

Included general administrative expense and other operating income at comprehensive income.

   2018 
   Goodwill   Software  Development
cost		  Other  Total 

Beginning balance

  W3,901,260    83,829   75,322   212,910   4,273,321 

Acquisitions

   —      56,009   38,230   69,501   163,740 

Business combination

   2,258    —     —     —     2,258 

Disposals

   —      (334)   (5,880)   (7,117)   (13,331) 

Impairment (*1)

   —      —     (706)   (362)   (1,068) 

Amortization (*2)

   —      (40,792)   (24,430)   (41,957)   (107,179) 

Effects of foreign currency movements

   —      3,681   —     (1,288)   2,393 
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Ending balance

  W3,903,518    102,393   82,536   231,687   4,320,134 
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

(*1)

Memberships such as golf and condominium memberships are intangible assets that cannot be limited to a specific period of time. If the market value of the exchanges is less than the carrying amount at the end of the reporting period, the impairment loss is recognized.

(*2)

Included general administrative expense and other operating income at comprehensive income.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

19.

Intangible assets (continued)

(c)

Goodwill

i)

Goodwill allocated in the Group’s CGUs as of December 31, 2017 and 2018

   2017 (*1)   2018 

Banking

  W810,058    810,058 

Credit card

   2,773,231    2,773,231 

Securities

   5,646    7,904 

Life insurance

   275,371    275,371 

Others

   36,954    36,954 
  

 

 

   

 

 

 
  W3,901,260    3,903,518 
  

 

 

   

 

 

 

(*1)

As the accounting treatment for the acquisition of ANZ Retail business by Shinhan Bank Vietnam Co. Ltd. was completed, the amount was adjusted retrospectively.

ii)

Changes in goodwill for the years ended December 31, 2017 and 2018

   2017 (*1)   2018 

Beginning balance

  W3,873,060    3,901,260 

Acquisitions through business combinations (*2)

   28,200    2,258 
  

 

 

   

 

 

 

Ending balance

  W3,901,260    3,903,518 
  

 

 

   

 

 

 

(*1)

As the accounting treatment for the acquisition of ANZ Retail business by Shinhan Bank Vietnam Co. Ltd. was completed, the amount was adjusted retrospectively (Note 57).

(*2)

Goodwill recognized as a result of the acquisition of the business by Shinhan Financial Investment Co., Ltd. (Note 58).

iii)

Goodwill impairment test

The recoverable amounts of each CGU were evaluated based on their respective value in use.

 

Explanation on evaluation method

The income approach was applied when evaluating the recoverable amounts based on value in use, considering the characteristics of each unit or group of CGU.

 

Projection period

When evaluating the value in use, 5.5 years of cash flow estimates – July 1, 20172018 through December 31, 20222023 – was used in projection and the value thereafter was reflected as terminal value. In case of Shinhan Life Insurance, only the 30 years of future cash flows were applied since the present value of the future cash flows thereafter is not significant.

 

Discount rates and terminal growth rates

The required rates of return expected by shareholders were applied to the discount rates by calculating the cost of capital which comprises a risk-free interest rate, a market risk premium and systemic risk (beta factor). Expected terminal growth rate is on the basis of inflation rates.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

15.19.

Intangible assets net (continued)

 

Discount rates and terminal growth rates applied to each CGU are as follows:

 

  Discount rates  Terminal growth rate  Discount rates(%)  Terminal growth rate(%)

Banking

  6.6%~13.5%  0.7%~3.4%  7.0~13.8  1.2~2.9

Credit card

  7.6%  1.7%  8.4  1.8

Securities

  11.3%, 12,9%  3.4%  11.9, 12.4  2.9

Life insurance

  8.5%  —    8.5  0.0

Others

  9.4%, 12.0%  1.7%  9.8, 13.2  1.8

iv) Key assumptions

iv)

Key assumptions

Key assumptions used in the discounted cash flow calculations of CGUs (other than Shinhan Life Insurance) are as follows:

 

  2017 2018 2019 2020 2021 2022 and
thereafter		   2018 2019 2020 2021 2022 2023 

CPI growth

   1.9%  1.7%  1.5%  1.6%  1.7%  1.7%    1.6%  1.7%  1.5%  2.1%  2.3%  2.3% 

Real retail sales growth

   2.5%  2.1%  1.9%  2.0%  2.2%  2.2%    3.0%  2.4%  2.2%  2.3%  2.2%  2.2% 

Real GDP growth

   2.9%  2.3%  1.9%  2.6%  2.8%  2.8%    2.9%  2.8%  2.4%  3.2%  3.0%  3.0% 

Key assumptions used in the discounted cash flow calculations of Shinhan Life Insurance are as follows:

 

   Key assumptions 

Rate of return on investment

   3.153.65% 

Risk-based capital ratio

   204.70199.61% 

The values for the CPI growth rate, real retail sales growth rate, real GDP growth rate, rate of return on investment and risk-based capital ratio are based on a combination of internal and external analysis.

v) Total recoverable amount and total carrying value of CGUs to which goodwill has been allocated, are as follows:

v)

Total recoverable amount and total carrying value of CGUs to which goodwill has been allocated, are as follows:

 

   Amount 

Total recoverable amount

  W42,196,35742,291,637 

Total carrying value(*)value

   37,160,56637,775,928 
  

 

 

 
  W5,035,7914,515,709 
  

 

 

 

(*)The goodwill recognized at the acquisition of the retail business of ANZ Vietnam is excluded from the table as the measurement of the fair value of assets acquired and liabilities assumed are not completed (see Note 49).

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

16.20.

Investments in associates

 

 (a)

Investments in associates as of December 31, 20162017 and 2017December 31, 2018 are as follows:

 

Investees

 Country Reporting
date		 Ownership (%) 
   2016  2017 

BNP Paribas Cardif Life Insurance (*1),(*3)

 Korea September 30  14.99   14.99 

Aju Capital Co., Ltd. (*8)

 ” —    12.85   —   

Daewontos Co., Ltd.(*4),(*9)

 ” December 31  36.33   36.33 

Neoplux Technology Valuation Investment
Fund (*1)

 ” September 30  33.33   33.33 

JAEYOUNG SOLUTEC CO.,
LTD. (*1),(*4),(*5)

 ” ”  10.45   9.61 

Partners 4th Growth Investment Fund (*1)

 ” ”  25.00   25.00 

JAEYANG INDUSTRY (*4),(*9)

 ” March 31  25.90   25.90 

Chungyoung INC (*4),(*9)

 ” June 30  18.94   18.94 

DAEKWANG SEMICONDUCTOR CO.,
LTD. (*4),(*9)

 ” ”  20.94   20.94 

Dream High Fund III (*7)

 ” December 31  54.55   54.55 

Asia Pacific No.39 Ship Investment Co., Ltd.

 ” ”  50.00   50.00 

KCLAVIS Meister Fund No.17

 ” ”  26.09   26.09 

SG No.9 Corporate Recovery Private Equity Fund

 ” ”  26.49   26.49 

Plutus-SG Private Equity Fund

 ” ”  26.67   26.67 

SG ARGES Private Equity Fund No.1

 ” ”  24.06   24.06 

OST Progress- 2 Fund

 ” ”  27.62   27.62 

Eum Private Equity Fund No.3

 ” ”  20.76   20.76 

Richmond Private Yong in Retail Facility Real Estate Fund No.1

 ” ”  —     41.80 

KTB Confidence Private Placement

 ” ”  —     30.29 

MeritzAI-SingA330-A Investment Type Private Placement Special Asset Fund

 ” ”  —     23.89 

MeritzAI-SingA330-B Investment Type Private Placement Special Asset Fund

 ” ”  —     20.16 

Pine Asia Unsecured Individual Rehabilitation Bond Fund 18

 ” ”  —     22.86 

Platform Partners brick save Private Investment trust (*7)

 ” ”  —     98.77 

Synergy-Shinhan Mezzanine New Technology Investment Fund

 ” ”  —     47.62 

The Asia Pacific Capital Fund II L.P.

 Cayman
Islands		 ”  25.18   25.18 

Shinhan PraxisK-Growth Global Private Equity Fund (*6)

 Korea ”  18.87   18.87 

Credian Healthcare Private Equity Fund II

 ” ”  34.07   34.07 

Kiwoom Milestone Professional Private Real Estate Trust 19

 ” ”  50.00   50.00 

FG EURO GREEN PRIVATE REAL ESTATE TRUST No.3

 ” ”  21.28   21.28 

Brain Professional Private Trust No.4

 ” ”  27.49   27.49 

Hanhwa US Equity Strategy Private Real Estate Fund No.1

 ” ”  44.84   44.84 

Brain KS Qualified Privately Placed Fund No.6

 ” ”  50.00   50.00 

Investees

 Country Reporting
date		 Ownership (%) 
 2017  2018 

BNP Paribas Cardif Life Insurance (*1)(*3)

 Korea September 30  14.99   14.99 

Daewontos Co., Ltd. (*1)(*4)

 ” December 31  36.33   36.33 

Neoplux Technology Valuation Investment Fund (*1)

 ” September 30  33.33   33.33 

JAEYOUNG SOLUTEC CO., LTD. (*7)

 ” —    9.61   —   

Partners 4th Growth Investment Fund (*1)

 ” September 30  25.00   25.00 

Songrim Partners. (*1)(*4)

 ” ”  35.34   35.34 

KTB Newlake Global Healthcare PEF (*1)

 ” ”  30.00   30.00 

JAEYANG INDUSTRY (*1)(*4)

 ” December 31  25.90   25.90 

Chungyoung INC (*10)

 ” —    18.94   —   

DAEKWANG SEMICONDUCTOR CO., LTD. (*1)(*4)

 ” September 30  20.94   20.94 

Shinhan-Neoplux Energy Newbiz Fund (*1)

 ” ”  23.33   23.33 

Shinhan-Albatross Tech Investment Fund

 ” December 31  50.00   50.00 

Asia Pacific No.39 Ship Investment Co., Ltd. (*7)

 ” —    50.00   —   

KCLAVIS Meister Fund No.17

 ” December 31  26.09   26.09 

SG No.9 Corporate Recovery Private Equity Fund

 ” ”  26.49   26.49 

Plutus-SG Private Equity Fund

 ” ”  26.67   26.67 

SG ARGES Private Equity Fund No.1

 ” ”  24.06   24.06 

OST Progress- 2 Fund (*7)

 ” —    27.62   —   

Eum Private Equity Fund No.3

 ” December 31  20.76   20.76 

Richmond Private Yong in Retail Facility Real Estate Fund No.1 (*7)

 ” —    41.80   —   

KTB Confidence Private Placement

 ” December 31  30.29   30.29 

MeritzAI-SingA330-A Investment Type Private Placement Special Asset Fund

 ” ”  23.89   23.89 

MeritzAI-SingA330-B Investment Type Private Placement Special Asset Fund

 ” ”  20.16   20.16 

Pine Asia Unsecured Individual Rehabilitation Bond Fund 18 (*7)

 ” —    22.86   —   

VOGO DEBT STRATEGY QUALIFIED INV PRIVATE R/E INV TR 4

 ” December 31  20.00   20.00 

Platform Partners Brick Save Private Investment Trust (*6)

 ” ”  98.77   98.77 

Synergy-Shinhan Mezzanine New Technology Investment Fund

 ” ”  47.62   47.62 

The Asia Pacific Capital Fund II L.P.

 Cayman Islands ”  25.18   25.18 

Shinhan PraxisK-Growth Global Private Equity Fund (*5)

 Korea ”  18.87   18.87 

Credian Healthcare Private Equity Fund II

 ” ”  34.07   34.07 

Kiwoom Milestone Professional Private Real Estate Trust 19

 ” ”  50.00   50.00 

AIP EUROGREEN Private Real Estate Investment Trust No.3 (*11)

 ” ”  21.28   21.28 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

16.20.

Investments in associates (continued)

Investees

 Country Reporting
date		 Ownership (%) 
   2016  2017 

M360 CRE Income Fund (*7)

 U.S.A ”  42.83   57.87 

Shinhan Global Healthcare Fund 1(*6)

 Korea December 31  —     4.41 

JB Power TL Investment Type Private Placement Special Asset Fund 7

 ” ”  —     33.33 

IBK AONE convertible 1

 ” ”  —     47.25 

Rico synergy collaboMulti-Mezzanine 3 (*7)

 ” ”  —     50.00 

KB NA Hickory Private Special Asset Fund

 ” ”  —     37.50 

GB Professional Private Investment Trust 6 (*7)

 ” ”  —     94.51 

Koramco Europe Core Private Placement Real Estate FundNo.2-2

 ” ”  —     48.49 

SHBNPP Private Korea Equity Long-Short Professional Feeder (*10)

 ” ”  15.88   9.85 

SHBNPP Private Multi Strategy Professional Feeder No.1 (*8)

 ” —    29.55   —   

Shinhan-Stonebridge Petro PEF (*6)

 ” December 31  1.82   1.82 

BNP Paribas Cardif General Insurance (*1),(*2)

 ” September 30  10.00   10.00 

Axis Global Growth New Technology Investment Association

 ” December 31  —     31.85 

Polaris No7 Start up and Venture Private Equity Fund

 ” ”  —     28.57 

Hermes Private Investment Equity Fund

 ” ”  —     29.17 

Investees

 Country Reporting
date		 Ownership (%) 
 2017  2018 

Brain Professional Private Trust No.4

 ” ”  27.49   27.50 

Hanhwa US Equity Strategy Private Real Estate Fund No.1

 ” ”  44.84   44.84 

Brain KS Qualified Privately Placed Fund No.6

 ” ”  50.00   50.00 

M360 CRE Income Fund (*7)

 U.S.A —    57.87   —   

Shinhan Global Healthcare Fund 1 (*5)

 Korea December 31  4.41   4.41 

JB Power TL Investment Type Private Placement Special Asset Fund 7

 ” ”  33.33   33.33 

IBK AONE convertible 1

 ” ”  47.25   47.25 

Rico Synergy CollaboMulti-Mezzanine 3 (*9)

 ” ”  50.00   50.03 

KB NA Hickory Private Special Asset Fund

 ” ”  37.50   37.50 

GB Professional Private Investment Trust 6 (*6)

 ” ”  94.51   94.51 

Koramco Europe Core Private Placement Real Estate FundNo.2-2

 ” ”  48.49   44.02 

SHBNPP Private Korea Equity Long-Short Professional Feeder (*8)

 ” ”  9.85   21.52 

Shinhan-Stonebridge Petro PEF (*5)

 ” ”  1.82   1.82 

BNP Paribas Cardif General Insurance (*1)(*2)

 ” September 30  10.00   10.00 

Axis Global Growth New Technology Investment Association

 ” December 31  31.85   31.85 

Polaris No7 Start up and Venture Private Equity Fund

 ” ”  28.57   28.57 

Hermes Private Investment Equity Fund

 ” ”  29.17   29.17 

Shinhan AIM FoF Fund 1a

 ” ”  —     24.91 

Daishin Heim Qualified Investor Private Investment Trust No.1808

 ” ”  —     34.48 

Heungkuk High Class Professional Trust Private Fund 37

 ” ”  —     50.00 

IGIS Global Credit Fund150-1

 ” ”  —     25.11 

GX SHINHAN INTERVEST 1st Private Equity Fund

 ” ”  —     25.27 

Soo Commerce Platform Growth Fund

 ” ”  —     24.62 

Partner One Value up I Private Equity Fund

 ” ”  —     27.91 

Genesis No.1 Private Equity Fund

 ” ”  —     22.80 

GMB ICT New Technology Investment Fund

 ” ”  —     26.75 

Soo Delivery Platform Growth Fund

 ” ”  —     30.00 

Genesis North America Power Company No.1 PEF

 ” ”  —     39.92 

SHBNPP MAIN Professional Investment Type Private Mixed Asset Investment Trust No.3

 ” ”  —     23.33 

 

(*1)Financial

The latest financial statements as of September 30, 2017 were used for the equity method since the financial statements as of December 31, 20172018 were not available. Significant trades and events occurred within the period were properly reflected.

(*2)

The Group applies the equity method accounting as the Group has significant influence on the financial and operating policies of the investee through the ability to elect investees’ board members and representation in decision making bodies of the investee.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

20.

Investments in associates (continued)

(*3)

The Group applies the equity method accounting as the Group has a significant influence on the investees through important business transactions.

(*4)The shares

As a part of the investees wererehabilitation process, the Group acquired by debt-equity swap.shares through the conversion of equity investments; as the Group cannot exercise voting rights during the process, the Group has classified the shares as investments at fair value through profit or loss. The Group reclassifiedavailable-for-sale financial assets Securities at fair value through profit or loss to investments in associates as the reorganization procedures were completed and now the Group can normally exercise its voting rights to the investees.

(*5)Although the ownership interests in JAEYOUNG SOLUTEC CO., LTD. were less than 15%, the Group used the equity method as the investee should consult with the Group when the investee decides major management decision such as dividend, business planning or business transfer.
(*6)

As a managing partner, the Group has a significant influence over the investees.

(*7)6)

As a limited partner, the Group does not have an ability to participate in policy-making processes to obtain economic benefit from the investees that would allow the Group to control the entity.

(*8)7)

The associates were disposed or reclassified.

(*9)8)The latest financial statements were used for the equity method since the financial statements as of December 31, 2017 were not available. Significant trades and events occurred within the period were properly reflected.
(*10)

Although the ownership interests in SHBNPP Private Korea Equity Long-Short Professional Feeder were less than 20%, the Group has a significant influence.

(*9)

Although the ownership interests were more than 50%, the Group applies the equity method accounting as the Group does not have an ability to participate in the financial and operating policy-making process.

(*10)

These entities were excluded from the scope of associates due to the Shinhan Bank’s accounting policy change, which is to change significant influence oncriteria from 15% to 20%.

(*11)

During this period, the entity as the investment manager.name of FG EUROGREEN Private Real Estate Investment Trust No.3 has been changed to AIP EUROGREEN Private Real Estate Investment Trust No.3.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

16.20.

Investments in associates (continued)

 

 (b)

Changes in investments in associates for the years ended December 31, 20162017 and 20172018 were as follows:

 

   2016 

Investees

  Beginning
balance		   Investment
and
dividend		  Equity
method
income
(loss)		  Change in
other
comprehensive
income		  Impairment
loss		  Ending
balance		 

BNP Paribas Cardif Life Insurance

  W57,280    —     (2,495)   5,428   —     60,213 

Aju Capital Co., Ltd. (*1)

   34,444    (2,588)   9,038   (58)   —     40,836 

UAMCO., Ltd.

   125,822    (128,827)   2,882   123   —     —   

Daewontos Co., Ltd. (*3)

   —      —     —     —     —     —   

Neoplux Technology Valuation Investment Fund

   1,993    4,768   765   —     —     7,526 

JAEYOUNG SOLUTEC CO., LTD. (*2)

   6,238    —     (504)   2   —     5,736 

Partners 4th Growth Investment Fund

   1,800    3,080   (325)   —     —     4,555 

JAEYANG INDUSTRY (*3)

   —      —     —     —     —     —   

Chungyoung INC

   —      —     —     —     —     —   

DAEKWANG SEMICONDUCTOR CO., LTD.

   —      4,776   —     —     —     4,776 

SHC-IMM New Growth Fund

   3,175    (1,189)   309   —     —     2,295 

Dream High Fund III

   1,556    —     171   1,417   —     3,144 

SHC-EN Fund

   4,312    (4,942)   630   —     —     —   

Albatross Growth Fund

   3,341    (727)   347   (1,389)   —     1,572 

Asia Pacific No.39 Ship Investment Co., Ltd.

   5,085    (837)   342   586   —     5,176 

SG No.9 Corporate Recovery Private Equity Fund

   —      3,886   96   —     —     3,982 

Plutus-SG Private Equity Fund

   —      4,338   (39)   —     —     4,299 

SG ARGES Private Equity Fund No.1

   —      8,955   21   —     —     8,976 

Eum Private Equity Fund No.3

   —      5,982   (49)   —     —     5,933 

The Asia Pacific Capital Fund II L.P.

   33,715    (4,419)   (7,506)   (2,872)   (7,339)   11,579 

BNH-CJ Bio Healthcare Fund

   9,095    (12,892)   3,797   —     —     —   

Korea Investment Gong-pyeong Office Real Estate Investment Trust 2nd

   28,010    (28,631)   1,085   —     —     464 

Shinhan PraxisK-Growth Global Private Equity Fund

   8,614    4,624   (205)   500   —     13,533 

Credian Healthcare Private Equity Fund II

   —      4,148   (61)   —     —     4,087 

Kiwoom Milestone Professional Private Real Estate Trust 19

   —      10,944   (183)   —     —     10,761 

FG EURO GREEN PRIVATE REAL ESTATE TRUST No.3

   —      19,144   461   1,632   —     21,237 

Brain Professional Private Trust No.4

   —      5,000   316   —     —     5,316 

Hanhwa US Equity Strategy Private Real Estate Fund No.1

   —      25,000   747   17   —     25,764 

Brain KS Qualified Privately Placed Fund No.6

   —      5,001   (13)   (92)   —     4,896 

M360 CRE Income Fund

   —      22,992   —     175   —     23,167 

SHBNPP Private Korea Equity Long-Short Professional Feeder

   28,076    (13,467)   (429)   —     —     14,180 
   2017 

Investees

  Beginning
balance		   Investment
and
dividend		  Equity
method
income
(loss)		  Change in
other
comprehensive
income		  Impairment
loss		   Ending
balance		 

BNP Paribas Cardif Life Insurance

  W60,213    (255)   3,682   (11,024)   —      52,616 

Aju Capital Co., Ltd.

   40,836    (42,022)   438   748   —      —   

Daewontos Co., Ltd. (*2)

   —      —     —     —     —      —   

Neoplux Technology Valuation Investment Fund

   7,526    3,890   1,564   490   —      13,470 

JAEYOUNG SOLUTEC CO., LTD. (*1)

   5,736    —     (2,009)   122   —      3,849 

Partners 4th Growth Investment Fund

   4,555    9,220   (385)   —     —      13,390 

JAEYANG INDUSTRY (*2)

   —      —     —     —     —      —   

Chungyoung INC (*2)

   —      —     —     —     —      —   

DAEKWANG SEMICONDUCTOR CO., LTD.

   4,776    —     (952)   —     —      3,824 

Dream High Fund III

   3,144    —     (109)   (830)   —      2,205 

Asia Pacific No.39 Ship Investment Co., Ltd.

   5,176    (802)   300   8   —      4,682 

KCLAVIS Meister Fund No.17

   2,989    —     50   —     —      3,039 

SG No.9 Corporate Recovery Private Equity Fund

   3,982    (192)   173   —     —      3,963 

Plutus-SG Private Equity Fund

   4,299    (132)   84   —     —      4,251 

SG ARGES Private Equity Fund No.1

   8,976    (2,754)   200   —     —      6,422 

OST Progress- 2 Fund

   1,460    3,500   (65)   —     —      4,895 

Eum Private Equity Fund No.3

   5,933    (1,362)   354   —     —      4,925 

Richmond Private Yong in Retail Facility Real Estate Fund No.1

   —      7,223   878   —     —      8,101 

KTB Confidence Private Placement

   —      4,927   377   1,099   —      6,403 

MeritzAI-SingA330-A Investment Type Private Placement Special Asset Fund

   —      6,504   457   (204)   —      6,757 

MeritzAI-SingA330-B Investment Type Private Placement Special Asset Fund

   —      8,012   628   (253)   —      8,387 

Pine Asia Unsecured Individual Rehabilitation Bond Fund 18

   —      5,867   145   —     —      6,012 

Platform Partners Brick Save Private Investment Trust

   —      7,877   192   —     —      8,069 

Synergy-Shinhan Mezzanine New Technology Investment Fund

   —      5,000   (1)   —     —      4,999 

The Asia Pacific Capital Fund II L.P.

   11,579    454   (901)   (3,825)   —      7,307 

Shinhan PraxisK-Growth Global Private Equity Fund

   13,533    6,415   (1,590)   596   —      18,954 

Credian Healthcare Private Equity Fund II

   4,087    —     7   (281)   —      3,813 

Kiwoom Milestone Professional Private Real Estate Trust 19

  W10,761    (222)   (131)   —     —      10,408 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

16.20.

Investments in associates (continued)

 

  2016   2017 

Investees

  Beginning
balance		   Investment
and
dividend		 Equity
method
income
(loss)		   Change in
other
comprehensive
income		 Impairment
loss		 Ending
balance		   Beginning
balance		   Investment
and
dividend		 Equity
method
income
(loss)		 Change in
other
comprehensive
income		 Impairment
loss		 Ending
balance		 

FG EURO GREEN PRIVATE REAL ESTATE TRUST No.3

  W21,237    (841)  641  (577)   —    20,460 

Brain Professional Private Trust No.4

   5,316    —    529  2   —    5,847 

Hanhwa US Equity Strategy Private Real Estate Fund No.1

   25,764    (1,859)  1,591  (17)   —    25,479 

Brain KS Qualified Privately Placed Fund No.6

   4,896    —    (78)  (13)   —    4,805 

M360 CRE Income Fund

   23,167    132,768  9,270  (11,300)   —    153,905 

Shinhan Global Healthcare Fund 1

   —      3,440  (33)   —     —    3,407 

JB Power TL Investment Type Private Placement Special Asset Fund 7

   —      18,268  422   —     —    18,690 

IBK AONE convertible 1

   —      5,000  122   —     —    5,122 

Rico synergy collaboMulti-Mezzanine 3

   —      5,001  25   —     —    5,026 

KB NA Hickory Private Special Asset Fund

   —      33,362  729   —     —    34,091 

GB PROFESSIONAL PRIVATE INVESTMENT TRUST 6

   —      8,600   —     —     —    8,600 

Koramco Europe Core Private Real Estate TrustNo.2-2

   —      21,408  (648)   —     —    20,760 

SHBNPP Private Korea EquityLong-Short Professional Feeder

   14,180    (9,972)  653   —     —    4,861 

SHBNPP Private Multi Strategy Professional Feeder No.1

  W—      5,000  14    —     —    5,014    5,014    (5,049)  35   —     —     —   

Shinhan-Stonebridge Petro PEF

   17,841    (2)  648    —     —    18,487    18,487    —    714   —     —    19,201 

BNP Paribas Cardif General Insurance

   2,584    2,750  (910)  5   —    4,429 

Axis Global Growth New Technology Investment Association

   —      5,000  (47)   —     —    4,953 

Polaris No.7 Entrepreneur Private Equity Fund

   —      4,400  (41)   —     —    4,359 

Hermes Private Investment Equity Fund

   —      17,500  (3)   —     —    17,497 

Others

   22,609    17,008  135    (3,656)   —    36,096    33,394    21,820  4,036  (45)  (144)  59,061 
  

 

   

 

  

 

   

 

  

 

  

 

   

 

   

 

  

 

  

 

  

 

  

 

 
  W393,006    (43,875)  9,995    1,813  (7,339)  353,600   W353,600    282,744  20,393  (25,299)  (144)  631,294 
  

 

   

 

  

 

   

 

  

 

  

 

   

 

   

 

  

 

  

 

  

 

  

 

 

 

(*1)

The market value of the investment isW51,5436,826 million as of December 31, 20162017 based on the quoted market price.

(*2)The market value of the investment isW10,466 million as of December 31, 2016 based on the quoted market price.
(*3)

The Group has stopped recognizing its equity method income or loss due to the investees’ cumulative loss.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

16.20.

Investments in associates (continued)

 

  2017   2018 

Investees

  Beginning
balance		   Investment
and
dividend		 Equity
method
income
(loss)		 Change in
other
comprehensive
income		 Impairment
loss		   Ending
balance		   Beginning
balance		   Investment
and
dividend		 Equity
method
income
(loss)		 Change in
other
comprehensive
income		 Impairment
loss		 Ending
balance		 

BNP Paribas Cardif Life Insurance

  W60,213    (255)  3,682  (11,024)   —      52,616   W52,616    (2,043)  783  (1,540)   —    49,816 

Aju Capital Co., Ltd.

   40,836    (42,022)  438  748   —      —   

Daewontos Co., Ltd. (*2)

   —      —     —     —     —      —   

Daewontos Co., Ltd. (*1)

   —      —     —     —     —     —   

Songrim Partners. (*1)

   48    —    (48)   —     —     —   

Neoplux Technology Valuation Investment Fund

   7,526    3,890  1,564  490   —      13,470    13,470    6,000  (242)  (490)   —    18,738 

JAEYOUNG SOLUTEC CO., LTD. (*1)

   5,736    —    (2,009)  122   —      3,849 

JAEYOUNG SOLUTEC CO., LTD.

   3,849    (2,865)  (836)  (148)   —     —   

Partners 4th Growth Investment Fund

   4,555    9,220  (385)   —     —      13,390    13,390    2,597  625   —     —    16,612 

JAEYANG INDUSTRY (*2)

   —      —     —     —     —      —   

Chungyoung INC (*2)

   —      —     —     —     —      —   

JAEYANG INDUSTRY (*1)

   —      —     —     —     —     —   

KTB Newlake Global Healthcare PEF

   2,653    7,470  (238)   —     —    9,885 

DAEKWANG SEMICONDUCTOR CO., LTD.

   4,776    —    (952)   —     —      3,824    3,824    —    (490)   —     —    3,334 

Dream High Fund III

   3,144    —    (109)  (830)   —      2,205 

Shinhan-Neoplux Energy Newbiz Fund

   1,400    2,800  (226)   —     —    3,974 

Shinhan-Albatross Tech Investment Fund

   2,672    6,000  (70)  306   —    8,908 

Asia Pacific No.39 Ship Investment Co., Ltd.

   5,176    (802)  300  8   —      4,682    4,682    (4,803)  121   —     —     —   

KCLAVIS Meister Fund No.17

   2,989    —    50   —     —      3,039    3,039    —    44   —     —    3,083 

SG No.9 Corporate Recovery Private Equity Fund

   3,982    (192)  173   —     —      3,963    3,963    (3,102)  566   —     —    1,427 

Plutus-SG Private Equity Fund

   4,299    (132)  84   —     —      4,251    4,251    (132)  133   —     —    4,252 

SG ARGES Private Equity Fund No.1

   8,976    (2,754)  200   —     —      6,422    6,422    (2,295)  214   —     —    4,341 

OST Progress- 2 Fund

   1,460    3,500  (65)   —     —      4,895    4,895    (4,895)   —     —     —     —   

Eum Private Equity Fund No.3

   5,933    (1,362)  354   —     —      4,925    4,925    (277)  241   —     —    4,889 

Richmond Private Yong in Retail Facility Real Estate Fund No.1

   —      7,223  878   —     —      8,101    8,101    (10,286)  2,185   —     —     —   

KTB Confidence Private Placement

   —      4,927  377  1,099   —      6,403    6,403    (389)  387  (1,099)   —    5,302 

MeritzAI-SingA330-A Investment Type Private Placement Special Asset Fund

   —      6,504  457  (204)   —      6,757    6,757    (1,518)  193   —     —    5,432 

MeritzAI-SingA330-B Investment Type Private Placement Special Asset Fund

   —      8,012  628  (253)   —      8,387    8,387    (305)  347   —     —    8,429 

Pine Asia Unsecured Individual Rehabilitation Bond Fund 18

   —      5,867  145   —     —      6,012    6,012    (6,035)  23   —     —     —   

Platform Partners brick save Private Investment trust

   —      7,877  192   —     —      8,069 

VOGO DEBT STRATEGY QUALIFIED INV PRIVATE R/E INV TR 4

   1,638    3,060  133   —     —    4,831 

Platform Partners Brick Save Private Investment Trust

   8,069    (496)  547   —     —    8,120 

Synergy-Shinhan Mezzanine New Technology Investment Fund

   —      5,000  (1)   —     —      4,999    4,999    5,000  150   —     —    10,149 

The Asia Pacific Capital Fund II L.P.

   11,579    454  (901)  (3,825)   —      7,307   W7,307    (3,004)  (656)  2,602  (5,849)  400 

Shinhan PraxisK-Growth Global Private Equity Fund

   13,533    6,415  (1,590)  596   —      18,954 

Credian Healthcare Private Equity Fund II

   4,087    —    7  (281)   —      3,813 

Kiwoom Milestone Professional Private Real Estate Trust 19

   10,761    (222)  (131)   —     —      10,408 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

16.20.

Investments in associates (continued)

 

  2017   2018 

Investees

  Beginning
balance		   Investment
and
dividend		 Equity
method
income
(loss)		 Change in
other
comprehensive
income		 Impairment
loss		 Ending
balance		   Beginning
balance		   Investment
and
dividend		 Equity
method
income
(loss)		 Change in
other
comprehensive
income		   Impairment
loss		   Ending
balance		 

FG EURO GREEN PRIVATE REAL ESTATE TRUST No.3

  W21,237    (841)  641  (577)   —    20,460 

Shinhan PraxisK-Growth Global Private Equity Fund

  W18,954    (7,473)  5,046   —      —      16,527 

Credian Healthcare Private Equity Fund II

   3,813    —    740   —      —      4,553 

Kiwoom Milestone Professional Private Real Estate Trust 19

   10,408    (199)  210   —      —      10,419 

AIP EURO GREEN PRIVATE REAL ESTATE TRUST No.3

   20,460    (1,253)  1,337   —      —      20,544 

Brain Professional Private Trust No.4

   5,316    —    529  2   —    5,847    5,847    (1,274)  671   —      —      5,244 

Hanhwa US Equity Strategy Private Real Estate Fund No.1

   25,764    (1,859)  1,591  (17)   —    25,479    25,479    (2,000)  2,753   —      —      26,232 

Brain KS Qualified Privately Placed Fund No.6

   4,896    —    (78)  (13)   —    4,805    4,805    —    292   —      —      5,097 

M360 CRE Income Fund

   23,167    132,768  9,270  (11,300)   —    153,905    153,905    (171,215)  6,183  11,127    —      —   

Shinhan Global Healthcare Fund 1

   —      3,440  (33)   —     —    3,407    3,407    —    (122)   —      —      3,285 

JB Power TL Investment Type Private Placement Special Asset Fund 7

   —      18,268  422   —     —    18,690    18,690    (2,075)  869   —      —      17,484 

IBK AONE convertible 1

   —      5,000  122   —     —    5,122    5,122    —    784   —      —      5,906 

Rico synergy collaboMulti-Mezzanine 3

   —      5,001  25   —     —    5,026    5,026    —    264   —      —      5,290 

KB NA Hickory Private Special Asset Fund

   —      33,362  729   —     —    34,091    34,091    (1,560)  1,829   —      —      34,360 

GB PROFESSIONAL PRIVATE INVESTMENT TRUST 6

   —      8,600   —     —     —    8,600 

Koramco Europe Core Private Real Estate TrustNo.2-2

   —      21,408  (648)   —     —    20,760 

GB Professional Private Investment Trust 6

   8,600    —    (12)   —      —      8,588 

Koramco Europe Core Private Placement Real Estate FundNo.2-2

   20,760    (2,357)  213   —      —      18,616 

SHBNPP Private Korea Equity Long-Short Professional Feeder

   14,180    (9,972)  653   —     —    4,861    4,861    9,412  97   —      —      14,370 

SHBNPP Private Multi Strategy Professional Feeder No.1

   5,014    (5,049)  35   —     —     —   

Shinhan-Stonebridge Petro PEF

   18,487    —    714   —     —    19,201    19,201    (1,133)  613   —      —      18,681 

BNP Paribas Cardif General Insurance

   2,584    2,750  (910)  5   —    4,429    4,429    —    (1,026)  20    —      3,423 

Axis Global Growth New Technology Investment Association

   —      5,000  (47)   —     —    4,953    4,953    —    (78)   —      —      4,875 

Polaris No.7 Entrepreneur Private Equity Fund

   —      4,400  (41)   —     —    4,359 

Polaris No7 Start up and Venture Private Equity Fund

   4,359    —    (21)   —      —      4,338 

Hermes Private Investment Equity Fund

   —      17,500  (3)   —     —    17,497    17,497    (5,158)  (5,274)   —      —      7,065 

Others

   33,394    21,820  4,036  (45)  (144)  59,061 
  

 

   

 

  

 

  

 

  

 

  

 

 
  W353,600    282,744  20,393  (25,299)  (144)  631,294 
  

 

   

 

  

 

  

 

  

 

  

 

 

Shinhan AIM FoF Fund 1a

   —      4,125  226   —      —      4,351 

Daishin Heim Qualified Investor Private Investment Trust No.1808

   —      9,786  340   —      —      10,126 

Heungkuk High Class Professional Trust Private Fund 37

   —      9,178  260   —      —      9,438 

IGIS Global Credit Fund150-1

   —      8,529  367   —      —      8,896 

GX SHINHAN INTERVEST 1st Private Equity Fund

  W—      34,900  (3,069)   —      —      31,831 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

20.

Investments in associates (continued)

   2018 

Investees

  Beginning
balance		   Investment
and
dividend		   Equity
method
income
(loss)		  Change in
other
comprehensive
income		   Impairment
loss		  Ending
balance		 

Soo Commerce Platform Growth Fund

  W—      6,500    (122)   —      —     6,378 

Partner One Value up I Private Equity Fund

   —      12,000    (61)   —      —     11,939 

Genesis No.1 Private Equity Fund

   —      46,068    (310)   —      —     45,758 

GMB ICT New Technology Investment Fund

   —      8,000    (66)   —      —     7,934 

Soo Delivery Platform Growth Fund

   —      9,000    (17)   —      —     8,983 

Genesis North America Power Company No.1 PEF

   —      21,592    (768)   —      —     20,824 

SHBNPP MAIN Professional Investment Type Private Mixed Asset Investment Trust No.3

   —      6,300    (96)   —      —     6,204 

Others (*2)

   52,855    37,442    1,550   2    —     91,849 
  

 

 

   

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 
  W631,294    17,617    17,488   10,780    (5,849)   671,330 
  

 

 

   

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

 

(*1)The market value of the investment isW6,826 million as of December 31, 2017 based on the quoted market price.
(*2)

The Group has stopped recognizing its equity method income or loss due to the investees’ cumulative loss.

(*2)

Disposal by account reclassification includesnon-cash flow.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

16.20.

Investments in associates (continued)

 

 (c)Condensed

The statement of financial position information of associates as of and for the year ended December 31, 20162017 and 2017 are2018 were as follows:

 

  2016  2017 

Investees

  Asset   Liability  Asset Liability Operating
revenue		 Net profit
(loss)		 Other
comprehensive
income
(loss)		 Total
comprehensive
income
(loss)		 

BNP Paribas Cardif Life Insurance

  W4,182,208    3,779,257  W4,133,674  3,781,688  78,010  24,230  (73,495)  (49,265) 

Aju Capital Co., Ltd.

   6,543,737    5,744,415 

Daewontos Co., Ltd.

   399    2,492  400  2,492   —     —     —     —   

Neoplux Technology Valuation Investment Fund

   22,577    —    40,692  283  5,895  4,691  1,471  6,162 

JAEYOUNG SOLUTEC CO., LTD.

   155,368    120,184  157,009  137,916  142,228  (22,756)  2,764  (19,992) 

Partners 4th Growth Investment Fund

   18,478    257  53,944  383  137  (1,540)   —    (1,540) 

JAEYANG INDUSTRY

   2,146    4,717  2,146  4,717   —     —     —     —   

Chungyoung INC

   2,341    6,753  3,292  8,392  5,568  (693)   —    (693) 

DAEKWANG SEMICONDUCTOR CO., LTD.

   35,204    12,392  29,069  10,806  13,929  (4,549)   —    (4,549) 

SHC-IMM New Growth Fund

   3,675    117 

Dream High Fund III

   5,765    —    4,076  34  27  (200)  (1,522)  (1,722) 

Albatross Growth Fund

   5,237    915 

Asia Pacific No.39 Ship Investment Co., Ltd.

   10,379    28  9,389  27  666  616  32  648 

KCLAVIS Meister Fund No.17

 11,694  42  425  194   —    194 

SG No.9 Corporate Recovery Private Equity Fund

   15,069    38  15,035  76  (157)  652   —    652 

Plutus-SG Private Equity Fund

   16,188    68  16,009  69  317  316   —    316 

SG ARGES Private Equity Fund No.1

   37,392    91  26,758  69  (351)  832   —    832 

OST Progress- 2 Fund

 17,829  107  (234)  (234)   —    (234) 

Eum Private Equity Fund No.3

   28,584    4  23,725  5  1,614  1,649   —    1,649 

Richmond Private Yong in Retail Facility Real Estate Fund No.1

 48,006  28,624  2,265  2,100   —    2,100 

KTB Confidence Private Placement

 42,230  21,090  1,604  1,242  3,629  4,871 

MeritzAI-SingA330-A Investment Type Private Placement Special Asset Fund

 28,286  1  1,914  1,913  (856)  1,057 

MeritzAI-SingA330-B Investment Type Private Placement Special Asset Fund

 41,599  1  3,117  3,116  (1,257)  1,859 

Pine Asia Unsecured Individual Rehabilitation Bond Fund 18

 26,316  14  648  634   —    634 

Platform Partners Brick Save Private Investment Trust

 8,441  271  207  194   —    194 

Synergy-Shinhan Mezzanine New Technology Investment Fund

 10,500  3   —    (3)   —    (3) 

The Asia Pacific Capital Fund II L.P.

   46,043    65  29,103  88   —    (3,582)  (10,269)  (13,851) 

Korea Investment Gong-pyeong Office Real Estate Investment Trust 2nd

   928    1 

Shinhan PraxisK-Growth Global Private Equity Fund

   72,075    350  100,805  353  7,273  (8,428)  3,156  (5,272) 

Credian Healthcare Private Equity Fund II

   12,040    47  W11,236  47  211  19  (823)  (804) 

Kiwoom Milestone Professional Private Real Estate Trust 19

   57,692    36,169 

FG EURO GREEN PRIVATE REAL ESTATE TRUST No.3

   99,794    3 

Brain Professional Private Trust No.4

   19,384    46 

Hanhwa US Equity Strategy Private Real Estate Fund No.1

   59,781    2,327 

Brain KS Qualified Privately Placed Fund No.6

   9,794    1 

M360 CRE Income Fund

   60,261    6,167 

SHBNPP Private Korea Equity Long-Short Professional Feeder

   105,775    16,519 

SHBNPP Private Multi Strategy Professional Feeder No.1

   20,325    3,340 

Shinhan-Stonebridge Petro PEF

   1,015,299    804 
  

 

   

 

 
  W12,663,938    9,737,567 
  

 

   

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

16.20.

Investments in associates (continued)

 

   2017 

Investees

  Asset   Liability 

BNP Paribas Cardif Life Insurance

  W4,133,674    3,781,688 

Daewontos Co., Ltd.

   400    2,492 

Neoplux Technology Valuation Investment Fund

   40,692    283 

JAEYOUNG SOLUTEC CO., LTD.

   157,009    137,916 

Partners 4th Growth Investment Fund

   53,944    383 

JAEYANG INDUSTRY

   2,146    4,717 

Chungyoung INC

   3,292    8,392 

DAEKWANG SEMICONDUCTOR CO., LTD.

   29,069    10,806 

Dream High Fund III

   4,076    34 

Asia Pacific No.39 Ship Investment Co., Ltd.

   9,389    27 

KCLAVIS Meister Fund No.17

   11,694    42 

SG No.9 Corporate Recovery Private Equity Fund

   15,035    76 

Plutus-SG Private Equity Fund

   16,009    69 

SG ARGES Private Equity Fund No.1

   26,758    69 

OST Progress- 2 Fund

   17,829    107 

Eum Private Equity Fund No.3

   23,725    5 

Richmond Private Yong in Retail Facility Real Estate Fund No.1

   48,006    28,624 

KTB Confidence Private Placement

   42,230    21,090 

MeritzAI-SingA330-A Investment Type Private Placement Special Asset Fund

   28,286    1 

MeritzAI-SingA330-B Investment Type Private Placement Special Asset Fund

   41,599    1 

Pine Asia Unsecured Individual Rehabilitation Bond Fund 18

   26,316    14 

Platform Partners brick save Private Investment trust

   8,441    271 

Synergy-Shinhan Mezzanine New Technology Investment Fund

   10,500    3 

The Asia Pacific Capital Fund II L.P.

   29,103    88 

Shinhan PraxisK-Growth Global Private Equity Fund

   100,805    353 

Credian Healthcare Private Equity Fund II

   11,236    47 

Kiwoom Milestone Professional Private Real Estate Trust 19

   57,405    36,589 

FG EURO GREEN PRIVATE REAL ESTATE TRUST No.3

   97,203    1,066 

Brain Professional Private Trust No.4

   21,369    105 

Hanhwa US Equity Strategy Private Real Estate Fund No.1

   56,898    78 

Brain KS Qualified Privately Placed Fund No.6

   9,639    28 

M360 CRE Income Fund

   265,945    — �� 

Shinhan Global Healthcare Fund 1

   77,166    —   

JB Power TL Investment Type Private Placement Special Asset Fund 7

   56,125    53 

IBK AONE convertible 1

   10,840    —   

Rico synergy collaboMulti-Mezzanine 3

   10,054    3 
  2017 

Investees

 Asset  Liability  Operating
revenue		  Net profit
(loss)		  Other
comprehensive
income
(loss)		  Total
comprehensive
income
(loss)		 

Kiwoom Milestone Professional Private Real Estate Trust 19

 W57,405   36,589   2,742   (262)   —     (262) 

FG EURO GREEN PRIVATE REAL ESTATE TRUST No.3

  97,203   1,066   5,851   3,012   (2,713)   299 

Brain Professional Private Trust No.4

  21,369   105   2,942   1,925   —     1,925 

Hanhwa US Equity Strategy Private Real Estate Fund No.1

  56,898   78   11,562   3,549   (37)   3,512 

Brain KS Qualified Privately Placed Fund No.6

  9,639   28   3   (110)   (72)   (182) 

M360 CRE Income Fund

  265,945   —     7   14,179   —     14,179 

Shinhan Global Healthcare Fund 1

  77,166   —     3   (757)   —     (757) 

JB Power TL Investment Type Private Placement Special Asset Fund 7

  56,125   53   7,115   1,267   —     1,267 

IBK AONE convertible 1

  10,840   —     279   258   —     258 

Rico Synergy CollaboMulti-Mezzanine 3

  10,054   3   371   50   —     50 

KB NA Hickory Private Special Asset Fund

  90,978   67   11,092   1,945   —     1,945 

GB PROFESSIONAL PRIVATE INVESTMENT TRUST 6

  9,101   1   1   —     —     —   

Koramco Europe Core Private Placement Real Estate FundNo.2-2

  44,886   2,074   2,503   (1,337)   —     (1,337) 

SHBNPP Private Korea EquityLong-Short Professional Feeder

  54,029   4,733   28,956   9,356   —     9,356 

Shinhan-Stonebridge Petro PEF

  1,056,401   2,740   39,170   39,170   —     39,170 

BNP Paribas Cardif General Insurance

  59,699   15,405   10,093   (9,294)   94   (9,200) 

Axis Global Growth New Technology Investment Association

  15,553   —     (147)   (147)   —     (147) 

Polaris No7 Start up and Venture Private Equity Fund

  15,280   22   (142)   (142)   —     (142) 

Hermes Private Investment Equity Fund

  60,000   10   (10)   (10)   —     (10) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
 W6,959,834   4,060,572   387,704   63,065   (79,898)   (16,833) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(*)

As of December 31, 2017, the Group has discontinued the application of the equity method of accounting and excluded the financial information of the associates for which financial information is not available.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

16.20.

Investments in associates (continued)

 

   2017 

Investees

  Asset   Liability 

KB NA Hickory Private Special Asset Fund

  W90,978    67 

GB Professional Private Investment Trust 6

   9,101    1 

Koramco Europe Core Private Placement Real Estate FundNo.2-2

   44,886    2,074 

SHBNPP Private Korea Equity Long-Short Professional Feeder

   54,029    4,733 

Shinhan-Stonebridge Petro PEF

   1,056,401    2,740 

BNP Paribas Cardif General Insurance

   59,699    15,405 

Axis Global Growth New Technology Investment Association

   15,553    —   

Polaris No7 Start up and Venture Private Equity Fund

   15,280    22 

Hermes Private Investment Equity Fund

   60,000    10 
  

 

 

   

 

 

 
  W6,959,834    4,060,572 
  

 

 

   

 

 

 
  2018 

Investees

 Asset  Liability  Operating
revenue		  Net profit
(loss)		  Other
comprehensive
income
(loss)		  Total
comprehensive
income
(loss)		 

BNP Paribas Cardif Life Insurance

 W3,995,746   3,662,567   53,756   5,191   (10,268)   (5,077) 

Daewontos Co., Ltd.

  400   2,492   —     —     —     —   

Songrim Partners.

  2,288   2,311   1,898   (164)   —     (164) 

Neoplux Technology Valuation Investment Fund

  57,018   804   390   (724)   (1,969)   (2,693) 

Partners 4th Growth Investment Fund

  67,403   954   4,424   3,025   —     3,025 

JAEYANG INDUSTRY

  2,146   4,717   —     —     —     —   

KTB Newlake Global Healthcare PEF

  32,508   123   69   (793)   —     (793) 

DAEKWANG SEMICONDUCTOR CO., LTD.

  25,459   9,537   15,794   (2,341)   —     (2,341) 

Shinhan-Neoplux Energy Newbiz Fund

  17,347   315   19   (968)   —     (968) 

Shinhan-Albatross Tech Investment Fund

  18,009   182   299   (435)   917   482 

KCLAVIS Meister Fund No.17

  11,866   47   398   167   —     167 

SG No.9 Corporate Recovery Private Equity Fund

  5,566   181   —     2,136   —     2,136 

Plutus-SG Private Equity Fund

  16,012   69   778   499   —     499 

SG ARGES Private Equity Fund No.1

  18,085   46   —     888   —     888 

Eum Private Equity Fund No.3

  23,552   5   1,667   1,311   —     1,311 

KTB Confidence Private Placement

  38,559   21,054   506   256   (3,629)   (3,373) 

MeritzAI-SingA330-A Investment Type Private Placement Special Asset Fund

  22,739   1   1,451   62   —     62 

MeritzAI-SingA330-B Investment Type Private Placement Special Asset Fund

  41,809   2   3,027   1,044   —     1,044 

VOGO DEBT STRATEGY QUALIFIED INV PRIVATE R/E INV TR 4

  24,174   15   3,046   1,165   —     1,165 

Platform Partners brick save Private Investment trust

  8,286   64   809   763   —     763 

Synergy-Shinhan Mezzanine New Technology Investment Fund

 W21,312   —     553   331   —     331 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

16.20.

Investments in associates (continued)

 

Condensed statement of comprehensive income information for years ended December 31, 2016 and 2017 were as follows:

   2016 

Investees

  Operating
revenue		   Net profit
(loss)		  Other
comprehensive
income
(loss)		  Total
comprehensive
income
(loss)		 

BNP Paribas Cardif Life Insurance

  W144,583    (16,706)   36,189   19,483 

Aju Capital Co., Ltd.

   757,345    70,598   (458)   70,140 

Daewontos Co., Ltd.

   517    (624)   —     (624) 

Neoplux Technology Valuation Investment Fund

   3,441    2,295   —     2,295 

JAEYOUNG SOLUTEC CO., LTD.

   137,920    (7,095)   (614)   (7,709) 

Partners 4th Growth Investment Fund

   113    (1,300)   —     (1,300) 

JAEYANG INDUSTRY

   212    (69)   —     (69) 

Chungyoung INC

   —      —     —     —   

DAEKWANG SEMICONDUCTOR CO., LTD.

   —      —     —     —   

SHC-IMM New Growth Fund

   855    479   —     479 

Dream High Fund III

   535    313   2,597   2,910 

Albatross Growth Fund

   1,024    957   (3,821)   (2,864) 

Asia Pacific No.39 Ship Investment Co., Ltd.

   730    681   1,172   1,853 

SG No.9 Corporate Recovery Private Equity Fund

   —      428   —     428 

Plutus-SG Private Equity Fund

   5    (148)   —     (148) 

SG ARGES Private Equity Fund No.1

   —      87   —     87 

Eum Private Equity Fund No.3

   85    (235)   —     (235) 

The Asia Pacific Capital Fund II L.P.

   —      (29,768)   (13,407)   (43,175) 

Korea Investment Gong-pyeong Office Real Estate Investment Trust 2nd

   2,170    2,170   —     2,170 

Shinhan PraxisK-Growth Global Private Equity Fund

   513    (1,084)   2,656   1,572 

Credian Healthcare Private Equity Fund II

   190    (180)   —     (180) 

Kiwoom Milestone Professional Private Real Estate Trust 19

   924    (367)   —     (367) 

FG EURO GREEN PRIVATE REAL ESTATE TRUST No.3

   10,321    2,210   7,669   9,879 

Brain Professional Private Trust No.4

   2,158    1,148   —     1,148 

Hanhwa US Equity Strategy Private Real Estate Fund No.1

   5,199    1,667   37   1,704 

Brain KS Qualified Privately Placed Fund No.6

   1    (26)   (182)   (208) 

M360 CRE Income Fund

   —      —     —     —   

SHBNPP Private Korea Equity Long-Short Professional Feeder

   25,736    (396)   —     (396) 

SHBNPP Private Multi Strategy Professional Feeder No.1

   4,510    70   —     70 

Shinhan-Stonebridge Petro PEF

   38,898    35,559   —     35,559 
  

 

 

   

 

 

  

 

 

  

 

 

 
  W1,137,985    60,664   31,838   92,502 
  

 

 

   

 

 

  

 

 

  

 

 

 
  2018 

Investees

 Asset  Liability  Operating
revenue		  Net profit
(loss)		  Other
comprehensive
income
(loss)		  Total
comprehensive
income
(loss)		 

The Asia Pacific Capital Fund II L.P.

 W1,674   86   1   (25,828)   —     (25,828) 

Shinhan PraxisK-Growth Global Private Equity Fund

  87,897   307   31,059   26,381   —     26,381 

Credian Healthcare Private Equity Fund II

  13,408   47   2,364   2,171   —     2,171 

Kiwoom Milestone Professional Private Real Estate Trust 19

  57,678   36,839   3,383   422   —     422 

AIP EURO GREEN PRIVATE REAL ESTATE TRUST No.3

  96,624   86   18,700   6,287   —     6,287 

Brain Professional Private Trust No.4

  19,113   46   4,306   2,435   —     2,435 

Hanhwa US Equity Strategy Private Real Estate Fund No.1

  58,575   77   10,098   6,139   —     6,139 

Brain KS Qualified Privately Placed Fund No.6

  10,089   —     812   477   —     477��

Shinhan Global Healthcare Fund 1

  74,409   —     4   (2,757)   —     (2,757) 

JB Power TL Investment Type Private Placement Special Asset Fund 7

  52,627   174   9,878   2,607   —     2,607 

IBK AONE convertible 1

  12,807   307   2,042   1,660   —     1,660 

Rico Synergy CollaboMulti-Mezzanine 3

  10,736   161   686   529   —     529 

KB NA Hickory Private Special Asset Fund

  91,694   67   9,601   4,877   —     4,877 

GB Professional Private Investment Trust 6

  9,088   1   1   (13)   —     (13) 

Koramco Europe Core Private Placement Real Estate FundNo.2-2

  44,491   2,202   6,470   878   —     878 

SHBNPP Private Korea EquityLong-Short Professional Feeder

  77,465   10,728   18,729   728   —     728 

Shinhan-Stonebridge Petro PEF

  1,025,884   807   36,968   33,616   —     33,616 

BNP Paribas Cardif General Insurance

  51,211   16,986   10,972   (10,264)   196   (10,069) 

Axis Global Growth New Technology Investment Association

  15,308   —     1   (245)   —     (245) 

Polaris No7 Start up and Venture Private Equity Fund

  15,193   10   —     (75)   —     (75) 

Hermes Private Investment Equity Fund

  24,233   8   6   (18,025)   —     (18,025) 

Shinhan AIM FoF Fund 1a

  17,478   11   3,004   342   —     342 

Daishin Heim Qualified Investor Private Investment Trust No.1808

  29,770   405   806   741   —     741 

Heungkuk High Class Professional Trust Private Fund 37

 W20,523   1,646   1,045   1,005   —     1,005 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

16.20.

Investments in associates (continued)

 

   2017 

Investees

  Operating
revenue		  Net profit
(loss)		  Other
comprehensive
income (loss)		  Total
comprehensive
income (loss)		 

BNP Paribas Cardif Life Insurance

  W78,010   24,230   (73,495)   (49,265) 

Daewontos Co., Ltd.

   —     —     —     —   

Neoplux Technology Valuation Investment Fund

   5,895   4,691   1,471   6,162 

JAEYOUNG SOLUTEC CO., LTD.

   142,228   (22,756)   2,764   (19,992) 

Partners 4th Growth Investment Fund

   137   (1,540)   —     (1,540) 

JAEYANG INDUSTRY

   —     —     —     —   

Chungyoung INC

   5,568   (693)   —     (693) 

DAEKWANG SEMICONDUCTOR CO., LTD.

   13,929   (4,549)   —     (4,549) 

Dream High Fund III

   27   (200)   (1,522)   (1,722) 

Asia Pacific No.39 Ship Investment Co., Ltd.

   666   616   32   648 

KCLAVIS Meister Fund No.17

   425   194   —     194 

SG No.9 Corporate Recovery Private Equity Fund

   (157)   652   —     652 

Plutus-SG Private Equity Fund

   317   316   —     316 

SG ARGES Private Equity Fund No.1

   (351)   832   —     832 

OST Progress- 2 Fund

   (234)   (234)   —     (234) 

Eum Private Equity Fund No.3

   1,614   1,649   —     1,649 

Richmond Private Yong in Retail Facility Real Estate Fund No.1

   2,265   2,100   —     2,100 

KTB Confidence Private Placement

   1,604   1,242   3,629   4,871 

MeritzAI-SingA330-A Investment Type Private Placement Special Asset Fund

   1,914   1,913   (856)   1,057 

MeritzAI-SingA330-B Investment Type Private Placement Special Asset Fund

   3,117   3,116   (1,257)   1,859 

Pine Asia Unsecured Individual Rehabilitation Bond Fund 18

   648   634   —     634 

Platform Partners brick save Private Investment trust

   207   194   —     194 

Synergy-Shinhan Mezzanine New Technology Investment Fund

   —     (3)   —     (3) 

The Asia Pacific Capital Fund II L.P.

   —     (3,582)   (10,269)   (13,851) 

Shinhan PraxisK-Growth Global Private Equity Fund

   7,273   (8,428)   3,156   (5,272) 

Credian Healthcare Private Equity Fund II

   211   19   (823)   (804) 

Kiwoom Milestone Professional Private Real Estate Trust 19

   2,742   (262)   —     (262) 

FG EURO GREEN PRIVATE REAL ESTATE TRUST No.3

   5,851   3,012   (2,713)   299 

Brain Professional Private Trust No.4

   2,942   1,925   —     1,925 

Hanhwa US Equity Strategy Private Real Estate Fund No.1

   11,562   3,549   (37)   3,512 

Brain KS Qualified Privately Placed Fund No.6

   3   (110)   (72)   (182) 

M360 CRE Income Fund

   7   14,179   —     14,179 

Shinhan Global Healthcare Fund 1

   3   (757)   —     (757) 

JB Power TL Investment Type Private Placement Special Asset Fund 7

   7,115   1,267   —     1,267 

IBK AONE convertible 1

   279   258   —     258 

Rico synergy collaboMulti-Mezzanine 3

   371   50   —     50 
  2018 

Investees

 Asset  Liability  Operating
revenue		  Net profit
(loss)		  Other
comprehensive
income
(loss)		  Total
comprehensive
income
(loss)		 

IGIS Global Credit Fund150-1

 W35,453   27   3,457   214   —     214 

GX SHINHAN INTERVEST 1st Private Equity Fund

  125,954   —     6   (12,146)   —     (12,146) 

Soo Commerce Platform Growth Fund

  25,905   3   —     (497)   —     (497) 

Partner One Value up I Private Equity Fund

  42,776   —     326   (224)   —     (224) 

Genesis No.1 Private Equity Fund

  201,103   434   —     (1,360)   —     (1,360) 

GMB ICT New Technology Investment Fund

  29,657   —     3   (242)   —     (242) 

Soo Delivery Platform Growth Fund

  29,946   2   —     (56)   —     (56) 

Genesis North America Power Company No.1 PEF

  52,393   223   1   (1,922)   —     (1,922) 

SHBNPP MAIN Professional Investment Type Private Mixed Asset Investment Trust No.3

  26,826   237   2   (411)   —     (411) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
 W6,938,272   3,777,413   263,615   28,857   (14,753)   14,103 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(*)

As of December 31, 2018, the Group has discontinued the application of the equity method of accounting and excluded the financial information of the associates for which financial information is not available.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

16.20.

Investments in associates (continued)

 

   2017 

Investees

  Operating
revenue		  Net profit
(loss)		  Other
comprehensive
income (loss)		  Total
comprehensive
income (loss)		 

KB NA Hickory Private Special Asset Fund

  W11,092   1,945   —     1,945 

GB PROFESSIONAL PRIVATE INVESTMENT TRUST 6

   1   —     —     —   

Koramco Europe Core Private Placement Real Estate FundNo.2-2

   2,503   (1,337)   —     (1,337) 

SHBNPP Private Korea Equity Long-Short Professional Feeder

   28,956   9,356   —     9,356 

Shinhan-Stonebridge Petro PEF

   39,170   39,170   —     39,170 

BNP Paribas Cardif General Insurance

   10,093   (9,294)   94   (9,200) 

Axis Global Growth New Technology Investment Association

   (147)   (147)   —     (147) 

Polaris No7 Start up and Venture Private Equity Fund

   (142)   (142)   —     (142) 

Hermes Private Investment Equity Fund

   (10)   (10)   —     (10) 
  

 

 

  

 

 

  

 

 

  

 

 

 
  W387,704   63,065   (79,898)   (16,833) 
  

 

 

  

 

 

  

 

 

  

 

 

 
(d)

Reconciliation of the financial information to the carrying values of its interests in the associates as of December 31, 2017 and 2018 are as follows:

  2017 

Investees

 Net assets
(a)		  Ownership
(%)
(b)		  Interests
in the net
assets
(a)*(b)		  Intra-group
transactions		  Other  Carrying
Value		 

BNP Paribas Cardif Life Insurance

 W351,986   14.99   52,763   (147)   —     52,616 

Daewontos Co., Ltd. (*1)

  (2,092)   36.33   (760)   —     760   —   

Neoplux Technology Valuation Investment Fund

  40,409   33.33   13,470   —     —     13,470 

JAEYOUNG SOLUTEC CO., LTD. (*2)

  17,484   9.61   1,680   —     2,169   3,849 

Partners 4th Growth Investment Fund

  53,561   25.00   13,390   —     —     13,390 

JAEYANG INDUSTRY (*3)

  (2,571)   25.90   (666)   —     666   —   

Chungyoung INC (*3)

  (5,100)   18.94   (966)   —     966   —   

DAEKWANG SEMICONDUCTOR CO., LTD.

  18,263   20.94   3,824   —     —     3,824 

Dream High Fund III

  4,042   54.55   2,205   —     —     2,205 

Asia Pacific No.39 Ship Investment Co., Ltd.

  9,362   50.00   4,682   —     —     4,682 

KCLAVIS Meister Fund No.17

  11,652   26.09   3,039   —     —     3,039 

SG No.9 Corporate Recovery Private Equity Fund

  14,959   26.49   3,963   —     —     3,963 

Plutus-SG Private Equity Fund

  15,940   26.67   4,251   —     —     4,251 

SG ARGES Private Equity Fund No.1

  26,689   24.06   6,422   —     —     6,422 

OST Progress- 2 Fund

  17,722   27.62   4,895   —     —     4,895 

Eum Private Equity Fund No.3

  23,720   20.76   4,925   —     —     4,925 

Richmond Private Yong in Retail Facility Real Estate Fund No.1

  19,382   41.80   8,101   —     —     8,101 

KTB Confidence Private Placement

  21,140   30.29   6,403   —     —     6,403 

MeritzAI-SingA330-A Investment Type Private Placement Special Asset Fund

  28,285   23.89   6,757   —     —     6,757 

MeritzAI-SingA330-B Investment Type Private Placement Special Asset Fund

  41,598   20.16   8,387   —     —     8,387 

Pine Asia Unsecured Individual Rehabilitation Bond Fund 18

  26,302   22.86   6,012   —     —     6,012 

Platform Partners Brick Save Private Investment Trust

  8,170   98.77   8,069   —     —     8,069 

Synergy-Shinhan Mezzanine New Technology Investment Fund

  10,497   47.62   4,999   —     —     4,999 

The Asia Pacific Capital Fund II L.P.

  29,015   25.18   7,307   —     —     7,307 

Shinhan PraxisK-Growth Global Private Equity Fund

  100,452   18.87   18,954   —     —     18,954 

Credian Healthcare Private Equity Fund II

  11,189   34.07   3,813   —     —     3,813 

Kiwoom Milestone Professional Private Real Estate Trust 19

  20,816   50.00   10,408   —     —     10,408 

FG EURO GREEN PRIVATE REAL ESTATE TRUST No.3

 W96,137   21.28   20,460   —     —     20,460 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

16.20.

Investments in associates (continued)

 

(d)Reconciliation of the financial information to the carrying values of its interests in the associates as of December 31, 2016 and 2017 are as follow:

   2016 

Investees

  Net assets
(a)		  Ownership
(%)
(b)		   Interests
in the net
assets
(a)*(b)		  Intra-group
transactions		  Other  Carrying
Value		 

BNP Paribas Cardif Life Insurance

  W402,951   14.99    60,443   (230)   —     60,213 

Aju Capital Co., Ltd. (*1)

   749,882   12.85    96,365   —     (55,529)   40,836 

Daewontos Co., Ltd. (*2)

   (2,093)   36.33    (760)   —     760   —   

Neoplux Technology Valuation Investment Fund

   22,577   33.33    7,526   —     —     7,526 

JAEYOUNG SOLUTEC CO., LTD. (*3)

   34,147   10.45    3,567   —     2,169   5,736 

Partners 4th Growth Investment Fund

   18,221   25.00    4,555   —     —     4,555 

JAEYANG INDUSTRY (*5)

   (2,571)   25.90    (666)   —     666   —   

Chungyoung INC (*4)

   (4,412)   18.94    (836)   —     836   —   

DAEKWANG SEMICONDUCTOR CO., LTD.

   22,812   20.94    4,776   —     —     4,776 

SHC-IMM New Growth Fund

   3,559   64.52    2,295   —     —     2,295 

Dream High Fund III

   5,765   54.55    3,144   —     —     3,144 

Albatross Growth Fund

   4,322   36.36    1,572   —     —     1,572 

Asia Pacific No.39 Ship Investment Co., Ltd.

   10,351   50.00    5,176   —     —     5,176 

SG No.9 Corporate Recovery Private Equity Fund

   15,031   26.49    3,982   —     —     3,982 

Plutus-SG Private Equity Fund

   16,120   26.67    4,299   —     —     4,299 

SG ARGES Private Equity Fund No.1

   37,301   24.06    8,976   —     —     8,976 

Eum Private Equity Fund No.3

   28,580   20.76    5,933   —     —     5,933 

The Asia Pacific Capital Fund II L.P.

   45,978   25.18    11,579   —     —     11,579 

Korea Investment Gong-pyeong Office Real Estate Investment Trust 2nd

   927   50.00    464   —     —     464 

Shinhan PraxisK-Growth Global Private Equity Fund

   71,725   18.87    13,533   —     —     13,533 

Credian Healthcare Private Equity Fund II

   11,993   34.07    4,087   —     —     4,087 

Kiwoom Milestone Professional Private Real Estate Trust 19

   21,523   50.00    10,761   —     —     10,761 

FG EURO GREEN PRIVATE REAL ESTATE TRUST No.3

   99,791   21.28    21,237   —     —     21,237 

Brain Professional Private Trust No.4

   19,338   27.49    5,316   —     —     5,316 

Hanhwa US Equity Strategy Private Real Estate Fund No.1

   57,454   44.84    25,764   —     —     25,764 

Brain KS Qualified Privately Placed
Fund No.6

   9,793   50.00    4,896   —     —     4,896 

M360 CRE Income Fund

   54,094   42.83    23,167   —     —     23,167 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

16.Investments in associates (continued)

  2016  2017 

Investees

  Net assets
(a)		   Ownership
(%)
(b)		   Interests
in the net
assets
(a)*(b)		   Intra-group
transactions		 Other Carrying
value		  Net assets
(a)		 Ownership
(%)
(b)		 Interests
in the net
assets
(a)*(b)		 Intra-group
transactions		 Other Carrying
Value		 

SHBNPP Private Korea Equity Long Short Professional Feeder

  W89,256    15.88    14,180    —     —    14,180 

SHBNPP Private Multi Strategy Professional Feeder No.1

   16,985    29.55    5,014    —     —    5,014 

Brain Professional Private Trust No.4

 W21,264  27.49  5,847   —     —    5,847 

Hanhwa US Equity Strategy Private Real Estate Fund No.1

 56,820  44.84  25,479   —     —    25,479 

Brain KS Qualified Privately Placed Fund No.6

 9,611  50.00  4,805   —     —    4,805 

M360 CRE Income Fund

 265,945  57.87  153,905   —     —    153,905 

Shinhan Global Healthcare Fund 1

 77,166  4.41  3,407   —     —    3,407 

JB Power TL Investment Type Private Placement Special Asset Fund 7

 56,072  33.33  18,690   —     —    18,690 

IBK AONE convertible 1

 10,840  47.25  5,122   —     —    5,122 

Rico Synergy CollaboMulti-Mezzanine 3

 10,051  50.00  5,026   —     —    5,026 

KB NA Hickory Private Special Asset Fund

 90,911  37.50  34,091   —     —    34,091 

GB PROFESSIONAL PRIVATE INVESTMENT TRUST 6

 9,100  94.51  8,600   —     —    8,600 

Koramco Europe Core Private Placement Real Estate FundNo.2-2

 42,812  48.49  20,760   —     —    20,760 

SHBNPP Private Korea Equity Long-Short Professional Feeder

 49,296  9.85  4,861   —     —    4,861 

Shinhan-Stonebridge Petro PEF

   1,014,495    1.82    18,487    —     —    18,487  1,053,661  1.82  19,201   —     —    19,201 

BNP Paribas Cardif General Insurance

 44,294  10.00  4,429   —     —    4,429 

Axis Global Growth New Technology Investment Association

 15,553  31.85  4,953   —     —    4,953 

Polaris No7 Start up and Venture Private Equity Fund

 15,258  28.57  4,359   —     —    4,359 

Hermes Private Investment Equity Fund

 59,990  29.17  17,497   —     —    17,497 

Others

   158,356    —      35,507    —    589  36,096  218,647   —    58,362   —    699  59,061 
  

 

     

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 
  W3,034,251      404,339    (230)  (50,509)  353,600  W3,116,300   —    626,181  (147)  5,260  631,294 
  

 

     

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

 

(*1)Net assets do not includenon-controlling interests and other adjustments represent the cumulative impairment.
(*2)

Other adjustments represent the unrecognized equity method losses because the Group has stopped recognizing its equity method losses as the balance of the investment has been reduced to zero.

(*3)2)

Net assets do not includenon-controlling interests;interests and other adjustments represent the difference between the cost of the investment and the Group’s interests in the net carrying value of the investee’s assets and liabilities at the investment date and the cumulative impairment.date.

(*4)3)Other adjustments represent the difference between the cost of the investment and the Group’s interests in the net carrying value of the investee’s assets and liabilities at the investment date.
(*5)

Other adjustments represent the unrecognized equity method losses because the Group has stopped recognizing its equity method losses as the balance of the investment has been reduced to zero and the difference between the cost of the investment and the Group’s interests in the net carrying value of the investee’s assets and liabilities at the investment date.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

16.20.

Investments in associates (continued)

 

 2017  2018 

Investees

 Net assets
(a)		 Ownership
(%)
(b)		 Interests
in the net
assets
(a)*(b)		 Intra-group
transactions		 Other Carrying
Value		  Net assets
(a)		 Ownership
(%)
(b)		 Interests
in the net
assets
(a)*(b)		 Intra-group
transactions		 Other Carrying
Value		 

BNP Paribas Cardif Life Insurance

 W351,986  14.99  52,763  (147)   —    52,616  W333,179  14.99  49,952  (136)   —    49,816 

Daewontos Co., Ltd (*1)

 (2,092)  36.33  (760)   —    760   —   

Daewontos Co., Ltd. (*1)

 (2,092)  36.33  (760)   —    760   —   

Songrim Partners (*1)

 (23)  35.34  (8)   —    8   —   

Neoplux Technology Valuation Investment Fund

 40,409  33.33  13,470   —     —    13,470  56,214  33.33  18,738   —     —    18,738 

JAEYOUNG SOLUTEC CO., LTD (*2)

 17,484  9.61  1,680   —    2,169  3,849 

Partners 4th Growth Investment Fund

 53,561  25.00  13,390   —     —    13,390  66,449  25.00  16,612   —     —    16,612 

JAEYANG INDUSTRY (*3)

 (2,571)  25.90  (666)   —    666   —   

Chungyoung INC (*3)

 (5,100)  18.94  (966)   —    966   —   

JAEYANG INDUSTRY (*2)

 (2,571)  25.90  (666)   —    666   —   

KTB Newlake Global Healthcare PEF (*3)

 32,385  30.00  9,715   —    170  9,885 

DAEKWANG SEMICONDUCTOR CO., LTD.

 18,263  20.94  3,824   —     —    3,824  15,922  20.94  3,334   —     —    3,334 

Dream High Fund III

 4,042  54.55  2,205   —     —    2,205 

Asia Pacific No.39 Ship Investment Co., Ltd.

 9,362  50.00  4,682   —     —    4,682 

Shinhan-Neoplux Energy Newbiz Fund

 17,032  23.33  3,974   —     —    3,974 

Shinhan-Albatross Tech Investment Fund

 17,827  50.00  8,908   —     —    8,908 

KCLAVIS Meister Fund No.17

 11,652  26.09  3,039   —     —    3,039  11,819  26.09  3,083   —     —    3,083 

SG No.9 Corporate Recovery Private Equity Fund

 14,959  26.49  3,963   —     —    3,963  5,385  26.49  1,427   —     —    1,427 

Plutus-SG Private Equity Fund

 15,940  26.67  4,251   —     —    4,251  15,943  26.67  4,252   —     —    4,252 

SG ARGES Private Equity Fund No.1

 26,689  24.06  6,422   —     —    6,422  18,039  24.06  4,341   —     —    4,341 

OST Progress- 2 Fund

 17,722  27.62  4,895   —     —    4,895 

Eum Private Equity Fund No.3

 23,720  20.76  4,925   —     —    4,925  23,547  20.76  4,889   —     —    4,889 

Richmond Private Yong in Retail Facility Real Estate Fund No.1

 19,382  41.80  8,101   —     —    8,101 

KTB Confidence Private Placement

 21,140  30.29  6,403   —     —    6,403  17,505  30.29  5,302   —     —    5,302 

MeritzAI-SingA330-A Investment Type Private Placement Special Asset Fund

 28,285  23.89  6,757   —     —    6,757  22,738  23.89  5,432   —     —    5,432 

MeritzAI-SingA330-B Investment Type Private Placement Special Asset Fund

 41,598  20.16  8,387   —     —    8,387  41,807  20.16  8,429   —     —    8,429 

Pine Asia Unsecured Individual Rehabilitation Bond Fund 18

 26,302  22.86  6,012   —     —    6,012 

VOGO DEBT STRATEGY QUALIFIED INV PRIVATE R/E INV TR 4

 24,159  20.00  4,831   —     —    4,831 

Platform Partners brick save Private Investment trust

 8,170  98.77  8,069   —     —    8,069  8,222  98.77  8,120   —     —    8,120 

Synergy-Shinhan Mezzanine New Technology Investment Fund

 10,497  47.62  4,999   —     —    4,999  21,312  47.62  10,149   —     —    10,149 

The Asia Pacific Capital Fund II L.P.

 29,015  25.18  7,307   —     —    7,307  1,588  25.18  400   —     —    400 

Shinhan PraxisK-Growth Global Private Equity Fund

 100,452  18.87  18,954   —     —    18,954  87,590  18.87  16,527   —     —    16,527 

Credian Healthcare Private Equity Fund II

 11,189  34.07  3,813   —     —    3,813  13,361  34.07  4,553   —     —    4,553 

Kiwoom Milestone Professional Private Real Estate Trust 19

 20,816  50.00  10,408   —     —    10,408  20,839  50.00  10,419   —     —    10,419 

FG EURO GREEN PRIVATE REAL ESTATE TRUST No.3

 96,137  21.28  20,460   —     —    20,460 

AIP EURO GREEN PRIVATE REAL ESTATE TRUST No.3

 96,538  21.28  20,544   —     —    20,544 

Brain Professional Private Trust No.4

 21,264  27.49  5,847   —     —    5,847  19,067  27.50  5,244   —     —    5,244 

Hanhwa US Equity Strategy Private Real Estate Fund No.1

 56,820  44.84  25,479   —     —    25,479  58,498  44.84  26,232   —     —    26,232 

Brain KS Qualified Privately Placed Fund No.6

 9,611  50.00  4,805   —     —    4,805  10,089  50.00  5,097   —     —    5,097 

Shinhan Global Healthcare Fund 1

 74,409  4.41  3,285   —     —    3,285 

JB Power TL Investment Type Private Placement Special Asset Fund 7

 52,453  33.33  17,484   —     —    17,484 

IBK AONE convertible 1

 12,500  47.25  5,906   —     —    5,906 

Rico Synergy CollaboMulti-Mezzanine 3

 W10,575  50.03  5,290   —     —    5,290 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

16.20.

Investments in associates (continued)

 

 2017  2018 

Investees

 Net assets
(a)		 Ownership
(%)
(b)		 Interests
in the net
assets
(a)*(b)		 Intra-group
transactions		 Other Carrying
Value		  Net assets
(a)		 Ownership
(%)
(b)		 Interests
in the net
assets
(a)*(b)		 Intra-group
transactions		 Other Carrying
Value		 

M360 CRE Income Fund

 W265,945  57.87  153,905   —     —    153,905 

Shinhan Global Healthcare Fund 1

 77,166  4.41  3,407   —     —    3,407 

JB Power TL Investment Type Private Placement Special Asset Fund 7

 56,072  33.33  18,690   —     —    18,690 

IBK AONE convertible 1

 10,840  47.25  5,122   —     —    5,122 

Rico synergy collaboMulti-Mezzanine 3

 10,051  50.00  5,026   —     —    5,026 

KB NA Hickory Private Special Asset Fund

 90,911  37.50  34,091   —     —    34,091  W91,627  37.50  34,360   —     —    34,360 

GB Professional Private Investment Trust 6

 9,100  94.51  8,600   —     —    8,600  9,087  94.51  8,588   —     —    8,588 

Koramco Europe Core Private Placement Real Estate FundNo.2-2

 42,812  48.49  20,760   —     —    20,760  42,289  44.02  18,616   —     —    18,616 

SHBNPP Private Korea Equity Long-Short Professional Feeder

 49,296  9.85  4,861   —     —    4,861  66,737  21.52  14,370   —     —    14,370 

Shinhan-Stonebridge Petro PEF

 1,053,661  1.82  19,201   —     —    19,201  1,025,077  1.82  18,681   —     —    18,681 

BNP Paribas Cardif General Insurance

 44,294  10.00  4,429   —     —    4,429  34,225  10.00  3,423   —     —    3,423 

Axis Global Growth New Technology Investment Association

 15,553  31.85  4,953   —     —    4,953  15,308  31.85  4,875   —     —    4,875 

Polaris No7 Start up and Venture Private Equity Fund

 15,258  28.57  4,359   —     —    4,359 

Polaris No.7 Start up and Venture Private Equity Fund

 15,183  28.57  4,338   —     —    4,338 

Hermes Private Investment Equity Fund

 59,990  29.17  17,497   —     —    17,497  24,225  29.17  7,065   —     —    7,065 

Shinhan AIM FoF Fund 1a

 17,467  24.91  4,351   —     —    4,351 

Daishin Heim Qualified Investor Private Investment Trust No.1808

 29,365  34.48  10,126   —     —    10,126 

Heungkuk High Class Professional Trust Private Fund 37

 18,877  50.00  9,438   —     —    9,438 

IGIS Global Credit Fund150-1

 35,426  25.11  8,896   —     —    8,896 

GX SHINHAN INTERVEST 1st Private Equity Fund

 125,954  25.27  31,831   —     —    31,831 

Soo Commerce Platform Growth Fund

 25,902  24.62  6,378   —     —    6,378 

Partner One Value up I Private Equity Fund

 42,776  27.91  11,939   —     —    11,939 

Genesis No.1 Private Equity Fund

 200,669  22.80  45,758   —     —    45,758 

GMB ICT New Technology Investment Fund

 29,657  26.75  7,934   —     —    7,934 

Soo Delivery Platform Growth Fund

 29,944  30.00  8,983   —     —    8,983 

Genesis North America Power Company No.1 PEF

 52,170  39.92  20,824   —     —    20,824 

SHBNPP MAIN Professional Investment Type Private Mixed Asset Investment Trust No.3

 26,589  23.33  6,204   —     —    6,204 

Others

 218,647   —    58,362   —    699  59,061  315,179   —    91,483   —    366  91,849 
 

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 
 W3,116,300   626,181  (147)  5,260  631,294  W3,476,038   —    669,496  (136)  1,970  671,330 
 

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

 

(*1)

Other adjustments represent the unrecognized equity method losses because the Group has stopped recognizing its equity method losses as the balance of the investment has been reduced to zero.

(*2)Net

Other on this investee represents the cumulative losses as the Group has stopped the equity method, and its carrying value becomes zero due to the adjustment for the difference between the cost of the investment and the Group’s interests in the net carrying value of the investee’s assets do not includenon-controlling interests and otherliabilities at the investment date.

(*3)

Other adjustments represent the difference between the cost of the investment and the Group’s interests in the net carrying value of the investee’s assets and liabilities at the investment date.

(*3)Other adjustments represent the unrecognized equity method losses because the Group has stopped recognizing its equity method losses as the balance of the investment has been reduced to zero and the difference between the cost of the investment and the Group’s interests in the net carrying value of the investee’s assets and liabilities at the investment date.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

16.20.

Investments in associates (continued)

 

 (e)

The unrecognized equity method losses for the year ended December 31, 2017 and the cumulative unrecognized equity method losses as of and for the years ended December 31, 2017 and 2018 are as follows:

 

   2017 

Investees

  Unrecognized equity
method losses		   Cumulative unrecognized
equity method losses		 

Daewontos Co., Ltd.

  W—      (760) 

JAEYANG INDUSTRY

   —      (18) 

Chungyoung INC

   (130)    (130) 
  

 

 

   

 

 

 
  W(130)    (908) 
  

 

 

   

 

 

 

 

   2018 

Investees

  Unrecognized equity
method losses		   Cumulative unrecognized
equity method losses		 

Daewontos Co., Ltd.

  W—      (760) 

JAEYANG INDUSTRY

   —      (18) 

Songlim Partners.

   (8)    (8) 
  

 

 

   

 

 

 
  W(8)    (786) 
  

 

 

   

 

 

 

17.21.

Investment properties net

 

 (a)

Investment properties as of December 31, 20162017 and 20172018 are as follows:

 

  2016   2017   2017   2018 

Acquisition cost

  W438,004    508,784   W508,784    579,852 

Accumulated depreciation

   (84,829)    (90,481)    (90,481)    (105,032) 
  

 

   

 

   

 

   

 

 

Book value

  W353,175    418,303   W418,303    474,820 
  

 

   

 

   

 

   

 

 

 

 (b)

Changes in investment properties for the years ended December 31, 20162017 and 20172018 are as follows:

 

  2016   2017   2017   2018 

Beginning balance

  W208,717    353,175   W353,175    418,303 

Acquisitions

   175,835    2,125    2,125    115,333 

Disposals

   (20,479)    (6,277)    (6,277)    (13,608) 

Depreciation

   (19,588)    (16,095)    (16,095)    (16,917) 

Amounts transferred from (to) property and equipment

   10,898    91,782    91,782    (28,199) 

Amounts transferred to assets held for sale (*)

   (2,200)    (6,306)    (6,306)    —   

Foreign currency adjustment

   (8)    (101)    (101)    (92) 
  

 

   

 

   

 

   

 

 

Ending balance

  W353,175    418,303   W418,303    474,820 
  

 

   

 

   

 

   

 

 

 

 (*)

Comprise land and buildings, etc.

(c)Income and expenses on investment property for the years ended December 31, 2015, 2016 and 2017 were as follows:

   2015   2016   2017 

Rental income

  W30,876    27,852    33,023 

Direct operating expenses for investment properties that generated rental income

   9,434    9,384    10,998 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

17.21.

Investment properties net (continued)

 

 (c)

Income and expenses on investment property for the years ended December 31, 2016, 2017 and 2018 were as follows:

   2016   2017   2018 

Rental income

  W27,852    33,023    32,488 

Direct operating expenses for investment properties that generated rental income

   9,384    10,998    12,191 

(d)

The fair value of investment property as of December 31, 20162017 and 20172018 is as follows:

 

   2016   2017 

Land and buildings(*)

  W1,127,262    1,027,830 
   2017   2018 

Land and buildings (*)

  W1,027,830    1,121,985 

 

 (*)

Fair value of investment properties is estimated based on the recent market transactions and certain significant unobservable inputs. Accordingly, fair value of investment properties is classified as level 3.

 

18.22.

Other assets net

Other assets as of December 31, 20162017 and 20172018 are as follows:

 

  2016   2017   2017   2018 

Accounts receivable

  W5,333,459    6,295,129   W6,295,129    7,666,217 

Domestic exchange settlement debit

   6,123,196    2,973,751    2,973,751    6,121,332 

Guarantee deposits

   1,167,045    1,158,693    1,158,693    1,152,434 

Present value discount

   (37,863)    (50,170)    (50,170)    (44,694) 

Accrued income

   1,342,009    1,624,992    1,624,992    1,896,822 

Prepaid expense

   115,583    163,727    163,727    194,040 

Suspense payments

   57,691    63,486    63,486    73,153 

Sundry assets

   58,347    53,034    53,034    92,221 

Separate account assets

   2,737,869    3,040,534    3,040,534    2,650,302 

Advance payments

   280,301    219,861    219,861    616,996 

Unamortized deferred acquisition cost

   975,365    888,262    888,262    786,134 

Other

   66,592    170,338    170,338    423,759 

Allowances for impairment

   (51,186)    (49,679)    (49,679)    (56,798) 
  

 

   

 

   

 

   

 

 
  W18,168,408    16,551,958   W16,551,958    21,571,918 
  

 

   

 

   

 

   

 

 

 

19.23.

Leases

 

 (a)

Finance lease receivables of the Group as lessor as of December 31, 20162017 and 20172018 are as follows:

   2016 
   Gross investment   Unearned finance
income		   Present value of
minimum lease
payment		 

Not later than 1 year

  W760,468    73,129    687,339 

1 ~ 5 years

   1,182,066    72,813    1,109,253 

Later than 5 years

   20,172    16    20,156 
  

 

 

   

 

 

   

 

 

 
  W1,962,706    145,958    1,816,748 
  

 

 

   

 

 

   

 

 

 

 

   2017 
   Gross investment   Unearned finance
income		   Present value of
minimum lease
payment		 

Not later than 1 year

  W688,358    76,677    611,681 

1 ~ 5 years

   1,176,334    86,280    1,090,054 

Later than 5 years

   16,226    585    15,641 
  

 

 

   

 

 

   

 

 

 
  W 1,880,918    163,542    1,717,376 
  

 

 

   

 

 

   

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

19.23.

Leases (continued)

   2018 
   Gross investment   Unearned finance
income		   Present value of
minimum lease
payment		 

Not later than 1 year

  W595,427    85,333    510,094 

1 ~ 5 years

   1,306,571    106,333    1,200,238 

Later than 5 years

   16,529    38    16,491 
  

 

 

   

 

 

   

 

 

 
  W 1,918,527    191,704    1,726,823 
  

 

 

   

 

 

   

 

 

 

 (b)

The scheduled maturities of minimum lease payments for finance and operating leases of the Group as lessor as of December 31, 20162017 and 20172018 are as follows:

 

   Minimum lease payment 
   2016   2017 

Not later than 1 year

  W14,992    37,455 

1 ~ 5 years

   11,062    70,764 

Over 5 years

   —      12 
  

 

 

   

 

 

 
  W26,054    108,231 
  

 

 

   

 

 

 
i)

Finance lease

   2017 
   Minimum lease
payment		   Present value
adjustment		   Present value of
minimum lease
payment		 

Not later than 1 year

  W688,358    76,677    611,681 

1 ~ 5 years

   1,176,334    86,280    1,090,054 

Later than 5 years

   16,226    585    15,641 
  

 

 

   

 

 

   

 

 

 
  W1,880,918    163,542    1,717,376 
  

 

 

   

 

 

   

 

 

 

   2018 
   Minimum lease
payment		   Present value
adjustment		   Present value of
minimum lease
payment		 

Not later than 1 year

  W595,427    85,333    510,094 

1 ~ 5 years

   1,306,571    106,333    1,200,238 

Later than 5 years

   16,529    38    16,491 
  

 

 

   

 

 

   

 

 

 
  W1,918,527    191,704    1,726,823 
  

 

 

   

 

 

   

 

 

 

ii)

Operating lease

   Minimum lease payment 
   2017   2018 

Not later than 1 year

  W37,455    94,540 

1 ~ 5 years

   70,764    180,304 

Over 5 years

   12    10 
  

 

 

   

 

 

 
  W108,231    274,854 
  

 

 

   

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

23.

Leases (continued)

 

 (c)

Future minimum lease payments undernon-cancellable operating lease of the Group as lessee as of December 31, 20162017 and 20172018 are as follows:

 

  Minimum lease payment   Minimum lease payment 
  2016   2017   2017   2018 

Not later than 1 year

  W178,272    247,815   W247,815    204,323 

1 ~ 5 years

   160,988    328,482    328,482    382,620 

Later than 5 years

   3,720    32,740    32,740    23,148 
  

 

   

 

   

 

   

 

 
  W342,980    609,037   W609,037    610,091 
  

 

   

 

   

 

   

 

 

 

20.24.

Pledged assets

(a)

(a)

Assets pledged as collateral as of December 31, 2016 and 2017 and 2018 are as follows:

 

  2016   2017   2017   2018 

Loans

  W76,432    99,158     

Loans

  W99,158    —   

Loans at amortized cost

   —      129,210 

Securities

        

Securities at FVTPL

   —      11,533,107 

Securities at FVOCI

   —      1,372,746 

Securities at amortized cost

   —      10,670,253 

Trading assets

   10,761,284    12,660,710    12,660,710    —   

Financial assets designated at fair value through profit or loss

   580,837    587,380    587,380    —   

Available-for-sale financial assets

   2,290,029    1,968,870    1,968,870    —   

Held-to-maturity financial assets

   8,011,985    10,508,112    10,508,112    —   
  

 

   

 

   

 

   

 

 
   21,644,135    25,725,072    25,725,072    23,576,106 
  

 

   

 

   

 

   

 

 

Deposits

   701,366    1,501,661     

Deposits

   1,501,661    —   

Deposits at amortized cost

   —      1,481,085 

Real estate

   61,711    157,485    157,485    154,490 
  

 

   

 

   

 

   

 

 
  W22,483,644    27,483,376   W27,483,376    25,340,891 
  

 

   

 

   

 

   

 

 

The carrying amounts of asset pledged that the pledgees have the right to sell or repledge regardless of the Group’s default as of December 31, 20162017 and 20172018 areW8,877,1669,688,816 million andW9,688,8168,026,332 million, respectively.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

20.Pledged assets (continued)(b)

(b) The fair value of collateral held that the Group has the right to sell or repledge regardless of pledger’s default as of December 31, 2016 and 2017 and 2018 are as follows:

2016
Collateral held
Assets pledged
as collateral		Assets
received as
collateral

Securities

W7,667,4173,749,791

Others

200—  

 

   2017 
   Collateral held 
   Assets pledged
as collateral		   Assets
received as
collateral		 

Securities

  W8,779,621    3,749,516 

21.Deposits

Deposits as of December 31, 2016 and 2017 are as follows:

   2016   2017 

Demand deposits

  W93,632,192    102,928,642 

Time deposits

   126,325,628    129,483,260 

Negotiable certificates of deposits

   6,478,626    7,583,365 

Note discount deposits

   4,581,276    3,423,459 

CMA(*)

   2,473,048    4,197,146 

Others

   1,647,188    1,803,352 
  

 

 

   

 

 

 
  W235,137,958    249,419,224 
  

 

 

   

 

 

 

(*)CMA: Cash management account deposits

22.Trading liabilities

Trading liabilities as of December 31, 2016 and 2017 are as follows:

   2016   2017 

Securities sold:

    

Equity

  W581,625    495,019 

Debt

   815,383    871,884 

Others

   93,757    47,001 
  

 

 

   

 

 

 
   1,490,765    1,413,904 

Gold deposits

   485,995    434,586 
  

 

 

   

 

 

 
  W1,976,760    1,848,490 
  

 

 

   

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

23.Financial liabilities designated at fair value through profit or loss

Financial liabilities designated at fair value through profit or loss as of December 31, 2016 and 2017 are as follows:

   2016   2017   

Reason for designation

Deposits

  W6,282    —     Combined instrument

Equity-linked securities sold

   7,024,194    5,865,990   Combined instrument

Derivatives-combined securities sold

   2,193,032    2,394,646   Combined instrument

Securities sold

   10,134    36,973   Evaluation and management on a fair value basis
  

 

 

   

 

 

   
  W9,233,642    8,297,609   
  

 

 

   

 

 

   

24.Borrowings

Borrowingsas of December 31, 2016 and 2017 are as follows:

   2016 
   Interest rate
(%)		   Amount 

Borrowings in won:

    

Borrowings from Bank of Korea

   0.50~0.75   W2,669,027 

Others

   0.00~5.00    7,582,778 
    

 

 

 
     10,251,805 
    

 

 

 

Borrowings in foreign currency:

    

Overdraft due to banks

   0.00    152,589 

Borrowings from banks

   0.24~3.95    3,717,391 

Others

   1.02~1.86    1,947,650 
    

 

 

 
     5,817,630 
    

 

 

 

Call money

   0.10~10.00    1,130,476 

Bills sold

   0.65~1.52    12,427 

Bonds sold under repurchase agreements

   0.30~6.29    8,082,626 

Bond issuance costs

     (723) 
    

 

 

 
    W25,294,241 
    

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

24.Borrowings

Pledged assets (continued)

 

   2017 
   Interest rate
(%)		   Amount 

Borrowings in won:

    

Borrowings from Bank of Korea

   0.50~0.75   W2,913,045 

Others

   0.00~5.00    9,585,511 
    

 

 

 
     12,498,556 
    

 

 

 

Borrowings in foreign currency:

    

Overdraft due to banks

   0.00    128,634 

Borrowings from banks

   0.10~12.50    3,737,366 

Others

   0.00~7.90    1,295,572 
    

 

 

 
     5,161,572 
    

 

 

 

Call money

   0.00~6.20    856,813 

Bills sold

   0.65~3.26    13,605 

Bonds sold under repurchase agreements

   0.00~6.00    9,056,232 

Bond issuance costs

     (168) 
    

 

 

 
    W27,586,610 
    

 

 

 
2018
Collateral held
Assets pledged
as collateral		Assets
received as
collateral

Securities

W7,342,2395,190,387

 

25.Debt securities issued

Deposits

Debt securities issuedDeposits as of December 31, 20162017 and 2018 were as follows:

   2017   2018 

Demand deposits:

  W102,928,642    106,160,833 

Time deposits:

   129,483,260    139,644,763 

Negotiable certificates of deposits

   7,583,365    9,247,088 

Note discount deposits

   3,423,459    4,087,530 

CMA

   4,197,146    4,084,709 

Others

   1,803,352    1,775,267 
  

 

 

   

 

 

 
  W249,419,224    265,000,190 
  

 

 

   

 

 

 

26.

Financial liabilities at fair value through profit or loss

Financial liabilities at fair value through profit or loss as of December 31, 2018 are as follows:

2018

Securities sold:

Stocks

W488,873

Bonds

440,382

Others

32,117

961,372

Gold deposits

458,934

W1,420,306

27.

Trading liabilities

Trading liabilities as of December 31, 2017 are as follows:

 

   2016 
   Interest rate
(%)		  Amount 

Debt securities issued in won:

    

Debt securities issued

  0.00~8.00  W33,838,495 

Subordinated debt securities issued

  2.20~4.69   3,991,056 

Loss on fair value hedges

     (147,208) 

Bond issuance cost

     (38,178) 
    

 

 

 
     37,644,165 
    

 

 

 

Debt securities issued in foreign currencies:

    

Debt securities issued

  0.03~4.38   5,526,809 

Subordinated debt securities issued

  3.88   1,189,067 

Loss on fair value hedges

     (9,977) 

Bond issuance cost

     (23,279) 
    

 

 

 
     6,682,620 
    

 

 

 
    W44,326,785 
    

 

 

 
2017

Securities sold:

Stocks

W495,019

Bonds

871,884

Others

47,001

1,413,904

Gold deposits

434,586

W1,848,490

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

25.28.

Financial liabilities designated at fair value through profit or loss (IFRS 9)

Financial liabilities designated at fair value through profit or loss as of December 31, 2018 are as follows:

2018

Reason for designation

Equity-linked securities sold

W6,439,292Combined instrument

Securities sold with embedded derivatives

2,096,508Combined instrument

W8,535,800

(*)

The Group designated the financial liabilities at the initial recognition (or subsequently) in accordance with paragraph 6.7.1 of IFRS 9 as financial liabilities at fair value through profit or loss.

Maximum credit risk exposure of the financial liabilities designated at fair value through profit or loss amounts toW8,535,800 million as of December 31, 2018. Changes in values of the liability areW2,376 million for the year ended December 31, 2018 and the accumulated changes areW235 million as of December 31, 2018.

29.

Financial liabilities designated at fair value through profit or loss (IAS 39)

Financial liabilities designated at fair value through profit or loss as of December 31, 2017 are as follows:

2017

Reason for designation

Equity-linked securities sold

W5,865,990Combined instrument

Securities sold with embedded derivatives

2,394,646Combined instrument

Securities sold

36,973Evaluation and management on a fair value basis

W8,297,609

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

30.

Borrowings

Borrowings as of December 31, 2017 and 2018 are as follows:

   2017 
   Interest
rate (%)		   Amount 

Call money

   0.00~6.20   W856,813 

Bill sold

   0.65~3.26    13,605 

Bonds sold under repurchase agreements

   0.00~6.00    9,056,232 

Borrowings in Korean won:

    

Borrowings from Bank of Korea

   0.50~0.75    2,913,045 

Others

   0.00~5.00    9,585,511 
    

 

 

 
     12,498,556 
    

 

 

 

Borrowings in foreign currencies:

    

Overdraft due to banks

   0.00    128,634 

Borrowings from banks

   0.10~12.50    3,737,366 

Others

   0.00~7.90    1,295,572 
    

 

 

 
     5,161,572 
    

 

 

 

Deferred origination costs

     (168) 
    

 

 

 
    W27,586,610 
    

 

 

 

   2018 
   Interest
rate (%)		   Amount 

Call money

   0.00~6.85   W1,425,162 

Bill sold

   0.75~1.70    14,536 

Bonds sold under repurchase agreements

   0.50~6.50    7,614,659 

Borrowings in Korean won:

    

Borrowings from Bank of Korea

   0.50~0.75    2,329,946 

Others

   0.00~4.25    12,108,741 
    

 

 

 
     14,438,687 
    

 

 

 

Borrowings in foreign currencies:

    

Overdraft due to banks

   0.00    77,673 

Borrowings from banks

   0.00~12.00    4,653,055 

Others

   2.60~7.90    1,596,626 
    

 

 

 
     6,327,354 
    

 

 

 

Deferred origination costs

     (1,856) 
    

 

 

 
    W29,818,542 
    

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

31.

Debt securities issued (continued)

Debt securities issued as of December 31, 2017 and 2018 are as follows:

 

   2017 
   Interest
rate
(%)		  Amount 

Debt securities issued in Korean won:

    

Debt securities issued

  0.00~8.00  W41,781,486 

Subordinated debt securities issued

  2.20~4.60   3,500,401 

Loss on fair value hedges

     (274,047) 

Bond issuance costDiscount on debt securities issued

     (45,969) 
    

 

 

 
     44,961,871 
    

 

 

 

Debt securities issued in foreign currencies:

    

Debt securities issued

  0.00~4.20   4,989,904 

Subordinated debt securities issued

  3.75~3.88   1,446,390 

Loss on fair value hedges

     (25,794) 

Bond issuance costDiscount on debt securities issued

     (31,550) 
    

 

 

 
     6,378,950 
    

 

 

 
    W51,340,821 
    

 

 

 

 

26.Employee benefits

 (a)Defined benefit plan assets and liabilities2018
Interest
rate (%)		Amount

Debt securities issued in Korean won:

Debt securities issued

0.00~8.00W50,661,472

Subordinated debt securities issued

2.20~4.604,400,145

Loss on fair value hedges

(206,985) 

Discount on debt securities issued

(84,962) 

54,769,670

Debt securities issued in foreign currencies:

Debt securities issued

0.20~4.016,278,680

Subordinated debt securities issued

3.75~5.002,271,799

Loss on fair value hedges

(55,251) 

Discount on debt securities issued

(37,199) 

8,458,029

W63,227,699

Defined benefit plan assets and liabilities as of December 31, 2016 and 2017 are as follows:

   2016   2017 

Present value of defined benefit obligations

  W1,689,980    1,695,191 

Fair value of plan assets

   (1,559,101)    (1,688,047) 
  

 

 

   

 

 

 

Recognized liabilities for defined benefit obligations

  W130,879    7,144 
  

 

 

   

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

26.32.

Employee benefits (continued)

 

 (a)

Defined benefit obligations and plan assets

Defined benefit obligations and plan assets as of December 31, 2017 and December 31, 2018 are as follows:

   2017   2018 

Present value of defined benefit obligations

  W1,695,191    1,841,982 

Fair value of plan assets

   (1,688,047)    (1,714,634) 
  

 

 

   

 

 

 

Recognized liabilities for defined benefit obligations

  W7,144    127,348 
  

 

 

   

 

 

 

(b)

Changes in the present value of defined benefit obligation and plan assets for the years ended December 31, 20162017 and 20172018 were as follows:

 

  2016   2017 
  Defined benefit
obligation		   Plan assets   Net defined
benefit liability		   Defined benefit
obligation		   Plan assets   Net defined
benefit liability		 

Beginning balance

  W1,567,898    (1,341,768)    226,130   W1,689,980    (1,559,101)    130,879 

Included in profit or loss:

            

Current service cost

   179,811    —      179,811    172,152    —      172,152 

Past service cost

   —      —      —      2,810    —      2,810 

Interest expense (income)

   50,892    (44,773)    6,119    54,485    (52,136)    2,349 
  

 

   

 

   

 

   

 

   

 

   

 

 
   230,703    (44,773)    185,930    229,447    (52,136)    177,311 
  

 

   

 

   

 

   

 

   

 

   

 

 

Included in other comprehensive income:

            

Remeasurement loss (gain):

            

- Actuarial gains (losses) arising from :

            

Demographic assumptions

   2,344    —      2,344    4,471    —      4,471 

Financial assumptions

   (297)    —      (297)    (96,957)    —      (96,957) 

Experience adjustment

   (41,538)    —      (41,538)    (56,709)    —      (56,709) 

- Return on plan assets excluding interest income

   —      19,448    19,448    —      27,460    27,460 
  

 

   

 

   

 

   

 

   

 

   

 

 
   (39,491)    19,448    (20,043)    (149,195)    27,460    (121,735) 
  

 

   

 

   

 

   

 

   

 

   

 

 

Other:

            

Benefits paid by the plan

   (69,439)    62,405    (7,034)    (74,841)    69,857    (4,984) 

Contributions paid into the plan

   —      (254,413)    (254,413)    —      (174,127)    (174,127) 

Change in subsidiaries

   250    —      250 

Effect of movements in exchange rates

   59    —      59    (200)    —      (200) 
  

 

   

 

   

 

   

 

   

 

   

 

 
   (69,130)    (192,008)    (261,138)    (75,041)    (104,270)    (179,311) 
  

 

   

 

   

 

   

 

   

 

   

 

 

Ending balance

  W1,689,980    (1,559,101)    130,879   W1,695,191    (1,688,047)    7,144 
  

 

   

 

   

 

   

 

   

 

   

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

26.32.

Employee benefits (continued)

 

Profit or loss arising from defined benefit plans is included in general and administrative expenses.

   2018 
   Defined benefit
obligation		   Plan assets   Net defined
benefit liability		 

Beginning balance

  W1,695,191    (1,688,047)    7,144 

Included in profit or loss:

      

Current service cost

   144,923    —      144,923 

Past service cost

   54    —      54 

Interest expense (income)

   59,836    (66,676)    (6,840) 
  

 

 

   

 

 

   

 

 

 
   204,813    (66,676)    138,137 
  

 

 

   

 

 

   

 

 

 

Included in other comprehensive income:

      

Remeasurement loss (gain):

      

- Actuarial gains (losses) arising from :

      

Demographic assumptions

   18,399    —      18,399 

Financial assumptions

   79,038    1,215    80,253 

Experience adjustment

   (10,762)    —      (10,762) 

- Return on plan assets excluding interest income

   —      40,486    40,486 
  

 

 

   

 

 

   

 

 

 
   86,675    41,701    128,376 
  

 

 

   

 

 

   

 

 

 

Other:

      

Benefits paid by the plan

   (142,938)    137,335    (5,603) 

Contributions paid into the plan

   —      (139,348)    (139,348) 

Settlement gain or loss

   407    —      407 

Effect of movements in exchange rates

   (1,273)    —      (1,273) 

Others (*2)

   (893)    401    (492) 
  

 

 

   

 

 

   

 

 

 
   (144,697)    (1,612)    (146,309) 
  

 

 

   

 

 

   

 

 

 

Ending balance

  W1,841,982    (1,714,634)    127,348 
  

 

 

   

 

 

   

 

 

 

 

   2017 
   Defined benefit
obligation		   Plan assets   Net defined benefit
liability		 

Beginning balance

  W1,689,980    (1,559,101)    130,879 

Included in profit or loss:

      

Current service cost

   172,152    —      172,152 

Past service cost

   2,810    —      2,810 

Interest expense (income)

   54,485    (52,136)    2,349 
  

 

 

   

 

 

   

 

 

 
   229,447    (52,136)    177,311 
  

 

 

   

 

 

   

 

 

 

Included in other comprehensive income:

      

Remeasurement loss (gain):

      

- Actuarial gains (losses) arising from :

      

Demographic assumptions

   4,471    —      4,471 

Financial assumptions

   (96,957)    —      (96,957) 

Experience adjustment

   (56,709)    —      (56,709) 

- Return on plan assets excluding interest income

   —      27,460    27,460 
  

 

 

   

 

 

   

 

 

 
   (149,195)    27,460    (121,735) 
  

 

 

   

 

 

   

 

 

 

Other:

      

Benefits paid by the plan

   (74,841)    69,857    (4,984) 

Contributions paid into the plan

   —      (174,127)    (174,127) 

Effect of movements in exchange rates

   (200)    —      (200) 
  

 

 

   

 

 

   

 

 

 
   (75,041)    (104,270)    (179,311) 
  

 

 

   

 

 

   

 

 

 

Ending balance

  W1,695,191    (1,688,047)    7,144 
  

 

 

   

 

 

   

 

 

 
(*1)

Profit or loss arising from defined benefit plans is included in general and administrative expenses.

(*2)

Others represent the change amounts due to the conversion to defined contribution.

 

 (c)

The composition of plan assets as of December 31, 20162017 and 20172018 are as follows:

 

  2016   2017   2017   2018 

Plan assets comprise:

        

Equity securities

  W126,348    231,620   W231,620    257,581 

Debt securities

   32,838    43,990    43,990    817 

Due from banks

   1,363,942    1,380,656    1,380,656    1,394,634 

Other

   35,973    31,781    31,781    61,602 
  

 

   

 

   

 

   

 

 
  W1,559,101    1,688,047   W1,688,047    1,714,634 
  

 

   

 

   

 

   

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

26.32.

Employee benefits (continued)

 

 (d)

Actuarial assumptions as of December 31, 20162017 and 20172018 are as follows:

 

  2016  2017  

Description

  2017  2018 

Description

Discount rate

  2.78%~3.40%  2.44%~4.07%  AA0 corporate bond yields  2.44%~4.07%  3.02%~3.22% AA0 corporate bond yields

Future salary increase rate

  2.50%~5.38%

+ Upgrade rate

  0.99%~5.61%

+ Upgrade rate

  Average for 5 years  0.99%~5.61%

+ Upgrade rate

  0.99%~3.40%

+ Upgrade rate

 Average for 5 years

Weighted average maturity

  7.25 years ~
13.16 years		  7.25 years ~

9.33 years

    7.25 years ~
9.33 years		  7.7 years ~

9.9 years

 

 

 (e)

Sensitivity analysis

As of December 31, 2017,2018, reasonably possible changes in one of the relevant actuarial assumptions, holding other assumptions constant, would have affected the defined benefit obligation by the amounts shown below.

 

  Defined benefit obligation   Defined benefit obligation 
  Increase   Decrease   Increase   Decrease 

Discount rate (1%p movement)

  W(147,071)    164,735   W(159,549)    180,542 

Future salary increase rate (1%p movement)

   164,977    (149,641)    176,924    (159,169) 

 

27.33.

Provisions

 

 (a)

Provisions as of December 31, 20162017 and 20172018 are as follows:

 

  2016   2017   2017   2018 

Asset retirement obligations

  W50,738    45,495   W45,495    49,183 

Expected loss related to litigation

   34,471    32,650    32,650    25,554 

Unused credit commitments

   450,997    168,006    168,006    232,347 

Bonus card points program

   25,425    26,434 

Bonus card point reward program (*)

   26,434    —   

Financial guarantee contracts issued

   79,238    80,861    80,861    115,325 

Others

   88,019    75,512    75,512    86,007 
  

 

   

 

   

 

   

 

 
  W728,888    428,958   W428,958    508,416 
  

 

   

 

   

 

   

 

 

 

 (b)(*)Changes in provisions for

In accordance with IFRS 15, the years ended December 31, 2016 and 2017 were as follows:Group has adjusted all bonus card point reward program related to customer loyalty programs.

   2016 
   Asset
retirement		  Litigation  Unused
credit		   Card point
(*2)		  Guarantee  Other  Total 

Beginning balance

  W48,434   25,945   434,941    27,649   81,374   80,445   698,788 

Provision

   2,714   11,387   15,419    51,745   3,887   25,174   110,326 

Provision used

   (2,647)   (3,226)   —      (54,300)   —     (17,649)   (77,822) 

Foreign exchange translation

   —     365   637    —     993   60   2,055 

Others(*1)

   2,237   —     —      331   (7,016)   (11)   (4,459) 
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Ending balance

  W50,738   34,471   450,997    25,425   79,238   88,019   728,888 
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

27.33.

Provisions (continued)

 

   2017 
   Asset
retirement		  Litigation  Unused
credit		  Card point
(*2)		  Guarantee  Other  Total 

Beginning balance

  W50,738   34,471   450,997   25,425   79,238   88,019   728,888 

Provision(reversal)

   (4,562)   704   (279,508)   51,294   2,548   11,797   (217,727) 

Provision used

   (2,695)   (1,908)   —     (50,285)   (132)   (22,637)   (77,657) 

Foreign exchange translation

   —     (617)   (3,483)   —     (4,458)   (52)   (8,610) 

Others(*1)

   2,014   —     —     —     3,665   (1,615)   4,064 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Ending balance

  W45,495   32,650   168,006   26,434   80,861   75,512   428,958 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
(b)

Changes in provision for unused credit commitments and financial guarantee contracts issued as of December 31, 2018 are as follows:

  Unused credit commitments  Financial guarantee contracts issued  Total 
  12 month
expected
credit loss		  Life time
expected
credit loss		  Impaired
financial asset		  12 month
expected
credit loss		  Life time
expected
credit loss		  Impaired
financial
asset		 

Beginning allowance

 W124,492   96,010   2,137   31,456   3,368   2,464   259,927 

Transfer to 12 month expected credit loss

  42,514   (42,057)   (457)   1,140   (1,140)   —     —   

Transfer to life time expected credit loss

  (8,899)   8,976   (77)   (1,804)   1,804   —     —   

Transfer to impaired financial asset

  (213)   (802)   1,015   (13)   —     13   —   

Provided (reversed)

  (32,070)   38,576   2,519   (3,964)   455   (690)   4,826 

FX change

  578   105   —     758   481   449   2,371 

Others (*1)

  —     —     —     36,621   936   (479)   37,078 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Ending balance

 W126,402   100,808   5,137   64,194   5,904   1,757   304,202 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

(*1)

Others include the adjustment of the provision from financial guarantee contracts measured at fair value newly, and the expired contracts, and the change of discount rate.

(c)

Changes in provisions for the years ended December 31, 2017 and 2018 were as follows:

   2017 
   Asset
retirement		  Litigation  Unused
credit		  Card point
(*2)		  Guarantee  Other  Total 

Beginning balance

  W50,738   34,471   450,997   25,425   79,238   88,019   728,888 

Provision(reversal)

   (4,562)   704   (279,508)   51,294   2,548   11,797   (217,727) 

Provision used

   (2,695)   (1,908)   —     (50,285)   (132)   (22,637)   (77,657) 

Foreign exchange translation

   —     (617)   (3,483)   —     (4,458)   (52)   (8,610) 

Others (*1)

   2,014   —     —     —     3,665   (1,615)   4,064 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Ending balance

  W45,495   32,650   168,006   26,434   80,861   75,512   428,958 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(*1)

Others include the effects of decrease in discount and changes in discount rate.

(*2)

Provisions for card point were classified as fees and commission expense.

   2018 
   Asset
retirement		  Litigation  Guarantee  Other  Total 

Beginning balance (*1)

  W45,495   32,650   46,340   75,512   199,997 

Provision(reversal)

   4,789   (1,138)   (2,833)   4,900   5,718 

Provision used

   (4,210)   (6,343)   —     (7,554)   (18,107) 

Foreign exchange translation

   —     385   1,677   (1,006)   1,056 

Others (*2)

   3,109   —     (1,714)   14,155   15,550 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Ending balance

  W49,183   25,554   43,470   86,007   204,214 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

33.

Provisions (continued)

(*1)

In accordance with IFRS 15, the Group has adjusted all bonus card point reward program related to customer loyalty programs.

(*2)

Others include the effects of decrease in discount and changes in discount rate.

 

 (c)(d)

Asset retirement obligation liabilities represent the estimated cost to restore the existing leased properties which is discounted to the present value using the appropriate discount rate at the end of the reporting period. Disbursements of such costs are expected to incur at the end of lease contract. Such costs are reasonably estimated using the average lease year and the average restoration expenses. The average lease year is calculated based on the pastten-year historical data of the expired leases. The average restoration expense is calculated based on the actual costs incurred for the past three years using the three-year average inflation rate.

 

 (d)(e)

Allowance for guarantees and acceptances as of December 31, 20162017 and 20172018 are as follows:

 

  2016   2017   2017   2018 

Guarantees and acceptances outstanding

  W9,324,734    7,611,211   W7,611,211    9,437,691 

Contingent guarantees and acceptances

   2,997,553    3,259,613    3,259,613    3,985,532 

ABS and ABCP purchase commitments

   2,060,089    2,035,543    2,035,543    2,083,522 

Endorsed bill

   32,187    85,456    85,456    37,667 
  

 

   

 

   

 

   

 

 
  W14,414,563    12,991,823   W12,991,823    15,544,412 
  

 

   

 

   

 

   

 

 

Allowance for loss on guarantees and acceptances

  W79,238    80,861   W80,861    115,325 

Ratio

  %0.55    0.62   %0.62    0.74 

 

28.34.

Liability under insurance contracts

 

 (a)

Insurance riskliabilities as of December 31, 2017 and 2018 are as follows:

Insurance risk, arising out of underwriting of insurance contract and benefit payment, means a risk in which the amount from an unexpected loss is larger than the premium amount. Insurance risk management aims to minimize risk, of benefit to be paid in excess of what was initially assumed at the time of pricing due to occurrence of an unusual occasion or change of economic environment.

   2017   2018 

Policy reserve

  W24,515,364    26,211,044 

Policyholder’s equity adjustment

   (76)    7,838 
  

 

 

   

 

 

 
  W24,515,288    26,218,882 
  

 

 

   

 

 

 

The insurance products that the Group provides are life insurance products and can be categorized as individual insurance and group insurance with regard to the insured person. In group insurance contacts the insured person is an employee or member of an entity and the policy holder is either the entity or a representative of the entity. The group insurances comprise savings insurances and protection type insurances. The protection type insurance means an insurance in which the aggregate of the insurance

(b)

Policy reserve as of December 31, 2017 and 2018 are as follows:

   2017   2018 

Interest rate linked

  W16,464,193    17,328,353 

Fixed interest rate

   8,051,171    8,882,691 
  

 

 

   

 

 

 
  W24,515,364    26,211,044 
  

 

 

   

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

28.34.

Liability under insurance contracts (continued)

proceeds payable upon survival under the base age condition, cases where a male at the full age of 40 purchases an insurance policy, shall not exceed insurance premiums already paid. The savings insurance means an insurance, other than a protection type insurance product, in which the aggregate of insurance proceeds payable upon survival may exceed insurance premiums already paid. Individual insurances comprise death insurances (in which the insurance event is death), pure endowment insurances (in which the insurance event is survival) and endowment insurances (in which the insurance event is both survival and death).

(b)Insurance risk management

Insurance risk management comprises acceptance and administration of insurance contracts, calculation and adjustment of premium rate, review and payment of claims, reinsurance and closing accounts. Each insurance component is managed by a department operating for the risk component.

The Risk Management Team and other related departments conduct preemptive risk management when they develop or revise an insurance product. Insurance risk is continuously improved through regularly reviewing experience rate analysis, insurance risk measurement, underwriting and claims inspection process after product selling.

i)Underwriting

The Group reviews and improves the medical underwriting guideline based on the changes of medical environment. The Group reassesses and reinforces underwriting standards through profit and loss analysis over insurance contracts. Consultants are updated with the latest underwriting standards. The Group distributes underwriting manual for consultants to preventmis-selling. Risk Management Supporting enhances the accuracy of the risk assessment over a subscribed insurance contract. It provides various risk information that are consistent and underwriting that is reasonable.

ii)Risk management through reinsurance

The Group cedes an insurance contract to reinsurer if risks of the contract need to be transferred or diversified to ensure claims payment ability and to maintain financial sustainability of the Group. To achieve the objectives of reinsurance activity, the Group runs reinsurance business efficiently by profit-loss analysis, cedes insurance contracts to reliable reinsurer and observes relevant regulations through the internal control system.

iii)Developing insurance product

When an insurance product is developed or revised, the Group prices insurance premium based on the analysis of expected and actual insurance risk difference and sensitivity to the risk factors. The Group also reviews the appropriateness of the premium and the profitability of the products through the historical loss experience analysis. The Group reviews compliance of risk management policy and appropriateness of expected profit-loss based on experience rate as a part of post selling risk management for a high risk product. Policy and underwriting standard of the product would be revised in line with the result of the review to improve insurance risk.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

28.Liability under insurance contracts (continued)

 

 iv)Assessment of claims requests and payment

A standard process for accepting requests and claims payment is enacted to regulate the assessment process of claims requests. The Group pays reasonable benefit using insurance risk management system score, assessment process by types of claims and historical insurance loss experience analysis. The Group monitors deficiency of insurance policy through claim assessment process, and based on that, modifies insurance policies and contracts. The claims payment process is continuously improved reflecting the result of insurance event inspection process monitoring, internal audit and customer complaints etc.

(c)Insurance liabilities as of December 31, 2016 and 2017 are as follows:

   2016   2017 

Policy reserve

  W22,366,865    24,515,364 

Policyholder’s equity adjustment

   10,569    (76) 
  

 

 

   

 

 

 
  W22,377,434    24,515,288 
  

 

 

   

 

 

 

(d)Policy reserve as of December 31, 2016 and 2017 are as follows:

   2016   2017 

Interest rate linked

  W15,177,891    16,464,193 

Fixed interest rate

   7,188,974    8,051,171 
  

 

 

   

 

 

 
  W22,366,865    24,515,364 
  

 

 

   

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

28.Liability under insurance contracts (continued)

(e)The details of policy reserves as of December 31, 20162017 and 20172018 are as follows:

  2016 
  Individual insurance   Group insurance    
  Pure
endowment		  Death  Endowment  Subtotal   Pure
protection		   Savings   Subtotal  Total 

Premium reserve

 W4,848,027   9,451,671   6,958,191   21,257,889    37,777    297    38,074   21,295,963 

Guarantee reserve

  11,265   44,288   156   55,709    —      —      —     55,709 

Unearned premium reserve

  3   376   —     379    465    —      465   844 

Reserve for outstanding claims

  79,017   714,129   155,735   948,881    29,788    —      29,788   978,669 

Interest rate difference guarantee reserve

  1,882   163   13   2,058    —      —      —     2,058 

Mortality gains reserve

  6,212   5,275   222   11,709    4    —      4   11,713 

Interest gains reserve

  17,356   268   21   17,645    —      —      —     17,645 

Long term duration dividend reserve

  56   10   2   68    —      —      —     68 

Reserve for policyholder’s profit dividend

  2,862   —     —     2,862    —      —      —     2,862 

Reserve for losses on dividend insurance contract

  1,334   —     —     1,334    —      —      —     1,334 
 

 

 

  

 

 

  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 
 W4,968,014   10,216,180   7,114,340   22,298,534    68,034    297    68,331   22,366,865 
 

 

 

  

 

 

  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

28.Liability under insurance contracts (continued)

 

   2017 
   Individual insurance   Group insurance     
   Pure
endowment		   Death   Endowment   Subtotal   Pure
protection		   Savings   Subtotal   Total 

Premium reserve

  W5,343,670    10,628,661    7,323,183    23,295,514    32,538    57    32,595    23,328,109 

Guarantee reserve

   11,678    50,615    151    62,444    —      —      —      62,444 

Unearned premium reserve

   3    364    —      367    652    —      652    1,019 

Reserve for outstanding claims

   98,596    784,535    176,566    1,059,697    26,068    —      26,068    1,085,765 

Interest rate difference guarantee reserve

   2,280    159    12    2,451    —      —      —      2,451 

Mortality gains reserve

   7,736    5,195    200    13,131    5    —      5    13,136 

Interest gains reserve

   18,463    268    20    18,751    —      —      —      18,751 

Long term duration dividend reserve

   59    10    1    70    —      —      —      70 

Reserve for policyholder’s profit dividend

   2,374    —      —      2,374    —      —      —      2,374 

Reserve for losses on dividend insurance contract

   1,245    —      —      1,245    —      —      —      1,245 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  W5,486,104    11,469,807    7,500,133    24,456,044    59,263    57    59,320    24,515,364 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

28.34.

Liability under insurance contracts (continued)

 

(f)Reinsurance credit risk as of December 31, 2016 and 2017 are as follows:

   2016 
   Reinsurance
assets		   Reinsurance
account receivable		 

AA- to AA+

  W930    2,377 

A- to A+

   820    1,692 
  

 

 

   

 

 

 
  W1,750    4,069 
  

 

 

   

 

 

 

   2017 
   Reinsurance
assets		   Reinsurance
account receivable		 

AA- to AA+

  W1,893    3,420 

A- to A+

   1,217    3,387 
  

 

 

   

 

 

 
  W3,110    6,807 
  

 

 

   

 

 

 

(g)Income or expenses on insurance for the years ended December 31, 2015, 2016 and 2017 are as follows:

   2015   2016   2017 

Insurance income:

      

Premium income

  W4,421,381    4,558,453    4,550,277 

Reinsurance income

   4,239    6,840    10,532 

Separate account income

   22,208    20,805    38,999 
  

 

 

   

 

 

   

 

 

 
   4,447,828    4,586,098    4,599,808 

Insurance expenses:

      

Claims paid

   (1,946,669)    (2,007,831)    (2,213,285) 

Reinsurance premium expenses

   (5,306)    (8,405)    (13,220) 

Provision for policy reserves

   (2,277,549)    (2,325,010)    (2,147,139) 

Separate account expenses

   (22,207)    (20,805)    (38,999) 

Discount charge

   (458)    (548)    (632) 

Acquisition costs

   (596,124)    (559,213)    (543,752) 

Collection expenses

   (14,139)    (15,367)    (15,716) 

Deferred acquisition costs

   418,975    373,490    336,851 

Amortization of deferred acquisition costs

   (436,512)    (440,913)    (423,955) 
  

 

 

   

 

 

   

 

 

 
   (4,879,989)    (5,004,602)    (5,059,847) 
  

 

 

   

 

 

   

 

 

 

Net loss on insurance

  W(432,161)    (418,504)    (460,039) 
  

 

 

   

 

 

   

 

 

 

(h)Maturity of premium reserve as of December 31, 2016 and 2017 are as follows:

   2016 
   Less than
1 year		   1 ~ 3
years		   3 ~ 7
years		   7 ~ 10
years		   10 ~ 20
years		   More than
20 years		   Total 

Fixed interest rate

  W25,096    175,097    549,783    598,030    1,186,510    4,026,275    6,560,791 

Interest rate linked

   38,828    220,839    1,711,187    469,287    1,227,833    11,067,198    14,735,172 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  W63,924    395,936    2,260,970    1,067,317    2,414,343    15,093,473    21,295,963 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   2018 
   Individual insurance   Group insurance     
   Pure
endowment		   Death   Endowment   Subtotal   Pure
protection		   Savings   Subtotal   Total 

Premium reserve

  W5,729,045    11,722,964    7,482,084    24,934,093    24,422    58    24,480    24,958,573 

Guarantee reserve

   10,148    64,978    124    75,250    —      —      —      75,250 

Unearned premium reserve

   3    301    —      304    506    —      506    810 

Reserve for outstanding claims

   99,676    837,317    185,328    1,122,321    18,089    —      18,089    1,140,410 

Interest rate difference guarantee reserve

   2,068    148    11    2,227    —      —      —      2,227 

Mortality gains reserve

   7,026    4,741    176    11,943    3    —      3    11,946 

Interest gains reserve

   18,662    254    19    18,935    —      —      —      18,935 

Long term duration dividend reserve

   52    9    1    62    —      —      —      62 

Reserve for policyholder’s profit dividend

   1,773    —      —      1,773    —      —      —      1,773 

Reserve for losses on dividend insurance contract

   1,058    —      —      1,058    —      —      —      1,058 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  W5,869,511    12,630,712    7,667,743    26,167,966    43,020    58    43,078    26,211,044 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

28.34.

Liability under insurance contracts (continued)

   2017 
   Less than
1 year		   1 ~ 3
years		   3 ~ 7
years		   7 ~ 10
years		   10 ~ 20
years		   More than
20 years		   Total 

Fixed interest rate

  W62,611    256,126    646,634    550,935    1,227,656    4,629,667    7,373,629 

Interest rate linked

   32,364    660,966    1,549,321    384,276    1,359,071    11,968,482    15,954,480 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  W94,975    917,092    2,195,955    935,211    2,586,727    16,598,149    23,328,109 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 (i)(d)

Reinsurance credit risk as of December 31, 2017 and 2018 are as follows:

   2017 
   Reinsurance
assets		   Reinsurance
account receivable		 

AA- to AA+

  W1,893    3,420 

A- to A+

   1,217    3,387 
  

 

 

   

 

 

 
  W3,110    6,807 
  

 

 

   

 

 

 

   2018 
   Reinsurance
assets		   Reinsurance
account receivable		 

AA- to AA+

  W2,451    4,416 

A- to A+

   1,622    3,598 
  

 

 

   

 

 

 
  W4,073    8,014 
  

 

 

   

 

 

 

(e)

Income or expenses on insurance for the years ended December 31, 2016, 2017 and 2018 are as follows:

   2016   2017   2018 

Insurance income:

      

Premium income

  W4,558,453    4,550,277    4,348,745 

Reinsurance income

   6,840    10,532    15,222 

Separate account income

   20,805    38,999    34,771 
  

 

 

   

 

 

   

 

 

 
   4,586,098    4,599,808    4,398,738 
  

 

 

   

 

 

   

 

 

 

Insurance expenses:

      

Claims paid

   2,007,831    2,213,285    2,549,147 

Reinsurance premium expenses

   8,405    13,220    18,482 

Provision for policy reserves (*)

   2,325,010    2,147,139    1,694,716 

Separate account expenses

   20,805    38,999    34,770 

Discount charge

   548    632    669 

Acquisition costs

   559,213    543,752    454,479 

Collection expenses

   15,367    15,716    16,046 

Deferred acquisition costs

   (373,490)    (336,851)    (283,665) 

Amortization of deferred acquisition costs

   440,913    423,955    385,793 
  

 

 

   

 

 

   

 

 

 
   5,004,602    5,059,847    4,870,437 
  

 

 

   

 

 

   

 

 

 

Net loss on insurance

  W(418,504)    (460,039)    (471,699) 
  

 

 

   

 

 

   

 

 

 

(*)

Shinhan Life Insurance’s saving interest is included. (AccumulatedW 960,927 million as of December 31, 2017 and accumulatedW 966,910 million as of December 31, 2018)

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

34.

Liability under insurance contracts (continued)

(f)

Maturity of premium reserve as of December 31, 2017 and 2018 are as follows:

   2017 
   Less than
1 year		   1 ~ 3
years		   3 ~ 7
years		   7 ~ 10
years		   10 ~ 20
years		   More than
20 years		   Total 

Fixed interest rate

  W62,611    256,126    646,634    550,935    1,227,656    4,629,667    7,373,629 

Interest rate linked

   32,364    660,966    1,549,321    384,276    1,359,071    11,968,482    15,954,480 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  W94,975    917,092    2,195,955    935,211    2,586,727    16,598,149    23,328,109 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

   2018 
   Less than
1 year		   1 ~ 3
years		   3 ~ 7
years		   7 ~ 10
years		   10 ~ 20
years		   More than
20 years		   Total 

Fixed interest rate

  W111,102    247,619    741,222    502,572    1,288,815    5,284,548    8,175,878 

Interest rate linked

   195,843    922,832    1,247,871    343,562    1,500,893    12,571,694    16,782,695 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  W306,945    1,170,451    1,989,093    846,134    2,789,708    17,856,242    24,958,573 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(g)

Liability adequacy test, LAT

i) Liability adequacy tests were performed on the premium reserve, unearned premium reserve and guarantee reserve for the contracts held at December 31, 20162017 and 2017.2018. The premium reserve considered the amount net level premium reserve less, where appropriate, deferred acquisition cost in accordance with the article6-3 of Regulation on Supervision of Insurance Business Act.

The assumptionsii) Output overview

In the debt appraisal system, the insurance premium surplus method is applied to calculate premium deficits.

Premium deficiency refers to deficiency when the amount of accumulated reserve is insufficient due to a decrease in the interest rate after the sale of the current estimation usedproduct or an increase in the risk rate compared with the expected basic rate at the time of product development.

The insurance premium standard inspection method is a method of calculating the reserve amount based on the present value of total income reflecting the interest rate, the risk rate, the business ratio, the cancellation rate, etc. and the present value of the total expenditure, that is, (discount rate), business ratio, risk rate, and cancellation rate calculated based on the Group’s own experience, which reflects company-specific characteristics, and does not reflect subjective factors such as management’s willingness to assessment and their basis for calculation was as follows:improve management.

  

Assumptions

  
  

2016

 

2017

 

Measurement basis

Discount rate

 2.04% ~ 5.08% 2.16% ~ 4.94% 

Scenario that adds liquidity premium to risk-free rate scenario

is based on the rate scenario suggested by FSS

Mortality rate

 8% ~ 445% 6.24% ~ 257.25% Rate of premium paid on risk premium based on experience-based rate by classes of sales channel, product and transition period of last 5 years

Operating expense rate

 

Acquisition cost

- The first time :

90% ~ 975.7%

- From the second time :

0% ~ 282.5%

Maintenance expense (each case):

214 won ~ 3,026 won

Collection expenses (on gross premium):

0.03% ~ 1.03%

 

Acquisition cost

- The first time :

90% ~ 1034.9%

- From the second time :

0% ~ 212.9%

Maintenance expense (each case):

843 won ~ 3,768 won

Collection expenses (on gross premium):

0.03% ~ 1.05%

 Operating expense rate on gross premium or expense per contract based on experience-based rate of last 1 year

Surrender ratio

 1.00% ~ 64.83% 0.95% ~ 34.08% Surrender ratio by classes of sales channel, product and transition period of last 5 years

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

28.34.

Liability under insurance contracts (continued)

The result of liability adequacy test as of December 31, 2016 and 2017 are as follows:

   2016 
   Provisions for test   LAT base   Premium loss
(surplus)(*)		 

Participating:

      

Fixed interest

  W571,759    1,375,004    803,245 

Variable interest

   751,848    697,361    (54,487) 
  

 

 

   

 

 

   

 

 

 
   1,323,607    2,072,365    748,758 
  

 

 

   

 

 

   

 

 

 

Non-Participating:

      

Fixed interest

   4,767,752    3,010,507    (1,757,245) 

Variable interest

   12,157,477    8,530,948    (3,626,529) 
  

 

 

   

 

 

   

 

 

 
   16,925,229    11,541,455    (5,383,774) 
  

 

 

   

 

 

   

 

 

 
  W18,248,836    13,613,820    (4,635,016) 
  

 

 

   

 

 

   

 

 

 

   2017 
   Provisions for test   LAT base   Premium loss
(surplus)(*)		 

Participating:

      

Fixed interest

  W582,842    1,351,510    768,668 

Variable interest

   811,078    854,073    42,995 
  

 

 

   

 

 

   

 

 

 
   1,393,920    2,205,583    811,663 
  

 

 

   

 

 

   

 

 

 

Non-Participating:

      

Fixed interest

   5,374,209    2,083,833    (3,290,376) 

Variable interest

   13,374,917    9,819,816    (3,555,101) 
  

 

 

   

 

 

   

 

 

 
   18,749,126    11,903,649    (6,845,477) 
  

 

 

   

 

 

   

 

 

 
  W20,143,046    14,109,232    (6,033,814) 
  

 

 

   

 

 

   

 

 

 

 

 (*)iii)To

The assumptions of the extent the premiums are deficientcurrent estimation used to cover expected future losses at the entity level, an additional reserve is recordedassessment and their basis for the premium deficiency. Ascalculation was as follows:

  

Assumptions

  
  

2017

 

2018

 

Measurement basis

Discount rate

 1.98% ~ 8.77% 1.27% ~ 4.95% The scenario adding liquidity premium to risk-free rate, which is suggested from Financial Supervisory Service

Mortality rate

 6.24% ~ 257.25% 2.58% ~ 247.65% Ratio by claims paid per premium paid on risk premium based on experience-based rate by products, collateral of last 5 years.

Operating expense rate

 

Acquisition cost

- The first time :

90% ~ 1034.9%

- From the second time :

0% ~ 212.9%

Maintenance expense (each case):

843 won ~ 3,768 won

Collection expenses (on gross premium):

0.03% ~ 1.05%

 

Acquisition cost

- The first time :

90% ~ 982.7%

- From the second time :

0% ~ 193.5%

Maintenance expense (each case):

207 won ~ 3,531 won

Collection expenses (on gross premium):

0.04% ~ 1.10%

 Business rate on insurance premium or expenses per contract based on experience-based rate of last 1 year

Surrender ratio

 0.95% ~ 34.08% 0.95% ~ 48.35% Surrender ratio by elapsed period, classes of sales channel, product of last 5 years

vi)

The result of liability adequacy test as of December 31, 20162017 and 2017 no additional reserve was required.2018 are as follows:

Sensitivity analysis as of December 31, 2016 and 2017 are as follows:

   LAT fluctuation 
   2016   2017 

Discount rate increased by 0.5%

  W(1,643,171)    (1,492,528) 

Discount rate decreased by 0.5%

   1,874,896    1,635,133 

Operating expense increased by 10%

   176,568    138,689 

Mortality rate increased by 10%

   723,132    700,324 

Mortality rate increased by 5%

   354,587    318,270 

Surrender ratio increased by 10%

   365,768    326,184 
   2017 
   Provisions for test   LAT base   Premium loss
(surplus)		 

Participating:

      

Fixed interest

  W582,842    1,448,564    865,722 

Variable interest

   811,078    895,052    83,973 
  

 

 

   

 

 

   

 

 

 
   1,393,920    2,343,616    949,695 
  

 

 

   

 

 

   

 

 

 

Non-Participating:

      

Fixed interest

   5,374,209    2,204,431    (3,169,778) 

Variable interest

   13,374,917    10,448,900    (2,926,017) 
  

 

 

   

 

 

   

 

 

 
   18,749,126    12,653,331    (6,095,795) 
  

 

 

   

 

 

   

 

 

 
  W20,143,046    14,996,947    (5,146,100) 
  

 

 

   

 

 

   

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

29.34.Other liabilities

Liability under insurance contracts (continued)

Other liabilities as of December 31, 2016 and 2017 are as follows:

   2018 
   Provisions for test   LAT base   Premium
loss (surplus)		 

Participating:

      

Fixed interest

  W589,618    1,368,008    778,390 

Variable interest

   859,858    964,358    104,500 
  

 

 

   

 

 

   

 

 

 
   1,449,476    2,332,366    882,890 
  

 

 

   

 

 

   

 

 

 

Non-Participating:

      

Fixed interest

   6,009,771    3,019,087    (2,990,684) 

Variable interest

   14,149,581    12,339,559    (1,810,022) 
  

 

 

   

 

 

   

 

 

 
   20,159,352    15,358,646    (4,800,706) 
  

 

 

   

 

 

   

 

 

 
  W21,608,828    17,691,012    (3,917,816) 
  

 

 

   

 

 

   

 

 

 

 

   2016   2017 

Accounts payable

  W7,258,267    8,524,295 

Accrued expenses

   2,835,472    3,022,127 

Dividend payable

   9,553    8,345 

Advance receipts

   180,626    120,724 

Unearned income

   373,895    402,541 

Withholding value-added tax and other taxes

   338,771    343,938 

Securities deposit received

   713,417    911,304 

Foreign exchange remittances pending

   226,927    223,465 

Domestic exchange remittances pending

   980,663    1,808,652 

Borrowing from trust account

   3,447,078    4,057,649 

Due to agencies

   498,943    607,743 

Deposits for subscription

   46,983    79,154 

Separate account liabilities

   2,999,109    3,213,389 

Sundry liabilities

   969,010    1,930,410 

Other

   55,896    76,966 

Present value discount account

   (17,463)    (17,929) 
  

 

 

   

 

 

 
  W20,917,147    25,312,773 
  

 

 

   

 

 

 
v)

Sensitivity analysis as of December 31, 2017 and 2018 are as follows:

   LAT fluctuation 
   2017   2018 

Discount rate increased by 0.5%

  W(1,532,611)    (2,010,046) 

Discount rate decreased by 0.5%

   1,836,098    2,353,179 

Operating expense increased by 10%

   216,340    236,693 

Mortality rate increased by 10%

   818,261    866,683 

Mortality rate increased by 5%

   410,822    435,423 

Surrender ratio increased by 10%

   457,119    298,121 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

30.35.

Other liabilities

Other liabilities as of December 31, 2017 and 2018 are as follows:

   2017   2018 

Accounts payable

  W8,524,295    9,748,168 

Accrued expenses

   3,022,127    3,267,188 

Dividend payable

   8,345    49,486 

Advance receipts

   120,724    131,386 

Unearned income

   402,541    236,827 

Withholding value-added tax and other taxes

   343,938    547,097 

Securities deposit received

   911,304    651,153 

Foreign exchange remittances pending

   223,465    225,956 

Domestic exchange remittances pending

   1,808,652    1,115,939 

Borrowing from trust account

   4,057,649    2,999,445 

Due to agencies

   607,743    779,473 

Deposits for subscription

   79,154    76,019 

Separate account liabilities

   3,213,389    2,845,380 

Sundry liabilities

   1,930,410    2,496,169 

Other

   76,966    50,881 

Present value discount account

   (17,929)    (20,888) 
  

 

 

   

 

 

 
  W25,312,773    25,199,679 
  

 

 

   

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

36.

Equity

 

 (a)

Equity as of December 31, 20162017 and 20172018 are as follows:

 

 2016 2017  2017 2018 

Capital stock:

    

Common stock

 W2,370,998  2,370,998  W2,370,998  2,370,998 

Preferred stock

 274,055  274,055  274,055  274,055 
 

 

  

 

  

 

  

 

 
 2,645,053  2,645,053  2,645,053  2,645,053 
 

 

  

 

  

 

  

 

 

Hybrid bond

 498,316  423,921  423,921  1,531,759 

Capital surplus:

    

Share premium

 9,494,769  9,494,769  9,494,769  9,494,769 

Others

 392,566  392,566 

Others (*1)

 392,566  400,719 
 

 

  

 

  

 

  

 

 
 9,887,335  9,887,335  9,887,335  9,895,488 
 

 

  

 

  

 

  

 

 

Capital adjustments

 (458,461)  (398,035) 

Capital adjustments (*2)

 (398,035)  (552,895) 

Accumulated other comprehensive income, net of tax:

    

Gain on financial assets at fair value through other comprehensive income

  —    2,958 

Valuation gain onavailable-for-sale financial assets

 394,183  72,126  72,126   —   

Loss on financial assets at fair value through profit or loss (overlay approach)

  —    (79,057) 

Equity in other comprehensive income of associates

 21,258  (294)  (294)  4,883 

Foreign currency translation adjustments for foreign operations

 (151,726)  (345,199)  (345,199)  (321,853) 

Net gain (loss) from cash flow hedges

 (13,464)  2,440 

Other comprehensive income (loss) of separate account

 4,466  (4,812) 

Net gain(loss) from cash flow hedges

 2,440  (17,751) 

Other comprehensive income(loss) of separate account

 (4,812)  4,112 

Actuarial losses

 (357,300)  (253,995)  (253,995)  (346,682) 

Changes in own credit risk on financial liabilities designated under fair value option

  —    170 
 

 

  

 

  

 

  

 

 
 (102,583)  (529,734)  (529,734)  (753,220) 
 

 

  

 

  

 

  

 

 

Retained earnings (*1)

 18,640,038  20,790,599 

Non-controlling interest (*2)

 635,282  883,397 

Retained earnings (*3)(*4)(*5)(*6)

 20,791,681  22,959,440 

Non-controlling interest (*7)

 883,397  925,805 
 

 

  

 

  

 

  

 

 
 W31,744,980  33,702,536  W33,703,618  36,651,430 
 

 

  

 

  

 

  

 

 

 

(*1)Restriction on appropriation

During the year ended December 31, 2018, the Group recorded a capital surplus of retained earningsKRW 8,153 million as a result of participating in the capital increase of its subsidiary, Jeju Bank Co. Ltd.

(*2)

The Group acquired treasury stock through treasury stock trusts, and the consideration paid or received is as follows:recognized directly in equity.

(*3)1)

The controlling company’s legal reserve for profits of the Group, due to In accordance with Article 53 of the Financial Holding Company Act, amounted toW1,845,691 1,992,716 million andW1,992,716 2,068,190 million as of December 31, 20162017 and 2017,2018, respectively.

2)The controlling company’s regulatory reserve for loan loss ofW9,144 million andW5,953 million as of December 31, 2016 and 2017, respectively.
3)Retained earnings restricted for dividend at subsidiaries level pursuant to law and regulations amounts toW5,658,334 million as of December 31, 2017.

(*2)The hybrid bonds ofW496,393 million andW718,775 million and issued by Shinhan Bank and Jeju Bank were attributed tonon-controlling interests as of December 31, 2016 and 2017, respectively. Dividends to those hybrid bonds ofW45,691 million andW30,442 million were attributed tonon-controlling interests as of December 31, 2016 and 2017, respectively.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

30.36.

Equity (continued)

(*4)

The reserve for loan losses in the retained earnings amounted toW 5,953 million andW 7,572 million as of December 31, 2017 and 2018, respectively.

(*5)

The total amount of retained earnings from the consolidated subsidiaries that are not available for the payment of cash dividends due to the related regulation is 5,800,002 million.

(*6)

The acquisition of ANZ Retail business by Shinhan Bank of Vietnam was completed and the amount was adjusted retrospectively.

(*7)

As of December 31, 2017 and 2018, Shinhan Bank and Jeju Bank have recognizedW 718,775 million andW 748,497 million, respectively, asnon-controlling interests. The amount of dividends paid by Shinhan Bank and Jeju BankW 27,546 million andW 30,442 million are allocated to the net income ofnon-controlling interests.

 

 (b)

Capital stock

i) Capital stock of the Group as of December 31, 20162017 and 20172018 are as follows:

 

Number of authorized shares

   1,000,000,000 

Par value per share in won

  W5,000 

Number of issued common stocks outstanding

   474,199,587 

 

 (c)

Hybrid bondbonds

Hybrid bondbonds classified as other equity instruments as of December 31, 20162017 and 2017December 31, 2018 are as follows:

 

Issue date

  Maturity date  Interest rate (%)   2016   2017   Currency  

Maturity date

  Interest rate (%)   2017   2018 

May 22, 2012

  May 22, 2042   5.34   W298,861    —   

June 25, 2015

  June 25, 2045   4.38    199,455    199,455   KRW  June 25, 2045   4.38   W199,455    199,455 

September 15, 2017

  —     3.77    —      134,683   ”  —     3.77    134,683    134,683 

September 15, 2017

  —     4.25    —      89,783   ”  —     4.25    89,783    89,783 

April 13, 2018

  ”  —     4.08    —      134,678 

April 13, 2018

  ”  —     4.56    —      14,955 

August 29, 2018

  ”  —     4.15    —      398,679 

August 13, 2018

  USD  —     5.88    —      559,526 
      

 

   

 

         

 

   

 

 
      W498,316    423,921         W423,921    1,531,759 
      

 

   

 

         

 

   

 

 

The hybridGroup can make advanced redemption for the above bonds, above can be repaid early after 5 or 10 years from the date of issuance date; and the Group has an unconditional rightrights to extend the maturity under the same condition. In addition, if nothe determination has been made that dividend is to benot paid for common shares, then the agreed interest for the above bonds is also not paid. On May 22, 2017, the Group exercised the early redemption right and redeemed all the hybrid bonds issued on May 22, 2012.

(d)Capital adjustments

Changes in capital adjustments for the years ended December 31, 2016 and 2017 are as follows:

   2016   2017 

Beginning balance

  W(423,536)    (458,461) 

Transaction on redemption of hybrid bonds

   (1,418)    (1,139) 

Other transactions with owners

   (33,507)    61,565 
  

 

 

   

 

 

 

Ending balance

  W(458,461)    (398,035) 
  

 

 

   

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

30.36.

Equity (continued)

 

 (e)(d)Accumulated other comprehensive income

Capital adjustments

i) Changes in accumulated other comprehensive incomecapital adjustments for the years ended December 31, 20162017 and 20172018 are as follows:

 

   2016 
   Items that are or may be reclassified to profit or loss  Items that will
never be
reclassified to
profit or loss		  Total 
   Unrealized
gain (loss) on
available-for-sale
financial
assets		  Equity in other
comprehensive
income of
associates		   Foreign currency
translation
adjustments
for foreign
operations		  Net loss
from cash
flow
hedges		  Other comprehensive
income of separate
account		  Remeasurements of
the defined benefit
plans		  

Beginning balance

  W826,712   18,569    (163,737)   (12,202)   8,795   (373,366)   304,771 

Change due to fair value

   (123,415)   1,813    —     —     (5,712)   —     (127,314) 

Reclassification:

         

Change due to impairment or disposal

   (445,040)   —      —     —     —     —     (445,040) 

Effect of hedge accounting

   —     —      —     (44,348)   —     —     (44,348) 

Hedging

   2,289   —      (54,393)   42,683   —     —     (9,421) 

Effects from exchange rate fluctuations

   (1,395)   —      52,936   —     —     —     51,541 

Remeasurements of the defined benefit plans

   —     —      —     —     —     20,513   20,513 

Deferred income taxes

   133,904   876    13,560   403   1,383   (4,845)   145,281 

Non-controlling interests

   1,127   —      (91)   —     —     398   1,434 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Ending balance

  W394,182   21,258    (151,725)   (13,464)   4,466   (357,300)   (102,583) 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
   2017   2018 

Beginning balance

  W(458,461)    (398,035) 

Transaction on redemption of hybrid bonds

   (1,139)    —   

Acquisition of stocks

   —      (155,923) 

Other transactions with owners

   61,565    1,063 
  

 

 

   

 

 

 

Ending balance

  W(398,035)    (552,895) 
  

 

 

   

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

30.36.

Equity (continued)

 

   2017 
   Items that are or may be reclassified to profit or loss  Items that will
never be
reclassified to
profit or loss		  Total 
   Unrealized
gain (loss) on
available-for-sale
financial
assets		  Equity in other
comprehensive
income of
associates		  Foreign currency
translation
adjustments
for foreign
operations		  Net loss
from cash
flow
hedges		  Other comprehensive
income of separate
account		  Remeasurements of
the defined benefit
plans		  

Beginning balance

  W394,182   21,258   (151,725)   (13,464)   4,466   (357,300)   (102,583) 

Change due to fair value

   (60,397)   (24,886)   —     —     (12,529)   —     (97,812) 

Reclassification:

        

Change due to impairment or disposal

   (346,126)   —     —     —     —     —     (346,126) 

Effect of hedge accounting

   —     —     —     250,875   —     —     250,875 

Hedging

   1,241   —     97,353   (229,747)   —     —     (131,153) 

Effects from exchange rate fluctuations

   (28,553)   —     (276,285)   —     —     —     (304,838) 

Remeasurements of the defined benefit plans

   —     —     —     —     —     121,735   121,735 

Transfer to other account

   —     (414)   —     —     —     —     (414) 

Deferred income taxes

   110,708   3,748   (15,240)   (5,224)   3,251   (18,210)   79,033 

Non-controlling interests

   1,071   —     698   —     —     (220)   1,549 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Ending balance

  W72,126   (294)   (345,199)   2,440   (4,812)   (253,995)   (529,734) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
(e)

Accumulated other comprehensive income

Changes in accumulated other comprehensive income for the years ended December 31, 2017 and 2018 are as follows:

   2017 
   Unrealized
gain (loss) on
available-for-sale
financial
assets		  Equity in other
comprehensive
income of
associates		  Foreign currency
translation
adjustments
for foreign
operations		  Net loss
from cash
flow
hedges		  Other comprehensive
income of separate
account		  Remeasurements of
the defined benefit
plans		  Total 

Beginning balance

  W394,182   21,258   (151,725)   (13,464)   4,466   (357,300)   (102,583) 

Change due to fair value

   (60,397)   (24,886)   —     —     (12,529)   —     (97,812) 

Reclassification:

        

Change due to impairment or disposal

   (346,126)   —     —     —     —     —     (346,126) 

Effect of hedge accounting

   —     —     —     250,875   —     —     250,875 

Hedging

   1,241   —     97,353   (229,747)   —     —     (131,153) 

Effects from exchange rate fluctuations

   (28,553)   —     (276,285)   —     —     —     (304,838) 

Remeasurements of the defined benefit plans

   —     —     —     —     —     121,735   121,735 

Transfer to other account

   —     (414)   —     —     —     —     (414) 

Deferred income taxes

   110,708   3,748   (15,240)   (5,224)   3,251   (18,210)   79,033 

Non-controlling interests

   1,071   —     698   —     —     (220)   1,549 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Ending balance

  W72,126   (294)   (345,199)   2,440   (4,812)   (253,995)   (529,734) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

30.36.

Equity (continued)

 

  2018 
  Items that are or may be reclassified to profit or loss  Items that will never be reclassified to profit or loss  Total 
  Gain (loss) on
financial asset
at fair value
through other
comprehensive
income		  Gain (loss) on
valuation of
financial asset
measured at
FVTPL
(overlay
approach)		  Equity in
other
comprehensive
income of
associates		  Foreign
currency
translation
adjustments
for foreign
operations		  Net loss
from cash
flow
hedges		  Other
comprehensive
income
of separate
account		  Remeasurements
of the defined
benefit
plans		  Equity in
other
comprehensive
income of
associates		  Gain (loss) on
financial asset
at fair value
through other
comprehensive
income		  Gain (loss) on
financial
liabilities
measured
at FVTPL
attributable to
changes in
credit risk		 

Beginning balance

 W(211,003)   (24,724)   (2,516)   (342,318)   2,441   (4,564)   (253,995)   (46)   31,533   (1,553)   (806,745) 

Change due to fair value

  225,173   (74,942)   (2,327)   —     —     11,967   —     39   25,077   2,376   187,363 

Reclassification:

           

Change due to impairment or disposal

  15,812   —     13,103   —     (91,011)   —     —     —     —     —     (62,096) 

Effect of hedge accounting

  —     —     —     —     (1,261)   —     —     —     —     —     (1,261) 

Hedging

  (2,365)   —     —     (35,879)   60,501   —     —     —     —     —     22,257 

Effects from exchange rate fluctuations

  1,733   —     —     45,904   —     —     —     —     423   —     48,060 

Remeasurements of the defined benefit plans

  —     —     —     —     —     —     (128,139)   —     —     —     (128,139) 

Deferred income taxes

  (79,345)   20,609   (3,369)   9,958   11,579   (3,291)   35,041   (11)   (5,410)   (653)   (14,892) 

Transfer to other account

  —     —     —     —     —     —     —     10   2,635   —     2,645 

Non-controlling interests

  (1,305)   —     —     482   —     —     411   —     —     —     (412) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Ending balance

 W(51,300)   (79,057)   4,891   (321,853)   (17,751)   4,112   (346,682)   (8)   54,258   170   (753,220) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

(*)(f)Appropriation

The beginning balance is restated due to the adoption of retained earningsIFRS 9 and 15.

Statements of appropriation of retained earnings for the years ended December 31, 2016 and 2017 are as follows:

   2016   2017 

Unappropriated retained earnings:

    

Balance at beginning of year

  W5,422,880    4,896,292 

Redemption of preferred stock

   (1,125,906)    —   

Dividend to hybrid bonds

   (36,091)    (17,678) 

Net income

   1,470,250    754,727 
  

 

 

   

 

 

 
   5,731,133    5,633,341 

Reversal of regulatory reserve for loan losses

   3,191    —   
  

 

 

   

 

 

 
   5,734,324    5,633,341 
  

 

 

   

 

 

 

Appropriation of retained earnings:

    

Legal reserve

   147,025    75,473 

Dividends

    

Dividends on common stocks paid

   687,589    687,589 

Regulatory reserve for loan losses

   —      1,619 

Voluntary reserve (loss compensation reserve)

   2,000    —   

Loss on redemption of hybrid bonds

   1,418    1,139 
  

 

 

   

 

 

 
   838,032    765,820 
  

 

 

   

 

 

 

Unappropriated retained earnings to be carried over to subsequent year

  W4,896,292    4,867,521 
  

 

 

   

 

 

 

Date of appropriation:

   March 23, 2017    March 22, 2018 

These statements of appropriation of retained earnings were based on the separate financial statements of Shinhan Finance Group.

(g)Regulatory reserve for loan loss

In accordance with Regulations for the Supervision of Financial Institutions, the Group reserves the difference between allowance for credit losses by IFRS and by Regulations for the Supervision of Financial Institutions at the account of regulatory reserve for loan losses.

i)Changes in regulatory reserve for loan losses includingnon-controlling interests for the years ended December 31, 2016 and 2017 were as follows:

   2016   2017 

Beginning balance

  W2,192,635    2,252,771 

Planned regulatory reserve for (reversal of) loan losses

   60,136    632,247 
  

 

 

   

 

 

 

Ending balance

  W2,252,771    2,885,018 
  

 

 

   

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

30.36.

Equity (continued)

(f) Appropriation of retained earnings

Statements of appropriation of retained earnings for the years ended December 31, 2017 and 2018 are as follows:

   2017   2018 
Date of appropriation:  March 22, 2018   March 27, 2019 

Unappropriated retained earnings:

    

Balance at beginning of year

  W4,896,292    4,867,521 

Net effect due to change in accounting policy

   —      (23) 

Dividend to hybrid bonds

   (17,678)    (40,357) 

Net income

   754,727    1,234,883 
  

 

 

   

 

 

 
   5,633,341    6,062,024 

Reversal of regulatory reserve for loan losses

   —      —   
  

 

 

   

 

 

 
   5,633,341    6,062,024 
  

 

 

   

 

 

 

Appropriation of retained earnings:

    

Legal reserve

   (75,473)    (123,488) 

Dividends

    

Dividends on common stocks paid

   (687,589)    (753,041) 

Regulatory reserve for loan losses

   (1,619)    (1,156) 

Loss on redemption of hybrid bonds

   (1,139)    —   
  

 

 

   

 

 

 
   (765,820)    (877,685) 
  

 

 

   

 

 

 

Unappropriated retained earnings to be carried over to subsequent year

  W4,867,521    5,184,339 
  

 

 

   

 

 

 

(*)

These statements of appropriation of retained earnings were based on the separate financial statements of Shinhan Finance Group.

(g)

Regulatory reserve for loan losses

In accordance with Regulations for the Supervision of Financial Institutions, the Group reserves the difference between allowance for credit losses by IFRS and that as required by the Regulations at the account of regulatory reserve for loan losses in retained earnings.

i)

Changes in regulatory reserve for loan losses includingnon-controlling interests for the years ended December 31, 2017 and 2018 are as follows:

   2017   2018 

Beginning balance

  W2,252,771    2,885,018 

IFRS 9 adoption

   —      (388,551) 

Planned regulatory reversal of loan losses

   632,247    348,223 
  

 

 

   

 

 

 

Ending balance

  W2,885,018    2,844,690 
  

 

 

   

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

36.

Equity (continued)

 

 ii)

Profit attributable to equity holders of Shinhan Financial Group and earnings per share after factoring in regulatory reserve for loan losses for the years ended December 31, 20162017 and 20172018 are as follows:

 

  2016   2017   2017 (*3)   2018 

Profit attributable to equity holders of Shinhan Financial Group

  W2,774,778    2,917,735   W2,918,816    3,156,722 

Provision for regulatory reserve for loan losses

   (58,537)    (631,578) 

Provision for regulatory reserve for loan losses (*1)

   (631,578)    (348,127) 
  

 

   

 

   

 

   

 

 

Profit attributable to equity holders of Shinhan Financial Group adjusted for regulatory reserve

  W2,716,241    2,286,157   W2,287,238    2,808,595 
  

 

   

 

   

 

   

 

 

Basic and diluted earnings per share adjusted for regulatory reserve in won (*)

   5,612    4,784 

Basic and diluted earnings per share adjusted for regulatory reserve in won (*2)

   4,786    5,844 

 

(*)(*1)

Amortization of reserve for credit losses due to the transfer of IFRS 9 during the year is excluded.

(*2)

Dividends for preferred stocks and hybrid bonds are deducted.

(*3)

The acquisition of ANZ Retail business by Shinhan Bank of Vietnam was completed, the amount was adjusted retrospectively.

 

31.(h)

Treasury stock

The acquisition of treasury stock is as follows:

   Beginning
balance		   Acquisition   disposal   Ending
balance		 

The number of share

   —      3,648,659    —      3,648,659 

Carrying value

  W—      155,923    —      155,923 

(*)

For the December 31, 2018, the Group entered into a treasury stock trust agreement with Samsung Securities Co., Ltd. for a total consideration ofW200,000 million.

37.

Dividends

 

 (a)

Details of dividends recognized as distributions to common stockholders for the years ended December 31, 20162017 and 20172018 are as follows:

 

  2016   2017   2017   2018 (*1) 

Total number of shares issued and outstanding

   474,199,587    474,199,587   W474,199,587    474,199,587 

Par value per share in won

   5,000    5,000    5,000    5,000 

Dividend per share in won

   1,450    1,450    1,450    1,600 
  

 

   

 

   

 

   

 

 

Dividends (*)

  W687,589    687,589 

Dividends (*2)

  W687,589    753,041 
  

 

   

 

   

 

   

 

 

Dividend rate per share

   %             29.0    29.0    %         29.0    32.0 

 

 (*)1)

The dividend is the amount of dividend that will be paid on March 27, 2019 and is not recognized as a distribution to the owners during the period.

(*2)

The amounts are proposed or declared dividends before the financial statements were authorized for issue but not recognized as a distribution to owners during the year.

(b)Dividend for hybrid bond was calculated as follows for years ended December 31, 2016 and 2017:

   2016   2017 

Amount of hybrid bond

  W500,000    425,000 

Interest rate

  %    4.38~5.80    3.77~4.38 
  

 

 

   

 

 

 

Dividend (*)

  W36,091    17,678 
  

 

 

   

 

 

 

(*)The dividends to hybrid bonds that were early redeemed during the period are included.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

32.37.

Dividends (continued)

(b)

Dividend for hybrid bond was calculated as follows for the years ended December 31, 2017 and 2018:

   2017   2018 

Amount of hybrid bond

  W425,000    1,538,150 

Interest rate

  % 3.77 ~ 4.38    3.77 ~ 5.88 
  

 

 

   

 

 

 

Dividend (*)

  W17,678    40,357 
  

 

 

   

 

 

 

(*)

The dividends to hybrid bonds that were early redeemed during the period are included.

38.

Net interest income

Net interest income for the years ended December 31, 2015, 2016, 2017 and 20172018 are as follows:

 

   2015   2016   2017 

Interest income:

      

Cash and due from banks

  W225,554    185,534    167,793 

Trading assets

   510,764    454,274    489,836 

Financial assets designated at fair value

through profit or loss

   48,264    43,398    57,899 

Available-for-sale financial assets

   665,561    632,829    671,912 

Held-to-maturity financial assets

   539,190    561,823    651,107 

Loans

   9,024,682    9,230,303    9,673,635 

Others

   115,689    128,141    86,472 
  

 

 

   

 

 

   

 

 

 
   11,129,704    11,236,302    11,798,654 

Interest expense:

      

Deposits

   (2,861,027)    (2,586,742)    (2,482,415) 

Borrowings

   (325,564)    (300,759)    (352,069) 

Debt securities issued

   (1,183,758)    (1,085,830)    (1,085,366) 

Others

   (66,422)    (57,605)    (35,851) 
  

 

 

   

 

 

   

 

 

 
   (4,436,771)    (4,030,936)    (3,955,701) 
  

 

 

   

 

 

   

 

 

 

Net interest income

  W6,692,933    7,205,366    7,842,953 
  

 

 

   

 

 

   

 

 

 

33.Net fees and commission income

Net fees and commission income for the years ended December 31, 2015, 2016 and 2017 are as follows:

   2015   2016   2017 

Fees and commission income:

      

Credit placement fees

  W74,769    74,352    59,133 

Commission received as electronic charge receipt

   136,991    137,213    142,755 

Brokerage fees

   410,682    333,722    373,108 

Commission received as agency

   167,137    131,026    129,460 

Investment banking fees

   79,840    66,150    66,191 

Commission received in foreign exchange activities

   162,989    182,975    197,705 

Asset management fees

   86,144    115,574    190,802 

Credit card fees

   2,351,140    2,343,255    2,369,745 

Others

   426,837    419,329    516,056 
  

 

 

   

 

 

   

 

 

 
   3,896,529    3,803,596    4,044,955 

Fees and commission expense:

      

Credit-related fee

   (43,337)    (32,401)    (35,665) 

Credit card fees

   (1,848,510)    (1,899,339)    (1,988,826) 

Others

   (383,703)    (306,317)    (309,510) 
  

 

 

   

 

 

   

 

 

 
   (2,275,550)    (2,238,057)    (2,334,001) 
  

 

 

   

 

 

   

 

 

 

Net fees and commission income

  W1,620,979    1,565,539    1,710,954 
  

 

 

   

 

 

   

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

34.Dividend income

Dividend income for the years ended December 31, 2015, 2016 and 2017 are as follows:

   2015   2016   2017 

Trading assets

  W68,607    50,805    57,615 

Available-for-sale financial assets

   239,670    230,818    199,691 
  

 

 

   

 

 

   

 

 

 
  W308,277    281,623    257,306 
  

 

 

   

 

 

   

 

 

 

35.Net trading income (loss)

Net trading income (loss) for the years ended December 31, 2015, 2016 and 2017 are as follows:

   2015   2016   2017 

Trading assets:

      

Debt securities

      

Loss on valuation

  W(6,451)    (47,017)    (90,442) 

Gain (loss) on

   55,810    (1,933)    (93,528) 
  

 

 

   

 

 

   

 

 

 
   49,359    (48,950)    (183,970) 
  

 

 

   

 

 

   

 

 

 

Equity securities

      

Gain on valuation

   19,355    161,234    187,442 

Gain on sale

   125,552    70,603    128,118 
  

 

 

   

 

 

   

 

 

 
   144,907    231,837    315,560 
  

 

 

   

 

 

   

 

 

 

Other

      

Gain (loss) on valuation

   (5,238)    18,336    5,782 

Trading liabilities:

      

Securities sold

      

Gain (loss) on valuation

   20,146    (121,262)    (138,134) 

Gain (loss) on disposition

   (84,642)    5,174    (20,610) 
  

 

 

   

 

 

   

 

 

 
   64,496    (116,088)    (158,744) 
  

 

 

   

 

 

   

 

 

 

Other

      

Gain (loss) on valuation

   24,366    (61,321)    260 

Gain on disposition

   1,805    2,589    2,440 
  

 

 

   

 

 

   

 

 

 
   26,171    (58,732)    2,700 
  

 

 

   

 

 

   

 

 

 

Derivatives:

      

Gain (loss) on valuation

   (803,990)    1,667    369,225 

Gain on .transaction

   309,189    341,440    612,670 
  

 

 

   

 

 

   

 

 

 
   (494,801)    343,107    981,895 
  

 

 

   

 

 

   

 

 

 
  W(344,098)    369,510    963,223 
  

 

 

   

 

 

   

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

36.Net gain (loss) on financial instruments designated at fair value through profit or loss

Net gain (loss) on financial instruments designated at fair value through profit or loss for the years ended December 31, 2015, 2016 and 2017 are as follows:

   2015   2016   2017 

Financial assets designated at fair value through profit or loss:

      

Other securities

      

Gain on valuation

  W14,707    11,798    13,020 

Debt securities

      

Gain (loss) on valuation

   (19,786)    20,498    (65,475) 

Gain on sale and redemption

   14,651    16,625    11,673 
  

 

 

   

 

 

   

 

 

 
   (5,135)    37,123    (53,802) 
  

 

 

   

 

 

   

 

 

 

Equity securities

      

Dividend income

   112    185    51 

Loss on valuation

   (24,509)    (5,664)    (78,633) 

Gain on sale

   46,200    5,747    5,622 
  

 

 

   

 

 

   

 

 

 
   21,803    268    (72,960) 
  

 

 

   

 

 

   

 

 

 

Financial liabilities designated at fair value through profit or loss:

      

Other securities

      

Gain (loss) on valuation

   95    (97)    —   

Loss on disposal and redemption

   (111)    (109)    (43) 
  

 

 

   

 

 

   

 

 

 
   (16)    (206)    (43) 

Borrowings

      

Gain (loss) on valuation

   778,451    (174,348)    (100,685) 

Loss on disposal and redemption

   (350,045)    (376,590)    (845,356) 
  

 

 

   

 

 

   

 

 

 
   428,406    (550,938)    (946,041) 
  

 

 

   

 

 

   

 

 

 
  W459,765    (501,955)    (1,059,826) 
  

 

 

   

 

 

   

 

 

 

37.Net impairment loss on financial assets

Net impairment loss on financial assets for the years ended December 31, 2015, 2016 and 2017 are as follows:

   2015   2016   2017 

Impairment losses on:

      

Loans

  W(1,021,711)    (1,102,781)    (800,928) 

Available-for-sale financial assets

   (254,883)    (96,381)    (202,360) 

Other financial assets

   —      (4,851)    (15,672) 
  

 

 

   

 

 

   

 

 

 
   (1,276,594)    (1,204,013)    (1,018,960) 
  

 

 

   

 

 

   

 

 

 

Reversal of impairment losses on:

      

Available-for-sale financial assets

   12,541    8,350    4,061 
  

 

 

   

 

 

   

 

 

 
  W(1,264,053)    (1,195,663)    (1,014,899) 
  

 

 

   

 

 

   

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

38.General and administrative expenses

General and administrative expenses for the years ended December 31, 2015, 2016 and 2017 are as follows:

   2015   2016   2017 

Employee benefits:

      

Salaries

  W2,478,136    2,515,492    2,668,224 

Severance benefits:

      

Defined contribution

   20,203    22,007    21,040 

Defined benefit

   165,706    181,703    173,080 

Termination benefits

   105,031    106,833    285,158 
  

 

 

   

 

 

   

 

 

 
   2,769,076    2,826,035    3,147,502 

Rent

   350,718    340,504    336,124 

Entertainment

   33,339    31,409    29,039 

Depreciation

   193,927    177,405    173,541 

Amortization

   75,060    74,222    66,860 

Taxes and dues

   195,729    164,177    165,689 

Advertising

   255,656    292,552    271,819 

Research

   13,442    14,070    14,093 

Others

   588,121    588,201    606,531 
  

 

 

   

 

 

   

 

 

 
  W4,475,068    4,508,575    4,811,198 
  

 

 

   

 

 

   

 

 

 

39.Share-based payments

(a)Stock options granted as of December 31, 2017 are as follows:

  4th grant(*1)  5th grant(*1)  6th grant(*1)  7th grant(*1)(*2) 

Grant date

  March 30, 2005   March 21, 2006   March 20, 2007   March 19, 2008 

Exercise price in won

  W28,006   W38,829   W54,560   W49,053 

Number of shares granted

  2,695,200   3,296,200   1,301,050   808,700 

Options expiry dates

  August 30, 2018   August 21, 2019   August 19, 2020   


May 17, 2021/

September 17,
2021

 

 
 

Changes in number of shares granted:

 

   

Balance at January 1, 2017

  102,389   108,356   58,764   45,628 

Exercised

  (99,889)   (105,856)   —     —   
 

 

 

  

 

 

  

 

 

  

 

 

 

Balance at December 31, 2017

  2,500   2,500   58,764   45,628 
 

 

 

  

 

 

  

 

 

  

 

 

 
     




W5,401

(Expiration of
contractual
exercise period :
May 17, 2021)

 

 
 
 
 

Fair value per share in won

 

W

21,394

 

 

W

10,571

 

 

W

3,154

 

 

 




W5,536

(Expiration of
contractual
exercise period :
Sep 17, 2021)

 

 
 
 
 

   2016   2017   2018 

Interest income:

      

Cash and due from banks

  W185,534    167,793    —   

Cash and deposits at amortized cost

   —      —      155,075 

Deposits at FVTPL

   —      —      33,845 

Trading assets

   454,274    489,836    —   

Financial assets designated at fair value through profit or loss

   43,398    57,899    —   

Securities at FVTPL

   —      —      623,651 

Securities at FVOCI

   —      —      759,301 

Securities at amortized cost

   —      —      730,382 

Available-for-sale financial assets

   632,829    671,912    —   

Held-to-maturity financial assets

   561,823    651,107    —   

Loans

   9,230,303    9,673,635    —   

Loans at amortized cost

   —      —      11,158,558 

Loans at FVTPL

   —      —      23,110 

Others

   128,141    86,472    88,534 
  

 

 

   

 

 

   

 

 

 
   11,236,302    11,798,654    13,572,456 
  

 

 

   

 

 

   

 

 

 

Interest expense:

      

Deposits

   (2,586,742)    (2,482,415)    (3,091,659) 

Borrowings

   (300,759)    (352,069)    (468,068) 

Debt securities issued

   (1,085,830)    (1,085,366)    (1,336,840) 

Others

   (57,605)    (35,851)    (95,800) 
  

 

 

   

 

 

   

 

 

 
   (4,030,936)    (3,955,701)    (4,992,367) 
  

 

 

   

 

 

   

 

 

 

Net interest income

  W7,205,366    7,842,953    8,580,089 
  

 

 

   

 

 

   

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

39.Share-based payments (continued)

Net fees and commission income

Net fees and commission income for the years ended December 31, 2016, 2017 and 2018 are as follows:

   2016   2017   2018 

Fees and commission income:

      

Credit placement fees

  W74,352    59,133    62,766 

Commission received as electronic charge receipt

   137,213    142,755    146,309 

Brokerage fees

   333,722    373,108    412,165 

Commission received as agency

   131,026    129,460    120,508 

Investment banking fees

   66,150    66,191    91,273 

Commission received in foreign exchange activities

   182,975    197,705    214,395 

Asset management fees

   115,574    190,802    235,275 

Credit card fees

   2,343,255    2,369,745    1,360,322 

Others

   419,329    516,056    652,243 
  

 

 

   

 

 

   

 

 

 
   3,803,596    4,044,955    3,295,256 
  

 

 

   

 

 

   

 

 

 

Fees and commission expense:

      

Credit-related fee

   (32,401)    (35,665)    (36,817) 

Credit card fees

   (1,899,339)    (1,988,826)    (944,533) 

Others

   (306,317)    (309,510)    (374,909) 
  

 

 

   

 

 

   

 

 

 
   (2,238,057)    (2,334,001)    (1,356,259) 
  

 

 

   

 

 

   

 

 

 

Net fees and commission income

  W1,565,539    1,710,954    1,938,997 
  

 

 

   

 

 

   

 

 

 

40.

Dividend income

Dividend income for the years ended December 31, 2016, 2017 and 2018 are as follows:

   2016   2017   2018 

Securities at FVTPL

  W—      —      70,955 

Trading assets

   50,805    57,615    —   

Securities at FVOCI

   —      —      16,871 

Available-for-sale financial assets

   230,818    199,691    —   
  

 

 

   

 

 

   

 

 

 
  W281,623    257,306    87,826 
  

 

 

   

 

 

   

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

41.

Net gain (loss) on financial instruments measured at fair value through profit or loss

Net gain (loss) on financial instruments measured at fair value through profit or loss for the year ended December 31, 2018 are as follows:

2018

Net gain (loss) on deposits measured at FVTPL

Loss on valuation

W(61,848) 

Net gain (loss) on loans measured at FVTPL

Gain on valuation

916

Gain on sale

9,133

10,049

Net gain (loss) on securities measured at FVTPL

Debt securities

Gain on valuation

111,029

Gain on sale

78,718

Other gains

223,731

413,478

Equity securities

Gain on valuation

286,801

Loss on sale

(275,356) 

11,445

Other

Gain on valuation

19,086

Net gain (loss) on financial liabilities measured at FVTPL

Debt securities

Loss on valuation

(115,667) 

Gain (loss) on disposition

268,932

153,265

Other

Gain (loss) on valuation

(14,892) 

Gain on disposition

1,394

(13,498) 

Derivatives:

Gain on valuation

(291,879) 

Gain on transaction

179,928

(111,951) 

W420,026

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

42.

Net trading income (loss)

Net trading income (loss) for the year ended December 31, 2016 and 2017 are as follows:

   2016   2017 

Trading assets:

    

Debt securities:

    

Loss on valuation

  W(47,017)    (90,442) 

Gain (loss) on sale

   (1,933)    (93,528) 
  

 

 

   

 

 

 
   (48,950)    (183,970) 
  

 

 

   

 

 

 

Equity securities:

    

Gain on valuation

   161,234    187,442 

Gain on sale

   70,603    128,118 
  

 

 

   

 

 

 
   231,837    315,560 
  

 

 

   

 

 

 

Other:

    

Gain (loss) on valuation

   18,336    5,782 

Trading liabilities:

    

Debt securities:

    

Gain (loss) on valuation

   (121,262)    (138,134) 

Gain (loss) on disposition

   5,174    (20,610) 
  

 

 

   

 

 

 
   (116,088)    (158,744) 
  

 

 

   

 

 

 

Other:

    

Gain (loss) on valuation

   (61,321)    260 

Gain on disposition

   2,589    2,440 
  

 

 

   

 

 

 
   (58,732)    2,700 
  

 

 

   

 

 

 

Derivatives:

    

Gain (loss) on valuation

   1,667    369,225 

Gain on transaction

   341,440    612,670 
  

 

 

   

 

 

 
   343,107    981,895 
  

 

 

   

 

 

 
  W 369,510    963,223 
  

 

 

   

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

43.

Net gain (loss) on financial instruments designated at fair value through profit or loss (IFSR9)

Net gain (loss) on financial instruments designated at fair value through profit or loss for the year ended December 31, 2018 are as follows:

2018

Financial assets designated at fair value through profit or loss:

Equity securities:

Gain on sale

W(4,737) 

Financial liabilities designated at fair value through profit or loss:

Borrowings:

Gain on valuation

382,667

Loss on sale and redemption

(404,573) 

W(26,643) 

 

(*1)44.The equity

Net gain (loss) on financial instruments designated at fair value through profit or loss (IAS39)

Net gain (loss) on financial instruments designated at fair value through profit or loss for the year ended December 31, 2016 and 2017 were as follows:

   2016   2017 

Financial assets designated at fair value through profit or loss:

    

Other securities:

    

Gain on valuation

  W11,798    13,020 

Debt securities:

    

Gain (loss) on valuation

   20,498    (65,475) 

Gain on sale and redemption

   16,625    11,673 
  

 

 

   

 

 

 
   37,123    (53,802) 
  

 

 

   

 

 

 

Equity securities:

    

Dividend income

   185    51 

Loss on valuation

   (5,664)    (78,633) 

Gain on sale

   5,747    5,622 
  

 

 

   

 

 

 
   268    (72,960) 
  

 

 

   

 

 

 

Financial liabilities designated at fair value through profit or loss:

    

Other securities:

    

Gain (loss) on valuation

   (97)    —   

Loss on disposal and redemption

   (109)    (43) 
  

 

 

   

 

 

 
   (206)    (43) 

Borrowings:

    

Gain (loss) on valuation

   (174,348)    (100,685) 

Loss on disposal and redemption

   (376,590)    (845,356) 
  

 

 

   

 

 

 
   (550,938)    (946,041) 
  

 

 

   

 

 

 
  W(501,955)    (1,059,826) 
  

 

 

   

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

45.

Allowance provided (reversed) for credit loss on financial assets

Allowance provided (reversed) for credit loss on financial assets for the year ended December 31, 2018 are as follows:

2018

Loans at amortized cost

W(704,515) 

Other financial assets at amortized cost

(24,070) 

Securities at fair value through other comprehensive income

(12,066) 

Others (unused credit line and financial guarantee, etc)

(4,826) 

Securities at amortized cost

(2,400) 

W(747,877) 

46.

Net impairment loss on financial assets

Net impairment loss on financial assets for the year ended December 31, 2016 and 2017 were as follows:

   2016   2017 (*) 

Impairment losses on:

    

Loans

  W(1,102,781)    (799,577) 

Available-for-sale financial assets

   (96,381)    (202,360) 

Other financial assets

   (4,851)    (15,672) 
  

 

 

   

 

 

 
   (1,204,013)    (1,017,609) 
  

 

 

   

 

 

 

Reversal of impairment losses on:

    

Available-for-sale financial assets

   8,350    4,061 
  

 

 

   

 

 

 
  W(1,195,663)    (1,013,548) 
  

 

 

   

 

 

 

(*)

As the acquisition of ANZ Retail business by Shinhan Bank of Vietnam was completed, the amount was adjusted retrospectively.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

47.

General and administrative expenses

General and administrative expenses for the years ended December 31, 2016, 2017 and 2018 are as follows:

   2016   2017   2018 

Employee benefits:

      

Salaries

  W2,515,492    2,668,224    2,736,604 

Severance benefits:

      

Defined contribution

   22,007    21,040    23,745 

Defined benefit

   181,703    173,080    133,749 

Termination benefits

   106,833    285,158    115,275 
  

 

 

   

 

 

   

 

 

 
   2,826,035    3,147,502    3,009,373 
  

 

 

   

 

 

   

 

 

 

Rent

   340,504    336,124    357,981 

Entertainment

   31,409    29,039    30,442 

Depreciation

   177,405    173,541    171,771 

Amortization

   74,222    66,860    73,575 

Taxes and dues

   164,177    165,689    176,133 

Advertising

   292,552    271,819    287,688 

Research

   14,070    14,093    13,928 

Others

   588,201    606,531    620,684 
  

 

 

   

 

 

   

 

 

 
  W4,508,575    4,811,198    4,741,575 
  

 

 

   

 

 

   

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

48.

Share-based payments

(a)

Stock options granted are fully vested as of December 31, 2017. 2018 are as follows:

  4th grant(*1)  5th grant(*1)  6th grant(*1)  7th grant(*1)(*2) 

Grant date

  March 30, 2005   March 21, 2006   March 20, 2007   March 19, 2008 

Exercise price in won

  W28,006   W38,829   W54,560   W49,053 

Number of shares granted

  2,695,200   3,296,200   1,301,050   808,700 

Options expiry dates

  August 30, 2018   August 21, 2019   August 19, 2020   

May 17, 2021/

September 17, 2021

 

 

Changes in number of shares granted:

 

   

Balance at January 1, 2018

  2,500   2,500   58,764   45,628 

Exercised

  2,500   —     —     —   
 

 

 

  

 

 

  

 

 

  

 

 

 

Balance at December 31, 2018

  —     2,500   58,764   45,628 
 

 

 

  

 

 

  

 

 

  

 

 

 
     




W1,441

(Expiration of
contractual
exercise period :
May 17, 2021)

 

 
 
 
 

Fair value per share in won

  —    W2,874  W397   




W1,610

(Expiration of
contractual
exercise period :
Sep 17, 2021)

 

 
 
 
 

(*1)

The weighted average exercise price in won for 109,392106,892 stock options outstanding at December 31, 20172018 isW51,297.51,841.

(*2)

As of December 31, 2017,2018, the exercise of the remaining for 9,466 stock options (7th grant) was temporarily suspended.

 

 (b)

Performance shares granted as of December 31, 20172018 are as follows:

 

 Expired Not expired  Expired Not expired 

Type

  Cash-settled share-based payment   Cash-settled share-based payment 

Performance conditions

  
Increase rate of the stock price and
achievement of target ROE		 
 		  

Increase rate of the stock price and

achievement of target ROE

 

 

Operating period(*)

  4 or 5 years 

Estimated number of shares vested at December 31, 2017

 273,541  1,165,525 

Operating period (*)

  4 or 5 years 

Estimated number of shares vested at December 31, 2018

 397,464  1,336,188 

Fair value per share in won

  



W45,926,
W47,376,
W40,889,
W45,766  and
W49,405		 
 
 
 
 		  W49,400   




W45,926, W47,376,

W40,889,W45,766,

W49,405,W40,580
for the expiration of
operating period
from 2013 to 2018

 

 

 
 
 
 

  W39,600 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

48.

Share-based payments (continued)

 

 (*)

Four-year period is applied from the beginning of the year that the grant date belongs while five-year period for the shares with deferred payment.

The amount of cash payment for the Group’s cash-settled share-based payment arrangements with performance conditions is determined at the fourth anniversary date from the grant date based on the share price which is an arithmetic mean of weighted average share prices of the pasttwo-months, pastone-month and pastone-week. Share price to be paid in the future is evaluated using the share price as of the end of the reporting period. For share-based payment transactions among the Group, Shinhan Financial Groupcontrolling company and its subsidiaries, the controlling company and its subsidiaries receiving the services shall measure the services received as a cash-settled and the subsidiaries measure as an equity-settled share-based payment transaction, respectively.

 

 (c)

Share-based compensation costs for the years ended December 31, 2015, 2016, 2017 and 2017 are2018 were as follows:

 

  2015   2016 
  Employees of       Employees of     
  The controlling
company		   The subsidiaries   Total   The controlling
company		   The subsidiaries   Total 

Stock options granted :

      

Stock options granted:

      

4th

  W(44)    (458)    (502)   W51    533    584 

5th

   (31)    (500)    (531)    36    582    618 

6th

   —      —      —      —      —      —   

7th

   (4)    (15)    (19)    —      —      —   

Performance shares

   1,599    13,878    15,477 

Performance share

   2,890    23,845    26,735 
  

 

   

 

   

 

   

 

   

 

   

 

 
  W1,520    12,905    14,425   W2,977    24,960    27,937 
  

 

   

 

   

 

   

 

   

 

   

 

 

   2017 
   Employees of     
   The controlling
company		   The subsidiaries   Total 

Stock options granted:

      

4th

  W67    413    480 

5th

   48    757    805 

6th

   26    159    185 

7th

   83    120    203 

Performance share

   1,782    15,717    17,499 
  

 

 

   

 

 

   

 

 

 
  W2,006    17,166    19,172 
  

 

 

   

 

 

   

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

39.48.

Share-based payments (continued)

 

   2016 
   Employees of     
   The controlling
company		   The subsidiaries   Total 

Stock options granted:

      

4th

  W51    533    584 

5th

   36    582    618 

6th

   —      —      —   

7th

   —      —      —   

Performance shares

   2,890    23,845    26,735 
  

 

 

   

 

 

   

 

 

 
  W2,977    24,960    27,937 
  

 

 

   

 

 

   

 

 

 

  2017   2018 
  Employees of       Employees of     
  The controlling
company		   The subsidiaries   Total   The controlling
company		   The subsidiaries   Total 

Stock options granted:

            

4th

  W67    413    480   W—      (14)    (14) 

5th

   48    757    805    —      (19)    (19) 

6th

   26    159    185    (23)    (139)    (162) 

7th

   83    120    203    (59)    (86)    (145) 

Performance shares

   1,782    15,717    17,499 

Performance share

   1,154    9,768    10,922 
  

 

   

 

   

 

   

 

   

 

   

 

 
  W2,006    17,166    19,172   W1,072    9,510    10,582 
  

 

   

 

   

 

   

 

   

 

   

 

 

 

 (d)

Accrued expenses and the intrinsic value as of December 31, 20162017 and 20172018 are as follows:

 

   2016 
   Employees of     
   The controlling
company		   The subsidiaries   Total 

Stock options granted:

      

4th

  W155    1,611    1,766 

5th

   41    655    696 

6th

   —      —      —   

7th

   —      —      —   

Performance shares

   7,433    57,638    65,071 
  

 

 

   

 

 

   

 

 

 
  W7,629    59,904    67,533 
  

 

 

   

 

 

   

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

39.Share-based payments (continued)

The intrinsic value of share-based payments isW67,533 million as of December 31, 2016. For calculating, the quoted market priceW45,250 per share was used for stock options and the fair value was considered as intrinsic value for performance shares, respectively.

  2017   2017 
  Employees of       Employees of     
  The controlling
company		   The subsidiaries   Total   The controlling
company		   The subsidiaries   Total 

Stock options granted:

            

4th

  W—      54    54   W—      54    54 

5th

   —      26    26    —      26    26 

6th

   26    159    185    26    159    185 

7th

   83    120    203    83    120    203 

Performance shares

   8,286    62,769    71,055 

Performance share

   8,286    62,769    71,055 
  

 

   

 

   

 

   

 

   

 

   

 

 
  W8,395    63,128    71,523   W8,395    63,128    71,523 
  

 

   

 

   

 

   

 

   

 

   

 

 

The intrinsic value of share-based payments isW71,151 million as of December 31, 2017. For calculating, the quoted market priceW49,400 per share was used for stock options and the fair value was considered as intrinsic value for performance shares, respectively.

   2018 
   Employees of     
   The controlling
company		   The subsidiaries   Total 

Stock options granted:

      

4th

  W—      —      —   

5th

   —      7    7 

6th

   3    20    23 

7th

   24    33    57 

Performance share

   7,328    61,790    69,118 
  

 

 

   

 

 

   

 

 

 
  W7,355    61,850    69,205 
  

 

 

   

 

 

   

 

 

 

The intrinsic value of share-based payments isW69,120 million as of December 31, 2018. For calculating, the quoted market priceW39,600 per share was used for stock options and the fair value was considered as intrinsic value for performance shares, respectively.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

40.49.

Net other operating expense

Other operating income and other operating expense for the years ended December 31, 2015, 2016, 2017 and 20172018 are as follows:

 

  2015   2016   2017  ��2016   2017   2018 

Other operating income

            

Gain on sale of assets:

            

Loans

  W180,306    69,002    50,707   W69,002    50,707    —   

Loans at amortized cost

   —      —      40,624 

Others:

            

Gain on hedged items

   356,090    392,913    634,695    392,913    634,695    418,390 

Reversal of allowance for acceptances and guarantee

   33,526    4,046    —      4,046    —      2,834 

Gain on trust account

   5,027    3,379    14    3,379    14    —   

Gain on other allowance

   6,988    30,419    306,730 

Reversal of other allowance

   30,419    286,932    5,033 

Others

   392,548    47,556    82,375    47,556    82,375    131,345 
  

 

   

 

   

 

   

 

   

 

   

 

 
   794,179    478,313    1,023,814    478,313    1,004,016    557,602 
  

 

   

 

   

 

   

 

   

 

   

 

 
   974,485    547,315    1,074,521    547,315    1,054,723    598,226 
  

 

   

 

   

 

   

 

   

 

   

 

 

Other operating expense

            

Loss on sale of assets:

            

Loans

   (10,759)    (11,021)    (8,394)    (11,021)    (8,394)    —   

Loans at amortized cost

   —      —      (14,271) 

Others:

            

Loss on hedged items

   (297,066)    (451,728)    (629,754)    (451,728)    (629,754)    (406,872) 

Contribution

   (274,685)    (252,178)    (252,419)    (252,178)    (252,419)    (283,331) 

Loss on allowance for acceptances and guarantee

   (825)    (7,933)    (2,548) 

Loss on other allowance

   (55,425)    (84,048)    (31,931) 

Provision for acceptances and guarantee allowance

   (7,933)    (2,548)    —   

Provision for other allowance

   (84,048)    (12,133)    (13,036) 

Depreciation of operating lease assets

   (9,895)    (8,315)    (12,943)    (8,315)    (12,943)    (56,570) 

Others

   (769,973)    (530,003)    (599,524)    (530,003)    (599,524)    (653,501) 
  

 

   

 

   

 

   

 

   

 

   

 

 
   (1,407,869)    (1,334,205)    (1,529,119)    (1,334,205)    (1,509,321)    (1,413,310) 
  

 

   

 

   

 

   

 

   

 

   

 

 
   (1,418,628)    (1,345,226)    (1,537,513)    (1,345,226)    (1,517,715)    (1,427,581) 
  

 

   

 

   

 

   

 

   

 

   

 

 

Net other operating expenses

  W(444,143)    (797,911)    (462,992)   W(797,911)    (462,992)    (829,355) 
  

 

   

 

   

 

   

 

   

 

   

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

41.50.

Net othernon-operating income

Othernon-operating income and othernon-operating expense for the years ended December 31, 2015, 2016, 2017 and 20172018 are as follows:

 

  2015   2016   2017   2016   2017   2018 

Othernon-operating income

            

Gain on sale of assets:

            

Property and equipment

  W2,379    3,343    5,278   W3,343    5,278    12,611 

Gain on disposition of assets held for sale

   —      —      22,748 

Investment property

   5,586    2,668    219    2,668    219    4,783 

Assets held for sale

   —      22,748    —   

Lease assets

   328    272    605    272    605    1,153 

Others

   433    95    125    95    125    —   
  

 

   

 

   

 

   

 

   

 

   

 

 
   8,726    6,378    28,975    6,378    28,975    18,547 
  

 

   

 

   

 

   

 

   

 

   

 

 

Gain on sale of investments in associates

   95,485    5,218    8,891 

Gain on sale of Investments in associates

   5,218    8,891    17,427 

Others:

            

Rental income on investment property

   30,876    27,852    33,023    27,852    33,023    32,488 

Reversal of impairment losses on intangible asset

   982    301    91    301    91    62 

Gain from assets contributed

   714    53    1,067    53    1,067    77 

Others

   100,877    104,563    67,535    104,563    67,535    49,276 
  

 

   

 

   

 

   

 

   

 

   

 

 
   133,449    132,769    101,716    132,769    101,716    81,903 
  

 

   

 

   

 

   

 

   

 

   

 

 
   237,660    144,365    139,582    144,365    139,582    117,877 
  

 

   

 

   

 

   

 

   

 

   

 

 

Othernon-operating expense

            

Loss on sale of assets:

            

Property and equipment

   (1,496)    (2,811)    (2,642)    (2,811)    (2,642)    (3,082) 

Investment property

   (55)    (248)    (1,627)    (248)    (1,627)    (2,958) 

Lease assets

   (2,714)    (2,429)    (1,282)    (2,429)    (1,282)    (3,964) 

Others

   (69)    (118)    (149)    (118)    (149)    (3) 
  

 

   

 

   

 

   

 

   

 

   

 

 
   (4,334)    (5,606)    (5,700)    (5,606)    (5,700)    (10,007) 
  

 

   

 

   

 

   

 

   

 

   

 

 

Loss on sale of investments in associates

   (2,012)    (3,315)    (1,332)    (3,315)    (1,332)    (11,546) 

Impairment loss on investments in associates

   (9,024)    (7,339)    (144)    (7,339)    (144)    (5,849) 
  

 

   

 

   

 

   

 

   

 

   

 

 
   (11,036)    (10,654)    (1,476)    (10,654)    (1,476)    (17,395) 
  

 

   

 

   

 

   

 

   

 

   

 

 

Others:

            

Donations

   (24,830)    (19,367)    (140,243)    (19,367)    (140,243)    (88,650) 

Depreciation of investment properties

   (13,117)    (19,588)    (16,095)    (19,588)    (16,095)    (16,917) 

Impaired loss on property and equipment

   —      (2,204)    (16)    (2,204)    (16)    —   

Impaired loss on intangible assets

   (3,125)    (3,411)    (271)    (3,411)    (271)    (771) 

Write-off of intangible assets

   (960)    (966)    (1,210)    (966)    (1,210)    (1,537) 

Collecting ofwritten-off expenses

   (8,088)    (4,379)    (7,162)    (4,379)    (7,162)    (6,048) 

Others

   (25,705)    (26,355)    (20,220)    (26,355)    (20,220)    (26,844) 
  

 

   

 

   

 

   

 

   

 

   

 

 
   (75,825)    (76,270)    (185,217)    (76,270)    (185,217)    (140,767) 
  

 

   

 

   

 

   

 

   

 

   

 

 
   (91,195)    (92,530)    (192,393)    (92,530)    (192,393)    (168,169) 
  

 

   

 

   

 

   

 

   

 

   

 

 

Net othernon-operating income (loss)

  W146,465    51,835    (52,811)   W51,835    (52,811)    (50,292) 
  

 

   

 

   

 

   

 

   

 

   

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

42.51.

Income tax expense

 

 (a)

Income tax expense for the years ended December 31, 2015, 2016, 2017 and 20172018 are as follows:

 

  2015 2016 2017   2016   2017 (*)   2018 

Current income tax expense

  W556,558  718,757  749,649   W718,757    749,649    900,016 

Adjustment for prior periods

   (31,101)  (36,372)  (23,265)    (36,372)    (23,265)    (3,261) 

Temporary differences

   67,928  (480,280)  46,198    (480,280)    46,468    383,190 

Income tax recognized in other comprehensive income

   101,234  143,448  75,551    143,448    75,551    (11,600) 
  

 

  

 

  

 

   

 

   

 

   

 

 

Income tax expenses

  W694,619  345,553  848,133   W345,553    848,403    1,268,345 
  

 

  

 

  

 

   

 

   

 

   

 

 

(*)

As the acquisition of ANZ Retail business by Shinhan Bank of Vietnam was completed, the amount was adjusted retrospectively.

 

 (b)

Income tax expense calculated by multiplying net income before tax with the tax rate for the years ended December 31, 2015, 2016, 2017 and 20172018 are as follows:

 

       2015   2016   2017 

Profit before income taxes

    W3,140,577    3,170,472    3,796,257 

Income taxes at statutory tax rates

    W758,345    765,395    917,476 

Adjustments:

        

Non-taxable income

     (16,421)    (30,839)    (10,614) 

Non-deductible expense

     7,862    18,786    12,772 

Tax credit

     (557)    (401)    (195) 

Recognition of deferred tax assets related to expired unused tax losses (see note 42 (c)(*2))

     —      (357,307)    —   

Changes in deferred tax due to change in tax rate

     —      —      (72,985) 

Other

     (42,869)    (13,709)    24,944 

Refund due to adjustments of prior year tax returns

     (11,741)    (36,372)    (23,265) 
    

 

 

   

 

 

   

 

 

 

Income tax expense

    W694,619    345,553    848,133 
    

 

 

   

 

 

   

 

 

 

Effective tax rate

    %         22.12    10.90    22.34 

The statutory tax rate in Korea was amended in 2017 and will be effective from 2018 as listed below.

Taxable income

  Tax Rate 
  2017  Thereafter 

W200 million or below

   11.0%   11.0% 

BelowW20 billion

   22.0%   22.0% 

BelowW300 billion

   24.2%   24.2% 

W300 billion or above

   24.2%   27.5% 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

42.Income tax expense (continued)

(c)Deferred tax expenses by origination and reversal of deferred assets and liabilities and temporary differences for the years ended December 31, 2016 and 2017 are as follows:

   2016 
   Beginning
balance		   Profit or loss   Other
comprehensive
income/Other		  Ending
Balance (*1)		 

Unearned income

  W(138,541)    (693)    —     (139,234) 

Account receivable

   (13,203)    1,710    —     (11,493) 

Trading assets

   (59,232)    25,808    —     (33,424) 

Available-for-sale

   90,904    (137,598)    133,591   86,897 

Investment in associates

   3,021    16,215    876   20,112 

Valuation and depreciation of property and equipment

   (154,151)    7,291    —     (146,860) 

Derivative asset (liability)

   190,834    (66,004)    403   125,233 

Deposits

   15,412    2,750    —     18,162 

Accrued expenses

   95,278    13,422    —     108,700 

Defined benefit obligation

   350,047    34,510    (6,157)   378,400 

Plan assets

   (308,455)    (6,426)    1,173   (313,708) 

Other provisions

   203,360    18,389    —     221,749 

Allowance for acceptances and guarantees

   20,074    (544)    —     19,530 

Allowance related to asset revaluation

   (46,988)    11    —     (46,977) 

Allowance for expensing depreciation

   (578)    57    —     (521) 

Deemed dividend

   1,582    (204)    —     1,378 

Accrued contributions

   11,261    (2,497)    —     8,764 

Financial instruments designated at fair value through profit of loss

   (159,839)    100,954    —     (58,885) 

Allowances

   75,515    19,039    —     94,554 

Fictitious dividend

   5,101    (268)    —     4,833 

Liability under insurance contracts

   10,238    2,866    —     13,104 

Other

   (43,851)    (46,909)    13,562   (77,198) 
  

 

 

   

 

 

   

 

 

  

 

 

 
   147,789    (18,121)    143,448   273,116 
  

 

 

   

 

 

   

 

 

  

 

 

 

Expired unused tax losses:

       

Extinguishment of deposit and insurance liabilities (*2)

   —      357,307    —     357,307 
  

 

 

   

 

 

   

 

 

  

 

 

 
  W147,789    339,186    143,448   630,423 
  

 

 

   

 

 

   

 

 

  

 

 

 
   2016   2017 (*1)   2018 

Profit before income taxes

  W3,170,472    3,797,608    4,466,610 

Income taxes at statutory tax rates

   765,395    917,802    1,222,840 

Adjustments:

      

Non-taxable income

   (30,839)    (10,614)    (6,300) 

Non-deductible expense

   18,786    12,772    12,854 

Tax credit

   (401)    (195)    (23,317) 

Recognition of deferred tax assets related to expired unused tax losses (*2)

   (357,307)    —      —   

Changes in deferred tax due to change in tax rate

   —      (72,985)    —   

Other

   (13,709)    24,888    65,529 

Refund due to adjustments of prior year tax returns

   (36,372)    (23,265)    (3,261) 
  

 

 

   

 

 

   

 

 

 

Income tax expense

  W345,553    848,403    1,268,345 
  

 

 

   

 

 

   

 

 

 

Effective tax rate

  %10.90    22.34    28.40 

 

 (*1)Deferred tax assets from overseas subsidiaries were decreased

As the acquisition of ANZ Retail business byW1,954 million due to foreign exchange rate movements. Shinhan Bank of Vietnam was completed, the amount was adjusted retrospectively.

 (*2)

The Group did not previously recognized the deferred tax asset relating to the expired unused tax losses as the utilization of the expired unused tax losses had been assessed remote. In 2016, based on the new tax interpretation issued by Korea National Tax Service which allows utilization of expired unused tax losses against extinguishment of deposit and insurance liabilities and the relating recent tax refund, the Group recognized the deferred tax asset after factoring in future taxable profits and the expected future extinguishment of deposit and insurance liabilities.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

42.51.

Income tax expense (continued)

 

   2017 
   Beginning
balance		   Profit or loss   Other
comprehensive
income		  Ending
Balance (*1)		 

Unearned income

  W(139,234)    (62,835)    —     (202,069) 

Account receivable

   (11,493)    (7,774)    —     (19,267) 

Trading assets

   (33,424)    44,841    —     11,417 

Available-for-sale

   86,897    77,198    110,405   274,500 

Investment in associates

   20,112    1,062    3,748   24,922 

Valuation and depreciation of property and equipment

   (146,860)    (16,452)    —     (163,312) 

Derivative asset (liability)

   125,233    (197,253)    (5,224)   (77,244) 

Deposits

   18,162    9,742    —     27,904 

Accrued expenses

   108,700    62,610    —     171,310 

Defined benefit obligation

   378,400    50,410    (20,544)   408,266 

Plan assets

   (313,708)    (100,624)    2,396   (411,936) 

Other provisions

   221,749    (46,132)    —     175,617 

Allowance for acceptances and guarantees

   19,530    3,608    —     23,138 

Allowance related to asset revaluation

   (46,977)    (5,909)    —     (52,886) 

Allowance for expensing depreciation

   (521)    (8)    —     (529) 

Deemed dividend

   1,378    3,939    —     5,317 

Accrued contributions

   8,764    3,140    —     11,904 

Financial instruments designated at fair value through profit of loss

   (58,885)    52,397    —     (6,488) 

Allowances

   94,554    (70,201)    —     24,353 

Fictitious dividend

   4,833    157    —     4,990 

Liability under insurance contracts

   13,104    5,001    —     18,105 

Deficit carried over

   —      1,505    —     1,505 

Other

   (77,198)    49,675    (15,230)   (42,753) 
  

 

 

   

 

 

   

 

 

  

 

 

 
   273,116    (141,903)    75,551   206,764 
  

 

 

   

 

 

   

 

 

  

 

 

 

Expired unused tax losses:

       

Extinguishment of deposit and insurance liabilities

   357,307    18,500    —     375,807 
  

 

 

   

 

 

   

 

 

  

 

 

 
  W630,423    (123,403)    75,551   582,571 
  

 

 

   

 

 

   

 

 

  

 

 

 
(c)

Deferred tax expenses by origination and reversal of deferred assets and liabilities and temporary differences for the years ended December 31, 2017 and 2018 are as follows:

   2017 
   Beginning
Balance		   Profit or
loss		   Other
comprehensive
income		  Ending
Balance (*1)(*2)		 

Unearned income

  W(139,234)    (62,835)    —     (202,069) 

Account receivable

   (11,493)    (7,774)    —     (19,267) 

Trading assets

   (33,424)    44,841    —     11,417 

Available-for-sale

   86,897    77,198    110,405   274,500 

Investment in associates

   20,112    1,062    3,748   24,922 

Valuation and depreciation of property and equipment

   (146,860)    (16,452)    —     (163,312) 

Derivative asset (liability)

   125,233    (197,253)    (5,224)   (77,244) 

Deposits

   18,162    9,742    —     27,904 

Accrued expenses

   108,700    62,610    —     171,310 

Defined benefit obligation

   378,400    50,410    (20,544)   408,266 

Plan assets

   (313,708)    (100,624)    2,396   (411,936) 

Other provisions

   221,749    (47,484)    —     174,265 

Allowance for acceptances and guarantees

   19,530    3,608    —     23,138 

Allowance related to asset revaluation

   (46,977)    (5,909)    —     (52,886) 

Allowance for expensing depreciation

   (521)    (8)    —     (529) 

Deemed dividend

   1,378    3,939    —     5,317 

Accrued contributions

   8,764    3,140    —     11,904 

Financial instruments designated at fair value through profit of loss

   (58,885)    52,397    —     (6,488) 

Allowances

   94,554    (70,201)    —     24,353 

Fictitious dividend

   4,833    157    —     4,990 

Liability under insurance contracts

   13,104    5,001    —     18,105 

Deficit carried over

   —      1,505    —     1,505 

Other

   (77,198)    49,675    (15,230)   (42,753) 
  

 

 

   

 

 

   

 

 

  

 

 

 
   273,116    (143,255)    75,551   205,412 
  

 

 

   

 

 

   

 

 

  

 

 

 

Expired unused tax losses:

       

Extinguishment of deposit and insurance liabilities

   357,307    18,500    —     375,807 
  

 

 

   

 

 

   

 

 

  

 

 

 
  W630,423    (124,755)    75,551   581,219 
  

 

 

   

 

 

   

 

 

  

 

 

 

 

 (*1)

As the acquisition of ANZ Retail business by Shinhan Bank of Vietnam was completed, the amount was adjusted retrospectively.

(*2)

Deferred tax assets from overseas subsidiaries were decreased byW1,654 million due to foreign exchange rate movements.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

42.51.

Income tax expense (continued)

   2018 
   Beginning
Balance (*1)		   Profit or
loss		   Other
comprehensive
income		   Ending
Balance (*2)		 

Unearned income

  W(202,069)    (53,267)    —      (255,336) 

Account receivable

   (19,267)    (4,872)    —      (24,139) 

Financial assets at fair value through profit or loss

   (47,548)    79,000    16,825    48,277 

Securities at fair value through other comprehensive income

   307,729    (47,548)    (82,823)    177,358 

Investment in associates

   24,918    3,205    (3,380)    24,743 

Valuation and depreciation of property and equipment

   (163,313)    1,317    —      (161,996) 

Derivative asset (liability)

   (70,828)    171,000    11,579    111,751 

Deposits

   27,904    132    —      28,036 

Accrued expenses

   171,310    (38,621)    —      132,689 

Defined benefit obligation

   408,266    6,965    32,427    447,658 

Plan assets

   (411,935)    (37,117)    2,729    (446,323) 

Other provisions

   191,298    3,177    —      194,475 

Allowance for acceptances and guarantees

   23,929    5,228    —      29,157 

Allowance related to asset revaluation

   (52,886)    3,173    —      (49,713) 

Allowance for expensing depreciation

   (529)    64    —      (465) 

Deemed dividend

   5,317    (5,317)    —      —   

Accrued contributions

   11,904    9,807    —      21,711 

Financial instruments designated at fair value through profit of loss

   (7,194)    (80,214)    —      (87,408) 

Allowances

   131,222    (82,438)    —      48,784 

Fictitious dividend

   4,990    (3,665)    —      1,325 

Liability under insurance contracts

   18,105    4,488    —      22,593 

Deficit carried over

   1,505    (1,505)    —      —   

Other

   59,471    (296,190)    11,043    (225,676) 
  

 

 

   

 

 

   

 

 

   

 

 

 
   412,299    (363,198)    (11,600)    37,501 
  

 

 

   

 

 

   

 

 

   

 

 

 

Expired unused tax losses:

        

Extinguishment of deposit and insurance liabilities

   375,807    (8,363)    —      367,444 
  

 

 

   

 

 

   

 

 

   

 

 

 
  W788,106    (371,561)    (11,600)    404,945 
  

 

 

   

 

 

   

 

 

   

 

 

 

(*1)

Changes in the scope of application of IFRS 9 and 15 have been reflected (Note 60).

(*2)

Deferred tax assets from overseas subsidiaries were decreased byW29 million due to foreign exchange rate movements.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

51.

Income tax expense (continued)

 

 (d)

Deferred tax assets and liabilities that were directly charged or credited to equity for the years ended December 31, 20162017 and 20172018 are as follows:

 

  January 1, 2016 Changes December 31, 2016   January 1, 2017 Changes December 31, 2017 
  OCI (*2) Tax effect OCI (*2) Tax effect OCI (*2) Tax effect   OCI Tax effect OCI (*2) Tax effect OCI Tax effect 

Valuation gain (loss) onavailable-for-sale financial assets

  W1,090,456  (263,744)  (566,121)  133,591  524,335  (130,153) 

Gain (loss) on valuation ofavailable-for-sale financial assets

  W524,335  (130,153)  (432,461)  110,405  91,874  (19,748) 

Foreign currency translation adjustments for foreign operations

   (140,265)  (23,472)  (1,550)  13,562  (141,815)  (9,910)    (141,815)  (9,910)  (178,244)  (15,230)  (320,059)  (25,140) 

Gain (loss) on cash flow hedge

   (16,098)  3,896  (1,665)  403  (17,763)  4,299    (17,763)  4,299  21,128  (5,224)  3,365  (925) 

Equity in other comprehensive income of associates

   20,746  (2,177)  1,813  876  22,559  (1,301)    22,559  (1,301)  (25,300)  3,748  (2,741)  2,447 

The accumulated other comprehensive income in separate account (*1)

   11,603  (2,808)  (5,712)  1,383  5,891  (1,425)    5,891  (1,425)  (12,529)  3,251  (6,638)  1,826 

Remeasurements of the defined benefit liability

   (492,191)  118,825  21,050  (4,984)  (471,141)  113,841    (471,141)  113,841  121,451  (18,146)  (349,690)  95,695 
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Income tax charged or credited directly to equity

  W474,251  (169,480)  (552,185)  144,831  (77,934)  (24,649)   W(77,934)  (24,649)  (505,955)  78,804  (583,889)  54,155 
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

 

  January 1, 2017 Changes December 31, 2017   January 1, 2018 (*2) Changes December 31, 2018 
  OCI (*2) Tax effect OCI (*2) Tax effect OCI (*2) Tax effect   OCI Tax effect OCI Tax effect OCI Tax effect 

Valuation gain (loss) onavailable-for-sale financial assets

  W524,335  (130,153)  (432,461)  110,405  91,874  (19,748) 

Gain (loss) on valuation of financial assets measured at FVOCI

  W(255,593)  76,124  267,306  (84,878)  11,713  (8,754) 

Gain (loss) on financial liabilities measured at FVTPL attributable to changes in credit risk

   (2,141)  588  2,376  (653)  235  (65) 

Foreign currency translation adjustments for foreign operations

   (141,815)  (9,910)  (178,244)  (15,230)  (320,059)  (25,140)    (317,264)  (25,054)  10,498  9,967  (306,766)  (15,087) 

Gain (loss) on cash flow hedge

   (17,763)  4,299  21,128  (5,224)  3,365  (925)    7,286  (4,845)  (31,771)  11,578  (24,485)  6,733 

Equity in other comprehensive income of associates

   22,559  (1,301)  (25,300)  3,748  (2,741)  2,447    (5,868)  3,306  10,825  (3,380)  4,957  (74) 

The accumulated other comprehensive income in separate account (*1)

   5,891  (1,425)  (12,529)  3,251  (6,638)  1,826    (6,295)  1,731  11,967  (3,291)  5,672  (1,560) 

Remeasurements of the defined benefit liability

   (471,141)  113,841  121,451  (18,146)  (349,690)  95,695    (349,538)  95,543  (127,844)  35,157  (477,382)  130,700 

Gain (loss) on valuation of financial asset measured at FVTPL (Overlay approach)

   (33,713)  8,988  (74,942)  20,609  (108,655)  29,597 
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Income tax charged or credited directly to equity

  W(77,934)  (24,649)  (505,955)  78,804  (583,889)  54,155   W(963,126)  156,381  68,415  (14,891)  (894,711)  141,490 
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

 

(*1)

Deferred tax effects, which are originated from the accumulated other comprehensive income in separate account, were included in the other assets of separate account’s financial statement.

(*2)OCI : Other Comprehensive Income

Changes in the scope of application of IFRS 9 and 15 have been reflected (Note 60)

(e)The amount of deductible temporary differences, unused tax losses, and unused tax credits that are not recognized as deferred tax assets as of December 31, 2016 and 2017 are as follows:

   2016   2017 

Tax loss carry forward (*)

  W99,449    99,449 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

42.51.

Income tax expense (continued)

(e)

The amount of deductible temporary differences, unused tax losses, and unused tax credits that are not recognized as deferred tax assets as of December 31, 2017 and 2018 are as follows:

   2017   2018 

Tax loss carry forward (*)

  W99,449    99,449 

 

 (*)

At the end of reporting date, the expected extinctive date of tax loss carry forward and tax credits carry forward that are not recognized as deferred tax assets are as follows:

 

   1 year
or less		   1-2
years		   2-3
years		   More than
3 years		 

Tax loss carry forward

  W—   99,449    99,449—      —      —   

 

 (f)

The amount of temporary difference regarding investment in subsidiaries that are not recognized as deferred tax liabilities as of December 31, 20162017 and 20172018 are as follows:

 

   2016   2017 

Investment in associates

  W(283,161)    (480,184) 
   2017   2018 

Investment in associates

  W(480,184)    (686,107) 

 

 (g)

The Group set off a deferred tax asset against a deferred tax liability of the same taxable entity if, and only if, they relate to income taxes levied by the same taxation authority and the entity has a legally enforceable right to set off current tax assets against current tax liabilities. Deferred tax assets and liabilities presented on a gross basis prior to any offsetting as of December 31, 20162017 and 20172018 are as follows:

 

   2016   2017 

Deferred tax assets

  W701,482    659,594 

Deferred tax liabilities

   (71,059)    (77,023) 

43.Earnings per share

Basic and diluted earnings per share for the years ended December 31, 2015, 2016 and 2017 are as follows:

   2015   2016   2017 

Profit attributable to equity holders of Shinhan Financial Group

  W2,367,171    2,774,778    2,917,735 

Less:

      

Dividends on preferred stock (*)

   61,938    18,836    —   

Dividends to hybrid bond

   34,488    36,091    17,678 
  

 

 

   

 

 

   

 

 

 
   96,426    54,927    17,678 
  

 

 

   

 

 

   

 

 

 

Net profit available for common stock

  W2,270,745    2,719,851    2,900,057 
  

 

 

   

 

 

   

 

 

 

Weighted average number of common shares outstanding

   474,199,587    474,199,587    474,199,587 

Basic and diluted earnings per share in won

  W4,789    5,736    6,116 
  

 

 

   

 

 

   

 

 

 
   2017 (*)   2018 

Deferred tax assets

  W659,594    483,517 

Deferred tax liabilities

   (77,293)    (78,572) 

 

 (*)

As the acquisition of ANZ Retail business by Shinhan Bank of Vietnam was completed, the amount was adjusted retrospectively.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

52.

Earnings per share

(a)

Basic and diluted earnings per share for the years ended December 31, 2016, 2017 and 2018 are as follows:

   2016   2017 (*2)   2018 

Profit attributable to equity holders of Shinhan Financial Group

  W2,774,778    2,918,816    3,156,722 

Less:

      

Dividends on preferred stock (*3)

   18,836    —      —   

Dividends to hybrid bond

   36,091    17,678    40,357 
  

 

 

   

 

 

   

 

 

 
   54,927    17,678    40,357 

Net profit available for common stock

  W2,719,851    2,901,138    3,116,365 
  

 

 

   

 

 

   

 

 

 

Weighted average number of common shares outstanding (*1)

   474,199,587    474,199,587    473,649,076 

Basic and diluted earnings per share in won

  W5,736    6,118    6,579 

(*1)

The number of basic ordinary shares outstanding is 474,199,587 shares. As a result of the acquisition of treasury stock, the weighted average number of common shares outstanding for the year ended December 31, 2018 decreased.

(*2)

As the acquisition of ANZ Retail business by Shinhan Bank of Vietnam was completed, the amount was adjusted retrospectively.

(*3)

The amount of 2016 is the additionally paid amount based on the contractual dividend rate for the period from the beginning of the period to the day before the redemption date according to the redemption conditions of the redeemable preferred stocks.

(b)

The Board of Directors’ meeting on February 12, 2019, after the reporting period, approved an issue of a convertible preferred stock that could potentially dilute basic earnings per share in the future (Note 59).

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

44.53.

Commitments and contingencies

 

 (a)

Guarantees, acceptances and credit commitments as of December 31, 20162017 and 20172018 are as follows:

 

  2016   2017   2017   2018 

Guarantees:

        

Guarantee outstanding

  W9,324,734    7,611,211 

Guarantees outstanding

  W7,611,211    9,437,691 

Contingent guarantees

   2,997,553    3,259,613    3,259,613    3,985,532 
  

 

   

 

   

 

   

 

 
   12,322,287    10,870,824    10,870,824    13,423,223 
  

 

   

 

   

 

   

 

 

Commitments to extend credit:

        

Loan commitments in won

   54,077,528    54,827,918    54,827,918    69,906,336 

Loan commitments in foreign currency

   20,464,242    18,992,984    18,992,984    19,967,297 

ABS and ABCP commitments (*)

   2,060,089    2,035,543 

ABS and ABCP commitments

   2,035,543    2,083,522 

Others

   1,362,433    3,021,513    66,767,465    73,816,233 
  

 

   

 

   

 

   

 

 
   77,964,292    78,877,958    142,623,910    165,773,388 
  

 

   

 

   

 

   

 

 

Endorsed bills:

        

Secured endorsed bills

   32,187    85,456    85,456    37,667 

Unsecured endorsed bills

   8,822,654    7,810,788    7,810,788    7,758,242 
  

 

   

 

   

 

   

 

 
   8,854,841    7,896,244    7,896,244    7,795,909 
  

 

   

 

   

 

   

 

 

Loans sold under repurchase agreement

   2,099    2,099 

Loans sold with recourse

   2,099    2,099 
  

 

   

 

   

 

   

 

 
  W99,143,519    97,647,125   W161,393,077    186,994,619 
  

 

   

 

   

 

   

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

53.

Commitments and contingencies (continued)

 

 (*)(b)

Legal contingencies

The Group’s pending lawsuits as a defendant for the year ended December 31, 2018 are as follows:

Case

  Number of
claim		  

Descriptions

  Claim amount 

Payment Guarantee

  1  The plaintiff filed claims against the Group for guarantee deposit of receivable-backed ABL of KT ENS. The case are currently pending in its second appeal.  W12,866 

Compensation for a loss

  1  

According to the asset custody contract, the plaintiff is liable for damages caused by a fire in the property of the real estate investment company in which the Group is holding assets.

 

In 2015 and 2017, the plaintiffs prevailed, but the first and second decisions were different.

   6,893 

Confirm deposit accounts

  1  

Hanwha Savings Bank, a party to the lender of Meat Loan, filed a lawsuit against all creditors to confirm deposit accounts for the sale of frozen meat.

 

HYUN, which is proceeding civil litigation against the group’s individual owners, has been entrusted to proceed the confirm deposit accounts.

   5,575 

Others

  152  Compensation for a loss claim, etc.   78,900 
  

 

    

 

 

 
  155    W104,234 
  

 

    

 

 

 

As of December 31, 2018, the Group has recordedW 25,554 million andW 1,006 million, respectively, as other provisions and insurance contract liabilities (reserve for claims) for litigations, etc., The outcome of the lawsuits is not expected to have a material impact on the consolidated financial statements, but additional losses may result from future litigation

(c)

The Group consolidates a structured entity when it is exposed, or has rights,entered into an agreement with Asia Trust Co., Ltd. (60% of its total shares) to variable returns from its involvementacquire remaining stake in the Group. In accordance with the investee andagreement, the Group has the abilityright to most significantly affect those returns through its power overpurchase shares held by the structured entity based onshareholders of Asia Trust Co., Ltd. In response, the terms inshareholders of Asia Trust Co., Ltd. have the agreement relatingright to the establishment of the structured entity. The structured entities are established to buy assets from originators and issue asset-backed securities in order to facilitate the originators’ funding activities and enhance their financial soundness. The Group is involved in the securitization vehicles by purchasing or committingdemand to purchase the asset-backed securities issued and/or providing other forms of credit enhancement. As thenon-controlling interests in the structured entities are presented as liabilities in the consolidated statement of financial positionshares of the Group, the Group does not recognizenon-controlling interests for the consolidated structured entities.Group.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

44.54.Commitments and contingencies (continued)

Statement of cash flows

 

 (b)(a)Legal contingencies

Cash and cash equivalents in the consolidated statements of cash flows as of December 31, 2016, 2017 and 2018 are as follows:

The Group’s pending lawsuits as a defendant

   2016   2017   2018 

Cash and due from banks

  W19,196,875    22,682,652    —   

Cash and due from banks at amortized cost

   —      —      17,363,450 

Adjustments:

      

Due from financial institutions with a maturity over three months from date of acquisition

   (4,458,286)    (3,010,471)    (3,008,188) 

Restricted due from banks

   (9,106,053)    (13,435,531)    (6,175,506) 
  

 

 

   

 

 

   

 

 

 
  W5,632,536    6,236,650    8,179,756 
  

 

 

   

 

 

   

 

 

 

(b)

Significantnon-cash activities for the years ended December 31, 2016, 2017 and 2018 are as follows:

   2016   2017   2018 

Debt-equity swap

  W32,229    32,530    28,759 

Transfers fromconstruction-in-progress to property and equipment

   15,405    14,285    6,319 

Transfers between property / equipment and investment property

   10,898    91,782    28,199 

Transfers between assets held for sale and property / equipment

   411    5,336    80 

Transfers between investment property and assets held for sale

   2,200    6,306    —   

(c) Changes in assets and liabilities arising from financing activities for the years ended December 31, 2017 and 2018 are as follows:

 

Case

  Number of
claim		  

Descriptions

  Claim amount 

Demands on stock return

  1  The Medison stock sales contract made between the plaintiff and PEF has been discharged or cancelled. The plaintiff is demanding the return of Medison stocks based on the invalidity of the stock sales contract and the invalidity of option contracts and revised option contracts stated within the stock sales contract.  W7,500 

Lehman Brothers Special Financing Inc (LBSF)

  1  A plaintiff, Lehman Brothers has claimed that the CDO investment that had been returned to the Group after bankruptcy should be returned to the Lehman Brothers. Because it was contrary to US bankruptcy law. While in internal discussion for arbitral proceeding and settlement with Leman Brothers, defendants including the Group have won the first trial and have currently denied to pay claim amount. Further action will be considered depending on the effects of the arbitration and the possibility of winning the second trial.   12,857 

Payment Guarantee

  1  The plaintiff filed claims against the Group for guarantee deposit of receivable-backed ABL of KT ENS. The case are currently pending in its second appeal.   12,866 

Others

  172  Compensation for a loss claim, etc.   91,145 
  

 

    

 

 

 
  175    W124,368 
  

 

    

 

 

 

As of December 31, 2017, the Group recordedW32,650 million as provisions andW1,120 million as liabilities under insurance contracts with respect to these lawsuits. In respect of a claim for Lehman Brothers Special Financing Inc (LBSF) above the Group recognised a provision ofW5,352 million and in respect of others the Group recognised a provision ofW27,298. Additional losses might be incurred from these legal actions, but the result of such the lawsuits cannot be predicted. The management believes that the result of the lawsuits would not have significant impact on the financial position.

   2017 
   Assets  Liabilities 
   Derivative
assets		  Derivative
liabilities		   Borrowings  Debentures  Total 

Balance at January 1, 2017

  W153,343   10,842    25,294,241   44,326,785   69,785,211 

Changes from cash flows

   (48,499)   10,211    3,047,844   7,784,142   10,793,698 

Changes fromnon-cash flows

       

Amortization of discount on borrowings and debentures

   —     —      1,480   16,126   17,606 

Changes in foreign currency

exchange rate

   —     —      (22,850)   (635,836)   (658,686) 

Others

   (100,878)   125,225    (734,105)   (150,396)   (860,154) 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

Balance at December 31, 2017

  W3,966   146,278    27,586,610   51,340,821   79,077,675 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

45.54.

Statement of cash flows (continued)

 

(a)Cash and cash equivalents in the consolidated statements of cash flows as of December 31, 2015, 2016 and 2017 are as follows:

   2015   2016   2017 

Cash and due from banks

  W22,037,236    19,196,875    22,682,652 

Adjustments:

      

Due from financial institutions with a maturity over three months from date of acquisition

   (4,590,643)    (4,458,286)    (3,010,471) 

Restricted due from banks

   (12,839,342)    (9,106,053)    (13,435,531) 
  

 

 

   

 

 

   

 

 

 
  W4,607,251    5,632,536    6,236,650 
  

 

 

   

 

 

   

 

 

 
   2018 
   Assets  Liabilities 
   Derivative
assets		  Derivative
liabilities		  Borrowings  Debentures  Total 

Balance at January 1, 2018

  W3,966   146,278   27,586,610   51,340,821   79,077,675 

Changes from cash flows

   (5,845)   (12,002)   1,772,203   11,798,466   13,552,822 

Changes fromnon-cash flows

      

Amortization of discount on borrowings and debentures

   —     —     181,050   335,935   516,985 

Changes in foreign currency exchange rate

   —     —     955,512   229,277   1,184,789 

Others

   9,356   (49,697)   (676,833)   (476,800)   (1,193,974) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at December 31, 2018

  W7,477   84,579   29,818,542   63,227,699   93,138,297 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

55.(b)Significantnon-cash activities for the years ended December 31, 2015, 2016 and 2017 are as follows:

Related parties

Intra-group balances, and income and expenses arising from intra-group transactions are eliminated in preparing the consolidated financial statements.

   2015   2016   2017 

Debt-equity swap

  W34,218    32,229    32,530 

Transfers fromconstruction-in-progress to property and equipment

   3,255    15,405    14,285 

Transfers between property and equipment and investment property

   3,122    10,898    91,782 

Transfers between assets held for sale to property and equipment

   —      411    5,336 

Transfers between investment property and assets held for sale

   —      2,200    6,306 

(a) Balances with the related parties as of December 31, 2017 and 2018 are as follows:

 

(c)Changes in assets and liabilities arising from financing activities for the year ended December 31, 2017 are as follows:

   2017 
   Assets  Liabilities 
   Derivative
assets		  Derivative
liabilities		   Borrowings  Debentures  Total 

Balance at January 1, 2017

  W153,343   12,276    25,294,241   44,326,785   69,633,302 

Changes from cash flows

   48,500   10,211    3,047,844   7,784,142   10,842,197 

Changes fromnon-cash flows

       

Amortization of discount on borrowings and debentures

   —     —      1,480   16,126   17,606 

Changes in foreign currency exchange rate

   —     —      (22,850)   (635,836)   (658,686) 

Others

   (197,875)   128,819    (734,105)   (150,396)   (755,682) 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

Balance at December 31, 2017

  W3,968   151,306    27,586,610   51,340,821   79,078,737 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

Related party

  

Account

  2017   2018 

Investments in associates:

      

BNP Paribas Cardif Life Insurance

  Other assets  W9,868    9,860 

”

  Credit card loans   191    116 

”

  Allowances   (4)    —   

”

  Deposits   446    444 

”

  Provisions   2    —   

JAEYOUNG SOLUTEC CO., LTD. (*1)

  Loans   14,847    —   

”

  Allowances   (124)    —   

”

  Credit card loans   33    —   

”

  Deposits   2,659    —   

”

  Provisions   4    —   

Partners 4th Growth Investment Fund

  Deposits   2,076    1,855 

BNP Paribas Cardif General Insurance

  Credit card loans   29    29 

”

  Allowances   (1)    (2) 

”

  Deposits   221    157 

Shinhan PraxisK-Growth Global Private Equity Fund

  Other assets   174    151 

Dream High Fund III

  Deposits   3    4 

MidasDong-A Snowball Venture Fund

  Deposits   220    159 

IBKS-Shinhan Creative Economy New Technology Fund (*1)

  Deposits   78    —   

Credian Healthcare Private Equity Fund II

  Deposits   26    45 

KDBC MidasDong-A Snowball Venture Fund 2

  Deposits   239    354 

IBKS-Shinhan Creative Economy New Technology Fund II

  Deposits   76    672 

Eum Private Equity Fund No.3

  Deposits   65    49 

Branbuil CO., LTD. (*2)

  Deposits   55    —   

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

46.55.

Related parties (continued)

Intra-group balances, and income and expenses arising from intra-group transactions are eliminated in preparing the consolidated financial statements.

(a) Significant balances with the related parties as of December 31, 2016 and 2017 are as follows:

Related party

  

Account

  2017   2018 

SHBNPP Private Korea Equity Long-Short Professional Feeder

  Other assets   97    133 

Shinhan Global Healthcare Fund 1

  Unearned revenue   409    360 

Shinhan Fintech New Technology Fund No.1

  Unearned revenue   123    123 

KTB Newlake Global Healthcare PEF

  Deposits   465    151 

”

  Provisions   13    —   

Taihan Industrial System Co., Ltd.

  Deposits   100    85 

Incorporated association Finance Saving Information Center

  Credit card loans   —      3 

”

  Deposits   4    4 

GX Shinhan interest 1st Private Equity Fund

  Unearned revenue   —      278 

Nomura investment property trust No.19

  Loans   —      11,966 

”

  Other assets   —      45 

SHBNPP MAIN Professional Investment Type Private Mixed Asset Investment Trust No.3

  Other assets   —      236 

Key management personnel

and their immediate relatives:

  Loans   3,247    3,313 
    

 

 

   

 

 

 
  Assets   28,357    25,850 
  Liabilities  W7,284    4,740 
    

 

 

   

 

 

 

 

Related party

  

Account

  2016   2017 

Investments in associates:

      

Aju Capital Co., Ltd.

  Trading assets  W49,990    —   

”

  Loans   210,000    —   

”

  Credit card loans   1,922    —   

”

  Allowances   (627)    —   

”

  Deposits   692    —   

”

  Provisions   73    —   

Pohang TechnoPark2PFV

  Deposits   14,658    —   

BNP Paribas Cardif Life Insurance

  Other assets   112    9,868 

”

  Credit card loans   127    191 

”

  Allowances   (1)    (4) 

”

  Accrued expenses   29    —   

”

  Deposits   353    446 

”

  Provisions   1    2 

BNP Paribas Cardif General Insurance

  Credit card loans   44    29 

”

  Allowances   (1)    (1) 

”

  Deposits   13    221 

Dream High Fund III

  Deposits   1    3 

MidasDong-A Snowball Venture Fund

  Deposits   427    220 

IBKS-Shinhan Creative Economy New Technology Fund

  Accounts receivable   12    —   

”

  Deposits   1,751    78 

EQP Global Energy Infrastructure Private Equity Fund

  Deposits   1    —   

Shinhan PraxisK-Growth Global Private Equity Fund

  Other assets   175    174 

JAEYOUNG SOLUTEC CO., LTD.

  Loans   14,356    14,847 

”

  Credit card loans   42    33 

”

  Allowances   (70)    (124) 

”

  Deposits   7,638    2,659 

”

  Provisions   7    4 

Partners 4th Growth Investment Fund

  Deposits   2,160    2,076 

SHBNPP Private Korea Equity Long-Short Professional Feeder

  Other assets   175    97 

Credian Healthcare Private Equity Fund II

  Deposits   7    26 

MidasDong-A Snowball Venture Fund 2

  Deposits   242    239 

IBKS-Shinhan Creative Economy New Technology Fund II

  Accounts receivable   8    —   

”

  Deposits   179    76 

PSA 1st Fintech Private Equity Fund

  Deposits   525    —   

SHBNPP Private Multi Strategy Professional Feeder No.1

  Other assets   43    —   

Eum Private Equity Fund No.3

  Deposits   80    65 
(*1)

Excluded from related parties due to the disposal or terminated.

(*2)

As a result of changes in accounting policies at the beginning of the current year, they were excluded from associates.

(b)

Transactions with the related parties for the years ended December 31, 2016, 2017 and 2018 are as follows:

Related party

 

Account

  2016  2017  2018 

Investments in associates

     

Aju Capital co., Ltd

 Interest income  W7,332   —     —   

”

 Fees and commission income   257   —     —   

”

 Interest expense   (2)   —     —   

”

 Fees and commission expense   (302)   —     —   

”

 Other operating expenses   (18)   —     —   

”

 Provision for credit losses   (149)   —     —   

Pohang TechnoPark2PFV

 Interest expense   (15)   —     —   

BNP Paribas Cardif Life Insurance

 Fees and commission income   4,265   4,631   3,716 

”

 Reversal of credit losses   —     —     4 

”

 Provision for credit losses   (1)   (3)   —   

”

 General and administrative expenses   (9)   (10)   (17) 

Shinhan PraxisK-Growth Global Private Equity Fund

 Fees and commission income   691   689   685 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

46.55.

Related parties (continued)

 

Related party

  

Account

  2016   2017 

Branbuil CO., LTD.

  Loans  W15    —   

”

  Credit card loans   3    —   

”

  Allowances   (1)    —   

”

  Deposits   28    55 

Semantic

  Credit card loans   1    —   

”

  Allowances   (1)    —   

Albatross Growth Fund

  Accounts receivable   326    —   

Shinhan Global Healthcare Fund 1

  Unearned revenue   —      409 

KTB Newlake Global Healthcare PEF

  Deposits   —      465 

”

  Provisions   —      13 

Shinhan Fintech New Technology Fund No.1

  Unearned revenue   —      123 

Taihan Industrial System Co., Ltd.

  Deposits   —      100 

Incorporated association Finance Saving Information Center

  Deposits   —      4 

Key management personnel and their immediate relatives:

  Loans   1,877    3,247 
    

 

 

   

 

 

 
  Assets  W278,527    28,357 
  Liabilities   28,865    7,284 
    

 

 

   

 

 

 

(b)Transactions with the related parties for the years ended December 31, 2015, 2016 and 2017 are as follows:

Related party

 

Account

  2015   2016  2017  

Account

  2016 2017 2018 
   

Investments in associates

      

Aju Capital co., Ltd

 Interest income  W6,440    7,332   —   

BNP Paribas Cardif General Insurance

 Fees and commission income   4  4  9 

”

 Reversal of credit losses   —    1   —   

”

 Provision for credit losses   (1)   —    (2) 

Shinhan K2 Secondary Fund

 Fees and commission income   665   —     —   

MidasDong-A Snowball Venture Fund

 Fees and commission income   28  38  47 

”

 Interest expense   (4)  (3)  (2) 

SHC-EN Fund

 Fees and commission income   149   —     —   

SP New Technology Business investment Fund I (*1)

 Fees and commission income   30  41  317 

IBKS-Shinhan Creative Economy New Technology Fund I (*1)

 Fees and commission income   50  37  13 

”

 Interest expense   (1)  (2)   —   

SM New Technology Business Investment Fund I

 Fees and commission income   —    55  55 

JAEYOUNG SOLUTEC CO., LTD. (*1)

 Interest income   671  654  523 

”

 Fees and commission income   291    257   —    Fees and commission income   1  1  2 

”

 Other operating income   23    —     —    Other operating income   7  3  3 

”

 Reversal of credit losses   146    —     —    Reversal of credit losses   89  1   —   

”

 Interest expense   (1)    (2)   —    Interest expense   (21)  (4)  (2) 

”

 Fees and commission expense   (694)    (302)   —    Provision for credit losses   —    (55)  (1) 

Korea Investment Gong-pyeong Office Real Estate Investment Trust 2nd

 Fees and commission income   55   —     —   

The Asia Pacific Capital Fund II L.P.

 Fees and commission income   175  85   —   

Partners 4th Growth Investment Fund

 Interest expense   (2)  (16)  (19) 

Albatross Growth Fund

 Interest expense  W(6)   —     —   

Shinhan-Albatross Technology Investment

 Fees and commission income  W—    152  216 

”

 Other operating expenses   —      (18)   —    Interest expense   —    (21)   —   

”

 Provision for credit losses   —      (149)   —   

UAMCO., Ltd

 Interest income   4    —     —   

”

 Fees and commission income   9    —     —   

”

 Other operating income   4    —     —   

”

 Provision for credit losses   (32)    —     —   

Pohang TechnoPark2PFV

 Interest expense   (15)    (15)   —   

BNP Paribas Cardif Life Insurance

 Fees and commission income   1,994    4,265  4,631 

”

 Provision for credit losses   (1)    (1)  (3) 

”

 Non-operating expense   (847)    —     —   

”

 General and administrative expenses   (7)    (9)  (10) 

Kukdong Engineering & Construction CO., LTD

 Interest income   26    —     —   

”

 Fees and commission income   16    —     —   

”

 Reversal of credit losses   1    —     —   

PSA 1st Fintech Private Equity Fund

 Interest expense   (5)   —     —   

IBKS-Shinhan Creative Economy New Technology Fund 2

 Fees and commission income   22  25  16 

KDBC MidasDong-A Snowball Venture Fund 2

 Interest expense   (1)   —    (2) 

SHBNPP Private Korea Equity Long-Short Professional Feeder

 Fees and commission income   785  892  975 

SHBNPP Private Multi Strategy Professional Feeder No.1

 Fees and commission income   160   —     —   

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

46.55.

Related parties (continued)

 

Related party

 

Account

  2015   2016  2017 

”

 Interest expense   (35)    —     —   

”

 Fees and commission expense   (3)    —     —   

”

 Other operating expenses   (15)    —     —   

BNP Paribas Cardif General Insurance

 Fees and commission income   10    4   4 

”

 Provision for credit losses   (1)    (1)   —   

”

 Reversal of credit losses   —      —     1 

Shinhan K2 Secondary Fund

 Fees and commission income   116    665   —   

Dream High Fund III

 Interest expense   (5)    —     —   

MidasDong-A Snowball Venture Fund

 Fees and commission income   30    28   38 

”

 Interest expense   (3)    (4)   (3) 

SHC-EN Fund

 Fees and commission income   54    149   —   

SP New Technology Business investment Fund I

 Fees and commission income   79    30   41 

IBKS-Shinhan Creative Economy New Technology Fund

 Fees and commission income   39    50   37 

”

 Interest expense   (2)    (1)   (2) 

SH Rental Service

 Interest expense   (1)    —     —   

SM New Technology Business Investment Fund I

 Fees and commission income   96    —     55 

JAEYOUNG SOLUTEC CO., LTD.

 Interest income  W616    671   654 

”

 Fees and commission income   1    1   1 

”

 Other operating income   —      7   3 

”

 Reversal of credit losses   —      89   1 

”

 Interest expense   (47)    (21)   (4) 

”

 Provision for credit losses   (160)    —     (55) 

”

 Other operating expense   (15)    —     —   

Korea Investment Gong-pyeong Office Real Estate Investment Trust 2nd

 Fees and commission income   21    55   —   

The Asia Pacific Capital Fund II L.P.

 Fees and commission income   —      175   85 

Shinhan PraxisK-Growth Global Private Equity Fund

 Fees and commission income   391    691   689 

Partners 4th Growth Investment Fund

 Interest expense   (6)    (2)   (16) 

Albatross Growth Fund

 Interest expense   —      (6)   —   

Shinhan-Albatross Growth Fund

 Fees and commission income   —      —     152 

”

 Interest expense   —      —     (21) 

PSA 1st Fintech Private Equity Fund

 Interest expense   —      (5)   —   

IBKS-Shinhan Creative Economy New Technology Fund II

 Fees and commission income   —      22   25 

Related party

 

Account

  2016  2017  2018 

Semantic

 Interest income   15   —     —   

”

 Provision for credit losses   (1)   —     —   

Branbuil CO., LTD. (*2)

 Fees and commission income   1   2   —   

”

 Provision for credit losses   (1)   —     —   

Treenkid

 Interest income   3   —     —   

STI-New Growth Engines Investment

 Fees and commission income   —     30   16 

Shinhan Fintech New Technology Fund No.1

 Fees and commission income   —     30   153 

KTB New lake medical Global Investment

 Interest income   —     10   2 

”

 Other operating expenses   —     (13)   —   

Shinhan Global health Care Investment No.1

 Fees and commission income   —     282   785 

Taihan Industrial System Co., Ltd.

 Fees and commission income  W—     2   1 

Shinhan capital-Cape FN Fund No.1

 Fees and commission income   —     —     82 

SHC-K2 Global Material Fund

 Fees and commission income   —     —     20 

Synergy-Shinhan Mezzanine New Technology Investment Fund

 Fees and commission income   —     —     127 

Shinhan-MidasDong-A Secondary Venture Fund

 Fees and commission income   —     —     71 

GX Shinhan interest 1st Private Equity Fund

 Fees and commission income   —     —     412 

Shinhan-Nvestor Liquidity Solution Fund

 Fees and commission income   —     —     214 

SHC ULMUS Fund No.1

 Fees and commission income   —     —     51 

Shinhan-PS Investment Fund No.1

 Fees and commission income   —     —     12 

Nomura investment property trust No.19

 Interest income   —     —     312 

”

 Provision for credit loss   —     —     (34) 

SHBNPP MAIN Professional Investment Type Private Mixed Asset Investment Trust No.3

 Fees and commission income   —     —     236 

Key management personnel and their immediate relatives

 

Interest income

   68   101   101 
   

 

 

  

 

 

  

 

 

 
   W14,984   7,639   9,097 
   

 

 

  

 

 

  

 

 

 

(*1)

Excluded from related parties due to the disposal or terminated.

(*2)

As a result of changes in accounting policies at the beginning of the current year, they were excluded from associates.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

46.55.

Related parties (continued)

Related party

 

Account

  2015   2016  2017 

MidasDong-A Snowball Venture Fund 2

 Interest expense   —      (1)   —   

SHBNPP Private Korea Equity Long-Short Professional Feeder

 Fees and commission income   506    785   892 

SHBNPP Private Multi Strategy Professional Feeder No.1

 Fees and commission income   —      160   —   

Semantic

 Interest income   —      15   —   

”

 Provision for credit losses   —      (1)   —   

Branbuil CO., LTD.

 Fees and commission income   —      1   2 

”

 Provision for credit losses   —      (1)   —   

Treenkid

 Interest income   —      3   —   

STI New development Co, LTD

 Fees and commission income   —      —     30 

Shinhan Fintech New Technology Fund No.1

 Fees and commission income   —      —     30 

KTB New lake medical Global Investment

 Interest income   —      —     10 

”

 Other operating income   —      —     (13) 

Shinhan Global Healthcare Fund 1

 Fees and commission income   —      —     282 

Taihan Industrial System Co., Ltd.

 Fees and commission income   —      —     2 

Key management personnel and their immediate relatives

 

Interest income

   119    68   101 
   

 

 

   

 

 

  

 

 

 
   W9,142    14,984   7,639 
   

 

 

   

 

 

  

 

 

 

The above outstanding balances and transactions have arose in the ordinary course of business and on substantially the same terms, including interest rates and security, as for comparable transactions with third-party counterparties.

 

 (c)

Key management personnel compensation

Key management personnel compensation for the years ended December 31, 2015, 2016, 2017 and 2017 are2018 were as follows:

 

  2015   2016   2017   2016   2017   2018 

Short-term employee benefits

  W18,462    16,428    17,112   W16,428    17,112    22,502 

Severance benefits

   393    418    979    418    979    419 

Share-based payment transactions

   6,318    9,162    6,787    9,162    6,787    4,944 
  

 

   

 

   

 

   

 

   

 

   

 

 
  W25,173    26,008    24,878   W26,008    24,878    27,865 
  

 

   

 

   

 

   

 

   

 

   

 

 

(*)

The expenses of share-based payment transactions are the remuneration expenses during the vesting period.

(d)

The guarantees provided between the related parties as of December 31, 2017 and 2018 were as follows:

      Amount of guarantees    

Guarantor

  

Guaranteed Parties

  2017   2018   

Account

Shinhan Bank

  

KTB New lake medical Global Investment

  W700    849   Unused credit line
  

BNP Paribas Cardif Life Insurance

   10,000    10,000   Unused credit line
  

Neoplux Technology Valuation Investment Fund

   6,000    —     Security underwriting commitment
  

JAEYOUNG SOLUTEC CO., LTD. (*)

   109    —     Unused credit
  ”   429    —     Import letter of credit
    

 

 

   

 

 

   
    W17,238    10,849   
    

 

 

   

 

 

   

(*)

Excluded from related parties due to the disposal.

(e)

Details of collaterals provided by the related parties as of December 31, 2017 and December 31, 2018 were as follows:

Provided to

  

Provided by

  

Pledged assets

  2017   2018 

Shinhan Bank

  

BNP Paribas Cardif Life Insurance

  

Government

bonds

  W11,666    12,000 

”

  

JAEYOUNG SOLUTEC CO., LTD. (*)

  Properties   20,814    —   
  ”  Guarantee insurance policy   7,037    —   
      

 

 

   

 

 

 
      W39,517    12,000 
      

 

 

   

 

 

 

(*)

Excluded from related parties due to the disposal.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

46.55.

Related parties (continued)

 

 (d)(f)The guarantees provided between the

Details of significant loan transactions with related parties as of December 31, 2016 and 2017 were2018 are as follows:

 

      Amount of guarantees    

Guarantor

  

Guaranteed Parties

  2016   2017   

Account

Shinhan Bank

  Aju Capital Co., Ltd.  W  50,000    —     Unused credit line
  New lake alliance   —      700   Unused credit line
  

BNP Paribas Cardif Life Insurance

   10,000    10,000   Unused credit line
  

Neoplux Technology Valuation Investment Fund

   12,000    6,000   Security underwriting commitment
  

JAEYOUNG SOLUTEC CO., LTD.

   600    109   Unused credit
  ”   483    429   Import letter of credit
    

 

 

   

 

 

   
    W73,083    17,238   
    

 

 

   

 

 

   

Classification

  

Company

  Beginning   Loan   Recover   Other
(*)		  Ending 

Investments in associates

  

Nomura investment property trust No.19

  W—      12,000    —      (34)   11,966 

 

 (e)(*)Details

The effect of collaterals provided by the related parties as of December 31, 2016 and 2017 were as follows:changes in allowance for doubtful accounts is included.

 

Provided to

  

Provided by

  

Pledged assets

  2016   2017 

Shinhan Bank

  Aju Capital Co., Ltd.  

Beneficiary

certificate

   W160,000    —   
  

BNP Paribas Cardif Life Insurance

  

Government

bonds

   13,699    11,666 
  Treenkid  Properties   200    —   
  

JAEYOUNG SOLUTEC CO., LTD.

  Properties   20,814    20,814 
  

”

  Guarantee insurance policy   7,037    7,037 
      

 

 

   

 

 

 
      W201,750    39,517 
      

 

 

   

 

 

 

47.56.Information of trust business

Interests in unconsolidated structured entities

 

 (a)Significant balances with trust business as of December 31, 2016 and 2017 are as follows:

   2016   2017 

Borrowings from trust account

  W3,447,078    4,057,649 

Accrued fees on trust accounts

   30,485    28,795 

Accrued interest expense

   782    824 

(b)Transactions with trust business for the years ended December 31, 2015, 2016 and 2017 are as follows:

   2015   2016   2017 

Trust management fees

  W71,753    98,712    166,588 

Fees on early withdrawal

   1    87    3,415 

Interest on borrowings from trust account

   44,986    35,894    37,884 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

48.Interests in unconsolidated structured entities

(a)The nature and extent of interests in unconsolidated structured entities

The Group is involved in assets-backed securitization, structured financing, beneficiary certificates (primarily investment funds) and other structured entities and characteristics of these structured entities are as follows:

 

   

Description

Assets-backed securitization

  Securitization vehicles are established to buy assets from originators and issue asset-backed securities in order to facilitate the originators’ funding activities and enhance their financial soundness. The Group is involved in the securitization vehicles by purchasing (or committing to purchase) the asset-backed securities issued and/or providing other forms of credit enhancement.
  

The Group does not consolidate a securitization vehicle if

(i) the Group is unable to make or approve decisions as to the modification of the terms and conditions of the securities issued by such vehicle or disposal of such vehicles’ assets, (ii) (even if the Group is so able) if the Group does not have the exclusive or primary power to do so, or (iii) if the Group does not have exposure, or right, to a significant amount of variable returns from such entity due to the purchase (or commitment to purchase) of asset-backed securities so issued or subordinated obligations or by providing other forms of credit support.

Structured financing

  Structured entities for project financing are established to raise funds and invest in a specific project such as M&A (mergers and acquisitions), BTL (build-transfer-lease), shipping finance, etc. The Group is involved in the structured entities by originating loans, investing in equity, or providing credit enhancement.

Investment fund

  Investment fund means an investment trust, a PEF (private equity fund) or a partnership which invests in a group of assets such as stocks or bonds by issuing a type of beneficiary certificates to raise funds from the general public, and distributes its income and capital gains to their investors. The Group manages assets by investing in shares of investment fund or playing a role of an operator or a GP (general partner) of investment fund, on behalf of other investors.

The size of unconsolidated structured entities as of December 31, 2016 and 2017 are as follows:

   2016   2017 

Total assets:

    

Asset-backed securitization

  W108,649,039    175,953,075 

Structured financing

   66,759,795    84,719,599 

Investment fund

   33,891,120    69,736,443 
  

 

 

   

 

 

 
  W209,299,954    330,409,117 
  

 

 

   

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

48.56.

Interests in unconsolidated structured entities (continued)

The size of unconsolidated structured entities as of December 31, 2017 and 2018 are as follows:

   2017   2018 

Total assets:

    

Asset-backed securitization

  W175,953,075    196,108,655 

Structured financing

   84,719,599    132,050,391 

Investment fund

   69,736,443    71,487,406 
  

 

 

   

 

 

 
  W330,409,117    399,646,452 
  

 

 

   

 

 

 

 

 (b)

Nature of risks

i) The carrying amounts of the assets and liabilities relating to its interests in unconsolidated structured entities as of December 31, 20162017 and 20172018 are as follows:

   2016 
   Assets-backed
securitization		   Structured
financing		   Investment
fund		   Total 

Assets:

        

Loans

  W380,961    5,791,745    106,234    6,278,940 

Trading assets

   2,082,684    30,266    31,791    2,144,741 

Derivative assets

   19,144    —      —      19,144 

Available-for-sale financial assets

   2,648,304    559,990    2,711,666    5,919,960 

Held-to-maturity financial assets

   2,612,564    —      —      2,612,564 

Other assets

   13,253    21,705    170    35,128 
  

 

 

   

 

 

   

 

 

   

 

 

 
  W7,756,910    6,403,706    2,849,861    17,010,477 
  

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

        

Derivative liabilities

  W137    —      —      137 

Borrowings

   —      1,318    —      1,318 

Other

   1,006    264    —      1,270 
  

 

 

   

 

 

   

 

 

   

 

 

 
  W1,143    1,582    —      2,725 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

   2017 
   Assets-backed
securitization		   Structured
financing		   Investment
fund		   Total 

Assets:

        

Loans

  W329,776    6,189,042    91,078    6,609,896 

Trading assets

   3,201,400    958    351,290    3,553,648 

Derivative assets

   14,218    —      —      14,218 

Available-for-sale financial assets

   2,200,974    400,283    3,525,538    6,126,795 

Held-to-maturity financial assets

   3,259,451    —      —      3,259,451 

Other assets

   729    2,576    1,150    4,455 
  

 

 

   

 

 

   

 

 

   

 

 

 
  W9,006,548    6,592,859    3,969,056    19,568,463 
  

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

        

Derivative liabilities

  W4,448    —      —      4,448 

Other

   557    1,050    9    1,616 
  

 

 

   

 

 

   

 

 

   

 

 

 
  W5,005    1,050    9    6,064 
  

 

 

   

 

 

   

 

 

   

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

48.56.

Interests in unconsolidated structured entities (continued)

 

   2018 
   Assets-backed
securitization		   Structured
financing		   Investment
fund		   Total 

Assets:

        

Loans measured at fair value through profit or loss

  W292    504,571    802,825    1,307,688 

Loan at amortized cost

   478,998    6,925,438    33,500    7,437,936 

Securities at fair value through profit or loss

   4,263,817    288,757    5,293,807    9,846,381 

Derivate assets

   16,390    578    —      16,968 

Securities at fair value through other comprehensive income

   2,244,364    91,316    32,279    2,367,959 

Securities at amortized cost

   4,277,675    —      —      4,277,675 

Other assets

   5,453    48,457    34,333    88,243 
  

 

 

   

 

 

   

 

 

   

 

 

 
  W11,286,989    7,859,117    6,196,744    25,342,850 
  

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

        

Derivative liabilities

  W111    —      —      111 

Other

   5,368    4,128    —      9,496 
  

 

 

   

 

 

   

 

 

   

 

 

 
  W5,479    4,128    —      9,607 
  

 

 

   

 

 

   

 

 

   

 

 

 

ii)Exposure to risk relating to its interests in unconsolidated structured entities as of December 31, 20162017 and 20172018 are as follows:

 

  2016   2017 
  Assets-backed
securitization		   Structured
financing		   Investment
fund		   Total   Assets-backed
securitization		   Structured
financing		   Investment
fund		   Total 

Assets held

  W7,756,910    6,403,706    2,849,861    17,010,477   W9,006,548    6,592,859    3,969,056    19,568,463 

ABS and ABCP commitments

   1,108,282    30,000    —      1,138,282    1,391,035    57,300    452,311    1,900,646 

Loan commitments

   977,383    328,236    47,246    1,352,865    529,566    719,650    31,987    1,281,203 

Guarantees

   83,000    28,060    —      111,060    74,300    15,200    —      89,500 

Others

   61,400    —      —      61,400    4,200    45,634    —      49,834 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 
  W9,986,975    6,790,002    2,897,107    19,674,084   W11,005,649    7,430,643    4,453,354    22,889,646 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

  2017   2018 
  Assets-backed
securitization		   Structured
financing		   Investment
fund		   Total   Assets-backed
securitization		   Structured
financing		   Investment
fund		   Total 

Assets held

  W9,006,548    6,592,859    3,969,056    19,568,463   W11,286,989    7,859,117    6,196,744    25,342,850 

ABS and ABCP commitments

   1,391,035    57,300    452,311    1,900,646    1,395,417    2,300    602,594    2,000,311 

Loan commitments

   529,566    719,650    31,987    1,281,203    1,791,650    815,910    26,100    2,633,660 

Guarantees

   74,300    15,200    —      89,500    88,810    142,032    —      230,842 

Others

   4,200    45,634    —      49,834    —      49,464    —      49,464 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 
  W11,005,649    7,430,643    4,453,354    22,889,646   W14,562,866    8,868,823    6,825,438    30,257,127 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

49.57.Business Combination

Retroactive adjustments for business combination

 

 (a)

Overview

The Group has acquired ANZ Retail Business in Vietnam on December 17, 2017, which was a local entity operating banking business in Vietnam, to strengthen business competitiveness and synergies through the acquisition of related businesses. The Group could not complete the initial accounting for the business acquisition until the end of the reporting period in which the acquisition incurred, since the valuation data of the acquired business has not been obtained, and the goodwill value was recognized at a provisional amount. The Group has finished the business acquisition accounting during 2018, reflecting the valuation results on the acquired net assets, and retrospectively adjusted the provisional value of net assets recognized at the acquisition date.

(b)

Retroactive adjustment of fair value of assets and liabilities

The retroactive adjustment of fair value of assets acquired and liabilities assumed by acquisition of ANZ as of acquisition date is as follows:

   Amount   Adjustments   Adjusted Amount 

Assets:

      

Cash and due from banks

  W8,151    —      8,151 

Loans (*1)

   301,766    (1,352)    300,414 

Property and equipment

   538    —      538 

Intangible assets (*2)

   —      15,256    15,256 

Other assets

   9,269    —      9,269 
  

 

 

   

 

 

   

 

 

 
   319,724    13,904    333,628 
  

 

 

   

 

 

   

 

 

 

Liabilities:

      

Deposits

   (436,285)    —      (436,285) 

Other liabilities

   (1,022)    —      (1,022) 
  

 

 

   

 

 

   

 

 

 
   (437,307)    —      (437,307) 
  

 

 

   

 

 

   

 

 

 

The fair value of the identifiable assets acquired and liabilities assumed

  W(117,583)    13,904    (103,679) 
  

 

 

   

 

 

   

 

 

 

(*1)

Adjustments are mainly due to the loan loss estimation.

(*2)

The intangible assets mainly comprise the present value of the saved borrowing costs due to the deposits amounting toW4,454 million and the future economic benefits generated due to the relationship with the customers amounting toW10,802 million.

(c)

Adjustments of goodwill

The retrospective adjustments of goodwill due to the measurement period adjustment for business combination are as follows:

   Amount   Adjustments   Adjusted Amount 

Consideration received (cash)

  W(75,480)    —      (75,480) 

Fair value of identifiable net assets

   (117,583)    13,904    (103,679) 
  

 

 

   

 

 

   

 

 

 

Goodwill

  W42,103    (13,904)    28,199 
  

 

 

   

 

 

   

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

57.

Retroactive adjustments for business combination (continued)

(d)

Adjustments of the prior year end balances.

   Amount   Adjustments   Adjusted Amount 

Intangible assets

  W4,271,969    1,352    4,273,321 

Deferred tax liabilities

   9,712    270    9,982 
  

 

 

   

 

 

   

 

 

 

Retained earnings

  W20,790,599    1,082    20,791,681 
  

 

 

   

 

 

   

 

 

 

58.

Acquisition of subsidiary

(a)

General information

On December 17, 2017,September 12, 2018, the Group acquires 75% of the shares of PT ARCHIPELAGO ASSET MANAGEMENT in Indonesia and acquired the retail businesscontrol, and changed its name to PT Shinhan Asset Management Indonesia. The Group acquired a subsidiary in Indonesia to pursue new market penetration through its asset management business.

(b)

Identifiable net assets

The assets and liabilities of ANZ Vietnam to increase business competitiveness and to achieve synergy effect in the banking business in Vietnam. Goodwill ofW42,103 million arising fromPT Shinhan Asset Management Indonesia recognized at the acquisition date are as follows.

Classification

Amounts

Asset

Cash and cash equivalent assetsW18
Financial assets measured at FVTPL3,012
PP&E20
Deferred tax assets20
Other assets17

Total

3,087

Liabilities

Income tax payable7

Other liabilities

75

Total82

Identifiable net assets at fair value

W3,005

(c)

Goodwill

Goodwill recognized as a result of business combination is dueas follows.

Classification

Amounts

Previous transfer price

W4,476

Identifiable net assets at fair value

(3,005) 

Non-controlling interest

787

Goodwill

W2,258

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the synergy generatedConsolidated Financial Statements

(In millions of won)

58.

Acquisition of subsidiary (continued)

(d)

In connection with the business combination, the Group incurred a charge of KRW 192 million, including legal fees and due diligence fees, which were recognized as commissions in the consolidated statement of comprehensive income.

59.

Events after reporting period

(a)

Subsidiary investments

i)

Orange Life Insurance Co. Ltd

The Group has entered into a share purchase agreement to acquire a 59.15% stake in Orange Life Insurance Co., Ltd. on January 16, 2019. The Financial Services Commission approved the transfer of the subsidiary, and the acquisition process was completed on February 1, 2019, after the reporting period.

ii)

Asia Trust Co. Ltd

The Group has entered into a contract to acquire a stake in Asia Trust Co., Ltd. during the current period. Based on the approval of the supervisory authority, the Group will acquire 60% of its total shares for 193.4 billion won. (FN 53)

iii)

Prudential Finance Co. Ltd

On January 23, 2018, the Group entered into a contract to acquire a 100% stake in Prudential Vietnam Finance Company Limited, a local consumer finance company in Vietnam, for US $ 151 million. On January 17, 2019, and was approved by the combinationlocal FSS.

(b)

Rights offering

The Board of Directors approved the Group’s businessissuance of convertible preferred stock of KRW 750 billion at the meeting held on February 1, 2019. Investors may request a conversion from one year after the issuance date before four years after the date, and the convertible preferred stock that has not been converted until four years after the date will automatically be converted to common shares.

60.

Transition effects arising from changes in accounting policies

The Group has changed its accounting policies as applying IFRS 9,Financial Instruments, and IFRS 15,Revenue from Contracts with Customers. With respect to classification, measurement and impairment of financial instruments, the financial statements as of and for the year ended December 31, 2017 have not been restated in accordance with the acquired retail businessclause waiving the requirement to restate comparative financial statements.

IFRS 9 replaces IAS 39,Financial Instruments: Recognition and the customer base.Measurement, relating to recognition, classification and measurement of financial assets and financial liabilities, derecognition of financial instruments, impairment of financial assets and hedge accounting. Additionally, IFRS 9 have made amendments to other standards relating to financial instruments such as IFRS 7,Financial Instruments: Disclosures.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

49.60.Business Combination

Transition effects arising from changes in accounting policies (continued)

 

 (b)(i)Fair value

Changes in equity due to application of assetsIFRS 9 and liabilities15

Fair value of assets acquired and liabilities assumed by acquisition of ANZChanges in equity as of acquisitionJanuary 1, 2018 due to the initial application date isof IFRS 9 and 15 are as follows:

 

   Amount(*)Amounts 

Asset:Retained earnings at January 1, 2018 before changes

W20,791,681

Adjustments of retained earnings due to the application of IFRS 9 :

  

Cash and dueReclassification from banks

W8,151

Property and equipment

538

Receivable

301,766

Otherfinancial assets

9,269

319,724

Liabilities:

Accounts payable at amortized cost to financial assets measured at fair value through profit or loss

   (436,28574,061) 

Other liabilitiesReclassification fromavailable-for-sale financial assets to financial assets measured at fair value through profit or loss

178,518

Reclassification fromavailable-for-sale financial assets to financial assets measured at fair value through other comprehensive income (*1)

204,457

Increase in loss allowance for financial assets measured at amortized cost

   (1,022573,088) 

Increase in loss allowance for loan commitments and financial guarantee contracts

(55,274) 

Increase in loss allowance for debt instruments measured at fair value through other comprehensive income

(18,976) 

Effect of overlay approach application

34,102

Others (*2)

(40,063) 
  

 

 

 
   (437,307344,385) 
  

 

 

 

The fair valueAdjustments of the identifiable assets
acquired and liabilities assumed

W(117,583) 

(*)The accounting treatments for this business combination has not been completed by the end of the reporting period. The goodwill amount may be changedretained earnings due to fair value assessmentsthe application of identifiable assets liabilities for allocation of acquisition consideration.

(c)Goodwill

Goodwill arising from the acquisitions has been recognized as follows:

Amount

Consideration received (cash)

W75,480

Fair value of identifiable net assetsIFRS 15 (*3)

   (117,5832,896)

Tax effects (*4)

95,426 
  

 

 

 

GoodwillRetained earnings at January 1, 2018 after changes

  W42,10320,539,826 
  

 

 

 

 

(*1)(d)Acquisition-related costs

With the application of IFRS 9, the effect of retained earnings of the recognized impairment from equity securities has reclassified to other comprehensive income.

The Group incurred acquisition-related costs ofW5,830 million on legal fees and due diligence costs. These costs were included in the administrative expenses.
(*2)

Include translation of foreign currencies, etc.

(*3)

The Group has divided the trust fees into trust sales fees and trust managing fees and recognition of trust managing fees are deferred.

(*4)

Tax effects due to the application of IFRS 9 are separately shown.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

50.60.Condensed Shinhan Financial Group (Parent Company only) Financial Statements

Transition effects arising from changes in accounting policies (continued)

STATEMENTS OF FINANCIAL POSITION

Amounts

Accumulated other comprehensive loss at January 1, 2018 before changes

W(529,734) 

Adjustments of accumulated other comprehensive income due to the application of IFRS 9:

Reclassification fromavailable-for-sale financial assets to financial assets measured at fair value through profit or loss

(178,518) 

Reclassification fromavailable-for-sale financial assets to financial assets measured at fair value through other comprehensive income (*1)

(204,457) 

Increase in loss allowance for debt instruments measured at fair value through other comprehensive income

18,976

Effect of overlay approach application

(34,102) 

Others (*2)

11,039

(387,062) 

Tax effects (*3)

110,051

Accumulated other comprehensive loss at January 1, 2018 after changes

W(806,745) 

 

   December 31,
2016		   December 31,
2017		 

Assets

    

Deposits with banking subsidiary

  W42    3 

Receivables from subsidiaries:

    

Non-banking subsidiaries

   934,664    1,234,527 

Investment (at equity) in subsidiaries:

    

Banking subsidiaries

   13,752,799    13,752,799 

Non-banking subsidiaries

   11,950,360    11,980,360 

Trading asset

   195,026    255,086 

Property, equipment and intangible assets, net

   6,536    7,180 

Other assets

    

Banking subsidiaries

   167,781    224,688 

Non-banking subsidiaries

   159,851    179,258 

Other

   28,548    5,882 
  

 

 

   

 

 

 

Total assets

   27,195,607    27,639,783 
  

 

 

   

 

 

 

Liabilities and equity

    

Borrowings

   5,000    5,000 

Debt securities issued

   6,583,308    7,003,622 

Accrued expenses & other liabilities

   389,438    439,083 
  

 

 

   

 

 

 

Total liabilities

   6,977,746    7,447,705 
  

 

 

   

 

 

 

Equity

   20,217,861    20,192,078 
  

 

 

   

 

 

 

Total liabilities and equity

  W27,195,607    27,639,783 
  

 

 

   

 

 

 
(*1)

The effect on retained earnings arising from the recognition of impairment losses related to equity securities in the prior periods was transferred to other comprehensive income upon the application of IFRS 9.

(*2)

Other adjustments include foreign currency translation and changes innon-controlling interests, resulting from the adoption of IFRS 9.

(*3)

Tax effects due to the application of IFRS 9 are separately shown.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

50.60.Condensed Shinhan Financial Group (Parent Company only) Financial Statements

Transition effects arising from changes in accounting policies (continued)

 

(ii)

Reclassification of financial instruments upon adoption of IFRS 9

CONDENSED STATEMENTS OF INCOMEDetails of reclassification of financial instruments as of January 1, 2018, the initial application date of IFRS 9, are as follows:

 

   2015   2016   2017 

Income

      

Dividends from banking subsidiaries

  W451,524    651,524    481,524 

Dividends fromnon-banking subsidiaries

   611,823    994,615    448,588 

Interest income from banking subsidiaries

   2,429    2,187    228 

Interest income fromnon-banking subsidiaries

   56,443    35,005    27,111 

Other income

   80,122    57,011    51,953 
  

 

 

   

 

 

   

 

 

 

Total income

   1,202,341    1,740,342    1,009,404 
  

 

 

   

 

 

   

 

 

 

Expenses

      

Interest expense

   (241,312)    (197,519)    (179,330) 

Other expense

   (69,255)    (72,157)    (74,733) 
  

 

 

   

 

 

   

 

 

 

Total expenses

   (310,567)    (269,676)    (254,063) 
  

 

 

   

 

 

   

 

 

 

Profit before income tax expense

   891,774    1,470,666    755,341 
  

 

 

   

 

 

   

 

 

 

Income tax expense (benefit)

   (1,267)    416    614 
  

 

 

   

 

 

   

 

 

 

Profit for the year

  W893,041    1,470,250    754,727 
  

 

 

   

 

 

   

 

 

 

IAS 39

 

IFRS 9 (*2)

 Carrying value
under
IAS 39 (*1)		  Carrying
value under
IFRS 9 (*1)		  Difference 

Financial assets:

     

Due from banks

 

Loans and receivables

 

Financial assets measured at FVTPL (*2)

 W 902,124   833,942   (68,182) 
 

Loans and receivables

 

Amortized cost

  19,988,001   19,988,001   —   

Loan receivables

 

Loans and receivables

 

Financial assets measured at FVTPL (*2)

  750,342   778,985   28,643 
 

Loans and receivables

 

Amortized cost

  277,126,029   277,126,029   —   

Other financial assets

 

Loans and receivables

 

Amortized cost

  12,090,983   12,090,983   —   

Trading assets
(debt securities)

 

Financial assets
at FVTPL

 

Financial assets
measured at FVTPL

  23,640,646   23,640,646   —   

Trading assets
(equity securities)

 

Financial assets
at FVTPL

 

Financial assets
measured at FVTPL

  4,634,353   4,634,353   —   

Trading assets (deposit in gold and silver)

 

Financial assets
at FVTPL

 

Financial assets
measured at FVTPL

  189,297   189,297   —   

Financial assets designated as at FVTPL (debt securities)

 

Financial assets
at FVTPL

 

Financial assets
measured at FVTPL (*3)

  2,030,522   2,030,522   —   
 

Financial assets at FVTPL

 

Financial assets
designated as at FVTPL

  80,288   80,288   —   

Financial assets designated as at FVTPL (equity securities)

 

Financial assets
at FVTPL

 

Financial assets
measured at FVTPL (*3)

  1,162,553   1,162,553   —   
 

Financial assets
at FVTPL

 

Financial assets
designated as at FVTPL

  71,803   71,803   —   

Financial assets designated as at FVTPL (other securities – compound financial instruments)

 

Financial assets
at FVTPL

 

Financial assets
measured at FVTPL (*3)

  233,892   233,892   —   

Derivatives

 

Financial assets
at FVTPL

 

Financial assets
measured at FVTPL (*3)

  3,400,178   3,348,803   (51,375) 

AFS financial assets
(debt securities)

 

AFS financial assets

 

Financial assets
measured at FVTPL (*2)

  528,745   533,452   4,707 
 

AFS financial assets

 

Financial assets
measured at FVOCI

  36,657,807   36,657,807   —   

AFS financial assets (equity securities)

 

AFS financial assets

 

Financial assets
measured at FVTPL (*2)

  4,339,979   4,350,969   10,990 
 

AFS financial assets

 

Financial assets
measured at FVOCI

  590,405   590,405   —   

HTM financial assets (debt securities)

 

HTM financial assets

 

Financial assets
measured at FVTPL (*2)

  565,813   529,906   (35,907) 
 

HTM financial assets

 Amortized cost  24,424,867   24,424,867   —   
   

 

 

  

 

 

  

 

 

 
   W 413,408,627   413,297,503   (111,124) 
   

 

 

  

 

 

  

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

 

50.60.

Transition effects arising from changes in accounting policies (continued)

IAS 39

 

IFRS 9 (*2)

 Carrying value
under
IAS 39 (*1)		  Carrying
value under
IFRS 9 (*1)		  Difference 

Financial Liabilities:

     

Deposits

 

Financial liability measured at amortized cost

 

Financial liabilities
measured at amortized cost

 W249,419,224   249,419,224   —   

Trading liabilities

 

Financial liabilities at FVTPL

 

Financial liabilities
measured at FVTPL

  1,848,490   1,848,490   —   

Financial liabilities designated as at FVTPL

 

Financial liabilities at FVTPL

 

Financial liabilities
designated as at FVTPL

  8,260,636   8,260,636   —   
 

Financial liabilities at FVTPL

 

Financial liabilities
measured at FVTPL (*3)

  36,973   36,973   —   

Derivatives

 

Financial liabilities at FVTPL

 

Financial liabilities
measured at FVTPL (*3)

  3,487,661   3,483,642   (4,019) 

Borrowings

 

Financial liabilities measured at amortized cost

 

Financial liabilities
measured at amortized cost

  27,586,610   27,586,313   (297) 

Debt securities issued

 

Financial liabilities measured at amortized cost

 

Financial liabilities
measured at amortized cost

  51,340,821   51,340,821   —   

Others

 

Financial liabilities measured at amortized cost

 

Financial liabilities
measured at amortized cost

  20,124,451   20,124,432   (19) 
   

 

 

  

 

 

  

 

 

 
   W362,104,866   362,100,531   (4,335) 
   

 

 

  

 

 

  

 

 

 

(*1)

Gross carrying amounts that are before netting allowance for loan losses or credit loss allowance.

(*2)

Under IFRS 9, these financial instruments were categorized as financial assets or liabilities – FVTPL, as 1) the instruments are not held within a business model whose objective is achieved by both collecting contractual ca flows and selling them, or 2) the contractual terms of them does not give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

(*3)

For hybrid contracts including embedded derivatives, the host contract and the derivatives are separated in accordance with IFRS 9.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

60.

Transition effects arising from changes in accounting policies (continued)

(iii)

Impairment of financial assets upon adoption of IFRS 9

Changes of credit loss allowance as of January 1, 2018, the initial application date of IFRS 9, are as follows:

Classification
based on IAS 39

 

Classification
based on IFRS 9

  Loss allowance
based on
IAS 39		   Loss allowance
based on
IFRS 9		 

Loans and receivables

     

Due from banks

 

Financial assets at amortized cost

  W 14,054    15,062 

Loan receivables

 

Financial assets at amortized cost

   2,307,275    2,871,986 
 

Financial assets measured at FVTPL

   3,329    —   

Other financial assets

 

Financial assets at amortized cost

   49,679    51,818 

AFS financial assets

     

Debt securities

 

Financial assets measured at FVOCI

   —      18,976 

HTM financial assets

     

Debt securities

 

Financial assets at amortized cost

   —      8,559 
   

 

 

   

 

 

 
   W 2,374,337    2,966,401 
   

 

 

   

 

 

 

Financial guarantee

 

Financial guarantee

  W 36,506    37,289 

Unused credit line and other credit commitment

 

Unused credit line and other credit commitment

   168,006    222,498 
   

 

 

   

 

 

 
   W 204,512    259,787 
   

 

 

   

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

60.

Transition effects arising from changes in accounting policies (continued)

(iv)

The reclassification applying business model

For the financial assets as of January 1, 2018, the date of the initial application of IFRS 9, the management of the Group has assessed business model of those, and classified those applying the IFRS.

The effect of reclassification is as follows:

1)

Gross carrying amounts

  Carrying value
based on the
current standard		  Amount
reclassified		  Amount
remeasured		  Carrying value
based on the new
standard		  Changes in
retained earnings		  Changes in
other
comprehensive
income		 

Financial assets:

      

Due from banks

      

Carrying value under IAS 39 as of January 1, 2018

 W20,890,125   —     —     20,890,125   —     —   

Reclassification to financial assets measured at FVTPL

  —     (902,124)   —     (902,124)   —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  20,890,125   (902,124)   —     19,988,001   —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Loans

      

Carrying value under IAS 39 as of January 1, 2018

  277,876,371   —     —     277,876,371   —     —   

Reclassification to financial assets measured at FVTPL

  —     (750,342)   —     (750,342)   —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  277,876,371   (750,342)   —     277,126,029   —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Other financial assets

      

Carrying value under IAS 39 as of January 1, 2018

  12,090,983   —     —     12,090,983   —     —   

Trading assets (debt instruments) (*1)

      

Carrying value under IAS 39 as of January 1, 2018

  23,640,646   —     —     23,640,646   —     —   

Reclassification to financial assets measured at FVTPL

  —     (23,640,646)   —     (23,640,646)   —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  23,640,646   (23,640,646)   —     —     —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Trading assets (equity instruments)

      

Carrying value under IAS 39 as of January 1, 2018

  4,634,353   —     —     4,634,353   —     —   

Reclassification to financial assets measured at FVTPL

  —     (4,634,353)   —     (4,634,353)   —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  4,634,353   (4,634,353)   —     —     —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

60.

Transition effects arising from changes in accounting policies (continued)

  Carrying value
based on the
current standard		  Amount
reclassified		  Amount
remeasured		  Carrying value
based on the new
standard		  Changes in
retained earnings		  Changes in
other
comprehensive
income		 

Trading assets (gold deposit) (*1)

      

Carrying value under IAS 39 as of January 1, 2018

  189,297   —     —     189,297   —     —   

Reclassification to financial assets measured at FVTPL

  —     (189,297)   —     (189,297)   —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  189,297   (189,297)   —     —     —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Derivatives (*1)

      

Carrying value under IAS 39 as of January 1, 2018

  3,400,178   —     —     3,400,178   —     —   

Reclassification to financial assets measured at FVTPL

  —     (51,375)   —     (51,375)   —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  3,400,178   (51,375)   —     3,348,803   —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Financial assets designated at FVTPL (*1)

      

Carrying value under IAS 39 as of January 1, 2018

  3,579,057   —     —     3,579,057   —     —   

Reclassification to financial assets measured at FVTPL

  —     (3,426,966)   —     (3,426,966)   —     —   

Reclassification to financial assets designated at FVTPL

  —     (152,091)   —     (152,091)   —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
 W 3,579,057   (3,579,057)   —     —     —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

60.

Transition effects arising from changes in accounting policies (continued)

  Carrying value
based on the
current standard		  Amount
reclassified		  Amount
remeasured		  Carrying value
based on the new
standard		  Changes in
retained earnings (*3)		  Changes in other
comprehensive
income (*3)		 

AFS (debt securities)

      

Carrying value under IAS 39 as of January 1, 2018

 W37,186,552   —     —     37,186,552   —     —   

Reclassification to financial assets measured at FVTPL

  —     (528,745)   —     (528,745)   —     —   

Reclassification to financial assets measured at FVOCI

  —     (36,657,807)   —     (36,657,807)   —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  37,186,552   (37,186,552)   —     —     —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

AFS (equity securities)

      

Carrying value under IAS 39 as of January 1, 2018

  4,930,385   —     —     4,930,385   —     —   

Reclassification to financial assets measured at FVTPL

  —     (4,339,979)   —     (4,339,979)   —     —   

Reclassification to financial assets measured at FVOCI

  —     (590,405)   —     (590,405)   —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  4,930,385   (4,930,385)   —     —     —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

HTM (debt securities)

      

Carrying value under IAS 39 as of January 1, 2018

  24,990,680   —     —     24,990,680   —     —   

Reclassification to financial assets measured at FVTPL

  —     (565,813)   —     (565,813)   —     —   

Reclassification to financial assets measured at amortized cost

  —     (24,424,867)   —     (24,424,867)   —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  24,990,680   (24,990,680)   —     —     —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Financial assets as measured at FVTPL

      

Carrying value under IAS 39 as of January 1, 2018

  —     —     —     —     —     —   

Transfer from due from banks

  —     902,124   (68,182)   833,942   —     (68,182) 

Transfer from loans and other receivables

  —     750,342   30,027   780,369   30,027   —   

Transfer from trading assets

  —     28,464,296   —     28,464,296   —     —   

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

60.

Transition effects arising from changes in accounting policies (continued)

  Carrying value
based on the
current standard		  Amount
reclassified		  Amount
remeasured		  Carrying value
based on the new
standard		  Changes in
retained earnings (*3)		  Changes in other
comprehensive
income (*3)		 

Transfer from financial assets designated at FVTPL

  —     3,426,967   —     3,426,967   —     —   

Transfer from AFS

  —     4,868,724   7,708   4,876,432   108,532   (108,532) 

Transfer from HTM

  —     565,813   (35,907)   529,906   —     (35,907) 

Transfer from derivative assets

  —     51,375   (42,195)   9,180   —     —   
  —     —     (2,575)   (2,575)   —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  —     39,029,641   (111,124)   38,918,517   138,559   (212,620) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Financial assets designated at FVTPL(IFRS 9)

      

Carrying value under IAS 39 as of January 1, 2018

  —     —     —     —     —     —   

Transfer from financial assets designated at FVTPL(IAS 39)

  —     152,091   —     152,091   —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  —     152,091   —     152,091   —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Financial assets measured at FVOCI (*2)

      

Carrying value under IAS 39 as of January 1, 2018

  —     —     —     —     —     —   

Transfer from AFS

  —     37,248,212   —     37,248,212   204,457   (204,457) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  —     37,248,212   —     37,248,212   204,457   (204,457) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Financial assets measured at amortized cost (*2)

      

Carrying value under IAS 39 as of January 1, 2018

  —     —     —     —     —     —   

Transfer from HTM

  —     24,424,867   —     24,424,867   —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  —     24,424,867   —     24,424,867   —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
 W 413,408,627   —     (111,124)   413,297,503   343,016   (417,077) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

60.

Transition effects arising from changes in accounting policies (continued)

Financial liabilities : Carrying value
based on the
current standard		  Amount
reclassified		  Amount
remeasured		  Carrying value
based on the new
standard		  Changes in
retained earnings		  Changes in other
comprehensive
income		 

Deposits

      

Carrying value under IAS 39 as of January 1, 2018

 W249,419,224   —     —     249,419,224   —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  249,419,224   —     —     249,419,224   —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Trading liabilities (*1)

      

Carrying value under IAS 39 as of January 1, 2018

  1,848,490   —     —     1,848,490   —     —   

Reclassification to financial liabilities measured at FVTPL

  —     (1,848,490)   —     (1,848,490)   —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  1,848,490   (1,848,490)   —     —     —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Financial liabilities designated at FVTPL

      

Carrying value under IAS 39 as of January 1, 2018

  8,297,609   —     —     8,297,609   —     —   

Reclassification to financial liabilities designated at FVTPL

  —     (8,260,636)   —     (8,260,636)   —     —   

Reclassification to financial liabilities measured at FVTPL

  —     (36,973)   —     (36,973)   —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  8,297,609   (8,297,609)   —     —     —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Financial liabilities measured at FVTPL

      

Carrying value under IAS 39 as of January 1, 2018

  —     —     —     —     —     —   

Transfer from trading liabilities

  —     1,848,490   —     1,848,490   —     —   

Transfer from financial liabilities designated at FVTPL

  —     36,973   —     36,973   —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  —     1,885,463   —     1,885,463   —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Financial liabilities designated at FVTPL

      

Carrying value under IAS 39 as of January 1, 2018

  —     —     —     —     —     —   

Transfer from financial liabilities designated at FVTPL

  —     8,260,636   —     8,260,636   —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  —     8,260,636   —     8,260,636   —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

60.

Transition effects arising from changes in accounting policies (continued)

Financial liabilities : Carrying value
based on the
current standard		  Amount
reclassified		  Amount
remeasured		  Carrying value
based on the new
standard		  Changes in
retained earnings		  Changes in other
comprehensive
income		 

Derivative liabilities

      

Carrying value under IAS 39 as of January 1, 2018

  3,487,661   —     —     3,487,661   —     —   

Other

  —     —     (4,019)   (4,019)   —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  3,487,661   —     (4,019)   3,483,642   —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Borrowings

      

Carrying value under IAS 39 as of January 1, 2018

  27,586,610   —     —     27,586,610   —     —   

Other

  —     —     (297)   (297)   —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  27,586,610   —     (297)   27,586,313   —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Debt securities issued

      

Carrying value under IAS 39 as of January 1, 2018

  51,340,821   —     —     51,340,821   —     —   

Other financial liabilities

      

Carrying value under IAS 39 as of January 1, 2018

  20,124,451   —     —     20,124,451   —     —   

Other

  —     —     (19)   (19)   —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  20,124,451   —     (19)   20,124,432   —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
 W 362,104,866   —     (4,335)   362,100,531   —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(*1)

With respect to financial assets and financial liabilities reclassified from the category of fair value through profit or loss, effective interest rates calculated on the initial application date of IFRS 9 and interest income or expense recognized shall be disclosed. Such reclassification has not occurred as a result of the IFRS 9 adoption.

(*2)

With respect to financial assets and financial liabilities reclassified to financial instruments measured at amortized cost, and financial assets measured at fair value through profit or loss reclassified to the category of fair value through other comprehensive income, the gain or loss on fair value measurement that would otherwise have been recognized in profit or loss or other comprehensive income in the reporting period, and the fair value of the financial assets or financial liabilities, shall be disclosed. Such reclassification has not occurred as a result of the IFRS 9 adoption.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

60.

Transition effects arising from changes in accounting policies (continued)

2)

Credit loss allowance

   Carrying value
based on the
current standard		   Amount
reclassified		  Amount
remeasured		   Carrying value
based on the
new standard		   Changes in
retained
earnings		  Changes in
other
comprehensive
income		 

Credit loss allowance for

          

Due from banks

  W14,054    —     1,008    15,062    (1,008)   —   

Loans

   2,310,604    (3,328)   564,710    2,871,986    (561,382)   —   

Financial asset measured at FVOCI (Debt securities)

   —      —     18,976    18,976    (18,976)   18,976 

Financial asset measured at amortized cost (Debt securities)

   —      —     8,559    8,559    (8,559)   —   

Other assets

   49,679    —     2,139    51,818    (2,139)   —   

Financial guarantee

   36,506    —     783    37,289    (783)   —   

Unused credit line and other credit commitment

   168,006    —     54,492    222,498    (54,492)   —   
  

 

 

   

 

 

  

 

 

   

 

 

   

 

 

  

 

 

 
  W2,578,849    (3,328)   650,667    3,226,188    (647,339)   18,976 
  

 

 

   

 

 

  

 

 

   

 

 

   

 

 

  

 

 

 

(v)

Hedge accounting

IFRS 9 maintains the mechanics of hedge accounting (i.e. fair value hedge, cash flow hedge, hedge of a net investment in a foreign operation) as defined in IAS 39, whereas a principle-based hedge accounting requirements that focuses on an entity’s risk replaced complex and rule-based hedge accounting requirements in IAS 39. Additionally, qualifying hedged items and qualifying hedging instruments have been expanded and hedge accounting requirements have been eased by eliminating a subsequent hedge effectiveness assessment and a quantitative test (80~125%). Hedge accounting can be applied to certain transactions that fail to qualify for hedge accounting requirements under IAS 39 when applying IFRS 9, and thus alleviates profit or loss volatility.

(vi)

Financial impact with IFRS 15

As of December 31, 2018, the effect of applying IFRS 15 is as follows in the statement of comprehensive income of the Group as of December 31, 2018 (excluding trust fees reflected by the conversion effect). The effect on the terminated cash flow statement is not significant.

The effect on the consolidated statement of financial position as of December 31, 2018 is as follows.

   Disclosed
amount		   Adjustments   Amount before
implementation of
IFRS 15		 

Liabilities:

      

Provisions:

      

Credit card

  W—      (24,700)    24,700 

Other liabilities:

      

Accounts payable

   9,748,168    (41,758)    9,789,926 

Unearned revenues

   236,827    (209,241)    446,068 

Others

   2,496,169    275,698    2,220,471 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

60.

Transition effects arising from changes in accounting policies (continued)

The effect on the consolidated statement of comprehensive income is as follows.

   Disclosed
amount		   Adjustments   Amount before
implementation of
IFRS 15		 

Net fee and commission income:(*1)(*2)

      

Fee and commission income:

      

Credit card

  W1,360,322    (1,135,515)    2,495,837 

Fee and commission incomes

      

Credit card payment

   (944,533)    1,135,515    (2,080,048) 

(*1)

Before adopting IFRS 15, the Group defers and recognizes the amount allocated to the credit card points as unearned revenue and revenue is recognized only when the points are redeemed and the Group has fulfilled its obligation to provide the benefits. In addition, a provision for onerous contracts is recognized when the expected benefits to be derived by the Group from customer loyalty program are lower than the unavoidable cost of meeting its obligations under the programmes. However under IFRS 15, the amount allocated to the credit card points is regarded as consideration payable to the customers and recognized as a reduction of fee and commission income, estimated as fair value of the monetary benefits taking into account the expected redemption rate.

(*2)

The Group has changed the recognition of card holder service fee paid to a customer recognized as fee and commission expense before adopting IFRS 15, to reduction of fee and commission income under IFRS 15.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

61.

Condensed Shinhan Financial Group (Parent Company only) Financial Statements

STATEMENTS OF FINANCIAL POSITION

   2017   2018 

Assets

    

Deposits

    

Banking subsidiaries

  W3    24 

Other

     48,572 

Receivables from subsidiaries:

    

Non-banking subsidiaries

   1,234,527    1,644,666 

Investment (at equity) in subsidiaries:

    

Banking subsidiaries

   13,752,799    13,792,072 

Non-banking subsidiaries

   11,980,360    11,983,360 

Trading asset

   255,086    —   

Financial assets at FVTPL

     1,927,150 

Property, equipment and intangible assets, net

   7,180    7,983 

Other assets

    

Banking subsidiaries

   224,688    311,052 

Non-banking subsidiaries

   179,258    162,695 

Other

   5,882    236,658 
  

 

 

   

 

 

 

Total assets

  W27,639,783    30,114,232 
  

 

 

   

 

 

 

Liabilities and equity

    

Borrowings

  W5,000    125,000 

Debt securities issued

   7,003,622    7,812,358 

Accrued expenses & other liabilities

   439,083    526,806 
  

 

 

   

 

 

 

Total liabilities

   7,447,705    8,464,164 
  

 

 

   

 

 

 

Equity

   20,192,078    21,650,068 
  

 

 

   

 

 

 

Total liabilities and equity

  W27,639,783    30,114,232 
  

 

 

   

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

61.

Condensed Shinhan Financial Group (Parent Company only) Financial Statements (continued)

CONDENSED STATEMENTS OF INCOME

   2016   2017   2018 

Income

      

Dividends from banking subsidiaries

  W651,524    481,524    541,524 

Dividends fromnon-banking subsidiaries

   994,615    448,588    866,150 

Interest income from banking subsidiaries

   2,187    228    268 

Interest income fromnon-banking subsidiaries

   35,005    27,111    31,224 

Other income

   57,011    51,953    74,215 
  

 

 

   

 

 

   

 

 

 

Total income

   1,740,342    1,009,404    1,513,381 
  

 

 

   

 

 

   

 

 

 

Expenses

      

Interest expense

   (197,519)    (179,330)    (187,882) 

Other expense

   (72,157)    (74,733)    (89,145) 
  

 

 

   

 

 

   

 

 

 

Total expenses

   (269,676)    (254,063)    (277,027) 
  

 

 

   

 

 

   

 

 

 

Profit before income tax expense

   1,470,666    755,341    1,236,354 
  

 

 

   

 

 

   

 

 

 

Income tax expense (benefit)

   416    614    1,471 
  

 

 

   

 

 

   

 

 

 

Profit for the year

  W1,470,250    754,727    1,234,883 
  

 

 

   

 

 

   

 

 

 

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(In millions of won)

61.

Condensed Shinhan Financial Group (Parent Company only) Financial Statements (continued)

 

CONDENSED STATEMENTS OF CASH FLOWS

 

  2015   2016   2017   2016   2017   2018 

Cash flows from operating activities

            

Profit before income taxes

  W891,774    1,470,666    755,341   W1,470,666    755,341    1,236,354 

Non-cash items included in profit before tax

   (876,454)    (1,480,864)    (774,385)    (1,480,864)    (774,385)    (1,251,379) 

Changes in operating assets and liabilities

   (456,937)    320,716    (66,339)    320,716    (66,339)    (1,671,189) 

Net interest paid

   (182,277)    (158,620)    (149,642)    (158,620)    (149,642)    (153,926) 

Dividend received from subsidiaries

   1,063,347    1,646,139    930,112    1,646,139    930,112    1,407,674 

Income tax refunds

   —      —      100    —      100    —   
  

 

   

 

   

 

   

 

   

 

   

 

 

Net cash provided by operating activities

   439,453    1,798,037    695,187    1,798,037    695,187    (432,466) 
  

 

   

 

   

 

   

 

   

 

   

 

 

Cash flows from investing activities

            

Loan collection (origination) tonon-banking subsidiaries

   102,500    300,000    (300,000)    300,000    (300,000)    (412,630) 

Acquisition of subsidiary

   —      (500,000)    (30,000)    (500,000)    (30,000)    (42,273) 

Other, net

   (205)    (1,308)    (715)    (1,308)    (715)    (231,281) 
  

 

   

 

   

 

   

 

   

 

   

 

 

Net cash provided by (used in) investing activities

   102,295    (201,308)    (330,715)    (201,308)    (330,715)    (686,184) 
  

 

   

 

   

 

   

 

   

 

   

 

 

Cash flows from financing activities

            

Issuance of hybrid bonds

   199,455    —      224,466    —      224,466    1,107,838 

Redemption of hybrid bonds

   —      (240,000)    (300,000)    (240,000)    (300,000)    —   

Redemption of preferred stock

   —      (1,125,906)    —      (1,125,906)    —      —   

Net changes in borrowings

   (2,500)    —      —      —      —      120,000 

Issuance of debt securities issued

   1,497,553    1,597,413    1,497,588    1,597,413    1,497,588    2,396,138 

Repayments of securities issued

   (1,310,000)    (1,660,000)    (1,080,000) 

Repayments of debt securities issued

   (1,660,000)    (1,080,000)    (1,590,000) 

Dividend paid

   (546,160)    (669,103)    (706,565)    (669,103)    (706,565)    (714,705) 

Acquisition of treasury stock

   —      —      (151,993) 
  

 

   

 

   

 

   

 

   

 

   

 

 

Net cash used in financing activities

   (161,652)    (2,097,596)    (364,511)    (2,097,596)    (364,511)    1,167,278 
  

 

   

 

   

 

   

 

   

 

   

 

 

Net increase (decrease) in cash and cash equivalents

   380,096    (500,867)    (39)    (500,867)    (39)    48,628 
  

 

   

 

   

 

 

Cash and cash equivalents at beginning of year

   120,810    500,906    39    500,906    39    —   
  

 

   

 

   

 

   

 

   

 

   

 

 

Cash and cash equivalents at end of year

  W500,906    39    —     W39    —      48,628 
  

 

   

 

   

 

   

 

   

 

   

 

 

 

F-174F-219