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SHG Shinhan Financial

Table of Contents

As filed with the Securities and Exchange Commission on April 29, 2020

 

 

 

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, 2019

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)

 

 

Park Cheolwoo, +822 6360 3129 (T), 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:

 

Trading Symbol(s):

 

Name of Each Exchange on Which Registered:

Common stock, par value Won 5,000 per share SHG New York Stock Exchange*
American depositary shares SHG 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: 460,317,525 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, if any, every Interactive Data File required to be submitted 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 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 whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.    Yes   ☒    No  ☐

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

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   10 
  ITEM 3.C.  Reasons for the Offer and Use of Proceeds   11 
  ITEM 3.D.  Risk Factors   11 
 ITEM 4. INFORMATION ON THE COMPANY   48 
  ITEM 4.A.  History and Development of the Company   48 
  ITEM 4.B.  Business Overview   54 
  ITEM 4.C.  Organizational Structure   195 
  ITEM 4.D.  Properties   196 
 ITEM 4A. UNRESOLVED STAFF COMMENTS   197 
 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS   197 
  ITEM 5.A.  Operating Results   197 
  ITEM 5.B.  Liquidity and Capital Resources   240 
  ITEM 5.C.  Research and Development, Patents and Licenses, etc.   245 
  ITEM 5.D.  Trend Information   245 
  ITEM 5.E.  Off-Balance Sheet Arrangements   245 
  ITEM 5.F.  Tabular Disclosure of Contractual Obligations   246 
 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES   246 
  ITEM 6.A.  Directors and Senior Management   246 
  ITEM 6.B.  Compensation   250 
  ITEM 6.C.  Board Practices   252 
  ITEM 6.D.  Employees   254 
  ITEM 6.E.  Share Ownership   255 
 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS   256 
  ITEM 7.A.  Major Shareholders   256 
  ITEM 7.B.  Related Party Transactions   256 
  ITEM 7.C.  Interests of Experts and Counsel   257 
 ITEM 8. FINANCIAL INFORMATION   257 
  ITEM 8.A.  Consolidated Statements and Other Financial Information   257 
  ITEM 8.B.  Significant Changes   259 
 ITEM 9. THE OFFER AND LISTING   259 
  ITEM 9.A.  Offer and Listing Details   259 
  ITEM 9.B.  Plan of Distribution   260 
  ITEM 9.C.  Markets   260 
  ITEM 9.D.  Selling Shareholders   267 
  ITEM 9.E.  Dilution   267 
  ITEM 9.F.  Expenses of the Issue   267 
 ITEM 10. ADDITIONAL INFORMATION   267 
  ITEM 10.A.  Share Capital   267 
  ITEM 10.B.  Memorandum and Articles of Incorporation   267 
  ITEM 10.C.  Material Contracts   274 
  ITEM 10.D.  Exchange Controls   274 
  ITEM 10.E.  Taxation   276 
  ITEM 10.F.  Dividends and Paying Agents   284 
  ITEM 10.G.  Statements by Experts   284 

 

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          Page 
  ITEM 10.H.  Documents on Display   284 
  ITEM 10.I.  Subsidiary Information   285 
 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   285 
 

ITEM 12.

 DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES   285 
  

ITEM 12.A.

  Debt Securities   285 
  

ITEM 12.B.

  Warrants and Rights   285 
  

ITEM 12.C.

  Other Securities   285 
  

ITEM 12.D.

  American Depositary Shares   285 

PART II

  
 

ITEM 13.

 DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES   287 
 

ITEM 14.

 MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS   287 
 

ITEM 15.

 CONTROLS AND PROCEDURES   287 
 

ITEM 16.

 [RESERVED]   289 
 

ITEM 16A.

 AUDIT COMMITTEE FINANCIAL EXPERT   289 
 

ITEM 16B.

 CODE OF ETHICS   289 
 

ITEM 16C.

 PRINCIPAL ACCOUNTANT FEES AND SERVICES   289 
 

ITEM 16D.

 EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES   290 
 

ITEM 16E.

 PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS   290 
 

ITEM 16F.

 CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT   290 
 

ITEM 16G.

 CORPORATE GOVERNANCE   291 
 

ITEM 16H.

 MINE SAFETY DISCLOSURE   296 

PART III

  
 

ITEM 17.

 FINANCIAL STATEMENTS   296 
 

ITEM 18.

 FINANCIAL STATEMENTS   296 
 

ITEM 19.

 EXHIBITS   296 

INDEX OF EXHIBITS

   297 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

   F-1 

 

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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;

 

  

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

 

  

“Shinhan Card” refers to Shinhan Card Co., Ltd., “Shinhan Life Insurance” refers to Shinhan Life Insurance Co., Ltd., “Shinhan Investment” refers to Shinhan Investment Corp. and “Orange Life Insurance” refers to Orange Life Insurance, 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 “Korean Won”, “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 atW1,155.5 to US$1.00, which was the noon buying rate in the City of New York on December 31, 2019 for cable transfers according to the H.10 statistical release of the Federal Reserve Board (the “Noon Buying Rate”). On April 17, 2020, the Noon Buying Rate wasW1,217.8 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.

 

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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.

 

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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, 2015, 2016, 2017, 2018 and 2019 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, 2015, 2016, 2017, 2018 and 2019 have been audited by independent registered public accounting firm KPMG Samjong Accounting Corp.

Beginning on January 1, 2019, we have adopted IFRS 16, ‘Leases’. On January 1, 2019, the date of initial application,right-of-use assets were measured by taking an amount equal to the lease liability and adjusting by the amount of prepaid or unpaid lease payments in relation to leases recognized in the consolidated statement of financial position, and therefore we did not recognize any cumulative effect of initial application. As restatement of prior periods is not required, comparative financial information for prior periods, which have been prepared applying IAS 17, have not been restated. Accordingly, certain of our historical financial information as of and for the years ended December 31, 2017 and 2018 is not directly comparable against that of our financial information after January 1, 2019. For further information regarding the adoption of IFRS 16, see “Item 5.A. Operating Results — Critical Accounting Policies — Recently Adopted Standards and Interpretations — IFRS 16, ‘Leases.’” 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. 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. For further information regarding the adoption of IFRS 9 and IFRS 15, see “Item 5.A. Operating Results — Critical Accounting Policies.” For further details regarding these changes and the transition effects of the adoption of these new standards, see Note 51 of the notes to our consolidated financial statements included in this annual report.

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.

 

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Consolidated Income Statement Data

 

   Year Ended December 31, 
   2015  2016  2017  2018  2019  2019(1) 
   (In billions of Won and millions of US$, except per common share data) 

Interest income

  W11,130  W11,236  W11,799  W13,572  W15,707  $13,594 

Interest expense

   (4,437  (4,031  (3,956  (4,992  (5,969  (5,166
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net interest income

   6,693   7,205   7,843   8,580   9,738   8,428 

Fees and commission income

   3,897   3,804   4,045   3,295   3,557   3,078 

Fees and commission expense

   (2,276  (2,238  (2,334  (1,356  (1,416  (1,226
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net fees and commission income

   1,621   1,566   1,711   1,939   2,141   1,852 

Net insurance loss

   (432  (419  (460  (472  (497  (430

Dividend income

   308   282   257   88   82   71 

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

            420   1,385   1,199 

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

            75   (247  (214

Net trading income (loss)

   (344  370   963          

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

            (27  (846  (732

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

   460   (502  (1,060         

Net foreign currency transaction gain

   78   462   364   194   441   382 

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

            21   152   132 

Net gain on disposal ofavailable-for-sale financial assets

   772   648   499          

Provision for credit loss allowance

            (748  (981  (849

Impairment loss on financial assets

   (1,264  (1,196  (1,014         

General and administrative expense

   (4,475  (4,509  (4,811  (4,742  (5,135  (4,444

Net other operating expenses

   (444  (798  (462  (829  (1,187  (1,028
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Operating income

   2,973   3,109   3,830   4,499   5,046   4,367 

Equity method income

   21   10   20   17   53   46 

Othernon-operating income (expense), net

   147   52   (53  (50  (188  (163
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Profit before income taxes

   3,141   3,171   3,797   4,466   4,911   4,250 

Income tax expense

   (695  (346  (848  (1,268  (1,269  (1,098
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Profit for the year

  W2,446  W2,825  W2,949  W3,198  W3,642  $3,152 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

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  W161  W352  $305 

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

            (54  163   141 

Loss onavailable-for-sale financial assets

   (266  (434  (323         

Equity in other comprehensive income (loss) of associates

   12   3   (23  7   3   3 

Foreign currency translation adjustments for foreign operations

   (6  12   (194  20   106   92 

 

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   Year Ended December 31, 
   2015  2016  2017  2018  2019  2019(1) 
   (In billions of Won and millions of US$, except per common share data) 

Net change in unrealized fair value of cash flow hedges

   3   (1  16   (20  (19  (16

Other comprehensive income (loss) of separate account

   2   (4  (9  9   11   8 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
   (255  (424  (533  123   616   533 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Items that will never be reclassified to profit or loss:

       

Remeasurements of the defined benefit liability

   (82  15   103   (93  (55  (47

Equity in other comprehensive income of associates

         1          

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

            23   19   16 

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

            (3  (6  (5

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

            2   (8  (7
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
   (82  15   104   (71  (50  (43
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

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

   (337  (409  (429  52   566   490 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
Total comprehensive income for the year  W  2,109  W  2,416  W  2,520  W  3,250  W  4,208  $  3,642 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Profit for the year attributable to:

       

Equity holders of the Group

  W2,367  W2,775  W2,919  W3,156  W3,403  $2,945 

Non-controlling interest

   79   50   30   42   239   207 

Total comprehensive income attributable to:

       

Equity holders of the Group

   2,034   2,367   2,491   3,208   3,891   3,367 

Non-controlling interest

   75   49   29   42   317   275 

Earnings per share:

       

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

   4,789   5,736   6,118   6,579   7,000   6.06 

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

   4,789   5,736   6,118   6,579   7,000   6.06 

 

Notes:

 

(1)

Won amounts are expressed in U.S. Dollar at the rate ofW1,155.5 to US$1.00, the Noon Buying Rate in effect on December 31, 2019 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 profit 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.

 

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Consolidated Balance Sheet Data

 

  As of December 31, 
  2015  2016  2017  2018  2019  2019(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  W17,349  W28,424  $24,599 

Cash and due from banks

  22,024   19,181   22,669          

Financial assets at fair value through profit or loss

           43,535   53,163   46,009 

Trading assets

  22,638   26,696   28,464          

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

  3,244   3,416   3,579          

Derivative assets

  1,995   3,003   3,400   1,794   2,829   2,449 

Securities at fair value through other comprehensive income

           38,314   59,381   51,390 

Available-for-sale financial assets

  33,966   37,663   42,117          

Securities at amortized cost

           28,478   45,582   39,448 

Held-to-maturity financial assets

  16,192   19,805   24,991          

Loans at amortized cost

           299,609   323,245   279,745 

Loans

  246,441   259,011   275,566          

Property and equipment

  3,055   3,146   3,022   3,004   4,083   3,534 

Intangible assets

  4,266   4,227   4,273   4,320   5,559   4,811 

Investments in associates

  393   354   631   671   1,453   1,257 

Current tax receivable

  10   13   25   45   88   77 

Deferred tax assets

  164   641   592   427   218   189 

Investment property

  209   353   418   475   489   423 

Asset for defined benefit obligations

              2   1 

Other assets

  15,947   18,167   16,552   21,572   27,879   24,124 

Assets held for sale

  4   4   8   8   25   22 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total assets

 W370,548  W395,680  W426,307  W459,601  W552,420  $478,078 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Liabilities

      

Deposits

 W217,676  W235,138  W249,419  W265,000  W294,874  $255,192 

Financial liabilities at fair value through profit or loss

           1,420   1,632   1,413 

Trading liabilities

  2,135   1,977   1,848          

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

           8,536   9,409   8,143 

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

  8,916   9,234   8,298          

Derivative liabilities

  2,599   3,528   3,488   2,440   2,303   1,993 

Borrowings

  21,734   25,294   27,587   29,819   34,863   30,171 

Debt securities issued

  41,221   44,327   51,341   63,228   75,363   65,221 

Liability for defined benefit obligations

  226   131   7   127   121   105 

Provisions

  699   729   429   508   557   482 

 

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  As of December 31, 
  2015  2016  2017  2018  2019  2019(1) 
  (In billions of Won and millions of US$, except per common share data) 

Current tax payable

  142   273   349   430   513   444 

Deferred tax liabilities

  16   11   10   22   452   391 

Liabilities under insurance contracts

  20,058   22,377   24,515   26,219   52,164   45,144 

Other liabilities

  23,313   20,916   25,312   25,200   38,238   33,092 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total liabilities

 W338,735  W363,935  W392,603  W422,949  W510,489  $441,791 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Equity

      

Capital stock

 W2,645  W2,645  W2,645  W2,645  W2,732  $2,365 

Hybrid bonds

  737   498   424   1,532   1,731   1,498 

Capital surplus

  9,887   9,887   9,887   9,896   10,565   9,144 

Capital adjustments

  (424  (458  (398  (553  (1,117  (966

Accumulated other comprehensive income(loss)

  305   (102  (530  (753  (258  (225

Retained earnings

  17,690   18,640   20,792   22,959   25,526   22,090 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total equity attributable to equity holders of the Group

  30,840   31,110   32,820   35,726   39,179   33,906 

Non-controlling interests

  973   635   884   926   2,752   2,381 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total equity

 W31,813  W31,745  W33,704  W36,652  W41,931  $36,287 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total liabilities and equity

 W370,548  W395,680  W426,307  W459,601  W552,420  $478,078 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

Note:

 

(1)

Won amounts are expressed in U.S. Dollar at the rate ofW1,155.5 to US$1.00, the Noon Buying Rate in effect on December 31, 2019 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, 
   2015   2016   2017   2018   2019 
   (In Won and US$) 

Cash dividends per share of common stock:

          

In Korean Won

  W1,200   W1,450   W1,450   W1,600   W1,850 

In U.S. Dollars(1)

  $1.03   $1.20   $1.36   $1.44   $1.60 

Cash dividends per share of preferred stock:

          

In Korean Won

  W5,580   WN/A   WN/A   WN/A   W1,850 

In U.S. Dollars(1)

  $4.77   $N/A   $N/A   $N/A   $1.60 

 

N/A = not available

Note:

 

(1)

Won amounts for 2015, 2016, 2017, 2018 and 2019 are expressed in U.S. Dollar at the rate ofW1,169.3,W1,203.7,W1,067.4,W1,112.9 andW1,155.5, respectively, to US$1.00, the Noon Buying Rate in effect on December 31, 2015, 2016, 2017, 2018 and 2019, 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.

 

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Selected Statistical Information

Profitability Ratios and Other Data

 

   Year Ended December 31, 
   2015  2016  2017  2018  2019 
   (Percentages) 

Net income attributable to the Group as a percentage of:

      

Average total assets(1)

   0.69  0.73  0.72  0.72  0.69

Average total Group stockholders’ equity(1)

   7.87   8.97   8.94   9.23   9.02 

Dividend payout ratio(2)

   27.21   25.62   23.92   24.81   25.97 

Net interest spread(3)

   1.78   1.83   1.94   1.91   1.77 

Net interest margin(4)

   2.08   2.06   2.13   2.14   2.07 

Efficiency ratio(5)

   88.15   88.73   89.04   85.36   87.11 

Cost-to-income ratio(6)

   52.74   51.34   52.39   47.51   46.13 

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

   6.56   6.45   7.48   5.84   6.30 

Equity to average asset ratio(1)(8)

   8.72   8.14   8.00   7.77   7.66 

 

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, 
   2015  2016  2017  2018  2019 
   (In billions of Won, except percentages) 

Non-interest expense (A)

  W23,368  W24,957  W30,831  W26,042  W33,203 

Divided by

      

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

   26,509   28,127   34,627   30,508   38,114 

Net interest income

   6,693   7,205   7,843   8,580   9,738 

Non-interest income

   19,816   20,922   26,784   21,928   28,376 

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

   88.15  88.73  89.04  85.36  87.11

 

(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.

 

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Asset Quality Ratios

 

   As of December 31, 
   2015  2016  2017  2018  2019 
   (In billions of Won, except percentages) 

Total gross loans

  W248,429  W261,004  W277,489  W303,070  W327,578 

Total allowance for credit losses on loans

  W2,318  W2,361  W2,311  W2,725  W2,685 

Allowance for credit losses on loans as a percentage of total loans

   0.93  0.90  0.83  0.90  0.82

Impaired loans(1)

  W1,902  W1,804  W1,793  W1,697  W1,878 

Impaired loans as a percentage of total loans

   0.77  0.69  0.65  0.56  0.57

Allowance as a percentage of impaired loans

   121.87  130.88  128.89  160.58  142.97

Totalnon-performing loans(2)

  W1,333  W1,174  W1,075  W1,090  W1,325 

Non-performing loans as a percentage of total loans

   0.54  0.45  0.39  0.36  0.40

Allowance as a percentage of total assets

   0.63  0.60  0.54  0.59  0.49

 

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, 
   2015  2016  2017  2018  2019 
   (Percentages) 

Group BIS ratio(1)

   13.39  15.00  14.78  14.87  13.90

Total capital adequacy ratio of Shinhan Bank

   14.75   15.70   15.59   16.03   15.91 

Adjusted equity capital ratio of Shinhan Card(2)

   28.88   26.23   24.52   21.69   20.08 

Solvency ratio for Shinhan Life Insurance(3)

   204.19   178.28   175.41   238.67   227.86 

Solvency ratio for Orange Life Insurance(3)

   324.88   319.20   455.32   425.03   393.91 

 

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 and Orange Life Insurance are 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.”

 

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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, 
   2017  2018  2019 
   (In millions of Won, except percentages) 

Risk-weighted assets

  W207,768,636  W228,678,105  W256,891,664 

Total risk-adjusted capital

  W30,713,464  W33,993,061  W35,714,570 

Tier I capital

  W27,672,891  W30,677,876  W31,699,830 

Tier I common equity capital

  W26,756,509  W28,696,267  W28,561,567 

Capital adequacy ratio (%)

   14.78  14.87  13.90

Tier I capital adequacy ratio (%)

   13.32  13.42  12.34

Common equity capital adequacy ratio (%)

   12.88  12.55  11.12

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 
   (Won per US$1.00) 

2015

   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 

2017

   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 

2019

   1,155.5    1,165.8    1,220.7    1,111.8 

October

   1,169.1    1,183.4    1,205.5    1,163.0 

November

   1,181.3    1,167.3    1,181.3    1,154.4 

December

   1,155.5    1,174.7    1,194.5    1,155.5 

2020 (through April 17)

   1,217.8    1,198.9    1,267.3    1,156.3 

January

   1,191.3    1,167.5    1,191.9    1,156.3 

February

   1,214.9    1,195.3    1,218.5    1,179.0 

March

   1,218.9    1,218.2    1,267.3    1,181.1 

April (through April 17)

   1,217.8    1,222.5    1,230.6    1,211.7 

 

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 31, 2019, which wasW1,155.5 to US$1.00. On April 17, 2020, the Noon Buying Rate in effect wasW1,217.8 to US$1.00.

 

ITEM 3.B.

Capitalization and Indebtedness

Not applicable.

 

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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 amidst Brexit), signs of cooling economy for China, 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, potential escalation of ongoing trade wars between major economies including the U.S. and China and the recent coronavirus(COVID-19) outbreak, 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, allowance for credit losses on loans 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, including some Korean commercial conglomerates knowns as “chaebols,” in such industries, and in certain cases, even insolvency, workouts, recovery proceedings and/or voluntary arrangements with creditors. 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 months past due and after 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

 

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delinquency ratio has steadily decreased or remained stable since then, to 0.39% as of December 31, 2013, 0.31% as of December 31, 2014, 0.33% as of December 31, 2015, 0.28% as of December 31, 2016, 0.23% as of December 31, 2017, 0.25% as of December 31, 2018 and 0.26% as of December 31, 2019. Shinhan Bank’s delinquency ratio has remained stable during the past few years mainly due to Shinhan Bank’s efforts to increase asset quality for both its retail and corporate loans and reduce exposures in certain industries such as IT, manufacturing and construction. There is no assurance, however, that Shinhan Bank will not experience further credit losses on loans from borrowers, particularly those in troubled industries, since the quality of loans to such borrowers may further deteriorate due to a continued slump in volatile industries amid sluggish economic situation or for other reasons. In addition, the recent coronavirus(COVID-19) outbreak is expected to have a direct impact on global and domestic consumption, most notably in the transportation, tourism, retail, lodging, catering, industrial production and construction industries, and particularly small- andmedium-sized enterprises and retail customers may face significant difficulties in making timely interest and principal payments, which may lead to an increase in delinquency and adversely affect Shinhan Bank’s 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, 2019, 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 36 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

 

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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. Shinhan Bank’s net interest margin (on a separate basis) declined slightly to 1.54% in 2019 from 1.62% in 2018 due to, at least partly, decreases in base interest rate by the Bank of Korea from 1.75% to 1.50% in July 2019 and from 1.50% to 1.25% in October 2019 and may decline further as the Bank of Korea has reduced the base interest rate from 1.25% to 0.75% in March 2020 and if the base interest rate is decreased again during 2020. Even if interest rates were to increase, the effect on Shinhan Bank’s results of operations may not be as beneficial as expected, or at all, due to factors such as increased volatility of market interest rates and tighter regulations regarding SOHO loans, including the implementation of additional credit review guidelines for individual businesses. Further, 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 further 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 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. Also, over the years, the Government has implemented regulations lowering certain merchant fees chargeable by credit card companies. In 2012, the Government adopted regulations mandating lower merchant fees chargeable to small- andmedium-sized enterprises, and beginning 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, since the implementation of the Improper Solicitation and Graft Act in September 2016, revenue growth for corporate cards and service related industries such as dining, floral and entertainment have shown signs of decline, and additional regulations on loans reducing maximum interest rates chargeable from 27.9% to 24% came into effect in February 2018. These developments have put further downward pressure on the results of operations for credit card companies, 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

 

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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 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 recently, including 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 interests 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, 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. In the asset management business sector, Woori Financial Group acquired two asset management companies, Tongyang Asset Management and ABL Global Asset Management (former Allianz Global Investors). 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, the former Korean unit of ING Life Insurance, as part of our efforts to diversify and enhance ournon-banking businesses and closed on February 1, 2019. On January 28, 2020, we acquired the remaining interests in Orange Life Insurance by effecting a comprehensive stock exchange under Articles360-2 of the Korean Commercial Code whereby holders (other than us) of Orange Life Insurance’s common stock transferred all of their shares to us and in return receive shares of our common stock, and hence Orange Life Insurance has become our wholly owned subsidiary as of such date. 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

 

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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 became available on mobile channels in February 2016 and expanded its scope of services to include savings banks and securities companies. Since their introduction, the integrated automatic payment transfer management service, integrated account management service and “my account at a glance” system have gained widespread 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. Moreover, 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 are 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.

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, and Viva Republica consortium’s Toss Bank has recently obtained preliminary business authorization from the Financial Services Commission on December 16, 2019. 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.

As part of the Government’s financial policies to promote innovative digital finance, 10 commercial banks, including Shinhan Bank, began offering a preliminary open banking service in October 2019. More local banks

 

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and fintech companies joined in December 2019, when the open banking service was fully and officially launched. Open banking service allows each fintech company and bank to provide banking services, such as checking balances and making withdrawals and transfers, with regards to customers’ accounts at other banks. Using open banking service, customers can easily access accounts, products and services across multiple banks, instead of being limited to the accounts, products and services available at the particular bank that they deal with. In addition, on January 9, 2020, the Korean National Assembly passed amendments to three major data privacy laws (the Personal Information Protection Act, the Act on the Promotion of Information and Communications Network Utilization and Information Protection and the Act on the Use and Protection of Credit Information). These amendments introduced the MyData service, allowing and requiring (upon the customer’s request and subject to compliance requirements) financial institutions that have been approved by the Financial Service Commission as a MyData service provider access and sharing of customers’ personal information, credit information and transaction data. If and when fintech companies receive authorization as MyData service providers, we expect competition for customers among banks and fintech firms such as Kakao Pay, Toss and Bank Salad to intensify.

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 has implemented the Basel III requirements relating to liquidity coverage ratio and capital conservation buffer, each of which have been fully phased in as 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 have been required to maintain an additional capital buffer of 0.25% since January 1, 2016, with such buffer increased by 0.25% annually to reach 1.00% as 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.

 

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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, Orange 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 capital 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%, have been fully implemented as 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, a 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 an output 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. The Basel Committee has recommended that banks implement the 2017 reforms by January 2022 with respect to the revised standardized approach for credit and operational risk, revised CVA framework, and revised market risk framework. The 72.5% capital floor is subject to asix-yearphase-in period, beginning at 50% in January 2020 and increasing to 72.5% by January 2027. Upon implementation, banks in jurisdictions that permit reference to external credit ratings will be able to take into account external credit ratings in determining the risk weights for certain exposure classes, and different mortgage risk weights will apply depending on theloan-to-value ratio of the mortgage. In addition, the 2017 reforms remove the option to use internal ratings-based approaches for measurement of equity exposures, thus requiring use of the standardized approach. Banks will also need to reflect internal loss data in evaluating operational risk and comply with the principles for sound management of operational risk.

 

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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 have also been phased in from January 1, 2016 in increments of 0.625% annually, to the effect that commercial banks in Korea are 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, from 2016 through 2020. According to the instructions of the Financial Services Commission, domestic systematically important banks including Shinhan Bank have been required to maintain an additional capital buffer of 0.25% since January 1, 2016, with such buffer increased by 0.25% annually to reach 1.00% as 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 has maintained the countercyclical capital buffer requirement at 0% for the first quarter of 2020. In addition, the Regulation on the Supervision of the Banking Business is expected to be amended during 2020 to introduce an additional countercyclical capital buffer requirement that specifically addresses the increase of 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 was also amended on June 30, 2018 to add “concentration of risk in the retail sector” as an additional criterion 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.

 

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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 was increased in annual increments of 10% so that the minimum liquidity coverage ratio is 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 is 100% since 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.

 

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Changes in interest rates, foreign exchange rates, bond and equity prices, and other market factors have affected and will continue to affect our business, 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 increased the base interest rate since 2011, and further raised such rate to 1.75% in November 2018. The Bank of Korea reduced the base interest rate from 1.75% to 1.50% in July 2019, from 1.50% to 1.25% in October 2019 and from 1.25% to 0.75% in March 2020. 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 repricing 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 Bank of Korea 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

 

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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.

The extent to which the recent coronavirus(COVID-19) outbreak impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted.

The rapid and diffuse spread of the recent coronavirus(COVID-19) and global health concerns relating to this outbreak, which was declared a “pandemic” by the World Health Organization in March 2020, have had severe negative impact on, among other things, financial markets, liquidity, economic conditions and trade and could continue to do so or could worsen for an unknown period of time, which could in turn have a material adverse impact on our business, results of operations and financial condition, including liquidity, asset quality and growth. The extent to which theCOVID-19 outbreak impacts our business, results of operations and financial condition will depend on future developments, including the timeliness and effectiveness of actions taken or not taken to contain and mitigate the effects ofCOVID-19 both in Korea and internationally by governments, central banks, healthcare providers, health system participants, other businesses and individuals, which are highly uncertain and cannot be predicted. In particular, a number of governments and organizations have revised GDP growth forecasts for 2020 downward in response to the economic slowdown caused by the spread ofCOVID-19, and it is possible that theCOVID-19 outbreak will cause a prolonged global economic crisis or recession. Also, if any of our employees or customers are suspected to have been infected or identified as a possible source ofCOVID-19, we may be required to quarantine the employees as well as any others that had come into contact with them and may also be required to disinfect the affected bank branches or other offices and therefore suffer a temporary suspension of business operations. Any of these factors could have a material adverse effect on our results of operations and financial condition, including liquidity, asset quality and growth.

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”). Shinhan Bank’s loans (before allowance for credit losses on loans and deferred loan origination costs and fees) to such enterprises amounted toW78,556 billion as of December 31, 2017,W84,972 billion as of December 31, 2018 andW91,162 billion as of December 31, 2019, representing 28.3%, 28.0% and 27.8%, 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

 

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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 hurt the liquidity and financial condition of related small- andmedium-sized enterprises, including those to which we have exposure, also resulting 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, 2017, 2018 and 2019, Shinhan Bank’s delinquent loans to small- andmedium-sized enterprises wereW303 billion,W299 billion andW346 billion, respectively, representing delinquency ratios (net of charge-offs and loan sales) of 0.39%, 0.35% and 0.38%, 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 exposure to enterprises in the real estate and leasing and construction industries. As of December 31, 2019, Shinhan Bank had outstanding loans (before allowance for credit losses on loans and deferred loan origination costs and fees) to enterprises in the real estate and leasing and construction industries (many of which are small- andmedium-sized enterprises) ofW28,868 billion andW3,172 billion, respectively, representing 10.7% and 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, have recently seen modest growth backed by the housing market which has remained strong over the recent few years. However, the Government’s policy measures to stabilize the real estate market, oversupply of residential property, ongoing economic sluggishness in Korea and globally and demographic changes in the Korean population may result in difficulties to the housing market in general as well as these enterprises. 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

 

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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, 2019, the secured portion of Shinhan Bank’s loans (before allowance for credit losses on loans and deferred loan origination costs and fees) amounted toW121,944 billion, representing 49.1% 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 45% to 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. 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 theloan-to-value ratio of loans. As of December 31, 2019, installment principal repayment-based housing loans accounted for 49.6% of the housing loans extended by Shinhan Bank, and theloan-to-value ratio of mortgage and home equity loans of Shinhan Bank was 49.6%. 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 the 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 securing our mortgage and home equity loans, and such reduction in the value of collateral 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, 2019, the total outstanding amount of Shinhan Bank’s real estate project financing-related exposure wasW3.7 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.

 

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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, 2019, 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 wasW18,325 billion, or 9.8%, of its total exposures. As of that date, Shinhan Bank’s single largest outstanding exposure to a main debtor group amounted toW3,797 billion, or 2.0%, 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. Amid 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. Partly 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 established 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 to further improve 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. See “Item 4.B. Business Overview — Description of Assets and Liabilities — Loans — Loan Portfolio — Exposure to Main Debtor Groups.”

 

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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, 2019, Shinhan Bank’s retail loan portfolio (before allowance for credit losses on loans and deferred loan origination costs and fees and excluding credit card loans) wasW123,219 billion, representing 45.6% of its total loans outstanding. As of December 31, 2017, 2018 and 2019, Shinhan Bank’snon-performing retail loans (excluding credit card loans) wereW215 billion,W238 billion andW271 billion, respectively, representingnon-performing loan ratios (net of charge-offs and loan sales) of 0.21%, 0.21% and 0.22%, 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 hurt consumers could result in increasing delinquencies and a decline in the asset quality of 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, 2019, we had aggregate guarantees and acceptances ofW14,893 billion, for which we provided allowances for losses ofW91.1 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, 2017, 2018 and 2019, Shinhan Card’s interest-earning credit card assets amounted toW25,250 billion,W28,311 billion andW30,597 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

 

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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.

Internet-only banks, as well asnon-financial institutions and fintech companies, are becoming major competitors to Shinhan Card in various business areas, particularly in themid-term interest loan, andmid-range credit loan and installment financing markets. KT consortium’sK-Bank and Kakao consortium’s Kakao Bank commenced operations in April 2017 and July 2017, respectively. 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 launched its own credit card business, expanding itsmid-range interest rate loan 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. With the introduction of the MyData service and increased sharing of customers’ personal information, credit information and transaction data among various digital platforms, we expect competition for customers to intensify.

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 less thanW500 million are subject to merchant fees chargeable with respect to credit cards of 0.8%, 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. Additionally, during 2018, the Seoul metropolitan and other regional governments have launched “Zero Pay”, a

 

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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 or Government policies aimed at reducing transaction fees paid to credit card companies may be implemented in the 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. Effective 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

 

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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.In July 2019, we made a capital contribution ofW660 billion by subscribing for new shares of common stock of Shinhan Investment, enabling Shinhan Investment to satisfy theW4 trillion capitalization requirement required to apply to the Financial Services Commission for designation as a mega-investment bank (“mega-IB”). Upon designation as amega-IB, Shinhan Investment will be able to issue debt securities up to 200% of its capitalization amount and would be able to utilize such proceeds for corporate lending and other businesses. This capital contribution was made in line with our strategic initiative to strengthen ournon-banking businesses and capital market activities. However, we cannot assure you that this capital contribution, any designation of Shinhan Investment as amega-IB or any resulting developments will not have a negative effect on our business, financial condition and results of operations that outweigh any potential benefits, and we may not be successful in furthering our strategic initiative.

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 2023, 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, the former Korean unit of ING Life Insurance, as

 

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part of our efforts to diversify and enhance ournon-banking businesses and closed on February 1, 2019. On January 28, 2020, we acquired the remaining interests in Orange Life Insurance by effecting a comprehensive stock exchange under Articles360-2 of the Korean Commercial Code whereby holders (other than us) of Orange Life Insurance’s common stock transferred all of their shares to us and in return receive shares of our common stock, and hence Orange Life Insurance has become our wholly owned subsidiary as of such date. 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,

 

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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. For details of the claims, disputes, legal proceedings and government investigations we are subject to, see “Item 8.A. Consolidated Statements and Other Financial Information — Legal Proceedings.”

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, in the past, a limited number of our and our subsidiaries’ personnel 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

 

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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. We believe such certifications represent third-party validations that we are in compliance withbest-in-class international standards on matters of information security. Our Integrated Security Control Center’s 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. 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 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

 

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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 December 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. Recently, on January 9, 2020, the Korean National Assembly passed amendments to three major data privacy laws (the Personal Information Protection Act, the Act on the Promotion of Information and Communications Network Utilization and Information Protection and the Act on the Use and Protection of Credit Information), expanding the scope of personal information that may be shared among financial institutions. With this, we expect cyber security and ensuring confidentiality of customers’ information to become more important than ever for financial institutions. We maintain an integrated system that closely monitors customer information to ensure compliance with data protection laws and regulations as well as our internal policies.

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

 

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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 2019 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.

 

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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,

 

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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 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. Moreover, in response to the threat posed to the economy by the recent coronavirus (COVID-19) outbreak, the Government has implemented various emergency aid initiatives involving Korean banks, including Shinhan Bank, to provide liquidity assistance to small- and medium-sized enterprises. Such initiatives include extending new loans to borrowers with low credit ratings, extending maturity dates on existing loans and deferring interest payment obligations on certain loans. Our participation in such Government initiatives may lead us to extend credit to small- and medium-sized enterprises that we would not otherwise extend, or offer terms on such credit that we would not otherwise offer, in the absence of such initiatives. There is no guarantee that the financial condition and liquidity of the small- and medium-sized enterprises benefiting from such initiatives will improve sufficiently for them to service their debt on a timely basis or at all. Accordingly, an increase in our exposure to small- and medium-sized enterprise borrowers resulting from such Government initiatives may have a material adverse effect on our financial condition and results of operations.

In addition, as a way of supporting the Government’s initiative to assist promising 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 and to enhance technology-related credit review capabilities. Pursuant to these initiatives, Shinhan Bank has reinforced its credit review process with increased staff and developed a technology-related credit assessment system, resulting in a Level 4 designation for 2019, the highest among Korean commercial banks, by the Financial Services Commission in terms of technology evaluation capability. According to the Korea Federation of Banks, the aggregate balance of loans to technology companies in the small- tomedium-sized enterprise segment reachedW127.7 trillion,W163.8 trillion andW191.7 trillion as of December 31, 2017, 2018 and September 2019, respectively. Shinhan Bank’s total lending to technology companies extended during the year ended December 31, 2017, 2018 and 2019 wasW14.5 trillion,W18.1 trillion andW21.7 trillion, respectively, and the total balance of outstanding loans to technology companies as of December 31, 2019 wasW26.4 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 35%, 37.5% and 40% and the target proportion for installment principal repayment-based housing loans was set at 35%, 40% and 45%, each by the end of 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. The target proportions for fixed interest rate loans for 2018 and 2019 were subsequently increased to 47.5% and 48%, respectively, while the target

 

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proportion for installment principal repayment-based housing loans remained at 55% for 2018 and 2019. In April 2020, the Financial Services Commission announced that the target proportion for fixed interest rate loans for 2020 would be set at 50%. 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. 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 44.2% and 51.0%, respectively, of the total housing loans extended by commercial banks in Korea as of June 30, 2018, according to data published by the Government in December 2018. Fixed interest rate and installment principal repayment-based housing loans accounted for 45.8% and 49.6%, respectively, of the housing loans extended by Shinhan Bank as of December 31, 2019.

On August 26, 2019, the Financial Services Commission announced that it will implement an additional round of the program for up toW20 trillion. Despite tighter thresholds for eligibility, including newly adopted restrictions on annual income, and the imposition of prepayment penalties, the newly implemented program is expected to be substantively similar to the mortgage refinancing program implemented in 2015. Similar to the 2015 program, banks holding newly converted fixed rate loans will be required to sell such loans to Korea Housing Finance Corporation, 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. The amount of loans Shinhan Bank will need to transfer to Korea Housing Finance Corporation isW1.7 trillion, but the amount of mortgage-backed securities Shinhan Bank will need to purchase from Korea Housing Finance Corporation has yet to be determined. Similar to the 2015 program, in the event that market interest rates increase from those applicable during this program’s implementation, we may experience valuation or realization losses on the mortgage-backed securities to be held by Shinhan Bank. Further, Shinhan Bank will be required to hold mortgage-backed securities it purchases from Korea Housing Finance Corporation under the program for a period of one year, and Shinhan Bank 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 due to the prevailing interest rate environment and/or other market conditions. 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

 

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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 whichW85.1 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 ofW118.2 billion,W131.7 billion andW110.4 billion, in 2017, 2018 and 2019, 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,

 

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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, 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 were 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 countermeasure requiring property buyers in Seoul to retain ownership for a longer period of time and increasing down payments

 

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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 have been fully implemented since October 2018. The newdebt-to-income ratios are used as the primary reference index in the evaluation and approval process for mortgage and home equity loans, and debt service ratios are generally 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 at least 1.50 fornon-residential rental businesses.

Since June 2017, the Government led by President MoonJae-in has announced and implemented a series of robust polices aimed at taming speculation and deterring the rise of housing prices including, among others, the designation of “speculative districts” (comprised of fifteen districts in Seoul and Sejong Special Self-Governing City as of February 21, 2020), “overheated speculative districts” (comprised of Seoul, Gwacheon City, Bundang District in Seongnam City, Gwangmyeong City, Hanam City respectively in Gyeonggi Province, Suseong District in Daegu Metropolitan City and Sejong Special Self-Governing City as of February 21, 2020) and “adjustment targeted areas” (comprised of Seoul, 25 cities, districts or other areas in Gyeonggi Province and Sejong Special Self-Governing City as of February 21, 2020) (the “speculative districts”, “overheated speculative districts” and “adjustment targeted areas” are hereinafter referred to as the “regulated areas”), and the application of reducedloan-to-value ratios anddebt-to-income ratios to those buying homes in the regulated areas.

For example, recently, on December 16, 2019, the Government unveiled a tighter set of measures aimed at the housing market. According to these new measures, which became effective from December 17, 2019, no mortgage or home equity loans can be provided to purchase a new home located in any of the regulated areas to a household that already owns two or more housing units. For a household that already owns one housing unit, such loans can only be provided under very limited circumstances. Furthermore, the “speculative districts” and “overheated speculative districts” are further restricted by tighterloan-to-value ratios. If the market value of a home located in any of the “speculative districts” or “overheated speculative districts” being acquired is greater thanW1.5 billion, no mortgage or home equity loans may be provided. For homes located in any of the “speculative districts” or “overheated speculative districts” with a market value equal or less thanW1.5 billion but greater thanW900 million, the loans can only cover 40% of the market value up toW900 million and 20% of any remaining value betweenW1.5 billion andW900 million. In addition to the foregoing restrictions, no mortgage loan applicant buying a home in any of the “speculative districts” or “overheated speculative districts” may incur a loan that will exceed 40% of his/her debt service ratio for homes with market values exceedingW900 million. Furthermore, on February 20, 2020, the Government announced additional countermeasures to curb housing prices in the “adjustment targeted areas”, under which if the market value of a home located in any of the “adjustment targeted areas” being acquired is greater thanW900 million, the loans can only cover 50% of the market value up toW900 million and 30% of any remaining value exceedingW900 million. 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, Shinhan 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 was amended on July 12, 2018 to provide that, beginning from January 1, 2020, in calculating such loan to deposit ratio, retail loans and corporate loans are weighed differently, with retail loans subject to a

 

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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 was amended on 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 2020 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 criterion when the Financial 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 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 Primary 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 Korea authorized Shinhan Bank to act as a settlement bank for Euro-denominated transactions between 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. From August 2016 through August 2017, Shinhan Bank processed ten such transactions that resulted in a minimal amount of revenue. Since August 2017, Shinhan Bank has ceased processing any such 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. On May 8, 2018, U.S. President Donald Trump announced his decision to terminate the participation of the United States in the Joint Comprehensive Plan of Action (the “JCPOA”), 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 one that ended on November 4, 2018,

 

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all Iran-related Secondary Sanctions that had been waived pursuant to the JCPOA 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 the targeted activities. As such, any Iran-related activities may subject us to OFAC 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, 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, 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” and Note 51 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” and Note 51 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

 

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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 United Kingdom’s exit from the European Union on January 31, 2020 (“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 coronavirus(COVID-19) outbreak, as well as the 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;

 

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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 Korea and North Korea has fluctuated and may increase abruptly as a result of current and future events. In particular, 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 six rounds of nuclear tests since October 2006, including claimed detonations of hydrogen bombs, which are more powerful than plutonium bombs, and warheads that can be mounted on ballistic missiles. Over the years, North Korea has also conducted a series of ballistic missile tests, including missiles launched from submarines and intercontinental ballistic missiles that it claims can reach the United States mainland. In response, the Government has repeatedly condemned the provocations and flagrant violations of relevant United Nations Security Council resolutions. Internationally, the United Nations Security Council has passed a series of resolutions condemning North Korea’s actions and significantly expanding the scope of sanctions applicable to North Korea, most recently in December 2017 in response to North Korea’s intercontinental ballistic missile test in November 2017. Over the years, the United States and the European Union have also expanded their sanctions applicable to North Korea.

 

  

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.

 

  

In February 2016, in retaliation of North Korea’s launch of a long-range rocket, Korea announced that it would halt its operations of the Kaesong Industrial Complex, an industrial complex in the border city of Kaesong, to impede North Korea’s utilization of funds from the industrial complex to finance its nuclear and missile programs. In response, North Korea announced that it would expel all Korean

 

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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.

In April, May and September 2018, President MoonJae-in met KimJong-un in a series of summit meetings to discuss, among other matters, denuclearization of the Korean peninsula. In June 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. A second official summit between U.S. President Donald Trump and KimJong-un was held in Vietnam in February 2019 but ended abruptly and without an agreement. In June 2019, U.S. President Donald Trump and KimJong-un had another summit at the Korean Demilitarized Zone, following which both sides announced a resumption of denuclearization talks. However, in December 2019, North Korea announced its intention to resume missile testing, heightening tensions.

In the aftermath of these developments, 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.

 

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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 the 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

 

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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 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

 

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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 2019, and we do not expect to be a PFIC in 2020 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 may 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

 

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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 2020 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 largest financial services provider in Korea (as measured by consolidated total assets as of September 30, 2019) and operate the second largest banking business (as measured by consolidated total bank assets as of September 30, 2019) and the largest credit card business (as measured by total credit purchase volume in 2019) 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, the former Korean unit of ING Life Insurance, as part of our efforts to diversify and enhance ournon-banking businesses and closed on February 1, 2019. On January 28, 2020, we acquired the remaining interests in Orange Life Insurance by effecting a comprehensive stock exchange under Articles360-2 of the Korean Commercial Code whereby holders (other than us) of Orange Life Insurance’s common stock transferred all of their shares to us and in return receive shares of our common stock, and hence Orange Life Insurance has become our wholly owned subsidiary as of such date.

As of March 31, 2020, we have 17 direct and 27 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 19 million active customers, which we believe is the largest customer base in Korea, through approximately 24,515 employees at approximately 1,383 network branches group-wide. While over 80% of our revenues have been historically derived from Korea, we aim to serve the needs of our customers through a global network of 219 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, Seoul, Korea 04513 and our telephone number is +822 6360 3000.

Our Strategy

‘2020 Smart Project’ through 2020

Since our inception in 2001 we have strived to become Asia’s leading financial group by establishing a foundation for sustainable growth. In furtherance of this goal, we implemented the “2020 SMART Project” in

 

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2017, consisting of four strategic pillars — (1) balanced growth, (2) glocalization, (3) digital transformation and (4) upholding the Shinhan culture — to ensure a high level of consistency in the strategic directions the Group announces each year, to continuously upgrade the strategic tasks in furtherance of these directives and to maintain and improve upon the speed upon we undertake such initiatives.

We have also adopted the “One Shinhan (creating synergies within the Group)” strategy as an additional initiative on top of the 2020 SMART Project in order to efficiently utilize the entire range of the Group’s resources and provide comprehensive financial solutions for our customers. 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 Korea’s leading brand and a world class financial group.

We have specifically focused on the following four strategic areas and have made significant progress through 2019.

 

A.

Maximizing our value through balanced growth

We recorded total net income ofW3,403 billion, the highest since our inception, through robust organic growth of our existing subsidiaries and inorganic growth, including through establishing new entities such as Shinhan REITs Management and acquiring businesses such as Orange Life Insurance 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.

 

B.

Accelerating glocalization

We aim for the 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 acquired 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 effectively coordinate the decision process across multiple subsidiaries within a country and allowing us to maximize synergy between our global businesses. In addition, we have 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 the local business environment. In part due to such efforts, we recorded the highest net profit from our overseas operations since our inception in 2019.

 

C.

Upgrading to ‘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. As a result of our consistent digital transformation efforts, the number of users of SOL and PayFAN have increased from approximately 8.3 million and 10.5 million respectively, as of December 31, 2018, to 10.8 million and 11.6 million, respectively, as of December 31, 2019. 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

 

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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.

Promoting our 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.

‘Excellent Shinhan’ for 2020 and beyond

Beginning in 2020, we have set ourselves new aspirations and strategic priorities to achieve ‘Excellent Shinhan,’ our newmid- and long-term goal upgrading and in succession to the 2020 SMART Project and designed to address internal and external instability we may face and continue growing as a world-class financial group. We have developed a business philosophy, namely the ‘Three Principles’ that define our vision for the future, a unique growth directive known as ‘F.R.E.S.H.’ and seven strategic directions for ‘Excellent Shihan.’

The Three Principles are trust, openness and progress. We value trust, since we believe our presence as a financial group can only exist because of our customers’ trust in us. We believe the future growth of financial services lies beyond the current boundaries. Finally, we believe that innovation and progress are the foundation for achieving our mission to contribute to a better world through finance. By following the Three Principles, we strive to be recognized by our customers and the society as a world-class financial group and to achieve our goal of Excellent Shinhan.

Under the Three Principles, we aim to successfully complete the 2020 SMART Project and implement our unique business development approach summarized as ‘F.R.E.S.H.’ ‘F.R.E.S.H.’ stands for ‘Fundamental’ (stable fundamentals), ‘Resilience’ (ability to overcome crisis situations), ‘Ecosystem’ (online and offline platforms and digital ecosystem), ‘Sustainability’ (consistent group-wide effort to achieve sustainable growth) and ‘Human-talent’ (talented human resources leading the Fourth Industrial Revolution). Given continuously uncertain and unstable market conditions, we place particular importance on ‘Resilience’, i.e., our strength to strengthen andre-create our core capabilities amidst an uncertain and unstable market environment.

Seven Strategic Directions for ‘Excellent Shinhan’

 

A.

Pursuit of Efficient Growth

We plan to pursue quality focused growth by improving our return on assets through efficient capital management and strategic cost reduction, and we are aiming to invest in high added-value areas by utilizing the capital accrued from our existing business lines, accelerating our growth both organically and inorganically.

 

B.

Global Connection and Expansion

Although our global business have mostly been limited to local channels, we plan to expand to cover global wealth management and asset management. We intend to increase our overseas investment and foreign asset management capabilities and provide further advanced global financial services for our clients, including export-import financing, global direct investment and structured product sourcing. Furthermore, we plan to establish a unique and competitive business model by strategically rebuilding our global business portfolio.

 

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C.

Conversion to Innovative and Open Digital Platforms

As part of our proactive preparation for the future, we aim toscale-up our group-wide digital capabilities, organization system, culture, and human resources by partnering and cooperating with major technology and fintech companies. Specifically, our future projects would include providing innovative customer experiences with diverse platforms, ramping up AI capabilities, establishing integrated big data and algorithm platforms, fostering a digital ecosystem and using digital means to enhance efficient task management and IT infrastructure.

 

D.

High Performance in Environmental, Social and Governance (ESG) Management

We have received various distinctions from environmental, social and governance (“ESG”) rating agencies, both domestic and abroad, for example inclusion in the DSJI World for seven consecutive years (ranked sixth worldwide and first in the Korean market) published by RobecoSAM and in the Global 100 (ranked within top 43 for eight consecutive years and ranked sixth among financial companies), for our market-leading ESG management, such as the establishment of the innovative finance committee and implementation of the “ECO Transformation 2020” initiative emphasizing environment-friendly business practices. We aim to further strengthen our ESG management capabilities to foster an environmentally friendly, inclusive and trust-based business management system. Furthermore, we plan to develop a business evaluation model to measure the value of a sustainable management and establish a system that can lead to tangible results.

 

E.

Development of a Dynamic Organization System

To further efficient management on a group-wide basis, we plan to develop a dynamic group-wide portfolio system based on (i) creativity and balance and (ii) cooperation and promotion. In particular, we plan to strengthen the Group’s role where efficient use of capital and human resources across various Group subsidiaries is required, there are overlapping customers or markets among Group subsidiaries and where we believe a synergy effect within the Group is possible. Additionally, we plan to flexibly allow our subsidiaries to take on roles within the Group where we believe such subsidiary’s expertise and swift response to customers are required.

 

F.

Convergent Human Resources Management

In order to recruit and retain talent, we plan to go beyond simply improving our human resources system by establishing an innovative human resource management platform. Our specific plans include fostering a healthy working environment, creating a flexible organization and culture by benchmarkingstart-up companies and recruiting talented professionals.

 

G.

Proactive Risk Management

We plan to expand our risk management services for our customers beyond risk management related to credit, interest rates, and liquidity. We aim to reform our overall risk management system by strengthening internal controls as well as by improving our ability to read fundamental market changes.

Seven Strategies for ‘Excellent Shinhan’ 2022

For 2020, we have forecasted three-stage scenarios of business environments and have set response measures for each of the scenarios to address internal and external uncertainties and maintain high performance. We have also set management targets and risk management systems for each stage. We have established the following seven strategies for 2020, marking the first year of our new goal towards ‘Excellent Shinhan’ and the culmination of projects that we pursued since 2017 under the 2020 SMART Project initiatives. The following seven strategies are designed to align with the aforementioned F.R.E.S.H. directives and the seven strategic directions for the ‘Excellent Shinhan.’

 

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A.

Strengthening the customer-centered “One Shinhan” value chain

We plan to establish a unique customer value creation system. In 2020, we plan to strengthen our asset management capabilities utilizing our matrix organizational structure to better adapt to thelow-interest rate environment. We also plan to expand the group-wide offering of customer services and enhance customervalue-add of the “One Shinhan” value chain.

 

B.

Expanding the market-leading business model

We will work towards cultivating new markets and further solidifying our market-leading positions in key areas by utilizing our market-leading business model. We plan to identify new markets through detailed market segmentation and to strengthen a new growth engine through the Group’s other well-performing business sectors, such as insurance, real estate and capital markets.

 

C.

Pursuing advanced global growth strategies

We are pursuing quality focused growth and advanced global growth strategies, focusing on not just quantitative expansion but quality focused growth. We plan to establish a cooperative system among our overseas operations and to pursue specialized local strategies to diversify our global business model.

 

D.

Driving innovative digital transformation

We plan to continue to upgrading our core digital competencies in technology, human resources, organization, platform and partnership and change management, while focusing on transforming our existing business model and developing innovative business models. We plan to promote these strategies with greater emphasis in 2020 through the establishment of customer-oriented platforms and achieve strategic cost reduction using digital platforms.

 

E.

Fostering sustainable and innovative finance

We aim to foster innovative finance and to expand our performance while maintaining a balanced growth model, including climate finance (promoting environmentally sustainable development through financing of projects aimed at reducing carbon and greenhouse gas emissions) and social and inclusive finance (promoting financial inclusion through financing of projects forlow-income and underprivileged sectors, such as financial support and education). We plan to establish amid- to long-term global ESG management roadmap, including initiative compliance systems such as principles for responsible banking.

 

F.

Differentiating our risk management capabilities in response to volatility

In response to the business environment with increased volatility, we plan to revamp our early risk detection system and risk management strategy. We plan to further support our businesses’ performance in new growth areas based on our enhanced risk management capabilities. We also plan to continue to strengthen our ICT and information security system.

 

G.

Establishing “Shinhan Value” as a leading company

“Shinhan Value” includes our corporate culture and employees, as well as our brand value. In line with such value, we will reestablish our culture as one of the leading companies and secure top class leaders and talented employees, while enhancing our brand value as loved and recognized by our customers and the society.

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

 

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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 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

October 2017

  Shinhan REITs Management  Real estate asset management  Newly established

February 2019, January 2020

  

 

Orange Life Insurance(5)

  

 

Life insurance services

  

 

Acquisition from majority shareholders and subsequent comprehensive stock exchange

May 2019

  Asia Trust Co. Ltd.(6)  Real estate trust business  Acquisition from majority shareholders

August 2019

  Shinhan AI. Co., Ltd.  Investment advisory  Incorporated and joined as a wholly-owned subsidiary

 

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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)

On February 1, 2019, we acquired a 59.15% interest in Orange Life Insurance, the former Korean unit of ING Life Insurance, as part of our efforts to diversify and enhance ournon-banking businesses. On January 28, 2020, we acquired the remaining interests in Orange Life Insurance by effecting a comprehensive stock exchange under Articles360-2 of the Korean Commercial Code whereby holders (other than us) of Orange Life Insurance’s common stock transferred all of their shares to us and in return receive shares of our common stock, and hence Orange Life Insurance has become our wholly owned subsidiary as of such date.

(6)

In October 2018, we announced the acquisition of a 60.0% interest in Asia Trust Co. Ltd. According to the transaction agreement, we seek to complete the acquisition by acquiring the remaining 40.0% shares in Asia Trust Co. Ltd. by 2022. The acquisition was approved by the Financial Services Commission on February 17, 2019 and closed on May 2, 2019. Upon closing, Asia Trust Co. Ltd. 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, mainly 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;

 

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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, services, including leasing and equipment financing, savings banking services, loan collection and credit reporting, collective investment administrative services and financial system development services, real estate trust services, investment advisory services as well as engaging in alternative 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 following business departments and planning offices, the primary functions of which are to support cross-divisional management with respect to these specific functional areas: group & global investment banking business department, global market & securities planning office, global business planning office, wealth management planning office and retirement pension planning office.

Our principal business activities are not subject to any material seasonal trends. Although 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 16.6%, 16.1% and 15.6% of our total deposits as of December 31, 2017, 2018 and 2019, respectively. Demand deposits paid average interest of 0.36%, 0.39% and 0.42% in 2017, 2018 and 2019, respectively.

 

  

Time and savings 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 of 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 50.3%, 51.3% and 52.4% of our total deposits as of December 31, 2017, 2018 and 2019, respectively, and paid average interest of 1.55%, 1.81% and 1.92% in 2017, 2018 and 2019, 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 30.1%, 29.1% and 28.7% of our total deposits as of December 31, 2017, 2018 and 2019, respectively, and paid average interest of 0.51%, 0.56% and 0.58% in 2017, 2018 and 2019, 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 3.0%, 3.5% and 3.3% of our total deposits as of December 31, 2017, 2018 and 2019, respectively and paid average interest of 1.57%, 1.96% and 2.07% in 2017, 2018 and 2019, 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

 

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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 toW5,639 billion,W5,645 billion andW6,015 billion as of December 31, 2017, 2018 and 2019, 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 credit losses on loans and deferred loan origination costs and fees and excluding credit card receivables, amounted toW134,424 billion as of December 31, 2019.

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.

 

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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 highnet-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, 2019, our mortgage and home equity loans and other retail loans accounted for 50.6% and 49.4% of our total retail loans, respectively.

For secured loans, our policy is to lend up to 40% 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, and maximumloan-to-value ratios are further adjusted based on factors such as the location of the secured property, nature and purpose of the 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, 2019, theloan-to-value ratio of mortgage and home equity loans of Shinhan Bank was 49.6%. As of December 31, 2019, substantially all of its 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 the Detailed Regulation on the Supervision of the Banking Business reflecting the tightened measures as discussed below), our banking subsidiaries were subject to, when extending mortgage and home equity loans, 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).

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 and (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.

 

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Since June 2017, the Government led by President MoonJae-in has announced and implemented a series of robust polices aimed at taming speculation and deterring the rise of housing prices including, among others, the designation of “speculative districts” (comprised of fifteen districts in Seoul and Sejong Special Self-Governing City as of February 21, 2020), “overheated speculative districts” (comprised of Seoul, Gwacheon City, Bundang District in Seongnam City, Gwangmyeong City, Hanam City respectively in Gyeonggi Province, Suseong District in Daegu Metropolitan City and Sejong Special Self-Governing City as of February 21, 2020) and “adjustment targeted areas” (comprised of Seoul, 25 cities, districts or other areas in Gyeonggi Province and Sejong Special Self-Governing City as of February 21, 2020) (the “speculative districts”, “overheated speculative districts” and “adjustment targeted areas” are hereinafter referred to as the “regulated areas”), and the application of reducedloan-to-value ratios anddebt-to-income ratios to those buying homes in the regulated areas.

For example, recently, on December 16, 2019, the Government unveiled a tighter set of measures aimed at the housing market. According to these new measures, which became effective from December 17, 2019, no mortgage or home equity loans can be provided to purchase a new home located in any of the regulated areas to a household that already owns two or more housing units. For a household that already owns one housing unit, such loans can only be provided under very limited circumstances. Furthermore, the “speculative districts” and “overheated speculative districts” are further restricted by tighterloan-to-value ratios. If the market value of a home located in any of the “speculative districts” or “overheated speculative districts” being acquired is greater thanW1.5 billion, no mortgage or home equity loans may be provided. For homes located in any of the “speculative districts” or “overheated speculative districts” with a market value equal or less thanW1.5 billion but greater thanW900 million, the loans can only cover 40% of the market value up toW900 million and 20% of any remaining value betweenW1.5 billion andW900 million. In addition to the foregoing restrictions, no mortgage loan applicant buying a home in any of the “speculative districts” or “overheated speculative districts” may incur a loan that will exceed 40% of his/her debt service ratio for homes with market values exceedingW900 million. Furthermore, on February 20, 2020, the Government announced additional countermeasures to curb housing prices in the “adjustment targeted areas”, under which if the market value of a home located in any of the “adjustment targeted areas” being acquired is greater thanW900 million, the loans can only cover 50% of the market value up toW900 million and 30% of any remaining value exceedingW900 million. 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.

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, 
   2017  2018  2019 
   (In billions of Won, except percentages) 

Retail loans(1)

    

Mortgage and home-equity loans

  W59,078  W62,394  W68,074 

Other retail loans

   52,512   58,438   66,350 

Percentage of retail loans to total gross loans

   40.2  39.9  41.0

 

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Note:

 

(1)

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

The total mortgage and home equity loans amounted toW68,074 billion as of December 31, 2019, and as of such date, consisted of amortizing loans (whose principal is repaid by part of the installment payments) in the amount ofW47,676 billion andnon-amortizing loans in the amount ofW20,398 billion. In addition, as of December 31, 2019, we also provided lines of credit in the aggregate outstanding amount ofW915 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 repaid within three years following the date of the loan, the borrower is required to pay an early repayment fee, which is typically 0.7% to 1.4%, depending on types of loans and applicable interest rates, 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.

As of December 31, 2019, Shinhan Bank’s three-month,six-month and twelve-month base rates were 1.53%, 1.52% and 1.51%, respectively. As of December 31, 2019, Shinhan Bank’s fixed rates for mortgage and home equity loans with a maturity of five years was 2.85%. Shinhan Bank’s fixed rates for other retail loans with a maturity of one year ranged from 2.41% to 14.00%, depending on the credit scores of its customers.

As of December 31, 2019, 92.4% of Shinhan Bank’s total retail loans were floating rate loans and 7.6% were fixed rate loans. As of the same date, 92.9% of Shinhan Bank’s retail loans with maturity of more than one year were floating rate loans and 7.1% 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

 

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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 highnet-worth. Our retail banking services include providing private banking services to highnet-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 grand prize at the Premium Brand Index by Korean Standards Association, Chosun Ilbo and Ministry of Trade, Industry and Energy (awarded 12 consecutive years), the Korea Prestige Brand Award by the Korea Economic Daily (awarded four consecutive years), the Star Brand Award by Maekyung Media Group (awarded three consecutive years), National Brand Award by Chosun Ilbo (awarded two consecutive years) in 2019.

As of December 31, 2019, 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, 2019, Shinhan Bank had approximately 15,677 private banking customers, who typically are required to haveW500 million in deposits with the 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 credit losses on loans 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, 
   2017  2018  2019 
   (In billions of Won, except percentages) 

Small- andmedium-sized enterprises loans(1)

  W78,556    28.3 W84,972    28.0 W 91,162    27.8

Large corporate loans

   35,664    12.9   35,428    11.7   34,466    10.5 

Others(2)

   31,038    11.1   39,390    13.0   43,502    13.3 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total corporate loans

  W145,258    52.3 W159,790    52.7 W169,130    51.6
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

 

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.

 

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(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. Pursuant to an amendment to the SME Basic Act, which will become effective in June 2020, an enterprise shall not qualify as a small- andmedium-sized enterprise if it is incorporated into, or is deemed to be incorporated into a business group subject to disclosure under the Monopoly Regulations and Fair Trade 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, 2019, we made loans to 307,705 small- andmedium-sized enterprises for an aggregate amount ofW91,162 billion (before allowance for credit losses on loans 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 with 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 to small- andmedium-sizedenterprises. Shinhan Bank currently has relationship management teams in 182 banking branches, of which 51 are corporate banking branches and 131 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 toW34,466 billion (before allowance for credit losses on loans and deferred loan origination costs and fees) as of December 31, 2019. 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

 

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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 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. As part of Shinhan Bank’s effort to lower settlement fees for small business owners, in May 2019, Shinhan Bank launched “ZeroPay Biz Shinhan”, an account-based mobile payment service enabling vendors to easily receive payments from customers’ accounts by scanning the vendor’s QR code with a smartphone.

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, 2019, working capital loans and facilities loans amounted toW56,074 billion andW56,534 billion, respectively, representing 48.2% and 48.6% 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, 2019, secured loans and guaranteed loans (including loans secured by guaranty certificates issued by credit guarantee insurance funds) accounted for 62.6% and 12.7%, respectively, of ourWon-denominated loans to small- andmedium-sized enterprises. As of December 31, 2019, 54.9% 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

 

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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, 2019, 54.4% 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, 2019, 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 1.52% for three months, 1.51% for six months, 1.51% for one year, 1.52% for two years, 1.58% for three years and 1.67% 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 0.23% 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.

 

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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 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 wereW183,457 billion,W233,655 billion andW246,982 billion, in 2017, 2018 and 2019, 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.”

 

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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, 2017, 2018 and 2019, Shinhan Bank had total trust assets ofW58,536 billion,W76,161 billion andW93,127 billion, respectively, comprised principally of securities investments ofW16,870 billion,W22,479 billion andW23,902 billion respectively; real property investments ofW12,053 billion,W14,154 billion andW13,493 billion, respectively; and loans with an aggregate principal amount ofW469 billion,W528 billion andW415 billion, respectively. Securities investments consisted of corporate bonds, government-related bonds and other securities, primarily commercial paper. As of December 31, 2017, 2018 and 2019, debt securities accounted for 27.3%, 28.5% and 24.9%, respectively, and equity securities constituted 1.5%, 1.1% and 0.8%, 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, 2017, 2018 and 2019, 57.1%, 57.8% and 62.7%, 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 toW37,700 billion,W44,290 billion andW49,695 billion as of December 31, 2017, 2018 and 2019, respectively.

Shinhan Bank offers variable rate trust products through its retail branch network. As of December 31, 2017, 2018 and 2019, Shinhan Bank’s variable rate trust accounts amounted toW33,720 billion,W40,270 billion

 

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andW45,627 billion, respectively, of which principal guaranteed variable rate trust accounts amounted toW3,979 billion,W4,019 billion andW4,067 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, 2017, 2018 and 2019, 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 23.9%.

 

  

cash advances, which enable the cardholders to withdraw cash subject to a preset limit from an ATM 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 23.9% and the revolving cash advances generally accrue interest at a minimum rate of 6.4% to 23.9% 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

 

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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 8.4% to 24.0% per annum. Since the first half of 2018, instead of levying a late charge in lieu of interest rates prior to default, Shinhan Card maintained the interest rates prior to default but added 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 2.3% of the purchased amount depending on the merchant used, with the average charge for credit cards being 1.54% in 2019. 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.

 

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Recently, the Financial Services Commission has allowed certain financial institutions, including Shinhan Card, to test innovative financial services. Shinhan Card obtained approval from the Financial Services Commission to test five business:(i) peer-to-peer credit card payment services whereby individuals can make credit card payments to others directly, without a third-party platform, (ii) a credit scoring system that evaluates individual business owners’ credit standing based on their revenue records and history of credit card use, (iii) small-scale investment using credit cards, (iv) face recognition system for payments and (v) monthly rent payments using credit cards. We expect to test the feasibility and potential of these businesses beginning in 2020.

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.

Customers and Merchants

In addition to internal growth through cross-selling, we seek to enhance our market position by selectively targeting new customers with highnet-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 and provision of big data-based consulting services. In 2019, utilizing an innovative platform based on big data analysis, Shinhan Card launched a “Super Personalization Service”, aimed at providing our individual customers with tailored and personalized services that meet their individual needs.

 

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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, 
   2017  2018  2019 
   (In thousands, except percentages) 

Shinhan Card:

    

Number of credit card holders(1)

   12,424   12,701   12,843 

Personal accounts

   12,295   12,495   12,667 

Corporate accounts

   129   206   176 

Active ratio(2)

   96.3  96.1  96.05

Number of merchants

   2,724   2,810   2,909 

 

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 3.43% of Shinhan Card’s total operating revenue in 2019. 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 provides auto leasing financing to retail customers and corporations. Revenues from auto lease operations accounted for 1.39%, 3.37% and 4.83% of Shinhan Card’s total operating revenue in 2017, 2018 and 2019, 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

 

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services offered by Shinhan Investment range from securities brokerage services, investment advice and financial planning services, and investment banking services such as underwriting and mergers 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, 2019, according to internal data, Shinhan Investment’s annual market share of Korean equity brokerage market was 5.61% (consisting of 2.34% in the retail segment, 0.74% in the institutional segment and 2.53% in the international segment) in terms of total brokerage volume, ranking eighth among securities firms in Korea. As of the same date, according to internal data, Shinhan Investment held the eighth largest annual market share in the options brokerage segment and the second largest annual market share in the futures segment of 6.26% and 18.79%, 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 highnet-worth individuals. The fees generated include brokerage commissions for the purchase and sale of securities, asset management fees, interest income from credit extensions (including in the form of stock subscription loans), margin transaction loans and loans secured by deposited securities.

 

  

institutional client services:

 

  

brokerage services. These services include brokerage of stocks, corporate bonds, futures and options provided to Shinhan Investment’s institutional and international customers and sale of institutional financial products. These services are currently supported by a team of approximately 68 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%

 

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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 capitalize 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 totaling US$62 million in December 2017 in our subsidiaries located in Hong Kong, New York, Vietnam and 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 and Orange Life Insurance. Shinhan Life Insurance and Orange Life Insurance provide services through diversified distribution channels consisting of financial planners, telemarketers, agency marketers and bancassurance specialists. Shinhan Life Insurance had total assets ofW29,719 billion,W31,824 billion andW34,134 billion as of December 31, 2017, 2018 and 2019, respectively, and net profits ofW121 billion,W131 billion andW124 billion for the years ended December 31, 2017, 2018 and 2019, respectively. Orange Life Insurance had total assets ofW31,455 billion,W32,744 billion andW32,841 billion as of December 31, 2017, 2018 and 2019, respectively, and net profits ofW340 billion,W311 billion andW271 billion for the years ended December 31, 2017, 2018 and 2019, 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 Alternative Investment Management (in addition to Shinhan Investment), we are also engaged in alternative 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, 2019, 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, 2019, Shinhan BNP Paribas Asset Management had assets under management amounting toW50,309 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

 

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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. (“Shinhan Credit Information”), 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.

Alternative 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 DS, which offers system integration, system management, IT outsourcing, business process outsourcing and IT consulting services.

 

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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.

Real Estate Trust Services

Asia Trust Co., Ltd is a comprehensive real estate trust service provider, providing services including land development trust, management trust, proxy and agency businesses and consulting, etc.

Artificial Intelligence Based Investment Consulting

Shinhan AI. Co., Ltd. is an artificial intelligence-based investment consulting company established to enhance our competitiveness in the digital age and provide differentiated investment consulting services, with plans to expand business into the asset management sector.

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, 2019.

 

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

Distribution Channels in Korea(1)

Seoul metropolitan

   363    1    8    59    37    80    548 

Gyeonggi province

   191        4    21    25    3    244 

Six major cities:

   167    1    8    25    41    18    260 

Incheon

   59        1    3    7    2    72 

Busan

   38    1    2    6    19    6    72 

Gwangju

   13        1    3    4    3    24 

Daegu

   24        1    7    5    4    41 

Ulsan

   15        1    3    2    1    22 

Daejeon

   18        2    3    4    2    29 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

   721    2    20    105    103    101    1,052 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Others

   155    33    6    21    20    5    240 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   876    35    26    126    123    106    1,292 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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, 2019, Shinhan Bank’s branch network in Korea comprised of 876 service centers, consisting of our headquarters, 673 retail banking service centers, 13 large corporate banking service centers, 51 corporate banking services centers and 139 hybrid banking branches designed to serve retail as well as small-

 

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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 highnet-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 in the Seoul metropolitan area featuring biometric authentication technology and the ability to perform a wide range of services that were 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 44 branches in the Seoul metropolitan area. As of December 31, 2019, Shinhan Bank had 5,773 ATMs, 13 cash dispensers and 48 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 2019, 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

 

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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, 2019, Shinhan Bank had 20,173,251 subscribers to its Internet banking services and 15,222,356 users of its smart banking apps, representing an increase of 9.8% and 8.8%, respectively, compared to December 31, 2018. 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. In addition to innovative features allowing customers to withdraw from their accounts at other banks using Shinhan Bank’s ATMs and transfer funds with minimal time and effort (for example, with no need to log in or insert account numbers), Shinhan Bank began offering open banking service in October 2019, allowing customers to access accounts, products and services across multiple banks using only SOL. In November 2019, Shinhan Bank also launched “SOL Global”, a mobile banking application for foreigners, allowing foreign customers to use open banking and various other financial services. Shinhan Bank continues to expand the scope of its mobile banking services by providing innovative offerings, including “SOL Land”, a mobile application providing information on real estate prices and loan limits and “SOL Trip”, a mobile application providing travel-related services such as foreign currency exchange and travel insurance services.

Overseas Distribution Network

The table below sets forth Shinhan Bank’s overseas banking subsidiaries and branches as of December 31, 2019.

 

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.   1990 

Shinhan Bank (China) Limited

  Beijing, China   2008 

Shinhan Bank (Cambodia) 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 

 

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Business Unit

  

Location

  Year Established
or
Acquired
 

London

  United Kingdom   1991 

Mumbai

  India   1996 

Hong Kong

  China   2006 

New Delhi

  India   2006 

Kancheepuram

  India   2010 

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 

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 commenced operations in 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 March 3, 2016, Bank Metro Express obtained a license to conduct business activities in the name of PT Shinhan Bank 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.

 

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Credit Card Distribution Channels

Shinhan Card primarily uses four distribution channels to attract new credit card customers: (i) the banking and credit card branch network, (ii) sales agents, (iii) business partnerships and affiliations with vendors and (iv) digital platforms such as Shinhan PayFAN.

The branch network for our credit card operations consisted of 876branches as of December 31, 2019of 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 2019, the number of new cardholders acquired through our banking distribution network accounted for approximately 29.0% 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 2019, and the number of new cardholders acquired through sales agents accounted for approximately 37.7% of the total number of Shinhan Card’s new cardholders in 2019. As of December 31, 2019, Shinhan Card had 2,036 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 expanded its sales channels and introduced new credit loan products. In 2019, LLP MFO Shinhan Finance focused on expanding its sales coverage while enhancing its risk management capabilities. In 2020, LLP MFO Shinhan Finance plans to diversify and optimize its product offerings to create a more stable income base.

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. In 2018, PT Shinhan Indo Finance began to expand its retail business across Indonesia. In 2019, PT Shinhan Indo

 

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Finance launched its joint finance product with Shinhan Bank, maintaining a conservative approach to its retail business while steadily increasing its corporate leasing assets, particularly corporate fleet vehicles. In 2020, PT Shinhan Indo Finance plans to continue expanding its corporate fleet vehicle leasing business and improve 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. Since then, it has expanded its business operations by diversifying the range of microfinance product offerings and expanding its sales network. In 2020, Shinhan Microfinance looks to increase efficiency through new branch operational strategies and continue to seek long term growth opportunities.

In January 2018, Shinhan Card acquired Prudential Vietnam Finance Company Limited in order to gain a stronger presence in Vietnam and increase synergy with Shinhan Bank and Shinhan Investment’s Vietnam operations. In July 2019, Shinhan Card changed its legal name into Shinhan Vietnam Finance Company Ltd. (“Shinhan Vietnam Finance”). Utilizing its relatively lower funding cost resulting from cooperation with other affiliates in Vietnam such as Shinhan Bank and Shinhan Investment, Shinhan Vietnam Finance was able to expand its asset base, reaching total assets of US$336 million as of December 31, 2019. The State Bank of Vietnam recently introduced Circular 18, which amends the regulation on consumer lending activities in Circular 43 and is aimed at improving soundness of Vietnam’s consumer finance industry and facilitating a transition towards a cashless society by regulating the proportion of direct disbursements (for example, cash loans) to the total outstanding loans. According to the amendment, the rate of total consumer loans with direct disbursements to total consumer credit balance should gradually be decreased to 30% by 2024. In order to efficiently cope with the new regulatory changes, in 2020, Shinhan Vietnam Finance plans to diversify its business offerings to include, among others, car loans and installment financing and also leverage Shinhan Card’s digitalization capabilities to increase efficiency and provide customers with innovative services.

Securities Brokerage Distribution Channels

Our securities brokerage services are conducted principally through Shinhan Investment. As of December 31, 2019, Shinhan Investment had 126 service centers nationwide, and four overseas subsidiaries based in Hong Kong, New York, Vietnam and Indonesia to service our corporate customers.

Approximately 63% of our brokerage branches are located in the Seoul metropolitan area with a focus on attracting highnet-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 and Orange Life Insurance. Both Shinhan Life Insurance and Orange Life Insurance, in addition to distributing bancassurance products through our bank branches, also distribute a wide range of life insurance products through their own branch network, agency network of financial planners and telemarketers, as well as through the Internet. As of December 31, 2019, Shinhan Life Insurance and Orange Life Insurance had 123 and 106 branches and 7 and 3 customer support centers, respectively. 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.

 

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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 Shinhan 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 relocated their information management capabilities to this center in 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 2017, 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 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, 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. 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, including our databack-up centers and disaster recovery centers, 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

 

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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, 2019, 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 36 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. Shinhan Bank’s net interest margin (on a separate basis) declined slightly to 1.54% in 2019 from 1.62% in 2018 due to, at least partly, decreases in base interest rate by the Bank of Korea from 1.75% to 1.50% in July 2019 and from 1.50% to 1.25% in October 2019 and may decline further as the Bank of Korea has reduced the base interest rate from 1.25% to 0.75% in March 2020 and if the base interest rate is decreased again during 2020. Even if interest rates were to increase, the effect on Shinhan Bank’s results of operations may not be as beneficial as expected, or at all, due to factors such as increased volatility of market interest rates and tighter regulations regarding SOHO loans, including the implementation of additional credit review guidelines for individual businesses. Further, 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 further 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

 

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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 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. Also, over the years, the Government has implemented regulations lowering certain merchant fees chargeable by credit card companies. In 2012, the Government adopted regulations mandating lower merchant fees chargeable to small- andmedium-sized enterprises, and beginning 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, since the implementation of the Improper Solicitation and Graft Act in September 2016, revenue growth for corporate cards and service related industries such as dining, floral and entertainment have shown signs of decline, and additional regulations on loans reducing maximum interest rates chargeable from 27.9% to 24% came into effect in February 2018. These developments have put further downward pressure on the results of operations for credit card companies, 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 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 recently, including 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 interests 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

 

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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, 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. In the asset management business sector, Woori Financial Group acquired two asset management companies, Tongyang Asset Management and ABL Global Asset Management (former Allianz Global Investors). 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, the former Korean unit of ING Life Insurance, as part of our efforts to diversify and enhance ournon-banking businesses and closed on February 1, 2019. On January 28, 2020, we acquired the remaining interests in Orange Life Insurance by effecting a comprehensive stock exchange under Articles360-2 of the Korean Commercial Code whereby holders (other than us) of Orange Life Insurance’s common stock transferred all of their shares to us and in return receive shares of our common stock, and hence Orange Life Insurance has become our wholly owned subsidiary as of such date. 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 became available on mobile channels in February 2016 and expanded its scope of services to include savings banks and securities companies. Since their introduction, the integrated automatic payment transfer management service, integrated account management service and “my account at a glance” system have gained widespread 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. Moreover, 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 are 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.

 

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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, and Viva Republica consortium’s Toss Bank has recently obtained preliminary business authorization from the Financial Services Commission on December 16, 2019. 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.

As part of the Government’s financial policies to promote innovative digital finance, 10 commercial banks, including Shinhan Bank, began offering a preliminary open banking service in October 2019. More local banks and fintech companies joined in December 2019, when the open banking service was fully and officially launched. Open banking service allows each fintech company and bank to provide banking services, such as checking balances and making withdrawals and transfers, with regards to customers’ accounts at other banks. Using open banking service, customers can easily access accounts, products and services across multiple banks, instead of being limited to the accounts, products and services available at the particular bank that they deal with. In addition, on January 9, 2020, the Korean National Assembly passed amendments to three major data privacy laws (the Personal Information Protection Act, the Act on the Promotion of Information and Communications Network Utilization and Information Protection and the Act on the Use and Protection of Credit Information). These amendments introduced the MyData service, allowing and requiring (upon the customer’s request and subject to compliance requirements) financial institutions that have been approved by the Financial Service Commission as a MyData service provider access and sharing of customers’ personal information, credit information and transaction data. If and when fintech companies receive authorization as MyData service providers, we expect competition for customers among banks and fintech firms such as Kakao Pay, Toss and Bank Salad to intensify.

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 has implemented the Basel III requirements relating to liquidity coverage ratio and capital conservation buffer, each of which have been fully phased in as 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

 

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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 have been required to maintain an additional capital buffer of 0.25% since January 1, 2016, with such buffer increased by 0.25% annually to reach 1.00% as 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 “— Supervision and Regulation.”

 

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Description of Assets and Liabilities

Loans

As of December 31, 2019, our total gross loan portfolio wasW327,578 billion, which represented an increase of 8.1% fromW303,070 billion on December 31, 2018. The increase in our portfolio primarily reflects a 5.8% increase in corporate loans and an 11.2% increase in retail loans.

Loan Types

The following table presents our loans by type as of the dates indicated. Except where specified otherwise, all loan amounts stated below are before deduction of allowance for credit losses on loans. Total loans reflect our loan portfolio, including past due amounts.

 

   As of December 31, 
   2015   2016   2017   2018(6)   2019(6) 
   (In billions of Won) 

Corporate

          

Corporate loans(1)

  W125,155   W128,672   W138,277   W151,647   W161,501 

Public and other(2)

   2,191    2,154    2,298    2,831    3,312 

Loans to banks(3)

   4,653    4,730    2,970    3,586    2,634 

Lease financing

   1,875    1,814    1,713    1,726    1,683 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total — Corporate

   133,874    137,370    145,258    159,790    169,130 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Retail

          

Mortgages and home equity

   54,983    56,235    59,078    62,394    68,074 

Other retail(4)

   41,035    47,949    52,512    58,438    66,350 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total — Retail

   96,018    104,184    111,590    120,832    134,424 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Credit cards

   18,537    19,450    20,641    22,448    24,024 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans(5)

  W248,429   W261,004   W277,489   W303,070   W327,578 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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, 2015, 2016, 2017, 2018 and 2019, 89.4%, 88.9%, 88.2%, 88.9% and 87.9% of our total gross loans, respectively, wereWon-denominated.

(6)

Loan amounts as of December 31, 2018 and 2019 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 andW2,155 billion as of December 31, 2018 and 2019, respectively.

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”).

 

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Twenty Largest Exposures by Individual Borrower

As of December 31, 2019, our 20 largest exposures, consisting of loans, securities and guarantees and acceptances, totaledW83,647.3 billion. The following table sets forth our total exposures to these top 20 borrowers as of December 31, 2019.

 

  As of December 31, 2019 
  Loans in
Won
Currency
  Loans in
Foreign
Currency
  Securities  Guarantees
and
Acceptances
  Others  Total
Exposure
  Impaired
Loans and
Guarantees
and
Acceptances
 
  (In billions of Won) 

Ministry of Economy and Finance

 W 0.0  W  W35,364.7  W  W  W35,364.7  W 

Bank of Korea

  1,660.0      6,929.5   0.1      8,589.6    

Korea Housing Finance Corporation.

  0.0      7,603.3         7,603.3    

Korea Development Bank

  7.1      6,045.1   70.6      6,122.9    

Industrial Bank of Korea.

  752.3   10.6   4,247.7   0.1      5,010.7    

Export-Import Bank of Korea

     11.8   2,956.0         2,967.8    

NongHyup Bank.

  1,242.5   14.9   660.5   17.0      1,935.0    

Samsung Electronics Co., Ltd.

     1,856.7            1,856.7    

KEB Hana Bank

  432.5   126.9   888.8   75.5      1,523.8    

Korea Land & Housing Corporation.

  0.0      1,464.0         1,464.0    

Korea Deposit Insurance Corporation

        1,397.7         1,397.7    

Kookmin Bank.

  836.0   46.5   488.8   13.4      1,384.7    

National Agricultural Cooperative Federation.

  53.6      1,327.6         1,381.2    

Korea Expressway Corporation

  0.0      1,325.9         1,326.0    

United States of America

        1,050.7         1,050.7    

Korea Electric Power Corporation

  0.3      1,004.0   6.3      1,010.7    

Woori Bank.

  195.4   31.8   768.4         995.6    

KB Kookmin Card Co., Ltd.

        931.0         931.0    

Korea Rail Network Authority

        875.3         875.3    

Korea Gas Corporation.

  0.0   40.6   815.5         856.2    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 W5,179.9  W2,139.9  W76,144.6  W182.9  W  W83,647.3  W 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

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Exposure to Main Debtor Groups

As of December 31, 2019, our total exposure to the main debtor groups as identified by the Governor of the Financial Supervisory Serviceamounted toW29,577 billion. The main debtor groups are largely comprised ofchaebols.The following table shows, as of December 31, 2019, our total exposures to the 10 main debtor groups to which we have the largest exposure.

 

  As of December 31, 2019 

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
 
  (In billions of Won) 

Hyundai Motors

 W 514.5  W2,102.5  W1,819.1  W 300.6  W0.1  W 4,736.8  W 

Samsung

  195.1   2,286.3   972.3   716.7   0.0   4,170.4    

Lotte

  57.8   681.2   1,870.2   349.5   0.1   2,958.8    

SK

  942.4   390.9   1,096.1   441.9   0.0   2,871.3    

LG

  399.1   435.0   998.8   353.7   0.0   2,186.6    

Hyundai Heavy Industries

  106.7   82.3   210.9   1,276.7      1,676.6    

Hanwha

  269.7   300.1   621.3   339.7   0.0   1,530.9    

LS

  132.9   416.3   212.1   704.1   0.0   1,465.5    

GS

  42.6   347.5   544.8   283.2   0.0   1,218.2    

CJ

  154.3   184.7   545.5   105.4      989.9    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 W2,815.1  W7,226.8  W8,891.2  W4,871.5  W0.3  W23,804.9  W 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Loan Concentration by Industry

The following table shows the aggregate balance of our corporate loans by industry concentration as of December 31, 2019.

 

   As of December 31, 2019 

Industry

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

Manufacturing

  W47,611    28.2

Real estate, leasing and service

   32,802    19.4 

Retail and wholesale

   20,672    12.2 

Finance and insurance

   16,784    9.9 

Transportation, storage and communication

   5,006    3.0 

Hotel and leisure

   7,818    4.6 

Construction

   3,872    2.3 

Other service(1)

   17,724    10.5 

Other(2)

   16,841    9.9 
  

 

 

   

 

 

 

Total

  W169,130    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.

 

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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, 2019. The amounts below are before allowance for credit losses on loans 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, 2019 
   1 Year or
Less
   Over 1
Year but
Not More
Than 5
Years
   Over 5
Years(1)
   Total 
   (In billions of Won) 

Corporate:

        

Corporate loans

  W103,111   W50,555   W7,835   W161,501 

Public and other

   1,516    1,387    409    3,312 

Loans to banks

   1,947    535    152    2,634 

Lease financing

   575    1,101    7    1,683 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total corporate

  W107,149   W53,578   W8,403   W169,130 
  

 

 

   

 

 

   

 

 

   

 

 

 

Retail:

        

Mortgage and home equity

  W11,737   W19,171   W37,166   W68,074 

Other retail

   40,133    16,902    9,315    66,350 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total retail

  W51,870   W36,073   W46,481   W134,424 
  

 

 

   

 

 

   

 

 

   

 

 

 

Credit cards

  W21,084   W2,718   W222   W24,024 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

  W180,103   W92,369   W55,106   W327,578 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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 initial loan date. Retail loans may be extended for additional terms of up to 12 months for an aggregate term of ten years from the initial 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, 2019.

 

   As of December 31, 2019 
   Due Within
1 Year
   Due After 1
Year
   Total 
   (In billions of Won) 

Fixed rate loans(1)

  W57,735   W36,201   W93,936 

Variable rate loans(2)

   122,368    111,274    233,642 
  

 

 

   

 

 

   

 

 

 

Total loans

  W180,103   W147,475   W327,578 
  

 

 

   

 

 

   

 

 

 

 

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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 2015, 2016, 2017, 2018 and 2019, we would have recorded gross interest income ofW79 billion,W91 billion,W96 billion,W66 billion andW64 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 2015, 2016, 2017, 2018 and 2019 wereW39 billion,W38 billion,W42 billion,W36 billion andW38 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, 
   2015   2016   2017   2018   2019 
   (In billions of Won) 

Loans accounted for on a nonaccrual basis(1)

          

Corporate

  W1,235   W1,102   W1,035   W897   W903 

Retail

   228    243    311    358    413 

Credit cards

   93    86    67    92    101 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

   1,556    1,431    1,413    1,347    1,417 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

          

Corporate

   176    234    199    199    258 

Retail

   316    313    440    706    874 

Credit cards

   399    369    509    558    545 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

   891    916    1,148    1,463    1,677 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  W2,447   W2,347   W2,561   W2,810   W3,094 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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, 
   2015   2016   2017   2018   2019 
   (In billions of Won) 

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

  W244   W133   W10   W12   W89 

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

  W714   W526   W502   W440   W425 

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.

 

   As of December 31, 
   2015   2016   2017   2018   2019 
   (In billions of Won) 

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

  W22   W17   W15   W19   W19 

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

  W6   W8   W11   W7   W6 

 

Note:

 

(1)

Includes nonaccrual and past due loans.

The following table presents a breakdown of the outstanding balance and specific allowance for credit losses on loans as of December 31, 2015, 2016, 2017, 2018 and 2019 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, 
  2015  2016  2017  2018  2019 
  Outstanding
Balance
  Allowance  Outstanding
Balance
  Allowance  Outstanding
Balance
  Allowance  Outstanding
Balance
  Allowance  Outstanding
Balance
  Allowance 
  (In billions of Won) 

Workout

 W506  W215  W410  W214  W387  W275  W331  W237  W292  W140 

Recovery Proceedings

  208   63   113   32   109   36   98   34   121   32 

Others(1)

        3   2   6   5   11   5   12   8 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 W714  W278  W526  W248  W502  W316  W440  W276  W425  W180 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

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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 credit losses on loans as of December 31, 2015, 2016, 2017, 2018 and 2019 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. 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, 
  2015  2016  2017  2018  2019 
  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):

 W61  W40  W84  W49  W118  W70  W84  W46  W126  W73 

 

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, 
   2015   2016   2017   2018   2019 
   (In billions of Won) 

Impaired and nonaccrual restructured loans

  W470   W393   W492   W428   W336 

Totalcharge-off of restructured loans

  W259   W118   W89   W59   W138 

Charge-off as part ofdebt-to-equity conversion

  W51   W22   W68   W67   W230 

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, 2019, 0.13% of our total loans, orW425 billion (of whichW336 billion was classified as nonaccrual andW89 billion was classified as accruing), was under restructuring. Restructuring of our credit exposures generally takes the form of workout and recovery proceedings.

Workout

The original Corporate Restructuring Promotion Act (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, 2005, and new Corporate Restructuring Promotion Acts 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),

 

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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 as the “CRPA”).

If the ‘main Creditor Financial Institution’ of a Failing Company provided notice of convening a Creditor Committee (defined below) on or before October 15, 2023, any proceedings commenced by such Creditor Committee will remain subject to the CRPA even after October 15, 2023 unless and until such proceedings are completed or discontinued.

The following is a summary of the key provisions of the CRPA. The CRPA applies to a financial creditor (the “Financial Creditor”) who has financial claims against a debtor company by ‘providing credit’ to such debtor company or other third parties. “Provision of Credit” is defined in the CRPA as any transaction determined by the Financial Supervisory Commission to fall under any of the following:

 

  

loans;

 

  

purchase of promissory notes and debentures or bonds;

 

  

equipment leasing;

 

  

payment guarantees;

 

  

providing advance payments on 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 “debtor company” is defined under the CRPA as a company established under the Korean Commercial Code or other person performing profit-making activities. The Failing 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 Failing Company, such company may submit 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 committee of Financial Creditors (the “Creditor Committee”) or such main Creditor Financial Institution.

Under the CRPA, the main Creditor Financial Institution of a Failing Company is required to take or arrange one of the following actions if it determines that there is a possibility that the financial condition of the Failing Company may be rehabilitated or brought back to normal in accordance with its business restructuring plan:

 

  

convocation of the first meeting of the Creditor Committee to decide whether to commence the management 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 notify 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 Financial Creditors who are set out in the CRPA such as 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

 

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the Creditor Committee; provided that if they nevertheless want to attend 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 Creditor 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 deemed to have terminated.

The resolution at the Creditor Committee is generally passed by an approval of the Financial Creditors representing at least 75 per cent. of the outstanding credit to the Failing Company of the Financial Creditors who constitute the Creditor Committee; provided that if a single Financial Creditor holds at least 75 per cent. of the outstanding credit, the resolution shall be passed by an approval of not less than 40 per cent. of the total number of the Financial Creditors who constitute the Creditor Committee, including such single Financial Creditor. An additional approval of the Financial Creditors holding 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 Failing Company.

A Financial Creditor which has opposed the resolutions of the 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 Financial Creditors that have approved such resolutions (the “Approving Financial Creditors”) shall jointly purchase such claims within six months of such request.

The purchase price and terms of 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

 

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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, 2019, the total loan amount subject to recovery proceedings wasW121 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 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.

Once a borrower is deemed to be eligible to participate in thepre-workout program, we promptly sell the collateral underlying such borrower’s secured loans to 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, the total loan amount, the repayment amount and the probability of repayment, 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.

 

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Interest rate adjustment: The interest rate of the loan may be adjusted to 70% of the original interest rate or 5% per annum, whichever is higher; provided that if the original interest rate is less than 5% per annum, no adjustment applies. The adjusted interest rate applies to the principal amount following any adjustment thereto as part of thepre-workout program, and no interest accrues on the interest already accrued or fees payable.

 

  

Debt forgiveness: Debt forgiveness under thepre-workout program is limited to (i) the default interest accrued prior to the application for thepre-workout program and (ii) the regular and default interest accrued following such application but before the approval of the program.

 

  

Deferral: If the foregoing three measures are deemed to be insufficient in terms of providing meaningful assistance to a qualifying borrower due to layoff, unemployment, business closure, disaster or earnings loss, loan repayment may be deferred for a maximum of one year, provided that thepre-workout committee may extend such deferral period every six months, for a period not to exceed six months, upon the borrower’s application. The deferral period is not counted toward the repayment period, and interest accrues at 3% per annum during the deferral period.

In 2019, the aggregate amount of our retail credit (including credit card receivables) which became subject to thepre-workout program wasW126 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.

 

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The following table presents a breakdown of the gross amount of loans under restructuring as of December 31, 2015, 2016, 2017, 2018 and 2019 by our loan modification programs, as further categorized according to the loan category and performing versusnon-performing status at each fiscal year end.

 

As of December 31, 2015

 

Modification Programs

  Non-Performing   Performing   Total 
   (In billions of Won) 

Extension of due date for principal and interest

  W   W87   W87 

Reduction of interest rate

   119    368    487 

Forgiveness of principal

            

Equity conversion

            

Additional lending(1)

   4    19    23 

Others(2)

   87    30    117 
  

 

 

   

 

 

   

 

 

 

Total

  W210   W504   W714 
  

 

 

   

 

 

   

 

 

 

 

As of December 31, 2016

 

Modification Programs

  Non-Performing   Performing   Total 
   (In billions of Won) 

Extension of due date for principal and interest

  W   W92   W92 

Reduction of interest rate

   3    234    237 

Forgiveness of principal

            

Equity conversion

            

Additional lending(1)

       37    37 

Others(2)

   116    44    160 
  

 

 

   

 

 

   

 

 

 

Total

  W119   W407   W526 
  

 

 

   

 

 

   

 

 

 

 

As of December 31, 2017

 

Modification Programs

  Non-Performing   Performing   Total 
   (In billions of Won) 

Extension of due date for principal and interest

  W3   W82   W85 

Reduction of interest rate

   9    299    308 

Forgiveness of principal

            

Equity conversion

            

Additional lending(1)

            

Others(2)

   70    39    109 
  

 

 

   

 

 

   

 

 

 

Total

  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 
  

 

 

   

 

 

   

 

 

 

 

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As of December 31, 2019

 

Modification Programs

  Non-Performing   Performing   Total 
   (In billions of Won) 

Extension of due date for principal and interest

  W   W76   W76 

Reduction of interest rate

   45    211    256 

Forgiveness of principal

            

Equity conversion

            

Additional lending(1)

       2    2 

Others(2)

   56    35    91 
  

 

 

   

 

 

   

 

 

 

Total

  W101   W324   W425 
  

 

 

   

 

 

   

 

 

 

 

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 that are 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 2019, our loans restructured into equity securities amounted toW112 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.

 

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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 is 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)

 

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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

 

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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, 2019, we hadW657 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 credit losses on loans. Our management believes the allowance for credit losses on loans reflects the best estimate of the expected credit losses as of the date of each statement of financial position.

At each reporting date, we assess whether the credit risk on a financial instrument has increased significantly since initial recognition. When making the assessment, we use 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. 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 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 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 the remaining life of the exposure from the accumulated data and (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 others.

We consider 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, or

 

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if we determine that it is not possible to recover principal and interest without enforcing the collateral on a financial asset.

We use 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 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 incurred and the extent thereof may vary.

We measure expected credit losses on a forward-looking basis, and expected credit losses reflects information presented by internal experts based on a variety of sources. 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 occur 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 techniques 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 expected 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 borrower or collateral, and

 

  

Days of delinquency.

The criteria for classification of groups 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

 

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particular portfolio that does not have sufficient internal data accumulated from the past experience. See “Item 5.A. Operating Results — Critical Accounting Policies — Impairment of Financial Assets — Allowance for Credit Losses on Loans.”

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 credit card accounts with balances that are more than 30 days past due, we generally assign collection to collection companies such as Shinhan Credit Information, a subsidiary of ours, and Mirae Credit Information. For credit card accounts that are charged off, we outsource collection to collection companies such as Shinhan Credit Information, 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 

As of December 31,

  Amount   %   Amount   %   Amount   %   Amount   %   Amount 
   (In billions of Won, except percentages) 

2015

   245,998    99.02    1,098    0.44    781    0.32    552    0.22    248,429 

2016

   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 

2018

   300,324    99.09    1,656    0.55    684    0.23    406    0.13    303,070 

2019

   324,458    99.05    1,795    0.55    772    0.24    553    0.16    327,578 

 

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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, 
   2015  2016  2017  2018  2019 
   (In billions of Won, except percentages) 

Totalnon-performing loans

  W1,333  W1,174  W1,075  W1,090  W1,325 

As a percentage of total loans

   0.54  0.45  0.39  0.36  0.40

 

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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, 
  2015  2016  2017  2018  2019 
  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) 
Corporate                                             

Corporate loans

 W125,155  W663   0.53 W128,672  W480   0.37 W138,277  W325   0.24 W151,647  W278   0.18 W161,501  W388   0.24

Public and other(2)

  2,191   1   0.05   2,154         2,298   1   0.04   2,831      0.00   3,312   12   0.36 

Loans to banks

  4,653         4,730         2,970         3,586      0.00   2,634       

Lease financing

  1,875   16   0.85   1,814   20   1.10   1,713   15   0.88   1,726   16   0.93   1,683   17   1.01 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total corporate

  133,874   680   0.51   137,370   500   0.36   145,258   341   0.23   159,790   294   0.18   169,130   417   0.25 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Retail

               

Mortgage and home equity

  54,983   45   0.08   56,235   33   0.06   59,078   45   0.08   62,394   45   0.07   68,074   70   0.10 

Other retail

  41,035   193   0.47   47,949   222   0.46   52,512   296   0.56   58,438   332   0.57   66,350   385   0.58 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total retail

  96,018   238   0.25   104,184   255   0.24   111,590   341   0.31   120,832   377   0.31   134,424   455   0.34 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Credit cards

  18,537   415   2.24   19,450   419   2.15   20,641   393   1.90   22,448   419   1.87   24,024   453   1.89 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 W248,429  W1,333   0.54 W261,004  W1,174   0.45 W277,489  W1,075   0.39 W303,070  W1,090   0.36 W327,578  W1,325   0.40
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

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.

 

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Non-Performing Loans by Industry

The following table sets forth a breakdown of ournon-performing corporate loans by industry as of December 31, 2019.

 

Industry

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

Construction

  W32    7.7

Manufacturing

   182    43.7 

Real estate, leasing and service

   28    6.7 

Retail and wholesale

   54    12.9 

Finance and insurance

   2    0.5 

Hotel and leisure

   17    4.1 

Transportation, storage and communication

   11    2.6 

Other service(1)

   70    16.8 

Other(2)

   21    5.0 
  

 

 

   

 

 

 

Total

  W417    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, 2019, our 20 largestnon-performing loans accounted 10.8% 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, 2019

 
     

Industry

  Gross Principal
Outstanding
   Allowance for
credit losses on
loans
 
     (In billions of Won) 
1 Borrower A  Manufacturing  W23   W2 
2 Borrower B  Manufacturing   18     
3 Borrower C  Other service   16    4 
4 Borrower D  Construction   15    8 
5 Borrower E  Retail and wholesale   13    13 
6 Borrower F  Manufacturing   6    1 
7 Borrower G  Other service   5    0 
8 Borrower H  Other service   4    1 
9 Borrower I  Manufacturing   4     
10 Borrower J  Other service   4     
11 Borrower K  Manufacturing   4    1 
12 Borrower L  Real estate, leasing and service   4    1 
13 Borrower M  Manufacturing   4     
14 Borrower N  Manufacturing   4    2 
15 Borrower O  Real estate, leasing and service   4    1 
16 Borrower P  Other service   3    1 

 

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As of December 31, 2019

 
     

Industry

  Gross Principal
Outstanding
   Allowance for
credit losses on
loans
 
     (In billions of Won) 
17 Borrower Q  Retail and wholesale   3    2 
18 Borrower R  Manufacturing   3    3 
19 Borrower S  Transportation, storage, and communication   3    0 
20 Borrower T  Construction   3    3 
     

 

 

   

 

 

 
     W143   W43 
     

 

 

   

 

 

 

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;

 

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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 2019, we soldnon-performing loans in the amount ofW41 billion to third parties, includingW28 billion transferred to JB Woori Capital Co., Ltd, 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 2019.

 

   (In billions of Won) 

Non-performing loans as of December 31, 2018

  W1,090 
  

 

 

 

Additionalnon-performing loans due to delinquency

   602 

Loans sold

   (41

Loans charged off

   (230

Loans modified and returned to performing

   (52

Other adjustments(1)

   (44
  

 

 

 

Non-performing loans as of December 31, 2019

  W1,325 
  

 

 

 

 

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 Credit Losses on Loans

The following table presents, as of the dates indicated, the allocation of our allowance for credit losses on loans by loan type. The table as of December 31, 2018 and 2019 has been presented separately due to the adoption of IFRS 9 from January 1, 2018.

 

  As of December 31, 
  2018  2019 
  (In billions of Won, except percentages) 
  12-month
expected
credit
Losses
  Lifetime expected credit losses        12-month
expected
credit

Losses
  Lifetime expected credit losses       
  Not-
impaired
  Impaired  Total  % of Total
Allowances
  Not-
impaired
  Impaired  Total  % of Total
Allowances
 

Corporate

          

Corporate loans

 W419  W568  W482  W1,469   53.9 W393  W511  W435  W1,339   49.9

Public and other

  4   5   10   19   0.7   4   8   2   14   0.5 

Loan to banks

  6         6   0.2   5   0      5   0.2 

Lease financing

  9   9   32   50   1.8   26   20   34   80   3.0 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total corporate

  438   582   524   1,544   56.6   428   539   471   1,438   53.6 

Retail

          

Mortgages and home equity

  2   6   2   10   0.4   2   5   4   11   0.4 

Other retail

  216   200   368   784   28.8   131   86   165   382   14.2 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total retail

  218   206   370   794   29.2   133   91   169   393   14.6 

 

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  As of December 31, 
  2018  2019 
  (In billions of Won, except percentages) 
  12-month
expected
credit
Losses
  Lifetime expected credit losses        12-month
expected
credit

Losses
  Lifetime expected credit losses       
  Not-
impaired
  Impaired  Total  % of Total
Allowances
  Not-
impaired
  Impaired  Total  % of Total
Allowances
 

Credit cards

  76   240   71   387   14.2   174   365   315   854   31.8 

Total allowance for credit losses on loans

 W732  W1,028  W965  W2,725   100.0 W735  W995  W955  W2,685   100.0
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

  As of December 31, 
  2015  2016  2017 
  (In billions of Won, except percentages) 
  Amount  % of
Total
Allowances
  Amount  % of
Total
Allowances
  Amount  % of
Total
Allowances
 

Corporate

      

Corporate loans

 W1,357   58.5 W1,312   55.7 W1,285   55.6

Public and other

  8   0.4   8   0.3   5   0.2 

Loan to banks

  10   0.4   8   0.3   9   0.4 

Lease financing

  29   1.3   34   1.4   50   2.2 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total corporate

  1,404   60.6   1,362   57.7   1,349   58.4 

Retail

      

Mortgages and home equity

  33   1.4   29   1.2   27   1.2 

Other retail

  206   8.9   267   11.3   331   14.3 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total retail

  239   10.3   296   12.5   358   15.5 

Credit cards

  675   29.1   703   29.8   604   26.1 

Total allowance for credit losses on loans

 W2,318   100.0 W2,361   100.0 W2,311   100.0
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Our total allowance for credit losses on loans decreased byW40 billion, or 1.5%, toW2,685 billion as of December 31, 2019 fromW2,725 billion as of December 31, 2018, primarily due to an increase in the sale and transfer of debt securities as well as an increase in the sale, transfer and charge-offs ofnon-performing loans.

Our total allowance for credit losses on loans 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.

 

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Analysis of Allowance for Credit Losses on Loans

The following tables present an analysis of our credit losses on loans experience for each of the years indicated. The table for 2018 and 2019 has been presented separately due to the adoption of IFRS 9 from January 1, 2018.

 

  2018  2019 
  (In billions of Won, except percentages) 
  12-month
expected

credit
losses
  Lifetime expected credit losses  Total  12-month
expected

credit
losses
  Lifetime expected credit losses  Total 
  Not-impaired  Impaired  Not-impaired  Impaired 

Balance at the beginning of the period

 W731  W1,088  W1,053  W2,872  W732  W1,028  W 965  W2,725 

Stage Transfer

  52   (52        56   14   (70   

Amounts charged against income

  24   160   521   705   2   270   639   911 

Gross charge-offs:

        

Corporate:

        

Corporate loans

  (1     (365  (366        (287  (287

Public and other

        (5  (5        (10  (10

Loan to banks

                        

Lease financing

        (5  (5        (22  (22

Retail:

        

Mortgage and home equity

        (4  (4        (3  (3

Other retail

        (361  (361        (277  (277

Credit cards

        (192  (192        (338  (338
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total gross charge-offs

  (1     (932  (933        (937  (937
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Recoveries:

        

Corporate:

        

Corporate loans

        68   68         50   50 

Public and other

        1   1         2   2 

Loan to banks

                        

Lease financing

        2   2         13   13 

Retail:

        

Mortgage and home equity

                        

Other retail

        130   130         70   70 

Credit cards

        110   110         191   191 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total recoveries

        311   311         326   326 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Other

  (74  (168  12   (230  (71  (321  8   (384
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Business combination

              16   4   24   44 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net charge-offs

  (75  (168  (609  (852  (55  (317  (579  (951
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at the end of the period

 W732  W1,028  W965  W2,725  W 735  W 995  W 955  W2,685 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Ratio of net charge-offs during the period to average loans outstanding during the period

  0.02  0.06  0.21  0.29  0.02  0.10  0.18  0.30
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

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   2015  2016  2017 
   (In billion of Won, except percentages) 

Balance at the beginning of the period

  W2,501  W 2,318  W 2,361 

Amounts charged against income

   1,022   1,103   800 

Gross charge-offs:

    

Corporate:

    

Corporate loans

   (731  (758  (376

Public and other

   (2  (1  (1

Loan to banks

          

Lease financing

   (60  (42  (4

Retail:

    

Mortgage and home equity

         (2

Other retail

   (128  (130  (137

Credit cards

   (520  (462  (540
  

 

 

  

 

 

  

 

 

 

Total gross charge-offs

   (1,441  (1,393  (1,060
  

 

 

  

 

 

  

 

 

 

Recoveries:

    

Corporate:

    

Corporate loans

   88   125   81 

Public and other

          

Loan to banks

          

Lease financing

   1   1   1 

Retail:

    

Mortgage and home equity

   3      1 

Other retail

   24   35   43 

Credit cards

   171   176   185 
  

 

 

  

 

 

  

 

 

 

Total recoveries

   287   337   311 
  

 

 

  

 

 

  

 

 

 

Other

   (51  (4  (101
  

 

 

  

 

 

  

 

 

 

Net charge-offs

   (1,205  (1,060  (850
  

 

 

  

 

 

  

 

 

 

Balance at the end of the period

  W2,318  W 2,361  W 2,311 
  

 

 

  

 

 

  

 

 

 

Ratio of net charge-offs during the period to average loans outstanding during the period

   0.51  0.42  0.32

Loan Charge-offs

Our gross charge-offs increased by 0.4% fromW933 billion in 2018 toW937 billion in 2019, primarily due to an increase in the amount of charge-offs for credit cards in 2019 compared to 2018. Our gross charge-offs decreased by 12.0% fromW1,060 billion in 2017 toW933 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.

In 2019, thecharge-off on restructured loans amounted toW138 billion, of whichW230 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.

 

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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 collectible 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 12 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 Shinhan 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.

 

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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 seven months to one year from initiation to collection depending on the nature of the collateral.

Financial Statement Presentation

Our financial statements generally report as charge-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.”

 

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Book Value and Fair Value

The following tables 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 and 2019 has been presented separately due to the adoption of IFRS 9 from January 1, 2018.

 

   As of
December 31, 2018
   As of
December 31, 2019
 
   Book
Value
   Fair
Value
   Book
Value
   Fair
Value
 
   (In billions of Won) 

Securities at fair value through other comprehensive income

        

Equity securities

  W 636   W 636   W 808   W 808 

Debt securities:

        

Korean treasury and governmental agencies

   7,756    7,756    15,701    15,701 

Debt securities issued by financial institutions

   17,341    17,341    21,527    21,527 

Corporate debt securities

   9,183    9,183    17,177    17,177 

Debt securities issued by foreign government

   1,220    1,220    1,897    1,897 

Mortgage-backed and asset-backed securities

   2,178    2,178    2,271