Business context and reporting period
Shinhan Financial Group Co., Ltd. filed this audited Form 20-F on April 30, 2018, for the fiscal year ended December 31, 2017. The filing reports the full year, not standalone fourth-quarter results. Financial statements are consolidated, prepared under IFRS as issued by the IASB, and denominated primarily in Korean won (KRW). KPMG Samjong issued unqualified audit opinions on the financial statements and internal control over financial reporting.
Shinhan is a diversified Korean financial group spanning banking, credit cards, securities, life insurance and other financial services. Most assets and revenue are generated in Korea. The company describes itself as Korea’s second-largest financial services provider by assets and largest credit-card business by 2017 purchase volume.
Key financial metrics
Amounts below are KRW billions unless stated otherwise; year-over-year comparisons are 2017 versus 2016.
| Metric | 2017 | 2016 | Change or context |
|---|---|---|---|
| Interest income | 11,799 | 11,236 | +5.0% |
| Interest expense | (3,956) | (4,031) | −1.9% |
| Net interest income | 7,843 | 7,205 | +8.9% |
| Net fees and commission income | 1,711 | 1,566 | +9.3% |
| Operating income | 3,829 | 3,109 | +23.2% |
| Profit before tax | 3,796 | 3,170 | +19.7% |
| Profit for the year | 2,948 | 2,825 | +4.4% |
| Profit attributable to Group shareholders | 2,918 | 2,775 | +5.2% |
| Basic and diluted EPS | KRW 6,116 | KRW 5,736 | +6.6% |
| Net interest margin | 2.13% | 2.05% in operating analysis | Selected-data table reports 2.06% for 2016 |
| Cost-to-income ratio | 52.39% | 51.34% | Higher ratio indicates weaker efficiency |
| General and administrative expenses | 4,811 | 4,509 | +6.7% |
Net trading income improved to KRW 963 billion from KRW 370 billion. This was partly offset by a larger loss on financial instruments designated at fair value through profit or loss: KRW 1,060 billion versus KRW 502 billion.
Balance sheet, funding, capital and cash flow
| Metric at year-end, except cash flows | 2017 | 2016 | Change or context |
|---|---|---|---|
| Total assets | 426,306 | 395,680 | +7.7% |
| Net loans | 275,566 | 259,011 | +6.4% |
| Deposits | 249,419 | 235,138 | +6.1% |
| Borrowings | 27,587 | 25,294 | +9.1% |
| Debt securities issued | 51,341 | 44,327 | +15.8% |
| Total liabilities | 392,603 | 363,935 | +7.9% |
| Total equity | 33,703 | 31,745 | +6.2% |
| Operating cash flow | 1,021 | 3,797 | Down substantially |
| Investing cash flow | (10,704) | (7,594) | Greater net outflow |
| Financing cash flow | 10,332 | 4,845 | Higher inflow, including debt funding |
| Cash and cash equivalents, year-end | 6,237 | 5,633 | Up KRW 604 billion |
Regulatory capital remained above minimums: Group BIS capital ratio was 14.78% (15.00% in 2016), Tier 1 ratio 13.32% (13.19%), and common equity Tier 1 ratio 12.88% (12.75%). Shinhan Bank’s December average liquidity coverage ratio was 93.75%, above the 90% 2017 minimum but below the 95% requirement effective January 2018. Its foreign-currency liquidity coverage ratio was 103.75%. Shinhan Bank’s loan-to-deposit ratio was 99.3%, against a 100% limit.
Common dividends were KRW 1,450 per share, unchanged from 2016; the reported payout ratio was 23.92%, versus 25.62%. Group-wide capital adequacy should be distinguished from the parent holding company’s standalone liquidity and ability to receive subsidiary dividends.
Asset quality and exposures
- Total gross loans grew 6.3% to KRW 277,489 billion. Non-performing loans fell to KRW 1,075 billion, or 0.39% of loans, from KRW 1,174 billion, or 0.45%.
- Impaired loans were KRW 1,793 billion, or 0.65% of loans, compared with KRW 1,804 billion, or 0.69%. Allowances were KRW 2,311 billion, equal to 0.83% of loans and 128.89% of impaired loans.
- Impairment losses on financial assets declined 15.1% to KRW 1,015 billion; loan impairment losses fell 27.4% to KRW 801 billion. Net charge-offs were KRW 851 billion, or 0.32% of average loans, versus KRW 1,060 billion, or 0.42%.
- Retail NPL ratio rose to 0.31% from 0.24%, while Shinhan Card’s delinquency ratio improved to 1.49% from 1.68%. SME lending was KRW 78,556 billion, 28.3% of the loan portfolio; real estate/leasing and construction exposure remained notable.
- Credit commitments and guarantees totaled KRW 97,647 billion. Pending lawsuits had aggregate claims of KRW 124 billion; a KRW 33 billion provision was recorded.
Material changes versus the prior comparable period
- Earnings improved: operating income rose 23.2%, while shareholder-attributable profit increased 5.2%. Net interest income benefited from loan growth and lower deposit funding costs; the Bank of Korea raised its base rate to 1.50% in November 2017 from 1.25%.
- Operating cash flow dropped to KRW 1,021 billion from KRW 3,797 billion, while investing outflows increased. Financing inflows rose, alongside growth in borrowings and issued debt securities.
- Credit-card loss estimates changed methodology in 2017, from a roll-rate model to an internal model approach. The filing says this reduced loan-loss allowances by KRW 129 billion and unused-credit-line provisions by KRW 317 billion; it contributed to lower reported credit-card impairment.
- Net trading income improved, but fair-value losses increased. General and administrative costs also rose, partly due to retirement allowances paid to early retirees at Shinhan Bank and Shinhan Card.
- Income tax expense increased to KRW 848 billion from KRW 346 billion; the effective tax rate rose to 22.3% from 10.9%. The 2016 comparison included recognition of deferred tax assets relating to expired unused tax losses, a significant benefit that did not recur at the same level.
- Other comprehensive loss widened to KRW 429 billion, including KRW 194 billion of foreign-currency translation losses, compared with a KRW 12 billion gain in 2016.
Outlook, management commentary, risks and unusual items
Management expected moderate but potentially sluggish Korean growth in 2018, citing household-debt controls, lower infrastructure budgets and uncertainty in global trade, interest rates and foreign exchange. It anticipated rising competition from internet-only banks and fintech firms, continued pressure on credit-card merchant fees and lending rates, and ongoing regulatory limits on household lending. Its stated priorities include digital transformation, global growth, integrated “One Shinhan” services, risk management and cost discipline. These are management expectations, not quantified earnings guidance; the filing provides no clear numerical 2018 earnings or revenue forecast.
- Macro and credit: Korea and the Group are exposed to household debt, interest-rate increases, property-price declines, SME and corporate distress, and Korean/global economic or geopolitical shocks.
- Margins and competition: Deposit pricing, loan-rate competition, fintech, internet-only banks and fee regulation could constrain margins and revenue. Rising rates may help loan yields but also raise borrower stress and credit losses.
- Liquidity and regulation: Deposit outflows, funding-cost increases, credit-rating downgrades and phased Basel III liquidity/capital requirements could constrain operations, dividends or growth. The reported bank LCR was below the 2018 regulatory threshold at the December 2017 average.
- Market, insurance and technology risks: Trading and valuation volatility, counterparty exposures, low-rate insurance guarantees and IFRS 17 (expected in 2021) could affect earnings or capital. Cyber incidents, data protection, operational failures, litigation and regulatory sanctions remain material risks.
- Unusual accounting and contingent items: The card-loss model change materially reduced estimates of provisions. The 2016 deferred-tax benefit makes the year-over-year tax comparison less representative. The Group also reported significant Level 3 fair-value exposures and off-balance-sheet commitments; outcomes on pending litigation remain uncertain.
For 2018, the filing describes adoption of IFRS 9 as likely to increase fair-value-through-profit-or-loss assets and earnings volatility, and to recognize credit losses earlier under an expected-loss model. Management did not expect IFRS 15 to have a material impact.
Important facts an investor should verify
- Reconcile reported 2017 earnings and cash flows to the audited statements, particularly the sharp operating-cash-flow decline and the contribution of financing inflows.
- Review the card portfolio’s 2017 model change, including its effect on allowances and whether subsequent credit performance supports the revised estimates.
- Track Shinhan Bank’s LCR against the 95% 2018 requirement and its 99.3% loan-to-deposit ratio against the 100% ceiling.
- Assess the quality and sustainability of loan growth, especially rising retail NPLs, SME exposure and property-related lending, alongside coverage and charge-off trends.
- Separate recurring operating performance from fair-value trading results, early-retirement costs and the unusually low 2016 effective tax rate.
- Check the KRW 124 billion of pending legal claims, KRW 33 billion provision, and KRW 97,647 billion of commitments and guarantees for developments or potential calls.
- Confirm the effect of IFRS 9 adoption, subsequent capital and liquidity disclosures, and dividend capacity at the parent holding company.