SHINHAN FINANCIAL GROUP CO LTD annual report, Q4 FY2021

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Business context and reporting period

Shinhan Financial Group Co., Ltd. filed this annual report on Form 20-F on April 20, 2022, covering the fiscal year ended December 31, 2021. The filing is an annual report, not a standalone 2021 fourth-quarter report; separate Q4 results are not clearly provided. The Group is a Korea-based financial holding company with banking, credit card, securities, insurance and other businesses. Financial statements are consolidated and prepared under IFRS as issued by the IASB, with Korean won as the reporting currency.

Key financial metrics

  • Profitability: Operating income was W5.952 trillion, up 20.7% from 2020. Net income was W4.113 trillion, up 17.6%; net income attributable to the Group’s equity holders was W4.019 trillion, up from W3.415 trillion. Basic and diluted EPS was W7,308, versus W6,654.
  • Income and margins: Net interest income increased 9.0% to W10.769 trillion; net fees and commission income rose 12.3% to W2.675 trillion. Net interest margin was 1.94%, compared with 1.92%; net interest spread was 1.80%, compared with 1.71%. The cost-to-income ratio was 45.25%, nearly unchanged from 45.20%.
  • Balance sheet and lending: Total assets were W648.152 trillion, up 7.1%. Gross loans were W393.474 trillion, up 9.1%, including corporate loans of W208.468 trillion and retail loans of W159.006 trillion. Deposits were W364.897 trillion, up 11.8%.
  • Asset quality and credit costs: Allowance for credit losses on loans was W3.167 trillion, or 0.80% of loans. Impaired loans were W1.864 trillion, or 0.47% of loans; allowance coverage of impaired loans was 169.90%. Non-performing loans were W1.826 trillion, or 0.46% of loans. Provision for credit loss allowance on financial assets declined to W975 billion from W1.382 trillion.
  • Cash flow: The consolidated cash-flow statement reported net cash inflow from operating activities of W11.080 trillion, compared with an outflow of W4.409 trillion in 2020. For a financial group, these cash flows can be substantially affected by movements in deposits and lending.
  • Debt and capital: At year-end, borrowings were W43.167 trillion and debt securities issued were W80.149 trillion. The Group’s Basel III total capital ratio was 16.20%, Tier 1 ratio 14.94%, and common equity Tier 1 ratio 13.10%, all higher than the stated 8% minimum total capital requirement.
  • Liquidity: Shinhan Bank’s December average liquidity coverage ratio was 89.63%, foreign-currency liquidity coverage ratio 110.84%, and net stable funding ratio 110.03%. The filing states that temporary regulatory minimums through June 2022 were 85% for the liquidity coverage ratio and 70% for the foreign-currency ratio; the stated minimum for NSFR is 100%.
  • Shareholder returns: The filing reports 2021 cash dividends of W1,960 per common share and a dividend payout ratio of 28.28%. The disclosed dividend amounts and timing should be checked against the relevant shareholder approvals and payment records.

Material changes versus 2020

  • Profit attributable to equity holders rose 17.7%, while total assets grew 7.1% and gross loans grew 9.1%.
  • Net interest income increased 9.0% as funding costs fell and lending balances expanded. Interest income was nearly flat, while total interest expense fell 19.1%.
  • Credit-loss provisions declined 29.5% from 2020’s elevated level. The Group said the 2020 increase reflected forward-looking COVID-19 assumptions and additional individual borrower assessments.
  • Other comprehensive loss widened to W618 billion from W174 billion, primarily because of losses on financial assets measured at fair value through other comprehensive income, partly offset by foreign-currency translation gains.
  • Shinhan Life Insurance absorbed Orange Life Insurance in a July 2021 merger. The Group also acquired the remaining 35% interest in Shinhan Asset Management in January 2021.

Outlook, commentary and risks

  • Management described a moderate recovery outlook for Korea in 2022, supported by exports, investment and gradual consumption recovery, but did not provide formal numerical earnings guidance. The filing highlights uncertainty from COVID-19, inflation, interest-rate increases, the Russia-Ukraine conflict, China’s slowdown, household debt and volatility in real estate and financial markets.
  • The Group recorded an additional W187.9 billion of COVID-19-related provisions in the fourth quarter of 2021. The filing says additional provisions could be significant, and government loan-rescheduling and payment-deferral support for eligible small businesses and SMEs was expected to continue through September 30, 2022.
  • Interest rates present both potential benefits and risks: higher rates may support bank margins, but could raise borrower debt burdens, weaken asset quality, affect securities values and increase funding costs. The Bank of Korea’s base rate reached 1.00% in November 2021 and was raised to 1.25% in January 2022 and 1.50% in April 2022, after the fiscal year.
  • Sales-related disputes and regulatory proceedings remain material. The filing describes Lime Asset, Discovery Asset and German Heritage DLS products, investor compensation or prepayments, and related provisions. The Financial Supervisory Service’s recommended sanctions on Shinhan Bank and Shinhan Financial Group concerning Lime Asset were still subject to further regulatory deliberation. For 2021, Shinhan Bank and Shinhan Investment recorded W220.8 billion and W256.3 billion, respectively, in credit-loss allowances associated with financial products including these matters; the filing warns additional provisions may be required. Shinhan Investment also reported W229.1 billion of provisions for potential compensation related to German Heritage DLS products.
  • IFRS 17 was expected to take effect in 2023 and could increase measured insurance liabilities and reduce risk-based capital. The Group noted that the impact remained uncertain.
  • Other disclosed risks include competition from fintech and internet-only banks, lower regulated credit-card merchant fees, SME and real-estate exposure, cyber and operational risks, and regulatory capital and liquidity requirements. The independent auditor issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.

Important facts for investors to verify

  • Confirm the annual figures against the audited IFRS statements and distinguish them from any standalone Q4 results, which this filing text does not clearly provide.
  • Track final regulatory decisions, investor compensation, underlying-asset recoveries and any additional provisions related to Lime Asset, Discovery Asset and German Heritage DLS products.
  • Assess credit quality after COVID-era repayment deferrals and support programs expire, particularly across SMEs, retail borrowers and real-estate-related exposures.
  • Verify Shinhan Bank’s liquidity ratios against the applicable regulatory requirements as temporary relief expires and requirements normalize.
  • Monitor the Group’s capital and dividend capacity, including potential IFRS 17 impacts on insurance liabilities and capital ratios.
  • Consider currency effects when comparing won results with U.S.-dollar amounts; the filing cautions that exchange-rate volatility makes translated dollar amounts an imperfect reflection of results.