Business context and reporting period
Shinhan Financial Group Co., Ltd. filed this audited annual report on Form 20-F on April 30, 2019, covering the fiscal year ended December 31, 2018. It is an annual filing, not a standalone fourth-quarter report. The Korean financial group operates banking, credit-card, securities, life-insurance and other businesses, with most assets and revenue generated in Korea. Financial statements use IFRS as issued by the IASB. Amounts below are in Korean won; dollar translations are for convenience.
Key financial results and position
| Metric | FY or year-end 2018 | Comparison |
|---|---|---|
| Interest income | W13,572bn | Up 15.0% from 2017 |
| Net interest income | W8,580bn | Up 9.4% |
| Net fees and commission income | W1,939bn | Up 13.3% |
| Operating income | W4,499bn | Up 17.5% |
| Profit before tax | W4,467bn | Up 17.6% |
| Profit for the year | W3,198bn | Up 8.4% |
| Profit attributable to Group shareholders | W3,157bn | Up from W2,919bn |
| Basic and diluted EPS | W6,579 | Up from W6,118 |
| Total assets | W459,601bn | Up 7.8% |
| Gross loans | W303,070bn | Up 9.2% |
| Deposits | W265,000bn | Up 6.2% |
| Total liabilities / total equity | W422,949bn / W36,652bn | Liabilities up 7.7%; equity up 8.7% |
Margins and efficiency: Net interest margin was 2.14%, versus 2.13% in 2017; net interest spread was 1.91%, down from 1.94%. The cost-to-income ratio improved to 47.51% from 52.39%; the separately defined efficiency ratio improved to 85.36% from 89.04%.
Credit quality and capital: Non-performing loans were W1,090bn, or 0.36% of gross loans, versus 0.39% in 2017. The allowance-to-impaired-loans ratio was 160.58%, versus 128.89%. The Group BIS capital ratio was 14.87%, versus 14.78%; Tier 1 was 13.42% versus 13.32%, while common equity Tier 1 was 12.55% versus 12.88%.
Funding and liquidity: Year-end borrowings were W29,819bn and debt securities issued W63,228bn. Customer deposits remained the principal funding source. Shinhan Bank’s loan-to-deposit ratio was 99.2%, close to the 100% limit. For December 2018, its liquidity coverage ratio was 97.68% (the stated minimum rose to 100% on January 1, 2019), foreign-currency liquidity coverage ratio was 117.71%, and net stable funding ratio was 112.57%.
Cash flow: Net cash used in operating activities was W6,320bn; investing activities used W5,513bn; financing activities provided W13,807bn. Cash and cash equivalents increased W1,943bn to W8,180bn. Operating cash outflow occurred alongside W27,547bn of cash outflow from loans at amortized cost; the filing does not present a single, simple free-cash-flow measure.
Material changes versus the prior comparable period
- Net interest income rose as loan volumes and lending yields increased, but interest expense grew faster in percentage terms, up 26.2%, as deposit and debt funding costs rose. The overall margin edged up only slightly.
- Loan growth was broad: retail and corporate loan averages increased 9.1% and 7.8%, respectively. Year-end gross loans rose 9.2%.
- Credit-card segment operating income fell 33.1% to W873bn. Management cited higher credit-loss provisions and pressure from lower regulated merchant fees; IFRS 15 also changed the presentation of customer rewards and fees.
- Group profit growth was slower than operating-income growth, partly reflecting income tax expense rising to W1,268bn from W848bn. The effective tax rate increased to 28.4% from 22.3%.
- Total assets and liabilities grew, while debt securities issued rose 23.2% to W63,228bn. The Group also issued W1,108bn of hybrid bonds and acquired W156bn of treasury shares.
- Credit measures improved overall, although the allowance for loan losses increased to W2,725bn from W2,311bn. Gross charge-offs declined from W1,060bn to W913bn.
Outlook, management commentary, risks and unusual items
Management described a subdued outlook for Korea in 2019, citing slower domestic consumption and investment, employment weakness, household debt, global trade uncertainty and a possible slowdown in exports. The report provides no numerical Group earnings or revenue guidance. Management highlighted priorities including balanced growth, digital transformation, global expansion, non-bank diversification and stronger risk management.
- Accounting comparability: IFRS 9 and IFRS 15 were adopted from January 1, 2018 without restating comparative periods. IFRS 9 changed classification and introduced expected-credit-loss provisioning; the opening allowance for loans increased from W2,311bn to W2,872bn. The filing reports a W344bn IFRS 9 opening carrying-value difference, while the combined IFRS 9/15 transition reduced opening equity by W532bn. Comparisons with 2017 therefore require care.
- Liquidity and credit: Deposit competition, loan growth and the near-limit loan-to-deposit ratio warrant monitoring. Key exposures include SMEs, real estate and leasing, construction, household borrowing and consumer credit; a weaker economy, higher rates or falling property values could increase losses.
- Competition and regulation: Digital banks and technology payment providers, regulated reductions in credit-card merchant fees, consumer-protection rules and tighter housing-loan measures could constrain margins or growth. Further regulatory changes may affect capital, liquidity and lending.
- Market and operating risks: Interest-rate, foreign-exchange, securities-price and counterparty movements may affect earnings and capital. The filing also identifies cyberattacks, data protection, operational controls, reputation and Korean geopolitical tensions as risks.
- Acquisitions and financing: The Group completed its acquisition of a 59.15% stake in Orange Life Insurance on February 1, 2019, after year-end. It also agreed to acquire 60% of Asia Trust for W193.4bn, subject to regulatory approval. A W750bn convertible preferred-share issuance was approved in February 2019 and could dilute common shareholders.
- Legal matters: Pending lawsuits had aggregate claims of W104bn at year-end, with W26bn provisioned. Shinhan Bank and its parent CEO were among parties indicted in a pending case concerning alleged hiring irregularities; management said outcomes were difficult to predict.
- Other notable transition: IFRS 16 was expected to take effect in 2019; the Group estimated initial right-of-use assets and lease liabilities would increase by W582bn and W537bn, respectively.
Most important facts for an investor to verify
- Reconcile the IFRS 9/15 transition effects, including the opening allowance and equity adjustments, before comparing 2018 with 2017.
- Confirm actual post-year-end liquidity ratios against the 2019 regulatory minimums, particularly Shinhan Bank’s 97.68% December 2018 LCR.
- Assess whether loan growth and negative operating cash flow are sustainable, and whether credit losses or provisioning are beginning to rise.
- Review the terms, funding, integration progress and shareholder dilution implications of Orange Life, Asia Trust and the convertible preferred-share issuance.
- Track the hiring-related proceedings, the W104bn legal claims and any changes to provisions or regulatory actions.