Sustainability meets Reliability Shinhan Financial Group Annual Report 2008 C o n t e n t s 001 Profile 002 Stock Performance 003 Financial Highlights 004 Chairman’s Message 006 CEO’s Message 010 BOD and Management (Shinhan Financial Group) 012 BOD and Management (Subsidiaries) 014 Management Principles – “ABCD Principles” 017 Business Portfolio Inspiring confidence 020 Vision and Strategy 022 Capital Management 023 Corporate Governance 024 Risk Management Achieving balance 028 Synergy 030 Retail Banking 032 Corporate Banking 034 Credit Card 036 Wealth Management 038 Brokerage 040 Insurance 042 Investment Banking 043 Asset Management Sustaining growth 046 Corporate Social Responsibilities 048 Ethical Management 049 HR Management 050 Customer Satisfaction Financial section 052 Management’s Discussion & Analysis 076 Independent Auditors’ Report 078 Consolidated Financial Statements 087 Notes to Consolidated Financial Statements 170 Directory 172 Organization Chart 173 Contact Us P r o f i l e Incorporated on September 1, 2001, Shinhan Financial Group (SFG) was the first privately established financial holding company in Korea. Since its inception, SFG has developed and introduced a wide range of financial products and services in Korea, and aims to deliver comprehensive financial solutions to clients through a convenient one-portal network. SFG currently has 11 subsidiaries offering a wide range of financial products and services, including retail banking, corporate banking, private banking, credit card, asset management, brokerage and insurance services. SFG currently serves approximately 14.8 million active customers through approximately 17,200 employees at more than 1,430 network branches. SFG has experienced substantial growth through several mergers and acquisitions. Most notably, the acquisition of Chohung Bank in Sept. 2003 and LG Card in March 2007 have enabled us to expand our nationwide organization of branch networks and broaden our customer base. In addition, SFG has significantly expanded its non-banking business capacity and achieved a balanced business portfolio. H i s t o r y 2001 2002 2006 2007 Establishment of Launching of GMSH Integrated Merger of Shinhan Financial Shinhan Securities, Shinhan Bank Shinhan Card & LG Card Group formerly a subsidiary Shinhan Bank, LG Card became SFG was established of SFG and an innovator an affiliate of SFG and in September and Good Morning in the industry, and soon thereafter merged immediately followed Securities, Chohung Bank, a long- with Shinhan Card on by a strategic alliance merged to provide standing industry October 1st to become with BNP Paribas advanced professional leader, merged to the number 1 card Group financial services become one company in Asia 1897 1982 Establishment of Establishment of Hanseong Bank Shinhan Bank Established Hanseong Shinhan Bank was Bank, which later formed in 1982 with became Chohung Bank seed money from through the merger of the Korean Japanese Hanseong and Dongil community Banks in 1943 Stock Performance Number of Shares Issued Share Ownership 2008 ( As of March 2009 ) Type of Stock No. of Shares ( % ) Foreign Registered common stock 474,199,587 Domestic Registered redeemable preferred stock 47,690,251 Registered convertible redeemable preferred stock 14,721,000 58.9 Total 536,610,838 58.1 51.2 48.8 41.9 Credit Ratings 41.1 Shinhan Bank Moody’s S&P Fitch Long Term A2 A- A Short Term P1 A2 F1 2006 2007 2008 Major Shareholders ( As of Dec. 2008 ) ( % ) BNP Paribas Group 8.50 Korea National Pension Fund 6.61 Citibank, N.A. (ADR Dept.) 4.73 Mirae Asset Management 2.72 SFG Employee Stock Ownership Association 1.63 NTC-GOV SPORE. 1.54 Mizuho 1.50 Samsung Life Insurance 1.41 Daekyo 1.32 Samsung Investment Trust Management 1.27 Norges Bank 1.05 Others 67.71 SFG Stock Price Performance ( Market Cap: US$ 11.7 billion, as of March 2009 ) ( KRW ) 60,000 Share price of SFG KOSPI Index 50,000 Banking Industry Index 40,000 30,000 20,000 10,000 0 Sep.01 Dec.02 Dec.03 Dec.04 Dec.05 Dec.06 Dec.07 Dec.08 Mar.09 Shinhan Financial Group 002 003 Annual Report 2008 Financial Highlights FY2008 FY2007 Chg Amt Chg % For the Year (KRW Billion) Operating Revenues 59,775.6 26,639.5 33,136.1 124.4% Operating Income Before Provisioning 4,018.2 4,603.9 -585.8 -12.7% Net Income 2,018.6 2,396.4 -377.8 -15.8% At Year End (KRW Trillion) Total Assets 321.3 276.7 44.6 16.1% Total Loans 166.5 149.3 17.2 11.5% Total Deposits 131.4 119.2 12.2 10.3% Total Shareholders' Equity 17.6 18.0 -0.4 -2.1% Key Financial Ratios BIS Capital Adequancy Ratio - Group (*) 10.2% 9.8% 0.4%p BIS Capital Adequancy Ratio - Shinhan Bank 13.4% 12.1% 1.3%p (Tier I Ratio) 9.3% 7.6% 1.7%p NPL (Substandard and Below Loans) Ratio 1.1% 1.0% 0.1%p NPL Coverage Ratio 172% 192% -20.0%p ROA 0.8% 1.2% -0.4%p ROE 12.4% 16.8% -4.4%p Group NIM 3.5% 3.9% -0.4%p Cost-to-Income Ratio 49.3% 46.6% 2.7%p Cost-to-Income Ratio excluding goodwill amortization 43.1% 42.2% 0.9%p BPS (KRW) 35,312 35,141 171 0.5% EPS (KRW) 4,384 5,404 -1,020 -18.9% (*) Goodwill excluded according to BIS I standard (Reduction of around 2%p) Total Assets Net Income ROA ROE ( KRW Billion ) ( KRW Billion ) ( % ) ( % ) 321,263 2,396.4 1.2 19.2 1.1 2,018.6 0.8 16.8 276,666 12.4 217,582 1,832.7 2006 2007 2008 2006 2007 2008 2006 2007 2008 2006 2007 2008 Shinhan Financial Group 002 003 Annual Report 2008 Chairman’s Message Dear Shareholders and Customers, I am pleased to take this opportunity to express my sincere appreciation for the unwavering Even in such a support and encouragement you have shown to Shinhan Financial Group. “difficult business Financial deleveraging ignited by insolvency in U.S. subprime mortgage vehicles has led to a environment, worldwide financial crisis in 2008, which in turn led to a sluggish global economy, resulting in increased difficulties for all but, in particular the export-oriented economies such as Korea. As Shinhan Financial such, Korean financial institutions are witnessing a significant deterioration of asset quality owing Group has made to a rise in delinquencies and insufficient foreign currency liquidity as a consequence of a surge in the won-dollar exchange rate. In such uncertain times, the key competency is risk management. meaningful achievements in tune I am pleased to share with you the news that even in such a difficult business environment, with its reputation as Shinhan Financial Group has made meaningful achievements in tune with its reputation as the leading financial group of Korea. the leading financial group of Korea. Last year, Shinhan Financial Group took another step towards becoming a world-leading financial group by establishing a future growth foundation and strengthening its business lines. Shinhan Financial Group 004 ” 005 Annual Report 2008 Based on the long-term strategic relationship and cooperation with the BNP Paribas Group, we have successfully carried out the integration of our two asset management companies, thereby establishing a firm presence and leadership in the asset management industry in Korea. In addition, thanks to the sound performance made in the non-banking sectors, such as credit card, securities, and insurance, Shinhan Financial Group was able to establish the most balanced domestic business portfolio. In recognition of our progress made at home and abroad, Shinhan Financial Group became the first Korean financial group to be chosen by Fortune Magazine as one of the top 500 global companies. SFG further strengthened its reputation as Korea’s leading financial institution by posting a net income of more than KRW 2 trillion for two consecutive years, based on its efforts to strengthen internal competencies and generate new synergistic effects. Committed to continuing innovation and achievement, Shinhan Financial Group will not become complacent with its recent achievements. It is expected that the the Korean economy will continue to suffer from sluggish exports as well as volatile foreign exchange and stock markets. Though the forcasts of market participants may differ in actual figures, most agree that a considerable amount of time needs to pass before a meaningful turnaround can be expected due to these factors, in addition to sluggish domestic consumption. Shinhan Financial Group has established a separate strategy to weather the current storm and overcome the crisis, faithfully executing this strategy since the end of 2008. The group also established a system that enables active response to sharp changes in the market. All business lines of the group are strengthening their basic competencies and building distinctive development models, thereby developing pipelines for new growth. I believe these efforts by Shinhan Financial Group will allow the group to overcome the current crisis and be prepared to seize opportunities for new growth following the crisis. Through committed performance of its responsibilities as the best financial group in Korea, we seek to contribute to the sustainable development of the national economy and financial industry by employing new methods suitable for the new era. We will continue utilizing our strength and efforts to become a more reliable and true financial partner by taking steps forward towards the future with the mindset of “Back to Basics.” I believe that these strenuous efforts will lead to the realization of our vision of becoming a world-class financial group. I ask you for your continued support and encouragement and wish you all and your family, good health and happiness.