SHINHAN FINANCIAL GROUP ANNUAL REPORT 2010 Delivering Tranquility Share Information Number of Shares Issued As of December 31, 2010 Type of Stock No. of Shares Registered common stock 474,199,587 Registered redeemable preferred stock 28,990,000 Registered convertible redeemable preferred stock 14,721,000 Total Assets 517,910,587 Stock Performance (Common Stock) 2010 2009 Average Daily Trading Volume 1.8 million shares 3.2 million shares Share Price high ₩ 53,600 ₩ 49,550 Share Price Low ₩ 39,250 ₩ 20,500 Share Price (Year End) ₩ 52,900 ₩ 43,200 Market Capitalization (Year End) ₩ 25.1 trillion ₩ 20.5 trillion Weighting in the KOSPI (Year End) 2.2% 2.3% Dividend Per Share ₩ 750 ₩ 400 Dividend Paid ₩ 356 billion ₩ 190 billion Share Ownership (%) Shareholders holding ownership of more than 1% As of December 31, 2010 Domestic Name of Shareholder % Owned BNP Paribas Group 6.35% Foreign National Pension Service 6.11% CITIBANK.N.A (ADR DEPT) 4.08% SFG Employee Stock 3.59% Ownership Association 60.2 Saudi Arabian Monetary Agency 2.80% 57.6 The Lazard Fund Inc. 2.53% 51.2 48.8 Mirae Asset Investments Co., Ltd. 1.72% 42.4 The Government of Singapore 1.35% Mizuho 1.26% 39.8 Samsung Life Insurance 1.14% Daekyo Co., Ltd. 1.07% Others 68.00% Total 100.00% 2008 2009 2010 Financial Highlights 2010 2009 change amount % change For the Year (KRW in billions) Operating Income Before Provisioning 4,342.5 3,741.9 600.6 16.1% Net Income 2,383.9 1,305.3 1,078.6 82.6% As of Year End (KRW in trillions) Total Assets 266.0 255.0 11.0 4.3% Total Loans 176.9 167.0 9.9 6.0% Total Deposits 153.1 147.7 5.3 3.6% Total Stockholders’ Equity 22.7 20.7 2.0 9.6% Key Financial Ratios ROA 0.9% 0.5% 0.4%p ROE 11.7% 6.8% 4.9%p Group Net Interet Margin 3.5% 3.0% 0.5%p Cost-to-Income Ratio 49.3% 51.5% -2.2%p Cost-to-Income Ratio excluding Goodwill Amortization 42.7% 46.0% -3.3%p NPL (Substandard and Below Loans) Ratio 1.4% 1.3% 0.1%p NPL Coverage Ratio 137% 157% -20.0%p Group BIS Ratio 12.8% 12.6% 0.2%p Shinhan Bank BIS Ratio 15.9% 15.1% 0.8%p (Tier 1 Ratio) 13.2% 11.6% 1.6%p BPS (KRW) 40,550 36,256 4,294 11.8% EPS (KRW) 4,461 2,324 2,137 92.0% Credit Ratings S&P Moody’s Fitch JCR Shinhan Bank Long Term A- A1 A - Short Term A2 P1 F1 - Shinhan Card Long Term BBB+ - A- A Short Term A2 - F2 - Total Assets Net Income ROA ROE (KRW in trillions) (KRW in billions) (%) (%) 0.9 266 264 12.4 255 2,384 0.8 11.7 2,019 0.5 6.8 1,305 2008 2009 2010 2008 2009 2010 2008 2009 2010 2008 2009 2010 Contents 01 Prologue 10 Chairman's Message 14 Board of Directors & Management 16 Organization 18 Vision & Strategy 22 Corporate Governance 24 Risk Management 26 Shinhan Way 28 Business Portfolio Review of Operations 30 Synergy 32 Retail Banking 34 Corporate Banking 36 Credit Card 38 Wealth Management 40 Brokerage 42 Insurance 44 Investment Banking 46 Asset Management 48 Special Feature : A Look Back on the 10th Anniversary of SFG > Social Stewardship Financial Highlights here 52 Corporate Social Responsibility 54 Ethical Management Financial Section 58 Management's Discussion and Analysis 80 Independent Auditor's Report 82 Consolidated Financial Statements 88 Notes to Financial Statements 174 Global Networks 176 Investor Information Delivering Tranquility A value of a company is enhanced when the company is able to deliver customers and shareholders greater satisfaction. That is why Shinhan Financial Group has developed a comprehensive lineup of financial services to meet diversified needs of customers and shareholders. But in 2010, we have learned that beside these products and strong financial performance, our customers and shareholders deserves something more fundamental, that is, a peace of mind and a state of tranquility built upon trust and faith. We will do our best to comfort our customers and shareholders. Shinhan Financial Group will remain steadfast and committed. pg.02 To Reassure Customers We understand why customers choose Shinhan Financial Group as their financial institution. They are in need of a place where they can place their wealth, a safe haven where they can put their minds at ease knowing that it is safe and secured. Aware of the trust and loyalty which Shinhan Financial Group has received, we want to recompense our customers with the very best of products and services. There is nothing second to the happiness of our customers. pg.03 To Earn Shareholder & Investor Trust The track of a pioneer serves as a milestone to those who follow. Our steps, as the top financial brand, will set the future paradigm, and that is why we take the voice of our shareholders importantly, and share our thoughts and opinions to point for a better direction in our journey. Shinhan Financial Group is committed to realizing balanced growth and harmonious operation, for such is the cornerstone for fulfilling obligations toward shareholders and earning trust from them. pg.04 pg.05 pg.06 To Prepare for New Challenges Nature brings about relentless change even in places unseen, like the sprouts that push up through frozen soil. Shinhan Financial Group is also changing and innovating constantly to find new growth engines that can pave the way for breakthroughs. New future lies within the quiet changes taking place at Shinhan Financial Group, like tiny sprouts filled with life-generating vitality. pg.07 To Help Shape a Happier, Better World The true meaning of life can be learned by sharing with neighbors. Likewise, the true value of a corporation is found among its society. Shinhan Financial Group has revamped the CSR program to fulfill the role and obligations of a corporate citizen, thereby helping to make our society a happier and better place for all. We aspire to be a shining beacon for our society. pg.08 pg.09 CHAIRMAN'S MESSAGE Shinhan Financial Group will forge ahead with a new resolve, never forgetting that the interests of customers and shareholders are fundamental to its own sustained growth. pg.10 To Our Customers and Shareholders: It is an honor for me to represent Shinhan Financial Group to our customers and shareholders on our annual reports for 2010. I assumed the position of chairman in the wake of the greatest crisis for Shinhan Financial Group following the events that unfolded in the autumn of 2010 to right what has been wronged and restore the values of our organization that has enabled its spectacular growth for the past 29 years. Shinhan has built its reputation as a clean and fair financial institution which respects and serves its customers since founding. Last year’s incidents have eroded some of the trust and loyalty of our customers, and I am fully aware of such a loss which would be swiftly dealt with under new management and board directors. I will personally oversee implementations measures for modernizing our governance structure befitting its stature as Korea’s premier financial institution, and at the end of this process, we hope to regain your trust. 2.38 trillion Shinhan Financial Group will forge ahead with a new resolve, never forgetting that the interests of customers and shareholders are We posted more than KRW 2.38 trillion in net fundamental to its own sustained growth. profit, delivering the best performance in the industry and exceeding Our 2010 Business Results our peers for three Looking back, 2010 was a year where the global economy was on a consecutive years. recovery track, though the pace of recovery varied by region and country. Emerging economies, as a whole, experienced a stronger pulse and velocity compared to the advanced nations. In fact, the issue for some emerging economies was deciding the right timing to exercise exit strategies, may that be discontinuing government subsidies or raising interest rate, most of which are designed to reduce excessive liquidity that leads to an inflationary pressure. Korea was one of those emerging countries on the better end. Specifically, the exports sector remained robust and led the recovery. Concerns regarding inflation were escalating within Monetary Board members of the Bank of Korea, and they decided to raise interest rate in late 2010. While there were some constraints, such as burden remaining from the restructuring of distressed companies, the business environment in general was favorable to our operations. As a result, in 2010, we posted more than KRW 2.38 trillion in net profit, delivering the best performance in the industry and exceeding our peers for three consecutive years. The earnings pg.11 recovery from banking operations was the primary contributor, as they recorded more than KRW 1.66 trillion in net profit, mainly due to solid growth in corporate and household loans with improved interest rate environment for loan pricing. Adding to this, the non-banking business units continued to deliver sound performance for two consecutive years, recording in aggregate KRW 1.54 trillion of net profit. Based on the reading of the economy (on its recovery mode), our Group took the lead in increasing loans one step ahead of others. Specifically, during the second half of 2010, loans in Korean Won grew by 3.8% totaling 5% growth for 2010, compared to the 1.5% in 2009.