Edgar Filing: SHINHAN FINANCIAL GROUP CO LTD

FORM 20-F

As filed with the Securities and Exchange Commission on April 30, 2014

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 20-F

(Mark One)

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2013

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report

Commission File Number: 001-31798

Shinhan Financial Group Co., Ltd.

(Exact name of registrant as specified in its charter)

N/A

The Republic of Korea

(Translation of registrant’s

name into English)

(Jurisdiction of incorporation

or organization)

20, Sejong-Daero 9-Gil, Jung-Gu

Seoul 100-724, Korea

(Address of principal executive offices)

Sung Hun Yu, +822 6360 3071(T), irshy@shinhan.com, +822 6360 3082 (F), 20, Sejong-Daero 9-Gil, Jung-Gu, Seoul 100-724, Korea

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:


Title of Each Class:				Name of Each Exchange on Which Registered:
Common stock, par value Won 5,000 per share				New York Stock Exchange*
American depositary shares				New York Stock Exchange

*	Not for trading, but only in connection with the listing of American depositary shares on the New York Stock Exchange, pursuant to the requirements of the Securities and Exchange Commission.

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

Indicate the number of outstanding shares of each of Shinhan Financial Group’s classes of capital or common stock as of the close of the last full fiscal year covered by this Annual Report: 474,199,587 shares of common stock, par value of Won 5,000 per share.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:

Yes þ No ¨

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934:

Yes ¨ No þ

Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ Accelerated filer ¨ Non-accelerated filer ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:


U.S. GAAP ¨		International Financial Reporting Standards as issued by the International Accounting Standards Board þ		Other ¨

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:

Item 17 ¨ Item 18 ¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

Yes ¨ No þ

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court:

Yes ¨ No ¨

TABLE OF CONTENTS


		Page
ITEM 1.	IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS		3
ITEM 2.	OFFER STATISTICS AND EXPECTED TIMETABLE		3
ITEM 3.	KEY INFORMATION		3
ITEM 3.A.	Selected Financial Data		3
ITEM 3.B.	Capitalization and Indebtedness		8
ITEM 3.C.	Reasons for the Offer and Use of Proceeds		8
ITEM 3.D.	Risk Factors		9
ITEM 4.	INFORMATION ON THE COMPANY		37
ITEM 4.A.	History and Development of the Company		37
ITEM 4.B.	Business Overview		42
ITEM 4.C.	Organizational Structure		158
ITEM 4.D.	Properties		159
ITEM 4.E.	Unresolved Staff Comments		160
ITEM 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS		160
ITEM 5.A.	Operating Results		160
ITEM 5.B.	Liquidity and Capital Resources		214
ITEM 5.C.	Research and Development, Patents and Licenses		218
ITEM 5.D.	Trend Information		219
ITEM 5.E.	Off-Balance Sheet Arrangements		219
ITEM 5.F.	Tabular Disclosure of Contractual Obligations		219
ITEM 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES		219
ITEM 6.A.	Directors and Senior Management		219
ITEM 6.B.	Compensation		223
ITEM 6.C.	Board Practices		224
ITEM 6.D.	Employees		226
ITEM 6.E.	Share Ownership		226
ITEM 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS		228
ITEM 7.A.	Major Shareholders		228
ITEM 7.B.	Related Party Transactions		228
ITEM 7.C.	Interests of Experts and Counsel		229
ITEM 8.	FINANCIAL INFORMATION		229
ITEM 8.A.	Consolidated Statements and Other Financial Information		229
ITEM 8.B.	Significant Changes		231
ITEM 9.	THE OFFER AND LISTING		231
ITEM 9.A.	Offer and Listing Details		231
ITEM 9.B.	Plan of Distribution		232
ITEM 9.C.	Markets		232
ITEM 9.D.	Selling Shareholders		239
ITEM 9.E.	Dilution		239
ITEM 9.F.	Expenses of the Issue		239
ITEM 10.	ADDITIONAL INFORMATION		239
ITEM 10.A.	Share Capital		239
ITEM 10.B.	Memorandum and Articles of Incorporation		239
ITEM 10.C.	Material Contracts		246
ITEM 10.D.	Exchange Controls		246
ITEM 10.E.	Taxation		247
ITEM 10.F.	Dividends and Paying Agents		255
ITEM 10.G.	Statements by Experts		255
ITEM 10.H.	Documents on Display		255
ITEM 10.I.	Subsidiary Information		255


		Page
ITEM 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		255
ITEM 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES		255
ITEM 12.A.	Debt Securities		255
ITEM 12.B.	Warrants and Rights		255
ITEM 12.C.	Other Securities		255
ITEM 12.D.	American Depositary Shares		256
ITEM 13.	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES		258
ITEM 14.	MATERIAL MODIFICATION TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS		258
ITEM 15.	CONTROLS AND PROCEDURES		258
ITEM 16.A.	AUDIT COMMITTEE FINANCIAL EXPERT		259
ITEM 16.B.	CODE OF ETHICS		259
ITEM 16.C.	PRINCIPAL ACCOUNTANT FEES AND SERVICES		259
ITEM 16.D.	EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES		260
ITEM 16.E.	PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS		260
ITEM 16.F.	CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT		260
ITEM 16.G.	CORPORATE GOVERNANCE		260
ITEM 16.H.	MINE SAFETY DISCLOSURE		264
ITEM 17.	FINANCIAL STATEMENTS		264
ITEM 18.	FINANCIAL STATEMENTS		264
ITEM 19.	EXHIBITS		264
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS			F-1
SUPPLEMENTAL FINANCIAL INFORMATION (UNAUDITED)			S-1
INDEX OF EXHIBITS			E-1

CERTAIN DEFINED TERMS, CONVENTIONS AND CURRENCY OF PRESENTATION

Unless otherwise specified or the context otherwise requires:

•

the terms “we,” “us,” “our,” “Shinhan Financial Group,” “SFG” and the “Group” mean Shinhan Financial Group Co., Ltd. and its consolidated subsidiaries; and

•

the terms “Shinhan Financial Group Co., Ltd.,” “our company” and “our holding company” mean Shinhan Financial Group Co., Ltd.

All references to “Korea” or the “Republic” contained in this annual report mean The Republic of Korea. All references to the “Government” mean the government of The Republic of Korea. The Financial Supervisory Service is the executive body of the Financial Services Commission of Korea (“Financial Services Commission”). References to “MOSF” are to the Ministry of Strategy and Finance of Korea.

Our fiscal year ends on December 31 of each year, except Shinhan Savings Bank. Unless otherwise specified or the context otherwise requires, all references to a particular year are to the year ended December 31 of that year.

The currency of the primary economic environment in which we operate is Korean Won.

In this annual report, unless otherwise indicated, all references to “Won” or “￦” are to the currency of The Republic of Korea, and all references to “U.S. Dollars,” “Dollars,” “$” or “US$” are to the currency of the United States of America. Unless otherwise indicated, all translations from Won to Dollars were made at ￦1,055.3 to US$1.00, which was the noon buying rate in the City of New York on December 31, 2013 for cable transfers according to the H.10 statistical release of the Federal Reserve Board (the “Noon Buying Rate”). On April 11, 2014, the Noon Buying Rate was ￦1,035.4 to US$1.00. The Noon Buying Rate has been volatile recently and the U.S. Dollar amounts referred to in this report should not be relied upon as an accurate reflection of our results of operations. We expect this volatility to continue in the near future. No representation is made that the Won or U.S. Dollar amounts referred to in this report could have been or could be converted into Dollars or Won, as the case may be, at any particular rate or at all.

Unless otherwise indicated, the financial information presented in this annual report has been prepared on a consolidated basis in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

Effective January 1, 2013, we adopted IFRS 10 “Consolidated Financial Statements” (“IFRS 10”) and amendments to International Accounting Standard (“IAS”) 19 “Employee Benefits” (“IAS 19”), as a result of which we changed our accounting policies regarding the scope of consolidation and remeasurements of net defined benefit liability (asset), respectively. Accordingly, we have restated our consolidated statements of comprehensive income for the year ended December 31, 2012 and our consolidated statements of financial position as of January 1, 2012 and December 31, 2012 to give effect to IFRS 10 and the amendments to IAS 19. We have also restated our consolidated statements of comprehensive income for the years ended December 31, 2011 and 2010 and our consolidated statements of financial position as of December 31, 2011 and 2010 to give effect to the amendments to IAS 19 for comparative purposes. See “Item 5.A. Operating Results — Critical Accounting Policies” and Note 2 of the notes to our consolidated financial statements.

Unless stated otherwise, all financial information contained in this annual report for the years ended December 31, 2012 and 2013 and as of January 1, 2012 and December 31, 2012 and 2013 is presented in accordance with IFRS, as amended and supplemented by IFRS 10 and the amendments to IAS 19, and all financial information contained in this annual report as of and for the years ended December 31, 2010 and 2011 is presented in accordance with IFRS, as amended and supplemented by the amendments to IAS 19.

Any discrepancies in the tables included herein between totals and sums of the amounts listed are due to rounding.

FORWARD LOOKING STATEMENTS

This annual report includes “forward-looking statements,” as defined in Section 27A of the U.S. Securities Act, as amended, and Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements regarding our expectations and projections for future operating performance and business prospects. The words “believe,” “expect,” “anticipate,” “estimate,” “project” and similar words used in connection with any discussion of our future operating or financial performance identify forward-looking statements. In addition, all statements other than statements of historical facts included in this annual report are forward-looking statements.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. All forward-looking statements are management’s present expectations of future events and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. This annual report discloses, under the caption “Item 3.D. Risk Factors” and elsewhere, important factors that could cause actual results to differ materially from our expectations (“Cautionary Statements”). Included among the factors discussed under the caption “Item 3.D. Risk Factors” are the followings risks related to our business, which could cause actual results to differ materially from those described in the forward-looking statements: the risk of adverse impacts from an economic downturn; increased competition; market volatility in securities and derivatives markets, interest or foreign exchange rates or indices; other factors impacting our operational plans; or legislative or regulatory developments. We caution you not to place undue reliance on the forward-looking statements, which speak only as of the date of this annual report. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the Cautionary Statements.

ITEM 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2.

OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3.

KEY INFORMATION

ITEM 3.A.

Selected Financial Data

The selected consolidated income statement and balance sheet data set forth below for the years ended December 31, 2010, 2011, 2012 and 2013 have been derived from our consolidated financial statements which have been prepared in accordance with IFRS as issued by the IASB. Until December 31, 2010, we prepared our consolidated financial information in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). All financial information as of and for the year ended December 31, 2010 included in this report has been prepared in accordance with IFRS. Our consolidated financial statements as of and for the years ended December 31, 2010, 2011, 2012 and 2013 have been audited by independent registered public accounting firm KPMG Samjong Accounting Corp.

You should read the following data with the more detailed information contained in “Item 5. Operating and Financial Review and Prospects” and our consolidated financial statements included in “Item 18. Financial Statements.” Historical results do not necessarily predict future results.

Consolidated Income Statement Data


	Year Ended December 31,
	2010			2011			2012			2013
	(In billions of Won and millions of US$, except per common share data)
Interest income	￦	12,909		￦	13,781		￦	13,998		￦	12,588		$	11,929
Interest expense		(6,436	)		(6,701	)		(7,018	)		(5,985	)		(5,672	)

Net interest income		6,473			7,080			6,980			6,603			6,257
Fees and commission income		3,397			3,557			3,491			3,490			3,307
Fees and commission expense		(1,640	)		(1,798	)		(1,948	)		(2,103	)		(1,993	)

Net fees and commission income		1,757			1,759			1,543			1,387			1,314
Net insurance loss		(76	)		(119	)		(209	)		(379	)		(359	)
Dividend income		217			209			174			158			150
Net trading income (loss)		334			(132	)		608			77			73
Net foreign currency transaction gain		117			14			280			296			281
Net gain (loss) on financial instruments designated at fair value through profit or loss		(125	)		172			(532	)		(122	)		(116	)
Net gain on sale of available-for-sale financial assets		652			846			536			701			664
Impairment losses on financial assets		(1,336	)		(983	)		(1,416	)		(1,340	)		(1,270	)
General and administrative expenses		(3,789	)		(3,983	)		(4,062	)		(4,203	)		(3,983	)
Net other operating expenses		(613	)		(538	)		(724	)		(540	)		(511	)

Operating income		3,611			4,325			3,178			2,638			2,500
Equity in income of associates		15			58			28			7			7
Other non-operating income (loss), net		(138	)		(38	)		25			37			35

Profit before income taxes		3,488			4,345			3,231			2,682			2,542
Income tax expense		(584	)		(957	)		(739	)		(623	)		(590	)

Profit for the year	￦	2,904		￦	3,388		￦	2,492		￦	2,059		$	1,952


	Year Ended December 31,
	2010			2011			2012			2013
	(In billions of Won and millions of US$, except per common share data)
Other comprehensive income (loss) for the year, net of income tax
Items that are or may be reclassified to profit or loss:
Foreign currency translation adjustments for foreign operations	￦	(18	)	￦	16		￦	(85	)	￦	(58	)	$	(55	)
Net change in unrealized fair value of available-for-sale financial assets		175			(461	)		13			(270	)		(256	)
Equity in other comprehensive income of associates		21			3			4			(5	)		(5	)
Net change in unrealized fair value of cash flow hedges		13			1			16			6			6
Other comprehensive income (loss) of separate account		2			—			1			(2	)		(2	)

		193			(441	)		(51	)		(329	)		(312	)

Items that will never be reclassified to profit or loss:
Remeasurements of defined benefit liability		(45	)		(115	)		—			20			18

		(45	)		(115	)		—			20			18

Total other comprehensive loss, net of income tax		148			(556	)		(51	)		(309	)		(294	)

Total comprehensive income for the year	￦	3,052		￦	2,832		￦	2,441		￦	1,750		$	1,658

Net income attributable to:
Equity holders of the Group		2,729			3,215			2,322			1,903			1,803
Non-controlling interest		175			173			170			156			149
Total comprehensive income attributable to:
Equity holders of the Group		2,876			2,660			2,269			1,594			1,511
Non-controlling interest		176			172			172			156			147
Earnings per share:
Basic earnings per share in Won and US$(1)		5,269			6,195			4,684			3,819			3.62
Dilutive earnings per share in Won and US$(2)		5,167			6,065			4,684			3,819			3.62

Notes:

(1)	Basic earnings per share are calculated by dividing net income available to holders of our common shares by the weighted average number of common shares issued and outstanding for the relevant period.

(2)

Dilutive earnings per share are calculated in a manner consistent with basic earnings per share, while giving effect to the potential dilution that could occur if convertible securities, options or other contracts to issue common shares were converted into or exercised for common shares. Common shares issuable upon conversion of redeemable convertible preferred shares are potentially dilutive.

Consolidated Balance Sheet Data


	As of December 31,						As of January 1,			As of December 31,
	2010			2011			2012			2012			2013			2013
	(In billions of Won and millions of US$, except per common share data)
Assets
Cash and due from banks	￦	11,822		￦	14,731		￦	14,799		￦	13,507		￦	16,473		$	15,610
Trading assets		9,412			11,954			14,521			16,654			18,033			17,089
Financial assets designated at fair value through profit or loss		2,208			1,801			1,801			2,542			3,361			3,185
Derivative assets		3,159			2,319			2,321			2,171			1,717			1,628
Loans, net		181,347			192,573			193,229			200,289			205,723			194,952
Available-for-sale financial assets		29,452			34,106			34,016			36,284			33,604			31,845
Held-to-maturity financial assets		12,529			11,895			11,895			11,660			11,031			10,454
Property and equipment, net		2,976			2,994			2,994			3,108			3,214			3,046
Intangible assets, net		4,073			4,203			4,203			4,195			4,226			4,005
Investments in associates		300			249			249			299			329			311
Current tax receivable		11			9			9			14			6			6
Deferred tax assets		65			29			31			100			197			186
Investment properties, net		286			275			515			779			690			654
Other assets, net		9,949			10,888			10,948			13,283			12,449			11,797
Assets held for sale		21			16			16			54			243			230

Total assets	￦	267,610		￦	288,042		￦	291,547		￦	304,939		￦	311,296		$	294,998

Liabilities
Deposits	￦	149,417		￦	163,016		￦	166,244		￦	173,296		￦	178,810		$	169,448
Trading liabilities		823			704			704			1,371			1,258			1,192
Financial liabilities designated at fair value through profit or loss		1,954			3,298			3,298			4,822			5,909			5,600
Derivative liabilities		2,588			1,972			1,972			1,904			2,027			1,920
Borrowings		18,085			20,033			20,255			19,518			20,143			19,088
Debt securities issued		40,286			39,737			39,735			38,838			37,491			35,528
Liability for defined benefit obligations		170			275			275			222			118			111
Provisions		859			870			870			748			750			711
Current tax payable		251			568			568			254			239			227
Deferred tax liabilities		184			—			22			42			15			14
Liabilities under insurance contracts		8,986			10,867			10,867			13,419			15,656			14,837
Other liabilities		16,812			19,843			19,817			21,593			19,021			18,025

Total liabilities	￦	240,415		￦	261,183		￦	264,627		￦	276,027		￦	281,437		$	266,701

Equity
Capital stock	￦	2,590		￦	2,645		￦	2,645		￦	2,645		￦	2,645		$	2,507
Other equity instrument		—			239			239			537			537			509
Capital surplus		8,835			9,887			9,887			9,887			9,887			9,370
Capital adjustments		(391	)		(393	)		(393	)		(393	)		(393	)		(373	)
Accumulated other comprehensive income		1,584			1,030			1,033			980			672			637
Retained earnings		12,116			10,989			11,047			12,715			14,194			13,451

Total equity attributable to equity holders of the Group		24,734			24,397			24,458			26,371			27,542			26,101
Non-controlling interest		2,461			2,462			2,462			2,541			2,317			2,196

Total equity	￦	27,195		￦	26,859		￦	26,920		￦	28,912		￦	29,859		$	28,297

Total liabilities and equity	￦	267,610		￦	288,042		￦	291,547		￦	304,939		￦	311,296		$	294,998

Dividends


	Year Ended December 31,
	2010		2011		2012		2013
	(In Won and US$)
Cash dividends per share of common stock:
In Korean Won	￦	750	￦	750	￦	700	￦	650
In U.S. Dollars	$	0.66	$	0.65	$	0.66	$	0.62
Cash dividends per share of preferred stock:
In Korean Won	￦	5,275	￦	4,996	￦	5,580	￦	5,580
In U.S. Dollars	$	4.62	$	4.31	$	5.25	$	5.29

Selected Statistical Information

Profitability Ratios


	Year Ended December 31,
	2010			2011			2012			2013
	(Percentages)
Net income attributable to the Group as a percentage of:
Average total assets(1)		0.98	%		1.09	%		0.82	%		0.66	%
Average total Group stockholders’ equity(1)		10.36			10.89			8.83			7.04
Dividend payout ratio(2)		21.84			20.39			16.76			19.43
Net interest spread(3)		2.29			2.34			2.11			1.95
Net interest margin(4)		2.69			2.80			2.57			2.36
Efficiency ratio(5)		87.39			82.53			85.97			88.22
Cost-to-average assets ratio(6)		8.85			7.23			6.54			6.48
Equity to average asset ratio(7)		9.49			9.97			9.31			9.43

Notes:

(1)	Average balances are based on (a) daily balances for Shinhan Bank and (b) quarterly balances for other subsidiaries.

(2)	Represents the ratio of total dividends declared on common and preferred stock as a percentage of net income attributable to the Group.

(3)	Represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(4)	Represents the ratio of net interest income to average interest-earning assets.

(5)	Represents the ratio of non-interest expense to the sum of net interest income and non-interest income, a measure of efficiency for banks and financial institutions. Efficiency ratio may be reconciled to comparable line-items in our income statements for the periods indicated as follows:


	Year Ended December 31,
	2010			2011			2012			2013
	(In billions of Won, except percentages)
Non-interest expense (A)	￦	24,124		￦	20,505		￦	19,800		￦	20,095
Divided by
The sum of net interest income and non-interest income (B)		27,606			24,845			23,031			22,777
Net interest income		6,473			7,080			6,980			6,603
Non-interest income		21,133			17,765			16,051			16,174
Efficiency ratio ((A) as a percentage of (B))		87.39	%		82.53	%		85.97	%		88.22	%

(6)	Represents the ratio of non-interest expense to average total assets.

(7)	Represents the ratio of average stockholders’ equity to average total assets.

Asset Quality Ratios


	As of December 31,
	2010			2011			2012			2013
	(In billions of Won, except percentages)
Total gross loans	￦	184,249		￦	195,055		￦	202,916		￦	207,987
Total allowance for loan losses		2,852			2,577			2,800			2,476
Allowance for loan losses as a percentage of total loans		1.55	%		1.32	%		1.38	%		1.19	%
Impaired loans(1)	￦	2,757		￦	2,457		￦	2,658		￦	2,386
Impaired loans as a percentage of total loans		1.50	%		1.26	%		1.31	%		1.15	%
Allowance as a percentage of impaired loans		103.45	%		104.88	%		105.34	%		103.77	%
Total non-performing loans(2)	￦	1,427		￦	1,416		￦	1,695		￦	1,197
Non-performing loans as a percentage of total loans		0.77	%		0.73	%		0.84	%		0.58	%
Allowance as a percentage of total assets		1.06	%		0.89	%		0.92	%		0.80	%

Notes:

(1)	Impaired loans include (i) loans for which the borrower has defaulted under Basel standards and (ii) loans that qualify as “troubled debt restructurings” under IFRS.

(2)	Non-performing loans are defined as loans, whether corporate or retail, that are past due more than 90 days.

Capital Ratios


	As of December 31,
	2010			2011			2012			2013
	(Percentages)
Group BIS ratio(1)		12.38	%		11.41	%		12.46	%		13.43	%
Total capital adequacy ratio of Shinhan Bank		15.47			15.26			15.83			16.29
Adjusted equity capital ratio of Shinhan Card(2)		24.99			25.81			27.43			30.41
Solvency ratio for Shinhan Life Insurance(3)		397.93			324.02			287.70			253.24

Notes:

(1)

Under the guidelines of the Financial Services Commission applicable to financial holding companies, the minimum requisite capital ratio applicable to us is the Bank for International Settlement (“BIS”) ratio of 8%. This computation is based on our consolidated financial statements in accordance with IFRS. See “Item 4.B. Business Overview — Supervision and Regulation — Principal Regulations Applicable to Financial Holding Companies — Capital Adequacy.”

(2)

Represents the ratio of total adjusted shareholders’ equity to total adjusted assets and is computed in accordance with the guidelines issued by the Financial Services Commission for credit card companies. Under these guidelines, a credit card company is required to maintain a minimum adjusted equity capital ratio of 8%. This computation is based on the consolidated financial statements of the credit card company prepared in accordance with IFRS. See “Item 4.B. Business Overview — Supervision and Regulation — Principal Regulations Applicable to Credit Card Companies — Capital Adequacy.”

(3)

Solvency ratio is the ratio of the solvency margin to the standard amount of solvency margin as defined and computed in accordance with the guidelines issued by the Financial Services Commission for life insurance companies. Under these guidelines, Shinhan Life Insurance is required to maintain a minimum solvency ratio of 100%. See “Item 4.B. Business Overview — Supervision and Regulation — Principal Regulations Applicable to Insurance Companies — Capital Adequacy.”

The Financial Services Commission regulations require that capital ratios be computed based on our consolidated financial statements under IFRS and regulatory guidelines. The following table sets forth our capital ratios computed on the basis of our consolidated financial statements under IFRS and the regulatory guidelines of the Financial Services Commission.


	As of December 31,
	2011			2012			2013
	(In millions of Won, except percentages)
Risk-weighted assets	￦	195,579,399		￦	201,184,402		￦	190,716,648
Total risk-adjusted capital	￦	22,315,419		￦	25,075,736		￦	25,605,827
Tier 1 capital	￦	17,316,861		￦	19,124,728		￦	21,538,399
Capital adequacy ratio (%)		11.41	%		12.46	%		13.43	%
Tier 1 capital ratio (%)		8.85	%		9.51	%		11.29	%

Exchange Rates

The following table sets forth, for the periods and dates indicated, certain information concerning the Noon Buying Rate in Won per US$1.00.


Year Ended December 31,	At End of Period		Average(1)		High		Low
	(Won per US$1.00)
2009		1,163.7		1,270.0		1,532.8		1,163.7
2010		1,130.6		1,155.7		1,253.2		1,104.0
2011		1,158.5		1,106.9		1,197.5		1,049.2
2012		1,063.2		1,126.2		1,185.0		1,063.2
2013		1,055.3		1,094.7		1,161.3		1,050.1
October		1,060.8		1,065.9		1,075.5		1,057.5
November		1,057.8		1,061.6		1,072.7		1,054.8
December		1,055.3		1,055.6		1,161.4		1,050.1
2014 (through April 11)		1,035.4		1,065.8		1,084.3		1,035.4
January		1,080.4		1,067.1		1,083.7		1,050.3
February		1,066.0		1,071.3		1,084.3		1,062.1
March		1,064.7		1,070.5		1,079.6		1,064.1
April (through April 11)		1,035.4		1,050.1		1,058.3		1,035.4

Source:

Federal Reserve Board

Note:

(1)	Represents the average of the Noon Buying Rates on the last day of each month during the relevant period.

We have translated certain amounts in Korean Won, which appear in this annual report, into U.S. Dollars for convenience. This does not mean that the Won amounts referred to could have been, or could be, converted into U.S. Dollars at any particular rate, the rates stated above, or at all. Unless otherwise stated, translations of Won amounts to U.S. Dollars are based on the Noon Buying Rate in effect on December 31, 2013, which was ￦1,055.3 to US$1.00. On April 11, 2014, the Noon Buying Rate in effect was ￦1,035.4 to US$1.00.

ITEM 3.B.

Capitalization and Indebtedness

Not applicable.

ITEM 3.C.

Reasons for the Offer and Use of Proceeds

Not applicable.

ITEM 3.D.

Risk Factors

An investment in the American depositary shares representing our common shares involves a number of risks. You should carefully consider the following information about the risks we face, together with the other information contained in this annual report, in evaluating us and our business.

Risks Relating to the Recent Economic and Market Crisis

Difficult conditions and turbulence in the Korean and global economy and financial markets may adversely affect our business, asset quality, capital adequacy and earnings.

The Korean economy is closely integrated with, and is significantly affected by, developments in the global economy and financial markets. The lagging difficulties affecting the European, U.S. and global financial sectors, adverse conditions and volatility in the worldwide credit and financial markets, fluctuations in oil and commodity prices and the general weakness of the European, U.S., Chinese and global economy have caused global economic prospects to remain uncertain in general and have adversely affected, and may continue to adversely affect, the Korean economy. Due to the ongoing volatility in the global financial markets and speculations regarding changes in monetary policies of the United States and other countries, the value of the Won relative to the U.S. Dollar has also fluctuated significantly in recent years. Furthermore, as a result of adverse global and Korean economic conditions, there has been continuing volatility in the stock prices of Korean companies. While the global economy has incrementally shown mixed signs of stabilization and recovery starting 2010, the overall prospects for the global and Korean economies in 2014 and beyond remain uncertain due in part to the continuing fiscal and macroeconomic difficulties in Europe and less than robust recovery of Asian economies, including China, Japan and India, notwithstanding expansionary monetary policies. Any future deterioration of the global and Korean economies could adversely affect our business, financial condition and results of operations.

In particular, difficulties in financial and economic conditions could result in significant deterioration in the quality of our assets and accumulation of higher provisioning, allowances for loan losses and charge-offs as an increasing number of our corporate and retail customers declare bankruptcy or insolvency or otherwise face increasing difficulties in meeting their debt obligations. In addition, the continuing slump in the real estate market and the shipbuilding industry have led to increased delinquency among our corporate borrowers in the construction, real estate leasing, shipbuilding and shipping industries (and in certain cases, even insolvency, corporate restructurings and/or voluntary arrangements with creditors, as was the case for the current and former member companies of the STX Group and Keangnam Enterprises Co., Ltd., to which we have limited exposure). While we have sought to actively reduce our exposure to such troubled industries through preemptive risk management policies, we cannot assure you that we will not experience further loan losses from borrowers in these industries since the quality of their assets may further deteriorate due to the continued slump in these industries or for other reasons. Shinhan Bank’s delinquency ratio (based on one or more month of delinquency) increased from 0.48% in 2010 to 0.60% in 2011 and 0.61% in 2012, before decreasing to 0.39% in 2013 primarily due to Shinhan Bank’s active efforts to reduce its exposure to such troubled industries and other at-risk borrowers through preemptive risk management policies and increased lending to borrowers with high-quality credit profiles as part of Shinhan Bank’s strategic initiative to improve its asset quality. As for Shinhan Card, its delinquency ratio under the Financial Services Commission guidelines increased from 2.01% in 2010 to 2.27% in 2011 and 2.64% in 2012 largely as a result of an increase in its assets, before decreasing to 2.15% in 2013 largely as a result of its enhanced preemptive risk management and controlled asset growth as well as the sale of large nonperforming loans to improve its asset quality.

Moreover, as was the case during the recent global financial crisis, depending on the nature of the difficulties in the financial markets and general economy, we may be forced to scale back certain of our core lending activities and other operations and/or borrow money at a higher funding cost or face a tightening in the net interest spread, any of which may have a negative impact on our earnings and profitability. Furthermore, while we and our principal subsidiaries currently maintain a capital adequacy ratio at a level higher than the required regulatory minimum, there is no guarantee that an even higher capital requirement will not be imposed by the Government in case of a renewed economic crisis.

In addition, given the highly integrated nature of financial systems and economic relationships worldwide, there may be other, unanticipated systemic or other risks that may not be presently predictable. Any of these risks if materialized may have a material adverse effect on our business, liquidity, financial condition and results of operations.

Risks Relating to Our Overall Business

Competition in the Korean financial services industry is intense, and may further intensify as a result of further deregulation.

Competition in the Korean financial services industry is, and is likely to remain, intense.

In the banking sector, Shinhan Bank competes principally with other national commercial banks in Korea, but also faces competition from a number of additional banking institutions, including branches and subsidiaries of foreign banks operating in Korea, regional banks, government-owned development banks and Korea’s specialized banks, such as Korea Development Bank, the Industrial Bank of Korea and the National Association of Agriculture and Fisheries, as well as various other types of financial service providers, including savings institutions (such as mutual savings and finance companies, credit unions and credit cooperatives), investment companies (such as securities brokerage firms, merchant banking corporations and asset management companies) and life insurance companies. As of December 31, 2013, Korea had seven major nationwide domestic commercial banks (including Citibank Korea Inc. and Standard Chartered Bank Korea Limited, both of which are domestic commercial banks acquired by global financial institutions), six regional commercial banks and branches and subsidiaries of 39 foreign banks. We believe that foreign financial institutions, many of which have greater experiences and resources than we do, will continue to enter the Korean market and compete with us in providing financial products and services either by themselves or in partnership with existing Korean financial institutions.

In the small- and medium-sized enterprise and retail banking segments, which have been Shinhan Bank’s traditional core businesses, competition is expected to increase further, although in a more limited fashion compared to that prior to the recent global financial crisis. Prior to the crisis, most Korean banks, including Shinhan Bank, focused on enlarging their assets through aggressive loan growth from small- and medium-sized enterprises and retail customers and, to a lesser extent, from large corporate borrowers, while developing fee income businesses, including bancassurance and investment products, as complementary sources of revenue. Following the crisis, Korean banks, including Shinhan Bank, are increasingly focusing on stable asset growth based on quality credit, such as corporate borrowers with high credit ratings, loans to “small office, home office” (“SOHO”) with high levels of collateralization, and mortgage and home equity loans within the limits of the prescribed loan-to-value ratios and debt-to-income ratios. This shift in focus toward stable growth based on less risky assets may result in lower net interest margin and reduced overall profitability, especially as banks compete for the same pool of quality credit by engaging in price competition or by other means. Shinhan Bank has traditionally focused, and will continue to focus, on enhancing profitability rather than increasing asset size or market share, and has avoided, to the extent practicable, engaging in price competition by way of lowering lending rates. Therefore, if competing financial institutions seek to expand market share by lowering their lending rates, Shinhan Bank may suffer customer loss, especially among customers who select their lenders principally on the basis of lending rates. In response thereto or for other strategic reasons, Shinhan Bank may subsequently lower its lending rates to stay competitive, which could lead to a decrease in its net interest margins and outweigh any positive impact on the net interest margin from a general rise in market interest rates. Any future decline in Shinhan Bank’s customer base or its net interest margins could have an adverse effect on its results of operations and financial condition.

In the credit card sector, Shinhan Card competes principally with existing “monoline” credit card companies, credit card divisions of commercial banks, consumer finance companies, other financial institutions and, recently, credit card service providers allied with mobile telecommunications service providers in Korea. Competition has been historically intense in this sector and the market has shown signs of saturation as existing and new credit card service providers make significant investments and engage in aggressive marketing campaigns and promotions to acquire new customers and target customers with high credit quality. While competition has subsided somewhat recently due to stricter government regulations, such as curbs on excessive marketing expenses, competition remains intense and credit card issuers may continue to compete with Shinhan Card for customers by offering lower interest rates and fees, higher credit limits, more attractive promotions and incentives and alternative products such as phone cards, gift cards and low-interest consumer loan products. As a result, Shinhan Card may lose customers or service opportunities to competing credit card issuers and/or incur higher marketing expenses. In addition, Government regulations adopted in 2012 mandating lower merchant fees chargeable to small- and medium-sized businesses and Government guidelines issued in 2013 suggesting lower standard interest rates for cash advances and card loans have reduced and are likely to continue to reduce the revenues of credit card companies, including Shinhan Card. Customer attrition, together with any further lowering of fees or reduction in base and market interest rates and/or additional expenses from more extensive marketing and promotional campaigns that Shinhan Card might implement to acquire and retain customers, could reduce its revenues and earnings. Furthermore, the average credit quality of Shinhan Card’s customers may decline if customers with higher credit quality borrow from Shinhan Card’s competitors rather than from Shinhan Card.

In other financial services sectors, our other subsidiaries also compete in a highly fragmented market. Some of our competitors, particularly the major global financial institutions, have greater experience and resources than we do.

Consolidation among our rival institutions may also add competition in the markets in which we and our subsidiaries conduct business. The Korean banking industry may undergo further consolidation either voluntarily or as part of government-led initiatives, including privatization, although the Government announced in March 2013 that it would no longer pursue privatization of Korea Development Bank and Industrial Bank of Korea. Some of the financial institutions resulting from these developments may, by virtue of their increased size, expanded business scope and more efficient operations, provide greater competition for us. For example, since announcing in January 2010 that the Government intends to sell its controlling stake in Woori Financial Group, one of the top four financial holding companies in Korea in terms of assets as of December 31, 2013 with a similarly ranked banking operation, the Government has actively taken measures to sell several of Woori Financial Group’s subsidiaries, including Woori Investment & Securities, a leading brokerage firm, for which the National Agricultural Cooperative Federation was selected as the preferred bidder in December 2013. In addition, Woori Financial Group’s other major subsidiaries, including in the businesses of asset management and regional banking, have found preferred bidders in December 2013. While the outlook for such sales remains uncertain, if Woori Financial Group or any of its major operating subsidiaries (particularly Woori Bank) were to be acquired by a rival bank or financial holding company, the consolidated entity may have a greater scale of operations, including a larger customer base, and financial resources than us, which may hurt our ability to compete effectively. In addition, in April 2013, Korea Exchange Bank became part of Hana Financial Group after acquisition of the former by the latter in February 2012, and it is expected that Korea Exchange Bank will eventually be merged into Hana Bank, one of the major commercial banks in Korea. Furthermore, in March 2012, the National Agricultural Cooperative Federation, a policy bank controlled by the Government, was reorganized into a holding company structure pursuant to which several of its financial business units were spun off into separate subsidiaries, including banking, life insurance and non-life insurance units. Following such reorganization, the National Agricultural Cooperative Federation has actively expanded its retail operations. Any of these developments may place us at a competitive disadvantage and outweigh any potential benefit to us in the form of opportunities to acquire new customers who are displeased with the level of services at the newly reorganized entities or to provide credit facilities to corporate customers who wish to maintain relationships with a wide range of banks in order to diversify their sources of funding.

As the Korean economy further develops and new business opportunities arise, more competitors may enter the financial services industry. Recently, banks are beginning to compete for new customers and competition between bank-operated credit card companies and independent card companies may increase substantially. For example, in November 2011, BC Card became a subsidiary of KT Group, a mobile phone service provider. In addition, as part of the aforementioned privatization efforts by the Government, Woori Card may be sold to another major credit card company, in which case it is possible that a credit card company comparable to Shinhan Card in terms of asset size and customer base may newly emerge. Furthermore, large non-financial institutions, such as mobile telecommunications companies, have also been reported to be considering entry into the Korean credit card and consumer finance businesses by way of convergence with the existing and future mobile telephone networks. SK Telecom, Korea Telecom and LG Uplus have been actively providing mobile phone payment services through payment solutions tailored for smartphones. As these companies are the three largest telecommunications service providers in Korea serving substantially all of the Korean population, a widespread consumer acceptance of mobile phone payment services in lieu of credit card services could pose a serious competitive threat to the existing credit card service providers, including our credit card subsidiary.

Competition in the Korean financial services industry may also intensify as a result of deregulation. For example, the Financial Investment Services and Capital Markets Act, which became effective in February 2009, promotes integration and rationalization of the Korean capital markets and financial investment products industry by permitting a wider range of financial services providers to engage in a broader sphere of financial activities, including depositary services, and has, to a significant extent, removed the regulatory barriers between securities brokerage, asset management, derivative financial services and trust services in favor of creating financial investment companies that may engage in all of the foregoing activities. Accordingly, the Financial Investment Services and Capital Markets Act enables the creation of large financial institutions that can offer both commercial and investment banking and asset management services modeled after the major global financial institutions based in the United States and Europe. Recently, in light of the recent global financial crisis, the Government has subjected Korean financial institutions to stricter regulatory requirements and guidelines in areas of asset quality, capital adequacy, liquidity and residential and other lending practices, which has had a dampening effect on competition. The Financial Services Commission implemented the capital requirements of Basel III, which minimum requirements are being phased in sequentially from December 1, 2013 and will become fully effective on January 1, 2016, based on the guidelines set forth in the amended Regulation on the Supervision of the Banking Business and the Detailed Regulation on the Supervision of the Banking Business. In addition, the Financial Services Commission announced its plan to implement Basel III requirements relating to liquidity coverage ratio and countercyclical capital buffer in 2015 and 2016, respectively, among other Basel III requirements. However, there is no assurance that these measures will continue to curb competition or that the Government will not reverse or reduce such measures or introduce other deregulatory measures, which may further intensify competition in the Korean financial services industry.

We and our subsidiaries need to maintain our capital ratios above minimum required levels, and the failure to so maintain could result in the suspension of some or all of our operations.

We and our subsidiaries in Korea are required to maintain specified capital adequacy ratios. For example, we and our banking subsidiaries in Korea are required to maintain a minimum Tier I capital adequacy ratio of 5.5% (which ratio will increase to 6.0% effective January 1, 2015), a common equity Tier I ratio of 4.0% (which ratio will increase to 4.5% effective January 1, 2015) and a BIS ratio of 8.0%. These ratios measure the respective regulatory capital as a percentage of risk-weighted assets on a consolidated basis and are determined based on guidelines of the Financial Services Commission. In addition, our subsidiaries Shinhan Card, Shinhan Life Insurance and Shinhan Investment are required to maintain a consolidated adjusted equity capital ratio of 8.0%, a solvency ratio of 100% and a net operating capital ratio of 150%, respectively.

While we and our subsidiaries currently maintain capital adequacy ratios in excess of the respective required regulatory minimum levels we or our subsidiaries may not be able to continue to satisfy the capital adequacy

requirements for a number of reasons, including an increase in risky assets and provisioning expenses, substitution costs related to the disposal of problem loans, declines in the value of securities portfolios, adverse changes in foreign currency exchange rates, changes in the capital ratio requirements, the guidelines regarding the computation of capital ratios, or the framework set by the Basel Committee on Banking Supervision (the “Basel Committee”) upon which the guidelines of the Financial Services Commission are based, or other adverse developments affecting our asset quality or equity capital.

In December 2010, the Basel Committee issued final rules in respect of (i) a global regulatory framework for more resilient banks and banking systems and (ii) an international framework for liquidity risk measurement, standards and monitoring, which together are commonly referred to as “Basel III.” The new minimum capital requirements, including the minimum common equity Tier 1 requirement of 4.5% and additional capital conservation buffer requirement of 2.5%, are currently being implemented in phases until January 1, 2019. Additional countercyclical capital buffer requirements are also expected to be phased in starting in 2016, which will range at the discretion of national regulators between 0% and 2.5% of risk-weighted assets. Basel III introduces a minimum leverage ratio requirement that is currently proposed at 3% on a preliminary basis. Effective January 1, 2011, the leverage ratio is subject to a supervisory monitoring period as well as a parallel run period from January 1, 2013 to January 1, 2017, after which the leverage ratio and related definitions will be finalized. Public disclosure of the components of the leverage ratio will be required beginning January 1, 2015 and full compliance will be required beginning January 1, 2018. On January 13, 2011, the Basel Committee issued further minimum requirements to ensure that all classes of capital instruments fully absorb losses at the point of non-viability before taxpayers are exposed to loss. Instruments issued on or after January 1, 2013 may only be included in regulatory capital if the new requirements are met. The capital treatment of securities issued prior to this date will be phased out over a ten-year period commencing January 1, 2013.

The Financial Supervisory Service amended the Regulation on the Supervision of the Banking Business to implement the capital requirements of Basel III in Korea under which the new Basel III capital requirements will be phased in sequentially from December 2013 and will become fully effective in January 2015. Under the amended Regulation on the Supervision of the Banking Business, commercial banks in Korea must meet certain minimum capital requirements with respect to risk-weighted assets. Specifically, from December 1, 2013, commercial banks are required to maintain a minimum total capital adequacy (BIS) ratio of 8.0%, a minimum common stock capital ratio of 3.5% and a minimum Tier I capital ratio of 4.5% and, from January 1, 2015, commercial banks will be required to maintain a minimum total capital adequacy (BIS) ratio of 8.0%, a minimum common stock capital ratio of 4.5% and a minimum Tier 1 capital ratio of 6.0%. If any bank fails to satisfy the above requirements, prompt corrective measures will apply from January 1, 2015. In addition to such minimum capital requirements, capital conservation buffer requirements will be phased in sequentially from January 2016, at which time commercial banks will be required to reserve at least a 0.625% capital surcharge in its capital conservation buffer, and from January 2019, at which time commercial banks will be required to maintain a capital conservation buffer of 2.5%. If a commercial bank fails to maintain such capital conservation buffer requirements, such bank will be subject to certain restrictions relating to its use of income, such as distributing dividends and purchasing treasury stock. In addition, under the amended Regulation on the Supervision of the Banking Business, equity securities issued after December 1, 2013 must include a contingent capital feature as required under Basel III’s capital requirements. For equity securities issued before December 1, 2013, a certain amount thereof will be derecognized annually as equity securities pursuant to the transitional provisions of such amended regulations. However, equity securities issued after September 12, 2010 containing step-up provisions do not benefit from such transitional provisions and are not recognized as equity securities in their full amount. Accordingly, the Series 12 non-voting redeemable preferred shares we issued on April 20, 2011 are no longer recognized as equity securities. See “Item 10.B. Memorandum and Articles of Incorporation — Description of Preferred Stock — Preferred Stock” for more details regarding our Series 12 non-voting redeemable preferred shares.

We and our banking subsidiaries are currently in compliance with Basel III requirements in effect since December 1, 2013.

If the capital adequacy ratios of us or our subsidiaries fall below the required levels, the Financial Services Commission may impose penalties ranging from a warning to suspension or revocation of our or our

subsidiaries’ business licenses. In order to maintain the capital adequacy ratios above the required levels, we or our subsidiaries may be required to raise additional capital through equity financing, but there is no assurance that we or our subsidiaries will be able to do so on commercially favorable terms or at all and, even if successful, any such capital raising may have a dilutive effect on our shareholders with respect to their interest in us or on us with respect to our interest in our subsidiaries.

Liquidity, funding management and credit ratings are critical to our ongoing performance.

Liquidity is essential to our business as a financial intermediary, and we may seek additional funding in the near future to satisfy liquidity needs, meet regulatory requirements, enhance our capital levels or fund the growth of our operations as opportunities arise.

For example, Basel III includes an international framework for liquidity risk measurement, standards and monitoring, as noted above, including a new minimum liquidity standard, known as the liquidity coverage ratio (“LCR”), which is designed to ensure that banks have an adequate stock of unencumbered high quality liquid assets (“HQLA”) that can be easily and speedily converted into cash in the private marketplace to survive a significant stress scenario lasting 30 calendar days. The LCR is computed as (a) the value of a banking organization’s HQLA, divided by (b) its total expected net cash outflows over the next 30 calendar days under stress scenarios. The minimum LCR is 100%. In January 2013, the Basel Committee on Bank Supervision released a revised formulation of the LCR, one of two quantitative liquidity measures approved in December 2010 as part of Basel III. The Basel Committee extended the timetable for full phase-in of the LCR to the effect that the minimum LCR will be 60% as of January 1, 2015 and will thereafter rise by an annual increment of 10% so that the minimum LCR will be 100% as of January 1, 2019, with the minimum LCR rising 10% each year. The Financial Supervisory Service and the Financial Services Commission are expected to promulgate proposed regulations to implement the liquidity requirements of Basel III.

A substantial part of the liquidity and funding requirements for our banking subsidiaries is met through short-term customer deposits, which typically roll over upon maturity. While the volume of our customer deposits has generally been stable over time, customer deposits have from time to time declined substantially due to the popularity of other, higher-yielding investment opportunities, namely stocks and mutual funds, for example, during times of bullish stock markets. During such times, our banking subsidiaries were required to obtain alternative funding at higher costs. In addition, due to the deregulation of depositary and settlement services as a result of the Financial Investment Services and Capital Markets Act, our banking subsidiaries may experience a decrease in customer deposits due to intensified competition among a more diversified group of financial services providers.

We and our subsidiaries also raise funds in the capital markets and borrow from other financial institutions, the cost of which depends on the market rates and the general availability of credit and the terms of which may limit our ability to pay dividends, make acquisitions or subject us to other restrictive covenants. In addition, during times of sudden and significant devaluations of the Korean Won against the U.S. Dollar, as was the case at the outset of the recent global liquidity crisis, Korean commercial banks, including our banking and credit card subsidiaries, had temporary difficulties in refinancing or obtaining optimal amounts of foreign currency-denominated funding on terms commercially acceptable to us. While we and our subsidiaries are not currently facing liquidity difficulties in any material respect, if we or our subsidiaries are unable to obtain the funding we need on terms commercially acceptable to us for an extended period of time for whatever reason, we may not be able to ensure our financial viability, meet regulatory requirements, implement our strategies or compete effectively.

Credit ratings affect the cost and other terms upon which we and our subsidiaries are able to obtain funding. Domestic and international rating agencies regularly evaluate us and our subsidiaries, and their ratings of our and our subsidiaries’ long-term debt are based on a number of factors, including our financial strength as well as conditions affecting the financial services industry generally and in Korea. There can be no assurance that the rating agencies will maintain our current ratings or outlooks. There is no assurance that Shinhan Bank, Shinhan Card, any of our other major subsidiaries or our holding company will not experience a downgrade in their respective credit ratings and outlooks for reasons related to the general Korean economy or reasons specific to

such entity. Any downgrade in the credit ratings and outlooks of us and our subsidiaries will likely increase the cost of our funding, limit our access to capital markets and other borrowings, require us to post additional collateral in financial transactions, and could increase the amount of regulatory liquidity we will be required to hold when Basel III liquidity requirements become effective, any of which could adversely affect our liquidity, net interest margins and profitability, and in turn, our business, financial condition and results of operations.

Changes in interest rates, foreign exchange rates, bond and equity prices, and other market factors have affected and will continue to affect our business.

The most significant market risks we face are interest rate, foreign exchange and bond and equity price risks. Changes in interest rate levels, yield curves and spreads may affect the interest rate margin realized between lending and borrowing costs. Changes in currency rates, particularly in the Korean Won-U.S. Dollar exchange rates, affect the value of our assets and liabilities denominated in foreign currencies, the reported earnings of our non-Korean subsidiaries and income from foreign exchange dealings, and substantial and rapid fluctuations in the exchange rates may cause difficulty in obtaining foreign currency-denominated financing in international financial markets on commercial terms acceptable to us or at all. The performance of financial markets may affect bond and equity prices and, therefore, cause changes in the value of our investment and trading portfolios. While we have implemented risk management systems to mitigate and control these and other market risks to which we are exposed, it is difficult to predict with accuracy changes in economic or market conditions and to anticipate the effects that such changes could have on our business, financial condition and results of operations.

A significant or sustained decrease in interest rates could decrease our net interest margin due to a mismatch in our assets and liabilities structures, which could have a material adverse effect on our asset quality and profitability.

Commencing in the second half of 2008, interest rates in Korea declined to historically low levels as the government sought to stimulate the economy through active rate-lowering measures. As the Korean economy showed signs of recovery, the Korean government increased the base interest rate by an aggregate of 125 basis points during the period of 2010 and 2011 from 2.0% in 2010 to 3.25% in 2011; however, in an effort to spur domestic economy amid signs of protracted economic difficulties, the Korean government decreased the base interest rate by an aggregate of 50 basis points from 3.25% in 2011 to 2.75% in 2012 and by 25 basis points from 2.75% in 2012 to 2.50% in 2013.

Interest rate movements, in terms of magnitude and timing as well as their relative impacts on our assets and liabilities, have a significant impact on our net interest margin and profitability, particularly with respect to our financial products that are sensitive to such movements. For example, if the interest rates applicable to our loans (which are recorded as assets) decrease or increase at a slower pace or by a thinner margin than the interest rates applicable to our deposits (which are recorded as liabilities), our net interest margin will shrink and our profitability will be negatively affected. In addition, the relative size and composition of our variable rate loans and deposits (as compared to our fixed rate loans and deposits) may also impact our net interest margin. Furthermore, the difference in the average term of our interest-earning assets (primarily loans) compared to our interest-bearing liabilities (primarily deposits) may also impact our net interest margin. For example, since our deposits tend to have longer terms, on average, than those of our loans, our deposits are on average less sensitive to movements in the base interest rates on which our deposits and loans tend to be pegged, and therefore, an increase in the base interest rates tend to increase our net interest margin while a decrease in the base interest rates tend to have the opposite effect. While we continually manages our assets and liabilities to minimize our exposure to interest rate volatility, such efforts by us may not mitigate the impact of interest rate volatility in a timely or effective manner, and our net interest margin, and in turn our financial condition and results of operations, could suffer significantly.

We cannot assure you when and to what extent the Korean government will in the future raise the base interest rate, to which the market interest rate correlate, as such determination is subject to many policy considerations, including the general economic cycle, inflationary levels, interest rates in other economies and foreign currency exchange rates, among others. If there were to be a significant or sustained increase in interest

rates, all else being equal, such movement would lead to a decline in the value of traded debt securities and could also raise our funding costs, while reducing loan demand, especially among retail customers. Rising interest rates may therefore require us to re-balance our assets and liabilities in order to minimize the risk of potential mismatches and maintain our profitability. In additional, rising interest rates may adversely affect the Korean economy and the financial condition of our corporate and retail borrowers, including holders of our credit cards, which in turn may lead to deterioration of our credit portfolio. Since most of our retail and corporate loans bear interest at rates that adjust periodically based on prevailing market rates, a sustained increase in interest rates will increase the funding costs of our borrowers and could adversely affect their ability to make payments on their outstanding loans.

We may incur losses associated with our counterparty exposures.

We face the risk that counterparties will be unable to honor contractual obligations to us or our subsidiaries. These parties may default on their obligations to us or our subsidiaries due to bankruptcy, lack of liquidity, operational failure or other reasons. This risk may arise, for example, from entering into swaps or other derivative contracts under which counterparties have obligations to make payments to us or our subsidiaries or in executing currency or other trades that fail to settle at the required time due to non-delivery by the counterparty or systems failure by clearing agents, exchanges, clearing houses or other financial intermediaries. Any realization of counterparty risk may adversely affect our business, operations and financial condition.

Risks Relating to Our Banking Business

We have significant exposure to small- and medium-sized enterprises, and financial difficulties experienced by such enterprises may result in a deterioration of our asset quality.

Our banking activities are conducted primarily through our wholly-owned subsidiary, Shinhan Bank. One of our core banking businesses has historically been and continues to be lending to small- and medium-sized enterprises (as defined in “Item 4.B. Business Overview — Our Principal Activities — Corporate and Investment Banking Services — Small- and Medium-sized Enterprises Banking”). Our loans to such enterprises amounted to ￦52,268 billion as of December 31, 2011, ￦51,324 billion as of December 21, 2012 and ￦55,062 billion as of December 31, 2013, representing 26.8%, 25.37% and 26.47%, respectively, of our total loan portfolio as of such dates.

Compared to loans to large corporations, which tend to be better capitalized and weather business downturns with greater ease, or loans to individuals and households, which tend to be secured with homes and with respect to which the borrowers are therefore less willing to default, loans to small- and medium-sized enterprises have historically had a relatively higher delinquency ratio. Prior to the onset of the recent global financial crisis, loans to such enterprises were the targets of aggressive lending by Korean banks, including Shinhan Bank, as part of their campaigns to increase their respective market shares. Many small- and medium-sized enterprises represent sole proprietorships or small businesses dependent on a relatively limited number of suppliers or customers and tend to be affected to a greater extent than large corporate borrowers by fluctuations in the Korean and global economy. In addition, small- and medium-sized enterprises often maintain less sophisticated financial records than large corporate borrowers. Therefore, it is generally more difficult for us to judge the level of risk inherent in lending to these enterprises, as compared to large corporations. In addition, many small- and medium-sized enterprises have close business relationships with large corporations in Korea, primarily as suppliers. Any difficulties encountered by those large corporations would likely hurt the liquidity and financial condition of related small- and medium-sized enterprises, including those to which we have exposure, also resulting in an impairment of their ability to repay loans. As large Korean corporations continue to expand into China and other countries with lower labor costs and other expenses through relocating their production plants and facilities to such countries, such development may have a material adverse impact on such small- and medium-sized enterprises.

Financial difficulties experienced by small- and medium-sized enterprises as a result of, among other things, recent economic difficulties in Korea and globally and aggressive marketing and intense competition among banks to lend to this segment in recent years, coupled with our efforts to counter asset quality deterioration

through controlled lending policy, have led to a fluctuation in the asset quality of our loans to this segment. As of December 31, 2011, 2012 and 2013, Shinhan Bank’s delinquent loans to small- and medium-sized enterprises were ￦597 billion, ￦487 billion and ￦320 billion, respectively, representing delinquency ratios (net of charge-offs and loan sales) of 1.04%, 0.89% and 0.55%, respectively. If the ongoing difficulties in the Korean or global economy were to be sustained or experience an even more severe downturn, the delinquency ratio for our loans to small- and medium-sized enterprises may rise significantly.

Of particular concern is the significant exposure we have to enterprises in the real estate and leasing and construction industries. As of December 31, 2013, Shinhan Bank had outstanding loans to the real estate and leasing and construction industries (many of which are small- and medium-sized enterprises) of ￦15,805 billion and ￦3,254 billion, respectively, representing 8.98% and 1.85%, respectively, of our total loan portfolio as of such date. We also have other exposure to borrowers in these sectors of the Korean economy, including extending guarantees for the benefit of such companies and holding debt and equity securities issued by such companies. In addition, Shinhan Bank has exposure to borrowers in the shipbuilding and shipping industries, which are continuing to experience business downturns.

The enterprises in the real estate development and construction industries in Korea, concentrated in the housing market, are currently experiencing a prolonged downturn characterized by reduced real estate demand and stagnant real estate prices, largely due to a combination of excessive supply of residential property, sustained efforts by the Korean government to stem speculation in the housing market, ongoing economic sluggishness in Korea and globally and the demographic changes in the Korean population. We also have a limited exposure to real estate project financing, particularly by construction companies that have built residential units in provinces outside the metropolitan Seoul area, which have experienced a relatively low rate of pre-sales, the proceeds from which the construction companies primarily rely on as a source for their liquidity and cash flow.

The delinquency ratio for the small- and medium-sized enterprises in the construction industry may increase significantly if restructuring of troubled companies in this industry intensifies as a result of a Government initiative or concerted efforts by lending institutions to improve their asset quality. For example, in 2009 and 2010, in an effort to curtail further deterioration in the credit quality of troubled companies in certain industries that have been disproportionately affected by the recent global economic crisis, the Government encouraged a swift review of the credit quality of such companies and restructuring of troubled companies by creditor financial institutions, including Shinhan Bank. In accordance with such program, 29 construction companies became subject to workouts in February and March 2009. In addition, in June 2010, the Government announced that, following review of credit risk relating to 1,985 companies in Korea with outstanding debt of ￦50 billion or more, 65 of such companies would be subject to restructuring in the form of workout, liquidation or court receivership. Of the 65 companies, 16 were construction companies. There is no assurance that credit exposure to companies in the construction or other troubled industries will not increase in the future as a result of an economic downturn or for other reasons, and additional restructuring may follow as a result of a Government initiative or otherwise.

Any of the foregoing developments may result in deterioration in the asset quality of our banking subsidiaries. See “Item 4.B. Business Overview — Description of Assets and Liabilities — Credit Exposures to Companies in Workout and Recovery Proceedings.” According to the annual evaluation conducted pursuant to the Corporate Restructuring Promotion Act in relation to exposure to troubled companies (which examines each large corporation with credit exposure of ￦50 billion or more and small- to –medium enterprises with credit exposure of ￦5 billion to ￦50 billion), in 2011, we had an aggregate exposure of ￦149 billion to five conglomerates (for which we set out provisions in the aggregate amount of ￦16 billion) and an aggregate exposure of ￦113 billion to eight small- to medium-sized enterprises (for which we set out provisions in the aggregate amount of ￦16 billion), in 2012, we had an aggregate exposure of ￦142.0 billion to four conglomerates (for which we set out provisions in the aggregate amount of ￦86 billion) and an aggregate exposure of ￦19 billion to one small- to medium-sized enterprise (for which we set out provisions in the aggregate amount of ￦19 billion) and in 2013, we had an aggregate exposure of ￦28 billion to two conglomerates (for which we set out provisions in the aggregate amount of ￦20 billion) and an aggregate exposure of ￦21 billion to two small- to medium-sized enterprises (for which we set out provisions in the aggregate amount of ￦15 billion).

We have been taking active steps to curtail delinquency among our small- and medium-sized enterprise customers, including by way of strengthening loan application review processes and closely monitoring borrowers in troubled sectors. Despite such efforts, there is no assurance that the delinquency ratio for our loans to small- and medium-sized enterprises will not rise in the future, especially if the Korean economy were to face renewed difficulties and a subsequent deterioration in the liquidity and cash flow of these borrowers. A significant rise in the delinquency ratios among these borrowers would lead to increased charge-offs and higher provisioning and reduced interest and fee income from this segment in the future, which would have a material adverse effect on our business, financial condition and results of operations.

A decline in the value of the collateral securing our loans or our inability to fully realize the collateral value may adversely affect our credit portfolio.

Most of our mortgage and home equity loans are secured by borrowers’ homes, other real estate, other securities and guarantees (which are principally provided by the Government and other financial institutions), and a substantial portion of our corporate loans are also secured, including by real estate. As of December 31, 2013, the secured portion of Shinhan Bank’s loans amounted to ￦82,766 billion, or 56.3% of its total loans. There is no assurance that the collateral value will not materially decline in the future. Shinhan Bank’s general policy for mortgage and home equity loans is to lend up to 40% to 60% of the appraised value of the collateral and to periodically re-appraise such collateral. However, in light of the sustained downturn in the real estate market in Korea, the value of the collateral may fall below the outstanding principal balance of the underlying mortgage loans. Borrowers of such under-collateralized mortgages or loans may be forced to pay back all or a portion of such mortgage loans or, if unable to meet the collateral requirement through such repayment, sell the underlying collateral, which sales may lead to a further decline in the price of real estate in general and set off a chain reaction for other borrowers due to the further decline in the value of collateral. Declines in real estate prices reduce the value of the collateral securing our mortgage and home equity loans, and such reduction in the value of collateral may result in our inability to cover the uncollectible portion of our secured loans. A decline in the value of the real estate or other collateral securing our loans, or our inability to obtain additional collateral in the event of such decline, may result in the deterioration of our asset quality and require us to make additional loan loss provisions. In Korea, foreclosure on collateral generally requires a written petition to a Korean court. Foreclosure procedures in Korea generally take seven months to one year from initiation to collection depending on the nature of the collateral, and foreclosure applications may be subject to delays and administrative requirements, which may result in a decrease in the recovery value of such collateral. There can be no assurance that we will be able to realize the full value of collateral as a result of, among others, delays in foreclosure proceedings, defects in the perfection of collateral and general declines in collateral value. Our failure to recover the expected value of collateral could expose us to significant losses.

Guarantees received in connection with our real estate financing may not provide sufficient coverage.

Primarily through Shinhan Bank, we, alone or together with other financial institutions, provide financing to real estate development projects, which are concentrated in the construction of residential and, to a lesser extent, commercial complexes. Developers in Korea commonly use project financing to acquire land and pay for related project development costs. As a market practice, lenders in project financing, including Shinhan Bank, generally receive from general contractors a performance guarantee for the completion of projects by the developers as well as a payment guarantee for the loans raised by a special purpose financing vehicle established by the developers in order to procure the construction orders, as the developers tend to be small and highly leveraged. While the general contractors tend to be large and well-established construction companies, given the sustained downturn in the real estate market and the construction industry in general, there is no guarantee that even such companies will have sufficient liquidity to back up their guarantees made for the benefit of the developers if the real estate development projects do not generate sufficient cash flow from pre-sales of the residential or commercial units. This is particularly the case for development projects outside the Seoul metropolitan area, which in recent years have had lower than expected levels of pre-sales. If defaults arise under our loans to real estate development projects and the general contractors fail to pay the guaranteed amount necessary to cover the amount of our financings, this may have a material adverse effect on our business, financial condition and results of operations.

A limited portion of our credit exposure is concentrated in a relatively small number of large corporate borrowers, and future financial difficulties experienced by them may have an adverse impact on us.

Of Shinhan Bank’s 20 largest corporate exposures as of December 31, 2013, six were companies that are or were members of the main debtor groups identified by the Governor of the Financial Supervisory Service, which are largely comprised of chaebols. As of such date, the total amount of Shinhan Bank’s exposures to the main debtor groups was ￦30,337 billion, or 13.1% of its total exposure. As of that date, Shinhan Bank’s single largest outstanding exposure to a main debtor group (mostly comprised of chaebols) amounted to ￦5,027 billion, or 2.2% of its total exposures. Largely due to the continued stagnation in the shipbuilding and construction industries, in the second half of 2013, current and former member companies of the STX Group, one of the leading conglomerates in Korea, entered or took steps to enter into a voluntary arrangement with their creditors (including Shinhan Bank) to improve their credit situation, and in October 2013, Keangnam Enterprises Co., Ltd., a construction company in Korea, entered into workout proceedings. Partly as a result of our active past efforts to reduce exposure to the shipbuilding and construction sectors, we currently have limited exposure to both the former and current member companies of the STX Group and Keangnam Enterprises Co., Ltd. If the credit quality of our exposures to these and other large corporations, including those in the main debtor groups, declines, we may be required to record additional loan loss provisions in respect of loans and impairment losses in respect of securities, which would adversely affect our financial condition, results of operations and capital adequacy. We cannot assure you that the allowances we have established against these exposures will be sufficient to cover all future losses arising from such exposures, especially in the case of a prolonged or renewed economic downturn.

In May 2010, creditor financial institutions entered into agreements with eight main debtor groups, largely comprised of chaebols, under which such groups agreed to undertake plans to improve their financial conditions, including through the sale of subsidiaries. While Shinhan Bank was not the main creditor financial institution to any of these main debtor groups, Shinhan Bank was one of the creditor financial institutions and has exposure to a limited number of such corporations and main debtor groups. As of December 31, 2013, six main debtor groups remained subject to restructuring programs or were otherwise making significant efforts to improve their financial conditions, such as by obtaining intragroup loans and entering into agreements to further improve their capital structures. There is no assurance that there will not be future restructuring with major corporate customers or that such restructuring will not result in significant losses to Shinhan Bank with less than full recovery. In addition, bankruptcies or financial difficulties of large corporations, including chaebol groups, may have the adverse ripple effect of triggering delinquencies and impairment of our loans to small- and medium-sized enterprises that supply parts or labor to such corporations. If we experience future losses from our exposures to large corporations, including chaebol groups, it may have a material adverse impact on our business, financial condition and results of operations. See “Item 4.B. Business Overview — Description of Assets and Liabilities — Loans — Loan Portfolio — Exposure to Main Debtor Groups.”

Any deterioration in the asset quality of our guarantees and acceptances will likely have a material adverse effect on our financial condition and results of operations.

In the normal course of banking activities, we make various commitments and incur certain contingent liabilities in the form of guarantees and acceptances. Financial guarantees, which are contracts that require us to make specified payments to reimburse the beneficiary of the guarantee for a loss such beneficiary incurs because the debtor in respect of which the guarantee is given fails to make payments when due in accordance with the terms of the relevant debt instrument, are recognized initially at fair value, and such initial fair value is amortized over the life of the financial guarantee. Other guarantees are recorded as off-balance sheet items in the footnotes to our financial statements and those guarantees that we have confirmed to make payments are recorded on the statements of financial position. As of December 31, 2013, we had aggregate guarantees and acceptances of ￦15,618 billion, for which we provided allowances for losses of ￦93 billion. Such guarantees and acceptances include refund guarantees provided by us to shipbuilding companies, which involve guaranteeing a refund payment of the initial cash payment (typically 25% of the contract amount for ship orders) received by shipbuilders from buyers in the event that such shipbuilders are unable to deliver ships in time or otherwise default under shipbuilding contracts. In recent years, small- and medium-sized shipbuilding companies have

faced increasing financial difficulties due to the global economic downturn and the resulting slowdown in shipbuilding orders, which has increased the risk that they may default on their shipbuilding contracts and we may have to make payments under the refund guarantees. The refund guarantees provided by us to small- and medium-sized shipbuilding companies amounted to approximately ￦85 billion as of December 31, 2013. If there is significant deterioration in the quality of assets underlying our guarantees and acceptances, our allowances may be insufficient to cover actual losses resulting in respect of these liabilities, or the losses we incur on the relevant guarantees and acceptances may be larger than the outstanding principal amount of the underlying loans.

Risks Relating to Our Credit Card Business

Future changes in market conditions as well as other factors, such as stricter regulation, may lead to reduced revenues and deterioration in the asset quality of credit card receivables.

In recent years, credit card and other consumer debt has increased significantly in Korea. As of December 31, 2011, 2012 and 2013, Shinhan Card’s interest-earning credit card assets amounted to ￦19,772 billion, ￦20,027 billion and ￦19,626 billion, respectively. Our large exposure to credit card and other consumer debt means that we are exposed to changes in economic conditions affecting Korean consumers in general. For example, a rise in unemployment, an increase in interest rates, a downturn in the real estate market, or a general contraction or other difficulties affecting the Korean economy may lead Korean consumers to reduce spending (a substantial portion of which is conducted through credit card transactions), which in turn leads to reduced earnings for our credit card business, as well as to higher default rates on credit card loans, deterioration in the quality of our credit card assets and increased difficulties in recovering written-off assets from which a significant portion of Shinhan Card’s revenues is derived. Any of these developments could have a material adverse effect on our business, financial condition and results of operations.

In addition, Government regulations aimed at protecting small- and medium-sized enterprises, such as the reduction of fees chargeable to small- and medium-sized merchants, may have a material adverse effect on our revenues. In January 2012, the Government expanded the definition of a small- and medium-sized merchant to include those with annual sales of up to ￦200 million and effective September 2012, lowered fees chargeable to such merchants from 1.8% to 1.5% with respect to credit cards. The Government has also recently implemented measures regulating marketing costs in order to control excessive marketing campaigns and curtail undue marketing expenses, which had the effect of impeding revenue growth for credit card companies, but also reduced or slowed the growth in their marketing expenses. In addition, Shinhan Card’s interest income from card loans and cash advances is expected to decrease in 2014 due to the Government’s introduction of new guidelines that will have the effect of lowering interest rates chargeable for such card loans and cash advances, effective December 2013. Furthermore, the Government may also introduce tax incentives and other measures to encourage the use of check cards (akin to debit cards in the United States where all outstanding balances are settled monthly) in lieu of credit cards in an attempt to preempt a potential rise in delinquency among credit card users, and if check cards are widely used in lieu of credit cards, this would reduce interest income from credit cards, which generally have a longer repayment period than that of check cards, and may have an adverse impact on Shinhan Card’s revenues and results of operations.

Competition in the Korean credit card industry is intense and growing market saturation in the credit card sector may adversely affect growth prospects and profitability of Shinhan Card.

Competition in the credit card and consumer finance businesses remains intense as existing credit card companies, commercial banks, consumer finance companies and other financial and mobile telecommunications institutions in Korea have made significant investments and engaged in aggressive marketing campaigns and promotions in these areas, notwithstanding the recent introduction of stricter regulatory measures, such as the reduction of merchant fees and interest rates on card loans and cash advances chargeable by credit card companies and the regulation of their marketing expenses. While the rapid increase in competition has somewhat subsided due to the aforementioned regulatory measures, competition remains intense. The growth, market share and profitability of our credit card subsidiary’s operations may decline or become negative as a result of market saturation in this sector, interest rate competition, pressure to lower fee rates and incur higher marketing expenses, as well as Government regulation and social and economic developments in Korea, such as changes in

consumer confidence levels, spending patterns or public perception of credit card usage and consumer debt. For example, other credit card issuers may compete with Shinhan Card for customers by offering lower interest rates and fees, higher credit limits, different product offerings and/or better customer service, which may lead to a loss by Shinhan Card of accounts and/or account balances to competing credit card issuers. Customer attrition from any or all of Shinhan Card’s products, together with any lowering of interest rates or fees that Shinhan Card might implement to retain customers and higher marketing expenses could reduce its revenues and earnings. As the credit card market further matures and becomes more saturated in terms of the number of cardholders and transaction volume, the average credit quality of Shinhan Card’s customers may deteriorate if customers with higher credit quality borrow from our competitors rather than Shinhan Card and it may become more difficult for Shinhan Card to attract and maintain quality customers.

Shinhan Card’s ability to maintain its market position and continue its asset growth in the future will depend on, among others, its ability to (i) develop and market new products and services that are attractive to its customers, (ii) generate funding at commercially reasonable rates and in amounts sufficient to support preservation of assets and further asset growth, (iii) develop the personnel and systemic infrastructure necessary to manage its growth and increasingly diversified business operations and (iv) manage increasing delinquencies. In addition, external factors such as competition and Government regulation in Korea may limit Shinhan Card’s ability to maintain its growth, and economic and social developments in Korea, such as changes in consumer confidence levels or spending patterns, as well as changes in the public perception of credit card usage and consumer debt, could have an adverse impact on the growth of Shinhan Card’s credit card assets in the future. Furthermore, if Shinhan Card fails to simultaneously manage its asset quality and its asset growth or sacrifices asset quality in exchange for asset growth, its delinquency ratio may be adversely affected. If the rate of growth of Shinhan Card’s assets declines or becomes negative or its delinquency ratio increases, our business, financial condition and results of operations may be adversely affected.

Shinhan Card may not be able to increase consumer and business spending and borrowing on its card products or manage the costs of its cardholder benefits intended to stimulate such use.

Increasing consumer and corporate spending and borrowing on our card products and growth in card lending balances depend in part on Shinhan Card’s ability to develop and issue new or enhanced card and prepaid products and increase revenue from such products and services, as well as the level of discretionary income among our cardholders, which is largely affected by macroeconomic factors beyond our control, including the rising level of household debt. Shinhan Card’s future earnings and profitability also depend on its ability to attract new cardholders, reduce cardholder attrition, increase merchant coverage and capture a greater share of customers’ total credit card spending in Korea and overseas. Shinhan Card may not be able to manage and expand cardholder benefits in a cost-effective manner or contain the growth of marketing, promotion and reward expenses to a commercially reasonable level. If Shinhan Card is not successful in increasing customer spending or in containing costs or cardholder benefits, its financial condition, results of operations and cash flow could be negatively affected.

Our customers may become victims to “voice phishing”, other financial scams or cyber security breaches, for which we may be required to make monetary compensation and suffer damage to our business and reputation.

In recent years, financial scams known as voice phishing have been on the rise in Korea. While voice phishing takes many forms and has evolved over time in terms of sophistication, it typically involves the scammer making a phone call to a victim under false pretenses (for example, the scammer pretending to be a member of law enforcement, an employee of a financial institution or even an abductor of the victim’s child) and luring the victim to transfer money to an untraceable account controlled by the scammer. More recently, voice phishing has increasingly taken the form of the scammer “hacking” or otherwise wrongfully obtaining personal financial information of the victim (such as credit card numbers or Internet banking login information) over the telephone or other means and illegally using such information to obtain credit card loans or cash advances through automated telephone banking or Internet banking. Reportedly, a substantial number of such scammers belong to international criminal syndicates with bases overseas, such as China, with operatives in Korea.

In response to the growing incidents of voice phishing, regulatory authorities have undertaken a number of steps to protect consumers against voice phishing and other financial scams. There is no assurance, however, that the regulatory activities will have the desired effect of substantially eradicating or even containing the incidents of voice phishing or other financial scams. For example, following an investigation in November and December 2011 of major credit card companies, including Shinhan Card, as to their compliance with regulations on card loan-related voice phishing and the scope of damage suffered by customers as a result of voice phishing, the Financial Supervisory Service issued a number of guidelines for credit companies to comply with in order to minimize damage from voice phishing, including, among others, (i) strengthening identity verification procedures for card loan applications that are made online or through the automated response system, (ii) delaying the timing of loan payout by a few hours following the approval of card loan application, and (iii) giving an option to customers to block card loan applications. In May 2012, Shinhan Card completed all necessary steps to fully comply with these additional guidelines and has been in full compliance since then.

Pursuant to guidelines set forth by the Credit Finance Association of Korea, credit card companies in Korea, including Shinhan Card, adopted a standard compensation scheme for victims of voice phishing under which the credit card companies would compensate up to 50% of the damage suffered by such victims, depending on the nature of the victims (for example, more compensation if the victim is handicapped or at the lowest income bracket) and the level of precautionary steps undertaken by the relevant credit card company before approving the credit card loans or cash advances in connection with voice phishing; provided that if the applicant personally made the application, for example, through an ATM terminal or an outcall procedure was undertaken to confirm the personal identity of the applicant, no compensation would be made. The compensation scheme applies to claims of voice phishing received for the period from January 1, 2011 to December 8, 2011. Although the financial institutions are often not legally at fault for the damage suffered by victims of voice phishing, the compensation scheme was adopted largely in consideration of social responsibility among financial institutions and that the financial institutions were not required to, and therefore in many instances did not, confirm the personal identity of the card loan or cash advance applicants prior to the adoption of such scheme. On December 8, 2011, Shinhan Card began implementing a mandatory outcall procedure to verify the personal identity of applicants for card loans and cash advances if not requested in person. In January 2012, financial institutions, the Financial Supervisory Service, the police and other related institutions formed a joint committee to prevent voice phishing incidents and implemented preventive measures such as enforcing a 10 minute delay for withdrawal of credit card loans of ￦3 million or more from an automated teller machine.

In 2013, Shinhan Card received 1,478 customer claims in relation to voice phishing in the aggregate amount of ￦13.1 billion. In 2013, Shinhan Card reserved as other provisioning ￦0.4 billion to cover its potential liability.

Other than voice phishing, cyber security risks relating to our businesses primarily involve potential security breaches of our customers’ personal and financial information and illegal use thereof through system-wide “hacking” or other means. For example, in December 2013 it was reported that there was a leakage of personal information of approximately 130,000 customers of Standard Chartered Bank and Citibank in Korea, which leakage was attributed to a third party sub-contractor in the case of Standard Chartered Bank, and an employee in the case of Citibank. In addition, in January 2014, it was reported that there was a leakage of personal information of approximately 100 million customers of NH Card, Lotte Card and KB Card in Korea due to illegal access to such information by an employee of a third party credit information company in the course of developing information technology programs for these three credit card companies. In order to minimize the risk of security breaches related to customer information, we have taken a series of group-wide preventive measures, such as the adoption and implementation of a best-in-class information security system and reinforcement of internal control measures, and we have not experienced any similar large scale leakage of customer information in the past. However, there can be no guarantee that we will not experience a leakage of customer information or other security breaches in the future as a result of illegal activities by its internal employees, outside consultants or hackers, or otherwise. If a security breach were to happen with respect to us or any of our subsidiaries, it may result in litigation by affected customers or other third parties (including class actions), damage to our reputation and loss of customers, heightened regulatory scrutiny and related sanctions and other costs related to damage control and reinforcement of information security systems, any of which may have a material adverse effect on our business, results of operation and financial condition.

We are fully committed to maintaining the highest standards of cyber security and consumer protection measures and upgrading them continually. We believe that our ISO 27001-certified security management system is among the best-in-class in the industry. Our security management system continuously monitors for signs of potential cyber attacks or other security breaches, and is designed to provide early warning alerts to enable prompt action on our part. We also actively provide employee training on cyber security and other security breaches and have adopted advanced security infrastructure for online financial services such as mandatory website certification and keyboard security functions. In addition, in compliance with applicable regulations we currently carry insurance to cover cyber security breaches up to ￦2 billion in relation to our banking business and up to ￦3 billion in the aggregate and up to ￦1 billion per incident for our securities investment business and have set aside a reserve of ￦1 billion for our credit card business. In addition, in light of the growing use of smartphones and other mobile devices to access financial services, we have implemented security measures to provide a secure mobile banking service as well as to prevent illegal leakage or sharing of customer data and otherwise enhance customer privacy.

We do not believe that the currently outstanding claims in relation to voice phishing will have a material adverse impact on our business, financial condition or results of operations. Additionally, other than voice phishing incidents and the recent cyber security attacks as discussed above, we have not experienced any material security breaches in the past. Furthermore, we are actively taking steps to implement preventive and other steps recommended or required by the regulatory authorities in relation to actual and potential financial scams. However, major financial institutions in Korea, including us, have fallen victim to cyber security attacks in the past, and given the unpredictable and continually evolving nature of cyber security threats due to advances in technology or other reasons, we cannot assure you that, notwithstanding our best efforts at maintaining the best-in-class cyber security systems, we will not be vulnerable to major cyber security attacks in the future, which may have a material adverse effect on our business, financial condition and results of operations. In addition, we may be required to incur substantial costs in connection with compensation to victims of cyber security attack, compliance with the present and future regulatory restrictions, and reparation and other remedial actions relating to system malfunction in the case of a widespread cyber security breach, and suffer reputational damage.

Risks Relating to Our Other Businesses

We may incur significant losses from our investments and, to a lesser extent, trading activities due to market fluctuations.

We enter into and maintain large investment positions in fixed income products, primarily through our treasury and investment operations. We describe these activities in “Item 4.B. Business Overview — Our Principal Activities — Corporate and Investment Banking Services.” We also maintain smaller trading positions, including equity and equity-linked securities and derivative financial instruments as part of our operations. Taking these positions entails making assessments about financial market conditions and trends. The revenues and profits we derive from many of these positions and related transactions are dependent on market prices, which are beyond our control. When we own assets such as debt or equity securities, a decline in market prices, for example, as a result of fluctuating market interest rates or stock market indices, can expose us to trading and valuation losses. If market prices move in a way that we have not anticipated, we may experience losses. In addition, when markets are volatile and subject to rapid changes in price directions, the actual market prices may be contrary to our assessments and lead to lower than anticipated revenues or profits, or even result in losses, with respect to the related transactions and positions.

We may generate losses from our brokerage and other commission- and fee-based business.

We, through our investment and other subsidiaries, currently provide, and seek to expand the offerings of, brokerage and other commission- and fee-based services. Downturns in stock markets typically lead to a decline in the volume of transactions that we execute for our customers and, therefore, a decline in our non-interest revenues. In addition, because the fees that we charge for managing our clients’ portfolios are often based on the size of the assets under management, a downturn in the stock market, which has the effect of reducing the value of our clients’ portfolios or increasing the amount of withdrawals, also generally reduces the fees we receive from our securities brokerage, trust account management and other asset management services. Even in the

absence of a market downturn, below-market performance by our securities, trust account or asset management subsidiaries may result in increased withdrawals and reduced cash inflows, which would reduce the revenue we receive from these businesses. In addition, protracted declines in asset prices can reduce liquidity for assets held by us and lead to material losses if we cannot close out or otherwise dispose of deteriorating positions in a timely way or at commercially reasonable prices.

Other Risks Relating to Us

Our ability to continue to pay dividends and service debt will depend on the level of profits and cash flows of our subsidiaries.

We are a financial holding company with minimal operating assets other than the shares of our subsidiaries. Our primary source of funding and cash flow is dividends from, or disposition of our interests in, our subsidiaries or our cash resources, most of which are currently the result of borrowings. Since our principal assets are the outstanding capital stock of our subsidiaries, our ability to pay dividends on our common and preferred shares and service debt will mainly depend on the dividend payments from our subsidiaries.

Companies in Korea are subject to certain legal and regulatory restrictions with respect to payment of dividends. For example, under the Korean Commercial Code, dividends may only be paid out of distributable income, which is calculated by subtracting the aggregate amount of a company’s paid-in capital and certain mandatory legal reserves from its net assets, in each case as of the end of the prior fiscal year. In addition, financial companies in Korea, including banks, credit card companies, securities companies and life insurers, such as our subsidiaries, must meet minimum capital requirements and capital adequacy ratios applicable to their respective industries before dividends can be paid. For example, under the Banking Act, a bank is required to credit at least 10% of its net profit to a legal reserve each time it pays dividends on distributable income until such time when this reserve equals the amount of its total paid-in capital, and under the Banking Act, the Specialized Credit Financial Business Act and the regulations promulgated by the Financial Services Commission, if a bank or a credit card company fails to meet its required capital adequacy ratio or is otherwise subject to the management improvement measures imposed by the Financial Services Commission, then the Financial Services Commission may restrict the declaration and payment of dividend by such a bank or credit card company. In addition, if our or our subsidiaries’ capital adequacy ratios fall below the required levels, our ability to pay dividends may be restricted by the Financial Services Commission.

Damage to our reputation could harm our business.

We are one of the largest and most influential financial institutions in Korea by virtue of our financial track records, market share and the size of our operations and customer base. Our reputation is critical to maintaining our relationships with clients, investors, regulators and the general public. Our reputation can be damaged in numerous ways, including, among others, employee misconduct (including embezzlement), cyber or other security breaches, litigation, compliance failures, corporate governance issues, failure to properly address potential conflicts of interest, the activities of customers and counterparties over which we have limited or no control, prolonged or exacting scrutiny from regulatory authorities and customers regarding our trade practices, or uncertainty about our financial soundness and our reliability. If we are unable to prevent or properly address these concerns, we could lose our existing or prospective customers and investors, which could adversely affect our business, financial condition and results of operations.

Our risk management policies and procedures may not be fully effective at all times.

In the course of our operations, we must manage a number of risks, such as credit risks, market risks and operational risks. Although we devote significant resources to developing and improving our risk management policies and procedures and expect to continue to do so in the future, our risk management techniques may not be fully effective at all times in mitigating risk exposures in all market environments or against all types of risk, including risks that are unidentified or unanticipated. For example, from time to time, a limited number of our and our subsidiaries’ personnel have engaged in embezzlement of substantial amounts for an extended period of time before such activities were detected by our risk management systems. In response to these incidents, we

have strengthened our internal control procedures by, among others, implementing a real-time monitoring system, but there is no assurance that such measures will be sufficient to prevent similar employee misconducts in the future. Management of credit, market and operational risk requires, among others, policies and procedures to record properly and verify a large number of transactions and events, and we cannot assure you that these policies and procedures will prove to be fully effective at all times against all the risks we face.

Legal claims and regulatory risks arise in the conduct of our business.

In the ordinary course of our business, we are subject to regulatory oversight and potential legal and administrative liability risk. We are also subject to a variety of other claims, disputes, legal proceedings and government investigations in Korea and other jurisdictions where we are active. These types of proceedings expose us to substantial monetary damages and legal defense costs, injunctive relief, criminal and civil penalties and the potential for regulatory restrictions on our businesses. The outcome of these matters cannot be predicted and they could adversely affect our future business.

Due to a global economic slowdown and a deteriorating Korean stock market in the second half of 2008, investment funds whose performance was tied to domestic and foreign stock market indices experienced a sharp fall in their rates of return. Consequently, investors in these funds brought lawsuits against commercial banks in Korea that sold such investment fund products based on the allegation that such banks used defective sales practices in selling such products, such as failing to comply with disclosure requirements or unfairly inducing them to invest in such products. For example, in 2009, we, like other commercial banks that sold similar products, became a defendant in lawsuits in connection with the sale of foreign currency derivatives products known as “KIKOs,” which stands for “knock-in knock-out,” to certain of our customers comprised mostly of small- and medium-sized enterprises. The KIKOs, which are intended to be hedging instruments, operate so that if the value of Korean Won increases to a certain level, we are required to pay the purchasers a certain amount, and if the value of Korean Won falls below a certain level, the purchasers of KIKOs are required to pay us a certain amount. As the Korean Won significantly depreciated against the U.S. Dollar in the second half of 2008, purchasers of KIKOs were required under the relevant contracts to make large payments to us, and some of such purchasers filed lawsuits to nullify their obligations under the allegation that we did not sufficiently disclose the risks in investing in KIKOs and unfairly induced them to make such investments. As of December 31, 2013, at the lower court level, we had won 16 of 35 KIKO-related cases and partially lost five cases, with 14 cases pending. If we lose our cases on appeal, the court may nullify the contracts under which KIKO products were sold and order us to return payments received from the customers. As of December 31, 2013, the aggregate amount of the outstanding KIKO-related claims was ￦164.9 billion, for which we set aside ￦18.1 billion as allowance. See “Item 8.A. Consolidated Statements and Other Financial Information — Legal Proceedings” for more information on the legal and regulatory proceedings currently pending against us. While it is difficult to predict the outcome of each lawsuit against us, as it will ultimately depend on the specific facts and circumstances underlying such lawsuit, if the courts rule against us, the lawsuits may have a material adverse effect on our business, financial condition and results of operations.

While we plan to rigorously defend our positions in the foregoing lawsuits, it is difficult to predict the final outcome of litigation. The total amount in dispute may increase during the course of litigation and other lawsuits may be brought against us based on similar allegations. Accordingly, these lawsuits, especially if the courts finally rule against us, may have a material adverse effect on our business, financial condition and results of operations. In addition, while in response to the foregoing claims we have implemented extensive employee training and other operational processes and procedures to provide adequate disclosure, prevent unfair inducement and otherwise comply with all relevant laws and regulations, we cannot assure you that, despite due training and other preventive measures, all of our employees in charge of such sales have not breached disclosure requirements, engaged in unfair inducement or committed similar acts or will not do the same in the future and, as a result, we may face additional claims or litigation in the future, which may have a material adverse effect on our business, reputation, financial condition and results of operations.

We may experience disruptions, delays and other difficulties relating to our information technology systems.

We rely on our information technology systems for our daily operations, including billing, online and offline financial transactions settlement and record keeping. We also upgrade from time to time our group-wide customer data-sharing and other customer relations management systems. We may experience disruptions, delays, cyber or other security breaches or other difficulties relating to our information technology systems, and may not timely upgrade our systems as currently planned. Any of these developments may have an adverse effect on our business and adversely impact our customers’ confidence in us.

Our activities are subject to cyber security risk.

Our activities have been, and will continue to be, subject to an increasing risk of cyber attacks, the nature of which is continually evolving. Cyber security risks include unauthorized access to privileged and sensitive customer information, including passwords and account information of our retail and corporate customers. For example, many of our customers increasing rely on our Internet banking services for various types of transactions and while such transactions are protected by encryption and other security programs, they are not free from security breaches. We have made substantial investments to build systems and defenses to address threats from cyber attacks. In March 2013, we experienced a temporary interruption in providing online financial services due to large-scale cyber attacks on the security systems of major broadcasting networks and financial institutions in Korea by sources that have yet to be identified. While the interruption of our online financial services lasted approximately 90 minutes, after which our online system resumed without further malfunction, we do not believe such incident resulted in any material loss, loss of customer information or other sensitive data or unauthorized financial transactions. The Financial Supervisory Service conducted an investigation into the incident and found that Shinhan Bank and Jeju Bank had not properly maintained their information technology administrator accounts and vaccine servers. As a result, in December 2013, the Financial Supervisory Service notified Shinhan Bank and Jeju Bank of an institutional caution (which does not give rise to significant sanctions unlike in the case of repeated institutional warnings), in December 2013 against Shinhan Bank and Jeju Bank and imposed disciplinary actions against five of Shinhan Bank’s employees and three of Jeju Bank’s employees. In response to the Financial Supervisory Service’s findings, Shinhan Bank and Jeju Bank adopted additional safety measures, including total segregation between their internal and external networks and enhancements to their security and vaccine programs. See “— Risks Relating to Our Credit Card Business — Our customers may become victims to “voice phishing”, other financial scams or cyber security breaches, for which we may be required to make monetary compensation and suffer damage to our business and reputation” and “Item 4.B. Business Overview — Information Technology” for more information on cyber security risks relating to our businesses and the steps we have taken to strengthen the security of our information technology systems and to prevent cyber security attacks.

Risks Relating to Law, Regulation and Government Policy

We are a heavily regulated entity and operate in a legal and regulatory environment that is subject to change, and violations could result in penalties and other regulatory actions.

As a financial services provider, we are subject to a number of regulations that are designed to maintain the safety and soundness of Korea’s financial system, to ensure our compliance with economic and other obligations and to limit our risk exposure. These regulations may limit our activities, and changes in these regulations may increase our costs of doing business. Regulatory agencies frequently review regulations relating to our business and implement new regulatory measures, including increasing the minimum required provisioning levels or capital adequacy ratios applicable to us and our subsidiaries from time to time. We expect the regulatory environment in which we operate to continue to change. Changes in regulations applicable to us, our subsidiaries and our or their business or changes in the implementation or interpretation of such regulations could affect us and our subsidiaries in unpredictable ways and could adversely affect our business, financial condition and results of operations.

For example, under the Financial Investment Services and Capital Markets Act, financial institutions, including us and our subsidiaries, may offer a broader range of investment products with novel and complex structures, including by way of hedge funds and private equity funds. Such products may involve counterparty risks as well as compliance risks associated with inadequate disclosure of investment risks. In addition, upon implementation of the proposed Financial Consumer Protection Act (currently pending at the National Assembly for a vote), customers of financial services will be entitled to heightened investor protection measures, including additional remedies in the case of “imperfect sales” of financial products based on inadequate disclosure or unfair inducement, such as mandatory compensatory damages, right of rescission, class action eligibility and double damages in case of a statutory violation. Furthermore, in an effort to curb the recent substantial rise in retail loans in Korea, regulators may adopt measures and guidelines designed to limit further growth of our retail lending, in particular mortgage and home equity loans that are deemed to be “high-risk” (namely, mortgage and home equity loans over ￦50 million (i) whose principal and interest are due at maturity, (ii) whose interest is due periodically over the term of the loan but whose principal is due at maturity, or (iii) whose borrower has more than three mortgage and home equity loans from financial institutions). We may also become subject to other restrictions on our operations as a result of future changes in laws and regulations, including more stringent liquidity and capital requirements under Basel III, which will be adopted in phases in Korea in consideration of, among others, the pace and scope of international adoption of such requirements. Any of these regulatory developments may have a material adverse effect on our ability to expand operations or adequately manage our risks and liabilities.

In addition, violations of law and regulations could expose us to significant liabilities and sanctions. For example, the Financial Supervisory Service conducts periodic audits on us and, from time to time, we have received institutional warnings from the Financial Supervisory Service. If the Financial Supervisory Service determines as part of such audit or otherwise that our financial condition, including the financial conditions of our operating subsidiaries, is unsound or that we have violated applicable law or regulations, including Financial Services Commission orders, or if we or our operating subsidiaries fail to meet the applicable requisite capital ratio or the capital adequacy ratio, as the case may be, set forth under Korean law, the Financial Services Commission may order, among others, at the level of the holding company or that of the relevant subsidiary, capital increases or reductions, suspension of officers from performing their duties and appointment of custodians, stock cancellations, consolidations, transfers of business, sales of assets, closures of branch offices, mergers with other financial institutions and/or suspensions of a part or all of our business operations.

In July 2012, the Financial Supervisory Service issued an institutional warning against Shinhan Bank in relation to an embezzlement case involving Dongah Construction Industrial Co., Ltd. on the grounds that there was misconduct in payment of funds held in the trust account and mismanagement of internal control. For detailed description of the Dongah Construction case, please see “Item 8.A. Consolidated Statements and Other Financial Information — Legal Proceedings.” In addition, the Financial Supervisory Service conducted a comprehensive audit of Shinhan Bank from November to December 2012, and in July 2013, notified Shinhan Bank of an institutional caution (which does not give rise to significant sanctions unlike in the case of repeated institutional warnings), imposed disciplinary actions against 65 Shinhan Bank employees and assessed a fine of ￦87.5 million after finding that Shinhan Bank had illegally monitored customer accounts, breached confidentiality with respect to certain financial transactions and violated its obligation to disclose and report an investment in an affiliated company to the Financial Services Commission. Furthermore, in March 2013 the Financial Supervisory Service conducted a special audit of Shinhan Bank as to an alleged malfunctioning of its financial computer network and in December 2013, notified Shinhan Bank of an institutional caution and imposed disciplinary actions against five Shinhan Bank employees after finding that Shinhan Bank did not properly maintain its information technology administrator account and vaccine server.

The Financial Supervisory Service also conducted a special audit of Shinhan Card, together with BC Card and KB Kookmin Card, from June to July 2013, in relation to alleged imperfect sales of insurance products, and in March 2014, issued an institutional warning against each of the three credit card companies based on a finding that card customers were provided inadequate or misleading disclosures regarding the risks relating to such products at the time of sale. The Financial Supervisory Service also imposed disciplinary actions against three Shinhan Card employees and assessed a fine of ￦10 million against Shinhan Card as well as similar sanctions against BC Card and KB Kookmin Card.

For further details on the principal laws and regulations applicable to us as a holding company and our principal subsidiaries, see “Item 4.B. Business Overview — Supervision and Regulation.”

Increased government involvement in the economy and tighter regulation of the financial services industry in Korea in response to a financial crisis or economic downturn could impose greater restrictions on our business and hurt our profitability.

During the global financial crisis and the ensuing economic downturn starting in 2008, many governments worldwide, including the Government, became involved in providing assistance, including by direct investment, to troubled financial institutions and corporations, typically in exchange for increased government monitoring and guidance of the operations of such entities. In Korea, for example, in 2008 and 2009 several major commercial banks, including Shinhan Bank, applied for Government-backed credit lines, which if drawn down would have imposed greater Government monitoring of their operations. While no drawdown has been made and these programs have since terminated, there is no assurance that if the Korean or global economy were to experience another severe crisis, financial institutions in Korea, including us and our subsidiaries, will not require special assistance from the Government, which would generally impose greater government monitoring and restrictions on our business and operations and may have a material adverse effect on our business, financial condition and results of operations.

In light of the widely held perception that the recent global liquidity crisis is at least partly attributable to deficiencies in the risk management systems and capital adequacy of financial institutions, many governments worldwide have taken or are considering taking measures to increase regulatory oversight in these and other areas. Examples of such measures currently being considered by the Government include proposals to further regulate capital and liquidity of financial institutions in line with Basel II and Basel III. There can be no assurance that such measures will have the desired consequences or not have unintended adverse consequences which could hurt our business, financial condition and results of operations or profitability.

The Korean government may encourage targeted lending to and investment in certain sectors in furtherance of policy initiatives, and we may take this factor into account.

The Government has encouraged and may in the future encourage lending to or investment in the securities of certain types of borrowers and other financial institutions in furtherance of government initiatives. The Government, through its regulatory bodies such as the Financial Services Commission, from time to time announces lending policies to encourage Korean banks and financial institutions to lend to or invest in particular industries or customer segments, and, in certain cases, has provided lower cost funding through loans made by the Bank of Korea for further lending to specific customer segments. While all of our loans or securities investments are reviewed in accordance with our internal credit review policies or internal investment guidelines and regulations, we, on a voluntary basis, may factor the existence of such policies and encouragements into consideration in making loans or securities investments. In addition, while the ultimate decision whether to make loans or securities investments remains with us and is made based on our internal credit approval procedures and risk management systems independently of Government policies, the Government may in the future request financial institutions in Korea, including us, to make investments in or provide other forms of financial support to particular sectors of the Korean economy as a matter of policy, which financial institutions, including us, may be required to make or may otherwise decide to accept. For example, the Government has taken and is taking various initiatives to support small- and medium-sized enterprises, which were disproportionately affected by the recent downturn in the Korean and global economy.

For example, under the rules of the Bank of Korea, when commercial banks (including Shinhan Bank) make Won-denominated loans to certain start-up, venture, innovative and other strategic small- and medium-sized enterprises specially designated by the Bank of Korea as “priority borrowers”, the Bank of Korea will provide the underlying funding to these banks at concessionary rates for up to 50% of all such loans made to priority borrowers subject to a monthly-adjusted limit prescribed by the Bank of Korea (currently ￦5 trillion), provided that if such loans to priority borrowers made by all commercial banks exceed the prescribed limit for a given month, the concessionary funding for the following month will be allocated to each commercial bank in proportion to such bank’s lending to priority borrowers two months prior to the time of such allocation, which

has the effect that, if a particular bank lags other banks in making loans to priority borrowers, the amount of funding such bank can receive from the Bank of Korea at concessionary rates will be proportionately reduced.

In tandem with providing additional loans to small- and medium-sized enterprises pursuant to the foregoing arrangement, Shinhan Bank has taken active steps to mitigate the potential adverse impacts from making bad loans to enterprises with high risk profiles as a result of such arrangements, such as by strengthening its loan review and post-lending monitoring processes. However, we cannot assure you that such arrangement did not or will not, or similar or other government-led initiatives in the future will not, result in a suboptimal allocation of our loan portfolio from a risk-reward perspective compared to what we would have allocated based on purely commercial decisions in the absence of such initiatives. The government may implement similar or other initiatives in the future to spur the overall economy or encourage the growth of targeted industries, particularly in light of the fact that bolstering the role of, and providing additional support to, small- and medium-sized enterprises has been a major campaign pledge and accordingly is likely to become a significant policy initiative of the current presidential administration in Korea. Specifically, the government may introduce lending-related initiatives or enforce existing ones in a heightened fashion during times when small- and medium-sized enterprises on average are facing an increased level of financial distress or vulnerability due to an economic downturn, which makes lending to them in the volume and the manner suggested by the government even riskier and less commercially desirable. For example, the Financial Supervisory Service has recently encouraged banks in Korea to increase lending to small- and medium-sized enterprises in order to ease the financial burden on such enterprises amid sluggish economic recovery, and partly as a result of government policy, in January 2014, banks in Korea announced their commitment to increase lending to small- and medium-sized enterprises by ￦34.6 trillion in the aggregate (comprised of a ￦27.3 trillion commitment by commercial banks and a ￦7.5 trillion commitment by government-controlled policy banks) in 2014 in anticipation of growing funding needs by such enterprises in tandem with expected GDP growth for 2014. However, making loans to small- and medium-sized enterprises in furtherance of the government-led initiatives may result in enhanced difficulties for us in terms of risk management, deterioration of our asset quality and reduced earnings, compared to what would have been in the absence of such initiatives.

In addition, in light of the sizable non-performing assets from project financings (mostly related to real estate project financings suffering from the persistent slump in the real estate market) by commercial banks (mostly in the lower tier) and merchant banks, in June 2011, the Government established the United PF 1^st Recovery Private Equity Fund (the “Fund”), a joint-stock private equity fund sponsored by United Asset Management Company Ltd. (“UAMCO”), a government-invested enterprise and the largest purchaser in Korea of non-performing financial assets generally, and eight major commercial and policy banks, namely Woori Bank, Kookmin Bank, Nonghyup Bank, Shinhan Bank, Hana Bank, Korea Exchange Bank, Korea Development Bank and Industrial Bank of Korea.

Shinhan Bank does not have any involvement in the management or day-to-day operations of the Fund. While Shinhan Bank holds a 10.65% equity interest in the Fund, Shinhan Bank is designated as a limited partner, and under the Fund’s articles of organization the management and day-to-day operations of the Fund are specifically delegated to a general partner designated as the managing partner for the Fund, which is currently UAMCO, a limited liability company established under Korean law whose shareholders are the six banks that have made capital contributions to the Fund. The scope of such delegated management activities are as follows: (i) management and operating of the Fund’s assets and liabilities, (ii) selection of investment targets and exercise of investment decisions and redemption decisions, (iii) exercise of rights over investment assets, (iv) issuance and distribution of beneficiary certificates underlying the investment assets, (v) distribution of Fund assets, (vi) accounting and recordkeeping, (vii) payment of expenses and liabilities related to the operation of the Fund and (viii) ancillary activities related to the foregoing. Under the Fund’s articles of organization, the activities of the general partner acting as the managing partner are subject to supervision by an advisory committee consisting of representatives of each of the limited partners (which may not be a general partner), and the advisory committee may express a view on the activities of the managing partner. The advisory committee’s view is not binding, and serves only as a recommendation with respect to certain activities over which the managing partner is authorized to exercise its discretion under the Financial Investment Services and Capital Markets Act. However, in the event the managing partner breaches law or material articles of the Fund’s articles of

incorporation, the advisory committee, with the consent from members representing two-thirds or more of the equity interests in the Fund, may suspend (and if applicable, restore) such managing partner’s activities relating to the operation and management of the Fund.

The Fund is funded with capital contributions and loans from the aforesaid nine sponsors in the aggregate amount of ￦1,828 billion (consisting of ￦1,400 billion in capital contributions and ￦428 billion in loans) as of December 31, 2013. Of such amounts, under the fund organization documents, Shinhan Bank is obligated to make capital contributions up to ￦149 billion (representing a 10.65% equity interest in the Fund in the form of common shares) and loans of ￦19.4 billion (representing 4.5% of the total loans made by the sponsors) as of December 31, 2013, and Shinhan Bank, together with other sponsors, may be requested to make, on a prorated basis based on their relative shareholdings, additional capital contributions and loans upon further purchase by the Fund of non-performing assets from project financings. The amount of funding obligation is proportionate to each sponsor’s relative asset size and its exposure to project financings. As of December 31, 2013, Shinhan Bank made capital contributions in the aggregate amount of ￦118.7 billion and has fulfilled its capital contribution obligations. As for the capital contributions made by Shinhan Bank to-date, these have not been subject to impairment since the underlying assets of the Fund, which primarily consist of impaired loans, are purchased at fair value, and profits have subsequently been realized thereon either in the form of recovery from enhanced collection measures or capital gains upon resale thereof. Shinhan Bank currently does not plan to make additional capital contributions. The terms of the loans, including the interest rate and redemption provisions, are subject to further negotiation among the sponsors.

The objective of the Fund is to purchase non-performing assets from project financing companies, professionally manage such assets and later sell them at a profit once these assets have normalized. By doing so, the Fund is expected to enhance the asset quality of financial institutions with significant exposure to unsound project financings by transferring a part of such exposure from such institutions to the Fund, as well as help to normalize the project financing industry. The Fund is not backed by any government guarantee, and the Fund operates based on mutual agreement of the sponsors. The term of the Fund is five years, which may be extended at a general meeting of the sponsors. Upon liquidation of the Fund, each sponsor will be entitled to a share in the net assets of the Fund at the time of liquidation in proportion to their respective contributions to the Fund.

Since the establishment of the Fund in June 2011 and as of December 31, 2013, Shinhan Bank has sold non-performing project financing assets in the aggregate amount of ￦179.1 billion to the Fund and recognized from such sales an aggregate loss of ￦56.2 billion before applying allowance for loan losses allocated to such assets and an aggregate profit of ￦7.7 billion after applying allowance for loan losses allocated to such assets. Under IFRS, the sale of non-performing project financing assets to the Fund is classified as a true sale, and therefore, gain or loss from such sale is recognized at the time of sale, and no gain or loss is recognized after the time of sale. Subject to market conditions, Shinhan Bank may sell additional non-performing project financing assets to the Fund and use all or part of the proceeds for its future capital contribution or loan requirements. However, given the generally poor asset quality of its non-performing project financing assets, there is no assurance that Shinhan Bank will be able to sell such assets held by it on commercially reasonable terms or that the Fund will be able to attain its objective of selling the purchased project financing assets at a profit, in which case Shinhan Bank may not be able to recoup its investment in, or be repaid the loans to, the Fund fully or at all.

The level and scope of government oversight of our lending business, particularly regarding mortgage and home equity loans, may change depending on the economic or political climate.

Curtailing excessive speculation in the real estate market has historically been a key policy initiative for the Government, and it has in the past adopted several regulatory measures, including in relation to retail banking, to affect such policy. Some of the measures undertaken in the past include requiring financial institutions to impose stricter debt-to-income ratio and loan-to-value ratio requirements for mortgage loans for real property located in areas deemed to have engaged in a high level of speculation, raising property tax on real estate transactions for owners of multiple residential units, adopting a ceiling on the sale price of newly constructed housing units and recommending that commercial banks restrain from making further mortgage and home equity lending, among others.

The Government may from time to time take measures to regulate the housing market in response to prevailing market conditions. For example, in an effort to facilitate real estate transactions amid a prolonged slump in the housing market in Korea, in April 2013, the Government announced the Real Estate Comprehensive Countermeasure, which provides for, among other things, (i) reduced capital gains tax and (ii) exemption of acquisition tax for first-time homebuyers. In addition, in November 2013, the Government announced a permanent reduction in acquisition tax, with retrospective application from August 2013. Prior to such reduction, acquisition tax was assessed on a differentiated scale based on whether the homebuyer was purchasing a primary home or a secondary home, with the former being assessed an acquisition tax of 2% for the purchase of homes under ￦900 million and 4% for homes exceeding ￦900 million, and the latter being assessed an acquisition tax of 4% regardless of the price of the home. Under the new regulatory structure, the differentiated tax scale for primary homes and secondary homes is eliminated, and all homebuyers are assessed an acquisition tax of 1% for the purchase of homes under ￦600 million, 2% for homes exceeding ￦600 million but less than ￦900 million and 3% for homes exceeding ￦900 million.

While any Government measure that is designed to stimulate growth in the real estate sector may result in growth of, and improved profitability for, our retail lending business (particularly with respect to mortgage and home equity loans) at least for the short term, such measure could also result in unintended consequences, including potentially excessive speculation resulting in a “bubble” for the Korean real estate market and a subsequent market crash. In addition, if the Government were to change the direction of its stimulative measures (for example, in order to preemptively curtail an actual or anticipated bubble in the real estate market), such change in policy may result in a contraction of the real estate market, a decline in real estate prices and consequently, a reduction in the growth of, and profitability for, our retail and/or other lending businesses, as well as otherwise have an adverse effect on the business, financial condition and results of operations or profitability of the Bank. See “— Risks Relating to Our Banking Business — A decline in the value of the collateral securing our loans or our inability to fully realize the collateral value may adversely affect our credit portfolio.”

Following from the recent decision of the Supreme Court of Korea, we may be exposed to potential claims made by current or previous employees for unpaid wages for the past three years under the expanded scope of ordinary wages and become subject to additional labor costs arising from the broader interpretation of ordinary wages under such decision.

Under the Labor Standards Act, an employee is legally entitled to “ordinary wages”. Under the guidelines previously issued by the Ministry of Labor, ordinary wages include base salary and certain fixed monthly allowances for work performed overtime during night shifts and holidays. Prior to the Supreme Court decision described below, many companies in Korea had typically interpreted these guidelines as excluding from the scope of ordinary wages fixed bonuses that are paid other than on a monthly basis, namely on a bi-monthly, quarterly or biannually basis, although such interpretation had been a subject of controversy and had been overruled in a few court cases.

In a decision rendered on December 18, 2013, the Supreme Court of Korea ruled that regular bonuses (including those that are paid other than on a monthly basis) shall be deemed to be ordinary wages if these bonuses are paid “regularly” and “uniformly” on a “fixed basis” notwithstanding differential amounts based on seniority. Under this decision, any collective bargaining agreement or labor-management agreement which attempts to exclude such regular bonuses from ordinary wage will be deemed void for violation of the mandatory provisions of Korean law. However, the Supreme Court further ruled that an employee’s claim for underpayments under the expanded scope of ordinary wages for the past three years within the statute of limitations may be denied based on the principles of good faith in certain limited situations. In response to the Supreme Court’s ruling, on January 23, 2014, the Ministry of Employment and Labor issued a guideline on ordinary wages to further clarify what constitutes ordinary wages under Korean law. Pursuant to such guidelines, we believe that the bonuses and performance incentives paid by most of our subsidiaries, including Shinhan Bank, do not fall within the definition of ordinary wage. In addition, given our collective bargaining agreements and labor-management agreements currently in effect, and which were entered into prior to the Supreme Court decision, exclude bonuses and performance incentive compensation from ordinary wages, any additional payments due as a result of retrospective application of the decision is likely to be minimal.

We anticipate that this decision may result in additional labor cost in the form of additional payments under the expanded scope of ordinary wages incurred in the past three years as well as to be incurred in the future. Although we believe that the amount of such additional costs at least for past unpaid wages under the expanded scope of ordinary wages will be limited, we may be required to revise our compensation structure and negotiate with our employees and there is no assurance that such additional payments or restructuring of compensation structure will not have an adverse effect on our results of operation and cash flows.

Korea’s legislation allowing class action suits related to securities transactions may expose us to additional litigation risk.

The Act on Class Actions regarding Securities allows class action suits to be brought by shareholders of companies listed on the Korea Exchange, including ours, for losses incurred in connection with the purchase and sale of securities and other securities transactions arising from (i) false or inaccurate statements provided in registration statements, prospectuses and business reports; (ii) insider trading and (iii) market manipulation. This law permits 50 or more shareholders who collectively hold 0.01% or more of the shares of a company at the time when the cause of such damages occurred to bring a class action suit against us and our subsidiaries and our and their respective directors and officers. It is uncertain how the courts will apply this law, however, as this law has been enacted relatively recently and there are few precedents. Litigation can be time-consuming and expensive to resolve, and can divert valuable management time and attention from the operation of a business. We are not aware of any basis for such suit being brought against us, nor, to our knowledge, are there any such suits pending or threatened. Any such litigation brought against us could have a material adverse effect on our business, results of operations and financial condition.

Risks Relating to Korea

Unfavorable financial and economic conditions in Korea and globally may have a material adverse impact on our asset quality, liquidity and financial performance.

We are incorporated in Korea, where most of our assets are located and most of our income is generated. As a result, we are subject to political, economic, legal and regulatory risks specific to Korea, and our business, results of operations and financial condition are substantially dependent on developments relating to the Korean economy. As Korea’s economy is highly dependent on the health and direction of the global economy, and investor’s reactions to developments in one country can have adverse effects on the securities price of companies in other countries, we are also subject to the fluctuations of the global economy and financial markets. Factors that determine economic and business cycles in the Korean or global economy are for the most part beyond our control and inherently uncertain. In addition to discussions of recent developments regarding the global economic and market uncertainties and the risks relating to us as provided elsewhere in this section, factors that could hurt Korea’s economy in the future include, among others:

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further deterioration of the fiscal and financial crisis in Europe, downgrades in the sovereign or other credit ratings of the governments and financial institutions in Europe and the United States, as well as the slowdown of the Chinese and Indian economies, which could have adverse effects on the global, and in turn Korean, credit and financial markets;

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inflation levels, volatility in foreign currency reserve levels, commodity prices (including coal, oil, LNG prices), exchange rates (including fluctuation of U.S. Dollar exchange rates or revaluation of the Renminbi), interest rates, and stock markets and inflows and outflows of foreign capital, either directly, into the stock markets, through derivatives or otherwise;

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increased reliance on exports to service foreign currency debts, which could cause friction with Korea’s trading partners;

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adverse developments in the economies of countries to which Korea exports goods and services (such as the United States, China and Japan), or in emerging market economies in Asia or elsewhere that could result in a loss of confidence in the Korean economy;

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the continued emergence of China, to the extent its benefits (such as increased exports to China) are outweighed by its costs (such as competition in export markets or for foreign investment and relocation of the manufacturing base from Korea to China);

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social and labor unrest or declining consumer confidence or spending resulting from layoffs, increasing unemployment and lower levels of income;

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uncertainty and volatility in real estate prices arising, in part, from the Government’s policy-driven tax and other regulatory measures;

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a decrease in tax revenues and a substantial increase in the Government’s expenditures for unemployment compensation and other social programs that together could lead to an increased Government budget deficit;

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political uncertainty or increasing strife among or within political parties in Korea, including as a result of the increasing polarization of the positions of the ruling conservative party and the progressive opposition;

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a deterioration in economic or diplomatic relations between Korea and its trading partners or allies, including such deterioration resulting from trade disputes or disagreements in foreign policy; and

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any other developments that has a material adverse effect in the global economy, such as an act of war, a terrorist act, a breakout of an epidemic such as SARS, avian flu or swine flu or natural disasters such as the earthquake and tsunami in Japan in March 2011 and the resulting leakage of nuclear materials, and the related disruptions in the economies of Japan and other countries.

Any future deterioration of the Korean economy could have an adverse effect on our business, financial condition and results of operations.

Tensions with North Korea could have an adverse effect on us, the price of our common shares and our American depositary shares.

Relations between Korea and North Korea have been tense throughout Korea’s modern history. The level of tension between the two Koreas has fluctuated and may increase abruptly as a result of current and future events. In recent years, there have been heightened security concerns stemming from North Korea’s nuclear weapons and long-range missile programs and increased uncertainty regarding North Korea’s actions and possible responses from the international community. For example, in March 2010, the Cheonan, a Korean navy ship, sank off the western coast of Korea killing 46 soldiers. An investigation carried out by the Joint Civilian-Military Investigation Group, consisting of investigators from Korea, the United States, Australia, the United Kingdom and Sweden, concluded that the Cheonan was sunk by a North Korean torpedo. Also, in November 2010, the North Korean military fired artillery shells onto the Korean island of Yeonpyeong, killing two Korean soldiers and two civilians which set off an exchange of fire between the two sides. Around the end of 2010, the International Criminal Court tentatively concluded that North Korea’s sinking of the Cheonan and shelling of the island of Yeonpyeong constituted a war crime, and launched a preliminary investigation regarding such incidents. While there has been no major attack or territorial invasion from North Korea since the attack on the island of Yeonpyeong, North Korea has been launching test missiles on a periodic basis.

Furthermore, following a series of missile testing in 2009, in April 2012, North Korea conducted a test of a long-range missile against the protests of many in the international community, including Korea, Japan and the United States. Although the test failed, it has raised tensions in the Korean peninsula. The United Nations Security Council has strongly condemned the tests and the United States has cut off food aid to North Korea. North Korea has responded by issuing a statement that it is free to take necessary retaliatory measures. After Korea announced in October 2012 that it would extend the range of its ballistic missiles from 185 to 500 miles, a distance which could hit the northeast corner of North Korea from launch sites in central Korea, the National Defense Commission (which is the top military body of North Korea) announced that it was ready to wage war on the United States and its allies and threatened to launch nuclear weapons in the event the United States or its allies use nuclear weapons against North Korea. In February 2013, North Korea conducted a third nuclear test

following the previous two rounds of nuclear tests in 2006 and 2009. The regime also heralded further actions after the nuclear test and mentioned a potential fourth nuclear test. In response, the Korean government announced that North Korea’s nuclear test was in clear violation of the U.N. resolution and Korea would strengthen the coordination with the international community in order to deter the regime from being armed with nuclear weapons. In April 2013, North Korea blocked South Koreans from entering the Kaesong Industrial Complex, an economic cooperation zone within North Korea and on April 26, 2013, Korea decided to withdraw its workers from the complex. In September 2013, however, Korea and North Korea reached an agreement and resumed operation of the Kaesong Industrial Complex, and have since made efforts to improve the business environment of the complex, including by building radio frequency identification data transfer systems and launching internet service, among other things. In February 2014, the U.S. Congressional Research Service reported that the Government’s approach towards the expansion and internationalization of the Kaesong Industrial Complex could conflict with U.S. legislative efforts to expand its sanctions on North Korea, and there is no assurance that the Government will not reverse or reduce such efforts at detente.

In addition, there recently has been increased uncertainty about the future of North Korea’s political leadership and its implications for the economic and political stability of the region. Shortly after the death of Kim Jong-il, a long-standing former ruler of North Korea, in December 2011, his son Kim Jong-un was named North Korea’s Supreme Commander of the Armed Forces. Whether Kim Jong-un will successfully solidify his political power or whether he will implement policies that will successfully assist North Korea in withstanding the many challenges it faces, however, remains uncertain. If the consolidation of power by Kim Jong-un is not successful or there exist any conflicts among different political factions, there may be significant uncertainty regarding the policies, actions and initiatives that North Korea might pursue in the future. For example, in December 2013, Jang Sung-taek, a relative of Kim Jong-un who was widely speculated to be the second in command after Kim Jong-un, was executed on charges of sedition, among others. There are reports that such development has led to and may further lead to an extensive political purge in the North Korean leadership and cause further political and social instability in North Korea and/or adoption of more hostile policies that could enhance friction with Korea and the rest of the world. For example, North Korea has recently announced its plan to test long-distance missiles, Kwang-myong Sung No. 3, despite the sanction from the United Nations Security Council and objection from the international society.

There can be no assurance that the level of tension and instability in the Korean peninsula will not escalate in the future, or that the political regime in North Korea may not suddenly collapse. Furthermore, North Korea’s economy also faces severe challenges, including severe inflation and food shortages, which may further aggravate social and political tensions within North Korea. In addition, reunification of Korea and North Korea could occur in the future, which would entail significant economic commitment and expenditure by Korea. Any further increase in tension or uncertainty relating to the military, political or economic stability in the Korean peninsula, including a breakdown of diplomatic negotiations over the North Korean nuclear program, occurrence of military hostilities, heightened concerns about the stability of North Korea’s political leadership or its actual collapse, a leadership crisis, a breakdown of high-level contacts or accelerated reunification could have a material adverse effect on our business, financial condition and results of operations, as well as the price of our common shares and our American depositary shares.

Risks Relating to Our American Depositary Shares

There are restrictions on withdrawal and deposit of common shares under the depositary facility.

Under the deposit agreement, holders of shares of our common stock may deposit those shares with the depositary bank’s custodian in Korea and obtain American depositary shares, and holders of American depositary shares may surrender American depositary shares to the depositary bank and receive shares of our common stock. However, under current Korean laws and regulations, the depositary bank is required to obtain our prior consent for the number of shares to be deposited in any given proposed deposit which exceeds the difference between (1) the aggregate number of shares deposited by us for the issuance of American depositary shares (including deposits in connection with the initial and all subsequent offerings of American depositary shares and stock dividends or other distributions related to these American depositary shares) and (2) the number of shares on deposit with the depositary bank at the time of such proposed deposit. We have consented to the deposit of

outstanding shares of common stock as long as the number of American depositary shares outstanding at any time does not exceed 40,432,628. As a result, if you surrender American depositary shares and withdraw shares of common stock, you may not be able to deposit the shares again to obtain American depositary shares.

Ownership of our shares is restricted under Korean law.

Under the Financial Holding Companies Act, any single shareholder (together with certain persons in a special relationship with such shareholder) may acquire beneficial ownership of up to 10% of the total issued and outstanding shares with voting rights of a bank holding company controlling national banks such as us. In addition, any person, except for a “non-financial business group company” (as defined below), may acquire in excess of 10% of the total voting shares issued and outstanding of a financial holding company which controls a national bank, provided that a prior approval from the Financial Services Commission is obtained each time such person’s aggregate holdings exceed 10% (or 15% in the case of a financial holding company controlling regional banks only), 25% or 33% of the total voting shares issued and outstanding of such financial holding company. The Government and the Korea Deposit Insurance Corporation are exempt from this limit. Furthermore, certain non-financial business group companies (i.e., (i) any same shareholder group with aggregate net assets of all non-financial business companies belonging to such group of not less than 25% of the aggregate net assets of all members of such group; (ii) any same shareholder group with aggregate assets of all non-financial business companies belonging to such group of not less than ￦2 trillion; or (iii) any mutual fund in which a same shareholder group identified in (i) or (ii) above owns more than 4% of the total shares issued and outstanding of such mutual fund) may not acquire beneficial ownership in us in excess of 4% of our outstanding voting shares, provided that such non-financial business group companies may acquire beneficial ownership of up to 10% of our outstanding voting shares with the approval of the Financial Services Commission under the condition that such non-financial business group companies will not exercise voting rights in respect of such shares in excess of the 4% limit. See “Item 4.B. Business Overview — Supervision and Regulation — Principal Regulations Applicable to Financial Holding Companies — Restrictions on Financial Holding Company Ownership.” To the extent that the total number of shares of our common stock that you and your affiliates own together exceeds these limits, you will not be entitled to exercise the voting rights for the excess shares, and the Financial Services Commission may order you to dispose of the excess shares within a period of up to six months. Failure to comply with such an order would result in a fine of up to ￦50 million, plus an additional charge of up to 0.03% of the book value of such shares per day until the date of disposal.

Holders of our ADSs will not have preemptive rights in certain circumstances.

The Korean Commercial Code and our articles of incorporation require us, with some exceptions, to offer shareholders the right to subscribe for new shares in proportion to their existing ownership percentage whenever new shares are issued. If we offer any rights to subscribe for additional shares of our common stock or any rights of any other nature, the depositary bank, after consultation with us, may make the rights available to you or use reasonable efforts to dispose of the rights on your behalf and make the net proceeds available to you. The depositary bank, however, is not required to make available to you any rights to purchase any additional shares unless it deems that doing so is lawful and feasible and:

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a registration statement filed by us under the U.S. Securities Act of 1933, as amended, is in effect with respect to those shares; or

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the offering and sale of those shares is exempt from or is not subject to the registration requirements of the U.S. Securities Act.

We are under no obligation to file any registration statement with the U.S. Securities and Exchange Commission. If a registration statement is required for you to exercise preemptive rights but is not filed by us, you will not be able to exercise your preemptive rights for additional shares and you will suffer dilution of your equity interest in us.

The market value of your investment in our ADSs may fluctuate due to the volatility of the Korean securities market.

Our common stock is listed on the KRX KOSPI Division of the Korea Exchange, which has a smaller market capitalization and is more volatile than the securities markets in the United States and many European countries. The market value of ADSs may fluctuate in response to the fluctuation of the trading price of shares of our common stock on the Stock Market Division of the Korea Exchange. The Stock Market Division of the Korea Exchange has experienced substantial fluctuations in the prices and volumes of sales of listed securities and the Stock Market Division of the Korea Exchange has prescribed a fixed range in which share prices are permitted to move on a daily basis. Like other securities markets, including those in developed markets, the Korean securities market has experienced problems including market manipulation, insider trading and settlement failures. The recurrence of these or similar problems could have a material adverse effect on the market price and liquidity of the securities of Korean companies, including our common stock and ADSs, in both the domestic and the international markets.

The Korean government has the potential ability to exert substantial influence over many aspects of the private sector business community, and in the past has exerted that influence from time to time. For example, the Korean government has promoted mergers to reduce what it considers excess capacity in a particular industry and has also encouraged private companies to publicly offer their securities. Similar actions in the future could have the effect of depressing or boosting the Korean securities market, whether or not intended to do so. Accordingly, actions by the government, or the perception that such actions are taking place, may take place or has ceased, may cause sudden movements in the market prices of the securities of Korean companies in the future, which may affect the market price and liquidity of our common stock and ADSs.

Your dividend payments and the amount you may realize upon a sale of your ADSs will be affected by fluctuations in the exchange rate between the U.S. Dollar and the Won.

Investors who purchase the American depositary shares will be required to pay for them in U.S. Dollars. Our outstanding shares are listed on the Korea Exchange and are quoted and traded in Won. Cash dividends, if any, in respect of the shares represented by the American depositary shares will be paid to the depositary bank in Won and then converted by the depositary bank into U.S. Dollars, subject to certain conditions. Accordingly, fluctuations in the exchange rate between the Won and the U.S. Dollar will affect, among other things, the amounts a registered holder or beneficial owner of the American depositary shares will receive from the depositary bank in respect of dividends, the U.S. Dollar value of the proceeds which a holder or owner would receive upon sale in Korea of the shares obtained upon surrender of American depositary shares and the secondary market price of the American depositary shares.

If the Government deems that certain emergency circumstances are likely to occur, it may restrict the depositary bank from converting and remitting dividends in Dollars.

If the Government deems that certain emergency circumstances are likely to occur, it may impose restrictions such as requiring foreign investors to obtain prior Government approval for the acquisition of Korean securities or for the repatriation of interest or dividends arising from Korean securities or sales proceeds from disposition of such securities. These emergency circumstances include any or all of the following:

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sudden fluctuations in interest rates or exchange rates;

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extreme difficulty in stabilizing the balance of payments; and

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a substantial disturbance in the Korean financial and capital markets.

The depositary bank may not be able to secure such prior approval from the government for the payment of dividends to foreign investors when the Government deems that there are emergency circumstances in the Korean financial markets.

Other Risks

We are generally subject to Korean corporate governance and disclosure standards, which differ in significant respects from those in other countries.

Companies in Korea, including us, are subject to corporate governance standards applicable to Korean public companies which differ in many respects from standards applicable in other countries, including the United States. As a reporting company registered with the Securities and Exchange Commission and listed on the New York Stock Exchange, we are, and in the future will be, subject to certain corporate governance standards as mandated by the Sarbanes-Oxley Act of 2002. However, foreign private issuers, including us, are exempt from certain corporate governance requirements under the Sarbanes-Oxley Act or under the rules of the New York Stock Exchange. For significant differences, see “Item 16.G. Corporate Governance.” There may also be less publicly available information about Korean companies, such as us, than is regularly made available by public or non-public companies in other countries. Such differences in corporate governance standards and less public information could result in less than satisfactory corporate governance practices or disclosure to investors in certain countries.

You may not be able to enforce a judgment of a foreign court against us.

We are a corporation with limited liability organized under the laws of Korea. Substantially all of our directors and officers and other persons named in this annual report reside in Korea, and all or a significant portion of the assets of our directors and officers and other persons named in this annual report and substantially all of our assets are located in Korea. As a result, it may not be possible for holders of the American depository shares to affect service of process within the United States, or to enforce against them or us in the United States judgments obtained in United States courts based on the civil liability provisions of the federal securities laws of the United States. There is doubt as to the enforceability in Korea, either in original actions or in actions for enforcement of judgments of United States courts, of civil liabilities predicated on the United States federal securities laws.

We may become a passive foreign investment company (“PFIC”), which could result in adverse U.S. tax consequences to U.S. investors.

Based upon the past and projected composition of our income and valuation of our assets, we do not believe that we were a PFIC for 2013, and we do not expect to be a PFIC in 2014 or to become one in the foreseeable future, although there can be no assurance in this regard. If, however, we become a PFIC, such characterization could result in adverse U.S. tax consequences to you if you are a U.S. investor. For example, if we become a PFIC, our U.S. investors will become subject to increased tax liabilities under U.S. tax laws and regulations and will become subject to burdensome reporting requirements. Our PFIC status is determined on an annual basis and depends on the composition of our income and assets. Specifically, we will be classified as a PFIC for U.S. tax purposes if either: (i) 75% or more of our gross income in a taxable year is passive income, or (ii) the average percentage of our assets by value in a taxable year which produce or are held for the production of passive income (which generally includes cash) is at least 50%. Special rules treat certain income earned by a non-U.S. corporation engaged in the active conduct of a banking business as non-passive income. See “Item 10.E. Taxation — Certain United States Federal Income Tax Consequences — Passive Foreign Investment Company Rules.” We cannot assure you that we will not be a PFIC for 2014 or any future taxable year.

ITEM 4.

INFORMATION ON THE COMPANY

ITEM 4.A.

History and Development of the Company

Introduction

Incorporated on September 1, 2001, Shinhan Financial Group is the first privately-held financial holding company to be established in Korea. Since inception, we have developed and introduced a wide range of financial products and services in Korea and aim to deliver comprehensive financial solutions to clients through a convenient one-portal network. According to reports by the Financial Supervisory Service, we are second largest

financial services provider in Korea as measured by total assets as of December 31, 2013 and operate the third largest banking business (as measured by consolidated total assets as of December 31, 2013) and the largest credit card business (as measured by the total credit purchase volume as of December 31, 2013) in Korea.

We have experienced substantial growth through several mergers and acquisitions. Most notably, our acquisition of Chohung Bank in 2003 has enabled us to have one of the three largest banking operations in Korea and enhanced our banking client base by adding Chohung Bank’s large corporate clients to our traditional client base of small- and medium-sized enterprises. In addition, our acquisition in March 2007 of LG Card, the then and now largest credit card company in Korea, has significantly expanded our non-banking business capacity and helped us to achieve a balanced business portfolio.

We currently have 13 direct subsidiaries and 18 indirect subsidiaries offering a wide range of financial products and services, including commercial banking, corporate banking, private banking, credit card, asset management, brokerage and insurance services. We believe that such breadth of services will help us to meet the diversified needs of our present and potential clients. We currently serve approximately 29 million active customers, which we believe is the largest customer base in Korea, through approximately 24,134 employees at approximately 1,447 network branches group-wide. While substantially all of our revenues have been historically derived from Korea, we aim to serve the needs of our clients through a global network of our 71 offices in the United States, Canada, the United Kingdom, Japan, the People’s Republic of China, Germany, India, Hong Kong, Vietnam, Cambodia, Kazakhstan and Singapore.

Our registered office and corporate headquarters are located at 20, Sejong-Daero 9-Gil, Jung-Gu, Seoul 100-724, Korea and our telephone number is +822 6360 3000.

Our Strategy

Since our inception in 2001, we have pursued the following objectives as the core of our long-term strategy: (i) balanced growth in our banking and non-banking businesses, (ii) continued creation of value by identifying new business opportunities and gaining a competitive edge through differentiating our business model from that of our competitors; and (iii) becoming the market leader in Korea and a world-class financial holding company through enhancement of our management systems and core competencies.

The global financial crisis that began in the second half of 2008 has engendered, even as its immediate ripple effects have subsided for the most part, a new set of challenges for financial service providers such as us and our subsidiaries by having created a “new normal” in the business environment with the following defining features: (i) stricter financial regulations and regulatory scrutiny with a focus on heightened risk management, (ii) less tolerance for unbalanced risk in financial products, (iii) demand for higher levels of capital adequacy and reduced debt levels, (iv) greater market acceptability of a business model that emphasizes stable and conservative growth even at the expense of higher return, (v) rising political and social skepticism of unfettered capitalism and stronger demand for enhanced social responsibility and accountability of financial institutions. In addition, advances in mobile and other technologies are renewing challenges for financial service providers to continually reexamine their existing business models. Combined, these developments require that we continue to seek opportunities to foster customer trust, enhance our social capital and quickly adapt ourselves to the constant changes in our business environment.

Accordingly, in recognition of these trends in our business environment, which we expect to continue for the foreseeable future, and in order to meet the new set of challenges arising therefrom, as a general strategic objective, we are in the process of re-making ourselves with an overarching focus of putting our customers first, namely by constantly seeking ways to make our interactions with customers more user-friendly and customer-oriented, as well as further strengthening risk management, efficiently using our resources and selectively identifying new growth opportunities.

Our mid- to long-term strategic target is to become Korea’s number one financial brand by 2015 through emphasis on creation of value to our customers and fostering “good” growth. We believe that establishing ourselves firmly as the market leader in Korea is critical to realizing our ultimate objective of becoming a world-class financial institution, and our strategic priorities reflect our renewed commitment to sustainable growth, stable profitability and best-class core competencies. In addition, in May 2013, we have added “compassionate

finance” and “strategic cost-saving” as our key strategic priorities in order to further foster the trust element in our relationships with customers and to promote sustainable efficiency in the face of changing business environments, respectively.

More specifically, our key strategic priorities currently include the following:

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Solidify our market position as the “local best” in our core businesses. Currently, our two core businesses of banking and credit cards rank as number one in their respective industries (banking in terms of profitability and credit cards in terms of market share and the number of customers). We seek to solidify our brand and market position in these fields as the indisputable local best in both quantitative and qualitative terms by offering our customers quality service that clearly differentiates us from our competitors. To this end, in our banking business, we will seek to offer a variety of products and services tailored to each customer segment, enhance service capabilities that do not require customers’ physical presence in our branch offices and increase its distribution network outside the Seoul metropolitan area. As for our credit card business, we seek to further solidify our market leadership position and generate further revenue growth by offering new differentiated services and exploring opportunities in the emerging arena of strategic convergence between financial services providers and telecommunication service providers as well as other potential business opportunities on a selective basis, as well as further improve our cost structure.

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Strengthen fee-earnings businesses. While we will continue to focus on our core, interest income generating business of banking and credit card services, in order to attain a more balanced overall business portfolio as well as in anticipation of a potential rise in interest rates and cost of capital, we plan to strengthen our businesses that generate non-interest fee income, such as asset management, insurance and securities. To this end, we are currently re-evaluating the business models for our key business segments with the goal of strengthening our competitiveness in areas of core competencies that will ensure our long-term viability and profitability. More specifically, our asset management business will focus on building the Shinhan brand through continued customer-oriented product development, our securities business will support our asset management business through developing and distributing new investment products and enhancing marketing channels, and our insurance business will seek to join the top tier in the industry through organic growth.

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Enhance synergy through shared focus on the customer. We plan to renew our commitment to our founding principle of emphasizing customer-oriented service by streamlining our business lines to provide a comprehensive financial services package tailored to each customer, as well as enhancing customer access to our diverse product offerings through a more customer-friendly one portal financial service platform. To that end, we are identifying precedents that can serve as useful guidelines for successful intra-group synergy generation and are building clear and comprehensive joint marketing models that can provide specific guidance for differentiated synergy output for our entire group.

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Gain competitiveness in strategic growth areas. In light of the increasing maturation of the domestic financial services sector, we intend to seek new business opportunities at the group level by sharing group-wide management resources to identify and develop potential strategic growth areas. In particular, we plan to enhance the competitiveness of our investment banking business so as to be on par with our group-wide market leadership by redefining its business model and selectively entering into international markets, with an initial focus on Asia. In addition, we will explore selectively entering into strategic alliances with telecommunications service providers and retail grocery and department store chains to take advantage of new business opportunities generated by technological developments and the growing prominence of retail chains in the distribution of financial services.

In order to effectively achieve the foregoing strategic objectives, we plan to continue to enhance our business fundamentals in the following areas:

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systematic roll-out of “compassionate finance” through (i) group-wide adoption and implementation of various operating systems and infrastructure designed to enhance customer value in our marketing and other business generation efforts, (ii) continued development of products and services specifically tailored to promote the theme of compassionate finance, (iii) strengthening support for low-income households

and small businesses, and (iv) embedding compassionate finance into the group-wide culture through continuous internal education and outside consulting, including through promotional campaigns for successful cases of compassionate finance;

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systemized strategic cost-savings through (i) implementation of a group-wide efficiency management optimization system, (ii) continuous organizational “slimming”, and (iii) realignment of the group-wide business portfolio. The efficiency optimization system will focus on optimizing internal and external operational networks for productivity improvement, streamlining operational processes for low-cost efficiency, rationalizing human resources, and selective reinforcement of core competencies such as information technology systems and top-performing employees. Organizational slimming will include restructuring of low-profitability business units, outsourcing of non-core business areas and simplifying decision-making processes. Realignment of the group-wide business portfolio will involve re-evaluation of the existing business models for our core business units, selective entry into new business areas through joint ventures or strategic alliances and formulation of more profitable and balanced business portfolios;

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increased investment in employee training and professional development, with a focus on nurturing leaders for the next generation;

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brand promotion and bolstering a unified corporate culture that stresses flexibility and open-mindedness to new objectives and challenges;

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balanced risk-return management; and

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bolstering customer confidence and building up social capital through enhancement of our corporate governance and addressing demand for greater social responsibility by financial institutions.

At the subsidiary level, we plan to implement the following strategies with respect to our core business lines:

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in commercial banking, our primary objective is to strengthen our competitive position and become the leading bank in Korea by enhancing customer satisfaction, locking in the loyalty of our existing banking customers and further enlarging our customer base. To this end, we plan to fully leverage the scale of our banking operation afforded by our extensive branch network, emphasize cross-selling non-banking products at our banking network, offer total financial service packages, bolster our brand image and further upgrade our customer service infrastructure, risk management systems and other operating processes. We also intend to enter, on a selective basis, into promising new businesses by strengthening our investment banking, private banking and other fee-based businesses, making significant inroads into the retirement pension market, and offering differentiated wealth management strategies and portfolios.

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in credit card business, our primary objective is to further solidify our market leadership as the largest credit card service provider in Korea through differentiated and tailored customer service based on a strategy that emphasizes “soft” and “smart” aspects of enhancing customer loyalty, brand recognition and revenue expansion. We will also emphasize further optimizing our risk management through preemptive risk prevention, creating new synergy opportunities through collaboration with our other Shinhan affiliates and enhanced use of the group-wide customer relationship management system. As a way of identifying and exploring new potential growth areas, we are also exploring, on a selective basis, entering into strategic alliances with telecommunications service providers and retail grocery and department store chains for further expansion of our distribution network.

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in securities business, our primary objective is to establish a solid platform for providing leading brokerage and financial advisory services in Korea in light of the recent deregulations of the securities industries in Korea. We aim to selectively develop competitive business models and capture promising business opportunities, including wealth management and investment advisory services. We have recently merged our investment advisory affiliates to promote economy of scale and solidify our brand recognition in this market. Our near-term strategic objective is to promote cross-selling, and in order to achieve this end, we have implemented strategies to enhance our research and preemptive risk management capabilities and maximize our group-wide synergy base.

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in life insurance business, our primary objective is to enhance our market position as one of the leading insurers in Korea. To that end, we aim to maximize the use of our group-wide distribution channels, particularly in banking and credit card businesses, in order to foster direct interaction with customers. We also aim to train specialists and offer differentiated products targeting the fast-growing senior citizen population in Korea.

Our History and Development

On September 1, 2001, we were formed as a financial holding company under the Financial Holding Companies Act, as a result of acquiring all of the issued shares of the following four entities from their former shareholders in exchange for shares of our common stock: (i) Shinhan Bank, a nationwide commercial bank listed on the Korea Exchange, (ii) Shinhan Securities Co., Ltd., a securities brokerage company listed on the Korea Exchange, (iii) Shinhan Capital Co., Ltd., a leasing company listed on the Korea Exchange Korean Securities Dealers Automated Quotations (“KRX KOSDAQ”), and (iv) Shinhan Investment Trust Management Co., Ltd., a privately held investment trust management company. On September 10, 2001, the common stock of our holding company was listed on what is currently the KRX KOSPI Market.

Since our inception, we have expanded our operations, in large part, through strategic acquisitions or formation of joint ventures. Our key acquisitions and joint venture formations are described as below:


Date of Acquisition	Entity	Principal Activities	Method of Establishment
April 2002	Jeju Bank	Regional banking	Acquisition from Korea Deposit Insurance Corporation
July 2002	Shinhan Investment Corp.(1)	Securities and investment	Acquisition from the SsangYong Group
August 2002	Shinhan BNP Paribas Investment Trust Management Co., Ltd.(2)	Investment advisory	50:50 joint venture with BNP Paribas
August 2003	Chohung Bank	Commercial banking	Acquisition from creditors
December 2005	Shinhan Life Insurance	Life insurance services	Acquisition from shareholders
March 2007	LG Card	Credit card services	Acquisition from creditors
January 2012	Tomato Mutual Savings Bank(3)	Savings bank	Purchase and assumption of assets and liabilities from creditors
January 2013	Yehanbyoul Savings Bank(4)	Savings bank	Acquisition from Korea Deposit Insurance Corporation

Notes:

(1)	Renamed as Shinhan Investment Corp. from Goodmorning Shinhan Securities Co., Ltd. effective August 2009.

(2)	In January 2009, SH Asset Management Co., Ltd. and Shinhan BNP Paribas Investment Trust Management merged to form Shinhan BNP Paribas Asset Management Co., Ltd.

(3)	Shinhan Hope Co., Ltd. was established on December 12, 2011, to purchase and assume certain assets and liabilities of Tomato Mutual Savings Bank. On December 28, 2011, Shinhan Hope Co., Ltd. obtained a savings bank license, changed its name to Shinhan Savings Bank and became our direct subsidiary.

(4)

In January 2013, we entered into a share purchase agreement with Korea Deposit Insurance Corporation for the acquisition of Yehanbyoul Savings Bank, a savings bank located in Korea, for ￦45.3 billion, and received regulatory approval to merge Yehanbyoul Savings Bank into our existing subsidiary Shinhan Saving Bank. On April 1, 2013, Shinhan Savings Bank and Yehanbyoul Savings Bank merged into a single entity, with Yehanbyoul Savings Bank being the surviving entity and the newly merged bank being named Shinhan Savings Bank.

In addition, in December 2012, we entered into an agreement to acquire a 40% equity interest in Bankmetro Express, a bank in Indonesia, subject to obtaining requisite approvals from the Indonesian authorities. Such approvals remain pending as of the date of this annual report.

ITEM 4.B.

Business Overview

Unless otherwise specifically mentioned, the following business overview is presented on a consolidated basis under IFRS.

Our Principal Activities

We provide comprehensive financial services, principally consisting of the following:

•

commercial banking services, consisting of:

•

retail banking, which primarily focuses on making loans to or receiving deposits from individual customers (including high net-worth individuals and families) and, to a lesser extent, not-for-profit institutions such as hospitals, airports and schools;

•

corporate and investment banking services, which primarily focuses on making loans to or receiving deposits from for-profit corporations, including small- and medium-sized enterprises;

•

international banking, which primarily focuses on management of overseas subsidiaries and branch operations and other international businesses, as well as internal asset and liability management, trading of securities and derivatives, investment portfolio management and other related activities; and

•

other banking, which primarily focuses on administration of banking operations.

•

credit card services;

•

securities brokerage services;

•

life insurance services;

•

asset management services, including brokerage and trading of various securities, related margin lending and deposit and trust services, and other asset management services; and

•

other services, including leasing and equipment financing, regional banking services, savings banking services, loan collection and credit reporting, collective investment administrative services, private equity investment advisory services and financial system development services.

In addition to the above-mentioned business activities, we have a corporate center at the holding company level whose primary function is to support the cross-divisional management of our organization.

Our principal business activities are not subject to any material seasonal trends. While we have a number of overseas branches and subsidiaries, substantially all of our assets are located, and substantially all of our revenues are generated, in Korea.

Deposit-Taking Activities

Principally through Shinhan Bank, we offer many deposit products that target different customer segments with features tailored to each segment’s financial and other profile. Our deposit products consist principally of the following:

•

Demand deposits. Demand deposits do not accrue interest or accrue interest at a lower rate than time or savings deposits and allow the customer to deposit and withdraw funds at any time. If interest-bearing,

demand deposits have interest accruing at a fixed or variable rate depending on the period and the amount of deposit. Demand deposits constituted approximately 12.1%, 12.3% and 13.7% of our total deposits as of December 31, 2011, 2012 and 2013, respectively. Our demand deposits paid average interest of 0.72%, 0.68% and 0.65% in 2011, 2012 and 2013, respectively.

•

Savings deposits. Savings deposits allow the customer to deposit and withdraw funds at any time and accrue interest at an adjustable interest rate, which is typically lower than the rate applicable to time or installment deposits. Saving deposits constituted approximately 21.1%, 22.0% and 23.5% of our total deposits as of December 31, 2011, 2012 and 2013, respectively, and paid average interest of 0.98%, 1.24% and 0.96% in 2011, 2012 and 2013, respectively.

•

Time deposits. Time deposits generally require the customer to maintain a deposit for a fixed term during which the deposit accrues interest at a fixed rate or a variable rate based on certain financial indexes, including the Cost of Funds Index (“COFIX”). If the deposit is withdrawn prior to the end of the fixed term, the customer is paid a lower interest rate than that originally offered. The term typically ranges from one month to five years. Time deposits constituted approximately 65.0%, 64.9% and 61.8% of our total deposits as of December 31, 2011, 2012 and 2013, respectively, and paid average interest of 3.61%, 3.63% and 3.00% in 2011, 2012 and 2013, respectively.

•

Other deposits. Other deposits consist mainly of certificates of deposit. Certificates of deposit typically have maturities from 30 days to five years. Interest rates on certificates of deposit are determined based on the length of the deposit and prevailing market interest rates. Certificates of deposit are sold at a discount to their face value, reflecting the interest payable on the certificates of deposit. Certificates of deposit constituted approximately 1.8%, 0.8% and 1.0% of our total deposits as of December 31, 2011, 2012 and 2013, respectively. Our certificates of deposit paid average interest of 3.40%, 3.26% and 2.01% in 2011, 2012 and 2013, respectively.

We also offer deposits which provide the customer with preferential rights to housing subscriptions under the Housing Law, and eligibility for mortgage and home equity loans. These products include:

•

Housing subscription time deposits. These deposit products are special purpose time deposits providing the customer with a preferential right to subscribe for new private apartment units under the Housing Law and Rules on Housing Supply (the “Housing Law”). This law provides various measures supporting the purchase of houses and the supply of such houses by construction companies. If a potential home-buyer subscribes for these deposit products and holds them for a certain period of time set forth in the Housing Law, such deposit customer obtains the right to subscribe for new private apartment units on a priority basis. Such preferential rights are neither transferable nor marketable in the open market. These products accrue interest at a fixed rate for one year and at an adjustable rate after one year, which are consistent with other time deposits. Required deposit amounts per account range from ￦2 million to ￦15 million depending on the size and location of the dwelling unit. These deposit products target high- and middle-income households as customers.

•

Housing subscription installment savings deposits. These deposit products are monthly installment savings products providing the customer with a preferential subscription right for new private apartment units under the Housing Law. Such preferential rights are neither transferable nor marketable in the open market. These deposits require monthly installments of ￦50,000 to ￦500,000, have maturities between three and five years and accrue interest at fixed rates depending on the term, which are consistent with other installment savings deposits. These deposit products target low- and middle-income households as customers. For information on our deposits in Korean Won based on the principal types of deposit products we offer, see “— Description of Assets and Liabilities — Funding — Deposits.”

We offer a range of interest rates on our deposit products depending on average funding costs, the rate of return on our interest-earning assets, prevailing market interest rates among financial institutions and other major financial indicators.

We also offer court deposit services for litigants in Korean courts, which involve providing effectively an escrow service for litigants involved in certain types of legal or other proceedings. Chohung Bank historically

was a dominant provider of such services since 1958, and following the acquisition of Chohung Bank, we continue to hold a dominant market share in these services. Such deposits typically carry interest rates lower than the market rates (by approximately 1% per annum) and amounted to ￦6,103 billion, ￦6,150 billion and ￦6,680 billion as of December 31, 2011, 2012 and 2013, respectively.

The Monetary Policy Committee of the Bank of Korea imposes a reserve requirement on Won currency deposits of commercial banks which ranges from 0% to 7%, based generally on the term to maturity and the type of deposit instrument. See “— Supervision and Regulation — Principal Regulations Applicable to Banks — Liquidity.”

The Depositor Protection Act provides for a deposit insurance system where the Korea Deposit Insurance Corporation guarantees to depositors the repayment of their eligible bank deposits. The deposit insurance system insures up to a total of ￦50 million per depositor per bank. See “— Supervision and Regulation — Principal Regulations Applicable to Banks — Deposit Insurance System.”

Retail Banking Services

Overview

We provide retail banking services primarily through Shinhan Bank, and, to a significantly lesser extent, through Jeju Bank, a regional commercial bank. The retail loans, excluding credit card receivables, amounted to ￦77,150 billion as of December 31, 2013.

Retail banking services include mortgage and home equity lending and retail lending as well as demand, savings and fixed deposit-taking, checking account services, electronic banking and ATM services, bill paying services, payroll and check-cashing services, currency exchange and wire fund transfer. We believe that providing modern and efficient retail banking services is important to maintaining our public profile and as a source of fee-based income. We believe that our retail banking services and products will become increasingly important in the coming years as the domestic banking sector further develops and becomes more complex.

Retail banking has been and will continue to remain one of our core businesses. Our strategy in retail banking is to provide prompt and comprehensive services to retail customers through increased automation and improved customer service, as well as a streamlined branch network focused on sales. The retail segment places an emphasis on targeting high net worth individuals.

Retail Lending Activities

We offer various retail loan products, consisting principally of household loans, which target different segments of the population with features tailored to each segment’s financial profile and other characteristics, including each customer’s profession, age, loan purpose, collateral requirements and the duration of the customer’s relationship with Shinhan Bank. Retail loans consist principally of the following:

•

Mortgage and home equity loans, which are mostly comprised of mortgage loans that are used to finance home purchases and are generally secured by the home being purchased; and

•

Other retail loans, which are loans made to customers for any purpose other than mortgage and home equity loans and the terms of which vary based primarily upon the characteristics of the borrower and which are either unsecured or secured, or guaranteed by deposits or a third party.

As of December 31, 2013, our mortgage and home equity loans and other retail loans accounted for 60.80% and 39.20%, respectively, of our retail loans (excluding credit card loans).

For secured loans, including mortgage and home equity loans, our policy is to lend up to 40% to 60% of the appraisal value of the collateral, after taking into account the value of any lien or other security interest that has priority over our security interest (other than petty claims). The loan-to-value ratio of secured loans is updated on a monthly basis using the most recent appraisal value of the collateral. As of December 31, 2013, the loan-to-value ratio of mortgage and home equity loans of Shinhan Bank was approximately 51%. As of December 31, 2013, substantially all of our mortgage and home equity loans were secured by residential property.

Under the Regulation on the Supervision of the Banking Business currently in effect, our banking subsidiaries (i) are subject to limits on loan-to-value ratios ranging from 40% to 70% when extending home mortgage loans, which limits depend on various factors including collateral value, loan period, whether the real estate collateral is an apartment (which has greater liquidity in the secondary markets in Korea compared to other forms of residential property) and the location of such collateral; (ii) are required to comply with a limit on debt-to-income ratio of less than 40% in extending home mortgage loans for the purchase of new apartments that are secured by such apartments appraised at a market value of more than ￦600 million in areas of excessive speculation; (iii) are prohibited from accepting apartments located in areas of high speculation as collateral from borrowers who have already obtained home mortgage loans; (iv) in the case of borrowers with two or more loans secured by apartments in areas of high speculation, are required to limit the extension of the maturity of such loans so that the number of loans secured by apartments in areas of high speculation held by such borrowers is reduced to one such loan; (v) are prohibited from extending home equity loans to minors; and (vi) are prohibited from accepting apartments located in areas of high speculation as collateral for company loans with the purpose of acquiring such apartments, except for unavoidable cases.

In addition, the supervising authorities from time to time issue administrative instructions to banks, which have the effect of regulating the access of borrowers to housing loans and, as such, demand for real estate properties. For example, the Financial Supervisory Service issued administrative instructions to financial institutions to (except in limited circumstances) verify the borrower’s ability to repay based on proof of income prior to making a mortgage and home equity loan regardless of the type or value of the collateral or the location of the property, which has had the effect of practically barring the grant of any new mortgage and home equity loans to borrowers without verifiable income.

Our banking subsidiaries are currently extending mortgage and home equity loans in compliance with the applicable regulations and administrative instructions by the relevant supervising authorities.

The following table sets forth the portfolio of our retail loans.


	As of December 31,
	2011			2012			2013
	(In billions of Won, except percentages)
Retail loans(1)
Mortgage and home-equity loans	￦	44,399		￦	46,130		￦	46,908
Other retail loans(2)		25,052			28,407			30,242
Percentage of retail loans to total gross loans		35.61	%		36.73	%		37.09	%

Notes:

(1)	Before allowance for loan losses and excludes credit card accounts.

(2)

In Korea, construction companies typically require buyers of new homes (including apartment units) to make installment payments of the purchase price well in advance of the title transfer. Commercial banks, including Shinhan Bank, provide advance loans, on an unsecured basis for the time being, to retail borrowers where the use of proceeds is restricted to financing of home purchases. A significant portion of these loans are guaranteed by third parties, which may include the construction company receiving the installment payments, until construction of the home is completed. Once construction is completed and the titles to the homes are transferred to the borrowers, which may take several years, these loans become secured by the new homes purchased by these borrowers. In recognition of the unsecured nature of such loans, we classify such loans as other retail loans.

The total mortgage and home equity loans in the amount of ￦46,908 billion outstanding as of December 31, 2013 consisted of amortizing loans (where part of the installment payments thereon is applied toward repaying the principal amount of the loans) in the amount of ￦35,092 billion and non-amortizing loans in the amount of ￦11,816 billion. In addition, as of December 31, 2013, there were lines of credit in the aggregate outstanding amount of ￦5,614 billion for non-amortizing loans.

Pricing

The interest rates on retail loans made by Shinhan Bank are either periodically adjusted floating rates (based on a base rate determined for three-month, six-month or twelve-month periods derived using an internal transfer price system, which reflects the cost of funding in the market, as further adjusted to account for expenses related to lending and the profit margin of the relevant loan products) or fixed rates that reflect the cost of funding, as further adjusted to account for expenses related to lending and the profit margin. Fixed rate loans currently have maturities of 15 years or less and are offered only on a limited basis and at a premium to floating rate loans. For unsecured loans, which we provide on a floating or fixed rate basis, the interest rates thereon take into account a margin based on, among other things, the borrower’s credit score as determined during our loan approval process. For secured loans, the credit limit is based on the type of collateral, priority with respect to the collateral and the loan-to-value ratio. Shinhan Bank may adjust the pricing of these loans to reflect the borrower’s current and/or expected future contribution to Shinhan Bank’s profitability. The interest rate on our loan products may become adjusted at the time the loan is extended. If a loan is terminated prior to its maturity, the borrower is obligated to pay us an early termination fee of approximately 0.5% to 3.0% of the outstanding principal amount of and accrued and unpaid interest on the loan, depending on the timing of termination, the nature of the loan and the loan amount.

As of December 31, 2013, Shinhan Bank’s three-month, six-month and twelve-month base rates were approximately 2.65%, 2.72% and 2.78%, respectively. As of December 31, 2013, Shinhan Bank’s fixed rates for mortgage and home equity loans with a maturity of three years, five years and seven years were approximately 4.00%, 4.20% and 4.40%, respectively, and Shinhan Bank’s fixed rates for other retail loans with a maturity of one year ranged from 5.75% to 13.25%, depending on the credit scores of its customers.

As of December 31, 2013, approximately 75.52% of Shinhan Bank’s total retail loans were floating rate loans and approximately 24.48% were fixed rate loans. As of the same date, approximately 71.39% of Shinhan Bank’s retail loans with maturity of more than one year were floating rate loans and approximately 28.61% was fixed rate loans.

Since February 2010, the Korean Federation of Banks has published the “cost of funding index”, or COFIX, which is computed based on the weighted average interest of select funding products (including time deposits, housing and other installment savings deposits, repos, discounted bills and senior non-convertible financial debentures) of nine major Korean banks (comprised of Kookmin Bank, Shinhan Bank, Woori Bank, Hana Bank, Korea Exchange Bank, Nonghyup Bank, Industrial Bank of Korea, Citibank Korea Inc. and Standard Chartered Bank Korea Limited). Each bank then independently determines the interest rate applicable to its respective customers by adding a spread to the COFIX based on the difference between the COFIX and such bank’s general funding costs, administration fees, the customer’s credit score, the maturity of the loan and other customer-specific premiums and discounts based on the customer relationship with such bank. These interest rates are typically adjusted on a monthly basis.

Private Banking

We have long focused on customers with high net worth. Our retail banking services include providing private banking services to high net worth customers who seek personal advice in complex financial matters. Our aim in private banking is to help enhance wealth accumulation by, and increase the financial sophistication of, our high net-worth clients by offering them portfolio and fund management, tax consulting and real estate management services, among others.

As of December 31, 2013, Shinhan Bank operated 24 private banking centers nationwide, including 18 in Seoul, two in the suburbs of Seoul and four in cities located in other regions in Korea. As of December 31, 2013, Shinhan Bank had approximately 5,744 private banking customers, who are typically required to have ￦500 million in deposit with us to qualify for private banking services.

Corporate and Investment Banking Services

Overview

We provide corporate banking services, primarily through Shinhan Bank, to small- and medium-sized enterprises, including enterprises known as SOHO, or “small office, home office”, which are small enterprises operated by individuals or households, and, to a lesser extent, to large corporations, including corporations that are affiliated with chaebols. We also lend to government-controlled enterprises.

The following table sets forth the balances and percentage of our total lending attributable to each category of our corporate lending business as of the dates indicated.


	As of December 31,
	2011				2012				2013
	(In billions of Won, except percentages)
Small- and medium-sized enterprises loans(1)	￦	52,268	26.80	%	￦	51,324	25.29	%	￦	55,062	26.47	%
Large corporate loans		34,413	17.64	%		33,713	16.61	%		31,412	15.10	%
Others		21,043	10.79	%		25,488	12.56	%		26,698	12.84	%

Total corporate loans	￦	107,724	55.23	%	￦	110,525	54.47	%	￦	113,172	54.41	%

Note:

(1)	Represents the principal amount of loans extended to corporations meeting definition of small- and medium-sized enterprises under the Basic Act on Small- and Medium-sized Enterprises and its Presidential Decree.

Shinhan Bank also engages in treasury and securities investment business, which involves, among other things, treasury, or internal asset and liability management, securities investment trading and derivatives trading.

Small- and Medium-sized Enterprises Banking

Under the Basic Act on Small- and Medium-sized Enterprises and its Presidential Decree, in order to qualify as a small- and medium-sized enterprise, (i) the number of regular employees of the enterprise must be less than 1,000, (ii) the enterprise’s total assets at the end of the immediately preceding fiscal year must be less than ￦500 billion, (iii) the enterprise’s paid-in capital at the end of the immediately preceding fiscal year must be less than ￦100 billion, (iv) the enterprise’s average sales revenues for the most recent three fiscal years must be less than ￦150 billion, (v) the enterprise must meet the standards prescribed by the Presidential Decree applicable to the type of its main business, and (vi) the enterprise must meet the standards of management independence from ownership as prescribed by the Presidential Decree, including non-membership in a conglomerate as defined in the Monopoly Regulations and Fair Trade Act. As of January 26, 2012, non-profit enterprises with a number of regular employees not exceeding 300 or revenue of less than ￦30 billion that satisfy certain requirements prescribed in the Basic Act on Small- and Medium-sized Enterprises and its Presidential Decree may qualify as a small- and medium-sized enterprise. Furthermore, cooperatives and federations of cooperatives as prescribed by the Presidential Decree must be deemed as small- and medium-sized enterprises from April 15. 2014. As of December 31, 2013, we made loans to 202,771 small- and medium-sized enterprises for an aggregate amount ￦55,062 billion.

We believe that Shinhan Bank, whose traditional focus has been on small- and medium-sized enterprises lending, is well-positioned to succeed in the small- and medium-sized enterprises market in light of its marketing capabilities (which we believe have provided Shinhan Bank with significant customer loyalty) and its prudent risk management practices, including conservative credit rating system for credit approval. To maintain or increase its market share of small- and medium-sized enterprises lending, Shinhan Bank:

•

has positioned itself based on accumulated expertise as to customers and products. We believe Shinhan Bank has a good understanding of the credit risks embedded in this market segment and to develop loan and other products specifically tailored to the needs of this market segment;

•

operates a relationship management system to provide targeted and tailored customer service to small-and medium-sized enterprises. Shinhan Bank currently has relationship management teams in 185 banking branches, of which two are corporate banking branches and 183 are hybrid banking branches designed to serve retail customers and, to a limited extent, corporate customers. These relationship management teams market products and review and approve smaller loans that pose less credit risks; and

•

continues to focus on cross-selling loan products with other products. For example, when Shinhan Bank lends to small- and medium-sized enterprises, it also explores opportunities to cross-sell retail loans or deposit products to the employees of these enterprises or to provide financial advisory services.

Large Corporate and Investment Banking

Large corporate customers consist primarily of member companies of chaebols and financial institutions. Our large corporate loans amounted to ￦31,412 billion as of December 31, 2013. As large corporate customers tend to have better credit profiles than small- and medium-sized enterprises, since the onset of the global financial crisis and economic downturns in Korea starting in 2008, Shinhan Bank has focused on attracting and retaining large corporate customers as part of its risk management policy.

Shinhan Bank aims to be a one-stop financial solution provider and partner with its corporate clients in their corporate expansion and growth endeavors. To this end and in order to take advantage of the deregulation in the Korean financial industry as a result of the adoption of the Financial Investment Services and Capital Markets Act, Shinhan Bank provides investment banking services, including real estate financing, overseas real estate project financing, large development project financing, infrastructure financing, structured financing, equity investments/venture investments, mergers and acquisitions consulting, securitization and derivatives services, including securities and derivative products and foreign exchange trading. Shinhan Bank, through Shinhan Asia Limited, a subsidiary in Hong Kong, also arranges financing for, and offers consulting services to, Korean companies expanding their business overseas, particularly in Asia.

Electronic Corporate Banking

Shinhan Bank offers to corporate customers a web-based total cash management service through “Shinhan Bizbank.” Shinhan Bizbank supports all types of banking transactions from basic transaction history inquiries and fund transfers to opening letters of credit, trade finance, payment management, collection management, sales settlement service, acquisition settlement service, business-to-business settlement service, sweeping and pooling. In addition, Shinhan Bank provides customers with integrated and advanced access to its financial services through its “Inside Bank” program, which combines internet banking, capital management services and enterprise resource planning to better serve corporate customers. The Inside Bank program also seeks to provide customized financial services to meet the comprehensive needs of target corporate customers ranging from conglomerates to small enterprises in various industries, with the goal of enhancing convenience to our corporate customers in accessing our financial services as well as assisting them to strategically manage their funds.

Corporate Lending Activities

Our principal loan products for corporate customers are working capital loans and facilities loans. Working capital loans, which include discounted notes and trade financing, are generally loans used for general working capital purposes. Facilities loans are provided to finance the purchase of equipment and construction of manufacturing plants. As of December 31, 2013, working capital loans and facilities loans amounted to ￦52,015 billion and ￦28,842 billion, respectively, representing 64.33% and 35.67% of Shinhan Bank’s total Won-denominated corporate loans. Working capital loans generally have a maturity of one year, but may be extended on an annual basis for an aggregate term of three years in the case of unsecured loans and five years in the case of secured loans. Facilities loans have a maximum maturity of ten years and are typically repaid in installments of at least twice a year, subject to a grace period for the first repayment of not less than one-third of the loan term; provided that facilities loans with a term of three years or less may be paid in full at maturity.

Loans to corporations may be unsecured or secured by real estate, deposits or guaranty certificates. As of December 31, 2013, secured loans and guaranteed loans (including loans secured by guaranty certificates issued

by credit guarantee insurance funds) accounted for 56.08% and 10.45%, respectively, of Shinhan Bank’s Won-denominated loans to small- and medium-sized enterprises. Approximately 43.77% of the corporate loans were secured by real estate.

When evaluating whether to extend loans to corporate customers, Shinhan Bank reviews their creditworthiness, credit score, value of any collateral and/or third party guarantee. The value of collateral is computed using a formula that takes into account the appraised value of the collateral, any prior liens or other claims against the collateral and an adjustment factor based on a number of considerations including, with respect to property, the average value of any nearby property sold in a court-supervised auction during the previous year. Shinhan Bank revalues collateral when a secured loan is renewed or if a trigger event occurs with respect to the loan in question.

Pricing

Shinhan Bank determines the price for its corporate loan products based principally on their respective cost of funding and the expected loss rate based on the borrower’s credit risk. As of December 31, 2013, 62.8% of Shinhan Bank’s corporate loans with outstanding maturities of one year or more had interest rates that were not fixed but were variable by reference to their market rates.

More specifically, the interest rate on Shinhan Bank’s corporate loans is generally determined as follows:

Interest rate = (Shinhan Bank’s periodic market floating rate or reference rate) plus transaction cost plus a credit spread plus risk premium plus or minus a discretionary adjustment rate.

Depending on the market condition and the agreement with the borrower, Shinhan Bank may use either its periodic market floating rate or the reference rate as the base rate in determining the interest rate for the borrower. As of December 31, 2013, Shinhan Bank’s periodic market floating rates (which are based on a base rate determined for three-month, six-month, one-year, two-year, three-year or five-year periods derived using Shinhan Bank’s market rate system) were 2.65% for three months, 2.72% for six months, 2.78% for one year, 2.94% for two years, 3.13% for three years and 3.52% for five years. As of the same date, Shinhan Bank’s reference rate was 6.75%. The reference rate refers to the base lending rate used by Shinhan Bank. The reference rate is determined annually by Shinhan Bank’s Asset & Liability Management Committee based on, among others, Shinhan Bank’s funding costs, cost efficiency ratio and discretionary margin.

Transaction cost is added to reflect the standardized transaction cost assigned to each loan product and other miscellaneous costs, including contributions to the Credit Guarantee Fund, and education taxes. The Credit Guarantee Fund is a statutorily created entity that provides credit guarantees to loans made by commercial banks and is funded by mandatory contributions from commercial banks in the amount of approximately 0.2% of all loans made by them.

The credit spread is added to the periodic floating rate to reflect the expected loss based on the borrower’s credit rating and the value of any collateral or payment guarantee. In addition, Shinhan Bank adds a risk premium which takes into account the potential of unexpected loss that may exceed the expected loss from the credit rating assigned to a particular borrower.

A discretionary adjustment rate is added or subtracted to reflect the borrower’s current and/or future contribution to Shinhan Bank’s profitability. If additional credit is provided by way of a guarantee of another loan, the adjustment rate is subtracted to reflect such change in the credit spread. In addition, depending on the price and other terms set by competing banks for similar borrowers, Shinhan Bank may reduce the interest rate to compete more effectively with other banks.

Treasury

Shinhan Bank’s treasury division provides funds to all of Shinhan Bank’s business operations and ensures the liquidity of its operation. To secure stable long-term funds, Shinhan Bank uses fixed and floating rate notes, debentures, structured financing, and other advanced funding methods. As for overseas funding, Shinhan Bank closely monitors the feasibility of raising funds in currencies other than the U.S. Dollar, such as the Japanese Yen

and the Euro. In addition, Shinhan Bank makes call loans and borrows call money in the short-term money market. Call loans are short-term lending among banks and financial institutions in either Korean Won or foreign currencies with a minimum transaction amount of ￦100 million and maturities of typically one day.

Securities Investment and Trading

Shinhan Bank invests in and trades securities for its own accounts in order to maintain adequate sources of liquidity and to generate interest income, dividend income and capital gains. Shinhan Bank’s trading and investment portfolios consist primarily of Korean treasury securities and debt securities issued by Korean government agencies, local governments or certain government-invested enterprises, debt securities issued by financial institutions and equity securities listed on the KRX KOSPI Market and KRX KOSDAQ Market of the Korea Exchange. For a detailed description of our securities investment portfolio, see “— Description of Assets and Liabilities — Investment Portfolio.”

Derivatives Trading

Shinhan Bank provides to its customers, and to a limited extent trades for its proprietary accounts, a range of derivatives products, which include:

•

interest rate swaps, options, and futures relating to Korean Won interest rate risks and LIBOR risks, respectively;

•

cross-currency swaps largely for Korean Won against U.S. Dollars, Japanese Yen and Euros;

•

equity and equity-linked options;

•

foreign currency forwards, swaps and options;

•

commodity forwards, options and swaps;

•

credit derivatives; and

•

KOSPI 200 indexed equity options.

Shinhan Bank’s outstanding derivatives commitments in terms of notional amount was ￦165,879 billion, ￦136,795 billion and ￦122,842 billion in 2011, 2012 and 2013, respectively. Such derivative operations generally focus on addressing the needs of Shinhan Bank’s corporate clients to hedge their risk exposure and back-to-back derivatives entered into to hedge Shinhan Bank’s risk exposure that results from such client contracts.

Shinhan Bank also enters into derivative trading contracts to hedge the interest rate and foreign currency risk exposures that arise from its own assets and liabilities. In addition, to a limited extent, Shinhan Bank engages in proprietary trading of derivatives within our regulated open position limits. See “— Description of Assets and Liabilities — Derivatives.”

International Business

Shinhan Bank also engages in treasury and investment activities in international capital markets, principally including foreign currency-denominated securities trading, foreign exchange trading and services, trade-related financial services, international factoring services and foreign banking operations through its overseas branches and subsidiaries. Shinhan Bank aims to become a leading bank in Asia and expand its international business by focusing on further bolstering its overseas network, localizing its overseas operations and diversifying its product offerings, particularly in terms of asset management, in order to meet the various financing needs of its current and potential customers overseas.

Trust Account Management Services

Overview

Shinhan Bank’s trust account management services involve management of trust accounts, primarily in the form of money trusts. Trust account customers are typically individuals seeking higher rates of return than those

offered by bank account deposits. Because deposit reserve requirements do not apply to deposits held in trust accounts as opposed to deposits held in bank accounts, and regulations governing trust accounts tend to be less strict, Shinhan Bank is generally able to offer higher rates of return on trust account products than on bank deposit products. However, in recent years, due to the ongoing low interest environment, Shinhan Bank has not been able to offer attractive rates of return on its trust account products.

Trust account products generally require higher minimum deposit amounts than those required by comparable bank account deposit products. Unlike bank deposit products, deposits in trust accounts are invested primarily in securities (consisting principally of debt securities and beneficiary certificate for real estate financing) and, to a lesser extent, in loans, as the relative shortage of funding sources require that trust accounts be invested in a higher percentage of liquid assets.

Under the Banking Act, the Financial Investment Services and Capital Markets Act and the Trust Act, assets accepted in trust accounts are required to be segregated from other assets of the trustee bank and are not available to satisfy the claims of the depositors or other creditors of such bank. Accordingly, trust accounts that are not guaranteed as to principal (or as to both principal and interest) are accounted for and reported separately from the bank accounts. See “— Supervision and Regulation.” Trust accounts are regulated by the Trust Act and the Financial Investment Services and Capital Markets Act, and most national commercial banks offer similar trust account products. Shinhan Bank earns income from trust account management services, which is recorded as net trust management fees.

As of December 31, 2011, 2012 and 2013, Shinhan Bank had total trust assets of ￦30,563 billion, ￦29,243 billion and ￦26,342 billion, respectively, comprised principally of real property investments of ￦10,683 billion, ￦9,511 billion and ￦4,723 billion, respectively; securities investments of ￦5,759 billion, ￦5,266 billion and ￦5,195 billion, respectively; and loans with an aggregate principal amount of ￦566 billion, ￦560 billion and ￦466 billion, respectively. Securities investments consisted of corporate bonds, government-related bonds and other securities, primarily commercial paper. As of December 31, 2011, 2012 and 2013, debt securities accounted for 17.2%, 16.3% and 18.3%, respectively, and equity securities constituted 1.6%, 1.7% and 1.4%, respectively, of Shinhan Bank’s total trust assets. Loans made by trust accounts are similar in type to those made by bank accounts, except that they are made only in Korean Won. As of December 31, 2011, 2012 and 2013, approximately 58.5%, 51.9% and 54.5%, respectively, of the amount of loans from the trust accounts were collateralized or guaranteed. In making investment from funds received for each trust account, each trust product maintains investment guidelines applicable to each such product which set forth, among other things, company-, industry- and security-specific limitations.

Trust Products

In Korea, trust products typically take the form of money trusts, which are discretionary trusts over which (except in the case of a specified money trust) the trustees have investment discretion subject to applicable law and is commingled and managed jointly for each type of trust account. The specified money trusts are established on behalf of customers who give specific directions as to how their trust assets should be invested.

Money trusts managed by Shinhan Bank’s trust account business amounted to ￦14,000 billion, ￦15,453 billion and ￦16,830 billion as of December 31, 2011, 2012 and 2013, respectively.

Shinhan Bank offers variable rate trust products through its retail branch network. As of December 31, 2011, 2012 and 2013, Shinhan Bank’s variable rate trust accounts amounted to ￦10,814 billion, ￦12,289 billion and ￦13,531 billion, respectively, of which principal guaranteed variable rate trust accounts amounted to ￦3,185 billion, ￦3,163 billion and ￦3,298 billion, respectively. Variable rate trust accounts offer their holders variable rates of return on the principal amount of the deposits in the trust accounts and do not offer a guaranteed return on the principal of deposits, except in the limited cases of principal guaranteed variable rate trust accounts, for which payment of the principal amount is guaranteed. Shinhan Bank charges a lump sum or a fixed percentage of the assets held in such trusts as a management fee, and, depending on the trust products, is also entitled to additional fees in the event of early termination of the trusts by the customer. Korean banks, including Shinhan Bank, are currently allowed to guarantee the principal of the following types of variable rate trust account products: (i) existing individual pension trusts, (ii) new individual pension trusts, (iii) existing retirement

pension trusts, (iv) new retirement pension trusts, (v) pension trusts and (vi) employee retirement benefit trusts. Shinhan Bank also offers an insignificant amount of guaranteed fixed rate trust products (amounting to ￦1.0 billion, ￦1.0 billion and ￦1.0 billion as of December 31, 2011, 2012 and 2013, respectively), which provide to its holders a guaranteed return of the principal as well as a guaranteed fixed rate of return.

Credit Card Services

Overview

We currently provide our credit card services principally through our credit card subsidiary, Shinhan Card, and to a limited extent, Jeju Bank. Former Shinhan Card was originally formed as a result of the spin-off of Shinhan Bank’s credit card business in 2002. In 2006, the credit card division of Chohung Bank was split and merged into former Shinhan Card concurrently with the merger of Chohung Bank and Shinhan Bank. Chohung Bank was a member of BC Card Co., Ltd. (“BC Card”), which is owned by consortium banks. Shinhan Card currently holds a 1.0% equity interest in BC Card. BC Card issues credit cards under the names of the member banks, substantially all of which are licensed to use MasterCard, Visa or JCB. This enables holders of BC Card to use their cards at any establishment which accepts MasterCard, Visa or JCB, as the case may be.

In 2007, we acquired the controlling equity interest in LG Card, which assumed all of the assets and liabilities of former Shinhan Card and changed its name to Shinhan Card. We believe that the acquisition of LG Card, which was the largest credit card company in Korea in terms of the number of cardholders, has contributed to our having the largest market share in the Korean credit card industry and diversifying our revenue sources by reducing our reliance on our banking operations.

Products and Services

Shinhan Card offers a wide range of credit card and other services, principally consisting of the following:

•

credit card services, which involve providing cardholders with credit up to a preset limit to purchase products and services. Payment must be made either (i) in full at the end of a monthly billing cycle (the Lump-sum Basis) or (ii) on a revolving basis subject to a minimum monthly payment which is the lesser of (x) 5% to 20% of the amount outstanding (depending on the cardholder’s credit) or (y) ￦30,000. Currently (the Revolving Payment Basis), the remaining outstanding balance generally accrues interest at the effective annual rates of approximately 6.34% to 24.94%.

•

cash advances, for which payment must be made either on a lump-sum basis or a revolving basis. Currently, the lump-sum cash advances generally accrue interest at the effective annual rates of approximately 7.8% to 27.4% and the revolving cash advances generally accrue interest at a minimum rate of (x) 5% to 20% of the outstanding balance (depending on the cardholder’s credit) or (y) ￦30,000. Cash advances may be made at ATM machines and bank branches.

•

installment purchases, which provide customers with an option to purchase products and services from select merchants on an installment basis for which payments must be made in equal amounts over a fixed term ranging from two months to 24 months. Currently, the outstanding installment purchase balances generally accrue interest at the effective annual rates of approximately 9.5% to 20.9%.

•

card loans, which provide customers with generally unsecured loans. Payment must be made generally by (i) repaying principal and interest in equal amounts on an installment basis over a fixed term of two to 36 months, (ii) repaying the principal and interest amounts in full at maturity, or (iii) making interest-only payments during the initial grace period of typically three months and repaying the principal and interest amounts on a monthly installment basis over the remaining period of typically two to 24 months. Currently, the outstanding card loan balances generally accrue interest at the effective annual rates of approximately 7.6% to 25.9%. Delinquent credit card receivables can also be restructured into loans, which we classify as card loans, and these loans generally accrue interest at the effective annual rates of approximately 17.0% to 27.8% over a fixed term whose maximum is 72 months.

Shinhan Card derives revenues from annual membership fees paid by credit cardholders, interest charged on credit card balances, fees and interest charged on cash advances and card loans, interest charged on late and deferred payments and merchant fees paid by retail and service establishments. Merchant fees and interest on cash advances constitute the largest source of revenue.

The annual membership fees for credit cards vary depending on the type of credit card and the benefits offered thereunder. For its standard credit cards, Shinhan Card charges an annual membership fee ranging from ￦2,000 to ￦1,000,000 per credit card, depending on the type of the card and the cardholder profile. Annual membership fees for various affinity and co-branded cards vary from ￦2,000 to ￦1,000,000. Shinhan Card also charges cardholders’ fees charged by financial institutions for cash advances provided through each such financial institution’s ATMs.

Any accounts that are unpaid when due are deemed to be delinquent accounts, for which Shinhan Card levies a late charge in lieu of the interest rates applicable prior to default. The late charge bears interest ranging from 23.0% to a maximum rate of 29.5% per annum.

Merchant discount fees, which are processing fees Shinhan Card charges to merchants, can be up to 2.7% of the purchased amount depending on the merchant used, with the average charge being 1.88% in 2013.

Although making payments on a revolving basis is more common in many other countries, this payment method is still in its early stages of development in Korea. Cardholders in Korea are generally required to repay their purchases within approximately 14 to 44 days of purchase depending on their payment cycle, except in the case of installment purchases where the repayment term is typically three to six months. Accounts that remain unpaid after this period are deemed to be delinquent, and Shinhan Card levies late charges on and closely monitors such accounts. For purchases made on an installment basis, Shinhan Card charges interest on unpaid amounts at rates that vary according the terms of repayment.

Cardholders are required to settle their outstanding balances in accordance with the terms of the credit cards they hold. Accountholders may choose the monthly settlement date. Settlement dates around the end of each month are the most popular since salaries are typically paid at the end of the month. A cardholder is required to select a settlement date when the account is opened. The cardholder may change the settlement date after the account has been opened but no more than once every two months.

In addition to credit card services, Shinhan Card also offers check cards, which are similar to debit cards in the United States and many other countries, to its individual retail customers as well as corporate customers. A check card can be used at any of the merchants that accept credit cards issued by Shinhan Card and the amount charged to a check card is directly debited from the cardholder’s designated bank account. Check cards have a low risk of default and there are no procurement costs. Although Shinhan Card does not charge annual membership fees on check cards, merchants are charged fees on the amount purchased using check cards at a rate between 1.00% and 1.85%, depending on the type of business, which is lower than the corresponding fee charged for credit card use.

Credit Card Products

Shinhan Card offers a wide range of credit card products tailored for credit cardholders’ lives and to satisfy their preferences and needs. Credit card products offered by Shinhan Card include:

•

cards that provide additional benefits such as frequent flyer miles and reward program points that can be redeemed by the customer for complementary services, prices and cash;

•

gold cards, platinum cards and other preferential members’ cards, which have higher credit limits and provide additional services in return for higher annual membership fees;

•

cards with new features to preferred customers, such as revolving credit cards, travel services and insurance;

•

cards with fraud detection and security systems to prevent the misuse of credit cards and to encourage the use of credit cards over the Internet;

•

corporate and affinity cards that are issued to employees or members of particular companies or organizations; and

•

mobile phone cards allowing customers to conduct wireless credit card transactions with their mobile phones using 3G or more advanced technology.

Customers and Merchants

In addition to internal growth through cross-selling, we also seek to enhance our market position by selectively targeting new customers with high net worth and solid credit quality through the use of a sophisticated and market-oriented risk management system. Shinhan Card screens its credit card applicants and sets individualized credit limits for such applicants according to internal guidelines based on a comprehensive credit scoring system.

The following table sets forth the number of customers of Shinhan Card and the number of merchants at which Shinhan Card can be used for purchases as of the dates indicated.


	As of December 31,
	2011			2012			2013
	(In thousands, except percentages)
Shinhan Card:
Number of credit card holders(1)		15,540			15,182			13,493
Personal accounts		15,424			15,070			13,385
Corporate accounts		116			112			108
Active ratio(2)		81.5	%		83.6	%		93.7	%
Number of merchants		2,669			2,755			2,392

Notes:

(1)	Represents the number of cardholders not subject to suspension or termination as of the relevant date.

(2)	Represents the ratio of accounts used at least once within the last six months to the total accounts as of year-end.

Installment Finance

Shinhan Card provides installment finance services to customers in connection with purchases of durable consumer goods such as new and used cars, appliances, computers and other home electronics products. Revenues from installment finance operations accounted for 2.0% of Shinhan Card’s total operating revenue in 2013. Shinhan Card pays the merchants when Shinhan Card’s customers purchase such goods, and the customers remit monthly installment payments to Shinhan Card over a number of months, generally up to 36 months (and, in the case of installment financings for automobile purchases, up to 72 months), as agreed with the customers. For installment finance products for new cars, Shinhan Card historically charged, in addition to interest, an initial financing fee of up to 9.9% of the purchase price, depending on the customer’s credit score, the installment period and installment amount. Initial financing fees charged in connection with installment finance products for new cars, however, was abolished effective March 2, 2013 pursuant to the Financial Consumer Report (Automobile Financings) issued by the Financial Supervisory Service on January 29, 2013. Shinhan Card has installment financing arrangements with over 10,000 merchants in Korea, including major car dealers, manufacturers and large retailers with nationwide networks, such as electronics goods stores.

Shinhan Card promptly processes installment financing applications and, based on the extensive credit information it possesses or can access, it is able to offer flexible installment payment terms tailored to individual needs of the customers. Shinhan Card also devotes significant efforts to develop and maintain its relationships with merchants, which are the most important source of referrals for installment finance customers. Shinhan Card has developed a system of prompt payments to merchants for goods purchased by the installment finance customers.

Auto Lease

Shinhan Card currently provides auto leasing financing to retail customers and corporations. Revenues from auto lease operations accounted for 0.9% of Shinhan Card’s total operating revenue in 2013.

Securities Brokerage Services

Overview

Through Shinhan Investment, we provide a wide range of financial investment services to our diversified customer base including corporations, institutional investors, governments and individuals. Financial investment services offered by Shinhan Investment range from securities brokerage to our retail and institutional customers, investment advice and financial planning services to our retail customers, as well as investment banking services such as underwriting and M&A advisory services to our institutional customers.

As of December 31, 2013, according to internal data, Shinhan Investment’s annual market share of Korean equity brokerage market was 6.05% (consisting of 2.36% in the retail segment, 0.67% in the institutional segment and 3.02% in the international segment) in terms of total brokerage volume, ranking third among securities firms in Korea. As of the same date, according to internal data, Shinhan Investment held the fifth largest annual market share in options brokerage segments and the second largest annual market share in the KOSPI 200 futures of 3.47% and 7.07%, respectively, in terms of total brokerage volume with respect to these products.

Following the implementation of the Financial Investment Services and Capital Markets Act in 2009, Shinhan Investment has obtained requisite approvals for its existing businesses in investment banking services, securities brokerage services, trust services, investment advisory services and discretionary account asset management services, as well as existing and new derivatives businesses, which enables Shinhan Investment to provide not only its existing services in equity- and stock index-linked derivatives sales and brokerage, but also proprietary trading and brokerage services for futures involving interest rates, currency and commodities as well as foreign exchange margin trading. Shinhan Investment currently provides all of the foregoing services, subject to prevailing market conditions.

Products and Services

Shinhan Investment provides principally the following services:

•

retail client services. These services include equity and bond brokerage, investment advisory and financial planning services to retail customers, with a focus on high net worth individuals. The fees generated include brokerage commissions for the purchase and sale of securities, asset management fees, interest income from credit extensions (including in the form of stock subscription loans), margin transaction loans and loans secured by deposited securities.

•

institutional client services:

•

brokerage services. These services include brokerage of stocks, corporate bonds, futures and options provided to Shinhan Investment’s institutional and international customers and sale of institutional financial products. These services are currently supported by a team of 77 research analysts that specialize in equity, bonds and derivatives research.

•

investment banking services. These services include a wide array of investment banking services to Shinhan Investment’s corporate customers, such as domestic and international initial public offerings, mergers and acquisitions advisory services, bond issuances, underwriting, capital increase, asset-backed securitizations, issuance of convertible bonds and bonds with warrants, structured financing, issuance of asset-backed commercial papers and project financings involving infrastructure, real estate and shipbuilding.

Shinhan Investment also engages, to a limited extent, in proprietary trading in equity and debt securities, derivative products and over-the-counter market products.

With respect to brokerage services, in the face of intense competition in the domestic brokerage industry, Shinhan Investment primarily focuses on strengthening profitability through service differentiation and efficient management of its distribution network rather than enlarging its market share indiscriminately through lowering fees and commissions. Shinhan Investment’s service differentiation efforts include offering its customers opportunities to purchase stocks in a wide range of countries (currently more than 25 countries), leveraging synergy opportunities afforded by affiliation with other Shinhan entities such as offering brokerage accounts maintained at Shinhan Bank and Shinhan Capital.

With respect to investment banking services, Shinhan Investment provides such services through five divisions consisting of equity capital markets, debt capital markets, private equity, project finance and mergers and acquisitions, as well as three overseas service centers in Hong Kong, Shanghai and Ho Chi Minh City.

Life Insurance Services

We provide life insurance products and services primarily through Shinhan Life Insurance. Shinhan Life Insurance provides its services through diversified distribution channels consisting of financial planners, telemarketers, agency marketers and bancassurance specialists. As of the end of calendar years ended December 31, 2011, 2012 and 2013, Shinhan Life Insurance had total assets of ￦13,977 billion, ￦16,942 billion and ￦19,385 billion and net profits of ￦237 billion, ￦209 billion and ￦80 billion, respectively. In 2014, we expect the life insurance industry to continue to be adversely affected by recent unfavorable changes in applicable regulations, such as the lowering of the cap on deferral of expenses incurred in connection with new insurance contracts, which regulations were implemented in 2013, and to the extent the low interest rate environment persists, we expect Shinhan Life Insurance to experience limited growth, if any, in net profit.

Asset Management Services

In addition to personalized wealth management services provided as part of our private banking and securities brokerage services, we also provide asset management services through Shinhan BNP Paribas Asset Management, a joint venture with BNP Paribas Investment Partners, of which we and BNP Paribas Investment Partners hold 65:35 interests, respectively. Shinhan BNP Paribas Asset Management was formed on January 1, 2009 through the merger of Shinhan BNP Paribas Investment Trust Management, our 50:50 joint venture with BNP Paribas Investment Partners, and SH Asset Management, our wholly-owned subsidiary, in order to streamline our asset management services capabilities. Shinhan BNP Paribas Asset Management ranked fourth among asset managers in Korea in terms of assets under management as of December 31, 2013, and provides a wide range of investment products, including traditional equity/fixed income funds as well as alternative investment products, to retail and institutional clients. As a joint venture with BNP Paribas Investment Partners, we believe Shinhan BNP Paribas Asset Management has significantly benefited from BNP Paribas’s global network of investment professionals and expertise in the asset management industry. As of December 31, 2013, Shinhan BNP Paribas Asset Management had assets under management amounting to approximately ￦33,501 billion. To a limited extent, Shinhan Investment also provides asset management services for discretionary accounts, see “— Securities Brokerage Services.”

In 2014, we expect the activity level in the asset management industry, including fund formation activities, to remain similar to 2013 due to uncertainties surrounding the domestic and international economy, with the exception of the discretionary investment market, which is expected to continue to grow due to expanded use of such services by large institutional investors, such as the National Pension Service.

Other Services

Through our other subsidiaries, we also provide leasing and equipment financing, regional banking services, savings banking services, loan collection and credit reporting, collective investment administration services, private equity investment advisory services and financial system development services.

Leasing and Equipment Financing

We provide leasing and equipment financing services to our corporate customers mainly through Shinhan Capital. Established as a leasing company in 1991, Shinhan Capital provides customers with leasing, installment

financing and new technology financing, equipment leasing, and corporate credit financing. Shinhan Capital’s strength has traditionally been in leasing of ships, printing machines, automobiles and other specialty items, but also offers other leasing and financing services, such as corporate restructuring services for financially troubled companies and financing provided to real estate development projects and infrastructure investments, and corporate leasing and equipment financing.

Regional Banking

We provide regionally focused commercial banking services, primarily in Jeju Island of Korea, through a majority-owned banking subsidiary, Jeju Bank. Jeju Bank provides retail banking, corporate banking, treasury and trust account management services, and has a network of 39 branches as of December 31, 2013.

Savings Banking

We provide savings banking services in accordance with the Mutual Savings Bank Act to customers that generally would not, due to their credit profile, qualify for our commercial banking services or who seek higher returns on their deposits than those offered by our commercial banking subsidiaries, through Shinhan Savings Bank, which was established in December 2011. Shinhan Savings Bank offers savings and other deposit products with relatively higher interest rates and loans (usually in relatively small amounts and on customer-tailored terms and including loans for which we receive credit support from the Government) primarily to small- to medium-sized enterprises and low income households who would not generally qualify for our commercial banking services. Shinhan Savings Bank has assumed the assets and liabilities of Tomato Savings Bank, which we acquired in January 2012, and has merged into Yehanbyoul Savings Bank, which we acquired in March 2013, with Yehanbyoul Savings Bank as the surviving entity with its name changed to Shinhan Savings Bank. Both Tomato Savings Bank and Yehanbyoul Savings Bank were facing liquidity troubles due to difficulties in the real estate project financing business as a result of the prolonged slump in the Korean real estate market at the time we acquired them. We closely monitor the business activities and product offerings of Shinhan Savings Bank to ensure its financial soundness.

Loan Collection and Credit Reporting

We centralize credit collection and credit reporting operations for our subsidiaries through Shinhan Credit Information Co. Ltd., which also provides similar services to third party customers. Shinhan Credit Information’s services include debt collection, credit inquiries, credit reporting, civil application/petition services and process agent services, among others. Shinhan Credit Information also manages participants in credit recovery programs and provides support to the Kookmin Happy Fund, which is a Government-established fund that supports retail borrowers with low credit scores by purchasing defaulted loans from creditors or providing credit guarantees to enable such borrowers to refinance at lower rates.

Collective Investment Administration Services

We provide integrated collective investment administration services through Shinhan AITAS Co., Ltd. which was established in 2000. Shinhan AITAS provides general management service, asset management systems, accounting systems and trading systems to asset management companies and institutional investors. The target customers for our collective investment administration services are asset managers, investment advisors and institutional investors, and we seek to provide Shinhan AITAS a comprehensive service package including the computation of the reference value for funds, evaluation of fund performance, provision of trading systems and fund-related legal administrative services.

Private Equity Investment Advisory Services

We provide investment advisory services in the areas of private equity investments through Shinhan Private Equity Investment Management, which was established in 2004.

Financial System Development Services

We provide financial system development services through Shinhan Data Systems, which was established in 1991 and offers system integration, system management, IT outsourcing, business process outsourcing and IT consulting services.

Our Distribution Network

We offer a wide range of financial services to retail and corporate customers through a variety of distribution networks and channels established by our subsidiaries. The following table presents the geographical distribution of our distribution network based on the branch offices and other distribution channels of our principal subsidiaries, as of December 31, 2013.

Distribution Channels in Korea(1)


	Shinhan Bank		Jeju Bank		Shinhan Card		Shinhan Investment		Shinhan Life Insurance		Total
Seoul metropolitan		396		2		7		49		56		510
Kyunggi province		210		—		5		15		36		266
Six major cities:		180		1		7		19		52		259
Incheon		60		—		1		3		17		81
Busan		41		1		2		6		11		61
Kwangju		15		—		1		2		7		25
Taegu		30		—		1		4		6		41
Ulsan		13		—		1		2		3		19
Taejon		21		—		1		2		8		32

Sub-total		786		3		19		83		144		1,035

Others		157		37		13		16		64		287

Total		943		40		32		99		208		1,322

Note:

(1)	Includes our main office and those of our subsidiaries.

Banking Service Channels

Our banking services are primarily provided through an extensive branch network, specializing in retail and corporate banking services, as complemented by self-service terminals and electronic banking, as well as an overseas services network.

As of December 31, 2013, Shinhan Bank’s branch network in Korea comprised of 943 service centers, consisting of 745 retail banking service centers, 11 corporate banking service centers primarily designed to serve large corporate customers and 187 hybrid banking branches designed to serve retail as well as small-business corporate customers. Shinhan Bank’s banking branches are designed to provide one-stop banking services tailored to their respective target customers.

Retail Banking Channels

In Korea, many retail transactions are conducted in cash or with credit cards, and conventional checking accounts are generally not offered or used as widely as in other countries such as the United States. As a result, an extensive retail branch network plays an important role for Korean banks as customers generally handle most transactions through bank branches. Recently, one of the key initiatives at Shinhan Bank has been to target high net worth individuals through private banking. Our private banking services are provided principally through private banking relationship managers who, within target customer groups, assist clients in developing individual

investment strategies. We believe that such relationship managers help us foster enduring relationships with our clients. Private banking customers also have access to Shinhan Bank’s retail branch network and other general banking products Shinhan Bank offers through its retail banking operations.

Corporate Banking Channels

Shinhan Bank currently provides corporate banking services through corporate banking service centers primarily designed to serve large corporate customers and hybrid banking branches designed to serve retail as well as small-business corporate customers. Small- and medium-sized enterprises have traditionally been Shinhan Bank’s core corporate customers and we plan to continue to maintain Shinhan Bank’s strength vis-à-vis these customers.

Self-Service Terminals

In order to complement its banking branch network, Shinhan Bank maintains an extensive network of automated banking machines, which are located in branches and in unmanned outlets. These automated banking machines consist of ATMs, cash dispensers and passbook printers. As of December 31, 2013, Shinhan Bank had 168 cash dispensers and 7,559 ATMs. Shinhan Bank has actively promoted the use of these distribution outlets in order to provide convenient service to customers, as well as to maximize the marketing and sales functions at the branch level, reduce employee costs and improve profitability. We believe that use of Shinhan Bank’s automated banking machines has increased in recent years. In 2013, automated banking machine transactions accounted for a substantial portion and a majority of total deposit and withdrawal transactions of Shinhan Bank in terms of the number of transactions and fee revenue generated, respectively.

Electronic Banking

Shinhan Bank’s Internet banking services are more comprehensive than those available at the counter, including such services as 24-hour account balance posting, real-time account transfer, overseas remittance and loan requests. Shinhan Bank also offers mobile banking services in order to enable customers to make speedy, convenient and secure banking transactions using mobile phones. As the purpose of electronic banking is primarily cost-saving rather than profit generation, the substantial majority of Shinhan Bank’s electronic banking transactions do not generate fee income.

Overseas Distribution Network

The table below sets forth Shinhan Bank’s overseas banking subsidiaries and branches as of December 31, 2013.


Business Unit	Location	Year Established or Acquired
Subsidiaries

Shinhan Asia Ltd.	Hong Kong SAR, China	1982
Shinhan Bank Europe GmbH	Germany	1994
Shinhan Bank America	New York, U.S.A.	2003
Shinhan Bank (China) Limited	Beijing, China	2008
Shinhan Khmer Bank PLC	Cambodia	2007
Shinhan Bank Kazakhstan Limited	Kazakhstan	2008
Shinhan Bank Canada	Toronto, Canada	2009
Shinhan Bank Japan(1)	Tokyo, Japan	2009
Shinhan Bank Vietnam Ltd.(2)	Ho Chi Minh City, Vietnam	2011

Branches

New York	U.S.A.	1989
Singapore	Singapore	1990
London	United Kingdom	1991
Mumbai	India	1996
Hong Kong	China	2006
New Delhi	India	2006
Vellore	India	2010

Representative Offices

Mexico	Mexico City, Mexico	2008
Uzbekistan	Tashkent, Uzbekistan	2009
Myanmar	Yangon, Myanmar	2013

Notes:

(1)	While Shinhan Bank established the subsidiary in Japan in 2009, Shinhan Bank has provided banking services in Japan through a branch structure since 1986.

(2)

On November 28, 2011, two of Shinhan Bank’s wholly-owned banking subsidiaries in Vietnam, Shinhan Vina and Shinhan Vietnam, merged to form Shinhan Bank Vietnam. Shinhan Vina, prior to its merger with Shinhan Vietnam, was a 50-50 joint venture established in 2000 between Shinhan Bank and Vietcombank, a state-owned bank of Vietnam. On November 14, 2011, Shinhan Bank acquired Vietcombank’s 50% interest in Shinhan Vina to facilitate the merger. Shinhan Vietnam was established in 2009. Shinhan Bank has been providing banking services in Vietnam through a branch since 1995.

Currently, our overseas subsidiaries and branches are primarily engaged in trade financing and local currency funding for Korean companies and Korean nationals in the overseas markets, as well as providing foreign exchange services in conjunction with Shinhan Bank’s headquarters. On a limited basis, these overseas branches and subsidiaries also engage in investment and trading of securities of foreign issuers. In the future, as part of our globalization efforts, we plan to expand our coverage of local customers in the overseas markets by providing a wider range of services in retail and corporate banking, and to that end, we have increasingly established subsidiaries in lieu of branches in select markets and in 2011 merged two of our Vietnam banking subsidiaries in order to enhance our presence and enable a greater flexibility in our service offerings in these markets.

Credit Card Distribution Channels

Shinhan Card primarily uses three distribution channels to attract new credit card customers: (i) the banking and credit card branch network, (ii) sales agents, and (iii) business partnerships and affiliations with vendors.

The branch network for our credit card operations consisted of 943 branches as of December 31, 2013 of Shinhan Bank and 32 card sales branches of Shinhan Card. The use of the established distribution network of Shinhan Bank is part of the group-wide cross-selling efforts of selling credit card products to existing banking customers. In 2013, the number of new cardholders acquired through our banking distribution network accounted for approximately 14.1% of the total number of new cardholders. We believe that the banking distribution network will continue to provide a stable and low-cost venue for acquiring high-quality credit cardholders.

The sales agents represented the most significant source of Shinhan Card’s new cardholders in 2013, and the number of new cardholders acquired through sales agents accounted for approximately 60.4% of the total number of Shinhan Card’s new cardholders in 2013. As of December 31, 2013, Shinhan Card had 4,992 sales agents, of which 4,592 were independent contractors and 400 were sales agents of Shinhan Card’s business partners and affiliates. These sales agents assist prospective customers with the application process and customer service. Compensation of these sales agents is tied to the transaction volume and the repayment patterns of the customers introduced by them, and we believe this system helps to minimize credit risk and enhance profitability.

As a way of acquiring new cardholders, Shinhan Card also has business partnership and affiliation arrangements with a number of vendors, including gas stations, major retailers, airlines and telecommunication and Internet service providers. Shinhan Card plans to continue to leverage its alliances with such vendors to attract new cardholders.

Securities Brokerage Distribution Channels

Our securities brokerage services are conducted principally through Shinhan Investment. As of December 31, 2013, Shinhan Investment had 99 service centers nationwide, and two overseas subsidiaries based in New York and Hong Kong to service our corporate customers.

Approximately 63.3% of our brokerage branches are located in the Seoul metropolitan area with a focus on attracting high net worth individual customers as well as enhancing synergy with our retail and corporate banking branch network. We plan to continue to explore new business opportunities, particularly in the corporate customer segment, through further cooperation between Shinhan Investment and Shinhan Bank.

Insurance Sales and Distribution Channels

We sell and provide our insurance services primarily through Shinhan Life Insurance. Shinhan Life Insurance, in addition to distributing bancassurance products through our bank branches, also distributes a wide range of life insurance products through its own branch network, an agency network of financial planners and telemarketers, as well as through the Internet. As of December 31, 2013, Shinhan Life Insurance had 208 branches and 13 customer support centers. These branches are staffed by financial planners, telemarketers, agent marketers and bancassurance to meet the various needs of our insurance and lending customers. Our group-wide customer support centers arrange for policy loans (namely loans secured by the cash surrender value of the underlying insurance policy) for our insurance customers and, to a limited extent, other loans to other customers, and also handle insurance payments.

Information Technology

We dedicate substantial resources to maintaining a sophisticated information technology system to support our operations management and provide high quality customer service. Since 2009, we have operated our information and technology system at a group-wide level (rather than the previous subsidiary-specific level) based on a comprehensive group-wide information collection and processing. Since developing in 2008 a single group-wide enterprise information technology system known as “enterprise data warehouse” for customer relations management capabilities, risk management systems and data processing, which is designed to maximize synergy among our subsidiaries, we have continually upgraded our group-wide information technology system,

with the current upgrade targeted for completion by the first half of 2015, which, among other things, will focus on applying the best-in-class technology to our risk management systems to reflect the changes in our business environment as well as enhance differentiation from our competitors.

We continue to upgrade the information technology systems for each of our subsidiaries to enhance the quality of our customer service specific to such subsidiary, including with respect to electronic and mobile banking (including by means of smartphones), online consultation, expanded sales services and customized informational services. In addition, we have enhanced our smartphone banking service by providing a more convenient and secure mobile platform. In addition, in tandem with the expansion of our overseas operations, we have completed the installation of AITHER, a new global network of information technology systems, for our overseas subsidiaries and branches. In 2013, we have also expanded information technology systems for indirect service channels, such as corporate online banking (in addition to retail online banking), and completed the construction of Shinhan Data Center, which is responsible for comprehensive management of information technology systems for our subsidiaries. This Data Center ensures a stable use of a central information processing facilities for at least 15 years and is designed to maximize operational and cost efficiency by combining the various data centers previously used by our subsidiaries. Shinhan Bank and Shinhan Card completed relocation of their respective information technology centers to this Data Center in September 2013 and January 2014, respectively, and all our other subsidiaries are expected to complete similar relocation in the first half of 2014.

In order to enhance security and trustworthiness of the financial services provided by us, we have continually been in the process of enhancing a group-wide set of standards for information security and upgrading related systems. In 2008, we established group-wide information systems and policies. In 2010, we installed a system for monitoring security breaches at a group-wide level on a 365 days a year, 24 hours a day basis. In 2011, we built a security control tower to enhance the security features of our information management systems on a group-wide level and we and all of our subsidiaries obtained in September 2011, the internationally recognized ISO 27001 certification. Partly as a result of such efforts, when in March 2013 major broadcasting networks and financial institutions in Korea, including some of our subsidiaries, experienced a temporary interruption in providing online services due to large-scale cyber attacks by an outside hacker, we were among the first to restore services through operation of a group-wide emergency response system and did so without suffering leakage of confidential customer information or illegal financial transactions. In response to such cyber attacks, we have taken a number of security enhancement measures, the short-term measures of which have already been completed and the long-term measures of which are due for completion by the end of 2014. We believe that our so enhanced security system was instrumental in preventing the type of large-scale customer information leakage suffered by three major credit card companies in Korea in January 2014.

The information technology system for each of our subsidiaries is currently backed up on a real-time basis. We are currently in the process of establishing a group-wide back-up information technology system that will fully back up our main data processing system in the event of any interruption or failure of the latter. Following the construction of the Shinhan Financial Group Data Center the previous data centers are being converted into back-up or disaster recovery facilities. We believe that by centralizing our back-up systems for the entire group, such systems will be managed more efficiently and at a higher level of security. Our information technology system at the group-wide level is currently able to fully resume operation within an hour even in the case of a complete disruption of the information technology system at our headquarters.

Competition

Competition in the Korean financial services industry is, and is likely to remain, intense.

companies (such as securities brokerage firms, merchant banking corporations and asset management companies) and life insurance companies. As of December 31, 2013, Korea had seven major nationwide domestic commercial banks (including Citibank Korea Inc. and Standard Chartered Bank Korea Limited, both of which are domestic commercial banks acquired by global financial institutions), six regional commercial banks and branches and subsidiaries of 39 foreign banks. We believe that foreign financial institutions, many of which have greater experiences and resources than we do, will continue to enter the Korean market and compete with us in providing financial products and services either by themselves or in partnership with existing Korean financial institutions.

Services and Capital Markets Act enables the creation of large financial institutions that can offer both commercial and investment banking and asset management services modeled after the major global financial institutions based in the United States and Europe. Recently, in light of the recent global financial crisis, the Government has subjected Korean financial institutions to stricter regulatory requirements and guidelines in areas of asset quality, capital adequacy, liquidity and residential and other lending practices, which has had a dampening effect on competition. The Financial Services Commission implemented the capital requirements of Basel III, which minimum requirements are being phased in sequentially from December 1, 2013 and will become fully effective on January 1, 2016, based on the guidelines set forth in the amended Regulation on the Supervision of the Banking Business and the Detailed Regulation on the Supervision of the Banking Business. In addition, the Financial Services Commission announced its plan to implement Basel III requirements relating to liquidity coverage ratio and countercyclical capital buffer in 2015 and 2016, respectively, among other Basel III requirements. However, there is no assurance that these measures will continue to curb competition or that the Government will not reverse or reduce such measures or introduce other deregulatory measures, which may further intensify competition in the Korean financial services industry.

If we are unable to compete effectively in the changing business and regulatory environment, our profit margin and market share may erode and our future growth opportunities may become limited, which could adversely affect our business, financial condition and results of operations. See “Item 3.D. Risk Factors — Risks Relating to Our Overall Business — Competition in the Korean financial services industry is intense, and may further intensify as a result of further deregulation” and “Item 4.B. Business Overview — Supervision and Regulation — Financial Investment Services and Capital Markets Act.”

Description of Assets and Liabilities

Loans

As of December 31, 2013, our total gross loan portfolio was ￦207,987 billion, which represented an increase of 2.50% from ￦202,916 billion at December 31, 2012. The increase in our portfolio primarily reflects a 2.39% increase in corporate loans and a 3.51% increase in retail loans.

Loan Types

The following table presents our loans by type for the periods indicated. Except where specified otherwise, all loan amounts stated below are before deduction for loan loss allowances. Total loans reflect our loan portfolio, including past due amounts.


	As of December 31,
	2010		2011		2012		2013
	(In billions of Won)
Corporate
Corporate loans(1)	￦	95,835	￦	98,598	￦	101,162	￦	102,823
Public and other(2)		2,771		4,930		3,107		2,525
Loans to banks(3)		1,467		2,557		4,557		6,103
Lease financing		1,555		1,639		1,699		1,721

Total — Corporate		101,628		107,724		110,525		113,172

Retail
Mortgages and home equity		40,073		44,399		46,130		46,908
Other retail(4)		24,901		25,052		28,407		30,242

Total — Retail		64,974		69,451		74,537		77,150

Credit cards		17,647		17,880		17,854		17,665

Total loans(5)	￦	184,249	￦	195,055	￦	202,916	￦	207,987

Notes:

(1)	Consists primarily of working capital loans, general purpose loans, bills purchased and trade-related notes and excludes loans to public institutions and commercial banks.

(2)	Consists of working capital loans and loan facilities to public institutions and non-profit organizations.

(3)	Consists of interbank loans and call loans.

(4)	Consists of general unsecured loans and loans secured by collateral other than housing to retail customers.

(5)	As of December 31, 2010, 2011, 2012 and 2013, approximately 89.25%, 88.76%, 89.59% and 89.99% of our total gross loans, respectively, were Won-denominated.

Loan Portfolio

The total exposure of us or our banking subsidiaries to any single borrower and exposure to any single group of companies belonging to the same conglomerate is limited by law to 20% and 25%, respectively, of the Net Total Equity Capital (as defined in “— Supervision and Regulation”).

Twenty Largest Exposures by Borrower

As of December 31, 2013, our 20 largest exposures, consisting of loans, securities and guarantees and acceptances, totaled ￦42,413 billion and accounted for 16.1% of our total exposures. The following table sets forth our total exposures to these top 20 borrowers as of December 31, 2013.


	Loans in Won Currency		Loans in Foreign Currency		Securities		Guarantees and Acceptances		Total Exposure		Impaired Loans and Guarantees and Acceptances
	(In billions of Won)
The Bank of Korea	￦	2,730	￦	—	￦	5,060	￦	—	￦	7,790	￦	—
Ministry of Strategy and Finance		—		—		6,197		—		6,197		—
Korea Development Bank		9		84		2,782		—		2,875		—
Hyundai Heavy Industries Co., Ltd.		35		174		309		2,255		2,774		—
Industrial Bank of Korea		492		63		2,205		—		2,760		—
Korea Deposit Insurance Corporation		—		—		2,710		—		2,710		—
Woori Bank		857		34		1,483		—		2,374		—
Korea Finance Corporation		—		—		2,195		—		2,195		—
Korea Securities Finance Corporation		36		—		1,490		—		1,526		—
Korea Land & Housing Corporation		—		—		1,497		—		1,497		—
Nonghyup Bank		529		—		792		11		1,332		—
Samsung Heavy Industries Co., Ltd.		—		19		53		1,257		1,328		—
Hyundai Samho Heavy Industries Co., Ltd.		4		34		10		1,137		1,185		—
Korea Housing Finance Corporation.		—		—		974		—		974		—
Hana Bank		57		72		766		—		894		—
Korea Electric Power Corporation		2		—		841		20		863		—
The Export-Import Bank of Korea		—		—		853		—		853		—
Hyundai Steel Co., Ltd.		493		171		98		42		803		—
Hyundai Mipo Dockyard Co., Ltd.		—		—		1		761		762		—
LG Electronics Inc.		196		—		86		438		720		—

Total	￦	5,440	￦	650	￦	30,401	￦	5,921	￦	42,413	￦	—

Exposure to Main Debtor Groups

As of December 31, 2013, 12.7% of our total exposure was to the 30 main debtor groups, which are largely comprised of chaebols. The following table shows, as of December 31, 2013, our total exposures to the ten main debtor groups to which we have the largest exposure.


Main Debtor Groups	Loans in Won Currency		Loans in Foreign Currency		Securities		Guarantees and Acceptances		Others		Total Exposure		Amounts of Impaired Loans and Guarantees and Acceptances
	(In billions of Won)
Hyundai Heavy Industries	￦	152	￦	377	￦	340	￦	4,180	￦	—	￦	5,050	￦	—
Samsung		395		1,026		1,112		1,892		—		4,425		—
SK		488		637		1,192		1,189		—		3,506		—
Hyundai Motors		1,229		938		992		325		—		3,485		—
LG		795		313		474		507		—		2,089		—
Lotte		555		529		756		248		—		2,088		—
POSCO		253		409		461		232		1		1,357		—
LS		188		381		171		342		—		1,082		—
Hyosung		253		492		76		142		—		963		9
GS		227		103		193		365		—		887		—

Total	￦	4,535	￦	5,205	￦	5,767	￦	9,422	￦	1	￦	24,931	￦	9

Loan Concentration by Industry

The following table shows the aggregate balance of our corporate loans by industry concentration as of December 31, 2013.


Industry	Aggregate Loan Balance		Percentage of Total Corporate Loan Balance
	(In billions of Won)		(Percentages)
Manufacturing	￦	33,331		29.45	%
Retail and wholesale		15,180		13.41
Real estate, leasing and service		17,250		15.24
Construction		3,635		3.21
Hotel and leisure		5,445		4.81
Finance and insurance		10,874		9.61
Transportation, storage and communication		5,108		4.51
Other service		12,063		10.66
Other		10,286		9.10

Total	￦	113,172		100.00	%

Maturity Analysis

The following table sets out the scheduled maturities (time remaining until maturity) of our loan portfolio as of December 31, 2013. The amounts below are before deduction of attributable loan loss reserves.


	As of December 31, 2013
	1 Year or Less		Over 1 Year but Not More Than 5 Years		Over 5 Years		Total
	(In billions of Won)
Corporate:
Corporate loans	￦	75,518	￦	22,621	￦	4,684	￦	102,823
Public and other		1,609		757		159		2,525
Loans to banks		5,452		543		108		6,103
Lease financing		591		949		181		1,721

Total corporate	￦	83,170	￦	24,870	￦	5,132	￦	113,172

Retail:
Mortgage and home equity	￦	7,787	￦	11,401	￦	27,720	￦	46,908
Other retail		23,321		6,072		849		30,242

Total retail	￦	31,108	￦	17,473	￦	28,569	￦	77,150

Credit cards	￦	16,016	￦	1,405	￦	244	￦	17,665

Total loans	￦	130,294	￦	43,748	￦	33,945	￦	207,987

We may roll over our corporate loans (primarily consisting of working capital loans and facility loans) and retail loans (to the extent not payable in installments) after we conduct our normal loan reviews in accordance with our loan review procedures. Working capital loans may be extended on an annual basis for an aggregate term of three to five years for unsecured loans and five years for secured loans. Facilities loans, which are generally secured, may generally be extended once for a maximum of five years from the date the relevant loan is initially made. Retail loans may be extended for additional terms of up to 12 months for an aggregate term of ten years for both unsecured loans and secured loans.

Interest Rate Sensitivity

The following table shows our loans by interest rate sensitivity as of December 31, 2013.

As of December 31, 2013

Due Within 1 Year

Due After 1 Year

Total

(In billions of Won)

Fixed rate loans(1)

￦

55,956

￦

29,675

￦

85,631

Variable rate loans(2)

70,887

51,469

122,356

Total loans

￦

126,843

￦

81,144

￦

207,987

Notes:

(1)	Fixed rate loans are loans for which the interest rate is fixed for the entire term of the loan.

(2)	Variable or adjustable rate loans are for which the interest rate is not fixed for the entire term of the loan.

For additional information regarding our management of interest rate risk, see “— Risk Management.”

Nonaccrual Loans and Past Due Accruing Loans

Except in the case of repurchased loans, we generally recognize interest income on nonaccrual loans using the rate of interest used to discount the future cash flows of such loans for the purpose of measuring impairment loss. Generally, we discontinue accruing of interest on loans (other than repurchased loans) when payment of interest and/or principal becomes past due by 90 days. Loans (other than repurchased loans) are not reclassified as accruing until interest and principal payments are brought current.

We generally do not request borrowers to make immediate repayment of the whole outstanding principal balances and related accrued interest on loans whose interest payments are past due for one to 14 days in case of commercial loans and one to 30 days in case of retail loans.

Interest foregone is the interest due on nonaccrual loans that has not been accrued in our books of account. In 2010, 2011, 2012 and 2013 we would have recorded gross interest income of ￦145 billion, ￦131 billion, ￦163 billion and ￦119 billion respectively, on loans accounted for on a nonaccrual basis throughout the respective years, or since origination for loans held for part of the year, had the loans been current with respect to their original contractual terms. The amount of interest income on those loans that was included in our net income in 2010, 2011, 2012 and 2013 were ￦52 billion, ￦66 billion, ￦70 billion and ￦61 billion, respectively.

The following table shows, at the dates indicated, the amount of loans that are placed on a nonaccrual basis and accruing loans which are past due one day or more. The term “accruing but past due one day” includes loans which are still accruing interest but on which principal or interest payments are contractually past due one day or more. We continue to accrue interest on loans where the total amount of loan outstanding, including accrued interest, is fully secured by cash on deposits.


	As of December 31,
	2010		2011		2012		2013
	(In billions of Won)
Loans accounted for on a nonaccrual basis(1)
Corporate	￦	1,813	￦	1,621	￦	1,642	￦	1,660
Retail		155		239		416		217
Credit cards		155		152		215		108

Sub-total		2,123		2,012		2,273		1,985

Accruing loans which are contractually past due one day or more as to principal or interest
Corporate		263		224		245		194
Retail		369		482		354		436
Credit cards		432		576		633		524

Sub-total		1,064		1,282		1,232		1,154

Total	￦	3,187	￦	3,294	￦	3,505	￦	3,139

Note:

(1)	Represents either loans that are “troubled debt restructuring” as defined under IFRS or loans for which payment of interest and/or principal became past due by 90 days or more (adjusting for any overlap due to loans that satisfy both prongs so as to avoid double counting).

Troubled Debt Restructurings

The following table presents, at the dates indicated, our loans which are “troubled debt restructurings” as defined under IFRS. These loans mainly consist of corporate loans that have been restructured through the process of workout and recovery proceedings. See “— Credit Exposures to Companies in Workout and Recovery Proceedings.” These loans accrue interest at rates lower than the original contractual terms, or involve the extension of the original contractual maturity as a result of a variation of terms upon restructuring.

As of December 31,

2010

2011

2012

2013

(In billions of Won)

Loans classified as “troubled debt restructurings” (excluding nonaccrual and past due loans)(1)

￦

193

￦

173

￦

Note:

(1)	The total amount of loans classified as “troubled debt restructurings,” including nonaccrual and past due loans, amounted to ￦1,275 billion, ￦1,009 billion, ￦868 billion and ￦756 billion for the year ended December 31, 2010, 2011, 2012 and 2013, respectively.

For the year ended December 31, 2010, 2011, 2012 and 2013, interest income that would have been recorded under the original contract terms of restructured loans amounted to ￦69 billion, ￦42 billion, ￦74 billion and ￦68 billion, respectively, out of which ￦31 billion, ￦14 billion, ￦20 billion and ￦15 billion was reflected as our interest income, respectively.

The following table presents a breakdown of the outstanding balance and specific allowance for loan losses as of December 31, 2010, 2011, 2012 and 2013 of corporate loans classified as “troubled debt restructurings” under IFRS by the type of restructuring to which such loans are subject. The table provides a breakdown of the total amount of “troubled debt restructurings” (including nonaccrual and past due loans) for purposes of enhanced disclosure.


	As of December 31,
	2010				2011				2012				2013
	Outstanding Balance		Allowance		Outstanding Balance		Allowance		Outstanding Balance		Allowance		Outstanding Balance		Allowance
	(In billions of Won)
Corporate loans classified as “troubled debt restructurings”(1):
Workout	￦	1,201	￦	651	￦	752	￦	351	￦	683	￦	276	￦	571	￦	266
Recovery Proceedings		73		31		250		38		185		20		185		75
Others(2)		1		1		7		5		—		—		—		—

Total	￦	1,275	￦	683	￦	1,009	￦	394	￦	868	￦	296	￦	756	￦	341

Notes:

(1)	Includes nonaccrual and past due loans.

(2)	Principally consists of loans subject to corporate turnaround or corporate reorganization pursuant to the Debtor Rehabilitation and Bankruptcy Act (also known as the Consolidated Insolvency Act).

With respect to the retail loans (including nonaccrual and past due loans) subject to credit rehabilitation programs for retail borrowers (which loans are not part of the aforementioned corporate loans and therefore not included in the table above), the outstanding loan balance and specific allowance for loan losses amounted to ￦70 billion and ￦58 billion, respectively, as of December 31, 2010, ￦68 billion and ￦54 billion, respectively, as of December 31, 2011, ￦60 billion and ￦46 billion, respectively, as of December 31, 2012 and ￦41 billion and ￦30 billion, respectively, as of December 31, 2013. All such loans became modified under credit rehabilitation programs and became beneficiaries of maturity extension and interest rate reductions, while a substantially limited portion of such loans also became beneficiaries of debt forgiveness and deferral. For more information on the credit rehabilitation program, see “— Credit Exposures to Companies in Workout and Recovery Proceedings — Credit Rehabilitation Programs for Delinquent Consumer and Small- and Medium-sized Enterprise Borrowers.”

As of December 31, 2010, 2011, 2012 and 2013, the amount of restructured loans that are considered impaired and classified as nonaccrual pursuant to our general interest accrual policy as described below was ￦1,082 billion, ￦934 billion, ￦695 billion and ￦685 billion, respectively. In 2010, 2011, 2012 and 2013, the charge-off on restructured loans amounted to ￦261 billion, ￦259 billion, ￦263 billion and ￦153 billion, respectively, of which ￦49 billion, ￦46 billion, ￦84 billion and ￦29 billion, respectively, were charge-offs as part of debt-to-equity conversions.

Credit Exposures to Companies in Workout and Recovery Proceedings

Our credit exposures to restructuring are managed and collected by our Corporate Credit Collection Department. As of December 31, 2013, 0.4% of our total loans, or ￦756 billion (of which ￦685 billion was classified as nonaccrual and ￦71 billion was classified as accruing), was under restructuring. Restructuring of our credit exposures principally takes the legal form of workout and recovery proceedings.

Workout

Under the Corporate Restructuring Promotion Act, which will remain effective until December 31, 2015, all creditors to borrowers that are financial institutions are required to participate in a creditors’ committee. The Corporate Restructuring Promotion Act mandatorily applies to a wide range of financial institutions in Korea, which include commercial banks, insurance companies, asset management companies, securities companies, merchant banks, the Korea Deposit Insurance Corporation and the Korea Asset Management Corporation. Under this act, the approval of financial institution creditors holding not less than 75% of the total debt outstanding of a borrower is required for such borrower’s restructuring plan, including debt restructuring and provision of additional funds, which plan is binding on all the financial institution creditors of the borrower, provided that any financial institution creditor that disagrees with the final restructuring plan approved by the creditors’ committee has the right to request the creditors’ committee to purchase its claims at a mutually agreed price. In the event that the creditors’ committee and the dissenting financial institution creditor fail to come to an agreement, a mediation committee consisting of seven experts is set up to resolve the matter. There is a risk that these procedures may require us to participate in a plan we do not agree with or may require us to sell our claims at prices that we do not believe are adequate. With respect to any workout for which the lead creditor bank called for a meeting of the creditors’ committee while the old Corporate Restructuring Promotion Act was still effective, the procedures applicable to such creditors’ committee and the related workout remain subject to the old Corporate Restructuring Promotion Act until the suspension or conclusion of such workout, provided that such workout became subject to the procedures under the reinstated Corporate Restructuring Promotion Act as of its effective date, as opposed to the old Corporate Restructuring Promotion Act, even if such workout began while the old law was in effect. Under the reinstated Corporate Restructuring Promotion Act, if any of our borrowers becomes subject to corporate restructuring procedures, we may be forced to (i) restructure our credits pursuant to restructuring plans approved by other creditor financial institutions holding 75% or more of the total outstanding debt (and 75% or more of the total outstanding secured debt, if the restructuring plan includes the restructuring of existing secured debt) of the borrower or (ii) dispose of our credits to other creditors on unfavorable terms.

The total loan amount currently undergoing workout as of December 31, 2013 was ￦571 billion.

Recovery Proceedings

Under the Debtor Rehabilitation and Bankruptcy Act, which took effect on April 1, 2006, court receiverships have been replaced with recovery proceedings. In a recovery proceeding, unlike court receivership proceedings where the management of the debtor company was vested in a court appointed receiver, the existing chief executive officer of the debtor company may continue to manage the debtor company, provided, that (i) neither fraudulent conveyance nor concealment of assets existed, (ii) the financial failure of the debtor company was not due to gross negligence of such chief executive officer, and (iii) no creditors’ meeting was convened to request, based on reasonable cause, a court-appointed receiver to replace such chief executive officer. Recovery proceeding may be commenced by any insolvent debtor. Furthermore, in an effort to meet the global standards, international bankruptcy procedures have been introduced in Korea under which a receiver of a foreign bankruptcy proceeding may, upon receiving Korean court approval of the ongoing foreign bankruptcy proceeding, apply for or participate in a Korean bankruptcy proceeding. Similarly, a receiver in a domestic recovery proceeding or a bankruptcy trustee is allowed to perform its duties in a foreign country where an asset of the debtor is located to the extent the applicable foreign law permits.

Any composition, corporate reorganization, bankruptcy and rehabilitation proceedings for individual debtors pending as of April 1, 2006, the effective date of the Debtor Rehabilitation and Bankruptcy Act, continue to proceed in accordance with the respective applicable laws.

As of December 31, 2013, the total loan amount subject to recovery proceedings was ￦185 billion. No loan amount was subject to court receivership or composition proceedings.

Loans in the process of workout and recovery proceedings are reported as nonaccrual loans on our statements of financial position as described in “— Nonaccrual Loans and Past Due Accruing Loans” above since generally, they are past due by more than 90 days and interest does not accrue on such loans. Restructured loans that meet the definition of a troubled debt restructuring are included within “— Troubled Debt Restructurings” described above. Such restructured loans are disclosed as either loans or securities on our statements of financial position depending on the type of instrument we receive after the restructuring.

Credit Rehabilitation Programs for Delinquent Consumer and Small- and Medium-sized Enterprise Borrowers

In light of the gradual increase in delinquencies in credit card and other consumer credit, the Korean government has implemented a number of measures intended to support the rehabilitation of the credit of delinquent consumer borrowers. These measures may affect the amount and timing of our collections and recoveries on our delinquent consumer credits.

Upon application to the Credit Counseling and Recovery Service and approval of a majority of unsecured and secured creditor financial institutions, a qualified “credit delinquent person” with outstanding debts to financial institutions in an aggregate amount not exceeding ￦1.5 billion may participate in an “individual work-out program” designed to restructure such person’s debt and rehabilitate such person’s credit.

Under the Debtor Rehabilitation and Bankruptcy Act, a qualified individual debtor with outstanding debts in an aggregate amount not exceeding threshold amounts of ￦500 million of unsecured debt and/or ￦1 billion of secured debt may restructure his or her debts through a court-supervised debt restructuring that is binding on creditors.

In 2008, in order to support consumer borrowers with low credit scores, the Financial Services Commission established the Credit Rehabilitation Fund, which was subsequently renamed Kookmin Happy Fund, to purchase defaulted loans from creditors or provide credit guarantees to enable refinancing at lower rates. Kookmin Happy Fund provides credit guarantees to borrowers who (i) have credit scores between category 6 and 10 (which requirement will be waived for individuals who are “basic living welfare recipients” or have an annual income not exceeding ￦30 million); (ii) earn an annual income not exceeding ￦40 million (or, in the case of borrowers who are self-employed or have two or more dependent family members, earn an annual income not exceeding ￦45 million); (iii) have made timely repayments for at least six months in an aggregate repayment amount exceeding ￦10 million or for at least three months in an aggregate repayment amount not exceeding ￦10 million. In 2013, Kookmin Happy Fund purchased loans of approximately 214,000 borrowers from creditors based on such borrowers’ applications, and purchased loans of approximately 940,000 borrowers in lump sum from finance companies, including banks, without requiring applications from such borrowers. In 2013, we sold loans in an aggregate amount of ￦9 billion to Kookmin Happy Fund.

In 2008, the Financial Supervisory Service requested Korean banks, including us, to establish a “fast track” program to provide liquidity assistance to small- and medium-sized enterprises on an expedited basis. Under the fast track program we established, which is effective until the end of 2014, we provided liquidity assistance to small- and medium-sized enterprise borrowers applying for such assistance, in the form of new short-term loans or maturity extensions or interest rate adjustments with respect to existing loans, after expedited credit review and approval by us.

In 2009, the Financial Services Commission requested Korean banks, including us, to establish a “pre-workout program,” including a credit counseling and recovery service, for retail borrowers with short-term outstanding debt. Our pre-workout program is generally available to retail borrowers meeting all of the following requirements: (i) unsecured borrowings from at least two financial institutions not exceeding ￦500 million in the aggregate; (ii) payment default of more than 30 days but less than 90 days; (iii) all borrowings newly made within six months prior to the application for the pre-workout program not to exceed 30% of the applicant’s total outstanding borrowings; (iv) the annual aggregate amount of principal and interest payment obligations being 30% or more of the borrower’s annual income; (v) assets in possession of less than ￦1 billion, and in the case of

real estate, calculated based on the official land price announced by the Ministry of Land, Infrastructure and Transport; and (vi) a person deemed by the pre-workout committee to be impaired in his or her ability to repay without a pre-workout arrangement due to layoff, unemployment, business closure, disaster or earnings loss. Retail borrowers who fail any of these requirements, have previously participated in the pre-workout program or have lost eligibility in the course of participating in a previous pre-workout program are ineligible to participate in the pre-workout program.

Once a borrower is deemed to be eligible to participate in the pre-workout program, we promptly sell the collateral underlying such borrower’s secured loans to mitigate our losses, and we may restructure such borrower’s unsecured loans (regardless of their type) as follows:

•

Extension of maturity: Based on considerations of the type of loan, the total loan amount, the repayment amount and the probability of repayment, the maturity of the loan may be extended by up to 10 years.

•

Interest rate adjustment: The interest rate of the loan may be adjusted to 70% of the original interest rate or 5% per annum, whichever is higher; provided that if the original interest rate is less than 5% per annum, no adjustment applies. The adjusted interest rate applies to the principal amount following any adjustment thereto as part of the pre-workout program, and no interest accrues on the interest already accrued or fees payable.

•

Debt forgiveness: Debt forgiveness under the pre-workout program is limited to (i) the default interest accrued prior to the application for the pre-workout program and (ii) the regular and default interest accrued following such application but before the approval of the program.

•

Deferral: If the foregoing three measures are deemed to be insufficient in terms of providing meaningful assistance to a qualifying borrower due to layoff, unemployment, business closure, disaster or earnings loss, loan repayment may be deferred for a maximum of one year, provided that the pre-workout committee may extend such deferral period upon the borrower’s application which can be made at a one-month interval. The deferral period is not counted toward the repayment period, and interest accrues at 3% per annum during the deferral period.

Loan Modification Programs for Loans under Restructuring

We generally offer the following types of concessions in relation to restructured loans: reduction of interest rate, forgiveness of overdue interest, extension of the term for repayment of principal, conversion of debt into equity or the combination of the foregoing. The nature and degree of such concessions vary depending on, among other things, the creditworthiness of the borrower, the size of loans being restructured, the existing terms of the loans and other factors deemed relevant by the relevant creditors’ committee. We generally do not restructure an existing loan into multiple new loans (for example, an A Note/B Note structure).

The following table presents a breakdown of the gross amount of loans under restructuring as of December 31, 2010, 2011, 2012 and 2013 by our loan modification programs, as further categorized according to the loan category and performing versus nonperforming status.


	2010
Modification Programs	Non-Performing		Performing		Total
	(In billions of Won)
Extension of due date for principal and interest	￦	20	￦	177	￦	197
Reduction of interest rate		155		241		396
Forgiveness of principal		—		—		—
Equity conversion		15		10		25
Additional lending(1)		3		233		236
Others(2)		51		370		421

Total	￦	244	￦	1,031	￦	1,275


	2011
Modification Programs	Non-Performing		Performing		Total
	(In billions of Won)
Extension of due date for principal and interest	￦	43	￦	340	￦	383
Reduction of interest rate		40		213		253
Forgiveness of principal		—		1		1
Equity conversion		—		46		46
Additional lending(1)		1		97		98
Others(2)		63		165		228

Total	￦	147	￦	862	￦	1,009


	2012
Modification Programs	Non-Performing		Performing		Total
	(In billions of Won)
Extension of due date for principal and interest	￦	4	￦	142	￦	146
Reduction of interest rate		90		322		412
Forgiveness of principal		—		—		—
Equity conversion		3		—		3
Additional lending(1)		—		179		179
Others(2)		51		77		128

Total	￦	148	￦	720	￦	868


	2013
Modification Programs	Non-Performing		Performing		Total
	(In billions of Won)
Extension of due date for principal and interest	￦	2	￦	81	￦	83
Reduction of interest rate		54		283		337
Forgiveness of principal		—		—		—
Equity conversion		—		—		—
Additional lending(1)		27		169		196
Others(2)		37		103		140

Total	￦	120	￦	636	￦	756

Notes:

(1)	Represents additional loans provided to the borrower at favorable terms as part of the restructuring package, which may include extension of the due date or reduction of interest rate, among others.

(2)

Principally consists of restructured loans whose restructuring terms were not determined as of the end of the period indicated. A loan is deemed to be subject to restructuring upon the commencement of the recovery proceedings or when the relevant creditors’ committee or our credit officer determines that the borrower will be subject to workout, and in many cases the restructuring terms for such loans are not determined at the time such loans are deemed to be subject to restructuring.

Debt-to-equity Conversion

We distinguish between loans that we consider to be collectible under modified terms and loans that we consider to be uncollectible regardless of any modification of terms. With respect to a loan that we consider to be uncollectible regardless of any modification of terms, we convert a portion of such loan into equity securities following negotiation with the borrower and charge off the remainder of such loan as further described below. The equity securities so converted are recorded at fair value, based on the market value of such securities if available or the appraisal value of such securities by an outside appraiser if a market value is unavailable. In 2013, we converted into equity securities restructured loans amounting to ￦171 billion, of which ￦29 billion was subsequently treated as charge-off and ￦142 billion was treated as the new cost basis of the equity securities.

Debt-to-equity conversion generally has two primary benefits. One, the debt-to-equity conversion reduces the amount of loans and related interest expenses of the borrower, resulting in lesser debt burden and greater liquidity for the borrower, a greater likelihood of its exit from restructuring and the repayment of its obligations to us. Two, in the case of a successful turnaround of the borrower, we are entitled to the upside gains from the increase in the value of the equity securities so converted. Notwithstanding these benefits, however, the resulting impact from the debt-to-equity conversion on our interest income is generally not material as the loans being converted as part of restructuring are generally deemed to be uncollectible regardless any modification of terms. As for the impact on our asset classification, we generally apply the same asset classification standards to both non-restructured and restructured loans. As for restructured loans, we also consider additional factors such as the borrower’s adherence to its business plans and execution of the self-help measures, among others, to the extent applicable. In consideration of such criteria, we generally classify loans subject to workout as “precautionary”. For a general discussion of our loan classifications, see “— Supervision and Regulation — Principal Regulations Applicable to Financial Holding Companies — Capital Adequacy.”

Evaluation of Loan Modification Programs

We currently do not conduct a systematic or quantitative evaluation of the success of any particular concession by type, whether historically, relative to each other or relative to other financial institutions in Korea, although we do monitor on an individual basis the compliance by the borrower with the modified terms of the restructured loans. This is principally due to the following reasons.

One, in the case of large corporations subject to or about to be subject to restructuring, which represents the most significant restructuring cases in Korea, the restructuring process is generally not driven by us, but by a creditors’ committee involving several large creditor financial institutions, and in the case of very large corporations or corporations that are members of large business conglomerates, the process frequently involves the guidance of the Government in light of the potential ripple effects of the restructuring on the general economy. Hence, it is difficult for us to collect data that would help us to evaluate the success of a particular concession based on the credit profile of the borrower and the type of concessions offered.

Two, the unavailability of systematic analysis notwithstanding, our general sense is that the restructuring cases in Korea have, to a large part, been successful as measured in terms of the ability of the borrowers to exit restructuring programs relatively quickly and further that the failed cases have not been particularly material. As a result, to date, we have not found it particularly necessary or helpful to expend the time and resources required to conduct a systematic analysis for purposes of evaluating the success of concessions by the type of a particular concession offered.

We do, however, measure the success of concessions in limited ways, that is, principally in terms of how well the borrower complies with the terms and conditions of the restructuring plan as agreed between the borrower and its creditor institutions. A restructuring plan typically includes a business plan and self-help measures to be undertaken by the borrower. We monitor the borrower’s compliance with the restructuring plan on a periodic basis (namely, annual, semiannual or quarterly in accordance with the terms of the restructuring plan) and evaluate the success thereof principally in terms of three attributes: (i) the progress in the execution of the business plan, (ii) the progress in the execution of the self-help measures and (iii) other qualitative factors such as major developments in the general economy, the regulatory environment, the competitive landscape, the quality of senior management and personnel, and transparency in management. We also closely monitor the cash inflows and outflows of the borrower, and the creditors’ committee typically has the right to participate in decision-making related to major spending and borrowings by the borrower.

Accrual Policy for Restructured Loans

For purposes of our accrual policy, we classify restructured loans principally into (i) loans subject to workout pursuant to the Corporate Restructuring Promotion Act and (ii) loans subject to recovery proceedings pursuant to the Debtor Rehabilitation and Bankruptcy Act, which is the comprehensive bankruptcy-related law in Korea. See “— Credit Exposures to Companies in Workout and Recovery Proceedings.” As for loans subject to workout, our general policy is to discontinue accruing interest on a loan when payment of principal and/or

interest thereon becomes past due by 90 days or more, as described above in “— Nonaccrual Loans and Past Due Accruing Loans.” Interest is recognized on these loans on a cash basis (i.e., when collected) from the date such loan is reclassified as non-accruing, and such loans are not reclassified as accruing until the overdue principal and/or interest amounts are paid in full. This general policy also applies to loans subject to workout even if such loans are restructured loans. In the case of loans subject to recovery proceedings, we discontinue accruing interest immediately upon the borrowers becoming subject to recovery proceedings (notwithstanding the absence of delinquency of such loans) in light of the heightened uncertainty regarding the borrower’s ability to repay, interest on such loans are recognized on a cash basis and such loans are not reclassified as accruing until the borrower exits recovery proceedings, as the case may be. Accordingly, under to our accrual policy, the number of payments made on a nonaccrual restructured loan is not a relevant factor in determining whether to reinstate such loan to accrual status.

Determination of Performance of Restructured Loans

In determining whether a borrower has satisfactorily performed its obligations under the existing loan terms, we principally review the payment history of the borrower, namely whether the borrower has been delinquent by one day or more pursuant to our general interest accrual policy. In determining whether a borrower has shown the capacity to continue to perform under the restructured terms, we primarily rely upon the assessment of our credit officers (or the creditors’ committee in the case of large corporate borrowers with significant outstanding loans) of the likelihood of the borrower’s ability to repay under the restructured terms, which assessment takes into account the size of the loans in question, the credit profile of the borrower, the original terms of the loans and other factors deemed relevant by the relevant credit officers. Depending on various factors such as the size of the loans in question and the credit profile of the borrower, we or the relevant creditors’ committee, as the case may be, sometimes engage an outside advisory firm to perform further due diligence in order to supplement the aforementioned assessment. In certain cases, the borrowers also submit self-help proposals to facilitate obtaining the approval for restructuring, which measures are then also taken into consideration by our credit officers or the relevant creditors’ committees, as the case may be, in determining their future capacity to continue to perform under the restructured terms.

Charge-off of Restructured Loans

As for loans that we consider to be collectible under modified terms (for example, by extending the due date for the payment of principal and/or interest or reducing the interest rate below the applicable interest rate to a rate below the prevailing market rate, or a combination of the foregoing), we generally restructure such loans under the modified terms and do not charge off any portion of such loans.

As for loans that we consider to be uncollectible regardless of any modification of terms, we negotiate with the borrower to have a portion of such loans converted into equity securities (usually common stock) of the borrower in consideration, among others, of (i) the degree to which such conversion will alleviate the debt burdens and liquidity concerns of the borrower, (ii) our potential upside from the gain in the value of the equity securities compared to the likelihood of collection if the loans were not converted into equity securities, and (iii) the borrower’s concerns regarding its shareholding structure subsequent to such conversion. We then charge off the remainder of the loans not converted into equity securities. The value of the equity securities so converted are recorded at fair value, based on the market value of such securities if available or the appraisal value of such securities by an outside appraiser if a market value is unavailable.

Since we generally do not accrue interest on loans subject to recovery proceedings while we generally accrue interest on loans subject to workout unless past due by 90 days or more, charge-off is not a relevant factor we consider when determining the accrual status of a particular restructured loan.

We continue to accrue interest on restructured loans if we conclude that repayment of interest and principal contractually due on the entire debt is reasonably assured. Such conclusion is reached only after we have carefully reviewed the borrower’s ability to repay based on an assessment, among others, of various factors such as the size of the loans in question and the credit quality of the borrower by our credit officer or the relevant creditors’ committee as supplemented by the due diligence by outside advisory firms, as the case may be.

Potential Problem Loans

Since 2012, in order to enable a more systematic and real-time monitoring of loans with a significant potential of non-repayment, we have in place an “early warning system”. This system enables our management to determine potential problem loans to include all loans which have caused our management to have serious doubt as to the ability of the borrowers to comply with their respective loan repayment terms.

We classify potential problem loans as loans that are designed as “early warning loans” and reported to the Financial Services Commission. “Early warning loans” are extended to borrowers that have been (i) identified by our early warning system as exhibiting signs of credit risk based on the relevant borrower’s financial data, credit information and/or transactions with banks and, following such identification and (ii) designated by our loan officers as potential problem loans on their evaluation of known information about such borrowers’ possible credit problems. Such loans are required to be reported on a quarterly basis to the Financial Services Commission. If a borrower’s loans are designated as “early warning loans” pursuant to the process described above and included in our quarterly report to the Financial Services Commission, we consider this to be an indication of serious doubt as to such borrower’s ability to comply with repayment terms in the near future. As of December 31, 2013, we had ￦1,751 billion of potential problem loans.

Provisioning Policy

We conduct periodic and systematic detailed reviews of our loan portfolios to identify credit risks and to establish the overall allowance for loan losses. Our management believes the allowance for loan losses reflects the best estimate of the probable loan losses incurred as of the date of each statement of financial position.

We first assess whether objective evidence of impairment exists individually for loans and receivables that are individually significant, and individually or collectively for financial assets that are not individually significant. If we determine that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, we include the asset in a group of financial assets with similar credit risk characteristics and collectively assess them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment.

If there is objective evidence that a financial asset, such as a loan or receivable, has suffered impairment loss, the amount of the impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flow (excluding anticipated future credit losses) discounted at the financial asset’s original effective interest rate (i.e., the effective interest rate computed at initial recognition).

If the financial asset in question is a loan or receivable with a floating rate, the discount rate used to evaluate impairment loss is the current effective interest rate defined in the relevant transaction agreement. The present value of estimated future cash flows of secured financial assets is calculated by including cash flows from collateral after deducting costs to acquire and sell the collateral, regardless of the probability of realization of such collateral.

In assessing collective impairment, we rate and classify financial assets based on credit risk assessment or credit rating assessment process that takes into account asset type, industry, regional location, collateral type, delinquency and other relevant factors.

Future cash flow of financial assets applicable to collective impairment assessment is estimated by using statistical modeling of historical trends of the probability of default, timing of recoveries and the amount of loss incurred, as adjusted for management’s judgment as to whether current economic and credit conditions are such that the impairment losses are likely to be greater or less than suggested by historical modeling. When adjusting future cash flow based on historical modeling, we ensure that such adjustments are in line with changes and trends of observable data. Methodologies and assumptions used to estimate future cash flow are evaluated on a regular basis in order to reduce any discrepancy between impairment loss estimation and actual loss. See “Item 5.A. Operating Results — Critical Accounting Policies — Impairment of Financial Assets — Allowance for Loan Losses.”

Corporate Loans

We review corporate loans annually for potential impairment through a formal credit review. In addition, our loan officers consider the credits for impairment throughout the year if there is an indication that an impairment event has occurred.

Under IFRS, a loan is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and if the loss event had a negative effect on the estimated future cash flows of that asset and can be estimated reliably. We consider, among others, the following loans to be impaired:

•

loans whose principal or interest amount is more than 90 days past due;

•

loans that by reason of non-performance becomes subject to write-off, charge-off, debt restructuring (including recovery proceedings and work-out) or bankruptcy;

•

loans to customers whose credit record shows past instances of delinquency, enforcement of guarantee or subrogation; and

•

loans to customers who become finally insolvent by an order to suspend settlement of personal checks, corporate checks or promissory note.

Loan loss allowances for corporate loans are established based on whether a particular loan is impaired. Corporate loans with relatively small balances are evaluated collectively for impairment as they are managed collectively.

— Loans individually identified for review and considered impaired

Consistent with the internal credit risk monitoring policies, we evaluate impaired loans with relatively large balances (typically more than ￦3 billion) individually for impairment. Loan loss allowances for these loans are generally established by discounting the estimated future cash flows (both principal and interest) we expect to receive using the loan’s effective interest rate. We consider the likelihood of all possible outcomes in determining our best estimate of expected future cash flows. Management consults closely with individual loan officers and reviews the cash flow assumptions used to ensure these estimates are valid.

We establish allowances for impaired corporate loans when the discounted cash flow of the loan is lower than its carrying amount. The allowance is equal to the difference between the discounted cash flow amount of the loan and its carrying amount.

We may also measure impairment by reference to the loan’s observable market price; however this information is not commonly available in Korea.

— Loans collectively evaluated for impairment

We also establish allowances for impaired corporate loans with relatively small balances (typically ￦3 billion or less). We manage these loans on a portfolio basis and therefore collectively evaluate them for impairment since it is impractical to analyze each such loan on an individual basis. The allowance for such loans is determined based on loss factors taking into consideration past performance of the portfolio, previous loan loss history and charge-off information.

We identify loss factors based on the discounted cash flow (“DCF”) model using a statistical tool with look-back periods longer than a year. For impaired corporate loans whose amounts are relatively small, we use the collective DCF model, under which cash flow projections for the relevant loans are not individually computed for each borrower, but are collectively computed for a group of loans sharing similar characteristics (for example, retail versus corporate, secured versus unsecured, and so forth), except that, when we discount the projected cash flow at the present value, we apply the interest rate effective prior to impairment specific to each borrower.

— Loans not specifically identified as impaired

We establish allowances collectively for non-impaired corporate loans to reflect losses incurred within the portfolio which have not yet been specifically identified as impaired. We use the probability of default / loss-given default method, also known as the Advanced Internal Rating-Based approach under Basel II,

to calculate the historical loss rate on migration analysis based on measurable long-term risk factors such as probability of default from risk grading and loss given default based on the Basel II framework.

As for the probability of default-based loan grouping, corporate loans are grouped into different risk classes based on the credit rating assigned by the relevant credit evaluation model, and retail loans are grouped into different risk classes based on the type of the loan, maturity structure and the duration of delinquency.

As for the loss given default-based loan grouping, secured loans are grouped into different risk classes based on the type of collateral, the location of the collateral and the loan-to-value ratio to which they are subject, and unsecured loans are grouped into different risk classes based on the type of the loan.

Retail Loans

We consider the following retail loans to be impaired for an individual assessment of impairment:

•

loans whose principal or interest amount is more than 90 days past due;

•

loans that by reason of non-performance becomes subject to write-off, charge-off, debt restructuring (including recovery proceedings and work-out) or bankruptcy;

•

loans to customers whose credit record shows past instances of delinquency, enforcement of guarantee or subrogation; and

•

loans to customers who become finally insolvent by an order to suspend settlement of personal checks, corporate checks or promissory note.

The provisioning policy for retail loans is similar to that for corporate loans, except that different groupings are used for retail loans for purposes of determining probability of default and loss-given default in that all retail loans, regardless of their size, are collectively (rather than individually) assessed due to difficulties in obtaining personal information, such as personal income and assets.

For loan losses for retail loans, we also establish allowances based on loss factors taking into consideration the historical performance of the portfolio, previous loan loss history and charge-off information over a nine-year look-back period for loans secured by real estate and a four-year look-back period for unsecured loans and other secured loans.

We further adjust the loss factors based on factors that may impact loss recognition which have not been adequately captured by our historical analysis. These factors include:

•

changes in economic and business conditions such as levels of unemployment and housing price;

•

changes in the nature and volume of the portfolio, including any concentration of credits; and

•

external factors such as regulatory or government requirements.

Credit Cards

We establish an allowance for the credit card portfolio using a roll-rate model. A roll-rate model is a statistical tool used to monitor the progression of loans based on aging of the balance and established loss rates. The actual loss rates derived from this model are used to project the percentage of losses within each aging category based on performance over a five-year look-back period.

The expected percentage of loss reflects estimates of both the default probability within each loan aging category and the magnitude of loss. Generally, loans that are six months or more past due are charged off. We adjust our loan loss rate for the magnitude of loss when considering historical recovery of charged off credits when establishing the allowance.

We segment our credit card portfolio into several product types and perform separate roll-rate analysis for such product types to reflect the different risks and characteristics of each such product type.

We further adjust the results from the roll-rate analysis based on factors that may impact loss recognition which have not been adequately captured by our historical analysis. These factors include:

•

delinquency levels of cardholders;

•

government policies toward the credit card industry; and

•

key retail performance indicators (such as ratios of household debt to disposable income and household liabilities to financial assets).

The actual amount of incurred loan losses may vary from the estimate of incurred losses due to changes in economic conditions or industry or geographic concentrations. We also monitor differences between estimated and actual incurred loan losses through procedures including detailed periodic assessments by senior management of both individual loans and credit portfolios and the models used to estimate incurred loan losses in those portfolios.

We determine whether credit card loans are impaired using criteria similar to those used for corporate loans, except that upon the closure of business by merchants using our credit card services, the related credit card loans are deemed impaired.

We consider a credit card or card loan to be delinquent if payment on such account is not received when first due and the amount outstanding is greater than ￦10,000. Our general policy is to be proactive in its collection procedures. We believe that card accounts which are in early stages of delinquency are easier to collect than those accounts which have been delinquent for a longer period of time and, therefore, we emphasize collections at an early stage of delinquency although we increase the level of collection efforts as the delinquency period increases with respect to the relevant account. Efforts to collect from cardholders whose account balances are up to 30 days past due are generally made by our credit support centers at Shinhan Card. Our credit support centers classify delinquent customers based upon three criteria: the expected level of difficulty in collection, the nature of the customer and the customer’s contribution to Shinhan Card’s profitability. By implementing collection activities tailored to each such category of customers, we seek to maximize efficiency in our collection efforts.

For card accounts with balances that are more than 30 days past due, we generally assign collection to our collection branches. During the first two months of their appointment, these collection branches rely on postal or telephone notice and take measures to locate and provisionally attach accounts receivables or other properties of the delinquent cardholders. After the initial two months period, the collection branches commence compulsory execution procedures against the delinquent cardholders’ accounts receivables or other properties to secure the amount of outstanding balances. During the entire period managed by branches, we offer restructured card loan and reduction programs. For card accounts that are charged off, we outsource collection to external collection centers such as Shinhan Credit Information, which is our subsidiary, and Mirae Credit Information Services Corp.

Loan Aging Schedule

The following table shows our loan aging schedule (excluding accrued interest) for all loans as of the dates indicated.


	Current				Past Due Up to 3 Months				Past Due 3-6 Months				Past Due More Than 6 Months				Total
As of December 31,	Amount		%		Amount		%		Amount		%		Amount		%		Amount
	(In billions of Won, except percentages)
2010		181,659		98.59		1,163		0.63		635		0.34		792		0.43		184,249
2011		192,120		98.50		1,519		0.77		597		0.31		819		0.42		195,055
2012		199,658		98.39		1,563		0.77		579		0.29		1,116		0.55		202,916
2013		205,282		98.70		1,508		0.73		420		0.20		777		0.37		207,987

Non-Performing Loans

Non-performing loans are defined as loans past due by more than 90 days. The following table shows, as of the dates indicated, the amount of the total non-performing loan portfolio and as a percentage of our total loans.


	As of December 31,
	2010			2011			2012			2013
	(In billions of Won, except percentages)
Total non-performing loans	￦	1,427		￦	1,416		￦	1,695		￦	1,197
As a percentage of total loans		0.77	%		0.73	%		0.84	%		0.57	%

Analysis of Non-Performing Loans

The following table sets forth, for the periods indicated, the total non-performing loans by the borrower type.


	As of December 31,
	2010							2011							2012							2013
	Total Loans		Non- Performing Loans(1)		Ratio of Non- Performing Loans			Total Loans		Non- Performing Loans(1)		Ratio of Non- Performing Loans			Total Loans		Non- Performing Loans(1)		Ratio of Non- Performing Loans			Total Loans		Non- Performing Loans(1)		Ratio of Non- Performing Loans
	(In billions of Won, except percentages)
Corporate
Corporate loans	￦	95,835	￦	816		0.85	%	￦	98,598	￦	739		0.75	%	￦	101,162	￦	769		0.76	%	￦	102,825	￦	529		0.51	%
Public and other		2,771		8		0.29			4,930		8		0.16			3,107		9		0.29			2,525		—		0.00
Loans to banks		1,467		—		0.00			2,557		—		0.00			4,557		—		0.00			6,103		—		0.00
Lease financing		1,555		10		0.64			1,639		5		0.31			1,699		8		0.47			1,721		11		0.64

Total corporate		101,628		834		0.82			107,724		752		0.70			110,525		786		0.71			113,174		540		0.48

Retail
Mortgage and home equity		40,073		30		0.07			44,399		55		0.12			46,130		60		0.13			46,906		41		0.09
Other retail		24,901		102		0.41			25,052		164		0.65			28,407		315		1.11			30,242		174		0.58

Total retail		64,974		132		0.20			69,451		219		0.31			74,537		375		0.50			77,148		215		0.28

Credit cards		17,647		461		2.61			17,880		445		2.49			17,854		534		2.99			17,665		442		2.50

Total	￦	184,249	￦	1,427		0.77	%	￦	195,055	￦	1,416		0.73	%	￦	202,916	￦	1,695		0.84	%	￦	207,987	￦	1,197		0.58	%

Note:

(1)	Includes unsecured retail loans and credit card loans past due by more than six months. The number of days past due of restructured credit card loans is calculated from the first date of non-payment regardless of subsequent modification of terms.

Non-Performing Loans by Industry

The following table sets forth a breakdown of our non-performing corporate loans by industry as of December 31, 2013.


Industry	Aggregate Non-Performing Corporate Loan Balance		Percentage of Total Non-Performing Corporate Loan Balance
	(In billions of Won)		(Percentages)
Real estate, leasing and service	￦	236		43.70	%
Construction		43		7.96
Manufacturing		88		16.30
Retail and wholesale		28		5.19
Transportation, storage and communication		17		3.15
Hotel and leisure		15		2.78
Finance and insurance		11		2.04
Other service(1)		56		10.37
Other(2)		46		8.51

Total	￦	540		100.00	%

Notes:

(1)	Includes other service industries such as publication, media and education.

(2)	Includes other industries such as agriculture, forestry, mining, electricity and gas.

Top 20 Non-Performing Loans

As of December 31, 2013, our 20 largest non-performing loans accounted for 28.4% of our total non-performing loan portfolio. The following table shows, at the date indicated, certain information regarding our 20 largest non-performing loans.


		As of December 31, 2013
		Industry	Gross Principal Outstanding		Allowance for Loan Losses
		(In billions of Won)
1	Borrower A	Real estate, leasing and service	￦	90	￦	7
2	Borrower B	Manufacturing		29		3
3	Borrower C	Real estate, leasing and service		28		11
4	Borrower D	Real estate, leasing and service		19		3
5	Borrower E	Construction		18		7
6	Borrower F	Manufacturing		18		—
7	Borrower G	Other service		18		18
8	Borrower H	Real estate, leasing and service		15		4
9	Borrower I	Real estate, leasing and service		14		14
10	Borrower J	Real estate, leasing and service		13		—
11	Borrower K	Other service		11		4
12	Borrower L	Other service		11		—
13	Borrower M	Other service		11		—
14	Borrower N	Real estate, leasing and service		9		—
15	Borrower O	Other service		7		—
16	Borrower P	Real estate, leasing and service		6		2
17	Borrower Q	Transportation, storage, and communication		6		—
18	Borrower R	Transportation, storage, and communication		6		6
19	Borrower S	Other service		6		—
20	Borrower T	Other service		5		2

			￦	340	￦	81

Non-Performing Loan Strategy

One of our primary objectives is to prevent our loans from becoming non-performing. Through our corporate credit rating system, which is designed to prevent our loan officers from extending new loans to borrowers with high credit risks based on the borrower’s credit rating, we seek to reduce credit risk related to future non-performing loans. Our early warning system is designed to bring any sudden increase in a borrower’s credit risk to the attention of our loan officers, who then closely monitor such loans.

If a loan becomes non-performing notwithstanding such preventive mechanism, an officer at the branch level responsible for monitoring non-performing loans will commence due diligence on the borrower’s assets, send a notice demanding payment or a notice that we will take or prepare for legal action.

At the same time, we also initiate our non-performing loan management process, which includes:

•

identifying loans subject to a proposed sale by assessing the estimated losses from such sale based on the estimated recovery value of collateral, if any, for such non-performing loans;

•

identifying loans subject to charge-off based on the estimated recovery value of collateral, if any, for such non-performing loans and the estimated rate of recovery of unsecured loans; and

•

to a limited extent, identifying commercial loans subject to normalization efforts based on the cash-flow situation of the borrower.

Once the details of a non-performing loan are identified, we pursue early solutions for recovery. Actual recovery efforts for non-performing loans are handled by the relevant department, depending on the nature of such loans and the borrower, among others. The officers or agents of the responsible departments and units use a variety of methods to resolve non-performing loans, including:

•

making phone calls and paying visits to the borrower to request payment;

•

continuing to assess and evaluate assets of our borrowers; and

•

if necessary, initiating legal action such as foreclosures, attachment and litigation.

In order to promote speedy recovery on loans subject to foreclosures and litigation, the branch responsible for handling these loans may transfer them to the relevant unit at headquarters.

Our policy is to commence legal action within one month after default on promissory notes and four months after delinquency of payment on other types of loans. For loans to insolvent or bankrupt borrowers or when we conclude that it is not possible to recover through normal procedures, we take prompt legal actions regardless of the grace period.

In addition to making efforts to collect on these non-performing loans, we take other measures to reduce the level of our non-performing loans, including:

•

selling non-performing loans to third parties including the Korea Asset Management Corporation;

•

entering into asset-backed securitization transactions with respect to non-performing loans;

•

managing retail loans that are three months or more past due through Shinhan Credit Information under an agency agreement; and

•

using third-party collection agencies including credit information companies such as Solomon Credit Information.

In 2013, we sold non-performing loans in the amount of ￦77 billion to third parties and transferred ￦33 billion to the Woori F&I Co., Ltd. See “Item 3.D. Risk Factors — Other Risks Relating to Us — The Korean government may encourage targeted lending to and investment in certain sectors in furtherance of policy initiatives, and we may take this factor into account.” These loans met the criteria of true sale and were derecognized accordingly.

The following table presents a roll-forward of our nonperforming loans in 2013.


	(In billions of Won)
Non-performing loans as of December 31, 2012	￦	1,695

Additional non-performing loans due to delinquency		1,038
Loans sold		(157	)
Loans charged off		(894	)
Loans modified and returned to performing		(39	)
Other adjustments(1)		(446	)

Non-performing loans as of December 31, 2013	￦	1,197

Note:

(1)

Represents loans paid down or paid off and loans returned to performing other than as a result of modification. We do not separately collect and analyze data relating to non-performing loans other than those that were sold, charged off, modified and returned to performing, or transferred to held-for-sale investment portfolio.

Allocation of Allowance for Loan Losses

The following table presents, as of the dates indicated, the allocation of our loan loss allowance by loan type.


	As of December 31,
	2010					2011					2012					2013
	Amount		Loans % of Total Loans			Amount		Loans % of Total Loans			Amount		Loans % of Total Loans			Amount		Loans % of Total Loans
	(In billions of Won, except percentages)
Corporate
Corporate loans	￦	1,923		67.43	%	￦	1,634		63.41	%	￦	1,700		60.71	%	￦	1,576		63.65	%
Public and other		15		0.53			19		0.74			14		0.50			10		0.40
Loan to banks		32		1.12			13		0.50			11		0.39			5		0.20
Lease financing		17		0.60			14		0.54			33		1.18			21		0.85

Total corporate		1,987		69.68			1,680		65.19			1,758		62.78			1,612		65.10

Retail
Mortgages and home equity		17		0.60			19		0.74			23		0.82			26		1.05
Other retail		178		6.24			202		7.84			275		9.82			190		7.68

Total retail		195		6.84			221		8.58			298		10.64			216		8.73

Credit cards		670		23.48			676		26.23			744		26.58			648		26.17

Total allowance for loan losses	￦	2,852		100.00	%	￦	2,577		100.00	%	￦	2,800		100.00	%	￦	2,476		100.00	%

Our total allowance for loan losses decreased by ￦324 billion, or 11.57%, to ￦2,476 billion as of December 31, 2013 from ￦2,800 billion as of December 31, 2012. During 2013, the allowance for loan losses decreased primarily as a result of a decrease in the loss rate for other retail loans due to a decrease in overall delinquency of retail loans following an increase in loans with sound quality.

Our total allowance for loan losses increased by ￦223 billion, or 8.65%, to ￦2,800 billion as of December 31, 2012 from ￦2,577 billion as of December 31, 2011. During 2012, the allowance for loan losses increased primarily as a result of increased loss rate for other retail loans.

Analysis of Allowance for Loan Losses

The following table presents an analysis of our loan loss experience for each of the years indicated.


	2010			2011			2012			2013
	(In billions of Won, except percentages)
Balance at the beginning of the period	￦	3,114		￦	2,852		￦	2,585		￦	2,800
Amounts charged against income		1,301			864			1,325			1,082
Gross charge-offs:
Corporate:
Corporate loans		1,292			960			844			799
Public and other		19			1			1			—
Loan to banks		—			—			—			—
Lease financing		18			14			19			33
Retail:
Mortgage and home equity		25			1			4			4
Other retail		76			80			130			242
Credit cards		429			447			486			657

Total gross charge-offs		1,859			1,503			1,484			1,735

Recoveries:
Corporate:
Corporate loans		83			75			75			150
Public and other		—			—			6			—
Loan to banks		—			—			—			—
Lease financing		1			2			2			1
Retail:
Mortgage and home equity		2			6			—			—
Other retail		52			37			32			28
Credit cards		327			283			257			217
Total recoveries		465			403			372			396

Other		(169	)		(39	)		2			(67	)
Net charge-offs		(1,563	)		(1,139	)		(1,110	)		(1,406	)

Balance at the end of the period	￦	2,852		￦	2,577		￦	2,800		￦	2,476

Ratio of net charge-offs during the period to average loans outstanding during the period		1.06	%		0.78	%		0.55	%		0.68	%

Loan Charge-offs

Our gross charge-offs decreased from ￦1,503 billion in 2011 to ￦1,484 billion in 2012, primarily due to a decrease in charge-off of corporate loans as a result of a slowdown in the deterioration in asset quality for corporate loans in 2012 as compared to 2011. Our gross charge-offs increased to ￦1,735 billion in 2013, primarily due to an increase in charge-off of impaired retail loans as part of our efforts to enhance the overall asset quality of our assets.

In 2013, the charge-off on restructured loans amounted to ￦153 billion, of which ￦29 billion was related to loans converted into equity securities as part of restructuring. With respect to a loan that we consider to be uncollectible regardless of any modification of terms, we convert a portion of such loan into equity securities following negotiation with the borrower and charge off the remainder of such loan as previously discussed in “— Troubled Debt Restructurings — Charge-off of Loans Subject to Restructuring.” The equity securities so converted are recorded at fair value, based on the market value of such securities if available or the appraisal value of such securities by an outside appraiser if a market value is unavailable.

Basic Principles

We attempt to minimize loans to be charged off by practicing a sound credit approval process based on credit risk analysis prior to extending loans and a systematic management of outstanding loans.

Loans to be Charged-off

Loans are charged off if they are deemed to be uncollectible by falling under any of the following categories:

•

loans for which collection is not foreseeable due to insolvency or bankruptcy, dissolution or the termination of the debtor’s business;

•

loans for which collection is not foreseeable due to the death or disappearance of debtors;

•

loans for which collection expenses exceed the collectable amount;

•

loans for which collection is not possible through legal or any other means;

•

payments in arrears in respect of credit cards that are overdue for more than six months;

•

payments outstanding on unsecured retail loans that are overdue for more than six months;

•

payments in arrears in respect of leases that are overdue for more than 12 months; or

•

the portion of loans classified as “estimated loss,” net of any recovery from collateral, which is deemed to be uncollectible.

Procedure for Charge-off Approval

An application for Shinhan Bank’s loans to be charged off is submitted by the relevant branch to the Corporate Credit Collection Department in the case of corporate loans and foreign branches, and the Consumer Credit Collection Department in the case of retail loans. An application for charge-off is generally submitted immediately after the relevant loan becomes 180 days past due. The General Manager in charge of review evaluates the application. The General Manager of Audit and Examination Department conducts review of compliance with our internal procedures for charge-offs, and if the review is satisfactory, requests approval from the President of Shinhan Bank. As for Shinhan Card, it generally charges off receivables that are 180 days past due following internal review.

Treatment of Loans Charged-off

Once loans are charged off, they are derecognized from our statements of financial position. We continue collection efforts in respect of these loans through third-party collection agencies including the Korea Asset Management Corporation and Shinhan Credit Information.

Treatment of Collateral

When we determine that a loan collateralized by real estate cannot be recovered through normal collection channels, we generally petition a court to foreclose and sell the collateral through a court-supervised auction within one month after default and insolvency and within four months after delinquency. However, this procedure does not apply to companies under restructuring, recovery proceedings, workout or other court proceedings where there are restrictions on such auction procedures. Filing of such petition with the court generally encourages the debtor to repay the overdue loan. If a debtor ultimately fails to repay and the court grants its approval for foreclosure, we sell the collateral and recover the principal amount and interest accrued up to the sales price, net of expenses incurred from the auction. Foreclosure proceedings in under the laws and regulations in Korea typically take seven months to one year from initiation to collection depending on the nature of the collateral.

Financial Statement Presentation

Our financial statements include as charges-offs all unsecured retail loans, including credit cards, which are overdue for more than six months. Leases are charged off when past due for more than twelve months. For

collateral dependent loans, we charge off the excess of the book value of the subject loan over the amount received or to be received from the sale of the underlying collateral when the collateral is sold as part of a foreclosure proceeding and its sale price becomes known through court publication as part of such proceeding.

Investment Portfolio

Investment Policy

We invest in and trade Won-denominated and, to a lesser extent, foreign currency-denominated securities for our own account in order to:

•

maintain the stability and diversification of our assets;

•

maintain adequate sources of back-up liquidity to match our funding requirements; and

•

supplement income from our core lending activities.

In making securities investments, we take into account a number of factors, including macroeconomic trends, industry analysis and credit evaluation in determining whether to make investments in particular securities.

Our investments in securities are subject to a number of regulatory guidelines, including limitations prescribed under the Financial Holding Companies Act and the Banking Act. Generally, a financial holding company is prohibited from acquiring more than 5% of the total issued and outstanding shares of another company (other than its direct and indirect subsidiaries). Furthermore, under these regulations, Shinhan Bank must limit its investments in shares and securities with a maturity in excess of three years (other than monetary stabilization bonds issued by the Bank of Korea and national government bonds) to 60.0% of the sum of Tier I and Tier II capital (less any deductions) of Shinhan Bank. Generally, Shinhan Bank is also prohibited from acquiring more than 15.0% of the shares with voting rights issued by any other corporation (other than for the purpose of establishing or acquiring a subsidiary). Further information on the regulatory environment governing our investment activities is set out in “— Supervision and Regulation — Principal Regulations Applicable to Banks — Restrictions on Investments in Property”, “— Principal Regulations Applicable to Banks — Restrictions on Shareholdings in Other Companies”, “— Principal Regulations Applicable to Financial Holding Companies — Liquidity” and “— Principal Regulations Applicable to Financial Holding Companies — Restrictions on Shareholdings in Other Companies.”

Book Value and Market Value

The following table sets out the book value and market value of investments in our investment portfolio as of the dates indicated.


	As of December 31, 2011				As of December 31, 2012				As of December 31, 2013
	Book Value		Market Value		Book Value		Market Value		Book Value		Market Value
	(In billions of Won)
Financial assets designated at fair value
Marketable equity securities	￦	1,361	￦	1,361	￦	1,689	￦	1,689	￦	2,173	￦	2,173
Debt securities:
Korean treasury and governmental agencies		88		88		87		87		172		172
Debt securities issued by financial institutions		110		110		175		175		229		229
Corporate debt securities		242		242		591		591		780		780
Debt securities issued by foreign government		—		—		—		—		—		—
Mortgage-backed and asset-backed securities		—		—		—		—		6		6
Others		—		—		—		—		—		—

Total — Fair Value Through Profit and Loss		1,801		1,801		2,542		2,542		3,360		3,360

Available-for-sale securities
Marketable equity securities		5,038		5,038		4,971		4,971		5,085		5,085
Debt securities:
Korean treasury and governmental agencies		4,612		4,612		5,053		5,053		3,707		3,707
Debt securities issued by financial institutions		13,689		13,689		13,750		13,750		12,842		12,842
Corporate debt securities		10,046		10,046		11,633		11,633		10,404		10,404
Debt securities issued by foreign government		218		218		394		394		589		589
Mortgage-backed and asset-backed securities		503		503		483		483		977		977

Total — Available-for-sale		34,106		34,106		36,284		36,284		33,604		33,604

Held-to-maturity securities
Debt securities:
Korean treasury and governmental agencies		5,781		6,076		5,613		6,003		5,585		5,828
Debt securities issued by financial institutions		2,064		2,162		1,701		1,758		1,406		1,426
Corporate debt securities		3,887		3,978		4,182		4,358		3,785		3,874
Debt securities issued by foreign government		90		90		104		104		135		135
Mortgage-backed and asset-backed securities		73		74		60		61		120		117

Total — Held-to-maturity		11,895		12,380		11,660		12,284		11,031		11,380


	As of December 31, 2011				As of December 31, 2012				As of December 31, 2013
	Book Value		Market Value		Book Value		Market Value		Book Value		Market Value
	(In billions of Won)
Trading Securities
Marketable equity securities		1,988		1,988		2,337		2,337		2,693		2,693
Debt securities:
Korean treasury and governmental agencies		698		698		992		992		866		866
Financial institutions		2,994		2,994		5,770		5,770		6,035		6,035
Corporations		5,843		5,843		6,934		6,934		7,676		7,676
Mortgage-backed and asset-backed securities		90		90		141		141		679		679
Debt securities issued by foreign governments		—		—		2		2		7		7
Other trading assets		341		341		438		438		76		76
Total — Trading		11,954		11,954		16,654		16,654		18,032		18,032

Total securities	￦	59,756	￦	60,241	￦	67,140	￦	67,764	￦	66,027	￦	66,376

Maturity Analysis

The following table categorizes our securities by maturity and weighted average yield as of December 31, 2013.


	As of December 31, 2013
	1 Year or Less					Over 1 but within 5 Years					Over 5 but within 10 Years					Over 10 Years					Total
	Carrying Amount		Weighted Average Yield(1)			Carrying Amount		Weighted Average Yield(1)			Carrying Amount		Weighted Average Yield(1)			Carrying Amount		Weighted Average Yield(1)			Carrying Amount		Weighted Average Yield(1)
	(In billions of Won, except percentages)
Financial assets designated at fair value:
Korean treasury securities and government agencies	￦	—		0.00	%	￦	70		2.90	%	￦	102		3.57	%	￦	—		0.00	%	￦	172		3.30	%
Debt securities issued by financial institutions		40		2.83	%		110		3.22	%		79		3.93	%		—		0.00	%		229		3.40	%
Corporate debt securities		10		3.19	%		665		3.21	%		105		3.75	%		—		0.00	%		780		3.30	%
Mortgage Backed Securities and Asset Backed Securities		—		0.00	%		6		3.32	%		—		0.00	%		—		0.00	%		6		3.32	%

Total	￦	50		2.90	%	￦	851		3.18	%	￦	286		3.74	%	￦	—		0.00	%	￦	1,187		2.96	%

Available-for-sale securities:
Korean treasury securities and government agencies	￦	234		3.47	%	￦	2,467		3.11	%	￦	877		3.25	%	￦	129		3.75	%	￦	3,707		3.19	%
Debt securities issued by financial institutions		6,984		3.00	%		5,322		3.00	%		527		3.85	%		9		5.15	%		12,842		3.04	%
Corporate debt securities		2,913		3.38	%		6,659		3.51	%		703		3.68	%		129		4.32	%		10,404		3.48	%
Debt securities issued by foreign governments		205		4.11	%		255		9.02	%		11		5.01	%		118		4.00	%		589		6.23	%
Mortgage-backed securities and asset-backed securities		365		2.90	%		533		3.04	%		79		3.50	%		—		0.00	%		977		3.03	%

Total	￦	10,701		3.13	%	￦	15,236		3.34	%	￦	2,197		3.55	%	￦	385		4.05	%	￦	28,519		3.28	%


	As of December 31, 2013
	1 Year or Less					Over 1 but within 5 Years					Over 5 but within 10 Years					Over 10 Years					Total
	Carrying Amount		Weighted Average Yield(1)			Carrying Amount		Weighted Average Yield(1)			Carrying Amount		Weighted Average Yield(1)			Carrying Amount		Weighted Average Yield(1)			Carrying Amount		Weighted Average Yield(1)
	(In billions of Won, except percentages)
Held-to-maturity securities:
Korean treasury securities and government agencies	￦	1,624		4.98	%	￦	2,602		4.58	%	￦	121		3.71	%	￦	1,238		3.79	%	￦	5,585		4.50	%
Debt securities issued by financial institutions		310		2.19	%		607		3.34	%		266		3.84	%		223		4.73	%		1,406		3.40	%
Corporate debt securities		531		4.14	%		2,216		3.50	%		434		3.16	%		604		3.89	%		3,785		3.62	%
Debt securities issued by foreign governments		91		3.54	%		14		6.14	%		30		1.91	%		—		0.00	%		135		3.45	%
Mortgage-backed securities and asset-backed securities		—		0.00	%		20		3.37	%		20		3.68	%		80		3.64	%		120		3.60	%

Total	￦	2,556		4.42	%	￦	5,459		4.01	%	￦	871		3.41	%	￦	2,145		3.91	%	￦	11,031		4.04	%

Trading securities:
Korean treasury securities and government agencies	￦	207		3.02	%	￦	530		3.05	%	￦	82		2.56	%	￦	47		3.78	%	￦	866		2.93	%
Debt securities issued by financial institutions		4,810		2.70	%		1,214		2.90	%		—		0.00	%		11		5.97	%		6,035		2.74	%
Corporate debt securities		5,772		2.85	%		1,901		3.07	%		2		4.63	%		1		3.90	%		7,676		2.90	%
Debt securities issued by foreign governments		1		0.01	%		3		10.25	%		3		12.11	%		—		0.00	%		7		8.81	%
Mortgage-backed securities and asset-backed securities		644		2.83	%		35		3.00	%		—		0.00	%		—		0.00	%		679		2.84	%

Total	￦	11,434		2.79	%	￦	3,683		3.02	%	￦	87		2.90	%	￦	59		4.19	%	￦	15,263		2.84	%

Total	￦	24,741				￦	25,229				￦	3,441				￦	2,589				￦	56,000

Note:

(1)	The weighted-average yield for the portfolio represents the yield to maturity for each individual security, weighted using its amortized cost.

Concentrations of Risk

The following table provides securities held by us whose aggregate book value exceeded 10% of our stockholders’ equity as of December 31, 2013. As of December 31, 2013, 10% of our stockholders’ equity was ￦2,986 billion.


	As of December 31, 2013
	Book Value		Fair Value
	(In billions of Won)
Name of issuer:
Ministry of Strategy and Finance	￦	6,197	￦	6,336
The Bank of Korea	￦	5,060	￦	5,060

All of the above entities are either an agency of the Korean government or an entity controlled by the Korean government.

Credit-Related Commitments and Guarantees

In the normal course of our operations, we make various commitments and guarantees to meet the financing and other business needs of our customers. Commitments and guarantees are usually in the form of, among others, commitments to extend credit, commercial letters of credit, standby letters of credit and performance guarantees. The contractual amount of these financial instruments represents the maximum possible loss amount if the account party draws down the commitment or we should fulfill our obligation under the guarantee and the account party fails to perform under the contract.

The following table sets forth our credit-related commitments and guarantees as of the dates indicated.


	As of December 31,
	2011		2012		2013
	(In billions of Won)
Commitments to extend credit	￦	65,822	￦	71,256	￦	73,464
Commercial letters of credit		3,859		3,115		3,045
Other(1)		28,017		26,444		26,743

Total	￦	97,698	￦	100,815	￦	103,252

Note:

(1)	Consists of financial guarantees, performance guarantees, liquidity facilities to special purpose entities, acceptances, guarantee on trust accounts and endorsed bills.

We have credit-related commitments that are not reflected on our statements of financial position, which primarily consist of commitments to extend credit and commercial letters of credit. Commitments to extend credit, including credit lines, represent unfunded portions of authorizations to extend credit in the form of loans. These commitments expire on fixed dates and a customer is required to comply with predetermined conditions to draw funds under the commitments. Commercial letters of credit are undertakings on behalf of customers authorizing third parties to draw drafts on us up to a stipulated amount under specific terms and conditions. They are generally short-term and collateralized by the underlying shipments of goods to which they relate and therefore have less risk.

We also have guarantees that are recorded on our statements of financial position at their fair value at inception which are amortized over the life of the guarantees. Such guarantees generally include standby letters of credit, other financial and performance guarantees and liquidity facilities to special purpose entities. Standby letters of credit are irrevocable obligations to pay third-party beneficiaries when our customers fail to repay loans or debt instruments, which are generally in foreign currencies. A substantial portion of these standby letters of credit are secured by collateral, including trade-related documents. Other financial and performance guarantees are irrevocable assurances that we will pay beneficiaries if our customers fail to perform their obligations under certain contracts. Liquidity facilities to special purpose entities are irrevocable commitments to provide contingent liquidity credit lines to special purpose entities established by our customers in the event that a triggering event such as shortage of cash occurs.

The commitments and guarantees do not necessarily represent our exposure since they often expire unused.

Derivatives

As discussed under “— Business Overview — Our Principal Activities — Corporate and Investment Banking Services — Derivatives Trading” above, we engage in derivatives trading activities primarily on behalf of our customers so that they may hedge their risks and also enter into back-to-back derivatives with other financial institutions to cover exposures arising from such transactions. In addition, we enter into derivatives transactions to hedge against risk exposures arising from our own assets and liabilities, some of which are nontrading derivatives that do not qualify for hedge accounting treatment.

The following shows, as of December 31, 2013, the gross notional or contractual amounts of derivatives held or issued for (i) trading and (ii) nontrading that qualify for hedge accounting.


	As of December 31, 2013
	Underlying Notional Amount(1)		Estimated Fair Value Assets		Estimated Fair Value Liabilities
	(In billions of Won)
Trading:
Foreign exchange derivatives:
Future and forward contracts	￦	28,148	￦	421	￦	494
Swaps		14,328		428		348
Options		314		9		2

Sub-total		42,790		858		844

Interest rate derivatives:
Future and forward contracts		963		—		—
Swaps		85,988		487		443
Options		3,161		13		17

Sub-total		90,112		500		460

Credit derivatives:
Swaps		230		1		5

Sub-total		230		1		5

Equity derivatives:
Swaps and forward contracts		3,043		91		64
Options		3,752		87		222
Future contracts		223		—		—

Sub-total		7,018		178		286

Commodity derivatives:
Swaps and forward contracts		1,184		8		82
Options		108		2		7
Future contracts		185		2		3

Sub-total		1,477		12		92

Total	￦	141,627	￦	1,549	￦	1,687

Nontrading:
Hedge accounting:
Foreign exchange derivatives:
Swaps	￦	1,881	￦	12	￦	102
Future and forward contracts		152		2		—
Interest rate derivatives:
Swaps		8,691		153		236

Total	￦	10,724	￦	167	￦	338

Note:

(1)	Notional amounts in foreign currencies were converted into Won at prevailing exchange rates as of December 31, 2013.

Funding

We obtain funding from a variety of sources, both domestic and foreign. Our principal source of funding is customer deposits obtained from our banking operations, and we from time to time issue equity and debt securities, including preferred shares. In addition, our subsidiaries acquire funding through call money, borrowings from the Bank of Korea, other short-term borrowings, corporate debentures and other long-term debt, including debt and equity securities issuances, asset-backed securitizations and repurchase transactions, to complement, or if necessary, replace funding through customer deposits. For further details relating to funding by us and our subsidiaries, see “Item 5.B. Liquidity and Capital Resources.”

Deposits

Although the majority of our bank deposits are short-term, the majority of our depositors have historically rolled over their deposits at maturity, providing our banking operation with a stable source of funding.

The following table shows the average balances of our deposits and the average rates paid on our deposits for the periods indicated.


	2011					2012					2013
	Average Balance(1)		Average Rate Paid			Average Balance(1)		Average Rate Paid			Average Balance(1)		Average Rate Paid
	(In billions of Won, except percentages)
Interest-bearing deposits:
Demand deposits	￦	16,517		0.72	%	￦	17,233		0.68	%	￦	19,531		0.65	%
Savings deposits		34,234		0.98			38,655		1.24			40,139		0.96
Time deposits		99,654		3.61			109,743		3.63			112,133		3.00
Other deposits		3,513		3.71			1,875		3.26			1,680		2.01

Total interest-bearing deposits	￦	153,918		2.72	%	￦	167,506		2.77	%	￦	173,483		2.26	%

Note:

(1)	Average balances are based on (a) daily balances of Shinhan Bank and (b) quarterly balances for other subsidiaries.

For a breakdown of deposit products, see “— Our Principal Activities — Deposit-taking Activities,” except that cover bills sold are reflected on short-term borrowings and securities sold under repurchase agreements are reflected as secured borrowings.

Certificates of Deposit and Other Time Deposits

The following table presents the balance and remaining maturities of certificates of deposit and other time deposits which had a fixed maturity in excess of ￦100 million or more as of December 31, 2013.


	As of December 31, 2013
	Certificates of Deposit		Other Time Deposits		Total
	(In billions of Won)
Maturing within three months	￦	459	￦	29,813	￦	30,272
After three but within six months		285		17,059		17,344
After six but within 12 months		204		24,117		24,321
After 12 months		102		3,714		3,816

Total	￦	1,050	￦	74,703	￦	75,753

A majority of our certificates of deposit accounts and other time deposits issued by our foreign offices is in the amount of US$100,000 or more.

Short-term Borrowings

The following table presents information regarding our short-term borrowings (borrowings with an original maturity of one year or less) for the periods indicated.


	2011												2012												2013
	Balance Out- standing		Average Balance Out- standing(1)		Highest Balances at Any Month- end		Weighted Average Interest Rate(2)			Year-end Interest Rate			Balance Out- standing		Average Balance Out- standing(1)		Highest Balances at Any Month- end		Weighted Average Interest Rate(2)			Year-end Interest Rate			Balance Out- standing		Average Balance Out- standing(1)		Highest Balances at Any Month- end		Weighted Average Interest Rate(2)			Year-end Interest Rate
	(In billions of Won, except for percentages)
Borrowings from
Bank of Korea(3)	￦	1,029	￦	1,046	￦	1,240		1.18	%		0.10-1.50	%	￦	1,510	￦	1,159	￦	1,510		1.20	%		0.10-1.50	%	￦	1,385	￦	1,373	￦	1,531		0.97	%		0.1-1.25	%
Call money		1,309		2,212		2,013		4.93			0.14-3.55			1,089		2,402		2,861		4.50			0.07-9.00			1,403		2,397		3,335		2.93			0.01-5.08
Other short-term borrowings(4)		11,508		7,430		12,022		1.14			0.60-9.26	%		9,434		7,555		12,069		1.63			0.00-14.00	%		9,007		5,540		9,925		1.52			0.0-6.17	%

	￦	13,846	￦	10,688	￦	15,275		1.93	%				￦	12,033	￦	11,116	￦	16,440		2.24	%				￦	11,795	￦	9,310	￦	14,791		1.8	%

Notes:

(1)	Average balances are based on (a) daily balances of Shinhan Bank and (b) quarterly balances for other subsidiaries.

(2)	Weighted-average interest rates are calculated by dividing the total interest expenses by the average amount borrowed.

(3)	Borrowings from the Bank of Korea generally mature within one month for borrowings in Won and six months for borrowings in foreign currencies.

(4)	Other short-term borrowings included borrowings from trust accounts, bills sold, borrowings in domestic and foreign currencies.

Our short-term borrowings have maturities of less than one year which are generally unsecured with the exception of borrowings from the Bank of Korea.

Risk Management

Overview

As a financial services provider, we are exposed to various risks relating to our lending, credit card, insurance, securities investment, trading and leasing businesses, our deposit taking and borrowing activities and our operating environment. The principal risks to which we are exposed are credit risk, market risk, interest rate risk, liquidity risk and operational risk. These risks are recognized, measured and reported in accordance with risk management guidelines established at our holding company level and implemented at the subsidiary level through a carefully stratified checks-and-balances system.

We believe that our risk management system has been instrumental to building our reputation as a well-managed and prudent financial service provider and withstanding various external shocks. In particular, during the global financial crisis of 2008 and 2009, we believe our risk management provided effective early warning signals which helped us to proactively reconfigure our asset portfolio and substantially reduce our exposure to troubled debtors and thereby avoid what could have been a substantially greater credit loss during such crisis, and we are carefully upgrading and refining our risk management system in the face of ongoing economic difficulties in Europe and elsewhere.

In particular, our group-wide risk management is guided by the following core principles:

•

carrying out all business activities within prescribed risk tolerance levels and prudently balancing profitability and risk management;

•

standardizing the risk management process and monitoring compliance on a group-wide level;

•

operating a risk management decision making system with active participation by management;

•

creating and operating a risk management organization independent of business activities;

•

operating a performance management system that enhances clear identification of risks when making business decisions;

•

aiming to achieve preemptive and practical risk management; and

•

prudent preparation for known and unknown contingencies.

We take the following steps to implement the foregoing risk management principles:

•

risk capital management — Risk capital refers to capital necessary to compensate for losses in case of a potential risk being realized, and risk capital management refers to the process of asset management based on considerations of risk exposure and risk appetite among total assets so that we can maintain an appropriate level of risk capital. As part of our risk capital management, we and our subsidiaries have adopted and maintain various risk planning processes and reflect such risk planning in our business and financial planning. We also maintain a risk limit management system to ensure that risks in our business do not exceed prescribed limits.

•

risk monitoring — We proactively, preemptively and periodically review risks that may impact our overall operations, including through a multidimensional risk monitoring system that is currently being installed. Currently, each of our subsidiaries is required to report to the holding company any factors that could have a material impact on group-wide risk management, and the holding company reports to our chief risk officer and other members of our senior management the results of risk monitoring weekly, monthly and on an ad hoc basis as needed. In addition, we perform preemptive risk management through a “risk dashboard system” under which we closely monitor any increase in asset size, risk levels and sensitivity to external factors with respect to the major asset portfolios of each of our subsidiaries, and to the extent such monitoring yields any warning signals, we promptly analyze the causes and, if necessary, formulate and implement actions in response to such warning signals.

•

risk review — Prior to entering any new business, offering any new products or changing any major policies, we review any relevant risk factors based on a prescribed risk management checklist and, in the

case of changes for which assessment of risk factors is difficult, promote reasonable decision-making in order to avoid taking any unduly risky action. The risk management departments of all our subsidiaries are required to review all new businesses, products and services prior to their launch and closely monitor the development of any related risks following their launch, and in the case of any action that involves more than one subsidiary, the relevant risk management departments are required to consult with the risk management team at the holding company level prior to making any independent risk reviews.

•

crisis management — We maintain a group-wide risk management system to detect the early warnings signals of any crisis and, in the event of a crisis actually happening, to respond on a timely, efficient and flexible basis so as to ensure our survival as a going concern. Each of our subsidiaries maintains crisis planning for three levels of contingencies, namely, “alert”, “imminent crisis” and “crisis”, determination of which is made based on quantitative and qualitative monitoring and consequence analysis, and upon the occurrence of any such contingency, is required to respond according to a prescribed contingency plan. At the holding company level, we maintain and install a crisis detection and response system which is applied consistently group-wide, and upon the occurrence of an “imminent crisis” or “crisis” event at a subsidiary level, we directly take charge of the situation so that we manage it on a concerted group-wide basis.

Organization

Our risk management system is organized along the following hierarchy: from the top and at the holding company level, the Group Risk Management Committee, the Group Risk Management Council, the Group Chief Risk Officer and the Group Risk Management Team, and at the subsidiary level, the Risk Management Committee, the Chief Risk Officer and the Risk Management Team of the relevant subsidiary. The Group Risk Management Committee, which is under the supervision of our holding company’s board of directors, sets the basic group-wide risk management policies and strategies. Our Group Chief Risk Officer reports to the Group Risk Management Committee, and the Group Risk Management Council coordinates the risk management policies and strategies at the group level as well as at the subsidiary level among each of our subsidiaries. Each of our subsidiaries also has a separate Risk Management Committee, Risk Management Working Committee and Risk Management Team, whose tasks are to implement the group-wide risk management policies and strategies at the subsidiary level as well as to set risk management policies and strategies specific to such subsidiary in line with the group-wide guidelines. We also have the Group Risk Management Team, which supports our Chief Risk Officer in his or her risk management and supervisory role.

In order to maintain the group-wide risk at an appropriate level, we use a hierarchical risk limit system under which the Group Risk Management Committee assigns reasonable risk limits for the entire group and each of our subsidiaries, and the Risk Management Committee and the Risk Management Working Committee of each of our subsidiaries manage the subsidiary-specific risks by establishing and managing risk limits in more detail by type of risk and type of product for each department and division within such subsidiary. Further details follow.

At the holding company level:

•

Group Risk Management Committee — The Group Risk Management Committee consists of three outside directors of our holding company. The Group Risk Management Committee convenes at least quarterly and on an ad hoc basis as needed. Specifically, the Group Risk Management Committee does the following: (i) establish the overall risk management policies consistent with management strategies, (ii) set reasonable risk limits for the entire group and each of our subsidiaries, (iii) approve appropriate investment limits or allowed loss limits, (iv) enact and amend risk management regulations, and (v) decide other risk management-related issues the board of directors or the Group Risk Management Committee sees fit to discuss. The results of the Group Risk Management Committee meetings are reported to the board of directors of our holding company. The Group Risk Management Committee makes decisions through affirmative votes by a majority of the committee members.

•

Group Risk Management Council — Comprised of the Group Chief Risk Officer, Group Risk Management Team head, and Chief Risk Officers of each of our subsidiaries, the Group Risk

Management Council provides a forum for risk management executives from each subsidiary to discuss our group-wide risk management guidelines and strategy in order to maintain consistency in the group-wide risk policies and strategies.

•

Group Chief Risk Officer — The Group Chief Risk Officer aids the Group Risk Management Committee by implementing the risk policies and strategies as well as ensuring consistency in the risk management systems of our subsidiaries. Furthermore, the Group Chief Risk Officer evaluates the Chief Risk Officer of each subsidiary in addition to monitoring the risk management practices of each subsidiary.

•

Group Risk Management Team — This team provides support and assistance to the Group Chief Risk Officer in carrying out his responsibilities.

At the subsidiary level:

•

Risk Management Committee — In order to maintain group-wide risk at an appropriate level, we have established a hierarchical risk limit system where the Group Risk Management Committee establishes risk limits for us and our subsidiaries, and each of our subsidiaries establishes and manages risk limits in more detail by type of risk and type of product for each department and division within such subsidiary. In accordance with the group risk management policies and strategies, the risk management committee at the subsidiary level establishes its own risk management policies and strategies in more detail and the respective risk management department implements those policies and strategies.

•

Risk Management Team — The risk management team, operating independently from the business units of each of our subsidiaries, monitors, assesses, manages and controls the overall risk of its operations and reports all major risk-related issues to the Group Risk Management Team at the holding company level, which then reports to the Group Chief Risk Officer.

The following is a flowchart of our risk management system at the holding company level and the subsidiary level.

LOGO

Credit Risk Management

Credit risk, which is the risk of loss from default by an obligor or counterparty, is our greatest risk. Our credit risk management encompasses all areas of credit that may result in potential economic loss, including not just transactions that are recorded on our balance sheets, but also off-balance-sheet transactions such as guarantees, loan commitments and derivatives transactions. A substantial majority of our credit risk relates to the operations of Shinhan Bank and Shinhan Card.

Credit Risk Management of Shinhan Bank

Shinhan Bank’s credit risk management is guided by the following principles:

•

achieve profit level corresponding to the level of risks involved;

•

improve asset quality and achieve optimal industrial and rating loan portfolios;

•

avoid excessive loan concentration in a particular borrower or sector;

•

focus on the borrower’s ability to repay the debt; and

•

provide financial support to advance the growth of select customers.

Major policies for Shinhan Bank’s credit risk management, including Shinhan Bank’s overall credit risk management plan and credit policy guidelines, are determined by the Risk Policy Committee of Shinhan Bank, the executive decision-making body for management of credit risk. The Risk Policy Committee is headed by the Chief Risk Officer, and also comprises of the Chief Credit Officer, the heads of each business. In order to separate the loan approval functions from credit policy decision-making, Shinhan Bank has a Credit Review Committee that performs credit review evaluations, which focus on improving the asset quality and profitability from the loans being made, and operates separately from the Risk Policy Committee. Both the Risk Policy Committee and the Credit Review Committee make decisions by a vote of two-thirds or more of the attending members of the respective committees, which must constitute at least two-thirds of the respective committee members to satisfy the respective quorum.

Shinhan Bank complies with credit risk management procedures pursuant to internal guidelines and regulations and continually monitors and improves these guidelines and regulations. Its credit risk management procedures include:

•

credit evaluation and approval;

•

credit review and monitoring; and

•

credit risk assessment and control.

Credit Evaluation and Approval

All loan applicants and guarantors are subject to credit evaluation before approval of any loans. Credit evaluation of loan applicants are carried out by the relevant lending approval authority of Shinhan Bank. Loan evaluation is carried out by a group rather than at an individual level through an objective and deliberative process. Credit ratings of loan applicants and guarantors influence loan interest rates, approval authority, credit exposure limits, calculation of potential losses and estimated cost of capital, and therefore are determined objectively and independently by the relevant business unit. Shinhan Bank uses a credit scoring system for retail loans and a credit-risk rating system for corporate loans.

Each of Shinhan Bank’s borrowers is assigned a credit rating, which is based on a comprehensive internal credit evaluation system that considers a variety of criteria. For retail borrowers, the credit rating takes into account the borrower’s biographic details, past dealings with Shinhan Bank and external credit rating information, among other things. For corporate borrowers, the credit rating takes into account financial indicators as well as non-financial indicators such as industry risk, operational risk and management risk, among other things. The credit rating, once assigned, serves as the fundamental instrument in Shinhan Bank’s credit risk management, and is applied in a wide range of credit risk management processes, including credit approval, credit limit management, loan pricing and computation of allowance for loan losses. Shinhan Bank has separate credit evaluation systems for retail customers, SOHO customers and corporate customers, which are further segmented and refined to meet Basel II requirements, which requirements have not changed under Basel III. See “Item 5.A. Operating Results — Critical Accounting Policies — Impairment of Financial Assets — Allowance for Loan Losses.”

Retail Loans

Loan applications for retail loans are reviewed in accordance with Shinhan Bank’s credit scoring system and the objective statistics models for secured and unsecured loans maintained and operated by Shinhan Bank’s Retail Banking Division. Shinhan Bank’s credit scoring system is an automated credit approval system used to evaluate loan applications and determine the appropriate pricing for the loan, and takes into account factors such as a borrower’s personal information, transaction history with Shinhan Bank and other financial institutions and other relevant credit information. The applicant is assigned a score, which is used to determine (i) whether to approve the applicant’s loan, (ii) the amount of loan to be granted, and (iii) the interest rates thereon. The applicant’s score also determines whether the applicant is approved for credit, conditionally approved, subject to further assessment, or denied. If the applicant becomes subject to further assessment, the appropriate discretionary body, either at the branch level or at the headquarter level, makes a reassessment based on qualitative as well as quantitative factors, such as credit history, occupation and past relationship with Shinhan Bank.

For mortgage and home equity loans and loans secured by real estate, Shinhan Bank evaluates the value of the real estate offered as collateral using a proprietary database, which contains information about real estate values throughout Korea. In addition, Shinhan Bank uses up-to-date information provided by third parties regarding the real estate market and property values in Korea. While Shinhan Bank uses internal staff from the processing centers to appraise the value of the real estate collateral, Shinhan Bank also hires certified appraisers to review the appraisal value of real estate collateral that have an appraisal value exceeding ￦5 billion, as initially determined by the processing centers. Shinhan Bank also reevaluates internally, on a summary basis, the appraisal value of collateral at least every year.

For loans secured by securities, deposits or other assets other than real estate, Shinhan Bank requires borrowers to observe specified collateral ratios in respect of secured obligations.

Corporate Loans

Shinhan Bank rates all of its corporate borrowers using internally developed credit evaluation systems. These systems consider a variety of criteria (quantitative, qualitative, financial and non-financial) in order to standardize credit decisions and focus on the quality of borrowers rather than the size of loans. The quantitative considerations include the borrower’s financial and other data, while the qualitative considerations are based on the judgment of Shinhan Bank’s credit officers as to the borrower’s ability to repay. Financial considerations include financial variables and ratios based on customer’s financial statements, such as return on assets and cash flow to total debt ratios, and non-financial considerations include, among other things, the industry to which the borrower’s businesses belong, the borrower’s competitive position in its industry, its operating and funding capabilities, the quality of its management and controlling stockholders (based in part on interviews with its officers and employees), technological capabilities and labor relations.

In addition, in order to enhance the accuracy of its internal credit reviews, Shinhan Bank also considers reports prepared by external credit rating services, such as Nice Information Service and Korea Enterprise Data, and monitors and improves the effectiveness of the credit risk-rating systems using a database that it updates continually with actual default records.

Based on the scores calculated under the credit rating system, which takes into account the evaluation criteria described above and the probability of default, Shinhan Bank assigns the borrower one of 20 grades (from the highest of AAA to the lowest of D). Grades AA through B are further broken down into “+”, “0” or “-”. Grades AAA through B- are classified as normal, grade CCC precautionary, and grades CC through D non-performing. The credit risk-rating model is further differentiated by the size of the corporate borrower and the type of credit facilities.

Loan Approval Process

Loans are generally approved after evaluations and approvals by the relationship manager at the branch level as well as the committee of the applicable business unit at Shinhan Bank. The approval limit for retail loans is made based on Shinhan Bank’s automated credit scoring system. In the case of large corporate loans, approval limits are also reviewed and approved by a Credit Officer at the headquarter level. Depending on the size and the

100

importance of the loan, the approval process is further reviewed by the Credit Officer Committee or the Chief Credit Officer Committee. If the loan is considered significant or the amount exceeds the discretion limit of the Chief Credit Officer Committee, further evaluation is made by the Credit Review Committee, which is Shinhan Bank’s highest decision-making body in relation to credit approval. The Credit Review Committee’s evaluation and approval of loan limits vary depending on the credit ratings of the borrowers as determined by Shinhan Bank’s internal credit rating system. For example, for borrowers with a credit rating of B-, the Credit Review Committee evaluates and approves unsecured loans in excess of ￦10 billion and secured loans in excess of ￦15 billion, whereas for borrowers with a credit rating of AAA, the Credit Review Committee evaluates and approves unsecured loans in excess of ￦40 billion and secured loans in excess of ￦90 billion. Meetings to approve applications for large-sized loans whose principal amounts exceed prescribed levels set by the Credit Review Committee are held twice a week.

The chart below summarizes the credit approval process of our banking operation. The Chief Credit Officer and the Head of Business Division do not make individual decisions on loan approval, but are part of the decision-making process at the group level.

LOGO

The reviewer at each level of the review process may in its discretion approve loans up to a maximum amount per loan assigned to such level. The discretionary loan approval limit for each level of the loan approval process takes into account the total amount of loans extended to the borrower, the credit level of the applicant based on credit review, the existence and value of collateral and the level of credit risk established by the credit rating system. The discretionary loan amount approval limit ranges from ￦30 million for unsecured retail loans with a credit rating of B-, which are subject to approvals by the retail branch manager, to ￦90 billion for secured loans with a credit rating of AAA, which are subject to approvals by the Chief Credit Officer Committee. Any loans exceeding the maximum discretionary loan amount approval limit must be approved by the Credit Review Committee.

Credit Review and Monitoring

Shinhan Bank continually reviews and monitors existing credit risks primarily with respect to borrowers. In particular, Shinhan Bank’s automated early warning system conducts daily examination for borrowers using over 174 financial and non-financial factors, and the relationship manager and the credit officer must conduct periodic loan review and report to an independent loan review team which analyzes in detail the results and adjusts credit ratings accordingly. Based on these reviews, Shinhan Bank adjusts a borrower’s credit rating, credit limit, applied interest rates and credit policies. In addition, the group credit rating of the borrower’s group, if applicable, may be adjusted following a periodic review of the main debtor groups, mostly comprised of chaebols, as identified by the Governor of the Financial Supervisory Service based on their outstanding credit exposures, of which 30 were identified as such as of December 31, 2013. Shinhan Bank also continually reviews other factors, such as industry-specific conditions for the borrower’s business and its domestic and overseas asset base and operations, in order to ensure that the assigned ratings are appropriate. The Credit Review Department provides credit review reports, independent of underwriting, to the Chief Risk Officer on a monthly basis.

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The early warning system performs automatic daily checks for borrowers to whom the Bank has more than ￦1 billion of total exposure or ￦500 million of credit exposure. When the early warning system detects a warning signal, the results of such monitoring are reviewed by the Credit Review Department in the case of a borrower to whom the Bank has more than ￦2 billion of exposure, and the relationship manager and the Credit Officer in the case of a borrower to whom the Bank has less than ￦2 billion of exposure. In addition, the Bank carries out a planned review of each borrower in accordance with changing credit risk factors based on the changing economic environment. The results of such planned review are continually reported to the Chief Risk Officer of the Bank.

The early warning system performs automatic daily checks for borrowers to whom Shinhan Bank has more than ￦1 billion of total exposure (which represents the total outstanding amount due from a borrower, net of collateral for deposit, installment savings and guarantees, as well as import guarantee money) or ￦500 million of net credit exposure (which represents total exposure net of effective collateral). When the early warning systems detects a warning signal, such signal and other findings from the monitoring are reviewed by the Credit Review Department in the case of a borrower to whom Shinhan Bank has more than ￦2 billion of exposure, and by the relationship manager and the Credit Officer in the case of a borrower to whom Shinhan Bank has less than ￦2 billion of exposure. In addition, Shinhan Bank carries out a preemptive review of each borrower in accordance with changing credit risk factors based on the changing economic environment. The results of such preemptive review are continually reported to the Chief Risk Officer of Shinhan Bank.

Depending on the nature of the items detected by the early warning system, a borrower may be classified as a “deteriorating credit” and become subject to evaluation for a possible downgrade in rating, or may be initially classified as a “borrower showing early warning signs” or become reinstated to the “normal borrower” status. For borrowers classified as “showing early warning signs”, the relevant relationship manager gathers information and conducts a review of the borrower to determine whether it should be classified as a deteriorating credit or whether to impose management improvement warnings or implement joint creditors’ management. If the borrower becomes non-performing, Shinhan Bank’s collection department directly manages such borrower’s account in order to maximize recovery rate, and conducts auctions, court proceedings, sale of assets or corporate restructuring as needed.

Pursuant to the foregoing credit review and monitoring procedures and in order to promptly prevent deterioration of loan qualities, Shinhan Bank classifies potentially problematic borrowers into (i) borrowers that show early warning signals, (ii) borrowers that require precaution, (iii) borrowers that require observation and (iv) normal borrowers, and treats them differentially accordingly.

In order to curtail delinquency among corporate customers, Shinhan Bank has taken primarily the following measures: (i) adoption of a systematic approach in monitoring borrowers with sizable outstanding loans, (ii) heightened monitoring of borrowers with bad credit history and/or belonging to troubled industries and (iii) assignment of industry-specific lending caps, as adjusted for whether specific industries are particularly sensitive to general business cycles and/or are troubled at a given time.

Systematic monitoring of borrowers with sizable outstanding loans. Shinhan Bank currently applies a heightened monitoring system to corporate borrowers with outstanding loans (other than guaranteed loans and loans secured by specified types of collaterals such as deposits with us or letters of credit) in the aggregate amount of ￦1 billion or more and borrowers with net outstanding loans (i.e., the outstanding loan amount minus the fair value of collaterals (other than as aforesaid) securing such loans) in the aggregate amount of ￦0.5 billion or more. Under this monitoring system, each such borrower is assigned one of the following ratings:

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“Normal borrower” — a borrower with a credit rating of B- or above that are deemed to carry a low risk of default;

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“Borrower that requires observation” — a borrower that carries some risk of potential default and therefore requires periodic monitoring to detect any elevation of such risk;

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“Borrower that requires precaution” — a borrower with an elevated risk of default and therefore requires detailed reassessment of the credit quality of such borrower and precaution in extending any further loans;

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“Borrower with early warning signs” — a borrower with a high level of default risk; and

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•

“Problematic or reorganized borrower” — a borrower currently in default and either subject to workout or restructuring or showing no signs of recovery.

A periodic monitoring of the foregoing borrowers is carried out at intervals depending on the borrower’s credit rating (for example, every 12 months for “normal” borrowers with a credit rating of AAA to A-, every nine months for “normal” borrowers with a credit rating of BBB+ to BBB-, every six months for a credit rating of BB+ to B- and every three months for borrowers with a credit rating of CCC or below and borrowers not deemed to be “normal”). In addition, the loan reviewer may request more frequent monitoring if the borrower is showing signs of deteriorating credit quality. For borrowers with outstanding loan amounts of ￦2 billion or more, Shinhan Bank also monitors the revenues and earnings of such borrower on a quarterly basis within 10 weeks of the quarter ends.

Heightened monitoring of borrowers with bad credit history and/or belonging to troubled industries. In addition to the systematic monitoring discussed above, Shinhan Bank also carries out additional monitoring for borrowers that, among others, (i) are rated as “requiring observation”, “requiring precaution” or “with early warning signs” as noted above, (ii) have prior history of delinquency or restructuring or (iii) have borrowings that are classified as substandard or below. Based on the heightened monitoring of these borrowers, Shinhan Bank adjusts contingency planning as to how the overall asset quality of a specific industry should change for each phase of the business cycle, how it should limit or reduce its exposure to such borrowers, and how our group-wide delinquency and nonperforming ratio would change, among other things.

Assignment of industry-specific lending caps. Shinhan Bank currently classifies loans to corporate borrowers by industry, and caps the aggregate amount of loans to each industry, which amount varies depending on the respective industry forecasts and industry-specific loan default rates, among other factors. By doing so, Shinhan Bank seeks to avoid concentration of loans in risky industries and subject loans to risky industries to heightened monitoring and risk management.

Shinhan Bank further sub-classifies risky industries into two categories: “industries that are generally highly sensitive to economic cycles” and “troubled industries”. Currently, the following industries belong to the former category: real estate, leasing and service; retail and wholesale; construction; and hotel and leisure. Shinhan Bank enforces a conservative cap on the aggregate amount of loans to each such industry, and the business units responsible for exceeding such limits are penalized in their performance evaluations, which would have a negative impact on the pay and promotion of the employees belonging to such units.

Credit Risk Assessment and Control

In order to assess credit risk in a systematic manner, Shinhan Bank has developed and upgraded systems designed to quantify credit risk based on selection and monitoring of various statistics, including delinquency rate, non-performing loan ratio, expected loan loss and weighted average risk rating.

Shinhan Bank controls loan concentration by monitoring and managing loans at two levels: portfolio level and individual loan account level. In order to maintain portfolio-level credit risk at an appropriate level, Shinhan Bank manages its loans using value-at-risk (“VaR”) limits for the entire bank as well as for each of its business units. In order to prevent concentration of risk in a particular borrower or borrower class, Shinhan Bank also manages credit risk by borrower, industry, country and other detailed categories.

Shinhan Bank measures credit risk using internally accumulated data. Shinhan Bank measures expected and unexpected losses with respect to total assets monthly, which Shinhan Bank refers to when setting risk limits for, and allocating capital to, its business groups. Expected loss is calculated based on the probability of default, the loss given default, the exposure at default and the past bankruptcy rate and recovery rate, and Shinhan Bank provides allowance for loan losses accordingly. Shinhan Bank makes provisioning at a level which is the higher of the Financial Supervisory Service requirement or Shinhan Bank’s internal calculation. Unexpected loss is predicted based on VaR, which is used to determine compliance with the aggregate credit risk limit for Shinhan Bank as well as the credit risk limit for the relevant department within Shinhan Bank. Shinhan Bank uses the Advanced Internal Rating-Based (“AIRB”) method as proposed by the Basel Committee to compute VaR at the account-specific level as well as to measure risk adjusted performance.

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Credit Risk Management of Shinhan Card

Major policies for Shinhan Card’s credit risk management are determined by Shinhan Card’s Risk Management Council, and Shinhan Card’s Risk Management Committee is responsible for approving them. Shinhan Card’s Risk Management Council is headed by the Chief Risk Officer, and also comprises of the heads of each business unit, supporting unit and relevant department at Shinhan Card. Shinhan Card’s Risk Management Council convenes at least once every month and may also convene on an ad hoc basis as needed. Shinhan Card’s Risk Management Committee is comprised of three Non-Standing Directors. Shinhan Card’s Risk Management Committee convenes at least once every quarter and may also convene on an ad hoc basis as needed.

The risk of loss from default by an obligor or counterparty is Shinhan Card’s greatest risk. Shinhan Card manages credit risk based on the following principles:

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achieve profit at a level corresponding to the level of risks involved;

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improve asset quality and achieve optimal asset portfolios; and

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focus on borrower’s ability to repay the debt.

Credit Card Approval Process

Shinhan Card uses an automated credit scoring system to approve credit card applications or credit card authorizations. The credit scoring system is divided into two sub-systems: the behavior scoring system and the application scoring system. The behavior scoring system is based largely on the credit history, and the application scoring system is based largely on personal information of the applicant. For credit card applicants with whom we have an existing relationship, Shinhan Card’s credit scoring system considers internally gathered information such as repayment ability, total assets, the length of the existing relationship and the applicant’s contribution to profitability. The credit scoring system also automatically conducts credit checks on all credit card applicants. Shinhan Card gathers information about applicants’ transaction history with financial institutions, including banks and credit card companies, from a number of third party credit reporting agencies including, among others, National Information & Credit Evaluation Inc. and Korea Credit Bureau. These credit checks reveal a list of the delinquent customers of all the credit card issuers in Korea.

If a credit score awarded to an applicant is above a minimum threshold, the application is approved unless overridden based on other considerations such as delinquencies with other credit card companies. For a credit card application by a long-standing customer with a good credit history, Shinhan Card may, on a discretionary basis, waive the assigned credit score unless overridden by other considerations. All of these factors also serve as the basis for setting a credit limit if Shinhan Card approves the related application.

The following describes the process on how Shinhan Card sets credit limits for credit cards, cash advances and card loans:

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Credit purchase and cash advance limits — These limits are set based on the applicant’s limit request and Shinhan Card’s credit screening criteria. Except where an accountholder has requested for a reduction in the credit purchase and/or cash advance limit, Shinhan Card is required to provide prior notice to the accountholder for any reduction in such accountholder’s limit. However, where the accountholder has defaulted or the accountholder’s credit limit is reduced according to the terms of the card agreement, Shinhan Card is entitled to lower the credit limit before notifying the accountholder.

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Card loan limit — This limit is set monthly by Shinhan Card based on the accountholder’s credit rating and transaction history. The card loan limit can be adjusted monthly based on the accountholder’s credit standing without prior notification.

Monitoring

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card usage and amounts, payment status and other relevant data. The behavior score is recalculated each month and is used to manage the accounts and approval of additional loans and other products to the cardholder. Shinhan Card also uses the scoring system to monitor its overall risk exposure and to modify its credit risk management strategy.

Loan Application Review and On-going Credit Review

When reviewing new applications and conducting an on-going credit review for retail loans, installment purchase loans and personal leases, Shinhan Card uses criteria substantially similar to those used in the credit underwriting system and credit review system for credit card customers. For retail loans, installment purchase loans and personal leases to existing cardholders, Shinhan Card reviews their card usage history in addition to other factors such as their income, occupation and assets.

Fraud Loss Prevention

Shinhan Card seeks to minimize losses from the fraudulent use of credit cards issued by it. Shinhan Card focuses on preventing fraudulent uses and, following the occurrence of a fraudulent use, makes investigations in order to make the responsible party bear the losses. Misuses of lost credit cards account for a substantial majority of Shinhan Card’s fraud losses. Through its fraud loss prevention system, Shinhan Card seeks to detect, on a real-time basis, transactions that are unusual or inconsistent with prior usage history and calls are made to the relevant cardholders to confirm their purchases. A team at Shinhan Card dedicated to investigating fraud losses also examines whether the cardholder was at fault by, for example, not reporting a lost card or failing to endorse the card, or whether the relevant merchant was negligent in checking the identity of the user. Fault may also lie with delivery companies that fail to deliver credit cards to the relevant applicant. In such instances, Shinhan Card attempts to recover fraud losses from the responsible party. To prevent misuse of a card as well as to manage credit risk, Shinhan Card’s information technology system will automatically suspend the use of a card (i) when, as a result of ongoing monitoring, fraudulent use or loss of the card is suspected based on the accountholder’s credit score, or (ii) at the request of the accountholder.

Approximately 80% of Shinhan Card’s cardholders have consented to Shinhan Card accessing their travel records to detect any misuse of credit cards while they are traveling abroad. Shinhan Card also offers cardholders additional fraud protection through a fee-based short message service. At the cardholder’s option, Shinhan Card notifies the cardholder of any credit card activity in his or her account by sending a text message to his or her mobile phone. This monitoring service allows customers to quickly and easily identify any fraudulent use of their credit cards.

Credit Risk Management of Shinhan Investment

In accordance with the guidelines of the Financial Supervisory Service, Shinhan Investment assesses its credit risks (including through VaR analyses) and allocates the maximum limit for the credit amount at risk by department. Shinhan Investment also assesses the counterparty risks in all credit-related transactions, such as loans, acquisition financings and derivative transactions and takes corresponding risk management measures. In assessing the credit risk of a corporate counterparty, Shinhan Investment considers such counterparty’s corporate credit rating obtained from Shinhan Bank’s internal corporate rating database. Through its risk management system, Shinhan Investment also closely monitors credit risk exposures by counterparty, industry, conglomerates, credit ratings and country. Shinhan Investment conducts credit risk stress tests on a daily basis based on probability of default and also conducts more advanced stress tests from time to time, the results of which are then reported to its management as well as the Group Chief Risk Officer to support group-wide credit risk management.

Market Risk Management

Market risk is the risk of loss generated by fluctuations in market prices such as interest rates, foreign exchange rates and equity prices. The principal market risks to which we are exposed are interest rate risk and, to a lesser extent, foreign exchange risk and equity price risk. These risks stem from our trading and non-trading

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activities relating to financial instruments such as loans, deposits, securities and financial derivatives. We divide market risk into risks arising from trading activities and risks arising from non-trading activities.

Our market risks arise primarily from Shinhan Bank, and to a lesser extent, Shinhan Investment, our securities trading and brokerage subsidiary, which incurs market risk relating to its trading activities. Shinhan Bank’s Risk Policy Committee acts as the executive decision-making body in relation to market risks in terms of setting the risk management policies and risk limits in relation to market risks and assets and controlling market risks arising from trading and non-trading activities. This Committee consists of the deputy presidents of the Bank’s seven business groups, which includes the Bank’s Chief Risk Officer and the Chief Financial Officer. At least on a monthly basis, the Risk Policy Committee reviews and approves reports, which include the position and VaR of Shinhan Bank’s trading activities and the position, VaR, duration gap and market value analysis and net interest income simulation of its non-trading activities. In addition, Shinhan Bank’s Risk Management Department comprehensively manages market risks on an independent basis from Shinhan Bank’s operating departments, and functions as the middle office of Shinhan Bank. Shinhan Bank measures market risk with respect to all assets and liabilities in bank accounts and trust accounts in accordance with the regulations promulgated by the Financial Services Commission.

Shinhan Investment manages its market risk based on its overall risk limit established by its risk management committee as well as the risk limits and detailed risk management guidelines for each product and department established by its Risk Management Working Committee. Shinhan Investment’s Risk Management Working Committee is the executive decision-making body for managing market risks related to Shinhan Investment, and determines, among other things, Shinhan Investment’s overall market risk management policies and strategies, and assesses and approves trading activities and limits. In addition, Shinhan Investment’s Risk Management Department manages various market risk limits and monitors operating conditions on an independent basis from Shinhan Investment’s operating departments. Shinhan Investment assesses the adequacy of these limits at least annually. In addition, Shinhan Investment assesses the market risks of its trading assets. The assessment procedure is based on the standard procedures set by the Financial Supervisory Service as well as an internally developed model. Shinhan Investment assesses the risk amount and VaR, and manages the risk by setting a risk limit per sector as well as a VaR limit.

Shinhan Life Insurance manages its market risk based on its overall risk limit established by its risk management committee. Shinhan Life Insurance manages market risk in regard to assets that are subject to trading activities and foreign exchange positions.

Shinhan Card does not have any assets with significant exposure to market risks and therefore does not maintain a risk management policy with respect to market risks.

We use IFRS numbers on a separate basis for the market risk management of our subsidiaries and, unless otherwise specified, the numbers presented for quantitative market risk disclosure relating to our subsidiaries have been prepared in accordance with IFRS on a separate basis.

Market Risk Exposure from Trading Activities

Shinhan Bank’s trading activities principally consist of:

•

trading activities to realize short-term trading profits in debt and stock markets and foreign exchange markets based on Shinhan Bank’s short-term forecast of changes in market situation and customer demand, for its own account as well as for the trust accounts of Shinhan Bank’s customers; and

•

trading activities primarily to realize profits from arbitrage transactions in derivatives such as swap, forward, futures and option transactions, and, to a lesser extent, to sell derivative products to Shinhan Bank’s customers and to cover market risk incurred from those trading activities.

Shinhan Investment’s trading activities principally consist of trading for customers and for proprietary accounts equity and debt securities and derivatives based on stocks, stock indexes, interest rates, foreign exchange and commodity.

As a result of these trading activities, Shinhan Bank is exposed principally to interest rate risk, foreign exchange risk and equity risk, and Shinhan Investment is exposed principally to equity risk and interest rate risk.

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Interest Rate Risk

Shinhan Bank’s exposure to interest rate risk arises primarily from Won-denominated debt securities, directly held or indirectly held through beneficiary certificates, and, to a lesser extent, from interest rate derivatives. Shinhan Bank’s exposure to interest rate risk arising from foreign currency-denominated trading debt securities is minimal since its net position in those securities is not significant. As Shinhan Bank’s trading accounts are marked-to-market daily, it manages the interest rate risk related to its trading accounts using VaR, a market value-based tool.

Shinhan Investment’s interest rate risk arises primarily from management of its interest rate-sensitive asset portfolio, which mainly consists of debt securities, interest rate swaps and government bond futures, and the level of such risk exposure depends largely on the variance between the interest rate movement assumptions built into the asset portfolio and the actual interest rate movements and the spread between a derivative product and its underlying assets. Shinhan Investment quantifies and manages the interest rate-related exposure by daily conducting VaR and stress tests on a marked-to-market basis.

Foreign Exchange Risk

Foreign exchange risk arises because of Shinhan Bank’s assets and liabilities, including derivatives such as foreign exchange forwards and futures and currency swaps, which are denominated in currencies other than the Won. Shinhan Bank manages foreign exchange risk on an overall position basis, including its overseas branches, by covering all of its foreign exchange spot and forward positions in both trading and non-trading accounts.

Shinhan Bank’s net foreign currency open position, which is the difference between its foreign currency assets and liabilities as offset against forward foreign exchange positions, is Shinhan Bank’s foreign exchange risk. The Risk Policy Committee oversees Shinhan Bank’s foreign exchange exposure for both trading and non-trading activities by establishing limits for the net foreign currency open position, loss limits and VaR limits. The management of Shinhan Bank’s foreign exchange position is centralized at the FX & Derivatives Department. Dealers in the FX & Derivatives Department manage Shinhan Bank’s overall position within the set limits through spot trading, forward contracts, currency options, futures and swaps and foreign exchange swaps. Shinhan Bank sets a limit for net open positions by currency and the limits for currencies other than the U.S. Dollar, Japanese Yen, Euro and Chinese Yuan are set in a conservative manner in order to minimize other foreign exchange trading.

Shinhan Investment carries foreign exchange risk in relation to the following product offerings: currency forwards, currency swaps and currency futures. Transactions of such products are centrally monitored and managed by Shinhan Investment’s Fixed Income, Currency & Commodities Departments. Shinhan Investment’s Risk Management Working Committee, which has been delegated the decision-making authority over the approval of foreign exchange-related transactions and limits on the related open positions, manages the related foreign exchange risk by setting nominal limits on the amounts of foreign exchange-related products and monitoring compliance with such limits on a daily basis. As of December 31, 2013, Shinhan Investment’s net open position related to foreign exchange-related products was US$194.4 million, and its open positions related to the sale of U.S. Dollar forwards was US$(202.2) million. As of December 31, 2013, Shinhan Investment did not have any open positions related to the sale of Won-U.S. Dollar futures.

The net open foreign currency positions held by our other subsidiaries are insignificant. In the case of Shinhan Capital, which incurs a considerable amount of foreign exchange exposure from its leasing business, it maintains its net exposure below US$10 million by hedging its foreign exchange positions using forwards and currency swaps.

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The following table shows Shinhan Bank’s net foreign currency open positions as of December 31, 2011, 2012 and 2013. Positive amounts represent long exposures and negative amounts represent short exposures.


	As of December 31,
Currency	2011			2012			2013
	(In millions of US$)
U.S. Dollars	US$	162.3		US$	165.5		US$	53.1
Japanese Yen		(1.3	)		(54.6	)		(54.7	)
Euro		(1.3	)		2.2			1.8
Others		624.6			668.4			698.3

Total	US$	784.2		US$	781.7		US$	698.5

Equity Risk

Equity risk for Shinhan Bank’s trading activities results from trading equity portfolios of Korean companies and Korea Stock Price Index futures and options. The trading equity portfolio consists of stocks listed on the KRX KOSPI Market or the KRX KOSDAQ Market of the Korea Exchange and nearest-month or second nearest-month futures contracts under strict limits on diversification as well as limits on positions. Shinhan Bank maintains strict scrutiny of these activities in light of the volatility in the Korean stock market. In addition, Shinhan Bank pays close attention to the loss limits. Although Shinhan Bank holds a substantially smaller amount of equity securities than debt securities in its trading accounts, the VaR of trading account equity risk is generally higher than that of trading account interest rate risk due to high volatility in the value of equity securities. As of December 31, 2011, 2012 and 2013, Shinhan Bank held ￦106.9 billion, ￦165.4 billion and ￦16.1 billion, respectively, of equity securities in its trading accounts (including the trust accounts).

Equity risk for Shinhan Investment’s trading activities also results from the trading of equity portfolio of Korean companies and Korea Stock Price Index futures and options. As of December 31, 2011, 2012 and 2013, the total amount of equity securities at risk held by Shinhan Investment was ￦15.7 billion, ￦15.8 billion and ￦16.1 billion, respectively.

Equity positions held by our other subsidiaries are insignificant.

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Management of Market Risk from Trading Activities

The following table presents an overview of market risk, measured by VaR, from trading activities of Shinhan Bank and Shinhan Investment, respectively, for the year ended and as of December 31, 2013. For market risk management purposes, Shinhan Bank includes its trading portfolio in bank accounts and assets in trust accounts for which it guarantees principal or fixed return in accordance with the Financial Services Commission regulations.


	Trading Portfolio VaR for the Year 2013
	Average			Minimum			Maximum			As of December 31, 2013
	(In billions of Won)
Shinhan Bank:(1)
Interest rate	￦	21.6		￦	14.4		￦	28.7		￦	25.1
Foreign exchange(2)		45.2			41.6			50.9			44.0
Equities		5.7			2.7			13.2			7.3
Option volatility(3)		0.3			0.2			0.4			0.2
Less: portfolio diversification(4)		(25.8	)		(18.5	)		(40.9	)		(27.0	)

Total VaR(5)	￦	46.9		￦	40.4		￦	52.3		￦	49.7

Shinhan Investment:(1)
Interest rate	￦	12.6		￦	2.9		￦	33.5		￦	6.4
Equities		8.3			3.4			17.2			3.5
Foreign exchange		2.2			0.1			7.5			1.2
Option volatility(3)		1.7			0.3			3.4			1.4
Less: portfolio diversification(4)		(9.9	)		(3.6	)		(22.2	)		(7.4	)

Total VaR	￦	14.9		￦	3.1		￦	39.4		￦	5.1

Notes:

(1)	Shinhan Bank and Shinhan Investment’s ten-day VaR is based on a 99.9% confidence level.

(2)	Includes both trading and non-trading accounts as Shinhan Bank and Shinhan Investment manage foreign exchange risk on a total position basis.

(3)	Volatility implied from the option price using the Black-Scholes or a similar model.

(4)	Calculation of portfolio diversification effects may occur on different days scenario for different risk components. Total VaRs are less than the simple sum of the risk component VaRs due to offsets resulting from portfolio diversification.

(5)	Includes trading portfolio in Shinhan Bank’s bank accounts and assets in trust accounts for which it guarantees principal or fixed return.

Shinhan Bank generally manages its market risk from the trading activities of its portfolios on an aggregated basis. To control its trading portfolio market risk, Shinhan Bank uses position limits, VaR limits, stop loss limits, Greek limits and stressed loss limits. In addition, it establishes appropriate limits for investment securities. Shinhan Bank maintains risk control and management guidelines for derivative trading based on the regulations and guidelines promulgated by the Financial Services Commission, and measures market risk from trading activities to monitor and control the risk of its operating divisions and teams that perform trading activities. Shinhan Bank manages VaR measurements and limits on a daily basis based on an automatic interfacing of its trading positions into its market risk measurement system. In addition, Shinhan Bank establishes pre-set loss, sensitivity, investment and stress limits for its trading departments and desks and monitors such limits daily.

Value-at-risk analysis. Shinhan Bank uses ten-day and one-day VaRs to measure its market risk. Shinhan Bank calculates ten-day VaRs on a daily basis based on data for the previous 12 months for the holding periods of ten days and one-day VARs on a daily basis based on data for the previous 12 months for the holding periods

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of one day. A ten-day VaR and one-day VaR are statistically estimated maximum amounts of loss that can occur for ten days and one day, respectively, under normal market conditions. If a VaR is measured using a 99% confidence level, the actual amount of loss may exceed the expected VaR, on average, once out of every 100 business days, while if a VaR is measured using a 99.9% confidence level, the actual amount of loss may exceed the VaR, on average, once out of 1,000 business days.

Shinhan Bank currently uses the ten-day 99% confidence level-based VaR and stressed VAR for purposes of calculating the regulatory capital used in reporting to the Financial Supervisory Service. Stressed VaR reflects the potential significant loss in the current trading portfolio based on scenario derived from a crisis simulation during the preceding 12 months. Shinhan Bank also uses the more conservative ten-day 99.9% confidence level-based VaR for purposes of calculating its “economic” capital used for internal management purposes, which is a concept used in determining the amount of Shinhan Bank’s requisite capital in light of the market risk. In addition, Shinhan Bank uses the one-day 99% confidence level-based VaR on a supplemental basis for purposes of setting and managing risk limits specific to each desk or team in its operating units as well as for back-testing purposes. For Shinhan Bank, the actual amount of losses exceeded VaR at the 99% confidence level twice in 2013. Shinhan Bank’s actual amount of losses never exceeded VaR at the 99% confidence level in 2012.

Shinhan Investment currently uses the ten-day 99.9% confidence level-based historical VaR for purposes of calculating its “economic” capital used for internal management purposes. In addition, Shinhan Investment applies this VaR as a risk limit for the entire company as well as individual departments and products, and the adequacy of such VaR is reviewed by way of daily back-testing. When computing VAR, Shinhan Investment does not assume any particular probability distribution and calculates it through a simulation of the “full valuation” method based on changes of market variables such as stock prices, interest rates and foreign exchange rates in the past one year. For Shinhan Investment, the actual amount of losses did not exceed VaR at 99% confidence level in 2012 and 2013.

Value-at-risk is a commonly used market risk management technique. However, VaR models have the following shortcomings:

•

VaR estimates possible losses over a certain period at a particular confidence level using past market movement data. Past market movement, however, is not necessarily a reliable indicator of future events, particularly potential future events that are extreme in nature;

•

VaR may underestimate the probability of extreme market movements;

•

Shinhan Bank’s VaR models assume that a holding period of generally one to ten days is sufficient prior to liquidating the underlying positions, but the length of the holding period so assumed may actually be insufficient or excessive;

•

The 99.9% confidence level does not take into account or make any statement about any losses that might occur beyond this confidence level; and

•

VaR does not capture all complex effects of various risk factors on the value of positions and portfolios and could underestimate potential losses.

Currently, Shinhan Bank and Shinhan Investment conduct back-testing of VaR results against actual outcomes on a daily basis.

Shinhan Bank operates an integrated market risk management system which manages Shinhan Bank’s Won-denominated and foreign-denominated accounts. This system uses historical simulation to measure both linear risks arising from products such as equity and debt securities and nonlinear risks arising from other products including options. We believe that this system enables Shinhan Bank to generate elaborate and consistent VaR numbers and perform sensitivity analysis and back testing to check the validity of the models on a daily basis. Shinhan Life also measure market risks based on a VaR analysis.

Stress test. In addition to VaR, Shinhan Bank performs stress tests to measure market risk. As VaR assumes normal market situations, Shinhan Bank assesses its market risk exposure to unlikely abnormal market fluctuations through stress test. Stress test is an important way of supplementing VaR since VaR does not cover

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potential loss if the market moves in a manner that is outside Shinhan Bank’s normal expectations. Stress test projects the anticipated change in value of holding positions under certain scenarios assuming that no action is taken during a stress event to change the risk profile of a portfolio.

Shinhan Bank uses seven relatively simple but fundamental scenarios for stress test taking into account four market risk components such as foreign exchange rates, stock prices and Won-denominated and foreign currency-denominated interest rates. For the worst case scenario, we assume instantaneous and simultaneous movements in four market risk components — appreciation of Won by 20%, a decrease in Korea Exchange Composite Index by 30% and increases in Won-denominated and U.S. Dollar-denominated interest rates by 200 basis points and 200 basis points, respectively. Under this worst-case scenario, the market value of Shinhan Bank’s trading portfolio declined by ￦334.4 billion as of December 31, 2013. Shinhan Bank performs stress test on a daily basis and reports the results to the Risk Policy Committee on a monthly basis and the Risk Management Committee on a quarterly basis.

Shinhan Investment uses nine scenarios for stress tests, taking into account four market risk components: stock prices (both in terms of stock market indices and ß-based individual stock prices), interest rates for Won-denominated loans, foreign exchange rates and implied volatility. As of December 31, 2013, under the worst case scenario assuming a 1% point increase in the three-year government bond yield, the market value of Shinhan Investment’s trading portfolio fluctuated by ￦22.0 billion for one day.

Shinhan Life Insurance conducts a stress test annually based on a “bad” scenario and a “worst-case” scenario, and the results of the stress test include expected losses and impacts on capital adequacy. Shinhan Life Insurance takes preemptive measures on the basis of the results from its stress tests.

Shinhan Bank sets limits on stress testing for its overall operations. Although Shinhan Life Insurance does not set any limits on stress testing, it monitors the impact of market turmoil or any abnormality. Shinhan Investment sets limits on stress testing for its overall operations as well as at its department level. In the case of Shinhan Bank, Shinhan Investment and Shinhan Life Insurance, if the impact is large, their respective Chief Risk Officer may request a portfolio restructuring or other proper action.

Hedging and Derivative Market Risk

The principal objective of our group-wide hedging strategy is to manage market risk within established limits. We use derivative instruments to hedge our market risk as well as to make profits by trading derivative products within pre-approved risk limits. Our derivative trading includes interest rate and cross-currency swaps, foreign currency forwards and futures, stock index and interest rate futures, and stock index and currency options.

While we use derivatives for hedging purposes, derivative transactions by nature involve market risk since we take trading positions for the purpose of making profits. These activities consist primarily of the following:

•

arbitrage transactions to make profits from short-term discrepancies between the spot and derivative markets or within the derivative markets;

•

sales of tailor-made derivative products that meet various needs of our corporate customers, principally of Shinhan Bank and Shinhan Investment, and related transactions to reduce their exposure resulting from those sales;

•

taking positions in limited cases when we expect short-swing profits based on our market forecasts; and

•

trading to hedge our interest rate and foreign currency risk exposure as described above.

Market risk from derivatives is not significant for Shinhan Bank since its derivative trading activities involve primarily arbitrage and customer transactions with limited open trading positions.

In relation to our adoption of IAS 39, “Financial Instruments: Recognition and Measurement”, we have implemented internal processes which include a number of key controls designed to ensure that fair value is measured appropriately, particularly where a fair value model is internally developed and used to price a significant product.

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Shinhan Bank assesses the adequacy of the fair market value of a new product derived from its internal model prior to the launch of such product. The assessment process involves the following:

•

computation of an internal dealing system market value (based on assessment by the quantitative analysis team of the adequacy of the formula and the model used to compute the market value as derived from the dealing system);

•

computation of the market value as obtained from an outside credit evaluation company; and

•

following comparison of the market value derived from an internal dealing system to that obtained from outside credit evaluation companies, determination as to whether to use the internally developed market value based on inter-departmental agreement.

The dealing system market value, which is used officially by Shinhan Bank after undergoing the assessment process above, does not undergo a sampling process that confirms the value based on review of individual transactions, but is subject to an additional assessment procedure of comparing such value against the profits derived from the dealing systems based on the deal portfolio sensitivity.

Shinhan Investment follows an internal policy as set by its Fair Value Evaluation Committee for computing and assessing the adequacy of fair value of all of its over-the-counter derivative products. Shinhan Investment computes the fair value based on an internal model and internal risk management systems and assesses the adequacy of the fair value through cross-departmental checks as well as comparison against fair values obtained from outside credit evaluation companies.

See “Item 5.A. Operating Results — Critical Accounting Policies” and Note 4 of the notes to our consolidated financial statements.

Market risk from derivatives is not significant since derivative trading activities of Shinhan Bank and Shinhan Investment are primarily driven by arbitrage and customer deals with very limited open trading positions. Market risk from derivatives is also not significant for Shinhan Life Insurance as its derivative trading activities are limited to those within pre-approved risk limits and are subject to heavy regulations imposed on the insurance industry. Market risk from derivatives is not significant for our other subsidiaries since the amount of such positions by our other subsidiaries is insignificant.

Market Risk Management for Non-trading Activities

Interest Rate Risk

Principal market risk from non-trading activities of Shinhan Bank is interest rate risk. Interest rate risk is the risk of loss resulting from interest rate fluctuations that adversely affect the financial condition and results of operations of Shinhan Bank. Shinhan Bank’s interest rate risk arises primarily due to differences between the timing of rate changes for interest-earning assets and interest-bearing liabilities.

Interest rate risk affects Shinhan Bank’s earnings and the economic value of Shinhan Bank’s net assets:

•

Earnings: interest rate fluctuations have an effect on Shinhan Bank’s net interest income by affecting its interest-sensitive operating income and expenses.

•

Economic value of net assets: interest rate fluctuations influence Shinhan Bank’s net worth by affecting the present value of cash flows from the assets, liabilities and other transactions of Shinhan Bank.

Accordingly, Shinhan Bank measures and manages interest rate risk for non-trading activities by taking into account the effects of interest rate changes on both its income and net asset value. Shinhan Bank measures and manages interest rate risk on a daily/monthly basis with respect to all interest-earning assets and interest-bearing liabilities in Shinhan Bank’s bank accounts (including derivatives denominated in Won which are interest rate swaps for the purpose of hedging) and in trust accounts, except that it measures VaRs on a monthly basis. Most of Shinhan Bank’s interest-earning assets and interest-bearing liabilities are denominated in Won.

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Interest Rate Risk Management

The principal objectives of Shinhan Bank’s interest rate risk management are to generate stable net interest income and to protect Shinhan Bank’s net asset value against interest rate fluctuations. Through its asset and liability management system, Shinhan Bank measures and manages its interest rate risk based on various analytical measures such as interest rate gap, duration gap and net present value and net interest income simulations, and monitors on a monthly basis its interest rate VaR limits, interest rate earnings at risk (“EaR”) limits and interest rate gap ratio limits. Shinhan Bank measures its interest rate VaR and interest rate EaR based on a simulated estimation of the maximum decrease in net asset value and net interest income in a one-year period based on various scenario analyses of historical interest rates. The Risk Policy Committee sets out interest rate risk limits for Shinhan Bank’s Won-denominated and foreign currency-denominated non-trading accounts and trust accounts and the Risk Management Committee sets Shinhan Bank’s overall interest rate risk, in both cases, at least annually, and the Risk Management Department monitors Shinhan Bank’s compliance with these limits and reports the monitoring results to the Risk Policy Committee on a monthly basis and the Risk Management Committee on a quarterly basis. Shinhan Bank uses interest rate swaps to control its interest rate exposure limits.

Interest rate VaR represents the maximum anticipated loss in a net present value calculation (computed as the present value of interest-earning assets minus the present value of interest-bearing liabilities), whereas interest rate EaR represents the maximum anticipated loss in a net earnings calculation (computed as interest income minus interest expenses) for the immediately following one-year period, in each case, as a result of negative movements in interest rates. Therefore, interest rate VaR is a more expansive concept than interest rate EaR in that the former covers all interest-earning assets and all interest-bearing liabilities, whereas the latter covers only those interest-earning assets and interest-bearing liabilities that are exposed to interest rate volatility for a one-year period.

Hence, for interest rate VaRs, the duration gap (namely, the weighted average duration of all interest-earning assets minus the weighted average duration of all interest-bearing liabilities) can be a more critical factor than the relative sizes of the relevant assets and liabilities in influencing interest rate VaRs. In comparison, for interest rate EaRs, the relative sizes of the relevant assets and liabilities in the form of the “one year or less interest rate” gap (namely, the volume of interest-earning assets with maturities of less than one year minus the volume of interest-bearing liabilities with maturities of less than one year) is the most critical factor in influencing the interest rate EaRs.

The interest rate VaR limits are set as the sum of (i) the average of the monthly non-trading interest rate VARs as a percentage of interest-bearing assets over a period of one year and (ii) the standard deviation at the 99% confidence level (namely, 2.33 times the standard deviation of the monthly non-trading interest rate VARs as a percentage of interest-bearing assets).

The interest rate EaR limits are set at the maximum decrease in net interest income by (i) assuming that the estimated interest rate gap will expand to the maximum level of manageable (tolerable) situations and (ii) applying the interest rate shock scenario to the annual volatility of interest rates using past 10-year market interest rates.

On a monthly basis, we monitor whether the non-trading positions for interest rate VaR and EaR exceed their respective limits as described above.

Interest rate VaR cannot be meaningfully compared to the ten-day 99% confidence level based VaR (“market risk VaR”) for managing trading risk principally because (i) the underlying assets are different (namely, non-trading interest-bearing assets as well as liabilities in the case of the interest rate VaR, compared to trading assets in the case of the market risk VaR), and (ii) interest rate VaR is sensitive to interest rate movements only while the market risk VaR is sensitive to interest rate movements as well as other elements such as foreign currency exchange rates, stock market prices and option volatility.

Even if comparison is being made between the interest rate VaR and the interest rate portion only of the market risk VaR, we do not believe such comparison will be meaningful since the interest rate VaR examines the impact of interest rate movements on both assets and liabilities (which will likely have offsetting effects), whereas the interest rate portion of the market VaR examines the impact of interest rate movements on assets only.

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On a daily/monthly basis, Shinhan Bank uses various analytical methodologies to measure and manage its interest rate risk for non-trading activities, including the following:

•

Interest Rate Gap Analysis: Interest rate gap analysis measures the difference in the amounts of interest-earning assets and interest-bearing liabilities at each maturity and re-pricing date for a specific time frame.

•

Duration Gap Analysis: Duration gap analysis measures durations of Shinhan Bank’s interest-earning assets and interest-bearing liabilities, which are weighted average maturities of these assets and liabilities calculated based on discounted cash flows from these assets and liabilities using yield curves.

•

Market Value Analysis: Market value analysis measures changes in the market value of Shinhan Bank’s interest-earning assets and interest-bearing liabilities based on the assumption of parallel shifts in interest rates.

•

Net Interest Income Simulation Analysis: Net interest income simulation analysis uses deterministic analysis methodology to measure changes in Shinhan Bank’s annual net interest income (interest income less interest expenses) under the current maturity structure, using different scenarios for interest rates (assuming parallel shifts) and funding requirements.

Interest Rate Gap Analysis

Interest rate gap analysis measures the difference in the amounts of interest-earning assets and interest-bearing liabilities at each maturity and re-pricing date by preparing interest rate gap tables in which Shinhan Bank’s interest-earning assets and interest-bearing liabilities are allocated to the applicable time categories based on the expected cash flows and re-pricing dates. On a daily basis, Shinhan Bank performs interest rate gap analysis for Won- and foreign currency-denominated assets and liabilities in its bank and trust accounts. Shinhan Bank’s gap analysis includes Won-denominated derivatives (which are interest rate swaps for the purpose of hedging) and foreign currency-denominated derivatives (which are currency swaps for the purpose of hedging) whose management is centralized at the FX & Derivatives Department. Through the interest rate gap analysis that measures interest rate sensitivity gaps, cumulative gaps and gap ratios, Shinhan Bank assesses its exposure to future interest risk fluctuations. For interest rate gap analysis, Shinhan Bank assumes and uses the following maturities for different assets and liabilities:

•

with respect to the maturities and re-pricing dates of Shinhan Bank’s assets, Shinhan Bank assumes that the maturity of Shinhan Bank’s prime rate-linked loans is the same as that of its fixed-rate loans. Shinhan Bank excludes equity securities from interest-earning assets;

•

with respect to the maturities and re-pricing of Shinhan Bank’s liabilities, Shinhan Bank assumes that money market deposit accounts and “non-core” demand deposits under the Financial Services Commission guidelines have a maturity of one month or less for both Won-denominated accounts and foreign currency-denominated accounts; and

•

with respect to “core” demand deposits under the Financial Services Commission guidelines, Shinhan Bank assumes that they have maturities of eight different intervals ranging from one month to five years.

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The following tables show Shinhan Bank’s interest rate gaps as of December 31, 2013 for (1) Won-denominated non-trading bank accounts, including derivatives for the purpose of hedging and (2) foreign currency-denominated non-trading bank accounts, including derivatives for the purpose of hedging.

Won-denominated non-trading bank accounts(1)


	As of December 31, 2013
	0-3 Months			3-6 Months			6-12 Months			1-2 Years			2-3 Years			Over 3 Years			Total
	(In billions of Won, except percentages)
Interest-earning assets	￦	98,048		￦	42,306		￦	11,516		￦	8,833		￦	7,400		￦	17,723		￦	185,826
Fixed rates		24,702			4,055			8,840			8,102			5,471			8,228			59,399
Floating rates		72,335			37,271			1,275			462			1,319			8,805			121,467
Interest rate swaps		1,010			980			1,400			270			610			690			4,960
Interest-bearing liabilities	￦	80,931		￦	29,645		￦	39,929		￦	10,616		￦	8,018		￦	13,827		￦	182,965
Fixed liabilities		51,938			28,234			39,707			10,353			7,973			13,082			151,288
Floating liabilities		24,033			1,411			222			263			44			746			26,718
Interest rate swaps		4,960			—			—			—			—			—			4,960
Sensitivity gap		17,116			12,661			(28,413	)		(1,782	)		(618	)		3,896			2,861
Cumulative gap		17,116			29,778			1,365			(417	)		(1,035	)		2,861			2,861
% of total assets		9.21	%		16.02	%		0.73	%		(0.22	)%		(0.56	)%		1.54	%		1.54	%

Foreign currency-denominated non-trading bank accounts(1)


	As of December 31, 2013
	0-3 Months			3-6 Months			6-12 Months			1-3 Years			Over 3 Years			Total
	(In millions of US$, except percentages)
Interest-earning assets	$	16,463		$	3,705		$	2,142		$	3,518		$	2,162		$	27,990
Interest-bearing liabilities		14,427			2,826			3,583			4,991			2,488			28,315
Sensitivity gap		2,036			879			(1,441	)		(1,473	)		(326	)		(325	)
Cumulative gap		2,036			2,915			1,474			(2	)		(325	)		(325	)
% of total assets		7.27	%		10.42	%		5.27	%		0.01	%		1.16	%		1.16	%

Note:

(1)	Includes merchant banking accounts.

Duration Gap and Market Value Analysis

Shinhan Bank performs a duration gap analysis to measure effects of interest rate risk on the market value of its assets and liabilities. Shinhan Bank measures, on a daily basis and for each operating department, account, product and currency, durations of interest-earning assets and interest-bearing liabilities. Shinhan Bank also measures, on a daily basis, changes in the market value of Shinhan Bank’s interest-earning assets and interest-bearing liabilities.

The following tables show duration gaps and market values of Shinhan Bank’s Won-denominated interest-earning assets and interest-bearing liabilities in its non-trading accounts as of December 31, 2013 and changes in these market values when interest rate increases by one percentage point.

Duration as of December 31, 2013 (for non-trading Won-denominated bank accounts(1))


	Duration as of December 31, 2013
	(In months)
Interest-earning assets		9.46
Interest-bearing liabilities		9.93
Gap		(0.30	)

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Market Value as of December 31, 2013 (for non-trading Won-denominated bank accounts(1))


	Market Value as of December 31, 2013
	Actual		1% Point Increase		Changes
	(In billions of Won)
Interest-earning assets	￦	189,364	￦	187,977	￦	(1,386	)
Interest-bearing liabilities		186,236		184,836		(1,399	)
Gap		3,128		3,141		13

Note:

(1)	Includes merchant banking accounts and derivatives for the purpose of hedging.

Net Interest Income Simulation

Shinhan Bank performs net interest income simulation to measure the effects of the change in interest rate on its results of operations. Such simulation measures the estimated changes in Shinhan Bank’s annual net interest income (interest income less interest expenses) under the current maturity structure, using different scenarios for interest rates and funding requirements. For simulations involving interest rate changes, assuming that there is no change in funding requirements, Shinhan Bank applies three scenarios of parallel shifts in interest rate: (1) no change, (2) a 1% point increase in interest rates and (3) a 1% point decrease in interest rates.

The following table illustrates by way of an example the simulated changes in Shinhan Bank’s annual net interest income for 2013 with respect to Won-denominated interest-earning assets and interest-bearing liabilities, using Shinhan Bank’s net interest income simulation model, when it assumes (a) the maturity structure and funding requirement of Shinhan Bank as of December 31, 2013 and (b) the same interest rates as of December 31, 2013 and a 1% point increase or decrease in the interest rates.


	Simulated Net Interest Income for 2013
	(For Non-Trading Won-Denominated Bank Accounts(1))
	Assumed Interest Rates						Change in Net Interest Income					Change in Net Interest Income
	No Change		1% Point Increase		1% Point Decrease		Amount (1% Point Increase)		% Change (1% Point Increase)			Amount (1% Point Decrease)			% Change (1% Point Decrease)
	(In billions of Won, except percentages)
Simulated interest income	￦	7,688	￦	8,768	￦	6,609	￦	1,079		14.04	%	￦	1,079			(14.04	)%
Simulated interest expense		4,122		4,937		3,307		815		19.77	%		(815	)		(19.77	)%
Net interest income		3,566		3,830		3,302		264		7.41	%		(264	)		(7.41	)%

Note:

(1)	Includes Merchant Banking account and derivatives for the purpose of hedging.

Shinhan Bank’s Won-denominated interest-earning assets and interest-bearing liabilities in non-trading accounts have a maturity structure that benefits from an increase in interest rates, because the re-pricing periods of the interest-earning assets in Shinhan Bank’s non-trading accounts tend to be shorter than those of the interest-bearing liabilities in these accounts. This is primarily due to a sustained low interest rate environment in the recent years in Korea, which resulted in a significant increase in floating rate loans, resulting in the maturities or re-pricing periods of Shinhan Bank’s loans becoming shorter. As a result, Shinhan Bank’s net interest income tends to increase when the market interest rates rise.

Interest Rate VaRs for Non-trading Assets and Liabilities

Shinhan Bank measures VaRs for interest rate risk from non-trading activities on a monthly basis. The following table shows, as of and for the year ended December 31, 2013, the VaRs of interest rate mismatch risk

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for other assets and liabilities, which arises from mismatches in the re-pricing dates of Shinhan Bank’s non-trading interest-earning assets and interest-bearing liabilities including available-for-sale investment securities. Under the Financial Services Commission regulations, Shinhan Bank includes in calculation of these VaRs interest-earning assets and interest-bearing liabilities in its bank accounts and its merchant banking accounts.

VaR for the Year 2013(1)

Average

Minimum

Maximum

As of
December 31

(In billions of Won)

Interest rate mismatch — non-trading assets and liabilities

￦

275

￦

362

￦

Note:

(1)	One-year VaR results with a 99.9% confidence level.

Interest Rate Risk for Other Subsidiaries

Shinhan Card also monitors and manages its interest rate risk for all its interest-bearing assets and liabilities (including off-balance sheet items) in terms of impact on its earnings and net asset value from changes in interest rates. Shinhan Card primarily uses interest rate VaR and EaR analyses to measure its interest rate risk.

The interest rate VaR analysis used by Shinhan Card principally focuses on the maximum impact on its net asset value from adverse movements in interest rates and consists of (i) historical interest rate VaR analysis and (ii) interest rate gap analysis. The historical interest rate VaR analysis is made through simulation of net asset value based on the interest rate volatility over a fixed past period to produce expected future interest rate scenarios and computes the maximum value at risk at a 99.9% confidence level by analyzing the net present value distribution under each such scenario. As for interest rate gap analysis, Shinhan Card computes the value at risk based on the duration proxies and interest rate shocks for each time bucket as recommended under the Basel Accord.

The interest rate EaR analysis used by Shinhan Card computes the maximum loss in net interest income for a one-year period following adverse movements in interest rates, based on an interest rate gap analysis using the time buckets and the “middle of time band” as recommended under the Basel Accord.

In addition, Shinhan Life Insurance monitors and manages its interest rate risk for its investment assets and liabilities based on simulations of its asset-liability management system. These simulations typically involve subjecting Shinhan Life Insurance’s current and future assets and liabilities to more than 2,000 market scenarios based on varying assumptions, such as new debt purchases and target investment portfolios, so as to derive its net asset value forecast for the next three years at a 99% confidence level.

Interest rate risk for our other subsidiaries is not materially significant.

Equity Risk

Substantially all of Shinhan Bank’s equity risk results from its portfolio of stocks of Korean companies. As of December 31, 2013, Shinhan bank held an aggregate amount of ￦69.8 billion of equity interest in unlisted foreign companies (including ￦45.0 billion invested in unlisted private equity funds).

The equity securities in Won held in Shinhan Bank’s investment portfolio consist of stocks listed on the KRX KOSPI Market or the KRX KOSDAQ Market of the Korea Exchange and certain non-listed stocks. Shinhan Bank sets exposure limits for most of these equity securities to manage their related risk. As of December 31, 2013, Shinhan Bank held equity securities in an aggregate amount of ￦2,764.6 billion in its non-trading accounts, including equity securities in the amount of ￦456.1 billion that it held, among other reasons, for management control purposes and as a result of debt-to-equity conversion as a part of reorganization proceedings of the companies to which it had extended loans.

As of December 31, 2013, Shinhan Bank held Won-denominated convertible bonds in an aggregate amount of ￦17.0 billion and Won-denominated bonds with warrants in an aggregate amount of ￦2.7 billion, in each

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case, in its non-trading accounts. Shinhan Bank does not measure equity risk with respect to convertible bonds with warrants and the interest rate risk of these bonds are measured together with the other debt securities. As such, Shinhan Bank measures interest rate risk VaRs but not equity risk VaRs for these equity-linked securities.

Liquidity Risk Management

Liquidity risk is the risk of insolvency, default or loss due to disparity between inflow and outflow of funds, including having to obtain funds at a high price or to dispose of securities at an unfavorable price due to lack of available funds or losing attractive investment opportunities. Each of our subsidiaries seeks to minimize liquidity risk through early detection of risk factors related to the sourcing and managing of funding that may cause volatility in liquidity and by ensuring that it maintains an appropriate level of liquidity through systematic management. At the group-wide level, we manage our liquidity risk by conducting monthly stress tests that compare liquidity requirements under normal situations against those under three types of stress situations, namely, our group-specific internal crisis, crisis in the external market and a combination of internal and external crisis. In addition, in order to preemptively and comprehensively manage liquidity risk, we measure and monitor liquidity risk management using various indices, including the “limit management index”, “early warning index” and “monitoring index”.

Shinhan Bank applies the following basic principles for liquidity risk management:

•

raise funding in sufficient amounts, at the optimal time at reasonable costs;

•

maintain risk at appropriate levels and preemptively manage them through a prescribed risk limit system and an early warning signal detection system;

•

secure stable sources of revenue and minimize actual losses by implementing an effective asset-liability management system based on diversified sources of funding with varying maturities;

•

monitor and manage daily and intra-daily liquidity positions and risk exposures for timely payment and settlement of financial obligations due under both normal and crisis situations;

•

conduct periodic contingency analysis in anticipation of any potential liquidity crisis and establish and implement emergency plans in case of a crisis actually happening; and

•

consider liquidity-related costs, benefits of and risks in determining the pricing of our products and services, employee performance evaluations and approval of launching of new products and services.

Each of our subsidiaries manages liquidity risk in accordance with the risk limits and guidelines established internally as well as by the relevant regulatory authorities. Pursuant to principal regulations applicable to financial holding companies and banks as promulgated by the Financial Services Commission, we, at the holding company, are required to keep specific Won and foreign currency liquidity ratios. These ratios require us to keep the ratio of liquid assets to liquid liabilities above certain minimum levels.

Shinhan Bank manages its liquidity risk within the limits set on Won and foreign currency accounts in accordance with the regulations of the Financial Services Commission. The Financial Services Commission requires Korean banks to maintain a Won liquidity ratio of at least 100.0% and a foreign currency liquidity ratio of at least 85.0%. The Financial Services Commission defines the foreign currency liquidity ratio as foreign currency-denominated liquid assets (including marketable securities) due within three months divided by foreign currency-denominated liabilities due within three months. As for the Won liquidity ratio, the Financial Services Commission defines it as all Won-denominated assets divided by all Won-denominated liabilities, in each case, that are on the balance sheet and in off-balance sheet derivative transactions with remaining maturities of less than one month, except that (i) Won-denominated trading and available-for-sale securities with remaining terms of one month or more are included as Won liquid assets at their fair market value to the extent that such securities are marketable and have not been provided as collateral, and (ii) Won-denominated demand deposits with no fixed maturity are included as Won liquid liabilities in an amount equal to the sum of (x) the standard deviation of the monthly weighted average balance during the preceding 12-month period multiplied by 2.33 (such product, the “non-core” deposits) and (y) 15% of “core” deposit (meaning the monthly average balance of the most recent month prior to the time of determination), less the “non-core” deposits.

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The monthly weighted average balance for the preceding 12-month period is calculated using the following formula:

LOGO

The standard deviation of the monthly weighted average balance during the preceding 12-month period is calculated using the following formula:

LOGO

The weighed period coefficients for the applicable month are set forth below:


Applicable Month	Weighed Period Coefficient
t-11 month		1/78
t-10 month		2/78
t-9 month		3/78
t-8 month		4/78
t-7 month		5/78
t-6 month		6/78
t-5 month		7/78
t-4 month		8/78
t-3 month		9/78
t-2 month		10/78
t-1 month		11/78
t month		12/78
Sum		1

With respect to Won-denominated demand deposits with no fixed maturity, we recognize that a portion of the balance of such demand deposits may be withdrawn at any time and therefore categorize them as core deposits and non-core deposits as defined above.

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The following tables show Shinhan Bank’s liquidity status and limits for Won-denominated accounts (including derivatives and merchant banking accounts), together with a breakdown of their respective components, as of December 31, 2013 in accordance with the regulations of the Financial Services Commission.

Shinhan Bank’s Won-denominated accounts (including derivatives and merchant banking accounts)


Won-Denominated Accounts	0-1 Months			1-3 Months		3-6 Months		6-12 Months		1-3 Years		Over 3 Years		Sub- standard or Below		Total
	(In billions of Won, except percentages)
Assets:	￦	53,590		￦	18,013	￦	29,092	￦	44,851	￦	28,349	￦	50,092	￦	1,663	￦	225,650
Cash and deposit		6,870			—		—		—		—		—		—		6,870
Available-for-sale securities		27,102			—		—		—		—		3,888		45		31,034
Loans		10,336			14,006		25,242		40,484		23,496		38,563		1,619		153,746
Other assets		2,875			—		—		—		—		6,229		—		9,104
Derivative assets		4,011			3,559		3,523		3,120		4,562		1,125		—		19,900
Merchant banking account assets		2,396			477		328		1,247		290		288		—		4,996
Liabilities:		41,700			22,288		27,720		43,478		14,412		55,884		—		205,481
Deposits (including certificates of deposit)		25,022			17,834		22,627		37,412		5,018		43,214		—		151,126
Borrowings		1,570			252		105		172		621		1,838		—		4,557
Debt securities		152			600		1,610		2,680		4,271		4,449		—		13,762
Other liabilities		7,475			—		—		—		—		4,375		—		11,850
Derivatives liabilities		4,002			3,603		3,378		3,214		4,502		1,063		—		19,762
Merchant banking account liabilities		3,479			—		—		—		—		944		—		4,424
Liquidity gap		11,890
Liquidity ratio		128.51	%
Limit		100.00	%

The breakdown of financial instruments by contractual maturities for purposes of analyzing liquidity risk as set forth in Note 4 to the consolidated financial statements was prepared based on the relevant line items presented in Shinhan Bank’s statement of financial position. In comparison, the breakdown of financial instruments by contractual maturities for purposes of analyzing liquidity gap as set forth above was prepared based on the Banking Regulations promulgated by the Financial Services Commission.

For the most part, the criteria used for determining the remaining maturities on these two sections are the same, the primary exception being in respect of demand deposits. Under IFRS, all demand deposits are categorized as having maturities of less than one month; however, under the Banking Regulations, demand deposits are categorized as having maturities of less than one month in an amount equal to the sum of (x) the non-core deposits and (y) 15% of core deposits. Shinhan Bank’s total demand deposit balance as of December 31, 2013 was ￦52,708 billion of which ￦49,814 billion was classified as core deposits and ￦10,814 billion was classified as Won liquid liabilities (namely, liabilities with maturities of less than one month based on the formula under the Banking Regulations).

Shinhan Bank’s Treasury Department is in charge of liquidity risk management with respect to Shinhan Bank’s Won and foreign currency funds. The Treasury Department submits Shinhan Bank’s monthly funding and asset management plans to Shinhan Bank’s Asset & Liability Committee for approval, based on the analysis of various factors, including macroeconomic indices, interest rate and foreign exchange movements and maturity structures of Shinhan Bank’s assets and liabilities. Shinhan Bank’s Risk Management Department measures

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Shinhan Bank’s liquidity ratio and liquidity gap ratio on a daily basis and reports on a monthly basis whether they are in compliance with the limits to Shinhan Bank’s Risk Policy Committee, which sets and monitors Shinhan Bank’s liquidity ratio and liquidity gap ratio.

The following tables show Shinhan Bank’s liquidity status and limits for foreign currency-denominated accounts (including derivatives and merchant banking accounts) as of December 31, 2013 in accordance with the regulations of the Financial Services Commission.

Shinhan Bank’s foreign currencies-denominated accounts (including derivatives and merchant banking accounts)


	As of December 31, 2013
Foreign Currencies Denominated Accounts:	7 Days or Less		1 Month or Less		3 Months or Less			6 Months or Less		12 Months or Less		Total Before Sub-Standard or Below(1)		Sub- Standard or Below		Total
	(In millions of US$, except percentages)
Assets:	$	8,815	$	16,441	$	25,808		$	35,566	$	41,695	$	51,128	$	90	$	51,219
Liabilities		7,422		13,512		20,294			27,185		34,795		50,385		—		50,385
For three months or less:
Assets						25,808
Liabilities						20,294
Liquidity ratio						127.17	%
Limit						85.00	%

Note:

(1)	Cumulative total of accounts, including accounts over one year, but excluding accounts that are sub-standard or below.

Shinhan Bank maintains diverse sources of liquidity to facilitate flexibility in meeting its funding requirements. Shinhan Bank funds its operations principally by accepting deposits from retail and corporate depositors, accessing the call loan market (a short-term market for loans with maturities of less than one month), issuing debentures and borrowing from the Bank of Korea. Shinhan Bank uses the funds primarily to extend loans or purchase securities. Generally, deposits are of shorter average maturity than loans or investments.

Shinhan Card manages its liquidity risk according to the following principles: (i) provide a sufficient volume of necessary funding in a timely manner at a reasonable cost, (ii) establish an overall liquidity risk management strategy, including in respect of liquidity management targets, policy and internal control systems, and (iii) manage its liquidity risk in conjunction with other risks based on a comprehensive understanding of the interaction among the various risks. As for any potential liquidity shortage at or near the end of each month, Shinhan Card maintains liquidity at a level sufficient to withstand credit shortage for three months. In addition, Shinhan Card manages liquidity risk by defining and managing various indicators of liquidity risk, such as the actual liquidity gap ratio (in relation to the different maturities for assets as compared to liabilities), the liquidity buffer ratio, the maturity repayment ratio, the ratio of actual funding compared to budgeted funding and the ratio of asset-backed securities to total borrowings, at different risk levels of “caution”, “unstable” and “at risk”, and we also have contingency plans in place in case of any emergency or crisis. In managing its liquidity risks, Shinhan Card focuses on a prompt response system based on periodic monitoring of the relevant early signals, stress testing and contingency plan formulations. Shinhan Card identifies its funding needs on a daily, monthly, quarterly and annual basis based on the maturity schedule of its liabilities as well as short-term liquidity needs, based upon which it formulates its funding plans using diverse sources such as corporate debentures, commercial papers, asset-backed securitizations and credit line facilities. Shinhan Card also has in place master asset-backed securitization arrangements through which it can securitize assets with minimum delay, and when entering into asset-backed securitizations, it provides sufficient credit enhancements to avoid triggering early amortization events. In addition, Shinhan Card formulates long-term funding plans with a time horizon of three years, enters into derivative arrangements to hedge interest rate- and foreign currency-related risks and conducts pre-transaction risk analyses before entering into any new type of derivative arrangements.

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Furthermore, Shinhan Card also manages its liquidity risk within the limits set on Won accounts in accordance with the regulations of the Financial Services Commission. Under the Specialized Credit Financial Business Act and the regulations thereunder, credit card companies in Korea are required to maintain a Won liquidity ratio of at least 100.0%.

The following tables show Shinhan Card’s liquidity status and limits for Won-denominated accounts as of December 31, 2013 in accordance with the regulations of the Financial Services Commission.

Shinhan Card’s Won-denominated accounts


Won-Denominated Accounts	7 Days or Less		1 Month or Less		3 Months or Less			6 Months or Less		1 Year or Less		Over 1 Year		Total
	(In billions of Won, except percentages)
Assets	￦	2,254	￦	9,983	￦	14,491		￦	16,609	￦	18,633	￦	3,107	￦	21,741
Liabilities		619		2,742		3,902			4,468		5,695		9,477		15,172
Liquidity ratio						371.36	%

Shinhan Investment manages its liquidity risk for its Won-denominated accounts by setting a limit of ￦100 billion on each of its seven-day and one-month liquidity gap, a limit of 110% on its three-months liquidity ratio and a limit of ￦10 billion on its liquidity VaR. As for its foreign currency-denominated accounts, Shinhan Investment manages the liquidity risk on a quarterly basis in compliance with the guidelines of the Financial Supervisory Service, which requires the one-week and one-month maturity mismatch ratios to be 0% and -10% or less, respectively, and the three months liquidity ratio to be 80% or higher.

Our other subsidiaries fund their operations primarily through call money, bank loans, commercial paper, corporate debentures and asset-backed securities. Our holding company acts as a funding vehicle for long-term financing of our subsidiaries whose credit ratings are lower than the holding company, including Shinhan Card and Shinhan Capital, to lower the overall funding costs within regulatory limitations. Under the Monopoly Regulation and Fair Trade Act of Korea, however, a financial holding company is prohibited from borrowing funds in excess of 200% of its total stockholders’ equity.

In addition to liquidity risk management under the normal market situations, we have contingency plans to effectively cope with possible liquidity crisis. Liquidity crisis arises when we would not be able to effectively manage the situations with our normal liquidity management measures due to, among other reasons, inability to access our normal sources of funds or epidemic withdrawals of deposits as a result of various external or internal factors, including a collapse in the financial markets or abrupt deterioration of our credit. We have contingency plans corresponding to different stages of liquidity crisis, “cautionary stage,” “near-crisis stage” and “crisis stage,” based on the following liquidity indices:

•

indices that reflect the market movements such as interest rates and stock prices;

•

indices that reflect financial market psychology such as the size of money market funds; and

•

indices that reflect our internal financial condition.

Operational Risk Management

Operational risk is difficult to quantify and subject to different definitions. The Basel Committee defines operational risk as the risk of loss resulting from inadequate or failed internal processes, people and systems or from other external events. Similarly, we define operational risk as the risks related to our overall management other than credit risk, market risk, interest rate risk and liquidity risk. These include risks arising from system failure, human error or non-adherence to policy and procedures, from fraud or inadequate internal controls and procedures or from environmental changes, resulting in financial and non-financial loss, including reputational loss. We monitor and assess operational risks related to our business operations, including administrative risk, information technology risk, managerial risk, legal risk and reputation risk, with a view to minimizing such losses.

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Our holding company’s Audit Committee, which consists of four outside directors, two of whom are accounting or financial experts as required by internal control regulations under the Financial Holding Company Act, oversees and monitors our operational compliance with legal and regulatory requirements. The Audit Committee also oversees management’s operations and may, at any time it deems appropriate, demand additional operations-related reporting from management and inspect our asset condition. At the holding company level, we define each subsidiary’s operational process and establish an internal review system applicable to each subsidiary. Each subsidiary’s operational risk is internally monitored and managed at the subsidiary level and the Group Internal Audit Department at our holding company, which reports to our Audit Committee, continuously monitors the integrity of our subsidiaries’ operational risk management system. Our holding company’s board of directors and the Group Risk Management Committee establish our basic policies for operational risk management at the group level. The Group Internal Audit Department at our holding company is directly responsible for overseeing our operational risk management with a focus on legal, regulatory, operational and reputational risks. The Group Internal Audit Department audits both our and our subsidiaries’ operations and asset condition in accordance to our annual audit plan, which is approved by the Audit Committee, and submits regular reports to the Audit Committee pursuant to our internal reporting system. If the Group Internal Audit Department discovers any non-compliance with operational risk procedures or areas of weaknesses, it promptly alerts the business department in respect of which such non-compliance was discovered and demands implementation of corrective measures. Implementation of such corrective measures is subsequently reviewed by the Group Internal Audit Department.

To monitor and manage operational risks, Shinhan Bank maintains a system of comprehensive policies and has in place a control framework designed to provide a stable and well-managed operational environment throughout the organization. Currently, the primary responsibility for ensuring compliance with our banking operational risk procedures remains with each of the business units and operational teams. In addition, the Audit Department, the Risk Management Department and the Compliance Department of Shinhan Bank also play important roles in reviewing and maintaining the integrity of Shinhan Bank’s internal control environment.

The operational risk management system of Shinhan Bank is managed by the operational risk team under the Risk Management Department. The current system principally consists of risk control self-assessment, risk quantification using key risk indicators, loss data collection, scenario management and operational risk capital measurement. Shinhan Bank operates several educational and awareness programs designed to familiarize all of its employees to this system. In addition, Shinhan Bank has a designated operational risk manager at each of its departments and branch offices, serving the role of a coordinator between the operational risk team at the headquarters and the employees in the field and seeking to provide centralized feedback to further improve the operational risk management system.

As of December 31, 2013, Shinhan Bank has conducted risk control self-assessments on its departments as well as domestic and overseas branch offices, from which it collects systematized data on all of its branch offices, and uses the findings from such self-assessments to improve the procedures and processes for the relevant departments or branch offices. In addition, Shinhan Bank has accumulated risk-related data since 2003, improved the procedures for monitoring operational losses and is developing risk simulation models. In addition, Shinhan Bank selects and monitors, at the department level, approximately 190 key risk indicators.

The audit committee of Shinhan Bank, which consists of three outside directors, is an independent inspection authority that supervises Shinhan Bank’s internal controls and compliance with established ethical and legal principles. The audit committee performs internal audits of, among other matters, Shinhan Bank’s overall management and accounting, and supervises its Audit Department that assists Shinhan Bank’s audit committee. Shinhan Bank’s audit committee also reviews and evaluates Shinhan Bank’s accounting policies and their changes, financial and accounting matters and fairness of financial reporting.

Shinhan Bank’s Audit Committee and the Audit Department supervise and perform the following audits:

•

general audits, including full-scale audits performed annually for the overall operations, sectional audits of selected operations performed when necessary, and periodic and irregular spot audits;

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•

special audits, performed when the Audit Committee or standing auditor deems it necessary or pursuant to requests by the chief executive officer or supervisory authorities such as the Financial Supervisory Service;

•

day-to-day audits, performed by the standing auditor for material transactions or operations that are subject to approval by the heads of Shinhan Bank’s operational departments or senior executives;

•

real-time monitoring audits, performed by the computerized audit system to identify any irregular transactions and take any necessary actions; and

•

self-audits as a self-check by each operational department to ensure its compliance with our business regulations and policies, which include daily audits, monthly audits and special audits.

In addition to these audits and compliance activities, Shinhan Bank’s Audit Department designates operational risk management examiners to monitor the appropriateness of operational risk management frameworks and the functions and activities of the board of directors, relevant departments and business units, and conducts periodic checks on the operational risk and reports such findings. Shinhan Bank’s Audit Department also reviews in advance proposed banking products or other business or service plans with a view to minimizing operational risk.

As for Shinhan Investment, its audit department conducts an annual inspection as to whether the internal policy and procedures of Shinhan Investment relating to its overall operational risk management are being effectively complied. The inspection has a particular focus on the appropriateness of the scope of operational risks and the collection, maintenance and processing of relevant operating data.

Shinhan Investment, through its operational risk management system, also conducts self-assessments of risks, collects loss data and manages key risk indicators. The operational risk management system is supervised by its audit department, compliance department and operational risk management department, as well as a risk management officer in each of Shinhan Investment’s departments.

General audits, special audits, day-to-day audits and real-time monitoring audits are performed by our examiners, and self-audits are performed by the self-auditors of the relevant operational departments.

In addition to internal audits and inspections, the Financial Supervisory Service conducts general annual audits of our and our subsidiaries’ operations. The Financial Supervisory Service also performs special audits as the need arises on particular aspects of our and our subsidiaries’ operations such as risk management, credit monitoring and liquidity. In the ordinary course of these audits, the Financial Supervisory Service routinely issues warning notices where it determines that a regulated financial institution or such institution’s employees have failed to comply with the applicable laws or rules, regulations and guidelines of the Financial Supervisory Service. We and our subsidiaries have in the past received, and expect in the future to receive, such notices and we have taken and will continue to take appropriate actions in response to such notices. For example, in July 2012, the Financial Supervisory Service issued an institutional warning in relation to an embezzlement case involving Dongah Construction Industrial Co., Ltd. on the grounds that there were misconduct in payment of funds held in the trust account and mismanagement of internal control. For detailed description of the Dongah Construction case, please see “Item 8.A. Consolidated Statements and Other Financial Information — Legal Proceedings.”

The Financial Supervisory Service conducted a comprehensive audit of Shinhan Bank from November to December 2012, and in July 2013, notified Shinhan Bank of an institutional caution, imposed disciplinary actions against 65 Shinhan Bank employees and assessed a fine of ￦87.5 million after finding that Shinhan Bank had illegally monitored customer accounts, breached confidentiality with respect to certain financial transactions and violated its obligation to disclose and report an investment in an affiliated company to the Financial Services Commission. Furthermore, in March 2013 the Financial Supervisory Service conducted a special audit of Shinhan Bank as to an alleged malfunctioning of its financial computer network and in December 2013, notified Shinhan Bank of an institutional caution and imposed disciplinary actions against five Shinhan Bank employees after finding that Shinhan Bank did not properly maintain its information technology administrator account and vaccine server.

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We consider legal risk as a part of operational risk. The uncertainty of the enforceability of obligations of our customers and counterparties, including foreclosure on collateral, creates legal risk. Changes in laws and regulations could also adversely affect us. Legal risk is higher in new areas of business where the law is often untested in the courts although legal risk can also increase in our traditional business to the extent that the legal and regulatory landscape in Korea is changing and many new laws and regulations governing the banking industry remain untested. We seek to minimize legal risk by using stringent legal documentation, employing procedures designed to ensure that transactions are properly authorized and consulting legal advisers. The Compliance Department operates Shinhan Financial Group’s compliance system. This system is designed to ensure that all employees of Shinhan Financial Group and its subsidiaries comply with the law. The compliance system’s main function is to monitor the degree of improvement in compliance with the law, maintain internal controls (including ensuring that each department has established proper internal policies and that it complies with those policies) and educate employees about observance of the law. The Compliance Department also supervises the management, execution and performance of self-audits.

Upgrades of Risk Management System

Shinhan Bank

In order to strengthen risk management of its overseas subsidiaries and effectively comply with local and domestic regulations, Shinhan Bank is in the process of laying out a global risk management system network, which records the risk data of its overseas subsidiaries. Shinhan Bank seeks to leverage the development of this system for further overseas expansion and stable growth of existing overseas subsidiaries. Shinhan Bank completed the development of such system for its subsidiaries in China and Japan in 2012, and in Vietnam and the United States in 2013, and plans to expand the application of this system to its other overseas subsidiaries.

Shinhan Bank has also completed development of a system to calculate stressed VaR based on Basel II standards in order to prepare for stress situations such as the global financial crisis in 2008. Shinhan Bank has received approval for such system from the Financial Supervisory Service and has been implemented since 2012.

In 2012, Shinhan Bank also developed a system for improving collection and recovery of bad assets through enhanced loss given default (“LGD”) data processing. In 2012, Shinhan Bank also upgraded the credit evaluation system to improve assessment of small- and medium size enterprises which are not subject to periodic audit by outside accounting firms. Such upgrade was approved by the Financial Supervisory Service and began implementation since 2012. In 2013, Shinhan Bank obtained approval from the Financial Supervisory Service to use an internal evaluation model with respect to Basel II credit risks related to Shinhan Bank’s retail SOHO exposures.

Shinhan Bank also upgraded the asset and liability management system in 2012 in order to timely comply with Basel III, IFRS and other regulatory requirements as well as to upgrade the quality of risk-related data.

Shinhan Card

In 2012, Shinhan Card completed further upgrades to its credit risk measurement system in satisfaction of the Basel II standards, as well as other regulatory requirements and internal needs in order to address the ongoing volatility in the economic and regulatory environment.

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Supervision and Regulation

Principal Regulations Applicable to Financial Holding Companies

General

The Korean financial holding companies and their subsidiaries are regulated by the Financial Holding Companies Act (last amended on June 8, 2010, Law No. 10361). In addition, Korean financial holding companies and their subsidiaries are subject to the regulations and supervision of the Financial Services Commission and the Financial Supervisory Service.

Pursuant to the Financial Holding Companies Act, the Financial Services Commission regulates various activities of financial holding companies. For instance, it approves the application for setting up a new financial holding company and promulgates regulations on the capital adequacy of financial holding companies and their subsidiaries and other regulations relating to the supervision of financial holding companies.

The Financial Supervisory Service is subject to the instructions and directives of the Financial Services Commission and carries out supervision and examination of financial holding companies and their subsidiaries. In particular, the Financial Supervisory Service sets forth liquidity and capital adequacy requirements for financial holding companies and reporting requirements pursuant to the authority delegated to the Financial Supervisory Service under the Financial Services Commission regulations, pursuant to which financial holding companies are required to submit quarterly reports on business performance, financial status and other matters prescribed in the Presidential Decree of the Financial Holding Companies Act.

Under the Financial Holding Companies Act, the establishment of a financial holding company must be approved by the Financial Services Commission. A financial holding company is required to be mainly engaged in controlling its subsidiaries by holding the shares or equities of the subsidiaries in the amount of not less than 50% of aggregate amount of such financial holding company’s assets based on the latest balance sheet. A financial holding company is prohibited from engaging in any profit-making businesses other than controlling the management of its subsidiaries and certain ancillary businesses as prescribed in the Presidential Decree of the Financial Holding Companies Act which include the following businesses:

•

financially supporting its subsidiaries and the subsidiaries of its subsidiaries (the “direct and indirect subsidiaries”);

•

raising capital necessary for the investment in subsidiaries or providing financial support to its direct and indirect subsidiaries;

•

supporting the business of its direct and indirect subsidiaries for the joint development and marketing of new product and the joint utilization of facilities or IT systems; and

•

pursuing any other activities exempted from authorization, permission or approval under the applicable laws and regulations.

The Financial Holding Companies Act requires every financial holding company (other than any financial holding company that is controlled by any other financial holding company) or its subsidiaries to obtain the prior approval from the Financial Services Commission before acquiring control of another company or to file with the Financial Services Commission a report within thirty days after acquiring such control. Permission to liquidate or to merge with any other company must be obtained in advance from the Financial Services Commission. A financial holding company must report to the Financial Services Commission regarding certain events including:

•

when there is a change of its officers;

•

when there is a change of its largest shareholder;

•

when there is a change of principal shareholders of a bank holding company;

•

when the shareholding of the largest shareholder or a principal shareholder as prescribed under the Financial Holding Companies Act or a person who is in a special relationship with such largest or principal shareholder (as defined under the Presidential Decree of the Financial Holding Companies Act) changes by 1% or more of the total issued and outstanding voting shares of the financial holding company;

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•

when there is a change of its name;

•

when there is a cause for dissolution; and

•

when it or its subsidiary ceases to control any of its respective direct and indirect subsidiaries by disposing of the shares of such direct and indirect subsidiaries.

Capital Adequacy

The Financial Holding Companies Act does not provide for a minimum paid-in capital of financial holding companies. All financial holding companies, however, are required to maintain a specified level of solvency. In addition, in its allocation of the net profit earned in a fiscal term, a financial holding company is required to set aside in its legal reserve an amount equal to at least 10% of the net income after tax each time it pays dividends on its net profits earned until its legal reserve reaches at least the aggregate amount of its paid-in capital.

A financial holding company controlling banks or other financial institutions conducting banking business as prescribed in the Financial Holding Company Act (hereinafter, the “bank holding company”) is required to maintain a minimum consolidated equity capital ratio of 8.0%. “Consolidated equity capital ratio” is defined as the ratio of equity capital as a percentage of risk-weighted assets on a consolidated basis, determined in accordance with the Financial Services Commission requirements that have been formulated based on the Bank of International Settlements standards. “Equity capital,” as applicable to bank holding companies, is defined as the sum of Tier I capital, Tier II capital, and Tier III capital less any deductible items, each as defined under the Regulation on the Supervision of Financial Holding Companies. “Risk-weighted assets” is defined as the sum of credit risk-weighted assets and market risk-weighted assets.

For regulatory reporting purposes, we maintain allowances for credit losses on the following loan classifications that classify corporate and retail loans as required by the Financial Services Commission. In making these classifications, we take into account a number of factors, including the financial position, profitability and transaction history of the borrower, the value of any collateral or guarantee taken as security for the extension of credit, probability of default and loss amount in the event of default. This classification method, and our related provisioning policy, is intended to reflect the borrower’s capacity to repay. To the extent there is any conflict between the Financial Services Commission guidelines and our internal analysis in such classifications, we adopt whichever is more conservative.

The following table sets forth loan classifications according to the guidelines of the Financial Services Commission.


Loan Classification		Loan Characteristics

Normal		Loans made to customers whose financial position, future cash flows and nature of business are deemed financially sound. No problems in recoverability are expected.

Precautionary		Loans made to customers whose financial position, future cash flows and nature of business show potential weakness, although there is no immediate risk of nonrepayment.

Substandard		Loans made to customers whose adverse financial position, future cash flows and nature of business have a direct effect on the repayment of the loan.

Doubtful		Loans made to customers whose financial position, future cash flows and nature of business are so weak that significant risk exists in the recoverability of the loan, to the extent the outstanding amount exceeds any collateral pledged.

Estimated loss		Loans where write-off is unavoidable.

In accordance with the Regulations for the Supervision of Financial Institutions, we establish regulatory reserve for loan loss in the amount of the difference between allowance for credit losses as calculated pursuant to

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our provisioning policy in accordance with IFRS and allowance for credit losses based on the loan classifications set forth above as required by the Financial Services Commission. In determining consolidated equity capital ratio, we deduct regulatory reserve for loan loss from equity capital.

Liquidity

All financial holding companies are required to match the maturities of their assets to those of liabilities in accordance with the Financial Holding Companies Act in order to ensure liquidity. Financial holding companies are required to submit quarterly reports regarding their liquidity to the Financial Supervisory Service and must:

•

maintain a Won liquidity ratio (defined as Won assets due within one month, including marketable securities, divided by Won liabilities due within three months) of not less than 100%;

•

maintain a foreign currency liquidity ratio (defined as foreign currency liquid assets due within three months divided by foreign currency liabilities due within three months) of not less than 80% except for financial holding companies with a foreign currency liability to total assets ratio of less than 1%;

•

maintain a ratio of foreign currency liquid assets due within seven days less foreign currency liabilities due within seven days divided by total foreign currency assets of not less than 0%, except for financial holding companies with a foreign currency liability to total assets ratio of less than 1%; and

•

maintain a ratio of foreign currency liquid assets due within a month less foreign currency liabilities due within a month divided by total foreign currency assets of not less than negative 10% except for financial holding companies with a foreign currency liability to total assets ratio of less than 1%.

Financial Exposure to Any Single Customer and Major Shareholders

Subject to certain exceptions, the total sum of credit (as defined in the Presidential Decree of the Financial Holding Companies Act, the Bank Act, the Presidential Decree of the Financial Investment Services and Capital Markets Act, the Insurance Act, the Mutual Savings Bank Act and the Specialized Credit Financial Business Act, respectively) of a financial holding company and its direct and indirect subsidiaries which are banks, merchant banks or securities companies (“Financial Holding Company Total Credit”) extended to a single group of companies that belong to the same conglomerate as defined in the Monopoly Regulations and Fair Trade Act will not be permitted to exceed 25% of the Net Total Equity Capital.

“Net Total Equity Capital” for the purpose of the calculation of financial exposure to any single customer and Major Shareholder (as defined below) as applicable to us and our subsidiaries is defined under the Presidential Decree of the Financial Holding Companies Act as

(a) the sum of:

(i) in the case of a financial holding company, the shareholders’ equity as defined under Article 24-3, Section 7(2) of the Presidential Decree of the Financial Holding Companies Act, which represents the difference between the total assets less total liabilities on the balance sheet as of the end of the most recent quarter;

(ii) in the case of a bank, the shareholders’ equity as defined under Article 2, Section 1(5) of the Bank Act, which represents the sum of Tier I and Tier II capital amounts determined according to the standards set by the BIS;

(iii) in the case of a financial investment company, the shareholders’ equity as defined under Article 37, Section 3 of the Presidential Decree of the Financial Investment Services and Capital Markets Act, which represents the total shareholders’ equity as adjusted as determined by the Financial Services Commission, such as the amount of increase or decrease in paid-in capital after the end of the most recent fiscal year;

(iv) in the case of an insurance company, the shareholders’ equity as defined under Article 2, Section 15 of the Insurance Act, which represents the sum of items designated by the Presidential Decree, such as paid-in-capital, capital surplus, earned surplus and any equivalent items, less the value of good will and other equivalent items;

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(v) in the case of a mutual savings bank, the shareholders’ equity as defined under Article 2, Section 4 of the Mutual Savings Bank Act, which represents the sum of Tier I and Tier II capital amounts determined in accordance with the standards set by the Bank for International Settlements; and

(vi) in the case of a credit card company or a specialty credit provider, the shareholders’ equity as defined under Article 2, Section 19 of the Specialized Credit Financial Business Act, which represents the sum of the items designated by the Presidential Decree, such as paid-in-capital, capital surplus, earned surplus and any equivalent items;

(b) less the sum of:

(i) the amount of shares in direct and indirect subsidiaries held by the financial holding company;

(ii) the amount of shares in the direct and indirect subsidiaries that are cross-held by such subsidiaries; and

(iii) the amount of shares in the financial holding company held by its direct and indirect subsidiaries.

The Financial Holding Company Total Credit to a single individual or legal entity may not exceed 20% of the Net Total Equity Capital.

Furthermore, the total sum of credits (as defined under the Financial Holding Companies Act, the Banking Act and the Financial Investment Services and Capital Markets Act, respectively) of a bank holding company and its direct and indirect subsidiaries (“Bank Holding Company Total Credit”) extended to a “Major Shareholder” (together with the persons who have special relationship with such Major Shareholder) (as defined below) generally may not exceed the smaller of (x) 25% of the Net Total Equity Capital and (y) the amount of the equity capital of the financial holding company multiplied by the shareholding ratio of such Major Shareholder, subject to certain exceptions.

“Major Shareholder” is defined under the Financial Holding Companies Act as follows:

(a) a shareholder holding (together with persons who have a special relationship with such shareholder as defined in the Presidential Decree of the Financial Holding Companies Act) in excess of 10% (or in the case of a financial holding company controlling regional banks only, 15%) in the aggregate of the financial holding company’s total issued and outstanding voting shares; or

(b) a shareholder holding (together with persons who have a special relationship with such shareholder as defined in the Presidential Decree of the Financial Holding Companies Act) more than 4% in the aggregate of the total issued and outstanding voting shares of the financial holding company controlling national banks (other than a financial holding company controlling regional banks only), excluding shares related to the shareholding restrictions on non-financial business group companies as described below, where such shareholder is the largest shareholder or has actual control over the major business affairs of the financial holding company through, for example, appointment and dismissal of the officers pursuant to the Presidential Decree of the Financial Holding Companies Act.

In addition, the total sum of the Bank Holding Company Total Credit extended to all of a bank holding company’s Major Shareholder may not exceed 25% of the Net Total Equity Capital. Furthermore, the bank holding company and its direct and indirect subsidiaries that intend to extend the Bank Holding Company Total Credit to the bank holding company’s Major Shareholder not less than the lesser of (i) the amount equivalent to 0.1% of the Net Total Equity Capital or (ii) ￦5 billion, with respect to a single transaction, must obtain prior unanimous board resolutions and then, immediately after the completion of the transaction, must file a report with the Financial Services Commission and publicly disclose the filing of such report (for example, through a website).

Restrictions on Transactions Among Direct and Indirect Subsidiaries and Financial Holding Company

Generally, a direct or indirect subsidiary of a financial holding company may not extend credit to the financial holding company which directly or indirectly controls such subsidiary. In addition, a direct or indirect subsidiary of a financial holding company may not extend credit to any other single direct or indirect subsidiary

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of the financial holding company in excess of 10% of its stockholders’ equity and to any other direct and indirect subsidiaries of the financial holding company in excess of 20% of its stockholders’ equity in the aggregate. The direct or indirect subsidiaries of a financial holding company must obtain an appropriate level of collateral for the credits extended to the other direct and indirect subsidiaries unless otherwise approved by the Financial Services Commission. The appropriate level of collateral for each type of such collateral is as follows:

(i) For deposits and installment savings, obligations of the Korean government or the Bank of Korea, obligations guaranteed by the Korean government or the Bank of Korea, obligations secured by securities issued or guaranteed by the Korean government or the Bank of Korea: 100% of the amount of the credit extended;

(ii) (a) For obligations of local governments under the Local Autonomy Act, local public enterprises under the Local Public Enterprises Act, and investment institutions and other quasi-investment institutions under the Basic Act on the Management of Government-Invested Institution (hereinafter, the “public institutions and others”); (b) obligations guaranteed by the public institutions and others; and (c) obligations secured by the securities issued or guaranteed by public institutions and others: 110% of the amount of the credit extended; and

(iii) For any property other than those set forth in the above (i) and (ii): 130% of the amount of the credit extended.

Subject to certain exceptions, a direct or indirect subsidiary of a financial holding company is prohibited from owning the shares of any other direct or indirect subsidiaries (other than those directly controlled by the direct and indirect subsidiaries in question) in common control by the financial holding company. However, a direct or indirect subsidiary of a financial holding company may invest as a limited partner in a private equity fund that is a direct or indirect subsidiary of the same financial holding company. The transfer of certain assets subject to or below the precautionary criteria between the financial holding company and its direct or indirect subsidiary or between the direct and indirect subsidiaries of a financial holding company is prohibited except for (i) the transfer to an asset-backed securitization company, typically a special purpose entity, or the entrustment with a trust company, under the Asset-Backed Securitization Act, (ii) the transfer to a mortgage-backed securitization company under the Mortgage-Backed Securitization Company Act, (iii) the transfer or in-kind contribution to a corporate restructuring vehicle under the Corporate Restructuring Investment Company Act or (iv) the acquisition by a corporate restructuring company under the Industrial Development Act.

Disclosure of Management Performance

For the purpose of protecting the depositors and investors in the subsidiaries of the financial holding companies, the Financial Services Commission requires financial holding companies to disclose certain material matters including (i) financial condition and profit and loss of the financial holding company and its direct and indirect subsidiaries, (ii) how capital was raised by the financial holding company and its direct and indirect subsidiaries and how such capital was used, (iii) any sanctions levied on the financial holding company and its direct and indirect subsidiaries under the Financial Holding Companies Act or any corrective measures or sanctions under the Law on Improvement of Structure of Financial Industry or (iv) occurrence of any non-performing assets or financial incident which may have a material adverse effect.

Restrictions on Shareholdings in Other Companies

Subject to certain exceptions, a bank holding company may not own more than 5% of the total issued and outstanding shares of another company (other than its direct and indirect subsidiaries). If the financial holding company owns shares of another company (other than its direct and indirect subsidiaries) which is not a finance-related company, the financial holding company is required to exercise its voting rights in the same manner and same proportion as the other shareholders of the company exercise their voting rights in favor of or against any resolutions under consideration at the shareholders’ meeting of the company.

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Restrictions on Shareholdings by Direct and Indirect Subsidiaries

Generally, a direct subsidiary of a financial holding company is prohibited from controlling any other company; provided that a direct subsidiary of a financial holding company may control (as an indirect subsidiary of the financial holding company): (i) subsidiaries in foreign jurisdiction which are engaged in a financial business, (ii) certain financial institutions which are engaged in the business that the direct subsidiary may conduct without any licenses or permits, (iii) certain financial institutions whose business is related to the business of the direct subsidiary as prescribed under the Presidential Decree of the Financial Holding Companies Act (for example, the companies which a bank subsidiary may control are limited to credit information companies, credit card companies, trust business companies, securities investment management companies, investment advisory companies, futures business companies, and asset management companies), (iv) certain financial institutions whose business is related to financial business as prescribed by the regulations of the Ministry of Strategy and Finance, and (v) certain companies which are not financial institutions but whose business is related to the financial business of the financial holding company as prescribed by the Presidential Decree of the Financial Holding Companies Act (e.g. finance-related research company, finance-related information technology company, etc.). Acquisition by the direct subsidiaries of such indirect subsidiaries requires a prior permission from the Financial Services Commission or a report to be submitted to the Financial Services Commission, depending on the types of the indirect subsidiaries and the amount of total assets of the indirect subsidiaries.

An indirect subsidiary of a financial holding company is prohibited from controlling any other company, provided, however, that in the case where a company held control over another company at the time such company initially became an indirect subsidiary of a financial holding company, such indirect subsidiary shall be required to dispose of its interest in such other company within two years after becoming an indirect subsidiary of a financial holding company.

A subsidiary of a financial holding company may invest in a special purpose company as its largest shareholder for purposes of making investments under the Act on Private Investment in Social Infrastructure without being deemed as controlling such special purpose company.

In addition, a private equity fund established in accordance with the Financial Investment Services and Capital Markets Act is not considered to be a subsidiary of a financial holding company even if the financial holding company is the largest investor in the private equity fund unless the financial holding company is the asset management company for the private equity fund.

Restrictions on Transactions Between a Financial Holding Company and its Major Shareholder

A bank holding company and its direct and indirect subsidiaries are prohibited from acquiring (including acquisition by a trust account of its subsidiary bank) shares issued by such bank holding company’s Major Shareholder in excess of 1% of the Net Total Equity Capital. In addition, the financial holding company and its direct and indirect subsidiaries which intend to acquire shares issued by such Major Shareholder not less than the lesser of (i) the amount equivalent to 0.1% of the Equity Capital or (ii) ￦5 billion, with respect to a single transaction, must obtain prior unanimous board resolutions and then, immediately after the acquisition, must file a report with the Financial Services Commission and publicly disclose the filing of such report (for example, through a website).

Restrictions on Financial Holding Company Ownership

Under the Financial Holding Companies Act, foreign financial institutions are permitted to establish financial holding companies in Korea. Pursuant to the Presidential Decree of the Financial Holding Companies Act, a foreign financial institution can control a financial holding company if, subject to satisfying certain other conditions, it, together with its specially-related persons, holds 100% of the total shares in the financial holding company.

In addition, any single shareholder and persons who stand in a special relationship with such shareholder (as defined under the Presidential Decree to the Financial Holding Companies Act) may acquire beneficial

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ownership of up to 10% of the total issued and outstanding shares with voting rights of a financial holding company controlling national banks (or 15% in the case of a financial holding company controlling regional banks only). The Government and the Korea Deposit Insurance Corporation are not subject to such a ceiling.

However, “non-financial business group companies” (as defined below) may not acquire beneficial ownership of shares of a bank holding company in excess of 9% of such financial holding company’s outstanding voting shares, provided that such non-financial business group companies may acquire beneficial ownership of up to 10% of such financial holding company’s outstanding voting shares with the approval of the Financial Services Commission under the condition that such non-financial business group companies will not exercise voting rights in respect of such shares in excess of the 9% limit. In addition, any person (whether a Korean national or a foreigner), with the exception of non-financial business group companies described above, may also acquire in excess of 10% of total voting shares issued and outstanding of a financial holding company which controls national bank, provided that an approval from the Financial Services Commission is obtained in instances where the total holding exceeds 10% (or 15% in the case of a financial holding company controlling regional banks only), 25% or 33% of the total voting shares issued and outstanding of such bank holding company.

“Non-financial business group companies” are defined under the Financial Holding Companies Act as companies, which include:

(i) any same shareholder group with aggregate net assets of all non-financial business companies belonging to such group of not less than 25% of the aggregate net assets of all members of such group;

(ii) any same shareholder group with aggregate assets of all non-financial business companies belonging to such group of not less than ￦2 trillion;

(iii) any mutual fund in which a same shareholder group identified in item (i) or (ii) above holds more than 4% of the total shares issued and outstanding of such mutual fund;

(iv) any private equity fund (x) which has a partner with limited liability that falls under item (i), (ii) or (iii) above and holds equity equivalent to 10% or greater of the total amount invested by the private equity fund, (y) which has a partner with unlimited liability that falls under item (i), (ii) or (iii) above or (z) whose affiliates belonging to an enterprise group subject to limitation on mutual investment hold in aggregate equity equivalent to 30% or greater of the total amount invested by such private equity fund; or

(v) any investment purpose company in which a private equity fund that falls under item (iv) above acquires and holds no less than 4% of such company’s shares or equity or exercises de-facto influence on such company’s significant managerial matters.

Financial Investment Services and Capital Markets Act

General

The Financial Investment Services and Capital Markets Act categorizes capital markets-related business into six different functions, as follows:

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dealing (trading and underwriting of “financial investment products” (as defined below));

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brokerage (brokerage of financial investment products);

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collective investment (establishment of collective investment schemes and the management thereof);

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investment advice;

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discretionary investment management; and

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trusts (together with the five business set forth above, the “Financial Investment Businesses”).

Accordingly, all financial business relating to financial investment products are reclassified as one or more of the Financial Investment Businesses described above, and financial institutions are subject to the regulations applicable to their relevant Financial Investment Businesses, irrespective of the type of the financial institution it

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is. For example, under the Financial Investment Services and Capital Markets Act, derivative businesses conducted by securities companies and future companies will be subject to the same regulations under the Financial Investment Services and Capital Markets Act, at least in principle.

The banking business and insurance business are not subject to the Financial Investment Services and Capital Markets Act and will continue to be regulated under separate laws; provided, however, that they may become subject to the Financial Investment Services and Capital Markets Act if their activities involve any financial investment businesses requiring a license based on the Financial Investment Services and Capital Markets Act.

Comprehensive Definition of Financial Investment Products

In an effort to encompass the various types of securities and derivative products available in the capital markets, the Financial Investment Services and Capital Markets Act sets forth a comprehensive term “financial investment products,” defined to mean all financial products with a risk of loss in the invested amount (in contrast to “deposits,” which are not financial investment products for which the invested amount is protected or preserved). Financial investment products are classified into two major categories: (i) “securities” (relating to financial investment products where the risk of loss is limited to the invested amount) and (ii) “derivatives” (relating to financial investment products where the risk of loss may exceed the invested amount). As a result of the general and open-ended manner in which financial investment products are defined, any future financial product could potentially fall under the definition of financial investment products, which would enable Financial Investment Companies (as defined below) to handle a broader range of financial products. Under the Financial Investment Services and Capital Markets Act, securities companies, asset management companies, futures companies and other entities engaging in any Financial Investment Business are classified as “Financial Investment Companies.”

License System

Financial Investment Companies are able to choose what Financial Investment Business to engage in (through the “check the box” method set forth in the relevant license application), by specifying the desired (i) Financial Investment Business, (ii) financial investment product and (iii) target customers to which financial investment products may be sold (namely, general investors or professional investors). Licenses will be issued under the specific business sub-categories described above. For example, it would be possible for a Financial Investment Company to obtain a license to engage in the Financial Investment Business of (i) dealing (ii) over the counter derivatives products (iii) only with professional investors.

Expanded Business Scope of Financial Investment Companies

Under the previous regulatory regime in Korea, it was difficult for a financial institution to explore a new line of business or expand upon its existing line of business. For example, a financial institution licensed as a securities company generally could not engage in the asset management business. In contrast, under the Financial Investment Services and Capital Markets Act, pursuant to the integration of its current business involving financial investment products into a single Financial Investment Business, a licensed Financial Investment Company is permitted to engage in all types of Financial Investment Businesses, subject to compliance with the relevant regulations, for example, maintaining an adequate “Chinese Wall,” to the extent required. As to incidental businesses (i.e., a financial related business which is not a Financial Investment Business), the Financial Investment Services and Capital Markets Act generally allows a Financial Investment Company to freely engage in such incidental businesses by shifting away from the previous system of permitting only the listed activities towards a more comprehensive system. In addition, a Financial Investment Company is permitted (i) to outsource marketing activities by contracting with “introducing brokers” that are individuals but not employees of the Financial Investment Company, (ii) to engage in foreign exchange business related to their Financial Investment Business and (iii) to participate in the settlement network, pursuant to an agreement among the settlement network participants.

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Improvement in Investor Protection Mechanism

While the Financial Investment Services and Capital Markets Act broadens the scope of financial businesses in which financial institutions are permitted to engage, a more rigorous investor-protection mechanism is imposed upon Financial Investment Companies dealing in financial investment products. The Financial Investment Services and Capital Markets Act makes a distinction between general investors and sophisticated investors and provides new or enhanced protections to general investors. For instance, the Financial Investment Services and Capital Markets Act expressly provides for strict know-your-customer rules for general investors and imposes an obligation on Financial Investment Companies that they should market financial investment products suitable to each general investor considering his or her personal attributes, including investment objective, net worth, and investment experience. Under the Financial Investment Services and Capital Markets Act, a Financial Investment Company can be held liable if a general investor proves (i) damages or losses relating to such general investor’s investment in financial investment products solicited by such Financial Investment Company and (ii) absence of explanation, false explanation, or omission of material fact (without having to prove fault or causation). In case there are any conflicts of interest between the Financial Investment Companies and investors, the Financial Investment Services and Capital Markets Act expressly requires (i) disclosure of any conflict of interest to investors and (ii) mitigation of conflicts of interest to a comfortable level or abstention from the relevant transaction.

Other Regulatory Changes Related to Securities and Investments

The Financial Investment Services and Capital Markets Act brought changes to various rules in securities regulations including those relating to public disclosure, insider trading and proxy contests, which had previously been governed by the Securities and Exchange Act. For example, the 5% and 10% reporting obligations under the Securities and Exchange Act have become more stringent under the Financial Investment Services and Capital Markets Act. For instance, the numbers of events requiring an investor to update its 5% report have increased under the Financial Investment Services and Capital Markets Act. Previously, only a change in the shareholding of 1% or more or in the purpose of shareholding (such as an intention to influence management) could trigger the obligation to update the 5% report. The Government has issued detailed regulations stipulating additional events requiring updates to 5% reports, such as the change in the type of holding and change in any major aspect of the relevant contract. As for the 10% report filing obligation, the initial filing is expected to be required to be made within five business days of the date of the event triggering the 10% reporting obligation, compared to 10 calendar days under the previous law. The due date for reporting a subsequent change after the initial 10% report filing has been reduced from the 10th day of the first month immediately following the month in which such change took place to five business days of the date of such change. Under the previous law, there had been a limitation on the type of investment vehicles that could be used in a collective investment scheme (namely, to trusts and corporations), the type of funds that could be used for collective investments, and the types of assets and investment securities a fund could invest in. However, the Financial Investment Services and Capital Markets Act significantly liberalizes these restrictions, permitting all legal entities, including limited liability companies or partnerships, to be used for the purpose of collective investments, allowing the formation of fund complexes and permitting investment funds to invest in a wide variety of different assets and investment instruments.

Principal Regulations Applicable to Banks

General

The banking system in Korea is governed by the Banking Act of 1950, as amended (the “Banking Act”) and the Bank of Korea Act of 1950, as amended (the “Bank of Korea Act”). In addition, Korean banks are subject to the regulations and supervision of the Bank of Korea, the Bank of Korea’s Monetary Policy Committee, the Financial Services Commission and its executive body, the Financial Supervisory Service.

The Bank of Korea, established in 1950 under the Bank of Korea Act, performs the customary functions of a central bank. It seeks to contribute to the sound development of the national economy by price stabilization through establishing and implementing efficient monetary and credit policies. The Bank of Korea acts under instructions of the Monetary Policy Committee, the supreme policy-making body of the Bank of Korea.

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Under the Bank of Korea Act, the Monetary Policy Committee’s primary responsibilities are to formulate monetary and credit policies and to determine the operations, management and administration of the Bank of Korea. The Financial Services Commission, established in 1998, regulates commercial banks pursuant to the Banking Act, including establishing guidelines on capital adequacy of commercial banks, and promulgates regulations relating to supervision of banks. Furthermore, pursuant to the Amendment to the Government Organization Act and the Banking Act in 1999, the Financial Services Commission, instead of the Ministry of Strategy and Finance, now regulates market entry into the banking business.

The Financial Supervisory Service is subject to the instructions and directives of the Financial Services Commission and carries out supervision and examination of commercial banks. In particular, the Financial Supervisory Service sets requirements both for the prudent control of liquidity and for capital adequacy and establishes reporting requirements pursuant to the authority delegated to it under the Financial Services Commission regulations, pursuant to which banks are required to submit annual reports on financial performance and shareholdings, regular reports on management strategy and non-performing loans, including write-offs, and management of problem companies and plans for the settlement of bad loans.

Under the Banking Act, approval to commence a commercial banking business or a long-term financing business must be obtained from the Financial Services Commission. Commercial banking business is defined as the lending of funds acquired predominantly from the acceptance of deposits for a period not exceeding one year or, subject to the limitation established by the Financial Services Commission, for a period between one year and three years. Long-term financing business is defined as the lending, for periods in excess of one year, of funds acquired predominantly from paid-in capital, reserves or other retained earnings, the acceptance of deposits with maturities of at least one year, or the issuance of bonds or other securities. A bank wishing to enter any business other than commercial banking and long-term financing businesses, such as the trust business, must obtain approval from the Financial Services Commission. Approval to merge with any other banking institution, to liquidate, to close a banking business or to transfer all or a part of a business must also be obtained from the Financial Services Commission.

If the Korean government deems a bank’s financial condition to be unsound or if a bank fails to meet the applicable capital adequacy ratio set forth under Korean law, the government may order:

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capital increases or reductions;

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suspension of officers from performing their duties and appointment of custodians;

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stock cancellations or consolidations;

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transfers of a part or all of business;

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sale of assets;

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closures of branch offices;

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mergers or becoming a subsidiary under the Financial Holding Companies Act of a financial holding company;

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acquisition of a bank by a third party;

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suspensions of a part or all of business operation; and

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assignments of contractual rights and obligations relating to financial transactions.

Capital Adequacy

The Banking Act requires nationwide banks to maintain a minimum paid-in capital of ￦100 billion and regional banks to maintain a minimum paid-in capital of ￦25 billion.

In addition to minimum capital requirements, all banks including foreign bank branches in Korea are required to maintain a prescribed solvency position. A bank must also set aside as its legal reserve an amount equal to at least 10% of its net profits after tax each time it pays dividends on net profits earned until such time when the reserve equals the amount of its total paid-in capital.

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Under the Banking Act, the capital of a bank is divided into two categories: Tier I and Tier II capital. Tier I capital (core capital) consists of stockholders’ equity, capital surplus, retained earnings and equity representing new types of equity securities deemed to be functionally equivalent to capital which are designated by the Financial Services Commission. Tier II capital (supplementary capital) consists of revaluation reserves, gain on valuation of investment in securities, allowance for bad debts set aside for loans classified as “normal” or “precautionary,” perpetual subordinated debt, cumulative preferred shares, redeemable preferred shares (with a right to redeem after the fifth anniversary of the date of issuance) and certain other subordinated debt.

All banks must meet standards regarding minimum ratios of Tier I and Tier II capital (less any capital deductions) to risk-weighted assets, determined in accordance with the Financial Services Commission requirements that have been formulated based on the Bank for International Settlement (“BIS”) Standards. These standards were adopted and became effective in 1996. Under these regulations, all domestic banks and foreign bank branches were required to meet the minimum ratio of Tier I and Tier II capital (less any capital deductions) to risk-weighted assets of 8%.

Under the Regulation on the Supervision of the Banking Business and the Detailed Regulations promulgated thereunder, Korean banks apply the following risk-weight ratios in respect of their home mortgage loans:

(1) for those banks adopting a standardized approach for calculating credit risk capital requirements, the risk-weight ratio of 35%; and

(2) for those banks adopting an internal ratings-based approach for calculating credit risk capital requirements, a risk-weight ratio calculated with reference to the probability of default, loss given default and exposure at default, each as defined in the Detailed Regulations on the Supervision of the Banking Business.

In Korea, Basel II, a convention entered into by the Basel committee in 2004 for the purpose of improving risk management and increasing capital adequacy of banks, was implemented beginning in 2008. Pursuant to Basel II, operational risk, such as inadequate procedure, loss risk by employees, internal system, occurrence of unexpected event, as well as credit risk and market risk, is taken into account in calculating the risk-weighted assets, in addition to maintaining the capital adequacy ratio of 8% for banks. Under Basel II, the capital requirements for credit risk can be calculated by the internal rating based (IRB) approach or the standardized approach.

Under the standardized approach, a home mortgage loan fully secured by a residential property, which is or will be occupied by a borrower, is risk-weighted at 35%.

Under the Regulation on the Supervision of the Banking Business, banks generally must maintain allowances for credit losses in respect of their outstanding loans and other credits (including confirmed guarantees and acceptances and trust account loans) in an aggregate amount covering not less than:

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0.85% of normal credits (or 0.9% in the case of normal credits comprising loans to certain industries including construction, retail and wholesale sales, accommodations, restaurant, real estate and lease, 1.0% in the case of normal credits comprising loans to individuals and households, 2.5% in the case of normal credits comprising card loan assets and revolving assets and 1.1% in the case of normal credits comprising other card assets such as claims arising from the use of a credit card, a debit card or a prepaid card (“other card assets”));

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7% of precautionary credits (or 10% in the case of precautionary credits comprising loans to individuals and households, 50% in the case of precautionary credits comprising card loan assets and revolving assets and 40% in the case of other card assets);

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20% of substandard credits (or 10% in the case of substandard credits comprising assets for which a bank has the right to receive repayment in preference (“assets subject to preferential repayment”) under the Corporate Restructuring Promotion Act or the Debtor Rehabilitation and Bankruptcy Act, 65% in the case of substandard credits comprising card loan assets and revolving assets and 60% in the case of substandard credits comprising other card assets);

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50% of doubtful credits (or 25% in the case of doubtful credits comprising assets subject to preferential repayment, 55% in the case of doubtful credits comprising loans to individuals and households and 75% in the case of doubtful credits comprising other card assets); and

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100% of estimated loss credits (or 50% in the case of estimated loss credits comprising assets subject to preferential repayment).

Furthermore, under the Regulation on the Supervision of the Banking Business, banks must maintain allowances for credit losses in respect of their confirmed guarantees (including confirmed acceptances) and outstanding non-used credit lines as of the settlement date in an aggregate amount calculated at the same rates applicable to normal, precautionary, substandard and doubtful credits comprising their outstanding loans and other credits as set forth above.

Liquidity

All banks are required to match the maturities of their assets and liabilities in accordance with the Banking Act in order to ensure adequate liquidity. Banks may not invest in excess of an amount exceeding 60% of their Tier I and Tier II capital (less any capital deductions) in stocks and other securities with a period remaining to maturity of over three years. However, this restriction does not apply to government bonds or to Monetary Stabilization Bonds issued by the Bank of Korea.

The Financial Services Commission requires each Korean bank to maintain a Won liquidity ratio (defined as Won assets due within one month, including marketable securities, divided by Won liabilities due within one month) of not less than 100% and to make monthly reports to the Financial Supervisory Service. The Financial Services Commission also requires each Korean bank to (1) maintain a foreign-currency liquidity ratio due within three months (defined as foreign-currency liquid assets due within three months divided by foreign-currency liabilities due within three months) of not less than 85%, (2) maintain a ratio of foreign-currency liquid assets due within seven days (defined as foreign-currency liquid assets due within seven days less foreign-currency liabilities due within seven days, divided by total foreign-currency assets) of not less than negative 3% and (3) maintain a ratio of foreign-currency liquid assets due within a month (defined as foreign-currency liquid assets due within a month less foreign currency liabilities due within a month, divided by total foreign-currency assets) of not less than negative 10%. The Financial Services Commission also requires each Korean bank to submit monthly reports with respect to its compliance with these ratios.

The Monetary Policy Committee is authorized to fix and alter minimum reserve requirements that banks must maintain against their deposit liabilities. The current minimum reserve ratio is 7.0% of average balances for Won-denominated demand deposits outstanding, 0.0% of average balances for Won-denominated employee asset establishment savings deposits, employee long-term savings deposits, employee house purchase savings deposits, long-term house purchase savings deposits, household long-term savings deposits and employee preferential savings deposits outstanding and 2.0% of average balances for Won-denominated time and savings deposits, mutual installments, housing installments and certificates of deposit outstanding. For foreign currency deposit liabilities, a 2.0% minimum reserve ratio is applied to savings deposits outstanding and a 7.0% minimum reserve ratio is applied to demand deposits, while a 1.0% minimum reserve ratio is applied for offshore accounts, immigrant accounts and resident accounts opened by foreign exchange banks.

Loan-to-Deposit Ratio

In 2009, the Financial Supervisory Service announced that it would introduce a new set of regulations on the loan-to-deposit ratio by amending the Regulation on the Supervision of the Banking Business (“RSBB”) upon its determination that the overall liquidity of banks in Korea had become unstable due to the ongoing increase in the loan-to-deposit ratio resulting from banks expanding their asset size too competitively by granting mortgages on houses and loans to small- and medium-sized enterprises over the last couple of years. The RSBB, which was amended as of August 18, 2010 and became effective on January 1, 2014, requires banks with Won-denominated loans of more than ￦2 trillion in value to maintain a ratio of Won-denominated loans to Won-denominated deposits lower than 1:1. In practice, however, the Financial Supervisory Service instructed relevant banks to comply with this newly enacted loan-to-deposit ratio by the end of June 2012. Shinhan Bank’s loan-to-deposit ratio as of December 31, 2013 was 98.5%.

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Financial Exposure to Any Single Customer and Major Shareholders

Under the Banking Act, the sum of material credit exposures by a bank, namely, the total sum of its credits to single individuals, legal entities or groups of companies belonging to the same enterprise groups as defined in the Monopoly Regulation and Fair Trade Act that exceed 10% of the sum of Tier I and Tier II capital (less any capital deductions), must not exceed five times the sum of Tier I and Tier II capital (less any capital deductions), subject to certain exceptions. Subject to certain exceptions, no bank is permitted to extend credit (including loans, guarantees, purchases of securities (only in the nature of a credit) and such other transactions which directly or indirectly create credit risk) in excess of 20% of the sum of Tier I and Tier II capital (less any capital deductions) to a single individual or a legal entity, and no bank may grant credit in excess of 25% of the sum of Tier I and Tier II capital (less any capital deductions) to a single group of companies that belong to the same enterprise group as defined in the Monopoly Regulations and Fair Trade Act.

Under the Banking Act, certain restrictions apply to extending credits to a major shareholder. The definition of a “major shareholder” is as follows:

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a shareholder holding (together with persons who have a special relationship with such shareholder as defined in the Presidential Decree of the Banking Act) in excess of 10% (or in the case of regional banks, 15%) in the aggregate of the bank’s total issued and outstanding voting shares; or

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a shareholder holding (together with persons who have a special relationship with such shareholder as defined in the Presidential Decree of the Banking Act) more than 4% in the aggregate of the total issued and outstanding voting shares of a bank (other than a regional bank), where such shareholder is the largest shareholder or is able to actually control the major business affairs of the bank, for example, through appointment and dismissal of the chief executive officer or of the majority of the executives.

Under the Banking Act, banks are prohibited from extending credits in the amount greater than the lesser of (1) 25% of the sum of such bank’s Tier I and Tier II capital (less any capital deductions) and (2) the relevant major shareholder’s shareholding ratio multiplied by the sum of the bank’s Tier I and Tier II capital (less any capital deductions) to a major shareholder (together with persons who have special relationship with such major shareholder as defined in the Presidential Decree of the Banking Act). Also, no bank is allowed to grant credit to its major shareholders in the aggregate in excess of 25% of its Tier I and Tier II capital (less any capital deductions).

When managing the credit risk of banks, among the methods for providing credit support by banks, a loan agreement, a purchase agreement for asset-backed commercial papers, purchase of subordinate beneficiary certificates, and assumption of liability by providing warranty against default under asset-backed securitization are examples of creating financial exposure to banks.

Interest Rates

Korean banks remain dependent on the acceptance of deposits as their primary source of funds. Currently, there are no legal controls on interest rates on bank loans in Korea except for a cap of 34.9% on the default interest rate under the Act on Lending Business, which cap will remain effective until December 31, 2015.

Lending to Small- and Medium-sized Enterprises

When commercial banks (including Shinhan Bank) make Won-denominated loans to certain start-up, venture, innovative and other strategic small- and medium-sized enterprises specially designated by the Bank of Korea as “priority borrowers”, the Bank of Korea generally provides the underlying funding to these banks at concessionary rates for up to 50% of all such loans made to the priority borrowers subject to a monthly-adjusted limit prescribed by the Bank of Korea (currently ￦5 trillion) provided that if such loans to priority borrowers made by all commercial banks exceed the prescribed limit for a given month, the concessionary funding for the following month will be allocated to each commercial bank in proportion to such bank’s lending to priority borrowers two months prior to the time of such allocation, which has the effect that, if a particular bank lags other banks in making loans to priority borrowers, the amount of funding such bank can receive from the Bank of Korea at concessionary rates will be proportionately reduced.

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Disclosure of Management Performance

For the purpose of enforcing mandatory disclosure of management performance so that the general public, especially depositors and stockholders, will be in a better position to monitor banks, the Financial Services Commission requires commercial banks to disclose certain matters as follows:

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loans bearing no profit made to a single business group in an amount exceeding 10% of the sum of the bank’s Tier I and Tier II capital (less any capital deductions) as of the end of the previous month (where the loan exposure to such borrower is calculated as the sum of substandard credits, doubtful credits and estimated loss credits) except where the loan exposure to a single business group is not more than ￦4 billion;

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occurrence of any financial event involving embezzlement, malfeasance or misappropriation of funds the amount of which exceeds 1% of the sum of the bank’s Tier I and Tier II capital (less any capital deductions), unless the bank has lost or expects to lose not more than ￦1 billion as a result thereof, or the Governor of the Financial Supervisory Service has made a public announcement regarding such an occurrence; and

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any loss due to court judgments or similar decisions in civil proceedings in an amount exceeding 1% of the sum of the bank’s Tier I and Tier II capital (less any capital deductions) as of the end of the previous month except where the loss is not more than ￦1 billion.

Restrictions on Lending

According to the Banking Act, commercial banks are prohibited from making any of the following categories of loans:

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loans made directly or indirectly on the pledge of a bank’s own shares (subject to certain exceptions with respect to financing for infrastructure projects);

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loans made directly or indirectly to enable a natural or a legal person to buy the bank’s own shares; and

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loans made to any of the bank’s officers or employees other than de minimis loans of up to (1) ￦20 million in the case of a general loan, (2) ￦50 million in the case of a general loan plus a housing loan, or (3) ￦60 million in the aggregate for general loans, housing loans and loans to pay damages arising from wrongful acts of employees in financial transactions.

Restrictions on Investments in Property

A bank may possess real estate property only to the extent necessary for conducting its business; provided that the aggregate value of such real estate property must not exceed 60% of the sum of its Tier I and Tier II capital (less any capital deductions). Any property acquired by a bank (1) through the exercise of its rights as a secured party or (2) the acquisition of which is prohibited by the Banking Act must be disposed of within one year, subject to certain exceptions.

Restrictions on Shareholdings in Other Companies

Under the Banking Act, a bank may not own more than 15% of shares outstanding with voting rights of another company, except where, among other reasons:

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the company issuing such shares is engaged in a business that falls under the category of financial businesses set forth by the Financial Services Commission (including companies which business purpose is to own equity interests in private equity funds); or

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the acquisition of shares by the bank is necessary for corporate restructuring of such company and is approved by the Financial Services Commission.

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In the above cases, a bank’s total investment in a company in which the bank owns more than 15% of shares outstanding with voting rights (“subsidiary”) shall not exceed:

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an amount equivalent to 15% of the sum of such bank’s Tier I and Tier II capital; or

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an amount equivalent to 30% of the sum of such bank’s Tier I and Tier II capital if the bank and its subsidiary, after consideration of their managerial condition, satisfy the requirements prescribed and published by the Financial Services Commission.

The Banking Act provides that a bank using its bank accounts and its trust accounts is not permitted to acquire the shares issued by the Major Shareholder of such bank in excess of an amount equal to 1% of the sum of Tier I and Tier II capital (less any capital deductions).

Restrictions on Bank Ownership

Under the Banking Act, subject to certain exceptions, a single shareholder and persons who stand in a special relationship with such shareholder (as described in the Presidential Decree to the Banking Act) may acquire beneficial ownership of up to 10% of a national bank’s total issued and outstanding shares with voting rights and up to 15% of a regional bank’s total issued and outstanding shares with voting rights. The government, the Korea Deposit Insurance Corporation and financial holding companies qualifying under the Financial Holding Companies Act are not subject to such ceilings. However, non-financial business group companies — namely, (1) any same shareholder group with an aggregate net assets of all non-financial companies belonging to such group of not less than 25% of the aggregate net assets of all corporations that are members of such group; (2) any group with aggregate assets of all non-financial companies belonging to such group of not less than ￦2 trillion; (3) any mutual fund in which a same shareholder group, as described in items (1) and (2) above, owns more than 9% of the total shares issued and outstanding; (4) a private equity fund (under the Financial Investment Services and Capital Markets Act) where (i) the general partner of such private equity fund, (ii) the limited partner whose equity holding ratio in such private equity fund is 18% or more, or (iii) the limited partners, being member companies of a single group of companies that belong to the same conglomerate as defined in the Monopoly Regulations and Fair Trade Act, whose aggregate equity holding ratio in such private equity fund is 36% or more falls under either of item (1) to (3) above; or (5) a special purpose company of a private equity fund where a private equity fund, as described in item (4) above, owns 9% or more of the special purpose company’s issued and outstanding shares or has actual control over the major business affairs of the special purpose company through, for example, appointment and dismissal of the officers – may not acquire beneficial ownership of shares of a national bank in excess of 9% of such bank’s outstanding voting shares, and must obtain the approval of the Financial Services Commission in order to acquire beneficial ownership of shares of a national bank in excess of 4% of such bank’s outstanding voting shares if, through such acquisition, the non-financial business group companies become the largest shareholder of such bank or have actual control over the major business affairs of such bank through the methods set out in the Enforcement Decree of the Banking Act such as appointment and dismissal of the officers; provided that such non-financial business group companies may acquire beneficial ownership of:

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up to 10% of a national bank’s outstanding voting shares with the approval of the Financial Services Commission under the condition that such non-financial group companies will not exercise voting rights in respect of such shares in excess of the 4% limit; and

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in the event that a foreigner, as defined in the Foreign Investment Promotion Act, owns in excess of 4% of a national bank’s outstanding voting shares, up to 10% of such bank’s outstanding voting shares without the approval of the Financial Services Commission, and in excess of 10%, 25% or 33% of such bank’s outstanding voting shares, with the approval of the Financial Services Commission, up to the number of shares owned by such foreigner.

In addition, any person (whether a Korean national or a foreigner), with the exception of non-financial business group companies described above, may also acquire in excess of 10% of a national bank’s total voting shares issued and outstanding, provided that an approval from the Financial Services Commission is obtained in instances where the total holding exceeds 10% (or 15% in the case of regional banks), 25% or 33% of the bank’s total voting shares issued and outstanding.

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Deposit Insurance System

The Depositor Protection Act provides, through a deposit insurance system, insurance for certain deposits of banks in Korea. Under the Depositor Protection Act, all banks governed by the Banking Act, including Shinhan Bank and Jeju Bank, are required to pay to the Korea Deposit Insurance Corporation an insurance premium on a quarterly basis at such rate as determined by the Presidential Decree to the Depositor Protection Act, which shall not exceed 0.5% of the bank’s insurable deposits in any given year. The current insurance premium is 0.02% of insurable deposits for each quarter. If the Korea Deposit Insurance Corporation pays the insured amount, it will acquire the claims of the depositors within the payment amount. Under current rules, the Korea Deposit Insurance Corporation insures only up to a total of ￦50 million per an individual for deposits and interest in a single financial institution, regardless of when the deposits were made and the size of the deposits.

Trust Business

A bank that intends to enter into the trust business must obtain the approval of the Financial Services Commission. Trust activities of banks are governed by the Financial Investment Services and Capital Markets Act. Banks engaged in the banking business and trust business are subject to certain legal and accounting procedures requirements, including the following:

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under the Banking Act, the Financial Investment Services and Capital Markets Act and the Trust Act, assets accepted in trust by a bank in Korea must be segregated from its other assets in the accounts of such bank; accordingly, banks engaged in the banking and trust businesses must maintain two separate accounts, the “banking accounts” and the “trust accounts,” and two separate sets of records which provide details of their banking and trust businesses, respectively; and

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assets comprising the trust accounts are not available to depositors or other general creditors of such bank in the event the trustee is liquidated or is wound up.

In the event that a bank qualifies and operates as an asset management company, a trustee, a custodian or a general office administrator under the Financial Investment Services and Capital Markets Act, it is required to establish relevant operation and management systems to prevent potential conflicts of interest among the banking business, the asset management business, the trustee or custodian business and general office administration. These measures include:

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prohibitions against officers, directors and employees of one particular business operation from serving as an officer, director and employee in another business operation, except where an officer or a director (1) serving in two or more business operations with no significant conflict of interest in accordance with the Presidential Decree on the Financial Investment Services and Capital Markets Act or (2) serving in a trustee business or a custodian business and simultaneously serving in a general office administrator business in accordance with the Financial Investment Services and Capital Markets Act;

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prohibitions against the joint use or sharing of computer equipment or office equipment; and

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prohibitions against the sharing of information by and among officers, directors and employees engaged in the different business operations.

A bank which qualifies and operates as an asset management company may engage in the sale of beneficiary certificates of investment trusts which are managed by such bank. However, such bank is prohibited from engaging in the following activities:

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acting as trustee of an investment trust managed by such bank;

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purchasing with such bank’s own funds beneficiary certificates of an investment trust managed by such bank;

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using in its sales activities of other collective investment securities information relating to the trust property of an investment trust managed by such bank;

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selling through a financial institution established under the Banking Act beneficiary certificates of an investment trust managed by such bank;

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establishing a short-term financial indirect investment vehicle; and

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establishing a mutual fund.

Laws and Regulations Governing Other Business Activities

To enter the foreign exchange business, a bank must register with the Minister of the Ministry of Strategy and Finance. The foreign exchange business is governed by the Foreign Exchange Transaction Law. To enter the securities business, a bank must obtain the approval of the Financial Services Commission. The securities business is governed by regulations under the Financial Investment Services and Capital Markets Act. Pursuant to the above-mentioned laws, banks are permitted to engage in the foreign exchange business and the underwriting business for government and other public bonds.

Recently, regulatory authorities are encouraging financial institutions to lower the ATM usage fees in order to decrease the financial expense burden on consumers. Further, in light of the increasing household debt, regulatory authorities are encouraging financial institutions to gradually increase the proportion of the principal of retail loans that are subject to the fixed interest rates from the currently effective proportion of 10% of the principal amount to 15% and 30% by 2012 and 2016, respectively.

Principal Regulations Applicable to Credit Card Companies

General

Any person, including a bank, wishing to engage in the credit card business must obtain a license from the Financial Services Commission. In addition, in order to enter the credit card business, a bank must obtain a license from the Financial Services Commission (hereinafter, a bank which obtains such license is defined as “licensed bank engaged in the credit card business”). The credit card business is regulated and governed by the Specialized Credit Financial Business Act. Under the Specialized Credit Financial Business Act and regulations thereunder, a company in the same conglomerate group (as defined in the Monopoly Regulation and Fair Trade Act) may engage in the credit card business even though another company in the same conglomerate group is already engaged in such business, which was previously not permitted.

The Specialized Credit Financial Business Act establishes guidelines on capital adequacy and provides for other regulations relating to the supervision of credit card companies. The Specialized Credit Financial Business Act delegates regulatory authority over credit card companies to the Financial Services Commission and its executive body, the Financial Supervisory Service.

A licensed bank engaging in the credit card business is regulated by the Financial Services Commission and the Financial Supervisory Service.

The Financial Services Commission regulates credit card companies and licensed banks engaged in the credit card business by establishing guidelines or regulations on management of such companies. Moreover if the Financial Services Commission deems the financial condition of a credit card company or a licensed bank engaged in the credit card business to be unsound or such companies fail to satisfy the guidelines or regulations, the Financial Services Commission may take certain measures to improve the financial condition of such companies.

Restrictions on Scope of Business

Under the Specialized Credit Financial Business Act, a credit card company may conduct only the following types of business: (i) credit card business as licensed or other specialized credit finance businesses as registered pursuant to the Specialized Credit Financial Business Act; (ii) the businesses ancillary to the credit card business, (for example, providing cash advance loans to existing credit card holders, issuing and settling of debit cards and issuing, selling and settling of pre-paid cards); (iii) provision of unsecured or secured loans; (iv) provision of discount on notes; (v) purchase, management and collection of account receivables originated by companies in the course of providing goods and services; (vi) provision of payment guarantee; (vii) asset management business under the Asset Backed Securitization Act; (viii) credit investigation; and (ix) other incidental businesses related

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to the foregoing. Under the Specialized Credit Financial Business Act, a credit card company’s scope of business includes “businesses that utilize existing manpower, assets or facilities in a credit card company, as designated by the Financial Services Commission.” Under the current regulation established by the Financial Services Commission, a credit card company may engage in various types of business including, but not limited to, e-commerce, operation of insurance agency, delegation of card issuance, supply of payment settlement system, loan brokerage and brokerage of collective investment securities.

A credit card company’s average balance of claim amounts arising from the advance of loans to credit card holders (excluding such claims arising from the re-advance of loans to credit card holders following a change in the maturity or interest rate of such loans as part of a debt restructuring) as of the end of each quarter may not exceed the sum of the following amounts:

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Average balance of claims during a quarter arising from the purchase of goods or services by credit card holders with credit cards; and

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Amount of debit card usage during a quarter by debit card members.

Capital Adequacy

The Specialized Credit Financial Business Act provides for a minimum paid-in capital amount of: (i) ￦20 billion in the case of a specialized credit financial business company which wishes to engage in no more than two kinds of core businesses (i.e. credit card, installment finance, leasing and new technology business) and (ii) ￦40 billion in the case of an specialized credit financial business company, which wishes to engage in three or more kinds of core businesses.

Under the Specialized Credit Financial Business Act and regulations thereof, a credit card company must maintain a “capital adequacy ratio,” defined as the ratio of adjusted equity capital to adjusted total asset, of 8% or more and a “delinquent claim ratio,” defined as the ratio of delinquent claims to total claims as set forth under the regulations relating to the Specialized Credit Financial Business Act, of less than 10%.

Under the Specialized Credit Financial Business Act and regulations thereof, the minimum ratio of allowances for losses on loans, leased assets (except assets subject to an operating lease) and suspense receivables as of the date of accounting settlement (including semiannual preliminary accounts settlement) would be 0.5% of normal assets, 1% of precautionary assets and 20% of substandard assets, 75% of doubtful assets and 100% of estimated loss assets, and the minimum ratio of allowances for losses on card assets would be 1.1% (or 2.5%, in the case of card loan assets and revolving assets) of normal assets, 40% (or 50%, in the case of card loan assets and revolving assets) of precautionary assets, 60% (or 65%, in the case of card loan assets and revolving assets) of substandard assets, 75% of doubtful assets and 100% of estimated loss assets. In addition, a credit card company has to reserve a certain amount calculated according to relevant regulations as loss allowances for unused credit limits.

Liquidity

Under the Specialized Credit Financial Business Act and regulations thereunder, a credit card company must maintain a Won liquidity ratio (Won-denominated current assets/Won-denominated current liabilities) of 100% or more. In addition, once a credit card company is registered as a foreign exchange business institution with the Minister of the Ministry of Strategy and Finance, such credit card company is required to (1) maintain a foreign-currency liquidity ratio within three months (defined as foreign-currency liquid assets due within three months divided by foreign-currency liabilities due within three months) of not less than 80%, (2) maintain a ratio of foreign-currency liquid assets due within seven days (defined as foreign-currency liquid assets due within seven days less foreign-currency liabilities due within seven days, divided by total foreign-currency assets) of not less than 0% and (3) maintain a ratio of foreign-currency liquid assets due within a month (defined as foreign-currency liquid assets due within a month less foreign-currency liabilities due within a month, divided by total foreign-currency assets) of not less than negative 10%. The Financial Services Commission requires a credit card company to submit quarterly reports with respect to the maintenance of these ratios.

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Restrictions on Funding

Under the Specialized Credit Financial Business Act, a credit card company may raise funds using only the following methods: (i) borrowing from financial institutions, (ii) issuing corporate debentures or notes, (iii) selling securities held by the credit card company, (iv) transferring claims held by the credit card company, (v) transferring claims held by the credit card company in connection with its businesses, or (vi) issuing securities backed by the claims held by the credit card company relating to its businesses.

Furthermore, a credit card company may borrow funds from offshore or issue foreign currency denominated securities once it is registered as a foreign exchange business institution with the Minister of the Ministry of Strategy and Finance.

A credit card company must ensure that its total asset does not exceed six times the amount of its equity capital. However, if the credit card company cannot comply with such limit due to the occurrence of unavoidable events such as drastic changes in the domestic and global financial markets, such limit of its total assets compared to the equity capital may be adjusted by a resolution of the Financial Services Commission. A non-credit card company must ensure that its total asset does not exceed ten times the amount of its equity capital.

Restrictions on Loans to Affiliate Companies

Under the Specialized Credit Financial Business Act and regulations thereof, a credit card company may not provide loans exceeding 100% of its equity capital, in the aggregate, to its specially related persons (as defined under the relevant laws) including, but not limited to, its affiliates.

Restrictions on Assistance to Other Companies

Under the Specialized Credit Financial Business Act, a credit card company may not engage in any of the following acts in conjunction with other financial institutions or companies: (i) holding voting shares under cross shareholding or providing credit for the purpose of avoiding the restrictions on loans to affiliate companies; (ii) acquiring shares under cross shareholding for the purpose of avoiding the limitation on purchase of its treasury shares under the Korean Commercial Code or the Financial Investment Services and Capital Markets Act; or (iii) other acts which are likely to have a material adverse effect on the interests of transaction parties as stipulated by the Presidential Decree to the Specialized Credit Financial Business Act, which are not yet provided.

A credit card company also may not extend credit for enabling another person to purchase the shares of such credit card company or to arrange financing for the purpose of avoiding the restrictions on loans to affiliate companies.

Restrictions on Investment in Real Estate

Under the Specialized Credit Financial Business Act and the regulations thereof, a credit card company may possess real estate only to the extent that such business conduct is designated by such laws and regulations, with certain exceptions such as for the purposes of factoring or leasing or as a result of enforcing its security rights, provided that the Financial Services Commission may limit the maximum amount a credit card company may invest in real estate investments for business purposes up to a percentage equal to or in excess of 100% of its equity capital.

Restrictions on Shareholding in Other Companies

Under the Specialized Credit Financial Business Act and the Act on the Structural Improvement of the Financial Industry, a credit card company and its affiliate financial institutions (together a “group”) are required to obtain prior approval of the Financial Services Commission if such credit card company, together with its affiliate financial institutions, (i) owns 20% or more of outstanding voting shares of a target company or (ii) owns 5% or more of outstanding voting shares of a target company, and shall be deemed to have control of the target company, including being the largest shareholder of such target company or otherwise.

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Disclosure and Reports

Pursuant to the Specialized Credit Financial Business Act and the regulations thereof, the ordinary disclosure requirement for a credit card company is to disclose any material matters relating to management performance, profits and losses, corporate governance, competence of the employees or risk management within three months from the end of each fiscal year and within two months from the end of the first half of the fiscal year. In addition, a credit card company is required to disclose on an on-going basis certain matters such as the occurrence of non-performing loans, a financial incident or losses exceeding certain amounts. In addition, under the regulations issued by the Financial Services Commission, a credit card company or a licensed bank engaging in the credit card business must submit such report as required by the Governor of the Financial Supervisory Service, with certain important matters being reported as frequently as each month. In addition, all companies engaged in the specialized credit financial business under the Specialized Credit Financial Business Act, including, without limitation, credit card companies, must file a report to the Financial Supervisory Service regarding the result of settlement of accounts within one month after the end of its fiscal year. Also, these companies are required to conduct a provisional settlement of accounts for each quarter and file a report to the Financial Supervisory Service within one month after the end of such quarter.

Risk of Loss Due to Lost, Stolen, Forged or Altered Credit Cards

Under the Specialized Credit Financial Business Act, upon notice from the holder of a credit card or a debit card of its loss or theft, a credit card company or a licensed bank engaged in the credit card business, as the case may be, is liable for any loss arising from the unauthorized use of credit cards or debit cards thereafter as well as any loss from unauthorized transactions made within 60 days prior to such notice. However, a credit card company or a licensed bank engaged in the credit card business, as the case may be, may transfer to the cardholder all or part of the risks of loss associated with unauthorized transactions made within 60 days prior to such notice, in accordance with the standard terms and conditions agreed between the credit card company or the licensed bank engaged in the credit card business, as the case may be, and the cardholder, provided that the loss or theft must be due to the cardholder’s willful misconduct or negligence. Disclosure of a cardholder’s password under duress or threat to the cardholder’s or his/her family’s life or health will not be deemed as the cardholder’s willful misconduct or negligence.

Moreover, a credit card company or a licensed bank engaged in the credit card business, as the case may be, is also responsible for any losses resulting from the use of forged or altered credit cards, debit cards and pre-paid cards. However, a credit card company or a licensed bank engaged in the credit card business, as the case may be, may transfer all or part of this risk of loss to holders of credit cards in the event of willful misconduct or gross negligence by holders of such cards if the terms and conditions of the written agreement entered between the credit card company or a licensed bank engaged in the credit card business, as the case may be, and holders of such cards specifically provide for such transfer. For these purposes, disclosure of a customer’s password that is made intentionally or through gross negligence, or the transfer of or giving as collateral of the credit card or debit card, is considered willful misconduct or gross negligence.

In addition, the Specialized Credit Financial Business Act prohibits a credit card company from transferring to merchants the risk of loss arising from lost, stolen, forged or altered credit cards, debit cards or pre-paid cards; provided, however, that a credit card company may enter into an agreement with a merchant under which the merchant agrees to be responsible for such loss if caused by the merchant’s gross negligence or willful misconduct.

Each credit card company or a licensed bank engaged in the credit card business must institute appropriate measures such as establishing reserves, purchasing insurance or joining a cooperative association in order to fulfill its obligations related to the risk of loss arising from unauthorized use due to lost, stolen, forged or altered credit cards, debit cards or pre-paid cards.

Under the Specialized Credit Financial Business Act, the Financial Services Commission may take necessary measures to maintain credit order and protect consumers by establishing standards to be complied with by credit card companies relating to:

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maximum limits for cash advances on credit cards;

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restrictions on debit cards with respect to per day or per transaction usage;

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aggregate issuance limits and maximum limits on the amount per card on pre-paid cards;

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calculation and determination of credit limits;

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determination of the amount limit of credit cards;

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provisions included in credit card agreements;

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management of credit card merchants;

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collection on claims; or

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classification of credit card holders for purposes of determining the fees applicable to such holders.

Lending Ratio in Ancillary Business

Pursuant to the Presidential Decree of the Specialized Credit Financial Business Act, as amended in September 2013, a credit card company must maintain a quarterly average balance of receivables arising from cash advances to credit card holders (excluding cash advances incurred by re-lending to a credit card holder after modifying the terms and conditions, such as maturity or interest rate, of the original cash advance for debt rescheduling purposes) no greater than its aggregate quarterly average balance of receivables arising from credit card holders’ purchase of goods and services (excluding the amount of receivables arising from the purchase of goods and services using an exclusive use card for business purposes) plus its aggregate quarterly amount of payments made by members using their debit cards.

Issuance of New Cards and Solicitation of New Card Holders

The Presidential Decree of the Specialized Credit Financial Business Act establishes the conditions under which a credit card company or a licensed bank engaged in the credit card business may issue new cards and solicit new members. Specifically, new credit cards may be issued only to the following persons that meet all of the following criteria: (i) age of 19 years or more as defined in the Korean Civil Code, or age of 18 years or more with evidence of employment as of the date of the credit card application; (ii) satisfaction of a minimum credit score as publicly announced by the Financial Services Commission, provided that the minimum personal credit score requirement will not apply in the case where (a) the credit card company can confirm through objective evidence that an applicant is sufficiently capable of paying for his or her credit card use or such applicant can provide objective evidence therefor, or (b) a credit card function is added to an existing debit card for added convenience to the card holder and the credit card function is subject to limits determined by the Financial Services Commission and (iii) satisfaction of the application scoring system for the relevant credit; and (iv) verification of personal identity.

In addition, a credit card company or a licensed bank engaged in the credit card business, as the case may be, may not engage in the following methods of soliciting credit card holders: (i) providing economic benefits or conditioning such benefits in excess of 10% of the annual credit card fee (in the case of no-annual fee credit cards, the average annual fees will be ￦10,000) in connection with issuance of credit cards; (ii) solicitation on streets and private roads as prescribed under the Road Act and Private Road Act, public place and corridors used by the general public; (iii) solicitation through visits, except those visits made upon prior consent and visits to a business area; (iv) solicitation through pyramid sales methods; and (v) solicitation through the Internet, as further discussed below.

In addition, a credit card company or a licensed bank engaged in the credit card business is required to check whether the credit card applicant has any delinquent debt owed to any other credit card company or other financial institutions which the applicant is unable to repay, and also require, in principle, with respect to solicitations made through the Internet, the certified electronic signature of the applicant. Moreover, persons who intend to engage in solicitation of credit card applicants must register with the Financial Services Commission, unless the solicitation is made by officers or employees of a credit card company or a company in business alliance with such credit card company.

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Compliance Rules on Collection of Receivable Claims

Pursuant to the Specialized Credit Financial Business Act and its regulations, a credit card company or a licensed bank engaged in the credit card business are prohibited from collecting its claims by way of:

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exerting violence or threat of violence;

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informing a Related Party (a guarantor of the debtor, blood relative or fiancée of the debtor, a person living in the same household as the debtor or a person working in the same workplace as the debtor) of the debtor’s liability without just cause;

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providing false information relating to the debtor’s obligation to the debtor or his or her Related Party;

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threatening to sue or suing the debtor for fraud despite lack of affirmative evidence to establish that the debtor has submitted forged or false documentation with respect to his/her capacity to make payment;

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visiting or telephoning the debtor during late hours between 9:00 p.m. and 8:00 a.m.; and

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utilizing other uncustomary methods to collect the receivables thereby invading the privacy or the peacefulness in the workplace of the debtor or his or her Related Party.

Principal Regulations Applicable to Financial Investment Companies

General

The securities business is regulated and governed by the Financial Investment Services and Capital Markets Act. Financial investment companies are under the regulation and supervision of the Financial Services Commission, the Financial Supervisory Service and the Securities and Futures Commission.

Under the Financial Investment Services and Capital Markets Act, a financial investment company may engage in dealing, brokerage, collective investment, investment advice, discretionary investment management or trust businesses if it has obtained relevant licenses from the Financial Services Commission.

A financial investment company may also engage in certain businesses ancillary to the primary business or certain other additional businesses by submitting a report to the Financial Services Commission at least seven days prior to the commencement of the business without obtaining any separate license. Approval to merge with any other entity or to transfer all or substantially all of a business must also be obtained from the Financial Services Commission.

Under the Act on the Structural Improvement of the Financial Industry, if the Korean government deems a financial investment company’s financial condition to be unsound or if a financial investment company fails to meet the applicable Net Operating Equity Ratio (as defined below), the government may order certain sanctions, including among others, sanctions against a financial investment company or its officers or employees, capital increase or reduction and a suspension or assignment of a part or all of business operation.

Regulations on Financial Soundness — Capital Adequacy

The Financial Investment Services and Capital Markets Act sets forth various types of brokerage and/or dealing business licenses based on (i) the scope of products and services that may be provided by each type of the brokerage and/or dealing licensee and (ii) the type of customers to which such products and services may be provided. For example, a financial investment company engaged in the brokerage, dealing and underwriting businesses with retail investors as well as professional investors in connection with all types of securities is required to have a minimum paid-in capital of ￦53 billion in order to obtain a license for such brokerage, dealing and underwriting businesses.

The financial soundness of a financial investment company is to be assessed, pursuant to the Financial Investment Services and Capital Markets Act and the regulations of the Financial Services Commission, in accordance with the Net Operating Equity Ratio of the company, which is to be calculated as follows and to be expressed as a percentage.

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Net Operating Equity Ratio = Net Operating Equity/Total Risk × 100

The terms “Net Operating Equity” and “Total Risk” for the purpose of the above-stated formula are defined and elaborated in the regulations of the Financial Services Commission. Generally, the Net Operating Equity and the Total Risk are to be calculated according to the following formula:

Net Operating Equity = Net assets (total assets—total liabilities)—the total of items that may be deducted + the total of items that may be added

Total Risk = market risk + counterparty risk + management risk

The regulations of the Financial Services Commission requires, among other things, financial investment companies to maintain the net operating equity ratio at a level equal to or higher than 150% at the end of the each quarter of the fiscal year.

In addition, all Korean companies, including financial investment companies, are required to set aside, as a legal reserve, 10% of the cash portion of the annual dividend or interim dividend in each fiscal year until the reserve reaches 50% of the stated capital.

Under the Financial Investment Services and Capital Markets Act and regulations thereunder, the minimum ratio of allowances for losses on loans and suspense receivables specified under such regulations is 0.5% of normal assets, 2% of precautionary assets, 20% of substandard assets, 75% of doubtful assets and 100% of estimated loss assets.

Other Provisions on Financial Soundness

The Financial Investment Services and Capital Markets Act, the Presidential Decree of the Financial Investment Services and Capital Markets Act and the regulations of the Financial Services Commission also include certain provisions which are designed to regulate certain types of activities relating to the management of the assets of a securities company, subject to certain exceptions. Such provisions include:

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restrictions on the holdings by a securities company of securities issued by another company which is the largest shareholder or the major shareholder (each as defined under the Financial Investment Services and Capital Markets Act) of such securities company; and

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restrictions on providing money or credit to the largest shareholder (including specially-related persons of such shareholder), major shareholders, officers and specially-related persons of the securities company.

Principal Regulations Applicable to Insurance Companies

General

Insurance companies are regulated and governed by the Insurance Business Act, as amended (the “Insurance Business Act”). In addition, insurance companies in Korea are under the regulation and supervision of the Financial Services Commission and its governing entity, the Financial Supervisory Service.

Under the Insurance Business Act, approval to commence an insurance business must be obtained from the Financial Services Commission based on the type of insurance businesses, which are classified as life insurance business, non-life insurance business and third type insurance business. Life insurance business means an insurance business which deals with life insurance policies or pension insurance policies (including retirement insurance policies). Non-life insurance business means an insurance business which deals with fire insurance policies, marine insurance policies, car insurance policies, guaranty insurance policies, reinsurance policies, liability insurance policies or other insurance policies prescribed under the Presidential Decree of the Insurance Business Act. Third type insurance business means an insurance business which deals with injury insurance policies, health insurance policies or nursing care insurance policies. Under the Insurance Business Act, insurance companies are not allowed to engage in both a life insurance business and a non-life insurance business, subject to certain exceptions.

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If the Korean government deems an insurance company’s financial condition to be unsound or if an insurance company fails to properly manage the business as set forth under relevant Korean law, the government may order certain sanctions including, among others, sanctions against an insurance company or its officers or employees, capital increase or reduction and a suspension or assignment of a part or all of business operation.

Capital Adequacy

The Insurance Business Act requires a minimum paid-in capital of ￦30 billion for an insurance company; provided, that, the insurance company which intends to engage in only certain types of insurance policies may have a lower paid-in capital pursuant to the Presidential Decree of the Insurance Business Act.

In addition to the minimum capital requirement, an insurance company is required to maintain a Solvency Margin Ratio of 100% or more. “Solvency Margin Ratio” is the ratio of the Solvency Margin to the Standard Amount of the Solvency Margin. Solvency Margin is the aggregate amount of paid-in capital, reserve for dividends to policyholders, allowance for bad debt and subordinated debt amount and others similar thereto as set out in the regulation of the Financial Services Commission, less non-amortized acquisition costs, goodwill and others similar thereto as appearing in the regulation of the Financial Services Commission. The Standard Amount of Solvency Margin for life insurance companies is defined under the regulation of the Financial Services Commission and is required to comply with the risk based capital regime.

Under the Insurance Business Act, the Presidential Decree and other regulations thereunder, for each accounting period, insurance companies are required to appropriate policy reserve that is earmarked for future payments of insurance money, refund and dividends to policyholders (hereinafter collectively referred to as “Insurance Money”) for each insurance contract. However, if an insurance company has reinsured a portion of its insurance contracts with a creditworthy reinsurance company in order to lower its overall risk, in principle, the insurance company is not required to appropriate policy reserve for the reinsured contracts. Instead, the reinsurance company is required to appropriate such policy reserve for the reinsured contracts. However, if an insurance company transfers more than 50% of its risk to a reinsurance company, the amount of risk transferred in excess of 50% will be disallowed for purposes of calculating the solvency margin ratio. In particular, if the ratio of the risks transferred to the reinsurance company to the total risks insured by an insurance company exceeds 50%, such insurance company will be required to have net assets in relation to such risks transferred in excess of the 50% threshold for purposes of the solvency margin requirement. The Insurance Business Act was amended on January 24, 2011 to classify the insurance products into two categories: (i) reportable insurance products and (ii) voluntary insurance products. Under this amendment, only the changes to the terms and conditions of the reportable insurance products require a prior report and approval from the Financial Supervisory Service and the voluntary insurance products can be sold without prior approval from the Financial Supervisory Service. The policy reserve needs to be appropriated in accordance with the policy reserve calculation method for each insurance product as stipulated in amended Insurance Business Act.

The policy reserve amount consists of the following: (i) premium reserves and prepaid insurance premiums which are calculated under the methods determined by the written calculation methods for insurance premiums and policy reserves by insurance types or by lapses of insurance period, with regard to the contracts for which the causes for payment of the Insurance Money have yet to occur as of the end of each accounting period; (ii) amounts for which a lawsuit is pending on the Insurance Money or amounts for which a payment has been fixed with regard to the contracts for which the causes for payment of Insurance Money have occurred as of the end of each accounting period, and amounts which have not been paid yet due to an unsettled amount for paying the Insurance Money, even if the causes for payment of the Insurance Money have already occurred; and (iii) amounts reserved by an insurance company for allocation to policyholders.

Pursuant to the regulations established by the Financial Services Commission, insurance companies are required to maintain allowances for outstanding loans, accounts receivables and other credits (including accrued income, payment on account, and bills receivables or dishonored) in an aggregate amount covering not less than 0.5% of normal credits, 2% of precautionary credits, 20% of substandard credits, 50% of doubtful credits and 100% of estimated loss credits, provided that the minimum ratio of allowances for certain type of outstanding loans by insurance companies to individuals and households (including, retail loans, housing loans, and other

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forms of retail loans extended to individuals not registered for business), is increased to 1% of normal credits, 10% of precautionary credits and 55% of doubtful credits. Furthermore, the regulations on insurance companies became more stringent in September 2010 by adding a requirement that insurance companies maintain allowance for bad debts in connection with real estate project financing loans in excess of 0.9% of normal credits and 7% of precautionary credits.

Variable Insurance and Bancassurance Agents

Variable insurance is regulated pursuant to the Insurance Business Act and the Financial Investment Services and Capital Markets Act. In order for an insurance company to sell variable insurance to a policyholder and operate such variable insurance, the insurance company must obtain a license with respect to collective investment business from the Financial Services Commission and register as a selling company with the Financial Services Commission. In this case, according to the Financial Investment Services and Capital Markets Act, an insurance company will be regulated as an investment trust and assets acquired in connection with variable insurance must be held by a trust company that is registered with the Financial Services Commission pursuant to the Financial Investment Services and Capital Markets Act.

According to the Financial Investment Services and Capital Markets Act, insurance companies may operate variable insurance through (i) mandating all of the management and the management instruction business to another asset management company, (ii) operating by way of discretionary investment all of the assets constituting the investment advisory assets out of the investment trust assets, or (iii) operating all of the investment trust assets into other collective investment securities, thereby allowing all of the particular variable insurance assets to be outsourced.

The Insurance Business Act permits banks, securities companies, credit card companies and other financial institutions to register as insurance agents or insurance brokers and engage in the insurance business (the “Bancassurance Agents”), who are currently permitted to sell all types of life and non-life insurance products, except for protection type insurance products, such as whole life insurance, critical illness insurance and automobile insurance.

Restrictions on Investment of Assets

According to the Insurance Business Act, insurance companies are prohibited from making any of the following investment of assets:

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owning any real estate (excluding any real estate owned as a result of enforcing their own security interest) other than real estate for conducting its business as designated by the Presidential Decree. In any case, the total amount of real estate owned by an insurance company must not exceed 15% of its Total Assets, provided that investment in real estate for a separate account is limited to 15% of the assets of such separate account;

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loans made for the purpose of speculation in commodities or securities;

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loans made directly or indirectly to enable a natural or legal person to buy their own shares;

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loans made directly or indirectly to finance political campaigns and other similar activities; and

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loans made to any of the insurance company’s officers or employees other than loans based on insurance policy or de minimis loans of up to (1) ￦20 million in the case of a general loan, (2) ￦50 million in the case of a general loan plus a housing loan, or (3) ￦60 million in the aggregate for general loans, housing loans and loans to pay damages arising from wrongful acts of employees in financial transactions.

In addition, insurance companies are not allowed to exceed the following limits in making the following investments:

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with respect to holding foreign currency under the Foreign Exchange Transaction Act or owning offshore real estate, 30% of its Total Assets; and

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with respect to the sum of margins for a futures exchange designated by the Presidential Decree or a foreign futures exchange, and commitment amounts of over-the-counter derivatives must not exceed 6%

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of its Total Assets, provided that the over-the-counter derivative trades are limited to 3%. The derivatives trades of a separate account are limited to 6% of the assets of separate account, provided that the over-the-counter derivatives trades are limited to 3%.

U.S. Regulations

As substantially all of our, and our subsidiaries’, operations are in Korea, we are primarily subject to the regulations and supervision of the Financial Services Commission and the Financial Supervisory Service. Our subsidiaries, however, have limited operations in the United States, and we own a bank in the United States. Therefore, we and our U.S. operations are subject to U.S. supervision, regulation and enforcement by relevant authorities in the United States with regard to our U.S. operations.

U.S. Banking Regulations

Our operations in the United States are subject to a variety of regulatory regimes. Shinhan Bank maintains an uninsured branch in New York, which is licensed by the New York State Department of Financial Services (“Department”) and registered with the banking authority of Korea. Shinhan Bank’s New York branch is subject to regulation and examination by the Department under its licensing authority. In addition, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) exercises examination and regulatory authority over Shinhan Bank’s U.S. branch. We also own a non-member state chartered bank, Shinhan Bank America, which is regulated by the Department, as its chartering authority, and by the Federal Deposit Insurance Corporation (“FDIC”), as its primary federal banking regulator and as the insurer of its deposits. Our U.S. branch and U.S. bank subsidiary are subject to restrictions on their respective activities, as well as prudential restrictions, such as limits on extensions of credit to a single borrower, and restrictions on transactions with affiliates, among other things. We are also a financial holding company and a bank holding company under U.S. banking laws and our U.S. operations are subject to regulation, supervision and enforcement by the Federal Reserve.

Shinhan Bank’s U.S. Branch

The Department, as the licensing authority of Shinhan Bank’s U.S. branch, has the authority, in certain circumstances, to take possession of the business and property of Shinhan Bank located in New York. Such circumstances generally include violations of law, unsafe business practices and insolvency. If the Department exercised this authority over the New York branch of Shinhan Bank, all assets of Shinhan Bank located in New York would generally be applied first to satisfy creditors of the New York branch. Any remaining assets would be applied to satisfy creditors of other U.S. offices of Shinhan Bank, after which any residual assets of the New York branch would be returned to the principal office of Shinhan Bank, and made available for application pursuant to any Korean insolvency proceeding.

Financial Holding Company

Because we operate a U.S. branch and have a subsidiary bank in the U.S., our nonbanking activities in the United States are subject to regulation by the Federal Reserve pursuant to the International Banking Act of 1978, the Bank Holding Company Act of 1956 (the “BHC Act”), and other laws. We have elected to be a “financial holding company” under the BHC Act. Financial holding companies may engage in a broader spectrum of activities than bank holding companies or foreign banking organizations that are not financial holding companies, including underwriting and dealing in securities. To maintain our financial holding company status, (i) we and our U.S. subsidiary bank located in New York are required to be “well capitalized” and “well managed”, (ii) our U.S. branch and our U.S. subsidiary bank located in New York are required to meet certain examination ratings, and (iii) our subsidiary bank in New York is required to maintain a rating of at least “satisfactory” under the Community Reinvestment Act of 1977 (the “CRA”).

A major focus of U.S. governmental policy relating to financial institutions in recent years has been aimed at fighting money laundering and terrorist financing. Regulations applicable to us and our subsidiaries impose obligations to maintain effective policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identities of clients. Failure of a financial institution to maintain and

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implement adequate programs to combat money laundering and terrorist financing could have serious consequences for the firm, both in legal terms and in terms of our reputation.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which was enacted on July 21, 2010 in response to the financial crisis, impacts the financial services industry by addressing, among other issues, systemic risk oversight, bank capital standards, the liquidation of failing systemically important institutions, OTC derivatives, the ability of banking entities, including non-U.S. banks with branches in the U.S., like us, to engage in proprietary trading activities and invest in hedge funds and private equity (the so-called Volcker rule), consumer and investor protection, hedge fund registration, securitization, investment advisors, shareholder “say on pay,” the role of credit-rating agencies, and more. The Dodd-Frank Act requires various federal banking and financial regulatory authorities to adopt a broad range of implementing rules and regulations. Such authorities have significant discretion in drafting the implementing rules and regulations and, consequently, the full impact of the Dodd-Frank Act may not be known for years.

The Dodd-Frank Act provides regulators with tools to impose greater capital, leverage and liquidity requirements and other prudential standards, particularly for financial institutions that pose significant systemic risk and bank holding companies with greater than $50 billion in assets. In imposing such heightened prudential standards on non-U.S. banks such as us, the Federal Reserve Board is directed to take into account the principle of national treatment and equality of competitive opportunity, and the extent to which the foreign bank holding company is subject to comparable home country standards. In February 2014, the Federal Reserve Board issued final rules applying enhanced prudential standards to foreign banking organizations, or FBOs, like us with $50 billion or more in total global consolidated assets. The final rules represent significant changes to the way that the U.S. operations of FBOs are supervised by the Federal Reserve within the United States. In particular, the final rules:

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require an FBO with both $50 billion or more in total global consolidated assets and combined U.S. assets (excluding the total assets of each U.S. branch and agency) of $50 billion or more to establish a U.S. top-tier intermediate holding company (“IHC”) over all U.S. bank and nonbank subsidiaries subject to the proposal;

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subject an FBO’s IHC to the same capital adequacy standards, including minimum risk based capital and leverage requirements, as those applicable to U.S. bank holding companies;

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require an FBO with combined U.S. assets of $50 billion or more to have its U.S. operations satisfy certain liquidity risk management standards, conduct liquidity stress tests, and maintain a buffer of highly liquid assets over specified time horizons, and an FBO with combined U.S. assets of less than $50 billion would be required to conduct an internal liquidity stress test and report the results to the Federal Reserve Board on an annual basis; and

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subject the largest FBOs with the most significant U.S. operations (i.e., those FBOs with $50 billion or more in total global consolidated assets and $50 billion or more in combined U.S. assets, excluding the assets of their U.S. branch and agency networks) to heightened compliance obligations with respect to capital plans, capital and leverage standards, capital stress testing, liquidity stress testing and risk management.

The final rules also include requirements relating to overall risk management and debt-to-equity limits for the U.S. operations of FBOs. Implementation of the final rules begins June 1, 2014 with the most significant requirements to be implemented beginning July 1, 2016. Rules imposing single counterparty credit limits and early remediation requirements on FBOs have yet to be finalized. We are currently assessing the full impact of these enhanced prudential requirements on our business.

Shinhan Bank America

Shinhan Bank America, a state chartered bank that is located in New York and is not a member of the Federal Reserve, is subject to extensive regulation and examination by the Department, as its chartering authority, and by the FDIC, as the insurer of its deposits and as its primary federal banking regulator. The federal and state laws and regulations which are applicable to banks regulate, among other things, the activities in which

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they may engage and the locations at which they may engage in them, their investments, their reserves against deposits, the timing of the availability of deposited funds and transactions with affiliates, among other things. Shinhan Bank America must file reports with the Department and the FDIC concerning its activities and financial condition, in addition to obtaining regulatory approvals prior to entering into certain transactions, such as establishing branches and mergers with, or acquisitions of, other depository institutions. The Department and the FDIC periodically examine the bank to test Shinhan Bank America’s safety and soundness and its compliance with various regulatory requirements. This comprehensive regulatory and supervisory framework restricts the activities in which a bank can engage and is intended primarily for the protection of the FDIC insurance fund and the bank’s depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves. Any change in such regulations, whether by the Department, the FDIC or as a result of the enactment of legislation, could have a material adverse impact on Shinhan Bank America and its operations.

Capital Requirements. The FDIC imposes capital adequacy standards on state-chartered banks like Shinhan Bank America. In order to be considered “adequately capitalized”, the FDIC’s current capital regulations require a minimum 3.0% Tier I leverage capital requirement for the most highly-rated state-chartered, non-member banks, with an additional cushion of at least 100 basis points required for all other state-chartered, non-member banks, which effectively will increase the minimum Tier I leverage ratio for such other banks to 4.0%. Under the FDIC’s regulation, the highest-rated banks are those that the FDIC determines are not anticipating or experiencing significant growth and have well diversified risk, including no undue interest rate risk exposure, excellent asset quality, high liquidity, good earnings and, in general, which are considered a strong banking organization and are rated composite 1 under the Uniform Financial Institutions Rating System. Tier I or core capital is defined as the sum of common stockholders’ equity (including retained earnings), non-cumulative perpetual preferred stock and related surplus, and minority interests in consolidated subsidiaries, minus all intangible assets other than certain qualifying supervisory goodwill and certain mortgage servicing rights.

The FDIC also requires that banks meet a risk-based capital standard. The current risk-based capital standard for banks requires, in order to be “adequately capitalized”, the maintenance of a ratio of total capital (which is defined as Tier I capital and supplementary capital) to risk-weighted assets of 8.0% and Tier I capital to risk-weighted assets of 4%. In determining the amount of risk-weighted assets, all assets, plus certain off-balance sheet assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in the type of asset or item. The components of Tier I capital are the same as for the leverage capital standard. The components of supplementary capital include certain perpetual preferred stock, certain mandatory convertible securities, certain subordinated debt and intermediate preferred stock and general allowances for loan and lease losses. Allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of capital counted toward supplementary capital cannot exceed 100% of core capital.

In order for our U.S. bank subsidiary to be classified as “well-capitalized”, which is necessary in order for us to maintain our financial holding company status, it must have a Tier I leverage ratio of at least 5%, a Tier I risk-based capital ratio of at least 6% and a total risk-based capital ratio of at least 10%. Furthermore, banks are generally encouraged to maintain even higher levels of capital during the current period of economic difficulty.

As of December 31, 2013, Shinhan Bank America exceeded all of the capital ratio standards for a well-capitalized bank with a Tier I leverage ratio of 12.58%, a Tier I risk-based capital ratio of 19.25% and a total risk-based capital ratio of 20.52%.

The current FDIC capital adequacy guidelines will be modified in accordance with “Basel III”. In July 2013, the Federal Reserve, the FDIC and the Office of the Comptroller of the Currency issued final rules (the “Final Rules”) that substantially revise the federal banking agencies’ current capital rules and implement Basel III. The Final Rules, among other things, narrow the definition of capital, and increase capital requirements for specific exposures. They also include higher capital ratio requirements. In addition, consistent with the Dodd-Frank Act, they remove references to, or requirements of reliance on, credit ratings in the capital rules and replace them with alternative standards of creditworthiness. Although Shinhan Bank America will not be subject to the Final Rules until January 1, 2015, its current capital ratios would satisfy the requirements set forth in the Final Rules.

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Activities and Investments of New York-Chartered Banks. Shinhan Bank America derives its lending, investment and other authority primarily from the applicable provisions of New York State Banking Law and the regulations of the Department, as well as FDIC regulations and other federal laws and regulations. See “— Activities and Investments of FDIC-Insured State-Chartered Banks” below. These New York laws and regulations authorize Shinhan Bank America to invest in real estate mortgages, consumer and commercial loans, certain types of debt securities, including certain corporate debt securities and obligations of federal, State and local governments and agencies, and certain other assets. A bank’s aggregate lending powers are not subject to percentage of asset limitations, but, as discussed below, there are limits on the amount of credit exposure that a bank may have to a single borrower or group of related borrowers. A New York-chartered bank may also exercise trust powers upon approval of the Department. Shinhan Bank America does not have trust powers.

With certain limited exceptions, Shinhan Bank America may not make loans or extend credit for commercial, corporate or business purposes (including lease financing) to a single borrower, the aggregate amount of which would be in excess of 15% of Shinhan Bank America’s net worth, on an unsecured basis, and 25% of the net worth if the excess is collateralized by readily marketable collateral or collateral otherwise having a value equal to the amount by which the loan exceeds 15% of Shinhan Bank America’s net worth. In calculating the amount of outstanding loans or credit to a particular borrower for this purpose, Shinhan Bank America must include its credit exposure arising from derivative transactions with that borrower.

Activities and Investments of FDIC-Insured State-Chartered Banks. The activities and equity investments of FDIC-insured, state-chartered banks are generally limited to those that are permissible for national banks. Under regulations dealing with equity investments, an insured state bank generally may not directly or indirectly acquire or retain any equity investment of a type, or in an amount, that is not permissible for a national bank. An insured state bank may, among other things, (i) acquire or retain a majority interest in a subsidiary that is engaged in activities that are permissible for the bank itself to engage in, (ii) invest as a limited partner in a partnership the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2% of the bank’s total assets, and (iii) acquire up to 10% of the voting stock of a company that solely provides or reinsures directors’, trustees’ and officers’ liability insurance coverage or bankers’ blanket bond group insurance coverage for insured depository institutions. In addition, an FDIC-insured state-chartered bank may not directly, or indirectly through a subsidiary, engage as “principal” in any activity that is not permissible for a national bank unless the FDIC has determined that such activities would pose no risk to the insurance fund of which it is a member and the bank is in compliance with applicable regulatory capital requirements.

Regulatory Enforcement Authority. Applicable banking laws include substantial enforcement powers available to federal banking regulators. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions against banking organizations and institution-affiliated parties, as defined. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities.

Under the New York State Banking Law, the Department may issue an order to a New York-chartered banking institution to appear and explain an apparent violation of law, to discontinue unauthorized or unsafe practices and to keep prescribed books and accounts. Upon a finding by the Department that any director, trustee or officer of any banking organization has violated any law, or has continued unauthorized or unsafe practices in conducting the business of the banking organization after having been notified by the Department to discontinue such practices, such director, trustee or officer may be removed from office by the Department after notice and an opportunity to be heard. The Department also may take possession of a banking organization under specified statutory criteria.

Prompt Corrective Action. Section 38 of the Federal Deposit Insurance Act (“FDIA”) provides the federal banking regulators with broad power to take “prompt corrective action” to resolve the problems of undercapitalized institutions. The extent of the regulators’ powers depends on whether the institution in question is “well capitalized”, “adequately capitalized”, “undercapitalized”, “significantly undercapitalized” or “critically

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undercapitalized”. A bank is deemed to be (i) “well capitalized” if it has total risk-based capital ratio of 10.0% or more, has a Tier I risk-based capital ratio of 6.0% or more, has a Tier I leverage capital ratio of 5.0% or more and is not subject to specified requirements to meet and maintain a specific capital level for any capital measure, (ii) “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or more, a Tier I risk-based capital ratio of 4.0% or more and a Tier I leverage capital ratio of 4.0% or more (3.0% under certain circumstances) and does not meet the definition of “well capitalized”, (iii) “undercapitalized” if it has a total risk-based capital ratio that is less than 8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a Tier I leverage capital ratio that is less than 4.0% (3.0% under certain circumstances), (iv) “significantly undercapitalized” if it has a total risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a Tier I leverage capital ratio that is less than 3.0%, and (v) “critically undercapitalized” if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. The regulations also provide that a federal banking regulator may, after notice and an opportunity for a hearing, reclassify a “well capitalized” institution as “adequately capitalized” and may require an “adequately capitalized” institution or an “undercapitalized” institution to comply with supervisory actions as if it were in the next lower category if the institution is in an unsafe or unsound condition or engaging in an unsafe or unsound practice. The federal banking regulator may not, however, reclassify a “significantly undercapitalized” institution as “critically undercapitalized.”

An institution generally must file a written capital restoration plan which meets specified requirements, as well as a performance guaranty by each company that controls the institution, with an appropriate federal banking regulator within 45 days of the date that the institution receives notice or is deemed to have notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Immediately upon becoming undercapitalized, an institution becomes subject to statutory provisions, which, among other things, set forth various mandatory and discretionary restrictions on the operations of such an institution.

FDIC Insurance. Shinhan Bank America is a member of the FDIC. As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the FDIC.

In the past four years, there have been many failures and near-failures among financial institutions, although such failures have been declining in the United States in recent years. The FDIC insurance fund reserve ratio, representing the ratio of the fund to the level of insured deposits, declined due to losses caused by bank failures and the FDIC then increased its deposit insurance premiums on remaining institutions in order to replenish the insurance fund. The FDIC insurance fund balance increased throughout 2010 and turned positive in 2011. The Dodd-Frank Act requires the FDIC to increase the ratio of the FDIC insurance fund to estimated total insured deposits to 1.35% by September 30, 2020. If bank failures in the future are more costly than the FDIC currently anticipates, then the FDIC will be required to continue to impose higher insurance premiums. Such an increase would increase our non-interest expense. Thus, despite the prudent steps Shinhan Bank America may take to avoid the mistakes made by other banks, its costs of operations may increase as a result of those mistakes by others.

As required by the Dodd-Frank Act, the FDIC revised its deposit insurance premium assessment rates in 2011. In general, the rates are applied to a bank’s total assets less tangible capital, in contrast to the former rule which applied the assessment rate to a bank’s amount of deposits. The FDIC believes that while the largest banks will face higher assessments under the new system than they would under the former system, most banks, including Shinhan Bank America, will pay a lower total assessment under the new system than they would have paid under the former system.

As a result of the Dodd-Frank Act, the increase in the standard FDIC insurance limit from $100,000 to $250,000 was made permanent. Since the Dodd-Frank Act also authorized banks to pay interest on commercial demand deposits, commercial depositors currently must choose between earning interest on their demand deposits or having the benefit of unlimited deposit insurance coverage.

The FDIC may terminate the deposit insurance of any insured depository institution, including Shinhan Bank America, if it determines, after a hearing, that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable

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law, regulation, order or any condition imposed by an agreement with the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. Management is aware of no existing circumstances that would result in termination of Shinhan Bank America’s deposit insurance.

Brokered Deposits. Under federal law and applicable regulations, (i) a well capitalized bank may solicit and accept, renew or roll over any brokered deposit without restriction, (ii) an adequately capitalized bank may not accept, renew or roll over any brokered deposit unless it has applied for and been granted a waiver of this prohibition by the FDIC and (iii) an undercapitalized bank may not (x) accept, renew or roll over any brokered deposit or (y) solicit deposits by offering an effective yield that exceeds by more than 75 basis points the prevailing effective yields on insured deposits of comparable maturity in such institution’s normal market area or in the market area in which such deposits are being solicited. The term “undercapitalized insured depository institution” is defined to mean any insured depository institution that fails to meet the minimum regulatory capital requirement prescribed by its appropriate federal banking agency. The FDIC may, on a case-by-case basis and upon application by an adequately capitalized insured depository institution, waive the restriction on brokered deposits upon a finding that the acceptance of brokered deposits does not constitute an unsafe or unsound practice with respect to such institution. Shinhan Bank America had an aggregate amount of US$8.0 million of brokered deposits outstanding at December 31, 2013.

Community Reinvestment and Consumer Protection Laws. In connection with its lending activities, Shinhan Bank America is subject to a variety of federal laws designed to protect borrowers and promote lending to various sectors of the economy and population. Included among these are the Home Mortgage Disclosure Act, Real Estate Settlement Procedures Act, Truth-in-Lending Act, Equal Credit Opportunity Act, Fair Credit Reporting Act and CRA.

The CRA requires FDIC insured banks to define the assessment areas that they serve, identify the credit needs of those assessment areas and take actions that respond to the credit needs of the community. The FDIC must conduct regular CRA examinations of Shinhan Bank America and assign it a CRA rating of “outstanding,” “satisfactory,” “needs improvement” or “unsatisfactory.” Shinhan Bank America is also subject to provisions of the New York State Banking Law which impose similar obligations to serve the credit needs of its assessment areas. The Department and the FDIC each periodically assess a bank’s compliance, and make the assessment available to the public. Federal and New York State laws both require consideration of these ratings when reviewing a bank’s application to engage in certain transactions, including mergers, asset purchases and the establishment of branch offices. A negative assessment may serve as a basis for the denial of any such application. Shinhan Bank America has received “satisfactory” ratings from both the Department and the FDIC.

The Dodd-Frank Act created a new federal Consumer Financial Protection Bureau (“Bureau”) with broad authority to regulate and enforce consumer protection laws. The Bureau has the authority to adopt regulations under numerous existing federal consumer protection statutes. The Bureau may also decide that a particular consumer financial product or service, or the manner in which it is offered, is an unfair, deceptive, or abusive act or practice. If the Bureau so decides, it has the authority to outlaw such act or practice. The FDIC enforces the regulations of the Bureau with regard to Shinhan Bank America.

Limitations on Dividends. The payment of dividends by Shinhan Bank America is subject to various regulatory requirements. Under New York State Banking Law, a New York-chartered stock bank may declare and pay dividends out of its net profits, unless there is an impairment of capital, but approval of the Superintendent of Banks is required if the total of all dividends declared in a calendar year would exceed the total of its net profits for that year combined with its retained net profits of the preceding two years, subject to certain adjustments.

Assessments. Banking institutions are required to pay assessments to both the FDIC and the Department to fund the operations of those agencies. The assessments are based upon the amount of Shinhan Bank America’s total assets. Shinhan Bank America must also pay an examination fee to the Department when it conducts an examination.

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Transactions with Related Parties. Shinhan Bank America’s authority to engage in transactions with related parties or “affiliates” (i.e., any entity that controls or is under common control with an institution) or to make loans to certain insiders is limited by Sections 23A and 23B of the Federal Reserve Act. Section 23A limits the aggregate amount of transactions with any individual affiliate to 10% of the capital and surplus of the institution and also limits the aggregate amount of transactions with all affiliates to 20% of the institution’s capital and surplus. The term “affiliate” includes, for this purpose, us and any company that we control other than Shinhan Bank America and its subsidiaries.

Loans to affiliates must be secured by collateral with a value that depends on the nature of the collateral. The purchase of low quality assets from affiliates is generally prohibited. Loans and asset purchases with affiliates, must be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the institution as those prevailing at the time for comparable transactions with nonaffiliated companies. In the absence of comparable transactions, such transactions may only occur under terms and circumstances, including credit standards that in good faith would be offered to or would apply to nonaffiliated companies. Shinhan Bank America’s authority to extend credit to executive officers, directors and 10% shareholders, as well as entities controlled by such persons, is currently governed by Regulation O of the Federal Reserve Board. Regulation O generally requires such loans to be made on terms substantially similar to those offered to unaffiliated individuals (except for preferential loans made in accordance with broad based employee benefit plans), places limits on the amount of loans Shinhan Bank America may make to such persons based, in part, on Shinhan Bank America’s capital position, and requires certain approval procedures to be followed.

Standards for Safety and Soundness. FDIC regulations require that Shinhan Bank America adopt procedures and systems designed to foster safe and sound operations in the areas of internal controls, information systems, internal and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings and compensation, fees and benefits. Among other things, these regulations prohibit compensation and benefits and arrangements that are excessive or that could lead to a material financial loss. If Shinhan Bank America fails to meet any of these standards, it will be required to submit to the FDIC a plan specifying the steps that will be taken to cure the deficiency. If it fails to submit an acceptable plan or fails to implement the plan, the FDIC will require it to correct the deficiency and until corrected, may impose restrictions on it.

The FDIC has also adopted regulations that require Shinhan Bank America to adopt written loan policies and procedures that are consistent with safe and sound operation, are appropriate for its size, and must be reviewed by its Board of Directors annually. Shinhan Bank America has adopted such policies and procedures, the material provisions of which are discussed above as part of the discussion of our lending operations.

U.S. Regulation of Other U.S. Operations

In the United States, Shinhan Investment America Inc., our U.S.-registered broker-dealer subsidiary, is subject to regulations that cover all aspects of the securities business, including, sales methods, trade practices among broker-dealers, use and safekeeping of clients’ funds and securities, capital structure; record-keeping, the financing of clients’ purchases, and the conduct of directors, officers and employees.

Shinhan Investment America Inc. is regulated by a number of different government agencies and self-regulatory organizations, including the SEC and the Financial Industry Regulatory Authority (“FINRA”). Our U.S. subsidiaries are also regulated by some or all of the NYSE, the Municipal Securities Rulemaking Board, the U.S. Department of the Treasury, the Federal Reserve, the Commodities Futures Trading Commission. In addition, the U.S. states, provinces and territories have local securities commissions that regulate and monitor activities in the interest of investor protection. These regulators have a variety of sanctions available, including the authority to conduct administrative proceedings that can result in censure, fines, the issuance of cease-and-desist orders or the suspension or expulsion of the broker-dealer or its directors, officers or employees.

FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA covers a broad spectrum of securities businesses, including, registering and educating industry participants, examining securities firms, writing rules,

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enforcing those rules and the federal securities laws, informing and educating the investing public, providing trade reporting and other industry utilities, and administering a dispute resolution forum for investors and registered firms. It also performs market regulation under contract for the NASDAQ Stock Market, the American Stock Exchange and the Chicago Climate Exchange.

Many of the provisions of the Dodd-Frank Act discussed above will affect the operation of Shinhan Investment America, as well as our U.S. banking operations. Again, the impact of this statute on our operations will depend on the final regulations ultimately adopted by various agencies and oversight boards in coming years.

ITEM 4.C.

Organizational Structure

As of the date hereof, we have 13 direct and 18 indirect subsidiaries. The following diagram provides an overview of our organizational structure, including our significant subsidiaries and our ownership of such subsidiaries as of the date of this annual report:

LOGO

All of our subsidiaries are incorporated in Korea, except for the following:

•

Shinhan Asia Limited (incorporated in Hong Kong);

•

Shinhan Bank America (incorporated in the United States);

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•

Shinhan Bank Canada (incorporated in Canada);

•

Shinhan Bank (China) Limited (incorporated in the People’s Republic of China);

•

Shinhan Bank Europe GmbH (incorporated in Germany);

•

Shinhan Bank Kazakhstan Limited (incorporated in Kazakhstan);

•

Shinhan Bank Japan (incorporated in Japan);

•

Shinhan Khmer Bank PLC (incorporated in Cambodia);

•

Shinhan Bank Vietnam Ltd. (incorporated in Vietnam);

•

Shinhan Investment Corp., Europe Ltd. (incorporated in the United Kingdom);

•

Shinhan Investment Corp., USA Inc. (incorporated in the United States);

•

Shinhan Investment Corp., Asia Ltd. (incorporated in Hong Kong); and

•

Shinhan BNP Paribas Asset Management (Hong Kong) Limited (incorporated in Hong Kong).

ITEM 4.D.

Properties

The following table provides information regarding certain of our properties in Korea.


		Area (In square meters)
Type of Facility	Location	Building		Site (If Different)
Registered office and corporate headquarters	20, Sejong-Daero 9-Gil, Jung-Gu, Seoul 100-724, Korea		59,519		5,418
Shinhan Investment Corp.	23-2, Youido-Dong, Youngdungpo-Gu, Seoul, Korea 150-312		70,170		4,765
Shinhan Centennial Building	117, Samgak-Dong, Jung-Gu, Seoul, Korea		19,697		1,389
Shinhan Bank Gwanggyo Branch	14, 1-Ga, Namdaemun-Ro, Jung-Gu, Seoul, Korea		16,727		6,783
Shinhan Myongdong Branch	53-1, 1-Ga, Myong-Dong, Jung-Gu, Seoul, Korea		8,936		1,014
Shinhan Youngdungpo Branch	57, 4-Ga, Youngdungpo-Dong, Youngdungpo-Gu, Seoul, Korea		6,171		1,983
Shinhan Back Office Support Center	781, Janghang-Dong, Ilsan-Gu, Goyang-Si, Kyunggi Province, Korea		24,496		5,856
Shinhan Bank Back Office and Call Center	731, Yoksam-Dong, Kangnam-Gu, Seoul, Korea		23,374		7,964
Shinhan Bank Back Office and Storage Center	210-12, Bangseo-Dong, Sangdang-Gu, Cheongju-Si, Chungcheongbuk-Do, Korea		6,094		5,376
Shinhan Card Yoksam-Dong Building	790-5, Yoksam-Dong, Kangnam-Gu, Seoul, Korea		7,348		1,185
Shinhan Data Center	23-2, Jukjeon-Dong, Suji-Gu, Yongin, Kyunggi Province, Korea		44,676		9,114

Our subsidiaries own or lease various land and buildings for their branches and sales offices.

As of December 31, 2013, Shinhan Bank had a countrywide network of 943 branches. Approximately 24.1% of these facilities were housed in buildings owned by us, while the remaining branches were leased properties. As of December 31, 2013, Jeju Bank had 40 branches of which we own 18 of the buildings in which the facilities are located, representing 45% of its total branches. Lease terms are generally from two to three years, and seldom exceed five years.

As of December 31, 2013, Shinhan Card had 32 branches, all but one of which were leased. Lease terms are generally from one to two years. We also lease Shinhan Card’s headquarters for a term of five years. As of December 31, 2013, Shinhan Investment had a nationwide network of 99 branches of which we own six of the

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buildings in which the facilities are located, representing 6% of its total branches in Korea. Lease terms are generally from one to two years. As of December 31, 2013, Shinhan Life had 208 branches which we leased for a term of generally two to three years.

The net book value of all the properties owned by us at December 31, 2013 was ￦2,774 billion. We do not own any material properties outside of Korea.

ITEM 4.E.

Unresolved Staff Comments

We do not have any unresolved comments from the staff of the U.S. Securities and Exchange Commission regarding our periodic reports under the Securities Exchange Act of 1934, as amended.

ITEM 5.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and notes thereto included in this annual report. The following discussion is based on our consolidated financial statements, which have been prepared in accordance with IFRS.

ITEM 5.A.

Operating Results

Overview

We are one of the leading financial institutions in Korea in terms of total assets, revenues, profitability and capital adequacy, among others. Incorporated on September 1, 2001, we are the first privately-held financial holding company to be established in Korea. Since inception, we have developed and introduced a wide range of financial products and services in Korea and aimed to deliver comprehensive financial solutions to clients through a convenient one-portal network. According to reports by the Financial Supervisory Service, we are the second largest financial services provider in Korea as measured by total assets as of December 31, 2013 and operate the third largest banking business (as measured by consolidated total assets as of December 31, 2013) and the largest credit card business (as measured by the total credit purchase volume as of December 31, 2013) in Korea.

Most of our assets are located in, and we generate most of our income from, Korea. Accordingly, our business and profitability are largely dependent on the general economic and social conditions in Korea, including interest rates, inflation, exports, personal expenditures and consumption, unemployment, demand for business products and services, debt service burden of households and businesses, the general availability of credit, the asset value of real estate and securities and other factors affecting the financial well-being of our corporate and retail customers. The Korean economy is closely integrated with, and is significantly affected by, developments in the global economy and financial markets. In recent years, the global economy and financial markets experienced hardship, which also had a negative impact on the Korean economy and in turn on our business and profitability. See “Item 3.D. Risk Factors — Risks Relating to our Banking Business — Difficult conditions and turbulence in the Korean and global economy and financial markets may adversely affect our business, asset quality, capital adequacy and earnings.”

The ongoing fiscal and financial difficulties affecting Europe and elsewhere in the world and the slow economic recovery in Korea and globally continue to present a number of difficulties and challenges for financial institutions in Korea, including us, particularly in the form of deterioration in asset quality as an increasing number of corporate borrowers face liquidity difficulties and are forced to undergo restructuring, sometimes under the guidance of the Government. For example, Shinhan Bank’s delinquency ratio for large corporate borrowers increased from 0.31% as of December 31, 2011 to 0.34% as of December 31, 2012 and to 0.44% as of December 31, 2013, largely as a result of continued financial difficulties for an increasing number of companies in the construction and shipbuilding sectors, some of which (including several members of the STX Group and Keangnam Enterprises Co., Ltd.) have entered into workouts or rehabilitation proceedings. In contrast, Shinhan Bank’s delinquency ratio for small- to medium-sized enterprises has subsided from 1.04% as of December 31, 2011 to 0.89% as of December 31, 2012 and to 0.55% as of December 31, 2013 largely as a result of our strategic focus on conservative and prudent asset growth for these borrowers, including by increasing the portion

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of borrowers with high collateral values and SOHOs with demonstrated stability in their business and financial track records. Compared to the corporate banking business, the economic sluggishness in 2011 and 2012 had a less severe impact on Shinhan Bank’s retail banking business. This was largely because Shinhan Bank’s retail loans are mostly mortgage and home equity loans collateralized by residential properties and individuals and households traditionally are less prone to default on mortgage and home equity loans. Nonetheless, Shinhan Bank’s delinquency ratio for retail borrowers increased from 0.39% as of December 31, 2011 to 0.53% as of December 31, 2012 largely as a result of increased delinquency for collective housing loans in tandem with the sustained slump in the housing market, before decreasing to 0.24% as of December 31, 2013 following enhanced risk management initiatives, including aggressive write-off of troubled loans. Similarly, the delinquency ratio of Shinhan Card, our credit card business, increased from 2.27% as of December 31, 2011 to 2.64% as of December 31, 2012 due to the continued general economic downturn, before decreasing to 2.15% as of December 31, 2013 following enhanced risk management initiatives, including conservative and prudent asset growth and aggressive write-off of troubled loans.

We derive most of our income from interest earned on our corporate and retail loans, net of funding costs (which primarily consist of interest payable on customer deposits). Net interest income is largely a function of the average volume of loans and the net interest spread thereon. In 2012 and 2013, the average volume of retail loans showed moderate growth largely because secured housing loans, which had represented the primary factor for loan growth until 2011, barely grew as a result of a sustained slump in the real estate market and the sale of a portion of our existing secured housing loans to Korea National Housing Fund by way of asset-backed securitization, while loans to retail customers with high-quality credit and key deposit loans for housing rental grew modestly. Similarly, in 2012 and 2013, the average volume of corporate loans did not show significant growth largely because corporate borrowers increasingly resorted to debenture issuances through capital markets rather than bank borrowings as their primary funding source due to the ample liquidity in the Korean financial sector and low interest rates available for such debentures.

From 2011 to 2012, both the average yield on interest-earning assets and the average rate on interest-bearing liabilities decreased (with the former decreasing more sharply than the latter due to the difference in relative maturity profiles) while the average balance increased for both interest-earning assets and interest-bearing liabilities. Largely due to the greater decrease in the average yield on interest-earning assets compared to that for the average rate on interest-bearing liabilities, Shinhan Bank’s net interest income decreased from ￦4,971 billion in 2011 to ￦4,768 billion in 2012. Net interest income after provision for loan losses amounted to ￦4,325 billion and ￦3,950 billion in 2011 and 2012, respectively. Shinhan Bank’s operating income also decreased from ￦2,673 billion in 2011 to ￦2,078 billion in 2012.

From 2012 to 2013, both the average yield on interest-earning assets and the average rate on interest-bearing liabilities decreased (with the former decreasing more sharply than the latter due to the difference in relative maturity profiles) while the average balance increased for both interest-earning assets and interest-bearing liabilities. Largely due to the greater decrease in the average yield on interest-earning assets compared to that for the average rate on interest-bearing liabilities, Shinhan Bank’s net interest income decreased from ￦4,768 billion in 2012 to ￦4,351 billion in 2013. Net interest income after provision for loan losses amounted to ￦3,950 billion and ￦3,677 billion in 2012 and 2013, respectively. Shinhan Bank’s operating income also decreased from ￦2,078 billion in 2012 to ￦1,720 billion in 2013.

As for Shinhan Card, its net interest income is largely dependent on the transaction volume and less sensitive to interest rate movements than our banking business, since merchant fees (representing a fixed percentage of a credit card purchase amount) provide a stable source of income and our credit card business enjoys more diversified sources of funding, including commercial paper, corporate debentures (which have maturities longer than most bank deposit products) and asset-backed securitizations. The credit card transaction volume is largely dependent on the overall trends of the general Korean economy, such as general consumer spending patterns in Korea. As a result, operating revenue for Shinhan Card remained largely stable from ￦4,526 billion in 2011 to ￦4,599 billion in 2012, largely due to an increase of the volume of credit card loans, which was substantially offset by a reduction in merchant fee rates, and increased slightly from ￦4,599 billion in 2012 to ￦4,615 billion in 2013, largely due to the increased volume of credit card loans, which was largely offset by a decrease in interest rates charged on card loans and cash advances.

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The following provides a discussion of the major trends surrounding the general economy and the financial services sector in Korea in 2013 and our current outlook for 2014 as they relate to our core businesses. The following discussion represents the subjective view of our management and may significantly differ from the actual results for 2014.

Recent Developments and Outlook for Korean Economy

During 2013, the Korean economy grew at the rate of 3.00%, largely due to modest but steady growth in export and domestic consumption in tandem with the general improvements in the global economy following the recovery of U.S. and European economies, notwithstanding the general economic sluggishness in emerging markets (such as Brazil and India).

We believe that the global economy is likely to continue to improve at a modest rate in 2014 driven by, among other things, continued recovery of the U.S. economy backed by improved consumer sentiment based in part on the continued weakening of the deleveraging effect and improving housing markets, as well as the recovery of troubled European economies as their fiscal crises gradually subside. However, there is no assurance that the global economy will not stumble into difficulties in 2014 for reasons including uncertainties related to the tightening of U.S. monetary policies and its impact on the global economy and investor sentiment, a potential hard landing of the Chinese economy due to problems associated with social and economic restructuring and accelerated difficulties in emerging market economies.

We expect that in 2014, the Korean economy will likely follow the trends of the global economy and record a modest growth, backed by continued improvements in export and domestic consumptions. However, a number of challenges remain ahead, including potential appreciation of the Korean Won, which would adversely impact export consumption, as well as the sustained slump in the real estate market and the continued high level of household debt, which would adversely impact domestic consumption.

Recent Developments and Outlook for the Korean Financial Sector

Commercial Banking

In 2013, major commercial banks in Korea generally had a difficult year in terms of operating results due to a narrowing of the net interest margin following a further reduction in the base interest rate set by the Government. We believe that in 2014, commercial banks in Korea will experience modest growth in asset size as demand for loans grows in tandem with the expected incremental recovery of the general economy. However, the amount of such growth is expected to be substantially limited since it is expected that retail borrowers in general will continue to face significant interest burden amid a high level of household debt and corporate borrowers will continue to have access to low-cost funding from debenture issuances in capital markets in light of the ample liquidity in the Korean financial sector. Asset quality in general of the major commercial banks in Korea is expected to slightly improve in 2014, assuming an absence of major corporate bankruptcies and restructurings as was the case in 2013; the anticipated tightening of U.S. monetary policy may increase interest rates globally and accordingly, increase the interest burden of borrowers, particularly those with limited discretionary income, which could adversely affect the quality of banks’ assets. Assuming no significant deterioration of asset quality, profitability of major commercial banks is also expected to improve slightly in 2014 in tandem with the continued recovery of the general economy and the expected rise in base and market interest rates.

On the regulatory side, we expect the Government to continue to focus on supporting small- and medium-sized enterprises and consumers with low income or otherwise facing financial difficulties, as well as actively lowering household debt, which has been on the rise in recent years. In that connection, we expect the Government to further strengthen financial consumer protection through new regulatory measures or reforms in 2014.

If the currently contemplated privatization of Woori Financial Group, one of the top four financial holding companies in Korea in terms of assets as of December 31, 2013, is materialized and a megabank emerges as a result of such privatization, including by way of a merger between Woori Bank and another large commercial bank or foreign bank, competition may intensify for commercial banks in Korea. Currently, the Government has

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secured preferred bidders only for relatively small regional banking subsidiaries of Woori Financial Group, and we anticipate that the Government will have greater difficulty in receiving commercially satisfactory bids for Woori Bank from any major commercial banks or financial holding companies, unlike in the case of Woori Investment & Securities, a leading brokerage firm in Korea, which is expected to be sold to National Agricultural Cooperative Federation.

Credit Cards

In 2013, credit companies in Korea generally experienced deterioration in profitability due to a slower than anticipated rate of recovery in domestic consumption and the reduction in the rates of merchant fees charged to businesses as a result of Government guidelines designed to assist small businesses.

In 2014, we believe that card use will likely increase in tandem with the general rate of recovery in domestic consumption; however, we expect that such increase will likely involve the use of check cards rather than credit cards, as the Government has been encouraging the use of the former through tax and other incentives. In contrast, we expect interest income from card loans and cash advances, which generally represent the most profitable segments for credit card companies, will decrease in 2014 due to the mandatory adoption of standard interest rates (which generally is lower than what was charged previously) with respect to card loans as a result of Government guidelines designed to assist low income households and individuals. Accordingly, we believe that profitability for credit companies in Korea will continue to worsen in 2014.

As for asset quality of credit card receivables, we believe that it is likely to stabilize in 2014 due to the industry-wide focus on conservative risk management and the reduction of credit card interest burden with respect to card loans and cash advances following the adoption of standard interest rates for such services.

The competitive environment for credit card companies in Korea may significantly change in 2014 upon the expected privatization of Woori Card and merger of Hana-SK Card with KEB Card.

In light of the negative prospect for profitability and asset growth in 2014, we expect that credit card companies in Korea will likely focus on cost savings, operational efficiency, development of new products and services and strategic responses to the changing competitive landscape.

Securities

In 2013, securities companies in Korea suffered a particularly difficult year in terms of revenue and profitability due to an increasing flight of investors from the stock markets, a decline in trading volumes and aggressive competition through brokerage fee reduction. As a result, many securities companies put themselves up for sale and most securities companies underwent layoff and contracted their number of branch offices.

In 2014, we believe that the operating environment will likely remain adverse for securities companies as negative investor sentiment persists in the face of continued significant volatility in the stock markets, In addition, the expected rise in the base and market interest rates will likely dampen opportunities for transaction gains from the sale of debt securities as well as increase funding costs.

However, the wealth management business may continue to grow in 2014. In 2013, demand grew for major products offered by the wealth management businesses, such as equity-linked securities, wraps, repos, trust and fund products, and it is expected that demand for alternative investment products, particularly those offering high returns for high risk, as well as desire for portfolio diversification, will continue to grow in 2014.

Due to an increase in the sale of equity-linked securities (which combine features of debt and equity securities and have elements of upside optionality plus downside protection through derivative hedging) and repos, the proportion of interest rate-sensitive products in the proprietary trading portfolio of securities companies has been on the rise. Accordingly, profitability for securities companies may experience significant volatility depending on the actual and anticipated movements in the base and market interest rates.

We believe that segmentation will continue to intensify in 2014 for the securities industry in Korea with the larger companies gearing toward becoming large-scale investment banking houses with diversified business portfolios (including prime brokerage and merchant banking) and the smaller companies seeking to become boutiques specializing in particular products.

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In 2014, there may be significant restructuring (including consolidation) in the Korean securities industry depending on the disposition of securities companies currently or expected to be up for sale, as well as substantial layoffs and contraction of branch operations. We believe that in order to stay profitable and competitive, securities companies may be required to further bolster the wealth management business, expand product development and asset management capabilities, refine risk management systems for proprietary trading and decide on strategic positioning in light of the industry segmentation.

Life Insurance

In 2013, the life insurance companies in Korea generally recorded reduced profits due to sluggish growth in insurance premium following the reduction in tax benefits for long-term savings insurance products, changes in commission structure (namely, restrictions on the upfront payouts of commissions payable to insurance brokers on savings-type life insurance products and adoption of an amortized payment schedule of such commissions to streamline the incentives of insurance brokers) and net negative margin for aged insurance products due to a decrease in asset management income. As a result, asset quality as measured by risk-based capital also significantly deteriorated.

In 2014, we expect that insurance companies are unlikely to experience a significant turnaround in profitability, notwithstanding the expected increase in the base and market interest rates, since the level of such increase is not expected to be sufficiently high to reverse the net negative margin for aged insurance products. However, we expect that demand will continue to grow in 2014 for individual retirement accounts, annuities and health insurance products in tandem with aging demographics, as well as due to Government policies to expand the pension market.

On the regulatory side, we expect that the Government will adopt stricter measures for consumer protection, including the enactment of the Financial Consumer Protection Act, amendments to the Commercial Code and the Insurance Act and guidelines for reducing complaints by consumers of insurance products. As a result, it will be important for life insurance companies in Korea to revamp their operating processes, including reinforcing the policies and practices for complete sales, simplification of products to facilitate informed decision-making by consumers and other measures designed to bolster consumer trust.

Specialized Credit

The specialized credit business was introduced in Korea in August 1997. The specialized credit business cannot accept customer deposits and generally involves providing a combination of four types of financing: equipment and facilities leasing, installment finance, new technology finance and credit card services, and sources funding primarily by issuing debentures and commercial papers. The specialized credit business generally targets customers with higher risk profile in return for higher return compared to customers of commercial banks, which makes risk management (including customer screening) a particularly key factor for commercial success of this business.

Due, in part, to the variety of services being offered and the broad range of potential customers, specialized credit providers often find it relatively easy to develop new customer segments and provide niche offerings. Due to the relatively low barriers of entry, however, competition is intense and is expected to further intensify as a result of the commencement of automobile loan offerings by commercial banks and the expanded entry into personal loan markets by micro lenders.

The financial supervisory authorities are currently considering consolidating three types of specialized credit services, namely, equipment and facilities leasing, installment finance and new technology finance, in order to bolster the capacity of specialized credit providers to support corporate finance. Accordingly, we expect that in 2014, specialized credit providers will strengthen their efforts to find further growth opportunities, including by expanding the new technology finance segment and selective overseas expansions.

Asset Management

In 2013, the asset management companies generally experienced growth in the size of assets under management largely due to increased demand for their services from corporate customers (particularly financial institutions).

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In 2014, we expect that asset management companies will likely experience further growth in asset size due to a continued increase in demand for their services from financial institutions as well as modest growth in demand from retail customers in tandem with the expected recovery of the general economy, although the growth for the latter is likely to be limited in the event of significant movements in interest rates and volatility of the stock markets.

In 2014, we anticipate the following areas to be important for the growth and profitability of asset management companies: stronger disclosure policies and practices in response to the anticipated adoption by the Government of stricter measures for financial consumer protection, enhanced asset management capabilities in the face of expected volatilities in interest rates and equity market indices and product differentiation strategies (particularly for alternative investment products including passive funds) to meet growing customer demand for diversified investment portfolios and stable returns on investments.

Private Equity

Since the introduction of private equity funds in Korea at the end of 2004, the number of registered private equity funds with the Financial Supervisory Commission has increased. For example, in 2013, 237 private equity funds with an aggregate fund size of ￦44 trillion were registered compared to 226 private equity funds with an aggregate fund size of ￦40 trillion registered in 2012. As these funds increase their funding size, we expect them to diversify their investment focus, including to buyouts and restructuring of troubled companies.

On the regulatory side, the Government is expected to implement policies designed to foster the growth of domestic private equity funds. However, due to increasing global regulations in relation to private equity funds, the Government is also expected to adopt measures that will strengthen monitoring and supervision of private equity funds and otherwise enhance risk management in relation to such funds.

Interest Rates

Interest rate movements, in terms of magnitude and timing as well as their relative impacts on our assets and liabilities, have a significant impact on our net interest margins and profitability, particularly with respect to its financial products that are sensitive to such movements. For example, if the interest rates applicable to Shinhan Bank’s loans (which are recorded as our assets) decrease at a faster pace or by a thicker margin, or increase at a slower pace or by a thinner margin, compared to the interest rates applicable to its deposits (which are recorded as our liabilities), Shinhan Bank’s net interest margin will shrink and its profitability will be negatively affected. In addition, the relative size and composition of Shinhan Bank’s variable rate loans and deposits (as compared to our fixed rate loan and deposits) may also impact Shinhan Bank’s net interest margin. Furthermore, the difference in the average term of Shinhan Bank’s interest-earning assets (primarily loans) compared to its interest-bearing liabilities (primarily deposits) may also impact its net interest margin. For example, since Shinhan Bank’s deposits currently have a longer term, on average, than that of its loans, its deposits are on average less sensitive to movements in the base interest rates on which its deposits and loans tend to be pegged, and therefore, an increase in the base interest rates tend to increase its net interest margin while a decrease in the base interest rates tend to have the opposite effect. Since Shinhan Bank is one of our principal operating subsidiaries, its net interest margin and profitability have a substantial effect on ours. While we continually manage our assets and liabilities to minimize our exposure to the interest rate volatility, such efforts by us may not mitigate the impact of interest rate volatility in a timely or effective manner.

Prior to February 2010, major commercial banks in Korea, including Shinhan Bank, principally used the certificate of deposit, or CD, rates set by Bank of Korea in determining the base rate for secured housing loans, which represent the substantial majority of retail loans. However, amid concerns that the CD rates do not accurately represent the banks’ cost of capital as certificates of deposit constitute relatively a minor fraction of the banks’ assets and in light of the substantial variance in recent periods between the CD rates and the actual market rates, beginning in February 2010, the Korean Federation of Banks publishes the “cost of funding index”, or COFIX, which is computed based on the weighted average interest of select funding products (including time deposits, housing and other installment savings deposits, repos, discounted bills and senior non-convertible financial debentures) of nine major Korean banks (comprised of Kookmin Bank, Shinhan Bank, Woori Bank,

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Hana Bank, Korea Exchange Bank, Nonghyup Bank, Industrial Bank of Korea, Citibank Korea Inc. and Standard Chartered Bank Korea Limited). Each bank then independently determines the interest rate applicable to the customer by adding a spread to the COFIX based on the difference between the COFIX and such bank’s general funding costs, administration fees, the customer’s credit score, the maturity of the loan and other customer-specific premiums and discounts based on the customer relationship with such bank. These interest rates are typically set on a monthly basis.

The following table shows certain benchmark Won-denominated borrowing interest rates as of the dates indicated.


	Corporate Bond Rates(1)		Treasury Bond Rates(2)		Certificate of Deposit Rates(3)		COFIX Balance-Based(4)		COFIX New Borrowing-Based(5)
June 30, 2009		5.39		4.16		2.41		N/A		N/A
December 31, 2009		5.53		4.41		2.86		N/A		N/A
June 30, 2010		4.77		3.86		2.46		3.95		2.89
December 31, 2010		4.27		3.38		2.80		3.72		3.10
June 30, 2011		4.49		3.76		3.57		3.88		3.66
December 31, 2011		4.21		3.34		3.55		3.95		3.69
June 30, 2012		3.87		3.30		3.54		3.91		3.63
December 31, 2012		3.29		2.82		2.89		3.57		3.01
June 30, 2013		3.34		2.89		2.69		3.17		2.66
December 31, 2013		3.37		2.86		2.66		2.91		2.60

Source: Korea Securities Dealers Association

Notes:

(1)	Measured by the yield on three-year AA- rated corporate bonds.

(2)	Measured by the yield on three-year treasury bonds.

(3)	Measured by the yield on certificates of deposit (with maturity of 91 days).

(4)	Measured based on the weighted average of the borrowing rates for the monthly ending balances of the funding made by the commercial banks that are subject of the COFIX reporting.

(5)	Measured based on the weighted average of the borrowing rates for new funding for each month made by the commercial banks that are subject of the COFIX reporting.

Changes in Accounting Policies

Adoption of IFRS 10 “Consolidated Financial Statements”

We adopted IFRS 10 “Consolidated Financial Statements” since January 1, 2013. As a result, we have changed our accounting policy with respect to determining whether we have control over, and consequently whether we consolidate, our investees. IFRS 10 introduces a new control model that is applicable to all investees; among other things, it requires the consolidation of an investee if we control the investee on the basis of de facto circumstances.

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We re-assessed the control conclusion for our investees as of January 1, 2013. As a consequence, we changed our control relationship with its investees as below.


Newly included subsidiaries		Reason
Everdigm Corp.		The practical ability to direct the relevant activities.

Guaranteed principal money trusts		We are exposed, or have rights, to variable returns from our involvement with the guaranteed principal money trusts and have the ability to affect those returns through our power over these investees. Accordingly, they are newly consolidated. Prior to the adoption of IFRS 10, they had not been consolidated since we had not held the majority of the benefits or the residual risk.

The following tables set out the effect of applying the requirements of IFRS 10 “Consolidated Financial Statements”.

Consolidated Balance Sheet Data


	As of January 1, 2012
	As previously reported(1)		Adjustments			As restated
	(In billions of Won)
Cash and due from banks	￦	14,731	￦	68		￦	14,799
Trading assets		11,952		2,569			14,521
Derivative assets		2,319		2			2,321
Loans		192,573		656			193,229
Available-for-sale financial assets		34,106		(90	)		34,016
Deferred tax assets		29		2			31
Investment property		275		240			515
Other assets		10,888		60			10,948

Impact on total assets			￦	3,507

Deposits	￦	163,016	￦	3,228		￦	166,244
Borrowings		20,033		222			20,255
Debt securities issued		39,737		(2	)		39,735
Liability for defined benefit obligations		274		1			275
Deferred tax liabilities		—		22			22
Other liabilities		19,842		(25	)		19,817

Impact on total liabilities			￦	3,446

Accumulated other comprehensive income		1,030		3			1,033
Retained earnings		10,989		58			11,047

Impact on total equity			￦	61

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	As of December 31, 2012
	As previously reported(1)		Adjustments			As restated
	(In billions of Won)
Cash and due from banks	￦	13,394	￦	113		￦	13,507
Trading assets		14,019		2,635			16,654
Financial assets designated at fair value through profit or loss		2,585		(43	)		2,542
Derivative assets		2,165		6			2,171
Loans		199,656		633			200,289
Available-for-sale financial assets		36,328		(44	)		36,284
Held-to-maturity financial assets		11,659		1			11,660
Property and equipment		3,047		61			3,108
Intangible assets		4,191		4			4,195
Deferred tax assets		96		4			100
Investment property		247		532			779
Other assets		13,094		189			13,283

Impact on total assets			￦	4,091

Deposits	￦	170,097	￦	3,199		￦	173,296
Borrowings		18,891		627			19,518
Debt securities issued		38,840		(2	)		38,838
Liability for defined benefit obligations		214		8			222
Provisions		747		1			748
Current tax payable		252		2			254
Deferred tax liabilities		20		22			42
Other liabilities		21,492		101			21,593

Impact on total liabilities			￦	3,958

Accumulated other comprehensive income		975		5			980
Retained earnings		12,659		56			12,715
Non-controlling interests		2,469		72			2,541

Impact on total equity			￦	133

Note:

(1)	The amounts have been recalculated to reflect the impact of the amendments to IAS 19 “Employee Benefits”.

Consolidated Income Statement Data


	For the year ended December 31, 2012
	As previously reported(1)			Adjustments			As restated
	(In billions of Won)
Net interest income	￦	6,974		￦	6		￦	6,980
Net fees and commission income		1,572			(29	)		1,543
Dividend income		175			(1	)		174
Net trading income		596			12			608
Net gain on sale of available-for-sale financial assets		537			(1	)		536
General and administrative expenses		(4,060	)		(2	)		(4,062	)
Other non-operating income, net		12			13			25

Net income for the year	￦	2,494		￦	(2	)	￦	2,492

Note:

(1)	The amounts have been recalculated to reflect the impact of the amendments to IAS 19 “Employee Benefits”.

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Cash and cash equivalents as of January 1, 2012 increased by ￦13,303 million. Cash flows from financing activities for the year ended December 31, 2012 increased by ￦355,138 million, and cash flows from operating activities and investing activities decreased by ￦9,584 million and ￦316,818 million respectively. As a result, cash and cash equivalents as of December 31, 2012 increased by ￦42,039 million.

Amendments to IAS 19 “Employee Benefits”

We have applied the amendments to IAS 19 “Employee Benefits” since January 1, 2013. The standard requires recognition of actuarial gains and losses immediately in other comprehensive income and calculation of expected return on plan assets based on the rate used to discount the defined benefit obligation.

As a result of the application of the amendments to IAS 19 “Employee Benefits”, we have restated the comparative financial information for prior periods retrospectively.

The following tables set out the effect of applying the requirements of IAS 19 “Employee Benefits”.

Consolidated Balance Sheet Data


	As of December 31, 2010
	As previously reported(1)		Adjustments			As restated
	(In billions of Won)
Accumulated other comprehensive income	￦	1,629	￦	(45	)	￦	1,584
Retained earnings		12,071		45			12,116


	As of January 1, 2012
	As previously reported(1)		Adjustments			As restated
	(In billions of Won)
Accumulated other comprehensive income	￦	1,192	￦	(159	)	￦	1,033
Retained earnings		10,888		159			11,047


	As of December 31, 2012
	As previously reported(1)		Adjustments			As restated
	(In billions of Won)
Accumulated other comprehensive income	￦	1,140	￦	(160	)	￦	980
Retained earnings		12,555		160			12,715

Note:

(1)	The amounts are recalculated to reflect the impact of the adoption of IFRS 10 “Consolidated Financial Statements”.

Consolidated Income Statement Data


	For the year ended December 31, 2010
	As previously reported(1)			Adjustments			As restated
	(In billions of Won)
General and administrative expenses	￦	(3,848	)	￦	59		￦	(3,789	)
Income tax expense		(570	)		(14	)		(584	)
Net income for the year		2,859			45			2,904
Remeasurement loss related to the defined benefit liability		—			(45	)		(45	)

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	For the year ended December 31, 2011
	As previously reported(1)			Adjustments			As restated
	(In billions of Won)
General and administrative expenses	￦	(4,135	)	￦	152		￦	(3,983	)
Income tax expense		(920	)		(37	)		(957	)
Net income for the year		3,273			115			3,388
Remeasurement loss related to the defined benefit liability		—			(115	)		(115	)


	For the year ended December 31, 2012
	As previously reported(1)			Adjustments		As restated
	(In billions of Won)
General and administrative expenses	￦	(4,062	)	￦	—	￦	(4,062	)
Income tax expense		(739	)		—		(739	)
Net income for the year		2,492			—		2,492
Remeasurement loss related to the defined benefit liability		—			—		—

Note:

(1)	The amounts are recalculated to reflect the impact of the adoption of IFRS 10 “Consolidated Financial Statements”.

Critical Accounting Policies

The accounting policies set out below have been applied consistently to all periods presented in these consolidated annual financial statements, unless otherwise indicated.

We and our subsidiaries have consistently applied these accounting policies.

Basis of Consolidation

Subsidiaries

Subsidiaries are entities that we control. The financial statements of our subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The accounting policies of our subsidiaries have been changed when necessary to align them with the policies we have adopted.

Structured Entities

We have established or invested in various structure entities. A structured entity is an entity designed so that its activities are not governed by way of voting rights. When assessing control of a structured entity, we consider factors such as the purpose and the design of the investee; our practical ability to direct the relevant activities of the investee; the nature of our relationship with the investee; and the size of our exposure to the variability of returns of the investee. We do not recognize any non-controlling interests in the consolidated statements of financial position since our interests in these entities are recognized as liabilities of us.

Investments in Associates and Jointly Controlled Entities (Collectively, “Associates”)

Associates are those entities in which we have significant influence, but not control, over the financial and operating policies. Significant influence is presumed to exist when we hold between 20% and 50% of the voting power of another entity or in excess of 15% if the other entity is classified as a subsidiary under the Banking Act. Joint ventures are those entities over whose activities we have joint control, established by contractual agreement and requiring unanimous consent for strategic financial and operating decisions.

Investments in associates are accounted for using the equity method and are recognized initially at cost. Our investment includes goodwill identified on acquisition, net of any accumulated impairment losses. The

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consolidated financial statements include our share of the income and expenses and equity movements of associates, after adjustments to align their accounting policies with ours, from the date that significant influence or joint control commences until the date that significant influence or joint control ceases. When our share of losses exceeds our interest in an equity accounted investee, the carrying amount of that interest, including any long-term investments, is reduced to nil, and the recognition of further losses is discontinued except to the extent that we have an obligation or are otherwise required to make payments on behalf of the investee.

Transactions Eliminated on Consolidation

Intra-group balances, transactions, and any unrealized income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealized gains arising from transactions with associates are eliminated against the investment to the extent of our interest in the investee. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment.

Foreign Currency

Foreign Currency Transactions

Transactions in foreign currencies are translated to the respective functional currencies of us and our subsidiaries at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortized cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortized cost in foreign currency translated at the exchange rate at the end of the reporting period. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are translated to the functional currency at the exchange rate at the date that the fair value was determined. Foreign currency differences arising on translation are recognized in profit or loss, except for differences arising on the translation of available-for-sale equity instruments, a financial liability designated as a hedge of the net investment in a foreign operation or in a qualifying cash flow hedge, which are recognized in other comprehensive income. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction.

Foreign Operations

The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated into Won at exchange rates at the reporting date. The income and expenses of foreign operations, excluding foreign operations in hyperinflationary economies, are translated into Won at exchange rates at the dates of the transactions.

Foreign currency differences are recognized in other comprehensive income in the translation reserve.

When a foreign operation is disposed of, the relevant amount in the translation is transferred to profit or loss as part of the profit or loss on disposal. In any other partial disposal of a foreign operation, the relevant proportion is reclassified to profit or loss.

Hedge of Net Investment in Foreign Operations

We apply hedge accounting to foreign currency differences arising between the functional currency of the foreign operations and the parent entity’s functional currency (namely, Korean Won), regardless of whether the net investment is held directly or through an intermediate parent.

Foreign currency differences arising on the retranslation of a financial liability designated as a hedge of a net investment in a foreign operation are recognized in other comprehensive income to the extent that the hedge is effective, and are presented within equity in the translation reserve. To the extent that the hedge is ineffective, such differences are recognized in profit or loss. When the hedged part of a net investment is disposed of, the relevant amount in the translation reserve is transferred to profit or loss as part of the profit or loss on disposal.

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Cash and Cash Equivalents

Cash and cash equivalents comprise cash balances and call deposits with maturities of three months or less from the acquisition date that are subject to an insignificant risk of changes in their fair value, and are used by us in the management of our short-term commitments.

Non-derivative Financial Assets

Financial assets are classified into financial assets at fair value through profit or loss, loans and receivables, available-for-sale financial assets and held-to-maturity financial assets. Financial assets are recognized in the consolidated financial statements when we become a party to the contractual provisions of the instrument.

A financial asset is measured initially at its fair value plus, for an item not at fair value through profit or loss, transaction costs that are directly attributable to its acquisition of the financial asset.

Financial Assets at Fair Value through Profit or Loss

A financial asset is classified as held for trading or designated at fair value through profit or loss upon initial recognition. These financial assets are measured at fair value after initial recognition and changes in the fair value are recognized through profit or loss of the period. Costs attributable to the acquisition are immediately expensed in the period.

Held-to-maturity Financial Assets

Held-to-maturity financial assets are non-derivative assets with fixed or determinable payments and fixed maturity that we have the positive intent and ability to hold to maturity. They are carried at amortized cost using the effective interest method after their initial recognition.

Loans and Receivables

Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition loans and receivables are measured at amortized cost using the effective interest method, less any impairment losses.

For non-collateral dependent loans, impairment is measured using a discount cash flow analysis under which allowances are established when the discounted cash flow of the loan is lower than its carrying amount. The allowance is equal to the difference between the discounted cash flow amount of the loan and its carrying amount. With respect to collateral dependent loans, our discount cash flow analysis considers, among other things, the fair value of the collateral underlying the subject loan. When the carrying amount of the subject loan is higher than the fair value of the collateral, the carrying amount is written down to the fair value of the collateral. The fair value of the collateral is determined as the present value of the estimated realizable value of the collateral at the expected time of the sale of such collateral. Once the valuation report of the court-appointed appraiser becomes publicly available as part of a foreclosure proceeding, we use the appraisal value for the collateral indicated in such report as the estimated realizable value of the collateral. However, until such publication, we use the valuation amount for the collateral as determined by outside independent appraisers at the time that the subject loan was initially approved, with adjustments made for the change in value from the effect of time passage and current market circumstances that may impact the value of the collateral.

As a general rule, we obtain updated appraisal on an annual basis for all collateral dependent loans and therefore, adjust the appraisal value of loans every 12 months. We estimate the fair value of collateral with outdated appraisal value primarily on the basis of the publicly available standard reference prices as officially published by the government (or (x) in the case of collateral in the form of apartment units, the real estate market price database maintained by Kookmin Bank for apartment units, (y) in the case of collateral in the form of other communal housing units, the publicly available standard reference prices as officially published by the Ministry of Land, Infrastructure and Transport or (z) in the case of commercial buildings, the publicly available standard reference prices as officially published by the National Tax Service), except that (i) if there are bid prices for

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such collateral, we use as the fair value the lowest bid price deemed to be credible as to the bidder’s intent to purchase based on the written bid submitted by such purchaser and (ii) in the circumstances where we deem that the aforesaid reference prices do not accurately reflect the true value of such land, for example, due to a downturn in the relevant real estate market, we hire an outside appraiser to obtain an independent valuation, which valuation is typically derived from 90% or lower of the lowest of two or more sale prices from recent sales of similar types of collateral in the vicinity, and we use such valuation as the fair value for such collateral. Other than in the case of a bid price which is higher than the original appraisal value, we design our fair value estimation system so that the adjusted fair value does not exceed the original appraisal value and hence, in the absence of a higher bid price, the adjustments made have the effect of assigning a fair value lower than the original appraisal value. Since the magnitude of adjustments is principally dependent on reference prices maintained by the Government or bid prices, which are in turn dependent on the market prices, it varies case by case and is therefore difficult to compute the average adjustments made to outdated appraisals. After making such adjustments, we also internally appraise each collateral at least annually in order to ensure that the adjusted value is fair and reasonable.

We implement the following procedures to minimize the potential for outdated appraisal values being reflected in allowance for loan losses: (i) the date of appraisal is assigned next to the appraisal value to facilitate identification of an appraisal value as being outdated, (ii) our internal audit department constantly monitors the status of appraisal values, and (iii) the loan-to-value ratio, usually 60%, is strictly enforced when making the original loan so that the value of collateral typically stays above the outstanding loan amount during the life of the loan even in the case of an adjustment to the original appraisal value. If in the limited circumstances where the adjusted fair value of collateral falls below the outstanding loan amount, if the loan is impaired, we promptly set aside allowance for loan losses for such difference in amount.

Available-for-sale Financial Assets

Available-for-sale financial assets are the non-derivative financial assets that are designated as available-for-sale or are not classified as financial assets at fair value through profit or loss, held-to-maturity investments or loans and receivables. They are measured at fair value after their initial recognition.

Derecognition of Financial Assets

We derecognize a financial asset when the contractual rights to the cash flows from the asset expire, or we transfer the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that we create or retain is recognized as a separate asset or liability.

Offsetting

Financial assets and liabilities are offset and the net amount presented in the consolidated statements of financial position when, and only when, we have a legal right to offset the amounts and intend either to settle on a net basis or to realize the asset and settle the liability simultaneously.

Impairment of Financial Assets

We assess at the end of each reporting period whether there is any objective evidence that a financial asset or group of financial assets except for financial assets at fair value through profit or loss is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset and that loss event has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Objective evidence that financial assets are impaired includes significant financial difficulty of the borrower or issuer, default or delinquency in interest or principal payments, restructuring of a loan or a concession granted by us, which we would not otherwise consider, indications that a borrower or issuer will enter bankruptcy or other financial reorganization, or observable data such as an increased number of delayed payments indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets.

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Loans and Receivables

If there is objective evidence that an impairment loss on loans and receivables has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (i.e., the effective interest rate computed at initial recognition).

If the interest rate of loans and receivables is a floating rate, the discount rate used to evaluate impairment loss is the current effective interest rate defined in an agreement. The present value of estimated future cash flows of secured financial assets is calculated by including cash flows from collateral after deducting costs to acquire and sell the collateral, regardless of the probability of realization of such collateral.

In assessing collective impairment, we rate and classify financial assets, based on a credit risk assessment or credit rating assessment process that takes into account asset type, industry, regional location, collateral type, delinquency and other relative factors.

Future cash flow of financial assets applicable to collective impairment assessment is estimated by using statistical modeling of historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management’s judgment as to whether current economic and credit conditions are such that the impairment losses are likely to be greater or less than suggested by historical modeling. In adjusting the future cash flow by historical modeling, the result has to be in line with changes and trends of observable data (e.g., impairment loss of collective assets and unemployment rate, asset price, commodity price, payment status and other variables representing the size of implement loss). Methodologies and assumptions used to estimate future cash flow are reviewed on a regular basis in order to narrow down discrepancy between impairment loss estimation and actual loss.

Impairment losses are recognized in profit or loss and reflected in an allowance account against loans and receivables. When a subsequent event causes the amount of impairment loss to decrease, and the decrease can be related objectively to an event occurring after the impairment was recognized, the decrease in impairment loss is reversed through profit or loss of the period.

Allowance for Loan Losses

Our methodology for determining allowance for loan losses has changed in 2011.

Under both the previous and current methodology, determining allowance for loan losses involves determination both at the individual level and on the aggregate basis. While there is no material difference between our previous and current methodology in determining allowance for loan losses at the individual level except for differences in its recognition of loan losses as a result of subsequent events, there are certain differences when determining the allowance on the aggregate basis.

When determining allowance for loan losses, under the previous methodology, Shinhan Bank, which accounts for the substantial majority of loans held by Shinhan Financial Group, used a migration model, while under the current methodology, Shinhan Bank used a probability of default / loss-given default (“PD/LGD”) model. Certain differences may arise in allowances for loan losses calculated under the previous migration model and the current PD/LGD model.

Under the previous migration model, when determining allowance for loan losses, Shinhan Bank, which accounts for the substantial majority of loans held by Shinhan Financial Group, applied a migration model based on loan classifications. Shinhan Bank identified the probability of default for corporate loans through a migration

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model, which uses a statistical tool to monitor the progression of loans through nine different classifications over recent one year, while retail loans uses five different classifications over recent one year and are segmented into the two product types for the purposes of credit risk evaluation, namely, mortgage and home equity loans, and other retail loans (consisting of unsecured and secured retail loans). Loss given default for corporate loans is derived by the loss rate of individually evaluated impaired loans, while retail loans is derived by the historical charge-off and recovery information of the portfolio.

Under the current PD/LGD model, Shinhan Bank calculates the aggregate allowance for loan losses by multiplying (x) the probability of default for each class of borrowers that have been assigned the same credit rating by (y) the loss given default for such class of borrowers. A particular credit rating is assigned individually to each borrower based on (i) the borrower type (namely, household, corporate, SOHOs or high-risk borrowers) and (ii) its particular risk and credit profile within such type, using our proprietary credit evaluation model.

Our current PD/LGD model determines the probability of default for each class of borrowers having the same credit rating as follows. First, we determine the projected probability of default for such class of borrowers using the longer look-back periods under IFRS. However, at least annually (and more frequently during times of heightened systemic risks), we test such projected probability of default against the actual rate of default among such class of borrowers in the 12-months period immediately preceding such testing date. If based on such test the actual rate of default exceeds the mean or the maximum value of projected probability of default, we reassess, on an individual basis and using more conservative metrics, the credit rating assigned to each borrower within such class. Such credit rating reassessment generally has the effect of lowering the credit rating for a substantial number of borrowers that initially belonged to such class, which in turn has the effect of increasing the allowance of losses on an aggregate basis since the pool of borrowers having high credit ratings will have shrunk (and the pool of borrowers having lower credit ratings will have expanded) as the result of the individualized credit rating reassessment. Hence, such recalibration has the effect of reflecting the effects of current conditions in our final determination of the probability of default.

The migration and PD/LGD methods described above also have other differences. Under the previous migration method, the historical loss rate on migration analysis is calculated from a transition matrix table based on asset quality classification and takes into consideration historical loss rates and recovery rates after charge-off, whereas the current PD/LGD method (sophisticated approach), also known as Advanced Internal Rating-Based approach under Basel II, is calculated via measurable long-term risk factors such as probability of default from risk grading and loss given default based on the Basel II framework.

We believe that our current PD/LGD model has the following advantages compared to the previous migration model:

•

Statistically more robust while reflecting effects of current condition. From a statistical perspective, we believe our current PD/LGD model enables a more robust and reliable analysis by adopting a longer look-back period based on the Continuous Time Marcov Chain Rating Transition Approach than the one-year migration model does. While adopting a longer look-back period may have the effect of undervaluing the effects of current conditions, our model largely compensates for such potential undervaluation through the annual calibration process discussed above.

•

Analytically more fine-tuned. Our previous migration model analyzed the probability of default based on the following criteria only: retail vs. corporate and secured vs. unsecured. Under our current PD/LGD model, we examine the probability of default based on more granular classification as follows: households, corporate, small-office/home-office (SOHOs) and special high-risk borrowers. In addition, our current PD/LGD model also analyzes loss given default in greater detail, including location, types of collateral, loan-to-value ratios and (in the case of unsecured loans) types of loans.

•

More versatile use and improved reliability through greater internal scrutiny. The previous migration model was used only for the purpose of determining the probability of default in connection of computing allowance for losses based on asset classification. In comparison, our current PD/LGD model is being used for substantially all areas of our credit risk evaluation, including credit ratings, loan review and computation of capital adequacy. Given the more versatile use of our current PD/LGD model and the

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greater impact on system-wide risk arising from its misuse, we devote greater resources to ensuring the accuracy of this model through heightened scrutiny over its design, implementation and evaluation.

Available-for-sale Financial Assets

Impairment losses on available-for-sale financial assets are recognized by transferring the cumulative loss that has been recognized in other comprehensive income, and presented in the fair value reserve in equity, to profit or loss. The cumulative loss that is removed from other comprehensive income and recognized in profit or loss is the difference between the acquisition cost, net of any principal repayment and amortization, and the current fair value, less any impairment loss previously recognized in profit or loss. Changes in impairment provisions attributable to time value are reflected as a component of interest income.

If, in a subsequent period, the fair value of an impaired available-for-sale debt security increases and the increase can be related objectively to an event occurring after the impairment loss was recognized in profit or loss, then the impairment loss is reversed, with the amount of the reversal recognized in profit or loss. However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognized in other comprehensive income.

Held-to-maturity Financial Assets

An impairment loss in respect of held-to-maturity financial assets measured at amortized cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate and is recognized in profit or loss. Interest on the impaired asset continues to be recognized through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss.

Derivative Financial Instruments

Derivatives are recognized initially at fair value and attributable transaction costs are recognized in profit or loss as incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are accounted for as described below.

Hedge Accounting

We hold derivative financial instruments to hedge our foreign currency and interest rate risk exposures. On initial designation of the hedge, we formally document the relationship between the hedging instrument(s) and hedged item(s), including the risk management objectives and strategy in undertaking the hedge transaction, together with the methods that will be used to assess the effectiveness of the hedging relationship. We make an assessment, both at the inception of the hedge relationship as well as on an ongoing basis, whether the hedging instruments are expected to be “highly effective” in offsetting the changes in the fair value or cash flows of the respective hedged items during the period for which the hedge is designated, and whether the actual results of each hedge are within a range of 80-125%. For a cash flow hedge of a forecast transaction, the transaction should be highly probable to occur and should present an exposure to variations in cash flows that could ultimately affect reported net income.

Fair Value Hedges

When a derivative is designated as the hedging instrument in a hedge of the change in fair value of a recognized asset or liability or a firm commitment that could affect profit or loss, changes in the fair value of the derivative are recognized immediately in profit or loss together with changes in the fair value of the hedged item that are attributable to the hedged risk (in the same line item in the consolidated statements of comprehensive income as the hedged item).

If the hedging derivative expires or is sold, terminated, or exercised, or the hedge no longer meets the criteria for fair value hedge accounting, or the hedge designation is revoked, hedge accounting is discontinued prospectively. Any adjustment to a hedged item up to the point for which the effective interest method is used is amortized to profit or loss as part of the recalculated effective interest rate of the item over its remaining life.

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Cash Flow Hedges

When a derivative is designated as the hedging instrument in a hedge of the variability in cash flows attributable to a particular risk associated with a recognized asset or liability or a highly probable forecast transaction that could affect profit or loss, the effective portion of changes in the fair value of the derivative is recognized in other comprehensive income and presented in the hedging reserve in equity. The amount recognized in other comprehensive income is removed and included in profit or loss in the same period as the hedged cash flows affect profit or loss under the same line item in the consolidated statements of comprehensive income as the hedged item. Any ineffective portion of changes in the fair value of the derivative is recognized immediately in profit or loss.

If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated, exercised, or the designation is revoked, then hedge accounting is discontinued prospectively. The cumulative gain or loss previously recognized in other comprehensive income and presented in the hedging reserve in equity remains there until the forecast transaction affects profit or loss. If the forecast transaction is no longer expected to occur, then the balance in other comprehensive income is recognized immediately in profit or loss. In other cases the amount recognized in other comprehensive income is transferred to profit or loss in the same period that the hedged item affects profit or loss.

Separable Embedded Derivatives

Embedded derivatives are separated from the host contract and accounted for separately if the economic characteristics and risks of the host contract and the embedded derivative are not closely related, a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative, and the combined instrument is not measured at fair value through profit or loss. Changes in the fair value of separable embedded derivatives are recognized immediately in profit or loss.

Other Non-trading Derivatives

When a derivative financial instrument is not held for trading, and is not designated in a qualifying hedge relationship, all changes in its fair value are recognized immediately in profit or loss.

Property and Equipment

Items of property and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. We elect to measure land and buildings at fair value at the date of transition and use those fair values as their deemed costs.

The cost of replacing a part of an item of property or equipment is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to us and its cost can be measured reliably. The carrying amount of the replaced cost is derecognized. The cost of the day to day servicing of property and equipment are recognized in profit or loss as incurred.

Land is not depreciated. Other property and equipment are depreciated on a straight-line basis over their estimated useful life, which most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Leased assets under finance lease are depreciated over the shorter of the lease term and their useful lives. The estimated useful lives for the current and comparative periods are as follows:


Descriptions	Depreciation Method		Useful Lives
Buildings		Straight-line		40 years
Other properties		Straight-line		4~5 years

Depreciation methods, useful lives and residual value are reassessed at each fiscal year-end and any adjustment is accounted for as a change in accounting estimate.

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Intangible Assets

Goodwill

Goodwill that arises upon the acquisition of subsidiaries is included in intangible assets. Goodwill is measured at cost less accumulated impairment losses. In respect of associates, the carrying amount of goodwill is included in the carrying amount of the investment, and an impairment loss on such an investment is not allocated to any asset, including goodwill, that forms part of the carrying amount of the equity method accounted investee.

Research and Development

Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is recognized in profit or loss as incurred.

Development activities involve a plan or design for the production of new or substantially improved products and processes. Development expenditure is capitalized only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and we intend to and have sufficient resources to complete development and to use or sell the asset. The expenditure capitalized includes the cost of materials, direct labor, overhead costs that are directly attributable to preparing the asset for its intended use, and borrowing costs on qualifying assets for which the commencement date for capitalization is on or after January 1, 2010. Other development expenditure is recognized in profit or loss as incurred.

Capitalized development expenditure is measured at cost less accumulated amortization and accumulated impairment losses.

Intangible Assets such as Club Memberships with Indefinite Useful Lives

There are no foreseeable limits to the periods over which club memberships are expected to be available for use. This intangible asset is determined as having indefinite useful lives and not amortized.

The useful lives of intangible assets that are not being amortized are reviewed at the end of each reporting period to determine whether events and circumstances continue to support indefinite useful life assessments for those assets. Changes are accounted for as changes in accounting estimates.

Other Intangible Assets

Other intangible assets with finite useful lives that we acquire are measured at cost less accumulated amortization and accumulated impairment losses.

Amortization

Amortization is calculated over the cost of the asset, or other amount substituted for cost, less its residual value. Amortization is recognized in profit or loss on a straight-line basis over the estimated useful lives of intangible assets, other than goodwill, from the date that they are available for use, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. The estimated useful lives for the current and comparative periods are as follows:


Descriptions		Useful Lives
Software, capitalized development cost		5 years
Other intangible assets		5 years or contract periods

Amortization methods, useful lives and residual values are reviewed at each financial year-end and adjusted if appropriate.

Investment Property

Investment property is property held either to earn rental income or for capital appreciation or for both, but not for sale in the ordinary course of business, use in the production or supply of goods or services, or for administrative purposes.

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Investment property is measured initially at cost. Transaction costs are included in the initial measurement. Subsequently, investment property is carried at depreciated cost less any accumulated impairment loss.

Leased Assets

Classification of a Lease

A finance lease is a lease that transfers substantially all of the risks and rewards incidental to ownership of the leased asset from the lessor to the lessee; title to the asset may or may not transfer under such a lease. An operating lease is a lease other than a finance lease.

Lessee

Under a finance lease, the lessee recognizes the leased asset and a liability for future lease payments. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset.

Under an operating lease, the lessee recognizes the lease payments as expense over the lease term and does not recognize the leased asset in the consolidated statements of financial position.

Lessor

Under a finance lease, the lessor recognizes a finance lease receivable. Over the lease term the lessor accrues interest income on the net investment. The receipts under the lease are allocated between reducing the net investment and recognizing finance income, so as to produce a constant rate of return on the net investment.

Under an operating lease, the lessor recognizes the lease payments as income over the lease term and the leased asset in the consolidated statements of financial position.

Assets Held for Sale

Non-current assets, or disposal groups comprising assets and liabilities, that are expected to be recovered primarily through sale rather than through continuing use, are classified as held for sale. Immediately before classification as held for sale, the assets, or components of a disposal group, are remeasured in accordance with our accounting policies. Thereafter generally the assets, or disposal group, are measured at the lower of their carrying amount and fair value less cost to sell. Impairment losses on initial classification as held for sale and subsequent gains or losses on remeasurement are recognized in profit or loss. Gains are not recognized in excess of any cumulative impairment loss.

Impairment of Non-financial Assets

The carrying amounts of our non-financial assets, other than investment property and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. For goodwill, and intangible assets that have indefinite useful lives or that are not yet available for use, the recoverable amount is estimated each year at the same time.

The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the “cash-generating unit”, or “CGU”).

An impairment loss is recognized if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. Impairment losses are recognized in profit or loss. Impairment losses recognized in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the units, and then to reduce the carrying amounts of the other assets in the unit (group of units) on a pro rata basis.

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An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.

Goodwill that forms part of the carrying amount of an investment in an associate is not recognized separately, and therefore is not tested for impairment separately. Instead, the entire amount of the investment in an associate is tested for impairment as a single asset when there is objective evidence that the investment in an associate may be impaired.

Non-Derivative Financial Liabilities

Depending on commitments in a contract and definition of financial liabilities, the non-derivative financial liabilities are categorized as either at fair value through profit or loss or other financial liabilities.

Our equity-linked securities are hybrid financial products that combine features of debt securities and equity options. Their returns are based on the interest earned on the debt securities plus the gains or losses from the equity options. Equity-linked securities can be offered in Korea only by specially licensed brokers dealing in over-the-counter derivative products, and we offer these products through Shinhan Investment.

Under the accounting principle of fair value option, we measure the fair value of the equity-linked securities and reflect the changes in such fair value in net income. We compute the fair value of these securities primarily internally based on the Black and Scholes’ option pricing model, except that in the case of overseas stocks, overseas stock indexes or other underlying assets, we use the average of valuations by two outside valuation firms hired by us.

Financial Liabilities at Fair Value through Profit or Loss

The financial liabilities at fair value through profit or loss include a financial liability held for trading or designated at fair value through profit or loss upon initial recognition. These financial liabilities are measured at fair value after initial recognition and changes in the fair value are recognized through profit or loss of the period. Costs attributable to the issuance or acquisition are immediately expensed in the period.

Other Financial Liabilities

The financial liabilities not classified as at fair value through profit or loss are classified into other financial liabilities. The liabilities are measured at a fair value minus cost relating to issuance upon initial recognition. Then, they are carried at amortized cost, using the effective interest rate method.

Only when financial liabilities become extinct, or obligations in a contract are cancelled or terminated, are they derecognized from our consolidated statements of financial position.

Equity Instrument

Capital Stock

Capital stock is classified as equity. Incremental costs directly attributable to the transaction of stock are deducted, net of tax, from the equity.

Preference Share Capital

Preference share capital is classified as equity if it is non-redeemable, or redeemable only at our option, and any dividends are discretionary. Dividends thereon are recognized as distributions within equity upon approval by our shareholders.

Preference share capital is classified as a liability if it is redeemable on a specific date or at the option of the shareholders, or if dividend payments are not discretionary. Dividends thereon are recognized as interest expense in profit or loss as accrued.

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Hybrid Bond

We classify issued financial instrument, or its component parts, on initial recognition as a financial liability or an equity instrument in accordance with the substance of the contractual arrangement and the definitions of a financial liability and an equity instrument. Hybrid bonds, in which we have an unconditional right to avoid delivering cash or another financial asset to settle a contractual obligation, are classified as equity instruments and presented in equity.

Non-controlling Interest

Non-controlling interest, which means the equity is a subsidiary not attributable, directly or indirectly, to a parent, consists of the amount of those non-controlling interests at the date of the original combination calculated in accordance with IFRS 3(R) “Business Combination” and the non-controlling interests’ share of changes in equity since the date of the combination.

Employee Benefits

Short-term Employee Benefits

Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided.

A liability is recognized for the amount expected to be paid under short-term cash bonus or profit-sharing plans if we have a present legal or constructive obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably.

Other Long-term Employee Benefits

Our net obligation in respect of long-term employee benefits other than pension plans is the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value, and the fair value of any related assets is deducted. The discount rate is the yield at the reporting date on AA credit-rated bonds that have maturity dates approximating the terms of our obligations. The calculation is performed using the projected unit credit method. Any actuarial gains and losses are recognized in profit or loss in the period in which they arise.

Defined Benefit Plans

A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. Our net obligation in respect of defined benefit plans is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value. The fair value of plan assets is deducted. The calculation is performed annually by an independent actuary using the projected unit credit method.

Remeasurements of the net defined benefit liability, which comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognized immediately in other comprehensive income. We determine the net interest expense (income) on the net defined benefit liability (asset) for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the then-net defined benefit liability (asset), taking into account any changes in the net defined benefit liability (asset) during the period as a result of contributions and benefit payments. Net interest expense and other expenses related to defined benefit plans are recognized in personnel expenses in profit or loss.

The discount rate is the yield at the reporting date on high-quality corporate bonds that have maturity dates approximating the terms of our obligations and that are denominated in the same currency in which the benefits are expected to be paid. We recognize service cost and net interest on the net defined benefit liability (asset) in profit or loss and remeasurement of the net defined benefit liability (asset) in other comprehensive income.

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When the benefits of a plan are changed or when a plan is curtailed, the resulting change in benefit that relates to past service or the gain or loss on curtailment is recognized immediately in profit or loss. We recognize gains and losses on the settlement of a defined benefit plan when the settlement occurs.

Defined Contribution Plans

A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans are recognized as an employee benefit expense in profit or loss in the periods during which services are rendered by employees. Prepaid contributions are recognized as an asset to the extent that a cash refund or a reduction in future payments is available.

Termination Benefits

Termination benefits are recognized as an expense when we are committed demonstrably, without realistic possibility of withdrawal, to a formal detailed plan to either terminate employment before the normal retirement date, or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits for voluntary redundancies are recognized as an expense if we have made an offer of voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably. If benefits are payable more than 12 months after the reporting period, then they are discounted to their present value.

Share-based Payment Transactions

The grant date fair value of share-based payment awards granted to employees is recognized as an employee expense, with a corresponding increase in equity, over the period that the employees unconditionally become entitled to the awards. The amount recognized as an expense is adjusted to reflect the number of awards for which the related service and non-market vesting conditions are expected to be met, such that the amount ultimately recognized as an expense is based on the number of awards that do meet the related service and non-market performance conditions at the vesting date. For share-based payment awards with non-vesting conditions, the grant date fair value of the share-based payment is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes.

The fair value of the amount payable to employees in respect of share appreciation rights, which are settled in cash, is recognized as an expense with a corresponding increase in liabilities, over the period that the employees unconditionally become entitled to payment. The liability is remeasured at each reporting date and at settlement date. Any changes in the fair value of the liability are recognized as personnel expense in profit or loss.

Provisions

A provision is recognized if, as a result of a past event, we have a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability.

Provisions are reviewed at the end of each reporting period and adjusted to reflect the current best estimate. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision is reversed.

Financial Guarantee Contract

Financial guarantees are contracts that require us to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument. Financial guarantee liabilities are recognized initially at their fair value, and the initial fair value is amortized over the life of the financial guarantee. The financial guarantee liability is subsequently carried at the higher of this amortized amount and the present value of any expected payment when a payment under the guarantee has become probable. Financial guarantees are included within other liabilities.

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Financial Income and Expense

Interest

Interest income and expense are recognized in profit or loss using the effective interest method. The effective interest rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability (or, where appropriate, a shorter period) to the carrying amount of the financial asset or liability. When calculating the effective interest rate, we estimate future cash flows considering all contractual terms of the financial instrument, but not future credit losses.

The calculation of the effective interest rate includes all fees and points paid or received that are an integral part of the effective interest rate. Transaction costs include incremental costs that are directly attributable to the acquisition or issue of a financial asset or liability.

Recognition of Interest Income on Impairment Losses

Once an impairment loss has been recognized on a loan, although the accrual of interest in accordance with the contractual terms of the instrument is discontinued, interest income is recognized at the rate of interest that was used to discount estimated future cash flows for the purpose of measuring the impairment loss.

Fees and Commission

Fees and commission income and expense that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate.

Other fees and commission income, including account servicing fees, investment management fees, sales commission, placement fees and syndication fees, are recognized as the related services are performed. When a loan commitment is not expected to result in the draw-down of a loan, the related loan commitment fees are recognized on a straight-line basis over the commitment period.

Other fees and commission expense relate mainly to transaction and service fees, which are expensed as the services are received.

Dividends

Dividend income is recognized when the right to receive income is established. Usually this is the ex-dividend date for equity securities.

Customer Loyalty Program

For customer loyalty programs, the fair value of the consideration received or receivable in respect of the initial sale is allocated between award credits (“points”) and other components of the fee and commission income. The Group provides awards, in the form of price discounts and by offering a variety of gifts. The fair value allocated to the points is estimated by reference to the fair value of the monetary and/or non-monetary benefits for which they could be redeemed. The fair value of the benefits is estimated taking into account the expected redemption rate and the timing of such expected redemptions. Such amount is deferred and recognized as unearned revenue. Unearned revenue is recognized only when the points are redeemed and the Group has fulfilled its obligations to provide the benefits. The amount of revenue recognized in those circumstances is based on the number of points that have been redeemed in exchange for benefits, relative to the total number of points that are expected to be redeemed.

Income Tax

Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in profit or loss except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income.

Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.

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Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss, and differences associated with investments in subsidiaries, associates, and interests in joint ventures, to the extent that we are able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. In addition, deferred tax is not recognized for taxable temporary differences arising on the initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.

A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.

We file our national income tax return with the Korean tax authorities under the consolidated corporate tax system, which allows us to make national income tax payments based on our and our wholly owned domestic subsidiaries’ consolidated profits or losses. Deferred taxes are measured based on the future tax benefits expected to be realized in consideration of the expected profits or losses of eligible companies in accordance with the consolidated corporate tax system. Consolidated corporate tax amounts, once determined, are allocated to each of our subsidiaries and are used as a basis for the income taxes to be recorded in their separate financial statements.

Accounting for Trust Accounts

We account for trust accounts separately from our group accounts under the Financial Investment Services and Capital Markets Act and thus the trust accounts are not included in the consolidated financial statements except those which are guaranteed as to principal (or as to both principal and interest) controlled by us, based on an evaluation of the substance of its relationship with us and the special purpose entity’s risks and rewards. Funds transferred between a group account and a trust account are recognized as borrowings from trust accounts in other liabilities with fees for managing the accounts recognized as non-interest income by us.

Earnings per Share

We present basic and diluted earnings per share (“EPS”) data for our ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to an ordinary shareholder by the weighted average number of common shares outstanding during the period, adjusted for own shares held. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding, adjusted for own shares held, for the effects of all dilutive potential ordinary shares, which comprise convertible notes and share options granted to employees.

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Average Balance Sheet and Volume and Rate Analysis

Average Balance Sheet and Related Interest

The following table shows our average balances and interest rates, as well as the net interest spread, net interest margin and asset liability ratio, in 2011, 2012 and 2013.


	Year Ended December 31,
	2011							2012							2013
	Average Balance(1)		Interest Income/ Expense		Yield / Rate			Average Balance(1)		Interest Income/ Expense		Yield / Rate			Average Balance(1)		Interest Income/ Expense		Yield / Rate
	(In billions of Won, except percentages)
Assets:
Interest-earning assets
Due from banks	￦	11,110	￦	249		2.24	%	￦	12,080	￦	247		2.04	%	￦	13,918	￦	201		1.44	%
Trading assets		11,285		414		3.67			17,378		515		2.96			19,037		531		2.79
Loans(2)
Retail loans		66,953		3,751		5.60			70,974		3,847		5.42			75,069		3,487		4.65
Corporate loans		99,734		5,349		5.36			102,800		5,280		5.14			105,482		4,664		4.42
Public and other loans		3,516		193		5.50			3,591		195		5.43			2,821		131		4.64
Loans to banks		3,750		102		2.72			5,215		153		2.92			4,824		122		2.54
Credit card loans		17,740		1,887		10.64			17,508		1,834		10.48			17,436		1,764		10.12

Total loans		191,693		11,282		5.89			200,088		11,309		5.65			205,632		10,168		4.94

Securities(3)
Available-for-sale financial assets		26,626		1,026		3.85			30,566		1,154		3.78			30,474		983		3.23
Held-to-maturity financial assets		12,307		643		5.22			11,793		595		5.04			11,187		528		4.72

Total securities		38,933		1,669		4.29			42,359		1,749		4.13			41,661		1,511		3.63

Other interest-earning assets		—		167		—			—		178		—			—		177		—

Total interest-earning assets	￦	253,021	￦	13,781		5.45	%	￦	271,905	￦	13,998		5.15	%	￦	280,248	￦	12,588		4.49	%

Non-interest-earning assets
Cash and due from banks	￦	2,390						￦	2,661						￦	2,601
Derivative assets		2,951							2,094							1,789
Available-for-sale financial assets		4,760							4,389							4,046
Property and equipment and intangible assets		6,981							7,732							7,393
Other non-interest-earning assets		15,552							14,081							14,149

Total non-interest-earning assets	￦	32,634						￦	30,957						￦	29,978

Total assets	￦	285,655	￦	13,781				￦	302,862	￦	13,998				￦	310,226	￦	12,588

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	Year Ended December 31,
	2011							2012							2013
	Average Balance(1)		Interest Income/ Expense		Yield / Rate			Average Balance(1)		Interest Income/ Expense		Yield / Rate			Average Balance(1)		Interest Income/ Expense		Yield / Rate
	(In billions of Won, except percentages)
Liabilities:
Interest-bearing liabilities
Deposits
Demand deposits	￦	16,517	￦	119		0.72	%	￦	17,233	￦	118		0.68	%	￦	19,531	￦	126		0.65	%
Savings deposits		34,234		335		0.98	%		38,655		478		1.24			40,139		387		0.96
Time deposits		99,653		3,597		3.61	%		109,743		3,980		3.63			112,134		3,367		3.00
Other deposits		3,513		130		3.71	%		1,875		61		3.26			1,680		34		2.01

Total interest-bearing deposits		153,917		4,181		2.72	%		167,506		4,637		2.77			173,484		3,914		2.26

Borrowings		19,733		485		2.46	%		22,258		565		2.54			21,730		468		2.16
Debt securities issued		40,048		1,943		4.85	%		39,938		1,740		4.36			38,251		1,521		3.98
Other interest-bearing liabilities		1,715		92		5.34	%		1,367		76		5.58			2,098		82		3.87

Total interest-bearing liabilities	￦	215,413	￦	6,701		3.11	%	￦	231,069	￦	7,018		3.04	%	￦	235,563	￦	5,985		2.54	%

Non-interest-bearing liabilities
Non-interest-bearing deposits	￦	2,570						￦	2,459						￦	2,669
Derivatives liabilities		2,569							1,811							1,790
Insurance liabilities		9,940							12,053							14,590
Other non-interest-bearing liabilities		26,694							27,263							26,335

Total non-interest-bearing liabilities	￦	41,773						￦	43,586						￦	45,404

Total liabilities	￦	257,186	￦	6,701				￦	274,655	￦	7,018				￦	280,967	￦	5,985

Total equity attributable to equity holder of the Group		26,008							25,728							26,976
Non-controlling interest		2,461							2,479							2,283

Total liabilities and equity	￦	285,655	￦	6,701				￦	302,862	￦	7,018				￦	310,226	￦	5,985

Net interest spread(4)						2.34	%						2.11	%						1.95	%
Net interest margin(5)						2.80	%						2.57	%						2.36	%
Average asset liability ratio(6)						117.46	%						117.67	%						118.97	%

Notes:

(1)	Average balances are based on (a) daily balances for Shinhan Bank and (b) quarterly balances for other subsidiaries.

(2)	Non-accruing loans are included in the respective average loan balances. Income on such non-accruing loans is no longer recognized from the date the loan is placed on nonaccrual status. We reclassify loans as accruing when interest (including default interest) and principal payments are current.

(3)

Represents the average balance and yield on securities based on amortized cost. The yield on the available-for-sale portfolio is based on average historical cost balances. Accordingly, the yield information does not give effect to changes in fair value that are reflected as a component of stockholders’ equity.

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(4)	Represents the difference between the average rate of interest earned on interest-earning assets and the average rate of interest paid on interest-bearing liabilities.

(5)	Represents the ratio of net interest income to average interest-earning assets.

(6)	Represents the ratio of average interest-earning assets to average interest-bearing liabilities.

Analysis of Changes in Net Interest Income — Volume and Rate Analysis

The following table provides an analysis of changes in interest income, interest expense and net interest income between changes in volume and changes in rates for (i) 2013 compared to 2012 and (ii) 2012 compared to 2011. Volume and rate variances have been calculated on the movement in average balances and the change in the interest rates on average interest-earning assets and average interest-bearing liabilities in proportion to absolute volume and rate change. The variance caused by the change in both volume and rate has been allocated in proportion to the absolute volume and rate change.


	From 2012 to 2013 Interest Increase (Decrease) Due to Change in
	Volume			Rate			Change
	(In billions of Won)
Increase (decrease) in interest income
Due from banks	￦	34		￦	(80	)	￦	(46	)
Trading assets		47			(31	)		16
Loans:
Retail loans		213			(573	)		(360	)
Corporate loans		135			(751	)		(616	)
Public and other loans		(38	)		(26	)		(64	)
Loans to banks		(11	)		(20	)		(31	)
Credit card loans		(7	)		(63	)		(70	)

Total loans		292			(1,433	)		(1,141	)

Securities:
Available-for-sale financial assets		(3	)		(168	)		(171	)
Held-to-maturity financial assets		(30	)		(37	)		(67	)

Total securities		(33	)		(205	)		(238	)

Other interest-earning assets		—			(1	)		(1	)

Total interest income	￦	340		￦	(1,750)		￦	(1,410	)


Increase (decrease) in interest expense
Deposits:
Demand deposits	￦	15		￦	(7	)	￦	8
Savings deposits		18			(109	)		(91	)
Time deposits		85			(698	)		(613	)
Other deposits		(6	)		(21	)		(27	)

Total interest-bearing deposits		112			(835	)		(723	)

Borrowings		(13	)		(84	)		(97	)
Debt securities issued		(71	)		(148	)		(219	)
Other interest-bearing liabilities		34			(28	)		6

Total interest expense	￦	82		￦	(1,095)		￦	(1,033	)

Net increase (decrease) in net interest	￦	278		￦	(655)		￦	(377)

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	From 2011 to 2012 Interest Increase (Decrease) Due to Change in
	Volume			Rate			Change
	(In billions of Won)
Increase (decrease) in interest income
Due from banks	￦	21		￦	(23	)	￦	(2	)
Trading assets		192			(91	)		101
Loans:
Retail loans		220			(124	)		96
Corporate loans		162			(231	)		(69	)
Public and other loans		4			(2	)		2
Loans to banks		43			8			51
Credit card loans		(25	)		(28	)		(53	)

Total loans		404			(377	)		27

Securities:
Available-for-sale financial assets		148			(20	)		128
Held-to-maturity financial assets		(26	)		(22	)		(48	)

Total securities		122			(42	)		80

Other interest-earning assets		—			11			11

Total interest income	￦	739		￦	(522	)	￦	217

Increase (decrease) in interest expense
Deposits:
Demand deposits	￦	5		￦	(6	)	￦	(1	)
Savings deposits		47			96			143
Time deposits		366			17			383
Other deposits		(55	)		(14	)		(69	)

Total interest-bearing deposits		363			93			456

Borrowings		64			16			80
Debt securities issued		(5	)		(198	)		(203	)
Other interest-bearing liabilities		(20	)		4			(16	)

Total interest expense	￦	402		￦	(85	)	￦	317

Net increase (decrease) in net interest	￦	337		￦	(437	)	￦	(100	)

Results of Operations

2013 Compared to 2012

The following table sets forth, for the periods indicated, the principal components of our operating income.


	Year Ended December 31,
	2012			2013			% Change
	(In billions of Won, except percentages)
Net interest income	￦	6,980		￦	6,603			(5.4	)%
Net fees and commission income		1,543			1,387			(10.1	)
Net other operating income (expense)		(5,345	)		(5,352	)		0.1

Operating income	￦	3,178		￦	2,638			(17.0	)%

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Net Interest Income

The following table shows, for the periods indicated, the principal components of our net interest income.


	Year Ended December 31,
	2012			2013			% Change
	(In billions of Won, except percentages)
Interest income:
Cash and due from banks	￦	247		￦	201			(18.6	)%
Trading assets		489			493			0.8
Financial assets designated at fair value through profit or loss		26			38			46.2
Loans		11,309			10,168			(10.1	)
Available-for-sale financial assets		1,154			983			(14.8	)
Held-to-maturity financial assets		595			528			(11.3	)
Other interest income		178			177			(0.6	)

Total interest income	￦	13,998		￦	12,588			(10.1	)%

Interest expense:
Deposits	￦	4,637		￦	3,914			(15.6	)%
Borrowings		565			468			(17.2	)
Debt securities issued		1,740			1,521			(12.6	)
Other interest expense		76			82			7.9

Total interest expense	￦	7,018		￦	5,985			(14.7	)%

Net interest income	￦	6,980		￦	6,603			(5.4	)%

Net interest margin(1)		2.57	%		2.36	%		(8.3	)%

Note:

(1)	Represents the ratio of net interest income to average interest-earning assets. See “— Average Balance Sheet and Volume and Rate Analysis — Average Balance Sheet and Related Interest.”

Interest income. The 10.1% decrease in interest income was due primarily to a decrease in interest on loans. Interest on loans decreased by 10.1% from ￦11,309 billion in 2012 to ￦10,168 billion in 2013, primarily as a result of a decrease in the average lending rate from 5.65% in 2012 to 4.94% in 2013 largely as a result of a general decrease in market interest rates in reflection of the lowering of the base interest rate by the Bank of Korea and the ample liquidity in the Korean financial sector, which was partially offset by a 2.8% increase in the average balance of total loans from ￦200,088 billion in 2012 to ￦205,632 billion in 2013 due to an increase in the average balance of both retail and corporate loans following targeted loan growth in select strategic customer segments.

Interest on retail loans decreased by 9.4% from ￦3,847 billion in 2012 to ￦3,487 billion in 2013, primarily due to a decrease in the average lending rate for retail loans from 5.42% in 2012 to 4.65% in 2013, which was partially offset by a 5.8% increase in the average balance of retail loans from ￦70,974 billion in 2012 to ￦75,069 billion in 2013. The average lending rate for retail loans decreased largely as a result of a decrease in the base rate set by the Bank of Korea, which largely determines the market rates for certificates of deposit, which in turn largely determines our lending rates for a substantial majority of our retail loans. The average balance of retail loans increased principally as a result of an increase in the volume of long-term housing rental deposit loans in tandem with a growing preference for long-term housing rental in lieu of home ownership due in part to the continued slump in the Korean real property market, as well as increased lending to borrowers with high credit profiles and government employees with relatively strong job security, such as police officers and firefighters, as part of our strategic initiative to increase the volume of lending while maintaining or improving the profit margin and asset quality for such lending.

189

Interest on corporate loans decreased by 11.7% from ￦5,280 billion in 2012 to ￦4,664 billion in 2013, which was primarily due to a decrease in the average lending rate for corporate loans from 5.14% in 2012 to 4.42% in 2013, which was partially offset by a 2.6% increase in the average balance of such loans from ￦102,800 billion in 2012 to ￦105,482 billion in 2013. The average lending rate for corporate loans decreased largely as a result of a general decrease in market interest rates in reflection of the lowering of the base rate by the government and the ample liquidity in the Korean financial sector. The average balance of corporate loans increased principally as a result of an increase in loans to SOHO and small- and medium-sized enterprise borrowers with quality credit profiles as part of our strategic lending policies as well as the launch of new loan products for SOHO and small- and medium-sized enterprises in general at relatively affordable rates in line with the Government’s policy initiative to assist and support such enterprises, which more than offset a decrease in the balance of loans to large corporations due to the sale or write-off of a portion of such loans that were insolvent or at risk of insolvency as part our risk management efforts to improve the overall quality of our assets.

Interest expense. Interest expense decreased by 14.7% from ￦7,018 billion in 2012 to ￦5,985 billion in 2013, due primarily to a 15.6% decrease in interest expense on deposits from ￦4,637 billion in 2012 to ￦3,914 billion in 2013, a 17.2% decrease in interest expense on borrowings from ￦565 billion in 2012 to ￦468 billion in 2013 and a 12.6% decrease in interest expense on debt securities issued from ￦1,740 billion in 2012 to ￦1,521 billion in 2013.

The decrease in interest expense on deposits was due to a decrease in the average interest rate payable on deposits from 2.77% in 2012 to 2.26% in 2013, which was partially offset by a 3.6% increase in the average balance of deposits from ￦167,506 billion in 2012 to ￦173,484 billion in 2013. The increase in the average balance of deposits was primarily due to a 2.2% increase in the average balance of time deposits from ￦109,743 billion in 2012 to ￦112,134 billion in 2013, which was partially offset by a 10.4% decrease in the average balance of other deposits from ￦1,875 billion in 2012 to ￦1,680 billion in 2013. The overall increase in the average balance of time deposits was largely due to the growing preference among customers for higher-yielding deposit products such as time deposits (which generally offer relatively higher rates of interest compared to our other deposit products) in light of the continued low interest rate environment in Korea in 2013, as well as our efforts to maintain our customer base by offering competitive rates on time deposits. The average balance of other deposits, which principally consist of certificates of deposit, decreased primarily as a result of our efforts to replace a portion of certificates of deposit with regular customer deposits in order to improve our loan-to-deposit ratio since the former are not classified as deposits for purposes of computing such ratio. The decrease in the average interest rate payable on deposits resulted mainly from a decrease in the average interest rate payable on time deposits from 3.63% in 2012 to 3.00% in 2013 and a decrease in the average interest rate payable on other deposits from 3.26% in 2012 to 2.01% in 2013. The average interest rate payable on time deposits decreased largely as a result of increasing competition among commercial banks for customer deposits to secure stable funding and strengthen customer loyalty as well as a general decrease in market interest rates attributable to the decrease in the base interest rate set by the Bank of Korea and ample liquidity in the Korean financial sector. The average interest rate payable on other deposits also decreased largely as a result of the general decrease in market interest rates in 2013, as well as our efforts to decrease the volume of our certificates of deposit by offering lower rates thereon.

The decrease in interest expense on borrowings was due to a 2.4% decrease in the average balance of borrowings from ￦22,258 billion in 2012 to ￦21,730 billion in 2013 and a decrease on the average interest rate payable on borrowings from 2.54% in 2012 to 2.16% in 2013. The average balance of borrowings decreased largely as a result of the increase in the average balance of deposits and greater availability of funding through capital markets in tandem with the ample liquidity in the Korean financial sector, both of which reduced our need to source funding through borrowings. The average interest rate payable on borrowings decreased largely due to the general decrease in market interest rates in 2013 and our active efforts to reduce borrowings with relatively high interest rates through repayment.

The decrease in interest expense on debt securities issued was due to a decrease in the average interest rate payable on debt securities from 4.36% in 2012 to 3.98% in 2013, and a 4.2% decrease in the average balance of debt securities from ￦39,938 billion in 2012 to ￦38,251 billion in 2013. The average interest rate payable on

190

debt securities issued decreased largely as a result of a general decrease in market interest rates in reflection of the lowering of the base rate by the Bank of Korea and the ample liquidity in the Korean financial sector. The average balance of debt securities issued decreased largely as a result of the increase in the average balance of deposits, which reduced our need to source funding through issuance of debt securities, which bear higher interest rates.

Net interest margin. Net interest margin represents the ratio of net interest income to the average balance of interest-earning assets. Our overall net interest margin decreased by 21 basis points from 2.57% in 2012 to 2.36% in 2013, due to a decrease by 16 basis points in net interest spread from 2.11% in 2012 to 1.95% in 2013, which more than offset a 3.1% increase in the average volume of interest-earning assets from ￦271,905 billion in 2012 to ￦280,248 billion in 2013. Net interest spread, which represents the difference between the average rate of interest earned on interest-earning assets and the average rate of interest paid on interest-bearing liabilities, decreased from 2012 to 2013 primarily due to a 66 basis points decrease in the average rate of interest receivable on interest-earning assets (principally consisting of loans) from 5.15% in 2012 to 4.49% in 2013 primarily resulting from the decrease in base interest rates set by the Bank of Korea in 2012 from 2.75% in 2012 to 2.50% in 2013, which more than offset a 50 basis points decrease in the average rate of interest paid on interest-bearing liabilities from 3.04% in 2012 to 2.54% in 2013 primarily due to a decrease in the average interest rate payable on deposits from 2.77% in 2012 to 2.26% in 2013 and a decrease in the average interest rate payable on debt securities issued from 4.36% in 2012 to 3.98% in 2013, in each case, for reasons discussed above. In general, as was the case in 2012, a decrease in the base rates set by the Bank of Korea tend to decrease our net interest margin since our deposits (on which we pay interest) have, on average, a longer maturity profile than our loans (from which we receive interest) do and are therefore less sensitive to movements in base and market interest rates. See “— Overview — Interest Rates.”

Fees and Commission Income (Expense), Net

The following table shows, for the periods indicated, the principal components of our net fees and commission income.


	Year Ended December 31,
	2012		2013		% Change
	(In billions of Won, except percentages)
Fees and commission income:
Credit placement fees	￦	58	￦	67		15.5	%
Commission received as electronic charge receipt		134		132		(1.5	)
Brokerage fees		354		329		(7.1	)
Commission received as agency		211		213		0.9
Investment banking fees		70		45		(35.7	)
Commission received in foreign exchange activities		148		143		(3.4	)
Asset management fees		47		51		8.5
Credit card fees		2,071		2,106		1.7
Others		398		404		1.5

Total fees and commission income	￦	3,491	￦	3,490		N/M	%

Fees and commission expense:
Credit-related fees	￦	38	￦	38		—	%
Credit card fees		1,678		1,726		2.9
Others		232		339		46.1

Total fees and commission expense		1,948		2,103		8.0

Net fees and commission income	￦	1,543	￦	1,387		(10.1	)%

N/M = not meaningful

191

Net fees and commission income decreased by 10.1% from ￦1,543 billion in 2012 to ￦1,387 billion in 2013, primarily as a result of a 46.1% increase in other fees and commission expense from ￦232 billion in 2012 to ￦339 billion in 2013, a 2.9% increase in credit card fee expense from ￦1,678 billion in 2012 to ￦1,726 billion in 2013, a 35.7% decrease in investment banking fee income from ￦70 billion in 2012 to ￦45 billion in 2013 and a 7.1% decrease in brokerage fee income from ￦354 billion in 2012 to ￦329 billion in 2013, which were partially offset by a 1.7% increase in credit card fee income from ￦2,071 billion in 2012 to ￦2,106 billion in 2013.

The increase in other fees and commission expense was principally attributable to an increase in fees paid by Shinhan Card in connection with factoring transactions relating to SK Telecom mobile handset installment receivables and an increase in insurance premiums relating to Shinhan Card’s guarantee for such receivables. The increase in credit card fee expense was principally attributable to an increase in the expenses related to the reward points systems and membership services for Shinhan Card largely as a result of enhanced marketing efforts to maintain and expand our credit card customers. Investment banking fee income decreased largely due to a decrease in advisory fee income as a result of a general decline in the number and volume of investment banking transactions in Korea, including real estate development, public infrastructure projects and mergers and acquisitions. The decrease in brokerage fee income was principally attributable to decreases in the balance of indirect investment products and the trading volume in the Korean stock market due to increased investor preference for low risk investments in the face of uncertainty in the general economy as well as a decrease in brokerage fee rates due to intensifying competition for brokerage services primarily brought by the prevalence of Internet-based and mobile trading services for which minimal brokerage fee is charged. The increase in credit card fees income was principally attributable to an increase in average credit card balances, which was largely offset by a decrease in the rate of fees we charge on merchants.

Other Operating Income (Expense), Net

The following table shows, for the periods indicated, the principal components of our net operating expense.


	Year Ended December 31,
	2012			2013			% Change
	(In billions of Won, except percentages)
Net insurance loss	￦	(209	)	￦	(379	)		81.3	%
Dividend income		174			158			(9.2	)
Net trading income		608			77			N/M
Net foreign currency transaction gain		280			296			5.7
Net loss on financial instruments designated at fair value through profit or loss		(532	)		(122	)		N/M
Net gain on sale of available-for-sale financial assets		536			701			30.8
Impairment loss on financial assets		(1,416	)		(1,340	)		(5.4	)
General and administrative expenses		(4,062	)		(4,203	)		3.5
Others		(724	)		(540	)		(25.4	)

Other operating income (expense)	￦	(5,345	)	￦	(5,352	)		0.1	%

N/M = not meaningful

Net other operating expenses remained relatively stable at ￦5,352 billion in 2013 compared to ￦5,345 billion in 2012, primarily as a result of a significant decrease in net loss on financial instruments designated at fair value through profit or loss, a 25.4% decrease in other expense, a 30.8% increase in net gain on sale of available-for-sale financial assets and a 5.4% decrease in impairment loss on financial assets (as further explained below), which were partially offset by a significant decrease in net trading income, a 3.5% increase in general and administrative expense and a 81.3% increase in net insurance loss.

Net loss on financial instruments designated at fair value through profit or loss decreased significantly from ￦532 billion in 2012 to ￦122 billion in 2013, largely as a result of significant valuation gain and gain on sale of

192

equity-linked securities sold by us due to a general decrease in market stock prices in 2013. However, the net economic effect from such loss is negligible since we hedge substantially all of our equity-linked securities and such loss is therefore offset for the most part by net trading income from valuation gains from related derivative products.

Other expense decreased by 25.4% from ￦724 billion in 2012 to ￦540 billion in 2013 principally due to an increase in other income attributable to the sale of defaulted loans to Kookmin Happy Fund and a decrease in loss from hedging activities.

Net gain on sale of available-for-sale financial assets increased by 30.8% from ￦536 billion in 2012 to ￦701 billion in 2013 principally due to gain realized from the sale of shares in SK Hynix and available-for-sale debt securities in 2013 in the amount of ￦148 billion and ￦123 billion, respectively.

Net trading income decreased significantly from ￦608 billion in 2012 to ￦77 billion in 2013, largely as a result of losses incurred by Shinhan Bank and Shinhan Investment relating to derivative transactions and valuation loss on derivative products.

General and administrative expenses increased by 3.5% from ￦4,062 billion in 2012 to ￦4,203 billion in 2013 principally due to an increase in severance and retirement benefits related to our early retirement programs and performance-related bonuses, as well as an increase in Shinhan Card’s marketing expenses.

Net insurance loss increased by 81.3% from ￦209 billion in 2012 to ￦379 billion in 2013 principally due to a decrease in Shinhan Life Insurance’s fee income resulting from a decrease in the sale of new bancassurance contracts following adverse changes in tax regulation, as well as an increase in commission expenses that are recognized upfront as a result of changes in insurance regulations.

Impairment Loss on Financial Assets

The following table sets forth for the periods indicated the impairment loss by type of financial asset.


	Year Ended December 31,
	2012			2013			% Change
	(In billions of Won, except percentages)
Loans:
Retail	￦	177		￦	140			(20.9	)%
Corporate		860			613			(28.7	)
Credit card		295			339			14.9
Others		(7	)		(10	)		42.9

Subtotal		1,325			1,082			(18.3	)
Securities(1)		101			215			N/M
Others		(10	)		43			N/M

Total impairment loss on financial assets	￦	1,416		￦	1,340			(5.4	)%

N/M = not meaningful

Note:

(1)	Consist of available-for-sale financial assets.

Impairment loss on financial assets decreased by 5.4% from ￦1,416 billion in 2012 to ￦1,340 billion in 2013 principally due to a 18.3% decrease in impairment on loans from ￦1,325 billion in 2012 to ￦1,082 billion in 2013, which mainly resulted from:

•

a 28.7% decrease in impairment loss on corporate loans from ￦860 billion in 2012 to ￦613 billion in 2013 principally due to a decrease in delinquency among corporate borrowers resulting from our enhanced risk management policy and ongoing efforts to increase the overall asset quality of our corporate loans by focusing on SOHOs and small- to medium- sized enterprises with high quality credit, and

193

•

a 20.9% decrease in impairment loss on retail loans from ￦177 billion in 2012 to ￦140 billion in 2013 principally due to a decrease in impairment of our collective housing loans, which are loans made to a group of borrowers on identical terms for certain types of purchases of real property, such as subscription for apartment pre-sales. Impairment of our collective retail loans decreased largely as a result of a decrease in our balance of collective retail loans due to the sustained downturn in the real estate market in Korea and our sale of a portion of our impaired collective retail loans in 2013; and

which more than offset

•

a 14.9% increase in impairment loss on credit card loans from ￦295 billion in 2012 to ￦339 billion in 2013 principally due to increases in allowance for credit card loan losses and bad debt expenses resulting from an increase in the delinquency rate for such loans and a reduction in recovery of credit card loans that were written off.

The decrease in impairment loss on loans was partially offset by a significant increase in impairment loss on securities from ￦101 billion in 2012 to ￦215 billion in 2013 principally due to recognition of impairment loss on shares in POSCO and SsangYong Engineering & Construction held by us following a decline in their stock prices and on our capital investment in Credit Recovery Fund due to lowered valuations of such capital investment by a third party valuation firm in 2013.

Income Tax Expense

Income tax expense decreased by 15.7% from ￦739 billion in 2012 to ￦623 billion in 2013 as a result of the decrease in our taxable income. Our effective rate of income tax remained relatively stable from 22.9% in 2012 to 23.2% in 2013.

Net Income for the Period

As a result of the foregoing, our net income for the period decreased by 17.4% from ￦2,492 billion in 2012 to ￦2,059 billion in 2013.

Other Comprehensive Income for the Period


	Year Ended December 31,
	2012			2013			% Change
	(In billions of Won, except percentages)
Items that will be reclassified to profit or loss:
Foreign currency translation differences for foreign operations	￦	(85	)	￦	(58	)		(31.8	)%
Net change in fair value of available-for-sale financial assets		13			(270	)		N/M
Equity in other comprehensive income of associates		4			(5	)		N/M
Net change in unrealized fair value of cash flow hedges		16			6			N/M
Other Comprehensive income (loss) of separate account		1			(2	)		N/M

		(51	)		(329	)		545.1
Items that will not be reclassified to profit or loss:
Remeasurements of defined benefit liability		—			20			N/M

		—			20			N/M

Total other comprehensive loss, net of income tax	￦	(51	)	￦	(309	)		N/M	%

N/M = not meaningful

Other comprehensive loss increased significantly to ￦309 billion in 2013 from ￦51 billion in 2012, principally due to the absence in 2013 of the one-time gain realized from the sale of shares in SK Hynix and Visa in 2012.

194

2012 Compared to 2011

The following table sets forth, for the periods indicated, the principal components of our operating income.


	Year Ended December 31,
	2011			2012			% Change
	(In billions of Won, except percentages)
Net interest income	￦	7,080		￦	6,980			(1.4	)%
Net fees and commission income		1,759			1,543			(12.3	)
Net other operating income (expense)		(4,514	)		(5,345	)		18.4

Operating income	￦	4,325		￦	3,178			(26.5	)%

Net Interest Income

The following table shows, for the periods indicated, the principal components of our net interest income.


	Year Ended December 31,
	2011			2012			% Change
	(In billions of Won, except percentages)
Interest income:
Cash and due from banks	￦	249		￦	247			(0.8	)%
Trading assets		394			489			24.1
Financial assets designated at fair value through profit or loss		20			26			30.0
Loans		11,282			11,309			0.2
Available-for-sale financial assets		1,026			1,154			12.5
Held-to-maturity financial assets		643			595			(7.5	)
Other interest income		167			178			6.6

Total interest income	￦	13,781		￦	13,998			1.6	%

Interest expense:
Deposits	￦	4,181		￦	4,637			10.9	%
Borrowings		485			565			16.5
Debt securities issued		1,943			1,740			(10.4	)
Other interest expense		92			76			(17.4	)

Total interest expense	￦	6,701		￦	7,018			4.7	%

Net interest income	￦	7,080		￦	6,980			(1.4	)%

Net interest margin(1)		2.80	%		2.57	%		(8.2	)%

Note:

(1)	Represents the ratio of net interest income to average interest-earning assets. See “— Average Balance Sheet and Volume and Rate Analysis — Average Balance Sheet and Related Interest.”

Interest income. The moderate 1.6% increase in interest income was due primarily to the stable level of interest on loans coupled with a 12.5% increase in interest on available-for-sale financial assets. The increase in interest on available-for-sale financial assets largely resulted from a 14.8% increase in the average balance of our available-for-sale financial assets from ￦26,626 billion in 2011 to ￦30,566 billion in 2012 due to our active investment in debt securities as a source of profit in the face of sluggishness of the general economy, which was partially offset by a decrease in the average interest rates for available-for-sale financial assets from 3.85% in 2011 to 3.78% in 2012 due a general decrease in market interest rates.

Interest on loans remained largely stable, having decreased by 0.2% from ￦11,282 billion in 2011 to ￦11,309 billion in 2012, primarily as a result of a decrease in the average lending rate from 5.89% in 2011 to

195

5.65% in 2012 largely as a result of a general decrease in market interest rates in reflection of the lowering of the base rate by the Bank of Korea and the ample liquidity in the Korean financial sector, which was substantially offset by a 4.4% increase in the average balance of total loans from ￦191,693 billion in 2011 to ￦200,088 billion in 2012 due to an increase in the average balance of both retail and corporate loans following targeted loan growth in select strategic customer segments.

Interest on retail loans increased by 2.6% from ￦3,751 billion in 2011 to ￦3,847 billion in 2012, which was primarily due to a 6.0% increase in the average balance of retail loans from ￦66,953 billion in 2011 to ￦70,974 billion in 2012, which was partially offset by a decrease in the average lending rate for such loans from 5.60% in 2011 to 5.42% in 2012. The average balance of retail loans increased principally as a result of a net increase in the volume of mortgage and home equity loans in 2012 largely due to a decrease in the lending rates in the second half of 2012 which more than offset the prolonged downturn in the real estate market, as well an increase in specialized lending to police officers and other government employees with relatively strong job security and stable credit profiles as part of our tailored strategic marketing efforts. The average lending rate for retail loans decreased largely as a result of a decrease in the base rate set by the Bank of Korea, which largely determines the market rates for certificates of deposit, which in turn largely determines our lending rates for a substantial majority of our retail loans.

Interest on corporate loans decreased by 1.3% from ￦5,349 billion in 2011 to ￦5,280 billion in 2012, which was primarily due to a decrease in the average lending rate for corporate loans from 5.36% in 2011 to 5.14% in 2012, which was partially offset by a 2.1% increase in the average balance of such loans from ￦99,734 billion in 2011 to ￦102,800 billion in 2012. The average lending rate for corporate loans decreased largely as a result of a general decrease in market interest rates in reflection of the lowering of the base rate by the government and the ample liquidity in the Korean financial sector. The average balance of corporate loans increased principally as a result of an increase in the volume of facility loans as well as an increase in the volume of loans to small-office, small-home sole proprietorship borrowers (SOHOs) and other quality small- to medium-sized enterprises with strong credit profiles as part of our tailored strategic marketing efforts, which was partially offset by a decrease in the volume of working capital loans following the redemption by Korea Deposit Insurance Corporation of working capital loans in the aggregate amount of ￦1,982 billion in the first half of 2012 in connection with the restructuring of savings banks.

Interest expense. Interest expense increased by 4.7% from ￦6,701 billion in 2011 to ￦7,018 billion in 2012, due primarily to a 10.9% increase in interest expense on deposits from ￦4,181 billion in 2011 to ￦4,637 billion in 2012 and a 16.5% increase in interest expense on borrowings from ￦485 billion in 2011 to ￦565 billion in 2012, which was partially offset by a 10.4% decrease in interest expense on debt securities issued from ￦1,943 billion in 2011 to ￦1,740 billion in 2012.

The increase in interest expense on deposits was due to a 6.8% increase in the average balance of deposits from ￦153,917 billion in 2011 to ￦167,506 billion in 2012 and a slight increase in the average interest rate payable on deposits from 2.72% in 2011 to 2.77% in 2012. The increase in the average balance of deposits was primarily due to a 10.1% increase in the average balance of time deposits from ￦99,653 billion in 2011 to ￦109,743 billion in 2012, which was partially offset by a 46.6% decrease in the average balance of other deposits from ￦3,513 billion in 2011 to ￦1,875 billion in 2012. The overall increase in the average balance of deposits was largely due to the increasing preference among consumers for bank deposits (and particularly, time deposits, which generally offered the highest interest rates among our deposit products) as safe investment products amid the continued uncertainty in the general economy and the sustained slump in the housing market. The average balance of other deposits, which principally consist of certificates of deposit, decreased primarily as a result of our efforts to replace a portion of certificates of deposit with regular customer deposits in order to improve our loan-to-deposit ratio since the former are not classified as deposits for purposes of computing such ratio. The slight increase in the average interest rate payable on deposits resulted mainly from an increase in the average interest rate payable on time deposits from 3.61% in 2011 to 3.63% in 2012, which more than offset the decrease in the average interest rate payable on other deposits from 3.71% in 2011 to 3.26% in 2012. The average interest rate payable on time deposits increased largely as a result of increasing competition among commercial banks (as well as Korea Development Bank which launched retail banking services in 2012) for customer deposits to secure stable funding, strengthen customer loyalty and reduce the loan-to-deposit ratio,

196

which more than offset the impact from the increase in the base rate set by the Bank of Korea, which tends to have a lag effect compared to lending rates due to the differential maturity profiles of our customer deposits compared to our loans.

The increase in interest expense on borrowings was due to a 12.8% increase in the average balance of borrowings from ￦19,733 billion in 2011 to ￦22,258 billion in 2012 and an increase on the average interest rate payable on borrowings from 2.46% in 2011 to 2.54% in 2012, which resulted primarily from an increase in the average balance of bonds sold under repurchase agreements, which bear relatively higher interest rates, from ￦3,675 billion in 2011 to ￦4,753 billion in 2012 as part of our effort to expand the customer base for Shinhan Investment in this type of product offering.

The decrease in interest expense on debt securities issued was due to a decrease in the average interest rate payable on debt securities from 4.85% in 2011 to 4.36% in 2012, and to a lesser extent, a 0.3% decrease in the average balance of debt securities from ￦40,048 billion in 2011 to ￦39,938 billion in 2012. The average interest rate payable on debt securities issued decreased largely as a result of a general decrease in market interest rates in reflection of the lowering of the base rate by the Bank of Korea and the ample liquidity in the Korean financial sector. The average balance of debt securities issued decreased largely as a result of the increase in the average balance of deposits, which reduced our need to source funding through issuance of debt securities, which bear higher interest rates.

Net interest margin. Net interest margin represents the ratio of net interest income to the average balance of interest-earning assets. Our overall net interest margin decreased by 23 basis points from 2.80% in 2011 to 2.57% in 2012, due to a decrease by 23 basis points in net interest spread from 2.34% in 2011 to 2.11% in 2012, which more than offset a 7.5% increase in the average volume of interest-earning assets from ￦253,021 billion in 2011 to ￦271,905 billion in 2012. Net interest spread, which represents the difference between the average rate of interest earned on interest-earning assets and the average rate of interest paid on interest-bearing liabilities, decreased from 2011 to 2012 primarily due to a 30 basis points decrease in the average rate of interest receivable on interest-earning assets (principally consisting of loans) from 5.45% in 2011 to 5.15% in 2012 primarily resulting from the decrease in base interest rates set by the Bank of Korea in 2012 from 3.25% in 2011 to 2.75% in 2012, which more than offset a seven basis points decrease in the average rate of interest paid on interest-bearing liabilities from 3.11% in 2011 to 3.04% in 2012 primarily due to a decrease in the average interest rate payable on debt securities issued from 4.85% in 2011 to 4.36% in 2012, which was partially offset by an increase in the average interest rate payable on deposits from 2.72% in 2011 to 2.77% in 2012, in each case, for reasons discussed above. In general, as was the case in 2012, a decrease in the base rates set by the Bank of Korea tend to decrease our net interest margin since our deposits (on which we pay interest) have, on average, a longer maturity profile than our loans (from which we receive interest) do and are therefore less sensitive to movements in base and market interest rates. See “— Overview — Interest Rates.”

197

Fees and Commission Income (Expense), Net

The following table shows, for the periods indicated, the principal components of our net fees and commission income.


	Year Ended December 31,
	2011		2012		% Change
	(In billions of Won, except percentages)
Fees and commission income:
Credit placement fees	￦	50	￦	58		16.0	%
Commission received as electronic charge receipt		145		134		(7.6	)
Brokerage fees		495		354		(28.5	)
Commission received as agency		115		240		108.7
Investment banking fees		69		70		1.4
Commission received in foreign exchange activities		162		148		(8.6	)
Asset management fees		68		47		(30.9	)
Credit card fees		2,020		2,071		2.5
Others		433		369		(14.8	)

Total fees and commission income	￦	3,557	￦	3,491		(1.9	)%

Fees and commission expense:
Credit-related fees	￦	25	￦	38		52.0	%
Credit card fees		1,544		1,678		8.7
Others		229		232		1.3

Total fees and commission expense		1,798		1,948		8.3

Net fees and commission income	￦	1,759	￦	1,543		(12.3	)%

Net fees and commission income decreased by 12.3% from ￦1,759 billion in 2011 to ￦1,543 billion in 2012, primarily as a result of a 28.5% decrease in brokerage fees income from ￦495 billion in 2011 to ￦354 billion in 2012 and a 8.7% increase in credit card fees expenses from ￦1,544 billion in 2011 to ￦1,678 billion in 2012, which was substantially offset by a 108.7% increase in commission received as agency.

The decrease in brokerage fees income was principally attributable to decreases in the balance of indirect investment products and the trading volume in the Korean stock market due to increased investor preference for low risk investments in the face of uncertainty in the general economy as well as a decrease in the brokerage fee rates due to intensifying competition for brokerage services primarily brought by the prevalence of Internet-based and mobile trading services for which minimal brokerage fee is charged. Commission received as agency primarily represents fees received for sale of bancassurance products, and its increase was largely due to increased sales of certain tax-exempt insurance and annuity products due to changes in tax law. The increase in credit card fee expense was principally attributable to an increase in the expenses related to the reward points systems and membership services for Shinhan Card largely as a result of enhanced marketing efforts to maintain and expand our credit card customers. Credit card fee income remained largely stable, having increased by 2.5% from ￦2,020 billion in 2011 to ￦2,071 billion in 2012 largely due to an increase in average credit card balances, which was largely offset by a decrease in the rate of fees we charge on merchants.

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Other Operating Income (Expense), Net

The following table shows, for the periods indicated, the principal components of our net operating expense.


	Year Ended December 31,
	2011			2012			% Change
	(In billions of Won, except percentages)
Net insurance loss	￦	(119	)	￦	(209	)		75.6	%
Dividend income		209			174			(16.7	)
Net trading income (loss)		(132	)		608			N/M
Net foreign currency transaction gain		14			280			N/M
Net gain (loss) on financial instruments designated at fair value through profit or loss		172			(532	)		N/M
Net gain on sale of available-for-sale financial assets		846			536			(36.6	)
Impairment loss on financial assets		(983	)		(1,416	)		44.0
General and administrative expenses		(3,983	)		(4,062	)		2.0
Others		(538	)		(724	)		34.6

Other operating expense	￦	(4,514	)	￦	(5,345	)		18.4	%

N/M = not meaningful

Net other operating expenses increased by 18.4% from ￦4,514 billion in 2011 to ￦5,345 billion in 2012, primarily as a result of an increase in impairment loss on financial assets (as further explained below), recording a net loss on financial instruments designated at fair value through profit or loss in 2012 compared to recording net such gain in 2011 and a decrease in net gain on sale of available-for-sale financial assets, which more than offset recording net trading income in 2012 compared to net trading loss in 2011.

We recorded net loss on financial instruments designated at fair value through profit or loss of ￦532 billion in 2012 compared to net such gain of ￦172 billion in 2011, largely as a result of valuation losses on equity-linked securities issued by us. However, the net economic effect from such loss is negligible since we hedge substantially all of our equity-linked securities and such loss is therefore offset for the most part by net trading income from valuation gains from related derivative products.

Net gain on sale of available-for-sale financial assets decreased by 36.6% from ￦846 billion in 2011 to ￦536 billion in 2012 principally due to the gain on sale of shares in Hyundai Construction and BC Card in 2011 in the amount of ￦352 billion and ￦89 billion, respectively.

We recorded net trading income of ￦608 billion in 2012 compared to net trading loss of ￦132 billion in 2011, largely as a result of valuation gains on derivative products used for hedging equity-linked securities issued by us.

General and administrative expenses increased by 2.0% from ￦4,062 billion in 2011 to ￦3,983 billion in 2012 principally due to our cost reduction efforts, including less advertising and a reduced payout of performance-related bonuses.

199

Impairment Loss on Financial Assets

The following table sets forth for the periods indicated the impairment loss by type of financial asset.


	Year Ended December 31,
	2011			2012			% Change
	(In billions of Won, except percentages)
Loans:
Retail	￦	66		￦	177			168.2	%
Corporate		647			860			32.9
Credit card		166			295			77.7
Others		(15	)		(7	)		(53.3	)

Subtotal		864			1,325			53.4
Securities(1)		87			101			16.1
Others		32			(10	)		N/M

Total impairment loss on financial assets	￦	983		￦	1,416			44.0	%

N/M = not meaningful

Note:

(1)	Consist of available-for-sale financial assets and held-to-maturity financial assets

Impairment loss on financial assets increased by 44.0% from ￦983 billion in 2011 to ￦1,416 billion in 2012 principally due to a 53.4% increase in impairment on loans from ￦864 billion in 2011 to ￦1,325 billion in 2012, which mainly resulted from:

•

an increase in impairment loss on retail loans by 168.2% from ￦66 billion in 2011 to ￦177 billion in 2012 principally due to an increase in delinquency among collective loans for apartment pre-sales as a result of a continued slump in the housing market, particularly in respect of sales of newly constructed apartment units;

•

an increase in impairment loss on corporate loans by 32.9% from ￦647 billion in 2011 to ￦860 billion in 2012 principally due to the deteriorating financial soundness of construction companies resulting from the continued slump in the housing market and the increase in allowance for losses on loans made by Shinhan Capital to shipbuilders as a result of continued difficulty in the shipbuilding industry; and

•

an increase in impairment loss on credit card loans by 77.7% from ￦166 billion in 2011 to ￦295 billion in 2012 principally due to an increase in the delinquency rate and a reduction in recovery for credit card loans that were written off.

Income Tax Expense

Income tax expense decreased by 22.8% from ￦957 billion in 2011 to ￦739 billion in 2012 as a result of the decrease in our taxable income. Our effective rate of income tax increased from 21.9% in 2011 to 22.9% in 2012 largely as a result of a decrease in tax refunds in 2012 compared to 2011.

Net Income for the Period

As a result of the foregoing, our net income for the period decreased by 26.4% from ￦3,388 billion in 2011 to ￦2,492 billion in 2012.

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Other Comprehensive Income for the Period


	Year Ended December 31,
	2011			2012			% Change
	(In billions of Won, except percentages)
Items that will be reclassified to profit or loss:
Foreign currency translation differences for foreign operations	￦	16		￦	(85)			N/M%
Net change in fair value of available-for-sale financial assets		(461	)		13			N/M
Equity in other comprehensive income of associates		3			4			33.3
Net change in unrealized fair value of cash flow hedges		1			16			N/M
Other Comprehensive income (loss) of separate account		—			1			N/M

		(441	)		(51	)		(88.4	)
Items that will never be reclassified to profit or loss:
Remeasurements of defined benefit liability		(115	)		—			N/M

		(115	)		—			N/M

Total other comprehensive loss, net of income tax	￦	(556	)	￦	(51	)		N/M	%

N/M = not meaningful

Other comprehensive loss decreased to ￦51 billion in 2012 from ￦556 billion in 2011, principally due to the absence of divestment of Hyundai Engineering & Construction Co., Ltd. shares in 2011.

Results by Principal Business Segment

As of December 31, 2013, we were organized into eight major business segments as follows:

•

the following banking services, which are principally provided by Shinhan Bank:

•

retail banking;

•

corporate and investment banking;

•

international banking; and

•

other banking services;

•

credit card services, which are provided by Shinhan Card;

•

securities brokerage services, which are provided by Shinhan Investment;

•

life insurance services, which are provided by Shinhan Life Insurance; and

•

other.

Our senior management regularly makes decisions about resources to be allocated to these activities and assesses performance of the activities using this information, and consequently this forms the basis of our segment reporting included in Note 7 in the notes to our consolidated financial statements included in this annual report.

Operating Income by Principal Business Segment

Effective January 1, 2012, in order to enhance operational efficiency, Shinhan Bank reorganized its business operations which resulted in a partial adjustment of segmentation of its principal businesses.

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The table below provides the income statement data for our principal business segments for the periods indicated. For purposes of facilitating comparability of segment results in 2011 compared to 2012, the segment results for 2011 for purposes of such comparison were adjusted to reflect the adjusted business segments.


	Year Ended December 31,									% Change
	2011(1)			2012			2013			2011/2012			2012/2013
	(In billions of Won, except percentages)
Banking:
Retail banking	￦	913		￦	699		￦	460			(23.4	)%		(34.2	)%
Corporate and investment banking		838			889			988			6.1			11.1
International banking		75			211			123			181.3			(41.7	)
Others		1,005			314			175			(68.8	)		(44.3	)

Subtotal		2,831			2,113			1,746			(25.4	)		(17.4	)
Credit card		1,097			942			833			(14.1	)		(11.6	)
Securities		123			68			102			(44.7	)		50.0
Life insurance		322			279			113			(13.4	)		(59.5	)
Others		(66	)		(261	)		(117	)		N/M			(55.2	)
Consolidation adjustment(2)		18			37			(39	)		N/M			N/M

Total operating income	￦	4,325		￦	3,178		￦	2,638			(26.5	)%		(17.0	)%

N/M = not meaningful

Notes:

(1)

Prior to 2012, the “Others” segment included our holding company’s income for the period on a non-consolidated basis, which consisted of dividends from our subsidiaries on account of our ownership of stock in our subsidiaries, interest income from loans extended to our subsidiaries and fees and commissions received from our subsidiaries for the use of the group brands and logos, interest expense and administrative costs. Starting in 2012, the “Others” segment no longer includes dividends from our subsidiaries on account of our ownership of stock in our subsidiaries. The “Others” segment results for 2011 have also been so adjusted retroactively for comparability purposes.

(2)	Consolidation adjustment consists of unrealized operating income in respect of related party transactions and adjustment difference of individual asset and liability price in respect of consolidated and nonconsolidated financial statements.

For segment reporting purposes, each segment result reflects provision for loan losses that are allocated based on the ending balances of loans for each segment in order to show a meaningful comparison of performance within such segment and compared to other segments.

We allocate provision for loan losses as follows: (i) first, each of our operating segments is allocated up to 100% of the expected loss from loans made by such segment (namely, with respect to a particular loan, 80% of the expected loss for such loan on a daily basis based on the daily ending balance of such loan and the remaining 20% upon the occurrence of insolvency for such loan), and (ii) the difference between the actual incurred loss and the expected loss for a given operating segment is in the “Others (Banking)” segment. Accordingly, the total provision of losses recorded for our banking business is a sum of expected loss for each banking segment and any amounts by which actual incurred loss exceeds expected loss allocated to a loan whose borrower has become insolvent, which is recorded as provision of loan losses for the “Others (Banking)” segment.

Retail Banking

The retail banking segment primarily consists of banking and other services provided by Shinhan Bank and Jeju Bank’s retail banking branches to the branch customers, which principally consist of individuals and households. The retail banking products principally consist of mortgage and home equity loans and other retail loans, deposits and other savings products and fees earned from the sale of investment and bancassurance products.

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The table below provides the income statement data for the retail banking segment for the periods indicated. For purposes of facilitating comparability of segment results in 2011 compared to 2012, the segment results for 2011 for purposes of such comparison were adjusted to reflect the adjusted business segment.


	Year Ended December 31,									% Change
	2011			2012			2013			2011/2012			2012/2013
	(In billions of Won, except percentages)
Net interest income (expense)	￦	2,671		￦	2,513		￦	2,341			(5.9	)%		(6.8	)%
Net fees and commission income (expense)		624			600			559			(3.8	)		(6.8	)
Net other income (expense)		(2,382	)		(2,414	)		(2,440	)		1.3			1.1

Operating income (expense)	￦	913		￦	699		￦	460			(23.4	)%		(34.2	)%

Comparison of 2013 to 2012

Operating income for retail banking decreased by 34.2% from ￦699 billion in 2012 to ￦460 billion in 2013.

Net interest income for retail banking decreased by 6.8% from ￦2,513 billion in 2012 to ￦2,341 billion in 2013 due to a tightening of our net interest margin resulting from a decline in general market interest rates following the reduction of the base interest rate set by the Bank of Korea to 2.50% in 2013 from 2.75% in 2012, which generally has a greater impact on the average interest rate on loans relative to that on deposits due to the shorter repricing periods for the former, as well as intensified rate competition among peer commercial banks for high quality retail loans and customer deposits and an increase in the proportion of retail loans with higher asset quality for which Shinhan Bank charges lower rates. The deterioration in the our net interest margin more than offset the increase in the volume of retail loans, which was primarily attributable to an increase in the volume of specialized loan products for government employees and borrowers with high credit profiles and long-term home rental deposit loans.

Net fees and commission income decreased by 6.8% from ￦600 billion in 2012 to ￦559 billion in 2013 primarily due to reduced demand for indirect investment products offered by Shinhan Bank’s retail banking branches resulting from the continued stagnation in domestic stock markets, as well as a decrease in fees received for bancassurance products due to a decrease in the volume of bancassurance products sold in response to a change in applicable tax regulations relating to tax exemptions and deductions for bancassurance products.

Net other expense remained largely stable, having increased by 1.1% from ￦2,414 billion in 2012 to ￦2,440 billion in 2013 primarily due to an increase in general and administrative expense resulting from an increase in severance and other benefits related to Shinhan Bank’s early retirement programs.

Comparison of 2012 to 2011

Operating income for retail banking decreased by 23.4% from ￦913 billion in 2011 to ￦699 billion in 2012.

Net interest income for retail banking decreased by 5.9% from ￦2,671 billion in 2011 to ￦2,513 billion in 2012 due to an increase in funding costs arising from the increase in the volume of deposits amidst consumers’ continuing preference for bank deposits, the increase in the rates offered on deposits to attract customer deposit in light of the increased competition among commercial banks for customer deposits, as well as the decrease in the average lending rates for retail loans in reflection of the abundant market liquidity in Korea, which more than offset an increase in the volume of retail loans (particularly as a result of the introduction of specialized loan products for police officers and other government employees) and mortgage loan products. The decrease in net interest income for retail banking was also attributable to a gradual deterioration of Shinhan Bank’s net interest spread, which resulted from a general decrease in market interest rates largely driven by the incremental decrease in the base interest rate set by the Bank of Korea to 2.75% in 2012 from 3.25% in 2011, which had a greater impact on the average interest rate on Shinhan Bank’s loans relative to the average interest rate on Shinhan Bank’s deposits due to the shorter repricing periods for the former and increased rate competition among commercial banks for retail loans and customer deposits.

203

Net fees and commission income decreased by 3.8% from ￦624 billion in 2011 to ￦600 billion in 2012 primarily due to reduced demand for indirect investment products offered by Shinhan Bank’s retail banking branches as a result of the continued stagnation in domestic stock markets.

Net other expense remained largely stable, having increased by 1.3% from ￦2,382 billion in 2011 to ￦2,414 billion in 2012 primarily due to a decrease in expenses related to court deposit service, which was substantially offset by an increase in general and administrative expense resulting from an increase in severance and other benefits related to Shinhan Bank’s early retirement programs.

Corporate and Investment Banking

The corporate and investment banking segment primarily consists of banking and other services provided by Shinhan Bank’s corporate banking branches to their corporate customers, most of which are small- and medium-sized enterprises and large corporations, including members of the chaebol groups, such as general lending and providing overdrafts and other credit facilities.

The table below provides the income statement data for the corporate and investment banking segment for the periods indicated. For purposes of facilitating comparability of segment results in 2011 compared to 2012, the segment results for 2011 for purposes of such comparison were adjusted to reflect the adjusted business segment.


	Year Ended December 31,									% Change
	2011			2012			2013			2011/2012			2012/2013
	(In billions of Won, except percentages)
Net interest income (expense)	￦	1,014		￦	1,049		￦	937			3.5	%		(10.7	)%
Net fees and commission income (expense)		279			275			233			(1.4	)		(15.3	)
Net other income (expense)		(455	)		(435	)		(182	)		(4.4	)		(58.2	)

Operating income (expense)	￦	838		￦	889		￦	988			6.1	%		11.1	%

Comparison of 2013 to 2012

Operating income for corporate and investment banking increased by 11.1% from ￦889 billion in 2012 to ￦988 billion in 2013.

Net interest income decreased by 10.7% from ￦1,049 billion in 2012 to ￦937 billion in 2013 primarily due to a decrease in the volume of loans to large corporate borrowers, which resulted primarily from an increased use of capital markets for financing, instead of bank loans, by large corporations to take advantage of ample liquidity in the Korean financial sector, as well as intensified pricing competition among commercial banks to make high quality corporate loans, which adversely affected Shinhan Bank’s average lending rate.

Net fees and commission income decreased by 15.3% from ￦275 billion in 2012 to ￦233 billion in 2013 primarily due to a decrease in investment advisory fees resulting from decreased investment banking activities in light of the continued weakness in the Korean and global economies.

Net other expense significantly decreased by 58.2% from ￦435 billion in 2012 to ￦182 billion in 2013 primarily due to a decrease in provision of loan losses resulting from an absence of major workouts or rehabilitations of corporate borrowers as well as an increase in net gain on the sale of debt securities as a preemptive measure to reduce interest rate volatility.

Comparison of 2012 to 2011

Operating income for corporate and investment banking increased by 6.1% from ￦838 billion in 2011 to ￦889 billion in 2012.

Net interest income increased by 3.5% from ￦1,014 billion in 2011 to ￦1,049 billion in 2012 primarily due to an increase in the volume of corporate loans to quality SOHO and small- and medium-sized enterprise borrowers as a result of from Shinhan Bank’s ongoing efforts to attract and maintain quality corporate borrowers

204

as part of Shinhan Bank’s tailored strategic marketing efforts as well as enhanced risk management policy in response to the uncertainty in global economic prospects, and a decrease in funding costs resulting from the decrease in the base interest rate set by the Bank of Korea.

Net fees and commission income decreased by 1.4% from ￦279 billion in 2011 to ￦275 billion in 2012 primarily due to a decrease in investment advisory fees resulting from decreased investment banking activities in light of the continued weakness in the Korean and global economies.

Net other expense decreased by 4.4% from ￦455 billion in 2011 to ￦435 billion in 2012 primarily due to a decrease in the expected loss from corporate loans made resulting from a slowdown in the growth of corporate loans in 2012 compared to 2011, which was partially offset by an increase in selling and administrative expenses for reasons similar to that for retail banking as discussed above and an increase in provision for loan losses attributable to the increase in the proportion of insolvent borrowers in the construction industry and, to a lesser extent, the shipbuilding and shipping industries, as a result of the continued slump in such industries in 2012.

International Banking

The international banking segment primarily consists of the results of operations of Shinhan Bank’s overseas subsidiaries and branches, as well as Shinhan Bank’s non-deposit funding activities, including trading of, and investment in, debt securities and, to a lesser extent, equity securities for its own accounts, handling its treasury activities, such as inter-segment lending and borrowing, entering into derivatives transactions and investment banking.

The table below provides the income statement data for the international banking segment for the periods indicated. For purposes of facilitating comparability of segment results in 2011 compared to 2012, the segment results for 2011 for purposes of such comparison were adjusted to reflect the adjusted business segment.


	Year Ended December 31,									% Change
	2011			2012			2013			2011/2012			2012/2013
	(In billions of Won, except percentages)
Net interest income (expense)	￦	259		￦	289		￦	273			11.6	%		(5.5	)%
Net fees and commission income (expense)		46			48			50			4.3			4.2
Net other income (expense)		(230	)		(126	)		(200	)		(45.2	)		58.7

Operating income (expense)	￦	75		￦	211		￦	123			181.3	%		(41.7	)%

Comparison of 2013 to 2012

Operating income for international banking decreased by 41.7% from ￦211 billion in 2012 to ￦123 billion in 2013.

Net interest income decreased by 5.5% from ￦289 billion in 2012 to ￦273 billion in 2013 primarily due to a general decrease in net interest margins for Shinhan Bank’s overseas operations in both developed and emerging markets as a result of a global decrease in market interest rates.

Net fees and commission income increased by 4.2% from ￦48 billion in 2012 to ￦50 billion in 2013 primarily due to an increase in fees and commissions charged by Shinhan Bank Japan for its loans.

Net other expense increased by 58.7% from ￦126 billion in 2012 to ￦200 billion in 2013 primarily due to an increase in valuation losses related to loans made to corporate borrowers in China mostly prior to the onset of the recent global financial crisis who have subsequently entered into corporate restructuring, as well as an increase in general and administrative expense related to the expansion of Shinhan Bank’s overseas operations.

Comparison of 2012 to 2011

Operating income for international banking increased by 181.3% from ￦75 billion in 2011 to ￦211 billion in 2012.

205

Net interest income increased by 11.6% from ￦259 billion in 2011 to ￦289 billion in 2012 primarily due to export-import and other loan growth and improved net interest margins for Shinhan Bank’s subsidiaries in key overseas markets due to Shinhan Bank’s efforts to increase the synergy between Shinhan Bank’s domestic and overseas activities, including through enhanced trade financing.

Net fees and commission income increased by 4.3% from ￦46 billion in 2011 to ￦48 billion in 2012 primarily due to an increase in fees earning from export-import related remittances.

Net other expense decreased by 45.2% from ￦230 billion in 2011 to ￦126 billion in 2012 primarily due to a gain on disposal of trading assets.

Others (Banking)

This segment primarily consists of Shinhan Bank’s back-office functions, including management of non-performing loans and restructured loans and consolidated adjustments within Shinhan Bank.

The table below provides the income statement data for the others (banking) segment for the periods indicated. For purposes of facilitating comparability of segment results in 2011 compared to 2012, the segment results for 2011 for purposes of such comparison were adjusted to reflect the adjusted business segment.


	Year Ended December 31,									% Change
	2011			2012			2013			2011/2012			2012/2013
	(In billions of Won, except percentages)
Net interest income (expense)	￦	1,110		￦	1,003		￦	878			(9.6	)%		(12.5	)%
Net fees and commission income (expense)		(50	)		(75	)		(82	)		50.0			9.3
Net other income (expense)		(55	)		(614	)		(621	)		N/M			1.1

Operating income (expense)	￦	1,005		￦	314		￦	175			(68.8	)%		(44.3	)%

N/M = not meaningful

Comparison of 2013 to 2012

Operating income for the other banking segment decreased by 44.3% from ￦314 billion in 2012 to ￦175 billion in 2013.

Net interest income decreased by 12.5% from ￦1,003 billion in 2012 to ￦878 billion in 2013 primarily due to a decrease in the average balance of loans made by our other banking segment resulting from substantial repayment of such loans in 2013.

Net fees and commission expense increased by 9.3% from ￦75 billion in 2012 to ￦82 billion in 2013 primarily due to the effect of consolidation adjustments relating to an increase in commission expenses relating to Won-denominated guarantees among affiliates.

Net other expense increased by 1.1% from ￦614 billion in 2012 to ￦621 billion in 2013 primarily due to an increase in provision for loan losses of a consolidated special purpose company.

Comparison of 2012 to 2011

Operating income for the other banking segment decreased by 68.8% from ￦1,005 billion in 2011 to ￦314 billion in 2012.

Net interest income decreased by 9.6% from ￦1,110 billion in 2011 to ￦1,003 billion in 2012 primarily due to a decrease in interest earned on asset-backed securitization bonds, which resulted mainly from the expiry of the securitization or redemption of the related bonds.

Net fees and commission expense increased by 50.0% from ￦50 billion in 2011 to ￦75 billion in 2012 primarily due to increased consulting fees for the other banking segment.

206

Net other expense increased significantly from ￦55 billion in 2011 to ￦614 billion in 2012 primarily due to a one-time gain realized from the sale of shares in Hyundai Construction & Engineering in 2011.

Credit Card Services

The credit card services segment consists of the credit card business of Shinhan Card, including its installment finance and automobile leasing businesses.


	Year Ended December 31,									% Change
	2011			2012			2013			2011/2012			2012/2013
	(In billions of Won, except percentages)
Income statement data
Net interest income (expense)	￦	1,360		￦	1,410		￦	1,395			3.7	%		(1.1	)%
Net fees and commission income (expense)		320			246			166			(23.1	)		(32.5	)
Net other income (expense)		(583	)		(714	)		(728	)		22.5			2.0

Operating income (expense)	￦	1,097		￦	942		￦	833			(14.1	)%		(11.6	)%

Comparison of 2013 to 2012

Operating income for the credit card business decreased by 11.6% from ￦942 billion in 2012 to ￦833 billion in 2013.

Net interest income decreased by 1.1% largely as a result of decreases in the average balance of credit card loans and the average lending rate for credit card loans, which more than offset a decrease in funding costs attributable to decreases in the volume of credit card loans and related interest expense as well as funding cost savings from the issuance of low-cost, long-term debt securities issued by Shinhan Card. The decrease in the average balance of credit card loans was principally attributable to reduced use of card loans and cash advances by customers in light of ample liquidity in the Korean financial sector and the resulting increase in the availability of lower-cost loans and other financing options. The average lending rate on credit card loans decreased due to a general decrease in market interest rates largely driven by the decrease in the base interest rate set by the Bank of Korea.

Net fees and commission income decreased by 32.5% due primarily to the lowering of merchant fee rates in compliance with new regulatory requirements and an increase in fees and commissions payable as a result of increased use of membership points by Shinhan Card’s credit card customers as part of enhanced marketing efforts.

Net other expense increased by 2.0% primarily as a result of reduced recovery from delinquent loans largely due to a decrease in the outstanding balance of bad debt to be recovered as well as increased difficulties in collection due to the ageing of such loans with the passage of time and an increase in marketing and general expenses resulting from intensified competition among credit card companies, which was substantially offset by a gain on the sale of credit card loans such as factoring assets in 2013.

Comparison of 2012 to 2011

Operating income for the credit card business decreased by 14.1% from ￦1,097 billion in 2011 to ￦942 billion in 2012.

Net interest income increased by 3.7% largely as a result of a decrease in funding costs due to a general decrease in the market interest rates and the required overall funding amount due to a decrease in the volume of credit card loans, which more than offset a decrease in the average balance of credit card loans. The decrease in the average balance of credit card loans was principally attributable to reduced use of card loans and cash advances by customers in light of the ample liquidity in the Korean financial sector and the resulting increase in the availability of lower-cost loans and other financing options.

207

Net fees and commission income decreased by 23.1% due primarily to a decrease in card loans and cash advances, lowering of merchant fee rates in compliance with new regulatory requirements and an increase in fees and commissions payable as a result of increased use of membership points by Shinhan Card’s credit card customers as part of enhanced marketing efforts.

Net other expense increased by 22.5% due to an increase in provision for loan losses in anticipation of rising delinquency as a result of the increased level of household debt and a decrease in recovery from delinquent loans primarily due to a decrease in the outstanding balance of bad debt to be recovered as well as increased difficulties in collection due to the ageing of such loans with the passage of time.

Securities Brokerage Services

Securities brokerage services segment primarily reflects securities brokerage and dealing services on behalf of customers, which is conducted by Shinhan Investment, our principal securities brokerage subsidiary.


	Year Ended December 31,									% Change
	2011			2012			2013			2011/2012			2012/2013
	(In billions of Won, except percentages)
Income statement data
Net interest income (expense)	￦	231		￦	248		￦	282			7.4	%		13.7	%
Net fees and commission income (expense)		319			237			212			(25.7	)		(10.5	)
Net other income (expense)		(427	)		(417	)		(392	)		(2.3	)		(6.0	)

Operating income (expense)	￦	123		￦	68		￦	102			(44.7	)%		50.0	%

Comparison of 2013 to 2012

Operating income for securities brokerage services increased by 50.0% from ￦68 billion in 2012 to ￦102 billion in 2013.

Net interest income increased by 13.7% due primarily to an increase in financial bonds under our management, which more than offset a decrease in net interest margin.

Net fees and commission income decreased by 10.5% due primarily to a decrease in brokerage fee resulting from a decrease in the trading volume in the Korean stock market due to increased investor preference for low risk investments in the face of uncertainty in the general economy as well as a decrease in the brokerage fee rates due to intensifying competition for brokerage services primarily brought by the growing prevalence of Internet-based and mobile trading services for which minimal brokerage fee is charged.

Net other expense decreased by 6.0% due primarily to a reversal of impairment loss on bonds and equity securities and provision for litigation recorded in 2012, which more than offset an increase in employee benefits and severance under Shinhan Investment’s early retirement program and valuation losses of its affiliated companies.

Comparison of 2012 to 2011

Operating income for securities brokerage services decreased by 44.7% from ￦123 billion in 2011 to ￦68 billion in 2012.

Net interest income increased by 7.4% due primarily to an increase of our holdings of financial bonds following the purchase of such bonds from the proceeds of additional issuances of equity-linked securities.

Net fees and commission income decreased by 25.7% due primarily to a decrease in brokerage fee resulting from a decrease in the trading volume in the Korean stock market due to increased investor preference for low risk investments in the face of uncertainty in the general economy as well as a decrease in the brokerage fee rates due to intensifying competition for brokerage services primarily brought by the prevalence of Internet-based and mobile trading services for which minimal brokerage fee is charged.

Net other expense decreased from by 2.3% due primarily to a decrease in general administrative expense.

208

Life Insurance Services

Life insurance services segment consists of life insurance services provided by Shinhan Life Insurance.


	Year Ended December 31,									% Change
	2011			2012			2013			2011/2012			2012/2013
	(In billions of Won, except percentages)
Income statement data
Net interest income (expense)	￦	524		￦	566		￦	601			8.0	%		6.2	%
Net fees and commission income (expense)		28			35			32			25.0			(8.6	)
Net other income (expense)		(230	)		(322	)		(520	)		40.0			61.5

Operating income (expense)	￦	322		￦	279		￦	113			(13.4	)%		(59.5	)%

Comparison of 2013 to 2012

Operating income for life insurance services decreased by 59.5% from ￦279 billion in 2012 to ￦113 billion in 2013.

Net interest income increased by 6.2% due primarily to an increase in interest on insurance loans and cash balances resulting from an increase in insurance premium collected largely due to an increase in tax-exempt insurance policies and annuities sold following a change in tax law in 2012.

Net fees and commission income decreased by 8.6% due primarily to an increase in fees incurred in connection with maintaining existing customers and attracting new customers in response to intensified competition in the life insurance sector in Korea.

Net other expense increased by 61.5% from ￦322 billion in 2012 to ￦520 billion in 2013 due primarily to a decrease in other income resulting from a decrease in the volume of insurance policies sold as a result of intensified competition in the life insurance sector and decreased purchasing power of consumers due to ongoing economic difficulties and slow economic recovery in Korea in 2013 following the global financial crisis in 2008 and 2009.

Comparison of 2012 to 2011

Operating income for life insurance services decreased by 13.4% from ￦322 billion in 2011 to ￦279 billion in 2012.

Net interest income increased by 8.0% due primarily to an increase in interest on insurance loans and cash balances resulting from an increase in insurance premium collected largely due to an increase in tax-exempt insurance policies and annuities sold following a change in tax law.

Net fees and commission income increased by 25.0% due primarily to increase in fees resulting from an increase in the volume of insurance policies sold for reasons noted above.

Net other expense increased by 40.0% from ￦230 billion in 2011 to ￦322 billion in 2012 due primarily to an increase in provision for policy reserves due to an increase in the volume of insurance policies and annuities sold and an increase in provision for loan losses related to the increase in loans purchased with premium from the new insurance contracts.

Others

Other segment primarily reflects all other activities of Shinhan Financial Group, as the holding company, and our other subsidiaries, including the results of operations of Shinhan Capital, Shinhan Credit Information, Shinhan BNP Paribas Asset Management, Shinhan Private Equity, Shinhan Savings Bank and back-office functions maintained at the holding company.

209


	Year Ended December 31,									% Change
	2011			2012			2013			2011/2012			2012/2013
	(In billions of Won, except percentages)
Net interest income (expense)	￦	(96	)	￦	(108	)	￦	(108	)		12.5	%		—	%
Net fees and commission income (expense)		219			196			222			(10.5	)		13.3
Net other income (expense)		(189	)		(349	)		(231	)		84.7			(33.8	)

Operating income (expense)	￦	(66	)	￦	(261	)	￦	(117	)		N/M	%		(55.2	)%

N/M = not meaningful

Comparison of 2013 to 2012

Operating expense decreased from ￦261 billion in 2012 to ￦117 billion in 2013 primarily due to Shinhan Capital’s recording operating expense of ￦12 billion in 2012 to operating income of ￦60 billion in 2013 and the recording of operating expense by Shinhan Savings Bank of ￦27 billion in 2013, its second year of operation.

Net interest expense remained stable at ￦108 billion in each of 2012 and 2013 primarily due to a decrease in net interest expense for our financial holding company attributable to a decrease in debt securities issued and an increase in Shinhan Capital’s net interest income, which were offset by a decrease in Shinhan Saving Bank’s net interest income.

Net fees and commission income increased by 13.3% primarily due to trust fee and commission income of Shinhan AITAS, a former subsidiary of Shinhan Bank which became a consolidated subsidiary of our financial holding company in November 2012.

Net other expense decreased by 33.8% primarily due to a decrease in Shinhan Capital’s bad debt expense relating to vessel financing and other large loans as a result of its active efforts reduce its exposure to the shipbuilding and shipping industries and other troubled industries, as well as a decrease in the remaining balance of troubled loans previously made by Shinhan Savings Bank prior to our acquisition, which resulted in a corresponding decrease in Shinhan Savings Bank’s bad debt expense.

Comparison of 2012 to 2011

Operating expense increased significantly from ￦66 billion in 2011 to ￦261 billion in 2012 primarily due to Shinhan Capital’s recording operating income of ￦50 billion in 2011 to operating expense of ￦12 billion in 2012 and the recording of operating expense by Shinhan Savings Bank of ￦23 billion in 2012, its first year of operation.

Net interest expense increased by 12.5% from ￦96 billion in 2011 to ￦108 billion in 2012, primarily due to an increase in net interest expense due to a substantial decrease in interest-bearing assets following the redemption by our financial holding company of all Series 10 redeemable preferred shares and Series 11 redeemable convertible preferred shares in the aggregate amount of ￦3,573 billion in January 2012, which was partially offset by Shinhan Savings Bank’s recording net interest income of ￦64 billion in 2012.

Net fees and commission income decreased by 10.5% primarily due to a decrease in the fee that our financial holding company collects from its subsidiaries relating to the use of the “Shinhan” brand and a decrease in Shinhan BNP Paribas Asset Management’s net fees and commission income largely as a result of a net withdrawal of fund assets by investors in light of the stagnant stock markets in Korea.

Net other expenses increased by 84.7% primarily due to an increase in allowance for loan losses for Shinhan Capital from ￦46 billion in 2011 to ￦120 billion in 2012 primarily in relation to loans to borrowers in the shipbuilding industry which continues to face difficulties, as well as recording of allowance for loan losses of ￦59 billion in 2012 for Shinhan Savings Bank.

210

Financial Condition

Assets

The following table sets forth, as of the dates indicated, the principal components of our assets.


	As of December 31,						% Change
	2011		2012		2013		2011/2012			2012/2013
	(In billions of Won, except percentages)
Cash and due from banks	￦	14,731	￦	13,507	￦	16,473		(8.3	)%		22.0	%
Trading assets		11,954		16,654		18,033		39.3			8.3
Financial assets designated at fair value through profit or loss		1,801		2,542		3,361		41.1			32.2
Derivative assets		2,319		2,171		1,717		(6.4	)		(20.9	)
Loans		192,573		200,289		205,723		4.0			2.7
Available-for-sale financial assets		34,106		36,284		33,604		6.4			(7.4	)
Held-to-maturity financial assets		11,895		11,660		11,031		(2.0	)		(5.4	)
Property and equipment		2,994		3,108		3,214		3.8			3.4
Intangible assets		4,203		4,195		4,226		(0.2	)		0.7
Investments in associates		249		299		329		20.1			10.0
Deferred tax assets		29		100		197		244.8			97.0
Current tax receivables		9		14		6		55.6			(57.1	)
Investment property		275		779		690		183.3			(11.4	)
Assets held for sale		16		54		243		237.5			N/M
Other assets		10,888		13,283		12,449		22.0			(6.3	)

Total assets	￦	288,042	￦	304,939	￦	311,296		5.9	%		2.1	%

N/M = not meaningful

2013 Compared to 2012

Our assets increased by 2.1% from ￦304,939 billion as of December 31, 2012 to ￦311,296 billion as of December 31, 2013, principally due to increases in loans, cash and due from banks and trading assets, which was partially offset by decreases in available-for-sale financial assets and net other assets.

Our loans increased by 2.7% from ￦200,289 billion as of December 31, 2012 to ￦205,723 billion as of December 31, 2013, principally as a result of our risk management and tailored strategic marketing policy which emphasized increasing the proportion of high quality assets such as retail loans to police officers and other government employees and corporate loans to quality SOHO and small- to medium-sized enterprise customers.

Our cash and due from banks increased by 22.0% from ￦13,507 billion as of December 31, 2012 to ￦16,473 billion as of December 31, 2013, principally due to an increase in foreign currency deposits in response to abundant foreign currency liquidity in 2013 as well as the inclusion of cash and dues held by Yehanbyoul Savings Bank following our acquisition thereof in 2013.

Our trading assets increased by 8.3% from ￦16,654 billion as of December 31, 2012 to ￦18,033 billion as of December 31, 2013, principally due to an increase in securities held for hedging purposes to offset increases in the volume of equity-linked securities.

Our available-for-sale financial assets decreased by 7.4% from ￦36,284 billion as of December 31, 2012 to ￦33,604 billion as of December 31, 2013, principally due to an increase in the disposal of debt securities as part of our efforts to reduce our exposure to interest rate volatility.

211

Our held-to-maturity financial assets decreased by 5.4% from ￦11,660 billion as of December 31, 2012 to ￦11,031 billion as of December 31, 2013, principally due to an increase in the disposal of debt securities as part of our efforts to reduce our exposure to interest rate volatility.

2012 Compared to 2011

Our assets increased by 5.9% from ￦288,042 billion as of December 31, 2011 to ￦304,939 billion as of December 31, 2012, principally due to increases in loans, trading assets, available-for-sale financial assets and other assets.

Our loans increased by 4.0% from ￦192,573 billion as of December 31, 2011 to ￦200,289 billion as of December 31, 2012, principally as a result of our risk management and tailored strategic marketing policy which emphasized increasing the proportion of high quality assets such as retail loans to police officers and other government employees and corporate loans to quality SOHO and small- to medium-sized enterprise customers.

Our cash and due from banks decreased by 8.3% from ￦14,731 billion as of December 31, 2011 to ￦13,507 billion as of December 31, 2012, principally due to the redemption of the Series 10 redeemable preferred shares and the Series 11 redeemable convertible preferred shares in the aggregate amount of ￦3,765 billion in January 2012.

Our trading assets increased by 39.3% from ￦11,954 billion as of December 31, 2011 to ￦16,654 billion as of December 31, 2012 and available-for-sale financial assets increased by 6.4% from ￦34,106 billion as of December 31, 2011 to ￦36,284 billion as of December 31, 2012, in each case, largely due to an increased purchase of debt securities issued by corporations and financial institutions as a part of our cash management and the inclusion of financial assets of newly consolidated entities as a result of our adoption of IFRS 10, effective January 1, 2013, pursuant to which we restated our financial information as of December 31, 2012.

Our net other assets increased by 22.0% from ￦10,888 billion as of December 31, 2011 to ￦13,283 billion as of December 31, 2012, principally due to an increase in transitional accounts such as spot exchange receivables (which are foreign currency exchange recognized as receivables from the trading date to the settlement date) and domestic exchange settlement debits (which are receivables recognized in respect of domestic inter-bank transactions).

212

Liabilities and Equity

The following table sets forth, as of the dates indicated, the principal components of our liabilities.


	As of December 31,						% Change
	2011		2012		2013		2011/2012			2012/2013
	(In billions of Won, except percentages)
Deposits	￦	163,016	￦	173,296	￦	178,810		6.3	%		3.2	%
Trading liabilities		704		1,371		1,258		94.7			(8.2	)
Financial liabilities designated at fair value through profit or loss		3,298		4,822		5,909		46.2			22.5
Derivative liabilities		1,972		1,904		2,027		(3.4	)		6.5
Borrowings		20,033		19,518		20,143		(2.6	)		3.2
Debt securities issued		39,737		38,838		37,491		(2.3	)		(3.5	)
Liability for defined benefit obligations		275		222		118		(19.3	)		(46.8	)
Provisions		870		748		750		(14.0	)		0.3
Current tax liabilities		568		254		239		(55.3	)		(5.9	)
Deferred tax liabilities		—		42		15		—			(64.3	)
Liabilities under insurance contracts		10,867		13,419		15,656		23.5			16.7
Other liabilities		19,843		21,593		19,021		8.8			(11.9	)

Total liabilities		261,183		276,027		281,437		5.7			2.0

Total equity attributable to equity holder of the Group		24,397		26,371		27,542		8.1			4.4
Non-controlling interest		2,462		2,541		2,317		3.2			(8.8	)

Total equity		26,859		28,912		29,859		7.6			3.3

Total liabilities and equity	￦	288,042	￦	304,939	￦	311,296		5.9	%		2.1	%

2013 Compared to 2012

Our total liabilities increased by 2.0% from ￦276,027 billion as of December 31, 2012 to ￦281,437 billion as of December 31, 2013, primarily due to an increase in deposits (which principally consist of customer deposits) and, to a lesser extent, an increase in liabilities under insurance contracts, which were partially offset by a decrease in other liabilities.

Our deposits increased by 3.2% from ￦173,296 billion as of December 31, 2012 to ￦178,810 billion as of December 31, 2013, primarily due to continuing preference among customers for safe investment products in light of the lingering uncertainties surrounding the general economy, the continued slump in the real estate market and the stagnant stock markets.

Our liabilities under insurance contracts increased by 16.7% from ￦13,419 billion as of December 31, 2012 to ￦15,656 billion as of December 31, 2013, primarily due to an increase in policy reserve related to an increase in the cumulative volume of our insurance policies.

Our other liabilities decreased by 11.9% from ￦21,593 billion as of December 31, 2012 to ￦19,021 billion as of December 31, 2013, primarily due to a significant decrease in other accounts payable, and in particular, swap exchange payables, as a result of a decrease in derivative transactions for hedging foreign currency-denominated loans following a decrease in such loans in 2013.

Total equity increased by 3.3% from ￦28,912 billion as of December 31, 2012 to ￦29,859 billion as of December 31, 2013, largely due to net income attributable to equity holders in the amount of ￦1,903 billion, which more than offset a dividend payout of ￦394 billion in 2013 and the effect of recording other comprehensive loss of ￦309 billion in 2013.

213

2012 Compared to 2011

Our total liabilities increased by 5.7% from ￦261,183 billion as of December 31, 2011 to ￦276,027 billion as of December 31, 2012, primarily due to an increase in deposits (which principally consist of customer deposits) and, to a lesser extent, an increase in insurance liabilities.

Our deposits increased by 6.3% from ￦163,016 billion as of December 31, 2011 to ￦173,296 billion as of December 31, 2012, primarily due to continuing preference among customers for safe investment products in light of the lingering uncertainties surrounding the general economy, the continued slump in the real estate market and the stagnant stock markets.

Our liabilities under insurance contracts increased by 23.5% from ￦10,867 billion as of December 31, 2011 to ￦13,419 billion as of December 31, 2012, primarily due to an increase in policy reserve related to an increase in the cumulative volume of our insurance policies.

Total equity increased by 7.6% from ￦26,859 billion as of December 31, 2011 to ￦28,912 billion as of December 31, 2012, largely due to net income attributable to equity holders in the amount of ￦2,323 billion and the issuance of hybrid bonds in the amount of ￦299 billion, which more than offset a dividend payout of ￦630 billion in 2012.

ITEM 5.B.

Liquidity and Capital Resources

We are exposed to liquidity risk arising from the funding of our lending, trading and investment activities and in the management of trading positions. The goal of liquidity management is for us to be able, even under adverse conditions, to meet all of our liability repayments on time and fund all investment opportunities. For an explanation of how we manage our liquidity risk, see “Item 4.B. Business Overview — Risk Management — Market Risk Management — Market Risk Management for Non-trading Activities — Liquidity Risk Management.” In our opinion, the working capital is sufficient for our present requirements.

The following table sets forth our capital resources as of December 31, 2013.


	As of December 31, 2013
	(In billions of Won)
Deposits	￦	178,810
Long-term debt		40,303
Call money		1,403
Borrowings from the Bank of Korea		1,385
Other short-term borrowings		9,007
Asset securitizations		6,395
Stockholders’ equity(1)		2,645

Total	￦	239,948

Note:

(1)	Includes Series 12 redeemable preferred stock. See Note 30 of the notes to our consolidated financial statements included in this annual report.

Our primary funding strategy has been to achieve low-cost funding by increasing the average balances of low-cost retail customer deposits. Customer deposits accounted for 72.2% of our total funding as of December 31, 2011, 73.5% of our total funding as of December 31, 2012 and 74.5% of our total funding as of December 31, 2013. Historically, except in limited circumstances, largely due to the lack of alternative investment opportunities for individuals and households in Korea, especially in light of a low interest rate

214

environment and volatile stock market conditions, a substantial portion of such customer deposits were rolled over upon maturity and accordingly provided a stable source of funding for our banking subsidiaries. However, in the face of attractive alternative investment opportunities such as during a bullish run of the stock market, customers may transfer a significant amount of bank deposits to alternative investment products in search of higher returns, which may result in temporary difficulties in finding sufficient funding on commercial terms favorable to us.

While our banking subsidiaries generally have not faced, and currently are not facing, liquidity difficulties in any material respect, if we or our banking subsidiaries are unable to obtain the funding we need on terms commercially acceptable to us for an extended period of time for reasons of Won devaluation or otherwise, we may not be able to ensure our financial viability, meet regulatory requirements, implement our strategies or compete effectively. See “Item 3.D. Risk Factors — Risks Related to Our Overall Business — Changes in interest rates, foreign exchange rates, bond and equity prices, and other market factors have affected and will continue to affect our business.”

As of December 31, 2011, 2012 and 2013 ￦6,103 billion, ￦6,150 billion and ￦6,680 billion, or 4.33%, 3.68% and 3.82%, respectively, of Shinhan Bank’s total deposits in Korean Won were deposits made by litigants in connection with legal proceedings in Korean courts. Court deposits carry interest rates, which are generally lower than market rates.

In addition, we obtain funding through borrowings and the issuances of debt and equity securities, primarily through Shinhan Bank. Our borrowings consist mainly of borrowings from financial institutions, the Korean government and Korean government-affiliated funds. Call money, which is available in both Won and foreign currencies, is obtained from the domestic call loan market, a short-term loan market for loans with maturities of less than one month. As for our long-term debt, it is principally in the form of corporate debt securities issued by Shinhan Bank. Since 1999, Shinhan Bank has actively issued and continues to issue long-term debt securities with maturities of over one year in the Korean fixed-income market. Shinhan Bank and we have maintained one of the highest credit ratings in the domestic fixed-income market since their inception in 1999 and 2001, respectively. As Shinhan Bank maintains one of the highest debt ratings in the fixed-income market in Korea, we believe that Shinhan Bank will be able to obtain replacement funding through the issuance of long-term debt securities. Shinhan Bank’s interest rates on long-term debt securities are in general 20 to 30 basis points higher than the interest rates offered on their deposits. However, since long-term debt is not subject to premiums paid for deposit insurance and the Bank of Korea reserves, we estimate that our funding costs on long-term debt securities are generally on par with our funding costs on deposits. In addition, we, Shinhan Bank and Shinhan Card, may also issue long-term debt securities denominated in foreign currencies in overseas markets, and Shinhan Bank and Shinhan Card have global medium term notes programs under which foreign currency-denominated notes may be issued with an aggregate program limit of US$8 billion. As of December 31, 2011, 2012 and 2013, our long-term debt amounted to ￦42,670 billion, ￦42,021 billion and ￦40,303 billion, respectively.

We also have funding requirements for our credit card activities. We obtain funding for our credit card activities from a variety of sources, primarily in Korea. The principal sources of funding for Shinhan Card are debentures, commercial papers (including call money), borrowings from the holding company and third-parties, which amounted to ￦10,250 billion, ￦1,062 billion, ￦700 billion, ￦20 billion, or 85.2%, 8.8%, 5.8% and 0.2%, respectively, of the funding for our credit card activities, as of December 31, 2013. Unlike other credit card companies, Shinhan Card has the benefit of obtaining funding at favorable rates through loans from Shinhan Financial Group, which currently maintains the highest credit rating assigned by local rating agencies. Shinhan Card aims to further diversify its funding sources and more actively tap the domestic and international capital markets to ensure access to liquidity as needed.

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Our holding company does not receive credit ratings from international rating agencies since it has not engaged in debt financing from overseas sources to date.

There can be no assurance that that we or our subsidiaries will maintain our current credit ratings if, among other reasons, the global or Korean economy were to face another downturn, there are any changes in our corporate governance or our businesses significantly deteriorate. Our failure to maintain current credit ratings and outlooks could increase the cost of our funding, limit our access to capital markets and other borrowings, and require us to post additional collateral in financial transactions, any of which could adversely affect our liquidity, net interest margins and profitability.

Secondary funding sources also include call money, borrowings from the Bank of Korea and other short-term borrowings which amounted to ￦13,846 billion, ￦12,032 billion and ￦11,795 billion as of December 31, 2011, 2012 and 2013, respectively, each representing 6.1%, 5.1% and 4.9%, respectively, of our total funding as of such dates.

We may also from time to time obtain funding through issuance of equity securities. For example, in the first quarter of 2009, we conducted a rights offering in the face of an expanding global credit crisis in order to enhance our capital position to prepare for potential contingencies, despite having fully met the required capital adequacy ratios required under applicable laws and regulations and not facing any significant liquidity constraints or financial distress. As a result of such offering, which was substantially fully subscribed and resulted in a capital increase of approximately 16.4%, we raised approximately ￦1,310 billion (before underwriting commissions and other offering expenses).

In limited situations, we may also issue convertible and/or preferred shares. For example, in August 2003, in order to partly fund our acquisition of Chohung Bank, we raised a total of ￦2,552 billion through domestic private placements of redeemable preferred shares and redeemable convertible preferred shares to domestic financial institutions and governmental entities in Korea, all of which shares have since been redeemed or converted. In addition, in January 2007, partly to fund the acquisition of LG Card, we raised a total of ￦3,750 billion through domestic private placements of redeemable preferred shares and redeemable convertible preferred shares, all of which have been redeemed as of the date hereof, and in April 2011, we issued redeemable preferred shares to fund redemption of such securities. For further details on the terms of these preferred shares, see “Item 10.B. Memorandum and Articles of Incorporation — Description of Preferred Stock.”

Pursuant to laws and regulations in Korea, we may redeem our preferred stock to the extent of our retained earnings of the previous fiscal year, net of certain reserves. At this time, we expect that cash from our future operations would be adequate to provide us with sufficient capital resources to enable us to redeem our preferred stock on or prior to their scheduled maturities. In the event there is a short-term shortage of liquidity to make the required cash payments for redemption as a result of, among other things, failure to receive dividend payments from our operating subsidiaries on time or as a result of significant expenditures resulting from future acquisitions, we plan to raise cash liquidity through the issuance of long-term debt in the Korean fixed-income market in advance of the scheduled maturity on our preferred stock. To the extent we need to obtain additional liquidity, we plan to do so through the issuance of long-term corporate debentures or further preferred stock and/or the use of our other secondary funding sources.

We generally may not acquire our own shares except in certain limited circumstances such as a capital reduction. However, pursuant to the Financial Investment Services and Capital Markets Act and regulations under the Financial Holding Companies Act, we may purchase our own shares on the KRX KOSPI Market of the Korea Exchange or through a tender offer, or retrieve our own shares from a trust company upon termination of a trust agreement subject to the restrictions that (1) the aggregate purchase price of such shares may not exceed the total amount available for distribution of dividends at the end of the preceding fiscal year less the amounts of dividends and reserves for such fiscal year, subtracted by the sum of (a) the purchase price of treasury stock acquired if any treasury stock has been purchased after the end of the preceding fiscal year pursuant to the Commercial Act or the Financial Investment Services and Capital Markets Act, (b) the amount subject to a trust contract, and (c) the amount of dividends approved at the ordinary general shareholders’ meeting after the end of the preceding fiscal year and the amount of retained earnings reserve required under the Commercial Act; plus if any treasury stock has been disposed of after the end of the preceding fiscal year, the acquisition cost of such

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treasury stock, and (2) the purchase of such shares shall meet the requisite ratio under the Financial Holding Companies Act and regulations thereunder. In addition, pursuant to the Financial Investment Services and Capital Markets Act, in certain limited circumstances, dissenting holders of shares have the right to require us to purchase their shares.

Contractual Obligations, Commitments and Guarantees

In the ordinary course of our business, we have certain contractual cash obligations and commitments which extend for several years. As we are able to obtain liquidity and funding through various sources as described in “— Liquidity and Capital Resources” above, we do not believe that these contractual cash obligations and commitments will have a material effect on our liquidity or capital resources.

Contractual Cash Obligations

The following table sets forth our contractual cash obligations as of December 31, 2013.


	As of December 31, 2013 Payments Due by Period(1)
	Less than 1 Month		1-3 Months		3-6 Months		6-12 Months		1-5 Years		More than 5 Years		Total
	(In billions of Won)
Deposits	￦	81,532	￦	20,667	￦	25,856	￦	43,638	￦	10,648	￦	2,908	￦	185,249
Borrowings		10,104		1,792		2,152		1,795		3,816		791		20,450
Debt securities issued		1,111		2,865		3,065		4,711		24,848		5,709		42,309

Total	￦	92,747	￦	25,324	￦	31,073	￦	50,144	￦	39,312	￦	9,408	￦	248,008

Note:

(1)

Reflects all estimated contractual interest payments due on our interest-bearing deposits, borrowings and debt securities issued, and the estimated contractual interest payments on borrowings and debt securities that are on a floating rate basis as of December 31, 2013 were computed as if the interest rate used on the last applicable date (for example, the interest payment date for such floating rate loans immediately preceding the determination date) were the interest rate applicable throughout the remainder of the term.

Commitments and Guarantees

In the normal course of business, our subsidiaries make various commitments and guarantees to meet the financing needs of our customers. Commitments and guarantees are usually in the form of, among others, commitments to extend credit, commercial letters of credit, standby letter of credit and performance guarantees. The contractual amount of these financial instruments represents the maximum possible loss amount if the counterparty draws down the commitment or we should fulfill our obligation under the guarantee and the counterparty fails to perform under the contract. See “Item 4.B. Business Overview — Description of Assets and Liabilities — Credit-Related Commitments and Guarantees.”

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The following table sets forth our commitments and guarantees as of December 31, 2013. These commitments, apart from certain guarantees and acceptances, are not included within our consolidated statements of financial position.


	As of December 31, 2013 Commitment Expiration by Period
	Less than 1 Year		1-5 Years		More than 5 Years		Total
	(In billions of Won)
Commitments to extend credit(1)	￦	69,382	￦	3,731	￦	351	￦	73,464
Commercial letters of credit(2)		2,912		125		8		3,045
Financial guarantees(3)		857		133		25		1,015
Performance guarantees(4)		8,107		2,618		325		11,050
Liquidity facilities to SPEs(5)		259		860		480		1,599
Acceptances(6)		495		2		12		509
Endorsed bills(7)		11,382		—		—		11,382
Other		1,004		32		152		1,188

Total	￦	94,398	￦	7,501	￦	1,353	￦	103,252

Notes:

(1)	Commitments to extend credit represent unfunded portions of authorizations to extend credit in the form of loans. The commitments expire on fixed dates and a customer is required to comply with predetermined conditions to draw funds under the commitments.

(2)

Commercial letters of credit are undertakings on behalf of customers authorizing third parties to draw drafts on us up to a stipulated amount under specific terms and conditions. These are generally short-term and collateralized by the underlying shipments of goods to which they relate. Commitments to extend credit, including credit lines, are in general subject to provisions that allow us to withdraw such commitments in the event there are material adverse changes affecting an obligor.

(3)

(4)

Performance guarantees are issued to guarantee customers’ tender bids on construction or similar projects or to guarantee completion of such projects in accordance with contractual terms. They are also issued to support a customer’s obligation to supply products, commodities, maintenance or other services to third parties

(5)	Liquidity facilities to SPEs represent irrevocable commitments to provide contingent credit lines including commercial paper purchase agreements to special purpose entities for which we serve as the administrator.

(6)	Acceptances represent guarantees by us to pay a bill of exchange drawn on a customer. We expect most acceptances to be presented, but reimbursement by the customer is normally immediate.

(7)	Endorsed bills represent notes transferred to third parties by us. We are obligated to fulfill the duty of payment if the person primarily liable does not honor the bill on the due date.

See also Note 44 of the notes to our consolidated financial statements included in this annual report.

ITEM 5.C.

Research and Development, Patents and Licenses

Not applicable.

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ITEM 5.D.

Trend Information

These matters are discussed under Items 4.B., 5.A. and 5.B. above where relevant.

ITEM 5.E.

Off-Balance Sheet Arrangements

We have several types of off-balance sheet arrangements, including guarantees for loans, debentures, trade financing arrangements, guarantees for other financings, credit lines, letters of credit and credit commitments. In the normal course of our banking activities, we make various commitments and guarantees to meet the financing needs of our customers. Commitments and guarantees are usually in the form of, among others, commitments to extend credit, commercial letters of credit, standby letters of credit and performance guarantees. The contractual amount of these financial instruments represents the maximum possible loss amount if the account party draws down the commitment or we should fulfill our obligation under the guarantee and the account party fails to perform under the contract. See “Item 4.B. Business Overview — Description of Assets and Liabilities — Credit-Related Commitments and Guarantees.”

Details of our off-balance sheet arrangements are provided in Note 44 in the notes to our consolidated financial statements included in this annual report.

ITEM 5.F.

Tabular Disclosure of Contractual Obligations

See “Item 5.B. Liquidity and Capital Resources — Contractual Obligations, Commitments and Guarantees.”

ITEM 6.

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

ITEM 6.A.

Directors and Senior Management

Executive Directors

Our executive director is as follows:


Name	Age		Position	Director Since	Date Term Ends(1)
Dong Woo Han		65	Chairman and Chief Executive Officer	March 23, 2011	March 2017

Note:

(1)	The date on which each term will end will be the date of the general stockholders’ meeting in the relevant year.

Dong Woo Han is our Chairman and Chief Executive Officer. Prior to being elected to his current position on March 23, 2011, he was the vice-chairman of Shinhan Life Insurance from 2007 to 2009 and also served as the chief executive officer of Shinhan Life Insurance in 2002, a vice president of Shinhan Bank in 1999, a managing director of Shinhan Bank in 1995 and a director of Shinhan Bank in 1993. Mr. Han received a LL.B. degree from the College of Law, Seoul National University.

Non-Executive and Outside Directors

Non-executive directors are directors who are not our employees and do not hold executive officer positions with us. Outside directors are non-executive directors who also satisfy the requirements set forth under the Financial Investment Services and Capital Markets Act to be independent of our major shareholders, affiliates and the management. Our non-executive directors are selected based on the candidates’ talents and skills in diverse areas, such as law, finance, economy, management and accounting. Currently, 11 non-executive directors are in office, all of whom were nominated by our board of directors.

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Our non-executive directors are as follows:


Name	Age		Position	Director Since	Date Term Ends(1)
Jin Won Suh		63	Non-Executive Director	March 23, 2011	March 2015
Taeeun Kwon		73	Outside Director	March 23, 2011	March 2015
Kee Young Kim		76	Outside Director	March 23, 2011	March 2015
Seok Won Kim		67	Outside Director	March 23, 2011	March 2015
Hoon Namkoong		66	Outside Director and Chairman of Board of Directors	March 23, 2011	March 2015
Man Woo Lee		59	Outside Director	March 26, 2014	March 2016
Sang Kyung Lee		68	Outside Director	March 29, 2012	March 2015
Boo In Ko		72	Outside Director	March 28, 2013	March 2015
Jin Chung		77	Outside Director	March 26, 2014	March 2016
Haruki Hirakawa		49	Outside Director	March 23, 2011	March 2015
Philippe Aguignier		56	Outside Director	March 24, 2010	March 2015

Note:

(1)	The date on which each term will end will be the date of the general stockholders’ meeting in the relevant year.

Jin Won Suh has been our non-executive director since March 23, 2011. Mr. Suh currently also serves as the president and chief executive officer of Shinhan Bank. Prior to his current position, Mr. Suh served as the chief executive officer of Shinhan Life Insurance in 2007, the deputy president of Shinhan Financial Group in 2006 and the deputy president of Shinhan Bank in 2004. Mr. Suh received a bachelor’s degree in Historical Science from Korea University.

Taeeun Kwon has been our outside director since March 23, 2011. Mr. Kwon served as the former Dean of the Department of Global Business at the School of Contemporary International Studies, Nagoya University of Foreign Studies from 2010 to 2012, the chief executive officer of Nam Bu Ham Co., Ltd. from 1983 to 2010, a committee member of the Korea Residents’ Union HQ in Japan from 1997 to 2009 and counsel and director of the Korea Education Foundation from 1991 to 2008. Mr. Kwon also was a professor of the Department of Global Business at the School of Contemporary International Studies, Nagoya University of Foreign Studies from 2004 to 2012. Mr. Kwon received a Ph.D. in Business Administration from Nanzan University.

Kee Young Kim has been our outside director since March 23, 2011. Mr. Kim served as the President of Kwangwoon University from 2009 to 2013, an outside director of GS Holdings Corp. from 2004 to 2009 and an outside director of KTB Networks, currently renamed KTB Investment & Securities Co., Ltd., in 2003. Mr. Kim also was the dean of the Graduate School of Information, Yonsei University in 2000 and a professor at the School of Business, Yonsei University from 1979 to 2003. Mr. Kim received a Ph.D. in Business Administration from Washington University.

Seok Won Kim has been our outside director since March 23, 2011. Mr. Kim served as the former chairman of Credit Information Companies Association from 2009 to 2012, the chairman of the Korea Federation of Savings Banks from 2006 to 2009, an outside director at Woori Bank in 2005, the vice president of Korea Deposit Insurance Corporation from 2002 to 2005 and the head of the Korea-OECD Multilateral Tax Center from 1999 to 2001. Mr. Kim received a Ph.D. in Economics from Kyung Hee University.

Hoon Namkoong has been our outside director since March 23, 2011 and is currently the Chairman of the Board of Directors. Mr. Namkoong served as an outside director of Samsung Electro-Magnetics Co., Ltd. from 2005 to 2014, an outside director of Korea Real Asset Management Company (KORAMCO) from 2009 to 2011, the chairman of Korea Life Insurance Association from 2005 to 2008, a member of the Monetary Policy Committee of the Bank of Korea from 2000 to 2004 and the chairman and president of the Korea Deposit Insurance Corporation from 1999 to 2000. Mr. Namkoong received a master’s degree Public Administration from the University of Wisconsin at Madison.

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Man Woo Lee has been our outside director since March 26, 2014. Mr. Lee is currently a professor at Korea University Business School. Mr. Lee served as the chairman of the Korean Accounting Association from 2007 to 2008, the chairman of the Korean Academic Society of Taxation from 2006 to 2007 and a member of the Securities Listing Committee of the Korea Exchange from 2001 to 2007. Mr. Lee received a Ph.D. in Business Administration from the University of Georgia.

Sang-Kyung Lee has been our outside director since March 29, 2012. Mr. Lee currently serves as the representative attorney of the law firm WONJON. Prior to his current position, Mr. Lee served as the chief judge of the Constitutional Court of Korea. Mr. Lee received a bachelor’s degree in law from Chung-Ang University.

Boo In Ko has been our outside director since March 28, 2013. Mr. Ko is currently the chief executive officer of Sansei Co., Ltd. Mr. Ko served as an outside director of Shinhan Financial Group from 2009 to 2010, an outside director of Jeju Bank from 2005 to 2009, a director of Jeju International Convention Center in 2002, an advisor to the National Unification Advisory Council in 1998 and the vice chairman of the Korea Chamber of Commerce and Industry in Tokyo in 1998. Mr. Ko received a bachelor’s degree from Meiji University.

Jin Chung has been our outside director since March 26, 2014. Mr. Chung currently serves as the chairman of Jin Corporation. Mr. Chung served as the chairman and vice chairman of the Korean Residents Union in Japan from 2006 to 2012 and 2003 to 2006, respectively, the president of Daitou Co., Ltd. from 1978 to 1994 and the deputy president of Muramathu Co., Ltd. from 1959 to 1978. Mr. Chung received a bachelor’s degree in economics from Nihon University.

Haruki Hirakawa has been our outside director since March 23, 2011. Mr. Hirakawa currently serves as the chief executive officer of Hirakawa Shoji Co., Ltd. Prior to his current position, Mr. Hirakawa served as the chief executive officer of Shinei Shoji Co., Ltd. and Kokusai Kaihatus Co., Ltd. Mr. Hirakawa received a bachelor’s degree in political science and economics from Kinki University.

Philippe Aguignier has been our outside director since March 24, 2010. Mr. Aguignier was nominated by BNP Paribas and elected to our board of directors pursuant to the alliance agreement dated December 2001 between us and BNP Paribas. See “Item 7.B. Related Party Transactions.” Mr. Aguignier is currently the head of BNP Paribas Asia Retail Banking. Mr. Aguignier received a Ph.D. in Far Eastern Studies from Université Paris III (Inalco).

Any director wishing to enter into a transaction with Shinhan Financial Group including the subsidiaries in his or her personal capacity is required to obtain the prior approval of our Board of Directors. The director having an interest in the transaction may not vote at the meeting of our Board of Directors at which the relevant transaction is subject to vote for approval.

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Executive Officers

In addition to the executive directors who are also our executive officers, we currently have the following executive officers.


Name	Age	Position	In Charge of
Hyung Jin Kim	55	Deputy President and Chief Strategic Officer	Strategic Planning Team
Hyung Jin Kim	55	Deputy President and Chief Strategic Officer	Global Business Strategy Team Future Strategy Research Institute Corporate Culture Development Team
Jae Gwang Soh	52	Deputy President	Synergy Management Team
			Information, Communication and Technology Planning Team
			Audit Team Smart Finance Team
Jung Kee Min	55	Deputy President and Chief Financial Officer	Finance Management Team Investor Relations Team Human Resource Team
Sin Gee Lee	57	Deputy President	Public Relations Team Corporate Social Responsibility Team Management Support Team
Young Jin Lim	53	Deputy President	Wealth Management Planning Office
Dong Hwan Lee	54	Deputy President	Corporate & Investment Banking Planning Office
Bo Hyuk Yim	53	Executive Vice President	Risk Management Team

None of the executive officers have any significant activities outside Shinhan Financial Group.

Hyung Jin Kim has been our Deputy President and Chief Strategic Officer since May 23, 2013. Mr. Kim previously served as president of Shinhan Data System. Mr. Kim also serves as a deputy president of Shinhan Bank. Mr. Kim received a bachelor’s degree in economics from Yeungnam University.

Jae Gwang Soh has been our Deputy President since April 18, 2011. Mr. Soh previously served as a deputy president of Shinhan Card in charge of risk management and held various posts at Shinhan Card and LG Card. Mr. Soh received a bachelor’s degree in business management from Korea University.

Jung Kee Min has been our Deputy President since August 25, 2010 and our Chief Financial Officer since April 2011. Mr. Min previously served as head of the large corporate financing center of Shinhan Bank and held various posts at Shinhan Financial Group and Chohung Bank. Mr. Min received a bachelor’s degree in German language from Seoul National University.

Sin Gee Lee has been our Deputy President since January 2, 2013. Mr. Lee previously served as executive vice president of Shinhan Bank from 2011 to 2013. Mr. Lee received a bachelor’s degree in commerce and trade from Yeungnam University.

Young Jin Lim has been our Deputy President since May 27, 2013. Mr. Lim also serves as a deputy president of Shinhan Bank and a non-executive director of Shinhan Investment Corp. Mr. Lim received a bachelor’s degree in business management from Korea University.

Dong Hwan Lee has been our Deputy President since April 18, 2011. Mr. Lee previously served as deputy vice president of Shinhan Bank in charge of capital markets and held various posts at Shinhan Bank and Shinhan Financial Group. Mr. Lee also currently serves as an outside director of Shinhan Investment. Mr. Lee received a bachelor’s degree in business management from Yonsei University.

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Bo Hyuk Yim has been our Executive Vice President since January 2, 2014. Mr. Yim previously served as our Managing Director in charge of risk management. Mr. Yim received a bachelor’s degree in business management from Korea University.

There are no family relationships among our directors and/or executive officers.

ITEM 6.B.

Compensation

The aggregate remuneration and benefits-in-kind paid by us to our chairman, our executive directors, our non-executive directors and our executive officers for the year ended December 31, 2013 was ￦4.2 billion, consisting of ￦2.8 billion in salaries and wages and ￦1.4 billion in bonus payments.

We do not have service contracts with any of our directors or executive officers providing for benefits upon termination of their employment with us. We do not pay any severance payment to our chairman or directors upon their retirement, but we do, however, pay fixed sums of severance payment to other members of senior management pursuant to internal guidelines on severance payments to members of senior management. In 2013, we accrued ￦100 million for retirement bonus.

Prior to April 1, 2010, we granted stock options to our chairman, our president and chief executive officer and other directors and executive officers as described below in “Item 6.E. Share Ownership — Stock Options.” For options granted prior to March 19, 2008, we are required to pay in cash the difference between the exercise and the market price at the date of exercise. These options are subject to a vesting period of two or three years from the grant date and require continued employment for two to three years. Upon vesting, options may be exercised during a period commencing two or three years from the grant date and ending four years thereafter. As of December 31, 2013, we recorded ￦16 million in accrued expense for the stock options granted to our directors and management under our incentive stock option plan. Effective April 1, 2010, we ceased granting stock options.

Since March 20, 2007, we have granted “performance units” to certain high-ranking officers of select group companies. These performance units are performance-based cash compensation, the per-unit value of which is initially determined at the time of grant subject to adjustment after a fixed number of years based on the operating and financial performance of the relevant group company over the same or another fixed term, at the end of which a cash amount equal to the adjusted number of the performance units is paid out. For performance units granted prior to April 1, 2010, the performance review period was three years, and the payout was made at the end of the three-year term. For performance units granted on or after April 1, 2010, the performance review period has been extended principally to four years (and to a limited extent, five years), and the payment is made at the end of such four- or five-year term.

Since April 1, 2010, in addition to the performance units, we also grant “performance shares” to certain high-ranking officers of select group companies. The performance shares are conceptually similar to the performance units granted since April 1, 2010, in that the number of performance shares is based on the operating and financial performance of the relevant group company, except that the number of performance shares granted is adjusted on the basis of the movements in the market price of our shares. In addition, while the performance shares are paid out in cash at the end of the adjustment period, the grantee is contractually required to use the payout solely to purchase our shares in the market at the then-prevailing market price.

Currently, the aggregate amount of performance units and performance shares granted to a given grantee is generally equal to the expected incentive compensation payable to such grantee for three years of service starting from the date of the grant, which initial amount is computed based on the expected performance of the grantee’s company and the expected price movements of our shares over the adjustment period. If the grantee is no longer employed by us or our subsidiaries during the adjustment period, a pro rata amount is paid out at the time of termination of employment. Neither the performance units nor the performance shares are granted to outside directors.

As of December 31, 2013, we recognized ￦1.2 billion and ￦1.8 billion as accrued expenses for performance units and performance shares, respectively.

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Under the Financial Supervisory Service’s standards for preparing corporate disclosure forms, which standards were amended in November 2013, we are required to disclose in our Korean annual report the individual annual compensation paid by us to our directors and auditors if such individual annual compensation is ￦500 million or greater. In 2013, Dong Woo Han, our Chairman and Chief Executive Officer, received ￦1,398 million in annual compensation, which consisted of ￦981 million in salaries and wages and ￦418 million in bonus payments. He also currently holds 15,020 performance units and 15,020 performance shares. The exercisability of these performance units and performance shares into cash and our common shares, as well as the respective amounts thereof, will be determined based on a review of our business performance and share price movements during the period from 2011 to 2015.

ITEM 6.C.

Board Practices

Board of Directors

Our board of directors, which currently consists of one executive director, one non-executive director and ten outside directors, has the ultimate responsibility for the management of our affairs.

Our Articles of Incorporation provide for no less than three but no more than 15 directors, the number of outside directors must be more than 50% of the total number of directors, and we must maintain at least three outside directors. All directors are elected for a term not exceeding three years as determined by the shareholders meeting, except that outside directors are elected for a term not exceeding two years, provided that the term of re-election shall not exceed 1 year and the term cannot be extended in excess of 5 years.

Terms are renewable and are subject to the Korean Commercial Code, the Financial Holding Companies Act and related regulations. See “Item 6.A. Directors and Senior Management” above for information concerning the terms of office of our directors and executive officers.

Our board of directors meets on a regular basis to discuss and resolve material corporate matters. Additional extraordinary meetings may also be convened at the request of the president and chief executive officer or a director designated by the board.

Currently, there are no outstanding service contracts between any of our directors or executive officers and us or any of our subsidiaries providing for benefits upon termination of employment by such director or executive officer.

Committees of the Board of Directors

We currently have seven management committees that serve under the board:

•

the Board Steering Committee;

•

the Risk Management Committee;

•

the Audit Committee

•

the Outside Director Recommendation Committee;

•

the Compensation Committee;

•

the Audit Committee Member Recommendation Committee; and

•

the Corporate Governance and Chief Executive Officer Recommendation Committee.

Each committee member is appointed by the board of directors, except for members of the Audit Committee, who are elected at the general meeting of shareholders.

Board Steering Committee

The Board Steering Committee currently consists of five directors, namely Boo In Ko, Kee Young Kim, Seok Won Kim and Jin Chung and the Chairman of our group. The committee is responsible for ensuring the efficient operations of the board and the facilitation of the board’s functions. The committee’s responsibilities also include reviewing and assessing the board’s structure and the effectiveness of that structure in fulfilling the board’s fiduciary responsibilities. The committee holds regular meetings every quarter.

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Risk Management Committee

The Risk Management Committee currently consists of three directors, namely Kee Young Kim, Hoon Namkoong and Philippe Aguignier. The committee oversees and makes determinations on all issues relating to our comprehensive risk management function. In order to ensure our stable financial condition and to maximize our profits, the committee monitors our overall risk exposure and reviews our compliance with risk policies and risk limits. In addition, the committee reviews risk and control strategies and policies, evaluates whether each risk is at an adequate level, establishes or abolishes risk management divisions, reviews risk-based capital allocations, and reviews the plans and evaluation of internal control. The committee holds regular meetings every quarter.

Audit Committee

The Audit Committee currently consists of four outside directors, namely Taeeun Kwon, Seok Won Kim, Man Woo Lee and Sang Kyung Lee. The committee oversees our financial reporting and approves the appointment of and interaction with our independent auditors and our internal audit-related officers. The committee also reviews our financial information, audit examinations, key financial statement issues and the administration of our financial affairs by the board of directors. In connection with the general meetings of stockholders, the committee examines the agenda for, and financial statements and other reports to be submitted by, the board of directors for each general meeting of stockholders. The committee holds regular meetings every quarter.

Compensation Committee

The Compensation Committee currently consists of four directors, namely Seok Won Kim, Hoon Namkoong, Haruki Hirakawa, and Man Woo Lee. At least one-half of the members of this committee must be outside directors. This committee is responsible for reviewing and approving the management’s evaluation and compensation programs. The committee meetings are called by the chairman of this committee, who must be an outside director.

Corporate Governance and Chief Executive Officer Recommendation Committee

The Corporate Governance and Chief Executive Officer (CEO) Recommendation Committee was established in March 2012 and currently consist of six directors, namely Taeeun Kwon, Sang Kyung Lee, Hoon Namkoong, Philippe Aguignier, Bo In Ko and the Chairman of our group. This committee is responsible for reviewing and making recommendations in relation to the overall corporate governance of our group (including any aspects of corporate governance relating to code of ethics and other code of behavior, size of the board of directors and other matters necessary for improving our overall corporate governance structure), as well as recommendation of the nominees for the president and/or chief executive officer of our group and development, operation and review of our management succession plan, including setting the qualifications for the CEO, evaluating CEO candidate pool and recommending CEO candidates. The chairperson of the committee must be an outside director, and the incumbent CEO may be restricted from participating and voting on matters related to the CEO selection.

Outside Director Recommendation Committee

Members of this committee will be appointed by our board of directors if and only to the extent necessary to recommend and nominate candidates for our outside director positions and related matters. The committee meetings are called by the chairman of this committee, who must be an outside director.

Audit Committee Member Recommendation Committee

Members of this committee must be outside directors and will be appointed by our board of directors on an as-needed basis to recommend and nominate candidates for our audit committee member positions and related matters. This committee recommends candidates for the members of the Audit Committee and is required to act on the basis of a two-thirds vote of the members present.

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ITEM 6.D.

Employees

At the holding company level, we had 148, 147 and 142 regular employees as of December 31, 2011, 2012 and 2013, respectively, almost all of whom are employed within Korea. Our subsidiaries had 17,932, 20,197 and 21,478 regular employees as of December 31, 2011, 2012 and 2013, respectively, almost all of whom are employed within Korea. In addition, we had ten, nine and nine non-regular employee at the holding company level as of December 31, 2011, 2012 and 2013, respectively, and 4,780, 3,343 and 2,318 non-regular employees at the subsidiary level as of December 31, 2011, 2012 and 2013, respectively. Of the total number of regular and non-regular employees at both the holding company and subsidiaries, approximately 0.25% were managerial or executive employees.

8,330 employees of Shinhan Bank, 330 employees of Jeju Bank and 1,590 employees of Shinhan Investment were members of the Korea Securities Trade Union as of December 31, 2013. 2,536 employees of Shinhan Card and 1,187 employees of Shinhan Life were members of the Korean Federation of Clerical and Financial Labor Union as of December 31, 2013.

Under Korean law, we may not terminate full time employees except under certain circumstances.

Since our acquisition of Chohung Bank in 2003, we have not experienced any general employee work stoppages and consider our employee relations to be good.

Under the Korean National Pension Law, we annually contribute an amount equal to 4.5% of employee wages and contribute 4.5% of employees’ wages which are deducted from such wages to the National Pension Management Corporation. In addition, pursuant to the Employee Retirement Security Act, we operate a retirement pension system under which we make annual contributions to pension funds managed by financial institutions (which replaced our former retirement pension system under which we managed the pension fund in-house) that provide employees both regular pension payments and a lump sum payment upon termination of employment. We believe that our retirement pension system confers the following benefits: (1) insulation of employees from the risk of default on their pension payments as the pension funds are deposited with large financial institutions; (2) offer of varied forms of payment, i.e., regular pension payments and a lump sum payment, upon termination of employment; (3) offer to employees the option to make investment decisions for his or her individual pension account and (4) elimination of the ability of employees to cash in his or her retirement fund prematurely, thereby guaranteeing such employee a lump sum payment upon termination of employment. Under this retirement pension system, we and our subsidiaries can opt for either a defined benefit plan or a defined contribution plan, or a combination of both. Under the defined benefit plan, the amount of pension payable upon an employee’s retirement is fixed in advance, and the employer is responsible for making the requisite payments to the pension fund and making investment decisions in relation to the fund assets. Under the defined contribution plan, the employee sets aside a fixed percentage or amount of his salaries to the pension fund and exercises investment decisions for his or her individual pension account. As of December 31, 2011, 2012 and 2013, we recognized liabilities for defined benefit obligations of ￦275 billion, ￦222 billion and ￦118 billion, respectively. See Note 26 of the notes to our consolidated financial statements.

ITEM 6.E.

Share Ownership

As of December 31, 2013, the persons who are currently our directors or executive officers, as a group, beneficially held an aggregate of 714,519 shares of our common stock representing approximately 0.15% of our outstanding common stock as of such date. None of these persons individually held more than 1% of our outstanding common stock as of such date.

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Stock Options

We have granted stock options to certain of the directors and officers of the holding company and its subsidiaries. For all such options that are currently outstanding, we pay in cash the difference between the exercise and the market price at the date of exercise. The following table is the breakdown of outstanding stock options with respect to our common stock that we have granted to our directors and officers, describing the grant dates, positions held by such directors and officers, exercise period, price and the number of options as of April 8, 2014.

Exercise Period

Grant Date

From

Exercise
Price
(In Won)

Number of Granted
Options

Number of Options
Outstanding

Shinhan Financial Group

Hyung Jin Kim

3/19/2008

3/19/2011

3/18/2015

49,053

6,386

(Deputy President)

Jae Gwang Soh

3/19/2008

3/19/2011

3/18/2015

49,053

5,989

(Deputy President)

Shinhan Bank

Jin Won Suh

3/19/2008

3/19/2011

3/18/2015

49,053

17,600

(President & Chief Executive Officer)

Shinhan Card

Sung Ho Wi

3/19/2008

3/19/2011

3/18/2015

49,053

7,100

(President & Chief Executive Officer)

Jae Jeong Lee

3/19/2008

3/19/2011

3/18/2015

49,053

2,495

(Deputy CEO)

O Heum Kwon

3/19/2008

3/19/2011

3/18/2015

49,053

2,495

(Deputy CEO)

Sung Ha Cho

3/19/2008

3/19/2011

3/18/2015

49,053

2,495

(Deputy CEO)

Shinhan Investment Corp.

Kyeong Ho Chu

3/19/2008

3/19/2011

3/18/2015

49,053

2,131

(Vice President)

Seok Hun Park

3/19/2008

3/19/2011

3/18/2015

49,053

1,937

(Vice President)

Total

48,628

In addition, members of the employee stock ownership association have certain pre-emptive rights in relation to our shares that are publicly offered under the Financial Investment Services and Capital Markets Act. As of December 31, 2013, the employee stock ownership association owned 19,332,502 shares of our common stock.

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ITEM 7.

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

ITEM 7.A.

Major Shareholders

The following table sets forth certain information relating to the beneficial ownership of our common shares as of December 31, 2013.


Name of Shareholder	Number of Common Shares Beneficially Owned		Beneficial Ownership (%)
National Pension Service(1)		41,795,962		8.81
BNP Paribas SA		25,356,276		5.35
Shinhan Financial Group Employee Stock Ownership Association		19,332,502		4.08
Saudi Arabian Monetary Agency		17,112,570		3.61
Citibank, N.A. (ADR Department)		12,143,776		2.56
The Government of Singapore		9,612,739		2.03
The Lazard Funds Inc.		9,094,314		1.92
Samsung Asset Management		6,023,595		1.27
Mizuho		5,955,000		1.26
Abu Dhabi Investment Authority		5,550,669		1.17
Dimensional Emerging Markets Value Fund		5,415,719		1.14
Others		316,806,465		66.80

Total		474,199,587		100.00

Note:

(1)	As of December 31, 2013, National Pension Service held 2,000,000 shares, or 18.02% of our Series 12 redeemable preferred stock, which we issued in April 2011. The redeemable preferred stock does not carry voting rights.

Other than those listed above, no other person or entity known by us, jointly or severally, directly or indirectly own more than 1% of our issued and outstanding voting securities or otherwise exercise control or could exercise control over us. None of our shareholders have different voting rights.

As of the date hereof, our total authorized share capital is 1,000,000,000 shares, par value ￦5,000 per share.

As of December 31, 2013, 474,199,587 common shares and 11,100,000 Series 12 redeemable preferred shares are currently issued and outstanding. See “Item 10.B. Memorandum and Articles of Incorporation — Description of Preferred Stock.”

As of December 31, 2013, the latest date on which we closed our shareholders’ registry, 507 shareholders of record were notated as U.S. persons, holding in the aggregate 21.9% of our then total outstanding shares (including Citibank, N.A., as the depositary for our American depositary shares, each representing one shares of our common stock effective October 15, 2012, prior to which each American depositary share represented two common shares).

ITEM 7.B.

Related Party Transactions

Since the beginning of the preceding three financial years, none of our directors or officers has or had any transactions with us that are or were unusual in their nature or conditions or significant to our business, other than as set forth below and also described in Note 46 to our consolidated financial statements included in this annual report.

In December 2001, BNP Paribas acquired 4.00% of our common stock in return for an investment of approximately ￦155 billion in cash pursuant to an alliance agreement. Under the terms of the alliance agreement, for so long as BNP Paribas does not sell or otherwise transfer (except to any of its wholly-owned subsidiaries) any portion of its ownership interest in our common stock and maintains, after any issuances of new shares by us from time to time, its shareholding percentage of not less than 3.5% of our issued common stock, we

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are required to call a meeting of our shareholders to recommend that one nominee of BNP Paribas be elected to our board of directors. In addition, under the alliance agreement, BNP Paribas has the right to subscribe for new issuances of our common shares in the event that such new issuances would result in the dilution of the shareholding percentage of BNP Paribas below 3.5%. As of December 31, 2013, BNP Paribas Group held 25,356,276 shares, or 5.35%, of our total common stock.

As of December 31, 2011, 2012 and 2013, we had principal loans outstanding to our directors, executive officers and their affiliates in the principal amount of ￦2.1 billion, ￦3.2 billion and ￦4.6 billion, which were made in the ordinary course of business on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions with other persons, and did not involve more than the normal risk of collectability or present other unfavorable features.

ITEM 7.C.

Interests of Experts and Counsel

Not applicable.

ITEM 8.

FINANCIAL INFORMATION

ITEM 8.A.

Consolidated Statements and Other Financial Information

See “Item 18. Financial Statements” and our consolidated financial statements included in this annual report.

Legal Proceedings

As of December 31, 2013, we and our subsidiaries were defendants in pending lawsuits (including any government proceedings) in the aggregate claim amount of ￦631 billion, for which we recorded a provision of ￦106 billion.

In November 2005, Shinhan Bank purchased the shares of Shinho Paper Co., Ltd. (currently known as Artone Paper Co., Ltd.) (“Shinho”) held by Aram Corporate Restructuring Association (“Aram”) from Choong-Shik Lee, an executive member of the Aram, who allegedly sold such shares against the will of the other members of Aram in an act of embezzlement (the “Embezzlement”). Chung Wook Uhm, who was then in charge of the management of Shinho, brought claim for damages against Shinhan Bank on the grounds that (i) Shinhan Bank was aware of the Embezzlement when it bought the shares and (ii) Shinhan Bank caused forfeiture of

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Chung Wook Uhm’s management rights when it exercised its voting rights in favor of Kuk- Il Paper MFG Co., Ltd. (“Kuk-Il”), which had announced its intention to attempt a hostile takeover of Shinho. In our rebuttal, we argued that we did not participate in the alleged Embezzlement since Shinhan Bank properly purchased the shares through a block trade on the Korea Exchange during trading hours. In September 2011, the Seoul Central District Court ruled in favor of Chung Wook Uhm, ordering Shinhan Bank and Choong-Shik Lee to jointly and severally compensate approximately ￦25 billion to Chung Wook Uhm as damages for his loss of management rights on the grounds that (i) Shinhan Bank either knew or could have known the Embezzlement and (ii) Shinhan Bank either participated in or aided and abetted the Embezzlement by exercising its voting rights in favor of Kuk-Il. We have appealed and such appeal is currently pending at the Seoul High Court.

In March 2008, the Korea Federation of Banks, together with 16 banks, including Shinhan Bank, brought a joint claim against the Fair Trade Commission of Korea (the “FTC”) in the Seoul High Court for an order invalidating the FTC’s recent measures recommending banks to use a revised standard contract for loan transactions (the “FTC Recommendation”). On April 6, 2011, the Seoul High Court dismissed the claim for invalidation on the grounds that (i) the terms of the previous standard contract, which provide that banks and customers shall “mutually agree” on the party responsible for bearing the stamp duty, costs and expenses associated with the establishment and registration of the mortgage in connection with bank loans, are unfair and (ii) the revised standard contract recommended by the FTC Recommendation, which expressly sets out the specific parties responsible for bearing each of the itemized costs and expenses associated with bank loans, is fair and legitimate. In particular, the Seoul High Court noted that the previous standard form contract is unfair because a bank may abuse its advantageous position as a lender by requiring customers to bear the costs that should have be borne by the bank in loan transactions. Since July 1, 2011, banks in Korea have been using the revised standard form contract pursuant to the FTC Recommendation, the terms of which require the costs and expenses associated with the establishment and registration of the right to collateral security in connection with bank loans to be borne by a specified party (either the bank or the customer) depending on the nature of the costs and expenses. Certain of Shinhan Bank’s customers have filed lawsuits against Shinhan Bank which are currently pending, alleging that it should return the mortgage registration expenses paid by such customers under mortgage loan agreements that did not reflect the amendments instituted by the Korea Fair Trade Commission. As of December 31, 2013, there were 86 such cases outstanding for a total amount in dispute of ￦11.4 billion. There is no assurance that additional lawsuits will not be filed against Shinhan Bank on similar or other grounds, and the final outcome of the existing and any such new litigation remains uncertain.

In May 2011, Shinhan Bank commenced an action against Dongah Construction Industrial Co., Ltd. (“Dongah”) and two of its employees in connection with such employees’ embezzlement of ￦89.8 billion from funds held in a trust account managed by Shinhan Bank on behalf of Dongah’s creditors. Through the action, Shinhan Bank sought, among other things, a declaratory judgment finding that Shinhan Bank is not liable for the embezzlement on the basis that Shinhan Bank properly remitted the trust funds at issue in accordance with the release instruction duly executed by the employees of Dongah. Shinhan Bank further claimed compensation for damages from the employees of Dongah in the amount of ￦89.8 billion. Dongah, in its counterclaim, alleged that Shinhan Bank should reinstate the embezzled funds on the grounds that Shinhan Bank, as the trustee, did not manage the trust account properly and thereby caused reduction in trust funds. In May 2011, the Seoul Central District Court dismissed Shinhan Bank’s claim, ruling that Shinhan Bank’s transfer of the funds was not in accordance with the terms of the trust agreement and therefore, inappropriate. The court concurrently admitted Dongah’s counterclaim and ordered Shinhan Bank to restore the embezzled trust funds by depositing ￦89.8 billion, while accepting Shinhan Bank’s claim for compensatory damages against the employees of Dongah in the amount of ￦89.8 billion and interest accrued thereon (except the claim for loss incurred by delay). Shinhan Bank appealed to the Seoul High Court alleging that Shinhan Bank is not liable for the embezzlement or, in the alternative, that Dongah should reinstate ￦42.7 billion as unjust profits since such funds were eventually credited to the account of Dongah by its employees and pay damages to Shinhan Bank in the amount of ￦18.8 billion for Dongah’s failure to properly manage and supervise its employees. In April 2012, the Seoul High Court dismissed Shinhan Bank’s claim that it was not liable for the embezzlement and ordered Shinhan Bank to restore the embezzled trust funds by depositing ￦96.2 billion (representing the principal amount of the embezzled funds and profit that would have been earned by the trust account through March 13, 2012 absent the embezzlement) and paying interest on such deposit amount until the date on which such amount

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is deposited in full. The Seoul High Court, however, admitted Shinhan Bank’s alternative claim and ordered Dongah to pay ￦61.5 billion (representing the sum of ￦42.7 billion and ￦18.8 billion claimed by Shinhan Bank as described above) and interest accrued thereon to Shinhan Bank. Pursuant to the ruling of the Seoul High Court, Shinhan Bank has deposited ￦96.8 billion to the trust account managed by Shinhan Bank on behalf of Dongah’s creditors. Shinhan Bank subsequently appealed to the Supreme Court of Korea. In addition, the Financial Supervisory Service commenced an investigation of Shinhan Bank in connection with this incident, and, in July 2012, issued an institutional warning against Shinhan Bank. The above lawsuit is currently pending in the Supreme Court of Korea.

Our management believes that these lawsuits will not have a material adverse effect on our financial condition, equity or results of operations. For further details of these and other litigations, see Note 44 of the notes to our consolidated financial statements.

Dividend Policy

For a detailed description on the dividend policy, please see “Item 10.B. Memorandum and Articles of Incorporation — Description of Share Capital — Dividends.”

ITEM 8.B.

Significant Changes

Not applicable.

ITEM 9.

THE OFFER AND LISTING

ITEM 9.A.

Offer and Listing Details

Market Prices of Common Stock and American Depositary Shares

The principal trading market for our common shares is the KRX KOSPI Market Division of the Korea Exchange, where our common shares were listed on September 10, 2001. Our American depositary shares have been listed on the New York Stock Exchange since September 16, 2003 and are identified by the symbol “SHG.”

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The table below sets forth, for the periods indicated, the high and low closing prices and the average daily volume of trading activity on the Korea Exchange for our common stock since 2009, and their high and low closing prices and the average daily volume of trading activity on the New York Stock Exchange for our American depositary shares since 2009.


	Korea Exchange						New York Stock Exchange
	Closing Price per Common Stock				Average Daily Trading Volume		Closing Price per ADS				Average Daily Trading Volume
	High		Low		Average Daily Trading Volume		High		Low		Average Daily Trading Volume
					(Shares)						(ADSs)
2009		49,550		20,500		3,219,298		86.42		26.25		115,649
2010		53,600		39,250		1,830,799		93.82		66.31		53,391
2011		53,800		36,150		1,749,097		101.33		61.77		51,671
First Quarter		53,800		46,350		1,696,713		95.65		82.76		43,879
Second Quarter		52,500		46,250		1,970,879		97.40		85.29		58,282
Third Quarter		52,900		36,150		1,842,548		101.33		61.77		58,528
Fourth Quarter		46,250		37,300		1,487,274		84.00		62.92		45,640
2012(1)		47,000		33,350		1,167,012		42.22		31.25		39,369
First Quarter		47,000		38,650		1,250,825		84.44		67.34		44,454
Second Quarter		44,650		37,000		1,031,253		79.08		62.79		28,073
Third Quarter		40,900		33,350		1,372,606		72.84		58.54		31,853
Fourth Quarter		38,950		33,550		968,017		36.64		31.25		53,217
2013		48,650		35,950		969,961		45.70		30.82		66,410
First Quarter		42,650		37,650		1,083,492		39.32		33.60		77,668
Second Quarter		40,700		35,950		951,656		36.26		30.82		96,414
Third Quarter		44,850		37,300		876,582		42.34		32.58		49,804
Fourth Quarter		48,650		42,150		969,944		45.70		40.06		42,457
October		48,650		43,800		1,158,945		45.61		40.63		38,189
November		46,800		42,150		817,671		43.87		40.06		37,159
December		47,500		43,900		931,378		45.70		41.27		52,178
2014 (through April 11)		47,000		42,000		962,483		44.85		39.44		57,384
January		46,600		43,000		1,007,697		43.77		39.77		63,164
February		45,250		42,000		972,797		41.79		39.44		74,470
March		47,000		43,500		909,929		43.95		40.24		45,706
April (through April 11)		47,000		45,500		961,711		44.85		42.74		35,072

Source:

Korea Exchange; New York Stock Exchange

Note:

(1)

Effective October 15, 2012, the exchange rate of ADRs per common share was changed from 2:1 to 1:1. As supplemental information, the high price, low price and average daily trading volume of our ADRs was US$84.44, US$58.54 and 34,778 ADRs, respectively, for the period from January to September 2012 (prior to the ratio change) and US$36.64, US$31.25 and 53,217 ADRs, respectively, for the period from October to December 2012.

ITEM 9.B.

Plan of Distribution

Not applicable.

ITEM 9.C.

Markets

The Korea Exchange

Pursuant to the Korea Stock and Futures Exchange Act, as of January 27, 2005, the Korea Stock Exchange, which began its operations in 1956, the KRX KOSDAQ, which began its operation in July 1, 1996, and the Korea Futures Exchange (as an exchange operating futures market and options market), which began its operation in February 1, 1999, were unified to form the Korea Exchange.

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The Korea Exchange was established in a form of a limited liability stock company in accordance with the Korean Commercial Code with the minimum paid-in capital of ￦100 billion in accordance with the Financial Investment Services and Capital Markets Act. Historically, the Korea Exchange was the only exchange authorized under the Financial Investment Services and Capital Markets Act. On May 28, 2013, however, the Financial Investment Services and Capital Markets Act was amended to implement a license system under which a license may be granted to an exchange upon satisfaction of certain requirements. In addition, the Financial Services Commission has authorized the establishment of alternative trading systems that engage in the trading of listed beneficial certificates, among other things, for a multiple number of parties through electronic means. Notwithstanding the foregoing regulatory developments, the Korea Exchange is presently the only duly licensed exchange in Korea and there have been no definitive developments regarding newly licensed exchanges or alternative trading systems in Korea. The Korea Exchange operates and supervises four market divisions, the KRX KOSPI Market Division, the KRX KOSDAQ Market Division, the KRX Futures Market Division and the KRX KONEX Market Division. It has its principal office in Busan.

As of December 31, 2013, the aggregate market value of equity securities listed on the KOSPI was approximately ￦1,186 trillion. The average daily trading volume of equity securities for 2013 was approximately 328 million shares with an average transaction value of ￦3,993 billion.

Even though the Financial Investment Services and Capital Markets Act prescribed that the Korea Exchange be established in a form of a limited liability stock company, the Korea Exchange is expected to play a public role as a public organization. In order to safeguard against a possible conflict, the Financial Investment Services and Capital Markets Act has placed restrictions on the ownership and operation of the Korea Exchange and any newly established exchanges approved by the Financial Services Commission as follows:

•

Any person’s ownership of shares in the Korea Exchange is limited to 5% or less except for an investment trust company or investment company established under the Financial Investment Services and Capital Markets Act, or the Korean government. However, more than 5% ownership in Korea Exchange is permitted if necessary for forming a strategic alliance with a foreign stock or futures exchange and such amount of ownership is approved by the Financial Services Commission on grounds that such ownership may contribute to the efficiency and soundness of capital markets and the distribution of shares held by shareholders;

•

The number of outside directors on the board of directors of the Korea Exchange shall be more than half of the total number of directors;

•

Any amendment to the Articles of Incorporation, transfer or consolidation of business, spin off, stock swap in its entirety or transfer of shares in its entirety of the Korea Exchange will receive prior approval from the Financial Services Commission; and

•

In the event the Financial Services Commission determines that the chief executive officer of the Korea Exchange is not appropriate for the position, the Financial Services Commission can request the Korea Exchange upon reasonable cause, within one month from the chief executive officer’s election, to dismiss the chief executive officer. Subsequently, the chief executive officer will be suspended from performing his duties and the Korea Exchange will elect a new chief executive officer within two months from the request.

The Korea Exchange has the power in some circumstances to suspend trading in the shares of a given company or to de-list a security. The Korea Exchange also restricts share price movements. All listed companies are required to file accounting reports annually, semiannually and quarterly and to release immediately all information that may affect trading in a security.

The Government has in the past exerted, and continues to exert, substantial influence over many aspects of the private sector of the Korean economy and its actions may depress or boost the stock market. In the past, the Government has informally both encouraged and restricted the declaration and payment of dividends, induced mergers to reduce what it considers excess capacity in a particular industry and induced private companies to offer publicly their securities.

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The Korea Exchange publishes the Korea Composite Stock Price Index (“KOSPI”) every ten seconds, which is an index of all equity securities listed on the Korea Exchange. Historical movements in KOSPI are set out in the following.


	Opening(1)		High		Low		Closing
2001		503.31		715.93		463.54		693.70
2002		698.00		943.54		576.49		627.55
2003		633.03		824.26		512.30		810.71
2004		821.26		939.52		713.99		895.92
2005		893.71		1,383.14		866.17		1,379.37
2006		1,389.27		1,464.70		1,192.09		1,434.46
2007		1,435.26		2,085.45		1,345.08		1,897.13
2008		1,853.45		1,901.13		892.16		1,124.47
2009		1,157.40		1,723.17		992.69		1,682.77
2010		1,696.14		2,051.00		1,552.79		2,051.00
2011		2,070.08		2,228.96		1,652.71		1,825.74
2012		1,826.37		2,049.28		1,769.31		1,997.05
2013		2,031.10		2,059.58		1,780.63		2,011.34
2014 (through April 11)		1,967.19		2,008.61		1,886.85		1,997.44

Source: Korea Exchange

Note:

(1)

The figures represent the daily closing price of the first trading day of the respective year.

Shares are quoted “ex-dividend” on the first trading day of the relevant company’s accounting period. “Ex-dividend” refers to a share no longer carrying the right to receive the following dividend payment because the settlement date occurs after the record date for determining which shareholders are entitled to receive dividends. “Ex-rights” refers to shares no longer carrying the right to participate in the following rights offering or bonus issuance because the settlement date occurs after the record date for determining which shareholders are entitled to new shares. The calendar year is the accounting period for the majority of listed companies, this may account for the drop in KOSPI between its closing level at the end of one calendar year and its opening level at the beginning of the following calendar year.

With certain exceptions, principally to take account of a share being quoted “ex-dividend” and “ex-rights,” permitted upward and downward movements in share prices of any category of shares on any day are limited under the rules of the Korea Exchange to 15% of the previous day’s closing price of the shares, rounded down as set out below:


Previous Day’s Closing Price	Rounded Down to Won
Less than 1,000		1
1,000 to less than 5,000		5
5,000 to less than 10,000		10
10,000 to less than 50,000		50
50,000 to less than 100,000		100
100,000 to less than 500,000		500
500,000 or more		1,000

As a consequence, if a particular closing price is the same as the price set by the fluctuation limit, the closing price may not reflect the price at which persons would have been prepared, or would be prepared to continue, if so permitted, to buy and sell shares. Orders are executed on an auction system with priority rules to deal with competing bids and offers.

Due to deregulation of restrictions on brokerage commission rates, the brokerage commission rate on equity securities transactions may be determined by the parties, subject to commission schedules being filed with the

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Korea Exchange by the financial investment companies with brokerage licenses. In addition, a securities transaction tax of 0.15% of the sales price will generally be imposed on the transfer of shares or certain securities representing rights to subscribe for shares on the Korea Exchange. A special agricultural and fishery tax of 0.15% of the sales prices will also be imposed on transfer of these shares and securities on the Korea Exchange. See “Item 10.E. Taxation — Korean Taxation.”

The number of companies listed on the KRX KOSPI Market, the corresponding total market capitalization at the end of the periods indicated and the average daily trading volume for those periods are set forth in the following table.


			Total Market Capitalization				Average Daily Trading Volume, Value
Year	Number of Listed Companies		(Millions of Won)		(Thousands of Dollars)(1)		Thousands of Shares		(Millions of Won)		(Thousands of Dollars)(1)
Year	Number of Listed Companies		(Millions of Won)		(Thousands of Dollars)(1)		Thousands of Shares		(Millions of Won)		(Thousands of Dollars)(1)
2000		704		188,041,490		148,414,751		306,163		2,602,211		2,053,837
2001		689		255,850,070		194,784,979		473,241		1,997,420		1,520,685
2002		683		258,680,756		218,056,778		857,245		3,041,598		2,563,937
2003		684		355,362,626		298,123,008		542,010		2,216,636		1,859,594
2004		683		412,588,139		398,597,371		372,895		2,232,109		2,156,419
2005		702		655,074,595		648,588,708		467,629		3,157,662		3,126,398
2006		731		704,587,508		757,620,976		279,096		3,435,180		3,693,742
2007		746		951,917,907		1,017,223,666		363,846		5,540,151		5,920,229
2008		765		576,927,703		457,153,489		355,440		5,190,180		4,112,663
2009		770		887,935,183		763,060,356		485,657		5,795,552		4,980,495
2010		777		1,141,885,458		1,009,981,831		380,859		5,619,768		4,970,607
2011		791		1,041,999,162		899,438,206		353,760		6,863,146		5,924,166
2012		784		1,154,294,167		1,085,638,395		486,480		4,823,643		4,536,739
2013		777		1,185,973,724		1,123,826,139		328,325		3,993,422		3,784,158
2014 (through April 11)		775		1,189,691,462		1,149,016,285		235,844		3,786,923		3,657,450

Source: Korea Exchange

Note:

(1)	Converted at the Noon Buying Rate at the end of the periods indicated.

The Korean securities markets are principally regulated by the Financial Services Commission and the Financial Investment Services and Capital Markets Act. The law imposes restrictions on insider trading and price manipulation, requires specified information to be made available by listed companies to investors and establishes rules regarding margin trading, proxy solicitation, takeover bids, acquisition of treasury shares and reporting requirements for shareholders holding substantial interests.

Protection of Customer’s Interest in Case of Insolvency of Financial Investment Companies

Under Korean law, the relationship between a customer and a financial investment company in connection with a securities sell or buy order is deemed to be consignment and the securities acquired by a consignment agent (i.e., the securities company) through such sell or buy order are regarded as belonging to the customer in so far as the customer and the consignment agent’s creditors are concerned. Therefore, in the event of a bankruptcy or reorganization procedure involving a financial investment company, the customer of the financial investment company is entitled to the proceeds of the securities sold by the financial investment company. In addition, the Financial Investment Services and Capital Markets Act recognizes the ownership of a customer in securities held by a financial investment company in such customer’s account.

When a customer places a sell order with a financial investment company which is not a member of the Korea Exchange and this financial investment company places a sell order with another financial investment company which is a member of the Korea Exchange, the customer is still entitled to the proceeds of the securities sold received by the non-member company from the member company regardless of the bankruptcy or

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reorganization of the non-member company. Likewise, when a customer places a buy order with a non-member company and the non-member company places a buy order with a member company, the customer has the legal right to the securities received by the non-member company from the member company because the purchased securities are regarded as belonging to the customer in so far as the customer and the non-member company’s creditors are concerned.

In addition, under the Financial Investment Services and Capital Markets Act, the Korea Exchange is obliged to indemnify any loss or damage incurred by a counterparty as a result of a breach by its members. If a financial investment company which is a member of the Korea Exchange breaches its obligation in connection with a buy order, the Korea Exchange is obliged to pay the purchase price on behalf of the breaching member. Therefore, the customer can acquire the securities that have been ordered to be purchased by the breaching member.

As the cash deposited with a financial investment company is regarded as belonging to the financial investment company, which is liable to return the same at the request of its customer, the customer cannot take back deposited cash from the financial investment company if a bankruptcy or reorganization procedure is instituted against the financial investment company and, therefore, can suffer from loss or damage as a result. However, the Depositor Protection Act provides that the Korea Deposit Insurance Corporation will, upon the request of the investors, pay each investor up to ￦50 million per financial institution in case of the financial investment company’s bankruptcy, liquidation, cancellation of securities business license or other insolvency events. The premiums related to this insurance are paid by financial investment companies. Pursuant to the Financial Investment Services and Capital Markets Act, a financial investment company with a dealing or brokerage license is required to deposit the cash received from its customers with the Korea Securities Finance Corporation, a special entity established pursuant to the Financial Investment Services and Capital Markets Act. Set-off or attachment of cash deposits by securities companies with the Korea Securities Finance Corporation is prohibited. In addition, in the event of bankruptcy or dissolution of the financial investment company, the cash so deposited shall be withdrawn and paid to the customer prior to payment to other creditors of the financial investment company.

Restrictions Applicable to ADSs

No Korean governmental approval is necessary for the sale and purchase of our ADSs in the secondary market outside Korea or for the withdrawal of shares of our common stock underlying the ADSs and the delivery inside Korea of shares in connection with the withdrawal, provided that a foreigner who intends to acquire the shares must obtain an investment registration card from the Financial Supervisory Service as described below. The acquisition of the shares by a foreigner must be immediately reported to the governor of the Financial Services Commission, either by the foreigner or by his standing proxy in Korea.

Persons who have acquired shares of our common stock as a result of the withdrawal of shares underlying our ADSs may exercise their preemptive rights for new shares, participate in free distributions and receive dividends on shares without any further Korean governmental approval.

Under current Korean laws and regulations, the depositary is required to obtain our prior consent for the number of shares of our common stock to be deposited in any given proposed deposit that exceeds the difference between:

(1) the aggregate number of shares of our common stock deposited by us for the issuance of our ADSs (including deposits in connection with the initial issuance and all subsequent offerings of our ADSs and stock dividends or other distributions related to these ADSs); and

(2) the number of shares of our common stock on deposit with the depositary at the time of such proposed deposit. We have agreed to grant such consent to the extent that the total number of shares on deposit with the depositary would not exceed 40,432,628 at any time.

Reporting Requirements for Holders of Substantial Interests

Under the Financial Investment Services and Capital Markets Act, any person whose direct or beneficial ownership of our common stock with voting rights, whether in the form of shares of common stock or ADSs,

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certificates representing the rights to subscribe for shares and equity-related debt securities including convertible bonds and bonds with warrants (which we refer to collectively as “Equity Securities”), together with the Equity Securities beneficially owned by certain related persons or by any person acting in concert with the person, accounts for 5% or more of the total outstanding shares (including Equity Securities of us held by such persons) is required to report the status of the holdings and the purpose of the holdings (for example, whether intending to seek management control) to the Financial Services Commission and the Korea Exchange within five business days after reaching the 5% ownership level. In addition, any change in the ownership interest subsequent to the report that equals or exceeds 1% of the total outstanding Equity Securities or change in the purpose of the holdings is required to be reported to the Financial Services Commission and the Korea Exchange within five business days from the date of the change (within ten days of the end of the month in which the change occurred, in the case of a person with no intent to seek management control and within ten days of the end of the quarter in which the change occurred, in the case of an institutional investor prescribed by the Financial Services Commission).

Violation of these reporting requirements may subject a person to criminal sanctions such as administrative sanctions, fines, imprisonment and/or a loss of voting rights with respect to the portion of ownership of Equity Securities exceeding 5% of the total outstanding shares. In addition, the Financial Services Commission may order the disposal of the unreported Equity Securities. Any persons who reports management control as the purpose for its holdings is prohibited from acquiring additional shares or from exercising voting rights during the following five days following the reporting date.

In addition to the reporting requirements described above, any person whose direct or beneficial ownership of our stock accounts for 10% or more of the total issued and outstanding shares (which we refer to as a “major stockholder”) must report the status of his/her shareholding to the Korea Securities Futures Commission and the Korea Exchange within five days after he/she becomes a major stockholder. In addition, any change in the ownership interest subsequent to the report must be reported to the Korea Securities Futures Commission and the Korea Exchange within five days after the change occurred. Violation of these reporting requirements may subject a person to criminal sanctions such as fines or imprisonment. Any single stockholder or persons who have a special relationship with such stockholder that jointly acquire more than 10% (4% in case of non-financial business group companies) of the voting stock of a Korean financial holding company who controls national banks will be subject to reporting or approval requirements pursuant to the Financial Holding Company Act. See “Item 4.B. Business Overview — Supervision and Regulation — Principal Regulations Applicable to Financial Holding Companies — Restrictions on Financial Holding Company Ownership.”

Restrictions Applicable to Shares

Under the Foreign Exchange Transaction Laws and Financial Services Commission regulations, as amended (collectively, the “Investment Rules”), foreigners may invest, with limited exceptions and subject to procedural requirements, in all shares of Korean companies, whether listed on the Stock Market Division of the Korea Exchange or on the KOSDAQ Market Division of the Korea Exchange, unless prohibited by specific laws. Foreign investors may trade shares listed on the Stock Market Division of the Korea Exchange or on the KOSDAQ Market Division of the Korea Exchange only through the Stock Market Division of the Korea Exchange or the KOSDAQ Market Division of the Korea Exchange, except in limited circumstances, including:

•

odd-lot trading of shares;

•

acquisition of shares (which we refer to as “Converted Shares”) by exercise of warrants, conversion rights or exchange rights under bonds with warrants, convertible bonds or exchangeable bonds or withdrawal rights under depositary receipts issued outside of Korea by a Korean company;

•

acquisition of shares as a result of inheritance, donation, bequest or exercise of stockholders’ rights, including preemptive rights or rights to participate in free distributions and receive dividends;

•

over-the-counter transactions between foreigners of a class of shares for which the ceiling on aggregate acquisition by foreigners, as explained below, has been reached or exceeded subject to certain exceptions; and

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•

sale and purchase of shares at fair value between foreigners who are part of an investor group comprised of foreign companies investing under the control of a common investment manager pursuant to applicable laws or contract.

For over-the-counter transactions of shares between foreigners outside the Stock Market Division of the Korea Exchange or the KOSDAQ Market Division of the Korea Exchange for shares with respect to which the limit on aggregate foreign ownership has been reached or exceeded, a securities company licensed in Korea must act as an intermediary. Odd-lot trading of shares outside the Stock Market Division of the Korea Exchange or the KOSDAQ Market Division of the Korea Exchange must involve a licensed securities company in Korea as the other party. Foreign investors are prohibited from engaging in margin transactions with respect to shares that are subject to a foreign ownership limit.

The Investment Rules require a foreign investor who wishes to invest in shares on the Stock Market Division of the Korea Exchange or the KOSDAQ Market Division of the Korea Exchange (including Converted Shares and shares being issued for initial listing on the Stock Market Division of the Korea Exchange or on KOSDAQ Market Division of the Korea Exchange) to register its identity with the Financial Supervisory Service prior to making any such investment. The registration requirement does not, however, apply to foreign investors who acquire Converted Shares with the intention of selling such Converted Shares within three months from the date of acquisition. Upon registration, the Financial Supervisory Service will issue to the foreign investor an investment registration card, which must be presented each time the foreign investor opens a brokerage account with a securities company. Foreigners eligible to obtain an investment registration card include foreign nationals who have not been residing in Korea for a consecutive period of six months or more, foreign governments, foreign municipal authorities, foreign public institutions, international financial institutions or similar international organizations, corporations incorporated under foreign laws and any person in any additional category designated by decree of the Ministry of Strategy and Finance under the Korean Securities and Exchange Act. All Korean offices of a foreign corporation as a group are treated as a separate foreigner from the offices of the corporation outside Korea for the purpose of investment registration. However, a foreign corporation or depositary issuing depositary receipts may obtain one or more investment registration cards in its name in certain circumstances as described in the relevant regulations.

Upon a foreign investor’s purchase of shares through the Stock Market Division of the Korea Exchange or the KOSDAQ Market Division of the Korea Exchange, no separate report by the investor is required because the investment registration card system is designed to control and oversee foreign investment through a computer system. However, a foreign investor’s acquisition or sale of shares outside the Stock Market Division of the Korea Exchange or the KOSDAQ Market Division of the Korea Exchange (as discussed above) must be reported by the foreign investor or his standing proxy to the governor of the Financial Supervisory Service at the time of each such acquisition or sale. A foreign investor must ensure that any acquisition or sale by it of shares outside the Stock Market Division of the Korea Exchange or the KOSDAQ Market Division of the Korea Exchange in the case of trades in connection with a tender offer, odd-lot trading of shares, trades of a class of shares for which the aggregate foreign ownership limit has been reached or exceeded, is reported to the governor of the Financial Supervisory Service by himself or his standing proxy, or, in the case of sale and purchase of shares at fair value between foreigners, who are part of an investor group comprised of foreign companies investing under the control of a common investment manager pursuant to applicable laws or contract. A foreign investor may appoint a standing proxy from among the Korea Securities Depository, foreign exchange banks (including domestic branches of foreign banks), securities companies (including domestic branches of foreign securities companies), asset management companies, futures trading companies and internationally recognized custodians which will act as a standing proxy to exercise stockholders’ rights or perform any matters related to the foregoing activities if the foreign investor does not perform these activities himself. Generally, a foreign investor may not permit any person, other than its standing proxy, to exercise rights relating to his shares or perform any tasks related thereto on his behalf. However, a foreign investor may be exempted from complying with these standing proxy rules with the approval of the governor of the Financial Supervisory Service in cases deemed inevitable by reason of conflict between laws of Korea and the home country of the foreign investor.

Certificates evidencing shares of Korean companies must be kept in custody with an eligible custodian in Korea. Only foreign exchange banks (including domestic branches of foreign banks), securities companies

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(including domestic branches of foreign securities companies), the Korea Securities Depository, asset management companies, futures trading companies and internationally recognized custodians are eligible to act as a custodian of shares for a non-resident or foreign investor. A foreign investor must ensure that his custodian deposits his shares with the Korea Securities Depository. However, a foreign investor may be exempted from complying with this deposit requirement with the approval of the governor of the Financial Supervisory Service in circumstances where compliance with that requirement is made impracticable, including cases where compliance would contravene the laws of the home country of such foreign investor.

Under the Investment Rules, with certain exceptions, foreign investors may acquire shares of a Korean company without being subject to any foreign investment ceiling. As one such exception, designated public corporations are subject to a 40% ceiling on the acquisition of shares by foreigners in the aggregate. Designated public corporations may set a ceiling on the acquisition of shares by a single person in their articles of incorporation. Currently, Korea Electric Power Corporation is the only designated public corporation that has set such a ceiling. Furthermore, an investment by a foreign investor in 10% or more of the issued and outstanding shares with voting rights of a Korean company is defined as a foreign direct investment under the Foreign Investment Promotion Act of Korea. Generally, a foreign direct investment must be reported to the Ministry of Commerce, Industry and Energy of Korea. The acquisition of shares of a Korean company by a foreign investor may also be subject to certain foreign or other shareholding restrictions in the event that the restrictions are prescribed in a specific law that regulates the business of the Korean company. For a description of such restrictions applicable to Korean banks, see “Item 4.B. Business Overview — Supervision and Regulation — Principal Regulations Applicable to Banks — Restrictions on Bank Ownership.”

ITEM 9.D.

Selling Shareholders

Not applicable.

ITEM 9.E.

Dilution

Not applicable.

ITEM 9.F.

Expenses of the Issue

Not applicable.

ITEM 10.

ADDITIONAL INFORMATION

ITEM 10.A.

Share Capital

Not applicable.

ITEM 10.B.

Memorandum and Articles of Incorporation

We are a financial holding company established under the Financial Holding Company Act. As set forth in our Articles of Incorporation, our objects and purposes as a financial holding company are, among others, to operate and manage financial companies or companies engaged in similar lines of business, to provide financial support to, or investments in, our subsidiaries and to develop and jointly sell products with our subsidiaries. We are registered with the commercial registry office of Seoul Central District Court.

Our articles of incorporation, which was last amended on March 29, 2012 to reflect an amendment to the Korean Commercial Code, the laws and enforcement decrees of the Act on External Audit of Stock Companies as well as the establishment of a corporate governance and chief executive officer recommendation committee, is annexed to this annual report as Exhibit 1.1.

Description of Share Capital

This section provides information relating to our capital stock, including brief summaries of material provisions of our Articles of Incorporation, the Korean Commercial Code, the Financial Investment Services and Capital Markets Act, the Financial Holding Companies Act and certain related laws of Korea, all as currently in

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effect. The following summaries are intended to provide only summaries and are subject to the full text of the Articles of Incorporation and the applicable provisions of the Financial Investment Services and Capital Markets Act, the Korean Commercial Code, and certain other related laws of Korea.

General

As of December 31, 2013 and as of the date hereof, our authorized share capital is 1,000,000,000 shares. Our Articles of Incorporation provide that we are authorized to issue shares of preferred stock up to one-half of all of the issued and outstanding shares. Furthermore, through an amendment of the Articles of Incorporation, we have created new classes of shares in addition to the common shares and the preferred shares. See “— Description of Preferred Stock — Redeemable Preferred Stock (Series 10)” and “— Description of Preferred Stock — Redeemable Convertible Preferred Stock (Series 11).” As of December 31, 2013 and as of the date hereof, the number of our issued and outstanding common shares was 474,199,587.

On January 25, 2007, we issued 28,990,000 Series 10 redeemable preferred shares and 14,721,000 Series 11 redeemable convertible preferred shares as part of our funding for the acquisition of LG Card, all of which were redeemed as of January 25, 2012.

On April 20, 2011, as part of funding for partial redemption of the Series 10 redeemable preferred stock and the Series 11 redeemable convertible preferred stock, we issued 11,100,000 shares of the Series 12 non-voting redeemable preferred stock. See “— Description of Preferred Stock — Redeemable Preferred Stock (Series 12)”. Other than as described above, there are no other preferred shares authorized, issued or outstanding as of the date hereof.

All of the issued and outstanding shares are fully-paid and non-assessable, and are in registered form. As of the date hereof, our authorized but unissued share capital consists of 373,684,849 shares. We may issue the unissued shares without further shareholder approval but subject to a board resolution as provided in the Articles of Incorporation. See “— Distribution of Free Shares.” Share certificates are issued in denominations of one, five, ten, 50, 100, 500, 1,000 and 10,000 shares. The par value of our common shares per share is ￦5,000.

Dividends

Dividends are distributed to shareholders in proportion to the number of shares of the relevant class of capital stock owned by each shareholder following approval by the shareholders at an annual general meeting of shareholders. We pay full annual dividends on newly issued shares (such as the common shares representing the American depositary shares (“ADSs”)) for the year in which the new shares are issued. We declare our dividend annually at the annual general meeting of shareholders which is held within three months after the end of the fiscal year. Once declared, the annual dividend must be paid to the stockholders of record as of the end of the preceding fiscal year within one month after the annual general meeting unless otherwise resolved thereby. Annual dividends may be distributed either in (i) cash or (ii) shares provided that shares must be distributed at par value and, if the market price of the shares is less than their par value, dividends in shares may not exceed one-half of the total annual dividends (including dividends in shares). In addition to the annual dividend, we may also distribute cash dividends to the stockholders of record as of the end of March, June and September of each year upon a resolution by the board of directors. Under the Korean Commercial Code we do not have an obligation to pay any annual dividend unclaimed for five years from the scheduled payment date.

In addition, under the Korean Commercial Code and our Articles of Incorporation, we may pay interim dividends once during each fiscal year (in addition to the annual dividends). Interim dividends may be paid upon the resolution of the board of directors and are not subject to shareholder approval. The interim dividends, if any, will be paid to the shareholders of record at 12:00 a.m. midnight, July 1 of the relevant fiscal year in cash. Under the Korean Commercial Code, an interim dividend may not be more than the net assets on the balance sheet of the immediately preceding fiscal period, after deducting (i) the capital of the immediately preceding fiscal period, (ii) the sum of the capital reserve and legal reserve accumulated up to the immediately preceding fiscal period, (iii) the amount of earnings for dividend payment approved at the general shareholders’ meeting of the immediately preceding fiscal period, (iv) other special reserves accumulated up to the immediately preceding fiscal period, either pursuant to the provisions of our Articles of Incorporation or to the resolution of the general meeting of shareholders, and (v) amount of legal reserve that should be set aside for the current fiscal period following the interim dividend payment.

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Under the Financial Holding Companies Act and the regulations thereunder, a financial holding company may not pay an annual dividend unless it has set aside as its legal reserve an amount equal to at least one-tenth of its net income after tax and shall set aside such amount as its legal reserve until its legal reserve reaches at least the aggregate amount of its stated capital.

Other than as set forth above and the dividend rights granted to preferred shareholders as further described in “— Description of Preferred Shares,” our articles of incorporation do not provide special rights to our common or preferred shareholders to share in our profits. For information regarding Korean taxes on dividends, see “—Taxation — Korean Taxation.”

Distribution of Free Shares

In addition to permitting dividends in the form of shares to be paid out of retained or current earnings, the Korean Commercial Code permits a company to distribute to its shareholders, in the form of free shares, an amount transferred from the capital surplus or legal reserve to stated capital. These free shares must be distributed to all of the shareholders pro rata. Our Articles of Incorporation require the same types of preferred shares to be distributed to the holders of preferred shares in case of distribution of free shares. For information regarding the treatment under Korean tax laws of free share distributions, see “Item 10.E. Taxation — Korean Taxation — Taxation of Dividends on Shares of Common Stock or American Depositary Shares.”

Preemptive Rights and Issuance of Additional Shares

Unless otherwise provided in the Korean Commercial Code, a company may issue authorized but unissued shares at such times and upon such terms as the board of directors of the company may determine. The company must offer the new shares on uniform terms to all shareholders who have preemptive rights and who are listed on the shareholders’ register as of the record date. Our shareholders are entitled to subscribe for any newly issued shares in proportion to their existing shareholdings. However, as provided in the Articles of Incorporation, we may issue new shares by resolution of board of directors to persons other than existing shareholders if those shares are (1) publicly offered (where the number of such shares so offered may not exceed 50% of our total number of issued and outstanding shares); (2) preferentially allocated to the members of the ESOA pursuant to relevant provisions of the Financial Investment Services and Capital Markets Act; (3) issued for the purpose of issuing depositary receipts pursuant to relevant provisions of the Financial Investment Services and Capital Markets Act (where the number of such shares so issued may not exceed 50% of our total number of issued and outstanding shares); (4) issued to directors or employees as a result of exercise of stock options we granted to them pursuant to the Korean Commercial Code; (5) issued to a financial investment company, a private equity fund or a special purpose company under the Financial Investment Services and Capital Markets Act; or (6) issued to any specified foreign investors, foreign or domestic financial institutions or alliance companies for operational needs such as introduction of advanced financial technology, improvement of its or subsidiaries’ financial structure and funding or strategic alliance (where such number of shares so issued may not exceed 50% of our total number of issued and outstanding shares). Under the Korean Commercial Code, a company may vary, without stockholders’ approval, the terms of such preemptive rights for different classes of shares. Public notice of the preemptive rights to new shares and the transferability thereof must be given not less than two weeks (excluding the period during which the shareholders’ register is closed) prior to the record date. We will notify the shareholders who are entitled to subscribe for newly issued shares of the deadline for subscription at least two weeks prior to the deadline. If a shareholder fails to subscribe on or before such deadline, the shareholder’s preemptive rights will lapse. Our board of directors may determine how to distribute shares in respect of which preemptive rights have not been exercised or where fractions of shares occur. Under the Financial Investment Services and Capital Markets Act, if a listed company intends to issue new shares by way of allotment to shareholders, it must issue a certificate of preemptive right to the newly issued shares. Furthermore, the company must list the newly issued shares on the Korea Exchange for a certain period of time or designate a securities company to broker and/or deal in such newly issued shares in order to ensure that they are properly distributed. In the event certain shareholder forfeit their right to subscribe to newly issued shares, the company may allot the forfeited shares to a third party under certain conditions, including in relation to the purchase price of such shares, although in principle, the company must withdraw the forfeited shares. Under the

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Korean Commercial Code, when a company issues new shares by way of allotment to a third party, it must also notify its stockholders or make public notice of the conditions and other details of such new shares not less than two weeks prior to their subscription payment date. Under the Financial Investment Services and Capital Markets Act, however, a listed company may substitute such notification or public notice by disclosing the material fact in a report publicly filed with the listing authorities.

Under the Financial Investment Services and Capital Markets Act, members of a company’s employee stock ownership association, whether or not they are shareholders, have a preemptive right, subject to certain exceptions, to subscribe for up to 20% of the shares publicly offered pursuant to the Financial Investment Services and Capital Markets Act. However, this right is exercisable only to the extent that the total number of shares so acquired and held by such members does not exceed 20% of the total number of shares to be newly issued and shares then outstanding. As of December 31, 2013, the ESOA owned 18,787,067 shares of our common stock.

General Meeting of Shareholders

There are two types of general meetings of shareholders: annual general meetings and extraordinary general meetings. We are required to convene our annual general meeting within three months after the end of each fiscal year. Subject to a board resolution or court approval, an extraordinary general meeting of shareholders may be held when necessary or at the request of our audit committee. In addition, under the Korean Commercial Code, an extraordinary general meeting of shareholders may be held at the request of the shareholders holding shares for at least 6 months of an aggregate of 1.5% or more of the outstanding shares with voting rights of the listed company, subject to a board resolution or court approval. Furthermore, under the Financial Holding Companies Act of Korea, an extraordinary general meeting of shareholders may be held at the request of the shareholders holding shares for at least 6 months of an aggregate of 1.5% (0.75% in the case of a financial holding company (i) whose total assets at the end of the latest fiscal year is ￦5 trillion or more and (ii) who is in control of two or more subsidiaries, each with total assets of ￦2 trillion or more) or more of the outstanding shares of the company, subject to a board resolution or court approval. Holders of non-voting shares may be entitled to request a general meeting of shareholders only to the extent the non-voting shares have become enfranchised as described under “— Voting Rights” below (hereinafter referred to as “enfranchised non-voting shares”). Meeting agendas are determined by the board of directors or proposed by holders of an aggregate of 3% or more of the outstanding shares with voting rights by way of a written proposal to the board of directors at least six weeks prior to the meeting. In addition, under the Korean Commercial Code, the meeting agenda may be proposed by the shareholders holding shares for at least 6 months of an aggregate of 1% (0.5% in the case of a listed company whose capital at the end of the latest operating year is ￦100 billion or more) or more of the outstanding shares of the listed company. Furthermore, under the Financial Holding Companies Act, the meeting agenda may be proposed by the shareholders holding shares for at least 6 months of an aggregate of 0.5% (0.25% in the case of a financial holding company (i) whose total assets at the end of the latest fiscal year is ￦5 trillion or more and (ii) who is in control of two or more subsidiaries, each with total assets of ￦2 trillion or more) or more of the outstanding shares of the company. Written notices stating the date, place and agenda of the meeting must be given to the shareholders at least two weeks prior to the date of the general meeting of shareholders; provided, that, notice may be given to holders of 1% or less of the total number of issued and outstanding shares which are entitled to vote, by placing at least two public notices at least two weeks in advance of the meeting in at least two daily newspapers or by using an electronic method defined under the Korean Commercial Code and related regulations at least two weeks in advance of the meeting. Currently, we use The Korea Economic Daily and Maeil Business Newspaper for the publication of such notices. Shareholders who are not on the shareholders’ register as of the record date are not entitled to receive notice of the general meeting of shareholders, and they are not entitled to attend or vote at such meeting. Holders of enfranchised non-voting shares who are on the shareholders’ register as of the record date are entitled to receive notice of the general meeting of shareholders and they are entitled to attend and vote at such meeting. Otherwise, holders of non-voting shares are not entitled to receive notice of or vote at general meetings of shareholders.

The general meeting of shareholders is held at our executive office (which is our registered executive office) or, if necessary, may be held anywhere in the vicinity of our executive office.

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Voting Rights

Holders of common shares are entitled to one vote for each share. However, voting rights with respect to common shares that we hold and common shares that are held by a corporate shareholder, more than one-tenth of the outstanding capital stock of which is directly or indirectly owned by us, may not be exercised. Unless stated otherwise in a company’s Articles of Incorporation, the Korean Commercial Code permits holders of an aggregate of 3% (1%, in case of a company whose total assets as at the end of the latest fiscal year is ￦2 trillion or more) or more of the outstanding shares with voting rights to request cumulative voting when electing two or more directors. Our Articles of Incorporation currently do not prohibit cumulative voting. In addition, under the Korean Commercial Code, in case of appointment of an audit committee member who is an outside director, any shareholder holding more than 3% of the outstanding shares with voting rights shall not exercise its voting rights with respect to any portion of its shares exceeding the 3% limit; and in case of appointment of an audit committee member who is a non-outside director, the largest shareholder (together with certain related persons) holding more than 3% of the outstanding shares with voting rights shall not exercise its voting rights with respect to any portion of its shares exceeding the 3% limit.

The Korean Commercial Code and our Articles of Incorporation provide that an ordinary resolution may be adopted if approval is obtained from the holders of at least a majority of those common shares present or represented at such meeting and such majority also represents at least one-fourth of the total of our issued and outstanding common shares. Holders of non-voting shares (other than enfranchised non-voting shares) are not entitled to vote on any resolution or to receive notice of any general meeting of shareholders unless the agenda of the meeting includes consideration of a resolution on which such holders are entitled to vote. If our general shareholders’ meeting resolves not to pay to holders of preferred shares the annual dividend as determined by the board of directors at the time of issuance of such shares, the holders of preferred shares will be entitled to exercise voting rights from the general shareholders’ meeting immediately following the meeting adopting such resolution until the end of the meeting to declare to pay such dividend with respect to the preferred shares. Holders of such enfranchised preferred shares have the same rights as holders of common shares to request, receive notice of, attend and vote at a general meeting of shareholders.

The Korean Commercial Code provides that to amend the Articles of Incorporation (which is also required for any change to the authorized share capital of the company) and in certain other instances, including removal of a director of a company, dissolution, merger or consolidation of a company, transfer of the whole or a significant part of the business of a company, acquisition of all of the business of any other company or issuance of new shares at a price lower than their par value, a special resolution must be adopted by the approval of the holders of at least two-thirds of those shares present or represented at such meeting and such special majority must also represent at least one-third of the total issued and outstanding shares with voting rights of the company.

In addition, in the case of amendments to the Articles of Incorporation or any merger or consolidation of a company or in certain other cases which affect the rights or interest of the shareholders of the preferred shares, a resolution must be adopted by a separate meeting of shareholders of the preferred shares. Such a resolution may be adopted if the approval is obtained from shareholders of at least two-thirds of the preferred shares present or represented at such meeting and such preferred shares also represent at least one-third of the total issued and outstanding preferred shares of the company.

A shareholder may exercise his voting rights by proxy given to another shareholder. If a particular shareholder intends to obtain proxy from another shareholder, a reference document specified by the Financial Supervisory Service must be sent to the shareholder giving proxy, with a copy furnished to the company’s executive office or the branch office, transfer agent and the Financial Services Commission. The proxy must present the power of attorney prior to the start of the general meeting of shareholders.

Rights of Dissenting Shareholders

Pursuant to the Financial Investment Services and Capital Markets Act, in certain limited circumstances (including, without limitation, if we transfer all or any significant part of our business or if we merge or consolidate with another company), dissenting holders of shares have the right to require us to purchase their shares. Pursuant to the Financial Holding Companies Act, the Financial Investment Services and Capital Markets

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Act and the Korean Commercial Code, if a financial holding company acquires a new direct or indirect subsidiary through the exchange or transfer of shares except in limited circumstances, the dissenting holders of such shares have the right to require us to purchase their shares. To exercise such a right, shareholders must submit to us a written notice of their intention to dissent prior to the general meeting of shareholders. Within 20 days (or 10 days under certain circumstances according to the Financial Holding Companies Act) after the date on which the relevant resolution is passed at such meeting, such dissenting shareholders must request in writing that we purchase their shares. We are obligated to purchase the shares of dissenting shareholders within one month after the end of such request period at a price to be determined by negotiation between the shareholder and us. If we cannot agree on a price with the shareholder through such negotiations, the purchase price will be the arithmetic mean of (1) the weighted average of the daily closing share prices on the KRX KOSPI Market of the Korea Exchange for two months prior to the date of the adoption of the relevant board of directors’ resolution, (2) the weighted average of the daily closing share prices on the KRX KOSPI Market of the Korea Exchange for one month prior to the date of the adoption of the relevant board of directors’ resolution and (3) the weighted average of the daily closing share prices on the KRX KOSPI Market of the Korea Exchange for one week prior to the date of the adoption of the relevant board of directors’ resolution. If we or the dissenting shareholder who requested purchase of their shares do not accept such purchase price, we or the shareholder may request to the court to adjust such purchase price.

Register of Shareholders and Record Dates

We maintain the register of our shareholders at our transfer agent’s office in Seoul, Korea. The Korea Securities Depository as our transfer agent, registers transfers of shares on the register of shareholders upon presentation of the share certificates.

The record date for annual dividends is December 31. For the purpose of determining the holders of shares entitled to annual dividends, the register of shareholders may be closed for the period from January 1 of each year up to January 15 of such year. Further, the Korean Commercial Code and the Articles of Incorporation permit us upon at least two weeks’ public notice to set a record date and/or close the register of shareholders for not more than three months for the purpose of determining the shareholders entitled to certain rights pertaining to the shares. The trading of shares and the delivery of certificates in respect thereof may continue while the register of shareholders is closed.

Other Shareholder Rights

Our articles of incorporation do not have sinking fund provisions or provisions creating liability to further capital calls. Other than to amend our articles of incorporation in accordance with the Korean Commercial Code, no particular action is necessary to change the rights of holders of our capital stock. In addition, our articles of incorporation do not have specific provisions for governing changes in capital or which would have an effect of delaying, deferring or preventing a change in control of us and that would operate only with respect to a merger, acquisition or corporate restructuring involving us or any of our subsidiaries.

Directors

Under the Korean Commercial Code and our articles of incorporation, any director wishing to enter into a transaction with us or our subsidiaries in his or her personal capacity is required to obtain the prior approval of the Board of Directors, and any director having an interest in the transaction may not vote at the meeting of the Board of Directors to approve the transaction.

Neither our articles of incorporation nor applicable Korean laws have provisions relating to (i) the directors’ power, in the absence of an independent quorum, to vote compensation to themselves or any members of their body (ii) borrowing powers exercisable by the directors and how such borrowing powers can be varied; (iii) retirement or non-retirement of directors under an age limit requirement; or (iv) the number of shares required for a director’s qualification.

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Description of Preferred Stock

Preferred Stock

On January 25, 2007, as part of funding our acquisition of LG Card, we issued 28,990,000 Series 10 non-voting redeemable preferred shares. On January 25, 2012, we redeemed all of the Series 10 preferred shares.

On January 25, 2007, as part of funding our acquisition of LG Card, we issued 14,721,000 Series 11 non-voting redeemable convertible preferred shares. On January 25, 2012, we redeemed all of the Series 11 preferred shares.

On April 20, 2011, as part of funding for preferred stocks due to be redeemed in January 2012, we issued 11,100,000 Series 12 non-voting redeemable preferred shares for the subscription price of ￦100,000 per share, or ￦1,110 billion in the aggregate. These shares are currently entitled to dividends at the following rate: (i) for the period from the issue date until December 31, 2011, 5.58% of the subscription price per share multiplied by a fraction of the number of days from the issue date to and including December 31, 2001 over 365; (ii) for 2012 to and including 2015, 5.58% of the subscription price per share; (iii) for 2016, (x) 5.58% of the subscription price per share, multiplied by a fraction of the number of days from January 1, 2016 to April 19, 2016 over 365, plus (y) ‘R’% of the subscription price, multiplied by a fraction of the number of days from April 20, 2016 to December 31, 2016 over 365, where R% means the sum of (A) the five trading-day average of a designated five-year treasury rate quotes immediately preceding April 20, 2016 and (B) 250 basis points; and (iv) for 2017 and each year thereafter, R% of the subscription price per share. If in any fiscal year we do not pay any dividend as provided above, the holders of these shares are entitled to receive such accumulated unpaid dividend prior to the holders of our common shares from the dividends payable in respect of the next fiscal year. If dividends are not paid to the holders of these shares, voting rights attach to such shares. See “— Voting Rights.” We may redeem these shares at any time during the period commencing on the fifth anniversary of the issuance date until the 20th anniversary of the issuance date to the extent that distributable profits are available for such redemption. None of these shares may be redeemed except during the redemption period. There is no maturity date for these shares.

Other than as set forth above, there are currently no other outstanding preferred stocks.

Annual Report

Under the Financial Investment Services and Capital Markets Act, we must file with the Financial Services Commission and the Korea Exchange an annual business report (containing audit report and audited annual nonconsolidated and consolidated financial statements) within 90 days after the end of our fiscal year as well as a semiannual business report within 45 days after the end of the first six months of our fiscal year and quarterly business reports within 45 days after the end of the first three months and nine months of our fiscal year, respectively (in each case, containing review report and reviewed interim nonconsolidated and consolidated financial statements). Copies of such reports are available for public inspection at the websites of the Financial Services Commission and the Korea Exchange.

Transfer of Shares

Under the Korean Commercial Code, the transfer of shares is effected by the delivery of share certificates. In order to exercise shareholders’ rights, the transferee must have his name and address registered on the register of shareholders. For this purpose, shareholders are required to file with us their name, address and seal. Nonresident shareholders must notify us of the name of their proxy in Korea to which our notice can be sent. Under the Financial Services Commission regulations, nonresident shareholders may appoint a standing proxy and may not allow any person other than the standing proxy to exercise rights regarding the acquired share or perform any task related thereto on his behalf, subject to certain exceptions. Under current Korean regulations, the Korea Securities Depository, foreign exchange banks (including domestic branches of foreign banks), financial investment companies with a dealing, brokerage or collective investment license and internationally recognized custodians are authorized to act as standing proxy and provide related services. Certain foreign exchange controls and securities regulations apply to the transfer of shares by nonresidents or non-Koreans. See “Item 10.D. Exchange Controls.” As to the ceiling on the aggregate shareholdings of a single shareholder and

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persons who have a special relationship with such shareholder, please see “Item 4.B. Business Overview — Supervision and Regulation — Principal Regulations Applicable to Financial Holding Companies — Restrictions on Financial Holding Company Ownership.”

Acquisition of Treasury Shares

Under the Korean Commercial Code, we may acquire our own shares upon a resolution of the general meeting of the shareholders by either (i) purchasing them on a stock exchange or (ii) purchasing a number of shares, other than the redeemable shares as set forth in Article 345, Paragraph (1) of the Korean Commercial Code, from each shareholder in proportion to its existing shareholding ratio through the methods set forth in the Presidential Decree, provided that the total purchase price does not exceed the amount of our profit that may be distributed as dividends in respect of the immediately preceding fiscal year.

In addition, pursuant to the Financial Investment Services and Capital Markets Act and regulations under the Financial Holding Companies Act, we may purchase our own shares on the KRX KOSPI Market of the Korea Exchange, through a tender offer, or through a trust agreement with a trust company, or retrieve our own shares from a trust company upon termination of a trust agreement, subject to the restrictions that (1) the aggregate purchase price of such shares may not exceed the total amount available for distribution of dividends at the end of the preceding fiscal year less the amounts of dividends and reserves for such fiscal year, subtracted by the sum of (a) the purchase price of treasury stock acquired if any treasury stock has been purchased after the end of the preceding fiscal year pursuant to the Commercial Act or the Financial Investment Services and Capital Markets Act, (b) the amount subject to trust agreements, and (c) the amount of dividends approved at the ordinary general shareholders’ meeting after the end of the preceding fiscal year and the amount of retained earnings reserve required under the Commercial Act; plus if any treasury stock has been disposed of after the end of the preceding fiscal year, the acquisition cost of such treasury stock and (2) the purchase of such shares shall meet the requisite capital ratio under the Financial Holding Companies Act and the guidelines issued by the Financial Services Commission. In general, under the Financial Holding Companies Act, our subsidiaries are not permitted to acquire our shares.

Liquidation Rights

In the event we are liquidated, the assets remaining after the payment of all debts, liquidation expenses and taxes will be distributed to shareholders in proportion to the number of shares held by such shareholders. Holders of preferred shares may have preferences over holders of common shares in liquidation.

ITEM 10.C.

Material Contracts

None.

ITEM 10.D.

Exchange Controls

General

The Foreign Exchange Transaction Act of Korea the related Presidential Decree and the regulations under such Act and Decree (collectively the “Foreign Exchange Transaction Laws”) herein, regulate investment in Korean securities by nonresidents and issuance of securities by Korean companies outside Korea. Under the Foreign Exchange Transaction Laws, nonresidents may invest in Korean securities only to the extent specifically allowed by these laws or otherwise permitted by the Ministry of Strategy and Finance of Korea. The Financial Services Commission has also adopted, pursuant to its authority under the Financial Investment Services and Capital Markets Act, regulations that restrict investment by foreigners in Korean securities and regulate issuance of securities by Korean companies outside Korea.

Under the Foreign Exchange Transaction Laws, (1) if the Korean government determines that it is inevitable due to the outbreak of natural calamities, wars, conflict of arms or grave and sudden changes in domestic or foreign economic circumstances or other situations equivalent thereto, the Ministry of Strategy and Finance may temporarily suspend payment, receipt or the whole or part of transactions to which the Foreign Exchange

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Transaction Laws apply, or impose an obligation to safe keep, deposit or sell means of payment in or to certain Korean governmental agencies or financial institutions; and (2) if the Korean government determines that international balance of payments and international finance face or are likely to face serious difficulty or the movement of capital between Korea and abroad will cause or is likely to cause serious obstacles in carrying out its currency policies, exchange rate policies and other macroeconomic policies, the Ministry of Strategy and Finance may take measures to require any person who intends to perform capital transactions to obtain permission or to require any person who performs capital transactions to deposit part of the payments received in such transactions at certain Korean governmental agencies or financial institutions, in each case subject to certain limitations.

Restrictions Applicable to Shares

Under the Foreign Exchange Transaction Laws, a foreign investor who intends to acquire shares must designate a foreign exchange bank at which he must open a foreign currency account and a Won account exclusively for stock investments. No approval is required for remittance into Korea and deposit of foreign currency funds in the foreign currency account. Foreign currency funds may be transferred from the foreign currency account at the time required to make a deposit for, or settle the purchase price of, a stock purchase transaction to a Won account opened at a financial investment company with a securities dealing or brokerage license. Funds in the foreign currency account may be remitted abroad without any Korean governmental approval.

Dividends on shares of Korean companies are paid in Won. No Korean governmental approval is required for foreign investors to receive dividends on, or the Won proceeds of the sale of, any shares to be paid, received and retained in Korea. Dividends paid on, and the Won proceeds of the sale of, any shares held by a nonresident of Korea must be deposited either in a Won account with the investor’s financial investment company with a securities dealing or brokerage license or in his Won account. Funds in the investor’s Won account may be transferred to his foreign currency account or withdrawn for local living expenses, provided that any withdrawal of local living expenses by any one person exceeding US$10,000 per day needs to be reported to the governor of the Financial Supervisory Service by the foreign exchange bank at which the Won account is maintained. Funds in the Won account may also be used for future investment in shares or for payment of the subscription price of new shares obtained through the exercise of preemptive rights.

Financial investment companies with a securities dealing, brokerage or collective investment license are allowed to open foreign currency accounts with foreign exchange banks exclusively for accommodating foreign investors’ stock investments in Korea. Through these accounts, financial companies with a securities dealing, brokerage or collective investment license may enter into foreign exchange transactions on a limited basis, such as conversion of foreign currency funds and Won funds, either as a counterparty to or on behalf of foreign investors, without the investors having to open their own accounts with foreign exchange banks.

ITEM 10.E.

Taxation

The following summary is based upon tax laws, regulations, rulings, decrees, income tax conventions (treaties), administrative practice and judicial decisions of Korea and the United States as of the date of this annual report, and is subject to any change in Korean or United States law that may come into effect after such date. Investors in shares of common stock or American depositary shares are advised to consult their own tax advisers as to the Korean, United States or other tax consequences of the purchase, ownership and disposition of such securities, including the effect of any national, state or local tax laws.

Korean Taxation

The following summary of Korean tax considerations applies to you so long as you are not:

•

a resident of Korea;

•

a corporation having its head office, principal place of business, or place of effective management in Korea (a Korean corporation); or

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•

engaged in a trade or business in Korea through a permanent establishment or a fixed base to which the relevant income is attributable or with which the relevant income is effectively connected.

Taxation of Dividends on Shares of Common Stock or American Depositary Shares

We will deduct Korean withholding tax from dividends (whether in cash or in shares) paid to you at a rate of 22% (including local income surtax). If you are a qualified resident and a beneficial owner of the dividends in a country that has entered into a tax treaty with Korea, you may qualify for a reduced rate of Korean withholding tax. See “— Tax Treaties” below for a discussion of treaty benefits. If we distribute to you free shares representing a transfer of certain capital reserves or asset revaluation reserves into paid-in capital, such distribution may be subject to a Korean withholding tax.

Taxation of Capital Gains from Transfer of Common Shares or American Depositary Shares

As a general rule, capital gains earned by non-residents upon transfer of our common shares or American depositary shares (“ADSs”) are subject to a Korean withholding tax at the lower of (1) 11% (including local income surtax) of the gross proceeds realized or (2) 22% (including local income surtax) of the net realized gain, subject to the production of satisfactory evidence of acquisition costs and certain direct transaction costs associated with common shares or ADSs, unless exempt from Korean income taxation under an applicable tax treaty between Korea and the country of your tax residence. See “— Tax Treaties” below for a discussion on treaty benefits. Even if you do not qualify for the exemption under a tax treaty, you will not be subject to the foregoing withholding tax on capital gains if you meet certain requirements for the exemption under Korean domestic tax laws discussed in the following paragraphs.

You will not be subject to the Korean income taxation on capital gains realized upon a transfer of our common shares through the Korea Exchange if you (1) have no permanent establishment in Korea and (2) do not own and have never owned (together with any shares owned by any entity with which you have a special relationship and possibly including the shares represented by the ADSs) 25% or more of our total issued and outstanding shares at any time during the calendar year in which the sale occurs and during the five consecutive calendar years prior to the calendar year in which the sale occurs.

Under the tax law amendments effective for capital gains recognized or to be recognized from disposition of ADSs on or after January 1, 2008, ADSs are viewed as shares of stock for capital gains tax purposes. Accordingly, capital gains from sale or disposition of ADSs are taxed (if taxable) as if such gains are from sale or disposition of shares of our common stock. It should be noted that (i) capital gains earned by you (regardless of whether you have a permanent establishment in Korea) from a transfer of ADSs outside Korea will generally be exempt from Korean income taxation by virtue of the Special Tax Treatment Control Law of Korea, or the STTCL, provided that the issuance of ADSs is deemed to be an overseas issuance under the STTCL, but (ii) in the case where an owner of the underlying shares of stock transfers ADSs after conversion of the underlying shares into ADSs, the exemption under the STTCL described in (i) will not apply. In the case where an owner of the underlying shares of stock transfers the ADSs after conversion of the underlying shares of stock into ADSs, such person is obligated to file corporate income tax returns and pay tax unless a purchaser or a financial investment company with a brokerage license, as applicable, withholds and pays the tax on capital gains derived from transfer of ADSs, as discussed below.

If you are subject to tax on capital gains with respect to a sale of common shares or ADSs, the purchaser or, in the case of a sale of common shares on the Korea Exchange or through a financial investment company with a brokerage license in Korea, the financial investment company is required to withhold Korean tax from the sales proceeds in an amount equal to 11% (including local income surtax) of the gross realization proceeds and to remit the withheld tax to the Korean tax authority, unless you establish your entitlement to an exemption under an applicable tax treaty or domestic tax law or produce satisfactory evidence of your acquisition costs and certain direct transaction costs associated with common shares or ADSs. See the discussion under “— Tax Treaties” below for an explanation of claiming treaty benefits.

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Tax Treaties

Korea has entered into a number of income tax treaties with other countries, including the United States, which reduce or exempt Korean withholding tax on the income derived by residents of such treaty countries. For example, under the Korea-U.S. income tax treaty, reduced rates of Korean withholding tax on dividends of 16.5% or 11.0%, respectively (including local income surtax), depending on your shareholding ratio, and an exemption from Korean withholding tax on capital gains are generally available to residents of the United States that are beneficial owners of the relevant dividend income or capital gains. However, under Article 17 (Investment or Holding Companies) of the Korea-U.S. income tax treaty, such reduced rates and exemption do not apply if (1) you are a United States corporation, (2) by reason of any special measures the tax imposed on you by the United States with respect to such dividends or capital gains is substantially less than the tax generally imposed by the United States on corporate profits, and (3) 25% or more of your capital is held of record or is otherwise determined, after consultation between competent authorities of the United States and Korea, to be owned directly or indirectly by one or more persons who are not individual residents of the United States. Also, under Article 16 (Capital Gains) of the Korea-U.S. income tax treaty, the exemption on capital gains does not apply if (a) you have a permanent establishment in Korea and any shares of common stock in which you hold an interest and which gives rise to capital gains are effectively connected with such permanent establishment, (b) you are an individual and you maintain a fixed base in Korea for a period or periods aggregating 183 days or more during the taxable year and your common shares, or ADSs giving rise to capital gains are effectively connected with such fixed base or (c) you are an individual and you are present in Korea for a period or periods of 183 days or more during the taxable year.

You should inquire for yourself whether you are entitled to the benefit of an income tax treaty with Korea. It is the responsibility of the party claiming the benefits of an income tax treaty in respect of dividend payments or capital gains to submit to us, the purchaser, the financial investment company, or other withholding agent, as the case may be, a certificate as to his tax residence. In the absence of sufficient proof, we, the purchaser, the financial investment company, or other withholding agent, as the case may be, must withhold tax at the normal rates. Furthermore, in order for you to claim the benefit of a tax rate reduction or tax exemption on certain Korean source income (e.g., dividends or capital gains) under an applicable tax treaty as the beneficial owner of such Korean source income, Korean tax law requires you (or your agent) to submit an application (in the case for reduced withholding tax rate, an “application for entitlement to reduced tax rate”, and in the case for exemption from withholding tax, an “application for tax exemption”) with a certificate of your tax residency issued by the competent authority of your country of tax residence, subject to certain exceptions (together, the “BO application”). For example, a U.S. resident would be required to provide a Form 6166 as a certificate of tax residency with the application for entitlement to reduced tax rate or the application for tax exemption, as the case may be. Subject to certain exceptions, where the relevant income is paid to an overseas investment vehicle that is not the beneficial owner of such income (an “OIV”), a beneficial owner claiming the benefit of an applicable tax treaty with respect to such income must submit its BO application to such OIV, which in turn must submit an OIV report and a schedule of beneficial owners to the withholding agent prior to the payment date of such income. In the case of a tax exemption application, the withholding agent is required to submit such application (together with the applicable OIV report in the event the income will be paid to an OIV) to the relevant district tax office by the ninth day of the month following the date of the payment of such income.

Inheritance Tax and Gift Tax

If you die while holding an ADS or donate an ADS, it is unclear whether, for Korean inheritance and gift tax purposes, you would be treated as the owner of the shares of common stock underlying the ADSs. If the tax authority interprets depositary receipts as the underlying share certificates, you may be treated as the owner of the shares of common stock and your heir or the donee (or in certain circumstances, you as the donor) will be subject to Korean inheritance or gift tax, which ranges from 10% to 50% recently, assessable based on the value of the ADSs or shares of common stock and the identity of the individual against whom the tax is assessed.

If you die while holding a common share or donate a subscription right or a common share, your heir or donee (or in certain circumstances, you as the donor) will be subject to Korean inheritance or gift tax at the same rate as indicated above.

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At present, Korea has not entered into any tax treaty relating to inheritance or gift taxes.

Securities Transaction Tax

If you transfer common shares through the Korea Exchange, you will be subject to a securities transaction tax at the rate of 0.15% and an agriculture and fishery special surtax at the rate of 0.15% of the sales price of common shares. If your transfer of common shares is not made through the Korea Exchange, subject to certain exceptions, you will be subject to a securities transaction tax at the rate of 0.5% but will not be subject to an agriculture and fishery special surtax.

Depositary receipts, which the ADSs constitute, are included in the scope of securities transfer subject to securities transaction tax effective starting with transfers occurring on or after January 1, 2011. Nonetheless, transfer of depositary receipts listed on a foreign securities exchange similar to the Korea (e.g. the New York Stock Exchange, the NASDAQ National Market) will not be subject to the securities transaction tax.

In principle, the securities transaction tax, if applicable, must be paid by a transferor of common shares. When a transfer is affected through a securities settlement company, such settlement company is generally required to withhold and remit the tax to the tax authorities. When such transfer is made through a financial investment company only, such financial investment company is required to withhold and remit the tax. Where a transfer is affected by a non-resident who has no permanent establishment in Korea by a method other than through a securities settlement company or a financial investment company, the transferee is required to withhold the securities transaction tax.

Non-reporting or underreporting of securities transaction tax will generally result in the imposition of penalties equal to 20% to 40% of the non-reported or 10% to 40% of underreported tax amount and a failure to timely pay securities transaction tax due will result in penalties of 10.95% per annum of the due but unpaid tax. The penalty is imposed on the party responsible for paying the securities transaction tax or, if the securities transaction tax is to be withheld, on the party that has the withholding obligation.

Certain United States Federal Income Tax Consequences

The following summary describes certain U.S. federal income tax considerations for beneficial owners of our common shares or ADSs that hold the common shares or ADSs as capital assets and are “U.S. holders.” You are a “U.S. holder” if you are for U.S. federal income tax purposes:

(i) an individual citizen or resident of the United States;

(ii) a corporation, or other entity treated as a corporation, created or organized in or under the laws of the United States, any state thereof or District of Columbia;

(iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source;

(iv) a trust that is subject to the primary supervision of a court within the United States and has one or more U.S. persons with authority to control all substantial decisions of the trust; or

(v) a trust that has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.

In addition, this summary only applies to you if you are a U.S. holder that is a resident of the United States for purposes of the current income tax treaty between the United States and Korea (the “Treaty”), your common shares or ADSs are not, for purposes of the Treaty, effectively connected with a permanent establishment in Korea and you otherwise qualify for the full benefits of the Treaty.

This summary is based upon the provisions of the Internal Revenue Code of 1986, as amended (the “Code”) and regulations (including proposed regulations), rulings and judicial decisions thereunder as of the date hereof, as well as the Treaty, all of which are subject to change, perhaps retroactively. It is for general purposes only and you should not consider it to be tax advice. In addition, it is based in part on representations by the ADS depositary and assumes that each obligation under the deposit agreement will be performed in accordance with its terms. This summary does not represent a detailed description of all the U.S. federal income tax consequences

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to you in light of your particular circumstances, and does not address the effects of any state, local or non-U.S. tax laws. In addition, it does not represent a detailed description of the U.S. federal income tax consequences applicable to you if you are subject to special treatment under the U.S. federal income tax laws, including if you are:

•

a bank;

•

a dealer in securities or currencies;

•

an insurance company or one of certain financial institutions;

•

a regulated investment company;

•

a real estate investment trust;

•

a tax-exempt entity;

•

a trader in securities that has elected to use a mark-to-market method of accounting for your securities holdings;

•

a person holding common shares or ADSs as part of a hedging, conversion, constructive sale or integrated transaction or a straddle;

•

a person liable for the alternative minimum tax;

•

a partnership or other pass-through entity for U.S. federal income tax purposes;

•

a person who owns or is deemed to own 10% or more of our voting stock; or

•

a person whose functional currency is not the U.S. Dollar.

If a partnership holds our common shares or ADSs, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. If you are a partner of a partnership holding our common shares or ADSs, you are urged to consult your tax advisor.

You should consult your own tax advisor concerning the particular U.S. federal tax consequences to you of the ownership and disposition of common shares or ADSs as well as any consequences arising under the laws of any other taxing jurisdiction.

American Depositary Shares

If you hold ADSs, for U.S. federal income tax purposes, you generally will be treated as the owner of the underlying common shares that are represented by such ADSs. Accordingly, deposits or withdrawals of common shares for ADSs will not be subject to U.S. federal income tax.

Distributions on Common Shares or American Depositary Shares

Subject to the discussion below under “Passive Foreign Investment Company Rules,” the gross amount of distributions on our common shares or ADSs (including amounts withheld to reflect Korean withholding tax) will be taxable as dividends to the extent paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). Such income (including withheld taxes) will be includable in your gross income as ordinary income on the day you actually or constructively receive it, in the case of our common shares, or the day actually or constructively received by the ADS depositary, in the case of ADSs. Such dividends will not be eligible for the dividends-received deduction allowed to corporations under the Code.

With respect to non-corporate U.S. holders, certain dividends received from a qualified foreign corporation may be subject to reduced rates of taxation. A qualified foreign corporation includes a foreign corporation that is eligible for the benefits of a comprehensive income tax treaty with the United States which the U.S. Treasury Department determines to be satisfactory for these purposes and which includes an exchange of information provision. The U.S. Treasury Department has determined that the Treaty meets these requirements, and we believe we are eligible for the benefits of the Treaty. A foreign corporation is also treated as a qualified foreign

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corporation with respect to dividends paid by that corporation on shares (or ADSs backed by such shares) that are readily tradable on an established securities market in the United States. Our common shares will generally not be considered readily tradable for these purposes. U.S. Treasury Department guidance indicates that securities such as our ADSs, which are listed on the New York Stock Exchange, are treated as readily tradable on an established securities market in the United States for these purposes. There can be no assurance that our ADSs will be considered readily tradable on an established securities market in later years. Non-corporate U.S. holders that do not meet a minimum holding period requirement during which they are not protected from a risk of loss or that elect to treat the dividend income as “investment income” pursuant to Section 163(d)(4) of the Code will not be eligible for the reduced rates of taxation regardless of our status as a qualified foreign corporation. In addition, the rate reduction will not apply to dividends if the recipient of a dividend is obligated to make related payments with respect to positions in substantially similar or related property. This disallowance applies even if the minimum holding period has been met. Furthermore, non-corporate U.S. holders will not be eligible for the rate reduction if we are a passive foreign investment company (as discussed below under “Passive Foreign Investment Company Rules”) in the taxable year in which such dividends are paid or were a passive foreign investment company in the preceding taxable year. If you are a non-corporate U.S. holder, you should consult your own tax advisor regarding the application of these rules given your particular circumstances.

The amount of any dividend paid in Korean Won will equal the U.S. Dollar value of the Korean Won received calculated by reference to the exchange rate in effect on the date you receive the dividend, in the case of our common shares, or the date received by the ADS depositary, in the case of ADSs, regardless of whether the Korean Won are converted into U.S. Dollars. If the Korean Won received as a dividend are converted into U.S. Dollars on the date they are received, you generally will not be required to recognize foreign currency gain or loss in respect of the dividend income. If the Korean Won received are not converted into U.S. Dollars on the day of receipt, you will have a basis in the Korean Won equal to their U.S. Dollar value on the date of receipt. Any gain or loss realized on a subsequent conversion or other disposition of the Korean Won will be treated as United States source ordinary income or loss.

Subject to certain significant conditions and limitations, Korean taxes withheld from dividends (at a rate not exceeding the rate provided in the Treaty) will be treated as foreign income taxes eligible for credit against your U.S. federal income tax liability. See “— Korean Taxation — Taxation of Dividends on Shares of Common Stock or American Depositary Shares” for a discussion of the Treaty rate. Korean taxes withheld in excess of the rate provided in the Treaty will not be eligible for credit against your U.S. federal income tax until you exhaust all effective and practical remedies to recover such excess withholding, including the seeking of competent authority assistance from the Internal Revenue Service. For purposes of the foreign tax credit, dividends paid on our common shares or ADSs will be treated as income from sources outside the United States and will generally constitute passive category income. If you do not elect to claim a credit for any foreign taxes paid during a taxable year, you may instead elect, subject to certain limitations, to claim a deduction in respect of such foreign taxes, provided that you apply this election to all foreign taxes paid or accrued in the taxable year.

Further, in certain circumstances, if you have held our common shares or ADSs for less than a specified minimum period during which you are not protected from risk of loss, or are obligated to make payments related to the dividends, you will not be allowed a foreign tax credit for foreign taxes imposed on dividends paid on our common shares or ADSs. The rules governing the foreign tax credit are complex. You are urged to consult your tax advisors regarding the availability of the foreign tax credit under your particular circumstances.

To the extent that the amount of any distribution exceeds our current and accumulated earnings and profits for a taxable year, as determined under U.S. federal income tax principles, the distribution will first be treated as a tax-free return of capital, causing a reduction of your adjusted basis in our common shares or ADSs (thereby increasing the amount of gain, or decreasing the amount of loss, to be recognized by you on a subsequent disposition of our common shares or ADSs), and the balance in excess of adjusted basis will be taxed as capital gain recognized on a sale or exchange. However, we do not expect to determine earnings and profits in accordance with U.S. federal income tax principles. Therefore, you should expect that a distribution will be reported and generally be treated as a dividend (as discussed above).

Distributions of our common shares (including ADSs) or rights to subscribe for our common shares that are received as part of a pro rata distribution to all of our shareholders (including holders of ADSs) generally will not

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be subject to U.S. federal income tax to recipient common shareholders (including holders of ADSs). Consequently, such distributions will not give rise to foreign source income and you will not be able to use the foreign tax credit arising from any Korean withholding tax unless such credit can be applied (subject to applicable limitations) against U.S. tax due on other income derived from foreign sources.

Disposition of Common Shares or American Depositary Shares

Subject to the discussion under “— Passive Foreign Investment Company Rules,” upon the sale, exchange or other disposition of our common shares or ADSs, you generally will recognize capital gain or loss equal to the difference between the amount realized upon the sale, exchange or other disposition and your adjusted tax basis in our common shares or ADSs, as the case may be. The capital gain or loss will be long-term capital gain or loss if at the time of sale, exchange or other disposition, our common shares or ADSs have been held for more than one year. Capital gains of individuals derived with respect to capital assets held for more than one year are eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations. Any gain or loss you recognize on the sale, exchange or other disposition of our common shares or ADSs will generally be treated as United States source gain or loss. Consequently, you may not be able to use the foreign tax credit arising from any Korean tax imposed on the disposition of our common shares or ADSs unless such credit can be applied (subject to applicable limitations) against tax due on other income treated as derived from foreign sources.

You should note that any Korean securities transaction tax generally will not be treated as a creditable foreign tax for U.S. federal income tax purposes, although you may be entitled to deduct such taxes, subject to applicable limitations under the Code.

Passive Foreign Investment Company Rules

Based upon the past and projected composition of our income and valuation of our assets, we do not believe that we were a passive foreign investment company (a “PFIC”) for 2013, and we do not expect to be a PFIC in 2014 or to become one in the foreseeable future, although there can be no assurance in this regard. However, PFIC status is a factual determination that is made annually. Accordingly, it is possible that we may become a PFIC in the current or any future taxable year due to changes in valuation or composition of our income or assets.

In general, we will be considered a PFIC for any taxable year if either:

•

at least 75% of our gross income is passive income; or

•

at least 50% of the value of our assets is attributable to assets that produce or are held for the production of passive income.

The 50% of value test is based on the average of the value of our assets for each quarter during the taxable year. For this purpose, passive income generally includes dividends, interest, royalties and rents (other than royalties and rents derived in the active conduct of a trade or business and not derived from a related person). Certain proposed U.S. Treasury regulations and other administrative pronouncements from the Internal Revenue Service provide special rules for determining the character of income and assets derived in the active conduct of a banking business for purposes of the PFIC rules. Specifically, these rules treat certain income earned by a non-U.S. corporation engaged in the active conduct of a banking business as non-passive income. Although we believe we have adopted a reasonable interpretation of the proposed U.S. Treasury regulations and administrative pronouncements, there can be no assurance that the Internal Revenue Service will follow the same interpretation. You should consult your own tax advisor regarding the application of these rules.

If we own at least 25% by value of another company’s stock, we will be treated, for purposes of the PFIC rules, as owning our proportionate share of the assets and receiving our proportionate share of the income of that company.

If we are a PFIC for any taxable year during which you hold our common shares or ADSs, you will be subject to special tax rules with respect to any “excess distribution” that you receive and any gain you realize from the sale or other disposition (including a pledge) of our common shares or ADSs. These special tax rules generally will apply even if we cease to be a PFIC in future years. Distributions you receive in a taxable year that

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are greater than 125% of the average annual distributions you received during the shorter of the three preceding taxable years or your holding period for our common shares or ADSs will be treated as excess distributions. Under these special tax rules:

•

the excess distribution or gain will be allocated ratably over your holding period for our common shares or ADSs;

•

the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we are a PFIC, will be treated as ordinary income; and

•

the amount allocated to each other year will be subject to tax at the highest tax rate in effect for that year, and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.

In certain circumstances, you could make a mark-to-market election, under which in lieu of being subject to the special rules discussed above, you will include gain on our common shares or ADSs on a mark-to-market basis as ordinary income, provided that our common shares or ADSs are regularly traded on a qualified exchange or other market. Our common shares are listed on the Korea Exchange, which must meet certain trading, listing, financial disclosure and other requirements to be treated as a qualified exchange under applicable U.S. Treasury regulations for purposes of the mark-to-market election, and no assurance can be given that the common shares are or will continue to be “regularly traded” for purposes of the mark-to-market election. Our ADSs are currently listed on the New York Stock Exchange, which constitutes a qualified exchange, although there can be no assurance that the ADSs are or will be “regularly traded.” If you make a valid mark-to-market election, you will include in each year as ordinary income the excess of the fair market value of your common shares or ADSs at the end of the year over your adjusted tax basis in the common shares or ADSs. You will be entitled to deduct as an ordinary loss each year the excess of your adjusted tax basis in the common shares or ADSs over their fair market value at the end of the year, but only to the extent of the net amount previously included in income as a result of the mark-to-market election. If you make an effective mark-to-market election, in each year that we are a PFIC any gain you recognize upon the sale or other disposition of your common shares or ADSs will be treated as ordinary income, and any loss will be treated as ordinary loss, but only to the extent of the net amount previously included in income as a result of the mark-to-market election.

A U.S. holder’s adjusted tax basis in common shares or ADSs will be increased by the amount of any income inclusion and decreased by the amount of any deductions under the mark-to-market rules. If a U.S. holder makes a mark-to-market election, it will be effective for the taxable year for which the election is made and all subsequent taxable years unless the common shares or ADSs are no longer regularly traded on a qualified exchange or the Internal Revenue Service consents to the revocation of the election. You should consult your tax advisor about the availability of the mark-to-market election, and whether making the election would be advisable with respect to your particular circumstances.

In addition, a holder of common shares or ADSs in a PFIC can sometimes avoid the rules described above by electing to treat the company as a “qualified electing fund” under Section 1295 of the Code. This option is not available to you because we do not intend to comply with the requirements necessary to permit holders to make this election.

If you hold our common shares or ADSs in any year in which we are classified as a PFIC, you would be required to file Internal Revenue Service Form 8621.

Non-corporate U.S. holders will not be eligible for reduced rates of taxation on any dividends received from us if we are a PFIC in the taxable year in which such dividends are paid or were a PFIC in the preceding taxable year. You should consult your tax advisor concerning the determination of our PFIC status and the U.S. federal income tax consequences of holding our common shares or ADSs if we are considered a PFIC in any taxable year.

Information Reporting and Backup Withholding

In general, information reporting will apply to dividends in respect of our common shares or ADSs and the proceeds from the sale, exchange or redemption of our common shares or ADSs that are paid to you within the

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United States (and in certain cases, outside the United States), unless you are an exempt recipient. A backup withholding tax may apply to such payments if you fail to provide a taxpayer identification number or certification of other exempt status or fail to report in full dividend and interest income.

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against your U.S. federal income tax liability provided the required information is timely furnished to the Internal Revenue Service.

ITEM 10.F.

Dividends and Paying Agents

Not applicable.

ITEM 10.G.

Statements by Experts

Not applicable.

ITEM 10.H.

Documents on Display

We are subject to the information requirements of the U.S. Securities Exchange Act of 1934, as amended, and, in accordance therewith, are required to file reports, including annual reports on Form 20-F, and other information with the U.S. Securities and Exchange Commission. You may inspect and copy these materials, including this annual report and the exhibits thereto, at SEC’s Public Reference Room 100 Fifth Street, N.E., Washington, D.C. 20549. Please call the Commission at 1-800-SEC-0330 for further information on the public reference rooms. As a foreign private issuer, we are also required to make filings with the Commission by electronic means. Any filings we make electronically will be available to the public over the Internet at the Commission’s web site at http://www.sec.gov.

ITEM 10.I.

Subsidiary Information

Not applicable.

ITEM 11.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See “Item 4.B. Business Overview —Risk Management” for quantitative and qualitative disclosures about market risk.

ITEM 12.

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

ITEM 12.A.

Debt Securities

Not applicable.

ITEM 12.B.

Warrants and Rights

Not applicable.

ITEM 12.C.

Other Securities

Not applicable.

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ITEM 12.D.

American Depositary Shares

Depositary Fees and Charges

Under the terms of the Deposit Agreement in respect of our American depositary shares (“ADSs”), the holder of ADSs may be required to pay the following fees and charges to Citibank, N.A., acting as depositary for our ADSs:


Item	Services	Fees	Paid by

1	Issuance of ADSs upon deposit of common shares (excluding issuances contemplated by items 3(b) and 5 below	Up to US$5.00 per 100 ADSs (or fraction thereof) issued	Person depositing common shares or person receiving ADSs
2	Delivery of deposited securities against surrender of ADSs	Up to US$5.00 per 100 ADSs (or fraction thereof) surrendered	Person surrendering ADSs for purpose of withdrawal of deposited securities or person to whom deposited securities are delivered
3	Distribution of (a) cash dividends or (b) ADSs pursuant to stock dividends	No fee, to the extent prohibited by the exchange on which the ADSs are listed. If the charging of such fee is not prohibited, the fees specified in item 4 below shall be payable	Person to whom distribution is made
4	Distribution of (a) cash proceeds (i.e., upon sale of rights and other entitlements) or (b) free shares in the form of ADSs (not constituting a stock dividend)	Up to US$2.00 per 100 ADSs (or fraction thereof) held	Person to whom distribution is made
5	Distribution of securities other than ADSs or rights to purchase additional ADSs (i.e., spinoff shares)	Up to US$5.00 per 100 ADSs (or fraction thereof) distributed	Person to whom distribution is made
6	Depositary Services	Unless prohibited by the exchange on which the ADSs are listed, up to US$2.00 per 100 ADSs (or fraction thereof) held as of the last day of each calendar year, except to the extent of any cash dividend fee(s) charged under paragraph (3)(a) above during the applicable calendar year	Person holding ADSs on last day of calendar year
7	Distribution of ADSs pursuant to exercise of rights to purchase additional ADSs	Up to US$2.00 per 100 ADSs (or fraction thereof) held	Person who exercises such rights

Holders and beneficial owners of ADSs, persons depositing common shares for deposit and persons surrendering ADSs for cancellation and for the purpose of withdrawing deposited securities shall be responsible for the following charges:

(i) taxes (including applicable interest and penalties) and other governmental charges;

256

(ii) such registration fees as may from time to time be in effect for the registration of common shares or other deposited securities on the share register and applicable to transfers of common shares or other deposited securities to or from the name of the custodian, the depositary or any nominees upon the making of deposits and withdrawals, respectively;

(iii) such cable, telex and facsimile transmission and delivery expenses as are expressly provided in the Deposit Agreement to be at the expense of the person depositing or withdrawing common shares or holders and beneficial owners of ADSs;

(iv) the expenses and charges incurred by the depositary in the conversion of foreign currency;

(v) such fees and expenses as are incurred by the depositary in connection with compliance with exchange control regulations and other regulatory requirements applicable to common shares, deposited securities, ADSs and ADRs; and

(vi) the fees and expenses incurred by the depositary, the custodian or any nominee in connection with the servicing or delivery of deposited securities.

Depositary fees payable upon the issuance and cancellation of ADSs are typically paid to the depositary by the brokers (on behalf of their clients) receiving the newly-issued ADSs from the depositary and by the brokers (on behalf of their clients) delivering the ADSs to the depositary for cancellation. The brokers in turn charge these transaction fees to their clients.

Depositary fees payable in connection with distributions of cash or securities to ADS holders and the depositary services fee are charged by the depositary to the holders of record of ADSs as of the applicable ADS record date. The depositary fees payable for cash distributions are generally deducted from the cash being distributed. In the case of distributions other than cash (i.e., stock dividends, rights offerings), the depositary charges the applicable fee to the ADS record date holders concurrent with the distribution. In the case of ADSs registered in the name of the investor (whether certificated or un-certificated in direct registration), the depositary sends invoices to the applicable record date ADS holders. In the case of ADSs held in brokerage and custodian accounts via the central clearing and settlement system, The Depository Trust Company (DTC), the depositary generally collects its fees through the systems provided by DTC (whose nominee is the registered holder of the ADSs held in DTC) from the brokers and custodians holding ADSs in their DTC accounts. The brokers and custodians who hold their clients’ ADSs in DTC accounts in turn charge their clients’ accounts the amount of the fees paid to the depositary banks.

In the event of refusal to pay the depositary fees, the depositary may, under the terms of the Deposit Agreement, refuse the requested service until payment is received or may set- off the amount of the depositary fees from any distribution to be made to the ADS holder.

The fees and charges the ADS holders may be required to pay may vary over time and may be changed by us and by the depositary. The ADS holders will receive prior notice of such changes.

Depositary Payments for the Fiscal Year 2013

In 2013, we received the following payments from Citibank, N.A., acting as depositary for our ADSs:


Reimbursement of settlement infrastructure fees (including DTC fees)	US$	20,191.52
Reimbursement of proxy process expenses (printing, postage and distribution)	US$	40,328.66
Legal expenses	US$	1,782.00
Contributions towards our investor relations efforts (i.e. non-deal roadshows, investor conferences and IR agency fees) and legal expenses incurred in connection to the preparation of our Form 20-F for the fiscal year 2012	US$	538,619.32

Total:	US$	600,921.50

Note: The amounts provided above are after deduction of applicable of U.S. taxes.

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ITEM 13.

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

Not applicable.

ITEM 14.

MATERIAL MODIFICATION TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

Not applicable.

ITEM 15.

CONTROLS AND PROCEDURES

Disclosure Control

Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of December 31, 2013. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can provide only reasonable assurance of achieving their control objectives. Based upon our evaluation, our chief executive officer and chief financial officer concluded that the design and operation of our disclosure controls and procedures as of December 31, 2013 were effective to provide reasonable assurance that information required to be disclosed by us in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decision regarding required disclosure.

Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, for our company. Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we have evaluated the effectiveness of our internal control over financial reporting as of December 31, 2013 based on the framework established in Internal Control-Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements in accordance with generally accepted accounting principles and includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of a company’s assets, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that a company’s receipts and expenditures are being made only in accordance with authorizations of a company’s management and directors, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of a company’s assets that could have a material effect on the consolidated financial statements. Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance with respect to consolidated financial statement preparation and presentation and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2013. The effectiveness of our internal control over financial reporting has been audited by KPMG Samjong, an independent registered public accounting firm, who has also audited our consolidated financial statements for the year ended December 31, 2013. KPMG Samjong has issued an attestation report on the effectiveness of our internal control over financial reporting under Auditing Standard No. 5 of the Public Company Accounting Oversight Board, which is included herein.

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Attestation Report of the Independent Registered Public Accounting Firm

KPMG Samjong’s attestation report on the effectiveness of internal control over financial reporting can be found on page F-2 of this annual report.

Changes in Internal Controls

There were no changes in our internal control over financial reporting during 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 16.A.

AUDIT COMMITTEE FINANCIAL EXPERT

Our Audit Committee currently consists of four outside directors, namely Taeeun Kwon, Man Woo Lee, Sang Kyung Lee and Seok Won Kim. Our board of directors has determined that Taeeun Kwon, the chairman of our Audit Committee, and Man Woo Lee are “audit committee financial experts”, as such term is defined by the regulations of the Securities and Exchange Commission issued pursuant to Section 407 of the Sarbanes-Oxley Act of 2002. Taeeun Kwon, Man Woo Lee, Sang Kyung Lee and Seok Won Kim are independent as such term is defined in Section 303A.02 of the NYSE Listed Company Manual, Rule 10A-3 under the Exchange Act and the Korea Stock Exchange listing standards.

ITEM 16.B.

CODE OF ETHICS

We have adopted a code of ethics for our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions as required under Section 406 of the Sarbanes-Oxley Act of 2002, together with an insider reporting system in compliance with Section 301 of the Sarbanes-Oxley Act. The code of ethics is available on our website www.shinhangroup.com. We have not granted any waiver, including an implicit waiver, from a provision of the code of ethics to any of the above-mentioned officers during our most recently completed fiscal year.

ITEM 16.C.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table sets forth the aggregate fees billed for professional services rendered by KPMG Samjong Accounting Corp. for the years ended December 31, 2011, 2012 and 2013, our principal accountants for the respective period, depending on the various types of services and a brief description of the nature of such services.

Type of Services

Aggregate Fees
Billed During
the Year Ended
December 31,

Nature of Services

2011

2012

2013

(In millions of Won)

Audit fees

￦

6,193

￦

5,909

￦

5,004

Audit service for Shinhan Financial Group and its subsidiaries.

Tax fees

317

116

171

Tax return and consulting advisory service.

All other fees

—

All other services which do not meet the two categories above.

Total

￦

6,510

￦

6,025

￦

5,175

Our audit committee generally pre-approves all engagements of our principal accountants pursuant to policies and procedures adopted by it. Our audit committee has adopted the following policies and procedures for consideration and approval of requests to engage our principal accountants to perform audit and non-audit services. Engagement requests must in the first instance be submitted as follows: (i) in the case of audit and non-audit services for our holding company, to our Planning & Financial Management subject to reporting to our

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Chief Financial Officer; and (ii) in the case of audit and non-audit services for our subsidiaries, to our Audit and Compliance Team subject to reporting to the Senior Executive Vice President of Audit & Compliance Team. If the request relates to services that would impair the independence of our principal accountants, the request must be rejected. If the engagement request relates to audit and permitted non-audit services, it must be forwarded to the Audit Committee for consideration. To facilitate the consideration of engagement requests between its meetings, the Audit Committee has delegated approval authority of the following: (i) permitted non-audit services to our holding company, (ii) audit services to our subsidiaries and (iii) permitted non-audit services to our subsidiaries, to one of its members who is “independent” as defined by the Securities and Exchange Commission and the New York Stock Exchange. Such member in our case is Mr. Taeeun Kwon, the chairman of our Audit Committee, and he is required to report any approvals made by them to the Audit Committee at its next meeting. Our Audit Committee meets regularly once every quarter.

Any other audit or permitted non-audit service must be pre-approved by the audit committee on a case-by-case basis. Our audit committee did not pre-approve any non-audit services under the de minimis exception of Rule 2.01(c)(7)(i)(C) of Regulation S-X as promulgated by the Securities and Exchange Commission.

ITEM 16.D.

EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

Not applicable.

ITEM 16.E.

PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

Neither we nor any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) of the Exchange Act, purchased any of our equity securities during the period covered by this annual report.

ITEM 16.F.

CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

Not applicable.

ITEM 16.G.

CORPORATE GOVERNANCE

We are committed to high standards of corporate governance. We are in compliance with the corporate governance provisions of the Korean Commercial Code, the Financial Holding Companies Act of Korea, the Financial Investment Services and Capital Markets Act and the Listing Rules of the Korea Exchange. We, like all other companies in Korea, must comply with the corporate governance provisions of the Korean Commercial Code. In addition, as a financial holding company, we are also subject to the Financial Holding Companies Act. Also, our subsidiaries that are financial institutions must comply with the respective corporate governance provisions under the relevant laws under which they were established.

We are a “foreign private issuer” (as such term is defined in Rule 3b-4 under the Exchange Act), and our ADSs are listed on the New York Stock Exchange, or NYSE. Under Section 303A of the NYSE Listed Company Manual, NYSE-listed companies that are foreign private issuers are permitted to follow home country practice in lieu of the corporate governance provisions specified by the NYSE with limited exceptions. Under the NYSE Listed Company Manual, we as foreign private issuers are required to disclose significant differences between NYSE’s corporate governance standards and those we follow under Korean law. The following summarizes some significant ways in which our corporate governance practices differ from those followed by U.S. companies listed on the NYSE under the listing rules of the NYSE:

Majority of Independent Directors on the Board

Under the NYSE listing rules, U.S. companies listed on the NYSE must have a board the majority of which is comprised of independent director satisfying the requirements of “independence” as set forth in Rule 10A-3 under the Exchange Act. While as a foreign private issuer, we are exempt from this requirement, but our board of directors is in compliance with this requirement as it currently consists of 12 directors, of which ten directors satisfy the requirements of “independence” as set forth in Rule 10A-3 under the Exchange Act. Ten of our

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directors are also “outside directors” as defined in the Financial Holding Companies Act of Korea. An “outside director” for purposes of the Financial Holding Companies Act and the Korean Commercial Code means a director who does not engage in the regular affairs of the financial holding company, and who is elected at a shareholders meeting, after having been nominated by the outside director nominating committee, and none of the largest shareholder, those persons “specially related” to the largest shareholder of such company, persons who during the past two years have served as an officer or employee of such company, the spouses and immediate family members of an officer of such company, and certain other persons specified by law may qualify as an outside director of such company. Under the Korea Exchange listing rules and the Korean Commercial Code, at least one-fourth of a listed company’s directors must be outside directors provided that there must be at least three outside directors. In the case of “large listed companies” as defined under the Korean Commercial Code, like us, a majority of the directors must be outside directors.

Executive Session

Under the NYSE listing rules, non-management directors of U.S. companies listed on the NYSE are required to meet on a regular basis without management present and independent directors must meet separately at least once per year. There is no such requirement under Korean law or listing standards or our internal regulations.

Audit Committee

Under the NYSE listing rules, listed companies must have an audit committee that has a minimum of three members, and all audit committee members must satisfy the requirements of independence set forth in Section 303A.02 of the NYSE Listed Company Manual and Rule 10A-3 under the Exchange Act. We are in compliance with this requirement as our audit committee comprises of four outside directors meeting the requirements of independence set forth in Section 303A.02 of the NYSE Listed Company Manual and Rule 10A-3 under the Exchange Act. Under the Korea Exchange listing rules and the Korean Commercial Code, a large listed company must also establish an audit committee of which at least two-thirds of its members must be outside directors and whose chairman must be an outside director. In addition, at least one member of the audit committee who is an outside director must also be an accounting or financial expert. We are also in compliance with the foregoing requirements.

Nomination/Corporate Governance Committee

Under the NYSE listing rules, U.S. companies listed on the NYSE must have a nomination/corporate governance committee composed entirely independent directors. In addition to identifying individuals qualified to become board members, this committee must develop and recommend to the board a set of corporate governance principles. Under the Korean Commercial Code and other applicable laws, large listed companies, financial holding companies, commercial banks, and certain other financial institutions are required to have an outside director nominating committee of which at least one-half of its members are required to be outside directors. However, there is no requirement to establish a corporate governance committee under applicable Korean law. We currently have a board steering committee which manages corporate governance practices applicable to us. Our outside director nominating committee is formed on an ad hoc basis prior to a general shareholders meeting if the agenda for such meeting includes appointment of an outside director. The composition of the committee is in compliance with the relevant provisions under the Korean Commercial Code and the chairman of the committee must be an outside director pursuant to our outside director recommendation committee regulations. The board steering committee consists of five directors, including four outside directors.

A nomination/corporate governance committee is not required under Korean law. However, in March 2012, we established the Corporate Governance and Chief Executive Officer Recommendation Committee, which is responsible for reviewing and making recommendations in relation to the overall corporate governance of our group (including any aspects of corporate governance relating to code of ethics and other code of behavior, size of the board of directors and other matters necessary for improving our overall corporate governance structure), as well as recommendation of the nominees for the president and/or chief executive officer of our group and development, operation and review of our management succession plan, including setting the qualifications for

261

the CEO, evaluating CEO candidate pool and recommending CEO candidates. The chairperson of the committee must be an outside director, and the incumbent CEO may be restricted from participating and voting on matters related to the CEO selection.

Compensation Committee

Under the NYSE listing rules, U.S. companies listed on the NYSE are required to have a compensation committee which is composed entirely of independent directors. In January 2013, the SEC approved amendments to the listing rules of NYSE and NASDAQ regarding the independence of compensation committee members and the appointment, payment and oversight of compensation consultants. The listing rules were adopted as required by Section 952 of the Dodd-Frank Act and rule 10C-1 of the Securities Exchange Act of 1934, as amended, which direct the national securities exchanges to prohibit the listing of any equity security of a company that is not in compliance with the rule’s compensation committee director and advisor independence requirements. Certain elements of the listing rules became effective on July 1, 2013 and companies listed on the NYSE must comply with such listing rules by the earlier of the company’s first annual meeting after January 15, 2014, or October 31, 2014.

While no such requirement currently exists under applicable Korean law or listing standards, such committee is recommended to be established under the model guidelines set by the Financial Supervisory Service in relation to executives’ performance pay.

We currently have a compensation committee, which is responsible for reviewing and approving the management’s evaluation and compensation programs. The committee consists of four members, all of whom are outside directors and satisfy the independent director requirements as set forth in Rule 10A-3 under the Exchange Act.

Corporate Governance Guidelines and Code of Business Conduct and Ethics

Under the NYSE listing rules, U.S. companies listed on the NYSE are required to establish corporate governance guidelines and to adopt a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers. As a foreign private issuer, we are exempt from this requirement. While we have not adopted official corporate governance guidelines, our board of directors, outside director recommendation committee and the board steering committee review and determine corporate policies as needed to ensure efficient and transparent corporate governance practices. Pursuant to the requirements of the Sarbanes-Oxley Act, we have adopted a code of ethics applicable to our Chairman & Chief Executive Officer and all other directors and executive officers including the Chief Financial Officer and the Chief Accounting Officer, as well as all financial, accounting and other officers of Shinhan Financial Group and its subsidiaries that are involved in the preparation and disclosure of Shinhan Financial Group’s consolidated financial statements and internal control of financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. We have also adopted an insider reporting system in compliance with Section 301 of the Sarbanes-Oxley Act. The code of ethics applicable to our executive officers as well as the financial officers of the holding company and its subsidiaries is available on our website www.shinhangroup.com. Several of our subsidiaries, including Shinhan Bank, Shinhan Investment and Shinhan Life Insurance, currently also have their own codes of business conduct and ethics.

On May 25, 2011, the SEC adopted final rules to implement whistleblower provisions of the Dodd-Frank Act, which are applicable to foreign private issuers with securities registered under the U.S. securities laws. The final rules provide that any eligible whistleblower who voluntarily provides the SEC with original information that leads to the successful enforcement of an action brought by the SEC under U.S. securities laws must receive an award of between 10 and 30 percent of the total monetary sanctions collected if the sanctions exceed $1,000,000. An eligible whistleblower is defined as someone who provides information about a possible violation of the securities laws that he or she reasonably believes has occurred, is ongoing, or is about to occur. The possible violation does not need to be material, probably or even likely, but the information must have a “facially plausible relationship to some securities law violation”; frivolous submissions would not qualify. The final rules also prohibit retaliation against the whistleblower. While the final rules do not require employees to

262

first report allegations of wrongdoing through a company’s corporate compliance system, they do seek to incentivize whistleblowers to utilize internal corporate compliance first by, among other things, (i) giving employees who first report information internally the benefit of the internal reporting date for purposes of the SEC program so long as the whistleblower submits the same information to the SEC within 120 days of the initial disclosure; (ii) clarifying that the SEC will consider, as part of the criteria for determining the amount of a whistleblower’s award, whether the whistleblower effectively utilized the company’s corporate compliance program or hindered the function of the program; and (iii) crediting a whistleblower who reports internally first and whose company passes the information along to the SEC, which would mean the whistleblower could receive a potentially higher award for information gathered in an internal investigation initiated as a result of the whistleblower’s internal report.

In addition, the final rules address concerns that the whistleblower rules incentivize officers, directors and those with legal, audit, compliance or similar responsibilities to abuse these positions by making whistleblower complaints to the SEC with respect to information they obtained in these roles by generally providing that information obtained through a communication subject to attorney-client privilege or as a result of legal representation would not be eligible for a whistleblower award unless disclosure would be permitted by attorney conduct rules. Accordingly, officers and directors, auditors and compliance personnel and other persons in similar roles would not be eligible to receive awards for information received in these positions unless (x) they have a reasonable basis to believe that (1) disclosure of the information is necessary to prevent the entity from engaging in conduct that is likely to cause substantial injury to the financial interests of the entity or investors; or (2) the entity is engaging in conduct that will impede an investigation of the misconduct, for example, destroying documents or improperly influencing witnesses; or (y) 120 days has passed since the whistleblower provided the information to senior responsible persons at the entity or 120 days has passed since the whistleblower received the information at a time when these people were already aware of the information.

There is no corresponding law or regulation in Korea. However, we have established corporate governance guidelines and code of business conduct and ethics through our Corporate Governance and Chief Executive Officer Recommendation Committee.

Shareholder Approval of Equity Compensation Plans

Under the NYSE listing rules, shareholders of U.S. companies listed on the NYSE are required to approve all equity compensation plans. We currently have two equity compensation plans, consisting of a performance share plan for directors and key employees and an employee stock ownership plan for all employees under the Framework Act on Workers’ Welfare. Performance shares are granted pursuant to a board of director resolution, subject to the limit amount set by a resolution at the shareholders’ meeting. There are no requirements relating to the granting of performance shares under applicable Korean laws and our articles of incorporation. Under the Framework Act on Workers’ Welfare and the Enforcement Decree thereunder, a Korean company may issue stock options up to 20% of its issued and outstanding shares by a resolution at the shareholders’ meeting with an individual limit of ￦6 million for any given year per each member of the employee stock ownership association, if permitted by the articles of incorporation. In addition, if a company is issuing stock options by a 10% of its issued and outstanding shares, only a board of director resolution is required for such issuance if permitted by the Articles of Incorporation. However, we have not adopted such provision in our articles of incorporation and currently do not offer any performance shares to our employees.

On April 1, 2010, our performance share plan replaced our stock option plan for directors. Accordingly, no stock options have been granted since April 1, 2010, and our outstanding stock option balance is wholly in connection with stock options granted prior to such date.

Annual Certification of Compliance

Under the NYSE listing rules, a chief executive officer of a U.S. company listed on the NYSE must annually certify that he or she is not aware of any violation by the company of NYSE corporate governance standards. As a foreign private issuer, we are not subject to this requirement. However, in accordance with rules applicable to both U.S. companies and foreign private issuers, we are required to promptly notify the NYSE in

263

writing if any executive officer becomes aware of any material noncompliance with the NYSE corporate governance standards applicable to us. In addition, foreign private issuers, including us, are required to submit to the NYSE an annual written affirmation relating to compliance with Sections 303A.06 and 303A.11 of the NYSE listed company manual, which are the NYSE corporate governance standards applicable to foreign private issuers. All written affirmations must be executed in the form provided by the NYSE, without modification. An annual written affirmation is required to be submitted to the NYSE within 30 days of filing with the SEC our annual report on Form 20-F. We have been in compliance with this requirement in all material respects and plan to submit such affirmation within the prescribed time line.

ITEM 16.H.

MINE SAFETY DISCLOSURE

Not applicable.

ITEM 17.

FINANCIAL STATEMENTS

We have responded to Item 18 in lieu of responding to this item.

ITEM 18.

FINANCIAL STATEMENTS

Reference is made to Item 19(a) for a list of all financial statements filed as part of this annual report.

ITEM 19.

EXHIBITS

(a) Financial Statements filed as part of this Annual Report:

See Index to Financial Statements on page F-1 of this annual report.

(b) Statistical disclosure by bank holding companies specified in Industry Guide 3 filed as part of this Annual Report:

See Supplemental Financial Information on page S-1 of this annual report.

See Exhibit Index beginning on page E-1 of this annual report.

264

SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

Date: April 30, 2014


SHINHAN FINANCIAL GROUP CO, LTD.

By:	/s/ Dong Woo Han
	Name:	Dong Woo Han
	Title:	Chairman and Chief Executive Officer

265

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


	Page

Index to Consolidated Financial Statements		F-1

Report of Independent Registered Public Accounting Firm		F-2

Consolidated Statements of Financial Position		F-4

Consolidated Statements of Comprehensive Income		F-5

Consolidated Statements of Changes in Equity		F-7

Consolidated Statements of Cash Flows		F-10

Notes to the Consolidated Financial Statements		F-12

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Shinhan Financial Group Co., Ltd.:

We have audited the accompanying consolidated statements of financial position of Shinhan Financial Group Co., Ltd. and its subsidiaries (the “Group”) as of December 31, 2012 and 2013, and the related consolidated statements of comprehensive income, changes in equity and cash flows for each of the years in the three-year period ended December 31, 2013. We also have audited the Group’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Group’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Annual Report on Internal Control over Financial Reporting”. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Group’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Group as of December 31, 2012 and 2013 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2013, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, the Group maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

F-2

Without qualifying our opinion, we draw attention to the following:

As discussed in note 2 to the consolidated financial statements, the Group applied the amendments to IAS 19 Employee Benefits and recognized remeasurements in other comprehensive income, and the Group adopted IFRS 10 Consolidated Financial Statements to determine the scope of consolidation. The Group applied this change in accounting policies retrospectively, and accordingly restated the comparative information of the consolidated financial statements for the year ended December 31, 2012, and the consolidated statement of comprehensive income, changes in equity and cash flows for the year ended December 31, 2011.

/s/ KPMG Samjong Accounting Corp.

Seoul, Korea

April 30, 2014

F-3

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Consolidated Statements of Financial Position

As of January 1, 2012 and December 31, 2012, 2013


	Note		January 1, 2012 (restated)			December 31, 2012 (restated)			December 31, 2013
	(In millions of won)
Assets
Cash and due from banks		4,8,20	￦	14,799,035			13,507,249			16,472,509
Trading assets		4,9,20		14,520,784			16,654,255			18,033,298
Financial assets designated at fair value through profit or loss		4,10,20		1,800,846			2,542,333			3,360,765
Derivative assets		4,11		2,321,301			2,170,765			1,717,468
Loans, net		4,12,20		193,229,389			200,288,636			205,722,718
Available-for-sale financial assets		4,13,20		34,015,741			36,283,918			33,604,301
Held-to-maturity financial assets		4,13,20		11,894,664			11,659,682			11,031,307
Property and equipment, net		14,20		2,993,860			3,108,457			3,214,303
Intangible assets, net		15		4,203,460			4,195,496			4,226,378
Investments in associates		16		248,848			298,518			328,567
Current tax receivable				9,022			14,128			6,184
Deferred tax assets		42		31,464			99,964			196,780
Investment properties, net		17		515,362			778,505			690,257
Other assets, net		4,18		10,948,286			13,282,907			12,449,193
Assets held for sale				15,792			54,412			242,815

Total assets			￦	291,547,854			304,939,225			311,296,843

Liabilities
Deposits		4,21	￦	166,243,830			173,295,702			178,809,881
Trading liabilities		4,22		704,418			1,370,723			1,258,283
Financial liabilities designated at fair value through profit or loss		4,23		3,298,409			4,822,197			5,909,130
Derivative liabilities		4,11		1,972,197			1,904,044			2,026,534
Borrowings		4,24		20,255,421			19,518,040			20,142,908
Debt securities issued		4,25		39,735,249			38,838,467			37,491,439
Liability for defined benefit obligations		26		275,435			222,333			117,655
Provisions		27		869,632			747,885			750,283
Current tax payable				568,074			253,524			239,174
Deferred tax liabilities		42		21,816			41,746			14,625
Liabilities under insurance contracts		28		10,867,254			13,418,559			15,656,455
Other liabilities		4,29		19,816,727			21,592,861			19,020,815

Total liabilities				264,628,462			276,026,081			281,437,182

Equity		30
Capital stock				2,645,053			2,645,053			2,645,053
Other equity instrument				238,582			537,443			537,443
Capital surplus				9,886,849			9,887,199			9,887,335
Capital adjustments				(392,654	)		(393,097	)		(393,128	)
Accumulated other comprehensive income				1,032,780			980,121			671,807
Retained earnings				11,046,478			12,715,172			14,194,163

Total equity attributable to equity holders of Shinhan Financial Group Co., Ltd.				24,457,088			26,371,891			27,542,673
Non-controlling interests		30		2,462,304			2,541,253			2,316,988

Total equity				26,919,392			28,913,144			29,859,661

Total liabilities and equity			￦	291,547,854			304,939,225			311,296,843

See accompanying notes to the consolidated financial statements

F-4

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

For the years ended December 31, 2011, 2012 and 2013


	Note		2011 (restated)			2012 (restated)			2013
			(In millions of won)
Interest income			￦	13,780,714			13,998,109			12,588,015
Interest expense				(6,700,743	)		(7,018,391	)		(5,985,159	)

Net interest income		32		7,079,971			6,979,718			6,602,856

Fees and commission income				3,557,132			3,491,104			3,489,624
Fees and commission expense				(1,797,961	)		(1,947,959	)		(2,103,269	)

Net fees and commission income		33		1,759,171			1,543,145			1,386,355

Net insurance loss		28		(119,201	)		(209,303	)		(379,322	)
Dividend income		34		208,860			174,325			158,016
Net trading income		35		(131,848	)		607,861			77,034
Net foreign currency transaction gain				13,874			280,028			296,187
Net loss on financial instruments designated at fair value through profit or loss		36		171,911			(532,070	)		(122,020	)
Net gain on sale of available-for-sale financial assets		13		846,345			535,578			700,609
Impairment losses on financial assets		37		(982,958	)		(1,416,220	)		(1,339,897	)
General and administrative expenses		38		(3,984,128	)		(4,061,576	)		(4,202,550	)
Net other operating expenses		40		(538,382	)		(723,519	)		(539,687	)

Operating income				4,323,615			3,177,967			2,637,581

Equity in income of associates		16		57,790			27,538			7,286
Other non-operating income (loss), net		41		(37,614	)		25,131			37,268

Profit before income taxes				4,343,791			3,230,636			2,682,135
Income tax expense		42		(956,580	)		(738,727	)		(622,565	)

Profit for the year		30,43		3,387,211			2,491,909			2,059,570

Other comprehensive income (loss) for the year, net of income tax
Items that are or may be reclassified to profit or loss:
Foreign currency translation adjustments for foreign operations				16,120			(84,917	)		(57,845	)
Net change in unrealized fair value of available-for-sale financial assets				(460,437	)		13,441			(270,103	)
Equity in other comprehensive income of associates				2,717			4,097			(4,811	)
Net change in unrealized fair value of cash flow hedges				1,429			15,655			6,089
Other comprehensive income (loss) of separate account				(579	)		570			(1,829	)

				(440,750	)		(51,154	)		(328,499	)

Items that will never be reclassified to profit or loss:
Remeasurements of the defined benefit liability				(114,578	)		179			18,599

Total other comprehensive loss, net of income tax		30		(555,328	)		(50,975	)		(309,900	)

Total comprehensive income for the year			￦	2,831,883			2,440,934			1,749,670

See accompanying notes to the consolidated financial statements.

F-5

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income — (Continued)

For the years ended December 31, 2011, 2012 and 2013


	Note		2011 (restated)		2012 (restated)		2013
			(In millions of won, except earnings per share)
Net income attributable to:
Equity holders of Shinhan Financial Group Co., Ltd.		30,43	￦	3,214,124		2,321,890		1,902,808
Non-controlling interest				173,087		170,019		156,762

			￦	3,387,211		2,491,909		2,059,570

Total comprehensive income attributable to:
Equity holders of Shinhan Financial Group Co., Ltd.			￦	2,659,464		2,269,231		1,594,494
Non-controlling interest				172,419		171,703		155,176

			￦	2,831,883		2,440,934		1,749,670

Earnings per share:		30,43
Basic earnings per share in won			￦	6,195		4,684		3,819

Diluted earnings per share in won			￦	6,065		4,684		3,819

See accompanying notes to the consolidated financial statement

F-6

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Consolidated Statements of Changes in Equity

For the years ended December 31, 2011, 2012 and 2013


	Equity attributable to equity holders of Shinhan Financial Group Co., Ltd																		Non-controlling interests			Total
	Capital stock		Other equity instruments		Capital surplus		Capital adjustments			Accumulated other comprehensive income			Retained earnings			Sub-total			Non-controlling interests			Total
	(In millions of won)
Balance at January 1, 2011	￦	2,589,553		—		8,834,971		(390,853	)		1,629,495			12,071,221			24,734,387			2,460,838			27,195,225
Changes in accounting policy		—		—		—		—			(44,507	)		44,507			—			—			—
Restated Balance at January 1, 2011		2,589,553		—		8,834,971		(390,853	)		1,584,988			12,115,728			24,734,387			2,460,838			27,195,225
Profit for the period		—		—		—		—			—			3,214,124			3,214,124			173,087			3,387,211
Other comprehensive income, net of income tax
Foreign currency translation adjustments		—		—		—		—			16,086			—			16,086			34			16,120
Net change in unrealized fair value of available-for-sale financial assets		—		—		—		—			(460,200	)		—			(460,200	)		(237	)		(460,437	)
Equity in other comprehensive income of associates		—		—		—		—			2,717			—			2,717			—			2,717
Net change in unrealized fair value of cash flow hedges		—		—		—		—			1,429			—			1,429			—			1,429
Other comprehensive income of separate account		—		—		—		—			(579	)		—			(579	)		—			(579	)
Remeasurements of the defined benefit liability		—		—		—		—			(114,113	)		—			(114,113	)		(465	)		(114,578	)

		—		—		—		—			(554,660	)		—			(554,660	)		(668	)		(555,328	)

Total comprehensive income for the period		—		—		—		—			(554,660	)		3,214,124			2,659,464			172,419			2,831,883

Transactions with owners, etc
Dividends		—		—		—		—			—			(586,236	)		(586,236	)		—			(586,236	)
Dividends to hybrid bonds		—		—		—		—			—			(2,594	)		(2,594	)		—			(2,594	)
Issuance of preferred stock		55,500		—		1,050,664		—			—			—			1,106,164			—			1,106,164
Issuance of hybrid bonds		—		238,582		—		—			—			—			238,582			—			238,582
Redemption of preferred stock		—		—		—		—			—			(3,752,679	)		(3,752,679	)		—			(3,752,679	)
Change in other capital surplus		—		—		1,214		—			—			—			1,214			—			1,214
Change in other capital adjustments		—		—		—		(1,801	)		—			—			(1,801	)		—			(1,801	)
Change in other non-controlling interests		—		—		—		—			—			—			—			(170,953	)		(170,953	)

		55,500		238,582		1,051,878		(1,801	)		—			(4,341,509	)		(2,997,350	)		(170,953	)		(3,168,303	)

Balance at December 31, 2011	￦	2,645,053		238,582		9,886,849		(392,654	)		1,030,328			10,988,343			24,396,501			2,462,304			26,858,805

See accompanying notes to the consolidated financial statements

F-7

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Consolidated Statements of Changes in Equity — (Continued)

For the years ended December 31, 2011, 2012 and 2013


	Equity attributable to equity holders of Shinhan Financial Group Co., Ltd																					Total
	Capital stock		Other equity instruments		Capital surplus		Capital adjustments			Accumulated other comprehensive income			Retained earnings			Sub-total			Non-controlling interests			Total
	(In millions of won)
Balance at January 1, 2012	￦	2,645,053		238,582		9,886,849		(392,654	)		1,188,948			10,829,723			24,396,501			2,462,304			26,858,805
Changes in accounting policy		—		—		—		—			(156,168	)		216,755			60,587			—			60,587
Restated Balance at January 1, 2012		2,645,053		238,582		9,886,849		(392,654	)		1,032,780			11,046,478			24,457,088			2,462,304			26,919,392
Profit for the period		—		—		—		—			—			2,321,890			2,321,890			170,019			2,491,909
Other comprehensive income, net of income tax
Foreign currency translation adjustments		—		—		—		—			(84,695	)		—			(84,695	)		(222	)		(84,917	)
Net change in unrealized fair value of available-for-sale financial assets		—		—		—		—			12,852			—			12,852			589			13,441
Equity in other comprehensive income of associates		—		—		—		—			4,097			—			4,097			—			4,097
Net change in unrealized fair value of cash flow hedges		—		—		—		—			15,655			—			15,655			—			15,655
Other comprehensive income of separate account		—		—		—		—			570			—			570			—			570
Remeasurements of the defined benefit liability		—		—		—		—			(1,138	)		—			(1,138	)		1,317			179

		—		—		—		—			(52,659	)		—			(52,659	)		1,684			(50,975	)

Total comprehensive income for the period		—		—		—		—			(52,659	)		2,321,890			2,269,231			171,703			2,440,934

Transactions with owners, etc
Dividends		—		—		—		—			—			(629,508	)		(629,508	)		—			(629,508	)
Dividends to hybrid bonds		—		—		—		—			—			(23,688	)		(23,688	)		—			(23,688	)
Issuance of hybrid bonds		—		298,861		—		—			—			—			298,861			—			298,861
Change in other capital surplus		—		—		350		—			—			—			350			—			350
Change in other capital adjustments		—		—		—		(443	)		—			—			(443	)		—			(443	)
Change in other non-controlling interests		—		—		—		—			—			—			—			(92,754	)		(92,754	)

		—		298,861		350		(443	)		—			(653,196	)		(354,428	)		(92,754	)		(447,182	)

Balance at December 31, 2012	￦	2,645,053		537,443		9,887,199		(393,097	)		980,121			12,715,172			26,371,891			2,541,253			28,913,144

See accompanying notes to the consolidated financial statements

F-8

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Consolidated Statements of Changes in Equity — (Continued)

For the years ended December 31, 2011, 2012 and 2013


	Equity attributable to equity holders of Shinhan Financial Group Co., Ltd
	Capital stock		Other equity instruments		Capital surplus		Capital adjustments			Accumulated other comprehensive income			Retained earnings			Sub-total			Non-controlling interests			Total
	(In millions of won)
Balance at January 1, 2013	￦	2,645,053		537,443		9,887,199		(393,097	)		1,134,820			12,499,259			26,310,677			2,469,146			28,779,823
Changes in accounting policy		—		—		—		—			(154,699	)		215,913			61,214			72,107			133,321
Restated Balance at January 1, 2013		2,645,053		537,443		9,887,199		(393,097	)		980,121			12,715,172			26,371,891			2,541,253			28,913,144
Profit for the period		—		—		—		—			—			1,902,808			1,902,808			156,762			2,059,570
Other comprehensive income, net of income tax
Foreign currency translation adjustments		—		—		—		—			(57,825	)		—			(57,825	)		(20	)		(57,845	)
Net change in unrealized fair value of available-for-sale financial assets		—		—		—		—			(268,854	)		—			(268,854	)		(1,249	)		(270,103	)
Equity in other comprehensive income of associates		—		—		—		—			(4,811	)		—			(4,811	)		—			(4,811	)
Net change in unrealized fair value of cash flow hedges		—		—		—		—			6,089			—			6,089			—			6,089
Other comprehensive income of separate account		—		—		—		—			(1,829	)		—			(1,829	)		—			(1,829	)
Remeasurements of defined benefit liability		—		—		—		—			18,916			—			18,916			(317	)		18,599

		—		—		—		—			(308,314	)		—			(308,314	)		(1,586	)		(309,900	)

Total comprehensive income for the period		—		—		—		—			(308,314	)		1,902,808			1,594,494			155,176			1,749,670

Transactions with owners, etc
Dividends		—		—		—		—			—			(393,878	)		(393,878	)		—			(393,878	)
Dividends to hybrid bonds		—		—		—		—			—			(29,939	)		(29,939	)		—			(29,939	)
Change in other capital adjustments		—		—		136		—			—			—			136			—			136
Change in other capital adjustments		—		—		—		(31	)		—			—			(31	)		—			(31	)
Change in other non-controlling interests		—		—		—		—			—			—			—			(379,441	)		(379,441	)

		—		—		136		(31	)		—			(423,817	)		(423,712	)		(379,441	)		(803,153	)

Balance at December 31, 2013	￦	2,645,053		537,443		9,887,335		(393,128	)		671,807			14,194,163			27,542,673			2,316,988			29,859,661

See accompanying notes to the consolidated financial statements.

F-9

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the years ended December 31, 2011, 2012 and 2013


	Note		2011 (restated)			2012 (restated)			2013
			(In millions of won)
Cash flows from operating activities
Profit before income taxes			￦	4,343,791			3,230,636			2,682,135
Adjustments for:
Net interest income		32		(7,079,971	)		(6,979,718	)		(6,602,856	)
Dividend income		34		(208,860	)		(174,325	)		(158,016	)
Net fees and commission expense				182,169			39,142			82,410
Insurance expense		28		2,297,723			3,043,780			2,760,884
Net trading loss (income)		35		17,876			(414,253	)		227,976
Net foreign currency transaction gain				11,293			(86,820	)		(2,520	)
Net loss (gain) on financial assets designated at fair value through profit or loss		36		(167,961	)		353,830			(177,645	)
Gain on disposal of available-for-sale financial assets		13		(846,345	)		(535,578	)		(700,609	)
Provision for allowance		12		896,006			1,315,365			1,124,927
Impairment losses on other financial assets				91,303			100,855			214,970
Salaries expense				66,510			146,501			80,600
Depreciation and amortization		38		287,734			298,836			319,730
Other operating income				(578,983	)		(534,076	)		61,074
Equity in income of associates		16		(57,790	)		(27,538	)		(7,286	)
Other non-operating loss (income), net				(7,621	)		(25,126	)		15,510

				(5,096,917	)		(3,479,125	)		(2,760,851	)

Changes in assets and liabilities:
Due from banks				(3,540,709	)		1,843,530			(1,954,448	)
Trading assets				(2,723,770	)		(1,414,528	)		(1,305,364	)
Financial instruments designated at fair value through profit or loss				1,821,807			467,291			396,252
Derivative assets				195,027			301,268			21,049
Loans				(11,397,231	)		(8,940,062	)		(7,444,790	)
Other assets				(1,036,742	)		(3,232,456	)		(65,799	)
Deposits				12,941,911			8,444,336			5,825,422
Liability for defined benefit obligations		26		(115,687	)		(206,635	)		(140,462	)
Provision		27		(19,564	)		(154,851	)		(105,796	)
Other liabilities				(298,829	)		6,530,566			(2,315,596	)

				(4,173,787	)		3,638,459			(7,089,532	)

Income taxes paid				(651,914	)		(1,074,846	)		(695,725	)
Interest received				13,273,499			13,569,246			12,499,754
Interest paid				(6,492,566	)		(6,990,531	)		(5,891,494	)
Dividends received				208,860			174,475			156,196

Net cash provided by (used in) operating activities			￦	1,410,966			9,068,314			(1,099,517	)

See accompanying notes to the consolidated financial statements.

F-10

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Consolidated Statements of Cash Flows — (Continued)

For the years ended December 31, 2011, 2012 and 2013


	Note		2011 (restated)			2012 (restated)			2013
			(In millions of won)
Cash flows from investing activities
Proceeds from disposition of financial assets designated at fair value through profit or loss			￦	98,472			52,909			57,833
Acquisition of financial assets designated at fair value through profit or loss				—			(134,507	)		(7,937	)
Proceeds from disposition of available-for-sale financial assets				43,335,156			40,687,182			29,917,886
Acquisition of available-for-sale financial assets				(47,704,240	)		(42,572,548	)		(26,999,720	)
Proceeds from redemption of held-to-maturity financial assets				4,499,462			2,684,122			2,393,951
Acquisition of held-to-maturity financial assets				(3,828,684	)		(2,489,373	)		(1,806,589	)
Proceeds from disposition of property and equipment		14,41		69,347			8,017			29,021
Acquisition of property and equipment		14		(302,111	)		(292,898	)		(294,003	)
Proceeds from disposition of intangible assets		15,41		12,676			6,711			8,097
Acquisition of intangible assets		15		(168,132	)		(123,736	)		(154,407	)
Proceeds from disposition of investments in associates				71,827			50,125			27,466
Acquisition of investments in associates				(27,661	)		(43,353	)		(55,389	)
Proceeds from disposition of investment property		17,41		23,037			2,880			38,085
Acquisition of investment property		17		(17	)		(296,316	)		(234,432	)
Proceeds from disposition of assets held for sale				2,047			6,489			49,185
Net increase (decrease) in other assets				(90,922	)		(166,593	)		39,509
Net increase (decrease) in derivatives				107			(58	)		2,073
Business combinations, net of cash acquired		45		(103,859	)		95,270			385,291

Net cash provided by (used in) investing activities				(4,113,495	)		(2,525,677	)		3,395,920

Cash flows from financing activities
Issuance of preferred stock				1,107,278			—			—
Issuance of hybrid bond				238,682			298,860			—
Proceeds from borrowings				21,300,793			22,256,148			21,665,428
Repayments of borrowings				(19,397,747	)		(22,743,958	)		(21,142,955	)
Proceeds from debt securities issued				13,056,571			11,696,281			10,338,560
Repayments of debt securities issued				(13,760,022	)		(12,506,217	)		(11,352,135	)
Repayments of preferred stock				—			(3,765,124	)		—
Net increase in other liabilities				(22,512	)		20,996			31,893
Dividends paid				(585,557	)		(650,697	)		(424,014	)
Net cash flows from derivative financial instruments for hedging purposes				75,887			36,752			(24,292	)
Decrease in non-controlling interest				(173,559	)		(164,874	)		(379,441	)

Net cash used in financing activities				1,839,814			(5,521,833	)		(1,286,956	)

Effect of exchange rate fluctuations on cash and cash equivalents held				(1,088	)		4,316			3,964

Increase in cash and cash equivalents				(863,803	)		1,025,120			1,013,411
Cash and cash equivalents at beginning of year		45		4,833,145			3,982,645			5,007,765

Cash and cash equivalents at end of year		45	￦	3,969,342			5,007,765			6,021,176

See accompanying notes to the consolidated financial statements.

F-11

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2011, 2012 and 2013

1.	Reporting entity

Shinhan Financial Group Co., Ltd., the controlling company, and its subsidiaries included in consolidation (collectively the “Group”) are summarized as follows:

(a) Controlling company

Shinhan Financial Group Co., Ltd. (the “Shinhan Financial Group”) was incorporated on September 1, 2001 through a business combination involving the exchange of Shinhan Financial Group’s common stock with the former stockholders of Shinhan Bank, Shinhan Investment Corp., Shinhan Capital Co., Ltd. and Shinhan BNP Paribas AMC. Shinhan Financial Group’s shares were listed on the Korea Exchange on September 10, 2001 and Shinhan Financial Group’s American Depository Shares were listed on the New York Stock Exchange on September 16, 2003.

(b) Ownership of Shinhan Financial Group and its major consolidated subsidiaries as of December 31, 2012 and 2013 are as follows: Ownership (%)

Investor

Investee(*1)

Location

Date of
financial
information

Ownership (%)

2012
(restated)

2013

Shinhan Financial Group

Shinhan Bank

Korea

December 31

100.0

”

Shinhan Card Co., Ltd.

”

100.0

”

Shinhan Investment Corp.

”

100.0

”

Shinhan Life Insurance Co., Ltd

”

100.0

”

Shinhan Capital Co., Ltd.

”

100.0

”

Jeju Bank

”

68.9

”

Shinhan Credit Information Co., Ltd.

”

100.0

”

Shinhan Private Equity

”

100.0

”

Shinhan BNP Paribas AMC

”

65.0

”

SHC Management Co., Ltd.

”

100.0

”

Shinhan Data system

”

100.0

”

Shinhan Savings Bank

”

100.0

”

Shinhan Aitas Co., Ltd.

”

99.8

Shinhan Bank

Shinhan Asia Limited

Hong Kong

”

99.9

”

Shinhan Bank America

USA

”

100.0

”

Shinhan Europe GmbH

Germany

”

100.0

”

Shinhan Khmer Bank

Cambodia

”

90.0

93.3

”

Shinhan Kazakhstan Bank

Kazakhstan

”

100.0

”

Shinhan Canada Bank

Canada

”

100.0

”

Shinhan China Limited

China

”

100.0

”

SBJ Bank

Japan

”

100.0

”

Shinhan Bank Vietnam

Vietnam

”

100.0

Shinhan Investment Corp.

Shinhan Investment Corp. America Inc.

USA

December 31

100.0

”

Shinhan Investment Corp. Asia Ltd.

Hong Kong

”

100.0

Shinhan Private Equity

Symphony Energy Co., Ltd.(*2)

Korea

—

77.6

—

”

HKC&T Co., Ltd.

”

September 30

100.0

”

Everdigm, Corp.

”

38.7

45.2

Shinhan BNP Paribas AMC

Shinhan BNP Asset Mgt HK Ltd.

Hong Kong

December 31

100.0

(*1)	Subsidiaries such as trust, beneficiary certificates, corporate restructuring fund and private equity fund are excluded.

(*2)	The investee was liquidated for the current period.

F-12

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

2.	Basis of preparation

(a) Statement of compliance

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. (“IFRS”).

(b) Basis of measurement

The consolidated financial statements have been prepared on the historical cost basis except for the following material items in the statement of financial position:

•

derivative financial instruments are measured at fair value

•

financial instruments at fair value through profit or loss are measured at fair value

•

available-for-sale financial assets are measured at fair value

•

liabilities for cash-settled share-based payment arrangements are measured at fair value

•

liabilities for defined benefit plans are recognized as net of the total present value of defined benefit obligations less the fair value of plan assets and unrecognized past service costs

(c) Functional and presentation currency

These consolidated financial statements are presented in Korean won, which are the controlling company’s functional currency and the currency of the primary economic environment in which the Group operates.

(d) Use of estimates and judgments

The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are evaluated on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future years affected.

Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the next financial year are included in note 5.

(e) Changes in accounting policies

i) IFRS 1, Presentation of Financial Statements

The Group has applied the amendments to IFRS 1, Presentation of Financial Statements since January 1, 2013. The amendments require presenting in other comprehensive income on the basis of whether they are potentially reclassifiable to profit or loss subsequently (reclassification adjustments).

ii) IFRS 10, Consolidated Financial Statement

The Group adopted IFRS 10, Consolidated Financial Statements since January 1, 2013. As a result, the Group has changed its accounting policy with respect to determining whether it has control over and consequently whether it consolidates its investees. IFRS 10 introduces a new control model that is applicable to all investees; among other things, it requires the consolidation of an investee if the Group controls the investee on the basis of de facto circumstances.

F-13

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

iii) IFRS 11, Joint Arrangements

The Group adopted IFRS 11, Joint Arrangements since January 1, 2013. The standard classifies joint arrangements into two types — joint operations and joint ventures. A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement (i.e. joint operators) have rights to the assets, and obligations for the liabilities, relating to the arrangement. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement (i.e. joint venturers) have rights to the net assets of the arrangement. The standard requires a joint operator to recognize and measure the assets and liabilities (and recognize the related revenues and expenses) in relation to its interest in the arrangement in accordance with relevant IFRSs applicable to the particular assets, liabilities, revenues and expenses. The standard requires a joint venturer to recognize an investment and to account for that investment using the equity method.

iv) IFRS 12, Disclosure of Interests in Other Entities

The Group adopted IFRS 12, Disclosure of Interests in Other Entities since January 1, 2013. The standard brings together into a single standard all the disclosure requirements about an entity’s interests in subsidiaries, joint arrangements, associates and unconsolidated structured entities. The standard requires the disclosure of information about the nature, risks and financial effects of these interests. (See Note 49)

v) Amendments to IAS 19, Employee Benefits

The Group has applied the amendments to IAS 19, Employee Benefits since January 1, 2013. The standard requires recognition of actuarial gains and losses immediately in other comprehensive income and to calculate expected return on plan assets based on the rate used to discount the defined benefit obligation.

vi) IFRS 13, Fair Value Measurement

The Group adopted IFRS 13, Fair Value Measurement since January 1, 2013. The standard defines fair value and a single framework for fair value, and requires disclosures about fair value measurements. (See Note 4.(f))

vii) Amendments to IFRS 7, Financial Instruments: Disclosures

The Group has applied the amendments to IFRS 7, Financial Instruments: Disclosures since January 1, 2013. The amendments require to disclose information so that users of its financial statements are able to evaluate the effect or potential effect of netting arrangements and similar agreements on the Group’s financial position. (See Note 4.(h))

F-14

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(f) Impact of changes in accounting policy

The following table summarizes the adjustments made to the Group’s consolidated statements of financial position as of January 1, 2012 and December 31, 2012.


	January 1, 2012
	As previously reported		Adjustments								As restated
	As previously reported		IFRS 10			IAS 19		Sub-total			As restated
Assets
Cash and due from banks	￦	14,730,932		68,103			—		68,103			14,799,035
Trading assets		11,954,266		2,566,518			—		2,566,518			14,520,784
Financial assets designated at fair value through profit or loss		1,800,846		—			—		—			1,800,846
Derivative assets		2,319,585		1,716			—		1,716			2,321,301
Loans, net		192,572,571		656,818			—		656,818			193,229,389
Available-for-sale financial assets		34,105,747		(90,006	)		—		(90,006	)		34,015,741
Held-to-maturity financial assets		11,894,664		—			—		—			11,894,664
Property and equipment, net		2,993,860		—			—		—			2,993,860
Intangible assets, net		4,203,460		—			—		—			4,203,460
Investments in associates		248,848		—			—		—			248,848
Current tax receivable		9,022		—			—		—			9,022
Deferred tax assets		29,202		2,262			—		2,262			31,464
Investment properties, net		275,123		240,239			—		240,239			515,362
Other assets, net		10,887,878		60,408			—		60,408			10,948,286
Assets held for sale		15,792		—			—		—			15,792

Total assets		288,041,796		3,506,058			—		3,506,058			291,547,854

F-15

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013


	January 1, 2012
	As previously reported			Adjustments
	As previously reported			IFRS 10			IAS 19			Sub-total			As restated
Liabilities
Deposits		163,015,732			3,228,098			—			3,228,098			166,243,830
Trading liabilities		704,418			—			—			—			704,418
Financial liabilities designated at fair value through profit or loss		3,298,409			—			—			—			3,298,409
Derivative liabilities		1,972,197			—			—			—			1,972,197
Borrowings		20,033,246			222,175			—			222,175			20,255,421
Debt securities issued		39,736,958			(1,709	)		—			(1,709	)		39,735,249
Liability for defined benefit obligations		274,661			774			—			774			275,435
Provisions		869,592			40			—			40			869,632
Current tax payable		568,074			—			—			—			568,074
Deferred tax liabilities		282			21,534			—			21,534			21,816
Liabilities under insurance contracts		10,867,254			—			—			—			10,867,254
Other liabilities		19,842,168			(25,441	)		—			(25,441	)		19,816,727

Total liabilities		261,182,991			3,445,471			—			3,445,471			264,628,462

Equity
Capital stock		2,645,053			—			—			—			2,645,053
Other equity instrument		238,582			—			—			—			238,582
Capital surplus		9,886,849			—			—			—			9,886,849
Capital adjustments		(392,654	)		—			—			—			(392,654	)
Accumulated other comprehensive income		1,188,948			2,452			(158,620	)		(156,168	)		1,032,780
Retained earnings		10,829,723			58,135			158,620			216,755			11,046,478
Total equity attributable to equity holders of Shinhan Financial Group Co., Ltd.		24,396,501			60,587			—			60,587			24,457,088
Non-controlling interests		2,462,304			—			—			—			2,462,304

Total equity		26,858,805			60,587			—			60,587			26,919,392

Total liabilities and equity	￦	288,041,796			3,506,058			—			3,506,058			291,547,854

F-16

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013


	December 31, 2012
	As previously reported		Adjustments
	As previously reported		IFRS 10			IAS 19		Sub-total			As restated
Assets
Cash and due from banks	￦	13,394,331		112,918			—		112,918			13,507,249
Trading assets		14,018,894		2,635,361			—		2,635,361			16,654,255
Financial assets designated at fair value through profit or loss		2,585,111		(42,778	)		—		(42,778	)		2,542,333
Derivative assets		2,164,852		5,913			—		5,913			2,170,765
Loans, net		199,655,732		632,904			—		632,904			200,288,636
Available-for-sale financial assets		36,328,429		(44,511	)		—		(44,511	)		36,283,918
Held-to-maturity financial assets		11,659,215		467			—		467			11,659,682
Property and equipment, net		3,046,686		61,771			—		61,771			3,108,457
Intangible assets, net		4,190,776		4,720			—		4,720			4,195,496
Investments in associates		298,518		—			—		—			298,518
Current tax receivable		14,128		—			—		—			14,128
Deferred tax assets		95,970		3,994			—		3,994			99,964
Investment properties, net		246,970		531,535			—		531,535			778,505
Other assets, net		13,094,465		188,442			—		188,442			13,282,907
Assets held for sale		54,412		—			—		—			54,412

Total assets		300,848,489		4,090,736			—		4,090,736			304,939,225

Liabilities
Deposits		170,096,454		3,199,248			—		3,199,248			173,295,702
Trading liabilities		1,370,723		—			—		—			1,370,723
Financial liabilities designated at fair value through profit or loss		4,822,197		—			—		—			4,822,197
Derivative liabilities		1,904,044		—			—		—			1,904,044
Borrowings		18,891,378		626,662			—		626,662			19,518,040
Debt securities issued		38,840,175		(1,708	)		—		(1,708	)		38,838,467
Liability for defined benefit obligations		214,068		8,265			—		8,265			222,333

F-17

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013


	December 31, 2012
	As previously reported			Adjustments								As restated
	As previously reported			IFRS 10		IAS 19			Sub-total			As restated
Provisions		746,846			1,039		—			1,039			747,885
Current tax payable		252,283			1,241		—			1,241			253,524
Deferred tax liabilities		19,890			21,856		—			21,856			41,746
Liabilities under insurance contracts		13,418,559			—		—			—			13,418,559
Other liabilities		21,492,049			100,812		—			100,812			21,592,861

Total liabilities		272,068,666			3,957,415		—			3,957,415			276,026,081

Equity
Capital stock		2,645,053			—		—			—			2,645,053
Other equity instrument		537,443			—		—			—			537,443
Capital surplus		9,887,199			—		—			—			9,887,199
Capital adjustments		(393,097	)		—		—			—			(393,097	)
Accumulated other comprehensive income		1,134,820			5,059		(159,758	)		(154,699	)		980,121
Retained earnings		12,499,259			56,155		159,758			215,913			12,715,172
Total equity attributable to equity holders of Shinhan Financial Group Co., Ltd.		26,310,677			61,214		—			61,214			26,371,891
Non-controlling interests		2,469,146			72,107		—			72,107			2,541,253

Total equity		28,779,823			133,321		—			133,321			28,913,144

Total liabilities and equity	￦	300,848,489			4,090,736		—			4,090,736			304,939,225

F-18

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

The following table summarizes the adjustments made to the Group’s consolidated statements of comprehensive income for the year ended December 31, 2011 and 2012.


	2011
	As previously reported			IAS 19			As restated
Interest income	￦	13,780,714			—			13,780,714
Interest expense		(6,700,743	)		—			(6,700,743	)

Net interest income		7,079,971			—			7,079,971

Fees and commission income		3,557,132			—			3,557,132
Fees and commission expense		(1,797,961	)		—			(1,797,961	)

Net fees and commission income		1,759,171			—			1,759,171

Net insurance loss		(119,201	)		—			(119,201	)
Dividend income		208,860			—			208,860
Net trading income (loss)		(131,848	)		—			(131,848	)
Net foreign currency transaction gain		13,874			—			13,874
Net gain (loss) on financial instruments designated at fair value through profit or loss		171,911			—			171,911
Net gain on sale of available-for-sale financial assets		846,345			—			846,345
Impairment losses on financial assets		(982,958	)		—			(982,958	)
General and administrative expenses		(4,135,357	)		151,229			(3,984,128	)
Net other operating expenses		(538,382	)		—			(538,382	)

Operating income		4,172,386			151,229			4,323,615

Equity in income of associates		57,790			—			57,790
Other non-operating income (loss), net		(37,614	)		—			(37,614	)

Income before income taxes		4,192,562			—			4,343,791
Income tax expense		(919,929	)		(36,651	)		(956,580	)

Net income for the year		3,272,633			114,578			3,387,211

Other comprehensive income (loss) for the year, net of income tax
Items that are or may be reclassified to profit or loss :
Foreign currency translation adjustments for foreign operations		16,120			—			16,120

F-19

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013


	2011
	As previously reported			IAS 19			As restated
Net change in unrealized fair value of available-for-sale financial assets		(460,437	)		—			(460,437	)
Equity in other comprehensive income of associates		2,717			—			2,717
Net change in unrealized fair value of cash flow hedges		1,429			—			1,429
Other comprehensive income (loss) of separate account		(579	)		—			(579	)

		(440,750	)		—			(440,750	)

Items that will never be reclassified to profit or loss :
Remeasurements of the defined benefit liability		—			(114,578	)		(114,578	)

Total other comprehensive loss, net of income tax		(440,750	)		(114,578	)		(555,328	)

Total comprehensive income for the year		2,831,883			—			2,831,883

Net income attributable to:
Equity holders of Shinhan Financial Group Co., Ltd.		3,100,011			114,113			3,214,124
Non-controlling interest		172,622			465			173,087

		3,272,633			114,578			3,387,211

Total comprehensive income attributable to:
Equity holders of Shinhan Financial Group Co., Ltd.		2,659,464			—			2,659,464
Non-controlling interest		172,419			—			172,419

		2,831,883			—			2,831,883

Earnings per share:
Basic earnings per share in won	￦	5,954			241			6,195

Diluted earnings per share in won	￦	5,832			233			6,065

F-20

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013


	2012
	As previously reported			Adjustments
	As previously reported			IFRS 10			IAS 19			Sub-total			As restated
Interest income	￦	13,857,112			140,997			—			140,997			13,998,109
Interest expense		(6,882,901	)		(135,490	)		—			(135,490	)		(7,018,391	)

Net interest income		6,974,211			5,507			—			5,507			6,979,718

Fees and commission income		3,513,839			(22,735	)		—			(22,735	)		3,491,104
Fees and commission expense		(1,941,748	)		(6,211	)		—			(6,211	)		(1,947,959	)

Net fees and commission income		1,572,091			(28,946	)		—			(28,946	)		1,543,145

Net insurance loss		(209,303	)		—			—			—			(209,303	)
Dividend income		175,783			(1,458	)		—			(1,458	)		174,325
Net trading income (loss)		595,866			11,995			—			11,995			607,861
Net foreign currency transaction gain		280,028			—			—			—			280,028
Net gain (loss) on financial instruments designated at fair value through profit or loss		(532,070	)		—			—			—			(532,070	)
Net gain on sale of available-for-sale financial assets		536,581			(1,003	)		—			(1,003	)		535,578
Impairment losses on financial assets		(1,415,794	)		(426	)		—			(426	)		(1,416,220	)
General and administrative expenses		(4,059,560	)		(1,780	)		(236	)		(2,016	)		(4,061,576	)
Net other operating expenses		(723,881	)		362			—			362			(723,519	)

Operating income		3,193,952			(15,749	)		(236	)		(15,985	)		3,177,967

Equity in income of associates		27,538			—			—			—			27,538
Other non-operating income (loss), net		11,522			13,609			—			13,609			25,131

Income before income taxes		3,233,012			(2,140	)		(236	)		(2,376	)		3,230,636
Income tax expense		(738,944	)		160			57			217			(738,727	)

Net income for the year		2,494,068			(1,980	)		(179	)		(2,159	)		2,491,909

Other comprehensive income (loss) for the year, net of income tax
Items that are or may be reclassified to profit or loss :
Foreign currency translation adjustments for foreign operations		(85,343	)		426			—			426			(84,917	)
Net change in unrealized fair value of available-for-sale financial assets		11,260			2,181			—			2,181			13,441
Equity in other comprehensive income of associates		4,097			—			—			—			4,097
Net change in unrealized fair value of cash flow hedges		15,655			—			—			—			15,655
Other comprehensive income (loss) of separate account		570			—			—			—			570

		(53,761	)		2,607			—			2,607			(51,154	)

F-21

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013


	2012
	As previously reported			Adjustments
	As previously reported			IFRS 10			IAS 19			Sub-total			As restated
Items that will never be reclassified to profit or loss :
Remeasurements of the defined benefit liability		—			—			179			179			179

Total other comprehensive loss, net of income tax		(53,761	)		2,607			179			2,786			(50,975	)

Total comprehensive income for the year		2,440,307			627			—			627			2,440,934

Net income attributable to:
Equity holders of Shinhan Financial Group Co., Ltd.		2,322,732			(1,980	)		1,138			(842	)		2,321,890
Non-controlling interest		171,336			—			(1,317	)		(1,317	)		170,019

		2,494,068			(1,980	)		(179	)		(2,159	)		2,491,909

Total comprehensive income attributable to:
Equity holders of Shinhan Financial Group Co., Ltd.		2,268,604			627			—			627			2,269,231
Non-controlling interest		171,703			—			—			—			171,703

		2,440,307			627			—			627			2,440,934

Earnings per share:
Basic and diluted earnings per share in won	￦	4,686			(2	)		—			(2	)		4,684

Cash and cash equivalents as of January 1, 2012 were increased by ￦13,303 million. And cash flows from financing activities for the year ended December 31, 2012 were increased by ￦355,138 million, and cash flows from operating activities and investing activities were decreased by ￦9,584 million and ￦316,818 million respectively. As a result, cash and cash equivalents as of December 31, 2012 were increased by ￦42,039 million.

Additionally, there was no impact on the net cash flows from operating activities, investing and financing activities for the year ended December 31, 2011.

F-22

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(i) IFRS 10, Consolidated Financial Statements

The Group re-assessed the control conclusion for its investees as of January 1, 2013. As a consequence, the Group changed its control relationship with its investees as below.


Newly included subsidiaries		Reason
Everdigm Corp.		The practical ability to direct the relevant activities

Guaranteed principal money trusts		The Group is exposed, or has rights, to variable returns from its involvement with the guaranteed principal money trusts and has the ability to affect those returns through its power over these investees. Accordingly, they are newly consolidated. Prior to the adoption of IFRS 10, they had not been consolidated since the Group had not held the majority of the benefits or the residual risk.

(ii) Amendments to IFRS 11, Joint Arrangements

As a result of the adoption of IFRS 11, the Group has changed its accounting policy with respect to its interests in joint arrangements.

Under IFRS 11, the Group classifies its interests in joint arrangements as either joint operations or joint ventures depending on the Group’s rights to the assets and obligations for the liabilities of the arrangements. When making this assessment, the Group considers the structure of the arrangements, the legal form of any separate vehicles, the contractual terms of the arrangements and other facts and circumstances. Previously, the structure of the arrangement was the sole focus of classification.

The Group has re-evaluated its involvement in its only joint arrangement and has reclassified the investment from jointly controlled entity to joint venture. Notwithstanding the reclassification, the investment continues to be recognized by applying the equity method and there has been no impact on the recognized assets, liabilities and comprehensive income of the Group.

(iii) Amendments to IAS 19, Employee Benefits

As a result of the application the amendments to IAS 19, the Group has restated the comparative financial information for the prior periods, retrospectively.

(g) Approval of the consolidated financial statements

The consolidated financial statements were approved by the Board of Directors on February 11, 2014, which were approved by the shareholders’ meeting which was held on March 26, 2014.

3.	Significant accounting policies

The significant accounting policies applied by the Group in preparation of its consolidated financial statements are included below. The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, unless otherwise indicated.

(a) Operating segments

An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the

F-23

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

Group’s other components. All operating segments’ operating results are reviewed regularly by the Group’s CEO to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available.

Segment results that are reported to the CEO include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. The Group has reportable segments which consist of banking, credit card, securities, life insurance, others, as described in note 7.

(b) Basis of consolidation

i) Subsidiaries

Subsidiaries are investees controlled by the Group. The Group controls an investee if it is exposed to, or has rights to, variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date when control ceases.

If a member of the Group uses accounting policies other than those adopted in the consolidated financial statements for the same transactions and events in similar circumstances, appropriate adjustments are made to its financial statements in preparing the consolidated financial statements.

ii) Structured entity

The Group establishes or invests in various structured entities. A structured entity is an entity designed so that its activities are not governed by way of voting rights. When assessing control of a structured entity, the Group considers factors such as the purpose and the design of the investee; its practical ability to direct the relevant activities of the investee; the nature of its relationship with the investee; and the size of its exposure to the variability of returns of the investee. The Group does not recognize any non-controlling interests in the consolidated statements of financial position since the Group’s interests in these entities are recognized as liabilities of the Group.

iii) Intra-group transactions

Intra-group balances and transactions, and any unrealized income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Intra-group losses are recognized as expense if intra-group losses indicate an impairment that requires recognition in the consolidated financial statements.

iv) Non-controlling interests

Non-controlling interests in a subsidiary are accounted for separately from the parent’s ownership interests in a subsidiary. Each component of net profit or loss and other comprehensive income is attributed to the owners of the parent and non-controlling interest holders, even when the allocation reduces the non-controlling interest balance below zero.

(c) Business combinations

i) Business combinations

A business combination is accounted for by applying the acquisition method, unless it is a combination involving entities or businesses under common control.

F-24

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

Each identifiable asset and liability is measured at its acquisition-date fair value except for below:

•

Leases and insurance contracts are required to be classified on the basis of the contractual terms and other factors

•

Only those contingent liabilities assumed in a business combination that are a present obligation and can be measured reliably are recognized

•

Deferred tax assets or liabilities are recognized and measured in accordance with IAS 12 Income Taxes

•

Employee benefit arrangements are recognized and measured in accordance with IAS 19 Employee Benefits

•

Indemnification assets are recognized and measured on the same basis as the indemnified liability or asset

•

Reacquired rights are measured on the basis of the remaining contractual terms of the related contract

•

Liabilities or equity instruments related to share-based payment transactions are measured in accordance with the method in IFRS 2 Share-based Payment

•

Assets held for sale are measured at fair value less costs to sell in accordance with IFRS 5 Non-current Assets Held for Sale

As of the acquisition date, non-controlling interests in the acquiree are measured as the non-controlling interests’ proportionate share of the acquiree’s identifiable net assets.

The consideration transferred in a business combination shall be measured at fair value, which shall be calculated as the sum of the acquisition-date fair values of the assets transferred by the acquirer, the liabilities incurred by the acquirer to former owners of the acquiree and the equity interests issued by the acquirer. However, any portion of the acquirer’s share-based payment awards exchanged for awards held by the acquiree’s employees that are included in consideration transferred in the business combination shall be measured in accordance with the method described above rather than at fair value.

Acquisition-related costs are costs the acquirer incurs to effect a business combination. Those costs include finder’s fees; advisory, legal, accounting, valuation and other professional or consulting fees; general administrative costs, including the costs of maintaining an internal acquisitions department; and costs of registering and issuing debt and equity securities. Acquisition-related costs, other than those associated with the issue of debt or equity securities, are expensed in the periods in which the costs are incurred and the services are received. The costs to issue debt or equity securities are recognized in accordance with IAS 32 Financial Instruments: Presentation and IAS 39 Financial Instruments: Recognition and Measurement.

ii) Goodwill

The Group measures goodwill at the acquisition date as:

•

the fair value of the consideration transferred; plus

•

the recognized amount of any non-controlling interests in the acquiree; plus

•

if the business combination is achieved in stages, the fair value of the pre-existing equity interest in the acquiree; less

•

the net recognized amount (generally fair value) of the identifiable assets acquired and liabilities assumed.

When the excess is negative, bargain purchase gain is recognized immediately in profit or loss.

F-25

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

When the Group additionally acquires non-controlling interest, the group does not recognize goodwill since the transaction is regarded as equity transaction.

(d) Investments in associates and joint ventures

An associate is an entity in which the Group has significant influence, but not control, over the entity’s financial and operating policies. Significant influence is presumed to exist when the Group holds between 20 and 50 percent of the voting power of another entity or when another entity is classified as a subsidiary by the Banking act since the Group holds more than 15% of the voting power of another entity.

A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.

The investment in an associate and a joint venture is initially recognized at cost, and the carrying amount is increased or decreased to recognize the Group’s share of the profit or loss and changes in equity of the associate and the joint venture after the date of acquisition. Intra-group balances and transactions, and any unrealized income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Intra-group losses are recognized as expense if intra-group losses indicate an impairment that requires recognition in the consolidated financial statements.

If an associate or a joint venture uses accounting policies different from those of the Group for like transactions and events in similar circumstances, appropriate adjustments are made to its financial statements in applying the equity method.

When the Group’s share of losses exceeds its interest in an equity accounted investee, the carrying amount of that interest, including any long-term investments, is reduced to nil and the recognition of further losses is discontinued except to the extent that the Group has an obligation or has to make payments on behalf of the investee for further losses.

(e) Cash and cash equivalents

Cash and cash equivalents comprise cash balances and call deposits with maturities of three months or less from the acquisition date that are subject to an insignificant risk of changes in their fair value, and are used by the Group in the management of its short-term commitments.

(f) Non-derivative financial assets

The Group recognizes and measures non-derivative financial assets by the following four categories: financial assets at fair value through profit or loss, held-to-maturity investments, loans and receivables and available-for-sale financial assets. The Group recognizes financial assets in the consolidated statement of financial position when the Group becomes a party to the contractual provisions of the instrument.

Upon initial recognition, non-derivative financial assets are measured at their fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the asset’s acquisition or issuance.

i) Financial assets at fair value through profit or loss

A financial asset is classified as at fair value through profit or loss if it is held for trading or is designated at fair value through profit or loss. Upon initial recognition, transaction costs are recognized in profit or loss when incurred. Financial assets at fair value through profit or loss are measured at fair value, and changes therein are recognized in profit or loss.

F-26

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

A financial asset other than a financial asset held for trading may be designated as at FVTPL upon initial recognition if:

•

such designation eliminates or significantly reduces a recognition or measurement inconsistency that would otherwise arise; or

•

the financial asset forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group’s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or

•

it forms part of a contract containing one or more embedded derivatives that would be required to be separated from the host contract.

ii) Held-to-maturity financial assets

A non-derivative financial asset with a fixed or determinable payment and fixed maturity, for which the Group has the positive intention and ability to hold to maturity, are classified as held-to-maturity investments. Subsequent to initial recognition, held-to-maturity investments are measured at amortized cost using the effective interest method.

iii) Loans and receivables

Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Subsequent to initial recognition, loans and receivables are measured at amortized cost using the effective interest method.

iv) Available-for-sale financial assets

Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale or are not classified as financial assets at fair value through profit or loss, held-to-maturity investments or loans and receivables. Subsequent to initial recognition, they are measured at fair value, which changes in fair value, net of any tax effect, recorded in other comprehensive income in equity. Investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured and derivatives that are linked to and must be settled by delivery of such unquoted equity instruments are measured at cost.

v) Derecognition of financial assets

The Group derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognized as a separate asset or liability.

If the Group retains substantially all the risks and rewards of ownership of the transferred financial assets, the Group continues to recognize the transferred financial assets and recognizes financial liabilities for the consideration received.

vi) Offsetting

Financial assets and financial liabilities are offset and the net amount is presented in the consolidated statement of financial position only when the Group currently has a legally enforceable right to offset the recognized amounts, and there is the intention to settle on a net basis or to realize the asset and settle the liability simultaneously.

F-27

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(g) Derivative financial instruments including hedge accounting

Derivative financial instruments are classified as either trading or hedging if they qualify for hedge accounting. Derivatives are initially recognized at fair value at the date the derivative contract is entered into and are subsequently remeasured to their fair value at the end of each reporting period. The resulting gain or loss is recognized in profit or loss immediately unless the derivative is designated and effective as a hedging instrument.

i) Hedge accounting

The Group holds forward exchange contracts, interest rate swaps, currency swaps and other derivative contracts to manage interest rate risk and foreign exchange risk. The Group designated derivatives as hedging instruments to hedge the risk of changes in the fair value of assets, liabilities or firm commitments (a fair value hedge) and foreign currency risk of highly probable forecasted transactions or firm commitments (a cash flow hedge).

On initial designation of the hedge, the Group formally documents the relationship between the hedging instrument(s) and hedged item(s), including the risk management objectives and strategy in undertaking the hedge transaction, together with the methods that will be used to assess the effectiveness of the hedging relationship.

Fair value hedge

Changes in the fair value of a derivative hedging instrument designated as a fair value hedge are recognized in profit or loss. The gain or loss from remeasuring the hedging instrument at fair value for a derivative hedging instrument and the gain or loss on the hedged item attributable to the hedged risk are recognized in profit or loss in the same line item of the consolidated statement of comprehensive income.

The Group discontinues fair value hedge accounting if the hedging instrument expires or is sold, terminated or exercised, or if the hedge no longer meets the criteria for hedge accounting. Any adjustment arising from gain or loss on the hedged item attributable to the hedged risk is amortized to profit or loss from the date the hedge accounting is discontinued.

Cash flow hedge

When a derivative is designated to hedge the variability in cash flows attributable to a particular risk associated with a recognized asset or liability or a highly probable forecasted transaction that could affect profit or loss, the effective portion of changes in the fair value of the derivative is recognized in other comprehensive income, net of tax, and presented in the hedging reserve in equity. Any ineffective portion of changes in the fair value of the derivative is recognized immediately in profit or loss.

If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated, exercised, or the designation is revoked, then hedge accounting is discontinued prospectively. The cumulative gain or loss on the hedging instrument that has been recognized in other comprehensive income is reclassified to profit or loss in the periods during which the forecasted transaction occurs. If the forecasted transaction is no longer expected to occur, then the balance in other comprehensive income is recognized immediately in profit or loss.

Hedge of net investment

Foreign currency differences arising on the retranslation of a financial liability designated as a hedge of a net investment in a foreign operation are recognized in other comprehensive income to the extent that the hedge is effective. To the extent that the hedge is ineffective, such differences are recognized in profit or loss. When the hedged part of a net investment is disposed of, the relevant amount in the accumulated other comprehensive income is transferred to profit or loss as part of the profit or loss on disposal in accordance with IAS 21 The Effects of Changes in Foreign Exchange Rates.

F-28

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

ii) Separable embedded derivatives

Embedded derivatives are separated from the host contract and accounted for separately only if the following criteria has been met: (a) the economic characteristics and risks of the embedded derivative are not closely related to those of the host contract; (b) a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and (c) the hybrid instrument is not measured at fair value with changes in fair value recognized in profit or loss. Changes in the fair value of separable embedded derivatives are recognized immediately in profit or loss.

iii) Other derivative financial instruments

Changes in the fair value of other derivative financial instrument not designated as a hedging instrument are recognized immediately in profit or loss.

iv) Unobservable valuation differences at initial recognition

Any difference between the fair value of over the counter derivatives at initial recognition and the amount that would be determined at that date using a valuation technique in a situation in which the valuation is dependent on unobservable parameters is not recognized in profit or loss but is recognized on a straight-line basis over the life of the instrument or immediately when the fair value becomes observable.

(h) Impairment of financial assets

A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably. However, losses expected as a result of future events, regardless of likelihood, are not recognized.

In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment.

If financial assets have objective evidence that they are impaired, impairment losses should be measured and recognized.

Objective evidence that a financial asset or group of assets is impaired includes observable data that comes to the attention of the holder of the asset about the following loss events:

•

significant financial difficulty of the issuer or obligor

•

a breach of contract, such as a default or delinquency in interest or principal payments;

•

the lender, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider

•

it becoming probable that the borrower will enter bankruptcy or other financial reorganization

•

the disappearance of an active market for that financial asset because of financial difficulties

•

observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the group.

F-29

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

i) Loans and receivables

The Group first assesses whether objective evidence of impairment exists individually for loans and receivables that are individually significant, and individually or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment.

If the interest rate of a loan or receivable is a floating rate, the discount rate used to evaluate impairment loss is the current effective interest rate defined in the loan agreement. The present value of estimated future cash flows of secured financial assets is calculated by including cash flows from collateral after deducting costs to acquire and sell the collateral, regardless of the probability of realization of such collateral.

In assessing collective impairment , the Group rates and classifies financial assets, based on credit risk assessment or credit rating assessment process that takes into account asset type, industry, regional location, collateral type, delinquency and other relative factors.

Future cash flow of financial assets applicable to collective impairment assessment is estimated by using statistical modeling of historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management’s judgment as to whether current economic and credit conditions are such that the impairment losses are likely to be greater or less than suggested by historical modeling. In adjusting the future cash flow by historical modeling, the result has to be in line with changes and trends of observable data. Methodologies and assumptions used to estimate future cash flow are evaluated on a regular basis in order to reduce any discrepancy between impairment loss estimation and actual loss.

ii) Available-for-sale financial assets

When a decline in the fair value of an available-for-sale financial asset has been recognized in other comprehensive income and there is objective evidence that the asset is impaired, the cumulative loss that had been recognized in other comprehensive income is reclassified from equity to profit or loss as a reclassification adjustment even though the financial asset has not been derecognized. Impairment losses recognized in profit or loss for an investment in an equity instrument classified as available-for-sale are not reversed through profit or loss. If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss is recognized in profit or loss, the impairment loss is reversed, with the amount of the reversal recognized in profit or loss.

iii) Held-to-maturity financial assets

F-30

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

at the asset’s original effective interest rate and is recognized in profit or loss. Interest on the impaired asset continues to be recognized through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss.

(i) Property and equipment

Property and equipment are initially measured at cost and after initial recognition, are carried at cost less accumulated depreciation and accumulated impairment losses. The cost of property and equipment includes expenditures arising directly from the construction or acquisition of the asset, any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management and the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located.

Items of property and equipment are measured at cost less accumulated depreciation and accumulated impairment losses.

The cost of replacing a part of an item of property or equipment is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Group and its cost can be measured reliably. The carrying amount of the replaced cost is derecognized. The cost of the day to day servicing of property and equipment are recognized in profit or loss as incurred.

Property and equipment are depreciated on a straight-line basis over the estimated useful lives, which most closely reflect the expected pattern of consumption of the future economic benefits embodied in the asset. Leased assets under finance lease are depreciated over the shorter of the lease term and their useful lives.

Gains and losses on disposal of an item of property and equipment are determined by comparing the proceeds from disposal with the carrying amount of property and equipment and are recognized in profit or loss.

The estimated useful lives for the current and comparative years are as follows:


Descriptions	Depreciation method	Useful lives
Buildings	Straight-line	40 years
Other properties	Straight-line	4~5 years

Depreciation methods, useful lives and residual value are reassessed at each fiscal year-end and any adjustment is accounted for as a change in accounting estimate.

(j) Intangible assets

Intangible assets are measured initially at cost and, subsequently, are carried at cost less accumulated amortization and accumulated impairment losses.

Amortization of intangible assets except for goodwill is calculated on a straight-line basis over the estimated useful lives of intangible assets from the date that they are available for use. The residual value of intangible assets is zero. However, as there are no foreseeable limits to the periods over which club memberships are expected to be available for use, this intangible asset is determined as having indefinite useful lives and not amortized.


Descriptions		Useful lives
Software, capitalized development cost		5 years
Other intangible assets		5 years or contract periods

Amortization periods and the amortization methods for intangible assets with finite useful lives are reviewed at the end of each reporting period. The useful lives of intangible assets that are not being amortized are reviewed

F-31

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

at the end of each reporting period to determine whether events and circumstances continue to support indefinite useful life assessments for those assets. Changes are accounted for as changes in accounting estimates.

i) Research and development

Expenditures on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, are recognized in profit or loss as incurred. Development expenditures are capitalized only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and the Group intends to and has sufficient resources to complete development and to use or sell the asset. Other development expenditures are recognized in profit or loss as incurred.

ii) Subsequent expenditures

Subsequent expenditures are capitalized only when they increase the future economic benefits embodied in the specific asset to which it relates. All other expenditures, including expenditures on internally generated goodwill and brands, are recognized in profit or loss as incurred.

(k) Investment property

Property held for the purpose of earning rentals or benefiting from capital appreciation is classified as investment property. Investment property is measured initially at its cost. Transaction costs are included in the initial measurement. Subsequently, investment property is carried at depreciated cost less any accumulated impairment losses.

The estimated useful lives for the current and comparative years are as follows:


Descriptions	Depreciation method	Useful lives
Buildings	Straight-line	40 years

(l) Leased assets

i) Classification of a lease

The Group classifies and accounts for leases as either a finance or operating lease, depending on the terms. Leases where the lessee assumes substantially all of the risks and rewards of ownership are classified as finance leases. All other leases are classified as operating leases.

ii) Lessee

Under an operating lease, the lessee recognizes the lease payments as expense over the lease term and does not recognize the leased asset in its statement of financial position.

iii) Lessor

F-32

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

Under an operating lease, the lessor recognizes the lease payments as income over the lease term and the leased asset in its statement of financial position.

(m) Assets held for sale

Non-current assets, or disposal groups comprising assets and liabilities, that are expected to be recovered primarily through sale rather than through continuing use, are classified as held for sale. In order to be classified as held for sale, the asset (or disposal group) must be available for immediate sale in its present condition and its sale must be highly probable. The assets or disposal group that are classified as non-current assets held for sale are measured at the lower of their carrying amount and fair value less cost to sell.

The Group recognizes an impairment loss for any initial or subsequent write-down of an asset (or disposal group) to fair value less costs to sell, and a gain for any subsequent increase in fair value less costs to sell, up to the cumulative impairment loss previously recognized in accordance with IAS 36 Impairment of Assets.

An asset that is classified as held for sale or part of a disposal group classified as held for sale is not depreciated (or amortized).

(n) Impairment of non-financial assets

The carrying amounts of the Group’s non-financial assets, other than assets arising from employee benefits, deferred tax assets and assets held for sale, are reviewed at the end of the reporting period to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. Goodwill and intangible assets that have indefinite useful lives or that are not yet available for use, irrespective of whether there is any indication of impairment, are tested for impairment annually by comparing their recoverable amount to their carrying amount.

The Group estimates the recoverable amount of an individual asset. If it is impossible to measure the individual recoverable amount of an asset, then the Group estimates the recoverable amount of cash-generating unit (“CGU”). A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. The value in use is estimated by applying a pre-tax discount rate that reflect current market assessments of the time value of money and the risks specific to the asset or CGU for which estimated future cash flows have not been adjusted, to the estimated future cash flows expected to be generated by the asset or CGU.

An impairment loss is recognized if the carrying amount of an asset or a CGU exceeds its recoverable amount. Impairment losses are recognized in profit or loss.

Goodwill acquired in a business combination is allocated to each CGU that is expected to benefit from the synergies arising from the goodwill acquired. Any impairment identified at the CGU level will first reduce the carrying value of goodwill and then be used to reduce the carrying amount of the other assets in the CGU on a pro rata basis. Except for impairment losses in respect of goodwill which are never reversed, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.

(o) Non-derivative financial liabilities

The Group classifies non-derivative financial liabilities into financial liabilities at fair value through profit or loss or other financial liabilities in accordance with the substance of the contractual arrangement and the definitions of financial liabilities. The Group recognizes financial liabilities in the consolidated statement of financial position when the Group becomes a party to the contractual provisions of the financial liability.

F-33

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

i) Financial liabilities at fair value through profit or loss

Financial liabilities at fair value through profit or loss include financial liabilities held for trading or designated as such upon initial recognition. Subsequent to initial recognition, financial liabilities at fair value through profit or loss are measured at fair value, and changes therein are recognized in profit or loss. Upon initial recognition, transaction costs that are directly attributable to the acquisition are recognized in profit or loss as incurred.

The criteria for designation of financial liabilities at FVTPL upon initial recognition are the same as those of financial assets at FVTPL.

ii) Other financial liabilities

Non-derivative financial liabilities other than financial liabilities at fair value through profit or loss are classified as other financial liabilities. At the date of initial recognition, other financial liabilities are measured at fair value minus transaction costs that are directly attributable to the acquisition. Subsequent to initial recognition, other financial liabilities are measured at amortized cost using the effective interest method.

The Group derecognizes a financial liability from the consolidated statement of financial position when it is extinguished (i.e. when the obligation specified in the contract is discharged, cancelled or expires).

(p) Foreign currency

i) Foreign currency transactions

Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortized cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortized cost in foreign currency translated at the exchange rate at the end of the reporting period. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value is determined.

Foreign currency differences arising on translation are recognized in profit or loss, except for differences arising on the translation of available-for-sale equity instruments, a financial liability designated as a hedge of the net investment in a foreign operation (see iii) below), or in a qualifying cash flow hedge, which are recognized in other comprehensive income. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction.

ii) Foreign operations

If the presentation currency of the Group is different from a foreign operation’s functional currency, the financial statements of the foreign operation are translated into the presentation currency using the following methods:

The assets and liabilities of foreign operations, whose functional currency is not the currency of a hyperinflationary economy, are translated to presentation currency at exchange rates at the reporting date. The income and expenses of foreign operations are translated to functional currency at exchange rates at the dates of the transactions. Foreign currency differences are recognized in other comprehensive income.

Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of that foreign operation is treated as assets and liabilities of the foreign operation. Thus they are expressed in the functional currency of the foreign operation and translated at the closing rate.

F-34

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

Foreign exchange gains or losses arising from a monetary item receivable from or payable to a foreign operation, the settlement of which is neither planned nor likely to occur in the foreseeable future and which in substance is considered to form part of the net investment in the foreign operation, are recognized in other comprehensive income in the translation reserve.

iii) Hedge of net investment in foreign operations

The Group applies hedge accounting to foreign currency differences arising between the functional currency of the foreign operations and the parent entity’s functional currency (Korean won), regardless of whether the net investment is held directly or through an intermediate parent.

(q) Equity

i) Capital stock

Ordinary shares are classified as equity. Incremental costs directly attributable to the issuance of ordinary shares and share options are recognized as a deduction from equity, net of any tax effects.

Preference share capital is classified as equity if it is non-redeemable, or redeemable only at the Group’s option, and any dividends are discretionary. Dividends thereon are recognized as distributions within equity upon approval by the Group’s shareholders.

ii) Hybrid bonds

The Group classifies issued financial instruments, or their component parts, as a financial liability or an equity instrument depending on the substance of the contractual arrangement of such financial instruments. Hybrid bonds where the Group has an unconditional right to avoid delivering cash or another financial asset to settle a contractual obligation are classified as equity instruments and presented in equity.

iii) Capital adjustments

Changes in ownership interests in a subsidiary that do not result in a loss of control, such as the subsequent purchase or sale by a parent of a subsidiary’s equity instruments, are accounted for as equity transactions in capital adjustments.

F-35

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(r) Employee benefits

i) Short-term employee benefits

Short-term employee benefits are employee benefits that are due to be settled within 12 months after the end of the period in which the employees render the related service. When an employee has rendered service to the Group during an accounting period, the Group recognizes the undiscounted amount of short-term employee benefits expected to be paid in exchange for that service.

ii) Other long-term employee benefits

Other long-term employee benefits include employee benefits that are settled beyond 12 months after the end of the period in which the employees render the related service, and are calculated at the present value of the amount of future benefit that employees have earned in return for their service in the current and prior periods, less the fair value of any related assets. The present value is determined by discounting the expected future cash flows using the interest rate of corporate bonds that have maturity dates approximating the terms of the Group’s obligations and that are denominated in the same currency in which the benefits are expected to be paid. Any actuarial gains and losses are recognized in profit or loss in the period in which they arise.

iii) Retirement benefits: defined contribution plans

When an employee has rendered service to the Group during a period, the Group recognizes the contribution payable to a defined contribution plan in exchange for that service as a liability (accrued expense), after deducting any contribution already paid. If the contribution already paid exceeds the contribution due for service before the end of the reporting period, the Group recognizes that excess as an asset (prepaid expense) to the extent that the prepayment will lead to a reduction in future payments or a cash refund.

iv) Retirement benefits: defined benefit plans

A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. The Group’s net obligation in respect of defined benefit plans is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value. The fair value of plan assets is deducted. The calculation is performed annually by an independent actuary using the projected unit credit method.

Remeasurements of the net defined benefit liability, which comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognized immediately in other comprehensive income. The Group determines the net interest expense (income) on the net defined benefit liability (asset) for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the then-net defined benefit liability (asset), taking into account any changes in the net defined benefit liability (asset) during the period as a result of contributions and benefit payments. Net interest expense and other expenses related to defined benefit plans are recognized in personnel expenses in profit or loss.

The discount rate is the yield at the reporting date on high-quality corporate bonds that have maturity dates approximating the terms of the Group’s obligations and that are denominated in the same currency in which the benefits are expected to be paid. The Group recognizes service cost and net interest on the net defined benefit liability (asset) in profit or loss and remeasurements of the net defined benefit liability (asset) in other comprehensive income.

When the benefits of a plan are changed or when a plan is curtailed, the resulting change in benefit that relates to past service or the gain or loss on curtailment is recognized immediately in profit or loss. The Group recognizes gains and losses on the settlement of a defined benefit plan when the settlement occurs.

F-36

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

v) Termination benefits

Termination benefits are recognized as an expense when the Group is committed demonstrably, without realistic possibility of withdrawal, to a formal detailed plan to either terminate employment before the normal retirement date, or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits for voluntary redundancies are recognized as an expense if the Group has made an offer of voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably. If benefits are payable more than 12 months after the reporting period, then they are discounted to their present value.

(s) Share-based payment transactions

(t) Provisions

A provision is recognized if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation.

The risks and uncertainties that inevitably surround many events and circumstances are taken into account in reaching the best estimate of a provision. Where the effect of the time value of money is material, provisions are determined at the present value of the expected future cash flows.

Provision shall be used only for expenditures for which the provision was originally recognized.

(u) Financial guarantee contract

A financial guarantee contract is a contract that requires the issuer (the Group) to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due in accordance with the original or modified terms of a debt instrument.

Financial guarantee contracts are initially measured at their fair values and, if not designated as at fair value through profit or loss, are subsequently measured at the higher of:

•

The amount determined in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets and

F-37

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

•

The initial amount recognized, less, when appropriate, cumulative amortization recognized in accordance with IAS 18 Revenue

(v) Insurance contracts

Insurance contracts are defined as “a contract under which one party (the insurer) accepts significant insurance risk from another party by agreeing to compensate the policyholder if a specified uncertain future event adversely affects the policyholder”. A contract that qualifies as an insurance contract remains an insurance contract until all rights and obligations are extinguished or expire. Such a contract that does not contain significant insurance risk is classified as an investment contract and is within the scope of IAS 39 Financial Instruments:Recognition and Measurement to the extent that it gives rise to a financial asset or financial liability, except if the investment contract contains a Discretionary Participation Features (“DPF”). If the contract has a DPF, the contract is subject to IFRS 4 Insurance Contracts.

i) Reserves for insurance contracts

The Group accounts for insurance contracts based on the Insurance Business Law and other related Insurance Supervisory Regulation. These insurance contracts are calculated based on insurance terms, premium and policy reserves approved by the Financial Supervisory Commission, as follows:

Premium reserve

Provision is made for premium payable based on assumptions that all policies are surrendered immediately after fiscal year.

Guarantee reserve

At the end of reporting period, the Group is required to make reserve on the outstanding insurance contracts to guarantee a certain level of claims for the amount equals to the average amount of net losses of the worst 30% cases forecasted by scenarios or the standard reserve amount by insurance type and the lowest insured amount, whichever is greater.

Unearned premium reserve

Unearned premium reserve refers to premium for subsequent years but collected before the reporting date.

Reserve for outstanding claims

Reserve for outstanding claims is an estimate of losses for insured events that have occurred prior to the reporting date but the corresponding actual claims have not yet been settled or determined.

Reserve for participating policyholders’ dividends

Reserve for participating policyholder’s dividends are recorded to account for the difference in actual investment yields, mortality rates or morbidity rates and operating expense rates from the initial rates in each policy payable to participating policyholders. In addition, it includes a reserve for long-term maintenance dividends to discourage cancellations.

Reserve for losses on dividend insurance contract

In accordance with the Regulation on Supervision of Insurance Business, the Group accumulates reserve for losses of participating insurance contract within 30/100 of policyholders’ share in dividend-paying insurance income. A reserve for compensation for losses on dividend-paying insurance contracts accumulated shall be used

F-38

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

for replenishing the losses of the participating insurance contract, and the balance after the replenishment shall be used as for the source of policyholders’ dividend for individual policyholders, for five fiscal years from the end of the fiscal year when the accumulation is made.

ii) Policyholders’ equity adjustment

At year end, unrealized holding gains and losses on available-for-sale securities are allocated to policyholders’ equity adjustment by the ratio of the average policy reserve of the participating and non-participating contracts or the ratio of the investment source at the new acquisition year based on the date of acquisition.

iii) Liability adequacy test (the “LAT”)

Liability adequacy tests are performed by the Group in order to ensure the adequacy of the contract liabilities, net of related deferred acquisition costs and deferred policyholders’ participation liability or asset

iv) Reinsurance contracts

Transactions relating to reinsurance assumed and ceded are accounted for in the consolidated statements of financial position and comprehensive income in a similar way to direct business transactions provided that these contracts meet the insurance contracts classification requirements and in agreement with contractual clauses.

v) Deferred acquisition costs (the “DAC”)

Policy acquisition costs, which include commissions, certain underwriting and agency expenses associated with acquiring insurance policies, are deferred and amortized using the straight-line method over the contract year, up to seven years. Actual acquisition costs incurred in excess of estimated acquisition costs are expensed.

(w) Financial income and expense

i) Interest

Interest income and expense are recognized in profit or loss using the effective interest method. The effective interest rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability (or, where appropriate, a shorter year) to the carrying amount of the financial asset or liability. When calculating the effective interest rate, the Group estimates future cash flows considering all contractual terms of the financial instrument, but not future credit losses.

ii) Fees and commission

Fees and commission income and expense that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate.

Fees and commission income, including account servicing fees, investment management fees, sales commission, placement fees and syndication fees, are recognized as the related services are performed. When a loan commitment is not expected to result in the draw-down of a loan, the related loan commitment fees are recognized on a straight-line basis over the commitment period.

F-39

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

Fees and commission expense relate mainly to transaction and service fees, which are expensed as the services are received.

iii) Dividends

Dividend income is recognized when the right to receive income is established.

(x) Customer loyalty program

A provision for onerous contracts is recognized when the expected benefits to be derived by the Group from customer loyalty programs are lower than the unavoidable cost of meeting its obligations under the programs.

(y) Income tax

i) Current tax

Current tax is the expected tax payable or receivable on the taxable profit or loss for the year, using tax rates enacted or substantively enacted at the end of the reporting period and any adjustment to tax payable in respect of previous years. The taxable profit is different from the accounting profit for the period since the taxable profit is calculated excluding the temporary differences, which will be taxable or deductible in determining taxable profit (tax loss) of future periods, and non-taxable or non-deductible items from the accounting profit.

ii) Deferred tax

Deferred tax is recognized, using the asset-liability method, in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. A deferred tax liability is recognized for all taxable temporary differences. A deferred tax asset is recognized for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which they can be utilized. However, deferred tax is not recognized for the following temporary differences: taxable temporary differences arising on the initial recognition of goodwill, or the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting profit or loss nor taxable income.

The Group files its national income tax return with the Korean tax authorities under the consolidated corporate tax system, which allows it to make national income tax payments based on the combined profits or losses of the Controlling Company and its wholly owned domestic subsidiaries. Deferred taxes are measured based on the future tax benefits expected to be realized in consideration of the expected combined profits or losses of eligible companies in accordance with the consolidated corporate tax system. Consolidated corporate tax amounts, once determined, are allocated to each of the subsidiaries and are used as a basis for the income taxes to be recorded in their separate financial statements.

F-40

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

The Group recognizes a deferred tax liability for all taxable temporary differences associated with investments in subsidiaries, associates, and interests in joint ventures, except to the extent that the Group is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The Group recognizes a deferred tax asset for all deductible temporary differences arising from investments in subsidiaries and associates, to the extent that it is probable that the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilized.

The carrying amount of a deferred tax asset is reviewed at the end of each reporting period and reduces the carrying amount to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilized.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and deferred tax assets reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting period to recover or settle the carrying amount of its assets and liabilities.

Deferred tax assets and liabilities are offset only if there is a legally enforceable right to offset the related current tax liabilities and assets, and they relate to income taxes levied by the same tax authority and they intend to settle current tax liabilities and assets on a net basis.

(z) Accounting for trust accounts

The Group accounts for trust accounts separately from its group accounts under the Financial Investment Services and Capital Markets Act and thus the trust accounts are not included in the accompanying consolidated financial statements. Borrowings from trust accounts are included in other liabilities. Trust fees and commissions in relation to the service provided to trust accounts by the Group are recognized as fees and commissions income.

(aa) Earnings per share

The Group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Group by the weighted average number of ordinary shares outstanding during the period, adjusted for own shares held. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding, adjusted for own shares held, for the effects of all dilutive potential ordinary shares, which comprise convertible notes and share options granted to employees.

(ab) New standards and interpretations not yet adopted

The following new standards, interpretations and amendments to existing standards have been published and are mandatory for the Group for annual periods beginning after January 1, 2014, and the Group has not early adopted them.

i) Amendments to IAS 32 Financial Instruments: Presentation

The amendments clarified the application guidance related to ‘offsetting a financial asset and a financial liability’. The amendment is mandatorily effective for periods beginning on or after January 1, 2014 with earlier application permitted. The amendments are not expected to have a material effect on the Group’s financial statements.

F-41

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

ii) IFRS 9 Financial Instruments (2013), IFRS 9 Financial Instruments (2010) and IFRS 9 Financial Instruments (2009) (together, IFRS 9)

IFRS 9 (2009) introduces new requirements for the classification and measurement of financial assets. IFRS 9 (2010) introduces additions relating to financial liabilities. IFRS 9 (2013) introduces new requirements for hedge accounting. The IASB currently has an active project to make limited amendments to the classification and measurement requirements of IFRS 9 and add new requirements to address the impairment of financial assets.

The IFRS 9 (2009) requirements represent a significant change from the existing requirements in IAS 39 in respect of financial assets. The standard contains two primary measurement categories for financial assets: amortized cost and fair value. A financial asset would be measured at amortized cost if it is held within a business model whose objective is to hold assets in order to collect contractual cash flows, and the asset’s contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal outstanding. All other financial assets would be measured at fair value. The standard eliminates the existing IAS 39 categories of held-to-maturity, available-for-sale and loans and receivables. For an investment in an equity instrument that is not held for trading, the standard permits an irrevocable election, on initial recognition, on an individual share-by-share basis, to present all fair value changes from the investment in OCI. No amount recognized in OCI would ever be reclassified to profit or loss at a later date. However, dividends on such investments would be recognized in profit or loss, rather than OCI, unless they clearly represent a partial recovery of the cost of the investment. Investments in equity instruments in respect of which an entity does not elect to present fair value changes in OCI would be measured at fair value with changes in fair value recognized in profit or loss.

The standard requires derivatives embedded in contracts with a host that is a financial asset in the scope of the standard not to be separated; instead, the hybrid financial instrument is assessed in its entirety for whether it should be measured at amortized cost or fair value.

IFRS 9 (2010) introduces a new requirement in respect of financial liabilities designated under the fair value option to generally present fair value changes that are attributable to the liability’s credit risk in OCI rather than in profit or loss. Apart from this change, IFRS 9 (2010) largely carries forward without substantive amendment the guidance on classification and measurement of financial liabilities from IAS 39.

IFRS 9 (2013) introduces new requirements for hedge accounting that align hedge accounting more closely with risk management. The requirements also establish a more principles-based approach to hedge accounting and address inconsistencies and weaknesses in the hedge accounting model in IAS 39.

The mandatory effective date of IFRS 9 is not specified but will be determined when the outstanding phases are finalized. However, application of IFRS 9 is permitted.

The Group has started the process of evaluating the potential effect of this standard but is awaiting finalization of the limited amendments before the evaluation can be completed. Given the nature of the Group’s operations, this standard is expected to have a significant impact on the Group’s financial statements.

4.	Financial risk management

(a) Overview

As a financial services provider, the Group is exposed to various risks relating to lending, credit card, insurance, securities investment, trading and leasing businesses, its deposit taking and borrowing activities in addition to the operating environment.

The principal risks to which the Group is exposed are credit risk, market risk, interest rate risk, liquidity risk and operational risk. These risks are recognized, measured and reported in accordance with risk management guidelines established at the controlling company level and implemented at the subsidiary level through a carefully stratified checks-and-balances system.

F-42

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

i) Risk management principles

The Group risk management is guided by the following core principles:

•

identifying and managing all inherent risks;

•

standardizing risk management process and methodology;

•

ensuring supervision and control of risk management independent of business activities;

•

continuously assessing risk preference;

•

preventing risk concentration;

•

operating a precise and comprehensive risk management system including statistical models; and

•

balancing profitability and risk management through risk-adjusted profit management.

ii) Risk management organization

The Group risk management system is organized along the following hierarchy: from the top and at the controlling company level, the Group Risk Management Committee, the Group Risk Management Council, the Chief Risk Officer and the Group Risk Management Team, and at the subsidiary level, the Risk Management Committees and the Risk Management Team of the relevant subsidiary. The Group Risk Management Committee, which is under the supervision of the controlling company’s board of directors, sets the basic group wide risk management policies and strategies. The controlling company’s Chief Risk Officer reports to the Group Risk Management Committee, and the Group Risk Management Council, whose members consist of the controlling company’s Chief Risk Officer and the risk management team heads of each of subsidiaries, coordinates the risk management policies and strategies at the group level as well as at the subsidiary level among each of subsidiaries. Each of subsidiaries also has a separate Risk Management Committee, Risk Management Working Committee and Risk Management Team, whose tasks are to implement the group wide risk management policies and strategies at the subsidiary level as well as to set risk management policies and strategies specific to such subsidiary in line with the group wide guidelines. The Group also has the Group Risk Management Team, which supports the controlling company’s Chief Risk Officer in his or her risk management and supervisory role.

In order to maintain the group wide risk at an appropriate level, the Group use a hierarchical risk limit system under which the Group Risk Management Committee assigns reasonable risk limits for the entire group and each of subsidiaries, and the Risk Management Committee and the Management Council of each of subsidiaries manage the subsidiary-specific risks by establishing and managing risk limits in more detail by type of risk and type of product for each department and division within such subsidiary.

The Group Risk Management Committee consists of directors of the controlling company. The Group Risk Management Committee convenes at least once every quarter and may also convene on an ad hoc basis as needed. Specifically, the Group Risk Management Committee does the following: (i) establish the overall risk management policies consistent with management strategies, (ii) set reasonable risk limits for the entire group and each of subsidiaries, (iii) approve appropriate investment limits or allowed loss limits, (iv) enact and amends risk management regulations, and (v) decide other risk management-related issues the Board of directors or the Group Risk Management Committee sees fit to discuss. The results of the Group Risk Management Committee meetings are reported to the Board of Directors of the controlling company. The Group Risk Management Committee makes decisions through affirmative votes by a majority of the committee members.

F-43

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

The Group Risk Management Council is comprised of the controlling company’s chief risk officer, head of risk management team, and risk officers from each subsidiary. The Group Risk Management Council holds meetings for risk management executives from each subsidiary to discuss the Group’s group wide risk management guidelines and strategy in order to maintain consistency in the group wide risk policies and strategies

iii) Risk management framework

The Group takes the following steps to implement the foregoing risk management principles:

•

Risk capital management — Risk capital refers to capital necessary to compensate for losses in case of a potential risk being realized, and risk capital management refers to the process of asset management based on considerations of risk exposure and risk appetite among total assets so that the Group can maintain an appropriate level of risk capital. As part of the Group’s risk capital management, the Group has adopted and maintains various risk planning processes and reflect such risk planning in the Group’s business and financial planning. The Group also has adopted and maintains a risk limit management system to ensure that risks in the Group’s business do not exceed prescribed limits.

•

Risk monitoring — The Group are currently installing a multidimensional risk monitoring system under which the Group will, on a periodic basis, proactively and preemptively review risks that may impact the Group’s overall operations. Currently, each of subsidiaries is required to report to the controlling company any factors that could have a material impact on the groupwide risk management, and the controlling company reports to the Group’s chief risk officer and other members of the Group’s senior management the results of risk monitoring on a weekly, monthly and continual basis. In addition, the Group perform preemptive risk management through a “risk dashboard system” under which the Group closely monitor any increase in asset size, risk levels and sensitivity to external factors with respect to the major asset portfolios of each of subsidiaries, and to the extent such monitoring yields any warning signals, the Group promptly analyze the causes and, if necessary, formulate and implement actions in response to these warning signals.

•

Risk review — Prior to entering any new business, offering any new products or changing any major policies, the Group review any relevant risk factors based on a prescribed risk management checklist and, in the case of changes for which assessment of risk factors is difficult, promote reasonable decision-making in order to avoid taking any unduly risky action. The risk management departments of all subsidiaries are required to review all new businesses, products and services prior to their launch and closely monitor the development of any related risks following their launch, and in the case of any action that involves more than one subsidiary, the relevant risk management departments are required to consult with the risk management team at the controlling company level prior to making any independent risk reviews.

•

Risk management — The Group maintain a group wide risk management system to detect the early warnings signals of any crisis and, in the event of a crisis actually happening, to respond on a timely, efficient and flexible basis so as to ensure the Group’s survival as a going concern. Each subsidiary maintains crisis planning for three levels of contingencies, namely, “alert”, “imminent crisis” and “crisis”, determination of which is made based on quantitative and qualitative monitoring and consequence analysis, and upon the happening of any such contingency, is required to respond according to a prescribed contingency plan. At the controlling company level, the Group maintains and installs crisis detection and response system which is applied consistently group wide, and upon the happening of any contingency at two or more subsidiary level, the Group directly takes charge of the situation so that the Group manages it on a concerted group wide basis.

F-44

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(b) Credit risk

i) Credit risk management

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s receivables from customers and investment securities. The Group’s credit risk management encompasses all areas of credit that may result in potential economic loss, including not just transactions that are recorded on balance sheets, but also off-balance-sheet transactions such as guarantees, loan commitments and derivatives transactions.

Credit Risk Management of Shinhan Bank

Major policies for Shinhan Bank’s credit risk management, including Shinhan Bank’s overall credit risk management plan and credit policy guidelines, are determined by the Risk Policy Committee of Shinhan Bank, the executive decision-making body for management of credit risk. The Risk Policy Committee is headed by the Chief Risk Officer, and also comprises of the Chief Credit Officer, the heads of each business unit and the head of the Risk Management Department. In order to separate the loan approval functions from credit policy decision-making, Shinhan Bank has a Credit Review Committee that performs credit review evaluations, which focus on improving the asset quality and profitability from the loans being made, and operates separately from the Risk Policy Committee.

•

credit evaluation and approval;

•

credit review and monitoring; and

•

credit risk assessment and control.

Each of Shinhan Bank’s borrowers is assigned a credit rating, which is based on a comprehensive internal credit evaluation system that considers a variety of criteria. For retail borrowers, the credit rating takes into account the borrower’s past dealings with Shinhan Bank and external credit rating information, among others. For corporate borrowers, the credit rating takes into account financial indicators as well as non-financial indicators such as industry risk, operational risk and management risk, among others. The credit rating, once assigned, serves as the fundamental instrument in Shinhan Bank’s credit risk management, and is applied in a wide range of credit risk management processes, including credit approval, credit limit management, loan pricing and computation of allowance for loan losses. Shinhan Bank has separate credit evaluation systems for retail customers, SOHO customers and corporate customers, which are further segmented and refined to meet Basel III requirements.

Loans are generally approved after evaluations and approvals by the manager at the branch level as well as the committee of the applicable business unit at Shinhan Bank . The approval limit for retail loans is made based on Shinhan Bank’s automated credit scoring system. In the case of large corporate loans, approval limits are also reviewed and approved by a Credit Officer at the headquarter level. Depending on the size and the importance of the loan, the approval process is further reviewed by the Credit Officer Committee or the Master Credit Officer Committee. If the loan is considered, further evaluation is made by the Credit Review Committee, which is Shinhan Bank’s highest decision-making body in relation to credit approval.

Pursuant to the foregoing credit review and monitoring procedures and in order to promptly prevent deterioration of loan qualities, Shinhan Bank classifies potentially problematic borrowers into (i) borrowers that show early warning signals, (ii) borrowers that require close monitoring and (iii) normal borrowers, and treats them differentially accordingly.

F-45

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

In order to maintain portfolio-level credit risk at an appropriate level, Shinhan Bank manages its loans using value-at-risk (“VaR”) limits for the entire bank as well as for each of its business units. In order to prevent concentration of risk in a particular borrower or borrower class, Shinhan Bank also manages credit risk by borrower, industry, country and other detailed categories.

Credit Risk Management of Shinhan Card

Major policies for Shinhan Card’s credit risk management are determined by Shinhan Card’s Risk Management Council and Shinhan Card’s Risk Management Committee is responsible for approving them. Shinhan Card’s Risk Management Council is headed by the Chief Risk Officer, and also comprises of the heads of each business unit, supporting unit and relevant department at Shinhan Card. In order to separate credit policy decision-making from credit evaluation functions, Shinhan Card also has a Risk Management Committee, which evaluates applications for corporate loans exceeding a certain amount and other loans deemed important. Shinhan Card uses an automated credit scoring system to approve credit card applications or credit card authorizations. The credit scoring system is divided into two sub-systems: the application scoring system and the behavior scoring system. The behavior scoring system is based largely on the credit history, and the application scoring system is based largely on personal information of the applicant. For credit card applicants with whom the Group has an existing relationship, Shinhan Card’s credit scoring system considers internally gathered information such as repayment ability, total assets, the length of the existing relationship and the applicant’s contribution to profitability. The credit scoring system also automatically conducts credit checks on all credit card applicants.

Shinhan Card continually monitors all accountholders and accounts using a behavior scoring system. The behavior scoring system predicts a cardholder’s payment pattern by evaluating the cardholder’s credit history, card usage and amounts, payment status and other relevant data. The behavior score is recalculated each month and is used to manage the accounts and approval of additional loans and other products to the cardholder. Shinhan Card also uses the scoring system to monitor its overall risk exposure and to modify its credit risk management strategy.

F-46

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

ii) Maximum exposure to credit risk

The Group’s maximum exposure to credit risk without taking account of any collateral held or other credit enhancements as of December 31, 2012 and 2013 are as follows:


	2012 (restated)		2013
Due from banks and loans (1)(6)	￦	210,798,802		219,551,119
Banks		11,126,070		14,392,195
Retail		82,924,709		85,959,631
Government		7,597,140		9,296,770
Corporate		92,082,186		92,920,898
Card receivable		17,068,697		16,981,625
Trading assets		14,277,000		15,339,949
Financial assets designated at FVTPL(*3)		1,325,646		1,890,919
AFS financial assets(*4)		31,371,415		28,581,427
HTM financial assets(*5)		11,659,682		11,031,307
Derivative assets		2,170,765		1,717,468
Other financial assets (1)(2)		9,563,182		8,603,430
Financial guarantee contracts		2,895,878		2,457,712
Loan commitments and other liabilities for credit		72,383,708		74,824,310

	￦	356,446,078		363,997,641

(*1)	The maximum exposure amounts for due from banks, loans and other financial assets are recorded as net of allowances.

(*2)	Comprise of account receivables, accrued income, guarantee deposits, domestic exchange settlement debit and suspense payments, etc.

(*3)	FVTPL : fair value through profit or loss

(*4)	AFS : available-for-sale

(*5)	HTM : held-to-maturity

(*6)	Due from banks and loans were classified as similar credit risk group in calculating equity capital ratio under New Basel Capital Accord (Basel III).

F-47

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

iii) Due from banks and loans by past due or impairment

Due from banks and loans as of December 31, 2012 and 2013 are as follows:


	2012 (restated)
	Banks			Retail			Government			Corporate			Card			Total
Neither past due nor impaired	￦	11,133,952			82,394,657			7,600,456			91,602,154			16,539,121			209,270,340
Past due but not impaired		116			438,505			378			496,409			739,736			1,675,144
Impaired		—			478,247			—			1,646,130			533,902			2,658,279

		11,134,068			83,311,409			7,600,834			93,744,693			17,812,759			213,603,763
Less : allowance		(7,998	)		(386,700	)		(3,694	)		(1,662,507	)		(744,062	)		(2,804,961	)

	￦	11,126,070			82,924,709			7,597,140			92,082,186			17,068,697			210,798,802


	2013
	Banks			Retail			Government			Corporate			Card			Total
Neither past due nor impaired	￦	14,406,019			85,460,776			9,301,890			92,298,605			16,634,186			218,101,476
Past due but not impaired		—			505,408			197			492,877			552,954			1,551,436
Impaired		—			273,316			—			1,670,702			442,301			2,386,319

		14,406,019			86,239,500			9,302,087			94,462,184			17,629,441			222,039,231
Less : allowance		(13,824	)		(279,869	)		(5,317	)		(1,541,286	)		(647,816	)		(2,488,112	)

	￦	14,392,195			85,959,631			9,296,770			92,920,898			16,981,625			219,551,119

Credit quality of due from banks and loans, net of allowance, that are neither past due nor impaired as of December 31, 2012 and 2013 are as follows:


	2012 (restated)
	Banks			Retail			Government			Corporate			Card			Total
Grade 1 (*1)	￦	11,133,866			79,418,399			7,597,923			54,675,569			15,186,242			168,011,999
Grade 2 (*1)		86			2,976,258			2,533			36,926,585			1,352,879			41,258,341

		11,133,952			82,394,657			7,600,456			91,602,154			16,539,121			209,270,340
Less : allowance		(7,998	)		(141,664	)		(3,690	)		(1,070,722	)		(321,865	)		(1,545,939	)

	￦	11,125,954			82,252,993			7,596,766			90,531,432			16,217,256			207,724,401

Mitigation of credit risk due to collateral (*2)	￦	124,104			55,043,349			388			41,733,524			5,529			96,906,894

F-48

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)


	2013
	Banks			Retail			Government			Corporate			Card			Total
Grade 1 (*1)	￦	14,406,019			79,598,552			9,300,931			55,623,367			14,186,554			173,115,423
Grade 2 (*1)		—			5,862,224			959			36,675,238			2,447,632			44,986,053

		14,406,019			85,460,776			9,301,890			92,298,605			16,634,186			218,101,476
Less : allowance		(13,823	)		(141,374	)		(5,315	)		(722,229	)		(322,158	)		(1,204,899	)

	￦	14,392,196			85,319,402			9,296,575			91,576,376			16,312,028			216,896,577

Mitigation of credit risk due to collateral (*2)	￦	124,204			58,302,024			408			47,932,602			5,058			106,364,296

(*1)	Credit quality of due from banks and loans was classified based on the internal credit rating.

(*2)

The Group holds collateral against due from banks and loans to customers in the form of mortgage interests over property, other registered securities over assets, and guarantees. Estimates of quantification of the extent to which collateral mitigate credit risk are based on the fair value of collateral.

Aging analyses of due from banks and loans, net of allowance, that are past due but not impaired as of December 31, 2012 and 2013 are as follows:


	2012 (restated)
	Banks		Retail			Government			Corporate			Card			Total
Less than 30 days	￦	116		351,806			378			360,946			636,595			1,349,841
31~60 days		—		53,263			—			59,230			65,267			177,760
61~90 days		—		32,021			—			58,400			37,874			128,295
More than 90 days		—		1,415			—			17,833			—			19,248

		116		438,505			378			496,409			739,736			1,675,144
Less : allowance		—		(20,078	)		(3	)		(25,601	)		(93,680	)		(139,362	)

	￦	116		418,427			375			470,808			646,056			1,535,782

Mitigation of credit risk due to collateral (*)	￦	—		266,454			44			271,123			22			537,643

F-49

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)


	2013
	Banks		Retail			Government			Corporate			Card			Total
Less than 30 days	￦	—		424,331			197			414,958			471,146			1,310,632
31~60 days		—		49,189			—			37,930			56,589			143,708
61~90 days		—		29,396			—			24,079			25,204			78,679
More than 90 days		—		2,492			—			15,910			15			18,417

		—		505,408			197			492,877			552,954			1,551,436
Less : allowance		—		(24,199	)		(2	)		(25,682	)		(78,484	)		(128,367	)

	￦	—		481,209			195			467,195			474,470			1,423,069

Mitigation of credit risk due to collateral (*)	￦	—		341,937			44			275,010			59			617,050

(*)

Mitigation of credit risk due to the collateral of impaired due from banks and loans, net of allowance, as of December 31, 2012 and 2013 are as follows:


	2012 (restated)
	Banks		Retail			Government		Corporate			Card			Total
Impaired loans	￦	—		478,247			—		1,646,130			533,902			2,658,279
Less : allowance		—		(224,957	)		—		(566,184	)		(328,519	)		(1,119,660	)

	￦	—		253,290			—		1,079,946			205,383			1,538,619

Mitigation of credit risk due to collateral (*)	￦	—		124,546			—		606,059			6			730,611


	2013
	Banks		Retail			Government		Corporate			Card			Total
Impaired loans	￦	—		273,316			—		1,670,702			442,301			2,386,319
Less : allowance		—		(114,296	)		—		(793,377	)		(247,174	)		(1,154,847	)

	￦	—		159,020			—		877,325			195,127			1,231,472

Mitigation of credit risk due to collateral (*)	￦	—		104,993			—		583,160			25			688,178

(*)

F-50

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

iv) Credit rating

Credit rating of debt securities as of December 31, 2012 and 2013 are as follows:


	2012 (restated)
	Trading assets		Financial assets designated at fair value through profit or loss		Available–for- sale financial assets		Held-to- maturity financial assets		Total
AAA	￦	4,376,337		177,567		19,868,860		9,594,512		34,017,276
AA- to AA+		4,601,391		131,845		5,923,292		1,411,353		12,067,881
A- to A+		3,376,639		527,359		3,175,284		293,422		7,372,704
BBB- to BBB+		1,243,112		350,891		1,419,647		19		3,013,669
Lower than BBB-		62,542		—		246,909		26,337		335,788
Unrated		179,051		137,984		737,423		334,039		1,388,497

	￦	13,839,072		1,325,646		31,371,415		11,659,682		58,195,815


	2013
	Trading assets		Financial assets designated at fair value through profit or loss		Available–for- sale financial assets		Held-to- maturity financial assets		Total
AAA	￦	4,264,959		181,842		16,055,970		7,954,950		28,457,721
AA- to AA+		5,807,978		253,736		6,566,924		2,577,316		15,205,954
A- to A+		4,051,365		866,705		3,548,370		341,974		8,808,414
BBB- to BBB+		553,614		460,788		1,303,271		19		2,317,692
Lower than BBB-		271,603		—		419,464		23,305		714,372
Unrated		314,093		127,848		687,428		133,743		1,263,112

	￦	15,263,612		1,890,919		28,581,427		11,031,307		56,767,265

The credit qualities of securities (debt securities) according to the credit ratings by external rating agencies are as follows:


	*KIS (1)**	*KR (2)**	S&P	Fitch	Moody’s
AAA	—	—	AAA	AAA	Aaa
AA- to AA+	AAA	AAA	AA- to AA+	AA- to AA+	Aa3 to Aa1
A- to A+	AA- to AA+	AA- to AA+	A- to A+	A- to A+	A3 to A1
BBB- to BBB+	BBB- to A	BBB- to A	BBB-to BBB+	BBB-to BBB+	Baa3 to Baa1
Lower than BBB-	Lower than BBB-	Lower than BBB-	Lower than BBB-	Lower than BBB-	Lower than Baa3
Unrated	Unrated	Unrated	Unrated	Unrated	Unrated

(*1)	KIS : Korea Investors Service

(*2)	KR : Korea Ratings

F-51

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

Credit status of debt securities as of December 31, 2012 and 2013 are as follows:


	2012 (restated)		2013
Neither past due nor impaired	￦	58,164,862		56,759,666
Impaired		30,952		7,599

	￦	58,195,814		56,767,265

Assets acquired through foreclosures amounting to ￦9,977 million and ￦6,074 million were classified as assets held for sale (non-business purpose property) as of December 31, 2012 and 2013, respectively.

v) Concentration by geographic location

An analysis of concentration by geographic location for due from financial instrument, net of allowance, as of December 31, 2012 and 2013 are as follows:


		2012 (restated)
		Korea		USA		Japan		Vietnam		China		Other		Total
Due from banks and loans	Banks	￦	7,631,544		538,588		142,839		104,819		1,112,010		1,596,270		11,126,070
	Retail		82,409,529		246,815		43,919		9,062		13,693		201,691		82,924,709
	Government		7,042,917		221,413		226,426		50,827		617		54,940		7,597,140
	Corporate		85,746,150		1,043,872		1,252,544		681,755		1,275,962		2,081,903		92,082,186
	Card		17,051,936		5,812		1,793		1,145		2,266		5,745		17,068,697

			199,882,076		2,056,500		1,667,521		847,608		2,404,548		3,940,549		210,798,802

Trading assets			13,830,184		—		1,127		—		—		445,689		14,277,000
Financial assets designated at FVTPL(*1)			1,322,056		—		—		—		—		3,590		1,325,646
AFS financial assets(*2)			30,771,099		264,487		—		218,275		—		117,554		31,371,415
HTM financial assets(*3)			11,525,398		1,210		62,629		19,609		—		50,836		11,659,682

		￦	257,330,813		2,322,197		1,731,277		1,085,492		2,404,548		4,558,218		269,432,545

F-52

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)


		2013
		Korea		USA		Japan		Vietnam		China		Other		Total
Due from banks and loans	Banks	￦	7,437,875		1,302,191		203,670		99,266		2,975,472		2,373,721		14,392,195
	Retail		85,220,722		230,881		226,899		30,824		23,792		226,513		85,959,631
	Government		8,824,682		222,567		141,928		39,176		936		67,481		9,296,770
	Corporate		84,444,327		1,271,063		1,640,463		935,723		1,892,867		2,736,455		92,920,898
	Card		16,961,645		6,302		2,008		2,320		3,413		5,937		16,981,625

			202,889,251		3,033,004		2,214,968		1,107,309		4,896,480		5,410,107		219,551,119

Trading assets			15,249,072		1,477		—		—		—		89,400		15,339,949
Financial assets designated at FVTPL(*1)			1,887,358		—		—		—		—		3,561		1,890,919
AFS financial assets(*2)			27,482,775		582,395		—		373,060		5,106		138,091		28,581,427
HTM financial assets(*3)			10,829,152		64,451		50,408		10,450		63,991		12,855		11,031,307

		￦	258,337,608		3,681,327		2,265,376		1,490,819		4,965,577		5,654,014		276,394,721

(*1)	FVTPL : fair value through profit or loss

(*2)	AFS : available-for-sale

(*3)	HTM : held-to-maturity

vi) Concentration by industry sector

An analysis of concentration by industry sector of due from banks and loans, net of allowance, as of December 31, 2012 and 2013 are as follows:


		2012 (restated)
		Finance and insurance		Manu- facturing		Retail and wholesale		Real estate and service		Other		Retail customers		Total
Due from banks and loans	Banks	￦	10,090,348		—		—		120,696		915,026		—		11,126,070
	Retail		—		—		—		—		—		82,924,709		82,924,709
	Government		7,304,220		6		132		39		292,743		—		7,597,140
	Corporate		3,078,782		32,595,013		11,630,765		16,625,570		28,152,056		—		92,082,186
	Card		46,493		127,504		140,127		25,846		610,321		16,118,406		17,068,697

			20,519,843		32,722,523		11,771,024		16,772,151		29,970,146		99,043,115		210,798,802

Trading assets			9,204,943		1,185,807		532,840		1,189,942		2,163,468		—		14,277,000
Financial assets designated at FVTPL(*1)			817,997		112,852		10,371		123,632		260,794		—		1,325,646
AFS financial assets(*2)			20,369,556		1,193,095		229,618		1,040,793		8,538,353		—		31,371,415
HTM financial assets(*3)			3,803,177		10,005		—		694,149		7,152,351		—		11,659,682

		￦	54,715,516		35,224,282		12,543,853		19,820,667		48,085,112		99,043,115		269,432,545

F-53

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)


		2013
		Finance and insurance		Manu- facturing		Retail and wholesale		Real estate and service		Other		Retail customers		Total
Due from banks and loans	Banks	￦	12,280,508		—		—		114,037		1,997,650		—		14,392,195
	Retail		—		—		—		—		—		85,959,631		85,959,631
	Government		8,979,578		—		125		51		317,016		—		9,296,770
	Corporate		3,120,088		32,099,156		12,912,762		16,244,112		28,544,780		—		92,920,898
	Card		49,173		149,566		129,553		27,929		489,201		16,136,203		16,981,625

			24,429,347		32,248,722		13,042,440		16,386,129		31,348,647		102,095,834		219,551,119

Trading assets			10,563,868		1,009,708		329,326		795,317		2,641,730		—		15,339,949
Financial assets designated at FVTPL(*1)			1,253,602		110,074		20,243		60,810		446,190		—		1,890,919
AFS financial assets(*2)			19,328,390		1,288,842		215,759		892,194		6,856,242		—		28,581,427
HTM financial assets(*3)			3,144,309		36,961		—		589,116		7,260,921		—		11,031,307

		￦	58,719,516		34,694,307		13,607,768		18,723,566		48,553,730		102,095,834		276,394,721

(*1)	FVTPL : fair value through profit or loss

(*2)	AFS : available-for-sale

(*3)	HTM : held-to-maturity

(c) Market risk

Market risk from trading positions is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Group’s income or the value of its holdings of financial instruments.

Interest rate risk from non-trading positions is the risk of loss resulting from interest rate fluctuations that adversely affect the financial condition and results of operations of the Group and affects the earnings and the economic value of net assets of the Group.

Foreign exchange risk arises because of the Group’s assets and liabilities which are denominated in currencies other than the Won.

The Group’s market risks arise primarily from Shinhan Bank, and to a lesser extent, Shinhan Investment, which incurs market risk relating to its trading activities.

Shinhan Bank’s Risk Policy Committee, acts as the executive decision making body in relation to market risks in terms of setting the risk management policies and risk limits in relation to market risks and assets and controlling market risks arising from trading and non-trading activities. In addition, Shinhan Bank’s Risk Management Department comprehensively manages market risks on an independent basis from Shinhan Bank’s operating departments, and functions as the middle office of Shinhan Bank.

Shinhan Investment’s Risk Management Working Committee is the executive decision-making body for managing market risks related to Shinhan Investment, and determines, among other things, Shinhan Investment’s overall market risk management policies and strategies, and assesses and approves trading activities and limits. In addition, Shinhan Investment’s Risk Management Department manages various market risk limits and monitors operating conditions on an independent basis from Shinhan Investment’s operating departments.

F-54

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

i) Market risk management from trading positions

Trading activities are to realize short-term trading profits in debt and stock markets and foreign exchange markets based on short-term forecast of changes in market situation and profits from arbitrage transactions in derivatives such as swap, forward, futures and option transactions. The Group manages market risk related to its trading positions using VaR, market value-based tool.

Shinhan Bank currently uses the ten-day 99% confidence level-based VaR for purposes of calculating the regulatory capital used in reporting to the Financial Supervisory Service and uses the more conservative ten-day 99.9% confidence level-based VaR for purposes of calculating its “economic” capital used for internal management purposes, which is a concept used in determining the amount of Shinhan Bank’s requisite capital in light of the market risk. In addition, Shinhan Bank also uses the one-day 99% confidence level-based VaR on a supplemental basis for purposes of setting and managing risk limits specific to each desk or team in its operating units as well as for back-testing purposes. Shinhan Bank manages VaR measurements and limits on a daily basis based on an automatic interfacing of its trading positions into its market risk measurement system. In addition, Shinhan Bank establishes pre-set loss, sensitivity, investment and stress limits for its trading departments and desks and monitors such limits daily.

Shinhan Investment currently uses the ten-day 99.9% confidence level-based historical VaR for purposes of calculating its “economic” capital used for internal management purposes. When computing the VAR, Shinhan Investment does not assume any particular probability distribution and calculates it through a simulation of the “full valuation” method based on changes of market variables such as stock prices, interest rates, and foreign exchange rates in the past one year.

In addition, Shinhan Investment applies this VaR as a risk limit for the entire company as well as individual departments and products, and the adequacy of such VaR is reviewed by way of daily back-testing.

In order to streamline such differences and use a consistent VaR among operating subsidiaries, the Group has adopted starting in 2013 a unified group-wide market risk measurement methodology, which uses the ten-day 99.9% confidence level for calculating the VaR.

An analysis of the Group’s requisite capital in light of the market risk for trading positions as of and for the years ended December 31, 2012 and 2013 based on the standard guidelines for risk management promulgated by the Financial Supervisory Service, was as follows:


	2012
	Average		Maximum		Minimum		At December 31
Interest rate	￦	189,958		203,740		176,840		182,318
Equities		63,419		74,694		55,241		74,694
Foreign exchange		114,537		117,037		112,022		113,434
Option volatility		4,602		5,801		3,828		4,594

	￦	372,516		401,272		347,931		375,040


	2013
	Average		Maximum		Minimum		At December 31
Interest rate	￦	195,496		210,229		185,555		200,557
Equities		75,107		85,345		66,493		85,345
Foreign exchange		128,086		137,491		121,200		122,205
Option volatility		6,631		7,506		4,941		7,324

	￦	405,320		440,571		378,189		415,431

F-55

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

Insurance company, Shinhan life insurance, was excluded when the Group estimated the market risk, because insurance company was not included in the Group’s subsidiaries for the consolidated BIS capital ratio.

An analysis of market risk for trading positions of the major subsidiaries as of and for the years ended December 31, 2012 and 2013 are as follows:

i-1) Shinhan Bank

An analysis of the ten-day 99% confidence level-based VaR for managing market risk for trading positions of Shinhan Bank as of and for the years ended December 31, 2012 and 2013 are as follows:


	2012
	Average			Maximum			Minimum			At December 31
Interest rate	￦	24,085			32,036			19,817			19,817
Equities		26,476			41,920			11,085			12,247
Foreign exchange		79,449			95,661			49,583			55,243
Option volatility		257			897			95			251
Portfolio diversification		(60,274	)		(80,989	)		(37,435	)		(38,967	)

	￦	69,993			89,525			43,145			48,591


	2013
	Average			Maximum			Minimum			At December 31
Interest rate	￦	21,604			28,670			14,413			25,136
Equities		5,677			13,250			2,737			7,341
Foreign exchange		45,176			50,933			41,554			43,993
Option volatility		278			350			198			208
Portfolio diversification		(25,837	)		(40,931	)		(18,457	)		(27,001	)

	￦	46,898			52,272			40,445			49,677

(*)	Includes both trading and non-trading accounts as Shinhan Bank manages foreign exchange risk on a total position basis.

i-2) Shinhan Card

An analysis of Shinhan Card’s requisite capital in light of the market risk for trading positions as of and for the years ended December 31, 2012 and 2013, based on the standard guidelines for risk management promulgated by the Financial Supervisory Service, is as follows:


	2012
	Average		Maximum		Minimum		At December 31
Interest rate	￦	358		900		250		500
Foreign exchange		35,291		40,972		32,313		36,905

	￦	35,649		41,872		32,563		37,405

F-56

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)


	2013
	Average		Maximum		Minimum		At December 31
Interest rate	￦	233		750		150		150
Foreign exchange		42,640		46,678		39,401		46,678

	￦	42,873		47,428		39,551		46,828

(*)	The Group has been exposed to only foreign exchange rate risk of foreign currency equity securities for the purpose of non-trading because the Shinhan Card hedges all cash flow of foreign currency liabilities by currency rate swap.

i-3) Shinhan Investment

An analysis of the ten-day 99% confidence level-based VaR for managing market risk for trading positions of Shinhan Investment as of and for the years ended December 31, 2012 and 2013 are as follows:


	2012
	Average			Maximum			Minimum			At December 31
Interest rate	￦	9,102			15,797			2,532			3,467
Equities		2,790			8,816			882			8,620
Foreign exchange		2,779			10,825			90			1,292
Option volatility		4,465			11,866			237			736
Portfolio diversification		(10,253	)		(20,771	)		(3,036	)		(6,875	)

	￦	8,883			26,533			705			7,240


	2013
	Average			Maximum			Minimum			At December 31
Interest rate	￦	12,583			33,534			2,930			6,404
Equities		8,287			17,163			3,418			3,471
Foreign exchange		2,160			7,524			116			1,194
Option volatility		1,681			3,400			323			1,409
Portfolio diversification		(9,889	)		(22,237	)		(3,662	)		(7,416	)

	￦	14,822			39,384			3,125			5,062

i-4) Shinhan Life Insurance

An analysis of the ten-day 99% confidence level-based VaR for managing market risk for trading positions of Shinhan Life Insurance as of and for the years ended December 31, 2012 and 2013 are as follows:


	2012
	Average		Maximum		Minimum		At December 31
Interest rate	￦	826		1,333		197		958
Equities		750		947		499		947
Foreign exchange		216		253		136		135

	￦	1,792		2,533		832		2,040

F-57

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)


	2013
	Average		Maximum		Minimum		At December 31
Interest rate	￦	975		1,599		455		455
Equities		346		988		20		89
Foreign exchange		254		546		32		113

	￦	1,575		3,133		507		657

ii) Interest rate risk management from non-trading positions

Principal market risk from non-trading activities of the Group is interest rate risk, which affects the Group’s earnings and the economic value of the Group’s net assets:

•

Earnings: interest rate fluctuations have an effect on the Group’s net interest income by affecting its interest-sensitive operating income and expenses and EaR (Earnings at Risk) is a commonly used risk management technique.

•

Economic value of net assets: interest rate fluctuations influence the Group’s net worth by affecting the present value of cash flows from the assets, liabilities and other transactions of the Group and VaR is a commonly used risk management technique.

Interest rate VaR represents the maximum anticipated loss in a net present value calculation, whereas interest rate EaR represents the maximum anticipated loss in a net earnings calculation for the immediately following one-year period, in each case, as a result of negative movements in interest rates.

Accordingly, the Group measures and manages interest rate risk for non-trading activities by taking into account effects of interest rate changes on both its income and net asset value.

Shinhan Card Co., Ltd and Shinhan Life Insurance also monitors and manages its interest rate risk limits for all its interest-bearing assets and liabilities (including off-balance sheet items) in terms of impact on its earnings and net asset value from changes in interest rates. The interest rate VaR analysis used by Shinhan Card Co., Ltd and Shinhan Life Insurance principally focuses on the maximum impact on its net asset value from adverse movement in interest rates.

Non-trading positions for interest rate VaR and EaR as of December 31, 2012 and 2013 are as follows:

ii-1) Shinhan Bank


	2012		2013
VaR	￦	841,157		415,700
EaR		249,567		356,453

F-58

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

ii-2) Shinhan Card


	2012		2013
VaR	￦	338,930		285,352
EaR		29,318		17,040

ii-3) Shinhan Investment


	2012		2013
VaR	￦	26,289		11,725
EaR		107,733		126,321

ii-4) Shinhan Life Insurance


	2012		2013
VaR	￦	126,359		62,298
EaR		28,705		2,428

(*1)	The Interest VaR was calculated by The Financial Supervisory Service regulations based on the duration proxies and interest shocks by 200 basis points for each time bucket as recommended under the Basel Accord.

(*2)	The Interest EaR was calculated by The Financial Supervisory Service regulations based on an interest rate gap analysis using the time buckets and the “middle of time band” as recommended under the Basel Accord.

iii) Foreign exchange risk

Foreign exchange risk arises because of the Group’s net foreign currency open position, which is the difference between its foreign currency assets and liabilities, including derivatives.

The Group manages foreign exchange risk on an overall position basis, including its overseas branches, by covering all of its foreign exchange spot and forward positions in both trading and non-trading accounts.

The Risk Policy Committee oversees Shinhan Bank’s foreign exchange exposure for both trading and non-trading activities by establishing limits for the net foreign currency open position, loss limits and VaR limits.

The management of Shinhan Bank’s foreign exchange position is centralized at the FX & Derivatives Department. Dealers in the FX & Derivatives Department manage Shinhan Bank’s overall position within the set limits through spot trading, forward contracts, currency options, futures and swaps and foreign exchange swaps.

F-59

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

Foreign currency denominated assets and liabilities as of December 31, 2012 and 2013 are as follows:


	2012 (restated)
	USD		JPY			EUR			CNY		Other		Total
Assets
Cash and due from banks	￦	1,198,615		1,119,555			74,962			870,378		340,001		3,603,511
Loans		11,790,540		4,932,804			1,323,022			1,351,857		1,964,774		21,362,997
Trading assets		153,521		—			—			14,715		451,165		619,401
Derivative assets		276,729		—			9,939			—		127		286,795
Available-for-sale financial assets		1,357,859		44,099			9,005			—		335,003		1,745,966
Held-to-maturity financial assets		1,210		392,628			—			—		40,648		434,486
Other financial assets		2,094,597		215,778			15,696			145,082		95,961		2,567,114

	￦	16,873,071		6,704,864			1,432,624			2,382,032		3,227,679		30,620,270

Liabilities
Deposits	￦	5,328,631		5,651,318			247,045			1,634,518		1,523,852		14,385,364
Trading liabilities		—		—			—			—		484,061		484,061
Derivative liabilities		123,007		47,718			—			—		60		170,785
Borrowings		4,968,386		669,168			688,261			85,055		250,880		6,661,750
Debt securities issued		4,863,268		436,625			106,220			210,002		701,964		6,318,079
Other financial liabilities		1,334,236		227,995			253,896			245,871		227,323		2,289,321

	￦	16,617,528		7,032,824			1,295,422			2,175,446		3,188,140		30,309,360

Net assets (liabilities)	￦	255,543		(327,960	)		137,202			206,586		39,539		310,910
Off-balance derivative exposure		794,675		328,526			(123,325	)		203,512		614,279		1,817,667

Net position	￦	1,050,218		566			13,877			410,098		653,818		2,128,577

F-60

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)


	2013
	USD		JPY			EUR			CNY		Other		Total
Assets
Cash and due from banks	￦	2,454,298		1,236,206			94,546			1,464,235		454,990		5,704,275
Loans		12,066,235		4,074,563			1,088,485			1,777,469		2,045,999		21,052,751
Trading assets		237,996		5,020			—			—		110,694		353,710
Derivative assets		188,332		34			7,864			397		1,910		198,537
Available-for-sale financial assets		1,740,787		9,125			13,508			5,106		523,371		2,291,897
Held-to-maturity financial assets		64,451		294,027			—			63,991		28,251		450,720
Other financial assets		1,329,737		348,676			105,395			43,322		116,523		1,943,653

	￦	18,081,836		5,967,651			1,309,798			3,354,520		3,281,738		31,995,543

Liabilities
Deposits	￦	6,526,255		5,280,535			319,828			2,492,930		1,818,909		16,438,457
Trading liabilities		—		—			—			—		398,596		398,596
Financial liabilities designated at fair value through profit or loss		46,806		—			—			—		—		46,806
Derivative liabilities		130,607		46,114			—			2,901		1,919		181,541
Borrowings		4,320,200		420,004			505,242			228,988		221,460		5,695,894
Debt securities issued		4,618,872		653,029			—			104,292		507,813		5,884,006
Other financial liabilities		1,134,441		309,432			374,739			170,065		320,016		2,308,693

	￦	16,777,181		6,709,114			1,199,809			2,999,176		3,268,713		30,953,993

Net assets (liabilities)	￦	1,304,655		(741,463	)		109,989			355,344		13,025		1,041,550
Off-balance derivative exposure		147,613		753,581			(114,039	)		49,107		296,693		1,132,955

Net position	￦	1,452,268		12,118			(4,050	)		404,451		309,718		2,174,505

(d) Liquidity risk

Liquidity risk is the risk that the Group will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset.

Each subsidiary seeks to minimize liquidity risk through early detection of risk factors related to the sourcing and managing of funding that may cause volatility in liquidity and by ensuring that it maintains an appropriate level of liquidity through systematic management. At the groupwide level, the Group manages liquidity risk by conducting monthly stress tests that compare liquidity requirements under normal situations against those under three types of stress situations, namely, the group-specific internal crisis, crisis in the external market and a combination of internal and external crisis. In addition, in order to preemptively and

F-61

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

comprehensively manage liquidity risk, the Group measure and monitor liquidity risk management using various indices, including the “limit management index”, “early warning index” and “monitoring index”.

Shinhan Bank applies the following basic principles for liquidity risk management:

•

raise funding in sufficient amounts, at the optimal time at reasonable costs;

•

maintain risk at appropriate levels and preemptively manage them through a prescribed risk limit system and an early warning signal detection system;

•

secure stable sources of revenue and minimize actual losses by implementing an effective asset-liability management system based on diversified sources of funding with varying maturities;

•

monitor and manage daily and intra-daily liquidity positions and risk exposures for timely payment and settlement of financial obligations due under both normal and crisis situations;

•

conduct periodic contingency analysis in anticipation of any potential liquidity crisis and establish and implement emergency plans in case of a crisis actually happening; and

•

consider liquidity-related costs, benefits of and risks in determining the pricing of the Group’s products and services, employee performance evaluations and approval of launching of new products and services.

As for any potential liquidity shortage at or near the end of each month, Shinhan Card maintains liquidity at a level sufficient to withstand credit shortage for three months. In addition, Shinhan Card manages liquidity risk by defining and managing various indicators of liquidity risk, such as the actual liquidity gap ratio (in relation to the different maturities for assets as compared to liabilities), the liquidity buffer ratio, the maturity repayment ratio, the ratio of actual funding compared to budgeted funding and the ratio of asset-backed securities to total borrowings, at different risk levels of “caution”, “unstable” and “at risk”, and the Group also has contingency plans in place in case of any emergency or crisis.

F-62

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

Contractual maturities for financial instruments including cash flows of principal and interest and off balance as of December 31, 2012 and 2013 are as follows:


	2012 (restated)
	Less than 1 month		1~3 months		3~6 months			6 months~ 1 year		1~5 years		More than 5 years		Total
Non-derivatives:
Assets
Cash and due from banks	￦	9,787,042		1,200,221		1,015,252			1,251,796		281,700		51,490		13,587,501
Loans		29,530,726		28,531,335		32,647,384			45,347,878		47,575,372		47,325,670		230,958,365
Trading assets (*3)		14,079,144		171,414		254,080			776,572		1,373,046		—		16,654,256
Financial assets designated at fair value through profit or loss		1,793,657		73,857		5,169			41,007		609,711		21,728		2,545,129
Available-for-sale financial assets (*3)		33,002,881		1,243,237		—			60,648		35,377		1,945,647		36,287,790
Held-to-maturity financial assets		270,168		424,714		437,935			1,527,358		7,663,374		4,192,561		14,516,110
Other financial assets		5,743,829		184,686		40,126			282,030		3,393,670		106,117		9,750,458

	￦	94,207,447		31,829,464		34,399,946			49,287,289		60,932,250		53,643,213		324,299,609

Liabilities
Deposits (*2)	￦	70,081,054		19,834,349		17,568,677			58,212,569		11,138,795		2,655,637		179,491,081
Trading liabilities (*3)		1,370,723		—		—			—		—		—		1,370,723
Borrowings		9,314,059		2,085,094		1,390,841			1,416,346		4,719,507		892,355		19,818,202
Debt securities issued		1,068,555		1,949,034		2,922,035			6,558,938		27,084,263		4,321,377		43,904,202
Financial liabilities designated at fair value through profit or loss		85,260		173,289		296,974			495,799		3,617,151		153,724		4,822,197
Other financial liabilities		17,963,473		50,675		38,652			160,998		434,581		66,282		18,714,661

	￦	99,883,124		24,092,441		22,217,179			66,844,650		46,994,297		8,089,375		268,121,066

Off balance
Finance guarantee contracts	￦	2,895,878		—		—			—		—		—		2,895,878
Loan commitments and other		72,200,742		—		—			—		—		—		72,200,742

	￦	75,096,620		—		—			—		—		—		75,096,620

Derivatives:
Cash inflow	￦	2,024,108		373,602		161,696			571,717		2,137,068		631,768		5,899,959
Cash outflow		1,761,438		100,083		167,306			569,682		1,939,458		375,361		4,913,328

	￦	262,670		273,519		(5,610	)		2,035		197,610		256,407		986,631

F-63

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)


	2013
	Less than 1 month			1~3 months		3~6 months		6 months~ 1 year		1~5 years		More than 5 years		Total
Non-derivatives:
Assets
Cash and due from banks	￦	13,158,921			1,132,108		1,158,640		842,635		71,427		236,053		16,599,784
Loans		29,266,553			28,405,856		32,069,312		46,773,416		51,992,423		45,558,541		234,066,101
Trading assets (*3)		18,021,851			—		—		—		—		—		18,021,851
Financial assets designated at fair value through profit or loss		2,387,535			146,011		99,491		88,401		639,495		—		3,360,933
Available-for-sale financial assets (*3)		28,471,792			1,424,789		43,166		569,533		177,199		2,936,276		33,622,755
Held-to-maturity financial assets		163,006			860,399		216,955		1,708,192		6,138,602		5,884,452		14,971,606
Other financial assets		4,234,883			115,317		257,777		335,576		3,732,060		83,282		8,758,895

	￦	95,704,541			32,084,480		33,845,341		50,317,753		62,751,206		54,698,604		329,401,925

Liabilities
Deposits (*2)	￦	81,531,603			20,667,444		25,856,289		43,637,751		10,648,429		2,907,671		185,249,187
Trading liabilities (*3)		1,258,283			—		—		—		—		—		1,258,283
Borrowings		10,104,078			1,791,667		2,152,228		1,795,100		3,816,464		790,890		20,450,427
Debt securities issued		1,111,445			2,864,917		3,065,423		4,710,799		24,847,517		5,708,971		42,309,072
Financial liabilities designated at fair value through profit or loss		56,175			206,479		442,352		677,631		4,205,094		321,399		5,909,130
Other financial liabilities		14,587,022			148,854		52,803		173,826		433,346		65,753		15,461,604

	￦	108,648,606			25,679,361		31,569,095		50,995,107		43,950,850		9,794,684		270,637,703

Off balance
Financial guarantee contracts	￦	2,457,712			—		—		—		—		—		2,457,712
Loan commitments and others		74,824,310			—		—		—		—		—		74,824,310

	￦	77,282,022			—		—		—		—		—		77,282,022

Derivatives:
Cash inflow	￦	1,827,969			671,262		234,757		327,195		1,886,110		736,877		5,684,170
Cash outflow		1,894,089			425,602		221,876		263,615		1,678,499		416,179		4,899,860

	￦	(66,120	)		245,660		12,881		63,580		207,611		320,698		784,310

(*1)	These amounts include cash flows of principal and interest on financial assets and financial liabilities.

(*2)	Demand deposits amounting to ￦52,171,149 million and ￦59,143,510 million as of December 31, 2012 and 2013 are included in the ‘Less than 1 month’ category, respectively.

(*3)	Trading assets and available-for-sale financial assets, except for assets restricted for sale for certain periods, were included in the ‘Less than 1 month’ category.

(*4)	Financial guarantees such as financial guarantee contracts and loan commitments and others provided by the Group are classified based on the earliest date at which the Group should fulfill the obligation under the guarantee when the counter party requests payment.

F-64

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

(e) Measurement of fair value

Fair values, which the Group primarily uses for the measurement of financial instruments, are the published price quotations based on market prices or dealer price quotations of financial instruments traded in an active market where available.

If the market for a financial instrument is not active, fair value is determined either by using a valuation technique or independent third-party valuation service. Valuation techniques include using recent arm’s length market transactions between knowledgeable, willing parties, if available, referencing to the current fair value of another instrument that is substantially the same, discounted cash flow analysis and option pricing models.

For example, fair value of interest rate swaps and currency forwards were calculated discounted cash flow analysis method and exchange forward rate method.

i) Financial instruments measured at the fair value

The Group classifies and discloses fair value of the financial instruments into the following three-level hierarchy:

•

Level 1: Financial instruments measured at quoted prices from active markets are classified as fair value level 1.

•

Level 2: Financial instruments measured using valuation techniques where all significant inputs are observable market data are classified as level 2.

•

Level 3: Financial instruments measured using valuation techniques where one or more significant inputs are not based on observable market data are classified as level 3.

F-65

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

i-1) The table below analyzes financial instruments measured at the fair value as of December 31, 2012 and 2013 by the level in the fair value hierarchy into which the fair value measurement is categorized:


	2012 (restated)
	Level 1		Level 2		Level 3		Total
Assets
Trading assets
Debt securities	￦	3,170,587		10,495,814		172,671		13,839,072
Equity securities		437,925		1,934,550		4,780		2,377,255
Gold deposits		437,928		—		—		437,928
Financial assets designated at fair value through profit or loss
Debt securities and others		161,056		614,664		549,926		1,325,646
Equity securities		58,772		1,014,981		142,934		1,216,687
Derivative assets
Trading		25,315		1,607,049		275,277		1,907,641
Hedging		—		193,207		69,917		263,124
Available-for-sale financial assets
Debt securities		7,987,288		23,342,149		41,978		31,371,415
Equity securities		2,159,574		235,445		2,517,484		4,912,503

	￦	14,438,445		39,437,859		3,774,967		57,651,271

Liabilities
Trading liabilities
Debt securities	￦	886,662		—		—		886,662
Gold deposits		484,061		—		—		484,061
Financial liabilities designated at fair value through profit or loss
Borrowings		—		563,998		4,258,199		4,822,197
Derivative liabilities
Trading		21,286		1,481,257		210,866		1,713,409
Hedging		—		139,997		50,638		190,635

	￦	1,392,009		2,185,252		4,519,703		8,096,964

F-66

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)


	2013
	Level 1		Level 2		Level 3		Total
Assets
Trading assets
Debt securities	￦	2,904,587		12,329,028		29,997		15,263,612
Equity securities		627,131		2,060,870		5,348		2,693,349
Gold Deposits		76,337		—		—		76,337
Financial assets designated at fair value through profit or loss
Debt securities and others		171,881		1,037,630		681,408		1,890,919
Equity securities		46,573		1,209,975		213,298		1,469,846
Derivative assets
Trading		7,010		1,345,476		197,230		1,549,716
Hedging		—		115,195		52,557		167,752
Available-for-sale financial assets
Debt securities		7,614,090		20,950,068		17,269		28,581,427
Equity securities		2,285,388		485,498		2,251,988		5,022,874

	￦	13,732,997		39,533,740		3,449,095		56,715,832

Liabilities
Trading liabilities
Debt securities	￦	859,687		—		—		859,687
Gold deposits		398,596		—		—		398,596
Financial liabilities designated at fair value through profit or loss
Borrowings		672		1,379,367		4,529,091		5,909,130
Derivative liabilities
Trading		6,216		1,310,870		370,687		1,687,773
Hedging		—		147,416		191,345		338,761

	￦	1,265,171		2,837,653		5,091,123		9,193,947

i-2) There was no transfer between level 1 and level 2 for the year ended December 31, 2013.

F-67

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

i-3) Changes in level 3 of the fair value hierarchy for the years ended December 31, 2012 and 2013 are as follows:


	2012 (restated)
	Trading assets			Financial assets designated at fair value through profit or loss			Available- for-sale financial assets			Net derivatives			Financial liabilities designated at fair value through profit or loss
Beginning balance	￦	9,991			308,029			2,191,946			22,940			3,298,409
comprehensive income
Profit or loss		2,680			42,955			94,029			418,900			649,683
Other comprehensive income		—			—			46,157			19			—

		2,680			42,955			140,186			418,919			649,683
Purchases		640,000			981,102			525,561			69,590			—
Issuances		—			—			—			(170,367	)		9,080,911
Settlements		(480,000	)		(737,868	)		(594,107	)		(221,565	)		(8,770,804	)
Transfers into (out of) level 3		4,780			98,642			295,876			(35,827	)		—

Ending balance	￦	177,451			692,860			2,559,462			83,690			4,258,199


	2013
	Trading assets			Financial assets designated at fair value through profit or loss			Available- for-sale financial assets			Net derivatives			Financial liabilities designated at fair value through profit or loss
Beginning balance	￦	177,451			692,860			2,559,462			83,690			4,258,199
Comprehensive income
Profit or loss		(3,603	)		5,856			(61,469	)		(157,720	)		59,683
Other comprehensive income		—			—			75,371			(1,148	)		—

		(3,603	)		5,856			13,902			(158,868	)		59,683
Purchases		486,200			680,253			673,700			48,469			—
Issuances		—			—			—			(82,857	)		4,996,245
Settlements		(626,200	)		(473,800	)		(404,688	)		(202,679	)		(4,785,036	)
Transfers into (out of) level 3		1,497			(10,463	)		(573,119	)		—			—

Ending balance	￦	35,345			894,706			2,269,257			(312,245	)		4,529,091

F-68

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

i-4) Valuation technique and inputs used in measuring fair value

i-4-1) Information about valuation technique and inputs used at December 31, 2013 in the fair value measurement of financial instruments classified as level 2 was as follows:


Type of financial instrument	Valuation technique	Book value		Inputs
Assets
Trading assets
Debt securities	DCF(*1)	￦	12,329,028	Discount rate
Equity securities	NAV(*2)		2,060,870	Price of underlying assets

			14,389,898

Financial assets designated at fair value through profit or loss
Debt securities	DCF(*1)		1,037,630	Discount rate
Equity securities	NAV(*2)		1,209,975	Price of underlying assets

			2,247,605

Derivative assets
Trading	Option model DCF(*1)		1,345,476	Discount rate, Foreign exchange rate, volatility, stock price, commodity index, etc.
Hedging	Option model DCF(*1)		115,195

			1,460,671

Available-for-sale financial assets
Debt securities	DCF(*1)		20,950,068	Discount rate
Equity securities	NAV(*2)		485,498	Price of underlying assets

			21,435,566

			39,533,740

Liabilities
Financial liabilities designated at fair value through profit or loss
Borrowings	DCF(*1)		1,379,367	Discount rate
Derivative liabilities
Trading	Option model DCF(*1)		1,310,870	Discount rate, Foreign exchange rate, volatility, stock price, commodity index, etc
Hedging	Option model DCF(*1)		147,416

			1,458,286

		￦	2,837,653

(*1)	DCF : Discounted cash flow

(*2)	NAV : Net asset value

F-69

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

i-4-2) Information about valuation technique and significant unobservable inputs used at December 31, 2013 in the fair value measurement of financial instruments classified as level 3 was as follows:


Type of financial instrument	Valuation technique	Book value (*4)			significant unobservable inputs	Range
Assets
Trading assets
Dept securities	DCF(*1)	￦	29,997		The volatility of the underlying asset	0.88%
Equity securities	DCF(*1)		5,348		Discount rate Growth rate	10.48% 0.00%~1.00%

			35,345

Financial assets designated at fair value through profit or loss
Dept securities and others	DCF(*1)		681,408		The volatility of the underlying asset Correlations	14.41%~48.86% 4.40%~81.68%
Equity securities	DCF(*1)		213,298		Discount rate Growth rate	10.48% 0.00%~1.00%

			894,706

Derivative assets
Equity and foreign exchange related	Option model(*2)		174,178		The volatility of the underlying asset Correlations	5.00%~48.09% (34.85%)~94.71%
Interest rates related	Option model(*2)		69,036		The volatility of the underlying asset Regression coefficient Correlations	0.44%~60.10% 0.02%~2.05% (17.75)%~61.19%
Credit related	Option model(*2)		277		The volatility of the underlying asset	4.76%
Commodity related	Option model(*2)		6,296		The volatility of the underlying asset Correlations	1.60%~41.33% (3.31%)~(85.97%)

			249,787

Available-for-sale financial assets
Dept securities	NAV(*3)		17,269		Discount rate Growth rate	0.00%
Equity securities	DCF(*1)		2,158,571		Discount rate, Growth rate	2.01%~26.61% 0.00%~2.00%

			2,175,840

			3,355,678

Liabilities
Financial liabilities designated at fair value through profit or loss
Other securities	Option model(*2)		4,529,091		The volatility of the underlying asset Correlations	1.60%~105.96% (4.91%)~74.16%
Derivative liabilities
Equity and foreign exchange related	Option model(*2)		280,811		The volatility of the underlying asset Correlations	5.63%~90.49% (34.85%)~68.88%
Interest rates related	Option model(*2)		213,124		The volatility of the underlying asset Regression coefficient Correlations	0.22%~0.51% 0.00%~5.12% 27.02%~94.60%
Credit related	Option model(*2)		(363	)	Correlations	50.00%~80.00%
Commodity related	Option model(*2)		68,460		The volatility of the underlying asset Correlations	8.69%~41.33% (1.59%)~85.97%

			562,032

		￦	5,091,123

F-70

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

(*1)	DCF : Discounted cash flow

(*2)	Option model that the Group uses in derivative valuation includes Black-Scholes model, Hull-White model, Monte Carlo simulation, etc.

(*3)	NAV : Net asset value

(*4)	Valuation techniques and inputs are not disclosed when the carrying amount is a reasonable approximation of fair value.

i-5) Sensitivity analysis for fair value measurements in Level 3

Although the Group believes that its estimates of fair value are appropriate, the use of different methodologies or assumptions could lead to different measurements of fair value.

For level 3 fair value measurement, changing one or more of the unobservable inputs used to reasonably possible alternative assumptions would have the following effect on profit or loss, or other comprehensive income:


	2012 (restated)
	Favorable changes		Unfavorable changes
Profit or loss
Trading assets	￦	1,362		(17	)
Financial assets designated at fair value through profit or loss		7,020		(4,185	)
Derivative assets		41,556		(39,570	)
Available-for-sale financial assets(*1)		183,294		(137,350	)

		233,232		(181,122	)

Profit or loss
Financial liabilities designated at fair value through profit or loss		54,241		(39,574	)
Derivative liabilities		21,952		(12,268	)

	￦	76,193		(51,842	)

(*1)	Fair value changes of equity securities are calculated by increasing or decreasing discount rate (-1~1%) or liquidation value (-1~1%).


	2013
	Favorable changes		Unfavorable changes
Profit or loss(*1)
Trading assets	￦	375		(1,249	)
Financial assets designated at fair value through profit or loss		5,170		(4,385	)
Derivative assets		16,053		(24,130	)
Available-for-sale financial assets(*2)		165,734		(73,273	)

		187,332		(103,037	)

Profit or loss(*1)
Financial liabilities designated at fair value through profit or loss		45,080		(48,732	)
Derivative liabilities		56,084		(58,729	)

	￦	101,164		(107,461	)

F-71

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

(*1)	Fair value changes are calculated by increasing or decreasing the volatility of the underlying asset (-10~10%) or correlations (-10~10%).

(*2)	Fair value changes are calculated by increasing or decreasing discount rate (-1~1%) or growth rate (0~1%).

ii) Financial instruments measured at amortized cost

ii-1) The method of measuring the fair value of financial instruments measured at amortized cost is as follows:


Type		Measurement methods of fair value
Cash and due from banks		The book amount and the fair value for cash are identical and the most of deposits are floating interest rate deposit or the next day deposit of a short-term instrument. For this reason, the book value approximates fair value.

Loans		The fair value of the loans is measured by discounting the expected cash flow at the market interest rate and credit risk, etc.

Held-to-maturity financial assets		The fair value of held-to-maturity financial assets is determined by applying the lesser of two quoted bond prices provided by two bond pricing agencies as of the latest trading date

Deposits and borrowings		The book amount and the fair value for demand deposits, cash management account deposits, call money as short-term instrument are identical. The fair value of others is measured by discounting the contractual cash flow at the market interest rate that takes into account the residual risk.

Debt securities issued		The fair value of deposits and borrowings is based on the published price quotations in an active market. In case there is no data for an active market price, it is measured by discounting the contractual cash flow at the market interest rate that takes into account the residual risk.

ii-2) The book value and the fair value of financial instruments measured at amortized cost as of December 31, 2012 and 2013 are as follows:


	2012 (restated)				2013
	Book value		Fair value		Book value		Fair value
Assets
Loans	￦	200,288,636		202,224,920		205,722,718		207,047,757
Held-to-maturity financial assets		11,659,682		12,284,153		11,031,307		11,380,798
Other financial assets		9,563,182		9,627,212		8,603,430		8,650,316

		221,511,500		224,136,285		225,357,455		227,078,871

Liabilities
Deposits		173,295,702		173,592,345		178,809,881		178,792,752
Borrowings		19,518,040		19,581,684		20,142,908		20,186,806
Debt securities issued		38,838,467		39,874,554		37,491,439		37,905,035
Other financial liabilities		18,741,468		18,743,359		15,500,424		15,470,331

	￦	250,393,677		251,791,942		251,944,652		252,354,924

F-72

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

ii-3) The fair values of financial instruments not measured at fair value and analyzes them by the level in the fair value hierarchy into which each fair value measurement as of December 31, 2013 is categorized.


	Level 1		Level 2		Level 3		Total
Assets
Loans	￦	4,875,218		—		202,172,539		207,047,757
Held-to-maturity financial assets		3,800,855		7,579,943		—		11,380,798
Other financial assets		4,678,461		—		3,971,855		8,650,316

		13,354,534		7,579,943		206,144,394		227,078,871

Liabilities
Deposits		61,210,971		—		117,581,781		178,792,752
Borrowings		7,288,983		—		12,897,823		20,186,806
Debt securities issued		—		23,276,229		14,628,806		37,905,035
Other financial liabilities		3,226,901		—		12,243,430		15,470,331

	￦	71,726,855		23,276,229		157,351,840		252,354,924

ii-4) Information about valuation technique and inputs used at December 31, 2013 in measuring financial instruments not measured at fair value classified as level 2 or 3 was as follows:


	*Fair value (2)**		Valuation technique			Inputs
Financial instruments classified as level 2 :
Assets
Held-to-maturity financial assets	￦	7,579,943		DCF	(*1)	Discount rate
Liabilities
Debt securities issued	￦	23,276,229		DCF	(*1)	Discount rate
Financial instruments classified as level 3 :
Assets
Loans	￦	202,172,539		DCF	(*1)	Discount rate, Credit spread, Prepayment rate
Other financial assets		3,971,855		DCF	(*1)	Discount rate

		206,144,394

Liabilities
Deposits		117,057,230		DCF	(*1)	Discount rate
Borrowings		8,777,156		DCF	(*1)	Discount rate
Debt securities issued		14,628,806		DCF	(*1)	Discount rate, Regression coefficient, Correlation coefficient
Other financial liabilities		12,243,430		DCF	(*1)	Discount rate

	￦	152,706,622

(*1)	DCF : Discounted cash flow

(*2)	Valuation techniques and inputs are not disclosed when the carrying amount is a reasonable approximation of fair value

F-73

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

iii) Unamortized balance of financial instruments valued using models with significant unobservable inputs.

Changes in the difference between the fair value at initial recognition (the transaction price) and the value using models with unobservable inputs for the years ended December 31, 2012 and 2013, are as follows:


	2012			2013
Beginning balance	￦	(3,097	)		(2,574	)
Deferral on new transactions		88			(36,241	)
Recognized in the income statement during the period		435			9,367

Ending balance	￦	(2,574	)		(29,448	)

(f) Classification by categories of financial instruments

Financial assets and liabilities are measured at fair value or amortized cost. The financial instruments measured at fair value or amortized costs are measured in accordance with the Group’s valuation methodologies, which are described in Note 4.(f) Measurement of fair value. The carrying amounts of each category of financial assets and financial liabilities as of December 31, 2012 and 2013 are as follows:


	2012 (restated)
	Trading		FVTPL assets(*1)		*AFS(2)**		*HTM(3)**		Loans and receivable		Derivatives held for hedging		Total
Assets :
Cash and due from banks	￦	—		—		—		—		13,507,249		—		13,507,249
Trading assets		16,654,255		—		—		—		—		—		16,654,255
Financial assets designated at FVTPL (*1)		—		2,542,333		—		—		—		—		2,542,333
Derivatives		1,907,641		—		—		—		—		263,124		2,170,765
Loans		—		—		—		—		200,288,636		—		200,288,636
AFS financial assets(*2)		—		—		36,283,918		—		—		—		36,283,918
HTM financial assets(*3)		—		—		—		11,659,682		—		—		11,659,682
Other		—		—		—		—		9,563,182		—		9,563,182

	￦	18,561,896		2,542,333		36,283,918		11,659,682		223,359,067		263,124		292,670,020

F-74

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)


	2012 (restated)
	Trading		FVTPL liabilities(*1)		Amortized cost		Derivatives held for hedging		Total
Liabilities :
Deposits	￦	—		—		173,295,702		—		173,295,702
Trading liabilities		1,370,723		—		—		—		1,370,723
Financial liabilities designated at FVTPL (*1)		—		4,822,197		—		—		4,822,197
Derivatives		1,713,409		—		—		190,635		1,904,044
Borrowings		—		—		19,518,040		—		19,518,040
Debt securities issued		—		—		38,838,467		—		38,838,467
Other		—		—		18,741,468		—		18,741,468

	￦	3,084,132		4,822,197		250,393,677		190,635		258,490,641

(*1)	FVTPL : Fair value through profit of loss

(*2)	AFS : Available-for-sale

(*3)	HTM : Held-to-maturity

(g) The transaction as a transfer of financial instruments

i) Transfers that do not qualify for derecognition

Bonds sold under repurchase agreements as of December 31, 2012 and 2013 are as follows:


	2012		2013
Transferred asset:
Financial assets at fair value through profit or loss	￦	4,721,888		5,904,275
Available-for-sale financial assets		448,224		573,096
Held-to-maturity financial assets		241,592		262,225
Loans		—		121,350
Associated liabilities:
Bonds sold under repurchase agreements	￦	5,174,780		6,390,886

‚ Securities loaned as of December 31, 2012 and 2013 are as follows:


	2012		2013		Lender
Government bonds	￦	433,850		185,161	Korea Securities Finance Corp., Mitsui Sumitomo and others
Financial institutions bonds		370,143		17,043	Korea Securities Finance Corp.,
Corporate bonds		12,634		3,368	Mirae Asset Securities Co. Ltd.,

	￦	816,627		205,572

ii) Qualify for derecognition and continued involvement financial instrument.

There are no financial instrument which qualifies for derecognition and continued involvement as of December 31, 2012 and 2013.

F-75

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

(h) Offsetting financial assets and financial liabilities

Financial assets and liabilities subject to offsetting, enforceable master netting arrangements and similar agreements as of December 31, 2012 and 2013 are as follows:


	2012
	Gross amounts of recognized financial assets/ liabilities		Gross amounts of recognized financial liabilities set off in the statement of financial position			Net amounts of financial assets presented in the statement of financial position		Related amounts not set off in the statement of financial position				Net amount
	Gross amounts of recognized financial assets/ liabilities							Financial instruments		Cash collateral received		Net amount
Assets
Derivatives(*1)	￦	2,138,741		—			2,138,741		4,474,050		104,789		847,834
Other financial instruments(*1)		3,286,214		(1,718	)		3,287,932		4,474,050		104,789		847,834
Bonds purchased under repurchase agreements(*2)		9,102,007		—			9,102,007		8,786,669		—		315,338
Securities loaned(*2)		816,627		—			816,627		816,627		—		—
Domestic exchange settlement debit(*3)		23,605,892		21,490,097			2,115,795		146		—		2,115,649
Receivables from disposal of securities(*4)		987,603		879,580			108,023		—		—		108,023
Insurance receivables		2,657		—			2,657		1,728		—		929

		39,939,741		22,367,959			17,571,782		14,079,220		104,789		3,387,773

Liabilities
Derivatives(*1)		1,834,127		—			1,834,127		4,320,184		—		588,541
Other financial instruments(*1)		3,072,880		(1,718	)		3,074,598		4,320,184		—		588,541
Bonds purchased under repurchase agreements(*2)		5,174,780		—			5,174,780		5,174,780		—		—
Securities borrowed(*2)		883,750		—			883,750		883,750		—		—
Domestic exchange settlement pending(*3)		24,486,098		21,490,097			2,996,001		2,613,130		—		382,871
Payable from purchase of securities(*4)		1,007,732		879,580			128,152		—		—		128,152
Insurance payables		1,906		—			1,906		1,728		—		178

	￦	36,461,273		22,367,959			14,093,314		12,993,572		—		1,099,742

F-76

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)


	2013
	Gross amounts of recognized financial assets/ liabilities		Gross amounts of recognized financial liabilities set off in the statement of financial position		Net amounts of financial assets presented in the statement of financial position		Related amounts not set off in the statement of financial position				Net amount
	Gross amounts of recognized financial assets/ liabilities						Financial instruments		Cash collateral received		Net amount
Assets
Derivatives(*1)	￦	1,688,219		—		1,688,219		3,080,591		22,499		1,055,926
Other financial instruments(*1)		2,470,797		—		2,470,797		3,080,591		22,499		1,055,926
Bonds purchased under repurchase agreements(*2)		10,064,835		—		10,064,835		9,594,775		—		470,060
Securities loaned(*2)		205,572		—		205,572		205,572		—		—
Domestic exchange settlement debit(*3)		23,413,253		21,045,416		2,367,837		4,145		—		2,363,692
Receivables from disposal of securities(*4)		616,732		616,732		—		—		—		—
Insurance receivables		2,107		—		2,107		2,052		—		55

		38,461,515		21,662,148		16,799,367		12,887,135		22,499		3,889,733

Liabilities
Derivatives(*1)		1,947,627		—		1,947,627		3,128,198		—		949,872
Other financial instruments(*1)		2,130,443		—		2,130,443		3,128,198		—		949,872
Bonds purchased under repurchase agreements(*2)		6,390,886		—		6,390,886		6,390,886		—		—
Securities borrowed(*2)		858,039		—		858,039		858,039		—		—
Domestic exchange settlement pending(*3)		21,966,798		21,045,416		921,382		889,904		—		31,478
Payable from purchase of securities(*4)		716,475		616,732		99,743		—		—		99,743
Insurance payables		2,193		—		2,193		2,052		—		141

	￦	34,012,461		21,662,148		12,350,313		11,269,079		—		1,081,234

(*1)	The Group has certain derivative transactions subject to the ISDA (International Derivatives Swaps and Dealers Association) agreement. According to the ISDA agreement, when credit events (e.g. default) of counterparties occur, all derivative agreements are terminated and set off.

(*2)	Resale and repurchase agreement, securities borrowing and lending agreement are also similar to ISDA agreement with respect to enforceable netting agreements.

(*3)	The Group has legally enforceable right to set off and settles financial assets and liabilities on a net basis. Therefore, domestic exchanges settlement receivables (payables) are recorded on a net basis in the consolidated statements of financial position.

F-77

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

(*4)

Receivables and payables related to settlement of purchase and disposition of enlisted securities are offset and the net amount is presented in the consolidated statement of financial position because the Group currently has a legally enforceable right to set off the recognized amounts and intends to settle on a net basis.

(i) Capital risk management

The controlling company, controlling banks or other financial institutions conducting banking business as prescribed in the Financial Holding Company Act, is required to maintain a minimum consolidated equity capital ratio of 8.0%.

“Consolidated equity capital ratio” is defined as the ratio of equity capital as a percentage of risk-weighted assets on a consolidated basis, determined in accordance with the Financial Services Commission requirements that have been formulated based on Bank of International Settlement standards. “Equity capital”, as applicable to bank holding companies, is defined as the sum of Common Equity Tier 1 capital (including common stock, share premium resulting from the issue of instruments included common equity Tier 1, retained earnings, etc.), Additional Tier 1 capital (with the minimum set of criteria for an instrument issued by the Group to meet, ie ‘perpetual’) and Tier 2 capital (to provide loss absorption on a gone-concern basis) less any deductible items (including goodwill, income tax assets, etc.), each as defined under the Regulation on the Supervision of Financial Holding Companies. “Risk-weighted assets” is defined as the sum of credit risk-weighted assets and market risk-weighted assets.

The capital adequacy ratio of the Group as of December 31, 2012 and 2013 are as follows:


	*2012()**			2013
Capital (A)	￦	25,075,736			25,605,827
Risk-weighted assets (B)		201,184,402			190,716,648
BIS ratio (A/B)		12.46	%		13.43	%

(*) The BIS ratio was calculated under the first accord, Basel I.

As of December 31, 2012 and 2013, the Group met the regulatory capital ratio above 8%.

5.	Significant estimate and judgment

The preparation of consolidated financial statements requires the application of certain critical accounting and assumptions relative to the future. The management’s estimate of outcome may differ from an actual outcome if the managements’ estimate and assumption based on its best judgment at the reporting date are different from an actual environment. The change in an accounting estimate is recognized prospectively by including in profit or loss in the year of the change, if the change affects that year only, or the year of the change and future years, if the change affects both.

(a) Goodwill

The Group assesses annually whether any objective evidence of impairment on goodwill exists in accordance with the accounting policy as described in note 3. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. Value in use is measured based on estimates.

(b) Income taxes

The Group is subject to tax law from various countries. Within the normal business process, there are various types of transaction and different accounting method that may add uncertainties to the decision of the

F-78

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

final income taxes. The Group has recognized current and deferred tax that reflect tax consequences that would follow from the manner in which the entity expects, at the end of the reporting year, to recover or settle the carrying amount of its assets and liabilities. However, actual income tax in the future may not be identical to the recognized deferred tax assets and liabilities, and this difference can affect current and deferred tax at the year when the final tax effect is conformed.

(c) Fair value of financial instruments

The fair values of financial instruments which are not actively traded in the market are determined by using valuation techniques. The Group determines valuation method and assumptions based on significant market conditions at the end of each reporting year. Diverse valuation techniques are used to determine the fair value of financial instruments, from general market accepted valuation model internally developed valuation model that incorporates various types of assumptions and variables.

(d) Allowances for loan losses, guarantees and unused loan commitments

The Group determines and recognizes allowances for losses on loans through impairment testing and recognizes provision for guarantees and unused loan commitments. The accuracy of provisions of credit losses is determined by the methodology and assumptions used for estimating expected cash flows of the borrower for allowances on individual loans and collectively assessing allowances for groups of loans, guarantees and unused loan commitments.

(e) Defined benefit obligation

The present value of defined benefit obligation that is measured by actuarial valuation method uses various assumptions which can change according to various elements. The rate used to discount post-employment benefit obligations is determined by reference to market yields at the end of the reporting year on high quality corporate bonds. The currency and term of the corporate bonds are consistent with the currency and estimated term of the post-employment benefit obligations. Actuarial gains and losses including experience adjustments and the effects of changes in actuarial assumptions are recognized in profit or loss. Other significant assumptions related to defined benefit obligation are based on current market situation

(f) Impairment of available-for-sale equity investments

When there is a significant or prolonged decline in the fair value of an investment in an equity instrument below its original cost, there is objective evidence that available-for-sale equity investments are impaired. Accordingly, the Group considers the decline in the fair value of more than 30% against the original cost as “significant decline” and the status when the market price for marketable equity less than the carrying amounts of instruments for a six consecutive months as a “prolonged decline”.

(g) Hedging relationship

The hedging instruments are expected to be “highly effective” in offsetting the changes in the fair value or cash flows of the respective hedged items during the period. For a cash flow hedge of a forecasted transaction, the transaction should be highly probable to occur and should present an exposure to variations in cash flows that could ultimately affect reported net income.

6.	Business combinations

The acquisition of savings banks is expected to boost synergies between the savings banks and other Group companies. When the Group’s linked loan system commences operations, loan introduction processes between

F-79

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

banks and savings banks will be accelerated. The Group expects synergies from diversification of customers through the business combination and has recognized the goodwill attributable to the synergies.

(a) Incorporation of Shinhan Savings Bank and acquisition of Tomato Savings Bank.

The Group established Shinhan Hope Co. Ltd., on December 12, 2011, in order to acquire and assume certain assets and liabilities of Tomato Savings Bank. Shinhan Hope Co. Ltd. obtained a savings bank license on December 28, 2011 and changed its name to “Shinhan Savings Bank” on December 29, 2011.

On January 2, 2012, Shinhan Savings Bank acquired certain assets and liabilities of Tomato Savings Bank.

Recognized amounts of assets acquired and liabilities assumed from the business combination are as follows;


	Amount
Assets :
Cash and due from banks	￦	237,443
Trading assets		83,860
Loans(*)		361,728
Available-for-sale financial assets		125,446
Property and equipment		180
Intangible assets		24,023
Other assets		798,676

		1,631,356

Liabilities :
Deposits		1,563,377
Other liabilities		95,533

		1,658,910

Net liabilities acquired		(27,554	)

Consideration		—
Goodwill	￦	27,554

(*)	The aggregate principal amount of loans was ￦533,165 million.

F-80

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

Comprehensive loss of the business acquired from the date of acquisition to December 31, 2012 was as follows:


	Amount
Operating loss	￦	(23,186	)
Net interest income		63,523
Interest income		99,139
Interest expense		(35,616	)
Net fees and commission expense		(2,114	)
Fees and commission income		121
Fees and commission expense		(2,235	)
Net trading income		8,286
Net gain on sale of available-for-sale financial assets		647
Impairment losses on financial assets		(60,093	)
General and administrative expenses		(27,428	)
Net other operating expenses		(6,007	)
Other non-operating income, net		3,891

Loss before income taxes		(19,295	)

Income tax expense		(4,094	)

Loss for the period		(23,389	)

Other comprehensive loss for the period, net of income tax		(3,078	)
Net change in unrealized fair value of available-for-sale financial assets		(3,078	)

Total comprehensive loss for the period	￦	(26,467	)

(b) Acquisition of Yehanbyoul Saving Bank

On January 11, 2013, Shinhan Financial Group signed a share purchase agreement with Korea Deposit Insurance Corporation (KDIC) for the acquisition of Yehanbyoul Savings Bank (payment for acquisition is ￦45,296 million).

On April 1, 2013, Shinhan Savings Bank and Yehanbyoul Savings Bank merged into a single entity, with Yehanbyoul Savings Bank being the surviving entity and the newly merged bank named Shinhan Savings Bank.

F-81

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

Recognized amounts of assets acquired and liabilities assumed from the business combination were as follows:


	Amount
Assets :
Cash and due from banks	￦	907,174
Trading assets		14,813
Available-for-sale financial assets		25,945
Loans		133,663
Property and equipment, net		685
Other assets		5,614

		1,087,894

Liabilities :
Deposits		1,023,195
Other liabilities		31,392

		1,054,587

Net assets acquired		33,307

Consideration (cash and cash equivalent)		45,296
Goodwill	￦	11,989

Comprehensive loss of the business acquired from the date of acquisition to December 31, 2013 was as follows:


	Amount
Operating loss	￦	(19,127	)
Net interest income		26,433
Interest income		54,638
Interest expense		(28,205	)
Net fees and commission expense		(866	)
Fees and commission income		1,027
Fees and commission expense		(1,893	)
Dividend income		631
Net trading income		829
Net gain on sale of available-for-sale financial assets		286
Impairment losses on financial assets		(15,466	)
General and administrative expenses		(24,876	)
Net other operating expenses		(6,098	)
Other non-operating loss, net		(389	)

Loss before income taxes		(19,516	)

Income tax expense		(2,361	)

Loss for the period		(21,877	)

Other comprehensive loss for the period, net of income tax		(115	)
Net change in unrealized fair value of available-for-sale financial assets		(115	)

Total comprehensive loss for the period	￦	(21,992	)

F-82

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

7.	Operating segments

(a) Segment information

The general descriptions by operating segments as of December 31, 2012 and 2013 are as follows:


		Description
Banking	Retail banking	Loans to or deposits from individual customers, wealth management customers, and institutions such as hospitals, airports and schools

	Corporate and investment banking	Loans to or deposits from corporations including small or medium sized companies and business related to investment banking

	International group	Internal asset and liability management, trading of securities and derivatives, investment portfolio management and other related business supervision on overseas subsidiaries and branch operations and other international business

	Others	Administration of bank operations

Credit card		Credit card business

Securities		Securities trading, underwriting and brokerage services

Life insurance		Life insurance and related business

Others		Leasing, assets management and other businesses

F-83

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

(b) The following table provides information of income for each operating segment for the years ended December 31, 2011, 2012 and 2013.


	2011 (restated)
	Banking															Credit card			Securities			Life insurance			Others			Consolidation adjustments			Total
	Retail			Corporate			International			Other			Adjustments			Credit card			Securities			Life insurance			Others			Consolidation adjustments			Total
Net interest income (loss)	￦	2,671,278			1,013,951			259,548			1,049,467			60,820			1,359,734			230,747			523,663			(96,275	)		7,038			7,079,971
Net fees and commission Income (loss)		623,694			279,177			45,580			(47,281	)		(2,442	)		319,845			319,115			27,533			219,555			(25,605	)		1,759,171
Net other operating income (expense)		(2,381,593	)		(455,328	)		(230,543	)		(47,492	)		(8,516	)		(582,661	)		(426,967	)		(229,211	)		(189,289	)		36,073			(4,515,527	)

Operating income (loss)		913,379			837,800			74,585			954,694			49,862			1,096,918			122,895			321,985			(66,009	)		17,506			4,323,615

Equity method income (loss)		—			—			—			—			28,995			—			8,170			—			15,748			4,877			57,790
Income tax expense (benefit)		181,401			169,104			20,369			185,975			16,016			229,983			39,206			73,518			33,572			7,436			956,580

Profit (loss) for the year	￦	714,972			670,335			52,384			719,866			75,829			893,959			101,710			239,456			1,750,295			(1,831,595	)		3,387,211

Controlling interest	￦	714,972			670,335			52,384			719,866			74,870			893,959			101,710			239,456			1,752,029			(2,005,457	)		3,214,124

Non-controlling interest		—			—			—			—			959			—			—			—			(1,734	)		173,862			173,087


	2012 (restated)
	Banking															Credit card			Securities			Life insurance			Others			Consolidation adjustments			Total
	Retail			Corporate			International			Other			Adjustments			Credit card			Securities			Life insurance			Others			Consolidation adjustments			Total
Net interest income (loss)	￦	2,513,032			1,049,015			288,671			987,871			14,771			1,410,193			248,254			566,499			(107,569	)		8,981			6,979,718
Net fees and commission Income (loss)		599,891			275,065			47,578			(62,880	)		(12,517	)		246,000			236,573			34,945			195,717			(17,227	)		1,543,145
Net other operating income (expense)		(2,414,333	)		(435,250	)		(125,543	)		(521,978	)		(91,565	)		(714,539	)		(416,948	)		(322,230	)		(348,816	)		46,306			(5,344,896	)

Operating income (loss)		698,590			888,830			210,706			403,013			(89,311	)		941,654			67,879			279,214			(260,668	)		38,060			3,177,967

Equity method income		—			—			—			—			21,897			—			2,221			—			1,518			1,902			27,538
Income tax expense (benefit)		146,395			179,849			42,033			91,207			(25,458	)		214,699			15,177			57,198			11,868			5,759			738,727

Profit (loss) for the year	￦	538,554			714,482			166,981			366,881			(101,137	)		741,772			63,912			215,303			(234,374	)		19,535			2,491,909

Controlling interest	￦	538,554			714,482			166,981			366,881			(101,311	)		741,772			63,912			215,303			(232,105	)		(152,579	)		2,321,890

Non-controlling interest		—			—			—			—			174			—			—			—			(2,269	)		172,114			170,019

F-84

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)


	2013
	Banking															Credit card			Securities			Life insurance			Others			Consolidation adjustments			Total
	Retail			Corporate			International			Other			Adjustments			Credit card			Securities			Life insurance			Others			Consolidation adjustments			Total
Net interest income (loss)	￦	2,340,500			936,884			272,513			865,486			12,530			1,395,425			281,858			601,201			(108,286	)		4,746			6,602,857
Net fees and commission Income (loss)		558,894			232,673			49,547			(83,585	)		1,987			166,129			212,276			32,270			221,627			(5,463	)		1,386,355
Net other operating income (expense)		(2,439,364	)		(181,966	)		(199,254	)		(553,045	)		(68,702	)		(728,559	)		(392,488	)		(520,554	)		(230,343	)		(37,356	)		(5,351,631	)

Operating income (loss)		460,030			987,591			122,806			228,856			(54,185	)		832,995			101,646			112,917			(117,002	)		(38,073	)		2,637,581

Equity method income		—			—			—			—			22,448			—			(19,401	)		—			7,029			(2,790	)		7,286
Income tax expense (benefit)		103,326			198,408			23,893			42,163			(7,367	)		192,728			21,896			22,539			29,974			(4,995	)		622,565

Profit (loss) for the year	￦	364,484			794,236			95,647			168,780			(29,488	)		658,074			75,366			79,691			(99,437	)		(47,783	)		2,059,570

Controlling interest	￦	364,484			794,236			95,647			168,780			(29,647	)		658,074			75,366			79,691			(105,420	)		(198,403	)		1,902,808

Non-controlling interest		—			—			—			—			159			—			—			—			5,983			150,620			156,762


	2012 (restated)
	Banking											Credit card		Securities		Life insurance		Others		Consolidation adjustments			Total
	Retail		Corporate		International		Other		Adjustments			Credit card		Securities		Life insurance		Others		Consolidation adjustments			Total
Trading assets		—		5,606,443		—		2,964,627		(576,199	)		100,023		7,776,746		473,707		308,908		—			16,654,255
Loans	￦	104,015,570		58,446,332		8,975,232		2,159,083		(1,591,205	)		20,156,564		1,217,660		3,581,004		4,723,211		(1,394,815	)		200,288,636
Available-for-sale financial assets		607,848		25,030,962		871,999		2,664,565		(250,778	)		486,540		1,455,369		5,339,775		408,823		(331,185	)		36,283,918
Held-to-maturity financial assets		—		8,789,842		434,486		—		—			—		—		2,429,848		5,506		—			11,659,682

	￦	104,623,418		97,873,579		10,281,717		7,788,275		(2,418,182	)		20,743,127		10,449,775		11,824,334		5,446,448		(1,726,000	)		264,886,491


	2013
	Banking											Credit card		Securities		Life insurance		Others		Consolidation adjustments			Total
	Retail		Corporate		International		Other		Adjustments			Credit card		Securities		Life insurance		Others		Consolidation adjustments			Total
Trading assets		—		5,525,821		—		2,918,422		(924,478	)		30,009		9,399,511		464,422		619,591		—			18,033,298
Loans	￦	107,691,917		58,927,881		9,667,785		1,888,357		(1,222,272	)		19,303,111		1,375,047		4,160,146		5,294,693		(1,363,947	)		205,722,718
Available-for-sale financial assets		599,738		21,365,262		1,106,929		1,953,003		(332,109	)		608,840		1,658,456		6,484,313		445,013		(285,144	)		33,604,301
Held-to-maturity financial assets		—		7,046,218		387,402		—		—			—		—		3,592,151		5,536		—			11,031,307

	￦	108,291,655		92,865,182		11,162,116		6,759,782		(2,478,859	)		19,941,960		12,433,014		14,701,032		6,364,833		(1,649,091	)		268,391,624

F-85

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

(d) Financial information of geographical area

The following table provides information of income from external consumers by geographical area for the years ended December 31, 2012 and 2013.


	2011 (restated)		2012 (restated)		2013
Domestic	￦	4,179,287		2,990,495		2,520,008
Overseas		144,328		187,472		117,573

	￦	4,323,615		3,177,967		2,637,581

The following table provides information of non-current assets by geographical area as of December 31, 2012 and 2013.


	2012 (restated)		2013
Domestic	￦	8,030,779		8,071,974
Overseas		51,678		58,963

	￦	8,082,457		8,130,937

(*)	Non-current assets as of December 31, 2012 and 2013 include property and equipment, intangible assets, investment properties.

8.	Cash and due from banks

(a) Cash and due from banks as of December 31, 2012 and 2013 are as follows:


	2012 (restated)			2013
Cash and cash equivalents	￦	2,997,084			2,644,109

Deposits in won:
Reserve deposits		2,804,583			3,230,045
Time deposits		2,850,405			2,396,369
Certificate of deposits		—			79,515
Other		1,635,249			2,833,687

		7,290,237			8,539,616

Deposits in foreign currency:
Deposits		1,561,565			2,715,882
Time deposits		1,232,353			2,037,426
Other		430,466			547,135

		3,224,384			5,300,443

Provisions		(4,456	)		(11,659	)

	￦	13,507,249			16,472,509

F-86

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

(b) Restricted due from banks as of December 31, 2012 and 2013 are as follows:


	2012 (restated)		2013
Deposits in won
Reserve deposits	￦	2,804,583		3,230,045
Other(*)		996,503		2,034,098

		3,801,086		5,264,143

Deposits in foreign currency		728,619		878,274

	￦	4,529,705		6,142,417

(*)	Pursuant to the Regulation on Financial Investment Business, the Group is required to deposit certain portions of customers’ deposits with the Korean Securities Finance Corporation (“KSFC”) or banks to ensure repayment of customer deposits and the deposits may not be pledged as collateral.

9.	Trading assets

Trading assets as of December 31, 2012 and 2013 are as follows:


	2012 (restated)		2013
Debt securities:
Governments	￦	993,863		873,387
Financial institutions		5,770,083		6,034,954
Corporations		3,089,952		4,450,556
Bills bought		2,787,392		2,828,339
CMA(*)		1,018,520		1,043,266
Others		179,262		33,110

		13,839,072		15,263,612

Equity securities:
Stocks		327,853		521,406
Beneficiary certificates		1,672,624		1,836,729
Others		376,778		335,214

		2,377,255		2,693,349

Other
Gold deposits		437,928		76,337

	￦	16,654,255		18,033,298

(*)	CMA: Cash management account deposits

10.

Financial asset designated at fair value through profit or loss

Financial assets designated at fair value through profit or loss as of December 31, 2012 and 2013 are as follows:


	2012 (restated)		2013		Condition
Debt securities	￦	853,433		1,187,310	Evaluation and management on a fair value basis, accounting mismatch
Equity securities		1,216,687		1,469,846	Evaluation and management on a fair value basis, accounting mismatch
Others		472,213		703,609	Combined instrument

	￦	2,542,333		3,360,765

F-87

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

11.

Derivatives

(a) The notional amounts of derivatives as of December 31, 2012 and 2013 are as follows:


	2012 (restated)		2013
Foreign currency related
Over the counter
Currency forwards	￦	32,456,980		28,090,919
Currency swaps		11,789,631		14,327,504
Currency options		387,852		314,069

		44,634,463		42,732,492

Exchange traded
Currency futures		123,215		56,979

		44,757,678		42,789,471

Interest rates related
Over the counter
Interest rate swaps		91,314,373		85,987,990
Interest rate options		5,776,662		3,161,155

		97,091,035		89,149,145

Exchange traded
Interest rate futures		631,050		962,539

		97,722,085		90,111,684

Credit related
Over the counter
Credit swaps		165,789		229,742


Equity related
Over the counter
Equity swap and forwards		3,091,829		3,042,964
Equity options		1,671,376		2,717,467

		4,763,205		5,760,431

Exchange traded
Equity futures		161,051		223,417
Equity options		4,811,288		1,034,366

		4,972,339		1,257,783

		9,735,544		7,018,214

Commodity related
Over the counter
Swaps and forwards		467,334		1,183,862
Equity options		77,011		107,644

		544,345		1,291,506

Exchange traded
Equity options		282,185		185,346

		826,530		1,476,852

Hedge
Currency forwards		2,807		151,768
Currency swaps		1,848,578		1,880,545
Interest rate swaps		8,484,998		8,691,250

		10,336,383		10,723,563

	￦	163,544,009		152,349,526

F-88

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

(b) Fair values of derivative instruments as of December 31, 2012 and 2013 are as follows:


	2012 (restated)				2013
	Assets		Liabilities		Assets		Liabilities
Foreign currency related
Over the counter
Currency forwards	￦	511,226		611,165		421,167		494,163
Currency swaps		361,588		257,034		428,409		348,368
Currency options		25,167		11		9,123		1,504

		897,981		868,210		858,699		844,035

Interest rates related
Over the counter
Interest rate swaps		694,505		593,361		486,583		443,022
Interest rate options		23,921		33,297		12,982		16,932
Interest rate forwards		11		—		214		—

		718,437		626,658		499,779		459,954

Credit related
Over the counter
Credit swaps		1,147		842		1,480		5,324

Equity related
Over the counter
Equity swap and forwards		182,282		46,436		90,610		63,833
Equity options		75,760		144,417		86,113		221,341

		258,042		190,853		176,723		285,174

Exchange traded
Equity forwards		3		—		85		4
Equity options		20,740		18,995		1,341		928

		20,743		18,995		1,426		932

		278,785		209,848		178,149		286,106

Commodity related
Over the counter
Swaps and forwards		5,679		5,189		7,609		81,893
Equity options		1,052		371		1,852		7,268

		6,731		5,560		9,461		89,161

Exchange traded
Commodity futures		4,560		2,291		2,148		3,193

		11,291		7,851		11,609		92,354

Hedge
Currency forwards		447		—		2,112		141
Currency swaps		1,157		100,156		12,413		102,228
Interest rate swaps		261,520		90,479		153,227		236,392

		263,124		190,635		167,752		338,761

	￦	2,170,765		1,904,044		1,717,468		2,026,534

F-89

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)


	2011			2012 (restated)			2013
Foreign currency related
Over the counter
Currency forwards	￦	176,646			(160,903	)		(120,476	)
Currency swaps		(94,365	)		189,056			(11,165	)
Currency options		5,117			(9,160	)		4,673

		87,398			18,993			(126,968	)

Exchange traded
Currency futures		116			63			(27	)

		87,514			19,056			(126,995	)

Interest rates related
Over the counter
Interest rate swaps		42,931			(17,681	)		(74,566	)
Interest rate options		(3,501	)		985			3,328

		39,430			(16,696	)		(71,238	)

Exchange traded
Interest rate futures		(617	)		(777	)		(1,823	)

		38,813			(17,473	)		(73,061	)

Credit related
Over the counter
Credit swaps		(411	)		1,547			(4,391	)

Equity related
Over the counter
Equity swap and forwards		(200,928	)		352,700			(34,698	)
Equity options		(75,330	)		23,012			(10,993	)

		(276,258	)		375,712			(45,691	)

Exchange traded
Equity futures		749			(1,446	)		(1,214	)
Equity options		62,571			1,347			(1,587	)

		63,320			(99	)		(2,801	)

		(212,938	)		375,613			(48,492	)

Commodity related
Over the counter
Swaps and forwards		(430	)		1,286			(66,468	)
Commodity options		(6,055	)		(1,393	)		2,704

		(6,485	)		(107	)		(63,764	)

Exchange traded
Commodity futures		104			2,404			(4,065	)

		(6,381	)		2,297			(67,829	)

Hedge
Currency forwards		(358	)		1,252			1,665
Currency swaps		30,065			(128,935	)		(15,849	)
Interest rate swaps		45,081			15,429			(253,433	)

		74,788			(112,254	)		(267,617	)

	￦	(18,615	)		268,786			(588,385	)

F-90

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

(d) Gain or loss on fair value hedges for the years ended December 31, 2011, 2012 and 2013 are as follows:


	2011			2012 (restated)			2013
Hedged item	￦	(51,205	)		(18,970	)		279,618
Hedging instruments		29,467			20,209			(240,814	)

	￦	(21,738	)		1,239			38,804

(e) Hedge of net investment in foreign operations

Hedge accounting is applied for a portion of Net investments in foreign operations, Foreign currency translation adjustments for foreign operation by each hedging instrument for the years ended December 31, 2012 and 2013 are as follows:


	2012 (restated)		2013
Borrowings in foreign currency	￦	56,314		65,567
Debt securities issued in foreign currency		25,782		5,366
Currency forwards		—		98

	￦	82,096		71,031

12.

Loans

(a) Loans as of December 31, 2012 and 2013 are as follows:


	2012 (restated)			2013
Household loans	￦	74,537,214			77,150,180
Corporate loans		102,861,009			104,544,194
Public and other		3,106,885			2,525,043
Loans to banks		4,557,172			6,102,748
Card receivables		17,853,528			17,664,882

		202,915,808			207,987,047

Present value discount		(39,144	)		(39,127	)
Deferred loan origination costs and fees		212,477			251,249

		203,089,141			208,199,169
Allowance for impairment		(2,800,505	)		(2,476,451	)

	￦	200,288,636			205,722,718

F-91

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

(b) Changes in the allowance for impairment for the years ended December 31, 2012 and 2013 are as follows:


	2012 (restated)
	Loans															*Other(2)**			Total
	Household			Corporate			Credit Card			Other			Subtotal			*Other(2)**			Total
Beginning balance	￦	221,722			1,655,535			675,520			32,145			2,584,922			152,008			2,736,930
Provision for (reversal of) allowance		177,919			859,159			294,616			(6,908	)		1,324,786			(9,421	)		1,315,365
Write-offs		(116,871	)		(713,805	)		(490,108	)		—			(1,320,784	)		(21,484	)		(1,342,268	)
Effect of discounting		(321	)		(66,155	)		(1,526	)		—			(68,002	)		—			(68,002	)
Allowance related to loans transferred		(17,222	)		(84,463	)		6,125			—			(95,560	)		(9,623	)		(105,183	)
Recoveries		32,030			84,516			256,651			—			373,197			637			373,834
Others(*1)		—			(839	)		2,785			—			1,946			(9,171	)		(7,225	)

Ending balance	￦	297,257			1,733,948			744,063			25,237			2,800,505			102,946			2,903,451


	2013
	Loans															*Other(2)**			Total
	Household			Corporate			Credit Card			Other			Subtotal			*Other(2)**			Total
Beginning balance	￦	297,257			1,733,948			744,063			25,237			2,800,505			102,946			2,903,451
Provision for (reversal of) allowance		139,989			613,257			339,242			(10,122	)		1,082,366			42,561			1,124,927
Write-offs		(191,261	)		(656,801	)		(610,036	)		—			(1,458,098	)		(29,998	)		(1,488,096	)
Effect of discounting		(406	)		(51,244	)		(1,234	)		—			(52,884	)		—			(52,884	)
Allowance related to loans transferred		(53,864	)		(124,051	)		(45,987	)		—			(223,902	)		(4,398	)		(228,300	)
Recoveries		27,751			150,954			216,888			—			395,593			2,470			398,063
Others(*1)		(3,148	)		(68,863	)		4,882			—			(67,129	)		(14,964	)		(82,093	)

Ending balance	￦	216,318			1,597,200			647,818			15,115			2,476,451			98,617			2,575,068

(*1)	Other changes were due to debt restructuring, debt-equity swap, and foreign exchange rate, etc

(*2)	Included allowance for due from banks and other assets


	2012 (restated)			2013
Beginning balance	￦	138,933			212,477
Loan originations		122,985			150,137
Amortization		(49,441	)		(111,365	)

Ending balance	￦	212,477			251,249

F-92

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

13.

Available-for-sale financial assets and held-to-maturity financial assets

(a) Available-for-sale financial assets and held-to-maturity financial assets as of December 31, 2012 and 2013 are as follows:


	2012 (restated)		2013
Available-for-sale financial assets
Debt securities(*1)
Government bonds	￦	5,446,367		4,396,211
Financial institutions bonds		13,750,391		12,842,491
Corporate bonds and others		12,174,657		11,342,725

		31,371,415		28,581,427

Equity securities(*2)
Stock		3,819,723		3,193,031
Equity investments		506,012		517,846
Beneficiary certificates		537,766		1,047,228
Others		49,002		264,769

		4,912,503		5,022,874

		36,283,918		33,604,301

Held-to-maturity financial assets
Debt securities
Government bonds		5,717,180		5,720,223
Financial institutions bonds		1,700,583		1,406,063
Corporate bonds and others		4,241,919		3,905,021

		11,659,682		11,031,307

	￦	47,943,600		44,635,608

(*1)	Debt securities are measured at fair value by applying the lesser of two quoted bond prices provided by two bond pricing agencies as of the latest trading date from the end of reporting year.

(*2)	Equity securities with no quoted market prices in active markets and for which the fair value cannot be measured reliably are recorded at cost were ￦173,342 million and ￦93,417 million as of December 31, 2012 and 2013, respectively.

(b) Gain or loss on sale of available-for-sale financial assets for the years ended December 31, 2011, 2012 and 2013 are as follows:


	2011			2012 (restated)			2013
Gain on sale of available-for-sale financial assets	￦	866,138			566,157			773,032
Loss on sale of available-for-sale financial assets		(19,793	)		(30,579	)		(72,423	)

	￦	846,345			535,578			700,609

F-93

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

14.

Property and equipment, net

(a) Property and equipment as of December 31, 2012 and 2013 are as follows:


	2012 (restated)
	Acquisition cost		Accumulated depreciation			Book value
Land	￦	1,742,337		—			1,742,337
Buildings		962,217		(95,786	)		866,431
Other		2,113,681		(1,613,992	)		499,689

	￦	4,818,235		(1,709,778	)		3,108,457


	2013
	Acquisition cost		Accumulated depreciation			Accumulated impairment losses			Book value
Land	￦	1,798,444		—			—			1,798,444
Buildings		1,106,021		(130,467	)		—			975,554
Other		2,049,971		(1,609,581	)		(85	)		440,305

	￦	4,954,436		(1,740,048	)		(85	)		3,214,303

(*)	Land and buildings were revalued on January 1, 2010 by an independent valuation service provider. Valuation was based on the recent arm’s length market transactions between knowledgeable and willing parties.

(b) Changes in property and equipment for the years ended December 31, 2012 and 2013 are as follows:


	2012 (restated)
	Land			Buildings			Other			Total
Beginning balance	￦	1,751,634			862,009			380,216			2,993,859
Acquisitions(*1)		1,699			41,386			266,848			309,933
Disposals(*1)		(180	)		(7,191	)		(14,674	)		(22,045	)
Depreciation		—			(31,982	)		(169,789	)		(201,771	)
Amounts transferred from (to) investment property		(4,659	)		(2,042	)		—			(6,701	)
Amounts transferred to assets held for sale(*2)		(16,243	)		(5,264	)		—			(21,507	)
Effects of foreign currency movements		(179	)		(1,563	)		(3,341	)		(5,083	)
Change in subsidiaries		10,265			11,078			40,429			61,772

Ending balance	￦	1,742,337			866,431			499,689			3,108,457

(*1)	￦13,651 million of buildings increased by transfers from construction-in-progress.

(*2)	Comprised of land and buildings, etc.

F-94

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)


	2013
	Land			Buildings			Other			Total
Beginning balance	￦	1,742,337			866,431			499,689			3,108,457
Acquisitions(*1)		10,283			165,824			255,603			431,710
Disposals(*1)		(5,863	)		(5,259	)		(154,585	)		(165,707	)
Depreciation		—			(34,338	)		(168,830	)		(203,168	)
Impairment		—			—			(85	)		(85	)
Amounts transferred from (to) investment property		56,210			(12,442	)		—			43,768
Amounts transferred to assets held for sale(*2)		(3,752	)		(2,526	)		—			(6,278	)
Effects of foreign currency movements		(771	)		(2,136	)		8,513			5,606

Ending balance	￦	1,798,444			975,554			440,305			3,214,303

(*1)	￦134,790 million of buildings increased by transfers from construction-in-progress.

(*2)	Comprised of land and buildings, etc.


Type of insurance	Assets insured	Amount covered		Insurance company
Comprehensive insurance for financial institution	Cash and cash equivalent		22,600	Samsung Fire & Marine Insurance Co., Ltd and 7 other entities
Package insurance	Land and buildings		1,303,784	Samsung Fire & Marine Insurance Co., Ltd and 5 other entities
Fire insurance	Equipment		13,605	Samsung Fire & Marine Insurance Co., Ltd and AIG Insurance
Theft insurance	Cash and securities		57,030	Dongbu Insurance Co., Ltd., and 8 other entities
Directors’ and Officers’ Liability and Company Reimbursement Insurance	—		50,000	Samsung Fire & Marine Insurance Co., Ltd
Other	—		26,760	MERITZ Fire & Marine Insurance Co., Ltd and 2 other entities

			1,473,779

(*)	In addition, the Group maintains vehicle insurance, medical insurance, fire insurance for its assets, and employee compensation insurance covering loss and liability arising from accidents.

F-95

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

15.

Intangible assets, net

(a) Intangible assets as of December 31, 2012 and 2013 are as follows:


	2012 (restated)		2013
Goodwill	￦	3,830,363		3,835,141
Software		72,362		74,622
Development cost		115,506		87,168
Other		177,265		229,447

	￦	4,195,496		4,226,378

(b) Changes in intangible assets for the years ended December 31, 2012 and 2013 are as follows:


	2012 (restated)
	Goodwill			Development cost			Software			Other			Total
Beginning balance	￦	3,854,524			99,529			75,164			174,243			4,203,460
Acquisitions		27,554			50,339			28,794			44,603			151,290
Disposals		—			—			(578	)		(6,718	)		(7,296	)
Impairment(*1)		(54,124	)		—			(185	)		(4,208	)		(58,517	)
Amortization(*2)		—			(34,430	)		(31,483	)		(31,152	)		(97,065	)
Effects of foreign currency movements		—			—			(816	)		(280	)		(1,096	)
Change in subsidiaries		2,409			68			1,466			777			4,720

Ending balance	￦	3,830,363			115,506			72,362			177,265			4,195,496


	2013
	Goodwill			Development cost			Software			Other			Total
Beginning balance	￦	3,830,363			115,506			72,362			177,265			4,195,496
Acquisitions		—			12,754			34,114			107,537			154,405
Business combination		11,989			—			—			—			11,989
Disposals		(7,211	)		(61	)		(635	)		(8,122	)		(16,029	)
Impairment(*1)		—			—			—			(2,576	)		(2,576	)
Amortization(*2)		—			(41,031	)		(30,913	)		(44,618	)		(116,562	)
Effects of foreign currency movements		—			—			(306	)		(39	)		(345	)

Ending balance	￦	3,835,141			87,168			74,622			229,447			4,226,378

(*1)	The Group recognized impairment losses from golf and condo memberships with indefinite useful life by comparing its recoverable amount with its carrying amount.

(*2)	The Group recognized amortization of intangible asset in general and administrative expenses.

F-96

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

(c) Goodwill

i) Goodwill as of December 31, 2012 and 2013 are as follows:


	2012 (restated)		2013
Banking
Retail	￦	652,344		652,344
Corporate and investment		107,856		107,856
Other		82,060		82,060
Credit card		2,685,389		2,685,389
Life insurance		275,370		275,370
Others		27,344		32,122

	￦	3,830,363		3,835,141

ii) The changes in goodwill for the years ended December 31, 2012 and 2013 are as follows:


	2012 (restated)			2013
Beginning balance	￦	3,854,523			3,830,363
Acquisition of subsidiaries		27,555			11,989
Disposition from business combinations		—			(7,211	)
Impairment(*1)		(54,124	)		—
Change in subsidiaries		2,409			—

Ending balance	￦	3,830,363			3,835,141

(*1)	The impairment losses was recognized in ‘Others CGU’ of ￦10,284 million and ‘international CGU of Shinhan Bank’ of ￦43,840 million for the year ended December 31, 2013, respectively.

iii) Goodwill impairment test

The recoverable amounts of all CGUs to which goodwill has been allocated was based on their respective value in use and was determined by discounting the estimated future cash flows to be generated from the continuing use of the respective CGUs.

The recoverable amounts of CGUs have been determined using cash flow estimates which cover a 5.5 year period (July 31, 2013 through December 31, 2018) from the date of valuation, which is June 30, 2013, with a valuation of terminal value applied thereafter. In case of Shinhan Life Insurance, only the 30 years of future cash flows are applied since the present value of the future cash flows thereafter is not significant.

Discount and terminal growth rates

The discount rates applied have been determined based on the cost of equity which is comprised of a risk-free interest rate, a market risk premium and systemic risk (beta factor).

Expected terminal growth rate of cash flow estimation is on the basis of inflation rates.

F-97

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

Discount and terminal growth rates applied to each CGU are as follows:


	Discount rates		Terminal growth rate
Banking
Retail		11.45%		2.98%
Corporate and investment		10.40%, 11.45%		2.98%, 3.10%
Other		11.45%		2.98%
Credit card		11.00%		2.98%
Life insurance		10.50%		—
Other		11.40%, 11.80%		2.98%

Key assumptions used in the discounted cash flow calculations of CGUs (other than Shinhan Life Insurance) are as follows:


	2013			2014			2014			2016			2017 and thereafter
CPI growth		1.70	%		2.80	%		3.50	%		3.50	%		3.20	%
Real retail sales growth		0.00	%		3.30	%		4.00	%		3.70	%		3.40	%
Real GDP growth		1.60	%		3.40	%		4.10	%		3.80	%		3.60	%

Key assumptions used in the discounted cash flow calculations of Shinhan Life Insurance are as follows:


	Key assumptions
Return on investment		4.85	%
Risk-based solvency margin ratio		311.90	%

Total recoverable amount and book value of CGUs, to which goodwill has been allocated, are as follows:


	Amount
Total recoverable amount	￦	31,853,511
Total book value		29,351,776

	￦	2,501,735

F-98

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

16.

Investments in associates

(a) Investments in associates as of December 31, 2012 and 2013 are as follows:

Investees

Country

Reporting
date

Ownership (%) (*1)

2012

2013

Cardif Life Insurance(*1,3)

Korea

September 30

14.99

Aju Capital Co., Ltd.(*1,2)

”

12.85

Pohang TechnoPark 2PFV(*2)

”

December 31

14.90

Daewontos Co., Ltd.(*1,6)

”

September 30

36.33

Shinhan Corporate Restructuring Fund 5th(*5)

”

December 31

45.00

52.58

DCC Corporate Restructuring Fund 1st

”

24.14

—

PT Clemont Finance Indonesia(*1)

Indonesia

September 30

30.00

Haejin Shipping Co. Ltd.

Hongkong

December 31

24.00

APC Fund(*1)

”

September 30

25.20

SHC-IMM New Growth Fund(*5)

Korea

December 31

64.52

QCP New Technology Fund 20th

”

47.17

UAMCO., Ltd.(*2)

”

17.50

Miraeasset 3rd Investment Fund

”

50.00

Aju-Shinhan 1st Investment Fund

”

60.00

—

Aju-Shinhan 2nd Investment Fund

”

33.33

—

Aju 3rd Investment Fund

”

60.00

—

Medici 2nd Investment Fund(*5)

”

54.67

STI New growth engine Investment Fund

”

50.00

AJU-SHC WIN-WIN Company Fund 3(*5)

”

70.16

Shinhan K2 Secondary Fund(*4)

”

10.75

Aju 4th Investment Fund

”

30.00

KDB Daewoo Securities Platinum PEF

”

20.00

Shinhan-stonebridge Petro PEF(*4)

”

1.82

FAMILY FOOD CO,. LTD.(*1)

”

September 30

—

24.63

TS2013-6 M&A Investment Fund

”

December 31

—

25.00

Inhee Co., Ltd(*1,2,6)

”

September 30

—

15.36

Truston Falcon Asia US Feeder Fund

Singapore

December 31

—

31.58

Innopolis-CJ Bio Healthcare Fund

Korea

”

—

25.00

(*1)	Financial statements as of September 30, 2013 were used for the equity method.

(*2)	The Group used the equity method of accounting as the Group has significant influence in electing on the board of directors.

(*3)	The Group has significant influence due to material transaction with investee.

(*4)	As a managing partner, the Group has significant management control over the investee.

(*5)	As a limited partner, the Group is not able to participate in policy-making processes to obtain economic benefit from the investee.

(*6)	The Group reclassifies available-for-sale financial assets that were acquired by debt-equity swap to investments in associates since reorganization procedures were completed and voting rights were restored.

F-99

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

(b) Changes in investments in associates for the years ended December 31, 2012 and 2013 are as follows:


	2012
Investees	Beginning balance		Investment and dividend			Equity method income (loss)			Change in other comprehensive income			Impairment loss			Ending balance
Cardif Life Insurance	￦	25,028		9,775			1,138			6,706			—			42,647
Aju Capital Co., Ltd.(*1)		33,944		(1,849	)		5,505			494			(8,441	)		29,653
Macquarie Shinhan Infrastructure Management		4,576		(4,000	)		—			(576	)		—			—
Pohang TechnoPark 2PFV		3,697		—			(802	)		—			—			2,895
Daewontos Co., Ltd.		—		—			122			—			—			122
Shinhan Corporate Restructuring Fund 5th		669		—			6			—			—			675
DCC Corporate Restructuring Fund 1st		845		(290	)		(259	)		—			—			296
KTB Corporate Restructuring Fund 18th		10		(88	)		78			—			—			—
PT Clemont Finance Indonesia		7,346		—			517			(971	)		—			6,892
Haejin Shipping Co. Ltd.		1,164		—			(644	)		16			(536	)		—
APC Fund		38,400		279			2,391			(2,969	)		—			38,101
TSYoon 2nd Corporate Restructuring Fund		2,472		(3,475	)		570			433			—			—
SHC-IMM New Growth Fund		6,816		2,260			(192	)		—			—			8,884
Now IB Fund 6th		1,474		(1,529	)		55			—			—			—
QCP New Technology Fund 20th		121		—			138			—			—			259
UAMCO., Ltd.		104,240		—			16,652			25			—			120,917
Miraeasset 3rd Investment Fund		4,688		—			17			—			—			4,705
Now IB Fund 8th		1,334		(1,566	)		170			62			—			—
Aju-Shinhan 1st Investment Fund		3,370		—			378			—			—			3,748
Aju-Shinhan 2nd Investment Fund		2,036		(1,645	)		284			—			—			675
Aju 3rd Investment Fund		2,789		—			251			—			—			3,040
Stonebridge New Growth Investment Fund		564		(564	)		—			—			—			—
Medici 2nd Investment Fund		3,265		—			(57	)		—			—			3,208
STI New growth engine Investment Fund		—		2,000			824			—			—			2,824
AJU-SHC WIN-WIN Company Fund 3		—		2,375			579			—			—			2,954
Shinhan K2 Secondary Fund		—		1,750			(58	)		—			—			1,692
Aju 4th Investment Fund		—		3,000			(23	)		—			—			2,977
KDB Daewoo Securities Platinum PEF		—		6,580			(63	)		—			—			6,517
Shinhan-stonebridge Petro PEF		—		14,910			(73	)		—			—			14,837
NSC New Technology Fund 1st		—		(34	)		34			—			—			—

	￦	248,848		27,889			27,538			3,220			(8,977	)		298,518

(*1)	The market values of investments are ￦29,654 million as of December 31, 2012 based on the quoted market price at that date.

F-100

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)


	2013
Investees	Beginning balance		Investment and dividend			Equity method income (loss)			Change in other comprehensive income			Impairment loss			Ending balance
Cardif Life Insurance	￦	42,647		8,923			3,964			(4,284	)		—			51,250
Aju Capital Co., Ltd.(*1)		29,653		(1,849	)		568			(149	)		—			28,223
Pohang TechnoPark 2PFV		2,895		—			(48	)		—			—			2,847
Daewontos Co., Ltd.		122		—			(122	)		—			—			—
Shinhan Corporate Restructuring Fund 5th		675		—			(675	)		239			(239	)		—
DCC Corporate Restructuring Fund 1st		296		(273	)		(23	)		—			—			—
PT Clemont Finance Indonesia		6,892		—			81			(1,393	)		—			5,580
Haejin Shipping Co. Ltd.		—		—			1,051			(36	)		—			1,015
APC Fund		38,101		8,640			(23,533	)		(474	)		—			22,734
SHC-IMM New Growth Fund		8,884		440			(175	)		—			—			9,149
QCP New Technology Fund 20th		259		—			(10	)		—			—			249
UAMCO., Ltd.		120,917		—			18,373			(19	)		—			139,271
Miraeasset 3rd Investment Fund		4,705		—			232			799			—			5,736
Aju-Shinhan 1st Investment Fund		3,748		(3,635	)		(113	)		—			—			—
Aju-Shinhan 2nd Investment Fund		675		(693	)		18			—			—			—
Aju 3rd Investment Fund		3,040		(3,698	)		658			—			—			—
Medici 2nd Investment Fund]		3,208		—			(36	)		—			—			3,172
STI New growth engine Investment Fund		2,824		(273	)		(42	)		—			—			2,509
AJU-SHC WIN-WIN Company Fund 3		2,954		2,139			163			—			—			5,256
Shinhan K2 Secondary Fund		1,692		1,698			(28	)		—			—			3,362
Aju 4th Investment Fund		2,977		(3,957	)		2,560			—			—			1,580
KDB Daewoo Securities Platinum PEF		6,517		(1,079	)		1,125			—			—			6,563
Shinhan-stonebridge Petro PEF		14,837		(417	)		1,898			—			—			16,318
SHINHAN 2013-1 New Technology Business Investment Fund’		—		(172	)		172			—			—			—
FAMILY FOOD CO,. LTD.		—		4,158			53			460			—			4,671
TS2013-6 M&A Investment Fund		—		4,000			(89	)		—			—			3,911
Inhee Co., Ltd		—		—			382			(21	)		—			361
Truston Falcon Asia US Feeder Fund		—		10,030			913			(102	)		—			10,841
Innopolis-CJ Bio Healthcare Fund		—		4,000			(31	)		—			—			3,969

	￦	298,518		27,982			7,286			(4,980	)		(239	)		328,567

(*1)	The market values of investments are ￦37,049 million as of December 31, 2013 based on the quoted market price at that date.

F-101

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

(c) Condensed financial statements of associates as of and for the years ended December 31, 2012 and 2013 are as follows:


	2012				2013
Investees	Asset		Liability		Asset		Liability
Cardif Life Insurance	￦	2,993,361		2,765,496		3,466,657		3,184,257
Aju Capital Co., Ltd.		5,857,903		5,153,149		6,044,214		5,349,045
Pohang TechnoPark 2PFV		20,993		1,564		20,783		1,676
Daewontos Co., Ltd.		5,314		4,979		6,536		7,740
Shinhan Corporate Restructuring Fund 5th		2,749		1,250		12		1
DCC Corporate Restructuring Fund 1st		1,237		11		—		—
PT Clemont Finance Indonesia		77,548		54,573		56,333		37,734
Haejin Shipping Co. Ltd.		19,681		22,942		10,118		5,892
APC Fund		162,712		11,360		90,300		86
SHC-IMM New Growth Fund		13,772		2		14,180		—
QCP New Technology Fund 20th		548		—		527		—
UAMCO., Ltd.		4,906,006		4,215,061		4,363,884		3,568,061
Miraeasset 3rd Investment Fund		9,474		63		11,579		106
Aju-Shinhan 1st Investment Fund		6,353		106		—		—
Aju-Shinhan 2nd Investment Fund		2,031		7		—		—
Aju 3rd Investment Fund		5,070		3		—		—
Medici 2nd Investment Fund		5,869		—		5,803		—
STI New growth engine Investment Fund		5,649		—		5,019		—
AJU-SHC WIN-WIN Company Fund 3		4,229		19		7,554		62
Shinhan K2 Secondary Fund		15,732		—		31,266		5
Aju 4th Investment Fund		9,945		23		5,277		13
KDB Daewoo Securities Platinum PEF		32,676		90		33,005		188
Shinhan-stonebridge Petro PEF		814,189		—		895,695		211
FAMILY FOOD CO,. LTD.		—		—		67,882		45,103
TS2013-6 M&A Investment Fund		—		—		15,728		82
Inhee Co., Ltd		—		—		16,481		14,127
Truston Falcon Asia US Feeder Fund		—		—		35,209		880
Innopolis-CJ Bio Healthcare Fund		—		—		15,879		2

	￦	14,973,041		12,230,698		15,219,921		12,215,271

F-102

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

Condensed income statement information the years ended December 31, 2012 and 2013 are as follows:


	2012
Investees	Operating revenue		Net profit			Other comprehensive income			Total comprehensive income
Cardif Life Insurance	￦	798,918		2,497			44,709			47,206
Aju Capital Co., Ltd.		775,227		40,353			(96	)		40,257
Pohang TechnoPark 2PFV		—		(5,440	)		—			(5,440	)
Daewontos Co., Ltd.		24,397		243			—			243
Shinhan Corporate Restructuring Fund 5th		19		15			(532	)		(517	)
DCC Corporate Restructuring Fund 1st		16		(1,064	)		—			(1,064	)
PT Clemont Finance Indonesia		6,558		1,343			—			1,343
Haejin Shipping Co. Ltd.		2,482		(3,287	)		—			(3,287	)
APC Fund		3,564		2,076			—			2,076
SHC-IMM New Growth Fund		102		(300	)		—			(300	)
QCP New Technology Fund 20th		1		(21	)		—			(21	)
UAMCO., Ltd.		599,570		95,828			(422	)		95,406
Miraeasset 3rd Investment Fund		195		36			—			36
Aju-Shinhan 1st Investment Fund		677		630			—			630
Aju-Shinhan 2nd Investment Fund		882		852			—			852
Aju-Shinhan 3rd Investment Fund		433		419			—			419
Medici 2nd Investment Fund		5		(104	)		—			(104	)
STI New growth engine Investment Fund		—		1,648			—			1,648
AJU-SHC WIN-WIN Company Fund 3		844		825			—			825
Shinhan K2 Secondary Fund		—		(543	)		—			(543	)
Aju 4th Investment Fund		374		(77	)		—			(77	)
KDB Daewoo Securities Platinum PEF		—		(314	)		—			(314	)
Shinhan-stonebridge Petro PEF		26		(3,991	)		—			(3,991	)

	￦	2,214,290		131,624			43,659			175,283

F-103

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)


	2013
Investees	Operating revenue		Net profit			Other comprehensive income			Total comprehensive income
Cardif Life Insurance	￦	682,100		18,295			(28,557	)		(10,262	)
Aju Capital Co., Ltd.		790,073		2,232			1,324			3,556
Pohang TechnoPark 2PFV		—		(322	)		—			(322	)
Daewontos Co., Ltd.		17,313		(873	)		—			(873	)
Shinhan Corporate Restructuring Fund 5th		2,213		473			532			1,005
DCC Corporate Restructuring Fund 1st		42		(104	)		—			(104	)
PT Clemont Finance Indonesia		3,562		268			—			268
Haejin Shipping Co. Ltd.		194		7,572			—			7,572
APC Fund		—		(93,567	)		—			(93,567	)
SHC-IMM New Growth Fund		85		(271	)		—			(271	)
QCP New Technology Fund 20th		1		(21	)		—			(21	)
UAMCO., Ltd.		708,035		105,013			(107	)		104,906
Miraeasset 3rd Investment Fund		695		462			1,599			2,061
Aju-Shinhan 1st Investment Fund		274		(189	)		—			(189	)
Aju-Shinhan 2nd Investment Fund		131		55			—			55
Aju-Shinhan 3rd Investment Fund		1,234		1,097			—			1,097
Medici 2nd Investment Fund		—		(66	)		—			(66	)
STI New growth engine Investment Fund		—		(84	)		—			(84	)
AJU-SHC WIN-WIN Company Fund 3		869		233			—			233
Shinhan K2 Secondary Fund		680		(258	)		—			(258	)
Aju 4th Investment Fund		9,265		8,532			—			8,532
KDB Daewoo Securities Platinum PEF		6,000		5,626			—			5,626
Shinhan-stonebridge Petro PEF		107,695		104,163			—			104,163
SHINHAN 2013-1 New Technology Business Investment Fund’		872		729			—			729
FAMILY FOOD CO,. LTD.		32,205		217			1,869			2,086
TS2013-6 M&A Investment Fund		355		(354	)		—			(354	)
Inhee Co., Ltd		5,866		662			(18,156	)		(17,494	)
Truston Falcon Asia US Feeder Fund		3,977		2,887			—			2,887
Innopolis-CJ Bio Healthcare Fund		15		(123	)		—			(123	)

	￦	2,373,751		162,284			(41,496	)		120,788

F-104

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

(d) Reconciliation of the financial information presented to the carrying amount of its interest in the associate as of December 31, 2012 and 2013 are as follow:


	December 31, 2012
Investees	Net assets (a)			Ownership (%) (b)		the share of net assets (a)*(b)			Intra-group transactions			Other			Book value
Cardif Life Insurance(*1)	￦	227,865			14.99		34,157			(304	)		8,794			42,647
Aju Capital Co., Ltd.(*2)		662,870			12.85		85,176			—			(55,523	)		29,653
Pohang TechnoPark 2PFV		19,429			14.90		2,895			—			—			2,895
Daewontos Co., Ltd.		335			36.33		122			—			—			122
Shinhan Corporate Restructuring Fund 5th		1,499			45.00		675			—			—			675
DCC Corporate Restructuring Fund 1st		1,226			24.14		296			—			—			296
PT Clemont Finance Indonesia		22,975			30.00		6,892			—			—			6,892
Haejin Shipping Co. Ltd.(*3)		(3,261	)		24.00		(783	)		—			783			—
APC Fund		151,352			25.20		38,101			—			—			38,101
SHC-IMM New Growth Fund		13,770			64.52		8,884			—			—			8,884
QCP New Technology Fund 20th		548			47.17		259			—			—			259
UAMCO., Ltd.		690,945			17.50		120,917			—			—			120,917
Miraeasset 3rd Investment Fund		9,411			50.00		4,705			—			—			4,705
Aju-Shinhan 1st Investment Fund		6,247			60.00		3,748			—			—			3,748
Aju-Shinhan 2nd Investment Fund		2,024			33.33		675			—			—			675
Aju 3rd Investment Fund		5,067			60.00		3,040			—			—			3,040
Medici 2nd Investment Fund		5,869			54.67		3,208			—			—			3,208
STI New growth engine Investment Fund		5,649			50.00		2,824			—			—			2,824
AJU-SHC WIN-WIN Company Fund 3		4,210			70.16		2,954			—			—			2,954
Shinhan K2 Secondary Fund		15,732			10.75		1,692			—			—			1,692
Aju 4th Investment Fund		9,922			30.00		2,977			—			—			2,977
KDB Daewoo Securities Platinum PEF		32,586			20.00		6,517			—			—			6,517
Shinhan-stonebridge Petro PEF		814,189			1.82		14,837			—			—			14,837

	￦	2,700,459					344,768			(304	)		(45,946	)		298,518

(*1)	Other adjustments represent the increase in net assets due to paid-in capital increase occurred between the end of reporting period of the associate and the Group.

(*2)	Net assets do not include non-controlling interest. Other adjustments represent the cumulative impairment loss.

(*3)	Other adjustments represent the unrecognized share of losses of an associate because the Group has stopped recognizing its share losses of the associate due to cumulative loss.

F-105

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

(e) The unrecognized share of losses of associate for the year ended December 31, 2013 and cumulatively were as follow:


Investees	The unrecognized share of losses of associate for
Investees	the reporting period			the cumulative period
Daewontos Co., Ltd.	￦	(437	)		(437	)

17.

Investment properties, net

(a) Investment properties as of December 31, 2012 and 2013 are as follows:


	2012 (restated)			2013
Acquisition cost	￦	811,977			737,426
Accumulated depreciation		(33,472	)		(47,169	)

Book value	￦	778,505			690,257

(*)	Land and buildings were revalued on January 1, 2010 by an independent valuation service provider. Valuation was based on the recent arm’s length market transactions between knowledgeable and willing parties.

(b) Changes in investment properties for the years ended December 31, 2012 and 2013 are as follows:


	2012 (restated)			2013
Beginning balance	￦	512,034			778,505
Acquisitions		296,315			234,432
Disposals		(2,991	)		(32,915	)
Depreciation		(14,045	)		(17,238	)
Amounts transferred from property and equipment		6,701			(43,768	)
Amounts transferred to assets held for sale(*1)		(22,825	)		(228,762	)
Foreign currency adjustment		(13	)		3
Change in subsidiaries		3,329			—

Ending balance	￦	778,505			690,257

(*1)	Comprise of land and buildings, etc.


	2011		2012 (restated)		2013
Rental Income	￦	26,955		44,885		53,024
Direct operating expenses for investment properties that generated rental income		8,299		14,045		19,284

(d) The fair value of investment property as of December 31, 2012 and 2013 are as follows:


	2012 (restated)		2013
Land and buildings	￦	801,221		709,511

(*)	Valuation was based on the recent arm’s length market transactions between knowledgeable and willing parties.

F-106

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

18.

Other assets, net

Other assets as of December 31, 2012 and 2013 are as follows:


	2012 (restated)			2013
Accounts receivable	￦	4,579,155			3,530,688
Domestic exchange settlement debit		2,134,806			2,424,781
Guarantee deposits		1,358,007			1,353,898
Present value discount		(87,620	)		(75,218	)
Accrued income		1,524,432			1,329,910
Prepaid expense		187,568			133,086
Suspense payments		91,426			74,565
Sundry assets		204,479			157,572
Separate account assets		1,896,072			2,108,617
Advance payments		185,356			180,561
Unamortized deferred acquisition cost		1,239,756			1,152,549
Other		67,961			165,140
Allowances for impairment		(98,491	)		(86,956	)

	￦	13,282,907			12,449,193

19.

Leases

(a) Finance lease receivables of the Group as lessor as of December 31, 2012 and 2013 are as follows:


	2012
	Gross investment		Unearned finance income		Present value of minimum lease payment		Unguaranteed residual value
Not later than 1 year	￦	767,000		91,345		675,655		—
1 ~ 5 years		1,131,866		146,687		985,179		—
Later than 5 years		42,489		3,171		39,318		—

	￦	1,941,355		241,203		1,700,152		—


	2013
	Gross investment		Unearned finance income		Present value of minimum lease payment		Unguaranteed residual value
Not later than 1 year	￦	689,515		99,379		590,136		—
1 ~ 5 years		1,206,565		110,560		1,096,005		—
Later than 5 years		35,823		1,061		34,762		—

	￦	1,931,903		211,000		1,720,903		—

F-107

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

(b) The scheduled maturities of minimum lease payments of the Group as lessor as of December 31, 2012 and 2013 are as follows:

i) Finance leases


	2012
	Minimum lease payment		Unearned finance income		Present value of minimum lease payment
Not later than 1 year	￦	754,107		91,964		662,143
1 ~ 5 years		1,087,534		141,667		945,867
Later than 5 years		42,489		3,171		39,318

	￦	1,884,130		236,802		1,647,328


	2013
	Minimum lease payment		Unearned finance income		Present value of minimum lease payment
Not later than 1 year	￦	689,515		99,379		590,136
1 ~ 5 years		1,206,565		110,560		1,096,005
Later than 5 years		35,823		1,061		34,762

	￦	1,931,903		211,000		1,720,903

ii) Operating leases


	Minimum lease payment
	2012		2013
Not later than 1 year	￦	7,491		9,950
1 ~ 5 years		11,135		10,120

	￦	18,626		20,070

(c) Future minimum lease payments under non-cancellable operating lease of the Group as lessee as of December 31, 2012 and 2013 are as follows:


	Minimum lease payment
	2012		2013
Not later than 1 year	￦	104,108		94,296
1 ~ 5 years		122,332		115,946
Later than 5 years		9,606		12,238

	￦	236,046		222,480

F-108

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

20.

Pledged assets

(a) Assets pledged as collateral as of December 31, 2012 and 2013 are as follows:


	2012 (restated)		2013
Loans	￦	127,588		237,277
Securities
Trading assets		5,645,860		6,701,687
Available-for-sale financial assets		1,531,366		2,421,472
Held-to-maturity financial assets		5,551,874		4,922,650
Financial assets designated at fair value through profit or loss		400,837		485,202

		13,129,937		14,531,011

Deposits		100,498		124,716
Real estate		452,907		445,206
Other assets		56,056		93,480

	￦	13,866,986		15,431,690

(*)	The carrying amounts of asset pledged that the pledgees have the right to sell or repledge regardless of the Group’s default as of December 31, 2012 and 2013 were ￦5,530,540 million and ￦6,949,973 million, respectively.

(b) The fair value of collateral held that the Group has the right to sell or repledge regardless of pledger’s default as of December 31, 2012 and 2013 are as follows:


	2012 (restated)
	Collateral held		Collateral sold or repledged
Securities	￦	3,731,968		—

	2013
	Collateral held		Collateral sold or repledged
Securities	￦	3,233,542		—

F-109

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

21.

Deposits

Deposits as of December 31, 2012 and 2013 are as follows:


	2012 (restated)		2013
Demand deposits	￦	52,171,149		59,143,510
Time deposits		114,220,905		112,583,986
Negotiable certificates of deposits		1,303,683		1,827,088
Note discount deposits		3,013,376		3,132,185
CMA(*)		1,626,061		1,291,588
Others		960,528		831,524

	￦	173,295,702		178,809,881

(*)	CMA: Cash management account deposits

22.

Trading liabilities

Trading liabilities as of December 31, 2012 and 2013 are as follows:


	2012 (restated)		2013
Securities sold
Equity	￦	126,160		285,616
Debt		760,502		565,422
Others		—		8,649
Gold deposits		484,061		398,596

	￦	1,370,723		1,258,283

23.

Financial liabilities designated at fair value through profit or loss

Financial liabilities designated at fair value through profit or loss as of December 31, 2012 and 2013 are as follows:


	2012 (restated)		2013		Condition
Equity-linked securities sold	￦	4,017,337		4,545,850	Combined instrument
Derivatives-combined securities sold		804,860		1,362,608	Combined instrument
Securities sold		—		672	Evaluation and management on a fair value basis

	￦	4,822,197		5,909,130

F-110

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

24.

Borrowings

(a) Borrowings as of December 31, 2012 and 2013 are as follows:


	2012 (restated)
	Interest rate (%)	Amount
Borrowings in won
Borrowings from Bank of Korea	1.25~1.50	￦	1,354,261
Others	0.00~6.60		5,773,894

			7,128,155

Borrowings in foreign currency
Overdraft due to banks	0.00~0.63		155,269
Borrowings from banks	0.08~3.88		3,071,900
Others	0.30~1.86		2,675,937

			5,903,106

Call money	0.07~9.00		1,088,535
Bill sold	1.70~3.80		55,397
Bonds sold under repurchase agreements	0.30~3.65		5,189,539
Due to Bank of Korea in foreign currency	0.10		156,150
Bond Issuance Cost			(2,842	)

		￦	19,518,040


	2013
	Interest rate (%)	Amount
Borrowings in won
Borrowings from Bank of Korea	0.50~1.00	￦	1,291,005
Others	0.00~5.05		6,085,756

			7,376,761

Borrowings in foreign currency
Overdraft due to banks	0.00~0.78		225,689
Borrowings from banks	0.05~1.83		2,640,072
Others	0.55~1.85		1,980,853

			4,846,614

Call money	0.10~5.08		1,403,260
Bill sold	1.50~2.93		28,631
Bonds sold under repurchase agreements	0.30~3.34		6,395,322
Due to Bank of Korea in foreign currency	0.10		94,315
Bond Issuance costs			(1,995	)

		￦	20,142,908

F-111

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

25.

Debt securities issued

Debt securities issued as of December 31, 2012 and 2013 are as follows:


	2012 (restated)
	Interest rate (%)	Amount
Debt securities issued in won
Debt securities issued	0.00~9.00	￦	27,355,181
Subordinated debt securities issued	3.41~8.00		5,150,290
Loss on fair value hedges			107,559
Bond Issuance Cost			(64,123	)

			32,548,907

Debt securities issued in foreign currency
Debt securities issued	0.72~8.13		6,199,275
Loss on fair value hedges			117,096
Bond Issuance Cost			(26,811	)

			6,289,560

		￦	38,838,467


	2013
	Interest rate (%)	Amount
Debt securities issued in won
Debt securities issued	0.00~8.36	￦	26,219,135
Subordinated debt securities issued	3.41~8.00		5,510,630
Loss on fair value hedges			(24,853	)
Bond Issuance Cost			(73,895	)

			31,631,017

Debt securities issued in foreign currency
Debt securities issued	0.74~8.13		5,813,843
Loss on fair value hedges			70,163
Bond Issuance Cost			(23,584	)

			5,860,422

		￦	37,491,439

F-112

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

26.

Employee benefits

(a) Defined benefit plan assets and liabilities

Defined benefit plan assets and liabilities as of December 31, 2012 and 2013 are as follows:


	2012 (restated)			2013
Present value of defined benefit obligation	￦	1,016,018			1,037,143
Fair value of plan assets		(793,685	)		(919,488	)

Recognized liabilities for defined benefit obligation	￦	222,333			117,655

(b) Changes in the present value of defined benefit obligation and plan assets for the years ended December 31, 2012 and 2013 were as follows:


	2012 (restated)
(restated)	Defined benefit obligation			Plan assets			Net defined benefit liability
Beginning balance	￦	877,037			(601,602	)		275,435
Included in profit or loss
Current service cost		134,068			—			134,068
Interest expense (income)		44,732			(32,549	)		12,183

		178,800			(32,549	)		146,251

Included in other comprehensive income:
Remeasurements loss (gain) :
— Actuarial gains (losses) arising from :
Demographic assumptions		(87,623	)		—			(87,623	)
Financial assumptions		46,523			—			46,523
Experience adjustment		33,786			—			33,786
— Return on plan assets excluding interest income		—			7,079			7,079

		(7,314	)		7,079			(235	)

Other :
Benefits paid by the plan		(40,430	)		11,158			(29,272	)
Contributions paid into the plan		—			(177,362	)		(177,362	)
Change in subsidiaries		7,899			(409	)		7,490
Effect of movements in exchange rates		26			—			26

		(32,505	)		(166,613	)		(199,118	)

Ending balance	￦	1,016,018			(793,685	)		222,333

Profit or loss arising from defined benefit plans is included in general and administrative expenses.

F-113

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)


	2012 (restated)		2013
Plan assets
Equity securities	￦	28,680		35,691
Debt securities		892		741
Due from banks		725,584		868,455
Other		38,529		14,601

	￦	793,685		919,488

(d) Actuarial assumptions as of December 31, 2012 and 2013 were as follows;


	2012	2013	Description
Discount rate	3.06%~4.44%	4.12%~4.98%	AA corporate bond yields
Future salary increasing rate	1.88%~4.22% + Upgrade rate	2.28%~3.66% + Upgrade rate	Average for 5 years
the weighted-average duration	7.48 year~14.12 year	7.71 year~16.11 year

(e) Sensitivity analysis

Reasonably possible changes as of December 31, 2013 to one of the relevant actuarial assumptions, holding other assumptions constant, would have affected the defined benefit obligation by the amounts shown below.


	Defined benefit obligation
	Increase			Decrease
Discount rate (1% movement)	￦	135,953			(116,991	)
Future salary increasing rate (1% movement)		(113,506	)		133,939

27.

Provisions

(a) Provisions as of December 31, 2012 and 2013 are as follows:


	2012 (restated)		2013
Asset retirement obligations	￦	39,348		41,730
Expected loss related to litigation		135,748		106,202
Unused credit commitments		415,420		411,171
Bonus card points program		24,873		29,104
Financial guarantee contracts issued		77,840		92,980
Others		54,656		69,096

	￦	747,885		750,283

F-114

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

(b) Changes in provisions for the years ended December 31, 2012 and 2013 are as follows:


	2012 (restated)
	Asset retirement			Litigation			Unused credit			Card point(*1)			Guarantee			Other			Total
Beginning balance	￦	35,727			215,808			444,810			24,439			85,778			63,070			869,632
Provision (reversal)		676			13,986			(26,764	)		39,142			7,949			13,356			48,345
Provision used		(439	)		(93,586	)		—			(38,708	)		—			(22,118	)		(154,851	)
Foreign exchange translation		—			(460	)		(2,651	)		—			(2,428	)		(643	)		(6,182	)
Others		3,384			—			25			—			(13,459	)		—			(10,050	)
Change in subsidiaries		—			—			—			—			—			991			991

Ending balance	￦	39,348			135,748			415,420			24,873			77,840			54,656			747,885


	2013
	Asset retirement			Litigation			Unused credit			Card point(*1)			Guarantee			Other			Total
Beginning balance	￦	39,348			135,748			415,420			24,873			77,840			54,656			747,885
Provision (reversal)		301			3,456			(5,390	)		60,847			21,906			61,961			143,081
Provision used		(993	)		(32,844	)		—			(56,616	)		—			(44,515	)		(134,968	)
Foreign exchange translation		—			(158	)		1,141			—			2,240			(41	)		3,182
Others		3,074			—			—			—			(9,006	)		(2,965	)		(8,897	)

Ending balance	￦	41,730			106,202			411,171			29,104			92,980			69,096			750,283

(*1)	Provisions for card point were classified as fees and commission expense

(c) Asset retirement obligation liabilities represent the estimated cost to restore the existing leased properties which is discounted to the present value using the appropriate discount rate at the end of the reporting period. Disbursements of such costs are expected to incur at the end of lease contract. Such costs are reasonably estimated using the average lease year and the average restoration expenses. The average lease year is calculated based on the past ten-year historical data of the expired leases. The average restoration expense is calculated based on the actual costs incurred for the past three years using the three-year average inflation rate.

(d) Allowance for guarantees and acceptances as of December 31, 2012 and 2013 are as follows:


	2012 (restated)			2013
Guarantees and acceptances outstanding	￦	9,627,145			10,564,718
Contingent guarantees and acceptances		5,203,826			5,053,750
ABS and ABCP purchase commitments		2,019,404			1,599,331
Endorsed bill		3,946			54,460

	￦	16,535,149			17,272,259

Allowance for loss on guarantees and acceptances	￦	77,840			92,980
Ratio		0.47	%		0.54	%

F-115

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

28.

Liability under insurance contracts

(a) Insurance liabilities as of December 31, 2012 and 2013 are as follows:


	2012		2013
Policy reserve	￦	13,415,015		15,657,500
Policyholder’s equity adjustment		3,544		(1,045	)

	￦	13,418,559		15,656,455

(b) Policy reserve of December 31, 2012 and 2013 are as follows:


	2012		2013
Interest rate linked	￦	8,092,651		10,261,450
Fixed interest rate		5,322,364		5,396,050

	￦	13,415,015		15,657,500


	2012
	Individual insurance
	Pure endowment		Death		Endowment		Subtotal
Premium reserve	￦	2,983,148		5,745,842		3,932,195		12,661,185
Guarantee reserve		9,315		4,252		190		13,757
Unearned premium reserve		4		698		—		702
Reserve for outstanding claims		49,891		494,767		83,964		628,622
Interest rate difference guarantee reserve		2,534		229		20		2,783
Mortality gains reserve		7,910		7,292		397		15,599
Interest gains reserve		9,202		334		29		9,565
Long term duration dividend reserve		73		14		2		89
Reserve for policyholder’s profit dividend		5,388		—		—		5,388
Reserve for losses on dividend insurance contract		1,289		—		—		1,289

	￦	3,068,754		6,253,428		4,016,797		13,338,979


	Group insurance
	Pure protection		Savings		Subtotal		Total
Premium reserve	￦	42,471		281		42,752		12,703,937
Guarantee reserve		—		—		—		13,757
Unearned premium reserve		548		—		548		1,250
Reserve for outstanding claims		32,731		—		32,731		661,353
Interest rate difference guarantee reserve		—		—		—		2,783
Mortality gains reserve		5		—		5		15,604
Interest gains reserve		—		—		—		9,565
Long term duration dividend reserve		—		—		—		89
Reserve for policyholder’s profit dividend		—		—		—		5,388
Reserve for losses on dividend insurance contract		—		—		—		1,289

	￦	75,755		281		76,036		13,415,015

F-116

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)


	2013
	Individual insurance
	Pure endowment		Death		Endowment		Subtotal
Premium reserve	￦	3,302,309		6,484,119		5,023,729		14,810,157
Guarantee reserve		10,140		13,495		187		23,822
Unearned premium reserve		3		621		—		624
Reserve for outstanding claims		55,723		563,061		104,958		723,742
Interest rate difference guarantee reserve		2,422		194		18		2,634
Mortality gains reserve		7,579		6,246		354		14,179
Interest gains reserve		12,462		296		27		12,785
Long term duration dividend reserve		70		12		2		84
Reserve for policyholder’s profit dividend		1,057		—		—		1,057
Reserve for losses on dividend insurance contract		439		—		—		439

	￦	3,392,204		7,068,044		5,129,275		15,589,523


	Group insurance
	Pure protection		Savings		Subtotal		Total
Premium reserve	￦	38,092		278		38,370		14,848,527
Guarantee reserve		—		—		—		23,822
Unearned premium reserve		556		—		556		1,180
Reserve for outstanding claims		29,046		—		29,046		752,788
Interest rate difference guarantee reserve		—		—		—		2,634
Mortality gains reserve		5		—		5		14,184
Interest gains reserve		—		—		—		12,785
Long term duration dividend reserve		—		—		—		84
Reserve for policyholder’s profit dividend		—		—		—		1,057
Reserve for losses on dividend insurance contract		—		—		—		439

	￦	67,699		278		67,977		15,657,500

(d) Reinsurance credit risk as of December 31, 2012 and 2013 are as follows:


	2012
	Reinsurance assets		Reinsurance account receivable
AA- to AA+	￦	133		139
A- to A+		777		2,518

	￦	910		2,657


	2013
	Reinsurance assets		Reinsurance account receivable
AA- to AA+	￦	129		434
A- to A+		647		1,673

	￦	776		2,107

F-117

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

(e) Income or expenses on insurance for the years ended December 31, 2011, 2012 and 2013 are as follows:


	2011			2012			2013
Insurance income
Premium income	￦	3,553,537			4,412,777			4,209,673
Reinsurance income		7,528			5,348			4,301
Separate account income		22,008			15,665			14,894

		3,583,073			4,433,790			4,228,868

Insurance expenses
Claims paid		1,329,067			(1,508,778	)		(1,678,721	)
Reinsurance premium expenses		6,733			(5,011	)		(4,115	)
Provision for policy reserves		1,882,436			(2,554,251	)		(2,242,619	)
Separate account expenses		22,008			(15,665	)		(14,894	)
Discount charge		332			(406	)		(1,640	)
Acquisition costs		656,236			(686,716	)		(566,456	)
Collection expenses		12,373			(13,793	)		(12,538	)
Deferred acquisition costs		(622,198	)		631,056			431,058
Amortization of deferred acquisition costs		415,287			(489,529	)		(518,265	)

		3,702,274			(4,643,093	)		(4,608,190	)

Net loss on insurance	￦	(119,201	)		(209,303	)		(379,322	)

(f) Maturity of premium reserve as of December 31, 2012 and 2013 are as follows:


	2012
	Less than 1 year		1 ~ 3 years		3 ~ 7 years		7 ~ 10 years		10 ~ 20 years		More than 20 years		Total
Interest rate linked	￦	9,302		210,736		213,402		1,191,678		661,460		5,967,470		8,254,048
Fixed interest rate		56,883		65,960		219,535		342,018		1,273,608		2,491,885		4,449,889

Ending balance	￦	66,185		276,696		432,937		1,533,696		1,935,068		8,459,355		12,703,937


	2013
	Less than 1 year		1 ~ 3 years		3 ~ 7 years		7 ~ 10 years		10 ~ 20 years		More than 20 years		Total
Interest rate linked	￦	127,120		132,806		646,877		983,459		846,873		7,234,458		9,971,593
Fixed interest rate		41,429		37,924		349,342		377,535		1,221,327		2,849,376		4,876,933

Ending balance	￦	168,549		170,730		996,219		1,360,994		2,068,200		10,083,834		14,848,526

F-118

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

(g) Liability adequacy test, LAT

Liability adequacy tests were performed on the premium reserve, unearned premium reserve and guarantee reserve as of December 31, 2013 of contract held at December 31, 2013 and 2012. The premium reserve considered the amount net level premium reserve less, where appropriate, deferred acquisition cost in accordance with the article 6-3 of Regulation on Supervision of Insurance Business Act.

The assumptions of the current estimation used to assessment and their basis for calculation was as follows:


	Assumption		Measurement basis
	2012	2013	Measurement basis
Discount rate	4.50% ~ 5.03%	3.74% ~ 10.61%	Future rate of return on invested asset based on the rate scenario suggested by FSS.

Mortality rate	10% ~ 320%	9% ~ 256%	Rate of premium paid on risk premium based on experience-based rate by classes of sales channel, product and transition period of last 5 years.

Operating expense rate	Acquisition cost — The first time: 90.0% ~ 674.0% — From the second time : 0% ~ 90.0% Maintenance expense (each case): 1,532won ~ 6,768won Collection expenses (on gross premium): 132.26won ~ 440.53won	Acquisition cost — The first time: 90.0% ~ 586.9% — From the second time : 0% ~ 274.0% Maintenance expense (each case): 1,232won ~ 9,429won Collection expenses (on gross premium): 0won ~ 438won	Operating expense rate on gross premium or expense per contract based on experience-based rate of last 1 year

Surrender ratio	0.42% ~ 62.57%	0% ~ 60.9%	Surrender ratio by classes of sales channel, product and transition period of last 5 years.

F-119

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

The result of liability adequacy test as of December 31, 2012 and 2013 are as follows:


	2012
	Provisions for test		LAT base		Premium loss(surplus)
Participating
Fixed interest	￦	584,566		740,489		155,923
Variable interest		483,985		464,575		(19,410	)

		1,068,551		1,205,064		136,513

Non- Participating
Fixed interest		3,097,139		2,474,500		(622,639	)
Variable interest		6,579,371		5,478,979		(1,100,392	)

		9,676,510		7,953,479		(1,723,031	)

Option and Guarantee		12,126		67,255		55,129

	￦	10,757,187		9,225,798		(1,531,389	)


	2013
	Provisions for test		LAT base		Premium loss(surplus)
Participating
Fixed interest	￦	586,624		1,080,943		494,319
Variable interest		626,862		621,944		(4,918	)

		1,213,486		1,702,887		489,401

Non- Participating
Fixed interest		3,920,626		3,546,318		(374,308	)
Variable interest		10,706,716		8,446,667		(2,260,049	)

		14,627,342		11,992,985		(2,634,357	)

Option and Guarantee		23,822		204,963		181,141

	￦	15,864,650		13,900,835		(1,963,815	)

Sensitivity analysis as of December 31, 2012 and 2013 are as follows:


	LAT fluctuation
	2012			2013
Discount rate increased by 0.5%	￦	(979,703	)		(876,040	)
Discount rate decreased by 0.5%		1,089,958			993,435
Operating expense increased by 10%		229,698			224,335
Mortality rate increased by 10%		545,774			513,309
Mortality rate increased by 5%		272,887			256,274
Surrender ratio increased by 10%	￦	104,501			165,307

(*)	As a result of sensitivity analysis above, there are no effects on income and capital, because the increase of LAT exceeds LAT surplus.

F-120

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

29.

Other liabilities

Other liabilities as of December 31, 2012 and 2013 are as follows:


	2012 (restated)			2013
Accounts payable	￦	6,123,428			4,854,478
Accrued expenses		3,579,461			3,302,409
Dividend payable		27,599			27,837
Advance receipts		148,027			243,412
Unearned income(*)		318,604			318,572
Withholding value-added tax and other taxes		344,884			492,469
Securities deposit received		692,303			654,826
Present value discount account		(25,716	)		(24,397	)
Foreign exchange remittances pending		207,461			206,405
Domestic exchange remittances pending		3,032,615			1,022,871
Borrowing from trust account		2,110,786			2,299,929
Due to agencies		657,855			588,020
Deposits for subscription		101,798			72,270
Separate account liabilities		1,922,465			2,203,997
Sundry liabilities		2,042,118			2,538,431
Other		309,173			219,286

	￦	21,592,861			19,020,815

(*)	Changes in deferred (unearned) point income for the years ended December 31, 2012 and 2013 are as follows:


	2012			2013
Beginning balance	￦	150,177			158,895
Deferred income		184,248			208,618
Recognized income		(175,530	)		(227,077	)

Ending balance	￦	158,895			140,436

F-121

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

30.

Equity

(a) Equity as of December 31, 2012 and 2013 are as follows:


	2012 (restated)			2013
Capital stock:
Common stock	￦	2,370,998			2,370,998
Preferred stock		274,055			274,055

		2,645,053			2,645,053

Hybrid bond		537,443			537,443
Capital surplus:
Share premium		9,494,769			9,494,769
Others		392,430			392,566

		9,887,199			9,887,335

Capital adjustments		(393,097	)		(393,128	)
Accumulated other comprehensive income, net of tax:
Valuation gain (loss) on available-for-sale financial assets		1,225,809			956,955
Equity in other comprehensive income of associates		5,501			690
Foreign currency translation adjustments for foreign operations		(88,297	)		(146,122	)
Net loss from cash flow hedges		(4,846	)		1,243
Other comprehensive income of separate account		1,712			(117	)
Actuarial gains (losses)		(159,758	)		(140,842	)

		980,121			671,807

Retained earnings(*1)		12,715,172			14,194,163
Non-controlling interest(*2)		2,541,253			2,316,988

	￦	28,913,144			29,859,661

(*1)	Restriction on appropriation of retained earnings is as follows:

1) Legal reserve of ￦1,557,916 million and ￦1,616,961 million for the years ended December 31, 2012 and 2013, respectively

2) Regulatory reserve for loan loss of ￦8,786 million and ￦7,621 million for the years ended December 31, 2012 and 2013, respectively

3) Retained earnings restricted for dividend at subsidiaries level pursuant to law and regulations amounts to ￦3,792,011 million for the years ended December 31, 2013

(*2)

The hybrid bonds of ￦2,329,760 million and ￦2,099,350 million issued by Shinhan bank were attributed to non-controlling interests as of December 31, 2012 and 2013, respectively. Dividends to those hybrid bonds of ￦153,989 million and ￦133,268 million were attributed to non-controlling interests for years ended December 31, 2012 and 2013, respectively.

F-122

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

(b) Capital stock

i) Capital stock of the Group as of December 31, 2012 and 2013 are as follows:


Number of authorized shares		1,000,000,000
Par value per share in won	￦	5,000
Number of issued common stocks outstanding		474,199,587
Number of issued preferred stocks outstanding		11,100,000

The capital stock does not match the total amount of the par value for preferred stock issued ￦55,500 million as of December 31, 2013 because redeemable preferred stock (43,711,000 shares) has been repaid by retirement of stock method.

ii) Preferred stocks issued by the Group as of December 31, 2013 are as follows:


	Number of shares		Predetermined dividend rate (%) (*1)			Redeemable period
Redeemable preferred stock:
Series 12 (*2)		11,100,000		5.58	%	April 21, 2016 - April 21, 2031

(*1)	Based on initial issuance price

(*2)	The Group maintains the right to redeem Series 12 redeemable preferred stock in part or in its entirety during the redeemable period at par value (reflecting contract dividend rate). If the preferred shares are not redeemed by the end of the redeemable period, those rights will lapse.

(c) Hybrid bond

Hybrid bond classified as other equity as of December 31, 2012 and 2013 are as follows:


					Amount
	Issue date		Maturity date		2012 (restated)		2013		Interest rate (%)
Hybrid bond		October 24, 2011		October 24, 2041	￦	238,582		238,582		5.80	%
		May 22, 2012		May 22, 2042		298,861		298,861		5.34	%

					￦	537,443		537,443

The above hybrid bonds can be repaid at par value early after 5 years from date of issuance, and the Group has an unconditional right to extend the maturity under the same condition. In addition, if no dividend was to be paid for common shares, the agreed interest was also not paid.

(d) Capital adjustments

Changes in capital adjustments for the years ended December 31, 2012 and 2013 are as follows:


	2012			2013
Beginning balance	￦	(392,654	)		(393,097	)
Other transactions with owners		(443	)		(31	)

Ending balance	￦	(393,097	)		(393,128	)

F-123

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

(e) Accumulated other comprehensive income

i) Changes in accumulated other comprehensive income for the years ended December 31, 2012 and 2013 are as follows:


	2012 (restated)
	Items that are or may be reclassified to profit or loss														Items that will never be reclassified to profit or loss			Total
	Valuation gain(loss) on available-for- sale financial assets			Equity in other comprehensive income of associates		Foreign currency translation Adjustments for foreign operations			Net loss from cash flow hedges			Other Comprehensive income of separate account			Remeasurements of the defined benefit liability			Total
Beginning balance	￦	1,211,196			1,404		(1,841	)		(20,501	)		1,142			(158,620	)		1,032,780
Change due to fair value		449,494			3,220		—			—			841			—			453,555
Reclassification
Change due to impairment or disposal		(438,178	)		—		—			—			—			—			(438,178	)
Effect of hedge accounting		—			—		—			154,820			—			—			154,820
Hedging		(3,861	)		—		82,095			(134,167	)		—			—			(55,933	)
Effects from exchange rate fluctuations		12,785			—		(151,555	)		—			—			—			(138,770	)
Remeasurements of the defined benefit liability		—			—		—			—			—			(184	)		(184	)
Deferred income taxes		(5,038	)		877		(17,219	)		(4,998	)		(270	)		363			(26,285	)
Non-controlling interest		(589	)		—		222			—			—			(1,317	)		(1,684	)

Ending balance	￦	1,225,809			5,501		(88,298	)		(4,846	)		1,713			(159,758	)		980,121

F-124

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)


	2013
	Items that are or may be reclassified to profit or loss															Items that will never be reclassified to profit or loss			Total
	Valuation gain(loss) on available-for- sale financial assets			Equity in other comprehensive income of associates			Foreign currency translation Adjustments for foreign operations			Net loss from cash flow hedges			Other Comprehensive income of separate account			Remeasurements of the defined benefit liability			Total
Beginning balance	￦	1,225,809			5,501			(88,298	)		(4,846	)		1,713			(159,758	)		980,121
Change due to fair value		232,496			(4,979	)		—			—			(2,414	)		—			225,103
Reclassification
Change due to impairment or disposal		(583,253	)		—			—			—			—			—			(583,253	)
Effect of hedge accounting		—			—			—			37,580			—			—			37,580
Hedging		4,170			—			71,031			(29,546	)		—			—			45,655
Effects from exchange rate fluctuations		(9,374	)		—			(116,552	)		—			—			—			(125,926	)
Remeasurements of the defined benefit liability		—			—			—			—			—			24,635			24,635
Deferred income taxes		85,858			168			(12,324	)		(1,944	)		584			(6,036	)		66,306
Non-controlling interest		1,249			—			20			—			—			317			1,586

Ending balance	￦	956,955			690			(146,123	)		1,244			(117	)		(140,842	)		671,807

F-125

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

(f) Appropriation of retained earnings

Statements of appropriation of retained earnings for the years ended December 31, 2012 and 2013 are as follows:


	2012 (restated)			2013
Unappropriated retained earnings:
Balance at beginning of year	￦	4,846,219			4,969,958
Changes in accounting policy		1,605			2,650
Interest on hybrid bond		(23,688	)		(29,940	)
Net income		591,494			731,638

		5,415,630			5,674,306

Reversal of regulatory reserve for loan loss:		9,901			1,165

		5,425,531			5,675,471

Appropriation of retained earnings:
Legal reserve		59,045			73,164
Dividends
Dividends on common stock		331,940			308,230
Dividends on preferred stock paid		61,938			61,938

		393,878			370,168

		452,923			443,332

Unappropriated retained earnings to be carried over to subsequent year	￦	4,972,608			5,232,139

(*)	These statements of appropriation of retained earnings were based on the separate financial statements of the parent company.

31.

Dividends

(a) Details of dividends recognized as distributions to common stockholders for the years ended December 31, 2012 and 2013 are as follows:


	2012			2013
Total number of shares issued and outstanding	￦	474,199,587			474,199,587
Par value per share in won		5,000			5,000
Dividend per share in won		700			650

Dividends	￦	331,940			308,230

Dividend rate per share (%)		14	%		13	%

F-126

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

(b) Details of dividends recognized as distributions to preferred stockholders for the years ended December 31, 2012 and 2013 are as follows:


	2012
	Total shares outstanding		Dividend per share in won		Total dividend		Issue price per share in won		Dividend rate per issue price
Convertible redeemable preferred stock series 12		11,100,000		5,580		61,938		100,000		5.58	%

		11,100,000			￦	61,938


	2013
	Total shares outstanding		Dividend per share in won		Total dividend		Issue price per share in won		Dividend rate per issue price
Convertible redeemable preferred stock series 12		11,100,000		5,580		61,938		100,000		5.58	%

		11,100,000			￦	61,938


	2012			2013
Amount of hybrid bond	￦	540,000			540,000
Interest rate		5.34%~5.80	%		5.34%~5.80	%

Dividend	￦	23,688			29,939

(d) There is no unrecognized dividend on cumulative preferred stocks as of December 31, 2012 and 2013.

F-127

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

32.

Net interest income

Net interest income for the years ended December 31, 2011, 2012 and 2013 are as follows:


	2011		2012 (restated)			2013
Interest income
Cash and due from banks	￦	248,571		246,711			200,853
Trading assets		394,296		488,954			492,766
Financial assets designated at fair value through profit or loss		19,743		25,854			37,989
Available-for-sale financial assets		1,025,523		1,154,229			983,076
Held-to-maturity financial assets		642,931		594,684			527,853
Loans		11,281,606		11,309,119			10,168,445
Others		168,044		178,558			177,033

		13,780,714		13,998,109			12,588,015

Interest expense
Deposits		4,181,049		(4,636,873	)		(3,914,160	)
Borrowings		485,253		(565,090	)		(468,395	)
Debt securities issued		1,942,850		(1,740,174	)		(1,521,461	)
Others		91,591		(76,254	)		(81,143	)

		6,700,743		(7,018,391	)		(5,985,159	)

Net interest income	￦	7,079,971		6,979,718			6,602,856

33.

Net fees and commission income

Net fees and commission income for the years ended December 31, 2011, 2012 and 2013 are as follows:


	2011		2012 (restated)			2013
Fees and commission income
Credit placement fees	￦	50,440		57,900			66,891
Commission received as electronic charge receipt		145,449		133,842			132,146
Brokerage fees		495,082		353,694			328,781
Commission received as agency		114,970		211,001			212,982
Investment banking fees		68,856		70,142			44,530
Commission received in foreign exchange activities		161,887		148,271			143,177
Asset management fees		68,289		46,936			50,592
Credit card fees		2,020,010		2,070,625			2,105,870
Others		432,149		398,693			404,655

		3,557,132		3,491,104			3,489,624

Fees and commission expense
Credit-related fee		25,148		(38,363	)		(38,486	)
Credit card fees		1,544,291		(1,678,342	)		(1,726,023	)
Others		228,522		(231,254	)		(338,760	)

		1,797,961		(1,947,959	)		(2,103,269	)

Net fees and commission income	￦	1,759,171		1,543,145			1,386,355

F-128

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

34.

Dividend income

Dividend income for the years ended December 31, 2011, 2012 and 2013 are as follows:


	2011		2012 (restated)		2013
Trading assets	￦	2,290		3,102		6,243
Available-for-sale financial assets		206,570		171,223		151,773

	￦	208,860		174,325		158,016

35.

Net trading income (loss)

Net trading income (loss) for the years ended December 31, 2011, 2012 and 2013 are as follows:


	2011			2012 (restated)			2013
Trading assets
Gain (loss) on valuation of debt securities	￦	1,731			5,989			(9,790	)
Gain (loss) on sale of debt securities		4,603			40,249			(42,150	)
Gain on valuation of equity securities		(3,304	)		34,324			33,862
Gain on sale of equity securities		(36,315	)		44,959			50,660
Loss on valuation of other trading assets		23,939			(6,228	)		(91,522	)

		(9,346	)		119,293			(58,940	)

Trading liabilities
Gain (loss) on valuation of securities sold		(251	)		(5,850	)		2,695
Gain (loss) on disposition of securities sold		(22,284	)		(20,614	)		11,695
Gain on valuation of other trading liabilities		(29,670	)		4,978			157,547
Gain on disposition of other trading liabilities		5,308			2,944			2,355

		(46,897	)		(18,542	)		174,292

Derivatives
Gain (loss) on valuation of derivatives		(93,403	)		381,040			(320,768	)
Gain on transaction of derivatives		17,798			126,070			282,450

		(75,605	)		507,110			(38,318	)

	￦	(131,848	)		607,861			77,034

F-129

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

36.

Net gain (loss) on financial instruments designated at fair value through profit or loss

Net gain (loss) on financial instruments designated at fair value through profit or loss for the years ended December 31, 2011, 2012 and 2013 are as follows:


	2011			2012			2013
Financial assets designated at fair value through profit or loss:
Cash and due from banks
Gain on valuation	￦	32,731			38,982			30,346
Debt securities
Gain on valuation		(20,684	)		46,370			7,180
Gain on sale and redemption		12,206			15,359			21,858

		(8,478	)		61,729			29,038

Equity securities
Dividend income		1,405			1,025			688
Gain (loss) on valuation		(27,596	)		6,273			(3,210	)
Gain on sale		18,864			16,443			26,786

		(7,327	)		23,741			24,264

Financial liabilities designated at fair value through profit or loss:
Borrowings
Gain (loss) on valuation		239,011			(445,455	)		143,329
Loss on disposal and redemption		(84,026	)		(211,067	)		(348,997	)

		154,985			(656,522	)		(205,668	)

	￦	171,911			(532,070	)		(122,020	)

37.

Net impairment loss on financial assets

Net impairment loss on financial assets for the years ended December 31, 2011, 2012 and 2013 are as follows:


	2011			2012 (restated)		2013
Impairment loss
Loans	￦	864,060			1,324,786		1,082,366
Available-for-sale financial assets		110,481			121,004		229,614
Other		31,946			—		42,561

		1,006,487			1,445,790		1,354,541

Reversal of impairment loss
Available-for-sale financial assets		(23,529	)		20,149		14,644
Others		—			9,421		—

		(23,529	)		29,570		14,644

	￦	982,958			1,416,220		1,339,897

F-130

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

38.

General and administrative expenses

General and administrative expenses for the years ended December 31, 2011, 2012 and 2013 are as follows:


	2011 (restated)		2012 (restated)		2013
Employee benefits	￦	2,338,687		2,433,958		2,497,504
Salaries		2,132,229		2,228,600		2,330,885
Severance benefits		127,316		160,894		76,523
Defined contribution		18,573		14,643		15,371
Defined benefit		108,743		146,251		61,152
Termination benefits		79,142		44,464		90,096
Rent		294,178		338,536		348,239
Entertainment		35,321		34,987		34,224
Depreciation		211,771		201,771		203,168
Amortization		75,963		97,066		116,562
Taxes and dues		145,685		161,975		164,906
Advertising		230,633		188,358		211,304
Research		10,819		12,447		12,733
Others		641,071		592,478		613,910

	￦	3,984,128		4,061,576		4,202,550

F-131

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

39.

Share-based payments

(a) Stock options granted as of December 31, 2013 are as follows:


	4th grant		5th grant		6th grant			7th grant
Grant date		March 30, 2005		March 21, 2006		March 20, 2007			March 19, 2008
Exercise price in won		￦28,006		￦38,829		￦54,560			￦49,053
Number of shares granted		2,695,200		3,296,200		1,301,050			808,700
Contractual exercise year		Within 4 years after 3 years from grant date		Within 4 years after 3 years from grant date		Within 4 years after 3 years from grant date			Within 4 years after 3 years from grant date
Changes in number of shares granted:
Balance at January 1, 2013		102,389		2,012,706		1,025,856			619,778
Exercised		—		1,904,350		—			—

Balance at December 31, 2013		102,389		108,356		1,025,856			619,778
Assumptions used to determine the fair value of options:
Risk-free interest rate		—		—		2.64	%		2.64	%
Expected exercise year		—		—		2 months			8 months
Expected stock price volatility		—		—		16.91	%		19.76	%
Expected dividend yield		—		—		1.82	%		1.61	%
Weighted average fair value per share	￦	19,294	￦	8,471	￦	5		￦	2,228

The weighted average exercise price for 1,856,379 options outstanding as of December 31, 2013 is ￦50,339. As of December 31, 2013, the exercise of the remaining stock options was temporarily prohibited and after the suspension, the exercise period will be extended.

(b) Performance shares granted as of December 31, 2013 are as follows:


	Content
	Expired	Non-expired
Type	Cash-settled share-based payment
Performance conditions	Increase rate of stock price and achievement of target ROE
Number of shares estimated at December 31, 2013	381,134		492,462
Fair value per share in won	￦ 45,926	￦	47,300

The amount of cash payment for the Company’s cash-settled share-based payment arrangements with performance conditions is determined at the fourth anniversary date from the grant date based on the share price which is an arithmetic mean of weighted average share prices of the past two-months, past one-month and past one-week. So the fair value of number of shares expired is estimated using the arithmetic mean of weighted average share prices at the day after expiration date and the fair value of number of shares non-expired is estimated using the closing share price at the end of reporting year.

F-132

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)


	2011
	Employee of						Total
	Shinhan Financial Group			Subsidiaries			Total
Stock options granted:
4th	￦	(2,615	)		(10,105	)		(12,720	)
5th		(3,656	)		(19,130	)		(22,786	)
6th		(1,073	)		(4,784	)		(5,857	)
7th		(1,642	)		(5,854	)		(7,496	)
Performance share		296			6,330			6,626

	￦	(8,690	)		(33,543	)		(42,233	)


	2012
	Employee of						Total
	Shinhan Financial Group			Subsidiaries			Total
Stock options granted:
4th	￦	430			1,814			2,244
5th		(1,235	)		(6,938	)		(8,173	)
6th		(200	)		(1,411	)		(1,611	)
7th		(188	)		(992	)		(1,180	)
Performance share		1,163			7,807			8,970

	￦	(30	)		280			250


	2013
	Employee of						Total
	Shinhan Financial Group			Subsidiaries			Total
Stock options granted:
4th	￦	76			789			865
5th		494			3,190			3,684
6th		(9	)		(62	)		(71	)
7th		81			427			508
Performance share		2,189			12,272			14,461

	￦	2,831			16,616			19,447

F-133

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

(d) Accrued expenses and the intrinsic value as of December 31, 2012 and 2013 are as follows:


	2012
	Employee of				Total
	Shinhan Financial Group		Subsidiaries		Total
Stock options granted:
4th	￦	97		1,013		1,110
5th		322		1,809		2,131
6th		9		67		76
7th		139		734		873
Performance share		3,077		23,259		26,336

	￦	3,644		26,882		30,526

The intrinsic value of share-based payments is ￦27,489 million based on the quoted market price ￦38,850 per share for stock options and performance share.


	2013
	Employee of				Total
	Shinhan Financial Group		Subsidiaries		Total
Stock options granted:
4th	￦	173		1,802		1,975
5th		54		864		918
6th		1		4		5
7th		220		1,161		1,381
Performance share		5,267		35,531		40,798

	￦	5,715		39,362		45,077

The intrinsic value of share-based payments is ￦43,691 million based on the quoted market price ￦47,300 per share for stock options and performance share.

F-134

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

40.

Net other operating income (expense)

Other operating income and other operating expense for the years ended December 31, 2011, 2012 and 2013 are as follows:


	2011			2012 (restated)			2013
Other operating income
Gain on sale of assets:
Loans	￦	95,926			69,977			219,423
Others:
Gain on hedge activity		321,444			190,680			336,650
Reversal of allowance for acceptances and guarantee		70,860			10			5,317
Gain on trust account		1,025			3,255			3,960
Gain on other allowance		22,455			37,832			19,582
Others		89,002			91,679			259,070

		504,786			323,456			624,579

		600,712			393,433			844,002

Other operating expense
Loss on sale of assets:
Loans		(57,806	)		(40,397	)		(36,580	)
Others:
Loss on hedge activity		(276,088	)		(342,004	)		(363,531	)
Contribution		(239,841	)		(252,231	)		(249,730	)
Loss on allowance for acceptances and guarantee		—			(7,960	)		(27,223	)
Loss on other allowance		(123,792	)		(36,896	)		(56,903	)
Depreciation of operating lease assets		(11,320	)		(7,761	)		(7,734	)
Deposit insurance premium		(230,752	)		—			—
Others		(199,495	)		(429,703	)		(641,988	)

		(1,081,288	)		(1,076,555	)		(1,347,109	)

		(1,139,094	)		(1,116,952	)		(1,383,689	)

Net other operating expenses	￦	(538,382	)		(723,519	)		(539,687	)

F-135

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

41.

Net other non-operating expenses

Other non-operating income and other non-operating expense for the years ended December 31, 2011, 2012 and 2013 are as follows:


	2011			2012 (restated)			2013
Other non-operating income
Gain on sale of assets:
Property and equipment	￦	925			688			1,405
Investment property		5			315			5,170
Non-current assets held-for-sale		1			14,572			3,012
Lease assets		2,864			3,568			898
Others		776			222			193

		4,571			19,365			10,678

Gain on sale of Investments in associates		45,773			36,084			59

Others:
Rental income on investment property		26,955			44,885			52,733
Reversal of impairment loss on Intangible asset		—			32			170
Gain from assets contributed		5,900			5,039			561
Gain on bond retirement		14,473			24			—
Gains on conversion of convertible bond		—			7,217			—
Others		111,221			110,148			92,099

		158,549			167,345			145,563

		208,893			222,794			156,300

Other non-operating expense
Loss on sale of assets:
Property and equipment		1,910			(1,065	)		(3,301	)
Investment property		—			(426	)		—
Non-current assets held-for-sale		1,531			—			—
Lease assets		1,830			(1,368	)		(1,094	)
Others		107			(65	)		—

		5,378			(2,924	)		(4,395	)

Loss on sale of Investments in associates		470			(1,423	)		—
Impaired loss on Investments in associates		4,351			(8,977	)		(239	)

		4,821			(10,400	)		(239	)

Others:
Donations		117,887			(74,073	)		(48,619	)
Depreciation of investment properties		9,245			(14,045	)		(17,238	)
Impaired loss on property and equipment		—			—			(85	)
Impaired loss on intangible assets		39,674			(58,549	)		(2,746	)
Write-off of intangible assets		3,682			(585	)		(552	)
Loss on bond retirement		296			(10,256	)		(1,780	)
Collecting of written-off expenses		6,433			(6,414	)		(5,740	)
Others		59,091			(20,417	)		(37,638	)

		236,308			(184,339	)		(114,398	)

		246,507			(197,663	)		(119,032	)

Net other non-operating income	￦	(37,614	)		25,131			37,268

F-136

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

42.

Income tax expense

(a) Income tax expense for the years ended December 31, 2011, 2012 and 2013 are as follows:


	2011 (restated)			2012 (restated)			2013
Current income tax expense	￦	1,013,109			819,320			682,629
Adjustment for prior periods		(30,798	)		(7,838	)		(1,785	)
Origination and reversal of temporary differences		(147,061	)		(46,740	)		(124,002	)
Income tax recognized in other comprehensive income		121,330			(26,015	)		65,723

Income tax expenses	￦	956,580			738,727			622,565

(b) Income tax expense (benefit) is calculated by multiplying net income before tax with the tax rate for the years ended December 31, 2011, 2012 and 2013 are as follows:


	2011 (restated)			2012 (restated)			2013
Income before income taxes	￦	4,343,791			3,230,636			2,682,135
Income taxes at statutory tax rates		1,051,127			781,826			647,942
Adjustments:
Non-taxable income		(49,363	)		(42,217	)		(37,017	)
Non-deductible expense		8,312			10,837			14,304
Tax credit		(9,228	)		(1,819	)		(1,982	)
Other		(13,470	)		(2,062	)		1,103
Refund due to adjustments of prior year tax returns		(30,798	)		(7,838	)		(1,785	)
Income tax expense	￦	956,580			738,727			622,565

Effective tax rate (%)		22.02	%		22.87	%		23.21	%

F-137

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

(c) Deferred tax expenses by origination and reversal of deferred assets and liabilities and temporary differences for the years ended December 31, 2012 and 2013 are as follows:


	2012 (restated)
	Beginning balance			Profit or loss			Other comprehensive income			Change in subsidiaries			Ending balance
Unearned income	￦	(134,399	)		(15,039	)		—			—			(149,438	)
Account receivable		(18,044	)		5,074			—			—			(12,970	)
Trading assets		(5,665	)		(4,770	)		—			—			(10,435	)
Available-for-sale		3,646			58,401			(5,038	)		—			57,009
Investment in subsidiaries		6,006			(17,428	)		877			—			(10,545	)
Valuation and depreciation of property and equipment		(162,899	)		17,565			—			(349	)		(145,683	)
Derivative asset (liability)		33,762			21,902			(4,998	)		—			50,666
Deposits		37,508			(5,508	)		—			—			32,000
Accrued expenses		69,707			(5,656	)		—			—			64,051
Defined benefit obligation		132,058			87,570			68			1,543			221,239
Plan assets		(127,344	)		(27,719	)		295			—			(154,768	)
Other provisions		260,397			(25,658	)		—			—			234,739
Allowance for acceptances and guarantees		26,540			(7,881	)		—			—			18,659
Allowance related to asset revaluation		(44,873	)		—			—			—			(44,873	)
Allowance for expensing depreciation		(802	)		56			—			—			(746	)
Deemed dividend		1,334			—			—			—			1,334
Accrued contributions		20,282			(5,441	)		—			—			14,841
Financial assets designated at fair value through profit of loss		(52,642	)		(12,567	)		—			—			(65,209	)
Allowances		9,581			34,998			—			—			44,579
Fictitious dividend		1,077			(8	)		—			—			1,069
Liability under insurance contracts		2,591			738			—			—			3,329
Other		(48,173	)		(25,630	)		(17,219	)		392			(90,630	)

	￦	9,648			72,999			(26,015	)		1,586			58,218

(*)	Deferred tax assets from overseas subsidiaries were decreased by ￦244 million due to foreign exchange rate movements.

F-138

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)


	2013
	Beginning balance			Profit or loss			Other comprehensive income			Ending balance
Unearned income	￦	(149,438	)		(700	)		—			(150,138	)
Account receivable		(12,970	)		11,072			—			(1,898	)
Trading assets		(10,435	)		(8,335	)		—			(18,770	)
Available-for-sale		57,009			86,095			86,845			229,949
Investment in subsidiaries		(10,545	)		3,820			168			(6,557	)
Valuation and depreciation of property and equipment		(145,683	)		(4	)		—			(145,687	)
Derivative asset (liability)		50,666			(29,433	)		(1,944	)		19,289
Deposits		32,000			(6,310	)		—			25,690
Accrued expenses		64,051			8,270			—			72,321
Defined benefit obligation		221,239			(13,179	)		(6,345	)		201,715
Plan assets		(154,768	)		(40,016	)		318			(194,466	)
Other provisions		234,739			(2,348	)		—			232,391
Allowance for acceptances and guarantees		18,659			3,838			—			22,497
Allowance related to asset revaluation		(44,873	)		84			—			(44,789	)
Allowance for expensing depreciation		(746	)		56			—			(690	)
Deemed dividend		1,334			—			—			1,334
Accrued contributions		14,841			(2,605	)		—			12,236
Financial assets designated at fair value through profit of loss		(65,209	)		36,330			—			(28,879	)
Allowances		44,579			(8,274	)		—			36,305
Fictitious dividend		1,069			5,442			—			6,511
Liability under insurance contracts		3,329			2,436			—			5,765
Other		(90,630	)		11,975			(13,319	)		(91,974	)

	￦	58,218			58,214			65,723			182,155

(*)	Deferred tax assets from overseas subsidiaries were decreased by ￦ 65 million due to foreign exchange rate movements.

F-139

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

(d) Deferred tax assets and liabilities that were directly charged or credited to equity for the years ended December 31, 2012 and 2013 are as follows:


	January 1, 2012 (restated)						Changes						December 31, 2012 (restated)
	Other comprehensive income			Tax effect			Other comprehensive income			Tax effect			Other comprehensive income			Tax effect
Valuation gain (loss) on available-for-sale financial assets	￦	1,599,335			(386,377	)		17,890			(5,038	)		1,617,225			(391,415	)
Foreign currency translation adjustments for foreign operations		(8,143	)		4,540			(67,476	)		(17,219	)		(75,619	)		(12,679	)
Gain (loss) on cash flow hedge		(27,047	)		6,545			20,654			(4,998	)		(6,393	)		1,547
Equity in other comprehensive income of associates		1,520			(116	)		3,221			877			4,741			761
The accumulated other comprehensive income in separate account(*)		1,419			(277	)		840			(271	)		2,259			(548	)
Remeasurements of the defined benefit liability		(209,261	)		50,641			(1,501	)		363			(210,762	)		51,004

Income tax charged or credited directly to equity	￦	1,357,823			(325,044	)		(26,372	)		(26,286	)		1,331,451			(351,330	)


	December 31, 2012 (restated)						Changes						December 31, 2013
	Other comprehensive income			Tax effect			Other comprehensive income			Tax effect			Other comprehensive income			Tax effect
Valuation gain (loss) on available-for-sale financial assets	￦	1,617,225			(391,415	)		(354,713	)		85,858			1,262,512			(305,557	)
Foreign currency translation adjustments for foreign operations		(75,619	)		(12,679	)		(45,501	)		(12,324	)		(121,120	)		(25,003	)
Gain (loss) on cash flow hedge		(6,393	)		1,547			8,034			(1,944	)		1,641			(397	)
Equity in other comprehensive income of associates		4,741			761			(4,980	)		168			(239	)		929
The accumulated other comprehensive income in separate account(*)		2,259			(548	)		(2,413	)		584			(154	)		36
Remeasurements of the defined benefit liability		(210,762	)		51,004			24,952			(6,036	)		(185,810	)		44,968

Income tax charged or credited directly to equity	￦	1,331,451			(351,330	)		(374,621	)		66,306			956,830			(285,024	)

(*)	Deferred tax effects, which are originated from the accumulated other comprehensive income in separate account, were included in the other assets of separate account’s financial statement.

F-140

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

(e) The amount of deductible temporary differences, unused tax losses, and unused tax credits that are not recognized as deferred tax assets as of December 31, 2012 and 2013 are as follows:


	2012 (restated)		2013
Tax loss carry forward(*)	￦	99,449		99,449

(*)	At the end of reporting date, the expected extinctive date of tax loss carry forward and tax credits carry forward that are not recognized as deferred tax assets are as follows:


	1 year or less		1-2 years		2-3 years		More than 3 years
Tax loss carry forward	￦	—		—		—		99,449

(f) The amount of deferred tax liabilities regarding investment in subsidiaries which are not recognized as of December 31, 2012 and 2013 are as follows:


	2012 (restated)			2013
Investment in associates	￦	(11,346	)		(10,357	)

(g) The Group set off a deferred tax asset against a deferred tax liability of the same taxable entity if, and only if, they relate to income taxes levied by the same taxation authority and the entity has a legally enforceable right to set off current tax assets against current tax liabilities. Deferred tax assets and liabilities presented on a gross basis prior to any offsetting as of December 31, 2012 and 2013 are as follows:


	2012 (restated)			2013
Deferred tax assets	￦	213,115			216,483
Deferred tax liabilities		(154,897	)		(34,328	)

43.

Earnings per share

(a) Basic earnings per share

Basic earnings per share for the years ended December 31, 2011, 2012 and 2013 are as follows:


	2011 (restated)		2012 (restated)		2013
Net income for the year	￦	3,214,124		2,321,890		1,902,808
Less: dividends on preferred stock		273,858		77,100		61,938
hybrid bond		2,594		23,688		29,940

		276,452		100,788		91,878

Net income available for common stock		2,937,672		2,221,102		1,810,930
Weighted average number of common shares outstanding		474,199,587		474,199,587		474,199,587

Earnings per share in won	￦	6,195		4,684		3,819

F-141

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

(b) Diluted earnings per share

Diluted earnings per share for the years ended December 31, 2011, 2012 and 2013 are as follows:


	2011 (restated)		2012 (restated)		2013
Net income available for common stock	￦	2,937,672		2,221,102		1,810,930
Add: dividends on redeemable convertible preferred stock		27,657		—		—

Diluted net earnings		2,965,329		2,221,102		1,810,930
Weighted average number of common shares outstanding after adjustment for the effects of dilutive potential common shares(*)		488,920,587		474,199,587		474,199,587

Earnings and diluted per share in won	￦	6,065		4,684		3,819

(*)	Weighted average number of common shares outstanding after adjustment for the effects of dilutive potential common shares for the years ended December 31, 2011, 2012 and 2013 are as follows:


	2011 (restated)		2012 (restated)		2013
Weighted average number of common shares		474,199,587		474,199,587		474,199,587
Effect of conversion of convertible redeemable preferred stock		14,721,000		—		—

Weighted average number of common shares outstanding after adjustment for the effects of dilutive potential common shares		488,920,587		474,199,587		474,199,587

F-142

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

44.

Commitments and contingencies

(a) Guarantees, acceptances and credit commitments as of December 31, 2012 and 2013 are as follows:


	2012 (restated)		2013
Guarantees
Guarantee outstanding	￦	9,627,145		10,564,718
Contingent guarantees		5,203,826		5,053,750

		14,830,971		15,618,468

Commitments to extend credit
Loan commitments in won		51,984,314		53,343,728
Loan commitments in foreign currency		19,271,257		20,120,391
ABS and ABCP Commitments(*)		2,019,404		1,599,331
Others		1,183,413		1,185,788

		74,458,388		76,249,238

Endorsed bills
Secured endorsed bills		3,946		54,460
Unsecured endorsed bills		11,519,392		11,327,272

		11,523,338		11,381,732

Loans sold with recourse		2,099		2,099

	￦	100,814,796		103,251,537

(*)

The Group consolidates a structured entity when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to most significantly affect those returns through its power over the structured entity based on the terms in the agreement relating to the establishment of the structured entity. As the Group’s interests in the structured entities are presented as liabilities in the consolidated statement of financial position of the Group, the Group does not recognize non-controlling interests for the consolidated structured entities. The Group provides ABCP purchase agreement amounting to ￦ 362,277 million to the structured entities described above.

F-143

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

(b) Legal contingencies

The Group’s pending lawsuits as a defendant for the years ended December 31, 2013 were as follows.


Case	Number of claim		Descriptions	Claim amount
Contract void check and the return of unfair profits		35	As of December 31, 2013, the Group provided provision for the lawsuits that had been filed to nullify investor’s obligations under the KIKO contracts. The cases are currently pending at the second appeal or the final appeal. As of December 31, 2013, the Group believes that it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation. The Group has recorded a provision or a liability related to this claim.		164,865

Claimed for principal and interest of the ABCP		1	A holder of an Asset Backed Commercial Paper (“ABCP”) has claimed for principal and interest of the ABCP against the Group, the broker of the ABCP deal, as the Group had refused to pay insisting the line of credit was provided illegally by their employee. As of December 31, 2013, the Group believes that there are remote possibilities of resource outflows in respect of the lawsuit, considering other similar litigations. The Group has not recorded a provision or a liability related to this claim.		65,000

Compensation for a loss		1	The plaintiff has filed a lawsuit against the Group claiming that the Group should compensate for a loss of the damaged right of management insisting the Group had purchased the shares of Shinho Paper Co., Ltd. (currently known as Artone Paper Co., Ltd.) while being aware that the sale had been executed against the will of the members of Aram Corporate Restructuring Association. The first appeal has been ruled in favor of the plaintiff. The Group has appealed and such appeal is currently pending at the second appeal. As of December 31, 2013, the Group believes that it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation. The Group has recorded a provision or a liability related to this claim.		53,069

Claimed uncollected receivables of goods		1	A plaintiff claimed uncollected receivables of goods against the Group since the plaintiff had delivered goods based on a bank guarantee forged by the Group issued. The case is currently pending at the first appeal and the Group recorded a provision based on similar litigations.		43,362

Refund a cost of the fixed collateral establishment		86	The plaintiffs have filed the lawsuits against the Group claiming that the Group should refund a cost of the fixed collateral establishment insisting a loan agreement was unfair and invalid since it prescribed that the cost should be paid by the borrower. As of December 31, 2013, the Group believes that there are remote possibilities of resource outflows due to the lawsuits. The Group has not recorded a provision or a liability related to this claim.		11,436

Claimed for price collusion		19	The plaintiffs have filed the lawsuits against the Group claiming the price collusion for value added network fee.		33,724

Other		224	Various cases such as a compensation for a loss claim.		259,150

		367			630,606

F-144

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

As of December 31, 2013, the Group recorded ￦106,202 million as Provisions and ￦673 million as Liabilities under insurance contracts with respect to these lawsuits.

45.

Statement of cash flows

(a) Cash and cash equivalents in the consolidated statements of cash flows as of December 31, 2012 and 2013 are as follows:


	2012 (restated)			2013
Cash and due from banks	￦	13,511,704			16,484,168
Due from financial institutions with a maturity over three months from date of acquisition		(3,974,234	)		(4,320,575	)
Restricted due from banks		(4,529,705	)		(6,142,417	)

	￦	5,007,765			6,021,176

(b) Significant non-cash activities for the years ended December 31, 2012 and 2013 are as follows:


	2012 (restated)		2013
Increase in available-for-sale financial assets from debt-equity swap	￦	61,893		159,966
Transfers from construction-in-progress to property and equipment		13,651		134,790
Transfers between property and equipment and investment property		6,701		43,768
Transfers from property and equipment to assets held for sale		21,507		6,278
Transfers from investment property to assets held for sale		22,825		228,762

(c) On January 11, 2013, the Group obtained a controlling ownership over Yehanbyoul Savings Bank by acquiring an 100 % of the outstanding and voting interests for ￦45,813 million won in consideration.

Net cash inflow was ￦ 385,291 million from business combination as the investee had cash and cash equivalents of ￦431,104 million.

As of the acquisition date, the Group acquired cash and cash equivalents amounting to ￦ 90,010 million and ￦5,260 million through business combination with Tomato Savings Bank Co., Ltd and Everdigm, Corp., respectively.

F-145

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

46.

Related parties

Intra-group balances, and income and expenses arising from intra-group transactions are eliminated in preparing the consolidated financial statements.

(a) Significant balances with the related parties as of December 31, 2012 and 2013 are as follows:


Related party	Account	2012			2013
Investments in associates
Aju Capital co., Ltd	Loans and receivables	￦	50,000			50,000
”	Allowances		(254	)		(275	)
”	Deposits		20,297			467
UAMCO., Ltd	Deposits		517			1,719
Pohang TechnoPark2PFV	Deposits		14,794			14,689
Shinhan Corporate Restructuring Fund 5th	Account Receivable		27			27
”	Allowances		(27	)		(27	)
Cardif Life Insurance	Credit card assets		94			103
”	Deposits		2,353			231
Key management personnel and their immediate relatives
Loans and receivables			3,221			4,560

Assets			53,061			54,388
Liabilities		￦	37,961			17,106

F-146

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

(b)	Significant transactions with the related parties for the years ended December 31, 2011, 2012 and 2013 are as follows:


Related party	Account	2011			2012			2013
Investments in associates
Aju Capital co., Ltd	Interest income	￦	—			2,042			1,059
”	Net other operating income		664			11			—
”	Interest expense		—			—			(24	)
”	Allowance for impairment		304			—			(21	)
UAMCO., Ltd	Interest income		—			311			115
”	Interest expense		—			—			(1	)
”	Allowance for impairment		(23	)		52			—
Pohang TechnoPark2PFV	Net other operating income		(286	)		286			—
”	Interest expense		—			(17	)		(15	)
”	Allowance for impairment		(3	)		3			—
Shinhan Corporate Restructuring Fund 8th	Fees and commission income		824			—			—
SHC-AJU 1^st Investment Fund	”		97			—			—
Petra Private Equity Fund	”		365			—			—
SHC-AJU 2^nd Investment Fund	”		11			—			—
Cardif Life Insurance	”		577			271			168
Shinhan K2 Secondary Fund	”		—			281			464
NSC New Technology Fund 1st	”		—			—			88
Key management personnel and their immediate relatives
Interest income			80			135			168

		￦	2,610			3,375			2,001

(c) Key management personnel compensation

Key management personnel compensation for the years ended December 31, 2011, 2012 and 2013 are as follows:


	2011		2012		2013
Short-term employee benefits	￦	21,310		23,679		18,980
Severance benefits		585		503		322
Share-based payment transactions		3,279		3,904		6,475

	￦	25,174		28,086		25,777

(d) There are no guarantees provided between the related parties as of December 31, 2013 and 2012.

F-147

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

47.

Investment in subsidiaries

(a) Condensed financial information for the Group’s subsidiaries.

i) Condensed financial position for the Group’s subsidiaries as of December 31, 2012 and 2013 are as follows:


	2012 (restated)						2013
	Total assets		Total liabilities		Total equities		Total assets		Total liabilities		Total equities
Shinhan financial group (Separate)	￦	27,212,924		7,546,003		19,666,921		27,424,645		7,450,173		19,974,472
Shinhan Bank		237,395,784		217,058,924		20,336,860		238,045,694		217,509,614		20,536,080
Shinhan Card Co., Ltd.		22,279,918		16,546,741		5,733,177		21,649,234		15,540,451		6,108,783
Shinhan Investment Corp.		16,465,338		14,287,115		2,178,223		19,097,725		16,862,018		2,235,707
Shinhan Life Insurance Co., Ltd		16,942,184		15,617,037		1,325,147		19,385,187		18,085,212		1,299,975
Shinhan Capital Co., Ltd.		3,526,185		3,053,871		472,314		3,772,378		3,252,627		519,751
Jeju Bank		3,146,674		2,868,780		277,894		3,196,049		2,903,954		292,095
Shinhan Credit Information Co., Ltd.		19,176		5,659		13,517		21,026		7,303		13,723
Shinhan Private Equity		604,946		524,358		80,588		572,884		488,850		84,034
Shinhan BNP Paribas AMC		168,911		23,218		145,693		169,611		20,982		148,629
SHC Management Co., Ltd.		8,747		331		8,416		8,804		1,705		7,099
Shinhan Data system		16,298		8,594		7,704		20,542		12,360		8,182
Shinhan Savings Bank		636,115		542,861		93,254		777,096		681,113		95,983
Shinhan Aitas Co., Ltd.		30,976		4,309		26,667		34,584		4,146		30,438

	￦	328,454,176		278,087,801		50,366,375		334,175,459		282,820,508		51,354,951

(*1)	Summarized financial information of the subsidiaries is based of consolidated financial information, if applicable.

(*2)	Subsidiaries such as trust, beneficiary certificates, corporate restructuring fund and private equity fund are excluded.

F-148

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

ii) Condensed comprehensive income statement for the Group’s subsidiaries for the years ended December 31, 2011, 2012 and 2013 are as follows:


	2011 (restated)								2012 (restated)								2013
	Operating revenue		Net Income (loss)			Total comprehensive income (loss)			Operating revenue		Net Income (loss)			Total comprehensive income (loss)			Operating revenue		Net Income (loss)			Total comprehensive income (loss)
Shinhan financial group (separate)	￦	2,145,768		1,673,932			1,674,610			992,793		591,494			590,449			1,107,013		731,638			731,369
Shinhan Bank		18,808,507		2,208,988			1,634,530			17,382,529		1,662,718			1,526,684			15,470,116		1,373,177			1,014,975
Shinhan Card Co., Ltd.		4,497,105		893,959			936,096			4,585,830		741,772			802,663			4,591,704		658,074			776,419
Shinhan Investment Corp.		2,061,234		101,710			113,316			1,981,935		63,912			78,307			2,692,355		75,366			67,911
Shinhan Life Insurance Co., Ltd		4,340,729		239,456			217,586			5,240,366		215,303			201,838			5,057,368		79,690			15,423
Shinhan Capital Co., Ltd.		344,579		51,712			48,729			370,696		4,746			(3,108	)		313,499		50,372			48,074
Jeju Bank		193,042		23,905			22,275			193,712		23,041			29,977			176,138		20,483			15,452
Shinhan Credit Information Co., Ltd.		32,235		(662	)		(746	)		29,924		(48	)		1			29,399		155			259
Shinhan Private Equity		84,366		(7,647	)		(7,624	)		40,882		1,185			1,185			254,458		8,836			8,852
Shinhan BNP Paribas AMC		109,811		35,040			34,961			102,473		31,302			30,497			97,981		31,468			31,455
SHC Management Co., Ltd.		259		(34	)		(34	)		293		150			150			237		31,468			31,468
Shinhan Data system		50,128		1,329			1,056			58,170		1,623			946			62,858		(1,317	)		(1,923	)
Shinhan Savings Bank Co., Ltd.		—		(87	)		(87	)		124,244		(23,427	)		(26,467	)		75,929		(29,919	)		(30,622	)
Shinhan Aitas Co., Ltd.		—		—			—			4,385		(513	)		(513	)		27,608		3,770			3,770

	￦	32,667,763		5,221,601			4,674,668			31,108,232		3,313,258			3,232,609			29,956,663		3,033,261			2,712,882

(*1)	Summarized financial informations about the subsidiary are the amount after consolidation, if applicable.

(*2)	Subsidiaries such as trust, beneficiary certificates, corporate restructuring fund and private equity fund are excluded.

(b) Change in subsidiaries

i) Subsidiaries newly excluded in the Group for the year ended December 31, 2012 are as follows :


Subsidiary				Reason
Everdigm Corp.				The practical ability to direct the relevant activities.

ii) Subsidiaries newly consolidated in the Group for the year ended December 31, 2013 were as follows:


Subsidiary				Reason
Symphony Energy Co., Ltd.				The investee is in liquidated for the current period.

(*)	Subsidiaries such as trust, beneficiary certificates, corporate restructuring fund and private equity fund are excluded.

F-149

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

48.

Information of trust business

(a) Significant balances with trust business as of December 31, 2012 and 2013 are as follows:


	2012 (restated)		2013
Borrowings from trust account	￦	2,110,786		2,299,929

(b) Transactions with trust business for the years ended December 31, 2011, 2012 and 2013 are as follows:


	2011		2012 (restated)		2013
Trust management fees	￦	62,305		40,716		42,347
Commission income		46		24		—
Interest on borrowings from trust account		61,976		44,224		50,050

49.

Interests in Unconsolidated Structured Entities

(a) The nature and extent of interests in unconsolidated structured entities

The Group involved in assets-backed securitization, structured financing, investment fund and other structured entities and characteristics of these structured entities are as follows:


		Description
Assets-backed securitization		Securitization vehicles are established to buy the assets from the originators and issue the asset-backed securities in order to facilitate the originators’ funding activities and enhance their financial soundness. The group is involved in the securitization vehicles by purchasing the asset-backed securities issued, or providing credit enhancement.

Structured financing		Structured entities for project financing are established to raise funds and invest in a specific project such as M&A (Mergers and Acquisitions), BTL (Build-Transfer-Lease), shipping finance, etc. The Group is involved in the structured entities by originating loans, investing in equity, or providing credit enhancement

Investment fund		Investment funds include trusts, private equity fund and corporate restructuring fund which are financed through the issue of units to invest in a group of assets such as stocks or bonds and distribute their income and capital gains to their investors. The Group invests in units issued by the fund and manages assets on behalf of third-party investors as fund manager (including General Partner).

i) The size of unconsolidated structured entities as of December 31, 2013 are as follows:


	Assets-backed securitization		Structured financing		Investment fund		Total
Total assets	￦	45,419,633		86,940,716		98,365,874		230,726,223

F-150

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

(b) Nature of risks

i) The carrying amounts of the assets and liabilities recognized relating to its interests in unconsolidated structured entities as of December 31, 2013 are as follows:


	Assets-backed securitization		Structured financing		Investment fund		Total
Assets:
Loans	￦	165,698		5,156,721		12,361		5,334,780
Trading assets		230,729		—		41,008		271,737
Derivative assets		884		1,075		—		1,959
Available for sale financial assets		1,074,673		237,146		2,124,512		3,436,331
Held-to-maturity financial assets		119,945		—		—		119,945
Other assets		580		—		—		580

		1,592,509		5,394,942		2,177,881		9,165,332

ii) Exposure to risk relating to interests in unconsolidated structured entities as of December 31, 2013 are as follows:


	Assets-backed securitization		Structured financing		Investment fund		Total
Assets held	￦	1,592,509		5,394,942		2,177,881		9,165,332
ABS and ABCP commitments		157,000		183,800		18,913		359,713
Loan commitments		1,258,531		783,639		18,449		2,060,619
Guarantees		—		5,410		—		5,410

	￦	3,008,040		6,367,791		2,215,243		11,591,074

iii) Losses incurred by the Group relating to its interests in unconsolidated structured entities for the year ended December 31, 2013 was as follows:


	Assets-backed securitization		Structured financing		Investment fund		Total
Losses	￦	1,801		—		18,866		20,667

F-151

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

50.

Condensed Shinhan Financial Group (Parent Company only) Financial Statements

STATEMENTS OF FINANCIAL POSITION


	January 1, 2012 (restated)		December 31, 2012 (restated)		December 31, 2013
Assets
Deposits with banking subsidiary	￦	2,220,168		212,783		385
Receivables from subsidiaries:
Non-banking subsidiaries		1,104,678		1,359,605		1,377,083
Investment (at equity) in subsidiaries:
Banking subsidiaries		13,756,799		13,872,801		13,918,614
Non-banking subsidiaries		11,293,203		11,343,295		11,343,295
Trading asset		1,856,712		118,548		520,116
Property, equipment and intangible assets, net		9,337		8,376		7,667
Other assets
Banking subsidiaries		390,347		171,933		169,454
Non-banking subsidiaries		200,532		123,146		124,373
Other		12,474		2,437		3,658

Total assets		30,844,250		27,212,924		27,424,645

Liabilities and equity
Borrowings		5,000		10,000		7,500
Debt securities issued		7,034,393		7,196,951		7,098,797
Accrued expenses & other liabilities		4,374,050		339,052		343,876

Total liabilities		11,413,443		7,546,003		7,450,173

Equity		19,430,807		19,666,921		19,974,472

Total liabilities and equity	￦	30,844,250		27,212,924		27,424,645

F-152

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

CONDENSED STATEMENTS OF INCOME


	2011 (restated)			2012 (restated)			2013
Income
Dividends from banking subsidiaries	￦	828,033			390,000			451,132
Dividends from non-banking subsidiaries		1,009,446			410,223			469,043
Interest income from banking subsidiaries		36,046			10,431			2,916
Interest income from non-banking subsidiaries		74,610			57,366			58,948
Other income		197,994			126,605			127,159

Total income		2,146,129			994,625			1,109,198
Expenses
Interest expense		(372,084	)		(341,678	)		(310,438	)
Other expense		(92,686	)		(62,631	)		(67,552	)

Total expenses		(464,770	)		(404,309	)		(377,990	)

Profit before income tax expense		1,681,359			590,316			731,208
Income tax expense (benefit)		7,427			(1,178	)		(430	)

Profit for the year	￦	1,673,932			591,494			731,638

F-153

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2011, 2012 and 2013

(In millions of won)

CONDENSED STATEMENTS OF CASH FLOWS


	2011 (restated)			2012 (restated)			2013
Cash flows from operating activities
Profit before income taxes	￦	1,681,359			590,316			731,208
Non-cash items included in profit before tax		(1,585,744	)		(523,918	)		(666,455	)
Changes in operating assets and liabilities		(1,606,828	)		1,737,232			(401,830	)
Income taxes paid		(2,324	)		—			—
Net interest paid		(262,284	)		(246,380	)		(241,414	)
Dividend received from subsidiaries		1,837,479			800,223			919,805

Net cash provided by operating activities		61,628			2,357,473			341,314

Cash flows from investing activities
Loan origination (collection) to non-banking subsidiaries		350,000			(255,000	)		22,500
Acquisition of subsidiary		(4,000	)		(166,094	)		(45,813	)
Other, net		(14,689	)		11,327			(448	)

Net cash provided by (used in) investing activities		331,311			(409,767	)		(23,761	)

Cash flows from financing activities
Repayments of preferred stock		—			(3,765,124	)		—
Issuance of preferred stock and other equity instrument		1,344,746			298,861			—
Net changes in borrowings		—			5,000			(2,500	)
Issuance of debt securities issued		2,530,729			1,296,510			1,596,525
Repayments of securities issued		(2,105,126	)		(1,140,000	)		(1,700,000	)
Dividend paid		(585,557	)		(650,697	)		(424,014	)
Cash inflows from cash flow hedge		32,966			—			—

Net cash provided by (used in) financing activities		1,217,758			(3,955,450	)		(529,989	)

Net increase (decrease) in cash and cash equivalents		1,610,697			(2,007,744	)		(212,436	)
Cash and cash equivalents at beginning of year		609,865			2,220,562			212,818

Cash and cash equivalents at end of year	￦	2,220,562			212,818			382

F-154

SUPPLEMENTAL FINANCIAL INFORMATION (UNAUDITED)

INDUSTRY GUIDE 3 INFORMATION

Except where indicated otherwise, amounts for 2010, 2011, 2012 and 2013 have been prepared in accordance with IFRS, which is consistent with the Group’s Financial Statements. In accordance with the SEC Release, “First-time application of International Financial Reporting”, amounts for 2009 have been prepared under U.S. GAAP.

Loan Types

The following tables present our loans by type for the periods indicated. Except where specified otherwise, all loan amounts stated below are before deduction for loan loss allowances. Total loans reflect our loan portfolio, including past due amounts.


	As of December 31,
	2010		2011		2012		2013
	(In billions of Won)
Corporate
Corporate loans(1)	￦	95,835	￦	98,598	￦	101,162	￦	102,823
Public and other(2)		2,771		4,930		3,107		2,525
Loans to banks(3)		1,467		2,557		4,557		6,103
Lease financing		1,555		1,639		1,699		1,721

Total — Corporate		101,628		107,724		110,525		113,172

Retail
Mortgages and home equity		40,073		44,399		46,130		46,908
Other retail(4)		24,901		25,052		28,407		30,242

Total — retail		64,974		69,451		74,537		77,150

Credit cards		17,647		17,880		17,854		17,665

Total loans(5)	￦	184,249	￦	195,055	￦	202,916	￦	207,987

Notes:

(1)	Consists primarily of working capital loans, general purpose loans, bills purchased and trade-related notes and excludes loans to public institutions and commercial banks.

(2)	Consists of working capital loans and loan facilities to public institutions and non-profit organizations.

(3)	Consists of interbank loans and call loans.

(4)	Consists of general unsecured loans and loans secured by collateral other than housing to retail customers.

(5)	As of December 31, 2010, 2011, 2012 and 2013, approximately 89.25%, 88.76%, 89.59% and 89.99% of our total gross loans, respectively, were Won-denominated.


	As of December 31,
	2009
	(In billions of Won)
Corporate
Commercial and industrial(1)	￦	89,249
Lease financing		1,560

Total — Corporate		90,809

Retail
Mortgages and home equity		40,022
Other retail(2)		23,307

Total — Retail		63,329

Credit cards		15,117

Total loans(3)	￦	169,255

S-1

Notes:

(1)	Consists primarily of working capital loans, general purpose loans, bills purchased, trade-related notes, inter-bank loans, privately placed bonds, credit facility drawdowns and purchases of commercial paper or notes at a discount from its customers with recourse.

(2)	Consists of general unsecured loans and loans secured by collateral other than housing to retail customers.

(3)	As of December 31, 2009, approximately 94.4% of our total gross loans were Won-denominated.

Nonaccrual Loans and Past Due Accruing Loans

Interest foregone is the interest due on nonaccrual loans that has not been accrued in our books of account. In 2009, 2010, 2011, 2012 and 2013 we would have recorded gross interest income of ￦151 billion, ￦145 billion, ￦131 billion, ￦163 billion and ￦119 billion, respectively, on loans accounted for on a nonaccrual basis throughout the respective years, or since origination for loans held for part of the year, had the loans been current with respect to their original contractual terms. The amount of interest income on those loans that was included in our net income in 2009, 2010, 2011, 2012 and 2013 were ￦90 billion, ￦52 billion, ￦66 billion, ￦70 billion and ￦61 billion, respectively.

The following tables show, at the dates indicated, the amount of loans that are placed on a nonaccrual basis and accruing loans which are past due one day or more. The term “accruing but past due one day” includes loans which are still accruing interest but on which principal or interest payments are contractually past due one day or more. We continue to accrue interest on loans where the total amount of loan outstanding, including accrued interest, is fully secured by cash on deposits.


	As of December 31,
	2010		2011		2012		2013
	(In billions of Won)
Loans accounted for on a nonaccrual basis(1)
Corporate	￦	1,813	￦	1,621	￦	1,642	￦	1,660
Retail		155		239		416		217
Credit cards		155		152		215		108

Sub-total		2,123		2,012		2,273		1,985

Accruing loans which are contractually past due one day or more as to principal or interest
Corporate		263		224		245		194
Retail		369		482		354		436
Credit cards		432		576		633		524

Sub-total		1,064		1,282		1,232		1,154

Total	￦	3,187	￦	3,294	￦	3,505	￦	3,139

Note:

(1)	Represents either loans that are “troubled debt restructuring” as defined under IFRS or loans for which payment of interest and/or principal became past due by 90 days or more (adjusting for any overlap due to loans that satisfy both prongs so as to avoid double counting).

S-2


	As of December 31,
	2009
	(In billions of Won)
Loans accounted for on a nonaccrual basis
Corporate	￦	1,231
Retail		187
Credit cards		224

Sub-total		1,642

Accruing loans which are contractually past due one day or more as to principal or interest
Corporate		65
Retail		24
Credit cards		—

Sub-total		89

Total	￦	1,731

Troubled Debt Restructurings

The following tables present, at the dates indicated, our loans which are “troubled debt restructurings” as defined under IFRS for the years ended December 31, 2010, 2011, 2012 and 2013 and under U.S. GAAP for the year ended December 31, 2009. These loans mainly consist of corporate loans that have been restructured through the process of workout and recovery proceedings. See “Item 4.B. Business Overview — Description of Assets and Liabilities — Credit Exposures to Companies in Workout and Recovery Proceedings.” These loans accrue interest at rates lower than the original contractual terms, or involve the extension of the original contractual maturity as a result of a variation of terms upon restructuring.

As of December 31,

2010

2011

2012

2013

(In billions of Won)

Loans classified as “troubled debt restructurings” (excluding nonaccrual and past due loans)

￦

193

￦

173

￦

For the years ended December 31, 2010, 2011, 2012 and 2013, interest income that would have been recorded under the original contract terms of restructured loans amounted to ￦69 billion, ￦42 billion, ￦74 billion and ￦68 billion, respectively, out of which ￦31 billion, ￦14 billion, ￦20 billion and ￦15 billion was reflected as our interest income, respectively.


	As of December 31,
	2009
	(In billions of Won)
Loans classified as “troubled debt restructurings” (excluding nonaccrual and past due loans)	￦	932

For the year ended December 31, 2009, interest income that would have been recorded under the original contract terms of restructured loans amounted to ￦34 billion, out of which ￦22 billion was reflected as our interest income.

S-3

Analysis of Non-Performing Loans

The following tables set forth, for the periods indicated, the total non-performing loans by the borrower type.


	As of December 31,
	2010							2011							2012							2013
	Total Loans		Non- Performing Loans(1)		Ratio of Non- Performing Loans			Total Loans		Non- Performing Loans(1)		Ratio of Non- Performing Loans			Total Loans		Non- Performing Loans(1)		Ratio of Non- Performing Loans			Total Loans		Non- Performing Loans (1)		Ratio of Non- Performing Loans
	(In billions of Won, except percentages)
Corporate
Corporate loans	￦	95,835	￦	816		0.85	%	￦	98,598	￦	739		0.75	%	￦	101,162	￦	769		0.76	%	￦	102,825	￦	529		0.51	%
Public and other		2,771		8		0.29			4,930		8		0.16			3,107		9		0.29			2,525		—		0.00
Loans to banks		1,467		—		0.00			2,557		—		0.00			4,557		—		0.00			6,103		—		0.00
Lease financing		1,555		10		0.64			1,639		5		0.31			1,699		8		0.47			1,721		11		0.64

Total corporate		101,628		834		0.82			107,724		752		0.70			110,525		786		0.71			113,174		540		0.48

Retail
Mortgage and home equity		40,073		30		0.07			44,399		55		0.12			46,130		60		0.13			46,906		41		0.09
Other retail		24,901		102		0.41			25,052		164		0.65			28,407		315		1.11			30,242		174		0.58

Total retail		64,974		132		0.20			69,451		219		0.31			74,537		375		0.50			77,148		215		0.28

Credit cards		17,647		461		2.61			17,880		445		2.49			17,854		534		2.99			17,665		442		2.50

Total	￦	184,249	￦	1,427		0.77	%	￦	195,055	￦	1,416		0.73	%	￦	202,916	￦	1,695		0.84	%	￦	207,987	￦	1,197		0.58	%

Note:

(1)	Includes unsecured retail loans and credit card loans past due by more than six months. The number of days past due of restructured credit card loans is calculated from the first date of non-payment regardless of subsequent modification of terms.

S-4


	As of December 31,
	2009
	Loans		Non-Loans		Ratio of Non-Loans
	(In billions of Won, except percentages)
Corporate
Commercial and industrial	￦	89,249	￦	1,160		1.30	%
Lease financing		1,560		4		0.26

Total corporate		90,809		1,164		1.28

Retail
Mortgage and home equity		40,022		29		0.07
Other retail		23,307		51		0.22
Total retail		63,329		80		0.29
Credit cards		15,117		171		1.13

Total	￦	169,255	￦	1,415		0.84	%

Allocation of Allowance for Loan Losses

The following tables present, as of the dates indicated, the allocation of our loan loss allowance by loan type.


	As of December 31,
	2010					2011					2012					2013
	Amount		Loans % of Total Loans			Amount		Loans % of Total Loans			Amount		Loans % of Total Loans			Amount		Loans % of Total Loans
	(In billions of Won, except percentages)
Corporate
Corporate loans	￦	1,923		67.43	%	￦	1,634		63.41	%	￦	1,700		60.71	%	￦	1,576		63.65	%
Public and other		15		0.53			19		0.74			14		0.50			10		0.40
Loan to banks		32		1.12			13		0.50			11		0.39			5		0.20
Lease financing		17		0.60			14		0.54			33		1.18			21		0.85

Total corporate		1,987		69.68			1,680		65.19			1,758		62.78			1,612		65.10

Retail
Mortgages and home equity		17		0.60			19		0.74			23		0.82			26		1.05
Other retail		178		6.24			202		7.84			275		9.82			190		7

Total retail		195		6.84			221		8.58			298		10.64			216		8.73

Credit cards		670		23.48			676		26.23			744		26.58			648		26.17

Total allowance for loan losses	￦	2,852		100.00	%	￦	2,577		100.00	%	￦	2,800		100.00	%	￦	2,476		100.0	%

S-5


	As of December 31,
	2009
	Amount		Loans % of Total Loans
	(In billions of Won, except percentages)
Corporate
Commercial and Industrial	￦	2,969		81.61	%
Lease financing		13		0.36

Total corporate		2,982		81.97

Retail
Mortgages and home equity		11		0.30
Other retail		170		4.67

Total retail		181		4.97

Credit cards		475		13.06

Total allowance for loan losses	￦	3,638		100.00	%

S-6

Analysis of Allowance for Loan Losses

The following tables present an analysis of our loan loss experience for each of the years indicated.


	2010			2011			2012			2013
	(In billions of Won, except percentages)
Balance at the beginning of the period	￦	3,114		￦	2,852		￦	2,585		￦	2,800
Amounts charged against income		1,301			864			1,325			1,082
Gross charge-offs:
Corporate:
Corporate loans		1,292			960			844			799
Public and other		19			1			1			—
Loan to banks		—			—			—			—
Lease financing		18			14			19			33
Retail:
Mortgage and home equity		25			1			4			4
Other retail		76			80			130			242
Credit cards		429			447			486			657

Total gross charge-offs		1,859			1,503			1,484			1,735

Recoveries:
Corporate:
Corporate loans		83			75			75			150
Public and other		—			—			6			—
Loan to banks		—			—			—			—
Lease financing		1			2			2			1
Retail:
Mortgage and home equity		2			6			—			—
Other retail		52			37			32			28
Credit cards		327			283			257			217
Total recoveries		465			403			372			396

Other		(169	)		(39	)		2			(67	)
Net charge-offs		(1,563	)		(1,139	)		(1,110	)		(1,406	)

Balance at the end of the period	￦	2,852		￦	2,577		￦	2,800		￦	2,476

Ratio of net charge-offs during the period to average loans outstanding during the period		1.06	%		0.78	%		0.55	%		0.68	%

S-7


	2009
	(In billions of Won, except percentages)
Balance at the beginning of the period	￦	3,201
Amounts charged against income		1,751
Gross charge-offs:
Corporate:
Commercial and industrial		1,087
Lease financing		(19	)
Retail:
Mortgage and home equity		(1	)
Other retail		227
Credit cards		597

Total gross charge-offs		(1,891	)

Recoveries:
Corporate:
Commercial and industrial		123
Lease financing		1
Retail:
Mortgage and home equity		1
Other retail		59
Credit cards		393

Total recoveries		577

Net charge-offs		(1,314	)
Acquisition of LG Card		—

Balance at the end of the period	￦	3,638

Ratio of net charge-offs during the period to average loans outstanding during the period		0.78	%

S-8

INDEX OF EXHIBITS



	1.1			Articles of Incorporation, last amended as of March 29, 2012 (in English)†*

	2.1			Form of Common Stock Certificate (in English) † **

	2.2			Form of Deposit Agreement to be entered into among Shinhan Financial Group, Citibank, N.A., as depositary, and all owners and holders from time to time of American depositary shares issued thereunder, including the form of American depositary receipt**

	2.3			Long-term debt instruments of Shinhan Financial Group, Shinhan Bank and other consolidated subsidiaries for which financial statements are required to be filed are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K. Shinhan Financial Group agrees to furnish the Commission on request a copy of any instrument defining the rights of holders of its long-term debt and that of any subsidiary for which consolidated or unconsolidated financial statements are required to be filed.**

	4.1			Stock Purchase Agreement by and between Korea Deposit Insurance Corporation and Shinhan Financial Group dated July 9, 2003***

	4.2			Investment Agreement by and between Shinhan Financial Group and Korea Deposit Insurance Corporation dated July 9, 2003**

	4.3			Agreed Terms, dated June 22, 2004, by and among the President of Korea Deposit Insurance Corporation, CEO of Shinhan Financial Group, CEO of Chohung Bank, Chairman of the National Financial Industry Labor Union of Korea and the Head of the Chohung Bank Chapter of the National Financial Industry Labor Union**

	4.4			Merger Agreement between Shinhan Bank and Chohung Bank (in English) † ****

	4.5			Split-Merger Agreement between Shinhan Card and Chohung Bank (in English) † ****

	4.6			Form of Share Purchase Agreement, dated January 17, 2007, by and between Shinhan Financial Group and the holders of the redeemable preferred shares and the redeemable convertible shares issued by Shinhan Financial Group as part of the funding for the acquisition of LG Card Co., Ltd. (in English) †*****

	4.7			LG Card Acquisition Agreement, dated 2006, between Korea Development Bank and 13 other financial institutions, on the one hand, and Shinhan Financial Group†******

	8.1			List of all subsidiaries of Shinhan Financial Group

	12.1			Certifications of our Chief Executive Officer required by Rule 13a-14(a) of the Exchange Act

	12.2			Certifications of our Chief Financial Officer required by Rule 13a-14(a) of the Exchange Act

	13.1			Certifications of our Chief Executive Officer required by Rule 13a-14(b) and Section 1350 of Chapter 63 of the United States Code (18 U.S.C. 1350)

	13.2			Certifications of our Chief Financial Officer required by Rule 13a-14(b) and Section 1350 of Chapter 63 of the United States Code (18 U.S.C. 1350)

†	A fair and accurate translation from Korean into English.

*	Incorporated by reference to the registrant’s previous filing on Form 20-F (No. 001-31798), filed on April 30, 2012.

**	Incorporated by reference to the registrant’s previous filing on Form 20-F (No. 001-31798), filed on September 15, 2003.

***	Incorporated by reference to the registrant’s previous filing on Form 20-F (No. 001-31798), filed on September 15, 2003. Confidential treatment has been requested for certain portions of the Stock Purchase Agreement.

****	Incorporated by reference to the registrant’s previous filing on Form 20-F (No. 001-31798), filed on June 30, 2006.

*****

Incorporated by reference to the registrant’s previous filing on Form 20-F (No. 001-31798), filed on June 29, 2007.

******

Incorporated by reference to registrant’s previous filing on Form 20-F (No. 001-31798), filed on June 30, 2008.

E-1