Shinhan Financial : SFG FY2023 Audit Report (Consolidated)

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Consolidated Financial Statements

December 31, 2023 and 2022

(With Independent Auditor's Report Thereon)

Contents

	Page
Independent Auditors' Report	1
Consolidated Statements of Financial Position	6
Consolidated Statements of Comprehensive Income	8
Consolidated Statements of Changes in Equity	10
Consolidated Statements of Cash Flows	12
Notes to the Consolidated Financial Statements	15
Independent Auditors' Report on Internal Control over Financial Reporting
for Consolidation Purposes	319
ICFR Operating Status Report for Consolidation Purposes by CEO and IAM	321

152, Teheran-ro,Gangnam-gu, Seoul 06236

(Yeoksam-dong, Gangnam Finance Center 27th Floor)

Republic of Korea

Independent Auditors' Report

Based on a report originally issued in Korean

The Board of Directors and Stockholders

Shinhan Financial Group Co., Ltd.

Opinion

We have audited the consolidated financial statements of Shinhan Financial Group Co., Ltd. and its subsidiaries ("the Group"), which comprise the consolidated statement of financial position as of December 31, 2023, the consolidated statements of comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising material accounting policies and other explanatory information.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as of December 31, 2023, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with Korean International Financial Reporting Standards ("K-IFRS").

We have also audited, in accordance with Korean Standards on Auditing (KSAs), the Group's Internal Control over Financial Reporting ("ICFR") as of December 31, 2023 based on the criteria established in Conceptual Framework for Designing and Operating Internal Control over Financial Reporting issued by the Operating Committee of Internal Control over Financial Reporting in the Republic of Korea, and our report dated March 4, 2024 expressed an unmodified opinion on the effectiveness of the Group's internal control over financial reporting.

Basis for Opinion

We conducted our audit in accordance with KSAs. Our responsibilities under those standards are further described in the Auditors' Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in the Republic of Korea, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statement as of and for the year ended December 31, 2023. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

(1) Assessment of allowance for credit losses for loans

As discussed in Notes 3.(h), 5.(b), and 13 to the consolidated financial statements, the Group recognized an allowance for credit losses using the Expected Credit Loss (ECL) impairment model for loans at amortized cost amounting to KRW 4,330,470 million as of December 31, 2023. A lifetime ECL is recognized for those loans that have experienced a Significant Increase in Credit Risk (SICR) since initial recognition or are credit impaired, otherwise a 12-month ECL is recognized. The Group measures ECL

allowances on an individual basis for individually significant corporate loans which are credit impaired and for those which have experienced a SICR and demonstrate certain other high risk indicators (for example, debt restructuring).

The individual assessment involves judgment by the Group in estimating the future cash flows expected from collateral. The allowance for credit losses for other loans are measured on a collective basis. For these loans, the Group measures ECL based on its estimates of the Probability of Default (PD), the Loss Given Default (LGD) and the Exposure at Default (EAD) as well as the impact of Forward-Looking Information (FLI). When measuring allowance for credit losses, PD estimated considering various factors such as collateral, product and borrower type, credit rating, loan size, recovering period, etc. and LGD per recovery type are applied. For corporate loans measured on a collective basis, one of the relevant inputs for determining PD is the internal credit risk rating of the borrower. The internal credit risk rating of the borrower is defined by the Group using quantitative and qualitative factors. The evaluation of the qualitative factors involves a high level of judgment by the Group.

We identified the following risks in accordance with the assessment of the allowance for credit losses for loans as a key audit matter, considering likelihood of error, management judgement, and risk of material misstatement;

• Risks that (i) the analysis of the qualitative factors in determining the internal credit risk ratings of the corporate loans to be collectively assessed for ELC is inappropriate; (ii) the calculation of 12 month and lifetime PD, the calculation of LGD, and the evaluation if FLI incorporated in the measurement of collective ECL is inappropriate due to fraud or error

The following are the primary audit procedures we performed to address this key audit matter.

1. • We evaluated the design and tested the operating effectiveness of certain internal controls related to: (i) the validation of the models used to determine the inputs to the collective ECL calculation and the impact of FLI; (ii) the assessment of qualitative factors in the process of determining the internal credit risk rating of the loans; (iii) the completeness and accuracy of quantitative data used in the credit risk ratings.
   • We involved credit risk professionals with specialized skills, industry knowledge and relevant experience who assisted in: (i) evaluating the methodology and key judgments used in determining the PD and LGD parameters; (ii) evaluating how FLI was incorporated in the collective ECL model; and (iii) recalculating forward-looking PD and LGD on a sample basis.
   • We evaluated on a sample basis whether, for the corporate loans with ECL measured on a collective basis, Group policy was applied in the internal credit risk rating process.
2. Internally measured fair value of level 3 derivatives, and level 3 derivative-linked securities

As discussed in Notes 5.(e) to the consolidated financial statements, the Group classifies financial instruments measured at fair value using valuation techniques where one or more significant inputs are not based on observable market data as level 3 in the fair value hierarchy.

Those financial instruments measured at fair value classified as level 3 include derivatives and derivative- linked securities both held and issued by Shinhan Securities Co., Ltd. (a subsidiary of the Group), of which fair value is measured by the internally developed valuation models. The fair value of such derivative assets and liabilities as of December 31, 2023 was KRW 629,223 million and KRW 785,312 million, respectively.

Also, the fair value of such derivative-linked securities held (presented as 'financial assets at fair value through profit or loss - debt securities') and issued (presented as 'financial liabilities designated at fair value through profit or loss') as of December 31, 2023 was KRW 66,866 million and KRW 6,725,252 million, respectively. In order to measure the fair value of these financial instruments, the Group uses

valuation models such as discounted cash flow models and option models. These models use various inputs and assumptions, depending on the nature of the financial instruments.

We identified the following risk in accordance with the measurement of fair value of the derivatives and derivative-linked securities as a key audit matter considering the level of judgement;

• Risk that the models' significant inputs which are not directly observable in financial markets and related assumptions (such as volatility of underlying assets, correlations, regression coefficients, discount rates, etc.) are inappropriate

The following are the primary audit procedures we performed to address this key audit matter.

1. • We evaluated the design and tested the operating effectiveness of certain internal controls related to the measurement of fair value of the derivatives and derivative-linked securities. This included controls related to the development and application of the significant unobservable inputs and assumptions used in the measurement of fair values.
   • We involved valuation professionals with specialized skills and knowledge, who assisted in (i) evaluating unobservable inputs on a selection of the derivatives and derivative-linked securities; and (ii) developing unobservable inputs independently for a selection of the derivatives and derivative-linked securities and comparing the resulting fair value estimates to the Group's fair value measurements.
2. Measurement of Insurance Liabilities' Current Fulfilment Value

As discussed in Note 28 to the consolidated financial statements, the Group measures insurance contracts at the current fulfilment value and recognizes them as insurance contract liabilities amounting to KRW 48,334,232 million. These insurance contract liabilities are measured at the current fulfilment value by estimating all cash flows expected to occur within the boundaries of the insurance contract and using the current discount rate that reflects the assumptions and risks at the time of reporting.

We identified the following risk in accordance with the measurement of insurance liabilities' current fulfilment value as a key audit matter, considering likelihood of error, management judgement, and risk of material misstatement;

• Risk that the measurement of insurance contract liabilities may be misstated from calculating loss rate assumptions due to error

The following are the primary audit procedures we performed to address this key audit matter.

• We tested the operating effectiveness of management's controls over loss rate assumption calculation. These controls include review and approval of the calculation methodology applied to calculate loss rate assumptions, review of consistency of basic data, review and approval of correction and extrapolation methods, review and approval of appropriateness of calculated assumptions, and review control by an independent appointed actuary.
• By utilizing actuarial experts with professional skills and knowledge, we reviewed the calculation methodology applied to calculate the loss rate assumptions, the appropriateness of the correction and extrapolation method; additionally, we calculated the loss rate assumptions independently, compared with the applied loss rate assumptions, and verified whether the loss rate assumptions were applied when calculating fulfilment cash flows of insurance contracts.

Other matters

The procedures and practices utilized in the Republic of Korea to audit such consolidated financial statements may differ from those generally accepted and applied in other countries.

The consolidated statement of financial position of the Group as of December 31, 2022 and January 1, 2022, and the related consolidated statements of comprehensive income, changes in equity and cash flows for the year ended December 31, 2022 were audited by another auditor in accordance with KSAs, and their report thereon, dated March 6, 2023, expressed an unqualified opinion. The financial statements that another auditor audited are those before reflecting the adjustments due to the adoption of K-IFRS 1117 Insurance Contracts described in Note 52. The accompanying consolidated statements of financial position of the Group as of December 31, 2022 and January 1, 2022 presented for comparative purposes, are those after reflecting such adjustments.

As part of our audit on the consolidated financial statements for the year ended December 31, 2023, we have audited the adjustments to the accompanying consolidated financial statements presented for comparative purposes. In our opinion, the adjustments to the accompanying consolidated financial statements present fairly, in all material respects, in accordance with K-IFRS. We were not engaged to audit, review, or apply any other procedures to the accompanying consolidated financial statements presented for comparative purposes, other than with respect to the adjustments, and accordingly, we do not express an audit opinion or any other form of assurance on the accompanying consolidated financial statements presented for comparative purposes taken as a whole.

Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with K-IFRS, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is responsible for assessing the Group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Group's financial reporting process.

Auditors' Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors' report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with KSAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with KSAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and

obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for

• Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in the internal controls that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditors' report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

The engagement partner on the audit resulting in this independent auditors' report is Min-Seon Chae.

KPMG Samjong Accounting Corp.

Seoul, Korea

March 4, 2024

This report is effective as of March 4, 2024, the audit report date. Certain subsequent events or circumstances, which may occur between the audit report date and the time of reading this report, could have a material impact on the accompanying consolidated financial statements and notes thereto. Accordingly, the readers of the audit report should understand that the above audit report has not been updated to reflect the impact of such subsequent events or circumstances, if any.

SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Consolidated Statements of Financial Position

As of December 31, 2023, December 31, 2022 and January 1, 2022

(In millions of won)			December 31,	December 31,	January 1,
	Note		2023	2022	2022
Assets
Cash and due from banks at
amortized cost	5, 9, 13, 20	W	34,629,251	30,050,840	29,049,341
Financial assets at fair value
through profit or loss	5, 10, 20		71,216,564	61,508,281	68,161,348
Derivative assets	5, 11		4,711,421	6,460,652	3,800,158
Securities at fair value through
other comprehensive income	5, 12, 20		90,311,979	85,469,161	90,893,467
Securities at amortized cost	5, 12, 20		35,686,487	33,371,198	26,164,942
Loans at amortized cost	5, 13, 20		411,739,562	407,898,972	384,810,774
Property and equipment, net	14, 19, 20		3,972,304	4,011,097	4,046,164
Intangible assets	15		6,217,946	5,807,836	5,644,782
Investments in associates	16		2,692,031	2,904,474	2,913,745
Current tax receivable			30,590	26,307	15,159
Deferred tax assets	44		153,719	915,369	131,257
Investment property	17		257,806	363,108	675,391
Net defined benefit assets	26		114,378	456,838	33,429
Insurance contract assets	28		10,654	-	-
Reinsurance contract assets	28		88,353	88,772	-
Other assets	5, 13, 18		29,925,844	25,071,114	25,480,156
Assets held for sale			36,444	29,211	44,409
Total assets		W	691,795,333	664,433,230	641,864,522

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SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Consolidated Statements of Financial Position (Continued)

As of December 31, 2023, December 31, 2022 and January 1, 2022

(In millions of won)			December 31,	December 31,	January 1,
	Note		2023	2022	2022
Liabilities
Deposits	5, 21	W	381,512,664	382,988,294	364,874,652
Financial liabilities at fair value
through profit or loss	5, 22		1,868,977	1,146,110	1,369,225
Financial liabilities designated
at fair value through profit or
loss	5, 23		7,796,727	8,367,368	8,023,870
Derivative liabilities	5, 11		5,038,416	7,708,615	3,588,165
Borrowings	5, 24		56,901,352	49,279,175	43,167,065
Debt securities issued	5, 25		81,561,725	77,288,783	80,149,363
Net defined benefit liabilities	26		67,620	14,664	131,494
Provisions	27		1,369,666	1,266,314	1,166,883
Current tax payable			92,253	702,143	702,608
Deferred tax liabilities	44		542,595	810,569	420,677
Insurance contract liabilities	28		48,333,208	45,904,773	53,774,915
Reinsurance contract liabilities	28		93,240	62,803	281,763
Investment contract liabilities	5, 30		1,572,685	2,133,586	2,953,698
Other liabilities	5, 31		48,722,340	33,336,475	31,044,194
Total liabilities			635,473,468	611,009,672	591,648,572
Equity	32
Capital stock			2,969,641	2,969,641	2,969,641
Hybrid bonds			4,001,731	4,196,968	3,334,531
Capital surplus			12,094,968	12,095,043	12,095,043
Capital adjustments			(658,664)	(582,859)	(664,429)
Accumulated other
comprehensive loss			(1,074,453)	(1,910,750)	(905,223)
Retained earnings			36,387,314	33,963,799	31,139,115
Total equity attributable to
equity holders of
Shinhan Financial Group Co.,
Ltd.			53,720,537	50,731,842	47,968,678
Non-controlling interests			2,601,328	2,691,716	2,247,272
Total equity			56,321,865	53,423,558	50,215,950
Total liabilities and equity		W	691,795,333	664,433,230	641,864,522

Since K-IFRS 1117 "Insurance contracts" was first applied from January 1, 2023, the Group restated the consolidated statements of financial position as of December 31, 2022 and January 1, 2022 in accordance with K- IFRS 1001 "Financial statement presentation". See accompanying notes to the consolidated financial statements.

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SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

For the years ended December 31, 2023 and 2022

(In millions of won)	Note	2023	2022
Interest income	W	27,579,211	20,092,325
Interest expense		(16,761,289)	(9,495,472)
Net interest income	34	10,817,922	10,596,853
Fees and commission income		4,175,243	3,884,346
Fees and commission expense		(1,528,037)	(1,470,804)
Net fees and commission income	35	2,647,206	2,413,542
Insurance income		2,899,599	2,741,730
Reinsurance income		44,985	36,274
Insurance service expenses		(1,748,779)	(1,667,870)
Reinsurance service expenses		(82,190)	(63,910)
Net insurance income	28	1,113,615	1,046,224
Insurance finance income		143,064	850,940
Insurance finance expenses		(659,161)	(42,976)
Net insurance finance income (expenses)	29	(516,097)	807,964
Dividend income	36	181,486	177,569
Net gain (loss) on financial instruments at fair
value through profit or loss	37	2,493,626	(1,160,833)
Net gain (loss) on financial instruments designated
at fair value through profit or loss	38	(437,780)	576,942
Net gain on foreign currency transaction		256,766	245,079
Net gain (loss) on disposal of securities at fair
value through other comprehensive income	12	(129,575)	(161,423)
Net gain (loss) on disposal of securities at
amortized cost	12	251	(60)
Provision for allowance for credit loss	39	(2,244,503)	(1,291,813)
General and administrative expenses	40	(5,895,337)	(5,644,160)
Other operating expenses, net	42	(2,186,730)	(1,700,320)
Operating income		6,100,850	5,905,564
Equity method income	16	125,088	121,697
Other non-operating income (expense), net	43	(260,978)	339,365
Profit before income taxes		5,964,960	6,366,626
Income tax expense	44	1,486,960	1,611,112
Profit for the year	W	4,478,000	4,755,514

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