Consolidated Financial Statements

Transcription

1 SHINHAN FINANCIAL GROUP CO., LTD. AND SUBSIDIARIES Consolidated Financial Statements June 30, 2002 (With Independent Accountants Review Report Thereon)

2 Independent Accountants Review Report Based on a report originally issued in Korean The Board of Directors and Stockholders Shinhan Financial Group Co., Ltd. We have reviewed the accompanying consolidated balance sheet of Shinhan Financial Group Co., Ltd. (the Company ) and its subsidiaries as of June 30, 2002 and the related consolidated statement of earnings for the six-month period then ended, all expressed in Korean Won, in accordance with the Review Standards for Semiannual Financial Statements established by the Securities and Futures Commission of the Republic of Korea. All information included in these financial statements is the representation of the management of the Company. A review consists principally of inquiries of Company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with the Auditing Standards as established by the Financial Supervisory Commission of the Republic of Korea, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above in order for them to be in conformity with the Accounting Standards for Quarterly and Semiannual Financial Statements established by the Securities and Futures Commission of the Republic of Korea. The accompanying consolidated financial statements expressed in Korean Won have been translated into United States dollars solely for the convenience of the reader, on the basis set forth in Note 2 (b) to the consolidated financial statements. The following matters may be helpful to the readers in their understanding of the Company: As described in Note 1 to the accompanying consolidated financial statements, the Company took over a 51% share of Jeju Bank from Korea Insurance Deposit Corporation, on April 4, In addition, on June 1, 2002, Shinhan Card Co., Ltd. was established as a 100% subsidiary of the Company through the spin-off of the Shinhan Bank s credit card division, and on June 18, 2002, the Company acquired 29% share of Good Morning Securities Co., Ltd. from its largest shareholder. As discussed in Note 2(a) to the accompanying consolidated financial statements, accounting principles and review standards and their application in practice vary among countries. The accompanying consolidated financial statements are not intended to present the financial position and results of operations in accordance with accounting principles and practices generally accepted in countries other than the Republic of Korea. In addition, the procedures and practices utilized in the Republic of Korea to review such financial statements may differ from those generally accepted and applied in other countries. Accordingly, this report and the accompanying consolidated financial statements are for use by those knowledgeable about Korean accounting procedures and review standards and their application in practice.

3 As described in Note 30 to the accompanying consolidated financial statements, on July 31, 2002, Good Morning Securities Co., Ltd. was merged with Shinhan Securities Co., Ltd., which is one of subsidiaries of the Company, and renamed to Goodmorning Shinhan Securities Co., Ltd. Under the terms of the merger, shareholders of Shinhan Securities Co., Ltd. would receive common shares of Good Morning Securities Co., Ltd. for every common share they own. On July 8, 2002, Shinhan Credit Information Co., Ltd. was established as a 100% subsidiary of the Company with initial capital of W3,000 million ($2,496 thousand). In addition, on July 5, 2002, the Company acquired additional shares of Jeju Bank, which is one of subsidiaries of the Company, at W20,177 million ($16,789 thousand) and the Company s percentage of ownership increased to 62%. As discussed in Note 31 to the accompanying consolidated financial statements, the operations of the Company and its subsidiaries may be directly and indirectly affected by the general unstable economic conditions in the Republic of Korea and the impact of the implementation of structural reforms. July 25, 2002

4 Consolidated Balance Sheet June 30, 2002 (In millions of Won and thousands of U.S. dollars, except for share data) U.S. dollars Won (Note 2) Assets Cash and due from banks (notes 2, 4, 16, 17 and 18) W 2,795,843 $ 2,326,380 Trading securities (notes 2, 5, 16 and 18) 2,346,101 1,952,156 Investment securities (notes 2, 5, 16 and 18) 12,599,155 10,483,570 Loans, net (notes 2, 6 and 18) 41,525,846 34,553,042 Fixed assets, net (notes 2, 7 and 17) 1,064, ,010 Other assets (notes 2, 8, 9 and 18) 2,250,753 1,872,818 W 62,582,504 $ 52,073,976 Liabilities and Stockholders Equity Liabilities: Deposits (notes 2, 10 and 18) W 38,036,103 $ 31,649,279 Borrowings (notes 2, 11 and 18) 10,855,035 9,032,314 Debentures (notes 2, 12 and 18) 5,886,175 4,897,799 Retirement and severance benefits, net (notes 2 and 13) 166, ,357 Other liabilities (notes 2, 14, 15 and 18) 3,635,347 3,024,918 Total liabilities 58,578,937 48,742,667 Stockholders equity: Common stock, W 5,000 ($ 3.76) par value 1,461,800 1,216,342 Authorized - 1,000,000,000 shares Issued and outstanding - 292,360,083 shares Capital surplus 1,988,339 1,654,468 Retained earnings 392, ,672 Capital adjustments (notes 19 and 20) (412,772) (343,461) Minority interest in consolidated subsidiaries 573, ,288 Total stockholders equity 4,003,567 3,331,309 Commitments and contingencies (notes 2 and 27) Total liabilities and stockholders equity W 62,582,504 $ 52,073,976 See accompanying notes to consolidated financial statements

5 Consolidated Statement of Earnings Six-month period ended June 30, 2002 U.S. dollars Won (Note 2) Operating revenue: Interest income: Interest on due from banks W 23,912 $ 19,897 Interest on trading securities 52,954 44,062 Interest on investment securities 430, ,830 Interest on loans 1,229,211 1,022,808 Other 12,032 10,012 1,748,149 1,454,609 Fees and commission income 360, ,012 Other operating revenue: Gain on trading securities 53,253 44,311 Dividend income from securities 4,660 3,878 Foreign exchange gain 122, ,584 Fees on trust accounts 20,116 16,738 Derivative related gains 484, ,947 Other 8,767 7, , ,753 Total operating revenue 2,801,846 2,331,374 Operating expenses: Interest expenses: Interest on deposits 740, ,429 Interest on borrowings 226, ,196 Interest on debentures 154, ,671 Other 14,395 11,978 1,136, ,274 Fees and commission expense 81,823 68,084 Other operating expenses: Loss on trading securities 31,699 26,377 Foreign exchange loss 75,661 62,956 Bad debt expense 107,078 89,098 General and administrative expenses (note 21) 361, ,474 Derivative related losses 465, ,086 Other 47,971 39,916 1,088, ,907 Total operating expense 2,306,573 1,919,265 Operating income 495, ,109

6 Consolidated Statement of Earnings, Continued Six-month period ended June 30, 2002 (In millions of Won and thousands of U.S. dollars, except for earnings per share) Non-operating income: U.S. dollars Won (Note 2) Gain on investment securities W 47,089 $ 39,182 Valuation gain on investment in special fund 22,562 18,773 Gain on sales of loans 11,636 9,682 Other 28,151 23,425 Non-operating expenses: 109,438 91,062 Loss on investment securities 119,560 99,485 Loss on sale of loans 7,815 6,503 Other 16,781 13, , ,950 Ordinary income 460, ,221 Extraordinary gain Earnings before income taxes 460, ,590 Income taxes (notes 2 and 22) 134, ,117 Net earnings 326, ,473 Minority interest (2,389) (1,988) Consolidated net earnings W 323,867 $ 269,485 Ordinary income per share in Won and U.S. dollars (notes 2 and 23) W 1,233 $ 1.03 Net earnings per share in Won and U.S. dollars (notes 2 and 23) W 1,234 $ 1.03 See accompanying notes to consolidated financial statements

7 SHINHAN FINANCIAL GROUP CO., LTD AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2002 (1) General Description on Consolidated Companies In accordance with the Accounting Standards for Consolidated Financial Statements, Shinhan Financial Group Co., Ltd. as the controlling company and its subsidiaries included in consolidation or accounted for by the equity method are summarized as follows: (a) Controlling Company Shinhan Financial Group Co., Ltd. (the Company ), the controlling company, was incorporated on September 1, 2001 by way of the transfer of all issued shares owned by shareholders of Shinhan Bank, Shinhan Securities Co., Ltd., Shinhan Capital Co., Ltd. and Shinhan Investment Trust Management Co., Ltd. to the Company. The Company was formed for the purpose of providing management services and financing to subsidiaries with W1,461,721 million ($1,216,276 thousand) of initial capital stock and the Company s shares were listed on the Korea Stock Exchange on September 10, (b) Subsidiaries included in Consolidation a. Shinhan Bank Shinhan Bank was incorporated on September 15, 1981 under the General Banking Act of Korea to engage in the commercial banking and trust business. As of June 30, 2002, Shinhan Bank s capital stock was W1,223,149 million ($1,017,764 thousand). Shinhan Bank has 341 branch offices and 167 automated teller machine locations. b. Shinhan Securities Co., Ltd. Shinhan Securities Co., Ltd. ( Shinhan Securities ) was founded as Dong-Hwa Securities Co., Ltd. for underwriting, dealing and brokerage services on January 31, 1962 and changed its name to Shinhan Securities on August 2, As of June 30, 2002, Shinhan Securities s capital stock was W119,237 million ($99,215 thousand). Shinhan Securities has 32 branch offices. c. Shinhan Capital Co., Ltd. Shinhan Capital Co., Ltd. ( Shinhan Capital ) was incorporated on April 19, 1991 to engage in the leasing and rental business and it changed its name on May 27, 1999 from Shinhan Leasing Co., Ltd. to Shinhan Capital. As of June 30, 2002, its capital stock was W80,000 million ($66,567 thousand). d. Shinhan Investment Trust Management Co., Ltd. On August 1, 1996, Shinhan Investment Trust Management Co., Ltd. ( Shinhan ITMC ) was established and obtained a license to engage in the business of investment and trust of securities and advisory services under the Investment and Trust of Securities Law. Shinhan ITMC s capital stock was W40,000 million ($33,283 thousand) as of June 30, e. Jeju Bank Jeju Bank was incorporated on March 18, 1969 under the General Banking Act of Korea to engage in the commercial banking and trust business and listed its shares on the Korean Stock Exchange on December 28, On April 4, 2002, Jeju Bank became one of subsidiaries of the Company through acquiring a 51% share from Korea Deposit Insurance Corporation, and its capital stock was W55,460 million ($46,147 thousand) as of June 30, 2002.

8 2 (1) General Description on Consolidated Companies, Continued f. Shinhan Card Co., Ltd. Shinhan Card Co., Ltd. ( Shinhan Card ) was established on June 1, 2002 under Credit Specialty Finance Law through the spin-off of the credit card division of Shinhan Bank and it became one of the subsidiaries of the Company. Shinhan Card is engaged principally in credit card services, factoring, consumer loans and installment financing and it had 1.02 million franchise accounts and 2.39 million of credit card holders as of June 30, Its capital stock as of June 30, 2002 was W152,847 million ($127,182 thousand). g. Good Morning Securities Co., Ltd. Good Morning Securities Co., Ltd. ("Good Morning Securities") was incorporated on April 2, 1973 under the name of HyoSung Securities Co., Ltd. to engage in securities trading, underwriting and brokerage services. It was renamed Ssangyong Investment & Securities Co., Ltd. in 1983 and to Good Morning Securities Co., Ltd. in 1999, and its shares were listed on the Korean Stock Exchange on December 19, On June 18, 2002, the Company acquired 29% share of Good Morning Securities from its largest shareholders. It operates through 62 branches and its capital stock was W933,628 million ($776,858 thousand) as of June 30, h. Trust accounts of Shinhan and Jeju Bank Trust accounts in which Shinhan and Jeju Bank guarantees repayment of principal and, in certain cases, minimum interest earnings are included in consolidation. i. Shinhan Finance Ltd. Shinhan Finance Ltd. ( Shinhan Finance ) was incorporated in November 1990 in Hong Kong as a wholesale bank and has USD 55.6 million of capital stock as of June 30, j. Good Morning Securities Europe Ltd. Good Morning Securities Europe Ltd. ( Good Morning Securities Europe ) was established in 1991 and has been providing securities trading, underwriting and derivative brokerage services in Europe under the Securities and Futures Authority (SFA) of UK. Its capital stock was W6,498 million ($5,407 thousand) as of June 30, k. Good Morning Securities USA Inc. Good Morning Securities USA Inc. ( Good Morning Securities USA ) was established in 1993 and has been providing securities trading, underwriting and derivative brokerage services under the Federal Securities Act of USA. Its capital stock was W3,342 million ($2,781 thousand) as of June 30, l. Good Morning Investment Trust Management Co., Ltd. On February 2001, Good Morning Investment Trust Management Co., Ltd. ( Good Morning ITMC ) was established to engage in the business of investment and trust of securities and advisory services under the Investment and Trust of Securities Law. Good Morning ITMC s capital stock was W15,000 million ($12,481 thousand) as of June 30, 2002.

9 3 (1) General Description on Consolidated Companies, Continued Ownerships between the Company and its subsidiaries included in consolidation as of June 30, 2002 are as follows: Investor Investee Number of Percentage of (Consolidated subsidiaries) shares ownership (%) The Company Shinhan Bank 244,629, Shinhan Securities 23,847, Shinhan Capital 16,000, Shinhan ITMC 8,000, Jeju Bank 5,656, Shinhan Card 30,569, Good Morning Securities (*) 54,090, Shinhan Bank The Company 29,873, Shinhan Finance 55, Good Morning Securities Good Morning Securities Europe 5,000, Good Morning Securities USA 15, Good Morning ITMC 3,000, (*) Good Morning Securities was included in the scope of consolidation due to the right of the Company to appoint board of directors. (c) Subsidiaries Accounted for by the Equity Method a. e-shinhan Inc. e-shinhan Inc. was incorporated on February 21, 2001 to engage in the business of internet brokerage service and comprehensive management services on customer accounts, and its capital stock was W2,820million ($2,346 thousand) as of June 30, b. Shinhan Macquarie Financial Advisory Co., Ltd. Shinhan Macquarie Financial Advisory Co., Ltd. ( Shinhan Macquarie ) was incorporated on August 1, 2001 to engage in the business of financial advisory services and cross border leasing, and its capital stock was W1,000million ($832 thousand) as of June 30, c. Shinhan System Co., Ltd. Shinhan System Co., Ltd. ( Shinhan System ) was incorporated in May 1991 to engage in computer services and has capital stock of W1,000 million ($832 thousand) as of June 30, Ownerships of subsidiaries accounted for by the equity method as of June 30, 2002 is as follows: Investor Investee (equity method) Number of shares Percentage of ownership (%) Reason for exclusion from the scope of consolidation The Company e-shinhan 415, Asset under W 7 billion Shinhan Macquarie 102, Shinhan Bank Shinhan System 200,

10 4 (In millions of Won) (2) Basis of Financial Statements Presentation and Summary of Significant Accounting Policies (a) Basis of Financial Statements Presentation The Company maintains its official accounting records in Korean Won and prepares statutory financial statements in the Korean language in conformity with the accounting principles generally accepted in the Republic of Korea. Certain accounting principles applied by the Company that conform with financial accounting standards and accounting principles in the Republic of Korea may not conform with generally accepted accounting principles in other countries. Accordingly, these non-consolidated financial statements are intended for use only by those who are informed about Korean accounting principles and practices. The accompanying consolidated financial statements have been condensed, restructured and translated into English (with certain expanded descriptions) from the Korean language financial statements. (b) Basis of Financial Statements Translation The accompanying consolidated financial statements are expressed in Korean Won and have been translated, solely for convenience of the reader, into U.S. dollars at the rate of W 1, to $US1, the basic exchange rate on June 30, These translations should not be construed as a representation that any or all of the amounts shown could be converted into U.S. dollars at this or any other rate. (c) Translation of Foreign Currency Denominated Assets and Liabilities Monetary assets and liabilities denominated in foreign currencies are translated into Korean Won at the balance sheet date, with the resulting gains and losses recognized in current results of operations. As permitted by the Financial Accounting Standards, monetary assets and liabilities denominated in foreign currencies are translated into Korean Won at W 1,201.8 to US$ 1, the basic rate of exchange on June 30, 2002, except for swap funds which are translated at the specified rates in the contracts. In case where the acquisition of operating lease property was financed before March 31, 1998 by foreign currency borrowings and the risk of fluctuation of the exchange rate is hedged through a lease income denominated in a foreign currency, any gain or loss on foreign currency translation incurred from such foreign currency borrowings is deferred and recognized as a gain or loss when the related lease income is recognized as revenue. Financial statements of overseas branches are also translated into Korean won at the above base rates on the balance sheet date. Non-monetary assets and liabilities denominated in foreign currencies, which are stated at historical cost, are translated into Korean Won at the foreign exchange rate ruling at the date of the transaction.

11 5 (2) Basis of Financial Statements Presentation and Summary of Significant Accounting Policies, Continued (d) Trading and Investment Securities Debt and equity securities bought and held for the purpose of selling them in the near term are classified as trading securities. Those securities are recorded at fair market value. Valuation gains or losses on trading securities is included in current earnings. Debt and equity securities other than presented in the trading securities are classified as investment securities. Investments in debt securities categorized as held to maturity are recorded at amortized cost, with the related amortization included in interest expense. Investments in debt securities other than those held to maturity are recorded at fair value with the unrealized gain or loss included as a capital adjustment, which is a separate component of stockholders equity. Investment in equity securities with readily determinable fair values (except for the investment in affiliated companies accounted for using the equity method) are carried at fair value and the unrealized loss or gain is charged or credited to the capital adjustment account in the balance sheet. Investments in equity securities (except for the investment in affiliated companies accounted for using the equity method) that do not have readily determinable fair values are stated at acquisition cost. If the Company s equity in the net book value of the investee declines significantly and is not expected to recover, the difference between the book value and the fair value is charged to current results of operations as an impairment loss. Investments in the Stock Market Stabilization Fund and partnerships (investments in special funds) are reported at net asset value in the amount of its proportionate book value of the investee and the differences between net asset value and book value are charged to current earnings. Notwithstanding the above valuation methods, investments in equity securities of companies, over which the Company controls or exercises significant influence, are stated at an amount as determined using the equity method of accounting. The difference between carrying value and amount after adjusting investors interest in investee s net assets is charged or credited to current income and the difference derived from changes in the investee s retained earnings is presented as the increase or decrease in the investor s beginning retained earnings. If the difference is derived from changes in investee s capital surplus or capital adjustment, it is charged to the capital adjustment as a component of stockholders equity. In accordance with the accounting and reporting guidelines prescribed by Korean trust and banking regulatory authorities, securities included in trust accounts of Shinhan Bank are recorded at market value. However, according to the interim measure of the revised guidelines, debt securities included in the unspecified money trusts already established before the effective date of revised guidelines (November 13, 1998) are recorded at acquisition cost.

12 6 (2) Basis of Financial Statements Presentation and Summary of Significant Accounting Policies, Continued (e) Allowance for Loan Losses Shinhan Bank, the Company s subsidiary, established the credit risk-rating model, which considers the borrowers capacity to repay and credit risk ( Forward Looking Criteria: FLC ) in classifying its corporate loans and making provisions for loan losses. Based on the above model, the Company and its subsidiaries classified their corporate loans by ten credit risk ratings and made provisions for loan losses in the amount of %, 4.0%, 20.0%, 95% and 100% of those classified in category 1 6 (normal), 7 (precautionary), 8 (sub-standard), 9 (doubtful) and 10 (estimated loss), respectively. While household loans and credit card loans were classified by considering current financial status including delinquency period, bankruptcies and collaterals value. Those loans were made provision for loan losses of %, %, 20%, 55% 60% and 100% of those classified in normal, precautionary, sub-standard, doubtful and estimated loss, respectively. (f) Troubled Loans Restructuring Restructured loans which are related to companies involved in bankruptcy proceedings, composition proceedings or workout programs with creditors are stated at present value of expected future cash flows, and the difference between carrying amount and the present value of expected future cash flows is presented as a present value discount, and amortized and credited to operations as interest income using the effective interest rate method. In addition, an allowance for the present value on restructured loans is made depending on the credit conditions of borrowers. (g) Fixed Assets i) Tangible Assets Tangible assets are stated at cost, except for the case of revaluation made in accordance with the Asset Revaluation Law. Significant additions or improvements extending useful lives of assets are capitalized. However, normal maintenance and repairs are charged to expense when incurred. Depreciation is computed using the declining-balance method, except straight-line method for building and leasehold improvement, over estimated useful lives of the related assets ii) Intangible Assets Intangible assets are stated at acquisition cost less amortization computed using the straightline method over useful lives of related intangible assets.

13 7 (2) Basis of Financial Statements Presentation and Summary of Significant Accounting Policies, Continued (h) Discounts on Debentures Discounts on debentures issued, which represent the difference between the face value of debentures issued and the issuance price of debentures, are amortized on the effective interest method over the lives of the debentures. The amount amortized is included in interest expense. (i) Allowance for Guarantees and Acceptances The Company provides an allowance for losses on guarantees and acceptances, which are classified as substandard, doubtful and estimated loss using the same method as that used to provide for losses on its corporate loans. (j) Retirement and Severance Benefits Employees who have been with the Company for more than one year are entitled to lump-sum payments based on current rates of pay and length of service when they leave the Company. The Company's estimated liability under the plan which would be payable if all employees left on the balance sheet date is accrued in the accompanying balance sheets. A portion of the liability is covered by an employees severance pay insurance where the employees have a vested interest in the deposit with the insurance companies. The deposits for retirement insurance is, therefore, reflected in the accompanying balance sheet as a deduction from the liability for retirement and severance benefits. Under the National Pension Scheme of Korea, the Company transferred a certain portion of retirement allowances of employees to the National Pension Fund. The amount transferred will reduce the retirement and severance benefit amount to be payable to the employees when they leave the Company and is accordingly reflected in the accompanying financial statements as a reduction from the retirement and severance benefit liability in the accompanying consolidated financial statements. (k) Contingent Liabilities Contingent losses are generally recognized as liability when probable and reasonably estimable.

14 8 (2) Basis of Financial Statements Presentation and Summary of Significant Accounting Policies, Continued (l) Income Taxes Income tax on the earnings or loss for the year comprises current and deferred tax. Income tax is recognized in the statement of earnings except to the extent that it relates to items recognized directly to equity, in which case it is recognized in equity. Deferred tax is provided using the asset and liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realization or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the balance sheet date. A deferred tax asset is recognized only to the extent that it is probable that future taxable earnings will be available against which the unused tax losses and credits can be utilized. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realized. (m) Earnings Per Share Earnings per common share is calculated by dividing net earnings by the weighted-average number of common shares outstanding during each period. (n) Derivatives Forward foreign exchange contracts, currency swaps, interest rate swaps, etc. are valued principally at the fair value of rights or obligations associated with derivatives contracts as assets and liabilities. The gain realized or loss incurred from derivative transactions is recognized in current operations. Forward foreign exchange contracts, which have been made to hedge foreign exchange receivables and payables in future, are classified as forward foreign exchange contracts for hedging purposes. Unrealized gain or loss on forward foreign exchange contracts for hedging purposes is deferred as capital adjustment. The deferred gain or loss will be credited or charged to income when related foreign exchange receivables and payables are settled.

15 9 (2) Basis of Financial Statements Presentation and Summary of Significant Accounting Policies, Continued (o) Accounting for Leases and Rentals a. Classification of leases The Company accounts for and classifies its lease transactions as either operating or capital leases, depending on the terms of the lease under Korean Lease Accounting Standards. If a lease is substantially noncancellable and meets one or more of the criteria listed below, the present value of future minimum lease receivables is reflected as assets under capital lease. Otherwise, it is classified as an operating lease with lease receivables recognized as revenue when incurred. i) Ownership of the leased property shall be transferred to the lessee at the end of the lease term without additional payment or for a contract price. ii) The lease has a bargain purchase option. iii) The lease term is equal to 75% or more of the estimated economic useful life of the leased property. iv) The present value at the beginning of the lease term of the minimum lease payments equals or exceeds 90% of the fair value of the leased property. b. Revenue recognition In case of capital leases, the portion originated from principal is accounted for as collections of outstanding receivables and the remaining interest income is accounted for as revenue in the current period. Revenue from operating leases is recognized on a straight-line basis over the lease term. c. Capitalization of financing charges Interest expense and other similar financing charges incurred in the acquisition of leased property prior to the inception date of the lease are capitalized as a cost of the leased property. d. Depreciation of assets for operating leases Depreciation of assets for operating leases is computed using the straight-line method over the economic useful lives (or lease terms if contracted before April 1, 1998). e. Allowance for losses on disposal of leased property Allowance for losses on disposal of leased property on operating leases is provided using the same method as that used to provide for losses on enterprise loans. f. Advance payments on capital lease receivables and operating lease assets All costs and charges incurred in connection with acquiring lease assets by inception date of the lease are recorded as advance payments on operating lease assets or capital lease receivables. g. Contingent rental Rentals that represent the increases and decreases in basic lease rentals which result from changes occurring subsequent to the inception date of the lease in the factors (except for interest and foreign exchange rate) on which the lease rentals are calculated. Such changes are reported as income or expense in the period incurred.

16 10 (In millions of Won) (3) Standards Applied for Preparing Consolidated Financial Statements (a) The investment account of the Controlling Company was offset against the stockholders equity account of each subsidiary as of the date of acquisition. (b) The Company records differences between the cost of investment accounts and the corresponding fair value of subsidiaries net assets at the time of acquisition as goodwill (negative goodwill) and those are amortized over certain periods, which are less than 20 years. The changes in differentials for the six-month period ended June 30, 2002 are as follows: Subsidiaries Attributes Differentials at the time of acquisition Amortization Balance at June 30, 2002 Jeju Bank Land W (4,728) - (4,728) Building (3,549) (21) (3,528) Securities (435) (23) (412) Allowance for loan losses (2,575) (219) (2,356) Negative goodwill (6,854) (343) (6,512) (18,141) (606) (17,536) Good Morning Securities Building 4,156-4,156 Land 7,129-7,129 Goodwill 165, , , ,978 W 158,837 (606) 159,442 (c) All significant inter-company transactions and account balances among the consolidated companies have been fully eliminated in consolidation. (d) Additional allowances for loan losses on certain subsidiaries loans are provided in the consolidated financial statements for the purpose of applying consistent standards to all subsidiaries. Details of additional allowances are as follows: Shinhan Securities W 462 Shinhan Capital 9,650 Jeju Bank 5,480 W 15,592 (e) Valuations in the investment account by the equity method are as follows: e-shinhan Shinhan Shinhan Macquarie System Total Beginning balance W 4, ,864 7,313 Investment or dividend - (484) - (484) Current earnings (loss) - valuation gain (loss) by the equity method (443) 170 (188) (461) Retained earnings (1) (3) - (4) Capital adjustment - unrealized valuation gain (loss) by the equity method Ending balance W 4, ,676 6,389

17 11 (4) Cash and Due from Banks (a) Cash and due from banks as of June 30, 2002 consist of the following: Won U.S. dollars (Note 2) Cash on hand in Won W 571,992 $ 475,946 Cash on hand in foreign currencies 49,902 41,523 Deposits in Won 188, ,892 Deposits in foreign currencies Due from banks in Won: Reserve deposits in the Bank of Korea 780, ,634 Certificate deposits 264, ,903 Deposits for retirement insurance 78,117 65,000 Due from banks for customers' accounts 588, ,918 Other 88,175 73,369 1,800,085 1,497,824 Due from banks in foreign currencies: Demand deposits 25,056 20,849 Time deposits 147, ,495 Other deposits 2,333 1, , ,285 Other 10,500 8,737 W 2,795,843 $ 2,326,380 (b) Restricted due from banks as of June 30, 2002 are summarized as follows: Won U.S. dollars (Note 2) Restrictions Deposits in Won W 10,468 $ 8,710 Collateral for checking account Due from banks in Won: Reserve deposits in the Bank of Korea 780, ,634 General Banking Act Due from banks for customers' accounts 588, ,918 Reserve for customers deposits Other 93,384 65,330 Deposits for retirement insurance and other Due from banks in foreign Pledged for operation of overseas 7,435 6,187 currencies branches W 1,465,930 $ 1,219,779 (c) The maturities of the due from banks by remaining period as of June 30, 2002 are summarized as follows: Remaining period Due from banks Due from banks in in Won foreign currencies Total Due within 3 months W 717, , ,897 3 months 6 months 45,342 31,247 76,589 6 months 1 year 80,319-80, years 10,033-10,033 Due after 3 years 946,974 7, ,850 Total W 1,800, ,603 1,974,688

18 12 (5) Trading and Investment Securities (a) Securities as of June 30, 2002 consist of the following: Won U.S. dollars (Note 2) Trading securities: Stocks W 95,377 $ 79,362 Government bonds 386, ,832 Finance debentures 878, ,833 Corporate bonds 752, ,022 Beneficiary certificates 179, ,377 Commercial paper 50,000 41,604 Other 3,757 3,126 2,346,101 1,952,156 Investment securities: Stocks 229, ,931 Equity investments 78,096 64,982 Government bonds 1,670,415 1,389,928 Finance debentures 2,105,532 1,751,982 Corporate bonds 6,045,192 5,030,115 Beneficiary certificates 1,662,111 1,383,018 Investment securities in foreign currencies 804, ,203 Other 4,100 3,411 12,599,155 10,483,570 W 14,945,256 $ 12,435,726 (b) Trading and investment debt securities as of June 30, 2002 consist of the following: Face value Acquisition cost Fair value(*) Book value(*) Trading securities: Government bonds W 385, , , ,778 Finance debentures 906, , , ,315 Corporate bonds 738, , , ,353 2,030,487 2,026,297 2,023,928 2,017,446 Investment securities: <Available-for-sale> Government bonds 825, , , ,586 Finance debentures 1,671,090 1,631,582 1,665,989 1,638,532 Corporate bonds 2,675,848 2,703,210 2,750,879 2,712,463 5,172,019 5,161,232 5,338,842 5,182,581 <Held-to-maturity> Government bonds 843, , , ,829 Finance debentures 466, , , ,000 Corporate bonds 3,325,866 3,335,976 3,532,057 3,332,729 Other 4,100 4,099 4,256 4,100 4,639,580 4,645,737 4,989,448 4,642,658 9,811,599 9,806,969 10,328,290 9,825,239 W 11,842,086 11,833,266 12,352,218 11,842,685 (*) The difference between fair value and book value is recorded as accrued income.

19 13 (In millions of Won) (5) Trading and Investment Securities, Continued (c) Investment equity securities as of June 30, 2002 consist of the following: Ownership Acquisition Net asset (%) cost or fair value Book value Investment equity securities by the the equity method: e-shinhan W 8,270 4,254 4,254 Shinhan Macquarie Shinhan System ,000 1,676 1,676 9,780 6,389 6,389 Other: Korea Securities Finance 4 11,573 17,728 11,573 Shinwon ,310 8,201 8,201 Hyundai Construction ,971 34,054 34,054 SK Telecom ,822 9,083 9,083 Hyundai Petrochemical ,244 38,102 9,244 Other - 203,466 80, , , , , , , ,461 Investment in special fund: Stock Market Stabilization Fund 49,628 66,461 66,461 Korea Stock Exchange 4,761 37,640 4,761 Other 6,874 6,948 6,874 61, ,049 78,096 W 377, , ,557 (d) The maturity of investment debt securities classified as held-to maturity by remaining period, as of June 30, 2002, are summarized as follows: Remaining period Government Finance Corporate bonds debentures bonds Other Total Due within 3 months W 126, , ,080 3, ,330 3 months 6 months 164,452 39, , ,969 6 months 1 year 1,146 82, , , years 301, ,813 2,315,805-2,813,325 Due after 3 years 245, ,568 1, ,804 W 838, ,000 3,332,729 4,100 4,642,658

20 14 (5) Trading and Investment Securities, Continued (e) Investment securities in foreign currencies classified by issuing country as of June 30, 2002 are as follows: Foreign currency Equivalent Won (thousands of U.S. dollars) (millions) Ratio (%) Korea $ 550,438 W 661, U.S.A 56,203 67, Thailand 4,223 5, Malaysia 7,543 9, Indonesia 6,585 7, Philippines 6,784 8, Germany 20,470 24, Japan 3,205 3, Other 13,753 16, $ 669,204 W 804, (6) Loans (a) Loans outstanding as of June 30, 2002 consist of the following: Won U.S. dollars (Note 2) Loans in Won W 29,839,433 $ 24,828,951 Loans in foreign currencies 2,897,792 2,411,210 Domestic import usance bills 17,056 14,192 Call loans 951, ,452 Bills bought in Won 2,297,928 1,912,072 Bills bought in foreign currencies 1,831,010 1,523,556 Payments on guarantees and acceptances 95,628 79,571 Credit card accounts 2,553,857 2,125,027 Bonds purchased under repurchase agreement 16,009 13,321 Privately placed debentures 1,253,422 1,042,954 Factoring receivables 33,448 27,831 Loans convertible into equity securities Financing lease receivables 531, ,204 Receivables from cancelled financing lease 32,444 26,996 Other 67,261 55,967 42,418,389 35,295,714 Less: allowance for loan losses (872,341) (725,862) present value discounts (20,202) (16,810) W 41,525,846 $ 34,553,042

21 15 (In millions of Won) (6) Loans, Continued (b) The maturities of loans by remaining period as of June 30, 2002 are as follows: Remaining period Loans in Won Loans in foreign currencies Other Total Due within 3 months W 5,340, ,807 6,405,757 12,424,531 3 months 6 months 4,364, , ,532 5,804,146 6 months 1 year 7,454, , ,007 8,727, years 10,415, , ,430 11,763,113 Due after 3 years 2,263, , ,438 3,698,786 W 29,839,433 2,897,792 9,681,164 42,418,389 (c) Loan classified by country as of June 30, 2002 are as follows: Loans Loans in foreign in Won currencies Other Total Ratio (%) Korea W 29,839,433 2,151,773 9,634,895 41,626, U.S.A - 4,249-4, U.K ,036 24, Japan - 719, , Italy ,215 10, Indonesia - 16,166 12,018 28, Thailand - 2,812-2, Vietnam - 1,974-1,974 - Singapore - 1,418-1,418 - W 29,839,433 2,897,792 9,681,164 42,418, (d) Loans classified by consumer as of June 30, 2002 are as follows: Loans Loans in foreign in Won currencies Other Total Ratio (%) Corporate W 14,541,626 2,841,250 7,489,728 24,872, Household 15,081,834 40,320 1,914,779 17,036, Public and other 215,973 16, , , W 29,839,433 2,897,792 9,681,164 42,418, (e) Restructured loans due to commencement of bankruptcy proceedings, composition proceedings or workout programs during six-month period ended June 30, 2002 are as follows: Composition Bankruptcy proceedings Work out Total Equity securities converted from loans W 6,793 1,905-8,698 Conversion of convertible bonds Reduction in interest rate 2, ,807 Balances before restructuring 9,582 2,025 1,391 12,998 Balances after restructuring 3, ,271 4,615 Loss resulting from restructuring W 6,527 1, ,383

22 16 (In millions of Won) (6) Loans, Continued (f) Sale of non-performing loans Pursuant to asset securitization plans, Shinhan Bank ( the Bank ), subsidiary of the Company, sold non-performing loans of W79,955 million (including W2,121 million on Trust account) through issuing asset backed securities, for the six-month period ended June 30, In respect of these sales, the Bank recognized a gain of W11,705 million (including W 1,406 million in the Trust accounts) and a loss of W7,999 million (including W465 million in the Trust accounts), respectively, and it recorded W17,844 million of impairment losses to subordinated debentures, which the Bank assumed through securitization plans. In addition, the Bank provided W20,000 million of securities as collateral and W36,000 million of repurchasing rights for the purpose of credit enhancement in relation to securitization plans. (g) Changes in allowance for losses on loans, accounts receivable and accrued income for the sixmonth period ended June 30, 2002, are as follows: Beginning balance Increase (Decrease) Ending balance The Company W 1,472 1,661 3,133 Shinhan Bank 567,344 28, ,624 Shinhan Bank - Trust account 30,224 (5,600) 24,624 Shinhan Finance 3,949 (403) 3,546 Shinhan Securities (*) 15,671 (3,057) 12,614 Shinhan Capital (**) 102,454 (60,063) 42,391 Shinhan ITMC Jeju Bank (*) 26,952 14,060 41,012 Jeju Bank - Trust account 990 (727) 263 Good Morning Securities 82,609 (213) 82,396 Shinhan Card - 73,068 73,068 W 831,690 47, ,699 (*) After reflecting additional allowances for losses of W462 million and W5,480 million to Shinhan Securities and Jeju Bank, respectively. (**) Additional allowances for losses of W9,650 million and allowance for losses on disposition of lease assets to Shinhan Capital.

23 17 (7) Fixed Assets Fixed assets as of June 30, 2002 consist of the following: Won U.S. dollars (Note 2) Tangible assets: Land W 346,062 $ 287,953 Buildings 455, ,415 Other 547, ,257 1,349,171 1,122,625 Less: accumulated depreciation (452,820) (376,785) W 896,351 $ 745,840 Intangible assets: Goodwill W 165,693 $ 137,871 Negative goodwill (6,512) (5,418) Organization costs Development costs Other 8,353 6,951 W 168,455 $ 140,170 The officially declared value of land used in domestic branches at June 30, 2002, as announced by the Minister of Construction and Transportation, is as follows: Book value Declared value Land - held for business purpose W 345, ,873 Land - held for investment W 346, ,651 The officially declared value, which is used for government purposes, does not represent fair value. (8) Other Assets Other assets as of June 30, 2002 consist of the following: Won U.S. dollars (Note 2) Accounts receivable W 713,831 $ 593,968 Advance payments 23,465 19,525 Prepaid expenses 25,062 20,854 Accrued income 583, ,325 Operating lease assets 166, ,535 Guarantee deposits paid 442, ,066 Deferred tax assets 53,490 44,508 Derivative assets 141, ,014 Deferred foreign currency translation loss on operating lease 5,161 4,294 Investment assets 5,000 4,160 Other 192, ,517 2,352,844 1,957,766 Less: allowance for losses (5,157) (4,291) present value discounts (960) (799) accumulated depreciation on operating lease assets (94,773) (78,859) allowance for losses on disposition of lease assets (1,201) (999) W 2,250,753 $ 1,872,818

24 18 (9) Lease Assets (a) Operating lease assets Operating lease assets classified by industry as of June 30, 2002 are summarized as follows: Won U.S. dollars (Note 2) Mining W 5,096 $ 4,240 Manufacturing: Food and beverages 17,273 14,373 Clothing and fabrics 7,611 6,333 Paper and publishing 32,744 27,246 Chemicals 18,389 15,301 Mining 1, Metal Electrical components and equipment 19,264 16,029 Other manufacturing 15,263 12,700 Energy and gas 6,927 5,764 Construction Retail / wholesale and lodging 2,434 2,025 Transportation and containers 20,519 17,074 Banking, insurance and other financing Medical 5,481 4,561 Public and consumer services 13,119 10, , ,534 Accumulated depreciation (94,773) (78,859) Allowance for losses on disposition of lease assets (1,201) (999) W 70,517 $ 58,676 (b) The collection schedule of future lease receivables as of June 30, 2002 is as follows: Operating lease Capital lease Total W 35, , , , , , , , , ,528 70,578 73, ,468 28,116 29,584 Thereafter 1,468 21,923 23,391 76, , ,181 Unrealized interest income on capital lease - (85,833) (85,833) W 76, , ,348

25 19 (10) Deposits (a) Deposits as of June 30, 2002 consist of the following: Won U.S. dollars (Note 2) Deposits in Won: Demand deposits W 1,654,838 $ 1,376,966 Savings deposits 28,485,475 23,702,342 Installment savings 1,674,909 1,393,667 Other 600, ,357 32,415,349 26,972,332 Negotiable certificates of deposit 3,775,481 3,141,522 Deposits in foreign currencies: Demand deposits 538, ,038 Time and savings deposits 1,306,821 1,087,387 1,845,273 1,535,425 W 38,036,103 $ 31,649,279 (b) The maturities of deposits by remaining period as of June 30, 2002 is as follows: Remaining period Deposits in won Deposits in foreign currencies Negotiable certificates of deposit Due within 3 months W 10,160,657 1,042,649 2,355,657 13,558,963 3 months 6 months 3,853, ,162 1,264,799 5,506,927 6 months 1 year 8,644, , ,448 8,937, years 2,531, ,198 3,577 2,807,859 Due after 3 years 7,224, ,224,756 W 32,415,349 1,845,273 3,775,481 38,036,103 Total

26 20 (11) Borrowings (a) Borrowings as of June 30, 2002 consist of the following: Won U.S. dollars (Note 2) Borrowings in Won: Borrowings from the Bank of Korea W 1,025,301 $ 853,138 Other 1,200, ,202 2,226,142 1,852,340 Borrowings in foreign currencies 3,051,331 2,538,967 Bonds sold with repurchase agreements 4,100,728 3,412,155 Bills sold 640, ,994 Due to the Bank of Korea in foreign currencies 44,049 36,653 Call money 792, ,205 W 10,855,035 $ 9,032,314 (b) The details of subordinated borrowings as of June 30, 2002 are as follows: Date of Interest U.S. dollars Maturity Won contract rate (%) (Note 2) Hungkuk Life W 40,000 $ 33,283 Kyobo Life ,000 24,963 Samsung Life ,000 7,489 W 79,000 $ 65,735 (c) The maturities of borrowings classified by term as of June 30, 2002 are as follows: Remaining period Borrowings in Won Borrowings in foreign currencies Bonds sold with repurchase agreements Other Total Due within 3 months W 1,204,108 1,485,085 2,065,021 1,053,838 5,808,052 3 months 6 months 71, ,221 1,069, ,422 2,404,609 6 months 1 year 154, , , ,971 1,420, years 461, ,200 21,924 33, ,858 Due after 3 years 335,241 27,666-7, ,317 Total W 2,226,142 3,051,331 4,100,728 1,476,834 10,855,035

27 21 (12) Debentures (a) Debentures as of June 30, 2002 consist of the following: Won U.S. dollars (Note 2) Debentures in Won W 6,071,657 $ 5,052,136 Debentures in foreign currencies 196, ,911 6,268,645 5,216,047 Less: discounts (382,470) (318,248) W 5,886,175 $ 4,897,799 (b) Details of debentures in Won as of June 30, 2002 consist of the following: Face value Won U.S. dollars (Note 2) Interest rate (%) Discount bonds W 2,280,000 $ 1,897, Coupon bonds 1,958,000 1,629, Debentures with stock warrants (*) 299, , Subordinated bonds 1,534,593 1,276, W 6,071,657 $ 5,052,136 (*) Shinhan Bank s third series non-guaranteed and non-separable debentures with stock warrants issued on December 2, 1998 with an exercise price of W5,000. In respect of the debentures, the Bank recorded W298,574 million of discount on debentures as of June 30, The exercise period will expire on December 2, (c) Debentures in foreign currencies as of June 30, 2002 are summarized as follows: a. Shinhan Bank, which is the subsidiary of the Company, established two programs with Merrill Lynch International Limited and other four financial institutions to issue Euro Medium Term Note (EMTN) on November 9, 1995 and Global Medium Term Note (GMTN) on August 20, Details of the programs are as follows: Total amount which can be issued : USD 2,000,000,000 Place of trading : London Stock Exchange Issue price : Face value or discounted value Maturity date and interest date : Various depending on date of issuance Repayment : Maturity date b. In accordance with the above programs, Shinhan Bank issued the following debentures in foreign currencies as of June 30, 2002 are as follows: Issued date Issue price USD (million) Due date Interest rate Underwriter USD Libor + 20bp ABN HK