EX-99.2 3 d713206dex992.htm EX-99.2 EX-99.2

Exhibit 99.2

WOORI BANK

SEPARATE FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED

DECEMBER 31, 2018 AND 2017

ATTACHMENT: INDEPENDENT AUDITORS’ REPORT

WOORI BANK


INDEPENDENT AUDITORS’ REPORT

English Translation of a Report Originally Issued in Korean on March 19, 2019

To the Shareholders and the Board of Directors of Woori Bank

Report on the Audited Separate Financial Statements

Our Opinion

We have audited the accompanying separate financial statements of Woori Bank (the “Bank”), which comprise the separate statement of financial position as of December 31, 2018 and December 31, 2017, respectively, and the separate statement of comprehensive income, separate statement of changes in shareholders’ equity and separate statement of cash flows, for the years then ended, and a summary of significant accounting policies and other explanatory information.

In our opinion, the separate financial statements present fairly, in all material respects, the financial position of the Bank as of December 31, 2018 and December 31, 2017, respectively, and its financial performance and its cash flows for the years then ended in accordance with Korean International Financial Reporting Standards (“K-IFRS”).

Basis for Audit Opinion

We conducted our audits in accordance with the Korean Standards on Auditing (“KSAs”). Our responsibilities under those standards are further described in the Auditors Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Bank in accordance with the ethical requirements, including those related to independence, that are relevant to our audit of the separate financial statements in the Republic of Korea as required by prevailing audit regulations. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key Audit Matters

The key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the separate financial statements of the current period. These matters were addressed in the context of our audit of the separate financial statements as a whole, and in forming our audit opinion thereon, and we do not provide a separate opinion on these matters.


Allowance for credit loss in accordance with K-IFRS 1109 ‘Financial Instruments’

Key audit matter description

As a result of the adoption of K-IFRS 1109 in the current year, the Bank estimates and records an allowance for loans based on expected credit losses, as opposed to the previous method based on incurred credit losses under K-IFRS 1039 as described in notes 2, 3, 4 and 10. In order to estimate expected credit losses, the Bank segregated its portfolio in retail loans. With the exception of a portion of the corporate loan book comprised of individually significant loans (amortized cost of KRW 819,593 million), the Bank measures all portfolios (amortized cost of KRW 241,863,227 million) based on a collective assessment methodology. Both the collective and individual impairment methodologies in the amounts of KRW 1,025,866 million and KRW 371,188 million, respectively, must consider historical losses adjusted for forward looking information and include multiple scenarios for macroeconomic factors. The allowance for certain loans is measured, at least in part, based on the valuation of collaterals which must take into account an expectation of when and for how much the collateral will be sold.

There was a significant amount of judgment required by management when determining the appropriateness of the forward looking and macroeconomic information used in the calculation of the expected losses in its loan portfolio.

Given the level of subjectivity and judgment, auditing the estimated allowance for loan losses involved especially complex and subjective judgment.

How the scope of our audit responded to the key audit matter

Our audit procedures related to the assumptions and unobservable inputs used by management for the estimate of impaired loans including the following:

 

   

We tested the design and effectiveness of controls over the appropriateness of the cash-flows estimated to be collected in individually significant loans, including the estimates of collateral values.

 

   

We tested the design and effectiveness of the controls over the appropriateness of the models used to determine the calculation of the allowance for loan losses for collectively assessed loans and most importantly the determination of the relevant model and assumptions to incorporate forward looking and macro-economic information

 

   

We used our credit specialists to assist us in challenging the reasonableness of the methodologies and inputs used in the calculation of the allowance for loan losses for collectively assessed loans, most importantly in determining the appropriateness of forward looking and macro-economic scenarios used by management

 

   

We reperformed the calculation of the collective allowance taking into account forward looking and macroeconomic information determined to be appropriate in consultation with our credit specialists.

 

   

We selected samples of loans subject to individual assessments and performed the following:

 

   

Independently estimated future operating cash flows from borrowers with significant loans outstanding to determine the available cash flows to repay the loans.

 

   

With assistance of our appraisal specialists, evaluated the reasonableness of cash flow estimates based on the future sale of collateral.


Responsibilities of Management and the Audit Committee for the Financial Statements

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

In preparing the separate financial statements, management of the Bank is responsible for assessing the Bank’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 Bank or to cease operations, or has no realistic alternative but to do so.

The audit committee is responsible for overseeing the Bank’s financial reporting process.

Auditor’s Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the separate financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s 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 separate 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 separate financial statements, 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 one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

 

   

Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Bank’s internal control.

 

   

Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

 

   

Conclude on the appropriateness of the management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Bank’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the separate financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Bank to cease to continue as a going concern.


   

Evaluate the overall presentation, structure and content of the separate financial statements, including the disclosures, and whether the separate financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

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

We also provide the audit committee of the Bank with a statement that we have complied with relevant ethical requirements, including those related to independence, and to communicate with them all matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with the audit committee, we determine those matters that were of most significance in the audit of the separate financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter.

March 19, 2019

Notice to Readers

This report is effective as of March 19, 2019 the auditors’ report date. Certain subsequent events or circumstances may have occurred between the auditors’ report date and the time the auditors’ report is read. Such events or circumstances could significantly affect the separate financial statements and may result in modifications to the auditors’ report.


WOORI BANK

SEPARATE FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS

ENDED DECEMBER 31, 2018 AND 2017

The accompanying separate financial statements, including all footnote disclosures, were

prepared by, and are the responsibility of, the management of Woori Bank.

Tae Seung Sohn

President and Chief Executive Officer

 

Headquarters: (Address) 51, Sogong-ro, Jung-gu, Seoul
(Phone Number)    02-2002-3000


WOORI BANK

SEPARATE STATEMENTS OF FINANCIAL POSITION

AS OF DECEMBER 31, 2018 AND 2017

 

     December 31,
2018(*)
     December 31,
2017(*)
 
     (Korean Won in millions)  
ASSETS      

Cash and cash equivalents (Notes 6 and 45)

     5,723,801        5,328,960  

Financial assets at fair value through profit or loss (“FVTPL”) (K-IFRS 1109) (Notes 4, 7, 11, 12, 26 and 45)

     3,877,858        —    

Financial assets at FVTPL (K-IFRS 1039)

(Notes 4, 7, 11, 12, 18, 26 and 45)

     —          4,133,724  

Financial assets at fair value through other comprehensive income (“FVTOCI”) (Notes 4, 8, 11, 12, and 18)

     17,040,674        —    

Available for sale (“AFS”) financial assets (Notes 4, 8, 11, 12 and 18)

     —          14,186,704  

Securities at amortized cost (Notes 4, 9, 11, 12 and 18)

     22,802,050        —    

Held to maturity (“HTM”) financial assets (Notes 4, 9, 11, 12 and 18)

     —          16,638,727  

Loans and other financial assets at amortized cost (Notes 4, 10, 11, 12, 18 and 45)

     260,350,949        —    

Loans and receivables (Notes 4, 10, 11, 12, 18 and 45)

     —          248,810,624  

Investments in subsidiaries and associates (Note 13)

     4,193,775        4,148,795  

Investment properties (Note 14)

     367,117        350,235  

Premises and equipment (Note 15)

     2,350,342        2,374,590  

Intangible assets (Note 16)

     353,167        303,325  

Assets held for distribution (sale) (Note 17)

     143,288        46,183  

Deferred tax assets (Note 42)

     7,360        238,543  

Derivative assets (Designated for hedging) (Notes 4, 11, 12 and 26)

     35,503        59,272  

Other assets (Notes 19 and 45)

     146,995        117,889  
  

 

 

    

 

 

 

Total assets

     317,392,879        296,737,571  
  

 

 

    

 

 

 
LIABILITIES      

Financial liabilities at FVTPL (K-IFRS 1109) (Notes 4, 11 12, 20, 26 and 45)

     2,279,373        —    

Financial liabilities at FVTPL (K-IFRS 1039) (Notes 4, 11, 12, 20, 26 and 45)

     —          3,416,978  

Deposits due to customers (Notes 4, 11, 21 and 45)

     237,426,765        224,384,156  

Borrowings (Notes 4, 11, 12 and 22)

     14,081,092        13,662,984  

Debentures (Notes 4, 11 and 22)

     21,666,331        21,707,466  

Provisions (Notes 23, 44 and 45)

     283,501        368,027  

Net defined benefit liability (Note 24)

     136,163        14,284  

Liabilities of a disposal group classified as held for distribution (Note 17)

     72,361        —    

Current tax liabilities (Note 42)

     110,127        212,376  

Derivative liabilities (Designated for hedging) (Notes 4, 11, 12 and 26)

     17,654        12,103  

Other financial liabilities (Notes 4, 11, 12, 25 and 45)

     20,097,011        13,029,421  

Other liabilities (Notes 25 and 45)

     173,501        135,686  
  

 

 

    

 

 

 

Total liabilities

     296,343,879        276,943,481  
  

 

 

    

 

 

 

(Continued)


WOORI BANK

SEPARATE STATEMENTS OF FINANCIAL POSITION

AS OF DECEMBER 31, 2018 AND 2017  (CONTINUED)

 

     December 31,
2018(*)
    December 31,
2017(*)
 
     (Korean Won in millions)  
EQUITY     

Capital stock (Note 28)

     3,381,392       3,381,392  

Hybrid securities (Note 29)

     3,161,963       3,017,888  

Capital surplus (Note 28)

     269,533       269,533  

Other equity (Note 30)

     (386,840     (135,282

Retained earnings and other reserves (Notes 31 and 32)

(Regulatory reserve for credit loss as of December 31, 2018 and 2017 is 2,091,721 million Won and 2,017,342 million Won, respectively

    

Regulatory reserve for credit loss to be reversed (reserved) as of December 31, 2018 and 2017 is 202,905 million Won and (-) 74,379 million Won, respectively

    

Planned provision reversed (reserved) of regulatory reserve for credit loss as of December 31, 2018 and 2017 is 202,905 million Won and (-) 74,379 million Won, respectively)

     14,622,952       13,260,559  
  

 

 

   

 

 

 

Total equity

     21,049,000       19,794,090  
  

 

 

   

 

 

 

Total liabilities and equity

     317,392,879       296,737,571  
  

 

 

   

 

 

 

 

(*)

The separate statement of financial position as of December 31, 2018 was prepared in accordance with K-IFRS 1109; however, the comparative separate statement of financial position as of December 31, 2017 was not retrospectively restated in accordance with K-IFRS 1109.

See accompanying notes


WOORI BANK

SEPARATE STATEMENTS OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

 

     2018(*)     2017(*)  
     (Korean won in millions,
except for per share data)
 

Interest income

     8,331,967       7,385,721  

Financial assets at FVTPL (K-IFRS 1109)

     6,047       —    

Financial assets at FVTOCI

     256,995       —    

Financial assets at amortized cost

     8,068,925       —    

Financial assets at FVTPL (K-IFRS 1039)

     —         17,735  

AFS financial assets

     —         209,594  

HTM financial assets

     —         303,348  

Loans and receivables

     —         6,855,044  

Interest expense

     (3,604,249     (2,995,118
  

 

 

   

 

 

 

Net interest income (Notes 11, 34 and 45)

     4,727,718       4,390,603  

Fees and commissions income

     1,151,201       1,072,838  

Fees and commissions expense

     (148,554     (141,817
  

 

 

   

 

 

 

Net fees and commissions income (Notes 11, 35 and 45)

     1,002,647       931,021  

Dividend income (Notes 36 and 45)

     75,986       125,599  

Net gain on financial instruments at FVTPL (K-IFRS 1109) (Notes 11, 37 and 45)

     204,649       —    

Net loss on financial instruments at FVTPL (K-IFRS 1039) (Notes 11, 37 and 45)

     —         (96,983

Net gain on financial assets at FVTOCI (K-IFRS 1109) (Notes 11 and 38)

     1,333       —    

Net gain on AFS financial assets (Notes 11 and 38)

     —         135,003  

Net gain on disposals of financial assets at amortized cost (Note 11)

     44,166       —    

Net gain on disposals of securities at amortized cost

     431       —    

Net gain on disposals of loans and other financial assets at amortized cost

     43,735       —    

Impairment losses due to credit loss (Notes 11, 39 and 45)

     (58,823     (553,204

General and administrative expenses (Notes 40 and 45)

     (3,189,336     (3,128,725

Other net operating expenses (Notes 40 and 45)

     (392,649     (12,756
  

 

 

   

 

 

 

Operating income

     2,415,691       1,790,558  

Share of losses on subsidiaries and associates (Note 13)

     (241     (133,948

Net other non-operating income(expense)

     70,181       (36,388
  

 

 

   

 

 

 

Non-operating income(expense) (Note 41)

     69,940       (170,336

Net income before income tax expense

     2,485,631       1,620,222  

Income tax expense (Note 42)

     (674,727     (344,110


WOORI BANK

SEPARATE STATEMENTS OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

 

     2018(*)     2017(*)  
     (Korean won in millions,
except for per share data)
 

Net income

    

(Net income after the provision for regulatory reserve for credit loss for the years ended December 31, 2018 and 2017, is 1,819,532 million won and 1,201,733 million won, respectively) (Note 32)

     1,810,904       1,276,112  
  

 

 

   

 

 

 

Net loss on valuation of equity securities at FVTOCI

     (29,290     —    

Net gain on valuation of financial liabilities designated as at FVTPL due to own credit risk

     100       —    

Remeasurement gain (loss) related to defined benefit plan

     (79,639     16,566  

Items that will not be reclassified to profit or loss

     (108,829     16,566  

Net gain on valuation of debt securities at FVTOCI

     36,085       —    

Net loss on valuation of AFS financial assets

     —         (48,139

Net gain (loss) on foreign currencies translation of foreign operations

     7,882       (34,093

Items that may be reclassified to profit or loss

     43,967       (82,232

Other comprehensive loss, net of tax

     (64,682     (65,666

Total comprehensive income

     1,746,042       1,210,446  

Net income per share (Note 43)

    

Basic and diluted earnings per common share (in Korean Won)

     2,466       1,648  

 

(*)

The separate statement of comprehensive income for year ended December 31, 2018 was prepared in accordance with K-IFRS 1109; however, the comparative separate statement of comprehensive income for the year ended December 31, 2017 was not retrospectively restated in accordance with K-IFRS 1109.

See accompanying notes


WOORI BANK

SEPARATE STATEMENTS OF CHANGES IN EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

 

     Capital
stock
     Hybrid
securities
    Capital
surplus
     Other
equity
    Retained
Earnings and
other reserves
    Total  
     (Korean Won in millions)  

January 1, 2017

     3,381,392        3,574,896       269,533        138,542       12,488,155       19,852,518  

Net income

     —          —         —          —         1,276,112       1,276,112  

Dividends on common stocks

     —          —         —          —         (336,636     (336,636

Loss on valuation of available-for-sale financial assets

     —          —         —          (48,139     —         (48,139

Loss on foreign currency translation of foreign operations

     —          —         —          (34,093     —         (34,093

Remeasurement gain related to defined benefit plan

     —          —         —          16,566       —         16,566  

Dividends to hybrid securities

     —          —         —          —         (167,072     (167,072

Issuance of hybrid securities

     —          559,565       —          —         —         559,565  

Redemption of hybrid securities

     —          (1,116,573     —          (208,158     —         (1,324,731
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

December 31, 2017(*)

     3,381,392        3,017,888       269,533        (135,282     13,260,559       19,794,090  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

January 1, 2018

     3,381,392        3,017,888       269,533        (135,282     13,260,559       19,794,090  

Cumulative effect of change in accounting policy (Note 2)

     —          —         —          (393,473     246,464       (147,009
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Adjusted balance, beginning of period

     3,381,392        3,017,888       269,533        (528,755     13,507,023       19,647,081  

Net income

     —          —         —          —         1,810,904       1,810,904  

Dividends on common stocks

     —          —         —          —         (336,636     (336,636

Net gain on valuation of financial liabilities designated as at FVTPL due to own credit risk

     —          —         —          100       —         100  

Changes in other comprehensive income due to redemption of financial liabilities designated as at FVTPL

     —          —         —          (4     4       —    

Net gain on valuation of financial assets at FVTOCI

     —          —         —          6,795       —         6,795  

Changes in other comprehensive income due to disposal of equity securities at FVTOCI

     —          —         —          (1,009     1,009       —    

Gain on foreign currency translation of foreign operations

     —          —         —          7,882       —         7,882  

Remeasurement loss related to defined benefit plan

     —          —         —          (79,639     —         (79,639

Appropriation of retained earnings

     —          —         —          208,158       (208,158     —    

Dividends to hybrid securities

     —          —         —          —         (151,194     (151,194

Issuance of hybrid securities

     —          398,707       —          —         —         398,707  

Redemption of hybrid securities

     —          (254,632     —          (368     —         (255,000
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

December 31, 2018(*)

     3,381,392        3,161,963       269,533        (386,840     14,622,952       21,049,000  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

(*)

The separate statements of changes in equity for the year ended December 31, 2018 was prepared in accordance with K-IFRS 1109; however, the comparative separate statements of changes in equity for year ended December 31, 2017 was not retrospectively restated in accordance with K-IFRS 1109.

See accompanying notes


WOORI BANK

SEPARATE STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

 

     2018(*)     2017(*)  
     (Korean Won in millions)  

Cash flows from operating activities:

    

Net income

     1,810,904       1,276,112  

Adjustment to net income:

    

Income tax expense

     674,727       344,110  

Interest income

     (8,331,967     (7,385,721

Interest expense

     3,604,249       2,995,118  

Dividend income

     (113,467     (159,603
  

 

 

   

 

 

 
     (4,166,458     (4,206,096
  

 

 

   

 

 

 

Additions of expenses not involving cash outflows:

    

Impairment losses due to credit loss

     58,823       553,204  

Loss on valuation of financial instruments at FVTPL

     —         6,596  

Impairment loss on investments in subsidiaries and associates

     241       133,948  

Loss on transaction and valuation of derivatives (Designated for hedging)

     36,488       52,959  

Loss on hedged items (fair value hedge)

     17,299       —    

Loss on provision

     10,823       51,510  

Retirement benefits

     128,447       131,334  

Depreciation and amortization

     217,074       165,095  

Loss on disposal of premises and equipment, intangible assets and other assets

     933       1,714  

Impairment loss on premises and equipment, intangible assets and other assets

     5,933       184  
  

 

 

   

 

 

 
     476,061       1,096,544  
  

 

 

   

 

 

 

Deductions of income not involving cash inflows:

    

Gain on valuation of financial assets at FVTPL (K-IFRS 1109)

     216,135       —    

Gain on financial assets at FVTOCI

     1,333       —    

Gain on AFS financial assets

     —         135,003  

Gain on disposal of securities at amortized cost

     431       —    

Gain on transaction and valuation of derivatives (Designated for hedging)

     9,126       —    

Gain on hedged items (fair value hedge)

     42,797       53,532  

Gain on provisions

     1,883       2,357  

Gain on disposal of investment in subsidiaries and associates

     35,409       9,256  

Gain on disposal of premises and equipment, intangible assets and other assets

     25,537       12,950  

Reversal of impairment loss on premises and equipment and other assets

     491       141  
  

 

 

   

 

 

 
     333,142       213,239  
  

 

 

   

 

 

 

(Continued)


WOORI BANK

SEPARATE STATEMENTS OF CASH FLOWS  (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

 

     2018(*)     2017(*)  
     (Korean Won in millions)  

Changes in operating assets and liabilities:

    

Financial assets at FVTPL (K-IFRS 1109)

     1,232,277       —    

Financial assets at FVTPL (K-IFRS 1039)

     —         (439,949

Loans and other financial assets at amortized cost

     (11,927,559     —    

Loans and receivables

     —         (8,192,223

Other assets

     (23,497     (21,665

Deposits due to customers

     13,042,027       13,005,112  

Provisions

     7,781       4,788  

Net defined benefit liability

     (118,735     (34,946

Other financial liabilities

     6,919,137       (7,675,726

Other liabilities

     45,077       (28,404
  

 

 

   

 

 

 
     9,176,508       (3,383,013
  

 

 

   

 

 

 

Cash received from operating activities:

    

Interest income received

     8,305,699       7,389,513  

Interest expense paid

     (3,416,210     (3,013,602

Dividend received

     111,426       153,401  

Income tax paid

     (464,286     (343,529
  

 

 

   

 

 

 
     4,536,629       4,185,783  
  

 

 

   

 

 

 

Net cash provided by(used in) operating activities

     11,500,502       (1,243,909
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Cash in-flows from investing activities:

    

Disposal of Financial assets at FVTPL (K-IFRS 1109)

     11,918,394       —    

Disposal of financial assets at FVTOCI

     8,969,290       —    

Disposal of AFS financial assets

     —         23,119,666  

Redemption of securities at amortized cost

     9,400,596       —    

Redemption of HTM financial assets

     —         8,506,982  

Disposal of investments in subsidiaries and associates

     51,962       26,078  

Disposal of premises and equipment

     387       7,238  

Disposal of intangible assets

     2,845       383  

Disposal of assets held for distribution (sale)

     81,650       21,681  
  

 

 

   

 

 

 
     30,425,124       31,682,028  
  

 

 

   

 

 

 

Cash out-flows from investing activities:

    

Acquisition of financial assets at FVTPL (K-IFRS 1109)

     12,322,160       —    

Acquisition of financial instruments at FVTOCI

     12,945,225       —    

Acquisition of AFS financial assets

     —         19,287,548  

Acquisition of securities at amortized cost

     15,575,213       —    

Acquisition of HTM financial assets

     —         11,477,669  

Acquisition of investments in subsidiaries and associates

     285,140       522,906  

Acquisition of investment properties

     12,957       3,029  

Acquisition of premises and equipment

     89,414       134,271  

Acquisition of intangible assets

     163,877       172,121  

Cash out-flow related to derivatives for risk hedge

     —         13,742  
  

 

 

   

 

 

 
     41,393,986       31,611,286  
  

 

 

   

 

 

 

Net cash provided by(used in) investing activities

     (10,968,862     70,742  
  

 

 

   

 

 

 

(Continued)


WOORI BANK

SEPARATE STATEMENTS OF CASH FLOWS  (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

 

     2018(*)     2017(*)  
     (Korean Won in millions)  

Cash flows from financing activities:

    

Cash in-flows from financing activities:

    

Increase in borrowings

     8,539,312       8,529,590  

Issuance of debentures

     5,248,047       8,669,476  

Issuance of hybrid securities

     398,707       559,565  
  

 

 

   

 

 

 
     14,186,066       17,758,631  
  

 

 

   

 

 

 

Cash out-flows from financing activities:

    

Repayment of borrowings

     8,280,546       10,475,855  

Repayment of debentures

     5,523,518       4,680,520  

Payment of dividends to common stocks

     336,636       336,636  

Redemption of hybrid securities

     255,000       1,323,400  

Dividends paid on hybrid securities

     147,625       177,730  
  

 

 

   

 

 

 
     14,543,325       16,994,141  
  

 

 

   

 

 

 

Net cash provided by(used in) financing activities

     (357,259     764,490  
  

 

 

   

 

 

 

Net increase(decrease) in cash and cash equivalents

     174,381       (408,677

Cash and cash equivalents, beginning of the period

     5,328,960       6,104,029  

Effects of exchange rate changes on cash and cash equivalents

     220,460       (366,392
  

 

 

   

 

 

 

Cash and cash equivalents, end of the period (Note 6)

     5,723,801       5,328,960  
  

 

 

   

 

 

 

 

(*)

The separate statement of cash flows for the year ended December 31, 2018 was prepared in accordance with K-IFRS 1109; however, the comparative separate flows for the year ended December 31, 2017 was not retrospectively restated in accordance with K-IFRS 1109.

See accompanying notes


WOORI BANK

NOTES TO SEPARATE FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

 

1.

GENERAL

Summary of the Woori Bank

Woori Bank (the “Bank”) was established in 1899 and is engaged in the commercial banking business under the Banking Act, trust business and foreign exchange business under the Financial Investment Services and Capital Market Act (hereinafter referred to as the “Capital Market Act”).

Previously, Woori Finance Holdings Co., Ltd. (established on March 27, 2001 in accordance with Financial Holding Companies Act), the former holding company of Woori Financial Group, held a 100% ownership of the Bank. Effective November 1, 2014, Woori Finance Holdings Co., Ltd. completed its merger (the “Merger”) with and into the Bank. Accordingly, the shares of the Bank, 597 million shares, prior to the merger, was reduced to nil in accordance with capital reduction procedure, and then, in accordance with the merger ratio, the Bank newly issued 676 million shares. As a result, the paid-in capital of the Bank as of December 31, 2018 is capital stock amounting to 3,381,392 million Korean Won. Meanwhile, during the year ended December 31, 2016, the Korea Deposit Insurance Corporation (“KDIC”), the majority shareholder of the Bank, sold its 187 million shares in the Bank in accordance with the contract of “Disposal of Woori Bank’s shares to Oligopolistic Shareholders”. In addition to the sale, during the year ended December 31, 2017, KDIC sold additional 33 million shares. As a result, KDIC holds 125 million shares (18.43% ownership interest) of the Bank as of December 31, 2018 and 2017, and is the majority shareholder of the Bank.

On June 24, 2002, Woori Finance Holdings Co., Ltd. listed its common stock on the Korea Exchange through public offering. In addition, on September 29, 2003, Woori Finance Holdings Co., Ltd. registered with the Securities and Exchange Commission in the United States of America and, on the same day, listed its American Depositary Shares on the New York Stock Exchange.

As Woori Finance Holdings Co., Ltd. was merged into the Bank, the Bank, which is the existing company, succeeded such rights and obligations as a listed company on the Korea Exchange and the New York Stock Exchange.

As a result of such merger, the Bank incorporated Woori Card Co., Ltd., Woori Investment Bank Co., Ltd., Woori FIS Co., Ltd., Woori Private Equity Asset Management Co., Ltd. and Woori Finance Research Institute Co., Ltd. as its subsidiaries.

The headquarters of the Bank is located at 51, Sogong-ro, Jung-gu, Seoul, Korea. The Bank has 877 branches and offices in Korea, and 23 branches and offices overseas as of December 31, 2018.

 

2.

BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES

 

(1)

Basis of preparation

The Bank is preparing its financial statements in accordance with the Korean Financial Reporting Standards (“K-IFRS”), and this separate financial statements are prepared in accordance with K-IFRS 1027 “Separate Financial Statements”. Separate financial statements are those presented by an investor who has significant influence over subsidiaries or investees in which the entity could elect to account for its investments in subsidiaries, joint ventures and associates either at cost, in accordance with K-IFRS 1109 “Financial Instruments”, or using the equity method as described in K-IFRS 1028 “Investments in Associates and Joint Ventures”.


The significant accounting policies applied in the preparation of financial statements as of and for the year ended December 31, 2018 are stated below, and the accounting policies applied are identical to ones used in the preparation of previous period’s financial statements, except for the effects of adopting new standards or interpretations as explained below.

The financial statements are prepared at the end of each reporting period in historical cost basis, except for certain non-current assets and financial assets that are either revalued or measured in fair value. Historical cost is generally measured at the fair value of consideration given to acquire assets.

The financial statements of the Bank was approved by the Board of Directors on March 6, 2019, and is planned for an approval in the annual shareholders’ meeting on March 27, 2019.

 

1)

The Bank has newly adopted the following K-IFRS that affected the Bank’s accounting policies:

 

  -

Adoption of K-IFRS 1109 – Financial instruments (enacted)

The Bank initially applied K-IFRS 1109 and related amendments made to other standards during the current period, with January 1, 2018 as the date of initial application. K-IFRS 1109 introduces new rules on: 1) classification and measurement of financial assets and financial liabilities, 2) impairment of financial assets, and 3) hedge accounting. Additionally, the Bank adopted consequential amendments to K-IFRS 1107 Financial Instruments: Disclosures that were applied to the disclosures for 2018.

The Bank decided not to restate the prior period figures when applying the Standard for the first time, and as such the comparative financial statements are not restated.

The main contents of the new accounting standard and the effect on the financial statements of the Bank are as follows.

a) Classification and measurement of financial assets and financial liabilities

All financial assets included in the scope of K-IFRS 1109 are subsequently measured at amortized cost or fair value based on the Bank’s business model for the management of financial assets and the nature of the contractual cash flows of the financial assets.

Debt instruments that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal outstanding are generally measured at amortized cost at the end of subsequent accounting periods (Financial assets at amortized cost).

Debt instruments that are held within a business model whose objective is achieved both by collecting contractual cash flows and selling financial assets, and that have contractual cash flows that are solely payments of principal and interest on the principal outstanding are generally measured at fair value through other comprehensive income (Financial assets at fair value through other comprehensive income (“FVTOCI”)).

All other debt instruments and equity instruments are measured at their fair value at the end of subsequent accounting periods, and any change in the fair value is recognized as profit or loss (Financial assets at fair value through profit or loss (“FVTPL”)).

Notwithstanding the foregoing, the Bank may make the following irrevocable choice or designation at the time of initial recognition of a financial asset.

The Bank may make an irrevocable election to present in other comprehensive income subsequent changes in the fair value of an investment in an equity instrument within the scope of this standard that is neither held for trading nor is a contingent consideration recognized by an acquirer in a business combination to which K-IFRS 1103 applies.

At initial recognition, financial assets at amortized cost or FVTOCI may be irrevocably designated as financial assets at fair value through profit or loss mandatorily measured at fair value if doing so eliminates or significantly reduces a measurement or recognition inconsistency.

 

- 2 -


As of the date of initial application of K-IFRS 1109, there are no debt instruments classified either as financial assets at amortized cost or FVTOCI that are designated as financial assets at fair value through profit or loss.

When debt instruments measured at FVTOCI are derecognized, the cumulative gain or loss recognized in other comprehensive income is reclassified from equity to profit or loss as a reclassification adjustment. On the other hand, for equity instruments designated as financial assets at fair value through other comprehensive income, cumulative gains or losses previously recognized in other comprehensive income are subsequently transferred to retained earnings. Debt instruments measured subsequently at amortized cost or at FVTOCI are subject to impairment.

The classification and measurement of financial assets and financial liabilities in accordance with K-IFRS 1109 and K-IFRS 1039 as of January 1, 2018(date of initial application) are as follows (Unit: Korean Won in millions):

 

   

Classification in
accordance with

K-IFRS 1039

 

Classification in
accordance with

K-IFRS 1109

  Amount in
accordance
with K-IFRS
1039
    Reclassification     Remeasurement(*2)     Amount in
accordance
with K-IFRS
1109
 

Deposit

  Loans and receivables  

Loan and other financial assets at amortized cost

    7,394,885       —         —         7,394,885  

Deposit

 

Financial assets at FVTPL

 

Financial assets at FVTPL

    25,972       —         —         25,972  

Debt securities

 

Financial assets at FVTPL

 

Financial assets at FVTPL(*1)

    1,008,827       —         —         1,008,827  

Equity securities

 

Financial assets at FVTPL

 

Financial assets at FVTPL(*1)

    156       —         —         156  

Derivatives assets

 

Financial assets at FVTPL

 

Financial assets at FVTPL(*1)

    3,098,769       (2,137     —         3,096,632  

Equity securities

  AFS financial assets  

Financial assets at FVTPL(*1)

    1,254,928       1,219       —         1,256,147  

Equity securities

  AFS financial assets  

Financial assets at FVTOCI

    684,153       —         —         684,153  

Debt securities

  AFS financial assets  

Financial assets at FVTOCI

    12,247,622       —         —         12,247,622  

Debt securities

  HTM financial assets  

Securities at amortized cost

    16,638,727       —         —         16,638,727  

Loans

  Loans and receivables  

Financial assets at FVTPL (*1)

    51,653       918       282       52,853  

Loans

  Loans and receivables  

Loan and other financial assets at amortized cost

    236,691,399       —         —         236,691,399  

Derivative assets (Designated for hedging)

 

Derivative assets (Designated for hedging)

 

Derivatives assets (Designated for hedging)

    59,272       —         —         59,272  

Other financial assets

  Loans and receivables  

Loan and other financial assets at amortized cost

    6,233,677       —         —         6,233,677  
     

 

 

   

 

 

   

 

 

   

 

 

 

Total financial assets

    285,390,040       —         282       285,390,322  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

- 3 -


   

Classification in
accordance with

K-IFRS 1039

 

Classification in
accordance with

K-IFRS 1109

  Amount in
accordance
with K-IFRS
1039
    Reclassification     Remeasurement(*2)     Amount in
accordance
with K-IFRS
1109
 

Deposit due to customers

 

Financial liabilities at FVTPL

  Financial liabilities at FVTPL     25,964       —         —         25,964  

Deposit due to customers

 

Financial liabilities at amortized cost

 

Financial liabilities at amortized cost

    224,384,156       —         —         224,384,156  

Borrowings

 

Financial liabilities at amortized cost

 

Financial liabilities at amortized cost

    13,662,984       —         —         13,662,984  

Debentures

 

Financial liabilities at FVTPL

  Financial liabilities at FVTPL     91,739       —         —         91,739  

Debentures

 

Financial liabilities at amortized cost

 

Financial liabilities at amortized cost

    21,707,466       —         —         21,707,466  

Equity-linked securities

 

Financial liabilities at FVTPL

  Financial liabilities at FVTPL     160,057       —         —         160,057  

Derivative liabilities

 

Financial liabilities at FVTPL

  Financial liabilities at FVTPL     3,139,218       —         —         3,139,218  

Derivative liabilities (Designated for hedging)

 

Derivative liabilities (Designated for hedging)

 

Derivative liabilities (Designated for hedging)

    12,103       —         —         12,103  

Other financial liabilities

 

Financial liabilities at amortized cost

 

Financial liabilities at amortized cost

    13,029,421       —         —         13,029,421  

Provision for financial guarantee

 

Provisions

 

Financial liabilities at amortized cost

    74,277       —         —         74,277  
     

 

 

   

 

 

   

 

 

   

 

 

 

Total financial liabilities

    276,287,385       —         —         276,287,385  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(*1)

Under K-IFRS 1039, the embedded derivatives out of hybrid financial instruments are accounted for as derivative assets or liabilities if the criteria for separation of the embedded derivatives are met; and the host contract in those instruments are recorded as available-for-sale financial assets or loans and receivables respectively. However, since K-IFRS 1109 requires financial instruments to be accounted for based on the terms of the entire financial instrument, the hybrid financial assets are revalued and classified as financial assets at fair value through profit or loss.

(*2)

The remeasurement effect due to expected credit losses is not included (The remeasurement effect of expected credit losses is as follows: b) Impairment of financial assets).

At the date of the initial application of K-IFRS 1109, there were no financial assets or liabilities measured at FVTPL that were reclassified to FVTOCI or amortized cost category.

As of the date of initial application of K-IFRS 1109, there are no financial assets at FVTPL or FVTOCI reclassified to the amortized cost measurement category.

b) Impairment of financial assets

The impairment model under K-IFRS 1109 reflects expected credit losses, as opposed to incurred credit losses under K-IFRS 1039. Under the impairment approach in K-IFRS 1109, it is no longer necessary for a credit event to have occurred before credit losses are recognized. Instead, the Bank accounts for expected credit losses and changes in those expected credit losses. The amount of expected credit losses should be updated at each reporting date to reflect changes in credit risk since initial recognition.

 

- 4 -


The Bank is required to recognize the expected credit losses for financial instruments measured at amortized cost or FVTOCI (debt instrument), and loan commitments and financial guarantee contracts that are subject to the impairment provisions of K-IFRS 1109. In particular, K-IFRS 1109 requires the Bank to measure the loss allowance for a financial instrument at an amount equal to the lifetime expected credit losses (ECL) if the credit risk on that financial instrument has increased significantly since initial recognition, or if the financial instrument is a purchased or originated credit-impaired financial asset. If the credit risk of a financial instruments does not increase significantly after initial recognition (excluding “purchased or originated credit-impaired loans” - for financial assets already impaired at initial recognition), the Bank measures the loss allowance on the financial instruments at the amount equivalent to the expected 12-month credit loss.

Management assessed the impairment of the Bank’s financial assets, lending arrangements and financial guarantees at the date of initial application by using reasonable and supportive measures that can be used without undue cost or effort in determining the credit risk of the financial instruments at initial recognition in accordance with K-IFRS 1109 and in comparing above credit risk with the credit risk at the date of initial application. As of January 1, 2018, the results of the assessment are as follows (Unit: Korean Won in millions):

 

    

Classification in
accordance with
K-IFRS 1039

  

Classification in
accordance with

K-IFRS 1109

   Loss allowances
in accordance
with K-IFRS
1039(A)
     Loss allowances
in accordance
with
K-IFRS 1109 (B)
     Increases
(B-A)
 

Deposit

   Loans and receivables   

Loan and other financial assets at amortized cost

     2,080        2,464        384  

Debt securities

              

AFS securities

   AFS financial assets   

Financial assets at FVTOCI

     —          3,778        3,778  

HTM securities

   HTM financial assets   

Securities at amortized cost

     —          4,996        4,996  

Loans and other financial assets

   Loans and receivables   

Loan and other financial assets at amortized cost

     1,558,910        1,728,959        170,049  

Payment guarantee

           185,557        194,997        9,440  

Loan commitment

           36,031        55,373        19,342  
        

 

 

    

 

 

    

 

 

 

Total

     1,782,578        1,990,567        207,989  
  

 

 

    

 

 

    

 

 

 

c) Classification and measurement of financial liabilities

One of the major changes related to the classification and measurement of financial liabilities as a result of the adoption of K-IFRS 1109 is the accounting for change in the fair value of financial liabilities designated as fair value through profit or loss due to the change in issuer’s own credit risk. The Bank recognizes the effect of changes in the credit risk of financial liabilities designated as at FVTPL in other comprehensive income, except for cases where it creates or enlarges accounting mismatch of the profit or loss. Changes in fair value due to credit risk of financial liabilities are not subsequently reclassified to profit or loss, but are replaced with retained earnings when financial liabilities are derecognized.

In accordance with K-IFRS 1039, the entire of changes in fair value of financial liabilities designated as at FVTPL are recognized in profit or loss. As of January 1, 2018, the Bank designated 251,796 million Korean Won out of 276,291,854 million of financial liabilities to be measured at FVTPL, and recognized 133 million Korean Won as accumulated other comprehensive loss in relation to changes in own credit risk of financial liabilities.

d) Hedge accounting

The new hedge accounting model maintains three types of hedge accounting. However, it introduced more flexibility in the types of transactions that are eligible for hedge accounting and expanded the types of hedging instruments and non-financial hedge items that qualify for hedge accounting. The standard related to the evaluation of hedge accounting has been amended as a whole, where it is now replaced by the principle of “economic relationship” between the hedged item and the hedging instrument. Retrospective assessment of the hedging effectiveness is no longer required. Additional disclosure requirements have been introduced in relation to the Bank’s risk management activities.

 

- 5 -


In accordance with the transitional provisions of K-IFRS 1109 on hedge accounting, the Bank adopted the hedge accounting provisions of K-IFRS 1109 prospectively from January 1, 2018. As of the date of initial application, the Bank concluded that the hedging relationship in accordance with K-IFRS 1039 is appropriate for hedge accounting under K-IFRS 1109, thus the hedging relationship is considered to exist continually. Since the major conditions for hedging instruments and the hedged items are consistent, all hedging relationships are consistent within the effectiveness assessment requirements of K-IFRS 1109. The Bank has not designated a hedging relationship as such in accordance with K-IFRS 1109 in which the hedge relationship would not have met the requirements for hedge accounting under K-IFRS 1039.

e) Effect on equity as a result of adoption of K-IFRS 1109

The effect on equity due to the adoption of K-IFRS 1109 as of January 1, 2018 is as follows (Unit: Korean Won in millions):

 

  -

Impact on accumulated other comprehensive income due to financial assets at FVTOCI, etc.

 

     Effect of K-IFRS 1109  

Balance as of December 31, 2017 (prior to K-IFRS 1109)

     106,989  

Adjustment

     (393,473

Reclassification of available-for-sale financial assets to financial assets at FVTPL

     (148,857

Recognition of expected credit losses of debt securities at FVTOCI

     3,778  

Reclassification of available-for-sale financial assets(equity securities) to financial assets at FVTOCI

     (397,508

Effect on change in credit risk of financial liabilities at fair value through profit or loss designated as upon initial recognition

     (133

Income tax effect

     149,247  
  

 

 

 

Balance as of January 1, 2018 (based on K-IFRS 1109)

     (286,484
  

 

 

 

 

  -

Retained earnings impact

 

     Effect of K-IFRS 1109  

Balance as of December 31, 2017 (prior to K-IFRS 1109)

     13,260,559  

Adjustments

     246,464  

Reclassification of available-for-sale financial assets to financial assets at FVTPL

     148,857  

Recognition of expected credit losses of debt instruments at FVTOCI

     (3,778

Reclassification of available-for-sale financial assets(equity securities) to financial assets at FVTOCI

     397,508  

Effect on revaluation of financial assets at amortized cost from loan and receivables or AFS financial assets

     282  

Recognition of expected credit losses of financial assets at amortized cost which were previously loan and receivables

     (175,429

Effect on provision for guarantees and unused loan commitments on liabilities

     (28,782

Effect on change in credit risk of financial liabilities at fair value through profit or loss designated as upon initial recognition

     133  

Others

     398  

Income tax effect

     (92,725
  

 

 

 

Balance as of January 1, 2018 (based on K-IFRS 1109)

     13,507,023  
  

 

 

 

 

  -

Adoption of K-IFRS 1115 – Revenue from contracts with customers (enacted)

The Bank adopted the requirements using the modified retrospective method, with the effect of initial application recognized on the date of initial application and without restatement of the comparative periods. Also, this standard is retroactively applied to contracts which are not completed as of the date of initial application, but practical expedient is used so that contract modifications made before the date of initial application are not retroactively restated.

 

- 6 -


Accordingly, the Bank has not retroactively restated the comparative separate financial statements presented herein.

 

  -

Amendments to K-IFRS 1102 – Share-based Payment

The amendments clarify that: 1) When measuring the fair value of share-based payment, the effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payment should be consistent with the measurement of equity-settled share-based payment; 2) When an entity has an obligation to pay the employee’s withholding tax to the tax authority for the employee’s equity-settled share-based payment, the transaction shall be classified in its entirety as an equity-settled share-based payment transaction if it would have been so classified in the absence of the net settlement feature; and 3) When a cash-settled share-based payment changes to an equity-settled share-based payment because of modifications of the terms and conditions, the original liability recognized is derecognized and the equity-settled share-based payment is recognized at the modification date fair value. Any difference between the carrying amount of the liability at the modification date and the amount recognized in equity at the same date would be recognized in profit and loss immediately.

 

  -

Amendments to K-IFRS 1040 - Investment Property

The amendments clarify that a transfer to, or from, investment property necessitates an assessment of whether a property meets, or has ceased to meet, the definition of investment property, supported by observable evidence that a change in use has occurred. The amendments further clarify that situations other than the ones listed in K-IFRS 1040 may evidence a change in use, and that a change in use is possible for properties under construction (i.e., a change in use is not limited to completed properties).

 

  -

Enactments to K-IFRS 2122 – Foreign Currency Transactions and Advance Consideration

The interpretation addresses how to determine the ‘date of transaction’ for the purpose of determining the exchange rate to use on initial recognition of an asset, expense or income (or part of them) as a result of the derecognition of a non-monetary asset or non-monetary liability (e.g., a non-refundable deposit or deferred revenue) which were previously recognized due to the fact that consideration was paid or received in advance in a foreign currency. The interpretation specifies that the date of transaction is the date on which the entity initially recognizes the non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration. If there are multiple payments or receipts in advance, the interpretation requires an entity to determine the date of transaction for each payment or receipt of advance consideration.

 

  -

Annual Improvements to K-IFRS 2014-2016 Cycle

The amendments include partial amendments to K-IFRS 1101 ‘First-time Adoption of K-IFRS’ and K-IFRS 1028 ‘Investments in Associates and Joint Ventures.’ Amendments to K-IFRS 1028 provide that an investment company such as a venture capital investment vehicle may selectively designate each of its investment in associates and/or joint ventures to be measured at FVTPL, and that such designation must be made at the time of each investment’s initial recognition. In addition, when non-investment companies apply equity method to investment in associates and/or joint ventures that are investment companies, these companies may apply the same fair value measurement used by the said associates to value their own subsidiaries. This accounting treatment may be selectively applied to each associate. These amendments should be applied retrospectively and are available for early adoption.

The amendments, except for ones on K-IFRS 1109, do not have significant impact on the separate financial statements of the Bank.

 

2)

The Bank has not applied the following K-IFRS that has been issued but are not yet effective:

 

  -

K-IFRS 1116—Leases(enacted)

K-IFRS 1116 introduces a comprehensive model for the identification of lease arrangements and accounting treatments for both lessors and lessees. K-IFRS 1116 will supersede the current lease guidance including K-IFRS 1017 Leases and the related interpretations, and will be applied to periods beginning on or after January 1, 2019.

The Bank plans to apply modified retrospective approach as of January 1, 2019 in accordance with K-IFRS 1116. Therefore, the cumulative effect of applying K-IFRS 1116 will be adjusted in the retained earnings (or, where appropriate, other components of equity) at the date of initial application, and the comparative financial statements will not be restated.

 

- 7 -


K-IFRS 1116 distinguishes leases and service contracts on the basis of whether an identified asset is controlled by a customer. Distinctions of operating leases and finance leases are removed for lessee accounting, and is replaced by model where a right-of-use asset and corresponding liability have to be recognized for all leases by lessees except for short-term leases and leases of low value assets.

The right-of-use asset is initially measured at cost and subsequently measured at cost (subject to certain exceptions) less accumulated depreciation and impairment losses, adjusted for any remeasurement of the lease liability. The lease liability is initially measured at the present value of the lease payments that are not paid at that date. Subsequently, the lease liability is adjusted for interest and lease payments, as well as the impact of lease modifications, amongst others. Furthermore, the classification of cash flows will also be affected as operating lease payments under K-IFRS 1017 are presented as operating cash flows; whereas under the K-IFRS 1116 model, the lease payments will be split into a principal and an interest portion which will be presented as financing and operating cash flows respectively.

In contrast to lessee accounting, K-IFRS 1116 substantially carries forward the lessor accounting requirements in K-IFRS 1017, and continues to require a lessor to classify a lease either as an operating lease or a finance lease. Also, K-IFRS 1116 requires expanded disclosures.

According to the preliminary assessment of the Bank, the lease agreements entered into by the Bank as of December 31, 2018 are expected to meet the definition of lease under the Standard, and accordingly, if the Bank adopts the Standard, it applies to all leases except short-term leases and leases of low value assets, and the Bank will recognize the right-of-use assets and related liabilities accordingly. As a result of an analysis of the impact on financial statements, the Bank expects right-of-use asset and lease liability to both increase by 245,896 million Won as of December 31, 2018.

The following enacted/amended standards are not expected to affect the Bank:

 

  -

K-IFRS 2123 – Uncertainty over Income Tax Treatments (enacted)

 

  -

Amendments to K-IFRS 1109

 

  -

Amendments to K-IFRS 1028

 

  -

Amendments to K-IFRS 1019

 

  -

Amendments to K-IFRS 1115

 

  -

Annual Improvements to K-IFRS 2015-2017 Cycle

These annual improvements contain partial amendments to K-IFRS 1012 ‘Income taxes’, K-IFRS 1023 ‘Borrowing costs’, K-IFRS 1103 ‘Business combinations’ and K-IFRS 1111 ‘Joint arrangements’.

 

(2)

Business combinations

Acquisitions of subsidiaries and businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured as the sum of the acquisition-date fair values of the assets transferred by the Bank in exchange for control of the acquiree, liabilities assumed by the Bank and the equity interests issued by the Bank. Acquisition-related costs are generally recognized in profit or loss as incurred.

At the acquisition date, the acquiree’s identifiable assets, liabilities and contingent liabilities that meet the condition for recognition under K-IFRS 1103 are recognized at their fair value, except that:

 

   

deferred tax assets or liabilities and assets or liabilities related to employee benefit arrangements are recognized and measured in accordance with K-IFRS 1012 Income Taxes and K-IFRS 1019 Employee Benefits, respectively;

 

   

liabilities or equity instruments related to share-based payment arrangements of the acquiree or share-based payment arrangements of the Bank entered into to replace share-based payment arrangements of the acquiree are measured in accordance with K-IFRS 1102 Share-based Payment at the acquisition date; and

 

   

non-current assets (or disposal groups) that are classified as held for sale in accordance with K-IFRS 1105 Non-current Assets Held for Sale and Discontinued Operations are measured at the lower of their previous carrying amounts and fair value less costs to sell.

 

- 8 -


Any excess of the sum of the consideration transferred, the amount of any non-controlling interest in the acquiree and the fair value of the Bank’s previously held equity interest (if any) in the acquiree over the net of identifiable assets and liabilities assumed of the acquiree at the acquisition date is recognized as goodwill which is included in intangible assets.

If, after reassessment, the Bank’s interest in the fair value of the acquiree’s identifiable net assets exceeds the sum of the consideration transferred, the amount of any non-controlling interest in the acquiree and the fair value of the acquirer’s previously held equity interest in the acquiree (if any), the excess is recognized immediately in net income (or other comprehensive income, if applicable) identical to the treatment assuming interests are sold directly.

Non-controlling interests that are present ownership interests and entitle their holders to a proportionate share of the entity’s net assets in the event of liquidation may be initially measured either at fair value or at the non-controlling interests’ proportionate share of the recognized amounts of the acquiree’s identifiable net assets. The choice of measurement basis is made on a transaction-by-transaction basis. Other types of non-controlling interests are measured at fair value or, when applicable.

When the consideration transferred by the Bank in a business combination includes assets or liabilities resulting from a contingent consideration arrangement, the contingent consideration is measured at its acquisition-date fair value and included as part of the consideration transferred in a business combination. Changes in the fair value of the contingent consideration that qualify as measurement period adjustments are adjusted retrospectively, with corresponding adjustments against goodwill. Measurement period adjustments are adjustments that arise from additional information obtained during the ‘measurement period’ (which cannot exceed one year from the acquisition date) about facts and circumstances that existed at the acquisition date.

The subsequent accounting for changes in the fair value of the contingent consideration that do not qualify as measurement period adjustments depends on how the contingent consideration is classified. Contingent consideration that is classified as equity is not remeasured at subsequent reporting dates and its subsequent settlement is accounted for within equity. Contingent consideration other than the above is remeasured at subsequent reporting dates as appropriate, with the corresponding gain or loss being recognized in profit or loss.

When a business combination is achieved in stages, the Bank’s previously held equity interest in the acquiree is remeasured at fair value at the acquisition date (i.e., the date when the Bank obtains control) and the resulting gain or loss, if any, is recognized in net income(or other comprehensive income, if applicable). Amounts arising from changes in value of interests in the acquiree prior to the acquisition date that have previously been recognized in other comprehensive income are recognized, identical to the treatment assuming interests are sold directly.

In case where i) a common entity ultimately controls over all participating entities, or businesses, in a business combination transaction, prior to and after the transaction continuously, and ii) the control is not temporary, the transaction meets the definition of “business combination under common control” and it is deemed that the transaction only results in the changes in legal substance, and not economic substance, from the perspective of the ultimate controlling party. Thus, in such transactions, the acquirer recognizes the assets and liabilities of the acquiree in its financial statements at the book values as recognized in the ultimate controlling party’s consolidated financial statements, and the difference between the book value of consideration transferred to and the book value of net assets transferred in is recognized as equity.

 

(3)

Investment in Joint operation

A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to 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.

 

- 9 -


When the Bank operates as a joint operator, it recognizes in relation to its interest in a joint operation:

 

  -

its assets, including its share of any assets held jointly;

 

  -

its liabilities, including its share of any liabilities incurred jointly;

 

  -

its revenue from the sale of its share of the output arising from the joint operation;

 

  -

its share of the revenue from the sale of the output by the joint operation; and

 

  -

its expenses, including its share of any expenses incurred jointly.

The Bank accounts for the assets, liabilities, revenues and expenses relating to its interest in a joint operation in accordance with the K-IFRSs applicable to the particular assets, liabilities, revenues and expenses.

When the Bank enters into a transaction with a joint operation in which it is a joint operator, such as a purchase of assets, it does not recognize proportional share of profit or loss until the asset is sold to a third party.

 

(4)

Revenue recognition

K-IFRS 1018 allowed recognition of fees and commission income, a revenue from contracts with customers, in accordance with the accrual principle. However, K-IFRS 1115, applicable from the current period, requires the recognition of revenues based on transaction price allocated to the performance obligation when or as the Bank performs that obligation to the customer. Since revenues other than those from contracts with customers, such as interest revenue and loan origination fee (cost), are measured through effective interest rate method, the revenue recognition principles are identical with those applied in the previous periods.

 

1)

Revenue from contracts with customers

The Bank recognizes revenue when the Bank satisfies a performance obligation by transferring a promised good or service to a customer. When a performance obligation is satisfied, the Bank shall recognizes as a revenue the amount of the transaction price that is allocated to that performance obligation. The transaction price is the amount of consideration to which the Bank expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties.

The Bank is recognizing revenue by major sources as shown below:

Fees and commission received for brokerage

The fees and commission received for agency are the amount of consideration or fee expected to be entitled to receive in return for providing goods or services to the other parties with the Bank acting as an agency, such as in the case of sales of bancassurance and beneficiary certificates. The majority of these fees and commission received for brokerage are from the business activities relevant to Consumer banking segment.

Fees and commission received related to credit

The fees and commission received related to credit mainly include the lending fees received from the loan activity and the fees received in the L/C transactions. Except for the fees and commission accounted for in calculating the effective interest rate, it is generally recognized when the performance obligation has been performed. The majority of these fees and commission received related to credit are from the business activities relevant to Consumer banking and Corporate banking segment.

Fees and commission received for electronic finance

The fees and commission received for electronic finance include fees received in return for providing various kinds of electronic financial services through firm-banking and CMS. These fees are recognized as revenue immediately upon the completion of services. The majority of these fees and commission received for electronic finance are from the business activities relevant to Consumer banking and Corporate banking segment.

Fees and commission received on foreign exchange handling

The fees and commission received on foreign exchange handling consist of various fees incurred when transferring foreign currency. The point of processing the customer’s request is the time when performance obligation is satisfied, and revenue is immediately recognized when fees and commission are received after requests are processed. The business activities relevant to these fees and commission received on foreign exchange handling are substantially attributable to Corporate banking segment.

 

- 10 -


Fees and commission received on foreign exchange

The fees and commission received on foreign exchange consist of fees related to the issuance of various certificates, such as exchange, import and export performance certificates, purchase certificates, etc. The point of processing the customer’s request is the time when performance obligation is satisfied, and revenue is immediately recognized when fees and commission are received after requests are processed. The business activities relevant to these fees and commission received on foreign exchange are substantially attributable to Corporate banking segment.

Fees and commission received for guarantee

The fees and commission received for guarantee include the fees received for the various warranties. The activities related to the warranty consist mainly of performance obligations satisfied over time and fees and commission are recognized over the guarantee period. The business activities relevant to these fees and commission received for guarantee are substantially attributable to Corporate banking segment.

Fees and commission received on securities business

The fees and commission received on securities business consist mainly of fees and commission for the sale of beneficiary certificates, and these fees are recognized when the beneficiary certificates are sold to customers. The business activities relevant to these fees and commission received on credit card are substantially attributable to Consumer banking segment.

Fees and commission from trust management

The fees and commission from trust management consist of fees and commission received in return for the operation and management services for entrusted assets. These operation and management services are performance obligations satisfied over time, and revenue is recognized over the service period. Among the fees and commission from trust management, variable considerations such as profit commission that are affected by the value of entrusted assets and base return of the future periods are recognized as revenue when limitations to the estimates are lifted. The majority of these fees and commission received for brokerage are from the business activities relevant to Consumer banking segment.

Other fees

Other fees are usually fees related to remittances, but include fees related to various other services provided to customers by the Bank. These fees are recognized when transactions occur at the customers’ request and services are provided, at the same time when commissions are received. These other fees occur across all operating segments and no single operating segment represents majority of other fees.

 

2)

Other revenue from contracts with customers

Interest income

Interest income on financial assets measured at FVTOCI and financial assets at amortized costs is measured using the effective interest method.

The effective interest method is a method of calculating the amortized cost of debt securities (or group of financial assets) and of allocating the interest income over the expected life of the asset. The effective interest rate is the rate that exactly discounts estimated future cash flows to the instrument’s initial total carrying amount over the expected period, or shorter if appropriate. Future cash flows include commissions and cost of reward points (limited to the primary component of effective interest rate) and other premiums or discounts that are paid or received between the contractual parties, and future cash flows exclude expected credit loss when calculating the effective interest rate. All contractual terms of a financial instrument are considered when estimating future cash flows.

For purchased or originated credit-impaired financial assets, interest revenue is recognized by applying the credit-adjusted effective interest rate to the amortized cost of the financial asset from initial recognition. Even if the financial asset is no longer impaired in the subsequent periods due to credit improvement, the basis of interest revenue calculation is not changed from amortized cost to unamortized cost of the financial assets.

 

- 11 -


Loan origination fees and costs

The commission fees earned on loans, which is part of the effective interest of loans, is accounted for as deferred origination fees. Incremental costs related to the origination of loans are accounted for as deferred origination fees and is being added or deducted to/from interest income on loans using effective interest rate method.

 

(5)

Accounting for foreign currencies

The Bank’s separate financial statements are presented in Korean Won, which is the functional currency of the Bank. At the end of each reporting period, monetary assets and liabilities denominated in foreign currencies are translated to the functional currency at its prevailing exchange rates at the date. The effective portion of the changes in fair value of a derivative that qualifies as a cash flow hedge and the foreign exchange differences on monetary items that form part of net investment in foreign operations are recognized in equity.

Assets and liabilities of the foreign operations subject to consolidation are translated into Korean Won at foreign exchange rates at the end of the reporting period. Except for situations in which it is required to use exchange rates at the date of transaction due to significant changes in exchange rates during the period, items that belong to profit or loss shall be measured by average exchange rate, with foreign exchange differences recognized as other comprehensive income and added to equity (allocated to non-controlling interests, if appropriate). When foreign operations are disposed, the controlling interest’s share of accumulated foreign exchange differences related to such foreign operations will be reclassified to profit or loss, while non-controlling interest’s corresponding share will not be reclassified.

Adjustments to fair value of identifiable assets and liabilities, and goodwill arising from the acquisition of foreign operations will be treated as assets and liabilities of the corresponding foreign operation, and is translated using foreign exchange rates at the end of the period. The foreign exchange differences are recognized in equity.

 

(6)

Cash and cash equivalents

The Bank is classifying cash on hand, demand deposits, interest-earning deposits with original maturities of up to three months on acquisition date, and highly liquid investments that are readily convertible to known amounts of cash and subject to an insignificant risk of changes in value as cash and cash equivalents.

 

(7)

Financial assets and financial liabilities

The Bank’s accounting policies in accordance with the newly adopted K-IFRS 1109 are as follows:

 

  1)

Financial assets

A regular way purchase or sale of financial assets is recognized or derecognized on the trade or settlement date. A regular way purchase or sale is a purchase or sale of a financial asset under a contract whose term requires delivery of the asset within the time frame established generally by regulation or convention in the marketplace concerned.

On initial recognition, financial assets are classified into financial assets at FVTPL, financial assets at FVTOCI, and financial assets at amortized cost.

 

  a)

Business model

The Bank evaluates the way business is being managed, and the purpose of the business model for managing a financial asset best reflects the way information is provided to the management at its portfolio level. Such information considers the following:

 

  -

The accounting policies and purpose specified for the portfolio, and the actual operation of such policies. This includes strategy of the management focusing on the receipt of contractual interest revenue, maintaining a certain level of interest income, matching the duration of financial assets and the duration of corresponding liabilities to obtain the asset, and outflow or realization of expected cash flows from disposal of assets

 

  -

The way the performance of a financial asset held under the business model is evaluated, and the way such evaluation is being reported to the management

 

- 12 -


  -

The risk affecting the performance of the business model (and financial assets held under the business model), and the way such risk is being managed

 

  -

The compensation plan for the management (e.g. whether the management is being compensated based on the fair value of assets or based on contractual cash flows received)

 

  -

Frequency, amount, timing and reason for sale of financial assets in the past, and forecast of future sale activities.

 

  b)

Contractual cash flows

The principal is defined to be the fair value of a financial assets at initial recognition. Interest is not only composed of consideration for the time value of money, consideration for the credit risk related to remaining principal at a certain period of time, and consideration for other cost (e.g. liquidity risk and cost of operation) and fundamental risk associated with lending, but also profit.

When evaluating whether contractual cash flows are solely payments of principal and interests, the Bank considers the contractual terms of the financial instrument. When a financial asset contains contractual conditions that modify the timing and amount of contractual cash flows, it is required to determine whether contractual cash flows that arise during the remaining life of the financial instrument due to such contractual condition are solely payments of principal and interest. The Bank considers the following elements when evaluating the above:

 

  -

Conditions that lead to modification of timing or amount of cash flows

 

  -

Contractual terms that adjust contractual nominal interest, including floating rate features

 

  -

Early payment features and maturity extension features

 

  -

Contractual terms that limit the Bank’s claim on cash flows arising from certain assets (e.g. non-recourse feature)

 

 

Financial assets at FVTPL

The Bank is classifying those financial assets that are not classified as either financial assets at amortized cost or financial assets at FVTOCI, and those designated to be measured at FVTPL, as financial assets at FVTPL. Financial assets at FVTPL are measured at fair value, and related profit or loss is recognized in net income. Transaction costs related to acquisition at initial recognition is recognized in net income immediately upon its occurrence.

It is possible to designate a financial asset as financial asset at FVTPL if at initial recognition: (a) it is possible to remove or significantly reduce recognition or measurement mismatch that may otherwise have occurred if not for its designation as financial asset at FVTPL; (b) the financial asset forms part of the Bank’s financial instrument group (A group composed of a combination of financial asset or liability), is measured at fair value and is being evaluated for its performance, and such information is provided internally; and (c) the financial asset is part of a contract that contains one or more of embedded derivatives, and is a hybrid contract in which designation as financial asset at FVTPL is allowed under K-IFRS 1109 ‘Financial Instruments’. However, the designation is irrevocable.

 

 

Financial assets at FVTOCI

When financial assets are held under a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets, and when contractual cash flows from such financial assets are solely payments of principal and interest, the financial assets are classified as financial assets at FVTOCI. Also, for investments in equity instruments that are not held for short-term trade, an irrevocable election is available at initial recognition to present subsequent changes in fair value as other comprehensive income.

At initial recognition, financial assets at FVTOCI is measured at its fair value plus any direct transaction cost, and is subsequently measured in fair value. However, for equity instruments that do not have a quotation in an active market and in which fair value cannot be measured reliably, they are measured at cost. The changes in fair value except for profit or loss items such as impairment losses (reversals), interest revenue calculated by using effective interest method, and foreign exchange gain or loss, and related income tax effects are recognized as other comprehensive income until the asset’s disposal. Upon derecognition, the accumulated other comprehensive income is reclassified from equity to net income for FVTOCI (debt instrument), and reclassified within the equity for FVTOCI (equity instruments)

 

- 13 -


 

Financial assets at amortized cost

When financial assets are held under a business model whose objective is to hold financial assets in order to collect contractual cash flows, and when contractual cash flows from such financial assets are solely payments of principal and interest, the financial assets are classified as financial assets at amortized cost. At initial recognition, financial assets at amortized cost are recognized at fair value plus any direct transaction cost. Financial assets at amortized cost is presented at amortized cost using effective interest method, less any loss allowance.

 

  2)

Financial liabilities

At initial recognition, financial liabilities are classified into either financial liabilities at FVTPL or financial liabilities at amortized cost.

Financial liabilities are usually classified as financial liabilities at FVTPL when they are acquired with a purpose to repurchase them within a short period of time, when they are part of a certain financial instrument portfolio that is actually and recently being managed with a purpose of short-term profit and joint management by the Bank at initial recognition, and when they are derivatives that do not qualify as hedging instruments. Financial liabilities at FVTPL are measured at fair value plus direct transaction cost at initial recognition, and are subsequently measured at fair value. Profit or loss arising from financial liabilities at FVTPL is recognized in net income when occurred.

It is possible to designate a financial liability as financial liability at FVTPL if at initial recognition: (a) it is possible to remove or significantly reduce recognition or measurement mismatch that may otherwise have occurred if not for its designation as financial liability at FVTPL; (b) the financial asset forms part of the Bank’s financial instrument group (A group composed of a combination of financial asset or liability) according to the Bank’s documented risk management or investment strategy, is measured at fair value and is being evaluated for its performance, and such information is provided internally; and (c) the financial liability is part of a contract that contains one or more of embedded derivatives, and is a hybrid contract in which designation as financial liability at FVTPL is allowed under K-IFRS 1109 ‘Financial Instruments’.

Financial liabilities designated as at FVTPL are initially recognized at fair value, with any direct transaction cost recognized in profit or loss, and are subsequently measured at fair value. Any profit or loss from financial liabilities at FVTPL are recognized in profit or loss.

Financial liabilities not classified as financial liabilities at FVTPL are measured at amortized cost. The Bank is classifying liabilities such as deposits due to customers, borrowings and debentures as financial liabilities at amortized cost.

 

  3)

Reclassification

Financial assets are not reclassified after initial recognition unless the Bank modifies the business model used to manage financial assets. When the Bank modifies the business model used to manage financial assets, all affected financial assets are reclassified on the first day of the first reporting period after the modification.

 

  4)

Derecognition

Financial assets are derecognized when contractual rights to cash flows from the financial assets are expired, or when substantially all of risk and reward for holding financial assets is transferred to another entity as a result of a sale of financial assets. If the Bank does not have and does not transfer substantially all of the risk and reward of holding financial assets with control of the transferred financial assets retained, the Bank recognizes financial assets to the extent of its continuing involvement. If the Bank holds substantially all the risk and reward of holding a financial asset, it continues to recognize that asset and proceeds are accounted for as collateralized borrowings.

When a financial asset is fully derecognized, the difference between the book value and the sum of proceeds and accumulated other comprehensive income is recognized as profit or loss in case of FVTOCI (debt instruments), and as retained earnings for FVTOCI (equity instruments).

 

- 14 -


In case when a financial asset is not fully derecognized, the Bank allocates the book value into amounts retained in the books and removed from the books, based on the relative fair value of each portion at the date of sale, and based on the degree of continuing involvement. For the derecognized portion of the financial assets, the difference between its book value and the sum of proceeds and the portion of accumulated other comprehensive income attributable to that portion will be recognized in profit or loss in case of debt instruments and recognized in retained earnings in case of equity instruments. The accumulated other comprehensive income is distributed to the portion of book value retained in the books, and to the portion of book value removed from the books.

The Bank derecognizes financial liabilities when, and only when, the Bank’s obligations are discharged, cancelled or have expired. The difference between the carrying amount of the financial liability derecognized and the consideration paid and payable is recognized in profit or loss.

When the Bank exchanges with the existing lender one debt instrument into another one with the substantially different terms, such exchange is accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. Similarly, the Bank accounts for substantial modification of terms of an existing liability or part of it as an extinguishment of the original financial liability and the recognition of a new liability. It is assumed that the terms are substantially different if the discounted present value of the cash flows under the new terms, including any fees paid net of any fees received and discounted using the original effective rate is at least 10 percent different from the discounted present value of the remaining cash flows of the original financial liability.

 

  5)

Fair value of financial instruments

Financial assets at FVTPL and financial assets at FVTOCI are measured and presented in financial statements at their fair values, and all derivatives are also subject to fair value measurement.

Fair value is defined as the price that would be received to exchange an asset or paid to transfer a liability in a recent transaction between independent parties that are reasonable and willing. Fair value is the transaction price of identical financial assets or financial liabilities generated in an active market. An active market is a market where trade volume is sufficient and objective price information is available due to the fact that bid and ask price differences are small.

When trade volume of a financial instrument is low, when transaction prices within the market show large differences among them, or when it cannot be concluded that a financial instrument is being traded within an active market due to disclosures being extremely shallow, fair value is measured using valuation techniques based on alternative market information or using internal valuation techniques based on general and observable information obtained from objective sources. Market information includes maturity and characteristics, duration, similar yield curve, and variability measurement of financial instruments of similar nature. Fair value amount contains unique assumptions on each entity (the Bank concluded that it is using assumptions applied in valuing financial instruments in the market, or risk-adjusted assumptions in case marketability does not exist).

The market approach and income approach, which are valuation techniques used to estimate the fair value of financial instruments, both require significant judgment. Market approach measures fair value using either a recent transaction price that includes the financial instrument, or observable information on comparable firm or assets. Income approach measures fair value through discounting future cash flows with a discount rate reflecting market expectations, and revenue, operating income, depreciation, capital expenditures, income tax, working capital and estimated residual value of financial investments are being considered when deriving future cash flows. Valuation techniques such as the above include estimates based on the financial instruments’ complexity and usefulness of observable information in the market.

The valuation techniques used in the evaluation of financial instruments are explained below.

 

- 15 -


a) Financial assets at FVTPL and Financial assets at FVTOCI

The fair value of equity securities included in financial assets at FVTPL and financial assets at FVTOCI category is recognized in the statement of financial position at its available market price. Debt securities traded in the over-the-counter market are generally recognized at an amount computed by an independent appraiser. Especially, when the Bank uses the fair value determined by independent appraisers, the Bank usually obtains three values from three different appraisers for each financial instrument, and selects the minimum amount without making additional adjustments. For equity securities without marketability, the Bank uses the amount determined by the independent appraiser. The Bank verifies the prices obtained from appraisers in various ways, including the evaluation of independent appraisers’ competency, indirect verification through comparison between appraisers’ price and other available market information, and reperformance done by employees who have knowledge of valuation models and assumptions that appraisers used.

b) Derivatives

The Bank’s transactions involving derivatives such as futures and exchange traded options are measured at market value. For exchange traded derivatives classified as level 2 in the fair value hierarchy, the fair value is estimated using internal valuation techniques. If there are no publicly available market prices because they are traded over-the-counter, fair value is measured through internal valuation techniques. When using internal valuation techniques to derive fair value, the types of derivatives, base interest rate or characteristics of prices, or stock market indices are considered. When variables used in the internal valuation techniques are not observable information in the market, such variables may contain significant estimates.

c) Adjustment of valuation amount

The Bank is exposed to credit risk when counterparty to a derivative contract does not perform its contractual obligation, and the exposure amount is equal to the amount of derivative asset recognized in the statement of financial position. When the Bank earns income through derivatives, such income is recognized as derivative asset in the statement of financial position. Some of the derivatives are traded in the market, but most of the derivatives are measured at estimated fair value derived from internal valuation models that use observable information in the market. As such, in order to estimate the fair value there should be an adjustment made to incorporate counterparty’s credit risk, and credit risk adjustment is being considered when valuing derivative assets such as over-the counter derivatives. The amount of financial liabilities is also adjusted by the Bank’s own credit risk when valuing them.

The amount of adjustment is derived from counterparty’s probability of default and loss given default. This adjustment considers contractual matters that are designed to reduce the Bank’s exposure to each counterparty’s credit risk. When derivatives are under master netting arrangement, the exposure used in the computation of credit risk adjustment is a net amount after adding/deducting cash collateral received (or paid) from loss(or gain) position derivatives with the same counterparty.

6) Expected credit losses on financial assets

The Bank recognizes loss allowance on expected credit losses for the following assets:

 

  -

Financial assets at amortized cost

 

  -

Debt instruments measured at FVTOCI

 

  -

Contract assets as defined by K-IFRS 1115

Expected credit losses are weighted-average value of a range of possible results, considering the time value of money, and are measured by incorporating information on current conditions and forecasts of future economic conditions that are available without undue cost or effort.

The methods to measure expected credit losses are classified into following three categories in accordance with K-IFRS:

 

  -

General approach: Financial assets that does not belong to below two models and unused loan commitments

 

  -

Simplified approach: When financial assets are either trade receivables, contract assets or lease receivables

 

  -

Credit impairment model: Purchased or originated credit-impaired financial assets

 

- 16 -


The measurement of loss allowance under general approach is differentiated depending on whether the credit risk has increased significantly after initial recognition. That is, loss allowance is measured based on 12-month expected credit loss when the credit risk has not increased significantly after initial recognition, while loss allowance is measured at lifetime expected credit loss when credit risk has increased significantly. Lifetime is the expected remaining life of the financial instrument up to the maturity date of the contract.

The measurement of loss allowance under simplified approach is always based on lifetime expected credit loss, and loss allowance under credit impairment model is measured as the cumulative change in lifetime expected credit loss since initial recognition.

a) Measurement of expected credit losses on financial asset at amortized cost

The expected credit losses on financial assets at amortized cost is measured by the difference between the contractual cash flows during the period and the present value of expected cash flows. Expected cash inflows are computed for individually significant financial assets in order to calculate expected credit losses.

When financial assets that are not individually significant, they are included in a group of financial assets with similar credit risk characteristics and expected credit losses of the group are calculated collectively.

Expected credit losses are deducted through loss allowance account, and when the financial asset is determined to be uncollectible, the loss allowance is written off from the books along with the related financial asset. When loan receivable previously written off is subsequently collected, the related loss allowance is increased and changes in loss allowance are recognized in profit or loss.

b) Measurement of expected credit losses on financial asset at FVTOCI

The measurement method of expected credit loss is identical to financial asset at amortized cost, but changes in the allowance is recognized in other comprehensive income. When financial assets at FVTOCI is disposed or repaid, the related allowance is reclassified from other comprehensive income to net income.

The comparative financial statements for the year 2017 are prepared in accordance with K-IFRS 1039.

 

  1)

Financial assets

A regular way purchase or sale of financial assets is recognized or derecognized on the trade or settlement date. A regular way purchase or sale is a purchase or sale of a financial asset under a contract whose term requires delivery of the asset within the time frame established generally by regulation or convention in the marketplace concerned.

On initial recognition, financial assets are classified into financial assets at FVTPL, AFS financial assets, HTM and loans and receivables.

① Financial assets at FVTPL

The Bank classifies financial assets as financial assets measured at FVTPL when they are either held for trading or designated to be measured at FVTPL. Financial assets acquired with the purpose of selling in the near term are classified as financial assets held for trading, and are measured at fair value with related valuation gain or loss recognized in net income. Any transaction cost related to the acquisition of financial assets at initial recognition is recognized in net income upon its occurrence.

A financial asset other than a financial asset held for trading may be designated as at FVTPL upon initial recognition if: (a) such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or (b) 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 Bank’s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or (c) it forms part of a contract containing one or more embedded derivatives, and K-IFRS 1039 permits the entire combined contract (asset or liability) to be designated as at FVTPL.

 

- 17 -


 

AFS financial assets

Financial assets that are not classified as HTM, financial assets at FVTPL or loans and receivables, are classified as AFS. Financial assets can be designated as AFS on initial recognition. AFS financial assets are initially recognized at fair value, plus directly related transaction costs. They are subsequently measured at fair value. Unquoted equity investments whose fair value cannot be measured reliably are carried at cost and classified as AFS financial assets. Impairment losses in monetary and non-monetary AFS financial assets and dividends on non-monetary financial assets are recognized in net income. Interest revenue on monetary financial assets is calculated using the effective interest method. Other changes in the fair value of AFS financial assets and any related tax are reported in a separate component of shareholders’ equity until disposal, when the cumulative gain or loss is recognized in net income.

 

 

HTM financial assets

A financial asset may be classified as a HTM investment only if it has fixed or determinable payments, a fixed maturity and the Bank has the positive intention and ability to hold the financial asset to maturity. HTM investments are initially recognized at fair value, plus directly related transaction costs. They are subsequently measured at amortized cost using the effective interest method less any impairment losses.

 

 

Loans and receivables

Non-derivative financial assets with fixed or determinable repayments that are not quoted in an active market are classified as loans and receivables, except those that are classified as AFS or as held for trading, or designated as at FVTPL. Loans and receivables are initially recognized at fair value, plus directly related transaction costs. They are subsequently measured at amortized cost using the effective interest method less any impairment losses. Interest income is recognized using the effective interest method, except for the short-term receivables to which the present value discount is not meaningful.

 

  2)

Financial liabilities

On initial recognition financial liabilities are classified financial liabilities at FVTPL (held for trading and financial liabilities designated as at FVTPL) and financial liabilities measured at amortized cost.

A financial liability is classified as held for trading if it is incurred principally for repurchase in the near term, or forms part of a portfolio of financial instruments that are managed together and for which there is evidence of short-term profit taking, or it is a derivative (not in a qualifying hedge relationship). Held-for-trading financial liabilities are recognized at fair value with transaction costs being recognized in net income. Subsequently, they are measured at fair value. Gains and losses are recognized in net income as they incur.

A financial liability other than a financial liability held for trading may be designated as at FVTPL upon initial recognition if: (a) such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or (b) the financial liability 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 Bank’s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or (3) it forms part of a contract containing one or more embedded derivatives, and K-IFRS 1039 permits the entire combined contract (asset or liability) to be designated as at FVTPL.

Financial liabilities that the Bank designates on initial recognition as being at FVTPL are recognized at fair value, with transaction costs being recognized in net income, and are subsequently measured at fair value. Gains and losses on financial liabilities that are designated as at FVTPL are recognized in net income as they incur.

All other financial liabilities, such as deposits due to customers, borrowings, and debentures, are measured at amortized cost using the effective interest method.

 

  3)

Reclassification

Held-for-trading and AFS financial assets that meet the definition of loans and receivables (non-derivative financial assets with fixed or determinable payments that are not quoted in an active market) may be reclassified to loans and receivables if the Bank has the intention and ability to hold the financial asset for the foreseeable future or until maturity. The Bank typically considers the foreseeable future as 12 months from the date of reclassification. Reclassifications are made at fair value. This fair value becomes the asset’s new cost or amortized cost as appropriate. Gains and losses recognized up to the date of reclassification are not reversed.

 

- 18 -


  4)

Derecognition

The Bank derecognizes a financial asset when the contractual right to the cash flows from the asset is expired, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another company. If the Bank neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Bank recognizes its retained interest in the asset and an associated liability for amounts it may have to pay. If the Bank retains substantially all the risks and rewards of ownership of a transferred financial asset, the Bank continues to recognize the financial asset and also recognizes a collateralized borrowing for the proceeds received.

On derecognition of a financial asset in its entirety, the difference between the asset’s carrying amount and the sum of the consideration received and receivable and the cumulated gain or loss that had been recognized in other comprehensive income and accumulated in equity is recognized in profit or loss.

On derecognition of a financial asset other than in its entirety the Bank allocates the previous carrying amount of the financial asset between the part it continues to recognize under continuing involvement, and the part it no longer recognizes on the basis of the relative fair value of those parts on the date of the transfer. The difference between the carrying amount allocated to the part that is no longer recognized and the sum of the consideration received for the part that is no longer recognized and any cumulative gain or loss allocated to it that had been recognized in other comprehensive income is recognized in profit or loss. A cumulative gain or loss that had been recognized in other comprehensive income is allocated between the part that continues to be recognized and the part that is no longer recognized on the basis of the relative fair value of those parts.

The Bank derecognizes the financial liability, when Bank’s obligations are discharged, canceled or expired. The difference between paid cost and the carrying amount of financial liabilities is recorded in profit or loss.

 

  5)

Fair value of financial assets and liabilities

Financial instruments classified as held for trading or designated as at FVTPL and financial assets classified as AFS are recognized in the separate financial statements at fair value. All derivatives are measured at fair value.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in and orderly transaction between market participants at the measurement date. Fair values are determined from quoted prices in active markets for identical financial assets or financial liabilities where these are available. The Bank characterizes active markets as those in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.

Where a financial instrument is not in active market characterized by low transaction volumes, price quotations that vary substantially among market participants, or in which minimal information is released publicly, fair values are established using valuation techniques that rely on alternative market data or internally developed models using significant inputs that are generally readily observable from objective sources. Market data includes prices of financial instruments with similar maturities and characteristics, duration, interest rate yield curves, and measures of volatility. The amount determined to be fair value may incorporate the management of the Bank’s own assumptions (including assumptions that the Bank believes market participants would use in valuing the financial instruments and assumptions relating to appropriate risk adjustments for nonperformance and lack of marketability).

The valuation techniques used to estimate the fair value of the financial instruments include market approach and income approach, each of which involves a significant degree of judgment. Under the market approach, fair value is determined by reference to a recent transaction involving the financial instruments or by reference to observable valuation measures for comparable companies or assets. Under the income approach, fair value is determined by converting future amounts (e.g., cash flows or earnings) to a single present amount (discounted) using current market expectations about the future amounts. In determining value under this approach, the Bank makes assumptions regarding, among other things, revenues, operating income, depreciation and amortization, capital expenditures, income taxes, working capital needs, and terminal value of the financial investments. These valuation techniques involve a degree of estimation, the extent of which depends on the instrument’s complexity and the availability of market-based data.

 

- 19 -


The following are descriptions of valuation methodologies used by the Bank to measure various financial instruments at fair value.

a) Financial assets at FVTPL and AFS financial assets

The fair value of the securities included in financial assets at FVTPL and AFS financial assets are recognized in the separate statements of financial position based on quoted market prices, where available. For debt securities traded in the Over-The-Counter (“OTC”) market, the Bank generally determines fair value based on prices obtained from independent pricing services. Specifically, with respect to independent pricing services, the Bank obtains three prices per instrument from reputable independent pricing services in Korea, and generally uses the lowest of the prices obtained from such services without further adjustment. For non-marketable equity securities, the Bank obtains prices from the independent pricing services. The Bank validates prices received from such independent pricing services using a variety of means, including verification of the qualification of the independent pricing services, corroboration of the pricing by comparing the prices among the independent pricing services and by reference to other available market data, and review of the pricing model and assumptions used by the independent pricing services by the Bank’s personnel who are familiar with market-related conditions.

b) Derivatives

Quoted market prices are used for the Bank’s exchange-traded derivatives, such as certain interest rate futures and option contracts. All of the Bank’s derivatives are traded in the OTC markets where quoted market prices are not readily available and are valued using internal valuation techniques. Valuation techniques and inputs to internally developed models depend on the type of derivative and nature of the underlying rate, price or index upon which the derivative’s value is based. If the model inputs for certain derivatives are not observable in a liquid market, significant judgments on the level of inputs used for valuation techniques are required.

c) Adjustment of valuation amount

Using derivatives, the Bank is exposed to credit risk if counterparties to the derivative contracts do not perform as expected. If counterparty fails to perform, counterparty credit risk is equal to the amount reported as a derivative asset in the separate statements of financial position. The amounts reported as a derivative asset are derivative contracts in a gain position. Few of the Bank’s derivatives are listed on the exchange. The majority of derivative positions is valued using internally developed models that use observable market inputs as their basis. Therefore, an adjustment is necessary to reflect the credit quality of each counterparty to arrive at fair value. Counterparty credit risk adjustments are applied to derivative assets, such as OTC derivative instruments, when the market inputs used in valuation models may not be indicative of the creditworthiness of the counterparty. Adjustments are also made when valuing financial liabilities to reflect the Bank’s own credit standing.

The adjustment is based on probability of default of a counterparty and loss, given default. The adjustment also considers contractual factors designed to reduce the Bank’s credit exposure to each counterparty. To the extent derivative assets (liabilities) are subject to master netting arrangements, the exposure used to calculate the credit risk adjustment is net of derivatives in a loss (gain) position with the same counterparty and cash collateral received (paid).

6) Impairment of the financial assets

The Bank assesses at the end of each reporting date whether there is any objective evidence that a financial asset or group of financial assets classified as AFS, HTM or loans and receivables is impaired. A financial asset or portfolio of financial assets is impaired and an impairment loss incurred if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition asset and that event (or events) has an impact on the estimated future cash flows of the financial asset.

a) Financial assets carried at amortized cost

If there is objective evidence that an impairment loss on a financial asset or group of financial assets classified as HTM investments or as loans and receivables have been incurred, the Bank measures the amount of the loss as the difference between the carrying amount of the asset or group of assets and the present value of estimated future cash flows from the asset or group of assets discounted at the effective interest rate of the instrument at initial recognition. For collateralized loans and receivables, estimated future cash flows include cash flows that may result from foreclosure, less the costs of obtaining and selling the collateral.

 

- 20 -


Impairment losses are assessed individually for financial assets that are individually significant and assessed either individually or collectively for assets that are not individually significant. In making collective assessment of impairment, financial assets are grouped into portfolios on the basis of similar risk characteristics. Future cash flows from these portfolios are estimated on the basis of the contractual cash flows and historical loss experience for assets with similar credit risk characteristics. Historical loss experience is adjusted, on the basis of observable data, to reflect current conditions not affecting the period of historical experience.

Impairment losses are recognized in net income and the carrying amount of the financial asset or group of financial assets reduced by establishing a provision for impairment losses. If, in a subsequent period, the amount of the impairment loss reduces and the reduction can be ascribed to an event after the impairment was recognized (i.e., improvement in the credit quality of a debtor), the previously recognized loss is reversed by adjusting the provision. Once an impairment loss has been recognized on a financial asset or group of financial assets, interest income is recognized on the carrying amount using the rate of interest at which estimated future cash flows were discounted in measuring impairment.

It is not the Bank’s usual practice to write off the asset at the time an impairment loss is recognized. Impaired loans and receivables are written off (i.e., the impairment provision is applied in writing down the loan’s carrying value in full) when the Bank concludes that there is no longer any realistic prospect of recovery of part or the entire loan. Amounts recovered after a loan has been written off are reflected to the provision for the period in which they are received.

b) Financial assets carried at fair value

When a decline in the fair value of a financial asset classified as AFS has been recognized directly in other comprehensive income and there is objective evidence that the asset is impaired, the cumulative loss is removed from other comprehensive income and recognized in net income. The loss is measured as the difference between the amortized cost of the financial asset and its current fair value. Impairment losses on AFS equity instruments are not reversed through net income, but those on AFS debt instruments are reversed, if there is a decrease in the cumulative impairment loss that is objectively related to a subsequent event.

 

(8)

Offsetting financial instruments

Financial assets and liabilities are presented as a net amount in the statements of financial position when the Bank has an enforceable legal right and an intention to settle on a net basis or to realize an asset and settle the liability simultaneously.

 

(9)

Investment properties

The Bank classifies a property held to earn rentals and/or for capital appreciation as an investment property. Investment properties are measured initially at cost, including transaction costs, less subsequent depreciation and impairment.

Subsequent costs are included in the carrying amount of the asset or recognized as a separate asset if it is probable that future economic benefits associated with the assets will flow into the Bank and the cost of an asset can be measured reliably, and the book value of a portion of an asset that are replaced by a subsequent expenditure is removed from the books. Routine maintenance and repairs are expensed as incurred.

While land is not depreciated, all other investment properties are depreciated based on the depreciation method and useful lives of premises and equipment. The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period, and when it is deemed appropriate to change them, the effect of any change is accounted for as a change in accounting estimates.

An investment property is derecognized from the separate financial statements on disposal or when it is permanently withdrawn from use and no future economic benefits are expected even from its disposal. The gain or loss on the derecognition of an investment property is calculated as the difference between the net disposal proceeds and the carrying amount of the property, and is recognized in profit or loss in the period of the derecognition.

 

- 21 -


(10)

Premises and equipment

Premises and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. The cost of an item of premises and equipment is expenditures directly attributable to their purchase or construction, which includes any cost 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. It also includes the initial estimate of costs of dismantling and removing the item and restoring the site on which it is located.

Subsequent costs are recognized in the carrying amount of an asset or as a separate asset (if appropriate) if it is probable that future economic benefit associated with the assets will flow into the Bank and the cost of an asset can be measured reliably. Routine maintenance and repairs are expensed as incurred.

While land is not depreciated, for all other premises and equipment, depreciation is charged to net income on a straight-line basis by applying the following estimated economic useful lives on the amount of cost or revalued amount less residual value.

 

     Useful life  

Buildings used for business purpose

     40 years  

Structures in leased office

     5 years  

Properties for business purpose

     5 years  

The Bank reassesses the depreciation method, the estimated useful lives and residual values of premises and equipment at the end of each reporting period. If changes in the estimates are deemed appropriate, the changes are accounted for as a change in an accounting estimate. When there is an indicator of impairment and the carrying amount of a premises and equipment item exceeds the estimated recoverable amount, the carrying amount of such asset is reduced to the recoverable amount.

 

(11)

Intangible assets and goodwill

The Bank is recognizing intangible assets measured at the manufacturing cost or acquisition cost plus additional incidental expenses less accumulated amortization and accumulated impairment losses. The Bank’s intangible asset are amortized over the following economic lives using the straight-line method. The estimated useful life and amortization method are reviewed at the end of each reporting period. If changes in the estimates are deemed appropriate, the changes are accounted for as a change in an accounting estimate.

 

     Useful life  

Industrial property rights

     10 years  

Development costs

     5 years  

Other intangible assets

     5 years  

In addition, when an indicator that intangible assets are impaired is noted, and the carrying amount of the asset exceeds the estimated recoverable amount of the asset, the carrying amount of the asset is reduced to its recoverable amount immediately.

Goodwill is not amortized, but is subject to an impairment test every year, and whenever there is an indicator that goodwill is impaired.

Goodwill is allocated to each of the Bank’s cash-generating unit (or groups of cash-generating units) that is expected to benefit from the synergies of the combination. A cash-generating unit to which goodwill has been allocated is tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit on a pro rata basis based on the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognized directly in profit or loss. An impairment loss recognized for goodwill is not reversed in subsequent periods.

 

- 22 -


(12)

Impairment of non-monetary assets

Intangible assets with indefinite useful lives or intangible assets that are not yet available for use are tested for impairment annually, regardless of whether or not there is any indication of impairment. All other assets are tested for impairment by estimating the recoverable amount when there is an objective indication that the carrying amount may not be recoverable. Recoverable amount is the higher of value in use or net fair value, less costs to sell. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount and such impairment loss is recognized immediately in net income.

 

(13)

Leases

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

1) The Bank as a lessor

The Bank recognizes lease receivables at the present value of minimum lease payments of a finance lease and any unguaranteed residual value. After the commencement date of the lease, accounting is done to recognize interest income over each reporting period by computing periodic interest income on the Bank’s net investment.

Rental income from operating leases is recognized on a straight-line basis over the lease term. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and expensed on a straight-line basis over the lease term. Operating lease assets are included within other asset category in other assets, and depreciated over their economic life.

2) The Bank as a lessee

Assets held under finance leases are initially recognized as assets of the Bank at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the separate statements of financial position as a finance lease obligation. Lease payments are apportioned between finance expenses and reduction of the lease obligation to achieve a constant rate of interest on the remaining balance of the liability. Contingent rentals arising under finance leases are recognized as expenses in the periods in which they are incurred.

Operating lease payments are recognized as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Contingent rentals arising under operating leases are recognized as expenses in the period in which they are incurred.

 

(14)

Derivative instruments

Derivative instruments are classified as forwards, futures, options and swaps, depending on the types of transactions and are classified at the point of transaction as either trading or hedging based on its purpose.

Derivatives are initially recognized at fair value at the date of contract and are subsequently measured at fair value at the end of each reporting period. The resulting gain or loss is recognized in net income immediately unless the derivative is designated and effective as a hedging instrument. If derivatives have been designated as hedging instruments and if it is effective, the point of recognition of gain or loss depends on the characteristics of hedging relationship.

1) Embedded derivatives

Embedded derivatives are components of a hybrid financial instrument that includes a non-derivative host contract. It has an effect of modifying part of cash flows of the hybrid financial instrument similar to an independent derivative.

Embedded derivatives that are part of a hybrid contract of which the host contract is a financial asset within the scope of K-IFRS 1109 is not separated. The classification is done by considering the hybrid contract as a whole, and subsequent measurement is either at amortized cost or fair value.

 

- 23 -


If embedded derivatives are part of a hybrid contract of which the host contract is not a financial asset within the scope of K-IFRS 1109 (e.g. financial liability), then these are treated as separate derivatives if embedded derivatives meet the definition of a derivative, characteristics & risk of the embedded derivatives are not closely related to that of host contract, and if the host contract is not measured at FVTPL.

In the previous year, all embedded derivatives which were part of a hybrid contract were treated as separate derivatives if embedded derivatives meet the definition of a derivative, characteristics & risk of the embedded derivatives are not closely related to that of host contract, and if the host contract is not measured at FVTPL

2) Hedge accounting

The Bank is applying K-IFRS 1109 in regards to hedge accounting. The Bank designates certain derivatives as hedging instrument against fair value changes in relation to the interest rate risk, foreign currency translation and interest rate risk, and foreign currency translation risk.

The Bank documents the relationship between hedging instruments and hedged items at the commencement of hedging in accordance with their purpose and strategy. Also, the Bank documents at the commencement and subsequent dates whether the hedging instrument effectively counters the changes in fair value of hedged items. A hedging instrument is effective only when it meets all the following criteria:

 

   

When there is an economic relationship between the hedged items and hedging instruments.

 

   

When the effect of credit risk is not stronger than the change in value due to the economic relationship between the hedged items and hedging instruments.

 

   

When the hedge ratio is equal to the proportion and the number of hedged items to those of the hedging instruments.

When a hedging relationship no longer meets the hedging effectiveness requirements related to hedge ratio, but when the purpose of risk management on designated hedging relationship is still maintained, the hedge ratio of the hedging relationship is adjusted so that hedging relationship may meet the requirements again (Hedge ratio readjustment).

3) Fair value hedge

Gain or loss arising from valid hedging instrument is recognized in profit or loss. However, when the hedging instrument mitigates risks on equity instruments designated as financial assets at FVTOCI, related gain or loss is recognized in other comprehensive income.

The book value of hedged items that are not measured in fair value is adjusted by the changes in fair value arising from the hedged risk, with resulting gain or loss reflected in net income. In case of debt instruments measured at FVTOCI, book value is an amount that is already adjusted to fair value and thus gain or loss arising from the hedged risk is recognized in profit or loss instead of other comprehensive income without adjustments in book value. When the hedged item is equity instruments measured at FVTOCI, the gain or loss arising from hedged risk is retained at other comprehensive income in order to match the gain or loss with hedging instruments.

Hedge accounting ceases to apply only when hedging relationship (or part of it) does not meet the requirements of hedge accounting (even after hedging relationship readjustment, if applicable). This treatment holds in case of lapse, disposal, expiry and exercise of hedging instruments, and this cease of treatment applies prospectively. The fair value adjustments made to book value of hedged item due to hedged risk is amortized from the date of discontinuance of hedge accounting and is recognized in profit or loss.

 

(15)

Assets (or disposal group) held for sale

The Bank classifies a non-current asset (or disposal group) as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. Non-current assets (and disposal groups) classified as held for sale are measured at the lower of their previous carrying amount and fair value less costs to sell.

 

- 24 -


(16)

Provisions

The Bank recognizes provision if (a) it has present or contractual obligations as a result of the past event, (b) it is probable that an outflow of resources will be required to settle the obligation and (c) the amount of the obligation is reliably estimated. Provision is not recognized for the future operating losses.

The Bank recognizes provision related to the unused membership points, payment guarantees, loan commitment and litigations. Where the Bank is required to restore a leased property that is used as a branch to an agreed condition after the contractual term expires, the present value of expected amounts to be used to dispose, decommission or repair the facilities is recognized as an asset retirement obligation.

Where there are a number of similar obligations, the probability that an outflow will be required in settlement is determined by considering the obligations as a whole. Although the likelihood of outflow for any one item may be small, if it is probable that some outflow of resources will be needed to settle the obligations as a whole, a provision is recognized.

 

(17)

Capital and compound financial instruments

The Bank classifies a financial instrument that it issues as a financial liability or an equity instrument in accordance with the substance of the contractual arrangement. A financial liability is a contractual obligation to deliver cash or another financial asset to another entity. An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. The compound financial instruments issued by the Bank are financial instruments where it is neither a financial liability nor an equity instrument because it was designed to contain both equity and debt elements.

If the Bank reacquires its own equity instruments, the consideration paid including the direct transaction costs (net of tax expense) are presented as a deduction from total equity until such instruments are retired or reissued. When these instruments are reissued, the consideration received (net of direct transaction costs) is included in the shareholder’s equity.

 

(18)

Financial guarantee liabilities

A financial guarantee contract is a contract where the issuer must pay a certain amount of money in order to compensate losses suffered by the creditor when debtor defaults on a debt instrument in accordance with original or modified contractual terms.

A financial guarantee is initially measured at fair value and is subsequently measured at the higher of the amounts below unless it is designated to be measured at FVTPL or when it arises from disposal of an asset.

 

   

Loss allowance in accordance with K-IFRS 1109

 

   

Initial book value less accumulated profit measured in accordance with K-IFRS 1115

 

(19)

Employee benefits and pensions

The Bank recognizes the undiscounted amount of short-term employee benefits expected to be paid in exchange for the services rendered by the employees. Also, the Bank recognizes expenses and liabilities in the case of accumulating compensated absences when the employees render services that entitle their right to future compensated absences. Similarly, the Bank recognizes expenses and liabilities for customary profit distribution or bonuses when the employees render services, even though the Bank does not have legal obligation to do so because it can be construed as constructive obligation.

The Bank is operating defined contribution plans and defined benefit plans. Contributions to defined contribution plans are recognized as an expense when employees have rendered services entitling them to receive the benefits. For defined benefit plans, the defined benefit liability is calculated through an actuarial assessment using the projected unit credit method every end of the reporting period, conducted by a professional actuaries. Remeasurement, comprising actuarial gains and losses, the return on plan assets (excluding interest), and the effect of the changes to the asset ceiling (if applicable) is reflected immediately in the separate statement of financial position with a charge or credit recognized in other comprehensive income in the period in which they occur.

 

- 25 -


Remeasurement recognized in the statement of comprehensive income is not reclassified to profit or loss in the subsequent periods. Past service cost is recognized in profit or loss in the period of a plan amendment. Net interest is calculated by applying the discount rate at the beginning of the period to the net defined benefit liability or asset. Defined benefit costs are composed of service cost (including current service cost and past service cost, as well as gains and losses on curtailments and settlements), net interest expense (income) and remeasurement.

The Bank presents the service cost and net interest expense (income) components in profit or loss, and the remeasurement component in other comprehensive income. Curtailment gains and losses are accounted for as past service costs.

The retirement benefit obligation recognized in the separate statement of financial position represents the actual deficit or surplus in the Bank’s defined benefit plans. Any surplus resulting from this calculation is recognized as an asset limited to the present value of any economic benefits available in the form of refunds from the plans or reductions in future contributions to the plans.

Liabilities for termination benefits are recognized at the earlier of either 1) the date when the Bank is no longer able to cancel its proposal for termination benefits or 2) the date when the Bank has recognized the cost of restructuring that accompanies the payment of termination benefits.

 

(20)

Income taxes

Income tax expense is composed of current tax and deferred tax. That is, income tax expense is composed of taxes payable or refundable during the period and deferred taxes calculated by applying asset-liability method to taxable and deductible temporary differences arising from operating loss and tax credit carryforwards. Temporary differences are the differences between the carrying values of assets and liabilities for financial reporting purposes and their tax bases. Deferred income tax benefit or expense is recognized for the change in deferred tax assets or liabilities. Deferred tax assets and liabilities are measured as of the reporting date using the enacted or substantively enacted tax rates expected to apply in the period in which the liability is settled or asset realized. Deferred tax assets, including the carryforwards of unused tax losses, are recognized to the extent it is probable that the deferred tax assets will be realized.

Deferred income tax assets and liabilities are offset if, and only if, the Bank has a legally enforceable right to offset current tax assets against current tax liabilities, and the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority or when the entity intends to settle current tax liabilities and assets on a net basis with different taxable entities.

The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred liabilities are not recognized if the temporary difference arises from the initial recognition of goodwill. Deferred tax assets or liabilities are not recognized if they arise from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

Current and deferred taxes are recognized in profit or loss, except when they relate to items that are recognized in other comprehensive income or directly in equity or when it arises from business combination.

 

(21)

Earnings per share (“EPS”)

Basic EPS is a calculation of net income per each common stock. It is calculated by dividing net income attributable to ordinary shareholders by the weighted-average number of common shares outstanding. Diluted EPS is calculated by adjusting the earnings and number of shares for the effects of all dilutive potential common shares.

 

- 26 -


3.

SIGNIFICANT ACCOUNTING ESTIMATES AND ASSUMPTIONS

The significant accounting estimates and assumptions are continuously being evaluated based on numerous factors including historical experiences and expectations of future events considered to be reasonably possible. Actual results can differ from those estimates based on such definitions. The accounting estimates and assumptions that contain significant risk of materially changing current book values of assets and liabilities in the next accounting periods are as follows:

 

(1)

Income taxes

The Bank has recognized current and deferred taxes based on best estimates of expected future income tax effect arising from the Bank’s operations until the end of the current reporting period. However, actual tax payment may not be identical to the related assets and/or liabilities already recognized, and these differences may affect current taxes and deferred tax assets/liabilities at the time when income tax effects are finalized. Deferred tax assets relating to tax losses carried forward and deductible temporary differences are recognized only to the extent that it is probable that future taxable profit will be available against which the tax losses carried forward and the deductible temporary differences can be utilized. In this case the Bank’s evaluation considers various factors such as estimated future taxable profit based on forecasted operating results, which are based on historical financial performance. The Bank is reviewing the book value of deferred tax assets every end of the reporting period and in the event that the possibility of earning future taxable income changes, the deferred tax assets are adjusted up to taxable income sufficient to use deductible temporary differences.

 

(2)

Valuation of financial instruments

Financial assets at FVTPL and FVTOCI are recognized in the separate financial statements at fair value. All derivatives are measured at fair value. Valuation techniques are required in order to determine fair values of financial instruments where observable market prices do not exist. Financial instruments that are not actively traded and have low price transparency will have less objective fair value and require broad judgment in liquidity, concentration, uncertainty in market factors and assumption in price determination and other risks.

As described in Note 2-(7)-5), ‘Fair value of financial assets and liabilities’, when valuation techniques are used to determine the fair value of a financial instrument, various general and internally developed techniques are used, and various types of assumptions and variables are incorporated during the process.

 

(3)

Impairment of financial instruments

K-IFRS 1109 requires entities to measure loss allowance equal to 12-month expected credit losses or lifetime expected credit losses after classifying financial assets into one of the three stages, which depends on the degree of increase in credit risk after their initial recognition.

 

    

Stage 1

  

Stage 2

   Stage 3
  

Credit risk has not significantly increased
since initial recognition(*)

  

Credit risk has significantly increased
since initial recognition

   Credit has been impaired

Allowance for

expected credit

losses

  

Expected 12-month credit losses:

Expected credit losses due to possible defaults on financial instruments within a 12-month period from the year-end.

  

Expected lifetime credit losses:

Expected credit losses from all possible defaults during the expected lifetime of the financial instruments.

 

(*)

Credit risk may be considered to not have been significantly increased when credit risk is low at year-end.

The Bank has estimated the allowance for credit losses based on reasonable and supportable information that was available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions.

Probability of default (PD) and Loss given default (LGD) for each category of financial asset is being calculated by considering factors such as debtor type, credit rating and portfolio. The estimates are regularly being reviewed in order to reduce discrepancies with actual losses.

 

- 27 -


Also, in measuring the expected credit losses, the Bank is using reasonable and supportable macroeconomic indicators such as economic growth rate, interest rates, market index rates, etc., in order to forecast future economic conditions.

The Bank is conducting the following procedures to estimate and apply future economic forecast information.

 

  -  

Development of estimation models by analyzing the correlation between default rates of corporate and retail exposures per year and macroeconomic indicators

 

  -  

Calculation of estimated default rate incorporating future economic forecasts by applying estimated macroeconomic indicators provided by verified institutions such as Bank of Korea and National Assembly Budget Office to the estimation model developed.

At the end of every reporting period, the Bank is evaluating whether credit risk reflected forward-looking information has significantly been increased since the date of initial recognition. When evaluating whether credit risk has significantly been increased, the changes in the probability of default over the financial instrument’s remaining life is used instead of changes in the amount of expected credit losses. The Bank performs the above evaluation with distinctions made to corporate and retail exposures, and indicators of significant increase in credit risk are as follows:

 

Corporate Exposures

 

Retail Exposures

Asset quality level ‘Precautionary’ or lower

  Asset quality level ‘Precautionary’ or lower

Overdue of 30 days or longer

  Overdue of 30 days or longer

‘Warning’ level in early warning system

  Significant decrease in credit rating(*)

Debtor experiencing financial difficulties
(Capital impairment, Adverse opinion or Disclaimer of audit opinion)

 

Significant decrease in credit rating(*)

 

 

(*)

Determining whether there has been a significant decrease in the credit rating of corporate and retail exposures applies only to credit ratings that are measured through 12-month expected credit loss. The Bank has applied the above indicators of significant decrease in credit rating since initial recognition as follows, and the estimation method is regularly being monitored.

 

    

Credit rating

  

Indicators of significant decrease in credit rating

Corporate

   AAA ~ A+    More than 4 steps
   A- ~ BBB    More than 3 steps
   BBB- ~ BB+    More than 2 steps
   BB ~ BB-    More than 1 step

Retail

   1 ~ 3    More than 3 steps
   4 ~ 5    More than 2 steps
   6 ~ 10    More than 1 step

The Bank sees no significant increase in credit risk after initial recognition for debt securities, etc. with a credit rating of A + or higher, which are deemed to have low credit risk at the end of the reporting period.

The Bank concludes that credit is impaired when financial assets are under conditions stated below:

 

  -  

When principal of loan is overdue for 90 days or longer due to significant deterioration in credit

 

  -  

For loans overdue for less than 90 days, when it is determined that not even a portion of the loan will be recovered unless claim actions such as disposal of collaterals are taken

 

  -  

When other objective indicators of impairment has been noted for the financial asset.

 

- 28 -


The Bank determines which loan is subject to write-off in accordance with internal guidelines, and writes off loan receivables when it is determined that the loans are practically irrecoverable. For example, loans are practically irrecoverable when application is made for rehabilitation under the Debtor Rehabilitation and Bankruptcy Act and loans are confirmed as irrecoverable by the court’s decision to waive debtor’s obligation, or when it is impossible to recover the loan amount through legal means such as auctioning of debtor’s assets or through any other means of recovery available. Notwithstanding the write-off, the Bank may still exercise its right of collection after the asset has been written off in accordance with its collection policies.

 

(4)

Defined benefit plan

The Bank operates a defined benefit pension plan. Defined benefit obligation is calculated at every end of the reporting period by performing actuarial valuation, and estimation of assumptions such as discount rate, expected wage growth rate and mortality rate is required to perform such actuarial valuation. The defined benefit plan, due to its long-term nature, contains significant uncertainties in its estimates.

 

4.

RISK MANAGEMENT

The Bank’s operating activity is exposed to various financial risks. The Bank is required to analyze and assess the level of complex risks, and determine the permissible level of risks and manage such risks. The Bank’s risk management procedures have been established to improve the quality of assets for holding or investment purposes by making decisions as how to avoid or mitigate risks through the identification of the source of the potential risks and their impact.

The Bank has established an approach to manage the acceptable level of risks and reduce the excessive risks in financial instruments in order to maximize the profit given risks present, for which the Bank has implemented processes for risk identification, assessment, control, and monitoring and reporting.

The risk is managed by the risk management department in accordance with the Bank’s risk management policy. The Risk Management Committee makes decisions on the risk strategies such as the allocation of risk capital and the establishment of acceptable level of risk.

 

(1)

Credit risk

Credit risk represents the possibility of financial losses incurred when the counterparty fails to fulfill its contractual obligations. The goal of credit risk management is to maintain the Bank’s credit risk exposure to a permissible degree and to optimize the rate of return considering such credit risk.

1)    Credit risk management

The Bank considers the probability of failure in performing the obligation of its counterparties, credit exposure to the counterparty, the related default risk and the rate of default loss. The Bank uses the credit rating model to assess the possibility of counterparty’s default risk; and when assessing the obligor’s credit grade, the Bank utilizes credit grades derived using statistical methods.

In order to manage credit risk limit, the Bank establishes the appropriate credit line per obligor, company or industry. It monitors obligor’s credit line, total exposures and loan portfolios when approving the loan.

The Bank mitigates credit risk resulting from the obligor’s credit condition by using financial and physical collateral, guarantees, netting agreements and credit derivatives. The Bank has adopted the entrapment method to mitigate its credit risk. Credit risk mitigation is reflected in qualifying financial collateral, trade receivables, guarantees, residential and commercial real estate and other collaterals. The Bank regularly performs a revaluation of collateral reflecting such credit risk mitigation.

 

- 29 -


2) Maximum exposure to credit risk

The Bank’s maximum exposure to credit risk refers to net book value of financial assets net of allowances, which shows the uncertainties of maximum changes of net value of financial assets attributable to a particular risk without considering collateral and other credit enhancements obtained. However, the maximum exposure is the fair value amount (recorded on the books) for derivatives, maximum contractual obligation for payment guarantees and unused loan commitment.

The maximum exposure to credit risk is as follows (Unit: Korean Won in millions):

 

         December 31, 2018      December 31, 2017  

Loans and other financial assets at amortized cost

   Korean treasury and government agencies     13,513,927        —    
   Banks     19,965,172        —    
   Corporates     87,357,986        —    
   Consumers     139,513,864        —    
    

 

 

    

 

 

 
   Sub-total     260,350,949        —    
    

 

 

    

 

 

 

Loans and receivables

   Korean treasury and government agencies     —          8,792,977  
   Banks     —          25,053,476  
   Corporates     —          83,568,058  
   Consumers     —          131,396,113  
    

 

 

    

 

 

 
   Sub-total     —          248,810,624  
    

 

 

    

 

 

 

Financial assets at FVTPL (K-IFRS 1109)

   Deposit     26,935        —    
   Loans     21,492        —    
   Derivative assets     2,034,988        —    
   Sub-total     2,083,415        —    

Financial assets at FVTPL (K-IFRS 1039)

   Deposit     —          25,972  
   Debt securities     —          1,008,827  
   Derivative assets     —          3,098,769  
    

 

 

    

 

 

 
   Sub-total     —          4,133,568  
    

 

 

    

 

 

 

Financial assets at FVTOCI

   Debt securities     16,254,592        —    

AFS financial assets

   Debt securities     —          12,247,622  

Securities at amortized cost

   Debt securities     22,802,050        —    

HTM financial assets

   Debt securities     —          16,638,727  

Derivative assets

   Derivative assets (Held for hedging)     35,503        59,272  

Off-balance accounts

   Guarantees     13,990,450        13,589,728  
   Loan commitments     65,012,748        50,214,855  
    

 

 

    

 

 

 
   Sub-total     79,003,198        63,804,583  
    

 

 

    

 

 

 
   Total     380,529,707        345,694,396  
    

 

 

    

 

 

 

a) Credit risk exposure by geographical areas

The following tables analyze credit risk exposure by geographical areas (Unit: Korean Won in millions):

 

     December 31, 2018  
     Korea      USA      UK      Japan      Others (*)      Total  

Loans and other financial assets at amortized cost

     249,216,942        2,754,044        1,526,532        893,354        5,960,077        260,350,949  

Securities at amortized cost

     22,757,047        —          —          —          45,003        22,802,050  

Financial assets at FVTPL

     2,083,148        —          —          267        —          2,083,415  

Financial assets at FVTOCI

     15,642,031        —          16,718        —          595,843        16,254,592  

Derivative assets (Held for hedging)

     35,503        —          —          —          —          35,503  

Off-balance accounts

     77,614,417        257,816        136,727        34,999        959,239        79,003,198  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     367,349,088        3,011,860        1,679,977        928,620        7,560,162        380,529,707  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

- 30 -


     December 31, 2017  
     Korea      USA      UK      Japan      Others (*)      Total  

Loans and receivables

     240,912,334        1,209,094        1,094,988        381,889        5,212,319        248,810,624  

Financial assets at FVTPL

     3,892,601        —          148,955        —          92,012        4,133,568  

AFS debt securities

     11,972,446        —          —          —          275,176        12,247,622  

HTM securities

     16,606,692        —          —          —          32,035        16,638,727  

Derivative assets (Held for hedging)

     16,590        —          42,682        —          —          59,272  

Off-balance accounts

     62,856,918        121,784        66,974        25,039        733,868        63,804,583  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     336,257,581        1,330,878        1,353,599        406,928        6,345,410        345,694,396  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(*)

Others consist of financial assets in Hong Kong, Singapore and Australia and others.

b) Credit risk exposure by industries

The following tables analyze credit risk exposure by industries, which are service, manufacturing, finance and insurance, construction, individuals and others in accordance with the Korea Standard Industrial Classification Code (Unit: Korean Won in millions):

 

     December 31, 2018  
     Service      Manufacturing      Finance and
insurance
     Construction      Individuals      Others      Total  

Loans and other financial assets at amortized cost

     46,177,373        32,891,096        37,453,611        2,557,684        135,827,962        5,443,223        260,350,949  

Securities at amortized cost

     1,157,512        —          13,376,324        527,847        —          7,740,367        22,802,050  

Financial assets at FVTPL

     82,351        81,451        1,872,922        9,173        7,614        29,904        2,083,415  

Financial assets at FVTOCI

     326,333        41,673        12,830,631        194,562        5,535        2,855,858        16,254,592  

Derivative assets (Held for hedging)

     —          —          35,503        —          —          —          35,503  

Off-balance accounts

     15,205,797        23,696,274        8,784,514        3,706,275        21,663,309        5,947,029        79,003,198  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     62,949,366        56,710,494        74,353,505        6,995,541        157,504,420        22,016,381        380,529,707  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2017  
     Service      Manufacturing      Finance and
insurance
     Construction      Individuals      Others      Total  

Loans and receivables

     45,975,768        33,037,933        36,003,892        2,893,323        125,159,751        5,739,957        248,810,624  

Financial assets at FVTPL

     96,795        76,373        3,737,672        10,054        1,040        211,634        4,133,568  

AFS debt securities

     682,706        —          7,055,546        133,572        —          4,375,798        12,247,622  

HTM securities

     1,348,754        —          10,944,611        296,214        —          4,049,148        16,638,727  

Derivative assets (Held for hedging)

     —          —          59,272        —          —          —          59,272  

Off-balance accounts

     14,510,922        22,363,457        8,759,366        3,614,758        10,057,400        4,498,680        63,804,583  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     62,614,945        55,477,763        66,560,359        6,947,921        135,218,191        18,875,217        345,694,396  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

- 31 -


3) Credit risk exposure

 

a)

Financial assets

The maximum exposure to credit risk by asset quality, except for financial assets at FVTPL and derivative assets (Held for hedging) is as follows (Unit: Korean Won in millions):

 

     December 31, 2018  
     Stage 1      Stage 2      Stage 3      Total      Loss
allowance
    Total, net  
     Above
appropriate
credit rating (*1)
     Less than a
limited
credit
rating (*3)
     Above
appropriate
credit rating (*2)
     Less than a
limited
credit rating (*3)
 

Loans and other financial assets at amortized cost

     234,604,099        15,064,338        5,597,603        5,209,197        1,340,212        261,815,449        (1,464,500     260,350,949  

Korean treasury and government agencies

     13,517,080        —          —          —          —          13,517,080        (3,153     13,513,927  

Banks

     19,956,800        10,314        23,935        —          —          19,991,049        (25,877     19,965,172  

Corporates

     70,302,975        13,451,275        532,000        3,236,305        931,193        88,453,748        (1,095,762     87,357,986  

General business

     39,440,686        4,565,102        469,573        1,537,953        648,087        46,661,401        (736,204     45,925,197  

Small- and medium-sized enterprise

     27,303,978        8,337,471        62,427        1,545,602        269,059        37,518,537        (318,312     37,200,225  

Project financing and others

     3,558,311        548,702        —          152,750        14,047        4,273,810        (41,246     4,232,564  

Consumers

     130,827,244        1,602,749        5,041,668        1,972,892        409,019        139,853,572        (339,708     139,513,864  

Securities at amortized cost

     22,808,945        —          —          —          —          22,808,945        (6,895     22,802,050  

Financial assets at FVTOCI (*3)

     16,167,536        87,056        —          —          —          16,254,592        (5,413     16,254,592  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     273,580,580        15,151,394        5,597,603        5,209,197        1,340,212        300,878,986        (1,476,808     299,407,591  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(*1)

Credit grade of corporates are AAA ~ BBB, and consumers are grades 1 ~ 6.

(*2)

Credit grade of corporates are A- ~ BBB, and consumers are grades 1 ~ 6.

(*3)

Credit grade of corporate are BBB- ~ C, and consumers are grades 7 ~ 10.

(*4)

Financial assets at FVTOCI have been disclosed as the amount before deducting loss allowance because loss allowance does not reduce the carrying amount.

 

     December 31, 2018  
     Collateral value  
     Stage 1      Stage 2      Stage 3      Total  

Loans and other financial assets at amortized cost

     161,494,496        8,815,347        673,396        170,983,239  

Korean treasury and government agencies

     11,600        —          —          11,600  

Banks

     360,102        3,334        —          363,436  

Corporates

     50,464,533        2,492,375        405,277        53,362,185  

General business

     18,803,891        1,150,747        220,602        20,175,240  

Small- and medium-sized enterprise

     29,779,557        1,291,223        184,675        31,255,455  

Project financing and others

     1,881,085        50,405        —          1,931,490  

Consumers

     110,658,261        6,319,638        268,119        117,246,018  

Securities at amortized cost

     —          —          —          —    

Financial assets at FVTOCI (*3)

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     161,494,496        8,815,347        673,396        170,983,239  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  -

Loans and receivables

 

     December 31, 2017  
     Korean
treasury and
government
agencies
     Banks      Corporates                
   General
business
     Small- and
medium-sized
enterprise
     Project
financing
and others
     Sub-total      Consumers      Total  

Neither overdue nor impaired

     8,795,163        25,068,417        45,242,266        33,229,188        4,722,748        83,194,202        130,563,920        247,621,702  

Overdue but not impaired

     —          —          5,954        63,067        —          69,021        728,057        797,078  

Impaired

     —          —          1,354,096        241,776        17,665        1,613,537        339,297        1,952,834  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     8,795,163        25,068,417        46,602,316        33,534,031        4,740,413        84,876,760        131,631,274        250,371,614  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loss allowance

     2,186        14,941        1,019,687        262,628        26,387        1,308,702        235,161        1,560,990  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total, net

     8,792,977        25,053,476        45,582,629        33,271,403        4,714,026        83,568,058        131,396,113        248,810,624  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

- 32 -


  -

Debt securities

The Bank manages debt securities based on the external credit rating. Credit quality of debt securities on the basis of External Credit Assessment Institution (ECAI)’s rating is as follows (Unit: Korean Won in millions):

 

     December 31, 2017  
     Financial assets at
FVTPL
     AFS debt
securities
     HTM
securities
     Total  

AAA

     1,008,827        9,836,599        15,806,327        26,651,753  

AA- ~ AA+

     —          2,189,269        832,400        3,021,669  

BBB- ~ A+

     —          221,754        —          221,754  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1,008,827        12,247,622        16,638,727        29,895,176  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

b)

Guarantees and loan commitments

The credit quality of the guarantees and loan commitments as of December 31, 2018 as follows (Unit: Korean Won in millions):

 

     December 31, 2018  

Financial assets

   Stage 1      Stage 2      Stage3      Total  
   Above
appropriate
credit rating
(*1)
     Less than a
limited
credit rating
(*3)
     Above
appropriate
credit rating
(*2)
     Less than a
limited
credit rating
(*3)
 

Off-balance accounts

                 

Guarantees

     12,800,981        806,487        7,147        254,487        121,348        13,990,450  

Loan commitments

     60,405,878        2,663,904        1,404,007        538,959        —          65,012,748  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     73,206,859        3,470,391        1,411,154        793,446        121,348        79,003,198  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(*1)

Credit grade of corporates are AAA ~ BBB, and consumers are grades 1 ~ 6.

(*2)

Credit grade of corporates are A- ~ BBB, and consumers are grades 1 ~ 6.

(*3)

Credit grade of corporates are BBB- ~ C, and consumers are grades 7 ~ 10.

4) Collateral and other credit enhancements

During the current quarter, there have been no significant changes in the value of collateral or other credit enhancements held by the Bank and, there have been no significant changes in collateral or other credit enhancements due to changes in the collateral policy of the Bank. As of December 31, 2018, there are no financial assets that do not recognize the allowance for losses just because financial assets have collateral.

5) For the financial assets that record loss allowance as total expected credit loss, the amortized cost before the change in contractual cash flows is 23,132 million won, and the net loss due to the change is 239 million won.

6) As the Bank manages receivables that have not lost the right of claim to the debtor for the grounds of incomplete statute limitation and uncollected receivables under the related laws as receivable charge-offs, the balance as of December 31, 2018 is 8,009,143 million won.

 

(2)

Market risk

Market risk is the possible risk of loss arising from trading and non-trading activities in the volatility of market factors such as interest rates, stock prices, and foreign exchange rates. Market risk occurs as a result of changes in the interest rates and foreign exchange rates for financial instruments that are not yet settled, and all contracts are exposed to a certain level of volatility according to the interest rates, credit spreads, foreign exchange rates and the price of equity securities.

 

  1)

Market risk management

For trading activities and non-trading activities, the Bank avoids, bears or mitigates risks by identifying the underlying source of risks, measuring parameters and evaluating their appropriateness.

 

- 33 -


The Bank uses both a standard-based and an internal model-based approach to measure market risk. The standard-based approach is used to calculate individual market risk of owned capital while the internal model-based approach is used to calculate general capital market risk and it is used to measure internal risk management measure.

The Bank measures Value at Risk (“VaR,” maximum losses) with Historical Simulation Method based on 99% confidence level and 10-day holding period of positions, and calculates the required market risk capital using the internal model, which has been approved by Financial Supervisory Service in Korea. For the internal management purpose, VaR is measured based on 99% confidence level and one-day holding period of positions and the limit management is performed on a daily basis. The validation of the model is assessed through the performance of back testing, which is to compare the actual gain or loss to the VaR measurements on a daily basis.

In addition, for crisis management, the Bank performs stress testing on a monthly basis, which is to measure the expected loss amount in case of extreme situation, such as IMF bailout in 1997 or global financial crisis in 2008.

At the beginning of each year, the Risk Management Committee establishes the VaR limit, loss limit and risk capital limit for its management purposes. Limit by investment desk/dealer is independently managed to the extent of the limit given to each department of the Bank and the limit by investment and loss cut is managed by risk management personnel within the department.

 

  2)

Sensitivity analysis of market risk

The Bank performs sensitivity analysis, both for trading and for non-trading activities.

For trading activities, the Bank uses a VaR model, which uses certain assumptions of possible fluctuations in market condition and, by conducting simulations of gains and losses, under which the model estimates the maximum losses that may occur. A VaR model predicts based on statistics of possible losses on the portfolio at a certain period currently or in the future. It indicates the maximum expected loss with at least 99% confidence level. In short, there exists a 1% possibility that the actual loss might exceed the predicted loss generated from the VaR’s calculation. The actual results are periodically monitored to examine the validity of the assumptions and variables and factors that are used in VaR’s calculations. However, this approach cannot prevent the loss when the market fluctuation exceeds expectation.

For the non-trading activities, the interest rate risk is managed and measured based on the analysis of the Net Interest Income (“NII”) and Net Portfolio Value (“NPV”) by the scenarios. NII is a profit-based indicator for displaying the profit changes in the short term due to the short-term interest changes. It will be estimated as subtracting interest expenses of liabilities from the interest income of assets. NPV is an indicator for displaying risks in an economic view according to unfavorable changes related to interest rate. It will be estimated as subtracting the present value of liabilities from the present value of assets.

a) Trading activities

The minimum, maximum and average VaR for the year ended December 31, 2018 and 2017, respectively, and the VaR as of December 31, 2018 and 2017, respectively, are as follows (Unit: Korean Won in millions):

 

     December 31,
2018
    For the year ended
December 31, 2018
    December 31,
2017
    For the year ended
December 31, 2017
 

Risk factor

  Average     Maximum     Minimum     Average     Maximum     Minimum  

Interest rate

     3,107       3,702       5,528       1,730       4,183       3,799       4,918       2,467  

Stock price

     2,353       2,669       5,081       1,138       909       2,863       4,419       909  

Foreign currencies

     4,972       4,678       6,136       3,439       4,750       5,051       6,636       4,061  

Commodity

     —         3       24       —         —         31       188       —    

Diversification

     (4,445     (4,869     (8,155     (1,815     (4,472     (4,621     (6,798     (2,067
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total VaR(*)

     5,987       6,183       8,614       4,492       5,370       7,123       9,363       5,370  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(*)

VaR (Value at Risk): Maximum expected losses

 

- 34 -


b) Non-trading activities

The NII and NPV are calculated for the assets and liabilities owned by the Bank, respectively, by using the simulation method. The scenario responding to interest rate (“IR”) changes are as follows (Unit: Korean Won in millions):

 

Name of scenario

   December 31, 2018      December 31, 2017  
   NII(*1)      NPV(*2)      NII(*1)      NPV(*2)  

Base case

     4,886,919        24,635,872        4,936,457        23,487,317  

Base case (Prepay)

     4,881,567        24,225,127        4,936,334        23,178,467  

IR 100bp up

     5,580,848        24,414,552        5,394,161        22,900,740  

IR 100bp down

     4,321,315        24,906,922        4,401,735        24,141,984  

IR 200bp up

     6,622,298        24,231,110        5,851,632        22,386,912  

IR 200bp down

     3,500,800        25,245,603        3,462,869        24,844,803  

IR 300bp up

     7,593,109        24,077,356        6,309,102        21,943,972  

IR 300bp down

     3,344,206        25,680,348        2,259,870        26,648,024  

 

(*1)

NII: Net Interest Income

(*2)

NPV: Net Portfolio Value

The Bank estimates and manages risks related to changes in interest rate due to the difference in the maturities of interest-bearing assets and liabilities and discrepancies in the terms of interest rates. Cash flows (both principal and interest), interest-bearing assets and liabilities, presented by each repricing date, are as follows (Unit: Korean Won in millions):

 

     December 31, 2018  
     Within 3
months
     4 to 6
months
     7 to 9
months
     10 to 12
months
     1 to 5
years
     Over 5
years
     Total  

Asset:

                    

Loans and other financial assets at amortized cost

     145,015,086        43,247,365        7,827,430        9,077,245        41,492,032        3,419,576        250,078,734  

Financial assets at FVTPL

     117,324        50        160        49        2,281        27,536        147,400  

Financial assets at FVTOCI

     2,137,253        1,667,291        1,404,980        2,170,105        9,146,385        153,545        16,679,559  

Securities at amortized cost

     2,410,986        2,249,552        1,735,698        1,944,756        15,140,236        373,268        23,854,496  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     149,680,649        47,164,258        10,968,268        13,192,155        65,780,934        3,973,925        290,760,189  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liability:

                    

Deposits due to customers

     96,816,710        41,903,982        28,169,284        33,573,893        38,622,661        64,425        239,150,955  

Borrowings

     8,806,595        1,290,054        580,935        460,078        2,664,135        495,516        14,297,313  

Debentures

     1,723,882        1,972,348        1,693,796        1,839,700        13,675,096        2,387,717        23,292,539  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     107,347,187        45,166,384        30,444,015        35,873,671        54,961,892        2,947,658        276,740,807  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2017  
     Within 3
months
     4 to 6
months
     7 to 9
months
     10 to 12
months
     1 to 5
years
     Over 5
years
     Total  

Asset:

                    

Loans and receivables

     148,513,919        39,972,641        6,935,597        5,672,432        50,858,179        25,688,896        277,641,664  

AFS financial assets

     1,689,689        2,462,484        1,996,401        2,333,618        4,161,439        574,540        13,218,171  

HTM financial assets

     2,268,640        2,161,467        1,433,425        1,687,362        9,309,427        312,507        17,172,828  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     152,472,248        44,596,592        10,365,423        9,693,412        64,329,045        26,575,943        308,032,663  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liability:

                    

Deposits due to customers

     102,414,072        36,883,763        24,653,930        25,028,280        36,699,604        6,133        225,685,782  

Borrowings

     8,998,265        874,830        412,966        405,352        2,649,142        479,399        13,819,954  

Debentures

     1,571,159        2,069,377        677,903        1,520,299        14,614,175        2,843,679        23,296,592  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     112,983,496        39,827,970        25,744,799        26,953,931        53,962,921        3,329,211        262,802,328  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

- 35 -


  3)

Currency risk

Currency risk arises from the financial instrument denominated in foreign currencies other than the functional currency. Therefore, no currency risk arises from non-monetary items or financial instruments denominated in the functional currency.

Financial instruments in foreign currencies exposed to currency risk are as follows (Unit: USD in millions, JPY in millions, CNY in millions, and EUR in millions and Korean Won in millions):

 

        December 31, 2018  
        USD     JPY     CNY     EUR     Others     Total  
        Foreign
currency
    Korean
Won
equivalent
    Foreign
currency
    Korean
Won
equivalent
    Foreign
currency
    Korean
Won
equivalent
    Foreign
currency
    Korean
Won
equivalent
    Korean
won
equivalent
    Korean
Won
equivalent
 

Asset

 

Loans and other financial assets at amortized cost

    18,333       20,497,663       167,282       1,694,870       2,761       449,355       1,977       2,528,998       2,569,555       27,740,441  
 

Financial assets at FVTPL

    72       80,953       1,425       14,434       —         —         59       75,169       90,925       261,481  
 

Financial assets at FVTOCI

    1,472       1,646,081       —         —         —         —         —         —         187,959       1,834,040  
 

Securities at amortized cost

    52       58,489       —         —         —         —         —         —         45,013       103,502  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 

Total

    19,929       22,283,186       168,707       1,709,304       2,761       449,355       2,036       2,604,167       2,893,452       29,939,464  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liability

 

Financial liabilities at FVTPL

    118       131,927       1,956       19,815       —         —         55       70,250       121,658       343,650  
 

Deposits due to customers

    10,114       11,307,931       169,742       1,719,796       1,660       270,215       886       1,132,860       1,226,881       15,657,683  
 

Borrowings

    6,372       7,123,977       3,749       37,985       26       4,169       270       344,905       81,868       7,592,904  
 

Debentures

    3,145       3,516,034       —         —         —         —         —         —         103,050       3,619,084  
 

Other financial liabilities

    2,387       2,669,323       28,955       293,362       1,282       208,665       188       240,478       94,540       3,506,368  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 

Total

    22,136       24,749,192       204,402       2,070,958       2,968       483,049       1,399       1,788,493       1,627,997       30,719,689  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Off-balance accounts

    7,047       7,892,048       33,346       337,852       992       161,534       465       594,603       496,243       9,482,280  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

        December 31, 2017  
        USD     JPY     CNY     EUR     Others     Total  
        Foreign
currency
    Korean
Won
equivalent
    Foreign
currency
    Korean
Won
equivalent
    Foreign
currency
    Korean
Won
equivalent
    Foreign
currency
    Korean
Won
equivalent
    Korean
won
equivalent
    Korean
Won
equivalent
 

Asset

 

Loans and receivables

    19,534       20,928,891       124,167       1,178,480       1,050       171,802       1,143       1,461,960       1,978,164       25,719,297  
 

Financial assets at FVTPL

    29       31,360       25       238       —         —         27       34,583       104,892       171,073  
 

AFS financial assets

    1,712       1,833,836       —         —         —         —         —         590       77,118       1,911,544  
 

HTM financial assets

    51       54,439       —         —         —         —         —         —         32,035       86,474  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 

Total

    21,326       22,848,526       124,192       1,178,718       1,050       171,802       1,170       1,497,133       2,192,209       27,888,388  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liability

 

Financial liabilities at FVTPL

    41       43,423       79       752       —         —         19       24,878       69,977       139,030  
 

Deposits due to customers

    11,303       12,110,340       195,154       1,852,228       1,520       248,808       882       1,127,917       924,008       16,263,301  
 

Borrowings

    6,480       6,942,814       2,218       21,056       14       2,245       247       315,669       107,344       7,389,128  
 

Debentures

    2,967       3,178,711       —         —         700       114,555       —         —         196,620       3,489,886  
 

Other financial liabilities

    2,067       2,214,467       13,411       127,289       2,010       328,902       128       164,357       368,502       3,203,517  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 

Total

    22,858       24,489,755       210,862       2,001,325       4,244       694,510       1,276       1,632,821       1,666,451       30,484,862  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Off-balance accounts

    7,346       7,870,923       33,601       318,911       885       144,817       406       518,854       371,670       9,225,175  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 36 -


(3)

Liquidity risk

Liquidity risk refers to the risk that the Bank may encounter difficulties in meeting obligations from its financial liabilities.

 

  1)

Liquidity risk management

Liquidity risk management is to prevent potential cash shortage as a result of mismatching the use of funds (assets) and sources of funds (liabilities) or unexpected cash outflows. The financial liabilities that are relevant to liquidity risk are incorporated within the scope of risk management. Derivative instruments are excluded from those financial liabilities as they reflect expected cash flows for a predetermined period.

Assets and liabilities are grouped by account under Asset Liability Management (“ALM”) in accordance with the characteristics of the account. The Bank manages liquidity risk by identifying maturity gap, and then gap ratio through performing various cash flows analysis (i.e., based on remaining maturity and contract period, etc.), while maintaining the gap ratio at or below the target limit.

 

  2)

Maturity analysis of non-derivative financial liabilities

 

  a)

Cash flows of principals and interests by remaining contractual maturities of non-derivative financial liabilities are as follows (Unit: Korean Won in millions):

 

     December 31, 2018  
     Within 3
months
     4 to 6
months
     7 to 9
months
     10 to 12
months
     1 to 5
years
     Over
5 years
     Total  

Financial liabilities at FVTPL

     191,825        —          —          —          —          —          191,825  

Deposits due to customers

     139,983,251        32,838,781        20,969,174        40,220,788        5,701,940        509,189        240,223,123  

Borrowings

     4,979,142        2,682,745        1,775,656        1,512,857        2,917,566        495,516        14,363,482  

Debentures

     1,723,882        1,972,348        1,693,796        1,839,700        13,675,096        2,387,717        23,292,539  

Other financial liabilities

     14,057,046        —          —          —          —          2,182,602        16,239,648  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     160,935,146        37,493,874        24,438,626        43,573,345        22,294,602        5,575,024        294,310,617  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2017  
     Within 3
months
     4 to 6
months
     7 to 9
months
     10 to 12
months
     1 to 5
years
     Over
5 years
     Total  

Financial liabilities at FVTPL

     160,057        154,475        —          —          —          —          314,532  

Deposits due to customers

     143,085,964        28,776,407        17,749,883        29,951,466        6,723,926        644,187        226,931,833  

Borrowings

     5,339,315        1,700,358        1,488,848        1,132,055        3,799,707        479,140        13,939,423  

Debentures

     1,570,513        2,069,703        678,054        1,512,183        14,614,016        2,843,612        23,288,081  

Other financial liabilities

     6,531,004        —          —          —          —          2,704,197        9,235,201  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     156,686,853        32,700,943        19,916,785        32,595,704        25,137,649        6,671,136        273,709,070  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

- 37 -


  b)

Cash flows of principals and interests by expected maturities of non-derivative financial liabilities are as follows (Unit: Korean Won in millions):

 

     December 31, 2018  
     Within 3
months
     4 to 6
months
     7 to 9
months
     10 to 12
months
     1 to 5
years
     Over
5 years
     Total  

Financial liabilities at FVTPL

     191,825        —          —          —          —          —          191,825  

Deposits due to customers

     158,276,249        36,903,728        19,594,060        21,300,055        3,549,305        965        239,624,362  

Borrowings

     4,979,142        2,682,745        1,775,656        1,512,857        2,917,566        495,516        14,363,482  

Debentures

     1,723,882        1,972,348        1,693,796        1,839,700        13,675,096        2,387,717        23,292,539  

Other financial liabilities

     14,057,046        —          —          —          —          2,182,602        16,239,648  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     179,228,144        41,558,821        23,063,512        24,652,612        20,141,967        5,066,800        293,711,856  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2017  
     Within 3
months
     4 to 6
months
     7 to 9
months
     10 to 12
months
     1 to 5
years
     Over
5 years
     Total  

Financial liabilities at FVTPL

     160,057        154,475        —          —          —          —          314,532  

Deposits due to customers

     154,216,425        30,515,457        16,246,338        19,479,809        5,913,949        183,986        226,555,964  

Borrowings

     5,339,315        1,700,358        1,488,848        1,132,055        3,799,707        479,140        13,939,423  

Debentures

     1,570,513        2,069,703        678,054        1,512,183        14,614,016        2,843,612        23,288,081  

Other financial liabilities

     6,531,004        —          —          —          —          2,704,197        9,235,201  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     167,817,314        34,439,993        18,413,240        22,124,047        24,327,672        6,210,935        273,333,201  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  3)

Maturity analysis of derivative financial liabilities

Derivatives held for trading purposes are not managed in accordance with their contractual maturity since the Bank holds such financial instruments with the purpose of disposing or redemption before their maturity. As such, those derivatives are incorporated as “Within 3 months” in the table below.

Derivatives held for hedging purposes are estimated by offsetting cash inflows and cash outflows.

The cash flow by the maturity of derivative financial liabilities as of December 31, 2018 and 2017, is as follows (Unit: Korean Won in millions):

 

     Remaining maturity  
     Within 3
months
     4 to 6
months
     7 to 9
months
     10 to 12
months
     1 to 5
years
     Over 5
years
     Total  

December 31, 2018

     2,087,548        —          —          —          17,654        —          2,105,202  

December 31, 2017

     3,139,218        —          —          381        11,722        —          3,151,321  

 

  4)

Maturity analysis of off-balance accounts (Guarantees and loan commitments)

The Bank provides guarantees on behalf of customers. A financial guarantee represents an irrevocable undertaking that the Bank should meet customer’s obligations to third parties if the customer fails to do so. Under a loan commitment, the Bank agrees to make funds available to a customer in the future. Commitments to lend include commercial standby facilities and credit lines, liquidity facilities to commercial paper conduits and utilized overdraft facilities. The maximum limit to be paid by the Bank in accordance with guarantees and loan commitment only applies to principal amounts. There are contractual maturities for financial guarantees, such as guarantees for debentures issued or loans, loan commitments, and other guarantees, however, under the terms of the guarantees and loan commitments, funds should be paid upon demand from the counterparty. Details of off-balance accounts are as follows (Unit: Korean Won in millions):

 

     December 31, 2018      December 31, 2017  

Guarantees

     13,990,450        13,589,728  

Loan commitments

     65,012,748        50,214,855  

 

- 38 -


(4)

Operational risk

The Bank defines the operational risk that could cause a negative effect on capital resulting from inadequate internal process, labor work and systematic problem or external factors.

 

  1)

Operational risk management

The Bank has been running the operational risk management system under Basel II. The Bank developed Advanced Measurement Approaches (“AMA”) to quantify required capital for operational risk. This system is used for reinforcement in foreign competitions, reducing the amount of risk capitals, managing the risk and precaution for any unexpected occasions. This system has been tested by an independent third party, and this system is approved by the Financial Supervisory Service.

 

  2)

Operational risk measurement

To quantify the required capital for operational risk, the Bank applies AMA using internal and external loss data, business environment and internal control factors, and scenario analysis. For the operational risk management for its subsidiaries, the Bank adopted the Basic Indicator Approach.

 

(5)

Capital management

The Bank complies with the standard of capital adequacy provided by financial regulatory authorities. The capital adequacy standard is based on Basel III published by Basel Committee on Banking Supervision in Bank for International Settlements in 2010 and was implemented in Korea in December 2013. The capital adequacy ratio is calculated by dividing own capital by asset (weighted with a risk premium – risk weighted assets) based on the consolidated financial statements of the Group.

According to the above regulations, the Bank is required to meet the following new minimum requirements: Common Equity Tier 1 capital ratio of 7.13% and 6.25%, Tier capital 1 ratio of 8.63% and 7.75% and a minimum total capital ratio of 10.63% and 9.75% as of December 31, 2018 and 2017, respectively.

Details of the Group’s capital adequacy ratio as of December 31, 2018 and 2017, and are as follows (Unit: Korean Won in millions):

 

     December 31, 2018     December 31, 2017  

Tier 1 capital

     17,275,539       16,074,987  

Other Tier 1 capital

     3,147,680       3,041,664  

Tier 2 capital

     3,827,573       3,486,555  
  

 

 

   

 

 

 

Total risk-adjusted capital

     24,250,792       22,603,206  
  

 

 

   

 

 

 

Risk-weighted assets for credit risk

     142,626,069       134,767,711  

Risk-weighted assets for market risk

     2,372,451       2,316,938  

Risk-weighted assets for operational risk

     9,972,430       9,677,559  
  

 

 

   

 

 

 

Total risk-weighted assets

     154,970,950       146,762,208  
  

 

 

   

 

 

 

Common Equity Tier 1 ratio

     11.15     10.95
  

 

 

   

 

 

 

Tier 1 capital ratio

     13.18     13.03
  

 

 

   

 

 

 

Total capital ratio

     15.65     15.40
  

 

 

   

 

 

 

 

- 39 -


5.

OPERATING SEGMENTS

In evaluating the results of the Bank and allocating resources, the Bank’s Chief Operation Decision Maker (“CODM”) utilizes the information per type of customers. This financial information of the segments is regularly reviewed by the CODM to make decisions about resources to be allocated to each segment and evaluate its performance.

 

(1)

Segment by type of customers

The Bank’s reporting segments comprise the following customers: consumer banking, corporate banking, investment banking, capital market and headquarters and others. The reportable segments are classified based on the target customers for whom the service is being provided:

 

   

Consumer banking: Loans/deposits and financial services for retail and individual consumers, etc.

 

   

Corporate banking: Loans/deposits and export/import, financial services for corporations, etc.

 

   

Investment banking: Domestic/foreign investment, structured finance, M&A, equity & fund investment-related business, venture advisory related tasks, real estate SOC development practices, etc.

 

   

Capital market: Fund management, investment securities and derivatives business, etc.

 

   

Headquarters and others: Segments that do not belong to above operating segments

The details of operating income by each segment are as follows (Unit: Korean Won in millions):

 

     For the year ended December 31, 2018  
     Consumer
banking
    Corporate
banking
    Investment
banking
    Capital
market
    Headquarters
and others
    Sub-total     Adjustments
(*)
    Total  

Net interest income(expense)

                

Interest income

     3,529,645       3,409,835       152,273       8,945       896,479       7,997,177       334,790       8,331,967  

Interest expense

     (1,021,639     (2,168,000     (150     —         (685,647     (3,875,436     271,187       (3,604,249

Intersegment

     (634,110     833,224       (163,962     25,963       (61,115     —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     1,873,896       2,075,059       (11,839     34,908       149,717       4,121,741       605,977       4,727,718  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net non-interest income(expense)

                

Non-interest income

     678,360       721,096       230,357       7,020,740       475,258       9,125,811       (7,648,476     1,477,335  

Non-interest expense

     (143,704     (290,347     (53,671     (6,964,671     (165,937     (7,618,330     7,077,127       (541,203

Intersegment

     132,690       70,016       —         —         (202,706     —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     667,346       500,765       176,686       56,069       106,615       1,507,481       (571,349     936,132  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income(expense)

                

General and administrative expense

     (1,865,933     (868,608     (14,318     (18,452     (422,025     (3,189,336     —         (3,189,336

Reversal of allowance for credit loss and impairment losses due to credit loss

     (127,220     (61,064     62,454       (16,861     118,496       (24,195     (34,628     (58,823
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (1,993,153     (929,672     48,136       (35,313     (303,529     (3,213,531     (34,628     (3,248,159
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     548,089       1,646,152       212,983       55,664       (47,197     2,415,691       —         2,415,691  

Non-operating income (expense)

     (20,208     900       32,738       —         56,510       69,940       —         69,940  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income before income tax expense

     527,881       1,647,052       245,721       55,664       9,313       2,485,631       —         2,485,631  

Income tax expense

     (145,167     (445,619     (67,573     (15,308     (1,060     (674,727     —         (674,727
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     382,714       1,201,433       178,148       40,356       8,253       1,810,904       —         1,810,904  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(*)

These adjustments are performed in order to present intersegment profit or loss adjustments based on managerial accounting as profit or loss in accordance with K-IFRS.

 

- 40 -


     For the year ended December 31, 2017  
     Consumer
banking
    Corporate
banking
    Investment
banking
    Capital
market
    Headquarters
and others
    Sub-total     Adjustments
(*)
    Total  

Net interest income

                

Interest income

     3,149,625       2,964,813       148,500       18,834       786,889       7,068,661       317,060       7,385,721  

Interest expense

     (955,836     (1,681,652     (243     —         (624,394     (3,262,125     267,007       (2,995,118

Intersegment

     (490,850     512,216       (136,133     18,049       96,718       —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     1,702,939       1,795,377       12,124       36,883       259,213       3,806,536       584,067       4,390,603  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest income(expense)

                

Non-interest income

     802,387       680,778       366,523       9,548,399       1,944,670       13,342,757       (12,009,317     1,333,440  

Non-interest expense

     (253,961     (170,268     (214,355     (9,478,728     (1,703,600     (11,820,912     11,569,356       (251,556

Intersegment

     101,524       60,826       —         —         (162,350     —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     649,950       571,336       152,168       69,671       78,720       1,521,845       (439,961     1,081,884  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income(expense)

                

General and administrative expense

     (1,808,974     (832,429     (12,881     (16,567     (457,874     (3,128,725     —         (3,128,725

Reversal of allowance for credit loss and impairment losses due to credit loss

     (97,587     (316,859     (50,954     31,229       25,073       (409,098     (144,106     (553,204
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (1,906,561     (1,149,288     (63,835     14,662       (432,801     (3,537,823     (144,106     (3,681,929
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     446,328       1,217,425       100,457       121,216       (94,868     1,790,558       —         1,790,558  

Non-operating income (expense)

     (98,510     (3,153     39,350       —         (108,023     (170,336     —         (170,336
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income before income tax expense

     347,818       1,214,272       139,807       121,216       (202,891