20-F 1 d712932d20f.htm FORM 20-F FORM 20-F
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As filed with the Securities and Exchange Commission on April 29, 2014

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

(Mark One)

 

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

OR

 

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

For the fiscal year ended December 31, 2013

OR

 

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

For the transition period from             to             .

OR

 

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

Date of event requiring this shell company report                .

Commission file number 000-53445

KB Financial Group Inc.

(Exact name of Registrant as specified in its charter)

KB Financial Group Inc.

(Translation of Registrant’s name into English)

The Republic of Korea

(Jurisdiction of incorporation or organization)

84, Namdaemoon-ro, Jung-gu, Seoul 100-703, Korea

(Address of principal executive offices)

Kyu Sul Choi

84, Namdaemoon-ro, Jung-gu, Seoul 100-703, Korea

Telephone No.: +82-2-2073-2844

Facsimile No.: +82-2-2073-2848

(Name, telephone, e-mail and/or facsimile number and address of company contact person)

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

 

Title of each class

  

Name of each exchange on which registered

American Depositary Shares, each representing
one share of Common Stock
   New York Stock Exchange
Common Stock, par value ₩5,000 per share    New York Stock Exchange*

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

None

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

None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

386,351,693 shares of Common Stock, par value 5,000 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  x Yes  ¨ No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.  ¨ Yes  x No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x Yes  ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  ¨ Yes  ¨ No

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

  x    Large accelerated filer                ¨    Accelerated filer                ¨    Non-accelerated filer

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

 

¨    U.S. GAAP   

  x     International Financial Reporting Standards as issued

by the International Accounting Standards Board

   ¨    Other

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.  ¨ Item 17  ¨ Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ¨ Yes  x No

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

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  ¨ Yes  ¨ No

* Not for trading, but only in connection with the registration of the American Depositary Shares.

 

 

 


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TABLE OF CONTENTS

 

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

     1   

FORWARD-LOOKING STATEMENTS

     2   

Item 1.

   IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS      3   

Item 2.

   OFFER STATISTICS AND EXPECTED TIMETABLE      3   

Item 3.

   KEY INFORMATION      3   
   Item 3.A.    Selected Financial Data      3   
   Item 3.B.    Capitalization and Indebtedness      11   
   Item 3.C.    Reasons for the Offer and Use of Proceeds      11   
   Item 3.D.    Risk Factors      11   

Item 4.

   INFORMATION ON THE COMPANY      32   
   Item 4.A.    History and Development of the Company      32   
   Item 4.B.    Business Overview      35   
   Item 4.C.    Organizational Structure      110   
   Item 4.D.    Property, Plants and Equipment      112   
Item 4A.    UNRESOLVED STAFF COMMENTS      112   

Item 5.

   OPERATING AND FINANCIAL REVIEW AND PROSPECTS      112   
   Item 5.A.    Operating Results      112   
   Item 5.B.    Liquidity and Capital Resources      144   
   Item 5.C.    Research and Development, Patents and Licenses, etc.      150   
   Item 5.D.    Trend Information      150   
   Item 5.E.    Off-Balance Sheet Arrangements      150   
   Item 5.F.    Tabular Disclosure of Contractual Obligations      150   
   Item 5.G.    Safe Harbor      150   

Item 6.

   DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES      150   
   Item 6.A.    Directors and Senior Management      150   
   Item 6.B.    Compensation      154   
   Item 6.C.    Board Practices      155   
   Item 6.D.    Employees      157   
   Item 6.E.    Share Ownership      158   

Item 7.

   MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS      160   
   Item 7.A.    Major Shareholders      160   
   Item 7.B.    Related Party Transactions      160   
   Item 7.C.    Interests of Experts and Counsel      161   

Item 8.

   FINANCIAL INFORMATION      161   
   Item 8.A.    Consolidated Statements and Other Financial Information      161   
   Item 8.B.    Significant Changes      164   

 

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Item 9.

   THE OFFER AND LISTING      164   
   Item 9.A.    Offering and Listing Details      164   
   Item 9.B.    Plan of Distribution      165   
  

Item 9.C.

   Markets      165   
  

Item 9.D.

   Selling Shareholders      172   
  

Item 9.E.

   Dilution      172   
  

Item 9.F.

   Expenses of the Issue      172   

Item 10.

   ADDITIONAL INFORMATION      172   
  

Item 10.A.

   Share Capital      172   
  

Item 10.B.

   Memorandum and Articles of Association      172   
  

Item 10.C.

   Material Contracts      178   
  

Item 10.D.

   Exchange Controls      178   
  

Item 10.E.

   Taxation      179   
  

Item 10.F.

   Dividends and Paying Agents      184   
  

Item 10.G.

   Statements by Experts      184   
  

Item 10.H.

   Documents on Display      184   
  

Item 10.I.

   Subsidiary Information      185   

Item 11.

   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      185   

Item 12.

   DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES      206   

Item 13.

   DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES      207   

Item 14.

   MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS      207   

Item 15.

   CONTROLS AND PROCEDURES      207   

Item 16.

   [RESERVED]      208   
Item 16A.    AUDIT COMMITTEE FINANCIAL EXPERT      208   
Item 16B.    CODE OF ETHICS      208   
Item 16C.    PRINCIPAL ACCOUNTANT FEES AND SERVICES      209   
Item 16D.    EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES      209   
Item 16E.    PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS      210   
Item 16F.    CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT      210   
Item 16G.    CORPORATE GOVERNANCE      210   
Item 16H.    MINE SAFETY DISCLOSURE      211   

Item 17.

   FINANCIAL STATEMENTS      211   

Item 18.

   FINANCIAL STATEMENTS      211   

Item 19.

   EXHIBITS      212   

 

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PRESENTATION OF FINANCIAL AND OTHER INFORMATION

The financial statements included in this annual report are prepared in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or IASB. As such, we make an explicit and unreserved statement of compliance with IFRS as issued by the IASB with respect to our consolidated financial statements as of January 1, 2012, December 31, 2012 and 2013 and for the years ended December 31, 2011, 2012 and 2013 included in this annual report. Unless indicated otherwise, the financial information in this annual report (i) as of and for the years ended December 31, 2010, 2011, 2012 and 2013 has been prepared in accordance with IFRS as issued by the IASB, and (ii) as of and for the year ended December 31, 2009 has been prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP, which is not comparable to information prepared in accordance with IFRS.

In accordance with rule amendments adopted by the U.S. Securities and Exchange Commission which became effective on March 4, 2008, we are not required to provide a reconciliation to U.S. GAAP.

Unless expressly stated otherwise, all financial data included in this annual report are presented on a consolidated basis.

In this annual report:

 

   

references to “we,” “us” or “KB Financial Group” are to KB Financial Group Inc. and, unless the context otherwise requires, its subsidiaries;

 

   

references to “Korea” are to the Republic of Korea;

 

   

references to the “government” are to the government of the Republic of Korea;

 

   

references to “Won” or “₩” are to the currency of Korea; and

 

   

references to “U.S. dollars,” “$” or “US$” are to United States dollars.

Discrepancies between totals and the sums of the amounts contained in any table may be a result of rounding.

For your convenience, this annual report contains translations of Won amounts into U.S. dollars at the noon buying rate of the Federal Reserve Bank of New York for Won in effect on December 31, 2013, which was ₩1,055.3 = US$1.00.

 

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FORWARD-LOOKING STATEMENTS

The U.S. Securities and Exchange Commission encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This annual report contains forward-looking statements.

Words and phrases such as “aim,” “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “estimate,” “expect,” “future,” “goal,” “intend,” “may,” “objective,” “plan,” “positioned,” “predict,” “project,” “risk,” “seek to,” “shall,” “should,” “will likely result,” “will pursue,” “plan” and words and terms of similar substance used in connection with any discussion of future operating or financial performance or our expectations, plans, projections or business prospects identify forward-looking statements. In particular, the statements under the headings “Item 3.D. Risk Factors,” “Item 5. Operating and Financial Review and Prospects” and “Item 4.B. Business Overview” regarding our financial condition and other future events or prospects are forward-looking statements. All forward-looking statements are management’s present expectations of future events and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.

In addition to the risks related to our business discussed under “Item 3.D. Risk Factors,” other factors could cause actual results to differ materially from those described in the forward-looking statements. These factors include, but are not limited to:

 

   

our ability to successfully implement our strategy;

 

   

future levels of non-performing loans;

 

   

our growth and expansion;

 

   

the adequacy of allowances for credit and investment losses;

 

   

technological changes;

 

   

interest rates;

 

   

investment income;

 

   

availability of funding and liquidity;

 

   

cash flow projections;

 

   

our exposure to market risks; and

 

   

adverse market and regulatory conditions.

By their nature, certain disclosures relating to these and other risks are only estimates and could be materially different from what actually occurs in the future. As a result, actual future gains, losses or impact on our income or results of operations could materially differ from those that have been estimated. For example, revenues could decrease, costs could increase, capital costs could increase, capital investment could be delayed and anticipated improvements in performance might not be fully realized.

In addition, other factors that could cause actual results to differ materially from those estimated by the forward-looking statements contained in this annual report could include, but are not limited to:

 

   

general economic and political conditions in Korea or other countries that have an impact on our business activities or investments;

 

   

the monetary and interest rate policies of Korea;

 

   

inflation or deflation;

 

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unanticipated volatility in interest rates;

 

   

foreign exchange rates;

 

   

prices and yields of equity and debt securities;

 

   

the performance of the financial markets in Korea and globally;

 

   

changes in domestic and foreign laws, regulations and taxes;

 

   

changes in competition and the pricing environments in Korea; and

 

   

regional or general changes in asset valuations.

For further discussion of the factors that could cause actual results to differ, see the discussion under “Item 3.D. Risk Factors” contained in this annual report. We caution you not to place undue reliance on the forward-looking statements, which speak only as of the date of this annual report. Except as required by law, we are not under any obligation, and expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.

All subsequent forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this annual report.

 

Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

 

Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

 

Item 3. KEY INFORMATION

 

Item 3.A. Selected Financial Data

The selected consolidated financial and operating data set forth below as of and for the years ended December 31, 2010, 2011, 2012 and 2013 have been derived from our audited consolidated financial statements, which have been prepared in accordance with IFRS as issued by the IASB. Our consolidated financial statements as of and for the years ended December 31, 2010, 2011, 2012 and 2013 have been audited by independent registered public accounting firm Samil PricewaterhouseCoopers.

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

 

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Consolidated statements of comprehensive income data

 

    Year Ended December 31,  
    2010(1)     2011(1)     2012(1) (2)     2013(1) (2)     2013(3)  
    (in billions of Won, except common share data)     (in millions of US$,
except common
share data)
 

Interest income

      13,052          13,956          14,210          12,357      US$     11,710   

Interest expense

    (6,878     (6,852     (7,172     (5,834     (5,529
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

    6,174        7,104        7,038        6,523        6,181   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fee and commission income

    2,482        2,830        2,754        2,657        2,518   

Fee and commission expense

    (777     (1,035     (1,187     (1,178     (1,116
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net fee and commission income

    1,705        1,795        1,567        1,479        1,402   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net gains on financial assets and liabilities at fair value through profit or loss

    815        1,036        812        757        717   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net other operating income (expenses)

    (1,068     (1,092     (1,532     (1,305     (1,236
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

General and administrative expenses

    (4,380     (3,887     (3,846     (3,984     (3,775
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit before provision for credit losses

    3,246        4,956        4,039        3,470        3,289   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision for credit losses

    (2,871     (1,513     (1,607     (1,443     (1,368
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net operating profit

    375        3,443        2,432        2,027        1,921   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Share of profit (loss) of associates and joint ventures

    (211     5        (15     (199     (189
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net other non-operating income (expense)

    (28     (142     (118     (12     (12
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net non-operating profit (loss)

    (239     (137     (133     (211     (201
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit before income tax

    136        3,306        2,299        1,816        1,720   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tax income (expense)

    75        (845     (559     (552     (522
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit for the year

  211      2,461      1,740      1,264      US$ 1,198   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Items that will not be reclassified to profit or loss:

         

Actuarial gains (losses) on post defined benefit pension plans

    9        (32     (30     41        39   

Items that may be reclassified subsequently to profit or loss:

         

Exchange differences on translating foreign operations

    (7     6        (26     (2     (2

Change in value of financial investments

    108        (240     246        (4     (4

Shares of other comprehensive loss of associates and joint ventures

    (2     (1     (44     (10     (9

Cash flow hedges

    —          (1     (1     2        1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) for the year, net of tax

    108        (268     145        27        25   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income for the year

  319      2,193      1,885      1,291      US$ 1,223   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit attributable to:

         

Stockholders

  138      2,406      1,731      1,261      US$ 1,195   

Non-controlling interests

    73        55        9        3        3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  211      2,461      1,740      1,264      US$ 1,198   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income attributable to:

         

Stockholders

  226      2,134      1,865      1,302      US$ 1,233   

Non-controlling interests

    93        59        20        (11     (10
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  319      2,193      1,885      1,291      US$ 1,223   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share

         

Basic earnings per share

  401      6,548      4,480      3,263      US$ 3.09   

Diluted earnings per share

    401        6,533        4,467        3,249        3.08   

 

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(1) 

Pursuant to amendments to International Accounting Standards 19, or IAS 19, Employee Benefits, which are effective beginning in 2013, our consolidated financial statements as of and for the year ended December 31, 2013 reflect changes in the methodology for recognition and measurement of actuarial gains and losses and expected returns and service costs relating to our employee pension plans. Our consolidated financial statements as of and for the years ended December 31, 2011 and 2012 have been restated to retroactively apply such changes. See Note 2.1 of the notes to our consolidated financial statements included elsewhere in this annual report. Amounts for 2011 and 2012 reflect such restatement, and amounts for 2010 have been correspondingly restated.

(2) 

Pursuant to the adoption of IFRS 10, Consolidated Financial Statements, which is effective beginning in 2013, our consolidated financial statements as of and for the year ended December 31, 2013 include trust accounts for which we guarantee only the repayment of principal, as well as certain other entities, which were not previously subject to consolidation, while excluding certain other entities that were previously consolidated. Our consolidated financial statements as of and for the year ended December 31, 2012 (but not as of and for the year ended December 31, 2011) have been restated to retroactively apply this change. See Note 2.1 of the notes to our consolidated financial statements included elsewhere in this annual report. Amounts for 2012 reflect such restatement, while amounts for 2010 and 2011 have not been correspondingly restated.

(3) 

Won amounts are expressed in U.S. dollars at the rate of ₩1,055.3 to US$1.00, the noon buying rate in effect on December 31, 2013 as quoted by the Federal Reserve Bank of New York in the United States.

Consolidated statements of financial position data

 

    Year Ended December 31,  
    2010(1)     2011(1)     2012(1) (2)     2013(1) (2)     2013(3)  
    (in billions of Won)     (in millions of US$)  

Assets

   

Cash and due from financial institutions

  6,830      9,178      10,593      14,793      US$ 14,018   

Financial assets at fair value through profit or loss

    4,014        6,326        9,560        9,329        8,840   

Derivative financial assets

    2,595        2,449        2,091        1,819        1,724   

Loans

    197,621        212,107        213,645        219,001        207,535   

Financial investments

    36,190        35,432        36,467        34,849        33,024   

Investments in associates and joint ventures

    723        892        935        755        716   

Property and equipment

    3,150        3,186        3,100        3,061        2,901   

Investment property

    53        52        53        166        158   

Intangible assets

    505        468        493        443        420   

Deferred income tax assets

    4        22        18        16        15   

Assets held for sale

    9        10        35        38        36   

Other assets

    7,077        7,479        8,761        7,568        7,172   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

      258,771          277,601          285,751          291,838      US$     276,559   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

         

Financial liabilities at fair value through profit or loss

  1,295      1,388      1,851      1,115      US$ 1,057   

Derivative financial liabilities

    2,236        2,059        2,055        1,795        1,701   

Deposits

    179,862        190,337        197,346        200,882        190,364   

Debts

    11,745        16,824        15,965        14,101        13,363   

Debentures

    29,107        27,070        24,270        27,040        25,624   

Provisions

    1,020        798        670        678        643   

Defined benefit liabilities

    125        128        84        64        61   

Current income tax liabilities

    30        589        265        211        200   

Deferred income tax liabilities

    284        221        154        62        59   

Other liabilities

    13,401        15,087        18,328        20,237        19,177   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

  239,105      254,501      260,988      266,185      US$ 252,249   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    Year Ended December 31,  
    2010(1)     2011(1)     2012(1) (2)     2013(1) (2)     2013(3)  
    (in billions of Won)     (in millions of US$)  

Total Equity

         

Capital stock

  1,932      1,932      1,932      1,932      US$ 1,831   

Capital surplus

    15,990        15,842        15,840        15,855        15,024   

Accumulated other comprehensive income

    440        168        295        336        319   

Retained earnings

    2,612        4,976        6,501        7,530        7,136   

Treasury shares

    (2,477     —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity attributable to stockholders

    18,497        22,918        24,568        25,653        24,310   

Non-controlling interests

    1,169        182        195        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

  19,666      23,100      24,763      25,653      US$ 24,310   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

  258,771      277,601      285,751      291,838      US$ 276,559   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Pursuant to amendments to International Accounting Standards 19, or IAS 19, Employee Benefits, which are effective beginning in 2013, our consolidated financial statements as of and for the year ended December 31, 2013 reflect changes in the methodology for recognition and measurement of actuarial gains and losses and expected returns and service costs relating to our employee pension plans. Our consolidated financial statements as of and for the years ended December 31, 2011 and 2012 have been restated to retroactively apply such changes. See Note 2.1 of the notes to our consolidated financial statements included elsewhere in this annual report. Amounts as of December 31, 2011 and 2012 reflect such restatement, and amounts as of December 31, 2010 have been correspondingly restated.

(2) 

Pursuant to the adoption of IFRS 10, Consolidated Financial Statements, which is effective beginning in 2013, our consolidated financial statements as of and for the year ended December 31, 2013 include trust accounts for which we guarantee only the repayment of principal, as well as certain other entities, which were not previously subject to consolidation, while excluding certain other entities that were previously consolidated. Our consolidated financial statements as of and for the year ended December 31, 2012 (but not as of and for the year ended December 31, 2011) have been restated to retroactively apply this change. See Note 2.1 of the notes to our consolidated financial statements included elsewhere in this annual report. Amounts as of December 31, 2012 reflect such restatement, while amounts as of December 31, 2010 and 2011 have not been correspondingly restated.

(3) 

Won amounts are expressed in U.S. dollars at the rate of ₩1,055.3 to US$1.00, the noon buying rate in effect on December 31, 2013 as quoted by the Federal Reserve Bank of New York in the United States.

Profitability ratios and other data

 

     As of or for the year Ended December 31,  
     2010     2011     2012     2013  
     (Percentages)  

Profit (loss) attributable to stockholders as a percentage of:

        

Average total assets (1)

     0.05     0.88     0.60     0.44

Average stockholders’ equity (1)

     0.71        10.21        7.13        4.96   

Dividend payout ratio (2)

     29.71        11.55        13.40        15.31   

Net interest spread (3)

     2.37        2.64        2.48        2.31   

Net interest margin (4)

     2.58        2.88        2.71        2.51   

Efficiency ratio (5)

     57.44        43.96        48.78        53.45   

Cost-to-average assets ratio (6)

     1.64        1.41        1.33        1.37   

Won loans (gross) as a percentage of Won deposits

     107.56        107.97        106.37        107.12   

Total loans (gross) as a percentage of total deposits

     111.96        113.25        109.92        110.44   

 

(1) 

Average balances are based on daily balances for our banking, credit card and investment and securities operations and monthly or quarterly balances for our other operations.

(2) 

Represents the ratio of total dividends declared on common stock as a percentage of profit attributable to stockholders.

(3) 

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

(4) 

Represents the ratio of net interest income to average interest earning assets.

(5) 

Represents the ratio of general and administrative expenses to the sum of net interest income, net fee and commission income, net gain on financial assets and liabilities at fair value through profit or loss and net other operating income.

(6) 

Represents the ratio of general and administrative expenses to average total assets.

 

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Table of Contents

Capital ratios

 

     As of or for the year Ended December 31,  
             2011(1)                     2012(1)             2013  
     (Percentages)  

Consolidated capital adequacy ratio of KB Financial Group (2)

     13.00     13.90     15.38

Capital adequacy ratios of Kookmin Bank

      

Tier I capital adequacy ratio (3)

     10.30     10.87     12.61

Tier I common equity capital adequacy ratio (3)

     —          —          12.61   

Tier II capital adequacy ratio (3)

     3.25        3.53        2.81   

Average stockholders’ equity as a percentage of average total assets

     8.58        8.37        8.77   

 

(1) 

With effect from December 1, 2013, the Financial Services Commission adopted amended guidelines that implemented capital adequacy requirements in Korea based on Basel III. Capital adequacy ratios as of December 31, 2011 and 2012 were computed in accordance with previously applicable guidelines based on Basel I (for KB Financial Group) and Basel II (for Kookmin Bank) and therefore are not directly comparable to corresponding ratios as of December 31, 2013.

(2) 

Under applicable guidelines of the Financial Services Commission, we, as a bank holding company, are required to maintain a minimum consolidated capital adequacy ratio of 8%. See “Item 4.B. Business Overview—Supervision and Regulation—Principal Regulations Applicable to Financial Holding Companies—Capital Adequacy.”

(3) 

Kookmin Bank’s capital adequacy ratios are computed in accordance with the guidelines issued by the Financial Services Commission. See “Item 4.B. Business Overview—Supervision and Regulation—Principal Regulations Applicable to Banks—Capital Adequacy.”

Credit portfolio ratios and other data

 

     As of December 31,  
     2010     2011     2012     2013  
     (in billions of Won, except percentages)  

Total loans (1)

   201,377      215,555      216,914      221,862   

Total non-performing loans (2)

     1,612        1,180        1,606        1,421   

Other impaired loans not included in non-performing loans

     2,204        2,285        2,086        2,669   

Total of non-performing loans and other impaired loans

     3,816        3,465        3,692        4,090   

Total allowances for loan losses

     3,756        3,448        3,269        2,861   

Non-performing loans as a percentage of total loans

     0.80     0.55     0.74     0.64

Non-performing loans as a percentage of total assets

     0.62        0.43        0.56        0.49   

Total of non-performing loans and other impaired loans as a percentage of total loans

     1.89        1.61        1.70        1.84   

Allowances for loan losses as a percentage of total loans

     1.87        1.60        1.51        1.29   

 

(1) 

Before deduction of allowances for loan losses.

(2) 

Non-performing loans are defined as those loans, including corporate, retail and other loans, which are past due by 90 days or more.

 

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Selected Statistical Information

Average Balance Sheets and Related Interest

The following table shows our average balances and interest rates for the past three years:

 

    Year Ended December 31,  
    2011     2012     2013  
    Average
Balance (1)
    Interest
Income  (2)(3)
    Average
Yield
    Average
Balance (1)
    Interest
Income  (2)(3)
    Average
Yield
    Average
Balance (1)
    Interest
Income  (2)(3)
    Average
Yield
 
    (in billions of Won, except percentages)  

Assets

                 

Cash and interest earning deposits in other banks

  2,299      75        3.26   4,808      160        3.33   5,905      146        2.47

Financial investment (debt securities) (4)

    32,655        1,469        4.50        33,382        1,426        4.27        33,339        1,269        3.81   

Loans:

                 

Corporate

    94,486        5,132        5.43        102,773        5,328        5.18        100,614        4,526        4.50   

Mortgage

    43,790        2,172        4.96        44,444        2,161        4.86        44,514        1,826        4.10   

Home equity

    29,399        1,513        5.15        30,170        1,535        5.09        30,275        1,287        4.25   

Other consumer

    29,179        2,176        7.46        29,721        2,163        7.28        30,536        1,974        6.46   

Credit cards (5)

    12,378        1,342        10.84        12,078        1,345        11.14        11,611        1,242        10.70   

Foreign

    2,441        77        3.15        2,744        92        3.35        2,851        87        3.05   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Loans (total)

    211,673        12,412        5.86        221,930        12,624        5.69        220,401        10,942        4.96   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total average interest earning assets

  246,627      13,956        5.66   260,120      14,210        5.46   259,645      12,357        4.76
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Cash and due from banks

    7,267        —          —          7,622        —          —          7,688        —          —     

Financial assets at fair value through profit or loss:

                 

Debt securities (3)

    5,056        —          —          8,744        —          —          8,091        —          —     

Equity securities

    674        —          —          1,026        —          —          1,280        —          —     

Other

    20        —          —          36        —          —          42        —          —     
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Financial assets at fair value through profit or loss (total)

    5,750        —          —          9,806        —          —          9,413        —          —     

Financial investment (equity securities)

    3,687        —          —          2,444        —          —          2,671        —          —     

Investment in associates

    764        —          —          934        —          —          882        —          —     

Derivative financial assets

    2,420        —          —          2,040        —          —          1,760        —          —     

Premises and equipment

    3,224        —          —          3,212        —          —          3,191        —          —     

Intangible assets

    477        —          —          539        —          —          475        —          —     

Allowances for loan losses

    (4,227     —          —          (4,159     —          —          (4,108     —          —     

Other non-interest earning assets

    8,712        —          —          7,173        —          —          8,230        —          —     
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total average non-interest earning assets

    28,074        —          —          29,611        —          —          30,202        —          —     
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total average assets

  274,701      13,956        5.08   289,731      14,210        4.90   289,847      12,357        4.26
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

 

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Table of Contents
    Year Ended December 31,  
    2011     2012     2013  
    Average
Balance  (1)
    Interest
Expense
    Average
Cost
    Average
Balance  (1)
    Interest
Expense
    Average
Cost
    Average
Balance  (1)
    Interest
Expense
    Average
Cost
 
    (in billions of Won, except percentages)  

Liabilities

                 

Deposits:

                 

Demand deposits

  53,824      314        0.58   56,154      336        0.60   60,894      285        0.47

Time deposits

    124,713        4,563        3.66        136,617        5,047        3.69        130,286        3,940        3.02   

Certificates of deposit

    1,746        68        3.89        1,735        67        3.86        1,780        54        3.03   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Deposits (total)

    180,283        4,945        2.74        194,506        5,450        2.80        192,960        4,279        2.22   

Debts

    18,475        399        2.16        21,773        460        2.11        20,173        365        1.81   

Debentures

    28,400        1,508        5.31        24,552        1,262        5.14        25,319        1,190        4.70   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total average interest bearing liabilities

  227,158      6,852        3.02   240,831      7,172        2.98   238,452      5,834        2.45
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Non-interest bearing demand deposits

    3,249        —          —          3,075        —          —          3,252        —          —     

Derivative financial liabilities

    2,064        —          —          1,899        —          —          1,789        —          —     

Financial liabilities at fair value through profit or loss

    1,847        —          —          1,724        —          —          1,697        —          —     

Other non-interest bearing liabilities

    16,093        —          —          17,770        —          —          19,157        —          —     
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total average non-interest bearing liabilities

    23,253        —          —          24,468        —          —          25,895        —          —     
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total average liabilities

    250,411        6,852        2.74        265,299        7,172        2.70        264,347        5,834        2.21   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total equity

    24,290        —          —          24,432        —          —          25,500        —          —     
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total average liabilities and equity

  274,701      6,852        2.49   289,731      7,172        2.48   289,847      5,834        2.01
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

 

(1) 

Average balances are based on daily balances for our banking, credit card and investment and securities operations and monthly or quarterly balances for our other operations.

(2) 

We do not invest in any tax-exempt securities.

(3) 

Excludes interest income from debt securities at fair value through profit or loss.

(4) 

Information related to investment securities classified as available-for-sale has been computed using amortized cost, and therefore does not give effect to changes in fair value that are reflected as a component of total equity.

(5) 

Interest income from credit cards includes principally cash advance fees of ₩441 billion, ₩447 billion and ₩353 billion and interest on credit card loans of ₩484 billion, ₩457 billion and ₩435 billion for the years ended December 31, 2011, 2012 and 2013, respectively, but does not include interchange fees.

The following table presents our net interest spread, net interest margin, and asset liability ratio for the past three years:

 

     Year Ended December 31,  
     2011     2012     2013  
     (percentages)  

Net interest spread (1)

     2.64     2.48     2.31

Net interest margin (2)

     2.88        2.71        2.51   

Average asset liability ratio (3)

     108.57        108.01        108.89   

 

(1) 

The difference between the average rate of interest earned on interest earning assets and the average rate of interest paid on interest bearing liabilities.

(2) 

The ratio of net interest income to average interest earning assets.

(3) 

The ratio of average interest earning assets to average interest bearing liabilities.

 

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Table of Contents

Analysis of Changes in Net Interest Income—Volume and Rate Analysis

The following table provides an analysis of changes in interest income, interest expense and net interest income based on changes in volume and changes in rate for 2011 compared to 2012 and 2012 compared to 2013. Information is provided with respect to: (1) effects attributable to changes in volume (changes in volume multiplied by prior rate) and (2) effects attributable to changes in rate (changes in rate multiplied by prior volume). Changes attributable to the combined impact of changes in rate and volume have been allocated proportionately to the changes due to volume changes and changes due to rate changes.

 

     2012 vs. 2011
Increase/(Decrease)
Due to Change in
    2013 vs. 2012
Increase/(Decrease)
Due to Change in
 
     Volume     Rate     Total     Volume     Rate     Total  
     (in billions of Won)  

Interest earning assets

            

Cash and interest earning deposits in other banks

   83      2      85      32      (46   (14

Financial investment (debt securities)

     33        (76     (43     (2     (155     (157

Loans:

            

Corporate

     438        (242     196        (110     (692     (802

Mortgage

     33        (44     (11     3        (338     (335

Home equity

     40        (18     22        5        (253     (248

Other consumer

     40        (53     (13     58        (247     (189

Credit cards

     (33     36        3        (51     (52     (103

Foreign

     10        5        15        3        (8     (5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

   644      (390   254      (62   (1,791   (1,853
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2012 vs. 2011
Increase/(Decrease)
Due to Change in
    2013 vs. 2012
Increase/(Decrease)
Due to Change in
 
     Volume     Rate     Total     Volume     Rate     Total  
     (in billions of Won)  

Interest bearing liabilities

            

Deposits:

            

Demand deposits

   12      10      22      27      (78   (51

Time deposits

     446        38        484        (225     (882     (1,107

Certificates of deposit

     —          (1     (1     2        (15     (13

Debts

     70        (9     61        (32     (63     (95

Debentures

     (199     (47     (246     39        (111     (72
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     329        (9     320        (189     (1,149     (1,338
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net interest income

   315      (381   (66   127      (642   (515
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Exchange Rates

The table below sets forth, for the periods and dates indicated, information concerning the noon buying rate for Won, expressed in Won per one U.S. dollar. The “noon buying rate” is the rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York. Unless otherwise stated, translations of Won amounts into U.S. dollars in this annual report were made at the noon buying rate in effect on December 31, 2013, which was ₩1,055.3 to US$1.00. We do not intend to imply that the Won or U.S. dollar amounts referred to herein could have been or could be converted into U.S. dollars or Won, as the case may be, at any particular rate, or at all. On April 25, 2014, the noon buying rate was ₩1,041.0 = US$1.00.

 

     Won per U.S. dollar (noon buying rate)  
     Low      High      Average (1)      Period-End  

2009

     1,149.0         1,570.1         1,274.6         1,163.7   

2010

     1,104.0         1,253.2         1,155.7         1,130.6   

2011

     1,049.2         1,197.5         1,106.9         1,158.5   

2012

     1,063.2         1,185.0         1,126.2         1,063.2   

2013

     1,050.1         1,161.3         1,094.7         1,055.3   

October

     1,057.5         1,075.5         1,065.9         1,060.8   

November

     1,054.8         1,072.7         1,061.6         1,057.8   

December

     1,050.1         1,061.4         1,055.6         1,055.3   

2014 (through April 25)

     1,035.4         1,084.3         1,063.6         1,041.0   

January

     1,050.3         1,083.7         1,067.1         1,080.4   

February

     1,062.1         1,084.3         1,071.3         1,066.0   

March

     1,064.1         1,079.6         1,070.5         1,064.7   

April (through April 25)

     1,035.4         1,058.3         1,044.2         1,041.0   

 

Source:     Federal Reserve Bank of New York.

(1) 

The average of the daily noon buying rates of the Federal Reserve Bank in effect during the relevant period (or portion thereof).

 

Item 3.B. Capitalization and Indebtedness

Not applicable.

 

Item 3.C. Reasons for the Offer and Use of Proceeds

Not applicable.

 

Item 3.D. Risk Factors

Risks relating to our retail credit portfolio

Future changes in market conditions as well as other factors may lead to increases in delinquency levels of our retail loan portfolio.

For most of the recent past, consumer debt has increased significantly in Korea. Our portfolio of retail loans, including mortgage and home equity loans, grew from ₩98,996 billion as of December 31, 2010 to ₩103,855 billion as of December 31, 2011, although it decreased slightly to ₩103,432 billion as of December 31, 2012 but increased to ₩107,644 billion as of December 31, 2013. As of December 31, 2013, our retail loans represented 48.5% of our total lending. Within our retail loan portfolio, the outstanding balance of other consumer loans, which unlike mortgage or home equity loans are often unsecured and therefore tend to carry a higher credit risk, has increased from ₩27,281 billion as of December 31, 2010 to ₩28,275 billion as of December 31, 2011, ₩28,969 billion as of December 31, 2012 and ₩29,675 billion as of December 31, 2013; as a percentage of total

 

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outstanding retail loans, such balance has remained relatively stable at 27.6% as of December 31, 2010, 27.2% as of December 31, 2011, 28.0% as of December 31, 2012 and 27.6% as of December 31, 2013. The growth of our retail lending business, which generally offers higher margins than other lending activities, contributed significantly to our interest income and profitability in recent years.

The growth of our retail loan portfolio, together with adverse economic conditions in Korea and globally in recent years, may lead to further increases in delinquency levels and a deterioration in asset quality. The amount of our non-performing retail loans (defined as those that are past due by 90 days or more) increased from ₩642 billion as of December 31, 2011 to ₩762 billion as of December 31, 2012 but decreased to ₩546 billion as of December 31, 2013. Higher delinquencies in our retail loan portfolio will require us to increase our loan loss provisions and charge-offs, which in turn will adversely affect our financial condition and results of operations.

Our large exposure to consumer debt means that we are exposed to changes in economic conditions affecting Korean consumers. Accordingly, a rise in unemployment, an increase in interest rates, deterioration of the real estate market or difficulties in the Korean economy may have an adverse effect on Korean consumers, which could result in reduced growth and further deterioration in the credit quality of our retail loan portfolio. See “Risks relating to Korea—Unfavorable financial and economic developments in Korea may have an adverse effect on us.” In order to minimize our risk as a result of such exposure, we are continuing to strengthen our risk management processes, including further improving the retail lending process, upgrading our retail credit rating system, as well as strengthening the overall management of our portfolio. Despite our efforts, however, there is no assurance that we will be able to prevent significant credit quality deterioration in our retail loan portfolio.

In light of adverse conditions in the Korean economy affecting consumers, in March 2009, the Financial Services Commission requested Korean banks, including us, to establish a “pre-workout program,” including a credit counseling and recovery service, for retail borrowers with outstanding short-term debt. Under the pre-workout program, which has been in operation since April 2009, maturity extensions and/or interest reductions are provided for retail borrowers with total loans of ₩1.5 billion or less (consisting of no more than ₩500 million of unsecured loans and ₩1 billion of secured loans) who are in arrears on their payments for more than 30 days but less than 90 days or for retail borrowers with an annual income of ₩40 million or less who have been in arrears on their payments for more than 30 days on an aggregate basis for the 12 months prior to their application. While we believe that our participation in such pre-workout program has not had a material impact on the overall credit quality of our retail loan and credit card portfolio or on our results of operations and financial condition to date, our future participation in such government-led initiatives to provide financial support to retail borrowers may lead us to offer credit terms for such borrowers that we would not otherwise offer, in the absence of such initiatives, which may have an adverse effect on our results of operations and financial condition.

Our credit card operations may generate losses in the future, which could hurt our financial condition and results of operations.

With respect to our credit card portfolio, our delinquency ratio (which represents the ratio of amounts that are overdue by 30 days or more to total outstanding balances) increased from 1.0% as of December 31, 2010 to 1.5% as of December 31, 2011, then decreased to 1.3% as of December 31, 2012 but increased to 1.7% as of December 31, 2013. In line with industry practice, we have restructured a portion of delinquent credit card account balances (defined as balances overdue by 30 days or more) as loans. As of December 31, 2013, these restructured loans outstanding amounted to ₩50 billion. Because these loans are not treated as being delinquent at the time of conversion or for a period of time thereafter, our delinquency ratios may not fully reflect all delinquent amounts relating to our outstanding loans. Including all restructured loans, outstanding balances overdue by 30 days or more accounted for 2.1% of our credit card receivables (including credit card loans) as of December 31, 2013. Delinquencies may increase further in 2014 and in the future as a result of, among other things, adverse economic conditions in Korea and the inability of Korean consumers to manage increased household debt.

 

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Despite our continuing efforts to sustain and improve our credit card asset quality and performance, we may experience increased delinquencies or deterioration of the asset quality of our credit card portfolio, which would require us to increase our loan loss provisions and charge-offs and adversely affect our overall financial condition and results of operations.

In addition, in February 2014, the Financial Services Commission suspended the new credit card issuance and other related activities of our credit card subsidiary, KB Kookmin Card Co., Ltd., for three months from February to May 2014, in response to an incident involving the misappropriation of the personal information of a large number of its customers by an employee of an external credit information company in the first half of 2013. Specifically, during such suspension period, KB Kookmin Card will be prohibited from engaging in the following activities:

 

   

adding new subscribers for credit cards, prepaid cards and debit cards or issuing such types of cards (except as permitted by the chairman of the Financial Services Commission for public policy purposes);

 

   

providing new or additional credit lines to credit card customers; and

 

   

providing new services through mail order or telemarketing channels or related to travel or insurance products.

Furthermore, in connection with the misappropriation incident, a number of customers have filed lawsuits against KB Kookmin Card seeking damages, and it could become subject to additional litigation and regulatory sanctions. See “Item 8A. Consolidated Statements and Other Financial Information—Legal Proceedings.” KB Kookmin Card may also incur significant costs relating to the issuance of replacement cards for customers and the compensation of customers for losses incurred as a result of the fraudulent use of the misappropriated personal information. Accordingly, the misappropriation incident and the resulting regulatory sanctions (including the three-month suspension of KB Kookmin Card’s new business activities), customer claims and costs could have a material adverse effect on our business, reputation, results of operations and financial condition.

Risks relating to our small- and medium-sized enterprise loan portfolio

We have significant exposure to small- and medium-sized enterprises, and any financial difficulties experienced by these customers may result in a deterioration of our asset quality and have an adverse impact on us.

One of our core businesses is lending to small- and medium-sized enterprises (as defined under “Item 4.B. Business Overview—Corporate Banking—Small- and Medium-sized Enterprise Banking”). Our loans to small- and medium-sized enterprises increased from ₩65,132 billion as of December 31, 2010 to ₩71,045 billion as of December 31, 2013. During that period, non-performing loans (defined as those loans that are past due by 90 days or more) to small- and medium-sized enterprises decreased from ₩686 billion as of December 31, 2010 to ₩373 billion as of December 31, 2011 but increased to ₩568 as of December 31, 2013, and the non-performing loan ratio for such loans decreased from 1.1% as of December 31, 2010 to 0.5% as of December 31, 2011 but increased to 0.8% as of December 31, 2013, and may further increase in 2014. According to data compiled by the Financial Supervisory Service, the delinquency ratio for Won-currency loans by Korean commercial banks to small- and medium-sized enterprises was 1.4% as of December 31, 2013. The delinquency ratio for loans to small- and medium-sized enterprise is calculated as the ratio of (1) the outstanding balance of such loans in respect of which either principal or interest payments are overdue by one month or more to (2) the aggregate outstanding balance of such loans. Our delinquency ratio for such Won currency loans has remained relatively stable at 1.1% as of December 31, 2010, 1.0% as of December 31, 2011, 1.1% as of December 31, 2012, and 0.9% as of December 31, 2013, but may increase in 2014. In recent years, we have taken measures which sought to stem rising delinquencies in our loans to small- and medium-sized enterprises, including through strengthening

 

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the review of loan applications and closer monitoring of the post-loan performance of small- and medium-sized enterprise borrowers in industry sectors that are relatively more sensitive to downturns in the economy and have shown higher delinquency ratios, such as construction, lodging, retail and wholesale, restaurants and real estate. Despite such efforts, however, there is no assurance that delinquency levels for our loans to small- and medium-sized enterprises will not rise in the future. In particular, financial difficulties experienced by small- and medium-sized enterprises as a result of, among other things, adverse economic conditions in Korea and globally in recent years may lead to a deterioration in the asset quality of our loans to this segment. Any such deterioration would result in increased charge-offs and higher provisioning and reduced interest and fee income from this segment, which could have a material adverse impact on our financial condition and results of operations.

In addition, many small- and medium-sized enterprises have close business relationships with the largest Korean commercial conglomerates, known as “chaebols,” primarily as suppliers. Any difficulties encountered by those chaebols would likely hurt the liquidity and financial condition of related small- and medium-sized enterprises, including those to which we have exposure, also resulting in an impairment of their ability to repay loans.

A substantial part of our small- and medium-sized enterprise lending comprises loans to “small office/home office” customers, or SOHOs. SOHOs, which we currently define to include sole proprietorships and individual business interests, are usually dependent on a limited number of suppliers or customers. SOHOs tend to be affected to a greater extent than larger corporate borrowers by fluctuations in the Korean economy. In addition, SOHOs often maintain less sophisticated financial records than other corporate borrowers. Although we continue to make efforts to improve our internally developed credit rating systems to rate potential borrowers, particularly with respect to SOHOs, and intend to manage our exposure to these borrowers closely in order to prevent any deterioration in the asset quality of our loans to this segment, we may not be able to do so as intended.

In light of the deteriorating financial condition and liquidity position of small- and medium-sized enterprises in Korea since the global financial crisis commencing in the second half of 2008, the Korean government introduced policies and initiatives intended to encourage Korean banks to provide financial support to small- and medium-sized enterprises. For example, in November 2008, we entered into a memorandum of understanding with the Financial Supervisory Service under which we were required to improve the liquidity position of small- and medium-sized enterprises and exporters by providing them with adequate financing and to endeavor to alleviate burdens on low-income debtors by extending maturity dates or by delaying interest payments on loans owed to us. In addition, in October 2008, the Financial Supervisory Service requested Korean banks, including us, to establish a “fast track” program to provide liquidity assistance to small- and medium-sized enterprises on an expedited basis. Under the fast track program we established, which has been extended until December 31, 2014, we provide liquidity assistance to qualified small- and medium-sized enterprise borrowers applying for such assistance, in the form of new loans or maturity extensions or interest rate adjustments with respect to existing loans, after expedited credit review and approval by us. The overall prospects for the Korean economy in 2014 and beyond remain uncertain, and the Korean government may extend or renew existing or past policies and initiatives or introduce new policies or initiatives to encourage Korean banks to provide financial support to small- and medium-sized enterprises. Our participation in such government-led initiatives may lead us to extend credit to small- and medium-sized enterprise borrowers that we would not otherwise extend, or offer terms for such credit that we would not otherwise offer, in the absence of such initiatives. Furthermore, there is no guarantee that the financial condition and liquidity position of our small- and medium-sized enterprise borrowers benefiting from such initiatives will improve sufficiently for them to service their debt on a timely basis, or at all. Accordingly, increases in our exposure to small- and medium-sized enterprise borrowers resulting from such government-led initiatives may have a material adverse effect on our financial condition and results of operations.

 

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We have exposure to Korean construction and shipbuilding companies, and financial difficulties of these companies may have an adverse impact on us.

As of December 31, 2013, we had loans outstanding to construction companies and shipbuilding companies (many of which are small- and medium-sized enterprises) in the amount of ₩4,297 billion and ₩714 billion, or 1.9% and 0.3% of our total loans, respectively. We also have other exposures to Korean construction and shipbuilding companies, including in the form of guarantees extended on behalf of such companies (which included ₩485 billion of confirmed guarantees for construction companies and ₩1,987 billion of confirmed guarantees for shipbuilding companies as of December 31, 2013) and debt and equity securities of such companies held by us. In the case of construction companies, such exposures include guarantees provided to us by general contractors with respect to financing extended by us for residential and commercial real estate development projects. In the case of shipbuilding companies, such exposures include refund guarantees extended by us on behalf of shipbuilding companies to cover their obligation to return a portion of the ship order contract amount to customers in the event of performance delays or defaults under shipbuilding contracts.

The construction industry in Korea has experienced a downturn in recent years, due to excessive investment in residential property development projects, stagnation of real property prices and reduced demand for residential property, especially in areas outside of Seoul, including as a result of the deterioration of the Korean economy. The shipbuilding industry in Korea has also experienced a severe downturn in recent years due to a significant decrease in ship orders, primarily due to adverse conditions in the global economy and the resulting slowdown in global trade. In response to the deteriorating financial condition and liquidity position of borrowers in the construction and shipbuilding industries, which were disproportionately impacted by adverse economic developments in Korea and globally, the Korean government implemented a program in 2009 to promote expedited restructuring of such borrowers by their Korean creditor financial institutions, under the supervision of major commercial banks. In accordance with such program, 24 construction companies and five shipbuilding companies became subject to workout in 2009, following review by their creditor financial institutions (including us) and the Korean government. In addition, in June 2010, the Financial Services Commission and the Financial Supervisory Service announced that, following credit risk evaluations conducted by creditor financial institutions (including us) of companies in Korea with outstanding debt of ₩50 billion or more, 65 companies had been selected by such financial institutions for restructuring in the form of workout, liquidation or court receivership. Of such 65 companies, 16 were construction companies and three were shipbuilding companies. In July 2013, the Financial Services Commission and the Financial Supervisory Service announced the results of subsequent credit risk evaluations conducted by creditor financial institutions (including us) of companies in Korea, in which 40 companies with outstanding debt of ₩50 billion or more (20 of which were construction companies and three of which were shipbuilding and shipping companies) were selected by such financial institutions for restructuring in the form of workout, liquidation or court receivership. However, there is no assurance that these measures will be successful in stabilizing the Korean construction and shipbuilding industries.

The allowances that we have established against our credit exposures to Korean construction and shipbuilding companies may not be sufficient to cover all future losses arising from these and other exposures. If the credit quality of our exposures to Korean construction and shipbuilding companies declines further, we may be required to take substantial additional provisions (including in connection with restructurings of such companies), which could adversely impact our results of operations and financial condition. Furthermore, although a portion of our credit exposures to construction and shipbuilding companies are secured by collateral, such collateral may not be sufficient to cover uncollectible amounts in respect of such credit exposures. See “—Other risks relating to our business—A decline in the value of the collateral securing our loans and our inability to realize full collateral value may adversely affect our credit portfolio.”

We also have construction-related credit exposures under our project financing loans for real estate development projects in Korea. In light of the general deterioration in the asset quality of real estate project financing loans in Korea in recent years, Korean banks, including Kookmin Bank, implemented a uniform set of guidelines to apply more stringent criteria in evaluating the asset quality of real estate project financing loans. As a result, we may be required to establish additional allowances with respect to our outstanding real estate project financing loans, which could adversely affect our financial condition and results of operations.

 

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Risks relating to our financial holding company structure and strategy

We may not succeed in implementing our strategy to take advantage of, or fail to realize the anticipated benefits of, our financial holding company structure.

We were established as a new financial holding company in September 2008 pursuant to a “comprehensive stock transfer” under Korean law, following the completion of which Kookmin Bank, KB Investment & Securities Co., Ltd., KB Asset Management Co., Ltd., KB Real Estate Trust Co., Ltd., KB Investment Co., Ltd., KB Futures Co., Ltd., KB Credit Information Co., Ltd., and KB Data Systems Co., Ltd. became our wholly-owned subsidiaries. See “Item 4.A. History and Development of the Company—The Establishment of KB Financial Group.” In addition, as a part of our strategy to promote the growth of our credit card operations and enhance its synergies with our other businesses, we effected a horizontal spin-off of Kookmin Bank’s credit card business in March 2011. As a result, our credit card business is operated by a separate wholly-owned subsidiary, KB Kookmin Card Co., Ltd.

One of our principal strategies is to take advantage of our financial holding company structure to become a comprehensive financial services provider capable of offering a full range of products and services to our large existing base of retail and corporate banking customers. The continued implementation of these plans may require additional investments of capital, infrastructure, human resources and management attention. This strategy entails certain risks, including the possibility that we may face significant competition from other financial holding companies and more specialized financial institutions in particular segments. If our strategy does not succeed, we may incur losses on our investments and our results of operations and financial condition may suffer.

Furthermore, our success under a financial holding company structure depends on our ability to realize the anticipated synergies, growth opportunities and cost savings from coordinating the businesses of our various subsidiaries. Although we have been integrating certain aspects of our subsidiaries’ operations into our financial holding company structure, our subsidiaries will generally continue to operate as independent entities with separate management and staff and our ability to direct our subsidiaries’ day-to-day operations may be limited. For example, we may not be able to realize the anticipated benefits of the 2011 horizontal spin-off of the credit card business from Kookmin Bank into a new wholly-owned subsidiary, KB Kookmin Card Co., Ltd., due to various factors, including increased expenses arising from the operation of a separate credit card company, unexpected business disruptions, difficulties in reorganizing personnel and administrative functions and potential loss of customers.

In addition, one of the intended benefits of our financial holding company structure is that it enhances our ability to engage in mergers and acquisitions which we decide to pursue in the future as part of our strategy. For example, we may consider acquiring or merging with a non-bank financial institution to achieve balanced growth and diversify our revenue base. The integration of our subsidiaries’ separate businesses and operations, as well as those of any companies we may acquire or merge with in the future, under our financial holding company structure could require a significant amount of time, financial resources and management attention. Moreover, that process could disrupt our operations (including our risk management operations) or information technology systems, reduce employee morale, produce unintended inconsistencies in our standards, controls, procedures or policies, and affect our relationships with customers and our ability to retain key personnel. The realization of the anticipated benefits of our financial holding company structure and any mergers or acquisitions we decide to pursue may be blocked, delayed or reduced as a result of many factors, some of which may be outside our control. These factors include:

 

   

difficulties in integrating the diverse activities and operations of our subsidiaries or any companies we may merge with or acquire, including risk management operations and information technology systems, personnel, policies and procedures;

 

   

difficulties in reorganizing or reducing overlapping personnel, branches, networks and administrative functions;

 

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restrictions under the Financial Holding Company Act and other regulations on transactions between a financial holding company and, or among, its subsidiaries;

 

   

unforeseen contingent risks, including lack of required capital resources, increased tax liabilities or restrictions in our overseas operations, relating to our financial holding company structure;

 

   

unexpected business disruptions;

 

   

failure to attract, develop and retain personnel with necessary expertise;

 

   

loss of customers; and

 

   

labor unrest.

Accordingly, we may not be able to realize the anticipated benefits of our financial holding company structure, and our business, results of operations and financial condition may suffer as a result.

We depend on limited forms of funding to fund our operations at the holding company level.

We are a financial holding company with no significant assets other than the shares of our subsidiaries. Our primary sources of funding and liquidity are dividends from our subsidiaries, direct borrowings and issuances of equity or debt securities at the holding company level. In addition, as a financial holding company, we are required to meet certain minimum financial ratios under Korean law, including with respect to liquidity, leverage and capital adequacy. Our ability to meet our obligations to our direct creditors and employees and our other liquidity needs and regulatory requirements at the holding company level depends on timely and adequate distributions from our subsidiaries and our ability to sell our securities or obtain credit from our lenders.

The ability of our subsidiaries to pay dividends to us depends on their financial condition and operating results. In the future, our subsidiaries may enter into agreements, such as credit agreements with lenders or indentures relating to high-yield or subordinated debt instruments, that impose restrictions on their ability to make distributions to us, and the terms of future obligations and the operation of Korean law could prevent our subsidiaries from making sufficient distributions to us to allow us to make payments on our outstanding obligations. See “—As a financial holding company, we depend on receiving dividends from our subsidiaries to pay dividends on our common stock.” Any delay in receipt of or shortfall in payments to us from our subsidiaries could result in our inability to meet our liquidity needs and regulatory requirements, including minimum liquidity and capital adequacy ratios, and may disrupt our operations at the holding company level.

In addition, creditors of our subsidiaries will generally have claims that are prior to any claims of our creditors with respect to their assets. Furthermore, our inability to sell our securities or obtain funds from our lenders on favorable terms, or at all, could also result in our inability to meet our liquidity needs and regulatory requirements and may disrupt our operations at the holding company level.

As a financial holding company, we depend on receiving dividends from our subsidiaries to pay dividends on our common stock.

Since our principal assets at the holding company level are the shares of our subsidiaries, our ability to pay dividends on our common stock largely depends on dividend payments from those subsidiaries. Those dividend payments are subject to the Korean Commercial Code, the Bank Act and regulatory limitations, generally based on capital levels and retained earnings, imposed by the various regulatory agencies with authority over those entities. For example:

 

   

under the Korean Commercial Code, dividends may only be paid out of distributable income, an amount which is calculated by subtracting the aggregate amount of a company’s paid-in capital and certain mandatory legal reserves as well as certain unrealized profits from its net assets, in each case as of the end of the prior fiscal period;

 

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under the Bank Act, a bank also must credit at least 10% of its net profit to a legal reserve each time it pays dividends on distributable income until that reserve equals the amount of its total paid-in capital; and

 

   

under the Bank Act and the requirements of the Financial Services Commission, if a bank fails to meet its required capital adequacy ratio or otherwise becomes subject to management improvement measures imposed by the Financial Services Commission, then the Financial Services Commission may restrict the declaration and payment of dividends by that bank.

Our subsidiaries may not continue to meet the applicable legal and regulatory requirements for the payment of dividends in the future. If they fail to do so, they may stop paying or reduce the amount of the dividends they pay to us, which would have an adverse effect on our ability to pay dividends on our common stock.

Although increasing our fee income is an important part of our strategy, we may not be able to do so.

We have historically relied on interest income as our primary revenue source. While we have developed new sources of fee income as part of our business strategy, our ability to increase our fee income and thereby reduce our dependence on interest income will be affected by the extent to which our customers generally accept the concept of fee-based services. Historically, customers in Korea have generally been reluctant to pay fees in return for value-added financial services, and their continued reluctance to do so will adversely affect the implementation of our strategy to increase our fee income. Furthermore, the fees that we charge to customers are subject to regulation by Korean financial regulatory authorities, which may seek to implement regulations or measures that may also have an adverse impact on our ability to achieve this aspect of our strategy.

We may suffer customer attrition or our net interest margin may decrease as a result of our competition strategy.

We have been pursuing, and intend to continue to pursue, a strategy of maintaining or enhancing our margins where possible and avoid, to the extent possible, entering into price competition. In order to execute this strategy, we will need to maintain relatively low interest rates on our deposit products while charging relatively higher rates on loans. If other banks and financial institutions adopt a strategy of expanding market share through interest rate competition, we may suffer customer attrition due to rate sensitivity. In addition, we may in the future decide to compete to a greater extent based on interest rates, which could lead to a decrease in our net interest margins. Any future decline in our customer base or our net interest margins as a result of our future competition strategy could have an adverse effect on our results of operations and financial condition.

Risks relating to competition

Competition in the Korean financial industry is intense, and we may lose market share and experience declining margins as a result.

Competition in the Korean financial industry has been and is likely to remain intense. Some of the financial institutions that we compete with have longer operating histories as financial holding companies, greater financial resources or more specialized capabilities than us and our subsidiaries. In the retail and small- and medium-sized enterprise lending business, which has been our traditional core business, competition has increased significantly and is expected to increase further. Most Korean banks have been focusing on retail customers and small- and medium-sized enterprises in recent years, although they have begun to generally increase their exposure to large corporate borrowers. In addition, the profitability of our retail and credit card operations may decline as a result of growing market saturation in the retail lending and credit card segments, increased interest rate competition, pressure to lower the fee rates applicable to our credit cards (particularly merchant fee rates) and higher marketing expenses. Intense and increasing competition has made and continues to make it more difficult for us to secure retail, credit card and small- and medium-sized customers with the credit quality and on credit terms necessary to achieve our business objectives in a commercially acceptable manner.

 

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In addition, we believe that regulatory reforms and the general modernization of business practices in Korea will lead to increased competition among financial institutions in Korea. We also believe that foreign financial institutions, many of which have greater experience and resources than we do, will seek to compete with us in providing financial products and services either by themselves or in partnership with existing Korean financial institutions. Furthermore, a number of significant mergers and acquisitions in the industry have taken place in Korea over the past decade, including the acquisition of Koram Bank by an affiliate of Citibank in 2004, Standard Chartered Bank’s acquisition of Korea First Bank in 2005, Chohung Bank’s merger with Shinhan Bank in April 2006 and Hana Financial Group’s acquisition of a controlling interest in Korea Exchange Bank in February 2012. We expect that consolidation in the financial industry will continue. In particular, the Korean government is in the process of disposing of or reducing its controlling interest in Woori Finance Holdings Co., Ltd. (the financial holding company of Woori Bank), which involves, in part, sales of its subsidiaries. Other financial institutions may seek to acquire or merge with such entities, and the financial institutions resulting from this consolidation may, by virtue of their increased size and business scope, provide significantly greater competition for us. Increased competition and continuing consolidation may lead to decreased margins, resulting in a material adverse impact on our future profitability. Accordingly our results of operations and financial condition may suffer as a result of increasing competition in the Korean financial industry.

Risks relating to our large corporate loan portfolio

We have exposure to chaebols, and, as a result, financial difficulties of chaebols may have an adverse impact on us.

Of our 20 largest corporate exposures (including loans, debt and equity securities and guarantees and acceptances) as of December 31, 2013, 12 were to companies that were members of the 30 largest chaebols in Korea designated as such by the Financial Supervisory Service based on their outstanding exposures. As of that date, the total amount of our exposures to such 30 chaebols was ₩19,063 billion, or 6.9% of our total exposures. If the credit quality of our exposures to chaebols declines, we could require substantial additional loan loss provisions, which would hurt our results of operations and financial condition. See “Item 4.B. Business Overview—Assets and Liabilities—Loan Portfolio—Exposure to Chaebols.”

We cannot assure you that the allowances we have established against these exposures will be sufficient to cover all future losses arising from these exposures. In addition, with respect to those companies that are in or in the future enter into workout or liquidation proceedings, we may not be able to make any recoveries against such companies. We may, therefore, experience future losses with respect to those loans.

We have exposure to companies that are currently or may in the future be put in restructuring, and we may suffer losses as a result of additional loan loss provisions required and/or the adoption of restructuring plans with which we do not agree.

As of December 31, 2013, our loans and guarantees to companies that were in workout, restructuring or rehabilitation amounted to ₩1,026 billion or 0.4% of our total loans and guarantees, most of which was classified as impaired. As of the same date, our allowances for credit losses on these loans and guarantees amounted to ₩593 billion, or 57.8% of these loans and guarantees. These allowances may not be sufficient to cover all future losses arising from our exposure to these companies. Furthermore, we have other exposure to such companies, in the form of debt and equity securities of such companies held by us (including equity securities we acquired as a result of debt-to-equity conversions). Our exposures as of December 31, 2013 with respect to such securities of companies in workout, restructuring or rehabilitation amounted to ₩148 billion, or less than 0.3% of our total debt securities and equity securities, but may increase in the future. In addition, in the case of borrowers that are or become subject to workout, we may be forced to restructure our credits pursuant to restructuring plans approved by other creditor financial institutions of the borrower, or to dispose of our credits to other creditors on unfavorable terms.

 

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We have exposure to member companies of the Kumho Asiana Group, and financial difficulties of these companies may adversely impact us.

Several member companies of the Kumho Asiana Group, one of Korea’s largest chaebols, have been experiencing financial difficulties, including as a result of their heavily leveraged acquisition of Daewoo Engineering & Construction Co., Ltd. in 2006 and the subsequent global financial crisis commencing in the second half of 2008. In January 2010, Kumho Tires Co., Inc. and Kumho Industrial Co., Ltd. agreed with their creditors, including us, to begin an out-of-court debt restructuring program under the Corporate Restructuring Promotion Act. In addition, Kumho Petrochemical Co., Ltd. and Asiana Airlines announced that they would undergo a voluntary restructuring, in return for which their creditors, including us, agreed to a suspension of payments on the two companies’ debt until the end of 2010. These four companies are member companies of the Kumho Asiana Group. In 2010, we converted an aggregate of ₩38 billion of our loans to Kumho Tires and ₩9 billion of our loans to Kumho Industrial into equity interests in connection with their restructuring programs. As of December 31, 2013, our aggregate loans and guarantees to Kumho Tires, Kumho Industrial, Kumho Petrochemical and Asiana Airlines amounted to ₩288 billion, ₩81 billion of which was classified as impaired. As of December 31, 2013, our allowances for credit losses with respect to such loans and guarantees amounted to ₩68 billion. Our allowances may not be sufficient to cover all future losses arising from our exposures to these companies. Furthermore, in the event that the financial condition of these companies deteriorates further in the future, we may be required to record additional provisions for credit losses, as well as charge-offs and valuation or impairment losses or losses on disposal, which may have a material adverse effect on our financial condition and results of operations.

A large portion of our credit exposure is concentrated in a relatively small number of large corporate borrowers which increases the risk of our corporate credit portfolio.

As of December 31, 2013, our loans and guarantees to our 20 largest borrowers totaled ₩8,517 billion and accounted for 3.7% of our total loans and guarantees. As of that date, our single largest corporate credit exposure was to Hyundai Heavy Industries Co., Ltd., to which we had outstanding credit exposures (most of which was in the form of guarantees and acceptances) of ₩1,552 billion, representing 0.7% of our total loans and guarantees. Any further deterioration in the financial condition of our large corporate borrowers may require us to record substantial additional provisions and may have a material adverse impact on our results of operations and financial condition.

Other risks relating to our business

Difficult conditions in the global financial markets could adversely affect our results of operations and financial condition.

While the rate of deterioration of the global economy since the commencement of the global financial crisis in 2008 has slowed, with some signs of stabilization and improvement, the overall prospects for the Korean and global economy in the remainder of 2014 and beyond remain uncertain. Starting in the second half of 2011, the global financial markets have experienced significant volatility as a result of, among other things, the financial difficulties affecting many governments worldwide, in particular in Cyprus, Greece, Spain, Italy and Portugal, and the slowdown of economic growth in major emerging market economies, as well as concerns regarding the potential economic impact of the recently commenced scale-down by the U.S. Federal Reserve Board of its “quantitative easing” stimulus program. In addition, continuing negotiations regarding Iran’s nuclear program and sanctions adopted by the international community in response, as well as political and social instability in various countries in the Middle East and Northern Africa, including in Syria, Egypt and Libya, have resulted in volatility and uncertainty in the global energy markets. Furthermore, in response to China’s slowing gross domestic product growth rates that began in 2011, the Chinese government has implemented stimulus measures but the overall impact of such measures remains uncertain. In light of the high level of interdependence of the global economy, any of the foregoing developments could have a material adverse effect on the Korean economy and financial markets, and in turn on our business, financial condition and results of operations.

 

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We are also exposed to adverse changes and volatility in global and Korean financial markets as a result of our liabilities and assets denominated in foreign currencies and our holdings of trading and investment securities, including structured products. The value of the Won relative to major foreign currencies in general and the U.S. dollar in particular has fluctuated widely in recent years. See “Item 3.A. Selected Financial Data—Exchange Rates.” A depreciation of the Won will increase our cost in Won of servicing our foreign currency-denominated debt, while continued exchange rate volatility may also result in foreign exchange losses for us. Furthermore, as a result of adverse global and Korean economic conditions, there has been significant volatility in securities prices, including the stock prices of Korean and foreign companies in which we hold an interest. Such volatility has resulted in and may lead to further trading and valuation losses on our trading and investment securities portfolio as well as impairment losses on our investments accounted for under the equity method, including our noncontrolling equity stake in JSC Bank CenterCredit, a Kazakhstan bank, the initial stake in which we acquired in 2008. See “Item 4.B. Business Overview—Capital Markets Activities and International Banking—International Banking.”

Our business may be materially and adversely affected by legal claims and regulatory actions against us.

We are subject to the risk of legal claims and regulatory actions in the ordinary course of our business, which may expose us to substantial monetary damages and legal costs, injunctive relief, criminal and civil penalties, sanctions against our management and employees and regulatory restrictions on our operations, as well as significant reputational harm. In particular, commencing in November 2013, Kookmin Bank has been subject to a number of investigations by the Financial Supervisory Service and other governmental authorities concerning alleged issues with Kookmin Bank’s internal controls and possible legal violations by Kookmin Bank and its employees.

 

   

In November 2013, Kookmin Bank filed a complaint against the former head and two former employees of its Tokyo Branch for allegedly extending illegal loans under borrowed names. The Financial Supervisory Service and the Financial Services Agency of Japan have each launched an investigation into the allegations.

 

   

The Financial Supervisory Service launched an investigation into alleged embezzlement of funds by employees at Kookmin Bank’s headquarters, who have since been suspended, through the presentation for payment of forged Korean government housing bonds.

 

   

At the request of the Financial Supervisory Service, the Seoul Central District Prosecutors’ Office commenced investigations into such alleged illegalities at Kookmin Bank.

Kookmin Bank is cooperating with the ongoing investigations by the Financial Supervisory Service and other government authorities. Further investigations may be launched by governmental authorities or civil claims may be filed against Kookmin Bank with respect to the alleged legal violations by Kookmin Bank and its employees.

Furthermore, in February 2014, the Financial Services Commission suspended the new credit card issuance and other related activities of KB Kookmin Card for three months from February to May 2014, in response to an incident involving the misappropriation of the personal information of a large number of its customers by an employee of the Korea Credit Bureau in the first half of 2013. In connection with the incident, a number of customers have filed lawsuits against KB Kookmin Card seeking damages, and it could become subject to additional litigation and regulatory sanctions.

In addition, in connection with certain amendments to standard loan policy conditions for mortgage loan agreements that were instituted by the Korea Fair Trade Commission in January 2008 (which require banks to be responsible for the payment of mortgage registration expenses when issuing mortgage loans and which were upheld by the Supreme Court of Korea in August 2010), a number of Kookmin Bank’s customers have filed lawsuits in recent years seeking the return of mortgage registration expenses paid by such customers. See “Item 8A. Consolidated Statements and Other Financial Information—Legal Proceedings.”

 

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We are unable to predict the outcome of these and other investigations, lawsuits and regulatory actions, and the scope of investigations or the total amount in dispute in these matters may increase. Furthermore, adverse final determinations, decisions or resolutions in such matters could encourage other parties to bring related claims and actions against us. Accordingly, the outcome of current and future investigations, legal claims and regulatory actions, particularly those for which it is difficult to assess the maximum potential exposure or the ultimate adverse impact with any degree of certainty, may materially and adversely impact our business, reputation, results of operations and financial condition.

Our risk management system may not be effective in mitigating risk and loss.

We seek to monitor and manage our risk exposure through a group-wide risk management platform, encompassing a multi-layered risk management governance structure, reporting and monitoring systems, early warning systems, a centralized credit risk management system for our banking operations and other risk management infrastructure, using a variety of risk management strategies and techniques. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk.” However, such risk management strategies and techniques employed by us and the judgments that accompany their application cannot anticipate the economic and financial outcome in all market environments, and many of our risk management strategies and techniques have a basis in historic market behavior that may limit the effectiveness of such strategies and techniques in times of significant market stress or other unforeseen circumstances. Furthermore, our risk management strategies may not be effective in a difficult or less liquid market environment, as other market participants may be attempting to use the same or similar strategies as us to deal with such market conditions. In such circumstances, it may be difficult for us to reduce our risk positions due to the activity of such other market participants.

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

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

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

A substantial portion of our loans is secured by real estate, the values of which have fluctuated significantly in recent years. Although it is our general policy to lend up to 40% to 80% of the appraised value of collateral (except in areas of high speculation designated by the government where we generally limit our lending to between 40% to 60% of the appraised value of collateral) and to periodically re-appraise our collateral, the downturn in the real estate market in Korea in recent years has resulted in declines in the value of the collateral securing our mortgage and home equity loans. If collateral values decline further in the future, they may not be sufficient to cover uncollectible amounts in respect of our secured loans. Any future declines in the value of the real estate or other collateral securing our loans, or our inability to obtain additional collateral in the event of such declines, could result in a deterioration in our asset quality and may require us to take additional loan loss provisions.

 

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In Korea, foreclosure on collateral generally requires a written petition to a court. An application, when made, may be subject to delays and administrative requirements that may result in a decrease in the value realized with respect to such collateral. We cannot guarantee that we will be able to realize the full value on our collateral as a result of, among other factors, delays in foreclosure proceedings and defects in the perfection of our security interest in collateral. Our failure to recover the expected value of collateral could expose us to losses.

The secondary market for corporate bonds in Korea is not fully developed, and, as a result, we may not be able to realize the full “marked-to-market” value of debt securities we hold at the time of any sale of such securities.

As of December 31, 2013, we held debt securities issued by Korean companies and financial institutions (other than those issued by government-owned or -controlled enterprises or financial institutions, which include Korea Electric Power Corporation, the Bank of Korea, Korea Development Bank, Korea Finance Corporation and Industrial Bank of Korea) with a total carrying amount of ₩18,596 billion in our trading and investment securities portfolio. The market value of these securities could decline significantly due to various factors, including future increases in interest rates or a deterioration in the financial and economic condition of any particular issuer or of Korea in general. Any of these factors individually or a combination of these factors would require us to write down the fair value of these debt securities, resulting in impairment losses. Because the secondary market for corporate bonds in Korea is not fully developed, the market value of many of these securities as reflected on our statements of financial position is determined by references to suggested prices posted by Korean rating agencies or the Korea Securities Dealers Association. These valuations, however, may differ significantly from the actual value that we could realize in the event we elect to sell these securities. As a result, we may not be able to realize the full “marked-to-market” value at the time of any such sale of these securities and thus may incur losses.

We may be required to make transfers from our general banking operations to cover shortfalls in our guaranteed trust accounts, which could have an adverse effect on our results of operations.

We manage a number of money trust accounts through Kookmin Bank, our banking subsidiary. Under Korean law, trust account assets of a bank are required to be segregated from the assets of that bank’s general banking operations. Those assets are not available to satisfy the claims of a bank’s depositors or other creditors of its general banking operations. For some of the trust accounts we manage, we have guaranteed either the principal amount of the investor’s investment or the principal and a fixed rate of interest.

If, at any time, the income from our guaranteed trust accounts is not sufficient to pay any guaranteed amount, we will have to cover the shortfall first from the special reserves maintained in these trust accounts, then from our fees from such trust accounts and finally from funds transferred from our general banking operations. As of December 31, 2013, we had ₩93 billion as special reserves in trust account assets for which we provided guarantees of principal. There was no transfer from general banking operations to cover deficiencies in guaranteed trust accounts in 2011, 2012 and 2013. However, we may be required to make transfers from our general banking operations to cover shortfalls, if any, in our guaranteed trust accounts in the future. Such transfers may adversely impact our results of operations.

Our activities are subject to cybersecurity risk.

Our activities have been, and will continue to be, subject to an increasing risk of cyber attacks, the nature of which is continually evolving. For example, many of our customers increasingly rely on our Internet banking services as well as our mobile and smartphone banking services for various types of transactions and, while such transactions are protected by encryption and other security programs, they are not free from security breaches. We have made substantial and continuous investments to build systems and defenses to address threats from cyber attacks and our monitoring and protection systems have been able to detect and respond to such breaches to date. However, we may experience security breaches or unexpected disruptions in connection with our services in the future, which may result in liability to our customers and third parties and have an adverse effect on our business, reputation and results of operations.

 

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

We rely on our information technology systems for our daily operations including customer service, transactions, billing and record keeping. We may experience disruptions, delays or other difficulties from our information technology systems, which may have an adverse effect on our business and adversely impact our customers’ confidence in us.

Risks relating to liquidity and capital management

A considerable increase in interest rates could decrease the value of our debt securities portfolio and raise our funding costs while reducing loan demand and the repayment ability of our borrowers, which, as a result, could adversely affect us.

Interest rates in Korea have been subject to significant fluctuations in recent years. In late 2008 and early 2009, the Bank of Korea reduced its policy rate by a total of 325 basis points to support Korea’s economy amid the global financial crisis, and left such rate unchanged at 2.00% throughout 2009. In an effort to stem inflation amid improved growth prospects, the Bank of Korea gradually increased its policy rate in 2010 and 2011. However, the Bank of Korea reduced its policy rate to 3.00% in July 2012 and 2.75% in October 2012 and further reduced such rate to 2.50% in May 2013 to support Korea’s economy in light of the recent slowdown in Korea’s growth and uncertain global economic prospects. All else being equal, an increase in interest rates leads to a decline in the value of our portfolio of debt securities, which generally pay interest based on a fixed rate. A sustained increase in interest rates will also raise our funding costs, while reducing loan demand, especially among consumers. Rising interest rates may therefore require us to re-balance our asset portfolio and our liabilities in order to minimize the risk of potential mismatches and maintain our profitability.

In addition, rising interest rate levels may adversely affect the Korean economy and the financial condition of our corporate and retail borrowers, including holders of our credit cards, which in turn may lead to a deterioration in our credit portfolio. Since most of our retail and corporate loans bear interest at rates that adjust periodically based on prevailing market rates, a sustained increase in interest rate levels will increase the interest costs of our retail and corporate borrowers and could adversely affect their ability to make payments on their outstanding loans.

Our funding is highly dependent on short-term deposits, which dependence may adversely affect our operations.

We meet a significant amount of our funding requirements through short-term funding sources, which consist primarily of customer deposits. As of December 31, 2013, approximately 94.9% of our deposits had maturities of one year or less or were payable on demand. In the past, a substantial proportion of our customer deposits have been rolled over upon maturity. We cannot guarantee, however, that depositors will continue to roll over their deposits in the future. In the event that a substantial number of our short-term deposit customers withdraw their funds or fail to roll over their deposits as higher-yielding investment opportunities emerge, our liquidity position could be adversely affected. We may also be required to seek more expensive sources of short-term and long-term funding to finance our operations. See “Item 5.B. Liquidity and Capital Resources—Financial Condition—Liquidity.”

We may be required to raise additional capital if our capital adequacy ratio deteriorates or the applicable capital requirements change in the future, but we may not be able to do so on favorable terms or at all.

Under the capital adequacy requirements of the Financial Services Commission, both we and Kookmin Bank, our banking subsidiary, are required to maintain a minimum Tier I common equity capital adequacy ratio of 4.0%, Tier I capital adequacy ratio of 5.5% and combined Tier I and Tier II capital adequacy ratio of 8.0%, on a consolidated basis from, January 1, 2014. As of December 31, 2013, our Tier I common equity capital, Tier I capital and combined Tier I and Tier II capital adequacy ratios were 12.78%, 12.78% and 15.38%, respectively,

 

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and Kookmin Bank’s Tier I common equity capital, Tier I capital and combined Tier I and Tier II capital adequacy ratios were 12.61%, 12.61% and 15.42%, respectively, all of which exceeded the minimum levels required by the Financial Services Commission. However, our capital base and capital adequacy ratios may deteriorate in the future if our results of operations or financial condition deteriorates for any reason, including as a result of a deterioration in the asset quality of our retail loans (including credit card balances) and loans to small- and medium-sized enterprises, or if we are not able to deploy our funding into suitably low-risk assets.

In December 2009, the Basel Committee on Banking Supervision introduced a new set of measures to supplement Basel II which include, among others, a requirement for higher minimum capital, introduction of a leverage ratio as a supplementary measure to the capital adequacy ratio and flexible capital requirements for different phases of the economic cycle. Additional details regarding such new measures, including an additional capital conservation buffer and counter-cyclical capital buffer, liquidity coverage ratio and other supplemental measures, were announced by the Group of Governors and Heads of Supervision of the Basel Committee on Banking Supervision in September 2010. After further impact assessment and observation periods, the Basel Committee on Banking Supervision began phasing in the new set of measures, referred to as Basel III, starting from 2013. In May 2013, the Financial Services Commission announced that major Asian countries have already implemented Basel III in the first quarter of 2013 and that the proposed Basel III measures relating to stricter minimum capital ratio requirements will be implemented in Korea starting from December 1, 2013. In July 2013 and September 2013, the Financial Services Commission promulgated amended regulations implementing Basel III, pursuant to which Korean banks and bank holding companies were required to maintain a minimum ratio of Tier I common equity capital (which principally includes equity capital, capital surplus and retained earnings less reserve for credit losses) to risk-weighted assets of 3.5% and Tier I capital to risk-weighted assets of 4.5% from December 1, 2013, which minimum ratios increased to 4.0% and 5.5%, respectively, from January 1, 2014 and will increase further to 4.5% and 6.0%, respectively, from January 1, 2015. Such requirements are in addition to the pre-existing requirement for a minimum ratio of Tier I and Tier II capital (less any capital deductions) to risk-weighted assets of 8.0%, which remains unchanged. The amended regulations also contemplate an additional capital conservation buffer of 0.625% starting in 2016, with such buffer to increase in stages to 2.5% by 2019. The implementation of Basel III in Korea may have a significant effect on the capital requirements of Korean financial institutions, including us. See “Item 4.B. Business Overview—Supervision and Regulation—Principal Regulations Applicable to Financial Holding Companies—Capital Adequacy” and “—Principal Regulations Applicable to Banks—Capital Adequacy.”

We may be required to obtain additional capital in the future in order to remain in compliance with more stringent capital adequacy and other regulatory requirements. However, we may not be able to obtain additional capital on favorable terms, or at all. Our ability to obtain additional capital at any time may be constrained to the extent that banks or other financial institutions in Korea or from other Asian countries are seeking to raise capital at the same time. To the extent that we fail to comply with applicable capital adequacy ratio or other regulatory requirements in the future, Korean regulatory authorities may impose penalties on us ranging from a warning to suspension or revocation of our banking license.

Risks relating to government regulation and policy

The Korean government may promote lending and financial support by the Korean financial industry to certain types of borrowers as a matter of policy, which financial institutions, including us, may decide to follow.

Through its policies and recommendations, the Korean government has promoted and, as a matter of policy, may continue to attempt to promote lending by the Korean financial industry to particular types of borrowers. For example, the Korean government has in the past provided and may continue to provide policy loans, which encourage lending to particular types of borrowers. It has generally done this by identifying sectors of the economy it wishes to promote and making low-interest funding available to financial institutions that may voluntarily choose to lend to these sectors. The government has in this manner provided policy loans intended to

 

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promote mortgage lending to low-income individuals and lending to small- and medium-sized enterprises. All loans or credits we choose to make pursuant to these policy loans would be subject to review in accordance with our credit approval procedures. However, the availability of policy loans may influence us to lend to certain sectors or in a manner in which we otherwise would not in the absence of such loans from the government.

In the past, the Korean government has also announced policies under which financial institutions in Korea are encouraged to provide financial support to particular sectors. For example, in light of the deteriorating financial condition and liquidity position of small- and medium-sized enterprises in Korea as a result of the global financial crisis commencing in the second half of 2008 and adverse conditions in the Korean economy affecting consumers, the Korean government introduced measures intended to encourage Korean banks to provide financial support to small- and medium-sized enterprise and retail borrowers. See “—Risks relating to our small- and medium-sized enterprise loan portfolio—We have significant exposure to small- and medium-sized enterprises, and any financial difficulties experienced by these customers may result in a deterioration of our asset quality and have an adverse impact on us.” and “—Risks relating to our retail credit portfolio—Future changes in market conditions as well as other factors may lead to increases in delinquency levels of our retail loan portfolio.” The Korean government may in the future request financial institutions in Korea, including us, to make investments in or provide other forms of financial support to particular sectors of the Korean economy as a matter of policy, which financial institutions, including us, may decide to accept. We may incur costs or losses as a result of providing such financial support.

The Financial Services Commission may impose burdensome measures on us if it deems us or one of our subsidiaries to be financially unsound.

If the Financial Services Commission deems our financial condition or the financial condition of our subsidiaries to be unsound, or if we or our subsidiaries fail to meet applicable regulatory standards, such as minimum capital adequacy and liquidity ratios, the Financial Services Commission may order or recommend, among other things:

 

   

capital increases or reductions;

 

   

stock cancellations or consolidations;

 

   

transfers of business;

 

   

sales of assets;

 

   

closures of subsidiaries or branch offices;

 

   

mergers with other financial institutions; and

 

   

suspensions of a part of our business operations.

If any of these measures are imposed on us by the Financial Services Commission, they could hurt our business, results of operations and financial condition. In addition, if the Financial Services Commission orders us to partially or completely reduce our capital, you may lose part or all of your investment.

Risks relating to Korea

Escalations in tensions with North Korea could have an adverse effect on us and the market price of our ADSs.

Relations between Korea and North Korea have been tense throughout Korea’s modern history. The level of tension between the two Koreas has fluctuated and may increase abruptly as a result of future events. In particular, since the death of Kim Jong-il in December 2011, there has been increased uncertainty with respect to the future of North Korea’s political leadership and concern regarding its implications for political and economic stability in the region. Although Kim Jong-il’s third son, Kim Jong-eun, has assumed power as his father’s designated successor, the long-term outcome of such leadership transition remains uncertain.

 

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In addition, there have been heightened security concerns in recent years stemming from North Korea’s nuclear weapon and long-range missile programs as well as its hostile military actions against Korea. Some of the significant incidents in recent years include the following:

 

   

In March 2013, North Korea stated that it had entered “a state of war” with Korea, declaring the 1953 armistice invalid, and put its artillery at the highest level of combat readiness to protest the Korea-United States allies’ military drills and additional sanctions imposed on North Korea for its missile and nuclear tests.

 

   

North Korea renounced its obligations under the Nuclear Non-Proliferation Treaty in January 2003 and conducted three rounds of nuclear tests between October 2006 to February 2013, which increased tensions in the region and elicited strong objections worldwide. In response, the United Nations Security Council unanimously passed resolutions that condemned North Korea for the nuclear tests and expanded sanctions against North Korea, most recently in March 2013.

 

   

In December 2012, North Korea launched a satellite into orbit using a long-range rocket, despite concerns in the international community that such a launch would be in violation of the agreement with the United States as well as United Nations Security Council resolutions that prohibit North Korea from conducting launches that use ballistic missile technology.

 

   

In March 2010, a Korean naval vessel was destroyed by an underwater explosion, killing many of the crewmen on board. The Korean government formally accused North Korea of causing the sinking, while North Korea denied responsibility. Moreover, in November 2010, North Korea fired more than one hundred artillery shells that hit Korea’s Yeonpyeong Island near the Northern Limit Line, which acts as the de facto maritime boundary between Korea and North Korea on the west coast of the Korean peninsula, causing casualties and significant property damage. The Korean government condemned North Korea for the attack and vowed stern retaliation should there be further provocation.

North Korea’s economy also faces severe challenges. For example, in November 2009, the North Korean government redenominated its currency at a ratio of 100 to 1 as part of a currency reform undertaken in an attempt to control inflation and reduce income gaps. In tandem with the currency redenomination, the North Korean government banned the use or possession of foreign currency by its residents and closed down privately run markets, which led to severe inflation and food shortages. Such developments may further aggravate social and political tensions within North Korea. There can be no assurance that the level of tension on the Korean peninsula will not escalate in the future. Any further increase in tensions, which may occur, for example, if North Korea experiences a leadership crisis, high-level contacts between Korea and North Korea break down or military hostilities occur, could have a material adverse effect on the Korean economy and on our business, financial condition and results of operations and the market value of our common stock and ADSs.

Unfavorable financial and economic developments in Korea may have an adverse effect on us.

We are incorporated in Korea, and substantially all of our operations are located in Korea. As a result, we are subject to political, economic, legal and regulatory risks specific to Korea. The economic indicators in Korea in recent years have shown mixed signs of growth and uncertainty, and future growth of the economy is subject to many factors beyond our control.

In recent years, adverse conditions and volatility in the worldwide financial markets, fluctuations in oil and commodity prices and the general weakness of the U.S. and global economy have contributed to the uncertainty of global economic prospects in general and have adversely affected, and may continue to adversely affect, the Korean economy. See “Other risks relating to our business—Difficult conditions in the global financial markets could adversely affect our results of operations and financial condition.” The value of the Won relative to major foreign currencies in general and the U.S. dollar in particular has also fluctuated widely. See “Item 3.A. Selected Financial Data—Exchange Rates.” Furthermore, as a result of adverse global and Korean economic conditions, there has been significant volatility in the stock prices of Korean companies in recent years. Future declines in the Korea Composite Stock Price Index (known as the “KOSPI”) and large amounts of sales of Korean securities

 

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by foreign investors and subsequent repatriation of the proceeds of such sales may adversely affect the value of the Won, the foreign currency reserves held by financial institutions in Korea, and the ability of Korean companies to raise capital. Any future deterioration of the Korean or global economy could adversely affect our business, financial condition and results of operations.

Developments that could hurt Korea’s economy in the future include:

 

   

difficulties in the financial sectors in Europe and elsewhere and increased sovereign default risks in select countries and the resulting adverse effects on the global financial markets;

 

   

adverse changes or volatility in foreign currency reserve levels, commodity prices (including oil prices), exchange rates (including fluctuation of the U.S. dollar, the euro or the Japanese yen exchange rates or revaluation of the Chinese renminbi), interest rates, inflation rates or stock markets;

 

   

continuing adverse conditions in the economies of countries and regions that are important export markets for Korea, such as the United States, Europe, Japan and China, or in emerging market economies in Asia or elsewhere;

 

   

further decreases in the market prices of Korean real estate;

 

   

increasing delinquencies and credit defaults by retail or small- and medium-sized enterprise borrowers;

 

   

declines in consumer confidence and a slowdown in consumer spending;

 

   

increasing levels of household debt;

 

   

difficulties in the financial sector in Korea, including the savings bank sector;

 

   

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

 

   

social and labor unrest;

 

   

a decrease in tax revenues and a substantial increase in the Korean government’s expenditures for fiscal stimulus measures, unemployment compensation and other economic and social programs that, together, would lead to an increased government budget deficit;

 

   

financial problems or lack of progress in the restructuring of chaebols, other large troubled companies, their suppliers or the financial sector;

 

   

loss of investor confidence arising from corporate accounting irregularities and corporate governance issues concerning certain chaebols;

 

   

increases in social expenditures to support an aging population in Korea or decreases in economic productivity due to the declining population size in Korea;

 

   

the economic impact of any pending or future free trade agreements;

 

   

geo-political uncertainty and risk of further attacks by terrorist groups around the world;

 

   

natural disasters that have a significant adverse economic or other impact on Korea or its major trading partners;

 

   

the occurrence of severe health epidemics in Korea or other parts of the world;

 

   

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

 

   

political uncertainty or increasing strife among or within political parties in Korea;

 

   

hostilities or political or social tensions involving oil producing countries in the Middle East and North Africa and any material disruption in the global supply of oil or increase in the price of oil;

 

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an increase in the level of tensions or an outbreak of hostilities between North Korea and Korea or the United States; and

 

   

changes in financial regulations in Korea.

Labor unrest in Korea may adversely affect our operations.

Economic difficulties in Korea or increases in corporate reorganizations and bankruptcies could result in layoffs and higher unemployment. Such developments could lead to social unrest and substantially increase government expenditures for unemployment compensation and other costs for social programs. According to statistics from the Korea National Statistical Office, the unemployment rate was 3.4% in 2011, decreased to 3.2% in 2012 and decreased further to 3.1% in 2013. Future increases in unemployment and any resulting labor unrest in the future could adversely affect our operations, as well as the operations of many of our customers and their ability to repay their loans, and could adversely affect the financial condition of Korean companies in general, depressing the price of their securities. These developments would likely have an adverse effect on our financial condition and results of operations.

Risks relating to our common stock and ADSs

We or our major stockholders may sell shares of our common stock or ADSs in the future, and these and other sales may adversely affect the market price of our common stock and ADSs and may dilute your investment and relative ownership in us.

In September 2009, we issued 30,000,000 new shares of our common stock (including 2,775,585 new shares in the form of ADSs) at a subscription price of ₩37,250 per share (and US$29.95 per ADS), pursuant to a rights offering to our existing shareholders. In July 2011, Kookmin Bank, our wholly-owned subsidiary, sold 34,966,962 shares of our common stock in a block sale. We have no current plans for any subsequent public offerings of our common stock, ADSs or securities exchangeable for or convertible into such securities. However, it is possible that we may decide to offer or sell such securities in the future. In addition, our major stockholder, the Korean National Pension Service, held approximately 9.96% of our total issued common stock as of December 31, 2013, which it may sell at any time.

Any future offerings or sales by us of our common stock or ADSs or securities exchangeable for or convertible into such securities, significant sales of our common stock by a major stockholder, or the public perception that an offering or sales may occur, could have an adverse effect on the market price of our common stock and ADSs. Furthermore, any offerings by us in the future of any such securities could have a dilutive impact on your investment and relative ownership interest in us.

Ownership of our common stock is restricted under Korean law.

Under the Financial Holding Company Act, a single stockholder, together with its affiliates, is generally prohibited from owning more than 10.0% of the issued and outstanding shares of voting stock of a bank holding company such as us that controls a nationwide bank, with the exception of certain stockholders that are non-financial business group companies, whose applicable limit has been reduced from 9.0% to 4.0% pursuant to an amendment of the Financial Holding Company Act which became effective from February 14, 2014. To the extent that the total number of shares of our common stock (including those represented by ADSs) that a holder and its affiliates own exceeds the applicable limits, that holder will not be entitled to exercise the voting rights for the excess shares, and the Financial Services Commission may order that holder to dispose of the excess shares within a period of up to six months. Failure to comply with such an order would result in an administrative fine of up to 0.03% of the book value of such shares per day until the date of disposal. Non-financial business group companies can no longer acquire more than 4.0% of the issued and outstanding shares of voting stock of a bank holding company pursuant to the amended Financial Holding Company Act, which grants an exception for non-financial business group companies which, at the time of the enactment of the amended provisions, held more

 

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than 4.0% of the shares thereof with the approval of the Financial Services Commission before the amendment. See “Item 4.B. Business Overview—Supervision and Regulation—Principal Regulations Applicable to Financial Holding Companies—Restrictions on Ownership of a Financial Holding Company.”

A holder of our ADSs may not be able to exercise dissent and appraisal rights unless it has withdrawn the underlying shares of our common stock and become our direct stockholder.

In some limited circumstances, including the transfer of the whole or any significant part of our business and the merger or consolidation of us with another company, dissenting stockholders have the right to require us to purchase their shares under Korean law. However, holders of our ADSs will not be able to exercise such dissent and appraisal rights if the depositary refuses to do so on their behalf. Our deposit agreement does not require the depositary to take any action in respect of exercising dissent and appraisal rights. In such a situation, holders of our ADSs must withdraw the underlying common stock from the ADS facility (and incur charges relating to that withdrawal) and become our direct stockholder prior to the record date of the stockholders’ meeting at which the relevant transaction is to be approved, in order to exercise dissent and appraisal rights.

A holder of our ADSs may be limited in its ability to deposit or withdraw common stock.

Under the terms of our deposit agreement, holders of common stock may deposit such stock with the depositary’s custodian in Korea and obtain ADSs, and holders of ADSs may surrender ADSs to the depositary and receive common stock. However, to the extent that a deposit of common stock exceeds the difference between:

 

  (1) the aggregate number of common shares we have deposited or we have consented to allow to be deposited for the issuance of ADSs (including deposits in connection with offerings of ADSs and stock dividends or other distributions relating to ADSs); and

 

  (2) the number of shares of common stock on deposit with the custodian for the benefit of the depositary at the time of such proposed deposit,

such common stock will not be accepted for deposit unless

 

  (A) our consent with respect to such deposit has been obtained; or

 

  (B) such consent is no longer required under Korean laws and regulations.

Under the terms of the deposit agreement, no consent is required if the shares of common stock are obtained through a dividend, free distribution, rights offering or reclassification of such stock. We have consented, under the terms of the deposit agreement, to any deposit to the extent that, after the deposit, the number of deposited shares does not exceed such number of shares as we determine from time to time (which number shall at no time be less than 100,000,000 shares), unless the deposit would be prohibited by applicable laws or violate our articles of incorporation. We might not consent to the deposit of any additional common stock. As a result, if a holder surrenders ADSs and withdraws common stock, it may not be able to deposit the stock again to obtain ADSs.

A holder of our ADSs will not have preemptive rights in some circumstances.

The Korean Commercial Code of 1962, as amended, and our articles of incorporation require us, with some exceptions, to offer stockholders the right to subscribe for new shares of our common stock in proportion to their existing shareholding ratio whenever new shares are issued. If we offer any rights to subscribe for additional shares of our common stock or any rights of any other nature, the depositary, after consultation with us, may make the rights available to holders of our ADSs or use reasonable efforts to dispose of the rights on behalf of such holders and make the net proceeds available to such holders. The depositary, however, is not required to make available to holders any rights to purchase any additional shares of our common stock unless it deems that doing so is lawful and feasible and:

 

   

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

 

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

Similarly, holders of our common stock located in the United States may not exercise any such rights they receive absent registration or an exemption from the registration requirements under the Securities Act.

We are under no obligation to file any registration statement with the U.S. Securities and Exchange Commission or to endeavor to cause such a registration statement to be declared effective. Moreover, we may not be able to establish an exemption from registration under the Securities Act. Accordingly, a holder of our ADSs may be unable to participate in our rights offerings and may experience dilution in its holdings. If a registration statement is required for a holder of our ADSs to exercise preemptive rights but is not filed by us or is not declared effective, the holder will not be able to exercise its preemptive rights for additional ADSs and it will suffer dilution of its equity interest in us. If the depositary is unable to sell rights that are not exercised or not distributed or if the sale is not lawful or feasible, it will allow the rights to lapse, in which case the holder will receive no value for these rights.

Dividend payments and the amount a holder of our ADSs may realize upon a sale of its ADSs will be affected by fluctuations in the exchange rate between the U.S. dollar and the Won.

Our common stock is listed on the KRX KOSPI Market and quoted and traded in Won. Cash dividends, if any, in respect of the shares represented by the ADSs will be paid to the depositary in Won and then converted by the depositary into U.S. dollars, subject to certain conditions. Accordingly, fluctuations in the exchange rate between the Won and the U.S. dollar will affect, among other things, the amounts a holder of our ADSs will receive from the depositary in respect of dividends, the U.S. dollar value of the proceeds that it would receive upon sale in Korea of the shares of our common stock obtained upon surrender of ADSs and the secondary market price of ADSs. Such fluctuations will also affect the U.S. dollar value of dividends and sales proceeds received by holders of our common stock.

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

Our common stock is listed on the KRX KOSPI Market, which has a smaller market capitalization and is more volatile than the securities markets in the United States and many European countries. The market value of ADSs may fluctuate in response to the fluctuation of the trading price of shares of our common stock on the KRX KOSPI Market. The KRX KOSPI Market has experienced substantial fluctuations in the prices and volumes of sales of listed securities and the KRX KOSPI Market has prescribed a fixed range in which share prices are permitted to move on a daily basis. The KOSPI declined from 1,897.1 on December 31, 2007 to 938.8 on October 24, 2008. The KOSPI was 1,969.3 on April 28, 2014. There is no guarantee that the stock prices of Korean companies will not decline again in the future. Like other securities markets, including those in developed markets, the Korean securities market has experienced problems including market manipulation, insider trading and settlement failures. The recurrence of these or similar problems could have a material adverse effect on the market price and liquidity of the securities of Korean companies, including our common stock and ADSs, in both the domestic and the international markets.

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

 

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If the Korean government deems that emergency circumstances are likely to occur, it may restrict holders of our ADSs and the depositary from converting and remitting dividends and other amounts in U.S. dollars.

If the Korean government deems that certain emergency circumstances, including, but not limited to, severe and sudden changes in domestic or overseas economic circumstances, extreme difficulty in stabilizing the balance of payments or implementing currency exchange rate and other macroeconomic policies, have occurred or are likely to occur, it may impose certain restrictions provided for under the Foreign Exchange Transaction Law, including the suspension of payments or requiring prior approval from governmental authorities for any transaction. See “Item 10.D. Exchange Controls—General.”

A holder of our ADSs may not be able to enforce a judgment of a foreign court against us.

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

 

Item 4. INFORMATION ON THE COMPANY

 

Item 4.A.    History and Development of the Company

Overview

We were established as a new financial holding company on September 29, 2008 pursuant to a “comprehensive stock transfer” under Korean law, whereby holders of the common stock of Kookmin Bank and certain of its subsidiaries transferred all of their shares to us in return for shares of our common stock. We were established pursuant to the Financial Holding Company Act, which was enacted in October 2000 and which, together with associated regulations and a related presidential decree, has enabled banks and other financial institutions, including insurance companies, investment trust companies, credit card companies and securities companies, to be organized and managed under the auspices of a single financial holding company.

Our legal and commercial name is KB Financial Group Inc. Our registered office and principal executive offices are located at 84, Namdaemoon-ro, Jung-gu, Seoul, Korea 100-703. Our telephone number is 822-2073-7114. Our agent in the United States, Kookmin Bank, New York Branch, is located at 565 Fifth Avenue, 24th Floor, New York, NY 10017. Its telephone number is (212) 697-6100.

History of the Former Kookmin Bank

The former Kookmin Bank was established by the Korean government in 1963 under its original name of Citizens National Bank under the Citizens National Bank Act of Korea with majority government ownership. Under this Act, we were limited to providing banking services to the general public and to small- and medium-sized enterprises. In September 1994, we completed our initial public offering in Korea and listed our shares on the KRX KOSPI Market.

In January 1995, the Citizens National Bank Act of Korea was repealed and replaced by the Repeal Act of the Citizens National Bank Act. Our status was changed from a specialized bank to a nationwide commercial bank and in February 1995, we changed our name to Kookmin Bank. The Repeal Act allowed us to engage in lending to large businesses.

 

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History of H&CB

H&CB was established by the Korean government in 1967 under the name Korea Housing Finance Corporation. In 1969, Korea Housing Finance Corporation became the Korea Housing Bank pursuant to the Korea Housing Bank Act. H&CB was originally established to provide low and middle income households with long-term, low-interest mortgages in order to help them purchase their own homes, and to promote the increase of housing supply in Korea by providing low-interest housing loans to construction companies. Under the Korea Housing Bank Act, up to 20% of H&CB’s lending (excluding lending pursuant to government programs) could be non-mortgage lending. Until 1997 when the Korea Housing Bank Act was repealed, H&CB was the only entity in Korea allowed to provide mortgage loans with a term of longer than ten years. H&CB also had the exclusive ability to offer housing-related deposit accounts offering preferential rights to subscribe for newly-built apartments.

In July 1999, H&CB entered into an investment agreement with certain affiliates of the ING Groep N.V., a leading global financial services group. Through ING Insurance International B.V. and ING International Financial Holdings, ING Groep N.V. invested ₩332 billion to acquire 9,914,777 new common shares of H&CB representing 9.99999% of H&CB’s outstanding common shares. As of December 31, 2012, ING Groep N.V. beneficially owned, through its consolidated subsidiary ING Bank N.V., 5.02% of our issued common stock. In February 2013, ING Bank N.V. sold all of its stake in our company in a block trade.

The Merger of the Former Kookmin Bank and H&CB

Effective November 1, 2001, the former Kookmin Bank and H&CB merged into a new entity named Kookmin Bank. This merger resulted in Kookmin Bank becoming the largest commercial bank in Korea. Kookmin Bank’s ADSs were listed on the New York Stock Exchange on November 1, 2001 and its common shares were listed on the KRX KOSPI Market on November 9, 2001. As of October 31, 2001, H&CB’s total assets were ₩67,399 billion, its total deposits were ₩51,456 billion, its total liabilities were ₩64,537 billion and it had stockholders’ equity of ₩2,849 billion. As required by U.S. GAAP, we recognized H&CB’s total assets and liabilities at their estimated fair values of ₩68,329 billion and ₩64,840 billion, respectively. These amounts reflect the recognition of ₩562 billion of negative goodwill, which was allocated to the fixed assets, core deposit intangible assets and credit card relationship intangible assets assumed.

The Establishment of KB Financial Group

We were established on September 29, 2008 pursuant to a “comprehensive stock transfer” under Article 360-15 of the Korean Commercial Code, whereby holders of the common stock of Kookmin Bank and certain of its subsidiaries transferred all of their shares to us, a new financial holding company, and in return received shares of our common stock. In the stock transfer, each holder of one share of Kookmin Bank common stock received one share of our common stock, par value ₩5,000 per share. Holders of Kookmin Bank ADSs and global depositary shares, each of which represented one share of Kookmin Bank common stock, received one of our ADSs for every ADS or global depositary share they owned. In addition, holders of the common stock of KB Investment & Securities Co., Ltd., KB Asset Management Co., Ltd., KB Real Estate Trust Co., Ltd., KB Investment Co., Ltd., KB Futures Co., Ltd., KB Credit Information Co., Ltd., and KB Data Systems Co., Ltd., all of which were Kookmin Bank’s subsidiaries, transferred all of their shares to us and, as consideration for such transferred shares, received shares of our common stock in accordance with the specified stock transfer ratio applicable to each such subsidiary. Following the completion of the stock transfer, Kookmin Bank, KB Investment & Securities Co., Ltd., KB Asset Management Co., Ltd., KB Real Estate Trust Co., Ltd., KB Investment Co., Ltd., KB Futures Co., Ltd., KB Credit Information Co., Ltd., and KB Data Systems Co., Ltd. became our wholly-owned subsidiaries. The stock transfer was accounted for under U.S. GAAP as a transaction between entities under common control and, with respect to the transfer by noncontrolling stockholders of Kookmin Bank’s subsidiaries included in the stock transfer, the acquisition by us of such noncontrolling interests of such subsidiaries was accounted for using the purchase method.

 

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The following chart illustrates the organizational structure of Kookmin Bank prior to the completion of the stock transfer:

 

LOGO

The following chart illustrates our organizational structure after the completion of the stock transfer:

 

LOGO

The purpose of the stock transfer and our establishment as a financial holding company was to reorganize the different businesses of Kookmin Bank and its subsidiaries under a holding company structure, the adoption of which we believe will:

 

   

assist us in creating an integrated system that facilitates the sharing of customer information and the development of integrated products and services by the different businesses within our subsidiaries;

 

   

assist us in expanding our business scope to include new types of business with higher profit margins;

 

   

enhance our ability to pursue strategic investments or reorganizations by way of mergers, acquisitions, spin-offs or other means;

 

   

maximize our management efficiency; and

 

   

further enhance our capacity to expand our overseas operations.

Following the stock transfer, our common stock was listed on the KRX KOSPI Market on October 10, 2008 and our ADSs were listed on the New York Stock Exchange on September 29, 2008.

 

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In connection with the stock transfer, Kookmin Bank common stockholders who opposed the stock transfer were entitled to exercise appraisal rights and require Kookmin Bank to repurchase their shares in the event the stock transfer was completed. The purchase price for shares in respect of which appraisal rights were exercised was set at ₩63,293 per share. Kookmin Bank repurchased 38,263,249 shares of its common stock as a result of the exercise of appraisal rights by dissenting stockholders. In addition, prior to the stock transfer, Kookmin Bank executed a share buy back program, pursuant to which it repurchased 16,840,000 shares of its common stock. Accordingly, as a result of the transfer by Kookmin Bank of such treasury shares and the shares it held in its subsidiaries to us, Kookmin Bank received 73,607,601 shares of our common stock in the stock transfer, all of which it subsequently sold.

Item 4.B.    Business Overview

Business

We are one of the largest financial holding companies in Korea, in terms of consolidated total assets, and our operations include Kookmin Bank, the largest commercial bank in Korea in terms of total assets (including loans). Our subsidiaries collectively engage in a broad range of businesses, including commercial banking, credit cards, asset management, life insurance, capital markets activities and international banking. As of December 31, 2013, we had consolidated total assets of ₩292 trillion, consolidated total deposits of ₩201 trillion and consolidated stockholders’ equity of ₩26 trillion.

We were established as a financial holding company in September 2008, pursuant to a “comprehensive stock transfer” under Korean law. See “Item 4.A. History and Development of the Company—The Establishment of KB Financial Group.”

On the asset side, we provide credit and related financial services to individuals and small- and medium-sized enterprises and, to a lesser extent, to large corporate customers. On the deposit side, we provide a full range of deposit products and related services to both individuals and enterprises of all sizes. We provide these services predominantly through Kookmin Bank.

By their nature, our core consumer and small- and medium-sized enterprise operations place a high premium on customer access and convenience. Our combined banking network of 1,207 branches as of December 31, 2013, one of the most extensive in Korea, provides a solid foundation for our business and is a major source of our competitive strength. This network provides us with a large, stable and cost effective funding source, enables us to provide our customers convenient access and gives us the ability to provide the customer attention and service essential to conducting our business, particularly in an increasingly competitive environment. Our branch network is further enhanced by automated banking machines and fixed-line, mobile telephone and Internet banking. As of December 31, 2013, we had a customer base of approximately 30.5 million retail customers, which represented over one-half of the Korean population.

 

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The following table sets forth the principal components of our lending business as of the dates indicated. As of December 31, 2013, retail loans and credit card loans and receivables accounted for 53.8% of our total loan portfolio:

 

     As of December 31,  
     2011     2012     2013  
     (in billions of Won, except percentages)  

Retail

               

Mortgage and home equity (1)

   75,580         35.1   74,463         34.3   77,969         35.1

Other consumer (2)

     28,275         13.1        28,969         13.4        29,675         13.4   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total retail

     103,855         48.2        103,432         47.7        107,644         48.5   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Credit card

     12,421         5.8        11,874         5.5        11,784         5.3   

Corporate

     97,239         45.1        99,683         45.9        100,534         45.3   

Foreign

     2,040         0.9        1,925         0.9        1,900         0.9   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total loans

   215,555         100.0   216,914         100.0   221,862         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) 

Includes ₩991 billion, ₩942 billion and ₩945 billion of overdraft loans secured by real estate in connection with home equity loans as of December 31, 2011, 2012 and 2013, respectively.

(2) 

Includes ₩8,622 billion, ₩7,978 billion and ₩7,181 billion of overdraft loans as of December 31, 2011, 2012 and 2013, respectively.

We provide a full range of personal lending products and retail banking services to individual customers, including mortgage loans. We are the largest private sector mortgage lender in Korea.

Lending to small- and medium-sized enterprises is the single largest component of our non-retail credit portfolio and represents a widely diversified exposure to a broad spectrum of the Korean corporate community, both by type of lending and type of customer, with one of the categories being collateralized loans to SOHO customers that are among the smallest of the small- and medium-sized enterprises. The volume of our loans to small- and medium-sized enterprises requires a customer-oriented approach that is facilitated by our large and geographically diverse branch network.

With respect to large corporate customers, we continue to seek to maintain and expand quality relationships by providing them with an increasing range of fee-related services.

Since the former Kookmin Bank initiated the issuance of domestic credit cards in 1980, we have seen our credit card business grow rapidly over the past decade as the nationwide trend towards credit card use accelerated. In March 2011, we effected a horizontal spin-off of the credit card business from Kookmin Bank. As a result, our credit card business is operated by a separate wholly-owned subsidiary, KB Kookmin Card Co., Ltd. As of December 31, 2013, we had approximately 18.8 million holders of check cards or credit cards issued by KB Kookmin Card.

Strategy

Our strategic focus is to become a world-class financial group that ranks among the leaders of the financial industry in Asia and globally. We plan to continue to solidify our market position as Korea’s leading bank, enhance our ability to provide comprehensive financial services to our retail and corporate customers and strengthen our overseas operating platform and network. We believe our strong market position in the commercial banking area in Korea is an important competitive advantage, which will enable us to compete more effectively based on convenient delivery, product breadth and differentiation, and service quality while focusing on our profitability.

 

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The key elements of our strategy are as follows:

Providing comprehensive financial services and maximizing synergies among our subsidiaries through our financial holding company structure

We believe the Korean financial services market has been undergoing and will continue to undergo significant change, resulting from, among other things, fluctuations in the Korean and global economy and the evolving social landscape in Korea, including the acceleration of population aging in Korea, the prevalence of smartphone usage, developments in digital and mobile technologies and the ensuing trend toward high-tech “smart banking” in the banking sector. In the context of such changes, we plan to become a comprehensive financial services provider capable of offering a full range of products and services to our large existing base of retail and corporate banking customers, as well as a global firm that can effectively compete with leading international financial institutions. To that end, we are continuing to implement specific initiatives including the enhancement of our group-wide integrated customer relationship management system to facilitate the sharing of customer information and the integration of various customer loyalty programs among our subsidiaries.

We believe our financial holding company structure gives us a competitive advantage over commercial banks and unaffiliated financial services providers by:

 

   

allowing us to offer a more extensive range of financial products and services;

 

   

enabling us to share customer information, which is not permitted outside a financial holding company structure, thereby enhancing our risk management and cross-selling capabilities;

 

   

enhancing our ability to reduce costs in areas such as back-office processing and procurement; and

 

   

enabling us to raise and manage capital on a centralized basis.

Identifying, targeting and marketing to attractive customer segments and providing superior customer value and service to such segments

In recent years, rather than focusing on developing products and services to satisfy the overall needs of the general population, we have increasingly targeted specific market segments in Korea that we expect to generate superior growth and profitability. We will continue to implement a targeted marketing approach that seeks to identify the most attractive customer segments and to develop strategies to build market share in those segments. In particular, we intend to increase our “wallet share” of superior existing customers by using our advanced customer relationship management technology to better identify and meet the needs of our most creditworthy and high net worth customers, on whom we intend to concentrate our marketing efforts. For example, as part of this strategy, we operate a “priority customer” program called KB Star Club through four of our subsidiaries: Kookmin Bank, KB Investment & Securities, KB Life Insurance and KB Kookmin Card. We select and classify KB Star Club customers based on their transaction history with the four subsidiaries and provide such customers with preferential treatment in various areas, including interest rates and transaction fees, depending upon how they are classified. We also provide private banking services, including personal wealth management services through our exclusive brand “Gold & Wise,” to increase our share of the priority customer market and in turn increase our profitability and strengthen our position in retail banking.

We are also focusing on attracting and retaining creditworthy customers by offering more differentiated fee-based products and services that are tailored to meet their specific needs. The development and marketing of our products and services are, in part, driven by customer segmentation to ensure we meet the needs of each customer segment. For instance, we continue to develop hybrid financial products with enhanced features, including various deposit products and investment products, for which consumer demand has increased in recent years. We are also focusing on addressing the needs of our customers by providing the highest-quality products and services and developing an open-architecture strategy, which allows us to sell such products through one of the largest branch networks in Korea. In short, we aim to offer our customers a convenient one-stop financial services destination where they can meet their traditional retail and corporate banking requirements, as well as

 

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find a broad array of fee-based products and services tailored to address more specific financial needs, including in investment banking, insurance and wealth management. We believe such differentiated, comprehensive services and cross-selling will not only enhance customer loyalty but also increase profitability.

One of our key customer-related strategies continues to be creating greater value and better service for our customers. We intend to continue improving our customer service, including through:

 

   

Improved customer relationship management technology. Management has devoted substantial resources toward development of our customer relationship management system, which is designed to provide our employees with the needed information to continually improve the level of service and incentives offered to our preferred customers. Our system is based on an integrated customer database, which allows for better customer management and streamlines our customer reward system. We have also developed state-of-the-art call centers and online Internet capabilities to provide shorter response times to customers seeking information or to execute transactions. Our goals are to continually focus on improving customer service to satisfy our customer’s needs through continuing efforts to deliver new and improved services and to upgrade our customer relationship management system to provide the best possible service to our customers in the future.

 

   

Enhanced distribution channels. We also believe we can improve customer retention and usage rates by increasing the range of products and services we offer and by developing a differentiated, multi-channel distribution network, including branches, ATMs, call centers, mobile-banking and Internet banking. We believe that our leading market position in the commercial banking area in Korea gives us a competitive advantage in developing and enhancing our distribution capabilities.

Focusing on expanding and improving credit quality in our corporate lending business and increasing market share in the corporate financial services market

We plan to focus on corporate lending as one of our core businesses through attracting top-tier corporate customers and providing customized and distinctive products and services to build our position as a leading service provider in the Korean corporate financial market. To increase our market share in providing financial services to the corporate market, we intend to:

 

   

promote a more balanced and strengthened portfolio with respect to our corporate business by developing our large corporate customer base and utilizing our improved credit management operations to better evaluate new large corporate and small- and medium-sized enterprise customers;

 

   

develop and sell more varied corporate financial products, consisting of transactional banking products which provide higher margin and less risk;

 

   

generate more fee income from large corporate customers through business-to-business transactions, foreign exchange transactions and derivative and other investment products, as well as investment banking services;

 

   

strengthen our marketing system based on our accumulated expertise in order to attract top-tier corporate customers;

 

   

focus on enhancing our channel network in order to provide the best service by strengthening our corporate customer management; and

 

   

further develop and train our core professionals with respect to this market, including through programs such as the “Career Development Path.”

Strengthening internal risk management capabilities

We believe that ensuring strong asset quality through effective credit risk management is critical to maintaining stable growth and profitability and risk management will continue to be one of our key focus areas. One of our highest priorities is to improve our asset quality and more effectively price our lending products to take into account inherent credit risk in our portfolio. Our goal is to maintain the soundness of our credit

 

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portfolio, profitability and capital base. To this end, we intend to continue to strengthen our internal risk management capabilities by tightening our underwriting and management policies and improving our internal compliance policies. To accomplish this objective, we have undertaken the following initiatives:

 

   

Strengthening underwriting procedures with advanced credit scoring techniques. We have centralized our credit management operations into our Credit Management & Analysis Group. Through such centralization, we aim to enhance our credit management expertise and improve our system of checks-and-balances with respect to our credit portfolio. We have also improved our ability to evaluate the credit of our small- and medium-sized enterprise customers through assigning experienced credit officers to our regional credit offices. We also require the same officer to evaluate, review and monitor the outstanding loans and other credits with respect to a customer, which we believe enhances the expertise and improves the efficiency and accountability of such officer, while enabling us to maintain a consistent credit policy. We have also, as a general matter, implemented enhanced credit analysis and scoring techniques, which we believe will enable us to make better-informed decisions about the credit we extend and improve our ability to respond more quickly to incipient credit problems. We are also focusing on enhancing our asset quality through improvement of our early monitoring systems and collection procedures.

 

   

Improving our internal compliance policy and ensuring strict application in our daily operations. We have improved our monitoring capabilities with respect to our internal compliance by providing training and educational programs to our management and employees. We have also implemented strict compliance policies to maintain the integrity of our risk management system.

Cultivating a performance-based, customer-oriented culture that emphasizes market best practices

We believe a strong and dedicated workforce is critical to our ability to offer our customers the highest quality financial services and is integral to our goal of maintaining our position as one of Korea’s leading financial services providers. In the past, we have dedicated significant resources to develop and train our core professionals, and we intend to continue to enhance the productivity of our employees, including by regularly sponsoring in-house training and educational programs. We have also been seeking to cultivate a performance-based culture to create a work environment where members of our staff are incentivized to maximize their potential and in which our employees are directly rewarded for superior performance. We intend to maintain a professional workforce whose high quality of customer service reflects our goal to achieve and maintain global best practice standards in all areas of operations.

Retail Banking

Due to Kookmin Bank’s history and development as a retail bank and the know-how and expertise we have acquired from our activities in that market, retail banking has been and will continue to remain one of our core businesses. Our retail banking activities consist primarily of lending and deposit-taking.

Lending Activities

We offer various loan products that target different segments of the population, with features tailored to each segment’s financial profile and other characteristics. The following table sets forth the balances and the percentage of our total retail lending represented by the categories of our retail loans as of the dates indicated:

 

     As of December 31,  
     2011     2012     2013  
     (in billions of Won, except percentages)  

Retail:

               

Mortgage and home equity loans

   75,580         72.8   74,463         72.0   77,969         72.4

Other consumer loans (1)

     28,275         27.2        28,969         28.0        29,675         27.6   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   103,855         100.0   103,432         100.0   107,644         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) 

Excludes credit card loans, but includes overdraft loans.

 

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Our retail loans consist of:

 

   

Mortgage loans, which are loans made to customers to finance home purchases, construction, improvements or rentals; and home equity loans, which are loans made to our customers secured by their homes to ensure loan repayment. We also provide overdraft loans in connection with our home equity loans.

 

   

Other consumer loans, which are loans made to customers for any purpose (other than mortgage and home equity loans). These include overdraft loans, which are loans extended to customers to cover insufficient funds when they withdraw funds from their demand deposit accounts with us in excess of the amount in such accounts up to a limit established by us.

For secured loans, including mortgage and home equity loans, our policy is to lend up to 100% of the adjusted collateral value (except in areas of high speculation designated by the government where we generally limit our lending to between 40% to 60% of the appraised value of collateral) minus the value of any lien or other security interests that are prior to our security interest. In calculating the adjusted collateral value for real estate, we use the appraisal value of the collateral multiplied by a factor, generally between 40% to 80% (40% to 60% in the case of mortgage and home equity loans). This factor varies depending upon the location and use of the real estate and is established in part by taking into account court-supervised auction prices for nearby properties.

A borrower’s eligibility for our mortgage loans depends on the value of the mortgage property, the appropriateness of the use of proceeds and the borrower’s creditworthiness. A borrower’s eligibility for home equity loans is determined by the borrower’s credit and the value of the property, while the borrower’s eligibility for other consumer loans is primarily determined by the borrower’s credit. If the borrower’s credit deteriorates, it may be difficult for us to recover the loan. As a result, we review the borrower’s creditworthiness, collateral value, credit scoring and third party guarantees when evaluating a borrower. In addition, to reduce the interest rate of a loan or to qualify for a loan, a borrower may provide collateral, deposits or guarantees from third parties.

Mortgage and Home Equity Lending

The housing finance market in Korea is divided into public sector and private sector lending. In the public sector, two government entities, the National Housing Fund and the National Agricultural Cooperative Federation, are responsible for most of the mortgage lending.

Private sector mortgage and home equity lending in Korea has expanded substantially in recent years. We provide customers with a number of mortgage and home equity loan products that have flexible features, including terms, repayment schedules, amounts and eligibility for loans, and we offer interest rates on a commercial basis. The maximum term of mortgage loans is 35 years and the majority of our mortgage loans have long-term maturities, which may be renewed. Non-amortizing home equity loans have an initial maturity of one year, which may be extended on an annual basis for a maximum of five years. Home equity loans subject to amortization of principal may have a maximum term of up to 35 years. As of December 31, 2013, we had ₩25,794 billion of amortizing home equity loans, representing 81.9% of our total home equity loans, and ₩5,690 billion of non-amortizing home equity loans, representing 18.1% of our total home equity loans. Any customer is eligible for a mortgage or an individual home equity loan regardless of whether it participates in one of our housing related savings programs and so long as that customer is not barred by regulation from obtaining a loan because of bad credit history. However, customers with whom we frequently transact business and provide us with significant revenue receive preferential interest rates on loans.

As of December 31, 2013, 72.8% of our mortgage loans were secured by residential property which is the subject of the loan, 18.3% of our mortgage loans were guaranteed by the Housing Finance Credit Guarantee Fund, a government housing-related entity, and the remaining 8.9% of our mortgage loans, contrary to general practices in the United States, were unsecured (although the use of proceeds from these loans are restricted for the purpose of financing home purchases and some of these loans were guaranteed by a third party). One reason that a relatively high percentage of our mortgage loans are unsecured is that we, along with other Korean banks,

 

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provide advance loans to borrowers for the down payment of new housing (particularly apartments) that is in the process of being built. Once construction is completed, which may take several years, these mortgage loans become secured by the new housing purchased by these borrowers. For the year ended December 31, 2013, the average initial loan-to-value ratio of our mortgage loans, which is a measure of the amount of loan exposure to the appraised value of the security collateralizing the loan, was approximately 47.7%. There are three reasons that our loan-to-value ratio is relatively lower (as is the case with other Korean banks) compared to similar ratios in other countries, such as the United States. The first reason is that housing prices are high in Korea relative to average income, so most people cannot afford to borrow an amount equal to the entire value of their collateral and make interest payments on such an amount. The second reason relates to the “jeonsae” system, through which people provide a key money deposit while residing in the property prior to its purchase. At the time of purchase, most people use the key money deposit as part of their payment and borrow the remaining amount from Korean banks, which results in a loan that will be for an amount smaller than the appraised value of the property for collateral and assessment purposes. The third reason is that Korean banks discount the appraised value of the borrower’s property for collateral and assessment purposes so that a portion of the appraised value is reserved in order to provide recourse to a renter who lives at the borrower’s property. This is in the event that the borrower’s property is seized by a creditor, and the renter is no longer able to reside at that property. See “Item 3.D. Risk Factors—Other risks relating to our business—A decline in the value of the collateral securing our loans and our inability to realize full collateral value may adversely affect our credit portfolio.” In response to the implementation in recent years of various government initiatives designed to curtail extension of new or refinanced loans secured by housing (as described in “—Supervision and Regulation—Principal Regulations Applicable to Banks—Recent Regulations Relating to Retail Household Loans”), we have tightened our mortgage loan guidelines, principally by decreasing our maximum loan-to-value ratios and borrower debt-to-income ratios in accordance with the revised limits set forth in the related regulations.

The following table sets forth our unsecured and secured mortgage loans and home equity loans as of December 31, 2011, 2012 and 2013, based on their loan classification categories under IFRS and our internal credit ratings for loans (which are described in Note 4.2.4 of the notes to our consolidated financial statements):

 

    As of December 31, 2011  
    Non-impaired     Impaired     Total  
    Not Past Due     Past Due                          
    Grade 1     Grade 2     Grade 3     Grade 4     Grade 5           Past Due Up to
89 Days
    Past Due 90 Days to
179 Days
    Past Due 180
Days or
More
       
                                  (in billions of Won)                    

Mortgage:

                   

Secured (1)

  33,606      4,205      440      136      87      650      57      30      40      39,251   

Unsecured

    4,297        1,108        105        75        85        188        12        74        325        6,269   

Home Equity:

                   

Secured

    25,420        3,478        429        107        87        450        48        20        21        30,060   

Unsecured

    —          —          —          —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  63,323      8,791      974      318      259      1,288      117      124      386      75,580   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    As of December 31, 2012  
    Non-impaired     Impaired     Total  
    Not Past Due     Past Due              
    Grade 1     Grade 2     Grade 3     Grade 4     Grade 5           Past Due Up to
89 Days
    Past Due 90 Days to
179 Days
    Past Due 180
Days or
More
       
                                  (in billions of Won)                    

Mortgage:

                   

Secured (1)

  33,783      4,271      478      141      98      665      45      70      55      39,606   

Unsecured

    3,441        989        135        72        95        94        5        53        387        5,271   

Home Equity:

                   

Secured

    25,081        3,269        472        106        102        452        44        30        30        29,586   

Unsecured

    —          —          —          —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  62,305      8,529      1,085      319      295      1,211      94      153      472      74,463   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    As of December 31, 2013  
    Non-impaired     Impaired     Total  
    Not Past Due     Past Due                          
    Grade 1     Grade 2     Grade 3     Grade 4     Grade 5           Past Due Up
to 89 Days
    Past Due 90 Days to
179 Days
    Past Due 180
Days or
More
       
                                  (in billions of Won)                    

Mortgage:

                   

Secured (1)

  37,642      4,171      361      116      78      808      74      44      76      43,370   

Unsecured

    2,131        531        74        24        11        119        9        28        188        3,115   

Home Equity:

                   

Secured

    27,512        2,767        356        98        89        541        63        26        32        31,484   

Unsecured

    —          —          —          —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  67,285      7,469      791      238      178      1,468      146      98      296      77,969   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Includes advance loans guaranteed by the Housing Finance Credit Guarantee Fund to borrowers for the down payment of new housing that is in the process of being built.

Our home equity loan portfolio includes loans that are in a second lien position. In addition to the underwriting procedures we perform when we issue home equity loans in general, we perform additional underwriting procedures with respect to home equity loans secured by a second lien to assess and confirm the value and status of any loans secured by security interests on the collateral which would be prior to our security interest under the second lien home equity loan. Under regulations implemented by the Financial Supervisory Service, our home equity loans are subject to maximum loan-to-value ratios (i.e., the ratio of the aggregate principal amount of loans, including first and second lien loans, secured by a particular item of collateral to the appraised value of such collateral) of between 40% and 60%. As such, for home equity loans, we do not lend more than an amount equal to the adjusted collateral value (i.e., the collateral value as discounted by the required loan-to-value ratio) minus the value of any loans secured by security interests on the collateral that are prior to our security interest. Accordingly, in order to ascertain the value of loans secured by security interests on the collateral which would be prior to our security interest and to confirm the status of such loans, we perform additional underwriting procedures including a review of the relevant title and security interest registration documents and bank documents and certificates regarding such loans. In addition, for purposes of calculating debt-to-income ratios applicable to loans secured by certain types of housing under regulations implemented by the Financial Supervisory Service (see “—Supervision and Regulation—Principal Regulations Applicable to Banks—Recent Regulations Relating to Retail Household Loans”), which we apply on a nationwide basis for our home equity loans, we perform additional adjustments in our debt-to-income ratio calculations with respect to second lien home equity loans to account for the value of loans secured by security interests on the collateral that are prior to our security interest.

Following the issuance of a home equity loan, we make use of the Korea Federation of Bank’s database of delinquent borrowers to generally monitor the compliance of our borrowers with their other loan obligations, including the compliance of our second lien borrowers with their first lien loans. If a borrower in Korea is past due on payments of interest or principal for more than three months on any of its outstanding loans to Korean financial institutions (including mortgage, home equity, other consumer and credit card loans), such borrower is registered on the Korea Federation of Banks’ database of delinquent borrowers, which we monitor on a daily basis. The information disclosed by such database, which includes the outstanding loan amount which is past due, the identity of the delinquent borrower and the name of the applicable lending institution for such loan, provides an early warning about such borrower to our loan officers at the branch level, who then closely monitor our outstanding loans to such delinquent borrower and take appropriate preventive and remedial measures (including requiring such borrower to provide additional collateral) as necessary. Upon the occurrence of a default in the first lien position, we treat the second lien home equity loan as part of our potential problem loans or non-performing loans. More specifically, upon learning of the occurrence of a default in the first lien position, we examine our second lien home equity loan to determine whether the loan should be re-classified as

 

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“precautionary,” “substandard” or “doubtful” according to the asset classification guidelines of the Financial Services Commission. Assuming that such second lien home equity loan is not delinquent, if the outstanding principal amount of the relevant first lien loan is less than ₩15 million, we classify the entire amount of the second lien home equity loan as “precautionary” and closely monitor it as a loan that may potentially become problematic. If the outstanding principal amount of the relevant first lien loan is ₩15 million or above or the borrower is undergoing, or preparing to undergo, foreclosure proceedings with respect to the underlying collateral, we classify the estimated recoverable amount of the second lien home equity loan as “substandard” and the rest of such loan amount as “doubtful.”

Pricing. The interest rates on our retail mortgage loans are generally based on a periodic floating rate (which is based on a base rate determined for three-month, six-month or twelve-month periods using our Market Opportunity Rate system, which reflects our internal cost of funding, further adjusted to account for our expenses related to lending). Our interest rates also incorporate a margin based among other things on the type of security, the credit score of the borrower and the estimated loss on the security. We can adjust the price to reflect the borrower’s current and/or expected future contribution to us. The applicable interest rate is determined at the time of the loan. If a loan is terminated prior to its maturity, the borrower is obligated to pay us an early termination fee of approximately 0.7% to 1.4% of the loan amount in addition to the accrued interest.

The interest rates on our home equity loans are determined on the same basis as our retail mortgage loans.

As of December 31, 2013, our three-month, six-month and twelve-month base rates were 2.65%, 2.73% and 2.79%, respectively.

As of December 31, 2013, 82% of our outstanding mortgage and home equity loans were priced based on a floating rate.

Other Consumer Loans

Other consumer loans are primarily unsecured. However, such loans may be secured by real estate, deposits or securities. As of December 31, 2013, approximately ₩15,854 billion, or 53.4% of our consumer loans (other than mortgage and home equity loans) were unsecured loans (although some of these loans were guaranteed by a third party). Overdraft loans are also classified as other consumer loans, are primarily unsecured and generally have an initial maturity of one year, which is typically extended automatically on an annual basis and may be extended up to a maximum of five years. The amount of overdraft loans as of December 31, 2013 was approximately ₩7,181 billion.

Pricing. The interest rates on our other consumer loans (including overdraft loans) are determined on the same basis as on our mortgage and home equity loans, except that, for unsecured loans, the borrower’s credit score as determined during our loan approval process is also taken into account. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Credit Risk Management.”

As of December 31, 2013, 98% of our other consumer loans had interest rates that were not fixed but were variable in reference to our base rate, which is based on the Market Opportunity Rate.

Deposit-taking Activities

Due to our extensive nationwide network of branches, together with our long history of development and our resulting know-how and expertise, as of December 31, 2013, we had the largest number of retail customers and retail deposits among Korean commercial banks. The balance of our deposits from retail customers was ₩119,707 billion, ₩126,581 billion and ₩132,733 billion as of December 31, 2011, 2012 and 2013, respectively, which constituted 62.9%, 64.1% and 66.1%, respectively, of the balance of our total deposits.

We offer many deposit products that target different segments of our retail customer base, with features tailored to each segment’s financial profile, characteristics and needs, including:

 

   

Demand deposits, which either do not accrue interest or accrue interest at a lower rate than time deposits. Demand deposits allow the customer to deposit and withdraw funds at any time and, if they

 

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are interest bearing, accrue interest at a variable rate depending on the amount of deposit. Retail and corporate demand deposits constituted 32.4% of our total deposits as of December 31, 2013 and paid average interest of 0.47% for 2013.

 

   

Time deposits, which generally require the customer to maintain a deposit for a fixed term, during which the deposit accrues interest at a fixed rate or a variable rate based on the KOSPI, or to deposit specified amounts on an installment basis. If the amount of the deposit is withdrawn prior to the end of the fixed term, the customer will be paid a lower interest rate than that originally offered. The term for time deposits typically ranges from one month to five years, and the term for installment savings deposits ranges from six months to ten years. Retail and corporate time deposits constituted 61.5% of our total deposits as of December 31, 2013 and paid average interest of 3.02% for 2013. Most installment savings deposits offer fixed interest rates.

 

   

Certificates of deposit, the maturities of which typically range from 30 days to 730 days with a required minimum deposit of ₩10 million. Interest rates on certificates of deposit are determined based on the length of the deposit and prevailing market rates. Our certificates of deposit are sold at a discount to their face value, reflecting the interest payable on the certificates of deposit.

 

   

Foreign currency deposits, which accrue interest at an adjustable rate and are available to Korean residents, non-residents and overseas immigrants. We offer foreign currency time deposits and checking and passbook accounts in ten currencies.

We offer varying interest rates on our deposit products depending upon average funding costs, the rate of return on our interest earning assets and the interest rates offered by other commercial banks.

We also offer deposits that provide the holder with preferential rights to housing subscriptions and eligibility for mortgage loans. These products include:

 

   

Housing subscription time deposits, which are special purpose time deposit accounts providing the holder with a preferential right to subscribe for new private apartment units under the Housing Law. This law is the basic law setting forth various measures supporting the purchase of houses and the supply of such houses by construction companies. These products accrue interest at a fixed rate for one year, and at an adjustable rate after one year. Deposit amounts per account range from ₩2 million to ₩15 million depending on the location of the holder’s current residence and the size of the desired apartment unit. These deposit products target high and middle income households.

 

   

Housing subscription installment savings deposits, which are monthly installment savings programs providing the holder with a preferential subscription right for new private apartment units under the Housing Law. Account holders are also eligible for our mortgage loans. These deposits require monthly installments of ₩50,000 to ₩500,000, have maturities of between two and five years and accrue interest at fixed or variable rates depending on the term. These deposit products target low- and middle-income households.

In 2002, after significant research and planning, we launched private banking operations at Kookmin Bank’s headquarters. Shortly thereafter, we launched a comprehensive strategy with respect to customers with higher net worth, which included staffing appropriate representatives, marketing aggressively, establishing IT systems, selecting appropriate branch locations and readying such branches with the necessary facilities to service such customers. As of December 31, 2013, we operated 23 private banking centers through Kookmin Bank.

The Monetary Policy Committee of the Bank of Korea (the “Monetary Policy Committee”) imposes a reserve requirement on Won currency deposits of commercial banks based generally on the type of deposit instrument. The reserve requirement is currently up to 7%. See “—Supervision and Regulation—Principal Regulations Applicable to Banks—Liquidity.”

 

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The Depositor Protection Act provides for a deposit insurance system where the Korea Deposit Insurance Corporation guarantees to depositors the repayment of their eligible bank deposits. The deposit insurance system insures up to a total of ₩50 million per depositor per bank. See “—Supervision and Regulation—Principal Regulations Applicable to Banks—Deposit Insurance System.” We paid ₩303 billion of premium for 2013.

Credit Cards

Credit cards are another of our core retail products. We issue most of our credit cards under the “KB Kookmin Card” brand. In March 2011, we effected a horizontal spin-off of the credit card business from Kookmin Bank. As a result, our credit card business is operated by a separate wholly-owned subsidiary, KB Kookmin Card Co., Ltd.

 

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The following table sets forth certain data relating to our credit card operations, on a non-consolidated basis, as of the dates and for the periods indicated:

 

     As of and for the Year Ended December 31,  
             2011                     2012                     2013          
    

(in billions of Won, except

number of holders,

accounts and percentages)

 

Number of credit cardholders (at year end) (thousands)

      

General accounts

     10,364        10,112        8,987   

Corporate accounts

     407        424        435   
  

 

 

   

 

 

   

 

 

 

Total

     10,771        10,536        9,422   
  

 

 

   

 

 

   

 

 

 

Number of merchants (at year end) (thousands)

     2,265        2,024        2,058   

Active ratio (at year end) (1)

     77.4     81.0     88.6

Credit card fees

      

Merchant fees (2)

   1,441      1,484      1,480   

Installment and cash advance fees

     648        683        578   

Annual membership fees

     51        66        68   

Other fees

     566        542        539   
  

 

 

   

 

 

   

 

 

 

Total

   2,706      2,775      2,665   
  

 

 

   

 

 

   

 

 

 

Charge volume (3)

      

General purchase

   46,771      45,768      46,735   

Installment purchase

     11,644        12,153        10,852   

Cash advance

     12,220        11,606        10,516   

Card loan (4)

     4,306        3,800        4,688   
  

 

 

   

 

 

   

 

 

 

Total

   74,941      73,327      72,791   
  

 

 

   

 

 

   

 

 

 

Outstanding balance (at year end)

      

General purchase

   4,410      4,533      4,716   

Installment purchase

     2,770        2,679        2,600   

Cash advance

     2,276        2,032        1,525   

Card loan (4)

     2,982        2,647        2,959   
  

 

 

   

 

 

   

 

 

 

Total

   12,438      11,891      11,800   
  

 

 

   

 

 

   

 

 

 

Average outstanding balances

      

General purchase

   4,569      4,461      4,601   

Installment purchase

     2,579        2,728        2,474   

Cash advance

     2,238        2,134        1,717   

Card loan (4)

     2,996        2,759        2,829   
  

 

 

   

 

 

   

 

 

 

Total

   12,382      12,082      11,621   
  

 

 

   

 

 

   

 

 

 

Delinquency ratios (at year end) (5)

      

From 1 month to 3 months

     1.00     0.94     0.81

From 3 months to 6 months

     0.34        0.25        0.83   

Over 6 months

     0.17        0.13        0.07   
  

 

 

   

 

 

   

 

 

 

Total

     1.51     1.32     1.71
  

 

 

   

 

 

   

 

 

 

Non-performing loan ratio

     0.50     0.40     0.91

Write-offs (gross)

   413      541      404   

Recoveries (6)

     204        185        141   
  

 

 

   

 

 

   

 

 

 

Net write-offs

   209      356      263   
  

 

 

   

 

 

   

 

 

 

Gross write-off ratio (7)

     3.34     4.48     2.93

Net write-off ratio (8)

     1.69     2.95     1.91

 

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(1) 

The active ratio represents the ratio of accounts used at least once within the last six months to total accounts as of year end.

(2) 

Merchant fees consist of maintenance fees and costs associated with prepayment by us (on behalf of customers) of sales proceeds to merchants, processing fees relating to sales and membership applications, costs relating to the management of delinquencies and recoveries, provision for loan losses, general variable expenses and other fixed costs that are charged to our member merchants. We typically charge our member merchants fees that range from 1.5% to 2.7%.

(3) 

Represents the aggregate cumulative amount charged during the year.

(4) 

Card loans consist of loans that are provided on an unsecured basis to cardholders upon prior agreement. Payment on such a loan can be due either in one payment or in installments after a fixed period, in the case of principal payments, and will be due in installments, in the case of interest payments.

(5) 

Represents ratio of credit card balances overdue by one month or more to outstanding balance. In line with industry practice, we have restructured a portion of delinquent credit card account balances as loans. As of December 31, 2013, these restructured loans amounted to ₩50 billion. Because these restructured loans are not treated as being delinquent at the time of conversion or for a period of time thereafter, our delinquency ratios may not fully reflect all delinquent amounts relating to our outstanding balances.

(6) 

Does not include proceeds that we received from sales of our non-performing loans that were written off.

(7) 

Represents the ratio of gross write-offs for the year to average outstanding balance for the year. Our charge-off policy is generally to write off balances which have been overdue for four payment cycles or more or which have been classified as expected loss.

(8) 

Represents the ratio of net write-offs for the year to average outstanding balances for the year. Our charge-off policy is generally to write off balances which have been overdue for four payment cycles or more or which have been classified as expected loss.

In contrast to the system in the United States and many other countries, where most credit cards are revolving cards that allow outstanding amounts to be rolled over from month to month so long as a required minimum percentage is repaid, credit cardholders in Korea are generally required to pay for their purchases within approximately 14 to 44 days of purchase depending on their payment cycle. However, we also offer revolving payment plans to individuals that allow outstanding amounts to be rolled over to subsequent payment periods. Delinquent accounts (defined as amounts overdue for one day or more) are charged penalty interest and closely monitored. For installment purchases, we charge interest on unpaid installments at rates that vary according to the individual cardholder’s membership level, which is based on, among others, transaction history, the length of the cardholder’s relationship with us and contribution to our profitability.

We are committed to continuing to enhance our credit card business by strengthening our risk management and maximizing our operational efficiency. In addition, we believe that our extensive branch network, brand recognition and overall size will enable us to cross-sell products such as credit cards to our existing and new customers.

To promote our credit card business, we offer services targeted to various financial profiles and customer requirements and are concentrating on:

 

   

strengthening cross-sales to existing customers and offering integrated financial services;

 

   

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

 

   

offering platinum cards, VVIP cards and other prime members’ cards, which have a higher credit limit and provide additional services in return for a higher fee;

 

   

acquiring new customers through strategic alliances and cross-marketing with retailers;

 

   

encouraging increased use of credit cards by existing customers through special offers for frequent users;

 

   

introducing new features such as travel services and insurance through alliance partners; and

 

   

developing fraud detection and security systems to prevent the misuse of credit cards.

As of December 31, 2013, we had approximately 9.4 million credit cardholders. Of the credit cards outstanding, approximately 88.6% were active, meaning that they had been used at least once during the previous six months.

 

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Our card revenues consist principally of cash advance fees, merchant fees, credit card installment fees, interest income from credit card loans, annual fees paid by cardholders, interest and fees on late payments and, with respect to revolving payment plans we offer, interest and fees relating to revolving balances. Cardholders are generally required to pay for their purchases within 14 to 44 days after the date of purchase, depending on their payment cycle. Except in the case of installment purchases, accounts which remain unpaid after this period are deemed to be delinquent.

We generate other fees through a processing charge on merchants, which ranges from 1.5% to 2.7%.

Under non-exclusive license agreements with overseas financial services corporations, we also issue MasterCard, Visa, American Express, JCB and China UnionPay credit cards.

We issue debit cards and charge merchants commissions that range from 1.0% to 2.0% of the amounts purchased using a debit card. We also issue “check cards,” which are similar to debit cards except that “check cards” are accepted by all merchants that accept credit cards, and charge merchants commissions that range from 1.0% to 1.7%. Much like debit cards, check card purchases are also debited directly from customers’ accounts with us.

In the second half of 2012, we (through KB Kookmin Card) commenced accounts receivable factoring activities in partnership with SK Telecom Co., Ltd., a leading Korean mobile telecommunications company, pursuant to which we purchase accounts receivable arising from SK Telecom’s installment sale of mobile handsets to its customers. The outstanding balance of factored receivables amounted to ₩2,771 billion as of December 31, 2013.

In February 2014, the Financial Services Commission suspended the new credit card issuance and other related activities of KB Kookmin Card for three months from February to May 2014, in response to an incident involving the misappropriation of the personal information of a large number of its customers by an employee of an external credit information company in the first half of 2013. See “Item 8A. Consolidated Statements and Other Financial Information—Legal Proceedings.”

Corporate Banking

We lend to and take deposits from small- and medium-sized enterprises and, to a lesser extent, large corporate customers. We had over 230,000 small- and medium-sized enterprise borrowers as of December 31, 2011 and 2012 and over 220,000 small- and medium-sized enterprise borrowers as of December 31, 2013, for Won-currency loans. As of December 31, 2011, 2012 and 2013, we had 1,210, 1,486 and 1,654 large corporate borrowers, respectively, for Won-currency loans. For 2011, 2012 and 2013, we received fee revenue from cash management services offered to corporate customers, which include “firm-banking” services such as inter-account transfers, transfers of funds from various branches and agencies of a company (such as insurance premium payments) to the account of the headquarters of such company and transfers of funds from various customers of a company to the main account of such company, in the amount of ₩117 billion, ₩115 billion and ₩117 billion, respectively. Of our branch network as of December 31, 2013, we had eight branches that primarily handled large corporate banking.

The following table sets forth the balances and the percentage of our total corporate lending represented by our small- and medium-sized enterprise business loans and our large corporate business loans as of the dates indicated, estimated based on our internal classifications of corporate borrowers:

 

     As of December 31,  
     2011     2012     2013  
     (in billions of Won, except percentages)  

Corporate:

               

Small- and medium-sized enterprise loans

   68,730         70.7   70,471         70.7   71,045         70.7

Large corporate loans

     28,509         29.3        29,212         29.3        29,489         29.3   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   97,239         100.0   99,683         100.0   100,534         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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On the deposit-taking side, we currently offer our corporate customers several types of corporate deposits. Our corporate deposit products can be divided into two general categories: (1) demand deposits that have no restrictions on deposits or withdrawals, but which offer a relatively low interest rate; and (2) deposits from which withdrawals are restricted for a period of time, but offer higher interest rates. We also offer installment savings deposits, certificates of deposit and repurchase instruments. We offer varying interest rates on deposit products depending upon the rate of return on our income-earning assets, average funding costs and interest rates offered by other nationwide commercial banks.

The total amount of deposits from our corporate customers amounted to ₩62,449 billion as of December 31, 2013, or 31.1% of our total deposits.

Small- and Medium-sized Enterprise Banking

Our small- and medium-sized enterprise banking business has traditionally been and will remain one of our core businesses because of both our historical development and our accumulated expertise. We believe that we possess the necessary elements to succeed in the small- and medium-sized enterprise market, including our extensive branch network, our credit rating system for credit approval, our marketing capabilities (which we believe have provided us with significant brand loyalty) and our ability to take advantage of economies of scale.

We use the term “small- and medium-sized enterprises” as defined in the Small and Medium Industry Basic Act and related regulations. Under the Small and Medium Industry Basic Act and related regulations, an enterprise must meet each of the following criteria in order to meet the definition of a small- and medium-sized enterprise: (i) the number of regular employees must be fewer than 1,000, (ii) total assets at the end of the immediately preceding fiscal year must be less than ₩500 billion, (iii) paid-in capital at the end of the immediately preceding fiscal year must be less than ₩100 billion, (iv) average annual sales revenue for the most recent three fiscal years must be less than ₩150 billion, (v) the standards as prescribed by the Presidential Decree that are applicable to the enterprise’s primary business must be met and (vi) the standards of management independence as prescribed by the Presidential Decree must be met. Further, beginning in January 2012, a non-profit enterprise with no more than 300 regular employees and annual sales revenue of less than ₩30 billion that satisfies the requirements prescribed in the Small and Medium Industry Basic Act may also qualify as a small- and medium-sized enterprise.

Industry-wide delinquency ratios for Won-denominated loans to small- and medium-sized enterprises increased slightly from 2012 to 2013. Our delinquency ratio for loans to small- and medium-sized enterprises may increase in the future as a result of, among other things, adverse economic conditions in Korea and globally. See “Item 3.D. Risk Factors—Other risks relating to our business—Difficult conditions in the global financial markets could adversely affect our results of operations and financial condition.” In addition, in light of the deteriorating financial condition and liquidity position of small- and medium-sized enterprises in Korea, the Korean government has in recent years introduced measures intended to encourage Korean banks to provide financial support to small- and medium-sized enterprise borrowers. See “Item 3.D. Risk Factors—Risks relating to our small- and medium-sized enterprise loan portfolio—We have significant exposure to small- and medium-sized enterprises, and any financial difficulties experienced by these customers may result in a deterioration of our asset quality and have an adverse impact on us.”

Lending Activities

Our principal loan products for our small- and medium-sized enterprise customers are working capital loans and facilities loans. Working capital loans are provided to finance working capital requirements and include notes discounted and trade financing. Facilities loans are provided to finance the purchase of equipment and the establishment of manufacturing assembly plants. As of December 31, 2013, working capital loans and facilities loans accounted for 59.9% and 40.1%, respectively, of our total small- and medium-sized enterprise loans. As of December 31, 2013, we had over 220,000 small- and medium-sized enterprise customers on the lending side.

 

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Loans to small- and medium-sized enterprises may be secured by real estate or deposits or may be unsecured. As of December 31, 2013, secured loans and guaranteed loans accounted for, in the aggregate, 84.4% of our small- and medium-sized enterprise loans. Among the secured loans, 95.4% were secured by real estate and 4.6% were secured by deposits or securities. Working capital loans generally have a maturity of one year, but may be extended for additional terms of up to one year in length for an aggregate term of five years. Facilities loans have a maximum maturity of 15 years.

When evaluating the extension of working capital loans, we review the corporate customer’s creditworthiness and capability to generate cash. Furthermore, we take credit guaranty letters from other financial institutions and use time deposits that the borrower has with us as collateral, and may require additional collateral.

The value of any collateral is defined using a formula that takes into account the appraised value of the property, any prior liens or other claims against the property and an adjustment factor based on a number of considerations including, with respect to property, the value of any nearby property sold in a court-supervised auction during the previous five years. We revalue any collateral on a periodic basis (generally every year) or if a trigger event occurs with respect to the loan in question.

We also offer mortgage loans to home builders or developers who build or sell single- or multi-family housing units, principally apartment buildings. Many of these builders and developers are categorized as small- and medium-sized enterprises. We offer a variety of such mortgage loans, including loans to purchase property or finance the construction of housing units and loans to contractors used for working capital purposes. Such mortgage loans subject us to the risk that the housing units will not be sold. As a result, we review the probability of the sale of the housing unit when evaluating the extension of a loan. We also review the borrower’s creditworthiness and the adequacy of the intended use of proceeds. Furthermore, we take a lien on the land on which the housing unit is to be constructed as collateral. If the collateral is not sufficient to cover the loan, we also take a guarantee from the Housing Finance Credit Guarantee Fund as security.

A substantial number of our small- and medium-sized enterprise customers are SOHOs, which we currently define to include sole proprietorships and individual business interests. With respect to SOHOs, we apply credit risk evaluation models, which not only use quantitative analysis related to a customer’s accounts, personal credit and financial information and due amounts but also require our credit officers to perform a qualitative analysis of each potential SOHO customer. With respect to SOHO loans in excess of ₩1 billion, our credit risk evaluation model also includes a quantitative analysis of the financial statements of the underlying business. We generally lend to SOHOs on a secured basis, although a small portion of our SOHO exposures are unsecured.

Pricing

We establish the price for our corporate loan products based principally on transaction risk, our cost of funding and market considerations. Transaction risk is measured by such factors as the credit rating assigned to a particular borrower, the size of the borrower and the value and type of collateral. Our loans are priced based on the Market Opportunity Rate system, which is a periodic floating rate system that takes into account the current market interest rate. As of December 31, 2013, the Market Opportunity Rate was 2.65% for three months, 2.73% for six months and 2.79% for one year.

While we generally utilize the Market Opportunity Rate system, depending on the price and other terms set by competing banks for similar borrowers, we may adjust the interest rate we charge to compete more effectively with other banks.

Large Corporate Banking

Large corporate customers include all companies that are not small- and medium-sized enterprise customers. Kookmin Bank’s articles of incorporation provide that financial services to large corporate customers must be no

 

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more than 40% of the total amount of our Won-denominated loans. Our business focus with respect to large corporate banking is to selectively increase the proportion of high quality large corporate customers. Specifically, we are carrying out various initiatives to improve our customer relationship with large corporate customers and have been seeking to expand our service offerings to this segment.

Lending Activities

Our principal loan products for our large corporate customers are working capital loans and facilities loans. As of December 31, 2013, working capital loans and facilities loans accounted for 80.0% and 20.0%, respectively, of our total large corporate loans. We also offer mortgage loans to large corporate clients who build or sell single- or multi-family housing units, as described above under “—Small- and Medium-sized Enterprise Banking—Lending Activities.”

As of December 31, 2013, secured loans and guaranteed loans accounted for, in the aggregate, 14.8% of our large corporate loans. Among the secured loans, 83.4% were secured by real estate and 16.6% were secured by deposits or securities. Working capital loans generally have a maturity of one year, but may be extended for additional terms ranging from three months to one year in length for an aggregate term of five years. Facilities loans have a maximum maturity of 15 years.

In our unsecured lending to large corporate customers, a critical consideration in our policy regarding the extension of such unsecured loans is the borrower’s creditworthiness. We assign each borrower a credit rating based on the judgment of our experts or scores calculated using the appropriate credit rating system, taking into account both financial factors and non-financial factors (such as our perception of a borrower’s reliability, management and operational risk and risk relating to the borrower’s industry). The credit ratings, along with such factors, are key determinants that inform our lending to large corporate customers. Large corporate customers generally have higher credit ratings due to their higher repayment capability compared to other types of borrowers, such as small- and medium-sized enterprise borrowers. In addition, large corporate borrowers generally are affected to a lesser extent than small- and medium-sized enterprise borrowers by fluctuations in the Korean economy and also maintain more sophisticated financial records. As of December 31, 2013, 82.7% of our large corporate customers had credit ratings or BBB- or above according to the internal credit rating system of Kookmin Bank, compared to 38.7% of our small- and medium-sized enterprise customers. A credit rating of BBB- is assigned to customers whose ability to repay the principal and interest on their outstanding loans is determined by us to be generally satisfactory but nonetheless subject to adverse effects under unfavorable economic conditions or during downturns in the business environment. Based on our internal analysis of historical data, we believe that the probability of default for loans extended to large corporate customers with a credit rating of BBB- or above is between 0.00% and 2.26%.

We monitor the credit status of large corporate borrowers and collect information to adjust our ratings appropriately. We also manage and monitor our large corporate customers through a dedicated Corporate Banking Branch and Kookmin Bank’s Large Corporate Business Department. In addition, Kookmin Bank’s Credit Risk Department manages the exposures to each large corporate customer and conducts in-depth analysis of various economic and industry-related risks that are relevant to large corporate customers.

As of December 31, 2013, in terms of our outstanding loan balance, 32.4% of our large corporate loans was extended to borrowers in the financial institutions industry, 29.3% was extended to borrowers in the manufacturing industry and 20.8% was extended to borrowers in the service industry.

Pricing

We determine pricing of our large corporate loans in the same way as we determine the pricing of our small- and medium-sized enterprise loans. See “—Small- and Medium-sized Enterprise Banking—Pricing” above. As of December 31, 2013, the Market Opportunity Rate, which is utilized in pricing loans offered by us, was the same for our large corporate loans as for our small- and medium-sized enterprise loans.

 

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Capital Markets Activities and International Banking

Through our capital markets operations, we invest and trade in debt and equity securities and, to a lesser extent, engage in derivatives and asset securitization transactions and make call loans. We also provide investment banking services to corporate customers.

Securities Investment and Trading

We invest in and trade securities for our own account in order to maintain adequate sources of liquidity and to generate interest and dividend income and capital gains. As of December 31, 2011, 2012 and 2013, our investment portfolio, which consists primarily of held-to-maturity financial assets and available-for-sale financial assets, and our trading portfolio had a combined total carrying amount of ₩42,650 billion, ₩46,962 billion and ₩44,933 billion and represented 15.4%, 16.4% and 15.4% of our total assets, respectively.

Our trading and investment portfolios consist primarily of Korean treasury securities and debt securities issued by Korean government agencies, local governments or certain government-invested enterprises and debt securities issued by financial institutions. As of December 31, 2011, 2012 and 2013, we held debt securities with a total carrying amount of ₩37,966 billion, ₩42,285 billion and ₩39,776 billion, respectively, of which:

 

   

held-to-maturity debt securities accounted for ₩13,055 billion, ₩12,256 billion and ₩13,017 billion, or 34.4%, 29.0% and 32.7%, respectively;

 

   

available-for-sale debt securities accounted for ₩19,734 billion, ₩21,737 billion and ₩18,933 billion, or 52.0%, 51.4% and 47.6%, respectively; and

 

   

debt securities at fair value through profit or loss accounted for ₩5,177 billion, ₩8,292 billion and ₩7,826 billion, or 13.6%, 19.6% and 19.7%, respectively.

Of these amounts, debt securities issued by the Korean government and government agencies as of December 31, 2011, 2012 and 2013 amounted to:

 

   

₩5,436 billion, ₩4,449 billion and ₩4,357 billion, or 41.6%, 36.3% and 33.5%, respectively, of our held-to-maturity debt securities;

 

   

₩5,989 billion, ₩6,256 billion and ₩6,926 billion, or 30.3%, 28.8% and 36.6%, respectively, of our available-for-sale debt securities; and

 

   

₩1,508 billion, ₩2,376 billion and ₩2,085 billion, or 29.1%, 28.7% and 26.6%, respectively, of our debt securities at fair value through profit or loss.

From time to time we also purchase equity securities for our securities portfolios. Our equity securities consist primarily of marketable beneficiary certificates and equities listed on the KRX KOSPI Market or the KRX KOSDAQ Market. As of December 31, 2011, 2012 and 2013:

 

   

equity securities in our available-for-sale portfolio had a carrying amount of ₩2,643 billion, ₩2,474 billion and ₩2,899 billion, or 11.8%, 10.2% and 13.3% of our available-for-sale portfolio, respectively; and

 

   

equity securities in our trading portfolio had a carrying amount of ₩546 billion, ₩1,035 billion and ₩1,217 billion, or 8.6%, 10.8% and 13.0% of our debt and equity trading portfolio, respectively.

Our trading portfolio also includes derivative instruments. See “—Derivatives Trading.”

 

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The following tables show, as of the dates indicated, the gross unrealized gains and losses on available-for-sale and held-to-maturity financial assets within our investment portfolio, and the amortized cost and fair value of the portfolio by type of financial asset:

 

     As of December 31, 2011  
     Amortized
Cost
     Gross
Unrealized Gain
     Gross
Unrealized Loss
     Fair Value  
     (in billions of Won)  

Available-for-sale financial assets:

           

Debt securities

           

Korean treasury securities and government agencies

   5,928       62       1       5,989   

Financial institutions (1)

     6,413         20         1         6,432   

Corporate (2)

     5,277         99         1         5,375   

Asset-backed securities

     1,762         1         6         1,757   

Others

     180         1         —           181   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     19,560         183         9         19,734   

Equity securities

     2,193         616         166         2,643   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale financial assets

   21,753       799       175       22,377   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held-to-maturity financial assets:

           

Korean treasury securities and government agencies

   5,436       240       —         5,676   

Financial institutions (3)

     1,125         30         —           1,155   

Corporate (4)

     6,155         235         —           6,390   

Asset-backed securities

     339         2         —           341   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held-to-maturity financial assets

   13,055       507       —         13,562   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     As of December 31, 2012  
     Amortized
Cost
     Gross
Unrealized Gain
     Gross
Unrealized Loss
     Fair Value  
     (in billions of Won)  

Available-for-sale financial assets:

           

Debt securities

           

Korean treasury securities and government agencies

   6,171       87       2       6,256   

Financial institutions (1)

     7,436         40         —           7,476   

Corporate (2)

     6,470         139         3         6,606   

Asset-backed securities

     1,396         4         1         1,399   

Others

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     21,473         270         6         21,737   

Equity securities

     1,825         659         10         2,474   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale financial assets

   23,298       929       16       24,211   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held-to-maturity financial assets:

           

Korean treasury securities and government agencies

   4,449       272       1       4,720   

Financial institutions (3)

     1,316         22         —           1,338   

Corporate (4)

     6,213         285         —           6,498   

Asset-backed securities

     278         3         —           281   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held-to-maturity financial assets

   12,256       582       1       12,837   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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     As of December 31, 2013  
     Amortized
Cost
     Gross
Unrealized Gain
     Gross
Unrealized Loss
     Fair Value  
     (in billions of Won)  

Available-for-sale financial assets:

           

Debt securities

           

Korean treasury securities and government agencies

   6,910       30       14       6,926   

Financial institutions (1)

     5,771         15         4         5,782   

Corporate (2)

     4,948         57         7         4,998   

Asset-backed securities

     1,208         2         2         1,208   

Others

     19         —           —           19   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     18,856         104         27         18,933   

Equity securities

     2,092         823         16         2,899   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale financial assets

   20,948       927       43       21,832   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held-to-maturity financial assets:

           

Korean treasury securities and government agencies

   4,357       180       —         4,537   

Financial institutions (3)

     893         9         —           902   

Corporate (4)

     7,400         180         —           7,580   

Asset-backed securities

     367         1         —           368   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held-to-maturity financial assets

   13,017       370       —         13,387   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Includes debt securities issued by the Bank of Korea, Korea Development Bank, Korea Finance Corporation and Industrial Bank of Korea in the aggregate amount of ₩3,601 billion as of December 31, 2011, ₩5,702 billion as of December 31, 2012 and ₩4,463 billion as of December 31, 2013. These financial institutions are controlled by the Korean government.

(2) 

Includes debt securities issued by Korea Electric Power Corporation, which is controlled by the Korean government, in the amount of ₩344 billion as of December 31, 2011, ₩393 billion as of December 31, 2012 and ₩143 billion as of December 31, 2013.

(3) 

Includes debt securities issued by the Bank of Korea, Korea Development Bank, Korea Finance Corporation and Industrial Bank of Korea in the aggregate amount of ₩405 billion as of December 31, 2011, ₩986 billion as of December 31, 2012 and ₩519 billion as of December 31, 2013. These financial institutions are controlled by the Korean government.

(4) 

Includes debt securities issued by Korea Electric Power Corporation, which is controlled by the Korean government, in the amount of ₩483 billion as of December 31, 2011, ₩432 billion as of December 31, 2012 and ₩545 billion as of December 31, 2013.

Derivatives Trading

Until the full-scale launch of our derivatives operations in mid-1999, we had been engaged in limited volumes of derivatives trading, mostly on behalf of our customers. Since then, our trading volume significantly increased to ₩174,358 billion in 2011 and to ₩195,879 billion in 2012 but decreased slightly to ₩194,307 billion in 2013. Our net trading revenue from derivatives for the year ended December 31, 2011, 2012 and 2013 was ₩906 billion, ₩456 billion and ₩544 billion, respectively.

We provide and trade a range of derivatives products, including:

 

   

Won interest rate swaps, relating to Won interest rate risks;

 

   

cross-currency swaps, forwards and options relating to foreign exchange risks; and

 

   

stock price index options linked to the KOSPI index.

Our derivatives operations focus on addressing the needs of our corporate clients to hedge their risk exposure and the need to hedge our risk exposure that results from such client contracts. We also engage in derivatives trading activities to hedge the interest rate and foreign currency risk exposures that arise from our own assets and liabilities. In addition, we engage in proprietary trading of derivatives within our regulated open position limits.

 

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The following shows the estimated fair value of our derivatives as of December 31, 2011, 2012 and 2013:

 

     As of December 31,  
     2011      2012      2013  
     Estimated
Fair Value
Assets
     Estimated
Fair Value
Liabilities
     Estimated
Fair Value
Assets
     Estimated
Fair Value
Liabilities
     Estimated
Fair Value
Assets
     Estimated
Fair Value
Liabilities
 
     (in billions of Won)  

Foreign exchange derivatives (1)

   1,450       1,087       846       943       938       996   

Interest rate derivatives (1)

     796         737         1,100         1,040         766         731   

Equity derivatives

     200         220         74         68         47         50   

Credit derivatives

     —           —           —           —           —           —     

Commodity derivatives

     1         —           —           —           —           —     

Others (1)

     2         15         71         4         68         18   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   2,449       2,059       2,091       2,055       1,819       1,795   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Includes those for trading purposes and hedging purposes.

The following table shows certain information related to our derivatives designated as fair value hedges for the years ended December 31, 2011, 2012 and 2013:

 

    Year Ended December 31,  
    2011     2012     2013  
    Derivatives     Hedged
Items
    Hedge
Ineffectiveness
    Derivatives     Hedged
Items
    Hedge
Ineffectiveness
    Derivatives     Hedged
Items
    Hedge
Ineffectiveness
 
    (in billions of Won)  

Foreign exchange derivatives

  67      (48   19      (58   74      16      (11   36      25   

Interest rate derivatives

    23        (19     4        32        (25     7        (29     37        8   

Other derivatives

    19        (18     1        11        (11     —          (8     8        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  109      (85   24      (15   38      23 ₩      (48   81      33   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table shows certain information related to our derivatives designated as cash flow hedges for the years ended December 31, 2011, 2012 and 2013:

 

    Year Ended December 31,  
    2011     2012      2013  
    Derivatives     Effective
Portion
    Ineffective
Portion
    Derivatives     Effective
Portion
    Ineffective
Portion
     Derivatives     Effective
Portion
    Ineffective
Portion
 
    (in billions of Won)  

Foreign exchange derivatives

  23      23      —        (22   (22   —         (5   (5   —     

Interest rate derivatives

    (1     (1     —          (5     (5     —           2        2        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

  22      22      —        (27   (27   —         (3   (3   —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Asset Securitization Transactions

We are active in the Korean asset-backed securities market. Based on our diverse experience with respect to product development and management capabilities relating to asset securitization, we offer customers a wide

 

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range of financial products and participate in various asset securitization transactions, including through our subsidiary KB Investment & Securities, to reinforce our position as a leading financial services provider with respect to the asset securitization market. We were involved in asset securitization transactions with an initial aggregate issue amount of ₩1,380 billion in 2011, ₩5,040 billion in 2012 and ₩7,296 billion in 2013, all of which were public offerings of asset-backed securities. Most of these securities were sold to institutional investors through Korean securities houses.

Call Loans

We make call loans and borrow call money in the short-term money market. Call loans are defined as short-term lending among banks and financial institutions either in Won or in foreign currencies with maturities of 90 days or less. Typically, call loans have maturities of one day. As of December 31, 2013, we had made call loans of ₩3,206 billion and borrowed call money of ₩2,648 billion, compared to ₩2,534 billion and ₩2,597 billion, respectively, as of December 31, 2012, and ₩3,682 billion and ₩1,141 billion, respectively, as of December 31, 2011.

Investment Banking

We have focused on selectively expanding our investment banking activities in order to increase our fee income and diversify our revenue base. The main focus of our investment banking operations is project finance and financial advisory services. Our principal investment banking services include:

 

   

project finance and financial advisory services for social overhead capital projects such as highway, port, power, water and sewage projects;

 

   

financing and financial advisory services for real estate development projects;

 

   

structured finance; and

 

   

financing for mergers and acquisitions.

In 2013, we generated investment banking revenue of ₩151 billion, consisting of ₩24 billion of interest income and ₩127 billion of fee income.

International Banking

We engage in various international banking activities, including foreign exchange services and derivatives dealing, import and export-related services, offshore lending, syndicated loans and foreign currency securities investment. These services are provided primarily to our domestic customers and overseas subsidiaries and affiliates of Korean corporations. We also raise foreign currency funds through our international banking operations.

The table below sets forth certain information regarding our foreign currency assets and borrowings:

 

     As of December 31,  
     2011      2012      2013  
     (in millions of US$)  

Total foreign currency assets

   US$ 16,539       US$ 14,459       US$ 14,989   

Foreign currency borrowings:

        

Debts

     8,307         7,087         6,637   

Debentures

     3,409         2,974         3,123   
  

 

 

    

 

 

    

 

 

 

Total borrowings

   US$ 11,716       US$ 10,061       US$ 9,760   
  

 

 

    

 

 

    

 

 

 

 

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The table below sets forth our overseas subsidiaries, branches and representative office currently in operation as of December 31, 2013:

 

Business Unit(1)

   Location

Subsidiaries

  

Kookmin Bank Cambodia PLC

   Cambodia

Kookmin Bank (China) Ltd.

   China

Kookmin Bank Hong Kong Ltd.

   Hong Kong

Kookmin Bank International Ltd.

   United Kingdom

Branches

  

Kookmin Bank (China) Ltd., Beijing Branch

   China

Kookmin Bank (China) Ltd., Guangzhou Branch

   China

Kookmin Bank (China) Ltd., Harbin Branch

   China

Kookmin Bank (China) Ltd., Suzhou Branch

   China

Kookmin Bank, Osaka Branch

   Japan

Kookmin Bank, Tokyo Branch

   Japan

Kookmin Bank, Auckland Branch

   New Zealand

Kookmin Bank, New York Branch

   United States

Kookmin Bank, Ho Chi Minh City Branch

   Vietnam

Kookmin Bank Cambodia PLC, Toul Kork Branch

   Cambodia

Representative Office

  

Kookmin Bank, Mumbai Representative Office

   India

Kookmin Bank, Yangon Representative Office

   Myanmar

Kookmin Bank, Hanoi Representative Office

   Vietnam

 

(1) 

Does not include subsidiaries and branches in liquidation or dissolution.

Our overseas branches and subsidiaries principally provide Korean companies and nationals in overseas markets with trade financing, local currency funding and foreign exchange services, in conjunction with the operations of our headquarters.

In March 2008, we entered into agreements to acquire shares of JSC Bank CenterCredit, a Kazakhstan bank, and acquired an initial equity stake of 29,972,840 common shares (equal to 23.0% of the then-outstanding voting shares) for approximately ₩528 billion in August 2008. Pursuant to the terms of such agreements, we acquired an aggregate of 14,163,836 additional common shares of JSC Bank CenterCredit in November and December 2008. In addition, in September 2009, we entered into agreements with International Finance Corporation and certain shareholders of JSC Bank CenterCredit pursuant to which we acquired 3,886,574 additional common shares and 36,561,465 non-voting convertible preferred shares of JSC Bank CenterCredit in January and February 2010. As of December 31, 2013, we held 29.6% of the outstanding common shares of JSC Bank CenterCredit. Our investment in JSC Bank CenterCredit is accounted for under the equity method from the initial acquisition date and we applied the purchase method to account for each acquisition.

In May 2009, we acquired 132,600 common shares of Khmer Union Bank, a Cambodian bank, for approximately ₩10 billion. As a result, we acquired 51% of the voting rights in Khmer Union Bank, which was renamed Kookmin Bank Cambodia PLC. In December 2010, July 2012 and June 2013, we acquired additional 37,602 common shares, 125,592 common shares and 24,206 common shares of Kookmin Bank Cambodia PLC, respectively. As of December 31, 2013, we held 100.0% of the outstanding common shares of Kookmin Bank Cambodia PLC. We applied the purchase method to account for the initial acquisition of Kookmin Bank Cambodia PLC in May 2009. The subsequent acquisitions in December 2010, July 2012 and June 2013 were accounted for as equity transactions.

 

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Trustee and Custodian Services Relating to Investment Trusts and Other Functions

We act as a trustee for 64 financial investment companies with a collective investment license, which invest in investment assets using funds raised by the sale of beneficiary certificates of investment trusts to investors. We also act as custodian for 155 financial institutions and as fund administrator for 46 financial institutions with respect to various investments, as well as acting as settlement agent in connection with such services. We receive a fee for acting in these capacities and generally perform the following functions:

 

   

holding assets for the benefit of the investment trusts or institutional investors;

 

   

receiving and making payments in respect of such investments;

 

   

acting as settlement agent in respect of such investments on behalf of the investment trust or institutional investors, in the domestic and overseas markets;

 

   

providing reports on assets held in custody;

 

   

providing certain foreign exchange services for overseas investment and foreign investors; and

 

   

providing fund-related administration and accounting services.

For the year ended December 31, 2013, our fee income from our trustee and custodian services was ₩23 billion and revenue collected as a result of administration of the underlying investments was ₩6 billion.

Other Businesses

Trust Account Management Services

Money Trust Management Services

We provide trust account management services for both specified money trusts and unspecified money trusts. We receive fees for our trust account management services consisting of basic fees that are based upon a percentage of either the net asset value of the assets or the principal under management and, for certain types of trust account operations, performance fees that are based upon the performance of the trust account operations. In 2013, our basic fees ranged from 0.1% to 2.0% of total assets under management depending on the type of trust account. We also charge performance fees with respect to certain types of trust account products. We receive penalty payments when customers terminate their trust accounts prior to the original contract maturity.

We currently provide trust account management services for 20 types of money trusts. The money trusts we manage are generally trusts with a fixed maturity. Approximately 7.4% of our money trusts also provide periodic payments of dividends which are added to the assets held in such trusts and not distributed.

Under Korean law, the assets of our trust accounts are segregated from our banking account assets and are not available to satisfy the claims of any of our potential creditors. We are, however, permitted to deposit surplus funds generated by trust assets into our banking accounts.

As of December 31, 2013, the total balance of our money trusts was ₩23,912 billion (as calculated in accordance with Statement of Korea Accounting Standard No. 5004, Trust Accounts, and the Enforcement Regulations of Financial Investment Services under the Financial Investment Services and Capital Markets Act, which we refer to as an “SKAS basis”). As for unspecified money trust accounts, we have investment discretion over all money trusts, which are pooled and managed jointly for each type of trust account. Specified money trust accounts are established on behalf of individual customers who direct our investment of trust assets.

 

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The following table shows the balances of our money trusts by type as of the dates indicated. Under IFRS, commencing in 2013, we consolidate trust accounts for which we guarantee both the repayment of the principal amount and a fixed rate of interest as well as trust accounts for which we guarantee only the repayment of the principal amount.

 

     As of December 31,  
     2011      2012      2013  
     (in billions of Won)  

Principal and interest guaranteed trusts (1)

   0.2       0.2       0.2   

Principal guaranteed trusts (1)

     2,892         2,919         3,070   

Performance trusts (1)(2)

     15,304         18,066         20,842   
  

 

 

    

 

 

    

 

 

 

Total

   18,196       20,985       23,912   
  

 

 

    

 

 

    

 

 

 

 

(1) 

Calculated on an SKAS basis.

(2) 

Trusts which are primarily non-guaranteed.

The balance of our money trusts increased 31.4% between December 31, 2011 and December 31, 2013. As of December 31, 2013, the trust assets we managed consisted principally of securities investments and loans from the trust accounts. As of December 31, 2013, on an SKAS basis, our trust accounts had invested in securities in the aggregate amount of ₩11,686 billion, of which ₩10,119 billion was debt securities and derivative-linked securities. Securities investments consist of government-related debt securities, corporate debt securities, including bonds and commercial paper, equity securities, derivative-linked securities and other securities. Loans made by our trust account operations are similar in type to the loans made by our bank account operations. As of December 31, 2013, on an SKAS basis, our trust accounts had made loans in the principal amount of ₩160 billion (excluding loans from the trust accounts to our banking accounts of ₩1,396 billion), which accounted for 0.7% of our money trust assets. Loans by our money trusts are subject to the same credit approval process as loans from our banking accounts. As of December 31, 2013, substantially all loans from our money trust accounts were collateralized or guaranteed.

Our money trust accounts also invest, to a lesser extent, in equity securities, including beneficiary certificates issued by financial investment companies with a collective investment license. On an SKAS basis, as of December 31, 2013, equity securities in our money trust accounts amounted to ₩1,567 billion, which accounted for 6.4% of our total money trust assets. Of this amount, ₩1,522 billion was from specified money trusts and ₩45 billion was from unspecified money trusts.

We continue to offer pension-type money trusts that provide a guarantee of the principal amount of the investment. On an SKAS basis, as of December 31, 2013, the balance of the money trusts for which we guaranteed the principal was ₩3,070 billion.

If the income from a money trust for which we provide a guarantee is less than the amount of the payments we have guaranteed, we will need to pay the amount of the shortfall with funds from special reserves maintained with respect to trust accounts followed by basic fees from that money trust and funds from our general banking operations. In 2011, 2012 and 2013, we made no payment from our banking accounts to cover shortfalls in our guaranteed trusts. On an SKAS basis, we derived trust fees with regard to trust account management services (including those fees related to property trust management services) of ₩126 billion in 2011, ₩136 billion in 2012 and ₩131 billion in 2013.

Property Trust Management Services

We also offer property trust management services, where we manage non-cash assets in return for a fee. Non-cash assets include mostly securities, but can also include other liquid receivables and real estate. Under these arrangements, we render custodial services for the property in question and collect fee income in return.

 

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In 2013, our property trust fees ranged from 0.001% to 0.3% of total assets under management depending on the type of trust accounts. On an SKAS basis, as of December 31, 2013, the aggregate balance of our property trusts increased to ₩1,377 billion, compared to ₩1,171 billion as of December 2012 and ₩1,354 billion as of December 31, 2011.

Under IFRS, the property trusts are not consolidated within our financial statements.

Investment Trust Management

Through KB Asset Management, we offer investment trust products to customers and manage the funds invested by them in investment trusts. As of December 31, 2013, KB Asset Management had ₩25,805 billion of assets under management.

Management of the National Housing Fund

The National Housing Fund is a government fund that provides financial support to low-income households in Korea by providing mortgage financing and construction loans for projects to build small-sized housing. The operations of the National Housing Fund include providing and managing National Housing Fund loans, issuing National Housing Fund bonds and collecting subscription savings deposits.

In February 2013, the Ministry of Land, Infrastructure and Transport (formerly the Ministry of Land, Transport and Maritime Affairs) designated us as one of the managers of the National Housing Fund. During the five years preceding such designation, we chose not to participate in the bidding process to become a designated manager of the National Housing Fund and only managed pre-existing Fund accounts. In return for managing such pre-existing Fund accounts, we received quarterly fund management fees, calculated based on activity levels for the relevant quarter. In 2013, we received total fees of ₩28 billion for managing the National Housing Fund, compared to ₩28 billion in 2012 and ₩172 billion in 2011 (of which ₩137 billion related to accrued but previously unpaid fees for the period from January 2007 to June 2010).

The financial accounting for the National Housing Fund is entirely separate from our financial accounting, and the non-performing loans and loan losses of the National Housing Fund, in general, do not impact our financial condition. Regulations and guidelines for managing the National Housing Fund are issued by the Minister of Land, Infrastructure and Transport pursuant to the Housing Act.

Bancassurance

The Korean government’s liberalization of the bancassurance market in Korea has allowed us to offer insurance products of other institutions since September 2003. We currently market a wide range of bancassurance products and hope to develop additional fee-based revenues by expanding our offering of these products.

Currently, our bancassurance business has alliances with 17 life insurance companies (including our subsidiary, KB Life Insurance) and nine non-life insurance companies and offers 66 different products through our branch network. These products are composed of 43 types of life insurance policies such as annuities, savings insurance and variable life insurance, and 23 types of non-life insurance products. In 2013, our commission income from our bancassurance business amounted to ₩135 billion.

Distribution Channels

Banking Branch Network

As of December 31, 2013, Kookmin Bank operated a network of 1,207 branches and sub-branches in Korea, which was one of the largest branch networks among Korean commercial banks. An extensive branch network is

 

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important to attracting and maintaining retail customers, who use branches extensively and value convenience. We believe that our extensive branch network in Korea and retail customer base provide us with a source of stable and relatively low cost funding. Approximately 36.7% of our branches and sub-branches are located in Seoul, and approximately 23.4% of our branches are located in the six next largest cities. The following table presents the geographical distribution of our branch network in Korea as of December 31, 2013:

 

Area

   Number of
Branches
     Percentage  

Seoul

     443         36.7

Six largest cities (other than Seoul)

     283         23.4   

Other

     481         39.9   
  

 

 

    

 

 

 

Total

     1,207         100.0
  

 

 

    

 

 

 

In addition, we have continued to implement the specialization of our branch functions. Of our branch network as of December 31, 2013, we had eight branches that primarily handled large corporate banking.

In order to support our branch network, we have established an extensive network of ATMs, which are located in branches and in unmanned outlets known as “autobanks.” As of December 31, 2013, we had 9,490 ATMs.

We have actively promoted the use of these distribution outlets in order to provide convenient service to customers, as well as to maximize the marketing and sales functions at the branch level, reduce employee costs and improve profitability. The following table sets forth information, for the periods indicated, regarding the number of transactions and the fee revenue of our ATMs:

 

     For the Year Ended December 31,  
             2011                      2012                      2013          

Number of transactions (millions)

     688         640         606   

Fee revenue (in billions of Won)

   74       58       56   

Other Distribution Channels

The following table sets forth information, for the periods indicated, on the number of users and transactions and the fee revenue of the other distribution channels for our retail and corporate banking customers, which are discussed below:

 

     For the Year Ended December 31,  
     2011      2012      2013  

Internet banking:

        

Number of users (1)

     12,262,689         14,049,444         15,634,113   

Number of transaction (thousands)

     3,517,163         4,117,653         5,024,132   

Fee revenue (in millions of Won)

   27,715       28,374       28,538   

Phone banking:

        

Number of users (2)

     4,607,803         4,766,251         4,870,204   

Number of transaction (thousands)

     250,265         213,941         183,434   

Fee revenue (in millions of Won)

   12,284       13,297       13,817   

 

(1) 

Number of users is defined as the total cumulative number of persons who have registered through our branch offices to use our Internet banking services.

(2) 

Number of users is defined as the total cumulative number of persons who have registered through our branch offices to use our phone banking services.

 

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Internet Banking

Our goal is to consolidate our position as a market leader in on-line banking. Our Internet banking services currently include:

 

   

basic banking services, including fund transfers, balance and transaction inquiries, credit card transaction inquiries, pre-set automatic transfers, product inquiries, on-line bill payments and foreign exchange services;

 

   

investment services, including opening deposit accounts and investing in funds;

 

   

processing of loan applications, which allows us to quickly process and approve on-line loan applications;

 

   

electronic certification services, which permit our Internet banking service users to authenticate transactions on a confidential basis through digital signatures; and

 

   

wealth management and advisory services, including financial planning and real estate information services.

Phone Banking

We offer a variety of phone banking services, including inter-account fund transfers, balance and transaction inquiries, credit card transaction inquiries, customer service inquiries and bill payments. We also have call centers, which we primarily use to:

 

   

advise clients with respect to deposits, loans and credit cards and to provide our customers a way to report any emergencies with respect to their accounts;

 

   

allow our customers to conduct transactions with respect to their accounts, such as balance and transfer inquiries, transfers or payments, opening or closing accounts, processing loans through automated systems and conducting credit card transactions;

 

   

conduct telemarketing to our customers or potential customers to advertise products or services through phone, fax or text messaging; and

 

   

provide automated banking services, mobile services or other services relating to affinity programs.

Mobile & Smartphone Banking

Our mobile and smartphone banking services allow customers to use mobile phones and devices, such as smartphones, to conduct a number of financial transactions, including basic banking and investment activities. There are currently three major mobile phone service providers in Korea, SK Telecom, KT and LG U+, and we provide our services in association with all three. Our mobile and smartphone banking services currently include:

 

   

basic banking services, including fund transfers, balance and transaction inquiries, credit card transaction inquiries, bill payments and foreign exchange services;

 

   

investment services, including investing in savings deposits that are designed specifically for and offered only to smartphone banking customers;

 

   

processing of loan applications and bancassurance services; and

 

   

mobile stock trading, through which mobile banking customers can use their devices to trade stocks.

Other Channels

We provide cash management services, which include automatic transfers, connection services to other financial institutions, real-time firm banking, automatic fund concentration and transmittal of trading information.

 

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Competition

We compete principally with other financial institutions in Korea, including other financial holding companies and nationwide commercial banks, as well as regional banks, development banks, specialized banks and branches of foreign banks operating in Korea and installment finance corporations for mortgage loan products. We also compete for customer funds with other types of financial service institutions, including savings institutions (such as mutual savings and finance companies and credit unions and credit cooperatives), investment institutions (such as merchant banking corporations), life insurance companies and financial investment companies. Competition in the domestic banking industry is generally based on the types and quality of the products and services offered, including the size and location of retail networks, the level of automation and interest rates charged and paid.

Competition has increased significantly in our traditional core businesses, retail banking, small- and medium-sized enterprise banking and credit card lending, contributing to some extent to the asset quality deterioration in retail and small- and medium-sized loans. As a result, our margins on lending activities may decrease in the future.

In addition, general regulatory reforms in the Korean financial industry have increased competition among banks and financial institutions in Korea. As the reform of the financial sector continues, foreign financial institutions, some with greater resources than us, have entered, and may continue to enter, the Korean market either by themselves or in partnership with existing Korean financial institutions and compete with us in providing financial and related services.

In addition, the Korean financial industry is undergoing significant consolidation. A number of significant mergers and acquisitions in the industry have taken place in Korea during the last five years, including the establishment of financial holding companies, which have reduced the number of nationwide commercial banks in Korea from 16 as of December 31, 1997, to seven banks and six financial holding companies as of December 31, 2013. Furthermore, a number of significant mergers and acquisitions in the industry have taken place in Korea over the past decade, including the acquisition of Koram Bank by an affiliate of Citibank in 2004, Standard Chartered Bank’s acquisition of Korea First Bank in April 2005, Chohung Bank’s merger with Shinhan Bank in April 2006 and Hana Financial Group’s acquisition of a controlling interest in Korea Exchange Bank in February 2012. We expect that consolidation in the financial industry will continue. In particular, the Korean government is in the process of disposing of or reducing its controlling interest in Woori Finance Holdings Co., Ltd. (the financial holding company of Woori Bank), which involves sales of its subsidiaries. Other financial institutions may seek to acquire or merge with such entities, and the financial institutions resulting from this consolidation may, by virtue of their increased size and business scope, provide significantly greater competition for us. We intend to review potential acquisition opportunities as they arise. We cannot guarantee that we will not be involved in any future mergers or acquisitions.

For additional information, you should read the section entitled “Item 3.D. Risk Factors—Risks relating to competition.”

Information Technology

Pursuant to our establishment as a financial holding company, we are implementing various IT system-related initiatives and upgrades at the group and subsidiary level. We believe that continuous improvement of our IT systems is crucial in supporting our operations and management and providing high-quality customer service. Accordingly, we continue to upgrade and improve our systems through various activities, including projects to develop next generation banking systems for Kookmin Bank, further strengthen system security and timely develop and implement various new IT systems and services (including group-wide software) that support our business operations and risk management activities.

 

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Our mainframe-based banking and credit card IT systems are designed to ensure continuity of services even where there is a failure of the host data center due to a natural disaster or other accidents by utilizing backup systems in disaster recovery data centers. In addition, through the implementation of Parallel Sysplex, a “multi-CPU system,” our bank and credit card systems are designed and operated to be able to process transactions without material interruption in the event of CPU failure. In 2010, we launched a next-generation banking and credit card IT system that is designed to ensure greater reliability in financial transactions and allow more efficient development of new financial products. We also launched a new disaster recovery system to ensure continuity of operations. In addition, we implemented new technologies, including Multi Channel Integration and Enterprise Application Integration systems, to standardize our IT system and better manage IT system operational risk.

In 2011, we launched a mobile weblink to provide online banking services for smartphone users. In addition, we implemented virtual storage technology for our server systems to achieve a more flexible and cost-effective information storage capability.

The integrity of our IT systems, and their ability to withstand potential catastrophic events (such as natural calamities and internal system failures), are crucial to our continuing operations. We currently test our disaster recovery systems on a quarterly basis. For additional information, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Operational Risk Management.”

In 2013, we spent approximately ₩412 billion for our IT systems, including expenses related to the construction of new IT systems, implementation of hardware and software technologies and other new systems. As of December 31, 2013, we employed a total of 879 full-time employees in our IT operations.

Assets and Liabilities

The tables below set out selected financial highlights regarding our banking operations and individual assets and liabilities. Except as otherwise indicated, (i) amounts as of and for the years ended December 31, 2010, 2011, 2012 and 2013 are presented on a consolidated basis under IFRS, and (ii) amounts as of and for the year ended December 31, 2009 are presented on a consolidated basis under U.S. GAAP and are not comparable to information prepared in accordance with IFRS.

Loan Portfolio

As of December 31, 2013, our total loan portfolio was ₩221,862 billion compared to ₩216,914 billion as of December 31, 2012 and ₩215,555 billion as of December 31, 2011. As of December 31, 2013, 94.6% of our total loans were Won-denominated loans compared to 94.4% as of December 31, 2012 and 93.2% as of December 31, 2011.

 

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Loan Types

The following table presents loans by type as of the dates indicated under IFRS. Except where we specify otherwise, all loan amounts stated below are before deduction of allowances for loan losses. Total loans reflect our loan portfolio, including past due amounts.

 

     As of December 31,  
     2010      2011      2012      2013  
     (in billions of Won)  

Domestic:

           

Corporate

           

Small- and medium-sized enterprise

   65,132       68,730       70,471       71,045   

Large corporate (1)

     23,143         28,509         29,212         29,489   

Retail

           

Mortgage and home equity

     71,715         75,580         74,463         77,969   

Other consumer

     27,281         28,275         28,969         29,675   

Credit cards

     12,413         12,421         11,874         11,784   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total domestic

     199,684         213,515         214,989         219,962   

Foreign

     1,693         2,040         1,925         1,900   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total gross loans

   201,377       215,555       216,914       221,862   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Large corporate loans include ₩53 billion, ₩35 billion, ₩33 billion and ₩132 billion of loans to the Korean government and government related agencies (including the Korea Deposit Insurance Corporation) as of December 31, 2010, 2011, 2012 and 2013, respectively.

The following table presents loans by type as of the date indicated under U.S. GAAP. Except where we specify otherwise, all loan amounts stated below are before deduction of allowances for loan losses. Total loans reflect our loan portfolio, including past due amounts.

 

     As of December 31,  
     2009  
     (in billions of Won)  

Domestic:

  

Corporate

  

Commercial and industrial (1)

   74,611   

Construction

     8,097   

Other corporate

     2,178   

Retail

  

Mortgage and home equity

     70,678   

Other consumer

     26,949   

Credit cards

     11,368   
  

 

 

 

Total domestic

     193,881   

Foreign:

     2,344   
  

 

 

 

Total gross loans

   196,225   
  

 

 

 

 

(1) 

Commercial and industrial loans include ₩29 billion of loans to the Korean government and government related agencies (including the Korea Deposit Insurance Corporation) as of December 31, 2009.

Loan Concentrations

On a consolidated basis, our exposure to any single borrower or any single chaebol is limited by law to 20% and 25%, respectively, of our “net aggregate equity capital,” as defined under the Enforcement Decree of the

 

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Financial Holding Company Act. See “—Supervision and Regulation—Principal Regulations Applicable to Financial Holding Companies—Financial Exposure to Any Individual Customer and Major Shareholder.” In addition, Kookmin Bank’s exposure to any single borrower or any single chaebol is limited by the Bank Act to 20% and 25%, respectively, of its total Tier I and Tier II capital.

20 Largest Exposures by Borrower

As of December 31, 2013, our 20 largest exposures totaled ₩11,351 billion and accounted for 4.1% of our total exposures. The following table sets forth, as of December 31, 2013, our total exposures to these top 20 borrowers or issuers:

 

    Loans                 Guarantees
and
Acceptances
          Amounts
Classified
as
Impaired
Loans
 

Company (1)

  Won
Currency
    Foreign
Currency
    Equity
Securities
    Debt
Securities
      Total
Exposures
   
    (in billions of Won)  

Hyundai Heavy Industries Co., Ltd.

  —        59      10      —        1,493      1,562      —     

POSCO

    —          124        570        235        —          929        —     

Daewoo Shipbuilding & Marine Engineering Co., Ltd.

    —          184        1        10        722        917        —     

Hyundai Steel Company

    408        300        2        31        42        783        —     

Mizuho Bank, Ltd.

    —          739        —          —          —          739        —     

National Agricultural Cooperative Federation

    —          —          —          671        —          671        —     

Hyundai Capital Services Inc.

    340        —          —          223        —          563        —     

GS Caltex Corporation

    —          55        —          131        325        511        —     

Daewoo International Corporation

    —          199        —          21        239        459        —     

Samsung Heavy Industries Co., Ltd.

    —          —          —          10        443        453        —     

Woori Bank

    —          222        6        224        —          452        —     

Hyundai Securities Co., Ltd.

    —          400        36        —          —          436        —     

Samsung Everland Inc.

    373        —          —          29        —          402        —     

Industrial and Commercial Bank of China Ltd.

    —          372        —          —          —          372        —     

Korean Air Lines Co., Ltd.

    —          80        5        23        263        371        —     

LG Electronics Inc.

    340        —          4        16        —          360        —     

Bank of Communications Ltd.

    —          359        —          —          —          359        —     

Korea Exchange Bank

    —          148        —          193        —          341        —     

SK Energy Co., Ltd.

    —          182        —          50        106        338        —     

SH Corporation

    —          —          —          333        —          333        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  1,461      3,423      634      2,200      3,633      11,351      —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Excludes exposures to government-owned or -controlled enterprises or financial institutions, including Bank of Korea, Korea Housing Finance Corporation, Korea Land & Housing Corporation, Korea Deposit Insurance Corporation and Korea Development Bank.

As of December 31, 2013, 12 of these top 20 borrowers or issuers were companies belonging to the 30 largest chaebols in Korea designated as such by the Financial Supervisory Service based on their outstanding exposures.

 

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Exposure to Chaebols

As of December 31, 2013, 6.9% of our total exposure was to the 30 largest chaebols in Korea designated as such by the Financial Supervisory Service based on their outstanding exposures. The following table shows, as of December 31, 2013, our total exposures to the ten chaebol groups to which we have the largest exposure:

 

    Loans     Equity
Securities
    Debt
Securities
    Guarantees
and
Acceptances
    Total
Exposures
    Amounts
Classified as
Impaired Loans
 

Chaebol

  Won
Currency
    Foreign
Currency
           
    (in billions of Won)  

Hyundai Motors (1)

  867      440      13      517      538      2,375       —     

Samsung (2)

    648        256        41        381        781        2,107        —     

Hyundai Heavy Industries (3)

    17        97        70        10        1,866        2,060        —     

POSCO (4)

    161        336        637        276        437        1,847        —     

SK (5)

    215        584        284        369        329        1,781        —     

LG (6)

    742        293        19        55        13        1,122        —     

GS (7)

    126        128        4        197        534        989        —     

Daewoo Shipbuilding & Marine Engineering (8)

    38        184        1        10        723        956        —     

Hanwha (9)

    578        50        10        12        59        709        —     

Lotte (10)

    233        44        25        320        44        666        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  3,625      2,412      1,104      2,147      5,324      14,612      —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Includes principally Hyundai Steel Company, Hyundai Capital Services Inc. and Hyundai-Rotem Co.

(2) 

Includes principally Samsung Heavy Industries Co., Ltd., Samsung Everland Inc. and Samsung C&T Corporation.

(3) 

Includes principally Hyundai Heavy Industries Co., Ltd., Hyundai Mipo Dockyard Co., Ltd. and Hyundai Samho Heavy Industries Co., Ltd.

(4) 

Includes principally POSCO, Daewoo International Corporation and POSCO Energy Co., Ltd.

(5) 

Includes principally SK Energy Co., Ltd., SK C&C Co., Ltd. and SK Engineering & Construction Co., Ltd.

(6) 

Includes principally LG Electronics Inc., LG Display Co., Ltd. and LG Innotek Co., Ltd.

(7) 

Includes principally GS Caltex Corporation, GS Engineering & Construction Corporation and GS Power Co., Ltd.

(8) 

Includes principally Daewoo Shipbuilding & Marine Engineering Co., Ltd., DSME Construction Co., Ltd. and Shinhan Machinery Co., Ltd.

(9) 

Includes principally Hanwha Engineering & Construction Corp., Hanwha Corporation and Hanwha Galleria Co., Ltd.

(10) 

Includes principally Lotte Card Co., Ltd., Lotte Engineering & Construction Co., Ltd. and Lotte Capital Co., Ltd.

Loan Concentration by Industry

The following table presents the aggregate balance of our domestic and foreign corporate loans, by industry concentration, as of December 31, 2011, 2012 and 2013:

 

     As of December 31,  
     2011     2012     2013  

Industry

   Amount      %     Amount      %     Amount      %  
     (in billions of Won, except percentages)  

Services

   36,306         36.6   38,650         38.1   38,375         37.5

Manufacturing

     31,763         32.0        31,320         30.8        31,161         30.5   

Wholesale and retail

     15,639         15.8        15,124         14.9        13,874         13.6   

Financial institutions

     5,839         5.9        7,291         7.2        10,524         10.3   

Construction

     5,675         5.7        4,689         4.6        4,428         4.3   

Public sector

     311         0.3        520         0.5        655         0.6   

Others

     3,675         3.7        3,941         3.9        3,318         3.2   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   99,208         100.0   101,535         100.0   102,335         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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Maturity Analysis

We typically roll over our working capital loans and consumer loans (other than those payable in installments) after we conduct our normal loan review in accordance with our loan review procedures. Working capital loans may generally be extended on an annual basis for an aggregate term of five years and consumer loans may generally be extended for another term of up to 12 months for an aggregate term of 10 years.

The following table sets out the scheduled maturities (time remaining until maturity) of our loan portfolio as of December 31, 2013. The amounts disclosed are before deduction of allowances for loan losses:

 

     1 Year or
Less
     Over 1 Year
But Not More

Than 5 Years
     Over 5 Years      Total  
     (in billions of Won)  

Domestic:

           

Corporate

           

Small- and medium-sized enterprises

   53,215       12,406       5,424       71,045   

Large corporate

     21,170         5,471         2,848         29,489   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total corporate

     74,385         17,877         8,272         100,534   

Retail

           

Mortgage and home equity

     7,675         6,108         64,186         77,969   

Other consumer

     18,778         7,427         3,470         29,675   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total retail

     26,453         13,535         67,656         107,644   

Credit cards

     10,568         1,000         216         11,784   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total domestic

     111,406         32,412         76,144         219,962   

Foreign:

     1,417         414         69         1,900   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total gross loans

   112,823       32,826       76,213       221,862   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest Rate Sensitivity

The following table shows, as of December 31, 2013, the total amount of loans due after one year, which have fixed interest rates and variable or adjustable interest rates:

 

     As of
December 31, 2013
 
     (in billions of Won)  

Fixed rate (1)

   17,378   

Variable or adjustable rates (2)

     91,661   
  

 

 

 

Total gross loans

   109,039   
  

 

 

 

 

(1) 

Fixed rate loans are loans for which the interest rate is fixed for the entire term.

(2) 

Variable or adjustable rate loans are loans for which the interest rate is not fixed for the entire term.

For additional information regarding our management of interest rate risk, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Market Risk Management—Market Risk Management for Non-Trading Activities.”

Credit Exposures to Companies in Workout, Restructuring or Rehabilitation

Workout is a voluntary procedure through which we, together with the borrower and other creditors, restore the borrower’s financial stability and viability. Previously, workouts were regulated under the prior Corporate Restructuring Promotion Act, which expired on December 31, 2013. In December 2013, the National Assembly of Korea adopted another Corporate Restructuring Promotion Act, or the New Corporate Restructuring

 

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Promotion Act, which became effective on January 1, 2014. Workouts that had been initiated under the Corporate Restructuring Promotion Act are also governed by the New Corporate Restructuring Promotion Act effective from January 1, 2014. Under the New Corporate Restructuring Promotion Act, which is similar to the Corporate Restructuring Promotion Act, all creditor financial institutions of a financially troubled borrower are required to participate in a creditors’ committee which is authorized to prohibit such creditor financial institutions from exercising their rights against the borrower, commencing workout procedures or approving a reorganization plan prepared by the borrower. Any decision of the creditors’ committee requires the approval of creditor financial institutions holding not less than 75% of the total debt outstanding of a borrower. An additional approval of creditor financial institutions holding not less than 75% of the secured debt is required with respect to the borrower’s debt restructuring. Once approved, any decision made by the creditors’ committee is binding on all the creditor financial institutions of the borrower. Creditor financial institutions that voted against commencement of workout, debt restructuring or granting of new credit have the right to request the creditor financial institutions that voted in favor of such matters to purchase their claims at a mutually agreed price. In the event that the parties are not able to agree on the terms of purchase, a coordination committee consisting of experts would determine the terms. The creditor financial institutions that oppose a decision made by the coordination committee may request a court to change such decision. The New Corporate Restructuring Promotion Act is scheduled to expire on December 31, 2015.

Upon approval of the workout plan, a credit exposure is initially classified as precautionary or lower and thereafter cannot be classified higher than precautionary with limited exceptions. If a corporate borrower is in workout, restructuring or rehabilitation, we take the status of the borrower into account in valuing our loans to and collateral from that borrower for purposes of establishing our allowances for credit losses.

Korean law also provides for corporate rehabilitation proceedings, which are court-supervised procedures to rehabilitate an insolvent company. Under these procedures, a restructuring plan is adopted at a meeting of interested parties, including creditors of the company. Such restructuring plan is subject to court approval.

A portion of our loans to and debt securities of corporate customers are currently in workout, restructuring or rehabilitation. As of December 31, 2013, ₩916 billion or 0.4% of our total loans and debt securities were in workout, restructuring or rehabilitation. This included ₩487 billion of loans to and debt securities of large corporate borrowers and ₩429 billion of loans to and debt securities of small- and medium-sized enterprises.

The following table shows, as of December 31, 2013, our ten largest exposures that were in workout, restructuring or rehabilitation:

 

    Loans                 Guarantees
and
Acceptances
          Amounts
Classified as
Impaired
Loans
 

Company

  Won
Currency
    Foreign
Currency
    Equity
Securities
    Debt
Securities
      Total
Exposures
   
    (in billions of Won)  

Kumho Tire Co., Inc.

  23      27      95      —        8      153      —     

Orient Shipyard Co., Ltd.

    87        2        —          —          62        151        89   

Kumho Industrial Co., Ltd.

    58        —          8        —          24        90        58   

Dongmoon Construction Co., Ltd.

    66        —          —          —          —          66        66   

Ssangyong Engineering & Construction Co., Ltd.

    47        —          —          —          —          47        47   

Samho International Co., Ltd.

    33        —          6        6        —          45        33   

Dongil Construction Co., Ltd.

    42        —          —          —          —          42        42   

Hyundai Cement Co., Ltd.

    24        2        —          —          —          26        26   

Oriental Precision & Engineering Co., Ltd.

    2        —          18        —          —          20        2   

Chinhung International Inc.

    17        —          —          —          —          17        17   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  399      31      127      6      94      657      380   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Provisioning Policy

Under IFRS, we establish allowances for loan losses with respect to loans to absorb such losses. We assess individually significant loans on a case-by-case basis and other loans on a collective basis. In addition, if we determine that no objective evidence of impairment exists for a loan, we include such loan in a group of loans with similar credit risk characteristics and assess them collectively for impairment regardless of whether such loan is significant. For individually significant loans, allowances for loan losses are recorded if objective evidence of impairment exists as a result of one or more events that occurred after initial recognition. For collectively assessed loans, we base the level of allowances for loan losses on our evaluation of the risk characteristics of such loans, taking into account such factors as historical loss experience, the financial condition of the borrowers and current economic conditions. If additions or changes to the allowances for loan losses are required, then we record a provision for loan losses, which is included in impairment losses on credit loss and treated as a charge against current income. Credit exposures that we deem to be uncollectible, including actual loan losses, net of recoveries of previously charged-off amounts, are charged directly against the allowances for loan losses. See “Item 5.A. Operating Results—Critical Accounting Policies—Impairment of Loans and Allowances for Loan Losses.”

We generally consider the following loans to be impaired loans:

 

   

loans that are past due by 90 days or more;

 

   

loans that are subject to legal proceedings related to collection;

 

   

loans to a borrower that has received a warning from the Korea Federation of Banks indicating that such borrower has exhibited difficulties in making timely payments of principal and interest;

 

   

loans to corporate borrowers that are rated C or D according to Kookmin Bank’s internal credit ratings for large companies or small-and medium-sized enterprises;

 

   

loans for which account-specific provisions have been made resulting from a significant perceived decline in credit quality; and

 

   

loans with respect to which the amount of principal and interest payable has been materially decreased due to restructuring.

Under U.S. GAAP, we established loan loss allowances for corporate loans based on whether a particular loan was identified as impaired or not. Loan loss allowances were established for impaired loans, in general, by discounting the estimated future cash flow (both principal and interest) we expected to receive on such loans. Where the entire impaired loan or a portion of the impaired loan was secured by collateral or a guarantee, the fair value of the collateral or the guarantee payment was considered in establishing the level of the allowance. Alternatively, for impaired loans that were considered collateral-dependent, the amount of impairment was determined by reference to the fair value of the collateral. In addition, for certain foreign corporate loans that were considered impaired, the fair value was determined by reference to observable market prices, when available. We also established allowances for losses for corporate loans that had not been individually identified as impaired. These allowances were based on historical migration and loss information.

In the case of consumer loans, we established loan loss allowances under U.S. GAAP based on historical performance, previous loan loss history and charge-off information. Additional factors that management considered when establishing reserves for homogeneous pools of consumer loans included, but were not limited to, economic events, delinquencies and changes in underwriting and credit monitoring policies.

The actual amount of incurred loan losses may vary from loss estimates due to changing economic conditions or changes in industry or geographic concentrations. We have procedures in place to monitor differences between estimated and actual incurred loan losses, which include detailed periodic assessments by senior management of both individual loans and loan portfolios and the use of models to estimate incurred loan losses in those portfolios.

 

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We regularly evaluate the adequacy of the overall allowances for loan losses and we believe that the allowances for loan losses reflect our best estimate of probable loan losses as of each balance sheet date.

Loan Aging Schedule

The following table shows our loan aging schedule (excluding accrued interest) as of the dates indicated under IFRS:

 

As of December 31,

   Normal
Amount
     %     Amount
Past Due
1-3 Months
     %     Amount
Past Due
3-6
Months
     %     Amount
Past Due
6 Months
or More
     %     Total
Amount
 
     (in billions of Won, except percentages)  

2010

   199,013         98.8   752         0.4   608         0.3   1,004         0.5   201,377   

2011

     213,515         99.0        860         0.4        327         0.2        853         0.4        215,555   

2012

     214,489         98.9        819         0.4        532         0.2        1,074         0.5        216,914   

2013

     219,777         99.1        664         0.3        426         0.2        995         0.4        221,862   

Non-Accrual Loans and Past Due Accruing Loans

We generally consider impaired loans to be non-accrual loans. However, we exclude from non-accrual status and continue to accrue interest on loans that are fully secured by cash on deposit or on which there are financial guarantees from the government, Korea Deposit Insurance Corporation or certain financial institutions.

We no longer recognize interest on non-accrual loans from the date the loan is placed on non-accrual status. We reclassify loans as accruing when interest and principal payments are up-to-date and future payments of principal and interest are reasonably assured. We generally do not recognize interest income on non-accrual loans unless collected.

Interest foregone is the interest due on non-accrual loans that has not been accrued in our books of account. For the year ended December 31, 2013, we would have recorded gross interest income of ₩332 billion compared to ₩309 billion for the year ended December 31, 2012, ₩336 billion for the year ended December 31, 2011 and ₩328 billion for the year ended December 31, 2010, in each case under IFRS, on loans accounted for on a non-accrual basis throughout the year, or since origination for loans held for part of the year, had we not foregone interest on those loans. The amount of interest income on those loans that was included in our profit for the years ended December 31, 2010, 2011, 2012 and 2013 under IFRS was ₩194 billion, ₩192 billion, ₩187 billion and ₩206 billion, respectively.

The following table shows, as of the dates indicated, the amount of loans that were placed on a non-accrual basis and accruing loans under IFRS which were past due 90 days or more. The category “accruing but past due 90 days” includes loans which are still accruing interest but on which principal or interest payments are contractually past due 90 days or more.

 

     As of December 31,  
     2010      2011      2012      2013  
     (in billions of Won)  

Loans accounted for on a non-accrual basis

           

Corporate

   2,466       2,021       1,851       2,220   

Consumer

     1,012         1,200         1,290         1,253   
  

 

 

    

 

 

    

 

 

    

 

 

 

Sub-total

     3,478         3,221         3,141         3,473   
  

 

 

    

 

 

    

 

 

    

 

 

 

Accruing loans which are contractually past due 90 days or more as to principal or interest

           

Corporate

     5         4         84         98   

Consumer

     28         45         97         116   
  

 

 

    

 

 

    

 

 

    

 

 

 

Sub-total

     33         49         181         214   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   3,511       3,270       3,322       3,687   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Under U.S. GAAP, we generally placed loans on non-accrual status when payments of interest and/or principal became past due by one day. For the year ended December 31, 2009, we would have recorded gross interest income of ₩278 billion on loans accounted for on a non-accrual basis under U.S. GAAP in accordance with the foregoing throughout the year, or since origination for loans held for part of the year, had we not foregone interest on those loans. Under U.S. GAAP, the amount of interest income on those loans that was included in our net income for the year ended December 31, 2009 was ₩193 billion.

The following table shows, as of the date indicated, the amount of loans that were placed on a non-accrual basis and accruing loans under U.S. GAAP which were past due one day or more:

 

     As of December 31,  
     2009  
     (in billions of Won)  

Loans accounted for on a non-accrual basis

  

Corporate

   2,243   

Consumer

     2,124   
  

 

 

 

Sub-total

     4,367   
  

 

 

 

Accruing loans which are contractually past due one day or more as to principal or interest

  

Corporate (1)

     125   

Consumer

     124   
  

 

 

 

Sub-total

     249   
  

 

 

 

Total

   4,616   
  

 

 

 

 

(1) 

Includes accruing corporate loans which are contractually past due 90 days or more in the amount of ₩40 billion as of December 31, 2009.

Troubled Debt Restructurings

The following table presents, as of the dates indicated, our loans that are “troubled debt restructurings” for which we, for economic or legal reasons relating to the debtor’s financial difficulties, grant a concession to the debtor that we would not otherwise consider. These loans consist principally of corporate loans that have been restructured (through the process of workout, court receivership or composition) and which are accruing interest at rates lower than the original contractual terms as a result of a variation of terms upon restructuring.

 

     As of December 31,  
     2009      2010      2011      2012      2013  
     (in billions of Won)  

Loans classified as “troubled debt restructurings”

   116       573       412       465       269   

For 2013, interest income that would have been recorded under the original contract terms of restructured loans amounted to ₩36 billion, out of which ₩19 billion was reflected as interest income during 2013.

Potential Problem Loans

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

 

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As of December 31, 2013, we had ₩2,776 billion of potential problem loans.

Other Problematic Interest Earning Assets

We have certain other interest earning assets received in connection with troubled debt restructurings that, if they were loans, would be required to be disclosed as part of the non-accrual, past due or restructuring or potential problem loan disclosures provided above. As of December 31, 2009, 2010, 2011, 2012 and 2013, we did not have any debt securities received in connection with troubled debt restructurings on which interest was past due.

Non-Performing Loans

Non-performing loans are defined as loans that are past due by 90 days or more. These loans are generally classified as “substandard” or below. For further information on the classification of non-performing loans under Korean regulatory requirements, see “—Regulatory Reserve for Credit Losses” below.

The following table shows, as of the dates indicated, certain details of our total non-performing loan portfolio under IFRS:

 

     As of December 31,  
     2010     2011     2012     2013  
     (in billions of Won, except percentages)  

Total non-performing loans

   1,612      1,180      1,606      1,421   

As a percentage of total loans

     0.8     0.5     0.7     0.6

The following table shows, as of the date indicated, certain details of our total non-performing loan portfolio under U.S. GAAP:

 

     As of December 31,  
     2009  
     (in billions of Won, except percentages)  

Total non-performing loans

   1,365   

As a percentage of total loans

     0.7

 

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Analysis of Non-Performing Loans

The following table sets forth, as of the dates indicated, our total non-performing loans by type of borrower under IFRS:

 

     As of December 31,  
     2010     2011     2012     2013  
     Amount      %     Amount      %     Amount      %     Amount      %  
     (in billions of Won, except percentages)  

Domestic:

                    

Corporate

                    

Small- and medium-sized enterprise

   686         42.5   373         31.6   680         42.4   568         40.0

Large corporate

     241         15.0        84         7.1        97         6.0        158         11.1   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total corporate

     927         57.5        457         38.7        777         48.4        726         51.1   

Retail

                    

Mortgage and home equity

     478         29.7        510         43.2        625         38.9        394         27.7   

Other consumer

     163         10.1        132         11.2        137         8.5        152         10.7   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total retail

     641         39.8        642         54.4        762         47.4        546         38.4   

Credit cards

     39         2.4        62         5.3        47         2.9        107         7.5   

Total domestic

     1,607         99.7        1,161         98.4        1,586         98.7        1,379         97.0   

Foreign:

     5         0.3        19         1.6        20         1.3        42         3.0   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total non-performing loans

   1,612         100.0   1,180         100.0   1,606         100.0   1,421         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The following table sets forth, as of the date indicated, our total non-performing loans by type of borrower under U.S. GAAP:

 

     As of December 31,  
     2009  
     Amount      %  
     (in billions of Won, except percentages)  

Domestic:

     

Corporate

     

Commercial and industrial

   899         65.8

Construction

     125         9.2   

Lease financing

     —           —     

Other corporate

     2         0.2   
  

 

 

    

 

 

 

Total corporate

     1,026         75.2   

Retail

     

Mortgage and home equity

     211         15.4   

Other consumer

     79         5.8   
  

 

 

    

 

 

 

Total retail

     290         21.2   

Credit cards

     23         1.7   

Total domestic

     1,339         98.1   

Foreign:

     26         1.9   
  

 

 

    

 

 

 

Total non-performing loans

   1,365         100.0
  

 

 

    

 

 

 

 

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Top 20 Non-Performing Loans

As of December 31, 2013, our 20 largest non-performing loans accounted for 27.8% of our total non-performing loan portfolio. The following table shows, as of December 31, 2013, certain information regarding our 20 largest non-performing loans:

 

     Industry    Gross Principal
Outstanding
     Allowances for
Loan Losses
 
     (in billions of Won)  

Borrower A

   Manufacturing    55       6   

Borrower B

   Construction      38         22   

Borrower C

   Manufacturing      29         5   

Borrower D

   Manufacturing      29         9   

Borrower E

   Manufacturing      28         28   

Borrower F

   Services      23         1   

Borrower G

   Financial institutions      22         1   

Borrower H

   Construction      17         4   

Borrower I

   Construction      17         3   

Borrower J

   Services      15         1   

Borrower K

   Others      15         1   

Borrower L

   Construction      15         3   

Borrower M

   Services      14         1   

Borrower N

   Services      13         1   

Borrower O

   Manufacturing      13         13   

Borrower P

   Construction      12         1   

Borrower Q

   Construction      11         1   

Borrower R

   Services      11         11   

Borrower S

   Others      9         —     

Borrower T

   Construction      9         6   
     

 

 

    

 

 

 

Total

      395       118   
     

 

 

    

 

 

 

Non-Performing Loan Strategy

One of our primary objectives is to prevent our loans from becoming non-performing. Through our corporate credit rating systems, we believe that we have reduced our risks relating to future non-performing loans. Our credit rating systems are designed to prevent our loan officers from extending new loans to borrowers with high credit risks based on the borrower’s credit rating. Our early warning system is designed to bring any sudden increase in a borrower’s credit risk to the attention of our loan officers, who then closely monitor such loans. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Credit Risk Management—Credit Review and Monitoring.”

Notwithstanding the above, if a loan becomes non-performing, an officer at the branch level responsible for monitoring non-performing loans will commence a due diligence review of the borrower’s assets, send a notice either demanding payment or stating that we will take legal action and prepare for legal action.

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

 

   

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

 

   

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

 

   

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

 

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Once the details of a non-performing loan are identified, we pursue early solutions for recovery. While the overall process is the responsibility of Kookmin Bank’s Credit Analysis Group, actual recovery efforts on non-performing loans are handled at the operating branch level.

In addition, we use the services of our wholly-owned loan collection subsidiary, KB Credit Information Co., Ltd., which receives payments from recoveries made on charged-off loans and certain loans that are overdue for over three months (28 days on average in the case of credit card loans). KB Credit Information has over 140 employees, including legal experts and management employees. The fees that it receives are based on the amounts of non-performing and charged off loans that are recovered. In 2011, 2012 and 2013, the amount recovered was ₩468 billion, ₩589 billion and ₩473 billion, respectively.

Methods for resolving non-performing loans include the following:

 

   

non-performing loans are managed by the operating branches of Kookmin Bank until such loans are charged off;

 

   

a demand note is dispatched by mail if payment is generally one month past due;

 

   

calls and visits are made by Kookmin Bank’s operating branches to customers encouraging them to make payments;

 

   

borrowers who are past due on payments of interest and principal are registered on the Korea Federation of Banks’ database of non-performing loans;

 

   

for unsecured loans other than credit card loans, the loans are transferred to KB Credit Information for collection on a case-by-case basis;

 

   

for secured loans, actions to enforce or protect the security interests (including foreclosure and auction of the collateral) are commenced within four months of such loans becoming past due; and

 

   

charged off loans are given to KB Credit Information for collection, except for loans where the cost of collection exceeds the possible recovery or where the statute of limitations for collection has expired.

In addition, credit card loans that are in arrears for over 28 days on average are transferred to KB Credit Information for collection.

If a loan becomes non-performing, it is managed by an operating branch of Kookmin Bank until such loan is charged off. However, in order to promote speedy recovery on loans subject to foreclosures and litigation, our policy is to permit the branch responsible for handling these loans to request one of Kookmin Bank’s regional head offices for assistance with litigation proceedings and proceedings related to foreclosure and auction of the collateral.

In addition to making efforts to collect on these non-performing loans, we also undertake measures to reduce the level of our non-performing loans, which include:

 

   

selling our non-performing loans to third parties, including the Korea Asset Management Corporation and Woori F&I Co., Ltd.; and

 

   

entering into asset securitization transactions with respect to our non-performing loans.

We generally expect to suffer a partial loss on loans that we sell or securitize, to the extent such sales and securitizations are recognized under IFRS as sale transactions.

Pursuant to a memorandum of understanding among the Financial Supervisory Service and seven banks, including Kookmin Bank, a private equity fund was established in June 2011 to acquire approximately ₩1.2 trillion of non-performing bank loans to construction companies in workout, restructuring or rehabilitation. The

 

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general partner of the fund is United Asset Management Corp. and the limited partners consist of the seven banks and other investors. The fund purchases non-performing bank loans at market price and the funds required to purchase such loans are contributed or lent by the same banks that sell such loans to the fund. In June 2011, we agreed to make a capital commitment of ₩148 billion and provide a ₩109 billion revolving loan facility to the fund. From June to December 2011, we contributed the entire amount of our capital commitment to the fund in connection with its purchase of ₩148 billion of non-performing loans from us. In September 2012, we agreed to increase our capital commitment to ₩241 billion. From September to December 2012, we contributed ₩44 billion to the fund. In December 2013, our revolving loan facility to the fund was decreased to ₩55 billion. We have made no additional capital commitments to the fund in 2013.

Allocation and Analysis of Allowances for Loan Losses under IFRS

The following table presents, as of the dates indicated, the allocation of our allowances for loan losses by loan type under IFRS. The ratio represents the percentage of allowances for loan losses in each category to total allowances for loan losses.

 

     As of December 31,  
     2010     2011     2012     2013  
     Amount      %     Amount      %     Amount      %     Amount      %  
     (in billions of Won, except percentages)         

Domestic

                    

Corporate

                    

Small- and medium-sized enterprise

   2,028         54.0   1,533         44.4   1,234         37.7   1,023         35.8

Large corporate

     863         23.0        910         26.4        999         30.6        785         27.4   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total corporate

     2,891         77.0        2,443         70.8        2,233         68.3        1,808         63.2   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Retail

                    

Mortgage and home equity

     88         2.3        111         3.2        123         3.8        93         3.3   

Other consumer

     432         11.5        524         15.2        565         17.2        486         17.0   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total retail

     520         13.8        635         18.4        688         21.0        579         20.3   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Credit cards

     328         8.7        350         10.2        329         10.1        410         14.3   

Foreign (1)

     17         0.5        20         0.6        19         0.6        64         2.2   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total allowances for loan losses

   3,756         100.0   3,448         100.0   3,269         100.0   2,861         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) 

Consists primarily of loans to corporations.

Our total allowances for loan losses were ₩3,756 billion as of December 31, 2010. During 2011, total allowances for loan losses decreased by ₩308 billion, or 8.2%, to ₩3,448 billion as of December 31, 2011. During 2012, total allowances for loan losses decreased by ₩179 billion, or 5.2%, to ₩3,269 billion as of December 31, 2012. During 2013, total allowances for loan losses decreased by ₩408 billion, or 12.5%, to ₩2,861 billion as of December 31, 2013.

 

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The following table analyzes our allowances for loan losses and loan loss experience under IFRS for each of the years indicated:

 

     Year Ended December 31,  
     2010     2011     2012     2013  
     (in billions of Won, except percentages)  

Balance at the beginning of the period

   3,269      3,756      3,448      3,269   

Changes in accounting policy (1)

     —          —          —          —     

Restated balance at the beginning of the period

     3,269        3,756        3,448        3,269   

Amounts charged against income

     2,464        1,645        1,653        1,427   

Sale

     (193     (240     (105     (84

Gross charge-offs:

        

Domestic:

        

Corporate

        

Small- and medium-sized enterprise

     1,541        1,274        943        691   

Large corporate

     55        204        260        454   

Retail

        

Mortgage and home equity

     37        20        62        134   

Other consumer

     237        267        391        447   

Credit cards

     389        413        541        404   

Foreign:

     20        3        —          2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total gross charge-offs

     (2,279     (2,181     (2,197     (2,132
  

 

 

   

 

 

   

 

 

   

 

 

 

Recoveries:

        

Domestic:

        

Corporate

        

Small-and medium-sized enterprise

     133        162        149        145   

Large corporate

     1        6        9        —     

Retail

        

Mortgage and home equity

     14        13        7        22   

Other consumer

     114        104        97        105   

Credit cards

     246        204        185        141   

Foreign:

     4        1        3        2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total recoveries

     512        490        450        415   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (1,767     (1,691     (1,747     (1,717

Other charges

     (17     (22     20        (34
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, at the end of the period

   3,756      3,448      3,269      2,861   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ratio of net charge-offs during the period to average loans outstanding during the period

     0.9     0.8     0.8     0.8

 

(1) 

The amounts for 2013 reflect a change in our accounting policies pursuant to the adoption of IFRS 10, Consolidated Financial Statements, which is effective beginning in 2013. Corresponding amounts for 2012 (but not for 2011 or 2010) have been restated to retroactively apply such change. See “—Overview—Changes in Accounting Policies.”

 

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Allocation and Analysis of Allowances for Loan Losses under U.S. GAAP

The following table presents, as of the date indicated, the allocation of our allowances for loan losses by loan type under U.S. GAAP. The ratio represents the percentage of allowances for loan losses in each category to total allowances for loan losses.

 

     As of December 31,  
     2009  
     Amount      %  
     (in billions of Won, except percentages)  

Domestic

     

Corporate

     

Commercial and industrial

   2,165         38.1

Construction

     457         4.1   

Other corporate

     25         1.1   
  

 

 

    

 

 

 

Total corporate

     2,647         43.3   

Retail

     

Mortgage and home equity

     125         36.0   

Other consumer

     336         13.7   
  

 

 

    

 

 

 

Total retail

     461         49.7   

Credit cards

     202         5.8   

Foreign (1)

     31         1.2   
  

 

 

    

 

 

 

Total allowances for loan losses

   3,341         100.0
  

 

 

    

 

 

 

 

(1) 

Consists primarily of loans to corporations.

 

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The following table analyzes our allowances for loan losses and loan loss experience under U.S. GAAP for the year indicated:

 

     Year Ended
December 31,
 
     2009  
     (in billions of Won,
except percentages)
 

Balance at the beginning of the period

   3,043   

Amounts charged against income

     2,216   

Allowance relating to loans repurchased

     7   

Gross charge-offs:

  

Domestic:

  

Corporate

  

Commercial and industrial

     975   

Construction

     460   

Other corporate

     15   

Retail

  

Mortgage and home equity

     33   

Other consumer

     329   

Credit cards

     571   

Foreign:

     —     
  

 

 

 

Total gross charge-offs

     (2,383
  

 

 

 

Recoveries:

  

Domestic:

  

Corporate

  

Commercial and industrial

     54   

Construction

     10   

Other corporate

     1   

Retail

  

Mortgage and home equity

     12   

Other consumer

     125   

Credit cards

     256   

Foreign:

     —     
  

 

 

 

Total recoveries

     458   
  

 

 

 

Net charge-offs

     (1,925
  

 

 

 

Balance at the end of the period

   3,341   
  

 

 

 

Ratio of net charge-offs during the period to average loans outstanding during the period

     1.0

Regulatory Reserve for Credit Losses

If our allowances for credit losses are deemed insufficient for regulatory purposes, we are required to compensate for the difference by recording a regulatory reserve for credit losses, which is segregated within our retained earnings. The level of regulatory reserve for credit losses required to be recorded is equal to the amount by which our allowances for credit losses under IFRS are less than the greater of (x) the amount of expected loss calculated using the internal ratings-based approach under Basel II and as approved by the Financial Supervisory Service and (y) the required amount of credit loss reserve calculated based on guidelines prescribed by the Financial Services Commission. As of December 31, 2013, our regulatory reserve for credit losses was ₩2,280 billion.

 

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The following tables set forth the Financial Services Commission’s guidelines for the classification of loans and the minimum percentages of the outstanding principal amount of the relevant loans or balances that the credit loss reserve must cover:

 

Loan Classification

 

Loan Characteristics

Normal   Loans made to customers whose financial position, future cash flows and nature of business are deemed financially sound. No problems in recoverability are expected.
Precautionary   Loans made to customers whose financial position, future cash flows and nature of business show potential weakness, although there is no immediate risk of non-repayment.
Substandard   Loans to customers whose adverse financial position, future cash flows and nature of business have a direct effect on the repayment of the loan.
Doubtful   Loans to customers whose financial position, future cash flows and nature of business are so weak that significant risk exists in the recoverability of the loan to the extent the outstanding amount exceeds any collateral pledged.
Estimated loss   Loans where write-off is unavoidable.

 

Loan Classifications

   Corporate      Consumer      Credit Card
Balances (1)
     Credit Card
Loans (2)
 

Normal

     0.85% or above         1% or above         1.1% or above         2.5% or above   

Precautionary

     7% or above         10% or above         40% or above         50% or above   

Substandard

     20% or above         20% or above         60% or above         65% or above   

Doubtful

     50% or above         55% or above         75% or above         75% or above   

Estimated loss

     100%         100%         100%         100%   

 

(1) 

Applicable for credit card balances from general purchases.

(2) 

Applicable for cash advances, card loans and revolving credit card assets.

Loan Charge-Offs

Basic Principles

We attempt to minimize loans to be charged off by adhering to a sound credit approval process based on credit risk analysis prior to extending loans and a systematic management of outstanding loans. However, if charge-offs are necessary, we charge off loans subject to our charge-off policy at an early stage in order to maximize accounting transparency, to minimize any waste of resources in managing loans which have a low probability of being collected and to reduce our non-performing loan ratio.

Loans To Be Charged Off

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

 

   

loans for which collection is not foreseeable due to insolvency, bankruptcy, compulsory execution, disorganization, dissolution or the shutting down of the business of the debtor;

 

   

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

 

   

loans for which expenses of collection exceed the collectable amount;

 

   

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

 

   

payments in arrears in respect of credit cards that have been overdue for a period of six months or more and have been classified as expected loss (excluding instances where there has been partial payment of the overdue balance, where a related balance is not overdue or where a charge off is not possible due to Korean regulations); and

 

   

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

 

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Procedure for Charge-off Approval

In order to charge off corporate loans, an application for a charge-off must be submitted to Kookmin Bank’s Credit Management Department promptly after the corporate loan is classified as estimated loss or deemed uncollectible. The Credit Management Department refers the charge-off application to Kookmin Bank’s Branch Audit Department for their review to ensure compliance with our internal procedures for charge-offs. Then, the Credit Management Department, after reviewing the application to confirm that it meets relevant requirements, seeks an approval from the Financial Supervisory Service for our charge-offs, which is typically granted. Once we receive approval from the Financial Supervisory Service, we must also obtain approval from our senior management to charge off those loans. For accounting purposes, we recognize charge-offs of corporate loans under IFRS prior to approval from the Financial Supervisory Service.

With respect to credit card balances and unsecured retail loans, we follow a different process to determine which credit card balances and unsecured retail loans should be charged off, based on the length of time those loans or balances are past due. We charge off unsecured retail loans deemed to be uncollectible and credit card balances which have been overdue for a period of six months or more or which have been deemed to be uncollectible under IFRS.

Treatment of Loans Charged Off

Once loans are charged off, we classify them as charged-off loans and remove them from our balance sheet. These loans are managed based on a different set of procedures. We continue our collection efforts in respect of these loans, including through our subsidiary, KB Credit Information, although loans may be charged off before we begin collection efforts in some circumstances.

If a collateralized loan is overdue, we will, typically within one year from the time that such loan became overdue (or after a longer period in certain circumstances), petition a court to foreclose and sell the collateral through a court-supervised auction. If a debtor ultimately fails to repay and the court grants its approval for foreclosure, we will sell the collateral, net of expenses incurred from the auction.

Credit Rehabilitation Programs for Delinquent Consumer Borrowers

In light of the rapid increase in delinquencies in credit card and other consumer credit in recent years, and concerns regarding potential social issues posed by the growing number of individuals with bad credit, the Korean government has implemented a number of measures intended to support the rehabilitation of the credit of delinquent consumer borrowers. These measures may affect the amount and timing of our collections and recoveries on our delinquent consumer credits.

For example, in March 2009, the Financial Services Commission requested Korean banks, including us, to establish a “pre-workout program,” including a credit counseling and recovery service, for retail borrowers with outstanding short-term debt. Under the pre-workout program, which has been in operation since April 2009, maturity extensions and/or interest reductions are provided for retail borrowers with total loans of ₩1.5 billion or less (consisting of no more than ₩500 million of unsecured loans and ₩1 billion of secured loans) who are in arrears on their payments for more than 30 days but less than 90 days or for retail borrowers with an annual income of ₩40 million or less who have been in arrears on their payments for more than 30 days on an aggregate basis for the 12 months prior to their application.

In March 2013, in order to support low income consumer borrowers experiencing difficulty in repaying their unsecured long-term debt, the Financial Services Commission announced the establishment of a “National Happiness Fund” to provide one-time relief to such borrowers by:

 

   

purchasing from creditors unsecured loans of individual borrowers not exceeding ₩100 million in principal amount in the aggregate, which loans have been in arrears for a period of six months or more as of February 28, 2013 and, if requested by the borrower, reducing the balance of such loans by up to

 

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50% and/or extending the maturity of such loans to up to ten years based on the borrower’s expected ability to repay;

 

   

purchasing from certain creditors student loans of individual borrowers, which loans have been in arrears for a period of six months or more as of February 28, 2013 and, if requested by the borrower, restructuring the balance and/or extending the maturity of such loans based on the borrower’s expected ability to repay or extending the maturity of such loans until the borrower is employed; and

 

   

for individuals with annual income of ₩40 million or less with loans of a principal amount not exceeding ₩30 million in the aggregate and with an interest rate of 20% or higher, facilitating the refinancing of such loans at lower interest rates, provided that such loans have not been in default during the six months prior to the application for relief.

Over 3,800 Korean financial institutions and private lenders, including our subsidiaries, Kookmin Bank, KB Savings Bank and KB Kookmin Card, have signed a memorandum of understanding with the National Happiness Fund to sell eligible loans to the fund. The price and volume of such loans to be sold are subject to further negotiations between the National Happiness Fund and such financial institutions and lenders. The National Happiness Fund accepted applications from individual borrowers to participate in such relief programs until October 2013 and until January 2014 for individual borrowers of student loans from the Korea Student Aid Foundation.

Investment Portfolio

Investment Policy

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

 

   

maintain the stability and diversification of our assets;

 

   

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

 

   

supplement income from our core lending activities.

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

Our investments in securities are also subject to a number of guidelines, including limitations prescribed under the Financial Holding Company Act and the Bank Act. Under these regulations, a bank holding company may not own (i) more than 5% of the total issued and outstanding shares of another finance-related company, (ii) any shares of its affiliates, other than its direct or indirect subsidiaries or (iii) any shares of a non-finance-related company. In addition, Kookmin Bank must limit its investments in equity securities and bonds with a maturity in excess of three years (other than monetary stabilization bonds issued by the Bank of Korea and national government bonds) to 60.0% of its total Tier I and Tier II capital amount (less any capital deductions). Generally, Kookmin Bank is also prohibited from acquiring more than 15.0% of the shares with voting rights issued by any other corporation subject to certain exceptions. Pursuant to the Bank Act, a bank and its trust accounts are prohibited from acquiring the shares of a major shareholder (for the definition of “major shareholder,” see “—Supervision and Regulation—Principal Regulations Applicable to Banks—Financial Exposure to Any Individual Customer and Major Shareholders”) of that bank in excess of an amount equal to 1% of the sum of the bank’s Tier I and Tier II capital (less any capital deductions). Further information on the regulatory environment governing our investment activities is set out in “—Supervision and Regulation—Principal Regulations Applicable to Financial Holding Companies—Liquidity,” “—Supervision and Regulation—Principal Regulations Applicable to Financial Holding Companies—Restrictions on Shareholdings

 

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in Other Companies,” “—Supervision and Regulation—Principal Regulations Applicable to Banks—Liquidity” and “—Supervision and Regulation—Principal Regulations Applicable to Banks—Restrictions on Shareholdings in Other Companies.”

The following table sets out the definitions of the four categories of securities we hold:

 

Category

  

Classification

Financial assets held for trading    Financial assets bought and held for trading.
Financial assets designated at fair value through profit or loss    Financial assets which were not bought and held for trading but are otherwise designated as at fair value through profit or loss.
Available-for-sale financial assets.    Non-derivative financial assets not classified as held-to-maturity, at fair value through profit or loss or loans and receivables
Held-to-maturity financial assets.    Non derivative financial assets with fixed or determinable payments and fixed maturity dates that we have the positive intent and ability to hold to maturity

See “Item 5.A. Operating Results—Critical Accounting Policies—Valuation of Securities and Financial Instruments.”

We also hold limited balances of venture capital securities, non-marketable and restricted equity securities and derivative instruments.

 

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Carrying Amount and Market Value

The following table sets out the carrying amount and market value of securities in our securities portfolio as of the dates indicated:

 

    As of December 31,  
    2011     2012     2013  
    Carrying
Amount
    Market
Value
    Carrying
Amount
    Market
Value
    Carrying
Amount
    Market
Value
 
    (in billions of Won)  

Available-for-sale financial assets:

           

Equity securities

  2,643      2,643      2,474      2,474      2,899      2,899   

Debt securities

           

Korean treasury securities and government agency securities

    5,989        5,989        6,256        6,256        6,926        6,926   

Debt securities issued by financial institutions

    6,432        6,432        7,476        7,476        5,782        5,782   

Corporate debt securities

    5,375        5,375        6,606        6,606        4,998        4,998   

Asset-backed securities

    1,757        1,757        1,399        1,399        1,208        1,208   

Others

    181        181        —          —          19        19   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale

    22,377        22,377        24,211        24,211        21,832        21,832   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Held-to-maturity financial assets:

           

Debt securities

           

Korean treasury securities and government agency securities

    5,436        5,676        4,449        4,720        4,357        4,537   

Debt securities issued by financial institutions

    1,125        1,155        1,316        1,338        893        902   

Corporate debt securities

    6,155        6,390        6,213        6,498        7,400        7,580   

Asset-backed securities

    339        341        278        281        367        368   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total held-to-maturity

    13,055        13,562        12,256        12,837        13,017        13,387   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial assets at fair value through profit or loss:

           

Financial assets held for trading

           

Equity securities

    412        412        876        876        1,101        1,101   

Debt securities

           

Korean treasury securities and government agency securities

    1,508        1,508        2,376        2,376        2,085        2,085   

Debt securities issued by financial institutions

    2,837        2,837        4,018        4,018        3,266        3,266   

Corporate debt securities

    586        586        1,679        1,679        1,760        1,760   

Asset-backed securities

    135        135        105        105        510        510   

Others

    111        111        114        114        205        205   

Others

    28        28        40        40        40        40   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

    5,617        5,617        9,208        9,208        8,967        8,967   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial assets designated at fair value through profit or loss

           

Equity securities

    134        134        159        159        116        116   

Debt securities

    —          —          —          —          —          —     

Derivative-linked securities

    575        575        193        193        246        246   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

    709        709        352        352        362        362   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total financial assets at fair value through profit or loss

    6,326        6,326        9,560        9,560        9,329        9,329   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total securities

  41,758      42,265      46,027      46,608      44,178      44,548   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Maturity Analysis

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

 

    Within
1 Year
    Weighted
Average
Yield (1)
    Over 1
But
within 5
Years
    Weighted
Average
Yield (1)
    Over 5
But
within
10 Years
    Weighted
Average
Yield (1)
    Over 10
Years
    Weighted
Average
Yield (1)
    Total     Weighted
Average
Yield (1)
 
    (in billions of Won, except percentages)  

Available-for-sale financial assets:

                   

Korean treasury securities and government agencies

  1,570        3.89   5,119        3.56   228        3.90   9        4.35   6,926        3.64

Debt securities issued by financial institutions

    3,166        2.88        2,520        3.35        96        4.49        —          —          5,782        3.11   

Corporate debt securities

    1,236        4.17        3,497        3.80        234        5.05        31        4.02        4,998        3.95   

Asset-backed securities

    231        3.50        370        2.98        —          —          607        3.75        1,208        3.47   

Others

    19        3.50        —          —          —          —          —          —          19        3.50   
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Total

  6,222        3.42   11,506        3.57   558        4.48   647        3.77   18,933        3.55
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Held-to-maturity financial assets:

                   

Korean treasury securities and government agencies

  1,166        4.10   2,946        4.68   133        4.20   112        5.38   4,357        4.53

Debt securities issued by financial institutions

    440        5.04        402        3.81        51        4.06        —          —          893        4.43   

Corporate debt securities

    1,845        4.64        4,772        4.52        735        4.66        48        3.45        7,400        4.56   

Asset-backed securities

    183        3.57        184        3.06        —          —          —          —          367        3.31   
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Total

  3,634        4.46   8,304        4.51   919        4.56   160        4.80   13,017        4.50
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Financial assets at fair value through profit or loss:

                   

Financial assets held for trading:

                   

Korean treasury securities and government agency securities

  763        4.29   1,044        3.35   242        4.24   36        3.17   2,085        3.79

Debt securities issued by financial institutions

    1,646        3.15        1,549        3.30        71        4.13        —          —          3,266        3.24   

Corporate debt securities

    636        4.28        1,055        3.92        69        4.40        —          —          1,760        4.07   

Asset-backed securities

    306        3.57        194        3.82        10        3.71        —          —          510        3.67   

Others

    190        3.31        15        3.55        —          —          —          —          205        3.32   
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Sub-total

  3,541        3.64   3,857        3.51   392        4.23   36        3.17   7,826        3.60
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Financial assets designated at fair value through profit or loss:

  —          —        —          —        —          —        —          —        —          —     
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Total

  3,541        3.64   3,857        3.51   392        4.23   36        3.17   7,826        3.60
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

 

(1)

The weighted average yield for the portfolio represents the yield to maturity for each individual security, weighted using its carrying amount (which is the amortized cost in the case of held-to-maturity financial assets and the fair value in the case of available-for-sale financial assets and financial assets at fair value through profit or loss).

 

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Concentrations of Risk

As of December 31, 2013, we held the following securities of individual issuers where the aggregate carrying amount of those securities exceeded 10% of our stockholders’ equity at such date, which was ₩25,653 billion:

 

     Carrying
Amount
     Market
Value
 
     (in billions of Won)  

Name of issuer:

     

Korean government

   12,408       12,571   

Bank of Korea

     4,224         4,224   

Korea Deposit Insurance Corporation

     2,667         2,689   
  

 

 

    

 

 

 

Total

   19,299       19,484   
  

 

 

    

 

 

 

The Bank of Korea and the Korea Deposit Insurance Corporation are controlled by the Korean government.

Funding

We obtain funding for our lending activities from a variety of sources, both domestic and foreign. Our principal source of funding is customer deposits. In addition, we acquire funding through long-term borrowings (comprising debentures and debts), short-term borrowings, including borrowings from the Bank of Korea, and call money.

Our primary funding strategy has been to achieve low-cost funding by increasing the average balances of low-cost retail deposits, in particular demand deposits and time deposits. We also have focused our marketing efforts on higher net worth individuals, who account for a significant portion of the assets in our retail deposit base. Customer deposits accounted for 81.3% of total funding as of December 31, 2011, 83.1% of total funding as of December 31, 2012 and 83.0% of total funding as of December 31, 2013.

Our borrowings consist of issuances of debentures and debt from financial institutions, the Korean government and government-affiliated funds. The majority of our debt is long-term, with maturities ranging from one year to 30 years.

Deposits

Although the majority of our deposits are short-term, it has been our experience that the majority of our depositors generally roll over their deposits at maturity, providing us with a stable source of funding.

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

 

     2011     2012     2013  
     Average
Balance (1)
     Average
Rate Paid
    Average
Balance (1)
     Average
Rate Paid
    Average
Balance (1)
     Average
Rate Paid
 
     (in billions of Won, except percentages)  

Demand deposits:

               

Non-interest bearing

   3,249         —        3,075         —        3,252         —     

Interest bearing

     53,824         0.58     56,154         0.60     60,894         0.47

Time deposits

     124,713         3.66        136,617         3.69        130,286         3.02   

Certificates of deposit

     1,746         3.89        1,735         3.86        1,780         3.03   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Average total deposits

   183,532         2.69   197,581         2.76   196,212         2.18
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) 

Average balances are based on daily balances for our banking, credit card and investment and securities operations and monthly or quarterly balances for our other operations.

 

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For a description of our retail deposit products, see “—Business—Retail Banking—Lending Activities—Mortgage and Home Equity Lending” and “—Business—Retail Banking—Deposit-Taking Activities.”

Time Deposits and Certificates of Deposit

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

 

     Time Deposits      Certificates
of Deposit
     Total  
     (in billions of Won)  

Maturing within three months

   25,829       617       26,446   

After three but within six months

     16,177         368         16,545   

After six but within 12 months

     19,827         588         20,415   

After 12 months

     1,947         —           1,947   
  

 

 

    

 

 

    

 

 

 

Total

   63,780       1,573       65,353   
  

 

 

    

 

 

    

 

 

 

Long-term borrowings

The aggregate amount of contractual maturities of all long-term borrowings (comprising debentures and debt) as of December 31, 2013 was as follows:

 

     As of December 31, 2013  
     (in billions of Won)  

Due in 2014

   12,629   

Due in 2015

     5,523   

Due in 2016

     6,273   

Due in 2017

     2,607   

Due in 2018

     1,454   

Thereafter

     4,632   
  

 

 

 

Gross long-term borrowings

     33,118   

Fair value adjustments

     (122

Deferred financing costs

     (3

Discount

     (22
  

 

 

 

Total long-term borrowings, net

   32,971   
  

 

 

 

 

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Short-term borrowings

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

 

     As of and for the Year Ended December 31,  
     2011     2012     2013  
     (in billions of Won, except percentages)  

Call money:

      

Year-end balance

   1,141      2,597      2,648   

Average balance (1)

     2,676        4,788        4,679   

Maximum balance (2)

     2,491        5,043        5,835   

Average interest rate (3)

     2.29     2.38     2.12

Year-end interest rate

     0.15-4.48     0.15-2.72     0.17-5.23

Borrowings from the Bank of Korea: (4)

      

Year-end balance

   651      782      558   

Average balance (1)

     777        745        649   

Maximum balance (2)

     920        953        917   

Average interest rate (3)

     1.44     1.48     1.08

Year-end interest rate

     1.50     1.25     0.50-1.00

Other short-term borrowings: (5)

      

Year-end balance

   12,051      7,382      4,963   

Average balance (1)

     10,565        9,766        6,166   

Maximum balance (2)

     12,120        12,340        7,064   

Average interest rate (3)

     2.00     2.11     1.25

Year-end interest rate

     0.53-5.96     0.24-5.47     0.00-4.81

 

(1) 

Average balances are based on daily balances for our banking, credit card and investment and securities operations and monthly or quarterly balances for our other operations.

(2) 

Maximum balances are based on month-end balances.

(3) 

Average interest rates for the year are calculated by dividing the total interest expense by the average amount borrowed.

(4) 

Borrowings from the Bank of Korea generally mature within one month for borrowings in Won and six months for borrowings in foreign currencies. These short-term borrowings were secured by securities totaling ₩610 billion as of December 31, 2013.

(5) 

Other short-term borrowings include securities sold under repurchase agreement, bills sold, borrowings and debentures. Other short-term borrowings have maturities of one year or less. Securities sold under repurchase agreements were secured by securities totaling ₩3,901 billion as of December 31, 2013.

Supervision and Regulation

Principal Regulations Applicable to Financial Holding Companies

General

The Financial Holding Company Act, last amended on August 13, 2013, regulates Korean financial holding companies and their subsidiaries. The entities that regulate and supervise Korean financial holding companies and their subsidiaries are the Financial Services Commission and the Financial Supervisory Service.

The Financial Services Commission exerts direct control over financial holding companies pursuant to the Financial Holding Company Act. Among other things, the Financial Services Commission approves the establishment of financial holding companies, issues regulations on the capital adequacy of financial holding companies and their subsidiaries, and drafts regulations relating to the supervision of financial holding companies.

Following the instructions and directives of the Financial Services Commission, the Financial Supervisory Service supervises and examines financial holding companies and their subsidiaries. In particular, the Financial Supervisory Service sets requirements relating to Korean financial holding companies’ liquidity and capital

 

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adequacy ratios and establishes reporting requirements within the authority delegated under the Financial Services Commission regulations. Financial holding companies must submit quarterly reports to the Financial Supervisory Service discussing business performance, financial status and other matters identified in the Enforcement Decree of the Financial Holding Company Act.

Under the Financial Holding Company Act, a financial holding company is a company which primarily engages in controlling its subsidiaries by holding equity stakes in them equal in aggregate to at least 50% of the financial holding company’s aggregate assets based on its balance sheet as of the end of the immediately preceding fiscal year. A company is required to obtain approval from the Financial Services Commission to become a financial holding company.

A financial holding company may engage only in controlling the management of its subsidiaries, as well as certain ancillary activities including:

 

   

financially supporting its direct and indirect subsidiaries;

 

   

raising capital necessary for investment in its subsidiaries or providing financial support to its direct and indirect subsidiaries;

 

   

supporting the business of its direct and indirect subsidiaries for the joint development and marketing of new products;

 

   

supporting the operations of its direct and indirect subsidiaries by providing access to data processing, legal and accounting resources; and

 

   

any other businesses exempted from authorization, permission or approval under the applicable laws and regulations.

The Financial Holding Company Act requires every financial holding company (other than a financial holding company that is controlled by another financial holding company) and its subsidiaries to obtain prior approval from the Financial Services Commission before acquiring control of another company or to file a report with the Financial Services Commission within 30 days thereafter in certain cases (including acquiring control of another company whose assets are less than ₩100 billion as of the end of the immediately preceding fiscal year). In addition, the Financial Services Commission must grant permission to liquidate or to merge with any other company before the liquidation or merger. A financial holding company must report to the Financial Services Commission when certain events, including the following, occur:

 

   

when its officers or largest shareholder changes;

 

   

in the case of a bank holding company, when a major shareholder changes;

 

   

when the shareholding of the controlling shareholder (i.e., the “largest shareholder” or a “principal shareholder,” each as defined in the Financial Holding Company Act) or a person who has a “special relationship” with such controlling shareholder (as defined in the Enforcement Decree of the Financial Holding Company Act) changes by 1% or more of the total issued and outstanding voting shares of the financial holding company;

 

   

when it changes its corporate name;

 

   

when there is a cause for its dissolution; and

 

   

when it or its subsidiaries cease to control any of their respective direct or indirect subsidiaries by disposing of their shares of such direct or indirect subsidiary.

Capital Adequacy

The Financial Holding Company Act does not provide for a minimum paid-in capital requirement related to financial holding companies. However, all financial holding companies are required to maintain a specified level

 

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of solvency. In addition, with respect to the allocation of net profit earned in a fiscal term, a financial holding company must set aside in its legal reserve an amount equal to at least 10% of its net income after tax each time it pays dividends on its net profits earned until its legal reserve reaches at least the aggregate amount of its paid-in capital.

A bank holding company, which is a financial holding company controlling banks or other financial institutions conducting banking business as prescribed in the Financial Holding Company Act, is required to maintain a minimum consolidated capital adequacy ratio of 8.0%. “Consolidated capital adequacy ratio” is defined as the ratio of equity capital as a percentage of risk-weighted assets on a consolidated basis, determined in accordance with the Financial Services Commission requirements that have been formulated based on Bank of International Settlements (“BIS”) standards. “Equity capital,” as applicable to bank holding companies, is defined as the sum of Tier I common equity capital, other Tier I capital and Tier II capital less any deductible items, each as defined under the Regulation on the Supervision of Financial Holding Companies. “Risk-weighted assets” is defined as the sum of credit risk-weighted assets and market risk-weighted assets.

Pursuant to the amended regulations promulgated by the Financial Services Commission in 2013 to implement Basel III, Korean bank holding companies were required to maintain a minimum ratio of Tier I common equity capital to risk-weighted assets of 3.5% and Tier I capital to risk-weighted assets of 4.5% from December 1, 2013, which minimum ratios increased to 4.0% and 5.5%, respectively, from January 1, 2014 and will increase further to 4.5% and 6.0%, respectively, from January 1, 2015. Such requirements are in addition to the pre-existing requirement for a minimum ratio of Tier I and Tier II capital (less any capital deductions) to risk-weighted assets of 8.0%, which remains unchanged. The amended regulations also contemplate an additional capital conservation buffer of 0.625% starting in 2016, with such buffer to increase in stages to 2.5% by 2019.

Liquidity

All financial holding companies are required to match the maturities of their assets and liabilities on a non-consolidated basis in accordance with the Financial Holding Company Act in order to ensure liquidity. Financial holding companies must:

 

   

maintain a Won liquidity ratio (defined as Won assets due within one month, including marketable securities, divided by Won liabilities due within one month) of not less than 100% on a non-consolidated basis;

 

   

maintain a foreign currency liquidity ratio (defined as foreign currency liquid assets due within three months divided by foreign currency liabilities due within three months) of not less than 80% on a non-consolidated basis (except that such requirement is not applicable to a financial holding company whose foreign currency liabilities constitute less than 1% of its total assets);

 

   

maintain a ratio of foreign currency liquid assets due within seven days less foreign currency liabilities due within seven days as a percentage of total foreign currency assets of not less than 0% on a non-consolidated basis (except that such requirement is not applicable to a financial holding company whose foreign currency liabilities constitute less than 1% of its total assets);

 

   

maintain a ratio of foreign currency liquid assets due within a month less foreign currency liabilities due within a month as a percentage of total foreign currency assets of not less than negative 10% on a non-consolidated basis (except that such requirement is not applicable to a financial holding company whose foreign currency liabilities constitute less than 1% of its total assets); and

 

   

make quarterly reports regarding their Won liquidity and foreign currency liquidity to the Financial Supervisory Service.

Financial Exposure to Any Individual Customer and Major Shareholder

Subject to certain exceptions, the aggregate credit (as defined in the Financial Holding Company Act, the Bank Act, the Financial Investment Services and Capital Markets Act, the Insurance Business Act, the Mutual

 

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Savings Bank Act and the Specialized Credit Financial Business Act, respectively) of a financial holding company and its direct and indirect subsidiaries that are banks, merchant banks, financial investment companies, insurance companies, savings banks or specialized credit financial business companies (which we refer to as “Financial Holding Company Total Credit”) to a single group of companies that belong to the same conglomerate as defined in the Monopoly Regulations and Fair Trade Act will not be permitted to exceed 25% of net aggregate equity capital (as defined below).

“Net aggregate equity capital” is defined under the Enforcement Decree of the Financial Holding Company Act as the sum of:

(1) in case of a financial holding company, the capital amount as defined in Article 24-3(7), Item 2 of the Enforcement Decree of the Financial Holding Company Act;

(2) in case of a bank, the capital amount as defined in Article 2(1), Item 5 of the Bank Act;

(3) in case of a merchant bank, the capital amount as defined in Article 342(1) of the Financial Investment Services and Capital Markets Act; and

(4) in case of a financial investment company, the capital amount as defined in Article 37(3) of the Enforcement Decree of the Financial Holding Company Act;

(5) in case of an insurance company, the capital amount as defined in Article 2, Item 15 of the Insurance Business Act;

(6) in case of a savings bank, the capital amount as defined in Article 2, Item 4 of the Mutual Savings Bank Act; and

(7) in case of a specialized credit financial business company, the capital amount as defined in Article 2, Item 19 of the Specialized Credit Financial Business Act;

less the sum of:

(1) the amount of shares of direct and indirect subsidiaries held by the financial holding company;

(2) the amount of shares that are cross-held by each direct and indirect subsidiary that is a bank, merchant bank, financial investment company, insurance company, savings bank or specialized credit financial business company; and

(3) the amount of shares of a financial holding company held by such direct and indirect subsidiaries that are banks, merchant banks, financial investment companies, insurance companies, savings banks or specialized credit financial business companies.

The Financial Holding Company Total Credit to a single individual or judicial person may not exceed 20% of the net aggregate equity capital. In addition, the Financial Holding Company Total Credit to a shareholder holding (together with the persons who have a “special relationship” with the shareholder, as defined in the Enforcement Decree of the Financial Holding Company Act) in aggregate more than 10% of the total issued and outstanding voting shares of a financial holding company generally may not exceed the lesser of (x) 25% of the net aggregate equity capital and (y) the amount of the equity capital of the financial holding company multiplied by the shareholding ratio of the shareholder (together with the persons who have a special relationship with the shareholder).

Further, the total sum of credits (as defined in the Financial Holding Company Act, the Bank Act, the Financial Investment Services and Capital Markets Act, the Insurance Business Act, the Mutual Savings Bank Act and the Specialized Credit Financial Business Act, respectively) of a bank holding company and its direct and indirect subsidiaries that are banks, merchant banks, financial investment companies, insurance companies, savings banks or specialized credit financial business companies as applicable (“Bank Holding Company Total Credit”) extended to a “major shareholder” (as defined below) (together with the persons who have a special

 

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relationship with that major shareholder) will not be permitted to exceed the lesser of (x) 25% of the net aggregate equity capital and (y) the amount of the equity capital of the bank holding company multiplied by the shareholding ratio of the major shareholder, except for certain cases.

“Major shareholder” is defined as:

 

   

a shareholder holding (together with persons who have a special relationship with that shareholder), in excess of 10% (or in the case of a bank holding company controlling regional banks only, 15%) in the aggregate of the bank holding company’s total issued and outstanding voting shares; or

 

   

a shareholder holding (together with persons who have a special relationship with that shareholder), more than 4% in the aggregate of the total issued and outstanding voting shares of the bank holding company controlling nationwide banks, where the shareholder is the largest shareholder or has actual control over the major business affairs of the bank holding company through, for example, appointment and dismissal of the officers pursuant to the Enforcement Decree of the Financial Holding Company Act.

In addition, the total sum of the Bank Holding Company Total Credit granted to all of a bank holding company’s major shareholders must not exceed 25% of the bank holding company’s net aggregate equity capital. Furthermore, any bank holding company that, together with its direct and indirect subsidiaries, intends to extend credit to the bank holding company’s major shareholder in an amount equal to or exceeding the lesser of (x) the amount equivalent to 0.1% of the net aggregate equity capital and (y) ₩5 billion, in any single transaction, must obtain prior unanimous board resolutions and then, immediately after providing the credit, must file a report to the Financial Services Commission and publicly disclose the filing of the report.

Restrictions on Transactions Among Direct and Indirect Subsidiaries and Financial Holding Company

Generally, a direct or indirect subsidiary of a financial holding company may not extend credits (excluding the amount of corporate credit card payments issued by a direct or indirect subsidiary of a financial holding company that is engaged in the banking business) to that financial holding company. In addition, a direct or indirect subsidiary of a financial holding company may not extend credits (excluding the amount of corporate credit card payments issued by a direct or indirect subsidiary of a financial holding company that is engaged in the banking business) to other direct or indirect subsidiaries of the financial holding company in excess of 10% of its capital amount on an individual basis or to those subsidiaries in excess of 20% of its capital amount on an aggregate basis. The subsidiary extending the credit must also obtain an adequate level of collateral depending on the type of such collateral from the other subsidiaries unless the credit is otherwise approved by the Financial Services Commission. The adequate level of collateral for each type of collateral is as follows:

(1) for deposits and installment savings, obligations of the Korean government or the Bank of Korea, obligations guaranteed by the Korean government or the Bank of Korea, obligations secured by securities issued or guaranteed by the Korean government or the Bank of Korea, 100% of the credit extended;

(2) for obligations of municipal governments under the Local Autonomy Act, local public enterprise under the Local Public Enterprises Act and investment institutions and other quasi-investment institutions under the Basic Act on the Management of Government-Invested Institution or for obligations guaranteed by, or secured by the securities issued or guaranteed by, the aforementioned entities pursuant to the relevant regulations, 110% of the credit extended; and

(3) for any property other than those set forth in paragraphs (1) and (2) above, 130% of the credit extended.

Subject to certain exceptions, a direct or indirect subsidiary of a financial holding company is prohibited from owning the shares of any other direct or indirect subsidiaries (other than those directly controlled by that direct or indirect subsidiary) under the common control of the financial holding company.

 

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Subject to certain exceptions, a direct or indirect subsidiary of a financial holding company is also prohibited from owning the shares of the financial holding company controlling that direct or indirect subsidiary. The transfer of certain assets classified as precautionary or below between a financial holding company and its direct or indirect subsidiary or between the direct and indirect subsidiaries of a financial holding company is prohibited except for:

(1) transfers to a special purpose company, or entrustment with a trust company, for an asset-backed securitization transaction under the Asset-Backed Securitization Act;

(2) transfers to a mortgage-backed securities issuance company for a mortgage securitization transaction;

(3) transfers or in-kind contributions to a corporate restructuring vehicle under the Corporate Restructuring Investment Companies Act; and

(4) transfers to a corporate restructuring company under the Industry Promotion Act.

Disclosure of Management Performance

For the purpose of protecting the depositors and investors in the subsidiaries of financial holding companies, the Financial Services Commission requires financial holding companies to disclose certain material matters including:

(1) financial condition and profit and loss of the financial holding company and its direct and indirect subsidiaries;

(2) fund-raising by the financial holding company and its direct and indirect subsidiaries and the appropriation of such funds;

(3) any sanctions levied on the financial holding company and its direct and indirect subsidiaries under the Financial Holding Company Act or any corrective measures or sanctions under the Law on Improvement of Structure of Financial Industry; and

(4) occurrence of any non-performing assets or financial incident that may have a material adverse effect, or any other event as prescribed in the applicable regulations.

Restrictions on Shareholdings in Other Companies

Generally, a financial holding company may not own (i) more than 5% of the total issued and outstanding shares of another finance-related company, (ii) any shares of its affiliates, other than its direct or indirect subsidiaries or (iii) any shares of a non-finance-related company.

Restrictions on Shareholdings by Direct and Indirect Subsidiaries

Generally, a direct subsidiary of a financial holding company may not control any other company other than, as an indirect subsidiary of the financial holding company:

 

   

financial institutions established in foreign jurisdictions;

 

   

certain financial institutions which are engaged in any business that the direct subsidiary may conduct without any licenses or permits;

 

   

certain financial institutions whose business is related to the business of the direct subsidiary as described by the Enforcement Decree of the Financial Holding Company Act (for example, a bank subsidiary may control only credit information companies, credit card companies and financial investment companies with a dealing, brokerage, collective investment, investment advice, discretionary investment management and/or trust license);

 

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certain financial institutions whose business is related to the financial business as prescribed by the regulations of the Ministry of Strategy and Finance; and

 

   

certain companies which are not financial institutions but whose business is related to the financial business of the financial holding company as prescribed by the Enforcement Decree of the Financial Holding Company Act (for example, a finance-related research company or a finance-related information technology company).

Acquisition of such indirect subsidiaries by direct subsidiaries of a financial holding company requires prior permission from the Financial Services Commission or the submission of a report to the Financial Services Commission, depending on the types of the indirect subsidiaries and the amount of total assets of the indirect subsidiaries.

Subject to certain exceptions, an indirect subsidiary of a financial holding company may not control any other company. If an indirect subsidiary of a financial holding company had control over another company at the time it became such an indirect subsidiary, the indirect subsidiary is required to dispose of its interest in the other company within two years from such time.

Restrictions on Transactions between a Bank Holding Company and its Major Shareholder

A bank holding company and its direct and indirect subsidiaries may not acquire (including through their respective trust accounts) shares issued by the bank holding company’s major shareholder in excess of 1% of the net aggregate equity capital (as defined above). In addition, if those entities intend to acquire shares issued by that major shareholder in any single transaction equal to or exceeding the lesser of (x) the amount equivalent to 0.1% of the net aggregate equity capital and (y) ₩5 billion, that entity must obtain prior unanimous board resolutions and then, immediately after the acquisition, file a report to the Financial Services Commission and publicly disclose the filing of the report.

Restriction on Ownership of a Financial Holding Company

Under the Financial Holding Company Act, a financial institution generally may not control a financial holding company. In addition, any single shareholder and persons who have a special relationship with that shareholder may acquire beneficial ownership of up to 10% of the total issued and outstanding shares with voting rights of a bank holding company that controls nationwide banks or 15% of the total issued and outstanding shares with voting rights of a bank holding company that controls only regional banks, subject to certain exceptions. Among others, the Korean government and the Korea Deposit Insurance Corporation are not subject to this limit. “Non-financial business group companies” (as defined below), however, may not acquire the beneficial ownership of shares of a bank holding company controlling nationwide banks in excess of 4% of that bank holding company’s outstanding voting shares unless they obtain the approval of the Financial Services Commission and agree not to exercise voting rights in respect of shares in excess of the 4% limit, in which case they may acquire beneficial ownership of up to 10%. Any other person (whether a Korean national or a foreign investor) may acquire no more than 10% of total voting shares issued and outstanding of a bank holding company controlling nationwide banks unless they obtain approval from the Financial Services Commission in each instance where the total holding will exceed 10% (or 15% in the case of a bank holding company controlling only regional banks), 25% or 33% of the total voting shares issued and outstanding of that bank holding company controlling nationwide banks.

Furthermore, in the case where a person (including Korean and foreign investors, but excluding certain persons prescribed under the Enforcement Decree of the Financial Holding Company Act) (i) acquires in excess of 4% of the total issued and outstanding voting shares of any financial holding company (other than a financial holding company controlling only regional banks), (ii) becomes the largest shareholder of such financial holding company in which such person has acquired in excess of 4% of the total issued and outstanding voting shares, or

 

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(iii) changes its shareholding in such financial holding company, in which it has acquired in excess of 4% of the total issued and outstanding voting shares, by 1% or more of the total issued and outstanding voting shares of such financial holding company, such person must file a report on such change with the Financial Services Commission within five days thereafter.

“Non-financial business group companies” as defined under the Financial Holding Company Act include:

(1) any same shareholder group where the aggregate net assets of all non-financial business companies belonging to that group equals or exceeds 25% of the aggregate net assets of all members of that group;

(2) any same shareholder group where the aggregate assets of all non-financial business companies belonging to that group equals or exceeds ₩2 trillion;

(3) any mutual fund where a same shareholder group identified in (1) or (2) above beneficially owns and/or exercises the voting rights of more than 4% of the total issued and outstanding voting shares of that mutual fund;

(4) any private equity fund (a) where a person falling under any of items (1) through (3) above is a limited partner holding not less than 10% of the total amount of contributions to the private equity fund, or (b) where a person falling under any of items (1) through (3) above is a general partner, or (c) where the total equity of the private equity fund acquired by each affiliate belonging to several enterprise groups subject to the limitation on mutual investment is 30% or more of the total amount of contributions to the private equity fund; or

(5) the investment purpose company concerned, where a private equity fund falling under item (4) above acquires or holds stocks in excess of 4% of the stock or equity of such company or exercises de facto control over significant managerial matters of such company through appointment or dismissal of executives or in any other manner.

Sharing of Customer Information among Financial Holding Company and its Subsidiaries

Under the Act on Use and Protection of Credit Information, any individual customer’s credit information must be disclosed or otherwise used by financial institutions only to determine, establish or maintain existing commercial transactions with them and only after obtaining written consent to use that information. Under the Financial Holding Company Act, a financial holding company and its direct and indirect subsidiaries, however, may share certain credit information of individual customers among themselves for business purposes without the customers’ written consent. A subsidiary financial investment company with a dealing and/or brokerage license of a financial holding company may provide that financial holding company and its other direct and indirect subsidiaries information relating to the aggregate amount of cash or securities that a customer of the financial investment company with a dealing and/or brokerage license has deposited for business purposes.

Principal Regulations Applicable to Banks

The banking system in Korea is governed by the Bank Act of 1950, as amended (the “Bank Act”) and the Bank of Korea Act of 1950, as amended (the “Bank of Korea Act”). In addition, Korean banks come under the regulations and supervision of the Bank of Korea, the Monetary Policy Committee, the Financial Services Commission and its executive body, the Financial Supervisory Service.

The Bank of Korea, established in June 1950 under the Bank of Korea Act, performs the customary functions of a central bank. It seeks to contribute to the sound development of the national economy by price stabilization through establishing and implementing efficient monetary and credit policies. The Bank of Korea acts under instructions of the Monetary Policy Committee, the supreme policy-making body of the Bank of Korea.

 

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Under the Bank of Korea Act, the Monetary Policy Committee’s primary responsibilities are to formulate monetary and credit policies and to determine the operations, management and administration of the Bank of Korea.

The Financial Services Commission, established on April 1, 1998, regulates commercial banks pursuant to the Bank Act, including establishing guidelines on capital adequacy of commercial banks, and prepares regulations relating to supervision of banks. Furthermore, pursuant to the Amendment to the Government Organization Act and the Bank Act on May 24, 1999, the Financial Services Commission, instead of the Ministry of Strategy and Finance, now regulates market entry into the banking business.

The Financial Supervisory Service was established on January 2, 1999 as a unified body of the former Bank Supervisory Authority (the successor to the Office of Bank Supervision), the Securities Supervisory Board, the Insurance Supervisory Board and the Credit Management Fund. The Financial Supervisory Service is subject to the instructions and directives of the Financial Services Commission and carries out supervision and examination of commercial banks. In particular, the Financial Supervisory Service sets requirements both for prudent control of liquidity and for capital adequacy and establishes reporting requirements within the authority delegated to it under the Financial Services Commission regulations, pursuant to which banks are required to submit annual reports on financial performance and shareholdings, regular reports on management strategy and non-performing loans, including write-offs, and management of problem companies and plans for the settlement of bad loans.

Under the Bank Act, permission to commence a commercial banking business or a long-term financing business must be obtained from the Financial Services Commission. Commercial banking business is defined as the lending of funds acquired predominantly from the acceptance of deposits for a period not exceeding one year or subject to the limitation established by the Financial Services Commission, for a period between one year and three years. Long-term financing business is defined as the lending, for periods in excess of one year, of funds acquired predominantly from paid-in capital, reserves or other retained earnings, the acceptance of deposits with maturities of at least one year, or the issuance of bonds or other securities. A bank wishing to enter into any business other than commercial banking and long-term financing businesses, such as the financial investment business with a trust license, must obtain permission from the Financial Services Commission. Permission to merge with any other banking institution, to liquidate, to spin off, to close a banking business or to transfer all or a part of a business must also be obtained from the Financial Services Commission.

If the Korean government deems our financial condition to be unsound or if we fail to meet the applicable capital adequacy ratio set forth under Korean law, the government may order:

 

   

capital increases or reductions;

 

   

stock cancellations or consolidations;

 

   

transfers of business;

 

   

sales of assets;

 

   

closures of branch offices;

 

   

mergers with other financial institutions;

 

   

suspensions of a part or all of business operation; or

 

   

assignments of contractual rights and obligations relating to financial transactions.

Capital Adequacy

The Bank Act requires nationwide banks, such as us, to maintain a minimum paid-in capital of ₩100 billion and regional banks to maintain a minimum paid-in capital of ₩25 billion. All banks, including foreign bank branches in Korea, are also required to maintain a prescribed solvency position. A bank must also set aside in its

 

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legal reserve an amount equal to at least 10% of the net income after tax each time it pays dividends on net profits earned until its legal reserve reaches at least the aggregate amount of its paid-in capital.

Under the Enforcement Detailed Rules on the Supervision of Banking Business, the capital of a bank is divided into two categories, Tier I and Tier II capital. Tier I capital (core capital) consists of (i) Tier I common equity capital, including paid-in capital, capital surplus and retained earnings related to common equity and accumulated other comprehensive gains and losses, and (ii) other Tier I capital, including paid-in capital and capital surplus related to hybrid Tier I capital instruments that, among other things, qualify as contingent capital and are subordinated to subordinated debt. Tier II capital (supplementary capital) consists of, among other things, paid-in capital and capital surplus related to Tier II capital instruments, allowances for loan losses set aside for loans classified as normal or precautionary (up to certain limits) and certain other subordinated debt.

All banks must meet minimum ratios of Tier I and Tier II capital (less any capital deductions) to risk-weighted assets, determined in accordance with Financial Services Commission requirements that have been formulated based on BIS standards. These requirements were adopted and became effective in 1996, and were amended effective January 1, 2008 upon the implementation by the Financial Supervisory Service of Basel II. Under such requirements, all domestic banks and foreign bank branches must meet a minimum ratio of Tier I and Tier II capital (less any capital deductions) to risk-weighted assets of 8%. In July and September 2013, the Financial Services Commission promulgated amended regulations implementing Basel III in Korea, pursuant to which Korean banks and bank holding companies were required to maintain a minimum ratio of Tier I common equity capital to risk-weighted assets of 3.5% and Tier I capital to risk-weighted assets of 4.5% from December 1, 2013, which minimum ratios increased to 4.0% and 5.5%, respectively, from January 1, 2014 and will increase further to 4.5% and 6.0%, respectively, from January 1, 2015. Such requirements are in addition to the pre-existing requirement for a minimum ratio of Tier I and Tier II capital (less any capital deductions) to risk-weighted assets of 8.0%, which remains unchanged. The amended regulations also contemplate an additional capital conservation buffer of 0.625% starting in 2016, with such buffer to increase in stages to 2.5% by 2019.

In November 2002, the Financial Services Commission amended the Enforcement Detailed Rules on the Supervision of the Banking Business to include a more conservative risk-weighting system for certain newly extended home mortgage loans, which set the risk-weighted ratios of Korean banks in respect of home mortgage loans between 50% and 70% depending on the borrower’s debt ratio and whether the home mortgage loans are overdue. In June 2007 and in February 2012, the Financial Services Commission further amended the Enforcement Detailed Rules on the Supervision of the Banking Business and, as a result, the following risk-weight ratios must be applied by Korean banks in respect of home mortgage loans:

 

  (1) for those banks which adopted a standardized approach for calculating credit risk capital requirements, a risk-weight ratio of 35% and, with respect to high-risk home mortgage loans, 50%; and

 

  (2) for those banks which adopted an internal ratings-based approach for calculating credit risk capital requirements, a risk-weight ratio calculated with reference to the probability of default, loss given default and exposure at default, each as defined under the Enforcement Detailed Rules on the Supervision of the Banking Business.

Liquidity

All banks are required to ensure adequate liquidity by matching the maturities of their assets and liabilities in accordance with the Rules on the Supervision of the Banking Business. Banks may not invest an amount exceeding 60% of their Tier I and Tier II capital (less any capital deductions) in stocks and other securities with a maturity of over three years. This stipulation does not apply to Korean government bonds or to Monetary Stabilization Bonds issued by the Bank of Korea. The Financial Services Commission also requires each Korean bank to:

 

   

maintain a Won liquidity ratio (defined as Won assets due within one month, including marketable securities, divided by Won liabilities due within one month) of not less than 100% and to make monthly reports to the Financial Supervisory Service;

 

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maintain a foreign currency liquidity ratio (defined as foreign currency liquid assets due within three months divided by foreign currency liabilities due within three months) of not less than 85%;

 

   

maintain a ratio of foreign currency liquid assets due within seven days less foreign currency liabilities due within seven days, divided by total foreign currency assets, of not less than negative 3%;

 

   

maintain a ratio of foreign currency liquid assets due within a month less foreign currency liabilities due within a month, divided by total foreign currency assets, of not less than negative 10%; and

 

   

submit monthly reports with respect to the maintenance of these ratios.

The Monetary Policy Committee of the Bank of Korea is empowered to fix and alter minimum reserve requirements that banks must maintain against their deposit liabilities. The current minimum reserve ratio is:

 

   

7% of average balances for Won currency demand deposits outstanding;

 

   

0% of average balances for Won currency employee asset establishment savings deposits, employee long-term savings deposits, employee house purchase savings deposits, long-term house purchase savings deposits, household long-term savings deposits and employee preferential savings deposits outstanding; and

 

   

2% of average balances for Won currency time and savings deposits, mutual installments, housing installments and certificates of deposit outstanding.

For foreign currency deposit liabilities, a 2% minimum reserve ratio is applied to time deposits with a maturity of one month or longer, certificates of deposit with a maturity of 30 days or longer and savings deposits with a maturity of six months or longer and a 7% minimum reserve ratio is applied to demand deposits and other deposits. A 1% minimum reserve ratio applies to deposits in offshore accounts, immigrant accounts and resident accounts opened by foreign exchange banks as well as foreign currency certificates of deposit held by account holders of such offshore accounts, immigrant accounts and resident accounts opened by foreign exchange banks.

Furthermore, pursuant to the Regulation on Supervision of Banking Business, foreign exchange agencies, including our subsidiary, Kookmin Bank, are required to hold “foreign currency safe assets” in an aggregate amount that is not less than the lower of (i) the product of (x) its total foreign currency-denominated debt maturing in one year or less multiplied by 2/12 and (y) an amount equal to one minus the “lowest rollover ratio” and (ii) 2% of its total foreign currency-denominated assets as shown in the balance sheet for the immediately preceding quarter. The “lowest rollover ratio” of a foreign exchange agency means the ratio of (A) its total debt with a maturity of one year or less (excluding overnight money) incurred in a particular month to (B) its total debt with maturity of one year or less (excluding overnight money) payable in that particular month, and is calculated by taking the lowest three month average from a period to be designated by the governor of the Financial Supervisory Service. Under the regulation, foreign currency-denominated debt maturing in one year or less includes financial bonds, borrowings, call monies and repurchase selling denominated in foreign currencies and such other similar debt instruments denominated in a foreign currency as designated by the governor of the Financial Supervisory Service. “Foreign currency safe assets” are defined as cash denominated in foreign currency, deposits denominated in foreign currency with a central bank or financial institutions rated A or above, bonds issued or guaranteed by a government or central bank rated A or above or corporate bonds issued or guaranteed by corporations rated A or above. Under the regulation, Kookmin Bank is also required to maintain a minimum “mid- to long-term foreign exchange funding ratio” of 100%. “Mid-to long term foreign exchange funding ratio” refers to the ratio of (1) the total outstanding amount of foreign exchange borrowing with a maturity of more than one year to (2) the total outstanding amount of foreign exchange lending with a maturity of one year or more.

Financial Exposure to Any Individual Customer and Major Shareholder

Under the Bank Act, the sum of large exposures by a bank—in other words, the total sum of its credits to single individuals, juridical persons or business groups that exceed 10% of the sum of Tier I and Tier II capital

 

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(less any capital deductions)—generally must not exceed five times the sum of Tier I and Tier II capital (less any capital deductions). In addition, banks generally may not extend credit (including loans, guarantees, purchases of securities (only in the nature of a credit) and any other transactions that directly or indirectly create credit risk) in excess of 20% of the sum of Tier I and Tier II capital (less any capital deductions) to a single individual or juridical person, or grant credit in excess of 25% of the sum of Tier I and Tier II capital (less any capital deductions) to a single group of companies as defined in the Monopoly Regulations and Fair Trade Act.

Amendments to the Bank Act which became effective on July 28, 2002 strengthened restrictions on extending credits to a major shareholder. A “major shareholder” is defined as:

 

   

a shareholder holding (together with persons who have a special relationship with that shareholder) in excess of 10%; (or 15% in the case of regional banks) in the aggregate of the bank’s total issued voting shares; or

 

   

a shareholder holding (together with persons who have a special relationship with that shareholder) in excess of 4% in the aggregate of the bank’s (excluding regional banks) total issued voting shares (excluding shares subject to the shareholding restrictions on “non-financial business group companies” as described below), where the shareholder is the largest shareholder or has actual control over the major business affairs of the bank through, for example, appointment and dismissal of the officers pursuant to the Enforcement Decree of the Bank Act. Non-financial business group companies primarily consist of: (i) any single shareholding group whose non-financial company assets comprise no less than 25% of its aggregate net assets; (ii) any single shareholding group whose non-financial company assets comprise no less than ₩2 trillion in aggregate; or (iii) any mutual fund of which any single shareholding group identified in (i) or (ii) above, owns more than 9% of the total issued and outstanding shares.

Under these amendments, banks may not extend credits to a major shareholder (together with persons who have a special relationship with that shareholder) in an amount greater than the lesser of (x) 25% of the sum of the bank’s Tier I and Tier II capital (less any capital deductions) and (y) the relevant major shareholders’ shareholding ratio multiplied by the sum of the bank’s Tier I and Tier II capital (less any capital deductions). In addition, the total sum of credits granted to all major shareholders must not exceed 25% of the bank’s Tier I and Tier II capital (less any capital deductions).

Interest Rates

Korean banks generally depend on deposits as their primary funding source. Under the Act on Registration of Credit Business and Protection of Finance Users, interest rates on loans made by registered banks in Korea may not exceed 39% per annum. Historically, interest rates on deposits and lending rates were regulated by the Monetary Policy Committee. Controls on deposit interest rates in Korea have been gradually reduced and, in February 2004, the Korean government removed restrictions on all interest rates, except for the prohibition on interest payments on current account deposits. This deregulation process has increased competition for deposits based on interest rates offered and, therefore, may increase a bank’s interest expense.

Lending to Small- and Medium-sized Enterprises

In order to obtain funding from the Bank of Korea at concessionary rates for their small- and medium-sized enterprise loans, banks are required to allocate a certain minimum percentage of any quarterly increase in their Won currency lending to small- and medium-sized enterprises. Currently, this minimum percentage is 45% in the case of nationwide banks and 60% in the case of regional banks. If a bank does not comply with this requirement, the Bank of Korea may:

 

   

require the bank to prepay all or a portion of funds provided to that bank in support of loans to small- and medium-sized enterprises; or

 

   

lower the bank’s credit limit.

 

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Disclosure of Management Performance

For the purpose of protecting depositors and investors in commercial banks, the Financial Services Commission requires commercial banks to publicly disclose certain material matters, including:

 

   

financial condition and profit and loss of the bank and its subsidiaries;

 

   

fund raising by the bank and the appropriation of such funds;

 

   

any sanctions levied on the bank under the Bank Act or any corrective measures or sanctions under the Law on Improvement of Structure of Financial Industry; and

 

   

except as may otherwise have been disclosed by a bank or its financial holding company listed on the KRX KOSPI Market in accordance with the Financial Investment Services and Capital Markets Act, occurrence of any of the following events listed below or any other event as prescribed by the applicable regulations:

 

  (i) loans bearing no profit made to a single business group in an amount exceeding 10% of the sum of the bank’s Tier I and Tier II capital (less any capital deductions) as of the end of the previous month (where the loan exposure to that borrower is calculated as the sum of substandard credits, doubtful credits and estimated loss credits), unless the loan exposure to that group is not more than ₩4 billion;

 

  (ii) the occurrence of any financial incident involving embezzlement, malfeasance or misappropriation of funds in an amount exceeding 1% of the sum of the bank’s Tier I and Tier II capital (less any capital deductions) as of the end of the previous month, unless the bank has lost or expects to lose not more than ₩1 billion as a result of that financial incident, or the governor of the Financial Supervisory Service has made a public announcement regarding the incident; and

 

  (iii) any loss due to court judgments or similar decisions in civil proceedings in an amount exceeding 1% of the sum of the bank’s Tier I and Tier II capital (less any capital deductions) as of the end of the previous month, unless the loss is not more than ₩1 billion.

Restrictions on Lending

Pursuant to the Bank Act, commercial banks may not provide:

 

   

loans directly or indirectly secured by a pledge of a bank’s own shares;

 

   

loans directly or indirectly to enable a natural or juridical person to buy the bank’s own shares;

 

   

loans to any of the bank’s officers or employees, other than petty loans of up to ₩20 million in the case of a general loan, ₩50 million in the case of a general loan plus a housing loan or ₩60 million in the aggregate for general loans, housing loans and loans to pay damages arising from wrongful acts of employees in financial transactions;

 

   

credit (including loans) secured by a pledge of shares of a subsidiary corporation of the bank or to enable a natural or juridical person to buy shares of a subsidiary corporation of the bank; or

 

   

loans to any officers or employees of a subsidiary corporation of the bank, other than general loans of up to ₩20 million or general and housing loans of up to ₩50 million in the aggregate.

Recent Regulations Relating to Retail Household Loans

The Financial Services Commission implemented a number of changes in recent years to the mechanisms by which a bank evaluates and report its retail household loan balances and has proposed implementing further changes. Due to a rapid increase in the number of loans secured by homes and other forms of housing, the Financial Services Commission and the Financial Supervisory Service implemented regulations designed to curtail extension of new or refinanced loans secured by housing, including the following:

 

   

as to loans secured by a collateral of housing located nationwide, the loan-to-value ratio (the aggregate principal amount of loans secured by such collateral over the appraised value of the collateral) should not exceed 60%;

 

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as to loans secured by collateral of housing located in areas of excessive investment as designated by the government, (i) the loan-to-value ratio for loans with a maturity of not more than three years should not exceed 50% and (ii) the loan-to-value ratio for loans with a maturity of more than three years should not exceed 60%;

 

   

as to loans secured by collateral of housing located outside of Seoul, Incheon and Gyeong-gi province, which housing was offered for sale on or before June 10, 2008 and with respect to which a sale contract is executed and earnest money deposit paid during the period between June 11, 2008 and June 30, 2009, the loan-to-value ratio should not exceed 70%;

 

   

as to loans secured by apartments located in areas of high speculation as designated by the government, (i) the loan-to-value ratio for loans with a maturity of not more than ten years should not exceed 40%; and (ii) the loan-to-value ratio for loans with a maturity of more than ten years should not exceed (a) 40%, if the price of such apartment is over ₩600 million, and (b) 60%, if the price of such apartment is ₩600 million or lower;

 

   

as to loans secured by apartments with appraisal value of more than ₩600 million in areas of high speculation as designated by the government or certain metropolitan areas designated as areas of excessive investment by the government, the borrower’s debt-to-income ratio (calculated as (i) the aggregate annual total payment amount of (x) the principal of and interest on loans secured by such apartment(s) and (y) the interest on other debts of the borrower over (ii) the borrower’s annual income) should not exceed 40%;

 

   

as to apartments located in areas of high speculation as designated by the government, a borrower is permitted to have only one new loan secured by such apartment;

 

   

where a borrower has two or more loans secured by apartments located in areas of high speculation as designated by the government, the loan with the earliest maturity date must be repaid first and the number of loans must be eventually reduced to one; and

 

   

in the case of a borrower (i) whose spouse already has a loan secured by housing or (ii) who is single and under 30 years old, the debt-to-income ratio of the borrower in respect of loans secured by apartment(s) located in areas of high speculation as designated by the government should not exceed 40%.

See “Item 3D. Risk Factors—Risks relating to government regulation and policy—Government regulation of retail lending, particularly mortgage and home equity lending, has recently become more stringent, which may adversely affect our retail banking operations.”

Restrictions on Investments in Property

A bank may not invest in securities set forth below in excess of 60% of the sum of the bank’s Tier I and Tier II capital (less any capital deductions):

 

   

debt securities (within the meaning of paragraph (3) of Article 4 of the Financial Investment Services and Capital Markets Act) the maturity of which exceeds three years, but excluding government bonds, monetary stabilization bonds issued by the Bank of Korea and bonds within the meaning of item 2, paragraph (6) of Article 11 of the Law on the Improvement of the Structure of the Financial Industry;

 

   

equity securities, but excluding securities within the meaning of item 1, paragraph (6) of Article 11 of the Law on the Improvement of the Structure of the Financial Industry;

 

   

derivatives linked securities (within the meaning of paragraph (7) of Article 4 of the Financial Investment Services and Capital Markets Act) the maturity of which exceeds three years; and

 

   

beneficiary certificates, investment contracts and depositary receipts (within the meaning of paragraph (2) of Article 4 of the Financial Investment Services and Capital Markets Act) the maturity of which exceeds three years.

 

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A bank may possess real estate property only to the extent necessary for the conduct of its business, unless the aggregate value of that property does not exceed 60% of the sum of the bank’s Tier I and Tier II capital (less any capital deductions). Any property that a bank acquires by exercising its rights as a secured party, or which a bank is prohibited from acquiring under the Bank Act, must be disposed of within one year.

Restrictions on Shareholdings in Other Companies

Under the Bank Act, a bank may not own more than 15% of shares outstanding with voting rights of another corporation, except where, among other reasons:

 

   

that corporation engages in a category of financial businesses set forth by the Financial Services Commission; or

 

   

the acquisition is necessary for the corporate restructuring of the corporation and is approved by the Financial Services Commission.

 

   

In the above exceptional cases, the total investment in corporations in which the bank owns more than 15% of the outstanding shares with voting rights may not exceed 15% of the sum of Tier I and Tier II capital (less any capital deductions), or 30% of the sum of Tier I and Tier II capital (less any capital deductions) if the bank meets certain management conditions as set forth in the applicable rules adopted by the Financial Services Commission.

The Bank Act provides that a bank using its bank accounts and its trust accounts may not acquire the shares of another corporation that is a major shareholder of the bank in excess of an amount equal to 1% of the sum of Tier I and Tier II capital (less any capital deductions).

Restrictions on Bank Ownership

Under the Bank Act, a single shareholder and persons who have a special relationship with that shareholder generally may acquire beneficial ownership of no more than 10% of a nationwide bank’s total issued and outstanding shares with voting rights and no more than 15% of a regional bank’s total issued and outstanding shares with voting rights. The Korean government, the Korea Deposit Insurance Corporation and bank holding companies qualifying under the Financial Holding Company Act are not subject to this limit. However, non-financial business group companies may not acquire beneficial ownership of shares of a nationwide bank in excess of 4% of that bank’s outstanding voting shares, unless they obtain the approval of the Financial Services Commission and agree not to exercise voting rights in respect of shares in excess of the 4% limit, in which case they may acquire beneficial ownership of up to 10% of a nationwide bank’s outstanding voting shares.

Non-financial business group companies can no longer acquire more than 4.0% of the issued and outstanding shares of voting stock of a bank pursuant to an amendment of the Financial Holding Company Act that became effective from February 14, 2014, which grants an exception for non-financial business group companies which, at the time of the enactment of the amended provisions, held more than 4.0% of the shares of a bank with the approval of the Financial Services Commission before the amendment.

In addition, if a foreign investor, as defined in the Foreign Investment Promotion Act, owns in excess of 4% of a nationwide bank’s outstanding voting shares, non-financial business group companies may acquire beneficial ownership of up to 10% of that bank’s outstanding voting shares, and in excess of 10%, 25% or 33% of that bank’s outstanding voting shares with the approval of the Financial Services Commission in each instance, up to the number of shares owned by the foreign investor. Any other person (whether a Korean national or a foreign investor), with the exception of non-financial business group companies described above, may acquire no more than 10% of a nationwide bank’s total voting shares issued and outstanding, unless they obtain approval from the Financial Services Commission in each instance where the total holding will exceed 10% (or 15% in the case of regional banks), 25% or 33% of the bank’s total voting shares issued and outstanding provided that, in addition to the foregoing threshold shareholding ratios, the Financial Services Commission may, at its discretion, designate a separate and additional threshold shareholding ratio.

 

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Deposit Insurance System

The Depositor Protection Act provides insurance for certain deposits of banks in Korea through a deposit insurance system. Under the Depositor Protection Act, all banks governed by the Bank Act are required to pay an insurance premium to the Korea Deposit Insurance Corporation on a quarterly basis and the rate is determined under the Enforcement Decree to the Depositor Protection Act. If the Korea Deposit Insurance Corporation makes a payment on an insured amount, it will acquire the depositors’ claims with respect to that payment amount. The Korea Deposit Insurance Corporation insures a maximum of ₩50 million for deposits and interest, regardless of when the deposits were made and the size of the deposits.

Laws and Regulations Governing Other Business Activities

A bank must register with the Ministry of Strategy and Finance to enter the foreign exchange business, which is governed by the Foreign Exchange Transaction Law. A bank must obtain the permission of the Financial Services Commission to enter the securities business, which is governed by regulations under the Financial Investment Services and Capital Markets Act. Under these laws, a bank may engage in the foreign exchange business, securities repurchase business, governmental/public bond underwriting business and governmental bond dealing business.

Trust Business

A bank must obtain approval from the Financial Services Commission to engage in trust businesses. The Trust Act and the Financial Investment Services and Capital Markets Act govern the trust activities of banks, and they are subject to various legal and accounting procedures and requirements, including the following:

 

   

under the Trust Act, assets accepted in trust by a bank in Korea must be segregated from other assets in the accounts of that bank; and

 

   

depositors and other general creditors cannot obtain or assert claims against the assets comprising the trust accounts in the event the bank is liquidated or wound-up.

The bank must make a special reserve of 25% or more of fees from each unspecified money trust account for which a bank guarantees the principal amount and a fixed rate of interest until the total reserve for that account equals 5% of the trust amount. Since January 1999, the Korean government has prohibited Korean banks from offering new guaranteed fixed rate trust account products whose principal and interest are guaranteed.

Under the Financial Investment Services and Capital Markets Act, which became effective in February 2009, a bank with a trust business license (such as Kookmin Bank) is permitted to offer both specified money trust account products and unspecified money trust account products. Previously, banks were not permitted to offer unspecified money trust account products pursuant to the Indirect Investment Asset Management Act, which is no longer in effect following the effectiveness of the Financial Investment Services and Capital Markets Act.

Credit Card Business

General

In order to enter the credit card business, a company must register with the Financial Services Commission. Credit card businesses are governed by the Specialized Credit Financial Business Act, enacted on August 28, 1997 and last amended on March 22, 2013, which sets forth specific requirements with respect to the credit card business as well as generally prohibiting unsound business practices relating to the credit card business which may infringe on the rights of credit card holders or negatively affect the soundness of the credit card industry. Credit card companies, including our wholly-owned subsidiary, KB Kookmin Card Co., Ltd., are regulated by the Financial Services Commission and the Financial Supervisory Service.

 

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Disclosure and Reports

Under the Specialized Credit Financial Business Act and the regulations thereunder, a credit card company is required to disclose on a periodic and on-going basis certain material matters and events. In addition, a credit card company must submit its business reports with respect to its results of operations to the Governor of the Financial Supervisory Service within one month from the end of each quarter.

Restrictions on Funding

Under the Specialized Credit Financial Business Act and the regulations thereunder, a credit card company must ensure that its total assets do not exceed an amount equal to six times its equity capital. However, if a credit card company is unable to comply with such limit upon the occurrence of unavoidable events, such as drastic changes in the domestic and global financial markets, such limit may be adjusted through a resolution of the Financial Services Commission.

Risk of Loss Due to Lost, Stolen, Forged or Altered Credit Cards

Under the Specialized Credit Financial Business Act, a credit card company is liable for any loss arising from the unauthorized use of credit cards or debit cards after it has received notice from the holder of the loss or theft of the card. A credit card company is also responsible for any losses resulting from the use of forged or altered credit cards, debit cards and pre-paid cards. A credit card company may, however, transfer all or part of this latter risk of loss to holders of credit card in the event of willful misconduct or gross negligence by holders of credit card if the terms and conditions of the agreement entered between the credit card company and members of such cards specifically provide for that transfer.

For these purposes, disclosure of a customer’s password that is made intentionally or through gross negligence, or the transfer of or giving as collateral of the credit card or debit card, is considered willful misconduct or gross negligence. However, a disclosure of a cardholder’s password that is made under irresistible force or threat to cardholder or his/her relatives’ life or health will not be deemed as willful misconduct or negligence of the cardholder.

Each credit card company must institute appropriate measures to fulfill these obligations, such as establishing provisions, purchasing insurance or joining a cooperative association.

Pursuant to the Enforcement Decree to Specialized Credit Financial Business Act, a credit card company will be liable for any losses arising from loss or theft of a credit card (which was not from the holder’s willful misconduct or negligence) during the period beginning 60 days before the notice by the holder to the credit card company.

Pursuant to the Specialized Credit Financial Business Act, the Financial Services Commission may either restrict the limit or take other necessary measures against the credit card company with respect to such matters as the maximum limits on the amount per credit card, details of credit card terms and conditions, management of credit card merchants and collection of claims, including the following:

 

   

maximum limits for cash advances on credit cards;

 

   

use restrictions on debit cards with respect to per day or per transaction usage;

 

   

aggregate issuance limits and maximum limits on the amount per card on pre-paid cards; and

 

   

other matters prescribed by the Enforcement Decree to the Specialized Credit Financial Business Act.

Lending Ratio in Ancillary Business

Pursuant to the Enforcement Decree to the Specialized Credit Financial Business Act issued in December 2003, a credit card company must maintain an aggregate quarterly average outstanding lending balance to credit

 

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cardholders (including cash advances and credit card loans, but excluding restructured loans) no greater than the sum of (i) its aggregate quarterly average outstanding credit card balance arising from the purchase of goods and services and (ii) the aggregate quarterly debit card transaction volume.

Issuance of New Cards and Solicitation of New Cardholders

The Enforcement Decree to the Specialized Credit Financial Business Act establishes the conditions under which a credit card company may issue new cards and solicit new members. New credit cards may be issued only to the following persons:

 

   

persons who are at least 19 years old when they apply for a credit card;

 

   

persons whose capability to pay bills as they come due has been verified using standards established by the credit card company; and

 

   

in the case of minors who are 18 years old, persons who submit documents evidencing employment as of the date of the credit card application, such as an employment certificate, or persons for whom the issuance of a credit card is necessitated by governmental policies, such as financial aid.

In addition, a credit card company may not solicit credit card members by:

 

   

providing economic benefits or promising to provide economic benefits in excess of 10% of the annual credit card fee (in the case of credit cards with annual fees that are less than the average of the annual fees charged by the major credit cards in Korea, the annual fee will be deemed to be equal to such average annual fee) in connection with issuing a credit card;

 

   

soliciting applicants on roads, public places or along corridors used by the general public;

 

   

soliciting applicants through visits, except those visits made upon prior consent and visits to a business area;

 

   

soliciting applicants through the Internet without verifying whether the applicant is who he or she purports to be, by means of a certified digital signature under the Digital Signature Act; and

 

   

soliciting applicants through pyramid sales methods.

Compliance Rules on Collection of Receivable Claims

Pursuant to Supervisory Regulation on the Specialized Credit Financial Business, a credit card company may not:

 

   

exert violence or threaten violence;

 

   

inform a related party (a guarantor of the debtor, blood relative or fiancée of the debtor, a person living in the same household as the debtor or a person working in the same workplace as the debtor) of the debtor’s obligations without just cause;

 

   

provide false information relating to the debtor’s obligation to the debtor or his or her related parties;

 

   

threaten to sue or sue the debtor for fraud despite lack of affirmative evidence to establish that the debtor has submitted forged or false documentation with respect to his/her capacity to make payment;

 

   

visit or telephone the debtor during late evening hours (between the hours of 9:00 p.m. and 8:00 a.m.); and

 

   

utilize other uncustomary methods to collect the receivables that interfere with the privacy or the peace in the workplace of the debtor or his or her related parties.

 

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Regulations on Class Actions Regarding Securities

The Law on Class Actions Regarding Securities was enacted as of January 20, 2004 and last amended on May 28, 2013. The Law on Class Actions Regarding Securities governs class actions suits instituted by one or more representative plaintiff(s) on behalf of 50 or more persons who claim to have been damaged in a capital markets transaction involving securities issued by a listed company in Korea.

Applicable causes of action with respect to such suits include:

 

   

claims for damages caused by misleading information contained in a securities statement;

 

   

claims for damages caused by the filing of a misleading business report, semi-annual report, or quarterly report;

 

   

claims for damages caused by insider trading or market manipulation; and

 

   

claims instituted against auditors for damages caused by accounting irregularities.

Any such class action may be instituted upon approval from the presiding court and the outcome of such class action will have a binding effect on all potential plaintiffs who have not joined the action, with the exception of those who have filed an opt out notice with such court.

Financial Investment Services and Capital Markets Act

On July 3, 2007, the National Assembly of Korea passed the Financial Investment Services and Capital Markets Act, a new law consolidating six laws regulating capital markets. The Financial Investment Services and Capital Markets Act became effective in February 2009. Prior to the effective date, certain procedural matters were initiated from July 2008, as discussed further below.

The following is a summary of the major changes introduced under the Financial Investment Services and Capital Markets Act.

Consolidation of Capital Markets-Related Laws

Prior to the effectiveness of the Financial Investment Services and Capital Markets Act, there were separate laws regulating various types of financial institutions depending on the type of financial institution (for example, securities companies, futures companies, trust business companies and asset management companies) and subjecting financial institutions to different licensing and ongoing regulatory requirements (for example, the Securities and Exchange Act, the Futures Business Act and the Indirect Investment Asset Management Business Act). By applying one uniform set of rules to the same financial business having the same economic function, the Financial Investment Services and Capital Markets Act attempts to improve and address issues caused by the current regulatory system under which the same economic function relating to capital markets-related businesses are governed by multiple regulations. To this end, the Financial Investment Services and Capital Markets Act categorizes capital markets-related businesses into six different functions, as follows:

 

   

dealing (trading and underwriting of “financial investment products” (as defined below)),

 

   

brokerage (brokerage of financial investment products),

 

   

collective investment (establishment of collective investment schemes and the management thereof),

 

   

investment advice,

 

   

discretionary investment management, and

 

   

trusts (together with the five businesses set forth above, the “Financial Investment Businesses”).

 

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Therefore, all financial businesses relating to financial investment products have been reclassified as one or more of the Financial Investment Businesses described above, and financial institutions are subject to the regulations applicable to their relevant Financial Investment Business(es), irrespective of the type of the financial institution (for example, in principle, derivative businesses conducted by former securities companies and futures companies are subject to the same regulations under the Financial Investment Services and Capital Markets Act).

The banking business and insurance business are not subject to the Financial Investment Services and Capital Markets Act and continue to be regulated under separate laws. However, they may become subject to the Financial Investment Services and Capital Markets Act if their activities involve any financial investment businesses requiring a license pursuant to the Financial Investment Services and Capital Markets Act.

Comprehensive Definition of Financial Investment Products

In an effort to encompass the various types of securities and derivative products available in the capital markets, the Financial Investment Services and Capital Markets Act sets forth a comprehensive term “financial investment products,” defined to mean all financial products with a risk of loss in the invested amount (in contrast to “deposits,” which are financial products for which the invested amount is protected or preserved). Financial investment products are classified into two major categories: (i) “securities” (relating to financial investment products where the risk of loss is limited to the invested amount) and (ii) “derivatives” (relating to financial investment products where the risk of loss may exceed the invested amount). As a result of the general and open-ended manner in which financial investment products are defined, any future financial product could potentially come within the scope of the definition of financial investment products, thereby enabling Financial Investment Companies (as defined below) to handle a broader range of financial products. Under the Financial Investment Services and Capital Markets Act, securities companies, asset management companies, futures companies and other entities engaging in any Financial Investment Business are classified as “Financial Investment Companies.”

New License System and the Conversion of Existing Licenses

Under the Financial Investment Services and Capital Markets Act, Financial Investment Companies are able to choose what Financial Investment Business to engage in (via a “check the box” method set forth in the relevant license application), by specifying the desired (i) Financial Investment Business, (ii) financial investment product and (iii) target customers to which financial investment products may be sold or dealt to (i.e., general investors or professional investors). Licenses will be issued under the specific business sub-categories described in the foregoing sentence. For example, it would be possible for a Financial Investment Company to obtain a license to engage in the Financial Investment Business of (i) dealing (ii) over the counter derivatives products (iii) only with sophisticated investors.

Financial institutions that engage in business activities constituting a Financial Investment Business are required to take certain steps, such as renewal of their license or registration, in order to continue engaging in such business activities. Financial institutions that are not licensed Financial Investment Companies are not permitted to engage in any Financial Investment Business, subject to the following exceptions: (i) banks and insurance companies are permitted to engage in certain categories of Financial Investment Business; and (ii) other financial institutions that engaged in any Financial Investment Business prior to the effective date of the Financial Investment Services and Capital Markets Act (whether in the form of a concurrent business or an incidental business) are permitted to continue such Financial Investment Business for a period not exceeding six months commencing on the effective date of the Financial Investment Services and Capital Markets Act.

Expanded Business Scope of Financial Investment Companies

Under the previous regulatory system in Korea, it was difficult for a financial institution to explore a new line of business or expand upon its existing line of business. For example, a financial institution licensed as a

 

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securities company generally was not permitted to engage in the asset management business. In contrast, under the Financial Investment Services and Capital Markets Act, pursuant to the integration of its current businesses involving financial investment products into a single Financial Investment Business, a licensed Financial Investment Company is permitted to engage in all types of Financial Investment Businesses, subject to satisfying relevant regulations (for example, maintaining an adequate “Chinese Wall,” to the extent required). As to incidental businesses (i.e., a financial related business which is not a Financial Investment Business), the Financial Investment Services and Capital Markets Act generally allows a Financial Investment Company to freely engage in such incidental businesses by shifting away from the previous positive-list system towards a more comprehensive system. In addition, a Financial Investment Company is permitted to outsource marketing activities by contracting “introducing brokers” that are individuals but not employees of the Financial Investment Company. Financial Investment Companies are permitted (i) to engage in foreign exchange businesses related to their Financial Investment Business and (ii) to participate in the settlement network, pursuant to an agreement among the settlement network participants.

Improvement in Investor Protection Mechanism

While the Financial Investment Services and Capital Markets Act widens the scope of financial businesses in which financial institutions are permitted to engage, a more rigorous investor-protection mechanism is also imposed upon Financial Investment Companies dealing in financial investment products. The Financial Investment Services and Capital Markets Act distinguishes general investors from sophisticated investors and provides new or enhanced protections to general investors. For instance, the Financial Investment Services and Capital Markets Act expressly provides for a strict know-your-customer rule for general investors and imposes an obligation that Financial Investment Companies should market financial investment products suitable to each general investor, using written explanatory materials. Under the Financial Investment Services and Capital Markets Act, a Financial Investment Company could be liable if a general investor proves (i) damage or losses relating to such general investor’s investment in financial investment products solicited by such Financial Investment Company and (ii) the absence of the requisite written explanatory materials, without having to prove fault or causation. With respect to conflicts of interest between Financial Investment Companies and investors, the Financial Investment Services and Capital Markets Act expressly requires (i) disclosure of any conflict of interest to investors and (ii) mitigation of conflicts of interest to a comfortable level or abstention from the relevant transaction.

Other Changes of Securities/Fund Regulations

The Financial Investment Services and Capital Markets Act also affected various securities regulations including those relating to public disclosure, insider trading and proxy contests, which were previously governed by the Securities and Exchange Act. For example, the 5% and 10% reporting obligations under the Securities and Exchange Act has become more stringent. The Indirect Investment and Asset Management Business Act strictly limited the kind of vehicles that could be utilized under a collective investment scheme, restricting the range of potential vehicles to trusts and corporations, and the type of funds that can be used for investments. However, under the Financial Investment Services and Capital Markets Act, these restrictions have been significantly liberalized, permitting all vehicles that may be created under Korean law, such as limited liability companies or partnerships, to be used for the purpose of collective investments and allowing investment funds to be much more flexible as to their investments.

 

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Item 4.C. Organizational Structure

The following chart provides an overview of our structure, including our significant subsidiaries and our ownership of such subsidiaries as of the date of this annual report:

 

LOGO

Our largest subsidiary is Kookmin Bank, the assets of which represented approximately 90.9% of our total assets as of December 31, 2013. The following table provides summary information for our operating subsidiaries that are consolidated in our consolidated financial statements as of and for the year ended December 31, 2013, including their consolidated total assets, operating revenue, profit (loss) and total equity:

 

Subsidiaries (1)

   Total Assets      Operating Revenue      Profit (Loss)     Total Equity  
     (in millions of Won)  

Kookmin Bank

   265,258,942       17,461,406       819,719      20,617,314   

KB Kookmin Card Co., Ltd.

     15,854,992         2,990,037         384,411        3,469,861   

KB Investment & Securities Co., Ltd.

     2,525,070         577,649         11,856        551,182   

KB Life Insurance Co., Ltd.

     6,945,605         1,457,365         9,098        549,128   

KB Asset Management Co., Ltd.

     237,907         103,401         74,685        201,572   

KB Real Estate Trust Co., Ltd.

     182,657         46,524         2,110        169,045   

KB Investment Co., Ltd.

     241,227         34,497         6,078        130,587   

KB Credit Information Co., Ltd.

     30,142         43,627         (336     22,455   

KB Data Systems Co., Ltd.

     21,753         50,440         19        14,873   

KB Savings Bank Co., Ltd.

     584,025         47,865         (301     134,938   

Yehansoul Savings Bank (2)

     189,243         4,791         (5,331     25,159   

 

(1) 

KB Capital Co., Ltd. (formerly named Woori Financial Co., Ltd.) was added as a subsidiary in March 2014 as a result of our purchase of 52.02% of its shares.

(2) 

Yehansoul Savings Bank, which we acquired in September 2013, was merged with KB Savings Bank in January 2014, with KB Savings Bank as the surviving entity.

Further information regarding our subsidiaries is provided below:

 

   

Kookmin Bank was established in Korea in 2001 as a result of the merger of the former Kookmin Bank (established in 1963) and H&CB (established in 1967). Kookmin Bank provides a wide range of banking and other financial services to individuals, small- and medium-sized enterprises and large corporations in Korea. As of December 31, 2013, Kookmin Bank was one of the largest commercial

 

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banks in Korea based upon total assets (including loans) and deposits. As of December 31, 2013, Kookmin Bank had approximately 28.1 million customers, with 1,207 branches nationwide.

 

   

KB Kookmin Card Co., Ltd. was established in March 2011 as a separate entity upon the completion of a horizontal spin-off of Kookmin Bank’s credit card business, to provide credit card services.

 

   

KB Investment & Securities Co., Ltd. was established in Korea in 1995 to provide various investment banking services. KB Investment & Securities was formerly known as Hannuri Investment & Securities Co., Ltd. and was acquired by Kookmin Bank on March 11, 2008. In March 2011, KB Investment & Securities was merged with KB Futures Co., Ltd., with KB Investment & Securities as the surviving entity.

 

   

KB Life Insurance Co., Ltd. was established in Korea in April 2004 to provide life insurance and wealth management products primarily through our branch network.

 

   

KB Asset Management Co., Ltd. was established in Korea in April 1988 as a subsidiary of Citizens Investment Trust Company to provide investment advisory services.

 

   

KB Capital Co., Ltd., which provides leasing services and installment finance services, was formerly known as Woori Financial Co., Ltd. and was acquired by us on March 20, 2014.

 

   

KB Savings Bank Co., Ltd. was established in Korea in January 2012 to provide small-loan finance services. KB Savings Bank was established in connection with our purchase of assets and assumption of liabilities of Jeil Savings Bank in January 2012.

 

   

Yehansoul Savings Bank, which provided small-loan finance services, was acquired by us in September 2013. In January 2014, Yehansoul Savings Bank was merged with KB Savings Bank, with KB Savings Bank as the surviving entity.

 

   

KB Real Estate Trust Co., Ltd. was established in Korea in December 1996 to provide real estate development and brokerage services by managing trusts related to the real estate industry.

 

   

KB Investment Co., Ltd. was established in Korea in March 1990 to invest in and finance small- and medium-sized enterprises.

 

   

KB Credit Information Co., Ltd. was established in Korea in October 1999 to collect delinquent loans and to check credit history.

 

   

KB Data Systems Co., Ltd. was established in Korea in September 1991 to provide software services to us and other financial institutions.

 

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Item 4.D. Property, Plants and Equipment

Our registered office and corporate headquarters are located at 84, Namdaemoon-ro, Jung-gu, Seoul 100-703, Korea. The following table presents information regarding certain of our properties in Korea:

 

Type of facility/building

  

Location

   Area
(square meters)
 

Registered office and corporate headquarters

  

84, Namdaemoon-ro,

Jung-gu, Seoul 100-703

     1,749   

Kookmin Bank headquarters building

   26, Gukjegeumyung-ro 8-gil, Yeongdeungpo-gu,
Seoul 150-758
     5,354   

KB Kookmin Card headquarters building

   Jongro-gu, Seoul      3,797   

Kookmin Bank Training institute

   Ilsan      207,659   

Kookmin Bank Training institute

   Daecheon      4,158   

Kookmin Bank Training institute

   Sokcho      15,584   

Kookmin Bank Training institute

   Cheonan      196,649   

Kookmin Bank IT center

   Gangseo-gu, Seoul      13,116   

Kookmin Bank IT center

   Yeouido, Seoul      5,928   

Kookmin Bank IT center

   Yeouido, Seoul      2,006   

Kookmin Bank IT center

   Seongbuk-gu, Seoul      4,748   

As of December 31, 2013, we had a countrywide network of 1,207 banking branches and sub-branches, as well as 115 branches for our other operations including credit card, investment banking and insurance-related businesses. Approximately one-quarter of these facilities are housed in buildings owned by us, while the remaining branches are leased properties. Lease terms are generally from two to three years and seldom exceed five years. We also have subsidiaries in Cambodia, China, Hong Kong and the United Kingdom and branches of Kookmin Bank in Osaka and Tokyo in Japan, Auckland in New Zealand, New York in the United States and Ho Chi Minh City in Vietnam, as well as a branch of Kookmin Bank Cambodia PLC in Phnom Penh and branches of Kookmin Bank (China) Ltd. in Beijing, Guangzhou, Harbin and Suzhou in China. We also have representative offices of Kookmin Bank in Mumbai in India, Yangon in Myanmar and Hanoi in Vietnam. We do not own any material properties outside of Korea.

The net carrying amount of all the properties owned by us at December 31, 2013 was ₩2,856 billion.

 

Item 4A. UNRESOLVED STAFF COMMENTS

We do not have any unresolved comments from the U.S. Securities and Exchange Commission staff regarding our periodic reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act.

 

Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

Item 5.A. Operating Results

Overview

The following discussion is based on our consolidated financial statements, which have been prepared in accordance with IFRS as issued by the IASB. The consolidated financial statements include the accounts of subsidiaries over which substantive control is exercised through majority ownership of voting stock and/or other means. Investments in jointly controlled entities and associates (companies over which we have the ability to exercise significant influence) are accounted for by the equity method of accounting.

Trends in the Korean Economy

Our financial position and results of operations have been and will continue to be significantly affected by financial and economic conditions in Korea. Substantial growth in lending in Korea to small- and medium-sized

 

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enterprises in recent years, and financial difficulties experienced by such enterprises as a result of, among other things, adverse economic conditions in Korea and globally, have generally led to increasing delinquencies and a deterioration in overall asset quality in the credit exposures of Korean banks to small- and medium-sized enterprises. In 2013, we recorded charge-offs of ₩691 billion in respect of our loans to small- and medium-sized enterprises, compared to charge-offs of ₩943 billion in 2012 and charge-offs of ₩1,274 billion in 2011. In light of the difficult financial condition and liquidity position of small- and medium-sized enterprises in Korea since the second half of 2008, the Korean government introduced measures intended to encourage Korean banks to provide financial support to small- and medium-sized enterprise borrowers. See “Item 3.D. Risk Factors—Risks relating to our small- and medium-sized enterprise loan portfolio—We have significant exposure to small- and medium-sized enterprises, and any financial difficulties experienced by these customers may result in a deterioration of our asset quality and have an adverse impact on us.”

In recent years, commercial banks, consumer finance companies and other financial institutions in Korea have also made significant investments and engaged in aggressive marketing in retail lending (including mortgage and home equity loans), leading to substantially increased competition in this segment. The rapid growth in retail lending, together with adverse economic conditions in recent years, have generally led to increasing delinquencies and a deterioration in asset quality. In 2013, we recorded charge-offs of ₩581 billion and provision for loan losses of ₩361 billion in respect of our retail loan portfolio, compared to charge-offs of ₩453 billion and provision for loan losses of ₩402 billion in 2012 and charge-offs of ₩287 billion and provision for loan losses of ₩296 billion in 2011. See “Item 3.D. Risk Factors—Risks relating to our retail credit portfolio.”

The Korean economy is closely tied to, and is affected by developments in, the global economy. While the rate of deterioration of the global economy since the commencement of the global financial crisis in 2008 has slowed, with some signs of stabilization and improvement, the overall prospects for the Korean and global economy in the remainder of 2014 and beyond remain uncertain. Starting in the second half of 2011, the global financial markets have experienced significant volatility as a result of, among other things, the financial difficulties affecting many governments worldwide, in particular in Cyprus, Greece, Spain, Italy and Portugal, and the slowdown of economic growth in major emerging market economies, as well as concerns regarding the potential economic impact of the recently commenced scale-down by the U.S. Federal Reserve Board of its “quantitative easing” stimulus program. In addition, continuing negotiations regarding Iran’s nuclear program and sanctions adopted by the international community in response, as well as political and social instability in various countries in the Middle East and Northern Africa, including in Syria, Egypt and Libya, have resulted in volatility and uncertainty in the global energy markets. Furthermore, in response to China’s slowing gross domestic product growth rates that began in 2011, the Chinese government has implemented stimulus measures but the overall impact of such measures remains uncertain. In light of the high level of interdependence of the global economy, any of the foregoing developments could have a material adverse effect on the Korean economy and financial markets, and in turn on our business, financial condition and results of operations.

We are also exposed to adverse changes and volatility in global and Korean financial markets as a result of our liabilities and assets denominated in foreign currencies and our holdings of trading and investment securities, including structured products. The value of the Won relative to major foreign currencies in general and the U.S. dollar in particular has fluctuated widely in recent years. See “Item 3.A. Selected Financial Data—Exchange Rates.” A depreciation of the Won will increase our cost in Won of servicing our foreign currency-denominated debt, while continued exchange rate volatility may also result in foreign exchange losses for us. Furthermore, as a result of adverse global and Korean economic conditions, there has been significant volatility in securities prices, including the stock prices of Korean and foreign companies in which we hold an interest. Such volatility has resulted in and may lead to further trading and valuation losses on our trading and investment securities portfolio as well as impairment losses on our investments accounted for under the equity method, including our noncontrolling equity stake in JSC Bank CenterCredit, a Kazakhstan bank, the initial stake in which we acquired in 2008. See “Item 4.B. Business Overview—Capital Markets Activities and International Banking—International Banking.”

 

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As a result of volatile conditions and weakness in the Korean and global economies, as well as factors such as the uncertainty surrounding the global financial markets, fluctuations in oil and commodity prices, interest and exchange rate fluctuations, higher unemployment, lower consumer confidence, increases in inflation rates, potential tightening of fiscal and monetary policies and continued tensions with North Korea, the economic outlook for the financial services sector in Korea in 2014 and for the foreseeable future remains uncertain.

Acquisitions

In January 2012, we established KB Savings Bank to provide small-loan finance services to retail customers. KB Savings Bank was established in connection with our purchase of the assets of Jeil Savings Bank and assumption of its liabilities pursuant to a purchase and assumption agreement among Jeil Savings Bank, the Korea Deposit Insurance Corporation and us. In May 2012, pursuant to the purchase and assumption agreement, we transferred to the Korea Deposit Insurance Corporation a portion of the assets we purchased and related liabilities we assumed. In connection with such purchase and assumption (and after giving effect to the transfer to the Korea Deposit Insurance Corporation), we recognized an acquisition of ₩2,546 billion of assets and an assumption of ₩2,654 billion of liabilities and also ₩108 billion of goodwill.

In June 2013, we purchased ING Insurance International II B.V.’s 49% interest in KB Life Insurance Co., Ltd. for ₩167 billion, as a result of which KB Life Insurance Co., Ltd. became our wholly-owned subsidiary.

In September 2013, we purchased 100% of the shares of Yehansoul Savings Bank from the Korea Deposit Insurance Corporation for ₩38 billion. In connection with such purchase, we recognized an acquisition of ₩470 billion of assets and an assumption of ₩439 billion of liabilities and also ₩7 billion of goodwill. See Note 44 of the notes to our consolidated financial statements included elsewhere in this annual report. In January 2014, KB Savings Bank merged with Yehansoul Savings Bank, with KB Savings Bank as the surviving entity.

In addition, in March 2014, we acquired 52.02% of the outstanding shares of Woori Financial Co., Ltd. from Woori Finance Holdings Co., Ltd. for ₩280 billion.

Changes in Accounting Policies

Pursuant to the adoption of IFRS 10, Consolidated Financial Statements, which is effective beginning in 2013, our consolidated financial statements as of and for the year ended December 31, 2013 include trust accounts for which we guarantee only the repayment of principal, as well as certain other entities, which were not previously subject to consolidation, while excluding certain other entities that were previously consolidated. Our consolidated financial statements as of and for the year ended December 31, 2012 (but not as of and for the year ended December 31, 2011) have been restated to retroactively apply this change.

In addition, pursuant to the amendments to IAS 19, Employee Benefits, which are effective beginning in 2013, our consolidated financial statements as of and for the year ended December 31, 2013 reflect changes in the methodology for recognition and measurement of actuarial gains and losses and expected returns and service costs relating to our employee pension plans. Our consolidated financial statements as of and for the years ended December 31, 2011 and 2012 have been restated to retroactively apply such changes.

For further information regarding these and other changes to our accounting policies and their effect on our consolidated financial statements, see Note 2.1 of the notes to our consolidated financial statements included elsewhere in this annual report.

 

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Changes in Securities Values, Exchange Rates and Interest Rates

Fluctuations of exchange rates, interest rates and stock prices affect, among other things, the demand for our products and services, the value of and rate of return on our assets, the availability and cost of funding and the financial condition of our customers. The following table shows, for the dates indicated, the stock price index of all equities listed on the KRX KOSPI Market as published in the KOSPI, the Won to U.S. dollar exchange rates and benchmark Won borrowing interest rates.

 

    June 30,
2009
    Dec. 30,
2009
    June 30,
2010
    Dec. 30,
2010
    June 30,
2011
    Dec. 29,
2011
    June 29,
2012
    Dec. 31,
2012
    June 28,
2013
    Dec. 31,
2013
 

KOSPI

    1,390.07        1,682.77        1,698.29        2,051.00        2,100.69        1,825.74        1,854.01        1,997.05 (4)      1,863.32        2,011.34 (5) 

₩/US$ exchange rates (1)

  1,273.5      1,163.7      1,220.9      1,130.6      1,066.3      1,158.5      1,141.2      1,063.2      1,141.5      1,055.3   

Corporate bond rates (2)

    5.61     5.70     4.96     4.30     4.49     4.22     3.94     3.44     3.54     3.64

Treasury bond rates (3)

    4.16     4.41     3.86     3.38     3.76     3.34     3.30     2.82     2.88     2.86

 

(1) 

Represents the noon buying rate on the dates indicated.

(2) 

Measured by the yield on three-year Korean corporate bonds rated as A+ by the Korean credit rating agencies.

(3) 

Measured by the yield on three-year treasury bonds issued by the Ministry of Strategy and Finance of Korea.

(4) 

As of December 28, 2012, the last day of trading for the KRX KOSPI Market in 2012.

(5) 

As of December 30, 2013, the last day of trading for the KRX KOSPI Market in 2013.

Critical Accounting Policies

The notes to our consolidated financial statements contain a summary of our significant accounting policies, including a discussion of recently issued accounting pronouncements. Certain of these policies are critical to the portrayal of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. We discuss these critical accounting policies below.

Impairment of Loans and Allowances for Loan Losses

We evaluate our loan portfolio for impairment on an ongoing basis. We have established allowances for loan losses, which are available to absorb probable losses that have been incurred in our loan portfolio as of the balance sheet date. If we believe that additions or changes to the allowances for loan losses are required, we record a provision for loan losses (as part of our provision for credit losses), which is treated as a charge against current income. Loan exposures that we deem to be uncollectible, including actual loan losses, net of recoveries of previously written-off amounts, are charged directly against the allowances for loan losses.

Our accounting policies for losses arising from the impairment of loans and allowances for loan losses are described in Note 3.6 of the notes to our consolidated financial statements. We base the level of our allowances for loan losses on an evaluation of the risk characteristics of our loan portfolio. The evaluation considers factors such as historical loss experience, the financial condition of our borrowers and current economic conditions.

Allowances represent our management’s best estimate of losses incurred in the loan portfolio as of the balance sheet date. Our management is required to exercise judgment in making assumptions and estimates when calculating loan allowances on both individually and collectively assessed loans.

The determination of the allowances required for loans which are deemed to be individually significant often requires the use of considerable management judgment concerning such matters as economic conditions, the financial performance of the counterparty and the value of any collateral held for which there may not be a readily accessible market. Once we have identified loans as impaired, we generally value them either based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at a loan’s observable market price or the fair value of the collateral if a loan is collateral dependent.

 

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The actual amount of the future cash flows and their timing may differ from the estimates used by our management and consequently may cause actual losses to differ from the reported allowances.

The allowances for portfolios of smaller-balance homogenous loans, such as those to individuals and small business customers, and for those loans which are individually significant but for which no objective evidence of impairment exists, are determined on a collective basis. The collective allowances are calculated on a portfolio basis using statistical models which incorporate numerous estimates and judgments. We perform a regular review of the models and underlying data and assumptions.

Our consolidated financial statements for the year ended December 31, 2013 included total allowances for loan losses of ₩2,861 billion as of that date. Our total loan charge-offs, net of recoveries, amounted to ₩1,717 billion and we recorded a provision for loan losses (which forms a part of the provision for credit losses, together with provisions for unused loan commitments, acceptances and guarantees, financial guarantee contracts and other financial assets) of ₩1,427 billion in 2013.

We believe that the accounting estimates related to our impairment of loans and allowances for loan losses are a “critical accounting policy” because: (1) they are highly susceptible to change from period to period because they require us to make assumptions about future default rates and losses relating to our loan portfolio; and (2) any significant difference between our estimated loan losses (as reflected in our allowances for loan losses) and actual loan losses could require us to take an additional provision which, if significant, could have a material impact on our profit. Our assumptions about estimated losses require significant judgment because actual losses have fluctuated in the past and are expected to continue to do so, based on a variety of factors.

Valuation of Financial Instruments

Our accounting policy for determining the fair value of financial instruments is described in Notes 3.3 and 6 of the notes to our consolidated financial statements.

The best evidence of fair value is a quoted price in an actively traded market. In the event that the market for a financial instrument is not active, a valuation technique is used. The majority of valuation techniques employ only observable market data and, as such, the reliability of the fair value measurement is high. However, certain financial instruments are valued on the basis of valuation techniques that feature one or more significant market inputs that are unobservable. Valuation techniques that rely to a greater extent on unobservable inputs require a higher level of management judgment to calculate a fair value than those based wholly on observable inputs.

Valuation techniques used to calculate fair values are discussed in Note 6.1 of the notes to our consolidated financial statements. The main assumptions and estimates which our management considers when applying a model with valuation techniques are:

 

   

The likelihood and expected timing of future cash flows on the instrument. These cash flows are usually governed by the terms of the instrument, although judgment may be required when the ability of the counterparty to service the instrument in accordance with the contractual terms is in doubt. Future cash flows may be sensitive to changes in market rates.

 

   

Selecting an appropriate discount rate for the instrument. The determination of this rate is based on an assessment of what a market participant would regard as the appropriate spread of the rate for the instrument over the appropriate risk-free rate.

 

   

Judgment to determine what model to use to calculate fair value in areas where the choice of valuation model is particularly subjective (for example, valuation of complex derivative products).

The financial instruments carried at fair value have been categorized under the three levels of the IFRS fair value hierarchy as follows:

 

   

Level 1: Quoted prices in active markets for identical assets or liabilities.

 

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Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities.

 

   

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Fair value is a market-based measure considered from the perspective of a market participant. As such, even when market assumptions are not readily available, our own assumptions are intended to reflect those that market participants would use in pricing the asset or liability at the measurement date.

For financial instruments traded in the over-the-counter market, we measure the fair value of such instruments as the arithmetic mean of prices obtained from Korea Asset Pricing (an affiliate of Fitch Ratings), KIS Pricing (an affiliate of Moody’s Investors Service) and NICE Pricing Service, all three of which are recognized as major qualified independent pricing services in Korea. There are extremely rare cases where we do not receive price quotes from all three of the pricing services described above. In such cases, we contact the pricing service which did not submit a price quote to discuss the reason why it cannot provide a price and, following such discussion, we use the arithmetic mean of only the prices obtained from the other pricing services so long as there is no reason to believe that the prices that have been submitted are inadequate. We generally do not adjust the prices we obtain from these independent pricing services, as the variance among such prices is insignificant in most cases (primarily because most of the financial instruments we hold consist of government bonds and highly-rated corporate bonds, there is a high volume of transactions in the over-the-counter market and actual transaction prices are monitored and referenced by the pricing services).

Our consolidated financial statements for the year ended December 31, 2013 included financial assets measured at fair value using a valuation technique of ₩18,712 billion, representing 56.7% of total financial assets measured at fair value, and financial liabilities measured at fair value using a valuation technique of ₩2,674 billion, representing 91.9% of total financial liabilities measured at fair value. As used herein, the fair value using a valuation technique means the fair value at Level 2 and Level 3 in the fair value hierarchy.

We believe that the accounting estimates related to the determination of the fair value of financial instruments are a “critical accounting policy” because: (1) they may be highly susceptible to change from period to period based on factors beyond our control; and (2) any significant difference between our estimate of the fair value of these financial instruments on any particular date and either their estimated fair value on a different date or the actual proceeds that we receive upon sale of these financial instruments could result in valuation losses or losses on disposal which may have a material impact on our profit. Our assumptions about the fair value of financial instruments we hold require significant judgment because actual valuations have fluctuated in the past and are expected to continue to do so, based on a variety of factors.

Deferred Income Tax Assets

Our accounting policy for the recognition of deferred income tax assets is described in Notes 3.21 and 16 of the notes to our consolidated financial statements. The recognition of deferred income tax assets relies on an assessment of the probability and sufficiency of future taxable profits, future reversals of existing taxable temporary differences and ongoing tax planning strategies.

We recognize deferred income tax assets and liabilities for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, unused tax losses and unused tax credits. Deferred income tax assets are recognized only to the extent it is probable that sufficient taxable profit will be available against which those deductible temporary differences, unused tax losses or unused tax credits can be utilized. This assessment requires significant

 

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management judgment and assumptions. In determining the amount of deferred income tax assets, we use historical tax capacity and profitability information and, if relevant, forecasted operating results, based upon approved business plans, including a review of the eligible carry-forward periods, available tax planning opportunities and other relevant considerations.

Our consolidated financial statements for the year ended December 31, 2013 included deferred income tax assets and liabilities of ₩15 billion and ₩62 billion, respectively, as of that date, after offsetting of ₩1,080 billion of deferred income tax liabilities and assets.

We believe that the estimates related to our recognition and measurement of deferred income tax assets are a “critical accounting policy” because: (1) they may be highly susceptible to change from period to period based on our assumptions regarding our future profitability; and (2) any significant difference between our estimates of future profits on any particular date and estimates of such future profits on a different date could result in an income tax expense or benefit which may have a material impact on our profit from period to period. Our assumptions about our future profitability require significant judgment and are inherently subjective.

Results of Operations

Net Interest Income

The following table shows, for the periods indicated, the principal components of our net interest income:

 

    Year Ended December 31,     Percentage Change  
    2011     2012 (1)     2013 (1)     2012/2011     2013/2012  
    (in billions of Won, except percentages)     (%)  

Interest income

         

Cash and interest earning deposits in other banks

  75      160      146        113.3     (8.8 )% 

Loans

    12,412        12,624        10,942        1.7        (13.3

Financial investments (debt securities) (2)

    1,469        1,426        1,269        (2.9     (11.0
 

 

 

   

 

 

   

 

 

     

Total interest income

    13,956        14,210        12,357        1.8        (13.0
 

 

 

   

 

 

   

 

 

     

Interest expense

         

Deposits

    4,945        5,450        4,279        10.2        (21.5

Debts

    399        460        365        15.3        (20.7

Debentures

    1,508        1,262        1,190        (16.3     (5.7
 

 

 

   

 

 

   

 

 

     

Total interest expense

    6,852        7,172        5,834        4.7        (18.7
 

 

 

   

 

 

   

 

 

     

Net interest income

  7,104      7,038      6,523        (0.9 )%      (7.3 )% 
 

 

 

   

 

 

   

 

 

     

Net interest margin (3)

    2.88     2.71     2.51    

 

(1) 

The amounts for 2013 reflect a change in our accounting policies pursuant to the adoption of IFRS 10, Consolidated Financial Statements, which is effective beginning in 2013. Corresponding amounts for 2012 (but not for 2011) have been restated to retroactively apply such change. See “—Overview—Changes in Accounting Policies.”

(2) 

Consists of debt securities in our available-for-sale and held-to-maturity financial asset portfolios.

(3) 

The ratio of net interest income to average interest earning assets. See “Item 3.A. Selected Financial Data—Profitability ratios and other data.”

Comparison of 2013 to 2012

Interest income. Interest income decreased 13.0% from ₩14,210 billion in 2012 to ₩12,357 billion in 2013, primarily as a result of a 13.3% decrease in interest on loans. The average balance of our interest earning assets decreased 0.2% from ₩260,120 billion in 2012 to ₩259,645 billion in 2013, principally due to a decrease in our loan portfolio. The effect of this decrease was enhanced by a 70 basis point decrease in average yields on our interest earning assets from 5.46% in 2012 to 4.76% in 2013, which reflected a decrease in the general level of interest rates in Korea in 2013.

 

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The 13.3% decrease in interest on loans from ₩12,624 billion in 2012 to ₩10,942 billion in 2013 was primarily the result of:

 

   

a 68 basis point decrease in the average yields on corporate loans from 5.18% in 2012 to 4.50% in 2013, which was enhanced by a 2.1% decrease in the average volume of such loans from ₩102,773 billion in 2012 to ₩100,614 billion in 2013;

 

   

a 82 basis point decrease in the average yields on other consumer loans from 7.28% in 2012 to 6.46% in 2013, which was partially offset by a 2.7% increase in the average volume of such loans from ₩29,721 billion in 2012 to ₩30,536 billion in 2013;

 

   

a 76 basis point decrease in the average yields on mortgage loans from 4.86% in 2012 to 4.10% in 2013, which was partially offset by a 0.2% increase in the average volume of such loans from ₩44,444 billion in 2012 to ₩44,514 billion in 2013; and

 

   

an 84 basis point decrease in the average yields on home equity loans from 5.09% in 2012 to 4.25% in 2013, which was partially offset by a 0.3% increase in the average volume of such loans from ₩30,170 billion in 2012 to ₩30,275 billion in 2013.

The average yields for corporate loans, other consumer loans, mortgage loans and home equity loans decreased mainly as a result of the decrease in the general level of interest rates in Korea applicable to such loans from 2012 to 2013. The decrease in the average volume of corporate loans was primarily due to our efforts to improve the asset quality of our corporate loans by applying more stringent standards to the origination of new loans and renewal of existing loans to corporate customers. The increase in the average volume of other consumer loans was principally due to higher demand for such loans in Korea. The increase in the average volume of mortgage loans was primarily a result of an increase in loans relating to key money deposits. The increase in the average volume of home equity loans mainly reflected higher demand for such loans in Korea.

Overall, the average volume of our loans decreased 0.7%, from ₩221,930 billion in 2012 to ₩220,401 billion in 2013, while the average yields on our loans decreased by 73 basis points, from 5.69% in 2012 to 4.96% in 2013.

Debt securities in our financial investments portfolio consist of available-for-sale debt securities and held-to-maturity debt securities, including debt securities issued by government-owned or -controlled enterprises or financial institutions and debt securities issued by Korean banks and other financial institutions. Interest on debt securities in our financial investments portfolio decreased 11.0% from ₩1,426 billion in 2012 to ₩1,269 billion in 2013 primarily as a result of a 46 basis point decrease in average yields on such debt securities from 4.27% in 2012 to 3.81% in 2013, which was enhanced by a 0.1% decrease in the average volume of such debt securities from ₩33,382 billion in 2012 to ₩33,339 billion in 2013. The decrease in average yields on such debt securities was primarily due to the decrease in the general level of interest rates in Korea for debt securities from 2012 to 2013.

Interest expense. Interest expense decreased 18.7% from ₩7,172 billion in 2012 to ₩5,834 billion in 2013 primarily due to a 21.5% decrease in interest expense on deposits, which was enhanced by a 20.7% decrease in interest expense on debts. The average volume of interest bearing liabilities decreased 1.0% from ₩240,831 billion in 2012 to ₩238,452 billion in 2013, which mainly reflected a decrease in the average volume of deposits. The effect of this decrease was enhanced by a decrease of 53 basis points in the average cost of interest bearing liabilities from 2.98% in 2012 to 2.45% in 2013, which was driven mainly by the lower interest rate environment in Korea in 2013.

The 21.5% decrease in interest expense on deposits from ₩5,450 billion in 2012 to ₩4,279 billion in 2013 was primarily due to a 67 basis point decrease in the average cost of time deposits from 3.69% in 2012 to 3.02% in 2013, which was enhanced by a 4.6% decrease in the average volume of such deposits from ₩136,617 billion in 2012 to ₩130,286 billion in 2013. The decrease in the average cost of time deposits mainly reflected the

 

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decrease in the general level of interest rates in Korea from 2012 to 2013. The decrease in the average volume of time deposits was principally due to a decrease in time deposits for corporate customers. Overall, the average cost of our deposits decreased by 58 basis points from 2.80% in 2012 to 2.22% in 2013, while the average volume of our deposits decreased by 0.8% from ₩194,506 billion in 2012 to ₩192,960 billion in 2013.

The 20.7% decrease in interest expense on debts from ₩460 billion in 2012 to ₩365 billion in 2013 resulted from a 30 basis point decrease in the average cost of debts from 2.11% in 2012 to 1.81% in 2013, which was enhanced by a 7.3% decrease in the average volume of debts from ₩21,773 billion in 2012 to ₩20,173 billion in 2013. The decrease in the average cost of debts was primarily attributable to the general decrease in market interest rates in Korea, including for short-term borrowings and call money, in 2013, while the decrease in the average volume of debts mainly reflected a decrease in the use of short-term borrowings to meet our funding needs.

Net interest margin. Net interest margin represents the ratio of net interest income to average interest earning assets. Our overall net interest margin decreased from 2.71% in 2012 to 2.51% in 2013, as a 7.3% decrease in our net interest income from ₩7,038 billion in 2012 to ₩6,523 billion in 2013 outpaced a 0.2% decrease in the average volume of our interest earning assets from ₩260,120 billion in 2012 to ₩259,645 billion in 2013. The decrease in average interest earning assets was outpaced by a 1.0% decrease in average interest bearing liabilities from ₩240,831 billion in 2012 to ₩238,452 billion in 2013, while the decrease in interest expense was more than offset by a decrease in interest income, resulting in a decrease in net interest income. Our net interest spread, which represents the difference between the average yield on our interest earning assets and the average cost of our interest bearing liabilities, declined from 2.48% in 2012 to 2.31% in 2013. The decline in our net interest spread reflected a larger decrease in the average yield of our interest earning assets, relative to the decrease in the average cost of our interest bearing liabilities, primarily due to the earlier adjustment of interest rates on interest earning assets compared to interest rates on interest bearing liabilities in the context of the lower interest rate environment, as well as the continuing rate-based competition in the Korean banking industry for the marketing of loan products.

Comparison of 2012 to 2011

Interest income. Interest income increased 1.8% from ₩13,956 billion in 2011 to ₩14,210 billion in 2012, primarily as a result of a 1.7% increase in interest on loans. The average balance of our interest earning assets increased 5.5% from ₩246,627 billion in 2011 to ₩260,120 billion in 2012, principally due to the growth in our loan portfolio. The effect of this increase was offset in part by a 20 basis point decrease in average yields on our interest earning assets from 5.66% in 2011 to 5.46% in 2012, which reflected a decrease in the general level of interest rates in Korea in 2012.

The 1.7% increase in interest on loans from ₩12,412 billion in 2011 to ₩12,624 billion in 2012 was primarily the result of an 8.8% increase in the average volume of corporate loans from ₩94,486 billion in 2011 to ₩102,773 billion in 2012, which was partially offset by a 25 basis point decrease in average yields on such loans from 5.43% in 2011 to 5.18% in 2012. The increase in the average volume of corporate loans was principally due to an increase in loans to SOHO customers which reflected our focus on marketing to this segment in 2012, while the average yields for corporate loans decreased mainly as a result of the decrease in the general level of interest rates in Korea applicable to such loans from 2011 to 2012.

Overall, the average volume of our loans increased 4.8%, from ₩211,673 billion in 2011 to ₩221,930 billion in 2012, while the average yields on our loans decreased by 17 basis points, from 5.86% in 2011 to 5.69% in 2012.

Interest on debt securities in our financial investments portfolio decreased 2.9% from ₩1,469 billion in 2011 to ₩1,426 billion in 2012 as a result of a 23 basis point decrease in average yields on such debt securities from 4.50% in 2011 to 4.27% in 2012, which was partially offset by a 2.2% increase in the average volume of

 

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such debt securities from ₩32,655 billion in 2011 to ₩33,382 billion in 2012. The decrease in average yields on such debt securities was primarily due to the decrease in the general level of interest rates in Korea for debt securities, while the increase in the average volume of such debt securities mainly reflected our increased purchases of Korean treasury securities and debt securities issued by government agencies and financial institutions.

Interest expense. Interest expense increased 4.7% from ₩6,852 billion in 2011 to ₩7,172 billion in 2012 primarily due to a 10.2% increase in interest expense on deposits, which was partially offset by a 16.3% decrease in interest expense on debentures. The average volume of interest bearing liabilities increased 6.0% from ₩227,158 billion in 2011 to ₩240,831 billion in 2012, which mainly reflected an increase in the average volume of deposits. The effect of this increase was partially offset by a decrease of 4 basis points in the average cost of interest bearing liabilities from 3.02% in 2011 to 2.98% in 2012, which was driven mainly by the lower interest rate environment in Korea in 2012.

The 10.2% increase in interest expense on deposits from ₩4,945 billion in 2011 to ₩5,450 billion in 2012 was primarily due to a 9.5% increase in the average volume of time deposits from ₩124,713 billion in 2011 to ₩136,617 billion in 2012, while the average cost of such deposits increased by 3 basis points from 3.66% in 2011 to 3.69% in 2012. The increase in the average volume of time deposits mainly reflected continuing demand for lower-risk financial products from our customers. Overall, the average volume of our deposits increased by 7.9% from ₩180,283 billion in 2011 to ₩194,506 billion in 2012, while the average cost of our deposits increased by 6 basis points from 2.74% in 2011 to 2.80% in 2012 as the relative proportion of higher interest rate deposit products in our total deposit portfolio increased in light of the continuing rate-based competition in the Korean banking industry for deposits.

The 16.3% decrease in interest expense on debentures from ₩1,508 billion in 2011 to ₩1,262 billion in 2012 resulted from a 15.5% decrease in the average volume of long-term debentures from ₩25,352 billion in 2011 to ₩21,424 billion in 2012 as well as a 16 basis point decrease in the average cost of long-term debentures from 5.57% in 2011 to 5.41% in 2012. The decrease in the average volume of long-term debentures mainly reflected our decreased use of long-term debentures to meet our funding needs, while the decrease in the average cost of such debentures was primarily attributable to the general decrease in market interest rates in Korea, including for such debentures, in 2012.

Net interest margin. Our overall net interest margin decreased from 2.88% in 2011 to 2.71% in 2012, as the effect of a 0.9% decrease in our net interest income from ₩7,104 billion in 2011 to ₩7,038 billion in 2012 was enhanced by a 5.5% increase in the average volume of our interest earning assets from ₩246,627 billion in 2011 to ₩260,120 billion in 2012. The growth in average interest earning assets was outpaced by a 6.0% increase in average interest bearing liabilities from ₩227,158 billion in 2011 to ₩240,831 billion in 2012, while the increase in interest income was more than offset by the increase in interest expense, resulting in a decrease in net interest income. Our net interest spread declined from 2.64% in 2011 to 2.48% in 2012. The decline in our net interest spread reflected a larger decrease in the average yield of our interest earning assets, relative to the decrease in the average cost of our interest bearing liabilities, primarily due to the earlier adjustment of interest rates on interest earning assets compared to interest rates on interest bearing liabilities in the context of the lower interest rate environment, as well as the continuing rate-based competition in the Korean banking industry for the marketing of loan products.

Provision for Credit Losses

Provision for credit losses includes provision for loan losses, provision for unused loan commitments, provision for acceptances and guarantees, provision for financial guarantee contracts and provision for other financial assets, in each case net of reversal of provisions. For a discussion of our loan loss provisioning policy, see “Item 4.B. Business Overview—Assets and Liabilities—Loan Portfolio—Provisioning Policy.”

In accordance with the guidelines of the Financial Supervisory Service, if our provision for loan losses is deemed insufficient for regulatory purposes, we compensate for the difference by recording a regulatory reserve

 

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for credit losses, which is segregated within retained earnings. See “Item 4.B. Business Overview—Assets and Liabilities—Loan Portfolio—Regulatory Reserve for Credit Losses” and Note 26 of the notes to our consolidated financial statements included elsewhere in this annual report.

Comparison of 2013 to 2012

Our provision for credit losses decreased 10.2% from ₩1,607 billion in 2012 to ₩1,443 billion in 2013, primarily due to an improvement in the overall asset quality of our loans reflecting a decrease in delinquency rates.

Our loan write-offs, net of recoveries, decreased 1.7% from ₩1,747 billion in 2012 to ₩1,717 billion in 2013, primarily due to a decrease in write-offs of credit card loans.

Our reversal of provision for acceptances and guarantees and unused loan commitments decreased from ₩91 billion in 2012 to ₩8 billion in 2013, due primarily to a decrease in reversal of provision for refund guarantees issued on behalf of shipbuilding companies.

Comparison of 2012 to 2011

Our provision for credit losses increased 6.2% from ₩1,513 billion in 2011 to ₩1,607 billion in 2012, primarily due to an increase in provision for loan losses in respect of our retail loans in light of higher delinquencies in our retail loan portfolio, reflecting adverse economic conditions in Korea. Our loan write-offs, net of recoveries, increased 3.3% from ₩1,691 billion in 2011 to ₩1,747 billion in 2012, primarily due to an increase in write-offs of unsecured loans made to retail borrowers.

Our reversal of provision for acceptances and guarantees and unused loan commitments decreased from reversal of provision of ₩130 billion in 2011 to a reversal of provision of ₩91 billion in 2012, due primarily to a decrease in reversal of provision for refund guarantees issued on behalf of shipbuilding companies.

Allowances for Loan Losses

Under IFRS, we establish allowances for loan losses with respect to loans to absorb such losses. We assess individually significant loans on a case-by-case basis and other loans on a collective basis. In addition, if we determine that no objective evidence of impairment exists for a loan, we include such loan in a group of loans with similar credit risk characteristics and assess them collectively for impairment regardless of whether such loan is significant. For further information on allowances for loan losses, see “—Critical Accounting Policies—Impairment of Loans and Allowances for Loan Losses” and “Item 4.B. Business Overview—Assets and Liabilities—Loan Portfolio—Allocation and Analysis of Allowances for Loan Losses under IFRS.”

Corporate Loans. The following table shows, for the periods indicated, certain information regarding our impaired corporate loans:

 

     As of December 31,  
     2011     2012  (1)     2013  (1)  

Impaired corporate loans as a percentage of total corporate loans

     2.3     2.3     2.8

Allowances for loan losses for corporate loans as a percentage of total corporate loans

     2.5        2.2        1.8   

Allowances for loan losses for corporate loans as a percentage of impaired corporate loans

     107.3        94.5        65.5   

Net charge-offs of corporate loans as a percentage of total corporate loans

     1.3        1.0        1.0   

 

(1) 

The amounts as of December 31, 2013 reflect a change in our accounting policies pursuant to the adoption of IFRS 10, Consolidated Financial Statements, which is effective beginning in 2013. Corresponding amounts as of December 31, 2012 (but not as of December 31, 2011) have been restated to retroactively apply such change. See “—Overview—Changes in Accounting Policies.”

 

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During 2013, impaired corporate loans as a percentage of total corporate loans increased due to a reclassification of impaired corporate loans to include all loans for which account-specific provisions have been made, while allowances for loan losses for corporate loans as a percentage of total corporate loans decreased primarily as a result of an improvement in the overall asset quality of our corporate loans, resulting in a decrease in allowance for loan losses for corporate loans as a percentage of impaired corporate loans.

During 2012, impaired corporate loans as a percentage of total corporate loans remained relatively constant. Allowances for loan losses for corporate loans, as a percentage of total corporate loans and as a percentage of impaired corporate loans, respectively, decreased during 2012 primarily as a result of a decrease in our allowances for loan losses for such loans, which mainly reflected an increase in the relative proportion of such loan amounts that are secured by collateral.

During 2011, impaired corporate loans and allowances for loan losses for corporate loans, each as a percentage of total corporate loans, decreased due to decreases in our impaired corporate loans and allowances for loan losses for such loans. However, allowances for loan losses for corporate loans as a percentage of impaired corporate loans increased during 2011 as a result of the deterioration in the asset quality of loans to the construction and shipbuilding sectors, which led to a worse overall mix of impaired corporate loans.

Retail Loans. The following table shows, for the periods indicated, certain information regarding our impaired retail loans:

 

     As of December 31,  
     2011     2012  (1)     2013  (1)  

Impaired retail loans as a percentage of total retail loans

     1.0     1.1     1.0

Allowances for loan losses for retail loans as a percentage of total retail loans

     0.6        0.7        0.5   

Allowances for loan losses for retail loans as a percentage of impaired retail loans

     59.9        58.1        56.7   

Net charge-offs of retail loans as a percentage of total retail loans

     0.2        0.3        0.4   

 

(1) 

The amounts as of December 31, 2013 reflect a change in our accounting policies pursuant to the adoption of IFRS 10, Consolidated Financial Statements, which is effective beginning in 2013. Corresponding amounts as of December 31, 2012 (but not as of December 31, 2011) have been restated to retroactively apply such change. See “—Overview—Changes in Accounting Policies.”

During 2013, impaired retail loans as a percentage of total retail loans remained relatively constant. However, an improvement in the asset quality of our existing impaired retail loans led to a better overall mix of impaired loans, which caused the level of allowances for loan losses as a percentage of both total retail loans and impaired retail loans to decrease.

During 2012, impaired retail loans as a percentage of total retail loans increased as the effect of an increase in our impaired retail loans, which reflected a deterioration in the asset quality of our retail loan portfolio due to adverse economic conditions in Korea in 2012, was enhanced by a slight decrease in the amount of our total retail loans. Allowances for loan losses for retail loans as a percentage of total retail loans similarly increased during 2012 as the effect of an increase in allowances for retail loans, reflecting the deterioration in the asset quality of our retail loan portfolio, was enhanced by the decrease in the amount of our total retail loans. However, an improvement in the asset quality of our existing impaired retail loans reflecting our increased charge-offs of such loans in 2012 led to a better overall mix of impaired retail loans, which caused the level of allowances for loan losses for retail loans as a percentage of impaired retail loans to decrease.

During 2011, impaired retail loans as a percentage of total retail loans remained relatively constant. However, a deterioration in the asset quality of our existing impaired retail loans led to a worse overall mix of impaired retail loans, which caused the level of allowances for loan losses as a percentage of both total retail loans and impaired retail loans to increase.

 

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Credit Card Balances. The following table shows, for the periods indicated, certain information regarding our impaired credit card balances:

 

     As of December 31,  
     2011     2012  (1)     2013  (1)  

Impaired credit card balances as a percentage of total credit card balances

     0.9     1.0     1.8

Allowances for loan losses for credit card balances as a percentage of total credit card balances

     2.8        2.8        3.5   

Allowances for loan losses for credit card balances as a percentage of impaired credit card balances

     327.9        272.9        196.4   

Net charge-offs as a percentage of total credit card balances

     1.7        3.0        2.2   

 

(1) 

The amounts as of December 31, 2013 reflect a change in our accounting policies pursuant to the adoption of IFRS 10, Consolidated Financial Statements, which is effective beginning in 2013. Corresponding amounts as of December 31, 2012 (but not as of December 31, 2011) have been restated to retroactively apply such change. See “—Overview—Changes in Accounting Policies.”

During 2013, impaired credit card balances as a percentage of total credit card balances increased primarily due to an increase in impaired credit card balances, which mainly reflected a decrease in charge-off of such balances due to a change in our charge-off policy in 2013 which increased the delinquency period for credit card balances before charge-off from three months to six months. Allowances for loan losses for credit card balances as a percentage of total credit card balances increased during 2013 mainly as a result of an increase in impaired credit card balances. Allowance for loan losses for credit card balances as a percentage of impaired credit card balances decreased during 2013 as the increase in impaired credit card balances outpaced the increase in allowance for loans losses for credit card balances.

During 2012, impaired credit card balances as a percentage of total credit card balances increased slightly primarily due to the effect of a decrease in our total credit card balances while the amount of our impaired credit card balances remained relatively steady. Allowances for loan losses for credit card balances, which decreased during 2012 mainly as a result of a decrease in our total credit card balances as well as increased charge-offs (which, in turn, principally reflected increased delinquencies in our credit card portfolio from the second half of 2011 becoming subject to charge off in 2012), remained relatively constant as a percentage of total credit card balances and decreased as a percentage of impaired credit card balances.

During 2011, impaired credit card balances and allowances for loan losses for credit card balances, each as a percentage of total credit card balances, increased due to growth in our impaired credit card balances and allowances for loan losses for credit card balances. However, the increase in our impaired credit card balances outpaced the increase in our allowances for loan losses for credit card balances, resulting in a decrease in the level of allowances for loan losses for credit card balances as a percentage of impaired credit card balances.

Net Fee and Commission Income

The following table shows, for the periods indicated, the components of our net fee and commission income:

 

     Year Ended December 31,     Percentage Change  
     2011     2012 (1)     2013 (1)     2012/2011     2013/2012  
     (in billions of Won)     (%)  

Fee and commission income

   2,830      2,754      2,657        (2.7 )%      (3.5 )% 

Fee and commission expense

     (1,035     (1,187     (1,178     14.7        (0.8
  

 

 

   

 

 

   

 

 

     

Net fee and commission income

   1,795      1,567      1,479        (12.7 )%      (5.6 )% 
  

 

 

   

 

 

   

 

 

     

 

(1)

The amounts for 2013 reflect a change in our accounting policies pursuant to the adoption of IFRS 10, Consolidated Financial Statements, which is effective beginning in 2013. Corresponding amounts for 2012 (but not for 2011) have been restated to retroactively apply such change. See “—Overview—Changes in Accounting Policies.”

 

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Comparison of 2013 to 2012

Our net fee and commission income decreased 5.6% from ₩1,567 billion in 2012 to ₩1,479 billion in 2013, primarily due to a 3.5% decrease in fee and commission income from ₩2,754 billion in 2012 to ₩2,657 billion in 2013, which was partially offset by a 0.8% decrease in fee and commission expense from ₩1,187 billion in 2012 to ₩1,178 billion in 2013. The 3.5% decrease in fee and commission income was mainly the result of decreases in agent activity fees, mostly related to bancassurance activities, from ₩285 billion in 2012 to ₩207 billion in 2013 and in credit card related fees and commissions received from ₩1,180 billion in 2012 to ₩1,127 billion in 2013, which mainly reflected the impact of the new government initiative to encourage the use of check cards instead of credit cards. Check card related fees and commissions increased from ₩218 billion in 2012 to ₩256 billion in 2013.

The 0.8% decrease in fee and commission expense was primarily due to a decrease in credit card related fees and commissions paid from ₩997 billion in 2012 to ₩934 billion in 2013. The effect of such decrease was partially offset by a 62.3% increase in other fee and commission expenses from ₩77 billion in 2012 to ₩125 billion in 2013, mainly resulting from an increase in fee and commission expenses from factored receivables.

Comparison of 2012 to 2011

Our net fee and commission income decreased 12.7% from ₩1,795 billion in 2011 to ₩1,567 billion in 2012, as a 2.7% decrease in fee and commission income from ₩2,830 billion in 2011 to ₩2,754 billion in 2012 was enhanced by a 14.7% increase in fee and commission expense from ₩1,035 billion in 2011 to ₩1,187 billion in 2012. The 2.7% decrease in fee and commission income was mainly the result of a decrease in other business account commission on consignment from ₩174 billion in 2011 to ₩30 billion in 2012, which principally reflected our receipt in 2011 of ₩137 billion in accrued but unpaid fees from the Ministry of Land, Infrastructure and Transport (relating to our management of the National Housing Fund from January 2007 to June 2010) which was not repeated in 2012.

The 14.7% increase in fee and commission expense was primarily due to an increase in credit card related fees and commissions paid from ₩842 billion in 2011 to ₩997 billion in 2012, which was partially offset by a 3.3% increase in credit card related fees and commissions received from ₩1,142 billion in 2011 to ₩1,180 billion in 2012, which is recorded as part of fee and commission income. The 18.4% increase in credit card related fees and commissions paid resulted mainly from increases in benefits and rewards provided to our credit card users and marketing expenses.

For further information regarding our net fee and commission income, see Note 28 of the notes to our consolidated financial statements included elsewhere in this annual report.

Net Gain on Financial Assets and Liabilities at Fair Value through Profit or Loss

The following table shows, for the periods indicated, the components of our net gain on financial assets and liabilities at fair value through profit or loss:

 

     Year Ended December 31,     Percentage Change  
     2011     2012  (1)     2013  (1)     2012/2011     2013/2012  
     (in billions of Won)     (%)  

Net gain on financial assets held-for-trading

   181      437      250        141.4     (42.8 )% 

Net gain on derivatives held-for-trading

     907        456        544        (49.7     19.3   

Net loss on financial liabilities held-for-trading

     (59     (44     (15     (25.4     (65.9

Net gain on financial instruments designated at fair value through profit or loss

     7        (37     (22     N/M  (2)      (40.5
  

 

 

   

 

 

   

 

 

     

Net gain on financial assets and liabilities at fair value through profit or loss

   1,036      812      757        (21.6 )%      (6.8 )% 
  

 

 

   

 

 

   

 

 

     

 

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(1) 

The amounts for 2013 reflect a change in our accounting policies pursuant to the adoption of IFRS 10, Consolidated Financial Statements, which is effective beginning in 2013. Corresponding amounts for 2012 (but not for 2011) have been restated to retroactively apply such change. See “—Overview—Changes in Accounting Policies.”

(2) 

“N/M” means not meaningful.

Comparison of 2013 to 2012

Our net gain on financial assets and liabilities at fair value through profit or loss decreased 6.8% from ₩812 billion in 2012 to ₩757 billion in 2013, primarily as a result of a 42.8% decrease in net gain on financial assets held-for-trading from ₩437 billion in 2012 to ₩250 billion in 2013, which was offset in part by a 19.3% increase in net gain on derivatives held-for-trading from ₩456 billion in 2012 to ₩544 billion in 2013. The decrease in net gain on financial assets held-for-trading was principally due to a 43.1% decrease in net gain on debt securities held-for-trading from ₩390 billion in 2012 to ₩222 billion in 2013. The increase in net gain on derivatives held-for-trading mainly reflected a 16.4% increase in net gain on currency derivatives held-for-trading from ₩444 billion in 2012 to ₩517 billion in 2013.

Comparison of 2012 to 2011

Our net gain on financial assets and liabilities at fair value through profit or loss decreased 21.6% from ₩1,036 billion in 2011 to ₩812 billion in 2012, primarily as a result of a 49.7% decrease in net gain on derivatives held-for-trading from ₩907 billion in 2011 to ₩456 billion in 2012, which was offset in part by a 141.4% increase in net gain on financial assets held-for-trading from ₩181 billion in 2011 to ₩437 billion in 2012. The decrease in net gain on derivatives held-for-trading was principally due to a 49.9% decrease in net gain on currency derivatives held-for-trading from ₩886 billion in 2011 to ₩444 billion in 2012. The increase in net gain on financial assets held-for-trading mainly reflected a 87.5% increase in net gain on debt securities held-for-trading from ₩208 billion in 2011 to ₩390 billion in 2012.

For further information regarding our net gain on financial assets and liabilities at fair value through profit or loss, see Note 29 of the notes to our consolidated financial statements included elsewhere in this annual report.

General and Administrative Expenses

The following table shows, for the periods indicated, the components of our general and administrative expenses:

 

     Year Ended December 31,      Percentage Change  
     2011  (1)      2012 (1) (2)      2013 (1) (2)      2012/2011     2013/2012  
     (in billions of Won)      (%)  

Employee compensation and benefits

   2,348       2,442       2,534         4.0     3.8

Depreciation and amortization

     342         328         287         (4.1     (12.5

Other general and administrative expenses

     1,197         1,076         1,163         (10.1     8.1   
  

 

 

    

 

 

    

 

 

      

General and administrative expenses

   3,887       3,846       3,984         (1.1 )%      3.6
  

 

 

    

 

 

    

 

 

      

 

(1)

The amounts for 2013 reflect a change in our accounting policies pursuant to the amendments to IAS 19, Employee Benefits, which are effective beginning in 2013. Corresponding amounts for 2011 and 2012 have been restated to retroactively apply such change. See “—Overview—Changes in Accounting Policies.”

(2) 

The amounts for 2013 reflect a change in our accounting policies pursuant to the adoption of IFRS 10, Consolidated Financial Statements, which is effective beginning in 2013. Corresponding amounts for 2012 (but not for 2011) have been restated to retroactively apply such change. See “—Overview—Changes in Accounting Policies.”

Comparison of 2013 to 2012

Our general and administrative expenses increased 3.6% from ₩3,846 billion in 2012 to ₩3,984 billion in 2013, primarily as a result of a 3.8% increase in employee compensation and benefits from ₩2,442 billion in

 

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2012 to ₩2,534 billion in 2013, which was enhanced by an 8.1% increase in other general and administrative expenses from ₩1,076 billion in 2012 to ₩1,163 billion in 2013. The increase in employee compensation and benefits was principally due to a 2.7% increase in salaries and short-term employee benefits from ₩1,598 billion in 2012 to ₩1,641 billion in 2013, which mainly reflected an increase in the average wage of our employees. The 8.1% increase in other general and administrative expenses was principally due to a 95.8% increase in tax and dues from ₩72 billion in 2012 to ₩141 billion in 2013, which primarily reflected refunds of previously levied education taxes in 2012 as a result of claims filed by Kookmin Bank which were not repeated in 2013.

Comparison of 2012 to 2011

Our general and administrative expenses decreased 1.1% from ₩3,887 billion in 2011 to ₩3,846 billion in 2012, primarily as a result of a 10.1% decrease in other general and administrative expenses from ₩1,197 billion in 2011 to ₩1,076 billion in 2012, which was partially offset by a 4.0% increase in employee compensation and benefits from ₩2,348 billion in 2011 to ₩2,442 billion in 2012. The decrease in other general and administrative expenses was principally the result of a 50.3% decrease in tax and dues from ₩145 billion in 2011 to ₩72 billion in 2012, which reflected refunds of previously levied education taxes as a result of claims filed by Kookmin Bank. The increase in employee compensation and benefits was principally due to a 25.9% increase in other salaries and short-term employee benefits from ₩522 billion in 2011 to ₩657 billion in 2012, which mainly reflected an increase in contributions to internal funds for employee welfare.

Net Other Operating Expenses

The following table shows, for the periods indicated, the components of our net other operating expenses:

 

     Year Ended December 31,     Percentage Change  
     2011     2012  (1)     2013  (1)     2012/2011     2013/2012  
     (in billions of Won)     (%)  

Other operating income

   3,684      3,286      3,137        (10.8 )%      (4.5 )% 

Other operating expenses

     (4,776     (4,818     (4,442     0.9        (7.8
  

 

 

   

 

 

   

 

 

     

Net other operating expenses

   (1,092   (1,532   (1,305     40.3     (14.8 )% 
  

 

 

   

 

 

   

 

 

     

 

(1)

The amounts for 2013 reflect a change in our accounting policies pursuant to the adoption of IFRS 10, Consolidated Financial Statements, which is effective beginning in 2013. Corresponding amounts for 2012 (but not for 2011) have been restated to retroactively apply such change. See “—Overview—Changes in Accounting Policies.”

Comparison of 2013 to 2012

Our net other operating expenses decreased 14.8% from ₩1,532 billion in 2012 to ₩1,305 billion in 2013, as a 7.8% decrease in other operating expenses from ₩4,818 billion in 2012 to ₩4,442 billion in 2013 outpaced a 4.5% decrease in other operating income from ₩3,286 billion in 2012 to ₩3,137 billion in 2013.

Other operating income includes principally gain on foreign exchange transactions, income related to insurance, gain on sale of available-for-sale financial assets and other income. The 4.5% decrease in other operating income was attributable mainly to a 28.7% decrease in income related to insurance from ₩1,730 billion in 2012 to ₩1,234 billion in 2013, the effect of which was partially offset by a 26.8% increase in gains on foreign exchange transaction from ₩1,094 billion in 2012 to ₩1,387 billion in 2013. The decrease in income related to insurance was mainly the result of a decrease in demand for insurance products in 2013, which was substantially offset by a corresponding decrease in expense related to insurance, which is recorded as part of other operating expenses. On a net basis, our net expense related to insurance increased 35.9% from ₩92 billion in 2012 to ₩125 billion in 2013. The increase in gain on foreign exchange transactions, which was mainly the result of increased exchange rate volatility, was more than offset by a corresponding increase in loss on foreign exchange transactions, which is recorded as part of other operating expenses.

 

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Other operating expenses include principally loss on foreign exchange transactions, expenses related to insurance, loss on sale of available-for-sale financial assets and other expenses. The 7.8% decrease in other operating expenses was primarily the result of a 25.4% decrease in expense related to insurance from ₩1,822 billion in 2012 to ₩1,359 billion in 2013, which was enhanced by a 36.6% decrease in expense related to available-for-sale financial assets from ₩298 billion in 2012 to ₩189 billion in 2013. The decrease in expense related to insurance reflected a decrease in policy reserves due to a decrease in insurance products sold. The decrease in expense related to available-for-sale financial assets, which was principally due to a decrease in impairment on available-for-sale financials assets, was partially offset by an increase in revenue related to available-for-sale financial assets, which is recorded as part of other operating income.

Comparison of 2012 to 2011

Our net other operating expenses increased 40.3% from ₩1,092 billion in 2011 to ₩1,532 billion in 2012, as an 10.8% decrease in other operating income from ₩3,684 billion in 2011 to ₩3,286 billion in 2012 was enhanced by a 0.9% increase in other operating expenses from ₩4,776 billion in 2011 to ₩4,818 billion in 2012.

The 10.8% decrease in other operating income was attributable mainly to a 30.0% decrease in gain on foreign exchange transactions from ₩1,563 billion in 2011 to ₩1,094 billion in 2012 and a 72.8% decrease in gain on sale of available-for-sale financial assets from ₩552 billion in 2011 to ₩150 billion in 2012, the effect of which was partially offset by a 71.1% increase in income related to insurance from ₩1,011 billion in 2011 to ₩1,730 billion in 2012. The decrease in gain on foreign exchange transactions, which was mainly the result of reduced exchange rate volatility and a decrease in the relative proportion of foreign currency-denominated assets and liabilities on our balance sheet, was more than offset by a corresponding decrease in loss on foreign exchange transactions, which is recorded as part of other operating expenses. On a net basis, our net loss on foreign exchange transactions decreased 50.9% from ₩645 billion in 2011 to ₩317 billion in 2012. The decrease in gain on sale of available-for-sale financial assets primarily reflected gains from the disposal of our shares of Hyundai Engineering and Construction Co., Ltd. in 2011 not being repeated in 2012. The increase in income related to insurance, which was principally due to premiums and reinsurance income generated in 2012, was more than offset by a corresponding increase in expense related to insurance, which is recorded as part of other operating expenses.

The 0.9% increase in other operating expenses was primarily the result of a 67.5% increase in expense related to insurance from ₩1,088 billion in 2011 to ₩1,822 billion in 2012, and was partially offset by a 36.1% decrease in loss on foreign exchange transactions from ₩2,208 billion in 2011 to ₩1,411 billion in 2012. The increase in expense related to insurance reflected an increase in policy reserves during 2012. The decrease in loss on foreign exchange transactions, which was principally due to reduced exchange rate volatility and a decrease in the relative proportion of foreign currency-denominated assets and liabilities on our balance sheet, was partially offset by a corresponding decrease in gain on foreign exchange transactions, which is recorded as part of other operating income as discussed above.

For further information regarding our net other operating expenses, see Note 30 of the notes to our consolidated financial statements included elsewhere in this annual report.

Income Tax Expense (Benefit)

Our income tax expense is calculated by adding or subtracting changes in deferred income tax liabilities and assets to income tax amounts payable for the period. Deferred income tax assets are recognized for deductible temporary differences, unused tax losses and unused tax credits, while deferred income tax liabilities are recognized for taxable temporary differences. Temporary differences are those between the carrying values of assets and liabilities for financial reporting purposes and their respective tax bases. Deferred income tax assets, including unused tax losses and credits, are recognized only to the extent it is probable that sufficient taxable profit will be available against which such deferred income tax assets can be utilized. See “—Critical Accounting Policies—Deferred Income Tax Assets.”

 

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Comparison of 2013 to 2012

Income tax expense decreased by 1.3% from ₩559 billion in 2012 to ₩552 billion in 2013, primarily due to a decrease in our profit before income tax, which was partially offset by an increase in adjustments recognized in 2013 for current tax of prior years. The statutory tax rate was 24.2% in 2012 and 2013. Our effective tax rate was 30.4% in 2013 compared to 24.3% in 2012.

Comparison of 2012 to 2011

Income tax expense decreased by 33.8% from ₩845 billion in 2011 to ₩559 billion in 2012, primarily due to a decrease in our profit before income tax. The statutory tax rate was 24.2% in 2011 and 2012. Our effective tax rate was 24.3% in 2012 compared to 25.6% in 2011.

See Note 33 of the notes to our consolidated financial statements included elsewhere in this annual report.

Profit for the Year

As a result of the above, our profit for the year was ₩1,264 billion in 2013, compared to ₩1,740 billion in 2012 and ₩2,461 billion in 2011.

Results by Principal Business Segment

We compile and analyze financial information for our business segments based upon segment information used by our management for the purposes of resource allocation and performance evaluation. We are organized into six major business segments: retail banking operations, corporate banking operations, other banking operations, credit card operations, investment and securities operations and life insurance operations.

The following table shows, for the periods indicated, our results of operations by segment:

 

     Profit (Loss) (1)
for the Year Ended December 31,
     Total Operating Revenue (2)
for the Year Ended December 31,
 
     2011 (3)     2012 (3) (4)      2013 (3) (4)      2011  (3)     2012 (3) (4)      2013 (3) (4)  
     (in billions of Won)  

Retail banking operations

   909      686       178       3,267      3,041       2,454   

Corporate banking operations

     465        238         157         2,287        1,953         1,732   

Other banking operations

     581        516         485         1,634        1,297         1,486   

Credit card operations

     445        291         384         1,402        1,287         1,421   

Investment and securities operations

     26        18         12         163        143         115   

Life insurance operations

     19        17         9         115        131         102   

Other

     (45     48         61         (25     33         144   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total  (5)

   2,400      1,814       1,286       8,843      7,885       7,454   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) 

After deduction of income tax allocated to each segment.

(2) 

Represents operating revenue from external customers. See Note 5 of the notes to our consolidated financial statements.

(3) 

The amounts for 2013 reflect a change in our accounting policies pursuant to the amendments to IAS 19, Employee Benefits, which are effective beginning in 2013. Corresponding amounts for 2011 and 2012 have been restated to retroactively apply such change. See “—Overview—Changes in Accounting Policies.”

(4) 

The amounts for 2013 reflect a change in our accounting policies pursuant to the adoption of IFRS 10, Consolidated Financial Statements, which is effective beginning in 2013. Corresponding amounts for 2012 (but not for 2011) have been restated to retroactively apply such change. See “—Overview—Changes in Accounting Policies.”

(5) 

Prior to adjustments for consolidation, inter-segment transactions and certain differences in classification under our management reporting system.

 

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Retail Banking Operations

This segment consists of retail banking services provided by Kookmin Bank. The following table shows, for the periods indicated, our income statement data for this segment:

 

     Year Ended December 31,     Percentage Change  
     2011  (1)     2012  (1)     2013  (1)     2012/2011     2013/2012  
     (in billions of Won)     (%)  

Income statement data

          

Interest income

   5,723      5,682      4,786        (0.7 )%      (15.8 )% 

Interest expense

     (2,944     (3,158     (2,773     7.3        (12.2

Net fee and commission income

     635        696        612        9.6        (12.1

Net gain (loss) from financial assets and liabilities at fair value through profit or loss

     (2     (15     (2     650.0        (86.7

Net other operating income (expense)

     (200     (235     (261     17.5        11.1   

General and administrative expenses

     (1,758     (1,673     (1,740     (4.8     4.0   

Provision for credit losses

     (302     (392     (358     29.8        (8.7

Net other non-operating revenue (expense)

     33        —          —          (100.0     —     
  

 

 

   

 

 

   

 

 

     

Profit (loss) before income tax

     1,185        905        264        (23.6     (70.8

Tax income (expense) (2)

     (276     (219     (86     (20.7     (60.7
  

 

 

   

 

 

   

 

 

     

Profit for the year

   909      686      178        (24.5 )%      (74.1 )% 
  

 

 

   

 

 

   

 

 

     

 

(1) 

The amounts for 2013 reflect a change in our accounting policies pursuant to the amendments to IAS 19, Employee Benefits, which are effective beginning in 2013. Corresponding amounts for 2011 and 2012 have been restated to retroactively apply such change. See “—Overview—Changes in Accounting Policies.”

(2) 

Beginning in 2012, segment tax income (expense) is calculated to represent the portion of Kookmin Bank’s income tax allocated to this segment based on Kookmin Bank’s management accounts. Corresponding amounts for 2011, including profit for the year attributable to this segment, have been restated accordingly.

Comparison of 2013 to 2012

Our profit before income tax for this segment decreased 70.8% from ₩905 billion in 2012 to ₩264 billion in 2013.

Interest income from our retail banking operations decreased 15.8% from ₩5,682 billion in 2012 to ₩4,786 billion in 2013. This decrease was principally due to a decrease in the average yields on mortgage, home equity and other consumer loans, mainly reflecting a decrease in the general level of interest rates in Korea in 2013.

Our largest and most important funding source is deposits from retail customers, which represent more than half of our total deposits. Interest expense for this segment decreased 12.2% from ₩3,158 billion in 2012 to ₩2,773 billion in 2013. This decrease was primarily due to a decrease in the average cost of time deposits held by retail customers, which mainly reflected a decrease in the general level of interest rates in Korea in 2013.

Net fee and commission income attributable to this segment decreased 12.1% from ₩696 billion in 2012 to ₩612 billion in 2013, mainly due to a decrease in fee and commission income from bancassurance operations.

Net loss from financial assets and liabilities at fair value through profit or loss attributable to this segment decreased 86.7% from ₩15 billion in 2012 to ₩2 billion in 2013, principally as a result of a decrease in valuation loss on derivatives.

Net other operating expense attributable to this segment increased 11.1% from ₩235 billion in 2012 to ₩261 billion in 2013, mainly as a result of an increase in expenses related to inter-segment borrowings.

General and administrative expenses attributable to this segment increased 4.0% from ₩1,673 billion in 2012 to ₩1,740 billion in 2013, principally due to an increase in salary expense.

 

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Provision for credit losses decreased 8.7% from ₩392 billion in 2012 to ₩358 billion in 2013, due mainly to an improvement in the asset quality of retail loans reflecting a decrease in delinquency rates for retail loans.

Comparison of 2012 to 2011

Our profit before income tax for this segment decreased 23.6% from ₩1,185 billion in 2011 to ₩905 billion in 2012.

Interest income from our retail banking operations decreased 0.7% from ₩5,723 billion in 2011 to ₩5,682 billion in 2012. This decrease was principally due to a decrease in the average yields on mortgage, home equity and other consumer loans, mainly reflecting a decrease in the general level of interest rates in Korea in 2012.

Interest expense for this segment increased 7.3% from ₩2,944 billion in 2011 to ₩3,158 billion in 2012. This increase was primarily due to an increase in the average volume of time deposits held by retail customers, which mainly reflected continuing demand in Korea for lower-risk financial products.

Net fee and commission income attributable to this segment increased 9.6% from ₩635 billion in 2011 to ₩696 billion in 2012, mainly due to an increase in fee and commission income from bancassurance operations.

Net loss from financial assets and liabilities at fair value through profit or loss attributable to this segment increased more than six-fold from ₩2 billion in 2011 to ₩15 billion in 2012, principally as a result of an increase in valuation loss on derivatives.

Net other operating expense attributable to this segment increased 17.5% from ₩200 billion in 2011 to ₩235 billion in 2012, mainly as a result of an increase in expenses related to inter-segment borrowings.

General and administrative expenses attributable to this segment decreased 4.8% from ₩1,758 billion in 2011 to ₩1,673 billion in 2012, principally due to a decrease in employee benefit expenses, which reflected lower performance-based payments.

Provision for credit losses increased 29.8% from ₩302 billion in 2011 to ₩392 billion in 2012, mainly reflecting a deterioration in the asset quality of retail loans in 2012 due to adverse economic conditions in Korea.

Net other non-operating revenue attributable to this segment changed from revenue of ₩33 billion in 2011 to none in 2012, as the recognition of other non-operating revenue in 2011 from the liquidation of certain retail loan-related special purpose vehicles was not repeated in 2012.

 

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Corporate Banking Operations

This segment consists of corporate banking services provided by Kookmin Bank. The following table shows, for the periods indicated, our income statement data for this segment:

 

     Year Ended December 31,     Percentage Change  
     2011 (1)     2012 (1)     2013 (1)     2012/2011     2013/2012  
     (in billions of Won)     (%)  

Income statement data

          

Interest income

   5,107      5,190      4,391        1.6     (15.4 )% 

Interest expense

     (2,548     (2,597     (1,840     1.9        (29.1

Net fee and commission income

     243        233        241        (4.1     3.4   

Net gain (loss) from financial assets and liabilities at fair value through profit or loss

     (2     (1     —          (50.0     (100.0

Net other operating income (expense)

     (555     (871     (1,055     56.9        21.1   

General and administrative expenses

     (729     (792     (822     8.6        3.8   

Provision for credit losses

     (1,007     (853     (706     (15.3     (17.2

Net other non-operating revenue (expense)

     114        6        1        (94.7     (83.3
  

 

 

   

 

 

   

 

 

     

Profit (loss) before income tax

     623        315        210        (49.4     (33.3

Tax income (expense)(2)

     (158     (77     (53     (51.3     (31.2
  

 

 

   

 

 

   

 

 

     

Profit (loss) for the year

   465      238      157        (48.8 )%      (34.0 )% 
  

 

 

   

 

 

   

 

 

     

 

(1) 

The amounts for 2013 reflect a change in our accounting policies pursuant to the amendments to IAS 19, Employee Benefits, which are effective beginning in 2013. Corresponding amounts for 2011 and 2012 have been restated to retroactively apply such change. See “—Overview—Changes in Accounting Policies.”

(2) 

Beginning in 2012, segment tax income (expense) is calculated to represent the portion of Kookmin Bank’s income tax allocated to this segment based on Kookmin Bank’s management accounts. Corresponding amounts for 2011, including profit for the year attributable to this segment, have been restated accordingly.

Comparison of 2013 to 2012

Our profit before income tax for this segment decreased 33.3% from ₩315 billion in 2012 to ₩210 billion in 2013.

Interest income from our corporate banking operations decreased 15.4% from ₩5,190 billion in 2012 to ₩4,391 billion in 2013. This decrease was principally due to a decrease in the average yields on corporate loans, mainly reflecting the lower interest rate environment in Korea in 2013, which was enhanced by a decrease in the average volume of such loans.

Interest expense for this segment decreased 29.1% from ₩2,597 billion in 2012 to ₩1,840 billion in 2013. This decrease was principally due to a decrease in the average cost of time deposits held by corporate customers, which mainly reflected a decrease in the general level of interest rates in Korea in 2013.

Net fee and commission income attributable to this segment increased 3.4% from ₩233 billion in 2012 to ₩241 billion in 2013, due primarily to an increase in commissions on management of retirement annuity pensions.

Net loss from financial assets and liabilities at fair value through profit or loss attributable to this segment decreased by ₩1 billion from 2012 to 2013.

Net other operating expense attributable to this segment increased 21.1% from ₩871 billion in 2012 to ₩1,055 billion in 2013, mainly as a result of an increase in expenses related to inter-segment borrowings.

General and administrative expenses attributable to this segment increased 3.8% from ₩792 billion in 2012 to ₩822 billion in 2013, principally due to an increase in the average wages of our employees in this segment.

 

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Provision for credit losses decreased 17.2% from ₩853 billion in 2012 to ₩706 billion in 2013, due mainly to an overall improvement in the asset quality of corporate loans reflecting a decrease in delinquency rates for corporate loans.

Net other non-operating revenue attributable to this segment decreased 83.3% from ₩6 billion in 2012 to ₩1 billion in 2013, primarily due to a decrease in net other non-operating revenue from Kookmin Bank (China) Ltd., a subsidiary of Kookmin Bank.

Comparison of 2012 to 2011

Our profit before income tax for this segment decreased 49.4% from ₩623 billion in 2011 to ₩315 billion in 2012.

Interest income from our corporate banking operations increased 1.6% from ₩5,107 billion in 2011 to ₩5,190 billion in 2012. This increase was principally due to an increase in the average volume of corporate loans, mainly reflecting our increased marketing efforts to SOHO customers. The effect of such increase was offset in part by a decrease in the average yield on corporate loans, mainly reflecting the lower interest rate environment in Korea in 2012.

Interest expense for this segment increased 1.9% from ₩2,548 billion in 2011 to ₩2,597 billion in 2012. This increase was principally due to an increase in the average volume of time deposits held by corporate customers, mainly reflecting continuing demand for such deposits in Korea.

Net fee and commission income attributable to this segment decreased 4.1% from ₩243 billion in 2011 to ₩233 billion in 2012, due primarily to a decrease in miscellaneous corporate banking fee income.

Net loss from financial assets and liabilities at fair value through profit or loss attributable to this segment decreased from ₩2 billion in 2011 to ₩1 billion in 2012.

Net other operating expense attributable to this segment increased 56.9% from ₩555 billion in 2011 to ₩871 billion in 2012, mainly as a result of an increase in expenses related to inter-segment borrowings.

General and administrative expenses attributable to this segment increased 8.6% from ₩729 billion in 2011 to ₩792 billion in 2012, principally due to increases in rental expenses and service fees.

Provision for credit losses decreased 15.3% from ₩1,007 billion in 2011 to ₩853 billion in 2012, mainly reflecting an increase in the relative proportion of corporate loan amounts that are secured by collateral.

Net other non-operating revenue attributable to this segment decreased 94.7% from ₩114 billion in 2011 to ₩6 billion in 2012, as the recognition of other non-operating revenue in 2011 from the liquidation of corporate loan-related special purpose vehicles was not repeated in 2012.

 

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Other Banking Operations

This segment primarily consists of Kookmin Bank’s banking operations other than retail and corporate banking operations, including treasury activities and Kookmin Bank’s “back office” administrative operations. The following table shows, for the periods indicated, our income statement data for this segment:

 

     Year Ended December 31,     Percentage Change  
     2011 (1)     2012 (1) (2)     2013 (1) (2)     2012/2011     2013/2012  
     (in billions of Won)     (%)  

Income statement data

          

Interest income

   1,529      1,623      1,418        6.1     (12.6 )% 

Interest expense

     (854     (961     (822     12.5        (14.5

Net fee and commission income

     503        324        252        (35.6     (22.2

Net gain (loss) from financial assets and liabilities at fair value through profit or loss

     994        757        693        (23.8     (8.5

Net other operating income (expense)

     (318     (144     261        (54.7     N/M  (3) 

General and administrative expenses

     (848     (811     (835     (4.4     3.0   

Provision (reversal of provision) for credit losses

     17        (49     (1     N/M  (3)      (98.0

Share of profit (loss) of associates

     1        (6     (203     N/M  (3)      3,283.3   

Net other non-operating revenue (expense)

     (193     (71     (25     (63.2     (64.8
  

 

 

   

 

 

   

 

 

     

Profit (loss) before income tax

     831        662        738        (20.3     11.5   

Tax income (expense)(4)

     (250     (146     (253     (41.6     73.3   
  

 

 

   

 

 

   

 

 

     

Profit (loss) for the year

   581      516      485        (11.2 )%      (6.0 )% 
  

 

 

   

 

 

   

 

 

     

 

(1) 

The amounts for 2013 reflect a change in our accounting policies pursuant to the amendments to IAS 19, Employee Benefits, which are effective beginning in 2013. Corresponding amounts for 2011 and 2012 have been restated to retroactively apply such change. See “—Overview—Changes in Accounting Policies.”

(2) 

The amounts for 2013 reflect a change in our accounting policies pursuant to the adoption of IFRS 10, Consolidated Financial Statements, which is effective beginning in 2013. Corresponding amounts for 2012 (but not for 2011) have been restated to retroactively apply such change. See “—Overview—Changes in Accounting Policies.”

(3) 

“N/M” means not meaningful.

(4) 

Beginning in 2012, segment tax income (expense) is calculated to represent the portion of Kookmin Bank’s income tax allocated to this segment based on Kookmin Bank’s management accounts. Corresponding amounts for 2011, including profit for the year attributable to this segment have been restated accordingly.

Comparison of 2013 to 2012

Our profit before income tax for this segment increased 11.5% from ₩662 billion in 2012 to ₩738 billion in 2013.

Interest income from our other banking operations decreased 12.6% from ₩1,623 billion in 2012 to ₩1,418 billion in 2013. This decrease was attributable primarily to a decrease in the average yields on debt securities in Kookmin Bank’s financial investments portfolio, due mainly to the lower interest rate environment in Korea in 2013.

Interest expense for this segment decreased 14.5% from ₩961 billion in 2012 to ₩822 billion in 2013. This decrease was principally due to a decrease in the average cost of debentures, which mainly reflected the decrease in the general level of interest rates in Korea in 2013.

Net fee and commission income attributable to this segment decreased 22.2% from ₩324 billion in 2012 to ₩252 billion in 2013, mainly due to decreases in brokerage fees and participation fees.

Net gain from financial assets and liabilities at fair value through profit or loss attributable to this segment decreased 8.5% from ₩757 billion in 2012 to ₩693 billion in 2013, principally as a result of a decrease in net gains on financial instruments held-for-trading.

 

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Net other operating income (expense) changed from a net expense of ₩144 billion in 2012 to a net income of ₩261 billion in 2013, mainly as a result of an increase in income from inter-segment lending.

General and administrative expenses attributable to this segment increased 3.0% from ₩811 billion in 2012 to ₩835 billion in 2013, principally due to an increase in special termination benefits in connection with Kookmin Bank’s voluntary early retirement program, as well as an increase in salary expense.

Provision for credit losses decreased by ₩48 billion from ₩49 billion in 2012 to ₩1 billion in 2013, mainly reflecting a decrease in provision for receivables from derivative transactions.

Share of loss of associates increased by ₩197 billion from ₩6 billion in 2012 to ₩203 billion in 2013, principally as a result of an increase in loss on equity method investments from Kookmin Bank’s investment in JSC Bank CenterCredit.

Net other non-operating expense attributable to this segment decreased 64.8% from ₩71 billion in 2012 to ₩25 billion in 2013, primarily due to an increase in net other non-operating income, including income from employment insurance support and interest on delinquent leasehold deposits.

Comparison of 2012 to 2011

Our profit before income tax for this segment decreased 20.3% from ₩831 billion in 2011 to ₩662 billion in 2012.

Interest income from our other banking operations increased 6.1% from ₩1,529 billion in 2011 to ₩1,623 billion in 2012. This increase was attributable primarily to an increase in the average volume of debt securities in Kookmin Bank’s financial investments portfolio, which mainly reflected increased purchases of low-risk debt securities such as Korean treasury securities and debt securities issued by government agencies and financial institutions.

Interest expense for this segment increased 12.5% from ₩854 billion in 2011 to ₩961 billion in 2012. This increase was principally due to the inclusion in 2012 of interest expense related to trust accounts for which we guarantee only the repayment of principal as a result of our adoption of IFRS 10, which was retroactively applied for 2012 but not 2011. See “—Overview—Changes in Accounting Policies.”

Net fee and commission income attributable to this segment decreased 35.6% from ₩503 billion in 2011 to ₩324 billion in 2012, mainly because of a one-time increase in management fees received from the National Housing Fund in 2011, which was due to the payment of unpaid management fees from prior years claimed by Kookmin Bank, was not repeated in 2012.

Net gain from financial assets and liabilities at fair value through profit or loss attributable to this segment decreased 23.8% from ₩994 billion in 2011 to ₩757 billion in 2012, principally as a result of a decrease in net gain on derivatives held-for-trading.

Net other operating expense attributable to this segment decreased 54.7% from ₩318 billion in 2011 to ₩144 billion in 2012, mainly as a result of an increase in income from inter-segment lending.

General and administrative expenses attributable to this segment decreased 4.4% from ₩848 billion in 2011 to ₩811 billion in 2012, principally due to a decrease in employee benefit expenses, which reflected lower performance-based payments.

Provision for credit losses changed from a reversal of provision of ₩17 billion in 2011 to a provision of ₩49 billion in 2012, mainly reflecting an increase in provisions for receivables from derivatives transactions.

 

 

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Share of profit of associates changed from a profit of ₩1 billion in 2011 to a loss of ₩6 billion in 2012, principally as a result of recognition of additional impairment losses on Kookmin Bank’s investment in JSC Bank CenterCredit in 2012.

Net other non-operating expense attributable to this segment decreased 63.2% from ₩193 billion in 2011 to ₩71 billion in 2012, primarily due to an increase in gains on sales of tangible assets.

Credit Card Operations

This segment consists of credit card activities, which were conducted by Kookmin Bank in January and February of 2011. In March 2011, Kookmin Bank’s credit card business was spun-off to KB Kookmin Card, a newly established company. As such, since March 2011, our credit card activities have been conducted by KB Kookmin Card. The following table shows, for the periods indicated, our income statement data for this segment:

 

     Year Ended December 31,     Percentage Change  
     2011 (1)     2012 (1) (2)     2013 (1) (2)     2012/2011     2013/2012  
     (in billions of Won)     (%)  

Income statement data

          

Interest income

   1,381      1,388      1,436        0.5     3.5

Interest expense

     (480     (414     (379     (13.8     (8.5

Net fee and commission income

     242        158        185        (34.7     17.1   

Net other operating income (expense)

     (18     (83     (39     361.1        (53.0

General and administrative expenses

     (340     (349     (354     2.6        1.4   

Provision for credit losses

     (207     (315     (345     52.2        9.5   

Net other non-operating revenue (expense)

     (1     (4     (2     300.0        (50.0
  

 

 

   

 

 

   

 

 

     

Profit before income tax

     577        381        502        (34.0     31.8   

Tax income (expense) (3)

     (132     (90     (118     (31.8     31.1   
  

 

 

   

 

 

   

 

 

     

Profit for the year

   445      291      384        (34.6 )%      32.0
  

 

 

   

 

 

   

 

 

     

 

(1) 

The amounts for 2013 reflect a change in our accounting policies pursuant to the amendments to IAS 19, Employee Benefits, which are effective beginning in 2013. Corresponding amounts for 2011 and 2012 have been restated to retroactively apply such change. See “—Overview—Changes in Accounting Policies.”

(2) 

The amounts for 2013 reflect a change in our accounting policies pursuant to the adoption of IFRS 10, Consolidated Financial Statements, which is effective beginning in 2013. Corresponding amounts for 2012 (but not for 2011) have been restated to retroactively apply such change. See “—Overview—Changes in Accounting Policies.”

(3) 

Represents the portion of Kookmin Bank’s income tax for January and February of 2011 allocated to this segment based on profit before income tax, and income tax attributable to KB Kookmin Card for March to December of 2011, and for 2012 and 2013.

Comparison of 2013 to 2012

Our profit before income tax for this segment increased by 31.8% from ₩381 billion in 2012 to ₩502 billion in 2013.

Interest income from our credit card operations increased by 3.5% from ₩1,388 billion in 2012 to ₩1,436 billion in 2013. This increase was primarily due to an increase in interest income from factored receivables, reflecting an increase in the average volume of such receivables.

Interest expense for this segment decreased 8.5% from ₩414 billion in 2012 to ₩379 billion in 2013. This decrease was primarily due to decreased funding costs for this segment in light of the lower interest rate environment in Korea in 2013.

Net fee and commission income attributable to this segment increased 17.1% from ₩158 billion in 2012 to ₩185 billion in 2013, which resulted mainly from an increase in fee and commission income from check cards.

 

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Net other operating expense attributable to this segment decreased 53.0% from ₩83 billion in 2012 to ₩39 billion in 2013, primarily due to an increase in other operating income resulting from proceeds from sales of written-off credit card loans to the National Happiness Fund.

General and administrative expenses attributable to this segment increased 1.4% from ₩349 billion in 2012 to ₩354 billion in 2013, mainly due to an increase in salary expense.

Provision for credit losses increased 9.5% from ₩315 billion in 2012 to ₩345 billion in 2013, mainly reflecting a decrease in reversal of provisions primarily due to our sale of written-off credit card loans to the National Happiness Fund and an increase in impaired credit card balances due to a change in our charge-off policy in 2013 which increased the delinquency period for credit card balances before charge-off from three months to six months.

Net other non-operating expense attributable to this segment decreased 50.0% from ₩4 billion in 2012 to ₩2 billion in 2013, primarily due to a decrease in charitable donations by KB Kookmin Card.

Comparison of 2012 to 2011

Our profit before income tax for this segment decreased by 34.0% from ₩577 billion in 2011 to ₩381 billion in 2012.

Interest income from our credit card operations remained relatively constant at ₩1,388 billion in 2012 compared to ₩1,381 billion in 2011.

Interest expense for this segment decreased 13.8% from ₩480 billion in 2011 to ₩414 billion in 2012. This decrease was primarily due to decreased funding costs for this segment in light of the lower interest rate environment in Korea in 2012.

Net fee and commission income attributable to this segment decreased 34.7% from ₩242 billion in 2011 to ₩158 billion in 2012, which resulted mainly from an increase in credit card-related fee and commission expenses, principally reflecting increased marketing activities in 2012.

Net other operating expense attributable to this segment increased more than four-fold from ₩18 billion in 2011 to ₩83 billion in 2012, primarily as a result of a decrease in income from sales of charged-off credit card loans and receivables.

General and administrative expenses attributable to this segment increased 2.6% from ₩340 billion in 2011 to ₩349 billion in 2012, primarily due to an increase in salary expense.

Provision for credit losses increased 52.2% from ₩207 billion in 2011 to ₩315 billion in 2012, mainly reflecting increased delinquencies as well as decreased recoveries on charged-off credit card loans and receivables.

Net other non-operating expense attributable to this segment increased four-fold from ₩1 billion in 2011 to ₩4 billion in 2012, primarily due to an increase in charitable donations by KB Kookmin Card.

Investment and Securities Operations

This segment consists primarily of securities brokerage, investment banking, securities investment and trading and other capital markets services conducted by KB Investment & Securities. In March 2011, KB Investment & Securities was merged with KB Futures, with KB Investment & Securities as the surviving entity.

 

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Accordingly, the income statement data for this segment for 2011 reflect the results of operations of KB Futures for the period in 2011 following the merger. The following table shows, for the periods indicated, our income statement data for this segment:

 

     Year Ended December 31,     Percentage Change  
     2011 (1)     2012 (1)  (2)     2013 (1)  (2)     2012/2011     2013/2012  
     (in billions of Won)     (%)  

Income statement data

          

Interest income

   42      38      41        (9.5 )%      7.9

Interest expense

     (29     (19     (17     (34.5     (10.5

Net fee and commission income

     83        86        76        3.6        (11.6

Net gain (loss) from financial assets and liabilities at fair value through profit or loss

     50        39        19        (22.0     (51.3

Net other operating income (expense)

     14        5        1        (64.3     (80.0

General and administrative expenses

     (118     (118     (96     —          (18.6

Provision (reversal of provision) for credit losses

     (6     (4     (5     (33.3     25.0   

Net other non-operating revenue (expense)

     (2     (3     (2     50.0        (33.3
  

 

 

   

 

 

   

 

 

     

Profit before income tax

     34        24        17        (29.4     (29.2

Tax income (expense) (3)

     (8     (6     (5     (25.0     (16.7
  

 

 

   

 

 

   

 

 

     

Profit for the year

   26      18      12        (30.8 )%      (33.3 )% 
  

 

 

   

 

 

   

 

 

     

 

(1) 

The amounts for 2013 reflect a change in our accounting policies pursuant to the amendments to IAS 19, Employee Benefits, which are effective beginning in 2013. Corresponding amounts for 2011 and 2012 have been restated to retroactively apply such change. See “—Overview—Changes in Accounting Policies.”

(2) 

The amounts for 2013 reflect a change in our accounting policies pursuant to the adoption of IFRS 10, Consolidated Financial Statements, which is effective beginning in 2013. Corresponding amounts for 2012 (but not for 2011) have been restated to retroactively apply such change. See “—Overview—Changes in Accounting Policies.”

(3) 

Represents income tax attributable to KB Investment & Securities.

Comparison of 2013 to 2012

Our profit before income tax for this segment decreased 29.2% from ₩24 billion in 2012 to ₩17 billion in 2013.

Interest income from this segment increased 7.9% from ₩38 billion in 2012 to ₩41 billion in 2013. This increase was primarily due to an increase in the average volume of available-for-sale financial assets.

Interest expense for this segment decreased 10.5% from ₩19 billion in 2012 to ₩17 billion in 2013, which mainly reflected a general decrease in the average cost of our debts in light of the lower interest rate environment in Korea, which was enhanced by a decrease in the average volume of call money and customers’ deposits.

Net fee and commission income attributable to this segment decreased 11.6% from ₩86 billion in 2012 to ₩76 billion in 2013, principally as a result of a decrease in commissions relating to securities underwriting activities.

Net gain from financial assets and liabilities at fair value through profit or loss attributable to this segment decreased 51.3% from ₩39 billion in 2012 to ₩19 billion in 2013, principally as a result of a decrease in net gain on financial assets held-for-trading and derivatives held-for-trading.

Net other operating income attributable to this segment decreased 80.0% from ₩5 billion in 2012 to ₩1 billion in 2013, primarily as a result of a reversal of provisions for litigation in 2012 that was not repeated in 2013.

General and administrative expenses attributable to this segment decreased by 18.6% from ₩118 billion in 2012 to ₩96 billion and 2013, principally due to a decrease in performance-based salary expense.

 

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Provision for credit losses increased 25.0% from ₩4 billion in 2012 to ₩5 billion in 2013.

Net other non-operating expense attributable to this segment decreased 33.3% from ₩3 billion in 2012 to ₩2 billion in 2012.

Comparison of 2012 to 2011

Our profit before income tax for this segment decreased 29.4% from ₩34 billion in 2011 to ₩24 billion in 2012.

Interest income from this segment decreased 9.5% from ₩42 billion in 2011 to ₩38 billion in 2012. This decrease was primarily due to a decrease in the average volume of bonds purchased under repurchase agreements.

Interest expense for this segment decreased 34.5% from ₩29 billion in 2011 to ₩19 billion in 2012, which mainly reflected a general decrease in the average cost of our debts in light of the lower interest rate environment in Korea, which was enhanced by a decrease in the average volume of call money and bonds sold under repurchase agreements.

Net fee and commission income attributable to this segment increased 3.6% from ₩83 billion in 2011 to ₩86 billion in 2012, principally as a result of an increase in commissions relating to securities repurchase agreement activities.

Net gain from financial assets and liabilities at fair value through profit or loss attributable to this segment decreased 22.0% from ₩50 billion in 2011 to ₩39 billion in 2012, principally as a result of a decrease in net gains on securities and derivatives held-for-trading.

Net other operating income attributable to this segment decreased 64.3% from ₩14 billion in 2011 to ₩5 billion in 2012, primarily as a result of a decrease in other operating income from certain non-financial operations that were consolidated in 2011 but not in 2012.

General and administrative expenses attributable to this segment remained relatively constant at ₩118 billion in 2011 and 2012.

Provision for credit losses decreased 33.3% from ₩6 billion in 2011 to ₩4 billion in 2012, mainly reflecting an increase in reversal of provisions relating to loans purchased.

Net other non-operating expense attributable to this segment increased from ₩2 billion in 2011 to ₩3 billion in 2012.

 

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Life Insurance Operations

This segment consists of life insurance and wealth management services provided by KB Life Insurance. We currently hold a 100.0% voting interest in KB Life Insurance, which is accounted for as a consolidated subsidiary under IFRS as issued by the IASB. The following table shows, for the periods indicated, our income statement data for this segment:

 

     Year Ended December 31,     Percentage Change  
     2011 (1)     2012 (1)     2013 (1)     2012/2011     2013/2012  
     (in billions of Won)     (%)  

Income statement data

          

Interest income

   162      192      200        18.5     4.2

Interest expense

     —          —          —          —          —     

Net gain (loss) from financial assets and liabilities at fair value through profit or loss

     —          8        18        N/M  (2)      125.0   

Net other operating income (expense)

     (95     (132     (154     38.9        16.7   

General and administrative expenses

     (42     (45     (51     7.1        13.3   

Provision (reversal of provision) for credit losses

     (1     —          (1     (100.0     N/M  (2) 

Net other non-operating revenue (expense)

     —          (1     —          N/M  (2)      (100.0
  

 

 

   

 

 

   

 

 

     

Profit before income tax

     24        22        12        (8.3     (45.5

Tax income (expense) (3)

     (5     (5     (3     —          (40.0
  

 

 

   

 

 

   

 

 

     

Profit for the year

   19      17      9        (10.5 )%      (47.1 )% 
  

 

 

   

 

 

   

 

 

     

 

(1) 

The amounts for 2013 reflect a change in our accounting policies pursuant to the amendments to IAS 19, Employee Benefits, which are effective beginning in 2013. Corresponding amounts for 2011 and 2012 have been restated to retroactively apply such change. See “—Overview—Changes in Accounting Policies.”

(2) 

“N/M” means not meaningful.

(3) 

Represents income tax attributable to KB Life Insurance.

Comparison of 2013 to 2012

Our profit before income tax for this segment decreased 45.5% from ₩22 billion in 2012 to ₩12 billion in 2013.

Interest income for this segment increased 4.2% from ₩192 billion in 2012 to ₩200 billion in 2013, primarily due to an increase in the average volume of held-to-maturity debt securities held by KB Life Insurance, particularly government agency debt securities.

Net gain from financial assets and liabilities at fair value through profit or loss attributable to this segment increased 125.0% from ₩8 billion in 2012 to ₩18 billion in 2013, which mainly reflected an increase in gains on sales of beneficiary certificates.

Net other operating expense attributable to this segment increased 16.7% from ₩132 billion in 2012 to ₩154 billion in 2013, principally due to an increase in the amortization expense of deferred acquisition costs.

General and administrative expenses attributable to this segment increased 13.3% from ₩45 billion in 2012 to ₩51 billion in 2013, primarily due to an increase in expenses relating to tax and dues.

Provision for credit losses changed from nil in 2012 to ₩1 billion in 2013.

Net other non-operating expense attributable to this segment decreased from ₩1 billion in 2012 to nil in 2013.

 

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Comparison of 2012 to 2011

Our profit before income tax for this segment decreased 8.3% from ₩24 billion in 2011 to ₩22 billion in 2012.

Interest income for this segment increased 18.5% from ₩162 billion in 2011 to ₩192 billion in 2012, primarily due to an increase in the average volume of available-for-sale debt securities held by KB Life Insurance, particularly corporate debt securities and Korean treasury securities and government agency debt securities.

Net gain from financial assets and liabilities at fair value through profit or loss attributable to this segment changed from a gain of less than ₩1 billion in 2011 to a gain of ₩8 billion in 2012, which mainly reflected an increase in gains on sales of beneficiary certificates.

Net other operating expense attributable to this segment increased 38.9% from ₩95 billion in 2011 to ₩132 billion in 2012, principally due to increases in policy reserves relating to single premium life insurance products sold in 2012.

General and administrative expenses attributable to this segment increased 7.1% from ₩42 billion in 2011 to ₩45 billion in 2012, primarily due to increased salaries and overhead expenses resulting from the opening of new branch offices in 2012.

Provision for credit losses changed from provisions of ₩1 billion in 2011 to less than ₩1 billion in 2012.

Net other non-operating expense attributable to this segment increased from less than ₩1 billion in 2011 to ₩1 billion in 2012.

Other

“Other” includes the operations of our holding company and all of our subsidiaries that were consolidated under IFRS as issued by the IASB as of December 31, 2013 except Kookmin Bank, KB Kookmin Card, KB Investment & Securities and KB Life Insurance, including principally KB Asset Management, KB Real Estate Trust, KB Investment, KB Credit Information, KB Data System, KB Savings Bank (commencing in 2012) and Yehansoul Mutual Savings Bank (commencing in 2013). See “—Overview—Acquisitions.” The following table shows, for the periods indicated, our income statement data for this segment:

 

     Year Ended December 31,     Percentage Change  
     2011  (1)     2012 (1)  (2)     2013 (1)  (2)     2012/2011     2013/2012  
     (in billions of Won)     (%)  

Income statement data

          

Interest income

   66      123      106        86.4     (13.8 )% 

Interest expense

     (49     (47     (25     (4.1     (46.8

Net fee and commission income

     96        97        118        1.0        21.6   

Net gain (loss) from financial assets and liabilities at fair value through profit or loss

     (4     25        29        N/M  (3)      16.0   

Net other operating income

     54        37        40        (31.5     8.1   

General and administrative expenses

     (113     (133     (142     17.7        6.8   

Provision (reversal of provision) for credit losses

     (8     6        (28     N/M  (3)      N/M  (3) 

Share of profit of associates

     2               (38     (100.0     N/M  (3) 

Net non-operating revenue (expense)

     (85     (45     31        (47.1     N/M  (3) 
  

 

 

   

 

 

   

 

 

     

Profit (loss) before income tax

     (41     63        91        N/M  (3)      44.4   

Tax income (expense) (4)

     (4     (15     (30     275.0        100.0   
  

 

 

   

 

 

   

 

 

     

Profit (loss) for the year

   (45   48      61        N/M  (3)      27.1
  

 

 

   

 

 

   

 

 

     

 

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(1) 

The amounts for 2013 reflect a change in our accounting policies pursuant to the amendments to IAS 19, Employee Benefits, which are effective beginning in 2013. Corresponding amounts for 2011 and 2012 have been restated to retroactively apply such change. See “—Overview—Changes in Accounting Policies.”

(2) 

The amounts for 2013 reflect a change in our accounting policies pursuant to the adoption of IFRS 10, Consolidated Financial Statements, which is effective beginning in 2013. Corresponding amounts for 2012 (but not for 2011) have been restated to retroactively apply such change. See “—Overview—Changes in Accounting Policies.”

(3) 

“N/M” means not meaningful.

(4) 

Represents income tax attributable to our holding company and all of our subsidiaries that were consolidated under IFRS as issued by the IASB except Kookmin Bank, KB Kookmin Card, KB Investment & Securities and KB Life Insurance.

Comparison of 2013 to 2012

Our profit before income tax for this segment increased 44.4% from ₩63 billion in 2012 to ₩91 billion in 2013.

Interest income attributable to this segment decreased 13.8% from ₩123 billion in 2012 to ₩106 billion in 2013. This decrease was primarily due to a decrease in the average volume of deposits attributable to KB Savings Bank.

Interest expense attributable to this segment decreased 46.8% from ₩47 billion in 2012 to ₩25 billion in 2013, principally reflecting a decrease in the average volume of time deposits attributable to KB Savings Bank.

Net fee and commission income attributable to this segment increased 21.6% from ₩97 billion in 2012 to ₩118 billion in 2013, mainly as the result of an increase in fees received by KB Asset Management.

Net gain from financial assets and liabilities at fair value through profit or loss attributable to this segment increased 16.0% from ₩25 billion in 2012 to ₩29 billion in 2013, principally due to an increase in gain on valuation of derivatives held by KB Mezzanine Private Securities Fund 1.

Net other operating income attributable to this segment increased 8.1% from ₩37 billion in 2012 to ₩40 billion in 2013, primarily as a result of an increase in other operating income from sales of non-performing loans held by KB Savings Bank.

General and administrative expenses attributable to this segment increased 6.8% from ₩133 billion in 2012 to ₩142 billion in 2013, which mainly reflected an increase in salary expense for KB Asset Management and the inclusion of Yehansoul Savings Bank in this segment in 2013.

Provision for credit losses attributable to this segment changed from a reversal of provision of ₩6 billion in 2012 to a provision of ₩28 billion in 2013, principally due to an increase in provision for credit losses relating to the trust account lending activities of KB Real Estate Trust.

Share of profit of associates attributable to this segment changed from nil in 2012 to a loss of ₩38 billion in 2013, primarily due to an increase in impairment losses attributable to this segment.

Net other non-operating revenue (expense) attributable to this segment changed from an expense of ₩45 billion in 2012 to a revenue of ₩31 billion in 2013, primarily due to an increase in other non-operating revenue from KB Asset Management.

Comparison of 2012 to 2011

Our profit before income tax for this segment was ₩63 billion in 2012 compared to a loss before income tax of ₩41 billion in 2011.

 

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Interest income attributable to this segment increased 86.4% from ₩66 billion in 2011 to ₩123 billion in 2012. This increase was primarily due to the inclusion of KB Savings Bank in this segment from 2012.

Interest expense attributable to this segment decreased 4.1% from ₩49 billion in 2011 to ₩47 billion in 2012, principally reflecting a decrease in interest expense at our holding company level resulting from the repayment of outstanding debentures and borrowings by our holding company in 2012, the effect of which was offset in part by the inclusion of KB Savings Bank in this segment from 2012.

Net fee and commission income attributable to this segment remained relatively constant at ₩97 billion in 2012 compared to ₩96 billion in 2011.

Net gain from financial assets and liabilities at fair value through profit or loss attributable to this segment changed from a net loss of ₩4 billion in 2011 to a net gain of ₩25 billion in 2012, which mainly reflected the inclusion of KB Mezzanine Private Securities Fund 1 in this segment from 2012.

Net other operating income attributable to this segment decreased 31.5% from ₩54 billion in 2011 to ₩37 billion in 2012, primarily as a result of a decrease in gain on disposal of available-for-sale equity securities held by KB Investment.

General and administrative expenses attributable to this segment increased 17.7% from ₩113 billion in 2011 to ₩133 billion in 2012, which mainly reflected the inclusion of KB Savings Bank in this segment from 2012.

Provision for credit losses attributable to this segment changed from a provision of ₩8 billion in 2011 to a reversal of provision of ₩6 billion in 2012, principally due to an increase in reversal of KB Real Estate Trust’s provision for credit losses resulting from continuing improvements in the asset quality of trust accounts held by KB Real Estate Trust, as well as reversal of provision for credit losses relating to KB Savings Bank which reflected collections made on KB Savings Bank’s non-performing loans in 2012.

Share of profit of associates attributable to this segment decreased by ₩2 billion from 2011 to 2012.

Net other non-operating expense attributable to this segment decreased 47.1% from ₩85 billion in 2011 to ₩45 billion in 2012, primarily due to the recognition of significant impairment losses in 2011 on membership interests held by our holding company which was not repeated in 2012.

 

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Item 5.B. Liquidity and Capital Resources

Financial Condition

Assets

The following table sets forth, as of the dates indicated, the principal components of our assets:

 

     As of December 31,     Percentage Change  
     2011     2012  (1)     2013  (1)     2012/2011     2013/2012  
     (in billions of Won)     (%)  

Cash and due from financial institutions

   9,178      10,593      14,793        15.4     39.6

Financial assets at fair value through profit or loss

     6,326        9,560        9,329        51.1        (2.4

Derivative financial assets

     2,449        2,091        1,819        (14.6     (13.0

Financial investments

     35,432        36,467        34,849        2.9        (4.4

Loans:

          

Loans to banks

     3,988        4,398        6,335        10.3        44.0   
  

 

 

   

 

 

   

 

 

     

Loans to customers other than banks:

          

Loans in Won

     184,211        185,889        189,516        0.9        2.0   

Loans in foreign currencies

     4,141        3,538        3,055        (14.6     (13.7

Domestic import usance bills

     4,278        3,595        2,978        (16.0     (17.2

Off-shore funding loans

     893        754        670        (15.6     (11.1

Call loans

     1,093        1,193        697        9.1        (41.6

Bills bought in Won

     104        30        14        (71.2     (53.3

Bills bought in foreign currencies

     2,723        2,522        1,588        (7.4     (37.0

Guarantee payments under payment guarantee

     57        45        38        (21.1     (15.6

Credit card receivables in Won

     12,420        11,871        11,782        (4.4     (0.7

Credit card receivables in foreign currencies

     1        3        2        200.0        (33.3

Bonds purchased under repurchase agreements

     830        1,251        1,683        50.7        34.5   

Privately placed bonds

     816        604        733        (26.0     21.4   

Factored receivables

     —          1,221        2,771        N/M  (2)      126.9   
  

 

 

   

 

 

   

 

 

     

Total loans to customers other than banks

     211,567        212,516        215,527        0.4        1.4   

Less:

          

Allowances for loan losses

     (3,448     (3,269     (2,861     (5.2     (12.5
  

 

 

   

 

 

   

 

 

     

Total loans, net

     212,107        213,645        219,001        0.7        2.5   

Property and equipment

     3,186        3,100        3,061        (2.7     (1.3

Other assets (3)

     8,923        10,295        8,986        15.4        (12.7
  

 

 

   

 

 

   

 

 

     

Total assets

   277,601      285,751      291,838        2.9     2.1
  

 

 

   

 

 

   

 

 

     

 

(1) 

The amounts as of December 31, 2013 reflect a change in our accounting policies pursuant to the adoption of IFRS 10, Consolidated Financial Statements, which is effective beginning in 2013. Corresponding amounts as of December 31, 2012 (but not as of December 31, 2011) have been restated to retroactively apply such change. See “—Overview—Changes in Accounting Policies.”

(2) 

“N/M” means not meaningful.

(3) 

Includes investments in associates and joint ventures, investment properties, intangible assets, deferred income tax assets, assets held for sale and other assets.

For further information on our assets, see “Item 4.B. Business Overview—Assets and Liabilities.”

 

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Comparison of 2013 to 2012

Our total assets increased 2.1% from ₩285,751 billion as of December 31, 2012 to ₩291,838 billion as of December 31, 2013, principally due to a 2.5% increase in loans from ₩213,645 billion as of December 31, 2012 to ₩219,001 billion as of December 31, 2013 and a 39.6% increase in cash and due from financial institutions from ₩10,593 billion as of December 31, 2012 to ₩14,793 billion as of December 31, 2013. The effect of these increases was partially offset by a 4.4% decrease in financial investments from ₩36,467 billion as of December 31, 2012 to ₩34,849 billion as of December 31, 2013 and a 12.7% decrease in other assets from ₩10,295 billion as of December 31, 2012 to ₩8,986 billion as of December 31, 2013.

Comparison of 2012 to 2011

Our total assets increased 2.9% from ₩277,601 billion as of December 31, 2011 to ₩285,751 billion as of December 31, 2012, principally due to a 51.1% increase in financial assets at fair value through profit or loss from ₩6,326 billion as of December 31, 2011 to ₩9,560 billion as of December 31, 2012, a 0.7% increase in loans from ₩212,107 billion as of December 31, 2011 to ₩213,645 billion as of December 31, 2012, a 15.4% increase in cash and due from financial institutions from ₩9,178 billion as of December 31, 2011 to ₩10,593 billion as of December 31, 2012 and a 15.4% increase in other assets from ₩8,923 billion as of December 31, 2011 to ₩10,295 billion as of December 31, 2012. The effect of these increases was partially offset by a 14.6% decrease in derivative financial assets from ₩2,449 billion as of December 31, 2011 to ₩2,091 billion as of December 31, 2012.

Liabilities and Equity

The following table sets forth, as of the dates indicated, the principal components of our liabilities and our equity:

 

     As of December 31,      Percentage Change  
     2011 (1)      2012 (1) (2)      2013 (1) (2)      2012/2011     2013/2012  
     (in billions of Won)      (%)  

Liabilities:

             

Financial liabilities at fair value through profit or loss

   1,388       1,851       1,115         33.4     (39.8 )% 

Deposits

     190,337         197,346         200,882         3.7        1.8   

Debts

     16,824         15,965         14,101         (5.1     (11.7

Debentures

     27,070         24,270         27,040         (10.3     11.4   

Provisions

     798         670         678         (16.0     1.2   

Other liabilities (3)

     18,084         20,886         22,369         15.5        7.1   
  

 

 

    

 

 

    

 

 

      

Total liabilities

     254,501         260,988         266,185         2.5        2.0   
  

 

 

    

 

 

    

 

 

      

Equity:

             

Capital stock

     1,932         1,932         1,932         0.0        0.0   

Capital surplus

     15,842         15,840         15,855         (0.0     0.1   

Accumulated other comprehensive income

     168         295         336         75.6        13.9   

Retained earnings

     4,976         6,501         7,530         30.6        15.8   
  

 

 

    

 

 

    

 

 

      

Equity attributable to stockholders

     22,918         24,568         25,653         7.2        4.4   

Non-controlling interests

     182         195         —           7.1        (100.0
  

 

 

    

 

 

    

 

 

      

Total equity

     23,100         24,763         25,653         7.2        3.6   
  

 

 

    

 

 

    

 

 

      

Total liabilities and equity

   277,601       285,751       291,838         2.9     2.1
  

 

 

    

 

 

    

 

 

      

 

(1) 

The amounts as of December 31, 2013 reflect a change in our accounting policies pursuant to the amendments to IAS 19, Employee Benefits, which are effective beginning in 2013. Corresponding amounts as of December 31, 2011 and 2012 have been restated to retroactively apply such change. See “—Overview—Changes in Accounting Policies.”

 

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(2) 

The amounts as of December 31, 2013 reflect a change in our accounting policies pursuant to the adoption of IFRS 10, Consolidated Financial Statements, which is effective beginning in 2013. Corresponding amounts as of December 31, 2012 (but not as of December 31, 2011) have been restated to retroactively apply such change. See “—Overview—Changes in Accounting Policies.”

(3) 

Includes derivative financial liabilities, current income tax liabilities, deferred income tax liabilities, defined benefit liabilities and other liabilities.

Comparison of 2013 to 2012

Our total liabilities increased 2.0% from ₩260,988 billion as of December 31, 2012 to ₩266,185 billion as of December 31, 2013. The increase was primarily due to increases in deposits and debentures. Our deposits increased 1.8% from ₩197,346 billion as of December 31, 2012 to ₩200,882 billion as of December 31, 2013, mainly as a result of an increase in demand deposits. Our debentures increased 11.4% from ₩24,270 billion as of December 31, 2012 to ₩27,040 billion as of December 31, 2013, principally due to an increase in our debentures in Won and an increase in discount or premium on debentures in Won.

Our total equity increased by 3.6% from ₩24,763 billion as of December 31, 2012 to ₩25,653 billion as of December 31, 2013. This increase resulted principally from an increase in our retained earnings, which was attributable to the profit we generated in 2013.

Comparison of 2012 to 2011

Our total liabilities increased 2.5% from ₩254,501 billion as of December 31, 2011 to ₩260,988 billion as of December 31, 2012. The increase was primarily due to increases in deposits and other liabilities. Our deposits increased 3.7% from ₩190,337 billion as of December 31, 2011 to ₩197,346 billion as of December 31, 2012, mainly as a result of an increase in demand deposits. Our other liabilities increased 15.5% from ₩18,084 billion as of December 31, 2011 to ₩20,886 billion as of December 31, 2012, principally due to an increase in liabilities related to our life insurance business (mainly policy reserves).

Our total equity increased by 7.2% from ₩23,100 billion as of December 31, 2011 to ₩24,763 billion as of December 31, 2012. This increase resulted principally from an increase in our retained earnings, which was attributable to the profit we generated in 2012.

Liquidity

Our primary source of funding has historically been and continues to be deposits. Deposits amounted to ₩190,337 billion, ₩197,346 billion and ₩200,882 billion as of December 31, 2011, 2012 and 2013, which represented approximately 81.3%, 83.1% and 83.0% of our total funding, respectively. We have been able to use customer deposits to finance our operations generally, including meeting a portion of our liquidity requirements. Although the majority of deposits are short-term, it has been our experience that the majority of our depositors generally roll over their deposits at maturity, thus providing us with a stable source of funding. However, in the event that a substantial number of our depositors do not roll over their deposits or otherwise decide to withdraw their deposited funds, we would need to place increased reliance on alternative sources of funding, some of which may be more expensive than customer deposits, in order to finance our operations. See “Item 3.D. Risk Factors—Risks relating to liquidity and capital management—Our funding is highly dependent on short-term deposits, which dependence may adversely affect our operations.” In particular, we may increase our utilization of alternative funding sources such as short-term borrowings and cash and cash equivalents (including funds from maturing loans), as well as liquidating our positions in financial assets and using the proceeds to fund parts of our operations, as necessary.

We also obtain funding through debentures and debts to meet our liquidity needs. Debentures represented 11.6%, 10.2% and 11.2% of our total funding as of December 31, 2011, 2012 and 2013, respectively. Debts represented 7.2%, 6.7% and 5.8% of our total funding as of December 31, 2011, 2012 and 2013, respectively. For further information on our sources of funding, see “Item 4.B. Business Overview—Assets and Liabilities—Funding.”

 

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The Financial Services Commission of Korea requires each financial holding company and bank in Korea to maintain specific Won and foreign currency liquidity ratios. These ratios require us and Kookmin Bank to keep the ratio of liquid assets to liquid liabilities above certain minimum levels. For a description of these requirements, see “Item 4.B. Business Overview—Supervision and Regulation—Principal Regulations Applicable to Financial Holding Companies—Liquidity” and “Item 4.B. Business Overview—Supervision and Regulation—Principal Regulations Applicable to Banks—Liquidity.”

We are exposed to liquidity risk arising from withdrawals of deposits and maturities of our debentures and debts, as well as the need to fund our lending, trading and investment activities and the management of our trading positions. The goal of liquidity management is for us to be able, even under adverse conditions, to meet all of our liability repayments on time and fund all investment opportunities. For an explanation of how we manage our liquidity risk, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Liquidity Risk Management.”

We are a financial holding company, and substantially all of our operations are in our subsidiaries. Accordingly, we rely on distributions from our subsidiaries, direct borrowings and issuances of debt and equity securities to fund our liquidity obligations. We received aggregate dividends of nil, ₩688 billion and ₩282 billion from our subsidiaries in 2011, 2012 and 2013, respectively. See “Item 3.D. Risk Factors—Risks relating to our financial holding company structure and strategy.”

Contractual Cash Obligations

The following table sets forth our contractual cash obligations (excluding short-term borrowings) as of December 31, 2013.

 

     Payments Due by Period  
     Total      1 Year or
Less
     1-3
Years
     3-5
Years
     More
Than
5 Years
 
     (in billions of Won)  

Long-term borrowing obligations (1) (2)

   37,357       14,843       12,830       4,605       5,079   

Operating lease obligations (3)

     230         121         88         21         —     

Capital lease obligations

     2         2         —           —           —     

Pension obligations

     181         181         —           —           —     

Deposits (2) (4)

     138,590         127,309         7,558         1,045         2,678   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   176,360       142,456       20,476       5,671       7,757   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Includes debt and debentures with original maturities of one year or more.

(2) 

Includes estimated future interest payments, which have been estimated using contractual interest rates and scheduled contractual maturities of the outstanding debt obligations and borrowings as of December 31, 2013. In order to calculate future interest payments on debt with floating rates, we used contractual interest rates as of December 31, 2013.

(3) 

This line item is not included within our consolidated statements of financial position.

(4) 

Excluding demand deposits.

 

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Commitments and Guarantees

The following table sets forth our commitments and guarantees as of December 31, 2013. These commitments and guarantees are not included within our consolidated statements of financial position.

 

     Payments Due by Period  
     Total      1 Year
or Less
     1-3
Years
     3-5
Years
     More
Than
5 Years
 
     (in billions of Won)  

Financial guarantees (1)

   3,097       767       2,206       124       —     

Confirmed acceptances and guarantees

     5,764         4,290         1,018         262         194   

Commitments

     95,422         94,176         848         284         114   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   104,283       99,233       4,072       670       308   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Includes ₩2,673 billion of irrevocable commitments to provide contingent liquidity credit lines to special purpose entities for which we serve as the administrator. See Note 39 of the notes to our consolidated financial statements.

Capital Adequacy

Kookmin Bank is subject to capital adequacy requirements of the Financial Services Commission applicable to Korean banks. The requirements applicable prior to December 2013 were formulated based on Basel II, which was first published by the Basel Committee on Banking Supervision, Bank for International Settlements in 2004. The requirements applicable commencing in December 2013 pursuant to amended Financial Services Commission regulations promulgated in July 2013 were formulated based on Basel III, which was first introduced by the Basel Committee on Banking Supervision, Bank for International Settlements in December 2009. Under the amended Financial Services Commission regulations, all banks in Korea are required to maintain certain minimum ratios of Tier I common equity capital, total Tier I capital and total Tier I and Tier II capital to risk-weighted assets. See “Item 4.B. Business Overview—Supervision and Regulation—Principal Regulations Applicable to Banks—Capital Adequacy.”

 

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As of December 31, 2013, Kookmin Bank’s total Tier I and Tier II capital adequacy ratio was 15.42%.

The following table sets forth a summary of Kookmin Bank’s capital and capital adequacy ratios as of December 31, 2011 and 2012 based on Basel II and as of December 31, 2013 based on Basel III.

 

     As of December 31,  
     2011 (1)     2012 (1)     2013  
    

(in billions of Won,

except percentages)

 

Tier I capital:

   14,954      16,141      18,502   

Tier I common equity capital

     —          —          18,502   

Paid-in capital

     2,022        2,022        2,022   

Capital reserves

     5,043        5,042        5,220   

Retained earnings

     8,542        9,622        11,237   

Non-controlling interests in consolidated subsidiaries

     8        1        —     

Others

     (661     (546     23   

Additional Tier I capital

     —          —          —     

Tier II capital:

     4,714        5,250        4,122   

Revaluation reserves

     177        177        —     

Allowances for credit losses (2)

     1,092        987        843   

Hybrid debt

     136        73        43   

Subordinated debt

     2,943  (3)      3,611  (3)      3,236   

Valuation gain on investment securities

     66        83        —     

Others

     300        319        —     

Total core and supplementary capital

     19,668        21,391        22,624   

Risk-weighted assets

     145,185        148,544        146,743   

Credit risk:

      

On-balance sheet

     127,489        127,462        125,044   

Off-balance sheet

     5,340        6,622        6,787   

Market risk

     2,193        4,693        4,012   

Operational risk

     10,163        9,767        10,900   

Total Tier I and Tier II capital adequacy ratio

     13.55     14.40     15.42

Tier I capital adequacy ratio

     10.30        10.87        12.61   

Tier I common equity capital adequacy ratio

     —          —          12.61   

Tier II capital adequacy ratio

     3.25        3.53        2.81   

 

(1) 

With effect from December 1, 2013, the Financial Services Commission adopted amended guidelines that implemented capital adequacy requirements in Korea based on Basel III. Amounts and ratios as of December 31, 2011 and 2012 were computed in accordance with previously applicable guidelines based on Basel II and therefore are not directly comparable to corresponding amounts and ratios as of December 31, 2013.

(2) 

Under the standardized approach, allowances for credit losses in respect of credits classified as normal or precautionary are used to calculate Tier II capital only to the extent they represent up to 1.25% of credit risk-weighted assets. Under the internal ratings-based approach, allowances for credit losses, less estimated losses, are used to calculate Tier II capital only to the extent they represent up to 0.6% of credit risk-weighted assets.

(3) 

Subordinated debt up to an amount equal to 50% of Tier I capital may be used in the calculation of Tier II capital.

In addition, we, as a bank holding company, are required to maintain certain minimum capital adequacy ratios pursuant to applicable regulations of the Financial Services Commission. See “Item 4.B. Business Overview—Supervision and Regulation—Principal Regulations Applicable to Financial Holding Companies—Capital Adequacy.”

 

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The following table sets forth a summary of our consolidated capital adequacy ratio as of December 31, 2013, based on IFRS and applicable regulatory reporting standards:

 

     As of December 31,  
     2013  
     (in billions of Won,
except percentages)
 

Tier I capital

  

Tier I common equity capital

   22,694   

Additional Tier I capital

     —     
  

 

 

 

Total Tier I capital

   22,694   

Tier II capital

   4,603   
  

 

 

 

Risk-weighted assets

   177,514   
  

 

 

 

Total Tier I and Tier II capital adequacy ratio

     15.38

Tier I capital adequacy ratio

     12.78

Tier I common equity capital adequacy ratio

     12.78

Tier II capital adequacy ratio

     2.60

Recent Accounting Pronouncements

See Note 2 of the notes to our consolidated financial statements included elsewhere in this annual report for a description of recent accounting pronouncements under IFRS as issued by the IASB that have been issued but are not yet effective.

 

Item 5.C. Research and Development, Patents and Licenses, etc.

Not applicable.

 

Item 5.D. Trend Information

These matters are discussed under Item 5.A. and Item 5.B. above where relevant.

 

Item 5.E. Off-Balance Sheet Arrangements

See “Item 5B. Liquidity and Capital Resources—Financial Condition—Contractual Cash Obligations” and “Item 5B. Liquidity and Capital Resources—Financial Condition—Commitments and Guarantees.”

 

Item 5.F. Tabular Disclosure of Contractual Obligations

See “Item 5B. Liquidity and Capital Resources—Financial Condition—Contractual Cash Obligations.”

 

Item 5.G. Safe Harbor

See “Forward-Looking Statements.”

 

Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

Item 6.A. Directors and Senior Management

Board of Directors

Our board of directors, currently consisting of one executive director and nine non-executive directors, has the ultimate responsibility for the management of our affairs.

 

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Our articles of incorporation provide that:

 

   

we may have no more than 30 directors;

 

   

the number of executive directors must be less than 50% of the total number of directors; and

 

   

we have five or more non-executive directors.

The term of office for each director is renewable and is subject to the Korean Commercial Code, the Financial Holding Company Act and related regulations.

Our board of directors meets on a regular basis to discuss and resolve material corporate matters. Additional extraordinary meetings may also be convened at the request of any director or any committee that serves under the board of directors.

The names and positions of our directors are set forth below. The business address of all of the directors is our registered office at 84, Namdaemoon-ro, Jung-gu, Seoul 100-703, Korea.

Executive Director

The table below identifies our executive director as of the date of this annual report:

 

Name

  Date of Birth  

Position

  Director Since     End of Term  

Young-Rok Lim

  March 30, 1955   Chairman and Chief Executive Officer     March 25, 2011        July 12, 2016   

Our executive director does not have any significant activities outside KB Financial Group.

Young-Rok Lim is our chairman and chief executive officer. He previously served as our president, the vice minister and deputy minister of the former Ministry of Finance and Economy and the director-general of the Financial Policy Bureau at the former Ministry of Finance and Economy. He received a B.A. in literature and an M.A. in public administration from Seoul National University, an M.A. in economics from Vanderbilt University and a Ph.D. in economics from Hanyang University.

Non-executive Directors

Our non-executive directors are selected based on the candidates’ talents and skills in diverse areas, such as finance, economy, management and accounting. All nine non-executive directors below were nominated by our Non-executive Director Nominating Committee and approved by our shareholders.

The table below identifies our non-executive directors as of the date of this annual report:

 

Name

  

Date of Birth

  

Position

  

Director Since

   Year Term Ends  (1)

Kyung Jae Lee

   January 30, 1939    Non-executive Director    March 26, 2010    2015

Young Jin Kim

   December 11, 1949    Non-executive Director    March 25, 2011    2015

Kun Ho Hwang

   January 23, 1951    Non-executive Director    March 23, 2012    2015

Jong Cheon Lee

   February 3, 1951    Non-executive Director    March 25, 2011    2015

Jae Ho Cho

   January 18, 1955    Non-executive Director    March 28, 2014    2016

Seung Hee Koh

   June 26, 1955    Non-executive Director    March 26, 2010    2015

Young Kwa Kim

   December 13, 1955    Non-executive Director    March 22, 2013    2015

Myung Jig Kim

   October 19, 1959    Non-executive Director    March 28, 2014    2016

Sung Hwan Shin

   February 17, 1963    Non-executive Director    March 28, 2014    2016

 

(1) 

The date on which each term will end will be the date of the general stockholders’ meeting in the relevant year unless otherwise specified.

 

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Kyung Jae Lee has been a non-executive director and the chairman of our board of directors since March 2010. He previously served as the chief executive officer of the Industrial Bank of Korea, the chief executive officer of the Korea Financial Telecommunications & Clearings Institute and director and statutory auditor of the Bank of Korea. He received a B.A. in economics from Seoul National University, an M.A. in economics from New York University and a Ph.D. in economics from Kookmin University.

Young Jin Kim has been a non-executive director since March 2011. He is currently a professor at Seoul National University. He previously served as an outside director of Samsung Asset Management, director of the Korea Exchange and the president of the Korea Finance Association. He received a B.A. in business administration from Seoul National University, an M.B.A. from Columbia University and a D.B.A. in finance from Indiana Graduate School of Business.

Kun Ho Hwang has been a non-executive director since March 2012. He was previously the chairman of the Korea Financial Investment Association, the chief executive officer of Meritz Securities Co., Ltd. and the deputy president of Daewoo Securities Co., Ltd. He received a B.A. in business administration from Seoul National University and an M.A. in economics from Rutgers University.

Jong Cheon Lee has been a non-executive director since March 2011. He is currently a professor at Soongsil University. He was previously the chairman of the Korea Accounting Association, a non-standing director of Korea Gas Corporation and an advisory member at the former Ministry of Finance and Economy. He received a B.A. and an M.A. in business administration from Seoul National University and a Ph.D. in accounting from the University of Illinois.

Jae Ho Cho has been a non-executive director since March 2014. He is currently a professor at Seoul National University and a director of Kyung Hee Foundation. He was previously the chair of the capital markets division of the Committee for Financial Development of Korea and an outside director of SK Telecom Co., Ltd. He received a B.A. in business administration from Seoul National University and an M.B.A. and a Ph.D. in finance from the Wharton School, University of Pennsylvania.

Seung Hee Koh has been a non-executive director since March 2010. He is currently a professor at Sookmyung Women’s University and an advisor at the Fair Trade Commission of Korea. He was previously the vice president of the Management Accounting Association of Korea and a non-executive director of the United Asset Management Company. He received a B.A. in business administration from Seoul National University, an M.B.A. from Indiana University and a Ph.D. in business administration from the University of Oklahoma.

Young Kwa Kim has been a non-executive director since March 2013. He previously served as the president and chief executive officer of the Korea Securities Finance Corporation, the commissioner of the Financial Intelligence Unit at the Financial Services Commission and the director general of the Economic Cooperation Bureau at the Ministry of Finance and Economy. He received a B.A. in economics from Seoul National University and a Ph.D. in economics from the University of Hawaii.

Myung Jig Kim has been a non-executive director since March 2014. He is currently the dean of the college of economics and finance and a professor at Hanyang University. He was previously the vice president of the Korean Finance Association, the president of the Korean Securities Association and a non-executive director of Meritz Financial Group, Inc. He received a B.A. in economics from Hanyang University and an M.A. and a Ph.D. in economics from the University of Washington.

Sung Hwan Shin has been a non-executive director since March 2014. He is currently a professor at Hongik University and a senior advisor at the Korea Fixed Income Research Institute and the head of fund evaluation at the Ministry of Strategy and Finance. He was previously the president of the Korea Pension Association. He received a B.A. in economics from Seoul National University and an M.B.A. and a Ph.D. in finance from the Sloan School of Management, Massachusetts Institute of Technology.

 

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Any director having an interest in a transaction that is subject to approval by the board of directors may not vote at the meeting during which the board approves the transaction.

Executive Officers

The table below identifies our senior executive officers who are not executive directors as of the date of this annual report:

 

Name

  

Date of Birth

  

Position

Woong-Won Yoon

   February 9, 1960    Deputy President; Chief Financial Officer

Yong Soo Kim

   February 11, 1961    Deputy President; Chief Public Relations Officer

Ki-Bum Lee

   November 24, 1957    Senior Managing Director; Chief Risk Officer

Jae Youl Kim

   October 16, 1969    Senior Managing Director; Chief Information Officer

Minkyu Chung

   February 7, 1970    Managing Director; Chief Compliance Officer

Sang-Hwan Kim

   May 2, 1960    Managing Director; Chief Human Resources Officer

Jong-Hee Yang

   June 10, 1961    Managing Director; Chief Information Security Officer and Head of Strategic Planning Department

Kyu Sul Choi

   August 16, 1960    Managing Director; Head of Investor Relations

Kyung Yup Cho

   September 9, 1961    Managing Director; Head of KB Research

None of the executive officers has any significant activities outside KB Financial Group.

Woong-Won Yoon is a deputy president and the chief financial officer. He currently also serves as an outside director of Kookmin Bank and KB Kookmin Card. He previously served as a general manager of our Financial Planning & Management Department and Strategic Planning Department and as the head of the Financial Management Division of Kookmin Bank. He received a B.A., M.A. and Ph.D. in business administration from Hanyang University.

Yong Soo Kim is a deputy president and the chief public relations officer. He previously served as a senior managing director at Daewoo Securities Co., Ltd. and KDB Asset Management Co., Ltd. and as a lecturer at the Korea Advanced Institute of Science and Technology. He received a B.A. in law from Korea University, an M.B.A. in international finance from Hankuk University of Foreign Studies and a Ph.D. in communications from Sungkyunkwan University.

Ki-Bum Lee is a senior managing director and the chief risk officer. He previously served as the head of Kookmin Bank’s audit department, chief compliance officer of Kookmin Bank and the head of Gyeongseo and Bucheon regional offices of Kookmin Bank. He received a B.A. in German language and literature from Sogang University.

Jae Youl Kim is a senior managing director and the chief information officer. He previously served as the deputy director of the Government Reform Department of the Ministry of Planning and Budget and the head of Kookmin Bank’s green financial division. He graduated from Sunchon High School.

Minkyu Chung is a managing director and the chief compliance officer. He previously served as a vice chief public prosecutor at the Supreme Prosecutors’ Office of Korea and a managing partner at the law firm of The Firm. He received a B.A. in law from Seoul National University.

Sang-Hwan Kim is a managing director and the chief human resources officer. He previously served as a general manager of Kookmin Bank’s Taebaek branch, Wonjudangu branch and Youngtong branch. He received a B.A. in business administration from Gangwon University.

Jong-Hee Yang is a managing director, the chief information security officer and the head of the Strategic Planning Department. He previously served as a branch manager of Kookmin Bank, department head of our Office of the Board of Directors and the head of our Financial Planning & Management. He received a B.A. in Korean history from Seoul National University.

 

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Kyu Sul Choi is a managing director and the head of Investor Relations. He previously served as the head of Kookmin Bank’s Investor Relations Department and Asset and Liability Management Department and the head of Korea First Bank’s treasury department. He received a B.A. in business administration from Yonsei University.

Kyung Yup Cho is a managing director and the head of KB Research. He previously served as a senior editor at MaeKyung Media Group and the head of financial news, political news, social affairs and international news at Maeil Business Newspaper. He received a B.A. in business administration and a Ph.D. in business administration from Yonsei University.

 

Item 6.B. Compensation

The aggregate remuneration paid and benefits-in-kind granted by us to our chairman and chief executive officer, our other executive and non-standing directors, our non-executive directors and our executive officers for the year ended December 31, 2013 was ₩5,599 million. In addition, for the year ended December 31, 2013, we paid ₩445 million in termination benefits and set aside ₩82 million for allowances for severance and retirement benefits for our chairman and chief executive officer, the other executive directors and our executive officers.

The compensation of our directors who received total annual compensation exceeding ₩500 million in 2013 was as follows:

 

Name

  

Position

   Total Compensation
in 2013 (1)
    

Long-term Incentive Compensation for
Payment Subsequent to 2013 (2)

          (In millions of Won)

Young-Rok Lim

  

Chairman and Chief Executive Officer

   362       Grant of 10,968 long-term incentive performance shares
   Former President      833       Grant of 8,187 long-term incentive performance shares

Yoon-Dae Euh

  

Former Chairman and Chief Executive Officer

     991       Grant of 9,792 long-term incentive performance shares

 

(1) 

Includes earned income, other income and retirement income according to the Income Tax Act of Korea, as well as performance based short-term incentive payments made in the first quarter of 2013 with respect to services performed in 2012.

(2) 

Based on performance during term of office in 2013. The amount of disbursement, if any, of the long-term incentive performance shares (or the equivalent monetary amount based on the market value of such shares at the time of disbursement) will be determined at a later date.

We do not have service contracts with any of our directors or officers providing for benefits upon termination of their employment with us.

Kookmin Bank granted stock options to its president and chief executive officer, other directors and executive officers, as well as employees. In connection with the comprehensive stock transfer in September 2008 pursuant to which we were established, such stock options were converted into stock options with respect to our common stock. See “Item 6.E. Share Ownership—Stock Options.” For all of the options granted, upon their exercise, we are required to pay in cash the difference between the exercise price and the market price of our common stock at the date of exercise. Generally, upon vesting, options may be exercised from after three years from the grant date up to eight years after such date, once restrictions on the exercise of options, including continued employment for at least two years from the grant date, lapse.

In 2013, we recognized a reversal of compensation expense of ₩9 million for the stock options granted under our stock option plan. For additional information regarding our compensation expense in connection with our stock option plan, see Note 31 to our consolidated financial statements included elsewhere in this annual report.

 

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In 2008, we also established a stock grant plan. Pursuant to this plan, we have entered into performance share agreements with certain of our directors, executive officers and other senior management, whereby we may grant shares of our common stock (or the equivalent monetary amount based on the market value of such shares at the time of the grant) within specified periods as long-term incentive performance shares in accordance with pre-determined performance targets. See “Item 6.E. Share Ownership—Performance Share Agreements.” In 2013, we recognized ₩17,298 million as compensation expense for the disbursements made under such agreements.

 

Item 6.C. Board Practices

See “Item 6.A. Directors and Senior Management” above for information concerning the terms of office and contractual employment arrangements with our directors and executive officers.

Committees of the Board of Directors

We currently have the following committees that serve under the board:

 

   

the Audit Committee;

 

   

the Board Steering Committee;

 

   

the Management Strategy Committee;

 

   

the Risk Management Committee;

 

   

the Evaluation & Compensation Committee;

 

   

the Non-executive Director Nominating Committee; and

 

   

the Audit Committee Member Nominating Committee.

Each committee member is appointed by the board of directors, except for members of the Audit Committee, who are elected at the general meeting of stockholders.

Audit Committee

The committee currently consists of five non-executive directors, Kyung Jae Lee, Young Jin Kim, Jong Cheon Lee, Seung Hee Koh and Sung Hwan Shin. The chairperson of the Audit Committee is Young Jin Kim. The committee oversees our financial reporting and approves the appointment of our independent registered public accounting firm. The committee also reviews our financial information, auditor’s examinations, key financial statement issues, the plans and evaluation of internal control and the administration of our financial affairs by the board of directors. In connection with the general meetings of stockholders, the committee examines the agenda for, and financial statements and other reports to be submitted by, the board of directors to each general meeting of stockholders. The committee holds regular meetings every quarter.

Board Steering Committee

The committee currently consists of five non-executive directors, Kyung Jae Lee, Young Jin Kim, Kun Ho Hwang, Jong Cheon Lee and Young Kwa Kim, together with our chairman and chief executive officer, Young- Rok Lim. The chairperson of the Board Steering Committee is Kyung Jae Lee. The committee is responsible for ensuring the efficient operation of the board and the facilitation of the board’s functions. The committee is also responsible for discussion and review of overall matters with respect to the governance of us and our subsidiaries, promoting the efficiency and active function of the board and each committee. The committee holds regular meetings every quarter.

 

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Management Strategy Committee

The committee currently consists of four non-executive directors, Kun Ho Hwang, Young Kwa Kim, Seung Hee Koh and Sung Hwan Shin, and our chairman and chief executive officer, Young-Rok Lim. The chairperson of the committee is Young Kwa Kim. The committee reviews vision and mid-long term management strategy, the annual business plan, the annual budget plan, new strategic businesses, major financial strategy and major issues with respect to our management. The committee holds regular meetings every quarter.

Risk Management Committee

The committee currently consists five non-executive directors, Kyung Jae Lee, Young Jin Kim, Kun Ho Hwang, Jae Ho Cho and Myung Jig Kim. The chairperson of the Risk Management Committee is Kun Ho Hwang. The Risk Management Committee oversees and makes determinations on all issues relating to our comprehensive risk management function. In order to ensure our stable financial condition and to maximize our profits, the committee monitors our overall risk exposure and reviews our compliance with risk policies and risk limits. In addition, the committee reviews risk and control strategies and policies, evaluates whether each risk is at an adequate level, establishes or abolishes risk management divisions and reviews risk-based capital allocations. The committee holds regular meetings every quarter.

Evaluation & Compensation Committee

The committee currently consists of five non-executive directors, Jong Cheon Lee, Jae Ho Cho, Seung Hee Koh, Young Kwa Kim and Myung Jig Kim. The chairperson of the committee is Jong Cheon Lee. The Evaluation and Compensation Committee reviews compensation schemes and compensation levels of us and our subsidiaries. The committee is also responsible for deliberating and deciding the compensation of directors, evaluating management’s performance and implementing management training programs, as well as deciding and supervising the performance-based annual salary of the president and the executive officers of us and our subsidiaries. The committee holds regular meetings every quarter.

Non-executive Director Nominating Committee

The committee currently has no members. The last meeting of the committee was on February 21, 2014 to nominate Jae Ho Cho, Myung Jig Kim and Sung Hwan Shin as new non-executive directors and Kyung Jae Lee, Young Jin Kim, Kun Ho Hwang, Jong Cheon Lee and Seung Hee Koh for re-appointment as non-executive directors. The committee oversees the selection of non-executive director candidates and recommends them annually sometime prior to the general stockholders meeting. The term of office of its members is from the first meeting of the committee held to nominate the non-executive directors until the nominated non-executive directors are appointed.

Audit Committee Member Nominating Committee

The committee currently has no members. The last meeting of the committee was on February 21, 2014 to nominate Kyung Jae Lee, Young Jin Kim, Jong Cheon Lee, Seung Hee Koh and Sung Hwan Shin as new Audit Committee members. The committee oversees the selection of Audit Committee member candidates and recommends them annually sometime prior to the general stockholders meeting. The term of office of its members is from the first meeting of the committee held to nominate the Audit Committee members until the Audit Committee members are appointed.

 

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Item 6.D. Employees

As of December 31, 2013, we had a total of 151 full-time employees, excluding nine executive officers, at our financial holding company. The following table sets forth information regarding our employees at both our financial holding company and our subsidiaries as of the dates indicated:

 

          As of December 31,  
          2011      2012      2013  

KB Financial Group

   Full-time employees (1)      148         157         151   
   Contractual employees      —           —           —     
   Managerial employees      121         127         116   
   Members of Korea Financial Industry Union      —           —           —     

Kookmin Bank

   Full-time employees (1)      16,080         16,358         16,617   
   Contractual employees      6,175         5,713         5,136   
   Managerial employees      11,278         11,383         11,539   
   Members of Korea Financial Industry Union      17,389         17,149         17,123   

Other subsidiaries

   Full-time employees (1)      2,508         2,724         2,786   
   Contractual employees      542         541         137   
   Managerial employees      1,450         1,554         1,554   
   Members of Korea Financial Industry Union      1,334         1,370         1,509   

 

(1) 

Excluding executive officers.

We consider our relations with our employees to be satisfactory. We and our subsidiaries each have a joint labor-management council which serves as a forum for ongoing discussions between our management and employees. At four of our subsidiaries, Kookmin Bank, KB Kookmin Card, KB Real Estate Trust and KB Credit Information, our employees have a labor union. Every year, the unions at Kookmin Bank, KB Kookmin Card, KB Real Estate Trust and KB Credit Information and their respective managements negotiate and enter into new collective bargaining agreements and negotiate annual wage adjustments.

Our compensation packages consist of base salary and base bonuses. We also provide performance-based compensation to employees and management officers, including those of our subsidiaries, depending on level of responsibility of the employee or officer and business of the relevant subsidiary. Typically, executive officers, heads of regional headquarters and employees in positions that require professional skills, such as fund managers and dealers, are compensated depending on their individual annual performance evaluation. Also, Kookmin Bank has implemented a profit-sharing system in order to enhance the performance of Kookmin Bank’s employees. Under this system, Kookmin Bank pays bonuses to its employees, in addition to the base salary and depending on Kookmin Bank’s annual performance.

We provide a wide range of benefits to our employees, including our executive directors. Specific benefits provided may vary for each of our subsidiaries but generally include medical insurance, employment insurance, workers compensation, employee and spouse life insurance, free medical examinations, child tuition and fee reimbursement, disabled child financial assistance and reimbursement for medical expenses, and other benefits may be provided depending on the subsidiary.

In accordance with the National Pension Act, we contribute an amount equal to 4.5% of employee wages, and each employee contributes 4.5% of his or her wages, into each employee’s personal pension account. In addition, in accordance with the Guarantee of Worker’s Retirement Benefits Act, we have adopted a retirement pension plan for our employees. Contributions under the retirement pension plan are deposited annually into a financial institution, and an employee may elect to receive a monthly pension or a lump-sum amount upon retirement. Our retirement pension plans are provided in the form of a defined benefit plan and a defined contribution plan. The defined benefit plan guarantees a certain payout at retirement, according to a fixed formula based on the employee’s average salary and the number of years for which the employee has been a plan

 

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member. The defined contribution plan, in which the employer’s contribution is determined in advance based on one twelfth of an employee’s total annual pay, is managed directly by the employees. Under Korean law, we may not terminate the employment of full-time employees except under certain limited circumstances.

In June 2009, we established an employee stock ownership plan. All of our employees are eligible to participate in this plan. We are not required to, and do not, make cash contributions to this plan. Members of our employee stock ownership association have pre-emptive rights to acquire up to 20% of our shares issued in public offerings by us pursuant to the Financial Investment Services and Capital Markets Act. In August 2009, we offered to members of our employee stock ownership association 6,000,000 of the 30,000,000 new shares of common stock to be issued in our rights offering to our existing shareholders, and the entire amount was subscribed by members of our employee stock ownership association. The employee stock ownership association held 2,885,075 shares of our common stock as of December 31, 2013.

Employees of Kookmin Bank have been eligible to participate in its employee stock ownership plan, which will be terminated once all of our common stock held by the plan (which the plan received following the transfer of Kookmin Bank shares held by it as a result of the comprehensive stock transfer pursuant to which we were established) have been distributed to the relevant Kookmin Bank employees at the requests of such employees following the expiration of the required holding periods. As of December 31, 2013, Kookmin Bank’s employee stock ownership association held 878,590 shares of our common stock.

In order to develop our next generation of leaders and enhance the operational capability of our employees at each of our subsidiaries, we operate various employee training programs. These programs, which are aimed at cultivating financial specialists with higher levels of management and business skills, developing regional experts for increased global capabilities and enhancing employee loyalty, comprise a number of customized programs such as training courses for employees of different positions, domestic and foreign MBA courses and intensive human resources development programs for high performers to cultivate future leaders. For example, Kookmin Bank offers training programs at its employees’ worksites to facilitate access to training, as well as a foreign regional expert training program and a global language training course. We also provide financial and other support for our employees to develop their finance-related knowledge and skills by enrolling in training courses or engaging in self-study programs. The broad spectrum of training programs, combined with the state-of-the-art technologies such as cyber training, satellite broadcasting and mobile-learning, maximizes the level of exposure of the trainees to the contents of the programs. We also believe that our training scheme based on classified training courses and a development evaluation system has facilitated systemic development of employee skills and a spontaneous learning environment.

 

Item 6.E. Share Ownership

Common Stock

As of March 31, 2014, the persons who are currently our directors or executive officers, as a group, held an aggregate of 13,724 shares of our common stock, representing approximately 0.004% of the issued shares of our common stock as of such date. None of these persons individually held more than 1% of the outstanding shares of our common stock as of such date. The following table presents information regarding our directors and executive officers who beneficially owned our shares as of March 31, 2014.

 

Name of Executive Officer or Director

   Number of Shares of
Common Stock
 

Young-Rok Lim

     8,000   

Kyu Sul Choi

     1,506   

Woong-Won Yoon

     1,300   

Jong-Hee Yang

     914   

Jae Youl Kim

     904   

Ki-Bum Lee

     600   

Kyung Yup Cho

     500   
  

 

 

 

Total

     13,724   
  

 

 

 

 

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Stock Options

We have not, following our establishment pursuant to a comprehensive stock transfer in September 2008, granted any stock options with respect to our capital stock to our directors, executive officers and employees. Prior to our establishment, Kookmin Bank granted stock options with respect to its common stock to its directors, executive officers and employees. In connection with the comprehensive stock transfer, in September 2008, such stock options with respect to Kookmin Bank common stock were converted into stock options with respect to our common stock. For all of the options granted, upon their exercise, we are required to pay in cash the difference between the exercise price and the market price of our common stock at the date of exercise. The following table is the breakdown of such stock options granted to Kookmin Bank’s directors, executive officers and employees. It describes the grant date, position, exercise period and price and the number of options as of March 31, 2014, not including previously issued options which are no longer exercisable as of such date.

 

          Exercise Period      Exercise
Price
     Number
of
Granted
Options (1)
     Number of
Exercised
Options
     Number of
Exercisable
Options
 

Grant Date

  

Position When Granted

   From      To              

28-Apr-06

  

Employee

     29-Apr-09         28-Apr-14         81,900         25,613         0         25,613   

27-Oct-06

  

Employee

     28-Oct-09         27-Oct-14         76,600         18,987         0         18,987   

8-Feb-07

  

4 Senior Executive Vice Presidents

     9-Feb-10         8-Feb-15         77,100         55,594         0         55,594   

8-Feb-07

  

26 Employees

     9-Feb-10         8-Feb-15         77,100         601,904         0         601,904   

23-Mar-07

  

Non-executive Director

     24-Mar-10         23-Mar-15         84,500         15,246         0         15,246   
              

 

 

       

 

 

 
           717,344         0         717,344   
              

 

 

       

 

 

 

 

(1) 

Some numbers of the granted options have been adjusted due to the merger and the early retirement of the grantees.

Performance Share Agreements

In March 2009, our shareholders approved at the annual general meeting of shareholders the disbursement of a maximum of 250,000 shares of our common stock (or the equivalent monetary amount based on the market value of such shares at the time of disbursement), between September 29, 2008 and September 28, 2011, to our directors as long-term incentive performance shares over the term of their office in accordance with the performance targets set forth in the performance share agreements between us and such directors. In June 2009, we paid ₩24 million, the equivalent monetary amount for 733 shares of our common stock, to our former non-executive director, Kee Young Chung. In March 2010, our shareholders approved at the annual general meeting of shareholders the disbursement of a maximum of 250,000 shares of our common stock (or the equivalent monetary amount based on the market value of such shares at the time of disbursement), between September 29, 2009 and September 28, 2012, to our directors as long-term incentive performance shares over the term of their office in accordance with the performance targets set forth in the performance share agreements between us and such directors. In April 2010, we paid an aggregate of ₩184 million, the equivalent monetary amount for 3,563 shares of our common stock, to our former non-executive directors, Dam Cho and Bo Kyung Byun. In November 2010, we paid ₩110 million, the equivalent monetary amount for 2,149 shares of our common stock, to our former non-executive director, Chee Joong Kim. In January 2011, we paid ₩133 million, the equivalent monetary amount for 2,323 shares of our common stock, to our former non-executive director, Chan Soo Kang. In April 2011, we paid an aggregate of ₩229 million, the equivalent monetary amount for 4,056 shares of our common stock, to our former non-executive directors, Suk Sig Lim and Jacques Kemp. In April 2013, we paid an aggregate of ₩96 million, the equivalent monetary amount for 2,543 shares of our common stock, to our former non-executive director, Sang Moon Ham. Future disbursements of shares or equivalent monetary amount will be made to such directors upon the completion of their terms based on their performance. In accordance with the best practice guidelines for outside directors of banking institutions announced by the Korea Federation of Banks in January 2010, we have since not entered into any performance share agreements with our non-executive directors.

 

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We have also entered into performance share agreements with certain of our executive officers and senior management who are not directors, pursuant to which we may grant shares of our common stock (or the equivalent monetary amount based on the market value of such shares at the time of the grant) within specified periods as long-term incentive performance shares in accordance with pre-determined performance targets.

We expect that further actual disbursements under the performance share agreements with our senior management and directors other than non-executive directors will generally be in the form of cash disbursements of equivalent monetary amounts based on the market value of our shares at such time.

 

Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

 

Item 7.A. Major Shareholders

The following table presents information regarding the beneficial ownership of our shares at December 31, 2013 by each person or entity known to us to own beneficially more than 5% of our issued and outstanding shares.

Except as otherwise indicated, each stockholder identified by name has:

 

   

sole voting and investment power with respect to its shares; and

 

   

record and beneficial ownership with respect to its shares.

 

Beneficial Owner

   Number of Shares of
Common Stock
     Percentage of
Total Outstanding
Shares of
Common Stock (%) (1)
 

Korean National Pension Service

     38,476,974         9.96

Bank of New York Mellon (2)

     32,327,550         8.37

 

(1) 

Calculated based on 386,351,693 shares of our common stock outstanding as of December 31, 2013.

(2) 

As depositary bank.

Other than as set forth above, no other person or entity known by us to be acting in concert, directly or indirectly, jointly or separately, owned 5.0% or more of the issued shares of our common stock or exercised control or could exercise control over us as of December 31, 2013. None of our major stockholders has different voting rights from our other stockholders.

 

Item 7.B. Related Party Transactions

As of December 31, 2013, we had an aggregate of ₩4,771 million in loans outstanding to our executive officers and directors and Kookmin Bank’s executive officers and directors. In addition, as of such date, we had loans outstanding to various companies whose directors or executive officers were serving concurrently as our directors or executive officers. See Note 43 of the notes to our consolidated financial statements included elsewhere in this annual report. All of these loans were made in the ordinary course of business, on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than the normal risk of collectibility or present other unfavorable features.

None of our directors or officers have or had any interest in any transactions effected by us that are or were unusual in their nature or conditions or significant to our business which were effected during the current or immediately preceding year or were effected during an earlier year and remain in any respect outstanding or unperformed.

 

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Item 7.C. Interests of Experts and Counsel

Not applicable.

 

Item 8. FINANCIAL INFORMATION

 

Item 8.A. Consolidated Statements and Other Financial Information

See “Item 18. Financial Statements” and pages F-1 through F-182.

Legal Proceedings

Excluding the legal proceedings discussed below, we and our subsidiaries are not a party to any legal or administrative proceedings and no proceedings are known by any of us or our subsidiaries to be contemplated by governmental authorities or third parties, which, if adversely determined, may have a material adverse effect on our consolidated financial condition or results of operations.

During the first half of 2007, the National Tax Service of Korea completed a tax audit in respect of Kookmin Bank for the fiscal years 2002, 2003, 2004 and 2005, as a result of which Kookmin Bank was assessed ₩190 billion (including residence tax) for tax deficiencies. In addition, during the second half of 2007, the National Tax Service of Korea assessed additional income taxes for prior years amounting to ₩292 billion (including residence tax) for tax deficiencies. Kookmin Bank paid the entire amount of such additional assessments in 2007, but filed an appeal with the National Tax Tribunal with respect to tax assessments made in 2007 amounting to ₩482 billion (including residence tax), which dismissed the appeal in March 2010. In June 2010, Kookmin Bank filed an appeal with the Seoul Administrative Court, which ruled in favor of Kookmin Bank on April 1, 2011. On April 19, 2011, the National Tax Service of Korea appealed this case to the Seoul High Court, which ruled in favor of Kookmin Bank on January 12, 2012. On January 30, 2012, the National Tax Service of Korea appealed this case to the Supreme Court, where it is currently pending.

Since November 2008, certain of Kookmin Bank’s customers have filed lawsuits against it in connection with its sales of foreign currency derivatives products known as “KIKO” (which stands for “knock-in knock-out”), which are intended to operate as hedging instruments against fluctuations in the exchange rate between the Won and the U.S. dollar. Due to the significant depreciation of the Won against the U.S. dollar in 2008 and 2009, customers who have purchased KIKO products from Kookmin Bank are required to make large payments to it. Thirteen companies filed lawsuits against Kookmin Bank alleging that the contracts under which the relevant KIKO products were sold should be invalidated and that Kookmin Bank should return payments received thereunder. Five of the lawsuits were dismissed and not appealed. In two of the lawsuits, rulings were issued in favor of Kookmin Bank by the Seoul High Court in February 2013 and January 2014. The aggregate amount of the six remaining claims, as of February 28, 2014, was approximately ₩13.4 billion. Additional lawsuits, as well as motions for preliminary injunctions, may be filed against Kookmin Bank with respect to KIKO products, and the final outcome of such litigation remains uncertain.

In January 2008, the Korea Fair Trade Commission instituted certain amendments to standard loan policy conditions for mortgage loan agreements to require banks to be responsible for the payment of mortgage registration expenses when issuing mortgage loans. Subsequently, the Korea Federation of Banks and 16 banks, including Kookmin Bank, filed a lawsuit against the Korea Fair Trade Commission to prevent the implementation of such amendments. In August 2010, the Supreme Court ruled in favor of the Korea Fair Trade Commission. Since such ruling in August 2010, certain of Kookmin Bank’s customers have filed 132 lawsuits against Kookmin Bank, as of February 28, 2014, alleging that it should return the mortgage registration expenses paid by such customers under mortgage loan agreements that did not reflect the amendments instituted by the Korea Fair Trade Commission in January 2008. As of February 28, 2014, 84 such lawsuits had been concluded, 33 lawsuits were pending in the relevant trial courts and 15 lawsuits were appealed and pending in the appellate

 

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court. The aggregate amount of claimed damages in the 48 remaining lawsuits, as of February 28, 2014, was approximately ₩5 billion. Additional lawsuits may be filed against Kookmin Bank with respect to its mortgage loans, and the final outcome of such litigation remains uncertain.

In July 2010, Fairfield Sentry Limited, or Fairfield, which is currently in liquidation and whose assets were directly or indirectly invested with Bernard L. Madoff Investment Securities LLC, or BLMIS, filed a lawsuit in the Supreme Court of the State of New York against Kookmin Bank, which acted as a nominee for its clients who invested in Fairfield. Fairfield seeks restitution of approximately US$42 million paid to Kookmin Bank in connection with share redemptions on the ground that such payments were made by mistake, based on inflated values resulting from BLMIS’ fraud. The case is currently pending at such court. Fairfield has filed similar actions against numerous other fund investors to seek recovery of redemption payments.

In May 2012, the trustee appointed for the liquidation of BLMIS filed a lawsuit against Kookmin Bank in the United States Bankruptcy Court for the Southern District of New York. The trustee seeks recovery of approximately US$42 million, which amount is alleged to be equal to the amount of funds that were redeemed from Fairfield between June 2004 and January 2006 by Kookmin Bank. The trustee alleges that Fairfield was a “feeder fund” that invested in BLMIS and redemptions from such BLMIS feeder fund are avoidable and recoverable under the U.S. Bankruptcy Code and New York law. The case is currently pending at such court. The trustee has filed similar clawback actions against numerous other institutions.

In November 2012, Kookmin Bank filed a lawsuit against the Export-Import Bank of Korea and other creditor financial institutions comprising the creditors’ committee of a Korean shipbuilding company which is a borrower of Kookmin Bank and is currently in workout. Kookmin Bank voted against extending new credit to such borrower and exercised its appraisal rights. Kookmin Bank is seeking ₩103 billion as compensation for damages and payment of the purchase price of debt held by Kookmin Bank. In November 2012, the Export-Import Bank of Korea and other creditor financial institutions of the borrower filed a counter lawsuit against Kookmin Bank seeking ₩46 billion in damages in connection with the borrower’s debt restructuring plan. The case is currently pending at the Seoul Central District Court.

Commencing in November 2013, Kookmin Bank has been subject to a number of investigations by the Financial Supervisory Service and other governmental authorities concerning alleged issues with Kookmin Bank’s internal controls and possible legal violations by Kookmin Bank and its employees.

 

   

In November 2013, Kookmin Bank filed a complaint against the former head and two former employees of its Tokyo Branch for allegedly extending illegal loans under borrowed names. The Financial Supervisory Service and the Financial Services Agency of Japan have each launched an investigation into the allegations.

 

   

The Financial Supervisory Service launched an investigation into alleged embezzlement of funds by employees at Kookmin Bank’s headquarters, who have since been suspended, through the presentation for payment of forged Korean government housing bonds.

 

   

At the request of the Financial Supervisory Service, the Seoul Central District Prosecutors’ Office commenced investigations into such alleged illegalities at Kookmin Bank.

Kookmin Bank is cooperating with the ongoing investigations by the Financial Supervisory Service and other government authorities. Each of these investigations is in its early stages and we cannot predict the outcome of such investigations. Further investigations may be launched by governmental authorities or civil claims may be filed against Kookmin Bank with respect to the alleged legal violations by Kookmin Bank and its employees.

In February 2014, the Financial Services Commission suspended the new credit card issuance and other related activities of KB Kookmin Card for three months from February to May 2014, in response to an incident

 

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involving the misappropriation of the personal information of a large number of its customers by an employee of the Korea Credit Bureau in the first half of 2013. Specifically, during such suspension period, KB Kookmin Card will be prohibited from engaging in the following activities:

 

   

adding new subscribers for credit cards, prepaid cards and debit cards or issuing such types of cards (except as permitted by the chairman of the Financial Services Commission for public policy purposes);

 

   

providing new or additional credit lines to credit card customers; and

 

   

providing new services through mail order or telemarketing channels or related to travel or insurance products.

In connection with the misappropriation incident, as of March 31, 2014, certain of KB Kookmin Card’s customers have filed 42 lawsuits against KB Kookmin Card with the aggregate amount of claimed damages amounting to approximately ₩35 billion. The final outcome of such lawsuits remains uncertain. In addition, KB Kookmin Card could become subject to additional litigation and regulatory sanctions, and may also incur significant costs relating to the issuance of replacement cards for customers and the compensation of customers for losses incurred as a result of the fraudulent use of the misappropriated personal information.

Dividends

Dividends must be approved by the stockholders at the annual general meeting of stockholders. Cash dividends may be paid out of retained earnings that have not been appropriated to statutory reserves. See “Item 10.B. Memorandum and Articles of Association—Description of Capital Stock—Dividends and Other Distributions.”

The table below sets forth, for the periods indicated, the dividend per share of common stock and the total amount of dividends declared and paid by us in respect of the years ended December 31, 2010, 2011, 2012 and 2013. The dividends set out for each of the years below were paid within 30 days after our annual stockholders meeting, which is held no later than March of the following year.

 

Fiscal Year

   Dividends per
Common Share (1)
     Dividends per
Preferred Share
     Total Amount of Cash
Dividends Paid
 
                                 (in millions of Won)  

2010 (2)

   120       US$ 0.11         —           —         41,163   

2011 (3)

     720         0.62         —           —           278,173   

2012 (4)

     600         0.56         —           —           231,811   

2013 (5)

     500         0.47         —           —           193,176   

 

(1) 

Won amounts are expressed in U.S. dollars at the noon buying rate in effect at the end of the relevant periods as quoted by the Federal Reserve Bank of New York in the United States.

(2) 

On February 10, 2011, our board of directors passed a board resolution recommending a cash dividend of ₩120 per common share (before dividend tax), representing 2.4% of the par value of each share, for the fiscal year ended December 31, 2010. This resolution was approved and ratified by our stockholders on March 25, 2011.

(3) 

On February 9, 2012, our board of directors passed a board resolution recommending a cash dividend of ₩720 per common share (before dividend tax), representing 14.4% of the par value of each share, for the fiscal year ended December 31, 2011. This resolution was approved and ratified by our stockholders on March 23, 2012.

(4) 

On February 7, 2013, our board of directors passed a board resolution recommending a cash dividend of ₩600 per common share (before dividend tax), representing 12.0% of the par value of each share, for the fiscal year ended December 31, 2012. This resolution was approved and ratified by our stockholders on March 22, 2013.

(5) 

On February 7, 2014, our board of directors passed a board resolution recommending a cash dividend of ₩500 per common share (before dividend tax), representing 10.0% of the par value of each share, for the fiscal year ended December 31, 2013. This resolution was approved and ratified by our stockholders on March 28, 2014.

Future dividends will depend upon our revenues, cash flow, financial condition and other factors. As an owner of ADSs, you will be entitled to receive dividends payable in respect of the shares of common stock represented by such ADSs.

 

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For a description of the tax consequences of dividends paid to our stockholders, see “Item 10.E. Taxation—United States Taxation” and “—Korean Taxation—Taxation of Dividends.”

 

Item 8.B. Significant Changes

Not applicable.

 

Item 9. THE OFFER AND LISTING

 

Item 9.A. Offering and Listing Details

Market Price Information

The principal trading market for our common stock is the KRX KOSPI Market. Our common stock has been listed on the KRX KOSPI Market since October 10, 2008, and the ADSs have been listed on the New York Stock Exchange under the symbol “KB” since September 29, 2008. The ADSs are identified by the CUSIP number 48241A105.

Kookmin Bank’s common stock was listed on the KRX KOSPI Market on November 9, 2001, and was suspended from trading from September 25, 2008 and de-listed on October 10, 2008 in connection with the comprehensive stock transfer pursuant to which we were established. Kookmin Bank ADSs were listed on the New York Stock Exchange from November 1, 2001 to September 26, 2008. The Kookmin Bank ADSs were identified by the CUSIP number 50049M109.

The table below sets forth, for the periods indicated, the high and low closing prices and the average daily volume of trading activity on the KRX KOSPI Market for Kookmin Bank common stock with respect to the periods up to and including the third quarter of 2008 and for our common stock with respect to the subsequent periods, and the high and low closing prices and the average daily volume of trading activity on the New York Stock Exchange for Kookmin Bank ADSs with respect to the periods up to and including the third quarter of 2008 and for our ADSs with respect to the subsequent periods.

 

     KRX KOSPI Market (1)      New York Stock Exchange (2)  
     Closing Price Per
Common Stock
     Average Daily
Trading
Volume (in
thousands of
shares)
     Closing Price Per ADS      Average Daily
Trading
Volume (in
thousands of
shares)
 
     High      Low         High      Low     

2009

   63,200       26,850         2,390.1       US$  55.07       US$  16.82         533.3   

2010

     60,400         45,900         1,921.9         52.89         37.81         326.8   

2011

     62,100         34,600         2,385.3         55.00         29.64         202.3   

2012

     45,000         33,000         1,342.3         40.63         28.84         150.1   

First Quarter

     45,000         35,750         1,734.4         40.63         30.98         179.9   

Second Quarter

     43,500         35,300         1,296.3         38.21         29.90         143.6   

Third Quarter

     41,650         33,000         1,284.2         37.07         28.84         131.0   

Fourth Quarter

     39,250         34,350         1,050.8         36.09         31.87         145.5   

2013

     43,950         32,600         1,236.0         41.26         28.85         144.3   

First Quarter

     40,750         36,150         1,629.3         37.45         32.16         188.4   

Second Quarter

     37,600         33,650         1,093.7         33.46         29.17         147.7   

Third Quarter

     38,800         32,600         1,155.2         35.72         28.85         124.0   

Fourth Quarter

     43,950         37,700         1,072.2         41.26         35.38         122.0   

October

     43,950         37,700         1,466.0         41.26         35.38         110.1   

November

     41,150         38,400         894.1         38.65         36.21         137.5   

December

     42,250         38,800         845.9         40.51         36.79         120.3   

 

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     KRX KOSPI Market (1)      New York Stock Exchange (2)  
     Closing Price Per
Common Stock
     Average Daily
Trading
Volume (in
thousands of
shares)
     Closing Price Per ADS      Average Daily
Trading
Volume (in
thousands of
shares)
 
     High      Low         High      Low     

2014 (through April 28)

     42,100         35,050         1,157.4         39.33         32.34         130.7   

First Quarter

     42,100         35,900         1,215.4         39.33         32.34         143.7   

January

     42,100         35,900         1,257.4         39.33         33.01         171.2   

February

     39,900         36,050         1,238.7         36.90         32.34         161.1   

March

     40,350         36,000         1,153.1         37.86         33.50         100.5   

April (through April 28)

     37,800         35,050         980.6         36.26         34.02         88.9   

 

Source:    Global Stock Information Financial Network and KRX KOSPI Market

(1) 

Trading of Kookmin Bank common shares on the KRX KOSPI Market commenced on November 9, 2001 and ended on September 24, 2008. Trading of our common shares on the KRX KOSPI Market commenced on October 10, 2008.

(2) 

Trading of Kookmin Bank ADSs on the New York Stock Exchange commenced on November 1, 2001 and ended on September 26, 2008. Trading of our ADSs on the New York Stock Exchange commenced on September 29, 2008. Each ADS represents the right to receive one share.

 

Item 9.B. Plan of Distribution

Not applicable.

 

Item 9.C. Markets

The KRX KOSPI Market

The KRX KOSPI Market (formerly known as the Stock Market Division of the Korea Exchange) began its operations in 1956. It has a single trading floor located in Seoul. The KRX KOSPI Market is a membership organization consisting of most of the Korean financial investment companies with a dealing and/or brokerage license and some Korean branches of foreign financial investment companies with such license.

As of December 31, 2013, the aggregate market value of equity securities listed on the KRX KOSPI Market was approximately ₩1,186 trillion. The average daily trading volume of equity securities for 2013 was approximately 328 million shares and the average daily transaction value was ₩3,993 billion.

The KRX KOSPI Market has the power in some circumstances to suspend trading in the shares of a given company or to de-list a security pursuant to the Listing Regulation of the KRX KOSPI Market. The KRX KOSPI Market also restricts share price movements. All listed companies are required to file accounting reports annually, semiannually and quarterly and to release immediately all information that may affect trading in a security.

The KRX KOSPI Market publishes the KOSPI, which is an index of all equity securities listed on the KRX KOSPI Market, every ten seconds. On January 1, 1983, the method of computing KOSPI was changed from the Dow Jones method to the aggregate value method. In the new method, the market capitalizations of all listed companies are aggregated, subject to certain adjustments, and this aggregate is expressed as a percentage of the aggregate market capitalization of all listed companies as of the base date, January 4, 1980.

 

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The following table sets out movements in KOSPI:

 

     Opening      High      Low     Closing  

1984

     115.25         142.46         115.25        142.46   

1985

     139.53         163.37         131.40        163.37   

1986

     161.40         279.67         153.85        272.61   

1987

     264.82         525.11         264.82        525.11   

1988

     532.04         922.56         527.89        907.20   

1989

     919.61         1,007.77         844.75        909.72   

1990

     908.59         928.82         566.27        696.11   

1991

     679.75         763.10         586.51        610.92   

1992

     624.23         691.48         459.07        678.44   

1993

     697.41         874.10         605.93        866.18   

1994

     879.32         1,138.75         855.37        1,027.37   

1995

     1,013.57         1,016.77         847.09        882.94   

1996

     888.85         986.84         651.22        651.22   

1997

     653.79         792.29         350.68        376.31   

1998

     385.49         579.86         280.00        562.46   

1999

     587.57         1,028.07         498.42        1,028.07   

2000

     1,059.04         1,059.04         500.60        504.62   

2001

     520.95         704.50         468.76        693.70   

2002

     724.95         937.61         584.04        627.55   

2003

     635.17         822.16         515.24        810.71   

2004

     821.26         936.06         719.59        895.92   

2005

     893.71         1,379.37         870.84        1,379.37   

2006

     1,389.27         1,464.70         1,203.86        1,434.46   

2007

     1,435.26         2,064.85         1,355.79        1,897.13   

2008

     1,853.45         1,888.88         938.75        1,124.47   

2009

     1,157.40         1,723.17         992.69        1,682.77   

2010

     1,696.14         2,052.97         1,548.78        2,051.00   

2011

     2,070.08         2,228.96         1,652.71        1,825.74   

2012

     1,826.37         2,049.28         1,769.31        1,997.05   

2013

     2,031.10         2,059.58         1,780.63        2,011.34   

2014 (through April 28)

     1,967.19         2,008.61         1,886.85        1,969.26   

 

Source:    The KRX KOSPI Market

Shares are quoted “ex-dividend” on the first trading day of the relevant company’s accounting period. Since the calendar year is the accounting period for the majority of listed companies, this may account for the drop in KOSPI between its closing level at the end of one calendar year and its opening level at the beginning of the following calendar year.

With certain exceptions, principally to take account of a share being quoted “ex-dividend” and “ex-rights,” permitted upward and downward movements in share prices of any category of shares on any day are limited under the rules of the KRX KOSPI Market to 15% of the previous day’s closing price of the shares, rounded down as set out below:

 

Previous day’s closing price

   Rounded Down
to
 

Less than 5,000

     5   

5,000 to less than 10,000

     10   

10,000 to less than 50,000

     50   

50,000 to less than 100,000

     100   

100,000 to less than 500,000

     500   

500,000 or more

     1,000   

 

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As a consequence, if a particular closing price is the same as the price set by the fluctuation limit, the closing price may not reflect the price at which persons would have been prepared, or would be prepared to continue, if so permitted, to buy and sell shares. Orders are executed on an auction system with priority rules to deal with competing bids and offers.

Due to the deregulation of restrictions on brokerage commission rates, the brokerage commission rate on equity securities transactions may be determined by the parties, subject to commission schedules being filed with the KRX KOSPI Market by the financial investment companies with a brokerage license. In addition, a securities transaction tax will generally be imposed on the transfer of shares or certain securities representing rights to subscribe for shares. An agriculture and fishery special surtax of 0.15% of the sales prices will also be imposed on transfer of these shares and securities on the KRX KOSPI Market. See “Item 10.E. Taxation—Korean Taxation.”

The following table sets forth the number of companies listed on the KRX KOSPI Market, the corresponding total market capitalization at the end of the periods indicated and the average daily trading volume for those periods:

 

    Market Capitalization on the Last Day of Each
Period
    Average Daily Trading Volume, Value  

Year

  Number of
Listed
Companies
    (Billions of
Won)
    (Millions of
US$) (1)
    Thousands
of shares
    (Millions of
Won)
    (Thousands of
US$) (1)
 

1984

    336      5,149      US$ 6,434        14,847      10,642      US$ 13,301   

1985

    342        6,570        7,921        18,925        12,315        14,846   

1986

    355        11,994        13,439        31,755        32,870        36,830   

1987

    389        26,172        30,250        20,353        70,185        81,120   

1988

    502        64,544        81,177        10,367        198,364        249,483   

1989

    626        95,477        138,997        11,757        280,967        409,037   

1990

    669        79,020        115,610        10,866        183,692        268,753   

1991

    686        73,118        101,623        14,022        214,263        297,795   

1992

    688        84,712        110,691        24,028        308,246        402,779   

1993

    693        112,665        142,668        35,130        574,048        726,919   

1994

    699        151,217        185,657        36,862        776,257        953,047   

1995

    721        141,151        178,266        26,130        487,762        616,016   

1996

    760        117,370        151,289        26,571        486,834        627,525   

1997

    776        70,989        82,786        41,525        555,759        648,115   

1998

    748        137,799        81,297        97,716        660,429        389,634   

1999

    725        349,504        294,319        278,551        3,481,620        2,931,891   

2000

    704        188,042        166,703        306,163        2,602,211        2,306,925   

2001

    689        255,850        200,039        473,241        1,997,420        1,561,705   

2002

    683        258,681        217,379        857,245        3,041,598        2,308,789   

2003

    684        355,363        298,123        542,010        2,216,636        1,859,594   

2004

    683        412,588        398,597        372,895        2,232,108        2,156,418   

2005

    702        655,075        648,589        467,629        3,157,662        3,126,398   

2006

    731        704,588        757,621        279,096        3,435,180        3,693,742   

2007

    745        951,900        1,017,205        363,732        5,539,588        5,919,628   

2008

    763        592,635        469,600        355,205        5,189,643        4,112,238   

2009

    770        887,935        763,027        485,657        5,795,426        4,980,172   

2010

    777        1,141,885        1,009,981        380,859        5,619,768        4,970,607   

2011

    791        1,041,999        899,438        353,759        6,863,146        5,924,166   

2012

    784        1,154,294        1,085,638        486,480        4,823,643        4,536,739   

2013

    777        1,185,974        1,123,879        328,325        3,993,422        3,784,337   

2014 (through April 28)

    770        1,173,236        1,127,028        232,494        3,710,220        3,564,092   

 

Source:    The KRX KOSPI Market

(1) 

Converted at the noon buying rate of the Federal Reserve Bank of New York in effect on the last business day of the period indicated.

 

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The Korean securities markets are principally regulated by the Financial Services Commission and the Financial Investment Services and Capital Markets Act, which replaced the Korean Securities and Exchange Act in February 2009. The Financial Investment Services and Capital Markets Act imposes restrictions on insider trading, price manipulation and deceptive action (including unfair trading), requires specified information to be made available by listed companies to investors and establishes rules regarding margin trading, proxy solicitation, takeover bids, acquisition of treasury shares and reporting requirements for stockholders holding substantial interests.

Protection of Customer’s Interest in Case of Insolvency of Financial Investment Companies with a Brokerage License

Under Korean law, the relationship between a customer and a financial investment company with a brokerage license in connection with a securities sell or buy order is deemed to be consignment and the securities acquired by a consignment agent (i.e., the financial investment company with a brokerage license) through such sell or buy order are regarded as belonging to the customer in so far as the customer and the consignment agent’s creditors are concerned. Therefore, in the event of a bankruptcy or reorganization procedure involving a financial investment company with a brokerage license, the customer of such financial investment company is entitled to the proceeds of the securities sold by such financial investment company.

When a customer places a sell order with a financial investment company with a brokerage license which is not a member of the KRX KOSPI Market, and that financial investment company places a sell order with another financial investment company with a brokerage license, which is a member of the KRX KOSPI Market, the customer is still entitled to the proceeds of the securities sold and received by the non-member company from the member company regardless of the bankruptcy or reorganization of the non-member company.

Under the Financial Investment Services and Capital Markets Act, the KRX KOSPI Market is obliged to indemnify any loss or damage incurred by a counterparty as a result of a breach by its members. If a financial investment company with a brokerage license which is a member of the KRX KOSPI Market breaches its obligation in connection with a buy order, the KRX KOSPI Market is obliged to pay the purchase price on behalf of the breaching member. Therefore, the customer can acquire the securities that have been ordered to be purchased by the breaching member.

When a customer places a buy order with a non-member company and the non-member company places a buy order with a member company, the customer has the legal right to the securities received by the non-member company from the member company because the purchased securities are regarded as belonging to the customer in so far as the customer and the non-member company’s creditors are concerned.

As the cash deposited with a financial investment company with a brokerage license is regarded as belonging to such financial investment company, which is liable to return the same at the request of its customer, the customer cannot take back deposited cash from such financial investment company if a bankruptcy or reorganization procedure is instituted against such financial investment company and, therefore, can suffer from loss or damage as a result. However, the Depositor Protection Act provides that the Korea Deposit Insurance Corporation will, upon the request of the investors, pay investors an amount equal to the full amount of cash deposited with a financial investment company with a brokerage license prior to August 1, 1998 in case of such financial investment company’s bankruptcy, liquidation, cancellation of securities business license or other insolvency events. However, this indemnification was available only until the end of 2000. From 2001, the maximum amount to be paid to each customer is limited to ₩50 million. Pursuant to the Financial Investment Services and Capital Markets Act, financial investment companies with a dealing and/or brokerage license are required to deposit the cash received from its customers to the extent the amount is not covered by the insurance with the Korea Securities Finance Corporation, a special entity established pursuant to the Financial Investment Services and Capital Markets Act. Set-off or attachment of cash deposits by such financial investment companies is prohibited. The premiums related to this insurance are paid by such financial investment companies.

 

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Reporting Requirements for Holders of Substantial Interests

Any person whose direct or beneficial ownership of our common stock with voting rights, whether in the form of shares of common stock or ADSs, certificates representing the rights to subscribe for shares or equity-related debt securities including convertible bonds and bonds with warrants (which we refer to collectively as “Equity Securities”), together with the Equity Securities beneficially owned by certain related persons or by any person acting in concert with the person, accounts for 5% or more of the total issued and outstanding shares (plus Equity Securities of us held by such persons) is required to report the status and purpose (in terms of whether the purpose of the shareholding is to exercise control over our management) of the holdings to the Financial Services Commission and the KRX KOSPI Market within five business days after reaching the 5% ownership interest. In addition, any change in (i) the ownership interest subsequent to the report that equals or exceeds 1% of the total issued and outstanding Equity Securities of us or (ii) the purpose of the shareholding is required to be reported to the Financial Services Commission and the KRX KOSPI Market within five business days from the date of the change.

Violation of these reporting requirements may subject a person to criminal sanctions such as fines or imprisonment, an administrative fine of up to 0.001% of the aggregate market value of the total issued and outstanding stock or ₩500 million, whichever is lower, and/or a loss of voting rights with respect to the ownership of Equity Securities exceeding 5% of the total issued and outstanding Equity Securities with respect to which the reporting requirements were violated. Furthermore, the Financial Services Commission may order the disposal of the unreported Equity Securities.

In addition to the reporting requirements described above, any person whose direct or beneficial ownership of our stock accounts for 10% or more of the total issued and outstanding stock (which we refer to as a “major stockholder”) must report the status of his/her shareholding to the Korea Securities and Futures Commission and the KRX KOSPI Market within five days after he/she becomes a major stockholder. In addition, any change in the ownership interest subsequent to the report must be reported to the Korea Securities and Futures Commission and the KRX KOSPI Market within the 5th day of the occurrence of the change. Violation of these reporting requirements may subject a person to criminal sanctions such as fines or imprisonment.

Any single stockholder and persons who stand in a special relationship with that stockholder that acquire more than 4% of the voting stock of a nationwide Korean bank pursuant to the Bank Act will be subject to reporting requirements. In addition, any single stockholder and persons who stand in a special relationship with that stockholder that acquire in excess of 10% of a nationwide bank’s total issued and outstanding shares with voting rights must receive approval from the Financial Services Commission to acquire shares in each instance where the total shareholding would exceed 10%, 25% or 33%, respectively, of the bank’s total issued and outstanding shares with voting rights. See “Item 4.B. Business Overview—Supervision and Regulation—Principal Regulations Applicable to Banks—Restrictions on Bank Ownership.”

Restrictions Applicable to ADSs

No Korean governmental approval is necessary for the sale and purchase of our ADSs in the secondary market outside Korea or for the withdrawal of shares of our common stock underlying the ADSs and the delivery inside Korea of shares in connection with the withdrawal, provided that a foreigner who intends to acquire the shares must obtain an investment registration card from the Financial Supervisory Service as described below. The acquisition of the shares by a foreigner must be immediately reported to the governor of the Financial Supervisory Service, either by the foreigner or by his standing proxy in Korea.

Persons who have acquired shares of our common stock as a result of the withdrawal of shares underlying our ADSs may exercise their preemptive rights for new shares, participate in free distributions and receive dividends on shares without any further Korean governmental approval.

 

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Under current Korean laws and regulations, the depositary is required to obtain the prior consent of us for the number of shares of our common stock to be deposited in any given proposed deposit that exceeds the difference between:

 

  (1) the aggregate number of shares of our common stock deposited by us for the issuance of our ADSs (including deposits in connection with the initial issuance and all subsequent offerings of our ADSs and stock dividends or other distributions related to these ADSs); and

 

  (2) the number of shares of our common stock on deposit with the depositary at the time of such proposed deposit.

We have agreed to grant such consent to the extent that the total number of shares on deposit with the depositary would not exceed 116,583,985 at any time.

Restrictions Applicable to Shares

As a result of amendments to the Foreign Exchange Transaction Laws and Financial Services Commission regulations (which we refer to collectively as the “Investment Rules”) adopted in connection with the stock market opening from January 1992 and after that date, foreigners may invest, with limited exceptions and subject to procedural requirements, in all shares of Korean companies, whether listed on the KRX KOSPI Market or on the KRX KOSDAQ Market, unless prohibited by specific laws. Foreign investors may trade shares listed on the KRX KOSPI Market or on the KRX KOSDAQ Market only through the KRX KOSPI Market or the KRX KOSDAQ Market, except in limited circumstances, including:

 

   

odd-lot trading of shares;

 

   

acquisition of shares (which we refer to as “Converted Shares”) by exercise of warrants, conversion rights or exchange rights under bonds with warrants, convertible bonds or exchangeable bonds or withdrawal rights under depositary receipts issued outside of Korea by a Korean company;

 

   

acquisition of shares as a result of inheritance, donation, bequest or exercise of stockholders’ rights, including preemptive rights or rights to participate in free distributions and receive dividends;

 

   

over-the-counter transactions between foreigners of a class of shares for which the ceiling on aggregate acquisition by foreigners, as explained below, has been reached or exceeded subject to certain exceptions; and

 

   

sale and purchase of shares at fair value between foreigners who are part of an investor group comprised of foreign companies investing under the control of a common investment manager pursuant to applicable laws or contract.

For over-the-counter transactions of shares between foreigners outside the KRX KOSPI Market or the KRX KOSDAQ Market for shares with respect to which the limit on aggregate foreign ownership has been reached or exceeded, a financial investment company with a brokerage license in Korea must act as an intermediary. Odd-lot trading of shares outside the KRX KOSPI Market or the KRX KOSDAQ Market must involve a financial investment company with a dealing license as the other party. Foreign investors are prohibited from engaging in margin transactions by borrowing shares from a financial investment company with a dealing and/or brokerage license with respect to shares that are subject to a foreign ownership limit.

The Investment Rules require a foreign investor who wishes to invest in shares on the KRX KOSPI Market or the KRX KOSDAQ Market (including Converted Shares and shares being issued for initial listing on the KRX KOSPI Market or on KRX KOSDAQ Market) to register its identity with the Financial Supervisory Service prior to making any such investment. The registration requirement does not, however, apply to foreign investors who acquire Converted Shares with the intention of selling such Converted Shares within three months from the date of acquisition. Upon registration, the Financial Supervisory Service will issue to the foreign investor an investment registration card, which must be presented each time the foreign investor opens a brokerage account

 

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with a financial investment company with a brokerage license. Foreigners eligible to obtain an investment registration card include foreign nationals who have not been residing in Korea for a consecutive period of six months or more, foreign governments, foreign municipal authorities, foreign public institutions, international financial institutions or similar international organizations, corporations incorporated under foreign laws and any person in any additional category designated by decree of the Ministry of Strategy and Finance under the Financial Investment Services and Capital Markets Act. All Korean offices of a foreign corporation as a group are treated as a separate foreigner from the offices of the corporation outside Korea for the purpose of investment registration. However, a foreign corporation or depositary issuing depositary receipts may obtain one or more investment registration cards in its name in certain circumstances as described in the relevant regulations.

Upon a foreign investor’s purchase of shares through the KRX KOSPI Market or the KRX KOSDAQ Market, no separate report by the investor is required because the investment registration card system is designed to control and oversee foreign investment through a computer system. However, a foreign investor’s acquisition or sale of shares outside the KRX KOSPI Market or the KRX KOSDAQ Market (as discussed above) must be reported by the foreign investor or his standing proxy to the governor of the Financial Supervisory Service at the time of each such acquisition or sale. In addition, if a foreign investor acquires or sells his shares in connection with a tender offer, odd-lot trading of shares or trades of a class of shares for which the aggregate foreign ownership limit has been reached or exceeded, such foreign investor or his standing proxy must ensure that the financial investment company that was engaged to facilitate the transaction reports such transaction to the governor of the Financial Supervisory Service. A foreign investor may appoint a standing proxy from among the Korea Securities Depository, foreign exchange banks (including domestic branches of foreign banks), financial investment companies with a dealing and/or brokerage license (including domestic branches of foreign financial investment companies with such license), financial investment companies with a collective investment license (including domestic branches of foreign financial investment companies with such license) and internationally recognized custodians which will act as a standing proxy to exercise stockholders’ rights or perform any matters related to the foregoing activities if the foreign investor does not perform these activities himself. Generally, a foreign investor may not permit any person, other than its standing proxy, to exercise rights relating to his shares or perform any tasks related thereto on his behalf. However, a foreign investor may be exempted from complying with these standing proxy rules with the approval of the governor of the Financial Supervisory Service in cases deemed inevitable by reason of conflict between laws of Korea and the home country of the foreign investor.

Certificates evidencing shares of Korean companies must be kept in the custody of an eligible custodian in Korea. The same entities eligible to act as a standing proxy are eligible to act as a custodian of shares for a non-resident or foreign investor. A foreign investor must ensure that its custodian deposits its shares with the Korea Securities Depository. A foreign investor may be exempted from complying with this deposit requirement with the approval of the governor of the Financial Supervisory Service in circumstances where compliance with that requirement is made impracticable, including cases where compliance would contravene the laws of the foreign investors’ home country.

Under the Investment Rules, with certain exceptions, foreign investors may acquire shares of a Korean company without being subject to any foreign investment ceiling. As one such exception, designated public corporations are subject to a 40% ceiling on the acquisition of shares by foreigners in the aggregate. Designated public corporations may set a ceiling on the acquisition of shares by a single person in their articles of incorporation. Currently, Korea Electric Power Corporation is the only designated public corporation that has set such a ceiling. Furthermore, an investment by a foreign investor in 10% or more of the issued and outstanding shares with voting rights of a Korean company is defined as a foreign direct investment under the Foreign Investment Promotion Act of Korea. Generally, a foreign direct investment must be reported to the Ministry of Knowledge Economy of Korea. The acquisition of shares of a Korean company by a foreign investor may also be subject to certain foreign or other shareholding restrictions in the event that the restrictions are prescribed in a specific law that regulates the business of the Korean company. For a description of such restrictions applicable to Korean banks, see “Item 4.B. Business Overview—Supervision and Regulation—Principal Regulations Applicable to Banks—Restrictions on Bank Ownership.”

 

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Item 9.D. Selling Shareholders

Not applicable.

 

Item 9.E. Dilution

Not applicable.

 

Item 9.F. Expenses of the Issue

Not applicable.

 

Item 10. ADDITIONAL INFORMATION

 

Item 10.A. Share Capital

Not applicable.

 

Item 10.B. Memorandum and Articles of Association

Description of Capital Stock

Set forth below is information relating to our capital stock, including brief summaries of certain provisions of our articles of incorporation, the Korean Commercial Code, Financial Investment Services and Capital Markets Act and certain related laws of Korea, all as currently in effect. The following summaries do not purport to be complete and are subject to the articles of incorporation and the applicable provisions of the Financial Investment Services and Capital Markets Act, the Korean Commercial Code, and certain other related laws of Korea.

As of December 31, 2013, our authorized share capital is 1,000,000,000 shares. Pursuant to our articles of incorporation, we are authorized to issue shares with preferred dividend, non-voting shares, class shares with conversion rights, class shares with redemption rights and shares with a combination of all or any of the foregoing characteristics (collectively, “Class Shares”), as well as common shares. Subject to applicable laws and regulations, we are authorized to issue Class Shares up to one-half of all of our issued and outstanding shares.

Under our articles of incorporation, dividends on non-voting shares with preferred dividend are required to be at least 1% per annum of the par value and the board of directors must determine at the time of issuance of such shares the dividend rate, type of distributable properties, method of determining the value of distributable properties and conditions on payment of dividends. Also, we may, pursuant to a resolution of the board of directors, issue such non-voting shares with preferred dividend as redeemable shares that may be redeemed with profits at the relevant shareholder’s or our discretion, up to one-half of all of our issued and outstanding shares.

In addition, pursuant to a resolution of the board of directors, we may issue shares that are convertible into common shares or Class Shares at the request of the relevant shareholders, up to 20% of all of our issued and outstanding shares. The period during which a relevant shareholder may make a request for conversion may be determined by a resolution of the board of directors and must be a period between one and ten years from the issue date.

Furthermore, through an amendment of the articles of incorporation, we may create new classes of shares, which may be common shares or Class Shares having additional features as prescribed under the Korean Commercial Code. See “—Voting Rights.”

 

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As of the date of this annual report, 386,351,693 shares of common stock were issued and 386,351,693 shares of common stock were outstanding. No Class Shares are currently outstanding. All of the issued and outstanding shares are fully-paid and non-assessable, and are in registered form. Our authorized but unissued share capital consists of 613,648,307 shares. We may issue the unissued shares without further stockholder approval, subject to a board resolution as provided in the articles of incorporation. See “—Preemptive Rights and Issuances of Additional Shares” and “—Dividends and Other Distributions—Distribution of Free Shares.”

Our articles of incorporation provide that our stockholders may, by special resolution, grant to our and our subsidiaries’ officers, directors and employees stock options exercisable for up to 15% of the total number of our issued and outstanding shares. Our board of directors may also grant stock options to non-director officers and employees exercisable for up to 1% of our issued and outstanding shares, provided that such grant must be approved by a resolution of the subsequent general meeting of stockholders. As of March 31, 2014, our officers, directors and employees held options to purchase 717,344 shares of our common stock. Upon their exercise of such stock options, we are required to pay in cash the difference between the exercise price and the market price of our common stock at the date of exercise. See “Item 6.E. Share Ownership—Stock Options.”

Share certificates are issued in denominations of one, five, ten, 50, 100, 500, 1,000 and 10,000 shares.

Organization and Register

We are a financial holding company established under the Financial Holding Company Act. We are registered with the commercial registry office of Seoul Central District Court.

Dividends and Other Distributions

Dividends

Dividends are distributed to stockholders in proportion to the number of shares of the relevant class of capital stock owned by each stockholder following approval by the stockholders at an annual general meeting of stockholders. Subject to the requirements of the Korean Commercial Code and other applicable laws and regulations, we expect to pay full annual dividends on newly issued shares for the year in which the new shares are issued.

We declare our dividend annually at the annual general meeting of stockholders, which are held within three months after the end of each fiscal year. Once declared, the annual dividend must be paid to the stockholders of record as of the end of the preceding fiscal year within one month after the annual general meeting unless otherwise resolved thereby. Annual dividends may be distributed either in cash or in shares provided that shares must be distributed at par value and, if the market price of the shares is less than their par value, dividends in shares may not exceed one-half of the total annual dividend (including dividends in shares).

Under the Korean Commercial Code and our articles of incorporation, we do not have an obligation to pay any annual dividend unclaimed for five years from the payment date.

The Financial Holding Company Act and related regulations require that each time a Korean financial holding company pays an annual dividend, it must set aside in its legal reserve to stated capital an amount equal to at least one-tenth of its net income after tax until the amount set aside reaches at least the aggregate amount of its stated capital. Unless it sets aside this amount, a Korean financial holding company may not pay an annual dividend. We intend to set aside allowances for loan losses and reserves for severance pay in addition to this legal reserve.

For information regarding Korean taxes on dividends, see “Item 10.E. Taxation—Korean Taxation.”

 

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Distribution of Free Shares

In addition to permitting dividends in the form of shares to be paid out of retained or current earnings, the Korean Commercial Code permits a company to distribute to its stockholders, in the form of free shares, an amount transferred from the capital surplus or legal reserve to stated capital. These free shares must be distributed pro rata to all stockholders. Our articles of incorporation provide that the types of shares to be distributed to the holders of non-voting shares with preferred dividend will be the same type of non-voting shares with preferred dividend held by such holders.

Preemptive Rights and Issuances of Additional Shares

Unless otherwise provided in the Korean Commercial Code, a company may issue authorized but unissued shares at such times and upon such terms as the board of directors of the company may determine. The company must offer the new shares on uniform terms to all stockholders who have preemptive rights and who are listed on the stockholders’ register as of the applicable record date. Our stockholders will be entitled to subscribe for any newly issued shares in proportion to their existing shareholdings. However, as provided in our articles of incorporation, new shares may be issued to persons other than existing stockholders if such shares are:

(1) publicly offered pursuant to the Financial Investment Services and Capital Markets Act, (2) issued to an employee stock ownership association, (3) issued upon exercise of stock options pursuant to the Financial Investment Services and Capital Markets Act, (4) issued for the issuance of our depositary receipts, (5) issued to certain foreign or domestic financial institutions or institutional investors to raise funds to meet urgent needs for our management or operations or (6) issued primarily to a third party who has contributed to the management of our business, including by providing financing, credit, advanced financing technique, know-how or entering into close business alliances, except that, in the case of issuances of new shares under (1), (4), (5) and (6) above, the number of new shares issued to persons other than existing stockholders may not exceed 50% of our total issued and outstanding capital stock.

Public notice of the preemptive rights to new shares and the transferability thereof must be given not less than two weeks (excluding the period during which the stockholders’ register is closed) prior to the record date. We will notify the stockholders or persons other than existing stockholders, who are entitled to subscribe for newly issued shares of the deadline for subscription at least two weeks prior to the deadline. If such stockholders or persons fail to subscribe on or before such deadline, their preemptive rights will lapse. Our board of directors may determine how to distribute shares in respect of which preemptive rights have not been exercised or where fractions of shares occur.

Under the Financial Investment Services and Capital Markets Act, members of a company’s employee stock ownership association, whether or not they are stockholders, will have a preemptive right, subject to certain exceptions, to subscribe for up to 20% of the shares publicly offered pursuant to the Financial Investment Services and Capital Markets Act. This right is exercisable only to the extent that the total number of shares so acquired and held by such members does not exceed 20% of the total number of shares then issued and outstanding.

Voting Rights

Each outstanding share of our common stock is entitled to one vote per share. However, voting rights with respect to shares of common stock that we or any of our subsidiaries holds may not be exercised. Unless stated otherwise in a company’s articles of incorporation, the Korean Commercial Code permits holders of an aggregate of 1% or more of the issued and outstanding shares with voting rights to request cumulative voting when electing two or more directors. Our articles of incorporation do not prohibit cumulative voting. The Korean Commercial Code and our articles of incorporation provide that an ordinary resolution may be adopted if approval is obtained from the holders of at least a majority of those shares of common stock present or represented at such meeting

 

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and such majority also represents at least one-fourth of the total of our issued and outstanding voting shares. Holders of non-voting shares (other than enfranchised non-voting shares) will not be entitled to vote on any resolution or to receive notice of any general meeting of stockholders unless the agenda of the meeting includes consideration of a resolution on which such holders are entitled to vote. If our annual general stockholders’ meeting resolves not to pay to holders of non-voting shares with preferred dividend the annual dividend as determined by the board of directors at the time of issuance of such shares, the holders of non-voting shares with preferred dividend will be entitled to exercise voting rights from the general stockholders’ meeting following the meeting adopting such resolution to the end of a meeting to declare to pay such dividend with respect to the non-voting shares with preferred dividend. Holders of such enfranchised non-voting shares with preferred dividend will have the same rights as holders of common stock to request, receive notice of, attend and vote at a general meeting of stockholders.

The Korean Commercial Code provides that to amend the articles of incorporation, which is also required for any change to the authorized share capital of the company, and in certain other instances, including removal of a director of a company, dissolution, merger or consolidation of a company, transfer of the whole or a significant part of the business of a company, acquisition of all of the business of any other company, acquisition of a part of the business of any other company having a material effect on the business of the company or issuance of new shares at a price lower than their par value, a special resolution must be adopted by the approval of the holders of at least two-thirds of those shares present or represented at such meeting and such special majority also represents at least one-third of the total issued and outstanding shares with voting rights of the company.

In addition, in the case of amendments to the articles of incorporation or any merger or consolidation of a company or in certain other cases, where the rights or interest of the holders of Class Shares are adversely affected, a resolution must be adopted by a separate meeting of holders of Class Shares. Such a resolution may be adopted if the approval is obtained from stockholders of at least two-thirds of the Class Shares present or represented at such meeting and such shares also represent at least one-third of the total issued and outstanding Class Shares of the company.

A stockholder may exercise his voting rights by proxy given to another stockholder. The proxy must present the power of attorney prior to the start of a meeting of stockholders.

Liquidation Rights

In the event we are liquidated, the assets remaining after the payment of all debts, liquidation expenses and taxes will first be distributed to holders of Class Shares which have a preference right in respect of the distribution of residual properties as determined by our board of directors at the time of their issuance, and the residue thereafter will be distributed to the other stockholders in proportion to the number of shares held by them.

General Meetings of Stockholders

There are two types of general meetings of stockholders: annual general meetings and extraordinary general meetings. We will be required to convene our annual general meeting within three months after the end of each fiscal year. Subject to a board resolution or court approval, an extraordinary general meeting of stockholders may be held when necessary or at the request of the holders of an aggregate of 3% or more of our issued and outstanding shares, or the holders of an aggregate of 1.5% or more of our issued and outstanding stock with voting rights, who have held those shares at least for six months. Under the Korean Commercial Code, an extraordinary general meeting of stockholders may also be convened at the request of our Audit Committee, subject to a board resolution or court approval. Holders of non-voting shares may be entitled to request a general meeting of stockholders only to the extent the non-voting shares have become enfranchised as described under the section entitled “—Voting Rights” above, hereinafter referred to as “enfranchised non-voting shares.” Meeting agendas will be determined by the board of directors or proposed by holders of an aggregate of 3% or

 

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more of the issued and outstanding shares with voting rights, or by holders of an aggregate of 0.5% or more of our issued and outstanding shares with voting rights, who have held those shares for at least six months, by way of a written proposal to the board of directors at least six weeks prior to the meeting. Written notices or e-mail notices stating the date, place and agenda of the meeting must be given to the stockholders at least two weeks prior to the date of the general meeting of stockholders. Notice may, however, be given to holders of 1% or less of the total number of issued and outstanding shares which are entitled to vote, either by placing at least two public notices at least two weeks in advance of the meeting in at least two daily newspapers or by placing a notice through the electronic disclosure system operated by the Financial Supervisory Service or the Korea Exchange. Stockholders who are not on the stockholders’ register as of the record date will not be entitled to receive notice of the general meeting of stockholders, and they will not be entitled to attend or vote at such meeting. Holders of enfranchised non-voting shares who are on the stockholders’ register as of the record date will be entitled to receive notice of the general meeting of stockholders and they will be entitled to attend and vote at such meeting. Otherwise, holders of non-voting shares will not be entitled to receive notice of or vote at general meetings of stockholders.

The general meeting of stockholders will be held at our head office, which is our registered head office, or, if necessary, may be held anywhere in the vicinity of our head office.

Rights of Dissenting Stockholders

Pursuant to the Financial Investment Services and Capital Markets Act and the Law on the Improvement of the Structure of the Financial Industry, in certain limited circumstances (including, without limitation, if we transfer all or any significant part of our business, if we acquire a part of the business of any other company and such acquisition has a material effect on our business or if we merge or consolidate with another company), dissenting holders of shares of our common stock and our preferred stock who acquired such shares prior to the announcement of the relevant resolution of the board of directors (or up to one day after such announcement in the event that such resolution is made by the board of directors pursuant to a presidential decree) will have the right to require us to purchase their shares by providing written notice to us. To exercise such a right, stockholders must submit to us a written notice of their intention to dissent prior to the general meeting of stockholders. Within 20 days (10 days in the case of a merger or consolidation under the Law on Improvement of the Structure of the Financial Industry) after the date on which the relevant resolution is passed at such meeting, such dissenting stockholders must request in writing that we purchase their shares. We are obligated to purchase the shares from dissenting stockholders within one month after the end of such request period (within two months after the receipt of such request in the case of a merger or consolidation under the Law on Improvement of the Structure of Financial Industry) at a price to be determined by negotiation between the stockholder and us. If we cannot agree on a price with the stockholder through such negotiations, the purchase price will be the arithmetic mean of:

 

   

the weighted average of the daily stock prices on the KRX KOSPI Market for the two-month period prior to the date of the adoption of the relevant board of directors’ resolution;

 

   

the weighted average of the daily stock prices on the KRX KOSPI Market for the one-month period prior to the date of the adoption of the relevant board of directors’ resolution; and

 

   

the weighted average of the daily stock prices on the KRX KOSPI Market for the one-week period prior to the date of the adoption of the relevant board of directors’ resolution.

However, any dissenting stockholder who wishes to contest the purchase price may bring a claim in court.

Required Disclosure of Ownership

Under Korean law, stockholders who beneficially hold more than a certain percentage of our common stock, or who are related to or are acting in concert with other holders of certain percentages of our common stock or

 

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our other equity securities, must report the status of their holdings to the Financial Services Commission and other relevant governmental authorities. For a description of such required disclosure of ownership, see “Item 4.B. Business Overview—Supervision and Regulation—Principal Regulations Applicable to Financial Holding Companies—Restrictions on Ownership of a Financial Holding Company” and “Item 9.C. Markets—Reporting Requirements for Holders of Substantial Interests.”

Other Provisions

Register of Stockholders and Record Dates

We maintain the register of our stockholders at our principal office in Seoul, Korea. We register transfers of shares on the register of stockholders upon presentation of the share certificates.

The record date for annual dividends is December 31. For the purpose of determining the holders of shares entitled to annual dividends, the register of stockholders may be closed for the period beginning from January 1 and ending on January 31. Further, the Korean Commercial Code and our articles of incorporation permit us upon at least two weeks’ public notice to set a record date and/or close the register of stockholders for not more than three months for the purpose of determining the stockholders entitled to certain rights pertaining to the shares. However, in the event that the register of stockholders is closed for the period beginning from January 1 and ending on January 31 for the purpose of determining the holders of shares entitled to attend the annual general meeting of stockholders, the Korean Commercial Code and our articles of incorporation waive the requirement to provide at least two weeks’ public notice. The trading of shares and the delivery of certificates in respect thereof may continue while the register of stockholders is closed. Also, we may distribute dividends to stockholders on a quarterly basis, and the record dates for these quarterly dividends are the end of March, June and September of each year.

Annual Reports

At least one week before the annual general meeting of stockholders, we must make our management report to shareholders and audited financial statements available for inspection at our head office and at all of our branch offices. Copies of this report, the audited financial statements and any resolutions adopted at the general meeting of stockholders are available to our stockholders.

Under the Financial Investment Services and Capital Markets Act, we must file with the Korean Financial Services Commission and the KRX KOSPI Market an annual business report within 90 days after the end of each fiscal year, a half-year business report within 45 days after the end of the first six months of each fiscal year and quarterly business reports within 45 days after the end of the first three months and nine months of each fiscal year, respectively. Copies of such business reports will be available for public inspection at the Korean Financial Services Commission and the KRX KOSPI Market.

Transfer of Shares

Under the Korean Commercial Code, the transfer of shares is effected by the delivery of share certificates. The Financial Investment Services and Capital Markets Act provides, however, that in case of a company listed on the KRX KOSPI Market such as us, share transfers can be effected by the book-entry method. In order to assert stockholders’ rights against us, the transferee must have his name and address registered on the register of stockholders. For this purpose, stockholders are required to file with us their name, address and seal. Non-resident stockholders must notify us of the name of their proxy in Korea to which our notice can be sent.

Under current Korean regulations, the following entities may act as agents and provide related services for foreign stockholders:

 

   

the Korea Securities Depository;

 

   

internationally recognized foreign custodians;

 

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financial investment companies with a dealing license (including domestic branches of foreign financial investment companies with such license);

 

   

financial investment companies with a brokerage license (including domestic branches of foreign financial investment companies with such license);

 

   

foreign exchange banks (including domestic branches of foreign banks); and

 

   

financial investment companies with a collective investment license (including domestic branches of foreign financial investment companies with such license).

In addition, foreign stockholders may appoint a standing proxy among the foregoing and generally may not allow any person other than the standing proxy to exercise rights to the acquired shares or perform any tasks related thereto on their behalf. Certain foreign exchange controls and securities regulations apply to the transfer of shares by non-residents or non-Koreans. See “Item 9.C. Markets” and “Item 10.D. Exchange Controls.” Except as provided in the Financial Holding Company, the ceiling on the aggregate shareholdings of a single stockholder and persons who stand in a special relationship with such stockholder is 10% of our issued and outstanding voting shares. See “Item 4.B. Business Overview—Supervision and Regulation—Principal Regulations Applicable to Financial Holding Companies—Restrictions on Ownership of a Financial Holding Company.”

Acquisition of Our Shares

Under the Korean Commercial Code, we may acquire our own shares upon a resolution of a general meeting of shareholders by either (i) purchasing them on a stock exchange or (ii) purchasing a number of shares, other than the redeemable shares as set forth in Article 345, Paragraph (1) of the Korean Commercial Code, from each shareholder in proportion to their existing shareholding ratio through the methods set forth in the Presidential Decree, provided that the total purchase price does not exceed the amount of our profit that may be distributed as dividends in respect of the immediately preceding fiscal year.

Additionally, pursuant to the Financial Investment Services and Capital Markets Act and regulations under the Financial Holding Company Act and after submission of certain reports to the Korean Financial Services Commission, we may purchase our own shares on the KRX KOSPI Market or through a tender offer, subject to the restrictions that:

 

   

the aggregate purchase price of such shares may not exceed the total amount available for distribution of dividends at the end of the preceding fiscal year; and

 

   

the purchase of such shares shall meet the risk-adjusted capital ratio requirements prescribed in the regulations under the Financial Holding Company Act based on Bank for International Settlements standards.

Subject to certain limited exceptions, our subsidiaries will not be permitted to acquire our shares pursuant to the Financial Holding Company Act.

 

Item 10.C. Material Contracts

None.

 

Item 10.D. Exchange Controls

General

The Foreign Exchange Transaction Act of Korea and the Presidential Decree and regulations under that Act and Decree, which we refer to collectively as the “Foreign Exchange Transaction Laws,” regulate investment in

 

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Korean securities by non-residents and issuance of securities outside Korea by Korean companies. Non-residents may invest in Korean securities pursuant to the Foreign Exchange Transaction Laws. The Financial Services Commission has also adopted, pursuant to its authority under the Financial Investment Services and Capital Markets Act, regulations that restrict investment by foreigners in Korean securities and regulate issuance of securities outside Korea by Korean companies.

Under the Foreign Exchange Transaction Laws, (1) if the Korean government deems that it is inevitable due to the outbreak of natural calamities, wars, conflict of arms or grave and sudden changes in domestic or foreign economic circumstances or other situations equivalent thereto, the Ministry of Strategy and Finance may temporarily suspend payment, receipt or the whole or part of transactions to which the Foreign Exchange Transaction Laws apply, or impose an obligation to safe-keep, deposit or sell means of payment in or to certain Korean governmental agencies or financial institutions; and (2) if the Korean government deems that international balance of payments and international finance are confronted or are likely to be confronted with serious difficulty or the movement of capital between Korea and abroad brings or is likely to bring about serious obstacles in carrying out its currency policies, exchange rate policies and other macroeconomic policies, the Ministry of Strategy and Finance may take measures to require any person who intends to perform capital transactions to obtain permission or to require any person who performs capital transactions to deposit part of the payments received in such transactions at certain Korean governmental agencies or financial institutions, in each case subject to certain limitations.

Restrictions Applicable to Shares

Under the Foreign Exchange Transaction Laws, a foreign investor who intends to acquire shares must designate a foreign exchange bank at which he must open a foreign currency account and a Won account exclusively for stock investments. No approval is required for remittance into Korea and deposit of foreign currency funds in the foreign currency account. Foreign currency funds may be transferred from the foreign currency account at the time required to place a deposit for, or settle the purchase price of, a stock purchase transaction to a Won account opened at a financial investment company with a dealing and/or brokerage license. Funds in the foreign currency account may be remitted abroad without any Korean governmental approval.

Dividends on shares of Korean companies are paid in Won. No Korean governmental approval is required for foreign investors to receive dividends on, or the Won proceeds of the sale of, any shares to be paid, received and retained in Korea. Dividends paid on, and the Won proceeds of the sale of, any shares held by a non-resident of Korea must be deposited either in a Won account with the investor’s financial investment company with a dealing and/or brokerage license or in his Won account. Funds in the investor’s Won account may be transferred to his foreign currency account or withdrawn for local living expenses up to certain limitations. Funds in the Won account may also be used for future investment in shares or for payment of the subscription price of new shares obtained through the exercise of preemptive rights.

Financial investment companies with dealing and/or brokerage licenses are allowed to open foreign currency accounts with foreign exchange banks exclusively for accommodating foreign investors’ stock investments in Korea. Through these accounts, such financial investment companies may enter into foreign exchange transactions on a limited basis, such as conversion of foreign currency funds and Won funds, either as a counterparty to or on behalf of foreign investors, without the investors having to open their own accounts with foreign exchange banks.

 

Item 10.E. Taxation

United States Taxation

This summary describes certain material U.S. federal income tax consequences for a U.S. holder (as defined below) of acquiring, owning, and disposing of common shares or ADSs. This summary applies to you only if you

 

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hold the common shares or ADSs as capital assets for tax purposes. This summary does not apply to you if you are a member of a class of holders subject to special rules, such as:

 

   

a dealer in securities or currencies;

 

   

a trader in securities that elects to use a mark-to-market method of accounting for securities holdings;

 

   

a bank;

 

   

a life insurance company;

 

   

a tax-exempt organization;

 

   

a person that holds common shares or ADSs that are a hedge or that are hedged against interest rate or currency risks;

 

   

a person that holds common shares or ADSs as part of a straddle or conversion transaction for tax purposes;

 

   

a person whose functional currency for tax purposes is not the U.S. dollar; or

 

   

a person that owns or is deemed to own 5% or more of any class of our stock.

This summary is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations promulgated thereunder, and published rulings and court decisions, all as currently in effect. These laws are subject to change, possibly on a retroactive basis.

Please consult your own tax advisers concerning the U.S. federal, state, local, and other tax consequences of purchasing, owning, and disposing of common shares or ADSs in your particular circumstances.

For purposes of this summary, you are a “U.S. holder” if you are the beneficial owner of a common share or an ADS and are:

 

   

a citizen or resident of the United States;

 

   

a U.S. domestic corporation; or

 

   

otherwise subject to U.S. federal income tax on a net income basis with respect to income from the common share or ADS.

In general, if you are the beneficial owner of ADSs, you will be treated as the beneficial owner of the common shares represented by those ADSs for U.S. federal income tax purposes, and no gain or loss will be recognized if you exchange an ADS for the common share represented by that ADS.

Dividends

The gross amount of cash dividends that you receive (prior to deduction of Korean taxes) generally will be subject to U.S. federal income taxation as foreign source dividend income and will not be eligible for the dividends received deduction. Dividends paid in Won will be included in your income in a U.S. dollar amount calculated by reference to the exchange rate in effect on the date of your receipt of the dividend, in the case of common shares, or the depositary’s receipt, in the case of ADSs, regardless of whether the payment is in fact converted into U.S. dollars. If such a dividend is converted into U.S. dollars on the date of receipt, you generally should not be required to recognize foreign currency gain or loss in respect of the dividend income.

Subject to certain exceptions for short-term and hedged positions, the U.S. dollar amount of dividends received by an individual with respect to the ADSs will be subject to taxation at reduced rates if the dividends are “qualified dividends.” Dividends paid on the ADSs will be treated as qualified dividends if (i) the ADSs are readily tradable on an established securities market in the United States and (ii) we were not, in the year prior to

 

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the year in which the dividend was paid, and are not, in the year in which the dividend is paid, a passive foreign investment company as defined for U.S. federal income tax purposes (“PFIC”). The ADSs are listed on the New York Stock Exchange, and will qualify as readily tradable on an established securities market in the United States so long as they are so listed. Based on our audited financial statements, we believe that we were not a PFIC in our 2012 or 2013 taxable year. In addition, based on our audited financial statements and current expectations regarding our income, assets and activities, we do not anticipate becoming a PFIC for our 2014 taxable year.

Distributions of additional shares in respect of common shares or ADSs that are made as part of a pro-rata distribution to all of our stockholders generally will not be subject to U.S. federal income tax.

Sale or Other Disposition

For U.S. federal income tax purposes, gain or loss you realize on a sale or other disposition of common shares or ADSs generally will be treated as U.S. source capital gain or loss, and will be long-term capital gain or loss if the common shares or ADSs were held for more than one year. Your ability to offset capital losses against ordinary income is limited. Long-term capital gain recognized by an individual U.S. holder generally is subject to taxation at reduced rates.

Foreign Tax Credit Considerations

You should consult your own tax advisers to determine whether you are subject to any special rules that limit your ability to make effective use of foreign tax credits, including the possible adverse impact of failing to take advantage of benefits under the income tax treaty between the United States and Korea. If no such rules apply, you may claim a credit against your U.S. federal income tax liability for Korean taxes withheld from dividends on the common shares or ADSs, so long as you have owned the common shares or ADSs (and not entered into specified kinds of hedging transactions) for at least a 16-day period that includes the ex-dividend date. Instead of claiming a credit, you may, if you so elect, deduct such Korean taxes in computing your taxable income, subject to generally applicable limitations under U.S. tax law. Korean taxes withheld from a distribution of additional shares that is not subject to U.S. tax may be treated for U.S. federal income tax purposes as imposed on “general category” income. Such treatment could affect your ability to utilize any available foreign tax credit in respect of such taxes.

Any Korean securities transaction tax or agriculture and fishery special surtax that you pay will not be creditable for foreign tax credit purposes.

Foreign tax credits will not be allowed for withholding taxes imposed in respect of certain short-term or hedged positions in securities and may not be allowed in respect of arrangements in which a U.S. holder’s expected economic profit is insubstantial.

The calculation of foreign tax credits and, in the case of a U.S. holder that elects to deduct foreign taxes, the availability of deductions involve the application of complex rules that depend on a U.S. holder’s particular circumstances. You should consult your own tax advisers regarding the creditability or deductibility of such taxes.

U.S. Information Reporting and Backup Withholding Rules

Payments of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries are subject to information reporting and may be subject to backup withholding unless the holder (i) is a corporation or other exempt recipient and demonstrates this when required or (ii) provides a taxpayer identification number and certifies that no loss of exemption from backup withholding has occurred. Holders that are not U.S. persons generally are not subject to information reporting or backup withholding. However, such a holder may be required to provide a certification of its non-U.S. status in connection with payments received within the United States or through a U.S.-related financial intermediary.

 

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Korean Taxation

The following summary of Korean tax considerations applies to you so long as you are not:

 

   

a resident of Korea;

 

   

a corporation with its head office, principal place of business or place of effective management in Korea; or

 

   

engaged in a trade or business in Korea through a permanent establishment or a fixed base to which the relevant income is attributable or with which the relevant income is effectively connected.

Taxation of Dividends on Common Shares or ADSs

We will deduct Korean withholding tax from dividends paid to you (whether payable in cash or in shares) at a rate of 22.0% (inclusive of local income surtax). If you are a beneficial owner of the dividends in a country that has entered into a tax treaty with Korea, you may qualify for a reduced rate of Korean withholding tax. See “—Tax Treaties” below for a discussion on treaty benefits. If we distribute to you shares representing a transfer of earning surplus or certain capital reserves into paid-in capital, that distribution may be subject to Korean withholding tax.

Taxation of Capital Gains From Transfer of Common Shares or ADSs

As a general rule, capital gains earned by non-residents upon transfer of our common shares or ADSs are subject to Korean withholding tax at the lower of (1) 11% (inclusive of local income surtax) of the gross proceeds realized or (2) subject to the production of satisfactory evidence of acquisition costs and certain direct transaction costs of the common shares or ADSs, 22.0% (inclusive of local income surtax) of the net realized gain, unless exempt from Korean income taxation under the applicable Korean tax treaty with the non-resident’s country of tax residence. See “—Tax Treaties” below for a discussion on treaty benefits. Even if you do not qualify for an exemption under a tax treaty, you will not be subject to the foregoing withholding tax on capital gains if you qualify under the relevant Korean domestic tax law exemptions discussed in the following paragraphs.

In regards to the transfer of our common shares through the Korea Exchange, you will not be subject to the withholding tax on capital gains (as described in the preceding paragraph) if you (1) have no permanent establishment in Korea and (2) did not own or have not owned (together with any shares owned by any person with which you have a certain special relationship) 25% or more of the total issued and outstanding shares, which may include the common shares represented by the ADSs, at any time during the calendar year in which the sale occurs and during the five calendar years prior to the calendar year in which the sale occurs.

Under Korean tax law, ADSs are viewed as shares of common stock for capital gains tax purposes. Accordingly, capital gains from the sale or disposition of ADSs are taxed (if such sale or disposition constitutes a taxable event) as if such gains are from the sale or disposition of the underlying common shares. Capital gains that you earn (regardless of whether you have a permanent establishment in Korea) from a transfer of ADSs outside of Korea will generally be exempt from Korean income taxation by virtue of the Special Tax Treatment Control Law of Korea, or the STTCL, provided that the issuance of the ADSs is deemed to be an overseas issuance under the STTCL. However, if you transfer ADSs after having converted the underlying common shares, such exemption under the STTCL will not apply and you will be required to file a corporate income tax return and pay tax in Korea with respect to any capital gains derived from such transfer unless the purchaser or a financial investment company with a brokerage license, as applicable, withholds and pays such tax.

If you are subject to tax on capital gains with respect to the sale of ADSs, or of our common shares you acquired as a result of a withdrawal, the purchaser or, in the case of the sale of the common shares on the Korea

 

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Exchange or through a financial investment company with a brokerage license in Korea, such financial investment company is required to withhold Korean tax from the sales price in an amount equal to the lower of (1) 11% (inclusive of local income surtax) of the gross realization proceeds or (2) subject to the production of satisfactory evidence of acquisition costs and certain direct transaction costs of the common shares or ADSs, 22.0% (inclusive of local income surtax) of the net realized gain, and to make payment of these amounts to the Korean tax authority, unless you establish your entitlement to an exemption under an applicable tax treaty or domestic tax law. See the discussion under “—Tax Treaties” below for an additional explanation on claiming treaty benefits.

Tax Treaties

Korea has entered into a number of income tax treaties with other countries (including the United States), which would reduce or exempt Korean withholding tax on dividends on, and capital gains on transfer of, the common shares or ADSs. For example, under the Korea-United States income tax treaty, reduced rates of Korean withholding tax of 16.5% or 11.0% (depending on your shareholding ratio and inclusive of resident surtax) on dividends and an exemption from Korean withholding tax on capital gains are available to residents of the United States that are beneficial owners of the relevant dividend income or capital gains, subject to certain exceptions. However, under Article 17 (Investment or Holding Companies) of the Korea-United States income tax treaty, such reduced rates and exemption do not apply if (i) you are a United States corporation, (ii) by reason of any special measures, the tax imposed on you by the United States with respect to such dividend income or capital gains is substantially less than the tax generally imposed by the United States on corporate profits and (iii) 25% or more of your capital is held of record or is otherwise determined, after consultation between competent authorities of the United States and Korea, to be owned directly or indirectly by one or more persons who are not individual residents of the United States. Also, under Article 16 (Capital Gains) of the Korea-United States income tax treaty, the exemption on capital gains does not apply if you are an individual and (a) you maintain a fixed base in Korea for an aggregate of 183 days or more during a given taxable year and your ADSs or common shares giving rise to capital gains are effectively connected with such fixed base or (b) you are present in Korea for an aggregate of 183 days or more during a given taxable year.

You should inquire for yourself whether you are entitled to the benefit of a tax treaty between Korea and the country where you are a resident. It is the responsibility of the party claiming the benefits of an income tax treaty in respect of dividend payments or capital gains to submit to us, the purchaser or the financial investment company, as applicable, a certificate as to his tax residence. In the absence of sufficient proof, we, the purchaser or the financial investment company, as applicable, must withhold tax at the normal rates. Furthermore, in order for you to claim the benefit of a tax rate reduction or tax exemption on certain Korean source income (such as dividends or capital gains) under an applicable tax treaty, Korean tax law requires you (or your agent) to submit an application (for reduced withholding tax rate, “application for entitlement to reduced tax rate,” and in the case of exemptions from withholding tax, “application for tax exemption,” along with a certificate of your tax residency issued by a competent authority of your country of tax residence, subject to certain exceptions) as the beneficial owner of such Korean source income (“BO application”). Such application should be submitted to the withholding agent prior to the payment date of the relevant income. Subject to certain exceptions, where the relevant income is paid to an overseas investment vehicle (which is not the beneficial owner of such income) (“OIV”), a beneficial owner claiming the benefit of an applicable tax treaty with respect to such income must submit its BO application to such OIV, which must submit an OIV report and a schedule of beneficial owners to the withholding agent prior to the payment date of such income. In the case of a tax exemption application, the withholding agent is required to submit such application (together with the applicable OIV report in the case of income paid to an OIV) to the relevant district tax office by the ninth day of the month following the date of the payment of such income.

Inheritance Tax and Gift Tax

If you die while holding an ADS or donate an ADS, it is unclear whether, for Korean inheritance and gift tax purposes, you will be treated as the owner of the common shares underlying the ADSs. If the tax authority

 

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interprets depositary receipts as the underlying share certificates, you may be treated as the owner of the common shares and your heir or the donee (or in certain circumstances, you as the donor) will be subject to Korean inheritance or gift tax presently at the rate of 10% to 50%, provided that the value of the ADSs or the common shares is greater than a specified amount.

If you die while holding a common share or donate a common share, your heir or donee (or in certain circumstances, you as the donor) will be subject to Korean inheritance or gift tax at the same rate as indicated above.

At present, Korea has not entered into any tax treaty relating to inheritance or gift taxes.

Securities Transaction Tax

If you transfer our common shares on the Korea Exchange, you will be subject to securities transaction tax at the rate of 0.15% and an agriculture and fishery special surtax at the rate of 0.15% of the sale price of the common shares. If your transfer of the common shares is not made on the Korea Exchange, subject to certain exceptions, you will be subject to securities transaction tax at the rate of 0.5% and will not be subject to an agriculture and fishery special surtax.

Under the Securities Transaction Tax Law, depositary receipts (such as American depositary receipts) constitute share certificates subject to the securities transaction tax. However, the transfer of depositary receipts listed on the New York Stock Exchange, the Nasdaq Global Market, or other qualified foreign exchanges is exempt from the securities transaction tax.

In principle, the securities transaction tax, if applicable, must be paid by the transferor of the common shares or ADSs. When the transfer is effected through a securities settlement company, such settlement company is generally required to withhold and pay the tax to the tax authorities. When such transfer is made through a financial investment company only, such financial investment company is required to withhold and pay the tax. Where the transfer is effected by a non-resident without a permanent establishment in Korea, other than through a securities settlement company or a financial investment company, the transferee is required to withhold the securities transaction tax.

Non-reporting or under-reporting of securities transaction tax will generally result in penalties equal to 20% to 40% of the non-reported tax amount or 10% to 40% of under-reported tax amount. Also, a failure to timely pay securities transaction tax will result in a penalty equal to 10.95% per annum of the due but unpaid tax amount. The penalties are imposed on the party responsible for paying the securities transaction tax or, if such tax is required to be withheld, on the party that has the obligation to withhold.

 

Item 10.F. Dividends and Paying Agents

Not applicable.

 

Item 10.G. Statements by Experts

Not applicable.

 

Item 10.H. Documents on Display

We are subject to the information requirements of the U.S. Securities Exchange Act of 1934, as amended, and, in accordance therewith, are required to file reports, including annual reports on Form 20-F, and other information with the U.S. Securities and Exchange Commission. These materials, including this annual report and the exhibits thereto, may be inspected and copied at the Commission’s public reference rooms in

 

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Washington, D.C., New York, New York and Chicago, Illinois. Please call the Commission at 1-800-SEC-0330 for further information on the public reference rooms. As a foreign private issuer, we are also required to make filings with the Commission by electronic means. Any filings we make electronically will be available to the public over the Internet at the Commission’s web site at http://www.sec.gov.

 

Item 10.I. Subsidiary Information

Not applicable.

 

Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Overview

As a financial services provider, we are exposed to various risks related to our lending and trading businesses, our funding activities and our operating environment, principally through Kookmin Bank, our banking subsidiary. Our goal in risk management is to ensure that we identify, measure, monitor and control the various risks that arise, and that our organization adheres strictly to the policies and procedures which we establish to address these risks. Under our internal regulations pertaining to our consolidated capital adequacy ratio and internal standards for risk appetite and economic capital under Basel III, we identify the following eight separate categories of risk inherent in our business activities: credit risk, market risk, operational risk, interest rate risk, liquidity risk, credit concentration risk, reputation risk and strategic risk. Of these, the principal risks to which we are exposed are credit risk, market risk, liquidity risk and operational risk, and we strive to manage these and other risks within acceptable limits.

Organization

We have a multi-tiered risk management governance structure. Our Risk Management Committee is ultimately responsible for group-wide risk management, and directs our various subordinate risk management entities. The Risk Management Council reports directly to the Risk Management Committee and coordinates the implementation of directives set forth by the Risk Management Committee with the relevant risk management units of our subsidiaries. The Subsidiary Risk Management Committee of each of our subsidiaries, based on the Risk Management Committee’s directives, determines risk management strategies and implements risk management policies and guidelines for such subsidiary and directs the activities of the subsidiary’s risk management units within the risk guidelines set at the group level. Each Subsidiary Risk Management Committees generally receive inputs from the respective risk management units of such subsidiary, who also report directly to the Risk Management Committee.

 

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The following chart sets out our risk management governance structure as of the date of this annual report:

 

LOGO

Risk Management Committee

Our Risk Management Committee is a board-level committee that is responsible for overseeing all risks and advising the board of directors with respect to risk management-related issues. The committee consists of four non-executive directors (one of whom serves as the chairman of the committee), and its major roles include:

 

   

establishing risk management strategies in accordance with the directives of the board of directors;

 

   

determining our target risk appetite;

 

   

reviewing the level of risks we are exposed to and the appropriateness of our risk management policies, systems and operations; and

 

   

allocating risk capital to each subsidiary and approving our subsidiaries’ risk limits.

Risk Management Council

Our Risk Management Council is responsible for coordinating with the risk management units of our subsidiaries to ensure that they implement the policies, guidelines and limits established by the Risk Management Committee. Its responsibilities include:

 

   

analyzing our risk status by using information provided by our subsidiary-level risk management units;

 

   

adjusting the integrated risk capital allocation plan and risk limits for each of our subsidiaries; and

 

   

coordinating issues relating to the group-wide integration of our risk management functions.

The Risk Management Council is comprised of our chief risk management officer and the chief risk management officers of all of our subsidiaries. It operates independently from all business units, and reports directly the Risk Management Committee. Our Risk Management Council convenes on a quarterly basis.

Subsidiary Risk Management Committees

Each of our subsidiaries has delegated risk management authority to its Subsidiary Risk Management Committee. Each Subsidiary Risk Management Committee measures and monitors the various risks faced by the

 

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relevant subsidiary and reports to that subsidiary’s board of directors regarding decisions that it makes on risk management issues. It also makes certain strategic risk-related decisions regarding the operations of the relevant subsidiary, such as allocating credit risk limits, setting total exposure limits and market risk-related limits and determining which market risk derivatives instruments the subsidiary can trade. The major activities of each Subsidiary Risk Management Committee include:

 

   

determining and monitoring risk policies, guidelines, limits and tolerance levels and the level of subsidiary risk in accordance with group policy;

 

   

reviewing and analyzing the subsidiary’s risk profile;

 

   

setting limits for and adjusting the risk capital allocation plan and risk levels for each business unit within the subsidiary; and

 

   

monitoring compliance with our group-wide risk management policies and practices at the business unit and subsidiary level.

Each Subsidiary Risk Management Committee is comprised of the subsidiary’s chief executive officer, the non-executive directors on its board of directors and the director of its risk management unit.

Credit Risk Management

Credit risk is the risk of expected and unexpected losses in the event of borrower or counterparty defaults. Credit risk management aims to improve asset quality and generate stable profits while reducing risk through diversified and balanced loan portfolios. We determine the creditworthiness of each type of borrower or counterparty through reviews conducted by our credit experts and through our credit rating systems, and we set a credit limit for each borrower or counterparty.

We assess and manage all credit exposures. We measure expected losses and economic capital on assets (whether on- or off-balance sheet) that are subject to credit risk management and use expected losses and economic capital as management indicators. We manage credit risk by allocating credit risk economic capital limits. In addition, we control credit concentration risk exposure by applying and managing total exposure limits to prevent excessive risk concentration to particular industries or borrowers. Credit exposures that we assess and manage include loans to borrowers and counterparties, investments in securities, letters of credit, bankers’ acceptances, derivatives and commitments. Our risk appetite, which is the ratio of our required economic capital to our estimated available book capital, is approved by the Risk Management Committee once a year. Thereafter, Kookmin Bank calculates economic capital every month for its business groups and bank-wide based on attributed economic capital in accordance with the risk appetite as approved by the Risk Management Committee, and measures and reports profiles of credit risk on a bank-wide level and by business group regularly to its relevant business groups and senior management, including Kookmin Bank’s Risk Management Council and Risk Management Committee.

We use expected default rates and recovery rates to determine the expected loss rate of a borrower or counterparty. We use the expected loss rate to make credit related decisions, including pricing, loan approval and establishment of standards to be followed at each level of decision making. These rates are calculated using information gathered from our internal database. With respect to large corporate borrowers, we also use information provided by external credit rating services to calculate default rates and recovery rates.

Our credit risk management processes include:

 

   

establishing credit policy;

 

   

credit evaluation and approval;

 

   

industry assessment;

 

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total exposure management;

 

   

collateral evaluation and monitoring;

 

   

credit risk assessment;

 

   

early warning and credit review; and

 

   

post-credit extension monitoring.

Credit Evaluation

Kookmin Bank evaluates the ability of all loan applicants to repay their debts before it approves any loans, except for loans fully guaranteed by letters of guarantee issued by the Credit Guarantee Fund and the Korea Technology Credit Guarantee Fund, for loans fully secured by deposits and for other loans similarly guaranteed or secured. Kookmin Bank assigns each borrower or guarantor a credit rating based on the judgment of its experts or scores calculated using the appropriate credit rating system. Factors that Kookmin Bank considers in assigning credit ratings include both financial factors and non-financial factors, such as its perception of a borrower’s reliability, management and operational risk and risk relating to the borrower’s industry. The credit rating process differs according to the type, size and characteristics of a borrower.

Kookmin Bank uses its internally developed credit rating systems to rate potential borrowers. As the characteristics of each customer segment differ, Kookmin Bank uses several credit rating systems for its customers. The nature of the credit rating system used for a particular borrower depends on whether the borrower is an individual, a “small office/home office” customer, a small- and medium-sized enterprise or a large company. For large companies, Kookmin Bank has 17 credit ratings, ranging from AAA to D. For small- and medium-sized enterprises, it has 15 credit ratings ranging from AA to D. For retail customers, it has 13 credit ratings ranging from grade 1 to grade 13.

Based on the credit rating of a borrower, Kookmin Bank applies different credit policies, which affect factors such as credit limit, loan period, loan pricing, loan classification and provisioning. Kookmin Bank also uses these credit ratings in evaluating its bank-wide risk management strategy. Factors Kookmin Bank considers in making this evaluation include the profitability of each company or transaction, performance of each business unit and portfolio management. Kookmin Bank monitors the credit status of borrowers and collect information to adjust its ratings appropriately. If Kookmin Bank changes a borrower’s credit rating, it will also change the credit policies relating to that borrower and may also change the policies underlying its loan portfolio.

Retail Loan Approval Process

Mortgage Loans and Secured Retail Loans. Kookmin Bank’s processing center staff reviews mortgage loans and retail loans secured by real estate or guarantees. Branch staff employees of Kookmin Bank forward loan applications to processing centers. However, in the case of loans secured by deposits with Kookmin Bank, its branch staff approves such loans. Kookmin Bank makes lending decisions based on its assessment of the value of the collateral, debt service capability and the borrower’s score generated from its credit scoring systems.

For mortgage loans and loans secured by real estate, Kookmin Bank evaluates the value of the real estate offered as collateral using a database it has developed that contains information about real estate values throughout Korea. Kookmin Bank also uses information from a third party provider about the real estate market in Korea, which gives it up-to-date market value information for Korean real estate. In addition, Kookmin Bank’s processing center staff employees review the value of real estate provided by the evaluation system to ensure there are no significant discrepancies. Kookmin Bank bases decisions regarding the approval of such loans primarily on the results of its credit scoring systems.

For loans secured by deposits, Kookmin Bank will generally grant loans up to 95% of the deposit amount if it holds the deposit.

 

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With respect to mortgage loans and secured retail loans, Kookmin Bank screens customers based on various items on its checklist that indicate whether the customer may have deteriorating credit using internal information and rating information from credit bureaus. Kookmin Bank also evaluates debt service capability for eligible customers pursuant to certain checklist items, such as type of residence, profession, family information, annual income, age, credit card overdue information, transaction history (with both it and other financial institutions) and other relevant credit information.

Kookmin Bank generally decides whether to evaluate a loan application within three to five days after recording the relevant information in its credit scoring systems.

Unsecured Retail Loans. Kookmin Bank reviews applications for unsecured retail loans in accordance with its credit scoring systems. These automated systems evaluate loan applications and determine an appropriate pricing for the loan. The major benefits of using a credit scoring system are that it yields uniform results regardless of the user, that it can be used effectively by employees who do not necessarily have extensive experience in credit evaluation and that it can be updated easily to reflect changing market conditions by adjusting how each factor is weighted. The staff of Kookmin Bank’s processing centers reviews the results of the credit scoring system based on information input by its branch staff and, if approved, issues the loan.

Kookmin Bank’s credit scoring systems take into account factors including borrower’s income, assets, profession, age, transaction history (with both it and other financial institutions) and other relevant credit information. The systems rank each borrower in an appropriate grade, and that grade is used as a factor in deciding whether to approve loans as well as to determine loan amounts.

Kookmin Bank generally bases its decisions on the results of its credit scoring systems to evaluate applications. However, a credit officer may overturn the results of the credit scoring systems, in certain circumstances.

Corporate Loan Approval Process

We approve corporate loans at different levels of our organization depending on the size and type of the loan, the credit risk level assessed by the credit rating system, whether the loan is secured by collateral and, if secured, the value of the collateral. The lowest level of authority is the branch staff employee of Kookmin Bank, who can approve small loans and loans that have the lowest range of credit risk. Larger loans and loans with higher credit risk are approved by higher levels of authority depending on where they fall in a matrix of loan size and credit risk. Depending on the size and terms of any particular loan or the credit risk relating to a particular borrower, more than one entity may review the application, although generally loan applications are reviewed only by the entity having corresponding authority to approve the loan.

Kookmin Bank evaluates all of its corporate borrowers by using credit rating systems, except for applicants whose borrowings are fully secured by deposits or applicants who have obtained third-party guarantees from the government or certain other very highly rated guarantors. See “—Credit Evaluation.”

For owner-operated enterprises (which we refer to as SOHOs) with total outstanding loans of ₩1 billion or less, Kookmin Bank has put in place a retail SOHO credit rating system, which adopts simplified credit evaluation modeling procedures. This system consists of a scoring model, a qualitative credit assessment (or QCA) model and a preliminary examination checklist. The scoring model analyzes information with respect to the customer’s personal information and bank transaction history. The QCA model analyzes information about business capability, operating capability, management capability, transaction reliability, documentary reliability and financial stability.

The preliminary examination checklist is based on information regarding the customer’s credit delinquencies, loans and outstanding credit card debt. This system classifies customers into 13 possible credit ratings.

 

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For SOHOs with total outstanding loans of more than ₩1 billion, Kookmin Bank has put in place a separate credit rating system known as “SOHO CRS.” For other small- and medium-sized enterprises, Kookmin Bank has put in place a similar credit rating system known as CRS. For large corporations, Kookmin Bank has put in place a similar credit rating system known as LCRS. For financial institutions, certain non-profit organizations and public institutions, Kookmin Bank has put in place a similar credit rating system known as FNP CRS. The SOHO CRS, the CRS, the LCRS and the FNP CRS models consist of the following three parts:

 

   

Financial Model. The financial model uses the borrower’s current status and trend of financial ratios calculated using its financial statements. The financial model classifies potential borrowers into one of three size categories and one of five types of industry. This model incorporates logistic regression and statistical methods, which use financial ratios such as stability ratio, cash flow ratio, profitability ratio and turnover ratio to make credit determinations.

 

   

QCA Model. The QCA model uses various qualitative factors, such as future repayment capability, market prospects, management capability and business capability, to evaluate borrowers. The factors that are evaluated and the weighting given to each factor vary by type of industry and size of company.

 

   

Default Signal Check Model. The default signal check model checks the consistency of the preliminary rating. This model checks various factors, including financial ratios with low scores, any non-quantitative factors that may cause a corporate default and any information arising from past experience, to determine the likelihood of a future default. The results of the default signal check model may be used to cap a borrower’s credit grade.

In addition to the three parts outlined above, the SOHO CRS also includes a “CEO Evaluation Model,” which analyzes information with respect to personal information and bank transaction history of the individual owner of such SOHO.

We often refer to corporate information gathered or ratings assigned by external credit rating agencies, such as Korea Information Service, National Information & Credit Evaluation Inc. and Korea Management Consulting & Credit Rating Corporation, in order to improve the accuracy of our credit ratings.

Credit Card Approval Process

We make decisions on all credit card approvals based on the Financial Supervisory Service standard of review for payment ability (such as the occupation and income of the applicant), as well as a combination of KB Kookmin Card’s internal application scoring system and a credit scoring system developed by independent credit bureaus.

KB Kookmin Card’s application scoring system reflects various credit information, including basic customer information (such as credit history), transaction history with it, if any, delinquency and transaction history with other card companies and financial institutions and credit information provided by the Korea Federation of Banks and other credit bureaus. KB Kookmin Card also considers repayment ability, total assets, total outstanding debts and the length of the applicant’s relationship, if any, and past contribution to our profitability, if any.

The credit scoring system developed by credit bureaus, reflects various sources of information regarding the credit risk of customers, including delinquency and transaction history with other credit card companies and financial institutions.

On the basis of the standard of review for payment ability and the combination of the scores from our application scoring system and the credit scoring system developed by independent credit bureaus, KB Kookmin Card establishes, among other things, the term of any new approvals, initial limits and differentiation of fee rates with respect to its credit cards. KB Kookmin Card’s systems allow it to differentiate applicants into groups that receive immediate credit card approval or rejection, or that may require it to further investigate that applicant’s

 

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credit qualifications. The initial limits of new applicants are based on their estimated disposable income, which is based on their occupation and the value of their personal assets. KB Kookmin Card applies its fee rates to applicants differently according to risk premium and profitability.

Total Exposure Management

We establish and manage total exposure limits for corporations, chaebols and industries, as well as certain small- and medium-sized enterprises, in order to optimize the use of credit availability and avoid excessive risk concentration. We establish total exposure limits for large corporations to which we have exposures (in the form of securities or loans) of over ₩30 billion, small- and medium-sized enterprises to which we have exposures (in the form of securities or loans) of over ₩20 billion and chaebols designated by the Financial Supervisory Service or by Kookmin Bank, by reviewing factors such as their industry, size, cash flows, financial ratios and credit ratings, while establishing exposure limits for industries by peer group, as defined by us, by reviewing the sales growth rate and risk concentration for each industry. The guidelines used to set these total exposure limits are approved by Kookmin Bank’s Risk Management Council after review by the Credit Risk Management Subcommittee.

Kookmin Bank’s maximum exposure limit is within 25% of its Tier I and Tier II capital for a single chaebol, and within 10% of its Tier I and Tier II capital for an individual large corporation.

We manage and control exposure limits on a daily basis. The principal system that we use for this purpose is the Total Exposure Management System. This system allows us to monitor and control our total exposure to large corporations, chaebols and industries. We monitor our exposure to large corporations to which we have an exposure of ₩30 billion or more, individual corporations to which we have an exposure of more than ₩20 billion, and also our exposure to the 54 chaebols, which are comprised of the 30 largest chaebols in Korea designated as such by the Financial Supervisory Service based on their outstanding exposures as well as 24 chaebols selected for monitoring by the Senior Executive Vice President of Kookmin Bank’s Risk Management Division. We also monitor our exposure to industries by peer groups. Our Total Exposure Management System integrates all of our credit-related risk including credit extended by our overseas branches and affiliates. The assets subject to the system include all Won-denominated and foreign currency-denominated loans, all assets in trust accounts except specified money trusts, guarantees, trade-related credits, commercial paper, corporate bonds and other securities and derivatives.

Collateral Evaluation and Monitoring System

Kookmin Bank uses the Collateral Evaluation and Monitoring System to manage the liquidation value of collateral it holds. The Collateral Evaluation and Monitoring System is a computerized collateral management system that can be accessed from Kookmin Bank’s headquarters and its branches. Using this system, Kookmin Bank can more accurately assess the actual liquidation value of collateral, determine the recovery rate on its loans and use this information in setting its credit risk management and loan policies. Kookmin Bank can monitor the value of all the collateral a borrower provides and the value of that collateral based on its liquidation value. When appraising the value of real estate collateral, which makes up the largest part of Kookmin Bank’s collateral, Kookmin Bank consults a regularly updated database provided by a third party that tracks the prices at which various types of real estate in various regions of Korea are sold. Kookmin Bank appraises the value of collateral when it makes a loan, when the loan is due for renewal and when events occur that may change the value of the collateral.

Credit Risk Management and Monitoring

Kookmin Bank’s Credit Risk Department manages and regulates our loan portfolio policies. It also analyzes and monitors our loan portfolios and monitors our compliance with the applicable limits for credit risk. Moreover, it separately manages high-risk products, such as real estate project financing loans and cross-market derivative products, by setting appropriate limits.

 

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Credit Review

Kookmin Bank’s credit review function is independent of the business groups which manage our assets. Its Credit Review Department:

 

   

reviews internal credit regulations, policies and systems;

 

   

analyzes the credit status of selected loan assets and verifies the appropriateness of the credit evaluations/approvals made by branches and headquarters; and

 

   

evaluates the corporate credit risk of potentially insolvent companies.

More specifically, Kookmin Bank’s Credit Review Department continuously reviews the financial condition of selected borrowers with respect to their current debt, collateral, business, transactions with related parties and debt service capability. Based on such review, Kookmin Bank may adjust the borrower’s credit rating, lending policy or asset quality classification of the loan provided to the borrower, depending on the applicable circumstances. Kookmin Bank also regularly reviews other aspects of the lending process, including industries and regions in which its borrowers operate and the quality of its domestic and overseas assets. Kookmin Bank’s industry reviews focus on growth, stability, competition and ability to adapt to a changing environment. Based on the results of a particular industry review, Kookmin Bank may revise the total exposure limit assigned to that industry and lending policy for each company within that industry. When a review takes place, Kookmin Bank may adjust not only credit ratings of its borrowers based on a variety of factors, but also asset quality classification, credit limits and applied interest rates or its credit policies. Credit review results are reported to Kookmin Bank’s chief risk officer and its Risk Management Committee on a quarterly basis.

Kookmin Bank’s Credit Review Department also conducts on-site reviews of selected branches and related credit analysis centers which are experiencing increasing delinquency ratios and bad debts. During these visits Kookmin Bank examines the loan processes and recommend improvement plans and appropriate follow-up measures.

Also, based on guidelines provided by the Financial Supervisory Service to all Korean banks, Kookmin Bank operates a corporate credit risk assessment program to facilitate the identification of weak companies and possible commencement of corporate restructuring. Through this program, Kookmin Bank, together with other banks, is able to detect symptoms of financially troubled companies at an early stage, assess related credit risk and support the normalization of companies that are likely to turnaround through a workout process, or seek to liquidate those companies that are not likely to recover.

Kookmin Bank’s Credit Review Department also analyzes issues related to credit risk and provides information necessary for the formulation of effective credit policies and strategies and for effective credit risk management.

Market Risk Management

The major risk to which we are exposed is interest rate risk on debt instruments and interest bearing securities and, to a lesser extent, stock price risk and foreign exchange risk. The financial instruments that expose us to these risks are securities and financial derivatives. We are not exposed to commodity risk, the other recognized form of market risk, as we currently do not engage in commodities trading. We are also exposed to interest rate risk and liquidity risk in Kookmin Bank’s banking book. We divide market risk into risks arising from trading activities and risks arising from non-trading activities.

Kookmin Bank’s Risk Management Council establishes overall market risk management principles. It has delegated the responsibility for the market risk management for trading activities to the Market Risk Management Subcommittee of Kookmin Bank, which is chaired by Kookmin Bank’s chief risk officer. This subcommittee meets on a regular basis each month and as required to respond to developments in the market and

 

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the economy. Based on the policies approved by Kookmin Bank’s Risk Management Council, the Market Risk Management Subcommittee reviews and approves reports as required that include trading profits and losses, position reports, limit utilization, sensitivity analysis and VaR results for our trading activities.

Kookmin Bank’s Asset Liability Management Committee is responsible for day-to-day interest rate and liquidity risk management for its non-trading activities. The committee meets on a regular basis and as required to respond to developments in the market and the economy. Members of the Asset Liability Management Committee, acting through Kookmin Bank’s Financial Planning Department, review Kookmin Bank’s interest rate and liquidity gap position monthly, formulate a view on interest rates, establishing strategies with respect to deposit and lending rates and review the business profile and its impact on asset and liability management.

To ensure adequate interest rate and liquidity risk management, we have assigned the responsibilities for our asset and liability management risk control to Kookmin Bank’s Risk Management Department in Kookmin Bank’s Risk Management Division, which monitors and reviews the asset and liability management risk procedures and activities of Kookmin Bank’s Financial Planning Department, and independently reports to the management on the related issues.

Market Risk Management for Trading Activities

Our trading activities consist of:

 

   

trading activities for our own account to realize short-term trading profits in Won-denominated debt and equities markets and foreign exchange markets based on our short-term forecast of changes in the market situation; and

 

   

trading activities involving derivatives, such as swaps, forwards, futures and option transactions, to realize profits primarily from arbitrage transactions and, to a lesser extent, from selling derivative products to our customers and to hedge market risk incurred from those activities. In addition, certain derivative products that we use to hedge our own market risk are classified as trading activities as they do not qualify for hedge accounting treatment under IFRS. We believe, however, that certain of these products are effective as economic hedges.

We use derivative instruments to hedge our market risk and, to a limited extent, to make profits by trading derivative products within acceptable risk limits. The principal objective of our hedging strategy is to manage our market risk within established limits. We use the following hedging instruments to manage relevant risks:

 

   

to hedge interest rate risk arising from its trading activities, the Trading Department of Kookmin Bank occasionally uses interest rate futures (Korea Treasury Bond Futures) and interest rate swaps;

 

   

to hedge stock price risk arising from its trading activities, the Trading Department of Kookmin Bank selectively uses stock index futures;

 

   

to hedge interest rate risk and foreign exchange risk arising from our foreign currency-denominated asset and liability positions as well as our trading activities, the Trading Department and the Fund Management Department of Kookmin Bank use interest rate swaps, cross-currency interest rate swaps, foreign exchange forwards and futures, Euro-dollar futures and currency options; and

 

   

to change the interest rate characteristics of certain assets and liabilities after the original investment or funding, we use swaps. For example, depending on the market situation, we may choose to obtain fixed rate funding instead of floating rate funding if we believe that the terms are more favorable, which we can achieve by entering into interest rate swaps.

We generally manage our market risk at the portfolio level. To control our exposure to market risk, we use EC limits set by Kookmin Bank’s Risk Management Council for Kookmin Bank and at the group level within Kookmin Bank, VaR, position and stop loss limits set by Kookmin Bank’s Risk Management Council for

 

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Kookmin Bank and at the group level within Kookmin Bank, and VaR, position, stop loss and sensitivity limits (PVBP, Delta, Gamma, Vega) set by Kookmin Bank’s Market Risk Management Subcommittee at the department level within Kookmin Bank. We prepared our risk control and management guidelines for derivative trading based on the regulations and guidelines promulgated by the Financial Supervisory Service.

In addition, we have implemented internal processes which include a number of key controls designed to ensure that fair value is measured appropriately, particularly where a fair value model is internally developed and used to price a significant product. See “Item 5.A. Operating Results—Critical Accounting Policies—Valuation of Financial Instruments” and Notes 3.3 and 6 of the notes to our consolidated financial statements. For example, each year, Kookmin Bank’s Risk Management Department reviews the existing pricing and valuation models, with a focus on their underlying modeling assumptions and restrictions, to assess the appropriateness of their continued use. In consultation with Kookmin Bank’s Trading Department, the Risk Management Department recommends potential valuation models to Kookmin Bank’s Fair Value Evaluation Committee. Upon approval by Kookmin Bank’s Fair Value Evaluation Committee, the selected valuation models are reported to its Market Risk Management Subcommittee.

We monitor market risk arising from trading activities of our business groups and departments. The market risk measurement model we use for both our Won-denominated trading operations and foreign currency-denominated trading operations is implemented through our integrated market risk management system called Adaptiv, which enables us to generate consistent VaR numbers for all trading activities.

Value at Risk analysis. We use VaR to measure market risk. VaR is a statistically estimated maximum amount of loss that could occur over a given period of time at a given level of confidence. VaR is a commonly used market risk management technique. However, this approach does have some shortcomings. VaR estimates possible losses over a certain period at a particular confidence level using past market movement data. Past market movement, however, is not necessarily a good indicator of future events, as there may be conditions and circumstances in the future that the model does not anticipate. As a result, the timing and magnitude of the actual losses can be different depending on the assumptions made at the time of calculation. In addition, the time periods used for the model, generally one or ten days, are assumed to be a sufficient holding period before liquidating the relevant underlying positions. If these holding periods are not sufficient, or too long, the VaR results may understate or overstate the potential loss. Different VaR methodologies and distributional assumptions could produce a materially different VaR. VaR is most appropriate as a risk measure for trading positions in liquid capital markets and will understate the risk associated with severe events, such as a period of extreme illiquidity.

We use a 99% single tail confidence level to measure VaR, which means the actual amount of loss may exceed the VaR, on average, once out of 100 business days. Until 2011, we used the “variance-covariance method” or parametric VaR (“PVaR”) methodology to measure our daily VaR, which took into account the diversification effects among different risk categories as well as within the same risk category. In 2012, we received authorization from the Financial Services Commission to use a historical simulation VaR (“HSVaR”) methodology, which we believe to be more accurate and responsive in reflecting market volatilities, to measure market risk. Our ten-day HSVaR method, which is computed using a full valuation and is computationally intensive, uses an archive of historic price data and the VaR for a portfolio is estimated by creating a hypothetical time series of returns on that portfolio, obtained by running the portfolio through actual ten-day historical data and computing the changes that would have occurred in each ten-day period.

 

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The following table shows Kookmin Bank’s ten-day HSVaRs (at a 99% confidence level for a ten-day holding period) as of December 31, 2011, 2012 and 2013 for interest risk, stock price risk and foreign exchange risk relating to its trading activities. The following figures were calculated on a consolidated basis.

 

     As of December 31,  
         2011             2012             2013      
     (in billions of Won)  

Risk categories:

  

Interest risk

   18.8      8.3      17.0   

Stock price risk

     25.3        4.9        1.1   

Foreign exchange risk

     36.2        11.2        5.3   

Less: diversification

     (62.6     (12.7     (7.0
  

 

 

   

 

 

   

 

 

 

Diversified VaR for overall trading activities

   17.7      11.7      16.4   
  

 

 

   

 

 

   

 

 

 

In 2013, the average, high, low and ending amounts of ten-day HSVaR (at a 99% confidence level for a ten-day holding period) for Kookmin Bank relating to its trading activities were as follows.

 

     Trading activities VaR for 2013  
     Average      Minimum      Maximum      As of December 31,
2013
 
     (in billions of Won)  

Interest risk

   16.3       7.4       24.9       17.0   

Stock price risk

     3.5         0.9         7.1         1.1   

Foreign exchange risk

     9.3         5.3         13.6         5.3   

Less: diversification

              (7.0
           

 

 

 

Diversified VaR for overall trading activities

     17.3         10.9         22.2       16.4   
           

 

 

 

In 2012, the average, high, low and ending amounts of ten-day HSVaR (at a 99% confidence level for a ten-day holding period) for Kookmin Bank relating to its trading activities were as follows.

 

     Trading activities VaR for 2012  
     Average      Minimum      Maximum      As of December 31,
2012
 
     (in billions of Won)  

Interest risk

   20.1       8.3       29.3       8.3   

Stock price risk

     4.2         0.5         8.7         4.9   

Foreign exchange risk

     26.6         9.6         39.2         11.2   

Less: diversification

              (12.7
           

 

 

 

Diversified VaR for overall trading activities

     20.6         10.6         28.7       11.7   
           

 

 

 

 

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In 2011, the average, high and low amounts of ten-day HSVaR (at a 99% confidence level for a ten-day holding period) measured as of the end of each quarter, as well as the year end amounts of ten-day HSVaR, for Kookmin Bank relating to its trading activities were as follows.

 

     Trading activities VaR for 2011  
     Average  (1)      Minimum  (2)      Maximum  (3)      As of December 31,
2011
 
     (in billions of Won)  

Interest risk

   17.6       13.7       23.2       18.8   

Stock price risk

     22.0         1.6         57.2         25.3   

Foreign exchange risk

     21.7         12.8         36.2         36.2   

Less: diversification

              (62.6
           

 

 

 

Diversified VaR for overall trading activities

     19.7         8.2         39.5       17.7   
           

 

 

 

 

(1) 

The average of the amounts measured as of the end of each quarter in 2011.

(2) 

The lowest of the amounts measured as of the end of each quarter in 2011.

(3) 

The highest of the amounts measured as of the end of each quarter in 2011.

Standardized Method. Market risk for positions not measured by VaR are measured using the standardized method for measuring market risk-based required equity capital specified by the Financial Supervisory Service, which takes into account certain risk factors. Under the standardized method, the required equity capital is measured using the risk-weighted values for each risk factor. The method used to measure the market risk-based required equity capital for each risk factor is as follows:

 

   

Interest rate risk:

 

   

General market risk: General market risk relates to the risk of losses from macroscopic events which could have an impact on interest rates, stock prices, exchange rates, and market prices of general commodities. General market interest rate risk of a debt security is calculated on its net position, taking into consideration the remaining maturity and coupon rate.

 

   

Specific risk: Specific risk relates to the risk of loss from changes in credit risk of issuers of debt securities or equities, excluding changes in general market prices. Specific interest rate risk of a debt security is measured by multiplying the interest rate position appraised based on the market price of such security by the risk-weighted value applicable to the type of debt security, credit rating and the remaining maturity.

 

   

Equity risk: General and specific equity risk are calculated by multiplying the bought or sold position by the relevant risk-weighted values.

 

   

Foreign exchange risk: Foreign exchange risk is measured by multiplying the larger of the absolute values among the net bought or sold positions of each currency by the relevant risk-weighted values.

 

   

Option risk: Option risk is measured using the delta, gamma and vega of the option.

The standardized method is used to measure the market risk of the positions for which the Financial Supervisory Service has not approved the use of the VaR method. In addition, we use the standardized method for positions which are held by subsidiaries or for which measuring VaR is difficult due to the lack of daily position data. See Note 4.4.2 of the notes to our consolidated financial statements included elsewhere in this annual report.

Starting from January 1, 2012, the market risks of trading positions held by bond-type private equity funds that are consolidated in our financial statements are measured using VaR, whereas the standardized method was used to measure such market risks up to December 31, 2011. Accordingly, the required equity capital measured

 

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using the standardized method included the market risks of trading positions held by bond-type private equity funds prior to 2012 but no longer includes such market risks of bond-type private equity funds from 2012 onwards. The following table shows Kookmin Bank’s required equity capital measured using the standardized method as of December 31, 2011, 2012 and 2013, in each case excluding the market risks of trading positions held by bond-type private equity funds in accordance with the new methodology adopted in 2012.

 

     As of December 31,  
     2011      2012      2013  
     (in millions of Won)  

Risk categories:

        

Interest risk

   886       1,673       921   

Stock price risk

     3,781         4,567         2   

Foreign exchange risk

     9,561         9,081         9,214   
  

 

 

    

 

 

    

 

 

 

Total

   14,228       15,321       10,137   
  

 

 

    

 

 

    

 

 

 

Back-Testing. We conduct back testing on a daily basis to validate the adequacy of our market risk model. In back testing, we compare both the actual and hypothetical profit and loss with the VaR calculations and analyze any results that fall outside our predetermined confidence interval of 99%.

Stress testing. In addition to VaR, which assumes normal market situations, we use stress testing to assess our market risk exposure to abnormal market fluctuations. Abnormal market fluctuations include significant declines in the stock market and significant increases in the general level of interest rates. This is an important way to supplement VaR, as VaR is a statistical expression of possible loss under a given confidence level and holding period. It does not cover potential loss if the market moves in a manner that is outside our normal expectations. Stress testing projects the anticipated change in value of holding positions under certain scenarios assuming that no action is taken during a stress event to change the risk profile of a portfolio. According to Kookmin Bank’s stress testing, we estimate that as of December 31, 2013, Kookmin Bank’s trading portfolio could have lost ₩185 billion for an assumed short-term extreme decline of approximately 25% in the equity market and an approximate 87 basis point increase in interest rates under an abnormal stress environment.

We monitor the impact of market turmoil or any abnormality by conducting stress tests and confirming that the results are within our market risk limits. If the impact is large, Kookmin Bank’s chief risk officer may request that our portfolio be restructured or other appropriate action be taken.

Interest Risk

Interest risk from trading activities arises mainly from our trading of Won-denominated debt securities. Our trading strategy is to benefit from short-term movements in the prices of debt securities arising from changes in interest rates. As our trading accounts are marked-to-market daily, we manage the interest risk related to our trading accounts using market value-based tools such as VaR and sensitivity analysis. As of December 31, 2013, the VaR of Kookmin Bank’s interest risk from trading was ₩8.5 billion and the weighted average duration, or weighted average maturity, of its Won-denominated debt securities at fair value through profit or loss was approximately 1.18 years.

Foreign Exchange Risk

Foreign exchange risk arises because we have assets and liabilities that are denominated in currencies other than Won, as well as off-balance sheet items such as foreign exchange forwards and currency swaps.

Prior to August 2010, assets and liabilities denominated in U.S. dollars, Japanese yen, and Euro typically accounted for the majority of our foreign currency assets and liabilities. Beginning in August 2010, the

 

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Kazakhstan tenge has accounted for the majority of our foreign currency assets and liabilities. Until August 2010, our investment in JSC Bank CenterCredit, a Kazakhstan Bank, was fully hedged against currency risk. See “Item 4.B. Business Overview—Capital Markets Activities and International Banking—International Banking.” However, in August 2010, we decided to discontinue such currency hedge as the value of the Won had remained relatively stable against the Kazakhstan tenge for a prolonged period of time.

The difference between our foreign currency assets and liabilities is offset against forward foreign exchange positions, currency options and currency swaps to obtain our net foreign currency open position. Kookmin Bank’s Risk Management Council and Market Risk Management Subcommittee oversee Kookmin Bank’s foreign exchange exposure for both trading and non-trading purposes by establishing a limit for this net foreign currency open position, together with stop loss limits. VaR limits are established on a combined basis for our domestic operations and foreign branches.

The following table shows Kookmin Bank’s non-consolidated net open positions at the end of 2011, 2012 and 2013. Positive amounts represent long positions and negative amounts represent short positions. The net open positions held by subsidiaries other than Kookmin Bank are not significant.

 

     As of December 31, (1)  
     2011     2012     2013  
     (in millions of US$)  

Currency:

  

U.S. dollars

   US$ (83.7   US$ (72.0   US$ (135.0

Japanese yen

     (15.1     (8.3     (17.3

Euro

     (3.3     (4.8     (5.5

Kazakhstan tenge

     338.3        314.5        82.5   

Others

     (20.2     25.4        22.9   
  

 

 

   

 

 

   

 

 

 

Total

   US$ 216.0      US$ 254.8      US$ (52.4
  

 

 

   

 

 

   

 

 

 

 

(1) 

Amounts prepared on a non-consolidated basis.

Equity Price Risk

Equity price risk results from our equity derivatives trading portfolio in Won since we do not have any trading exposure to shares denominated in foreign currencies other than foreign equity index futures.

The equity derivatives trading portfolio in Won consists of exchange-traded stocks and equity derivatives under strict limits on diversification as well as position limits and stop loss limits.

Kookmin Bank’s Risk Management Council and Market Risk Management Subcommittee set annual and monthly stop loss limits that are monitored by Kookmin Bank’s Risk Management Department. In order to ensure timely action, the stop loss limit of individual securities is monitored by the relevant middle office.

As of December 31, 2013, Kookmin Bank’s equity trading position was ₩66.7 billion.

Derivative Market Risk

Our derivative trading includes interest rate and cross-currency swaps, foreign exchange forwards, stock index and interest rate futures and currency options. These activities consist primarily of the following:

 

   

arbitrage transactions to make profit from short-term discrepancies between the spot and forward derivative markets or within the derivative markets;

 

   

sales of tailor-made derivative products that meet various needs of our corporate customers and related transactions to reduce our exposure resulting from those sales;

 

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taking positions in limited cases when we expect short-swing profits based on our market forecasts; and

 

   

trading to hedge our interest rate and foreign currency risk exposure as described above.

Market risk from trading derivatives is not significant since our derivative trading activities are primarily driven by arbitrage and customer deals with very limited open trading positions.

Market Risk Management for Non-Trading Activities

Interest Rate Risk

Our principal market risk from non-trading activities is interest rate risk. Interest rate risk arises due to mismatches in the maturities or re-pricing periods of these rate-sensitive assets and liabilities. We measure interest rate risk for Won and foreign currency assets and liabilities in our bank accounts (including derivatives) and our principal guaranteed trust accounts. Most of our interest earning assets and interest bearing liabilities are denominated in Won and our foreign currency-denominated assets and liabilities are mostly denominated in U.S. dollars.

Our principal interest rate risk management objectives are to generate stable net interest revenues and to protect our asset value against interest rate fluctuations. We principally manage this risk for our non-trading activities by analyzing and managing maturity and duration gaps between our interest earning assets and interest bearing liabilities. Although we have used hedging instruments only on a limited basis for interest rate risk management for our non-trading assets and liabilities, to date the Korean financial market has not been sufficiently developed for this purpose. We expect to increase our use of derivatives to hedge this risk in the near future as the Korean financial market becomes more sophisticated.

Interest rate gap analysis measures expected changes in net interest revenues by calculating the difference in the amounts of interest earning assets and interest bearing liabilities at each maturity and interest resetting date. We perform interest rate gap analysis for Won-denominated and foreign currency-denominated assets and trust assets on a monthly basis or more frequently when deemed necessary.

Interest Rate Gap Analysis. We perform interest rate gap analysis based on interest rate repricing maturities of assets and liabilities. However, for some of our assets and liabilities with either no maturities or unique characteristics, we use or assume certain maturities, including the following examples:

 

   

With respect to asset maturities, we assume remaining maturities of prime rate-linked loans with remaining maturities of over one year to be one year and use the actual maturities for prime rate-linked loans with remaining maturities of less than one year.

 

   

With respect to liability maturities, adapting the regression analysis using last 36 months’ average balance, we assume “non-core” and “rate sensitive core” demand deposits to have remaining maturities of three months or less; and we assume “rate insensitive core” demand deposits to have remaining maturities between one year and four years.

 

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The following table shows Kookmin Bank’s interest rate gap for Won-denominated accounts and foreign currency-denominated accounts as of December 31, 2013.

 

     As of December 31, 2013  
     0-3 Months     3-6 Months     6-12 Months     1-3 Years     Over 3 Years     Total  
     (in billions of Won, except percentages)  

Won-denominated Interest earning assets:

            

Loans

   72,002      53,136      41,279      8,007      10,032      184,456   

Securities

     3,149        1,416        5,477        13,296        4,226        27,564   

Others

     8,785        37        77        305        39        9,243   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   83,935      54,589      46,833      21,608      14,297      221,263   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest bearing liabilities:

            

Deposits

   78,496      35,612      49,147      18,659      14,277      196,191   

Borrowings

     4,660        —          —          —          30        4,690   

Others

     8,350        2,355        1,501        2,290        3,938        18,433   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   91,506      37,967      50,648      20,949      18,245      219,314   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sensitivity gap

     (7,570     16,623        (3,815     660        (3,948     1,949   

Cumulative gap

     (7,570     9,052        5,237        5,897        1,949     

% of total assets

     (3.4 %)      4.1     2.4     2.7     0.9  

Foreign currency-denominated Interest earning assets:

            

Due from banks

   549      210      35      —        —        794   

Loans

     9,340        1,653        540        170        8        11,711   

Securities

     223        26        32        226        249        758   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   10,113      1,889      607      397      257      13,263   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest bearing liabilities:

            

Deposits

   2,404      1,519      786      129      45      4,884   

Borrowings

     4,285        851        614        25        79        5,854   

Others

     2,811        261        127        72          3,271   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   9,501      2,631      1,527      225      124      14,009   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sensitivity gap

     612        (743     (920     171        133        (746

Cumulative gap

     612        (130     (1,050     (879     (746  

% of total assets

     4.6     (1.0 %)      (7.9 %)      (6.6 %)      (5.6 %)   

Duration Gap Analysis. We also perform duration gap analysis to measure and manage interest rate risk. Duration gap analysis is a more long-term risk indicator than interest rate gap analysis, as interest rate gap analysis focuses more on accounting income as opposed to the market value of the assets and liabilities. We emphasize duration gap analysis because, in the long run, our principal concern with respect to interest rate fluctuations is the net asset value rather than net interest revenue changes. In 2013, our asset and liability duration gap was negative and it moved between (-)0.002 years and (-)0.023 years. Accordingly, our net asset value would have declined between ₩4 billion and ₩51 billion if interest rates had decreased by one percentage point.

For duration gap analysis we use or assume the same maturities for different assets and liabilities that we use or assume for our interest rate gap analysis.

 

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The following table shows duration gaps and net asset value changes when interest rates decrease by one percentage point as of the specified dates on a non-consolidated basis.

 

Won denominated    Asset
Duration
     Liability
Duration
     Duration
Gap
    Net Asset
Value Change
 
Date    (in years)      (in years)      (in years)     (in billions of
Won)
 

June 30, 2013

     0.792         0.809         (0.002     4   

December 31, 2013

     0.792         0.821         (0.023     51   

 

Foreign-currency denominated    Asset
Duration
     Liability
Duration
     Duration
Gap
     Net Asset
Value Change
 
Date    (in years)      (in years)      (in years)      (in billions of
Won)
 

June 30, 2013

     0.345         0.286         0.050         (7

December 31, 2013

     0.352         0.276         0.073         (9

We set interest rate risk limits using historical interest rate volatility of financial bonds and duration gaps with respect to expected asset and liability positions based on our annual business plans. The Financial Planning Department in Kookmin Bank’s Financial Management Group submits interest rate gap analysis reports, duration gap analysis reports, sensitivity reports and interest rate risk limit compliance reports monthly to Kookmin Bank’s Asset Liability Management Committee and quarterly to Kookmin Bank’s Risk Management Committee.

The following table summarizes Kookmin Bank’s interest rate risk, taking into account asset and liability durations as of December 31, 2013.

 

     As of December 31, 2013  
     3 Months
or Less
    3-6
Months
    6-12
Months
    1-3
Years
    Over
3 Years
    Total  
     (in billions of Won, except percentages and maturities in years)  

Won-denominated:

            

Asset position

   83,935      54,589      46,833      21,608      14,297      221,263   

Liability position

     91,506        37,967        50,648        20,949        18,245        219,314   

Gap

     (7,570     16,623        (3,815     660        (3,948     1,949   

Average maturity

     0.242        0.482        0.954        2.708        4.890     

Interest rate volatility

     (0.13 )%      (0.44 )%      (0.76 )%      (1.08 )%      (1.14 )%   

Amount at risk

     (4     (24     22        (4     206        195   

Foreign currency-denominated:

            

Asset position

   10,113      1,889      607      397      257      13,263   

Liability position

     9,501        2,631        1,527        225        124        14,009   

Gap

     612        (743     (920     171        133        (746

Average maturity

     0.25        0.49        0.97        2.75        5.01     

Interest rate volatility

     (0.23 )%      (0.35 )%      (0.73 )%      (0.83 )%      (0.96 )%   

Amount at risk

     —          (2     (2     4        8        8   

Interest Rate VaR Analysis. Interest rate VaR is the estimated maximum possible loss on net non-trading assets due to unfavorable changes in interest rates. We calculate interest rate VaR based on interest earning assets and interest bearing liabilities, excluding trading positions, at a 99.94% confidence level. In 2012, we changed our method of calculating the interest rate impact from the previous internal simulation method of applying probable interest rate scenarios to a historical simulation method which uses actual historical price, volatility and yield changes in comparison with the current position to generate hypothetical portfolios and calculate a distribution of position and portfolio market value changes. The previous internal simulation method used extreme values in applying hypothetical interest rates to each maturity period, which we believe may result in

 

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exaggerated interest rate VaR values. Accordingly, we believe that the change in our interest rate VaR methodology to a historical simulation method will allow us to benefit from more sophisticated risk measurements using practical scenarios. Using the historical simulation method, Kookmin Bank’s interest rate VaR was ₩179 billion as of December 31, 2012 and ₩203 billion as of December 31, 2013, respectively. See Note 4.4.3 of the notes to our consolidated financial statements included elsewhere in this annual report.

Foreign Exchange Risk

We manage foreign exchange rate risk arising from our non-trading operations together with such risks arising from our trading operations. See “—Market Risk Management for Trading Activities—Foreign Exchange Risk” above.

Liquidity Risk Management

Liquidity risk is the risk of insolvency or loss due to a disparity between the inflow and outflow of funds resulting from, for example, maturity mismatches, obtaining funds at a high price or disposing of securities at an unfavorable price due to lack of available funds. We manage our liquidity in order to meet our financial liabilities from withdrawals of deposits, redemption of matured debentures and repayments at maturity of borrowed funds. We also require sufficient liquidity to fund loans, to extend other credits and to invest in securities. Our liquidity management goal is to meet all our liability repayments on time and fund all investment opportunities even under adverse conditions. To date, we have not experienced significant liquidity risk.

We maintain liquidity by holding sufficient quantities of assets that can be liquidated to meet actual or potential demands for funds from depositors and others. We also manage liquidity by ensuring that the excess of maturing liabilities over maturing assets in any period is kept to manageable levels relative to the amount of funds we believe we could raise by issuing securities. We seek to minimize our liquidity costs by managing our liquidity position on a daily basis and by limiting the amount of cash at any time that is not invested in interest earning assets or securities.

We maintain diverse sources of liquidity to facilitate flexibility in meeting our funding requirements. We fund our operations principally by accepting deposits from retail and corporate depositors, accessing the call loan market (a short-term market for loans with maturities of less than 90 days), issuing debentures and borrowing from the Bank of Korea. We use the majority of funds we raise to extend loans or purchase securities. Generally, deposits are of shorter average maturity than loans or investments.

For Won-denominated assets and liabilities, we manage liquidity using a cash flow structure based on holding short-term liabilities and long-term assets. Generally, the average initial contract maturity of our new Won-denominated time deposits was about 11 months, while during the same period most of our new loans and securities had maturities over one year.

We manage liquidity risk within the limits set on Won and foreign currency accounts in accordance with the regulations of the Financial Services Commission. The Financial Services Commission requires Korean banks, including Kookmin Bank, to maintain a Won liquidity ratio of at least 100.0% and a foreign liquidity ratio of at least 85.0%. The Financial Services Commission defines the Won liquidity ratio as Won liquid assets (including marketable securities) due within one month divided by Won liabilities due within one month. The Won liquid assets and Won liabilities included in the calculation of Won liquidity ratio are determined in accordance with the “Standards for Calculation of Liquidity Ratio of Korean Won Currency” under the “Detailed Regulations on Supervision of Banking Business.”

Kookmin Bank’s Fund Management Department is responsible for daily liquidity risk management of its Won and foreign currency exposure. It reports monthly plans for funding and operations to the Asset Liability Management Committee of Kookmin Bank, which discusses factors such as interest rate movements and maturity structures of its deposits, loans and securities.

 

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The following table shows Kookmin Bank’s liquidity status and limits for Won and foreign currency accounts as of December 31, 2013 in accordance with Financial Services Commission regulations:

 

Won accounts:

   1 Month or
Less
 
     (in billions of
Won, except
percentages)
 

Assets (A)

   53,672   

Liabilities (B)

     43,544   

Liquidity gap

     10,129   

Liquidity ratio (A/B)

     123.26

Limit

     100

 

     7 Days
or Less
    1 Month
or Less
    3 Months
or Less
 
     (in millions of US$, except percentages)  

Foreign currency assets

   US$ 5,716      US$  10,072      US$  16,352   

Foreign currency liabilities

     4,510        9,133        14,572   

Maturity gap

     1,206        939        1,780   

Cumulative gap (A)

     1,206        939        1,780   

Total assets (B)

     36,736        36,736        36,736   

Liquidity gap ratio (A/B)

     3.28     2.56     112.22 (1) 

Limits

     (3 )%      (10 )%      85

 

(1) 

Liquidity ratio.

The Financial Planning Department in Kookmin Bank’s Financial Management Group reports whether we are complying with these limits monthly to Kookmin Bank’s Asset Liability Management Committee and quarterly to Kookmin Bank’s Risk Management Committee.

Operational Risk Management

Overall Status

Basel II currently defines operational risk as the “risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.” However, there is still no complete consensus on the definition of operational risk in the banking industry. We define operational risk broadly to include all financial and non-financial risks, other than credit risk, market risk, interest rate risk and liquidity risk, that may arise from our operations that could negatively impact our capital, including the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events as defined under Basel II. Our operational risk management objectives include not only satisfying regulatory requirements, but also providing internal support through the growth of a strong risk management culture, reinforcement of internal controls, improvement of work processes and provision of timely feedback to management members and staff throughout the bank.

We manage our operational risk primarily through Kookmin Bank, our banking subsidiary. Kookmin Bank uses an operational risk management framework meeting the Basel II Advanced Measurement Approach, or AMA, under which Kookmin Bank:

 

   

calculates its operational risk VaR on a quarterly basis using the “loss distribution approach VaR” and “scenario based VaR” methodology, and monitors operational risk in terms of Key Risk Indicators, or KRI, using tolerance levels for each indicator;

 

   

executes integrated compliance and operational risk Control Self Assessments, or CSAs, that enhance the effect on internal controls, which Kookmin Bank employees are able to access and use for process improvement;

 

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collects and analyzes internal and external loss data;

 

   

conducts scenario analyses to evaluate exposure to high-severity events;

 

   

manages certain insurance-related activities relating to insurance strategies established to mitigate operational risk;

 

   

examines operational risks arising in connection with the development of, changes in or discontinuance of products, policies or systems;

 

   

uses a detailed business continuity plan covering all of its operations and locations to prepare against unexpected events, including an alternate back-up site for use in disaster events as well as annual full-scale testing of such site.

 

   

refines bank-wide operational risk policies and procedures;

 

   

provides appropriate training and support to business line operational risk managers; and

 

   

reports overall operational risk status to our senior management.

Each of Kookmin Bank’s relevant business units has primary responsibility for the management of its own operational risk. In addition, the Operational Risk Unit, which is part of Kookmin Bank’s Risk Management Department, monitors bank-wide operational risk. Kookmin Bank also has internal control managers in all of its subsidiaries, departments and branches who periodically conduct CSAs and monitor KRIs. Through this method, Kookmin Bank is able to ensure proper monitoring and measurement of operational risk in each of its business groups.

Internal Control

To monitor and control operational risks, we maintain a system of comprehensive policies and have put in place a control framework designed to provide a stable and well-managed operational environment throughout our organization. Each of our subsidiaries establishes its own internal control system in accordance with the group-level internal control principles. Our Compliance Supporting Department is responsible for monitoring and advising our subsidiaries regarding their internal control systems. Our Audit Committee, which consists of five non-executive directors, is an independent authority that evaluates the effectiveness and efficiency of our group-wide internal control systems and business processes and monitors our subsidiaries’ compliance with such systems and processes, as well as reviews the reliability of our financial statements to secure the transparency and stability of our management (including through the activities of our independent auditors). In particular, we have established group-wide internal guidelines with respect to our subsidiaries’ reporting requirements. Our subsidiaries review their operations and their level of compliance with internal control systems and business processes on a periodic basis and, as part of this process, they are required to report any problems discovered and any remedial actions taken to our chief compliance officer, who is responsible for reporting to our Audit Committee. Based on the results of these reports, or on an ad hoc basis in response to any problem or potential problem that it identifies, the Audit Committee may direct a subsidiary to conduct an audit of its operations or, if it chooses to do so, conduct its own audit of those operations. The Audit Committee interacts on a regular basis with our Audit Department, Compliance Supporting Department and our independent auditors. In carrying out these duties, the Audit Committee ultimately protects our property for the benefit of our shareholders, investors and customers by independently monitoring our management.

Our Audit Department supports our Audit Committee in monitoring our accounting and business operations and overseeing the management of our subsidiaries’ internal control systems by performing the following activities:

 

   

general audits, which include full-scale audits of the overall operations performed according to an annual audit plan, and sectional audits of selected operations; and

 

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special audits of troubled or weak operations, which are performed when our Audit Committee or executive officer responsible for audits deems it necessary or pursuant to requests by our board, executive officers or supervisory authorities, such as the Financial Supervisory Service.

The Financial Supervisory Service periodically conducts a general examination of our operations. It also performs specific audits on particular aspects of our operations, such as risk management, credit monitoring and liquidity, as the need arises.

Kookmin Bank’s audit division consists of two departments, the Channel Audit Department and the Management Audit Department, and they are the execution bodies for its audit committee and support Kookmin Bank’s management objectives by auditing the operations of its branches using a risk analysis system and reviewing the operations of its headquarters and subsidiaries through the use of “risk-based audit” in accordance with the “business measurement process” audit methodology, which requires that its Management Audit Department evaluate the risk and process of its business units and concentrate their audit capacity with respect to high risk areas.

As a result of recent regulatory trends, Kookmin Bank’s audit division is continuing its efforts to establish an advanced audit system and value-added internal audit by introducing risk-based audit techniques.

Our Compliance Supporting Department operates a compliance system to ensure that all of our employees comply with the relevant laws and regulations. This system’s main function is to establish and manage our compliance program, educate employees and management and improve our internal control process.

Legal Risk

We consider legal risk as a part of our operational risk. The uncertainty of the enforceability of the obligations of our customers and counterparties creates legal risk. Changes in laws and regulations could also adversely affect us. Legal risk is higher in new areas of business where the law is often untested in the courts, although legal risk can also increase in our traditional business to the extent that the legal and regulatory landscape in Korea is changing and many new laws and regulations governing the financial industry remain untested. Our Compliance Supporting Department seeks to minimize legal risk by using stringent legal documentation, employing procedures designed to ensure that transactions are properly authorized and consulting legal advisers.

IT System Operational Risk

The integrity of our IT systems, and their ability to withstand potential catastrophic events, are crucial to our continuing operations. Accordingly, we are continuing to strengthen our disaster recovery capabilities. In order to minimize operational risks relating to our IT systems, we have implemented a multi-CPU system that runs multiple CPUs simultaneously on-site and ensures system continuity in case any of the CPUs fails. This system backs up our data systems at an off-site location on a real-time basis to ensure that our operations can be carried out normally and without material interruption in the event of CPU failure. Also, in order to protect our Internet banking services from system failures and cyber attacks, we process our Internet transactions through three separate data processing centers.

We currently test our disaster recovery systems on a quarterly basis, with the comprehensive testing including our branches and the main IT center’s disaster recovery system. Our disaster recovery capabilities involve a number of operations other than our core banking operations, including credit card and call center transactions. Internally, our IT Operations Department monitors all of our computerized network processes and IT systems. This department monitors and reports on any unusual delays or irregularities reported by our branches. In addition, our Information Security Department is responsible for the daily monitoring of our entire information security system. Our business operations, other than our core banking and credit card operations,

 

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regularly conduct joint IT security assessments with respect to such operations and have implemented measures to identify and respond collectively to security breach attempts, such as hacking attempts.

In 2009, Kookmin Bank obtained ISO 27001 certification, which relates to information security. In 2011, Kookmin Bank also obtained ISO 20000 certification, which relates to IT service management, and BS 25999 certification, which relates to business continuity management. Kookmin Bank is the first Korean bank to have obtained all three such international certifications.

 

Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Fees and Charges

Under the terms of the deposit agreement, as a holder of our ADSs, you are required to pay the following service fees to the depositary:

 

Services

  

Fees

Issuance of ADSs

   Up to $5.00 per 100 ADSs (or portion thereof) issued

Delivery of deposited shares against surrender of ADSs

   Up to $5.00 per 100 ADSs (or portion thereof) surrendered

Distribution of cash dividends or other cash distributions

   Up to $0.02 per ADS (or portion thereof) held

Distribution of ADSs pursuant to stock dividends, free stock distributions or exercise of rights.

   Up to $5.00 per 100 ADSs (or portion thereof) held

Distribution of securities other than ADSs or rights to purchase additional ADSs

   A fee equivalent to the fee that would be payable if securities distributed had been shares and such shares had been deposited for issuance of ADSs.

Depositary Services

   Up to $0.02 per ADS (or portion thereof) held on the applicable record date(s) established by the depositary

As a holder of our ADSs, you are also responsible for paying certain fees and expenses incurred by the depositary and certain taxes and governmental charges such as:

 

   

Fees for the transfer and registration of shares charged by the registrar and transfer agent for the shares in Korea (i.e., upon deposit and withdrawal of shares).

 

   

Expenses incurred for converting foreign currency into U.S. dollars.

 

   

Expenses for cable, telex and fax transmissions and for delivery of securities.

 

   

Taxes and duties upon the transfer of securities (i.e., when shares are deposited or withdrawn from deposit).

 

   

Fees and expenses incurred in connection with the delivery or servicing of shares on deposit or other deposited securities.

Depositary fees payable upon the issuance and surrender of ADSs are typically paid to the depositary by the brokers (on behalf of their clients) receiving the newly issued ADSs from the depositary and by the brokers (on behalf of their clients) delivering the ADSs to the depositary for surrender. The brokers in turn charge these fees to their clients. Depositary fees payable in connection with distributions of cash or securities to ADS holders and the depositary services fee are charged by the depositary to the holders of record of ADSs as of the applicable ADS record date.

 

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The depositary fees payable for cash distributions are generally deducted from the cash being distributed. In the case of distributions other than cash (i.e., stock dividend, rights), the depositary charges the applicable fee to the ADS record date holders concurrent with the distribution. In the case of ADSs registered in the name of the investor (whether certificated or uncertificated in direct registration), the depositary sends invoices to the applicable record date ADS holders. In the case of ADSs held in brokerage and custodian accounts (via the Depository Trust Company, or DTC), the depositary generally collects its fees through the systems provided by DTC (whose nominee is the registered holder of the ADSs held in DTC) from the brokers and custodians holding ADSs in their DTC accounts. The brokers and custodians who hold their clients’ ADSs in DTC accounts in turn charge their clients’ accounts the amount of the fees paid to the depositary.

In the event of refusal to pay the depositary fees, the depositary may, under the terms of the deposit agreement, refuse the requested service until payment is received or may set off the amount of the depositary fees from any distribution to be made to such holder of ADSs.

Note that the fees and charges you may be required to pay may vary over time and may be changed by us and by the depositary. You will receive prior notice of such changes.

Fees and Payments from the Depositary to Us

In 2013, we received the following payments from the depositary:

 

Reimbursement of listing fees:

   $ 43,194   

Reimbursement of SEC filing fees:

   $ 2,043   

Reimbursement of expenses related to proxy process (printing, postage and distribution) and ADS holders identification:

   $ 128,042   

Reimbursement of legal fees:

   $ 334,951   

Reimbursement of expenses related to our investor relations activities (investor conferences and investor relations agency fees, etc.):

   $ 317,532   

In addition, as part of its service to us, the depositary waives its fees for the standard costs and operating expenses associated with the administration of the ADS facility.

 

Item 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

Not applicable.

 

Item 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

Not applicable.

 

Item 15. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We have evaluated, with the participation of our chief executive officer and chief financial officer, the effectiveness of our disclosure controls and procedures as of December 31, 2013. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures as of December 31, 2013 were effective to provide reasonable assurance that information required to

 

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be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework 1992 issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS as issued by the IASB. Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with IFRS as issued by the IASB, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Based on our evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2013. The effectiveness of our internal control over financial reporting as of December 31, 2013 has been audited by Samil PricewaterhouseCoopers, an independent registered public accounting firm, as stated in its report included herein which expressed an unqualified opinion on the effectiveness of our internal control over financial reporting as of December 31, 2013.

Attestation Report of the Registered Public Accounting Firm

The attestation report of our independent registered public accounting firm is furnished in Item 18 of this Form 20-F.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting during 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Item 16. [RESERVED]

 

Item 16A. AUDIT COMMITTEE FINANCIAL EXPERT

Our board of directors has determined that each of Young Jin Kim, Jong Cheon Lee, Seung Hee Koh and Sung Hwan Shin, our non-executive directors and members of our Audit Committee, qualifies as an “audit committee financial expert” and is independent within the meaning of this Item 16A.

 

Item 16B. CODE OF ETHICS

We have adopted a code of ethics, as defined in Item 16B of Form 20-F under the Exchange Act. Our code of ethics applies to our chief executive officer and chief financial officer, as well as to our non-executive

 

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directors, non-standing directors and other officers and employees. Our code of ethics is available on our website at http://www.kbfg.com. If we amend the provisions of our code of ethics that apply to our chief executive officer and chief financial officer and persons performing similar functions, or if we grant any waiver of such provisions, we will disclose such amendment or waiver on our website at the same address.

 

Item 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit and Non-audit Fees

The following table sets forth the fees billed to us by independent registered public accounting firm Samil PricewaterhouseCoopers during the fiscal years ended December 31, 2012 and 2013:

 

     Year Ended December 31,  
         2012              2013      
     (in millions of Won)  

Audit fees

   5,241       5,524   

Audit-related fees

     22         35   

Tax fees

     2         16   
  

 

 

    

 

 

 

Total fees

   5,265       5,575   
  

 

 

    

 

 

 

Audit fees in the above table are the aggregate fees billed by Samil PricewaterhouseCoopers in connection with the audits of:

 

   

our annual financial statements and the review of our interim financial statements; and

 

   

our special purpose entities in connection with the Korean Securities and Exchange Act or the Financial Investment Services and Capital Markets Act.

Audit-related fees in the above table are fees billed by Samil PricewaterhouseCoopers in connection with attestation of our financial statements under IFRS and our financial debenture offering services. Tax fees in the above table are fees billed by Samil PricewaterhouseCoopers in connection with tax filing services for our subsidiaries.

Audit Committee Pre-Approval Policies and Procedures

Our Audit Committee pre-approves the engagement of our independent auditors for audit services with respect to our financial statements. Our Audit Committee has implemented a policy regarding pre-approval of certain other services provided by our independent auditors to our subsidiaries that the Audit Committee has deemed as not affecting their independence. Under this policy, pre-approvals for the following services to our subsidiaries have been granted by our Audit Committee to each of our subsidiaries’ audit committees: (i) services related to the audit of financial statements prepared in accordance with IFRS as adopted by Korea and internal controls under Korean laws and regulations; (ii) general tax advisory services; (iii) due diligence services; (iv) issuance of comfort letters in connection with offering of securities; and (v) educational services provided to employees.

Any other audit or permitted non-audit service must be pre-approved by the Audit Committee on a case-by-case basis. Our Audit Committee did not pre-approve any non-audit services under the de minimis exception of Rule 2.01(c)(7)(i)(C) of Regulation S-X as promulgated by the Securities and Exchange Commission.

 

Item 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

Not applicable.

 

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Item 16E. PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

Neither we nor any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) of the Exchange Act, purchased any of our equity securities during the period covered by this annual report.

 

Item 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

Not applicable.

 

Item 16G. CORPORATE GOVERNANCE

Differences in Corporate Governance Practices

Pursuant to the rules of the New York Stock Exchange applicable to foreign private issuers like us that are listed on the New York Stock Exchange, we are required to disclose significant differences between the New York Stock Exchange’s corporate governance standards and those that we follow under Korean law and in accordance with our own internal procedures. The following is a summary of such significant differences:

 

NYSE Corporate Governance Standards

  

KB Financial Group

Director Independence

  
Listed companies must have a majority of independent directors.    The majority of our board of directors is independent (as defined in accordance with the New York Stock Exchange’s standards), as nine out of ten directors are non-executive directors.
Executive Session   
Non-management directors must meet in regularly scheduled executive sessions without management. Independent directors should meet alone in an executive session at least once a year.    Our non-executive directors hold monthly executive sessions in accordance with the Regulation of the Board of Directors.
Nomination/Corporate Governance Committee   
A nomination/corporate governance committee of independent directors is required. The committee must have a charter that addresses the purpose, responsibilities (including development of corporate governance guidelines) and annual performance evaluation of the committee.    Our Non-executive Director Nominating Committee is generally composed of four non-executive directors and our chief executive officer.
Compensation Committee   
A compensation committee of independent directors is required. The committee must have a charter that addresses the purpose, responsibilities and annual performance evaluation of the committee. The charter must be made available on the company’s website. In addition, in accordance with the U.S. Securities and Exchange Commission rules adopted pursuant to Section 952 of the Dodd-Frank Act, the New York Stock Exchange listing standards were amended to expand the factors relevant in determining whether a committee member has a relationship with the company that will materially affect that member’s duties to the compensation committee.    We maintain an Evaluation and Compensation Committee composed of five non-executive directors.

 

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NYSE Corporate Governance Standards

  

KB Financial Group

Additionally, the committee may obtain or retain the advice of a compensation adviser only after taking into consideration all factors relevant to determining that adviser’s independence from management.   
Audit Committee   
Listed companies must have an audit committee that satisfies the independence and other requirements of Rule 10A-3 under the Exchange Act. All members must be independent. The committee must have a charter addressing the committee’s purpose, an annual performance evaluation of the committee, and the duties and responsibilities of the committee. The charter must be made available on the company’s website.    We maintain an Audit Committee composed of five non-executive directors. Accordingly, we are in compliance with Rule 10A-3 under the Exchange Act.
Audit Committee Additional Requirements   
Listed companies must have an audit committee that is composed of at least three directors.    Our Audit Committee has five members, as described above.
Shareholder Approval of Equity Compensation Plan   
Listed companies must allow its shareholders to exercise their voting rights with respect to any material revision to the company’s equity compensation plan.    We currently have three equity compensation plans: one providing for the grant of stock options to officers and directors; performance share agreements with certain of our directors; and an employee stock ownership plan, or ESOP.
   All material matters related to our stock option plan are provided in our Articles of Incorporation, and any amendments to the Articles of Incorporation are subject to shareholders’ approval.
   Matters related to the performance share agreements or ESOP are not subject to shareholders’ approval under Korean law.
Corporate Governance Guidelines   
Listed companies must adopt and disclose corporate governance guidelines.    We have adopted, but have not disclosed, corporate governance guidelines.

 

Item 16H. MINE SAFETY DISCLOSURE

Not applicable.

 

Item 17. FINANCIAL STATEMENTS

Not Applicable.

 

Item 18. FINANCIAL STATEMENTS

Reference is made to Item 19(a) for a list of all financial statements filed as part of this annual report.

 

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Item 19. EXHIBITS

 

  (a) List of Financial Statements:

 

     Page  

Audited consolidated financial statements of KB Financial Group Inc. and subsidiaries, prepared in accordance with IFRS as issued by the IASB

  

Report of Samil PricewaterhouseCoopers, independent registered public accounting firm

     F-1   

Consolidated statements of financial position as of January 1, 2012 and December  31, 2012 and 2013

     F-2   

Consolidated statements of comprehensive income for the years ended December 31, 2011, 2012 and 2013

     F-3   

Consolidated statements of changes in equity for the years ended December 31, 2011, 2012 and 2013

     F-5   

Consolidated statements of cash flows for the years ended December 31, 2011, 2012 and 2013

     F-9   

Notes to consolidated financial statements

     F-11   

 

  (b) Exhibits

Pursuant to the rules and regulations of the U.S. Securities and Exchange Commission, KB Financial Group has filed certain agreements as exhibits to this Annual Report on Form 20-F. These agreements may contain representations and warranties made by the parties. These representations and warranties have been made solely for the benefit of the other party or parties to such agreements and (i) may be intended not as statements of fact, but rather as a way of allocating the risk to one of the parties to such agreements if those statements turn out to be inaccurate, (ii) may have been qualified by disclosures that were made to such other party or parties and that either have been reflected in the company’s filings or are not required to be disclosed in those filings, (iii) may apply materiality standards different from what may be viewed as material to investors and (iv) were made only as of the date of such agreements or such other date(s) as may be specified in such agreements and are subject to more recent developments. Accordingly, these representations and warranties may not describe KB Financial Group’s actual state of affairs at the date of this annual report.

 

Number

 

Description

  1.1*   Articles of Incorporation of KB Financial Group (translation in English).
  2.1***   Form of Share Certificate of KB Financial Group’s common stock, par value ₩5,000 per share (translation in English).
  2.2****   Form of Amended and Restated Deposit Agreement among KB Financial Group, The Bank of New York Mellon, as depositary, and all owners and holders from time to time of American depositary shares evidenced by American depositary receipts issued thereunder, including the form of American depositary receipt.
  8.1*****   List of subsidiaries of KB Financial Group.
  11.1**   Code of Ethics.
  12.1   Section 302 certifications.
  13.1   Section 906 certifications.

 

* Incorporated by reference to the registrant’s filing on Form 20-F (No. 000-53445), filed on April 30, 2012.
** Incorporated by reference to the registrant’s filing on Form 20-F (No. 000-53445), filed on June 23, 2010.
*** Incorporated by reference to the registrant’s filing on Form 20-F (No. 000-53445), filed on June 15, 2009.
**** Incorporated by reference to the registrant’s filing on Form F-6 (No. 333-184696), filed on November 1, 2012.
***** Incorporated by reference to Note 40 of the consolidated financial statements of the registrant included in this annual report.

 

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SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

 

KB FINANCIAL GROUP INC.
(Registrant)
/s/ Young-Rok Lim
(Signature)
Young-Rok Lim
Chairman and Chief Executive Officer
(Name and Title)

Date: April 29, 2014

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of KB Financial Group Inc.:

In our opinion, the accompanying consolidated statements of financial position and the related consolidated statements of comprehensive income, of changes in equity and of cash flows present fairly, in all material respects, the financial position of KB Financial Group Inc. (the “Company”) and subsidiaries as of December 31, 2013 and 2012 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013 in conformity with International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control—Integrated Framework 1992 issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Annual Report on Internal Control over Financial Reporting.” Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Samil PricewaterhouseCoopers

Seoul, Korea

April 29, 2014

 

F-1


Table of Contents

KB FINANCIAL GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

AS OF JANUARY 1, 2012, DECEMBER 31, 2012 AND 2013

 

     Jan. 1, 2012      Dec. 31, 2012      Dec. 31, 2013      2013  
                          Translation into
U.S. dollars(Note 3)
 
     (In millions of Korean won)      (In thousands)  

ASSETS

           

Cash and due from financial institutions

   9,186,557       10,592,605       14,792,654       US$ 14,018,151   

Financial assets at fair value through profit or loss

     9,169,102         9,559,719         9,328,742         8,840,314   

Derivative financial assets

     2,499,445         2,091,285         1,819,409         1,724,150   

Loans

     213,027,696         213,644,791         219,001,356         207,535,045   

Financial investments

     34,992,681         36,467,352         34,849,095         33,024,491   

Investments in associates

     793,602         934,641         755,390         715,840   

Property and equipment

     3,182,746         3,100,393         3,060,843         2,900,586   

Investment property

     51,552         52,974         166,259         157,554   

Intangible assets

     461,986         493,131         443,204         419,999   

Deferred income tax assets

     18,944         18,432         15,422         14,615   

Assets held for sale

     9,931         35,412         37,718         35,743   

Other assets

     7,475,865         8,760,319         7,568,063         7,171,821   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   280,870,107       285,751,054       291,838,155       US$  276,558,309   
  

 

 

    

 

 

    

 

 

    

 

 

 

LIABILITIES

           

Financial liabilities at fair value through profit or loss

   1,388,079       1,851,135       1,115,202       US$ 1,056,813   

Derivative financial liabilities

     2,037,793         2,054,742         1,795,339         1,701,340   

Deposits

     193,258,556         197,346,205         200,882,064         190,364,429   

Debts

     16,821,233         15,965,458         14,101,331         13,363,024   

Debentures

     27,170,879         24,270,212         27,039,534         25,623,818   

Provisions

     789,780         669,729         678,073         642,571   

Net defined benefit liabilities

     127,437         83,723         64,473         61,098   

Current income tax liabilities

     588,825         264,666         211,263         200,202   

Deferred income tax liabilities

     242,308         154,303         61,816         58,580   

Other liabilities

     15,280,218         18,327,740         20,236,229         19,176,715   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   257,705,108       260,987,913       266,185,324       US$ 252,248,590   
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL EQUITY

           

Share capital

   1,931,758       1,931,758       1,931,758       US$ 1,830,617   

Capital surplus

     15,841,824         15,840,300         15,854,605         15,024,501   

Accumulated other comprehensive income

     161,039         295,142         336,312         318,703   

Retained earnings

     5,048,558         6,501,419         7,530,156         7,135,898   
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity attributable to shareholders of the parent company

     22,983,179         24,568,619         25,652,831         24,309,719   

Non-controlling interests

     181,820         194,522         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity

     23,164,999         24,763,141         25,652,831         24,309,719   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities and equity

   280,870,107       285,751,054       291,838,155       US$ 276,558,309   
  

 

 

    

 

 

    

 

 

    

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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KB FINANCIAL GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 and 2013

 

     2011     2012     2013     2013  
                      

Translation into
U.S. dollars

(Note 3)

 
    

(In millions of Korean won,

except per share amounts)

    (In thousands,
except per share
amounts)
 

Interest income

   13,956,257      14,210,106      12,356,930      US$ 11,709,955   

Interest expense

     (6,851,745     (7,172,323     (5,834,098     (5,528,640
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     7,104,512        7,037,783        6,522,832        6,181,315   
  

 

 

   

 

 

   

 

 

   

 

 

 

Fee and commission income

     2,829,754        2,753,876        2,657,365        2,518,233   

Fee and commission expense

     (1,035,004     (1,187,170     (1,178,126     (1,116,443
  

 

 

   

 

 

   

 

 

   

 

 

 

Net fee and commission income

     1,794,750        1,566,706        1,479,239        1,401,790   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net gains(losses) on financial assets/liabilities at fair value through profit or loss

     1,035,867        811,964        756,822        717,197   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net other operating income(expense)

     (1,092,199     (1,531,942     (1,304,765     (1,236,451
  

 

 

   

 

 

   

 

 

   

 

 

 

General and administrative expenses

     (3,887,131     (3,845,610     (3,983,564     (3,774,996
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit before provision for credit losses

     4,955,799        4,038,901        3,470,564        3,288,855   
  

 

 

   

 

 

   

 

 

   

 

 

 

Provision for credit losses

     (1,512,979     (1,606,703     (1,443,572     (1,367,991
  

 

 

   

 

 

   

 

 

   

 

 

 

Net operating profit

     3,442,820        2,432,198        2,026,992        1,920,864   
  

 

 

   

 

 

   

 

 

   

 

 

 

Share of profit(loss) of associates

     4,963        (15,282     (199,392     (188,953

Net other non-operating income(expense)

     (142,490     (118,272     (12,309     (11,664
  

 

 

   

 

 

   

 

 

   

 

 

 

Net non-operating profit (loss)

     (137,527     (133,554     (211,701     (200,617
  

 

 

   

 

 

   

 

 

   

 

 

 

Profit before income tax

     3,305,293        2,298,644        1,815,291        1,720,247   
  

 

 

   

 

 

   

 

 

   

 

 

 

Tax income(expense)

     (844,572     (558,511     (551,586     (522,706
  

 

 

   

 

 

   

 

 

   

 

 

 

Profit for the year

   2,460,721      1,740,133      1,263,705      US$ 1,197,541   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(Continued)

 

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Table of Contents

KB FINANCIAL GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 and 2013

 

     2011     2012     2013     2013  
                      

Translation into
U.S. dollars

(Note 3)

 
    

(In millions of Korean won,

except per share amounts)

    (In thousands,
except per share
amounts)
 

Remeasurements of net defined benefit liabilities

   (32,149   (30,272   40,984      US$ 38,838   
  

 

 

   

 

 

   

 

 

   

 

 

 

Items that will not be reclassified to profit or loss

     (32,149     (30,272     40,984        38,838   
  

 

 

   

 

 

   

 

 

   

 

 

 

Exchange differences on translating foreign operations

     5,602        (25,690     (2,298     (2,178

Change in value of financial investments

     (239,596     245,757        (3,591     (3,404

Shares of other comprehensive income of associates

     (433     (44,263     (9,811     (9,297

Cash flow hedges

     (1,321     (813     1,618        1,533   
  

 

 

   

 

 

   

 

 

   

 

 

 

Items that may be reclassified subsequently to profit or loss

     (235,748     174,991        (14,082     (13,346
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income(loss) for the year, net of tax

     (267,897     144,719        26,902        25,492   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income for the year

   2,192,824      1,884,852      1,290,607      US$ 1,223,033   
  

 

 

   

 

 

   

 

 

   

 

 

 

Profit attributable to:

        

Shareholders of the parent company

   2,405,176      1,731,034      1,260,509      US$ 1,194,512   

Non-controlling interests

     55,545        9,099        3,196        3,028   
  

 

 

   

 

 

   

 

 

   

 

 

 
   2,460,721      1,740,133      1,263,705      US$ 1,197,541   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income for the year attributable to:

        

Shareholders of the parent company

   2,134,096      1,865,137      1,301,679      US$ 1,233,526   

Non-controlling interests

     58,728        19,715        (11,072     (10,493
  

 

 

   

 

 

   

 

 

   

 

 

 
   2,192,824      1,884,852      1,290,607      US$ 1,223,033   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share

        

Basic earnings per share

   6,548      4,480      3,263      US$ 3.09   

Diluted earnings per share

     6,533        4,467        3,249        3.08   

Note) The consolidated statement of comprehensive income for the year ended December 31, 2011 was not restated in accordance with IFRS 10 but prepared based on the previous accounting policies since it is not required to adjust any earlier periods presented than the immediately preceding period under transitional provision rule of IFRS 10. See Note 2.1.

The accompanying notes are an integral part of these consolidated financial statements.

 

F-4


Table of Contents

KB FINANCIAL GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 and 2013

 

    Equity attributable to shareholders of the parent company              
    Share
capital
    Capital
surplus
    Accumulated
other
comprehensive
income
    Retained
earnings
    Treasury
share
    Non-controlling
interest
    Total equity  
    (In millions of Korean won)  

Balance at January 1, 2011

  1,931,758      15,990,278      430,572      2,620,888      (2,476,809   1,169,243      19,665,930   

Changes in accounting policy

    —          —          8,896        (8,896     —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Restated balance

  1,931,758      15,990,278      439,468      2,611,992      (2,476,809   1,169,243      19,665,930   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

             

Profit for the year

    —          —          —          2,405,176        —          55,545        2,460,721   

Remeasurements of net defined benefit liabilities

    —          —          (32,150     —          —          1        (32,149

Exchange differences on translating foreign operations

    —          —          5,492        —          —          110        5,602   

Change in value of financial investments

    —          —          (242,668     —          —          3,072        (239,596

Shares of other comprehensive income of associates

    —          —          (433     —          —          —          (433

Cash flow hedges

    —          —          (1,321     —          —          —          (1,321
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income(loss)

    —          —          (271,080     2,405,176        —          58,728        2,192,824   

Transactions with shareholders

             

Dividends paid to shareholders of the parent company

    —          —          —          (41,163     —          —          (41,163

Dividends paid to holders of hybrid capital instruments

    —          —          —          —          —          (46,151     (46,151

Redemption of hybrid capital instruments

    —          —          —          —          —          (1,000,000     (1,000,000

Disposal of treasury share

    —          (148,060     —          —          2,476,809        —          2,328,749   

Others

    —          (394     —          —          —          —          (394
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total transactions with shareholders

    —          (148,454     —          (41,163     2,476,809        (1,046,151     1,241,041   

Balance at December 31, 2011

    1,931,758        15,841,824        168,388        4,976,005        —          181,820        23,099,795   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(Continued)

 

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Table of Contents

KB FINANCIAL GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 and 2013

 

    Equity attributable to shareholders of the parent company              
    Share
capital
    Capital
surplus
    Accumulated
other
comprehensive
income
    Retained
earnings
    Treasury
share
    Non-controlling
interest
    Total equity  
    (In millions of Korean won)  

Balance at January 1, 2012

  1,931,758      15,841,824      168,388      4,976,005      —        181,820      23,099,795   

Changes in accounting policy

    —          —          (7,349     72,553          —          65,204   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Restated balance

  1,931,758      15,841,824      161,039      5,048,558      —        181,820      23,164,999   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

             

Profit for the year

    —          —          —          1,731,034        —          9,099        1,740,133   

Remeasurements of net defined benefit liabilities

    —          —          (30,253     —          —          (19     (30,272

Exchange differences on translating foreign operations

    —          —          (25,597     —          —          (93     (25,690

Change in value of financial investments

    —          —          235,029        —          —          10,728        245,757   

Shares of other comprehensive income of associates

    —          —          (44,263     —          —          —          (44,263

Cash flow hedges

    —          —          (813     —          —          —          (813
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

    —          —          134,103        1,731,034        —          19,715        1,884,852   

Transactions with shareholders

             

Dividends paid to shareholders of the parent company

    —          —          —          (278,173     —          —          (278,173

Changes in interest in subsidiaries

    —          (1,524     —          —          —          (7,013     (8,537
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total transactions with shareholders

    —          (1,524     —          (278,173     —          (7,013     (286,710

Balance at December 31, 2012

  1,931,758      15,840,300      295,142      6,501,419        ₩—        194,522      24,763,141   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(Continued)

 

F-6


Table of Contents

KB FINANCIAL GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 and 2013

 

    Equity attributable to shareholders of the parent company              
    Share
capital
    Capital
surplus
    Accumulated
other
comprehensive
income
    Retained
earnings
    Treasury
share
    Non-controlling
interest
    Total equity  
    (In millions of Korean won)  

Balance at January 1, 2013

  1,931,758      15,840,300      295,142      6,501,419      —        194,522      24,763,141   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

             

Profit for the year

    —          —          —          1,260,509        —          3,196        1,263,705   

Remeasurements of net defined benefit liabilities

    —          —          40,984        —          —          —          40,984   

Exchange differences on translating foreign operations

    —          —          (2,372     —          —          74        (2,298

Change in value of financial investments

    —          —          10,751        —          —          (14,342     (3,591

Shares of other comprehensive income of associates

    —          —          (9,811     —          —          —          (9,811

Cash flow hedges

    —          —          1,618        —          —          —          1,618   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

    —          —          41,170        1,260,509        —          (11,072     1,290,607   

Transactions with shareholders

             

Dividends paid to shareholders of the parent company

    —          —          —          (231,811     —          —          (231,811

Changes in interest in subsidiaries

    —          14,305        —          39        —          (183,450     (169,106
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total transactions with shareholders

    —          14,305        —          (231,772     —          (183,450     (400,917

Balance at December 31, 2013

  1,931,758      15,854,605      336,312      7,530,156      —        —        25,652,831   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(Continued)

 

F-7


Table of Contents

KB FINANCIAL GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 and 2013

 

    Equity attributable to shareholders of the parent company              
    Share
capital
    Capital
surplus
    Accumulated
other
comprehensive
income
    Retained
earnings
    Treasury
share
    Non-controlling
interest
    Total equity  
    (Translation into U.S. dollars(Note 3))(In thousands)  

Balance at January 1, 2013

  US$ 1,830,617      US$ 15,010,946      US$ 279,690      US$ 6,161,022      US$ —        US$  184,337      US$ 23,466,612   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

             

Profit for the year

    —          —          —          1,194,512        —          3,028        1,197,540   

Remeasurements of net defined benefit liabilities

    —          —          38,838        —          —          —          38,838   

Exchange differences on translating foreign operations

    —          —          (2,249     —          —          70        (2,179

Change in value of financial investments

    —          —          10,188        —          —          (13,592     (3,404

Shares of other comprehensive income of associates

    —          —          (9,297     —          —          —          (9,297

Cash flow hedges

    —          —          1,533        —          —          —          1,533   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

    —          —          39,013        1,194,512        —          (10,494     1,223,031   

Transactions with shareholders

             

Dividends paid to shareholders of the parent company

    —          —          —          (219,674     —          —          (219,674

Others

    —          13,555        —          38        —          (173,843     (160,250
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total transactions with shareholders

    —          13,555        —          (219,636     —          (173,843     (379,924

Balance at December 31, 2013

  US$ 1,830,617      US$ 15,038,056      US$ 357,716      US$ 8,110,774      US$ —        US$ (184,337   US$ 25,152,826   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Note) The consolidated statement of changes in equity for the year ended December 31, 2011 was not restated in accordance with IFRS 10 but prepared based on the previous accounting policies since it is not required to adjust any earlier periods presented than the immediately preceding period under transitional provision rule of IFRS 10. See Note 2.1.

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Table of Contents

KB FINANCIAL GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 and 2013

 

    2011     2012     2013     2013  
                     

Translation into
U.S. dollars

(Note 3)

 
    (In millions of Korean won)     (In thousands)  

Cash flows from operating activities:

       

Profit for the year

  2,460,721      1,740,133      1,263,705      US$ 1,197,541   
 

 

 

   

 

 

   

 

 

   

 

 

 

Adjustment for non-cash items

       

Net loss(gain) on financial assets/liabilities at fair value through profit or loss

    (391,197     (247,854     (110,425     (104,643

Net loss(gain) on derivative financial instruments for hedging purposes

    (107,371     15,165        48,787        46,233   

Adjustment of fair value of derivative financial instruments

    207,522        42        699        662   

Provision for credit loss

    1,512,978        1,606,703        1,443,572        1,367,991   

Net loss(gain) on financial investments

    (481,459     148,211        (1,191     (1,129

Share of loss (profit) of associates

    (4,963     15,282        199,392        188,953   

Depreciation and amortization expense

    342,656        328,320        286,858        271,840   

Other net losses on property and equipment/intangible assets

    18,533        40,881        39,777        37,695   

Share-based payments(reversal)

    (7,609     13,871        17,289        16,384   

Policy reserve appropriation

    673,259        1,305,730        761,877        721,987   

Post-employment benefits

    172,188        172,391        172,579        163,544   

Net interest expense

    84,470        229,691        314,866        298,381   

Loss(gains) on foreign currency translation

    273,971        (148,877     17,082        16,188   

Net other expense(income)

    130,206        2,783        (24,981     (23,676
 

 

 

   

 

 

   

 

 

   

 

 

 
    2,455,333        3,482,339        3,166,181        3,000,410   
 

 

 

   

 

 

   

 

 

   

 

 

 

Changes in operating assets and liabilities

       

Financial asset at fair value through profit or loss

    (2,370,999     (3,102,488     214,181        202,967   

Derivative financial instruments

    481,502        193,373        116,660        110,552   

Loans

    (17,023,252     (2,964,229     (7,335,434     (6,951,371

Deferred income tax assets

    —          3,211        1,349        1,278   

Other assets

    (877,081     2,201,280        (5,078,285     (4,812,400

Financial liabilities at fair value through profit or loss

    146,638        357,825        (773,558     (733,056

Deposits

    10,716,619        4,495,876        2,584,993        2,449,650   

Deferred income tax liabilities

    (13,150     (138,374     (74,463     (70,564

Other liabilities

    48,628        1,375,612        (430,856     (408,297
 

 

 

   

 

 

   

 

 

   

 

 

 
    (8,891,095     2,422,086        (10,775,413     (10,211,241
 

 

 

   

 

 

   

 

 

   

 

 

 

Net cash generated from (used in) operating activities

    (4,007,190     7,644,558        (6,345,527     (6,013,290
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(Continued)

 

F-9


Table of Contents

KB FINANCIAL GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 and 2013

 

    2011     2012     2013     2013  
                     

Translation into
U.S. dollars

(Note 3)

 
    (In millions of Korean won)     (In thousands)  

Cash flows from investing activities:

       

Disposal of financial investments

  22,875,143      24,805,560      25,655,149      US$ 24,311,916   

Acquisition of financial investments

    (21,918,460     (26,141,095     (23,020,912     (21,815,600

Decrease in investments in associates

    12,120        16,573        20,554        19,478   

Acquisition of investments in associates

    (176,105     (217,081     (23,340     (22,118

Disposal of property and equipment

    859        16,912        1,070        1,014   

Acquisition of property and equipment

    (261,905     (143,139     (153,469     (145,434

Acquisition of investment property

    —          —          (114,609     (108,608

Disposal of intangible assets

    10,353        10,176        5,072        4,807   

Acquisition of intangible assets

    (105,341     (81,899     (68,091     (64,526

Business combination, net of cash acquired

    —          40,575        322,641        305,749   

Others

    251,888        (838,816     1,554,752        1,473,348   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

    688,552        (2,532,234     4,178,817        3,960,026   
 

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

       

Net cash flows from derivative financial instrument for hedging purposes

    20,733        75,761        10,977        10,402   

Net increase (decrease) in debts

    5,453,721        (796,842     (1,990,258     (1,886,053

Increase in debentures

    9,665,174        10,282,920        10,758,948        10,195,639   

Decrease in debentures

    (11,607,211     (12,945,650     (7,924,609     (7,509,698

Increase in other payables to trust accounts

    —          456,449        414,279        392,589   

Disposal of treasury shares

    2,281,524        —          —          —     

Redemption of hybrid capital instruments

    (1,000,000     —          —          —     

Dividends paid to holders of hybrid capital instruments

    (46,331     —          —          —     

Dividends paid to shareholders of the parent company

    (41,163     (278,173     (231,811     (219,674

Changes in interest in subsidiaries

    —          (8,048     (168,293     (159,482

Others

    48,434        (38,680     837,906        794,035   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

    4,774,881        (3,252,263     1,707,139        1,617,758   
 

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

    32,982        (13,560     41,452        39,279   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

    1,489,225        1,846,501        (418,119     (396,227

Cash and cash equivalents at the

beginning of the year

    3,251,579        4,740,804        6,587,305        6,242,411   
 

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at the

end of the year

  4,740,804      6,587,305      6,169,186      US$ 5,846,184   
 

 

 

   

 

 

   

 

 

   

 

 

 

Note) The consolidated statement of cash flows for the year ended December 31, 2011 was not restated in accordance with IFRS 10 but prepared based on the previous accounting policies since it is not required to adjust any earlier periods presented than the immediately preceding period under transitional provision rule of IFRS 10. See Note 2.1.

The accompanying notes are an integral part of these consolidated financial statements.

 

F-10


Table of Contents

KB FINANCIAL GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. The Parent Company

KB Financial Group Inc. (the “Parent Company”) was incorporated on September 29, 2008, under the Financial Holding Companies Act of Korea. KB Financial Group Inc. and its subsidiaries (the “Group”) derive substantially all of their revenue and income from providing a broad range of banking and related financial services to consumers and corporations primarily in Korea and in selected international markets. The Parent Company’s principal business includes ownership and management of subsidiaries and associated companies that are engaged in financial services or activities. In 2011, Kookmin Bank spun off its credit card business segment and established a new separate credit card company, KB Kookmin Card Co., Ltd., and KB Investment & Securities Co., Ltd. merged with KB Futures Co., Ltd. The Group established KB Savings Bank Co., Ltd. in January 2012. The Group acquired Yehansoul Savings Bank Co., Ltd. in September 2013.

The Parent Company’s share capital as of December 31, 2013, is ₩1,931,758 million. The Parent Company is authorized to issue up to 1 billion shares. The Parent Company has been listed on the Korea Exchange (“KRX”) since October 10, 2008, and listed on the New York Stock Exchange (“NYSE”) for its American Depositary Shares (“ADS”) since September 29, 2008.

2. Basis of Preparation

2.1 Application of IFRS

The Group’s consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). IFRS are the standards and related interpretations issued by the International Accounting Standards Board (“IASB”).

The preparation of consolidated financial statements requires the use of certain critical accounting estimates. It also requires management to exercise judgment in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 2.4.

New standards, amendments and interpretations issued but not effective for the year beginning on January 1, 2013, and not early adopted by the Group are as follows:

Amendment to IAS 32, Financial Instruments: Presentation

According to Amendment to IAS 32, Financial Instruments: Presentation, provides that the right to offset must not be contingent on a future event and must be legally enforceable in all of circumstances; and if an entity can settle amounts in a manner such that outcome is, in effect, equivalent to net settlement, the entity will meet the net settlement criterion. This amendment is effective for annual periods beginning on or after January 1, 2014, and the Group is assessing the impact of application of this amendment on its consolidated financial statements.

Amendment to IAS 39, Financial Instruments: Recognition and Measurement

Amendment to IAS 39, Financial Instruments: Recognition and Measurement, allows the continuation of hedge accounting for a derivative that has been designated as a hedging instrument in a circumstance in which that derivative is novated to a central counterparty (CCP) as a consequence of laws or regulations. This amendment is effective for annual periods beginning on or after January 1, 2014, with early adoption permitted. The Group is assessing the impact of application of this amendment on its consolidated financial statements.

 

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Table of Contents

Amendment to IFRS 10, Consolidated Financial Statements

Amendment to IFRS 10, Consolidated Financial Statements, provides that, if a parent company qualifies as an investment entity, it is required to measure its investments in subsidiaries at fair value through profit or loss instead of consolidating these subsidiaries in its consolidated financial statements. The amendment does not apply for a parent of an investment entity if the parent itself is not an investment entity. This amendment is effective for annual periods beginning on or after January 1, 2014, with early adoption permitted. The application of this amendment does not have an impact on its consolidated financial statements of the Group.

Enactment of IFRIC 21, Levies

IFRIC 21, Levies, is applied to a liability to pay a levy imposed by a government in accordance with the legislation. The interpretation requires that the liability to pay a levy is recognized when the activity that triggers the payment of the levy occurs, as identified by the legislation (the obligating event). This interpretation is effective for annual periods beginning on or after January 1, 2014, with early adoption permitted. The Group is assessing the impact of application of this interpretation on its consolidated financial statements.

New standards, amendments and interpretations adopted by the Group for the financial year beginning on January 1, 2013, are as follows:

Amendment to IAS 1, Presentation of Financial Statements: Presentation of Items of Other Comprehensive Income

IAS 1, Presentation of Financial Statements, was amended to require other comprehensive income items to be classified into items that might be reclassified to profit or loss in subsequent periods and items that would not be reclassified subsequently. The Group applies the presentation of items of other comprehensive income in accordance with the enactment retrospectively, and restated consolidated statement of comprehensive income for the years ended December 31, 2011 and 2012. There is no effect on the Group’s total comprehensive income for the retrospective application of change in accounting policy.

Amendment to IAS 19, Employee Benefits

According to the amendment to IAS 19, Employee Benefits, the use of a ‘corridor’ approach is no longer permitted, and therefore all actuarial gains and losses incurred are immediately recognized in other comprehensive income. All past service costs incurred from changes in pension plan are immediately recognized, and interest costs and expected returns on plan assets that used to be separately calculated are now changed to calculating net interest expense(income) by applying discount rate used in measuring defined benefit obligation in net defined benefit liabilities(assets). The Group applies the accounting policy retrospectively in accordance with the amended standards. The comparative consolidated statements of financial position and statements of comprehensive income are restated by reflecting adjustments resulting from the retrospective application.

The effect of these changes in accounting policy to financial position as of January 1, 2012 and December 31, 2012 and 2013, and to comprehensive income for the years ended December 31, 2011, 2012 and 2013, are as follows:

Effect on Consolidated Statements of Financial Position

 

     Jan. 1, 2012     Dec. 31, 2012     Dec. 31, 2013  
     (In millions of Korean won)  

Increase(decrease) in net defined benefit liabilities

   —        9,820      9,103   

Increase(decrease) in deferred income tax liabilities

     —          (2,377     (2,203

Increase(decrease) in accumulated other comprehensive income

     (23,254     (53,507     (12,523

Increase(decrease) in retained earnings

     23,254        46,064        5,623   

 

F-12


Table of Contents

Effect on Consolidated Statements of Comprehensive Income

 

      2011     2012     2013  
     (In millions of Korean won)  

Decrease(increase) in general and administrative expenses

   44,677      30,121      (53,389

Decrease(increase) in income tax

     (10,812     (7,292     12,920   

Increase(decrease) in other comprehensive income

     32,149        (30,271     41,012   
     (In Korean won)  

Increase(decrease) in earnings per share

     87        59        (105

Increase(decrease) in diluted earnings per share

     88        59        (104

Termination benefits are payable when employment is terminated by the Group before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. An entity shall recognize a liability and expense for termination benefits at the earlier of the following dates: when the entity can no longer withdraw the offer of those benefits and when the entity recognizes costs for a restructuring that is within the scope of IAS 37 and involves the payment of termination benefits. Termination benefits are measured by considering the number of employees expected to accept the offer in the case of a voluntary early retirement. Termination benefits over 12 months after the reporting period are discounted to present value. The Group expects that the application of this amendment would not have a material impact on its consolidated financial statements.

Enactment of IFRS 10, Consolidated Financial Statements

IFRS 10 supersedes IAS 27, Consolidated and Separate Financial Statements and SIC 12, Consolidation: Special Purpose Entities.

IFRS 10, Consolidated Financial Statements, builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included in the consolidated financial statements of the Parent Company. An investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The standard provides additional guidance to assist in the determination of control where this is difficult to assess.

In accordance with transitional provision of IFRS 10, the financial statements for earlier comparative periods are restated, to ensure conformity with the conclusion of IFRS 10, unless it is impracticable to do so. However the consolidated financial statements for the year ended December 31, 2011 was not restated in accordance with IFRS 10 but prepared based on the previous accounting policies since it is not required to adjust any earlier periods presented than the immediately preceding period under transitional provision rule of IFRS 10. At the date of initial application, a reporting entity that has no change in consolidation is not required to make adjustments to the previous accounting policy.

As a result of reviewing the impact of the enactment of IFRS 10, the Group decided to consolidate nine trusts, including personal pension trusts, twelve structured entities, including KH First Co., Ltd., and deconsolidate five companies, including KB-Glenwood Private Equity Fund 1.

In accordance with IFRS 10, the Group consolidated nine trusts, including personal pension trusts because it has power as a trustee, exposure to variable returns because the Group guarantees repayment of principal, if the trust property is less than the principal, and the ability to use power to affect its amount of variable returns. In addition, the Group consolidated twelve structured entities, including KH First Co., Ltd., because it has power over their activities, exposure to variable returns and the ability to use power to affect its amount of variable returns. And the Group decided to deconsolidate five companies, including KB Glenwood Private Equity Fund 1, because it is not exposed to variable returns, although it has power over the relevant activities.

 

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Table of Contents

Changes in subsidiaries by the adoption of IFRS 10 are as follows:

 

   

Investor

 

Investee

  Ownership(%)     Location  

Industry

Included

 

Kookmin Bank

 

Personal pension trusts and 8 other trusts

    —        Korea   Trust

Included

 

Kookmin Bank

 

KH First Co., Ltd.

    —        Korea  

Asset-backed securitization and others

Included

 

Kookmin Bank

 

Samho Kyungwon Co., Ltd.

    —        Korea  

Asset-backed securitization and others

Included

 

Kookmin Bank

 

Taejon Samho The First Co., Ltd

    —        Korea  

Asset-backed securitization and others

Included

 

Kookmin Bank

 

Prince DCM Co., Ltd

    —        Korea  

Asset-backed securitization and others

Included

 

Kookmin Bank, KB Life Insurance Co., Ltd.

 

KB Hope Sharing BTL Private Special Asset

    40.00      Korea   Capital investment

Included

 

Kookmin Bank

 

Hanbando BTL Private Special Asset Fund 1

    39.74      Korea   Capital investment

Included

 

Kookmin Bank

 

Global Logistics Infra Private Fund 1

    57.14      Korea   Capital investment

Included

 

Kookmin Bank

 

Global Logistics Infra Private Fund 2

    —        Korea   Capital investment

Included

 

Kookmin Bank

 

KB Mezzanine Private Securities Fund 1

    46.51      Korea   Capital investment

Included

 

Kookmin Bank

 

KB Private Real Estate Securities Fund 1(NPL)

    45.00      Korea   Capital investment

Included

 

Kookmin Bank

 

K Star KTB ETF(Bond)

    48.78      Korea   Capital investment

Included

 

KB Private Real Estate Securities Fund 1(NPL)

 

Woori KA First Asset Securitization

    55.00      Korea  

Asset-backed securitization and others

Excluded

 

KB Investment & Securities Co., Ltd.

 

KB-Glenwood Private Equity Fund 1

    0.03      Korea   Capital investment

Excluded

 

KB-Glenwood Private Equity Fund 1

 

Chungkang Co., Ltd.

    100.00      Korea   Capital investment

Excluded

 

Chungkang Co., Ltd.

 

Powernet Technologies Co., Ltd.

    92.64      Korea  

Electronic product manufacturing

Excluded

 

KB Investment Co., Ltd.

 

NPS KBIC Private Equity Fund No. 1

    2.56      Korea   Capital investment

Excluded

 

KB Investment Co., Ltd.

 

KBIC Private Equity Fund No. 3

    2.00      Korea   Capital investment

 

F-14


Table of Contents

Effect on the consolidated financial statements by the adoption of IFRS 10:

Consolidated Statements of Financial Position

 

     Jan. 1, 2012  
     Before      Adjustment     After  
     (In millions of Korean won)  

Assets

       

Cash and due from financial institutions

   9,178,125       8,432      9,186,557   

Financial assets at fair value through profit or loss

     6,326,104         2,842,998        9,169,102   

Derivative financial assets

     2,448,455         50,990        2,499,445   

Loans

     212,107,027         920,669        213,027,696   

Financial investments

     35,432,182         (439,501     34,992,681   

Investments in associates

     892,132         (98,530     793,602   

Property and equipment

     3,186,020         (3,274     3,182,746   

Investment property

     51,552         —          51,552   

Intangible assets

     468,441         (6,455     461,986   

Deferred income tax assets

     22,329         (3,385     18,944   

Assets held for sale

     9,931         —          9,931   

Other assets

     7,478,519         (2,654     7,475,865   
  

 

 

    

 

 

   

 

 

 

Total assets

   277,600,817       3,269,290      280,870,107   
  

 

 

    

 

 

   

 

 

 

Liabilities

       

Financial liabilities at fair value through profit or loss

   1,388,079       —        1,388,079   

Derivative financial liabilities

     2,059,573         (21,780     2,037,793   

Deposits

     190,337,590         2,920,966        193,258,556   

Debts

     16,823,838         (2,605     16,821,233   

Debentures

     27,069,879         101,000        27,170,879   

Provisions

     797,739         (7,959     789,780   

Net defined benefit liabilities

     128,488         (1,051     127,437   

Current income tax liabilities

     588,825         —          588,825   

Deferred income tax liabilities

     220,842         21,466        242,308   

Other liabilities

     15,086,169         194,049        15,280,218   
  

 

 

    

 

 

   

 

 

 

Total liabilities

     254,501,022         3,204,086        257,705,108   
  

 

 

    

 

 

   

 

 

 

Equity

       

Equity attributable to shareholders of the parent company

     22,917,975         65,204        22,983,179   

Non-controlling interests

     181,820         —          181,820   
  

 

 

    

 

 

   

 

 

 

Total equity

     23,099,795         65,204        23,164,999   
  

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   277,600,817       3,269,290      280,870,107   
  

 

 

    

 

 

   

 

 

 

 

F-15


Table of Contents
     Dec. 31, 2012  
      Before      Adjustment     After  
     (In millions of Korean won)  

Assets

       

Cash and due from financial institutions

   10,568,350       24,255      10,592,605   

Financial assets at fair value through profit or loss

     6,299,194         3,260,525        9,559,719   

Derivative financial assets

     2,024,784         66,501        2,091,285   

Loans

     212,716,251         928,540        213,644,791   

Financial investments

     36,897,139         (429,787     36,467,352   

Investments in associates

     1,035,205         (100,564     934,641   

Property and equipment

     3,103,597         (3,204     3,100,393   

Investment property

     52,974         —          52,974   

Intangible assets

     500,023         (6,892     493,131   

Deferred income tax assets

     18,432         —          18,432   

Assets held for sale

     35,412         —          35,412   

Other assets

     8,755,217         5,102        8,760,319   
  

 

 

    

 

 

   

 

 

 

Total assets

   282,006,578       3,744,476      285,751,054   
  

 

 

    

 

 

   

 

 

 

Liabilities

       

Financial liabilities at fair value through profit or loss

   1,851,135       —        1,851,135   

Derivative financial liabilities

     2,068,813         (14,071     2,054,742   

Deposits

     194,403,279         2,942,926        197,346,205   

Debts

     15,969,522         (4,064     15,965,458   

Debentures

     24,131,770         138,442        24,270,212   

Provisions

     669,729         —          669,729   

Net defined benefit liabilities

     84,977         (1,254     83,723   

Current income tax liabilities

     264,666         —          264,666   

Deferred income tax liabilities

     127,592         26,711        154,303   

Other liabilities

     17,738,498         589,242        18,327,740   
  

 

 

    

 

 

   

 

 

 

Total liabilities

     257,309,981         3,677,932        260,987,913   
  

 

 

    

 

 

   

 

 

 

Equity

       

Equity attributable to shareholders of the parent company

     24,502,075         66,544        24,568,619   

Non-controlling interests

     194,522         —          194,522   
  

 

 

    

 

 

   

 

 

 

Total equity

     24,696,597         66,544        24,763,141   
  

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   282,006,578       3,744,476      285,751,054   
  

 

 

    

 

 

   

 

 

 

 

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Table of Contents

Consolidated Statements of Comprehensive Income

 

     2012  
     Before     Adjustment     After  
     (In millions of Korean won)  

Interest income

   14,155,825      54,281      14,210,106   

Interest expense

     (7,039,912     (132,411     (7,172,323
  

 

 

   

 

 

   

 

 

 

Net interest income

     7,115,913        (78,130     7,037,783   
  

 

 

   

 

 

   

 

 

 

Fee and commission income

     2,778,668        (24,792     2,753,876   

Fee and commission expense

     (1,186,027     (1,143     (1,187,170
  

 

 

   

 

 

   

 

 

 

Net fee and commission income

     1,592,641        (25,935     1,566,706   
  

 

 

   

 

 

   

 

 

 

Net gains(losses) on financial assets/liabilities at fair value through profit or loss

     651,203        160,761        811,964   
  

 

 

   

 

 

   

 

 

 

Net other operating income(loss)

     (1,455,270     (76,672     (1,531,942
  

 

 

   

 

 

   

 

 

 

General and administrative expenses

     (3,855,164     9,554        (3,845,610
  

 

 

   

 

 

   

 

 

 

Operating profit before provision for credit losses

     4,049,323        (10,422     4,038,901   
  

 

 

   

 

 

   

 

 

 

Provision for credit losses

     (1,607,804     1,101        (1,606,703
  

 

 

   

 

 

   

 

 

 

Net operating profit(loss)

     2,441,519        (9,321     2,432,198   

Share of profit of associates

     (13,536     (1,746     (15,282

Net other non-operating income(expense)

     (136,534     18,262        (118,272
  

 

 

   

 

 

   

 

 

 

Net non-operating profit(loss)

     (150,070     16,516        (133,554
  

 

 

   

 

 

   

 

 

 

Profit before income tax

     2,291,449        7,195        2,298,644   
  

 

 

   

 

 

   

 

 

 

Income tax expense

     (556,632     (1,879     (558,511
  

 

 

   

 

 

   

 

 

 

Profit for the year

     1,734,817        5,316        1,740,133   
  

 

 

   

 

 

   

 

 

 

Other comprehensive income(loss) for the year, net of tax

     148,696        (3,977     144,719   
  

 

 

   

 

 

   

 

 

 

Total comprehensive income for the year

   1,883,513      1,339      1,884,852   
  

 

 

   

 

 

   

 

 

 

Profit for the year attributable to:

      

Shareholders of the parent company

   1,725,742      5,292      1,731,034   

Non-controlling interests

     9,075        24        9,099   
  

 

 

   

 

 

   

 

 

 
   1,734,817      5,316      1,740,133   
  

 

 

   

 

 

   

 

 

 

Total comprehensive income for the year attributable to:

      

Shareholders of the parent company

   1,871,240      (6,103   1,865,137   

Non-controlling interests

     19,715        —          19,715   
  

 

 

   

 

 

   

 

 

 
   1,890,955      (6,103   1,884,852   
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Consolidated Statements of Cash Flows

 

     2012  
     Before     Adjustment     After  
     (In millions of Korean won)  

Cash flows from operating activities

      

Profit for the year

   1,734,817      5,316      1,740,133   
  

 

 

   

 

 

   

 

 

 

Adjustment for non-cash items

      

Net loss(gain) on financial assets/liabilities at fair value through profit or loss

     (222,022     (25,832     (247,854

Net loss(gain) on derivative financial instruments for hedging purposes

     15,165        —          15,165   

Adjustment of fair value of derivative financial instruments

     42        —          42   

Provision for credit loss

     1,607,804        (1,101     1,606,703   

Net loss(gain) on financial investments

     148,211        —          148,211   

Share of loss(profit) of associates

     13,536        1,746        15,282   

Depreciation and amortization expense

     328,642        (322     328,320   

Other net losses on property and equipment/intangible assets

     40,881        —          40,881   

Share-based payments

     13,871        —          13,871   

Policy reserve appropriation

     1,305,730        —          1,305,730   

Post-employment benefits

     172,743        (352     172,391   

Net interest expense

     229,691        —          229,691   

Loss(gains) on foreign currency translation

     (148,877     —          (148,877

Net other expense

     10,075        (7,292     2,783   
  

 

 

   

 

 

   

 

 

 
     3,515,492        (33,153     3,482,339   
  

 

 

   

 

 

   

 

 

 

Changes in operating assets and liabilities

      

Financial assets at fair value through profit or loss

     132,205        (3,234,693     (3,102,488

Derivative financial instruments

     252,166        (58,793     193,373   

Loans

     (2,226,547     (737,682     (2,964,229

Deferred income tax assets

     3,211        —          3,211   

Other assets

     2,202,544        (1,264     2,201,280   

Financial liabilities at fair value through profit or loss

     357,825        —          357,825   

Deposits

     1,552,950        2,942,926        4,495,876   

Deferred income tax liabilities

     (166,772     28,398        (138,374

Other liabilities

     630,144        745,468        1,375,612   
  

 

 

   

 

 

   

 

 

 
     2,737,726        (315,640     2,422,086   
  

 

 

   

 

 

   

 

 

 

Net cash generated from operating activities

     7,988,035        (343,477     7,644,558   
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities

      

Disposal of financial investments

     24,848,249        (42,689     24,805,560   

Acquisition of financial investments

     (26,141,095     —          (26,141,095

Decrease in investments in associates

     11,543        5,030        16,573   

Acquisition of investments in associates

     (212,556     (4,525     (217,081

Disposal of property and equipment

     8,740        8,172        16,912   

Acquisition of property and equipment

     (143,327     188        (143,139

Disposal of intangible assets

     3,785        6,391        10,176   

Acquisition of intangible assets

     (82,400     501        (81,899

Business combination, net of cash acquired

     40,575        —          40,575   

Others

     (838,816     —          (838,816
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (2,505,302     (26,932     (2,532,234
  

 

 

   

 

 

   

 

 

 

 

F-18


Table of Contents
     2012  
     Before     Adjustment     After  
     (In millions of Korean won)  

Cash flows from financing activities

      

Net cash flows from derivative financial instruments for hedging purposes

     75,761        —          75,761   

Net increase in debts

     (792,778     (4,064     (796,842

Increase in debentures

     10,282,920        —          10,282,920   

Decrease in debentures

     (13,084,093     138,443        (12,945,650

Decrease in other payables to trust accounts

     —          456,449        456,449   

Dividends paid to shareholders of the parent company

     (278,173     —          (278,173

Changes in interest in subsidiaries

     —          (8,048     (8,048

Others

     150,109        (188,789     (38,680
  

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (3,646,254     393,991        (3,252,263
  

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (13,560     —          (13,560
  

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

     1,822,919        23,582        1,846,501   

Cash and cash equivalents at the beginning of the year

     4,740,804        —          4,740,804   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at the end of the year

   6,563,723      23,582      6,587,305   
  

 

 

   

 

 

   

 

 

 

Enactment of IFRS 11, Joint Arrangements

IFRS 11, Joint Arrangements, aims to reflect the substance of joint arrangements by focusing on the contractual rights and obligations that each party to the arrangement has rather than its legal form. Joint arrangements are classified as either joint operations or joint ventures. A joint operation is when joint operators have rights to the assets and obligations for the liabilities, and account for the assets, liabilities, revenues and expenses, while parties to the joint venture have rights to the net assets of the arrangement. The adoption of IFRS 11 does not have a material impact on the consolidated financial statements of the Group.

Enactment of IFRS 12, Disclosures of Interests in Other Entities

IFRS 12, Disclosures of Interests in Other Entities, provides the disclosure requirements for all forms of interests in other entities, including a subsidiary, an associate, a joint arrangement and an unconsolidated structured entity.

Enactment of IFRS 13, Fair value measurement

IFRS 13 aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for all fair value measurements under IFRS. IFRS 13 does not extend the use of fair value accounting but provides guidance on how it should be applied where its use is already required or permitted by other standards within IFRS. IFRS 13 has been effective prospectively for annual periods beginning on or after January 1, 2013. The adoption of IFRS 13 does not have a material impact on the consolidated financial statements of the Group.

2.2 Measurement Basis

The consolidated financial statements have been prepared under the historical cost convention unless otherwise specified.

 

F-19


Table of Contents

2.3 Functional and Presentation Currency

Items included in the financial statements of each entity of the Group are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The consolidated financial statements are presented in Korean won, which is the Parent Company’s functional and presentation currency. Refer to Notes 3.2.1 and 3.2.2.

2.4 Significant Estimates

The preparation of consolidated financial statements requires the application of accounting policies, certain critical accounting estimates and assumptions that may have a significant impact on the assets (liabilities) and income (expenses). Management’s estimates of outcomes may differ from actual outcomes if management’s estimates and assumptions based on management’s best judgment at the reporting date are different from the actual environment.

Estimates and assumptions are continually evaluated and any change in an accounting estimate is recognized prospectively by including it in profit or loss in the period of the change, if the change affects that period only. Alternatively if the change in accounting estimate affects both the period of change and future periods, that change is recognized in the profit or loss of all those periods.

Uncertainty in estimates and assumptions with significant risk that may result in material adjustment to the consolidated financial statements are as follows:

2.4.1 Deferred income taxes

The recognition of a deferred tax asset relies on an assessment of the probability and sufficiency of future taxable profits, future reversals of existing taxable temporary differences and ongoing tax planning strategies.

2.4.2 Fair value of financial instruments

The fair value of financial instruments where no active market exists or where quoted prices are not otherwise available is determined by using valuation techniques. Financial instruments, which are not actively traded in the market and those with less transparent market prices, will have less objective fair values and require broad judgment on liquidity, concentration, uncertainty in market factors and assumptions in price determination and other risks.

As described in the significant accounting policies in Note 3.3, ‘Recognition and Measurement of Financial Instruments’, diverse valuation techniques are used to determine the fair value of financial instruments, from generally accepted market valuation models to internally developed valuation models that incorporate various types of assumptions and variables.

2.4.3 Provisions for credit losses (allowances for loan losses, provisions for acceptances and guarantees, and unused loan commitments)

The Group determines and recognizes allowances for losses on loans through impairment testing and recognizes provisions for guarantees, and unused loan commitments. The accuracy of provisions for credit losses is determined by the methodology and assumptions used for estimating expected cash flows of the borrower for individually assessed allowances of loans, collectively assessed allowances for groups of loans, guarantees and unused loan commitments.

2.4.4 Net defined benefit liabilities

The present value of net defined benefit liability depends on a number of factors that are determined on an actuarial basis using a number of assumptions (Note 24).

 

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Table of Contents

2.4.5 Estimated impairment of goodwill

The Group tests annually whether goodwill has suffered any impairment. The recoverable amounts of cash-generating units have been determined based on value-in-use calculations (Note 15).

3. Significant Accounting Policies

The significant accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all years presented, unless otherwise stated.

3.1 Consolidation

3.1.1 Subsidiaries

Subsidiaries are companies that are controlled by the Group. The Group controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The existence and effects of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date when control is transferred to the Group and de-consolidated from the date when control is lost.

If a subsidiary uses accounting policies other than those adopted in the consolidated financial statements for like transactions and events in similar circumstances, appropriate adjustments are made to make the subsidiary’s accounting policies conform to those of the Group when the subsidiary’s financial statements are used by the Group in preparing the consolidated financial statements.

Profit or loss and each component of other comprehensive income are attributed to the owners of the parent and to the non-controlling interests, if any. Total comprehensive income is attributed to the owners of the parent and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance.

Transactions with non-controlling interests that do not result in loss of control are accounted for as equity transactions; that is, as transactions with the owners in their capacity as owners. The difference between fair value of any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity.

When the Group ceases to have control, any retained interest in the entity is re-measured to its fair value at the date when control is lost, with the change in carrying amount recognized in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognized in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognized in other comprehensive income are reclassified to profit or loss.

3.1.2 Associates

Associates are entities over which the Group has significant influence in the financial and operating policy decisions. If the Group holds 20% or more of the voting power of the investee, it is presumed that the Group has significant influence.

Under the equity method, investments in associates are initially recognized at cost and the carrying amount is increased or decreased to recognize the Group’s share of the profit or loss of the investee and changes in the investee’s equity after the date of acquisition. The Group’s share of the profit or loss of the investee is recognized

 

F-21


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in the Group’s profit or loss. Distributions received from an investee reduce the carrying amount of the investment. Profit and losses resulting from ‘upstream’ and ‘downstream’ transactions between the Group and associates are eliminated to the extent of the Group’s interest in associates.

If associates use accounting policies other than those adopted in the consolidated financial statements for like transactions and events in similar circumstances, appropriate adjustments are made to make the associate’s accounting policies conform to those of the Group when the associate’s financial statements are used by the Group in applying equity method.

After the carrying amount of the investment is reduced to zero, additional losses are provided for, and a liability is recognized, only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the investee.

The Group determines at each reporting date whether there is any objective evidence that the investments in the associates are impaired. If this is the case, the Group calculates the amount of impairment as the difference between the recoverable amount of the associates and its carrying value and recognizes the amount as ‘share of profit or loss of associates’ in the statements of comprehensive income.

3.1.3 Structured entity

A structured entity is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity. When the Group decides whether it has power to the structured entities in which the Group has interests, it considers factors such as the purpose, the form, the practical ability to direct the relevant activities of a structured entity, the nature of its relationship with a structured entity and the amount of exposure to variable returns.

3.1.4 Trusts and funds

The Group provides management services for trust assets, collective investment and other funds. These trusts and funds are not consolidated in the Group’s consolidated financial statements, except for trusts and funds over which the Group has control.

3.1.5 Intra-group transactions

All intra-group balances and transactions, and any unrealized gains arising on intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealized losses are eliminated in the same way as unrealized gains except that they are only eliminated to the extent that there is no evidence of impairment.

3.2 Foreign Currency

3.2.1 Foreign currency transactions and balances

A foreign currency transaction is recorded, on initial recognition in the functional currency, by applying the spot exchange rate between the functional currency and the foreign currency at the date of the transaction. At the end of each reporting period foreign currency monetary items are translated using the closing rate which is the spot exchange rate at the end of the reporting period. Non-monetary items that are measured at fair value in a foreign currency are translated using the spot exchange rates at the date when the fair value was determined and non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the spot exchange rate at the date of the transaction.

Exchange differences arising on the settlement of monetary items or on translating monetary items at rates different from those at which they were translated on initial recognition during the period or in previous financial

 

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statements are recognized in profit or loss in the year in which they arise. When gains or losses on a non-monetary item are recognized in other comprehensive income, any exchange component of those gains or losses are also recognized in other comprehensive income. Conversely, when gains or losses on a non-monetary item are recognized in profit or loss, any exchange component of those gains or losses are also recognized in profit or loss.

3.2.2 Foreign Operations

The financial performance and financial position of all foreign operations, whose functional currencies differ from the Group’s presentation currency, are translated into the Group’s presentation currency using the following procedures:

Assets and liabilities for each statement of financial position presented are translated at the closing rate at the end of the reporting period. Income and expenses in the statement of comprehensive income presented are translated at average exchange rates for the period. All resulting exchange differences are recognized in other comprehensive income.

Any goodwill arising from the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising from the acquisition of that foreign operation are treated as assets and liabilities of the foreign operation. Thus they are expressed in the functional currency of the foreign operation and are translated into the presentation currency at the closing rate.

On the disposal of a foreign operation, the cumulative amount of the exchange differences relating to that foreign operation, recognized in other comprehensive income and accumulated in the separate component of equity, are reclassified from equity to profit or loss (as a reclassification adjustment) when the gains or losses on disposal are recognized. On the partial disposal of a subsidiary that includes a foreign operation, the Group re-attributes the proportionate share of the cumulative amount of the exchange differences recognized in other comprehensive income to the non-controlling interests in that foreign operation. In any other partial disposal of a foreign operation, the Group reclassifies to profit or loss only the proportionate share of the cumulative amount of the exchange differences recognized in other comprehensive income.

3.3 Recognition and Measurement of Financial Instruments

3.3.1 Initial recognition

The Group recognizes a financial asset or a financial liability in its statement of financial position when, the Group becomes a party to the contractual provisions of the instrument. A regular way purchase or sale of financial assets (a purchase or sale of a financial asset under a contract whose terms require delivery of the financial instruments within the time frame established generally by market regulation or practice) is recognized and derecognized using trade date accounting.

The Group classifies financial assets as financial assets at fair value through profit or loss, held-to-maturity financial assets, available-for-sale financial assets, or loans and receivables. The Group classifies financial liabilities as financial liabilities at fair value through profit or loss or other financial liabilities. The classification depends on the nature and holding purpose of the financial instrument at initial recognition in the financial statements.

At initial recognition, a financial asset or financial liability is measured at its fair value plus or minus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability. The fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The fair value of a financial instrument on initial recognition is normally the transaction price (that is, the fair value of the consideration given or received) in an arm’s length transaction.

 

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3.3.2 Subsequent measurement

After initial recognition, financial instruments are measured at amortized cost or fair value based on classification at initial recognition.

Amortized cost

The amortized cost of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured at initial recognition and adjusted to reflect principal repayments, cumulative amortization using the effective interest method and any reduction (directly or through the use of an allowance account) for impairment or uncollectibility.

Fair value

Fair values, which the Group primarily uses for the measurement of financial instruments, are the published price quotations based on market prices or dealer price quotations of financial instruments traded in an active market where available. These are the best evidence of fair value. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, an entity in the same industry, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis.

If the market for a financial instrument is not active, fair value is determined either by using a valuation technique or independent third-party valuation service. Valuation techniques include using recent arm’s length market transactions between knowledgeable, willing parties, if available, referencing to the current fair value of another instrument that is substantially the same, discounted cash flow analysis and option pricing models.

The Group uses valuation models that are commonly used by market participants and customized for the Group to determine fair values of common over-the-counter (OTC) derivatives such as options, interest rate swaps and currency swaps which are based on the inputs observable in markets. For more complex instruments, the Group uses internally developed models, which are usually based on valuation methods and techniques generally recognized as standard within the industry, or a value measured by an independent external valuation institution as the fair values if all or some of the inputs to the valuation models are not market observable and therefore it is necessary to estimate fair value based on certain assumptions.

The Group’s Fair Value Evaluation Committee, which consists of the risk management department, trading department and accounting department, reviews the appropriateness of internally developed valuation models, and approves the selection and changing of the external valuation institution and other considerations related to fair value measurement. The review results on the fair valuation models are reported to the Market Risk Management subcommittee by the Fair Value Evaluation Committee on a regular basis.

If the valuation technique does not reflect all factors which market participants would consider in setting a price, the fair value is adjusted to reflect those factors. These factors include counterparty credit risk, bid-ask spread, liquidity risk and others.

The chosen valuation technique makes maximum use of market inputs and relies as little as possible on entity-specific inputs. It incorporates all factors that market participants would consider in setting a price and is consistent with accepted economic methodologies for pricing financial instruments. Periodically, the Group calibrates the valuation technique and tests it for validity using prices from observable current market transactions of the same instrument or based on other relevant observable market data.

 

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3.3.3 Derecognition

Derecognition is the removal of a previously recognized financial asset or financial liability from the statement of financial position. The Group derecognizes a financial asset or a financial liability when, and only when:

Derecognition of financial assets

Financial assets are derecognized when the contractual rights to the cash flows from the financial assets expire or the financial assets have been transferred and substantially all the risks and rewards of ownership of the financial assets are also transferred, or all the risks and rewards of ownership of the financial assets are neither substantially transferred nor retained and the Group has not retained control. If the Group neither transfers nor disposes of substantially all the risks and rewards of ownership of the financial assets, the Group continues to recognize the financial asset to the extent of its continuing involvement in the financial asset.

If the Group transfers the contractual rights to receive the cash flows of the financial asset, but retains substantially all the risks and rewards of ownership of the financial asset, the Group continues to recognize the transferred asset in its entirely and recognize a financial liability for the consideration received.

Derecognition of financial liabilities

Financial liabilities are derecognized from the statement of financial position when the obligation specified in the contract is discharged, cancelled or expires.

3.3.4 Offsetting

A financial asset and a financial liability are offset and the net amount presented in the statement of financial position when, and only when, the Group currently has a legally enforceable right to offset the recognized amounts and intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously.

3.4 Cash and cash equivalents

Cash and cash equivalents include cash on hand, foreign currency, and short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

3.5 Non-derivative financial assets

3.5.1 Financial assets at fair value through profit or loss

This category comprises two sub-categories: financial assets classified as held for trading, and financial assets designated by the Group as at fair value through profit or loss upon initial recognition.

A non-derivative financial asset is classified as held for trading if either:

 

   

It is acquired for the purpose of selling in the near term, or

 

   

It is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking.

 

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The Group may designate certain financial assets, other than held for trading, upon initial recognition as at fair value through profit or loss when one of the following conditions is met:

 

   

It eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as ‘an accounting mismatch’) that would otherwise arise from measuring assets or liabilities or recognizing the gains and losses on them on different bases.

 

   

A group of financial assets is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided internally on that basis to the Group’s key management personnel.

 

   

A contract contains one or more embedded derivatives; the Group may designate the entire hybrid (combined) contract as a financial asset at fair value through profit or loss if allowed by IAS 39, Financial Instruments: Recognition and measurement.

After initial recognition, a financial asset at fair value through profit or loss is measured at fair value and gains or losses arising from a change in the fair value are recognized in profit or loss. Interest income, dividend income, and gains or losses from sale and repayment from financial assets at fair value through profit or loss are recognized in the statement of comprehensive income as net gains on financial instruments at fair value through profit or loss.

3.5.2 Financial Investments

Available-for-sale and held-to-maturity financial assets are presented as financial investments.

Available-for-sale financial assets

Profit or loss of financial assets classified as available for sale, except for impairment loss and foreign exchange gains and losses resulting from changes in amortized cost of debt securities, is recognized as other comprehensive income, and cumulative profit or loss is reclassified from equity to current profit or loss at the derecognition of the financial asset, and it is recognized as part of other operating profit or loss in the statement of comprehensive income.

However, interest revenue measured using the effective interest method is recognized in current profit or loss, and dividends of financial assets classified as available-for-sale are recognized when the right to receive payment is established.

Available-for-sale financial assets denominated in foreign currencies are translated at the closing rate. For available-for-sale debt securities denominated in foreign currency, exchange differences resulting from changes in amortized cost are recognized in profit or loss as part of other operating income and expenses. For available-for-sale equity securities denominated in foreign currency, the entire change in fair value including any exchange component is recognized in other comprehensive income.

Held-to-maturity financial assets

Held-to-maturity financial assets are non-derivative financial assets with fixed or determinable payments and fixed maturity that the Group’s management has the positive intention and ability to hold to maturity. Held-to-maturity financial assets are subsequently measured at amortized cost using the effective interest method after initial recognition and interest income is recognized using the effective interest method.

3.5.3 Loans and receivables

Non-derivative financial assets which meet the following conditions are classified as loans and receivables:

 

   

Those with fixed or determinable payments.

 

   

Those that are not quoted in an active market.

 

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Those that the Group does not intend to sell immediately or in the near term.

 

   

Those that the Group, upon initial recognition, does not designate as available-for-sale or as at fair value through profit or loss.

After initial recognition, these are subsequently measured at amortized cost using the effective interest method.

If the financial asset is purchased under an agreement to resale the asset at a fixed price or at a price that provides a lender’s return on the purchase price, the consideration paid is recognized as loans and receivables.

3.6 Impairment of financial assets

The Group assesses at the end of each reporting period whether there is any objective evidence that a financial asset or group of financial assets except for financial assets at fair value through profit or loss is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred, if and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. However, losses expected as a result of future events, no matter how likely, are not recognized.

Objective evidence that a financial asset or group of assets is impaired includes observable data that comes to the attention of the holder of the asset about the following loss events:

 

   

Significant financial difficulty of the issuer or obligor.

 

   

A breach of contract, such as a default or delinquency in interest or principal payments.

 

   

The lender, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider.

 

   

It becomes probable that the borrower will declare bankruptcy or undergo financial reorganization.

 

   

The disappearance of an active market for that financial asset because of financial difficulties.

 

   

Observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the portfolio.

In addition to the types of events in the preceding paragraphs, objective evidence of impairment for an investment in an equity instrument classified as an available-for-sale financial asset includes a significant or prolonged decline in the fair value below its cost. Accordingly, the Group considers the decline in the fair value of over 30% against the original cost as a “significant decline” and a six-month decline in the fair value below its cost for an equity instrument as a “prolonged decline”.

If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured and recognized in profit or loss as either provisions for credit loss or other operating income and expenses.

3.6.1 Loans and receivables

If there is objective evidence that an impairment loss on loans and receivables carried at amortized cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate.

 

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The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant (individual assessment of impairment), and individually or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment (collective assessment of impairment).

Individual assessment of impairment

Individual assessment of impairment losses are calculated by discounting the expected future cash flows of a loan at its original effective interest rate and comparing the resultant present value with the loan’s current carrying amount. This process normally encompasses management’s best estimate, such as operating cash flow of the borrower and net realizable value of any collateral held.

Collective assessment of impairment

A methodology based on historical loss experience is used to estimate inherent incurred loss on groups of assets for collective assessment of impairment. Such methodology incorporates factors such as type of collateral, product and borrowers, credit rating, loss emergence period, recovery period and applies probability of default on a group of assets and loss given default by type of recovery method. Also, consistent assumptions are applied to form a formula-based model in estimating inherent loss and to determine factors on the basis of historical loss experience and current condition. The methodology and assumptions used for collective assessment of impairment are reviewed regularly to reduce any differences between loss estimates and actual loss experience.

Impairment loss on loans reduces the carrying amount of the asset through use of an allowance account, and when a loan becomes uncollectable, it is written off against the related allowance account. If, in a subsequent period, the amount of the impairment loss decreases and is objectively related to the subsequent event after recognition of impairment, the previously recognized impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognized in profit or loss.

3.6.2 Available-for-sale financial assets

When a decline in the fair value of an available-for-sale financial asset has been recognized in other comprehensive income and there is objective evidence that the asset is impaired, the cumulative loss (the difference between the acquisition cost and current fair value, less any impairment loss on that financial asset previously recognized in profit or loss) that had been recognized in other comprehensive income is reclassified from equity to profit or loss as part of other operating income and expenses.

If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, a portion of the impairment loss is reversed up to but not exceeding the previously recorded impairment loss, with the amount of the reversal recognized in profit or loss as part of other operating income and expenses in the statement of comprehensive income. However, impairment losses recognized in profit or loss for an available-for-sale equity instrument classified as available for sale are not reversed through profit or loss.

3.6.3 Held-to-maturity financial assets

If there is objective evidence that an impairment loss on held-to-maturity financial assets carried at amortized cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the financial asset’s original effective interest rate. The amount of the loss is recognized in profit or loss as part of other operating income and expenses. The impairment loss on held-to-maturity financial assets is directly deducted from the carrying amount.

 

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In the case of a financial asset classified as held to maturity, if, in a subsequent period, the amount of the impairment loss decreases and it is objectively related to an event occurring after the impairment is recognized, a portion of the previously recognized impairment loss is reversed up to but not exceeding the amortized cost at the date of recovery. The amount of reversal is recognized in profit or loss as part of other operating income and expenses in the statement of comprehensive income.

3.7 Derivative Financial Instruments

The Group enters into numerous derivative financial instrument contracts such as currency forwards, interest rate swaps, currency swaps and others for trading purposes or to manage its exposures to fluctuations in interest rates and currency exchange, amongst others. These derivative financial instruments are presented as derivative financial instruments within the financial statements irrespective of transaction purpose and subsequent measurement requirement.

The Group designates certain derivatives as hedging instruments to hedge the risk of changes in fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value hedge) and the risk of changes in cash flow (cash flow hedge).

At the inception of the hedge there is formal designation and documentation of the hedging relationship and the Group’s risk management objective and strategy for undertaking the hedge. That documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s fair value attributable to the hedged risk.

3.7.1 Derivative financial instruments held for trading

All derivative financial instruments, except for derivatives that are designated and qualify for hedge accounting, are classified as financial instruments held for trading and are measured at fair value. Gains or losses arising from a change in fair value are recognized in profit or loss as part of net gains or losses on financial instruments at fair value through profit or loss.

3.7.2 Fair value hedges

If derivatives qualify for a fair value hedge, the change in fair value of the hedging instrument and the change in fair value of the hedged item attributable to the hedged risk are recognized in profit or loss as part of other operating income and expenses. Fair value hedge accounting is discontinued prospectively if the hedging instrument expires or is sold, terminated or exercised, or the hedge no longer meets the criteria for hedge accounting or the Group revokes the designation. Once fair value hedge accounting is discontinued, the adjustment to the carrying amount of a hedged item is fully amortized to profit or loss by the maturity of the financial instrument using the effective interest method.

3.7.3 Cash flow hedges

The portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognized directly in other comprehensive income and the ineffective portion of the gain or loss on the hedging instrument is recognized in profit or loss.

The associated gains or losses that were previously recognized in other comprehensive income are reclassified from equity to profit or loss as a reclassification adjustment in the same period or periods during which the hedged forecast cash flows affects profit or loss. Cash flow hedge accounting is discontinued prospectively if the hedging instrument expires or is sold, terminated or exercised, or the hedge no longer meets the criteria for hedge accounting or the Group revokes the designation. When the cash flow hedge accounting is

 

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discontinued, the cumulative gains or losses on the hedging instrument that have been recognized in other comprehensive income are reclassified to profit or loss over the year in which the forecast transaction occurs. If the forecast transaction is no longer expected to occur, the cumulative gains or losses that had been recognized in other comprehensive income are immediately reclassified to profit or loss.

3.7.4 Embedded derivatives

An embedded derivative is separated from the host contract and accounted for as a derivative if, and only if the economic characteristics and risks of the embedded derivative are not closely related to those of the host contract and a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative and the hybrid (combined) instrument is not measured at fair value with changes in fair value recognized in profit or loss. Gains or losses arising from a change in the fair value of an embedded derivative separated from the host contract are recognized in profit or loss as part of net gains or losses on financial instruments at fair value through profit or loss.

3.7.5 Day one gain and loss

If the Group uses a valuation technique that incorporates data not obtained from observable markets for the fair value at initial recognition of the financial instrument, there may be a difference between the transaction price and the amount determined using that valuation technique. In these circumstances, the difference is deferred and not recognized in profit or loss, and is amortized by using the straight-line method over the life of the financial instrument. If the fair value of the financial instrument is subsequently determined using observable market inputs, the remaining deferred amount is recognized in profit or loss as part of net gains or losses on financial instruments at fair value through profit or loss or other operating income and expenses.

3.8 Property and equipment

3.8.1 Recognition and Measurement

All property and equipment that qualify for recognition as an asset are measured at cost and subsequently carried at cost less any accumulated depreciation and any accumulated impairment losses.

The cost of property and equipment includes any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management and the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located.

Subsequent expenditures are capitalized only when they prolong the useful life or enhance values of the assets but the costs of the day-to-day servicing of the assets such as repair and maintenance costs are recognized in profit or loss as incurred. When part of an item of an asset has a useful life different from that of the entire asset, it is recognized as a separate asset.

3.8.2 Depreciation

Land is not depreciated, whereas other property and equipment are depreciated using the method that reflects the pattern in which the asset’s future economic benefits are expected to be consumed by the Group. The depreciable amount of an asset is determined after deducting its residual value. As for leased assets, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term, the asset is fully depreciated over the shorter of the lease term and its useful life.

Each part of an item of property and equipment with a cost that is significant in relation to the total cost of the item is depreciated separately.

 

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The depreciation method and estimated useful lives of the assets are as follows:

 

Property and equipment

  

Depreciation method

   Estimated useful lives

Buildings and structures

   Straight-line    40 years

Leasehold improvements

   Declining-balance    4 years

Equipment and vehicles

   Declining-balance    4 years

The residual value, the useful life and the depreciation method applied to an asset are reviewed at least at each financial year end and, if expectations differ from previous estimates or if there has been a significant change in the expected pattern of consumption of the future economic benefits embodied in the asset, the changes are accounted for as a change in an accounting estimate.

3.9 Investment properties

3.9.1 Recognition and Measurement

Properties held to earn rentals or for capital appreciation or both are classified as investment properties. Investment properties are measured initially at their cost and subsequently the cost model is used.

3.9.2 Depreciation

Land is not depreciated, whereas other investment properties are depreciated using the method that reflects the pattern in which the asset’s future economic benefits are expected to be consumed by the Group. The depreciable amount of an asset is determined after deducting its residual value.

The depreciation method and estimated useful lives of the assets are as follows:

 

Property and equipment

  

Depreciation method

  

Estimated useful lives

Buildings

   Straight-line    40 years

The residual value, the useful life and the depreciation method applied to an asset are reviewed at least at each financial year end and, if expectations differ from previous estimates or if there has been a significant change in the expected pattern of consumption of the future economic benefits embodied in the asset, the changes are accounted for as a change in an accounting estimate.

3.10 Intangible assets

Intangible assets are measured initially at cost and subsequently carried at their cost less any accumulated amortization and any accumulated impairment losses.

Intangible assets, except for goodwill and membership rights, are amortized using the straight-line method with no residual value over their estimated useful economic life since the asset is available for use.

 

Intangible assets

  

Amortization method

   Estimated useful lives

Industrial property rights

   Straight-line    3~10 years

Software

   Straight-line    3~5 years

Others

   Straight-line    4~30 years

The amortization period and the amortization method for intangible assets with a finite useful life are reviewed at least at each financial year end. Where an intangible asset is not being amortized because its useful life is considered to be indefinite, the Group carries out a review in each accounting period to confirm whether or not events and circumstances still support the assumption of an indefinite useful life. If they do not, the change from the indefinite to finite useful life is accounted for as a change in an accounting estimate.

 

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3.10.1 Goodwill

Recognition and measurement

Goodwill acquired from business combinations before January 1, 2010 is stated at its carrying amount which was recognized under the Group’s previous accounting policy, prior to the transition to IFRS.

Goodwill acquired from business combinations is initially measured as the excess of the aggregate of the consideration transferred, fair value of non-controlling interest and the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree over the net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets of the business acquired, the difference is recognized in profit or loss.

For each business combination, the Group decides whether the non-controlling interest in the acquiree is initially measured at fair value or at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets at the acquisition date.

Acquisition-related costs incurred to effect a business combination are charged to expenses in the periods in which the costs are incurred and the services are received, except for the costs to issue debt or equity securities.

Additional acquisitions of non-controlling interest

Additional acquisitions of non-controlling interests are accounted for as equity transactions. Therefore, no additional goodwill is recognized.

Subsequent measurement

Goodwill is not amortized and is stated at cost less accumulated impairment losses. However, goodwill that forms part of the carrying amount of an investment in associates is not separately recognized and an impairment loss recognized is not allocated to any asset, including goodwill, which forms part of the carrying amount of the investment in the associates.

3.10.2 Subsequent expenditure

Subsequent expenditure is capitalized only when it enhances values of the assets. Internally generated intangible assets, such as goodwill and trade name, are not recognized as assets but expensed as incurred.

3.11 Leases

3.11.1 Finance lease

A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership. At the commencement of the lease term, the Group recognizes finance leases as assets and liabilities in its statements of financial position at amounts equal to the fair value of the leased property or, if lower, the present value of the minimum lease payments, each determined at the inception of the lease. Any initial direct costs of the lessee are added to the amount recognized as an asset.

Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Contingent rents are charged as expenses in the periods in which they are incurred.

 

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The depreciable amount of a leased asset is allocated to each accounting period during the period of expected use on a systematic basis consistent with the depreciation policy the Group adopts for depreciable assets that are owned. If there is reasonable certainty that the lessee will obtain ownership by the end of the lease term, the period of expected use is the useful life of the asset; otherwise, the asset is fully depreciated over the shorter of the lease term and its useful life.

3.11.2 Operating lease

A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership.

Leases in the financial statements of lessors

Lease income from operating leases are recognized in income on a straight-line basis over the lease term, unless another systematic basis is more representative of the time pattern in which use benefit derived from the leased asset is diminished. Initial direct costs incurred by lessors in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognized as an expense over the lease term on the same basis as the lease income.

Leases in the financial statements of lessees

Lease payments under an operating lease (net of any incentives received from the lessor) are recognized as an expense on a straight-line basis over the lease term unless another systematic basis is more representative of the time pattern of the asset’s benefit.

3.12 Impairment of non-financial assets

The Group assesses at the end of each reporting period whether there is any indication that a non-financial asset, except for (i) deferred income tax assets, (ii) assets arising from employee benefits and (iii) non-current assets (or group of assets to be sold) classified as held for sale, may be impaired. If any such indication exists, the Group estimates the recoverable amount of the asset. However, irrespective of whether there is any indication of impairment, the Group tests (i) goodwill acquired in a business combination, (ii) intangible assets with an indefinite useful life and (iii) intangible assets not yet available for use for impairment annually by comparing their carrying amount with their recoverable amount.

The recoverable amount is estimated for the individual asset. If it is not possible to estimate the recoverable amount of the individual asset, the Group determines the recoverable amount of the cash-generating unit to which the asset belongs (the asset’s cash-generating unit). A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. The recoverable amount of an asset is the higher of its fair value less costs to sell and its value in use. Value in use is the present value of the future cash flows expected to be derived from an asset or cash-generating unit that are discounted by a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the future cash flow estimates have not been adjusted.

If the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. That reduction is an impairment loss and recognized immediately in profit or loss. For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the cash-generating units that are expected to benefit from the synergies of the combination. The impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit and then to the other assets of the unit pro rata on the basis of the carrying amount of each asset in the unit.

 

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An impairment loss recognized for goodwill is not reversed in a subsequent period. The Group assesses at the end of each reporting period whether there is any indication that an impairment loss recognized in prior periods for an asset, other than goodwill, may no longer exist or may have decreased, and an impairment loss recognized in prior periods for an asset other than goodwill shall be reversed if, and only if, there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognized. The increased carrying amount of an asset other than goodwill attributable to a reversal of an impairment loss cannot exceed the carrying amount that would have been determined (net of amortization or depreciation) had no impairment loss been recognized for the asset in prior years.

3.13 Non-current assets held for sale

A non-current asset or disposal group is classified as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. For this to be the case, the asset (or disposal group) must be available for immediate sale in its present condition and its sale must be highly probable. A non-current asset (or disposal group) classified as held for sale is measured at the lower of its carrying amount and fair value less costs to sell which is measured in accordance with the applicable IFRS, immediately before the initial classification of the asset (or disposal group) as held for sale.

A non-current asset while it is classified as held for sale or while it is part of a disposal group classified as held for sale is not depreciated (or amortized).

Impairment loss is recognized for any initial or subsequent write-down of the asset (or disposal group) to fair value less costs to sell. Gains are recognized for any subsequent increase in fair value less costs to sell of an asset, but not in excess of the cumulative impairment loss that has been recognized.

3.14 Financial liabilities at fair value through profit or loss

Financial liabilities at fair value through profit or loss are financial liabilities held for trading. After initial recognition, financial liabilities at fair value through profit or loss are measured at fair value and gains or losses arising from changes in the fair value, and gains or losses from sale and repayment of financial liabilities at fair value through profit or loss are recognized as net gains on financial instruments at fair value through profit or loss in the statement of comprehensive income.

3.15 Insurance Contracts

KB Life Insurance Co., Ltd., one of the subsidiaries of the Group, issues insurance contracts.

Insurance contracts are defined as “a contract under which one party (the insurer) accepts significant insurance risk from another party by agreeing to compensate the policyholder if a specified uncertain future event adversely affects the policyholder”. A contract that qualifies as an insurance contract remains an insurance contract until all rights and obligations are extinguished or expire. Such a contract that does not contain significant insurance risk is classified as an investment contract and is within the scope of IAS 39, Financial Instruments: Recognition and measurement to the extent that it gives rise to a financial asset or financial liability, except if the investment contract contains a Discretionary Participation Features (DPF). If the contract has a DPF, the contract is subject to IFRS 4, Insurance Contracts. The Group recognizes assets (liabilities) and gains (losses) relating to insurance contracts as other assets (liabilities) in the statements of financial position, and as other operating income (expenses) in the statements of comprehensive income, respectively.

 

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The following table lists numbers of currently available and discontinued insurance products as of December 31, 2013:

 

Type

   Available      Discontinued      Total  

Individual annuity

     —           9         9   

General annuity

     8         23         31   

Other pure endowment

     —           3         3   

Pure protection insurance

     17         25         42   

Other protection insurance

     —           28         28   

Joint insurance

     9         36         45   

Group protection insurance

     2         5         7   

Group savings insurance

     —           1         1   
  

 

 

    

 

 

    

 

 

 

Total

     36         130         166   
  

 

 

    

 

 

    

 

 

 

3.15.1 Insurance premiums

The Group recognizes collected premiums as revenue when a due date of collection of premiums from insurance contracts comes and the collected premium which is unmatured at the end of the reporting period is recognized as unearned premium.

3.15.2 Insurance liabilities

The Group recognizes a liability for future claims, refunds, policyholders’ dividends and related expenses as follows:

Premium reserve

A premium reserve refers to an amount based on the net premium method for payment of future claims with respect to events covered by insurance policies which have not yet occurred as of the reporting date.

Reserve for outstanding claims

A reserve for outstanding claims refers to the amount not yet paid, out of an amount to be paid or expected to be paid with respect to the insured events which have arisen as of the end of each fiscal year.

Unearned premium reserve

Unearned premium refers to the portion of the premium that has been paid in advance for insurance that has not yet been provided. An unearned premium reserve refers to the amount maintained by the insurer to refund in the event of either party cancelling the contract.

Policyholders’ dividends reserve

Policyholders’ dividends reserve including an interest rate guarantee reserve, a mortality dividend reserve and an interest rate difference dividend reserve is recognized for the purpose of provisioning for policyholders’ dividends in the future in accordance with statutes or insurance terms and conditions.

3.15.3 Liability adequacy test

The Group assesses at each reporting date whether its insurance liabilities are adequate, using current estimates of all future contractual cash flows and related cash flow such as claims handling cost, as well as cash flows resulting from embedded options and guarantees under its insurance contracts in accordance with IFRS 4.

 

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If the assessment shows that the carrying amount of its insurance liabilities is inadequate in light of the estimated future cash flows, the entire deficiency is recognized in profit or loss and reserved as insurance liabilities. Future cash flows from long-term insurance are discounted at a future rate of return on operating assets, whereas future cash flows from general insurance are not discounted to present value. For liability adequacy tests of premium and unearned premium reserves, the Group considers all cash flow factors such as future insurance premium, deferred acquisition costs, operating expenses and operating premiums. In relation to the reserve for outstanding claims, the Group elects a model that best reflects the trend of paid claims among several statistical methods to perform the adequacy test.

3.15.4 Deferred acquisition costs

Acquisition cost is deferred in an amount actually spent for an insurance contract and equally amortized over the premium payment period or the period in which acquisition costs are charged for the relevant insurance contract. Acquisition costs are amortized over the shorter of seven years or premium payment period; if there is any unamortized acquisition costs remaining as of the date of surrender or lapse, such remainder shall be amortized in the period in which the contract is surrendered or lapsed.

3.16 Provisions

Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of a past event and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. The risks and uncertainties that inevitably surround many events and circumstances are taken into account in reaching the best estimate of provisions, and where the effect of the time value of money is material, the amount of provisions are the present value of the expenditures expected to be required to settle the obligation.

Provisions on confirmed and unconfirmed acceptances and guarantees, unfunded commitments of credit cards and unused credit lines of consumer and corporate loans are recognized using a valuation model that applies the credit conversion factor, probability of default, and loss given default.

Provisions are reviewed at the end of each reporting period and adjusted to reflect the current best estimate. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provisions are reversed.

If the Group has a contract that is onerous, the present obligation under the contract is recognized and measured as provisions. An onerous contract is a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. The unavoidable costs under a contract reflect the minimum net cost to exit from the contract, which is the lower of the cost of fulfilling it and any compensation or penalties arising from failure to fulfill it.

3.17 Financial guarantee contracts

A financial guarantee contract is a contract that requires the issuer (the Group) to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due in accordance with the original or modified terms of a debt instrument.

Financial guarantee contracts are initially recognized at fair value. After initial recognition, financial guarantee contracts are measured at the higher of:

 

   

The amount determined in accordance with IAS 37, Provisions, Contingent Liabilities and Contingent Assets and

 

   

The initial amount recognized, less, when appropriate, cumulative amortization recognized in accordance with IAS 18, Revenue

 

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3.18 Equity instruments issued by the Group

An equity instrument is any contract or agreement that evidences a residual interest in the assets of an entity after deducting all of its liabilities.

3.18.1 Ordinary shares

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are deducted, net of tax, from the equity.

3.18.2 Treasury shares

If entities of the Group reacquire the Parent Company’s equity instruments, those instruments (‘treasury shares’) are deducted from equity. No gains or losses are recognized in profit or loss on the purchase, sale, issue or cancellation of own equity instruments.

3.19 Revenue recognition

3.19.1 Interest income and expense

Interest income and expense are recognized using the effective interest method. The effective interest method is a method of calculating the amortized cost of a financial asset or a financial liability (or groups of financial assets or financial liabilities) and of allocating the interest income or interest expense over the relevant period.

The effective interest rate is the rate that exactly discounts estimated future cash receipts or payments through the expected life of the financial instrument or, where appropriate, a shorter period, to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Group estimates cash flows considering all contractual terms of the financial instrument but does not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs, and all other premiums or discounts. In those rare cases when it is not possible to estimate reliably the cash flows or the expected life of a financial instrument (or group of financial instruments), the Group uses the contractual cash flows over the full contractual term of the financial instrument (or group of financial instruments).

Interest on impaired financial assets is recognized using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.

3.19.2 Fee and commission income

The Group recognizes financial service fees in accordance with the accounting standard of the financial instrument related to the fees earned.

Fees that are an integral part of the effective interest of a financial instrument

Such fees are generally treated as adjustments of effective interest. Such fees may include compensation for activities such as evaluating the borrower’s financial condition, evaluating and recording guarantees, collateral and other security arrangements, negotiating the terms of the instrument, preparing and processing documents and closing the transaction and origination fees received on issuing financial liabilities measured at amortized cost. However, fees relating to the creation or acquisition of a financial instrument at fair value through profit or loss are recognized as revenue immediately.

 

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Fees earned as services are provided

Such fees are recognized as revenue as the services are provided. The fees include fees charged for servicing a financial instrument and charged for managing investments.

Fees that are earned on the execution of a significant act

Such fees are recognized as revenue when the significant act has been completed.

Commission on the allotment of shares to a client is recognized as revenue when the shares have been allotted and placement fees for arranging a loan between a borrower and an investor is recognized as revenue when the loan has been arranged.

A syndication fee received by the Group that arranges a loan and retains no part of the loan package for itself (or retains a part at the same effective interest rate for comparable risk as other participants) is compensation for the service of syndication. Such a fee is recognized as revenue when the syndication has been completed.

3.19.3 Dividend income

Dividend income is recognized in profit or loss when the right to receive payment is established. Dividend income from financial assets at fair value through profit or loss and financial investment is recognized in profit or loss as part of net gains on financial assets at fair value through profit or loss and other operating income and expenses, respectively.

3.20 Employee compensation and benefits

3.20.1 Post-employment benefits:

Defined benefit plans

All post-employment benefits, other than defined contribution plans, are classified as defined benefit plans. The amount recognized as a defined benefit liability is the present value of the defined benefit obligation less the fair value of plan assets at the end of the reporting period.

The present value of the defined benefit obligation is calculated annually by independent actuaries using the Projected Unit Credit method. The rate used to discount post-employment benefit obligations is determined by reference to market yields at the end of the reporting period on high quality corporate bonds. The currency and term of the corporate bonds are consistent with the currency and estimated term of the post-employment benefit obligations. Actuarial gains and losses including experience adjustments and the effects of changes in actuarial assumptions are recognized in other comprehensive income(loss).

When the fair value of plan assets deducted from the total of the present value of the defined benefit obligation results in an asset, it is recognized to the extent of any cumulative unrecognized past service cost and the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan.

Past service cost is the change in the present value of the defined benefit obligation, which arises when the Group introduces a defined benefit plan or changes the benefits of an existing defined benefit plan. Such past service cost is immediately recognized as an expense for the year.

Defined contribution plans

The contributions are recognized as employee benefit expense when they are due.

 

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3.20.2 Short-term employee benefits

Short-term employee benefits are employee benefits (other than termination benefits) that are due to be settled within 12 months after the end of the period in which the employees render the related service. The undiscounted amount of short-term employee benefits expected to be paid in exchange for that service is recognized as a liability (accrued expense), after deducting any amount already paid.

The expected cost of profit-sharing and bonus payments are recognized as liabilities when the Group has a present legal or constructive obligation to make such payments as a result of past events rendered by employees and a reliable estimate of the obligation can be made.

3.20.3 Share-based payment

The Group operates share-based payment arrangements granting awards to directors and employees of the Group. The Group has a choice of whether to settle the awards in cash or by issuing equity instruments of the parent company at the date of settlement.

For a share-based payment transaction in which the terms of the arrangement provide the Group with the choice of whether to settle in cash or by issuing equity instruments, the Group determined that it has a present obligation to settle in cash because the Group has a past practice and a stated policy of settling in cash. Therefore, the Group accounts for the transaction in accordance with the requirements of cash-settled share-based payment transactions.

The Group measures the services acquired and the liability incurred at fair value. Until the liability is settled, the Group remeasures the fair value of the liability at the end of each reporting period and at the date of settlement, with any changes in fair value recognized in profit or loss for the year.

3.20.4 Termination benefits

Termination benefits are payable when employment is terminated by the Group before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. An entity shall recognize a liability and expense for termination benefits at the earlier of the following dates: when the entity can no longer withdraw the offer of those benefits and when the entity recognizes costs for a restructuring that is within the scope of IAS 37 and involves the payment of termination benefits. Termination benefits are measured by considering the number of employees expected to accept the offer in the case of a voluntary early retirement. Termination benefits over 12 months after the reporting period are discounted to present value.

3.21 Income tax expenses

Income tax expense (tax income) comprises current tax expense (current tax income) and deferred income tax expense (deferred income tax income). Current and deferred income tax are recognized as income or expense and included in profit or loss for the year, except to the extent that the tax arises from (a) a transaction or an event which is recognized, in the same or a different period outside profit or loss, either in other comprehensive income or directly in equity and (b) a business combination.

3.21.1 Current income tax

Current income tax is the amount of income taxes payable (recoverable) in respect of the taxable profit (tax loss) for a period. A difference between the taxable profit and accounting profit may arise when income or expense is included in accounting profit in one period, but is included in taxable profit in a different period. Differences may also arise if there is revenue that is exempt from taxation, or expense that is not deductible in determining taxable profit (tax loss). Current income tax liabilities (assets) for the current and prior periods are measured at the amount expected to be paid to (recovered from) the taxation authorities, using the tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.

 

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The Group offsets current income tax assets and current income tax liabilities if, and only if, the Group (a) has a legally enforceable right to offset the recognized amounts and (b) intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously.

3.21.2 Deferred income tax

Deferred income tax is recognized, using the asset-liability method, on temporary differences arising between the tax based amount of assets and liabilities and their carrying amount in the financial statements. Deferred income tax liabilities are recognized for all taxable temporary differences and deferred income tax assets are recognized for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilized. However, deferred income tax liabilities are not recognized if they arise from the initial recognition of goodwill; deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss.

Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except for deferred income tax liabilities for which the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.

The carrying amount of a deferred income tax asset is reviewed at the end of each reporting period. The Group reduces the carrying amount of a deferred income tax asset to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred income tax asset to be utilized.

Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred income tax liabilities and deferred income tax assets reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

The Group offsets deferred income tax assets and deferred income tax liabilities when the Group has a legally enforceable right to offset current income tax assets against current income tax liabilities; and the deferred income tax assets and the deferred income tax liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity; or different taxable entities which intend either to settle current income tax liabilities and assets on a net basis, or to realize the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred income tax liabilities or assets are expected to be settled or recovered.

3.21.3 Uncertain tax positions

Uncertain tax positions arise from tax treatments applied by the Group which may be challenged by the tax authorities due to the complexity of the transaction or different interpretation of the tax laws, a claim for rectification brought by the Group, or an appeal for a refund claimed from the tax authorities related to additional assessments. The Group recognizes its uncertain tax positions in the financial statements based on the guidance in IAS 37. A liability related to an uncertain tax position is recognized as the best estimate of expenditure if the uncertain tax position is probable of resulting in additional payment to the tax authorities. Meanwhile assets related to uncertain tax positions, caused by a claim for rectification or an appeal for refund claimed from the tax authorities related to additional assessments, are treated as contingent assets under IAS 37. Therefore, tax expenses are recognized in the financial statements when the uncertain tax position is probable of resulting in additional payment to the tax authorities, while tax benefits are recognized only when the tax refund is virtually certain.

 

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The Group classifies interest and penalties related to uncertain tax positions as a component of income tax expense.

3.22 Earnings per share

The Group calculates basic earnings per share amounts and diluted earnings per share amounts for profit or loss attributable to ordinary equity holders of the parent entity and presents them in the statement of comprehensive income. Basic earnings per share is calculated by dividing profit or loss attributable to ordinary equity holders of the Parent Company by the weighted average number of ordinary shares outstanding during the period. For the purpose of calculating diluted earnings per share, the Group adjusts profit or loss attributable to ordinary equity holders of the Parent Company and the weighted average number of shares outstanding for the effects of all dilutive potential ordinary shares including convertible bonds and share options.

3.23 Operating Segments

Operating segments are components of the Group where separate financial information is available and is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.

Segment information includes the items which are directly attributable and reasonably allocated to the segment.

3.24 United States dollar amounts

The Group operates primarily in Korea and its official accounting records are maintained in Korean won. The U.S. dollar amounts are provided herein as supplementary information solely for the convenience of the reader. Korean won amounts are expressed in U.S. dollars at the rate of ₩1,055.25 to U.S. $1.00, the U.S. Federal Reserve Bank of New York buying exchange rate in effect at noon, December 31, 2013. Such convenience translation into US dollars should not be construed as representations that the Korean won amounts have been, could have been, or could in the future be, converted at this or any other rate of exchange.

4. Financial risk management

4.1 Summary

4.1.1 Overview of Financial Risk Management Policy

The financial risks that the Group is exposed to are credit risk, market risk, liquidity risk, operational risk and others.

The note regarding financial risk management provides information about the risks that the Group is exposed to, including the objectives, policies and processes for managing the risks, the methods used to measure the risks, and capital adequacy. Additional quantitative information is disclosed throughout the consolidated financial statements.

The Group’s risk management system focuses on increasing transparency, developing the risk management environment, preventing transmission of risk to other related subsidiaries, and the preemptive response to risk due to rapid changes in the financial environment to support the Group’s long-term strategy and business decisions efficiently. Credit risk, market risk, liquidity risk, and operational risk have been recognized as the Group’s key risks. These risks are measured in Economic Capital or VaR (Value at Risk) and are managed using a statistical method.

 

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4.1.2 Risk Management Organization

Risk Management Committee

The Risk Management Committee establishes risk management strategies in accordance with the directives of the Board of Directors and determines the Group’s target risk appetite, approves significant risk matters and reviews the level of risks that the Group is exposed to and the appropriateness of the Group’s risk management operations as an ultimate decision-making authority.

Risk Management Council

The Risk Management Council is a consultative group which reviews and makes decisions on matters delegated by the Risk Management Committee and discusses the detailed issues relating to the Group’s risk management.

Risk Management Department

The Risk Management Department is responsible for monitoring and managing the Group’s economic capital limit and managing specific policies, procedures and work processes relating to the Group’s risk management.

4.2 Credit Risk

4.2.1 Overview of Credit Risk

Credit risk is the risk of possible losses in an asset portfolio in the event of a counterparty’s default, breach of contract and deterioration in the credit quality of the counterparty. For risk management reporting purposes, the individual borrower’s default risk, country risk, specific risks and other credit risk exposure components are considered as a whole.

4.2.2 Credit Risk Management

The Group measures expected losses and economic capital on assets that are subject to credit risk management whether on- or off-balance items and uses expected losses and economic capital as a management indicator. The Group manages credit risk by allocating credit risk economic capital limits.

In addition, the Group controls the credit concentration risk exposure by applying and managing total exposure limits to prevent an excessive risk concentration to each industry and borrower.

The Group has organized a credit risk management team that focuses on credit risk management in accordance with the Group’s credit risk management policy. For Kookmin Bank, which is the main subsidiary, its loan analysis department which is independent from the sales department is responsible for loan policy, loan limit, loan review, credit evaluation, restructuring and subsequent events. Kookmin Bank’s risk management group is also responsible for planning risk management policy, applying limits of credit lines, measuring the credit risk economic capital, adjusting credit limits, reviewing credit and verifying credit evaluation models.

 

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4.2.3 Maximum exposure to credit risk

The Group’s maximum exposures of financial instruments, excluding equity securities, to credit risk without consideration of collateral values as of December 31, 2012 and 2013, are as follows:

 

     As of December 31,  
     2012      2013  
     (In millions of Korean won)  

Financial assets

     

Due from financial institutions

   7,742,497       12,094,103   

Financial assets at fair value through profit or loss

     

Financial assets held for trading(1)

     8,331,454         7,866,037   

Financial assets designated at fair value through profit or loss

     192,607         210,805   

Derivatives

     2,091,285         1,819,409   

Loans

     213,644,791         219,001,356   

Financial investments

     

Available-for-sale financial assets

     21,737,240         18,933,288   

Held-to-maturity financial assets

     12,255,806         13,016,991   

Other financial assets

     7,569,596         6,251,679   
  

 

 

    

 

 

 

Total financial assets

     273,565,276         279,193,668   
  

 

 

    

 

 

 

Off-balance sheet items

     

Acceptances and guarantees contracts

     9,418,281         9,804,692   

Financial guarantee contracts

     1,509,269         3,097,372   

Commitments

     93,193,481         95,422,032   
  

 

 

    

 

 

 

Total off-balance items

     104,121,031         108,324,096   
  

 

 

    

 

 

 

Total

   377,686,307       387,517,764   
  

 

 

    

 

 

 

 

(1) 

Financial instruments indexed to the price of gold amounting to ₩39,839 million and ₩40,252 million as of December 31, 2012 and 2013, respectively, are included.

4.2.4 Credit risk of loans

The Group maintains an allowance for loan losses associated with credit risk on loans to manage its credit risk.

The Group recognizes an impairment loss on loans carried at amortized cost when there is any objective indication of impairment. Under IFRS, an impairment loss is based on losses incurred at the end of the reporting year. Therefore, the Group does not recognize losses expected as a result of future events. The Group measures inherent incurred losses on loans and presents them in the financial statements through the use of an allowance account which is offset against the related loans.

 

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Loans are classified as follows:

 

    2012  
    Retail     Corporate     Credit card     Total  
    Amount     %     Amount     %     Amount     %     Amount     %  
    (In millions of Korean won)  

Neither past due nor impaired

  100,663,733        97.26      98,673,368        97.18      11,353,316        95.61      210,690,417        97.13   

Past due but not impaired

    1,656,088        1.60        478,035        0.47        399,778        3.37        2,533,901        1.17   

Impaired

    1,184,820        1.14        2,383,555        2.35        120,757        1.02        3,689,132        1.70   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

    103,504,641        100.00        101,534,958        100.00        11,873,851        100.00        216,913,450        100.00   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowances(1)

    (687,851     0.66        (2,251,318     2.22        (329,490     2.77        (3,268,659     1.51   
 

 

 

     

 

 

     

 

 

     

 

 

   

Carrying amount

  102,816,790        99,283,640        11,544,361        213,644,791     
 

 

 

     

 

 

     

 

 

     

 

 

   

 

    2013  
    Retail     Corporate     Credit card     Total  
    Amount     %     Amount     %     Amount     %     Amount     %  
    (In millions of Korean won)  

Neither past due nor impaired

  104,751,607        97.22      98,939,364        96.68      11,253,836        95.50      214,944,807        96.88   

Past due but not impaired

    1,967,127        1.83        538,571        0.53        321,978        2.73        2,827,676        1.27   

Impaired

    1,024,480        0.95        2,856,933        2.79        208,644        1.77        4,090,057        1.85   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

    107,743,214        100.00        102,334,868        100.00        11,784,458        100.00        221,862,540        100.00   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowances(1)

    (580,510     0.54        (1,870,874     1.83        (409,800     3.48        (2,861,184     1.29   
 

 

 

     

 

 

     

 

 

     

 

 

   

Carrying amount

  107,162,704        100,463,994        11,374,658        219,001,356     
 

 

 

     

 

 

     

 

 

     

 

 

   

 

(1)

Collectively assessed allowances for loans are included as they are not impaired individually.

Credit quality of loans that are neither past due nor impaired are as follows:

 

     2012  
     Retail      Corporate      Credit card      Total  
     (In millions of Korean won)  

Grade 1

   83,028,229       38,723,278       5,674,508       127,426,015   

Grade 2

     13,894,242         40,862,205         3,871,593         58,628,040   

Grade 3

     2,574,463         15,395,220         1,568,939         19,538,622   

Grade 4

     766,998         3,429,806         153,906         4,350,710   

Grade 5

     399,801         262,859         84,370         747,030   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   100,663,733       98,673,368       11,353,316       210,690,417   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     2013  
     Retail      Corporate      Credit card      Total  
     (In millions of Korean won)  

Grade 1

   88,331,532       40,950,125       5,670,689       134,952,346   

Grade 2

     12,320,960         43,497,358         3,806,194         59,624,512   

Grade 3

     3,195,119         11,993,854         1,438,491         16,627,464   

Grade 4

     637,556         2,237,288         184,110         3,058,954   

Grade 5

     266,440         260,739         154,352         681,531   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   104,751,607       98,939,364       11,253,836       214,944,807   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Credit quality of loans graded according to internal credit ratings are as follows:

 

    Range of PD  (%)
(Probability of Default)
    Retail      Corporate  

Grade 1

    0.0  ~  1.0        1 ~5grade         AAA  ~  BBB+   

Grade 2

    1.0 ~ 5.0        6 ~ 8 grade         BBB ~  BB   

Grade 3

    5.0  ~  15.0        9  ~  10 grade         BB-  ~  B   

Grade 4

    15.0  ~  30.0        11 grade         B-  ~  CCC   

Grade 5

    30.0  ~              12 grade or under         CC or under   

Loans that are past due but not impaired are as follows:

 

     2012  
     1  ~  29 days      30  ~  59 days      60  ~  89 days      90 days or more      Total  
     (In millions of Korean won)  

Retail

   1,344,412       223,858       87,736       82       1,656,088   

Corporate

     322,516         125,503         28,153         1,863         478,035   

Credit card

     293,863         57,325         47,698         892         399,778   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   1,960,791       406,686       163,587       2,837       2,533,901   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     2013  
     1 ~ 29 days      30 ~ 59 days      60 ~ 89 days      90 days or more      Total  
     (In millions of Korean won)  

Retail

   1,729,091       169,341       68,629       66       1,967,127   

Corporate

     435,700         54,900         47,971         —           538,571   

Credit card

     234,003         51,416         36,259         300         321,978   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   2,398,794       275,657       152,859       366       2,827,676   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans are as follows:

 

     2012  
     Retail     Corporate     Credit card     Total  
     (In millions of Korean won)  

Loans

   1,184,820      2,383,555      120,757      3,689,132   

Allowances

        

Individual assessment

     —          (761,563     —          (761,563

Collective assessment

     (451,891     (236,062     (72,373     (760,326
  

 

 

   

 

 

   

 

 

   

 

 

 

Total allowances

     (451,891     (997,625     (72,373     (1,521,889
  

 

 

   

 

 

   

 

 

   

 

 

 

Carrying amount

   732,929      1,385,930      48,384      2,167,243   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     2013  
     Retail     Corporate     Credit card     Total  
     (In millions of Korean won)  

Loans

   1,024,480      2,856,933      208,644      4,090,057   

Allowances

        

Individual assessment

     (2     (1,126,249     —          (1,126,251

Collective assessment

     (381,739     (229,058     (133,616     (744,413
  

 

 

   

 

 

   

 

 

   

 

 

 

Total allowances

     (381,741     (1,355,307     (133,616     (1,870,664
  

 

 

   

 

 

   

 

 

   

 

 

 

Carrying amount

   642,739      1,501,626      75,028      2,219,393   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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A quantification of the extent to which collateral and other credit enhancements mitigate credit risk as of December 31, 2012 and 2013, are as follows:

 

     2012  
     Impaired Loans      Non-impaired Loans  
     Individual      Collective      Past due      Not past due      Total  
     (In millions of Korean won)  

Guarantees

   18,512       181,979       326,676       25,175,205       25,702,372   

Deposits and savings

     200         19,867         62,484         2,690,164         2,772,715   

Property and equipment

     18,776         4,816         883         1,427,940         1,452,415   

Real estate

     329,743         478,800         1,201,141         109,197,591         111,207,275   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   367,231       685,462       1,591,184       138,490,900       141,134,777   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     2013  
     Impaired Loans      Non-impaired Loans  
     Individual      Collective      Past due      Not past due      Total  
     (In millions of Korean won)  

Guarantees

   29,929       226,721       382,997       32,102,952       32,742,599   

Deposits and savings

     5,099         27,060         56,066         2,324,625         2,412,850   

Property and equipment

     11,843         1,959         1,281         1,676,443         1,691,526   

Real estate

     425,748         537,904         1,506,854         114,659,274         117,129,780   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   472,619       793,644       1,947,198       150,763,294       153,976,755   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

4.2.5 Credit quality of securities

The financial assets at fair value through profit or loss and financial investments excluding equity securities that are exposed to credit risk are as follows:

 

     2012      2013  
     (In millions of Korean won)  

Securities that are neither past due nor impaired

   42,464,823       39,977,309   

Impaired securities

     12,445         9,560   
  

 

 

    

 

 

 

Total

   42,477,268       39,986,869   
  

 

 

    

 

 

 

The credit quality of securities (excluding equity securities) that are neither past due nor impaired as of December 31, 2012 and 2013, are as follows:

 

     2012  
     Grade 1      Grade 2      Grade 3      Grade 4      Grade 5      Total  
     (In millions of Korean won)  

Financial assets held for trading

   7,590,634       671,544       29,437       —         —         8,291,615   

Financial assets designated at fair value through profit or loss

     84,428         108,179         —           —           —           192,607   

Available-for-sale financial assets

     20,616,413         1,027,165         81,162         56         —           21,724,796   

Held-to-maturity financial assets

     12,255,805         —           —           —           —           12,255,805   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   40,547,280       1,806,888       110,599       56       —         42,464,823   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
    2013  
    Grade 1     Grade 2     Grade 3     Grade 4     Grade 5     Total  
    (In millions of Korean won)  

Financial assets held for trading

  6,634,168      1,172,476      19,141      —        —        7,825,785   

Financial assets designated at fair value through profit or loss

    89,527        119,489        —          1,789        —          210,805   

Available-for-sale financial assets

    18,078,177        785,216        60,335        —          —          18,923,728   

Held-to-maturity financial assets

    13,016,991        —          —          —          —          13,016,991   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  37,818,863      2,077,181      79,476      1,789      —        39,977,309   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The credit qualities of securities (excluding equity securities) according to the credit ratings by external rating agencies are as follows:

 

    Domestic     Foreign  

Credit quality

  KIS     KAP     NICE     S&P     Fitch-IBCA     Moody’s  

Grade 1

    AA0 to AAA        AA0 to AAA        AA0 to AAA        A- to AAA        A- to AAA        A3 to Aaa   

Grade 2

    A- to AA-        A- to AA-        A- to AA-        BBB- to BBB+        BBB- to BBB+        Baa3 to Baa1   

Grade 3

    BBB0 to BBB+        BBB0 to BBB+        BBB0 to BBB+        BB to BB+        BB to BB+        Ba2 to Ba1   

Grade 4

    BB0 to BBB-        BB0 to BBB-        BB0 to BBB-        B+ to BB-        B+ to BB-        B1 to Ba3   

Grade 5

    BB- or under        BB- or under        BB- or under        B or under        B or under        B2 or under   

Debt securities’ credit qualities denominated in Korean won are based on the lowest credit rating by the three domestic credit rating agencies above, and those denominated in foreign currencies are based on the lowest credit rating by the three foreign credit rating agencies above.

4.2.6 Credit risk mitigation of derivative financial instruments

A quantification of the extent to which collateral and other credit enhancements mitigate credit risk of derivative financial instruments as of December 31, 2012 and 2013, is as follows:

 

     2012      2013  
     (In millions of Korean won)  

Deposits and savings, Securities and others

   216,906       271,380   
  

 

 

    

 

 

 

Total

   216,906       271,380   
  

 

 

    

 

 

 

4.2.7 Credit risk concentration analysis

The details of the Group’s loans by country as of December 31, 2012 and 2013, are as follows:

 

    2012  
    Retail     Corporate     Credit card     Total     %     Allowances     Carrying
amount
 
    (In millions of Korean won)  

Korea

  103,432,668      99,682,434      11,871,321      214,986,423        99.11      (3,249,850   211,736,573   

Europe

    3        80,454        378        80,835        0.04        (288     80,547   

China

    319        429,781        287        430,387        0.20        (2,372     428,015   

Japan

    7,944        885,607        437        893,988        0.41        (14,273     879,715   

U.S

    —          308,846        454        309,300        0.14        (478     308,822   

Others

    63,707        147,836        974        212,517        0.10        (1,398     211,119   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  103,504,641      101,534,958      11,873,851      216,913,450        100.00      (3,268,659   213,644,791   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
    2013  
    Retail     Corporate     Credit card     Total     %     Allowances     Carrying
amount
 
    (In millions of Korean won)  

Korea

  107,644,600      100,533,577      11,782,169      219,960,346        99.14      (2,797,651   217,162,695   

Europe

    9        98,752        406        99,167        0.04        (288     98,879   

China

    227        583,176        315        583,718        0.26        (16,075     567,643   

Japan

    5,708        475,242        350        481,300        0.22        (44,248     437,052   

U.S

    —          448,868        578        449,446        0.20        (654     448,792   

Others

    92,670        195,253        640        288,563        0.14        (2,268     286,295   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  107,743,214      102,334,868      11,784,458      221,862,540        100.00      (2,861,184   219,001,356   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The details of the Group’s corporate loans by industry as of December 31, 2012 and 2013, are as follows:

 

     2012  
     Loans      %      Allowances     Carrying
amount
 
     (In millions of Korean won)  

Financial institutions

   7,291,052         7.18       (11,139   7,279,913   

Manufacturing

     31,319,746         30.85         (931,442     30,388,304   

Service

     38,649,492         38.07         (477,560     38,171,932   

Wholesale & Retail

     15,124,459         14.90         (230,865     14,893,594   

Construction

     4,688,691         4.62         (528,284     4,160,407   

Public sector

     520,422         0.51         (7,076     513,346   

Others

     3,941,096         3.87         (64,952     3,876,144   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   101,534,958         100.00       (2,251,318   99,283,640   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

     2013  
     Loans      %      Allowances     Carrying
amount
 
     (In millions of Korean won)  

Financial institutions

   10,524,203         10.28       (87,471   10,436,732   

Manufacturing

     31,160,890         30.45         (611,257     30,549,633   

Service

     38,375,826         37.50         (448,114     37,927,712   

Wholesale & Retail

     13,873,681         13.56         (194,840     13,678,841   

Construction

     4,427,615         4.33         (502,223     3,925,392   

Public sector

     654,998         0.64         (8,469     646,529   

Others

     3,317,655         3.24         (18,500     3,299,155   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   102,334,868         100.00       (1,870,874   100,463,994   
  

 

 

    

 

 

    

 

 

   

 

 

 

The details of the Group’s retail and credit card loans by type as of December 31, 2012 and 2013, are as follows:

 

     2012  
     Loans      %      Allowances     Carrying
amount
 
     (In millions of Korean won)  

Housing purpose

   44,876,955         38.90       (109,490   44,767,465   

General purpose

     58,627,686         50.81         (578,361     58,049,325   

Credit card

     11,873,851         10.29         (329,490     11,544,361   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   115,378,492         100.00       (1,017,341   114,361,151   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents
     2013  
     Loans      %      Allowances     Carrying
amount
 
     (In millions of Korean won)  

Housing purpose

   46,485,300         38.89       (77,985   46,407,315   

General purpose

     61,257,914         51.25         (502,525     60,755,389   

Credit card

     11,784,458         9.86         (409,800     11,374,658   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   119,527,672         100.00       (990,310   118,537,362   
  

 

 

    

 

 

    

 

 

   

 

 

 

The details of the Group’s securities (excluding equity securities) and derivative financial instruments by industry as of December 31, 2012 and 2013, are as follows:

 

     2012  
     Amount      %  
     (In millions of Korean won)  

Financial assets held for trading

     

Government and government funded institutions

   3,225,970         38.91   

Banking and Insurance

     4,038,097         48.70   

Others

     1,027,548         12.39   
  

 

 

    

 

 

 

Total financial assets held for trading

     8,291,615         100.00   
  

 

 

    

 

 

 

Financial assets designated at fair value through profit or loss

     

Banking and Insurance

     192,607         100.00   
  

 

 

    

 

 

 

Total financial assets designated at fair value through profit or loss

     192,607         100.00   
  

 

 

    

 

 

 

Derivative financial assets

     

Government and government funded institutions

     29,236         1.40   

Banking and Insurance

     1,857,366         88.81   

Others

     204,683         9.79   
  

 

 

    

 

 

 

Total derivative financial assets

     2,091,285         100.00   
  

 

 

    

 

 

 

Available-for-sale financial assets

     

Government and government funded institutions

     10,355,155         47.64   

Banking and Insurance

     8,879,741         40.85   

Others

     2,502,344         11.51   
  

 

 

    

 

 

 

Total available-for-sale financial assets

     21,737,240         100.00   
  

 

 

    

 

 

 

Held-to-maturity financial assets

     

Government and government funded institutions

     9,854,991         80.41   

Banking and Insurance

     1,593,713         13.00   

Others

     807,102         6.59   
  

 

 

    

 

 

 

Total held-to-maturity financial assets

     12,255,806         100.00   
  

 

 

    

 

 

 

Total

   44,568,553      
  

 

 

    

 

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Table of Contents
     2013  
     Amount      %  
     (In millions of Korean won)  

Financial assets held for trading

     

Government and government funded institutions

   3,057,633         39.07   

Banking and Insurance

     3,776,119         48.25   

Others

     992,033         12.68   
  

 

 

    

 

 

 

Total financial assets held for trading

     7,825,785         100.00   
  

 

 

    

 

 

 

Financial assets designated at fair value through profit or loss

     

Banking and Insurance

     210,805         100.00   
  

 

 

    

 

 

 

Total financial assets designated at fair value through profit or loss

     210,805         100.00   
  

 

 

    

 

 

 

Derivative financial assets

     

Government and government funded institutions

     18,248         1.00   

Banking and Insurance

     1,606,285         88.29   

Others

     194,876         10.71   
  

 

 

    

 

 

 

Total derivative financial assets

     1,819,409         100.00   
  

 

 

    

 

 

 

Available-for-sale financial assets

     

Government and government funded institutions

     9,966,361         52.64   

Banking and Insurance

     6,986,895         36.90   

Others

     1,980,032         10.46   
  

 

 

    

 

 

 

Total available-for-sale financial assets

     18,933,288         100.00   
  

 

 

    

 

 

 

Held-to-maturity financial assets

     

Government and government funded institutions

     10,923,807         83.92   

Banking and Insurance

     1,259,282         9.67   

Others

     833,902         6.41   
  

 

 

    

 

 

 

Total held-to-maturity financial assets

     13,016,991         100.00   
  

 

 

    

 

 

 

Total

   41,806,278      
  

 

 

    

 

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Table of Contents

The details of the Group’s securities (excluding equity securities) and derivative financial instruments by country, as of December 31, 2012 and 2013, are as follows:

 

     2012  
     Amount      %  
     (In millions of Korean won)  

Financial assets held for trading

     

Korea

   8,291,615         100.00   
  

 

 

    

 

 

 

Total financial assets held for trading

     8,291,615         100.00   
  

 

 

    

 

 

 

Financial assets designated at fair value through profit or loss

     

Korea

     192,607         100.00   
  

 

 

    

 

 

 

Total financial assets designated at fair value through profit or loss

     192,607         100.00   
  

 

 

    

 

 

 

Derivative financial assets

     

Korea

     705,318         33.73   

United States

     366,827         17.54   

Others

     1,019,140         48.73   
  

 

 

    

 

 

 

Total derivative financial assets

     2,091,285         100.00   
  

 

 

    

 

 

 

Available-for-sale financial assets

     

Korea

     21,560,009         99.18   

United States

     176,394         0.81   

Others

     837         0.01   
  

 

 

    

 

 

 

Total available-for-sale financial assets

     21,737,240         100.00   
  

 

 

    

 

 

 

Held-to-maturity financial assets

     

Korea

     12,255,805         100.00   

United States

     1         0.00   
  

 

 

    

 

 

 

Total held-to-maturity financial assets

     12,255,806         100.00   
  

 

 

    

 

 

 

Total

   44,568,553      
  

 

 

    

 

     2013  
     Amount      %  
     (In millions of Korean won)  

Financial assets held for trading

     

Korea

   7,809,495         99.79   

India

     3,194         0.04   

Others

     13,096         0.17   
  

 

 

    

 

 

 

Total financial assets held for trading

     7,825,785         100.00   
  

 

 

    

 

 

 

Financial assets designated at fair value through profit or loss

     

Korea

     205,512         97.49   

Others

     5,293         2.51   
  

 

 

    

 

 

 

Total financial assets designated at fair value through profit or loss

     210,805         100.00   
  

 

 

    

 

 

 

Derivative financial assets

     

Korea

     617,804         33.96   

United States

     284,795         15.65   

Others

     916,810         50.39   
  

 

 

    

 

 

 

Total derivative financial assets

     1,819,409         100.00   
  

 

 

    

 

 

 

Available-for-sale financial assets

     

Korea

     18,908,743         99.87   

Others

     24,545         0.13   
  

 

 

    

 

 

 

Total available-for-sale financial assets

     18,933,288         100.00   
  

 

 

    

 

 

 

Held-to-maturity financial assets

     

Korea

     13,016,991         100.00   
  

 

 

    

 

 

 

Total held-to-maturity financial assets

     13,016,991         100.00   
  

 

 

    

 

 

 

Total

   41,806,278      
  

 

 

    

 

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Table of Contents

The counterparties to the financial assets under due from financial institutions and financial instruments indexed to the price of gold within financial assets held for trading are in the banking and insurance industries and have high credit ratings.

4.3 Liquidity risk

4.3.1 Overview of liquidity risk

Liquidity risk is the risk of insolvency or loss due to a disparity between the inflow and outflow of funds, unexpected outflow of funds, and obtaining funds at a high price or disposing of securities at an unfavorable price due to lack of available funds. The Group manages its liquidity risk through analysis of the contractual maturity of all financial assets, liabilities and off-balance items such as commitments and financial guarantee contracts. The Group discloses them by maturity groups: On demand, up to one month, between over one month and three months, between over three months and 12 months, between over one year and five years, and over five years.

Cash flows disclosed for the maturity analysis are undiscounted contractual principal and interest to be received (paid) and, thus, differ from the amount in the financial statements which are based on the present value of expected cash flows in some cases. The amount of interest to be received or paid on floating rate assets and liabilities is measured on the assumption that the current interest rate would be the same through maturity.

4.3.2. Liquidity risk management and indicator

The liquidity risk is managed by ALM (‘Asset Liability Management’) and related guidelines which are applied to the risk management policies and procedures that address all the possible risks that arise from the overall business of the Group.

For the purpose of liquidity management, the liquidity ratio and accumulated liquidity gap ratio on all transactions affecting the in and outflows of funds and transactions of off-balance items are measured, managed and reported to the Risk Planning Council and Risk Management Committee on a regular basis.

As the main subsidiary, Kookmin Bank regularly reports the liquidity gap ratio, liquidity ratio, maturity gap ratio and the results of the stress testing related to liquidity risk to the Asset-Liability Management Committee (‘ALCO’) which establishes and monitors the liquidity risk management strategy.

 

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4.3.3. Analysis of remaining contractual maturity of financial assets and liabilities

The remaining contractual maturity of financial assets and liabilities, excluding derivatives held for cash flow hedging, as of December 31, 2012 and 2013, are as follows:

 

     2012  
     On demand      Up to
1 month
     1-3 months      3-12 months     1-5 years      Over 5 years      Total  
     (In millions of Korean won)  

Financial assets

                   

Cash and due from financial institutions(1)

   5,953,114       586,856       75,523       187,260      —         136,584       6,939,337   

Financial assets held for trading(2)

     9,207,629         —           —           —          —           —           9,207,629   

Financial assets designated at fair value through profit or loss(2)

     352,090         —           —           —          —           —           352,090   

Derivatives held for trading(2)

     1,907,774         —           —           —          —           —           1,907,774   

Derivatives held for fair value hedging(3)

     —           6,645         929         18,600        125,511         163,808         315,493   

Loans

     270,630         22,283,867         24,831,094         76,258,158        57,820,640         78,541,113         260,005,502   

Available-for-sale financial assets(4)

     1,614,088         1,144,862         1,657,669         4,867,428        13,426,354         3,246,902         25,957,303   

Held-to-maturity financial assets

     —           142,902         362,905         2,525,112        8,753,186         2,192,044         13,976,149   

Other financial assets

     22,856         5,522,950         14,040         1,560,953        5,843         1,853         7,128,495   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

   19,328,181       29,688,082       26,942,160       85,417,511      80,131,534       84,282,304       325,789,772   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Financial liabilities

                   

Financial liabilities held for trading(2)

   1,381,997       —         —         —        —         —         1,381,997   

Financial liabilities designated at fair value through profit or loss(2)

     469,138         —           —           —          —           —           469,138   

Derivatives held for trading(2)

     1,854,216         —           —           —          —           —           1,854,216   

Derivatives held for fair value hedging(3)

     —           26,041         3         (1,456     189,613         2,396         216,597   

Deposits(5)

     67,380,045         16,409,143         29,419,363         79,230,974        8,388,915         2,233,375         203,061,815   

Debts

     273,586         3,854,683         2,934,083         5,671,408        2,879,533         662,557         16,275,850   

Debentures

     24,659         1,384,530         1,028,779         3,577,851        18,220,238         4,020,164         28,256,221   

Other financial liabilities

     14,374         7,056,273         8,624         75,325        8,831         22,041         7,185,468   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

   71,398,015       28,730,670       33,390,852       88,554,102      29,687,130       6,940,533       258,701,302   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Off- balance sheet items

                   

Commitments(6)

   93,193,481       —         —         —        —         —         93,193,481   

Financial guarantee contracts(7)

     1,509,269         —           —           —          —           —           1,509,269   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

   94,702,750       —         —         —        —         —         94,702,750   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

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    2013  
    On demand     Up to
1 month
    1-3 months     3-12 months     1-5 years     Over 5 years     Total  
    (In millions of Korean won)  

Financial assets

             

Cash and due from financial institutions(1)

  5,672,570      501,100      183,931      586,696      49,314      160,826      7,154,437   

Financial assets held for trading(2)

    8,967,006        —          —          —          —          —          8,967,006   

Financial assets designated at fair value through profit or loss(2)

    326,583        —          —          —          —          35,153        361,736   

Derivatives held for trading(2)

    1,680,880        —          —          —          —          —          1,680,880   

Derivatives held for fair value hedging(3)

    —          10,944        1,617        16,036        124,794        123,782        277,173   

Loans

    112,484        22,354,010        23,245,138        77,032,831        57,284,561        82,239,530        262,268,554   

Available-for-sale financial assets(4)

    2,496,486        571,796        1,542,912        4,891,859        12,313,615        1,977,317        23,793,985   

Held-to-maturity financial assets

    —          261,124        518,368        3,343,087        9,254,470        1,268,563        14,645,612   

Other financial assets

    27,788        4,262,763        22,473        1,526,228        6,554        2,382        5,848,188   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  19,283,797      27,961,737      25,514,439      87,396,737      79,033,308      85,807,553      324,997,571   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial liabilities

  

         

Financial liabilities held for trading(2)

  236,637      —        —        —        —        —        236,637   

Financial liabilities designated at fair value through profit or loss(2)

    878,565        —          —          —          —          —          878,565   

Derivatives held for trading(2)

    1,580,029        —          —          —          —          —          1,580,029   

Derivatives held for fair value hedging(3)

    —          —          25,411        179,000        8,959        —          213,370   

Deposits(5)

    74,110,641        14,193,153        28,638,089        77,181,179        8,603,695        2,677,536        205,404,293   

Debts

    270,987        3,279,051        1,711,622        4,733,173        4,038,514        356,424        14,389,771   

Debentures

    17,917        1,237,666        2,039,452        9,489,594        13,576,339        4,722,857        31,083,825   

Other financial liabilities

    141,041        8,372,426        13,101        63,409        198,068        509,412        9,297,457   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  77,235,817      27,082,296      32,427,675      91,646,355      26,425,575      8,266,229      263,083,947   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Off- balance sheet items

             

Commitments(6)

  95,422,032      —        —        —        —        —        95,422,032   

Financial guarantee contracts(7)

    3,097,372        —          —          —          —          —          3,097,372   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  98,519,404      —        —        —        —        —        98,519,404   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

The amounts of ₩3,647,285 million and ₩7,671,914 million which are restricted amounts due from the financial institutions as of December 31, 2012 and 2013, respectively, are excluded.

(2) 

Financial instruments held for trading, financial instruments designated at fair value through profit or loss and derivatives held for trading are not managed by contractual maturity because they are expected to be traded or redeemed before maturity. Therefore, the carrying amounts of those financial instruments are classified as ‘On demand’ category. However, hybrid capital instruments classified as financial instruments designated at fair value through profit or loss are included in the ‘Over 5 years’ category which they can be redeemed, owing to uncertain point of sale.

(3) 

Cash flows of derivative instruments held for fair value hedging are shown at net amounts of cash inflows and outflows by remaining contractual maturity.

(4) 

In the case of equity investments restricted for sale, they are shown in the period in which the restriction is expected to be expired.

(5) 

Deposits that are contractually repayable on demand or on short notice are classified under the ‘On demand’ category.

(6) 

Commitments are included under the ‘On demand’ category because payments can be required upon request.

(7) 

The financial guarantee contracts are included under the ‘On demand’ category as payments can be required upon request.

 

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The contractual cash flows of derivatives held for cash flow hedging as of December 31, 2012 and 2013, are as follows:

 

     2012  
     Up to
1 month
    1-3 months     3-12 months     1-5 years     Over 5 years      Total  
     (In millions of Korean won)  

To be received.

   3,321      4,931      23,486      357,927      —         389,665   

To be paid

     (3,864     (6,277     (29,702     (366,291     —           (406,134

 

     2013  
     Up to
1 month
    1-3 months     3-12 months     1-5 years     Over 5 years      Total  
     (In millions of Korean won)  

To be received.

   4,099      5,962      344,838      56,186      —         411,085   

To be paid

     (4,996     (7,872     (357,099     (54,974     —           (424,941

4.4 Market risk

4.4.1 Overview of market risk

Definition of market risk

Market risk is the risk of possible losses which arise from changes in market factors, such as interest rate, stock price, foreign exchange rate and other market factors that affect the fair value or future cash flows of financial instruments, such as securities and derivatives amongst others. The most significant risks associated with trading positions are interest rate risks, and other risks include stock price risks and currency risks. In addition, the Group is exposed to interest rate risks associated with non-trading positions. The Group classifies exposures to market risk into either trading or non-trading positions. The Group measures and manages market risk separately for each subsidiary in the Group.

Market risk management group

The Group sets economic capital limits for market risk and interest rate risk and monitors the risks to manage the risk of trading and non-trading positions. The Group maintains risk management systems and procedures, such as trading policies and procedures, and market risk management guidelines for trading positions, and interest rate risk management guidelines for non-trading positions in order to manage market risk efficiently. The procedures mentioned are implemented with approval from the Risk Management Committee and Risk Management Council.

As the main subsidiary, Kookmin Bank establishes market risk management policy, sets position limits, loss limits and VAR limits of each business group and approves newly developed derivative instruments, through its Risk Management Council. The Risk Management Council has delegated the responsibility for market risk management of individual business departments to the Market Risk Management Committee which is chaired by a Chief Risk Officer (CRO). The Market Risk Management Committee sets position limits, loss limits, VaR limits, sensitivity limits and scenario loss limits for each division, at the level of each individual business department.

The ALCO of Kookmin Bank determines operational standards of interest and commission, revises Asset Liability Management (ALM) risk management guidelines, interest rate and commission guidelines and monitors the establishment and enforcement of ALM risk management policies. The interest rate risk limit is set based on the future assets/liabilities position and interest rate volatility estimation reflects the annual work plan. The financial planning department and risk management department measures and monitors the interest risk status and limits on a regular basis. The status and limits of interest rate risks such as interest rate gap, duration gap and sensitivity are reported to the ALCO on a monthly basis and to the Risk Management Council on a quarterly basis. The responsibility for ALM control is delegated to the Risk Management Department to ensure adequacy of interest rate and liquidity risk management. The Risk Management Department monitors and reviews risk management procedures and tasks conducted by the Financial Planning Department, and reports related information to management independently.

 

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4.4.2 Trading Position

Definition of a trading position

Trading positions subject to market risk management are defined under the Trading Policy and Guideline, and the basic requirements are as follows:

 

   

The trading position is not restricted for sale, is measured daily at fair value, and its significant inherent risks are able to be hedged in the market.

 

   

The criteria for classification as a trading position are clearly defined in the Trading Policy and Guideline, and separately managed by the trading department.

 

   

The trading position is operated in accordance with the documented trading strategy and managed through position limits.

 

   

The operating department or professional dealers have an authority to enforce a deal on the trading position within predetermined limits without pre-approval.

 

   

The trading position is reported periodically to management for the purpose of the Group’s risk management.

Observation method on market risk arising from trading positions

The Group calculates VaR to measure the market risk by using market risk management systems on the entire trading portfolio. Generally, the Group manages market risk on the trading portfolio. In addition, the Group controls and manages the risk of derivative trading based on the regulations and guidelines formulated by the Financial Supervisory Service.

VaR (Value at Risk)

i. VaR (Value at Risk)

The Group uses the value-at-risk methodology to measure the market risk of trading positions. There have been changes in market risk measurement technique during the year ended December 31, 2012, and the detailed descriptions are below.

Previous method:

The Group used a daily VaR measure, which is a statistically estimated maximum amount of loss that could occur in one day under normal distribution of financial variables. The Group calculated VaR using the equal-weighted average method based on historical changes in market rates, prices and volatilities over the previous 550 business days and measured VaR at a 99% single tail confidence level.

Current method:

The Group now uses the 10-day VaR, which estimates the maximum amount of loss that could occur in ten days under an historical simulation model which is considered to be a full valuation method. The distributions of portfolio’s value changes are estimated based on the data over the previous 250 business days, and ten-day VaR is calculated by subtracting net present market value from the value measured at a 99% confident level of portfolio’s value distribution results. However, the KB Investment & Securities Co., Ltd. calculates ten-day VaR using the equal-weighted average method based on historical changes in market rates, prices and volatilities over the previous 250 business days and measures VaR at a 99% single tail confidence level.

These changes in market risk measurement technique are intended to reflect the volatilities of the market more accurately. The current method immediately reflects the scenario of a day when the financial market shows dramatic moves, and the market risk of financial instruments with complex risk attributes can be measured more appropriately than under the previous methodology.

 

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VaR is a commonly used market risk measurement technique. However, the method has some shortcomings. VaR estimates possible losses over a certain period at a particular confidence level using past market movement data. Past market movements are, however, not necessarily a good indicator of future events, as there may be conditions and circumstances in the future that the model does not anticipate. As a result, the timing and magnitude of the actual losses may vary depending on the assumptions made at the time of the calculation. In addition, the time periods used for the model, generally one or ten days, are assumed to be a sufficient holding period before liquidating the relevant underlying positions. If these holding periods are not sufficient, or too long, the VaR results may understate or overstate the potential loss.

The Group uses an internal model (VaR) to measure general risk, and a standard method to measure each individual risk. Also, general and individual risks in some positions included in the consolidated financial statements in adoption of IFRS, are measured using a standard method. Therefore, the market risk VaR may not reflect the market risk of each individual risk and some specific positions.

ii. Back-Testing

Back-testing is conducted on a daily basis to validate the adequacy of the market risk model. In back-testing, the Group compares both the actual and hypothetical profit and loss with the VaR calculations.

iii. Stress Testing

Stress testing is carried out to analyze the impact of abnormal market situations on the trading and available-for-sale portfolio. It reflects changes in interest rates, stock prices, foreign exchange rates, implied volatilities of derivatives and other risk factors that have significant influence on the value of the portfolio. The Group mainly uses an historical scenario tool and also uses a hypothetical scenario tool for the analysis of abnormal market situations. Stress testing is performed at least once every quarter.

VaR at a 99% confidence level of interest rate, stock price and foreign exchange rate risk for trading positions with a ten-day holding period by a subsidiary as of December 31, 2012 and 2013, are as follows:

Kookmin Bank

 

     2012  
     Average(1)      Minimum(1)      Maximum(1)      Ending  
     (In millions of Korean won)  

Interest rate risk

   20,173       8,379       29,329       8,379   

Stock price risk

     4,215         467         8,745         4,865   

Foreign exchange rate risk

     26,565         9,590         39,185         11,201   

Deduction of diversification effect

     —           —           —           (12,710
  

 

 

    

 

 

    

 

 

    

 

 

 

Total VaR

   20,685       10,637       28,717       11,735   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Measurement technique was changed during the year ended December 31, 2012, and the average, minimum and maximum amounts are based on the data from the beginning of May to the end of the year.

 

     2013  
     Average      Minimum      Maximum      Ending  
     (In millions of Korean won)  

Interest rate risk

   16,270       7,428       24,979       16,967   

Stock price risk

     3,480         932         7,114         1,049   

Foreign exchange rate risk

     9,264         5,287         13,589         5,287   

Deduction of diversification effect

     —           —           —           (6,928
  

 

 

    

 

 

    

 

 

    

 

 

 

Total VaR

   17,316       10,868       22,249       16,375   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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KB Investment & Securities Co., Ltd.

 

     2012  
     Average(1)      Minimum(1)      Maximum(1)      Ending  
     (In millions of Korean won)  

Interest rate risk

   1,805       572       5,054       3,532   

Stock price risk

     2,350         486         8,683         658   

Foreign exchange rate risk

     309         18         1,329         224   

Deduction of diversification effect

     —           —           —           (763
  

 

 

    

 

 

    

 

 

    

 

 

 

Total VaR

   3,119       724       8,752       3,651   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Measurement technique was changed during the year ended December 31, 2012, and the average, minimum and maximum amounts are based on the data from the beginning of April to the end of the year.

 

     2013  
     Average      Minimum      Maximum      Ending  
     (In millions of Korean won)  

Interest rate risk

   2,503       160       6,825       1,825   

Stock price risk

     1,920         507         6,244         1,139   

Foreign exchange rate risk

     527         24         1,311         53   

Deduction of diversification effect

     —           —           —           (698
  

 

 

    

 

 

    

 

 

    

 

 

 

Total VaR

   3,319       589       8,908       2,318   
  

 

 

    

 

 

    

 

 

    

 

 

 

KB Life Insurance Co., Ltd.

 

     2012  
     Average(1)      Minimum(1)      Maximum(1)      Ending  
     (In millions of Korean won)  

Interest rate risk

   111       58       152       127   

Deduction of diversification effect

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total VaR

   111       58       152       127   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Measurement technique was changed during the year ended December 31, 2012, and the average, minimum and maximum amounts are based on the data from the beginning of April to the end of the year.

 

     2013  
     Average      Minimum      Maximum      Ending  
     (In millions of Korean won)  

Interest rate risk

   279       157       441       329   

Deduction of diversification effect

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total VaR

   279       157       441       329   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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KB Investment Co., Ltd.

 

     2012  
     Average(1)      Minimum(1)      Maximum(1)      Ending  
     (In millions of Korean won)  

Foreign exchange rate risk

   63       39       92       41   

Deduction of diversification effect

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total VaR

   63       39       92       41   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Measurement technique was changed during the year ended December 31, 2012, and the average, minimum and maximum amounts are based on the data from the beginning of April to the end of the year.

 

     2013  
     Average      Minimum      Maximum      Ending  
     (In millions of Korean won)  

Foreign exchange rate risk

   40       29       53       30   

Deduction of diversification effect

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total VaR

   40       29       53       30   
  

 

 

    

 

 

    

 

 

    

 

 

 

Meanwhile, the required equity capital using the standardized method related to the positions which are not measured by VaR as of December 31, 2012 and 2013, is as follows:

Kookmin Bank

 

     2012      2013  
     (In millions of Korean won)  

Interest rate risk

   1,673       921   

Stock price risk

     4,567         2   

Foreign exchange rate risk

     9,081         9,214   
  

 

 

    

 

 

 

Total

   15,321       10,137   
  

 

 

    

 

 

 

KB Investment & Securities Co., Ltd.

 

     2012      2013  
     (In millions of Korean won)  

Interest rate risk

   4,607       5,081   

Stock price risk

     3,224         3,602   
  

 

 

    

 

 

 

Total

   7,831       8,683   
  

 

 

    

 

 

 

KB Life Insurance Co., Ltd.

 

     2012      2013  
     (In millions of Korean won)  

Stock price risk

   13       106   
  

 

 

    

 

 

 

Total

   13       106   
  

 

 

    

 

 

 

 

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KB Investment Co., Ltd.

 

     2012      2013  
     (In millions of Korean won)  

Stock price risk

   1,385       1,424   
  

 

 

    

 

 

 

Total

   1,385       1,424   
  

 

 

    

 

 

 

Details of risk factors

i. Interest rate risk

Trading position interest rate risk usually arises from debt securities in Korean won. The Group’s trading strategy is to benefit from short-term movements in the prices of debt securities arising from changes in interest rates. The Group manages interest rate risk on trading positions using market value-based tools such as VaR and sensitivity analysis (Price Value of a Basis Point: PVBP).

ii. Stock price risk

Stock price risk only arises from trading securities denominated in Korean won as the Group does not have any trading exposure to shares denominated in foreign currencies. The trading securities portfolio in Korean won are composed of exchange-traded stocks and derivative instruments linked to stock with strict limits on diversification.

iii. Foreign exchange rate risk

Foreign exchange rate risk arises from holding assets and liabilities denominated in foreign currency. Net foreign currency exposure mostly occurs from the foreign assets and liabilities which are denominated in US dollars and Kazakhstan Tenge, and the remainder in Japanese Yen or Euro. The Group sets both loss limits and net foreign currency exposure limits and manages comprehensive net foreign exchange exposures which consider both trading and non-trading portfolios.

4.4.3 Non-trading position

Definition of non-trading position

The most critical market risk that arises in non-trading portfolios is interest rate risk. Interest rate risk occurs due to mismatches on maturities and interest rate change periods between interest sensitive assets and liabilities. The Group measures interest rate risk arising from assets and liabilities denominated in Korean won and foreign currencies including derivative financial instruments held for hedging. Most interest-bearing assets and interest-bearing liabilities are denominated in Korean won. Most foreign currency assets and liabilities are denominated in US Dollars and the remainder in Japanese Yen or Euro.

Observation method on market risk arising from non-trading position

The main objective of interest rate risk management is to generate stable net interest income and to protect asset values against interest rate fluctuations. The Group manages the risk through interest rate gap analysis on interest rate maturities between interest-bearing assets and interest-bearing liabilities and measuring interest rate VaR.

 

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Disclosure of results from each observation method

i. Interest rate gap analysis

Interest rate gap analysis is based on the interest rates repricing dates for interest-bearing assets and interest-bearing liabilities. It measures expected changes in net interest income by calculating the difference in the amounts of interest-bearing assets and interest-bearing liabilities in each maturity bucket. The Group conducts interest gap analysis on assets denominated in Korean won and foreign currencies on a monthly basis. However, where there is no contractual maturity for a particular instrument, then a maturity date is set according to internal liquidity risk management guidelines, determined by ALM.

The results of the interest rate gap analysis by subsidiary as of December 31, 2012 and 2013, are as follows:

Kookmin Bank

 

    2012  
    Up to
3 months
    3~6
months
    6~12
months
    1~3
years
    Over
3 years
    Total  
    (In millions of Korean won)  

Interest-bearing assets in Korean won

  92,032,100      50,782,044      36,993,573      23,435,855      16,535,527      219,779,099   

Interest-bearing liabilities in Korean won

    92,375,407        35,360,716        49,686,942        22,184,737        15,961,186        215,568,988   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gap

  (343,307   15,421,328      (12,693,369   1,251,118      574,341      4,210,111   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Accumulated gap

    (343,307     15,078,021        2,384,652        3,635,770        4,210,111     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Percentage (%)

    (0.16     6.86        1.09        1.65        1.92     

Interest-bearing assets in foreign currencies

  10,105,090      2,090,551      718,802      641,281      121,700      13,677,424   

Interest-bearing liabilities in foreign currencies

    8,218,370        3,533,356        1,964,078        513,647        117,821        14,347,272   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gap

  1,886,720      (1,442,805   (1,245,276   127,634      3,879      (669,848
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Accumulated gap

    1,886,720        443,915        (801,361     (673,727     (669,848  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Percentage (%)

    13.79        3.25        (5.86     (4.93     (4.90  

 

    2013  
    Up to
3 months
    3~6
months
    6~12
months
    1~3
years
    Over
3 years
    Total  
    (In millions of Korean won)  

Interest-bearing assets in Korean won

  83,935,439      54,589,446      46,832,862      21,608,336      14,297,239      221,263,322   

Interest-bearing liabilities in Korean won

    91,505,923        37,966,586        50,647,954        20,948,789        18,244,867        219,314,119   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gap

  (7,570,484   16,622,860      (3,815,092   659,547      (3,947,628   1,949,203   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Accumulated gap

    (7,570,484     9,052,376        5,237,284        5,896,831        1,949,203     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Percentage (%)

    (3.42     4.09        2.37        2.67        0.88     

Interest-bearing assets in foreign currencies

  10,112,905      1,888,724      607,499      396,714      257,419      13,263,261   

Interest-bearing liabilities in foreign currencies

    9,500,565        2,631,393        1,527,154        225,300        124,357        14,008,769   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gap

  612,340      (742,669   (919,655   171,414      133,062      (745,508
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Accumulated gap

    612,340        (130,329     (1,049,984     (878,570     (745,508  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Percentage (%)

    4.62        (0.98     (7.92     (6.62     (5.62  

 

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KB Kookmin Card Co., Ltd.

 

    2012  
    Up to
3 months
    3~6
months
    6~12
months
    1~3
years
    Over
3 years
    Total  
    (In millions of Korean won)  

Interest-bearing assets in Korean won

  2,743,651      802,981      1,100,429      8,453,580      9,765      13,110,406   

Interest-bearing liabilities in Korean won

    1,370,000        260,000        1,310,000        3,921,800        2,221,000        9,082,800   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gap

  1,373,651      542,981      (209,571   4,531,780      (2,211,235   4,027,606   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Accumulated gap

    1,373,651        1,916,632        1,707,061        6,238,841        4,027,606     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Percentage (%)

    10.48        14.62        13.02        47.59        30.72     

 

    2013  
    Up to
3 months
    3~6
months
    6~12
months
    1~3
years
    Over
3 years
    Total  
    (In millions of Korean won)  

Interest-bearing assets in Korean won

  3,951,261      1,212,736      1,600,360      5,010,999      3,108,753      14,884,109   

Interest-bearing liabilities in Korean won

    940,000        782,765        1,868,825        4,704,000        2,190,000        10,485,590   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gap

  3,011,261      429,971      (268,465   306,999      918,753      4,398,519   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Accumulated gap

    3,011,261        3,441,232        3,172,767        3,479,766        4,398,519     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Percentage (%)

    20.23        23.12        21.32        23.38        29.55     

KB Investment & Securities Co., Ltd.

 

    2012  
    Up to
3 months
    3~6
months
    6~12
months
    1~3
years
    Over
3 years
    Total  
    (In millions of Korean won)  

Interest-bearing assets in Korean won

  342,543      75,000      66,032      100,000      2,291      585,866   

Interest-bearing liabilities in Korean won

    339,444        30,000        100,000        —          —          469,444   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gap

  3,099      45,000      (33,968   100,000      2,291      116,422   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Accumulated gap

    3,099        48,099        14,131        114,131        116,422     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Percentage (%)

    0.53        8.21        2.41        19.48        19.87     

Interest-bearing assets in foreign currencies

  2,263      —        —        —        —        2,263   

Interest-bearing liabilities in foreign currencies

    —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gap

  2,263      —        —        —        —        2,263   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Accumulated gap

    2,263        2,263        2,263        2,263        2,263     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Percentage (%)

    100.00        100.00        100.00        100.00        100.00     

 

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    2013  
    Up to
3 months
    3~6
months
    6~12
months
    1~3
years
    Over
3 years
    Total  
    (In millions of Korean won)  

Interest-bearing assets in Korean won

  491,652      14,000      227,542      169,990      1,823      905,007   

Interest-bearing liabilities in Korean won

    516,734        160,000        10,000        32,000        —          718,734   

Gap

  (25,082   (146,000   217,542      137,990      1,823      186,273   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Accumulated gap

    (25,082     (171,082     46,460        184,450        186,273     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Percentage (%)

    (2.77     (18.90     5.13        20.38        20.58     

Interest-bearing assets in foreign currencies

  66,576      6,162      56,558      —        —        129,296   

Interest-bearing liabilities in foreign currencies

    —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gap

  66,576      6,162      56,558      —        —        129,296   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Accumulated gap

    66,576        72,738        129,296        129,296        129,296     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Percentage (%)

    51.49        56.26        100.00        100.00        100.00     

KB Life Insurance Co., Ltd.

 

    2012  
    Up to
3 months
    3~6
months
    6~12
months
    1~3
years
    Over
3 years
    Total  
    (In millions of Korean won)  

Interest-bearing assets in Korean won

  133,084      100,088      640,829      1,106,126      2,482,444      4,462,571   

Interest-bearing liabilities in Korean won

    24,616        67,092        4,131,620        20,525        531,472        4,775,325   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gap

  108,468      32,996      (3,490,791   1,085,601      1,950,972      (312,754
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Accumulated gap

    108,468        141,464        (3,349,327     (2,263,726     (312,754  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Percentage (%)

    2.43        3.17        (75.05     (50.73     (7.01  

 

    2013  
    Up to
3 months
    3~6
months
    6~12
months
    1~3
years
    Over
3 years
    Total  
    (In millions of Korean won)  

Interest-bearing assets in Korean won

  249,863      187,377      630,846      1,314,773      2,502,573      4,885,432   

Interest-bearing liabilities in Korean won

    27,836        72,309        4,862,687        36,488        528,861        5,528,181   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gap

  222,027      115,068      (4,231,841   1,278,285      1,973,712      (642,749
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Accumulated gap

    222,027        337,095        (3,894,746     (2,616,461     (642,749  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Percentage (%)

    4.54        6.90        (79.72     (53.56     (13.16  

 

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KB Savings Bank Co., Ltd.

 

    2012  
    Up to
3 months
    3~6
months
    6~12
months
    1~3
years
    Over
3 years
    Total  
    (In millions of Korean won)  

Interest-bearing assets in Korean won

  251,570      81,607      90,543      42,725      180,729      647,174   

Interest-bearing liabilities in Korean won

    90,061        96,665        280,717        26,750        2,788        496,981   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gap

  161,509      (15,058   (190,174   15,975      177,941      150,193   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Accumulated gap

    161,509        146,451        (43,723     (27,748     150,193     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Percentage (%)

    24.96        22.63        (6.76     (4.29     23.21     

 

    2013  
    Up to
3 months
    3~6
months
    6~12
months
    1~3
years
    Over
3 years
    Total  
    (In millions of Korean won)  

Interest-bearing assets in Korean won

  160,377      64,008      90,405      71,477      43,765      430,032   

Interest-bearing liabilities in Korean won

    88,608        108,965        212,012        26,693        1,271        437,549   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gap

  71,769      (44,957   (121,607   44,784      42,494      (7,517
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Accumulated gap

    71,769        26,812        (94,795     (50,011     (7,517  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Percentage (%)

    16.69        6.23        (22.04     (11.63     (1.75  

Yehansoul Savings Bank Co., Ltd.

 

    2013  
    Up to
3 months
    3~6
months
    6~12
months
    1~3
years
    Over
3 years
    Total  
    (In millions of Korean won)  

Interest-bearing assets in Korean won

  109,603      11,149      1,881      4,515      23,659      150,807   

Interest-bearing liabilities in Korean won

    60,126        48,336        42,739        6,008        111        157,320   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gap

  49,477      (37,187   (40,858   (1,493   23,548      (6,513
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Accumulated gap

    49,477        12,290        (28,568     (30,061     (6,513  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Percentage (%)

    32.81        8.15        (18.94     (19.93     (4.32  

ii. Interest Rate VaR

Interest rate VaR is the maximum possible loss due to interest rate risk at a 99.94% confidence level. The measurement results of risk as of December 31, 2012 and 2013, are as follows:

 

     2012      2013  
     (In millions of Korean won)  

Kookmin Bank

   177,418       203,503   

KB Kookmin Card Co., Ltd.

     41,867         73,135   

KB Investment & Securities Co., Ltd.

     5,525         7,503   

KB Life Insurance Co., Ltd.

     156,474         168,542   

KB Savings Bank Co., Ltd.

     2,224         3,870   

Yehansoul Savings Bank Co., Ltd.

     —           1,604   

 

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4.4.4 Financial instruments in foreign currencies

Financial instruments in foreign currencies as of December 31, 2012 and 2013, are as follows:

 

    2012  
    USD     JPY     EUR     GBP     CNY     Others     Total  
    (In millions of Korean won)  

Financial Assets

             

Cash and due from financial institutions

  867,448      162,793      89,429      13,544      20,625      82,967      1,236,806   

Derivatives held for trading

    106,215        150        1,267        —          —          —          107,632   

Derivatives held for hedging

    21,794        —          —          —          —          —          21,794   

Loans

    9,185,177        2,185,242        528,812        139,134        883        169,483        12,208,731   

Available-for-sale financial assets

    628,941        21,313        17,315        1,109        —          1,504        670,182   

Held-to-maturity financial assets

    1        —          —          —          —          —          1   

Other financial assets

    528,529        51,020        100,883        1,388        —          109,452        791,272   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total financial assets

  11,338,105      2,420,518      737,706      155,175      21,508      363,406      15,036,418   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial liabilities

             

Derivatives held for trading

  180,324      177      1,753      —        —        —        182,254   

Deposits

    3,767,148        611,386        210,837        17,243        2,793        290,124        4,899,531   

Debts

    5,033,696        1,765,338        513,294        32,745        48        189,897        7,535,018   

Debentures

    2,006,660        550,037        249,668        —          —          355,381        3,161,746   

Other financial liabilities

    1,187,766        59,927        26,234        109,670        39        30,135        1,413,771   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total financial liabilities

  12,175,594      2,986,865      1,001,786      159,658      2,880      865,537      17,192,320   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Off-balance sheet items

  15,818,548      4,537      5,566      4,760      —        7,980      15,841,391   

 

    2013  
    USD     JPY     EUR     GBP     CNY     Others     Total  
    (In millions of Korean won)  

Financial Assets

 

Cash and due from financial institutions

  1,324,563      123,527      87,765      5,495      130,290      216,250      1,887,890   

Financial assets held for trading

    16,290        —          —          —          —          —          16,290   

Financial assets designated at fair value through profit or loss

    5,293        —          —          —          —          —          5,293   

Derivatives held for trading

    94,664        —          946        —          —          —          95,610   

Derivatives held for hedging

    16,094        —          —          —          —          —          16,094   

Loans

    10,061,929        1,235,187        381,415        51,677        456        190,827        11,921,491   

Available-for-sale financial assets

    777,081        10,052        —          —          —          3,747        790,880   

Other financial assets

    512,717        314,632        76,016        1,332        —          91,405        996,102   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total financial assets

  12,808,631      1,683,398      546,142      58,504      130,746      502,229      15,729,650   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    2013  
    USD     JPY     EUR     GBP     CNY     Others     Total  
    (In millions of Korean won)  

Financial liabilities

             

Financial liabilities designated at fair value through profit or loss

  5,287      —        —        —        —        —        5,287   

Derivatives held for trading

    127,308        —          1,333        —          15        —          128,656   

Deposits

    3,914,192        515,595        150,713        15,816        10,905        280,863        4,888,084   

Debts

    5,830,466        574,307        318,748        4,382        100,464        174,898        7,003,265   

Debentures

    2,717,876        236,020        193,062        —          —          148,687        3,295,645   

Other financial liabilities

    1,475,826        59,820        150,815        51,678        913        42,241        1,781,293   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total financial liabilities

  14,070,955      1,385,742      814,671      71,876      112,297      646,689      17,102,230   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Off-balance sheet items

  16,574,161      3,486      4,878      4,787      9,958      60,221      16,657,491   

4.5 Operational Risk

4.5.1 Concept

The Group defines operational risk broadly to include all financial and non-financial risks that may arise from operating activities and could cause a negative effect on capital.

4.5.2 Risk management

The purpose of operational risk management is not only to comply with supervisory and regulatory requirements but also to promote a risk management culture, strengthen internal controls, innovate processes and provide timely feedback to management and employees. In addition, Kookmin Bank established Business Continuity Plans (BCP) to ensure critical business functions can be maintained, or restored, in the event of material disruptions arising from internal or external events. It has constructed replacement facilities as well as has carried out exercise drills for head office and IT departments to test its BCPs.

4.6. Capital Adequacy

The Group complies with the capital adequacy standard established by the Financial Services Commission. The capital adequacy standard is based on Basel III published by Basel Committee on Banking Supervision in Bank of International Settlements in June 2011, and was implemented in Korea in December 2013. The Group is required to maintain a minimum Common Equity Tier 1 ratio of at least 3.5%, a minimum Tier 1 ratio of 4.5% and a minimum Total Regulatory Capital of 8.0% in December 2013.

The Group’s equity capital is classified into three categories in accordance with the Supervisory Regulations and Detailed Supervisory Regulations on Financial Holding Companies. :

 

   

Common Equity Tier 1 Capital: Common equity Tier 1 Capital represents the issued capital that takes the first and proportionately greatest share of any losses and represents the most subordinated claim in liquidation of the Group, and not repaid outside of liquidation. It includes common shares issued, capital surplus, retained earnings, non-controlling interests of consolidated subsidiaries, accumulated other comprehensive income, other capital surplus and others.

 

   

Additional Tier 1 Capital: Additional Tier 1 Capital includes (i) perpetual instruments issued by the Group that meet the criteria for inclusion in Additional Tier 1 capital, and (ii) stock surplus resulting from the issue of instruments included in Additional Tier 1 capital and others.

 

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Tier 2 Capital: Tier 2 Capital represents the capital that takes the proportionate share of losses in the liquidation of the Group. Tier 2 Capital includes a fund raised by issuing subordinated debentures maturing in not less than 5 years that meet the criteria for inclusion in Additional Tier 2 capital, and the allowance for loan losses which are accumulated for assets classified as normal or precautionary as a result of classification of asset soundness in accordance with Regulation on Supervision of Financial Holding Companies and others.

Risk weighted asset means the inherent risks in the total assets held by the Group. The Group calculates risk weighted asset by each risk (credit risk, market risk, and operational risk) based on the Supervisory Regulations and Detailed Supervisory Regulations on Financial Holding Companies and uses it for BIS ratio calculation.

The Group assesses and monitors its adequacy of capital by using the internal assessment and management policy of the capital adequacy. The assessment of the capital adequacy is conducted by comparing available capital (actual amount of available capital) and economic capital (amount of capital enough to cover all significant risks under target credit rate set by the Group). The Group monitors the soundness of finance and provides risk adjusted basis for performance review using the assessment of the capital adequacy.

Economic Capital is the amount of capital to prevent the inability of payment due to unexpected loss in the future. The Group measures, allocates and monitors economic capital by risk type and subsidiaries.

The Risk Management Council of the Group determines the Group’s risk appetite and allocates economic capital by risk type and subsidiary. Each subsidiary efficiently operates its capital within a range of allocated economic capital. The Risk Management Department of the Group monitors the limit on economic capital and reports the results to management and the Risk Management Council. The Group maintains the adequacy of capital through proactive review and approval of the Risk Management Committee when the economic capital is expected to exceed the limits due to new business or business expansion.

The details of the Group’s capital adequacy calculation in line with Basel III requirements as of December 31, 2013, are as follows:

 

     2013  
     (In millions of Korean won)  

Equity Capital

     ₩27,296,535   

Tier 1 Capital

     22,693,836   

Common Equity Tier 1 Capital

     22,693,836   

Additional Tier 1 Capital

     —     

Tier 2 Capital

     4,602,699   

Risk-weighted assets

     177,514,060   

Credit risk(1)

     157,040,868   

Market risk(2)

     5,122,146   

Operational risk(3)

     15,351,046   

Equity Capital (%)

     15.38   

Tier 1 Capital (%)

     12.78   

Common Equity Tier 1 Capital (%)

     12.78   

 

(1) 

Credit risk weighted assets are measured using the Internal Rating-Based Approach and Standardized Approach.

(2) 

Market-risk weighted assets are measured using Standardized Approach.

(3) 

Operational risk weighted assets are measured using the Basic Indicator Approach.

 

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The details of the Group’s capital adequacy calculation in line with Basel I requirements as of December 31, 2012, are as follows:

 

     2012  
     (In millions of Korean won)  

Equity Capital

     ₩26,907,004   

Tier 1 Capital

     20,595,885   

Tier 2 Capital

     6,311,119   

Risk-weighted assets

     193,510,143   

Credit risk

     187,465,230   

Market risk

     6,044,913   

Equity Capital (%)

     13.90   

Tier 1 Capital (%)

     10.64   

Tier 2 Capital (%)

     3.26   

5. Segment Information

5.1 Overall Segment Information and Business Segments

The Group is organized into the following business segments. These business divisions are based on the nature of the products and services provided, the type or class of customer, and the Group’s management organization.

 

Banking business

  

Corporate Banking

  

The activities within this segment include providing credit, deposit products and other related financial services to large, small-and medium-sized enterprises and SOHOs.

 

  

Retail Banking

  

The activities within this segment include providing credit, deposit products and other related financial services to individuals and households.

 

  

Other Banking services

 

  

The activities within this segment include trading activities in securities and derivatives, funding and other supporting activities.

 

Credit Card business

  

The activities within this segment include credit sale, cash service, card loan and other supporting activities.

 

Investment & Securities business

  

The activities within this segment include investment banking and brokerage services and other supporting activities.

 

Life Insurance business

   The activities within this segment include life insurance and other supporting activities.

 

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Financial information by business segment for the year ended December 31, 2011(1), is as follows:

 

    Banking business                                      
    Corporate
Banking
    Retail
Banking
    Other
Banking
Services
    Sub-total     Credit Card     Investment
& Securities
    Life
Insurance
    Others     Intra-group
Adjustments
    Total  
    (In millions of Korean won)  

Operating revenues from external customers

  2,287,249      3,266,610      1,634,596      7,188,455      1,401,669      162,835      114,616      (24,645   —        8,842,930   

Segment operating revenues (expenses)

    (42,943     (54,409     219,044        121,692        (276,340     (2,323     (47,350     187,416        16,905        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

  2,244,306      3,212,201      1,853,640      7,310,147      1,125,329      160,512      67,266      162,771      16,905      8,842,930   
Net interest income     2,559,260        2,779,467        674,268        6,012,995        901,487        13,256        161,717        17,220        (2,163     7,104,512   

Interest income

    5,107,821        5,723,486        1,528,099        12,359,406        1,381,384        42,221        161,793        65,679        (54,226     13,956,257   

Interest expense

    (2,548,561     (2,944,019     (853,831     (6,346,411     (479,897     (28,965     (76     (48,459     52,063        (6,851,745
Net fee and commission income     242,581        634,916        503,186        1,380,683        241,571        83,130        45        96,071        (6,750     1,794,750   

Fee and commission income

    277,579        736,098        545,509        1,559,186        1,351,103        99,803        45        109,296        (289,679     2,829,754   

Fee and commission expense

    (34,998     (101,182     (42,323     (178,503     (1,109,532     (16,673     —          (13,225     282,929        (1,035,004

Net gains(losses) on financial assets/ liabilities at fair value through profit or loss

    (2,205     (1,832     993,680        989,643        —          50,209        68        (4,050     (3     1,035,867   

Net other operating income(loss)

    (555,330     (200,350     (317,494     (1,073,174     (17,729     13,917        (94,564     53,530        25,821        (1,092,199

General and administrative expenses

    (728,735     (1,757,907     (849,122     (3,335,764     (340,235     (117,503     (41,561     (112,771     60,703        (3,887,131

Operating profit before provision for credit losses

    1,515,571        1,454,294        1,004,518        3,974,383        785,094        43,009        25,705        50,000        77,608        4,955,799   

Provision(reversal) for credit losses

    (1,006,656     (302,261     17,384        (1,291,533     (206,566     (5,919     (1,241     (7,765     45        (1,512,979

Net operating profit

    508,915        1,152,033        1,021,902        2,682,850        578,528        37,090        24,464        42,235        77,653        3,442,820   

Share of profit of associates

    —          —          1,352        1,352        —          242        —          2,436        933        4,963   

Net other non-operating revenue (expense)

    114,011        32,782        (192,701     (45,908     (1,748     (2,579     (614     (85,139     (6,502     (142,490

Segment profits before income tax

    622,926        1,184,815        830,553        2,638,294        576,780        34,753        23,850        (40,468     72,084        3,305,293   

Income tax expense

    (158,322     (275,747     (249,628     (683,697     (131,515     (8,469     (5,282     (4,209     (11,400     (844,572

Profit for the year

    464,604        909,068        580,925        1,954,597        445,265        26,284        18,568        (44,677     60,684        2,460,721   

Profit attributable to Shareholders of the parent company

    464,604        909,068        579,583        1,953,255        445,265        26,284        18,569        (44,677     6,480        2,405,176   

Profit attributable to Non-controlling interests

    —          —          1,342        1,342        —          —          (1     —          54,204        55,545   

Total assets(2)

    92,399,053        102,545,488        61,567,719        256,512,260        13,349,351        3,336,353        4,515,809        19,499,234        (19,612,190     277,600,817   

Total liabilities(2)

    87,160,301        112,167,430        38,116,124        237,443,855        10,567,141        2,812,128        4,161,121        1,363,489        (1,846,712     254,501,022   

 

(1) 

Operating revenues by business segment for the year ended December 31, 2011, have been restated due to a retrospective application of the accounting policy.

(2) 

Amounts before intra-group transaction adjustment.

 

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Financial information by business segment for the year ended December 31, 2012(1), is as follows:

 

    Banking business                                      
    Corporate
Banking
    Retail
Banking
    Other
Banking
Services
    Sub-total     Credit Card     Investment
&
Securities
    Life
Insurance
    Others     Intra-group
Adjustments
    Total  
    (In millions of Korean won)  

Operating revenues from external customers

  1,952,464      3,041,135      1,297,400      6,290,999      1,286,719      142,617      131,188      32,988      —        7,884,511   

Segment operating revenues (expenses)

    2,289        (70,422     300,356        232,223        (238,094     5,971        (62,774     201,566        (138,892     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

  1,954,753      2,970,713      1,597,756      6,523,222      1,048,625      148,588      68,414      234,554      (138,892   7,884,511   

Net interest income

    2,593,646        2,524,163        661,666        5,779,475        974,419        19,059        192,011        75,971        (3,152     7,037,783   

Interest income

    5,190,403        5,681,723        1,622,918        12,495,044        1,387,987        38,206        191,907        123,096        (26,134     14,210,106   

Interest expense

    (2,596,757     (3,157,560     (961,252     (6,715,569     (413,568     (19,147     104        (47,125     22,982        (7,172,323

Net fee and commission income

    232,981        696,311        324,120        1,253,412        157,788        85,610        211        96,899        (27,214     1,566,706   

Fee and commission income

    274,794        760,802        401,892        1,437,488        1,427,271        96,247        211        117,008        (324,349     2,753,876   

Fee and commission expense

    (41,813     (64,491     (77,772     (184,076     (1,269,483     (10,637     —          (20,109     297,135        (1,187,170

Net gains(losses) on financial assets/ liabilities at fair value through profit or loss

    (501     (15,102     756,103        740,500        —          39,137        7,703        24,617        7        811,964   

Net other operating income(loss)

    (871,373     (234,659     (144,133     (1,250,165     (83,582     4,782        (131,511     37,067        (108,533     (1,531,942

General and administrative expenses

    (792,533     (1,672,741     (811,714     (3,276,988     (348,243     (117,861     (45,166     (133,069     75,717        (3,845,610

Operating profit before provision for credit losses

    1,162,220        1,297,972        786,042        3,246,234        700,382        30,727        23,248        101,485        (63,175     4,038,901   

Provision(reversal) for credit losses

    (852,964     (392,354     (48,712     (1,294,030     (314,843     (3,244     (479     5,842        51        (1,606,703

Net operating profit

    309,256        905,618        737,330        1,952,204        385,539        27,483        22,769        107,327        (63,124     2,432,198   

Share of profit of associates

    —          —          (5,712     (5,712     —          —          —          (185     (9,385     (15,282

Net other non-operating revenue (expense)

    5,522        —          (69,537     (64,015     (4,334     (2,987     (856     (44,177     (1,903     (118,272

Segment profits before income tax

    314,778        905,618        662,081        1,882,477        381,205        24,496        21,913        62,965        (74,412     2,298,644   

Income tax expense

    (76,854     (219,173     (146,327     (442,354     (90,464     (6,604     (5,268     (14,894     1,073        (558,511

Profit for the year

    237,924        686,445        515,754        1,440,123        290,741        17,892        16,645        48,071        (73,339     1,740,133   

Profit attributable to Shareholders of the parent company

    237,924        686,445        515,385        1,439,754        290,741        17,892        16,645        48,071        (82,069     1,731,034   

Profit attributable to Non-controlling interests

    —          —          369        369        —          —          —          —          8,730        9,099   

Total assets(2)

    93,143,686        100,591,642        67,311,525        261,046,853        14,046,174        3,314,907        5,987,928        21,072,698        (19,717,506     285,751,054   

Total liabilities(2)

    84,489,904        115,521,270        41,018,121        241,029,295        10,966,541        2,769,160        5,594,727        1,097,595        (469,405     260,987,913   

 

(1) 

Operating revenues by business segment for the year ended December 31, 2012, have been restated due to a retrospective application of the accounting policy.

(2) 

Amounts before intra-group transaction adjustment.

 

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Financial information by business segment for the year ended December 31, 2013, is as follows:

 

    Banking business                                      
    Corporate
Banking
    Retail
Banking
    Other
Banking
Services
    Sub-total     Credit Card     Investment
& Securities
    Life
Insurance
    Others     Intra-group
Adjustments
    Total  
    (In millions of Korean won)  

Operating revenues from external customers

  1,731,770      2,453,683      1,486,647      5,672,100      1,420,937      115,054      102,226      143,811      —        7,454,128   

Segment operating revenues (expenses)

    4,945        (91,800     314,854        227,999        (218,231     5,180        (38,327     124,281        (100,902     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

  1,736,715      2,361,883      1,801,501      5,900,099      1,202,706      120,234      63,899      268,092      (100,902   7,454,128   

Net interest income

    2,550,728        2,012,661        596,851        5,160,240        1,057,046        23,985        200,422        80,694        445        6,522,832   

Interest income

    4,390,623        4,785,526        1,419,231        10,595,380        1,435,952        40,567        200,422        106,336        (21,727     12,356,930   

Interest expense

    (1,839,895     (2,772,865     (822,380     (5,435,140     (378,906     (16,582     —          (25,642     22,172        (5,834,098

Net fee and commission income

    240,698        612,165        251,881        1,104,744        184,679        75,796        109        118,136        (4,225     1,479,239   

Fee and commission income

    282,403        674,250        324,997        1,281,650        1,406,239        84,168        109        137,796        (252,597     2,657,365   

Fee and commission expense

    (41,705     (62,085     (73,116     (176,906     (1,221,560     (8,372     —          (19,660     248,372        (1,178,126

Net gains(losses) on financial assets/ liabilities at fair value through profit or loss

    184        (1,804     692,121        690,501        —          19,422        18,051        28,898        (50     756,822   

Net other operating income(loss)

    (1,054,895     (261,139     260,648        (1,055,386     (39,019     1,031        (154,683     40,364        (97,072     (1,304,765

General and administrative expenses

    (821,503     (1,739,768     (835,517     (3,396,788     (354,392     (96,345     (50,692     (141,668     56,321        (3,983,564

Operating profit before provision for credit losses

    915,212        622,115        965,984        2,503,311        848,314        23,889        13,207        126,424        (44,581     3,470,564   

Provision(reversal) for credit losses

    (706,464     (358,150     (575     (1,065,189     (344,555     (5,425     (526     (28,235     358        (1,443,572

Net operating profit

    208,748        263,965        965,409        1,438,122        503,759        18,464        12,681        98,189        (44,223     2,026,992   

Share of profit of associates

    —          —          (202,880     (202,880     —          7        —          (38,134     41,615        (199,392

Net other non-operating revenue (expense)

    1,662        —          (25,293     (23,631     (1,652     (1,728     (791     31,256        (15,763     (12,309

Segment profits before income tax

    210,410        263,965        737,236        1,211,611        502,107        16,743        11,890        91,311        (18,371     1,815,291   

Income tax expense

    (53,195     (86,283     (252,414     (391,892     (117,696     (4,887     (2,792     (30,021     (4,298     (551,586

Profit for the year

    157,215        177,682        484,822        819,719        384,411        11,856        9,098        61,290        (22,669     1,263,705   

Profit attributable to Shareholders of the parent company

    157,215        177,682        484,738        819,635        384,411        11,856        9,098        61,290        (25,781     1,260,509   

Profit attributable to Non-controlling interests

    —          —          84        84        —          —          —          —          3,112        3,196   

Total assets(1)

    92,498,513        103,202,391        69,558,038        265,258,942        15,854,992        2,525,070        6,945,605        21,504,989        (20,251,443     291,838,155   

Total liabilities(1)

    81,008,201        122,206,712        41,426,715        244,641,628        12,385,131        1,973,888        6,396,477        1,414,111        (625,911     266,185,324   

 

(1) 

Amounts before intra-group transaction adjustment.

 

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5.2 Services and Geographical Segments

5.2.1 Services information

Operating revenues from external customers by services for the years ended December 31, 2011, 2012 and 2013, are as follows:

 

     2011     2012      2013  
     (In millions of Korean won)  

Banking service

   7,188,455      6,290,999       5,672,100   

Credit card service

     1,401,669        1,286,719         1,420,937   

Investment & securities service

     162,835        142,617         115,054   

Life insurance service

     114,616        131,188         102,226   

Other service

     (24,645     32,988         143,811   
  

 

 

   

 

 

    

 

 

 

Total

   8,842,930      7,884,511       7,454,128   
  

 

 

   

 

 

    

 

 

 

5.2.2 Geographical information

Geographical operating revenues from external customers for the years ended December 31, 2011,2012 and 2013, and major non-current assets as of December 31, 2011, 2012 and 2013, are as follows:

 

     2011      2012      2013  
     Revenues
from external
customers
     Major
non-current
assets
     Revenues
from external
customers
     Major
non-current
assets
     Revenues
from external
customers
    Major
non-current
assets
 
     (In millions of Korean won)  

Domestic

   8,750,815       3,643,750       7,785,586       3,574,205       7,399,906      3,600,424   

United States

     12,849         145         11,438         35         12,730        21   

New Zealand

     7,591         60         8,268         35         8,581        20   

China

     25,528         861         30,800         11,349         32,190        10,488   

Japan

     31,499         2,103         30,810         2,653         (17,182     1,722   

Argentina

     7         —           10         —           6        —     

Vietnam

     65         481         1,172         429         3,268        316   

Cambodia

     2,929         557         4,151         546         5,741        898   

England

     11,647         42         12,276         16         8,888        9   

Intra-group adjustment

     —           58,014         —           57,230         —          56,408   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   8,842,930       3,706,013       7,884,511       3,646,498       7,454,128      3,670,306   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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6. Financial Assets and Financial Liabilities

6.1 Classification and Fair value of financial instruments

Carrying amount and fair value of financial assets and liabilities as of December 31, 2012 and 2013, are as follows:

 

     2012      2013  
     Carrying
amount
     Fair value      Carrying
amount
     Fair value  
     (In millions of Korean won)  

Financial assets

           

Cash and due from financial institutions

   10,592,605       10,545,944       14,792,654       14,793,603   

Financial assets held for trading

     9,207,629         9,207,629         8,967,006         8,967,006   

Debt securities

     8,291,615         8,291,615         7,825,785         7,825,785   

Equity securities

     876,175         876,175         1,100,969         1,100,969   

Others

     39,839         39,839         40,252         40,252   

Financial assets designated at fair value through profit or loss

     352,090         352,090         361,736         361,736   

Equity securities

     159,483         159,483         115,778         115,778   

Derivative linked securities

     192,607         192,607         245,958         245,958   

Derivatives held for trading

     1,907,774         1,907,774         1,680,880         1,680,880   

Derivatives held for hedging

     183,511         183,511         138,529         138,529   

Loans

     213,644,791         214,665,080         219,001,356         219,319,406   

Available-for-sale financial assets

     24,211,546         24,211,546         21,832,104         21,832,104   

Debt securities

     21,737,240         21,737,240         18,933,288         18,933,288   

Equity securities

     2,474,306         2,474,306         2,898,816         2,898,816   

Held-to-maturity financial assets

     12,255,806         12,837,009         13,016,991         13,386,962   

Other financial assets

     7,569,596         7,569,596         6,251,679         6,251,679   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   279,925,348       281,480,179       286,042,935       286,731,905   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities

           

Financial liabilities held for trading

   1,381,997       1,381,997       236,637       236,637   

Financial liabilities designated at fair value through profit or loss

     469,138         469,138         878,565         878,565   

Derivatives held for trading

     1,854,216         1,854,216         1,580,029         1,580,029   

Derivatives held for hedging

     200,526         200,526         215,310         215,310   

Deposits

     197,346,205         197,793,204         200,882,064         201,128,271   

Debts

     15,965,458         15,984,126         14,101,331         14,098,569   

Debentures

     24,270,212         25,762,049         27,039,534         28,221,196   

Other financial liabilities

     12,185,938         12,186,032         13,262,914         13,262,946   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   253,673,690       255,631,288       258,196,384       259,621,523   
  

 

 

    

 

 

    

 

 

    

 

 

 

The fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. For each class of financial assets and financial liabilities, the Group discloses the fair value of that class of assets and liabilities in a way that permits it to be compared with its carrying amount at the end of each reporting period. The best evidence of fair value of financial instruments is a quoted price in an active market.

Methods of determining fair value for financial instruments are as follows:

 

Cash and due from financial institutions

   The carrying amounts of cash and demand due from financial institutions and payment due from financial institutions are a reasonable approximation of fair values. These financial instruments do not have a fixed maturity and are receivable on demand. Fair value of ordinary due from financial institutions is measured using a DCF model.

 

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Investment securities

   The fair value of financial instruments that are quoted in active markets is determined using the quoted prices. Fair value is determined through the use of independent third-party pricing services where quoted prices are not available. Pricing services use one or more of the following valuation techniques including Discounted Cash Flow (DCF) Model, Imputed Market Value Model, Free Cash Flow to Equity Model, Dividend Discount Model, Risk Adjusted Discount Rate Method, and Net Asset Value Method.

Loans

   DCF Model is used to determine the fair value of loans. Fair value is determined by discounting the expected cash flows, which are contractual cash flows adjusted by the expected prepayment rate, at appropriate discount rate.

Derivatives

   For exchange traded derivatives, quoted price in an active market is used to determine fair value and for OTC derivatives, fair value is determined using valuation techniques. The Group uses internally developed valuation models that are widely used by market participants to determine fair values of plain vanilla OTC derivatives including options, interest rate swaps, and currency swaps, based on observable market parameters. However, some complex financial instruments are valued using appropriate models developed from generally accepted market valuation models including the Finite Difference Method and the Monte Carlo Simulation or independent third-party valuation service.

Deposits

   Carrying amount of demand deposits is regarded as representative of fair value because they do not have a fixed maturity and are payable on demand. Fair value of time deposits is determined using a DCF model. Fair value is determined by discounting the expected cash flows, which are contractual cash flows adjusted by the expected prepayment rate, at an appropriate discount rate.

Debts

   Carrying amount of overdraft in foreign currency is regarded as representative of fair value because they do not have a fixed maturity and are payable on demand. Fair value of other debts is determined using a DCF model discounting contractual future cash flows at an appropriate discount rate.

Debentures

   Fair value is determined by using the valuations of independent third-party pricing services, which are calculated using market inputs.

Other financial assets and liabilities

   The carrying amounts are reasonable approximation of fair values. These financial instruments are temporary accounts used for other various transactions and their maturities are relatively short or not defined. However, fair value of finance lease liabilities is measured using a DCF model.

Fair value hierarchy

The Group believes that valuation methods used for measuring the fair values of financial instruments are reasonable and that the fair values recognized in the statements of financial position are appropriate. However, the fair values of the financial instruments recognized in the statements of financial position may be different if other valuation methods or assumptions are used. Additionally, as there is a variety of valuation techniques and assumptions used in measuring fair value, it may be difficult to reasonably compare the fair value with that of other financial institutions.

 

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The Group classifies and discloses fair value of the financial instruments into the following three-level hierarchy:

Level 1: The fair values are based on quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date.

Level 2: The fair values are based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3: The fair values are based on unobservable inputs for the asset or liability.

The level in the fair value hierarchy within which the fair value measurement is categorized in its entirety shall be determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety. For this purpose, the significance of an input is assessed against the fair value measurement in its entirety. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a Level 3 measurement.

Fair value hierarchy of financial assets and liabilities measured at fair value

The fair value hierarchy of financial assets and liabilities measured at fair value in the statements of financial position as of December 31, 2012 and 2013, is as follows:

 

     2012  
     Fair value hierarchy         
     Level 1      Level 2      Level 3      Total  
     (In millions of Korean won)  

Financial assets

           

Financial assets held for trading

           

Debt securities

   3,945,101       4,346,514       —         8,291,615   

Equity securities

     449,268         426,907         —           876,175   

Others

     39,839         —           —           39,839   

Financial assets designated at fair value through profit or loss

           

Equity securities

     —           159,483         —           159,483   

Derivative linked securities

     —           14,983         177,624         192,607   

Derivatives held for trading

     2,839         1,858,150         46,785         1,907,774   

Derivatives held for hedging

     —           180,746         2,765         183,511   

Available-for-sale financial assets(1)

           

Debt securities

     10,351,980         11,379,670         5,590         21,737,240   

Equity securities

     793,362         208,195         1,472,749         2,474,306   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   15,582,389       18,574,648       1,705,513       35,862,550   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities

           

Financial liabilities held for trading

   1,381,997       —         —         1,381,997   

Financial liabilities designated at fair value through profit or loss

     —           —           469,138         469,138   

Derivatives held for trading

     2,560         1,803,713         47,943         1,854,216   

Derivatives held for hedging

     —           191,226         9,300         200,526   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   1,384,557       1,994,939       526,381       3,905,877   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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     2013  
     Fair value hierarchy         
     Level 1      Level 2      Level 3      Total  
     (In millions of Korean won)  

Financial assets

           

Financial assets held for trading

           

Debt securities

   3,160,592       4,665,193       —         7,825,785   

Equity securities

     327,260         773,709         —           1,100,969   

Others

     40,252         —           —           40,252   

Financial assets designated at fair value through profit or loss

           

Equity securities

     —           115,778         —           115,778   

Derivative linked securities

     —           12,030         233,928         245,958   

Derivatives held for trading

     744         1,630,940         49,196         1,680,880   

Derivatives held for hedging

     —           138,077         452         138,529   

Available-for-sale financial assets(1)

           

Debt securities

     9,754,737         9,175,742         2,809         18,933,288   

Equity securities

     985,108         254,464         1,659,244         2,898,816   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   14,268,693       16,765,933       1,945,629       32,980,255   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities

           

Financial liabilities held for trading

   236,637       —         —         236,637   

Financial liabilities designated at fair value through profit or loss

     —           —           878,565         878,565   

Derivatives held for trading

     261         1,538,374         41,394         1,580,029   

Derivatives held for hedging

     —           206,468         8,842         215,310   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   236,898       1,744,842       928,801       2,910,541   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

The amounts of equity securities carried at cost in “Level 3” which do not have a quoted market price in an active market and cannot be measured reliably at fair value are ₩232,596 million and ₩117,750 million as of December 31, 2012 and 2013, respectively. These equity securities are carried at cost because it is practically difficult to quantify the intrinsic values of the equity securities issued by unlisted public and non-profit entities. In addition, probabilities and range of estimated cash flows of the unlisted equity securities which are issued by project financing companies cannot be reasonably assessed. Therefore, these equity securities are carried at cost. The Group has no plan to sell these instruments in the near future.

 

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Valuation techniques and the inputs used in the fair value measurement classified as Level 2

The financial assets and liabilities measured at fair value classified as Level 2 in the statements of financial position as of December 31, 2013 is as follows:

 

     Fair value      Valuation
techniques
  

Inputs

     (In millions of Korean won)

Financial assets

        

Financial assets held for trading

        

Debt securities

   4,665,193       DCF Model    Discount rate

Equity securities

     773,709       DCF Model, Net
Asset Value
  

Discount rate, Fair value of underlying asset

  

 

 

       

Sub-total

     5,438,902         
  

 

 

       

Financial assets designated at fair value through profit or loss

        

Equity securities

     115,778       DCF Model    Discount rate

Derivative linked securities

     12,030       Monte Carlo
Simulation
  

Price of the underlying asset, Interest rates, Volatility of the underlying asset, Correlation of the underlying assets

  

 

 

       

Sub-total

     127,808         
  

 

 

       

Derivatives held for trading

     1,630,940       DCF Model,
Closed Form,
FDM
  

Discount rate, Volatility, Foreign exchange rate, Stock price and others

Derivatives held for hedging

     138,077       DCF Model,
Closed Form,
FDM
  

Discount rate, Volatility, Foreign exchange rate and others

Available-for-sale financial assets

        

Debt securities

     9,175,742       DCF Model    Discount rate

Equity securities

     254,464       DCF Model, Net
Asset Value
  

Discount rate, Fair value of underlying asset

  

 

 

       

Sub-total

     9,430,206         
  

 

 

       

Total financial assets

   16,765,933         
  

 

 

       

Financial liabilities

        

Derivatives held for trading

   1,538,374       DCF Model,
Closed Form,
FDM
  

Discount rate, Volatility, Foreign exchange rate, Stock price and others

Derivatives held for hedging

     206,468       DCF Model,
Closed Form,
FDM
  

Discount rate, Volatility, Foreign exchange rate and others

  

 

 

       

Total financial liabilities

   1,744,842         
  

 

 

       

 

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Fair value hierarchy of financial assets and liabilities whose the fair values are disclosed

The fair value hierarchy of financial assets and liabilities which the fair value is disclosed as of December 31, 2013 is as follows:

 

     2013  
     Fair value hierarchy         
     Level 1      Level 2      Level 3      Total  
     (In millions of Korean won)  

Financial assets

           

Cash and due from financial institutions(1)

   2,698,018       10,555,993       1,539,592       14,793,603   

Loans

     —           —           219,319,406         219,319,406   

Held-to-maturity financial assets

     3,535,217         9,851,745         —           13,386,962   

Other financial assets(2)

     —           —           6,251,679         6,251,679   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   6,233,235       20,407,738       227,110,677       253,751,650   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities

           

Deposits(1)

   —         72,839,365       128,288,906       201,128,271   

Debts(1)

     —           156,349         13,942,220         14,098,569   

Debentures

     —           27,752,493         468,703         28,221,196   

Other financial liabilities(2)

     —           —           13,262,946         13,262,946   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   —         100,748,207       155,962,775       256,710,982   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

The amounts included in Level 2 are the carrying amounts which are reasonable approximation of the fair values.

(2) 

The ₩6,251,679 million of other financial assets and ₩13,261,041 million of other financial liabilities included in Level 3 are the carrying amounts which are reasonable approximation of fair values.

Valuation techniques and the inputs used in the fair value measurement

The valuation techniques and the inputs of financial assets and liabilities which are disclosed by the carrying amounts because it is a reasonable approximation of fair value are not subject to be disclosed.

The valuation techniques and the inputs of financial assets and liabilities whose the fair values are disclosed and classified as Level 2 as of December 31, 2013, are as follows:

 

     Fair value     

Valuation technique

  

Inputs

     (In millions of Korean won)

Financial assets

        

Held-to-maturity financial assets

   9,851,745       DCF Model    Discount rate

Financial liabilities

        

Debentures

   27,752,493       DCF Model    Discount rate

 

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The valuation techniques and the inputs of financial assets and liabilities whose the fair values are disclosed and classified as Level 3 as of December 31, 2013, are as follows:

 

     Fair value     

Valuation technique

  

Inputs

     (In millions of Korean won)

Financial assets

        

Cash and due from financial institutions

   1,539,592       DCF Model    Credit spread, Other spread

Loans

     219,319,406       DCF Model   

Credit spread, Other spread, Prepayment rate

  

 

 

       

Total financial assets

   220,858,998         
  

 

 

       

Financial liabilities

        

Deposits

   128,288,906       DCF Model    Other spread, Prepayment rate

Debts

     13,942,220       DCF Model    Other spread

Debentures

     468,703       DCF Model   

Other spread, Implied default probability

Other financial liabilities

     1,905       DCF Model    Other spread
  

 

 

       

Total financial liabilities

   142,701,734         
  

 

 

       

6.2 Level 3 of the fair value hierarchy disclosure

6.2.1 Valuation policy and process of Level 3 Fair value

The Group uses the value of external, independent and qualified valuers or the value of internal valuation models to determine the fair value of the Group’s assets at the end of every financial year.

Where a reclassification between the levels of the fair value hierarchy occurs for a financial asset or liability, the Group’s policy is to recognize such transfers as having occurred at the beginning of the reporting period.

6.2.2 Changes in Level 3 of the fair value hierarchy used in the valuation techniques based on unobservable assumption in the market

Changes in Level 3 of the fair value hierarchy for the years ended December 31, 2012 and 2013, are as follows:

 

    2012  
    Financial assets at fair value
through profit or loss
    Financial
investments
    Financial
liabilities at fair
value through
profit or loss
    Net derivatives  
     Financial assets
held for
trading
    Designated at
fair value
through profit
or loss
    Available-for-sale
financial assets
    Designated at
fair value
through profit
or loss
    Derivatives held
for trading
    Derivatives held
for hedging
 
    (In millions of Korean won)  

Beginning balance

  10,826      574,687      1,150,633      (837,206   (10,805   (9,610

Total gains or losses

           

—Profit or loss

    —          120,779        (96,194     (159,685     (8,246     15,935   

—Other comprehensive income

    —          —          152,368        —          —          —     

Purchases

    —          129,612        49,700        —          28,163        —     

Sales

    (10,826     (647,454     (59,165     —          (10,211     —     

Issues

    —          —          —          (673,006     (6,903     —     

Settlements

    —          —          —          1,200,759        6,844        (12,860

Transfers into Level 3

    —          —          282,498        —          —          —     

Transfers out of Level 3

    —          —          (1,501     —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  —        177,624      1,478,339      (469,138   (1,158   (6,535
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    2013  
    Financial assets at fair value
through profit or loss
    Financial
investments
    Financial
liabilities at
fair value
through profit
or loss
    Net derivatives  
    Financial
assets held
for trading
    Designated at
fair value
through
profit or loss
    Available-for-sale
financial assets
    Designated at
fair value
through profit
or loss
    Derivatives
held for
trading
    Derivatives
held for
hedging
 
    (In millions of Korean won)  

Beginning balance

  —        177,624      1,478,339      (469,138   (1,158   (6,535

Total gains or losses

           

—Profit or loss

    —          7,138        (10,180     (31,379     (2,007     (1,229

—Other comprehensive income

    —          —          41,204        —          —          —     

Purchases

    —          415,876        519,140        —          96        —     

Sales

    —          (366,710     (85,191     —          (2,058     —     

Issues

    —          —          —          (1,076,965     (4,080     —     

Settlements

    —          —          —          698,917        17,009        (626

Transfers into Level 3

    —          —          26,979        —          —          —     

Transfers out of Level 3

    —          —          (308,238     —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  —        233,928      1,662,053      (878,565   7,802      (8,390
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

In relation to changes in Level 3 of the fair value hierarchy, total gains or losses recognized in profit or loss for the year, and total gains or losses for the year included in profit or loss for financial instruments held at the end of the reporting period in the statements of comprehensive income for the years ended December 31, 2011, 2012 and 2013, are as follows:

 

     2011  
     Net income from financial
investments at fair value
through profit or loss
     Other operating
income
 
     (In millions of Korean won)  

Total gains or losses included in profit or loss for the year

   60,227       406,389   

Total gains or losses for the year included in profit or loss for financial instruments held at the end of the reporting period

     18,295         (30,100

 

     2012  
     Net income from financial
investments at fair value
through profit or loss
    Other operating
income
 
     (In millions of Korean won)  

Total gains or losses included in profit or loss for the year

   (47,152   (80,259

Total gains or losses for the year included in profit or loss for financial instruments held at the end of the reporting period

     (18,063     (83,533

 

     2013  
     Net income from financial
investments at fair value
through profit or loss
    Other operating
income
 
     (In millions of Korean won)  

Total gains or losses included in profit or loss for the year

   (26,248   (11,409

Total gains or losses for the year included in profit or loss for financial instruments held at the end of the reporting period

     (3,285     (23,948

 

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6.2.3 Sensitivity analysis of changes in unobservable inputs

Information about fair value measurements using unobservable inputs

 

    Fair value    

Valuation
technique

 

Inputs

 

Unobservable inputs

  Range of
unobservable
inputs(%)
 

Relationship of unobservable inputs to
fair value

    (In millions of Korean won)

Financial assets

       

Financial assets designated at fair value through profit or loss

     

Derivative linked securities

 

233,928

  

 

Monte Carlo Simulation, Closed Form, Hull and White

 

Price of the underlying asset, Interest rates, Dividend yield, Volatility of the underlying asset, Correlation between underlying asset, Volatility of interest rate, Discount rate

 

Volatility of the underlying asset

 

10.99~40.28

 

The higher the volatility, the higher the fair value

        Correlation between underlying asset   -3.28~57.89   The higher the correlation between underlying asset, the higher the fair value
        Volatility of interest rate   0.48   The higher the volatility, the higher the fair value fluctuation
        Discount rate   2.54~5.32   The lower the discount rate, the higher the fair value

Derivatives held for trading

       

Stock and index

    42,706      DCF Model, Closed Form, FDM, Monte Carlo Simulation   Price of the underlying asset, Interest rates, Volatility of the underlying asset, Correlation of the underlying assets(index of stock prices), Dividend yield, Discount rate   Correlation of the indexes of stock prices   11.43~79.26   The higher the correlation, the higher the fair value fluctuation
        Volatility of the underlying asset   7.1~45.64   The higher the volatility, the higher the fair value fluctuation
        Discount rate   3.46   The lower the discount rate, the higher the fair value

Currency

    6,490      DCF Model,   Interest rates, Foreign exchange rate, Loss given default   Loss given default   88.24~94.12   The higher the loss given default, the lower the fair value

Derivatives held for hedging

   

Interest rate

    452      DCF Model, Closed Form, FDM, Monte Carlo Simulation   Interest rates, Correlation of the underlying assets(Interest rates), Foreign exchange rate   Correlation between interest rates   0.03   The higher the correlation, the higher the fair value fluctuation

Available-for-sale financial assets

       

Debt securities

    2,809      DCF Model   Discount rate   Discount rate   8.85   The lower the discount rate, the higher the fair value

 

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    Fair value    

Valuation
technique

 

Inputs

 

Unobservable inputs

  Range of
unobservable
inputs(%)
 

Relationship of unobservable inputs to
fair value

    (In millions of Korean won)

Equity securities

    1,659,244      DCF Model, Comparable Company Analysis, Adjusted discount rate method,   Growth rate, Discount rate, Volatility of interest rate, Volatilities of real estate selling price, Liquidation value, Discount rate of cash flows from rent, Net asset value, Stock price index of the comparative company   Growth rate   0.00~1.00   The higher the growth rate, the higher the fair value
        Discount rate   2.86~58.69   The lower the discount rate, the higher the fair value
        Volatility of interest rate   12.37~16.26   The higher the volatility, the higher the fair value fluctuation
        Volatilities of real estate selling price   0.74~0.96   The higher the real estate selling price, the higher the fair value
        Liquidation value   0.00   The higher the liquidation value, the higher the fair value
        Discount rate of cash flows from rent   6.43~12.83   The lower the discount rate of cash flows, the higher the fair value
 

 

 

           

Total financial assets

  1,945,629             
 

 

 

           

Financial liabilities

           

Financial liabilities designated at fair value through profit or loss

     

Derivative linked securities

 

878,565

  

 

Closed Form, MonteCarlo Simulation

 

Price of the underlying asset, Interest rates, Volatility, Correlation, Dividend yield

 

Correlation of the indexes of stock prices

 

-3.28~58.28

 

The higher the correlation between underlying asset, the higher the fair value

        Volatility of the underlying asset   10.99~44.71   The higher the volatility, the higher the fair value fluctuation

Stock and index

    41,394      DCF Model, Closed Form, FDM, Monte Carlo Simulation   Price of the underlying asset, Interest rates, Volatility of the underlying asset, Correlation of the underlying assets(index of stock prices), Dividend yield, Volatility of interest rate   Correlation of the indexes of stock prices   16.20~79.26   The higher the correlation, the higher the fair value fluctuation
        Volatility of the underlying asset   10.99~45.64   The higher the volatility, the higher the fair value fluctuation
        Volatility of interest rate   12.37~16.26   The higher the volatility, the higher the fair value fluctuation

Derivatives held for hedging

       

Interest rate

    8,842      DCF Model, Closed Form, FDM, Monte Carlo Simulation   Price of the underlying asset, Interest rates, Volatility of the underlying asset   Volatility of the underlying asset   3.00~5.28   The higher the volatility, the higher the fair value fluctuation
 

 

 

           

Total financial liabilities

  928,801             
 

 

 

           

 

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Sensitivity analysis of changes in unobservable inputs

Sensitivity analysis of financial instruments is performed, to measure favorable and unfavorable changes in the fair value of financial instruments which are affected by the unobservable parameters, using a statistical technique. When the fair value is affected by more than two input parameters, the amounts represent the most favorable or most unfavorable. Amongst Level 3 financial instruments subject to sensitivity analysis are equity-related derivatives, currency-related derivatives and interest rate-related derivatives whose fair value changes are recognized in profit and loss as well as debt securities and unlisted equity securities (including private equity funds) whose fair value changes are recognized in profit and loss or other comprehensive income and loss.

Sensitivity analyses by type of instrument as a result of varying input parameters are as follows:

 

     2012  
     Recognition in profit and loss  
     Favorable
changes
     Unfavorable
changes
 
     (In millions of Korean won)  

Financial assets

     

Financial assets designated at fair value through profit or loss

     

Derivative linked securities(1)

   953       (1,888

Derivatives held for trading(2)

     8,047         (9,451

Derivatives held for hedging(2)

     197         (202

Available-for-sale financial assets

     

Debt securities(3)

     2,773         (2,731

Equity securities(4)

     402,284         (173,054
  

 

 

    

 

 

 

Total financial assets

   414,254       (187,326
  

 

 

    

 

 

 

Financial liabilities

     

Financial liabilities designated at fair value through profit or loss(1)

   13,843       (7,752

Derivatives held for trading(2)

     3,934         (4,321

Derivatives held for hedging(2)

     176         (169
  

 

 

    

 

 

 

Total financial liabilities

   17,953       (12,242
  

 

 

    

 

 

 

 

     2013  
     Recognition in profit and loss  
     Favorable
changes
     Unfavorable
changes
 
     (In millions of Korean won)  

Financial assets

     

Financial assets designated at fair value through profit or loss

     

Derivative linked securities(1)

   6,188       (8,834

Derivatives held for trading(2)

     6,653         (6,299

Derivatives held for hedging(2)

     0         0   

Available-for-sale financial assets

     

Debt securities(3)

     61         (58

Equity securities(4)

     322,444         (121,192
  

 

 

    

 

 

 

Total financial assets

   335,346       (136,383
  

 

 

    

 

 

 

Financial liabilities

     

Financial liabilities designated at fair value through profit or loss(1)

   15,467       (10,330

Derivatives held for trading(2)

     4,596         (4,968

Derivatives held for hedging(2)

     345         (333
  

 

 

    

 

 

 

Total financial liabilities

   20,408       (15,631
  

 

 

    

 

 

 

 

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(1) 

For financial assets designated at fair value through profit or loss, the changes in fair value are calculated by shifting principal unobservable input parameters such as stock price fluctuation range of underlying assets by +/- 10%.

(2) 

For equity-related derivatives, the changes in fair value are calculated by shifting principal unobservable input parameters such as correlation between the stock price and volatility by +/- 10%. For currency-related derivatives, the changes in fair value are calculated by shifting principal unobservable input parameters such as loss given default by ± 1%. For interest rate-related derivatives, coefficient of correlation between long-term and short-term interest rates or the volatilities of the underlying assets are shifted by +/- 10% to calculate the fair value changes.

(3) 

For debt securities, the changes in fair value are calculated by shifting principal unobservable input parameters such as discount rate by +/- 1%.

(4) 

For equity securities, the changes in fair value are calculated by shifting principal unobservable input parameters such as correlation between growth rate (0~0.5%) and discount rate, or liquidation value (-1~1%) and discount rate. Sensitivity of fair values to unobservable parameters of private equity fund is practically impossible, but in the case of equity fund composed of real estate, the changes in fair value are calculated by shifting correlation between discount rate of cash flows from rent(-1~1%) and volatilities of real estate price(-1~1%).

6.2.4 Day one gain or loss

If the Group uses a valuation technique that incorporates data not obtained from observable markets for the fair value at initial recognition of financial instruments, there could be a difference between the transaction price and the amount determined using that valuation technique. In these circumstances, the fair value of financial instruments is recognized as the transaction price and the difference is deferred and not recognized in profit or loss, and is amortized by using the straight-line method over the life of the financial instrument. If the fair value of the financial instruments is subsequently determined using observable market inputs, the remaining deferred amount is recognized in profit or loss.

The aggregate difference yet to be recognized in profit or loss at the beginning and end of the period and a reconciliation of changes in the balance of this difference, are as follows:

 

     2012     2013  
     (In millions of Korean won)  

Balance at the beginning of the year (A)

   4,082      8,652   

New transactions (B)

     23,677        3,449   

Amounts recognized in profit or loss during the year (C= a+b)

    

a. Amortization

     (7,091     (3,484

b. Settlement

     (12,016     (4,427
  

 

 

   

 

 

 

Balance at the end of the year (A+B+C)

   8,652      4,190   
  

 

 

   

 

 

 

6.3 Carrying amounts of financial instruments by category

Financial assets and liabilities are measured at fair value or amortized cost. Measurement policies for each class of financial assets and liabilities are disclosed in Note 3, ‘Significant accounting policies’.

 

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The carrying amounts of financial assets and liabilities by category as of December 31, 2012 and 2013, are as follows:

 

    2012  
    Financial assets at  fair
value through profit or loss
                               
    Held for
trading
    Designated
at fair value
through
profit or loss
    Loans and
receivables
    Available-
for-sale
financial

assets
    Held-to-
Maturity
financial

assets
    Derivatives
held  for

hedging
    Total  
    (In millions of Korean won)  

Financial assets

             

Cash and due from financial institutions

  —        —        10,592,605      —        —        —        10,592,605   

Financial assets at fair value through profit or loss

    9,207,629        352,090        —          —          —          —          9,559,719   

Derivatives

    1,907,774        —          —          —          —          183,511        2,091,285   

Loans

    —          —          213,644,791        —          —          —          213,644,791   

Financial investments.

    —          —          —          24,211,546        12,255,806        —          36,467,352   

Other financial assets

    —          —          7,569,596        —          —          —          7,569,596   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  11,115,403      352,090      231,806,992      24,211,546      12,255,806      183,511      279,925,348   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     2012  
     Financial liabilities at fair
value through profit or loss
                      
     Held for
trading
     Designated
at fair value
through
profit or loss
     Financial
liabilities at
amortized cost
     Derivatives
held for
hedging
     Total  
     (In millions of Korean won)  

Financial liabilities

              

Financial liabilities at fair value through profit or loss

   1,381,997       469,138       —         —         1,851,135   

Derivatives

     1,854,216         —           —           200,526         2,054,742   

Deposits

     —           —           197,346,205         —           197,346,205   

Debts

     —           —           15,965,458         —           15,965,458   

Debentures

     —           —           24,270,212         —           24,270,212   

Other financial liabilities

     —           —           12,185,938         —           12,185,938   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   3,236,213       469,138       249,767,813       200,526       253,673,690   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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    2013  
    Financial assets at fair
value through profit or
loss
                               
    Held for
trading
    Designated
at fair value
through
profit or loss
    Loans and
receivables
    Available-for-sale
financial assets
    Held-to-Maturity
financial assets
    Derivatives
held for
hedging
    Total  
    (In millions of Korean won)  

Financial assets

             

Cash and due from financial institutions

  —        —        14,792,654      —        —        —        14,792,654   

Financial assets at fair value through profit or loss

    8,967,006        361,736        —          —          —          —          9,328,742   

Derivatives

    1,680,880        —          —          —          —          138,529        1,819,409   

Loans

    —          —          219,001,356        —          —          —          219,001,356   

Financial investments

    —          —          —          21,832,104        13,016,991        —          34,849,095   

Other financial assets

    —          —          6,251,679        —          —          —          6,251,679   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  10,647,886      361,736      240,045,689      21,832,104      13,016,991      138,529      286,042,935   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     2013  
     Financial liabilities at fair
value through profit or loss
                      
     Held for
trading
     Designated
at fair value
through
profit or loss
     Financial
liabilities at
amortized cost
     Derivatives
held for
hedging
     Total  
     (In millions of Korean won)  

Financial liabilities

              

Financial liabilities at fair value through profit or loss

   236,637       878,565       —         —         1,115,202   

Derivatives

     1,580,029         —           —           215,310         1,795,339   

Deposits

     —           —           200,882,064         —           200,882,064   

Debts

     —           —           14,101,331         —           14,101,331   

Debentures

     —           —           27,039,534         —           27,039,534   

Other financial liabilities

     —           —           13,262,914         —           13,262,914   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   1,816,666       878,565       255,285,843       215,310       258,196,384   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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6.4 Transfer of financial assets

Transferred financial assets that are derecognized in their entirety

The Group transferred loans and other financial assets that are derecognized in their entirety to SPEs, while the maximum exposure to loss (carrying amount) from its continuing involvement in the derecognized financial assets as of December 31, 2012 and 2013, are as follows:

 

    

2012

 
    

Type of continuing
involvement

  

Classification of financial
instruments

   Carrying amount of
continuing involvement
 
     (In millions of Korean won)  

KR ABS Co., Ltd. (1)

   Senior debt   

Loans and receivables

   21,288   
  

Mezzanine/subordinate debt

  

Available-for-sale financial assets

     43,143   
        

 

 

 
     

Total

   64,431   
        

 

 

 

 

(1) 

Recognized net loss from transferring loans to the SPEs amounts to ₩22,734 million.

 

   

2013

 
   

Type of continuing
involvement

 

Classification of financial
instruments

  Carrying amount
of continuing
involvement

in statement of
financial position
    Fair value of
continuing
involvement
 
    (In millions of Korean won)  

KR ABS Co., Ltd.

 

Mezzanine/subordinate debt

 

Available-for-sale financial assets

 

11,434

  

 

11,434

  

KR ABS Second Co., Ltd.(1)

  Senior debt  

Loans and receivables

    26,065        26,227   
 

Subordinate debt

 

Available-for-sale financial assets

 

 

33,017

  

 

 

33,017

  

EAK ABS Co., Ltd.(2)

  Subordinate debt  

Available-for-sale financial assets

 

 

35,020

  

 

 

35,020

  

AP ABS First Co., Ltd.(3)

  Senior debt  

Loans and receivables

    67,326        67,353   
 

Subordinate debt

 

Available-for-sale financial assets

 

 

16,669

  

 

 

16,669

  

Discovery ABS First Co., Ltd.(4)

  Senior debt  

Loans and receivables

    23,494        23,547   
 

Subordinate debt

 

Available-for-sale financial assets

 

 

21,454

  

 

 

21,454

  

     

 

 

   

 

 

 
   

Total

  234,479      234,721   
     

 

 

   

 

 

 

 

(1) 

Recognized net loss from transferring loans to the SPEs amounts to ₩24,589 million.

(2) 

Recognized net loss from transferring loans to the SPEs amounts to ₩2,480 million.

(3) 

Recognized net loss from transferring loans to the SPEs amounts to ₩18,556 million.

(4) 

Recognized net loss from transferring loans to the SPEs amounts to ₩37,975 million.

(5) 

In addition to the above, there were gains from the transfer of non-performing loans to the National Happiness Fund (‘the Fund’) amounting to ₩ 57,826 million as of December 31, 2013. According to the agreement with the Fund, where the recovered amounts exceed the consideration paid by the Fund for the non-performing loans, the excess amount is to be reimbursed to the Group.

 

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Transferred financial assets that are not derecognized in their entirety

The Group securitized the loans and received the subordinated debts as part of consideration related to the securitization to provide credit enhancements to other senior debtors, and this transaction was recognized by the Group as collateralized debts. The liabilities and related securitized assets as of December 31, 2012 and 2013, are as follows:

 

    2012  
                Liabilities arising from asset-backed securities  
    Carrying amount
of assets (Underlying
assets)
    Carrying amount
of the associated
liabilities (Senior
debentures)
    Fair value of
assets (Underlying
assets)
    Fair value of
the associated
liabilities (Senior
debentures)
    Net Position  
    (In millions of Korean won)  

KB Mortgage Loan First Securitization Specialty Co., Ltd

  361,668      249,668      361,668      250,835      110,833   

KAMCO Value Recreation Third Securitization Specialty Co., Ltd

    9,247        3,258        9,247        3,258        5,989   

KH First Co., Ltd.(1)

    99,762        101,000        —          —          —     

KB Kookmin Card First Securitization Co., Ltd.(1)

    601,924        319,664        —          —          —     

Wise Mobile First Securitization Specialty(1)

    533,936        569,170        —          —          —     

 

    2013  
                Liabilities arising from asset-backed securities  
    Carrying amount
of assets (Underlying
assets)
    Carrying amount
of the associated
liabilities (Senior
debentures)
    Fair value of
assets (Underlying
assets)
    Fair value of
the associated
liabilities (Senior
debentures)
    Net Position  
    (In millions of Korean won)  

KB Mortgage Loan First Securitization Specialty Co., Ltd

  295,679      193,062      295,679      192,972      102,707   

KAMCO Value Recreation Third Securitization Specialty Co., Ltd

    8,291        1,958        8,291        1,958        6,333   

KH First Co., Ltd.(1)

    99,763        100,900        —          —          —     

KB Kookmin Card First Securitization Co., Ltd.(1)

    568,916        315,845        —          —          —     

Wise Mobile First Securitization Specialty (1)

    289,873        329,785        —          —          —     

Wise Mobile Second Securitization Specialty(1)

    318,814        374,733        —          —          —     

Wise Mobile Third Securitization Specialty (1)

    292,321        343,736        —          —          —     

Wise Mobile Fourth Securitization Specialty (1)

    186,268        199,802        —          —          —     

Wise Mobile Fifth Securitization Specialty (1)

    320,538        339,631        —          —          —     

Wise Mobile Sixth Securitization Specialty (1)

    342,478        359,534        —          —          —     

Wise Mobile Seventh Securitization Specialty (1)

    328,685        349,485        —          —          —     

 

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(1) 

According to purchase agreements with third-party investors, the Group provides purchase commitments to third-party investors over the associated liabilities. Furthermore, as the third-party investors also have right of recourse to the asset-backed security, the Group did not disclose the fair value of the above liabilities.

Securities under repurchase agreements and loaned securities

In contracts such as repurchase agreements and securities lending transactions, the Group continues to recognize the financial assets on the statements of financial position since it transfers the financial assets but those transactions are not qualified for derecognition. A financial asset is sold under a reverse repurchase agreement to repurchase the same asset at a fixed price, or loaned under a securities lending agreement to be returned the same asset. Thus, the Group retains substantially all the risks and rewards of ownership of the financial asset.

The transferred assets amount and related amount of liabilities as of December 31, 2012 and 2013, are as follows:

 

     2012  
     Carrying amount of
transferred assets
     Carrying amount of related
liabilities
 
     (In millions of Korean won)  

Reverse repurchase, securities lending and similar agreements

   1,068,690       1,003,348   

Loaned securities

     

Government bond

     228,912         —     

Stock

     43,543         —     
  

 

 

    

 

 

 

Total

   1,341,145       1,003,348   
  

 

 

    

 

 

 

 

     2013  
     Carrying amount of
transferred assets
     Carrying amount of related
liabilities
 
     (In millions of Korean won)  

Reverse repurchase, securities lending and similar agreements

   649,309       608,156   

Loaned securities

     

Government bond

     527,427         —     

Stock

     14,296         —     
  

 

 

    

 

 

 

Total

   1,191,032       608,156   
  

 

 

    

 

 

 

6.5 Offsetting financial assets and financial liabilities

The Group enters into International Derivatives Swaps and Dealers Association (“ISDA”) master netting agreements and other arrangements with the Group’s derivative and spot exchange counterparties. Similar netting agreements are also entered into with the Group’s reverse repurchase, securities and others. Pursuant to these agreements, in the event of default by one party, contracts are to be terminated and receivables and payables are to be offset. Further, as the law allows for the right to offset, domestic uncollected receivables balances and domestic accrued liabilities balances are shown in its net settlement balance in the statement of consolidated financial position.

 

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The details of the Group’s recognized financial assets subject to enforceable master netting arrangement or similar agreement by type as of December 31, 2012 and 2013, are as follows:

 

    2012  
    Gross
amounts of
recognized
financial
assets
    Gross amounts of
recognized
financial liabilities
offset in the
statement of
financial position
    Net amounts of
financial assets
presented in the
statement of
financial
position
    Non-offsetting amount     Net amount  
          Financial
instruments
    Cash
collateral
received
   
    (In millions of Korean won)  

Derivatives held for trading

  1,811,797      —        1,811,797      (1,364,967   (28,624   418,206   

Derivatives held for hedging

    183,511        —          183,511        (32,716     —          150,795   

Receivable spot exchange

    1,929,721        —          1,929,721        (1,929,438     —          283   

Reverse repurchase, securities borrowing and similar agreements(1)

    3,635,071        —          3,635,071        (3,531,000     (104,071     —     

Other financial instruments

    18,078,061        (15,757,167     2,320,894        —          —          2,320,894   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  25,638,161      (15,757,167   9,880,994      (6,858,121   (132,695   2,890,178   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    2013  
    Gross
amounts of
recognized
financial
assets
    Gross amounts of
recognized
financial liabilities
offset in the
statement of
financial position
    Net amounts of
financial assets
presented in
the statement
of financial
position
    Non-offsetting amount     Net amount  
          Financial
instruments
    Cash
collateral
received
   
    (In millions of Korean won)  

Derivatives held for trading

  1,593,909      —        1,593,909      (1,190,301   (1,850   401,758   

Derivatives held for hedging

    138,028        —          138,028        (36,133     —          101,895   

Receivable spot exchange

    2,256,532        —          2,256,532        (2,255,085     —          1,447   

Reverse repurchase, securities borrowing and similar agreements(1)

    4,173,200        —          4,173,200        (4,173,200     —          —     

Other financial instruments

    16,475,869        (15,637,526     838,343        —          —          838,343   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  24,637,538      (15,637,526   9,000,012      (7,654,719   (1,850   1,343,443   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Includes a portion of the securities loaned.

 

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The details of the Group’s recognized financial liabilities subject to enforceable master netting arrangement or similar agreement by type as of December 31, 2012 and 2013, are as follows:

 

    2012  
    Gross
amounts of
recognized
financial
liabilities
    Gross amounts of
recognized
financial assets
offset in the
statement of
financial position
    Net amounts of
financial liabilities
presented in
the statement
of financial
position
    Non-offsetting amount     Net amount  
          Financial
instruments
    Cash
collateral
received
   
    (In millions of Korean won)  

Derivatives held for trading

  1,849,256      —        1,849,256      (1,278,931   —        570,325   

Derivatives held for hedging

    200,526        —          200,526        (18,161     —          182,365   

Payable spot exchange

    1,929,931        —          1,929,931        (1,929,438     —          493   

Reverse repurchase securities lending and similar agreements(1),(2)

    2,345,166        —          2,345,166        (2,345,166     —          —     

Other financial instruments

    16,029,986        (15,757,167     272,819        (151,090     —          121,729   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  22,354,865      (15,757,167   6,597,698      (5,722,786   —        874,912   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    2013  
    Gross
amounts of
recognized
financial
liabilities
    Gross amounts of
recognized
financial assets
offset in the
statement of
financial position
    Net amounts of
financial liabilities
presented in
the statement of
financial position
    Non-offsetting amount     Net amount  
          Financial
instruments
    Cash
collateral
received
   
    (In millions of Korean won)  

Derivatives held for trading

  1,579,878      —        1,579,878      (992,164   —        587,714   

Derivatives held for hedging

    204,642        —          204,642        (16,320     —          188,322   

Payable spot exchange

    2,256,147        —          2,256,147        (2,255,085     —          1,062   

Reverse repurchase securities lending and similar agreements(1),(2)

    804,726        —          804,726        (804,726     —          —     

Other financial instruments

    16,754,401        (15,637,526     1,116,875        (946,800     —          170,075   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  21,599,794      (15,637,526   5,962,268      (5,015,095   —        947,173   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Includes repurchase agreements sold to customers

(2) 

Includes a portion of securities sold

 

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7. Due from financial institutions

The details of due from financial institutions as of December 31, 2012 and 2013, are as follows:

 

        

Financial Institutions

   Interest rate(%)      2012      2013  
                    (In millions of Korean won)  

Due from financial institutions in Korean won

 

Due from Bank of Korea

 

Bank of Korea

     0.00~2.77       3,095,038       6,717,697   
 

Due from banking institutions

 

Hana Bank and others

     0.00~7.15         577,045         636,837   
 

Due from others

 

Samsung Securities Co., Ltd. and others

     0.10~2.93         3,177,727         3,203,452   
         

 

 

    

 

 

 
            6,849,810         10,557,986   
         

 

 

    

 

 

 

Due from financial institutions in foreign currencies

 

Due from banks in foreign currencies

 

Bank of Korea and others

     0.00~0.15         385,798         855,388   
 

Time deposits in foreign currencies

 

China Citi Bank and others

     0.15~3.87         448,349         657,408   
 

Due from others

 

Bank of Japan and others

     —           58,540         23,321   
         

 

 

    

 

 

 
            892,687         1,536,117   
         

 

 

    

 

 

 
          7,742,497       12,094,103   
         

 

 

    

 

 

 

Due from financial institutions, classified by type of financial institution as of December 31, 2012 and 2013, are as follows:

 

     2012  
     In Korean won      In foreign currencies      Total  
     (In millions of Korean won)  

Bank of Korea

   3,095,038       120,143       3,215,181   

Other banking institutions

     577,045         738,310         1,315,355   

Other financial institutions

     3,177,727         34,234         3,211,961   
  

 

 

    

 

 

    

 

 

 

Total

   6,849,810       892,687       7,742,497   
  

 

 

    

 

 

    

 

 

 

 

     2013  
     In Korean won      In foreign currencies      Total  
     (In millions of Korean won)  

Bank of Korea

   6,717,697       410,328       7,128,025   

Other banking institutions

     636,837         1,105,842         1,742,679   

Other financial institutions

     3,203,452         19,947         3,223,399   
  

 

 

    

 

 

    

 

 

 

Total

   10,557,986       1,536,117       12,094,103   
  

 

 

    

 

 

    

 

 

 

 

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Restricted due from financial institutions as of December 31, 2012 and 2013, are as follows:

 

       

Financial Institutions

  2012     2013    

Reason for restriction

    (In millions of Korean won)      

Due from financial institutions in Korean won

 

Due from Bank of Korea

  Bank of Korea   3,095,038      6,717,697     

Bank of Korea Act

 

Due from Banking institution

 

Hana Bank and others

    248,603        342,469     

Agreement for allocation of deposit

  Due from others  

The Korea Exchange and others

    152,908        102,460     

Market entry deposit and others

     

 

 

   

 

 

   
      3,496,549      7,162,626     
     

 

 

   

 

 

   

Due from financial institutions in foreign currencies

 

Due from banks in foreign currencies

 

Bank of Korea and others

  128,811      482,296     

Bank of Korea Act and others

 

Time deposit in foreign currencies

 

Itau Unibanco S.A NY Branch

    6,962        10,553     

Bank Act of the State of New York

  Due from others  

Ong First Tradition Pte. and others

    11,065        10,428     

Derivatives margin account and others

     

 

 

   

 

 

   
        146,838        503,277     
     

 

 

   

 

 

   
      3,643,387      7,665,903     
     

 

 

   

 

 

   

8. Assets pledged as collaterals

The details of assets pledged as collaterals as of December 31, 2012 and 2013, are as follows:

 

        2012

Assets pledged

 

Pledgee

  Carrying
amount
    Collateralized
amount
   

Reason of pledge

        (In millions of Korean won)

Due from financial institutions

 

Korea Federation of Savings Banks and others

  89,000      89,000      Borrowings from Bank and others
   

 

 

   

 

 

   

Financial assets held for trading

 

Korea Securities Depository and others

    321,454        306,194     

Reverse repurchase securities lending and similar agreements

 

Korea Securities Depository and others

    1,440,316        1,338,186     

Securities lending transactions

 

Samsung Futures Inc. and others

    80,583        72,801     

Derivatives transactions

 

Others

    18,917        17,945     

Others

   

 

 

   

 

 

   
 

Sub-total

    1,861,270        1,735,126     
   

 

 

   

 

 

   

Available-for-sale financial assets

 

Samsung Futures Inc. and others

    3,447        3,213     

Derivatives transactions

  Others     400        400     

Others

   

 

 

   

 

 

   
 

Sub-total

    3,847        3,613     
   

 

 

   

 

 

   

Held-to-maturity financial assets

 

Korea Securities Depository and others

    3,602,681        3,602,000     

Reverse repurchase securities lending and similar agreements

 

Bank of Korea

    965,072        960,000     

Borrowings from Bank of Korea

 

Bank of Korea

    781,389        776,800     

Settlement risk of Bank of Korea

 

Samsung Futures Inc. and others

    266,113        266,000      Derivatives transactions
  Others     1,249,441        1,220,500      Others
   

 

 

   

 

 

   
 

Sub-total

    6,864,696        6,825,300     
   

 

 

   

 

 

   

Mortgage loans

  Others     1,058,470        1,054,834      Covered Bond
   

 

 

   

 

 

   

Total

  9,877,283      9,707,873     
   

 

 

   

 

 

   

 

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        2013

Assets pledged

 

Pledgee

  Carrying
amount
    Collateralized
amount
   

Reason of pledge

        (In millions of Korean won)

Due from financial institutions

 

Korea Federation of Savings Banks and others

  238,901      238,901      Borrowings from Bank and others

Financial assets held for trading

 

Korea Securities Depository and others

    336,154     

 
329,391     

Reverse repurchase securities lending and similar agreements

 

Korea Securities Depository and others

    446,126        393,981     

Securities lending transactions

 

Samsung Futures Inc. and others

    15,570        14,589      Derivatives transactions
   

 

 

   

 

 

   
 

Sub-total

    797,850        737,961     
   

 

 

   

 

 

   

Available-for-sale financial assets

 

Korea Securities Depository and others

    45,771        45,145     

Securities lending transactions

 

Samsung Futures Inc. and others

    33,317        31,746     

Derivatives transactions

  Others     15,100        14,370      Others
   

 

 

   

 

 

   
 

Sub-total

    94,188        91,261     
   

 

 

   

 

 

   

Held-to-maturity financial assets

 

Korea Securities Depository and others

    3,577,052     

 
3,572,000     

Reverse repurchase securities lending and similar agreements

 

Bank of Korea

    617,250        610,000      Borrowings from Bank of Korea
 

Bank of Korea

    956,284        946,800      Settlement risk of Bank of Korea
 

Samsung Futures Inc. and others

    325,616        325,521     

Derivatives transactions

  Others     258,615        258,500      Others
   

 

 

   

 

 

   
 

Sub-total

    5,734,817        5,712,821     
   

 

 

   

 

 

   

Mortgage loans

  Others     846,000        843,127      Covered Bond
   

 

 

   

 

 

   

Total

  7,711,756      7,624,071     
   

 

 

   

 

 

   

The fair value of collateral available to sell or repledge, and collateral sold or repledged, regardless of debtor’s default, as of December 31, 2012 and 2013, are as follows:

 

     2012  
     Fair value of collateral
held
     Fair value of collateral
sold or repledged
     Total  
     (In millions of Korean won)  

Securities

   3,609,354       —         3,609,354   
  

 

 

    

 

 

    

 

 

 

Total

   3,609,354       —         3,609,354   
  

 

 

    

 

 

    

 

 

 

 

     2013  
     Fair value of collateral
held
     Fair value of collateral
sold or repledged
     Total  
     (In millions of Korean won)  

Securities

   4,258,909       —         4,258,909   
  

 

 

    

 

 

    

 

 

 

Total

   4,258,909       —         4,258,909   
  

 

 

    

 

 

    

 

 

 

 

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9. Derivative financial instruments and hedge accounting

The Group’s derivative operations focus on addressing the needs of the Group’s corporate clients to hedge their risk exposure and to hedge the Group’s risk exposure that results from such client contracts. The Group also engages in derivative trading activities to hedge the interest rate and foreign currency risk exposures that arise from the Group’s own assets and liabilities. In addition, the Group engages in proprietary trading of derivatives within the Group’s regulated open position limits.

The Group provides and trades a range of derivatives products, including:

 

   

Interest rate swaps, relating to interest rate risks in Korean won;

 

   

Cross-currency swaps, forwards and options relating to foreign exchange rate risks,

 

   

Stock price index options linked with the KOSPI index.

In particular, the Group uses cross currency swaps, interest rate swaps and others to hedge the risk of changes in fair values and in cash flows due to changes in interest rates and foreign exchange rates of subordinated debts in Korean won, structured debts and financial debentures in foreign currencies.

The details of derivative financial instruments for trading as of December 31, 2012 and 2013, are as follows:

 

     2012  
     Notional amount      Assets      Liabilities  
     (In millions of Korean won)  

Interest rate

        

Futures(1)

   1,609,679       —         —     

Swaps

     147,924,098         838,454         948,697   

Options

     10,715,347         79,942         78,149   
  

 

 

    

 

 

    

 

 

 

Sub-total

     160,249,124         918,396         1,026,846   
  

 

 

    

 

 

    

 

 

 

Currency

        

Forwards

     17,280,288         264,578         328,505   

Futures(1)

     602,051         974         7   

Swaps

     14,879,808         576,857         427,227   

Options

     334,912         3,215         2,638   
  

 

 

    

 

 

    

 

 

 

Sub-total

     33,097,059         845,624         758,377   
  

 

 

    

 

 

    

 

 

 

Stock and index

        

Futures(1)

     174,997         —           —     

Swaps

     355,995         18,056         6,879   

Options

     1,938,069         56,376         60,952   
  

 

 

    

 

 

    

 

 

 

Sub-total

     2,469,061         74,432         67,831   
  

 

 

    

 

 

    

 

 

 

Commodity

        

Futures(1)

     3,856         88         2   
  

 

 

    

 

 

    

 

 

 

Sub-total

     3,856         88         2   
  

 

 

    

 

 

    

 

 

 

Other

     60,000         69,234         1,160   
  

 

 

    

 

 

    

 

 

 

Total

   195,879,100       1,907,774       1,854,216   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     2013  
     Notional amount      Assets      Liabilities  
     (In millions of Korean won)  

Interest rate

        

Futures(1)

   928,684       —         —     

Swaps

     141,275,150         582,544         639,695   

Options

     8,285,091         45,063         85,906   
  

 

 

    

 

 

    

 

 

 

Sub-total

     150,488,925         627,607         725,601   
  

 

 

    

 

 

    

 

 

 

Currency

        

Forwards

     23,055,704         241,804         289,629   

Futures(1)

     415,560         219         15   

Swaps

     17,414,405         693,116         503,663   

Options

     273,745         2,428         1,492   
  

 

 

    

 

 

    

 

 

 

Sub-total

     41,159,414         937,567         794,799   
  

 

 

    

 

 

    

 

 

 

Stock and index

        

Futures(1)

     136,624         —           95   

Swaps

     477,143         17,565         15,168   

Options

     1,982,455         30,006         35,118   
  

 

 

    

 

 

    

 

 

 

Sub-total

     2,596,222         47,571         50,381   
  

 

 

    

 

 

    

 

 

 

Commodity

        

Futures(1)

     2,024         121         —     
  

 

 

    

 

 

    

 

 

 

Sub-total

     2,024         121         —     
  

 

 

    

 

 

    

 

 

 

Other

     60,000         68,014         9,248   
  

 

 

    

 

 

    

 

 

 

Total

   194,306,585       1,680,880       1,580,029   
  

 

 

    

 

 

    

 

 

 

 

(1) 

A gain or loss from daily mark-to-market futures is reflected in the margin accounts.

Fair value hedge

The details of derivatives designated as fair value hedging instruments as of December 31, 2012 and 2013, are as follows:

 

     2012  
     Notional amount      Assets      Liabilities  
     (In millions of Korean won)  

Interest rate

        

Swaps

   1,921,251       180,719       6,642   

Currency

        

Swaps

     1,071,100         —           183,929   

Other

     140,000         2,348         2,658   
  

 

 

    

 

 

    

 

 

 

Total

   3,132,351       183,067       193,229   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     2013  
     Notional
amount
     Assets      Liabilities  
     (In millions of Korean won)  

Interest rate

        

Swaps

   1,951,013       137,445       —     

Currency

        

Futures

     42,048         502         —     

Swaps

     1,055,300         —           195,800   

Other

     140,000         —           8,842   
  

 

 

    

 

 

    

 

 

 

Total

   3,188,361       137,947       204,642   
  

 

 

    

 

 

    

 

 

 

Gains and losses from fair value hedging instruments and hedged items attributable to the hedged risk for the years ended December 31, 2011, 2012 and 2013, are as follows:

 

     2011     2012     2013  
     (In millions of Korean won)  

Gains(losses) on hedging instruments

   108,507      (14,654   (48,545

Gains(losses) on the hedged item attributable to the hedged risk

     (84,914     37,641        81,428   
  

 

 

   

 

 

   

 

 

 

Total

   23,593      22,987      32,883   
  

 

 

   

 

 

   

 

 

 

Cash flow hedge

The details of derivatives designated as cash flow hedging instruments as of December 31, 2012 and 2013, are as follows:

 

     2012  
     Notional
amount
     Assets      Liabilities  
     (In millions of Korean won)  

Interest rate

        

Swaps

   1,065,000       444       7,013   

Currency

        

Swaps

     321,330         —           284   
  

 

 

    

 

 

    

 

 

 

Total

   1,386,330       444       7,297   
  

 

 

    

 

 

    

 

 

 

 

     2013  
     Notional
amount
     Assets      Liabilities  
     (In millions of Korean won)  

Interest rate

        

Swaps

   1,403,000       582       4,902   

Currency

        

Swaps

     316,590         —           5,766   
  

 

 

    

 

 

    

 

 

 

Total

   1,719,590       582       10,668   
  

 

 

    

 

 

    

 

 

 

 

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Gains and losses from cash flow hedging instruments and hedged items attributable to the hedged risk for the years ended December 31, 2011, 2012 and 2013, are as follows:

 

     2011      2012     2013  
     (In millions of Korean won)  

Gains(losses) on hedging instruments

   21,631       (27,006   (3,068

Gains(losses) on the hedged item attributable to the hedged risk

     21,631         (26,838     (2,990
  

 

 

    

 

 

   

 

 

 

Ineffectiveness recognized in profit or loss

   —         (168   (78
  

 

 

    

 

 

   

 

 

 

Amounts recognized in other comprehensive income and reclassified from equity to profit or loss for the years ended December 31, 2011, 2012 and 2013, are as follows:

 

     2011     2012     2013  
     (In millions of Korean won)  

Amount recognized in other comprehensive income

   21,631      (26,838   (2,990

Amount reclassified from equity to profit or loss

     (23,193     25,000        5,227   

Tax effect

     241        1,025        (619
  

 

 

   

 

 

   

 

 

 

Total

   (1,321   (813   1,618   
  

 

 

   

 

 

   

 

 

 

10. Loans

Loans as of December 31, 2012 and 2013, are as follows:

 

     2012     2013  
     (In millions of Korean won)  

Loans

   216,487,114      221,439,295   

Deferred loan origination fees and costs

     426,336        423,245   

Less: Allowances for loan losses

     (3,268,659     (2,861,184
  

 

 

   

 

 

 

Carrying amount

   213,644,791      219,001,356   
  

 

 

   

 

 

 

Loans to banks as of December 31, 2012 and 2013, are as follows:

 

     2012     2013  
     (In millions of Korean won)  

Loans

   4,397,742       6,335,056   

Less: Allowances for loan losses

     (9     (25
  

 

 

   

 

 

 

Carrying amount

   4,397,733      6,335,031   
  

 

 

   

 

 

 

 

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Loans to customers other than banks as of December 31, 2012 and 2013, consist of:

 

     2012  
     Retail     Corporate     Credit card     Total  
     (In millions of Korean won)  

Loans in Korean won

   102,234,562      83,653,562      —        185,888,124   

Loans in foreign currencies

     71,974        3,466,302        —          3,538,276   

Domestic import usance bills

     —          3,595,143        —          3,595,143   

Off-shore funding loans

     —          753,885        —          753,885   

Call loans

     —          1,193,334        —          1,193,334   

Bills bought in Korean won

     —          30,343        —          30,343   

Bills bought in foreign currencies

     —          2,522,110        —          2,522,110   

Guarantee payments under payment guarantee

     —          45,154        —          45,154   

Credit card receivables in Korean won

     —          —          11,871,313        11,871,313   

Credit card receivables in foreign currencies

     —          —          2,538        2,538   

Reverse repurchase agreements

     —          1,251,000        —          1,251,000   

Privately placed bonds

     —          603,667        —          603,667   

Factored receivables

     1,198,105        22,716        —          1,220,821   
  

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

     103,504,641        97,137,216        11,873,851        212,515,708   

Proportion (%)

     48.70        45.71        5.59        100.00   

Allowances

     (687,851     (2,251,309     (329,490     (3,268,650
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   102,816,790      94,885,907      11,544,361      209,247,058   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     2013  
     Retail     Corporate     Credit card     Total  
     (In millions of Korean won)  

Loans in Korean won

   104,920,187      84,596,181      —        189,516,368   

Loans in foreign currencies

     98,614        2,956,418        —          3,055,032   

Domestic import usance bills

     —          2,978,478        —          2,978,478   

Off-shore funding loans

     —          669,603        —          669,603   

Call loans

     —          696,929        —          696,929   

Bills bought in Korean won

     —          14,243        —          14,243   

Bills bought in foreign currencies

     —          1,588,066        —          1,588,066   

Guarantee payments under payment guarantee

     —          38,318        —          38,318   

Credit card receivables in Korean won

     —          —          11,782,005        11,782,005   

Credit card receivables in foreign currencies

     —          —          2,453        2,453   

Reverse repurchase agreements

     —          1,683,200        —          1,683,200   

Privately placed bonds

     —          731,706        —          731,706   

Factored receivables

     2,724,413        46,670        —          2,771,083   
  

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

     107,743,214        95,999,812        11,784,458        215,527,484   

Proportion (%)

     49.99        44.54        5.47        100.00   

Allowances

     (580,510     (1,870,849     (409,800     (2,861,159
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   107,162,704      94,128,963      11,374,658      212,666,325   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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The changes in deferred loan origination fees and costs for the years ended December 31, 2012 and 2013, are as follows:

 

     2012  
     Beginning      Increase      Decrease      Others     Ending  
     (In millions of Korean won)  

Deferred loan origination costs

             

Loans in Korean won

   448,122       321,090       266,700       —        502,512   

Other origination costs

     201         430         287         —          344   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Sub-total

     448,323         321,520         266,987         —          502,856   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Deferred loan origination fees

             

Loans in Korean won

     43,242         53,166         26,414         —          69,994   

Credit card

     106         —           106         —          —     

Other origination fees

     5,104         3,245         1,803         (20     6,526   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Sub-total

     48,452         56,411         28,323         (20     76,520   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   399,871       265,109       238,664       20      426,336   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

     2013  
     Beginning      Increase      Decrease      Others     Ending  
     (In millions of Korean won)  

Deferred loan origination costs

             

Loans in Korean won

   502,512       330,202       288,683       (33,130   510,901   

Other origination costs

     344         635         602         —          377   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Sub-total

     502,856         330,837         289,285         (33,130     511,278   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Deferred loan origination fees

             

Loans in Korean won

     69,994         72,822         62,383         (70     80,363   

Other origination fees

     6,526         3,872         2,709         (19     7,670   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Sub-total

     76,520         76,694         65,092         (89     88,033   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   426,336       254,143       224,193       (33,041   423,245   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

11. Allowances for Loan Losses

The changes in the allowances for loan losses for the years ended December 31, 2012 and 2013, are as follows:

 

     2012  
     Retail     Corporate     Credit card     Total  
     (In millions of Korean won)  

Beginning

   635,512      2,462,285      350,382      3,448,179   

Written-off

     (452,639     (1,203,832     (540,664     (2,197,135

Recoveries from written-off loans

     103,363        161,334        185,027        449,724   

Sale

     (6,082     (98,865     —          (104,947

Provision(1)

     401,690        914,516        336,356        1,652,562   

Other changes

     6,007        15,880        (1,611     20,276   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending

   687,851      2,251,318      329,490      3,268,659   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     2013  
     Retail     Corporate     Credit card     Total  
     (In millions of Korean won)  

Beginning

   687,851      2,251,318      329,490      3,268,659   

Written-off

     (581,100     (1,146,767     (404,199     (2,132,066

Recoveries from written-off loans

     126,651        147,110        141,452        415,213   

Sale

     (8,483     (76,413     435        (84,461

Provision(1)

     361,253        720,136        346,064        1,427,453   

Other changes

     (5,662     (24,510     (3,442     (33,614
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending

   580,510      1,870,874      409,800      2,861,184   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Provision for credit losses in statements of comprehensive income also include provision(reversal) for unused commitments and guarantees(Note 23), reversal for financial guarantees contracts(Note 23), and provision for other financial assets(Note 18).

The amounts of written-off loans, over which the Group still has a right to claim against the borrowers and guarantors, are ₩15,105,173 million and ₩15,061,182 million, as of December 31, 2012 and 2013, respectively.

The coverage ratio of allowances for loan losses as of December 31, 2012 and 2013, are as follows:

 

     2012      2013  
     (In millions of Korean won)  

Loans

   216,913,450       221,862,540   

Allowances for loan losses

     3,268,659         2,861,184   

Ratio (%)

     1.51         1.29   

12. Financial assets at fair value through profit or loss and Financial investments

The details of financial assets at fair value through profit or loss and financial investments as of December 31, 2012 and 2013, are as follows:

 

     2012      2013  
     (In millions of Korean won)  

Financial assets held for trading

     

Debt securities:

     

Government and public bonds

   2,376,174       2,085,450   

Financial bonds

     4,018,092         3,265,960   

Corporate bonds

     1,678,842         1,759,993   

Asset-backed securities

     105,492         510,159   

Others

     113,015         204,223   

Equity securities:

     

Stocks

     218,227         145,163   

Beneficiary certificates

     657,948         955,806   

Others

     39,839         40,252   
  

 

 

    

 

 

 

Total financial assets held for trading

     9,207,629         8,967,006   
  

 

 

    

 

 

 

Financial assets designated at fair value through profit or loss

     

Equity securities:

     

Beneficiary certificates

     159,483         115,778   

Derivative linked securities

     192,607         245,958   
  

 

 

    

 

 

 

Total financial assets designated at fair value through profit or loss

     352,090         361,736   
  

 

 

    

 

 

 

Total financial assets at fair value through profit or loss

   9,559,719       9,328,742   
  

 

 

    

 

 

 

 

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Table of Contents
     2012      2013  
     (In millions of Korean won)  

Available-for-sale financial assets

     

Debt securities:

     

Government and public bonds

   6,256,380       6,925,617   

Financial bonds

     7,476,233         5,782,234   

Corporate bonds

     6,605,556         4,997,788   

Asset-backed securities

     1,399,015         1,208,241   

Others

     56         19,408   

Equity securities:

     

Stocks

     2,142,442         2,366,887   

Equity investments and others

     109,832         97,937   

Beneficiary certificates

     222,032         433,992   
  

 

 

    

 

 

 

Total available-for-sale financial assets

     24,211,546         21,832,104   
  

 

 

    

 

 

 

Held-to-maturity financial assets

     

Debts securities:

     

Government and public bonds

     4,449,243         4,357,623   

Financial bonds

     1,315,417         892,509   

Corporate bonds

     6,212,850         7,400,085   

Asset-backed securities

     278,296         366,774   
  

 

 

    

 

 

 

Total held-to-maturity financial assets

     12,255,806         13,016,991   
  

 

 

    

 

 

 

Total financial investments

   36,467,352       34,849,095   
  

 

 

    

 

 

 

The impairment losses and the reversal of impairment losses in financial investments for the years ended December 31, 2011, 2012 and 2013, are as follows:

 

     2011  
     Impairment     Reversal      Net  
     (In millions of Korean won)  

Available-for-sale financial assets

   (51,072   —         (51,072

Held-to-maturity financial assets

     (150     117         (33
  

 

 

   

 

 

    

 

 

 

Total

   (51,222   117       (51,105
  

 

 

   

 

 

    

 

 

 

 

     2012  
     Impairment      Reversal      Net  
     (In millions of Korean won)  

Available-for-sale financial assets

   280,610       —         280,610   

Held-to-maturity financial assets

     154         —           154   
  

 

 

    

 

 

    

 

 

 

Total

   280,764       —         280,764   
  

 

 

    

 

 

    

 

 

 

 

     2013  
     Impairment      Reversal      Net  
     (In millions of Korean won)  

Available-for-sale financial assets

   163,464         —         163,464   

Held-to-maturity financial assets

     5         —           5   
  

 

 

    

 

 

    

 

 

 

Total

   163,469         —         163,469   
  

 

 

    

 

 

    

 

 

 

 

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13. Investments in associates

Investments in associates as of December 31, 2012 and 2013, are as follows:

 

    2012
    Ownership     Acquisition
cost
    Share of
net asset
amount
    Carrying
amount
   

Industry

  Location
    (%)     (In millions of Korean won)    

Associates

           

Balhae Infrastructure Fund(1).

    12.61      121,817      125,004      125,004      Investment finance   Korea

Korea Credit Bureau Co., Ltd.(1)

    9.00        4,500        3,790        3,790      Credit Information   Korea

UAMCO., Ltd.(1)

    17.50        85,050        120,916        139,760      Other finance   Korea

JSC Bank CenterCredit

           

Ordinary share(2),(4)

    29.56        954,104        257,996        281,889      Banking   Kazakhstan

Preference share(2)

    93.15             

KoFC KBIC Frontier Champ 2010-5(PEF)

    50.00        32,150        28,761        25,539      Investment finance   Korea

KB Global Star Game & Apps
SPAC(1),(4)

    0.23        20        48        48      SPAC   Korea

Semiland Co., Ltd

    21.32        1,470        2,513        2,513      Manufacture   Korea

Serit Platform Co., Ltd

    21.72        1,500        1,517        1,517     

Manufacture of communication equipment

  Korea

Sehwa Electronics Co., Ltd

    20.95        3,508        2,955        2,955     

Manufacture of electronic components

  Korea

Testian Co., Ltd

    47.09        1,018        1,041        1,041     

Manufacture of semiconductor equipment

  Korea

DS Plant Co., Ltd.(3)

    —          —          —          —        Manufacture of machine   Korea

Joam Housing Development Co., Ltd.(1)

    15.00        8        (371     —        Housing   Korea

United PF 1st Recovery Private Equity Fund(1)

    17.72        191,617        201,182        195,425      Other finance   Korea

CH Engineering Co., Ltd

    41.73        —          107        —        Architectural design and Service   Korea

Evalley Co., Ltd

    46.24        —          —          —       

Software advisory, development and supply

  Korea

Shinla Construction Co., Ltd.(5)

    20.24        —          —          —        Specialty construction   Korea

PyungJeon Industries Co.,LTD.(5)

    15.65        —          —          —        Specialty construction   Korea

Kores Co., Ltd.(5)

    16.01        634        1,384        1,384      Manufacture of automobile parts   Korea

KB GwS Private Securities Investment Trust

    26.74        113,880        124,410        120,939      Investment finance   Korea

Incheon Bridge Co., Ltd.(1)

    14.99        24,677        1,630        1,630     

Operation of Highways and Related facilities

  Korea

KB Star office Private real estate Investment Trust No.1

    21.05        20,000        20,311        19,898      Investment finance   Korea

KoFC POSCO HANHWA KB shared growth Private Equity Fund

    25.00        6,250        5,606        4,983      Investment finance   Korea

NPS KBIC Private Equity Fund No. 1(1)

    2.56        3,393        4,160        4,160      Investment finance   Korea

KBIC Private Equity Fund No. 3(1)

    2.00        2,050        2,156        2,156      Investment finance   Korea

KB-Glenwood Private Equity Fund 1(1)

    0.03        10        10        10      Investment finance   Korea
   

 

 

   

 

 

   

 

 

     

Total

    1,567,656      905,126      934,641       
   

 

 

   

 

 

   

 

 

     

 

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    2013
    Ownership     Acquisition
cost
    Share of
net asset
amount
    Carrying
amount
   

Industry

  Location
    (%)     (In millions of Korean won)    

Associates

           

Balhae Infrastructure Fund(1).

    12.61      121,817      124,968      124,968      Investment finance   Korea

Korea Credit Bureau Co., Ltd.(1)

    9.00        4,500        4,185        4,185      Credit Information   Korea

UAMCO., Ltd.(1)

    17.50        85,050        139,286        150,826      Other finance   Korea

JSC Bank CenterCredit

           

Ordinary share(2),(4)

    29.56             

Preference share(2)

    93.15        954,104        51,989        68,110      Banking   Kazakhstan

KoFC KBIC Frontier Champ 2010-5(PEF)

    50.00        47,580        46,496        45,393      Investment finance   Korea

Semiland Co., Ltd

    21.32        1,470        2,639        2,639      Manufacture   Korea

United PF 1st Recovery Private Equity Fund(1)

    17.72        191,617        203,618        197,941      Other finance   Korea

CH Engineering Co., Ltd

    41.73        —          64        —        Architectural design and Service   Korea

Shinla Construction Co., Ltd

    20.24        —          —          —        Specialty construction   Korea

Kores Co., Ltd.(5)

    10.39        634        1,925        1,505      Manufacture of automobile parts   Korea

KB GwS Private Securities Investment Trust

    26.74        113,880        126,556        123,085      Investment finance   Korea

Incheon Bridge Co., Ltd.(1)

    14.99        24,677        (429     —       

Operation of Highways and Related facilities

  Korea

Ssangyong Engineering & Construction Co., Ltd.(5)

    15.64        28,779        2,490        —       

Office and Commercial Building Construction

  Korea

KB Star office Private real estate Investment Trust No.1

    21.05        20,000        20,347        19,934      Investment finance   Korea

KoFC POSCO HANHWA KB shared growth Private Equity Fund

    25.00        14,025        11,620        10,329      Investment finance   Korea

NPS KBIC Private Equity Fund No. 1(1)

    2.56        3,393        4,238        4,238      Investment finance   Korea

KBIC Private Equity Fund No. 3(1)

    2.00        2,050        2,223        2,223      Investment finance   Korea

KB-Glenwood Private Equity Fund 1(1)

    0.03        10        10        10      Investment finance   Korea

Terra Co., Ltd

    24.06        —          20        4     

Manufacture of Hand-Operated Kitchen Appliances and Metal Ware

  Korea
   

 

 

   

 

 

   

 

 

     

Total

    1,613,586      742,245      755,390       
   

 

 

   

 

 

   

 

 

     

 

(1) 

As of December 31, 2012 and 2013, the Group is represented in the governing bodies of its associates. Therefore, the Group has significant influence over the decision-making process relating to their financial and business policies.

(2) 

The Group determined that ordinary shares and convertible preference shares issued by JSC Bank CenterCredit are the same in economic substance except for the voting rights, and therefore, the equity method of accounting is applied on the basis of single ownership ratio of 41.93%, calculated based on ordinary and convertible preference shares held by the Group against the total outstanding ordinary and convertible preference shares issued by JSC Bank CenterCredit.

(3) 

The Group’s ownership in DS Plant Co., Ltd. is 21.05% as of December 31, 2012, when the potential voting rights from convertible bond held by the Group are taken into account.

(4) 

Fair value of ordinary shares of JSC Bank CenterCredit, reflecting the published market price, as of December 31, 2012 and 2013, are ₩65,821 million and ₩57,476 million, respectively, and fair value of shares of KB Global Star Game & Apps SPAC, reflecting the published market price, as of December 31, 2012, is ₩49 million.

(5) 

Where the Group has acquired shares of entities through debt-for-equity swaps, the Group is represented in the creditor council. Therefore, the Group has significant influence over the decision-making process relating to their financial and business policies.

 

F-104


Table of Contents

Summarized financial information on associates:

 

    2012(1)  
    Total assets     Total
liabilities
    Share
capital
    Equity     Share of
net asset
amount
    Unrealized
gains
    Consolidated
carrying
amount
 
    (In millions of Korean won)  

Associates

             

Balhae Infrastructure Fund

  993,838      2,138      993,030      991,700      125,004      —        125,004   

Korea Credit Bureau Co., Ltd

    55,944        13,834        10,000        42,110        3,790        —          3,790   

UAMCO., Ltd

    4,906,010        4,215,061        2,430        690,949        120,916        18,844        139,760   

JSC Bank CenterCredit

    7,824,619        7,142,759        546,794        681,860        257,996        23,893        281,889   

KoFC KBIC Frontier Champ 2010-5(PEF).

    57,779        257        64,300        57,522        28,761        (3,222     25,539   

KB Global Star Game & Apps SPAC

    22,108        1,310        862        20,798        48        —          48   

Semiland Co., Ltd

    12,472        6,901        985        5,571        2,513        —          2,513   

Serit Platform Co., Ltd

    8,134        5,585        1,000        2,549        1,517        —          1,517   

Sehwa Electronics Co., Ltd

    23,255        9,744        1,050        13,511        2,955        —          2,955   

Testian Co., Ltd

    2,771        1,899        1,030        872        1,041        —          1,041   

DS Plant Co., Ltd

    10,253        7,530        600        2,723        —          —          —     

Joam Housing Development Co., Ltd

    117,159        119,632        50        (2,473     (371     371        —     

United PF 1st Recovery Private Equity Fund

    1,153,268        17,886        1,081,400        1,135,382        201,182        (5,757     195,425   

CH Engineering Co., Ltd.(2)

    1,088        833        158        255        107        (107     —     

Kores Co., Ltd.(3)

    75,750        67,105        11,099        8,645        1,384        —          1,384   

KB GwS Private Securities Investment Trust

    465,690        503        425,814        465,187        124,410        (3,471     120,939   

Incheon Bridge Co., Ltd

    765,522        754,646        164,621        10,876        1,630        —          1,630   

KB Star office Private real estate Investment Trust No.1

    217,732        121,256        95,000        96,476        20,311        (413     19,898   

KoFC POSCO HANHWA KB shared growth Private Equity Fund

    23,337        913        25,000        22,424        5,606        (623     4,983   

NPS KBIC Private Equity Fund No. 1

    176,650        14,140        132,541        162,510        4,160        —          4,160   

KBIC Private Equity Fund No. 3

    101,931        79        102,500        101,852        2,156        —          2,156   

KB-Glenwood Private Equity Fund 1

    30,632        1,238        31,100        29,394        10        —          10   
         

 

 

   

 

 

   

 

 

 

Total

          905,126      29,515      934,641   
         

 

 

   

 

 

   

 

 

 

 

F-105


Table of Contents
    2012  
    Operating
income
    Profit
(loss)
    Other
comprehensive
income (loss)
    Total
comprehensive
income (loss)
    Dividends  
    (In millions of Korean won)  

Associates

         

Balhae Infrastructure Fund

  67,825      61,514      —        61,514      7,747   

Korea Credit Bureau Co., Ltd

    47,660        5,019        —          5,019        —     

UAMCO., Ltd

    599,570        95,828        —          95,828        —     

JSC Bank CenterCredit

    269,586        (30,343     (62,892     (93,235     3   

KoFC KBIC Frontier Champ 2010-5(PEF)

    1,870        (6,635     (124     (6,759     —     

KB Global Star Game & Apps SPAC

    —          280        —          280        —     

Semiland Co., Ltd

    10,552        774        —          774        10   

Serit Platform Co., Ltd

    9,998        304        —          304        —     

Sehwa Electronics Co., Ltd

    14,059        (2,640     —          (2,640     —     

Testian Co., Ltd

    707        80        —          80        —     

DS Plant Co., Ltd

    10,190        (194     —          (194     —     

Joam Housing Development Co., Ltd

    953        (2,461     —          (2,461     —     

United PF 1st Recovery Private Equity Fund

    98,873        48,040        —          48,040        —     

CH Engineering Co., Ltd.(1)

    714        (42     —          (42     —     

Kores Co., Ltd.(3)

    72,622        190        —          190        —     

KB GwS Private Securities Investment Trust

    39,881        39,373        —          39,373        —     

Incheon Bridge Co., Ltd

    68,711        (29,451     —          (29,451     —     

KoFC POSCO HANHWA KB shared growth Private Equity Fund

    106        (1,900     (676     (2,576     —     

KB Star office Private real estate Investment Trust No.1

    2,865        1,476        —          1,476        —     

NPS KBIC Private Equity Fund No. 1

    12,772        11,780        (4,438     7,342        106   

KBIC Private Equity Fund No. 3.

    1,982        1,665        —          1,665        —     

KB-Glenwood Private Equity Fund 1

    (173     (647     —          (647     —     

 

(1) 

The amounts included in the financial statements of the associates are adjusted to reflect adjustments made by the entity, such as fair value adjustments made at the time of acquisition and adjustments for differences in accounting policies.

(2) 

As the financial statements as of December 31, 2012 are not available, the Group applied the equity method by using the financial statements as of November 30, 2012 and adjusted for the effects of significant transactions or events that occur between the date of those financial statements and the date of the consolidated financial statements.

(3) 

As the financial statements as of December 31, 2012 are not available, the Group applied the equity method by using the financial statements as of September 30, 2012 and adjusted for the effects of significant transactions or events that occur between the date of those financial statements and the date of the consolidated financial statements.

As Shinla Construction Co., Ltd. is impaired capital situation as of December 31, 2013, reliable financial information is not available. Therefore, financial information of these associates is not included in the summarized financial information.

 

F-106


Table of Contents
    2013(1)  
    Total assets     Total
liabilities
    Share capital     Equity     Share of
net asset
amount
    Unrealized
gains
    Consolidated
carrying
amount
 
    (In millions of Korean won)  

Associates

             

Balhae Infrastructure Fund

  993,571      2,157      993,030      991,414      124,968      —        124,968   

Korea Credit Bureau Co., Ltd

    63,043        16,542        10,000        46,501        4,185        —          4,185   

UAMCO., Ltd

    4,365,097        3,567,972        2,430        797,125        139,286        11,540        150,826   

JSC Bank CenterCredit.

    7,083,662        6,903,416        546,794        180,246        51,989        16,121        68,110   

KoFC KBIC Frontier Champ 2010-5(PEF)

    93,367        375        95,160        92,992        46,496        (1,103     45,393   

Semiland Co., Ltd.

    20,753        14,608        1,970        6,145        2,639        —          2,639   

United PF 1st Recovery Private Equity Fund

    1,159,220        10,092        1,081,400        1,149,128        203,618        (5,677     197,941   

CH Engineering Co., Ltd.(2)

    917        763        158        154        64        (64     —     

Kores Co., Ltd.(3)

    92,937        80,914        11,099        12,023        1,925        (420     1,505   

Terra Co., Ltd.(3)

    1,659        1,576        254        83        20        (16     4   

KB GwS Private Securities Investment Trust

    473,946        738        425,814        473,208        126,556        (3,471     123,085   

Incheon Bridge Co., Ltd

    740,321        743,182        164,621        (2,861     (429     429        —     

Ssangyong Engineering & Construction Co., Ltd.(3)

    1,359,658        1,343,734        73,045        15,924        2,490        (2,490     —     

KB Star office Private real estate Investment Trust No.1

    217,557        120,910        95,000        96,647        20,347        (413     19,934   

KoFC POSCO HANHWA KB shared growth Private Equity Fund

    48,192        1,712        56,100        46,480        11,620        (1,291     10,329   

NPS KBIC Private Equity Fund No. 1

    174,469        8,911        132,541        165,558        4,238        —          4,238   

KBIC Private Equity Fund No. 3

    111,270        79        102,500        111,191        2,223        —          2,223   

KB-Glenwood Private Equity Fund 1

    30,558        1,794        31,100        28,764        10        —          10   
         

 

 

   

 

 

   

 

 

 

Total

          742,245      13,145      755,390   
         

 

 

   

 

 

   

 

 

 

 

F-107


Table of Contents
    2013  
    Operating
income
    Profit (loss)     Other
comprehensive
income(loss)
    Total
comprehensive
income(loss)
    Dividends  
    (In millions of Korean won)  

Associates

         

Balhae Infrastructure Fund

  57,754      49,685      —        49,685      6,299   

Korea Credit Bureau Co., Ltd

    51,571        4,909        —          4,909        —     

UAMCO., Ltd

    708,035        105,085        —          105,085        —     

JSC Bank CenterCredit.

    532,768        (497,885     (5,732     (503,617     3   

KoFC KBIC Frontier Champ 2010-5(PEF)

    3,368        (2,454     7,064        4,610        —     

Semiland Co., Ltd

    11,513        649        —          649        11   

United PF 1st Recovery Private Equity Fund

    152,315        13,769        —          13,769        —     

CH Engineering Co., Ltd.(2)

    681        (102     —          (102     —     

Kores Co., Ltd.(3)

    100,769        565        2,472        3,037        —     

Terra Co., Ltd.(3)

    1,422        17        —          17        —     

KB GwS Private Securities Investment Trust

    76,201        41,247        —          41,247        8,894   

Incheon Bridge Co., Ltd

    77,311        (13,533     —          (13,533     —     

Ssangyong Engineering & Construction Co., Ltd.(3)

    1,724,742        (314,105     (8,615     (322,720     —     

KB Star office Private real estate Investment Trust No.1

    16,672        8,490        —          8,490        1,751   

KoFC POSCO HANHWA KB shared growth Private Equity Fund

    1,685        (8,803     1,759        (7,044     —     

NPS KBIC Private Equity Fund No. 1

    10,206        9,301        (2,113     7,188        106   

KBIC Private Equity Fund No. 3

    3,702        3,385        —          3,385        —     

KB-Glenwood Private Equity Fund 1

    —          (627     —          (627     —     

 

(1) 

The amounts included in the financial statements of the associates are adjusted to reflect adjustments made by the entity, such as fair value adjustments made at the time of acquisition and adjustments for differences in accounting policies.

 

(2) 

As the financial statements as of December 31, 2013 are not available, the Group applied the equity method by using the financial statements as of November 30, 2013 and adjusted for the effects of significant transactions or events that occur between the date of those financial statements and the date of the consolidated financial statements.

 

(3) 

As the financial statements as of December 31, 2013 are not available, the Group applied the equity method by using the financial statements as of September 30, 2013 and adjusted for the effects of significant transactions or events that occur between the date of those financial statements and the date of the consolidated financial statements.

 

F-108


Table of Contents

The changes in investments in associates for the years ended December 31, 2012 and 2013, are as follows:

 

    2012  
    Beginning     Acquisition
and others
    Disposal     Dividends     Gains
(losses)
    Other
compre-
hensive
income
    Impairment     Ending  
    (In millions of Korean won)  

Associates

               

Balhae Infrastructure Fund

  128,778      2,660      (6,440   (7,747   7,753      —        —        125,004   

Korea Credit Bureau Co., Ltd

    3,766        —          —          —          354        (330     —          3,790   

UAMCO., Ltd

    109,531        —          —          —          30,229        —          —          139,760   

JSC Bank CenterCredit(2)

    365,059        —          —          (3     (6,257     (43,097     (33,813     281,889   

KoFC KBIC Frontier Champ 2010-5(PEF)

    28,831        3,300        —          —          (5,477     (1,115     —          25,539   

KB Global Star Game & Apps SPAC

    48        —          —          —          —          —          —          48   

Semiland Co., Ltd

    2,247        —          —          (10     276        —          —          2,513   

Serit Platform Co., Ltd

    1,451        —          —          —          66        —          —          1,517   

Sehwa Electronics Co., Ltd

    3,454        —          —          —          (553     54        —          2,955   

Testian Co., Ltd

    789        198        —          —          54        —          —          1,041   

Joam Housing Development Co., Ltd

    —          —          —          —          —          —          —          —     

United PF 1st Recovery Private Equity Fund

    143,437        43,617        (402     —          8,773        —          —          195,425   

Kores Co., Ltd

    —          634        —          —          273        477        —          1,384   

KB GwS Private Securities Investment Trust

    —          115,745        (1,865     —          7,059        —          —          120,939   

Incheon Bridge Co., Ltd

    —          24,677        —          —          (22,916     (131     —          1,630   

KB Star office Private real estate Investment Trust No.1

    —          20,000        —          —          (102     —          —          19,898   

KoFC POSCO HANHWA KB shared growth Private Equity Fund

    —          6,250        —          —          (934     (333     —          4,983   

NPS KBIC Private Equity Fund No. 1

    4,079        —          —          (106     302        (114     —          4,161   

KBIC Private Equity Fund No. 3

    2,122        —          —          —          33        —          —          2,155   

KB-Glenwood Private Equity Fund 1

    10        —          —          —          —          —          —          10   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  793,602      217,081      (8,707   (7,866   18,933      (44,589   (33,813   934,641   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

F-109


Table of Contents
    2013  
    Beginning     Acquisition     Disposal     Dividends     Gains
(losses)
    Other
compre-
hensive
income
    Impairment     Others     Ending  
    (In millions of Korean won)  

Associates

                 

Balhae Infrastructure Fund

  125,004      —        —        (6,299   6,263      —        —        —        124,968   

Korea Credit Bureau Co., Ltd

    3,790        —          —          —          395        —          —          —          4,185   

UAMCO., Ltd

    139,760        —          —          —          11,066        —          —          —          150,826   

JSC Bank CenterCredit

    281,889        —          —          (3     (204,312     (9,464     —          —          68,110   

KoFC KBIC Frontier Champ 2010-5(PEF)

    25,539        15,565        (135     —          4,227        197        —          —          45,393   

KB Global Star Game & Apps SPAC

    48        —          —          —          1        —          —          (49     —     

Semiland Co., Ltd

    2,513        —          —          (11     137        —          —          —          2,639   

Serit Platform Co., Ltd

    1,517        —          (1,518     —          1        —          —          —          —     

Sehwa Electronics Co., Ltd

    2,955        —          (1,577     —          (360     (71     —          (947     —     

Testian Co., Ltd

    1,041        —          (260     —          (587     —          —          (194     —     

Joam Housing Development Co., Ltd

    —          —          —          —          —          —          —          —          —     

United PF 1st Recovery Private Equity Fund

    195,425        —          —          —          2,516        —          —          —          197,941   

Kores Co., Ltd

    1,384        —          —          —          91        450        (420     —          1,505   

KB GwS Private Securities Investment Trust.

    120,939        —          —          (8,894     11,040        —          —          —          123,085   

Incheon Bridge Co., Ltd

    1,630        —          —          —          (1,630     —          —          —          —     

Ssangyong Engineering & Construction Co., Ltd.(1)

    —          28,779        —          —          (8,200     (1,176     (19,403     —          —     

KB Star office Private real estate Investment Trust No.1

    19,898        —          —          (1,751     1,787        —          —          —          19,934   

KoFC POSCO HANHWA KB shared growth Private Equity Fund

    4,983        7,775        —          —          (2,703     274        —          —          10,329   

NPS KBIC Private Equity Fund No. 1

    4,160        —          —          (106     238        (54     —          —          4,238   

KBIC Private Equity Fund No. 3

    2,156        —          —          —          67        —          —          —          2,223   

KB-Glenwood Private Equity Fund 1

    10        —          —          —          —          —          —          —          10   

Terra Co., Ltd.(2)

    —          —          —          —          4        —          —          —          4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  934,641      52,119      (3,490   (17,064   (179,959   (9,844   (19,823   (1,190   755,390   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Impairment recognized on reorganization proceedings filed on December 30, 2013.

(2) 

Soundness in the assets of Kazakhstan banks has been deteriorating due to depression of its domestic economy mainly driven by the global credit crunch. The Group recognized impairment loss in investment of JSC Bank CenterCredit because the Group judged the recovery of JSC Bank CenterCredit’s financial soundness to have been delayed and assessed the economic condition in Kazakhstan as not recovering in the near future.

 

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Accumulated unrecognized share of losses in investments in associates due to discontinuation of applying the equity method as of December 31, 2012 and 2013, are as follows:

 

     2012  
     Unrecognized loss      Unrecognized change in equity  
     (In millions of Korean won)  

CH Engineering Co., Ltd

   51       51   

Shinla Construction Co., Ltd

     60         60   

Joam Housing Development Co., Ltd

     —           363   

 

     2013  
     Unrecognized loss      Unrecognized change in equity  
     (In millions of Korean won)  

Incheon Bridge Co., Ltd

   429       429   

CH Engineering Co., Ltd

     43         94   

Shinla Construction Co., Ltd

     41         101   

14. Property and Equipment, and Investment Property

The details of property and equipment as of December 31, 2012 and 2013, are as follows:

 

     2012  
     Acquisition
cost
     Accumulated
depreciation
    Accumulated
impairment
losses
    Carrying
amount
 
     (In millions of Korean won)  

Land

   2,012,846       —        (581   2,012,265   

Buildings

     1,209,909         (327,370     (2,661     879,878   

Leasehold improvements

     523,039         (467,381     —          55,658   

Equipment and vehicles

     1,630,116         (1,488,184     —          141,932   

Construction in-progress

     893         —          —          893   

Financial lease assets

     55,908         (46,141     —          9,767   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total

   5,432,711       (2,329,076   (3,242   3,100,393   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

     2013  
     Acquisition
cost
     Accumulated
depreciation
    Accumulated
impairment
losses
    Carrying
amount
 
     (In millions of Korean won)  

Land

   1,991,831       —        —        1,991,831   

Buildings

     1,219,806         (353,140     (2,117     864,549   

Leasehold improvements

     567,231         (511,207     —          56,024   

Equipment and vehicles

     1,642,796         (1,503,257     —          139,539   

Financial lease assets

     66,641         (57,741     —          8,900   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total

   5,488,305       (2,425,345   (2,117   3,060,843   
  

 

 

    

 

 

   

 

 

   

 

 

 

The changes in property and equipment for the years ended December 31, 2012 and 2013, are as follows:

 

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    2012  
    Beginning     Acquisition     Transfers(1)     Disposal     Depreciation(2)     Others     Ending  
    (In millions of Korean won)  

Land

  2,020,681      40      (6,505   (1,878   —        (73   2,012,265   

Buildings

    895,460        1,806        14,344        (2,667     (28,820     (245     879,878   

Leasehold improvements

    59,586        4,574        32,591        (272     (44,007     3,186        55,658   

Equipment and vehicles

    195,883        74,921        —          (365     (128,411     (96     141,932   

Construction in progress

    1,075        49,646        (49,828     —          —          —          893   

Financial lease assets

    10,061        12,152        —          —          (12,446     —          9,767   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  3,182,746      143,139      (9,398   (5,182   (213,684   2,772      3,100,393   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    2013  
    Beginning     Acquisition     Transfers1     Disposal     Depreciation2     Others     Ending  
    (In millions of Korean won)  

Land

  2,012,265      1,405      (21,551   (214   —        (74   1,991,831   

Buildings

    879,878        3,234        11,056        (281     (29,094     (244     864,549   

Leasehold improvements.

    55,658        2,687        33,001        (332     (46,057     11,067        56,024   

Equipment and vehicles

    141,932        94,875        247        (434     (97,119     38        139,539   

Construction in progress

    893        51,268        (52,161     —          —          —          —     

Financial lease assets

    9,767        10,734        —          —          (11,601     —          8,900   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  3,100,393      164,203      (29,408   (1,261   (183,871   10,787      3,060,843   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Including transfers with investment property and assets held for sale.

(2) 

Including ₩123 million and ₩71 million recorded in other operating expenses in the statements of comprehensive income for the years ended December 31, 2012 and 2013, respectively.

The changes in accumulated impairment losses of property and equipment for the years ended December 31, 2012 and 2013, are as follows:

 

2012  
Beginning      Impairment      Reversal      Others      Ending  
(In millions of Korean won)  
(3,242)       —         —         —         (3,242

 

2013  
Beginning      Impairment      Reversal      Others      Ending  
(In millions of Korean won)  
(3,242)       —         —         1,125       (2,117

The details of investment property as of December 31, 2012 and 2013, are as follows:

 

     2012  
     Acquisition
cost
     Accumulated
depreciation
    Carrying
amount
 
     (In millions of Korean won)  

Land

   38,653       —        38,653   

Buildings

     19,723         (5,402     14,321   
  

 

 

    

 

 

   

 

 

 

Total

   58,376       (5,402   52,974   
  

 

 

    

 

 

   

 

 

 

 

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     2013  
     Acquisition
cost
     Accumulated
depreciation
    Carrying
amount
 
     (In millions of Korean won)  

Land

   94,708       —        94,708   

Buildings

     78,526         (6,975     71,551   
  

 

 

    

 

 

   

 

 

 

Total

   173,234       (6,975   166,259   
  

 

 

    

 

 

   

 

 

 

The valuation technique and input variables that are used to measure the fair value of investment property as of December 31, 2013, are as follows:

 

     2013
     Fair value      Valuation technique   

Inputs

     (In millions of Korean won)

Land and buildings

   189,534       Cost Approach Method   

- Price per square meter

- Replacement cost

As of December 31, 2012 and 2013, fair values of the investment properties amount to ₩51,142 million and ₩189,534 million, respectively. The investment properties were measured by qualified independent appraisers with experience in valuing similar properties in the same area. In addition, per the fair value hierarchy on Note 6.1, the fair value hierarchy of all investment properties has been categorized and classified as Level 3.

Rental income from the above investment properties for the years ended December 31, 2012 and 2013, amounts to ₩675 million and ₩4,889 million, respectively.

The changes in investment property for the years ended December 31, 2012 and 2013, are as follows:

 

     2012  
     Beginning      Transfers      Depreciation     Ending  
     (In millions of Korean won)  

Land

   37,451       1,202       —        38,653   

Buildings

     14,101         685         (465     14,321   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   51,552       1,887       (465   52,974   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

     2013  
     Beginning      Acquisition      Transfers      Depreciation     Ending  
     (In millions of Korean won)  

Land

   38,653       56,055       —         —        94,708   

Buildings

     14,321         58,554         257         (1,581     71,551   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   52,974       114,609       257       (1,581   166,259   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Property and equipment insured as of December 31, 2012 and 2013, are as follows:

 

         Insurance coverage    

Insurance company

Type

  

Assets insured

  2012     2013    
         (In millions of Korean won)      

General property insurance

   Buildings(1)   1,138,216      1,027,420     

Samsung Fire & Marine Insurance Co., Ltd. and others

  

Leasehold improvements

    117,600        121,188     
  

Equipment and vehicles and others

    142,828        139,544     
    

 

 

   

 

 

   

Total

  1,398,644      1,288,152     
    

 

 

   

 

 

   

 

(1) 

Buildings include office buildings, investment properties and assets held for sale.

 

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15. Intangible Assets

The details of intangible assets as of December 31, 2012 and 2013, are as follows:

 

     2012  
     Acquisition
cost
     Accumulated
amortization
    Accumulated
impairment
losses
    Carrying
Amount
 
     (In millions of Korean won)  

Goodwill

   244,755       —        (35,157   209,598   

Other intangible assets

     786,063         (484,685     (17,845     283,533   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total

   1,030,818       (484,685   (53,002   493,131   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

     2013  
     Acquisition
cost
     Accumulated
amortization
    Accumulated
impairment
losses
    Carrying
Amount
 
     (In millions of Korean won)  

Goodwill

   252,098       —        (46,533   205,565   

Other intangible assets

     851,406         (590,550     (23,217     237,639   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total

   1,103,504       (590,550   (69,750   443,204   
  

 

 

    

 

 

   

 

 

   

 

 

 

The details of goodwill as of December 31, 2012 and 2013, are as follows:

 

     2012      2013  
     Acquisition
cost
     Carrying
amount
     Acquisition
cost
     Carrying
amount
 
     (In millions of Korean won)  

Housing & Commercial Bank

   65,288       65,288       65,288       65,288   

KB Cambodia Bank

     1,202         1,202         1,202         1,202   

KB Investment Securities

     70,265         70,265         70,265         58,889   

KB Savings Bank Co., Ltd

     108,000         72,843         108,000         72,843   

Yehansoul Savings Bank Co., Ltd

     —           —           7,343         7,343   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   244,755       209,598       252,098       205,565   
  

 

 

    

 

 

    

 

 

    

 

 

 

The changes in accumulated impairment losses of goodwill for the years ended December 31, 2012 and 2013, are as follows:

 

2012  
Beginning      Impairment      Others      Ending  
(In millions of Korean won)         
—         35,157       —         35,157   

 

2013  
Beginning      Impairment      Others      Ending  
(In millions of Korean won)         
35,157       11,376       —         46,533   

 

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The details of allocating goodwill to cash-generating units and related information for impairment testing as of December 31, 2013, are as follows:

 

    Housing & Commercial
Bank
                         
  Retail
Banking
    Corporate
Banking
    KB
Cambodia
Bank
    KB
Investment
Securities
    KB Savings
Bank Co., Ltd.
and Yehansoul
Savings Bank
Co., Ltd.
    Total  
    (In millions of Korean won)  

Carrying amounts

  49,315      15,973      1,202      58,889      80,186      205,565   

Recoverable amount exceeded carrying amount

    40,254        2,814,955        21,506        —          730        2,877,445   

Discount rate (%)

    13.27        13.04        26.25        14.65        13.94     

Permanent growth rate (%)

    3.00        3.00        3.40        3.00        2.00     

Goodwill is allocated to cash-generating units, based on management’s analysis, that are expected to benefit from the synergies of the combination for impairment testing, and cash-generating units consist of an operating segment or units which are not larger than an operating segment. The Group recognized the amount of ₩65,288 million related to goodwill acquired in the merger of Housing & Commercial Bank. Of those respective amounts, the amounts of ₩49,315 million and ₩15,973 million were allocated to the Retail Banking and Corporate Banking, respectively. Cash-generating units to which goodwill has been allocated is tested for impairment annually, and whenever there is an indication that the unit may be impaired, by comparing the carrying amount of the unit, including the goodwill, with the recoverable amount of the unit.

The recoverable amount of a cash-generating unit is measured at the higher of its fair value less costs to sell and its value in use. The fair value less costs to sell is the amount obtainable from the sale in an arm’s length transaction between knowledgeable, willing parties, less the costs of disposal. If it is difficult to measure the amount obtainable from the sale, the Group measures the fair value less costs to sell by reflecting the characteristics of the measured cash-generating unit. If it is not possible to obtain reliable information to measure the fair value less costs to sell, the Group uses the asset’s value in use as its recoverable amount. Value in use is the present value of the future cash flows expected to be derived from an asset or cash-generating unit. The projections of the future cash flows are based on the most recent financial budget approved by management and generally cover a period of five years. The future cash flows after projection period are estimated on the assumption that the future cash flows will increase by 3% for Retail Banking, Corporate Banking, KB Investment Securities, and 3.4% for KB Cambodia Bank and 2.0% for KB Savings Bank Co., Ltd. and Yehansoul Savings Bank Co., Ltd. for every year. The key assumptions used for the estimation of the future cash flows are the market size and the Group’s market share. The discount rate is a pre-tax rate that reflects assumptions regarding risk-free interest rate, market risk premium and the risks specific to the asset for which the future cash flow estimates have not been adjusted.

The details of intangible assets, excluding goodwill, as of December 31, 2012 and 2013, are as follows:

 

     2012  
     Acquisition
cost
     Accumulated
amortization
    Accumulated
impairment
losses
    Carrying
amount
 
     (In millions of Korean won)  

Industrial property rights

   1,436       (1,018   —        418   

Software

     576,056         (408,024     —          168,032   

Other intangible assets

     185,158         (59,319     (17,845     107,994   

Finance leases assets

     23,413         (16,324     —          7,089   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total

   786,063       (484,685   (17,845   283,533   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     2013  
     Acquisition
cost
     Accumulated
amortization
    Accumulated
impairment
losses
    Carrying
amount
 
     (In millions of Korean won)  

Industrial property rights

   1,405       (936   —        469   

Software

     614,124         (500,327     —          113,797   

Other intangible assets

     206,427         (67,892     (23,217     115,318   

Finance leases assets

     29,450         (21,395     —          8,055   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total

   851,406       (590,550   (23,217   237,639   
  

 

 

    

 

 

   

 

 

   

 

 

 

The changes in intangible assets, excluding goodwill, for the years ended December 31, 2012 and 2013, are as follows:

 

    2012  
    Beginning     Acquisition     Disposal     Transfer     Amortization(1)     Others     Ending  
    (In millions of Korean won)  

Industrial property rights

  106      429      —        —        (102   (15   418   

Software

    216,318        52,576        (280     —          (100,578     (4     168,032   

Other intangible assets(2)

    100,392        24,541        (3,946     —          (7,811     (5,182     107,994   

Finance leases assets

    8,416        4,353        —          —          (5,680     —          7,089   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  325,232      81,899      (4,226   —        (114,171   (5,201   283,533   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    2013  
    Beginning     Acquisition     Disposal     Transfer     Amortization(1)     Others     Ending  
    (In millions of Korean won)  

Industrial property rights

  418      190      —        —        (137   (2   469   

Software

    168,032        33,649        —          —          (87,078     (806     113,797   

Other intangible assets(2)

    107,994        34,252        (5,177     38        (9,122     (12,667     115,318   

Finance leases assets

    7,089        6,036        —          —          (5,070     —          8,055   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  283,533      74,127      (5,177   38      (101,407   (13,475   237,639   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Including ₩45 million and ₩31million recorded in other operating expenses in the statements of comprehensive income for the years ended December 31, 2012 and 2013.

(2)

Membership rights of other intangible assets with indefinite useful lives recognized impairment losses because their recoverable amount is lower than their carrying amount.

The changes in accumulated impairment losses on intangible assets, excluding goodwill, for the years ended December 31, 2012 and 2013, are as follows:

 

    2012  
    Beginning     Impairment     Reversal     Disposal
and
others
    Ending  
    (In millions of Korean won)  

Accumulated impairment losses on intangible assets

  (13,926   (5,166   72      1,175      (17,845
    2013  
    Beginning     Impairment     Reversal     Disposal
and
others
    Ending  
    (In millions of Korean won)  

Accumulated impairment losses on intangible assets

  (17,845   (5,763   24      367      (23,217

 

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16. Deferred income tax assets and liabilities

The details of deferred income tax assets and liabilities as of December 31, 2012 and 2013, are as follows:

 

     2012  
     Assets     Liabilities     Net amount  
     (In millions of Korean won)  

Other provisions

   139,412      (57   139,355   

Allowances for loan losses

     1,144        (2,578     (1,434

Impairment losses on property and equipment

     2,111        —          2,111   

Interest on equity index-linked deposits

     722        —          722   

Share-based payments

     6,191        —          6,191   

Provisions for guarantees

     50,398        —          50,398   

Losses(gains) from valuation on derivative financial instruments

     1,593        (39,501     (37,908

Present value discount

     2,337        (7,081     (4,744

Losses(gains) from fair value hedged item

     30,802        —          30,802   

Accrued interest

     —          (80,459     (80,459

Deferred loan origination fees and costs

     8,745        (94,142     (85,397

Gains from revaluation

     —          (276,421     (276,421

Investments in subsidiaries and others

     49,128        (57,388     (8,260

Derivative linked securities

     161,642        (160,131     1,511   

Others

     464,989        (337,327     127,662   
  

 

 

   

 

 

   

 

 

 

Sub-total

     919,214        (1,055,085     (135,871

Offsetting of deferred income tax assets and liabilities

     (900,782     900,782        —     
  

 

 

   

 

 

   

 

 

 

Total

   18,432      (154,303   (135,871
  

 

 

   

 

 

   

 

 

 

 

     2013  
     Assets     Liabilities     Net amount  
     (In millions of Korean won)  

Other provisions

   113,685      —        113,685   

Allowances for loan losses

     171        (2,118     (1,947

Impairment losses on property and equipment

     2,873        —          2,873   

Interest on equity index-linked deposits

     340        —          340   

Share-based payments

     8,512        —          8,512   

Provisions for guarantees

     50,463        —          50,463   

Losses(gains) from valuation on derivative financial instruments

     1,045        (15,119     (14,074

Present value discount

     2,554        (6,812     (4,258

Losses(gains) from fair value hedged item

     16,670        (111     16,559   

Accrued interest

     —          (79,656     (79,656

Deferred loan origination fees and costs

     13,263        (97,532     (84,269

Gains from revaluation

     —          (276,057     (276,057

Investments in subsidiaries and others

     74,324        (63,407     10,917   

Derivative linked securities

     265,477        (264,024     1,453   

Others

     546,499        (337,434     209,065   
  

 

 

   

 

 

   

 

 

 

Sub-total

     1,095,876        (1,142,270     (46,394

Offsetting of deferred income tax assets and liabilities

     (1,080,454     1,080,454        —     
  

 

 

   

 

 

   

 

 

 

Total

   15,422      (61,816   (46,394
  

 

 

   

 

 

   

 

 

 

 

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Unrecognized deferred income tax assets

No deferred income tax assets have been recognized for the deductible temporary difference of ₩603,097 million associated with investments in subsidiaries and others as of December 31, 2013, because it is not probable that the temporary differences will be reversed in the foreseeable future.

No deferred income tax assets have been recognized for deductible temporary differences of ₩250 million, ₩80,204 million and ₩94,786 million associated with loss on other provisions, SPE repurchase and others, respectively, as of December 31, 2013, due to the uncertainty that these will be realized in the future.

Unrecognized deferred income tax liabilities

No deferred income tax liabilities have been recognized for the taxable temporary difference of ₩118,749 million associated with investment in subsidiaries and associates as of December 31, 2013, due to the following reasons:

 

   

The Group is able to control the timing of the reversal of the temporary difference.

 

   

It is probable that the temporary difference will not be reversed in the foreseeable future.

No deferred income tax liabilities have been recognized as of December 31, 2013, for the taxable temporary difference of ₩65,288 million arising from the initial recognition of goodwill from the merger of Housing and Commercial Bank.

The changes in cumulative temporary differences for the years ended December 31, 2012 and 2013, are as follows:

 

    2012  
    Beginning     Decrease     Increase      Ending  
    (In millions of Korean won)  

Deductible temporary differences

        

Losses(gains) from fair value hedged item

  109,596      109,596      127,281       127,281   

Other provisions

    470,507        430,917        537,409         576,999   

Allowances for loan losses

    827        149        4,049         4,727   

Impairment losses on property and equipment

    12,666        12,666        8,723         8,723   

Deferred loan origination fees and costs

    204        204        36,136         36,136   

Interest on equity index-linked deposits

    7,378        7,378        2,985         2,985   

Share-based payments

    19,359        19,359        25,591         25,591   

Provisions for guarantees

    311,263        311,263        208,255         208,255   

Gains(losses) from valuation on derivative financial instruments

    6,548        6,548        6,581         6,581   

Present value discount

    15,579        15,579        9,655         9,655   

Loss on SPE repurchase

    80,204        —          —           80,204   

Investments in subsidiaries and others

    3,401,419        917,955        204,158         2,687,622   

Derivative securities

    1,837,877        1,837,877        667,942         667,942   

Others

    1,826,081        1,120,250        1,298,705         2,004,536   
 

 

 

   

 

 

   

 

 

    

 

 

 

Sub-total

    8,099,508        4,789,741        3,137,470         6,447,237   
 

 

 

   

 

 

   

 

 

    

 

 

 

Unrecognized deferred income tax assets:

        

Share-based payments

    2,546             10   

Other provisions

    365             817   

Loss on SPE repurchase

    80,204             80,204   

Investments in subsidiaries and others

    3,299,083             2,492,775   

Others

    88,939             87,342   
 

 

 

        

 

 

 

Total

    4,628,371             3,786,089   

Tax rate (%)

    24.2             24.2   
 

 

 

        

 

 

 

Total deferred income tax assets from deductible temporary differences

  1,128,914           919,214   
 

 

 

        

 

 

 

 

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Table of Contents
     2012  
     Beginning     Decrease     Increase     Ending  
     (In millions of Korean won)  

Taxable temporary differences

        

Accrued interest

   (381,276   (287,013   (244,863   (339,126

Allowances for loans losses

     (10,636     —          (18     (10,654

Deferred loan origination fees and costs

     (400,199     (400,199     (389,017     (389,017

Gains(losses) from valuation on derivative financial instruments

     (452,200     (452,200     (163,225     (163,225

Present value discount

     (57,287     (25,102     —          (32,185

Goodwill

     (65,288     —          —          (65,288

Gains on revaluation

     (1,142,581     (347     —          (1,142,234

Investments in subsidiaries and others

     (5,345,703     (562     (614,349     (5,959,490

Derivative securities

     (1,846,433     (1,846,433     (661,700     (661,700

Others

     (1,144,976     (187,505     (350,246     (1,307,717
  

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

     (10,846,579     (3,199,361     (2,423,418     (10,070,636
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrecognized deferred income tax assets:

        

Goodwill

     (65,288         (65,288

Investments in subsidiaries and others

     (53,293         (83,745
  

 

 

       

 

 

 

Total

     (10,727,998         (9,921,603

Tax rate (%)

     24.2            24.2   
  

 

 

       

 

 

 

Total deferred income tax assets from deductible temporary differences

   (1,352,279       (1,055,085
  

 

 

       

 

 

 

 

     2013  
     Beginning      Decrease      Increase      Ending  
     (In millions of Korean won)  

Deductible temporary differences

           

Losses(gains) from fair value hedged item

   127,281       127,281       68,884       68,884   

Other provisions

     576,999         553,376         446,706         470,329   

Allowances for loan losses

     4,727         4,221         199         705   

Impairment losses on property and equipment

     8,723         8,723         11,873         11,873   

Deferred loan origination fees and costs

     36,136         35,720         54,200         54,616   

Interest on equity index-linked deposits

     2,985         2,985         1,407         1,407   

Share-based payments

     25,591         25,591         35,174         35,174   

Provisions for guarantees

     208,255         208,255         208,524         208,524   

Gains(losses) from valuation on derivative financial instruments

     6,581         6,581         4,319         4,319   

Present value discount

     9,655         9,658         10,558         10,555   

Loss on SPE repurchase

     80,204         —           —           80,204   

Investments in subsidiaries and others

     2,687,622         2,099,827         302,836         890,631   

Derivative linked securities

     667,942         667,942         1,097,012         1,097,012   

Others

     2,004,536         947,787         1,300,751         2,357,500   
  

 

 

    

 

 

    

 

 

    

 

 

 

Sub-total

     6,447,237         4,697,947         3,542,443         5,291,733   
  

 

 

    

 

 

    

 

 

    

 

 

 

Unrecognized deferred income tax assets:

           

Share-based payments

     10               —     

Other provisions

     817               250   

Loss on SPE repurchase

     80,204               80,204   

Investments in subsidiaries and others

     2,492,775               603,097   

Others

     87,342               94,786   
  

 

 

          

 

 

 

Total

     3,786,089               4,513,396   

Tax rate (%)

     24.2               24.2   
  

 

 

          

 

 

 

Total deferred income tax assets from deductible temporary differences

   919,214             1,095,876   
  

 

 

          

 

 

 

 

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     2013  
     Beginning     Decrease     Increase     Ending  
     (In millions of Korean won)  

Taxable temporary differences

        

Losses(gains) from fair value hedged item

   —        —        (502   (502

Accrued interest

     (339,126     (220,320     (217,970     (336,776

Allowances for loans losses

     (10,654     (1,902     —          (8,752

Deferred loan origination fees and costs

     (389,017     (389,017     (403,026     (403,026

Gains(losses) from valuation on derivative financial instruments

     (163,225     (162,935     (62,287     (62,577

Present value discount

     (32,185     (1,221     —          (30,964

Goodwill

     (65,288     —          —          (65,288

Gains on revaluation

     (1,142,234     (1,504     —          (1,140,730

Investments in subsidiaries and others

     (5,959,490     (5,644,900     (53,127     (367,717

Derivative linked securities

     (661,700     (661,700     (1,091,009     (1,091,009

Others

     (1,307,717     (581,961     (660,956     (1,386,712
  

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

     (10,070,636     (7,665,460     (2,488,877     (4,894,053
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrecognized deferred income tax assets:

        

Goodwill

     (65,288         (65,288

Investments in subsidiaries and others

     (83,745         (118,749
  

 

 

       

 

 

 

Total

     (9,921,603         (4,710,016

Tax rate (%)

     24.2            24.2   
  

 

 

       

 

 

 

Total deferred income tax assets from deductible temporary differences

   (1,055,085       (1,142,270
  

 

 

       

 

 

 

17. Assets held for sale

The details of assets held for sale as of December 31, 2012 and 2013, are as follows:

 

     2012  
     Acquisition  cost(1)      Accumulated
impairment
    Carrying
amount
     Fair value less
costs to sell
 
     (In millions of Korean won)  

Buildings

   5,288       (2,613   2,675       2,675   

Land

     35,883         (3,146     32,737         32,737   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   41,171       (5,759   35,412       35,412   
  

 

 

    

 

 

   

 

 

    

 

 

 

 

     2013  
     Acquisition  cost(1)      Accumulated
impairment
    Carrying
amount
     Fair value less
costs to sell
 
     (In millions of Korean won)  

Buildings

   39,777       (18,330   21,447       21,447   

Land

     21,380         (5,109     16,271         16,271   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   61,157       (23,439   37,718       37,718   
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1)

Acquisition cost of buildings held for sale is net of accumulated depreciation.

 

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The valuation technique and input variables that are used to measure the fair value of assets held for sale as of December 31, 2013, are as follows:

 

    2013
    Fair value    

Valuation technique(1)

  Unobservable input(2)   Range of
unobservable inputs
(%)
 

Relationship of
unobservable

inputs to fair

value

  20,927     

Market comparison approach model

  Adjustment index   -2.98~2.72  

Fair value increases as the adjustment index rises.

      Adjustment ratio   -20~0  

Fair value decreases as the absolute value of adjustment index rises.

Land and buildings

 

 

16,791

  

 

Market comparison approach model

 

Unit price per area
of exclusive
possession,
Time point
adjustment,
Individual
factor and
others

 

Unit price per area
of exclusive
possession:
About ₩6.9
million

Time point
adjustment:
0.98862

Individual factor:
0.594

 

Fair value increases as the unit price per area of exclusive possess and others rise.

 

 

 

         

Total

  37,718           
 

 

 

         

 

(1) 

The Group adjusted the appraisal value by the adjustment ratio in the event the public sale is unsuccessful.

(2) 

Adjustment index is calculated using the real estate index or the producer price index, or land price volatility.

The fair values of assets held for sale were measured by qualified independent appraisers with experience in valuing similar properties in the same area. In addition, per the fair value hierarchy on Note 6.1, the fair value hierarchy of all investment properties has been categorized and classified as Level 3.

The changes in accumulated impairment losses of assets held for sale for the years ended December 31, 2012 and 2013, are as follows:

 

2012  
Beginning      Provision     Reversal      Others      Ending  
(In millions of Korean won)  
(6,247)       (5,708   —         6,196       (5,759

 

2013  
Beginning      Provision     Reversal      Others      Ending  
(In millions of Korean won)  
(5,759)       (22,365   —         4,685       (23,439

As of December 31, 2013, assets held for sale consist of eleven real estates of closed offices and one real estate acquired through execution of security right, which the management of the Group was committed to a plan to sell, but not sold by December 31, 2013. As of December 31, 2013, three assets out of above assets held for sale are under negotiation for sale and the remaining nine assets are also being actively marketed.

 

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18. Other Assets

The details of other assets as of December 31, 2012 and 2013, are as follows:

 

     2012     2013  
     (In millions of Korean won)  

Other financial assets

    

Other receivables

   3,234,195      3,494,745   

Accrued income

     1,084,570        1,018,907   

Guarantee deposits

     1,369,647        1,395,359   

Domestic exchange settlement debits

     2,239,607        735,807   

Others

     232,524        188,540   

Allowances for loan losses

     (590,110     (580,651

Present value discount

     (837     (1,028
  

 

 

   

 

 

 

Sub-total

     7,569,596        6,251,679   
  

 

 

   

 

 

 

Other non-financial assets

    

Other receivables

     32,396        663   

Prepaid expenses

     266,727        397,321   

Guarantee deposits

     4,189        3,941   

Insurance assets

     155,676        157,154   

Separate account assets

     655,040        696,909   

Others

     84,683        76,798   

Allowances on other asset

     (7,988     (16,402
  

 

 

   

 

 

 

Sub-total

     1,190,723        1,316,384   
  

 

 

   

 

 

 

Total

   8,760,319      7,568,063   
  

 

 

   

 

 

 

The changes in allowances for loan losses on other assets for the years ended December 31, 2012 and 2013, are as follows:

 

     2012  
     Other financial
assets
    Other non-financial
assets
    Total  
     (In millions of Korean won)  

Beginning

   353,422      8,339      361,761   

Written-off

     (30,604     (4,439     (35,043

Provision

     46,125        4,088        50,213   

Others

     221,167        —          221,167   
  

 

 

   

 

 

   

 

 

 

Ending

   590,110      7,988      598,098   
  

 

 

   

 

 

   

 

 

 

 

     2013  
     Other financial
assets
    Other non-financial
assets
    Total  
     (In millions of Korean won)  

Beginning

   590,110      7,988      598,098   

Written-off

     (37,382     (6,715     (44,097

Provision

     29,229        15,129        44,358   

Others

     (1,306     —          (1,306
  

 

 

   

 

 

   

 

 

 

Ending

   580,651      16,402      597,053   
  

 

 

   

 

 

   

 

 

 

 

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19. Financial liabilities at fair value through profit or loss

The details of financial liabilities at fair value through profit or loss as of December 31, 2012 and 2013, are as follows:

 

     2012      2013  
     (In millions of Korean won)  

Financial liabilities held for trading

     

Securities sold

   1,342,119       196,570   

Other

     39,878         40,067   
  

 

 

    

 

 

 

Sub-total

     1,381,997         236,637   
  

 

 

    

 

 

 

Financial liabilities designated at fair value through profit or loss

     

Derivative linked securities

     469,138         878,565   
  

 

 

    

 

 

 

Sub-total

     469,138         878,565   
  

 

 

    

 

 

 

Total financial liabilities at fair value through profit or loss

   1,851,135       1,115,202   
  

 

 

    

 

 

 

The details of credit risk of financial liabilities designated at fair value through profit or loss as of December 31, 2012 and 2013, are as follows:

 

     2012     2013  
     (In millions of Korean won)  

Financial liabilities designated at fair value through profit or loss

   469,138      878,565   

Changes in fair value resulting from changes in the credit risk

     3,812        (4,032

Accumulated changes in fair value resulting from changes in the credit risk

     (5,630     (9,662

 

20. Deposits

Deposits as of December 31, 2012 and 2013, are as follows:

 

     2012     2013  
     (In millions of Korean won)  

Deposits

   197,346,208      200,882,064   

Deferred financing costs

     (3     —     
  

 

 

   

 

 

 

Total

   197,346,205      200,882,064   
  

 

 

   

 

 

 

 

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The details of deposits as of December 31, 2012 and 2013, are as follows:

 

     2012      2013  

Demand deposits

     

Demand deposits in Korean won

     

Checking deposits

   116,417       122,296   

Household checking deposits

     434,814         467,229   

Special deposits

     3,093,865         2,706,609   

Ordinary deposits

     21,468,422         24,533,701   

Public fund deposits

     68,600         75,127   

Treasury deposits

     5,256         5,148   

General savings deposits

     24,668,545         28,077,274   

Corporate savings deposits

     10,504,790         10,715,746   

Nonresident’s deposit in Korean won

     31,614         32,355   

Nonresident’s free deposit in Korean won

     2,818         15,001   

Others

     186,193         163,262   
  

 

 

    

 

 

 

Sub-total

     60,581,334         66,913,748   
  

 

 

    

 

 

 

Demand deposits in foreign currencies

     

Checking deposits

     98,478         251,072   

Ordinary deposits

     1,809,712         2,461,685   

Special deposits

     1,316         5,325   

Others

     9,851         14,142   
  

 

 

    

 

 

 

Sub-total

     1,919,357         2,732,224   
  

 

 

    

 

 

 

Total demand deposits

     62,500,691         69,645,972   
  

 

 

    

 

 

 

Time deposits

     

Time deposits in Korean won

     

Time deposits

     114,496,449         108,216,861   

Installment savings deposits

     7,088,988         11,097,205   

Good-sum formation savings

     33,586         425,090   

Nonresident’s deposit in Korean won

     222,586         186,966   

Workers’ savings for housing

     1,692         1,543   

Nonresident’s free deposit in Korean won

     92,011         41,085   

Long-term housing savings deposits

     3,083,602         2,061,129   

Long-term savings for households

     206         190   

Preferential savings deposits for workers

     323         245   

Mutual installment deposits

     1,143,414         1,478,299   

Mutual installment for housing

     1,005,752         853,392   

Trust deposits

     2,944,666         3,093,949   
  

 

 

    

 

 

 

Sub-total

     130,113,275         127,455,954   
  

 

 

    

 

 

 

Time deposits in foreign currencies

     

Time deposits

     2,954,348         2,082,865   

Installment savings deposits

     2,131         4,035   

Others

     23,693         68,960   
  

 

 

    

 

 

 

Sub-total

     2,980,172         2,155,860   
  

 

 

    

 

 

 

Total time deposits

     133,093,447         129,611,814   
  

 

 

    

 

 

 

Certificates of deposits

     1,752,067         1,624,278   
  

 

 

    

 

 

 

Total deposits

   197,346,205       200,882,064   
  

 

 

    

 

 

 

 

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21. Debts

The details of debts as of December 31, 2012 and 2013, consist of:

 

     2012      2013  
     (In millions of Korean won)  

Borrowings

   12,274,501       10,767,737   

Bonds sold under repurchase agreements and others

     1,094,031         685,626   

Call money

     2,596,926         2,647,968   
  

 

 

    

 

 

 

Total

   15,965,458       14,101,331   
  

 

 

    

 

 

 

 

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The details of borrowings as of December 31, 2012 and 2013, are as follows:

 

         

Lender

   Annual
interest rate
(%)
   2012      2013  
                    (In millions of Korean won)  

Borrowings in Korean won

   Borrowings from the Bank of Korea    Bank of Korea    0.50~1.00    781,787       557,998   
   Borrowings from the government    KEMCO and others    0.00~5.00      626,059         626,593   
  

Borrowings from banking institutions

  

Industrial Bank of Korea and others

   2.12~3.50      103,398         61,877   
  

Borrowings from non-banking financial institutions

  

The Korea Development Bank and others

   1.17~2.70      268,491         142,511   
  

Other borrowings

  

The Korea Finance Corporation and others

   0.00~5.30      3,716,879         3,527,292   
           

 

 

    

 

 

 
  

Sub-total

           5,496,614         4,916,271   
           

 

 

    

 

 

 

Borrowings in foreign currencies

   Due to banks   

Deutsche Bank Trust Company America and others

   0.00~0.55      52,186         158,180   
  

Borrowings from banking institutions

  

Sumitomo Mitsui Banking Corp. and others

   0.27~4.45      4,312,614         3,831,929   
  

Other borrowings

  

The Korea Finance Corporation

   1.01~1.38      5,195         3,166   
   Other borrowings   

JP Morgan Chase Bank N.A. and others

   —        2,407,892         1,858,191   
           

 

 

    

 

 

 
  

Sub-total

           6,777,887         5,851,466   
           

 

 

    

 

 

 
  

Total

         12,274,501       10,767,737   
           

 

 

    

 

 

 

 

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The details of bonds sold under repurchase agreements and others as of December 31, 2012 and 2013, are as follows:

 

    

Lenders

   Annual
interest rate
(%)
     2012      2013  
                 (In millions of Korean won)  

Bonds sold under repurchase agreements

  

Individuals, Groups, Corporations

     0.74~3.69       1,003,348       608,156   

Bills sold

  

Counter sale

     1.60~2.70         90,683         77,470   
        

 

 

    

 

 

 

Total

      1,094,031       685,626   
        

 

 

    

 

 

 

The details of call money as of December 31, 2012 and 2013, are as follows:

 

    

Lenders

   Annual
interest rate
(%)
     2012      2013  
                 (In millions of Korean won)  

Call money in Korean won

  

The Korea Development Bank and others

     2.32~2.62       2,018,100       1,649,400   

Call money in foreign currencies

  

Central bank Uzbekistan and others

     0.17~5.23         578,826         998,568   
        

 

 

    

 

 

 

Total

      2,596,926       2,647,968   
        

 

 

    

 

 

 

Call money and borrowings from financial institutions as of December 31, 2012 and 2013, are as follows:

 

     2012  
     Bank of
Korea
     Other Banks      Others      Total  
     (In millions of Korean won)  

Call money

   —         1,431,826       1,165,100       2,596,926   

Borrowings

     781,787         6,546,839         1,438,969         8,767,595   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   781,787       7,978,665       2,604,069       11,364,521   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     2013  
     Bank of
Korea
     Other Banks      Others      Total  
     (In millions of Korean won)  

Call money

   1,001       1,970,567       676,400       2,647,968   

Borrowings

     557,998         5,901,018         630,733         7,089,749   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   558,999       7,871,585       1,307,133       9,737,717   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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22. Debentures

The details of debentures as of December 31, 2012 and 2013, are as follows:

 

     Annual
interest  rate
(%)
   2012     2013  
          (In millions of Korean won)  

Debentures in Korean won

       

Hybrid capital instrument

   —      100,000      —     

Structured debentures

   0.40~8.62      1,699,238        1,499,238   

Subordinated fixed rate debentures in Korean won

   3.08~7.70      7,921,510        8,648,474   

Fixed rate debentures in Korean won

   2.62~5.04      10,145,218        12,057,142   

Floating rate debentures in Korean won

   2.82~10.39      1,169,158        1,505,858   
     

 

 

   

 

 

 

Sub-total

        21,035,124        23,710,712   
     

 

 

   

 

 

 

Fair value adjustments on fair value hedged financial debentures in Korean won

       

Fair value adjustments on valuation of fair value hedged items (current period portion)

        36,417        (31,577

Fair value adjustments on valuation of fair value hedged items (prior year portion)

        52,572        81,369   
     

 

 

   

 

 

 

Sub-total

        88,989        49,792   
     

 

 

   

 

 

 

Discount or premium on debentures in Korean won

       

Discount on debentures

        (15,647     (16,615
     

 

 

   

 

 

 

Sub-total

        21,108,466        23,743,889   
     

 

 

   

 

 

 

 

Debentures in foreign currencies

       

Floating rate debentures

   1.11 ~ 1.64      759,783        1,143,360   

Fixed rate debentures

   0.40 ~ 7.25      2,553,814        2,335,059   
     

 

 

   

 

 

 

Sub-total

        3,313,597        3,478,419   
     

 

 

   

 

 

 

Fair value adjustments on fair value hedged debentures in foreign currencies

       

Fair value adjustments on valuation of fair value hedged items (current period portion)

        (68,212     (42,195

Fair value adjustments on valuation of fair value hedged items (prior year portion)

        (69,060     (130,011
     

 

 

   

 

 

 

Sub-total

        (137,272     (172,206
     

 

 

   

 

 

 

Discount or premium on debentures in foreign currencies

       

Discount on debentures

        (14,579     (10,568
     

 

 

   

 

 

 

Sub-total

        3,161,746        3,295,645   
     

 

 

   

 

 

 

Total

      24,270,212      27,039,534   
     

 

 

   

 

 

 

 

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The changes in debentures based on face value for the years ended December 31, 2012 and 2013, are as follows:

 

     2012  
     Beginning      Issues      Repayments     Others     Ending  
     (In millions of Korean won)  

Debentures in Korean won

            

Hybrid capital instrument

   100,000       —         —        —        100,000   

Structured debentures

     3,424,238         310,000         (2,035,000     —          1,699,238   

Subordinated fixed rate debentures in Korean won

     7,995,571         1,824,730         (1,898,791     —          7,921,510   

Fixed rate debentures in Korean won

     10,791,612         6,188,093         (6,834,487     —          10,145,218   

Floating rate debentures in Korean won

     904,258         865,900         (601,000     —          1,169,158   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Sub-total

     23,215,679         9,188,723         (11,369,278     —          21,035,124   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Debentures in foreign currencies

            

Floating rate debentures

     1,309,606         198,478         (682,622     (65,679     759,783   

Fixed rate debentures

     2,705,167         1,034,162         (1,042,992     (142,523     2,553,814   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Sub-total

     4,014,773         1,232,640         (1,725,614     (208,202     3,313,597   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total

   27,230,452       10,421,363       (13,094,892   (208,202   24,348,721   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
     2013  
     Beginning      Issues      Repayments     Others     Ending  
     (In millions of Korean won)  

Debentures in Korean won

            

Hybrid capital instrument

   100,000       —         (100,000   —        —     

Structured debentures

     1,699,238         100,000         (300,000     —          1,499,238   

Subordinated fixed rate debentures in Korean won

     7,921,510         1,000,000         (248,286     (24,750     8,648,474   

Fixed rate debentures in Korean won

     10,145,218         7,716,400         (5,791,683     (12,793     12,057,142   

Floating rate debentures in Korean won

     1,169,158         760,600         (423,900     —          1,505,858   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Sub-total

     21,035,124         9,577,000         (6,863,869     (37,543     23,710,712   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Debentures in foreign currencies

            

Floating rate debentures

     759,783         537,850         (176,050     21,777        1,143,360   

Fixed rate debentures

     2,553,814         657,465         (772,364     (103,856     2,335,059   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Sub-total

     3,313,597         1,195,315         (948,414     (82,079     3,478,419   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total

   24,348,721       10,772,315       (7,812,283   (119,622   27,189,131   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

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23. Provisions

The details of provisions as of December 31, 2012 and 2013, are as follows:

 

             2012                      2013          
     (In millions of Korean won)  

Provisions for unused loan commitments

   236,026       226,110   

Provisions for acceptances and guarantees

     208,753         209,118   

Provisions for financial guarantee contracts

     7,383         2,699   

Provisions for asset retirement obligation

     65,226         76,608   

Other

     152,341         163,538   
  

 

 

    

 

 

 

Total

   669,729       678,073   
  

 

 

    

 

 

 

Provisions for unused loan commitments as of December 31, 2012 and 2013, are as follows:

 

     2012  
     Commitments
outstanding
     Provision      Ratio
(%)
 
     (In millions of Korean won)  

Corporate loan commitments

   40,770,994       106,025         0.26   

Retail loan commitments

     14,348,821         41,273         0.29   

Credit line on credit cards

     36,214,899         88,728         0.25   
  

 

 

    

 

 

    

 

 

 

Total

   91,334,714       236,026         0.26   
  

 

 

    

 

 

    

 

 

 

 

     2013  
     Commitments
outstanding
     Provision      Ratio
(%)
 
     (In millions of Korean won)  

Corporate loan commitments

   42,446,365       101,455         0.24   

Retail loan commitments

     13,976,426         38,385         0.27   

Credit line on credit cards

     37,112,333         86,270         0.23   
  

 

 

    

 

 

    

 

 

 

Total

   93,535,124       226,110         0.24   
  

 

 

    

 

 

    

 

 

 

Provisions for acceptances and guarantees as of December 31, 2012 and 2013, are as follows:

 

     2012  
     Acceptances and
guarantees
     Provision      Ratio
(%)
 
     (In millions of Korean won)  

Confirmed acceptances and guarantees in Korean won

   1,564,128       33,554         2.15   

Confirmed acceptances and guarantees in foreign currencies

     3,609,636         75,859         2.10   

Unconfirmed acceptances and guarantees

     4,244,517         99,340         2.34   
  

 

 

    

 

 

    

 

 

 

Total

   9,418,281       208,753         2.22   
  

 

 

    

 

 

    

 

 

 

 

     2013  
     Acceptances and
guarantees
     Provision      Ratio
(%)
 
     (In millions of Korean won)  

Confirmed acceptances and guarantees in Korean won

   1,231,569       42,604         3.46   

Confirmed acceptances and guarantees in foreign currencies

     4,532,036         96,077         2.12   

Unconfirmed acceptances and guarantees

     4,041,087         70,437         1.74   
  

 

 

    

 

 

    

 

 

 

Total

   9,804,692       209,118         2.13   
  

 

 

    

 

 

    

 

 

 

 

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The changes in provisions for unused loan commitments, acceptances and guarantees for the years ended December 31, 2012 and 2013, are as follows:

 

     2012  
     Provisions for
unused loan
commitments
    Provisions for
acceptances and
guarantees
    Total  
     (In millions of Korean won)  

Beginning

   259,427      311,502      570,929   

Effects of changes in foreign exchange rate

     (770     (10,219     (10,989

Provision(reversal)

     (22,631     (68,777     (91,408

Others

     —          (23,753     (23,753
  

 

 

   

 

 

   

 

 

 

Ending

   236,026      208,753      444,779   
  

 

 

   

 

 

   

 

 

 

 

     2013  
     Provisions for
unused loan
commitments
    Provisions for
acceptances and
guarantees
    Total  
     (In millions of Korean won)  

Beginning

   236,026      208,753      444,779   

Effects of changes in foreign exchange rate

     (164     (961     (1,125

Provision(reversal)

     (9,752     1,326        (8,426
  

 

 

   

 

 

   

 

 

 

Ending

   226,110      209,118      435,228   
  

 

 

   

 

 

   

 

 

 

The changes in provisions for financial guarantee contracts for the years ended December 31, 2012 and 2013, are as follows:

 

             2012                     2013          
     (In millions of Korean won)  

Beginning

   7,959      7,383   

Provision(reversal)

     (576     (4,684
  

 

 

   

 

 

 

Ending

   7,383      2,699   
  

 

 

   

 

 

 

The changes in provisions for asset retirement obligations for the years ended December 31, 2012 and 2013, are as follows:

 

             2012                     2013          
     (In millions of Korean won)  

Beginning

   60,059      65,226   

Provision

     4,115        3,972   

Reversal

     —          (226

Used

     (1,296     (2,475

Unwinding of discount

     2,483        2,203   

Effects of changes in discount rate

     (135     7,908   
  

 

 

   

 

 

 

Ending

   65,226      76,608   
  

 

 

   

 

 

 

Provisions for asset retirement obligations are the present value of estimated costs to be incurred for the restoration of the leased properties. Actual expenses are expected to be incurred at the end of each lease contract. Three-year historical data of expired leases were used to estimate the average lease period. Also, the average restoration expense based on actual three-year historical data and the three-year historical average inflation rate were used to estimate the present value of estimated costs.

 

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The details of other provisions as of December 31, 2012 and 2013, are as follows:

 

     2012      2013  
     (In millions of Korean won)  

Membership rewards program

   11,108       5,402   

Dormant accounts

     16,028         16,839   

Litigations

     21,215         23,455   

Others

     103,990         117,842   
  

 

 

    

 

 

 

Total

   152,341       163,538   
  

 

 

    

 

 

 

The changes in other provisions for the years ended December 31, 2012 and 2013, are as follows:

 

     2012  
     Membership
rewards
program
    Dormant
accounts
    Litigations     Others     Total  
     (In millions of Korean won)  

Beginning

   13,495      11,292      49,286      84,719      158,792   

Increase

     15,958        13,998        18,073        51,799        99,828   

Decrease

     (18,345     (9,262     (46,144     (32,528     (106,279
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending

   11,108      16,028      21,215      103,990      152,341   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2013  
     Membership
rewards
program
    Dormant
accounts
    Litigations     Others     Total  
     (In millions of Korean won)  

Beginning

   11,108      16,028      21,215      103,990      152,341   

Increase

     13,473        10,596        4,800        18,026        46,895   

Decrease

     (19,179     (9,785     (2,560     (4,174     (35,698
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending

   5,402      16,839      23,455      117,842      163,538   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

24. Net Defined benefit liabilities

Defined benefit plan

The Group operates defined benefit plans which have the following characteristics:

 

   

The Group has the obligation to pay the agreed benefits to all its current and former employees.

 

   

Actuarial risk (that benefits will cost more than expected) and investment risk fall, in substance, on the Group.

The defined benefit liability recognized in the statements of financial position is calculated annually by independent actuaries in accordance with actuarial valuation methods.

The defined benefit obligation is calculated using the Projected Unit Credit method (the ‘PUC’). Data used in the PUC such as interest rates, future salary increase rate, mortality rate and consumer price index are based on observable market data and historical data which are updated annually.

Actuarial assumptions may differ from actual results, due to changes in the market, economic trends and mortality trends which may impact defined benefit liabilities and future payments. Actuarial gains and losses arising from changes in actuarial assumptions are recognized in the period incurred through other comprehensive income (loss).

 

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The changes in the net defined benefit liabilities for the years ended December 31, 2012 and 2013, are as follows:

 

    2012  
    Present value of
defined benefit
obligation
    Fair value of plan
assets
    Net defined benefit
liabilities
 
    (In millions of Korean won)  

Beginning

  727,760      (600,323   127,437   

Current service cost

    154,552        —          154,552   

Interest cost (income)

    31,158        (25,785     5,373   

Past service cost

    12,855        —          12,855   

Any gain or loss on settlement

    (389     —          (389

Remeasurements

     

Actuarial gains and losses by changes in demographic assumptions

    (30,879     —          (30,879

Actuarial gains and losses by changes in financial assumptions

    51,321        —          51,321   

Actuarial gains and losses by experience adjustments

    20,741        —          20,741   

Return on plan assets (excluding amounts included in interest income)

    —          (1,243     (1,243

Contributions

    —          (248,656     (248,656

Payments from plans (settlement)

    (541     221        (320

Payments from plans (benefit payments)

    (17,253     17,253        —     

Payments from the Group

    (6,907     —          (6,907

Transfer in

    2,198        (1,944     254   

Transfers out

    (2,198     1,867        (331

Effect of exchange rate changes

    (85     —          (85
 

 

 

   

 

 

   

 

 

 

Ending

  942,333      (858,610   83,723   
 

 

 

   

 

 

   

 

 

 

 

    2013  
    Present value of
defined benefit
obligation
    Fair value of plan
assets
    Net defined benefit
liabilities
 
    (In millions of Korean won)  

Beginning

  942,333      (858,610   83,723   

Current service cost

    172,857        —          172,857   

Interest cost (income)

    33,282        (30,321     2,961   

Past service cost

    1,005        —          1,005   

Any gain or loss on settlement

    (4,244     —          (4,244

Remeasurements

     

Actuarial gains and losses by changes in demographic assumptions

    563        —          563   

Actuarial gains and losses by changes in financial assumptions

    (62,793     —          (62,793

Actuarial gains and losses by experience adjustments

    7,066        —          7,066   

Return on plan assets (excluding amounts included in interest income)

    —          1,096        1,096   

Contributions

    —          (132,870     (132,870

Payments from plans (settlement)

    (65,493     65,212        (281

Payments from plans (benefit payments)

    (34,814     34,772        (42

Payments from the Group

    (4,590     —          (4,590

Transfer in

    2,551        (2,315     236   

Transfers out

    (2,551     2,314        (237

Effect of exchange rate changes

    (94     —          (94

Business combination

    117        —          117   
 

 

 

   

 

 

   

 

 

 

Ending

  985,195      (920,722   64,473   
 

 

 

   

 

 

   

 

 

 

 

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The details of the net defined benefit liabilities as of December 31, 2012 and 2013, are as follows:

 

     2012     2013  
     (In millions of Korean won)  

Present value of defined benefit obligation

   942,333      985,195   

Fair value of plan assets

     (858,610     (920,722
  

 

 

   

 

 

 

Net Defined benefit liabilities

   83,723      64,473   
  

 

 

   

 

 

 

The details of post-employment benefits recognized in profit or loss as employee compensation and benefits for the years ended December 31, 2011, 2012 and 2013, are as follows:

 

     2011      2012     2013  
     (In millions of Korean won)  

Current service cost

   145,397       154,552      172,857   

Past service cost

     10,285         12,855        1,005   

Any gain or loss on settlement

     —           (389     (4,244

Net interest expenses of net defined benefit liabilities

     4,717         5,373        2,961   
  

 

 

    

 

 

   

 

 

 

Post-employment benefits(1)

   160,399       172,391      172,579   
  

 

 

    

 

 

   

 

 

 

 

(1) 

Post-employment benefits amounting to ₩739 million, ₩883 million and ₩1,471 million for the years ended December 31, 2011, 2012 and 2013, respectively, are recognized as other operating expense in the statements of comprehensive income.

Remeasurements of the net defined benefit liabilities recognized as other comprehensive income for the years ended December 31, 2011, 2012 and 2013, are as follows:

 

     2011     2012     2013  
     (In millions of Korean won)  

Remeasurements

      

Return on plan assets (excluding amounts included in interest income)

   (3,802   1,243      (1,096

Actuarial gains and losses

     (40,685     (41,184     55,165   

Income tax effects

     (12,338     9,669        (13,085
  

 

 

   

 

 

   

 

 

 

Remeasurements after income tax

   (32,149   (30,272   40,984   
  

 

 

   

 

 

   

 

 

 

Plan assets as of December 31, 2012 and 2013, are as follows:

 

     2012  
     Assets quoted
in an active
market
     Assets not
quoted in
an active
market
     Total  
     (In millions of Korean won)  

Cash and due from financial institutions

   —         858,610       858,610   

 

     2013  
     Assets quoted
in an active
market
     Assets not
quoted in
an active
market
     Total  
     (In millions of Korean won)  

Cash and due from financial institutions

   —         915,584       915,584   

Repurchase agreements

     —           5,138         5,138   
  

 

 

    

 

 

    

 

 

 

Total

   —         920,722       920,722   
  

 

 

    

 

 

    

 

 

 

 

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Key actuarial assumptions used as of December 31, 2012 and 2013, are as follows:

 

     2012    2013
     (In millions of Korean won)

Discount rate (%)

   3.00 ~ 3.64    2.90 ~ 4.00

Salary increase rate (%)

   0.00 ~ 8.90    0.00 ~ 8.90

Turnover (%)

   0.00 ~ 32.00    0.00 ~ 32.00

Mortality assumptions are based on the 7th experience-based mortality table (retirement pension) of Korea Insurance Development Institute of 2012.

The sensitivity of the defined benefit obligation to changes in the weighted principal assumptions as of December 31, 2013, is as follows:

 

     Changes in principal
assumption
     Effect on net defined benefit obligation
        Increase in principal
assumption
   Decrease in principal
assumption

Discount rate (%)

     0.5       5.02 decrease    5.41 increase

Salary increase rate (%)

     0.5       5.05 increase    4.81 decrease

Turnover (%)

     0.5       0.24 decrease    0.18 increase

The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. The sensitivity of the defined benefit obligation to changes in principal actuarial assumptions is calculated using the projected unit credit method, the same method applied when calculating the defined benefit obligations recognized on the statement of financial position.

Expected maturity analysis of undiscounted pension benefits as of December 31, 2013, is as follows:

 

    

Less than

1 year

   Between
1 and 2 years
     Between
2 and 5 years
     Between
5 and
10 years
     Over
10 years
     Total  
     (In millions of Korean won)  

Pension benefits

   ₩21,096      ₩58,558         ₩248,744         ₩782,831         ₩3,532,620         ₩4,643,849   

The weighted average duration of the defined benefit obligation is 1 ~ 14.4 years.

Expected contribution to plan assets for period post-December 31, 2013, is estimated to be approximately ₩180,618 million.

 

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25. Other liabilities

The details of other liabilities as of December 31, 2012 and 2013, are as follows:

 

     2012      2013  
     (In millions of Korean won)  

Other financial liabilities

     

Other payables

   4,327,788       4,582,344   

Prepaid card and debit card

     18,165         18,527   

Accrued expenses

     4,444,807         4,053,809   

Financial guarantee liabilities

     7,153         11,797   

Deposits for letter of guarantees and others

     114,171         108,786   

Domestic exchange settlement credits

     167,842         998,928   

Foreign exchanges settlement credits

     52,456         83,237   

Borrowings from other business account

     34,367         7,911   

Other payables to trust accounts

     2,009,396         2,423,675   

Liability Incurred by agency relationship

     499,249         532,157   

Account for agency businesses

     402,290         384,921   

Dividend payables

     489         485   

Other payables from factored receivables

     78,025         42,924   

Others

     29,740         13,413   
  

 

 

    

 

 

 

Sub-total

     12,185,938         13,262,914   
  

 

 

    

 

 

 

 

Other non-financial liabilities

     

Other payables

     28,712         44,982   

Unearned revenue

     117,135         123,033   

Accrued expenses

     222,920         191,513   

Deferred revenue on credit card points

     111,838         117,659   

Withholding taxes

     121,688         111,975   

Insurance liabilities

     4,837,166         5,599,043   

Separate account liabilities

     661,782         702,757   

Others

     40,561         82,353   
  

 

 

    

 

 

 

Sub-total

     6,141,802         6,973,315   
  

 

 

    

 

 

 

Total

   18,327,740       20,236,229   
  

 

 

    

 

 

 

26. Equity

26.1 Share capital

The details of outstanding shares of the Parent Company as of December 31, 2012 and 2013, are as follows:

 

     Ordinary shares  
     2012      2013  

Number of shares authorized

     1,000,000,000         1,000,000,000   

Number of shares

     386,351,693         386,351,693   

Par value per share

   5,000       5,000   

Share capital stock(1)

   1,931,758       1,931,758   

 

 

(1) 

In millions of Korean won.

 

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26.2 Capital surplus

The details of capital surplus as of December 31, 2012 and 2013, are as follows:

 

     2012     2013  
     (In millions of Korean won)  

Share premium

   12,226,596      12,226,596   

Loss on sale of treasury shares

     (568,544     (568,544

Other capital surplus

     4,182,248        4,196,553   
  

 

 

   

 

 

 

Total

   15,840,300      15,854,605   
  

 

 

   

 

 

 

26.3 Accumulated other comprehensive income

The details of accumulated other comprehensive income as of December 31, 2012 and 2013, are as follows:

 

     2012     2013  
     (In millions of Korean won)  

Remeasurements of net defined benefit liabilities

   (53,507   (12,523

Exchange differences on translating foreign operations

     (27,061     (29,433

Change in value of available-for-sale financial assets

     426,354        430,976   

Change in value of held-to-maturity financial assets

     (1,225     4,904   

Shares of other comprehensive income of associates

     (47,286     (57,097

Cash flow hedges

     (2,133     (515
  

 

 

   

 

 

 

Total

   295,142      336,312   
  

 

 

   

 

 

 

26.4 Retained earnings

The details of retained earnings as of December 31, 2012 and 2013, consist of:

 

     2012      2013  
     (In millions of Korean won)  

Legal reserves(1)

   124,014       188,638   

Voluntary reserves

     982,000         982,000   

Unappropriated retained earnings

     5,395,405         6,359,518   
  

 

 

    

 

 

 

Total

   6,501,419       7,530,156   
  

 

 

    

 

 

 

 

(1)

With respect to the allocation of net profit earned in a fiscal term, the Parent Company must set aside in its legal reserve an amount equal to at least 10% of its net income after tax as reported in the separate statement of comprehensive income each time it pays dividends on its net profits earned until its legal reserve reaches at least the aggregate amount of its share capital in accordance with Article 53 of the Financial Holding Company Act. The reserve is not available for the payment of cash dividends, but may be transferred to share capital, or used to reduce accumulated deficit.

 

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27. Net Interest Income

The details of interest income and interest expense for the years ended December 31, 2011, 2012 and 2013, are as follows:

 

             2011                      2012                      2013          
     (In millions of Korean won)  

Interest income

        

Due from financial institutions

   74,663       160,400       146,105   

Loans

     12,412,206         12,623,923         10,942,021   

Financial investments

        

Available-for-sale financial assets

     775,783         799,020         694,218   

Held-to-maturity financial assets

     693,605         626,763         574,586   
  

 

 

    

 

 

    

 

 

 

Sub-total

     13,956,257         14,210,106         12,356,930   
  

 

 

    

 

 

    

 

 

 

Interest expenses

        

Deposits

     4,944,615         5,450,781         4,279,153   

Debts

     398,802         400,000         364,499   

Debentures

     1,508,328         1,261,542         1,190,446   

Sub-total

     6,851,745         7,172,323         5,834,098   
  

 

 

    

 

 

    

 

 

 

Net interest income

   7,104,512       7,037,783       6,522,832   
  

 

 

    

 

 

    

 

 

 

Interest income recognized on impaired loans and financial investments amounts to ₩127,120 million (2012: ₩124,183 million, 2011: ₩121,221 million) and ₩569 million (2012: ₩200 million, 2011: ₩200 million), respectively, for the year ended December 31, 2011, 2012 and 2013.

 

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28. Net Fee and Commission income

The details of fee and commission income, and fee and commission expense for the years ended December 31, 2011, 2012 and 2013, are as follows:

 

             2011                      2012                      2013          
     (In millions of Korean won)  

Fee and commission income

        

Banking activity fees

   188,652       169,244       167,507   

Lending activity fees

     88,521         89,964         90,413   

Credit card related fees and commissions

     1,142,306         1,179,618         1,126,944   

Debit card related fees and commissions

     192,686         217,870         255,742   

Agent activity fees

     238,216         285,183         207,036   

Trust and other fiduciary fees

     165,772         148,672         160,521   

Fund management related fees

     75,699         81,477         93,494   

Guarantee fees

     34,181         33,594         34,173   

Foreign currency related fees

     114,722         108,611         102,047   

Commissions from transfer agent services

     211,776         174,829         177,793   

Other business account commission on consignment

     173,893         30,354         29,799   

Securities brokerage fees

     57,435         67,858         68,158   

Other

     145,895         166,602         143,738   
  

 

 

    

 

 

    

 

 

 

Sub-total

     2,829,754         2,753,876         2,657,365   
  

 

 

    

 

 

    

 

 

 

Fee and commission expense

        

Trading activity related fees(1)

     3,498         14,963         9,358   

Lending activity fees

     2,743         20,466         18,791   

Credit card related fees and commissions

     842,294         997,368         934,114   

Outsourcing related fees

     61,551         62,546         74,516   

Foreign currency related fees

     18,003         11,638         12,561   

Management fees of written-off loans

     6,331         3,284         4,065   

Other

     100,584         76,905         124,721   
  

 

 

    

 

 

    

 

 

 

Sub-total

     1,035,004         1,187,170         1,178,126   
  

 

 

    

 

 

    

 

 

 

Net fee and commission income

   1,794,750       1,566,706       1,479,239   
  

 

 

    

 

 

    

 

 

 

 

(1) 

The fees from financial assets/liabilities at fair value through profit or loss.

 

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29. Net gains or losses on financial assets/liabilities at fair value through profit or loss

29.1 Net gains or losses on financial instruments held for trading

Net gain or loss from financial instruments held for trading includes interest income, dividend income and gains or losses arising from changes in the fair values, sales and redemptions. The details for the years ended December 31, 2011, 2012 and 2013, are as follows:

 

     2011      2012      2013  
     (In millions of Korean won)  

Gains related to financial instruments held for trading

        

Financial assets held for trading

        

Debt securities

   284,225       462,456       340,601   

Equity securities

     70,345         117,103         109,698   
  

 

 

    

 

 

    

 

 

 

Sub Total

     354,570         579,559         450,299   
  

 

 

    

 

 

    

 

 

 

Derivatives held for trading

        

Interest rate

     970,825         948,426         1,090,262   

Currency

     4,194,484         2,718,568         2,524,173   

Stock or stock index

     365,123         685,454         218,509   

Credit

     1,107         —           —     

Commodity

     2,421         486         1,336   

Other

     3,775         20,668         20,825   
  

 

 

    

 

 

    

 

 

 

Sub Total

     5,537,735         4,373,602         3,855,105   
  

 

 

    

 

 

    

 

 

 

Financial liabilities held for trading

     48,483         69,866         95,382   
  

 

 

    

 

 

    

 

 

 

Other financial instruments

     1,046         48         70   
  

 

 

    

 

 

    

 

 

 

Total

   5,941,834       5,023,075       4,400,856   
  

 

 

    

 

 

    

 

 

 

Losses related to financial instruments held for trading

        

Financial assets held for trading

        

Debt securities

   76,661       72,078       118,362   

Equity securities

     96,571         70,852         81,733   
  

 

 

    

 

 

    

 

 

 

Sub-total

     173,232         142,930         200,095   
  

 

 

    

 

 

    

 

 

 

Derivatives held for trading

        

Interest rate

     1,011,068         962,738         1,076,647   

Currency

     3,308,219         2,274,799         2,007,454   

Stock or stock index

     305,610         665,037         224,019   

Credit

     848         —           —     

Commodity

     2,238         506         182   

Other

     3,260         14,651         2,343   
  

 

 

    

 

 

    

 

 

 

Sub Total

     4,631,243         3,917,731         3,310,645   
  

 

 

    

 

 

    

 

 

 

Financial liabilities held for trading

     107,786         113,929         110,114   
  

 

 

    

 

 

    

 

 

 

Other financial instruments

     816         35         29   
  

 

 

    

 

 

    

 

 

 

Total

   4,913,077       4,174,625       3,620,883   
  

 

 

    

 

 

    

 

 

 

Net gains or losses on financial instruments held for trading

   1,028,757       848,450       779,973   
  

 

 

    

 

 

    

 

 

 

 

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29.2 Net gains or losses on financial instruments designated at fair value through profit or loss

Net gain or loss from financial instruments designated at fair value through profit or loss includes interest income, dividend income and gains or losses arising from changes in the fair values, sales and redemptions. The details for the years ended December 31, 2011, 2012 and 2013, are as follows:

 

     2011      2012     2013  
     (In millions of Korean won)  

Gains related to financial instruments designated at fair value through profit or loss

       

Financial assets designated at fair value through profit or loss

   6,231       117,213      23,760   

Financial liabilities designated at fair value through profit or loss

     66,126         5,230        20,846   
  

 

 

    

 

 

   

 

 

 

Total

     72,357         122,443        44,606   
  

 

 

    

 

 

   

 

 

 

Losses related to financial instruments designated at fair value through profit or loss

       

Financial assets designated at fair value through profit or loss

     57,084         6,753        14,754   

Financial liabilities designated at fair value through profit or loss

     8,163         152,176        53,003   
  

 

 

    

 

 

   

 

 

 

Total

     65,247         158,929        67,757   
  

 

 

    

 

 

   

 

 

 

Net gains or losses on financial instruments designated at fair value through profit or loss

   7,110       (36,486   (23,151
  

 

 

    

 

 

   

 

 

 

 

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30. Other operating income and expenses

The details of other operating income and expenses for the years ended December 31, 2011, 2012 and 2013, are as follows:

 

     2011     2012     2013  
     (In millions of Korean won)  

Other operating income

      

Revenue related to available-for-sale financial assets

      

Gains on redemption of available-for-sale financial assets

   118      480      867   

Gains on sale of available-for-sale financial assets

     551,506        149,925        189,011   
  

 

 

   

 

 

   

 

 

 

Sub-total

     551,624        150,405        189,878   
  

 

 

   

 

 

   

 

 

 

Revenue related to held-to-maturity financial assets

      

Reversal of impairment losses on held-to-maturity financial assets

     117        —          —     
  

 

 

   

 

 

   

 

 

 

Sub-total

     117        —          —     
  

 

 

   

 

 

   

 

 

 

Gains on foreign exchange transactions

     1,562,633        1,093,904        1,387,450   

Income related to insurance

     1,011,089        1,730,466        1,233,773   

Dividend income

     94,391        69,023        64,441   

Others

     464,340        242,169        261,886   
  

 

 

   

 

 

   

 

 

 

Sub-total

     3,684,194        3,285,967        3,137,428   
  

 

 

   

 

 

   

 

 

 

Other operating expenses

      

Expense related to available-for-sale financial assets

      

Loss on redemption of available-for-sale financial assets

     22        11        65   

Loss on sale of available-for-sale financial assets

     19,038        16,884        25,157   

Impairment on available-for-sale financial assets

     51,072        280,610        163,464   
  

 

 

   

 

 

   

 

 

 

Sub-total

     70,132        297,505        188,686   
  

 

 

   

 

 

   

 

 

 

Expense related to held-to-maturity financial assets

      

Impairment on held-to-maturity financial assets

     150        154        5   
  

 

 

   

 

 

   

 

 

 

Sub-total

     150        154        5   
  

 

 

   

 

 

   

 

 

 

Loss on foreign exchanges transactions

     2,208,390        1,410,525        1,667,335   

Expense related to insurance

     1,088,357        1,822,178        1,358,830   

Others

     1,409,174        1,287,547        1,227,337   
  

 

 

   

 

 

   

 

 

 

Sub-total

     4,776,203        4,817,909        4,442,193   
  

 

 

   

 

 

   

 

 

 

Net other operating income (expenses)

   (1,092,009   (1,531,942   (1,304,765
  

 

 

   

 

 

   

 

 

 

 

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31. General and administrative expenses

31.1 General and administrative expenses

The details of general and administrative expenses for the years ended December 31, 2011, 2012 and 2013, are as follows:

 

     2011(1)     2012     2013  
     (In millions of Korean won)  

Employee Benefits

      

Salaries and short-term employee benefits—salaries

   1,657,823      1,598,045      1,641,326   

Salaries and short-term employee benefits—others

     521,894        657,473        677,107   

Post employment benefits—defined benefit plans

     159,660        171,508        171,108   

Post employment benefits—defined contribution plans

     4,005        5,463        7,094   

Termination benefits

     12,308        (3,960     19,714   

Share-based payments(reversal)(2)

     (7,609     13,871        17,289   
  

 

 

   

 

 

   

 

 

 

Sub-total

     2,348,081        2,442,400        2,533,638   
  

 

 

   

 

 

   

 

 

 

Depreciation and amortization

     342,493        328,152        286,756   
  

 

 

   

 

 

   

 

 

 

Other general and administrative expenses

      

Rental expense

     255,760        276,769        290,886   

Tax and dues

     144,716        72,111        141,274   

Communication

     73,531        53,549        55,549   

Electricity and utilities

     23,535        24,898        26,315   

Publication

     23,308        20,764        19,259   

Repairs and maintenance

     15,576        13,426        14,615   

Vehicle

     11,392        12,114        11,816   

Travel

     5,405        5,526        5,722   

Training

     25,300        22,443        19,498   

Service fees

     99,706        105,972        104,210   

Others

     518,328        467,486        474,026   
  

 

 

   

 

 

   

 

 

 

Sub-total

     1,196,557        1,075,058        1,163,170   
  

 

 

   

 

 

   

 

 

 

Total

   3,887,131      3,845,610      3,983,564   
  

 

 

   

 

 

   

 

 

 

 

(1) 

Other general and administrative expenses for the year ended December 31, 2011, reclassified as employee benefits, amount to ₩521,894 million.

(2) 

Reversal of share-based payments was due to the decrease in share price.

31.2 Share-based payments

31.2.1 Share options

The details of the share options as of December 31, 2013, are as follows:

 

     Grant date     Exercise period     Granted  shares(1)     Vesting conditions
           (Years)     (In number of shares)      

Series 19

     2006.03.24        8        930,000      Service period: 1, 2, 3 years(2)

Series 20

     2006.04.28        8        30,000      Service period: 3 years(2)

Series 21

     2006.10.27        8        20,000      Service period: 2 years(2)

Series 22

     2007.02.08        8        855,000      Service period: 1, 3 years(2)

Series 23

     2007.03.23        8        30,000      Service period: 3 years(2)
      

 

 

   

Total

         1,865,000     
      

 

 

   

 

(1) 

Granted shares represent the total number of shares initially granted to directors and employees whose options have not been exercised at the end of the reporting period.

(2) 

The exercise price is indexed to the sum of the major competitors’ total market capitalization.

 

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The changes in the number of granted share options and the weighted average exercise price for the years ended December 31, 2012 and 2013, are as follows:

 

    2012  
    Number of granted shares     Number of
exercisable
shares
    Exercise
price per
share
    Remaining
contractual
life(Years)
 
    Beginning     Expired     Ending        
    (In Korean won, except shares)        

Series 12

    54,250        54,250        —          —          —          —     

Series 13-1

    20,000        20,000        —          —          —          —     

Series 15-1

    125,362        —          125,362        125,362        54,656        0.21   

Series 15-2

    440,928        —          440,928        440,928        46,800        0.21   

Series 17

    29,441        —          29,441        29,441        49,200        0.56   

Series 18

    7,212        —          7,212        7,212        53,000        0.64   

Series 19

    751,651        —          751,651        751,651        77,063        1.23   

Series 20

    25,613        —          25,613        25,613        81,900        1.32   

Series 21

    18,987        —          18,987        18,987        76,600        1.82   

Series 22

    657,498        —          657,498        657,498        77,100        2.11   

Series 23

    15,246        —          15,246        15,246        84,500        2.22   
 

 

 

   

 

 

   

 

 

   

 

 

     

Total

    2,146,188        74,250        2,071,938        2,071,938       
 

 

 

   

 

 

   

 

 

   

 

 

     

Weighted average exercise price

  68,144      46,787      68,909      68,909       

 

    2013  
    Number of granted shares     Number of
exercisable
shares
    Exercise
price per
share
    Remaining
contractual
life(Years)
 
    Beginning     Expired     Ending        
    (In Korean won, except shares)        

Series 15-1

    125,362        125,362        —          —          —          —     

Series 15-2

    440,928        440,928        —          —          —          —     

Series 17

    29,441        29,441        —          —          —          —     

Series 18

    7,212        7,212        —          —          —          —     

Series 19

    751,651        —          751,651        751,651        77,063        0.23   

Series 20

    25,613        —          25,613        25,613        81,900        0.32   

Series 21

    18,987        —          18,987        18,987        76,600        0.82   

Series 22

    657,498        —          657,498        657,498        77,100        1.11   

Series 23

    15,246        —          15,246        15,246        84,500        1.22   
 

 

 

   

 

 

   

 

 

   

 

 

     

Total

    2,071,938        602,943        1,468,995        1,468,995       
 

 

 

   

 

 

   

 

 

   

 

 

     

Weighted average exercise price

  68,909      48,625      77,235      77,235       

The fair value of each option granted is estimated using a Black-Scholes option pricing model based on the assumptions in the table below:

 

     Share
price
     Weighted
average
exercise
price
     Expected
volatility
(%)
     Option’s
expected
life

(Years)
     Expected
dividends
     Risk
free
interest
rate
(%)
 
     (In Korean won)  

Series 19 (Directors)

   40,700       76,726         10.99         0.11       57         2.67   

Series 19 (Employees)

     40,700         77,390         10.99         0.11         57         2.67   

Series 20 (Employees)

     40,700         81,900         15.65         0.16         81         2.67   

Series 21 (Employees)

     40,700         76,600         22.52         0.41         205         2.67   

Series 22 (Directors)

     40,700         77,100         23.67         0.55         275         2.67   

Series 22 (Employees)

     40,700         77,100         27.42         0.23         116         2.67   

Series 23 (Non-executive directors)

     40,700         84,500         22.76         0.61         304         2.67   

 

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The option’s expected life is separately estimated for employees and directors using actual historical behavior and projected future behavior to reflect the effects of expected early exercise. Expected volatility is based on the historical volatility of the share price over the most recent period that is generally commensurate with the expected term of the option. To reflect the changes in exercise price which is indexed to the sum of the major competitors’ total market capitalization, cross volatility is used in calculating the expected volatility.

31.2.2 Share Grants

The Group changed the scheme of share-based payment from share options to share grants in November 2007. The share grant award program is an incentive plan that sets, on grant date, the maximum amount of shares that can be awarded. Actual shares granted at the end of the vesting period is determined in accordance with achievement of pre-specified targets over the vesting period.

 

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The details of the share grants as of December 31, 2013, are as follows:

 

Share grants

  Grant date     Number of  granted
shares(1)
   

Vesting conditions

          (In number of shares)      

(KB Financial Group Inc.)

     

Series 2

    2009.03.27        3,090      Service fulfillment(2)

Series 3

    2010.01.01        32,256     

Services fulfillment, Achievement of targets on the basis of market and non-market performance(3),(8)

Series 4

    2010.07.13        218,944     

Services fulfillment, Achievement of targets on the basis of market and non-market performance(4),(8)

Series 5

    2010.12.23        13,260     

Services fulfillment, Achievement of targets on the basis of market and non-market performance(5),(8)

Series 6

    2011.08.10        8,183     

Services fulfillment, Achievement of targets on the basis of market and non-market performance(5),(8)

Series 7

    2012.01.01        42,568     

Services fulfillment, Achievement of targets on the basis of market and non-market performance(3),(8)

Series 8

    2012.01.01        59,272     

Services fulfillment, Achievement of targets on the basis of market and non-market performance(3),(8)

Series 9

    2013.07.17        94,185     

Services fulfillment, Achievement of targets on the basis of market and non-market performance(3),(8)

   

 

 

   

Sub-Total

      471,758     
   

 

 

   

(Kookmin Bank)

     

Series 32

    2011.03.24        7,986     

Services fulfillment, Achievement of targets on the basis of market and non-market performance(6),(8)

Series 33

    2011.07.07        6,025     

Services fulfillment, Achievement of targets on the basis of market and non-market performance(7),(8)

Series 34

    2011.08.10        10,242     

Services fulfillment, Achievement of targets on the basis of market and non-market performance(7),(8)

Series 36

    2011.10.18        8,596     

Services fulfillment, Achievement of targets on the basis of market and non-market performance(7),(8)

Series 37

    2011.12.23        68,310     

Services fulfillment, Achievement of targets on the basis of market and non-market performance(7),(8)

Series 38

    2012.01.01        171,100     

Services fulfillment, Non-market performance(7),(8)

Series 39

    2012.01.08        18,250     

Services fulfillment, Achievement of targets on the basis of market and non-market performance(7),(8)

Series 40

    2012.08.01        9,864     

Services fulfillment, Achievement of targets on the basis of market and non-market performance(7),(8)

Series 41

    2012.08.02        37,513     

Services fulfillment, Achievement of targets on the basis of market and non-market performance(7),(8)

Series 42

    2012.09.20        8,244     

Services fulfillment, Achievement of targets on the basis of market and non-market performance(7),(8)

Series 43

    2012.11.26        13,918     

Services fulfillment, Achievement of targets on the basis of market and non-market performance(7),(8)

Series 44

    2013.01.01        17,242     

Services fulfillment, Achievement of targets on the basis of market and non-market performance(7),(8)

Series 45

    2013.01.01        77,584     

Services fulfillment, Achievement of targets on the basis of market and non-market performance(7),(8)

Series 46

    2013.01.01        120,680     

Services fulfillment, Achievement of targets on the basis of market and non-market performance(7),(8)

Series 47

    2013.07.01        10,298     

Services fulfillment, Achievement of targets on the basis of market and non-market performance(7),(8)

Series 48

    2013.07.23        74,666     

Services fulfillment, Achievement of targets on the basis of market and non-market performance(7),(8)

Series 49

    2013.07.24        109,420     

Services fulfillment, Achievement of targets on the basis of market and non-market performance(7),(8)

Series 50

    2013.07.24        82,926     

Services fulfillment, Achievement of targets on the basis of market and non-market performance(7),(8)

Series 51

    2013.07.25        9,180     

Services fulfillment, Achievement of targets on the basis of market and non-market performance(7),(8)

Series 52

    2013.08.01        10,278     

Services fulfillment, Achievement of targets on the basis of market and non-market performance(7),(8)

Grant deferred in 2010

    —          5,240     

Satisfied

Grant deferred in 2011

    —          17,670     

Satisfied

Grant deferred in 2012

    —          47,892     

Satisfied

Grant deferred in 2013

    —          25,273      Satisfied
   

 

 

   

Sub-Total

      968,397     
   

 

 

   

 

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Share grants

  Grant date   Number of
granted shares(1)
   

Vesting conditions

        (In number of shares)      

(Other subsidiaries)

     

Share granted in 2010

      4,129     

Services fulfillment, Achievement of targets on the basis of market and non-market performance(9)

Share granted in 2011

      38,931     

Services fulfillment, Achievement of targets on the basis of market and non-market performance(9)

Share granted in 2012

      63,976     

Services fulfillment, Achievement of targets on the basis of market and non-market performance(9)

Share granted in 2013

      104,394     

Services fulfillment, Achievement of targets on the basis of market and non-market performance(9)

   

 

 

   

Sub-Total

      211,430     
   

 

 

   

Total

      1,651,585     
   

 

 

   

 

(1) 

Granted shares represent the total number of shares initially granted to directors and employees at the end of reporting period.

(2) 

The number of granted shares to be compensated is determined based on fulfillment of service requirements.

(3) 

The 30%, 30% and 40% of the number of granted shares to be compensated are determined upon the accomplishment of targeted KPIs, targeted financial results of the Group and targeted relative TSR, respectively. However, 50% of certain granted shares will be compensated based on the accomplishment of targeted KPIs and the remaining 50% of those shares will be compensated based on the accomplishment of targeted relative TSR.

(4) 

The 37.5%, 37.5% and 25% of the number of certain granted shares to be compensated are determined based on the accomplishment of targeted relative TSR, targeted relative EPS ratio and qualitative indicators, respectively. The 30%, 30% and 40% of the number of other granted shares to be compensated are determined based on the accomplishment of targeted KPIs, targeted financial results of the Group and targeted relative TSR, respectively. The 40%, 40% and 20% of the number of the remaining granted shares to be compensated are determined based on the accomplishment of the targeted relative EPS ratio, the targeted relative TSR and qualitative indicators, respectively.

(5) 

The 40%, 30% and 30% of the number of granted shares to be compensated are determined based on the accomplishment of the targeted relative TSR, the targeted KPIs and the targeted financial results of the Group, respectively.

(6) 

The number of granted shares to be compensated is not linked to performance, but fixed.

(7) 

The 30%, 30% and 40% of the number of granted shares to be compensated are determined based on the accomplishment of the targeted KPIs, the targeted financial results of Kookmin Bank and the targeted relative TSR, respectively. However, half of the number of granted shares to be compensated is determined based on the accomplishment of the targeted relative TSR, while the other half is determined by the targeted KPIs.

(8) 

Certain portion of the granted shares is compensated over a maximum period of three-years.

(9) 

The 30%, 30% and 40% of the number of granted shares to be compensated are determined based on the accomplishment of the key performance results, targeted results with the Group and the targeted relative TSR, respectively. The 60% and 40% of the number of certain granted shares to be compensated are determined based on targeted results with the Group and the targeted relative TSR, respectively.

 

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The details of share grants linked to short-term performance as of December 31, 2013, are as follows:

 

     Grant date      Number of vested shares(1)     

Vesting conditions

(KB Financial Group Inc.)

        

Share granted in 2010

     2010.01.01         3,082       Satisfied

Share granted in 2011

     2011.01.01         12,856       Satisfied

Share granted in 2012

     2012.01.01         22,349       Satisfied

Share granted in 2013

     2013.01.01         21,835       Proportion to service period

(Kookmin Bank)

        

Share granted in 2010

     2010.01.01         27,548       Satisfied

Share granted in 2011

     2011.01.01         94,822       Satisfied

Share granted in 2012

     2012.01.01         155,466       Satisfied

Share granted in 2013

     2013.01.01         174,304       Proportion to service period

 

(1) 

The number of shares, which are exercisable, is determined by the results of performance. The share grants are settled over three years.

 

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Share grants are measured at fair value using the Monte Carlo Simulation Model and assumptions used in determining the fair value are as follows:

 

     Expected
exercise
period
     Risk free
rate
     Fair value (Market
performance
condition)
     Fair value
(Non-market
performance
condition)
 
     (Years)      (%)      (In Korean won)  

Linked to long term performance

  

     

(KB Financial Group Inc.)

           

Series 2-3

     0.24         2.67         —           42,113   

Series 3-1

     0.25         2.67         —           40,662   

Series 3-2

     0.25~1.00         2.67         —           40,662~42,844   

Series 3-3

     0.25         2.67         —           40,662   

Series 4-1

     0.53~2.53         2.67         —           42,562~43,760   

Series 4-2

     0.53~2.53         2.67         —           42,562~43,760   

Series 4-3

     0.25~2.00         2.67         37,117         37,117~43,343   

Series 4-4

     0.25~2.00         2.67         37,117         40,662~43,343   

Series 4-5

     0.25~2.00         2.67         37,117         40,662~43,343   

Series 5-1

     0.25~1.00         2.67         —           40,662~42,844   

Series 6-1

     0.25~3.00         2.67         —           40,429~44,160   

Series 7-1

     0.25~3.00         2.67         —           40,429~44,160   

Series 8-1

     0.25~3.00         2.67         —           40,429~44,160   

Series 9-1

     2.00~5.00         2.76         20,402         41,154~45,144   

(Kookmin Bank)

           

Series 32

     0.25~2.97         2.67         —           39,923~44,228   

Series 33

     0.25~3.00         2.67         —           40,662~44,160   

Series 34

     0.25~3.00         2.67         —           40,662~44,160   

Series 36

     0.25~3.00         2.67         —           40,662~44,160   

Series 37

     0.25~3.00         2.67         —           40,662~44,160   

Series 38

     0.25~3.00         2.67         —           40,662~44,160   

Series 39

     0.25~3.00         2.67         —           40,662~44,160   

Series 40

     0.25~3.00         2.67         —           40,662~44,160   

Series 41-1

     0.58~4.00         2.67         10,272         42,844~44,477   

Series 41-2

     0.25~3.00         2.67         —           40,662~44,160   

Series 42

     0.25~3.00         2.67         —           40,662~44,160   

Series 43

     0.90~4.00         2.67         3,421         42,844~44,477   

Series 44

     0.25~3.00         2.67         —           40,662~44,160   

Series 45-1

     1.00~4.00         2.67         8,988         42,844~44,477   

Series 45-2

     0.25~3.00         2.67         —           40,662~44,160   

Series 46-1

     1.00~4.00         2.67         8,988         42,844~44,477   

Series 46-2

     0.25~3.00         2.67         —           40,662~44,160   

Series 47

     0.25~3.00         2.67         —           40,662~44,160   

Series 48

     1.56~5.00         2.72         21,274         43,343~45,144   

Series 49-1

     1.56~5.00         2.72         21,255         43,343~45,144   

Series 49-2

     0.25~3.00         2.67         28,655         40,662~44,160   

Series 50

     1.56~5.00         2.72         21,255         43,343~45,144   

Series 51

     1.56~5.00         2.72         21,050         43,343~45,144   

Series 52

     1.58~5.00         2.73         21,307         43,343~45,144   

Grant deferred in 2010

     0.25~1.00         2.67         —           40,662~42,844   

Grant deferred in 2011

     0.25~1.00         2.67         —           40,662~42,844   

Grant deferred in 2012

     0.25~2.00         2.67         —           40,662~43,343   

Grant deferred in 2013

     0.45~2.45         2.67         —           42,492~43,760   

 

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     Expected
exercise
period
     Risk free
rate
     Fair value (Market
performance
condition)
     Fair value
(Non-market
performance
condition)
 
     (Years)      (%)      (In Korean won)  

(Other subsidiaries)

           

Share granted in 2010

     0.25         2.67         —           40,429~42,113   

Share granted in 2011

     0.25~0.35         2.67         0~10         40,429~42,148   

Share granted in 2012

     1.00~1.54         2.67~2.72         8,732~18,607         41,418~41,747   

Share granted in 2013

     0.25~2.75         2.67~2.86         8,990~22,079         34,513~41,747   

Linked to short term performance

           

(KB Financial Group Inc.)

           

Share granted in 2011

     0.25~1.00         2.67         —           40,662~42,844   

Share granted in 2012

     0.25~2.00         2.67         —           40,662~43,343   

Share granted in 2013

     1.00~3.00         2.67         —           42,844~44,160   

(Kookmin Bank)

           

Share granted in 2011

     0.25~1.00         2.67         —           40,662~42,844   

Share granted in 2012

     0.25~2.00         2.67         —           40,662~43,343   

Share granted in 2013

     1.00~3.00         2.67         —           40,662~44,160   

Expected volatility is based on the historical volatility of the share price over the most recent period that is generally commensurate with the expected term of the grant. And the current stock price as of December 31, 2013, was used for the underlying asset price. Additionally, the average three-year historical dividend rate was used as the expected dividend rate.

As of December 31, 2012 and 2013, the accrued expenses related to share-based payments including share options and share grants amounted to ₩37,858 million and ₩48,423 million, respectively. The compensation costs from share options and share grants amounts to ₩7,609 million were reversed for the year ended December 31, 2011, and the compensation costs amounting to ₩13,871 million and ₩17,289 million were recognized as an expense for the years ended December 31, 2012 and 2013, respectively. There is no intrinsic value of the vested share options.

32. Other non-operating income and expenses

The details of other non-operating income and expenses for the years ended December 31, 2011, 2012 and 2013, are as follows:

 

     2011     2012     2013  
     (In millions of Korean won)  

Other non-operating income

      

Gains of disposal in property and equipment

   313      5,840      819   

Rent received

     3,678        4,349        8,615   

Others

     56,580        50,666        101,848   
  

 

 

   

 

 

   

 

 

 

Sub-total

     60,571        60,855        111,282   
  

 

 

   

 

 

   

 

 

 

Other non-operating expenses

      

Losses of disposal in property and equipment

     768        426        928   

Donation

     77,889        80,446        59,760   

Restoration cost

     1,981        945        909   

Others

     122,425        97,310        61,994   
  

 

 

   

 

 

   

 

 

 

Sub-total

     203,063        179,127        123,591   
  

 

 

   

 

 

   

 

 

 

Net other non-operating income(expense)

   (142,490   (118,272   (12,309
  

 

 

   

 

 

   

 

 

 

 

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33. Tax expenses

Income tax expense for the years ended December 31, 2011, 2012 and 2013, consist of:

 

     2011     2012     2013  
     (In millions of Korean won)  

Tax payable

      

Current tax expense

   816,051      695,135      569,449   

Adjustments recognized in the period for current tax of prior years

     3,639        18,017        86,931   
  

 

 

   

 

 

   

 

 

 

Sub-total

     819,690        713,152        656,380   
  

 

 

   

 

 

   

 

 

 

Changes in deferred income tax assets (liabilities)

     (80,996     (87,494     (89,477
  

 

 

   

 

 

   

 

 

 

Income tax recognized directly in equity

      

Remeasurements of net defined benefit liabilities

     12,327        9,663        (13,085

Change in value of available-for-sale financial assets

     46,303        (77,956     7,942   

Change in value of held-to-maturity financial assets

     (249     (240     (1,787

Share of other comprehensive income of associates

     31        390        9   

Cash flow hedges

     241        1,025        (618

Losses on Sale of Treasury Stock

     47,225        —          —     

Others

     —          (29     —     
  

 

 

   

 

 

   

 

 

 

Sub-total

     105,878        (67,147     (7,539
  

 

 

   

 

 

   

 

 

 

Others

     —          —          (7,778
  

 

 

   

 

 

   

 

 

 

Tax expense

   844,572      558,511      551,586   
  

 

 

   

 

 

   

 

 

 

An analysis of the net profit before income tax and income tax expense for the years ended December 31, 2011, 2012 and 2013, follows:

 

     2011     2012     2013  
     (In millions of Korean won)  

Net profit before income tax

   3,305,293      2,298,644      1,815,291   
  

 

 

   

 

 

   

 

 

 

Tax at the applicable tax rate(1)

   799,855      555,810      438,838   

Non-taxable income

     (14,325     (6,291     (17,716

Non-deductible expense

     16,220        13,263        33,489   

Tax credit and tax exemption

     (2,198     (187     (1,417

Temporary difference for which no deferred tax is recognized

     (2,567     1,633        47,138   

Deferred tax relating to changes in recognition and measurement

     (8,459     (7,289     2,828   

Income tax paid(refund) for tax of prior years

     23,479        (19,870     41,322   

Income tax expense of overseas branch

     18,308        16,929        4,796   

Effects from change in tax rate

     18,008        941        (871

Others

     (3,749     3,572        3,179   
  

 

 

   

 

 

   

 

 

 

Tax expense

   844,572      558,511      551,586   
  

 

 

   

 

 

   

 

 

 

Average effective tax rate (Income tax expense / Profit before tax) (%)

     25.55        24.30        30.39   

 

(1)

Applicable income tax rate for ₩200 million and below is 11%, for over ₩200 million is 24.2% as of December 31, 2011, which is composed of corporate tax and local income tax. In addition, for ₩200 million and below is 11%, for ₩200 million to ₩20 billion is 22% and for over ₩20 billion is 24.2% as of December 31, 2012 and 2013, which is composed of corporate tax and local income tax.

 

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The details of current tax assets (income tax refund receivables) and current tax liabilities (income tax payables), as of December 31, 2012 and 2013, are as follows:

 

     2012  
     Tax payables
(receivables)
before offsetting
    Offsetting     Tax payables
(receivables)
after offsetting
 
     (In millions of Korean won)  

Income tax refund receivables

   (429,676   415,156      (14,520

Income tax payables

     679,822        (415,156     264,666   

 

     2013  
     Tax payables
(receivables)
before offsetting
    Offsetting     Tax payables
(receivables)
after offsetting
 
     (In millions of Korean won)  

Income tax refund receivables

   (99,524   82,057      (17,467

Income tax payables

     293,320        (82,057     211,263   

34. Dividends

The dividends paid to the shareholders of the Parent Company in 2011, 2012 and 2013 were ₩41,163 million (₩120 per share), ₩278,173 million (₩720 per share) and ₩231,811 million (₩600 per share), respectively. The dividends to the shareholders of the Parent Company in respect of the year ended December 31, 2013, of ₩500 per share, amounting to total dividends of ₩193,176 million, is to be proposed at the annual general shareholder’s meeting on March 28, 2014. The Group’s consolidated financial statements as of December 31, 2013, do not reflect this dividend payable.

35. Accumulated other comprehensive income

The details of accumulated other comprehensive income for the years ended December 31, 2012 and 2013, are as follows:

 

     2012  
     Beginning     Changes except
for
reclassification
    Reclassification
to profit or loss
    Tax effect     Ending  
     (In millions of Korean won)  

Remeasurements of net defined benefit liabilities

   (23,254   (39,916   —        9,663      (53,507

Exchange differences on translating foreign operations

     (1,464     (25,597     —          —          (27,061

Change in value of available-for-sale financial assets

     191,752        383,043        (70,485     (77,956     426,354   

Change in value of held-to-maturity financial assets

     (1,652     671        (4     (240     (1,225

Shares of other comprehensive income of associates

     (3,023     (44,605     (48     390        (47,286

Cash flow hedges

     (1,320     (26,838     25,000        1,025        (2,133
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   161,039      246,758      (45,537   (67,118   295,142   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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     2013  
     Beginning     Changes except
for reclassification
    Reclassification to
profit or loss
    Tax effect     Ending  
     (In millions of Korean won)  

Remeasurements of net defined benefit liabilities

   (53,507   54,069      —        (13,085   (12,523

Exchange differences on translating foreign operations

     (27,061     (2,372     —          —          (29,433

Change in value of available-for-sale financial assets

     426,354        198,798        (202,118     7,942        430,976   

Change in value of held-to-maturity financial assets

     (1,225     1,005        6,911        (1,787     4,904   

Shares of other comprehensive income of associates

     (47,286     (9,765     (55     9        (57,097

Cash flow hedges

     (2,133     (2,991     5,227        (618     (515
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   295,142      238,744      (190,035   (7,539   336,312   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

36. Earnings per share

36.1 Basic earnings per share

Basic earnings per share is calculated by dividing profit and loss attributable to ordinary equity holders of the Parent Company by the weighted average number of ordinary shares outstanding, excluding the treasury shares, during the years ended December 31, 2011, 2012 and 2013.

Weighted average number of ordinary shares outstanding:

 

     2011  
     Number of
shares (a)
     Days
outstanding
(b)
     Total outstanding
shares [(a) x (b)]
 
     (In number of shares)  

Beginning (A)

     386,351,693         365         141,018,367,945   

Treasury shares (B)

     43,322,704         13         563,195,152   
     40,984,474         28         1,147,565,272   
     37,463,510         42         1,573,467,420   
     34,966,962         105         3,671,531,010   
        

 

 

 
           6,955,758,854   
        

 

 

 

Total outstanding shares [(C)=(A)-(B)]

           134,062,609,091   
        

 

 

 

Weighted average number of ordinary shares outstanding
[(D) =(C)/365]

           367,294,819   

 

     2012  
     Number of
shares (a)
     Days
outstanding (b)
     Total outstanding
shares [(a) x (b)]
 
     (In number of shares)  

Beginning (A)

     386,351,693         366         141,404,719,638   
        

 

 

 

Weighted average number of ordinary shares outstanding
[(D) =(C)/366]

           386,351,693   

 

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Table of Contents
     2013  
     Number of
shares (a)
     Days
outstanding (b)
     Total outstanding
shares [(a) x (b)]
 
     (In number of shares)  

Beginning (A)

     386,351,693         365         141,018,367,945   
        

 

 

 

Weighted average number of ordinary shares outstanding [(D) =(C)/365]

           386,351,693   

Basic earnings per share:

 

     2011  
     (in Korean won and in number of shares)  

Profit attributable to ordinary shares (C)

   2,405,176,343,515   

Weighted average number of ordinary shares outstanding (D)

     367,294,819   

Basic earnings per share [(E)=(C)/(D)]

   6,548   

 

     2012  
     (in Korean won and in number of shares)  

Profit attributable to ordinary shares (C)

   1,731,033,767,411   

Weighted average number of ordinary shares outstanding (D)

     386,351,693   

Basic earnings per share [(E)=(C)/(D)]

   4,480   

 

     2013  
     (in Korean won and in number of shares)  

Profit attributable to ordinary shares (C)

   1,260,509,261,925   

Weighted average number of ordinary shares outstanding (D)

     386,351,693   

Basic earnings per share [(E)=(C)/(D)]

   3,263   

36.2 Diluted earnings per share

Diluted earnings per share is calculated using the weighted average number of ordinary shares outstanding which is adjusted by the weighted average number of additional ordinary shares that would have been outstanding assuming the conversion of all dilutive potential ordinary shares. The Group’s dilutive potential ordinary shares include share grants.

A calculation is done to determine the number of shares that could have been acquired at fair value (determined as the average market share price of the Group’s outstanding shares for the period) based on the monetary value of the subscription rights attached to the share options. The number of shares calculated above is compared with the number of shares that would have been issued assuming the exercise of share grants.

Adjusted profit for diluted earnings per share:

 

     2011  
     (In Korean won)  

Profit attributable to ordinary shares

   2,405,176,343,515   

Adjustment

     —     

Adjusted profit for diluted earnings per share

   2,405,176,343,515   

 

     2012  
     (In Korean won)  

Profit attributable to ordinary shares

   1,731,033,767,411   

Adjustment

     —     

Adjusted profit for diluted earnings per share

   1,731,033,767,411   

 

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     2013  
     (In Korean won)  

Profit attributable to ordinary shares

   1,260,509,261,925   

Adjustment

     —     

Adjusted profit for diluted earnings per share

   1,260,509,261,925   

Adjusted weighted average number of ordinary shares outstanding to calculate diluted earnings per share:

 

      2011      2012      2013  
     (in number of shares)  

Weighted average number of ordinary shares outstanding

     367,294,819         386,351,693         386,351,693   

Adjustment

        

Share grants

     884,974         1,193,606         1,639,306   

Adjusted weighted average number of ordinary shares outstanding for diluted earnings per share

     368,179,793         387,545,299         387,990,999   

Diluted earnings per share:

 

      2011  
     (in Korean won and in number of shares)  

Adjusted profit for diluted earnings per share

   2,405,176,343,515   

Adjusted weighted average number of ordinary shares outstanding for diluted earnings per share

     368,179,793   

Diluted earnings per share

   6,533   

 

      2012  
     (in Korean won and in number of shares)  

Adjusted profit for diluted earnings per share

   1,731,033,767,411   

Adjusted weighted average number of ordinary shares outstanding for diluted earnings per share

     387,545,299   

Diluted earnings per share

   4,467   

 

      2013  
     (in Korean won and in number of shares)  

Adjusted profit for diluted earnings per share

   1,260,509,261,925   

Adjusted weighted average number of ordinary shares outstanding for diluted earnings per share

     387,990,999   

Diluted earnings per share

   3,249   

37. Insurance Contracts

37.1 Insurance liabilities

The details of insurance liabilities presented within other liabilities as of December 31, 2012 and 2013, are as follows:

 

      2012      2013  
     (In millions of Korean won)  

Individual insurance

     

Pure Endowment insurance

   3,281,701       3,861,364   

Death insurance

     63,821         85,123   

Joint insurance

     1,470,755         1,634,590   

Group insurance

     1,285         1,339   

Other

     19,604         16,627   
  

 

 

    

 

 

 

Total

   4,837,166       5,599,043   
  

 

 

    

 

 

 

 

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The changes in insurance liabilities for the years ended December 31, 2012 and 2013, are as follows:

 

     2012  
     Individual insurance      Group
insurance
     Others(1)      Total  
     Pure Endowment
insurance
     Death
insurance
     Joint
insurance
          
     (In millions of Korean won)  

Beginning

   2,159,534       54,008       1,301,139       266       16,489       3,531,436   

Provision

     1,122,167         9,813         169,616         1,019         3,115         1,305,730   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending

   3,281,701       63,821       1,470,755       1,285       19,604       4,837,166   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     2013  
     Individual insurance      Group
insurance
     Others(1)     Total  
     Pure Endowment
insurance
     Death
insurance
     Joint
insurance
         
     (In millions of Korean won)  

Beginning

   3,281,701       63,821       1,470,755       1,285       19,604      4,837,166   

Provision

     579,663         21,302         163,835         54         (2,977     761,877   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Ending

   3,861,364       85,123       1,634,590       1,339       16,627      5,599,043   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) 

Consists of policyholders’ profit dividend reserve, reserve for compensation for losses on dividend-paying insurance contracts and others.

37.2 Insurance assets

The details of insurance assets presented within other assets as of December 31, 2012 and 2013, are as follows:

 

             2012                      2013          
     (In millions of Korean won)  

Reinsurance assets

   3,751       5,245   

Deferred acquisition costs

     151,925         151,909   
  

 

 

    

 

 

 

Total

   155,676       157,154   
  

 

 

    

 

 

 

The changes in reinsurance assets for the years ended December 31, 2012 and 2013, are as follows:

 

             2012                      2013          
     (In millions of Korean won)  

Beginning

   2,146       3,751   

Increase (decrease)

     1,605         1,494   
  

 

 

    

 

 

 

Ending

   3,751       5,245   
  

 

 

    

 

 

 

The changes in deferred acquisition costs for the years ended December 31, 2012 and 2013, are as follows:

 

             2012                     2013          
     (In millions of Korean won)  

Beginning

   126,304      151,925   

Increase

     106,959        102,702   

Amortization

     (81,338     (102,718
  

 

 

   

 

 

 

Ending

   151,925      151,909   
  

 

 

   

 

 

 

 

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37.3 Insurance premiums and reinsurance

The details of insurance premiums for the years ended December 31, 2011, 2012 and 2013, are as follows:

 

     2011  
     Pure endowment
insurance
    Death
insurance
    Joint
insurance
    Group
insurance
    Others     Total  
     (In millions of Korean won)  

Insurance premiums earned

   651,281      7,073      339,204      1,640      8,173      1,007,371   

Reinsurance premiums paid

     (333     (773     (161     (1,373     (2,056     (4,696
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums earned

   650,948      6,300      339,043      267      6,117      1,002,675   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     2012  
     Pure endowment
insurance
    Death
insurance
    Joint
insurance
    Group
insurance
    Others     Total  
     (In millions of Korean won)  

Insurance premiums earned

   1,307,974      19,547      352,482      3,967      39,081      1,723,051   

Reinsurance premiums paid

     (196     (2,637     (133     (892     (8,354     (12,212
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums earned

   1,307,778      16,910      352,349      3,075      30,727      1,710,839   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     2013  
     Pure endowment
insurance
    Death
insurance
    Joint
insurance
    Group
insurance
    Others     Total  
     (In millions of Korean won)  

Insurance premiums earned

   795,031      41,389      336,540      5,019      42,474      1,220,453   

Reinsurance premiums paid

     (480     (3,854     (278     (2,177     (7,302     (14,091
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums earned

   794,551      37,535      336,262      2,842      35,172      1,206,362   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The details of reinsurance transactions for the years ended December 31, 2011, 2012 and 2013, are as follows:

 

     2011  
     Reinsurance expense      Reinsurance revenue  
     Reinsurance premium paid      Reinsurance claims      Reinsurance commission      Total  
     (In millions of Korean won)  

Individual

   1,268       623       674       1,297   

Group

     1,372         1,133         —           1,133   

Others

     2,056         1,288         —           1,288   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   4,696       3,044       674       3,718   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     2012  
     Reinsurance expense      Reinsurance revenue  
     Reinsurance premium paid      Reinsurance claims      Reinsurance commission      Total  
     (In millions of Korean won)  

Individual

   2,966       1,150       1,000       2,150   

Group

     892         1,138         —           1,138   

Others

     8,354         4,127         —           4,127   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   12,212       6,415       1,000       7,415   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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     2013  
     Reinsurance expense      Reinsurance revenue  
     Reinsurance premium paid      Reinsurance claims      Reinsurance commission      Total  
     (In millions of Korean won)  

Individual

   4,612       3,850       466       4,316   

Group

     2,177         2,124         220         2,344   

Others

     7,302         6,660         —           6,660   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   14,091       12,634       686       13,320   
  

 

 

    

 

 

    

 

 

    

 

 

 

Insurance expenses for the years ended December 31, 2011, 2012 and 2013, are as follows:

 

     2011  
     Pure endowment
insurance
    Death
insurance
    Joint
insurance
    Group
insurance
    Others     Total  
     (In millions of Korean won)  

Insurance expense

   2,010      670      25,201      1,663      206      29,750   

Dividend expense

     73        11        1        —          —          85   

Refund expense

     150,627        3,565        171,090        276        —          325,558   

Provision

     518,853        2,842        148,540        32        2,993        673,260   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

     671,563        7,088        344,832        1,971        3,199        1,028,653   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reinsurance claims

     (106     (433     (84     (1,133     (1,288     (3,044
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net insurance expense

   671,457      6,655      344,748      838      1,911      1,025,609   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     2012  
     Pure endowment
insurance
    Death
insurance
    Joint
insurance
    Group
insurance
    Others     Total  
     (In millions of Korean won)  

Insurance expense

   2,659      1,637      6,232      2,775      2,423      15,726   

Dividend expense

     154        12        —          —          —          166   

Refund expense

     202,965        4,043        183,061        215        —          390,284   

Provision

     1,122,167        9,813        169,616        1,019        3,115        1,305,730   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

     1,327,945        15,505        358,909        4,009        5,538        1,711,906   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reinsurance claims

     (184     (898     (68     (1,138     (4,127     (6,415
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net insurance expense

   1,327,761      14,607      358,841      2,871      1,411      1,705,491   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     2013  
     Pure
endowment
insurance
    Death
insurance
    Joint
insurance
    Group
insurance
    Others     Total  
     (In millions of Korean won)  

Insurance expense

   6,557      2,287      1,085      4,922      5,645      20,496   

Dividend expense

     295        13        —          —          —          308   

Refund expense

     259,710        5,257        185,286        351        —          450,604   

Provision

     579,663        21,302        163,835        54        (2,977     761,877   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

     846,225        28,859        350,206        5,327        2,668        1,233,285   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reinsurance claims

     (204     (3,592     (54     (2,124     (6,660     (12,634
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net insurance expense

   846,021      25,267      350,152      3,203      (3,992   1,220,651   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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37.4 Insurance risk

Summary of insurance risk

Insurance risk is the risk of loss arising from the actual risk at the time of claims exceeding the estimated risk at the time of underwriting. Insurance risk is classified by insurance price risk and policy reserve risk.

Insurance price risk is the risk of loss arising from differences between premiums from policyholders and actual claims paid.

Policy reserve risk is the risk of loss arising from differences between policy reserves the Group holds and actual claims to be paid.

Concentration of insurance risk and reinsurance policy

The Group uses reinsurance with the intent to expand the ability of underwriting insurance contracts through mitigating the exposure to insurance risk, and generates synergy by joint development of products, management discipline and collecting information on foreign markets.

The Group cedes reinsurance for mortality, illness and other risks arising from insurance contracts where the Group has little experience for a necessary period of time required to accumulate experience.

The Group’s Reinsurance is ceded through the following process:

i. In the decision-making process of launching a new product, the Group makes a decision on ceding reinsurance. Subsequently, a reinsurer is selected through bidding, agreements with the relevant departments and final approval by the executive management.

ii. The reinsurance department analyzes the object of reinsurance, the maximum limit of reinsurance and the loss ratio with the relevant departments.

The characteristic and exposure of insurance price risk

The insurance risk of a life insurance company is measured by insurance price risk. As the life insurance coverage is in the form of a fixed payment, the fluctuation of policy reserve is small and the period from insured event to claims payment is not long, the policy reserve risk is managed by assessments of adequacy of the policy reserve.

The Group measures the exposure of insurance price risk as the shortfall of the risk premiums received compared to the claims paid on all insurance contracts for the last 12 months preceding the reporting date.

The maximum exposure of premium risk as of December 31, 2012 and 2013, follows:

 

     2012  
     Before
reinsurance
mitigation
     After
reinsurance
mitigation
 
     (In millions of Korean won)  

Mortality

   8,016       5,905   

Disability

     509         176   

Hospitalization

     821         507   

Operation and diagnosis

     1,914         911   

Actual losses for medical expense

     121         43   

Other

     86         66   
  

 

 

    

 

 

 

Total

   11,467       7,608   
  

 

 

    

 

 

 

 

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     2013  
     Before
reinsurance
mitigation
     After
reinsurance
mitigation
 
     (In millions of Korean won)  

Mortality

   10,969       5,431   

Disability

     660         370   

Hospitalization

     861         600   

Operation and diagnosis

     1,731         1,164   

Actual losses for medical expense

     243         132   

Other

     89         68   
  

 

 

    

 

 

 

Total

   14,553       7,765   
  

 

 

    

 

 

 

Average ratios of claims paid per risk premium received on the basis of exposure before mitigation for the past three years as of December 31, 2012 and 2013, were 68% and 69%, respectively.

The exposure of market risk arising from embedded derivatives included in host insurance contracts as of December 31, 2012 and 2013, are as follows:

 

     2012      2013  
     Policy
holders
reserve
     Guarantee
reserve
     Policy
holders
reserve
     Guarantee
reserve
 
     (In millions of Korean won)  

Variable annuity

   524,903       3,937       540,797       4,058   

Variable universal

     117,397         59         132,413         135   

Others

     —           —           1,443         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   642,300       3,996       674,653       4,193   
  

 

 

    

 

 

    

 

 

    

 

 

 

Premium reserves and unearned premium reserves classified based on each residual maturity as of December 31, 2012 and 2013, are as follows:

 

    2012  
    Lower than
3 years
    3-5 years     5-10 years     10-15 years     15-20 years     20 years or
more
    Total  
    (In millions of Korean won)  

Premium reserves

  156,070      276,101      1,615,643      270,973      345,853      2,109,936      4,774,576   

Unearned premium reserves

    741        —          2        —          2        4        749   

 

    2013  
    Lower than
3 years
    3-5 years     5-10 years     10-15 years     15-20 years     20 years or
more
    Total  
    (In millions of Korean won)  

Premium reserves

  259,324      324,305      1,570,009      294,058      426,287      2,653,510      5,527,493   

Unearned premium reserves

    642        1        3        —          2        3        651   

 

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38. Supplemental Cash Flow Information

Cash and cash equivalents as of December 31, 2012 and 2013, are as follows:

 

     2012     2013  
     (In millions of Korean won)  

Cash

   2,041,647      1,963,977   

Checks with other banks

     808,461        734,574   

Due from Bank of Korea

     3,215,181        7,128,025   

Due from other financial institutions

     4,527,316        4,966,078   
  

 

 

   

 

 

 

Sub-total

     10,592,605        14,792,654   
  

 

 

   

 

 

 

Restricted due from financial institutions

     (3,643,387     (7,665,903

Due from financial institutions with original maturities over three-months

     (361,913     (957,565
  

 

 

   

 

 

 

Sub-total

     (4,005,300     (8,623,468
  

 

 

   

 

 

 

Total

   6,587,305      6,169,186   
  

 

 

   

 

 

 

Significant non-cash transactions for the years ended December 31, 2011, 2012 and 2013, are as follows:

 

     2011     2012     2013  
     (In millions of Korean won)  

Decrease in loans due to the write-offs

   2,181,414      2,197,135      2,132,066   

Changes in accumulated other comprehensive income due to valuation of financial investments

     (242,668     245,757        (3,591

Changes in investment in associates due to debt-for-equity swap with Ssangyong Engineering & Construction Co., Ltd

     —          —          28,779   

Changes in financial investments due to debt-for-equity swap with Taihan Electric Wire Co., Ltd

     —          —          115,716   

Increase in available-for-sale financial assets from debt-equity swap

     1,914        1,388        —     

Decrease in Accumulated other comprehensive income from measurement of investment securities in associates

     —          (44,263     (9,811

Cash inflow and outflow from income tax, interests and dividends for the years ended December 31, 2011 2012 and 2013, are as follows:

 

    

Activity

   2011     2012      2013  
          (In millions of Korean won)  

Income tax paid

   Operating    (121,533   838,073       504,900   

Interest received

   Operating      14,384,913        14,494,389         12,749,214   

Interest paid

   Operating      6,830,541        7,247,429         6,407,081   

Dividends received

   Operating      98,212        96,587         98,579   

Dividends paid

   Financing      41,163        278,173         231,811   

Dividends paid on hybrid capital instrument

   Financing      46,331        —           —     

 

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39. Contingent liabilities and commitments

Acceptances and guarantees as of December 31, 2012 and 2013, are as follows:

 

     2012      2013  
     (In millions of Korean won)  

Confirmed acceptances and guarantees

     

Confirmed acceptances and guarantees in Korean won

     

Acceptances and guarantees for corporate purchasing card

   17       17   

Acceptances and guarantees for KB purchasing loan

     546,480         448,906   

Other acceptances and guarantees

     1,017,631         782,646   
  

 

 

    

 

 

 

Sub-total

     1,564,128         1,231,569   
  

 

 

    

 

 

 

Confirmed acceptances and guarantees in foreign currency

     

Acceptances of letter of credit

     204,764         281,049   

Letter of guarantees

     66,535         57,596   

Bid bond

     85,228         24,212   

Performance bond

     529,088         999,872   

Refund guarantees

     2,172,006         2,263,202   

Other acceptances and guarantees

     552,015         906,105   
  

 

 

    

 

 

 

Sub-total

     3,609,636         4,532,036   
  

 

 

    

 

 

 

Financial guarantees

     

Guarantees for Debenture-Issuing

     —           20,200   

Acceptances and guarantees for mortgage

     45,123         43,272   

Overseas debt guarantees

     238,670         319,080   

International financing guarantees in foreign currencies

     21,422         41,896   
  

 

 

    

 

 

 

Sub-total

     305,215         424,448   
  

 

 

    

 

 

 

Total confirmed acceptances and guarantees

     5,478,979         6,188,053   
  

 

 

    

 

 

 

Unconfirmed acceptances and guarantees

     

Guarantees of letter of credit

     3,326,326         3,265,906   

Refund guarantees

     918,191         775,181   
  

 

 

    

 

 

 

Total unconfirmed acceptances and guarantees

     4,244,517         4,041,087   
  

 

 

    

 

 

 

Total

   9,723,496       10,229,140   
  

 

 

    

 

 

 

Acceptances and guarantees by counter party as of December 31, 2012 and 2013, are as follows:

 

     2012  
     Confirmed
guarantees
     Unconfirmed
guarantees
     Total      Proportion
(%)
 
     (In millions of Korean won)  

Corporations

   4,237,305       2,450,719       6,688,024         68.78   

Small companies

     1,185,994         763,254         1,949,248         20.05   

Public and others

     55,680         1,030,544         1,086,224         11.17   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   5,478,979       4,244,517       9,723,496         100.00   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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     2013  
     Confirmed
guarantees
     Unconfirmed
guarantees
     Total      Proportion
(%)
 
     (In millions of Korean won)  

Corporations

   4,998,062       2,723,162       7,721,224         75.48   

Small companies

     1,029,039         623,803         1,652,842         16.16   

Public and others

     160,952         694,122         855,074         8.36   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   6,188,053       4,041,087       10,229,140         100.00   
  

 

 

    

 

 

    

 

 

    

 

 

 

Acceptances and guarantees by industry as of December 31, 2012 and 2013, are as follows:

 

     2012  
     Confirmed
guarantees
     Unconfirmed
guarantees
     Total      Proportion
(%)
 
     (In millions of Korean won)  

Financial institutions

   92,037       8,610       100,647         1.04   

Manufacturing

     3,262,542         2,198,617         5,461,159         56.16   

Service

     389,831         33,815         423,646         4.36   

Whole sale & Retail

     924,602         725,224         1,649,826         16.97   

Construction

     754,876         284,448         1,039,324         10.69   

Public sector

     20,650         972,777         993,427         10.22   

Others

     34,441         21,026         55,467         0.56   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   5,478,979       4,244,517       9,723,496         100.00   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     2013  
     Confirmed
guarantees
     Unconfirmed
guarantees
     Total      Proportion
(%)
 
     (In millions of Korean won)  

Financial institutions

   145,197       3,924       149,121         1.46   

Manufacturing

     3,867,870         2,270,254         6,138,124         60.01   

Service

     523,698         115,710         639,408         6.25   

Whole sale & Retail

     1,083,264         745,658         1,828,922         17.88   

Construction

     484,764         244,727         729,491         7.13   

Public sector

     72,583         635,326         707,909         6.92   

Others

     10,677         25,488         36,165         0.35   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   6,188,053       4,041,087       10,229,140         100.00   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Commitments as of December 31, 2012 and 2013, are as follows:

 

     2012      2013  
     (In millions of Korean won)  

Commitments

     

Corporate loan commitments

   40,770,994       42,446,365   

Retail loan commitments

     14,348,821         13,976,426   

Credit line on credit cards

     36,214,899         37,112,333   

Private placement commitments

     80,000         80,000   

Purchase of other security investment

     1,778,767         1,806,908   
  

 

 

    

 

 

 

Total commitments

     93,193,481         95,422,032   
  

 

 

    

 

 

 

Financial Guarantees

     

Credit line

     1,141,554         2,572,424   

Purchase of security investment

     62,500         100,500   
  

 

 

    

 

 

 

Total financial guarantees

     1,204,054         2,672,924   
  

 

 

    

 

 

 

Total

   94,397,535       98,094,956   
  

 

 

    

 

 

 

Other Matters (including litigation)

i) The Group has filed 164 lawsuits (excluding minor lawsuits in relation to the collection or management of loans), involving aggregate claims of ₩797,816 million, and faces 288 lawsuits (as the defendant) (excluding minor lawsuits in relation to the collection or management of loans) involving aggregate damages of ₩532,098 million, which arose in the normal course of the business and are still pending as of December 31, 2013.

Meanwhile, certain customers of Kookmin Bank have filed lawsuits against Kookmin Bank in connection with fees paid for the registration of fixed collateral. Of the cases currently on trial, the Court has ruled in favor of Kookmin Bank, and where the case has been appealed, these appeals were subsequently dismissed. Based on these rulings, there is a low probability of potential losses related to the aforementioned lawsuits.

ii) According to the shareholders’ agreement on September 25, 2009, between Kookmin Bank, the International Finance Corporation (“IFC”) and the remaining shareholders, Kookmin Bank granted a put option to IFC with the right to sell shares of JSC Bank Center Credit to itself or its designee. The exercise price is determined at its fair value by mutual agreement between Kookmin Bank and IFC. If the price is not agreed by the designated date, it is determined by the value measured by the selected independent external valuation institution. The put option may be exercised by IFC at any time from February 24, 2013, to February 24, 2017.

iii) The face value of the securities sold to general customers through tellers’ sale amounts to ₩116,633 million and ₩57,159 million as of December 31, 2012 and 2013, respectively.

iv) Kookmin Bank underwent a tax investigation by the Seoul Regional Tax Office and in early 2007 was assessed additional corporate tax including local income tax of ₩482,755 million. Kookmin Bank paid this amount to the tax authorities. Subsequently, Kookmin Bank filed a claim for adjudication in August 2007 for repayment of the amount of ₩482,643 million. Of this amount, ₩117,135 million has been refunded to Kookmin Bank following a successful appeal to the National Tax Tribunal and administrative litigations. Further, a portion of the claim amounting to ₩970 million has been extinguished following litigation. Meanwhile, the claim for a refund of ₩364,538 million, specifically related to the merger of Kookmin Card Co., Ltd. was ruled in favor of Kookmin Bank in an original case on April 1, 2011, and in a second trial at the Seoul High Court on January 12, 2012. The ruling has been appealed by the tax authorities to the Supreme Court, where it is currently pending third trial as of December 31, 2013.

 

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v) During the year ended December 31, 2013, Kookmin Bank underwent a tax investigation for the fiscal years 2008 to 2012 by the Seoul Regional Tax Office. As a result, Kookmin Bank was fined a total of ₩124,357 million for income taxes (including local income taxes), paid ₩113,699 million, excluding local income taxes, and recognized local income taxes amounting to ₩10,658 million as other payables. In October 2013, the Group appealed to the tax tribunal the ₩116,257 million in fines.

vi) The Group filed a claim for rectification of foreign income tax paid of Kookmin Bank for the fiscal years 2010 to 2011. The claim was ruled in favor of the Group in January 2014 and a refund of ₩15,772 million was received from the Seoul Regional Tax Office. The refund will belong to Kookmin Bank.

vii) KB Kookmin Card suffered massive leakage of customer personal information in June 2013. This leakage was caused by an employee of outsourced subcontractor who was setting up a fraud detection system for KB Kookmin Card. Consequently, as at the date on which the Board of Directors approved the financial statements, KB Kookmin Card is subject to claims from five plaintiffs, with an aggregated claim of ₩34 million. Additional lawsuits may be filed against the Group with respect to the leakage of customer personal information, and the final outcomes of such litigations remain uncertain.

viii) The Group was chosen as the preferred bidder in the sale of Woori Financial Co., Ltd. on December 6, 2013.

40. Subsidiaries

The details of subsidiaries as of December 31, 2013, are as follows:

 

Investor

  

Investee

  Ownership
interests(%)
    Location   Date of
financial
information
   

Industry

KB Financial
Group Inc.

   Kookmin Bank     100.00      Korea     Dec. 31     

Banking and domestic, foreign exchange transaction

  

KB Kookmin Card Co., Ltd.

    100.00      Korea     Dec. 31     

Credit card

  

KB Investment & Securities Co., Ltd.

    100.00      Korea     Dec. 31     

Financial investment

  

KB Life Insurance Co., Ltd.

    100.00      Korea     Dec. 31     

Life insurance

  

KB Asset Management Co., Ltd.

    100.00      Korea     Dec. 31     

Security investment trust management and advisory

  

KB Real Estate Trust Co., Ltd.

    100.00      Korea     Dec. 31     

Real estate trust management

  

KB Investment Co., Ltd.

    100.00      Korea     Dec. 31     

Investment in small company

  

KB Credit Information Co., Ltd.

    100.00      Korea     Dec. 31     

Collection of receivables or credit investigation

  

KB Data System Co., Ltd.

    100.00      Korea     Dec. 31     

Software advisory, development, and supply

  

KB Savings Bank Co., Ltd.

    100.00      Korea     Dec. 31     

Savings banking

  

Yehansoul Savings Bank Co., Ltd.

    100.00      Korea     Dec. 31     

Savings banking

 

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Investor

  

Investee

  Ownership
interests(%)
    Location   Date of
financial
information
   

Industry

Kookmin Bank

  

Kookmin Bank Int’l Ltd.(London)

    100.00      United
Kingdom
    Dec. 31     

Banking and foreign exchange transaction

  

Kookmin Bank Hong Kong Ltd.

    100.00      Hong
Kong
    Dec. 31     

Banking and foreign exchange transaction

  

Kookmin Bank Cambodia PLC.

    100.00      Cambodia     Dec. 31     

Banking and foreign exchange transaction

  

Kookmin Bank (China) Ltd.

    100.00      China     Dec. 31     

Banking and foreign exchange transaction

  

Personal pension trusts and 10 other trusts(1)

    —        Korea     Dec. 31     

Trust

  

KB Mortgage Loan First Securitization Specialty Co., Ltd. and 10 others(2)

    —        Korea     Dec. 31     

Asset-backed securitization and others

  

KB Evergreen Private Securities 82 and 28 others

    100.00      Korea     Dec. 31     

Private equity fund

Kookmin Bank,
KB Investment Co., Ltd.

  

KB06-1 Venture Investment

    75.00      Korea     Dec. 31     

Capital investment

  

KB08-1 Venture Investment

    100.00      Korea     Dec. 31     

Capital investment

  

KB12-1 Venture Investment

    100.00      Korea     Dec. 31     

Capital investment

  

KB Start-up Creation Fund

    100.00      Korea     Dec. 31     

Capital investment

KB Asset Management Co., Ltd.

  

KB Wellyan Private Equity Real Estate Fund No. 6

    95.67      Korea     Dec. 31     

Capital investment

  

KB Wellyan Private Equity Real Estate Fund No. 7(2)

    47.97      Korea     Dec. 31     

Capital investment

KB Wellyan Private Equity Real Estate Fund No. 6, 7

  

Boyoung construction(2)

    —        Korea     Dec. 31     

Construction

KB Investment Co., Ltd.

  

NPS 07-5 KB Venture Fund(2)

    20.00      Korea     Dec. 31     

Capital investment

  

09-5 KB Venture Fund(2)

    33.33      Korea     Dec. 31     

Capital investment

  

KoFC-KB Pioneer Champ No.2010-8 Investment Partnership(2)

    50.00      Korea     Dec. 31     

Capital investment

  

2011 KIF-KB IT Venture Fund(2)

    43.33      Korea     Dec. 31     

Capital investment

  

KoFC-KB Young Pioneer 1st Fund(2)

    33.33      Korea     Dec. 31     

Capital investment

 

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Investor

  

Investee

  Ownership
interests(%)
    Location   Date of
financial
information
   

Industry

KB Kookmin Card Co., Ltd

  

KB Kookmin Card First Securitization Co., Ltd.(2)

    0.90      Korea     Dec. 31     

Asset-backed securitization

  

Wise Mobile First Securitization Specialty(2)

    —        Korea     Dec. 31     

Asset-backed securitization

  

Wise Mobile Second Securitization Specialty(2)

    —        Korea     Dec. 31     

Asset-backed securitization

  

Wise Mobile third Securitization Specialty(2)

    —        Korea     Dec. 31     

Asset-backed securitization

  

Wise Mobile fourth Securitization Specialty(2)

    —        Korea     Dec. 31     

Asset-backed securitization

  

Wise Mobile fifth Securitization Specialty(2)

    —        Korea     Dec. 31     

Asset-backed securitization

  

Wise Mobile sixth Securitization Specialty(2)

    —        Korea     Dec. 31     

Asset-backed securitization

  

Wise Mobile seventh Securitization Specialty(2)

    —        Korea     Dec. 31     

Asset-backed securitization

KB Life Insurance Co., Ltd.

  

Dream Smart Turn Private Securities 3 and five others

    100.00      Korea     Dec. 31     

Private equity fund

Kookmin Bank, KB Investment & Securities, KB life Insurance, KB Real Estate Trust Co., Ltd

  

KB Wise Star Private Real Estate Feeder Fund 1st.

    100.00      Korea     Dec. 31     

Investment trust

Kookmin Bank

  

Hanbando BTL Private Special Asset Fund(2)

    39.74      Korea     Dec. 31     

Capital investment

Kookmin Bank, KB life Insurance

  

KB Hope Sharing BTL Private Special Asset(2)

    40.00      Korea     Dec. 31     

Capital investment

Kookmin Bank

  

KB Mezzanine Private Securities Fund 1(2)

    46.51      Korea     Dec. 31     

Capital investment

  

K Star KTB ETF(Bond)(2)

    48.20      Korea     Dec. 31     

Capital investment

  

Global Logistics Infra Private
Fund 1

    57.14      Korea     Dec. 31     

Capital investment

  

Global Logistics Infra Private
Fund 2

    —        Korea     Dec. 31     

Capital investment

KB Wise Star Private Real Estate Feeder Fund 1st.

  

KB Star Retail Real Estate Feeder Fund 1st.(2)

    48.98      Korea     Dec. 31     

Capital investment

 

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(1) 

The Group controls the trust because it has power that determines the management performance over the trust and is exposed to variable returns to absorb losses through the guarantees of payment of principal or payment of principal and fixed rate of return.

(2) 

The Group controls these investees because it is exposed to variable returns from its involvement with the investees and has ability to affect those returns through its power, even though it holds less than a majority of the voting rights of the investees.

The condensed financial information of major subsidiaries as of December 31, 2012 and 2013, and for the years ended December 31, 2012 and 2013, is as follows:

 

    2012  
    Assets     Liabilities     Equity     Operating
income
(revenue)
    Profit(loss)
for the year
    Total compre-
hensive
income(loss) for
the year
 
    (In millions of Korean won)  

Kookmin Bank(1)

  261,046,853      241,029,295      20,017,558      19,421,893      1,440,123      1,549,881   

KB Kookmin Card Co., Ltd.(1)

    14,046,174        10,966,541        3,079,633        2,921,167        290,741        297,423   

KB Investment & Securities Co., Ltd.(1)

    3,314,907        2,769,160        545,747        1,003,421        17,892        21,760   

KB Life Insurance Co., Ltd.(1)

    5,987,928        5,594,727        393,201        1,944,103        16,645        38,498   

KB Asset Management Co., Ltd.(1)

    164,595        37,555        127,040        89,541        35,885        36,882   

KB Real Estate Trust Co., Ltd

    201,572        35,363        166,209        52,021        21,751        21,565   

KB Investment Co., Ltd.(1)

    226,528        103,086        123,442        26,233        5,501        7,380   

KB Credit Information Co., Ltd

    30,422        7,631        22,791        58,584        331        331   

KB Data System Co., Ltd

    25,519        10,761        14,758        78,021        (1,198     (1,461

KB Savings Bank Co., Ltd

    646,674        510,254        136,420        67,280        (32,546     (32,404

 

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    2013  
    Assets     Liabilities     Equity     Operating
income
(revenue)
    Profit(loss)
for the year
    Total compre-
hensive
income(loss) for
the year
 
    (In millions of Korean won)  

Kookmin Bank(1)

  265,258,942      244,641,628      20,617,314      17,461,406      819,719      883,258   

KB Kookmin Card Co., Ltd.(1)

    15,854,992        12,385,131        3,469,861        2,990,037        384,411        390,228   

KB Investment & Securities Co., Ltd.(1)

    2,525,070        1,973,888        551,182        577,649        11,856        5,436   

KB Life Insurance Co., Ltd.(1)

    6,945,605        6,396,477        549,128        1,457,365        9,098        (23,209

KB Asset Management Co., Ltd.(1)

    237,907        36,335        201,572        103,401        74,685        74,560   

KB Real Estate Trust Co., Ltd

    182,657        13,612        169,045        46,524        2,110        2,835   

KB Investment Co., Ltd.(1)

    241,227        110,640        130,587        34,497        6,078        7,145   

KB Credit Information Co., Ltd

    30,142        7,687        22,455        43,627        (336     (336

KB Data System Co., Ltd

    21,753        6,880        14,873        50,440        19        115   

KB Savings Bank Co., Ltd

    584,025        449,087        134,938        47,865        (301     (1,482

Yehansoul Savings Bank Co., Ltd

    189,243        164,084        25,159        4,791        (5,331     (5,259

 

(1)

Financial information is based on its consolidated financial statements.

Nature of the risks associated with interests in consolidated structured entities

The terms of contractual arrangements require to provide financial support to a consolidated structured entity

 

   

The Group has provided ABCP purchase commitment of ₩101,000 million to KH First Co., Ltd., the Group’s subsidiary, that had issued ABCP. This purchase commitment would require the Group to purchase unsold ABCP if there is a shortage of the investors for the ABCP issued by the structured entity.

 

   

The Group provides capital commitment to KB Wise Star Private Real Estate Feeder Fund 1st. and 8 other subsidiaries. The unexecuted amount of the investment agreement is ₩408,887 million. Based on the capital commitment, the Group is subject to increase its investment by the request from the asset management company or the additional agreement among investors.

 

   

The Group provides the guarantees of payment of principal or principal and fixed rate of return in case the operating results of the trusts are less than the guaranteed principal or principal and fixed rate of return.

Changes in subsidiaries

Yehansoul Savings Bank Co., Ltd., KB Startup Investment, KB Evergreen Private Securities 63 and 46 other private equity funds, and Wise Mobile Second, Third, Fourth, Fifth, Sixth, Seventh Securitization and KB Star Retail Private Real Estate Feeder Fund First were newly consolidated during the year ended December 31,

 

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2013. Yurie Select Private Securities Investment Trust 32 and 44 other private equity funds, KB K-Alpha private equity trust and New Star First Ltd. have been excluded from consolidation due to their liquidation. Also, KB Private Real Estate Securities Fund1 (NPL) and Woori KA First Asset Securitization Specialty Co., Ltd. have been excluded from consolidation due to the loss of control.

For the year ended December 31, 2012, the following table summarizes the information relating to the Group’s subsidiaries that have material non-controlling interests, before any intra-group eliminations, are as follows:

KB Life Insurance Co., Ltd.(1)

 

     2012  
     (In millions of Korean won)  

Non-controlling interests percentage (%)

     49.00         

Non-controlling interests

  

Assets of subsidiaries

   5,987,928   

Liabilities of subsidiaries

     5,594,727   

Equity of subsidiaries

     393,201   

Non-controlling interests

     192,668   

Profit attributable to non-controlling interests

  

Operating profit of subsidiaries

     22,769   

Profit of subsidiaries

     16,645   

Total comprehensive income of subsidiaries

     38,498   

Profit attributable to non-controlling interests

     8,156   

Cash flows of subsidiaries

  

Cash flows from operating activities

     833,231   

Cash flows from investing activities

     (826,956

Cash flows from financing activities

     300   
  

 

 

 

Net increase in cash and cash equivalents

   6,575   
  

 

 

 

 

(1)

The Group further acquired an additional 49% equity interest, resulting in the entity becoming a wholly owned subsidiary of the Group in June 2013.

Changes in non-controlling interest

The Group acquired an additional equity interest in Kookmin Bank Cambodia PLC in July 2012 for ₩8,048 million, with the carrying amount of the non-controlling interest being ₩8,364 million. The Group derecognized non-controlling interests of ₩7,013 million and recorded a decrease in equity attributable to shareholders of the parent entity of ₩1,035 million. In June 2013, the parent entity acquired an additional equity interest in Kookmin Bank Cambodia PLC for ₩1,463 million, with the carrying amount of the non-controlling interest being ₩1,495 million. This resulted in the elimination of non-controlling interest equity for Kookmin Bank Cambodia PLC and the remaining ₩32 million was recognized as an increase in the Group’s equity attributable to shareholders of the parent company. As of December 31, 2012, the Group owned 92.44%, which has increased to 100% as of December 31, 2013.

In addition, the Group acquired an additional equity interest in KB Life Insurance Co., Ltd. for ₩166,830 million, with the carrying amount of the non-controlling interest being ₩181,955 million. This resulted in the elimination of non-controlling interest equity for KB Life Insurance Co., Ltd. and the remaining ₩15,125 million was recognized as an increase in the Group’s equity attributable to shareholders of the parent company. As of December 31, 2012, the Group owned 51%, which has increased to 100% as of December 31, 2013.

 

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41. Unconsolidated Structured Entity

As of December 31, 2013, the nature, purpose and activities of the unconsolidated structured entities and how the structured entities are financed, are as follows:

 

Nature

  

Purpose

  

Activities

  

Methods of Financing

Asset-backed securitization

  

Early cash generation through transfer of securitization assets

 

Fees earned as services to SPC, such as providing lines of credit and ABCP purchase commitments

  

Fulfillment of Asset-backed securitization plan

 

Purchase and transfer of securitization assets

 

Issuance and repayment of ABS and ABCP

   Issuance of ABS and ABCP based on securitization assets

Project Financing

  

Granting PF loans to SOC and real estate

 

Granting loans to ships/aircrafts SPC

  

Construction of SOC and real property

Building ships/ construction and purchase of aircrafts

   Loan commitments through Credit Line, providing lines of credit and investment agreements

Trusts

   Management of trusts with no guarantee of the principal   

Management of trust assets

 

Payment of trust fees and allocation of trust profits

   Sales of trust financial instruments

Investment funds

  

Investment in beneficiary certificates

 

Investment in PEF and partnerships

  

Management of fund assets

 

Payment of fund fees and allocation of fund profits

  

Sales of beneficiary certificate instruments

Investment of managing partners and limited partners

 

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As of December 31, 2013, the size of the unconsolidated structured entities and the risks associated with its interests in unconsolidated structured entities, are as follows:

 

    Asset-backed
securitization
    Project
Financing
    Trusts     Investment
funds
    Others     Total  
    (In millions of Korean won)  

Total assets of unconsolidated Structured Entity

  12,631,056      24,605,331      2,261,415      12,618,790      3,502,834      55,619,426   

Carrying amount on financial statements

           

Assets

           

Loans

    382,478        3,155,621        —          —          291,599        3,829,698   

Financial investments

    1,121,676        97,754        —          525,680        —          1,745,110   

Investment in associates

    —          —          —          403,153        —          403,153   

Other assets

    —          —          165,709        1,909        —          167,618   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

  1,504,154      3,253,375      165,709      930,742      291,599      6,145,579   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

           

Deposits

    306,931        487,818        —          8,142        5,473        808,364   

Other liabilities

    —          14        —          144        —          158   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

  306,931      487,832      —        8,286      5,473      808,522   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Maximum exposure to loss(1)

  4,672,378      5,714,293      294,043      2,476,902      386,000      13,543,616   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Methods of determining the maximum exposure to
loss

   
 
 
 
Providing lines
of credit and
purchase
commitments
  
  
  
  
   
 
 
 
 
 
 
 
 
 
Investments
/loans, Loan
commitments
/investment
agreements
/purchase
commitments
and
Acceptances
and guarantees
  
  
  
  
  
  
  
  
  
  
   
 
 
 
 
 
Principal
/principal
and interest
trust: Total
amount of
trust asset
  
  
  
  
  
  
   
 
 
 
Investments
/loans and
capital
commitments
  
  
  
  
   
 
Loan
commitments
  
  
 

 

(1)

Maximum exposure to loss includes the asset amounts, after deducting loss(provision for assets, impairment losses and others), recognized in the financial statements of the Group.

 

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42. Finance/Operating Lease

42.1 Finance lease

The future minimum lease payments arising as of December 31, 2012 and 2013, are as follows:

 

             2012                      2013          
     (In millions of Korean won)  

Net carrying amount of finance lease assets

   16,856       16,955   

Minimum lease payment

     

Within 1 year

   2,310       1,927   

1-5 years

     1,427         —     
  

 

 

    

 

 

 

Total

   3,737       1,927   
  

 

 

    

 

 

 

Present value of minimum lease payment

     

Within 1 year

   2,163       1,873   

1-5 years

     1,386         —     
  

 

 

    

 

 

 

Total

   3,549       1,873   
  

 

 

    

 

 

 

42.2 Operating lease

42.2.1 The Group as operating lessee

The future minimum lease payments arising from the non-cancellable lease contracts as of December 31, 2012 and 2013, are as follows:

 

     2012     2013  
     (In millions of Korean won)  

Minimum lease payment

    

Within 1 year

   118,305      121,446   

1-5 years

     102,855        108,962   

Over 5 years

     643        67   
  

 

 

   

 

 

 

Total

   221,803      230,475   
  

 

 

   

 

 

 

Minimum sublease payment

     (154     (367

The lease payment reflected in profit or loss for the years ended December 31, 2011, 2012 and 2013, are as follows:

 

     2011     2012     2013  
     (In millions of Korean won)  

Lease payment reflected in profit or loss

      

Minimum lease payment

   188,854      201,450      204,164   

Contingent rent

     4        —          —     

Sublease payment

     (53     (165     (118
  

 

 

   

 

 

   

 

 

 

Total

   188,805      201,285      204,046   
  

 

 

   

 

 

   

 

 

 

 

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42.2.2 The Group as operating lessor

The future minimum lease receipts arising from the non-cancellable lease contracts as of December 31, 2012 and 2013, are as follows:

 

     2012      2013  
     (In millions of Korean won)  

Minimum lease receipts

     

Within 1 year

   2,028       8,327   

1-5 years

     443         22,280   
  

 

 

    

 

 

 

Total

   2,471       30,607   
  

 

 

    

 

 

 

43. Related Party Transactions

Profit and loss arising from transactions with related parties for the years ended December 31, 2011, 2012 and 2013, are as follows:

 

    2011     2012     2013  
        (In millions of Korean won)  

Associates

       

Korea Credit Bureau Co., Ltd.

  Fee and commission income   —        3      3   
 

Interest expense

    168        143        139   

UAMCO., Ltd.

  Interest income     1,196        297        31   
  Reversal for credit loss     —          68        —     
  Other operating income     13,455        —          —     
  Other operating expense     40,879        93,266        7,626   

JSC Bank CenterCredit

  Interest expense     218        —          —     

CH Engineering Co., Ltd.

  Reversal for credit loss     —          106        —     

Kores Co., Ltd.

  Interest income     —          317        386   
  Fee and commission income     —          9        —     
  Reversal for credit loss     —          —          36   
  Provision for credit loss     —          325        —     

Semiland Co., Ltd.

  Interest income     17        17        14   
  Reversal for credit loss     3        4        —     
  Interest expense     1        —          —     

Powerrex Corporation Co., Ltd

  Interest income     74        —          —     
  Reversal for credit loss     104        —          —     
  Interest expense     1        —          —     

Incheon Bridge Co., Ltd.

  Interest income     —          —          14,592   
  Reversal for credit loss     —          —          2   
  Interest expense     —          —          909   

Ssangyong Engineering & Construction Co., Ltd.

 

Interest income

   
—  
  
   
—  
  
   
2,007
  
  Reversal for credit loss     —          —          7,500   

United PF 1st Recovery Private Equity Fund1

 

Interest income

    —          500        91   
  Other operating income     30,722        1,900        —     
  Reversal for credit loss     —          7        83   
  Interest expense     —          28        —     

KBIC Private Equity Fund No. 3

  Other operating income     —          300        300   
  Interest expense     —          —          91   

NPS KBIC Private Equity Fund No. 1

  Other operating income     —          474        474   

 

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    2011     2012     2013  
        (In millions of Korean won)  

KoFC KBIC Frontier Champ 2010-5(PEF)

  Other operating income     —          1,000        1,014   

KoFC POSCO HANHWA KB shared growth Private Equity Fund

  Other operating income     —          303        569   

KB GwS Private Securities Investment Trust

  Fee and commission income     —          12,978        —     

KB Star office Private real estate Investment Trust No.1

  Interest expense     —          9        75   

Evalley Co., Ltd.(1)

  Reversal for credit loss     —          77        —     

PyungJeon Industries Co., LTD.(1)

  Reversal for credit loss     —          —          1,055   
  Provision for credit loss     —          343        —     

Testian Co., Ltd.

  Interest income     24        104        10   
  Other operating income     —          15        —     
  Provision for credit loss     8        —          —     

Serit Platform Co., Ltd.(1)

  Interest income     85        78        58   
  Fee and commission income     —          27        17   
  Provision for credit loss     26        4        74   

Sehwa Electronics Co., Ltd.(1)

  Fee and commission income     —          33        —     
  Gains on financial assets/liabilities at fair value through profit or loss     —          2        35   
  Interest income     21        —          —     
  Interest expense     19        10        —     
  Fee and commission expense     —          —          7   
  Losses on financial assets/liabilities at fair value through profit or loss     —          143        —     

DS Plant Co., Ltd.(1)

  Interest income     376        315        211   
  Fee and commission income     —          —          4   
  Reversal for credit loss     (39     3        2   
  Other operating income     —          8        8   
  Interest expense     —          1        2   
  Fee and commission expense     —          2        —     
  Losses on financial assets/liabilities at fair value through profit or loss     —          —          26   

KB Global Star Game & Apps SPAC(1)

 

Interest income

   
1,443
  
   
77
  
   
60
  
  Gains on financial assets/liabilities at fair value through profit or loss     —          158        273   
  Other operating income     —          3        —     
  Other non-operating income     —          —          7   
  Interest expense     36        430        10   
  Other operating expense     —          —          4   

Joam Housing Development Co., Ltd.(1)

  Interest expense     —          1        —     

Sunoo Co., Ltd.(1)

  Interest expense     —          —          1   

Burrill-KB Life Science Fund

  Net non-operating expense     17        —          —     

Key management

  Interest income and others     397        276        460   
  Reversal for credit loss     (7     1        9   
  Interest expense and others     289        167        332   

Other

       

Retirement pension

  Fee and commission income     199        415        386   
  Interest expense     898        1,699        1,971   

 

(1) 

Not considered to be the Group’s related party as at December 31, 2013.

 

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The details of receivables and payables, and related allowances for loans losses arising from the related party transactions as of December 31, 2012 and 2013, are as follows:

 

         2012      2013  
         (In millions of Korean won)  

Associates

       

JSC Bank CenterCredit

  Cash and due from financial institutions    161       353   

Korea Credit Bureau Co., Ltd.

  Deposits      18,017         20,200   
  Other liabilities      32         64   

UAMCO., Ltd.

  Deposits      6         5   
  Provisions      191         192   
  Other liabilities      1         —     

Kores Co., Ltd.

  Loans and receivables (Gross amount)      7,854         7,854   
  Allowances for loan losses      3,872         3,836   
  Other liabilities      3         2   

Semiland Co., Ltd.

  Loans and receivables (Gross amount)      —           19   
  Deposits      1         1   
  Provisions      3         3   

Incheon Bridge Co., Ltd.

  Loans and receivables (Gross amount)      263,080         249,362   
  Allowances for loan losses      302         300   
  Other assets      —           1,343   
  Deposits      33,569         30,991   
  Other liabilities      305         240   

Ssangyong Engineering & Construction Co., Ltd.

  Loans and receivables (Gross amount)      —           47,104   
 

Allowances for loan losses

     —           38,784   
 

Deposits

     —           61   
 

Other liabilities

     —           14   

Terra Co., Ltd.

 

Deposits

     —           1   

United PF 1st Recovery Private Equity Fund1

 

Loans and receivables (Gross amount)

     2,805         —     
 

Allowances for loan losses

     5         —     
 

Other assets

     4         —     
 

Provisions

     160         82   
 

Other liabilities

     1         —     

KB-Glenwood Private Equity Fund 1

 

Deposits

     —           1   

KBIC Private Equity Fund No. 3

 

Other assets

     75         76   
 

Deposits

     —           1,400   
 

Other liabilities

     —           25   

NPS KBIC Private Equity Fund No. 1

 

Other assets

     65         65   
 

Other liabilities

     125         42   

KoFC KBIC Frontier Champ 2010-5(PEF)

 

Other assets

    
251
  
    
266
  

KoFC POSCO HANHWA KB shared growth Private Equity Fund

 

Other assets

     303         569   

KB Star office Private real estate Investment Trust No.1

 

Deposits

    
4,850
  
    
8,142
  
 

Other liabilities

     9         31   

PyungJeon Industries Co.,LTD.(1)

 

Loans and receivables (Gross amount)

     2,125         —     
 

Allowances for loan losses

     1,055         —     
 

Other liabilities

     1         —     

Testian Co., Ltd.(1)

 

Investments in associates

     413         —     

 

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Table of Contents
                 2012                      2013          
         (In millions of Korean won)  

Serit Platform Co., Ltd.(1)

 

Loans and receivables (Gross amount)

     767         —     
 

Allowances for loan losses

     80         —     
 

Other assets

     2         —     
 

Deposits

     48         —     

Sehwa Electronics Co., Ltd.(1)

 

Derivative financial liabilities

     75         —     
 

Deposits

     72         —     
 

Provisions

     11         —     
 

Other liabilities

     7         —     

DS Plant Co., Ltd.(1)

 

Loans and receivables (Gross amount)

     3,254         —     
 

Allowances for loan losses

     12         —     
 

Investments in associates

     964         —     
 

Other assets

     14         —     
 

Deposits

     45         —     
 

Provisions

     3         —     
 

Other liabilities

     2         —     

KB Global Star Game & Apps SPAC(1)

 

Derivative financial assets

     1,776         —     
 

Loans and receivables (Gross amount)

     1,001         —     
 

Investments in associates

     262         —     
 

Deposits

     897         —     
 

Other liabilities

     2         —     

Joam Housing Development Co., Ltd.(1)

 

Deposits

     236         —     

Key management

 

Loans and receivables (Gross amount)

     5,741         4,765   
 

Allowances for loan losses

     21         1   
 

Other assets

     6         6   
 

Deposits

     8,585         5,798   
 

Insurance contract liability

     313         770   
 

Other liabilities

     71         62   
 

Provisions

     44         2   

Other

       

Retirement pension

 

Other assets

     195         166   
 

Deposits

     50,317         48,840   
 

Other liabilities

     1,099         908   

 

(1) 

Not considered to be the Group’s related party as at December 31, 2013.

According to IAS 24, the Group includes subsidiaries, associates, key management (including family members), and post-employment benefit plans of the Group in the scope of related parties. Additionally, the Group discloses balances (receivables and payables) and other amounts arising from the related party transactions in the notes to the consolidated financial statements. Refer to Note 13 for details on investments in associates.

Key management includes the directors of the Parent Company and the directors of Kookmin Bank and companies where the directors and/or their close family members have control or joint control.

 

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Unused commitments to related parties as of December 31, 2012 and 2013, are as follows:

 

     2012      2013  
     (In millions of Korean won)  

Balhae Infrastructure Fund

  Purchase of security investment    21,744       21,744   

UAMCO., Ltd.

  Loan commitments in Korean won      127,800         127,800   
  Purchase of security investment      89,950         89,950   

United PF 1st Recovery Private Equity Fund

  Loan commitments in Korean won      106,395         54,600   
  Purchase of security investment      49,383         49,383   

KoFC KBIC Frontier Champ 2010-(PEF)

  Purchase of security investment      17,850         2,200   

KoFC POSCO HANHWA KB shared growth Private Equity Fund

  Purchase of security investment      43,750         35,975   

Incheon Bridge Co., Ltd.

  Purchase of security investment      37,587         42,088   

KB GwS Private Securities Investment Trust

  Loan commitments      2,899         757   
  Purchase of security investment      1,119         1,119   
  Other commitments      88,151         —     

Unused commitments received from related parties as of December 31, 2012 and 2013, are as follows:

 

    2012     2013  
        (In millions of Korean won)  

Associates

     

Ssangyong Engineering & Construction Co., Ltd.

  Acceptances and Guarantees Outstanding in Won   —        293,500   

Compensation to key management for the years ended December 31, 2011, 2012 and 2013, are as follows:

 

     2011  
     Short-term
employee
benefits
     Post-
employment
benefit
     Termination
benefits
     Share-based
payments
    Total  
     (In millions of Korean won)  

Registered directors (executive)

   4,614       284       —         2,654      7,552   

Registered directors (non-executive)

     1,011         —           —           (48     963   

Non-registered directors

     5,769         505         135         840        7,249   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   11,394       789       135       3,446      15,764   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

     2012  
     Short-term
employee
benefits
     Post-
employment
benefits
     Termination
benefits
     Share-based
payments
     Total  
     (In millions of Korean won)  

Registered directors (executive)

   4,075       230       —         3,480       7,785   

Registered directors (non-executive)

     1,107         —           —           18         1,125   

Non-registered directors

     6,067         436         —           3,751         10,254   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   11,249       666       —         7,249       19,164   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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     2013  
     Short-term
employee
benefits
     Post-
employment
benefits
     Termination
benefits
     Share-based
payments
     Total  
     (In millions of Korean won)  

Registered directors (executive)

   3,270       144       —         (578)       2,836   

Registered directors (non-executive)

     1,199         —           —           13         1,212   

Non-registered directors

     7,305         380         1,024         5,686         14,395   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   11,774       524       1,024       5,121       18,443   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Collateral received from related party entities as of December 31, 2012 and 2013, are as follows:

 

          2012      2013  
          (In millions of Korean won)  

Associates

        

Kores Co., Ltd.

   Row house    24       24   
   Apartment      24         24   
   Factory/Forest land      15,000         15,000   

44. Business combination

The Group acquired Yehansoul Savings Bank Co., Ltd. for ₩37,760 million in September 2013.

The consideration transferred and the assets and liabilities arising from the M&A deal are as follows:

 

     Amounts  
     (In millions of Korean won)  

Total consideration

   37,760   
  

 

 

 

Recognized amounts of identifiable assets acquired and liabilities assumed

  

Cash and due from financial institutions

     360,401   

Financial assets at fair value through profit or loss

     4,395   

Loans

     81,179   

Financial investments

     6,926   

Other assets

     16,502   
  

 

 

 

Total assets

     469,403   
  

 

 

 

Deposits

     423,020   

Other liabilities

     15,966   

Total liabilities

     438,986   
  

 

 

 

Total identifiable net assets

   30,417   
  

 

 

 

Goodwill

   7,343   

Acquisition-related costs(1)

     771   

 

(1) 

Recorded in fee and commission expense in the statement of comprehensive income.

 

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The receivables including loans from the M&A deal at the acquisition date are as follows:

 

     Amounts  
     (In millions of Korean won)  

Fair value

  

Loans

   81,179   

Others

     11,202   
  

 

 

 

Total

   92,381   
  

 

 

 

Contractual cash flow

  

Loans

   94,914   

Others

     11,459   
  

 

 

 

Total

   106,373   
  

 

 

 

Estimate of the contractual cash flows not expected to be collected

  

Loans

   13,721   

Others

     28   
  

 

 

 

Total

   13,749   
  

 

 

 

Due to the business combination, the net operating loss and loss for the period from September 2, 2013 to December 31, 2013, included in the consolidated statement of comprehensive income were ₩6,678 million and ₩5,331 million, respectively.

Assuming the date of acquisition is beginning of the reporting period, income from operations and net profit for the year would have decreased by ₩23,793 million and ₩18,341 million, respectively. In calculating the pro forma information, the results of the acquired companies for the period before acquisition have been adjusted to reflect the Group’s accounting policies and the fair value adjustments made on acquisition.

45. Event after the Reporting Period

KB Savings Bank Co., Ltd. completed its merger with Yehansoul Savings Bank on January 13, 2014.

As a result of the leakage of customer personal information discussed in Note 39, KB Kookmin Card received notification from the Financial Service Commission on February 16, 2014, that KB Kookmin Card is subject to a temporary three-month suspension on the following operational activities:

 

Suspension of operations

  

The following credit-card operations are subject to the temporary suspension:

* Issuance of KB Kookmin Card products including credit cards, debit card and checking cards to new clients (except in circumstances where the Financial Services Commission’s Chairman approves it for the benefit of the public interest)

* Offering new products to existing KB Kookmin Card clients.

* Offering new products via telemarketers, travel agents and insurance agents.

Suspension period

   February 17, 2014 ~ May 16, 2014 (3 months)

The three-month suspension is likely to adversely affect the Group’s operational base in the short term. However, considering the Group’s asset quality, strong underlying financial performance and its credibility in the market, the long-term effect of the suspension has been determined as being low.

 

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46. Approval of the Financial Statements

The issuance of the Group’s financial statements as of and for the year ended December 31, 2013, was approved on February 21, 2014, by the Board of Directors.

47. Parent Company Information

The following tables present the Parent Company Only financial information:

Condensed Statements of Financial Position

 

     Jan. 1 2012      Dec. 31 2012      Dec. 31 2013  
     (In millions of Korean won)  

Assets

        

Cash held at bank subsidiaries

   32,031       96,234       77,298   

Receivables from nonbanking subsidiaries

     60,000         25,000         10,000   

Investments in subsidiaries(1)

        

Banking subsidiaries

     14,821,721         14,821,721         14,821,721   

Nonbanking subsidiaries

     2,951,601         3,123,127         3,470,722   

Other assets

     645,337         323,946         284,801   
  

 

 

    

 

 

    

 

 

 

Total assets

   18,510,690       18,390,028       18,664,542   
  

 

 

    

 

 

    

 

 

 

Liabilities and shareholders’ equity

        

Debts

   130,000       —         —     

Debentures

     49,988         —           349,157   

Other liabilities

     614,422         305,686         266,963   

Shareholders’ equity

     17,716,280         18,084,342         18,048,422   
  

 

 

    

 

 

    

 

 

 

Total liabilities and shareholders’ equity

   18,510,690       18,390,028       18,664,542   
  

 

 

    

 

 

    

 

 

 

 

(1) 

Investments in subsidiaries were accounted at cost method in accordance with IAS 27.

Condensed Statements of Comprehensive Income

 

     2011     2012     2013  
     (In millions of Korean won)  

Income

      

Dividends from subsidiaries:

      

Dividends from banking subsidiaries

   —        687,925      245,044   

Interest from subsidiaries

     26,999        6,018        3,859   

Other income

     884        —          —     
  

 

 

   

 

 

   

 

 

 

Total income

     27,883        693,943        248,903   
  

 

 

   

 

 

   

 

 

 

Expense

      

Interest expense

     41,571        3,025        5,227   

Non-interest expense

     51,537        44,901        48,273   
  

 

 

   

 

 

   

 

 

 

Total expense

     93,108        47,926        53,500   
  

 

 

   

 

 

   

 

 

 

Profit(loss) before tax expense

     (65,225     646,017        195,403   
  

 

 

   

 

 

   

 

 

 

Tax income(expense)

     1,547        1,080        423   
  

 

 

   

 

 

   

 

 

 

Profit(loss) for the year

     (63,678     647,097        195,826   
  

 

 

   

 

 

   

 

 

 

Other comprehensive income(loss) for the year, net of tax

     (1,357     (862     65   
  

 

 

   

 

 

   

 

 

 

Total comprehensive income for the year

   (62,231    646,235       195,891   
  

 

 

   

 

 

   

 

 

 

 

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Condensed Statements of Cash Flows

 

             2011                     2012                     2013          
     (In millions of Korean won)  

Operating activities

      

Net income (loss)

    (63,678   647,097      195,826   

Reconciliation of net income (loss) to net cash provided by operating activities:

      

Other operating activities, net

     (4,383     15,807        40,272   
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (68,061     662,904        236,098   
  

 

 

   

 

 

   

 

 

 

Investing activities

      

Net payments from (to) subsidiaries

     —          (136,526     (369,590

Other investing activities, net

     (10,743     7,998        (2,710
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (10,743     (128,528     (372,300
  

 

 

   

 

 

   

 

 

 

Financing activities

      

Increase in debts

     130,000        170,000        315,000   

Decreases in debts

     —          (300,000     (315,000

Increases in debentures

     —          —          349,077   

Decreases in debentures

     (750,000     (50,000     —     

Cash dividends paid

     (41,163     (278,173     (231,811
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (661,163     (458,173     117,266   
  

 

 

   

 

 

   

 

 

 

Net increase in cash held at bank subsidiaries

     (739,967     76,203        (18,936

Cash held at bank subsidiaries at January 1

     759,995        20,028        96,231   
  

 

 

   

 

 

   

 

 

 

Cash held at bank subsidiaries at December 31

   20,028      96,231      77,295   
  

 

 

   

 

 

   

 

 

 

 

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