6-K 1 d652523d6k.htm FORM 6-K Form 6-K

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 6-K

 

 

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16

UNDER THE SECURITIES EXCHANGE ACT OF 1934

For the month of March 2019

Commission File Number: 000-53445

 

 

KB Financial Group Inc.

(Translation of registrant’s name into English)

 

 

26, Gukjegeumyung-ro 8-gil, Yeongdeungpo-gu, Seoul 07331, Korea

(Address of principal executive office)

 

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F             ☒            Form 40-F             ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):  ☐

Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of a Form 6-K if submitted solely to provide an attached annual report to security holders.

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):  ☐

Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper of a Form 6-K if submitted to furnish a report or other document that the registrant foreign private issuer must furnish and make public under the laws of the jurisdiction in which the registrant is incorporated, domiciled or legally organized (the registrant’s “home country”), or under the rules of the home country exchange on which the registrant’s securities are traded, as long as the report or other document is not a press release, is not required to be and has not been distributed to the registrant’s security holders, and, if discussing a material event, has already been the subject of a Form 6-K submission or other Commission filing on EDGAR.

 

 

 


Audit Report of Kookmin Bank for Fiscal Year 2018

On March 12, 2019, KB Financial Group Inc. disclosed audit reports of Kookmin Bank, its wholly-owned subsidiary, for fiscal year 2018 based on the International Financial Reporting Standards as adopted by the Republic of Korea (including the consolidated and separate financial statements of Kookmin Bank as of and for the years ended December 31, 2018 and 2017 and related notes) received from Samil PricewaterhouseCoopers, its independent auditor. The financial statements in such reports have not been approved by the shareholders of Kookmin Bank and remain subject to change.

KB Financial Group Inc. is furnishing the following documents as exhibits to this Form 6-K filing:

Exhibit 99.1: An English-language translation of the Consolidated Audit Report of Kookmin Bank for FY 2018.

Exhibit 99.2: An English-language translation of the Separate Audit Report of Kookmin Bank for FY 2018.


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

   

KB Financial Group Inc.

    (Registrant)
Date: March 12, 2019     By:  

/s/ Ki-Hwan Kim

      (Signature)
    Name: Ki-Hwan Kim
    Title:   Deputy President and Chief Finance Officer


Exhibit 99.1

Kookmin Bank and Subsidiaries

Consolidated Financial Statements

December 31, 2018 and 2017


Kookmin Bank and Subsidiaries

Index

December 31, 2018 and 2017

 

 

     Page(s)  

Independent Auditor’s Report

     1~3  

Consolidated Financial Statements

  

Consolidated Statements of Financial Position

     4  

Consolidated Statements of Comprehensive Income

     5  

Consolidated Statements of Changes in Equity

     6  

Consolidated Statements of Cash Flows

     7  

Notes to the Consolidated Financial Statements

     8~196  

 


Independent Auditor’s Report

(English Translation of a Report Originally Issued in Korean)

To the Board of Directors and Shareholder of Kookmin Bank

Opinion

We have audited the accompanying consolidated financial statements of Kookmin Bank and its subsidiaries (collectively referred to as the “Group”), which comprise the consolidated statements of financial position as at December 31, 2018 and 2017 and the consolidated statements of comprehensive income, changes in equity and cash flows for the years then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies and other explanatory information.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at December 31, 2018 and 2017, and its consolidated financial performance and cash flows for the years then ended in accordance with International Financial Reporting Standards as adopted by the Republic of Korea (Korean IFRS)

Basis for Opinion

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

Other Matter

Auditing standards and their application in practice vary among countries. The procedures and practices used in the Republic of Korea to audit such consolidated financial statements may differ from those generally accepted and applied in other countries.

 

1


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

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

In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations.

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

Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements

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

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

 

   

Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

 

   

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

 

   

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

 

   

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

 

2


   

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

 

   

Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion.

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

/s/ Samil PricewaterhouseCoopers

Seoul, Korea

March 11, 2019

This report is effective as of March 11, 2019, the audit report date. Certain subsequent events or circumstances, which may occur between the audit report date and the time of reading this report, could have a material impact on the accompanying consolidated financial statements and notes thereto. Accordingly, the readers of the audit report should understand that there is a possibility that the above audit report may have to be revised to reflect the impact of such subsequent events or circumstances, if any.

 

3


Kookmin Bank and Subsidiaries

Consolidated Statements of Financial Position

Years Ended December 31, 2018 and 2017

 

(In millions of Korean won)    Notes      20181      2017  

Assets

        

Cash and due from financial institutions

     4,6,7,36        14,889,010        15,646,318  

Financial assets at fair value through profit or loss (Under Korean IFRS 1039)

     4,6,12        —          8,408,730  

Financial assets at fair value through profit or loss

     4,6,8,12        12,257,005        —    

Derivative financial assets

     4,6,9        1,613,970        2,607,659  

Loans at amortized cost

     4,6,8,10,11        276,944,202        251,710,605  

Financial investments

     4,6,8,12        42,723,480        40,815,674  

Investments in associates

     13        506,664        345,892  

Property and equipment

     14        3,127,666        3,015,594  

Investment property

     8,14        257,924        337,500  

Intangible assets

     15        224,208        217,608  

Current income tax assets

     32        4,638        3,209  

Deferred income tax assets

     16,32        3,131        2,050  

Assets held for sale

     18        16,952        155,506  

Other assets

     4,6,17        4,390,408        6,499,582  
     

 

 

    

 

 

 

Total assets

        356,959,258        329,765,927  
     

 

 

    

 

 

 

Liabilities

        

Financial liabilities at fair value through profit or loss (Under Korean IFRS 1039)

     4,6        —          74,191  

Financial liabilities at fair value through profit or loss

     4,6        87,168        —    

Derivative financial liabilities

     4,6,9        1,642,409        2,608,820  

Deposits

     4,6,19        272,484,528        252,478,931  

Debts

     4,6,20        17,496,055        15,810,753  

Debentures

     4,6,21        23,163,585        19,183,798  

Provisions

     22        308,374        358,192  

Net defined benefit liabilities

     23        166,605        8,568  

Current income tax liabilities

     32        5,737        3,543  

Deferred income tax liabilities

     16,32        120,867        172,131  

Other liabilities

     4,6,24,30        14,816,064        13,743,566  
     

 

 

    

 

 

 

Total liabilities

        330,291,392        304,442,493  
     

 

 

    

 

 

 

Equity

        

Capital stock

     25        2,021,896        2,021,896  

Capital surplus

     25        5,218,788        5,219,693  

Accumulated other comprehensive income

     25, 34        115,784        678,094  

Retained earnings

     25, 33        19,311,398        17,403,751  

(Provision of regulatory reserve for credit losses

        

December 31, 2018 : W2,150,772 million

        

December 31, 2017 : W2,001,063 million)

        

(Amounts estimated to be appropriated

        

December 31, 2018 : W140,247 million

        

December 31, 2017 : W149,709 million)

        
     

 

 

    

 

 

 

Equity attributable to the shareholder of the Parent Company

 

     26,667,866        25,323,434  

Non-controlling interest equity

        —          —    
     

 

 

    

 

 

 

Total equity

        26,667,866        25,323,434  
     

 

 

    

 

 

 

Total liabilities and equity

        356,959,258        329,765,927  
     

 

 

    

 

 

 

 

1 

The consolidated statement of financial position as at December 31, 2018 is prepared applying Korean IFRS 1109, and the comparative consolidated statement of financial position as at December 31, 2017 has not been restated retrospectively as permitted by the transitional provisions of Korean IFRS 1109.

The accompanying notes are an integral part of these consolidated financial statements.

 

4


Kookmin Bank and Subsidiaries

Consolidated Statements of Comprehensive Income

Years Ended December 31, 2018 and 2017

 

(In millions of Korean won)    Notes      20181     2017  

Interest income

        10,019,888       8,508,893  

Interest income from financial instruments at fair value through other comprehensive income and amortized cost

        9,797,583       —    

Interest income from financial instruments at fair value through profit or loss

        222,305       —    

Interest income from loans and receivables

        —         8,338,424  

Interest income from financial instruments at fair value through profit or loss (Under Korean IFRS 1039)

        —         170,469  

Interest expense

        (3,919,166     (2,944,109
     

 

 

   

 

 

 

Net interest income

     26        6,100,722       5,564,784  
     

 

 

   

 

 

 

Fee and commission income

        1,422,791       1,471,480  

Fee and commission expense

        (300,043     (246,791
     

 

 

   

 

 

 

Net fee and commission income

     27        1,122,748       1,224,689  
     

 

 

   

 

 

 

Net losses on financial instruments at fair value through profit or loss (Under Korean IFRS 1039)

     28        —         (71,207
     

 

 

   

 

 

 

Net gains on financial instruments at fair value through profit or loss

     28        326,395       —    
     

 

 

   

 

 

 

Net other operating expenses

     29        (696,486     (288,087
     

 

 

   

 

 

 

General and administrative expenses

     14,15,23,30,40        (3,766,995     (3,665,822
     

 

 

   

 

 

 

Operating profit before provision for credit losses

        3,086,384       2,764,357  
     

 

 

   

 

 

 

Provision for credit losses

     7,11,12,17,22        (93,916     (115,166
     

 

 

   

 

 

 

Operating profit

        2,992,468       2,649,191  

Share of profit of associates

     13        49,698       37,571  

Net other non-operating income

     31        44,172       (73,467
     

 

 

   

 

 

 

Net non-operating profit

        93,870       (35,896
     

 

 

   

 

 

 

Profit before income tax expense

        3,086,338       2,613,295  

Income tax expense

     32        (827,140     (438,590
     

 

 

   

 

 

 

Profit for the year

        2,259,198       2,174,705  
     

 

 

   

 

 

 

(Adjusted profit after provision of regulatory reserve for credit losses

     25       

2018 : W 2,011,991 million

       

2017 : W 2,024,996 million

       

Items that will not be reclassified to profit or loss:

       

Remeasurements of net defined benefit liabilities

     23        (95,796     14,177  

Net losses on equity instruments at fair value through other comprehensive income

        (36,013     —    

Items that may be subsequently reclassified to profit or loss:

 

    

Currency translation adjustments

        27,383       (67,106

Gains on valuation of financial investments

        —         110,188  

Net gains on debt instruments at fair value through other comprehensive income

        57,188       —    

Share of other comprehensive income(loss) of associates

 

     (3,383     91,839  

Gains (losses) on hedging instruments of net investments in foreign operations

 

     (25,386     26,719  

Gains on cash flow hedging instruments

        3,788       7,414  
     

 

 

   

 

 

 

Other comprehensive income for the year, net of tax

     34        (72,219     183,231  
     

 

 

   

 

 

 

Total comprehensive income for the year

        2,186,979       2,357,936  
     

 

 

   

 

 

 

Profit attributable to:

       

Shareholder of the Parent Company

        2,259,198       2,174,705  

Non-controlling interests

        —         —    
     

 

 

   

 

 

 
        2,259,198       2,174,705  
     

 

 

   

 

 

 

Total comprehensive income for the year attributable to:

 

    

Shareholder of the Parent Company

        2,186,979       2,357,936  

Non-controlling interests

        —         —    
     

 

 

   

 

 

 
        2,186,979       2,357,936  
     

 

 

   

 

 

 

 

1 

The consolidated statements of comprehensive income for the year ended December 31, 2018 are prepared applying Korean IFRS 1109, and the comparative consolidated statements of comprehensive income for the year ended December 31, 2017 have not been restated retrospectively as permitted by transitional provisions of Korean IFRS 1109.

The accompanying notes are an integral part of these consolidated financial statements.

 

5


Kookmin Bank and Subsidiaries

Consolidated Statements of Changes in Equity

Years Ended December 31, 2018 and 2017

 

            Attributable to the shareholder of the Parent Company               
(In millions of Korean won)    Notes      Capital
Stock
     Capital
Surplus
    Accumulated
Other
Comprehensive
Income
    Retained
Earnings
    Non-controlling
interests
     Total Equity  

Balance at January 1, 2017

        2,021,896        5,219,704       494,863       15,588,539       —          23,325,002  
     

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Comprehensive income for the year

                 

Profit for the year

        —          —         —         2,174,705       —          2,174,705  

Remeasurements of net defined benefit liabilities

        —          —         14,177       —         —          14,177  

Currency translation adjustments

        —          —         (67,106     —         —          (67,106

Gains on valuation of financial investments

        —          —         110,188       —         —          110,188  

Share of other comprehensive income of associates

        —          —         91,839       —         —          91,839  

Gains on hedging instruments of a net investment in a foreign operation

        —          —         26,719       —         —          26,719  

Gains on cash flow hedging instruments

        —          —         7,414       —         —          7,414  
     

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total comprehensive income for the year

        —          —         183,231       2,174,705       —          2,357,936  
     

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Transactions with the shareholder

                 

Dividends

        —          —         —         (359,493     —          (359,493

Changes in ownership of subsidiaries

        —          (11     —         —         —          (11
     

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total transactions with the shareholder

        —          (11     —         (359,493     —          (359,504
     

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance at December 31, 2017

        2,021,896        5,219,693       678,094       17,403,751       —          25,323,434  
     

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance at January 1, 2018

        2,021,896        5,219,693       678,094       17,403,751       —          25,323,434  
     

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

The effect of changes in accounting policies

     42        —          —         (490,091     274,943       —          (215,148

Balance after reflecting the change of accounting policies

        2,021,896        5,219,693       188,003       17,678,694       —          25,108,286  

Comprehensive income for the year

                 

Profit for the year

        —          —         —         2,259,198       —          2,259,198  

Remeasurements of net defined benefit liabilities

        —          —         (95,796     —         —          (95,796

Net gains on equity instruments at fair value through other comprehensive income

        —          —         (36,013     13,638       —          (22,375

Currency translation adjustments

        —          —         27,383       —         —          27,383  

Net gains on debt instruments at fair value through other comprehensive income

        —          —         57,188       —         —          57,188  

Share of other comprehensive loss of associates

        —          —         (3,383     —         —          (3,383

Losses on hedging instruments of net investments in foreign operations

        —          —         (25,386     —         —          (25,386

Gains on cash flow hedging instruments

        —          —         3,788       —         —          3,788  
     

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total comprehensive income for the year

        —          —         (72,219     2,272,836       —          2,200,617  
     

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Transactions with the shareholder

                 

Dividends

        —          —         —         (640,132     —          (640,132

Changes in ownership of subsidiaries

        —          (905     —         —         —          (905
     

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total transactions with the shareholder

        —          (905     —         (640,132     —          (641,037
     

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance at December 31, 2018

        2,021,896        5,218,788       115,784       19,311,398       —          26,667,866  
     

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

1

The consolidated statement of changes in equity for the year ended December 31, 2018 is prepared applying Korean IFRS 1109, and the comparative consolidated statement of changes in equity for the year ended December 31, 2017 has not been restated retrospectively as permitted by transitional provisions of Korean IFRS 1109.

The accompanying notes are an integral part of these consolidated financial statements.

 

6


Kookmin Bank and Subsidiaries

Consolidated Statements of Cash Flows

Years Ended December 31, 2017 and 2016

 

(In millions of Korean won)    Notes    20181      2017  

Cash flows from operating activities

        

Profit for the year

        2,259,198        2,174,705  
     

 

 

    

 

 

 

Adjustment for non-cash items

        

Net losses on financial assets/liabilities at fair value through profit or loss (Under Korean IFRS 1039)

        —          39,455  

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

        (56,385      —    

Net losses (gains) on derivative financial investments for hedging purposes

        41,522        (17,327

Adjustment of fair value of derivative financial instruments

        410        (1,000

Provision for credit losses

        93,916        115,166  

Net losses (gains) on financial investments

        (88,079      69,390  

Share of profit of associates and subsidiaries

        (49,698      (37,570

Depreciation and amortization expense

        246,488        236,436  

Other net losses (gains) on property and equipment/intangible assets

        (139,092      15,258  

Share-based payment

        4,051        33,148  

Post-employment benefits

        140,877        147,470  

Net interest expense

        250,854        274,832  

Gains on foreign currency translation

        (9,004      (301,414

Other expense

        16,356        47,666  
     

 

 

    

 

 

 
        452,216        621,510  
     

 

 

    

 

 

 

Changes in operating assets and liabilities

        

Financial assets at fair value through profit or loss (Under Korean IFRS 1039)

        —          (623,731

Financial assets at fair value through profit or loss

        (2,983,784      —    

Derivative financial instrument

        (9,867      (2,785

Loans at amortized cost

        (25,553,376      (16,964,006

Current income tax assets

        (1,416      8,728  

Deferred income tax assets

        (649      44,807  

Other assets

        1,622,046        (2,439,559

Financial liabilities at fair value through profit or loss (Under Korean IFRS 1039)

        —          953  

Financial liabilities at fair value through profit or loss

        10,419        —    

Deposits

        19,633,557        17,722,080  

Deferred income tax liabilities

        56,200        83,671  

Other liabilities

        975,835        (1,360,225
     

 

 

    

 

 

 
        (6,251,035      (3,530,067
     

 

 

    

 

 

 

Net cash outflow from operating activities

        (3,539,621      (733,852
     

 

 

    

 

 

 

Cash flows from investing activities

        

Net cash flows from derivative financial instrument for hedging purposes

        (14,918      (23,490

Disposal of financial assets at fair value through profit or loss

        8,303,648        —    

Acquisition of financial assets at fair value through profit or loss

        (6,220,238      —    

Disposal of financial investments

        53,180,839        33,006,057  

Acquisition of financial investments

        (57,553,020      (38,243,965

Disposal of investments in associates

        44,865        87,443  

Acquisition of investments in associates

        (159,320      (23,540

Disposal of property and equipment

        1,724        (58

Acquisition of property and equipment

        (333,949      (218,080

Acquisition of investment property

        (179      (262

Disposal of investment property

        139,639        —    

Disposal of intangible assets

        1,425        487  

Acquisition of intangible assets

        (53,057      (51,398

Net cash flows from changes in ownership of subsidiaries

        14,280        158,858  

Others

        301,012        210,834  
     

 

 

    

 

 

 

Net cash outflow from investing activities

        (2,347,249      (5,097,114
     

 

 

    

 

 

 

Cash flows from financing activities

        

Net cash flows from derivative financial instrument for hedging purposes

     (17,698      5,804  

Net increase in debts

        1,517,015        746,719  

Increase in debentures

        14,209,940        13,594,668  

Decrease in debentures

        (10,414,512      (9,026,842

Payment of dividends

        (640,132      (359,493

Net increase(decrease) in other payables from trust accounts

        267,076        587,523  

Others

        (220,618      215,662  
     

 

 

    

 

 

 

Net cash inflow from financing activities

        4,701,071        5,764,041  
     

 

 

    

 

 

 

Exchange gains (losses) on cash and cash equivalents

        (35,660      (193,279
     

 

 

    

 

 

 

Net decrease in cash and cash equivalents

        (1,221,459      (260,204

Cash and cash equivalents at the beginning of the year

   36      6,077,954        6,338,158  
     

 

 

    

 

 

 

Cash and cash equivalents at the end of the year

   36      4,856,495        6,077,954  
     

 

 

    

 

 

 

 

1

The consolidated statement of cash flows for the year ended December 31, 2018 is prepared applying Korean IFRS 1109, and the comparative consolidated statement of cash flows for the year ended December 31, 2017 has not been restated retrospectively as permitted by transitional provisions of Korean IFRS 1109.

The accompanying notes are an integral part of these consolidated financial statements.

 

7


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

1. The Bank

Kookmin Bank (the “Bank” or the “Parent Company”) was incorporated in 1963 under the Citizens National Bank Act to provide banking services to the general public and to small and medium-sized enterprises. Pursuant to the Repeal Act of the Citizens National Bank Act, effective January 5, 1995, the Bank’s status changed to a financial institution which operates under the Banking Act and Commercial Act.

The Bank merged with Korea Long Term Credit Bank on December 31, 1998, and with its subsidiaries, Daegu, Busan, Jeonnam Kookmin Mutual Savings & Finance Co., Ltd., on August 22, 1999. Pursuant to the directive from the Financial Services Commission related to the Structural Improvement of the Financial Industry Act, the Bank acquired certain assets, including performing loans, and assumed most of the liabilities of Daedong Bank on June 29, 1998. Also, the Bank completed the merger with Housing and Commercial Bank (“H&CB”) on October 31, 2001, and merged with Kookmin Credit Card Co., Ltd., a majority-owned subsidiary, on September 30, 2003. Meanwhile, the Bank spun off its credit card business segment on February 28, 2011, and KB Kookmin Card Co., Ltd. became a subsidiary of KB Financial Group Inc.

The Bank listed its shares on the Stock Market Division of the Korea Exchange (“KRX,” formerly Korea Stock Exchange) in September 1994. As a result of the merger with H&CB, the shareholder of the former Kookmin Bank and H&CB received new common shares of the Bank which were relisted on the KRX on November 9, 2001. In addition, H&CB listed its American Depositary Shares (“ADS”) on the New York Stock Exchange (“NYSE”) on October 3, 2000, prior to the merger. Following the merger with H&CB, the Bank listed its ADS on the NYSE on November 1, 2001. The Bank became a wholly owned subsidiary of KB Financial Group Inc. through a comprehensive stock transfer on September 29, 2008. Subsequently, the Bank’s shares and its ADS, each listed on the KRX and the NYSE, were delisted on October 10, 2008 and September 26, 2008, respectively. As at December 31, 2018, the Bank’s paid-in capital is W2,021,896 million.

The Bank engages in the banking business in accordance with the Banking Act, trust business in accordance with the Financial Investment Services and Capital Markets Act, and other relevant businesses. As at December 31, 2018, the Bank operates 1,057 domestic branches and offices, and six overseas branches (excluding four subsidiaries and three offices).

 

 

8


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

2. Basis of Preparation

2.1 Application of Korean IFRS

The Group maintains its accounting records in Korean won and prepares statutory financial statements in the Korean language (Hangul) in accordance with Korean IFRS. The accompanying consolidated financial statements have been condensed, restructured and translated into English from the Korean language financial statements.

The consolidated financial statements of the Bank and its subsidiaries (collectively the “Group”) have been prepared in accordance with Korean IFRS. These are the standards and related interpretations issued by the International Accounting Standards Board (“IASB”) that have been adopted by the Republic of Korea.

The preparation of the 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.

The Group newly applied the following amended and enacted standards and interpretations from January 1, 2018, and these applications do not have any material impact on the consolidated financial statements, except for the adoption of Korean IFRS 1109 Financial Instruments.

 

   

Amendments to Korean IFRS 1028 Investments in Associates and Joint Ventures

When an investment in an associate or a joint venture is held by, or it held indirectly through, an entity that is a venture capital organization, or a mutual fund and similar entities, the entity may elect to measure that investment at fair value through profit or loss. The amendments clarify that an entity shall make this election separately for each associate of joint venture, at initial recognition of the associate or joint venture.

 

   

Amendments to Korean IFRS 1040 Transfers of Investment Property

Paragraph 57 of Korean IFRS 1040 clarifies that a transfer to, or from, investment property, including property under construction, can only be made if there has been a change in use that is supported by evidence, and provides a list of circumstances as examples.

 

   

Amendments to Korean IFRS 1102 Share-based Payment

The amendments clarify accounting for a modification to the terms and conditions of a share-based payment that changes the classification of the transaction from cash-settled to equity-settled and also, clarifies that the measurement approach should treat the terms and conditions of a cash-settled award in the same way as for an equity-settled award.

 

   

Enactment of Interpretation 2122 Foreign Currency Transactions and Advance Consideration

According to the enactment, the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) is the date on which an entity initially recognizes the non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration. If there are multiple payments or receipts in advance, the entity shall determine a date of the transaction for each payment or receipt of advance consideration.

 

9


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

   

Amendments to Korean IFRS 1109 Financial Instruments

The Group adopted Korean IFRS 1109 Financial Instruments with a date of initial application of January 1, 2018. As permitted by the transitional provisions of Korean IFRS 1109, comparative periods have not been restated. The Group recognized the difference between the previous carrying amount and the carrying amount at the date of initial application in equity as at January 1, 2018.

For the detail impacts of the adoption of Korean IFRS 1109, see Note 42.

 

   

Enactment of Korean IFRS 1115 Revenue from Contracts with Customers

The Group has adopted Korean IFRS 1115, Revenue from Contracts with Customers from January 1, 2018. The new standard for revenue recognition replaced Korean IFRS 1018 Revenue, Korean IFRS 1011 Construction Contracts, Interpretation 2031 Revenue-Barter Transactions Involving Advertising Services, Interpretation 2113 Customer Loyalty Programs, Interpretation 2115 Agreements for the Construction of Real Estate and Interpretation 2118 Transfers of Assets from Customers.

The Group has changed the following accounting policy for the period beginning on January 1, 2018.

 

   

Presentation of interest income arising from financial assets at fair value through profit or loss

The Group previously recognized interest income arising from financial assets at fair value through profit or loss (under Korean IFRS 1039) as net gains (losses) of financial assets/liabilities at fair value through profit or loss (under Korean IFRS 1039) in the statement of comprehensive income. From January 1, 2018, the Group changed the accounting policy and corresponding interest income is presented as a part of interest income in the statement of comprehensive income. The Group believes the change in accounting policy provides more relevant information. The statements of comprehensive income for the year ended December 31, 2017 have been restated by adjusting classification of interest income.

This change in accounting policy does not have any impact on the statements of financial position as at December 31, 2018 and 2017 and profit for the years ended December 31, 2018 and 2017. The impacts on the statements of comprehensive income for the years ended December 31, 2018 and 2017, are as follows:

 

(in millions of Korean won)    2018      2017  

Increase in interest income

     222,305        170,469  

Decrease in net gains on financial instruments at fair value through profit or loss (under Korean IFRS 1109)

     (222,305      —    

Decrease in net gains on financial instruments at fair value through profit or loss (under Korean IFRS 1039)

     —          (170,469

 

10


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

Certain new accounting standards and interpretations that have been published but are not mandatory for the reporting period commencing January 1, 2018 and have not been early adopted by the Group are set out below.

 

   

Korean IFRS 1116 Leases

Korean IFRS 1116 Leases issued on May 22, 2017 is effective for annual periods beginning on or after January 1, 2019, with early adoption permitted. This standard will replace Korean IFRS 1017 Leases, Interpretation 2104 Determining whether an Arrangement contains a Lease, Interpretation 2015 Operating Leases-Incentives, and Interpretation 2027 Evaluating the Substance of Transactions Involving the Legal Form of a Lease.

At inception of a contract, the Group shall assess whether the contract is, or contains, a lease. Also, at the date of initial application, the Group shall assess whether the contract is, or contains, a lease in accordance with the standard. However, the Group may not need to reassess all contracts with applying the practical expedient that can be applied to contracts entered before the date of initial application. On the basis of the date of initial application, the Group will assess whether the contract is , or contains, a lease.

For a contract that is, or contains, a lease, the Group shall account for each lease component within the contract as a lease separately from non-lease components of the contract. In addition, as a practical expedient, the lessee may elect, by class of underlying asset, not to separate non-lease components from lease components, and instead account for each lease component and any associated non-lease components as a single lease component. For the all (or partial) contracts that are, or contain, a lease, the Group plans to apply the practical expedient to account for each lease component and any associated non-lease components as a single lease component.

A lessee is required to recognize a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments. The lessee may elect not to apply the requirements to short-term lease (a lease term of 12 months or less at the commencement date) and low value assets (e.g. underlying assets below $ 5,000). The Group plans to apply the recognition exemption for the short-term contracts of leasing realty for training purposes (a lease term of 12 months or less at the commencement date) and leases for which the underlying asset is of low value (e.g. underlying assets below \5,000,000 or $5,000). For sale and leaseback transactions, an entity (the seller-lessee) shall apply the requirements for determining when a performance obligation is satisfied in Korean IFRS 1115 Revenue from Contracts with Customers to determine whether the transfer of an asset is accounted for as a sale of that asset. The entity shall not reassess sale and leaseback transactions entered into before the date of initial application.

The accounting treatment as a lessor did not change significantly from the one under Korean IFRS 1017 Leases. The Group expects the effect on the financial statements applying the new standard will not be significant as accounting for the Group, as a lessor, will not significantly change.

A lessee shall apply this standard to its leases either (a) retrospectively to each prior reporting period presented applying Korean IFRS 1008 Accounting Policies, Changes in Accounting Estimates and Errors (Full retrospective application); or (b) with the cumulative effect of initially applying the standard being recognized at the date of initial application.

 

11


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

The Group plans to apply Korean IFRS 1116 retrospectively with the cumulative effect of initially applying the standard and as such will not restate any comparative information.

The Group performed an impact assessment to identify potential financial effects of applying Korean IFRS 1116. The assessment was performed based on available information as at December 31, 2018 to identify effects on 2019 financial statements.

The total minimum lease payment expected to be paid by the Group in relation to operating leases before discounted to their present value is \ 344,297 million. When the payment is discounted at incremental borrowing rate of the lessee, the total minimum lease payment amounts to \ 330,644 million. Based on the impact assessment, the Group expects the underlying leased asset and a lease liability as at December 31, 2018 to be increased by \ 363,869 million and \ 330,644 million, respectively. The difference between the right-of-use asset and the lease liability is arising from the adjustments made at the right-of-use asset for the lease contracts entered before the date of the adoption of this standard.

The impact assessment may change due to additional information that the Group may obtain after the assessment.

 

   

Korean IFRS 1109 Financial Instruments

The narrow-scope amendments made to Korean IFRS 1109 Financial Instruments enable entities to measure certain prepayable financial assets with negative compensation at amortized cost. When a modification of a financial liability measured at amortized cost that does not result in the derecognition, a modification gain or loss shall be recognized in profit or loss. These amendments will be applied for annual periods beginning on or after January 1, 2019, with early adoption permitted.

 

   

Amendments to Korean IFRS 1019 Employee Benefits

The amendments require that an entity shall calculate current service cost and net interest for the remainder of the reporting period after a plan amendment, curtailment or settlement based on updated actuarial assumptions from the date of the change. The amendments also require that a reduction in a surplus must be recognized in profit or loss even if that surplus was not previously recognized because of the impact of the asset ceiling. The amendments are effective for plan amendments, curtailments and settlements occurring in reporting periods that begin on or after 1 January 2019.

 

   

Amendments to Korean IFRS 1028 Investments in Associates and Joint Ventures

The amendments clarify that an entity shall apply Korean IFRS 1109 to financial instruments in an associate or joint venture to which the equity method is not applied. These include long-term interests that, in substance, form part of the entity’s net investment in an associate or joint venture. The amendments clarify that an entity shall apply Korean IFRS 1109 to other interests in an associate or joint venture to which the equity method is not applied. In addition, the entity shall apply the impairment requirements in Korean IFRS 1109 first to its other long-term interests that, in substance, form part of the entity’s net investment in an associate or joint venture. These amendments will be applied for annual periods beginning on or after January 1, 2019, with early adoption permitted. In accordance with the transitional provisions in Korean IFRS 1109, the restatement of the comparative information is not required and the cumulative effects of initially applying the amendments retrospectively should be recognized in the beginning balance of retained earnings (or other components of equity, as appropriate) at the date of initial application.

 

12


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

   

Enactment to Interpretation of Korean IFRS 2123 Uncertainty over Income Tax Treatments

The Interpretation explains how to recognize and measure deferred and current income tax assets and liabilities where there is uncertainty over a tax treatment, and includes guidance on how to determine whether each uncertain tax treatment is considered separately or together. It also presents examples of circumstances where a judgement or estimate is required to be reassessed. This Interpretation will be applied for annual periods beginning on or after January 1, 2019, and an entity can either restate the comparative financial statements retrospectively or recognize the cumulative effect of initially applying the Interpretation as an adjustment in the beginning balance at the date of initial application.

 

   

Annual Improvements to Korean IFRS 2015 – 2017 Cycle:

(a) Korean IFRS 1103 Business Combination

The amendments clarify that when a party to a joint arrangement obtains control of a business that is a joint operation, and had rights to the assets and obligations for the liabilities relating to that joint operation immediately before the acquisition date, the transaction is a business combination achieved in stages. In such cases, the acquirer shall remeasure its entire previously held interest in the joint operation. These amendments will be applied to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 January 2019, with early adoption permitted.

(b) Korean IFRS 1111 Joint Agreements

The amendments clarify that when a party that participates in, but does not have joint control of, a joint operation might obtain joint control of the joint operation in which the activity of the join operation constitutes a business. In such cases, previously held interests in the joint operation are not remeasured. These amendments will be applied to transactions in which an entity obtains joint control on or after the beginning of the first annual reporting period beginning on or after 1 January 2019, with early adoption permitted.

(c) Paragraph 57A of Korean IFRS 1012 Income Tax

The amendment is applied to all the income tax consequences of dividends and requires an entity to recognize the income tax consequences of dividends in profit or loss, other comprehensive income or equity according to where the entity originally recognized those past transactions or events. These amendments will be applied for annual reporting periods beginning on or after January 1, 2019, with early adoption permitted.

(d) Korean IFRS 1023 Borrowing Costs

The amendments clarify that if a specific borrowing remains outstanding after the related qualifying asset is ready for its intended use (or sale), it becomes part of general borrowings. These amendments will be applied to borrowing costs incurred on or after the beginning of the first annual reporting period beginning on or after January 1, 2019, with early adoption permitted.

 

13


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

2.2 Measurement Basis

The consolidated financial statements have been prepared under the historical cost convention unless otherwise specified.

2.3 Functional and Presentation Currency

Items included in the financial statements of each of the Group’s entities 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.

2.4 Critical Accounting 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 incomes (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 Income Taxes

The Group is operating in numerous countries and the income generated from these operations is subject to income taxes based on tax laws and interpretations of tax authorities in numerous jurisdictions. There are many transactions and calculations for which the ultimate tax determination is uncertain.

If certain portion of the taxable income is not used for investments, increase in wages, and others in accordance with the Tax Law for Promotion of investment and Collaborative Cooperation (Recirculation of Corporate Income), the Group is liable to pay additional income tax calculated based on the tax laws. The new tax law is effective for three years from 2018 and measurement of current and deferred income tax is affected. As the Group’s income tax is dependent on the investments, increase in wages, and others, there exists uncertainty with regard to measuring the final tax effects.

2.4.2 Fair Value of Financial Instruments

The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. The Group uses its judgment to select a variety of methods and make assumptions that are mainly based on market conditions existing at the end of each reporting period. Refer to Note 6 for details on valuation techniques and inputs used to determine the fair value of financial instruments.

 

14


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

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 financial assets at amortized cost and fair value through other comprehensive income through impairment test and recognizes provisions for acceptances and guarantees, and unused loan commitments. The accuracy of provisions for credit losses is determined by the methodology and assumptions used for the estimation of expected cash flows of the borrower for individually assessed allowances of loans, collectively assessed allowances for groups of loans, acceptances and guarantees, and unused loan commitments.

2.4.4 Net Defined Benefit Liability

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 23).

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. The items related to financial instruments on the financial statements are accounted for applying Koreans IFRS 1109 for the current period, and Korean IFRS 1039 for the comparative prior period, respectively.

Comparative financial statements are not restated retrospectively and the described accounting policies on financial instruments are applied for the financial statements for the current period. Except for the changes in accounting policies related to financial instruments, these policies have been consistently applied to all periods presented.

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 Company and to the non-controlling interests, if any. Total comprehensive income is attributed to the owners of the Parent Company and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance.

 

15


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

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 in the Group’s profit or loss. Distributions received from an investee reduce the carrying amount of the investment. Profit and loss resulting from ‘upstream’ and ‘downstream’ transactions between the Group and associates are eliminated to the extent at the Group’s interest in associates. 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.

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 period 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 ‘non-operating income (expense)’ in the statement of comprehensive income.

 

16


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

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 statements are recognized in profit or loss in the period in which they arise, except for exchange differences arising on net investments in a foreign operation and financial liability designated as a hedge of the net investment. 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.

 

17


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

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 the separate component of equity, is reclassified from other comprehensive income 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, financial assets at fair value through other comprehensive income or financial assets at amortized cost. The Group classifies financial liabilities as financial liabilities at fair value through profit or loss, or other financial liabilities. The classification depends on the Group’s business model for managing financial instruments and the contractual cash flow characteristics of the financial instruments at initial recognition.

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.

 

18


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

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 used 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. Those factors include counterparty credit risk, bid-ask spread, liquidity risk and others.

 

19


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

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 economic methodologies applied for pricing financial instruments. Periodically, the Group calibrates the valuation technique and tests its validity using prices of observable current market transactions of the same instrument or based on other relevant observable market data.

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.

The Group writes off the carrying amount and allowance of financial assets in its entirety or to a portion thereof when the principal and interest are determined to be no longer recoverable. In general, the Group considers write-off when it is determined that the debtor does not have sufficient resources or income to cover the principal and interest, and this write-off decision is made in accordance with internal regulations. After the write-off, the Group can collect the written-off loans continuously according to the internal policy. Recovered amounts from written-off financial assets are recognized in profit or loss.

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 expired.

3.3.4 Offsetting

Financial assets and financial liabilities are offset and the net amount are 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.

 

20


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

3.4 Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, foreign currency, and short-term, highly liquid investments 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

Financial assets classified as held for trading, financial assets designated by the Group as at fair value through profit or loss upon initial recognition, and financial assets that are required to be mandatorily measured at fair value through profit or loss are classified as financial assets at fair value through profit or loss.

The Group may designate certain financial assets upon initial recognition as at fair value through profit or loss when the designation 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.

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 using the effective interest method and dividend income from financial assets at fair value through profit or loss are also recognized in profit or loss.

3.5.2 Financial Assets at Fair Value through Other Comprehensive Income

The Group classifies below financial assets as financial assets at fair value through other comprehensive income;

 

   

Debt instruments that are held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets, and where the assets’ cash flows represent solely payments of principal and interest on the principal amount outstanding or;

 

   

Equity instruments that are not held for trading with the objective of generating a profit from short-term fluctuations in price or dealer’s margin, designated as financial assets at fair value through other comprehensive income

After initial recognition, a financial asset at fair value through other comprehensive income is measured at fair value. Gains or losses arising from a change in fair value, other than dividend income, interest income using effective interest method and exchange differences arising on monetary items which are recognized directly in profit or loss, are recognized as other comprehensive income in equity.

Upon disposal of financial assets at fair value through other comprehensive income, the cumulative gain or loss previously recognized in other comprehensive income is reclassified to profit or loss. However, cumulative gain or loss of equity instrument designated as fair value through other comprehensive income are not reclassified to profit or loss at disposal.

 

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Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

Financial assets at fair value through other comprehensive income denominated in foreign currencies are translated at the closing rate. Fair value differences resulting from exchange differences on the amortized cost are recognized in profit or loss, and other changes are recognized as equity.

3.5.3 Financial Assets at Amortized Cost

A financial asset, which are held within the business model whose objective is to hold assets in order to collect contractual cash flows and consistent with representing solely payments of principal and interest on the principal amount outstanding, are classified as a financial asset at amortized cost.

These financial assets are subsequently carried at amortized cost using the effective interest method after initial recognition and interest income is recognized using the effective interest method.

The carrying amount of financial assets at amortized cost is presented by deducting allowance for doubtful accounts, and the measurement method is described in Note 3.6.

3.6 Expected Credit Loss of Financial Assets (Debt Instruments)

The Group measures expected credit loss and recognizes loss allowance at the end of the reporting period for financial assets at amortized cost and fair value through other comprehensive income with the exception of financial asset at fair value through profit or loss.

Expected credit losses are estimated at present value of probability-weighted amount that is determined by evaluating a range of possible outcomes. The Group measures expected credit losses by reflecting reasonable and supportable information that is reasonably available at the reporting date without undue cost or effort, including information about past events, current conditions and forecasts of future economic conditions.

The approaches of measuring expected credit losses in accordance with Korean IFRS are as follows:

 

   

General approach: for financial assets not subject to the below approach and unused loan commitments on off-balance sheet

 

   

Credit-impaired approach: for financial assets that are credit-impaired at the time of acquisition

Application of general approach is differentiated depending on whether credit risk has increased significantly after initial recognition. After initial recognition, loss allowances for the assets without significant increase in credit risk are measured at the amount of 12 month expected credit losses, whereas the loss allowances for the assets with significant increase in credit risk are measured at the amount of lifetime expected credit losses. Lifetime is presumed to be a period to the contractual maturity date of financial assets (the expected life of financial assets).

The Group determines whether the credit risk has increased significantly using the following information, and if one or more of the following items are met, it is deemed as significant increase in credit risk. Information of more than 30 days overdue is applied to all subsidiaries, and other information is applied selectively considering specific indicators of each subsidiary or additionally considering specific indicators of each subsidiary. When the contractual cash flows of a financial asset are renegotiated or otherwise modified, the Group determines whether the credit risk has increased significantly using the same following information.

 

22


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

   

More than 30 days past due

 

   

Decline in credit rating at period end by more than certain notches as compared to that at initial recognition

 

   

Subsequent managing ratings below certain level in the early warning system

 

   

Debt restructuring (except for impaired financial assets) and

 

   

Credit delinquency information on Korea Federation of Banks, and etc.

If one or more of the following items are met, it is generally deemed as credit-impaired:

 

   

90 days or more past due

 

   

Legal proceedings related to collection

 

   

A borrower registered on the credit management list of Korea Federation of Banks

 

   

A corporate borrower with the credit rating C or D

 

   

Refinancing or

 

   

Debt restructuring, and etc.

3.6.1 Forward-looking Information

The Group uses forward-looking information, when it determines whether the credit risk has increased significantly and it measures the expected credit losses.

The Group assumes the risk components have a certain correlation with the economic cycle, and uses statistical methodologies to estimate the relation between key macroeconomic variables and risk components for expected credit losses. The Group has derived a correlation between the time series data of more than 8 years and the key macroeconomic variables, and calculates the expected credit losses by reflecting the results of the correlation on the risk component. The correlation between the major macroeconomic variables and the credit risk is as follows;

 

Key macroeconomic variables    Correlation between the major macroeconomic
variables and the credit risk
 

Domestic GDP growth rate

     (-

Composite stock index

     (-

Construction investment change rate

     (-

Housing transaction price index

     (-

Consumer price index

     (+

Unemployment rate

     (+

Forward-looking information used in calculation of expected credit losses is based on the macroeconomic forecasts utilized by the management of Bank for its business plan taking into account reliable external agency’s forecasts and others. The forward-looking information is generated by KB Research under KB Financial Group with comprehensive approach to capture the possibility of various economic forecast scenarios that are derived from the internal and external viewpoints of the macroeconomic situation.

3.6.2 Measuring Expected Credit Losses on Financial Assets at Amortized Cost

The expected credit losses on financial assets at amortized cost are measured as the difference between the asset’s contractual terms of cash flow and the present value of estimated future cash flows discounted at the financial asset’s original effective interest rate. The Group estimates expected future cash flows for financial assets that are individually significant (individual assessment of impairment).

 

23


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

For financial assets that are not individually significant, the Group collectively estimates expected credit loss by grouping loans with homogeneous credit risk profile (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

Collective assessment of impairment is performed by using a methodology based on historical loss experience and reflecting forward-looking information. Such methodology applies factors such as type of collateral, product and borrowers, credit rating, portfolio size, recovery period, probability of default estimated for each 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 expected credit loss and to determine factors on the basis of historical loss experience and forward-looking information. The methodology and assumptions used for collective assessment of impairment are reviewed regularly to reduce any differences between estimated and actual losses.

Lifetime expected credit loss is measured by applying Probability of Default (“PD”) and adjusted Loss Given Default (“LGD”) reflecting the changes in carrying amount to the carrying amount as at the end of the reporting period deducted by expected repayment of principals.

3.6.3 Measuring Expected Credit Losses on Financial Assets at Fair Value through Other Comprehensive Income

Measuring method of expected credit losses on financial assets at fair value through other comprehensive income is equal to the method of financial assets at amortized cost. However, the loss allowance shall be recognized in other comprehensive income. Upon disposal or repayment of financial assets at fair value through other comprehensive income, the amount of loss allowances is reclassified from other comprehensive income to profit or loss.

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. 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. These derivative financial instruments are presented as derivative financial instruments within the consolidated financial statements irrespective of transaction purpose and subsequent measurement requirement.

 

24


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

The Group designates certain derivatives and non-derivatives as hedging instruments to hedge the risk of changes in fair value and cash flow of a recognized asset or liability or of an unrecognized firm commitment (fair value hedge and cash flow hedge). The Group designates part of derivatives and non-derivatives as hedging instruments to hedge the risk of foreign exchange of a net investment in a foreign operation (hedge of net investment).

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.

See Note 9 for changes in fair value of the hedging instruments and changes in other comprehensive income related to derivatives held for cash flow hedging.

The Group applies hedge accounting for risk management activities aligned with the requirements and qualifying criteria for hedge accounting of Korean IFRS 1109.

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 measured at fair value. Gains or losses arising from changes 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 and non-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. If the hedged items are equity instruments for which the Group has elected to present changes in fair value in other comprehensive income, 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 other comprehensive income.

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 amortized to profit or loss by the maturity of the financial instrument using the effective interest method.

3.7.3 Cash Flow Hedges

The effective portion of changes in fair value of derivatives that are designated and qualify as cash flow hedges is recognized in other comprehensive income, limited to the cumulative change in fair value (present value) of the hedged item (the present value of the cumulative change in the future expected cash flows of the hedged item) from the inception of the hedge. The ineffective portion is recognized in gain or loss (other operating income or expense). The associated gains or losses that were previously recognized in other comprehensive income are reclassified from equity to profit or loss (other operating income and expenses) 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 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 period 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.

 

25


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

3.7.4 Hedge of Net Investment

If derivatives and non-derivatives qualify for a net investment hedge, the effective portion of changes in fair value of hedging instrument is recognized in other comprehensive income or loss and the ineffective portion is recognized in net other operating income (expense). The gain or loss on the hedging instrument relating to the effective portion of the hedge that has been recognized in other comprehensive income will be reclassified from other comprehensive income or loss to profit or loss as a reclassification adjustment on the disposal or partial disposal of the foreign operation.

3.7.5 Risk Management Strategy

Interest rate risk arises from changes in fair value resulting from changes in the discount rate of fixed rate financial instruments, and changes in cash flows resulting from changes in the nominal interest rate of floating rate financial instruments. Foreign currencies risk arises from net investment in a foreign operation, whose functional currencies differ from the Group’s functional currency.

While the Group entirely hedges the interest rate risk, the Group hedges the foreign currencies risk only the proportional part of the notional amount.

At inception of the hedge relationship, the Group reviews the hedge effectiveness; and periodically reviews the effectiveness in order to confirm that economic relationship between the hedged item and the hedging instrument exists. The requirement that an economic relationship exists means that the hedging instrument and the hedged item have values that generally move in the opposite direction because of the same risk, which is the hedged risk. The Group designates the exposure of hedged item opposite to the exposure of hedging instruments in order to meet economic relationship requirement.

The Group designates hedge relationship at one-on-one ratio between the nominal amount of hedging instrument and to the nominal amount of hedged item.

Ineffectiveness could arise because of differences in the underlying parameters (acquisition date, credit risk or liquidity and others) or other differences between the hedging instrument and the hedged item that the Group accepts in order to achieve a cost-effective hedging relationship.

The Group avoids the cash flow variability of its floating rate debt securities by using interest rate swaps. Both are linked to the same interest rate; however, the paid amount of the floating rate may be set on different dates. Even if the variability of interest rate related cash flows (as a risk factor) are designated as a hedged item, the difference in set-up dates creates a hedge ineffectiveness.

The Group avoids the variability of fair values of its fixed rate debt securities by using interest rate swaps. The calculating method of the number of the dates for paying fixed-rate interest amount can be different between both. Even if the volatility of the fair value due to the benchmark interest rate (as a risk factor) are designated as a hedged item, the difference calculating in set-up dates creates a hedge ineffectiveness.

 

26


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

3.7.6 Embedded Derivatives

An embedded derivative is separated from the host contract and accounted for as a derivative if, and only if, 1) the economic characteristics and risks of the embedded derivative are not closely related to those of the host contract, 2) a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative and, 3) the hybrid contract contains a host that is not a financial asset and is not designated as at fair value through 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.

3.7.7 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.

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.

 

27


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

The depreciation methods 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:

 

Investment properties    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    5 years

Software

   Straight-line    4 ~ 5 years

Others

   Straight-line    1 ~ 10 years

 

28


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

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.

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 Korean IFRS.

Goodwill acquired from business combinations after January 1, 2010, 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.

 

29


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

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.

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 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.

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 the 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.

 

30


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

3.12 Greenhouse Gas Emission Rights and Liabilities

The Group measured at zero the emission rights received free of charge from the government following the Enforcement of Allocation and Trading of Greenhouse Gas Emissions Allowances. Emission rights purchased are measured initially at cost and subsequently carried at their costs less any accumulated impairment losses. Emission liabilities are measured as the sum of the carrying amount of emission allowances held by the Group and best estimate of the expenditure required to settle the obligation for any excess emissions at the end of reporting period. The emission rights and liabilities are classified as ‘intangible assets’ and ‘provisions’, respectively, in the consolidated statement of financial position.

The emission rights held for trading are measured at fair value and the changes in fair value are recognized in profit or loss. The changes in fair value and gain or loss on disposal are classified as non-operating income and expenses.

3.13 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.

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.

 

31


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

3.14 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 being qualified as held for sale, the asset (or disposal group) must be available for immediate sale in its present condition and its sale must be highly probable. 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 Korean 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.

3.15 Financial Liabilities

The Group classifies non-derivative financial liabilities into financial liabilities at fair value through profit or loss or other financial liabilities in accordance with the substance of the contractual arrangement and the definitions of financial liabilities.

The Group recognizes financial liabilities in the statement of financial position when the Group becomes a party to the contractual provisions of the financial liability.

3.15.1 Financial Liabilities at Fair Value through Profit or Loss

Financial liabilities at fair value through profit or loss include financial liabilities held for trading or designated as such upon initial recognition. Subsequent to initial recognition, financial liabilities at fair value through profit or loss are measured at fair value, and changes therein are recognized in profit or loss. Upon initial recognition, transaction costs that are directly attributable to the acquisition are recognized in profit or loss as incurred.

In relation to securities lending or borrowing transactions, the Group records transaction using memorandum value when it borrows securities from Korea Securities Depository and others. The borrowed securities are treated as financial liabilities at fair value through profit or loss when they are sold. Changes in fair value at the end of the reporting period and difference between carrying amount at redemption and purchased amount is recognized as profit or loss.

 

32


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

3.15.2 Other Financial Liabilities

Non-derivative financial liabilities other than financial liabilities at fair value through profit or loss are classified as other financial liabilities. Other financial liabilities include deposits, debts, debentures and others. Upon of initial recognition, other financial liabilities are measured at fair value minus transaction costs that are directly attributable to the acquisition. Subsequent to initial recognition, other financial liabilities are measured at amortized cost using the effective interest method.

In case an asset is sold under repurchase agreement, the Group does not derecognize the asset while the amount sold is accounted for as financial liabilities.

The Group derecognizes a financial liability from the consolidated statement of financial position only when the obligation specified in the contract is discharged, cancelled or expired.

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.

When an onerous contract is occurred, the present obligation under the contract is recognized and measured as provisions.

 

33


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

3.17 Financial Guarantee Contracts

A financial guarantee contract is a contract that requires 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 according to the original or modified terms of a debt instrument.

Financial guarantee contracts are initially recognized at fair value and classified as other liabilities, and are amortized over the contractual term. After initial recognition, financial guarantee contracts are measured at the higher of:

 

   

Provisions measured in accordance with Korean IFRS 1109 Financial Instruments and

 

   

The initial amount recognized, less, when appropriate, cumulative amortization recognized in accordance with Korean IFRS 1115 Revenue from Contracts with Customers.

3.18 Equity Instrument 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. Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are deducted, net of tax, from the equity.

3.19 Revenue Recognition

The Group recognizes revenues in accordance with the following steps determined in accordance with Korean IFRS 1115 Revenue from Contracts with Customers.

 

   

Step 1: Identify the contract with a customer.

 

   

Step 2: Identify the performance obligations in the contract.

 

   

Step 3: Determine the transaction price.

 

   

Step 4: Allocate the transaction price to the performance obligations in the contract.

 

   

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

3.19.1 Interest Income and Expense

Interest income and expense from debt securities at fair value through profit or loss (excluding beneficiary certificates, equity investments, other debt securities and derivative-linked securities), loans, financial instruments at amortized cost and debt securities at fair value through other comprehensive income, are recognized in statement of comprehensive income 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 (main components of effective interest rates only) 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).

 

34


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

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. Interest income earned from debt instruments at fair value through profit or loss is also classified as interest income in the statement of comprehensive income.

3.19.2 Fee and Commission Income

The Group recognizes financial service fees in accordance with the purpose of charging the fees and 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 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.

Fees related to performance obligations in the contract satisfied over time

As control over related goods and services of fees and commission income of performance obligation contracts transfer over time, commission income is recognized over the period of performance obligations. Fees and commission income, including asset management fees and commission fees are recognized as the related services are rendered.

Fees earned at a point in time

Fees earned at a point in time are recognized when a customer obtains controls of a promised asset and the Group satisfies a performance obligation.

Commission on negotiation or participation in negotiation for the third party such as trading stocks or other securities, arranging transfer and acquisition of business is recognized as revenue when the transaction has been completed.

A syndication fee 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.

 

35


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

3.19.3 Net gains/losses on financial instruments at fair value through profit or loss

Net gains/losses on financial instruments at fair value through profit or loss include profit or loss (including changes in fair value, dividends, and gain/loss from foreign currency translation) from following financial instruments:

 

   

Gain or loss from financial instruments at fair value through profit or loss, excluding interest income calculated by the effective interest rate

 

   

Gain or loss from derivatives for trading, including derivatives for hedging that does not meet the criteria for hedge accounting

3.19.4 Dividend Income

Dividend income is recognized as profit or loss when the right to receive payment is established. Dividend income is recognized as relevant profit or loss on the statement of comprehensive income depending on the classification of equity securities.

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 net 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 total of the present value of the defined benefit obligation minus the fair value of plan assets results in an asset, it is recognized to the extent of 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 period.

Defined contribution plans

The contributions are recognized as employee benefit expense when they are due.

 

36


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

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 has share grant and mileage stock programs to directors and employees of the Group. The Group has a choice of whether to settle share grant in cash or by issuing equity instruments of KB Financial Group Inc., the ultimate parent company, at the date of settlement, while the Group shall settle the mileage stock in cash based on the stock price.

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 determines 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 fair value of the employee service is recognized as expense and accrued expenses over the vesting period. Also, the Group accounts for the mileage stock in accordance with the requirements of cash-settled share-based payment transactions, and recognizes the corresponding liability and expenses at the vesting period.

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 period.

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. The Group shall recognize a liability and expense for termination benefits at the earlier of the following dates: when the Group can no longer withdraw the offer of those benefits and when the Group recognizes costs for a restructuring that is within the scope of Korean IFRS 1037 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 comprises current tax expense and deferred income tax expense. Current and deferred income tax are recognized as income or expense for the period, except to the extent that the tax arises from 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 a business combination. Income tax expense for the period is recognized based on management’s best estimate of the weighted average annual income tax rate expected for the full financial year.

 

37


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

3.21.1 Current income tax

Current income tax is the amount of income tax payable in respect of the taxable profit (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 (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.

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 set off 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 consolidated 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 tax assets and liabilities shall be measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and deferred tax assets shall reflect 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.

 

38


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

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, an appeal for a refund claimed from the tax authorities related to additional assessments or a tax investigation processed by the tax authorities. The Group recognizes its uncertain tax positions in the consolidated financial statements based on the guidance in Korean IFRS 1012. The income tax asset is recognized if a tax refund is probable for taxes paid and levied by the tax authority, and the amount to be paid as a result of the tax investigation and others is recognized as the current tax payable. However, interest and penalties related to income taxes are recognized in accordance with Korean IFRS 1037 as its economic substances.

3.22 Transactions with the Trust Accounts

Under the Financial Investment Services and Capital Markets Act, the Group recognizes trust accounts (“the trust accounts”) as separate. The borrowings from trust accounts represent transfer of funds in trust accounts into banking accounts. Such borrowings from trust accounts are recorded as receivables from the banking accounts in the trust accounts and as borrowings from trust accounts in the banking accounts. The Group earns trust fees from the trust accounts for its management of trust assets and operations. The reserves for future profits and losses are set up in the trust accounts for profits and losses related to those trust funds with a guarantee of the principal or of the principal and a certain minimum rate of return in accordance with the relevant laws and regulations applicable to trust operations. The reserves are used to provide for the losses on such trust funds and, if the losses incurred are in excess of the reserves, the excess losses are compensation paid as a loss on trust management in other operating expenses and the trust accounts recognize the corresponding compensation as compensation from banking accounts.

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 items which are directly attributable and reasonably allocated to the segment.

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 management. Additional quantitative information is disclosed throughout the consolidated financial statements.

 

39


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

The Group’s risk management system focuses on increasing transparency, developing the risk management environment, preventing transmission of risk to other risk types, 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 and managed in Internal Capital or VaR (Value at Risk) using a statistical method.

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 Subcommittee

The Risk Management Subcommittee enforces decisions made by Risk Management Council, and makes practical decisions to implement risk management policies and procedures.

 

   

Credit Risk Management Subcommittee

The Credit Risk Management Subcommittee approves exotic and hybrid products accompanying credit risk and reviews newly developed products accompanying credit risk. Also, it reviews and approves the exposure limits by industry.

 

   

Market Risk Management Subcommittee

The Market Risk Management Subcommittee reviews and makes decisions on setting risk limits and approving the standard for investments in newly developed standard, exotic and hybrid products.

 

   

Operational Risk Management Subcommittee

The Operational Risk Management Subcommittee reviews the issues that have a significant effect on the Group’s operational risk relating to establishment, amendment and abolition of major system, process and others.

Risk Management Group

The Risk Management Group is responsible for managing specific policies, procedures and work processes relating to the Group’s risk management.

 

40


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

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. The Group uses definition of default as defined and applied in the calculation of Capital Adequacy Ratio (Basel III) in accordance with the new Basel Accord.

4.2.2 Credit Risk Management

The Group measures expected losses and internal capital on assets that are subject to credit risk management whether on- or off-balance sheet items and uses expected losses and internal capital as a management indicator. The Group manages credit risk by allocating credit risk internal 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 group that focuses on credit risk management in accordance with the Group’s credit risk management policy. The Group’s credit group, customer service group and SME/SOHO group, which are independent from the sales department, are responsible for loan policy, loan limit, loan review, credit evaluation, restructuring and subsequent events. The credit risk management group is also responsible for planning risk management policy, applying limits of credit lines, measuring the credit risk internal capital, adjusting credit limits, reviewing credit and verifying credit evaluation models.

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 at December 31, 2018 are as follows:

 

(In millions of Korean won)    2018  

Financial assets

  

Due from financial institutions 1

     11,831,688  

Financial assets at fair value through profit or loss

  

Securities

     11,883,025  

Loans

     212,596  

Financial instruments indexed to gold

     78,808  

Derivatives

     1,613,970  

Loans at amortized cost 1

     276,944,202  

Financial investments

  

Securities at fair value through other comprehensive income

     27,682,463  

Securities at amortized cost 1

     12,792,526  

Loans at fair value through other comprehensive income

     349,547  

Other financial assets 1

     4,199,197  
  

 

 

 
     347,588,022  
  

 

 

 

Off-balance sheet items 2

  

Acceptances and guarantees contracts

     7,277,136  

Financial guarantee contracts

     3,135,589  

Commitments

     81,278,583  
  

 

 

 
     91,691,308  
  

 

 

 
     439,279,330  
  

 

 

 

 

41


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

1 Due from financial institutions, loans at amortized cost, securities at amortized cost and other financial assets are presented net of allowance.

2 For details of relevant provisions, see Note 22.

The Group’s maximum exposures of financial instruments excluding equity securities and beneficiary certificates, to credit risk without consideration of collateral values as at December 31, 2017 are as follows:

 

(In millions of Korean won)    2017  

Financial assets

  

Due from financial institutions

     13,048,893  

Financial assets at fair value through profit or loss (under Korean IFRS 1039)

  

Financial assets held for trading 1

     7,974,469  

Financial assets designated at fair value through profit or loss

     95,357  

Derivatives

     2,607,659  

Loans 2

     251,710,605  

Financial investments

  

Available-for-sale financial assets

     27,605,761  

Held-to-maturity financial assets

     8,737,150  

Other financial assets 2

     6,341,463  
  

 

 

 
     318,121,357  
  

 

 

 

Off-balance sheet items

  

Acceptances and guarantees contracts

     6,977,468  

Financial guarantee contracts

     2,968,354  

Commitments

     50,851,024  
  

 

 

 
     60,796,846  
  

 

 

 
     378,918,203  
  

 

 

 

1The amounts of W73,856 million as at December 31, 2017, related to financial instruments indexed to the price of gold are included.

2 Loans and other financial assets are presented net of allowance for loan losses.

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.

 

42


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

The Group assesses expected credit loss on financial asset at amortized cost and financial asset at fair value through other comprehensive income other than financial asset at fair value through profit or loss and recognizes loss allowance. Expected credit losses are a probability-weighted estimate of possible credit losses occurred in a certain range by reflecting reasonable and supportable information that is reasonably available at the reporting date without undue cost or effort, including information about past events, current conditions and forecasts of future economic conditions. The Group measures the expected credit losses on loans classified as financial assets measured at amortized cost, and by deducting allowances for credit losses. The expected credit losses of loans classified as financial assets at fair value through other comprehensive income are presented in other comprehensive income on the financial statements.

Credit risk exposure

Loans as at December 31, 2018, are classified as follows:

 

(In millions of Korean won)            2018  
     Financial
instruments
applying 12-

month
expected
credit losses
     Financial instruments
applying lifetime expected
credit losses
     Financial
instruments
applying
credit
impaired
approach
     Financial
instruments
not
applying
expected
credit
losses
     Total  
     Non-
impaired
     Impaired  

Financial assets at amortized cost

 

Corporate

 

Grade 1

     69,619,761        1,451,514        1,573        —          —          71,072,848  

Grade 2

     54,119,274        4,073,167        1,610        —          —          58,194,051  

Grade 3

     2,698,199        1,691,008        6,566        —          —          4,395,773  

Grade 4

     395,707        903,215        40,043        —          —          1,338,965  

Grade 5

     26,019        342,477        935,447        —          —          1,303,943  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     126,858,960        8,461,381        985,239        —          —          136,305,580  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Retail

 

Grade 1

     124,212,610        4,387,477        8,836        —          —          128,608,923  

Grade 2

     4,171,518        7,058,259        6,218        —          —          11,235,995  

Grade 3

     140,074        881,415        4,158        —          —          1,025,647  

Grade 4

     478,701        154,535        5,103        —          —          638,339  

Grade 5

     8,478        296,087        379,555        —          —          684,120  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     129,011,381        12,777,773        403,870        —          —          142,193,024  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     255,870,341        21,239,154        1,389,109        —          —          278,498,604  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial assets at fair value through other comprehensive income

 

Corporate

 

Grade 1

     149,226        25,731        —          —          —          174,957  

Grade 2

     128,712        45,878        —          —          —          174,590  

Grade 3

     —          —          —          —          —          —    

Grade 4

     —          —          —          —          —          —    

Grade 5

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

43


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

     277,938        71,609        —          —          —          349,547  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Retail

 

Grade 1

     —          —          —          —          —          —    

Grade 2

     —          —          —          —          —          —    

Grade 3

     —          —          —          —          —          —    

Grade 4

     —          —          —          —          —          —    

Grade 5

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     277,938        71,609        —          —          —          349,547  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     256,148,279        21,310,763        1,389,109        —          —          278,848,151  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

1 Before netting of allowance.

 

     Corporate    Retail

Grade 1

   AAA ~ BBB+    1 ~ 5 grade

Grade 2

   BBB ~ BB    6 ~ 8 grade

Grade 3

   BB- ~ B    9 ~ 10 grade

Grade 4

   B- ~ CCC    11 grade

Grade 5

   CC or under    12 grade or under

Loans as at December 31, 2017, are classified as follows:

(In millions of Korean won)

 

     2017  
Loans    Retail      Corporate      Total  
   Amount     %      Amount     %      Amount     %  

Neither past due nor impaired

     129,231,082       99.04        121,257,211       98.88        250,488,293       98.96  

Past due but not impaired

     865,485       0.66        198,270       0.16        1,063,755       0.42  

Impaired

     389,552       0.30        1,182,726       0.96        1,572,278       0.62  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
     130,486,119       100.00        122,638,207       100.00        253,124,326       100.00  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Allowances

     (318,533     0.24        (1,095,188     0.89        (1,413,721     0.56  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Carrying amount

     130,167,586          121,543,019          251,710,605    
  

 

 

      

 

 

      

 

 

   

 

44


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

Credit qualities of loans that are neither past due nor impaired as at December 31, 2017 are as follows:

(In millions of Korean won)

 

     2017  
     Retail      Corporate      Total  

Grade 1

     115,311,505        62,287,457        177,598,962  

Grade 2

     12,537,698        52,057,018        64,594,716  

Grade 3

     804,042        5,341,955        6,145,997  

Grade 4

     398,177        1,253,960        1,652,137  

Grade 5

     179,660        316,821        496,481  
  

 

 

    

 

 

    

 

 

 
     129,231,082        121,257,211        250,488,293  
  

 

 

    

 

 

    

 

 

 

Credit qualities of loans graded according to internal credit ratings as at December 31, 2017 are as follows:

 

     Retail    Corporate

Grade 1

   1 ~ 5 grade    AAA ~ BBB+

Grade 2

   6 ~ 8 grade    BBB ~ BB

Grade 3

   9 ~ 10 grade    BB- ~ B

Grade 4

   11 grade    B- ~ CCC

Grade 5

   12 grade or under    CC or under

Loans that are past due but not impaired as at December 31, 2017 are as follows:

(In millions of Korean won)

 

     2017  
     1 ~ 29 days      30 ~ 59 days      60 ~ 89 days      Total  

Retail

     736,264        87,901        41,320        865,485  

Corporate

     154,706        26,654        16,910        198,270  
  

 

 

    

 

 

    

 

 

    

 

 

 
     890,970        114,555        58,230        1,063,755  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

45


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

Impaired loans as at December 31, 2017 are as follows:

(In millions of Korean won)

 

     2017  
     Retail      Corporate      Total  

Loans

     389,552        1,182,726        1,572,278  

Allowances

     (126,691      (771,131      (897,822

Individual

     —          (684,377      (684,377

Collective

     (126,691      (86,754      (213,445
  

 

 

    

 

 

    

 

 

 
     262,861        411,595        674,456  
  

 

 

    

 

 

    

 

 

 

Credit risk mitigation by collateral

The quantification of the extent to which collateral and other credit enhancements mitigate credit risk as at December 31, 2018 is as follows:

(In millions of Korean won)

 

     2018  
     Financial
instruments
applying 12-

month
expected credit
losses
     Financial instruments
applying lifetime expected
credit losses
     Financial
instruments
applying
credit
impaired
approach
     Financial
instruments
not applying
expected
credit

losses
     Total  
     Non-impaired      Impaired  

Guarantees

     60,020,814        5,864,526        146,818        —          —          66,032,158  

Deposits and savings

     1,372,286        76,960        5,265        —          —          1,454,511  

Property and equipment

     2,540,384        97,807        2,461        —          —          2,640,652  

Real estate

     145,155,068        12,512,423        388,109        —          —          158,055,600  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     209,088,552        18,551,716        542,653        —          —          228,182,921  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

A quantification of the extent to which collateral and other credit enhancements mitigate credit risk as at December 31, 2017, is as follows:

(In millions of Korean won)

 

     2017  
     Impaired Loans      Non-impaired Loans      Total  
     Individual      Collective      Past due      Not past due  

Guarantees

     17,257        107,610        198,379        57,399,810        57,723,056  

Deposits and savings

     10,501        5,375        23,126        1,576,897        1,615,899  

Property and equipment

     125        456        43        2,091,917        2,092,541  

Real estate

     96,010        271,937        638,044        145,583,507        146,589,498  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     123,893        385,378        859,592        206,652,131        208,020,994  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

46


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

4.2.5 Credit Quality of Securities

The credit quality of financial investments excluding equity securities that are exposed to credit risk as at December 31, 2018, are as follows:

 

     2018  
     Financial
instruments
applying 12-

month
expected
credit losses
     Financial
instruments applying
lifetime expected
credit losses
     Financial
instruments
applying
credit
impaired
approach
     Financial
instruments
not applying
expected
credit losses
     Total  
(In millions of Korean won)    Non-
impaired
     Impaired  

Securities at amortized cost

 

Grade 1

     12,769,605        —          —          —          —          12,769,605  

Grade 2

     9,569        —          —          —          —          9,569  

Grade 3

     14,649        —          —          —          —          14,649  

Grade 4

     —          —          —          —          —          —    

Grade 5

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     12,793,823        —          —          —          —          12,793,823  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Securities at fair value through other comprehensive income

 

Grade 1

     27,120,098        —          —          —          —          27,120,098  

Grade 2

     559,855        —          —          —          —          559,855  

Grade 3

     —          —          —          —          —          —    

Grade 4

     2,510        —          —          —          —          2,510  

Grade 5

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     27,682,463        —          —          —          —          27,682,463  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     40,476,286        —          —          —          —          40,476,286  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

1

Before netting of allowance.

The credit qualities of securities, excluding equity securities according to the credit ratings by external rating agencies as at December 31, 2018, are as follows:

 

    

Domestic

  

Foreign

Credit

quality

  

KIS

  

NICE P&I

  

FnPricing Inc.

  

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 ratings by the three foreign credit rating agencies above.

 

47


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

Financial assets at fair value through profit or loss and financial investments, excluding equity securities and beneficiary certificates, that are exposed to credit risk as at December 31, 2017 are as follows:

 

(In millions of Korean won)    2017  

Securities that are neither past due nor impaired

     44,338,881  

Impaired securities

     —    
  

 

 

 
     44,338,881  
  

 

 

 

The credit quality of securities, excluding equity securities and beneficiary certificates, that are neither past due nor impaired as at December 31, 2017, is as follows:

 

     2017  
(In millions of Korean won)    Grade 1      Grade 2      Grade 3      Grade 4      Grade 5      Total  

Financial assets held for trading

     6,525,798        1,304,926        44,157        25,732        —          7,900,613  

Financial assets designated at fair value through profit or loss

     95,357        —          —          —          —          95,357  

Available-for-sale financial assets

     27,433,166        144,312        25,762        2,521        —          27,605,761  

Held-to-maturity financial assets

     8,737,150        —          —          —          —          8,737,150  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     42,791,471        1,449,238        69,919        28,253        —          44,338,881  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The credit qualities of securities, excluding equity securities and beneficiary certificates, according to the credit ratings by external rating agencies as at December 31, 2017, are as follows:

 

    

Domestic

  

Foreign

Credit

quality

  

KIS

  

NICE P&I

  

FnPricing Inc.

  

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

Credit qualities of debt securities 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.

 

48


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

4.2.6 Credit Risk of Due from Financial Institutions

The credit quality of due from financial institutions as at December 31, 2018, is classified as follows:

 

     2018  
(In millions of Korean won)    Financial
instruments
applying 12-

month
expected
credit losses
     Financial instruments
applying lifetime expected
credit losses
     Financial
instruments
applying
credit
impaired
approach
     Total  
   Non-impaired      Impaired  

Due from financial institutions at amortized cost

 

Grade 1

     11,035,800        —          —          —          11,035,800  

Grade 2

     167,900        —          —          —          167,900  

Grade 3

     608,314        —          —          —          608,314  

Grade 4

     19,531        —          —          —          19,531  

Grade 5

     1,691        —          —          —          1,691  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     11,833,236        —          —          —          11,833,236  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

1

Before netting of allowance.

The classification criteria of the credit quality for due from financial institutions are the same as the criteria for securities (excluding equity securities).

4.2.7 Credit Risk Mitigation of Derivative Financial Instruments

The quantification of the extent to which collateral mitigates credit risk of derivative financial instruments as at December 31, 2018 and 2017, is as follows:

 

(In millions of Korean won)    2018      2017  

Deposits and savings, securities and others

     381,959        1,198,373  

4.2.8 Credit Risk Concentration Analysis

Details of the Group’s loans by country as at December 31, 2018 and 2017, are as follows:

 

     2018  
(In millions of Korean won)    Retail      Corporate1      Total      %      Allowances     Carrying
amount
 

Korea

     142,003,442        132,576,712        274,580,154        98.40        (1,524,099     273,056,055  

China

     —          2,278,545        2,278,545        0.82        (20,586     2,257,959  

Japan

     106        333,918        334,024        0.12        (1,865     332,159  

United States

     —          892,958        892,958        0.32        (5,165     887,793  

Europe

     —          348,336        348,336        0.12        (498     347,838  

Others

     189,476        437,254        626,730        0.22        (2,189     624,541  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     142,193,024        136,867,723        279,060,747        100.00        (1,554,402     277,506,345  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

1

Expected credit loss of loans at fair value through other comprehensive income is W 1,307 million.

 

49


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

 

     2017  
(In millions of Korean won)    Retail      Corporate      Total      %      Allowances     Carrying
amount
 

Korea

     130,390,627        119,273,608        249,664,235        98.63        (1,369,907     248,294,328  

China

     —          1,867,380        1,867,380        0.74        (30,720     1,836,660  

Japan

     539        127,009        127,548        0.05        (6,268     121,280  

United States

     —          866,867        866,867        0.34        (1,599     865,268  

Europe

     —          192,980        192,980        0.08        (2,326     190,654  

Others

     94,953        310,363        405,316        0.16        (2,901     402,415  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     130,486,119        122,638,207        253,124,326        100.00        (1,413,721     251,710,605  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Details of the Group’s corporate loans by industry as at December 31, 2018 and 2017, are as follows:

 

     2018  
(In millions of Korean won)    Loans      %      Allowances      Carrying
amount
 

Financial institutions

     11,118,159        8.12        (5,798      11,112,361  

Manufacturing

     42,063,832        30.73        (448,644      41,615,188  

Service

     59,278,536        43.31        (249,776      59,028,760  

Wholesale and retail

     16,284,464        11.90        (93,091      16,191,373  

Construction

     2,640,614        1.93        (283,768      2,356,846  

Public

     821,317        0.60        (3,286      818,031  

Others

     4,660,801        3.41        (24,512      4,636,289  
  

 

 

    

 

 

    

 

 

    

 

 

 
     136,867,723        100.00        (1,108,875      135,758,848  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     2017  
(In millions of Korean won)    Loans      %      Allowances      Carrying
amount
 

Financial institutions

     9,041,823        7.38        (6,265      9,035,558  

Manufacturing

     39,127,515        31.90        (434,349      38,693,166  

Service

     52,794,807        43.05        (281,847      52,512,960  

Wholesale and retail

     14,620,777        11.92        (85,972      14,534,805  

Construction

     2,538,256        2.07        (269,185      2,269,071  

Public

     834,687        0.68        (2,911      831,776  

Others

     3,680,342        3.00        (14,659      3,665,683  
  

 

 

    

 

 

    

 

 

    

 

 

 
     122,638,207        100.00        (1,095,188      121,543,019  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

50


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

Details of the Group’s retail loans by type as at December 31, 2018 and 2017, are as follows:

 

     2018  
(In millions of Korean won)    Loans      %      Allowances      Carrying
amount
 

Housing purpose

     70,178,328        49.35        (28,940      70,149,388  

General purpose

     72,014,696        50.65        (416,587      71,598,109  
  

 

 

    

 

 

    

 

 

    

 

 

 
     142,193,024        100.00        (445,527      141,747,497  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     2017  
(In millions of Korean won)    Loans      %      Allowances      Carrying
amount
 

Housing purpose

     62,319,992        47.76        (14,914      62,305,078  

General purpose

     68,166,127        52.24        (303,619      67,862,508  
  

 

 

    

 

 

    

 

 

    

 

 

 
     130,486,119        100.00        (318,533      130,167,586  
  

 

 

    

 

 

    

 

 

    

 

 

 

Details of the Group’s mortgage loans1 as at December 31, 2018, are as follows:

 

     2018  
(In millions of Korean won)    Loans      %      Allowances      Carrying
amount
 

Group1

     6,671,012        7.11        (3,296      6,667,716  

Group2

     18,911,235        20.16        (8,322      18,902,913  

Group3

     35,580,948        37.94        (8,753      35,572,195  

Group4

     32,256,160        34.39        (12,338      32,243,822  

Group5

     356,892        0.38        (737      356,155  

Group6

     16,776        0.02        (35      16,741  
  

 

 

    

 

 

    

 

 

    

 

 

 
     93,793,023        100.00        (33,481      93,759,542  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

1 

Retail loans for general purpose with the real estate as collateral are included.

 

    

Ranges

Group1

   LTV 0% to less than 20%

Group2

   LTV 20% to less than 40%

Group3

   LTV 40% to less than 60%

Group4

   LTV 60% to less than 80%

Group5

   LTV 80% to less than 100%

Group6

   LTV over 100%

 

1 

LTV: Loan to Value ratio

 

51


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

Credit risk by industry of due from financial institutions, securities and derivative financial instruments

Details of the Group’s credit risk concentration of due from financial institutions, securities excluding equity securities and derivative financial instruments as at December 31, 2018, are as follows:

 

     2018  
(In millions of Korean won)    Amount      %      Allowances      Carrying
amount
 

Due from financial institutions at amortized cost

  

Finance and insurance

     11,833,236        100.00        (1,548      11,831,688  
  

 

 

    

 

 

    

 

 

    

 

 

 
     11,833,236        100.00        (1,548      11,831,688  
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities at fair value through profit or loss1

           

Government and government funded institutions

     2,755,250        23.19        —          2,755,250  

Finance and insurance

     7,523,708        63.31        —          7,523,708  

Others

     1,604,067        13.50        —          1,604,067  
  

 

 

    

 

 

    

 

 

    

 

 

 
     11,883,025        100.00        —          11,883,025  
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivatives

           

Government and government funded institutions

     39,290        2.43        —          39,290  

Finance and insurance

     1,485,912        92.07        —          1,485,912  

Others

     88,768        5.50        —          88,768  
  

 

 

    

 

 

    

 

 

    

 

 

 
     1,613,970        100.00        —          1,613,970  
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities at fair value through other comprehensive income2

           

Government and government funded institutions

     7,844,258        28.34        —          7,844,258  

Finance and insurance

     17,770,112        64.19        —          17,770,112  

Others

     2,068,093        7.47        —          2,068,093  
  

 

 

    

 

 

    

 

 

    

 

 

 
     27,682,463        100.00        —          27,682,463  
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities at amortized cost

 

Government and government funded institutions

     1,937,657        15.15        (4      1,937,653  

Finance and insurance

     10,826,102        84.62        (1,287      10,824,815  

Others

     30,064        0.23        (6      30,058  
  

 

 

    

 

 

    

 

 

    

 

 

 
     12,793,823        100.00        (1,297      12,792,526  
  

 

 

    

 

 

    

 

 

    

 

 

 
     65,806,517           (2,845      65,803,672  
  

 

 

       

 

 

    

 

 

 

 

1 

Collective investment securities included in securities at fair value through profit or loss are classified as finance and insurance.

2 

Expected credit loss of securities at fair value through other comprehensive income is W 1,348 million.

 

52


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

Details of the Group’s credit risk of securities, excluding equity securities and beneficiary certificates, and derivative financial instruments by industry as at December 31, 2017, are as follows:

 

     2017  
(In millions of Korean won)    Amount      %  

Financial assets held for trading

     

Government and government funded institutions

     2,408,760        30.49  

Finance and Insurance

     3,876,344        49.06  

Others

     1,615,509        20.45  
  

 

 

    

 

 

 
     7,900,613        100.00  
  

 

 

    

 

 

 

Financial assets designated at fair value through profit or loss

     

Finance and Insurance

     95,357        100.00  
  

 

 

    

 

 

 
     95,357        100.00  
  

 

 

    

 

 

 

Derivative financial assets

     

Government and government funded institutions

     12,099        0.47  

Finance and Insurance

     2,464,286        94.50  

Others

     131,274        5.03  
  

 

 

    

 

 

 
     2,607,659        100.00  
  

 

 

    

 

 

 

Available-for-sale financial assets

     

Government and government funded institutions

     8,188,744        29.67  

Finance and Insurance

     18,044,307        65.36  

Others

     1,372,710        4.97  
  

 

 

    

 

 

 
     27,605,761        100.00  
  

 

 

    

 

 

 

Held-to-maturity financial assets

     

Government and government funded institutions

     2,563,480        29.34  

Finance and Insurance

     6,073,478        69.51  

Others

     100,192        1.15  
  

 

 

    

 

 

 
     8,737,150        100.00  
  

 

 

    

 

 

 
     46,946,540     
  

 

 

    

 

53


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

Details of the Group’s credit risk of due from financial institutions, securities, excluding equity securities, and derivative financial instruments by country as at December 31, 2018, are as follows:

 

     2018  
(In millions of Korean won)    Amount      %      Allowances      Carrying
amount1
 

Due from financial institutions at amortized cost

  

Korea

     9,478,190        80.10        —          9,478,190  

United States

     667,139        5.64        (6      667,133  

Others

     1,687,907        14.26        (1,542      1,686,365  
  

 

 

    

 

 

    

 

 

    

 

 

 
     11,833,236        100.00        (1,548      11,831,688  
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities at fair value through profit or loss

  

Korea

     10,524,924        88.57        —          10,524,924  

United States

     726,271        6.11        —          726,271  

Others

     631,830        5.32        —          631,830  
  

 

 

    

 

 

    

 

 

    

 

 

 
     11,883,025        100.00        —          11,883,025  
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivatives

 

Korea

     752,028        46.59        —          752,028  

United States

     285,460        17.69        —          285,460  

France

     222,905        13.81        —          222,905  

Others

     353,577        21.91        —          353,577  
  

 

 

    

 

 

    

 

 

    

 

 

 
     1,613,970        100.00        —          1,613,970  
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities at fair value through other comprehensive income1

  

Korea

     26,139,297        94.43        —          26,139,297  

United States

     711,946        2.57        —          711,946  

Others

     831,220        3.00        —          831,220  
  

 

 

    

 

 

    

 

 

    

 

 

 
     27,682,463        100.00        —          27,682,463  
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities at amortized cost

 

Korea

     11,805,442        92.27        (945      11,804,497  

United States

     155,417        1.21        (32      155,385  

United Kingdom

     705,790        5.52        (247      705,543  

Others

     127,174        1.00        (73      127,101  
  

 

 

    

 

 

    

 

 

    

 

 

 
     12,793,823        100.00        (1,297      12,792,526  
  

 

 

    

 

 

    

 

 

    

 

 

 
     65,806,517           (2,845      65,803,672  
  

 

 

       

 

 

    

 

 

 

 

1 

Expected credit loss of securities at fair value through other comprehensive income is W 1,348 million.

 

54


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

Details of the Group’s credit risk of securities, excluding equity securities and beneficiary certificates, and derivative financial instruments by country as at December 31, 2017, are as follows:

 

     2017  
(In millions of Korean won)    Amount      %  

Financial assets held for trading

     

Korea

     7,021,083        88.87  

Others

     879,530        11.13  
  

 

 

    

 

 

 
     7,900,613        100.00  
  

 

 

    

 

 

 

Financial assets designated at fair value through profit or loss

     

Korea

     95,357        100.00  
  

 

 

    

 

 

 
     95,357        100.00  
  

 

 

    

 

 

 

Derivative financial assets

     

Korea

     1,266,612        48.57  

United States

     303,283        11.63  

United Kingdom

     52,781        2.02  

France

     303,883        11.65  

Others

     681,100        26.13  
  

 

 

    

 

 

 
     2,607,659        100.00  
  

 

 

    

 

 

 

Available-for-sale financial assets

     

Korea

     27,006,817        97.83  

Others

     598,944        2.17  
  

 

 

    

 

 

 
     27,605,761        100.00  
  

 

 

    

 

 

 

Held-to-maturity financial assets

     

Korea

     7,647,772        87.53  

Others

     1,089,378        12.47  
  

 

 

    

 

 

 
     8,737,150        100.00  
  

 

 

    

 

 

 
     46,946,540     
  

 

 

    

The counterparties to the financial assets under due from financial institutions and financial instruments indexed to the price of gold within financial assets measured at fair value through profit or loss and derivatives are in the financial and insurance industries which have high credit ratings.

 

55


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

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 interest-bearing assets and liabilities, assets and liabilities related to the other in and outflows, and off-balance sheet items related to the inflows and outflows of currency derivative instruments and others.

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 addresses all the possible risks that arise from the overall business of the Group.

The Group has to establish the liquidity risk management strategy including the objectives of liquidity risk management, management policies and internal control system, and obtain approval from Risk Management Committee. Risk Management Committee operates the Risk Management Council for the purpose of efficient risk management, monitors establishment and enforcement of policies based on risk management strategy.

For the purpose of liquidity management, the liquidity gap ratio, liquidity ratio, maturity gap ratio and the results of the stress testing related to liquidity risk on transactions affecting the inflows and outflows of funds and transactions of off-balance sheet items are measured, managed and reported to the Risk Management Committee and Risk Management Council on a regular basis.

4.3.3. Analysis of Remaining Contractual Maturity of Financial Assets and Liabilities

Cash flows disclosed below are undiscounted contractual principal and interest to be received (paid) and, thus, differ from the amounts in the financial statements which are based on the present value of expected cash flows. 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.

 

56


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

The remaining contractual maturity of financial assets and liabilities, excluding derivatives held for cash flow hedging, as at December 31, 2018 and 2017, is as follows:    

 

     2018  
(In millions of Korean won)    On demand      Up to
1 month
     1-3
months
    3-12
months
    1-5
years
     Over 5
years
     Total  

Financial assets

                  

Cash and due from financial institutions 1

     4,727,159        339,350        178,406       458,164       —          —          5,703,079  

Financial assets at fair value through profit or loss 2

     12,043,909        230        7,182       184,881       5,542        90,736        12,332,480  

Derivatives held for trading

     1,533,650        —          —         —         —          —          1,533,650  

Derivatives held for hedging 3

     —          2,289        1,364       16,251       20,025        40,830        80,759  

Loans at amortized cost

     —          18,705,807        27,929,002       107,831,857       71,668,732        95,363,933        321,499,331  

Financial investments 4

     1,898,944        2,176,313        3,646,572       13,634,982       20,703,303        2,454,592        44,514,706  

Financial assets at fair value through other comprehensive income

     1,898,944        1,418,537        2,278,547       9,765,281       14,987,787        191,966        30,541,062  

Securities at amortized cost

     —          757,776        1,368,025       3,869,701       5,715,516        2,262,626        13,973,644  

Other financial assets

     285        2,449,979        520       1,020,442       —          —          3,471,226  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 
     20,203,947        23,673,968        31,763,046       123,146,577       92,397,602        97,950,091        389,135,231  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Financial liabilities

 

            

Financial liabilities at fair value through profit or loss 2

     87,168        —          —         —         —          —          87,168  

Derivatives held for trading 2

     1,553,858        —          —         —         —          —          1,553,858  

Derivatives held for hedging 3

     —          4,091        (4,249     (14,415     15,660        31        1,118  

Deposits 5

     123,264,494        16,840,316        27,895,787       94,902,004       11,164,154        2,780,594        276,847,349  

Debts

     872        2,683,213        3,317,577       6,830,511       4,348,308        669,151        17,849,632  

Debentures

     30,160        702,704        2,368,679       8,329,923       12,113,285        673,863        24,218,614  

Other financial liabilities

     —          10,451,177        2,206       76,647       60,145        —          10,590,175  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 
     124,936,552        30,681,501        33,580,000       110,124,670       27,701,552        4,123,639        331,147,914  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Off-balance sheet items

 

Commitments 6

     81,278,583        —          —         —         —          —          81,278,583  

Payment guarantee agreement

     7,277,136        —          —         —         —          —          7,277,136  

Financial

guarantee contracts 7

     3,135,590        —          —         —         —          —          3,135,590  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 
     91,691,309        —          —         —         —          —          91,691,309  

 

1 

The amounts of W 9,203,969 million which are restricted amount due from the financial institutions as at December 31, 2018 are excluded.

2

Financial liabilities at fair value through profit or loss and derivatives held for trading and financial assets at fair value through profit or loss (excluding loans) are not managed by contractual maturity because they are held for trading or redemption before maturity. Therefore, the carrying amounts are included in the ‘On demand’ category.

3

Cash flows of derivative instruments held for hedging are shown at net amounts of cash inflows and outflows by remaining contractual maturity.

4

Equity securities designated as financial assets at fair value through other comprehensive income included in the ‘On demand’ category as most are available for sale at any time. However, in the case of equity investments which are restricted for sale, these will be classified to its respective maturity when the restriction on disposal is released.

5

Deposits that are contractually repayable on demand or on short notice are included under the ‘On demand’ category.

6

Unused lines of credit within commitments are included under the ‘On demand’ category as payments can be required upon request.

7

Financial guarantee contracts are included under the ‘On demand’ category as payments can be required upon request.

 

57


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

     2017  
(In millions of Korean won)    On demand      Up to
1 month
     1-3
months
    3-12
months
    1-5
years
    Over 5
years
     Total  

Financial assets

                 

Cash and due from financial institutions 1

     5,716,586        399,460        140,676       159,353       —         —          6,416,075  

Financial assets held for trading 2

     8,313,373        —          —         —         —         —          8,313,373  

Financial assets

designated at fair value through profit or loss 2

     95,357        —          —         —         —         —          95,357  

Derivatives held for trading 2

     2,509,930        —          —         —         —         —          2,509,930  

Derivatives held for hedging 3

     —          21,489        2,722       2,647       (5,017     52,698        74,539  

Loans

     —          14,978,083        26,503,526       96,536,587       62,850,146       89,830,481        290,698,823  

Available-for-sale financial assets 4

     6,056,352        1,486,656        2,111,060       9,396,840       15,050,896       791,200        34,893,004  

Held-to-maturity financial assets

     —          584,825        388,928       2,608,727       4,343,586       1,986,169        9,912,235  

Other financial assets

     291        4,604,953        —         1,042,830       —         —          5,648,074  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
     22,691,889        22,075,466        29,146,912       109,746,984       82,239,611       92,660,548        358,561,410  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Financial liabilities

 

              

Financial liabilities held for trading 2

     74,191        —          —         —         —         —          74,191  

Derivatives held for trading 2

     2,558,786        —          —         —         —         —          2,558,786  

Derivatives held for hedging 3

     —          4,176        (4,715     (19,705     (7,144     244        (27,144

Deposits 5

     124,342,154        12,319,041        23,092,872       82,158,996       11,320,759       2,801,348        256,035,170  

Debts

     936        3,843,258        1,871,117       5,325,664       4,462,359       573,088        16,076,422  

Debentures

     40,655        540,471        1,218,396       5,425,995       11,524,310       1,536,151        20,285,978  

Other financial liabilities

     —          10,055,251        774       74,577       6,794       218,097        10,355,493  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
     127,016,722        26,762,197        26,178,444       92,965,527       27,307,078       5,128,928        305,358,896  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Off-balance sheet items

 

        

Commitments 6

     50,851,024        —          —         —         —         —          50,851,024  

Financial

guarantee contracts 7

     2,968,354        —          —         —         —         —          2,968,354  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
     53,819,378        —          —         —         —         —          53,819,378  

 

1

The amounts of W 9,240,008 million which are restricted amount due from the financial institutions as at December 31, 2017 are excluded.

2

Financial assets held for trading, financial assets designated at fair value through profit or loss, financial liabilities held for trading and derivatives held for trading are not managed by contractual maturity because they are held for trading or redemption before maturity. Therefore, the carrying amounts are included in the ‘On demand’ category. However, the cash flows of the embedded derivatives (e.g. conversion options and others) which are separated from their host contracts, are included in the cash flows of the host contracts.

3

Cash flows of derivative instruments held for hedging are shown at net amounts of cash inflows and outflows by remaining contractual maturity.

4

Equity investments in financial assets classified as available-for-sale are generally included in the ‘On demand’ category as most are available for sale at any time. However, in the case of equity investments which are restricted for sale, these will be classified to its respective maturity when the restriction on disposal is released.

5

Deposits that are contractually repayable on demand or on short notice are included under the ‘On demand’ category.

6

Unused lines of credit within commitments are included under the ‘On demand’ category as payments can be required upon request.

7

Financial guarantee contracts are included under the ‘On demand’ category as payments can be required upon request.

 

58


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

The remaining contractual cash flows of derivatives held for cash flow hedging as at December 31, 2018 and 2017, are as follows:

 

     2018  
(In millions of Korean won)    Up to
1 month
     1-3
months
     3-12
months
     1-5
years
     Over 5
years
     Total  

Cash flow to be received of net settlement derivatives

     251        2,548        4,871        11,642        —          19,312  

Cash flow to be paid of net settlement derivatives

     197        129        493        79        —          898  

 

     2017  
(In millions of Korean won)    Up to
1 month
     1-3
months
     3-12
months
     1-5
years
     Over
5 years
     Total  

Cash flow to be received of net settlement derivatives

     2        198        488        104        —          792  

Cash flow to be paid of net settlement derivatives

     94        536        1,444        5,852        —          7,926  

4.4 Market Risk

4.4.1 Concept

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, and incurred in securities, derivatives and others. The most significant risks associated with trading positions are interest rate risks and currency risks, and other risks include stock price 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 for managerial purpose.

4.4.2 Risk Management

The Group sets internal 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, market risk management guidelines for trading positions and ALM 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.

The Group establishes market risk management policy, sets position limits, loss limits and VaR limits of each business group and approves newly developed products through its Risk Management Council. The Market Risk Management Subcommittee, which is chaired by the Chief Risk Officer (CRO), is the decision maker and 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 Asset-Liability Management Committee (ALCO) determines the operational standards of interest and commission, the details of establishment and prosecution of the Asset Liability Management (ALM) policies and enacts and amends relevant guidelines. The Risk Management Council monitors the establishment and enforcement of ALM risk management policies and enact and amend ALM risk management guidelines. 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 measure and monitor the interest risk status and limits on a regular basis. The status and limits of interest rate risks, such as interest rate EaR, duration gap and interest rate VaR, are reported to the ALCO and Risk Management Council on a monthly basis and to the Risk Management Committee on a quarterly basis. To ensure adequacy of interest rate and liquidity risk management, the Risk Management Department assigns the limits, monitors and reviews the risk management procedures and tasks conducted by the Financial Planning Department. Also, the Risk Management Department independently reports related information to management.

 

59


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

4.4.3 Trading Position

Definition of a trading position

Trading positions subject to market risk management are interest rate, stock price positions for short-term profit-taking and others. Also, they include all foreign exchange rate positions. The basic requirements of trading positions are defined under the Trading Policy and Guideline, are as follows:

 

   

The trading position is not restricted for purchase and 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.

Value at Risk (VaR)

i. Value at Risk (VaR)

The Group uses the Value-at-Risk methodology to measure the market risk of trading positions.

The Group now uses the ten-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.

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.

 

60


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

The Group uses an internal model (VaR) to measure general risk, and a standard method to measure each individual risk. When the internal model is not permitted for certain market risk, the Group uses the 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 VaR model. In back- testing, the Group compares both the actual and hypothetical profit or 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 options and other risk factors that have significant influence on the value of the portfolio. The Group uses historical scenarios and hypothetical scenarios for the analysis of abnormal market situations. Stress testing is performed at least once every quarter.

The units that analyze total VaR can be categorized as follows: ① by product: interest rate products (debt securities in Korean won and foreign currencies, etc.), foreign currency products (spots, futures, and CRS, etc.), equity securities (equities, ELS, etc.), ② by risk factors: interest rates (government bond interest rate in Korean won and foreign currencies, corporate bond interest rate, etc.), exchange rates (USD/KRW, USD/JPY, etc.), and stock market indexes (KOSPI, S&P 500, etc.); the Group previously assesses VaR by product considering timeliness and efficiency.

However, as the amount of investment property in foreign currencies increases, products evaluated as multiple risk factors (i.e. for foreign currency bonds, ① by product: interest rate product ② by risk factor: interest rate and foreign exchange rate) had a tendency that dispersion effect is excessive due to not reflecting the actual hedge position by products in detail; to prevent which, the Group has decided to use VaR by risk factor from 2018.

VaR at a 99%, excluding Stressed Value at Risks, confidence level of interest rate, stock price and foreign exchange rate risk for trading positions with a ten-day holding period as at December 31, 2018 and 2017, are as follows:

 

61


Kookmin Bank and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

 

     2018  
(In millions of Korean won)    Average      Minimum      Maximum      Ending  

Interest rate risk

     12,513        6,044        18,684        7,074  

Stock price risk

     2,995        1,253        4,831        3,348  

Foreign exchange rate risk

     9,443        5,033        16,453        16,453  

Deduction of diversification effect

              (11,939
  

 

 

    

 

 

    

 

 

    

 

 

 

Total VaR

     16,221        11,653        23,078        14,936  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     2017  
(In millions of Korean won)    Average      Minimum      Maximum      Ending  

Interest rate risk

     22,682        14,313        42,155        23,758  

Stock price risk

     1,002        757        1,345        1,255  

Foreign exchange rate risk

     32,709        12,405        44,322        24,315  

Deduction of diversification effect

              (29,727