20-F 1 d676223d20f.htm FORM 20-F Form 20-F
Table of Contents

As filed with the Securities and Exchange Commission on April 30, 2019

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

(Mark One)

 

    

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

OR

 

    

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

For the fiscal year ended December 31, 2018

OR

 

    

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

For the transition period from                  to                 .

OR

 

    

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

Date of event requiring this shell company report                 .

Commission file number 000-53445

KB Financial Group Inc.

(Exact name of Registrant as specified in its charter)

KB Financial Group Inc.

(Translation of Registrant’s name into English)

The Republic of Korea

(Jurisdiction of incorporation or organization)

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

(Address of principal executive offices)

Peter BongJoong Kwon

11F, Kookmin Bank, 26, Gukjegeumyung-ro 8-gil, Yeongdeungpo-gu, Seoul 07331, Korea

Telephone No.: +82-2-2073-2824

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

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

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

 

Title of each class

  

Name of each exchange on which registered

American Depositary Shares, each representing one share of

Common Stock

   New York Stock Exchange

Common Stock, par value ₩5,000 per share

   New York Stock Exchange*

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

None

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

None

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

395,551,297 shares of Common Stock, par value 5,000 per share

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

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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  ☒ Yes  ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

  ☒    Large accelerated filer             ☐     Accelerated filer             ☐     Non-accelerated filer             ☐     Emerging growth company

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act:  ☐ Yes  ☐ No

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

 

☐    U.S. GAAP

     ☒    International Financial Reporting Standards as issued by the International Accounting Standards Board       Other

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

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

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

 

 

 


Table of Contents

TABLE OF CONTENTS

 

PRESENTATION OF FINANCIAL AND OTHER INFORMATION      1  
FORWARD-LOOKING STATEMENTS      2  

Item 1.

  

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

     3  

Item 2.

  

OFFER STATISTICS AND EXPECTED TIMETABLE

     3  

Item 3.

  

KEY INFORMATION

     3  
  

Item 3.A.

  

Selected Financial Data

     3  
  

Item 3.B.

  

Capitalization and Indebtedness

     12  
  

Item 3.C.

  

Reasons for the Offer and Use of Proceeds

     12  
  

Item 3.D.

  

Risk Factors

     12  

Item 4.

  

INFORMATION ON THE COMPANY

     37  
  

Item 4.A.

  

History and Development of the Company

     37  
  

Item 4.B.

  

Business Overview

     38  
  

Item 4.C.

  

Organizational Structure

     119  
  

Item 4.D.

  

Property, Plants and Equipment

     121  

Item 4A.

  

UNRESOLVED STAFF COMMENTS

     122  

Item 5.

  

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

     122  
  

Item 5.A.

  

Operating Results

     122  
  

Item 5.B.

  

Liquidity and Capital Resources

     164  
  

Item 5.C.

  

Research and Development, Patents and Licenses, etc.

     170  
  

Item 5.D.

  

Trend Information

     170  
  

Item 5.E.

  

Off-Balance Sheet Arrangements

     170  
  

Item 5.F.

  

Tabular Disclosure of Contractual Obligations

     170  
  

Item 5.G.

  

Safe Harbor

     170  

Item 6.

  

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

     170  
  

Item 6.A.

  

Directors and Senior Management

     170  
  

Item 6.B.

  

Compensation

     175  
  

Item 6.C.

  

Board Practices

     176  
  

Item 6.D.

  

Employees

     177  
  

Item 6.E.

  

Share Ownership

     180  

Item 7.

  

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

     181  
  

Item 7.A.

  

Major Shareholders

     181  
  

Item 7.B.

  

Related Party Transactions

     181  
  

Item 7.C.

  

Interests of Experts and Counsel

     181  

Item 8.

  

FINANCIAL INFORMATION

     182  
  

Item 8.A.

  

Consolidated Statements and Other Financial Information

     182  
  

Item 8.B.

  

Significant Changes

     184  

 

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Item 9.

  

THE OFFER AND LISTING

     184  
  

Item 9.A.

   Offering and Listing Details      184  
  

Item 9.B.

   Plan of Distribution      186  
  

Item 9.C.

   Markets      186  
  

Item 9.D.

   Selling Shareholders      186  
  

Item 9.E.

   Dilution      186  
  

Item 9.F.

   Expenses of the Issue      187  

Item 10.

  

ADDITIONAL INFORMATION

     187  
  

Item 10.A.

   Share Capital      187  
  

Item 10.B.

   Memorandum and Articles of Association      187  
  

Item 10.C.

   Material Contracts      193  
  

Item 10.D.

   Exchange Controls      194  
  

Item 10.E.

   Taxation      195  
  

Item 10.F.

   Dividends and Paying Agents      200  
  

Item 10.G.

   Statement by Experts      200  
  

Item 10.H.

   Documents on Display      200  
  

Item 10.I.

   Subsidiary Information      201  

Item 11.

  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     201  

Item 12.

  

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

     223  

Item 13.

  

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

     224  

Item 14.

   MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS      224  

Item 15.

  

CONTROLS AND PROCEDURES

     224  

Item 16.

  

[RESERVED]

     225  

Item 16A.

  

AUDIT COMMITTEE FINANCIAL EXPERT

     225  

Item 16B.

  

CODE OF ETHICS

     225  

Item 16C.

  

PRINCIPAL ACCOUNTANT FEES AND SERVICES

     226  

Item 16D.

  

EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

     226  

Item 16E.

  

PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

     227  

Item 16F.

  

CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

     227  

Item 16G.

  

CORPORATE GOVERNANCE

     227  

Item 16H.

  

MINE SAFETY DISCLOSURE

     229  

Item 17.

  

FINANCIAL STATEMENTS

     229  

Item 18.

  

FINANCIAL STATEMENTS

     229  

Item 19.

  

EXHIBITS

     229  

 

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PRESENTATION OF FINANCIAL AND OTHER INFORMATION

The financial statements included in this annual report are prepared in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or IASB. As such, we make an explicit and unreserved statement of compliance with IFRS as issued by the IASB with respect to our consolidated financial statements as of December 31, 2017 and 2018 and for the years ended December 31, 2016, 2017 and 2018 included in this annual report. Unless indicated otherwise, the financial information in this annual report as of and for the years ended December 31, 2014, 2015, 2016, 2017 and 2018 has been prepared in accordance with IFRS as issued by the IASB, which is not comparable to information prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP.

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

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

In this annual report:

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

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

For your convenience, this annual report contains translations of Won amounts into U.S. dollars at the noon buying rate of the Federal Reserve Bank of New York for Won in effect on December 31, 2018, which was ₩1,112.85 = US$1.00.

 

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FORWARD-LOOKING STATEMENTS

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

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

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

 

   

our ability to successfully implement our strategy;

 

   

future levels of non-performing loans;

 

   

our growth and expansion;

 

   

the adequacy of allowances for credit and investment losses;

 

   

technological changes;

 

   

interest rates;

 

   

investment income;

 

   

availability of funding and liquidity;

 

   

cash flow projections;

 

   

our exposure to market risks; and

 

   

adverse market and regulatory conditions.

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

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

 

   

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

 

   

the monetary and interest rate policies of Korea;

 

   

inflation or deflation;

 

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unanticipated volatility in interest rates;

 

   

foreign exchange rates;

 

   

prices and yields of equity and debt securities;

 

   

the performance of the financial markets in Korea and globally;

 

   

changes in domestic and foreign laws, regulations and taxes;

 

   

changes in competition and the pricing environments in Korea; and

 

   

regional or general changes in asset valuations.

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

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

 

Item 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

 

Item 2.

OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

 

Item 3.

KEY INFORMATION

 

Item 3.A.

Selected Financial Data

The selected consolidated financial and operating data as of and for the years ended December 31, 2014, 2015, 2016, 2017 and 2018 set forth below have been derived from our audited consolidated financial statements, which have been prepared in accordance with IFRS as issued by the IASB. Our consolidated financial statements as of and for the years ended December 31, 2014, 2015, 2016, 2017 and 2018 have been audited by independent registered public accounting firm Samil PricewaterhouseCoopers.

IFRS 9 Financial Instruments, or IFRS 9, is effective for annual periods beginning on or after January 1, 2018 and replaces International Accounting Standard 39 Financial Instruments: Recognition and Measurement, or IAS 39. We have applied IFRS 9 in our consolidated financial statements as of and for the year ended December 31, 2018 included elsewhere in this annual report. As permitted by the transition rules of IFRS 9, our consolidated financial statements as of and for the years ended December 31, 2016 and 2017 included elsewhere in this annual report have not been restated to retroactively apply IFRS 9. For information regarding the impact of the application of IFRS 9 to our consolidated financial statements, see “Item 5.A. Operating Results—Overview—Changes in Accounting Policies—Adoption of IFRS 9” and Notes 2.1 and 45 of the notes to our consolidated financial statements included elsewhere in this annual report.

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

 

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Consolidated statements of comprehensive income data

 

    Year Ended December 31,  
    2014     2015     2016     2017     2018(3)     2018(3)(4)  
    (in billions of Won, except common share data)     (in millions of US$,
except common
share data)
 

Interest income(1)

      11,907         10,617         10,335         11,919         13,735     US$     12,342  

Interest expense

    (5,219     (4,173     (3,619     (3,672     (4,830     (4,340
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income(1)

    6,688       6,444       6,716       8,247       8,905       8,002  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fee and commission income

    2,666       2,971       3,151       3,988       3,717       3,341  

Fee and commission expense

    (1,283     (1,436     (1,566     (1,938     (1,474     (1,325
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net fee and commission income

    1,383       1,535       1,585       2,050       2,243       2,016  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Insurance income(2)

    1,215       1,373       1,201       8,971       11,975       10,760  

Insurance expense(2)

    (1,352     (1,479     (1,319     (8,377     (11,485     (10,320
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net insurance income (expenses)(2)

    (137     (106     (118     594       490       440  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net gains (losses) on financial assets and liabilities at fair value through profit or loss(1)

    —         —         —         —         352       316  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net gains (losses) on financial assets and liabilities at fair value through profit or loss (under IAS 39)(1)

    167       119       (322     203       —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net other operating income (expenses)(2)

    (904     (610     (416     (902     (1,130     (1,015
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

General and administrative expenses

    (4,010     (4,524     (5,229     (5,629     (5,919     (5,318
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit before provision for credit losses

    3,187       2,858       2,216       4,563       4,941       4,440  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision for credit losses

    (1,228     (1,037     (539     (548     (674     (605
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net operating profit

    1,959       1,821       1,677       4,015       4,267       3,835  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Share of profit (loss) of associates and joint ventures

    13       203       281       84       24       22  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net other non-operating income (expenses)

    (71     140       671       39       11       9  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net non-operating profit (loss)

    (58     343       952       123       35       31  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit before income tax

    1,901       2,164       2,629       4,138       4,302       3,865  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tax income (expenses)

    (486     (437     (439     (795     (1,240     (1,114
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit for the year

  1,415     1,727     2,190     3,343     3,062     US$ 2,751  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Items that will not be reclassified to profit or loss:

           

Remeasurements of net defined benefit

    (100     (23     13       23       (138     (124

Shares of other comprehensive income of associates and joint ventures

    —         —         4       —         (0     (0

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

    —         —         —         —         (31     (28

Fair value changes on financial liabilities designated at fair value due to own credit risk

    —         —         —         —         1       1  

Items that may be reclassified subsequently to profit or loss:

           

Exchange differences on translating foreign operations

    17       45       20       (110     49       44  

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

    —         —         —         —         119       107  

Valuation gains (losses) on financial investments

    249       (29     (48     89       —         —    

Shares of other comprehensive income (loss) of associates and joint ventures

    (32     —         (11     101       (4     (3

Cash flow hedges

    (10     1       4       21       (9     (8

Gains (losses) on hedges of a net investment in a foreign operation

    —         (25     (7     27       (27     (24

Other comprehensive income of separate account

    —         —         —         (14     30       26  

Net gains (losses) on overlay adjustment

    —         —         —         —         0       0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    124       (31     (25     136       (10     (9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income for the year

  1,539     1,696     2,165     3,480     3,052     US$ 2,742  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit attributable to:

           

Shareholders of the parent company

  1,401     1,698     2,144     3,311     3,061     US$ 2,750  

Non-controlling interests

    14       29       46       32       1       1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  1,415     1,727     2,190     3,343     3,062     US$ 2,751  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income attributable to:

           

Shareholders of the parent company

  1,526     1,667     2,119     3,446     3,051     US$ 2,741  

Non-controlling interests

    13       29       46       34       1       1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  1,539     1,696     2,165     3,480     3,052     US$ 2,742  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share

           

Basic earnings per share

  3,626     4,396     5,588     8,305     7,721     US$ 6.94  

Diluted earnings per share

    3,611       4,376       5,559       8,257       7,676       6.90  

 

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(1)

Prior to 2018, interest income arising from financial assets at fair value through profit or loss was recorded as part of net gains (losses) on financial assets and liabilities at fair value through profit or loss. Pursuant to a change in our accounting policies which became effective as of January 1, 2018, commencing in such year, interest income arising from financial assets at fair value through profit or loss is recorded as part of interest income, instead of as part of net gains (losses) on financial assets and liabilities at fair value through profit or loss. Interest income arising from financial assets at fair value through profit or loss for prior years has been reclassified accordingly. See Note 2. 1 of the notes to our consolidated financial statements included elsewhere in this annual report.

(2) 

Prior to 2017, insurance income and expense of KB Life Insurance Co., Ltd., our life insurance subsidiary, and KB Kookmin Card Co., Ltd., our credit card subsidiary, were recorded as part of other operating income and expenses. In May 2017, KB Insurance Co., Ltd., a non-life insurance company, became our consolidated subsidiary pursuant to a tender offer (and became a wholly-owned subsidiary in July 2017 pursuant to a comprehensive stock swap). See “Item 5.A. Operating Results—Overview—Acquisitions.” As a result, commencing in 2017, insurance income and expense (comprising insurance income and expense of KB Life Insurance and KB Kookmin Card, as well as insurance income and expense of KB Insurance from the date of its consolidation) are recorded as separate line items, instead of as part of other operating income and expenses. Insurance income and expense of KB Life Insurance and KB Kookmin Card for prior years have been reclassified accordingly.

(3) 

Figures for 2018 reflect the application of IFRS 9 and therefore may not be directly comparable to corresponding figures for prior years. See Notes 2.1 and 45 of the notes to our consolidated financial statements included elsewhere in this annual report.

(4) 

Won amounts are expressed in U.S. dollars at the rate of ₩1,112.85 to US$1.00, the noon buying rate in effect on December 31, 2018 as quoted by the Federal Reserve Bank of New York in the United States.

 

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Consolidated statements of financial position data

 

    Year Ended December 31,  
    2014     2015     2016     2017     2018(2)     2018(2)(3)  
    (in billions of Won)     (in millions
of US$)
 

Assets

           

Cash and due from financial institutions

  15,424     16,316     17,885     19,818     20,274     US$ 18,219  

Financial assets at fair value through profit or loss

    —         —         —         —         50,988       45,817  

Financial assets at fair value through profit or loss (IAS 39)

    10,758       11,174       27,858       32,227       —         —    

Derivative financial assets

    1,968       2,278       3,382       3,310       2,026       1,821  

Loans

    231,450       245,005       265,486       290,123       319,202       286,833  

Financial investments

    34,961       39,137       45,148       66,608       61,665       55,412  

Investments in associates and joint ventures

    670       1,738       1,771       335       505       454  

Property and equipment

    3,083       3,287       3,627       4,202       4,272       3,839  

Investment property

    378       212       755       849       2,120       1,905  

Intangible assets

    489       467       652       2,943       2,756       2,476  

Net defined benefit assets

    —         —         —         1       —         —    

Current income tax assets

    306       19       66       6       10       9  

Deferred income tax assets

    16       8       134       4       4       4  

Assets held for sale

    70       49       52       156       17       15  

Other assets

    8,783       9,375       8,858       16,204       15,749       14,152  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  308,356     329,065     375,674     436,786     479,588     US$ 430,955  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

           

Financial liabilities at fair value through profit or loss

  —       —       —       —       15,327     US$ 13,773  

Financial liabilities at fair value through profit or loss (IAS 39)

    1,819       2,975       12,123       12,023       —         —    

Derivative financial liabilities

    1,797       2,326       3,807       3,143       2,901       2,607  

Deposits

    211,549       224,268       239,731       255,800       276,770       248,704  

Debts

    15,865       16,241       26,251       28,821       33,005       29,658  

Debentures

    29,201       32,601       34,992       44,993       53,279       47,876  

Provisions

    614       607       538       568       526       473  

Net defined benefit liabilities

    76       73       96       155       262       236  

Current income tax liabilities

    232       31       442       434       699       628  

Deferred income tax liabilities

    93       179       103       533       493       443  

Insurance contract liabilities(1)

    6,265       6,925       7,291       31,801       33,413       30,025  

Other liabilities(1)

    13,332       13,937       19,039       24,470       27,200       24,441  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

  280,843     300,163     344,413     402,741     443,875     US$ 398,864  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Equity

           

Capital stock

  1,932     1,932     2,091     2,091     2,091     US$ 1,879  

Capital surplus

    15,855       15,855       16,995       17,122       17,122       15,385  

Accumulated other comprehensive income

    461       429       405       538       178       159  

Retained earnings

    9,067       10,464       12,229       15,044       17,282       15,530  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Treasury shares

    —         —         (722     (756     (969     (870
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity attributable to shareholders of the parent company

    27,315       28,680       30,998       34,039       35,704       32,083  

Non-controlling interests

    198       222       263       6       9       8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

  27,513     28,902     31,261     34,045     35,713     US$ 32,091  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

  308,356     329,065     375,674     436,786     479,588     US$ 430,955  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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(1) 

Prior to 2017, insurance contract liabilities of KB Life Insurance, our life insurance subsidiary, and KB Kookmin Card, our credit card subsidiary, were recorded as part of other liabilities. In May 2017, KB Insurance, a non-life insurance company, became our consolidated subsidiary pursuant to a tender offer (and became a wholly-owned subsidiary in July 2017 pursuant to a comprehensive stock swap). See “Item 5.A. Operating Results—Overview—Acquisitions.” As a result, commencing as of December 31, 2017, insurance contract liabilities (comprising such liabilities of KB Life Insurance, KB Kookmin Card and KB Insurance) are recorded as separate line items, instead of as part of other liabilities. Insurance contract liabilities of KB Life Insurance and KB Kookmin Card as of prior dates have been reclassified accordingly.

(2) 

Figures as of December 31, 2018 reflect the application of IFRS 9 and therefore may not be directly comparable to corresponding figures as of prior dates. See Notes 2.1 and 45 of the notes to our consolidated financial statements included elsewhere in this annual report.

(3) 

Won amounts are expressed in U.S. dollars at the rate of ₩1,112.85 to US$1.00, the noon buying rate in effect on December 31, 2018 as quoted by the Federal Reserve Bank of New York in the United States.

Profitability ratios and other data

 

     As of or for the year Ended December 31,  
     2014     2015     2016     2017     2018  
     (Percentages)  

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

          

Average total assets(1)

     0.47     0.54     0.62     0.80     0.67

Average stockholders’ equity(1)

     5.30       6.05       7.13       9.56       8.58  

Dividend payout ratio(2)

     21.48       22.32       23.23       23.17       24.83  

Net interest spread(3)

     2.18       2.05       2.01       2.11       2.05  

Net interest margin(4)

     2.42       2.21       2.13       2.27       2.23  

Efficiency ratio(5)

     55.72       61.28       69.14       58.65       57.08  

Cost-to-average assets ratio(6)

     1.34       1.43       1.50       1.36       1.29  

Won loans (gross) as a percentage of Won deposits

     107.73       107.88       110.77       114.02       115.98  

Total loans (gross) as a percentage of total deposits

     110.57       110.40       111.69       114.24       116.27  

 

(1) 

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

(2) 

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

(3) 

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

(4) 

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

(5) 

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

(6) 

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

Capital ratios

 

     As of or for the year Ended December 31,  
     2016     2017     2018  
     (Percentages)  

Consolidated capital adequacy ratio of KB Financial Group(1)

     15.27     15.23     14.60

Capital adequacy ratios of Kookmin Bank

      

Tier I capital adequacy ratio(2)

     14.83       14.86       14.33  

Common equity Tier I capital adequacy ratio(2)

     14.83       14.86       14.33  

Tier II capital adequacy ratio(2)

     1.49       1.16       1.19  

Average stockholders’ equity as a percentage of average total assets

     8.63       8.37       7.75  

 

(1) 

Under applicable guidelines of the Financial Services Commission, we, as a bank holding company, were required to maintain a total minimum consolidated capital adequacy ratio of 10.625% (including applicable additional capital buffers and requirements) as of December 31, 2018. See “Item 4.B. Business Overview—Supervision and Regulation—Principal Regulations Applicable to Financial Holding Companies—Capital Adequacy.”

(2) 

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

 

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Credit portfolio ratios and other data

 

     As of December 31,  
     2014     2015     2016     2017     2018  
     (in billions of Won, except percentages)  

Total loans(1)

   233,902     247,587     267,764     292,233     321,811  

Total non-performing loans(2)

     1,068       922       923       758       725  

Other impaired loans not included in non-performing loans

     1,996       2,075       1,613       1,509       1,377  

Total of non-performing loans and other impaired loans

     3,064       2,997       2,536       2,267       2,102  

Total allowances for loan losses

     2,452       2,582       2,278       2,110       2,609  

Non-performing loans as a percentage of total loans

     0.46     0.37     0.34     0.26     0.23

Non-performing loans as a percentage of total assets

     0.35     0.28     0.25     0.17     0.15

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

     1.31     1.21     0.95     0.78     0.65

Allowances for loan losses as a percentage of total loans

     1.05     1.04     0.85     0.72     0.81

 

(1) 

Before deduction of allowances for loan losses.

(2) 

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

 

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Selected Statistical Information

Average Balance Sheets and Related Interest

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

 

    Year Ended December 31,  
    2016     2017     2018  
    Average
Balance(1)
    Interest
Income(2)(3)
    Average
Yield
    Average
Balance(1)
    Interest
Income(2)(3)
    Average
Yield
    Average
Balance(1)
    Interest
Income(2)(3)
    Average
Yield
 
    (in billions of Won, except percentages)  

Assets

                 

Cash and interest earning deposits in other banks

  8,630     111       1.29   9,620     126       1.31   8,162     109       1.34

Financial assets at fair value through profit or loss (debt securities)(4)

    13,562       313       2.31       22,908       537       2.34       27,911       749       2.68  

Financial investments (debt securities)(5)

    34,868       890       2.55       49,137       1,160       2.36       56,585       1,325       2.34  

Loans:

                 

Corporate

    112,657       3,469       3.08       123,004       3,962       3.22       134,938       4,471       3.31  

Mortgage

    55,638       1,522       2.74       60,944       1,683       2.76       65,799       1,994       3.03  

Home equity

    34,048       983       2.89       32,777       953       2.91       32,661       1,020       3.12  

Other consumer(6)

    39,506       1,835       4.64       46,325       2,115       4.57       52,333       2,491       4.76  

Credit cards(7)

    12,827       1,124       8.76       14,881       1,258       8.45       16,725       1,386       8.29  

Foreign

    3,011       88       2.92       3,607       125       3.47       4,254       190       4.47  
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Loans (total)

    257,687       9,021       3.50       281,538       10,096       3.59       306,710       11,552       3.77  
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total average interest earning assets

  314,747     10,335       3.28   363,203     11,919       3.28   399,368     13,735       3.44
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Cash and due from banks

    9,797       —         —         10,494       —         —         11,072       —         —    

Financial assets at fair value through profit or loss (excluding debt securities):

                 

Equity securities

    1,832       —         —         3,849       —         —         4,646       —         —    

Other

    1,353       —         —         4,499       —         —         17,051       —         —    
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

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

    3,185       —         —         8,348       —         —         21,697       —         —    

Financial investment (equity securities)

    6,140       —         —         9,135       —         —         2,628       —         —    

Investment in associates

    2,107       —         —         968       —         —         432       —         —    

Derivative financial assets

    2,583       —         —         2,372       —         —         2,470       —         —    

Premises and equipment

    3,464       —         —         5,826       —         —         5,639       —         —    

Intangible assets

    515       —         —         2,409       —         —         2,839       —         —    

Allowances for loan losses

    (2,734     —         —         (2,428     —         —         (2,827     —         —    

Other non-interest earning assets

    8,746       —         —         13,405       —         —         16,963       —         —    
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total average non-interest earning assets

    33,803       —         —         50,529       —         —         60,913       —         —    
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total average assets

  348,550     10,335       2.97   413,732     11,919       2.88   460,281     13,735       2.98
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

 

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    Year Ended December 31,  
    2016     2017     2018  
    Average
Balance(1)
    Interest
Expense
    Average
Cost
    Average
Balance(1)
    Interest
Expense
    Average
Cost
    Average
Balance(1)
    Interest
Expense
    Average
Cost
 
    (in billions of Won, except percentages)  

Liabilities

                 

Deposits:

                 

Demand deposits

  97,858     295       0.30   110,945     290       0.26   117,267     347       0.30

Time deposits

    125,612       2,126       1.69       127,478       2,010       1.58       141,021       2,637       1.87  

Certificates of deposit

    3,387       56       1.65       2,863       45       1.57       3,045       58       1.90  
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Deposits (total)

    226,857       2,477       1.09       241,286       2,345       0.97       261,333       3,042       1.16  

Debts(8)

    22,798       289       1.27       33,065       446       1.35       37,565       639       1.70  

Debentures

    34,213       853       2.49       39,767       880       2.22       48,147       1,149       2.39  
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total average interest bearing liabilities

  283,868     3,619       1.27   314,118     3,672       1.17   347,045     4,830       1.39
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Non-interest bearing demand deposits

    4,073       —         —         4,114       —         —         4,059       —         —    

Derivative financial liabilities

    2,687       —         —         2,422       —         —         2,932       —         —    

Financial liabilities at fair value through profit or loss

    5,737       —         —         12,674       —         —         14,280       —         —    

Other non-interest bearing liabilities

    21,877       —         —         45,618       —         —         56,275       —         —    
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total average non-interest bearing liabilities

    34,374       —         —         64,828       —         —         77,546       —         —    
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total average liabilities

    318,242       3,619       1.14       378,946       3,672       0.95       424,591       4,830       1.14  
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total equity

    30,308       —         —         34,786       —         —         35,690       —         —    
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total average liabilities and equity

  348,550     3,619       1.04   413,732     3,672       0.87   460,281     4,830       1.05
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

 

(1) 

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

(2) 

We do not invest in any tax-exempt securities.

(3) 

Includes interest income from financial assets at fair value through profit or loss.

(4) 

For 2018 only, includes deposits and loans at fair value through profit or loss. For information on interest income arising from such financial instruments, see Note 27 of the notes to our consolidated financial statements included elsewhere in this annual report.

(5)

Comprises financial assets at fair value through other comprehensive income and at amortized cost (or available-for-sale and held-to-maturity financial assets). For 2018 only, also includes loans at fair value through other comprehensive income. For information on interest income arising from such financial instruments, see Note 27 of the notes to our consolidated financial statements included elsewhere in this annual report. Information related to investment securities classified as financial assets at fair value through other comprehensive income (or available-for-sale financial assets) has been computed using amortized cost, and therefore does not give effect to changes in fair value that are reflected as a component of total equity.

(6) 

Includes other interest income

(7)

Interest income from credit cards includes principally cash advance fees of ₩210 billion, ₩216 billion and ₩223 billion and interest on credit card loans of ₩525 billion, ₩629 billion and ₩704 billion for the years ended December 31, 2016, 2017 and 2018, respectively, but does not include interchange fees.

(8) 

Includes other interest expense.

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

 

     Year Ended December 31,  
     2016     2017     2018  
     (percentages)  

Net interest spread(1)

     2.01     2.11     2.05

Net interest margin(2)

     2.13       2.27       2.23  

Average asset liability ratio(3)

     110.88       115.63       115.08  

 

(1) 

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

 

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(2) 

The ratio of net interest income to average interest earning assets, and reflects the application of the 2018 Accounting Policy Change.

(3) 

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

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

The following table provides an analysis of changes in interest income, interest expense and net interest income based on changes in volume and changes in rate for 2016 compared to 2017 and 2017 compared to 2018. Information is provided with respect to: (1) effects attributable to changes in volume (changes in volume multiplied by prior rate) and (2) effects attributable to changes in rate (changes in rate multiplied by prior volume). Changes attributable to the combined impact of changes in rate and volume have been allocated proportionately to the changes due to volume changes and changes due to rate changes.

 

     2017 vs. 2016
Increase/(Decrease)
Due to Change in
    2018 vs. 2017
Increase/(Decrease)
Due to Change in
 
     Volume     Rate     Total     Volume     Rate     Total  
     (in billions of Won)  

Interest earning assets

            

Cash and interest earning deposits in other banks

   13     2     15     (20   3     (17

Financial assets at fair value through profit or loss (debt securities)(1)

     220       4       224       127       84       211  

Financial investments (debt securities)(2)

     341       (71     270       176       (10     166  

Loans:

            

Corporate

     330       163       493       395       114       509  

Mortgage

     150       11       161       140       171       311  

Home equity

     (37     7       (30     (3     70       67  

Other consumer

     308       (28     280       285       91       376  

Credit cards

     175       (41     134       152       (24     128  

Foreign

     19       18       37       25       40       65  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

   1,519     65     1,584     1,277     539     1,816  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2017 vs. 2016
Increase/(Decrease)
Due to Change in
    2018 vs. 2017
Increase/(Decrease)
Due to Change in
 
     Volume     Rate     Total     Volume     Rate     Total  
     (in billions of Won)  

Interest bearing liabilities

            

Deposits:

            

Demand deposits

   37     (42   (5   15     42     57  

Time deposits

     30       (146     (116     230       397       627  

Certificates of deposit

     (8     (3     (11     3       10       13  

Debts

     138       19       157       66       127       193  

Debentures

     128       (100     28       197       71       268  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     325       (272     53       511       647       1,158  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net interest income

   1,194     337     1,531     766     (108   658  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

For 2018 only, includes deposits and loans at fair value through profit or loss. For information on interest income arising from such financial instruments, see Note 27 of the notes to our consolidated financial statements included elsewhere in this annual report.

(2)

Comprises financial assets at fair value through other comprehensive income and at amortized cost (or available-for-sale and held-to-maturity financial assets). For 2018 only, also includes loans at fair value through other comprehensive income. For information on interest income arising from such financial instruments, see Note 27 of the notes to our consolidated financial statements included elsewhere in this annual report. Information related to investment securities classified as financial assets at fair value through other comprehensive income (or available-for-sale financial assets) has been computed using amortized cost, and therefore does not give effect to changes in fair value that are reflected as a component of total equity.

 

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Item 3.B.

Capitalization and Indebtedness

Not applicable.

 

Item 3.C.

Reasons for the Offer and Use of Proceeds

Not applicable.

 

Item 3.D.

Risk Factors

Risks relating to our retail credit portfolio

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

In recent years, consumer debt has increased significantly in Korea. Our portfolio of retail loans, including mortgage and home equity loans, increased from ₩124,194 billion as of December 31, 2015 to ₩134,956 billion as of December 31, 2016, ₩146,150 billion as of December 31, 2017 and ₩158,807 billion as of December 31, 2018. As of December 31, 2018, our domestic retail loans represented 49.3% of our total lending. Within our retail loan portfolio, the outstanding balance of other consumer loans, which unlike mortgage or home equity loans are often unsecured and therefore tend to carry a higher credit risk, increased from ₩36,312 billion as of December 31, 2015 to ₩56,200 billion as of December 31, 2018; as a percentage of total outstanding retail loans, such balance increased from 29.2% as of December 31, 2015 to 35.4% as of December 31, 2018. The growth of our retail lending business, which generally offers higher margins than other lending activities, has contributed significantly to our interest income and profitability in recent years.

The growth of our retail loan portfolio, together with fluctuating economic conditions in Korea and globally in recent years, may lead to increases in delinquency levels and a deterioration in asset quality. The amount of our non-performing retail loans (defined as those loans that are past due by 90 days or more) decreased from ₩329 billion as of December 31, 2015 to ₩272 billion as of December 31, 2016 and ₩252 billion as of December 31, 2017, but increased to ₩304 billion as of December 31, 2018. Higher delinquencies in our retail loan portfolio in the future will require us to increase our loan loss provisions and charge-offs, which in turn will adversely affect our financial condition and results of operations.

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

In addition, we are exposed to changes in regulations and policies on retail lending by the Korean government, which may adopt measures to restrict retail lending or encourage financial institutions to provide financial support to certain types of retail borrowers. From the second half of 2016 to 2018, the Korean government introduced various measures to tighten regulations on mortgage lending and housing subscription in response to the rapid growth in consumer debt and concerns over speculative investments in real estate in certain areas. A decrease in housing prices as a result of the implementation of such measures, together with the high level of consumer debt and rising interest rate levels, could result in declines in consumer spending and reduced economic growth, which may lead to increases in delinquency levels of our retail loan portfolio.

 

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In light of adverse conditions in the Korean economy affecting consumers, in March 2009, the Financial Services Commission requested Korean banks, including us, to establish a “pre-workout program,” including a credit counseling and recovery service, for retail borrowers with outstanding short-term debt defaults. Under the pre-workout program, which has been in operation since April 2009, maturity extensions and/or interest reductions are provided for retail borrowers with total loans of ₩1.5 billion or less (consisting of no more than ₩500 million of unsecured loans and ₩1 billion of secured loans) who are in arrears on their payments for more than 30 days but less than 90 days, and who either have an income in excess of the minimum cost of living or are deemed by the Credit Counseling and Recovery Service, a public service organization that provides debt adjustment services to low-income families in Korea, to have the ability to repay their loans. In addition, in March 2015, in response to increasing levels of consumer debt and amid concerns over the debt-servicing capacity of retail borrowers if interest rates were to rise, the Korean government launched, and requested Korean banks to participate in, a mortgage loan refinancing program aimed at reducing the payment burden on and improving the asset quality of outstanding mortgage loans. Under such refinancing program, over 340,000 qualified retail borrowers converted their outstanding non-amortizing floating-rate mortgage loans from Korean commercial banks (including us) into amortizing fixed-rate mortgage loans with lower interest rates, amounting to an aggregate principal amount of ₩34 trillion for all commercial banks in 2015. Our participation in such refinancing program may lead to a decrease in our interest income on our outstanding mortgage loans, as well as in our overall net interest margin. Moreover, our participation in such initiatives led by the Korean government to provide financial support to retail borrowers may lead us to offer credit terms for such borrowers that we would not generally offer, which may have an adverse effect on our results of operations and financial condition.

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

With respect to our credit card portfolio, our delinquency ratio (which represents the ratio of amounts that are overdue by 30 days or more to total outstanding balances) was 1.21% as of December 31, 2016 and increased to 1.29% as of December 31, 2017 and 1.31% as of December 31, 2018. In line with industry practice, we have restructured a portion of delinquent credit card account balances (defined as balances overdue by 30 days or more) as loans. As of December 31, 2018, these restructured loans outstanding amounted to ₩97 billion. Because these loans are not treated as being delinquent at the time of conversion or for a period of time thereafter, our delinquency ratios may not fully reflect all delinquent amounts relating to our outstanding loans. Including all restructured loans, outstanding balances overdue by 30 days or more accounted for 1.9% of our credit card receivables (including credit card loans) as of December 31, 2018. Delinquencies may further increase in 2019 and in the future as a result of, among other things, adverse economic conditions in Korea, additional government regulations or the inability of Korean consumers to manage increased household debt.

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

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

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

One of our core businesses is lending to small- and medium-sized enterprises (as defined under “Item 4.B. Business Overview—Corporate Banking—Small- and Medium-sized Enterprise Banking”). Our loans to small- and medium-sized enterprises increased from ₩78,665 billion as of December 31, 2015 to ₩106,015 billion as of December 31, 2018. During that period, non-performing loans (defined as those loans that are past due by 90 days or more) to small- and medium-sized enterprises decreased from ₩309 billion as of December 31, 2015

 

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to ₩267 billion as of December 31, 2018, and the non-performing loan ratio for such loans decreased from 0.4% as of December 31, 2015 to 0.3% as of December 31, 2018. However, our non-performing loans and non-performing loan ratio may increase in 2019. According to data compiled by the Financial Supervisory Service, the delinquency ratio for Won-currency loans by Korean commercial banks to small- and medium-sized enterprises was 0.5% as of December 31, 2018. The delinquency ratio for Won-currency loans to small- and medium-sized enterprise is calculated as the ratio of (1) the outstanding balance of such loans in respect of which either principal or interest payments are overdue by one month or more to (2) the aggregate outstanding balance of such loans. Our delinquency ratio for such Won currency loans decreased from 0.5% as of December 31, 2015 to 0.3% as of December 31, 2018. However, our delinquency ratio for such Won currency loans may increase in 2019.

In light of the deteriorating financial condition and liquidity position of small- and medium-sized enterprises in Korea since the global financial crisis commencing in the second half of 2008, the Korean government introduced policies and initiatives intended to encourage Korean banks to provide financial support to small- and medium-sized enterprise borrowers. For example, the Korean government requested Korean banks, including us, to establish a “fast track” program to provide liquidity assistance to small- and medium-sized enterprises on an expedited basis. Under the “fast track” program we established, we provide liquidity assistance to qualified small- and medium-sized enterprise borrowers applying for such assistance, in the form of new loans or maturity extensions or interest rate adjustments with respect to existing loans, after expedited credit review and approval by us. The overall prospects for the Korean economy in 2019 and beyond remain uncertain, and the Korean government may extend or renew existing or past policies and initiatives or introduce new policies or initiatives to encourage Korean banks to provide financial support to small- and medium-sized enterprises. Our participation in such government-led initiatives may lead us to extend credit to small- and medium-sized enterprise borrowers that we would not otherwise extend, or offer terms for such credit that we would not otherwise offer, in the absence of such initiatives. Furthermore, there is no guarantee that the financial condition and liquidity position of our small- and medium-sized enterprise borrowers benefiting from such initiatives will improve sufficiently for them to service their debt on a timely basis, or at all. Accordingly, increases in our exposure to small- and medium-sized enterprise borrowers resulting from such government-led initiatives may have a material adverse effect on our financial condition and results of operations.

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

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

In recent years, we have taken measures which sought to stem rising delinquencies in our loans to small- and medium-sized enterprises, including through strengthening the review of loan applications and closer monitoring of the post-loan performance of small- and medium-sized enterprise borrowers in industry sectors that are relatively more sensitive to downturns in the economy and have shown higher delinquency ratios, such as shipping, construction, lodging, retail and wholesale, restaurants and real estate. Despite such efforts, however, there is no assurance that delinquency levels for our loans to small- and medium-sized enterprises will not rise in the future. In particular, financial difficulties experienced by small- and medium-sized enterprises as a result of,

 

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among other things, adverse economic conditions in Korea and globally, as well as aggressive marketing and competition among banks to lend to this segment, may lead to a deterioration in the asset quality of our loans to this segment in the future. Any such deterioration would result in increased charge-offs and higher provisioning and reduced interest and fee income from this segment, which would have an adverse impact on our financial condition and results of operations.

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

As of December 31, 2018, we had loans outstanding to construction, shipbuilding and shipping companies (many of which are small- and medium-sized enterprises) in the amount of ₩3,269 billion, ₩520 billion and ₩250 billion, or 1.02%, 0.16% and 0.08% of our total loans, respectively. We also have other exposures to Korean construction, shipbuilding and shipping companies, including in the form of guarantees extended on behalf of such companies (which included confirmed guarantees of ₩280 billion for construction companies, ₩569 billion for shipbuilding companies and ₩14 billion for shipping companies as of December 31, 2018) and debt and equity securities of such companies held by us. In the case of construction companies, such exposures include guarantees provided to us by general contractors with respect to financing extended by us for residential and commercial real estate development projects. In the case of shipbuilding companies, such exposures include refund guarantees extended by us on behalf of shipbuilding companies to cover their obligation to return a portion of the ship order contract amount to customers in the event of performance delays or defaults under shipbuilding contracts.

Although the construction industry in Korea has shown signs of recovery since 2015, excessive investment in residential property development projects, the recent strengthening of mortgage lending regulations by the Korean government, stagnation of real property prices and reduced demand for residential property in areas outside of Seoul are expected to continue to negatively impact the construction industry. The shipbuilding industry in Korea has experienced a severe downturn in recent years reflecting a significant decrease in ship orders, primarily due to oversupply. Although ship orders have started to increase again, the shipbuilding industry has yet to recover fully. In the case of shipping companies in Korea, reduced shipping rates and high chartering costs, together with the slowdown in global trade, have contributed to the deterioration of their financial condition, requiring some of them to file for bankruptcy or pursue voluntary restructuring of their debt.

In response to the deteriorating financial condition and liquidity position of borrowers in the construction, shipbuilding and shipping industries, which were disproportionately impacted by adverse economic developments in Korea and globally, the Korean government implemented a program in 2009 to promote expedited restructuring of such borrowers by their Korean creditor financial institutions, under the supervision of major commercial banks. In accordance with such program, 24 construction companies and five shipbuilding companies became subject to workout in 2009, following review by their creditor financial institutions (including us) and the Korean government. Each year since 2009, the Financial Services Commission and the Financial Supervisory Service have announced the results of subsequent credit risk evaluations conducted by creditor financial institutions (including us) of companies in Korea with outstanding credit exposures of ₩50 billion or more, pursuant to which a number of companies were selected by such financial institutions for restructuring in the form of workout, liquidation or court receivership. Most recently, in 2018, two companies with outstanding credit exposures of ₩50 billion or more (one of which was a construction company and the other a shipbuilding company) was selected by such financial institutions for restructuring. However, there is no assurance that these measures will be successful in stabilizing the Korean construction, shipbuilding and shipping industries.

The allowances that we have established against our credit exposures to Korean construction, shipbuilding and shipping companies may not be sufficient to cover all future losses arising from these and other exposures. If the credit quality of our exposures to such companies declines further, we may incur substantial additional provisions (including in connection with restructurings of such companies) and charge-offs, which could adversely impact our results of operations and financial condition. See “—Risks relating to our large corporate

 

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loan portfolio—We have exposure to companies that are currently or may in the future be put in restructuring, and we may suffer losses as a result of additional loan loss provisions required and/or the adoption of restructuring plans with which we do not agree.” Furthermore, although a portion of our credit exposures to construction, shipbuilding and shipping companies are secured by collateral, such collateral may not be sufficient to cover uncollectible amounts in respect of such credit exposures. See “—Other risks relating to our business—A decline in the value of the collateral securing our loans and our inability to realize full collateral value may adversely affect our credit portfolio.”

Risks relating to our financial holding company structure and strategy

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

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

Furthermore, our success under a financial holding company structure depends on our ability to realize the anticipated synergies, growth opportunities and cost savings from coordinating the businesses of our various subsidiaries. Although we have been integrating certain aspects of our subsidiaries’ operations into our financial holding company structure, our subsidiaries will generally continue to operate as independent entities with separate management and staff and our ability to direct our subsidiaries’ day-to-day operations may be limited.

In addition, one of the intended benefits of our financial holding company structure is that it enhances our ability to engage in mergers and acquisitions which we decide to pursue as part of our strategy. For example:

 

   

In March 2014, we acquired 52.02% of the outstanding shares of KB Capital Co., Ltd. (formerly named Woori Financial Co., Ltd.), a publicly listed Korean consumer finance company, from Woori Finance Holdings Co., Ltd. for ₩280 billion. We conducted a tender offer in May 2017, through which we acquired 5,949,300 shares of KB Capital at ₩27,500 per share, increasing our shareholding in KB Capital to 79.70%. We subsequently acquired the remaining outstanding shares of KB Capital in exchange for 2,269,057 shares of common stock of our company through a comprehensive stock swap effected in July 2017, as a result of which KB Capital became a wholly-owned subsidiary.

 

   

In June 2015, we acquired 19.47% of the outstanding shares of KB Insurance Co., Ltd. (formerly named LIG Insurance Co., Ltd.), a publicly listed Korean non-life insurance company, from a group of individual shareholders for ₩651 billion. In November 2015, we increased our shareholding in KB Insurance to 33.29% by acquiring its treasury shares for ₩231 billion, and in December 2016, we further increased our shareholding in KB Insurance to 39.81% by purchasing new shares of KB Insurance for ₩171 billion in a rights offering. Through a tender offer conducted in May 2017, we acquired 36,237,649 shares of KB Insurance at ₩33,000 per share, increasing our shareholding to 94.30%. We subsequently effected a comprehensive stock swap in July 2017 to acquire the remaining outstanding shares of KB Insurance in exchange for 2,170,943 shares of common stock of our company, as a result of which KB Insurance became a wholly-owned subsidiary.

 

   

In May 2016, we acquired 22.56% of the outstanding shares of Hyundai Securities Co., Ltd., a publicly listed Korean securities firm, from Hyundai Merchant Marine Co., Ltd. and other shareholders for ₩1,242 billion, and further increased our shareholding in Hyundai Securities to 29.62% in June 2016

 

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by acquiring treasury shares of Hyundai Securities for ₩107 billion. In October 2016, we effected a comprehensive stock swap of the outstanding shares of Hyundai Securities for 31,759,844 newly issued shares of common stock of our company, as a result of which Hyundai Securities became a wholly-owned subsidiary. Following such transaction, we merged an existing subsidiary, KB Investment & Securities, with and into Hyundai Securities in December 2016 and changed the name of the surviving entity to KB Securities Co., Ltd.

See “Item 5.A. Operating Results—Overview—Acquisitions.”

We may continue to increase our equity interest in our subsidiaries or investees and may also consider acquiring or merging with other financial institutions to achieve more balanced growth and further diversify our revenue base. For example, in July 2018, we acquired a 90% interest in Tomato Specialized Bank of Cambodia (which was subsequently renamed KB Daehan Specialized Bank) through our subsidiary, KB Kookmin Card, for US$11 million, and a 22% interest in Bank Bukopin of Indonesia through our subsidiary, Kookmin Bank, for ₩116 billion, as part of our efforts to expand our businesses abroad. The integration of our new subsidiaries’ or investees’ separate businesses and operations, as well as those of any companies we may acquire or merge with in the future, under our financial holding company structure could require a significant amount of time, financial resources and management attention. Moreover, that process could disrupt our operations (including our risk management operations) or information technology systems, reduce employee morale, produce unintended inconsistencies in our standards, controls, procedures or policies, and affect our relationships with customers and our ability to retain key personnel. The realization of the anticipated benefits of our financial holding company structure and any mergers or acquisitions we decide to pursue may be blocked, delayed or reduced as a result of many factors, some of which may be outside our control. These factors include:

 

   

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

 

   

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

 

   

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

 

   

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

 

   

unexpected business disruptions;

 

   

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

 

   

loss of customers; and

 

   

labor unrest.

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

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

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

 

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

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

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

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

 

   

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

 

   

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

 

   

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

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

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

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

 

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

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

Risks relating to competition

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

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

Furthermore, the introduction of Internet-only banks in Korea is expected to increase competition in the Korean banking industry. Internet-only banks operate without branches and conduct most of their operations through electronic means, which enables them to minimize costs and offer customers higher interest rates on deposits or lower lending rates. In April 2017, K Bank, the first Internet-only bank in Korea, commenced operations. Kakao Bank, another Internet-only bank, in which we hold a 10% equity interest, commenced operations in July 2017.

In the Korean insurance industry, there has been downward pressure in recent years on margins of insurance products as some of our competitors have sought to obtain or maintain market share by reducing margins and increasing marketing efforts. As the Korean non-life insurance and life insurance sectors continue to mature, they may experience a slowdown in growth as well as a stagnation in market penetration. Due to these and other factors, we believe that competition in the Korean insurance industry will likely remain intense in the future. Sustained or increased competition may lead to decreases in the market share and profitability of our non-life insurance and life insurance businesses.

In addition, we believe that regulatory reforms and the general modernization of business practices in Korea will lead to increased competition among financial institutions in Korea. In the second half of 2015, the Korean government implemented measures to facilitate bank account portability of retail customers by requiring commercial banks to establish systems that allow retail customers to easily switch their bank accounts at one commercial bank to another and automatically transfer the automatic payment settings of their former accounts to the new ones. Such measures are expected to further intensify competition among financial institutions in Korea.

 

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Moreover, in March 2016, the Financial Services Commission introduced an individual savings account scheme in Korea, which enables individuals to efficiently manage a wide range of retail investment vehicles, including cash deposits, funds and securities investment products, from a single integrated account with one financial institution and offers tax benefits on investment returns. Since the scheme backed by the Korean government allows only one individual savings account per person, financial institutions have been competing to retain existing customers and attract new customers since the launch of the individual savings account scheme. Over 30 financial institutions, including banks, securities companies and insurance companies, have registered with the Financial Services Commission to sell their individual savings account products and competition among these financial institutions is expected to remain intense.

Moreover, a number of significant mergers and acquisitions in the financial industry have taken place in Korea in recent years, including Hana Financial Group’s acquisition of a controlling interest in Korea Exchange Bank in 2012 and the subsequent merger of Hana Bank into Korea Exchange Bank in 2015. In addition, as part of the Korean government’s plans to privatize Woori Finance Holdings Co., Ltd. (the former financial holding company of Woori Bank), certain subsidiaries of Woori Finance Holdings were sold to other financial institutions and Woori Finance Holdings itself was merged into Woori Bank in 2014, which established a new financial holding company, Woori Financial Group Inc., in January 2019. In the insurance sector, China’s Anbang Insurance Group acquired controlling interests in Tong Yang Life Insurance Co., Ltd. and Allianz Life Insurance Korea Co., Ltd. in 2015 and 2016, respectively, while Mirae Asset Life Insurance Co., Ltd. acquired PCA Life Insurance Co., Ltd. in 2017. In February 2019, Shinhan Financial Group acquired a 59% interest in Orange Life Insurance, Ltd. (formerly known as ING Life Insurance Korea, Ltd.). In the securities sector, in 2016, Mirae Asset Securities Co., Ltd. acquired a 43% interest in KDB Daewoo Securities Co., Ltd., which subsequently merged with and into Mirae Asset Securities to create Mirae Asset Daewoo Securities Co., Ltd., the largest securities company in Korea in terms of capital.

We expect that consolidation in the Korean financial industry will continue. The financial institutions resulting from such consolidation may, by virtue of their increased size and business scope, provide significantly greater competition for us. We also believe that foreign financial institutions, many of which have greater experience and resources than we do, may seek to compete with us in providing financial products and services either by themselves or in partnership with existing Korean financial institutions. Increased competition and continuing consolidation may lead to decreased margins, resulting in a material adverse impact on our future profitability. Accordingly, our results of operations and financial condition may suffer as a result of increasing competition in the Korean financial industry.

Risks relating to our large corporate loan portfolio

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

Of our 20 largest corporate exposures (including loans, debt and equity securities and guarantees and acceptances) as of December 31, 2018, 12 were to companies that were members of the 31 largest highly-indebted business groups among chaebols in Korea designated as such by the Financial Supervisory Service based on their outstanding exposures. As of that date, the total amount of our exposures to 31 of such largest highly-indebted business groups among chaebols was ₩26,297 billion, or 5.9% of our total exposures. If the credit quality of our exposures to chaebols declines as a result of financial difficulties they experience or for other reasons, we could require substantial additional loan loss provisions, which would hurt our results of operations and financial condition. See “Item 4.B. Business Overview—Assets and Liabilities—Loan Portfolio—Exposure to Chaebols.”

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

 

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

As of December 31, 2018, our loans and guarantees to companies that were in workout, restructuring or rehabilitation amounted to ₩463 billion or 0.1% of our total loans and guarantees, most of which was classified as impaired. As of the same date, our allowances for credit losses on these loans and guarantees amounted to ₩274 billion, or 59.2% of these loans and guarantees. These allowances may not be sufficient to cover all future losses arising from our exposure to these companies. Furthermore, we have other exposure to such companies, in the form of debt and equity securities of such companies held by us (including equity securities we acquired as a result of debt-to-equity conversions). Our exposures as of December 31, 2018 with respect to such securities of companies in workout, restructuring or rehabilitation amounted to ₩23 billion, or less than 0.02% of our total debt securities and equity securities, but may increase in the future. In addition, in the case of borrowers that are or become subject to workout or restructuring, we may be forced to restructure our credits pursuant to restructuring plans approved by other creditor financial institutions of the borrower, or to dispose of our credits to other creditors on unfavorable terms.

In particular, as of December 31, 2018, we had ₩322 billion of outstanding exposures, comprising ₩111 billion of loans, ₩6 billion of debt securities, ₩38 billion of equity securities and ₩167 billion of guarantees (mainly in the form of refund guarantees relating to shipbuilding contracts), to Daewoo Shipbuilding & Marine Engineering Co., Ltd., or DSME, which has been pursuing a voluntary restructuring program. In April 2017, the creditors of DSME agreed on a plan to provide additional financial support to DSME in connection with its voluntary restructuring program, under which Korea Development Bank and the Export-Import Bank of Korea would provide ₩2.9 trillion of new loans to DSME, on the condition that DSME’s other creditors and bondholders agree to a ₩2.9 trillion debt-to-equity swap. The financial support plan required the Korean commercial bank creditors of DSME (including us) to swap 80% of our outstanding unsecured loans into equity of DSME and extend the maturity of the remaining loans for a period of three years. The financial support plan also requires DSME’s creditors (including us) to provide additional refund guarantees in connection with future shipbuilding contracts of DSME. The implementation of the financial support plan for DSME has required and may continue to require us to increase our loan loss provisions and recognize write-offs and impairment losses with respect to our exposures to DSME and may therefore have a material adverse impact on our results of operations and financial condition. Furthermore, there is no guarantee that the plan will be successful in ensuring the financial viability of DSME.

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

As of December 31, 2018, our loans and guarantees to our 20 largest borrowers totaled ₩9,984 billion and accounted for 3.0% of our total loans and guarantees. As of that date, our single largest corporate credit exposure was to the Korea Securities Finance Corporation, to which we had outstanding loans of ₩11 billion, as well as additional credit exposure of ₩1,886 billion in the form of debt securities. Any deterioration in the financial condition of the Korea Securities Finance Corporation or our other large corporate borrowers may require us to record substantial additional provisions and charge-offs and may have a material adverse impact on our results of operations and financial condition.

Risks relating to our insurance operations

Our profitability may be adversely affected if actual benefits and claims amounts on our in-force insurance policies exceed the amounts that we have reserved, or we increase the amount of reserves due to a change in our underlying assumptions.

We operate our insurance business through KB Insurance Co., Ltd., our non-life insurance subsidiary which became a consolidated subsidiary in May 2017, as well as KB Life Insurance Co., Ltd., our life insurance

 

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subsidiary. With respect to our insurance operations, we establish and carry, as a liability, policy reserves based on the greater of statutory reserves and actuarial estimates of how much we will need to pay for future benefits and claims on our in-force non-life insurance and life insurance policies. The profitability of our insurance operations depends significantly upon the extent to which our actual claims results are consistent with the assumptions used in setting the prices for our insurance products and establishing the liabilities in our financial statements for our obligations for future insurance policy benefits and claims. We establish the liabilities for obligations for future insurance policy benefits and claims based on the expected payout of benefits, calculated through the use of assumptions for investment returns, mortality, morbidity, expenses and persistency, as well as certain macroeconomic factors such as inflation. We also use methods to analyze loss trends with respect to certain risk assumptions relating to natural disasters. These assumptions are based on our previous experience and published data from third party industry sources, as well as judgments made by our management. These assumptions and estimates may deviate from our actual experience due to various factors that are beyond our control, including as a result of unexpected changes in the scope of coverage by the Korean national health insurance program and advancements in health care that result in increased life expectancy and early detection of diseases, as well as re-interpretations of our insurance policy terms by Korean regulators or courts. In addition, the occurrence of unexpected catastrophic events in Korea, including pandemics or natural or man-made disasters, may result in claims that significantly exceed our expectations. As a result, we cannot determine with precision the ultimate amounts that we will pay for, or the timing of payment of, actual benefits and claims or whether the assets supporting the insurance policy liabilities will grow to the level we assume prior to payment of benefits or claims. These amounts may vary from the estimated amounts, particularly when those payments may not occur until well into the future.

We evaluate the adequacy of our insurance policy liabilities periodically based on changes in the assumptions used to determine our best estimates of claims, expenses, persistency rates and interest rates, as well as based on our actual policy benefits and claims results. To the extent that trends in actual claims results are less favorable than our underlying assumptions used in establishing these liabilities, and our total insurance policy liabilities are considered to be inadequate to meet our future contractual obligations as and when they arise, we could be required to increase our liabilities. We record increases in our insurance policy liabilities as expenses in the period in which the liabilities are established or re-evaluated. If actual benefits and claims amounts exceed the amounts that we have reserved, or we increase the amount of insurance policy liabilities due to a change in our underlying assumptions, it could have a material adverse effect on our results of operations and financial condition.

Our insurance subsidiaries may be required to raise additional capital or reduce their growth or business scale if their risk-based capital adequacy ratio deteriorates or the applicable capital requirements change in the future.

Pursuant to the risk-based capital adequacy requirements implemented by the Financial Services Commission, insurance companies in Korea are required to maintain a statutory ratio of available regulatory capital to risk-weighted assets of not less than 100% on a consolidated basis. Furthermore, the Financial Supervisory Service had previously recommended that insurance companies maintain a risk-based capital adequacy ratio of not less than 150%, and its former administrative guidelines had required insurance companies failing to maintain such recommended 150% ratio to submit a capital increase plan. Although the Financial Supervisory Service has since withdrawn such administrative guidelines, we believe that a risk-based capital adequacy ratio of not less than 150% is still considered standard in the Korean insurance industry. Risk-based capital adequacy requirements require insurance companies to hold adequate capital to cover their exposures to interest rate risk, market risk, credit risk and operational risk as well as insurance risk by reflecting such risks in their calculation of risk-weighted assets. As of December 31, 2018, KB Insurance had a risk-based capital adequacy ratio of 187.09%, while KB Life Insurance had a risk-based capital adequacy ratio of 203.74%.

The Financial Supervisory Service has announced that it plans to introduce a new regulatory solvency regime for insurance companies by 2022 based on the International Capital Standard developed by the

 

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International Association of Insurance Supervisors, which would be similar in substance to the Solvency II Directive of the European Union. The Solvency II Directive, which has been in effect in the European Union since January 1, 2016, is a comprehensive program of regulatory requirements for insurance companies, covering authorization, corporate governance, supervisory reporting, public disclosure and risk assessment and management, as well as solvency. Under the Financial Supervisory Service’s planned new solvency regime in Korea, among other things, insurance contract liabilities are expected to be measured based on market value, rather than book value, which would require a number of insurance companies in Korea with a large portfolio of high guaranteed rate of return products to obtain additional capital to meet their capital adequacy requirements. The Financial Supervisory Service has also announced its plans to implement a series of incremental changes to the calculation methodology for the risk-based capital adequacy ratio of insurance companies, as interim measures. Such changes implemented in 2017 included increasing the maximum statutory duration of insurance liabilities recognized for purposes of such calculation, as well as reducing the coefficient applied in calculating interest rate risk and adjusting the methods used to assess the risk of guaranteed benefits of variable insurance policies. See “Item 4.B. Business Overview—Supervision and Regulation—Principal Regulations Applicable to Insurance Companies—Capital Adequacy.”

The details of the new solvency regime in Korea have not yet been finalized and may be further amended in the future. Accordingly, there is no guarantee that our insurance subsidiaries will not be required to raise additional capital to sustain their risk-based capital adequacy ratio above the required level in connection with the future implementation of the new solvency regime. Any material deterioration in the risk-based capital adequacy ratio of our insurance subsidiaries, as a result of the implementation of the new solvency regime or otherwise, could change their customers’ or business counterparties’ perception of their financial health, which in turn could adversely affect their business and profitability. Furthermore, if they grow rapidly or if their asset quality deteriorates in the future, our insurance subsidiaries may be required to raise additional capital, which we may need to provide in whole or in part, to meet their capital adequacy requirements. If we or our insurance subsidiaries are not able to raise any required additional capital, we may be forced to reduce the growth or scale of our insurance operations.

Changes in accounting standards for insurance contracts could adversely impact our reported results of operations and financial condition.

In response to a lack of comparability in the global insurance industry stemming from variations in accounting policies being applied, the IASB issued IFRS 17 (previously referred to as IFRS 4 Phase II), a new IFRS accounting standard for insurance contracts, in May 2017 with an effective date of January 1, 2021, which was subsequently deferred to January 1, 2022. Compliance with such revised accounting standards could significantly affect the way in which we and other operators of insurance businesses in Korea account for insurance policies, annuity contracts and financial instruments and how our financial statements are presented.

IFRS 17 will introduce a fundamentally different approach to current accounting policies in terms of both liability measurement and profit recognition. Under IFRS 17, insurance contract liabilities will no longer be calculated based on historical or past assumptions but based on the present value of future insurance cash flows using a discount rate reflecting current interest rates and the characteristics of the insurance contracts, with a risk adjustment and deferral of up-front profits. Among other effects, this may result in an increase in the level of the liabilities of our insurance subsidiaries, which would lead to a decrease in the balance of their available capital, which in turn may lower their risk-based capital adequacy ratio, depending on the solvency regime applicable at the time. In addition, under IFRS 17, certain parts of premium income from insurance contracts will be allocated over the coverage period in proportion to the value of expected coverage and other services that the insurer will provide over such period, rather than recognized at the time of receipt of premium payments, and the investment component of an insurance contract (which refers to amounts to be repaid to policyholders even if the insured event does not occur) will be disaggregated and excluded from premium income. Such changes to revenue recognition methodology will likely have the effect of, among other things, reducing the reported revenue from our insurance operations.

 

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Given the complexity of IFRS 17 and the significant amount of time and resources that will be required to adopt IFRS 17 accounting, we have established and are in the process of executing an implementation plan, including investments in information technology systems and processes, in order to enhance our financial analysis and impact assessment with respect to our insurance operations. We are also taking other measures to reduce the amount of our statutorily required capital under IFRS 17, including developing new products with improved capital efficiency and strengthening our asset-liability management and our monitoring of interest rate risk. Potential challenges that we may face in terms of implementation of IFRS 17 include:

 

   

interpretation of the requirements and potential operational difficulties when applying such requirements;

 

   

data collection, storage and analysis;

 

   

integration of existing systems and processes with new actuarial systems;

 

   

increased finance, actuarial and risk management coordination;

 

   

implementation of new business strategies in preparation for IFRS 17, including adjusting the duration of interest earning assets and interest bearing liabilities and our asset-liability management policies within our insurance operations;

 

   

impact of the transition to a new Korean regulatory solvency regime, which is expected to be implemented around the time of the effective date of IFRS 17; and

 

   

changes to other aspects of our insurance business, such as product design, remuneration policies and business planning.

Accordingly, the implementation of IFRS 17, as well as any other new or revised insurance accounting standards we are required to adopt in the future, could result in significant costs and may have a material adverse effect on our business and our reported results of operations and financial condition.

Other risks relating to our business

Unfavorable changes in the global financial markets could adversely affect our results of operations and financial condition.

The overall prospects for the Korean and global economy remain uncertain. In recent years, the global financial markets have experienced significant volatility as a result of, among other things:

 

   

a deterioration in economic and trade relations between the United States and its major trading partners, including China;

 

   

uncertainty regarding the timing and method of the United Kingdom’s exit from the European Union, or Brexit;

 

   

financial and social difficulties affecting many countries worldwide, in particular in Latin America and Europe;

 

   

the slowdown of economic growth in China and other major emerging market economies;

 

   

interest rate fluctuations as well as the possibility of further increases in policy rates by the U.S. Federal Reserve and other central banks; and

 

   

political and social instability in various countries in the Middle East, including Syria, Iraq and Yemen.

In addition, the global economy faces a number of uncertainties in 2019, including due to the possibility of higher inflation pressures in the United States and elsewhere, which may lead to corrections in the global financial markets, and credit risks arising from yield-seeking investors increasing their exposure to lower-rated

 

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corporate and sovereign borrowers, as well as escalations in trade protectionism globally and geopolitical tensions in East Asia and the Middle East. In light of the high level of interdependence of the global economy, unfavorable changes in the global financial markets, including as a result of any of the foregoing developments, could have a material adverse effect on the Korean economy and financial markets, and in turn on our business, financial condition and results of operations.

We are also exposed to adverse changes and volatility in the global and Korean financial markets as a result of our liabilities and assets denominated in foreign currencies and our holdings of trading and investment securities, including structured products. The value of the Won relative to major foreign currencies in general and the U.S. dollar in particular has fluctuated widely in recent years. A depreciation of the Won will increase our cost in Won of servicing our foreign currency-denominated debt, while continued exchange rate volatility may also result in foreign exchange losses for us. Furthermore, as a result of changes in global and Korean economic conditions, there has been volatility in securities prices, including the stock prices of Korean and foreign companies in which we hold an interest. Such volatility has resulted in and may lead to further trading and valuation losses on our trading and investment securities portfolio as well as impairment losses on our investments accounted for under the equity method.

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

We are subject to the risk of legal claims and regulatory actions in the ordinary course of our business, which may expose us to substantial monetary damages and legal costs, injunctive relief, criminal and civil penalties, sanctions against our management and employees and regulatory restrictions on our operations, as well as significant reputational harm. See “Item 8A. Consolidated Statements and Other Financial Information—Legal Proceedings.”

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

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

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

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

Companies in Korea, including us, are subject to corporate governance standards applicable to Korean public companies which may differ in some respects from standards applicable in other countries, including the

 

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

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

A substantial portion of our loans is secured by real estate, the values of which have fluctuated significantly in recent years. Although it is our general policy to lend up to 40% to 70% of the appraised value of collateral (except in areas of high speculation designated by the government where we generally limit our lending to between 40% to 60% of the appraised value of collateral) and to periodically re-appraise our collateral, a downturn in the real estate market in Korea may result in declines in the value of the collateral securing our mortgage and home equity loans. If collateral values decline in the future, they may not be sufficient to cover uncollectible amounts in respect of our secured loans. Any future declines in the value of the real estate or other collateral securing our loans, or our inability to obtain additional collateral in the event of such declines, could result in a deterioration in our asset quality and may require us to take additional loan loss provisions.

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

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

As of December 31, 2018, we held debt securities issued by Korean companies and financial institutions (other than those issued by the Bank of Korea, Korea Housing Finance Corporation, Korea Development Bank, Industrial Bank of Korea, the Export-Import Bank of Korea, Korea Deposit Insurance Corporation and the Korea Land & Housing Corporation, which are government-owned or -controlled enterprises or financial institutions) with a total carrying amount of ₩37,656 billion in our trading and investment securities portfolio. The market value of these securities could decline significantly due to various factors, including future increases in interest rates or a deterioration in the financial and economic condition of any particular issuer or of Korea in general. Any of these factors individually or a combination of these factors would require us to write down the fair value of these debt securities, resulting in impairment losses. Because the secondary market for corporate bonds in Korea is not fully developed, the market value of many of these securities as reflected on our statements of financial position is determined by references to suggested prices posted by Korean rating agencies or the Korea Financial Investment Association. These valuations, however, may differ significantly from the actual value that we could realize in the event we elect to sell these securities. As a result, we may not be able to realize the full book value at the time of any such sale of these securities and thus may incur losses.

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

We manage a number of money trust accounts through Kookmin Bank, our banking subsidiary. Under Korean law, trust account assets of a bank are required to be segregated from the assets of that bank’s general banking operations. Those assets are not available to satisfy the claims of a bank’s depositors or other creditors

 

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of its general banking operations. For some of the trust accounts we manage, we have guaranteed either the principal amount of the investor’s investment or the principal and a fixed rate of interest.

If, at any time, the income from our guaranteed trust accounts is not sufficient to pay any guaranteed amount, we will have to cover the shortfall first from the special reserves maintained in these trust accounts, then from our fees from such trust accounts and finally from funds transferred from our general banking operations. As of December 31, 2018, we had ₩111 billion of special reserves in respect of trust accounts for which we provided guarantees of principal. There was no transfer from general banking operations to cover deficiencies in guaranteed trust accounts in 2016, 2017 and 2018. However, we may be required to make transfers from our general banking operations to cover shortfalls, if any, in our guaranteed trust accounts in the future. Such transfers may adversely impact our results of operations.

Our operations have been, and will continue to be, subject to increasing and continually evolving cyber security and other technological risks.

With the proliferation of new technologies and the increasing use of the Internet and mobile devices to conduct financial transactions, our operations as a large financial institution have been, and will continue to be, subject to an increasing risk of cyber incidents relating to these activities, the nature of which is continually evolving. Our computer systems, software and networks are subject to cyber incidents, such as disruptions, delays or other difficulties from our information technology system, computer viruses or other malicious codes, loss or destruction of data (including confidential client information), unauthorized access, account takeover attempts and cyber attacks. A significant portion of our daily operations relies on our information technology systems, including customer service, billing, the secure processing, storage and transmission of confidential and other information as well as the timely monitoring of a large number of complex transactions. Although we have made substantial and continuous investments to build systems and defenses to address cyber security and other technological risks, there is no guarantee that such measures or any other measures can provide adequate security. In addition, because methods used to cause cyber attacks change frequently or, in some cases, are not recognized until launched, we may be unable to implement effective preventive measures or proactively address these methods. Furthermore, these cyber threats may arise from human error, accidental technological failure and third parties with whom we do business. Although we maintain insurance coverage that may cover certain aspects of cyber risks, such insurance coverage may be insufficient to cover all losses. If we were to be subject to a cyber incident, it could result in the disclosure of confidential client information, damage to our reputation with our customers and in the market, customer dissatisfaction, additional costs to us, regulatory penalties, exposure to litigation and other financial losses to both us and our customers, which could have an adverse effect on our business and results of operations.

Risks relating to liquidity and capital management

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

Interest rates in Korea have been subject to significant fluctuations in the past. The Bank of Korea reduced its policy rate to 2.00% through a series of reductions from 2012 to 2014 to support Korea’s economy in light of the slowdown in Korea’s growth and uncertain global economic prospects. The Bank of Korea further reduced its policy rate to 1.50% in 2015 and again to an unprecedented 1.25% in June 2016 amid deflationary concerns and interest rate cuts by central banks around the world. However, the Bank of Korea increased its policy rate to 1.50% in November 2017 and 1.75% in November 2018 in light of improved growth prospects in Korea and rising interest rate levels globally. All else being equal, further increases in interest rates in the future could lead to a decline in the value of our portfolio of debt securities, which generally pay interest based on a fixed rate. A sustained increase in interest rates will also raise our funding costs, while reducing loan demand, especially among retail borrowers. Rising interest rates may therefore require us to re-balance our asset portfolio and our liabilities in order to minimize the risk of potential mismatches and maintain our profitability.

 

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

Furthermore, in periods of increasing interest rates, the yields on the general account assets of our insurance subsidiaries may not be sufficient to fund the higher floating interest credit rates necessary to keep their interest-sensitive insurance products competitive. They may therefore have to accept a lower spread and thus lower profitability or face a decline in sales and greater attrition among their existing policyholders. In addition, in periods of increasing interest rates, the value of the debt securities and other general account assets of our insurance subsidiaries may decline, resulting in lower unrealized gains within other comprehensive income in their total equity, which in turn would lower their available capital and their risk-based capital adequacy ratio. Moreover, surrenders and withdrawals of insurance policies may increase as policyholders seek to buy products with perceived higher returns. This process may lead to a cash outflow from our insurance subsidiaries. Such cash outflows may require them to sell their investment assets at a time when the prices of those assets are lower because of the increase in market interest rates, which may result in investment losses.

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

We meet a significant amount of our funding requirements through short-term funding sources, which consist primarily of customer deposits. As of December 31, 2018, approximately 95.5% of our deposits had maturities of one year or less or were payable on demand. In the past, a substantial proportion of our customer deposits have been rolled over upon maturity. We cannot guarantee, however, that depositors will continue to roll over their deposits in the future. In the event that a substantial number of our short-term deposit customers withdraw their funds or fail to roll over their deposits as higher-yielding investment opportunities emerge, our liquidity position could be adversely affected. We may also be required to seek more expensive sources of short-term and long-term funding to finance our operations. See “Item 5.B. Liquidity and Capital Resources—Financial Condition—Liquidity.”

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

Under the capital adequacy requirements of the Financial Services Commission, as of December 31, 2018, both we and Kookmin Bank, our banking subsidiary, were required to maintain a total minimum common equity Tier I capital adequacy ratio of 7.125%, Tier I capital adequacy ratio of 8.625% and combined Tier I and Tier II capital adequacy ratio of 10.625%, on a consolidated basis (including applicable additional capital buffers and requirements as described below). As of December 31, 2018, our common equity Tier I capital, Tier I capital and combined Tier I and Tier II capital adequacy ratios were 13.97%, 13.97% and 14.60%, respectively, and Kookmin Bank’s common equity Tier I capital, Tier I capital and combined Tier I and Tier II capital adequacy ratios were 14.33%, 14.33% and 15.52%, respectively, all of which exceeded the minimum levels required by the Financial Services Commission. However, our capital base and capital adequacy ratios may deteriorate in the future if our results of operations or financial condition deteriorates for any reason, including as a result of a deterioration in the asset quality of our retail loans (including credit card balances) and loans to small- and medium-sized enterprises, or if we are not able to deploy our funding into suitably low-risk assets.

The current capital adequacy requirements of the Financial Services Commission are derived from a new set of bank capital measures, referred to as Basel III, which the Basel Committee on Banking Supervision initially introduced in 2009 and began phasing in starting from 2013. Commencing in July 2013, the Financial Services Commission promulgated a series of amended regulations implementing Basel III, pursuant to which Korean

 

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banks and bank holding companies were required to maintain a minimum ratio of common equity Tier I capital (which principally includes equity capital, capital surplus and retained earnings) to risk-weighted assets of 3.5% and Tier I capital to risk-weighted assets of 4.5% from December 1, 2013, which minimum ratios were increased to 4.0% and 5.5%, respectively, from January 1, 2014 and increased further to 4.5% and 6.0%, respectively, from January 1, 2015. Such requirements are in addition to the pre-existing requirement for a minimum ratio of Tier I and Tier II capital (less any capital deductions) to risk-weighted assets of 8.0%, which remains unchanged. The amended regulations also require an additional capital conservation buffer of 1.875% in 2018 and 2.5% in 2019, as well as a potential counter-cyclical capital buffer of up to 2.5%, which is determined on a quarterly basis by the Financial Services Commission. Furthermore, we were designated as one of five domestic systemically important banks for 2018 by the Financial Services Commission and were subject to an additional capital requirement of 0.75% in 2018. In June 2018, we were again designated as a domestic systemically important bank for 2019, which would subject us to an additional capital requirement of 1.0% in 2019. The implementation of Basel III in Korea may have a significant effect on the capital requirements of Korean financial institutions, including us. See “Item 4.B. Business Overview—Supervision and Regulation—Principal Regulations Applicable to Financial Holding Companies—Capital Adequacy” and “—Principal Regulations Applicable to Banks—Capital Adequacy.”

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

Risks relating to government regulation and policy

Our income tax expenses may increase as a result of changes to Korean corporate income tax laws.

Pursuant to an amendment to the Corporate Income Tax Law of Korea which became effective in January 2018, the corporate income tax rate applicable to the portion of the tax base of companies that exceeds ₩300 billion has been raised from 24.2% to 27.5%, inclusive of local income surtax in each case. In addition, pursuant to an amendment to the Special Tax Treatment Control Law of Korea which became effective in January 2018, large corporations with net equity in excess of ₩50 billion, including us and certain of our subsidiaries, are subject to a 20% additional levy on the unused amount if a certain portion (i.e., 65% or 15%, depending on the taxation method) of their taxable income is not used for investments or wage increases. Such changes in Korean income tax laws may result in an increase in our and our subsidiaries’ income tax expenses, which, depending on the magnitude of such increase, may have a material adverse effect on our results of operations.

Strengthening of consumer protection laws applicable to financial institutions could adversely affect our operations.

As a financial service provider, we are subject to a variety of regulations in Korea that are designed to protect financial consumers. In recent years, in light of heightened public concern regarding privacy issues, the Korean government has placed greater emphasis on protection of personal information by financial institutions and has implemented a number of measures to enhance consumer protection, including considerably restricting a financial institution’s ability to transfer or provide personal information to its affiliates or holding company. Under the Personal Information Protection Act, financial institutions, as personal information managers, may not collect, store, maintain, utilize or provide resident registration numbers of their customers, unless other laws or regulations specifically require or permit the management of resident registration numbers. In addition, under the Use and Protection of Credit Information Act, a financial institution has a higher duty to protect all information

 

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that it collects from its customers and is required to treat such information as credit information. A financial institution’s ability to transfer or provide the information to its affiliates or holding company is considerably restricted. Treble damages may be imposed on a financial institution for leakage of such information. Furthermore, under the Electronic Financial Transaction Act, a financial institution is primarily responsible for compensating its customers harmed by a cyber security breach affecting the financial institution even if the breach is not directly attributable to the financial institution.

In June 2016, the Financial Services Commission proposed the enactment of the Act on the Financial Consumer Protection Framework, which was submitted to the Korean National Assembly in May 2017. If the act is adopted as proposed, we as a financial instrument distributor will be subject to heightened investor protection measures, including stricter distribution guidelines, improved financial dispute resolution procedures, increased liability for customer losses and newly imposed penalty surcharges.

These and other measures that may be implemented by the Korean government to strengthen consumer protection laws applicable to financial institutions may limit our operational flexibility and cause us to incur significant additional compliance costs, as well as subject us to increased potential liability to our customers, which could adversely affect our business and performance.

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

Through its policies and recommendations, the Korean government has promoted and, as a matter of policy, may continue to attempt to promote lending by the Korean financial industry to particular types of borrowers. For example, the Korean government has in the past provided and may continue to provide policy loans, which encourage lending to particular types of borrowers. It has generally done this by identifying sectors of the economy it wishes to promote and making low interest funding available to financial institutions that may voluntarily choose to lend to these sectors. The government has in this manner provided policy loans intended to promote mortgage lending to low-income individuals and lending to small- and medium-sized enterprises. All loans or credits we choose to make pursuant to these policy loans would be subject to review in accordance with our credit approval procedures. However, the availability of policy loans may influence us to lend to certain sectors or in a manner in which we otherwise would not in the absence of such loans from the government.

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

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

If the Financial Services Commission deems our financial condition or the financial condition of our subsidiaries to be unsound, or if we or our subsidiaries fail to meet applicable regulatory standards, such as

 

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minimum capital adequacy and liquidity ratios, the Financial Services Commission may order or recommend, among other things:

 

   

capital increases or reductions;

 

   

stock cancelations or consolidations;

 

   

transfers of businesses;

 

   

sale of assets;

 

   

closures of subsidiaries or branch offices;

 

   

mergers with other financial institutions; and

 

   

suspensions of a part of our business operations.

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

Risks relating to Korea

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

Relations between Korea and North Korea have been tense throughout Korea’s modern history. The level of tension between the two Koreas has fluctuated and may increase abruptly as a result of current and future events. In particular, there have been heightened security concerns in recent years stemming from North Korea’s nuclear weapon and ballistic missile programs as well as its hostile military actions against Korea. Some of the significant incidents in recent years include the following:

 

   

North Korea renounced its obligations under the Nuclear Non-Proliferation Treaty in January 2003 and conducted six rounds of nuclear tests since October 2006, including claimed detonations of hydrogen bombs, and warheads that can be mounted on ballistic missiles. Over the years, North Korea has also conducted a series of ballistic missile tests, including missiles launched from submarines and intercontinental ballistic missiles that it claims can reach the United States mainland. In response, the Korean government has repeatedly condemned the provocations and flagrant violations of relevant United Nations Security Council resolutions. In February 2016, the government also closed the inter-Korea Gaesong Industrial Complex in response to North Korea’s fourth nuclear test in January 2016. Internationally, the United Nations Security Council has passed a series of resolutions condemning North Korea’s actions and significantly expanding the scope of sanctions applicable to North Korea, most recently in December 2017 in response to North Korea’s intercontinental ballistic missile test in November 2017. Over the years, the United States and the European Union have also expanded their sanctions applicable to North Korea.

 

   

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

North Korea’s economy also faces severe challenges, which may further aggravate social and political pressures within North Korea. Although bilateral summit meetings were held between the two Koreas in April,

 

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May and September 2018 and between the United States and North Korea in June 2018 and February 2019, there can be no assurance that the level of tensions affecting the Korean peninsula will not escalate in the future. Any increase in tensions, which may occur, for example, if North Korea experiences a leadership crisis, high-level contacts between Korea or the United States and North Korea break down or further military hostilities occur, could have a material adverse effect on the Korean economy and on our business, financial condition and results of operations and the market value of our common stock and American depositary shares, or ADSs.

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

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

In recent years, adverse conditions and volatility in the worldwide financial markets, fluctuations in oil and commodity prices and the general weakness of the global economy have contributed to the uncertainty of global economic prospects in general and have adversely affected, and may continue to adversely affect, the Korean economy. See “Other risks relating to our business—Unfavorable changes in the global financial markets could adversely affect our results of operations and financial condition.” The value of the Won relative to major foreign currencies has also fluctuated significantly. See “Item 3.A. Selected Financial Data—Exchange Rates.” Furthermore, as a result of changing global and Korean economic conditions, there has been volatility in the stock prices of Korean companies in recent years. Future declines in the Korea Composite Stock Price Index (known as the “KOSPI”) and large amounts of sales of Korean securities by foreign investors and subsequent repatriation of the proceeds of such sales may adversely affect the value of the Won, the foreign currency reserves held by financial institutions in Korea, and the ability of Korean companies to raise capital. Any future deterioration of the Korean or global economy could adversely affect our business, financial condition and results of operations.

Developments that could have an adverse impact on Korea’s economy in the future include:

 

   

adverse conditions or uncertainty in the economies of countries and regions that are important export markets for Korea, such as China, the United States, Europe and Japan, or in emerging market economies in Asia or elsewhere, as well as increased uncertainties regarding a future Brexit and deteriorating economic and trade relations between the United States and China;

 

   

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

 

   

a continuing rise in the level of household debt and increasing delinquencies and credit defaults by retail or small- and medium-sized enterprise borrowers in Korea;

 

   

declines in consumer confidence and a slowdown in consumer spending;

 

   

a deterioration in the financial condition or performance of small- and medium-sized enterprises and other companies in Korea due to the Korean government’s policies to increase minimum wages and limit working hours of employees;

 

   

investigations of Korean conglomerates and their senior management for bribery, embezzlement and other possible misconduct;

 

   

social and labor unrest;

 

   

decreases in the market prices of Korean real estate;

 

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

the occurrence of severe health epidemics in Korea or other parts of the world, such as the Middle East Respiratory Syndrome outbreak in Korea in 2015;

 

   

deterioration in economic or diplomatic relations between Korea and its trading partners or allies, including deterioration resulting from territorial or trade disputes or disagreements in foreign policy (such as the controversy between Korea and China regarding the deployment of a Terminal High Altitude Area Defense system in Korea by the United States);

 

   

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

 

   

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

 

   

political or social tensions involving Russia and any resulting adverse effects on the global supply of oil or the global financial markets;

 

   

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

 

   

changes in financial regulations in Korea.

Labor unrest in Korea may adversely affect our operations.

Economic difficulties in Korea or increases in corporate reorganizations and bankruptcies could result in layoffs and higher unemployment. Such developments could lead to social unrest and substantially increase government expenditures for unemployment compensation and other costs for social programs. According to statistics from the Korea National Statistical Office, the unemployment rate increased from 3.7% in 2016 and 2017 to 3.8% in 2018. Further increases in unemployment and any resulting labor unrest in the future could adversely affect our operations, as well as the operations of many of our customers and their ability to repay their loans, and could adversely affect the financial condition of Korean companies in general, depressing the price of their securities. These developments would likely have an adverse effect on our financial condition and results of operations.

 

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Risks relating to our common stock and ADSs

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

We have no current plans for any public offerings of our common stock, ADSs or securities exchangeable for or convertible into such securities. However, it is possible that we may decide to offer or sell such securities in the future. In addition, our major stockholder, the Korean National Pension Service, held approximately 9.5% of our total issued common stock as of December 31, 2018, which it may sell at any time.

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

Ownership of our common stock is restricted under Korean law.

Under the Financial Holding Company Act, a single stockholder, together with its affiliates, is generally prohibited from owning more than 10.0% of the issued and outstanding shares of voting stock of a bank holding company such as us that controls a nationwide bank, with the exception of certain stockholders that are non-financial business group companies, whose applicable limit has been reduced from 9.0% to 4.0% pursuant to an amendment of the Financial Holding Company Act which became effective from February 14, 2014. To the extent that the total number of shares of our common stock (including those represented by ADSs) that a holder and its affiliates own exceeds the applicable limits, that holder will not be entitled to exercise the voting rights for the excess shares, and the Financial Services Commission may order that holder to dispose of the excess shares within a period of up to six months. Failure to comply with such an order would result in an administrative fine of up to 0.03% of the book value of such shares per day until the date of disposal. Non-financial business group companies can no longer acquire more than 4.0% of the issued and outstanding shares of voting stock of a bank holding company pursuant to the amended Financial Holding Company Act, which grants an exception for non-financial business group companies which, at the time of the enactment of the amended provisions, held more than 4.0% of the shares thereof with the approval of the Financial Services Commission before the amendment. See “Item 4.B. Business Overview—Supervision and Regulation—Principal Regulations Applicable to Financial Holding Companies—Restrictions on Ownership of a Financial Holding Company.”

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

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

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

Under the terms of our deposit agreement, holders of common stock may deposit such stock with the depositary’s custodian in Korea and obtain ADSs, and holders of ADSs may surrender ADSs to the depositary

 

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and receive common stock. However, to the extent that a deposit of common stock exceeds the difference between:

 

  (1)

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

 

  (2)

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

such common stock will not be accepted for deposit unless

 

  (A)

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

 

  (B)

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

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

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

The Korean Commercial Code and our articles of incorporation require us, with some exceptions, to offer stockholders the right to subscribe for new shares of our common stock in proportion to their existing shareholding ratio whenever new shares are issued. If we offer any rights to subscribe for additional shares of our common stock or any rights of any other nature, to the extent practicable, the depositary may make the rights available to holders of our ADSs or dispose of the rights on behalf of such holders and make the net proceeds available to such holders. The depositary, however, is not required to make available to holders any rights to purchase any additional shares of our common stock unless it timely receives evidence satisfactory to it from us that it may lawfully do so and:

 

   

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

 

   

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

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

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

 

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

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

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

Our common stock is listed on the KRX KOSPI Market, which has a smaller market capitalization and is more volatile than the securities markets in the United States and many European countries. The market value of ADSs may fluctuate in response to the fluctuation of the trading price of shares of our common stock on the KRX KOSPI Market. The KRX KOSPI Market has experienced substantial fluctuations in the prices and volumes of sales of listed securities and the KRX KOSPI Market has prescribed a fixed range in which share prices are permitted to move on a daily basis. The KOSPI declined from 1,897.1 on December 31, 2007 to 938.8 on October 24, 2008. The KOSPI was 2,216.43 on April 29, 2019. There is no guarantee that the stock prices of Korean companies will not decline again in the future. Like other securities markets, including those in developed markets, the Korean securities market has experienced problems including market manipulation, insider trading and settlement failures. The recurrence of these or similar problems could have a material adverse effect on the market price and liquidity of the securities of Korean companies, including our common stock and ADSs, in both the domestic and the international markets.

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

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

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

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

We are a corporation with limited liability organized under the laws of Korea. Substantially all of our directors and officers and other persons named in this document reside in Korea, and all or a significant portion of the assets of our directors and officers and other persons named in this document and substantially all of our

 

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assets are located in Korea. As a result, it may not be possible for holders of our ADSs to effect service of process within the United States, or to enforce against them or us in the United States judgments obtained in United States courts based on the civil liability provisions of the federal securities laws of the United States. There is doubt as to the enforceability in Korea, either in original actions or in actions for enforcement of judgments of United States courts, of civil liabilities predicated on the United States federal securities laws.

 

Item 4.

INFORMATION ON THE COMPANY

 

Item 4.A.

History and Development of the Company

Overview

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

Our legal and commercial name is KB Financial Group Inc. Our registered office and principal executive offices are located at 26, Gukjegeumyung-ro 8-gil, Yeongdeungpo-gu, Seoul 07331, Korea. Our telephone number is +82-2-2073-7114. Our agent in the United States, Kookmin Bank, New York Branch, is located at 565 Fifth Avenue, 24th Floor, New York, NY 10017. Its telephone number is (212) 697-6100. The address of our English website is https://www.kbfg.com/Eng/index.jsp.

The U.S. Securities and Exchange Commission maintains a website (http://www.sec.gov), which contains reports, proxy and information statements and other information regarding issuers that file electronically with the U.S. Securities and Exchange Commission.

History of the Former Kookmin Bank

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

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

History of H&CB

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

 

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Merger of the Former Kookmin Bank and H&CB

Effective November 1, 2001, the former Kookmin Bank and H&CB merged into a new entity named Kookmin Bank. This merger resulted in Kookmin Bank becoming the largest commercial bank in Korea. Kookmin Bank’s ADSs were listed on the New York Stock Exchange on November 1, 2001 and its common shares were listed on the KRX KOSPI Market on November 9, 2001.

Establishment of KB Financial Group

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

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

 

   

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

 

   

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

 

   

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

 

   

maximize our management efficiency; and

 

   

further enhance our capacity to expand our overseas operations.

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

 

Item 4.B.

Business Overview

Business

We are one of the largest financial holding companies in Korea, in terms of consolidated total assets, and our operations include Kookmin Bank, one of the leading commercial banks in Korea. Our subsidiaries collectively engage in a broad range of businesses, including commercial banking, credit cards, asset management, non-life and life insurance, capital markets activities and international banking and finance. As of December 31, 2018, we had consolidated total assets of ₩480 trillion, consolidated total deposits of ₩277 trillion and consolidated total equity of ₩36 trillion.

 

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As part of our commercial banking activities, we provide credit and related financial services to individuals and small- and medium-sized enterprises and, to a lesser extent, to large corporate customers. We also provide a full range of deposit products and related services to both individuals and enterprises of all sizes. We provide these services predominantly through Kookmin Bank.

By their nature, our core consumer and small- and medium-sized enterprise operations place a high premium on customer access and convenience. Our combined banking network of 1,057 branches as of December 31, 2018, one of the most extensive in Korea, provides a solid foundation for our business and is a major source of our competitive strength. This network provides us with a large, stable and cost effective funding source, enables us to provide our customers convenient access and gives us the ability to provide the customer attention and service essential to conducting our business, particularly in an increasingly competitive environment. Our branch network is further enhanced by automated banking machines and fixed-line, smartphone and Internet banking. As of December 31, 2018, we had a customer base of approximately 34.2 million retail customers, which represented over one-half of the Korean population.

The following table sets forth the principal components of our lending business as of the dates indicated. As of December 31, 2018, retail loans and credit card loans and receivables accounted for 54.7% of our total loan portfolio:

 

     As of December 31,  
     2016     2017     2018  
     (in billions of Won, except percentages)  

Retail

               

Mortgage and home equity(1)

   93,327        34.9   97,253        33.3   102,607        31.9

Other consumer(2)

     41,629        15.5       48,897        16.7       56,200        17.5  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total retail

     134,956        50.4       146,150        50.0       158,807        49.4  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Credit card

     13,530        5.1       15,205        5.2       17,354        5.4  

Corporate

     116,271        43.4       127,381        43.6       140,701        43.7  

Foreign

     3,007        1.1       3,497        1.2       4,949        1.5  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total loans

   267,764        100.0   292,233        100.0   321,811        100.00
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) 

Includes ₩817 billion, ₩699 billion and ₩6,072 billion of overdraft loans secured by real estate in connection with home equity loans as of December 31, 2016, 2017 and 2018, respectively.

(2)

Includes ₩7,670 billion, ₩7,791 billion and ₩9,361 billion of overdraft loans as of December 31, 2016, 2017 and 2018, respectively.

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

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

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

Strategy

Our strategic focus is to become a world-class financial group that ranks among the leaders of the financial industry in Asia and globally. We plan to continue to solidify our market position as Korea’s leading financial

 

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group, enhance our ability to provide comprehensive financial services to our retail and corporate customers and strengthen our overseas operating platform and network. We believe our strong market position in the commercial banking area in Korea is an important competitive advantage, which will enable us to compete more effectively based on convenient delivery, product breadth and differentiation, and service quality while focusing on our profitability.

The key elements of our strategy are as follows:

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

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

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

 

   

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

 

   

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

 

   

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

 

   

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

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

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

We are also focusing on attracting and retaining creditworthy customers by offering more differentiated fee-based products and services that are tailored to meet their specific needs. The development and marketing of

 

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our products and services are, in part, driven by customer segmentation to ensure that we meet the needs of each customer segment. For instance, we continue to develop hybrid financial products with enhanced features, including various deposit products and investment products, for which consumer demand has increased in recent years. We are also focusing on addressing the needs of our customers by providing the highest-quality products and services and developing an open-architecture strategy, which allows us to sell such products through one of the largest branch networks in Korea. In short, we aim to offer our customers a convenient one-stop financial services destination where they can meet their traditional retail and corporate banking requirements, as well as find a broad array of fee-based products and services tailored to address more specific financial needs, including in investment banking, securities brokerage, insurance and wealth management. We believe such differentiated, comprehensive services and cross-selling will not only enhance customer loyalty but also increase profitability.

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

 

   

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

 

   

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

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

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

 

   

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

 

   

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

 

   

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

 

   

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

 

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

 

   

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

Strengthening internal risk management capabilities

We believe that ensuring strong asset quality through effective credit risk management is critical to maintaining stable growth and profitability and risk management will continue to be one of our key focus areas. One of our highest priorities is to improve our asset quality and more effectively price our lending products to take into account inherent credit risk in our portfolio. Our goal is to maintain the soundness of our credit portfolio, profitability and capital base. To this end, we intend to continue to strengthen our internal risk management capabilities by tightening our underwriting and management policies and improving our internal compliance policies. To accomplish this objective, we have undertaken the following initiatives:

 

   

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

 

   

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

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

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

Retail Banking

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

 

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Lending Activities

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

 

     As of December 31,  
     2016     2017     2018  
     (in billions of Won, except percentages)  

Retail:

               

Mortgage and home equity loans

   93,327        69.2   97,253        66.5   102,607        64.6

Other consumer loans(1)

     41,629        30.8       48,897        33.5       56,200        35.4  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   134,956        100.0   146,150        100.0   158,807        100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) 

Excludes credit card loans, but includes overdraft loans.

Our retail loans consist of:

 

   

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

 

   

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

For secured loans, including mortgage and home equity loans, our policy is to lend up to 100% of the adjusted collateral value (except in areas of high speculation designated by the government where we generally limit our lending to between 40% to 60% of the appraised value of collateral) minus the value of any lien or other security interests that are prior to our security interest. In calculating the adjusted collateral value for real estate, we use the appraisal value of the collateral multiplied by a factor, generally between 40% to 79% (40% to 70% in the case of mortgage and home equity loans). This factor varies depending upon the location and use of the real estate and is established in part by taking into account court-supervised auction prices for nearby properties.

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

Mortgage and Home Equity Lending

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

Private sector mortgage and home equity lending in Korea has expanded substantially in recent years. We provide customers with a number of mortgage and home equity loan products that have flexible features,

 

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including terms, repayment schedules, amounts and eligibility for loans, and we offer interest rates on a commercial basis. The maximum term of mortgage loans is 35 years and the majority of our mortgage loans have long-term maturities, which may be renewed. Non-amortizing home equity loans have a maturity of one to five years and home equity loans subject to amortization of principal may have a maximum term of up to 35 years. As of December 31, 2018, we had ₩29,400 billion of amortizing home equity loans, representing 92.7% of our total home equity loans, and ₩2,307 billion of non-amortizing home equity loans, representing 7.3% of our total home equity loans. Any customer is eligible for a mortgage or an individual home equity loan regardless of whether it participates in one of our housing related savings programs and so long as that customer is not barred by regulation from obtaining a loan because of bad credit history. However, customers with whom we frequently transact business and provide us with significant revenue receive preferential interest rates on loans.

As of December 31, 2018, 59.3% of our mortgage loans were secured by residential property which is the subject of the loan, 22.3% of our mortgage loans were guaranteed by the Housing Finance Credit Guarantee Fund, a government housing-related entity, and the remaining 18.4% of our mortgage loans, contrary to general practices in the United States, were unsecured (although the use of proceeds from these loans is restricted to financing of home purchases and some of these loans are guaranteed by a third party). One reason that a relatively high percentage of our mortgage loans are unsecured is that we, along with other Korean banks, provide advance loans to borrowers for the down payment of new housing (particularly apartments) that is in the process of being built. Once construction is completed, which may take several years, these mortgage loans become secured by the new housing purchased by these borrowers. For the year ended December 31, 2018, the average initial loan-to-value ratio of our mortgage loans, which is a measure of the amount of loan exposure to the appraised value of the security collateralizing the loan, was approximately 50.9%. There are three reasons that our loan-to-value ratio is relatively lower (as is the case with other Korean banks) compared to similar ratios in other countries, such as the United States. The first reason is that housing prices are high in Korea relative to average income, so most people cannot afford to borrow an amount equal to the entire value of their collateral and make interest payments on such an amount. The second reason relates to the “jeonsae” system, through which people provide a key money deposit while residing in the property prior to its purchase. At the time of purchase, most people use the key money deposit as part of their payment and borrow the remaining amount from Korean banks, which results in a loan that will be for an amount smaller than the appraised value of the property for collateral and assessment purposes. The third reason is that Korean banks discount the appraised value of the borrower’s property for collateral and assessment purposes so that a portion of the appraised value is reserved in order to provide recourse to a renter who lives at the borrower’s property. This is in the event that the borrower’s property is seized by a creditor, and the renter is no longer able to reside at that property. See “Item 3.D. Risk Factors—Other risks relating to our business—A decline in the value of the collateral securing our loans and our inability to realize full collateral value may adversely affect our credit portfolio.”

 

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The following table sets forth our unsecured and secured mortgage loans and home equity loans as of December 31, 2016, 2017 and 2018, based on their loan classification categories under IFRS and our internal credit ratings for loans (which are described in Note 4.2.4 of the notes to our consolidated financial statements):

 

    As of December 31, 2016  
    Non-impaired     Impaired     Total  
    Not Past Due     Past Due              
    Grade 1     Grade 2     Grade 3     Grade 4     Grade 5           Past Due Up to
89 Days
    Past Due 90 Days
to 179 Days
    Past Due
180 Days or
More
       
                                  (in billions of Won)                    

Mortgage:

                   

Secured(1)

  49,284     7,055     562     121     76     360     59     27     48     57,592  

Unsecured

    1,040       310       55       2       1       5       1       1       8       1,423  

Home Equity:

                   

Secured

    30,722       2,654       430       100       68       251       47       14       26       34,312  

Unsecured

    —         —         —         —         —         —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  81,046     10,019     1,047     223     145     616     107     42     82     93,327  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    As of December 31, 2017  
    Non-impaired     Impaired     Total  
    Not Past Due     Past Due              
    Grade 1     Grade 2     Grade 3     Grade 4     Grade 5           Past Due Up to
89 Days
    Past Due 90 Days
to 179 Days
    Past Due
180 Days or
More
       
                                  (in billions of Won)                    

Mortgage:

                   

Secured(1)

  54,547     6,645     336     76     75     426     67     23     42     62,237  

Unsecured

    1,800       88       2       2       1       5       1       1       3       1,903  

Home Equity:

                   

Secured

    30,039       2,358       259       56       57       260       44       15       25       33,113  

Unsecured

    —         —         —         —         —         —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  86,386     9,091     597     134     133     691     112     39     70     97,253  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     As of December 31, 2018  
     Stage 1      Stage 2      Stage 3      Total  
     Grade 1      Grade 2      Grade 3      Grade 4      Grade 5                       
                          (in billions of Won)                       

Mortgage:

                       

Secured(1)

   59,162      1,206      32      141      1      6,969      138      67,649  

Unsecured

     3,088        41        1        —          —          117        4        3,251  

Home Equity:

                       

Secured

     27,708        711        76        5        2        3,020        98        31,620  

Unsecured

     60        22        5        —          —          —          —          87  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   90,018      1,980      114      146      3      10,106      240      102,607  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

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

Our home equity loan portfolio includes loans that are in a second lien position. In addition to the underwriting procedures we perform when we issue home equity loans in general, we perform additional underwriting procedures with respect to home equity loans secured by a second lien to assess and confirm the value and status of any loans secured by security interests on the collateral which would be prior to our security interest under the second lien home equity loan. Under regulations implemented by the Financial Supervisory Service, our home equity loans are subject to maximum loan-to-value ratios (i.e., the ratio of the aggregate principal amount of loans, including first and second lien loans, secured by a particular item of collateral to the appraised value of such collateral) of between 40% and 70%. As such, for home equity loans, we do not lend more than an amount equal to the adjusted collateral value (i.e., the collateral value as discounted by the required loan-to-value ratio) minus the value of any loans secured by security interests on the collateral that are prior to

 

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our security interest. Accordingly, in order to ascertain the value of loans secured by security interests on the collateral which would be prior to our security interest and to confirm the status of such loans, we perform additional underwriting procedures including a review of the relevant title and security interest registration documents and bank documents and certificates regarding such loans. In addition, for purposes of calculating debt-to-income ratios applicable to loans secured by certain types of housing under regulations implemented by the Financial Supervisory Service (see “—Supervision and Regulation—Principal Regulations Applicable to Banks—Regulations Relating to Retail Household Loans”), which we apply on a nationwide basis for our home equity loans, we perform additional adjustments in our debt-to-income ratio calculations with respect to second lien home equity loans to account for the value of loans secured by security interests on the collateral that are prior to our security interest.

Following the issuance of a home equity loan, we make use of the Korea Credit Information Services’ database of delinquent borrowers to generally monitor the compliance of our borrowers with their other loan obligations, including the compliance of our second lien borrowers with their first lien loans. If a borrower in Korea is past due on payments of interest or principal for more than three months on any of its outstanding loans to Korean financial institutions (including mortgage, home equity, other consumer and credit card loans), such borrower is registered on the Korea Credit Information Services’ database of delinquent borrowers, which we monitor on a daily basis. The information disclosed by such database, which includes the outstanding loan amount which is past due, the identity of the delinquent borrower and the name of the applicable lending institution for such loan, provides an early warning about such borrower to our loan officers at the branch level, who then closely monitor our outstanding loans to such delinquent borrower and take appropriate preventive and remedial measures (including requiring such borrower to provide additional collateral) as necessary. Upon the occurrence of a default in the first lien position, we treat the second lien home equity loan as part of our potential problem loans or non-performing loans. More specifically, upon learning of the occurrence of a default in the first lien position, we examine our second lien home equity loan to determine whether the loan should be re-classified as “precautionary,” “substandard” or “doubtful” according to the asset classification guidelines of the Financial Services Commission. Assuming that such second lien home equity loan is not delinquent, if the outstanding principal amount of the relevant first lien loan is less than ₩15 million, we classify the entire amount of the second lien home equity loan as “precautionary” and closely monitor it as a loan that may potentially become problematic. If the outstanding principal amount of the relevant first lien loan is ₩15 million or above or the borrower is undergoing, or preparing to undergo, foreclosure proceedings with respect to the underlying collateral, we classify the estimated recoverable amount of the second lien home equity loan as “substandard” and the rest of such loan amount as “doubtful.”

Pricing. The interest rates on our retail mortgage loans are generally based on a periodic floating rate (which is based on a base rate determined for three-month, six-month or twelve-month periods using our Market Opportunity Rate system, which reflects our internal cost of funding, further adjusted to account for our expenses related to lending). Our interest rates also incorporate a margin based among other things on the type of security, the credit score of the borrower and the estimated loss on the security. We can adjust the price to reflect the borrower’s current and/or expected future contribution to us. The applicable interest rate is determined at the time of the loan. If a loan is terminated prior to its maturity, the borrower is obligated to pay us an early termination fee of approximately 1.2% to 1.4% of the loan amount in addition to the accrued interest.

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

As of December 31, 2018, our three-month, six-month and twelve-month base rates were 1.66%, 1.80% and 1.96%, respectively.

As of December 31, 2018, 68.4% of our outstanding mortgage and home equity loans were priced based on a floating rate.

 

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Other Consumer Loans

Other consumer loans are primarily unsecured. However, such loans may be secured by real estate, deposits or securities. As of December 31, 2018, approximately ₩30,412 billion, or 54.1% of our consumer loans (other than mortgage and home equity loans) were unsecured loans (although some of these loans were guaranteed by a third party). Overdraft loans are also classified as other consumer loans, are primarily unsecured and generally have an initial maturity of one year, which is typically extended automatically on an annual basis and may be extended up to a maximum of five years. The amount of overdraft loans as of December 31, 2018 was approximately ₩9,361 billion.

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

As of December 31, 2018, 54.1% of our other consumer loans had interest rates that were not fixed but were variable in reference to our base rate, which is based on the Market Opportunity Rate.

Deposit-taking Activities

Due to our extensive nationwide network of branches, together with our long history of development and our resulting know-how and expertise, as of December 31, 2018, we had the largest number of retail customers and retail deposits among Korean commercial banks. The balance of our deposits from retail customers was ₩161,232 billion, ₩169,246 and ₩174,851 billion as of December 31, 2016, 2017 and 2018, respectively, which constituted 67.3%, 66.2% and 63.2%, respectively, of the balance of our total deposits.

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

 

   

Demand deposits, which either do not accrue interest or accrue interest at a lower rate than time deposits. Demand deposits allow the customer to deposit and withdraw funds at any time and, if they are interest bearing, accrue interest at a variable rate depending on the amount of deposit. Retail and corporate demand deposits constituted 40.9% of our total deposits as of December 31, 2018 and paid average interest of 0.30% for 2018.

 

   

Time deposits, which generally require the customer to maintain a deposit for a fixed term, during which the deposit accrues interest at a fixed rate or a variable rate based on the KOSPI, or to deposit specified amounts on an installment basis. If the amount of the deposit is withdrawn prior to the end of the fixed term, the customer will be paid a lower interest rate than that originally offered. The term for time deposits typically ranges from one month to three years, and the term for installment savings deposits ranges from six months to five years. Retail and corporate time deposits constituted 51.7% of our total deposits as of December 31, 2018 and paid average interest of 1.87% for 2018. Most installment savings deposits offer fixed interest rates.

 

   

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

 

   

Foreign currency deposits, which are available to Korean and foreign residents, non-residents and overseas immigrants. We offer foreign currency demand deposits and time deposits as well as checking accounts in 11 currencies. Foreign currency demand deposits, which accrue interest at a variable rate, allow customers to deposit and withdraw funds at any time. Foreign currency time deposits generally require customers to maintain the deposit for a fixed term, during which the deposit accrues interest at a fixed rate. If the funds in a foreign currency time deposit are withdrawn prior to the end of the fixed term, the customer will be paid a lower interest rate than that originally offered.

 

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

We also offer comprehensive savings deposits for housing subscription, which are monthly installment savings deposits that provide the holder with preferential rights to subscribe for both public and private housing under the Housing Act. This law is the basic law setting forth various measures supporting the purchase of houses and the supply of such houses by construction companies. These deposits require monthly installments of ₩20,000 to ₩500,000 and accrue interest at variable rates depending on the term. An eligible account holder with ₩70 million or less in annual salary income may also claim a tax deduction for 40% of its annual installment amounts, subject to a maximum deductible amount, in its income tax return for the year under the Special Tax Treatment Control Law.

In 2002, after significant research and planning, we launched private banking operations at Kookmin Bank’s headquarters. Shortly thereafter, we launched a comprehensive strategy with respect to customers with higher net worth, which included staffing appropriate representatives, marketing aggressively, establishing IT systems, selecting appropriate branch locations and readying such branches with the necessary facilities to service such customers. As of December 31, 2018, we operated 21 private banking centers through Kookmin Bank.

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

The Depositor Protection Act provides for a deposit insurance system where the Korea Deposit Insurance Corporation guarantees to depositors the repayment of their eligible bank deposits. The deposit insurance system insures up to a total of ₩50 million per depositor per bank. See “—Supervision and Regulation—Principal Regulations Applicable to Banks—Deposit Insurance System.” We paid ₩401 billion of premium for 2018.

Credit Cards

Credit cards are another of our core retail products. We issue most of our credit cards under the “KB Kookmin Card” brand. Our credit card business is operated by our subsidiary, KB Kookmin Card Co., Ltd.

 

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

 

     As of and for the Year Ended December 31,  
             2016                     2017                     2018          
     (in billions of Won, except number of
holders, accounts and percentages)
 

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

      

General accounts

     8,896       9,217       9,772  

Corporate accounts

     484       502       564  
  

 

 

   

 

 

   

 

 

 

Total

     9,380       9,719       10,336  
  

 

 

   

 

 

   

 

 

 

Number of merchants (at year end) (thousands)

     2,414       2,499       2,575  

Active ratio (at year end)(1)

     88.4     90.0     89.2

Credit card fees(2)

      

Merchant fees(3)

   1,633     1,816     1,327  

Installment and cash advance fees

     380       406       450  

Annual membership fees

     105       127       114  

Other fees

     664       807       922  
  

 

 

   

 

 

   

 

 

 

Total

   2,782     3,156     2,813  
  

 

 

   

 

 

   

 

 

 

Charge volume(4)

      

General purchase

   51,876     60,657     70,622  

Installment purchase

     13,134       15,553       17,493  

Cash advance

     8,619       8,885       9,331  

Card loan(5)

     6,060       5,736       6,098  
  

 

 

   

 

 

   

 

 

 

Total

   79,689     90,831     103,544  
  

 

 

   

 

 

   

 

 

 

Outstanding balance (at year end)

      

General purchase

   4,747     5,356     6,417  

Installment purchase

     3,349       4,090       4,772  

Cash advance

     1,178       1,240       1,257  

Card loan(5)

     4,287       4,552       4,942  
  

 

 

   

 

 

   

 

 

 

Total

   13,561     15,238     17,388  
  

 

 

   

 

 

   

 

 

 

Average outstanding balances

      

General purchase

   4,749     5,373     6,145  

Installment purchase

     3,060       3,777       4,449  

Cash advance

     1,177       1,186       1,230  

Card loan(5)

     3,855       4,560       4,917  
  

 

 

   

 

 

   

 

 

 

Total

   12,841     14,896     16,741  
  

 

 

   

 

 

   

 

 

 

Delinquency ratios (at year end)(6)

      

From 1 month to 3 months

     0.60     0.62     0.63

From 3 months to 6 months

     0.57       0.63       0.63  

Over 6 months

     0.04       0.04       0.05  
  

 

 

   

 

 

   

 

 

 

Total

     1.21     1.29     1.31
  

 

 

   

 

 

   

 

 

 

Non-performing loan ratio

     0.60     0.66     0.66

Write-offs (gross)

   357     401     465  

Recoveries(7)

     134       133       135  
  

 

 

   

 

 

   

 

 

 

Net write-offs

   223     268     330  
  

 

 

   

 

 

   

 

 

 

Gross write-off ratio(8)

     2.78     2.69     2.78

Net write-off ratio(9)

     1.74     1.80     1.97

 

(1) 

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

 

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(2)

Due to our adoption of IFRS 15 Revenue from Contracts with Customers, effective as of January 1, 2018, credit card fees for 2018 exclude certain fees related to our services provided to cardholders. Figures for prior years have not been restated to reflect such changes and may not be directly comparable.

(3) 

Merchant fees consist of maintenance fees and costs associated with prepayment by us (on behalf of customers) of sales proceeds to merchants, processing fees relating to sales and membership applications, costs relating to the management of delinquencies and recoveries, provision for loan losses, general variable expenses and other fixed costs that are charged to our member merchants. We typically charge our member merchants fees that range from 0.8% to 2.3%. We offer discounts for member merchants that are small- and medium-sized enterprises pursuant to applicable laws.

(4)

Represents the aggregate cumulative amount charged during the year.

(5) 

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

(6) 

Represents ratio of credit card balances overdue by one month or more to outstanding balance. In line with industry practice, we have restructured a portion of delinquent credit card account balances as loans. As of December 31, 2016, 2017 and 2018, these restructured loans amounted to ₩43 billion, ₩55 billion and ₩97 billion, respectively. Because these restructured loans are not treated as being delinquent at the time of conversion or for a period of time thereafter, our delinquency ratios may not fully reflect all delinquent amounts relating to our outstanding balances.

(7) 

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

(8) 

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

(9) 

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

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

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

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

As of December 31, 2018, we had approximately 10.3 million credit cardholders. Of the credit cards outstanding, approximately 89.2% were active, meaning that they had been used at least once during the previous six months.

 

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Our card revenues consist principally of cash advance fees, merchant fees, credit card installment fees, interest income from credit card loans, annual fees paid by cardholders, interest and fees on late payments and, with respect to revolving payment plans we offer, interest and fees relating to revolving balances.

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

We issue debit cards and charge merchants commissions that range from 1.0% to 2.0% of the amounts purchased using a debit card. We also issue “check cards,” which are similar to debit cards except that “check cards” are accepted by all merchants that accept credit cards, and charge merchants commissions that typically range from 0.5% to 1.5%. Much like debit cards, check card purchases are also debited directly from customers’ accounts with us.

Corporate Banking

We lend to and take deposits from small- and medium-sized enterprises and, to a lesser extent, large corporate customers. We had 300,106 small- and medium-sized enterprise borrowers and 1,885 large corporate borrowers for Won-currency loans as of December 31, 2018. For 2018, we received fee revenue from cash management services offered to corporate customers, which include “firm-banking” services such as inter-account transfers, transfers of funds from various branches and agencies of a company (such as insurance premium payments) to the account of the headquarters of such company and transfers of funds from various customers of a company to the main account of such company, in the amount of ₩120 billion. Of our branch network as of December 31, 2018, we had three branches that primarily handled large corporate banking.

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

 

     As of December 31,  
     2016     2017     2018  
     (in billions of Won, except percentages)  

Corporate:

               

Small- and medium-sized enterprise loans

   86,065        74.0   97,379        76.4   106,015        75.3

Large corporate loans

     30,206        26.0       30,002        23.6       34,686        24.7  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   116,271        100.0   127,381        100.0   140,701        100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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

The total amount of deposits from our corporate customers amounted to ₩97,076 billion as of December 31, 2018, or 35.1% of our total deposits.

Small- and Medium-sized Enterprise Banking

Our small- and medium-sized enterprise banking business has traditionally been and will remain one of our core businesses because of both our historical development and our accumulated expertise. We believe that we

 

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possess the necessary elements to succeed in the small- and medium-sized enterprise market, including our extensive branch network, our credit rating system for credit approval, our marketing capabilities (which we believe have provided us with significant brand loyalty) and our ability to take advantage of economies of scale.

We use the term “small- and medium-sized enterprises” as defined in the Framework Act on Small and Medium Enterprises and related regulations. Under the Framework Act on Small and Medium Enterprises and related regulations, an enterprise must meet each of the following criteria in order to meet the definition of a small- and medium-sized enterprise: (i) total assets at the end of the immediately preceding fiscal year must be less than ₩500 billion, (ii) the average or annual sales revenue standards as prescribed by the Enforcement Decree of the Framework Act on Small and Medium Enterprises that are applicable to the enterprise’s primary business must be met and (iii) the standards of management independence as prescribed by the Enforcement Decree of the Framework Act on Small and Medium Enterprises must be met. In addition, certified social enterprises (as defined in the Social Enterprise Promotion Act) and cooperatives and federations of cooperatives (each as defined in the Framework Act on Cooperatives and the Consumer Cooperatives Act) that satisfy the requirements prescribed by the Framework Act on Small and Medium Enterprises may also qualify as small- and medium-sized enterprises.

Lending Activities

Our principal loan products for our small- and medium-sized enterprise customers are working capital loans and facilities loans. Working capital loans are provided to finance working capital requirements and include notes discounted and trade financing. Facilities loans are provided to finance the purchase of equipment and the establishment of manufacturing assembly plants. As of December 31, 2018, working capital loans and facilities loans accounted for 48.1% and 51.9%, respectively, of our total small- and medium-sized enterprise loans. As of December 31, 2018, we had 300,106 small- and medium-sized enterprise customers on the lending side.

Loans to small- and medium-sized enterprises may be secured by real estate or deposits or may be unsecured. As of December 31, 2018, secured loans and guaranteed loans accounted for, in the aggregate, 86.3% of our small- and medium-sized enterprise loans. Among the secured loans, 95.9% were secured by real estate and 4.1% were secured by deposits or securities. Working capital loans generally have a maturity of one year, but may be extended for additional terms of up to one year in length for an aggregate term of five years. Facilities loans have a maximum maturity of 15 years.

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

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

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

 

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

Pricing

We establish the price for our corporate loan products based principally on transaction risk, our cost of funding and market considerations. Transaction risk is measured by such factors as the credit rating assigned to a particular borrower, the size of the borrower and the value and type of collateral. Our loans are priced based on the Market Opportunity Rate system, which is a periodic floating rate system that takes into account the current market interest rate. As of December 31, 2018, the Market Opportunity Rate was 1.92% for three months, 1.95% for six months and 1.98% for one year.

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

Large Corporate Banking

Large corporate customers include all companies that are not small- and medium-sized enterprise customers. Kookmin Bank’s articles of incorporation provide that financial services to large corporate customers must be no more than 40% of the total amount of our Won-denominated loans. Our business focus with respect to large corporate banking is to selectively increase the proportion of high quality large corporate customers. Specifically, we are carrying out various initiatives to improve our customer relationship with large corporate customers and have been seeking to expand our service offerings to this segment.

Lending Activities

Our principal loan products for our large corporate customers are working capital loans and facilities loans. As of December 31, 2018, working capital loans and facilities loans accounted for 75.8% and 24.2%, respectively, of our total large corporate loans. We also offer mortgage loans to large corporate clients who build or sell single- or multi-family housing units, as described above under “—Small- and Medium-sized Enterprise Banking—Lending Activities.”

As of December 31, 2018, secured loans and guaranteed loans accounted for, in the aggregate, 25.7% of our large corporate loans. Among the secured loans, 76.9% were secured by real estate and 23.1% were secured by deposits or securities. Working capital loans generally have a maturity of one year, but may be extended for additional terms ranging from three months to one year in length for an aggregate term of five years. Facilities loans have a maximum maturity of 15 years.

In our unsecured lending to large corporate customers, a critical consideration in our policy regarding the extension of such unsecured loans is the borrower’s creditworthiness. We assign each borrower a credit rating based on the judgment of our experts or scores calculated using the appropriate credit rating system, taking into account both financial factors and non-financial factors (such as our perception of a borrower’s reliability, management and operational risk and risk relating to the borrower’s industry). The credit ratings, along with such factors, are key determinants in our lending to large corporate customers. Large corporate customers generally have higher credit ratings due to their higher repayment capability compared to other types of borrowers, such as small- and medium-sized enterprise borrowers. In addition, large corporate borrowers generally are affected to a

 

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lesser extent than small- and medium-sized enterprise borrowers by fluctuations in the Korean economy and also maintain more sophisticated financial records. As of December 31, 2018, 88.0% of our large corporate customers had credit ratings or BBB- or above according to the internal credit rating system of Kookmin Bank, compared to 74.5% of our small- and medium-sized enterprise customers. A credit rating of BBB- is assigned to customers whose ability to repay the principal and interest on their outstanding loans is determined by us to be generally satisfactory but nonetheless subject to adverse effects under unfavorable economic conditions or during downturns in the business environment. Based on our internal analysis of historical data, we believe that the probability of default for loans extended to large corporate customers with a credit rating of BBB- or above is between 0.00% and 2.26%.

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

As of December 31, 2018, in terms of our outstanding loan balance, 32.8% was extended to borrowers in the manufacturing industry, 32.2% of our large corporate loans was extended to borrowers in the financial industry, and 21.1% was extended to borrowers in the service industry.

Pricing

We determine pricing of our large corporate loans in the same way as we determine the pricing of our small- and medium-sized enterprise loans. See “—Small- and Medium-sized Enterprise Banking—Pricing” above. As of December 31, 2018, the Market Opportunity Rate, which is utilized in pricing loans offered by us, was the same for our large corporate loans as for our small- and medium-sized enterprise loans.

Capital Markets Activities and International Banking/Finance

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

Securities Investment and Trading

We invest in and trade securities for our own account in order to maintain adequate sources of liquidity and to generate interest and dividend income and capital gains. As of December 31, 2016, 2017 and 2018, our investment portfolio, which consists primarily of financial assets at amortized cost and financial assets at fair value through other comprehensive income (or held-to-maturity financial assets and available-for-sale financial assets) and our trading portfolio had a combined total carrying amount of ₩74,777 billion, ₩99,171 billion and ₩111,434 billion (including the investment and trading portfolios of our insurance operations) and represented 19.9%, 22.7% and 23.2% of our total assets, respectively.

Our trading and investment portfolios consist primarily of Korean treasury securities and debt securities issued by Korean government agencies, local governments or certain government-invested enterprises and debt securities issued by financial institutions. As of December 31, 2016, 2017 and 2018, we held debt securities with a total carrying amount of ₩61,942 billion, ₩82,989 billion and ₩107,192 billion, respectively, of which:

 

   

financial assets at amortized cost (or held-to-maturity debt securities) accounted for ₩11,178 billion, ₩18,492 billion and ₩23,663 billion, or 18.0%, 22.3% and 22.1%, respectively;

 

   

financial assets at fair value through other comprehensive income (or available-for-sale debt securities) accounted for ₩27,445 billion, ₩38,959 billion and ₩35,244 billion, or 44.4%, 46.9% and 32.9%, respectively; and

 

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debt securities at fair value through profit or loss accounted for ₩23,319 billion, ₩25,538 billion and ₩48,285 billion, or 37.6%, 30.8% and 45.0%, respectively.

Of these amounts, debt securities issued by the Korean government and government agencies as of December 31, 2016, 2017 and 2018 amounted to:

 

   

₩2,218 billion, ₩5,448 billion and ₩5,090 billion, or 19.8%, 29.5% and 21.5%, respectively, of our financial assets at amortized cost (or held-to-maturity debt securities);

 

   

₩7,111 billion, ₩3,629 billion and ₩3,475 billion, or 25.9%, 9.3% and 9.9%, respectively, of our financial assets at fair value through other comprehensive income (or available-for-sale debt securities); and

 

   

₩5,390 billion, ₩6,233 billion and ₩7,923 billion, or 23.1%, 24.4% and 16.4%, respectively, of our debt securities at fair value through profit or loss.

From time to time we also purchase equity securities for our securities portfolios. Our equity securities consist primarily of marketable beneficiary certificates and equities listed on the KRX KOSPI Market, the KRX KOSDAQ Market or the KRX KONEX Market. As of December 31, 2016, 2017 and 2018:

 

   

equity securities at fair value through other comprehensive income (or available-for-sale equity securities) had a carrying amount of ₩6,525 billion, ₩9,157 billion and ₩2,370 billion, or 19.2%, 19.0% and 6.3%, respectively, of our securities at fair value through other comprehensive income (or available-for-sale securities) portfolio; and

 

   

equity securities at fair value through profit or loss had a carrying amount of ₩3,107 billion, ₩5,003 billion and ₩1,288 billion, or 11.1%, 15.5% and 2.6%, respectively, of our securities at fair value through profit or loss portfolio.

Our trading portfolio also includes derivative-linked securities, the underlying assets of which were linked to, among other things, interest rates, exchange rates, stock price indices or credit risks. As of December 31, 2016, 2017 and 2018, derivative-linked securities in our trading portfolio had a carrying amount of ₩1,362 billion, ₩1,613 billion and ₩3,517 billion, or 4.9%, 5.0% and 7.1% of our trading portfolio, respectively. See “—Derivatives Trading.”

 

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

 

     As of December 31, 2016  
     Amortized
Cost
     Gross
Unrealized Gain
     Gross
Unrealized Loss
     Fair Value  
     (in billions of Won)  

Available-for-sale financial assets:

           

Debt securities

           

Korean treasury securities and government agencies

   7,213      10      112      7,111  

Financial institutions(1)

     11,189        10        27        11,172  

Corporate(2)

     5,891        38        25        5,904  

Asset-backed securities(3)

     2,717        18        5        2,730  

Others

     558        5        35        528  
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     27,568        81        204        27,445  

Equity securities

     5,343        1,223        41        6,525  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale financial assets

   32,911      1,304      245      33,970  
  

 

 

    

 

 

    

 

 

    

 

 

 

Held-to-maturity financial assets:

           

Korean treasury securities and government agencies

   2,218      113      —        2,331  

Financial institutions(4)

     1,869        —          44        1,825  

Corporate(5)

     3,488        114        —          3,602  

Asset-backed securities(6)

     3,603        40        —          3,643  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held-to-maturity financial assets

   11,178      267      44      11,401  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     As of December 31, 2017  
     Amortized
Cost
     Gross
Unrealized Gain
     Gross
Unrealized Loss
     Fair Value  
     (in billions of Won)  

Available-for-sale financial assets:

           

Debt securities

           

Korean treasury securities and government agencies

   3,640      7      18      3,629  

Financial institutions(1)

     21,001        13        68        20,946  

Corporate(2)

     10,593        36        58        10,571  

Asset-backed securities(3)

     2,408        2        8        2,402  

Others

     1,446        2        37        1,411  
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     39,088        60        189        38,959  

Equity securities

     7,775        1,477        95        9,157  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale financial assets

   46,863      1,537      284      48,116  
  

 

 

    

 

 

    

 

 

    

 

 

 

Held-to-maturity financial assets:

           

Korean treasury securities and government agencies

   5,448      —        16      5,432  

Financial institutions(4)

     2,475        15        —          2,490  

Corporate(5)

     6,219        —          4        6,215  

Asset-backed securities(6)

     4,306        —          3        4,303  

Others

     44        —          1        43  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held-to-maturity financial assets

   18,492      15      24      18,483  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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     As of December 31, 2018  
     Amortized
Cost(7)
     Net Unrealized
Gain and Loss(8)
    Loss Allowance
for Expected
Credit Losses(9)
     Fair Value  
     (in billions of Won)  

Financial assets at fair value through other comprehensive income:

          

Debt securities

          

Korean treasury securities and government agencies

   3,471      4     —        3,475  

Financial institutions(1)

     20,102        7       1        20,108  

Corporate(2)

     10,488        56       3        10,541  

Asset-backed securities(3)

     1,096        4       —          1,100  

Others

     20        —         —          20  
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal

     35,177        71       4        35,244  

Equity securities

     1,763        607       —          2,370  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total financial assets at fair value through other comprehensive income

   36,940      678     4      37,614  
  

 

 

    

 

 

   

 

 

    

 

 

 

Financial assets at amortized cost:

          

Korean treasury securities and government agencies

   5,090      362     —        5,452  

Financial institutions(4)

     6,847        (50     —          6,797  

Corporate(5)

     6,943        150       —          7,093  

Asset-backed securities(6)

     4,783        35       1        4,817  

Total financial assets at amortized cost

   23,663      497     1      24,159  
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) 

Includes debt securities issued by the Bank of Korea, Korea Housing Finance Corporation, Korea Development Bank, Industrial Bank of Korea and the Export-Import Bank of Korea in the aggregate amount of ₩6,749 billion as of December 31, 2016, ₩15,834 billion as of December 31, 2017 and ₩15,795 billion as of December 31, 2018. These financial institutions are owned or controlled by the Korean government.

(2)

Includes debt securities issued by Korea Housing Finance Corporation, Korea Deposit Insurance Corporation and Korea Land & Housing Corporation in the aggregate amount of ₩1,490 billion as of December 31, 2016, ₩2,254 billion as of December 31, 2017 and ₩1,857 billion as of December 31, 2018. These entities are owned or controlled by the Korean government.

(3) 

Includes mortgage-backed securities issued by Korea Housing Finance Corporation, which have residential mortgage loans as underlying assets, in the amount of ₩2,730 billion as of December 31, 2016, ₩2,277 billion as of December 31, 2017 and ₩1,016 billion as of December 31, 2018. Korea Housing Finance Corporation is controlled by the Korean government.

(4) 

Includes debt securities issued by the Bank of Korea, Korea Development Bank, Industrial Bank of Korea and the Export-Import Bank of Korea in the aggregate amount of ₩328 billion as of December 31, 2016, ₩1,055 billion as of December 31, 2017 and ₩5,512 billion as of December 31, 2018. These financial institutions are owned or controlled by the Korean government.

(5)

Includes debt securities issued by Korea Housing Finance Corporation, Korea Deposit Insurance Corporation and Korea Land & Housing Corporation in the aggregate amount of ₩1,169 billion as of December 31, 2016, ₩1,616 billion as of December 31, 2017 and ₩1,815 billion as of December 31, 2018. These entities are owned or controlled by the Korean government.

(6) 

Includes mortgage-backed securities issued by Korea Housing Finance Corporation, which have residential mortgage loans as underlying assets, in the amount of ₩3,583 billion as of December 31, 2016, ₩4,205 billion as of December 31, 2017 and ₩4,681 billion as of December 31, 2018. Korea Housing Finance Corporation is controlled by the Korean government.

(7) 

Gross carrying amount before adjusting for loss allowance for expected credit losses in accordance with IFRS 9.

(8) 

Net unrealized gain and loss after adjusting for loss allowance for expected credit losses in accordance with IFRS 9.

(9) 

Loss allowance for expected credit losses in accordance with IFRS 9.

Derivatives Trading

We engage in derivatives trading, including on behalf of our customers. Our trading volume increased from ₩264,110 billion in 2016 to ₩324,786 billion in 2017 and ₩376,249 billion in 2018. Our net trading revenue (expense) from derivatives for the year ended December 31, 2016, 2017 and 2018 was ₩173 billion, ₩906 billion and ₩(284) billion, respectively.

 

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

 

   

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

 

   

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

 

   

stock price index options linked to the KOSPI index.

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

The following shows the estimated fair value of our derivatives as of December 31, 2016, 2017 and 2018:

 

     As of December 31,  
     2016      2017      2018  
     Estimated
Fair Value

Assets
     Estimated
Fair Value
Liabilities
     Estimated
Fair Value
Assets
     Estimated
Fair Value
Liabilities
     Estimated
Fair Value
Assets
     Estimated
Fair Value
Liabilities
 
     (in billions of Won)  

Foreign exchange derivatives(1)

   2,139      2,148      2,361      2,036      1,133      1,090  

Interest rate derivatives(1)

     793        911        641        689        659        908  

Equity derivatives

     375        687        233        373        158        796  

Credit derivatives

     55        50        42        37        33        25  

Commodity derivatives

     1        5        4        —          2        3  

Others(1)

     18        6        29        8        41        79  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   3,381      3,807      3,310      3,143      2,026      2,901  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Includes those for trading purposes and hedging purposes.

The following table shows certain information related to our derivatives designated as fair value hedges for the years ended December 31, 2016, 2017 and 2018:

 

    Year Ended December 31,  
    2016     2017     2018  
    Derivatives     Hedged
Items
    Hedge
Ineffectiveness
    Derivatives     Hedged
Items
    Hedge
Ineffectiveness
    Derivatives     Hedged
Items
    Hedge
Ineffectiveness
 
    (in billions of Won)  

Foreign exchange derivatives(1)

  (27   28     1     78     (41   37     (119   98     (21

Interest rate derivatives

    (63     64       1       15       (15     —