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WF Woori Financial

Table of Contents

As filed with the Securities and Exchange Commission on April 29, 2020

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM20-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, 2019

OR

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

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 number001-31811

 

 

Woori Financial Group Inc.

(Exact name of Registrant as specified in its charter)

 

 

Woori Financial Group Inc.

(Translation of Registrant’s name into English)

 

 

The Republic of Korea

(Jurisdiction of incorporation or organization)

51,Sogong-ro,Jung-gu, Seoul 04632, Korea

(Address of principal executive offices)

 

Jeong Soo Lee

51,Sogong-ro,Jung-gu, Seoul 04632, Korea

Telephone No.:+82-2-2125-2050

Facsimile No.:+82-0505001-0451

(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 Trading symbol Name of each exchange on which registered

American Depositary Shares, each representing three shares of Common Stock

 

WF

 New York Stock Exchange

Common Stock, par value5,000 per share

 

WF

 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.

722,267,681 shares of Common Stock, par value5,000 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 RegulationS-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, anon-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule12b-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.    ☐

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.    ☒  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 Rule12b-2 of the Exchange Act).    ☐  Yes    ☒  No

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

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

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

 

 


Table of Contents

TABLE OF CONTENTS

 

        Page 

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

   10 
 

Item 3.C.

  

Reasons for the Offer and Use of Proceeds

   10 
 

Item 3.D.

  

Risk Factors

   10 

Item 4.

 

Information on the Company

   37 
 

Item 4.A.

  

History and Development of the Company

   37 
 

Item 4.B.

  

Business Overview

   44 
 

Item 4.C.

  

Organizational Structure

   119 
 

Item 4.D.

  

Property, Plants and Equipment

   120 

Item 4A.

 

Unresolved Staff Comments

   120 

Item 5.

 

Operating and Financial Review and Prospects

   120 
 

Item 5.A.

  

Operating Results

   120 
 

Item 5.B.

  

Liquidity and Capital Resources

   149 
 

Item 5.C.

  

Research and Development, Patents and Licenses, etc.

   155 
 

Item 5.D.

  

Trend Information

   155 
 

Item 5.E.

  

Off-Balance Sheet Arrangements

   155 
 

Item 5.F.

  

Tabular Disclosure of Contractual Obligations

   156 
 

Item 5.G.

  

Safe Harbor

   156 

Item 6.

 

Directors, Senior Management and Employees

   156 
 

Item 6.A.

  

Directors and Senior Management

   156 
 

Item 6.B.

  

Compensation

   160 
 

Item 6.C.

  

Board Practices

   160 
 

Item 6.D.

  

Employees

   162 
 

Item 6.E.

  

Share Ownership

   163 

Item 7.

 

Major Shareholders and Related Party Transactions

   164 
 

Item 7.A.

  

Major Shareholders

   164 
 

Item 7.B.

  

Related Party Transactions

   165 
 

Item 7.C.

  

Interest of Experts and Counsel

   165 

Item 8.

 

Financial Information

   165 
 

Item 8.A.

  

Consolidated Statements and Other Financial Information

   165 
 

Item 8.B.

  

Significant Changes

   167 

Item 9.

 

The Offer and Listing

   167 
 

Item 9.A.

  

Offering and Listing Details

   167 
 

Item 9.B.

  

Plan of Distribution

   170 
 

Item 9.C.

  

Markets

   170 
 

Item 9.D.

  

Selling Shareholders

   170 
 

Item 9.E.

  

Dilution

   170 
 

Item 9.F.

  

Expenses of the Issuer

   170 

Item 10.

 

Additional Information

   171 
 

Item 10.A.

  

Share Capital

   171 
 

Item 10.B.

  

Memorandum and Articles of Association

   171 
 

Item 10.C.

  

Material Contracts

   177 
 

Item 10.D.

  

Exchange Controls

   177 
 

Item 10.E.

  

Taxation

   178 

 

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        Page 
 

Item 10.F.

  

Dividends and Paying Agents

   184 
 

Item 10.G.

  

Statements by Experts

   184 
 

Item 10.H.

  

Documents on Display

   184 
 

Item 10.I.

  

Subsidiary Information

   184 

Item 11.

 

Quantitative and Qualitative Disclosures about Market Risk

   185 

Item 12.

 

Description of Securities Other Than Equity Securities

   207 

Item 13.

 

Defaults, Dividend Arrearages and Delinquencies

   208 

Item 14.

 

Material Modifications to the Rights of Security Holders and Use of Proceeds

   208 

Item 15.

 

Controls and Procedures

   208 

Item 16.

 

Reserved

   209 

Item 16A.

 

Audit Committee Financial Expert

   209 

Item 16B.

 

Code of Ethics

   210 

Item 16C.

 

Principal Accountant Fees and Services

   210 

Item 16D.

 

Exemptions from the Listing Standards for Audit Committees

   210 

Item 16E.

 

Purchase of Equity Securities by the Issuer and Affiliated Purchasers

   211 

Item 16F.

 

Change in Registrant’s Certifying Accountant

   211 

Item 16G.

 

Corporate Governance

   212 

Item 16H.

 

Mine Safety Disclosure

   213 

Item 17.

 

Financial Statements

   213 

Item 18.

 

Financial Statements

   213 

Item 19.

 

Exhibits

   213 

 

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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 the IASB.

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

We were established on January 11, 2019 pursuant to a “comprehensive stock transfer” under Korean law, whereby holders of the common stock of Woori 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. As a result of the stock transfer, Woori Bank and certain of its former wholly-owned subsidiaries, Woori FIS Co., Ltd., Woori Finance Research Institute Co., Ltd., Woori Credit Information Co., Ltd., Woori Fund Services Co., Ltd. and Woori Private Equity Asset Management Co., Ltd., became our direct and wholly-owned subsidiaries. Accordingly, our overall business and operations after the stock transfer, on a consolidated basis, are identical to those of Woori Bank on a consolidated basis immediately prior to the stock transfer. See “Item 4.A. History and Development of the Company—Establishment of Woori Financial Group.”

The stock transfer constituted a succession for purposes of Rule12g-3(a) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), such that our common stock was deemed registered under Section 12(b) of the Exchange Act by operation of Rule12g-3(a). Following the stock transfer, we file reports under the Exchange Act as the successor issuer to Woori Bank.

In our consolidated financial statements for financial reporting periods beginning on or after January 1, 2019, the stock transfer is accounted for as a transaction among entities under common control applying the pooling of interests method of accounting. We initially recognized the transferred assets and liabilities at their book value as of the date of the stock transfer in such consolidated financial statements, and no goodwill was recognized in connection with the transaction.

The consolidated financial statements included in this annual report as of dates and for periods prior to the date of our establishment in January 2019 pursuant to the stock transfer were prepared based on the consolidated financial statements for Woori Bank and its subsidiaries, except that Woori FIS Co., Ltd., Woori Finance Research Institute Co., Ltd., Woori Credit Information Co., Ltd., Woori Fund Services Co., Ltd. and Woori Private Equity Asset Management Co., Ltd. were consolidated on aline-by-line basis instead of being presented as assets and liabilities held for distribution. Unless expressly stated otherwise, historical financial data included in this annual report as of dates and for periods prior to our establishment are for Woori Bank and its subsidiaries, on a consolidated basis, with the foregoing modification. For further information regarding the accounting treatment of the stock transfer, see Note 42 of the notes to our consolidated financial statements included elsewhere in this annual report.

Unless otherwise indicated or required by the context, “we,” “us,” “our” and similar terms used in this annual report refer to Woori Financial Group and its subsidiaries (including Woori Bank) and, for periods prior to our establishment, refer to Woori Bank and its subsidiaries.

In this annual report:

 

  

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;

 

  

references to “U.S. dollars,” “$” or “US$” are to the currency of the United States; and

 

  

references to “Euros” or “EUR” are to the currency of the European Economic and Monetary Union.

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 conversions 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, 2019, which was ₩1,155.5 = 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” 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 4.B. Business Overview” and “Item 5. Operating and Financial Review and Prospects” 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:

 

  

a change or delay in, or cancellation of, the Korean government’s privatization plan with respect to us;

 

  

our ability to successfully implement our strategy;

 

  

future levels ofnon-performing loans;

 

  

our growth and expansion;

 

  

the adequacy of allowances for credit and other losses;

 

  

technological changes;

 

  

interest rates;

 

  

investment income;

 

  

availability of funding and liquidity;

 

  

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;

 

  

unanticipated volatility in interest rates;

 

  

foreign exchange rates;

 

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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 environment in Korea; and

 

  

regional or general changes in asset valuations.

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

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

 

Item 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not Applicable

 

Item 2.

OFFER STATISTICS AND EXPECTED TIMETABLE

Not Applicable

 

Item 3.

KEY INFORMATION

 

Item 3.A.

Selected Financial Data

The selected consolidated financial and operating data set forth below as of and for the years ended December 31, 2015, 2016, 2017, 2018 and 2019 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, 2015, 2016, 2017, 2018 and 2019 have been audited by Deloitte Anjin LLC, an independent registered public accounting firm.

IFRS 9Financial Instruments, or IFRS 9, is effective for annual periods beginning on or after January 1, 2018 and replaces International Accounting Standard 39Financial Instruments: Recognition and Measurement, or IAS 39. We have applied IFRS 9 in our consolidated financial statements as of and for the years ended December 31, 2018 and 2019 included elsewhere in this annual report. As permitted by the transition rules of IFRS 9, our consolidated financial statements as of and for the year ended December 31, 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 Note2-(1)-3)-a) 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 Statement of Comprehensive Income Data

 

  Year ended December 31, 
  2015  2016  2017  2018  2019  2019(1) 
  (in billions of Won except per share data)  (in millions of
US$ except per
share data)
 

Interest income

 8,698  8,512  8,551  9,684  10,577  US$9,153 

Interest expense

  (3,936  (3,492  (3,330  (4,033  (4,683  (4,053
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net interest income

  4,762   5,020   5,221   5,651   5,894   5,100 

Fees and commissions income

  1,757   1,865   2,069   1,681   1,709   1,479 

Fees and commissions expense

  (781  (928  (999  (611  (606  (525
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net fees and commissions income

  976   937   1,070   1,070   1,103   954 

Dividend income

  103   185   125   91   108   93 

Net gain on financial instruments at fair value through profit or loss (IFRS 9)

           214   25   22 

Net gain (loss) on financial instruments at fair value through profit or loss (IAS 39)

  240   114   (105         

Net gain on financial assets at fair value through other comprehensive income

           2   11   10 

Net gain (loss) onavailable-for-sale financial assets

  (3  (1  193          

Net gain arising on financial assets at amortized cost

           80   102   88 

Impairment losses due to credit loss

  (966  (834  (785  (330  (374  (324

General and administrative expenses

  (3,151  (3,479  (3,531  (3,624  (3,766  (3,259

Other net operating expenses(2)

  (610  (368  (31  (395  (303  (261
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Operating income

  1,351   1,574   2,157   2,759   2,800   2,423 

Share of gain (loss) of joint ventures and associates

  (70  (20  (101  3   84   73 

Other netnon-operating income (expense)

  171   (1  (106  43   (161  (139
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Non-operating income (loss)

  101   (21  (207  46   (77  (66

Net income before income tax expense

  1,452   1,553   1,950   2,805   2,723   2,357 

Income tax expense

  (377  (276  (420  (753  (685  (593
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income from continuing operations

  1,075   1,277   1,530   2,052   2,038   1,764 

Net income (loss) from discontinued operations

                  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income

 1,075  1,277  1,530  2,052  2,038  US$1,764 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net loss on valuation of equity securities at fair value through other comprehensive income

           (31  (58  (50

Items out of change in equity method securities due to change in equity of investee that will not be reclassified to profit or loss

        (3         

Remeasurement gain (loss) related to defined benefit plan

  (78  34   10   (85  (35  (30
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Items that will not be reclassified to profit or loss

  (78  34   7   (116  (93  (80

Net gain on valuation of debt securities at fair value through other comprehensive income

           33   44   38 

Gain (loss) onavailable-for-sale financial assets

  72   13   (85         

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

  3   (8  4   3   1   1 

Gain (loss) on foreign currency translation of foreign operations

  34   29   (208  (4  102   88 

Gain (loss) on valuation of cash flow hedge

     10   1   (5  (2  (2

Other comprehensive income (loss) on valuation of assets held for sale

        4   (4      
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Items that may be reclassified to profit or loss

  109   44   (284  23   145   125 

Other comprehensive income (loss), net of tax

  31   78   (277  (93  52   45 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total comprehensive income

 1,106  1,355  1,253  1,959  2,090  US$1,809 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income attributable to owners

 1,059  1,261  1,512  2,033  1,872  US$1,620 

Income from continuing operations

  1,059   1,261   1,512   2,033   1,872   1,620 

Income (loss) from discontinued operations

                  

Net income attributable tonon-controlling interests

 16  16  18  19  166  US$144 

Income from continuing operations

  16   16   18   19   166   144 

Loss from discontinued operations

                  

Comprehensive income attributable to owners

  1,095   1,332   1,249   1,944   1,914   1,658 

Comprehensive income attributable tonon-controlling interests

  11   23   4   15   176   151 

Basic and diluted earnings from continuing and discontinued operations per share

 1,301  1,567  1,999  2,796  2,727  US$2.360 

Basic and diluted earnings from continuing operations per share

  1,301   1,567   1,999   2,796   2,727   2.360 

Per common share data:

      

Net income per share—basic

 1,301  1,567  1,999  2,796  2,727  US$2.360 

Weighted average common shares outstanding—basic (in thousands)

  673,271   673,271   673,271   673,271   685,489   685,489 

Net income per share—diluted

 1,301  1,567  1,999  2,796  2,727  US$2.360 

Weighted average common shares outstanding—diluted (in thousands)

  673,271   673,271   673,271   673,271   685,489   685,489 

Cash dividends paid per share

 500  400  500  650  700  US$0.61 

 

(1)

Won amounts are expressed in U.S. dollars at the rate of ₩1,155.5 to US$1.00, the noon buying rate in effect on December 31, 2019 as quoted by the Federal Reserve Bank of New York in the United States.

(2)

For a description of “Other net operating expenses,” see Note 36 of the notes to our consolidated financial statements.

 

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Consolidated Statement of Financial Position Data

 

  As of December 31, 
  2015  2016  2017  2018  2019  2019(1) 
  (in billions of Won)  

(in millions

of US$)

 

Assets

      

Cash and cash equivalents

 6,644  7,591  6,908  6,748  6,393  US$5,532 

Financial assets at fair value through profit or loss (IFRS 9)

           6,126   8,069   6,983 

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

  5,133   5,651   5,843          

Financial assets at fair value through other comprehensive income

           18,063   27,731   23,999 

Available-for-sale financial assets

  17,171   20,818   15,353          

Securities at amortized cost

           22,933   20,321   17,586 

Held-to-maturity financial assets

  13,622   13,910   16,749          

Loans and other financial assets at amortized cost

           282,458   293,718   254,191 

Loans and receivables

  244,842   258,393   267,106          

Investments in joint ventures and associates

  644   439   417   362   806   698 

Investment properties

  351   358   371   378   280   243 

Premises and equipment

  2,471   2,458   2,478   2,450   3,365   2,912 

Intangible assets and goodwill

  420   484   519   598   844   731 

Assets held for sale

  18   2   49   18   11   9 

Net defined benefit assets

              3   2 

Current tax assets

  7   6   5   21   47   41 

Deferred tax assets

  210   232   280   59   39   34 

Derivative assets (designated for hedging)

  183   141   59   36   121   105 

Other assets(2)

  143   200   158   197   233   202 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total assets

 291,859  310,683  316,295  340,447  361,981  US$313,268 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Liabilities

      

Financial liabilities at fair value through profit or loss (IFRS 9)

       2,283  2,958  US$2,560 

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

  3,461   3,803   3,428          

Deposits due to customers

  209,142   221,020   234,695   248,691   264,686   229,066 

Borrowings

  20,034   18,770   14,785   16,203   18,999   16,442 

Debentures

  21,899   23,566   27,869   28,736   30,858   26,705 

Provisions

  517   429   410   391   444   384 

Net defined benefit liability

  99   65   43   173   92   80 

Current tax liabilities

  109   171   233   159   183   158 

Deferred tax liabilities

  19   22   23   18   134   116 

Derivative liabilities (designated for hedging)

     7   68   51   7   6 

Other financial liabilities(3)

  16,964   21,985   13,892   21,443   17,707   15,324 

Other liabilities(4)

  305   299   284   346   420   365 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total liabilities

 272,549  290,137  295,730  318,494  336,488  US$291,206 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Equity

      

Owners’ equity

      

Capital stock

 3,381  3,381  3,381  3,381  3,611  US$3,125 

Hybrid securities

  3,334   3,575   3,018   3,162   998   863 

Capital surplus

  294   286   286   286   626   542 

Other equity(5)

  (1,547  (1,468  (1,939  (2,214  (2,249  (1,947

Retained earnings

  13,726   14,612   15,620   17,125   18,525   16,032 

Non-controlling interests

  122   160   199   213   3,982   3,447 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total equity

 19,310  20,546  20,565  21,953  25,493  US$22,062 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total liabilities and equity

 291,859  310,683  316,295  340,447  361,981  US$313,268 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

(1)

Won amounts are expressed in U.S. dollars at the rate of ₩1,155.5 to US$1.00, the noon buying rate in effect on December 31, 2019 as quoted by the Federal Reserve Bank of New York in the United States.

(2)

For a description of “other assets,” see Note 19 of the notes to our consolidated financial statements.

(3)

For a description of “other financial liabilities,” see Note 25 of the notes to our consolidated financial statements.

(4)

For a description of “other liabilities,” see Note 25 of the notes to our consolidated financial statements.

(5)

For a description of “other equity,” see Note28-(1) of the notes to our consolidated financial statements.

 

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Profitability Ratios and Other Data

 

   Year ended December 31, 
   2015  2016  2017  2018  2019 
   (in billions of Won except percentages) 

Return on average assets(1)

   0.37  0.41  0.49  0.62  0.53

Return on average equity(2)

   5.62   6.26   7.25   9.36   9.00 

Net interest spread(3)

   1.67   1.65   1.69   1.74   1.66 

Net interest margin(4)

   1.74   1.71   1.74   1.80   1.74 

Cost-to-income ratio(5)

   66.22   66.48   60.79   59.98   59.56 

Average owners’ equity as a percentage of average total assets

   6.63   6.60   6.71   6.67   6.86 

Total revenue(6)

  10,795  10,675  10,833  11,752  12,532 

Operating expense(7)

   8,478   8,267   7,891   8,663   9,358 

Operating margin(8)

   2,317   2,408   2,942   3,089   3,174 

Operating margin as a percentage of total revenue

   21.46  22.56  27.16  26.28  25.33

 

(1)

Represents net income attributable to owners as a percentage of average total assets. Average balances are based on daily balances for Woori Bank and on quarterly balances for all of our other subsidiaries and our structured companies.

(2)

Represents net income attributable to owners as a percentage of average owners’ equity. Average balances are based on daily balances for Woori Bank and on quarterly balances for all of our subsidiaries and our structured companies.

(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 ofnon-interest expense (excluding impairment losses due to credit loss) to the sum of net interest income andnon-interest income.

(6)

Represents the sum of interest income, dividend income, fees and commissions income, net gain (loss) on financial instruments at fair value through profit or loss, net gain on financial assets at fair value through other comprehensive income and net gain arising on financial assets at amortized cost (or net gain (loss) onavailable-for-sale financial assets).

The following table shows how total revenue is calculated:

 

   Year ended December 31, 
   2015  2016  2017  2018   2019 
   (in billions of Won) 

Interest income

  8,698  8,512  8,551  9,684   10,577 

Fees and commissions income

   1,757   1,865   2,069   1,681    1,709 

Dividend income

   103   185   125   91    108 

Net gain on financial instruments at fair value through profit or loss (IFRS 9)

            214    25 

Net gain (loss) on financial instruments at fair value through profit or loss (IAS 39)

   240   114   (105       

Net gain on financial assets at fair value through other comprehensive income

            2    11 

Net gain (loss) onavailable-for-sale financial assets

   (3  (1  193        

Net gain arising on financial assets at amortized cost

            80    102 
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Total revenue

  10,795  10,675  10,833  11,752   12,532 
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

 

(7)

Represents interest expense, fees and commissions expense, general and administrative expense and other net operating expense, excluding impairment losses due to credit loss of ₩966 billion, ₩834 billion, ₩785 billion, ₩330 billion and ₩374 billion for 2015, 2016, 2017, 2018 and 2019, respectively.

 

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The following table shows how operating expense is calculated:

 

   Year ended December 31, 
   2015   2016   2017   2018   2019 
   (in billions of Won) 

Interest expense

  3,936   3,492   3,330   4,033   4,683 

Fees and commissions expense

   781    928    999    611    606 

General and administrative expense

   3,151    3,479    3,531    3,624    3,766 

Other net operating expenses

   610    368    31    395    303 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expense

  8,478   8,267   7,891   8,663   9,358 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(8)

Represents total revenue less operating expense.

Asset Quality Data

 

   As of December 31, 
   2015  2016  2017  2018  2019 
   (in billions of Won, except percentages) 

Total loans(1)

  227,169  236,801  252,793  262,034  271,993 

Totalnon-performing loans(2)

   2,909   2,080   1,853   1,329   1,157 

Other impaired loans not included innon-performing loans

   339   335   374   292   229 

Totalnon-performing loans and other impaired loans

   3,248   2,415   2,227   1,621   1,386 

Total allowance for credit losses

   2,051   1,851   1,770   1,778   1,575 

Non-performing loans as a percentage of total loans

   1.28  0.88  0.73  0.51  0.43

Non-performing loans as a percentage of total assets

   1.00   0.67   0.59   0.39   0.32 

Totalnon-performing loans and other impaired loans as a percentage of total loans

   1.43   1.02   0.88   0.62   0.51 

Allowance for credit losses as a percentage of total loans

   0.90   0.78   0.70   0.68   0.58 

 

(1)

Not including due from banks and other financial assets (or other receivables), and prior to deducting allowance for credit losses and present value discount or reflecting deferred origination costs.

(2)

Defined as those loans that are past due by 90 days or more or classified as substandard or below based on the Financial Services Commission’s asset classification criteria. See “Item 4.B. Business Overview—Assets and Liabilities—Asset Quality of Loans—Loan Classifications.”

 

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Selected Financial Information

Average Balances and Related Interest

The following tables show our average balances and interest rates for the past three years:

 

  Year ended December 31, 
  2017  2018  2019 
  Average
Balance(1)
  Interest
Income(2)
  Average
Yield
  Average
Balance(1)
  Interest
Income(2)
  Average
Yield
  Average
Balance(1)
  Interest
Income(2)
  Average
Yield
 
  (in billions of Won, except percentages) 

Assets

         

Interest-earning assets

         

Due from banks

 15,594  83   0.53 16,027  113   0.71 16,045  141   0.88

Loans(3)

         

Commercial and industrial

  95,349   3,141   3.29   104,269   3,437   3.30   110,291   3,604   3.27 

Trade financing

  12,155   240   1.97   11,916   315   2.64   11,112   295   2.65 

Lease financing(4)

  35   1   3.73   111   4   3.52   191   2   3.92 

Other commercial

  9,064   211   2.33   11,038   270   2.45   9,460   243   2.57 

General purpose household(5)

  66,420   2,287   3.44   67,042   2,647   3.95   71,413   2,928   4.10 

Mortgage

  47,545   1,405   2.96   48,445   1,559   3.22   53,296   1,717   3.22 

Credit cards(2)

  6,772   551   8.14   7,445   600   8.06   7,358   655   8.90 
 

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

  

Total loans

  237,340   7,836   3.30   250,266   8,832   3.53   263,121   9,444   3.59 

Securities

         

Trading(6)

  2,712   53   1.95   3,955   54   1.37   4,091   51   1.25 

Investment(7)

  32,881   548   1.67   32,404   657   2.03   43,568   911   2.09 
 

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

  

Total securities

  35,593   601   1.69   36,359   711   1.96   47,659   962   2.02 

Other

  11,164   31   0.28   11,990   28   0.23   12,809   30   0.23 
 

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

  

Total average interest earning assets

  299,691   8,551   2.85   314,642   9,684   3.08   339,634   10,577   3.11 
 

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

  

Total averagenon-interest earning assets

  11,104         11,144         15,428       
 

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

  

Total average assets

 310,795  8,551   2.75 325,786  9,684   2.97 355,062  10,577   2.98
 

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

  

 

  Year ended December 31, 
  2017  2018  2019 
  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

         

Interest-bearing liabilities

         

Deposits due to customers

         

Demand deposits

 8,319  52   0.63 8,512  51   0.60 8,213  35   0.43

Time and savings deposits

  186,277   2,008   1.08   196,806   2,418   1.23   211,732   2,814   1.33 

Certificates of deposit

  4,553   78   1.71   5,091   104   2.04   4,760   105   2.21 

Other deposits

  24,444   242   0.99   26,254   344   1.31   28,930   471   1.63 
 

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

  

Total deposits

  223,593   2,380   1.06   236,663   2,917   1.23   253,635   3,425   1.35 

Borrowings

  17,669   238   1.35   15,752   307   1.95   19,258   383   1.99 

Debentures

  25,865   639   2.47   27,613   720   2.61   29,536   777   2.63 

Other

  19,037   73   0.38   20,146   89   0.44   21,426   98   0.46 
 

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

  

Total average interest-bearing liabilities

  286,164   3,330   1.16   300,174   4,033   1.34   323,855   4,683   1.45 
 

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

  

Total averagenon-interest-bearing liabilities

  3,767         3,896         6,855       
 

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

  

Total average liabilities

  289,931   3,330   1.15   304,070   4,033   1.33   330,710   4,683   1.42 
 

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

  

Total average equity

  20,864         21,716         24,352       
 

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

  

Total average liabilities and equity

 310,795  3,330   1.07 325,786  4,033   1.24 355,062  4,683   1.32
 

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

  

 

(1)

Average balances are based on daily balances for Woori Bank and on quarterly balances for all of our other subsidiaries and our structured companies.

 

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(2)

Interest income from credit cards is derived from interest on credit card loans and credit card installment purchases.

(3)

Not including other financial assets (or other receivables), and prior to deducting allowance for credit losses and present value discount or reflecting deferred origination costs.

(4)

Includes automobile lease financing to consumer borrowers.

(5)

Includes home equity loans.

(6)

Includes financial assets at fair value through profit or loss.

(7)

Includes financial assets at fair value through other comprehensive income and securities at amortized cost (oravailable-for-sale financial assets andheld-to-maturity financial assets).

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 2018 compared to 2017 and 2019 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.

 

   2018 vs. 2017
Increase/(decrease)
due to changes in
  2019 vs. 2018
Increase/(decrease)
due to changes in
 
   Volume  Rate  Total  Volume  Rate  Total 
   (in billions of Won) 

Interest-earning assets

  

Due from banks

  2  28  30    28  28 

Loans(1)

       

Commercial and industrial

   293   3   296   199   (32  167 

Trade financing

   (5  80   75   (21  1   (20

Lease financing(2)

   3      3   3   (5  (2

Other commercial

   46   13   59   (39  12   (27

General purpose household(3)

   21   339   360   173   108   281 

Mortgage

   27   127   154   156   2   158 

Credit cards

   55   (6  49   (7  62   55 

Securities

       

Trading(4)

   24   (23  1   2   (5  (3

Investment(5)

   (8  117   109   227   27   254 

Other

   2   (5  (3  2      2 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total interest income

  460  673  1,133  695  198  893 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Interest-bearing liabilities

       

Deposits due to customers

       

Demand deposits

  1  (2 (1 (2 (14 (16

Time and savings deposits

   114   296   410   184   212   396 

Certificates of deposit

   9   17   26   (7  8   1 

Other deposits

   18   84   102   35   92   127 

Borrowings

   (26  95   69   68   8   76 

Debentures

   43   38   81   50   7   57 

Other

   4   12   16   6   3   9 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total interest expense

  163  540  703  334  316  650 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net interest income

  297  133  430  361  (118 243 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

(1)

Not including other financial assets (or other receivables) and prior to deducting allowance for credit losses and present value discount or reflecting deferred origination costs.

(2)

Includes automobile lease financing to consumer borrowers.

(3)

Includes home equity loans.

 

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(4)

Includes financial assets at fair value through profit or loss.

(5)

Includes financial assets at fair value through other comprehensive income and securities at amortized cost (oravailable-for-sale financial assets andheld-to-maturity financial assets).

 

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 corporate credit portfolio

The largest portion of our exposure is to small- andmedium-sized enterprises, and financial difficulties experienced by companies in this segment may result in a deterioration of our asset quality and have an adverse impact on us.

Our loans to small- andmedium-sized enterprises amounted to ₩74,906 billion, or 29.6% of our total loans, as of December 31, 2017, ₩79,371 billion, or 30.3 % of our total loans, as of December 31, 2018 and ₩85,367 billion, or 31.4% of our total loans, as of December 31, 2019. As of December 31, 2019,Won-denominated loans to small- andmedium-sized enterprises that were classified as substandard or below were ₩409 billion, representing 0.5% of such loans to those enterprises.See “Item 4.B. Business Overview—Corporate Banking—Small andMedium-Sized Enterprise Banking.” We recorded charge-offs of ₩185 billion in respect of ourWon-denominated loans to small- andmedium-sized enterprises in 2019, compared to charge-offs of ₩199 billion in 2018 and ₩325 billion in 2017. According to data compiled by the Financial Supervisory Service, the industry-wide delinquency ratios forWon-denominated loans to small- andmedium-sized enterprises increased in 2018 but decreased in 2019. The delinquency ratio for small- andmedium-sized enterprises 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 loans denominated in Won was 0.5% as of December 31, 2017, 0.5% as of December 31, 2018 and 0.4% as of December 31, 2019.Our delinquency ratio may increase in 2020 as a result of, among other things, adverse changes in economic conditions in Korea and globally. See “—Other risks relating to our business—Unfavorable changes in the global financial markets could adversely affect our results of operations and financial condition.” Accordingly, we may be required to take measures to decrease our exposures to these customers.

In light of the deteriorating financial condition and liquidity position of small- andmedium-sized enterprises in Korea as a result of the global financial crisis commencing in the second half of 2008, the Korean government introduced measures intended to encourage Korean banks to provide financial support to small- andmedium-sized enterprise borrowers. For example, the Korean government requested Korean banks, including Woori Bank, to establish a “fast track” program to provide liquidity assistance to small- andmedium-sized enterprises on an expedited basis. Under the “fast track” program established by Woori Bank, liquidity assistance is provided to small- andmedium-sized enterprise borrowers applying for such assistance, in the form of new short-term loans or maturity extensions or interest rate adjustments with respect to existing loans, after expedited credit review and approval. The overall prospects for the Korean economy in 2020 and beyond remain uncertain, especially in light of theCOVID-19 pandemic affecting many countries worldwide, including Korea, 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- andmedium-sized enterprises. For example, the Financial Services Commission requested 14 Korean banks, including Woori Bank, to extend speciallow-rate loans to small merchants affected by theCOVID-19 pandemic beginning in April 2020. The aggregate amount of such loans extended by the Korean banks is expected to be ₩3.5 trillion, of which ₩261 billion was provided by Woori Bank as of April 23, 2020. In addition, Korean financial regulatory authorities, including the Financial Services Commission and the Financial Supervisory Service, adopted guidelines for

 

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Korean banks to extend loan terms and defer interest payments with respect to small- and medium sized enterprises and small merchants affected by theCOVID-19 pandemic starting from April 2020. We believe that, to date, our participation in suchgovernment-led initiatives has not caused us to extend a material amount of credit that we would not have otherwise extended nor materially impacted our results of operations and financial condition in general. The aggregate amount of outstanding small- andmedium-sized enterprise loans made by us under the “fast track” program was ₩103.4 billion as of December 31, 2019, which represented 0.13% of our total small- andmedium-sized enterprise loan portfolio as of such date. Furthermore, loans made by us under the “fast track” program are partially guaranteed by the Korean government’s public financial institutions, including the Korea Credit Guarantee Fund and the Korea Technology Finance Corporation. However, there can be no assurance that our future participation in suchgovernment-led initiatives would not lead us to extend credit to small- andmedium-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- andmedium-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- andmedium-sized enterprises resulting from suchgovernment-led initiatives may have a material adverse effect on our results of operations and financial condition.

Many small- andmedium-sized enterprises represent sole proprietorships or very small businesses dependent on a relatively limited number of suppliers or customers and tend to be affected by fluctuations in the Korean and global economy to a greater extent than large corporate borrowers. In addition, small- andmedium-sized enterprises often maintain less sophisticated financial records than large corporate borrowers. Therefore, it is generally more difficult for us to judge the level of risk inherent in lending to these enterprises, as compared to large corporations. However, in light of theCOVID-19 pandemic, the Bank of Korea announced the early implementation of Basel III standards relating to lowering the risk weight of loans extended to small- andmedium-sized enterprises with no credit rating from 100% to 85% starting from April 2020 in an effort to boost such lending.

In addition, many small- andmedium-sized enterprises have close business relationships with large corporations in Korea, primarily as suppliers. Any difficulties encountered by those largecorporations would likely hurt the liquidity and financial condition of related small- andmedium-sized enterprises, including those to which we have exposure, also resulting in an impairment of their ability to repay loans.

Financial difficulties experienced by small- andmedium-sized enterprises as a result of, among other things, adverse changes in domestic and global economic conditions, could have an adverse impact on the ability of small- andmedium-sized enterprises to make payments on their loans. For example, the ongoingCOVID-19 pandemic has had a significant adverse impact on the Korean and global economy, including disruptions in the supply chains, declines in the sales and deterioration in the financial conditions of small- andmedium-sized enterprises. See “—Other risks relating to our business—The recent global outbreak of COVID-19 may adversely affect our business, financial condition or results of operations.” In addition, 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, 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 adversely impact us.

As of December 31, 2019, the total amount of loans provided by us to construction, shipbuilding and shipping companies in Korea amounted to ₩4,051 billion, ₩420 billion and ₩413 billion, or 1.5%, 0.2% and 0.2% of our total loans, respectively.We also have other exposures to Korean construction, shipbuilding and shipping companies, including in the form of guarantees extended for the benefit of such companies and debt and equity securities of such companies held by us.In the case of construction companies, we have potential exposure in the form of guarantees provided to us by general contractors with respect to financing extended by us for residential and commercial real estate development projects, as well as commitments to purchase asset-

 

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backed securities secured by the assets of companies in the construction industry and other commitments we enter into relating to project financing for such real estate projects which may effectively function as guarantees. 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 adverse conditions in the global economy and the resulting slowdown in global trade. 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 Korean construction, shipbuilding and shipping industries, which were disproportionately impacted by adverse domestic and global economic developments, 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 certain companies in Korea, pursuant to which a number of companies were selected by such financial institutions for restructuring in the form of workout, liquidation or court receivership. However, there is no assurance that these measures will be successful in stabilizing the Korean construction, shipbuilding and shipping industries.

The allowance for credit losses 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 for credit loss, which could adversely impact our results of operations and financial condition. Furthermore, although a portion of our loans to construction, shipbuilding and shipping companies are secured by collateral, such collateral may not be sufficient to cover uncollectible amounts in respect of such loans.

A large portion of our 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, 2019, our 20 largest exposures to corporate borrowers (including loans, debt and equity securities, credit-related commitments and other exposures) totaled ₩52,634 billion, which represented 12.0% of our total exposures. As of that date, our single largest corporate exposure was to Korea Development Bank, to which we had outstanding credits in the form of debt securities of ₩11,917 billion and loans in Won of ₩6 billion, representing 2.7% of our total exposures in the aggregate. Aside from exposure to the Korean government and government-related agencies, our next largest exposure was to KB Securities, to which we had outstanding exposure of ₩1,140 billion representing 0.3% of our total exposures. Any deterioration in the financial condition of our large corporate borrowers, including those in industries particularly affected by theCOVID-19 pandemic to which we have significant exposures such as the hotel, leisure and transportation industries, the retail and wholesale industries and the manufacturing industry, may require us to record substantial additional allowances and may have a material adverse impact on our results of operations and financial condition.

 

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We have exposure to the largest Korean commercial conglomerates, known as “chaebols,” and, as a result, financial difficulties of chaebols may have an adverse impact on us.

Of our 20 largest corporate exposures as of December 31, 2019, five were to companies that were members of the 28 largestchaebolsin Korea.As of that date, the total amount of our exposures to the 28 largestchaebols was ₩19,454 billion, or 4.4% of our total exposures.If the credit quality of our exposures tochaebols declines as a result of financial difficulties they experience or for other reasons, we could incur additional provisions for credit loss, which would hurt our results of operations and financial condition. See “Item 4.B. Business Overview—Assets and Liabilities—Loan Portfolio—Exposure to Chaebols.”

The allowances we have established against these exposures may not be sufficient to cover all future losses arising from these exposures. In addition, in the case of companies that are in or in the future enter into workout, restructuring, reorganization or liquidation proceedings, our recoveries from those companies may be limited. We may, therefore, experience future losses with respect to these exposures.

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

As of December 31, 2019, our credit exposures to companies that were in workout or corporate restructuring amounted to ₩274 billion or 0.1% of our total credit exposures, of which ₩227 billion or 82.8% was classified as substandard or below and substantially all of which was classified as impaired.As of the same date, our allowance for credit losses on these credit exposures amounted to ₩124 billion, or 45.3% of these exposures.These allowances may not be sufficient to cover all future losses arising from our credit 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 ofdebt-to-equity conversions). Including such securities, our exposures as of December 31, 2019 to companies in workout or restructuring amounted to ₩275 billion, or 0.1% of our total exposures.Our exposures to such companies may also increase in the future, including as a result of adverse conditions in the Korean economy. In addition, in the case of borrowers that are or become subject to workout, we may be forced to restructure our credits pursuant to restructuring plans approved by other creditor financial institutions of the borrower, or to dispose of our credits to other creditors on unfavorable terms, which may adversely affect our results of operations and financial condition.

Risks relating to our consumer credit portfolio

We may experience increases in delinquencies in our consumer loan and credit card portfolios.

In recent years, consumer debt has increased rapidly in Korea. Our portfolio of consumer loans amounted to ₩109,290 billion as of December 31, 2017, ₩117,096 billion as of December 31, 2018 and ₩124,003 billion as of December 31, 2019.Our credit card portfolio amounted to ₩6,827 billion as of December 31, 2017, ₩8,051 billion as of December 31, 2018 and ₩8,399 billion as of December 31, 2019.As of December 31, 2019, our consumer loans and credit card receivables represented 45.6%and 3.1%of our total lending, respectively.See “Item 4.B. Business Overview—Consumer Banking—Lending Activities” and “Item 4.B. Business Overview—Credit Cards—Products and Services.”

The growth in our consumer loan portfolio in recent years, together with adverse changes in economic conditions in Korea and globally, may lead to increasing delinquencies and a deterioration in asset quality. The amount of our consumer loans classified as substandard or below was ₩276 billion (or 0.3% of our consumer loan portfolio) as of December 31, 2017, ₩309 billion (or 0.3% of our consumer loan portfolio) as of December 31, 2018 and ₩314 billion (or 0.3% of our consumer loan portfolio) as of December 31, 2019.We charged off consumer loans amounting to ₩217 billion in 2019, as compared to ₩204 billion in 2018 and ₩147 billion in 2017, and recorded provisions for credit loss in respect of consumer loans of ₩163 billion in 2019, as compared to ₩192 billion in 2018 and ₩152 billion in 2017. Within our consumer loan portfolio, the outstanding balance of general purpose household loans, which, unlike mortgage or home equity loans, are often

 

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unsecured and therefore tend to carry a higher credit risk, amounted to ₩31,108 billion, or 28.5% of our total outstanding consumer loans, as of December 31, 2017, ₩33,486 billion, or 28.6% of our total outstanding consumer loans, as of December 31, 2018 and ₩35,981 billion, or 29.0% of our total outstanding consumer loans, as of December 31, 2019.

In our credit card segment, outstanding balances overdue by more than one month amounted to ₩88 billion, or 1.3% of our credit card receivables, as of December 31, 2017, ₩110 billion, or 1.4% of our credit card receivables, as of December 31, 2018 and ₩110 billion, or 1.3% of our credit card receivables, as of December 31, 2019.In line with industry practice, we have restructured a portion of our delinquent credit card account balances as loans. As of December 31, 2019, these restructured loans amounted to ₩165 billion, or 2.0% of our credit card balances.Because these restructured loans are not initially recorded as being delinquent, our delinquency ratios do not fully reflect all delinquent amounts relating to our credit card balances. Including all restructured loans, outstanding balances overdue by more than one month accounted for 3.2% of our credit card balances as of December 31, 2019.We charged off credit card balances amounting to ₩281 billion in 2019, as compared to ₩243 billion in 2018 and ₩228 billion in 2017, and recordedprovisions for credit loss in respect of credit card balances of ₩236 billion in 2019, as compared to ₩213 billion in 2018 and ₩204 billion in 2017.Delinquencies may further increase in the future as a result of, among other things, adverse economic conditions in Korea, additional government regulation or the inability of Korean consumers to manage increased household debt.

A deterioration of the asset quality of our consumer loan and credit card portfolios would require us to record increased provisions for credit loss and charge-offs and adversely affect our financial condition and results of operations. In addition, our large exposure to consumer loans means that we are exposed to changes in economic conditions affecting Korean consumers. Accordingly, economic difficulties in Korea that hurt those consumers could result in further deterioration in the credit quality of our consumer loan and credit card portfolios. For example, the severe impact of theCOVID-19 pandemic on Korea’s economy may disrupt the business, activities and operations of our consumers, which in turn could result in a significant decrease in the number of financial transactions or the inability of our consumers to meet existing payment or other obligations to us. In addition, a rise in unemployment or an increase in interest rates 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 addition, we are exposed to changes in regulations and policies on consumer lending by the Korean government, which may adopt measures to restrict consumer lending or encourage financial institutions to provide financial support to certain types of retail borrowers. In 2014 and 2015, the Korean government implemented several measures to encourage consumer spending and revive the housing market in Korea, including loosening regulations on mortgage lending, which contributed to an increase in our portfolio of consumer loans. However, the Korean government introduced various measures from the second half of 2016 to 2019 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 consumer loan and credit card portfolios.

In light of adverse conditions in the Korean economy affecting consumers, in March 2009, the Financial Services Commission requested Korean banks, including Woori Bank, to establish a“pre-workout program,” including a credit counseling and recovery service, for retail borrowers with outstanding short-term debt. Under thepre-workout program, which has been in operation since April 2009, maturity extensions and/or interest reductions are provided to retail borrowers with total loans of less than ₩1.5 billion (consisting of no more than ₩500 million of unsecured loans and ₩1 billion of secured loans) who are in arrears on their payments for more than 30 days but less than 90 days or for retail borrowers with an annual income of ₩40 million or less who have been in arrears on their payments for 30 days or more on an aggregate basis for the 12 months prior to their application, among others. The aggregate amount of consumer credit (including credit card receivables) we provided which became subject to thepre-workout program in 2019 was ₩43.7 billion. While we believe that

 

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ouroperation of thepre-workout program has not had a material impact on the overall credit quality of our consumer loan and credit card portfolios to date, our participation in suchgovernment-led initiatives to provide financial support to retail borrowers may lead us to offer credit terms for such borrowers that we would not otherwise offer in the absence of such initiatives, which may have an adverse effect on our results of operations and financial condition.

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

A substantial portion of our consumer 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 70% of the appraised value of collateral (except in areas of high speculation designated by the government where we generally limit our lending to 40% of the appraised value of collateral)and to periodicallyre-appraise our collateral, a downturn in the real estate markets in Korea may result in a decline 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 declines in the value of the real estate or other collateral securing our consumer 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 record additional allowances for credit losses.

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 decrease the value of 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 potential losses.

Risks relating to our financial holding company structure and strategy

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

We were established as a new financial holding company in January 2019 pursuant to a “comprehensive stock transfer” under Korean law, following the completion of which Woori Bank, Woori FIS Co., Ltd., Woori Finance Research Institute Co., Ltd., Woori Credit Information Co., Ltd., Woori Fund Services Co., Ltd. and Woori Private Equity Asset Management Co., Ltd. became our wholly-owned subsidiaries. See “Item 4A. History and Development of the Company—Establishment of Woori Financial Group.”

One of our principal strategies is to take advantage of our financial holding company structure to become a comprehensive financial services provider capable of developing and cross-selling a diverse range of products and services to our large existing base of retail and corporate banking customers. An intended benefit of our financial holding company structure is that it enhances our ability to engage in mergers and acquisitions which we may decide to pursue as part of our strategy. Accordingly, we may consider acquiring or merging with other financial institutions, particularly in thenon-banking sector, to achieve more balanced growth and further diversify our revenue base. We may also continue to seek opportunities to expand our operations in markets outside Korea. See “Item 4.B. Business Overview—Strategy” and “—We may not be able to successfully execute our overseas expansion strategy.”

The integration of 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 place a burden on 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 may be blocked, delayed or reduced as a result of many factors, some of which may be outside our control. These factors include:

 

  

competition from other financial institutions, as well as private equity firms and other potential acquirers, in Korea and elsewhere in terms of identifying and winning bids for attractive merger and

 

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acquisition targets in the financial industry, including thenon-banking sector, which may make it challenging for us to successfully acquire, or which may require us to pay a high acquisition price for, such targets;

 

  

difficulties in integrating the diverse activities and operations of our subsidiaries or any companies we may 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;

 

  

failure to leverage our financial holding company structure to realize operational efficiencies and to cross-sell multiple products and services;

 

  

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, sales of interests in our subsidiaries and 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 and capital adequacy. Our ability to meet our obligations to our direct creditors and employees and our other liquidity needs and regulatory requirements at the holding company level depends on timely and adequate distributions from our subsidiaries and our ability to sell our securities or obtain credit from our lenders.

The ability of our subsidiaries to pay dividends to us depends on their financial condition and operating results. In the future, our subsidiaries may enter into agreements, such as credit agreements with lenders or indentures relating to high-yield or subordinated debt instruments, that impose restrictions on their ability to make distributions to us, and the terms of future obligations and the operation of Korean law could prevent our subsidiaries from making sufficient distributions to us to allow us to make payments on our outstanding obligations. See “—As a financial holding company, we largely 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, which may disrupt our operations at the holding company level.

In addition, our creditors will generally not be able to assert claims on the assets of our subsidiaries. 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.

 

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As a financial holding company, we largely 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. The ability of our subsidiaries to pay dividends may be subject to regulatory restrictions to the extent that paying dividends would impair their respectivenon-consolidated profitability, financial condition or other cash flow needs. 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’spaid-in capital and certain mandatory legal reserves from its net assets, in each case as of the end of the prior annual 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 totalpaid-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.

The implementation of the Korean government’s privatization plan may have an adverse effect on us and your interests as a shareholder.

In June 2013, the Korean government, through the Public Funds Oversight Committee of the Financial Services Commission, announced an updated plan to privatize Woori Finance Holdings, Woori Bank’s former parent company, and its former subsidiaries. The privatization plan provided for the segregation of such entities into three groups and the disposal of the Korean government’s interest in these entities held through the Korea Deposit Insurance Corporation, or the KDIC, in a series of transactions, many of which have been completed. Such transactions included the following:

 

  

Kwangju Bank and Kyongnam Bank.  In May 2014, Woori Finance Holdings established KJB Financial Group and KNB Financial Group through aspin-off of its businesses related to the holding of the shares and thereby controlling the business operations of Kwangju Bank and Kyongnam Bank, respectively. As a result of suchspin-off, KJB Financial Group became the owner of the shares of Kwangju Bank previously held by Woori Finance Holdings and KNB Financial Group became the owner of the shares of Kyongnam Bank previously held by Woori Finance Holdings. Woori Finance Holdings no longer owned any shares of Kwangju Bank or Kyongnam Bank, and neither they nor their new holding companies were its subsidiaries, after the spin-off. Following suchspin-off, each of these banks was merged with its holding company, and in October 2014, the KDIC sold its 56.97% ownership interest in Kwangju Bank and Kyongnam Bank to JB Financial Group and BS Financial Group, respectively.

 

  

Woori Investment & Securities and Other Subsidiaries.  In March 2014, Woori Finance Holdings sold its 52.0% ownership interest in Woori Financial to KB Financial Group. In May 2014, Woori Finance Holdings sold its 100.0% ownership interest in Woori Asset Management to Kiwoom Securities and sold its 100.0% ownership interest in Woori F&I to Daishin Securities. In June 2014, Woori Finance Holdings sold its 37.9% ownership interest in Woori Investment & Securities, its 51.6% ownership interest in Woori Aviva Life Insurance and its 100.0% ownership interest in Woori FG Savings Bank to NongHyup Financial Group in a collective sale. As a result of such sales, Woori Investment &

 

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Securities, Woori Asset Management, Woori Aviva Life Insurance, Woori FG Savings Bank, Woori F&I and Woori Financial were no longer subsidiaries of Woori Finance Holdings, and it no longer owned any shares in such former subsidiaries.

 

  

Woori Bank.  In November 2014, Woori Finance Holdings merged with and into Woori Bank. As a result of the merger, the other former subsidiaries of Woori Finance Holdings, including Woori Card, Woori Private Equity, Woori FIS, Woori Investment Bank and Woori Finance Research Institute, became Woori Bank’s subsidiaries. In December 2014, the KDIC sold 40,143,022 shares of Woori Bank’s common stock (representing 5.9% of its outstanding common stock) in a private sale in Korea. In addition, in December 2016 and January 2017, the KDIC sold an aggregate of 200,685,395 shares of Woori Bank’s common stock (representing 29.7% of its outstanding common stock) in stakes ranging from 3.7% to 6.0% to seven financial companies through a bidding process. Pursuant to a commitment made by the KDIC in connection with such bidding process, five persons, each nominated by one of the winning bidders, were elected as new outside directors at an extraordinary general meeting of Woori Bank’s shareholders held in December 2016. In December 2018, five persons, each nominated by one of such winning bidders, were elected at an extraordinary general meeting of Woori Bank’s shareholders to serve as our outside directors upon our establishment. See “Item 6.A. Directors and Senior Management—Board of Directors—Outside Directors.” In 2017, pursuant to a series of transactions related to call options previously granted in connection with the KDIC’s sale of Woori Bank’s common stock in December 2014, the KDIC sold an aggregate of 19,852,364 shares of Woori Bank’s common stock (representing 2.94% of its outstanding common stock). As a result of such transactions, the KDIC’s ownership interest in Woori Bank was reduced to 18.43%.

See “Item 4.A. History and Development of the Company—Privatization Plan.” In connection with our establishment in January 2019 as a new financial holding company pursuant to a “comprehensive stock transfer” under Korean law, the KDIC received our common stock in exchange for the common stock of Woori Bank it owned and currently owns 17.25% of our outstanding common stock. We expect that the KDIC will sell all of such common stock in multiple transactions by 2022 in accordance with its plan that was approved by the Financial Services Commission in June 2019.

The implementation of the Korean government’s privatization plan, including the expected sale of the KDIC’s remaining ownership interest in us to third parties, is likely to have a significant impact on us. For example, the KDIC’s sale of its ownership interest in us to a small number of third parties may affect our business, management, strategy, capital structure and assets and liabilities and lead to diversion of management attention, a loss of customers and labor unrest. There is also no guarantee that such sale will not result in unintended adverse tax consequences for us and our subsidiaries, as well as our shareholders. See “—Risks relating to our common stock and ADSs—Future sales by the KDIC of the shares of our common stock it owns may result in adverse Korean tax consequences for you.” Accordingly, the implementation of the privatization plan may have a material adverse effect on the trading price of our common stock and American depositary shares, or ADSs, and your interests as a shareholder.

We may not be able to successfully execute our overseas expansion strategy.

As part of our business strategy, we have been seeking opportunities to expand our operations in markets outside Korea, including through the opening of additional overseas branches and offices as well as strategic acquisitions and investments, particularly in South and Southeast Asia. For example, we expanded our network of branches to India, where we established branches in Chennai, Gurgaon and Mumbai from 2012 to 2016. In October 2016, we acquired a 51% equity interest in Wealth Development Bank Corp., a thrift bank in the Philippines. In November 2016, we obtained a banking license to establish a local subsidiary in Vietnam, Woori Bank Vietnam, which commenced operations in January 2017 and currently operates 14 branches throughout the country. In June 2018, we acquired VisionFund (Cambodia) Ltd., a microfinance deposit-taking institution in Cambodia, which was renamed WB Finance Co., Ltd. In February 2020, with the approval of the Cambodian financial authorities, Woori Finance (Cambodia) Plc., a microfinance institution, merged with and into WB Finance Co., Ltd. Notwithstanding the foregoing, the expansion of our operations abroad may be difficult due to

 

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the presence of established competitors in the relevant local markets. In addition, overseas expansion and the management of international operations may require significant financial expenditures as well as management attention, and will subject us to the challenges of operating in an unfamiliar business environment with different regulatory, legal and taxation systems and political, economic and social risks. Accordingly, there is no guarantee that we will be successful in executing our overseas expansion strategy. The failure of our overseas expansion strategy could have an adverse impact on our business, results of operations and financial condition.

We may not generate sufficient additional fees to achieve our revenue diversification strategy.

An important element of our overall strategy is increasing our fee income in order to diversify our revenue base, in anticipation of greater competition and declining lending margins. Historically, our primary source of revenues has been net interest income from our banking operations at Woori Bank. To date, except for credit card, trust management, bancassurance and currency transfer fees (including foreign exchange-related commissions), and fees collected in connection with the operation of our investment funds and investment banking activities, we have not generated substantial fee income. We intend to develop new sources of fee income as part of our business strategy, including through our current investment banking and asset management businesses and mergers and acquisitions which we may decide to pursue through our financial holding company structure. See “Item 4.B. Business Overview—Strategy.” Although we, like many other Korean financial institutions, have begun to charge fees to our customers more regularly, customers may prove unwilling to pay additional fees, even in exchange for more attractive value-added services, and their reluctance to do so would 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 have an adverse impact on our ability to achieve this aspect of our strategy.

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 market has been and is likely to remain intense. Some of the financial institutions that we compete with are larger in terms of asset size and customer base and have longer operating histories as financial holding companies, greater financial resources or more specialized capabilities than us and our subsidiaries. In addition, in the area of our core banking operations, most Korean banks have been focusing on retail customers and small- andmedium-sized enterprises in recent years, although they have begun to generally increase their exposure to large corporate borrowers, and have been focusing on developing fee income businesses, including bancassurance and investment products, as increasingly important sources of revenue. In the area of credit cards, Korean banks and credit card companies have in the past engaged in aggressive marketing activities and made significant investments, contributing to some extent to lower profitability and asset quality problems previously experienced with respect to credit card receivables. The competition and market saturation resulting from this common focus may make it more difficult for us to secure retail, small- andmedium-sized enterprise and large corporate customers with the credit quality and on credit terms necessary to maintain or increase our income and profitability.

In addition, the following general regulatory reforms in the Korean financial industry have increased competition among banks and other 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.

 

  

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, investment funds and securities investment products, from a single integrated

 

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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.

 

  

In April 2019, the Financial Services Commission approved and is currently conducting test procedures for a financial regulatory sandbox, a framework set up to allow financial service providers to test new business models in a less regulated environment, as part of its efforts to work closely with the fintech sector and provide support to facilitate its development. In May 2019, we introduced a “drive-thru money exchange and withdrawal service” that is expected to allow our customers to exchange currencies and make withdrawals at drive-thru locations without having to visit a bank, which was approved by the Financial Services Commission for testing in the financial regulatory sandbox. In November 2019, we entered into an agreement with Shinsaegae Duty Free to provide foreign exchange drive-thru services on weekends, when banks are generally closed. Over 80 financial services have been similarly approved for such testing.

 

  

In December 2019, the Financial Services Commission launched an “open banking” system, which allows customers to view banking account information, regardless of institution, through a single mobile application. Such integrated system is expected to allow fintech firms to share payment networks with banks, thereby cutting transaction fees and encouraging the development of new payment services.

We expect such measures to intensify competition among financial institutions in Korea.

Furthermore, the introduction of Internet-only banks in Korea is expected to increase competition in the Korean banking industry. Internet-only banks generally operate without branches and conduct most of their operations through electronic means, which enable 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, in which Woori Bank owns 13.8% of the equity with voting rights, commenced operations. Kakao Bank, a mobile-only bank, commenced operations in July 2017. In December 2019, Toss Bank was granted a preliminary license by the Financial Services Commission to operate as an Internet-only bank and is expected to begin operations in July 2021 upon receiving final approval from the Financial Services Commission.

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, the subsequent merger of Hana Bank into Korea Exchange Bank in 2015, KB Financial Group’s acquisition of Hyundai Securities Co., Ltd. in 2016 and the subsequent merger of Hyundai Securities with and into KB Investment & Securities Co., Ltd. in 2016. 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. In 2014, pursuant to the implementation of the Korean government’s privatization plan with respect to Woori Finance Holdings and its former subsidiaries, Woori Financial, Woori Asset Management and Woori F&I were acquired by KB Financial Group, Kiwoom Securities and Daishin Securities, respectively, and Woori Investment & Securities, Woori Aviva Life Insurance and Woori FG Savings Bank were acquired by NongHyup Financial Group. In addition, in October 2014, the KDIC’s ownership interest in Kwangju Bank and Kyongnam Bank were acquired by JB Financial Group and BS Financial Group, respectively. See “Item 4.A. History and Development of the Company—Privatization Plan.” Furthermore, Orange Life Insurance, Ltd. (formerly known as ING Life Insurance Korea, Ltd.) became a wholly-owned subsidiary of Shinhan Financial Group following the acquisition of equity interests by Shinhan Financial Group in February 2019 and January 2020.

We expect that consolidation in the Korean financial industry will continue. Other financial institutions may seek to acquire or merge with other entities, and 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

 

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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.

Competition for customer deposits may increase, resulting in a loss of our deposit customers or an increase in our funding costs.

In recent years, we have faced increasing pricing pressure on deposit products from our competitors. If we do not continue to offer competitive interest rates to our deposit customers, we may lose their business. In addition, even if we are able to match our competitors’ pricing, doing so may result in an increase in our funding costs, which may have an adverse impact on our results of operations.

Other risks relating to our business

The recent global outbreak ofCOVID-19 may adversely affect our business, financial condition or results of operations.

COVID-19, an infectious disease caused by severe acute respiratory syndrome coronavirus 2, has spread globally and was declared a “pandemic” by the World Health Organization on March 11, 2020. The global outbreak ofCOVID-19 has led to global economic and financial disruptions and has adversely affected our business operations in recent months. Risks associated with a prolonged outbreak ofCOVID-19 may include:

 

  

an increase in defaults on loan payments from our customers who may not be able to meet payment obligations, which may lead to an increase in delinquency ratios and a deterioration in asset quality, resulting in increased charge-offs, higher provisioning and reduced interest and fee income;

 

  

decreases in interest rates worldwide (see “—An increase in interest rates would 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 could adversely affect us”);

 

  

depreciation of the Won against major foreign currencies, which may increase our costs in servicing foreign currency-denominated debt and result in foreign exchange losses (see “—Unfavorable changes in the global financial markets could adversely affect our results of operations and financial condition”);

 

  

impairments in the fair value of our investments in companies that may be adversely affected by the pandemic;

 

  

disruption in the normal operations of our business resulting from the contraction of the disease by our employees or customers, which may necessitate our employees to be quarantined and/or our offices or branches to be temporarily shut down; and

 

  

disruption resulting from the necessity for social distancing, including, for example, temporary arrangements for employees to work remotely, which may lead to a reduction in labor productivity.

While the exact nature and magnitude of the impact of the COVID-19 pandemic on our business, financial condition and results of operations are continuing to be assessed by our management, we believe that the COVID-19 pandemic has had a negative impact on our results of operations for the three months ended March 31, 2020.

It is not possible to predict the duration or the full magnitude of the overall harm that may result from the COVID-19 outbreak in the long term. In response to the outbreak, we and our subsidiaries have implemented various measures, both financial, such as offering extensions on the terms or discounts on the interest rates of certain loans and waiving ATM transaction fees in areas most affected by COVID-19 including Daegu and Gyeongsangbuk-do, and non-financial, such as installing acrylic transparent barriers in our branches and distributing masks to protect our customers and workforce. We have also established a group emergency management committee to accurately assess the relevant risks, proactively develop countermeasures and enhance reporting and communication systems on a group-wide basis. Notwithstanding such efforts, in the event that COVID-19 or other types of widespread infectious diseases cannot be effectively and timely contained, our business, financial condition, results of operations and cash flows may continue to be adversely affected.

 

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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 in 2020 and beyond remain uncertain. In recent years, the global financial markets have experienced significant volatility as a result of, among other things:

 

  

the occurrence of severe health epidemics, such as the ongoingCOVID-19 pandemic;

 

  

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

 

  

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

 

  

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

 

  

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

 

  

increased uncertainties resulting from the United Kingdom’s exit from the European Union; and

 

  

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

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 and has recently been subject to significant volatility as a result of the recentCOVID-19 pandemic. A depreciation of the Won will increase our cost 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 the deterioration in global and Korean economic conditions, there has been downward pressure on securities prices, including the stock prices of Korean and foreign companies in which we hold an interest. Notwithstanding the Korean government’s efforts to stabilize such volatility through the execution of a bilateral currency swap agreement with the U.S. Federal Reserve for the provision of US$60 billion in exchange forWon-denominated treasury bonds in March 2020 and the establishment of bond and stock market stabilization funds with the participation of Korean banks, such developments have 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 in joint ventures and associates.

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

We seek to monitor and manage our risk exposure through a standardized risk management system, encompassing a multi-tiered risk management governance structure under our Board Risk Management Committee, our centralized credit risk management system called the Credit Wizard system, reporting and monitoring systems, early warning systems 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.

 

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We have provided certain assets as collateral in connection with our secured borrowings and could be required to make payments and realize losses in the future relating to those assets.

We have provided certain assets as collateral for our secured borrowings in recent years. As of December 31, 2019, the aggregate amount of assets we had provided as collateral for our secured borrowings was ₩11,923 billion.These secured borrowings may take the form of asset securitization transactions, where we nominally sell our assets to a securitization vehicle that issues securities backed by those assets, although the assets remain on our statements of financial position. These secured borrowings are intended to be fully repaid through recoveries on collateral. Some of these nominal asset sales were with recourse, which means that if delinquencies arise with respect to such assets, we will be required to either repay a proportionate amount of the related secured borrowing (by reversing the nominal sale and repurchasing such assets) or compensate the securitization vehicle for any net shortfalls in its recoveries on such assets. If we are required to make payments on such assets, or to repay our secured borrowings on those assets and are unable to make sufficient recoveries on them, we may realize further losses on these assets.

An increase in interest rates would 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 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 1.25% in June 2016 amid deflationary concerns and interest rate cuts by central banks around the world. While 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, it again reduced its policy rate to 1.50% in June 2019 and 1.25% in October 2019 to address the sluggishness of the global and domestic economies. Moreover, in March 2020, the Bank of Korea further reduced its policy rate to an unprecedented 0.75% amid rising concerns of a potential global recession as a result of theCOVID-19 pandemic. All else being equal, 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 consumers. Rising interest rates may therefore require us tore-balance our asset portfolio and our liabilities in order to minimize the risk of potential mismatches and maintain our profitability. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk.” In addition, rising interest rate levels may adversely affect the Korean economy and the financial condition of our corporate and consumer 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 consumer and corporate loans bear interest at rates that adjust periodically based on prevailing market rates, a sustained increase in interest rates would increase the interest costs of our consumer and corporate borrowers and will adversely affect their ability to make payments on their outstanding loans.

Uncertainties regarding the possible discontinuation of the London Interbank Offered Rate, or LIBOR, or any other interest rate benchmark could have adverse consequences for market participants, including us.

In July 2017, the U.K. Financial Conduct Authority, or the FCA, which has regulatory authority with respect to LIBOR, announced that it does not intend to continue to encourage, or use its power to compel, panel banks to provide rate submissions for the determination of LIBOR beyond the end of 2021. It is possible that panel banks will continue to provide rate submissions, and that the ICE Benchmark Administration, the administrator of LIBOR, will continue to determine and announce LIBOR, on the current basis after 2021, if they are willing and able to do so. However, there is no guarantee that LIBOR will be determined and announced after 2021 on the current basis or at all.

Given the extensive use of LIBOR across financial markets, the transition away from LIBOR presents various risks and challenges to financial markets and institutions, including us, and in particular, Woori Bank. We issue, trade, hold or otherwise use various products and securities that reference LIBOR, including, among others, loans, securities, deposits, borrowings, derivatives and debentures. If not sufficiently planned for, the discontinuation of LIBOR or any other interest rate benchmark could result in increased financial, operational,

 

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legal, reputational and/or compliance risks. For example, a significant challenge will be managing the impact of the LIBOR transition on the contractual mechanics of LIBOR-based financial instruments and contracts that mature after 2021. Certain of these instruments and contracts may not provide for alternative reference rates. Even if such instruments and contracts provide for alternative reference rates, such alternative reference rates are likely to differ from the prior benchmark rates and may require us to pay interest at higher rates on the related obligations, which could adversely impact our interest expenses, results of operations and cash flows. While there are a number of international working groups focused on transition plans and the provision of fallback contract language that seek to minimize market disruption, replacement of LIBOR or any other benchmark with a new benchmark rate could adversely impact the value of and return on existing instruments and contracts. Moreover, replacement of LIBOR or other benchmark rates could result in market dislocations and have other adverse consequences for market participants, including the potential for increased costs, and litigation risks, including the potential for disputes with counterparties regarding the interpretation and enforceability of fallback contract language in LIBOR-based financial instruments and contracts.

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, 2019, approximately 96.8% of these deposits had maturities of one year or less or were payable on demand.In the past, a substantial proportion of these 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 these 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.”

Labor union unrest may disrupt our operations and hinder our ability to continue to reorganize our operations.

Most financial institutions in Korea have experienced periods of labor unrest. In recent years, we have transferred or merged some of the business operations of our subsidiaries and affiliates into one or more entities and implemented other forms of corporate and operational restructuring, including in connection with the Korean government’s privatization plan with respect to Woori Finance Holdings and its former subsidiaries. See “—Risks relating to our structure and strategy—The implementation of the Korean government’s privatization plan may have an adverse effect on us and your interests as a shareholder.” We may also decide to implement other organizational or operational changes, as well as acquisitions or dispositions, in the future. Such efforts have in the past been met with significant opposition from labor unions in Korea. Actual or threatened labor disputes may in the future disrupt the reorganization process and our business operations, which in turn may hurt our financial condition and results of operations.

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

As of December 31, 2019, we held debt securities issued by Korean companies and financial institutions (other than those issued by government-owned or -controlled enterprises or financial institutions, which include the Bank of Korea, the Korea Development Bank, the Korea Housing Finance Corporation and the Industrial Bank of Korea, among others) with a total book value of ₩2,424 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 consolidated statements of financial position is determined by references to suggested prices posted by Korean rating agencies, which measure prices based on observable market data. 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,

 

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we may not be able to realize the full“marked-to-market” value at the time of any such sale of these securities and thus may incur additional losses.

We may be required to raise additional capital if our capital adequacy ratios deteriorate 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, 2019, we as a bank holding company were required to maintain a total minimum common equity Tier I capital adequacy ratio of 7.0%, Tier I capital adequacy ratio of 8.5% and combined Tier I and Tier II capital adequacy ratio of 10.5%, on a consolidated basis (including applicable additional capital buffers and requirements as described below), and Woori Bank as a bank was required to maintain a total minimum common equity Tier I capital adequacy ratio of 8.0%, Tier I capital adequacy ratio of 9.5% and combined Tier I and Tier II capital adequacy ratio of 11.5%, on a consolidated basis (including applicable additional capital buffers and requirements as described below). As of December 31, 2019, our common equity Tier I capital, Tier I capital and combined Tier I and Tier II capital adequacy ratios were 8.39%, 9.86% and 11.89%, respectively, and Woori Bank’s common equity Tier I capital, Tier I capital and combined Tier I and Tier II capital adequacy ratios were 10.97%, 13.17% and 15.40%, 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, 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 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 thepre-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 2.5% in 2019 and 2020, 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, Woori Bank was designated as a domestic systemically important bank for 2019 by the Financial Services Commission and was subject to an additional capital requirement of 1.0% in 2019. In June 2019, we and Woori Bank were each designated as a domestic systemically important bank holding company and a domestic systemically important bank, respectively, for 2020, which subjects us and Woori Bank to the additional capital requirement of 1.0% in 2020. 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 “Item 4.B. Business Overview—Supervision and Regulation—Principal Regulations Applicable to Banks—Capital Adequacy.”

In measuring risk-weighted assets for the purpose of calculating capital adequacy ratios, generally the standardized approach or the internal ratings-based approach is applied. However, for the application of the internal ratings-based approach, which relies on the internal rating system of the relevant bank or bank holding company, the bank or bank holding company must receive approval from the Financial Supervisory Service after a trial evaluation period. While we have commenced the process to receive such approval, we are currently required to apply the standardized approach to measure our risk-weighted assets as a newly-established bank holding company, and as a result, our capital adequacy ratios may be lower compared to those of Woori Bank.

We may be required to obtain additional capital in the future in order to remain in compliance with the applicable capital adequacy and other regulatory requirements. However, we may not be able to obtain additional

 

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capital on favorable terms, or at all. Our ability to obtain additional capital at any time may be constrained to the extent that banks, bank holding companies 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 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.

We engage in limited activities relating to Iran and may become subject to sanctions under relevant laws and regulations of the United States and other jurisdictions as a result of such activities, which may adversely affect our business and reputation.

The U.S. Department of the Treasury’s Office of Foreign Assets Control, or OFAC, administers and enforces certain laws and regulations (which we refer to as OFAC sanctions) that impose restrictions upon activities or transactions within U.S. jurisdiction with certain countries, governments, entities and individuals that are the subject of OFAC sanctions, including Iran.Non-U.S. persons generally are not automatically bound by OFAC sanctions, but to the extent they engage in transactions completed in part in the United States or through U.S. persons (such as, for example, wiring an international payment that clears through a bank branch in New York), they are required to comply with U.S. sanctions. The European Union also enforces certain laws and regulations that impose restrictions upon nationals and entities of, and business conducted in, member states with respect to activities or transactions with certain countries, governments, entities and individuals that are the subject of such laws and regulations, including with respect to targeted entities in Iran. The United Nations Security Council and other governmental entities (including Korea) also impose similar sanctions.

The United States also maintains indirect sanctions, which we refer to collectively as U.S. secondary sanctions, which provide authority for the imposition of U.S. sanctions on foreign parties that engage in targeted transactions with no connection to U.S. jurisdiction. Secondary sanctions are maintained under a wide and growing range of statutes and Executive Orders, and the standard language of most Executive Orders provides authority to impose sanctions on persons providing material support to designated entities. Secondary sanctions have been of increasing importance in recent years, particularly (but not only) with respect to Iran, Russia, and North Korea. Iran has also been designated as a “jurisdiction of primary money laundering concern” under Section 311 of the USA PATRIOT Act, potentially subjecting banks dealing with Iranian financial institutions to increased regulatory scrutiny.

Violations of OFAC sanctions via transactions with a U.S. jurisdictional nexus can result in substantial civil or criminal penalties. U.S. secondary sanctions apply even when no such jurisdictional nexus exists, and companies that engage in targeted activities under secondary sanctions may themselves become the target of OFAC sanctions, including, among other things, the blocking of any property subject to U.S. jurisdiction in which the sanctioned company has an interest, which would include a prohibition on transactions or dealings within U.S. jurisdiction involving securities of the sanctioned company. Financial institutions engaging in targeted activity could in some instances be sanctioned by termination or restriction of their ability to maintain correspondent accounts in the United States. The imposition of sanctions against foreign financial institutions pursuant to U.S. secondary sanctions is not automatic, requiring further action by the U.S. administration.

Previously, Korea benefited from a “significant reduction” exception, or SRE, that exempted Korean companies from many U.S. secondary sanctions in connection with purchases of crude oil and natural gas from Iran that met a series of conditions, including restrictions on the currencies involved and stringent limits on the use of proceeds of oil and gas purchases. The U.S. Department of State announced that as of May 2, 2019, it would discontinue the exemption.

In 2019, we engaged in the following activities relating to Iran:

 

  

We have operated certain accounts for the CBI, which were opened by the CBI pursuant to a service agreement entered into by us and the CBI in September 2010, as amended from time to time, to facilitate trade between Korea and Iran. The accounts opened by the CBI consist ofWon-denominated accounts that are used for the settlement of exports of goods produced or substantially transformed in Korea to Iran by Korean exporters and Won, U.S. dollar, euro and JapaneseYen-denominated accounts (of which

 

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only the Won accounts are in use) that are used for the settlement of imports of crude oil and nauralgasfrom Iran by Korean importers. By the terms of the service agreement between us and the CBI, settlement of export and import transaction payments due from Iranian entities to Korean exporters or from Korean importers of oil and gas to Iranian entities through such accounts opened by the CBI was effected by crediting or debiting the relevant amount to or from the applicable accounts while a corresponding payment of funds was made to or from an Iranian commercial bank by the CBI. Any funds deposited for the account of Iranian entities as a result of Korean imports of crude oil and natural gas was only to be used by transferring them to theWon-denominated account and then making payment to accounts of Korean persons and entities opened at financial institutions in Korea in respect of Korean exports to Iran. No transfers of funds were to be made from these accounts to Iran, to Iranian accounts in any third country, or for any use other than those described above. In light of the discontinuation of the SRE, from July 8, 2019 to September 20, 2019, we limited activity in the existing CBI accounts to processing payments for exports of humanitarian goods to Iran, and since the imposition of additional secondary sanctions against the CBI on September 20, 2019, we ceased all activity in the existing CBI accounts. In 2019, the total fee revenue from maintaining the CBI accounts amounted to approximately ₩1.8 million.As there were no expenses directly applicable to such activities under our internal management accounts, we estimate that our net income before tax from maintaining the CBI accounts also amounted to approximately ₩1.8 million.

 

  

We have also provided fund transfer and financing services to Korean exporters and importers in connection with their trade transactions with Iranian parties which were permitted under the relevant Korean sanctions regime and not subject to U.S. secondary sanctions. We have discontinued all trade financing activities relating to export and import trades involving the CBI accounts since November 5, 2018. In 2019, all such exports and imports were settled through telegraphic transfer and did not involve our financing services. In addition, we continued to honor our obligations on a limited basis under previously-issued bank guarantees to the extent that such activities did not violate OFAC sanctions or applicable U.S. secondary sanctions.In 2019, our total fee revenue from the relevant telegraphic transfer services amounted to approximately ₩0.64 million.As there were no expenses directly applicable to such activities under our internal management accounts, we estimate that our net income before tax from such activities also amounted to approximately ₩0.64 million.

 

  

We also maintain a limited number of deposit accounts in Korea for an Iranian financial institution that were opened prior to its designation for U.S. sanctions. The relevant accounts have since been restricted, and no transactions are currently allowed through these accounts. Accordingly, there were no fee revenues from maintaining such deposit accounts, and there were no expenses directly applicable to such activities under our internal management accounts.

While we have conformed our Iran-related dealings with U.S. secondary sanctions previously waived under the SRE and ceased such activities following the expiration of the SRE on May 2, 2019, regulatory guidance regarding the wind down ofSRE-related activities to date is limited, and complications may arise in relation to legacy accounts or our past activities during or following the wind down. While we do not believe that our past activities relating to Iran have violated OFAC sanctions or are sanctionable under applicable U.S. secondary sanctions, there is no guarantee that such activities will not be found to have violated OFAC sanctions or involved sanctionable activity under U.S. secondary sanctions, or that any other government will not determine that our activities violated applicable sanctions of other countries. Sanctions against Iran continue to evolve rapidly, and future changes in law could also adversely affect us.

Furthermore, there is no guarantee that other countries (including Korea) that had provided sanctions relief to Iran in conjunction with the 2015 Joint Comprehensive Plan of Action (JCPOA) will not decide tore-impose sanctions relating to Iran, especially if there are further negative political developments relating to the Middle East. It is also possible that the United States, Korea or other countries might seek to expand their sanctions relating to Iran in the future beyond those existing currently. Such governmental actions and policies may also increase the risk of our violating certain sanctions or becoming a target of sanctions as a result of our past activities relating to Iran. Any such development could have a material adverse impact on our business, reputation or results of operations.

 

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Our business and reputation could be adversely affected if the U.S. government were to determine that our past activities relating to Iran violated OFAC sanctions or involved sanctionable activity under U.S. secondary sanctions, or if any other government were to determine that such activities violated applicable sanctions of other countries. Any prohibition or conditions placed on our use of U.S. correspondent accounts could effectively eliminate our access to the U.S. financial system, including U.S. dollar clearing transactions, which would adversely affect our business, and any other sanctions or civil or criminal penalties imposed could also adversely affect our business. If the U.S. government were to challenge the compatibility of our past activities relating to Iran with OFAC sanctions or U.S. secondary sanctions, while no assurances can be given that any such measures would be successful, we intend to take all necessary measures to the extent possible to ensure that prohibitions or conditions are not placed on our use of U.S. correspondent accounts, including closing the accounts opened by the CBI with us, if required.

We are cooperating with an investigation relating to compliance with U.S. sanctions and other U.S. laws led by the U.S. Attorney’s Office for the Southern District of New York and the New York State Office of the Attorney General on certain of our transactions involving sanctioned countries. We have provided the investigating authorities with information and documents pursuant to the applicable laws and regulations. We voluntarily reported the relevant transactions to OFAC, including a limited number of previous transactions that may have involved sanctioned countries including Iran, Sudan, Syria and Cuba. It is not possible to predict the outcome of such investigation at this time, and there can be no assurance that such investigation will not result in an unfavorable outcome or adversely affect our business or reputation.

Furthermore, some of our U.S. investors may be required to divest their investments in us or forego the purchase of our securities under the laws of certain U.S. states relating to investments by state-owned entities or under internal investment policies relating to companies (or their affiliates) doing business with Iran, or investors may decide for reputational reasons to divest or forego such investments. We are aware of initiatives by U.S. governmental entities and U.S. institutional investors, such as pension funds, to adopt or consider adopting laws, regulations or policies prohibiting transactions with or investment in, or requiring divestment from, entities doing business with countries identified as state sponsors of terrorism. There can be no assurance that the foregoing will not occur or that such occurrence will not have a material adverse effect on the value of our common stock and ADSs.

Our operations may be subject to increasing and continually evolving cybersecurity 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 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 affecting our information technology systems, 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 cybersecurity and other technological risks, there is no guarantee that such measures or any other measures can provide adequate security and stability. 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. If we were to be subject to a system failure or other 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.

 

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

We are subject to the risk of legal claims and regulatory actions, which may expose us to 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 reputational harm. See “Item 8.A. Consolidated Statements and Other Financial Information—Legal Proceedings and Regulatory Actions.”

We are unable to predict the outcome of many 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 decisions, findings or resolutions in such matters could encourage other parties, including governmental authorities in other jurisdictions, to bring similar 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.

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

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

Risks relating to government regulation and policy

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. 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 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.

The Act on the Financial Consumer Protection Framework was passed by the Korean National Assembly on March 5, 2020. Under the Act, 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. The Act is scheduled to be promulgated after deliberation by the cabinet and will become effective one year after such promulgation.

 

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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 policy guidelines 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 announced policy guidelines requesting financial institutions to participate in remedial programs for troubled corporate borrowers, as well as policies aimed at promoting certain sectors of the economy, including measures such as making low interest funding available to financial institutions that lend to these sectors. The government has in this manner encouraged mortgage lending tolow-income individuals and lending to small- andmedium-sized enterprises. We expect that all loans or credits made pursuant to these government policies will be reviewed in accordance with our credit approval procedures. However, these or any future government policies may influence us to lend to certain sectors or in a manner in which we otherwise would not in the absence of such policies.

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- andmedium-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- andmedium-sized enterprise borrowers. See “—Risks relating to our corporate credit portfolio—The largest portion of our exposure is to small- andmedium-sized enterprises, and financial difficulties experienced by companies in this segment may result in a deterioration of our asset quality and have an adverse impact on us.” In addition, in September 2019, 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 requested Korean banks to participate in a mortgage loan refinancing program forlow-income individuals with low repayment ability aimed at reducing the payment burden on outstanding mortgage loans. See “—Risks relating to our consumer credit portfolio—We may experience increases in delinquencies in our consumer loan and credit card portfolios.”

The Korean government may in the future request financial institutions in Korea, including us, to make investments in or provide other forms of financial support to particular sectors of the Korean economy as a matter of policy, which financial institutions, including us, may decide to accept. We may incur costs or losses as a result of providing such financial support.

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

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

 

  

admonitions or warnings with respect to our officers;

 

  

capital increases or reductions;

 

  

assignments of contractual rights and obligations relating to financial transactions;

 

  

a suspension of performance by our officers of their duties and the appointment of receivers;

 

  

disposals of property holdings or closures of subsidiaries or branch offices or downsizing;

 

  

stock cancellations or consolidations;

 

  

mergers with other financial institutions;

 

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acquisition of us by a third party; and

 

  

suspensions of a part or all of our business operations.

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

Risks relating to Korea

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

We are incorporated in Korea, and a substantial majority of our operations are located in Korea. As a result, we are subject to political, economic, legal and regulatory risks specific to Korea, and our performance and successful fulfillment of our operational strategies are dependent to a large extent on the overall Korean economy. The economic indicators in Korea in recent years have shown mixed signs of growth and uncertainty, and in early 2020, the overall Korean economy and the economies of Korea’s major trading partners have shown signs of deterioration due to the debilitating effects of theCOVID-19 pandemic. See “—Other risks relating to our business—The recent global outbreak ofCOVID-19 may adversely affect our business, financial condition or results of operations.” As a result, 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 increasing weakness of the global economy, mainly due to theCOVID-19 pandemic, 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 fluctuated significantly and, as a result of deteriorating global and Korean economic conditions, there has been significant volatility in the stock prices of Korean companies recently. Further declines in the Korea Composite Stock Price Index, or 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 the Korean economy include:

 

  

declines in consumer confidence and a slowdown in consumer spending;

 

  

the occurrence of severe health epidemics in Korea or other parts of the world, such as theCOVID-19 pandemic;

 

  

adverse conditions or developments 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, including as a result of deteriorating economic and trade relations between the United States and China and increased uncertainties resulting from the United Kingdom’s exit from the European Union;

 

  

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;

 

  

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 ongoing trade disputes with Japan);

 

  

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

 

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a deterioration in the financial condition or performance of small- andmedium-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 ofchaebols and their senior management for possible misconduct;

 

  

a continuing rise in the level of household debt and increasing delinquencies and credit defaults by consumer andsmall- andmedium-sized enterprise borrowers in Korea;

 

  

social and labor unrest;

 

  

substantial changes in the market prices of Korean real estate;

 

  

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

 

  

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

 

  

financial problems or lack of progress in the restructuring ofchaebols, other large troubled companies (including those in the construction, shipbuilding and shipping sectors) and their suppliers;

 

  

loss of investor confidence arising from corporate accounting irregularities or corporate governance issues concerning certainchaebols;

 

  

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

 

  

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

 

  

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

 

  

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

 

  

hostilities or political or social tensions involvingoil-producing countries in the Middle East (including a potential escalation of hostilities between the U.S. and Iran) and Northern Africa and any material disruption in the global supply of oil or sudden increase in the price of oil;

 

  

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.

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 NuclearNon-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

 

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United Nations Security Council resolutions. In February 2016, the government also closed the inter-Korea Gaeseong 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 August 2015, two Korean soldiers were injured in a landmine explosion near the Korean demilitarized zone. Claiming the landmines were set by North Koreans, the Korean army reinitiated its propaganda program toward North Korea utilizing loudspeakers near the demilitarized zone. In retaliation, the North Korean army fired artillery rounds on the loudspeakers, resulting in the highest level of military readiness for both Koreas.

 

  

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

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 and 2019. 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. Furthermore, the government’s privatization plan with respect to us contemplates the sale of its remaining ownership interest in us to one or more third parties, which may lead to labor unrest among our employees. See “Item 4.A. History and Development of the Company—Privatization Plan.” Any of these developments may have an adverse effect on our financial condition and results of operations.

Risks relating to our common stock and ADSs

We or our major shareholders may sell shares of our common stock in the future, and such sales may adversely affect the market price of our common stock and ADSs and may dilute your investment and relative ownership interest 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.

 

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In addition, the KDIC currently owns 124,604,797 shares, or 17.25%, of our outstanding common stock, and IMM Private Equity, Inc., through its special purpose company Nobis1, Inc., currently owns 40,560,000 shares, or 5.62%, of our outstanding common stock. See “Item 7.A. Major Shareholders.” In the future, such major shareholders or any other shareholder that owns a large number of shares of our outstanding common stock may choose to sell large blocks of our common stock in a public offering or privately to a strategic or financial investor, including a sale by the KDIC for the purpose of recovering the public funds it injected into us. For example, in accordance with the Korean government’s privatization plan, the KDIC sold 40,143,022 shares of Woori Bank’s common stock (representing 5.9% of its outstanding common stock) in a private sale in Korea in December 2014 and an aggregate of 200,685,395 shares of Woori Bank’s common stock (representing 29.7% of its outstanding common stock) in stakes ranging from 3.7% to 6.0% to seven financial companies through a bidding process in December 2016 and January 2017. In 2017, pursuant to a series of transactions related to call options previously granted in connection with the KDIC’s sale of Woori Bank’s common stock in December 2014, the KDIC sold an aggregate of 19,852,364 shares of Woori Bank’s common stock (representing 2.94% of its outstanding common stock). See “—Risks relating to our structure and strategy—The implementation of the Korean government’s privatization plan may have an adverse effect on us and your interests as a shareholder.” We expect the KDIC to sell all or a portion of the shares of our common stock it owns to one or more purchasers in the future.

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 shareholder, or the public perception that such an offering or sale 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.

Future sales by the KDIC of the shares of our common stock it owns may result in adverse Korean tax consequences for you.

Under applicable Korean tax laws, anon-Korean holder who held Woori Bank’s common stock or ADSs prior to our establishment as a new financial holding company in January 2019 pursuant to a “comprehensive stock transfer” under Korean law will be able to defer taxation on any capital gains arising from the stock transfer, by virtue of the Special Tax Treatment Control Law of Korea, or the STTCL, until such holder’s sale of our common stock or ADSs received in the stock transfer, at which time the tax basis of such common stock or ADSs will be the acquisition price at which such holder acquired such Woori Bank common stock or ADSs. However,non-Korean holders that are corporations may not defer such portion of tax on capital gains arising from the stock transfer that is attributable to the amount by which the market price of our common stock or ADSs (as calculated in accordance with applicable Korean laws and regulations) is in excess of the market price of Woori Bank’s common stock or ADSs. Any suchnon-Korean holder of our common stock or ADS, including a corporation, which seeks to defer taxation on capital gains arising from the stock transfer will be required to submit a tax deferral application in prescribed form to the Korean tax authorities when filing its tax return for the 2019 tax year.

Notwithstanding the foregoing, if our largest shareholder, the KDIC, disposes of 50% or more of the shares of our common stock it received in the stock transfer within two years from the end of 2019 (the fiscal year in which the date of the stock transfer falls), the deferral of taxation on capital gains will not be available, and anon-Korean holder who received our common stock or ADSs in the stock transfer will generally be subject to Korean tax on capital gains in an amount equal to the lower of (i) 11.0% (inclusive of local income surtax) of the gross realization proceeds (i.e., the value of our common stock or ADSs such holder received in the stock transfer) or (ii) 22.0% (inclusive of local income surtax) of the net realized gain. However, such capital gains tax may not apply, or may apply at a reduced rate, if such holder establishes its entitlement to an exemption or rate reduction under an applicable tax treaty or Korean tax law. See “Item 10.E. Taxation—Korean Taxation—Tax Treaties” for information regarding tax treaty benefits. Accordingly, if you received our common stock or ADSs in the stock transfer, future sales by the KDIC of the shares of our common stock it owns may result in adverse Korean tax consequences for you.

 

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Ownership of our common stock is restricted under Korean law.

Under the Financial Holding Company Act, a single shareholder, 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 shareholders that arenon-financial business group companies, whose applicable limit was reduced from 9.0% to 4.0% pursuant to an amendment of the Financial Holding Company Act which became effective on February 14, 2014. To the extent that the total number of shares of our common stock (including those represented by ADSs) that you and your affiliates own together exceeds the applicable limits, you will not be entitled to exercise the voting rights for the excess shares, and the Financial Services Commission may order you 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 fornon-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.”

You will not be able to exercise dissent and appraisal rights unless you have withdrawn the underlying shares of our common stock and become our direct shareholder.

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 shareholders have the right to require us to purchase their shares under Korean law. However, if you hold our ADSs, you will not be able to exercise such dissent and appraisal rights if the depositary refuses to do so on your 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 shareholder prior to the record date of the shareholders’ meeting at which the relevant transaction is to be approved, in order to exercise dissent and appraisal rights.

You may be limited in your ability to deposit or withdraw common stock.

Under the terms of our deposit agreement, holders of common stock may deposit such stock with the depositary’s custodian in Korea and obtain ADSs, and holders of ADSs may surrender ADSs to the depositary and receive common stock. However, to the extent that a deposit of common stock exceeds any limit that we may specify from time to time, that common stock will not be accepted for deposit unless our consent with respect to such deposit has been obtained. We currently have not set any such limit; however, we have the right to do so at any time. Under the terms of the deposit agreement, no consent would be required if the shares of common stock were to be 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 unless the deposit would be prohibited by applicable laws or violate our articles of incorporation. If we choose to impose a limit on deposits in the future, however, we might not consent to the deposit of any additional common stock. In that circumstance, if you surrender ADSs and withdraw common stock, you may not be able to deposit the stock again to obtain ADSs. See “Item 4.B. Business Overview—Supervision and Regulation—Restrictions Applicable to Shares” and “Item 10.D. Exchange Controls—Restrictions Applicable to Shares.”

You will not have preemptive rights in some circumstances.

The Korean Commercial Code, as amended, and our articles of incorporation require us, with some exceptions, to offer shareholders the right to subscribe for new shares of our common stock in proportion to their existing shareholding ratio whenever new shares are issued. If we offer any rights to subscribe for additional shares of our common stock or any rights of any other nature, the depositary, after consultation with us, may make the rights available to holders of our ADSs or use commercially feasible efforts to dispose of the rights on

 

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behalf of such holders, in a riskless principal capacity, and make the net proceeds available to such holders. The depositary will make rights available to holders of our ADSs only if:

 

  

we have requested in a timely manner that those rights be made available to such holders;

 

  

the depositary has received the documents that are required to be delivered under the terms of the deposit agreement, which may include confirmation that a registration statement filed by us under the U.S. Securities Act of 1933, as amended, or the Securities Act, is in effect with respect to those shares or that the offering and sale of those shares is exempt from or is not subject to the registration requirements of the Securities Act; and

 

  

the depositary determines, after consulting with us, that the distribution of rights is lawful and commercially feasible.

Holders of our common stock located in the United States may not exercise any 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, you may be unable to participate in our rights offerings and may experience dilution in your holdings. If a registration statement is required for you to exercise preemptive rights but is not filed by us or is not declared effective, you will not be able to exercise your preemptive rights for additional ADSs and you will suffer dilution of your equity interest in us. If the depositary is unable to sell rights that are not exercised or not distributed or if the sale is not lawful or feasible, it will allow the rights to lapse, in which case you will receive no value for these rights.

Your dividend payments and the amount you may realize upon a sale of your 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 you will receive from the depositary in respect of dividends, the U.S. dollar value of the proceeds that you would receive upon a 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 your investment may fluctuate due to the volatility of, and government intervention in, 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 was 1,914.73 on April 23, 2020. 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 induced mergers to reduce what it considers excess capacity in a particular industry and

 

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has also induced 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 you and the depositary from converting and remitting dividends and other amounts in U.S. dollars.

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

Other Risks

You 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 annual report reside in Korea, and all or a significant portion of the assets of our directors and officers and other persons named in this annual report and a substantial majority of our assets are located in Korea. As a result, it may not be possible for you 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 are a financial holding company that was newly established on January 11, 2019 pursuant to a “comprehensive stock transfer” under Korean law, whereby holders of the common stock of Woori Bank and certain of its subsidiaries transferred all of their shares to us and in return received shares of our common stock. We were established under the Financial Holding Company Act of Korea, which, together with associated regulations and a related Enforcement Decree, enables banks and other financial institutions, including insurance companies, invest trust companies, credit card companies and securities companies, to be organized and managed under the auspices of a single financial holding company. As a result of the stock transfer, Woori Bank and certain of its former wholly-owned subsidiaries, Woori FIS Co., Ltd., Woori Finance Research Institute Co., Ltd., Woori Credit Information Co., Ltd., Woori Fund Services Co., Ltd. and Woori Private Equity Asset Management Co., Ltd., became our direct and wholly-owned subsidiaries. Accordingly, our overall business and operations after the stock transfer, on a consolidated basis, are identical to those of Woori Bank on a consolidated basis immediately prior to the stock transfer.

The stock transfer constituted a succession for purposes of Rule12g-3(a) under the Securities Exchange Act of 1934, as amended, such that our common stock was deemed registered under Section 12(b) of the Exchange Act by operation of Rule12g-3(a). Following the stock transfer, we file reports under the Exchange Act as the successor issuer to Woori Bank.

Our legal and commercial name is Woori Financial Group Inc. Our registered office and corporate headquarters are located at 51,Sogong-ro,Jung-gu, Seoul, Korea. Our telephone number is822-2125-2000. Our website address ishttp://www.woorifg.com.

 

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

History

Establishment of Woori Bank

The predecessor of Woori Bank was originally established in 1899 and operated as the Commercial Bank of Korea until 1998, when it was acquired by the KDIC and merged with another commercial bank, Hanil Bank, which had been established in 1932. The surviving entity in the merger was renamed Hanvit Bank, which name was changed to Woori Bank in May 2002.

Establishment of Woori Finance Holdings

In response to a financial and economic downturn in Korea beginning in late 1997, the Korean government announced and implemented a series of comprehensive policy packages to address structural weaknesses in the Korean economy and the financial sector. As part of these measures, on October 1, 1998, the KDIC purchased 95.0% of the outstanding shares of the Commercial Bank of Korea and 95.6% of the outstanding shares of Hanil Bank, and subsequently merged Hanil Bank into the Commercial Bank of Korea (which was renamed Hanvit Bank). These banks had suffered significant losses in 1997 and 1998. The Korean government tookpre-emptive measures to ensure the survival of these and other banks as it believed that bank failures would have a substantial negative impact on the Korean economy.

In December 2000, the Korean government wrote down the capital of Hanvit Bank, as well as Kyongnam Bank, Kwangju Bank and Peace Bank of Korea, to zero. It accomplished this by having the Financial Services Commission issue a capital reduction order with respect to these banks pursuant to its regulatory authority. The Korean government also decided to recapitalize these banks by injecting public funds through the KDIC. In December 2000, the KDIC made initial capital injections to Hanvit Bank (₩2,764 billion), Kyongnam Bank (₩259 billion), Kwangju Bank (₩170 billion) and Peace Bank of Korea (₩273 billion), in return for new shares of those banks. The KDIC also agreed to make additional capital contributions, not involving the issuance of new shares, in the future, which were made in September 2001 to Hanvit Bank (₩1,877 billion), Kyongnam Bank (₩94 billion), Kwangju Bank (₩273 billion) and Peace Bank of Korea (₩339 billion).

In addition, in November 2000, the KDIC established Hanaro Merchant Bank to restructure substantially all of the assets and liabilities of four failed merchant banks (Yeungnam Merchant Banking Corporation, Central Banking Corporation, Korea Merchant Banking Corporation and H&S Investment Bank) that were transferred to it.

In March 2001, the KDIC established Woori Finance Holdings as a new financial holding company and transferred all of the shares in each of Hanvit Bank, Kyongnam Bank, Kwangju Bank, Peace Bank of Korea and Hanaro Merchant Bank held by the KDIC to Woori Finance Holdings in exchange for its newly issued shares. Accordingly, Woori Finance Holdings became the sole owner of those entities. Woori Finance Holdings subsequently listed its common stock on the KRX KOSPI Market in June 2002 and listed ADSs representing its common stock on the New York Stock Exchange in September 2003.

Reorganization and Expansion of Woori Finance Holdings and Woori Bank

Following its establishment and its acquisition of its subsidiaries, Woori Finance Holdings developed a reorganization and integration plan designed to reorganize the corporate structure of some of its subsidiaries and integrate its operations under a single management structure. As part of this plan:

 

  

From December 2001 through February 2002, Peace Bank of Korea was restructured by:

 

  

splitting off its commercial banking operations and merging them into Woori Bank;

 

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changing the name of Peace Bank of Korea to Woori Credit Card; and

 

  

transferring the credit card operations of Woori Bank to Woori Credit Card.

 

  

In March 2003, the credit card operations of Kwangju Bank were transferred to Woori Credit Card.

 

  

In August 2003, Woori Investment Bank (formerly named Hanaro Merchant Bank) was merged with Woori Bank.

In succeeding years, Woori Finance Holdings and Woori Bank further reorganized and expanded their operations, including through mergers, acquisitions and investments. For example:

 

  

In March 2004, Woori Credit Card was merged with Woori Bank.

 

  

In October and December 2004, Woori Finance Holdings acquired an aggregate 27.3% voting interest in LG Investment & Securities Co., Ltd., which was subsequently renamed Woori Investment & Securities.

 

  

In May 2005, Woori Finance Holdings acquired a 90.0% interest in LG Investment Trust Management Co., Ltd., which was subsequently renamed Woori Asset Management.

 

  

In October 2005, Woori Bank established Woori Private Equity as a consolidated subsidiary.

 

  

In April 2008, Woori Finance Holdings acquired a 51.0% interest in LIG Life Insurance Co., Ltd., which was subsequently renamed Woori Aviva Life Insurance.

 

  

In March 2011, Woori Finance Holdings acquired certain assets and assumed certain liabilities of Samhwa Mutual Savings Bank through a newly established subsidiary, Woori FG Savings Bank.

 

  

In September 2012, Woori FG Savings Bank acquired certain assets and assumed certain liabilities of Solomon Mutual Savings Bank.

 

  

In October 2012, Woori Finance Holdings established Woori Finance Research Institute, which engages in economic and finance research, management consulting, and management and sales of intellectual property rights.

 

  

In April 2013, Woori Bank effected aspin-off of its credit card business into a newly established wholly-owned subsidiary of Woori Finance Holdings, Woori Card.

 

  

In June 2013, through an internal reorganization, Kumho Investment Bank (previously a subsidiary of Woori Private Equity and subsequently renamed Woori Investment Bank), in which Woori Finance Holdings held a 41.6% interest, became its consolidated subsidiary, and ₩70 billion of new capital was injected into such entity.

 

  

In January 2014, Woori Bank completed the purchase of an additional 27% equity interest (in addition to the 6% equity interest it previously acquired through its subsidiary PT. Bank Woori Indonesia) in PT. Bank Himpunan Saudara 1906, an Indonesian commercial bank with a network of over 100 branches and offices throughout Indonesia. In December 2014, PT. Bank Woori Indonesia merged with and into PT. Bank Himpunan Saudara 1906. The merged entity, in which Woori Banks holds a 79.9% equity interest, was renamed PT Bank Woori Saudara Indonesia 1906, Tbk and became its consolidated subsidiary.

 

  

In October 2016, Woori Bank acquired a 51% equity interest in Wealth Development Bank Corp., a thrift bank in the Philippines with a network of 16 branches and approximately 300 employees.

 

  

In November 2016, Woori Bank obtained a banking license to establish a local subsidiary in Vietnam, Woori Bank Vietnam, which commenced operations in January 2017.

 

  

In June 2018, Woori Bank acquired VisionFund (Cambodia) Ltd., a microfinance deposit-taking institution in Cambodia, which was renamed WB Finance Co., Ltd. In February 2020, with the approval of the Cambodian financial authorities, Woori Finance (Cambodia) Plc., a microfinance institution, merged with and into WB Finance Co., Ltd.

 

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In November 2018, Woori Bank established a German subsidiary, Woori Bank Europe GmbH, which is headquartered in Frankfurt.

Privatization Plan

In June 2013, the Korean government, through the Public Funds Oversight Committee of the Financial Services Commission, announced an updated plan to privatize Woori Finance Holdings and its former subsidiaries, including Woori Bank. The privatization plan provided for the segregation of such entities into three groups and the disposal of the Korean government’s interest in these entities held through the KDIC in a series of transactions, many of which have been completed.

Spin-off of Kwangju Bank and Kyongnam Bank

In August 2013, the board of directors of Woori Finance Holdings approved a plan to establish two new companies, KJB Financial Group and KNB Financial Group (which we refer to as the New Holdcos), through aspin-off of its businesses related to the holding of the shares and thereby controlling the business operations of Kwangju Bank and Kyongnam Bank, respectively. Thespin-off was approved at an extraordinary general meeting of the shareholders of Woori Finance Holdings held in January 2014 and was effected in May 2014. After thespin-off, KJB Financial Group owned the shares of Kwangju Bank previously held by Woori Finance Holdings, and KNB Financial Group owned the shares of Kyongnam Bank previously held by Woori Finance Holdings. Woori Finance Holdings no longer owned any shares of Kwangju Bank or Kyongnam Bank, and neither they nor the New Holdcos were its subsidiaries, after thespin-off. Following thespin-off, each of these banks was merged with the relevant New Holdco.

In October 2014, the KDIC sold its 56.97% ownership interest in Kwangju Bank and Kyongnam Bank to JB Financial Group and BS Financial Group, respectively.

Disposal of Woori Financial, Woori Asset Management, Woori F&I, Woori Investment & Securities, Woori Aviva Life Insurance and Woori FG Savings Bank

In March 2014, Woori Finance Holdings sold its 52.0% ownership interest in Woori Financial to KB Financial Group for the sale price of ₩280 billion.

In May 2014, Woori Finance Holdings sold its 100.0% ownership interest in Woori Asset Management to Kiwoom Securities for the sale price of ₩76 billion.

In June 2014, Woori Finance Holdings sold its 100.0% ownership interest in Woori F&I to Daishin Securities for the sale price of ₩368 billion.

In June 2014, Woori Finance Holdings also sold its 37.9% ownership interest in Woori Investment & Securities, its 51.6% ownership interest in Woori Aviva Life Insurance and its 100.0% ownership interest in Woori FG Savings Bank to NongHyup Financial Group Inc. for the sale price of ₩1,039 billion in a collective sale.

Merger of Woori Bank and Woori Finance Holdings

In July 2014, Woori Bank entered into a merger agreement with Woori Finance Holdings, providing for the merger of Woori Finance Holdings with and into Woori Bank. The merger agreement was approved by the shareholders of Woori Finance Holdings at an extraordinary general meeting held on October 10, 2014. Pursuant to the merger agreement, Woori Finance Holdings merged with and into Woori Bank on November 1, 2014, such that Woori Bank remained as the surviving entity, and Woori Finance Holdings ceased to exist, after the merger. In connection with the merger, shareholders of Woori Finance Holdings recorded in its shareholder register as of November 1, 2014 received one share of Woori Bank’s common stock for each share of common stock of Woori Finance Holdings they held.

As a result of the merger, the other remaining subsidiaries of Woori Finance Holdings, including Woori Card, Woori Private Equity, Woori FIS, Woori Investment Bank and Woori Finance Research Institute, became

 

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Woori Bank’s subsidiaries. Accordingly, Woori Bank’s overall business and operations after the merger, on a consolidated basis, were substantially identical to those of Woori Finance Holdings on a consolidated basis prior to the merger.

Woori Bank was an unlisted corporation prior to the merger, while Woori Finance Holdings had its common stock listed on the KRX KOSPI Market and its ADSs listed on the New York Stock Exchange. Following the merger, Woori Bank became newly listed on the KRX KOSPI Market and succeeded to Woori Finance Holdings’ listing on the New York Stock Exchange.

Sales of the KDIC’s Ownership Interest

Pursuant to the Korean government’s privatization plan, in December 2014, the KDIC sold 40,143,022 shares of Woori Bank’s common stock (representing 5.9% of its outstanding common stock) in a private sale in Korea. In addition, in December 2016 and January 2017, the KDIC sold an aggregate of 200,685,395 shares of Woori Bank’s common stock (representing 29.7% of its outstanding common stock) in stakes ranging from 3.7% to 6.0% to seven financial companies through a bidding process. Pursuant to a commitment made by the KDIC in connection with such bidding process, five persons, each nominated by one of the winning bidders, were elected as new outside directors at an extraordinary general meeting of Woori Bank’s shareholders held in December 2016. In December 2018, five persons, each nominated by one of such winning bidders, were elected at an extraordinary general meeting of Woori Bank’s shareholders to serve as our outside directors upon our establishment. See “Item 6.A. Directors and Senior Management—Board of Directors—Outside Directors.” In 2017, pursuant to a series of transactions related to call options previously granted in connection with the KDIC’s sale of Woori Bank’s common stock in December 2014, the KDIC sold an aggregate of 19,852,364 shares of Woori Bank’s common stock (representing 2.94% of its outstanding common stock). As a result of such transactions, the KDIC’s ownership interest in Woori Bank was reduced to 18.43%. In connection with our establishment in January 2019 as a new financial holding company pursuant to a “comprehensive stock transfer” under Korean law, the KDIC received our common stock in exchange for the common stock of Woori Bank it owned and currently owns 17.25% of our outstanding common stock. We expect that the KDIC will sell all of such common stock in multiple transactions by 2022 in accordance with its plan that was approved by the Financial Services Commission in June 2019.

In December 2016, in connection with the KDIC’s sale of shares of Woori Bank’s common stock, Woori Bank entered into an agreement with the KDIC, pursuant to which Woori Bank was required to use its best efforts to cause an employee of the KDIC nominated by it to be appointed as Woori Bank’snon-standing director, so long as the KDIC either (x) owned 10% or more of Woori Bank’s total issued shares with voting rights or (y) owned more than 4% but less than 10% of Woori Bank’s total issued shares with voting rights and remained its largest shareholder (other than the National Pension Service of Korea). While such agreement with Woori Bank expired, in July 2019, we entered into an agreement with the KDIC with similar terms. See “Item 10.C. Material Contracts.”

Establishment of Woori Financial Group

We were established as a new financial holding company on January 11, 2019 pursuant to a “comprehensive stock transfer” under Korean law, whereby holders of the common stock of Woori Bank and certain of its subsidiaries transferred all of their shares to us and in return received shares of our common stock. The stock transfer was approved by the shareholders of Woori Bank at an extraordinary general meeting held on December 28, 2018. In the stock transfer, each holder of one share of Woori Bank’s common stock recorded in its shareholder register as of November 15, 2018 received one share of our common stock. In addition, we issued our common stock to Woori Bank in exchange for the outstanding common stock of certain of Woori Bank’s wholly-owned subsidiaries that became our wholly-owned direct subsidiaries. Specifically, in connection with the stock transfer, Woori Bank transferred all shares of common stock held by it of Woori FIS Co., Ltd., Woori Finance Research Institute Co., Ltd., Woori Credit Information Co., Ltd., Woori Fund Services Co., Ltd. and Woori Private Equity Asset Management Co., Ltd., all of which were Woori Bank’s wholly-owned subsidiaries, 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

 

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the stock transfer, Woori Bank, Woori FIS Co., Ltd., Woori Finance Research Institute Co., Ltd., Woori Credit Information Co., Ltd., Woori Fund Services Co., Ltd. and Woori Private Equity Asset Management Co., Ltd. became our direct and wholly-owned subsidiaries.

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

 

LOGO

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

 

LOGO

In connection with the stock transfer, Woori Bank’s common stock was suspended from trading from January 9, 2019 and wasde-listed from the KRX KOSPI Market on February 13, 2019. Following the stock transfer, our common stock was newly listed on the KRX KOSPI Market on February 13, 2019, and our ADSs succeeded to the listing of Woori Bank’s ADSs on the New York Stock Exchange on January 11, 2019.

 

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The shareholders of Woori Bank were entitled to exercise appraisal rights with respect to its common stock held by them at a purchase price of ₩16,079 per share, in accordance with Korean law. The period for exercise of appraisal rights started on December 28, 2018 and ended on January 7, 2019, during which shareholders exercised appraisal rights with respect to an aggregate of 11,453,702 shares of common stock of Woori Bank. The payment of the purchase price for such common stock held by the exercising shareholders was made on January 9, 2019, in the aggregate amount of ₩184 billion. As a result of the exchange for our common stock of such treasury shares obtained by Woori Bank pursuant to the exercise of appraisal rights by its shareholders and other treasury shares it held, as well as the transfer by Woori Bank of the shares it held in its relevant subsidiaries to us, Woori Bank received 18,346,782 shares of our common stock in the stock transfer, which constituted our treasury shares and represented 2.7% of our total issued common stock as of January 11, 2019. In March 2019, Woori Bank sold all such shares to institutional investors in a block trade, and we no longer hold any treasury shares as of the date of this annual report.

Reorganization and Expansion of Woori Financial Group

After our establishment, we have further reorganized and expanded our operations, including through mergers, acquisitions and investments. For example:

 

  

In August 2019, we acquired a 73% equity interest in Woori Asset Management Corp. (formerly known as Tongyang Asset Management Corp.) from Tongyang Life Insurance Co., Ltd., which became our consolidated subsidiary.

 

  

In September 2019, we conducted a “comprehensive stock exchange” under Korean law with Woori Bank, the former parent company of Woori Card, whereby Woori Bank transferred all of its Woori Card shares to us and in return received a combination of 42,103,377 shares of our common stock and ₩598 billion in cash, based on an exchange ratio of 0.4697442 shares of our common stock for each Woori Card share. As a result of the stock exchange, Woori Card ceased to be Woori Bank’s subsidiary and became our direct and wholly-owned subsidiary. Pursuant to applicable Korean law, Woori Bank was required to dispose of the 42,103,377 shares of our common stock it received in the stock exchange within six months of its consummation and sold 28,890,707 of such shares to Fubon Life Insurance Co., Ltd. in September 2019 for ₩358 billion and 13,212,670 of such shares in block trades in November 2019. As a result of such transactions, the number of our outstanding shares of common stock increased to 722,267,683.

 

  

In September 2019, we acquired a 59.83% equity interest in Woori Investment Bank from Woori Bank, its former parent company, for a sale price of ₩383 billion. As a result of the sale, Woori Investment Bank ceased to be Woori Bank’s subsidiary and became our direct consolidated subsidiary. Woori Investment Bank’s common stock is listed on the KRX KOSPI Market.

 

  

In October 2019, Woori Bank acquired a 20% equity interest in Lotte Card Co., Ltd., the eighth largest credit card issuer in Korea, according to BC Research, which is a quarterly report issued by BC Card. See “Item 4.B. Business Overview—Credit Cards.”

 

  

In December 2019, we acquired Woori Global Asset Management Co. (formerly known as ABL Global Asset Management Co.) from Anbang Asset Management (Hong Kong) Co., Limited, which became our consolidated subsidiary.

 

  

In December 2019, we acquired an aggregate 51% equity interest in Woori Asset Trust Co., Ltd. (formerly known as Kukje Asset Trust Ltd.), consisting of (i) 44.46% from its majority shareholders, including chairmanJae-Eun Yoo, and (ii) 6.54% from Woori Bank. As part of the share purchase agreement with the former majority shareholders, we have agreed to additionally acquire a 21.27% equity interest in the future, subject to certain conditions, at which point we will own an aggregate 72.2% equity interest in Woori Asset Trust Co., Ltd., which is currently our consolidated subsidiary.

 

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Item 4.B.

Business Overview

We are one of the largest financial holding companies in Korea, in terms of consolidated total assets, and our operations include Woori Bank, one of the largest commercial banks in Korea. Our subsidiaries collectively engage in a broad range of businesses, including corporate banking, consumer banking, credit card operations, investment banking, capital markets activities and other businesses. We provide a wide range of products and services to our customers, which mainly comprise small- andmedium-sized enterprises and individuals, as well as some of Korea’s largest corporations. As of December 31, 2019, we had, on a consolidated basis, total assets of ₩361,981 billion, total liabilities of ₩336,488 billion and total equity of ₩25,493 billion.

As one of the leading financial services groups in Korea, we believe our core competitive strengths include the following:

Strong and long standing relationships with corporate customers.Historically our operations concentrated on large corporate customers. As a result, we believe that we have strong relationships with many of Korea’s leading corporate groups, and we are the main creditor bank to 9 of the 30 largest Korean corporate borrowers. Further enhancing our corporate loan portfolio is our ability to lend to small- andmedium-sized enterprise customers. As of December 31, 2019, we had 325,749 small- andmedium-sized enterprise borrowers.

Large and loyal retail customer base.With respect to our consumer banking operations, we have the second-largest deposit base among Korean commercial banks, and over 23.5 million retail customers, representing about half of the Korean adult population. Of these customers, over 9.6 million are active customers, meaning that they have a deposit account with us with a balance of at least ₩300,000 or have a loan account with us.

Extensive distribution and marketing network.We serve our customers primarily through one of the largest banking networks in Korea, comprising 874 branches and 4,855 ATMs and cash dispensers as of December 31, 2019.Through Woori Bank, we also operate 10 dedicated corporate banking centers and 81 general managers for our large corporate customers and 909 relationship managers stationed at 725 branches (as well as 412 additionalnon-stationed employees who serve as relationship managers as needed) for our small- andmedium-sized enterprise customers as of December 31, 2019.In addition, we have Internet and mobile banking platforms to enhance customer convenience, reduce service delivery costs and allow our branch staff to focus on marketing and sales.

Strong capital base. As of December 31, 2019, our consolidated equity totaled ₩25 trillion, and our total capital adequacy ratio was 11.89%.Our management team at the holding company carefully coordinates the capital and dividend plans of each of our subsidiaries and for the consolidated group to ensure that we optimize our capital position. We believe our strong capital base and coordinated capital management enable us to support growth of our core businesses and to pursue franchise-enhancing initiatives such as selective investments and acquisitions.

Strong and experienced management team.Webenefit from our management team’s extensive experience accumulated with our subsidiaries and their predecessors. In January 2019,Tae-Seung Son assumed the role of our representative director, president and chief executive officer, which we believe enhanced the quality of our management team and our corporate governance. We also believe that the extensive experience of many members of our management team in the financial sector will help us to continue to strengthen our operations.

Strategy

We aim to continue to build our position as a comprehensive financial services provider in Korea, with a view to having our business platform and operating structure on par with those of leading global financial institutions. The key elements of our strategy are as follows:

Provide comprehensive financial services and maximize synergies among our subsidiaries through our financial holding company structure.We plan to become a comprehensive financial services provider capable of developing and cross-selling a diverse range of products and services to our large existing base of retail and

 

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corporate banking customers, so that we can more effectively compete with leading domestic and international financial institutions. We believe that the adoption of a financial holding company structure will continue to help us increase customer satisfaction, generate synergies and maximize profitability, by creating an integrated system among our affiliated companies and allowing us to effectively provide various financial services, including comprehensiveone-stop asset management services customized for clients, based on active expansion ofnon-banking and global business operations. 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 may decide to pursue as part of our strategy. For example, in an effort to expand our asset management services, in 2019, we acquired (i) a 73% equity interest in Woori Asset Management Corp. from Tongyang Life Insurance Co., Ltd., (ii) Woori Global Asset Management Co. from Anbang Asset Management (Hong Kong) Co., Limited and (iii) a 51% equity interest in Woori Asset Trust Co., Ltd. from its majority shareholders and Woori Bank, which became our consolidated subsidiaries. We may consider additionally acquiring or merging with other financial institutions, particularly in thenon-banking sector, to achieve more balanced growth and further diversify our revenue base.

In addition, we believe our financial holding company structure gives us a competitive advantage over stand-alone banks and other financial institutions by:

 

  

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

 

  

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

 

  

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

 

  

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

Further improve our asset quality and strengthen our risk management practices.We were one of the earliest and most aggressive banks in Korea to actively reducenon-performing loans through charge-offs and sales to third parties, and we have taken various measures to facilitate the disposal of our substandard or below loans. As a result of these and other initiatives, our ratio ofnon-performing loans to total loans has been declining and was 0.43% as of December 31, 2019.

One of our highest priorities is to maintain our strong asset quality and enhance our risk management practices on an ongoing basis. We have created a centralized group-wide risk management organization, installed a comprehensive warning and monitoring system, adopted uniform loan loss provisioning policies across all subsidiaries and implemented an advanced credit evaluation system called the “Credit Wizard” at Woori Bank. We plan to undertake a series of group-wide reviews of our credit risk management procedures, as well as our risk management infrastructure, in order to develop and implement various measures to further standardize and improve our risk management procedures and systems.

In addition, we use a value at risk, or “VaR,” monitoring system for managing market risk. We intend to vigorously maintain a manageable risk profile and balance that risk profile with adequate returns. We believe that our continuous focus on upgrading our risk management systems and practices will enable us to maintain our strong asset quality, improve our financial performance and enhance our competitiveness.

Enhance customer profitability through optimization of channel usage, products and services for each customer segment.Our extensive distribution network and wide range of quality products and services has enabled us to serve our customers effectively. However, we intend to further enhance the value proposition to our customers by differentiating products and delivery channels based on the distinct needs of different customer segments.

Retail customers. We have segmented our retail customers into four groups: high net worth; mass affluent; middle class; and mass market. We believe we are relatively competitive in our core customer base, which includes mass affluent and middle class customers, and we serve these customers via our team of financial planners in our branches who sell customized higher margin services and products, such as investment advice, mutual funds, insurance and personal loans. For our mass market customers, we offer simple,easy-to-understand and relatively more standardized products such as basic deposit and lending products, including mortgage loans,

 

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and we encourage the use of alternative distribution channels such as the Internet, mobile banking and ATMs by our mass market customers such that we can serve them in a cost efficient manner. We serve our high net worth individuals via branches and dedicated private banking centers staffed with experienced private bankers who offer sophisticated tailored financial services.

Corporate customers.We continuously and vigorously review our portfolio of large corporate and small- andmedium-sized enterprise customers to refine our database of core accounts and industries in terms of profitability potential. We seek to expand our relationship beyond a pure lending relationship by promoting our foreign exchange, factoring, trade finance and investment banking services to our core small- andmedium-sized enterprise customers and cross-selling our investment banking services, derivatives and other risk hedging products, as well as employee retirement products, to our core large corporate customers.

Diversify our revenue base with a view to reducing our exposure to interest rate cycles and increasing profitability. Currently, in line with the Korean banking industry, we derive a substantial majority of our revenues from our loan and other credit products. To reduce our traditional reliance on lending as a source of revenue and to increase our profitability, we have been seeking to further diversify our earnings base, in particular by focusing onfee-based services, such as foreign exchange, trade finance and derivatives products, investment banking and advisory investment trust services for our corporate customers and asset management and mutual funds, investment trust products and beneficiary certificates, and life andnon-life insurance products for our retail customers.

In addition, we intend to carefully consider potential acquisitions or other strategic investments that fit within our overall strategy. When considering acquisitions, we will focus on opportunities that supplement the range of products and services we offer and strengthen our existing customer base, enable us to maintain our standard for asset quality and profitability and provide us with a reasonable return on our investment. We may also consider acquiring or merging with other financial institutions, particularly in thenon-banking sector, to achieve more balanced growth and further diversify our revenue base.

Increase “fintech” capabilities. We have been enhancing our financial technology, or “fintech,” capabilities in order to expand ournon-traditional financial service delivery channels for our customers. We have established a mobile financial service platform through the launch of the first mobile-only banking service in Korea called WiBee Bank in May 2015. In addition, in April 2017, K bank, formed by a consortium with KT Corporation and 20 other companies, in which we, through Woori Bank, own 13.8% of the equity with voting rights, launched its services to become the first Internet-only bank in Korea.

We have also strengthened our alliances with information technology companies to provide innovative electronic payment methods, including Woori Samsung Pay with Samsung Electronics, which is a cardless ATM withdrawal system that utilizes smartphones. Through such partnership with Samsung Electronics, in April 2019, we introduced additional services that allow customers to open checking accounts, apply for debit cards and utilize currency exchange services using the Samsung Pay mobile application.

In April 2019, we also launched Digital Innovation Lab, or DinnoLab, which provides fintech startup companies in Korea with opportunities to test their services through an open application programming interface and Amazon Web Service’s cloud system. In June 2019, we introduced a robotic process automation system to improve our operations, minimize human error, support business activities and increase efficiency and productivity. In August 2019, we launched Woori WON Banking, our main mobile banking application, to provide enhanced digital platform services to our customers.

Expand presence in the global market. We have continuously expanded our overseas operations since our establishment of the first overseas branch of a Korean commercial bank in Tokyo, Japan in 1968. In December 2014, we became the first Korean bank to be involved in a merger with a listed overseas bank when our subsidiary PT. Bank Woori Indonesia merged with and into PT. Bank Himpunan Saudara 1906, which was renamed PT Bank Woori Saudara Indonesia 1906, Tbk. In October 2016, we acquired a 51% equity interest in Wealth Development Bank Corp., a thrift bank in the Philippines, and have partnered with Vicsal Development Corporation, an operator of department stores and supermarkets in the Philippines and another major shareholder

 

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of Wealth Development Bank Corp., to actively expand our base of local customers. In addition, in November 2016, we obtained a banking license to establish a local subsidiary in Vietnam, Woori Bank Vietnam, which commenced operations in January 2017 and manages the local operations of our branches in Vietnam. Furthermore, we have expanded the scope of our operations in Myanmar, Indonesia, Cambodia and the Philippines in order to capitalize on the potential for high growth and profitability in Southeast Asia and established a representative office in Poland as well as additional branches in India. In 2018, we acquired VisionFund (Cambodia) Ltd., a microfinance deposit-taking institution in Cambodia, which was renamed WB Finance Co., Ltd., and established a German subsidiary, Woori Bank Europe GmbH, which is headquartered in Frankfurt. In February 2020, with the approval of the Cambodian financial authorities, Woori Finance (Cambodia) Plc., a microfinance institution, merged with and into WB Finance Co., Ltd., and further expanded our network of local deposit-taking services, as a result of which we have a presence in over 20 countries with over 470 branches and offices outside Korea.

Develop and increase productivity of our professional workforce. We aim to retain the most qualified and highly-trained professionals in the market, and we intend to continue to focus on the development and training of our core professionals. In order to boost employee morale and productivity, we aim to create an environment that nurtures development and growth and accordingly have implemented performance-based incentive programs to recognize high performers on both an individual and business group level. In addition, a rigorous ethics management program and related measures have been instituted to reduce operational risk and help ensure compliance with our internal standards and policies.

Corporate Banking

We provide commercial banking services to large corporate customers (including government-owned enterprises) and small- andmedium-sized enterprises in Korea. Currently, our corporate banking operations consist mainly of lending to and taking deposits from our corporate customers. We also provide ancillary services on a fee basis, such as inter-account transfers, transfers of funds from branches and agencies of a company to its headquarters and transfers of funds from a company’s customer accounts to the company’s main account. We provide our corporate banking services predominantly through Woori Bank.

The following table sets forth the balances and percentages of our total lending and total deposits represented by our large corporate and small- andmedium-sized enterprise customer loans and deposits, respectively, and the number of such customers as of the dates indicated:

 

   As of December 31, 
   2017  2018  2019 
   Amount   % of
Total
  Amount   % of
Total
  Amount   % of
Total
 
   (in billions of Won, except percentages) 

Loans(1):

  

Small- andmedium-sized enterprise(2)

  74,906    29.6 79,371    30.3 85,367    31.4

Large corporate(3)

   43,372    17.2   38,256    14.6   31,058    11.4 

Others(4)

   18,398    7.3   19,260    7.4   23,167    8.5 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total

  136,676    54.1 136,887    52.3 139,592    51.3
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Deposits:

          

Small- andmedium-sized enterprise

  42,693    18.2 46,753    18.8 52,998    20.0

Large corporate

   68,340    29.1   75,128    30.2   76,943    29.1 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total

  111,033    47.3 121,881    49.0 129,941    49.1
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Number of borrowers:

          

Small- andmedium-sized enterprise

   280,129     306,424     325,749   

Large corporate

   4,169     5,389     6,046   

 

(1)

Not including due from banks, other financial assets (or other receivables) and outstanding credit card balances, and prior to deducting allowance for credit losses and present value discount or reflecting deferred origination costs.

 

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(2)

Loans to “small- andmedium-sized enterprises” as defined in the Framework Act on Small and Medium Enterprises of Korea and related regulations (and including project finance loans to such enterprises). See “—Small- andMedium-Sized Enterprise Banking.”

(3)

Loans to companies that are not “small- andmedium-size enterprises” as defined in the Framework Act on Small and Medium Enterprises of Korea and related regulations, and typically including companies that have assets of ₩12 billion or more and are therefore subject to external audit under the Act on External Audits of Stock Companies. See “—Large Corporate Banking.”

(4)

Includes loans to governmental agencies, foreign loans and other corporate loans.

Corporate loans we provide consist principally of the following:

 

  

working capital loans, which are loans used for general working capital purposes, typically with a maturity of one year or less, including notes discounted and trade finance; and

 

  

facilities loans, which are loans to finance the purchase of materials, equipment and facilities, typically with a maturity of three years or more.

On the deposit-taking side, we currently offer our corporate customers several types of corporate deposit products. These products can be divided into two general categories: demand deposits that have no restrictions on deposits or withdrawals, but which offer a relatively low interest rate; and time deposits from which withdrawals are restricted for a period of time, but offer higher interest rates. We also offer installment deposits, certificates of deposit and repurchase instruments. We offer varying interest rates on our 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.

Small- andMedium-Sized Enterprise Banking

We use the term “small- andmedium-sized enterprises” as defined in the Framework Act on Small and Medium Enterprises of Korea and related regulations. Under the Framework Act on Small and Medium Enterprises of Korea and related regulations, in order to qualify as a small- andmedium-sized enterprise, (i) the enterprise’s total assets at the end of the immediately preceding fiscal year must be less than ₩500 billion, (ii) the enterprise must meet the average or annual sales revenue standards prescribed by the Enforcement Decree of the Framework Act on Small and Medium Enterprises that are applicable to the enterprise’s primary business, and (iii) the enterprise must meet the standards of management independence from ownership as prescribed by the Enforcement Decree of the Framework Act on Small and Medium Enterprises. However, pursuant to an amendment to the Framework Act on Small and Medium Enterprises, which will become effective in June 2020, an enterprise that qualifies as a small- andmedium-sized enterprise pursuant to the above definition shall no longer be considered a small- andmedium-sized enterprise if it is incorporated into, or is deemed to be incorporated into, a business group subject to certain disclosure requirements under the Monopoly Regulation and Fair Trade Act. Furthermore, certified social enterprises (as defined in the Social Enterprise Promotion Act of Korea), cooperatives, federations of cooperatives, social cooperatives and federations of social cooperatives (as defined in the Framework Act on Cooperatives), as well as cooperatives, federations and national federations (as defined in the Consumer Cooperatives Act) that satisfy the requirements prescribed by the Framework Act on Small and Medium Enterprises, may also qualify as small- andmedium-sized enterprises. The small- andmedium-sized enterprise segment of the corporate banking market has grown significantly in recent years, including as a result of government measures to encourage lending to these enterprises. As of December 31, 2019, 23.5% of our small- andmedium-sized enterprise loans were extended to borrowers in the manufacturing industry, 16.3% were extended to borrowers in the retail and wholesale industries, and 7.2% were extended to borrowers in the hotel, leisure and transportation industries.

We service our small- andmedium-sized enterprise customers primarilythrough Woori Bank’s network of branches and small- andmedium-sized enterprise relationship managers. As of December 31, 2019, Woori Bank had stationed one or more relationship managers at 725 branches, of which 366 were located in the Seoul metropolitan area.The relationship managers specialize in servicing the banking needs of small- andmedium-sized enterprise customers and concentrate their marketing efforts on developing new customers in this segment. As of December 31, 2019, Woori Bank had a total of 909 small- andmedium-sized enterprise relationship managers stationed at its branches (as well as 412non-stationed employees who serve as relationship managers as needed).

 

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In addition to increasing our dedicated staffing and branches, our strategy for this banking segment is to identify promising industry sectors and to develop and market products and services targeted towards customers in these sectors. We have also developedin-house industry specialists who can help us identify leading small- andmedium-sized enterprises in, and develop products and marketing strategies for, these targeted industries. In addition, we operate customer loyalty programs at Woori Bank for our most profitable small- andmedium-sized enterprise customers and provide them with benefits and services such as preferential rates, free seminars and workshops and complementary invitations to cultural events.

Lending Activities.We provide both working capital loans and facilities loans to our small- andmedium-sized enterprise customers. As of December 31, 2019, working capital loans and facilities loans accounted for 43.5% and 53.3%, respectively, of our total small- andmedium-sized enterprise loans.As of December 31, 2019, we had 325,749 small- andmedium-sized enterprise borrowers.

As of December 31, 2019, secured loans and loans guaranteed by a third party accounted for 67.9% and 5.8%, respectively, of our small- andmedium-sized enterprise loans. As of December 31, 2019, approximately 76.8% of the secured loans were secured by real estate and 1.0% were secured by deposits.Working capital loans generally have a maturity of one year, but may be extended on an annual basis for an aggregate term of three to five years if periodic payments are made. Facilities loans have a maximum maturity of 10 years.

When evaluating the extension of working capital loans and facilities loans, we review the creditworthiness and capability to generate cash of the small- andmedium-sized enterprise customer. Furthermore, we take corporate guarantees and credit guarantee letters from other financial institutions and use deposits that the borrower has with us or securities pledged to us as 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 generally revalue any collateral on a periodic basis (every year for real estate (with apartments being revalued every month, subject to the availability of certain specified market value information), every year for equipment, every month for deposits and every week for stocks listed on a major Korean stock exchange) or if a trigger event occurs with respect to the loan in question.

Pricing.We establish the pricing for our small- andmedium-sized enterprise loan products based principally on transaction risk, our cost of funding and market considerations. Our lending rates are generally determined using our Credit Wizard system. We use our Credit Wizard system to manage our lending activities, and input data gathered from loan application forms, credit scores of borrowers and the appraisal value of collateral provided by external valuation experts into the Credit Wizard system and update such information periodically to reflect changes in such information. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Credit Risk Management—Credit Evaluation and Approval.” We measure transaction risk using factors such as the credit rating assigned to a particular borrower and the value and type of collateral. Our system also takes into account cost factors such as the current market interest rate, opportunity cost and cost of capital, as well as a spread calculated to achieve a target rate of return. Depending on the price and other terms set by competing banks for similar borrowers, we may reduce the interest rate we charge to compete more effectively with other banks. Loan officers have limited discretion in deciding what interest rates to offer, and significant variations require review at higher levels. As of December 31, 2019, approximately 64.5% of our small- andmedium-sized enterprise loans had interest rates that varied with reference to current market interest rates.

Large Corporate Banking

Our large corporate customers consist of companies that are not “small- andmedium-size enterprises” as defined in the Framework Act on Small and Medium Enterprises of Korea and related regulations, and typically include companies that have assets of ₩12 billion or more and are therefore subject to external audit under the Act on External Audits of Stock Companies. As a result of our history and development, particularly the history of Woori Bank, we remain the main creditor bank to many of Korea’s largest corporate borrowers.

 

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In terms of our outstanding loan balance, as of December 31, 2019, 37.6% of our large corporate loans were extended to borrowers in the manufacturing industry, 31.3% were extended to borrowers in the finance and insurance industries, and 9.0% were extended to borrowers in the retail and wholesale industries.

We service our large corporate customers primarily through Woori Bank’s network of dedicated corporate banking centers and general managers. Woori Bank operates 10 dedicated corporate banking centers, all of which are located in the Seoul metropolitan area.Each center is staffed with one or more general managers, and certain centers are headed by a senior general manager. Depending on the center, each such manager is responsible for large corporate customers that either are affiliates of a particularchaebol or operate in a particular industry or region. As of December 31, 2019, Woori Bank had a total of 81 generalmanagers who focus on marketing to and managing the accounts of large corporate customers.

Our strategy for the large corporate banking segment is to develop new products and cross-sell our existing products and services to our core base of large corporate customers. In particular, we continue to focus on marketingfee-based products and services such as foreign exchange and trade finance services, derivatives and other risk hedging products, investment banking services and advisory services. We have also been reviewing the credit and risk profiles of our existing customers as well as those of our competitors, with a view to identifying a target group of high-quality customers on whom we can concentrate our marketing efforts. In addition, we are seeking to continue to increase thechaebol-, region- and industry-based specialization of the managers at our dedicated corporate banking centers, including through the operation of a knowledge management database that allows greater sharing of marketing techniques and skills.

Lending Activities.  We provide both working capital loans and facilities loans to our large corporate customers. As of December 31, 2019, working capital loans (including domestic usance, bills bought and securities sold under repurchase agreements) and facilities loans accounted for 67.0% and 18.9%, respectively, of our total large corporate loans.

Loans to large corporate customers may be secured by real estate or deposits or be unsecured. As of December 31, 2019, secured loans and loans guaranteed by a third party accounted for 17.3% and 5.3%, respectively, of our large corporate loans.Since a relatively low percentage of our large corporate loan portfolio is secured by collateral, we may be required to establish larger allowances for credit losses with respect to any such loans that becomenon-performing or impaired. See “—Assets and Liabilities—Asset Quality of Loans—Loan Loss Provisioning Policy.” As of December 31, 2019, approximately 58.2% of the secured loans were secured by real estate and approximately 3.3% were secured by deposits. Working capital loans generally have a maturity of one year but may be extended on an annual basis for an aggregate term of three to five years. Facilities loans have a maximum maturity of 10 years.

We evaluate creditworthiness and collateral for our loans to large corporate customers in essentially the same way as we do for loans to small- andmedium-sized enterprise customers. See “—Small- andMedium-Sized Enterprise Banking—Lending Activities.”

Pricing.  We determine the pricing of our loans to large corporate customers in the same way that we determine the pricing of our loans to small- andmedium-sized enterprise customers. See “—Small- andMedium-Sized Enterprise Banking—Pricing.” As of December 31, 2019, approximately 79.0% of these loans had interest rates that varied with reference to current market interest rates.

Consumer Banking

We provide retail banking services to consumers in Korea. Our consumer banking operations consist mainly of lending to and taking deposits from our retail customers. We also provide ancillary services on a fee basis, such as wire transfers. While we have historically attracted and held large amounts of consumer deposits through our extensive branch network, our substantial consumer lending growth occurred principally in recent years, in line with the increase in the overall level of consumer debt in Korea. We provide our consumer banking services primarily through Woori Bank. See “—Branch Network and Other Distribution Channels.”

We classify our consumer banking customers based on their individual net worth and contribution to our consumer banking operations into four groups: high net worth; mass affluent; middle class; and mass market. We

 

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differentiate our products, services and service delivery channels with respect to these segments and target our marketing and cross-selling efforts based on this segmentation. With respect to the high net worth and mass affluent segments, we have established private banking operations to better service customers in these segments. See “—Private Banking Operations.” With respect to the middle class segment, we seek to use our branch-level sales staff to maximize the overall volume of products and services we provide. With respect to the mass market segment, we have focused on increasing our operating efficiency by encouraging customers to migrate tolow-cost alternative service delivery channels, such as the Internet, call centers, mobile banking and ATMs.

Lending Activities

We offer a variety of consumer loan products to households and individuals. We differentiate our product offerings based on a number of factors, including the customer’s age group, the purpose for which the loan is used, collateral requirements and maturity. The following table sets forth the balances and percentage of our total lending represented by our consumer loans as of the dates indicated:

 

  As of December 31, 
  2017  2018  2019 
  Amount(1)  % of
Total Loans(2)
  Amount(1)  % of
Total Loans(2)
  Amount(1)  % of
Total Loans(2)
 
  (in billions of Won, except percentage) 

General purpose household loans

 36,301   14.4 39,492   15.1 40,870   15.0

Mortgage loans

  47,476   18.8   51,280   19.6   54,511   20.1 

Home equity loans

  25,513   10.1   26,324   10.0   28,622   10.5 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 109,290   43.2 117,096   44.7 124,003   45.6
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

(1)

Not including outstanding credit card balances, and prior to deducting allowance for credit losses and present value discount or reflecting deferred origination costs.

(2)

Total loans do not include other financial assets (or other receivables) and are before the deduction of allowance for credit losses and present value discount and the reflection of deferred origination costs.

Our consumer loans consist of:

 

  

general purpose household loans, which are loans made to customers for any purpose (other than mortgage and home equity loans), and 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; and

 

  

mortgage loans,which are loans made to customers to finance home purchases, construction, improvements or rentals, andhome equity loans, which are loans made to customers secured by their homes to ensure loan repayment.

For secured loans, including mortgage and home equity loans, we generally lend up to 70% of the collateral value (except in areas of high speculation designated by the government where we generally limit our lending to 40% of the appraised value of collateral) minus the value of any lien or other security interest that is prior to our security interest.In calculating the collateral value for real estate for such secured consumer loans (which principally consists of residential properties), we generally use the fair value of the collateral as appraised by Korea Investors Service which is collated in our Credit Wizard system. We generally revalue collateral on a periodic basis. As of December 31, 2019, the revaluation frequency was every year for real estate (with apartments being revalued every month, subject to the availability of certain specified market value information), every year for equipment, every month for deposits and every week for stocks listed on a major Korean stock exchange.

A borrower’s eligibility for general purpose household loans is primarily determined by such borrower’s creditworthiness. In reviewing a potential borrower’s loan application, we also consider the suitability of the borrower’s proposed use of funds, as well as the borrower’s ability to provide a first-priority mortgage. A borrower’s eligibility for a home equity loan is primarily determined by such borrower’s creditworthiness

 

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(including as determined by our internal credit scoring protocols) and the value of the collateral property, as well as any third party guarantees of the borrowed amounts.

We also offer a variety of collective housing loans, including loans to purchase property or finance the construction of housing units, loans to contractors to be used for working capital purposes, and loans to educational institutions andnon-profit entities to finance the construction of dormitories. Collective housing 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 suitability of the borrower’s proposed use of funds. 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.

General Purpose Household Loans

Our general purpose household loans may be secured by real estate (other than homes), deposits or securities. As of December 31, 2019, approximately ₩30,982 billion, or 75.8%, of our general purpose household loans were unsecured, although some of these loans were guaranteed by a third party.Overdraft loans are primarily unsecured and typically have a maturity between one and three years, and the amount of such loans has been steadily declining. As of December 31, 2019, this amount was approximately ₩26 million.

Pricing. The interest rates on our general purpose household loans are either a periodic floating rate (which is based on a base rate determined for three-month,six-month or twelve-month periods, further adjusted to account for the borrower’s credit score and our opportunity cost) or a fixed rate that reflects our internal cost of funding and similar adjustments, but taking into account interest rate risks. In 2010, we began using the “Cost of Fund Index” (or COFIX) benchmark rate, as announced by the Korea Federation of Banks, as the base rate for our general purpose household loans with periodic floating rates in place of the benchmark certificate of deposit rate that we had traditionally used for such purpose.

Our interest rates also incorporate a margin based on, among other things, the type of collateral (if any), priority with respect to any security, our targetloan-to-value ratio and loan duration. We also can adjust the applicable rate based on current or expected profit contribution of the customer. Our lending rates are generally determined by our Credit Wizard system.The applicable interest rate is determined at the time of the drawdown of the loan. We also charge a termination fee in the event a borrower repays the loan prior to maturity. As of December 31, 2019, approximately 53.6% of our general purpose household loans had floating interest rates.

Mortgage and Home Equity Lending

We provide customers with a number of mortgage and home equity loan products that have flexible features, including terms, repayment schedules, amounts and eligibility for loans.The maximum term of our mortgage and home equity loans is typically 35 years.Most of our mortgage and home equity loans provided prior to January 2016 have an interest-only payment period of 10 years or less.However, the Korea Federation of Banks’ implementation of its Guidelines on Banks’ Mortgage Loan Screening changed the default interest-only payment period to one year or less, which applies to loans that were originated subsequent to the effective date of the Guidelines in January 2016. With respect to mortgage and home equity loans, we determine the eligibility of borrowers based on the borrower’s personal information, transaction history and credit history using our Credit Wizard system. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Credit Risk Management—Credit Evaluation and Approval.” The eligibility of a borrower that is participating in a housing lottery will depend on proof that it has paid a deposit or can obtain a guarantee from a Korean government-related housing fund.

As of December 31, 2019, approximately 63.9% of our mortgage and home equity loans were secured by residential or other property, 25.9% of our mortgage and home equity loans were guaranteed by Korean government-related housing funds and 6.0% of our mortgage and home equity loans, contrary to general practices in the United States, were unsecured (although the use of proceeds from mortgage and home equity loans is restricted for the purpose of financing home purchases and some of these loans were guaranteed by a

 

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third party).One reason that a portion of our mortgage and home equity 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 and home equity loans become secured by the new housing purchased by these borrowers. As of December 31, 2019, we had issued unsecured construction loans relating to housing where construction was not completed in the amount of ₩4,998 billion.For the year ended December 31, 2019, the average initialloan-to-value ratio of our mortgage loansand home equity loans was approximately 58.3% and 45.4%, respectively, compared to 55.5% and 45.8% for the year ended December 31, 2018.The averageloan-to-value ratio of our mortgage loans and home equity loans as of December 31, 2019 was approximately 53.2% and 46.4%, respectively, compared to 52.9% and 47.3% as of December 31, 2018.

Pricing.  The interest rates for our mortgage and home equity loans are determined on essentially the same basis as our general purpose household loans, except that for mortgage and home equity loans we place significantly greater weight on the value of any collateral that is being provided to secure the loan. The base rate we use in determining the interest rate for our mortgage and home equity loans is identical to the base rate we use to determine pricing for our general purpose household loans. As of December 31, 2019, approximately 50.8% of our outstanding mortgage and home equity loans had floating interest rates.

Private Banking Operations

Our private banking operations within Woori Bank aim to service our high net worth and mass affluent retail customers. As of December 31, 2019, we had 210,946 customers who qualified for private banking services, representing 0.9% of our total retail customer base.Of the total deposits of our retail unit of ₩100.5 trillion as of December 31, 2019, high net worth and mass affluent customers accounted for 62.3%.

Through our private bankers, we provide financial and real estate advisory services to our high net worth and mass affluent customers. We also market differentiated investment and banking products and services to these segments, including beneficiary certificates, overseas mutual fund products, specialized bank accounts and credit cards. In addition, we have developed a customer loyalty program for our private banking customers that provides preferential rate and fee benefits and awards. We have also segmented our private banking operations by introducing exclusive private client services for high net worth customers who individually maintain a deposit balance of at least ₩100 million.We believe that our private banking operations will allow us to increase our revenues from our existing high net worth and mass affluent customers, as well as attract new customers in these segments.

Woori Bank has 730 branches that offer private banking services.These branches are staffed by 743 private bankers, and almost all of the branches are located in metropolitan areas, including Seoul.

Woori Bank also operates an advisory center in Seoul for its private banking clients, which employs 20 specialists advising on matters of law, tax, real estate, risk assessment and investments.

Deposit-Taking Activities

We are one of the largest deposit holders among Korean banks, in large part due to our nation-wide branch network. The balance of our deposits from retail customers was ₩95,757 billion as of December 31, 2017, ₩95,146 billion as of December 31, 2018 and ₩106,255 billion as of December 31, 2019 which constituted 40.8%, 38.2% and 40.1%, respectively, of the balance of our total deposits.

We offer diversified deposit products that target different customers with different needs and characteristics. These deposit products fall into five general categories:

 

  

demand deposits, which either do not accrue interest or accrue interest at a lower rate than time, installment or savings deposits. The customer may deposit and withdraw funds at any time and, if the deposits are interest-bearing, they accrue interest at a fixed or variable rate depending on the period and/or amount of deposit;

 

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time deposits,which generally require a customer to maintain a deposit for a fixed term during which interest accrues at a fixed or floating rate. Early withdrawals require penalty payments. The term for time deposits typically ranges from one month to five years;

 

  

savings deposits, which allow the customer to deposit and withdraw funds at any time and accrue interest at a fixed rate set by us depending upon the period and amount of deposit;

 

  

installment deposits, which generally require the customer to make periodic deposits of a fixed amount over a fixed term during which interest accrues at a fixed rate. Early withdrawals require penalty payment. The term for installment deposits range from six months to five years; and

 

  

certificates of deposit, the maturities of which range from 30 days to five years, with a required minimum deposit of ₩10 million.Interest rates on certificates of deposit vary with the length of deposit and prevailing market rates. Certificates of deposit may be sold at face value or at a discount with the face amount payable at maturity.

The following table sets forth the percentage of our total retail and corporate deposits represented by each deposit product category as of December 31, 2019:

 

Demand Deposits

  

Time Deposits

  

Savings Deposits

  

Installment Deposits

  

Certificates of Deposit

8.62%  54.97%  36.04%  0.01%  0.36%

We offer varying interest rates on our deposit products depending on market interest rates as reflected in average funding costs, the rate of return on our interest-earning assets and the interest rates offered by other commercial banks. Generally, the interest payable is the highest on installment deposits and decreases with certificate of deposit accounts and time deposits and savings deposit accounts receiving relatively less interest, and demand deposits accruing little or no interest.

We also offer deposits in foreign currencies and a specialized deposit product, the apartment application comprehensive deposit, which is a monthly installment comprehensive savings program providing the holder with a preferential right to subscribe for new national housing units constructed under the Housing Act or new privately constructed housing units. This deposit product requires monthly installments of ₩20,000 to ₩500,000, terminates when the holder is selected as a subscriber for a housing unit and accrues interest at variable rates depending on the term.

The Monetary Policy Committee of the Bank of Korea imposes a reserve requirement on Won currency deposits of commercial banks based generally on the type of deposit instrument. The minimum reserve requirement ratio is 7%.See “—Supervision and Regulation—Principal Regulations Applicable to Banks—Liquidity.” Ongoing regulatory reforms have removed all controls on lending rates and deposit rates (except for the prohibition on interest payments on current account deposits).

The Depositor Protection Act provides for a deposit insurance system where the KDIC 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 pay a quarterly premium of 0.02% of our average deposits and a quarterly special contribution of 0.025% of our average deposits, in each case for the relevant quarter.For the year ended December 31, 2019, we paid an aggregate of ₩337 billion of such premiums and contributions.

Branch Network and Other Distribution Channels

Woori Bank had a total of 874 banking branches in Korea as of December 31, 2019, which was one of the most extensive networks of branches among Korean commercial banks.In recent years, demand in Korea for mutual funds and other asset management products as well as bancassurance products has been rising. These products require an extensive sales force and customer interaction to sell, further emphasizing the need for a large branch network. As a result, an extensive branch network is important to attracting and maintaining retail customers, as they generally conduct a significant portion of their financial transactions through bank branches. We believe that our extensive branch network in Korea helps us to maintain our retail customer base, which in turn provides us with a stable and relatively low cost funding source.

 

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The following table presents the geographical distribution of Woori Bank’s banking branch network in Korea as of December 31, 2019:

 

   Total 
   Number   % of
Total
 

Area

    

Seoul

   396    45.3

Six largest cities (other than Seoul)

   150    17.2 

Other

   328    37.5 
  

 

 

   

 

 

 

Total

   874    100
  

 

 

   

 

 

 

In order to maximize access to our products and services, we have established an extensive network of ATMs and cash dispensers, which are located in branches as well as unmanned outlets. Woori Bank had 4,855 ATMs and cash dispensers as of December 31, 2019.

We actively promote the use of alternative service delivery channels in order to provide convenient service to customers. We also benefit from customers’ increasing use of these channels, as they allow us to maximize the marketing and sales functions at the branch level, reduce employee costs and improve profitability. The following tables set forth information, for the periods indicated, relating to the number of transactions and the fee revenue of our alternative service delivery channels with respect to Woori Bank.

 

   For the year ended December 31, 
   2017   2018   2019 

ATMs(1):

      

Number of transactions (millions)

   316    296    272 

Fee income (billions of Won)

  40   36   32 

Telephone banking:

      

Number of users

   6,384,164    6,360,743    6,336,310 

Number of transactions (millions)

   104    148    143 

Fee income (billions of Won)

  3   2   1.5 

Internet banking:

      

Number of users

   16,554,353    17,387,658    17,975,675 

Number of transactions (millions)

   7,566    7,660    10,116 

Fee income (billions of Won)

  160   178   199 

 

(1)

Includes cash dispensers.

Most of our electronic banking transactions do not generate fee income as many of those transactions are free of charge, such as balance inquiries, consultations with customer representatives or transfers of money. This is particularly true for telephone banking services, where a majority of the transactions are balance inquiries or consultations with customer representatives, although other services such as money transfers are also available.

Our automated telephone banking system offers a variety of services, including inter-account fund transfers, balance and transaction inquiries and customer service inquiries. We also operate a call center that handles calls from customers, engages in telemarketing and assists in our collection efforts.

Our Internet banking services include balance and transaction inquiries, money transfers, loan applications, bill payment and foreign exchange transactions. We seek to maintain and increase our Internet banking customer base by focusing largely on our younger customers and those that are able to access the Internet easily (such as office workers) as well as by developing additional Internet-based financial services and products. We also develop new products to target different types of customers with respect to our Internet banking services, and have developed a service that enables private banking customers to access their accounts on a website that provides specialized investment advice. We also offer online escrow services.

 

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In addition, we provide mobile banking services to our customers, which is available to all our Internet-registered users. These services allow our customers to complete selected banking transactions through major Korean telecommunications networks using their smart phones or other mobile devices. In May 2015, we launched the first mobile-only banking service in Korea, called WiBee Bank, and we are expanding its services to Southeast Asia.

We also offer our“Win-CMS” service to corporate customers of Woori Bank, which provides an integrated electronic cash management system andin-house banking platform for such customers.

Credit Cards

We offer credit card products and services mainly to consumers and corporate customers in Korea. In April 2013, as a part of our strategy to enhance our credit card operations and increase its synergies with our other businesses, Woori Bank effected a horizontalspin-off of its credit card business, and the former credit card business of Woori Bank was operated by its wholly-owned subsidiary, Woori Card, until September 2019, when we conducted a “comprehensive stock exchange” under Korean law with Woori Bank, pursuant to which Woori Card became our direct and wholly-owned subsidiary. See “Item 4.A. History and Development of the Company—Establishment of Woori Financial Group—Reorganization and Expansion of Woori Financial Group.”

As of December 31, 2019, Woori Card’s market share based on transaction volume was approximately 8.7%, which ranked Woori Card as the sixth largest credit card issuer in Korea, according to BC Research, which is a quarterly report issued by BC Card.

Our credit card operations benefit from Woori Card’s ownership of a 7.65% equity stake in BC Card.BC Card isco-owned by KT Corporation, which is one of Korea’s largest telecommunications companies, and other Korean financial institutions, and operates the largest merchant payment network in Korea as measured by transaction volume. This ownership stake allows us to outsource production and delivery of new credit cards, the preparation of monthly statements, management of merchants and other ancillary services to BC Card for our credit card operations. In addition, in October 2019, Woori Bank acquired a 20% equity interest in Lotte Card Co., Ltd., the eighth largest credit card issuer in Korea, according to BC Research.

Products and Services

We currently have the following principal brands of credit cards outstanding:

 

  

a “Woori” brand;

 

  

a “BC Card” brand; and

 

  

a “Visa” brand.

We issue “Visa” brand cards under anon-exclusive license agreement with Visa International Service Association and also issue “MasterCard,” “JCB” and “Union Pay” brand cards under anon-exclusive,co-branding agreement with BC Card.

We offer a number of different services to holders of our credit cards. Generally, these services include:

 

  

credit purchase services, which allow cardholders to purchase merchandise or services on credit and repay such credit on alump-sum or installment basis;

 

  

cash advance services from ATMs and bank branches; and

 

  

credit card loans, which are loans that cardholders can obtain based on streamlined application procedures.

Unlike in the United States and many other countries, where most credit cards are revolving cards that allow outstanding balances to be rolled over from month to month so long as a required minimum percentage is repaid, cardholders in Korea are generally required to pay for theirnon-installment purchases as well as cash advances within approximately 15 to 60 days of purchase or advance, depending on their payment cycle.

 

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The following tables set forth certain data relating to the credit card operations of Woori Card (including BC Cards and Visa Cards issued through the BC Card consortium) as of the dates or for the period indicated:

 

  As of or for the year ended December 31, 
  2017  2018  2019 
  (in billions of Won, unless indicated otherwise) 

Number of credit card holders (at year end) (thousands of holders)

   

General accounts

  12,509   12,525   13,000 

Corporate accounts

  550   460   555 
 

 

 

  

 

 

  

 

 

 

Total

  13,059   12,985   13,555 
 

 

 

  

 

 

  

 

 

 

Active ratio(1)

  50.70  52.73  55.00

Credit card interest and fees

   

Installment and cash advance interest

 225  224  243 

Annual membership fees

  72   78   86 

Merchant fees

  896   943   918 

Other fees

  570   606   640 
 

 

 

  

 

 

  

 

 

 

Total

 1,763  1,851  1,885 
 

 

 

  

 

 

  

 

 

 

Charge volumes

   

General purchase

 61,175  58,952  64,762 

Installment purchase

  6,796   8,201   7,912 

Cash advance

  4,700   4,859   4,862 

Card loan

  2,944   3,306   3,664 
 

 

 

  

 

 

  

 

 

 

Total

 75,615  75,318  81,200 
 

 

 

  

 

 

  

 

 

 

Outstanding balances (at year end)

   

General purchase

 2,595  3,057  3,243 

Installment purchase

  1,559   2,089   1,969 

Cash advance

  574   607   585 

Card loan

  2,107   2,305   2,611 
 

 

 

  

 

 

  

 

 

 

Total

 6,835  8,058  8,408 
 

 

 

  

 

 

  

 

 

 

Average outstanding balances

   

General purchase

 2,822  3,036  3,292 

Installment purchase

  1,520   1,911   2,046 

Cash advance

  581   596   591 

Card loan

  2,174   2,391   2,567 
 

 

 

  

 

 

  

 

 

 

Total

 7,097  7,934  8,496 
 

 

 

  

 

 

  

 

 

 

Delinquency ratios(2)

   

Less than 1 month

  1.78   1.53   1.19 

From 1 month to 3 months

  0.72   0.72   0.65 

From 3 months to 6 months

  0.57   0.64   0.65 

Over 6 months

  0.00   0.00   0.00 
 

 

 

  

 

 

  

 

 

 

Total

  3.07  2.89  2.49
 

 

 

  

 

 

  

 

 

 

Non-performing loan ratio(3)

  0.83  0.87  0.87

Gross charge-offs

 228  242  281 

Recoveries

  51   57   60 
 

 

 

  

 

 

  

 

 

 

Net charge-offs

 177  185  221 
 

 

 

  

 

 

  

 

 

 

Grosscharge-off ratio(4)

  3.22  3.04  3.31

Netcharge-off ratio(5)

  2.49  2.33  2.61

 

(1)

Represents the ratio of accounts used at least once within the past month to total accounts as of the end of the relevant year.

(2)

Our delinquency ratios may not fully reflect all delinquent amounts relating to our outstanding balances since a certain portion of delinquent credit card balances (defined as balances one day or more past due) were restructured into loans and were not treated as being delinquent at the time of conversion or for a period of time thereafter. Including all restructured loans, outstanding balances overdue by more than one month accounted for 3.2% of our credit card balances as of December 31, 2019.

 

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(3)

Represents the ratio of balances that are more than three months overdue to total outstanding balances as of the end of the relevant year. These ratios do not include the following amounts of previously delinquent credit card balances restructured into loans that were classified as normal or precautionary as of December 31, 2017, 2018 and 2019:

 

   As of December 31, 
   2017   2018   2019 
   (in billions of Won) 

Restructured loans

  122   137   154 

 

(4)

Represents the ratio of gross charge-offs for the year to average outstanding balances for the year. Ourcharge-off policy is to charge off balances which are more than six months past due (including previously delinquent credit card balances restructured into loans that are more than six months overdue from the point at which the relevant balances were so restructured), except for those balances with a reasonable probability of recovery.

(5)

Represents the ratio of net charge-offs for the year to average outstanding balances for the year.

We offer a diverse range of credit card products within our various brands. Factors that determine which type of card a particular cardholder may receive include net worth, age, location, income level and the particular programs or services that may be associated with a particular card. Targeted products that we offer include:

 

  

cards that offer additional benefits, such as frequent flyer miles and award program points that can be redeemed for services, products or cash;

 

  

gold cards, platinum cards and other preferential members’ cards that have higher credit limits and provide additional services;

 

  

corporate and affinity cards that are issued to employees or members of particular companies or organizations; and

 

  

revolving credit cards and cards that offer travel services and insurance.

In recent years, credit card issuers in Korea have agreed with selected cardholders to restructure their delinquent credit card account balances as loans that have more gradual repayment terms, in order to retain fundamentally sound customers who are experiencing temporary financial difficulties and to increase the likelihood of eventual recovery on those balances. In line with industry practice, we have restructured a portion of our delinquent credit card account balances as loans. The general qualifications to restructure delinquent credit card balances as loans are that the delinquent amount be more than one month overdue and in excess of ₩1 million. The terms of the restructured loans usually require the payment of approximately 10% to 20% of the outstanding balance as a down payment and that they be guaranteed by a third party and carry higher interest rates than prevailing market rates. These loans are usually required to be repaid by the borrower in installments over terms ranging from three months to 60 months. As of December 31, 2019, the total amount of our restructured loans was ₩165 billion.Because restructured loans are not initially recorded as being delinquent, our delinquency ratios do not fully reflect all delinquent amounts relating to our outstanding credit card balances.

Payments and Charges

Revenues from our credit card operations consist principally of cash advance charges, merchant fees, interest income from credit card loans, interest on late and deferred payments, and annual membership fees paid by cardholders.

Each cardholder is allocated an aggregate credit limit in respect of all cards issued under his or her account and each month. We advise each cardholder of the credit limit relating to the cards in his or her monthly billing statement. Credit limits in respect of card loans are established separately. We conduct ongoing monitoring of all cardholders and accounts, and may reduce the credit limit or cancel an existing cardholder’s card based on current economic conditions, receipt of new negative credit data from third party sources or the cardholder’s score under the credit risk management systems we use to monitor their behavior, even if the cardholder continues to make timely payments in respect of his or her cards. We consider an account delinquent if the payment due is not received on the first monthly payment date on which such payment was due, and late fees are immediately applied. Late fee charges and computation of the delinquency period are based on each outstanding

 

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unpaid transaction or installment, as applicable. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Credit Risk Management—Credit Review and Monitoring.”

Payments on amounts outstanding on our credit cards must be made (at the cardholder’s election at the time of purchase) either in full on each monthly payment date, in the case oflump-sum purchases, or in equal monthly installments over a fixed term from two months to 36 months, in the case of installment purchases. Cardholders may prepay installment purchases at any time without penalty. Payment for cash advances must be made on a lump sum basis. Payments for card loans must be made on an equal principal installment basis over a fixed term from three months up to a maximum of 36 months, up to a maximum loan amount of ₩30 million.

No interest is charged onlump-sum purchases that are paid in full by the monthly payment date. For installment purchases, we charge a fixed rate of interest on the outstanding balance of the transaction amount, based on the installment period selected at the time of purchase. For a new cardholder, we currently apply an interest rate between approximately 9.5% and 20.5% per annum as determined by the cardholder’s application system score. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Credit Risk Management—Credit Evaluation and Approval—Credit Card Approval Process” and “—Credit Review and Monitoring—Credit Card Review and Monitoring.”

For cash advances, finance charges start accruing immediately following the cash withdrawal. We currently charge a periodic finance charge on the outstanding balance of cash advance of approximately 6.4% to 23.8% per annum. The periodic finance charge assessed on such balances is calculated by multiplying the daily installment balances for each day during the billing cycle by the applicable periodic finance charge rate, and aggregating the results for each day in the billing period. In addition to finance charges, cardholders using cash advance networks operated by companies that are not financial institutions (such as Hannet and NICE) are charged a minimum commission of ₩700 and a maximum of ₩900 per withdrawal.

We also generally charge a basic annual membership fee up to ₩1,000,000 for our credit cards, which is determined based on various factors including the type of card, and whether affiliation options are selected by the cardholder. For certain cards, such as the Woori V Card, we will waive membership fees if customers charge above a certain amount.

We outsource the management of merchants to BC Card. We charge merchant fees to merchants for processing transactions. Merchant fees vary depending on the type of merchant and the total transaction amounts generated by the merchant. As of December 31, 2019, we charged merchants an average of 1.32% of their respective total transaction amounts. In addition to merchant fees, we receive nominal interchange fees for international card transactions.

Capital Markets Activities

We engage in capital markets activities for our own account and for our customers. Our capital markets activities include securities investment and trading, derivatives trading, asset securitization services and investment banking.

Securities Investment and Trading

Through Woori Bank, 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, 2019, our investment portfolio, which consists of financial assets at fair value through other comprehensive income and securities at amortized cost, and our trading portfolio, which consists of financial assets at fair value through profit or loss (excluding deposits, derivative assets and loans), had a combined total book value of ₩52,963 billion and represented 14.6% of our total assets.

 

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Our trading and investment portfolios consist primarily of Korean treasury securities and debt securities issued by Korean government agencies, including the KDIC, local governments or government-invested enterprises, and debt securities issued by financial institutions. As of December 31, 2019, we held debt securities with a total book value of ₩49,892 billion, of which:

 

  

debt securities at amortized cost accounted for ₩20,326 billion, or 40.7%;

 

  

debt securities at fair value through other comprehensive income accounted for ₩26,714 billion, or 53.5%; and

 

  

debt securities at fair value through profit or loss accounted for ₩2,852 billion, or less than 5.7%.

Of these amounts, as of December 31, 2019, debt securities issued by the Korean government amounted to ₩8,044 billion, or 39.6% of our debt securities at amortized cost, ₩1,153 billion, or 4.3% of our debt securities at fair value through other comprehensive income, and ₩873 billion, or 30.6% of our debt securities at fair value through profit or loss.

From time to time, we also purchase and sell equity securities for our securities portfolios. Our equity securities consist primarily of equities listed on the KRX KOSPI Market or the KRX KOSDAQ Market. As of December 31, 2019:

 

  

equity securities at fair value through other comprehensive income had a book value of ₩935 billion, or 3.4% of our securities at fair value through other comprehensive income portfolio; and

 

  

equity securities at fair value through profit or loss accounted for ₩688 billion, or 14.0% of our securities at fair value through profit or loss portfolio.

Funds that are not used for lending activities are used for investment and liquidity management purposes, including investment and trading in securities. See “—Assets and Liabilities—Securities Investment Portfolio.”

For a discussion of our risk management policies with respect to our securities trading activities, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Market Risk Management—Market Risk Management for Trading Activities.”

Derivatives Trading

We offer derivatives products and engage in derivatives trading, mostly for our corporate customers. Our trading volume was ₩268,734 billion in 2017, ₩324,410 billion in 2018 and ₩371,500 billion in 2019. Our aggregate net trading gain (loss) from derivatives for the years ended December 31, 2017, 2018 and 2019 was ₩3 billion, ₩91 billion and ₩(12) billion, respectively.

We provide and trade a number of derivatives products principally through sales or brokerage accounts for our customers, including:

 

  

interest rate swaps, options and futures, relating principally to Won interest rate risks;

 

  

index futures and options, relating to stock market fluctuations;

 

  

cross currency swaps, relating to foreign exchange risks, largely for Won against U.S. dollars;

 

  

foreign exchange forwards, swaps, options and futures, relating to foreign exchange risks;

 

  

commodity derivatives, which we provide to customers that wish to hedge their commodities exposure; and

 

  

credit derivatives, which we provide to financial institutions that wish to hedge existing credit exposures or take on credit exposure to generate revenue.

Our derivatives operations focus on addressing the needs of our corporate clients to hedge their risk exposure and on hedging our risk exposure resulting from such client contracts. We also engage in derivatives trading activities to hedge the interest rate and foreign currency risk exposure that arises from our own assets and liability positions. In addition, we engage in proprietary trading of derivatives, such as index options and futures within our regulated open position limits, for the purpose of generating capital gains.

 

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The following shows the estimated fair value of derivatives we held or had issued for trading purposes as of the dates indicated:

 

   As of December 31, 
   2017   2018   2019 
   Estimated
Fair
Value of
Assets
   Estimated
Fair
Value of
Liabilities
   Estimated
Fair
Value of
Assets
   Estimated
Fair
Value of
Liabilities
   Estimated
Fair
Value of
Assets
   Estimated
Fair
Value of
Liabilities
 
   (in billions of Won) 

Currency derivatives

  2,732   2,782   1,623   1,571   2,433   2,146 

Interest rate derivatives

   236    267    229    279    313    423 

Equity derivatives

   147    100    174    241    176    274 

Commodity derivatives

   1    1                 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  3,116   3,150   2,026   2,091   2,922   2,843 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For a discussion of our risk management policies with respect to our derivatives trading activities, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Market Risk Management—Market Risk Management for Trading Activities.”

Asset Securitization Services

We are active in the Korean asset-backed securities market. Through Woori Bank, we participate in asset securitization transactions in Korea by acting as arranger, trustee or liquidity provider. In 2019, we were involved in asset securitization transactions with an initial aggregate issue amount of ₩1,472 billion and generated total fee income of approximately ₩0.9 billion in connection with such transactions. The securities issued in asset securitization transactions are sold mainly to institutional investors buying through Korean securities firms.

Investment Banking

Through Woori Bank and Woori Investment Bank, we engage in investment banking activities in Korea. In addition, we provide project finance and financial advisory services, in the area of social overhead capital projects such as highway, port, power and water and sewage projects, as well as structured finance, leveragedbuy-out financing, equity and venture financing and mergers and acquisitions financing services. In 2019, we generated investment banking revenue of approximately ₩289 billion from gains on investment in foreign bonds and equity securities and fees from advisory and other services.

We believe that significant opportunities exist for us to leverage our existing base of large corporate and small- andmedium-sized banking customers to cross-sell investment banking services. We intend to expand our investment banking operations to take advantage of these opportunities, with a view to increasing our fee income and further diversifying our revenue base.

International Banking

Through Woori Bank, we engage in various international banking activities, including foreign exchange services and dealing, import and export-related services, offshore lending, syndicated loans and foreign currency securities investment. These services are provided primarily to our domestic customers and overseas subsidiaries and affiliates of Korean corporations and, to a limited extent, to local companies and individuals. We also raise foreign currency funding through our international banking operations. In addition, we provide commercial banking services to retail and corporate customers in select overseas markets.

 

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

 

   As of December 31, 
   2017   2018   2019 
   (in millions of US$) 

Total foreign currency assets

  US$ 35,678   US$ 35,587   US$ 40,060 

Foreign currency borrowings

      

Call money

   593    872    115 

Long-term borrowings

   4,290    4,167    4,427 

Short-term borrowings

   6,191    6,336    7,509 
  

 

 

   

 

 

   

 

 

 

Total foreign currency borrowings

  US$11,074   US$11,375   US$12,051 
  

 

 

   

 

 

   

 

 

 

The table below sets forth the overseas subsidiaries and direct branches of Woori Bank in operation as of December 31, 2019:

 

Business Unit(1)

  

Location

Subsidiaries:

  

Woori America Bank

  United States

PT Bank Woori Saudara Indonesia 1906, Tbk

  Indonesia

Woori Global Markets Asia Limited

  China (Hong Kong)

Woori Bank (China) Limited

  China

AO Woori Bank

  Russia

Banco Woori Bank do Brasil S.A.

  Brazil

Woori Finance Myanmar Co., Ltd.

  Myanmar

Wealth Development Bank Corporation

  Philippines

Woori Bank Vietnam Limited

  Vietnam

WB Finance Co., Ltd.(2)

  Cambodia

Woori Finance (Cambodia) Plc.(2)

  Cambodia

Woori Bank Europe GmbH

  Germany

Branches, Agencies and Representative Offices:

  

London Branch

  United Kingdom

Tokyo Branch

  Japan

Singapore Branch

  Singapore

Hong Kong Branch

  China (Hong Kong)

Bahrain Branch

  Bahrain

Dhaka Branch

  Bangladesh

Gaeseong Branch(3)

  Korea(3)

New York Agency

  United States

Los Angeles Branch

  United States

Chennai Branch

  India

Sydney Branch

  Australia

Dubai Branch

  United Arab Emirates

Gurgaon Branch

  India

Mumbai Branch

  India

Kuala Lumpur Representative Office

  Malaysia

Yangon Representative Office

  Myanmar

Iran Representative Office(4)

  Iran(4)

Katowice Representative Office

  Poland

 

(1)

Does not include subsidiaries and branches in liquidation or dissolution.

(2)

In February 2020, with the approval of the Cambodian financial authorities, Woori Finance (Cambodia) Plc. merged with and into WB Finance Co., Ltd. See “Item 4.A. History and Development of the Company—Establishment of Woori Financial Group—Reorganization and Expansion of Woori Finance Holdings and Woori Bank.”

 

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(3)

Due to the shutdown of the Gaeseong Industrial Complex in February 2016, the Gaeseong Branch is currently located at our corporate headquarters in Seoul.

(4)

No longer operational (i.e., no employees or office space) since December 2018 following there-imposition of sanctions.

The principal activities of the overseas branches and subsidiaries of Woori Bank are providing trade financing and local currency funding for Korean companies and Korean nationals operating in overseas markets as well as servicing local customers and providing foreign exchange services in conjunction with our headquarters. On a limited basis, such overseas branches and subsidiaries also engage in the investment and trading of securities of foreign issuers.

Woori America Bank currently operates over 25 branches in states including New York, New Jersey, Maryland, Virginia, Pennsylvania and California and provides retail and corporate banking services targeted towards the Korean-American community. Woori America Bank had total assets of US$2,073 million as of December 31, 2019 and net profit of US$17 million in 2019.

In November 2007, Woori Bank established a local subsidiary in China, Woori Bank (China) Limited, which currently has branches in Beijing, Shanghai, Shenzhen, Suzhou, Tianjin, Dalian, Chengdu, Weihai, Chongqing and Shenyang. Woori Bank also established a local subsidiary in Russia, AO Woori Bank, in January 2008 and it currently has branches in Moscow and St. Petersburg and a representative office in Vladivostok.

In January 2014, Woori Bank completed the purchase of an additional 27% equity interest (in addition to the 6% equity interest it previously acquired through its subsidiary PT. Bank Woori Indonesia) in PT. Bank Himpunan Saudara 1906, an Indonesian commercial bank with a network of over 100 branches and offices throughout Indonesia. In December 2014, PT. Bank Woori Indonesia merged with and into PT. Bank Himpunan Saudara 1906. The merged entity, in which Woori Bank holds a 79.9% equity interest, was renamed PT Bank Woori Saudara Indonesia 1906, Tbk and became Woori Bank’s consolidated subsidiary. As of December 31, 2019, PT Bank Woori Saudara Indonesia 1906, Tbk had total assets of US$2,715 million and shareholders’ equity of US$498 million.

In October 2016, Woori Bank acquired a 51% equity interest in Wealth Development Bank Corp., a thrift bank in the Philippines with a network of 25 branches and approximately 450 employees as of December 31, 2019.

In November 2016, Woori Bank obtained a banking license to establish a local subsidiary in Vietnam, Woori Bank Vietnam, which commenced operations in January 2017 and currently operates 14 branches throughout the country.

Woori Bank is also expanding its network of branches in South and Southeast Asia through our other local subsidiaries, including PT Bank Woori Saudara Indonesia 1906, Tbk, Woori Finance Myanmar and Wealth Development Bank Corp. In June 2018, Woori Bank acquired VisionFund (Cambodia) Ltd., a microfinance deposit-taking institution in Cambodia, which was renamed WB Finance Co., Ltd. In February 2020, with the approval of the Cambodian financial authorities, Woori Finance (Cambodia) Plc., a microfinance institution, merged with and into WB Finance Co., Ltd. As of December 31, 2019, WB Finance Co., Ltd. had total assets of US$382 million and shareholders’ equity of US$80 million, and Woori Finance (Cambodia) Plc. had total assets of US$121 million and shareholders’ equity of US$24 million.

In November 2018, Woori Bank established a German subsidiary, Woori Bank Europe GmbH, which is headquartered in Frankfurt and conducts our European operations. As of December 31, 2019, Woori Bank Europe GmbH had total assets of US$184 million and shareholders’ equity of US$48 million.

Asset Management

Trust Management Services

Money Trusts.Through Woori Bank, we offer money trust products to our customers and manage the funds they invest in money trusts. The money trusts we manage are generally trusts with a fixed life that allow

 

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investors to share in the investment performance of the trust in proportion to the amount of their investment in the trust. We principally offer the following types of money trust products:

 

  

retirement trusts, which invest funds received from corporations or organizations and manage these funds until they are withdrawn to pay retirement funds to a corporation’s officers or employees or an organization’s members;

 

  

pension trusts, which invest funds received until pension benefits are due to be disbursed to a pension beneficiary; and

 

  

specified money trusts, which invest cash received as trust property at the direction of the trustors and, once the trust matures, disburse the principal and any gains to the trust beneficiaries.

We also offer other types of money trusts that have a variety of differing characteristics with respect to, for example, maturities and tax treatment.

Under Korean law, the assets of our money trusts are segregated from our assets and are not available to satisfy the claims of our creditors. We are, however, permitted to maintain deposits of surplus funds generated by trust assets in certain circumstances as set forth under the Financial Investment Services and Capital Markets Act and the regulations thereunder. Except for specified money trusts, we have investment discretion over all money trusts, which are pooled and managed jointly for each type of trust. Specified money trusts are established on behalf of individual customers, typically corporations, which direct our investment of trust assets.

We receive fees for our trust management services that are generally based upon a percentage, ranging between 0.01% and 2.0%, of the net asset value of the assets under management. We also receive penalty payments when customers terminate their trust deposit prior to the original contract maturity. Fees that we received for trust management services (including those fees related to property trust management services, described below, but excluding those fees relating to guaranteed trusts, which are eliminated in consolidation) amounted to ₩142 billion in 2017, ₩177 billion in 2018 and ₩171 billion in 2019.

For some of the money trusts we manage, we have guaranteed the principal amount of an investor’s investment as well as a fixed rate of interest. We no longer offer new money trust products where we guarantee both the principal amount and a fixed rate of interest. We continue to offer pension-type money trusts that provide a guarantee of the principal amount of an investor’s investment.

The following table shows the balances of our money trusts by type as of the dates indicated. We consolidate within our financial statements trust accounts for which we guarantee both the repayment of the principal amount and a fixed rate of interest and trust accounts for which we guarantee only the repayment of the principal amount, while we do not consolidate performance trusts on which we do not guarantee principal or interest:

 

   As of December 31, 
   2017   2018   2019 
   (in billions of Won) 

Principal and interest guaranteed trusts

  1   1   1 

Principal guaranteed trusts

   1,401    1,409    1,401 

Performance trusts

   29,252    36,451    36,288 
  

 

 

   

 

 

   

 

 

 

Total

  30,654   37,861   37,690 
  

 

 

   

 

 

   

 

 

 

The trust assets we manage consist principally of investment securities, loans made from the trusts and amounts due from banks. The investment securities consist of government-related debt securities, corporate debt securities, including bonds and commercial paper, equity securities and other securities. As of December 31, 2019, our money trusts had invested in securities with an aggregate book value of ₩12,462 billion, which accounted for approximately 32.5% of our money trust assets.Debt securities accounted for ₩5,474 billion of this amount.

 

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Our money trusts also invest, to a lesser extent, in equity securities, including beneficiary certificates issued by investment trust management companies. As of December 31, 2019, equity securities held by our money trusts amounted to ₩6,988 billion, which accounted for approximately 18.2% of our money trust assets.Of this amount, ₩1,816 billion was from money trusts over which we had investment discretion and the remainder was from specified money trusts.

Loans made by our money trusts are similar in type to the loans made by our banking operations. As of December 31, 2019, our money trusts had made loans in the aggregate principal amount of ₩7,293 billion (excluding loans to our banking operations of ₩2,731 billion), which accounted for approximately 19.0% of our money trust assets.

The amounts due from banks consist of local currency and foreign currencies. As of December 31, 2019, such amounts due from banks totaled ₩15,467 billion, which accounted for approximately 40.3% of our money trust assets.

If the income from a money trust for which we provide a guarantee is less than the amount of the payments we have guaranteed, we will need to pay the amount of the shortfall with funds from special reserves maintained in our trust accounts, followed by basic fees from that money trust and funds from our banking operations. We net any payments we make as a result of these shortfalls against any gains we receive from other money trusts. No material payments of any such shortfall amounts were made in 2019.

Property Trusts.Through Woori Bank and Woori Asset Trust Co., Ltd., we also offer property trust management services, where we managenon-cash assets in return for a fee.Non-cash assets include mostly receivables (including those securing asset-backed securities), real property and securities, but can also include movable property such as artwork. Under these arrangements, we render escrow or custodial services for the property in question and collect fees in return.

In 2019, our property trust fees generally ranged from 0.003% to 5.00% of total assets under management, depending on the type of trust account product.As of December 31, 2019, the balance of our property trusts totaled ₩49,358 billion.

Property trusts are not consolidated within our financial statements.

Investment Trust Management

Through Woori Asset Management Corp. and Woori Global Asset Management Co., which became our consolidated subsidiaries in 2019, and Woori Private Equity Asset Management Co. Ltd, we offer investment trust products to our customers and manage the assets invested by them in investment trusts. The investment trust products we offer generally take the form of beneficiary certificates evidencing an ownership interest in a particular investment trust. We currently offer various different types of investment trust products, including:

 

  

securities funds, where securities (excluding certain securities relating to, among others, real estate, ship investment companies, social infrastructure and overseas resource development) consist of more than 50% of their assets;

 

  

real estate funds, where real estate (including investments in, among others, derivatives based on underlying assets consisting of real estate and loans to corporations relating to real estate development) consist of more than 50% of their assets;

 

  

special asset funds, where assets other than securities and real estate consist of more than 50% of their assets;

 

  

mixed asset funds, which do not have the restrictions that apply to securities funds, real estate funds and special asset funds; and

 

  

money market funds, which invest in short-term financial products, such as call loans, commercial paper, certificates of deposit and short-term treasury notes and corporate bonds.

The investment trusts we manage are generally trusts that allow investors to share in the investment performance of the trust in proportion to the amount of their investment in the trust. We have investment

 

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discretion over all investment trusts. Investment trusts calculate the value of their assets as often as required by the relevant laws and regulations, and any change in the overall valuation of their assets will be reflected in the price of their beneficiary certificates. The trust will disburse principal and any return on investment based on the price of their beneficiary certificates at maturity or upon the receipt of a redemption request, as applicable. In addition to investment trust products, we provide our institutional clients with various investment advisory and discretionary asset investment services.

The following table shows the balances of our investment trusts by type as of December 31, 2019. Under IFRS, we do not consolidate investment trusts due to the fact that the assets invested are not our assets but customer assets:

 

   As of December 31, 
   2019(1) 
   (in billions of Won) 

Securities funds

  24,003 

Real estate funds

   92 

Special asset funds

   951 

Mixed asset funds

   15 

Money market funds

   3,416 
  

 

 

 

Total

  28,477 
  

 

 

 

 

(1)

Includes assets under management by Woori Private Equity Asset Management Co., Ltd. See “—Other Businesses—Private Equity.”

We receive fees for our investment trust management services consisting of management fees in connection with establishing, operating and managing the investment trust, asset management fees and related advisory fees. These fees are calculated by multiplying the daily net asset value of the trust by a percentage provided in the trust documentation. Fees accrue on a daily basis and are paid out as expenses periodically. Fees from our investment trust management services amounted to ₩9 billion in 2019.

Although our current customer base consists mainly of institutional investors, we have been seeking to market our investment trust products to retail customers through our consumer banking network. We believe that significant opportunities exist for us to leverage our existing base of consumer banking customers to cross-sell our investment trust products. We intend to focus on the development of new products tailored to particular customer segments and the enhancement of sales and distribution capabilities through each of our marketing channels to meet our customers’ needs.

Trustee and Custodian Services Relating to Securities Investment Trusts

Through Woori Bank, as of December 31, 2019, we acted as a trustee for 3,653 securities investment trusts, mutual funds and other investment funds.We receive a fee for acting as a trustee and generally perform the following functions:

 

  

receiving payments made in respect of such securities;

 

  

executing trades in respect of such securities on behalf of the investment fund, based on instructions from the relevant investment fund management company; and

 

  

in certain cases, authenticating beneficiary certificates issued by investment trust management companies and handling settlements in respect of such beneficiary certificates.

For the year ended December 31, 2019, our fee income from such services was ₩13 billion.

Other Businesses

Management of National Housing and Urban Fund

In April 2008, through Woori Bank, we were selected to be the lead manager of the National Housing and Urban Fund.The National Housing and Urban Fund provides financial support tolow-income households in

 

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Korea by providing mortgage financing and construction loans for projects to build small- andmedium-sized housing. As of December 31, 2019, outstanding housing loans from the National Housing and Urban Fund amounted to approximately ₩116.5 trillion, of which we originated approximately ₩62.9 trillion.The activities of the National Housing and Urban Fund are funded primarily by the issuance of national housing bonds, which must be purchased by persons and legal entities wishing to make real estate-related registrations and filings, and by subscription savings deposits held at the National Housing and Urban Fund.

In return for managing the operations of the National Housing and Urban Fund, we receive a monthly fee. This fee consists of a fund raising fee, a loan origination fee and a management fee. The fund raising fee is based on the number of National Housing and Urban Fund subscription savings deposit accounts opened and the level of activity for existing accounts and the number of National Housing and Urban Fund bonds issued or redeemed. The loan origination fee is based on the number of new National Housing and Urban Fund loans and the number of National Housing and Urban Fund mortgage loans to contractors constructing housing units that are assumed by the individual buyers of housing units and the level of activity for existing loans during each month. The management fee is based on the monthly average of the number of outstanding accounts and the monthly average of the number of overdue loans owed to the National Housing and Urban Fund.We received total fees of approximately ₩48.5 billion for managing the National Housing and Urban Fund in 2019.

Bancassurance

The term “bancassurance” refers to the marketing and sale by commercial banks of insurance products manufactured within a group of affiliated companies or by third-party insurance companies. Through Woori Bank, we market a wide range of bancassurance products. In 2019, we generated fee income of approximately ₩86.6 billion through the marketing of bancassurance products.We believe that we will be able to continue to develop an important new source offee-based revenues by expanding our offering of these products. We have entered into bancassurance marketing arrangements with 30 insurance companies, including TongYang Life Insurance, Hanwha Life Insurance, Samsung Life Insurance, Samsung Fire and Marine Insurance, Hyundai Fire and Marine Insurance and American International Assurance,and plan to enter into additional insurance product marketing arrangements with other leading insurance companies whose names and reputation are likely to be familiar to our customer base.

Private Equity

In 2016, Woori Private Equity Co., Ltd., which was established in October 2005, registered as a specialized private placement collective investment business under the Financial Investment Services and Capital Markets Act and changed its name to Woori Private Equity Asset Management Co., Ltd., or Woori PEAM. Such registration enabled it to manage specialized private placement collective investment vehicles (which include hedge funds) targeting professional investors, in addition to its existing business of making long-term and strategic investments in buyout target companies and actively involving itself in their management. In 2018 and 2019, Woori PEAM launched three private equity funds for which it acted as general partner, Woori-Hanwha Eureka Private Equity Fund, the size of which was approximately ₩43.5 billion, Woori-ShinyoungGrowth-Cap Private Equity Fund I, the size of which was approximately ₩163 billion, andWoori-Q Corporate Restructuring Private Equity Fund, the size of which was approximately ₩155 billion. As of December 31, 2019, Woori PEAM managed a total of 15 alternative investment funds (other than the three private equity funds mentioned above) with total investments of ₩1.1 trillion and total managed assets of ₩678.8 billion. We expect that Woori PEAM will continue to provide us with investment opportunities, through identifying potential investees suffering from inefficient management and effecting financial restructuring and strategic reorientation in those investees so as to enhance their enterprise value, as well as serve as a source of business for other segments by managing specialized private placement collective investment vehicles for professional investors.

Competition

We compete with other financial institutions in Korea, including principally nationwide and regional Korean commercial banks and branches of foreign banks operating in Korea. In addition, in particular segments such as credit cards, asset management and bancassurance, we compete with specialized financial institutions focusing

 

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on such segments. Some of the financial institutions we compete with are larger in terms of asset size and customer base and have greater financial resources or more specialized capabilities than us or our subsidiaries.

Competition in the Korean financial market has been and is likely to remain intense. In particular, in the area of our core banking operations, most Korean banks have been focusing on retail customers and small- andmedium-sized enterprises in recent years, although they have begun to increase their exposure to large corporate borrowers, and have been focusing on developing fee income businesses, including bancassurance, as increasingly important sources of revenue. In the area of credit cards, Korean banks and credit card companies have in the past engaged in aggressive marketing activities and made significant investments, contributing to some extent to lower profitability and asset quality problems previously experienced with respect to credit card receivables.

In addition, the following general regulatory reforms in the Korean financial industry have increased competition among banks and other 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.

 

  

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, investment 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.

 

  

In April 2019, the Financial Services Commission approved and is currently conducting test procedures for a financial regulatory sandbox, a framework set up to allow financial service providers to test new business models in a less regulated environment, as part of its efforts to work closely with the fintech sector and provide support to facilitate its development. In May 2019, we introduced a “drive-thru money exchange and withdrawal service” that is expected to allow our customers to exchange currencies and make withdrawals at drive-thru locations without having to visit a bank, which was approved by the Financial Services Commission for testing in the financial regulatory sandbox. In November 2019, we entered into an agreement with Shinsaegae Duty Free to provide foreign exchange drive-thru services on weekends, when banks are generally closed. Over 80 financial services have been similarly approved for such testing.

 

  

In December 2019, the Financial Services Commission launched an “open banking” system, which allows customers to view banking account information, regardless of institution, through a single mobile application. Such integrated system is expected to allow fintech firms to share payment networks with banks, thereby cutting transaction fees and encouraging the development of new payment services.

We expect such measures to intensify competition among financial institutions in Korea.

Furthermore, the introduction of Internet-only banks in Korea is expected to increase competition in the Korean banking industry. Internet-only banks generally operate without branches and conduct most of their operations through electronic means, which enable 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, in which Woori Bank owns 13.8% of the equity with voting rights, commenced operations. Kakao Bank, a mobile-only bank, commenced operations in July 2017. In December 2019, Toss Bank was granted a preliminary license by the Financial Services Commission to operate as an Internet-only bank and is expected to begin operations in July 2021 upon receiving final approval from the Financial Services Commission.

 

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Moreover, the Korean financial industry is undergoing significant consolidation through which the number of nationwide commercial banks in Korea has significantly decreased since the financial crisis in Korea in the late 1990s. A number of significant mergers and acquisitions in the financial industry have also taken place in Korea in recent years, including Hana Financial Group’s acquisition of a controlling interest in Korea Exchange Bank in 2012, the subsequent merger of Hana Bank into Korea Exchange Bank in 2015, KB Financial Group’s acquisition of Hyundai Securities Co., Ltd. in 2016 and the subsequent merger of Hyundai Securities with and into KB Investment & Securities Co., Ltd. in 2016. 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. In 2014, pursuant to the implementation of the Korean government’s privatization plan with respect to Woori Finance Holdings and its former subsidiaries, Woori Financial, Woori Asset Management and Woori F&I were acquired by KB Financial Group, Kiwoom Securities and Daishin Securities, respectively, and Woori Investment & Securities, Woori Aviva Life Insurance and Woori FG Savings Bank were acquired by NongHyup Financial Group. In addition, in October 2014, the KDIC’s ownership interest in Kwangju Bank and Kyongnam Bank were acquired by JB Financial Group and BS Financial Group, respectively. See “Item 4.A. History and Development of the Company—Privatization Plan.” Furthermore, Orange Life Insurance, Ltd. (formerly known as ING Life Insurance Korea, Ltd.) became a wholly-owned subsidiary of Shinhan Financial Group following the acquisition of equity interests by Shinhan Financial Group in February 2019 and January 2020.

We expect that consolidation in the Korean financial industry will continue. Other financial institutions may seek to acquire or merge with other entities, and the financial institutions resulting from this consolidation may, by virtue of their increased size and business scope, provide significantly greater competition for us. We 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. See “Item 3.D. Risk Factors—Risks relating to competition.”

Assets and Liabilities

The tables below and accompanying discussions provide selected financial highlights regarding our assets and liabilities on a consolidated basis.

Certain information with respect to our loan portfolio and the asset quality of our loans is presented below on a basis consistent with certain requirements of the Financial Services Commission applicable to Korean financial institutions, which differs (as described below where applicable) from the presentation of such information in our financial statements prepared in accordance with IFRS, as we believe that such alternative presentation allows us to provide additional details regarding our loan portfolio and the asset quality of our loans which would be helpful to our investors.

Loan Portfolio

As of December 31, 2019, the balance of our total loan portfolio was ₩271,993 billion. As of December 31, 2019, 89.0% of our total loans wereWon-denominated loans and 11.0% of our total loans were denominated in other currencies. Of the ₩29,810 billion of foreign currency-denominated loans as of that date, approximately 71.9% represented “foreign” loans provided by Woori Bank to offshore entities and individuals. Woori Bank makes foreign loans primarily through its overseas branches to affiliates of large Korean manufacturing companies for trade financing and working capital.

Except where we specify otherwise, all loan amounts stated below do not include amounts due from banks and other receivables and are prior to deducting allowance for credit losses and present value discount or reflecting deferred origination costs, and all corporate loan amounts stated below include loans made to the Korean government and government-owned agencies and banks.

 

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Loan Types

The following table presents loans by type as of the dates indicated. Total loans reflect our loan portfolio, including past due amounts.

 

   As of December 31, 
   2015  2016  2017  2018  2019 
   (in billions of Won) 

Domestic:

      

Corporate(1):

      

Commercial and industrial

  92,802  88,968  93,320  96,283  100,829 

Lease financing

      7   25   55   77 

Trade financing

   11,446   10,699   9,290   9,649   6,766 

Other commercial

   12,229   12,923   21,283   16,177   13,748 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total corporate

   116,477   112,597   123,918   122,164   121,420 

Consumer:

      

General purpose household

   26,971   30,684   34,374   36,962   37,605 

Mortgage

   40,598   47,630   47,476   51,280   54,511 

Home equity

   24,657   24,486   25,513   26,324   28,622 

Total consumer

   92,226   102,800   107,363   114,566   120,738 

Credit cards

   6,099   6,674   6,827   8,051   8,399 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total domestic

   214,802   222,071   238,108   244,781   250,557 

Foreign:

      

Corporate(2):

      

Commercial and industrial

   9,518   10,540   9,632   11,837   15,544 

Trade financing

   1,421   2,156   2,655   2,186   1,782 

Other commercial

   206   350   471   700   845 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total corporate

   11,145   13,046   12,758   14,723   18,171 

Consumer

   1,222   1,684   1,927   2,530   3,265 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total foreign

   12,367   14,730   14,685   17,253   21,436 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total loans(3)

  227,169  236,801  252,793  262,034  271,993 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Less: present value discount

   (5  (14  (11  (10  (7

Less: deferred origination costs (fees)

   435   464   511   574   621 

Less: allowance for credit losses

   (2,051  (1,851  (1,770  (1,778  (1,575
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total loans, net

  225,548  235,400  251,523  260,820  271,032 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

(1)

Including loans made to banks and the Korean government and government-owned agencies.

(2)

Including loans made to banks.

(3)

Not including due from banks and other financial assets (or other receivables) and prior to deducting allowance for credit losses and present value discount or reflecting deferred origination costs.

Loan Concentrations

On a consolidated basis, our exposure to any single borrower or any singlechaebol is limited by law to 20% and 25%, respectively, of our “net aggregate equity capital,” as defined under the Enforcement Decree of the Financial Holding Company Act. See “—Supervision and Regulation—Principal Regulations Applicable to Financial Holding Companies—Financial Exposure to Any Individual Customer and Major Investor.” In addition, Woori Bank’s exposure to any single borrower or any singlechaebol is limited by the Bank Act to 20% and 25%, respectively, of its total Tier I and Tier II capital.

 

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20 Largest Exposures by Borrower

As of December 31, 2019, our exposures to our 20 largest borrowers or issuers totaled ₩52,634 billion and accounted for 12.0% of our total exposures. The following table sets forth our total exposures to those borrowers or issuers as of that date:

 

  Loans        Guarantees
and
acceptances
        Amounts
classified as
substandard
or below(3)
 

Company (Credit Rating)(1)

 Won
currency
  Foreign
currency
  Equity
securities
  Debt
securities
  Total
exposures
  Collateral(2) 
  (in billions of Won) 

Korea Development Bank (AAA)

   6    11,917    11,923    8 

Korean Government(4)

           9,647      9,647       

The Bank of Korea(4)

  1,660         6,501      8,161       

Industrial Bank of Korea (AAA)

  94         5,321      5,415   22    

Korea Housing Finance Corporation (AAA)

           5,059      5,059       

U.S. Government(4)

           1,371      1,371       

Export-Import Bank of Korea (AAA)

           1,299   8   1,307       

KB Securities (AA+)

  1,100         40      1,140       

Kyobo Securities (A+)

  1,016               1,016       

Korea Student Aid Foundation (AAA)

           955      955       

Korea SMEs and Startups Agency (AAA)

  1         822      823       

Samsung Heavy Industries (BBB+)

     104      64   622   790       

LG Display (A+)

  607   116            723       

Mirae Asset Daewoo (AA)

  650         20      670       

Defense Acquisition Program Administration (A)

              652   652       

Korea Land & Housing Corporation (AAA)

  328         309      637       

DS Investment & Securities (BB)

  634               634       

Shinhan Investment (AA)

  602               602       

Posco International(AA-)

     165         390   555       

LG Electronics (AA)

  424   93      20   17   554       
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 7,116  484    43,345  1,689  52,634  22  8 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

(1)

Credit ratings are from one of the domestic credit rating agencies in Korea, including Korea Ratings Corporation, NICE Investors Service Co. and Korea Information Service Inc., as of December 31, 2019. If multiple ratings were available, the lowest one is indicated.

(2)

The value of collateral is appraised based on future cash flow and observable market price.

(3)

Classification is based on the Financial Services Commission’s asset classification criteria.

(4)

Credit rating is unavailable.

As of December 31, 2019, five of these top 20 borrowers or issuers were companies belonging to the 28 largestchaebol in Korea. See “Item 3.D. Risk Factors—Risks relating to our corporate credit portfolio—We have exposure to the largest Korean commercial conglomerates, known as “chaebols,” and, as a result, financial difficulties ofchaebols may have an adverse impact on us.”

 

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Exposure to Chaebols

As of December 31, 2019, 4.4% of our total exposure was to the 28 largestchaebolsin Korea. The following table shows, as of December 31, 2019, our total exposures to the 10chaebols to which we have the largest exposure:

 

  Loans        Guarantees
and
acceptances
        Amounts
Classified as
substandard
or below(2)
 

Chaebol

 Won
currency
  Foreign
currency
  Equity
securities
  Debt
securities
  Total
exposures
  Collateral(1) 
  (in billions of Won) 

Samsung

 418  1,119  78  84  1,241  2,940  190   

Hyundai Motors

  1,286   727   53   72   611   2,749       

SK

  845   276   16   30   460   1,627   179    

LG

  1,212   235      20   86   1,553   3    

Hanwha

  909   194      21   88   1,212   415    

Hyundai Heavy Industries

  158   50      2   964   1,174   6    

Kyobo Life Insurance

  1,019               1,019       

Doosan

  314   78      4   524   920       

Lotte

  282   472         68   822   2    

Hyosung

  264   309      6   176   755   237    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 6,707  3,460  147  239  4,218  14,771  1,032   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

(1)

The value of collateral is appraised based on future cash flow and observable market price.

(2)

Classification is based on the Financial Services Commission’s asset classification criteria.

Loan Concentration by Industry

The following table shows, as of December 31, 2019, the aggregate balance of our domestic and foreign corporate loans by industry concentration and as a percentage of our total corporate lending:

 

   Aggregate
corporate loan balance
   Percentage of total
corporate loan

balance
 
   (in billions of Won)     

Industry

    

Manufacturing

  36,094    25.9

Financial and insurance

   18,834    13.5 

Retail and wholesale

   17,538    12.6 

Hotel, leisure and transportation

   8,203    5.9 

Construction

   4,211    3.0 

Government and government agencies

   336    0.2 

Other

   54,376    39.0 
  

 

 

   

 

 

 

Total

  139,592    100.0
  

 

 

   

 

 

 

 

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Maturity Analysis

The following table sets out, as of December 31, 2019, the scheduled maturities (time remaining until maturity) of our loan portfolio:

 

   1 year or less   Over 1 year
but not more
than 5 years
   Over 5 years   Total 
   (in billions of Won) 

Domestic

        

Corporate(1)

        

Commercial and industrial

  64,800   31,084   4,945   100,829 

Lease financing

   4    73        77 

Trade financing

   6,766            6,766 

Other commercial

   9,594    3,452    702    13,748 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total corporate

   81,164    34,609    5,647    121,420 

Consumer

        

General purpose household

   20,491    6,548    10,566    37,605 

Mortgage

   12,557    13,017    28,937    54,511 

Home equity

   2,590    2,577    23,455    28,622 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

   35,638    22,142    62,958    120,738 

Credit cards

   7,031    1,098    270    8,399 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total domestic

   123,833    57,849    68,875    250,557 

Foreign

        

Corporate(2)

        

Commercial and industrial

   8,036    5,706    1,802    15,544 

Trade financing

   1,782            1,782 

Other commercial

   243    462    140    845 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total corporate

   10,061    6,168    1,942    18,171 

Consumer

        

Other consumer

   592    778    1,895    3,265 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total foreign

   10,653    6,946    3,837    21,436 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

  134,486   64,795   72,712   271,993 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Including loans made to banks and the Korean government and government-owned agencies.

(2) 

Including loans made to banks.

A significant portion of our loans with maturities of one year is renewed annually. We typically roll over our working capital loans and consumer loans (other than those payable in installments) after we conduct our normal loan review in accordance with our loan review procedures. Under our internal guidelines, we may generally extend working capital loans on an annual basis for an aggregate term of five years.Those guidelines also allow us to generally extend consumer loans other than home equity loans for another term on an annual basis for an aggregate term of up to five years (and home equity loans for an aggregate term of up to 10 years).

 

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Interest Rates

The following table shows, as of December 31, 2019, the total amount of our loans due after one year that have fixed interest rates and variable or adjustable interest rates:

 

   Domestic   Foreign   Total 
   (in billions of Won) 

Fixed rate(1)

  63,711   3,142   66,853 

Variable or adjustable rates(2)

   63,011    7,641    70,652 
  

 

 

   

 

 

   

 

 

 

Total loans

  126,722   10,783   137,505 
  

 

 

   

 

 

   

 

 

 

 

(1)

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

(2)

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

For additional information regarding our management of interest rate risk, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Market Risk Management—Asset and Liability Management.”

Asset Quality of Loans

Except where we specify otherwise, all loan amounts stated below do not include amounts due from banks and other receivables and are prior to deducting allowance for credit losses and present value discount or reflecting deferred origination costs, and all corporate loan amounts stated below include loans made to the Korean government and government-owned agencies and banks.

Loan Classifications

The Financial Services Commission generally requires Korean financial institutions to analyze and classify their assets by quality into one of five categories for reporting purposes. In making these classifications, we take into account a number of factors, including the financial position, profitability and transaction history of the borrower, and the value of any collateral or guarantee taken as security for the extension of credit. This classification method, and our related provisioning policy, is intended to fully reflect the borrower’s capacity to repay.

The following is a summary of the asset classification criteria we apply for corporate and consumer loans, based on the asset classification guidelines of the Financial Services Commission. Credit card receivables are subject to classification based on the number of days past due, as required by the Financial Services Commission. We also apply different criteria for other types of credits such as loans to the Korean government or to government-related or controlled entities, certain bills of exchange and certain receivables.

 

Asset Classification

  

Characteristics

Normal

  Credits extended to customers that, based on our consideration of their business, financial position and future cash flows, do not raise concerns regarding their ability to repay the credits.

Precautionary

  

Credits extended to customers that:

 

•  based on our consideration of their business, financial position and future cash flows, show potential risks with respect to their ability to repay the credits, although showing no immediate default risk; or

 

•  are in arrears for one month or more but less than three months.

 

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Asset Classification

  

Characteristics

Substandard

  

Either:

 

•  credits extended to customers that, based on our consideration of their business, financial position and future cash flows, are judged to have incurred considerable default risks as their ability to repay has deteriorated; or

 

•  the portion that we expect to collect of total loans (1) extended to customers that have been in arrears for three months or more, (2) extended to customers that have incurred serious default risks due to the occurrence of, among other things, final refusal to pay their debt instruments, entry into liquidation or bankruptcy proceedings, or closure of their businesses, or (3) extended to customers who have outstanding loans that are classified as “doubtful” or “estimated loss.”

Doubtful

  

Credits exceeding the amount we expect to collect of total credits to customers that:

 

•  based on our consideration of their business, financial position and future cash flows, have incurred serious default risks due to noticeable deterioration in their ability to repay; or

 

•  have been in arrears for three months or more but less than 12 months.

Estimated Loss

  

Credits exceeding the amount we expect to collect of total credits to customers that:

 

•  based on our consideration of their business, financial position and future cash flows, are judged to have to be accounted as a loss as the inability to repay became certain due to serious deterioration in their ability to repay;

 

•  have been in arrears for 12 months or more; or

 

•  have incurred serious risks of default in repayment due to the occurrence of, among other things, final refusal to pay their debt instruments, liquidation or bankruptcy proceedings or closure of their business.

Loan Loss Provisioning Policy

Under IFRS 9Financial Instruments, which replaced IAS 39, for annual periods commencing on or after January 1, 2018, we establish allowances for credit losses based on expected credit losses instead of incurred losses (as was the case under IAS 39) by assessing changes in expected credit losses and recognizing such changes as impairment loss (or reversal of impairment loss) in profit or loss. Under IFRS 9, the allowance required to be established with respect to a loan or financial asset is the amount of the expected12-month credit loss or the expected lifetime credit loss for the applicable loan or financial asset, according to three stages of credit risk deterioration since initial recognition.

 

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For financial reporting periods starting prior to January 1, 2018, under IAS 39Financial Instruments: Recognition and Measurement, we established allowances for credit losses with respect to loans using either acase-by-case or collective approach. We assessed individually significant loans on acase-by-case basis and other loans on a collective basis. In addition, if we determined that no objective evidence of impairment exists for a loan, we included such loan in a group of loans with similar credit risk characteristics and assessed them collectively for impairment regardless of whether such loan is significant. If there was objective evidence that an impairment loss had been incurred for individually significant loans, the amount of the loss was measured as the difference between the financial asset’s carrying amount and the present value of the estimated future cash flows discounted at such asset’s original effective interest rate. Future cash flows were estimated through acase-by-case analysis of individually assessed assets, which took into account the benefit of any guarantee or other collateral held. The value and timing of future cash flow receipts were based on available estimates in conjunction with facts available at the time of review and reassessed on a periodic basis as new information became available.

Under IAS 39, for collectively assessed loans, we based the level of allowance for credit losses on a portfolio basis in light of the homogenous nature of the assets included in each portfolio. The allowances were determined based on a quantitative review of the relevant portfolio, taking into account such factors as the level of arrears, the value of any security, and historical and projected cash recovery trends over the recovery period. The methodologies we used to estimate collectively assessed allowances reflected the probability that the performing customer would default, our historical loss experience (as adjusted by current economic and credit conditions where appropriate) and the emergence period between an impairment event occurring and a loan being identified and reported as impaired.

If additions or changes to the allowance for credit losses are required, then we record provisions for credit loss, which are included in impairment losses due to credit loss and treated as charges against current income. Credit exposures that we deem to be uncollectible, including actual loan losses, net of recoveries of previouslycharged-off amounts, are charged directly against the allowance for credit losses. See “Item 5.A. Operating Results—Critical Accounting Policies—Impairment of Loans and Allowance for Credit Losses.”

We conclude that a loan is impaired when it is under one of the following conditions:

 

  

when the principal is past due by 90 days or more due to significant deterioration in credit;

 

  

for loans overdue for less than 90 days, when it is determined that not even a portion of the loan will be recovered unless a claim action, such as disposal of collateral, is taken; or

 

  

when other objective indicators of impairment have been noted for the loan.

In addition, if our allowance for credit losses is deemed insufficient for regulatory purposes, we compensate for the difference by recording a planned regulatory reserve for credit loss, which is segregated within our retained earnings. The level of planned regulatory reserve for credit loss required to be recorded is equal to the amount by which our allowance for credit losses under IFRS is less than the greater of (x) the amount of expected loss calculated using the internal ratings-based approach under Basel II and as approved by the Financial Supervisory Service and (y) the required amount of credit loss reserve calculated based on guidelines prescribed by the Financial Services Commission. The following table sets forth the Financial Services Commission’s guidelines applicable to banking institutions for the minimum percentages of the outstanding principal amount of the relevant loans or balances that the credit loss reserve must cover:

 

Loan classifications

  

Corporate(1)

  

Consumer

  

Credit card
receivables(2)

  

Credit card
loans(3)

Normal

  0.85% or above  1% or above  1.1% or above  2.5% or above

Precautionary

  7% or above  10% or above  40% or above  50% or above

Substandard

  20% or above  20% or above  60% or above  65% or above

Doubtful

  50% or above  55% or above  75% or above  75% or above

Estimated loss

  100%  100%  100%  100%

 

(1)

Subject to certain exceptions pursuant to the Banking Industry Supervision Regulations of Korea.

 

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(2)

Applicable for credit card receivables for general purchases of products or services.

(3)

Applicable for cash advances, card loans and revolving loan receivables.

The process to determine the allowances foroff-balance sheet positions under IFRS is similar to the methodology used for loans. Any loss amounts are recognized as a provision in the consolidated statements of financial position within liabilities and charged to the consolidated statement of income as a component of the impairment losses due to credit loss.

The actual amount of credit losses we incur may differ from our loss estimates as a result of changing economic conditions, changes in industry or geographic concentrations, or other factors. We monitor the differences between our estimated and actual incurred credit losses, and we undertake detailed periodic assessments of both individual loans and credit portfolios, the models we use to estimate incurred credit losses in those portfolios and the adequacy of our overall allowances.

Problem Loans and Past Due Accruing Loans

We monitor and manage our “problem loans” by generally placing loans on “problem loan” status when payments of interest and/or principal become past due by 90 days. In addition, the following types of loans are classified as problem loans by us even if such loans are not past due:

 

  

Loans to creditors with dishonored notes or checks;

 

  

Loans for which interest payments are reduced or postponed (e.g., throughwork-out procedures or debt restructurings); and

 

  

Loans to creditors included in the “watch list” maintained by the Korea Federation of Banks.

We reclassify loans asnon-problem loans when interest and principal payments areup-to-date and future payments of principal and interest are reasonably assured. In applying payments on problem loans, we first apply payments to the delinquent interest outstanding, then tonon-delinquent interest, and then to the outstanding loan balance until the loan is paid in full.

Foregone interest is the portion of the contractual interest due on problem loans that we have not accrued in our books. If we had not foregone interest on our problem loans, we would have recorded gross interest income of ₩74 billion, ₩61 billion and ₩60 billion for 2017, 2018 and 2019, respectively, on loans accounted for as problem loans throughout the year, or since origination for loans held for part of the year.The actual amount of interest income on those loans included in our net income for 2017, 2018 and 2019 was ₩34 billion, ₩34 billion and ₩39 billion, respectively.

The category “accruing loans which are contractually past due 90 days or more as to principal or interest” includes loans that are still accruing interest based on the contractual rate of interest but on which principal or interest payments are contractually past due 90 days or more. We continue to accrue contractual interest on loans that are fully secured by deposits or on which there are financial guarantees from the Korean government, the KDIC or certain financial institutions.

 

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The following table shows, as of the dates indicated, the amount of loans that were problem loans and accruing loans which were past due 90 days or more:

 

  As of December 31, 
  2015  2016  2017  2018  2019 
  Domestic  Foreign  Total  Domestic  Foreign  Total  Domestic  Foreign  Total  Domestic  Foreign  Total  Domestic  Foreign  Total 

Loans classified as problem loans(1)

               

Corporate(2)

 1,901  44  1,945  1,200  67  1,267  924  145  1,069  627  35  662  688  42  730 

Consumer(3)

  436   4   440   442   20   462   460   23   483   537   24   561   559   20   579 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Sub-total

  2,337   48   2,385   1,642   87   1,729   1,384   168   1,551   1,164   59   1,223   1,247   62   1,309 

Accruing loans which are contractually past due 90 days or more as to principal or interest(1)

               

Corporate(2)

           3      3   2      2   1      1   11      11 

Consumer(3)

                                             
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Sub-total

           3      3   2      2   1      1   11      11 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 2,337  48  2,385  1,645  87  1,732  1,386  168  1,553  1,165  59  1,224  1,258  62  1,320 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

(1)

Not including due from banks and other financial assets (or other receivables), and prior to deducting allowance for credit losses and present value discount or reflecting deferred origination costs.

(2)

Including loans made to banks and the Korean government and government-owned agencies.

(3)

Includes credit card balances of ₩93 billion, ₩142 billion, ₩163 billion, ₩188 billion and ₩208 billion as of December 31, 2015, 2016, 2017, 2018 and 2019, respectively.

The following table shows, as of the dates indicated, the amount of problem loans, potential problem loans andnon-performing loans:

 

   As of December 31, 
   2017   2018   2019 
   (in billions of Won) 

Problem loans

  1,553   1,223   1,309 

Potential problem loans(1)

   937    1,513    1,345 

Non-performing loans

   1,853    1,329    1,157 

 

(1)

Potential problem loans are those classified as precautionary that we determine, through our internal loan review process, as requiring close management due to the borrower’s financial condition, our forecast for the industry in which it operates or as a result of other developments relating to its business.

 

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Loan Aging Schedule

The following table shows our loan aging schedule (excluding accrued interest) as of the dates indicated. In line with industry practice, we have restructured a portion of our delinquent credit card balances as loans.

 

  As of December 31, 2019 
  Normal  Past due by
1 month or less
  Past due by
1-3 months
  Past due by
3-6 months
  Past due by
more than
6 months
  Total 
  (in billions of Won, except percentages) 
  Amount  %  Amount
past due
  %  Amount
past due
  %  Amount
past due
  %  Amount
past due
  %  Amount  % 

Domestic

            

Corporate(1)

            

Commercial and industrial

 100,415   37.1 117   0.0 111   0.0 93   0.0 93   0.0 100,829   37.1

Lease financing

  77   0.0      0.0      0.0      0.0      0.0   77   0.0 

Trade financing

  6,758   2.5   1   0.0   2   0.0   3   0.0   2   0.0   6,766   2.5 

Other commercial

  13,705   5.1   6   0.0   3   0.0   5   0.0   29   0.0   13,748   5.1 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total corporate

  120,955   44.7   124   0.0   116   0.0   101   0.0   124   0.0   121,420   44.7 

Consumer

            

General purpose household

  37,368   13.8   120   0.0   45   0.0   33   0.0   39   0.0   37,605   13.8 

Mortgages

  54,145   19.9   202   0.1   67   0.0   41   0.0   56   0.0   54,511   20.1 

Home equity

  28,450   10.5   87   0.0   32   0.0   23   0.0   30   0.0   28,622   10.5 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total consumer

  119,963   44.2   409   0.1   144   0.0   97   0.0   125   0.0   120,738   44.3 

Credit cards

  8,189   3.1   100   0.0   55   0.0   55   0.0      0.0   8,399   3.1 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total domestic

  249,107   92.0   633   0.1   315   0.0   253   0.0   249   0.0   250,557   92.1 

Foreign

            

Corporate(2)

            

Commercial and industrial

  15,474   5.7   19   0.0   7   0.0   15   0.0   29   0.0   15,544   5.7 

Trade financing

  1,781   0.7      0.0      0.0      0.0   1   0.0   1,782   0.7 

Other commercial

  828   0.3      0.0   17   0.0      0.0      0.0   845   0.3 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total corporate

  18,083   6.7   19   0.0   24   0.0   15   0.0   30   0.0   18,171   6.7 

Consumer

  3,217   1.2   14   0.0   8   0.0   7   0.0   19   0.0   3,265   1.2 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total foreign

  21,300   7.9   33   0.0   32   0.0   22   0.0   49   0.0   21,436   7.9 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total loans(3)

 270,407   99.9 666   0.1 347   0.0 275   0.0 298   0.0 271,993   100.0
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

(1)

Including loans made to banks and the Korean government and government-owned agencies.

(2)

Including loans made to banks.

(3)

Not including due from banks and other receivables, and prior to deducting allowance for credit losses and present value discount or reflecting deferred origination costs.

 

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  As of December 31, 2018 
  Normal  Past due by
1 month or less
  Past due by
1-3 months
  Past due by
3-6 months
  Past due by
more than
6 months
  Total 
  (in billions of Won, except percentages) 
  Amount  %  Amount
past due
  %  Amount
past due
  %  Amount
past due
  %  Amount
past due
  %  Amount  % 

Domestic

            

Corporate(1)

            

Commercial and industrial

 95,811   36.6 169   0.1 117   0.0 84   0.0 102   0.0 96,283   36.7

Lease financing

  55   0.0      0.0      0.0      0.0      0.0   55   0.0 

Trade financing

  9,633   3.7   3   0.0   3   0.0   6   0.0   4   0.0   9,649   3.7 

Other commercial

  16,133   6.2   6   0.0   3   0.0   3   0.0   32   0.0   16,177   6.2 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total corporate

  121,632   46.5   178   0.1   123   0.0   93   0.0   138   0.0   122,164   46.6 

Consumer

            

General purpose household

  36,652   14.0   170   0.1   55   0.0   37   0.0   48   0.0   36,962   14.1 

Mortgages

  50,862   19.5   281   0.1   59   0.0   39   0.0   39   0.0   51,280   19.6 

Home equity

  26,112   10.0   117   0.0   36   0.0   24   0.0   35   0.0   26,324   10.0 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total consumer

  113,626   43.5   568   0.2   150   0.0   100   0.0   122   0.0   114,566   43.7 

Credit cards

  7,818   3.1   123   0.0   58   0.0   52   0.0      0.0   8,051   3.1 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total domestic

  243,076   93.1   869   0.3   331   0.0   245   0.0   260   0.0   244,781   93.4 

Foreign

            

Corporate(2)

            

Commercial and industrial

  11,778   4.5   8   0.0   13   0.0   3   0.0   35   0.0   11,837   4.5 

Trade financing

  2,185   0.8      0.0      0.0      0.0   1   0.0   2,186   0.8 

Other commercial

  700   0.3      0.0      0.0      0.0      0.0   700   0.3 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total corporate

  14,663   5.6   8   0.0   13   0.0   3   0.0   36   0.0   14,723   5.6 

Consumer

  2,502   1.0   3   0.0   4   0.0   4   0.0   17   0.0   2,530   1.0 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total foreign

  17,165   6.6   11   0.0   17   0.0   7   0.0   53   0.0   17,253   6.6 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total loans(3)

 260,241   99.7 880   0.3 348   0.0 252   0.0 313   0.0 262,034   100.0
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

(1)

Including loans made to banks and the Korean government and government-owned agencies.

(2)

Including loans made to banks.

(3)

Not including due from banks and other receivables, and prior to deducting allowance for credit losses and present value discount or reflecting deferred origination costs.

 

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  As of December 31, 2017 
  Normal  Past due by
1 month or less
  Past due by
1-3 months
  Past due by
3-6 months
  Past due by
more than
6 months
  Total 
  (in billions of Won, except percentages) 
  Amount  %  Amount
past due
  %  Amount
past due
  %  Amount
past due
  %  Amount
past due
  %  Amount  % 

Domestic

            

Corporate(1)

            

Commercial and industrial

 92,767   36.7 172   0.1 81   0.0 98   0.0 202   0.1 93,320   36.9

Lease financing

  25   0.0      0.0      0.0      0.0      0.0   25   0.0 

Trade financing

  9,264   3.7   8   0.0   4   0.0   3   0.0   11   0.0   9,290   3.7 

Other commercial

  21,238   8.4   5   0.0   5   0.0   1   0.0   34   0.0   21,283   8.4 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total corporate

  123,294   48.8   185   0.0   90   0.0   102   0.0   247   0.1   123,918   49.0 

Consumer

            

General purpose household

  34,084   13.5   165   0.1   41   0.0   30   0.0   54   0.0   34,374   13.6 

Mortgages

  47,104   18.7   277   0.1   46   0.0   23   0.0   26   0.0   47,476   18.8 

Home equity

  25,308   10.1   116   0.0   27   0.0   21   0.0   41   0.0   25,513   10.1 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total consumer

  106,496   42.3   558   0.2   114   0.0   74   0.0   121   0.0   107,363   42.5 

Credit cards

  6,617   2.7   122   0.0   49   0.0   39   0.0      0.0   6,827   2.7 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total domestic

  236,407   93.8   865   0.3   253   0.0   215   0.0   368   0.1   238,108   94.2 

Foreign

            

Corporate(2)

            

Commercial and industrial

  9,579   3.8   1   0.0   1   0.0   8   0.0   43   0.0   9,632   3.8 

Trade financing

  2,649   1.0   4   0.0   0   0.0   0   0.0   2   0.0   2,655   1.0 

Other commercial

  471   0.2   0   0.0   0   0.0   0   0.0   0   0.0   471   0.2 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total corporate

  12,699   5.0   5   0.0   1   0.0   8   0.0   45   0.0   12,758   5.0 

Consumer

  1,864   0.8   2   0.0   3   0.0   1   0.0   57   0.0   1,927   0.8 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total foreign

  14,563   5.8   7   0.0   4   0.0   9   0.0   102   0.0   14,685   5.8 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total loans(3)

 250,970   99.6 872   0.3 257   0.0 224   0.0 470   0.1 252,793   100.0
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

(1)

Including loans made to banks and the Korean government and government-owned agencies.

(2)

Including loans made to banks.

(3)

Not including due from banks and other receivables, and prior to deducting allowance for credit losses and present value discount or reflecting deferred origination costs.

Credit Exposures to Companies in Workout, Restructuring or Rehabilitation

Workout is a voluntary procedure through which we, together with the borrower and other creditors, seek to restore the borrower’s financial stability and viability. Previously, workouts were regulated under a series of Corporate Restructuring Promotion Acts, which last expired on June 30, 2018. In September 2018, the National Assembly of Korea adopted a new Corporate Restructuring Promotion Act, which became effective on October 16, 2018 and is scheduled to expire on October 15, 2023. Under the new Corporate Restructuring Promotion Act, creditors of a financially troubled borrower may participate in a creditors’ committee, which is authorized to prohibit such creditors from exercising their rights against the borrower, commence workout procedures and approve or make revisions to a reorganization plan prepared by the lead creditor bank, the borrower and external experts. The composition of the creditors’ committee is determined at the initial meeting of the committee by the approval of creditors holding not less than 75% of the borrower’s total outstanding debt held by creditors who were notified of the initial meeting of the committee. Although creditors that are not financial institutions or hold less than 1% of the total outstanding debt of the borrower need not be notified of the initial meeting of the creditors’ committee, if such creditors wish to participate, they may not be excluded. Any decision of the creditors’ committee requires the approval of creditors holding not less than 75% of the total outstanding debt of the borrower. However, if a single creditor holds 75% or more of the borrower’s total outstanding debt held by the creditors comprising the creditors’ committee, any decision of the creditors’ committee requires the approval of not less than 40% of the total number of creditors (including such single creditor) comprising the committee. An additional approval of creditors holding not less than 75% of the secured debt is required with respect to the borrower’s debt restructuring. Once approved, any decision made by the creditors’ committee is binding on all creditors of the borrower, with the exception of those creditors that were excluded by a resolution of the committee at its initial meeting and those who exercised their right to request that

 

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their claims be purchased. Creditors that voted against commencement of workout, approval or revision of the reorganization plan, debt restructuring, granting of new credit, extension of the joint management process or other resolutions of the committee have the right to request the creditors that voted in favor of such matters to purchase their claims at a mutually agreed price. In the event that the parties are not able to agree on the terms of purchase, a coordination committee consisting of experts would determine the terms. The creditors that oppose a decision made by the coordination committee may request a court to change such decision.

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

A portion of our loans to and debt securities of corporate customers are currently in workout, restructuring or rehabilitation. As of December 31, 2019, ₩185 billion, or 0.06%, of our total loans and debt securities were in workout, restructuring or rehabilitation.This included ₩97 billion of loans to and debt securities of large corporate borrowers in workout, restructuring or rehabilitation and ₩87 billion of loans to and debt securities of small- andmedium-sized enterprises in workout, restructuring or rehabilitation, which represented 0.03% and 0.03% of our total loans and debt securities, respectively.At Woori Bank, the Corporate Restoration Department manages its workout, restructured and rehabilitated loans. Upon approval of a workout, restructuring or rehabilitation plan, a credit exposure is initially classified as precautionary or lower and thereafter cannot be classified higher than precautionary with limited exceptions. If a corporate borrower is in workout, restructuring or rehabilitation, we take the status of the borrower into account in assessing our loans to and collateral from that borrower for purposes of establishing our allowance for credit losses.

The following table shows, as of December 31, 2019, our 10 largest exposures that were in workout, restructuring or rehabilitation:

 

  Loans        Guarantees
and
Acceptances
        Amounts
Classified as
Substandard
or Below(2)
  Allowance
for Credit
Loss
 

Company

 Won
Currency
  Foreign
Currency
  Equity
Securities
  Debt
Securities
  Total
Exposures
  Collateral(1) 
  (in billions of Won) 

Orient Shipyard

         82  82    82  6 

Posco Plantec

  53               53   19   53   43 

DB Metal

     27         2   29      2   23 

J.Y Heavy Industries

  12               12   12   12   4 

Kodaco

  10               10      10   10 

UPC

  9               9   9   6   2 

Crea Gunsan

  6               6   5   4   2 

Skono Korea

  6               6   3   5   2 

Kappa Korea

  5               5      5   5 

Lar Tehk Korea

  4               4   3   4   1 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 105  27      84  216  51  183  98 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

(1)

The value of collateral is appraised based on future cash flow and observable market price.

(2)

Classification is based on the Financial Services Commission’s asset classification criteria.

 

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Potential Problem Loans

As of December 31, 2019, we had ₩1,345 billion of corporate loans in respect of which we had serious doubt as to the borrower’s ability to comply with repayment terms in the near future.Potential problem loans are those classified as precautionary that we determine, through our internal loan review process, as requiring close management due to the borrower’s financial condition, our forecast for the industry in which it operates or as a result of other developments relating to its business. The following table shows changes in our potential problem loans for each of the years indicated:

 

   Year ended December 31, 
           2018                  2019         
   (in billions of Won) 

Balance at the beginning of the year

  937  1,513 

Increase in the balance of potential problem loans to borrowers who became newly classified as borrowers with potential problem loans during the year

   1,180   398 

Decrease in the balance of potential problem loans to borrowers to whom we had potential problem loans outstanding at the end of the preceding year and have potential problem loans outstanding at the end of the year

   (203  (109

Decrease in the balance of potential problem loans to borrowers to whom we had potential problem loans outstanding at the end of the preceding year but no longer have any loans outstanding at the end of the year

   (352  (294

Decrease in the balance of potential problem loans to borrowers to whom we had potential problem loans outstanding at the end of the preceding year but have loans outstanding classified as normal at the end of the year

   (59  (207

Net other increase in the balance of potential problem loans to existing borrowers to whom we had potential problems loans outstanding at the end of the year

   10  ��44 
  

 

 

  

 

 

 

Balance at the end of the year

  1,513  1,345 
  

 

 

  

 

 

 

Non-Performing Loans

Non-performing loans include commercial and consumer loans which are past due by 90 days or more. In addition,non-performing loans include those loans that, even if they are not past due, are classified as “substandard,” “doubtful” or “estimated loss” based on the Financial Services Commission’s asset classification criteria. Moreover, when a consumer loan borrower has any loans that are classified as “substandard,” “doubtful” or “estimated loss” under such criteria, all loans to such borrower are classified asnon-performing loans. See “—Loan Classifications” above. The following table shows, as of the dates indicated, certain details of our totalnon-performing loan portfolio:

 

   As of December 31, 
   2015  2016  2017  2018  2019 
   (in billions of Won, except percentages) 

Totalnon-performing loans

  2,909(1)  2,080(2)  1,853(3)  1,329(4)  1,157(5) 

As a percentage of total loans

   1.28  0.88  0.73  0.51  0.43

 

(1)

Excludes ₩73 billion of previously delinquent credit card balances restructured into loans that were classified as normal or precautionary.

(2)

Excludes ₩102 billion of previously delinquent credit card balances restructured into loans that were classified as normal or precautionary.

(3)

Excludes ₩122 billion of previously delinquent credit card balances restructured into loans that were classified as normal or precautionary.

(4)

Excludes ₩137 billion of previously delinquent credit card balances restructured into loans that were classified as normal or precautionary.

(5)

Excludes ₩154 billion of previously delinquent credit card balances restructured into loans that were classified as normal or precautionary.

 

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The above amounts do not include loans classified as substandard or below that we sold to United Asset Management Corp., or UAMCO, or to certain structured companies. See “—Sales ofNon-Performing Loans.”

We have also issued securities backed bynon-performing loans and other assets. Some of these transactions involved transfers of loans through securitizations where control of the loans has not been surrendered and, therefore, are not treated as sale transactions. Instead, the assets remain on our balance sheet with the securitization proceeds treated as part of borrowings. These assets are included in the table above.

The following table sets forth, as of the dates indicated, our totalnon-performing loans by type of loan:

 

  As of December 31, 
  2015  2016  2017  2018  2019 
  Amount  %  Amount  %  Amount  %  Amount  %  Amount  % 
  (in billions of Won, except percentages) 

Domestic

   

Corporate

   

Commercial and industrial

 2,098   72.1  ₩1,222   58.8 1,051   56.6 741   55.8 528   45.6

Lease financing

                 0.0      0.0      0.0 

Trade financing

  199   6.9   259   12.4   288   15.6   65   4.9   63   5.4 

Other commercial

  142   4.9   151   7.3   98   5.3   99   7.4   103   8.9 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total corporate

  2,439   83.9   1,632   78.5   1,437   77.5   905   68.1   694   59.9 

Consumer

          

General purpose household(1)

  283   9.7   227   10.9   187   10.1   190   14.3   166   14.4 

Mortgage

  46   1.6   60   2.9   73   3.9   94   7.1   117   10.1 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total consumer

  329   11.3   287   13.8   260   14.0   284   21.4   283   24.5 

Credit cards

  68   2.3   51   2.4   57   3.1   70   5.3   74   6.4 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total domestic

  2,836   97.5   1,970   94.7   1,754   94.6   1,259   94.8   1,051   90.8 

Foreign

          

Corporate

          

Commercial and industrial

  41   1.4   91   4.4   74   4.0   43   3.2   59   5.1 

Lease financing

           0.0      0.0      0.0      0.0 

Trade financing

  2   0.1   1   0.0   2   0.1   1   0.1      0.0 

Other commercial

  14   0.5      0.0   7   0.4      0.0   17   1.5 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total corporate

  57   2.0   92   4.4   83   4.5   45   3.3   76   6.6 

Consumer

  16   0.5   18   0.9   16   0.9   25   1.9   30   2.6 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total foreign

  73   2.5   110   5.3   99   5.4   70   5.2   106   9.2 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Totalnon- performing loans

 2,909   100.0  ₩2,080   100.0 1,853   100.0 1,329   100.0 1,157   100.0
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

(1)

Includes home equity loans.

 

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The following table presents an analysis of the changes in ournon-performing loans for each of the years indicated:

 

   Year ended December 31, 
           2018                  2019         
   (in billions of Won) 

Balance at the beginning of the year

  1,853  1,329 

Additions tonon-performing loans

   

Loans transferred intonon-performing loans

   1,437   1,393 

Reductions innon-performing loans

   

Loans sold

   (246  (289

Loans modified and returned to performing loans

   (682  (299

Loans paid down or paid off

   (284  (296

Loanscharged-off

   (749  (681

Other

       
  

 

 

  

 

 

 

Total net reductions tonon-performing loans

   (524  (172
  

 

 

  

 

 

 

Balance at the end of the year

  1,329  1,157 
  

 

 

  

 

 

 

Top 20Non-Performing Loans.  As of December 31, 2019, our 20 largestnon-performing loans accounted for 32.2% of our totalnon-performing loan portfolio.The following table shows, as of that date, certain information regarding those loans:

 

   Gross
principal
outstanding
   Allowance
for credit
losses
   Collateral(1)   

Industry

   (in billions of Won)    

Borrower A

  53   43   19   Manufacturing

Borrower B

   34        30   Manufacturing

Borrower C

   32    29       Shipping

Borrower D

   31    18       Manufacturing

Borrower E

   27    22       Manufacturing

Borrower F

   21    3       Construction

Borrower G

   19    6       Shipbuilding

Borrower H

   17    17       Manufacturing

Borrower I

   16    5    9   Manufacturing

Borrower J

   16    16       Other

Borrower K

   16    6    15   Manufacturing

Borrower L

   13    7       Manufacturing

Borrower M

   12    4    12   Manufacturing

Borrower N

   11           Manufacturing

Borrower O

   10    10       Manufacturing

Borrower P

   10           Manufacturing

Borrower Q

   9           Other

Borrower R

   8    5    1   Other

Borrower S

   8    3    6   Manufacturing

Borrower T

   8    3    4   Manufacturing
  

 

 

   

 

 

   

 

 

   

Total

  371   197   96   
  

 

 

   

 

 

   

 

 

   

 

(1)

The value of collateral is appraised based on future cash flow and observable market price.

Non-Performing Loans and Impaired Loans

The term“non-performing loan” is used for our asset quality management in accordance with the Banking Industry Supervision Regulations of Korea, whereas the term “impaired loan” is used for financial reporting purposes based on our internal accounting policies in accordance with IFRS 9 (or IAS 39 for periods prior to 2018).

 

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Major differences betweennon-performing loans and impaired loans are as follows:

 

Item

  

Non-performing loans

  

Impaired loans

Relevant regulation or accounting principle  

Banking Industry Supervision Regulations of Korea

(loans classified as “substandard,” “doubtful” or “estimated loss”)

  

Our internal policy based on

IFRS 9 (or IAS 39)

Scope  Loans  Loans (not including due from banks and other financial assets) under IFRS 9 (or loans and receivables (including due from banks and other receivables) under IAS 39)
Purchased impaired loans  Not included  Included
Loans classified as “precautionary” based on the Financial Services Commission’s asset classification criteria  Not included  Loans classified as “precautionary,” for which the borrower has a capital deficit or its auditor’s opinion on its financial statements is modified or qualified, are included

The following table shows, as of the dates indicated, the amounts of impaired loans andnon-performing loans:

 

   As of December 31, 
   2017   2018   2019 
   (in billions of Won) 

Impaired loans

  2,237   1,621   1,386 

Precautionary loans meeting the definition of impaired loans(1)

   51         

Others

   2,186    1,621    1,386 

Non-performing loans

   1,853    1,329    1,157 

 

(1)

Includes loans that are individually significant where the borrower has a capital deficit or its external auditor has expressed a qualified opinion or disclaimed its opinion on the borrower’s financial statements.

Non-Performing Loan Strategy

One of our goals is to improve our asset quality, in part by reducing ournon-performing loans. We have standardized the credit risk management systems of our subsidiaries to reduce our risks relating to futurenon-performing loans. Our credit rating systems are designed to prevent our subsidiaries from extending new loans to high-risk borrowers as determined by their credit rating. Our credit monitoring systems are designed to bring any sudden increase in a borrower’s credit risk to the attention of our subsidiaries, which then closely monitor such loans. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Credit Risk Management.”

Each of our subsidiaries has one or more units that are responsible for managingnon-performing loans. At Woori Bank, for example, the Credit Management and Collection Department and the Corporate Restoration Department generally oversee the process for resolvingnon-performing loans transferred to them by other Woori Bank business units. We believe that by centralizing the management of ournon-performing loans within each subsidiary, we can become more effective in dealing with the issues relating to these loans by pooling institutional knowledge and creating a more specialized workforce.

 

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When a loan becomesnon-performing, we will begin a due diligence review of the borrower’s assets, send a notice demanding payment or stating that we will take legal action, and prepare for legal action. At the same time, we initiate ournon-performing loan management process, which begins with:

 

  

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

 

  

identifying loans subject tocharge-off based on the estimated recovery value of collateral, if any, for suchnon-performing loans and the estimated rate of recovery of unsecured loans; and

 

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