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KB Financial (KB)

Filed: 28 Apr 14, 8:00pm
Table of Contents

As filed with the Securities and Exchange Commission on April 29, 2014

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

(Mark One)

 

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

OR

 

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

For the fiscal year ended December 31, 2013

OR

 

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

For the transition period from            to            .

OR

 

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

Date of event requiring this shell company report                .

Commission file number 000-53445

KB Financial Group Inc.

(Exact name of Registrant as specified in its charter)

KB Financial Group Inc.

(Translation of Registrant’s name into English)

The Republic of Korea

(Jurisdiction of incorporation or organization)

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

(Address of principal executive offices)

Kyu Sul Choi

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

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

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

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

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

 

Title of each class

  

Name of each exchange on which registered

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

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

None

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

None

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

386,351,693 shares of Common Stock, par 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.  x Yes  ¨ No

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

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

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

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

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

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

 

¨    U.S. GAAP  

  x     International Financial Reporting Standards as issued

by the International Accounting Standards Board

  ¨  Other

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

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

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

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

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

 

 

 


Table of Contents

TABLE OF CONTENTS

 

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

   1  

FORWARD-LOOKING STATEMENTS

   2  

Item 1.

  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS   3  

Item 2.

  OFFER STATISTICS AND EXPECTED TIMETABLE   3  

Item 3.

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

Item 4.

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

Item 5.

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

Item 6.

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

Item 7.

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

Item 8.

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

 

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Item 9.

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

Item 9.C.

  Markets   165  
  

Item 9.D.

  Selling Shareholders   172  
  

Item 9.E.

  Dilution   172  
  

Item 9.F.

  Expenses of the Issue   172  

Item 10.

  ADDITIONAL INFORMATION   172  
  

Item 10.A.

  Share Capital   172  
  

Item 10.B.

  Memorandum and Articles of Association   172  
  

Item 10.C.

  Material Contracts   178  
  

Item 10.D.

  Exchange Controls   178  
  

Item 10.E.

  Taxation   179  
  

Item 10.F.

  Dividends and Paying Agents   184  
  

Item 10.G.

  Statements by Experts   184  
  

Item 10.H.

  Documents on Display   184  
  

Item 10.I.

  Subsidiary Information   185  

Item 11.

  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   185  

Item 12.

  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES   206  

Item 13.

  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES   207  

Item 14.

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

Item 15.

  CONTROLS AND PROCEDURES   207  

Item 16.

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

Item 17.

  FINANCIAL STATEMENTS   211  

Item 18.

  FINANCIAL STATEMENTS   211  

Item 19.

  EXHIBITS   212  

 

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PRESENTATION OF FINANCIAL AND OTHER INFORMATION

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

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

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

In this annual report:

 

  

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

 

  

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

 

  

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

 

  

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

 

  

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

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

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

 

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FORWARD-LOOKING STATEMENTS

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

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

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

 

  

our ability to successfully implement our strategy;

 

  

future levels of non-performing loans;

 

  

our growth and expansion;

 

  

the adequacy of allowances for credit and investment losses;

 

  

technological changes;

 

  

interest rates;

 

  

investment income;

 

  

availability of funding and liquidity;

 

  

cash flow projections;

 

  

our exposure to market risks; and

 

  

adverse market and regulatory conditions.

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

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

 

  

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

 

  

the monetary and interest rate policies of Korea;

 

  

inflation or deflation;

 

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unanticipated volatility in interest rates;

 

  

foreign exchange rates;

 

  

prices and yields of equity and debt securities;

 

  

the performance of the financial markets in Korea and globally;

 

  

changes in domestic and foreign laws, regulations and taxes;

 

  

changes in competition and the pricing environments in Korea; and

 

  

regional or general changes in asset valuations.

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

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

 

Item 1.IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

 

Item 2.OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

 

Item 3.KEY INFORMATION

 

Item 3.A.Selected Financial Data

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

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

 

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Consolidated statements of comprehensive income data

 

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

Interest income

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

Interest expense

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net interest income

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Fee and commission income

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

Fee and commission expense

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net fee and commission income

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

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

  815    1,036    812    757    717  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net other operating income (expenses)

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

General and administrative expenses

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Operating profit before provision for credit losses

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Provision for credit losses

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net operating profit

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Share of profit (loss) of associates and joint ventures

  (211  5    (15  (199  (189
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net other non-operating income (expense)

  (28  (142  (118  (12  (12
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net non-operating profit (loss)

  (239  (137  (133  (211  (201
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Profit before income tax

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Tax income (expense)

  75    (845  (559  (552  (522
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Profit for the year

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Items that will not be reclassified to profit or loss:

     

Actuarial gains (losses) on post defined benefit pension plans

  9    (32  (30  41    39  

Items that may be reclassified subsequently to profit or loss:

     

Exchange differences on translating foreign operations

  (7  6    (26  (2  (2

Change in value of financial investments

  108    (240  246    (4  (4

Shares of other comprehensive loss of associates and joint ventures

  (2  (1  (44  (10  (9

Cash flow hedges

  —      (1  (1  2    1  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

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

  108    (268  145    27    25  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total comprehensive income for the year

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Profit attributable to:

     

Stockholders

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

Non-controlling interests

  73    55    9    3    3  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total comprehensive income attributable to:

     

Stockholders

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

Non-controlling interests

  93    59    20    (11  (10
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Earnings per share

     

Basic earnings per share

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

Diluted earnings per share

  401    6,533    4,467    3,249    3.08  

 

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(1) 

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

(2) 

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

(3) 

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

Consolidated statements of financial position data

 

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

Assets

  

Cash and due from financial institutions

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

Financial assets at fair value through profit or loss

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

Derivative financial assets

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

Loans

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

Financial investments

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

Investments in associates and joint ventures

  723    892    935    755    716  

Property and equipment

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

Investment property

  53    52    53    166    158  

Intangible assets

  505    468    493    443    420  

Deferred income tax assets

  4    22    18    16    15  

Assets held for sale

  9    10    35    38    36  

Other assets

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total assets

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Liabilities

     

Financial liabilities at fair value through profit or loss

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

Derivative financial liabilities

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

Deposits

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

Debts

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

Debentures

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

Provisions

  1,020    798    670    678    643  

Defined benefit liabilities

  125    128    84    64    61  

Current income tax liabilities

  30    589    265    211    200  

Deferred income tax liabilities

  284    221    154    62    59  

Other liabilities

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total liabilities

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

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

Total Equity

     

Capital stock

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

Capital surplus

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

Accumulated other comprehensive income

  440    168    295    336    319  

Retained earnings

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

Treasury shares

  (2,477  —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Equity attributable to stockholders

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

Non-controlling interests

  1,169    182    195    —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total equity

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total liabilities and equity

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

(1) 

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

(2) 

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

(3) 

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

Profitability ratios and other data

 

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

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

     

Average total assets (1)

   0.05  0.88  0.60  0.44

Average stockholders’ equity (1)

   0.71    10.21    7.13    4.96  

Dividend payout ratio (2)

   29.71    11.55    13.40    15.31  

Net interest spread (3)

   2.37    2.64    2.48    2.31  

Net interest margin (4)

   2.58    2.88    2.71    2.51  

Efficiency ratio (5)

   57.44    43.96    48.78    53.45  

Cost-to-average assets ratio (6)

   1.64    1.41    1.33    1.37  

Won loans (gross) as a percentage of Won deposits

   107.56    107.97    106.37    107.12  

Total loans (gross) as a percentage of total deposits

   111.96    113.25    109.92    110.44  

 

(1) 

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

(2) 

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

(3) 

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

(4) 

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

(5) 

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

(6) 

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

 

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Capital ratios

 

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

Consolidated capital adequacy ratio of KB Financial Group (2)

   13.00  13.90  15.38

Capital adequacy ratios of Kookmin Bank

    

Tier I capital adequacy ratio (3)

   10.30  10.87  12.61

Tier I common equity capital adequacy ratio (3)

   —      —      12.61  

Tier II capital adequacy ratio (3)

   3.25    3.53    2.81  

Average stockholders’ equity as a percentage of average total assets

   8.58    8.37    8.77  

 

(1) 

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

(2) 

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

(3) 

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

Credit portfolio ratios and other data

 

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

Total loans (1)

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

Total non-performing loans (2)

   1,612    1,180    1,606    1,421  

Other impaired loans not included in non-performing loans

   2,204    2,285    2,086    2,669  

Total of non-performing loans and other impaired loans

   3,816    3,465    3,692    4,090  

Total allowances for loan losses

   3,756    3,448    3,269    2,861  

Non-performing loans as a percentage of total loans

   0.80  0.55  0.74  0.64

Non-performing loans as a percentage of total assets

   0.62    0.43    0.56    0.49  

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

   1.89    1.61    1.70    1.84  

Allowances for loan losses as a percentage of total loans

   1.87    1.60    1.51    1.29  

 

(1) 

Before deduction of allowances for loan losses.

(2) 

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

 

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Selected Statistical Information

Average Balance Sheets and Related Interest

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

 

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

Assets

         

Cash and interest earning deposits in other banks

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

Financial investment (debt securities) (4)

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

Loans:

         

Corporate

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

Mortgage

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

Home equity

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

Other consumer

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

Credit cards (5)

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

Foreign

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

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

  

Loans (total)

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

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

  

Total average interest earning assets

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

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

  

Cash and due from banks

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

Financial assets at fair value through profit or loss:

         

Debt securities (3)

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

Equity securities

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

Other

  20    —      —      36    —      —      42    —      —    
 

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

  

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

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

Financial investment (equity securities)

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

Investment in associates

  764    —      —      934    —      —      882    —      —    

Derivative financial assets

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

Premises and equipment

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

Intangible assets

  477    —      —      539    —      —      475    —      —    

Allowances for loan losses

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

Other non-interest earning assets

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

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

  

Total average non-interest earning assets

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

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

  

Total average assets

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

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

  

 

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

Liabilities

         

Deposits:

         

Demand deposits

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

Time deposits

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

Certificates of deposit

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

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

  

Deposits (total)

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

Debts

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

Debentures

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

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

  

Total average interest bearing liabilities

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

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

  

Non-interest bearing demand deposits

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

Derivative financial liabilities

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

Financial liabilities at fair value through profit or loss

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

Other non-interest bearing liabilities

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

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

  

Total average non-interest bearing liabilities

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

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

  

Total average liabilities

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

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

  

Total equity

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

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

  

Total average liabilities and equity

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

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

  

 

(1) 

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

(2) 

We do not invest in any tax-exempt securities.

(3) 

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

(4) 

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

(5) 

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

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

 

   Year Ended December 31, 
   2011  2012  2013 
   (percentages) 

Net interest spread (1)

   2.64  2.48  2.31

Net interest margin (2)

   2.88    2.71    2.51  

Average asset liability ratio (3)

   108.57    108.01    108.89  

 

(1) 

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

(2) 

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

(3) 

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

 

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Table of Contents

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

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

 

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

Interest earning assets

       

Cash and interest earning deposits in other banks

  83   2   85   32   (46 (14

Financial investment (debt securities)

   33    (76  (43  (2  (155  (157

Loans:

       

Corporate

   438    (242  196    (110  (692  (802

Mortgage

   33    (44  (11  3    (338  (335

Home equity

   40    (18  22    5    (253  (248

Other consumer

   40    (53  (13  58    (247  (189

Credit cards

   (33  36    3    (51  (52  (103

Foreign

   10    5    15    3    (8  (5
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total interest income

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

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

Interest bearing liabilities

       

Deposits:

       

Demand deposits

  12   10   22   27   (78 (51

Time deposits

   446    38    484    (225  (882  (1,107

Certificates of deposit

   —      (1  (1  2    (15  (13

Debts

   70    (9  61    (32  (63  (95

Debentures

   (199  (47  (246  39    (111  (72
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total interest expense

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total net interest income

  315   (381 (66 127   (642 (515
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

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Table of Contents

Exchange Rates

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

 

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

2009

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

2010

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

2011

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

2012

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

2013

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

October

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

November

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

December

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

2014 (through April 25)

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

January

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

February

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

March

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

April (through April 25)

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

 

Source:     Federal Reserve Bank of New York.

(1) 

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

 

Item 3.B.Capitalization and Indebtedness

Not applicable.

 

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

Not applicable.

 

Item 3.D.Risk Factors

Risks relating to our retail credit portfolio

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

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

 

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

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

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

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

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

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

 

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

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

 

  

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

 

  

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

 

  

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

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

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

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

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

 

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

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

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

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

 

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

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

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

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

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

 

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Risks relating to our financial holding company structure and strategy

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

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

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

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

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

 

  

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

 

  

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

 

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

 

  

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

 

  

unexpected business disruptions;

 

  

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

 

  

loss of customers; and

 

  

labor unrest.

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

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

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

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

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

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

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

 

  

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

 

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

 

  

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

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

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

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

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

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

Risks relating to competition

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

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

 

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

Risks relating to our large corporate loan portfolio

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

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

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

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

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

 

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

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

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

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

Other risks relating to our business

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

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

 

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

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

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

 

  

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

 

  

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

 

  

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

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

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

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

 

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

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

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

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

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

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

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

 

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

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

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

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

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

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

Our activities are subject to cybersecurity risk.

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

 

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

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

Risks relating to liquidity and capital management

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

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

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

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

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

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

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

 

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

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

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

Risks relating to government regulation and policy

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

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

 

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

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

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

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

 

  

capital increases or reductions;

 

  

stock cancellations or consolidations;

 

  

transfers of business;

 

  

sales of assets;

 

  

closures of subsidiaries or branch offices;

 

  

mergers with other financial institutions; and

 

  

suspensions of a part of our business operations.

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

Risks relating to Korea

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

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

 

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

 

  

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

 

  

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

 

  

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

 

  

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

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

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

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

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

 

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

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

 

  

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

 

  

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

 

  

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

 

  

further decreases in the market prices of Korean real estate;

 

  

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

 

  

declines in consumer confidence and a slowdown in consumer spending;

 

  

increasing levels of household debt;

 

  

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

 

  

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

 

  

social and labor unrest;

 

  

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

 

  

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

 

  

loss of investor confidence arising from corporate accounting irregularities and 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;

 

  

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

 

  

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

 

  

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

 

  

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

 

  

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

 

  

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

 

  

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

 

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

 

  

changes in financial regulations in Korea.

Labor unrest in Korea may adversely affect our operations.

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

Risks relating to our common stock and ADSs

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

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

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

Ownership of our common stock is restricted under Korean law.

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

 

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

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

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

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

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

 

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

 

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

such common stock will not be accepted for deposit unless

 

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

 

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

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

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

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

 

  

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

 

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

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

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

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

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

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

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

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

 

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

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

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

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

 

Item 4.INFORMATION ON THE COMPANY

 

Item 4.A.    Historyand Development of the Company

Overview

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

Our legal and commercial name is KB Financial Group Inc. Our registered office and principal executive offices are located at 84, Namdaemoon-ro, Jung-gu, Seoul, Korea 100-703. Our telephone number is822-2073-7114. Our agent in the United States, Kookmin Bank, New York Branch, is located at 565 Fifth Avenue, 24th Floor, New York, NY 10017. Its telephone number is (212) 697-6100.

History of the Former Kookmin Bank

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

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

 

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History of H&CB

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

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

The Merger of the Former Kookmin Bank and H&CB

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

The Establishment of KB Financial Group

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

 

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

 

LOGO

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

 

LOGO

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

 

  

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

 

  

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

 

  

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

 

  

maximize our management efficiency; and

 

  

further enhance our capacity to expand our overseas operations.

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

 

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

Item 4.B.    Business Overview

Business

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

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

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

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

 

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

 

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

Retail

          

Mortgage and home equity (1)

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

Other consumer (2)

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

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total retail

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

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Credit card

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

Corporate

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

Foreign

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

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total loans

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

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

 

(1) 

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

(2) 

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

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

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

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

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

Strategy

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

 

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The key elements of our strategy are as follows:

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

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

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

 

  

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

 

  

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

 

  

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

 

  

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

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

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

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

 

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

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

 

  

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

 

  

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

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

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

 

  

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

 

  

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

 

  

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

 

  

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

 

  

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

 

  

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

Strengthening internal risk management capabilities

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

 

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

 

  

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

 

  

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

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

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

Retail Banking

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

Lending Activities

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

 

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

Retail:

          

Mortgage and home equity loans

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

Other consumer loans(1)

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

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total

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

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

 

(1) 

Excludes credit card loans, but includes overdraft loans.

 

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Our retail loans consist of:

 

  

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

 

  

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

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

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

Mortgage and Home Equity Lending

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

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

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

 

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

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

 

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

Mortgage:

          

Secured (1)

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

Unsecured

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

Home Equity:

          

Secured

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

Unsecured

  —      —      —      —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

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

Mortgage:

          

Secured (1)

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

Unsecured

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

Home Equity:

          

Secured

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

Unsecured

  —      —      —      —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

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

Mortgage:

          

Secured (1)

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

Unsecured

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

Home Equity:

          

Secured

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

Unsecured

  —      —      —      —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

(1) 

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

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

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

 

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

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

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

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

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

Other Consumer Loans

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

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

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

Deposit-taking Activities

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

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

 

  

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

 

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

 

  

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

 

  

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

 

  

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

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

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

 

  

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

 

  

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

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

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

 

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

Credit Cards

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

 

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

 

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

(in billions of Won, except

number of holders,

accounts and percentages)

 

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

    

General accounts

   10,364    10,112    8,987  

Corporate accounts

   407    424    435  
  

 

 

  

 

 

  

 

 

 

Total

   10,771    10,536    9,422  
  

 

 

  

 

 

  

 

 

 

Number of merchants (at year end) (thousands)

   2,265    2,024    2,058  

Active ratio (at year end) (1)

   77.4  81.0  88.6

Credit card fees

    

Merchant fees (2)

  1,441   1,484   1,480  

Installment and cash advance fees

   648    683    578  

Annual membership fees

   51    66    68  

Other fees

   566    542    539  
  

 

 

  

 

 

  

 

 

 

Total

  2,706   2,775   2,665  
  

 

 

  

 

 

  

 

 

 

Charge volume (3)

    

General purchase

  46,771   45,768   46,735  

Installment purchase

   11,644    12,153    10,852  

Cash advance

   12,220    11,606    10,516  

Card loan (4)

   4,306    3,800    4,688  
  

 

 

  

 

 

  

 

 

 

Total

  74,941   73,327   72,791  
  

 

 

  

 

 

  

 

 

 

Outstanding balance (at year end)

    

General purchase

  4,410   4,533   4,716  

Installment purchase

   2,770    2,679    2,600  

Cash advance

   2,276    2,032    1,525  

Card loan (4)

   2,982    2,647    2,959  
  

 

 

  

 

 

  

 

 

 

Total

  12,438   11,891   11,800  
  

 

 

  

 

 

  

 

 

 

Average outstanding balances

    

General purchase

  4,569   4,461   4,601  

Installment purchase

   2,579    2,728    2,474  

Cash advance

   2,238    2,134    1,717  

Card loan (4)

   2,996    2,759    2,829  
  

 

 

  

 

 

  

 

 

 

Total

  12,382   12,082   11,621  
  

 

 

  

 

 

  

 

 

 

Delinquency ratios (at year end) (5)

    

From 1 month to 3 months

   1.00  0.94  0.81

From 3 months to 6 months

   0.34    0.25    0.83  

Over 6 months

   0.17    0.13    0.07  
  

 

 

  

 

 

  

 

 

 

Total

   1.51  1.32  1.71
  

 

 

  

 

 

  

 

 

 

Non-performing loan ratio

   0.50  0.40  0.91

Write-offs (gross)

  413   541   404  

Recoveries (6)

   204    185    141  
  

 

 

  

 

 

  

 

 

 

Net write-offs

  209   356   263  
  

 

 

  

 

 

  

 

 

 

Gross write-off ratio (7)

   3.34  4.48  2.93

Net write-off ratio (8)

   1.69  2.95  1.91

 

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(1) 

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

(2) 

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

(3) 

Represents the aggregate cumulative amount charged during the year.

(4) 

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

(5) 

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

(6) 

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

(7) 

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

(8) 

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

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

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

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

 

  

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

 

  

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

 

  

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

 

  

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

 

  

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

 

  

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

 

  

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

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

 

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

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

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

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

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

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

Corporate Banking

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

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

 

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

Corporate:

          

Small- and medium-sized enterprise loans

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

Large corporate loans

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

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total

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

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

 

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

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

Small- and Medium-sized Enterprise Banking

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

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

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

Lending Activities

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

 

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

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

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

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

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

Pricing

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

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

Large Corporate Banking

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

 

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

Lending Activities

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

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

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

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

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

Pricing

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

 

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Capital Markets Activities and International Banking

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

Securities Investment and Trading

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

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

 

  

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

 

  

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

 

  

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

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

 

  

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

 

  

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

 

  

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

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

 

  

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

 

  

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

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

 

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

 

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

Available-for-sale financial assets:

        

Debt securities

        

Korean treasury securities and government agencies

  5,928    62    1    5,989  

Financial institutions (1)

   6,413     20     1     6,432  

Corporate (2)

   5,277     99     1     5,375  

Asset-backed securities

   1,762     1     6     1,757  

Others

   180     1     —       181  
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

   19,560     183     9     19,734  

Equity securities

   2,193     616     166     2,643  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale financial assets

  21,753    799    175    22,377  
  

 

 

   

 

 

   

 

 

   

 

 

 

Held-to-maturity financial assets:

        

Korean treasury securities and government agencies

  5,436    240    —      5,676  

Financial institutions (3)

   1,125     30     —       1,155  

Corporate (4)

   6,155     235     —       6,390  

Asset-backed securities

   339     2     —       341  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total held-to-maturity financial assets

  13,055    507    —      13,562  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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

Available-for-sale financial assets:

        

Debt securities

        

Korean treasury securities and government agencies

  6,171    87    2    6,256  

Financial institutions (1)

   7,436     40     —       7,476  

Corporate (2)

   6,470     139     3     6,606  

Asset-backed securities

   1,396     4     1     1,399  

Others

   —       —       —       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

   21,473     270     6     21,737  

Equity securities

   1,825     659     10     2,474  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale financial assets

  23,298    929    16    24,211  
  

 

 

   

 

 

   

 

 

   

 

 

 

Held-to-maturity financial assets:

        

Korean treasury securities and government agencies

  4,449    272    1    4,720  

Financial institutions (3)

   1,316     22     —       1,338  

Corporate (4)

   6,213     285     —       6,498  

Asset-backed securities

   278     3     —       281  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total held-to-maturity financial assets

  12,256    582    1    12,837  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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

Available-for-sale financial assets:

        

Debt securities

        

Korean treasury securities and government agencies

  6,910    30    14    6,926  

Financial institutions (1)

   5,771     15     4     5,782  

Corporate (2)

   4,948     57     7     4,998  

Asset-backed securities

   1,208     2     2     1,208  

Others

   19     —       —       19  
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

   18,856     104     27     18,933  

Equity securities

   2,092     823     16     2,899  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale financial assets

  20,948    927    43    21,832  
  

 

 

   

 

 

   

 

 

   

 

 

 

Held-to-maturity financial assets:

        

Korean treasury securities and government agencies

  4,357    180    —      4,537  

Financial institutions (3)

   893     9     —       902  

Corporate (4)

   7,400     180     —       7,580  

Asset-backed securities

   367     1     —       368  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total held-to-maturity financial assets

  13,017    370    —      13,387  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

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

(2) 

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

(3) 

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

(4) 

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

Derivatives Trading

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

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

 

  

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

 

  

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

 

  

stock price index options linked to the KOSPI index.

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

 

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

 

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

Foreign exchange derivatives(1)

  1,450    1,087    846    943    938    996  

Interest rate derivatives (1)

   796     737     1,100     1,040     766     731  

Equity derivatives

   200     220     74     68     47     50  

Credit derivatives

   —       —       —       —       —       —    

Commodity derivatives

   1     —       —       —       —       —    

Others(1)

   2     15     71     4     68     18  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Includes those for trading purposes and hedging purposes.

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

 

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

Foreign exchange derivatives

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

Interest rate derivatives

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

Other derivatives

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

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

 

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

Foreign exchange derivatives

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

Interest rate derivatives

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

Total

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

Asset Securitization Transactions

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

 

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

Call Loans

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

Investment Banking

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

 

  

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

 

  

financing and financial advisory services for real estate development projects;

 

  

structured finance; and

 

  

financing for mergers and acquisitions.

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

International Banking

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

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

 

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

Total foreign currency assets

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

Foreign currency borrowings:

      

Debts

   8,307     7,087     6,637  

Debentures

   3,409     2,974     3,123  
  

 

 

   

 

 

   

 

 

 

Total borrowings

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

 

 

   

 

 

   

 

 

 

 

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

 

Business Unit(1)

  Location

Subsidiaries

  

Kookmin Bank Cambodia PLC

  Cambodia

Kookmin Bank (China) Ltd.

  China

Kookmin Bank Hong Kong Ltd.

  Hong Kong

Kookmin Bank International Ltd.

  United Kingdom

Branches

  

Kookmin Bank (China) Ltd., Beijing Branch

  China

Kookmin Bank (China) Ltd., Guangzhou Branch

  China

Kookmin Bank (China) Ltd., Harbin Branch

  China

Kookmin Bank (China) Ltd., Suzhou Branch

  China

Kookmin Bank, Osaka Branch

  Japan

Kookmin Bank, Tokyo Branch

  Japan

Kookmin Bank, Auckland Branch

  New Zealand

Kookmin Bank, New York Branch

  United States

Kookmin Bank, Ho Chi Minh City Branch

  Vietnam

Kookmin Bank Cambodia PLC, Toul Kork Branch

  Cambodia

Representative Office

  

Kookmin Bank, Mumbai Representative Office

  India

Kookmin Bank, Yangon Representative Office

  Myanmar

Kookmin Bank, Hanoi Representative Office

  Vietnam

 

(1) 

Does not include subsidiaries and branches in liquidation or dissolution.

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

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

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

 

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Trustee and Custodian Services Relating to Investment Trusts and Other Functions

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

 

  

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

 

  

receiving and making payments in respect of such investments;

 

  

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

 

  

providing reports on assets held in custody;

 

  

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

 

  

providing fund-related administration and accounting services.

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

Other Businesses

Trust Account Management Services

Money Trust Management Services

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

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

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

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

 

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

 

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

Principal and interest guaranteed trusts (1)

  0.2    0.2    0.2  

Principal guaranteed trusts (1)

   2,892     2,919     3,070  

Performance trusts (1)(2)

   15,304     18,066     20,842  
  

 

 

   

 

 

   

 

 

 

Total

  18,196    20,985    23,912  
  

 

 

   

 

 

   

 

 

 

 

(1) 

Calculated on an SKAS basis.

(2) 

Trusts which are primarily non-guaranteed.

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

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

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

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

Property Trust Management Services

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

 

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

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

Investment Trust Management

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

Management of the National Housing Fund

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

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

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

Bancassurance

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

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

Distribution Channels

Banking Branch Network

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

 

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

 

Area

  Number of
Branches
   Percentage 

Seoul

   443     36.7

Six largest cities (other than Seoul)

   283     23.4  

Other

   481     39.9  
  

 

 

   

 

 

 

Total

   1,207     100.0
  

 

 

   

 

 

 

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

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

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

 

   For the Year Ended December 31, 
           2011                   2012                   2013         

Number of transactions (millions)

   688     640     606  

Fee revenue (in billions of Won)

  74    58    56  

Other Distribution Channels

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

 

   For the Year Ended December 31, 
   2011   2012   2013 

Internet banking:

      

Number of users (1)

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

Number of transaction (thousands)

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

Fee revenue (in millions of Won)

  27,715    28,374    28,538  

Phone banking:

      

Number of users (2)

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

Number of transaction (thousands)

   250,265     213,941     183,434  

Fee revenue (in millions of Won)

  12,284    13,297    13,817  

 

(1) 

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

(2) 

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

 

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Internet Banking

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

 

  

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

 

  

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

 

  

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

 

  

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

 

  

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

Phone Banking

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

 

  

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

 

  

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

 

  

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

 

  

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

Mobile & Smartphone Banking

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

 

  

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

 

  

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

 

  

processing of loan applications and bancassurance services; and

 

  

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

Other Channels

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

 

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Competition

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

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

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

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

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

Information Technology

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

 

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

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

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

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

Assets and Liabilities

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

Loan Portfolio

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

 

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Loan Types

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

 

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

Domestic:

        

Corporate

        

Small- and medium-sized enterprise

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

Large corporate (1)

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

Retail

        

Mortgage and home equity

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

Other consumer

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

Credit cards

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

 

 

   

 

 

   

 

 

   

 

 

 

Total domestic

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

Foreign

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

 

 

   

 

 

   

 

 

   

 

 

 

Total gross loans

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

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

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

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

 

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

Domestic:

  

Corporate

  

Commercial and industrial (1)

  74,611  

Construction

   8,097  

Other corporate

   2,178  

Retail

  

Mortgage and home equity

   70,678  

Other consumer

   26,949  

Credit cards

   11,368  
  

 

 

 

Total domestic

   193,881  

Foreign:

   2,344  
  

 

 

 

Total gross loans

  196,225  
  

 

 

 

 

(1) 

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

Loan Concentrations

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

 

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

20 Largest Exposures by Borrower

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

 

  Loans        Guarantees
and
Acceptances
     Amounts
Classified
as
Impaired
Loans
 

Company (1)

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

Hyundai Heavy Industries Co., Ltd.

 —     59   10   —     1,493   1,562   —    

POSCO

  —      124    570    235    —      929    —    

Daewoo Shipbuilding & Marine Engineering Co., Ltd.

  —      184    1    10    722    917    —    

Hyundai Steel Company

  408    300    2    31    42    783    —    

Mizuho Bank, Ltd.

  —      739    —      —      —      739    —    

National Agricultural Cooperative Federation

  —      —      —      671    —      671    —    

Hyundai Capital Services Inc.

  340    —      —      223    —      563    —    

GS Caltex Corporation

  —      55    —      131    325    511    —    

Daewoo International Corporation

  —      199    —      21    239    459    —    

Samsung Heavy Industries Co., Ltd.

  —      —      —      10    443    453    —    

Woori Bank

  —      222    6    224    —      452    —    

Hyundai Securities Co., Ltd.

  —      400    36    —      —      436    —    

Samsung Everland Inc.

  373    —      —      29    —      402    —    

Industrial and Commercial Bank of China Ltd.

  —      372    —      —      —      372    —    

Korean Air Lines Co., Ltd.

  —      80    5    23    263    371    —    

LG Electronics Inc.

  340    —      4    16    —      360    —    

Bank of Communications Ltd.

  —      359    —      —      —      359    —    

Korea Exchange Bank

  —      148    —      193    —      341    —    

SK Energy Co., Ltd.

  —      182    —      50    106    338    —    

SH Corporation

  —      —      —      333    —      333    —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

(1) 

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

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

 

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Exposure to Chaebols

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

 

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

Chaebol

 Won
Currency
  Foreign
Currency
      
  (in billions of Won) 

Hyundai Motors (1)

 867   440   13   517   538   2,375    —    

Samsung (2)

  648    256    41    381    781    2,107    —    

Hyundai Heavy Industries (3)

  17    97    70    10    1,866    2,060    —    

POSCO (4)

  161    336    637    276    437    1,847    —    

SK (5)

  215    584    284    369    329    1,781    —    

LG (6)

  742    293    19    55    13    1,122    —    

GS (7)

  126    128    4    197    534    989    —    

Daewoo Shipbuilding & Marine Engineering (8)

  38    184    1    10    723    956    —    

Hanwha (9)

  578    50    10    12    59    709    —    

Lotte (10)

  233    44    25    320    44    666    —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

(1) 

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

(2) 

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

(3) 

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

(4) 

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

(5) 

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

(6) 

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

(7) 

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

(8) 

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

(9) 

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

(10) 

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

Loan Concentration by Industry

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

 

   As of December 31, 
   2011  2012  2013 

Industry

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

Services

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

Manufacturing

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

Wholesale and retail

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

Financial institutions

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

Construction

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

Public sector

   311     0.3    520     0.5    655     0.6  

Others

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

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total

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

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

 

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Maturity Analysis

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

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

 

   1 Year or
Less
   Over 1 Year
But Not More

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

Domestic:

        

Corporate

        

Small- and medium-sized enterprises

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

Large corporate

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

 

 

   

 

 

   

 

 

   

 

 

 

Total corporate

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

Retail

        

Mortgage and home equity

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

Other consumer

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

 

 

   

 

 

   

 

 

   

 

 

 

Total retail

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

Credit cards

   10,568     1,000     216     11,784  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total domestic

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

Foreign:

   1,417     414     69     1,900  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total gross loans

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

 

 

   

 

 

   

 

 

   

 

 

 

Interest Rate Sensitivity

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

 

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

Fixed rate (1)

  17,378  

Variable or adjustable rates (2)

   91,661  
  

 

 

 

Total gross loans

  109,039  
  

 

 

 

 

(1) 

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

(2) 

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

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

Credit Exposures to Companies in Workout, Restructuring or Rehabilitation

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

 

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

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

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

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

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

 

  Loans        Guarantees
and
Acceptances
     Amounts
Classified as
Impaired
Loans
 

Company

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

Kumho Tire Co., Inc.

 23   27   95   —     8   153   —    

Orient Shipyard Co., Ltd.

  87    2    —      —      62    151    89  

Kumho Industrial Co., Ltd.

  58    —      8    —      24    90    58  

Dongmoon Construction Co., Ltd.

  66    —      —      —      —      66    66  

Ssangyong Engineering & Construction Co., Ltd.

  47    —      —      —      —      47    47  

Samho International Co., Ltd.

  33    —      6    6    —      45    33  

Dongil Construction Co., Ltd.

  42    —      —      —      —      42    42  

Hyundai Cement Co., Ltd.

  24    2    —      —      —      26    26  

Oriental Precision & Engineering Co., Ltd.

  2    —      18    —      —      20    2  

Chinhung International Inc.

  17    —      —      —      —      17    17  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 399   31   127   6   94   657   380  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

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Provisioning Policy

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

We generally consider the following loans to be impaired loans:

 

  

loans that are past due by 90 days or more;

 

  

loans that are subject to legal proceedings related to collection;

 

  

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

 

  

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

 

  

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

 

  

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

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

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

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

 

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

Loan Aging Schedule

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

 

As of December 31,

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

2010

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

2011

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

2012

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

2013

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

Non-Accrual Loans and Past Due Accruing Loans

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

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

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

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

 

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

Loans accounted for on a non-accrual basis

        

Corporate

  2,466    2,021    1,851    2,220  

Consumer

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

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

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

 

 

   

 

 

   

 

 

   

 

 

 

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

        

Corporate

   5     4     84     98  

Consumer

   28     45     97     116  
  

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

   33     49     181     214  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

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

 

 

   

 

 

   

 

 

   

 

 

 

 

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

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

 

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

Loans accounted for on a non-accrual basis

  

Corporate

  2,243  

Consumer

   2,124  
  

 

 

 

Sub-total

   4,367  
  

 

 

 

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

  

Corporate (1)

   125  

Consumer

   124  
  

 

 

 

Sub-total

   249  
  

 

 

 

Total

  4,616  
  

 

 

 

 

(1) 

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

Troubled Debt Restructurings

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

 

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

Loans classified as “troubled debt restructurings”

  116    573    412    465    269  

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

Potential Problem Loans

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

 

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

Other Problematic Interest Earning Assets

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

Non-Performing Loans

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

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

 

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

Total non-performing loans

  1,612   1,180   1,606   1,421  

As a percentage of total loans

   0.8  0.5  0.7  0.6

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

 

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

Total non-performing loans

  1,365  

As a percentage of total loans

   0.7

 

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Analysis of Non-Performing Loans

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

 

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

Domestic:

             

Corporate

             

Small- and medium-sized enterprise

  686     42.5 373     31.6 680     42.4 568     40.0

Large corporate

   241     15.0    84     7.1    97     6.0    158     11.1  
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total corporate

   927     57.5    457     38.7    777     48.4    726     51.1  

Retail

             

Mortgage and home equity

   478     29.7    510     43.2    625     38.9    394     27.7  

Other consumer

   163     10.1    132     11.2    137     8.5    152     10.7  
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total retail

   641     39.8    642     54.4    762     47.4    546     38.4  

Credit cards

   39     2.4    62     5.3    47     2.9    107     7.5  

Total domestic

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

Foreign:

   5     0.3    19     1.6    20     1.3    42     3.0  
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total non-performing loans

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

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

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

 

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

Domestic:

    

Corporate

    

Commercial and industrial

  899     65.8

Construction

   125     9.2  

Lease financing

   —       —    

Other corporate

   2     0.2  
  

 

 

   

 

 

 

Total corporate

   1,026     75.2  

Retail

    

Mortgage and home equity

   211     15.4  

Other consumer

   79     5.8  
  

 

 

   

 

 

 

Total retail

   290     21.2  

Credit cards

   23     1.7  

Total domestic

   1,339     98.1  

Foreign:

   26     1.9  
  

 

 

   

 

 

 

Total non-performing loans

  1,365     100.0
  

 

 

   

 

 

 

 

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Top 20 Non-Performing Loans

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

 

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

Borrower A

  Manufacturing  55    6  

Borrower B

  Construction   38     22  

Borrower C

  Manufacturing   29     5  

Borrower D

  Manufacturing   29     9  

Borrower E

  Manufacturing   28     28  

Borrower F

  Services   23     1  

Borrower G

  Financial institutions   22     1  

Borrower H

  Construction   17     4  

Borrower I

  Construction   17     3  

Borrower J

  Services   15     1  

Borrower K

  Others   15     1  

Borrower L

  Construction   15     3  

Borrower M

  Services   14     1  

Borrower N

  Services   13     1  

Borrower O

  Manufacturing   13     13  

Borrower P

  Construction   12     1  

Borrower Q

  Construction   11     1  

Borrower R

  Services   11     11  

Borrower S

  Others   9     —    

Borrower T

  Construction   9     6  
    

 

 

   

 

 

 

Total

    395    118  
    

 

 

   

 

 

 

Non-Performing Loan Strategy

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

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

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

 

  

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

 

  

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

 

  

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

 

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

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

Methods for resolving non-performing loans include the following:

 

  

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

 

  

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

 

  

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

 

  

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

 

  

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

 

  

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

 

  

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

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

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

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

 

  

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

 

  

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

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

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

 

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

Allocation and Analysis of Allowances for Loan Losses under IFRS

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

 

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

Domestic

             

Corporate

             

Small- and medium-sized enterprise

  2,028     54.0 1,533     44.4 1,234     37.7 1,023     35.8

Large corporate

   863     23.0    910     26.4    999     30.6    785     27.4  
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total corporate

   2,891     77.0    2,443     70.8    2,233     68.3    1,808     63.2  
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Retail

             

Mortgage and home equity

   88     2.3    111     3.2    123     3.8    93     3.3  

Other consumer

   432     11.5    524     15.2    565     17.2    486     17.0  
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total retail

   520     13.8    635     18.4    688     21.0    579     20.3  
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Credit cards

   328     8.7    350     10.2    329     10.1    410     14.3  

Foreign(1)

   17     0.5    20     0.6    19     0.6    64     2.2  
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total allowances for loan losses

  3,756     100.0 3,448     100.0 3,269     100.0 2,861     100.0
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

 

(1) 

Consists primarily of loans to corporations.

Our total allowances for loan losses were ₩3,756 billion as of December 31, 2010. During 2011, total allowances for loan losses decreased by ₩308 billion, or 8.2%, to ₩3,448 billion as of December 31, 2011. During 2012, total allowances for loan losses decreased by ₩179 billion, or 5.2%, to ₩3,269 billion as of December 31, 2012. During 2013, total allowances for loan losses decreased by ₩408 billion, or 12.5%, to ₩2,861 billion as of December 31, 2013.

 

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The following table analyzes our allowances for loan losses and loan loss experience under IFRS for each of the years indicated:

 

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

Balance at the beginning of the period

  3,269   3,756   3,448   3,269  

Changes in accounting policy (1)

   —      —      —      —    

Restated balance at the beginning of the period

   3,269    3,756    3,448    3,269  

Amounts charged against income

   2,464    1,645    1,653    1,427  

Sale

   (193  (240  (105  (84

Gross charge-offs:

     

Domestic:

     

Corporate

     

Small- and medium-sized enterprise

   1,541    1,274    943    691  

Large corporate

   55    204    260    454  

Retail

     

Mortgage and home equity

   37    20    62    134  

Other consumer

   237    267 ��  391    447  

Credit cards

   389    413    541    404  

Foreign:

   20    3    —      2  
  

 

 

  

 

 

  

 

 

  

 

 

 

Total gross charge-offs

   (2,279  (2,181  (2,197  (2,132
  

 

 

  

 

 

  

 

 

  

 

 

 

Recoveries:

     

Domestic:

     

Corporate

     

Small-and medium-sized enterprise

   133    162    149    145  

Large corporate

   1    6    9    —    

Retail

     

Mortgage and home equity

   14    13    7    22  

Other consumer

   114    104    97    105  

Credit cards

   246    204    185    141  

Foreign:

   4    1    3    2  
  

 

 

  

 

 

  

 

 

  

 

 

 

Total recoveries

   512    490    450    415  
  

 

 

  

 

 

  

 

 

  

 

 

 

Net charge-offs

   (1,767  (1,691  (1,747  (1,717

Other charges

   (17  (22  20    (34
  

 

 

  

 

 

  

 

 

  

 

 

 

Balance, at the end of the period

  3,756   3,448   3,269   2,861  
  

 

 

  

 

 

  

 

 

  

 

 

 

Ratio of net charge-offs during the period to average loans outstanding during the period

   0.9  0.8  0.8  0.8

 

(1) 

The amounts for 2013 reflect a change in our accounting policies pursuant to the adoption of IFRS 10,Consolidated Financial Statements, which is effective beginning in 2013. Corresponding amounts for 2012 (but not for 2011 or 2010) have been restated to retroactively apply such change. See “—Overview—Changes in Accounting Policies.”

 

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Allocation and Analysis of Allowances for Loan Losses under U.S. GAAP

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

 

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

Domestic

    

Corporate

    

Commercial and industrial

  2,165     38.1

Construction

   457     4.1  

Other corporate

   25     1.1  
  

 

 

   

 

 

 

Total corporate

   2,647     43.3  

Retail

    

Mortgage and home equity

   125     36.0  

Other consumer

   336     13.7  
  

 

 

   

 

 

 

Total retail

   461     49.7  

Credit cards

   202     5.8  

Foreign(1)

   31     1.2  
  

 

 

   

 

 

 

Total allowances for loan losses

  3,341     100.0
  

 

 

   

 

 

 

 

(1) 

Consists primarily of loans to corporations.

 

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The following table analyzes our allowances for loan losses and loan loss experience under U.S. GAAP for the year indicated:

 

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

Balance at the beginning of the period

  3,043  

Amounts charged against income

   2,216  

Allowance relating to loans repurchased

   7  

Gross charge-offs:

  

Domestic:

  

Corporate

  

Commercial and industrial

   975  

Construction

   460  

Other corporate

   15  

Retail

  

Mortgage and home equity

   33  

Other consumer

   329  

Credit cards

   571  

Foreign:

   —    
  

 

 

 

Total gross charge-offs

   (2,383
  

 

 

 

Recoveries:

  

Domestic:

  

Corporate

  

Commercial and industrial

   54  

Construction

   10  

Other corporate

   1  

Retail

  

Mortgage and home equity

   12  

Other consumer

   125  

Credit cards

   256  

Foreign:

   —    
  

 

 

 

Total recoveries

   458  
  

 

 

 

Net charge-offs

   (1,925
  

 

 

 

Balance at the end of the period

  3,341  
  

 

 

 

Ratio of net charge-offs during the period to average loans outstanding during the period

   1.0

Regulatory Reserve for Credit Losses

If our allowances for credit losses are deemed insufficient for regulatory purposes, we are required to compensate for the difference by recording a regulatory reserve for credit losses, which is segregated within our retained earnings. The level of regulatory reserve for credit losses required to be recorded is equal to the amount by which our allowances for credit losses under IFRS are less than the greater of (x) the amount of expected loss calculated using the internal ratings-based approach under Basel II and as approved by the Financial Supervisory Service and (y) the required amount of credit loss reserve calculated based on guidelines prescribed by the Financial Services Commission. As of December 31, 2013, our regulatory reserve for credit losses was ₩2,280 billion.

 

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The following tables set forth the Financial Services Commission’s guidelines for the classification of loans and the minimum percentages of the outstanding principal amount of the relevant loans or balances that the credit loss reserve must cover:

 

Loan Classification

 

Loan Characteristics

Normal Loans made to customers whose financial position, future cash flows and nature of business are deemed financially sound. No problems in recoverability are expected.
Precautionary Loans made to customers whose financial position, future cash flows and nature of business show potential weakness, although there is no immediate risk of non-repayment.
Substandard Loans to customers whose adverse financial position, future cash flows and nature of business have a direct effect on the repayment of the loan.
Doubtful Loans to customers whose financial position, future cash flows and nature of business are so weak that significant risk exists in the recoverability of the loan to the extent the outstanding amount exceeds any collateral pledged.
Estimated loss Loans where write-off is unavoidable.

 

Loan Classifications

  Corporate   Consumer   Credit Card
Balances (1)
   Credit Card
Loans (2)
 

Normal

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

Precautionary

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

Substandard

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

Doubtful

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

Estimated loss

   100%     100%     100%     100%  

 

(1) 

Applicable for credit card balances from general purchases.

(2) 

Applicable for cash advances, card loans and revolving credit card assets.

Loan Charge-Offs

Basic Principles

We attempt to minimize loans to be charged off by adhering to a sound credit approval process based on credit risk analysis prior to extending loans and a systematic management of outstanding loans. However, if charge-offs are necessary, we charge off loans subject to our charge-off policy at an early stage in order to maximize accounting transparency, to minimize any waste of resources in managing loans which have a low probability of being collected and to reduce our non-performing loan ratio.

Loans To Be Charged Off

Loans are charged off if they are deemed to be uncollectible by falling under any of the following categories:

 

  

loans for which collection is not foreseeable due to insolvency, bankruptcy, compulsory execution, disorganization, dissolution or the shutting down of the business of the debtor;

 

  

loans for which collection is not foreseeable due to the death or disappearance of the debtor;

 

  

loans for which expenses of collection exceed the collectable amount;

 

  

loans on which collection is not possible through legal or any other means;

 

  

payments in arrears in respect of credit cards that have been overdue for a period of six months or more and have been classified as expected loss (excluding instances where there has been partial payment of the overdue balance, where a related balance is not overdue or where a charge off is not possible due to Korean regulations); and

 

  

the portion of loans classified as “estimated loss,” net of any recovery from collateral, which is deemed to be uncollectible.

 

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Procedure for Charge-off Approval

In order to charge off corporate loans, an application for a charge-off must be submitted to Kookmin Bank’s Credit Management Department promptly after the corporate loan is classified as estimated loss or deemed uncollectible. The Credit Management Department refers the charge-off application to Kookmin Bank’s Branch Audit Department for their review to ensure compliance with our internal procedures for charge-offs. Then, the Credit Management Department, after reviewing the application to confirm that it meets relevant requirements, seeks an approval from the Financial Supervisory Service for our charge-offs, which is typically granted. Once we receive approval from the Financial Supervisory Service, we must also obtain approval from our senior management to charge off those loans. For accounting purposes, we recognize charge-offs of corporate loans under IFRS prior to approval from the Financial Supervisory Service.

With respect to credit card balances and unsecured retail loans, we follow a different process to determine which credit card balances and unsecured retail loans should be charged off, based on the length of time those loans or balances are past due. We charge off unsecured retail loans deemed to be uncollectible and credit card balances which have been overdue for a period of six months or more or which have been deemed to be uncollectible under IFRS.

Treatment of Loans Charged Off

Once loans are charged off, we classify them as charged-off loans and remove them from our balance sheet. These loans are managed based on a different set of procedures. We continue our collection efforts in respect of these loans, including through our subsidiary, KB Credit Information, although loans may be charged off before we begin collection efforts in some circumstances.

If a collateralized loan is overdue, we will, typically within one year from the time that such loan became overdue (or after a longer period in certain circumstances), petition a court to foreclose and sell the collateral through a court-supervised auction. If a debtor ultimately fails to repay and the court grants its approval for foreclosure, we will sell the collateral, net of expenses incurred from the auction.

Credit Rehabilitation Programs for Delinquent Consumer Borrowers

In light of the rapid increase in delinquencies in credit card and other consumer credit in recent years, and concerns regarding potential social issues posed by the growing number of individuals with bad credit, the Korean government has implemented a number of measures intended to support the rehabilitation of the credit of delinquent consumer borrowers. These measures may affect the amount and timing of our collections and recoveries on our delinquent consumer credits.

For example, in March 2009, the Financial Services Commission requested Korean banks, including us, to establish a “pre-workout program,” including a credit counseling and recovery service, for retail borrowers with outstanding short-term debt. Under the pre-workout program, which has been in operation since April 2009, maturity extensions and/or interest reductions are provided for retail borrowers with total loans of ₩1.5 billion or less (consisting of no more than ₩500 million of unsecured loans and ₩1 billion of secured loans) who are in arrears on their payments for more than 30 days but less than 90 days or for retail borrowers with an annual income of ₩40 million or less who have been in arrears on their payments for more than 30 days on an aggregate basis for the 12 months prior to their application.

In March 2013, in order to support low income consumer borrowers experiencing difficulty in repaying their unsecured long-term debt, the Financial Services Commission announced the establishment of a “National Happiness Fund” to provide one-time relief to such borrowers by:

 

  

purchasing from creditors unsecured loans of individual borrowers not exceeding ₩100 million in principal amount in the aggregate, which loans have been in arrears for a period of six months or more as of February 28, 2013 and, if requested by the borrower, reducing the balance of such loans by up to

 

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50% and/or extending the maturity of such loans to up to ten years based on the borrower’s expected ability to repay;

 

  

purchasing from certain creditors student loans of individual borrowers, which loans have been in arrears for a period of six months or more as of February 28, 2013 and, if requested by the borrower, restructuring the balance and/or extending the maturity of such loans based on the borrower’s expected ability to repay or extending the maturity of such loans until the borrower is employed; and

 

  

for individuals with annual income of ₩40 million or less with loans of a principal amount not exceeding ₩30 million in the aggregate and with an interest rate of 20% or higher, facilitating the refinancing of such loans at lower interest rates, provided that such loans have not been in default during the six months prior to the application for relief.

Over 3,800 Korean financial institutions and private lenders, including our subsidiaries, Kookmin Bank, KB Savings Bank and KB Kookmin Card, have signed a memorandum of understanding with the National Happiness Fund to sell eligible loans to the fund. The price and volume of such loans to be sold are subject to further negotiations between the National Happiness Fund and such financial institutions and lenders. The National Happiness Fund accepted applications from individual borrowers to participate in such relief programs until October 2013 and until January 2014 for individual borrowers of student loans from the Korea Student Aid Foundation.

Investment Portfolio

Investment Policy

We invest in and trade Won-denominated and, to a lesser extent, foreign currency-denominated securities for our own account to:

 

  

maintain the stability and diversification of our assets;

 

  

maintain adequate sources of back-up liquidity to match our funding requirements; and

 

  

supplement income from our core lending activities.

In making securities investments, we take into account a number of factors, including macroeconomic trends, industry analysis and credit evaluation in determining whether to make particular investments in securities.

Our investments in securities are also subject to a number of guidelines, including limitations prescribed under the Financial Holding Company Act and the Bank Act. Under these regulations, a bank holding company may not own (i) more than 5% of the total issued and outstanding shares of another finance-related company, (ii) any shares of its affiliates, other than its direct or indirect subsidiaries or (iii) any shares of a non-finance-related company. In addition, Kookmin Bank must limit its investments in equity securities and bonds with a maturity in excess of three years (other than monetary stabilization bonds issued by the Bank of Korea and national government bonds) to 60.0% of its total Tier I and Tier II capital amount (less any capital deductions). Generally, Kookmin Bank is also prohibited from acquiring more than 15.0% of the shares with voting rights issued by any other corporation subject to certain exceptions. Pursuant to the Bank Act, a bank and its trust accounts are prohibited from acquiring the shares of a major shareholder (for the definition of “major shareholder,” see “—Supervision and Regulation—Principal Regulations Applicable to Banks—Financial Exposure to Any Individual Customer and Major Shareholders”) of that bank in excess of an amount equal to 1% of the sum of the bank’s Tier I and Tier II capital (less any capital deductions). Further information on the regulatory environment governing our investment activities is set out in “—Supervision and Regulation—Principal Regulations Applicable to Financial Holding Companies—Liquidity,” “—Supervision and Regulation—Principal Regulations Applicable to Financial Holding Companies—Restrictions on Shareholdings

 

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in Other Companies,” “—Supervision and Regulation—Principal Regulations Applicable to Banks—Liquidity” and “—Supervision and Regulation—Principal Regulations Applicable to Banks—Restrictions on Shareholdings in Other Companies.”

The following table sets out the definitions of the four categories of securities we hold:

 

Category

  

Classification

Financial assets held for trading  Financial assets bought and held for trading.
Financial assets designated at fair value through profit or loss  Financial assets which were not bought and held for trading but are otherwise designated as at fair value through profit or loss.
Available-for-sale financial assets.  Non-derivative financial assets not classified as held-to-maturity, at fair value through profit or loss or loans and receivables
Held-to-maturity financial assets.  Non derivative financial assets with fixed or determinable payments and fixed maturity dates that we have the positive intent and ability to hold to maturity

See “Item 5.A. Operating Results—Critical Accounting Policies—Valuation of Securities and Financial Instruments.”

We also hold limited balances of venture capital securities, non-marketable and restricted equity securities and derivative instruments.

 

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Carrying Amount and Market Value

The following table sets out the carrying amount and market value of securities in our securities portfolio as of the dates indicated:

 

  As of December 31, 
  2011  2012  2013 
  Carrying
Amount
  Market
Value
  Carrying
Amount
  Market
Value
  Carrying
Amount
  Market
Value
 
  (in billions of Won) 

Available-for-sale financial assets:

      

Equity securities

 2,643   2,643   2,474   2,474   2,899   2,899  

Debt securities

      

Korean treasury securities and government agency securities

  5,989    5,989    6,256    6,256    6,926    6,926  

Debt securities issued by financial institutions

  6,432    6,432    7,476    7,476    5,782    5,782  

Corporate debt securities

  5,375    5,375    6,606    6,606    4,998    4,998  

Asset-backed securities

  1,757    1,757    1,399    1,399    1,208    1,208  

Others

  181    181    —      —      19    19  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total available-for-sale

  22,377    22,377    24,211    24,211    21,832    21,832  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Held-to-maturity financial assets:

      

Debt securities

      

Korean treasury securities and government agency securities

  5,436    5,676    4,449    4,720    4,357    4,537  

Debt securities issued by financial institutions

  1,125    1,155    1,316    1,338    893    902  

Corporate debt securities

  6,155    6,390    6,213    6,498    7,400    7,580  

Asset-backed securities

  339    341    278    281    367    368  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total held-to-maturity

  13,055    13,562    12,256    12,837    13,017    13,387  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Financial assets at fair value through profit or loss:

      

Financial assets held for trading

      

Equity securities

  412    412    876    876    1,101    1,101  

Debt securities

      

Korean treasury securities and government agency securities

  1,508    1,508    2,376    2,376    2,085    2,085  

Debt securities issued by financial institutions

  2,837    2,837    4,018    4,018    3,266    3,266  

Corporate debt securities

  586    586    1,679    1,679    1,760    1,760  

Asset-backed securities

  135    135    105    105    510    510  

Others

  111    111    114    114    205    205  

Others

  28    28    40    40    40    40  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Sub-total

  5,617    5,617    9,208    9,208    8,967    8,967  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Financial assets designated at fair value through profit or loss

      

Equity securities

  134    134    159    159    116    116  

Debt securities

  —      —      —      —      —      —    

Derivative-linked securities

  575    575    193    193    246    246  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Sub-total

  709    709    352    352    362    362  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total financial assets at fair value through profit or loss

  6,326    6,326    9,560    9,560    9,329    9,329  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total securities

 41,758   42,265   46,027   46,608   44,178   44,548  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

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Maturity Analysis

The following table categorizes our debt securities by maturity and weighted average yield as of December 31, 2013:

 

  Within
1 Year
  Weighted
Average
Yield (1)
  Over 1
But
within 5
Years
  Weighted
Average
Yield (1)
  Over 5
But
within
10 Years
  Weighted
Average
Yield (1)
  Over 10
Years
  Weighted
Average
Yield (1)
  Total  Weighted
Average
Yield (1)
 
  (in billions of Won, except percentages) 

Available-for-sale financial assets:

          

Korean treasury securities and government agencies

 1,570    3.89 5,119    3.56 228    3.90 9    4.35 6,926    3.64

Debt securities issued by financial institutions

  3,166    2.88    2,520    3.35    96    4.49    —      —      5,782    3.11  

Corporate debt securities

  1,236    4.17    3,497    3.80    234    5.05    31    4.02    4,998    3.95  

Asset-backed securities

  231    3.50    370    2.98    —      —      607    3.75    1,208    3.47  

Others

  19    3.50    —      —      —      —      —      —      19    3.50  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

Total

 6,222    3.42 11,506    3.57 558    4.48 647    3.77 18,933    3.55
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

Held-to-maturity financial assets:

          

Korean treasury securities and government agencies

 1,166    4.10 2,946    4.68 133    4.20 112    5.38 4,357    4.53

Debt securities issued by financial institutions

  440    5.04    402    3.81    51    4.06    —      —      893    4.43  

Corporate debt securities

  1,845    4.64    4,772    4.52    735    4.66    48    3.45    7,400    4.56  

Asset-backed securities

  183    3.57    184    3.06    —      —      —      —      367    3.31  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

Total

 3,634    4.46 8,304    4.51 919    4.56 160    4.80 13,017    4.50
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

Financial assets at fair value through profit or loss:

          

Financial assets held for trading:

          

Korean treasury securities and government agency securities

 763    4.29 1,044    3.35 242    4.24 36    3.17 2,085    3.79

Debt securities issued by financial institutions

  1,646    3.15    1,549    3.30    71    4.13    —      —      3,266    3.24  

Corporate debt securities

  636    4.28    1,055    3.92    69    4.40    —      —      1,760    4.07  

Asset-backed securities

  306    3.57    194    3.82    10    3.71    —      —      510    3.67  

Others

  190    3.31    15    3.55    —      —      —      —      205    3.32  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

Sub-total

 3,541    3.64 3,857    3.51 392    4.23 36    3.17 7,826    3.60
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

Financial assets designated at fair value through profit or loss:

 —      —     —      —     —      —     —      —     —      —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

Total

 3,541    3.64 3,857    3.51 392    4.23 36    3.17 7,826    3.60
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

(1)

The weighted average yield for the portfolio represents the yield to maturity for each individual security, weighted using its carrying amount (which is the amortized cost in the case of held-to-maturity financial assets and the fair value in the case of available-for-sale financial assets and financial assets at fair value through profit or loss).

 

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Concentrations of Risk

As of December 31, 2013, we held the following securities of individual issuers where the aggregate carrying amount of those securities exceeded 10% of our stockholders’ equity at such date, which was ₩25,653 billion:

 

   Carrying
Amount
   Market
Value
 
   (in billions of Won) 

Name of issuer:

    

Korean government

  12,408    12,571  

Bank of Korea

   4,224     4,224  

Korea Deposit Insurance Corporation

   2,667     2,689  
  

 

 

   

 

 

 

Total

  19,299    19,484  
  

 

 

   

 

 

 

The Bank of Korea and the Korea Deposit Insurance Corporation are controlled by the Korean government.

Funding

We obtain funding for our lending activities from a variety of sources, both domestic and foreign. Our principal source of funding is customer deposits. In addition, we acquire funding through long-term borrowings (comprising debentures and debts), short-term borrowings, including borrowings from the Bank of Korea, and call money.

Our primary funding strategy has been to achieve low-cost funding by increasing the average balances of low-cost retail deposits, in particular demand deposits and time deposits. We also have focused our marketing efforts on higher net worth individuals, who account for a significant portion of the assets in our retail deposit base. Customer deposits accounted for 81.3% of total funding as of December 31, 2011, 83.1% of total funding as of December 31, 2012 and 83.0% of total funding as of December 31, 2013.

Our borrowings consist of issuances of debentures and debt from financial institutions, the Korean government and government-affiliated funds. The majority of our debt is long-term, with maturities ranging from one year to 30 years.

Deposits

Although the majority of our deposits are short-term, it has been our experience that the majority of our depositors generally roll over their deposits at maturity, providing us with a stable source of funding.

The following table shows the average balances of our deposits and the average rates paid on our deposits for the periods indicated:

 

   2011  2012  2013 
   Average
Balance (1)
   Average
Rate Paid
  Average
Balance (1)
   Average
Rate Paid
  Average
Balance (1)
   Average
Rate Paid
 
   (in billions of Won, except percentages) 

Demand deposits:

          

Non-interest bearing

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

Interest bearing

   53,824     0.58  56,154     0.60  60,894     0.47

Time deposits

   124,713     3.66    136,617     3.69    130,286     3.02  

Certificates of deposit

   1,746     3.89    1,735     3.86    1,780     3.03  
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Average total deposits

  183,532     2.69 197,581     2.76 196,212     2.18
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

 

(1) 

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

 

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Table of Contents

For a description of our retail deposit products, see “—Business—Retail Banking—Lending Activities—Mortgage and Home Equity Lending” and “—Business—Retail Banking—Deposit-Taking Activities.”

Time Deposits and Certificates of Deposit

The following table presents the remaining maturities of our time deposits and certificates of deposit which had a fixed maturity in excess of ₩100 million as of December 31, 2013:

 

   Time Deposits   Certificates
of Deposit
   Total 
   (in billions of Won) 

Maturing within three months

  25,829    617    26,446  

After three but within six months

   16,177     368     16,545  

After six but within 12 months

   19,827     588     20,415  

After 12 months

   1,947     —       1,947  
  

 

 

   

 

 

   

 

 

 

Total

  63,780    1,573    65,353  
  

 

 

   

 

 

   

 

 

 

Long-term borrowings

The aggregate amount of contractual maturities of all long-term borrowings (comprising debentures and debt) as of December 31, 2013 was as follows:

 

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

Due in 2014

  12,629  

Due in 2015

   5,523  

Due in 2016

   6,273  

Due in 2017

   2,607  

Due in 2018

   1,454  

Thereafter

   4,632  
  

 

 

 

Gross long-term borrowings