Table of Contents
As filed with the Securities and Exchange Commission on
June 23, 2010
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 20-F
| (Mark One) | ||
|
o
|
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| OR | ||
|
þ
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the fiscal year ended December 31, 2009 | ||
| OR | ||
|
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from to . | ||
| OR | ||
|
o
|
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)
9-1, 2-ga, Namdaemoon-ro, Jung-gu, Seoul
100-703,
Korea
(Address of principal executive
offices)
Kyu Sul Choi
9-1, 2-ga, Namdaemoon-ro, Jung-gu, Seoul
100-703,
Korea
Telephone No.: +82-2-2073-2846
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
|
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.
343,028,989 shares of Common Stock, par value
W
5,000 per share
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
þ
Yes
o
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.
o
Yes
þ
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.
þ
Yes
o
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).
o
Yes
o
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):
| þ Large accelerated filer | o Accelerated filer | o Non-accelerated filer |
Indicate by check mark which basis of accounting the registrant
has used to prepare the financial statements included in this
filing:
| þ U.S. GAAP | o International Financial Reporting Standards as issued by the International Accounting Standards Board | o 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.
o
Item 17
o
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).
o
Yes
þ
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.
o
Yes
o
No
* Not for trading, but only in connection with the registration
of the American Depositary Shares.
Table of Contents
TABLE OF
CONTENTS
i
Table of Contents
ii
Table of Contents
PRESENTATION
OF FINANCIAL AND OTHER INFORMATION
As of and for the years ended December 31, 2005, 2006,
2007, 2008 and 2009, we have prepared financial information in
accordance with United States generally accepted accounting
principles, or U.S. GAAP. Unless indicated otherwise, the
financial information in this annual report as of and for the
years ended December 31, 2005, 2006, 2007, 2008 and 2009
has been prepared in accordance with U.S. GAAP.
We were established 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, a new
financial holding company, and in return received shares of our
common stock. See “Item 4A. History and Development of
the Company — The Establishment of KB Financial
Group.” 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. Accordingly, the consolidated financial
statements included in this annual report are, as of dates and
for periods prior to the date of the stock transfer, for Kookmin
Bank and its subsidiaries, and as of dates and for periods from
and after the date of the stock transfer, for us and our
subsidiaries, including Kookmin Bank. For further information
regarding the accounting treatment of the stock transfer, see
Note 3 of the notes to our consolidated financial
statements.
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 and, for periods of time prior to the establishment of KB Financial Group on September 29, 2008, Kookmin Bank and, unless the context otherwise requires, its subsidiaries as of such periods; | |
| • | 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 “
|
|
| • | 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, 2009, which was
W
1,163.65 =
US$1.00.
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,” “predict,”
“positioned,” “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 3D. Risk Factors,” “Item 5.
Operating and Financial Review and Prospects” and
“Item 4B. 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.
1
Table of Contents
In addition to the risks related to our business discussed under
“Item 3D. 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 allowance 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; | |
| • | 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 3D.
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.
2
Table of Contents
| Item 1. | IDENTITY OF DIRECTORS, SENIOR MANAGERS AND ADVISERS |
Not applicable
| Item 2. | OFFER STATISTICS AND EXPECTED TIMETABLE |
Not applicable
| Item 3. | KEY INFORMATION |
| Item 3A. | Selected Financial Data |
The selected consolidated financial and operating data set forth
below as of and for the years ended December 31, 2005,
2006, 2007, 2008 and 2009 have been derived from our audited
consolidated financial statements, which have been prepared in
accordance with U.S. GAAP. Our consolidated financial
statements as of and for the years ended December 31, 2005,
2006, 2007 and 2008 have been audited by independent registered
public accounting firm Deloitte Anjin LLC and our consolidated
financial statements as of and for the year ended
December 31, 2009 have been audited by independent
registered public accounting firm Samil PricewaterhouseCoopers.
We were established 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, a new
financial holding company, and in return received shares of our
common stock. See “Item 4A. History and Development of
the Company — The Establishment of KB Financial
Group.” The stock transfer was accounted for under
U.S. GAAP as a transaction between entities under common
control. Accordingly, the consolidated financial statements
included in this annual report are, as of dates and for periods
prior to the date of the stock transfer, for Kookmin Bank and
its subsidiaries, and as of dates and for periods from and after
the date of the stock transfer, for us and our subsidiaries,
including Kookmin Bank. For further information regarding the
accounting treatment of the stock transfer, see Note 3 of
the notes to our consolidated financial statements.
3
Table of Contents
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.
| Year Ended December 31, | ||||||||||||||||||||||||
| 2005 | 2006 | 2007 | 2008 | 2009 | 2009 (1) | |||||||||||||||||||
| (In billions of Won, except common share data) |
(In millions of
|
|||||||||||||||||||||||
|
US$, except common
|
||||||||||||||||||||||||
| share data) | ||||||||||||||||||||||||
|
Interest and dividend income
|
|
10,658 |
|
11,405 |
|
12,792 |
|
15,829 |
|
13,590 | US$ | 11,679 | ||||||||||||
|
Interest expense
|
4,757 | 5,342 | 6,687 | 9,360 | 8,231 | 7,074 | ||||||||||||||||||
|
Net interest income
|
5,901 | 6,063 | 6,105 | 6,469 | 5,359 | 4,605 | ||||||||||||||||||
|
Provision for credit losses
|
613 | (100 | ) | 18 | 2,313 | 2,204 | 1,894 | |||||||||||||||||
|
Non-interest income
|
2,844 | 2,880 | 4,013 | 2,952 | 3,513 | 3,019 | ||||||||||||||||||
|
Non-interest expenses
|
4,314 | 4,522 | 5,135 | 5,321 | 5,742 | 4,935 | ||||||||||||||||||
|
Income tax expense (benefit)
|
1,099 | 1,423 | 1,206 | 454 | 207 | 178 | ||||||||||||||||||
|
Income (loss) before cumulative effect of a change in accounting
principle, net of
tax
(2)
|
2,719 | 3,098 | 3,759 | 1,333 | 719 | 617 | ||||||||||||||||||
|
Cumulative effect of a change in accounting principle
|
— | (2 | ) | — | — | — | — | |||||||||||||||||
|
Net income
(loss)
(2)
|
2,719 | 3,096 | 3,759 | 1,333 | 719 | 617 | ||||||||||||||||||
|
Net income (loss) attributable to noncontrolling interests, net
of tax
(2)
|
3 | 5 | 4 | 7 | (2 | ) | (2 | ) | ||||||||||||||||
|
Net income (loss) attributable to
stockholders
(2)
|
|
2,716 |
|
3,091 |
|
3,755 |
|
1,326 |
|
721 | US$ | 619 | ||||||||||||
|
Net income (loss) attributable to stockholders per common share
|
||||||||||||||||||||||||
|
Net income (loss) — basic
|
|
8,214 |
|
8,969 |
|
10,898 |
|
4,012 |
|
2,215 | US$ | 1.90 | ||||||||||||
|
Net income (loss) —
diluted
(3)
|
8,210 | 8,969 | 10,898 | 4,012 | 2,215 | 1.90 | ||||||||||||||||||
|
Weighted average common shares outstanding-basic (in thousands
of common
shares)
(4)
|
330,679 | 344,576 | 344,570 | 330,498 | 325,397 | 325,397 | ||||||||||||||||||
|
Weighted average common shares outstanding-diluted (in thousands
of common
shares)
(4)
|
330,845 | 344,578 | 344,570 | 330,498 | 325,397 | 325,397 | ||||||||||||||||||
|
Cash dividends declared per common
share
(5)
|
|
550 |
|
550 |
|
3,650 |
|
2,450 |
|
— | US$ | — | ||||||||||||
| (1) |
Won amounts are expressed in U.S.
dollars at the rate of
|
|
| (2) | On January 1, 2009, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (ASC 810-10-45-15, “Consolidation — Noncontrolling Interest in a Subsidiary”) (“ASC 810-10-45-15”). As a result, minority interests have been recharacterized as noncontrolling interests and net income (loss) attributable to noncontrolling interests, net of tax, is included in income (loss) before cumulative effect of a change in accounting principle, net of tax, and subtracted from net income (loss) to calculate net income (loss) attributable to stockholders. Corresponding items for all prior periods have been restated accordingly. | |
| (3) | Diluted earnings per share gives effect to the potential dilution that could occur if convertible securities, options or other contracts to issue common stock were converted into or exercised for common stock for the relevant periods. Effective from 2003, we had one category of |
4
Table of Contents
| potentially dilutive common shares, which was shares issuable on exercise of stock options granted to directors, executive officers and employees. Effective from August 2005, we changed the settlement method for such stock options to a cash settlement method (excluding certain outstanding stock options which were exercised in full in 2006), and accordingly there were no potentially dilutive common shares in 2007, 2008 and 2009. | ||
| (4) |
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
|
|
| (5) | U.S. GAAP requires that dividends be recorded in the period in which they are declared rather than the period to which they relate unless these are the same. |
5
Table of Contents
| As of December 31, | ||||||||||||||||||||||||
| 2005 | 2006 | 2007 | 2008 | 2009 | 2009 (1) | |||||||||||||||||||
| (In billions of Won) | (In millions of US$) | |||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||
|
Cash and cash equivalents
|
|
3,086 |
|
3,775 |
|
2,770 |
|
3,073 |
|
2,696 | US$ | 2,316 | ||||||||||||
|
Restricted cash
|
2,259 | 3,277 | 3,996 | 4,794 | 6,050 | 5,199 | ||||||||||||||||||
|
Interest-bearing deposits in other banks
|
515 | 423 | 69 | 235 | 467 | 401 | ||||||||||||||||||
|
Call loans and securities purchased under resale agreements
|
1,716 | 1,738 | 1,628 | 1,407 | 2,036 | 1,749 | ||||||||||||||||||
|
Trading assets
|
4,754 | 3,744 | 6,594 | 13,095 | 7,721 | 6,636 | ||||||||||||||||||
|
Investments
(2)
|
25,372 | 25,348 | 24,685 | 29,209 | 33,245 | 28,570 | ||||||||||||||||||
|
Loans (net of allowance for loan losses of
|
134,939 | 149,216 | 170,721 | 197,067 | 193,454 | 166,248 | ||||||||||||||||||
|
Due from customers on acceptances
|
627 | 620 | 1,106 | 2,063 | 1,895 | 1,629 | ||||||||||||||||||
|
Premises and equipment, net
|
1,516 | 1,612 | 1,660 | 1,775 | 1,617 | 1,390 | ||||||||||||||||||
|
Accrued interest and dividends receivable
|
1,060 | 802 | 899 | 1,124 | 1,029 | 885 | ||||||||||||||||||
|
Security deposits
|
1,185 | 1,190 | 1,335 | 1,428 | 1,406 | 1,208 | ||||||||||||||||||
|
Goodwill
|
394 | 394 | 394 | 578 | 580 | 498 | ||||||||||||||||||
|
Other intangible assets, net
|
217 | 185 | 183 | 208 | 191 | 164 | ||||||||||||||||||
|
Other assets
|
868 | 654 | 1,643 | 2,271 | 1,468 | 1,261 | ||||||||||||||||||
|
Total assets
|
|
178,508 |
|
192,978 |
|
217,683 |
|
258,327 |
|
253,855 | US$ | 218,154 | ||||||||||||
|
Liabilities and Equity
|
||||||||||||||||||||||||
|
Deposits:
|
||||||||||||||||||||||||
|
Interest bearing
|
|
121,787 |
|
125,195 |
|
134,760 |
|
155,263 |
|
166,079 | US$ | 142,722 | ||||||||||||
|
Non-interest bearing
|
3,912 | 4,345 | 3,678 | 3,438 | 3,104 | 2,668 | ||||||||||||||||||
|
Call money
|
1,253 | 168 | 794 | 3,444 | 1,365 | 1,173 | ||||||||||||||||||
|
Trading liabilities
|
1,078 | 1,223 | 1,812 | 8,191 | 4,246 | 3,649 | ||||||||||||||||||
|
Acceptances outstanding
|
627 | 620 | 1,106 | 2,063 | 1,895 | 1,629 | ||||||||||||||||||
|
Other borrowed funds
|
6,118 | 10,627 | 7,776 | 10,527 | 8,176 | 7,026 | ||||||||||||||||||
|
Accrued interest payable
|
3,307 | 3,698 | 4,196 | 4,961 | 3,819 | 3,282 | ||||||||||||||||||
|
Secured borrowings
|
8,118 | 7,463 | 6,315 | 5,880 | 4,670 | 4,013 | ||||||||||||||||||
|
Long-term debt
|
16,751 | 21,675 | 36,307 | 45,148 | 39,570 | 34,005 | ||||||||||||||||||
|
Other liabilities
|
4,151 | 3,174 | 3,953 | 3,817 | 3,355 | 2,883 | ||||||||||||||||||
|
Total liabilities
|
167,102 | 178,188 | 200,697 | 242,732 | 236,279 | 203,050 | ||||||||||||||||||
|
Common stock
|
1,682 | 1,682 | 1,682 | 1,782 | 1,932 | 1,660 | ||||||||||||||||||
|
Additional paid-in capital
|
5,416 | 5,404 | 5,405 | 6,253 | 7,200 | 6,188 | ||||||||||||||||||
|
Other
|
4,294 | 7,686 | 9,879 | 7,560 | 8,407 | 7,224 | ||||||||||||||||||
|
Stockholders’ equity
|
11,392 | 14,772 | 16,966 | 15,595 | 17,539 | 15,072 | ||||||||||||||||||
|
Noncontrolling
interests
(3)
|
14 | 18 | 20 | 0 | 37 | 32 | ||||||||||||||||||
|
Total equity
|
11,406 | 14,790 | 16,986 | 15,595 | 17,576 | 15,104 | ||||||||||||||||||
|
Total liabilities and equity
|
|
178,508 |
|
192,978 |
|
217,683 |
|
258,327 |
|
253,855 | US$ | 218,154 | ||||||||||||
| (1) |
Won amounts are expressed in U.S.
dollars at the rate of
|
|
| (2) | Consists of available-for-sale securities, held-to-maturity securities, venture capital securities and other securities. | |
| (3) | On January 1, 2009, we adopted ASC 810-10-45-15. As a result, minority interests have been recharacterized as noncontrolling interests and reclassified as a component of equity. Corresponding items for all prior periods have been restated accordingly. |
6
Table of Contents
Profitability
ratios and other data
| Year Ended December 31, | ||||||||||||||||||||
| 2005 | 2006 | 2007 | 2008 | 2009 | ||||||||||||||||
| (Percentages) | ||||||||||||||||||||
|
Net income attributable to stockholders as a percentage of:
|
||||||||||||||||||||
|
Average total
assets
(1)
|
1.50 | % | 1.61 | % | 1.80 | % | 0.54 | % | 0.27 | % | ||||||||||
|
Average stockholders’
equity
(1)
|
25.51 | 22.52 | 22.66 | 7.79 | 4.45 | |||||||||||||||
|
Dividend payout
ratio
(2)
|
6.81 | 39.73 | 21.95 | — | 10.94 | |||||||||||||||
|
Net interest
spread
(3)
|
3.29 | 3.15 | 2.84 | 2.48 | 1.98 | |||||||||||||||
|
Net interest
margin
(4)
|
3.53 | 3.43 | 3.17 | 2.83 | 2.21 | |||||||||||||||
|
Efficiency
ratio
(5)
|
49.33 | 50.56 | 50.75 | 56.48 | 64.72 | |||||||||||||||
|
Cost-to-average assets
ratio
(6)
|
2.38 | 2.36 | 2.46 | 2.18 | 2.19 | |||||||||||||||
|
Won loans (gross) as a percentage of Won deposits
|
106.34 | 112.16 | 119.48 | 120.50 | 111.55 | |||||||||||||||
|
Total loans (gross) as a percentage of total deposits
|
109.80 | 116.88 | 124.38 | 125.79 | 115.98 | |||||||||||||||
| (1) | Average balances are based on daily balances for our primary banking 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 net income 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 non-interest expense to the sum of net interest income and non-interest income. | |
| (6) | Represents the ratio of non-interest expense to average total assets. |
Capital
ratios under Korean GAAP
| Year Ended December 31, | ||||||||||||||||||||
| 2005 | 2006 | 2007 | 2008 | 2009 | ||||||||||||||||
| (Percentages) | ||||||||||||||||||||
|
Consolidated capital adequacy ratio of KB Financial
Group
(1)
|
— | — | — | 11.73 | % | 13.34 | % | |||||||||||||
|
Capital adequacy ratios of Kookmin Bank
|
||||||||||||||||||||
|
Tier I capital adequacy
ratio
(2)
|
9.67 | % | 10.07 | % | 9.74 | % | 9.92 | % | 10.82 | % | ||||||||||
|
Tier II capital adequacy
ratio
(2)
|
3.28 | 4.10 | 2.88 | 3.26 | 3.22 | |||||||||||||||
|
Average stockholders’ equity as a percentage of average
total assets
|
6.31 | 7.37 | 7.63 | 6.06 | 6.09 | |||||||||||||||
| (1) | 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%. This computation is based on our consolidated financial statements prepared in accordance with Korean GAAP. See “Item 5B. Liquidity and Capital Resources — Financial Condition — Capital Adequacy.” | |
| (2) | Kookmin Bank’s capital adequacy ratios are computed in accordance with the guidelines issued by the Financial Services Commission. The computation is based on its consolidated financial statements prepared in accordance with Korean GAAP. See “Item 5B. Liquidity and Capital Resources — Financial Condition — Capital Adequacy.” |
7
Table of Contents
Credit
portfolio ratios and other data
| As of December 31, | ||||||||||||||||||||
| 2005 | 2006 | 2007 | 2008 | 2009 | ||||||||||||||||
| (In billions of Won, except percentages) | ||||||||||||||||||||
|
Total loans
|
|
138,012 |
|
151,403 |
|
172,189 |
|
199,637 |
|
196,225 | ||||||||||
|
Total non-performing
loans
(1)
|
3,149 | 2,143 | 1,339 | 1,068 | 1,365 | |||||||||||||||
|
Other impaired loans not included in non-performing loans
|
1,615 | 1,195 | 887 | 2,636 | 2,022 | |||||||||||||||
|
Total of non-performing loans and other impaired loans
|
4,764 | 3,338 | 2,226 | 3,704 | 3,387 | |||||||||||||||
|
Total allowance for loan losses
|
3,212 | 2,468 | 1,864 | 3,043 | 3,341 | |||||||||||||||
|
Non-performing loans as a percentage of total loans
|
2.28 | % | 1.42 | % | 0.78 | % | 0.53 | % | 0.70 | % | ||||||||||
|
Non-performing loans as a percentage of total assets
|
1.76 | 1.11 | 0.62 | 0.41 | 0.54 | |||||||||||||||
|
Total of non-performing loans and other impaired loans as a
percentage of total loans
|
3.45 | 2.21 | 1.29 | 1.86 | 1.73 | |||||||||||||||
|
Allowance for loan losses as a percentage of total loans
|
2.33 | 1.63 | 1.08 | 1.52 | 1.70 | |||||||||||||||
| (1) | Non-performing loans are defined as those loans, including corporate, retail and other loans, which are past due more than 90 days. |
8
Table of Contents
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, | ||||||||||||||||||||||||||||||||||||
| 2007 | 2008 | 2009 | ||||||||||||||||||||||||||||||||||
|
Average
|
Interest
|
Average
|
Average
|
Interest
|
Average
|
Average
|
Interest
|
Average
|
||||||||||||||||||||||||||||
| Balance (1) | Income (2)(3)(4) | Yield | Balance (1) | Income (2)(3)(4)(5) | Yield | Balance (1) | Income (2)(3)(4) | Yield | ||||||||||||||||||||||||||||
| (In billions of Won, except percentages) | ||||||||||||||||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||||||||||
|
Cash and interest-earning deposits in other banks
|
|
487 |
|
19 | 3.90 | % |
|
441 |
|
14 | 3.17 | % |
|
722 |
|
24 | 3.32 | % | ||||||||||||||||||
|
Call loans and securities purchased under resale agreements
|
1,201 | 60 | 5.00 | 2,007 | 88 | 4.38 | 2,836 | 46 | 1.62 | |||||||||||||||||||||||||||
|
Trading securities
|
5,070 | 247 | 4.87 | 5,184 | 282 | 5.44 | 4,505 | 191 | 4.24 | |||||||||||||||||||||||||||
|
Investment
securities
(6)
|
24,695 | 1,171 | 4.74 | 28,458 | 1,488 | 5.23 | 32,586 | 1,489 | 4.57 | |||||||||||||||||||||||||||
|
Loans:
|
||||||||||||||||||||||||||||||||||||
|
Commercial and industrial
|
55,759 | 3,484 | 6.25 | 70,442 | 4,808 | 6.83 | 78,206 | 4,489 | 5.74 | |||||||||||||||||||||||||||
|
Construction loans
|
6,959 | 471 | 6.77 | 9,491 | 681 | 7.18 | 9,067 | 562 | 6.20 | |||||||||||||||||||||||||||
|
Other commercial
|
1,623 | 98 | 6.04 | 2,415 | 156 | 6.46 | 2,564 | 139 | 5.42 | |||||||||||||||||||||||||||
|
Mortgage and home equity
|
64,419 | 4,182 | 6.49 | 68,154 | 4,659 | 6.84 | 70,643 | 3,320 | 4.70 | |||||||||||||||||||||||||||
|
Other consumer
|
21,834 | 1,802 | 8.25 | 25,716 | 2,166 | 8.42 | 27,273 | 1,867 | 6.85 | |||||||||||||||||||||||||||
|
Credit
cards
(4)
|
9,451 | 1,200 | 12.70 | 10,640 | 1,274 | 11.97 | 11,355 | 1,379 | 12.14 | |||||||||||||||||||||||||||
|
Foreign commercial and industrial
|
1,112 | 58 | 5.22 | 2,154 | 121 | 5.62 | 2,399 | 84 | 3.50 | |||||||||||||||||||||||||||
|
Loans (total)
|
161,157 | 11,295 | 7.01 | 189,012 | 13,865 | 7.34 | 201,507 | 11,840 | 5.88 | |||||||||||||||||||||||||||
|
Total average interest earning assets
|
192,610 | 12,792 | 6.64 | 225,102 | 15,737 | 6.99 | 242,156 | 13,590 | 5.61 | |||||||||||||||||||||||||||
|
Cash and due from banks
|
5,964 | — | — | 6,481 | — | — | 7,352 | — | — | |||||||||||||||||||||||||||
|
Foreign exchange spot contracts and derivatives
|
4,869 | — | — | 5,569 | — | — | 6,671 | — | — | |||||||||||||||||||||||||||
|
Premises and equipment
|
1,649 | — | — | 1,094 | — | — | 1,688 | — | — | |||||||||||||||||||||||||||
|
Due from customers on acceptances
|
757 | — | — | 2,215 | — | — | 2,050 | — | — | |||||||||||||||||||||||||||
|
Loan loss allowance
|
(1,570 | ) | — | — | (1,863 | ) | — | — | (2,923 | ) | — | — | ||||||||||||||||||||||||
|
Other non-interest earning assets
|
4,192 | — | — | 5,689 | — | — | 5,585 | — | — | |||||||||||||||||||||||||||
|
Total average non-interest earning assets
|
15,861 | — | — | 19,185 | — | — | 20,423 | — | — | |||||||||||||||||||||||||||
|
Total average assets
|
|
208,471 |
|
12,792 | 6.14 | % |
|
244,287 |
|
15,737 | 6.44 | % |
|
262,579 |
|
13,590 | 5.18 | % | ||||||||||||||||||
9
Table of Contents
| Year Ended December 31, | ||||||||||||||||||||||||||||||||||||
| 2007 | 2008 | 2009 | ||||||||||||||||||||||||||||||||||
|
Average
|
Interest
|
Average
|
Average
|
Interest
|
Average
|
Average
|
Interest
|
Average
|
||||||||||||||||||||||||||||
| Balance (1) | Expense | Cost | Balance (1) | Expense | Cost | Balance (1) | Expense | Cost | ||||||||||||||||||||||||||||
| (In billions of Won, except percentages) | ||||||||||||||||||||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||||||||||||||
|
Deposits:
|
||||||||||||||||||||||||||||||||||||
|
Demand deposits
|
|
605 |
|
13 | 2.15 | % |
|
622 |
|
14 | 2.25 | % |
|
846 |
|
10 | 1.18 | % | ||||||||||||||||||
|
Certificates of deposit
|
14,628 | 759 | 5.19 | 25,392 | 1,533 | 6.04 | 26,423 | 1,189 | 4.50 | |||||||||||||||||||||||||||
|
Other time deposits
|
63,082 | 2,778 | 4.40 | 77,495 | 4,152 | 5.36 | 87,721 | 3,905 | 4.45 | |||||||||||||||||||||||||||
|
Savings deposits
|
42,001 | 351 | 0.84 | 41,761 | 444 | 1.06 | 46,277 | 229 | 0.49 | |||||||||||||||||||||||||||
|
Mutual installment deposits
|
6,900 | 231 | 3.35 | 4,985 | 171 | 3.43 | 3,915 | 117 | 2.99 | |||||||||||||||||||||||||||
|
Deposits (total)
|
127,216 | 4,132 | 3.25 | 150,255 | 6,314 | 4.20 | 165,182 | 5,450 | 3.30 | |||||||||||||||||||||||||||
|
Call money
|
2,069 | 101 | 4.88 | 3,059 | 121 | 3.96 | 3,528 | 67 | 1.90 | |||||||||||||||||||||||||||
|
Borrowings from the Bank of Korea
|
539 | 16 | 2.97 | 570 | 17 | 2.98 | 1,200 | 15 | 1.25 | |||||||||||||||||||||||||||
|
Other short-term borrowings
|
9,335 | 462 | 4.95 | 8,634 | 400 | 4.63 | 8,805 | 267 | 3.03 | |||||||||||||||||||||||||||
|
Secured borrowings
|
7,688 | 379 | 4.93 | 6,411 | 342 | 5.33 | 5,293 | 240 | 4.53 | |||||||||||||||||||||||||||
|
Long-term debt
|
29,099 | 1,597 | 5.49 | 38,406 | 2,166 | 5.64 | 42,333 | 2,192 | 5.18 | |||||||||||||||||||||||||||
|
Total average interest bearing liabilities
|
175,946 | 6,687 | 3.80 | 207,335 | 9,360 | 4.51 | 226,341 | 8,231 | 3.64 | |||||||||||||||||||||||||||
|
Demand deposits
|
3,126 | — | — | 3,076 | — | — | 2,936 | — | — | |||||||||||||||||||||||||||
|
Foreign exchange spot contracts and derivatives
|
4,870 | — | — | 6,510 | — | — | 7,298 | — | — | |||||||||||||||||||||||||||
|
Acceptances to customers
|
813 | — | — | 2,285 | — | — | 2,049 | — | — | |||||||||||||||||||||||||||
|
Other non-interest bearing liabilities
|
7,123 | — | — | 8,056 | — | — | 7,746 | — | — | |||||||||||||||||||||||||||
|
Total average non-interest bearing liabilities
|
15,932 | — | — | 19,927 | — | — | 20,029 | — | — | |||||||||||||||||||||||||||
|
Total average liabilities
|
191,878 | 6,687 | 3.48 | 227,262 | 9,360 | 4.12 | 246,370 | 8,231 | 3.34 | |||||||||||||||||||||||||||
|
Total
equity
(7)
|
16,593 | — | — | 17,025 | — | — | 16,209 | — | — | |||||||||||||||||||||||||||
|
Total average liabilities and equity
|
|
208,471 |
|
6,687 | 3.21 | % |
|
244,287 |
|
9,360 | 3.83 | % |
|
262,579 |
|
8,231 | 3.13 | % | ||||||||||||||||||
| (1) | Average balances are based on daily balances for our primary banking operations and monthly or quarterly balances for our other operations. | |
| (2) | Interest income figures include dividends on securities and cash interest received on non-accruing loans. See “Item 4B. Business Overview — Assets and Liabilities — Loan Portfolio — Non-Accrual Loans and Past Due Accruing Loans.” | |
| (3) | We do not invest in any tax-exempt securities. | |
| (4) |
Interest income from credit cards
includes principally cash advance fees of
|
|
| (5) |
Excludes an interest payment of
|
|
| (6) | 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. | |
| (7) | On January 1, 2009, we adopted ASC 810-10-45-15. As a result, minority interests have been recharacterized as noncontrolling interests and reclassified as a component of equity. Corresponding items for all prior periods have been restated accordingly. |
10
Table of Contents
The following table presents our net interest spread, net
interest margin, and asset liability ratio for the past three
years:
| Year Ended December 31, | ||||||||||||
| 2007 | 2008 | 2009 | ||||||||||
| (Percentages) | ||||||||||||
|
Net interest
spread
(1)
|
2.84 | % | 2.48 | % | 1.98 | % | ||||||
|
Net interest
margin
(2)
|
3.17 | 2.83 | 2.21 | |||||||||
|
Average asset liability
ratio
(3)
|
109.47 | 108.57 | 106.99 | |||||||||
| (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. |
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 2008 compared to 2007
and 2009 compared to 2008. 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.
|
2008 vs. 2007
|
2009 vs. 2008
|
|||||||||||||||||||||||
|
Increase/(Decrease)
|
Increase/(Decrease)
|
|||||||||||||||||||||||
| Due to Change in | Due to Change in | |||||||||||||||||||||||
| Volume | Rate | Total (1) | Volume | Rate | Total | |||||||||||||||||||
| (In billions of Won) | ||||||||||||||||||||||||
|
Interest earning assets
|
||||||||||||||||||||||||
|
Cash and interest earning deposits in other banks
|
|
(2 | ) |
|
(3 | ) |
|
(5 | ) |
|
9 |
|
1 |
|
10 | |||||||||
|
Call loans and securities purchased under resale agreements
|
36 | (8 | ) | 28 | 27 | (69 | ) | (42 | ) | |||||||||||||||
|
Trading securities
|
6 | 29 | 35 | (34 | ) | (57 | ) | (91 | ) | |||||||||||||||
|
Investment securities
|
189 | 128 | 317 | 201 | (200 | ) | 1 | |||||||||||||||||
|
Loans:
|
||||||||||||||||||||||||
|
Commercial and industrial
|
980 | 344 | 1,324 | 495 | (814 | ) | (319 | ) | ||||||||||||||||
|
Construction loans
|
180 | 30 | 210 | (29 | ) | (90 | ) | (119 | ) | |||||||||||||||
|
Other commercial
|
51 | 7 | 58 | 9 | (26 | ) | (17 | ) | ||||||||||||||||
|
Mortgage and home equity
|
249 | 228 | 477 | 165 | (1,504 | ) | (1,339 | ) | ||||||||||||||||
|
Other consumer
|
326 | 38 | 364 | 125 | (424 | ) | (299 | ) | ||||||||||||||||
|
Credit cards
|
145 | (71 | ) | 74 | 87 | 18 | 105 | |||||||||||||||||
|
Foreign commercial and industrial
|
58 | 5 | 63 | 13 | (50 | ) | (37 | ) | ||||||||||||||||
|
Total interest income
|
2,218 | 727 | 2,945 | 1,068 | (3,215 | ) | (2,147 | ) | ||||||||||||||||
| (1) |
Excludes an interest payment of
|
11
Table of Contents
|
2008 vs. 2007
|
2009 vs. 2008
|
|||||||||||||||||||||||
|
Increase/(Decrease)
|
Increase/(Decrease)
|
|||||||||||||||||||||||
| Due to Change in | Due to Change in | |||||||||||||||||||||||
| Volume | Rate | Total | Volume | Rate | Total | |||||||||||||||||||
| (In billions of Won) | ||||||||||||||||||||||||
|
Interest bearing liabilities
|
||||||||||||||||||||||||
|
Deposits:
|
||||||||||||||||||||||||
|
Demand deposits
|
0 | 1 | 1 | 4 | (8 | ) | (4 | ) | ||||||||||||||||
|
Certificates of deposit
|
633 | 141 | 774 | 60 | (404 | ) | (344 | ) | ||||||||||||||||
|
Other time deposits
|
705 | 669 | 1,374 | 507 | (754 | ) | (247 | ) | ||||||||||||||||
|
Savings deposits
|
(2 | ) | 95 | 93 | 44 | (259 | ) | (215 | ) | |||||||||||||||
|
Mutual installment deposits
|
(66 | ) | 6 | (60 | ) | (34 | ) | (20 | ) | (54 | ) | |||||||||||||
|
Call money
|
42 | (22 | ) | 20 | 16 | (70 | ) | (54 | ) | |||||||||||||||
|
Borrowings from the Bank of Korea
|
1 | 0 | 1 | 12 | (14 | ) | (2 | ) | ||||||||||||||||
|
Other short-term borrowings
|
(33 | ) | (29 | ) | (62 | ) | 8 | (141 | ) | (133 | ) | |||||||||||||
|
Secured borrowings
|
(66 | ) | 29 | (37 | ) | (55 | ) | (47 | ) | (102 | ) | |||||||||||||
|
Long-term debt
|
524 | 45 | 569 | 211 | (185 | ) | 26 | |||||||||||||||||
|
Total interest expense
|
1,738 | 935 | 2,673 | 773 | (1,902 | ) | (1,129 | ) | ||||||||||||||||
|
Total net interest income
|
|
480 |
|
(208 | ) |
|
272 |
|
295 |
|
(1,313 | ) |
|
(1,018 | ) | |||||||||
Exchange
Rates
The tables below set 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, 2009, which was
W
1,163.65 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 June 18,
2010, the noon buying rate was
W
1,202.6 =
US$1.00.
| Won per U.S. dollar (Noon Buying Rate) | ||||||||||||||||
| Low | High | Average (1) | Period-End | |||||||||||||
|
2005
|
|
997.0 |
|
1,059.8 |
|
1,023.8 |
|
1,010.0 | ||||||||
|
2006
|
913.7 | 1,002.9 | 954.3 | 930.0 | ||||||||||||
|
2007
|
903.2 | 950.2 | 929.0 | 935.8 | ||||||||||||
|
2008
|
935.2 | 1,507.9 | 1,098.7 | 1,262.0 | ||||||||||||
|
2009
|
1,149.0 | 1,570.1 | 1,274.6 | 1,163.7 | ||||||||||||
|
December
|
1,149.0 | 1,185.4 | 1,163.3 | 1,163.7 | ||||||||||||
|
2010 (through June 18)
|
1,104.0 | 1,253.2 | 1,151.0 | 1,202.6 | ||||||||||||
|
January
|
1,120.0 | 1,163.1 | 1,138.2 | 1,158.7 | ||||||||||||
|
February
|
1,144.0 | 1,170.0 | 1,155.7 | 1,159.0 | ||||||||||||
|
March
|
1,128.0 | 1,153.0 | 1,136.1 | 1,131.2 | ||||||||||||
|
April
|
1,104.0 | 1,126.3 | 1,115.5 | 1,108.0 | ||||||||||||
|
May
|
1,115.0 | 1,253.2 | 1,164.8 | 1,194.5 | ||||||||||||
|
June (through June 18)
|
1,198.5 | 1,250.4 | 1,223.0 | 1,202.6 | ||||||||||||
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). |
12
Table of Contents
| Item 3B. | Capitalization and Indebtedness |
Not Applicable
| Item 3C. | Reasons for the Offer and Use of Proceeds |
Not Applicable
| Item 3D. | Risk Factors |
Risks
relating to our retail credit portfolio
Future
changes in market conditions as well as other factors may lead
to increases in delinquency levels of our retail loan
portfolio.
In recent years, consumer debt has increased rapidly in Korea.
Our portfolio of retail loans, in particular, mortgage and home
equity loans, has grown from
W
85,571 billion as of December 31,
2006 to
W
97,627 billion as of
December 31, 2009. As of December 31, 2009, our retail
loans represented 49.7% 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
W
21,589 billion as of
December 31, 2006 to
W
26,949 billion
as of December 31, 2009; as a percentage of total
outstanding retail loans, such balance has also increased from
25.2% as of December 31, 2006 to 27.6% as of
December 31, 2009. 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 size of our retail
portfolio decreased in 2005 due to increased delinquencies in
2004, heightened competition and government regulation in the
retail loan lending segment, but increased in 2006, 2007, 2008
and 2009 primarily as a result of increases in mortgage and home
equity loans.
The growth of our retail loan portfolio in recent years,
together with adverse economic conditions in Korea and globally,
may lead to increases in delinquency levels and a deterioration
in asset quality. While our non-performing retail loans (defined
as those that are over 90 days past due) decreased from
W
629 billion as of December 31, 2006
to
W
290 billion as of December 31,
2009 due to the relative stabilization of delinquency levels
during such period, our non-performing retail loans may increase
in 2010. 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. The pre-workout program has been in operation
since April 2009 and, following a one-year extension by the
Korean government, is expected to continue until April 2011.
Under the pre-workout program, maturity extensions and/or
interest reductions are provided for retail borrowers with total
loans of less than
W
500 million who are in
arrears on their payments for more than 30 days but less
than 90 days. Our participation in such pre-workout program
and other government-led initiatives to provide financial
support to retail borrowers may lead us to extend credit to such
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, which may have an adverse effect on our
results of operations and financial condition.
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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 one
day or more to total outstanding balances) decreased from 4.81%
as of December 31, 2006 to 2.52% as of December 31,
2009. In line with industry practice, we have restructured a
portion of delinquent credit card account balances (defined as
balances overdue for one day or more) as loans. As of
December 31, 2009, these restructured loans outstanding
amounted to
W
31 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 one day or more accounted for
2.73% of our credit card receivables (including credit card
loans) as of December 31, 2009. Delinquencies may increase
in 2010 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.
Despite our continuing efforts to sustain and improve our credit
card asset quality and performance, we may experience increased
delinquencies or deterioration of the asset quality of our
credit card portfolio, which would require us to increase our
loan loss provisions and charge-offs and adversely affect our
overall financial condition and results of operations.
Risks
relating to our small- and medium-sized enterprise loan
portfolio
We
have significant exposure to small- and medium-sized
enterprises, and any financial difficulties experienced by these
customers may result in a deterioration of our asset quality and
have an adverse impact on us.
One of our core businesses is lending to small- and medium-sized
enterprises (as defined under “Item 4B. Business
Overview — Corporate Banking — Small- and
Medium-sized Enterprise Banking”). We estimate, based on
our internal classifications made for Korean GAAP purposes, that
our loans to small- and medium-sized enterprises increased from
W
41,498 billion as of December 31,
2006 to
W
67,121 billion as of
December 31, 2009. During that period, we estimate that
non-performing loans to small- and medium-sized enterprises
decreased from
W
1,451 billion to
W
1,015 billion and the non-performing loan
ratio for such loans decreased from 3.5% as of December 31,
2006 to 1.5% as of December 31, 2009. 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 1.1% as of
December 31, 2009. Until December 31, 2006, the
delinquency ratio for loans to small- and medium-sized
enterprises was calculated as the ratio of (1) the
outstanding balance of such loans in respect of which either
principal payments are overdue by one day or more or interest
payments are overdue by 14 days or more (unless prior
interest payments on a loan were made late on more than three
occasions, in which case the loan is considered delinquent if
interest payments are overdue by one day or more) to
(2) the aggregate outstanding balance of such loans. From
January 1, 2007, 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 on
a Korean GAAP basis decreased from 1.0% as of December 31,
2006, calculated using the old method of calculation, to 0.6% as
of December 31, 2007, calculated using the new method of
calculation, but increased to 0.7% as of December 31, 2009
and may further increase in 2010. In recent years, we have taken
measures which sought to stem rising delinquencies in our loans
to small- and medium-sized enterprises, including through
strengthening the review of loan applications and closer
monitoring of the post-loan performance of small- and
medium-sized enterprise borrowers in industry sectors that are
relatively more sensitive to downturns in the economy and have
shown higher delinquency ratios, such as construction, hotels,
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, 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.
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In addition, many small- and medium-sized enterprises have close
business relationships with the largest Korean commercial
conglomerates, known as “
chaebols
,” primarily
as suppliers. Any difficulties encountered by those
chaebols
would likely hurt the liquidity and financial condition of
related small- and medium-sized enterprises, including those to
which we have exposure, also resulting in an impairment of their
ability to repay loans.
A substantial part of our small- and medium-sized enterprise
lending comprises loans to “small office/home office”
customers, or SOHOs. SOHOs, which we currently define to include
sole proprietorships and individual business interests, are
usually dependent on a limited number of suppliers or customers.
SOHOs tend to be affected to a greater extent than larger
corporate borrowers by fluctuations in the Korean economy. In
addition, SOHOs often maintain less sophisticated financial
records than other corporate borrowers. Although we continue to
make efforts to improve our internally developed credit rating
systems to rate potential borrowers, particularly with respect
to SOHOs, and intend to manage our exposure to these borrowers
closely in order to prevent any deterioration in the asset
quality of our loans to this segment, we may not be able to do
so as intended.
In light of the deteriorating financial condition and liquidity
position of small- and medium-sized enterprises in Korea since
the global financial crisis commencing in the second half of
2008, the Korean government introduced policies and initiatives
intended to encourage Korean banks to provide financial support
to small- and medium-sized enterprises. For example, in November
2008, we entered into a memorandum of understanding with the
Financial Supervisory Service under which we were required to
improve the liquidity position of small- and medium-sized
enterprises and exporters by providing them with adequate
financing and to endeavor to alleviate burdens on low-income
debtors by extending maturity dates or by delaying interest
payments on loans owed to us. In addition, in October 2008, the
Financial Supervisory Service requested Korean banks, including
us, to establish a “fast track” program to provide
liquidity assistance to small- and medium-sized enterprises on
an expedited basis. Under the fast track program we established,
which is effective through June 30, 2010, we provide
liquidity assistance to small- and medium-sized enterprise
borrowers applying for such assistance, in the form of new
short-term loans or maturity extensions or interest rate
adjustments with respect to existing loans, after expedited
credit review and approval by us. The overall prospects for the
Korean economy in 2010 and beyond remain uncertain, and the
Korean government may extend existing 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.
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, 2009, we had loans outstanding to
construction companies and shipbuilding companies (many of which
are small-and medium-sized enterprises) in the amount of
W
8,097 billion and
W
1,300 billion, or 4.1% and 0.7% of our
total loans, respectively. We also have other exposures to
Korean construction and shipbuilding companies, including in the
form of guarantees extended for the benefit of such companies
and debt and equity securities of such companies held by us. In
the case of construction companies, 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 commencing in the second
half of 2008. In October 2008, the Korean government implemented
a
W
9 trillion
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support package for the benefit of the Korean construction
industry, including a program to buy unsold housing units and
land from construction companies. 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 the first half of 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. 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.”
Risks
relating to our financial holding company structure and
strategy
We
have a limited operating history as a financial holding company,
and 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 4A. History and Development of the
Company — The Establishment of KB Financial
Group.”
One of our principal strategies is to take advantage of our
financial holding company structure to become a comprehensive
financial services provider capable of 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 are 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. As a
result, our ability to direct our subsidiaries’ day-to-day
operations may be limited. In addition, one of the intended
benefits of our financial holding company structure is that it
enhances our ability to engage in mergers and acquisitions which
we decide to pursue in the future as part of our strategy. For
example, the Korean government has announced that it plans to
dispose of or reduce its controlling interest in Woori Finance
Holdings Co., Ltd. (the financial holding company of Woori
Bank), while the Lone Star funds have announced that they plan
to sell their controlling interest in Korea Exchange Bank, and
it is possible that we will decide to seek to acquire or merge
with such financial institutions. 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
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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; | |
| • | 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.
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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 from its net assets, in each case as of the end of the prior fiscal period; | |
| • | under the Bank Act, a bank also must credit at least 10% of its net profit to a legal reserve each time it pays dividends on distributable income until that reserve equals the amount of its total paid-in capital; and | |
| • | under the Bank Act and the requirements of the Financial Services Commission, if a bank fails to meet its required capital adequacy ratio or otherwise becomes subject to management improvement measures imposed by the Financial Services Commission, then the Financial Services Commission may restrict the declaration and payment of dividends by that bank. |
Our subsidiaries may not continue to meet the applicable legal
and regulatory requirements for the payment of dividends in the
future. If they fail to do so, they may stop paying or reduce
the amount of the dividends they pay to us, which would have an
adverse effect on our ability to pay dividends on our common
stock.
Although
increasing our fee income is an important part of our strategy,
we may not be able to do so.
We have historically relied on interest income as our primary
revenue source. While we have developed new sources of fee
income as part of our business strategy, our ability to increase
our fee income and thereby reduce our dependence on interest
income will be affected by the extent to which our customers
generally accept the concept of fee-based services.
Historically, customers in Korea have generally been reluctant
to pay fees in return for value-added financial services, and
their continued reluctance to do so will adversely affect the
implementation of this aspect of our strategy.
In March 2007, we reduced or waived many of the fees we charge
on our banking services, in response to customer demand.
Specifically, we reduced or waived our fees on fund transfers
through our Internet, mobile and telephone banking services, as
well as on transfers and
after-hour
withdrawals through ATMs. We also reduced our wire transfer fees
and eliminated the fees we charge on issuance of bankers’
checks and certain tax-related statements. These measures may
continue to limit the growth in our banking-related fee income.
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.
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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.
In addition, we believe that regulatory reforms, including the
Financial Investment Services and Capital Markets Act which
became effective in February 2009, 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 and Chohung
Bank’s merger with Shinhan Bank in April 2006. We expect
that consolidation in the financial industry will continue. In
particular, the Korean government has announced that it plans to
privatize the Korea Development Bank and to dispose of or reduce
its controlling interest in Woori Finance Holdings Co., Ltd.
(the financial holding company of Woori Bank), while the Lone
Star funds have announced that they plan to sell their
controlling interest in Korea Exchange Bank. 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, recent and any
future financial difficulties of chaebols may have an adverse
impact on us.
Of our 20 largest corporate exposures (including loans, debt and
equity securities, guarantees and acceptances and other
exposures) as of December 31, 2009, five were to companies
that were members of the 41 largest
chaebols
in Korea
designated as such by the Financial Supervisory Service based on
their outstanding exposures. As of that date, the total amount
of our exposures to such 41
chaebols
was
W
19,754 billion, or 7.9% of our total
exposures. If the credit quality of our exposures to
chaebols
declines, we could require substantial additional loan loss
provisions, which would hurt our results of operations and
financial condition. See “Item 4B. Business
Overview — Assets and Liabilities — Loan
Portfolio — Exposure to Chaebols.”
We cannot assure you that the allowances we have established
against these exposures will be sufficient to cover all future
losses arising from these exposures. In addition, with respect
to those companies that are in or in the future enter into
workout or liquidation proceedings, we may not be able to make
any recoveries against such companies. We may, therefore,
experience future losses with respect to those loans.
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We
have exposure to companies that are currently or may in the
future be put in restructuring, and we may suffer losses as a
result of additional loan loss provisions required and/or the
adoption of restructuring plans with which we do not
agree.
As of December 31, 2009, our loans and guarantees to
companies that were in workout, restructuring or rehabilitation
amounted to
W
468 billion or 0.2% of our
total loans and guarantees, of which
W
357 billion or 76.3% was classified as
substandard or below and all of which was classified as
impaired. As of the same date, our allowances for losses on
these loans and guarantees amounted to
W
242 billion, or 51.7% 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, 2009 with respect to such securities of
companies in workout, restructuring or rehabilitation amounted
to
W
17 billion, or less than 0.1% of our
total exposures, 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 holding 75% or more of the total outstanding debt
(as well as 75% or more of the total outstanding secured debt)
of the borrower, or to dispose of our credits to other creditors
on unfavorable terms.
We
have exposure to member companies of the Kumho Asiana Group, and
financial difficulties of these companies may adversely impact
us.
Several member companies of the Kumho Asiana Group, one of
Korea’s largest chaebols, have been experiencing financial
difficulties, including as a result of their heavily leveraged
acquisition of Daewoo Engineering & Construction Co.,
Ltd. in 2006 and the subsequent global financial crisis
commencing in the second half of 2008. In January 2010, Kumho
Tires Co., Inc. and Kumho Industrial Co., Ltd. agreed with their
creditors, including us, to begin an out-of-court debt
restructuring program under the Corporate Restructuring
Promotion Act. In addition, Kumho Petrochemical Co., Ltd. and
Asiana Airlines announced that they would undergo a voluntary
restructuring, in return for which their creditors, including
us, agreed to a suspension of payments on the two
companies’ debt until the end of 2010. These four companies
are member companies of the Kumho Asiana Group. As of
December 31, 2009, our aggregate loans and guarantees to
Kumho Tires, Kumho Industrial, Kumho Petrochemical and Asiana
Airlines amounted to
W
412 billion, of
which
W
140 billion were classified as
substandard or below. As of December 31, 2009, our
allowances for credit losses with respect to such loans and
guarantees amounted to
W
105 billion. In
addition, as of December 31, 2009, we had other exposures
to such companies relating to put options granted to us in
connection with our co-investment in Daewoo
Engineering & Construction with the Kumho Asiana Group
(although such put options are not recorded as part of our
assets in our consolidated financial statements prepared under
U.S. GAAP). The fair value of our holdings of Daewoo
Engineering & Construction shares was
W
140 billion as of December 31, 2009.
Moreover, in the first four months of 2010, we extended
additional loans to Kumho Industrial in the aggregate amount of
approximately
W
50 billion to provide
additional liquidity in connection with its restructuring
program. We also converted an aggregate of
W
9 billion of our loans to Kumho
Industrial into equity interests in connection with its
restructuring program. 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, 2009, our loans and guarantees to our 20
largest borrowers totaled
W
5,706 billion
and accounted for 2.7% of our total loans and guarantees. As of
that date, our single largest corporate credit exposure was to
Samsung Heavy Industries, to which we had outstanding credit
exposures (most of which was in the form of guarantees and
acceptances) of
W
1,638 billion,
representing 0.8% of our total loans and guarantees. Any further
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deterioration in the financial condition of our large corporate
borrowers may require us to take 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.
During the second and third quarter of 2007, credit markets in
the United States started to experience difficult conditions and
volatility that in turn have affected worldwide financial
markets. In particular, in late July and early August 2007,
market uncertainty in the U.S. sub-prime mortgage sector
increased dramatically and further expanded to other markets
such as those for leveraged finance, collateralized debt
obligations and other structured products. In September and
October 2008, liquidity and credit concerns and volatility in
the global financial markets increased significantly with the
bankruptcy or acquisition of, and government assistance to,
several major U.S. and European financial institutions,
including the bankruptcy filing of Lehman Brothers Holdings Inc.
(“Lehman Brothers”), the acquisition of Merrill
Lynch & Co., Inc. by the Bank of America Corp., the
acquisition of Wachovia Corporation by Wells Fargo &
Co., U.S. federal government conservatorship of the Federal
Home Loan Mortgage Corporation, the Federal National Mortgage
Association and Washington Mutual, Inc. and the
U.S. federal government’s loans to American
International Group Inc. (“AIG”) in exchange for an
equity interest. These developments resulted in reduced
liquidity, greater volatility, widening of credit spreads and a
lack of price transparency in the United States and global
financial markets. In response to such developments, legislators
and financial regulators in the United States and other
jurisdictions, including Korea, have implemented a number of
policy measures designed to add stability to the financial
markets, including the provision of direct and indirect
assistance to distressed financial institutions. Such policy
measures implemented by the Korean government and the Bank of
Korea included a guarantee program to guarantee foreign
currency-denominated debt incurred by Korean banks and their
overseas branches, currency swap arrangements with U.S. and
Chinese monetary authorities, one-time interest payments to
Korean banks with respect to their required reserve deposits
with the Bank of Korea (which typically does not pay interest)
and the establishment of a
W
20 trillion
bank recapitalization fund (which purchased
W
1 trillion of hybrid Tier I
securities from us in March 2009). In addition, in line with
similar actions taken by monetary authorities in other
countries, from the third quarter of 2008 to the first quarter
of 2009, the Bank of Korea decreased its policy rate by a total
of 325 basis points in order to address financial market
instability and to help combat the slowdown of the domestic
economy. However, while the rate of deterioration of the global
economy slowed in the second half of 2009 and into 2010, with
some signs stabilization and possible improvement, the overall
prospects for the Korean and global economy in 2010 and beyond
remain uncertain. For example, in November 2009, the Dubai
government announced a moratorium on the outstanding debt of
Dubai World, a government-affiliated investment company. In
addition, many governments worldwide, in particular in Greece
and other countries in southern Europe, are showing increasing
signs of fiscal stress and may experience difficulties in
meeting their debt service requirements. Any of these or other
developments could potentially trigger another financial and
economic crisis. Furthermore, while many governments worldwide
are considering or are in the process of implementing “exit
strategies,” in the form of reduced government spending,
higher interest rates or otherwise, with respect to the economic
stimulus measures adopted in response to the global financial
crisis, such strategies may, for reasons related to timing,
magnitude or other factors, have the unintended consequence of
prolonging or worsening global economic and financial
difficulties. In light of the high level of interdependence of
the global economy, any of the foregoing developments could have
a material adverse effect on the Korean economy and financial
markets, and in turn on our business, financial condition and
results of operations.
We are also exposed to adverse changes and volatility in global
and Korean financial markets as a result of our liabilities and
assets denominated in foreign currencies and our holdings of
trading and investment securities, including structured
products. Beginning in the second half of 2008, the value of the
Won relative to major foreign currencies in general and the
U.S. dollar in particular has fluctuated widely. See
“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 an overall decline and continuing
volatility in securities prices, including the stock prices of
Korean and foreign companies in which we hold an interest, which
have resulted in and
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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 4B. 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 and regulatory restrictions
on our operations, as well as significant reputational harm. In
recent years, due to the difficult conditions and volatility in
the worldwide financial markets, particularly the significant
depreciation of the Won against the U.S. dollar and
declines in securities prices from the second half of 2008 into
2009, certain of our customers brought lawsuits against Kookmin
Bank, our banking subsidiary, in connection with its sales of
foreign currency derivatives products known as “KIKO”
(which stands for “knock-in knock-out”) and certain
investment fund products. See “Item 8A. Consolidated
Statements and Other Financial Information — Legal
Proceedings.” The outcome of these and other legal claims
and regulatory actions, which we cannot predict with any degree
of certainty, may materially and adversely impact our business
if such claims and actions are determined against us.
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
60% 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 50% of the appraised value
of collateral) and to periodically re-appraise our collateral,
the downturns in the real estate market in Korea in recent years
resulted in declines in the value of the collateral securing our
mortgage and
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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.
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.
Kookmin
Bank, our banking subsidiary, has in the past breached covenants
in some of its financing documents.
A number of the loan agreements of Kookmin Bank, our banking
subsidiary, contain covenants that limit its ability to pledge
its assets to secure indebtedness, to dispose, sell or transfer
assets or to enter into arrangements having a similar effect. In
early 2009, Kookmin Bank became aware that as a result of its
financing activities undertaken in the ordinary course of its
business, it had breached a number of these covenants. These
financing activities are as follows:
| • | Kookmin Bank borrows funds made available to it by the Bank of Korea (most recently in connection with the Korean government’s initiative to encourage Korean banks to provide financial support to small- and medium-size enterprises) on a secured basis. See “— Risks relating to our small- and medium-sized enterprise loan portfolio — We have significant exposure to small- and medium-sized enterprises, and any financial difficulties experienced by these customers may result in a deterioration of our asset quality and have an adverse impact on us.” | |
| • | Kookmin Bank obtains financing through sale and repurchase arrangements involving the transfer of assets. | |
| • | Kookmin Bank enters into swap transactions under which from time to time it may post or transfer title to collateral. | |
| • | Kookmin Bank securitizes its assets from time to time for funding purposes. |
The assets pledged or transferred through the above financing
activities comprise mainly Korean government bonds and other
types of securities and mortgage loans. In each case, these
financing activities were in breach of one or more of the
covenants set forth in, and triggered defaults under, the
relevant loan agreements. These defaults resulted in
consequential breaches of representations and covenants,
defaults, cross-defaults and termination events in other
financing documents (including loan agreements other than the
aforementioned loan agreements), swap transactions, Kookmin
Bank’s bond programs and securitizations.
During March and April 2009, Kookmin Bank sought and obtained
waivers of the foregoing covenant breaches and default
provisions from the lenders and agents under certain of the
relevant loan agreements. Kookmin Bank also sought and entered
into amendments to certain of the relevant loan agreements to
ensure that it has the ability to enter into ordinary course
financing activities, of the type described above, in the
future. With respect to the relevant loan agreements for which
Kookmin Bank did not obtain such amendments and waivers, Kookmin
Bank repaid the related borrowings.
In addition, a number of Kookmin Bank’s loan agreements
contain representations, covenants or events of default that
were breached or triggered as a result of the comprehensive
stock transfer pursuant to which we were established in 2008,
including as a result of the delisting of Kookmin Bank’s
common shares from the KRX KOSPI Market (formerly known as the
Stock Market Division of the Korea Exchange), the delisting of
the Kookmin Bank American depositary shares from the New York
Stock Exchange and the adoption of a financial holding company
structure pursuant to which Kookmin Bank’s former
subsidiaries became our subsidiaries. During April 2009, Kookmin
Bank sought and obtained certain waivers and amendments from
relevant parties affected by technical defaults stemming from
the comprehensive stock transfer.
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However, we cannot assure you that Kookmin Bank’s
counterparties or creditors under its other financing documents
and instruments, including derivatives and swap transactions,
sale and repurchase arrangements, bond issuances under Kookmin
Bank’s bond programs and securitizations, will not seek to
assert their contractual or other remedies for breach of
representations, cross-default, cross-acceleration, termination
events or failure to comply with the covenants or other terms
under such other financing documents and instruments as a
consequence of the defaults under the above-described loan
agreements, which in turn may trigger other cross-default or
cross-acceleration provisions. Any such developments may have an
adverse effect on our liquidity and financial condition.
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, 2009, we held debt securities issued by
Korean companies and financial institutions (other than those
issued by government-owned or -controlled enterprises or
financial institutions, which include the Korea Electric Power
Corporation, the Bank of Korea, the Korea Development Bank and
the Industrial Bank of Korea) with a total book value of
W
9,573 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 balance sheet 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
have been assessed additional income taxes in respect of prior
years as a result of a tax audit by the National Tax Service of
Korea, and our appeal with respect to a portion of such
assessment may not be successful.
During the first half of 2007, the National Tax Service of Korea
completed a tax audit in respect of us for the fiscal years
2002, 2003, 2004 and 2005, as a result of which we were assessed
W
190 billion (including residence tax) for
tax deficiencies. In addition, during the second half of 2007,
the National Tax Service of Korea assessed additional income
taxes for prior years amounting to
W
292 billion (including residence tax) for
tax deficiencies. We paid the entire amount of such additional
assessments in 2007. We have filed an appeal with the National
Tax Tribunal with respect to tax assessments made in 2007
amounting to
W
482 billion (including
residence tax), and we recorded
W
481 billion of such income taxes paid as
“Other Assets” in our consolidated financial
statements as of December 31, 2007 (upon adoption of
Financial Accounting Standards Board (“FASB”)
Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (“ASC 740”)) and 2008, which was
reduced to
W
401 billion as of
December 31, 2009. See “Item 5A. Operating
Results — Critical Accounting Policies —
Valuation Allowance for Deferred Tax Assets and Uncertain Tax
Positions.” However, there is no guarantee that such appeal
will be successful or that we will not be assessed additional
income taxes in respect of prior years as a result of further
tax audits by the National Tax Service of Korea.
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 the principal
amount of the investor’s investment. Since January 2004,
banks have been prohibited from providing new trust accounts
that guarantee the principal amount of investments, other than
certain retirement trust and annuity trust products.
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However, we will continue to provide guarantees with respect to
existing accounts, which contain the afore-mentioned guarantee
provisions.
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, 2009, we had
W
76 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 2007, 2008 and
2009. 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
Internet banking services are subject to security concerns
relating to the commercial use of the Internet.
We provide Internet banking services to our retail and corporate
customers, which require sensitive customer information,
including passwords and account information, to be transferred
over a secure connection on the Internet. However, connections
on the Internet, although secure, are not free from security
breaches. We may experience security breaches or unexpected
disruptions in connection with our Internet banking service in
the future, which may result in liability to our customers and
third parties and have an adverse effect on our business or
reputation.
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.
We do
not prepare interim financial information on a U.S. GAAP
basis.
Neither we nor our subsidiaries are required to, and we and our
subsidiaries do not, prepare interim financial information on a
U.S. GAAP basis. U.S. GAAP differs in significant
respects from Korean GAAP, particularly with respect to the
establishment of provisions and loan loss allowance. See
“Item 5B. Liquidity and Capital Resources —
Selected Financial Information under Korean GAAP” and
“— Reconciliation with Korean GAAP.” As a
result, our provision and allowance levels reflected under
Korean GAAP in our results as of the end of and for 2005, 2006,
2007, 2008 and 2009 may differ significantly from
comparable figures under U.S. GAAP for these and future
periods.
The
adoption of the Korean equivalent of International Financial
Reporting Standards may adversely affect our reported financial
condition and results of operations.
In March 2007, the Financial Services Commission and the Korea
Accounting Institute announced a road map for the adoption of
the Korean equivalent of International Financial Reporting
Standards, or IFRS, pursuant to which all listed companies in
Korea will be required to prepare their annual financial
statements under IFRS beginning in 2011. In December 2007, the
Korea Accounting Standards Board published the full text of the
Korean equivalent of IFRS, or Korean IFRS. However, as the
application of Korean IFRS is still voluntary, and as there is
not yet a significant body of established practice on which to
draw in forming judgments regarding its implementation and
application, it is not possible to estimate with any degree of
certainty the impact that the adoption of Korean IFRS will have
on our financial reporting. Accordingly, there can be no
assurance that the mandatory adoption of Korean IFRS beginning
in 2011 will not adversely affect our reported financial
condition and results of operations.
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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.
Commencing in the second half of 2008, interest rates in Korea
have declined to historically low levels as the government has
sought to stimulate the economy through active rate-lowering
measures. The vast majority of debt securities we hold pay
interest at a fixed rate. However, a considerable increase in
interest rates in the future, including as part of the Korean
government’s “exit strategy” with respect to the
economic stimulus measures adopted in response to the global
financial crisis, could lead to a decline in the value of the
debt securities in our portfolio. A sustained increase in
interest rates will also raise our funding costs, while reducing
loan demand, especially among consumers. A considerable rise in
interest rates may therefore require us to rebalance our assets
and 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, 2009, approximately 95.3% 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 5B. Liquidity and Capital
Resources — Financial Condition —
Liquidity.”
We may
be required to raise additional capital to maintain our capital
adequacy ratios, which we may not be able to do on favorable
terms or at all.
Under the capital adequacy requirements of the Financial
Services Commission, we, as a bank holding company, are required
to maintain a minimum consolidated capital adequacy ratio, which
is the ratio of equity capital as a percentage of risk-weighted
assets on a consolidated Korean GAAP basis, of 8.0%. In
addition, pursuant to the capital adequacy requirements of the
Financial Services Commission, Kookmin Bank, our banking
subsidiary, is required to maintain a minimum Tier I
capital adequacy ratio of 4.0% and a combined Tier I and
Tier II capital adequacy ratio of 8.0%, on a consolidated
Korean GAAP basis. Tier II capital is included in
calculating the combined Tier I and Tier II capital
adequacy ratio up to 100% of Tier I capital. As of
December 31, 2009, our consolidated capital adequacy ratio
was 13.34%, and Kookmin Bank’s Tier I capital adequacy
and its combined Tier I and Tier II capital adequacy
ratio was 10.82% and 14.04%, 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.
If our capital adequacy ratios deteriorate, we may be required
to obtain additional capital in order to remain in compliance
with the applicable capital adequacy requirements. 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
maintain our capital adequacy ratios in the future, Korean
regulatory authorities
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may impose penalties on us ranging from a warning to suspension
or revocation of our banking license. For a description of the
capital adequacy requirements of the Financial Services
Commission, see “Item 4B. Business
Overview — Supervision and Regulation —
Principal Regulations Applicable to Financial Holding
Companies — Capital Adequacy” and
“Item 5B. Liquidity and Capital Resources —
Financial Condition — Capital Adequacy.”
We may
face increased capital requirements under the new Basel Capital
Accord.
Beginning on January 1, 2008, the Financial Supervisory
Service implemented the new Basel Capital Accord, referred to as
Basel II, in Korea, which has substantially affected the way
risk is measured among Korean financial institutions, including
Kookmin Bank. Building upon the initial Basel Capital Accord of
1988, which focused primarily on credit risk and market risk and
on capital adequacy and asset soundness as measures of risk,
Basel II expands this approach to contemplate additional
areas of risk such as operational risk.
In addition, under Basel II, banks are permitted to follow
either a standardized approach or an internal ratings-based
approach with respect to calculating credit risk capital
requirements. Kookmin Bank has voluntarily chosen to establish
and follow an internal ratings-based approach, which is more
risk-sensitive in assessing its credit risk capital
requirements. In December 2007, the Financial Supervisory
Service approved Kookmin Bank’s internal ratings-based
approach for credit risk, and Kookmin Bank became the first
Korean bank permitted to use such internal ratings-based
approach. For regulatory reporting purposes, Kookmin Bank has
implemented its internal ratings-based approach for credit risk
with respect to retail and small and medium-sized enterprise
loans and asset-backed securities from January 2008, large
corporate loans from June 2008 and retail SOHO loans from
December 2008. Kookmin Bank plans to further implement its
internal ratings-based approach to other classes of credit risk
exposure on a phased rollout basis in 2010 based on
consultations with the Financial Supervisory Service and to
implement its “Advanced Internal Ratings-based
Approach” for credit risk for regulatory reporting purposes
in the near future. A standardized approach will be used in
measuring credit risk for those classes of exposure for which
Kookmin Bank’s internal ratings-based approach has not yet
been implemented, as well as for certain classes of exposure
(including those to the government, public institutions and
other banks) for which the internal ratings-based approach will
not be applied. With respect to operational risk, Kookmin Bank
implemented a standardized approach beginning in January 2008
and further implemented an “Advanced Measurement
Approach” for regulatory reporting purposes beginning in
January 2009.
While the implementation of Kookmin Bank’s internal
ratings-based approach in 2008 has increased its capital
adequacy ratio and led to a decrease in its credit risk-related
capital requirements as compared to those under its previous
approach under the initial Basel Capital Accord of 1988, there
can be no assurance that such internal ratings-based approach
under Basel II will not require an increase in Kookmin
Bank’s credit risk capital requirements in the future,
which may require Kookmin Bank to either improve its asset
quality or raise additional capital.
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. After
further impact assessment, the Basel Committee on Banking
Supervision is expected to implement the new set of measures in
2012. The timing and scope of implementation of such measures in
Korea remain uncertain. The implementation of such measures in
Korea may have a significant effect on the capital requirements
of Korean financial institutions, including us.
See “Item 5A. Operating Results —
Overview — New Basel Capital Accord” and
“Item 5B. Liquidity and Capital Resources —
Financial Condition — Capital Adequacy.”
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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 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 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” and
“— 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.”
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,
among other things:
| • | capital increases or reductions; | |
| • | stock cancellations or consolidations; | |
| • | transfers of business; | |
| • | sales of assets; | |
| • | closures of branch offices; | |
| • | mergers with other financial institutions; and | |
| • | suspensions of a part or all of our business operations. |
If any of these measures are imposed on us by the Financial
Services Commission, they could hurt our business, results of
operations and financial condition. In addition, if the
Financial Services Commission orders us to partially or
completely reduce our capital, you may lose part or all of your
investment.
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The
Financial Investment Services and Capital Markets Act may
intensify competition in the Korean financial
industry.
In July 2007, the National Assembly of Korea enacted the
Financial Investment Services and Capital Markets Act, a new law
intended to enhance the integration of the Korean capital
markets and financial investment products industry, which became
effective in February 2009. As a result, Kookmin Bank and other
banks in Korea face greater competition in the Korean financial
services market from financial investment companies and other
non-bank financial institutions. For example, securities
companies previously were not permitted to accept deposits other
than for purposes of securities investment by customers or
provide secondary services in connection with securities
investments such as settlement and remittance relating to such
deposits. However, under the Financial Investment Services and
Capital Markets Act, financial investment companies, which
replaced securities companies, among others, are able to provide
such secondary services. Accordingly, Kookmin Bank and other
banks in Korea may experience a loss of customer deposits (which
in turn may result in a need to seek alternative funding sources
and an increase in its funding costs), as well as a decrease in
its settlement and remittance service fee income.
Risks
relating to Korea
Escalations
in tensions with North Korea could have an adverse effect on us
and the market price of our ADSs.
Relations between Korea and North Korea have been tense
throughout Korea’s modern history. The level of tension
between the two Koreas has fluctuated and may increase abruptly
as a result of current and future events. In recent years, there
have been heightened security concerns stemming from North
Korea’s nuclear weapons and long-range missile programs and
increased uncertainty regarding North Korea’s actions and
possible responses from the international community. In December
2002, North Korea removed the seals and surveillance equipment
from its Yongbyon nuclear power plant and evicted inspectors
from the United Nations International Atomic Energy Agency. In
January 2003, North Korea renounced its obligations under the
Nuclear Non-Proliferation Treaty. Since the renouncement, Korea,
the United States, North Korea, China, Japan and Russia have
held numerous rounds of six party multi-lateral talks in an
effort to resolve issues relating to North Korea’s nuclear
weapons program.
In addition to conducting test flights of long-range missiles,
North Korea announced in October 2006 that it had successfully
conducted a nuclear test, which increased tensions in the region
and elicited strong objections worldwide. In response, the
United Nations Security Council passed a resolution that
prohibits any United Nations member state from conducting
transactions with North Korea in connection with any large scale
arms and material or technology related to missile development
or weapons of mass destruction and from providing luxury goods
to North Korea, imposes an asset freeze and travel ban on
persons associated with North Korea’s weapons program, and
calls upon all United Nations member states to take cooperative
action, including through inspection of cargo to or from North
Korea. In response, North Korea agreed in February 2007 at the
six-party talks to shut down and seal the Yongbyon nuclear
facility, including the reprocessing facility, and readmit
international inspectors to conduct all necessary monitoring and
verifications.
In April 2009, North Korea launched a long-range rocket over the
Pacific Ocean. Korea, Japan and the United States responded that
the launch poses a threat to neighboring nations and that it was
in violation of the United Nations Security Council resolution
adopted in 2006 against nuclear tests by North Korea, and the
United Nations Security Council unanimously passed a resolution
that condemned North Korea for the launch and decided to tighten
sanctions against North Korea. Subsequently, North Korea
announced that it would permanently pull out of the six party
talks and restart its nuclear program, and the International
Atomic Energy Agency reported that its inspectors had been
ordered to remove surveillance devices and other equipment at
the Yongbyon nuclear power plant and to leave North Korea. In
May 2009, North Korea announced that it had successfully
conducted a second nuclear test and test-fired three short-range
surface-to-air missiles. In response, the United Nations
Security Council unanimously passed a resolution that condemned
North Korea for the nuclear test and decided to expand and
tighten sanctions against North Korea. In July 2009, North Korea
test-fired several additional ballistic missiles into the sea
between Korea and Japan. In March 2010, a Korean warship was
destroyed by an underwater explosion, killing
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many of the crewmen on board. In May 2010, the Korean government
formally accused North Korea of causing the sinking and
announced it would seek United Nations Security Council
sanctions against North Korea for the act. North Korea has
denied responsibility for the sinking and has threatened
retaliation for any attempt to punish it for the act.
In addition, there recently has been increased uncertainty with
respect to the future of North Korea’s political leadership
and concern regarding its implications for economic and
political stability in the region. In June 2009, U.S. and
Korean officials announced that Kim Jong-il, the North Korean
ruler who reportedly suffered a stroke in August 2008,
designated his third son, who is reportedly in his twenties, to
become his successor. The succession plan, however, remains
uncertain. In addition, North Korea’s economy 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
break down or military hostilities occur, could have a material
adverse effect on our 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.
Recent difficulties affecting the U.S. and global financial
sectors, adverse conditions and volatility in the worldwide
credit and financial markets, fluctuations in oil and commodity
prices and the general weakness of the U.S. and global
economy have increased 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.”
Beginning in the second half of 2008, the value of the Won
relative to major foreign currencies in general and the
U.S. dollar in particular has fluctuated widely. See
“Item 3A. Selected Financial Data — Exchange
Rates.” A depreciation of the Won increases the cost of
imported goods and services and the Won revenue needed by Korean
companies to service foreign currency-denominated debt. An
appreciation of the Won, on the other hand, causes export
products of Korean companies to be less competitive by raising
their prices in terms of the relevant foreign currency and
reduces the Won value of such export sales. Furthermore, as a
result of adverse global and Korean economic conditions, there
has been an overall decline and continuing volatility in the
stock prices of Korean companies. The Korea Composite Stock
Price Index (known as the “KOSPI”) declined from
1,897.1 on December 31, 2007 to 938.8 on October 24,
2008. While the KOSPI has recovered to a significant extent in
2009 and into 2010, there is no guarantee that the stock prices
of Korean companies will not decline again in the future. Future
declines in the KOSPI and large amounts of sales of Korean
securities by foreign investors and subsequent repatriation of
the proceeds of such sales may continue to 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 housing and financial sectors in the United States and elsewhere and the resulting adverse effects on the global financial markets; |
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| • | adverse changes or volatility in foreign currency reserve levels, commodity prices (including oil prices), exchange rates (including fluctuation of the U.S. dollar or Japanese yen exchange rates or revaluation of the Chinese renminbi), interest rates and stock markets; | |
| • | adverse conditions in the economies of countries that are important export markets for Korea, such as the United States, Japan and China, or in emerging market economies in Asia or elsewhere; | |
| • | substantial decreases in the market prices of Korean real estate; | |
| • | increasing delinquencies and credit defaults by retail and small- and medium-sized enterprise borrowers; | |
| • | declines in consumer confidence and a slowdown in consumer spending; | |
| • | the continued emergence of the Chinese economy, to the extent its benefits (such as increased exports to China) are outweighed by its costs (such as competition in export markets or for foreign investment and the relocation of the manufacturing base from Korea to China); | |
| • | social and labor unrest; | |
| • | a decrease in tax revenues and a substantial increase in the Korean government’s expenditures for fiscal stimulus measures, unemployment compensation and other economic and social programs that, together, would lead to an increased government budget deficit; | |
| • | financial problems or lack of progress in the restructuring of chaebols , other large troubled companies, their suppliers or the financial sector; | |
| • | loss of investor confidence arising from corporate accounting irregularities and corporate governance issues at certain chaebols ; | |
| • | 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; | |
| • | the recurrence of severe acute respiratory syndrome, or SARS, or an outbreak of swine or avian flu in Asia and other parts of the world; | |
| • | deterioration in economic or diplomatic relations between Korea and its trading partners or allies, including deterioration resulting from trade disputes or disagreements in foreign policy; | |
| • | political uncertainty or increasing strife among or within political parties in Korea; | |
| • | hostilities involving oil producing countries in the Middle East and any material disruption in the supply of oil or increase in the price of oil; and | |
| • | an increase in the level of tensions or an outbreak of hostilities between North Korea and Korea or the United States. |
Labor
unrest in Korea may adversely affect our
operations.
Continuing 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 3.7% in 2005 and
decreased to 3.5% in 2006 and to 3.2% in 2007 and 2008, but
increased to 3.6% in 2009 primarily as a result of adverse
economic conditions in Korea. Further increases in unemployment
and any resulting labor unrest in the future could adversely
affect our operations, as well as the operations of many of our
customers and their ability to repay their loans, and could
adversely affect the financial condition of Korean companies in
general, depressing the price of their securities. These
developments would likely have an adverse effect on our
financial condition and results of operations.
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Risks
relating to our common stock and ADSs
We or
our major stockholders may sell shares of our common stock or
ADSs in the future, and these and other sales may adversely
affect the market price of our common stock and ADSs and may
dilute your investment and relative ownership in
us.
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
W
37,250 per share (and
US$29.95 per ADS), pursuant to a rights offering to our existing
shareholders. We have no current plans for any subsequent
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 particular, as of December 31, 2009, Kookmin
Bank, our wholly-owned subsidiary, owned 43,322,704 shares
of our common stock, or approximately 11.2% of our total issued
common stock. We are required under applicable Korean law to
dispose of such shares by September 2011. Accordingly, we may
decide to offer and sell such shares, in one or more
transactions, at any time prior to September 2011. In addition,
our major stockholders, the Korean National Pension Service and
ING Bank N.V., held approximately 5.2% and 5.0%, respectively,
of our total issued common stock as of December 31, 2009,
which they 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 Korean law, 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
group companies, whose applicable limit is 9.0%. See
“Item 4B. Business Overview — Supervision
and Regulation — Principal Regulations Applicable to
Financial Holding Companies — Restrictions on
Ownership of a Financial Holding Company.” 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
together 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.
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.
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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 | |
| • | 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.
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Dividend
payments and the amount a holder of our ADSs may realize upon a
sale of its ADSs will be affected by fluctuations in the
exchange rate between the U.S. dollar and the Won.
Our common stock is listed on the KRX KOSPI Market 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 1,731.5 on June 22, 2010. There is no guarantee
that the stock prices of Korean companies will not decline again
in the future. Like other securities markets, including those in
developed markets, the Korean securities market has experienced
problems including market manipulation, insider trading and
settlement failures. The recurrence of these or similar problems
could have a material adverse effect on the market price and
liquidity of the securities of Korean companies, including our
common stock and ADSs, in both the domestic and the
international markets.
The Korean government has the potential ability to exert
substantial influence over many aspects of the private sector
business community, and in the past has exerted that influence
from time to time. For example, the Korean government has
promoted mergers to reduce what it considers excess capacity in
a particular industry and has also encouraged private companies
to publicly offer their securities. Similar actions in the
future could have the effect of depressing or boosting the
Korean securities market, whether or not intended to do so.
Accordingly, actions by the government, or the perception that
such actions are taking place, may take place or has ceased, may
cause sudden movements in the market prices of the securities of
Korean companies in the future, which may affect the market
price and liquidity of our common stock and ADSs.
If the
Korean government deems that emergency circumstances are likely
to occur, it may restrict holders of our ADSs and the depositary
from converting and remitting dividends and other amounts in
U.S. dollars.
If the Korean government deems that certain emergency
circumstances, including, but not limited to, severe and sudden
changes in domestic or overseas economic circumstances, extreme
difficulty in stabilizing the balance of payments or
implementing currency exchange rate and other macroeconomic
policies, have occurred or are likely to occur, it may impose
certain restrictions provided for under the Foreign Exchange
Transaction Law, including the suspension of payments or
requiring prior approval from governmental authorities for any
transaction. See “Item 10D. 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
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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 4A. | History and Development of the Company |
Overview
We were established as a new financial holding company on
September 29, 2008 pursuant to a “comprehensive stock
transfer” under Korean law, whereby holders of the common
stock of Kookmin Bank and certain of its subsidiaries
transferred all of their shares to us in return for shares of
our common stock. We were established pursuant to the Financial
Holding Company Act, which was enacted in October 2000 and
which, together with associated regulations and a related
presidential decree, has enabled banks and other financial
institutions, including insurance companies, investment trust
companies, credit card companies and securities companies, to be
organized and managed under the auspices of a single financial
holding company.
Our legal and commercial name is KB Financial Group Inc. Our
registered office and principal executive offices are located at
9-1, 2-ga, Namdaemoon-ro, Jung-gu, Seoul, Korea
100-703.
Our
telephone number is
822-2073-7114.
Our agent in the United States, Kookmin Bank, New York Branch,
is located at 565 Fifth Avenue, 24th Floor, New York,
NY 10017. Its telephone number is
(212) 697-6100.
History
of the Former Kookmin Bank
The former Kookmin Bank was established by the Korean government
in 1963 under its original name of Citizens National Bank under
the Citizens National Bank Act of Korea with majority government
ownership. Under this Act, we were limited to providing banking
services to the general public and to small- and medium-sized
enterprises. In September 1994, we completed our initial public
offering in Korea and listed our shares on the KRX KOSPI Market.
In January 1995, the Citizens National Bank Act of Korea was
repealed and replaced by the Repeal Act of the Citizens National
Bank Act. Our status was changed from a specialized bank to a
nationwide commercial bank and in February 1995, we changed our
name to Kookmin Bank. The Repeal Act allowed us to engage in
lending to large businesses.
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
W
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, 2009, ING Groep N.V. beneficially owned 5.0%
of our issued common stock. For more details regarding our
relationship with ING Groep N.V., see “Item 4B.
Business Overview — Other Businesses —
Bancassurance,” “Item 7B. Related Party
Transactions” and “Item 10C. Material
Contracts.”
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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
W
67,399 billion, its total deposits
were
W
51,456 billion, its total
liabilities were
W
64,537 billion and it
had stockholders’ equity of
W
2,849 billion. As required by
U.S. GAAP, we recognized H&CB’s total assets and
liabilities at their estimated fair values of
W
68,329 billion and
W
64,840 billion, respectively. These
amounts reflect the recognition of
W
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
W
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. Accordingly, the
consolidated financial statements included in this annual report
are, as of dates and for periods prior to the date of the stock
transfer, for Kookmin Bank and its subsidiaries, and as of dates
and for periods from and after the date of the stock transfer,
for us and our subsidiaries, including Kookmin Bank. For further
information regarding the accounting treatment of the stock
transfer, see Note 3 of the notes to our consolidated
financial statements.
The following chart illustrates the organizational structure of
Kookmin Bank prior to the completion of the stock transfer:
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The following chart illustrates our organizational structure
after the completion of the stock transfer:
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.
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
W
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, some of which it subsequently sold. As of
December 31, 2009, Kookmin Bank owned
43,322,704 shares of our common stock, representing
approximately 11.2% of our total issued common stock.
| Item 4B. | 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,
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asset management, bancassurance, capital markets activities and
international banking. As of December 31, 2009, we had
consolidated total assets of
W
254 trillion, consolidated total deposits
of
W
169 trillion and consolidated
stockholders’ equity of
W
18 trillion.
We were established as a financial holding company in September
2008, pursuant to a “comprehensive stock transfer”
under Korean law. See “Item 4A. 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 1,197 branches
as of December 31, 2009, 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, 2009, we had a
customer base of over 25 million retail customers, which
represented approximately one-half of the Korean population.
The following table sets forth the principal components of our
lending business as of the dates indicated. As of
December 31, 2009 retail loans, credit card loans and
credit card receivables accounted for 55.5% of our total loan
portfolio:
| As of December 31, | ||||||||||||||||||||||||
| 2007 | 2008 | 2009 | ||||||||||||||||||||||
| (In billions of Won, except percentages) | ||||||||||||||||||||||||
|
Retail
|
||||||||||||||||||||||||
|
Mortgage and home
equity
(1)
|
|
65,819 | 38.2 | % |
|
69,924 | 35.0 | % |
|
70,678 | 36.0 | % | ||||||||||||
|
Other
consumer
(2)
|
23,020 | 13.4 | 27,592 | 13.8 | 26,949 | 13.7 | ||||||||||||||||||
|
Total retail
|
88,839 | 51.6 | 97,516 | 48.8 | 97,627 | 49.7 | ||||||||||||||||||
|
Credit card
|
10,429 | 6.1 | 11,523 | 5.8 | 11,368 | 5.8 | ||||||||||||||||||
|
Corporate
|
71,585 | 41.6 | 88,143 | 44.2 | 84,886 | 43.3 | ||||||||||||||||||
|
Capital markets activities and international banking
|
1,336 | 0.7 | 2,455 | 1.2 | 2,344 | 1.2 | ||||||||||||||||||
|
Total loans
|
|
172,189 | 100.0 | % |
|
199,637 | 100.0 | % |
|
196,225 | 100.0 | % | ||||||||||||
| (1) |
Includes
|
|
| (2) |
Includes
|
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.
In keeping with current industry trends, our credit exposure to
large corporate customers has in recent years increased as a
percentage of our total loan portfolio, although it decreased
slightly in 2009. We continue to seek to
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maintain and expand quality relationships by providing these
customers 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 in recent years as the nationwide trend towards credit
card use accelerated. As of December 31, 2009, we had
approximately 10 million holders of KB 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.
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,
including as a result of the effectiveness of the Financial
Investment Services and Capital Markets Act in February 2009,
and that the resulting trend toward consolidation and
convergence, as well as the growing presence of foreign
financial institutions in the Korean financial market and the
expansion of the overseas presence and operations of Korean
financial institutions, may provide significantly greater
competition for us in the future. 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 implementing 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.
As part of this strategy, 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
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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 currently offer customized
mortgage products and electronic banking promotions, and have
enhanced our private banking services for high net worth
individuals in Korea, including opening new branches
specializing in such services. We also continue to develop
hybrid financial products with enhanced features, including
trusts and other 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 the largest branch network in Korea. In short,
we aim to offer our customers a convenient one-stop financial
services destination where they can meet their traditional
retail and corporate banking requirements, as well as find a
broad array of fee-based products and services tailored to
address more specific financial needs, including in investment
banking, 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
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 such as “Cyber Branch” products to large corporate customers and “Cyber CFO” products to small- and medium-sized enterprise customers; | |
| • | 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 |
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| • | further develop and train our core professionals with respect to this market, including through programs such as the “Career Development Path.” |
Strengthening
internal risk management capabilities
We believe that ensuring strong asset quality through effective
credit risk management is critical to maintaining stable growth
and profitability and risk management will continue to be one of
our key focus areas. One of our highest priorities is to improve
our asset quality and more effectively price our lending
products to take into account inherent credit risk in our
portfolio. Our goal is to maintain the soundness of our credit
portfolio, profitability and capital base. To this end, we
intend to continue to strengthen our internal risk management
capabilities by tightening our underwriting and management
policies and improving our internal compliance policies. To
accomplish this objective, we have undertaken the following
initiatives:
| • | Strengthening underwriting procedures with advanced credit scoring techniques. We have centralized our credit management operations into our credit group. Our prior structure had divided such operations into four groups and ten teams. As a result of 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 loan officers to our regional credit offices. We have also introduced a policy requiring the same officer to evaluate, review and monitor the outstanding loans and other credits with respect to a customer, which will enhance expertise and improve efficiency and accountability of such officer, while enabling us to maintain a consistent credit policy. We have also, as a general matter, implemented enhanced credit analysis and scoring techniques, which we believe will enable us to make better-informed decisions about the credit we extend and improve our ability to respond more quickly to incipient credit problems. We are also focusing on enhancing our asset quality through improvement of our early monitoring systems and collection procedures. | |
| • | Improving our internal compliance policy and ensuring strict application in our daily operations. We have improved our monitoring capabilities with respect to our internal compliance by providing training and educational programs to our management and employees. We have also implemented strict compliance policies to maintain the integrity of our risk management system. |
Cultivating
a performance-based, customer-oriented culture that emphasizes
market best practices
We believe a strong and dedicated workforce is critical to our
ability to offer our customers the highest quality financial
services and is integral to our goal of maintaining our position
as one of Korea’s leading financial services providers. In
the past, we have dedicated significant resources to develop and
train our core professionals, and we intend to continue to
enhance the productivity of our employees, including by
regularly sponsoring in-house training and educational programs.
We have also been seeking to cultivate a performance-based
culture to create a work environment where members of our staff
are incentivized to maximize their potential and in which our
employees are directly rewarded for superior performance. We
intend to maintain a professional workforce whose high quality
of customer service reflects our goal to achieve and maintain
global best practice standards in all areas of operations.
Retail
Banking
Due to Kookmin Bank’s history and development as a retail
bank and the know-how and expertise we have acquired from our
activities in that market, retail banking has been and will
continue to remain one of our core businesses. Our retail
banking activities consist primarily of lending and
deposit-taking.
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Lending
Activities
We offer various loan products that target different segments of
the population, with features tailored to each segment’s
financial profile and other characteristics. The following table
sets forth the balances and the percentage of our total lending
represented by our retail loans as of the dates indicated:
| As of December 31, | ||||||||||||||||||||||||
| 2007 | 2008 | 2009 | ||||||||||||||||||||||
| (In billions of Won, except percentages) | ||||||||||||||||||||||||
|
Retail:
|
||||||||||||||||||||||||
|
Mortgage and home equity loans
|
|
65,819 | 38.2 | % |
|
69,924 | 35.0 | % |
|
70,678 | 36.0 | % | ||||||||||||
|
Other consumer
loans
(1)
|
23,020 | 13.4 | 27,592 | 13.8 | 26,949 | 13.7 | ||||||||||||||||||
|
Total
|
|
88,839 | 51.6 | % |
|
97,516 | 48.8 | % |
|
97,627 | 49.7 | % | ||||||||||||
| (1) | Excludes credit card loans, but includes overdraft loans. |
Our retail loans consist of:
| • | Mortgage loans , which are loans made to customers to finance home purchases, construction, improvements or rentals; and home equity loans , which are loans made to our customers secured by their homes to ensure loan repayment. We also provide overdraft loans in connection with our home equity loans. | |
| • | Other consumer loans , which are loans made to customers for any purpose (other than mortgage and home equity loans). These include overdraft loans, which are loans extended to customers to cover insufficient funds when they withdraw funds from their demand deposit accounts with us in excess of the amount in such accounts up to a limit established by us. |
For secured loans, including mortgage and home equity loans, our
policy is to lend up to 100% of the adjusted collateral value
(except in areas of high speculation designated by the
government where we generally limit our lending to between 40%
to 50% of the appraised value of collateral) minus the value of
any lien or other security interest that is prior to our
security interest. In calculating the adjusted collateral value
for real estate, we use the appraisal value of the collateral
multiplied by a factor, generally between 40% to 60%. 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. 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
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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, 2009, 63.7% of our mortgage loans were
secured by residential property which is the subject of the
loan, 7.0% of our mortgage loans were guaranteed by the Housing
Finance Credit Guarantee Fund, a government housing-related
entity, and the remaining 29.3% 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, 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, 2009, 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 45.0%. 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 3D. 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.” As a result of government initiatives, we have
also tightened our mortgage loan guidelines.
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 derived 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, 2009, our current three-month, six-month
and twelve-month base rates were 4.46%, 4.93% and 5.47%,
respectively.
As of December 31, 2009, 96% of our outstanding mortgage
and home equity loans was 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, 2009, approximately
W
15,759 billion, or 58.5% 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,
2009 was approximately
W
8,992 billion.
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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, 2009, 97% 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, 2009, we had the largest
number of retail customers and retail deposits among Korean
commercial banks. The balance of our deposits from retail
customers was
W
86,981 billion,
W
97,378 billion and
W
100,778 billion as of December 31,
2007, 2008 and 2009, respectively, which constituted 62.8%,
61.4% and 59.6%, respectively, of the balance of our total
deposits.
We offer many deposit products that target different segments of
our retail customer base, with features tailored to each
segment’s financial profile, characteristics and needs,
including:
| • | Demand deposits , which either do not accrue interest or accrue interest at a lower rate than time deposits. Demand deposits allow the customer to deposit and withdraw funds at any time and, if they are interest bearing, accrue interest at a variable rate depending on the amount of deposit. Retail and corporate demand deposits constituted 2.2% of our total deposits as of December 31, 2009 and paid average interest of 1.18% for 2009. | |
| • | 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 range from one month to five years, and the term for installment savings deposits range from six months to ten years. Retail and corporate time deposits constituted 52.9% of our total deposits as of December 31, 2009 and paid average interest of 4.45% for 2009. Most installment savings deposits offer fixed interest rates. | |
| • | Savings deposits , which allow depositors to deposit and withdraw money at any time and accrue interest at an adjustable interest rate, which is currently below 1.4%. Retail and corporate savings deposits constituted 28.4% of our total deposits as of December 31, 2009 and paid average interest of 0.49% for 2009. | |
| • |
Certificates of deposit
, the maturities of which range
from 30 days to 730 days with a required minimum
deposit of
|
|
| • | 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
|
44
Table of Contents
| 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
|
Since 2004, we have been operating a “priority
customer” program called KB Star Club through Kookmin Bank
and, beginning in February 2010, also through KB
Investment & Securities and KB Life Insurance. This
program categorizes our customers by their average deposit
balance for the most recent three-month period, the amount of
their transactions with us and their program points based on
such balances and transactions. A customer may receive
preferential treatment in various areas, including interest
rates and transaction fees, depending upon how the customer is
classified. As of December 31, 2009, we had over four
million KB Star Club customers, representing approximately 17%
of our total retail customer base of over 25 million retail
customers. In 2009, on an average balance basis, our KB Star
Club customers held approximately 87% of our total retail
customer deposits.
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, 2009, we had
established 29 private banking centers through Kookmin Bank and
plan to increase the number of private banking centers as
necessary. We believe that by offering high quality personal
wealth management services to these customers, including through
our exclusive brand “Gold & Wise”, we can
increase our share of the priority customer market, which will
increase our profitability and our position in the retail
banking market.
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.”
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
W
50 million per depositor per bank. See
“— Supervision and Regulation —
Principal Regulations Applicable to Banks — Deposit
Insurance System.” We pay a premium rate of 0.02% of our
average deposits for each quarter and we paid
W
106 billion for 2009.
Credit
Cards
Credit cards are another of our core retail products. As a
result of the merger of the former Kookmin Bank with H&CB,
for a period of time we issued and operated two brands of credit
cards, Kookmin Card and BC Card. Following the merger of Kookmin
Bank with its subsidiary, Kookmin Credit Card, in September
2003, we adopted a strategy of trying to unify the two brands.
Accordingly, commencing in October 2003, we have been issuing
most of our new credit cards under the “KB Card” brand.
45
Table of Contents
The following table sets forth certain data relating to our
credit card operations. All financial figures appearing below
have been prepared in accordance with Korean GAAP, which differs
significantly from U.S. GAAP. See “Item 5B.
Liquidity and Capital Resources — Reconciliation with
Korean GAAP.”
| As of and for the Year Ended December 31, | ||||||||||||
| 2007 | 2008 | 2009 | ||||||||||
| (In billions of Won, except number of holders, accounts and percentages) | ||||||||||||
|
Number of credit cardholders (at year end) (thousands)
|
||||||||||||
|
General accounts
|
8,518 | 9,241 | 9,716 | |||||||||
|
Corporate accounts
|
173 | 232 | 290 | |||||||||
|
Total
|
8,691 | 9,473 | 10,006 | |||||||||
|
Number of merchants (at year end) (thousands)
|
1,752 | 1,869 | 1,995 | |||||||||
|
Active ratio (at year
end)
(1)
|
75.9 | % | 74.2 | % | 73.3 | % | ||||||
|
Credit card fees
|
||||||||||||
|
Merchant
fees
(2)
|
|
1,007 |
|
1,114 |
|
1,220 | ||||||
|
Installment and cash advance fees
|
768 | 736 | 736 | |||||||||
|
Annual membership fees
|
34 | 38 | 46 | |||||||||
|
Other fees
|
397 | 490 | 550 | |||||||||
|
Total
|
|
2,206 |
|
2,378 |
|
2,552 | ||||||
|
Charge
volume
(3)
|
||||||||||||
|
General purchase
|
|
40,310 |
|
46,221 |
|
45,805 | ||||||
|
Installment purchase
|
7,708 | 8,399 | 9,503 | |||||||||
|
Cash advance
|
16,452 | 15,023 | 13,378 | |||||||||
|
Card
loan
(4)
|
3,593 | 4,554 | 3,970 | |||||||||
|
Total
|
|
68,063 |
|
74,197 |
|
72,656 | ||||||
|
Outstanding balance (at year
end)
(5)
|
||||||||||||
|
General purchase
|
|
3,753 |
|
4,114 |
|
4,330 | ||||||
|
Installment purchase
|
1,867 | 1,993 | 2,229 | |||||||||
|
Cash advance
|
2,480 | 2,531 | 2,260 | |||||||||
|
Card
loan
(4)
|
2,336 | 2,889 | 2,565 | |||||||||
|
Total
(6)
|
|
10,436 |
|
11,527 |
|
11,384 | ||||||
|
Average outstanding
balances
(5)
|
||||||||||||
|
General purchase
|
|
3,177 |
|
3,979 |
|
4,232 | ||||||
|
Installment purchase
|
1,740 | 1,894 | 2,145 | |||||||||
|
Cash advance
|
2,297 | 2,427 | 2,352 | |||||||||
|
Card
loan
(4)
|
2,020 | 2,617 | 2,636 | |||||||||
|
Delinquency ratios (at year
end)
(7)
|
||||||||||||
|
Less than
1 month
(8)
|
2.55 | % | 2.47 | % | 1.56 | % | ||||||
|
From 1 month to 3 months
|
0.81 | 1.21 | 0.79 | |||||||||
|
From 3 months to 6 months
|
0.24 | 0.22 | 0.17 | |||||||||
|
Over 6 months
|
0.06 | 0.03 | 0.12 | |||||||||
|
Total
|
3.66 | % | 3.93 | % | 2.64 | % | ||||||
46
Table of Contents
| As of and for the Year Ended December 31, | ||||||||||||
| 2007 | 2008 | 2009 | ||||||||||
| (In billions of Won, except number of holders, accounts and percentages) | ||||||||||||
|
Non-performing loan ratio
|
||||||||||||
|
Reported
|
0.87 | % | 0.91 | % | 0.80 | % | ||||||
|
Managed
|
0.88 | % | 0.91 | % | 0.80 | % | ||||||
|
Write-offs (gross)
|
|
340 |
|
379 |
|
560 | ||||||
|
Recoveries
(9)
|
294 | 274 | 256 | |||||||||
|
Net write-offs
|
|
46 |
|
105 |
|
304 | ||||||
|
Gross write-off
ratio
(10)
|
3.68 | % | 3.47 | % | 4.93 | % | ||||||
|
Net write-off
ratio
(11)
|
0.50 | % | 0.96 | % | 2.68 | % | ||||||
|
Asset sales
|
— | — | — | |||||||||
|
Asset
securitization
(12)
|
|
— |
|
— |
|
— | ||||||
| (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 merchant membership and maintenance fees, 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, bad debt expenses, 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 4.5%. | |
| (3) | Represents the aggregate cumulative amount charged during the year. | |
| (4) | Card loans consist of loans that are provided on either a secured or unsecured basis to cardholders upon prior agreement. Payment of principal, fees and interest on such a loan can be due either in one payment or in installments after a fixed period. | |
| (5) | Includes certain interest trust certificates issued by special purpose entities in connection with asset securitization transactions of our underlying credit card balances. Transfers of credit card balances to special purpose entities in connection with asset securitization transactions are recognized as sales under Korean GAAP but not under U.S. GAAP. | |
| (6) |
The total outstanding balances
pursuant to U.S. GAAP for all of our credit cards were
|
|
| (7) |
Represents ratio of delinquencies
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, 2009, these
restructured loans amounted to
|
|
| (8) | The amount of delinquent credit card balances recognized for the calculation of the delinquency ratio for less than one month is the total amount of such credit card balance for which the payments are overdue by less than one month, including those portions not yet due and payable. | |
| (9) | Does not include proceeds that we received from sales of our non-performing loans that were written off. | |
| (10) | Represents the ratio of gross write-offs for the year to average outstanding balance for the year. Under Korean GAAP, 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. | |
| (11) | Represents the ratio of net write-offs for the year to average outstanding balances for the year. Under Korean GAAP, 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. | |
| (12) | Comprises credit card balances that were transferred in asset securitization transactions. Under U.S. GAAP, these transfers are not recognized as sales. |
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 17 to 47 days of purchase
depending on their payment cycle. However, we also offer
revolving cards 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 terms of repayment.
47
Table of Contents
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 revolving credit cards as well as travel services and insurance through alliance partners; | |
| • | developing fraud detection and security systems to prevent the misuse of credit cards and to encourage the use of credit cards over the Internet; and | |
| • | issuing smart cards and preparing for a cardless business environment in which customers can use credit cards to make purchases by mobile phone or over the Internet. |
As of December 31, 2009, we had approximately
10 million cardholders. Of the credit cards outstanding,
approximately 73% were active, meaning that they had been used
at least once during the previous six months. For 2009, our
market share with respect to charge volume was approximately
14.4% according to the Financial Supervisory Service.
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 cards we offer, interest and fees relating to
revolving balances. Cardholders are generally required to pay
for their purchases within 17 to 47 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,
with the average charge equaling approximately 2.30%.
Under non-exclusive license agreements with MasterCard
International Incorporated and Visa International Service
Association, we also issue MasterCard and Visa credit cards.
We also issue debit cards and charge merchants an average
commission of approximately 1.13% 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. Much like
debit cards, “check card” purchases are also debited
directly from customers’ accounts with us.
Corporate
Banking
We lend to and take deposits from small- and medium-sized
enterprises and, to a lesser extent, large corporate customers.
As of December 31, 2007, 2008 and 2009, we had 170,059,
177,190 and 220,407 small- and medium-sized enterprise borrowers
and 897, 994 and 941 large corporate borrowers, respectively,
for Won-currency loans. For 2007, 2008 and 2009, 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
W
100 billion,
W
108 billion and
W
115 billion, respectively. Of our branch
network as of December 31, 2009, we
48
Table of Contents
had 101 branches dedicated exclusively to corporate banking
(including eight branches that primarily handled large corporate
banking).
The following table sets forth the balances and the percentage
of our total 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 under Korean GAAP:
| As of December 31, | ||||||||||||||||||||||||
| 2007 | 2008 | 2009 | ||||||||||||||||||||||
| (In billions of Won, except percentages) | ||||||||||||||||||||||||
|
Corporate:
|
||||||||||||||||||||||||
|
Small- and medium-sized enterprise loans
|
|
54,116 | 31.4 | % |
|
65,394 | 32.8 | % |
|
67,121 | 34.2 | % | ||||||||||||
|
Large corporate loans
|
17,469 | 10.2 | 22,749 | 11.4 | 17,765 | 9.1 | ||||||||||||||||||
|
Total
|
|
71,585 | 41.6 | % |
|
88,143 | 44.2 | % |
|
84,886 | 43.3 | % | ||||||||||||
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
W
58,353 billion as of
December 31, 2009, or 34.5% 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. The general criterion used to define small-
and medium-sized enterprises is either the number of full-time
employees (less than 300), paid-in capital (equal to or less
than
W
8 billion) or sales revenues (equal
to or less than
W
30 billion). Criteria
differ from industry to industry. In all cases, however, the
number of full-time employees may not equal or exceed 1,000, and
the total amount of assets may not equal or exceed
W
500 billion.
Industry-wide delinquency ratios for Won-denominated loans to
small- and medium-sized enterprises increased in 2009 and
further increased in the first quarter of 2010. Our delinquency
ratio for loans to
small- and
medium-sized enterprises may increase further in the future as a
result of, among other things, adverse economic conditions in
Korea and globally. See “Item 3D. 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 3D.
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.”
49
Table of Contents
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, 2009, working capital loans and
facilities loans accounted for 74.3% and 25.7%, respectively, of
our total small- and medium-sized enterprise loans. As of
December 31, 2009, we had over 220,400 small- and
medium-sized enterprise customers on the lending side.
Loans to small- and medium-sized enterprises may be secured by
real estate or deposits or may be unsecured. As of
December 31, 2009, secured loans and guaranteed loans
accounted for, in the aggregate, 86.9% of our small- and
medium-sized enterprise loans. Among the secured loans, 51.1%
were secured by real estate and 48.9% were secured by deposits
or securities. Working capital loans generally have a maturity
of one year, but may be extended on an annual basis for an
aggregate term of five years. Facilities loans have a maximum
maturity of ten years for loans to corporations and
15 years for loans to SOHOs.
When evaluating the extension of working capital loans, we
review the corporate customer’s creditworthiness and
capability to generate cash. Furthermore, we take personal
guarantees and credit guaranty letters from other financial
institutions and use time and savings deposits that the borrower
has with us as collateral, and may require additional
collateral. We receive fees in relation to credit evaluation,
collateral appraisal and other services provided in connection
with a loan extension.
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 5 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 collective housing loans. Our collective housing
loans are 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 collective housing loans, including loans to purchase
property or finance the construction of housing units, loans to
contractors used for working capital purposes, and loans to
educational establishments, small- and medium-sized enterprises
and non-profit entities to finance the construction of
dormitories. Collective housing loans subject us to the risk
that the housing units will not be sold. As a result, we review
the probability of the sale of the housing unit when evaluating
the extension of a loan. We also review the borrower’s
creditworthiness and the 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
uses quantitative analysis related to a customer’s
accounts, personal credit and financial information and due
amounts but also requires our credit officers to perform a
qualitative analysis of each potential SOHO customer. With
respect to SOHOs with annual revenues in excess of
W
2 billion or SOHO loans in excess of
W
300 million, 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 (other
than collective housing loans) 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
50
Table of Contents
into account the current market interest rate. As of
December 31, 2009, the Market Opportunity Rate was 2.85%
for three months, 3.42% for six months and 3.96% 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.
The interest rates on our collective housing loans are based on
a periodic floating rate, which in turn is based on a base rate
determined for three-month, six-month or twelve-month periods
derived using our Market Opportunity Rate system. After
selecting the appropriate periodic floating rate, our loan
analysis system raises or lowers the floating rate based on
various factors related to the loan and the borrower. In
addition, we take into account the market conditions and our
expenses and services to be provided with respect to such loan.
The repayment schedule differs according to the variable term,
repayment method and the particular loan. If a loan is
terminated prior to its maturity, the corporate borrower is
obligated to pay us an early termination fee in addition to the
accrued interest.
Large
Corporate Banking
Large corporate customers include all companies that are not
small- and medium-sized enterprise customers. Kookmin
Bank’s articles of incorporation provide that financial
services to large corporate customers must be no more than 40%
of the total amount of our Won-denominated loans. Our business
focus with respect to large corporate banking is to selectively
increase the proportion of high quality large corporate
customers. Specifically, we are carrying out various initiatives
to improve our customer relationship with large corporate
customers and have been seeking to expand our service offerings
to this segment.
Lending
Activities
Our principal loan products for our large corporate customers
are working capital loans and facilities loans. As of
December 31, 2009, working capital loans and facilities
loans accounted for 82.0% and 18.0%, respectively, of our total
large corporate loans. We also offer collective housing loans,
as described above under “— Small- and
Medium-sized Enterprise Banking — Lending
Activities,” to large corporate clients.
As of December 31, 2009, secured loans and guaranteed loans
accounted for, in the aggregate, 31.1% of our large corporate
loans. Among the secured loans, 26.1% were secured by real
estate and 73.9% were secured by deposits or securities. Working
capital loans generally have a maturity of one year but are
extended on an annual basis for an aggregate term of five years.
Facilities loans have a maximum maturity of 10 years.
We evaluate creditworthiness and collateral for our large
corporate loans in essentially the same way as we do for small-
and medium-sized enterprise loans. See “— Small-
and Medium-sized Enterprise Banking — Lending
Activities” above.
As of December 31, 2009, in terms of our outstanding loan
balance, 33.7% of our large corporate loans was extended to
borrowers in the manufacturing industry, 12.9% was extended to
borrowers in the construction industry, and 8.9% was extended to
borrowers in the financial and insurance 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, 2009, the Market Opportunity Rate, which is
utilized in pricing loans offered by us, was the same for our
large corporate loans as for our small- and medium-sized
enterprise loans.
Capital
Markets Activities and International Banking
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.
51
Table of Contents
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, 2007, 2008 and 2009, our investment portfolio,
which consists primarily of held-to-maturity securities and
available-for-sale securities, and our trading portfolio had a
combined total book value of
W
29,689 billion,
W
34,461 billion and
W
37,706 billion and represented 13.6%,
13.3% and 14.9% 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, 2007, 2008 and
2009, we held debt securities with a total book value of
W
28,337 billion,
W
32,036 billion and
W
34,392 billion, respectively, of which:
| • |
held-to-maturity debt securities accounted for
|
|
| • |
available-for-sale debt securities accounted for
|
|
| • |
trading debt securities accounted for
|
Of these amounts, debt securities issued by the Korean
government and government agencies as of December 31, 2007,
2008 and 2009 amounted to:
| • |
|
|
| • |
|
|
| • |
|
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 (formerly known as
the KOSDAQ Market Division of the Korea Exchange). As of
December 31, 2007, 2008 and 2009:
| • |
equity securities in our available-for-sale portfolio had a book
value of
|
|
| • |
equity securities in our trading portfolio had a book value of
|
Our trading portfolio also includes foreign exchange spot
contracts and derivative instruments. See
“— Derivatives Trading.” Our investment
portfolio also includes venture capital securities,
non-marketable or restricted equity securities and investments
under the equity method. As of December 31, 2007, 2008 and
2009, these investments had an aggregate book value of
W
797 billion,
W
1,804 billion and
W
1,925 billion, respectively.
52
Table of Contents
The following tables show, as of the dates indicated, the gross
unrealized gains and losses on available-for-sale and
held-to-maturity securities within our investment securities
portfolio, and the amortized cost and fair value of the
portfolio by type of investment security:
| As of December 31, 2007 | ||||||||||||||||
|
Amortized
|
Gross
|
Gross
|
||||||||||||||
| Cost | Unrealized Gain | Unrealized Loss | Fair Value | |||||||||||||
| (In billions of Won) | ||||||||||||||||
|
Available-for-sale securities:
|
||||||||||||||||
|
Debt securities
|
||||||||||||||||
|
Korean treasury securities and government agencies
|
|
4,197 |
|
— |
|
66 |
|
4,131 | ||||||||
|
Corporate
(1)
|
685 | 16 | 2 | 699 | ||||||||||||
|
Financial
institutions
(2)
|
7,715 | 5 | 78 | 7,642 | ||||||||||||
|
Foreign governments
|
9 | — | — | 9 | ||||||||||||
|
Asset-backed securities
|
43 | — | — | 43 | ||||||||||||
|
Other debt securities
|
— | — | — | — | ||||||||||||
|
Subtotal
|
12,649 | 21 | 146 | 12,524 | ||||||||||||
|
Marketable equity securities
|
293 | 25 | 13 | 305 | ||||||||||||
|
Total available-for-sale securities
|
|
12,942 |
|
46 |
|
159 |
|
12,829 | ||||||||
|
Held-to-maturity securities:
|
||||||||||||||||
|
Korean treasury securities and government agencies
|
|
8,601 |
|
7 |
|
298 |
|
8,310 | ||||||||
|
Corporate
(3)
|
194 | — | 8 | 186 | ||||||||||||
|
Financial
institutions
(4)
|
1,972 | — | 59 | 1,913 | ||||||||||||
|
Foreign governments
|
— | — | — | — | ||||||||||||
|
Asset-backed securities
|
291 | — | 3 | 288 | ||||||||||||
|
Total held-to-maturity securities
|
|
11,058 |
|
7 |
|
368 |
|
10,697 | ||||||||
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Table of Contents
| As of December 31, 2008 | ||||||||||||||||
|
Amortized
|
Gross
|
Gross
|
||||||||||||||
| Cost | Unrealized Gain | Unrealized Loss | Fair Value | |||||||||||||
| (In billions of Won) | ||||||||||||||||
|
Available-for-sale securities:
|
||||||||||||||||
|
Debt securities
|
||||||||||||||||
|
Korean treasury securities and government agencies
|
|
6,757 |
|
223 |
|
1 |
|
6,979 | ||||||||
|
Corporate
(1)
|
998 | 126 | 7 | 1,117 | ||||||||||||
|
Financial
institutions
(2)
|
6,038 | 134 | 12 | 6,160 | ||||||||||||
|
Foreign governments
|
— | — | — | — | ||||||||||||
|
Asset-backed securities
|
145 | 1 | — | 146 | ||||||||||||
|
Other debt securities
|
— | — | — | — | ||||||||||||
|
Subtotal
|
13,938 | 484 | 20 | 14,402 | ||||||||||||
|
Marketable equity securities
|
401 | 9 | 6 | 404 | ||||||||||||
|
Total available-for-sale securities
|
|
14,339 |
|
493 |
|
26 |
|
14,806 | ||||||||
|
Held-to-maturity securities:
|
||||||||||||||||
|
Korean treasury securities and government agencies
|
|
9,139 |
|
245 |
|
16 |
|
9,368 | ||||||||
|
Corporate
(3)
|
249 | 3 | 1 | 251 | ||||||||||||
|
Financial
institutions
(4)
|
2,980 | 43 | 14 | 3,009 | ||||||||||||
|
Foreign governments
|
— | — | — | — | ||||||||||||
|
Asset-backed securities
|
232 | 5 | — | 237 | ||||||||||||
|
Total held-to-maturity securities
|
|
12,600 |
|
296 |
|
31 |
|
12,865 | ||||||||
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Table of Contents
| As of December 31, 2009 | ||||||||||||||||
|
Amortized
|
Gross
|
Gross
|
||||||||||||||
| Cost | Unrealized Gain | Unrealized Loss | Fair Value | |||||||||||||
| (In billions of Won) | ||||||||||||||||
|
Available-for-sale securities:
|
||||||||||||||||
|
Debt securities
|
||||||||||||||||
|
Korean treasury securities and government agencies
|
|
7,855 |
|
68 |
|
31 |
|
7,892 | ||||||||
|
Corporate
(1)
|
1,183 | 104 | 6 | 1,281 | ||||||||||||
|
Financial
institutions
(2)
|
6,336 | 85 | 16 | 6,405 | ||||||||||||
|
Foreign governments
|
— | — | — | — | ||||||||||||
|
Asset-backed securities
|
1,998 | 1 | 1 | 1,998 | ||||||||||||
|
Other debt securities
|
— | — | — | — | ||||||||||||
|
Subtotal
|
17,372 | 258 | 54 | 17,576 | ||||||||||||
|
Marketable equity securities
|
924 | 257 | 46 | 1,135 | ||||||||||||
|
Total available-for-sale securities
|
|
18,296 |
|
515 |
|
100 |
|
18,711 | ||||||||
|
Held-to-maturity securities:
|
||||||||||||||||
|
Korean treasury securities and government agencies
|
|
8,992 |
|
106 |
|
34 |
|
9,064 | ||||||||
|
Corporate
(3)
|
380 | 4 | 2 | 382 | ||||||||||||
|
Financial
institutions
(4)
|
2,995 | 48 | 3 | 3,040 | ||||||||||||
|
Foreign governments
|
— | — | — | — | ||||||||||||
|
Asset-backed securities
|
243 | 3 | — | 246 | ||||||||||||
|
Total held-to-maturity securities
|
|
12,610 |
|
161 |
|
39 |
|
12,732 | ||||||||
| (1) |
Includes debt securities issued by
Korea Electric Power Corporation, which is controlled by the
Korean government, in the amount of
|
|
| (2) |
Includes debt securities issued by
the Bank of Korea, the Korea Development Bank and the Industrial
Bank of Korea in the aggregate amount of
|
|
| (3) |
Includes debt securities issued by
Korea Electric Power Corporation, which is controlled by the
Korean government, in the amount of
|
|
| (4) |
Includes debt securities issued by
the Bank of Korea, the Korea Development Bank and the Industrial
Bank of Korea in the aggregate amount of
|
Derivatives
Trading
Until the full-scale launch of our derivative 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
W
181,322 billion in 2007 and
W
207,083 billion in 2008, but decreased to
W
173,502 billion in 2009 primarily as a
result of instability in the financial markets. Our net trading
revenue from derivatives and foreign exchange contracts for the
year ended December 31, 2007, 2008 and 2009 was
W
64 billion,
W
36 billion and
W
181 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, relating to foreign exchange risks, largely for Won against U.S. dollars; |
55
Table of Contents
| • | foreign exchange forwards, swaps and options, relating to foreign exchange risks; and | |
| • | equity options on the KOSPI index. |
Our derivative operations focus on addressing the needs of our
corporate clients to hedge their risk exposure and to hedge our
risk exposure that results from such client contracts. We also
engage in derivative trading activities to hedge the interest
rate and foreign currency risk exposures that arise from our own
assets and liabilities. A substantial portion of these
hedge-purposed derivative contracts, however, do not qualify for
hedge accounting under U.S. GAAP and are consequently
treated as trading derivatives. In addition, we engage in
proprietary trading of derivatives within our regulated open
position limits.
The following shows the estimated fair value of our derivatives
and foreign exchange spot contracts as of December 31,
2007, 2008 and 2009:
| As of December 31, | ||||||||||||||||||||||||
| 2007 | 2008 | 2009 | ||||||||||||||||||||||
|
Estimated
|
Estimated
|
Estimated
|
Estimated
|
Estimated
|
Estimated
|
|||||||||||||||||||
|
Fair Value
|
Fair Value
|
Fair Value
|
Fair Value
|
Fair Value
|
Fair Value
|
|||||||||||||||||||
| Assets | Liabilities | Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||
| (In billions of Won) | ||||||||||||||||||||||||
|
Foreign exchange spot contracts
|
|
2 |
|
2 |
|
3 |
|
3 |
|
3 |
|
3 | ||||||||||||
|
Foreign exchange
derivatives
(1)
|
1,130 | 1,046 | 6,579 | 5,785 | 2,593 | 1,918 | ||||||||||||||||||
|
Interest rate
derivatives
(1)
|
391 | 640 | 1,226 | 1,403 | 621 | 823 | ||||||||||||||||||
|
Equity derivatives
|
62 | 134 | 84 | 638 | 86 | 322 | ||||||||||||||||||
|
Credit derivatives
|
— | — | — | 10 | 2 | — | ||||||||||||||||||
|
Commodity derivatives
|
3 | 3 | 18 | 17 | 2 | 2 | ||||||||||||||||||
|
Others
(1)
|
2 | 2 | 7 | 10 | 2 | 40 | ||||||||||||||||||
|
Total
|
|
1,590 |
|
1,827 |
|
7,917 |
|
7,866 |
|
3,309 |
|
3,108 | ||||||||||||
| (1) | Includes those for trading purposes and hedging purposes. |
The following table shows the unrealized gains and losses of
derivatives held or issued for hedging purposes that qualified
for hedge accounting under U.S. GAAP, as of
December 31, 2007, 2008 and 2009:
| As of December 31, | ||||||||||||||||||||||||
| 2007 | 2008 | 2009 | ||||||||||||||||||||||
|
Unrealized
|
Unrealized
|
Unrealized
|
Unrealized
|
Unrealized
|
Unrealized
|
|||||||||||||||||||
| Gains | Losses | Gains | Losses | Gains | Losses | |||||||||||||||||||
| (In billions of Won) | ||||||||||||||||||||||||
|
Foreign exchange
derivatives
(1)
|
|
— |
|
— |
|
— |
|
— |
|
107 |
|
165 | ||||||||||||
|
Interest rate
derivatives
(1)
|
18 | 18 | 56 | 83 | 125 | 119 | ||||||||||||||||||
|
Others
(1)
|
— | — | — | — | 39 | 33 | ||||||||||||||||||
|
Total
|
|
18 | (2) |
|
18 | (2) |
|
56 | (3) |
|
83 | (3) |
|
271 | (4) |
|
317 | (4) | ||||||
| (1) | Includes the unrealized gains and losses of the underlying hedged items. | |
| (2) |
Includes losses related to hedge
ineffectiveness of
|
|
| (3) |
Includes losses related to hedge
ineffectiveness of
|
|
| (4) |
Includes losses related to hedge
ineffectiveness of
|
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 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
56
Table of Contents
amount of
W
4,069 billion in 2007,
W
1,479 billion in 2008 and
W
5,271 billion in 2009, of which
W
2,168 billion,
W
1,425 billion and
W
5,159 billion, respectively, 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,
2009, we had made call loans of
W
446 billion and borrowed call money of
W
1,365 billion, compared to
W
177 billion and
W
3,444 billion, respectively, as of
December 31, 2008.
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 2009, under Korean GAAP, we generated investment banking
revenue of
W
300 billion, consisting of
W
140 billion of interest income and
W
160 billion of fee income.
In March 2008, we acquired 95.8% of the issued and outstanding
common stock of Hannuri Investment & Securities Co.,
Ltd. for
W
266.3 billion, which was renamed
KB Investment & Securities Co., Ltd. and became our
subsidiary. We believe that the acquisition of KB
Investment & Securities has provided us with
opportunities to leverage our existing base of small- and
medium-sized enterprise and large corporate customers to
cross-sell investment banking services, particularly under our
financial holding company structure, and we will seek to
increase our fee income and diversify our investment banking
operations by continuing to take advantage of such opportunities.
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, | ||||||||||||
| 2007 | 2008 | 2009 | ||||||||||
| (In millions of US$) | ||||||||||||
|
Total foreign currency assets
|
US$ | 10,753 | US$ | 12,301 | US$ | 10,326 | ||||||
|
Foreign currency borrowings:
|
||||||||||||
|
Long-term borrowings
|
5,657 | 4,825 | 3,842 | |||||||||
|
Short-term borrowings
|
2,576 | 4,763 | 3,418 | |||||||||
|
Secured borrowings
|
— | — | 1,424 | |||||||||
|
Total borrowings
|
US$ | 8,233 | US$ | 9,588 | US$ | 8,684 | ||||||
57
Table of Contents
The table below sets forth our overseas subsidiaries, branches
and representative offices currently in operation as of
December 31, 2009:
| Business Unit (1) | Location | |
|
Subsidiaries
|
||
|
Kookmin Bank Hong Kong Ltd.
|
Hong Kong | |
|
Kookmin Bank International Ltd.
|
United Kingdom | |
|
Kookmin Bank Cambodia PLC
|
Cambodia | |
|
KB Investment & Securities Hong Kong Ltd.
|
Hong Kong | |
|
Branches
|
||
|
Kookmin Bank, Tokyo Branch
|
Japan | |
|
Kookmin Bank, Auckland Branch
|
New Zealand | |
|
Kookmin Bank, New York Branch
|
United States | |
|
Kookmin Bank, Harbin Branch
|
China | |
|
Kookmin Bank, Guangzhou Branch
|
China | |
|
Representative Offices
|
||
|
Kookmin Bank, Almaty Representative Office
|
Kazakhstan | |
|
Kookmin Bank, Ho Chi Minh Representative Office
|
Vietnam | |
|
Kookmin Bank, Kyiv Representative Office
|
Ukraine |
| (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
W
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. We currently hold
29.6% of the outstanding common shares of JSC Bank CenterCredit.
In May 2009, we acquired 132,600 common shares of Khmer Union
Bank, a Cambodian bank, for approximately
W
10 billion. As a result, we hold 51% of
the voting rights in Khmer Union Bank, which was renamed Kookmin
Bank Cambodia PLC.
Trustee
and Custodian Services Relating to Investment Trusts and Other
Functions
We act as a trustee for 54 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 139 financial institutions and as fund
administrator for 62 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; |
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Table of Contents
| • | 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, 2009, our fee income from
our trustee and custodian services was
W
26 billion and revenues collected as a
result of administration of the underlying investments were
W
7 billion.
Other
Businesses
Trust Account
Management Services
Money
Trust Management Services
We provide trust account management services for unspecified
money trusts, which are trusts the assets of which we generally
have broad discretion in investing. We receive fees for our
trust account management services consisting of basic fees that
are based upon a percentage of the net asset value of the assets
under management and, for certain types of trust account
operations, performance fees that are based upon the performance
of the trust account operations. In 2009, 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 24
types of money trusts. The money trusts we manage are generally
trusts with a fixed maturity. Approximately half 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, 2009, the total balance of our money
trusts (under Korean GAAP) was
W
11,039 billion. 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.
The following table shows the balances of our money trusts by
type as of the dates indicated as determined in accordance with
Korean GAAP. Under U.S. GAAP, we consolidate money trusts
for which we guaranteed both the principal and a fixed rate of
interest. Under Korean GAAP, we consolidate money trusts for
which we guaranteed the principal amount invested as well as
those for which we guaranteed both the principal and a fixed
rate of interest.
| As of December 31, | ||||||||||||
| 2007 | 2008 | 2009 | ||||||||||
| (In billions of Won) | ||||||||||||
|
Principal and interest guaranteed trusts
|
|
0.3 |
|
0.2 |
|
0.2 | ||||||
|
Principal guaranteed trusts
|
3,259 | 3,315 | 2,869 | |||||||||
|
Performance
trusts
(1)
|
5,105 | 6,372 | 8,170 | |||||||||
|
Total
|
|
8,364 |
|
9,687 |
|
11,039 | ||||||
| (1) | Trusts which are primarily non-guaranteed. |
The balance of our money trusts increased 32.0% between
December 31, 2007 and December 31, 2009.
As of December 31, 2009, the trust assets we managed
consisted principally of securities investments and loans from
the trust accounts. As of December 31, 2009, under Korean
GAAP, our trust accounts had invested in securities in the
aggregate amount of
W
7,369 billion, of
which
W
6,766 billion was debt securities.
Securities investments consist of government-related debt
securities, corporate debt securities, including bonds and
commercial paper, equity 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, 2009, under Korean GAAP, our trust accounts
had made loans in the principal amount of
W
277 billion (excluding loans from the
trust accounts to our
59
Table of Contents
banking accounts of
W
733 billion), which
accounted for 2.4% 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, 2009,
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 a Korean GAAP basis, as of December 31, 2009,
equity securities in our money trust accounts amounted to
W
603 billion, which accounted for 5.2% of
our total money trust assets. Of this amount,
W
543 billion was from specified money
trusts and
W
60 billion was from
unspecified money trusts.
We currently continue to offer pension-type money trusts that
provide a guarantee of the principal amount of the investment.
On a Korean GAAP basis, as of December 31, 2009, the
balance of the money trusts for which we guaranteed the
principal was
W
2,869 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 2007, 2008 and 2009, we
made no payment from our banking accounts to cover shortfalls in
our guaranteed trusts. On a Korean GAAP basis, we derived trust
fees with regard to trust account management services (including
those fees related to property trust management services) of
W
70 billion in 2007,
W
58 billion in 2008 and
W
73 billion in 2009.
Under the Financial Investment Services and Capital Markets Act,
a bank with a trust business license (such as Kookmin Bank) is
permitted to offer both specified money trust account products
and unspecified money trust account products.
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.
In 2009, our property trust fees ranged from 0.001% to 0.3% of
total assets under management depending on the type of trust
accounts. As of December 31, 2009, the aggregate balance of
our property trusts decreased to
W
2,217 billion, compared to
W
3,230 billion as of December 31,
2008.
The property trusts are not consolidated within our
U.S. GAAP 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. In September 2008, in connection with the
“comprehensive stock transfer” under Korean law
pursuant to which we were established, ING Insurance
International B.V., which previously held a 20% equity interest
in KB Asset Management, transferred all of its shares of KB
Asset Management common stock to us and in return received
shares of our common stock. Following such stock transfer, KB
Asset Management became our wholly-owned subsidiary. As of
December 31, 2009, KB Asset Management had
W
17,235 billion of assets under management.
Management
of the National Housing Fund
Until February 2008, we acted as one of the managers 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 2008, the Ministry of Land, Transport and Maritime
Affairs (formerly the Ministry of Construction and
Transportation) designated several financial institutions to
manage the National Housing Fund, but we
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Table of Contents
chose not to participate in the bidding process due to the low
fees involved. As a result, we are no longer a designated
manager of the National Housing Fund and currently only manage
pre-existing Fund accounts. In return for managing such
pre-existing Fund accounts, we receive quarterly fund management
fees, calculated based on activity levels for the relevant
quarter. In 2009, we received total fees of
W
52 billion for managing the National
Housing Fund, compared to
W
85 billion in
2008.
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, Transport and Maritime
Affairs 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 16 life
insurance companies (including our subsidiary, KB Life
Insurance) and 9 non-life insurance companies and offers 52
different products through our branch network. These products
are composed of 32 types of life insurance policies such as
annuities, savings insurance and variable life insurance, and 20
types of non-life insurance products. In 2009, our commission
income from our bancassurance business amounted to
W
132 billion.
Distribution
Channels
Banking
Branch Network
As of December 31, 2009, Kookmin Bank operated a network of
1,197 branches and sub-branches in Korea, which was the largest
branch network among Korean commercial banks. An extensive
branch network is 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 39% of our branches and
sub-branches are located in Seoul, and approximately 23% 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, 2009:
|
Number of
|
||||||||
| Area | Branches | Percentage | ||||||
|
Seoul
|
470 | 39.3 | % | |||||
|
Six largest cities (other than Seoul)
|
281 | 23.4 | ||||||
|
Other
|
446 | 37.3 | ||||||
|
Total
|
1,197 | 100.0 | % | |||||
In addition, we have continued to implement the specialization
of our branch functions. Of our branch network as of
December 31, 2009, 101 branches were dedicated exclusively
to handling corporate transactions and providing comprehensive
services to its corporate customers (including eight branches
that primarily handled large corporate banking).
In order to support our branch network, we have established an
extensive network of automated banking machines, which are
located in branches and in unmanned outlets known as
“autobanks.” These automated banking machines consist
of ATMs, cash dispensers and passbook printers. As of
December 31, 2009, we had 9,601 ATMs, 2 cash dispensers and
72 passbook printers.
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
61
Table of Contents
improve profitability. The following table sets forth
information, for the periods indicated, regarding the number of
transactions and the fee revenue of our ATMs, including those
that only dispense cash:
|
For the Year Ended
|
||||||||||||
| December 31, | ||||||||||||
| 2007 | 2008 | 2009 | ||||||||||
|
Number of transactions (millions)
|
676 | 638 | 641 | |||||||||
|
Fee revenue (in billions of Won)
|
|
83 |
|
80 |
|
76 | ||||||
Other
Distribution Channels
The following table sets forth information under Korean GAAP,
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, | ||||||||||||
| 2007 | 2008 | 2009 | ||||||||||
|
Internet banking:
|
||||||||||||
|
Number of
users
(1)
|
7,499,609 | 8,623,482 | 9,811,243 | |||||||||
|
Number of transaction (thousands)
|
1,388,371 | 1,636,511 | 1,973,891 | |||||||||
|
Fee revenue (in millions of Won)
|
|
21,864 |
|
21,548 |
|
22,659 | ||||||
|
Phone banking:
|
||||||||||||
|
Number of
users
(2)
|
3,241,553 | 3,702,997 | 4,064,160 | |||||||||
|
Number of transaction (thousands)
|
315,433 | 314,945 | 303,086 | |||||||||
|
Fee revenue (in millions of Won)
|
|
12,681 |
|
11,299 |
|
11,503 | ||||||
| (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. |
In March 2007, we reduced or waived many of the fees we charge
on our banking services, in response to customer demand.
Specifically, we reduced or waived our fees on fund transfers
through our Internet, mobile and telephone banking services, as
well as on transfers and
after-hour
withdrawals through ATMs. We also reduced our wire transfer fees
and eliminated the fees we charge on issuance of bankers’
checks and certain tax-related statements.
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 and on-line bill payments; | |
| • | processing of loan applications, which allows us to quickly process and approve on-line loan applications; and | |
| • | electronic certification services, which permit our Internet banking service users to authenticate transactions on a confidential basis through digital signatures. |
62
Table of Contents
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 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
Banking
Mobile banking services allow customers to use mobile phones and
devices to make inter-account transfers and balance and other
transaction inquiries. There are currently three mobile phone
service providers in Korea, SK Telecom, Korea Telecom and
LG Telecom, and we provide our services in association with all
three. Our mobile banking services currently include:
| • | basic banking services, including fund transfers and balance and transaction inquiries; | |
| • | mobile stock trading, though which mobile banking customers can use their mobile phone to trade stocks; and | |
| • | a mobile lottery purchasing service. |
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. We have continued to develop
our firm banking services and, as of December 31, 2009, we
provided cash management services to over 1,300 large
corporations and small- and medium-sized enterprises.
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. We expect that competition within the
Korean financial industry may intensify as a result of the
Financial Investment Services and Capital Markets Act which
became effective in February 2009. See “Item 3D. Risk
Factors — Risks relating to government regulation and
policy— The Financial Investment Services and Capital
Markets Act may intensify competition in the Korean financial
industry.” As the
63
Table of Contents
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 five financial holding companies as of
December 31, 2009. 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 and
Chohung Bank’s merger with Shinhan Bank in April 2006. We
expect that consolidation in the financial industry will
continue. In particular, the Korean government has announced
that it plans to privatize the Korea Development Bank and to
dispose of or reduce its controlling interest in Woori Finance
Holdings Co., Ltd. (the financial holding company of Woori
Bank), while the Lone Star funds have announced that they plan
to sell their controlling interest in Korea Exchange Bank. 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 3D. 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.
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 February 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.
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 2009, we spent approximately
W
367 billion for our IT systems, including
expenses related to the implementation of our next-generation
core banking system, Enterprise Data Warehouse system and other
new systems. As of December 31, 2009, we employed a total
of approximately 980 full-time employees in our IT
operations.
64
Table of Contents
Assets
and Liabilities
The tables below set out selected financial highlights regarding
our banking operations and individual assets and liabilities.
Loan
Portfolio
As of December 31, 2009, our total loan portfolio decreased
to
W
196,225 billion compared to
W
199,637 billion at December 31,
2008. As of December 31, 2009, 95.5% of our total loans
were Won-denominated loans.
Loan
Types
The following table presents loans by type for the periods
indicated. Except where we specify otherwise, all loan amounts
stated below are before deduction of allowance for loan losses.
Total loans reflect our loan portfolio, including past due
amounts.
| As of December 31, | ||||||||||||||||||||
| 2005 | 2006 | 2007 | 2008 | 2009 | ||||||||||||||||
| (In billions of Won) | ||||||||||||||||||||
|
Domestic:
|
||||||||||||||||||||
|
Corporate
|
||||||||||||||||||||
|
Commercial and
industrial
(1)
|
|
39,636 |
|
48,183 |
|
60,945 |
|
75,140 |
|
74,611 | ||||||||||
|
Construction
|
5,025 | 6,504 | 8,843 | 10,052 | 8,097 | |||||||||||||||
|
Other corporate
|
1,496 | 1,409 | 1,797 | 2,951 | 2,178 | |||||||||||||||
|
Retail
|
||||||||||||||||||||
|
Mortgage and home equity
|
59,143 | 63,982 | 65,819 | 69,924 | 70,678 | |||||||||||||||
|
Other consumer
|
23,114 | 21,589 | 23,020 | 27,592 | 26,949 | |||||||||||||||
|
Credit cards
|
8,369 | 8,955 | 10,429 | 11,523 | 11,368 | |||||||||||||||
|
Total domestic
|
136,783 | 150,622 | 170,853 | 197,182 | 193,881 | |||||||||||||||
|
Foreign:
|
||||||||||||||||||||
|
Corporate
|
||||||||||||||||||||
|
Commercial and industrial
|
1,229 | 781 | 1,336 | 2,455 | 2,344 | |||||||||||||||
|
Total foreign
|
1,229 | 781 | 1,336 | 2,455 | 2,344 | |||||||||||||||
|
Total gross loans
|
|
138,124 |
|
151,403 |
|
172,189 |
|
199,637 |
|
196,225 | ||||||||||
| (1) |
Commercial and industrial loans
include
|
Loan
Concentrations
On a consolidated basis, our exposure to any single borrower or
any single
chaebol
is limited by law to 20% and 25%,
respectively, of our “net aggregate equity capital,”
as defined under the Enforcement Decree of the Financial Holding
Company Act. See “— Supervision and
Regulation — Principal Regulations Applicable to
Financial Holding Companies — Financial Exposure to
Any Individual Customer and Major Shareholder.” In
addition, Kookmin Bank’s exposure to any single borrower or
any single
chaebol
is limited by the Bank Act to 20% and
25%, respectively, of its total Tier I and Tier II
capital.
65
Table of Contents
20
Largest Exposures by Borrower
As of December 31, 2009, our 20 largest exposures totaled
W
22,361 billion and accounted for 9.0% of
our total exposures. The following table sets forth, as of
December 31, 2009, our total exposures to these top 20
borrowers or issuers:
|
Amounts
|
||||||||||||||||||||||||||||
| Loans |
Guarantees
|
Classified as
|
||||||||||||||||||||||||||
|
Won
|
Foreign
|
Equity
|
Debt
|
and
|
Total
|
Impaired
|
||||||||||||||||||||||
| Company | Currency | Currency | Securities | Securities | Acceptances | Exposures | Loans | |||||||||||||||||||||
| (In billions of Won) | ||||||||||||||||||||||||||||
|
Bank of Korea
|
|
— |
|
— |
|
— |
|
3,624 |
|
— |
|
3,624 |
|
— | ||||||||||||||
|
Korea Housing Corporation
|
— | — | — | 2,290 | — | 2,290 | — | |||||||||||||||||||||
|
Samsung Heavy Industries
|
70 | — | — | — | 1,568 | 1,638 | — | |||||||||||||||||||||
|
Hyundai Heavy Industries
|
— | — | 16 | — | 1,569 | 1,585 | — | |||||||||||||||||||||
|
Korea Land & Housing Corporation
|
— | — | — | 1,411 | 47 | 1,458 | — | |||||||||||||||||||||
|
The Korea Development Bank
|
13 | 22 | — | 1,133 | — | 1,168 | — | |||||||||||||||||||||
|
Shinhan Bank
|
— | — | — | 1,115 | — | 1,115 | — | |||||||||||||||||||||
|
Woori Bank
|
70 | — | — | 874 | — | 944 | — | |||||||||||||||||||||
|
Daewoo Shipbuilding & Marine Engineering
|
— | — | 6 | — | 857 | 863 | — | |||||||||||||||||||||
|
Industrial Bank of Korea
|
— | — | 2 | 835 | — | 837 | — | |||||||||||||||||||||
|
Korea Exchange Bank
|
— | — | 1 | 831 | — | 832 | — | |||||||||||||||||||||
|
POSCO
|
— | — | 764 | 14 | — | 778 | — | |||||||||||||||||||||
|
Kia Motors
|
300 | 306 | 1 | 99 | 19 | 725 | — | |||||||||||||||||||||
|
Korea Deposit Insurance Corporation
|
— | — | — | 712 | — | 712 | — | |||||||||||||||||||||
|
Nonghyup
|
63 | 64 | — | 545 | — | 672 | — | |||||||||||||||||||||
|
Korea Express Way Corporation
|
100 | — | 6 | 541 | — | 647 | — | |||||||||||||||||||||
|
Korea Electric Power Corporation
|
— | — | 6 | 635 | — | 641 | — | |||||||||||||||||||||
|
Korea Gas Corporation
|
— | 22 | — | 612 | — | 634 | — | |||||||||||||||||||||
|
Orient Shipyard
|
193 | 3 | — | — | 420 | 616 | — | |||||||||||||||||||||
|
Small & Medium Business Corporation
|
— | — | — | 582 | — | 582 | — | |||||||||||||||||||||
|
Total
|
|
809 |
|
417 |
|
802 |
|
15,853 |
|
4,480 |
|
22,361 |
|
— | ||||||||||||||
As of December 31, 2009, five of these top 20 borrowers or
issuers were companies belonging to the 41 largest
chaebols
in Korea designated as such by the Financial Supervisory
Service based on their outstanding exposures.
66
Table of Contents
Exposure
to Chaebols
As of December 31, 2009, 7.9% of our total exposure was to
the 41 largest
chaebols
in Korea designated as such by
the Financial Supervisory Service based on their outstanding
exposures. The following table shows, as of December 31,
2009, our total exposures to the ten
chaebol
groups to
which we have the largest exposure:
|
Amounts
|
||||||||||||||||||||||||||||
| Loans |
Guarantees
|
Classified as
|
||||||||||||||||||||||||||
|
Won
|
Foreign
|
Equity
|
Debt
|
and
|
Total
|
Impaired
|
||||||||||||||||||||||
| Chaebol | Currency | Currency | Securities | Securities | Acceptances | Exposures | Loans | |||||||||||||||||||||
| (In billions of Won) | ||||||||||||||||||||||||||||
|
Samsung
(1)
|
|
574 |
|
153 |
|
19 |
|
54 |
|
1,768 |
|
2,568 |
|
— | ||||||||||||||
|
Hyundai
Motors
(2)
|
1,167 | 673 | 8 | 207 | 278 | 2,333 | — | |||||||||||||||||||||
|
Hyundai Heavy
Industries
(3)
|
5 | — | 24 | — | 1,582 | 1,611 | — | |||||||||||||||||||||
|
LG
(4)
|
169 | 783 | 3 | 95 | 45 | 1,095 | — | |||||||||||||||||||||
|
SK
(5)
|
335 | 354 | 20 | 62 | 262 | 1,033 | — | |||||||||||||||||||||
|
POSCO
(6)
|
104 | — | 764 | 49 | 63 | 980 | — | |||||||||||||||||||||
|
Daewoo Shipbuilding & Marine
Engineering
(7)
|
51 | — | 6 | — | 859 | 916 | — | |||||||||||||||||||||
|
Kumho
Asiana
(8)
|
480 | 42 | 140 | — | 66 | 728 | 140 | |||||||||||||||||||||
|
SPP
(9)
|
101 | 2 | — | — | 624 | 727 | — | |||||||||||||||||||||
|
Hanwha
(10)
|
571 | 30 | — | 18 | 60 | 679 | — | |||||||||||||||||||||
|
Total
|
|
3,557 |
|
2,037 |
|
984 |
|
485 |
|
5,607 |
|
12,670 |
|
140 | ||||||||||||||
| (1) | Includes principally Samsung Electronics Co., Ltd., Samsung Corporation and Samsung Heavy Industries Co., Ltd. | |
| (2) | Includes principally Hyundai Motor Company Co., Ltd., Kia Motors Corporation and INI Steel Company. | |
| (3) | Includes principally Hyundai Heavy Industries Co., Ltd. and Hyundai Mipo Dockyard Co., Ltd. | |
| (4) | Includes principally LG Electronics Inc., LG Display Co., Ltd. and LG Petrochemical Co., Ltd. | |
| (5) | Includes principally SK Corporation, SK Telecom Co., Ltd. and SK Shipping Co., Ltd. | |
| (6) | Includes principally POSCO, POSCO Power Corporation, POSCO ICT Co., Ltd. and POSCO AST Co., Ltd. | |
| (7) | Includes principally Daewoo Shipbuilding & Marine Engineering Co., Ltd., Shinhan Machinery Co., Ltd. and DSEC Co., Ltd. | |
| (8) | Includes principally Kumho Tires Co., Ltd., Kumho Industrial Co., Ltd., Kumho Petrochemical Co., Ltd., Asiana Airlines and Daewoo Engineering & Construction. | |
| (9) | Includes principally SPP Shipbuilding Co., Ltd., SPP Machine Tech Co., Ltd. and SPP Plant & Shipbuilding Co., Ltd. | |
| (10) | Includes principally Hanwha Corp, Hanwha Galleria Co., Ltd. and Hanwha Engineering & Construction Corp. |
Loan
Concentration by Industry
The following table shows the aggregate balance of our domestic
and foreign corporate loans, by industry concentration, as of
December 31, 2009:
|
Percentage
|
||||||||
|
Aggregate
|
of Total
|
|||||||
| Industry | Loan Balance | Loan Balance | ||||||
| (In billions of Won) | ||||||||
|
Manufacturing
|
|
25,812 | 29.6 | % | ||||
|
Retail and wholesale
|
13,410 | 15.4 | ||||||
|
Hotel, leisure or transportation
|
10,106 | 11.6 | ||||||
|
Real estate
|
18,475 | 21.2 | ||||||
|
Construction
|
8,120 | 9.3 | ||||||
|
Finance and insurance
|
1,946 | 2.2 | ||||||
|
Other
|
9,361 | 10.7 | ||||||
|
Total
|
|
87,230 | 100.0 | % | ||||
67
Table of Contents
Loan
Concentration by Size of Loans
The following table shows the aggregate balances of our loans,
by outstanding loan amount, as of December 31, 2009:
|
Percentage
|
||||||||
|
Aggregate
|
of Total
|
|||||||
| Loan Balance | Loan Balance | |||||||
| (In billions of Won) | ||||||||
|
Commercial and industrial loans
|
||||||||
|
Up to
|
|
308 | 0.2 | % | ||||
|
Over
|
4,195 | 2.1 | ||||||
|
Over
|
4,362 | 2.2 | ||||||
|
Over
|
19,556 | 10.0 | ||||||
|
Over
|
9,366 | 4.8 | ||||||
|
Over
|
14,914 | 7.6 | ||||||
|
Over
|
3,786 | 1.9 | ||||||
|
Over
|
10,777 | 5.5 | ||||||
|
Over
|
4,508 | 2.4 | ||||||
|
Over
|
2,839 | 1.4 | ||||||
|
Sub-total
|
74,611 | 38.1 | ||||||
|
Construction loans
|
||||||||
|
Up to
|
|
36 | 0.0 | % | ||||
|
Over
|
328 | 0.2 | ||||||
|
Over
|
368 | 0.2 | ||||||
|
Over
|
1,504 | 0.8 | ||||||
|
Over
|
622 | 0.3 | ||||||
|
Over
|
989 | 0.5 | ||||||
|
Over
|
393 | 0.2 | ||||||
|
Over
|
2,011 | 1.0 | ||||||
|
Over
|
1,621 | 0.8 | ||||||
|
Over
|
225 | 0.1 | ||||||
|
Sub-total
|
8,097 | 4.1 | ||||||
|
Other corporate loans
|
||||||||
|
Up to
|
|
5 | 0.0 | % | ||||
|
Over
|
99 | 0.1 | ||||||
|
Over
|
155 | 0.1 | ||||||
|
Over
|
645 | 0.3 | ||||||
|
Over
|
282 | 0.1 | ||||||
|
Over
|
536 | 0.3 | ||||||
|
Over
|
206 | 0.1 | ||||||
|
Over
|
250 | 0.1 | ||||||
|
Sub-total
|
2,178 | 1.1 | ||||||
68
Table of Contents
|
Percentage
|
||||||||
|
Aggregate
|
of Total
|
|||||||
| Loan Balance | Loan Balance | |||||||
| (In billions of Won) | ||||||||
|
Credit cards
|
||||||||
|
Up to
|
|
9,781 | 4.9 | % | ||||
|
Over
|
570 | 0.3 | ||||||
|
Over
|
25 | 0.0 | ||||||
|
Over
|
128 | 0.1 | ||||||
|
Over
|
139 | 0.1 | ||||||
|
Over
|
297 | 0.1 | ||||||
|
Over
|
112 | 0.1 | ||||||
|
Over
|
182 | 0.1 | ||||||
|
Over
|
134 | 0.1 | ||||||
|
Over
|
— | — | ||||||
|
Sub-total
|
11,368 | 5.8 | ||||||
|
Mortgage and home equity loans
|
||||||||
|
Up to
|
|
1,438 | 0.7 | % | ||||
|
Over
|
16,865 | 8.6 | ||||||
|
Over
|
17,410 | 8.9 | ||||||
|
Over
|
33,686 | 17.2 | ||||||
|
Over
|
1,206 | 0.6 | ||||||
|
Over
|
73 | 0.0 | ||||||
|
Over
|
— | — | ||||||
|
Over
|
— | — | ||||||
|
Sub-total
|
70,678 | 36.0 | ||||||
|
Other consumer loans
|
||||||||
|
Up to
|
|
6,809 | 3.5 | % | ||||
|
Over
|
11,261 | 5.7 | ||||||
|
Over
|
2,619 | 1.3 | ||||||
|
Over
|
5,277 | 2.7 | ||||||
|
Over
|
698 | 0.4 | ||||||
|
Over
|
279 | 0.1 | ||||||
|
Over
|
6 | 0.0 | ||||||
|
Sub-total
|
26,949 | 13.7 | ||||||
69
Table of Contents
|
Percentage
|
||||||||
|
Aggregate
|
of Total
|
|||||||
| Loan Balance | Loan Balance | |||||||
| (In billions of Won) | ||||||||
|
Foreign commercial and industrial loans
|
||||||||
|
Up to
|
|
— | 0.0 | % | ||||
|
Over
|
3 | 0.0 | ||||||
|
Over
|
6 | 0.0 | ||||||
|
Over
|
74 | 0.0 | ||||||
|
Over
|
79 | 0.0 | ||||||
|
Over
|
674 | 0.3 | ||||||
|
Over
|
186 | 0.1 | ||||||
|
Over
|
1,081 | 0.7 | ||||||
|
Over
|
241 | 0.1 | ||||||
|
Over
|
— | — | ||||||
|
Sub-total
|
2,344 | 1.2 | ||||||
|
Total
|
|
196,225 | 100.0 | % | ||||
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 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 five years.
70
Table of Contents
The following table sets out the scheduled maturities (time
remaining until maturity) of our loan portfolio as of
December 31, 2009. The amounts disclosed are before
deduction of allowance for loan losses:
|
Over 1 Year
|
||||||||||||||||
|
but Not
|
||||||||||||||||
|
More Than
|
||||||||||||||||
| 1 Year or Less | 5 Years | Over 5 Years | Total | |||||||||||||
| (In billions of Won) | ||||||||||||||||
|
Domestic:
|
||||||||||||||||
|
Corporate
|
||||||||||||||||
|
Commercial and industrial
|
|
52,681 |
|
16,563 |
|
5,367 |
|
74,611 | ||||||||
|
Construction
|
6,301 | 1,745 | 51 | 8,097 | ||||||||||||
|
Other corporate
|
2,178 | — | — | 2,178 | ||||||||||||
|
Total corporate
|
61,160 | 18,308 | 5,418 | 84,886 | ||||||||||||
|
Retail
|
||||||||||||||||
|
Mortgage and home equity
|
12,045 | 12,794 | 45,839 | 70,678 | ||||||||||||
|
Other consumer
|
19,880 | 5,279 | 1,790 | 26,949 | ||||||||||||
|
Total retail
|
31,925 | 18,073 | 47,629 | 97,627 | ||||||||||||
|
Credit cards
|
9,951 | 1,411 | 6 | 11,368 | ||||||||||||
|
Total domestic
|
103,036 | 37,792 | 53,053 | 193,881 | ||||||||||||
|
Foreign:
|
||||||||||||||||
|
Corporate
|
||||||||||||||||
|
Commercial and industrial
|
854 | 767 | 723 | 2,344 | ||||||||||||
|
Total foreign
|
854 | 767 | 723 | 2,344 | ||||||||||||
|
Total gross loans
|
|
103,890 |
|
38,559 |
|
53,776 |
|
196,225 | ||||||||
Interest
Rate Sensitivity
The following table shows, as of December 31, 2009, the
total amount of loans due after one year, which have fixed
interest rates and variable or adjustable interest rates:
|
As of December 31,
|
||||
| 2009 | ||||
| (In billions of Won) | ||||
|
Fixed
rate
(1)
|
|
2,649 | ||
|
Variable or adjustable
rates
(2)
|
89,686 | |||
|
Total gross loans
|
|
92,335 | ||
| (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
borrowers and other creditors, restructure a borrower’s
credit terms. In July 2001, the National Assembly of Korea
adopted the Corporate Restructuring Promotion Act, which became
effective in September 2001 and expired on December 31,
2005. The Act applied to more than 420 financial institutions in
Korea, which included commercial banks, insurance companies,
asset management companies, securities companies, merchant
banks, the Korea Deposit Insurance Corporation and the
71
Table of Contents
Korea Asset Management Corporation. Under the Corporate
Restructuring Promotion Act, all creditor financial institutions
of a financially troubled borrower were required to participate
in a creditors’ committee to prepare a restructuring plan.
The approval of creditor financial institutions holding not less
than 75% of the total debt outstanding of a borrower (as well as
75% of the total outstanding secured debt, if the restructuring
plan includes secured debt restructuring) finalized the
borrower’s restructuring plan, including debt restructuring
and provision of additional funds. Once approved, the plan was
also binding on all the creditor financial institutions of the
borrower. Any creditor financial institution that disagreed with
the final restructuring plan approved by the creditors’
committee had the right to request the creditors’ committee
to purchase its claims at a mutually agreed price. In the event
that the creditors’ committee and the dissenting creditor
financial institution failed to come to an agreement on the
terms of purchase, a coordination committee consisting of seven
experts would be set up to resolve the matter.
As the Corporate Restructuring Promotion Act expired on
December 31, 2005 and no other law replacing this Act or
with similar effect was enacted, the Korean government presented
an amendment bill to extend the effective term of the Corporate
Restructuring Promotion Act until December 31, 2010 to the
National Assembly of Korea. In July 2007, the National Assembly
of Korea, instead of passing such amendment bill, adopted a new
Corporate Restructuring Promotion Act, or the New Corporate
Restructuring Promotion Act, which became effective in November
2007. The New Corporate Restructuring Promotion Act contains
provisions almost identical to those in the Corporate
Restructuring Promotion Act. The main differences between the
Corporate Restructuring Promotion Act and the New Corporate
Restructuring Promotion Act are: (i) when debts are
converted into shares of the borrower in the process of
restructuring, the Corporate Restructuring Promotion Act
required that a transferee of any such shares agree to be bound
by the terms of the restructuring, whereas under the New
Corporate Restructuring Promotion Act, such requirement does not
apply if a transferor of such shares holds more than 50% plus
one share of the total voting shares of the borrower after such
transfer; (ii) under the New Corporate Restructuring
Promotion Act, creditor financial institutions are no longer
required to perform periodic assessments of credit risks of the
borrower; and (iii) under the New Corporate Restructuring
Promotion Act, creditor financial institutions are no longer
required to advise a borrower which is likely to show
“signs of insolvency” (as determined by such
borrower’s principal creditor financial institution
following a credit risk assessment) to take measures to improve
its business management, as was the case under the Corporate
Restructuring Promotion Act.
The New Corporate Restructuring Promotion Act is scheduled to
expire on December 31, 2010. However, so far as a creditor
financial institution gives notice to convene a meeting of the
creditors’ committee regarding a restructuring of a
borrower prior to December 31, 2010, the New Corporate
Restructuring Promotion Act will continue to apply to such
restructuring until it is completed or discontinued. The New
Corporate Restructuring Promotion Act provides that any
restructuring begun under the Corporate Restructuring Promotion
Act will be deemed to continue under the New Corporate
Restructuring Promotion Act.
Currently, all of our workout loans are managed by Kookmin
Bank’s Corporate Restructuring Department. 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 loan losses.
Korean law has also provided 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.
The Korean Debtor Recovery and Bankruptcy Law was enacted on
March 31, 2005 and became effective on April 1, 2006,
as a result of which each of the Company Reorganization Act, the
Composition Act, the Bankruptcy Act and the Individual Debtor
Recovery Act was abolished. The Korean Debtor Recovery and
Bankruptcy Law contained notable changes to previously existing
corporate reorganization and composition procedures, including
nullification of the composition procedures previously in place
and the modification of reorganization procedures into
rehabilitation proceedings under the Korean Debtor Recovery and
Bankruptcy Law, whereby existing management continues to oversee
a company’s reorganization process (except that the court
is empowered to appoint a third-party receiver under certain
circumstances). Notwithstanding this legislative change, any
72
Table of Contents
composition or company reorganization proceedings that were
pending at the time the new law became effective continue to be
governed under the Composition Act and the Company
Reorganization Act, respectively.
A portion of our loans to and debt securities of corporate
customers are currently in workout, restructuring or
rehabilitation. As of December 31, 2009,
W
445 billion or 0.2% of our total loans
and debt securities were in workout, restructuring or
rehabilitation. This included
W
225 billion
of loans to and debt securities of large corporate borrowers and
W
220 billion of loans to and debt
securities of small- and medium-sized enterprises.
The following table shows, as of December 31, 2009, our ten
largest exposures that were in workout, restructuring or
rehabilitation:
|
Amounts
|
||||||||||||||||||||||||||||
| Loans |
Guarantees
|
Classified as
|
||||||||||||||||||||||||||
|
Won
|
Foreign
|
Equity
|
Debt
|
and
|
Total
|
Impaired
|
||||||||||||||||||||||
| Company | Currency | Currency | Securities | Securities | Acceptances | Exposures | Loans | |||||||||||||||||||||
| (In billions of Won) | ||||||||||||||||||||||||||||
|
Dongmoon Construction Co., Ltd.
|
|
50 |
|
— |
|
— |
|
— |
|
— |
|
50 |
|
50 | ||||||||||||||
|
Samho International Co., Ltd.
|
42 | — | — | 6 | — | 48 | 42 | |||||||||||||||||||||
|
Shindo Engineering & Construction Co., Ltd.
|
33 | — | — | — | 1 | 34 | 33 | |||||||||||||||||||||
|
Keangnam Enterprises, Co., Ltd.
|
22 | — | — | — | 5 | 27 | 22 | |||||||||||||||||||||
|
Korea Non-Bank Lease Financing Co., Ltd.
|
25 | — | — | — | — | 25 | 25 | |||||||||||||||||||||
|
Woolim Co., Ltd.
|
20 | — | — | — | 2 | 22 | 20 | |||||||||||||||||||||
|
Hongwon Paper Manufacturing Co., Ltd.
|
11 | — | — | — | 7 | 18 | 11 | |||||||||||||||||||||
|
NeulPooleun
|
15 | — | — | — | — | 15 | 15 | |||||||||||||||||||||
|
World Construction Co., Ltd.
|
15 | — | — | — | — | 15 | 15 | |||||||||||||||||||||
|
Pantech Co., Ltd.
|
9 | — | 3 | — | 1 | 13 | 9 | |||||||||||||||||||||
|
Total
|
|
242 |
|
— |
|
3 |
|
6 |
|
16 |
|
267 |
|
242 | ||||||||||||||
Provisioning
Policy
We base our provisioning on the following loan classifications
that classify corporate and consumer loans, with the exception
of credit card receivables which are classified based on the
number of days past due, as required by the Financial Services
Commission:
| 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. |
73
Table of Contents
We consider the following corporate loans to be impaired loans:
| • | loans classified as “substandard” or below according to the Financial Services Commission’s asset classification guidelines; | |
| • | loans that are over 30 days past due; | |
| • | loans to companies that have received a warning from the Korea Federation of Banks indicating that the company has exhibited difficulties in making timely payments of principal and interest; and | |
| • | loans which are “troubled debt restructurings” as defined under U.S. GAAP. |
We establish loan loss allowances for corporate loans based on
whether a particular loan is identified as impaired or not. Loan
loss allowances are established for impaired loans, in general,
by discounting the estimated future cash flow (both principal
and interest) we expect to receive on such loans. Where the
entire impaired loan or a portion of the impaired loan is
secured by collateral or a guarantee, the fair value of the
collateral or the guarantee payment is considered in
establishing the level of the allowance. Alternatively, for
impaired loans that are considered collateral-dependent, the
amount of impairment is determined by reference to the fair
value of the collateral. In addition, for certain foreign
corporate loans that are considered impaired, the fair value is
determined by reference to observable market prices, when
available. We also establish allowances for losses for corporate
loans that have not been individually identified as impaired.
These allowances are based on historical migration and loss
information.
The following table sets out, at the dates indicated, the
percentage of our impaired corporate loans covered by loan loss
allowances, based on their loan classification:
| As of December 31, | ||||||||||||||||||||
| 2005 | 2006 | 2007 | 2008 | 2009 | ||||||||||||||||
| (Percentages) | ||||||||||||||||||||
|
Normal
|
6.6 | % | 4.9 | % | 11.6 | % | 15.0 | % | 8.0 | % | ||||||||||
|
Precautionary
|
8.3 | 41.0 | 44.8 | 22.4 | 47.5 | |||||||||||||||
|
Substandard
|
23.2 | 21.2 | 24.0 | 44.6 | 36.5 | |||||||||||||||
|
Doubtful
|
74.0 | 58.7 | 66.2 | 70.9 | 70.8 | |||||||||||||||
|
Estimated loss
|
92.2 | 93.3 | 93.1 | 91.1 | 85.5 | |||||||||||||||
For consumer loans, we establish loan loss allowances based on
historical performance, previous loan loss history and
charge-off information. Additional factors that management
considers when establishing reserves for homogeneous pools of
consumer loans include, but are not limited to, economic events,
delinquencies and changes in underwriting and credit monitoring
policies.
The actual amount of incurred credit 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 credit losses, which include detailed periodic
assessments by senior management of both individual loans and
credit portfolios and the use of models to estimate incurred
credit losses in those portfolios.
We regularly evaluate the adequacy of the overall allowance for
credit losses and we believe that the allowance for credit
losses reflects our best estimate of probable credit losses as
of each balance sheet date.
74
Table of Contents
Loan
Aging Schedule
The following table shows our loan aging schedule (excluding
accrued interest) as of the dates indicated:
|
Amount
|
||||||||||||||||||||||||||||||||||||
|
Amount
|
Amount
|
Past Due
|
||||||||||||||||||||||||||||||||||
|
Normal
|
Past Due
|
Past Due
|
More Than
|
Total
|
||||||||||||||||||||||||||||||||
| As of December 31, | Amount | % | 1-3 Months | % | 3-6 Months | % | 6 Months | % | Amount | |||||||||||||||||||||||||||
| (In billions of Won, except percentages) | ||||||||||||||||||||||||||||||||||||
|
2007
|
|
170,340 | 98.9 | % |
|
510 | 0.3 | % |
|
316 | 0.2 | % |
|
1,023 | 0.6 | % |
|
172,189 | ||||||||||||||||||
|
2008
|
197,870 | 99.1 | 699 | 0.4 | 413 | 0.2 | 655 | 0.3 | 199,637 | |||||||||||||||||||||||||||
|
2009
|
194,371 | 99.1 | 488 | 0.2 | 315 | 0.2 | 1,051 | 0.5 | 196,225 | |||||||||||||||||||||||||||
Non-Accrual
Loans and Past Due Accruing Loans
We generally place loans on non-accrual status when payments of
interest
and/or
principal become past due by one day. We no longer recognize
interest on these 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, 2009, we would have recorded gross interest
income of
W
278 billion compared to
W
413 billion for the year ended
December 31, 2008 and
W
379 billion
for the year ended December 31, 2007 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 net income for the years ended
December 31, 2007, 2008 and 2009 was
W
285 billion,
W
338 billion and
W
193 billion, respectively.
The category “accruing but past due one day” includes
loans which are still accruing interest but on which principal
or interest payments are contractually past due one day or more.
We 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.
The following table shows, at the dates indicated, the amount of
loans that were placed on a non-accrual basis and accruing loans
which were past due one day or more:
| As of December 31, | ||||||||||||||||||||
| 2005 | 2006 | 2007 | 2008 | 2009 | ||||||||||||||||
| (In billions of Won) | ||||||||||||||||||||
|
Loans accounted for on a non-accrual basis
|
||||||||||||||||||||
|
Corporate
|
|
2,818 |
|
1,875 |
|
1,319 |
|
1,986 |
|
2,243 | ||||||||||
|
Consumer
|
5,271 | 4,416 | 3,557 | 3,669 | 2,124 | |||||||||||||||
|
Sub-total
|
8,089 | 6,291 | 4,876 | 5,655 | 4,367 | |||||||||||||||
|
Accruing loans which are contractually past due one day or more
as to principal or interest
|
||||||||||||||||||||
|
Corporate
(1)
|
111 | 60 | 51 | 313 | 125 | |||||||||||||||
|
Consumer
|
1,198 | 688 | 281 | 226 | 124 | |||||||||||||||
|
Sub-total
|
1,309 | 748 | 332 | 539 | 249 | |||||||||||||||
|
Total
|
|
9,398 |
|
7,039 |
|
5,208 |
|
6,194 |
|
4,616 | ||||||||||
| (1) |
Includes accruing corporate loans
which are contractually past due 90 days or more in the
amount of
|
75
Table of Contents
Troubled
Debt Restructurings
The following table presents, at the dates indicated, our loans
which are “troubled debt restructurings” as defined
under U.S. GAAP. These loans consist principally of
corporate loans that 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, | ||||||||||||||||||||
| 2005 | 2006 | 2007 | 2008 | 2009 | ||||||||||||||||
| (In billions of Won) | ||||||||||||||||||||
|
Loans classified as “troubled debt restructurings”
|
|
613 |
|
446 |
|
271 |
|
187 |
|
116 | ||||||||||
For 2009, interest income that would have been recorded under
the original contract terms of restructured loans amounted to
W
28 billion, out of which
W
18 billion was reflected as interest
income during 2009.
Potential
Problem Loans
As of December 31, 2009, we had
W
2,440 billion of loans which were current
as to payment of principal and interest but where there existed
serious doubt as to the ability of the borrower to comply with
repayment terms in the near future.
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, 2005, 2006,
2007, 2008 and 2009, we did not have any debt securities on
which interest was past due.
Non-Performing
Loans
Non-performing loans are defined as loans greater than
90 days past due. These loans are generally classified as
“substandard” or below. For further information on the
classification of non-performing loans under Korean regulatory
requirements, see “— Provisioning Policy”
above.
The following table shows, as of the dates indicated, certain
details of our total non-performing loan portfolio:
| As of December 31, | ||||||||||||||||||||
| 2005 | 2006 | 2007 | 2008 | 2009 | ||||||||||||||||
| (In billions of Won, except percentages) | ||||||||||||||||||||
|
Total non-performing loans
|
|
3,149 |
|
2,143 |
|
1,339 |
|
1,068 |
|
1,365 | ||||||||||
|
As a percentage of total loans
|
2.3 | % | 1.4 | % | 0.8 | % | 0.5 | % | 0.7 | % | ||||||||||
The above table does not reflect the amount of loans classified
as substandard or below that we or any of our predecessor
operations sold to Korea Asset Management Corporation in
connection with a government program to assist the Korean
banking industry and other parties.
We have also issued securities backed by non-performing loans
and collateralized bond obligations. Some of these transactions
involved transfers of loans through securitizations where
control of the loans has not been surrendered and, therefore,
are not treated as sale transactions. Instead, the assets remain
on our balance sheet with the securitization proceeds treated as
secured borrowings.
76
Table of Contents
Analysis
of Non-Performing Loans
The following table sets forth, as of the dates indicated, our
total non-performing loans by type of borrower:
| As of December 31, | ||||||||||||||||||||||||||||||||||||||||
| 2005 | 2006 | 2007 | 2008 | 2009 | ||||||||||||||||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | Amount | % | Amount | % | |||||||||||||||||||||||||||||||
| (In billions of Won, except percentages) | ||||||||||||||||||||||||||||||||||||||||
|
Domestic:
|
||||||||||||||||||||||||||||||||||||||||
|
Corporate
|
||||||||||||||||||||||||||||||||||||||||
|
Commercial and industrial
|
|
1,526 | 48.5 | % |
|
1,335 | 62.3 | % |
|
822 | 61.4 | % |
|
556 | 52.1 | % |
|
899 | 65.8 | % | ||||||||||||||||||||
|
Construction
|
223 | 7.1 | 149 | 7.0 | 88 | 6.6 | 161 | 15.1 | 125 | 9.2 | ||||||||||||||||||||||||||||||
|
Lease financing
|
— | — | — | 0.0 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
|
Other corporate
|
5 | 0.2 | 3 | 0.1 | 3 | 0.2 | 1 | 0.1 | 2 | 0.2 | ||||||||||||||||||||||||||||||
|
Total corporate
|
1,754 | 55.7 | 1,487 | 69.4 | 913 | 68.2 | 718 | 67.3 | 1,026 | 75.2 | ||||||||||||||||||||||||||||||
|
Retail
|
||||||||||||||||||||||||||||||||||||||||
|
Mortgage and home equity
|
855 | 27.1 | 484 | 22.6 | 297 | 22.2 | 216 | 20.2 | 211 | 15.4 | ||||||||||||||||||||||||||||||
|
Other consumer
|
516 | 16.4 | 145 | 6.8 | 101 | 7.5 | 86 | 8.0 | 79 | 5.8 | ||||||||||||||||||||||||||||||
|
Total retail
|
1,371 | 43.5 | 629 | 29.4 | 398 | 29.7 | 302 | 28.2 | 290 | 21.2 | ||||||||||||||||||||||||||||||
|
Credit cards
|
21 | 0.7 | 26 | 1.2 | 27 | 2.0 | 29 | 2.7 | 23 | 1.7 | ||||||||||||||||||||||||||||||
|
Total domestic
|
3,146 | 99.9 | 2,142 | 100 | 1,338 | 99.9 | 1,049 | 98.2 | 1,339 | 98.1 | ||||||||||||||||||||||||||||||
|
Foreign:
|
||||||||||||||||||||||||||||||||||||||||
|
Corporate
|
||||||||||||||||||||||||||||||||||||||||
|
Commercial and industrial
|
3 | 0.1 | 1 | 0.0 | 1 | 0.1 | 19 | 1.8 | 26 | 1.9 | ||||||||||||||||||||||||||||||
|
Total foreign
|
3 | 0.1 | 1 | 0.0 | 1 | 0.1 | 19 | 1.8 | 26 | 1.9 | ||||||||||||||||||||||||||||||
|
Total non-performing loans
|
|
3,149 | 100.0 | % |
|
2,143 | 100.0 | % |
|
1,339 | 100.0 | % |
|
1,068 | 100.0 | % |
|
1,365 | 100.0 | % | ||||||||||||||||||||
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Table of Contents
Top 20
Non-Performing Loans
As of December 31, 2009, our 20 largest non-performing
loans accounted for 31.0% of our total non-performing loan
portfolio. The following table shows, as of December 31,
2009, certain information regarding our 20 largest
non-performing loans:
|
Gross Principal
|
Allowance
|
|||||||||
| Industry | Outstanding | for Loan Losses | ||||||||
| (In billions of Won) | ||||||||||
|
Borrower A
|
Construction |
|
61 |
|
43 | |||||
|
Borrower B
|
Real estate | 60 | 16 | |||||||
|
Borrower C
|
Finance & insurance | 55 | 31 | |||||||
|
Borrower D
|
Real estate | 40 | 17 | |||||||
|
Borrower E
|
Real estate | 32 | 7 | |||||||
|
Borrower F
|
Real estate | 20 | 20 | |||||||
|
Borrower G
|
Real estate | 16 | 14 | |||||||
|
Borrower H
|
Other | 15 | 15 | |||||||
|
Borrower I
|
Leisure | 15 | 2 | |||||||
|
Borrower J
|
Real estate | 15 | — | |||||||
|
Borrower K
|
Other | 14 | 14 | |||||||
|
Borrower L
|
Real estate | 13 | 9 | |||||||
|
Borrower M
|
Other | 9 | 8 | |||||||
|
Borrower N
|
Real estate | 9 | 2 | |||||||
|
Borrower O
|
Other | 8 | 2 | |||||||
|
Borrower P
|
Manufacturing | 8 | 3 | |||||||
|
Borrower Q
|
Other | 8 | 4 | |||||||
|
Borrower R
|
Other | 8 | 8 | |||||||
|
Borrower S
|
Real estate | 8 | 3 | |||||||
|
Borrower T
|
Retail & wholesale | 8 | 2 | |||||||
|
Total
|
|
422 |
|
220 | ||||||
Most of our loans to companies in workout or restructuring were
not classified as non-performing as of December 31, 2009
because such loans had been rescheduled and payments on such
rescheduled loans were not past due by more than 90 days.
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; |
78
Table of Contents
| • | 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. |
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 Group,
actual recovery efforts on non-performing loans are handled by
one of Kookmin Bank’s regional credit management centers or
its Corporate Restructuring Department.
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
(45 days in the case of credit card loans). KB Credit
Information has over 190 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. The amount recovered was
W
435 billion in 2007,
W
388 billion in 2008 and
W
426 billion in 2009.
Methods for resolving non-performing loans include the following:
(i) For loans in arrears for more than three months but
less than six months and for loans to bankrupt companies:
| • | non-performing loans are transferred from the operating branch of Kookmin Bank to its regional credit management centers; | |
| • | a demand note is dispatched by mail if payment is generally one month past due; | |
| • | calls and visits are made by Kookmin Bank’s regional credit management center staff 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; | |
| • | preparations are made to use judicial means, including foreclosure and auction of the collateral; and | |
| • | for unsecured loans other than credit card loans, the loans are transferred to KB Credit Information for collection. |
(ii) For loans in arrears for more than six months but less
than one year and for loans to bankrupt companies over three
months after bankruptcy:
| • | for mortgage loans other than individual housing loans, foreclosure and auction proceedings are commenced. |
(iii) For loans in arrears for over one year:
| • | for individual housing loans, foreclosure and auction proceeding are commenced; | |
| • | in the case of unsecured loans, the loans are treated as loan losses; 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
45 days are transferred to KB Credit Information for
collection.
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 transfer them to Kookmin
Bank’s Corporate Restructuring Department, to one of
Kookmin Bank’s regional credit management centers or to KB
Credit Information.
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Table of Contents
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 | |
| • | 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 U.S. GAAP as sale transactions.
Allocation
of Allowance for Loan Losses
The following table presents, as of the dates indicated, the
allocation of our loan loss allowance by loan type. The ratio
represents the percentage of loans in each category to total
loans.
| As of December 31, | ||||||||||||||||||||||||||||||||||||||||
| 2005 | 2006 | 2007 | 2008 | 2009 | ||||||||||||||||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | Amount | % | Amount | % | |||||||||||||||||||||||||||||||
| (In billions of Won, except percentages) | ||||||||||||||||||||||||||||||||||||||||
|
Domestic
|
||||||||||||||||||||||||||||||||||||||||
|
Corporate
|
||||||||||||||||||||||||||||||||||||||||
|
Commercial and industrial
|
|
1,691 | 28.7 | % |
|
1,444 | 31.9 | % |
|
1,071 | 35.5 | % |
|
1,707 | 37.7 | % |
|
2,165 | 38.1 | % | ||||||||||||||||||||
|
Construction
|
240 | 3.6 | 179 | 4.3 | 175 | 5.1 | 674 | 5.0 | 457 | 4.1 | ||||||||||||||||||||||||||||||
|
Other corporate
|
18 | 1.1 | 12 | 0.9 | 14 | 1.0 | 26 | 1.5 | 25 | 1.1 | ||||||||||||||||||||||||||||||
|
Total corporate
|
1,949 | 33.4 | 1,635 | 37.1 | 1,260 | 41.6 | 2,407 | 44.2 | 2,647 | 43.3 | ||||||||||||||||||||||||||||||
|
Retail
|
||||||||||||||||||||||||||||||||||||||||
|
Mortgage and home equity
|
173 | 42.9 | 173 | 42.3 | 114 | 38.2 | 107 | 35.0 | 125 | 36.0 | ||||||||||||||||||||||||||||||
|
Other consumer
|
739 | 16.7 | 441 | 14.2 | 314 | 13.3 | 271 | 13.8 | 336 | 13.7 | ||||||||||||||||||||||||||||||
|
Total retail
|
912 | 59.6 | 614 | 56.5 | 428 | 51.5 | 378 | 48.8 | 461 | 49.7 | ||||||||||||||||||||||||||||||
|
Credit cards
|
331 | 6.1 | 205 | 5.9 | 165 | 6.1 | 213 | 5.8 | 202 | 5.8 | ||||||||||||||||||||||||||||||
|
Foreign
(1)
|
20 | 0.9 | 14 | 0.5 | 11 | 0.8 | 45 | 1.2 | 31 | 1.2 | ||||||||||||||||||||||||||||||
|
Total allowance for loan losses
|
|
3,212 | 100.0 | % |
|
2,468 | 100.0 | % |
|
1,864 | 100.0 | % |
|
3,043 | 100.0 | % |
|
3,341 | 100.0 | % | ||||||||||||||||||||
| (1) | Consists of loans to corporations. |
Our total allowance for loan losses was
W
1,864 billion as of December 31,
2007. During 2008, the allowance for loans losses increased by
W
1,179 billion, or 63.3%, to
W
3,043 billion as of December 31,
2008. During 2009, the allowance for loans losses increased by
W
298 billion, or 9.8%, to
W
3,341 billion as of December 31, 2009
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Table of Contents
Analysis
of Allowance for Loan Losses
The following table analyzes our loan loss experience for each
of the years indicated:
| Year Ended December 31, | ||||||||||||||||||||
| 2005 | 2006 | 2007 | 2008 | 2009 | ||||||||||||||||
| (In billions of Won, except percentages) | ||||||||||||||||||||
|
Balance at the beginning of the period
|
|
4,461 |
|
3,212 |
|
2,468 |
|
1,864 |
|
3,043 | ||||||||||
|
Amounts charged against income
|
433 | (195 | ) | 109 | 2,142 | 2,216 | ||||||||||||||
|
Allowance relating to loans repurchased
|
— | — | 1 | 3 | 7 | |||||||||||||||
|
Allowance relating to newly consolidated entities
|
— | — | — | — | — | |||||||||||||||
|
Gross charge-offs:
|
||||||||||||||||||||
|
Domestic:
|
||||||||||||||||||||
|
Corporate
|
||||||||||||||||||||
|
Commercial and industrial
|
726 | 480 | 580 | 703 | 975 | |||||||||||||||
|
Construction
|
9 | 55 | 108 | 140 | 460 | |||||||||||||||
|
Other corporate
|
9 | 15 | 4 | 5 | 15 | |||||||||||||||
|
Retail
|
||||||||||||||||||||
|
Mortgage and home equity
|
112 | 90 | 49 | 63 | 33 | |||||||||||||||
|
Other consumer
|
533 | 394 | 275 | 279 | 329 | |||||||||||||||
|
Credit cards
|
868 | 301 | 331 | 375 | 571 | |||||||||||||||
|
Foreign:
|
— | — | — | — | — | |||||||||||||||
|
Total gross charge-offs
|
(2,257 | ) | (1,335 | ) | (1,347 | ) | (1,565 | ) | (2,383 | ) | ||||||||||
|
Recoveries:
|
||||||||||||||||||||
|
Domestic:
|
||||||||||||||||||||
|
Corporate
|
||||||||||||||||||||
|
Commercial and industrial
|
114 | 86 | 98 | 98 | 54 | |||||||||||||||
|
Construction
|
3 | 6 | 21 | 13 | 10 | |||||||||||||||
|
Other corporate
|
2 | 2 | 1 | 2 | 1 | |||||||||||||||
|
Retail
|
||||||||||||||||||||
|
Mortgage and home equity
|
3 | 137 | 16 | 32 | 12 | |||||||||||||||
|
Other consumer
|
114 | 198 | 196 | 177 | 125 | |||||||||||||||
|
Credit cards
|
338 | 357 | 301 | 277 | 256 | |||||||||||||||
|
Foreign:
|
1 | — | — | — | — | |||||||||||||||
|
Total recoveries
|
575 | 786 | 633 | 599 | 458 | |||||||||||||||
|
Net charge-offs
|
(1,682 | ) | (549 | ) | (714 | ) | (966 | ) | (1,925 | ) | ||||||||||
|
Balance, at the end of the period
|
|
3,212 |
|
2,468 |
|
1,864 |
|
3,043 |
|
3,341 | ||||||||||
|
Ratio of net charge-offs during the period to average loans
outstanding during the period
|
1.2 | % | 0.4 | % | 0.4 | % | 0.5 | % | 1.0 | % | ||||||||||
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
81
Table of Contents
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 four payment cycles 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 those that have been overdue for more than six months; and | |
| • | the portion of loans classified as “estimated loss,” net of any recovery from collateral, which is deemed to be uncollectible. |
Procedure
for Charge-off Approval
In order to charge off corporate loans under Korean GAAP, 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. With respect to
corporate loans under U.S. GAAP, we follow a similar
procedure (although we will not seek approval from the Financial
Supervisory Service).
With respect to credit card balances (and, under U.S. GAAP,
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. Under Korean GAAP, we charge off
unsecured retail loans deemed to be uncollectible and credit
card balances which have been overdue for four payment cycles or
more or which have been classified as expected loss. Under
U.S. GAAP, we follow a similar procedure, in addition to
charging off any unsecured retail loans or credit card balances
which have not been charged off under Korean GAAP but are more
than six months overdue.
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.
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Table of Contents
Credit
Rehabilitation Programs for Delinquent Consumer and Small- and
Medium-sized Enterprise 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.
In 2002, the Financial Services Commission established the
Credit Counseling and Recovery Service based upon an agreement
among approximately 160 financial institutions in Korea. Upon
application to the Credit Counseling and Recovery Service and
approval of a majority of unsecured and two-thirds of secured
creditor financial institutions, a qualified “credit
delinquent person” with outstanding debts to two or more
financial institutions in an aggregate amount not exceeding
W
500 million may participate in an
individual work-out program designed to restructure such
person’s debt and rehabilitate such person’s credit.
On April 1, 2006, the Law Concerning Credit Restoration and
Bankruptcy took effect and replaced the Individual Debtor
Rehabilitation Law. Under the Law Concerning Credit Restoration
and Bankruptcy, a qualified individual debtor with outstanding
debts in an aggregate amount not exceeding threshold amounts of
W
500 million of unsecured debt
and/or
W
1 billion of secured debt may restructure
his or her debts through a court-supervised debt restructuring
that is binding on creditors.
On September 2, 2008, to support consumer borrowers with
low credit scores, the Financial Services Commission established
the Credit Rehabilitation Fund to purchase from creditors the
loans of such borrowers that are in default and to provide
guarantees so that such loans may be refinanced at lower rates.
The Credit Rehabilitation Fund provides support to
(i) individuals with low credit scores who are in default
on loans not exceeding
W
50 million in
principal amount in the aggregate (which requirement will be
waived for individuals who are “basic living welfare
recipients”) for a period of three months or more and
(ii) individuals with low credit scores ranging from
category 6 to 10 who are in default on loans not exceeding
W
30 million in principal amount in the
aggregate (which requirement will be waived for individuals who
are basic living welfare recipients) and the interest rate of
which is 30% or more.
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 is effective through
June 30, 2010, we provide liquidity assistance to small-
and medium-sized enterprise borrowers applying for such
assistance, in the form of new short-term loans or maturity
extensions or interest rate adjustments with respect to existing
loans, after expedited credit review and approval by us.
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.
The pre-workout program has been in operation since April 2009
and, following a one-year extension by the Korean government, is
expected to continue until April 2011. Under the pre-workout
program, maturity extensions
and/or
interest rate adjustments are provided for retail borrowers with
total loans of less than
W
500 million who
are in arrears on their payments for more than 30 days but
less than 90 days.
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. |
83
Table of Contents
The Corporate Banking Group, Capital Markets &
Treasury Group and the Risk Management Division of Kookmin Bank
primarily supervise our investment and trading 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 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 primary
categories of investments we hold:
| Investment Category | Definition | |
|
Held-to-maturity securities
|
Held-to-maturity securities are securities for which we have the positive ability and intent to hold to maturity and are recorded at amortized cost, adjusted for accretion or amortization of discounts and premiums. Effective January 1, 2009, under U.S. GAAP, the credit loss component of an other-than-temporary impairment of a debt security is recognized in earnings while the remaining amount of the impairment loss is recognized in accumulated other comprehensive income if (i) we do not intend to sell the security and (ii) we believe that it is more-likely-than-not that we will not be required to sell the security prior to recovery. | |
|
Available-for-sale securities
|
Securities are classified as available-for-sale when we intend to hold the securities for an indefinite period of time or when the securities may be utilized for tactical asset/liability purposes and may be sold from time to time to effectively manage interest rate exposure and resultant prepayment risk and liquidity needs. Available-for-sale securities are reported at fair value with unrealized gains and losses being recorded in accumulated other comprehensive income within stockholders’ equity. Effective January 1, 2009, under U.S. GAAP, the credit loss component of an other-than-temporary impairment of a debt security is recognized in earnings while the remaining amount of the impairment loss is recognized in accumulated other comprehensive income if(i) we do not intend to sell the security and (ii) we believe that it is more-likely-than-not that we will not be required to sell the security prior to recovery. | |
|
Trading securities
|
Trading assets include securities held in anticipation of short-term market movements. Trading securities are reported at fair value, with unrealized and realized gains and losses being recorded immediately in our income statement. |
84
Table of Contents
See “Item 5A. 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.
Book
Value and Market Value
The following table sets out the book value and market value of
securities in our investment portfolio as of the dates indicated:
| As of December 31, | ||||||||||||||||||||||||
| 2007 | 2008 | 2009 | ||||||||||||||||||||||
|
Book
|
Market
|
Book
|
Market
|
Book
|
Market
|
|||||||||||||||||||
| Value | Value | Value | Value | Value | Value | |||||||||||||||||||
| (In billions of Won) | ||||||||||||||||||||||||
|
Available-for-sale securities:
|
||||||||||||||||||||||||
|
Equity securities
|
|
305 |
|
305 |
|
404 |
|
404 |
|
1,135 |
|
1,135 | ||||||||||||
|
Debt securities
|
||||||||||||||||||||||||
|
Korean treasury securities and government agency securities
|
4,131 | 4,131 | 6,979 | 6,979 | 7,892 | 7,892 | ||||||||||||||||||
|
Debt securities issued by financial institutions
|
7,642 | 7,642 | 6,160 | 6,160 | 6,405 | 6,405 | ||||||||||||||||||
|
Corporate debt securities
|
699 | 699 | 1,117 | 1,117 | 1,281 | 1,281 | ||||||||||||||||||
|
Debt securities issued by foreign governments
|
9 | 9 | — | — | — | — | ||||||||||||||||||
|
Asset-backed securities
|
43 | 43 | 146 | 146 | 1,998 | 1,998 | ||||||||||||||||||
|
Other debt securities
|
— | — | — | — | — | — | ||||||||||||||||||
|
Total available-for-sale
|
12,829 | 12,829 | 14,806 | 14,806 | 18,711 | 18,711 | ||||||||||||||||||
|
Held-to-maturity securities:
|
||||||||||||||||||||||||
|
Debt securities
|
||||||||||||||||||||||||
|
Korean treasury securities and government agency securities
|
8,601 | 8,310 | 9,139 | 9,368 | 8,992 | 9,064 | ||||||||||||||||||
|
Debt securities issued by financial institutions
|
1,972 | 1,913 | 2,980 | 3,009 | 2,995 | 3,040 | ||||||||||||||||||
|
Corporate debt securities
|
194 | 186 | 249 | 251 | 380 | 382 | ||||||||||||||||||
|
Debt securities issued by foreign governments
|
— | — | — | — | — | — | ||||||||||||||||||
|
Asset-backed securities
|
291 | 288 | 232 | 237 | 243 | 246 | ||||||||||||||||||
|
Total held-to-maturity
|
11,058 | 10,697 | 12,600 | 12,865 | 12,610 | 12,732 | ||||||||||||||||||
|
Trading securities:
|
||||||||||||||||||||||||
|
Equity securities
|
250 | 250 | 217 | 217 | 254 | 254 | ||||||||||||||||||
|
Debt securities
|
||||||||||||||||||||||||
|
Korean treasury securities and government agency securities
|
1,055 | 1,055 | 1,780 | 1,780 | 1,359 | 1,359 | ||||||||||||||||||
|
Debt securities issued by financial institutions
|
3,667 | 3,667 | 2,693 | 2,693 | 2,699 | 2,699 | ||||||||||||||||||
|
Corporate debt securities
|
32 | 32 | 99 | 99 | 31 | 31 | ||||||||||||||||||
|
Asset-backed securities
|
1 | 1 | 462 | 462 | 117 | 117 | ||||||||||||||||||
|
Total trading
|
5,005 | 5,005 | 5,251 | 5,251 | 4,460 | 4,460 | ||||||||||||||||||
|
Total securities
|
|
28,892 |
|
28,531 |
|
32,657 |
|
32,922 |
|
35,781 |
|
35,903 | ||||||||||||
85
Table of Contents
Maturity
Analysis
The following table categorizes our debt securities by maturity
and weighted average yield as of December 31, 2009:
| As of December 31, 2009 | ||||||||||||||||||||||||||||||||||||||||||||||||
|
Securities
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Weighted
|
Over 1
|
Weighted
|
Over 5
|
Weighted
|
Weighted
|
Not Due at
|
Weighted
|
Weighted
|
||||||||||||||||||||||||||||||||||||||||
|
Within
|
Average
|
but Within
|
Average
|
but Within
|
Average
|
Over
|
Average
|
a Single
|
Average
|
Average
|
||||||||||||||||||||||||||||||||||||||
| 1 Year | Yield (1) | 5 Years | Yield (1) | 10 Years | Yield (1) | 10 Years | Yield (1) | Maturity | Yield (1) | Total | Yield (1) | |||||||||||||||||||||||||||||||||||||
| (In billions of Won, except percentages) | ||||||||||||||||||||||||||||||||||||||||||||||||
|
Available-for-sale securities:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Korean treasury securities and government agencies
|
|
1,380 | 5.42% | 6,299 | 4.97% | 213 | 5.47% | — | — | — | — |
|
7,892 | 5.06% | ||||||||||||||||||||||||||||||||||
|
Debt securities issued by financial institutions
|
4,980 | 3.86% | 1,320 | 5.11% | 105 | 6.48% | — | — | — | — | 6,405 | 4.16% | ||||||||||||||||||||||||||||||||||||
|
Corporate debt securities
|
567 | 4.77% | 664 | 5.88% | 30 | 5.18% | — | — | 20 | — | 1,281 | 5.28% | ||||||||||||||||||||||||||||||||||||
|
Asset-backed securities
|
113 | 4.71% | 120 | 5.07% | 1 | — | 1,764 | 4.15% | — | — | 1,998 | 4.23% | ||||||||||||||||||||||||||||||||||||
|
Total
|
|
7,040 | 4.25% |
|
8,403 | 5.07% |
|
349 | 5.73% |
|
1,764 | 4.15% |
|
20 | — |
|
17,576 | 4.66% | ||||||||||||||||||||||||||||||
|
Held-to-maturity securities
|
— | |||||||||||||||||||||||||||||||||||||||||||||||
|
Korean treasury securities and government agencies
|
1,249 | 4.26% | 5,411 | 4.62% | 2,292 | 5.52% | 40 | 5.59% | — | — | 8,992 | 4.80% | ||||||||||||||||||||||||||||||||||||
|
Debt securities issued by financial institutions
|
1,728 | 5.71% | 1,257 | 5.96% | 10 | 6.11% | — | — | — | — | 2,995 | 5.82% | ||||||||||||||||||||||||||||||||||||
|
Corporate debt securities
|
41 | 4.24% | 240 | 5.48% | 99 | 5.35% | — | — | — | — | 380 | 5.31% | ||||||||||||||||||||||||||||||||||||
|
Asset-backed securities
|
92 | 6.09% | 100 | 5.64% | 51 | 5.70% | — | — | — | — | 243 | 5.82% | ||||||||||||||||||||||||||||||||||||
|
Total
|
|
3,110 | 5.12% |
|
7,008 | 4.90% |
|
2,452 | 5.52% |
|
40 | 5.59% | — | — |
|
12,610 | 5.08% | |||||||||||||||||||||||||||||||
|
Trading securities:
|
— | |||||||||||||||||||||||||||||||||||||||||||||||
|
Korean treasury securities and government agencies
|
349 | 4.86% | 883 | 4.79% | 126 | 5.63% | 1 | 5.50% | — | — | 1,359 | 4.89% | ||||||||||||||||||||||||||||||||||||
|
Debt securities issued by financial institutions
|
1,732 | 4.07% | 966 | 4.47% | — | — | — | — | 1 | — | 2,699 | 4.21% | ||||||||||||||||||||||||||||||||||||
|
Corporate debt securities
|
2 | 6.88% | 29 | 6.05% | — | — | — | — | — | — | 31 | 6.10% | ||||||||||||||||||||||||||||||||||||
|
Asset-backed securities
|
— | — | 117 | 5.66% | — | — | — | — | — | — | 117 | 5.66% | ||||||||||||||||||||||||||||||||||||
|
Total
|
|
2,083 | 4.21% |
|
1,995 | 4.70% |
|
126 | 5.63% |
|
1 | 5.50% |
|
1 | — |
|
4,206 | 4.48% | ||||||||||||||||||||||||||||||
| (1) | The weighted average yield for the portfolio represents the yield to maturity for each individual security, weighted using its book value (which is the amortized cost in the case of held-to-maturity securities and the fair value in the case of available-for-sale securities and trading securities). |
Concentrations
of Risk
As of December 31, 2009, we held the following securities
of individual issuers where the aggregate book value of those
securities exceeded 10% of our stockholders’ equity at such
date, which was
W
17,539 billion:
|
Book
|
Market
|
|||||||
| Value | Value | |||||||
| (In billions of Won) | ||||||||
|
Name of issuer:
|
||||||||
|
Korean government
|
|
12,922 |
|
12,957 | ||||
|
Bank of Korea
|
3,898 | 3,898 | ||||||
|
Korea Housing Finance Corporation
|
2,290 | 2,295 | ||||||
|
Total
|
|
19,110 |
|
19,150 | ||||
The Bank of Korea and Korea Housing Finance Corporation are
controlled by the Korean government.
86
Table of Contents
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 debt, 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 savings 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
73.0% of total funding as of December 31, 2007, 70.9% of
total funding as of December 31, 2008 and 75.9% of total
funding as of December 31, 2009.
In addition, we acquire funding by issuing bonds. Our borrowings
consist mainly of borrowings from financial institutions, the
Korean government and government-affiliated funds. Such
borrowings are generally long-term borrowings, with maturities
ranging from one year to 36 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:
| 2007 | 2008 | 2009 | ||||||||||||||||||||||
|
Average
|
Average
|
Average
|
Average
|
Average
|
Average
|
|||||||||||||||||||
| Balance (1) | Rate Paid | Balance (1) | Rate Paid | Balance (1) | Rate Paid | |||||||||||||||||||
| (In billions of Won, except percentages) | ||||||||||||||||||||||||
|
Demand deposits:
|
||||||||||||||||||||||||
|
Non-interest bearing
|
|
3,126 | — |
|
3,076 | — |
|
2,936 | — | |||||||||||||||
|
Interest-bearing
|
605 | 2.15 | % | 622 | 2.25 | % | 846 | 1.18 | % | |||||||||||||||
|
Time deposits:
|
||||||||||||||||||||||||
|
Certificates
|
14,628 | 5.19 | 25,392 | 6.04 | 26,423 | 4.50 | ||||||||||||||||||
|
Other time deposits
|
63,082 | 4.40 | 77,495 | 5.36 | 87,721 | 4.45 | ||||||||||||||||||
|
Savings deposits
|
42,001 | 0.84 | 41,761 | 1.06 | 46,277 | 0.49 | ||||||||||||||||||
|
Mutual installment
deposits
(2)
|
6,900 | 3.35 | 4,985 | 3.43 | 3,915 | 2.99 | ||||||||||||||||||
|
Average total deposits
|
|
130,342 | 3.17 | % |
|
153,331 | 4.12 | % |
|
168,118 | 3.24 | % | ||||||||||||
| (1) | Average balances are based on daily balances for our primary banking operations and monthly or quarterly balances for our other subsidiaries. | |
| (2) | Mutual installment deposits are interest-bearing deposits offered by us, which enable customers to become eligible for our loans while they maintain an account with us. The customer’s account does not have to secure loan amounts once made but is a requirement for loan eligibility. Prior to qualifying for a loan a customer must make required periodic deposits to the mutual installment account for a contracted term of less than five years. A customer is not required to fulfill the deposit term prior to requesting a loan from us, but loan amounts and terms are not as favorable in the event of a loan request prior to completing the deposit contract term. |
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.”
87
Table of Contents
Certificates
of Deposit and Other Time Deposits
The following table presents the remaining maturities of our
time deposits, certificates of deposit and mutual installment
deposits which had a fixed maturity in excess of
W
100 million as of December 31, 2009:
|
Mutual
|
||||||||||||||||
|
Certificates
|
Other Time
|
Installment
|
||||||||||||||
| of Deposit | Deposits | Deposits | Total | |||||||||||||
| (In billions of Won) | ||||||||||||||||
|
Maturing within three months
|
|
14,714 |
|
17,411 |
|
174 |
|
32,299 | ||||||||
|
After three but within six months
|
3,073 | 6,404 | 119 | 9,596 | ||||||||||||
|
After six but within 12 months
|
3,895 | 17,248 | 166 | 21,309 | ||||||||||||
|
After 12 months
|
185 | 1,098 | 173 | 1,456 | ||||||||||||
|
Total
|
|
21,867 |
|
42,161 |
|
632 |
|
64,660 | ||||||||
The aggregate amount of contractual maturities of all long-term
debt at December 31, 2009 was as follows:
| At December 31, 2009 | ||||
| (In billions of Won) | ||||
|
Due in 2010
|
|
13,933 | ||
|
Due in 2011
|
9,038 | |||
|
Due in 2012
|
5,100 | |||
|
Due in 2013
|
1,661 | |||
|
Due in 2014
|
4,710 | |||
|
Thereafter
|
5,133 | |||
|
Gross long-term debt
|
39,575 | |||
|
Discount
|
(5 | ) | ||
|
Total long-term debt, net
|
|
39,570 | ||
88
Table of Contents
Short-term
borrowings
The following table presents information regarding our
short-term borrowings (borrowings with an original maturity of
one year or less) for the periods indicated:
| As of and for the Year Ended December 31, | ||||||||||||
| 2007 | 2008 | 2009 | ||||||||||
| (In billions of Won, except percentages) | ||||||||||||
|
Call money:
|
||||||||||||
|
Year-end balance
|
|
794 |
|
3,444 |
|
1,365 | ||||||
|
Average
balance
(1)
|
2,069 | 3,059 | 3,528 | |||||||||
|
Maximum balance
|
4,409 | 3,990 | 7,541 | |||||||||
|
Average interest
rate
(2)
|
4.88 | % | 3.96 | % | 1.90 | % | ||||||
|
Year-end interest rate
|
0.55-8.50 | % | 0.40-6.62 | % | 0.20-2.10 | % | ||||||
|
Borrowings from the Bank of
Korea:
(3)
|
||||||||||||
|
Year-end balance
|
|
488 |
|
796 |
|
1,344 | ||||||
|
Average
balance
(1)
|
539 | 570 | 1,200 | |||||||||
|
Maximum balance
|
705 | 796 | 1,512 | |||||||||
|
Average interest
rate
(2)
|
2.97 | % | 2.98 | % | 1.25 | % | ||||||
|
Year-end interest rate
|
3.25 | % | 1.75 | % | 1.25 | % | ||||||
|
Other short-term
borrowings:
(4)
|
||||||||||||
|
Year-end balance
|
|
7,288 |
|
9,731 |
|
6,832 | ||||||
|
Average
balance
(1)
|
9,335 | 8,634 | 8,805 | |||||||||
|
Maximum balance
|
10,616 | 9,731 | 12,142 | |||||||||
|
Average interest
rate
(2)
|
4.95 | % | 4.63 | % | 3.03 | % | ||||||
|
Year-end interest rate
|
1.07-6.91 | % (5) | 0.50-8.23 | % (5) | 0.22-7.49 | % | ||||||
| (1) | Average balances are based on daily balances for our primary banking operations and monthly or quarterly balances for our other subsidiaries. | |
| (2) | Average interest rates for the year are calculated by dividing the total interest expense by the average amount borrowed. | |
| (3) | Borrowings from the Bank of Korea generally mature within one month for borrowings in Won and six months for borrowings in foreign currencies. | |
| (4) |
Other short-term borrowings include
borrowings from trust accounts, bills sold, borrowings and
debentures. Other short-term borrowings have maturities of
30 days to one year and are unsecured with the exception of
borrowings from the Bank of Korea. These short-term borrowings
are secured by securities totaling
|
|
| (5) |
Excludes interest rates of 9.00%
and 25.00% on short-term borrowings of
|
Supervision
and Regulation
Principal
Regulations Applicable to Financial Holding
Companies
General
The Financial Holding Company Act, last amended on July 31,
2009, regulates Korean financial holding companies and their
subsidiaries. The entities that regulate and supervise Korean
financial holding companies and their subsidiaries are the
Financial Services Commission and the Financial Supervisory
Service.
The Financial Services Commission exerts direct control over
financial holding companies pursuant to the Financial Holding
Company Act. Among other things, the Financial Services
Commission approves the establishment of financial holding
companies, issues regulations on the capital adequacy of
financial holding companies and their subsidiaries, and drafts
regulations relating to the supervision of financial holding
companies.
Following the instructions and directives of the Financial
Services Commission, the Financial Supervisory Service
supervises and examines financial holding companies and their
subsidiaries. In particular, the Financial
89
Table of Contents
Supervisory Service sets requirements relating to Korean
financial holding companies’ liquidity and capital adequacy
ratios and establishes reporting requirements within the
authority delegated under the Financial Services Commission
regulations. Financial holding companies must submit quarterly
reports to the Financial Supervisory Service discussing business
performance, financial status and other matters identified in
the Enforcement Decree of the Financial Holding Company Act.
Under the Financial Holding Company Act, a financial holding
company is a company which primarily engages in controlling its
subsidiaries by holding equity stakes in them equal in aggregate
to at least 50% of the financial holding company’s
aggregate assets based on its balance sheet as of the end of the
immediately preceding fiscal year. A company is required to
obtain approval from the Financial Services Commission to become
a financial holding company.
A financial holding company may engage only in controlling the
management of its subsidiaries, as well as certain ancillary
activities including:
| • | financially supporting its direct and indirect subsidiaries; | |
| • | raising capital necessary for investment in its subsidiaries or providing financial support to its direct and indirect subsidiaries; | |
| • | supporting the business of its direct and indirect subsidiaries for the joint development and marketing of new products; | |
| • | supporting the operations of its direct and indirect subsidiaries by providing access to data processing, legal and accounting resources; and | |
| • | any other businesses exempted from authorization, permission or approval under the applicable laws and regulations. |
The Financial Holding Company Act requires every financial
holding company (other than a financial holding company that is
controlled by another financial holding company) and its
subsidiaries to obtain prior approval from the Financial
Services Commission before acquiring control of another company
or to file a report with the Financial Services Commission
within 30 days thereafter in certain cases (including
acquiring control of another company whose assets are less than
W
100 billion as of the end of the
immediately preceding fiscal year). In addition, the Financial
Services Commission must grant permission to liquidate or to
merge with any other company before the liquidation or merger. A
financial holding company must report to the Financial Services
Commission when certain events, including the following, occur:
| • | when its officers or largest shareholder changes; | |
| • | in the case of a bank holding company, when a major shareholder changes; | |
| • | when the shareholding of the controlling shareholder (i.e., the “largest shareholder” or a “principal shareholder,” each as defined in the Financial Holding Company Act) or a person who has a “special relationship” with such controlling shareholder (as defined in the Enforcement Decree of the Financial Holding Company Act) changes by 1% or more of the total issued and outstanding voting shares of the financial holding company; | |
| • | when it changes its corporate name; | |
| • | when there is a cause for its dissolution; and | |
| • | when it or its subsidiaries cease to control any of their respective direct or indirect subsidiaries by disposing of their shares of such direct or indirect subsidiary. |
Capital
Adequacy
The Financial Holding Company Act does not provide for a minimum
paid-in capital requirement related to financial holding
companies. However, all financial holding companies are required
to maintain a specified level of solvency. In addition, with
respect to the allocation of net profit earned in a fiscal term,
a financial holding company
90
Table of Contents
must set aside in its legal reserve an amount equal to at least
10% of its net income after tax each time it pays dividends on
its net profits earned until its legal reserve reaches at least
the aggregate amount of its paid-in capital.
Beginning on January 1, 2007, a bank holding company, which
is a financial holding company controlling banks or other
financial institutions conducting banking business as prescribed
in the Financial Holding Company Act, is required to maintain a
minimum consolidated capital adequacy ratio of 8.0%.
“Consolidated capital adequacy ratio” is defined as
the ratio of equity capital as a percentage of risk-weighted
assets on a consolidated basis, determined in accordance with
the Financial Services Commission requirements that have been
formulated based on Bank of International Settlements
(“BIS”) standards. “Equity capital,” as
applicable to bank holding companies, is defined as the sum of
Tier I capital, Tier II capital and Tier III
capital less any deductible items, each as defined under the
Regulation on the Supervision of Financial Holding Companies.
“Risk-weighted assets” is defined as the sum of credit
risk-weighted assets and market risk-weighted assets.
Liquidity
All financial holding companies are required to match the
maturities of their assets and liabilities on a non-consolidated
basis in accordance with the Financial Holding Company Act in
order to ensure liquidity. Financial holding companies must:
| • | maintain a Won liquidity ratio (defined as Won assets due within one month, including marketable securities, divided by Won liabilities due within one month) of not less than 100% on a non-consolidated basis; | |
| • | maintain a foreign currency liquidity ratio (defined as foreign currency liquid assets due within three months divided by foreign currency liabilities due within three months) of not less than 80% on a non-consolidated basis (except that such requirement is not applicable to financial holding companies whose foreign currency liabilities amount is less than 1% of its total assets); | |
| • | maintain a ratio of foreign currency liquid assets due within seven days less foreign currency liabilities due within seven days as a percentage of total foreign currency assets of not less than 0% on a non-consolidated basis; | |
| • | maintain a ratio of foreign currency liquid assets due within a month less foreign currency liabilities due within a month as a percentage of total foreign currency assets of not less than negative 10% on a non-consolidated basis; and | |
| • | make monthly reports regarding their Won liquidity and quarterly reports regarding their foreign currency liquidity to the Financial Supervisory Service. |
Financial
Exposure to Any Individual Customer and Major
Shareholder
Subject to certain exceptions, the aggregate credit (as defined
in the Financial Holding Company Act, the Bank Act, the
Financial Investment Services and Capital Markets Act, the
Insurance Business Act, the Mutual Savings Bank Act and the
Specialized Credit Financial Business Act, respectively) of a
financial holding company and its direct and indirect
subsidiaries that are banks, merchant banks, financial
investment companies, insurance companies, savings banks or
specialized credit financial business companies (which we refer
to as “Financial Holding Company Total Credit”) to a
single group of companies that belong to the same conglomerate
as defined in the Monopoly Regulations and Fair Trade Act will
not be permitted to exceed 25% of net aggregate equity capital
(as defined below).
“Net aggregate equity capital” is defined under the
Enforcement Decree of the Financial Holding Company Act as the
sum of:
(1) in case of a financial holding company, the capital
amount as defined in
Article 24-3(7),
Item 2 of the Enforcement Decree of the Financial Holding
Company Act;
(2) in case of a bank, the capital amount as defined in
Article 2(1), Item 5 of the Bank Act;
(3) in case of a merchant bank, the capital amount as
defined in Article 342(1) of the Financial Investment
Services and Capital Markets Act; and
91
Table of Contents
(4) in case of a financial investment company, the capital
amount as defined in Article 37(3) of the Enforcement
Decree of the Financial Holding Company Act;
(5) in case of an insurance company, the capital amount as
defined in Article 2, Item 14 of the Insurance
Business Act;
(6) in case of a savings bank, the capital amount as
defined in Article 2, Item 4 of the Mutual Savings
Bank Act; and
(7) in case of a specialized credit financial business
company, the capital amount as defined in Article 2,
Item 19 of the Specialized Credit Financial Business Act;
less the sum of:
(1) the amount of shares of direct and indirect
subsidiaries held by the financial holding company;
(2) the amount of shares that are cross-held by each direct
and indirect subsidiary that is a bank, merchant bank, financial
investment company, insurance company, savings bank or
specialized credit financial business company; and
(3) the amount of shares of a financial holding company
held by such direct and indirect subsidiaries that are banks,
merchant banks, financial investment companies, insurance
companies, savings banks or specialized credit financial
business companies.
The Financial Holding Company Total Credit to a single
individual or judicial person may not exceed 20% of the net
aggregate equity capital. In addition, the Financial Holding
Company Total Credit to a shareholder holding (together with the
persons who have a “special relationship” with the
shareholder, as defined in the Enforcement Decree of the
Financial Holding Company Act) in aggregate more than 10% of the
total issued and outstanding voting shares of a financial
holding company generally may not exceed the lesser of
(x) 25% of the net aggregate equity capital and
(y) the amount of the equity capital of the financial
holding company multiplied by the shareholding ratio of the
shareholder (together with the persons who have a special
relationship with the shareholder).
Further, the total sum of credits (as defined in the Financial
Holding Company Act, the Bank Act, the Financial Investment
Services and Capital Markets Act, the Insurance Business Act,
the Mutual Savings Bank Act and the Specialized Credit Financial
Business Act, respectively) of a bank holding company and its
direct and indirect subsidiaries that are banks, merchant banks,
financial investment companies, insurance companies, savings
banks or specialized credit financial business companies as
applicable (“Bank Holding Company Total Credit”)
extended to a “major shareholder” (as defined below)
(together with the persons who have a special relationship with
that major shareholder) will not be permitted to exceed the
lesser of (x) 25% of the net aggregate equity capital and
(y) the amount of the equity capital of the bank holding
company multiplied by the shareholding ratio of the major
shareholder, except for certain cases.
“Major shareholder” is defined as:
| • | a shareholder holding (together with persons who have a special relationship with that shareholder), in excess of 10% (or in the case of a bank holding company controlling regional banks only, 15%) in the aggregate of the bank holding company’s total issued and outstanding voting shares; or | |
| • | a shareholder holding (together with persons who have a special relationship with that shareholder), more than 4% in the aggregate of the total issued and outstanding voting shares of the bank holding company controlling nationwide banks (excluding shares subject to the shareholding restrictions on non-financial business group companies as described below), where the shareholder is the largest shareholder or has actual control over the major business affairs of the bank holding company through, for example, appointment and dismissal of the officers pursuant to the Enforcement Decree of the Financial Holding Company Act. |
In addition, the total sum of the Bank Holding Company Total
Credit granted to all of a bank holding company’s major
shareholders must not exceed 25% of the bank holding
company’s net aggregate equity capital. Furthermore, any
bank holding company that, together with its direct and indirect
subsidiaries, intends to extend
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credit to the bank holding company’s major shareholder in
an amount equal to or exceeding the lesser of (x) the
amount equivalent to 0.1% of the net aggregate equity capital
and (y)
W
5 billion, in any single
transaction, must obtain prior unanimous board resolutions and
then, immediately after providing the credit, must file a report
to the Financial Services Commission and publicly disclose the
filing of the report.
Restrictions
on Transactions Among Direct and Indirect Subsidiaries and
Financial Holding Company
Generally, a direct or indirect subsidiary of a financial
holding company may not extend credits (excluding the amount of
corporate credit card payments issued by a direct or indirect
subsidiary of a financial holding company that is engaged in the
banking business) to that financial holding company. In
addition, a direct or indirect subsidiary of a financial holding
company may not extend credits (excluding the amount of
corporate credit card payments issued by a direct or indirect
subsidiary of a financial holding company that is engaged in the
banking business) to other direct or indirect subsidiaries of
the financial holding company in excess of 10% of its capital
amount on an individual basis or to those subsidiaries in excess
of 20% of its capital amount on an aggregate basis. The
subsidiary extending the credit must also obtain an adequate
level of collateral depending on the type of such collateral
from the other subsidiaries unless the credit is otherwise
approved by the Financial Services Commission. The adequate
level of collateral for each type of collateral is as follows:
(1) for deposits and installment savings, obligations of
the Korean government or the Bank of Korea, obligations
guaranteed by the Korean government or the Bank of Korea,
obligations secured by securities issued or guaranteed by the
Korean government or the Bank of Korea, 100% of the credit
extended;
(2) for obligations of municipal governments under the
Local Autonomy Act, local public enterprise under the Local
Public Enterprises Act and investment institutions and other
quasi-investment institutions under the Basic Act on the
Management of Government-Invested Institution or for obligations
guaranteed by, or secured by the securities issued or guaranteed
by, the aforementioned entities pursuant to the relevant
regulations, 110% of the credit extended; and
(3) for any property other than those set forth in
paragraphs (1) and (2) above, 130% of the credit
extended.
Subject to certain exceptions, a direct or indirect subsidiary
of a financial holding company is prohibited from owning the
shares of any other direct or indirect subsidiaries (other than
those directly controlled by that direct or indirect subsidiary)
under the common control of the financial holding company.
Subject to certain exceptions, a direct or indirect subsidiary
of a financial holding company is also prohibited from owning
the shares of the financial holding company controlling that
direct or indirect subsidiary. The transfer of certain assets
classified as precautionary or below between a financial holding
company and its direct or indirect subsidiary or between the
direct and indirect subsidiaries of a financial holding company
is prohibited except for:
(1) transfers to a special purpose company, or entrustment
with a trust company, for an asset-backed securitization
transaction under the Asset-Backed Securitization Act;
(2) transfers to a mortgage-backed securities issuance
company for a mortgage securitization transaction;
(3) transfers or in-kind contributions to a corporate
restructuring vehicle under the Corporate Restructuring
Investment Companies Act; and
(4) transfers to a corporate restructuring company under
the Industry Promotion Act.
Disclosure
of Management Performance
For the purpose of protecting the depositors and investors in
the subsidiaries of financial holding companies, the Financial
Services Commission requires financial holding companies to
disclose certain material matters including:
(1) financial condition and profit and loss of the
financial holding company and its direct and indirect
subsidiaries;
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(2) fund-raising by the financial holding company and its
direct and indirect subsidiaries and the appropriation of such
funds;
(3) any sanctions levied on the financial holding company
and its direct and indirect subsidiaries under the Financial
Holding Company Act or any corrective measures or sanctions
under the Law on Improvement of Structure of Financial
Industry; and
(4) occurrence of any non-performing assets or financial
incident that may have a material adverse effect, or any other
event as prescribed in the applicable regulations.
Restrictions
on Shareholdings in Other Companies
Generally, a financial holding company may not own (i) more
than 5% of the total issued and outstanding shares of another
finance-related company, (ii) any shares of its affiliates,
other than its direct or indirect subsidiaries or (iii) any
shares of a non-finance-related company.
Restrictions
on Shareholdings by Direct and Indirect Subsidiaries
Generally, a direct subsidiary of a financial holding company
may not control any other company other than, as an indirect
subsidiary of the financial holding company:
| • | financial institutions established in foreign jurisdictions; | |
| • | certain financial institutions which are engaged in any business that the direct subsidiary may conduct without any licenses or permits; | |
| • | certain financial institutions whose business is related to the business of the direct subsidiary as described by the Enforcement Decree of the Financial Holding Company Act (for example, a bank subsidiary may control only credit information companies, credit card companies and financial investment companies with a dealing, brokerage, collective investment, investment advice, discretionary investment management and/or trust license); | |
| • | certain financial institutions whose business is related to the financial business as prescribed by the regulations of the Ministry of Strategy and Finance; and | |
| • | certain companies which are not financial institutions but whose business is related to the financial business of the financial holding company as prescribed by the Enforcement Decree of the Financial Holding Company Act (for example, a finance-related research company or a finance-related information technology company). |
Acquisition of such indirect subsidiaries by direct subsidiaries
of a financial holding company requires prior permission from
the Financial Services Commission or the submission of a report
to the Financial Services Commission, depending on the types of
the indirect subsidiaries and the amount of total assets of the
indirect subsidiaries.
Subject to certain exceptions, an indirect subsidiary of a
financial holding company may not control any other company. If
an indirect subsidiary of a financial holding company had
control over another company at the time it became such an
indirect subsidiary, the indirect subsidiary is required to
dispose of its interest in the other company within two years
from such time.
Restrictions
on Transactions between a Bank Holding Company and its Major
Shareholder
A bank holding company and its direct and indirect subsidiaries
may not acquire (including through their respective trust
accounts) shares issued by the bank holding company’s major
shareholder in excess of 1% of the net aggregate equity capital
(as defined above). In addition, if those entities intend to
acquire shares issued by that major shareholder in any single
transaction equal to or exceeding the lesser of (x) the
amount equivalent to 0.1% of the net aggregate equity capital
and (y)
W
5 billion, that entity must
obtain prior unanimous board resolutions and then, immediately
after the acquisition, file a report to the Financial Services
Commission and publicly disclose the filing of the report.
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Restriction
on Ownership of a Financial Holding Company
Under the Financial Holding Company Act, a financial institution
generally may not control a financial holding company. In
addition, any single shareholder and persons who have a special
relationship with that shareholder may acquire beneficial
ownership of up to 10% of the total issued and outstanding
shares with voting rights of a bank holding company that
controls nationwide banks or 15% of the total issued and
outstanding shares with voting rights of a bank holding company
that controls only regional banks, subject to certain
exceptions. Among others, the Korean government and the Korea
Deposit Insurance Corporation are not subject to this limit.
“Non-financial business group companies” (as defined
below), however, may not acquire the beneficial ownership of
shares of a bank holding company controlling nationwide banks in
excess of 9% of that bank holding company’s outstanding
voting shares unless they obtain the approval of the Financial
Services Commission and agree not to exercise voting rights in
respect of shares in excess of the 9% limit, in which case they
may acquire beneficial ownership of up to 10%. Any other person
(whether a Korean national or a foreign investor) may acquire no
more than 10% of total voting shares issued and outstanding of a
bank holding company controlling nationwide banks unless they
obtain approval from the Financial Services Commission in each
instance where the total holding will exceed 10% (or 15% in the
case of a bank holding company controlling only regional banks),
25% or 33% of the total voting shares issued and outstanding of
that bank holding company controlling nationwide banks.
Furthermore, in the case where a person (including Korean and
foreign investors, but excluding certain persons prescribed
under the Enforcement Decree of the Financial Holding Company
Act) (i) acquires in excess of 4% of the total issued and
outstanding voting shares of any financial holding company
(other than a financial holding company controlling only
regional banks), (ii) becomes the largest shareholder of
such financial holding company in which such person has acquired
in excess of 4% of the total issued and outstanding voting
shares, or (iii) changes its shareholding in such financial
holding company, in which it has acquired in excess of 4% of the
total issued and outstanding voting shares, by 1% or more of the
total issued and outstanding voting shares of such financial
holding company, such person must file a report on such change
with the Financial Services Commission within five days
thereafter.
“Non-financial business group companies” as defined
under the Financial Holding Company Act include:
(1) any same shareholder group where the aggregate net
assets of all non-financial business companies belonging to that
group equals or exceeds 25% of the aggregate net assets of all
members of that group;
(2) any same shareholder group where the aggregate assets
of all non-financial business companies belonging to that group
equals or exceeds
W
2 trillion; or
(3) any mutual fund where a same shareholder group
identified in (1) or (2) above beneficially owns
and/or
exercises the voting rights of more than 9% of the total issued
and outstanding voting shares of that mutual fund.
Sharing
of Customer Information among Financial Holding Company and its
Subsidiaries
Under the Act on Use and Protection of Credit Information, any
individual customer’s credit information must be disclosed
or otherwise used by financial institutions only to determine,
establish or maintain existing commercial transactions with them
and only after obtaining written consent to use that
information. Under the Financial Holding Company Act, a
financial holding company and its direct and indirect
subsidiaries, however, may share certain credit information of
individual customers among themselves for business purposes
without the customers’ written consent. A subsidiary
financial investment company with a dealing
and/or
brokerage license of a financial holding company may provide
that financial holding company and its other direct and indirect
subsidiaries information relating to the aggregate amount of
cash or securities that a customer of the financial investment
company with a dealing
and/or
brokerage license has deposited for business purposes.
Principal
Regulations Applicable to Banks
The banking system in Korea is governed by the Bank Act of 1950,
as amended (the “Bank Act”) and the Bank of Korea Act
of 1950, as amended (the “Bank of Korea Act”). In
addition, Korean banks come under the regulations
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and supervision of the Bank of Korea, the Monetary Policy
Committee, the Financial Services Commission and its executive
body, the Financial Supervisory Service.
The Bank of Korea, established in June 1950 under the Bank of
Korea Act, performs the customary functions of a central bank.
It seeks to contribute to the sound development of the national
economy by price stabilization through establishing and
implementing efficient monetary and credit policies. The Bank of
Korea acts under instructions of the Monetary Policy Committee,
the supreme policy-making body of the Bank of Korea.
Under the Bank of Korea Act, the Monetary Policy
Committee’s primary responsibilities are to formulate
monetary and credit policies and to determine the operations,
management and administration of the Bank of Korea.
The Financial Services Commission, established on April 1,
1998, regulates commercial banks pursuant to the Bank Act,
including establishing guidelines on capital adequacy of
commercial banks, and prepares regulations relating to
supervision of banks. Furthermore, pursuant to the Amendment to
the Government Organization Act and the Bank Act on May 24,
1999, the Financial Services Commission, instead of the Ministry
of Strategy and Finance, now regulates market entry into the
banking business.
The Financial Supervisory Service was established on
January 2, 1999 as a unified body of the former Bank
Supervisory Authority (the successor to the Office of Bank
Supervision), the Securities Supervisory Board, the Insurance
Supervisory Board and the Credit Management Fund. The Financial
Supervisory Service is subject to the instructions and
directives of the Financial Services Commission and carries out
supervision and examination of commercial banks. In particular,
the Financial Supervisory Service sets requirements both for
prudent control of liquidity and for capital adequacy and
establishes reporting requirements within the authority
delegated to it under the Financial Services Commission
regulations, pursuant to which banks are required to submit
annual reports on financial performance and shareholdings,
regular reports on management strategy and non-performing loans,
including write-offs, and management of problem companies and
plans for the settlement of bad loans.
Under the Bank Act, permission to commence a commercial banking
business or a long-term financing business must be obtained from
the Financial Services Commission. Commercial banking business
is defined as the lending of funds acquired predominantly from
the acceptance of deposits for a period not exceeding one year
or subject to the limitation established by the Financial
Services Commission, for a period between one year and three
years. Long-term financing business is defined as the lending,
for periods in excess of one year, of funds acquired
predominantly from paid-in capital, reserves or other retained
earnings, the acceptance of deposits with maturities of at least
one year, or the issuance of bonds or other securities. A bank
wishing to enter into any business other than commercial banking
and long-term financing businesses, such as the financial
investment business with a trust license, must obtain permission
from the Financial Services Commission. Permission to merge with
any other banking institution, to liquidate, to spin off, to
close a banking business or to transfer all or a part of a
business must also be obtained from the Financial Services
Commission.
If the Korean government deems our financial condition to be
unsound or if we fail to meet the applicable capital adequacy
ratio set forth under Korean law, the government may order:
| • | capital increases or reductions; | |
| • | stock cancellations or consolidations; | |
| • | transfers of business; | |
| • | sales of assets; | |
| • | closures of branch offices; | |
| • | mergers with other financial institutions; | |
| • | suspensions of a part or all of business operation; or | |
| • | assignments of contractual rights and obligations relating to financial transactions. |
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Capital
Adequacy and Allowances
The Bank Act requires nationwide banks, such as us, to maintain
a minimum paid-in capital of
W
100 billion
and regional banks to maintain a minimum paid-in capital of
W
25 billion. All banks, including foreign
bank branches in Korea, are also required to maintain a
prescribed solvency position. A bank must also set aside in its
legal reserve an amount equal to at least 10% of the net income
after tax each time it pays dividends on net profits earned
until its legal reserve reaches at least the aggregate amount of
its paid-in capital.
Under the Enforcement Detailed Rules on the Supervision of
Banking Business, the capital of a bank is divided into two
categories, Tier I and Tier II capital. Tier I
capital (core capital) consists of, among other things,
shareholders’ equity, capital surplus, retained earnings
and hybrid Tier I capital instruments. Tier II capital
(supplementary capital) consists of, among other things,
revaluation reserves, gains on valuation of investment
securities (up to certain limits), allowance for loan losses set
aside for loans classified as normal or precautionary (up to
certain limits), perpetual subordinated debt, cumulative
preferred shares and certain other subordinated debt.
All banks must meet minimum ratios of Tier I and
Tier II capital (less any capital deductions) to
risk-weighted assets, determined in accordance with Financial
Services Commission requirements that have been formulated based
on BIS standards. These standards were adopted and became
effective in 1996, and were amended effective January 1,
2008 upon the implementation by the Financial Supervisory
Service of Basel II. All domestic banks and foreign bank
branches must meet a minimum ratio of Tier I and
Tier II capital (less any capital deductions) to
risk-weighted assets of 8%.
In November 2002, the Financial Supervisory Service amended the
Enforcement Detailed Rules on the Supervision of the Banking
Business to include a more conservative risk-weighting system
for certain newly extended home mortgage loans, which set the
risk-weighted ratios of Korean banks in respect of home mortgage
loans between 50% and 70% depending on the borrower’s debt
ratio and whether the home mortgage loans are overdue. On
June 28, 2007, the Financial Supervisory Service further
amended the Enforcement Detailed Rules on the Supervision of the
Banking Business and, as a result, the following risk-weight
ratios must be applied by Korean banks in respect of home
mortgage loans from January 1, 2008:
(1) for those banks which adopted a standardized approach
for calculating credit risk capital requirements, a risk-weight
ratio of 35%; and
(2) for those banks which adopted an internal ratings-based
approach for calculating credit risk capital requirements, a
risk-weight ratio calculated with reference to the probability
of default, loss given default and exposure at default, each as
defined under the Enforcement Detailed Rules on the Supervision
of the Banking Business.
Under the Regulation on the Supervision of the Banking Business
most recently amended on December 31, 2009, banks must
generally maintain allowances for credit losses in respect of
their outstanding loans and other credits (including guarantees,
and acceptances and trust account loans) in an aggregate amount
covering not less than:
| • | 0.85% of normal credits (or 0.9% in the case of normal credits comprising loans to borrowers in the construction, wholesale and retail, accommodation and restaurant or real estate and housing industries (as classified under the Korean Industry Classification Standard), 1.0% in the case of normal credits comprising loans to individuals and households, and 1.5% in the case of normal credits comprising outstanding credit card receivables and card loans); | |
| • | 7% of precautionary credits (or 10% in the case of precautionary credits comprising loans to individuals and households, and 15% in the case of precautionary credits comprising outstanding credit card receivables and card loans); | |
| • | 20% of substandard credits; |
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| • | 50% of doubtful credits (or 55% in the case of doubtful credits comprising loans to individuals and households, and 60% in the case of doubtful credits comprising outstanding credit card receivables and card loans); and | |
| • | 100% of estimated loss credits. |
Furthermore, under a recent amendment to the Regulation on the
Supervision of the Banking Business, Korean banks must establish
allowances in respect of any confirmed guarantees (including
confirmed acceptances) and outstanding unused credit line as of
the date of settlement in an aggregate amount calculated at the
same rates applicable to normal, precautionary, substandard and
doubtful credits comprising their outstanding loans and other
credits as set forth above.
See “— Recent Regulations Relating to Retail
Household Loans” and “— Credit Card
Business.”
Liquidity
All banks are required to ensure adequate liquidity by matching
the maturities of their assets and liabilities in accordance
with the Rules on the Supervision of the Banking Business. Banks
may not invest an amount exceeding 60% of their Tier I and
Tier II capital (less any capital deductions) in stocks and
other securities with a maturity of over three years. This
stipulation does not apply to Korean government bonds or to
Monetary Stabilization Bonds issued by the Bank of Korea. The
Financial Services Commission also requires each Korean bank to:
| • | maintain a Won liquidity ratio (defined as Won assets due within one month, including marketable securities, divided by Won liabilities due within one month) of not less than 100% and to make monthly reports to the Financial Supervisory Service; | |
| • | maintain a foreign currency liquidity ratio (defined as foreign currency liquid assets due within three months divided by foreign currency liabilities due within three months) of not less than 85%; | |
| • | maintain a ratio of foreign currency liquid assets due within seven days less foreign currency liabilities due within seven days, divided by total foreign currency assets, of not less than negative 3%; | |
| • | maintain a ratio of foreign currency liquid assets due within a month less foreign currency liabilities due within a month, divided by total foreign currency assets, of not less than negative 10%; and | |
| • | submit monthly reports with respect to the maintenance of these ratios. |
The Monetary Policy Committee of the Bank of Korea is empowered
to fix and alter minimum reserve requirements that banks must
maintain against their deposit liabilities. The current minimum
reserve ratio is:
| • | 7% of average balances for Won currency demand deposits outstanding; | |
| • | 0% of average balances for Won currency employee asset establishment savings deposits, employee long-term savings deposits, employee house purchase savings deposits, long-term house purchase savings deposits, household long-term savings deposits and employee preferential savings deposits outstanding; and | |
| • | 2% of average balances for Won currency time and savings deposits, mutual installments, housing installments and certificates of deposit outstanding. |
For foreign currency deposit liabilities, a 2% minimum reserve
ratio is applied to time deposits with a maturity of one month
or longer, certificates of deposit with a maturity of
30 days or longer and savings deposits with a maturity of
six months or longer and a 7% minimum reserve ratio is applied
to demand deposits and other deposits. A 1% minimum reserve
ratio applies to offshore accounts, immigrant accounts and
resident accounts opened by foreign exchange banks.
Furthermore, pursuant to the Regulation on Supervision of
Banking Business issued by the Financial Services Commission as
amended by Notice
No. 2009-65
dated December 31, 2009, beginning on July 1, 2010,
foreign exchange agencies, including our subsidiary Kookmin
Bank, will be required to hold “foreign currency safe
assets” in an aggregate amount that is not less than the
lower of (i) the product of (x) its total foreign
currency-denominated debt maturing in one year or less
multiplied by
2
/
12
and (y) an amount equal to one minus the “lowest
rollover ratio”
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and (ii) 2% of its total foreign currency-denominated
assets as shown in the balance sheet for the immediately
preceding quarter. The “lowest rollover ratio” of a
foreign exchange agency means the ratio of (A) its total
debt with a maturity of one year or less (excluding overnight
money) incurred in a particular month to (B) its total debt
with maturity of one year or less (excluding overnight money)
payable in that particular month, and is calculated by taking
the lowest three month average from a period to be designated by
the governor of the Financial Supervisory Service. Under the new
regulation, foreign currency debt includes financial bonds,
borrowings, call monies and repurchase selling denominated in
foreign currencies and such other similar debt instruments
denominated in a foreign currency as designated by the governor
of the Financial Supervisory Service. “Foreign currency
safe assets” are defined as cash denominated in foreign
currency, deposits denominated in foreign currency with a
central bank or financial institutions rated A or above, bonds
issued or guaranteed by a government or central bank rated A or
above or corporate bonds issued or guaranteed by corporations
rated A or above. Accordingly, we may be required to acquire
further foreign currency safe assets. Effective from
January 1, 2010, the new regulation also increased the
minimum “mid- to long-term foreign exchange funding
ratio” applicable to foreign exchange agencies, including
us, from 80% to 90%. “Mid-to long term foreign exchange
funding ratio” refers to the ratio of (1) the total
outstanding amount of foreign exchange borrowing with a maturity
of more than one year to (2) the total outstanding amount
of foreign exchange lending with a maturity of one year or more.
Financial
Exposure to Any Individual Customer and Major
Shareholder
Under the Bank Act, the sum of large exposures by a
bank — in other words, the total sum of its credits to
single individuals, juridical persons or business groups that
exceed 10% of the sum of Tier I and Tier II capital
(less any capital deductions) — generally must not
exceed five times the sum of Tier I and Tier II
capital (less any capital deductions). In addition, banks
generally may not extend credit (including loans, guarantees,
purchases of securities (only in the nature of a credit) and any
other transactions that directly or indirectly create credit
risk) in excess of 20% of the sum of Tier I and
Tier II capital (less any capital deductions) to a single
individual or juridical person, or grant credit in excess of 25%
of the sum of Tier I and Tier II capital (less any
capital deductions) to a single group of companies as defined in
the Monopoly Regulations and Fair Trade Act.
Amendments to the Bank Act which became effective on
July 28, 2002 strengthened restrictions on extending
credits to a major shareholder. A “major shareholder”
is defined as:
| • | a shareholder holding (together with persons who have a special relationship with that shareholder) in excess of 10%; (or 15% in the case of regional banks) in the aggregate of the bank’s total issued voting shares; or | |
| • |
a shareholder holding (together with persons who have a special
relationship with that shareholder) in excess of 4% in the
aggregate of the bank’s (excluding regional banks) total
issued voting shares (excluding shares subject to the
shareholding restrictions on “non-financial business group
companies” as described below), where the shareholder is
the largest shareholder or has actual control over the major
business affairs of the bank through, for example, appointment
and dismissal of the officers pursuant to the Enforcement Decree
of the Bank Act. Non-financial business group companies
primarily consist of: (i) any single shareholding group
whose non-financial company assets comprise no less than 25% of
its aggregate net assets; (ii) any single shareholding
group whose non-financial company assets comprise no less than
|
Under these amendments, banks may not extend credits to a major
shareholder (together with persons who have a special
relationship with that shareholder) in an amount greater than
the lesser of (x) 25% of the sum of the bank’s
Tier I and Tier II capital (less any capital
deductions) and (y) the relevant major shareholders’
shareholding ratio multiplied by the sum of the bank’s
Tier I and Tier II capital (less any capital
deductions). In addition, the total sum of credits granted to
all major shareholders must not exceed 25% of the bank’s
Tier I and Tier II capital (less any capital
deductions).
Interest
Rates
Korean banks generally depend on deposits as their primary
funding source. Under the Act on Registration of Credit Business
and Protection of Finance Users, interest rates on loans made by
registered banks in Korea may not
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exceed 49% per annum. Historically, interest rates on deposits
and lending rates were regulated by the Monetary Policy
Committee. Controls on deposit interest rates in Korea have been
gradually reduced and, in February 2004, the Korean government
removed restrictions on all interest rates, except for the
prohibition on interest payments on current account deposits.
This deregulation process has increased competition for deposits
based on interest rates offered and, therefore, may increase a
bank’s interest expense.
Lending
to Small- and Medium-sized Enterprises
In order to obtain funding from the Bank of Korea at
concessionary rates for their small- and medium-sized enterprise
loans, banks are required to allocate a certain minimum
percentage of any quarterly increase in their Won currency
lending to small- and medium-sized enterprises. Currently, this
minimum percentage is 45% in the case of nationwide banks and
60% in the case of regional banks. If a bank does not comply
with this requirement, the Bank of Korea may:
| • | require the bank to prepay all or a portion of funds provided to that bank in support of loans to small-and medium-sized enterprises; or | |
| • | lower the bank’s credit limit. |
Disclosure
of Management Performance
For the purpose of protecting depositors and investors in
commercial banks, the Financial Services Commission requires
commercial banks to publicly disclose certain material matters,
including:
| • | financial condition and profit and loss of the bank and its subsidiaries; | |
| • | fund raising by the bank and the appropriation of such funds; | |
| • | any sanctions levied on the bank under the Bank Act or any corrective measures or sanctions under the Law on Improvement of Structure of Financial Industry; and | |
| • | except as may otherwise have been disclosed by a bank or its financial holding company listed on the KRX KOSPI Market in accordance with the Financial Investment Services and Capital Markets Act, occurrence of any of the following events listed below or any other event as prescribed by the applicable regulations: |
(i) loans bearing no profit made to a single business group
in an amount exceeding 10% of the sum of the bank’s
Tier I and Tier II capital (less any capital
deductions) as of the end of the previous month (where the loan
exposure to that borrower is calculated as the sum of
substandard credits, doubtful credits and estimated loss
credits), unless the loan exposure to that group is not more
than
W
4 billion;
(ii) the occurrence of any financial incident involving
embezzlement, malfeasance or misappropriation of funds in an
amount exceeding 1% of the sum of the bank’s Tier I
and Tier II capital (less any capital deductions), unless
the bank has lost or expects to lose not more than
W
1 billion as a result of that financial
incident, or the governor of the Financial Supervisory Service
has made a public announcement regarding the incident; and
(iii) any loss due to court judgments or similar decisions
in civil proceedings in an amount exceeding 1% of the sum of the
bank’s Tier I and Tier II capital (less any
capital deductions) as of the end of the previous month, unless
the loss is not more than
W
1 billion.
Restrictions
on Lending
Pursuant to the Bank Act, commercial banks may not provide:
| • | loans for the purpose of speculation in commodities or securities; | |
| • | loans directly or indirectly secured by a pledge of a bank’s own shares, or secured by a pledge of shares in excess of 20% of the issued and outstanding shares of any other corporation (subject to certain exceptions with respect to financing for infrastructure projects); |
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| • | loans directly or indirectly to enable a natural or juridical person to buy the bank’s own shares; | |
| • | loans directly or indirectly to finance political campaigns or related activities; | |
| • |
loans to any of the bank’s officers or employees, other
than petty loans of up to
|
|
| • | credit (including loans) secured by a pledge of shares of a subsidiary corporation of the bank or to enable a natural or juridical person to buy shares of a subsidiary corporation of the bank; or | |
| • |
loans to any officers or employees of a subsidiary corporation
of the bank, other than general loans of up to
|
Recent
Regulations Relating to Retail Household Loans
The Financial Services Commission implemented a number of
changes in recent years to the mechanisms by which a bank
evaluates and report its retail household loan balances and has
proposed implementing further changes. As a result of the rapid
increase in retail household loans and related credit risks, the
Financial Services Commission and the Financial Supervisory
Service increased the minimum provisioning requirements for
retail household loans. These requirements, set forth in the
following table, became effective on December 31, 2006:
|
Provisioning Ratio
|
||||||||
| On Retail Household Loans | ||||||||
| Asset Quality Classification | Before | Current | ||||||
|
Normal
|
0.75% or above | 1.0% or above | ||||||
|
Precautionary
|
8.0% or above | 10.0% or above | ||||||
|
Substandard
|
20.0% or above | 20.0% or above | ||||||
|
Doubtful
|
55.0% or above | 55.0% or above | ||||||
|
Estimated loss
|
100.0% | 100.0% | ||||||
In addition, due to a rapid increase in the number of loans
secured by homes and other forms of housing, the Financial
Services Commission and the Financial Supervisory Service
implemented regulations designed to curtail extension of new or
refinanced loans secured by housing, including the following:
| • | as to loans secured by a collateral of housing located nationwide, the loan-to-value ratio (the aggregate principal amount of loans secured by such collateral over the appraised value of the collateral) should not exceed 60%; | |
| • | as to loans secured by collateral of housing located in areas of excessive investment as designated by the government, (i) the loan-to-value ratio for loans with a maturity of not more than three years should not exceed 50% and (ii) the loan-to-value ratio for loans with a maturity of more than three years should not exceed 60%; | |
| • | as to loans secured by collateral of housing located outside of Seoul, Incheon and Gyeong-gi province, which housing was offered for sale on or before June 10, 2008 and with respect to which a sale contract is executed and earnest money deposit paid during the period between June 11, 2008 and June 30, 2009, the loan-to-value ratio should not exceed 70%; | |
| • |
as to loans secured by apartments located in areas of high
speculation as designated by the government, (i) the
loan-to-value ratio for loans with a maturity of not more than
ten years should not exceed 40%; and (ii) the loan-to-value
ratio for loans with a maturity of more than ten years should
not exceed (a) 40%, if the price of such apartment is over
|
|
| • |
as to loans secured by apartments with appraisal value of more
than
|
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| total payment amount of (x) the principal of and interest on loans secured by such apartment(s) and (y) the interest on other debts of the borrower over (ii) the borrower’s annual income) should not exceed 40%; |
| • | as to apartments located in areas of high speculation as designated by the government, a borrower is permitted to have only one new loan secured by such apartment; | |
| • | where a borrower has two or more loans secured by apartments located in areas of high speculation as designated by the government, the loan with the earliest maturity date must be repaid first and the number of loans must be eventually reduced to one; and | |
| • | in the case of a borrower (i) whose spouse already has a loan secured by housing or (ii) who is single and under 30 years old, the debt-to-income ratio of the borrower in respect of loans secured by apartment(s) located in areas of high speculation as designated by the government should not exceed 40%. |
See “Item 3D. Risk Factors — Risks relating
to government regulation and policy — Government
regulation of retail lending, particularly mortgage and home
equity lending, has recently become more stringent, which may
adversely affect our retail banking operations.”
Restrictions
on Investments in Property
A bank may possess real estate property only to the extent
necessary for the conduct of its business, unless the aggregate
value of that property does not exceed 60% of the sum of the
bank’s Tier I and Tier II capital (less any
capital deductions). Any property that a bank acquires by
exercising its rights as a secured party, or which a bank is
prohibited from acquiring under the Bank Act, must be disposed
of within one year.
Restrictions
on Shareholdings in Other Companies
Under the Bank Act, a bank may not own more than 15% of shares
outstanding with voting rights of another corporation, except
where, among other reasons:
| • | that corporation engages in a category of financial businesses set forth by the Financial Services Commission; or | |
| • | the acquisition is necessary for the corporate restructuring of the corporation and is approved by the Financial Services Commission. |
In the above exceptional cases, a bank must satisfy either of
the following requirements:
| • | the total investment in corporations in which the bank owns more than 15% of the outstanding shares with voting rights does not exceed 15% of the sum of Tier I and Tier II capital (less any capital deductions); or | |
| • | the acquisition satisfies the requirements determined by the Financial Services Commission. |
The Bank Act provides that a bank using its bank accounts and
its trust accounts may not acquire the shares of another
corporation that is a major shareholder of the bank in excess of
an amount equal to 1% of the sum of Tier I and Tier II
capital (less any capital deductions).
Restrictions
on Bank Ownership
Under the Bank Act, a single shareholder and persons who have a
special relationship with that shareholder generally may acquire
beneficial ownership of no more than 10% of a nationwide
bank’s total issued and outstanding shares with voting
rights and no more than 15% of a regional bank’s total
issued and outstanding shares with voting rights. The Korean
government, the Korea Deposit Insurance Corporation and bank
holding companies qualifying under the Financial Holding Company
Act are not subject to this limit. However, non-financial
business group companies may not acquire beneficial ownership of
shares of a nationwide bank in excess of 9% of that bank’s
outstanding voting shares, unless they obtain the approval of
the Financial Services Commission and agree not to exercise
voting rights in respect of shares in excess of the 9% limit, in
which case they may acquire beneficial ownership of up to 10% of
a nationwide bank’s outstanding voting shares. In addition,
if a foreign investor, as defined in the Foreign Investment
Promotion Act, owns in excess of 4% of a nationwide bank’s
outstanding voting
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shares, non-financial business group companies may acquire
beneficial ownership of up to 10% of that bank’s
outstanding voting shares, and in excess of 10%, 25% or 33% of
that bank’s outstanding voting shares with the approval of
the Financial Services Commission in each instance, up to the
number of shares owned by the foreign investor. Any other person
(whether a Korean national or a foreign investor), with the
exception of non-financial business group companies described
above, may acquire no more than 10% of a nationwide bank’s
total voting shares issued and outstanding, unless they obtain
approval from the Financial Services Commission in each instance
where the total holding will exceed 10% (or 15% in the case of
regional banks), 25% or 33% of the bank’s total voting
shares issued and outstanding provided that, in addition to the
foregoing threshold shareholding ratios, the Financial Services
Commission may, at its discretion, designate a separate and
additional threshold shareholding ratio.
Deposit
Insurance System
The Depositor Protection Act provides insurance for certain
deposits of banks in Korea through a deposit insurance system.
Under the Depositor Protection Act, all banks governed by the
Bank Act are required to pay an insurance premium to the Korea
Deposit Insurance Corporation on a quarterly basis. The rate is
determined under the Enforcement Decree to the Depositor
Protection Act, and may not exceed 0.5% of the bank’s
insurable deposits in any given year. The current insurance
premium is 0.02% of insurable deposits for each quarter. If the
Korea Deposit Insurance Corporation makes a payment on an
insured amount, it will acquire the depositors’ claims with
respect to that payment amount. The Korea Deposit Insurance
Corporation insures a maximum of
W
50 million for deposits and interest,
regardless of when the deposits were made and the size of the
deposits.
Restrictions
on Foreign Exchange Position
Under the Korean Foreign Exchange Transaction Law, each of a
bank’s net overpurchased and oversold positions may not
exceed 50% of its shareholders’ equity as of the end of the
prior month.
Laws and
Regulations Governing Other Business Activities
A bank must register with the Ministry of Strategy and Finance
to enter the foreign exchange business, which is governed by the
Foreign Exchange Transaction Law. A bank must obtain the
permission of the Financial Services Commission to enter the
securities business, which is governed by regulations under the
Financial Investment Services and Capital Markets Act. Under
these laws, a bank may engage in the foreign exchange business,
securities repurchase business, governmental/public bond
underwriting business and governmental bond dealing business.
Trust Business
A bank must obtain approval from the Financial Services
Commission to engage in trust businesses. The Trust Act and
the Financial Investment Services and Capital Markets Act govern
the trust activities of banks, and they are subject to various
legal and accounting procedures and requirements, including the
following:
| • | under the Bank Act, assets accepted in trust by a bank in Korea must be segregated from other assets in the accounts of that bank, which requires that banks engaged in both banking and trust businesses must maintain two separate accounts and two separate sets of records; and | |
| • | depositors and other general creditors cannot obtain or assert claims against the assets comprising the trust accounts in the event the bank is liquidated or wound-up. |
The bank must make a special reserve of 25% or more of fees from
each unspecified money trust account for which a bank guarantees
the principal amount and a fixed rate of interest until the
total reserve for that account equals 5% of the trust amount.
Since January 1999, the Korean government has prohibited Korean
banks from offering new guaranteed fixed rate trust account
products whose principal and interest are guaranteed.
Under the Financial Investment Services and Capital Markets Act,
which became effective in February 2009, a bank with a trust
business license (such as Kookmin Bank) is permitted to offer
both specified money trust account products and unspecified
money trust account products. Previously, banks were not
permitted to offer unspecified
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money trust account products pursuant to the Indirect Investment
Asset Management Act, which is no longer in effect following the
effectiveness of the Financial Investment Services and Capital
Markets Act.
Credit
Card Business
General
In order to enter the credit card business, a bank must register
with the Financial Services Commission. Credit card businesses
are governed by the Specialized Credit Financial Business Act,
enacted on August 28, 1997 and last amended on
March 12, 2010, which sets forth specific requirements with
respect to the credit card business as well as generally
prohibiting unsound business practices relating to the credit
card business which may infringe on the rights of credit card
holders or negatively affect the soundness of the credit card
industry. A registered bank engaging in the credit card business
is regulated by the Financial Services Commission and the
Financial Supervisory Service.
Disclosure
and Reports
Pursuant to the Specialized Credit Financial Business Act, a
registered bank engaging in the credit card business must submit
its business reports and reports with respect to its results of
operations to the Governor of the Financial Supervisory Service
within one month from the end of each quarter and each month.
Risk of
Loss Due to Lost, Stolen, Forged or Altered Credit
Cards
Under the Specialized Credit Financial Business Act, a
registered bank engaging in the credit card business is liable
for any loss arising from the unauthorized use of credit cards
or debit cards after it has received notice from the holder of
the loss or theft of the card. A registered bank engaging in the
credit card business is also responsible for any losses
resulting from the use of forged or altered credit cards, debit
cards and pre-paid cards. A registered bank engaging in the
credit card business may, however, transfer all or part of this
latter risk of loss to holders of credit card in the event of
willful misconduct or gross negligence by holders of credit card
if the terms and conditions of the agreement entered between the
registered bank engaging in the credit card business and members
of such cards specifically provide for that transfer.
For these purposes, disclosure of a customer’s password
that is made intentionally or through gross negligence, or the
transfer of or giving as collateral of the credit card or debit
card, is considered willful misconduct or gross negligence.
However, a disclosure of a cardholder’s password that is
made under irresistible force or threat to cardholder or
his/her
relatives’ life or health will not be deemed as willful
misconduct or negligence of the cardholder.
Each registered bank engaging in the credit card business must
institute appropriate measures to fulfill these obligations,
such as establishing provisions, purchasing insurance or joining
a cooperative association.
Pursuant to the Enforcement Decree to Specialized Credit
Financial Business Act, a registered bank engaging in the credit
card business will be liable for any losses arising from loss or
theft of a credit card (which was not from the holder’s
willful misconduct or negligence) during the period beginning
60 days before the notice by the holder to the registered
bank engaging in the credit card business.
Pursuant to the Specialized Credit Financial Business Act, the
Financial Services Commission may either restrict the limit or
take other necessary measures against the registered bank
engaging in the credit card business with respect to such
matters as the maximum limits on the amount per credit card,
details of credit card terms and conditions, management of
credit card merchants and collection of claims, including the
following:
| • | maximum limits for cash advances on credit cards; | |
| • | use restrictions on debit cards with respect to per day or per transaction usage; | |
| • | aggregate issuance limits and maximum limits on the amount per card on pre-paid cards; and | |
| • | other matters prescribed by the Enforcement Decree to the Specialized Credit Financial Business Act. |
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Lending
Ratio in Ancillary Business
Pursuant to the Enforcement Decree to the Specialized Credit
Financial Business Act issued in December 2003, a registered
bank engaging in the credit card business must maintain an
aggregate quarterly average outstanding lending balance to
credit cardholders (including cash advances and credit card
loans, but excluding restructured loans) no greater than the sum
of (i) its aggregate quarterly average outstanding credit
card balance arising from the purchase of goods and services and
(ii) the aggregate quarterly debit card transaction volume.
Issuance
of New Cards and Solicitation of New Cardholders
The Enforcement Decree to the Specialized Credit Financial
Business Act establishes the conditions under which a registered
bank engaging in the credit card business may issue new cards
and solicit new members. New credit cards may be issued only to
the following persons:
| • | persons who are at least 18 years old when they apply for a credit card; | |
| • | persons whose capability to pay bills as they come due has been verified using standards established by the registered bank engaging in the credit card business; and | |
| • | in the case of minors who are at least 18 years and younger than 20 years, persons who submit a guardian’s consent along with documents evidencing income, such as an employment certificate or a tax certificate. |
In addition, a registered bank engaging in the credit card
business may not solicit credit card members by:
| • | providing economic benefits or promising to provide economic benefits in excess of 10% of the annual credit card fee (in the case of credit cards with annual fees that are less than the average of the annual fees charged by the major credit cards in Korea, the annual fee will be deemed to be equal to such average annual fee) in connection with issuing a credit card; | |
| • | soliciting applicants on roads, public places or along corridors used by the general public; | |
| • | soliciting applicants through visits, except those visits made upon prior consent and visits to a business area; | |
| • | soliciting applicants through the Internet without verifying whether the applicant is who he or she purports to be, by means of a certified digital signature under the Digital Signature Act; and | |
| • | soliciting applicants through pyramid sales methods. |
Compliance
Rules on Collection of Receivable Claims
Pursuant to Supervisory Regulation on the Specialized Credit
Financial Business, a registered bank engaging in the credit
card business may not:
| • | exert violence or threaten violence; | |
| • | inform a related party (a guarantor of the debtor, blood relative or fiancée of the debtor, a person living in the same household as the debtor or a person working in the same workplace as the debtor) of the debtor’s obligations without just cause; | |
| • | provide false information relating to the debtor’s obligation to the debtor or his or her related parties; | |
| • | threaten to sue or sue the debtor for fraud despite lack of affirmative evidence to establish that the debtor has submitted forged or false documentation with respect to his/her capacity to make payment; | |
| • | visit or telephone the debtor during late evening hours (between the hours of 9:00 p.m. and 8:00 a.m.); and | |
| • | utilize other uncustomary methods to collect the receivables that interfere with the privacy or the peace in the workplace of the debtor or his or her related parties. |
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Regulations
on Class Actions Regarding Securities
The Law on Class Actions Regarding Securities was enacted
as of January 20, 2004, last amended on March 31,
2010. The Law on Class Actions Regarding Securities governs
class actions suits instituted by one or more representative
plaintiff(s) on behalf of 50 or more persons who claim to have
been damaged in a capital markets transaction involving
securities issued by a listed company in Korea.
Applicable causes of action with respect to such suits include:
| • | claims for damages caused by misleading information contained in a securities statement; | |
| • | claims for damages caused by the filing of a misleading business report, semi-annual report, or quarterly report; | |
| • | claims for damages caused by insider trading or market manipulation; and | |
| • | claims instituted against auditors for damages caused by accounting irregularities. |
Any such class action may be instituted upon approval from the
presiding court and the outcome of such class action will have a
binding effect on all potential plaintiffs who have not joined
the action, with the exception of those who have filed an opt
out notice with such court.
The Law on Class Actions Regarding Securities took effect
on January 1, 2007 with respect to companies with a total
asset value of less than
W
2 trillion, and took
effect on January 1, 2005 for all other companies and will
apply retroactively to all applicable claims arising out of acts
committed since its enactment.
An amendment of the new law delayed its effectiveness until
December 31, 2006 with respect to claims against companies
and their auditors in cases where such companies took steps to
correct any accounting irregularities.
Financial
Investment Services and Capital Markets Act
On July 3, 2007, the National Assembly of Korea passed the
Financial Investment Services and Capital Markets Act, a new law
consolidating six laws regulating capital markets. The Financial
Investment Services and Capital Markets Act became effective in
February 2009. Prior to the effective date, certain procedural
matters were initiated from July 2008, as discussed further
below.
The following is a summary of the major changes introduced under
the Financial Investment Services and Capital Markets Act.
Consolidation
of Capital Markets-Related Laws
Prior to the effectiveness of the Financial Investment Services
and Capital Markets Act, there were separate laws regulating
various types of financial institutions depending on the type of
financial institution (for example, securities companies,
futures companies, trust business companies and asset management
companies) and subjecting financial institutions to different
licensing and ongoing regulatory requirements (for example, the
Securities and Exchange Act, the Futures Business Act and the
Indirect Investment Asset Management Business Act). By applying
one uniform set of rules to the same financial business having
the same economic function, the Financial Investment Services
and Capital Markets Act attempts to improve and address issues
caused by the current regulatory system under which the same
economic function relating to capital markets-related businesses
are governed by multiple regulations. To this end, the Financial
Investment Services and Capital Markets Act categorizes capital
markets-related businesses into six different functions, as
follows:
| • | dealing (trading and underwriting of “financial investment products” (as defined below)), | |
| • | brokerage (brokerage of financial investment products), | |
| • | collective investment (establishment of collective investment schemes and the management thereof), | |
| • | investment advice, |
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Table of Contents
| • | discretionary investment management, and | |
| • | trusts (together with the five businesses set forth above, the “Financial Investment Businesses”). |
Therefore, all financial businesses relating to financial
investment products have been reclassified as one or more of the
Financial Investment Businesses described above, and financial
institutions are subject to the regulations applicable to their
relevant Financial Investment Business(es), irrespective of the
type of the financial institution (for example, in principle,
derivative businesses conducted by former securities companies
and futures companies are subject to the same regulations under
the Financial Investment Services and Capital Markets Act).
The banking business and insurance business are not subject to
the Financial Investment Services and Capital Markets Act and
continue to be regulated under separate laws. However, they may
become subject to the Financial Investment Services and Capital
Markets Act if their activities involve any financial investment
businesses requiring a license pursuant to the Financial
Investment Services and Capital Markets Act.
Comprehensive
Definition of Financial Investment Products
In an effort to encompass the various types of securities and
derivative products available in the capital markets, the
Financial Investment Services and Capital Markets Act sets forth
a comprehensive term “financial investment products,”
defined to mean all financial products with a risk of loss in
the invested amount (in contrast to “deposits,” which
are financial products for which the invested amount is
protected or preserved). Financial investment products are
classified into two major categories:
(i) “securities” (relating to financial
investment products where the risk of loss is limited to the
invested amount) and (ii) “derivatives” (relating
to financial investment products where the risk of loss may
exceed the invested amount). As a result of the general and
open-ended manner in which financial investment products are
defined, any future financial product could potentially come
within the scope of the definition of financial investment
products, thereby enabling Financial Investment Companies (as
defined below) to handle a broader range of financial products.
Under the Financial Investment Services and Capital Markets Act,
securities companies, asset management companies, futures
companies and other entities engaging in any Financial
Investment Business are classified as “Financial Investment
Companies.”
New
License System and the Conversion of Existing Licenses
Under the Financial Investment Services and Capital Markets Act,
Financial Investment Companies are able to choose what Financial
Investment Business to engage in (via a “check the
box” method set forth in the relevant license application),
by specifying the desired (i) Financial Investment
Business, (ii) financial investment product and
(iii) target customers to which financial investment
products may be sold or dealt to (i.e., general investors or
professional investors). Licenses will be issued under the
specific business sub-categories described in the foregoing
sentence. For example, it would be possible for a Financial
Investment Company to obtain a license to engage in the
Financial Investment Business of (i) dealing (ii) over
the counter derivatives products (iii) only with
sophisticated investors.
Financial institutions that engage in business activities
constituting a Financial Investment Business are required to
take certain steps, such as renewal of their license or
registration, in order to continue engaging in such business
activities. Financial institutions that are not licensed
Financial Investment Companies are not permitted to engage in
any Financial Investment Business, subject to the following
exceptions: (i) banks and insurance companies are permitted
to engage in certain categories of Financial Investment
Business; and (ii) other financial institutions that
engaged in any Financial Investment Business prior to the
effective date of the Financial Investment Services and Capital
Markets Act (whether in the form of a concurrent business or an
incidental business) are permitted to continue such Financial
Investment Business for a period not exceeding six months
commencing on the effective date of the Financial Investment
Services and Capital Markets Act.
Expanded
Business Scope of Financial Investment Companies
Under the previous regulatory system in Korea, it was difficult
for a financial institution to explore a new line of business or
expand upon its existing line of business. For example, a
financial institution licensed as a securities company generally
was not permitted to engage in the asset management business. In
contrast, under the Financial
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Investment Services and Capital Markets Act, pursuant to the
integration of its current businesses involving financial
investment products into a single Financial Investment Business,
a licensed Financial Investment Company is permitted to engage
in all types of Financial Investment Businesses, subject to
satisfying relevant regulations (for example, maintaining an
adequate “Chinese Wall,” to the extent required). As
to incidental businesses (i.e., a financial related business
which is not a Financial Investment Business), the Financial
Investment Services and Capital Markets Act generally allows a
Financial Investment Company to freely engage in such incidental
businesses by shifting away from the previous positive-list
system towards a more comprehensive system. In addition, a
Financial Investment Company is permitted to outsource marketing
activities by contracting “introducing brokers” that
are individuals but not employees of the Financial Investment
Company. Financial Investment Companies are permitted
(i) to engage in foreign exchange businesses related to
their Financial Investment Business and (ii) to participate
in the settlement network, pursuant to an agreement among the
settlement network participants.
Improvement
in Investor Protection Mechanism
While the Financial Investment Services and Capital Markets Act
widens the scope of financial businesses in which financial
institutions are permitted to engage, a more rigorous
investor-protection mechanism is also imposed upon Financial
Investment Companies dealing in financial investment products.
The Financial Investment Services and Capital Markets Act
distinguishes general investors from sophisticated investors and
provides new or enhanced protections to general investors. For
instance, the Financial Investment Services and Capital Markets
Act expressly provides for a strict know-your-customer rule for
general investors and imposes an obligation that Financial
Investment Companies should market financial investment products
suitable to each general investor, using written explanatory
materials. Under the Financial Investment Services and Capital
Markets Act, a Financial Investment Company could be liable if a
general investor proves (i) damage or losses relating to
such general investor’s investment in financial investment
products solicited by such Financial Investment Company and
(ii) the absence of the requisite written explanatory
materials, without having to prove fault or causation. With
respect to conflicts of interest between Financial Investment
Companies and investors, the Financial Investment Services and
Capital Markets Act expressly requires (i) disclosure of
any conflict of interest to investors and (ii) mitigation
of conflicts of interest to a comfortable level or abstention
from the relevant transaction.
Other
Changes of Securities/Fund Regulations
The Financial Investment Services and Capital Markets Act also
affected various securities regulations including those relating
to public disclosure, insider trading and proxy contests, which
were previously governed by the Securities and Exchange Act. For
example, the 5% and 10% reporting obligations under the
Securities and Exchange Act has become more stringent. The
Indirect Investment and Asset Management Business Act strictly
limited the kind of vehicles that could be utilized under a
collective investment scheme, restricting the range of potential
vehicles to trusts and corporations, and the type of funds that
can be used for investments. However, under the Financial
Investment Services and Capital Markets Act, these restrictions
have been significantly liberalized, permitting all vehicles
that may be created under Korean law, such as limited liability
companies or partnerships, to be used for the purpose of
collective investments and allowing investment funds to be much
more flexible as to their investments.
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| Item 4C. | Organizational Structure |
The following chart provides an overview of our structure,
including our significant subsidiaries and our ownership of such
subsidiaries as of the date of this annual report:
Our largest subsidiary is Kookmin Bank, the assets of which
represented approximately 99% of our total assets as of
December 31, 2009. The following table provides summary
information for our operating subsidiaries that are consolidated
in our consolidated financial statements as of and for the year
ended December 31, 2009, including their total assets, net
income, operating income and stockholders’ equity:
|
Operating
|
Stockholders’
|
|||||||||||||||
| Subsidiary | Total Assets | Income | Net Income | Equity | ||||||||||||
| (In millions of Won) | ||||||||||||||||
|
Kookmin Bank
|
|
251,748,020 |
|
784,137 |
|
563,844 |
|
17,097,996 | ||||||||
|
KB Investment & Securities Co., Ltd.
|
2,054,252 | (50,868 | ) | (43,024 | ) | 297,714 | ||||||||||
|
KB Asset Management Co., Ltd.
|
108,530 | 38,122 | 28,486 | 95,797 | ||||||||||||
|
KB Real Estate Trust Co., Ltd.
|
293,106 | 17,917 | 13,217 | 155,147 | ||||||||||||
|
KB Investment Co., Ltd.
|
133,753 | (420 | ) | (420 | ) | 112,504 | ||||||||||
|
KB Futures Co., Ltd.
|
215,199 | 7,829 | 6,026 | 31,418 | ||||||||||||
|
KB Credit Information Co., Ltd.
|
29,475 | 5,360 | 3,929 | 23,192 | ||||||||||||
|
KB Data Systems Co., Ltd.
|
44,824 | 6,312 | 4,773 | 16,248 | ||||||||||||
|
Kookmin Bank Hong Kong Ltd.
|
713,134 | 12,280 | 14,087 | 105,787 | ||||||||||||
|
Kookmin Bank International Ltd.
|
474,370 | 13,987 | 12,099 | 65,512 | ||||||||||||
|
KB Investment & Securities Hong Kong Ltd.
|
1,058 | (1,514 | ) | (1,514 | ) | 945 | ||||||||||
|
Kookmin Bank Cambodia PLC.
|
28,087 | (1,173 | ) | (1,185 | ) | 14,369 | ||||||||||
Further information regarding our subsidiaries is provided below:
| • | Kookmin Bank was established in Korea in 2001 as a result of the merger of the former Kookmin Bank (established in 1963) and H&CB (established in 1967). Kookmin Bank provides a wide range of banking and other financial services to individuals, small- and medium-sized enterprises and large corporations in Korea. As of December 31, 2009, Kookmin Bank was the largest commercial bank in Korea based upon total assets (including loans) and deposits. As of December 31, 2009, Kookmin Bank had more than 26 million customers, with 1,197 branches nationwide. | |
| • | KB Investment & Securities Co., Ltd. , was established in Korea in 1995 to provide various investment banking services. KB Investment & Securities was formerly known as Hannuri Investment & Securities Co., Ltd. and was acquired by Kookmin Bank on March 11, 2008. |
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| • | KB Asset Management Co., Ltd. was established in Korea in April 1988 as a subsidiary of Citizens Investment Trust Company to provide investment advisory services. | |
| • | KB Real Estate Trust Co., Ltd. was established in Korea in December 1996 to provide real estate development and brokerage services by managing trusts related to the real estate industry. | |
| • | KB Investment Co., Ltd. was established in Korea in March 1990 to invest in and finance small- and medium-sized enterprises. KB Investment was merged with Frontier Investment Co., Ltd. and Kookmin Venture Capital Co., Ltd. effective as of December 31, 2001 and June 27, 2002, respectively. | |
| • | KB Futures Co., Ltd. was established in Korea in March 1997 to act as a broker-dealer for domestic and overseas futures transactions. | |
| • | KB Credit Information Co., Ltd. was established in Korea in October 1999 to collect delinquent loans and to check credit history. KB Credit Information was merged with KM Credit Information Co., Ltd. on May 2, 2002. | |
| • | KB Data Systems Co., Ltd. was established in Korea in September 1991 to provide software services to us and other financial institutions. | |
| • | Kookmin Bank Hong Kong Ltd. was established in Hong Kong in July 1995 to provide a broad range of corporate banking services. | |
| • | Kookmin Bank International Ltd. was established in the United Kingdom in November 1991 to provide a broad range of corporate banking services. | |
| • | KB Investment & Securities Hong Kong Ltd. was established in Hong Kong in October 2002 to provide various investment banking services. | |
| • | Kookmin Bank Cambodia PLC was established in Cambodia in May 2009 to provide various banking services in Cambodia. | |
| • | KB Life Insurance Co., Ltd. , which is not a consolidated subsidiary under U.S. GAAP, was established in Korea in April 2004 to provide life insurance and wealth management products primarily through our branch network. | |
| • |
Other Subsidiaries.
For the year ended December 31,
2009, we derived an operating loss of
|
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| Item 4D. | Property, Plants and Equipment |
Our registered office and corporate headquarters are located at
9-1, 2-ga, Namdaemoon-ro, Jung-gu, Seoul
100-703,
Korea. The following table presents information regarding
certain of our properties in Korea:
| Type of Facility/Building | Location | Area | ||||
| (square meters) | ||||||
|
Registered office and corporate headquarters
|
9-1, 2-ga,
Namdaemoon-ro, Jung-gu, Seoul 100-703 |
1,749 | ||||
|
Kookmin Bank headquarters building
|
36-3, Yeouido-dong,
Yeongdeungpo-gu, Seoul 150-758 |
5,354 | ||||
|
Kookmin Bank headquarters building
|
Jongro-gu, Seoul | 3,704 | ||||
|
Kookmin Bank Training institute
|
Ilsan | 207,659 | ||||
|
Kookmin Bank Training institute
|
Daecheon | 4,158 | ||||
|
Kookmin Bank Training institute
|
Sokcho | 15,584 | ||||
|
Kookmin Bank Training institute
|
Cheonan | 196,649 | ||||
|
Kookmin Bank IT center
|
Gangseo-gu, Seoul | 13,116 | ||||
|
Kookmin Bank IT center
|
Yeouido, Seoul | 5,928 | ||||
|
Kookmin Bank IT center
|
Yeouido, Seoul | 2,006 | ||||
|
Kookmin Bank IT center
|
Seongbuk-gu, Seoul | 4,748 | ||||
As of December 31, 2009, we had a countrywide network of
1,197 banking branches and sub-branches, as well as 27 branches
for our other operations including credit information, real
estate and insurance-related businesses. Approximately
one-quarter of these facilities are housed in buildings owned by
us, while the remaining branches are leased properties. Lease
terms are generally from two to three years and seldom exceed
five years. We also have subsidiaries in Hong Kong, Cambodia and
the United Kingdom and branches of Kookmin Bank in Tokyo in
Japan, Auckland in New Zealand, New York in the United States
and Guangzhou and Harbin in China, as well as representative
offices of Kookmin Bank in Almaty in Kazakhstan, Ho Chi Minh
City in Vietnam and Kyiv in the Ukraine. We do not own any
material properties outside of Korea.
The net book value of all the properties owned by us at
December 31, 2009 was
W
1,260 billion.
| Item 4.A. | UNRESOLVED STAFF COMMENTS |
We do not have any unresolved comments from the
U.S. Securities and Exchange Commission staff regarding our
periodic reports under the Securities Exchange Act of 1934, as
amended, or the Exchange Act.
| Item 5. | OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
| Item 5A. | Operating Results |
Overview
The following discussion is based on our consolidated financial
statements, which have been prepared in accordance with
U.S. GAAP, except for (1) the segment analyses, which
are prepared based on Korean GAAP and (2) the selected
financial information under Korean GAAP, which is based on our
consolidated financial statements prepared in accordance with
Korean GAAP.
We were established 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, a new
financial holding company, and in return received shares of our
common stock. See “Item 4A. History and Development of
the Company — The Establishment of KB Financial
Group.” 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
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such noncontrolling interests of such subsidiaries was accounted
for using the purchase method. Accordingly, the consolidated
financial statements included in this annual report are, as of
dates and for periods prior to the date of the stock transfer,
for Kookmin Bank and its subsidiaries, and as of dates and for
periods from and after the date of the stock transfer, for us
and our subsidiaries, including Kookmin Bank. For further
information regarding the accounting treatment of the stock
transfer, see Note 3 of the notes to our consolidated
financial statements.
Trends
in the Korean Economy
Our financial position and results of operations have been and
will continue to be significantly affected by financial and
economic conditions in Korea.
Substantial growth in lending in Korea to small- and
medium-sized enterprises in recent years, and adverse economic
conditions in Korea and globally from the second half of 2008
and into 2009, have led to increasing delinquencies and a
deterioration in overall asset quality in the credit exposures
of Korean banks to small- and medium-sized enterprises. In 2009,
under Korean GAAP, we recorded charge-offs of
W
1,313 billion and provisions of
W
1,945 billion in respect of our loans to
small- and medium-sized enterprises, compared to charge-offs of
W
585 billion and provisions of
W
1,340 billion in 2008. See
“Item 3D. Risk Factors — Risks relating to
our small- and medium-sized enterprise loan portfolio.”
In recent years, commercial banks, credit card companies,
consumer finance companies and other financial institutions in
Korea have also made significant investments and engaged in
aggressive marketing in retail lending (including mortgage and
home equity loans), leading to substantially increased
competition in this segment. The rapid growth in retail lending,
together with adverse economic conditions from the second half
of 2008 and into 2009, have led to increasing delinquencies,
loan loss provisions, non-performing loans and charge-offs. In
2009, we recorded charge-offs of
W
362 billion in respect of our retail loan
portfolio, compared to charge-offs of
W
342 billion in 2008. See
“Item 3D. Risk Factors — Risks relating to
our retail credit portfolio.”
The Korean economy is closely tied to, and is affected by
developments in, the global economy. During the second and third
quarter of 2007, credit markets in the United States started to
experience difficult conditions and volatility that in turn have
affected worldwide financial markets. In particular, in late
July and early August 2007, market uncertainty in the
U.S. sub-prime mortgage sector increased dramatically and
further expanded to other markets such as those for leveraged
finance, collateralized debt obligations and other structured
products. In September and October 2008, liquidity and credit
concerns and volatility in the global financial markets
increased significantly with the bankruptcy or acquisition of,
and government assistance to, several major U.S. and
European financial institutions, including the bankruptcy filing
of Lehman Brothers, the acquisition of Merrill Lynch &
Co., Inc. by the Bank of America Corp., the acquisition of
Wachovia Corporation by Wells Fargo & Co.,
U.S. federal government conservatorship of the Federal Home
Loan Mortgage Corporation, the Federal National Mortgage
Association and Washington Mutual, Inc. and the
U.S. federal government’s loans to AIG in exchange for
an equity interest. These developments resulted in reduced
liquidity, greater volatility, widening of credit spreads and a
lack of price transparency in the United States and global
financial markets. In response to such developments, legislators
and financial regulators in the United States and other
jurisdictions, including Korea, have implemented a number of
policy measures designed to add stability to the financial
markets, including the provision of direct and indirect
assistance to distressed financial institutions. Such policy
measures implemented by the Korean government and the Bank of
Korea included a guarantee program to guarantee foreign
currency-denominated debt incurred by Korean banks and their
overseas branches, currency swap arrangements with U.S. and
Chinese monetary authorities, one-time interest payments to
Korean banks with respect to their required reserve deposits
with the Bank of Korea (which typically does not pay interest)
and the establishment of a
W
20 trillion bank
recapitalization fund (which purchased
W
1
trillion of hybrid Tier I securities from us in March
2009). In addition, in line with similar actions taken by
monetary authorities in other countries, from the third quarter
of 2008 to the first quarter of 2009, the Bank of Korea
decreased its policy rate by a total of 325 basis points in
order to address financial market instability and to help combat
the slowdown of the domestic economy. However, while the rate of
deterioration of the global economy slowed in the second half of
2009 and into 2010, with some signs stabilization and possible
improvement, the overall prospects for the Korean and global
economy in 2010 and beyond remain uncertain. For example, in
November 2009, the Dubai government announced a moratorium on
the outstanding debt of Dubai World, a government-affiliated
investment company. In addition, many governments worldwide, in
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particular in Greece and other countries in southern Europe, are
showing increasing signs of fiscal stress and may experience
difficulties in meeting their debt service requirements. Any of
these or other developments could potentially trigger another
financial and economic crisis. Furthermore, while many
governments worldwide are considering or are in the process of
implementing “exit strategies,” in the form of reduced
government spending, higher interest rates or otherwise, with
respect to the economic stimulus measures adopted in response to
the global financial crisis, such strategies may, for reasons
related to timing, magnitude or other factors, have the
unintended consequence of prolonging or worsening global
economic and financial difficulties. In light of the high level
of interdependence of the global economy, any of the foregoing
developments could have a material adverse effect on the Korean
economy and financial markets, and in turn on our business,
financial condition and results of operations.
We are also exposed to adverse changes and volatility in global
and Korean financial markets as a result of our liabilities and
assets denominated in foreign currencies and our holdings of
trading and investment securities, including structured
products. Beginning in the second half of 2008, the value of the
Won relative to major foreign currencies in general and the
U.S. dollar in particular has fluctuated widely. See
“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 an overall decline and continuing
volatility in securities prices, including the stock prices of
Korean and foreign companies in which we hold an interest, which
have resulted in and may lead to further trading and valuation
losses on our trading and investment securities portfolio as
well as impairment losses on our investments 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 4B. Business
Overview — Capital Markets Activities and
International Banking — International Banking.”
As a result of volatile conditions and weakness in the Korean
and global economies, as well as factors such as the uncertainty
surrounding the global financial markets, fluctuations in oil
and commodity prices, interest and exchange rate fluctuations,
higher unemployment, lower consumer confidence, a potential rise
in inflation rates and continued tensions with North Korea, the
economic outlook for the financial services sector in Korea in
2010 and for the foreseeable future remains uncertain.
New
Basel Capital Accord
Beginning on January 1, 2008, the Financial Supervisory
Service implemented Basel II in Korea, which has
substantially affected the way risk is measured among Korean
financial institutions, including Kookmin Bank. Building upon
the initial Basel Capital Accord of 1988, which focused
primarily on credit risk and market risk and on capital adequacy
and asset soundness as measures of risk, Basel II expands
this approach to contemplate additional areas of risk such as
operational risk when calculating risk-weighted assets. While
the implementation of Kookmin Bank’s internal ratings-based
approach in 2008 has increased its capital adequacy ratio and
led to a decrease in its credit risk-related capital
requirements as compared to those under its previous approach
under the initial Basel Capital Accord of 1988, there can be no
assurance that such internal ratings-based approach under
Basel II will not require an increase in Kookmin
Bank’s credit risk capital requirements in the future,
which may require it to either improve its asset quality or
raise additional capital. See “Item 5B. Liquidity and
Capital Resources — Financial Condition —
Capital Adequacy.”
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. After
further impact assessment, the Basel Committee on Banking
Supervision is expected to implement the new set of measures in
2012. The timing and scope of implementation of such measures in
Korea remain uncertain. The implementation of such measures in
Korea may have a significant effect on the capital requirements
of Korean financial institutions, including us.
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Changes
in Securities Values, Exchange Rates and Interest
Rates
Fluctuations of exchange rates, interest rates and stock prices
affect, among other things, the demand for our products and
services, the value of and rate of return on our assets, the
availability and cost of funding and the financial condition of
our customers. The following table shows, for the dates
indicated, the stock price index of all equities listed on the
KRX KOSPI Market as published in the KOSPI, the Won to
U.S. dollar exchange rates and benchmark Won borrowing
interest rates.
|
June 30,
|
Dec. 30,
|
June 30,
|
Dec. 29,
|
June 29,
|
Dec. 31,
|
June 30,
|
Dec. 30,
|
June 30,
|
Dec. 30,
|
|||||||||||||||||||||||||||||||
| 2005 | 2005 | 2006 | 2006 | 2007 | 2007 | 2008 | 2008 | 2009 | 2009 | |||||||||||||||||||||||||||||||
|
KOSPI
|
1,008.16 | 1,379.37 | 1,295.15 | 1,434.46 | 1,743.60 | 1,897.13 | 1,674.92 | 1,124.47 | 1,390.07 | 1,682.77 | ||||||||||||||||||||||||||||||
|
Won/US$ exchange
rates
(1)
|
|
1,034.5 |
|
1,010.0 |
|
948.5 |
|
930.0 |
|
922.6 |
|
935.8 |
|
1,046.8 |
|
1,257.4 |
|
1,273.5 |
|
1,163.7 | ||||||||||||||||||||
|
Corporate bond
rates
(2)
|
4.4 | % | 5.7 | % | 5.3 | % | 5.2 | % | 5.6 | % | 6.9 | % | 6.9 | % | 8.1 | % | 5.6 | % | 5.7 | % | ||||||||||||||||||||
|
Treasury bond
rates
(3)
|
4.0 | % | 5.1 | % | 4.9 | % | 4.9 | % | 5.3 | % | 5.7 | % | 5.9 | % | 3.4 | % | 4.2 | % | 4.4 | % | ||||||||||||||||||||
| (1) | Represents the noon buying rate on the dates indicated. | |
| (2) | Measured by the yield on three-year Korean corporate bonds rated as A+ by the Korean credit rating agencies. | |
| (3) | Measured by the yield on three-year treasury bonds issued by the Ministry of Strategy and Finance of Korea. |
Critical
Accounting Policies
The notes to our consolidated financial statements contain a
summary of our significant accounting policies, including a
discussion of recently issued accounting pronouncements. Certain
of these policies are critical to the portrayal of our financial
condition, since they require management to make difficult,
complex or subjective judgments, some of which may relate to
matters that are inherently uncertain. We discuss these critical
accounting policies below.
Allowance
for Credit Losses
We evaluate our credit portfolio for impairment on an ongoing
basis. We have established an allowance for credit losses, which
is available to absorb probable losses that have been incurred
in our credit portfolio as of the balance sheet date. If we
believe that additions or changes to the allowance for credit
losses are required, then we record provisions for credit
losses, which are treated as charges against current income.
Credit exposures that we deem to be uncollectible, including
actual credit losses, net of recoveries of previously
charged-off amounts, are charged directly against the allowance
for credit losses.
We base the level of our allowance for credit losses on an
evaluation of the risk characteristics of our credit portfolio.
The evaluation considers factors such as historical loss
experience, the financial condition of our borrowers and current
economic conditions. We evaluate corporate loans, consumer loans
and off-balance sheet credit instruments in different ways, due
to their respective characteristics, as follows:
| • | We generally evaluate impaired corporate loans individually, due to the unique characteristics of individual corporate borrowers, and establish an allowance for loan losses for such loans. As described in more detail in Note 1 of our consolidated financial statements, we consider a loan impaired when, after considering risk characteristics and current information and events, we believe it is probable that we will be unable to collect all amounts due under the contractual terms of the loan agreement, including principal and interest. Once we have identified loans as impaired, we generally value them either based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at a loan’s observable market price or the fair value of the collateral if a loan is collateral dependent. If the resulting value is less than the carrying value of the loan, we establish a specific allowance for the difference, which is deemed uncollectible. | |
| • | We also establish an allowance for loan losses for corporate loans that we do not believe are impaired. This allowance is established for each homogeneous pool of these loans based on our historical loss experience for these types of loans. |
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| • | We establish an allowance for losses related to leases based on historical loss experience for these types of loans. | |
| • | We generally evaluate consumer loans and certain smaller balance corporate loans, including mortgages and home equity loans and credit card balances, as individual pools for loan loss reserve purposes due to their homogeneous nature, and establish an allowance for loan losses relating to each pool based on historical loss experience. | |
| • | We establish an allowance for losses for off-balance sheet credit instruments based on the probability of usage and historical loss experience. |
Factors that we consider when establishing reserves for
homogeneous pools of corporate and consumer loans include, but
are not limited to, global and local economic events,
delinquencies and changes in underwriting and credit monitoring
policies.
We believe that the accounting estimate related to our allowance
for credit losses is a “critical accounting policy”
because: (1) it is highly susceptible to change from period
to period because it requires us to make assumptions about
future default rates and losses relating to our credit
portfolio; and (2) any significant difference between our
estimated credit losses (as reflected in our allowance for
credit losses) and actual credit losses could require us to take
additional provisions which, if significant, could have a
material impact on our net income. Our assumptions about
estimated losses require significant judgment because actual
losses have fluctuated in the past and are expected to continue
to do so, based on a variety of factors.
Our consolidated financial statements for the year ended
December 31, 2009 included a total allowance for credit
losses of
W
3,744 billion as of that date
(including allowances of
W
403 billion with
respect to off-balance sheet credit instruments). Our total loan
charge-offs, net of recoveries, amounted to
W
1,925 billion and we recorded a provision
for credit losses of
W
2,204 billion in
2009.
Valuation
of Securities and Financial Instruments
We invest in various financial instruments including debt and
equity securities, derivatives and securities in venture capital
activities. Depending on the accounting treatment specific to
each type of financial instrument, an estimate of fair value is
required to determine the instrument’s effect on our
consolidated financial statements.
Effective January 1, 2008, we adopted Statement of
Financial Accounting Standards (“SFAS”) No. 157
“Fair Value Measurements” (“ASC
820-10”),
which defines fair value as the price that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
We determine the fair value of our financial instruments that
are recognized or disclosed at fair value in the financial
statements on a recurring basis in accordance with ASC
820-10.
However, certain provisions of ASC
820-10
that
relate to non-financial assets and non-financial liabilities
that are not measured at fair value on a recurring basis were
adopted on January 1, 2009.
The fair value hierarchy established in ASC
820-10
requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair
value. Fair value is a market-based measure considered from the
perspective of a market participant. As such, even when market
assumptions are not readily available, our own assumptions
reflect those that market participants would use in pricing the
asset or liability at the measurement date. In accordance with
ASC
820-10,
we use the following three levels of inputs in measuring fair
value:
| • | Level 1: Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as certain securities that are highly liquid and are actively traded in over-the-counter markets. | |
| • | Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
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| • | Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques based on significant unobservable input data, as well as instruments for which the determination of fair value requires significant management judgment or estimation. |
The fair value for certain financial instruments is derived
using pricing models and other valuation techniques that involve
significant management judgment. The price transparency of
financial instruments is a key determinant of the degree of
judgment involved in measuring fair value of our financial
instruments. Financial instruments for which actively quoted
prices or pricing parameters are available will generally have a
higher degree of price transparency than those that are thinly
traded or not quoted. In accordance with ASC
820-10,
the
criteria we use to determine whether the market for a financial
instrument is active or inactive are based on the particular
asset or liability.
As a result of the adoption of ASC
820-10,
we
have made certain amendments to the techniques we use in
measuring the fair value of derivatives and other positions.
These amendments change the way that the probability of default
of a counterparty is factored into the valuation of derivative
positions and include the impact of our own credit risk on
derivatives and other liabilities measured at fair value.
In accordance with ASC
820-10,
we
maximize the use of observable inputs and minimize the use of
unobservable inputs when developing fair value measurements.
When market prices are available, we use quoted market prices to
measure fair value. If market prices are not available, fair
value measurements are based upon models that use primarily
market-based or independently-sourced market parameters,
including interest rate yield curves, prepayment speeds, option
volatilities and currency rates. We use either Level 1 or
Level 2 measurements to determine the fair value of most
financial instruments recorded in our financial statements.
However, in circumstances where market prices are limited or
unavailable, valuations may require significant management
judgments or adjustments that utilize significant unobservable
inputs, to determine fair value. In these cases, the applicable
financial instruments are classified as Level 3.
The following provides a brief description of our valuation
methodologies used to measure fair value by type of financial
instruments:
| • | Trading and available-for-sale securities and securities sold short, not yet purchased: The fair value of the securities included in trading assets, available-for-sale securities included in investments and securities in short position included in trading liabilities is recognized in our consolidated balance sheets based on quoted market prices, where available. For the securities traded in the over-the-counter market, we generally determine fair value utilizing internal valuation techniques or based on prices obtained from independent pricing services or brokers. Trading securities and available-for-sale securities recorded by using valuation methods and prices obtained from pricing services or brokers are generally classified as Level 2, except in cases where such quoted prices include unobservable inputs (such as estimates of cash flows, correlations among factors, recovery rates, etc.) to the models, in which case such financial instruments are classified as Level 3. We validate prices received from pricing services or brokers using a variety of methods, including, but not limited to, comparison to secondary pricing services, corroboration of pricing by reference to other independent market data such as secondary broker quotes and relevant benchmark indices, and review by our personnel who are familiar with market liquidity and other market-related conditions. We have internal price verification procedures and review fair value methodology documentation provided by independent pricing services. | |
| • | Other securities in venture capital activities: Other securities include venture capital securities. We carry venture capital investments traded publicly at fair value based on quoted market prices. If significant inputs (such as estimates of cash flows, yield curves and credit spreads) to the fair value measurement for such securities are unobservable in the market due to limited activity, such securities are classified as Level 3. | |
| • | Derivatives assets and liabilities: The majority of derivatives we enter into are traded in over-the-counter markets, and no quoted market prices exist for such instruments. The fair values of those derivatives are determined using internal valuation models that require the use of multiple market inputs including interest |
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| rate, prices and indices to generate continuous yield or pricing curves and volatility factors, which are used to value the position. The derivatives are placed as either Level 2 or Level 3 depending on the observability of significant inputs to the applicable internal valuation model. Most forwards, swaps and options are valued using internally developed models that use as their basis readily observable market parameters. However, some of the forwards, swaps and options are valued using unobservable inputs such as correlations and historical volatilities. Futures are exchange-traded derivatives classified as Level 1. Credit default swaps are valued based on models with significant unobservable market parameters and normally traded less actively and are classified as Level 3. |
With respect to our derivative positions, the majority of which
are valued using internally developed models that use as their
basis observable market inputs as described above, an adjustment
is necessary to reflect the credit quality of each derivative
counterparty to arrive at fair value. The adjustment is based on
market-based measures of credit risk to the extent available and
also takes into account contractual factors designed to reduce
our credit exposure to each counterparty. Debt valuation
adjustments are applied to reflect our own credit risk when
measuring derivative liabilities at fair value in accordance
with the requirements of ASC
820-10.
The
methodology to determine the adjustment is consistent with
counterparty credit risk adjustment and incorporates our credit
spread as observed through the credit default swap market.
Our management evaluates investments in a loss position for
other-than-temporary impairment. Decreases in the fair value of
equity securities below their cost basis that are deemed to be
other-than-temporary must be written off through a charge to
income. For investment debt securities, the credit loss
component of the impairment is recognized in earnings, while the
remaining amount of the fair value loss is recognized in
accumulated comprehensive income if (1) we do not intend to
sell such securities and (2) we believe that it is
more-likely-than-not that we will not be required to sell before
the expected recovery of the amortized cost basis. Factors we
consider in determining whether a credit loss exists and the
period over which an investment debt security is expected to
recover include the following: the length of time and extent to
which fair value is less than cost, the status, financial
condition and near-term prospects of the issuer, the status of
the security, our intent and ability to hold the related
security for a period of time sufficient to allow for any
recovery in market value, and the condition of the Korean and
relevant foreign economies. Any change in these assumptions
could significantly affect the valuation and timing of
recognition of an other-than-temporary impairment.
We believe that the accounting estimates related to the fair
market value and other-than-temporary impairment of our various
securities is a “critical accounting policy” because:
(1) they may be highly susceptible to change from period to
period based on factors beyond our control; and (2) any
significant difference between our estimated fair value of these
securities on any particular date and either their estimated
fair value on a different date or the actual proceeds that we
receive upon sale of these securities could result in valuation
losses or losses on disposal which may have a material impact on
our net income. Our assumptions about the fair market value of
securities we hold, and in particular whether or not any decline
in the value of our available-for-sale or held-to-maturity
securities is temporary, require significant judgment because
actual valuations have fluctuated in the past and are expected
to continue to do so, based on a variety of factors.
Goodwill
and Other Intangible Assets
We recognized a significant amount of goodwill in connection
with the merger of the former Kookmin Bank with Korea Long Term
Credit Bank in 1998 and our acquisitions of Kookmin Credit Card
in 2003 and KB Investment & Securities in March 2008,
as well as our acquisition of noncontrolling interest in our
consolidated subsidiaries pursuant to the comprehensive stock
transfer through which we were established in 2008. We also
recognized goodwill in connection with our acquisition in May
2009 of 51% of the voting rights in Khmer Union Bank, which was
renamed Kookmin Bank Cambodia PLC. In addition, we acquired core
deposit and credit card relationship intangible assets upon our
merger with H&CB in 2001, and credit card relationship
intangible assets upon our acquisition of Kookmin Credit Card.
Goodwill represents the excess of acquisition cost over the fair
value of assets and liabilities acquired in a business
combination. We allocated goodwill to the reporting unit level,
which we define as an operating segment, or one level below. We
do not amortize goodwill. Instead, we perform tests for
impairment of goodwill annually or
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more frequently if events or circumstances indicate that it
might be impaired. Such tests include comparing the fair value
of a reporting unit with its carrying amount, including
goodwill. If the fair value is less than the carrying amount, a
second test is required to measure the amount of goodwill
impairment. The second step of the goodwill impairment test
compares the implied fair value of the reporting unit goodwill
with the carrying amount of that goodwill. If the carrying
amount of the reporting unit goodwill exceeds the implied fair
value of that goodwill, we recognize an impairment loss in an
amount equal to that excess. Impairment assessments are
performed using a variety of valuation methodologies, including
discounted cash flow estimates. Management estimates the future
cash flows expected to be derived from the use and, if
applicable, the terminal value of the assets. The key variables
that management must estimate include, among other factors,
market trading volume, market share, fee income, growth rate and
profitability margin. Although the assumptions used are
consistent with internal planning, significant management
judgment is involved in estimating these variables, which
include inherent uncertainties. A discount rate is applied to
the cash flow estimates considering our cost of capital rate and
specific country and industry risk factors.
We recorded the other intangible assets at their estimated fair
values. The core deposit intangible assets reflects the value of
the base of demand deposits and savings accounts acquired, which
we can expect to maintain for an extended period because of
generally stable customer relationships. The fair value of this
asset was based principally upon the estimates of: (1) the
funding benefits that these deposits provide relative to our
alternative funding sources; and (2) the projected run-off
of the related customer accounts. The credit card relationship
intangible assets reflect the value of the credit card
relationships acquired from which we expect to derive future
benefits over the estimated life of such relationships. The fair
value of this asset was based principally upon the estimates of:
(1) the profitability of the acquired accounts; and
(2) the projected run-off of the acquired accounts. We will
amortize these intangible assets over their estimated useful
lives, which range from approximately six to ten years, on an
accelerated basis. Any changes to the assumptions used in
determining the fair values or the estimated useful lives of
such assets could significantly affect the carrying values of
these intangible assets. We periodically perform an impairment
review on these intangible assets when circumstances warrant
such an evaluation, and any impaired amounts are written off.
We believe that the accounting estimates related to the fair
values of our acquired goodwill and other intangible assets is a
“critical accounting policy” because: (1) they
may be highly susceptible to change from period to period
because they require assumptions about future cash flows,
run-off rates and profitability; and (2) any significant
difference between our estimates and the actual amounts could
result in valuation losses which may have a material impact on
our net income. Our assumptions about estimated future cash
flows, run-off rates and profitability require significant
judgment and the fair values of the goodwill and other
intangible assets could fluctuate in the future, based on a
variety of factors.
Valuation
Allowance for Deferred Tax Assets and Uncertain Tax
Positions
In the normal course of business, we and our subsidiaries enter
into transactions for which the tax treatment is unclear or
subject to varying interpretations. We evaluate and assess the
relative risks and merits of the appropriate tax treatment of
transactions, filing positions and taxable income calculations
after considering statutes, regulations, judicial precedent, and
other information, and maintain tax accruals consistent with our
evaluation of these relative risks and merits. The result of our
evaluation and assessment is by its nature an estimate. We and
our subsidiaries are routinely subject to audit and challenges
from tax authorities. In the event we resolve a challenge for an
amount different than amounts previously accrued, we will
account for the difference in the period in which we resolve the
matter. From January 1, 2007, with respect to accounting
for uncertainty in our tax positions, we adopted ASC 740, which
sets out a consistent framework to determine the appropriate
level of tax reserves to maintain for uncertain tax positions.
This interpretation uses a two-step approach, wherein a tax
benefit is recognized if a tax position is more likely than not
to be sustained upon examination by tax authorities, and the
amount recognized is measured as the largest amount of tax
benefit that has a greater than 50% likelihood of being realized
upon ultimate settlement with the tax authorities. Differences
between tax positions taken in a tax return and amounts
recognized are reflected in the financial statements as
adjustments of income tax expense or deferred tax assets
(liabilities). In addition, interest and penalties related to
tax positions are classified as a component of income tax
expense. ASC 740 also requires
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enterprises to make explicit disclosures at the end of each
reporting period about uncertainties in their income tax
positions, including detailed carry-forwards of tax benefits
taken that do not qualify for financial statement recognition.
As a result of losses incurred by certain of our subsidiaries in
the past, we had an aggregate of
W
106 billion of net operating loss
carry-forwards as of December 31, 2009, which expire from
2010 to 2019. We may be able to use these net operating loss
carry-forwards, as well as temporary differences in the amount
of tax recorded for tax purposes and accounting purposes, to
reduce the amount of tax that we would otherwise be required to
pay in future periods. We recognize all existing future tax
benefits arising from these tax attributes as deferred tax
assets and then, based on our internal estimates of our future
profits, establish a valuation allowance equal to the extent
that it is more likely than not that deferred tax assets will
not be realized. We record a benefit or expense under the income
tax expense/benefit line of our income statement when there is a
net change in our total deferred tax assets and liabilities in a
period. In 2007, 2008 and 2009, we recorded a valuation
allowance for a certain amount of deferred tax assets resulting
from net operating loss carry-forwards and land revaluation due
to the uncertainty of the amount of our future profitability.
We believe that the estimates related to our recognition and
measurement of uncertain tax positions and the establishment of
the valuation allowance for deferred tax assets is a
“critical accounting policy” because: (1) they
may be highly susceptible to change from period to period based
on our assumptions regarding the final outcome of our uncertain
tax positions and our future profitability; and (2) any
significant difference between our estimates of such outcomes
and future profits on any particular date and estimates of such
outcomes and future profits on a different date could result in
an income tax expense or benefit which may have a material
impact on our net income from period to period. Our assumptions
about the final outcomes of our uncertain tax positions and our
future profitability require significant judgment and are
inherently subjective.
Results
of Operations
Net
Interest Income
The following table shows, for the periods indicated, the
principal components of our net interest income:
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||
| 2007 | 2008 (1) | 2009 | 2008/2007 | 2009/2008 | ||||||||||||||||
| (In billions of Won, except percentages) | (% change) | |||||||||||||||||||
|
Interest and dividend
income
(1)
|
||||||||||||||||||||
|
Loans, including fees
|
|
11,295 |
|
13,865 |
|
11,840 | 22.8 | % | (14.6 | )% | ||||||||||
|
Trading securities
|
247 | 282 | 191 | 14.2 | (32.3 | ) | ||||||||||||||
|
Investment securities
|
1,171 | 1,488 | 1,489 | 27.1 | 0.1 | |||||||||||||||
|
Call loans and securities purchased under resale agreements
|
60 | 88 | 46 | 46.7 | (47.7 | ) | ||||||||||||||
|
Deposits
|
19 | 14 | 24 | (26.3 | ) | 71.4 | ||||||||||||||
|
Total interest and dividend income
|
12,792 | 15,737 | 13,590 | 23.0 | (13.6 | ) | ||||||||||||||
|
Interest expense
|
||||||||||||||||||||
|
Deposits
|
4,132 | 6,314 | 5,450 | 52.8 | (13.7 | ) | ||||||||||||||
|
Call money
|
101 | 121 | 67 | 19.8 | (44.6 | ) | ||||||||||||||
|
Other borrowed funds
|
478 | 417 | 282 | (12.8 | ) | (32.4 | ) | |||||||||||||
|
Secured borrowings
|
379 | 342 | 240 | (9.8 | ) | (29.8 | ) | |||||||||||||
|
Long-term debt
|
1,597 | 2,166 | 2,192 | 35.6 | 1.2 | |||||||||||||||
|
Total interest expense
|
6,687 | 9,360 | 8,231 | 40.0 | (12.1 | ) | ||||||||||||||
|
Net interest income
|
|
6,105 |
|
6,377 |
|
5,359 | 4.5 | (16.0 | ) | |||||||||||
|
Net interest
margin
(2)
|
3.17 | % | 2.83 | % | 2.21 | % | ||||||||||||||
| (1) |
Excludes an interest payment of
|
|
| (2) | The ratio of net interest income to average interest earning assets. See “Item 3A. Selected Financial Data — Profitability ratios and other data.” |
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Table of Contents
Comparison
of 2009 to 2008
Interest and dividend income.
Interest and
dividend income decreased 13.6% from
W
15,737 billion in 2008 to
W
13,590 billion in 2009, primarily due to
a 14.6% decrease in interest and fees on loans. The average
balance of our interest earning assets increased 7.6% from
W
225,102 billion in 2008 to
W
242,156 billion in 2009, principally as a
result of increases in loans and investment securities, which
was more than offset by a 138 basis point decrease in
average yields on our interest earning assets from 6.99% in 2008
to 5.61% in 2009.
The 14.6% decrease in interest and fees on loans from
W
13,865 billion in 2008 to
W
11,840 billion in 2009 was primarily the
result of:
| • |
a decrease of 214 basis points in average yields on
mortgage and home equity loans from 6.84% in 2008 to 4.70% in
2009, which was partially offset by a 3.7% increase in the
average volume of such loans from
|
|
| • |
a decrease of 109 basis points in average yields on
commercial and industrial loans from 6.83% in 2008 to 5.74% in
2009, which was partially offset by an 11.0% increase in the
average volume of such loans from
|
|
| • |
a decrease of 157 basis points in average yields on other
consumer loans from 8.42% in 2008 to 6.85% in 2009, which was
partially offset by a 6.1% increase in the average volume of
such loans from
|
|
| • |
a decrease of 98 basis points in average yields on
construction loans from 7.18% in 2008 to 6.20% in 2009, which
was enhanced by a 4.5% decrease in the average volume of such
loans from
|
The decreases in the average yields on mortgage and home equity
loans, commercial and industrial loans, other consumer loans and
construction loans were primarily the result of the lower
interest rate environment in Korea in 2009, which reflected the
low policy rate maintained by the Bank of Korea throughout 2009
as part of the Korean government’s initiative to stimulate
the domestic economy in the wake of the global financial crisis.
The increase in the average volume of mortgage and home equity
loans was mainly due to higher demand for such loans in Korea.
The average volume of commercial and industrial loans increased
mainly as the result of increased lending to small- and
medium-sized enterprises primarily due to policies and
initiatives introduced by the Korean government to encourage
Korean banks to provide financial support to small-and
medium-sized enterprises. The increase in the average volume of
other consumer loans, which are primarily unsecured and
generally have relatively higher interest rates, mainly
reflected higher demand for such loans in Korea. The decrease in
the average volume of construction loans was primarily a result
of a decrease in demand for such loans mainly due to the
downturn in the construction industry in Korea.
Overall, the average volume of our loans increased 6.6%, from
W
189,012 billion in 2008 to
W
201,507 billion in 2009, while the
average yields on our loans decreased 146 basis points,
from 7.34% in 2008 to 5.88% in 2009, reflecting the lower
interest rate environment.
Our securities portfolio consists primarily of investment
securities, of which 80.9% represented debt securities issued by
government-owned or -controlled enterprises or financial
institutions (including the Korea Electric Power Corporation,
the Korea Deposit Insurance Corporation, the Bank of Korea, the
Korea Development Bank and the Industrial Bank of Korea) and
debt securities issued by financial institutions and other
Korean banks as of December 31, 2009. Interest and
dividends on investment securities remained relatively constant
in 2009 compared to 2008, as the effects of a 14.5% increase in
the average volume of such securities from
W
28,458 billion in 2008 to
W
32,586 billion in 2009, which mainly
reflected our increased purchases of Korean treasury securities
and debt securities issued by government agencies and financial
institutions, were largely offset by a 66 basis point
decrease in average yields on such securities from 5.23% in 2008
to 4.57% in 2009, which was primarily due to the general
decrease in market interest rates in Korea for debt securities.
Our securities portfolio also includes trading securities, of
which 91.5% represented debt securities issued by
government-owned or -controlled enterprises or financial
institutions and debt securities issued by financial
institutions and other Korean banks as of December 31,
2009. Interest and dividends on trading securities decreased
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32.3% from
W
282 billion in 2008 to
W
191 billion in 2009. This decrease was
primarily due to a decrease of 120 basis points in average
yields on such securities from 5.44% in 2008 to 4.24% in 2009,
primarily due to the general decrease in market interest rates
in Korea for debt securities.
Interest Expense.
Interest expense decreased
12.1% from
W
9,360 billion in 2008 to
W
8,231 billion in 2009, primarily due to a
13.7% decrease in interest expense on deposits, as well as a
32.4% decrease in interest expense on other borrowed funds. The
average balance of our interest bearing liabilities increased
9.2% from
W
207,335 billion in 2008 to
W
226,341 billion in 2009, principally as a
result of increases in deposits and long-term debt, which was
more than offset by an 87 basis point decrease in the
average cost of our interest bearing liabilities from 4.51% in
2008 to 3.64% in 2009.
The 13.7% decrease in interest expense on deposits from
W
6,314 billion in 2008 to
W
5,450 billion in 2009 was primarily the
result of:
| • |
a 154 basis point decrease in the average interest rate
paid on certificates of deposit from 6.04% in 2008 to 4.50% in
2009, which was partially offset by a 4.1% increase in the
average volume of certificates of deposit from
|
|
| • |
a 91 basis point decrease in the average interest rate paid
on other time deposits from 5.36% in 2008 to 4.45% in 2009,
which was partially offset by a 13.2% increase in the average
volume of such deposits from
|
|
| • |
a 57 basis point decrease in the average interest rate paid
on savings deposits from 1.06% in 2008 to 0.49% in 2009, which
was partially offset by a 10.8% increase in the average volume
of such deposits from
|
The decreases in the average interest rates paid on certificates
of deposit, other time deposits and savings deposits were
primarily the result of the lower interest rate environment in
Korea in 2009. The increases in the average volumes of
certificates of deposit, other time deposits and savings
deposits were primarily attributable to increased demand for
such deposit products, as alternatives to higher-risk
investments.
Other borrowed funds include borrowings from the Bank of Korea
and other short-term borrowings. The 32.4% decrease in interest
expense on other borrowed funds from
W
417 billion in 2008 to
W
282 billion in 2009 was mainly due to a
160 basis point decrease in the average cost of other
short-term borrowings from 4.63% in 2008 to 3.03% in 2009, which
was attributable mainly to the general decrease in market
interest rates in Korea for such debt.
Net interest margin.
Net interest margin
represents the ratio of net interest income to average interest
earning assets. Our overall net interest margin decreased from
2.83% in 2008 to 2.21% in 2009 primarily as a result of a
decrease in our net interest income, the effect of which was
enhanced by an increase in the average volume of interest
earning assets. Net interest income decreased 16.0% from
W
6,377 billion in 2008 to
W
5,359 billion in 2009, while the average
volume of our interest earning assets increased 7.6% from
W
225,102 billion in 2008 to
W
242,156 billion in 2009. The effects of
the increase in the average volume of our interest earning
assets were largely matched by the 9.2% increase in the average
volume of our interest bearing liabilities from
W
207,335 billion in 2008 to
W
226,341 billion in 2009. However, our net
interest spread, which represents the difference between the
average yield on our interest earning assets and the average
cost of our interest bearing liabilities, declined from 2.48% in
2008 to 1.97% in 2009. The decline in net interest spread
reflected a larger decrease in the average yield on our interest
earning assets, relative to the decrease in the average cost of
our interest bearing liabilities, primarily due to the earlier
adjustment of interest rates on interest earning assets compared
to interest rates on interest bearing liabilities in the context
of the lower interest rate environment, as well as the
continuing rate-based competition in the Korean banking industry
for the marketing of both loan and deposit products.
Comparison
of 2008 to 2007
Interest and dividend income.
Interest and
dividend income increased 23.0% from
W
12,792 billion in 2007 to
W
15,737 billion in 2008, primarily due to
a 22.8% increase in interest and fees on loans, which was
enhanced by
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Table of Contents
a 27.1% increase in interest and dividends on investment
securities. The average balance of our interest earning assets
increased 16.9% from
W
192,610 billion in
2007 to
W
225,102 billion in 2008, and the
average yields on our interest earning assets increased from
6.64% in 2007 to 6.99% in 2008.
The 22.8% increase in interest and fees on loans from
W
11,295 billion in 2007 to
W
13,865 billion in 2008 was primarily the
result of:
| • |
a 26.3% increase in the average volume of commercial and
industrial loans from
|
|
| • |
a 5.8% increase in the average volume of mortgage and home
equity loans from
|
|
| • |
a 17.8% increase in the average volume of other consumer loans
from
|
The increase in the average volume of commercial and industrial
loans was primarily a result of increased lending to small- and
medium-sized enterprises due to increased marketing efforts to
procure such customers. The average volume of mortgage and home
equity loans increased mainly as the result of higher demand for
such loans in Korea. The increase in the average volume of other
consumer loans, which are primarily unsecured and generally have
higher interest rates, mainly reflected our efforts to increase
higher-margin loans to retail customers with good credit
ratings. The increase in the average yields for commercial and
industrial, mortgage and home equity and other consumer loans
was primarily a result of the general rise in market interest
rates in Korea for such loans from 2007 to 2008.
Overall, the average volume of our loans increased 17.3%, from
W
161,157 billion in 2007 to
W
189,012 billion in 2008, and the average
yields on our loans increased 33 basis points, from 7.01%
in 2007 to 7.34% in 2008, reflecting the higher interest rate
environment.
Our securities portfolio consists primarily of investment
securities, of which 88.0% represented debt securities issued by
government-owned or -controlled enterprises or financial
institutions (including the Korea Electric Power Corporation,
the Korea Deposit Insurance Corporation, the Bank of Korea, the
Korea Development Bank and the Industrial Bank of Korea) and
debt securities issued by financial institutions and other
Korean banks as of December 31, 2008. Interest and
dividends on investment securities increased 27.1% from
W
1,171 billion in 2007 to
W
1,488 billion in 2008. This increase was
primarily due to a 15.2% increase in the average volume of
investment securities from
W
24,695 billion
in 2007 to
W
28,458 billion in 2008, which
mainly reflected our increased purchases of Korean treasury and
government agency debt securities. The effect of this increase
was enhanced by an increase of 49 basis points in average
yields on such investment securities from 4.74% in 2007 to 5.23%
in 2008, primarily due to the general rise in market interest
rates in Korea for debt securities.
Our securities portfolio also includes trading securities, of
which 86.1% represented debt securities issued by
government-owned or -controlled enterprises or financial
institutions and debt securities issued by financial
institutions and other Korean banks as of December 31,
2008. Interest and dividends on trading securities increased
14.2% from
W
247 billion in 2007 to
W
282 billion in 2008. This increase was
primarily due to an increase of 57 basis points in average
yields on such securities from 4.87% in 2007 to 5.44% in 2008,
primarily due to the general rise in market interest rates in
Korea for debt securities.
Interest Expense.
Interest expense increased
40.0% from
W
6,687 billion in 2007 to
W
9,360 billion in 2008, primarily due to a
52.8% increase in interest expense on deposits, which was
enhanced by a 35.6% increase in interest expense on long-term
debt. The average balance of our interest bearing liabilities
increased 17.8% from
W
175,946 billion in
2007 to
W
207,335 billion in 2008,
principally as a result of increases in deposits and long-term
debt, which was enhanced by a 71 basis point increase in
the average cost of our interest bearing liabilities from 3.80%
in 2007 to 4.51% in 2008.
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Table of Contents
The 52.8% increase in interest expense on deposits from
W
4,132 billion in 2007 to
W
6,314 billion in 2008 was primarily the
result of:
| • |
a 22.8% increase in the average volume of other time deposits
from
|
|
| • |
a 73.6% increase in the average volume of certificates of
deposit from
|
The increases in the average volumes of other time deposits and
certificates of deposit were primarily attributable to increased
demand for such deposit products, as an alternative to
higher-risk investments. The increases in the average interest
rates paid on other time deposits and certificates of deposit
resulted from the general increase in market interest rates in
Korea from 2007 to 2008.
These increases were partially offset by a 27.8% decrease in the
average volume of mutual installment deposits from
W
6,900 billion in 2007 to
W
4,985 billion in 2008, which was
principally due to the continuing decrease in our
customers’ preference for mutual installment deposits
relative to higher-yielding banking products.
The 35.6% increase in interest expense on long-term debt from
W
1,597 billion in 2007 to
W
2,166 billion in 2008 was mainly due to a
32.0% increase in the average volume of such debt from
W
29,099 billion in 2007 to
W
38,406 billion in 2008, due primarily to
our increased use of long-term debt in order to meet our greater
funding needs. This was enhanced by a 15 basis point
increase in the average cost of such debt from 5.49% in 2007 to
5.64% in 2008, which was attributable mainly to the general
increase in market interest rates in Korea for such debt.
Net interest margin.
Our overall net interest
margin decreased from 3.17% in 2007 to 2.83% in 2008, as the
increase in the average volume of interest earning assets
outpaced the increase in our net interest income. The average
volume of our interest earning assets increased 16.9% from
W
192,610 billion in 2007 to
W
225,102 billion in 2008, while net
interest income increased 4.5% from
W
6,105 billion in 2007 to
W
6,377 billion in 2008. However, the net
interest spread declined from 2.84% in 2007 to 2.48% in 2008.
The decline in net interest spread reflected a larger increase
in the average cost of our interest bearing liabilities
(including as a result of sharp growth in the average volume of
other time deposits, where the increase in average cost was also
relatively large) relative to the increase in the average yield
on our interest earning assets (which was slowed by a relatively
small increase in the average yield on commercial and industrial
loans and other consumer loans, where the growth in average
volume was relatively large), primarily reflecting the
continuing rate-based competition in the Korean banking industry
for the marketing of both loan and deposit products.
Provision
for Credit Losses
For a discussion of our loan loss provisioning policy, see
“Item 4B. Business Overview — Assets and
Liabilities — Loan Portfolio — Provisioning
Policy.”
Comparison
of 2009 to 2008
Our provision for credit losses decreased 4.7% from
W
2,313 billion in 2008 to
W
2,204 billion in 2009, primarily due to a
decrease in our provision for credit losses on off-balance sheet
credit instruments, which reflected a decrease in the maximum
aggregate potential amount of future payments under guarantees
and commercial letters of credit.
Our loan charge-offs, net of recoveries, increased 99.3% from
W
966 billion in 2008 to
W
1,925 billion in 2009. Such increase was
attributable mainly to a
W
650 billion
increase in net charge-offs of corporate loans, including
primarily loans to small- and medium-sized enterprises, as a
result of the continuing deterioration in the asset quality of
such loans in 2009.
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Table of Contents
Comparison
of 2008 to 2007
Our provision for credit losses increased substantially from
W
18 billion in 2007 to
W
2,313 billion in 2008, primarily due to
increases in delinquencies and impaired loans in our loan
portfolio, particularly with respect to loans to small- and
medium-sized enterprises (including in the construction sector),
as well as a significant increase in the outstanding volume of
our corporate loans.
Our loan charge-offs, net of recoveries, increased 35.3% from
W
714 billion in 2007 to
W
966 billion in 2008, which was
attributable mainly to a
W
163 billion
increase in net charge-offs of corporate loans.
Allowance
for Loan Losses
For information on allowance for loan losses, see
“— Critical Accounting Policies —
Allowance for Loan Losses” and “Item 4B. Business
Overview — Assets and Liabilities — Loan
Portfolio — Allocation of Allowance for Loan
Losses.”
Corporate Loans.
We establish specific loan
loss allowances for corporate loans based on whether a
particular loan is impaired or not. See “Item 4B.
Business Overview — Assets and Liabilities —
Loan Portfolio — Provisioning Policy.” We also
establish an allowance for loan losses for corporate loans that
we do not believe are impaired based on our historical loss
experience for those types of loans. Smaller balance commercial
loans (which are commercial loans of
W
1 billion or less) are managed on a
portfolio basis and evaluated collectively for impairment. The
following table shows, for the periods indicated, certain
information regarding our impaired corporate loans.
| As of December 31, | ||||||||||||
| 2007 | 2008 | 2009 | ||||||||||
|
Impaired loans as a percentage of total corporate loans
|
2.5 | % | 3.7 | % | 3.5 | % | ||||||
|
Allowance for loan losses as a percentage of total corporate
loans
|
1.7 | 2.7 | 3.1 | |||||||||
|
Allowance for loan losses as a percentage of impaired loans
|
53.0 | 45.1 | 47.6 | |||||||||
During 2009, impaired loans as a percentage of total corporate
loans decreased, while the level of allowance for loan losses as
a percentage of both total corporate loans and impaired loans
increased. Although significant charge-offs resulted in a
decrease in the overall outstanding balance of impaired loans as
a percentage of total corporate loans, the deterioration in the
asset quality of small- and medium-sized enterprise loans led to
a worse overall mix of impaired loans, resulting in an increase
in allowance for loan losses as a percentage of both total
corporate loans and impaired loans.
During 2008, impaired loans and allowance for loan losses, each
as a percentage of total corporate loans, increased due to
significant growth in our impaired loans and allowance for loan
losses, which outpaced the growth in our total corporate loans.
However, the level of allowance for loan losses as a percentage
of impaired loans decreased as the increase in impaired loans,
primarily as a result of adverse economic conditions in Korea,
was comprised of a greater portion of relatively higher-quality
impaired loans with lower levels of allowances (or without an
allowance) as compared to lower-quality impaired loans.
Consumer Loans.
We establish allowances for
loan losses for consumer loans (including credit card
receivables) based on historical losses as well as delinquencies
and changes in underwriting and credit monitoring policies. We
also analyze government economic data when considering consumer
bankruptcies and delinquency rates as well as the
build-up
of
consumer debt in Korea. The following table shows, for the
periods indicated, certain information regarding our
non-performing loans to the consumer sector.
| As of December 31, | ||||||||||||
| 2007 | 2008 | 2009 | ||||||||||
|
Non-performing loans as a percentage of total consumer loans
|
0.4 | % | 0.3 | % | 0.3 | % | ||||||
|
Allowance for loan losses as a percentage of total consumer loans
|
0.6 | 0.5 | 0.6 | |||||||||
|
Allowance for loan losses as a percentage of non-performing
consumer loans
|
16.1 | 17.2 | 19.7 | |||||||||
124
Table of Contents
During 2009, non-performing consumer loans as a percentage of
total consumer loans remained relatively constant. However, a
deterioration in the asset quality of our existing
non-performing consumer loans led to a worse overall mix of
non-performing consumer loans, which caused the level of
allowance for loan losses as a percentage of both total consumer
loans and non-performing consumer loans to increase.
During 2008, non-performing consumer loans and allowance for
loan losses, each as a percentage of total consumer loans,
decreased as a result of the growth in our consumer loan
portfolio, which led to a decrease in the overall outstanding
balance of both total non-performing consumer loans and
allowance for loan losses as a percentage of total consumer
loans. However, a deterioration in the asset quality of our
existing non-performing consumer loans led to a worse overall
mix of non-performing consumer loans, which caused the level of
allowance for loan losses as a percentage of non-performing
consumer loans to increase.
Non-Interest
Income
The following table shows, for the periods indicated, the
components of our non-interest income:
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||
| 2007 | 2008 | 2009 | 2008/2007 | 2009/2008 | ||||||||||||||||
| (In billions of Won) | (% Change) | |||||||||||||||||||
|
Credit card merchant fees
|
|
976 |
|
1,034 |
|
1,090 | 5.9 | % | 5.4 | % | ||||||||||
|
Other fees and commission income (excluding credit card merchant
fees)
|
1,448 | 1,347 | 1,260 | (7.0 | ) | (6.5 | ) | |||||||||||||
|
Net trading revenue
|
41 | 104 | 165 | 153.7 | 58.7 | |||||||||||||||
|
Trust fees, net
|
159 | 165 | 189 | 3.8 | 14.5 | |||||||||||||||
|
Net gain on investments
|
1,017 | 90 | 267 | (91.2 | ) | 196.7 | ||||||||||||||
|
Other non-interest income
|
372 | 212 | 542 | (43.0 | ) | 155.7 | ||||||||||||||
|
Total non-interest income
|
|
4,013 |
|
2,952 |
|
3,513 | (26.4 | ) | 19.0 | |||||||||||
Comparison
of 2009 to 2008
Non-interest income increased 19.0% from
W
2,952 billion in 2008 to
W
3,513 billion in 2009. This increase was
attributable primarily to:
| • |
a
|
|
| • |
a
|
Other non-interest income consists mainly of gains on hedge
activities, recovery on non-performing loans that were written
off and gains on sales of loans. The 155.7% increase in other
non-interest income was attributable principally to a
W
246 billion increase in gains on hedge
activities. However, such increase was mostly offset by a
corresponding increase in losses on hedge activities, which is
recorded as other non-interest expense.
The 196.7% increase in net gain on investments was attributable
mainly to an increase in gains on disposal of investment
securities, principally gains from the disposal of our shares in
Hyundai Engineering and Construction Co., Ltd. in the first half
of 2009.
Comparison
of 2008 to 2007
Non-interest income decreased 26.4% from
W
4,013 billion in 2007 to
W
2,952 billion in 2008. This decrease was
attributable primarily to:
| • |
a
|
|
| • |
a
|
125
Table of Contents
| • |
a
|
These decreases were partially offset by a
W
63 billion increase in net trading
revenue from
W
41 billion in 2007 to
W
104 billion in 2008.
The 91.2% decrease in net gain on investments was attributable
mainly to a decrease in gains on disposal of investment
securities, as gains from the disposal of our shares in LG Card
Co., Ltd. in 2007 were not repeated in 2008, as well as the
deterioration of financial market conditions in 2008, which led
to a decrease in the general level of securities prices and a
significant increase in impairment losses on equity securities
in our investment securities portfolio.
The 43.0% decrease in other non-interest income was attributable
principally to proceeds received in 2007 from sales of assets by
one of our subsidiaries in liquidation, not being repeated in
2008.
Other fees and commission income consists of commissions
received on credit cards, commissions and fees received for
brokerage and agency activities, bancassurance fees, and
commissions received on fund management, cash dispenser services
and letters of credit. The 7.0% decrease in other fees and
commission income was attributable principally to a decrease in
commissions and fees received for brokerage and agency
activities, primarily reflecting a decrease in fees received
from sales of beneficiary certificates.
Net trading revenue consists of net realized and unrealized
gains on securities and derivatives in our trading portfolio.
The 153.7% increase in net trading revenue resulted mainly from
an increase in net gains on valuation of derivatives, which
reflected higher exchange rate and interest rate volatility and
transaction volume.
Non-Interest
Expense
The following table shows, for the periods indicated, the
components of our non-interest expense:
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||
| 2007 | 2008 | 2009 | 2008/2007 | 2009/2008 | ||||||||||||||||
| (In billions of Won) | (% Change) | |||||||||||||||||||
|
Salaries and employee benefits
|
|
2,281 |
|
2,335 |
|
2,218 | 2.4 | % | (5.0 | )% | ||||||||||
|
Other administrative expenses
|
836 | 875 | 857 | 4.7 | (2.1 | ) | ||||||||||||||
|
Other fees and commissions
|
729 | 827 | 870 | 13.4 | 5.2 | |||||||||||||||
|
Depreciation and amortization
|
419 | 407 | 431 | (2.9 | ) | 5.9 | ||||||||||||||
|
Credit card fees
|
338 | 374 | 417 | 10.7 | 11.5 | |||||||||||||||
|
Other non-interest expenses
|
532 | 503 | 949 | (5.5 | ) | 88.7 | ||||||||||||||
|
Total non-interest expense
|
|
5,135 |
|
5,321 |
|
5,742 | 3.6 | 7.9 | ||||||||||||
Comparison
of 2009 to 2008
Non-interest expense increased 7.9% from
W
5,321 billion in 2008 to
W
5,742 billion in 2009. This increase was
primarily due to a
W
446 billion increase
in other non-interest expenses, which was partially offset by a
W
117 billion decrease in salaries and
employee benefits.
Other non-interest expenses include losses on hedge activities,
provision for other losses, losses on sales of loans, losses on
the disposal of premises and equipment, tax expenses other than
income tax, insurance expense, donations and penalties. The
88.7% increase in other non-interest expenses was attributable
principally to a
W
236 billion increase in
losses on hedge activities, as well as a
W
188 billion increase in provision for
other losses. The increase in losses on hedge activities,
however, was more than offset by a corresponding increase in
gains on hedge activities, which is recorded as other
non-interest income.
The 5.0% decrease in salaries and employee benefits was due
mainly to a decrease in special termination benefits paid in
connection with our voluntary early retirement program, which
reflected a decrease in the number of employees who accepted
early retirement in 2009 compared to 2008.
126
Table of Contents
Comparison
of 2008 to 2007
Non-interest expense increased 3.6% from
W
5,135 billion in 2007 to
W
5,321 billion in 2008. This increase was
primarily due to a
W
98 billion increase in
other fees and commissions, a
W
54 billion
increase in salaries and employee benefits, a
W
39 billion increase in other
administrative expenses and a
W
36 billion
increase in credit card fees.
Other fees and commissions include contributions to guarantee
funds, deposit insurance fees paid to the Korea Deposit
Insurance Corporation and miscellaneous fees for consulting and
other services provided by third party service providers. The
13.4% increase in other fees and commissions was attributable
principally to an increase in contributions to guarantee funds.
The 2.4% increase in salaries and employee benefits was due
mainly to an increase in special termination benefits due to the
increased number of employees who accepted early retirement in
2008.
Other administrative expenses include leasing, advertising,
public relations, sales promotion, telecommunication and data
processing expenses. The 4.7% increase in other administrative
expenses was primarily due to increased leasing expenses.
Credit card fees include fees and commissions paid to our sales
agents, expenses related to awarding mileage and bonus points to
our credit card customers and fees and commissions paid to our
member merchants. The 10.7% increase in credit card fees
resulted mainly from marketing costs in connection with our
continued efforts to expand our credit card operations.
Income
Tax Expense
Comparison
of 2009 to 2008
Income tax expense decreased 54.4% from
W
454 billion in 2008 to
W
207 billion in 2009 primarily as a result
of a decrease in earnings from 2008 to 2009, as well as a
decrease in the statutory tax rate applicable to us. The
statutory tax rate applicable to us decreased from approximately
27.5% in 2008 to approximately 24.2% in 2009. Our effective tax
rate was 25.4% in 2008 and 22.4% in 2009.
Comparison
of 2008 to 2007
Income tax expense decreased 62.4% from
W
1,206 billion in 2007 to
W
454 billion in 2008, although our
deferred income tax assets decreased in 2008, primarily as a
result of a decrease in earnings from 2007 to 2008. The
statutory tax rate applicable to us was approximately 27.5% in
2007 and 2008. Our effective tax rate was 24.3% in 2007 and
25.4% in 2008.
Net
Income
As a result of the above, our net income was
W
719 billion in 2009, compared to
W
1,333 billion in 2008 and
W
3,759 billion in 2007.
Results
under Korean GAAP by Principal Business Segment
We are organized into four major business segments: retail
banking, credit card operations, corporate banking and capital
markets. The following discussion is based upon our internal
management account information, prepared based on Korean GAAP.
The income statement data presented below for the year ended
December 31, 2008 have been calculated using (i) the
consolidated income statement data of Kookmin Bank for the
period between January 1, 2008 and June 30, 2008 (for
which consolidated net income was
W
1,263 billion under Korean GAAP), and
(ii) our consolidated income statement data for the period
between September 29, 2008 and December 31, 2008 (for
which consolidated net income was
W
610 billion under Korean GAAP), which
includes the results of Kookmin Bank and its subsidiaries from
July 1, 2008 to September 28, 2008 because the
acquisition cost of Kookmin Bank and its subsidiaries in
connection with the comprehensive stock transfer pursuant to
which we were established was determined as the net asset amount
of Kookmin Bank and its subsidiaries as of June 30, 2008
based on Korean GAAP.
127
Table of Contents
The following table shows, for the periods indicated, our
results of operation by segment based on this information:
|
Net
Income
(1)
|
Total Revenue
|
|||||||||||||||||||||||
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
| 2007 | 2008 | 2009 | 2007 | 2008 | 2009 | |||||||||||||||||||
| (In billions of Won) | ||||||||||||||||||||||||
|
Retail banking
|
|
1,338 |
|
1,247 |
|
844 |
|
11,466 |
|
13,221 |
|
10,768 | ||||||||||||
|
Credit card operations
|
505 | 350 | 454 | 2,239 | 2,421 | 2,559 | ||||||||||||||||||
|
Corporate banking
|
414 | (146 | ) | (35 | ) | 7,048 | 10,795 | 9,117 | ||||||||||||||||
|
Capital markets
|
(19 | ) | 86 | 83 | 9,020 | 35,060 | 19,509 | |||||||||||||||||
|
Other
|
622 | 668 | (143 | ) | 3,482 | 4,345 | 2,863 | |||||||||||||||||
|
Total
(2)
|
|
2,860 |
|
2,205 |
|
1,203 |
|
33,255 |
|
65,842 |
|
44,816 | ||||||||||||
| (1) | After deduction of income tax allocated proportionately among each segment. | |
| (2) | Prior to elimination for consolidation, inter-segment transactions and certain differences in classification under our management reporting system. |
Retail
Banking
Our retail banking segment products include mortgage and home
equity loans and other consumer loans, deposits and other
savings products. The following table shows, for the periods
indicated, our income statement data for this segment:
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||
| 2007 | 2008 | 2009 | 2008/2007 | 2009/2008 | ||||||||||||||||
| (In billions of Won) | (% Change) | |||||||||||||||||||
|
Income statement data:
|
||||||||||||||||||||
|
Interest income
|
|
10,305 |
|
12,225 |
|
9,890 | 18.6 | % | (19.1 | )% | ||||||||||
|
Interest expense
|
7,351 | 9,257 | 7,450 | 25.9 | (19.5 | ) | ||||||||||||||
|
Provision for credit losses
|
84 | 203 | 264 | 141.7 | 30.0 | |||||||||||||||
|
Non-interest income
|
1,161 | 996 | 878 | (14.2 | ) | (11.8 | ) | |||||||||||||
|
Non-interest expense including depreciation and amortization
|
2,177 | 2,042 | 1,890 | (6.2 | ) | (7.4 | ) | |||||||||||||
|
Net income before tax
|
1,854 | 1,719 | 1,164 | (7.3 | ) | (32.3 | ) | |||||||||||||
|
Income
tax
(1)
|
516 | 472 | 320 | (8.5 | ) | (32.2 | ) | |||||||||||||
|
Net income
|
|
1,338 |
|
1,247 |
|
844 | (6.8 | ) | (32.3 | ) | ||||||||||
| (1) | Portion of income tax allocated to this segment based on income before tax. |
Comparison
of 2009 to 2008
Our net income before tax for this segment decreased 32.3% from
W
1,719 billion in 2008 to
W
1,164 billion in 2009.
Interest income from our retail banking activities decreased
19.1% from
W
12,225 billion in 2008 to
W
9,890 billion in 2009. This decrease was
primarily due to a decrease in average interest rates in respect
of retail loans from 7.27% in 2008 to 5.29% in 2009, principally
as a result of the lower interest rate environment in Korea in
2009, the effect of which was partially offset by a 4.5%
increase in the average volume of retail loans from
W
93,781 billion in 2008 to
W
98,018 billion in 2009, reflecting an
increase in demand for such loans, in particular for mortgage
and home equity loans.
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Table of Contents
Our largest and most important funding source is deposits from
retail customers, which represents more than half of our total
deposits. Interest expense in the retail banking segment
decreased 19.5% from
W
9,257 billion in
2008 to
W
7,450 billion in 2009, due
primarily to a decrease in average rates on deposit and savings
products from 3.73% in 2008 to 3.24% in 2009, the effect of
which was partially offset by a 5.5% increase in the average
volume of deposit and savings products from
W
88,953 billion in 2008 to
W
93,866 billion in 2009.
Provision for credit losses on retail loans increased 30.0% from
W
203 billion in 2008 to
W
264 billion in 2009, reflecting increases
in delinquencies and non-performing loans in our retail loan
portfolio due to the adverse economic conditions in Korea, as
well as an increase in the outstanding volume of our retail
loans.
Non-interest income decreased 11.8% from
W
996 billion in 2008 to
W
878 billion in 2009, primarily due to a
decrease in fees from sales of beneficiary certificates.
Non-interest expense decreased 7.4% from
W
2,042 billion in 2008 to
W
1,890 billion in 2009, mainly as a result
of decreased labor costs in this segment.
Comparison
of 2008 to 2007
Our net income before tax for this segment decreased 7.3% from
W
1,854 billion in 2007 to
W
1,719 billion in 2008.
Interest income from our retail banking activities increased
18.6% from
W
10,305 billion in 2007 to
W
12,225 billion in 2008. This increase was
primarily due to an 8.7% increase in the average volume of
retail loans from
W
86,258 billion in 2007
to
W
93,781 billion in 2008, reflecting
greater consumer demand for retail loans, the effect of which
was enhanced by an increase in average interest rates in respect
of such loans from 6.95% in 2007 to 7.27% in 2008 as a result of
the general increase in market interest rates for such loans in
Korea.
Interest expense in the retail banking segment increased 25.9%
from
W
7,351 billion in 2007 to
W
9,257 billion in 2008, due primarily to a
4.9% increase in the average volume of deposit and savings
products from
W
84,765 billion in 2007 to
W
88,953 billion in 2008, the effect of
which was enhanced by an increase in average rates on deposit
and savings products from 2.94% in 2007 to 3.73% in 2008.
Provision for credit losses on retail loans increased 141.7%
from
W
84 billion in 2007 to
W
203 billion in 2008, reflecting increases
in delinquencies and non-performing loans in our retail loan
portfolio due to the adverse economic conditions in Korea, as
well as an increase in the outstanding volume of our retail
loans.
Non-interest income decreased 14.2% from
W
1,161 billion in 2007 to
W
996 billion in 2008, primarily due to a
decrease in fees from sales of beneficiary certificates.
Non-interest expense decreased 6.2% from
W
2,177 billion in 2007 to
W
2,042 billion in 2008, primarily due to
decreased labor costs in this segment.
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Table of Contents
Credit
Card Operations
Our credit card segment handles our credit card activities. The
following table shows, for the periods indicated, our income
statement data for this segment:
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||
| 2007 | 2008 | 2009 | 2008/2007 | 2009/2008 | ||||||||||||||||
| (In billions of Won) | (% Change) | |||||||||||||||||||
|
Income statement data:
|
||||||||||||||||||||
|
Interest income
|
|
1,997 |
|
2,115 |
|
2,288 | 5.9 | % | 8.2 | % | ||||||||||
|
Interest expense
|
449 | 615 | 464 | 37.0 | (24.6 | ) | ||||||||||||||
|
Provision for credit losses
|
19 | 98 | 266 | 415.8 | 171.4 | |||||||||||||||
|
Non-interest income
|
241 | 306 | 271 | 27.0 | (11.4 | ) | ||||||||||||||
|
Non-interest expense including depreciation and amortization
|
1,064 | 1,225 | 1,203 | 15.1 | (1.8 | ) | ||||||||||||||
|
Net income (loss) before tax
|
706 | 483 | 626 | (31.6 | ) | 29.6 | ||||||||||||||
|
Income
tax
(1)
|
201 | 133 | 172 | (33.8 | ) | 29.3 | ||||||||||||||
|
Net income (loss)
|
|
505 |
|
350 |
|
454 | (30.7 | ) | 29.7 | |||||||||||
| (1) | Portion of income tax allocated to this segment based on income before tax. |
Comparison
of 2009 to 2008
Our net income before tax for this segment increased 29.6% from
W
483 billion in 2008 to
W
626 billion in 2009.
Interest income from our credit card operations increased 8.2%
from
W
2,115 billion in 2008 to
W
2,288 billion in 2009. This increase was
primarily due to a 4.1% increase in the average volume of our
credit card receivables from
W
10,917 billion in 2008 to
W
11,365 billion in 2009, which reflected
our continuing marketing efforts to procure new credit card
subscribers, the effect of which was enhanced by an increase in
the average interest rates in respect of such outstanding
balances from 21.70% in 2008 to 22.20% in 2009.
Interest expense decreased 24.6% from
W
615 billion in 2008 to
W
464 billion in 2009 principally due to a
decrease in the average interest rates of inter-segment
borrowings in line with the lower interest rate environment in
Korea, the effect of which was partially offset by an increase
in the average volume of such borrowings to support our credit
card operations.
Provision for credit losses increased 171.4% from
W
98 billion in 2008 to
W
266 billion in 2009. This increase was
primarily the result of a deterioration in the overall asset
quality of our credit card portfolio due to the adverse economic
conditions in Korea.
Non-interest income decreased 11.4% from
W
306 billion in 2008 to
W
271 billion in 2009. This decrease was
principally attributable to gains from disposal of our shares of
Visa Inc. and Mastercard Inc. in 2008, which were not repeated
in 2009.
Non-interest expense decreased 1.8% from
W
1,225 billion in 2008 to
W
1,203 billion in 2009, primarily due to a
decrease in marketing expenses resulting from our cost-cutting
efforts in 2009.
Comparison
of 2008 to 2007
Our net income before tax for this segment decreased 31.6% from
W
706 billion in 2007 to
W
483 billion in 2008.
Interest income from our credit card operations increased 5.9%
from
W
1,997 billion in 2007 to
W
2,115 billion in 2008. This increase was
primarily due to an 18.2% increase in the average volume of our
credit card receivables from
W
9,234 billion in 2007 to
W
10,917 billion in 2008.
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Table of Contents
Interest expense increased 37.0% from
W
449 billion in 2007 to
W
615 billion in 2008 principally due to an
increase in the average volume of inter-segment borrowings to
support our credit card operations, which was enhanced by an
increase in the average interest rates of such borrowings in
line with the general rise in market interest rates.
Provision for credit losses increased 415.8% from
W
19 billion in 2007 to
W
98 billion in 2008. This increase was
primarily attributable to a deterioration in the overall asset
quality of our credit card portfolio due to the adverse economic
conditions in Korea, as well as the increase in the outstanding
volume of our credit card receivables.
Non-interest income increased 27.0% from
W
241 billion in 2007 to
W
306 billion in 2008. This increase
resulted principally from gains from disposal of our shares of
Visa Inc. and Mastercard Inc. in the second half of 2008.
Non-interest expense increased 15.1% from
W
1,064 billion in 2007 to
W
1,225 billion in 2008, primarily due to
an increase in marketing costs as a result of increased
marketing efforts to procure new credit card subscribers.
Corporate
Banking
Our corporate banking segment handles our transactions with
private and public enterprises. Activities within the segment
include loans, overdrafts and other credit facilities, deposits
in Won and foreign currencies and foreign currency activities.
The following table shows, for the periods indicated, our income
statement data for this segment:
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||
| 2007 | 2008 | 2009 | 2008/2007 | 2009/2008 | ||||||||||||||||
| (In billions of Won) | (% Change) | |||||||||||||||||||
|
Income statement data:
|
||||||||||||||||||||
|
Interest income
|
|
6,373 |
|
9,551 |
|
8,379 | 49.9 | % | (12.3 | )% | ||||||||||
|
Interest expense
|
5,281 | 8,207 | 6,557 | 55.4 | (20.1 | ) | ||||||||||||||
|
Provision for credit losses
|
416 | 1,351 | 1,392 | 224.8 | 3.0 | |||||||||||||||
|
Non-interest income
|
676 | 1,244 | 739 | 84.0 | (40.6 | ) | ||||||||||||||
|
Non-interest expense including depreciation and amortization
|
767 | 1,439 | 1,218 | 87.6 | (15.4 | ) | ||||||||||||||
|
Net income (loss) before tax
|
585 | (202 | ) | (49 | ) | N/M | (2) | (75.7 | ) | |||||||||||
|
Income
tax
(1)
|
171 | (56 | ) | (14 | ) | N/M | (2) | (75.0 | ) | |||||||||||
|
Net income
|
|
414 |
|
(146 | ) |
|
(35 | ) | N/M | (2) | (76.0 | ) | ||||||||
| (1) | Portion of income tax allocated to this segment based on income before tax. | |
| (2) | N/M = not meaningful. |
Comparison
of 2009 to 2008
Our net loss before tax for this segment decreased 75.7% from
W
202 billion in 2008 to
W
49 billion in 2009.
Interest income from our corporate banking activities decreased
12.3% from
W
9,551 billion in 2008 to
W
8,379 billion in 2009. This decrease was
primarily due to a decrease in average interest rates on
corporate loans, reflecting the lower interest rate environment
in Korea in 2009, the effect of which was partially offset by a
10.6% increase in the average volume of corporate loans from
W
72,683 billion in 2008 to
W
80,400 billion in 2009, mainly as a
result of increased lending to small- and medium-sized
enterprises primarily due to policies and initiatives introduced
by the Korean government to encourage Korean banks to provide
financial support to small-and medium-sized enterprises.
Interest expense decreased 20.1% from
W
8,207 billion in 2008 to
W
6,557 billion in 2009. This decrease was
primarily due to a decrease in the average interest rates on
inter-segment borrowings in line with the lower interest
131
Table of Contents
rate environment, the effect of which was partially offset by an
increase in the average volume of such borrowings to support our
corporate lending growth.
Provision for credit losses on commercial loans increased 3.0%
from
W
1,351 billion in 2008 to
W
1,392 billion in 2009, primarily as a
result of increases in delinquencies and non-performing loans in
our corporate loan portfolio, in particular loans to small- and
medium-sized enterprises due to the adverse economic conditions
in Korea, as well as an increase in corporate lending volume.
Non-interest income decreased 40.6% from
W
1,244 billion in 2008 to
W
739 billion in 2009. This decrease was
mainly due to a decrease in gain on foreign currency
transactions, which mainly reflected reduced exchange rate
volatility and transaction volume.
Non-interest expense decreased 15.4% from
W
1,439 billion in 2008 to
W
1,218 billion in 2009, principally as a
result of a decrease in loss on foreign exchange transactions,
which mainly reflected reduced exchange rate volatility and
transaction volume.
Comparison
of 2008 to 2007
Our net income before tax for this segment changed from net
income of
W
585 billion in 2007 to a net
loss of
W
202 billion in 2008.
Interest income from our corporate banking activities increased
49.9% from
W
6,373 billion in 2007 to
W
9,551 billion in 2008. This increase was
primarily due to a 30.1% increase in the average volume of
corporate loans from
W
55,879 billion in
2007 to
W
72,683 billion in 2008,
reflecting our increased marketing efforts to corporate
customers, and was enhanced by an increase in average interest
rates on corporate loans, resulting principally from a general
rise in market interest rates for such loans.
Interest expense increased 55.4% from
W
5,281 billion in 2007 to
W
8,207 billion in 2008. This increase was
primarily due to an increase in the average volume of
inter-segment borrowings to support our corporate lending
growth, the effect of which was enhanced by an increase in the
average interest rates on such borrowings in line with the
general rise in market interest rates.
Provision for credit losses on commercial loans increased 224.8%
from
W
416 billion in 2007 to
W
1,351 billion in 2008, primarily as a
result of increases in delinquencies and non-performing loans in
our corporate loan portfolio, in particular loans to small- and
medium-sized enterprises (including in the construction sector)
due to the adverse economic conditions in Korea, as well as a
significant increase in corporate lending volume.
Non-interest income increased 84.0% from
W
676 billion in 2007 to
W
1,244 billion in 2008. This increase was
primarily due to an increase in gain on foreign exchange
transactions, which mainly reflected higher exchange rate
volatility and transaction volume.
Non-interest expense increased 87.6% from
W
767 billion in 2007 to
W
1,439 billion in 2008, primarily due to
an increase in loss on foreign exchange transactions, which
mainly reflected higher exchange rate volatility and transaction
volume.
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Table of Contents
Capital
Markets
Our capital markets segment handles our treasury activities and
dealing of trading and investment securities as well as raising
foreign currency funding through debentures and borrowings in
foreign currencies. The following table shows, for the periods
indicated, our income statement data for this segment:
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||
| 2007 | 2008 | 2009 | 2008/2007 | 2009/2008 | ||||||||||||||||
| (In billions of Won) | (% Change) | |||||||||||||||||||
|
Income statement data:
|
||||||||||||||||||||
|
Interest income
|
|
3,459 |
|
4,353 |
|
3,846 | 25.8 | % | (11.6 | )% | ||||||||||
|
Interest expense
|
3,517 | 4,205 | 3,702 | 19.6 | (12.0 | ) | ||||||||||||||
|
Provision for credit losses
|
— | 13 | 53 | — | 307.7 | |||||||||||||||
|
Non-interest income
|
5,561 | 30,707 | 15,663 | 452.2 | (49.0 | ) | ||||||||||||||
|
Non-interest expense including depreciation and amortization
|
5,529 | 30,724 | 15,640 | 455.7 | (49.1 | ) | ||||||||||||||
|
Net income (loss) before tax
|
(26 | ) | 118 | 114 | N/M | (2) | (3.4 | ) | ||||||||||||
|
Income
tax
(1)
|
(7 | ) | 32 | 31 | N/M | (2) | (3.1 | ) | ||||||||||||
|
Net income
|
|
(19 | ) |
|
86 |
|
83 | N/M | (2) | (3.5 | ) | |||||||||
| (1) | Portion of income tax allocated to this segment based on income before tax. | |
| (2) | N/M = not meaningful. |
Comparison
of 2009 to 2008
Our net income before tax for this segment decreased 3.4% from
W
118 billion in 2008 to
W
114 billion in 2009.
Interest income decreased 11.6% from
W
4,353 billion in 2008 to
W
3,846 billion in 2009, primarily due to a
decrease in the average interest rates on our investment and
trading securities, which reflected the lower interest rate
environment in Korea in 2009. This decrease was partially offset
by an increase in the average volume of our investment and
trading securities, which mainly reflected our increased
purchases of Korean treasury securities and debt securities
issued by government agencies and financial institutions.
Interest expense decreased 12.0% from
W
4,205 billion in 2008 to
W
3,702 billion in 2009, primarily due to a
decrease in interest expense relating to borrowings in both Won
and foreign currencies, which reflected the lower interest rate
environment, the effect of which was partially offset by an
increase in the average volume of our long-term debt mainly as a
result of our increased funding needs.
Non-interest income decreased 49.0% from
W
30,707 billion in 2008 to
W
15,663 billion in 2009, primarily due to
a 53.3% decrease in revenues and valuation gains on derivatives
from
W
23,888 billion in 2008 to
W
11,158 billion in 2009, which resulted
mainly from reduced foreign exchange and interest rate
volatility and transaction volume.
Non-interest expense decreased 49.1% from
W
30,724 billion in 2008 to
W
15,640 billion in 2009, primarily due to
a 61.8% decrease in losses (including valuation losses) on
derivatives from
W
23,636 billion in 2008
to
W
9,027 billion in 2009, which resulted
mainly from reduced foreign exchange and interest rate
volatility and transaction volume.
Comparison
of 2008 to 2007
Our net income before tax for this segment changed from a net
loss of
W
26 billion in 2007 to net income
of
W
118 billion in 2008.
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Table of Contents
Interest income increased 25.8% from
W
3,459 billion in 2007 to
W
4,353 billion in 2008, primarily due to
an increase in the average volume of our investment and trading
securities, which mainly reflected our increased purchases of
Korean treasury and government agency debt securities. This
increase was enhanced by an increase in the average interest
rates on our investment and trading securities, which reflected
the general rise in market interest rates in Korea in 2008.
Interest expense increased 19.6% from
W
3,517 billion in 2007 to
W
4,205 billion in 2008, primarily due to
an increase in the average volume of our long-term debt mainly
as a result of our increased funding needs.
Non-interest income increased 452.2% from
W
5,561 billion in 2007 to
W
30,707 billion in 2008, primarily due to
a 446.1% increase in revenues and valuation gains on derivatives
from
W
4,374 billion in 2007 to
W
23,888 billion in 2008, which resulted
mainly from increased foreign exchange and interest rate
volatility and transaction volume.
Non-interest expense increased 455.7% from
W
5,529 billion in 2007 to
W
30,724 billion in 2008, primarily due to
a 448.9% increase in losses (including valuation losses) on
derivatives from
W
4,306 billion in 2007 to
W
23,636 billion in 2008, which resulted mainly
from increased foreign exchange and interest rate volatility and
transaction volume.
Other
“Other” includes our “back office”
administrative operations, operations of our consolidated
subsidiaries other than Kookmin Bank (including our guaranteed
trust accounts), certain income or expenses related to our
inter-segment transactions and other income or expenses
(including severance payments) that cannot be categorized in
other segments. The following table shows, for the periods
indicated, our income statement data for this segment:
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||
| 2007 | 2008 | 2009 | 2008/2007 | 2009/2008 | ||||||||||||||||
| (In billions of Won) | (% Change) | |||||||||||||||||||
|
Income statement data
|
||||||||||||||||||||
|
Interest income
|
|
1,339 |
|
1,385 |
|
136 | 3.4 | % | (90.2 | )% | ||||||||||
|
Interest expense
|
342 | 564 | 593 | 64.9 | 5.1 | |||||||||||||||
|
Provision for credit losses
|
28 | 163 | 324 | 482.1 | 98.8 | |||||||||||||||
|
Non-interest income
|
2,143 | 2,960 | 2,727 | 38.1 | (7.9 | ) | ||||||||||||||
|
Non-interest expense including depreciation and amortization
|
1,587 | 2,855 | 2,554 | 79.9 | (10.5 | ) | ||||||||||||||
|
Net income (loss) before tax
|
1,525 | 763 | (608 | ) | (50.0 | ) | N/M | (2) | ||||||||||||
|
Income
tax
(1)
|
903 | 95 | (465 | ) | (89.5 | ) | N/M | (2) | ||||||||||||
|
Net income
|
|
622 |
|
668 |
|
(143 | ) | 7.4 | N/M | (2) | ||||||||||
| (1) | Portion of income tax allocated to this segment based on income before tax. | |
| (2) | N/M = not meaningful. |
Comparison
of 2009 to 2008
Our net income before tax for this segment changed from net
income of
W
763 billion in 2008 to a net
loss of
W
608 billion in 2009.
Interest income decreased 90.2% from
W
1,385 billion in 2008 to
W
136 billion in 2009. This decrease was
primarily due to a decrease in income from inter-segment
transactions attributable to this segment resulting from the
earlier adjustment of interest rates on inter-segment interest
earning assets compared to interest rates on inter-segment
interest bearing liabilities in the context of the lower
interest rate environment in 2009.
Interest expense increased 5.1% from
W
564 billion in 2008 to
W
593 billion in 2009 due mainly to an
increase in the average volume of secured borrowings
attributable to this segment.
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Table of Contents
Non-interest income decreased 7.9% from
W
2,960 billion in 2008 to
W
2,727 billion in 2009 primarily due to a
decrease in gains on our investments accounted for under the
equity method.
Non-interest expense decreased 10.5% from
W
2,855 billion in 2008 to
W
2,554 billion in 2009 primarily due to a
decrease in expenses relating to our “back office”
administrative operations resulting from our cost-cutting
efforts in 2009.
Comparison
of 2008 to 2007
Our net income before tax for this segment decreased 50.0% from
W
1,525 billion in 2007 to
W
763 billion in 2008.
Interest income increased 3.4% from
W
1,339 billion in 2007 to
W
1,385 billion in 2008. This increase was
primarily due to the interest income of KB
Investment & Securities, which was acquired by Kookmin
Bank in March 2008 and became our consolidated subsidiary, that
was included in this segment.
Interest expense increased 64.9% from
W
342 billion in 2007 to
W
564 billion in 2008 due mainly to an
increase in average interest rates of borrowings attributable to
this segment, principally borrowings by our consolidated
subsidiaries, as a result of the general increase in market
interest rates, which was enhanced by an increase in the average
volume of such borrowings.
Non-interest income increased 38.1% from
W
2,143 billion in 2007 to
W
2,960 billion in 2008 primarily due to an
increase in gains on our investments accounted for under the
equity method as a result of our adoption of a financial holding
company structure in the second half of 2008.
Non-interest expense increased 79.9% from
W
1,587 billion in 2007 to
W
2,855 billion in 2008 primarily due to
losses incurred in the disposal of treasury shares, which were
acquired in connection with the comprehensive stock transfer
pursuant to which we were established, in the second half of
2008.
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Table of Contents
| Item 5B. | Liquidity and Capital Resources |
Financial
Condition
Assets
The following table sets forth, as of the dates indicated, the
principal components of our assets:
| As of December 31, | % Change | |||||||||||||||||||
| 2007 | 2008 | 2009 | 2008/2007 | 2009/2008 | ||||||||||||||||
| (In billions of Won) | ||||||||||||||||||||
|
Cash and cash equivalents
|
|
2,770 |
|
3,073 |
|
2,696 | 10.9 | % | (12.3 | )% | ||||||||||
|
Restricted cash
|
3,996 | 4,794 | 6,050 | 20.0 | 26.2 | |||||||||||||||
|
Interest-bearing deposits in other banks
|
69 | 235 | 467 | 240.6 | 98.7 | |||||||||||||||
|
Call loans and securities purchased under resale agreements
|
1,628 | 1,407 | 2,036 | (13.6 | ) | 44.7 | ||||||||||||||
|
Trading assets
|
6,594 | 13,095 | 7,721 | 98.6 | (41.0 | ) | ||||||||||||||
|
Investments
(1)
|
24,685 | 29,209 | 33,245 | 18.3 | 13.8 | |||||||||||||||
|
Loans:
|
||||||||||||||||||||
|
Domestic:
|
||||||||||||||||||||
|
Commercial:
|
||||||||||||||||||||
|
Commercial and industrial
|
60,945 | 75,140 | 74,611 | 23.3 | (0.7 | ) | ||||||||||||||
|
Construction
|
8,843 | 10,052 | 8,097 | 13.7 | (19.4 | ) | ||||||||||||||
|
Lease financing
|
— | — | — | — | — | |||||||||||||||
|
Other commercial
|
1,797 | 2,951 | 2,178 | 64.2 | (26.2 | ) | ||||||||||||||
|
Total commercial
|
71,585 | 88,143 | 84,886 | 23.1 | (3.7 | ) | ||||||||||||||
|
Consumer:
|
||||||||||||||||||||
|
Credit cards
|
10,429 | 11,523 | 11,368 | 10.5 | (1.3 | ) | ||||||||||||||
|
Mortgage and home equity
|
65,819 | 69,924 | 70,678 | 6.2 | 1.1 | |||||||||||||||
|
Other consumer
|
23,020 | 27,592 | 26,949 | 19.9 | (2.3 | ) | ||||||||||||||
|
Total consumer
|
99,268 | 109,039 | 108,995 | 9.8 | 0.0 | |||||||||||||||
|
Total domestic
|
170,853 | 197,182 | 193,881 | 15.4 | (1.7 | ) | ||||||||||||||
|
Foreign:
|
||||||||||||||||||||
|
Commercial and industrial
|
1,336 | 2,455 | 2,344 | 83.8 | (4.5 | ) | ||||||||||||||
|
Total foreign
|
1,336 | 2,455 | 2,344 | 83.8 | (4.5 | ) | ||||||||||||||
|
Deferred origination costs
|
396 | 473 | 570 | 19.4 | 20.5 | |||||||||||||||
|
Less allowance for loan losses
|
(1,864 | ) | (3,043 | ) | (3,341 | ) | 63.3 | 9.8 | ||||||||||||
|
Total loans
|
170,721 | 197,067 | 193,454 | 15.4 | (1.8 | ) | ||||||||||||||
|
Due from customers on acceptances
|
1,106 | 2,063 | 1,895 | 86.5 | (8.1 | ) | ||||||||||||||
|
Premises and equipment, net
|
1,660 | 1,775 | 1,617 | 6.9 | (8.9 | ) | ||||||||||||||
|
Accrued interest and dividends receivable
|
899 | 1,124 | 1,029 | 25.0 | (8.5 | ) | ||||||||||||||
|
Security deposits
|
1,335 | 1,428 | 1,406 | 7.0 | (1.5 | ) | ||||||||||||||
|
Goodwill and other intangible assets
|
577 | 786 | 771 | 36.2 | (1.9 | ) | ||||||||||||||
|
Other assets
|
1,643 | 2,271 | 1,468 | 38.2 | (35.4 | ) | ||||||||||||||
|
Total assets
|
|
217,683 |
|
258,327 |
|
253,855 | 18.7 | (1.7 | ) | |||||||||||
| (1) | Consists of available-for-sale securities, held-to-maturity securities, venture capital securities and other securities. |
136
Table of Contents
Comparison
of 2009 to 2008
Our assets decreased 1.7% from
W
258,327 billion as of December 31,
2008 to
W
253,855 billion as of
December 31, 2009, primarily due to decreases in trading
assets and commercial loans, the effects of which were partially
offset by increases in investments and restricted cash.
Our loans (net of loan loss allowances) decreased 1.8% from
W
197,067 billion as of December 31,
2008 to
W
193,454 billion as of
December 31, 2009. Commercial loans decreased 3.7% from
W
88,143 billion as of December 31,
2008 to
W
84,886 billion as of
December 31, 2009.
Trading assets decreased 41.0% from
W
13,095 billion as of December 31,
2008 to
W
7,721 billion as of
December 31, 2009. Investments increased 13.8% from
W
29,209 billion as of December 31,
2008 to
W
33,245 billion as of
December 31, 2009. Restricted cash increased 26.2% from
W
4,794 billion as of December 31,
2008 to
W
6,050 billion as of
December 31, 2009.
Comparison
of 2008 to 2007
Our assets increased 18.7% from
W
217,683 billion as of December 31,
2007 to
W
258,327 billion as of
December 31, 2008, primarily due to increases in commercial
loans, consumer loans (including credit card receivables),
trading assets and investments.
Our loans (net of loan loss allowances) increased 15.4% from
W
170,721 billion as of December 31,
2007 to
W
197,067 billion as of
December 31, 2008.
Commercial loans increased 23.1% from
W
71,585 billion as of December 31,
2007 to
W
88,143 billion as of
December 31, 2008. Consumer loans increased 9.8% from
W
99,268 billion as of December 31,
2007 to
W
109,039 billion as of
December 31, 2008. Trading assets increased 98.6% from
W
6,594 billion as of December 31,
2007 to
W
13,095 billion as of
December 31, 2008. Investments increased 18.3% from
W
24,685 billion as of December 31,
2007 to
W
29,209 billion as of
December 31, 2008.
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Table of Contents
Liabilities
and Equity
The following table sets forth, as of the dates indicated, the
principal components of our liabilities and our equity:
| As of December 31, | % Change | |||||||||||||||||||
| 2007 | 2008 | 2009 (1) | 2008/2007 | 2009/2008 | ||||||||||||||||
| (In billions of Won) | ||||||||||||||||||||
|
Deposits
|
||||||||||||||||||||
|
Interest bearing
|
|
134,760 |
|
155,263 |
|
166,079 | 15.2 | % | 7.0 | % | ||||||||||
|
Non-interest bearing
|
3,678 | 3,438 | 3,104 | (6.5 | ) | (9.7 | ) | |||||||||||||
|
Call money
|
794 | 3,444 | 1,365 | 333.8 | (60.4 | ) | ||||||||||||||
|
Trading liabilities
|
1,812 | 8,191 | 4,246 | 352.0 | (48.2 | ) | ||||||||||||||
|
Acceptances outstanding
|
1,106 | 2,063 | 1,895 | 86.5 | (8.1 | ) | ||||||||||||||
|
Other borrowed funds
|
7,776 | 10,527 | 8,176 | 35.4 | (22.3 | ) | ||||||||||||||
|
Accrued interest payable
|
4,196 | 4,961 | 3,819 | 18.2 | (23.0 | ) | ||||||||||||||
|
Secured borrowings
|
6,315 | 5,880 | 4,670 | (6.9 | ) | (20.6 | ) | |||||||||||||
|
Long-term debt
|
36,307 | 45,148 | 39,570 | 24.4 | (12.4 | ) | ||||||||||||||
|
Other liabilities
|
3,953 | 3,817 | 3,355 | (3.4 | ) | (12.1 | ) | |||||||||||||
|
Total liabilities
|
200,697 | 242,732 | 236,279 | 20.9 | (2.7 | ) | ||||||||||||||
|
Common stock
|
1,682 | 1,782 | 1,932 | 5.9 | 8.4 | |||||||||||||||
|
Additional paid-in capital
|
5,405 | 6,253 | 7,200 | 15.7 | 15.1 | |||||||||||||||
|
Other
|
9,879 | 7,560 | 8,407 | (23.5 | ) | 11.2 | ||||||||||||||
|
Stockholders’ equity
|
16,966 | 15,595 | 17,539 | (8.1 | ) | 12.5 | ||||||||||||||
|
Noncontrolling
interests
(1)
|
20 | — | 37 | (100.0 | ) | N/M | (2) | |||||||||||||
|
Total equity
|
16,986 | 15,595 | 17,576 | (8.2 | ) | 12.7 | ||||||||||||||
|
Total liabilities and equity
|
|
217,683 |
|
258,327 |
|
253,855 | 18.7 | % | (1.7 | )% | ||||||||||
| (1) | On January 1, 2009, we adopted ASC 810-10-45-15. As a result, minority interests have been recharacterized as noncontrolling interests and reclassified as a component of equity. Corresponding items for prior periods have been restated accordingly. | |
| (2) | N/M = not meaningful. |
Comparison
of 2009 to 2008
Our total liabilities decreased 2.7% from
W
242,732 billion as of December 31,
2008 to
W
236,279 billion as of
December 31, 2009, principally due to decreases in
long-term debt, trading liabilities, other borrowed funds and
call money, which were partially offset by an increase in
interest bearing deposits.
Long term debt decreased 12.4% from
W
45,148 billion as of December 31,
2008 to
W
39,570 billion as of
December 31, 2009.
Trading liabilities decreased 48.2% from
W
8,191 billion as of December 31,
2008 to
W
4,246 billion as of
December 31, 2009.
Other borrowed funds decreased 22.3% from
W
10,527 billion as of December 31,
2008 to
W
8,176 billion as of
December 31, 2009.
Call money decreased 60.4% from
W
3,444 billion as of December 31,
2008 to
W
1,365 billion as of
December 31, 2009.
Interest bearing deposits increased 7.0% from
W
155,263 billion as of December 31,
2008 to
W
166,079 billion as of
December 31, 2009.
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Table of Contents
Our total equity increased by 12.7% from
W
15,595 billion as of December 31,
2008 to
W
17,576 billion as of
December 31, 2009. This increase resulted primarily from
our issuance in September 2009 of 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
W
37,250 per
share (and US$29.95 per ADS), pursuant to a rights offering to
our existing shareholders, as well as an increase in retained
earnings due to our net income in 2009.
Comparison
of 2008 to 2007
Our total liabilities increased 20.9% from
W
200,697 billion as of December 31,
2007 to
W
242,732 billion as of
December 31, 2008, principally due to increases in interest
bearing deposits, long-term debt, trading liabilities and other
borrowed funds.
Interest bearing deposits increased 15.2% from
W
134,760 billion as of December 31,
2007 to
W
155,263 billion as of
December 31, 2008.
Long term debt increased 24.4% from
W
36,307 billion as of December 31,
2007 to
W
45,148 billion as of
December 31, 2008.
Our trading liabilities increased 352.0% from
W
1,812 billion as of December 31,
2007 to
W
8,191 billion as of
December 31, 2008.
Other borrowed funds increased 35.4% from
W
7,776 billion as of December 31,
2007 to
W
10,527 billion as of
December 31, 2008.
Our total equity decreased by 8.2% from
W
16,986 billion as of December 31,
2007 to
W
15,595 billion as of
December 31, 2008. This decrease resulted primarily from an
increase in treasury stock, which reflected shares of our common
stock acquired by our consolidated subsidiaries in connection
with the “comprehensive stock transfer” under Korean
law pursuant to which we were established. See
“Item 4A. History and Development of the
Company — The Establishment of KB Financial
Group.” The effect of such increase in treasury stock was
partially offset by an increase in our additional paid-in
capital, which reflected the issuance of additional shares of
our common stock in connection with the comprehensive stock
transfer.
Liquidity
Our primary source of funding (which includes deposits,
long-term debt, borrowings from the Bank of Korea and other
short-term borrowings, secured borrowings and call money) has
historically been and continues to be customer deposits.
Deposits amounted to
W
138,438 billion,
W
158,701 billion and
W
169,183 billion as of December 31,
2007, 2008 and 2009, which represented approximately 73.0%,
70.9% and 75.9% of our total funding, respectively. We have been
able to use customer deposits to finance our operations
generally, including meeting a portion of our liquidity
requirements. We also use cash and cash equivalents, payments on
loans and sales of short-term securities to meet our liquidity
needs. Other sources of liquidity available to us include call
money, borrowings from the Bank of Korea and other short-term
borrowings which amounted to
W
8,570 billion,
W
13,971 billion and
W
9,541 billion as of December 31,
2007, 2008 and 2009 and represented 4.5%, 6.3% and 4.3% of our
total funding, respectively. These types of borrowings have
maturities of less than one year. For a more detailed
description of our funding sources, see “Item 4B.
Business Overview — Funding.”
Although most of our customer deposits have maturities of less
than one year or are payable on demand, our experience has been
that the majority of our depositors generally roll over their
deposits at maturity, providing us with a stable source of
funding. However, in the event that a substantial number of our
depositors do not roll over their deposits or otherwise decide
to withdraw their deposited funds, we would need to place
increased reliance on alternative sources of funding, some of
which may be more expensive than customer deposits, in order to
finance our operations. See “Item 3D. Risk
Factors — Risks relating to liquidity and capital
management — Our funding is highly dependent on
short-term deposits, which dependence may adversely affect our
operations.” In particular, we may increase our utilization
of alternative funding sources such as short-term borrowings and
cash and cash equivalents (including funds from maturing loans),
as well as liquidating our positions in trading and investment
securities and using the proceeds to fund parts of our
operations, as necessary. In addition, we are seeking to
139
Table of Contents
increase our reliance on long-term funding sources such as
secured borrowings (including asset securitizations), issuance
of debentures and long-term borrowings.
The Financial Services Commission of Korea requires each
financial holding company and bank in Korea to maintain specific
Won and foreign currency liquidity ratios. These ratios require
us and Kookmin Bank to keep the ratio of liquid assets to liquid
liabilities above certain minimum levels. For a description of
these requirements, see “Item 4B. Business
Overview — Supervision and Regulation —
Principal Regulations Applicable to Financial Holding
Companies — Liquidity” and “Item 4B.
Business Overview — Supervision and
Regulation — Principal Regulations Applicable to
Banks — Liquidity.”
We are exposed to liquidity risk arising from withdrawals of
deposits and maturities of our borrowings, as well as the need
to fund our lending, trading and investment activities and the
management of our trading positions. The goal of liquidity
management is for us to be able, even under adverse conditions,
to meet all of our liability repayments on time and fund all
investment opportunities. For an explanation of how we manage
our liquidity risk, see “Item 11. Quantitative and
Qualitative Disclosures about Market Risk — Liquidity
Risk Management.”
We are a financial holding company, and substantially all of our
operations are in our subsidiaries. Accordingly, we rely on
distributions from our subsidiaries, direct borrowings and
issuances of debt and equity securities to fund our liquidity
obligations. Following our establishment as a financial holding
company in September 2008, we received aggregate dividends of
W
98 billion from our subsidiaries in 2009.
See “Item 3D. Risk Factors — Risks relating
to our financial holding company structure and strategy.”
Contractual
Cash Obligations
The following table sets forth our contractual cash obligations
(excluding short-term borrowings) as of December 31, 2009.
| Payments Due by Period | ||||||||||||||||||||
|
More
|
||||||||||||||||||||
|
Than
|
||||||||||||||||||||
| Total | 1 Year or Less | 1-3 Years | 3-5 Years | 5 Years | ||||||||||||||||
| (In billions of Won) | ||||||||||||||||||||
|
Long-term debt
obligations
(1)(2)
|
|
47,395 |
|
15,793 |
|
16,248 |
|
7,523 |
|
7,831 | ||||||||||
|
Secured
borrowings
(2)(3)
|
2,947 | 430 | 331 | 1,408 | 778 | |||||||||||||||
|
Operating lease
obligations
(4)
|
212 | 108 | 89 | 13 | 2 | |||||||||||||||
|
Capital lease obligations
|
27 | 27 | — | — | — | |||||||||||||||
|
Deposits
(5)(6)
|
120,432 | 112,043 | 4,924 | 2,532 | 933 | |||||||||||||||
|
Total
|
|
171,013 |
|
128,401 |
|
21,592 |
|
11,476 |
|
9,544 | ||||||||||
| (1) | Long-term debt includes senior debt and subordinated debt, as contained in Note 17 to our consolidated financial statements. | |
| (2) | Includes estimated future interest payments, which have been estimated using contractual interest rates and scheduled contractual maturities of the outstanding debt obligations and borrowings as of December 31, 2009. In order to calculate future interest payments on debt with floating rates, we used contractual interest rates as of December 31, 2009. | |
| (3) | Excluding securities sold under repurchase agreements. | |
| (4) | This line item is not included within our consolidated balance sheet. | |
| (5) | Excluding demand deposits and savings deposits. | |
| (6) | Includes estimated future interest payments, which have been estimated using the weighted average interest rates paid for 2009 for each deposit product category and their scheduled contractual maturities. |
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Table of Contents
Commitments
and Guarantees
The following table sets forth our commitments and guarantees as
of December 31, 2009. These commitments, apart from certain
guarantees and acceptances, are not included within our
consolidated balance sheet. Guarantees are recorded at their
fair value at inception, which is amortized over the life of
guarantees.
| Payments Due by Period | ||||||||||||||||||||
|
Less
|
More
|
|||||||||||||||||||
|
Than
|
Than
|
|||||||||||||||||||
| Total | 1 Year | 1-3 Years | 3-5 Years | 5 Years | ||||||||||||||||
| (In billions of Won) | ||||||||||||||||||||
|
Financial guarantees
|
|
596 |
|
293 |
|
301 |
|
1 |
|
1 | ||||||||||
|
Performance guarantees
|
5,630 | 3,682 | 1,866 | 82 | — | |||||||||||||||
|
Liquidity facilities to special purpose
entities
(1)
|
1,575 | 470 | 1,015 | 90 | — | |||||||||||||||
|
Trust fund guarantees
|
2,869 | 506 | 430 | 326 | 1,607 | |||||||||||||||
|
Total
|
|
10,670 |
|
4,951 |
|
3,612 |
|
499 |
|
1,608 | ||||||||||
| (1) | Represents irrevocable commitments to provide contingent liquidity credit lines to special purpose entities for which we serve as the administrator. See Note 31 of the notes to our consolidated financial statements. |
Capital
Adequacy
The following discussion and the figures herein are based on the
Korean GAAP statistics we prepared for regulatory reporting
purposes in Korea. Kookmin Bank is subject to Financial Services
Commission capital adequacy requirements applicable to Korean
banks, which have been formulated based on, and are consistent
in all material respects with, the “International
Convergence of Capital Measurement and Capital Standards, a
Revised Framework,” also known as Basel II, first published
by the Basel Committee of Banking Supervision, Bank for
International Settlements in 2004 and implemented in Korea
beginning in 2008. Kookmin Bank is required to maintain a
minimum ratio of total capital to risk-weighted assets, as
determined by a specified formula, of 8.0%. See
“Item 4B. Business Overview — Supervision
and Regulation — Principal Regulations Applicable to
Banks — Capital Adequacy and Allowances.”
As of December 31, 2009, Kookmin Bank’s capital
adequacy ratio was 14.04%, compared to 13.18% as of
December 31, 2008 (in each case, calculated in accordance
with Basel II). This increase was primarily due to Kookmin
Bank’s issuances of subordinated notes in the amount of
W
1.0 trillion and hybrid Tier I securities
in the amount of
W
1.0 trillion, as well as a
W
0.3 trillion increase in paid-in capital
resulting from our purchase of new common shares issued by
Kookmin Bank.
As of December 31, 2008, Kookmin Bank’s capital
adequacy ratio was 13.18% (calculated in accordance with Basel
II), compared to 12.62% as of December 31, 2007 (calculated
in accordance with the initial Basel Capital Accord of 1988).
This increase was primarily due to Kookmin Bank’s issuance
of subordinated notes in the amount of
W
3.4
trillion, as well as a
W
0.5 trillion increase
in paid-in capital resulting from our purchase of new common
shares issued by Kookmin Bank in December 2008.
141
Table of Contents
The following table sets forth a summary of Kookmin Bank’s
capital and capital adequacy ratios as of December 31,
2007, 2008 and 2009.
| As of December 31, | ||||||||||||
| 2007 | 2008 (1) | 2009 (1) | ||||||||||
| (In billions of Won, except percentage) | ||||||||||||
|
Tier I capital:
|
|
15,157 |
|
15,302 |
|
16,735 | ||||||
|
Paid-in capital
|
1,682 | 2,182 | 2,482 | |||||||||
|
Capital reserves
|
6,097 | 6,092 | 6,090 | |||||||||
|
Retained earnings
|
7,775 | 8,486 | 9,125 | |||||||||
|
Noncontrolling interests in consolidated subsidiaries
|
44 | — | 7 | |||||||||
|
Others
|
(441 | ) | (1,458 | ) | (969 | ) | ||||||
|
Tier II capital:
|
4,858 | 5,024 | 4,973 | |||||||||
|
Revaluation reserves
|
177 | 177 | 177 | |||||||||
|
Allowance for credit
losses
(2)
|
1,953 | 486 | 394 | |||||||||
|
Hybrid debt
|
440 | 359 | 263 | |||||||||
|
Subordinated
debt
(3)
|
2,227 | 4,745 | 4,316 | |||||||||
|
Valuation gain on investment securities
|
61 | 161 | 169 | |||||||||
|
Others
|
— | (904 | ) | (346 | ) | |||||||
|
Investment in non-consolidated equity
investees
(4)
|
(129 | ) | — | — | ||||||||
|
Subordinated notes from
securitizations
(5)
|
(252 | ) | — | — | ||||||||
|
Total core and supplementary capital
|
19,634 | 20,326 | 21,708 | |||||||||
|
Risk-weighted
assets
(6)
|
155,599 | 154,261 | 154,593 | |||||||||
|
Credit risk:
|
||||||||||||
|
On-balance sheet
|
148,631 | 129,037 | 132,845 | |||||||||
|
Off-balance sheet
|
6,517 | 9,999 | 7,081 | |||||||||
|
Market risk
|
451 | (7) | 2,069 | 2,072 | ||||||||
|
Operational risk
|
— | 13,156 | 12,595 | |||||||||
|
Capital adequacy ratio
|
12.62 | % | 13.18 | % | 14.04 | % | ||||||
|
Tier I capital
|
9.74 | 9.92 | 10.82 | |||||||||
|
Tier II capital
|
2.88 | 3.26 | 3.22 | |||||||||
| (1) | Calculated in accordance with Basel II. | |
| (2) | Reserves for possible credit losses in respect of credits classified as normal or precautionary are used to calculate Tier II capital only to the extent they represent up to 1.25% of risk-weighted assets. | |
| (3) | Subordinated debt up to an amount equal to 50% of Tier I capital may be used in the calculation of Tier II capital. | |
| (4) | Prior to 2008, equity investees engaged in banking and financial activities of which Kookmin Bank owned more than 15% were deducted from total capital. Beginning in 2008, such equity investees are deducted directly from Tier I and Tier II capital pursuant to the guidelines of the Financial Supervisory Service. | |
| (5) | Prior to 2008, subordinated notes from securitizations were deducted from total capital. Beginning in 2008, such subordinated notes from securitizations are deducted directly from Tier I and Tier II capital pursuant to the guidelines of the Financial Supervisory Service. | |
| (6) | Prior to the implementation of Basel II in 2008, risk-weighted assets were classified as credit risk-weighted assets and market risk-weighted assets. Beginning in 2008, under Basel II, risk-weighted assets are classified as credit risk-weighted assets, market risk-weighted assets and operational risk-weighted assets. | |
| (7) | Represents amounts net of credit risk-weighted assets with respect to our trading activities account. |
In June 2004, the Basel Committee for Banking Supervision
published materials regarding Basel II. The Financial
Supervisory Service provided Korean banks with related
guidelines in October 2004 and implemented Basel II in
Korea beginning on January 1, 2008.
Under Basel II, banks are permitted to follow either a
standardized approach or an internal ratings-based approach with
respect to calculating credit risk capital requirements. Kookmin
Bank has voluntarily chosen to
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Table of Contents
establish and follow an internal ratings-based approach, which
is more risk-sensitive in assessing its credit risk capital
requirements. In December 2007, the Financial Supervisory
Service approved Kookmin Bank’s internal ratings-based
approach for credit risk, and Kookmin Bank became the first
Korean bank permitted to use such internal ratings-based
approach. For regulatory reporting purposes, Kookmin Bank has
implemented its internal ratings-based approach for credit risk
with respect to retail and small and medium-sized enterprise
loans and asset-backed securities from January 2008, large
corporate loans from June 2008 and retail SOHO loans from
December 2008. Kookmin Bank plans to further implement its
internal ratings-based approach to other classes of credit risk
exposure on a phased rollout basis in 2010 based on
consultations with the Financial Supervisory Service and to
implement its “Advanced Internal Ratings-based
Approach” for credit risk for regulatory reporting purposes
in the near future. A standardized approach will be used in
measuring credit risk for those classes of exposure for which
Kookmin Bank’s internal ratings-based approach has not yet
been implemented, as well as for certain classes of exposure
(including those to the government, public institutions and
other banks) for which the internal ratings-based approach will
not be applied. With respect to operational risk, Kookmin Bank
implemented a standardized approach beginning in January 2008
and further implemented an “Advanced Measurement
Approach” for regulatory reporting purposes beginning in
January 2009.
While the implementation of Kookmin Bank’s internal
ratings-based approach in 2008 has increased its capital
adequacy ratio and led to a decrease in its credit risk-related
capital requirements as compared to those under its previous
approach under the initial Basel Capital Accord of 1988, there
can be no assurance that such internal ratings-based approach
under Basel II will not require an increase in Kookmin
Bank’s credit risk capital requirements in the future,
which may require Kookmin Bank to either improve its asset
quality or raise additional capital.
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. After
further impact assessment, the Basel Committee on Banking
Supervision is expected to implement the new set of measures in
2012. The timing and scope of implementation of such measures in
Korea remain uncertain. The implementation of such measures in
Korea may have a significant effect on the capital requirements
of Korean financial institutions, including us.
In addition, we, as a bank holding company, are required under
the capital adequacy requirements of the Financial Services
Commission to maintain a minimum consolidated capital adequacy
ratio of 8.0%. “Consolidated capital adequacy ratio”
is defined as the ratio of equity capital as a percentage of
risk-weighted assets on a consolidated basis, determined in
accordance with Financial Services Commission requirements that
have been formulated based on Bank of International Settlements
standards. “Equity capital,” as applicable to bank
holding companies, is defined as the sum of Tier I capital,
Tier II capital and Tier III capital less any
deductible items (each as defined under the Regulation on the
Supervision of Financial Holding Companies). “Risk-weighted
assets” is defined as the sum of credit risk-weighted
assets and market risk-weighted assets.
The following table sets forth a summary of our consolidated
capital adequacy ratio as of December 31, 2008 and 2009,
based on applicable Korean GAAP and regulatory reporting
standards:
| As of December 31, | ||||||||
| 2008 | 2009 | |||||||
| (In billions of Won) | ||||||||
|
Risk-weighted assets
|
|
187,086 |
|
182,664 | ||||
|
Equity capital
|
21,937 | 24,360 | ||||||
|
Consolidated capital adequacy ratio
|
11.73 | % | 13.34 | % | ||||
Recent
Accounting Pronouncements
SFAS No. 141(R) —
Business Combinations (ASC 805)
In December 2007, the FASB issued
SFAS No. 141 (R), “Business
Combinations” (ASC 805). This statement applies to all
transactions or other events in which an entity obtains control
of one or more businesses, including
143
Table of Contents
those sometimes referred to as “true mergers” or
“mergers of equals” and combinations achieved without
the transfer of consideration, for example, by contract alone or
through the lapse of minority veto rights. This statement
modifies the accounting for business combinations and requires,
with limited exceptions, the acquirer in a business combination
to recognize 100% of the assets acquired, liabilities assumed,
and any noncontrolling interest in the acquiree at the
acquisition-date fair value. In addition, this statement
requires the expensing of acquisition-related transaction and
restructuring costs, and certain contingent assets and
liabilities acquired, as well as contingent consideration, to be
recognized at fair value. This statement also modifies the
accounting for certain acquired income tax assets and
liabilities. We adopted this statement on January 1, 2009.
Our adoption of this statement did not have a material impact on
our consolidated financial condition, results of operations or
cash flows.
SFAS No. 160 —
Noncontrolling Interests in Consolidated Financial Statements
(ASC 810)
In December 2007, the FASB issued SFAS No. 160,
“Noncontrolling Interests in Consolidated Financial
Statements” (ASC 810). This statement applies to all
entities that prepare consolidated financial statements, except
not-for-profit organizations, but affects only those entities
that have an outstanding noncontrolling interest in one or more
subsidiaries or that deconsolidate a subsidiary. We adopted this
statement on January 1, 2009. Our adoption of this
statement did not have a material impact on our consolidated
financial condition, results of operations or cash flows.
SFAS No. 161 —
Disclosures About Derivative Instruments and Hedging Activities
(ASC 815)
In March 2008, the FASB issued SFAS No. 161,
“Disclosures About Derivative Instruments and Hedging
Activities” (ASC 815). This statement establishes, among
other things, the disclosure requirements for derivative
instruments and hedging activities, and is effective for an
entity’s first interim period beginning after
November 15, 2008. Our adoption of this statement did not
have a material effect on our consolidated financial condition,
results of operations or cash flows.
FSP
No. FAS 140-3 —
Accounting for Transfers of Financial Assets and Repurchase
Financing Transactions (ASC 860)
In February 2008, the FASB issued FASB Staff Position
No. FAS 140-3,
“Accounting for Transfers of Financial Assets and
Repurchase Financing Transactions” (ASC 860). This
statement applies to repurchase agreements that relate to
previously transferred financial assets between the same
counterparties that are entered into contemporaneously with, or
in contemplation of, the initial transfer. We adopted this
statement for new transactions entered into after
January 1, 2009. Our adoption of this statement did not
have a material effect on our consolidated financial condition,
results of operations or cash flows.
SFAS No. 166 —
Accounting for Transfers of Financial Assets (ASC
860)
In June 2009, the FASB issued SFAS No. 166,
“Accounting for Transfers of Financial Assets, an amendment
to FASB Statement No. 140.” This statement removed
(1) the concept of a qualifying special purpose entity
(“QSPE”) from SFAS No. 140 (ASC
860 — Transfers and Servicing) and (2) the
exceptions from applying FASB Interpretation No.
(“FIN”) 46 (R) (ASC 810 —
Consolidation) to QSPEs. This statement amends
SFAS No. 140 (ASC 860) to revise and clarify the
derecognition requirements for transfers of financial assets and
the initial measurement of beneficial interests that are
received as proceeds by a transferor in connection with
transfers of financial assets. This statement also requires
additional disclosure about transfers of financial assets and a
transferor’s continuing involvement with such transferred
financial assets.
This statement became effective on January 1, 2010, at
which time any QSPEs were to be evaluated for consolidation in
accordance with SFAS No. 167, which amends FIN 46
(R) (ASC 810). However, the amendments on how to account for
transfers of financial assets will apply prospectively to
transfers occurring on or after the effective date. Our
management is currently evaluating the impact of the adoption of
this statement on our consolidated financial condition, results
of operations and cash flows.
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Table of Contents
SFAS No. 167 —
Amendments to FIN 46 (R) (ASC 810)
In June 2009, the FASB issued SFAS No. 167,
“Amendments to FASB Interpretation No. 46 (R).”
This statement amends FIN 46 (R) (ASC 810) to require
ongoing assessments to determine whether an entity is a variable
interest entity (“VIE”) and whether an enterprise is
the primary beneficiary of a VIE. This statement also amends the
guidance for determining which enterprise, if any, is the
primary beneficiary of a VIE by requiring the enterprise to
initially perform a qualitative analysis to determine if the
enterprise’s variable interest or interests give it a
controlling financial interest. Consolidation is based on a
company’s ability to direct the activities of the entity
that most significantly impact the entity’s economic
performance. If a company has control and the right to receive
benefits or the obligation to absorb losses which could
potentially be significant to the VIE, then consolidation is
required. This statement also requires additional disclosure
about transfers of financial assets and a transferor’s
continuing involvement with such transferred financial assets.
This statement is effective from the first annual reporting
period that begins after November 15, 2009, and for the
interim and annual reporting periods thereafter with earlier
application prohibited. This statement may be applied
retrospectively in previously issued financial statements, with
cumulative effects adjusted to retained earnings. Our management
is currently evaluating the impact of the adoption of this
statement on our consolidated financial condition, results of
operations and cash flows.
ASU
2009-12 —
Investments in Certain Entities that Calculate Net Asset Value
per Share (ASC 820)
In September 2009, the FASB issued ASU
2009-12,
“Fair Value Measurements and Disclosures: Investments in
Certain Entities That Calculate Net Asset Value per Share (or
Its Equivalent)” (ASC 820). This statement offers guidance
on how to use a net asset value per share to estimate the fair
value on investments in investment vehicles such as hedge funds,
private equity funds, real estate funds, venture capital funds,
offshore fund vehicles and fund of funds. Investors may use net
asset value to estimate the fair value of investments in
investment companies that do not have a readily determinable
fair value if the investees have the attributes of investment
companies and the net asset values or their equivalents are
calculated consistent with the AICPA Audit and Accounting Guide,
Investment Companies, which generally requires investments to be
measured at fair value. This approach is deemed to be a
“practical expedient” for investors in investment
companies as the U.S. GAAP fair-value measurement framework
defines an asset’s fair value as its current exit price.
This statement has limitations and disclosure requirements about
the nature and terms of the investments within the scope of the
new guidance. This statement became effective on
December 31, 2009. Disclosure required by this statement is
provided in Note 8 of the notes to our consolidated
financial statements.
ASU
2010-06,
Improving Disclosures about Fair Value Measurements (ASC
820)
In January 2010, the FASB issued ASU
2010-06,
“Improving Disclosures about Fair Value Measurements”
(ASC 820). This statement requires disclosure of the amounts of
significant transfers in and out of Level 1 and 2 fair
value measurements and description of the reasons for the
transfers. The disclosures are effective for reporting periods
beginning after December 15, 2009. Additionally,
disclosures of the gross purchases, sales, issuances and
settlements activity in Level 3 fair value measurements
will be required for fiscal years beginning after
December 15, 2010. Our management does not expect this new
accounting guidance to have a material impact on our
consolidated financial condition, results of operations or cash
flows.
ASU
2010-11 —
Scope Exception Related to Embedded Credit Derivatives (ASC
815)
In March 2010, the FASB issued ASU
2010-11,
“Scope Exception Related to Embedded Credit
Derivatives” (ASC 815). This statement clarifies that
certain embedded derivatives, such as those contained in certain
securitizations, collateralized debt obligations and structured
notes, should be considered embedded credit derivatives subject
to potential bifurcation and separated fair value accounting.
This statement allows any beneficial interest issued by a
securitization vehicle to be accounted for under the fair value
option at transition. This new accounting guidance will become
effective on July 1, 2010. Our management does not expect
this new accounting guidance to have a material impact on our
consolidated financial condition, results of operations or cash
flows.
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Table of Contents
Selected
Financial Information under Korean GAAP
The selected consolidated financial and other data shown below
have been derived from our consolidated financial statements,
prepared in accordance with Korean GAAP.
Under Korean GAAP, consolidated financial statements include the
accounts of fully- or majority-owned subsidiaries and
substantially controlled affiliates that have assets in excess
of
W
10 billion. Substantial control is
deemed to exist when the investor is the largest stockholder and
owns more than 30% of the investee’s voting shares.
Under Korean GAAP, financial statements of our trust accounts on
which we guarantee a fixed rate of return
and/or
the
repayment of principal are consolidated, whereby assets and
liabilities of third parties held by such trusts are reflected
as part of our consolidated assets and liabilities, and revenues
and expenses generated from such third-party assets are
reflected in our consolidated statement of income. Activities
between trusts and us are eliminated in consolidation.
Capital adequacy ratios have been calculated from the
consolidated financial statements prepared in accordance with
Korean GAAP and using the guidelines issued by the Financial
Supervisory Service.
Consolidated
Income Statement Data under Korean GAAP
| Year Ended December 31, | ||||||||||||||||||||||||
| 2005 | 2006 | 2007 | 2008 (1) | 2009 | 2009 (2) | |||||||||||||||||||
| (In billions of Won, except per common share data) |
(In millions
|
|||||||||||||||||||||||
|
of US$, except
|
||||||||||||||||||||||||
|
per common
|
||||||||||||||||||||||||
| share data) | ||||||||||||||||||||||||
|
Interest income
|
|
11,453 |
|
12,267 |
|
13,877 |
|
16,916 |
|
14,765 | US$ | 12,688 | ||||||||||||
|
Interest expense
|
4,731 | 5,392 | 6,798 | 9,510 | 8,352 | 7,177 | ||||||||||||||||||
|
Net interest income
|
6,722 | 6,875 | 7,079 | 7,406 | 6,413 | 5,511 | ||||||||||||||||||
|
Provision for possible loan losses
|
1,029 | 1,028 | 547 | 1,827 | 2,299 | 1,976 | ||||||||||||||||||
|
Net interest income after provision for possible loan losses
|
5,693 | 5,847 | 6,532 | 5,579 | 4,114 | 3,535 | ||||||||||||||||||
|
Non-interest
revenue
(3)(5)
|
6,834 | 8,052 | 8,277 | 28,779 | 15,681 | 13,475 | ||||||||||||||||||
|
Non-interest
expense
(4)(5)
|
9,438 | 10,649 | 10,529 | 32,016 | 19,144 | 16,451 | ||||||||||||||||||
|
Operating income
|
3,089 | 3,250 | 4,280 | 2,342 | 651 | 559 | ||||||||||||||||||
|
Non-operating (loss) income,
net
(5)
|
170 | 174 | 264 | 374 | (99 | ) | (85 | ) | ||||||||||||||||
|
Net (loss) income before income tax expense
|
3,259 | 3,424 | 4,544 | 2,716 | 552 | 474 | ||||||||||||||||||
|
Income tax (benefit)
expense
(5)
|
1,006 | 957 | 1,782 | 842 | 25 | 21 | ||||||||||||||||||
|
Net income before acquisition of subsidiary
|
— | — | — | 1 | — | — | ||||||||||||||||||
|
Net
income
(6)
|
|
2,253 |
|
2,467 |
|
2,762 |
|
1,873 |
|
527 | US$ | 453 | ||||||||||||
|
Stockholders’ interests
|
2,241 | 2,458 | 2,757 | 1,873 | 539 | 463 | ||||||||||||||||||
|
Noncontrolling interests
|
12 | 9 | 5 | — | (12 | ) | (10 | ) | ||||||||||||||||
|
Per common share data:
|
||||||||||||||||||||||||
|
Earnings per share-basic
|
|
6,943 |
|
7,308 |
|
8,197 |
|
5,884 |
|
1,659 | US$ | 1.43 | ||||||||||||
|
Earnings per share-diluted
|
6,938 | 7,308 | 8,179 | 5,880 | 1,659 | 1.43 | ||||||||||||||||||
|
Cash dividends per common
share
(7)
|
550 | 3,650 | 2,450 | — | 230 | 0.20 | ||||||||||||||||||
| (1) |
Figures shown in the above table
for the year ended December 31, 2008 represent (i) the
consolidated income statement data of Kookmin Bank for the
period between January 1, 2008 and June 30, 2008 (for
which consolidated net income was
|
146
Table of Contents
| July 1, 2008 to September 28, 2008 because the acquisition cost of Kookmin Bank and its subsidiaries in connection with the comprehensive stock transfer pursuant to which we were established was determined as the net asset amount of Kookmin Bank and its subsidiaries as of June 30, 2008 based on Korean GAAP. | ||
| (2) |
Won amounts are expressed in U.S.
dollars at the rate of
|
|
| (3) | Non-interest revenue includes fees and commission income, dividends on securities, gains on security valuations and disposals, gains on foreign currency transactions and gains from derivative transactions. | |
| (4) | Non-interest expense is composed of fees and commissions paid or payable, general and administrative expenses, losses on security valuations and disposals, losses on foreign currency transactions and losses from derivative transactions. | |
| (5) | Commencing with the year ended December 31, 2007, we reclassified a number of line items in our income statement, including gains or losses on disposal of available-for-sale securities and sale of loans, which have been reclassified from non-operating (loss) income to non-interest (expense) revenue, and refund of a prior year’s income tax and additional income tax paid for a prior year, which have been reclassified from non-operating (loss) income to income tax (benefit) expense. Certain income statement amounts for 2006 have been restated to reflect such reclassification. | |
| (6) | Commencing with the year ended December 31, 2007, net income is presented as the sum of stockholders’ interests and noncontrolling interests. In prior years, stockholders’ interests were presented as net income. Corresponding amounts for 2005 and 2006 have been restated to reflect such change. | |
| (7) | Shown for the periods to which the dividends relate. |
Consolidated
Balance Sheet Data under Korean GAAP
| As of December 31, | ||||||||||||||||||||||||
| 2005 | 2006 | 2007 | 2008 | 2009 | 2009 (1) | |||||||||||||||||||
| (In billions of Won) |
(In millions
|
|||||||||||||||||||||||
| of US$) | ||||||||||||||||||||||||
|
Cash and cash equivalents
|
|
5,943 |
|
6,689 |
|
6,727 |
|
8,316 |
|
9,769 | US$ | 8,395 | ||||||||||||
|
Foreign
exchange
(2)
|
— | — | — | — | — | — | ||||||||||||||||||
|
Loans
(3)(4)(5)
|
138,281 | 152,383 | 174,235 | 202,407 | 198,930 | 170,953 | ||||||||||||||||||
|
Less: allowance for doubtful accounts
|
(2,459 | ) | (2,365 | ) | (2,505 | ) | (3,477 | ) | (3,532 | ) | (3,035 | ) | ||||||||||||
|
Trading
securities
(6)
|
6,463 | 5,552 | 7,786 | 7,644 | 6,763 | 5,812 | ||||||||||||||||||
|
Investment
securities
(6)
|
27,016 | 27,036 | 26,454 | 31,342 | 35,772 | 30,741 | ||||||||||||||||||
|
Premises and equipment, net
|
2,442 | 2,513 | 2,640 | 3,915 | 3,664 | 3,149 | ||||||||||||||||||
|
Other
assets
(7)(8)
|
5,217 | 7,105 | 7,707 | 17,402 | 10,802 | 9,282 | ||||||||||||||||||
|
Total assets
|
|
182,903 |
|
198,913 |
|
223,044 |
|
267,549 |
|
262,168 | US$ | 225,298 | ||||||||||||
|
Deposits
|
129,616 | 133,297 | 142,101 | 162,210 | 172,440 | 148,189 | ||||||||||||||||||
|
Borrowings
(9)(10)
|
13,328 | 13,804 | 15,275 | 20,390 | 15,710 | 13,501 | ||||||||||||||||||
|
Debentures
|
16,548 | 24,983 | 34,895 | 43,106 | 38,783 | 33,329 | ||||||||||||||||||
|
Other
liabilities
(11)
|
10,960 | 11,701 | 14,666 | 25,781 | 17,124 | 14,716 | ||||||||||||||||||
|
Total liabilities
|
170,452 | 183,785 | 206,937 | 251,487 | 244,057 | 209,734 | ||||||||||||||||||
|
Total
equity
(12)
|
12,451 | 15,128 | 16,107 | 16,062 | 18,111 | 15,564 | ||||||||||||||||||
|
Total liabilities and equity
|
|
182,903 |
|
198,913 |
|
223,044 |
|
267,549 |
|
262,168 | US$ | 225,298 | ||||||||||||
| (1) |
Won amounts are expressed in U.S.
dollars at the rate of
|
|
| (2) |
Foreign exchange represents
holdings of foreign currency and bills bought in foreign
currencies and are included in cash and cash equivalents and
loans, respectively. The amounts of foreign currency and bills
bought in foreign currencies as of December 31, 2005 were
|
|
| (3) | Loans represent the gross amount of loans, before adjustment for the allowance for loan losses. Accrued interest income is included within other assets. |
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Table of Contents
| (4) |
Credit card assets are included in
loans. The amounts of credit card assets were
|
|
| (5) |
Call loans are included in loans.
The amounts of call loans at December 31, 2005, 2006, 2007,
2008 and 2009 were
|
|
| (6) | Under Korean GAAP, all debt securities and marketable equity securities are accounted for on a similar basis to U.S. GAAP. However, adjustments for impairment can be reversed up to the original cost of the investment. | |
| (7) |
Guarantees and acceptances for
which the amounts were determined do not appear on the balance
sheet but are recorded as an off-balance sheet item in the notes
to our consolidated financial statements. The amounts of
guarantees and acceptances at December 31, 2005, 2006,
2007, 2008 and 2009 were
|
|
| (8) | Other assets include leasehold deposits, accounts receivables, accrued interest income, prepaid expenses and unsettled debit of domestic exchange (which represents outstanding balances due from other banks generated in the process of fund settlements of domestic exchange, such as checks, bills, drafts, remittance exchange, ATM use and credit card network). Leasehold deposits are recorded as other assets on the balance sheet. Accumulated depreciation is recorded as a deduction from premises and equipment. | |
| (9) | Borrowings consist mainly of borrowings from the Bank of Korea, the Korean government and other banking institutions. | |
| (10) |
Call money is included in
borrowings at December 31, 2005, 2006, 2007, 2008 and 2009.
The balances of call money as of those dates were
|
|
| (11) |
Under Korean GAAP, contingent
losses with respect to guarantees and acceptances are recognized
by applying the same classification methods and provision
percentages used in determining the allowance for loan losses.
Provisions are only applied to acceptances and guarantees
classified as substandard, doubtful and estimated loss. The
amounts of allowance as of December 31, 2005, 2006, 2007,
2008 and 2009 were
|
|
| (12) |
Noncontrolling interests are
included in total equity. The amounts of noncontrolling
interests as of December 31, 2005, 2006, 2007, 2008 and
2009 were
|
Consolidated
Profitability and Other Ratios under Korean GAAP
| Year Ended December 31, | ||||||||||||||||||||
| 2005 | 2006 | 2007 | 2008 (1) | 2009 | ||||||||||||||||
| (Percentages) | ||||||||||||||||||||
|
Net income as a percentage of:
|
||||||||||||||||||||
|
Average total
assets
(2)
|
1.23 | % | 1.27 | % | 1.31 | % | 0.75 | % | 0.20 | % | ||||||||||
|
Average stockholders’
equity
(2)
|
19.41 | 17.21 | 17.12 | 12.42 | 3.27 | |||||||||||||||
|
Dividend payout
ratio
(3)
|
8.21 | 49.77 | 29.84 | — | 14.62 | |||||||||||||||
|
Net interest
spread
(4)
|
3.98 | 3.69 | 3.39 | 2.98 | 2.50 | |||||||||||||||
|
Net interest
margin
(5)
|
4.10 | 3.90 | 3.65 | 3.23 | 2.62 | |||||||||||||||
|
Efficiency
ratio
(6)
|
69.62 | 71.70 | 71.11 | 92.62 | 97.52 | |||||||||||||||
|
Cost-to-average assets
ratio
(7)
|
5.13 | 5.38 | 5.29 | 13.69 | 8.01 | |||||||||||||||
|
Fee income as a percentage of total
income
(8)
|
6.13 | 6.69 | 7.02 | 3.36 | 4.75 | |||||||||||||||
| (1) | Figures shown in the above table for the year ended December 31, 2008 have been calculated based on (i) the applicable consolidated financial data of Kookmin Bank under Korean GAAP for the period between January 1, 2008 and June 30, 2008 and (ii) our applicable consolidated financial data under Korean GAAP for the period between September 29, 2008 and December 31, 2008, which includes the results of Kookmin Bank and its subsidiaries from July 1, 2008 to September 28, 2008 because the acquisition cost of Kookmin Bank and its subsidiaries in connection with the comprehensive stock transfer pursuant to which we were established was determined as the net asset amount of Kookmin Bank and its subsidiaries as of June 30, 2008 based on Korean GAAP. | |
| (2) | Average balances are based on (a) daily balances for our primary banking operations and (b) monthly or quarterly balances for our other operations. | |
| (3) | The dividend payout ratio represents the ratio of total dividends paid on common stock as a percentage of net income attributable to common stock. | |
| (4) | Net interest spread represents the difference between the yield on average interest earning assets and cost of average interest bearing liabilities. | |
| (5) | Net interest margin represents the ratio of net interest income to average interest earning assets. | |
| (6) | Efficiency ratio represents the ratio of non-interest expense to the sum of net interest income and non-interest revenue. | |
| (7) | Cost-to-average assets ratio represents the ratio of non-interest expense to average total assets. |
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Table of Contents
| (8) | Fee income represents income other than interest income and other operating income, and excludes fees and commissions classified in those categories under Korean GAAP. |
Capital
Ratios under Korean GAAP
| Year Ended December 31, | ||||||||||||||||||||
| 2005 | 2006 | 2007 | 2008 | 2009 | ||||||||||||||||
| (Percentages) | ||||||||||||||||||||
|
Consolidated capital adequacy ratio of KB Financial
Group
(1)
|
— | — | — | 11.73 | % | 13.34 | % | |||||||||||||
|
Capital adequacy ratios of Kookmin Bank
|
||||||||||||||||||||
|
Tier I capital adequacy
ratio
(2)
|
9.67 | % | 10.07 | % | 9.74 | % | 9.92 | % | 10.82 | % | ||||||||||
|
Tier II capital adequacy
ratio
(2)
|
3.28 | 4.10 | 2.88 | 3.26 | 3.22 | |||||||||||||||
|
Average stockholders’ equity as a percentage of average
total assets
|
6.31 | 7.37 | 7.63 | 6.06 | 6.09 | |||||||||||||||
| (1) | 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%. This computation is based on our consolidated financial statements prepared in accordance with Korean GAAP. See “— Financial Condition — Capital Adequacy.” | |
| (2) | Kookmin Bank’s capital adequacy ratios are computed in accordance with the guidelines issued by the Financial Services Commission. The computation is based on its consolidated financial statements prepared in accordance with Korean GAAP. See “— Financial Condition — Capital Adequacy.” |
Consolidated
Credit Portfolio Ratios under Korean GAAP
| As of December 31, | ||||||||||||||||||||
| 2005 | 2006 | 2007 | 2008 | 2009 | ||||||||||||||||
| (In billions of Won, except percentages) | ||||||||||||||||||||
|
Non-performing
loans
(1)
|
|
2,297 |
|
1,551 |
|
1,297 |
|
2,559 |
|
2,380 | ||||||||||
|
Non performing loans as a percentage of total loans
|
1.66 | % | 1.02 | % | 0.74 | % | 1.27 | % | 1.20 | % | ||||||||||
|
Non performing loans as a percentage of total assets
|
1.26 | 0.78 | 0.58 | 0.96 | 0.91 | |||||||||||||||
|
Allowance for loan losses for non-performing loans as a
percentage of non-performing loans
|
52.83 | 52.31 | 53.62 | 45.18 | 49.88 | |||||||||||||||
|
Total allowance for loan losses as a percentage of total loans
|
1.78 | 1.55 | 1.44 | 1.72 | 1.78 | |||||||||||||||
|
Non-performing credits as a percentage of total
credits
(2)
|
1.63 | 1.00 | 0.71 | 1.24 | 1.17 | |||||||||||||||
|
Won loans as a percentage of Won
deposits
(3)
|
96.94 | 103.01 | 119.40 | 126.92 | 117.49 | |||||||||||||||
|
Precautionary loans as a percentage of total loans
|
2.30 | 1.13 | 0.82 | 1.45 | 1.77 | |||||||||||||||
|
Precautionary and below loans as a percentage of total
loans
(4)
|
3.97 | 2.15 | 1.56 | 2.71 | 2.97 | |||||||||||||||
|
Precautionary and below loans as a percentage of total
assets
(4)
|
3.00 | 1.64 | 1.22 | 2.05 | 2.25 | |||||||||||||||
|
Allowance for loan losses for precautionary and below loans as a
percentage of precautionary and below
loans
(4)
|
28.29 | 31.03 | 31.20 | 28.83 | 28.37 | |||||||||||||||
| (1) | Non-performing loans are defined in accordance with regulatory guidance in Korea. See “Item 4B. Business Overview — Supervision and Regulation — Principal Regulations Applicable to Banks.” | |
| (2) | Credits include loans and confirmed guarantees and acceptances provided from our trust accounts (including bills purchased and privately placed debentures), as well as the total loan portfolio of the banking accounts. Loans, as defined for Korean GAAP purposes, include loans provided from our trust accounts (including bills purchased and privately placed debentures), as well as the total loan portfolio of the banking accounts. | |
| (3) | Under Korean GAAP, Won loans do not include bills bought in Won, advances for customers, credit card accounts, bonds purchased under resale agreements, call loans, private placement corporate bonds and loans in restructurings that have been swapped for equity in the |
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| restructured borrower. Including these items, our ratios as of December 31, 2005, 2006, 2007, 2008 and 2009 would have been 107.40%, 117.65%, 134.40%, 140.44% and 128.98%, respectively. | ||
| (4) | As defined by the Financial Services Commission. |
Reconciliation
with Korean GAAP
Our consolidated financial statements are prepared in accordance
with accounting principles and policies as summarized in
Note 1 to our consolidated financial statements. These
principles and policies differ in some respect from generally
accepted accounting principles applicable in Korea. The
following are reconciliations of net income and total equity of
the consolidated statements with Korean GAAP:
|
As of and for the
|
||||
|
Year Ended
|
||||
| December 31, 2009 | ||||
| (In millions of Won) | ||||
|
U.S. GAAP net income
|
|
718,569 | ||
|
1 Provision for credit losses
|
115,034 | |||
|
2 Deferred loan costs
|
(57,948 | ) | ||
|
3 Equity method investments
|
(304,193 | ) | ||
|
4 Securities and hedging derivatives accounting
|
(9,634 | ) | ||
|
5 Other loan sale accounting
|
39,986 | |||
|
6 Fixed assets
|
10,432 | |||
|
7 Merger with Korea Long Term Credit Bank
|
— | |||
|
8 Reversal of amortization of present value discounts
|
14,067 | |||
|
9 Foreign currency translation
|
(71,400 | ) | ||
|
10 Merger with H&CB
|
(70,091 | ) | ||
|
11 Merger with Kookmin Credit Card
|
5,778 | |||
|
12 Consolidation of fund represented by the wholly owned
beneficiary certificates
|
(723 | ) | ||
|
13 Acquisition of KB Investment & Securities
|
(22,590 | ) | ||
|
14 Others
|
(22,363 | ) | ||
|
Total of adjustments
|
(373,645 | ) | ||
|
Tax effect of adjustments
|
182,570 | |||
|
Korean GAAP net income
|
|
527,494 | ||
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Table of Contents
|
As of and for the
|
||||
|
Year Ended
|
||||
| December 31, 2009 | ||||
| (In millions of Won) | ||||
|
U.S. GAAP total equity
|
|
17,576,275 | ||
|
1 Provision for credit losses
|
(1,464,431 | ) | ||
|
2 Deferred loan costs
|
(341,504 | ) | ||
|
3 Equity method investments
|
(71,006 | ) | ||
|
4 Securities and hedging derivatives accounting
|
688,012 | |||
|
5 Other loan sale accounting
|
(493,371 | ) | ||
|
6 Fixed assets
|
1,194,343 | |||
|
7 Merger with Korea Long Term Credit Bank
|
363,551 | |||
|
8 Reversal of amortization of present value discounts
|
188,319 | |||
|
9 Foreign currency translation
|
3,088 | |||
|
10 Merger with H&CB
|
420,302 | |||
|
11 Merger with Kookmin Credit Card
|
(225,221 | ) | ||
|
12 Consolidation of fund represented by the wholly owned
beneficiary certificates
|
(18 | ) | ||
|
13 Acquisition of KB Investment & Securities
|
(43,475 | ) | ||
|
14 Others
|
406,750 | |||
|
Total of adjustments
|
625,339 | |||
|
Tax effect of adjustments
|
(90,288 | ) | ||
|
Korean GAAP total equity
|
|
18,111,326 | ||
The following is a summary of the significant adjustments made
to consolidated net income and total equity to reconcile the
U.S. GAAP results with those under Korean GAAP. The
numbered paragraphs below refer to the corresponding item
numbers set forth above.
1. We established the U.S. GAAP loan loss allowance
for impaired non-homogeneous loans based on (1) the present
value of expected future cash flows discounted at the
loan’s effective interest rate, (2) the fair value of
the collateral if the loan was collateral dependent or
(3) observable market prices if available. For small
balance homogeneous impaired loan portfolios and consumer loans,
we established the allowance for the loan losses based on an
evaluation of the historical performance of the loan portfolios.
Allowance for loans that were not impaired was based principally
on historical migration patterns. Other factors that management
considered when establishing reserves for loans include, but
were not limited to, global and local economic events,
delinquencies, changes in underwriting and changes in credit
monitoring policies. See “Item 4B. Business
Overview — Assets and Liabilities — Loan
Portfolio — Provisioning Policy.”
Prior to 2004 year-end, the allowance for loan losses under
Korean GAAP was determined based on the classification
guidelines promulgated by the Financial Services Commission
(“FSC”), which require that the allowance should be
equal to or greater than the allowance based on the minimum
provisioning rate determined by the classification of the loan.
Beginning with 2004 year-end, the allowance for loan losses
under Korean GAAP has been determined at the larger of the
allowance based on historical loss rates of loan portfolios or
the one based on the loan classification guidelines of the FSC.
For 2009 year-end, we used the allowance based on the FSC
guidelines as
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Table of Contents
it was greater than the one based on the historical loss rates.
Our reserve under Korean GAAP was established based on the
following percentages as of December 31, 2009:
| 2009 | ||||||
|
Corporate
|
Credit Card
|
|||||
| Loans | Retail Loans | Balances | ||||
| (Percentages) | ||||||
|
Normal
(1)
|
0.85% or more | 1.00% or more | 1.50% or more | |||
|
Precautionary
|
7.00% or more | 10.00% or more | 15.00% or more | |||
|
Substandard
|
20.00% or more | 20.00% or more | 20.00% or more | |||
|
Doubtful
|
50.00% or more | 55.00% or more | 60.00% or more | |||
|
Estimated loss
|
100.00% | 100.00% | 100.00% | |||
| (1) | In the case of normal credits comprising loans to borrowers in the construction, wholesale and retail, accommodation and restaurant or real estate and housing industries (as classified under the Korean Industry Classification Standard), the applicable figure is 0.9% or more. |
The historical loss rates used under Korean GAAP were different
from those under U.S. GAAP as a result of differences in
methodologies and industry practice including approaches for
estimating charge-off recovery rates and loss factors from
migration and roll rate analyses.
This adjustment also reflected the offsetting effects of
(1) the consolidation of our trust accounts, which include
loans and related reserves under Korean GAAP and (2) the
deconsolidation of certain securitized loans and related
reserves which we recorded as sales under Korean GAAP.
2. Under U.S. GAAP, certain employee and other costs
associated with originating loans are deferred and amortized as
a yield adjustment over the life of the related loans, net of
any related fees received. These costs relate to direct loan
origination activities performed by us which include evaluating
the prospective borrower’s financial condition, recording
guarantees, collateral and other security arrangements,
negotiating loan terms, preparing and processing loan documents
and closing the transaction. Korean GAAP requires that certain
origination fees and costs be deferred and amortized as a yield
adjustment over the life of the related loans.
3. In our consolidated financial statements under
U.S. GAAP, we must include a proportionate share of the
results of operations of our investments accounted for under the
equity method, which would be also prepared on a U.S. GAAP
basis. Consequently, the results of each of our equity method
investments have been affected by the conversion from each
investment’s respective local GAAP to U.S. GAAP.
4. Under U.S. GAAP, decreases in fair value with
respect to equity securities below the cost basis of an
individual security and deemed to be other-than-temporary must
be written off through a charge to income. For investment debt
securities, the credit loss component of the impairment is
recognized in earnings, while the remaining amount of the fair
value loss is recognized in accumulated comprehensive income if
(i) we do not intend to sell such securities and
(ii) we believe that it is more-likely-than-not that we
will not be required to sell before the expected recovery of the
amortized cost basis. In determining whether a credit loss
exists and the period over which an investment debt security is
expected to recover, the following factors were considered: the
length of time and the extent to which the market value had been
less than cost; the financial condition and near-term prospects
of the issuer; and the intent and ability of the holder to
retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in market
value. Under Korean GAAP, when the recoverable value of
available-for-sale or held-to-maturity securities is less than
their amortized acquisition costs (in the case of equity
securities, their acquisition costs), and there is any objective
evidence of impairment, then their book value is adjusted to
their recoverable amount, and the amount of their amortized
acquisition costs (in the case of equity securities, their
acquisition costs) in excess of the recoverable amount less the
amount of impairment loss already recognized in the prior
periods is reflected in current loss as impairment loss.
Under U.S. GAAP, to qualify for hedge accounting,
derivatives must be highly effective at reducing the risk
associated with the exposure being hedged. Each derivative must
be formally designated as a hedge, with documentation of the
risk management objective and strategy for the hedge,
identification of the hedging instrument, the hedged item and
risk exposure, and how effectiveness would be assessed
prospectively and retrospectively. Under Korean GAAP, the
criteria that must be met in order to apply hedge accounting
were less
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Table of Contents
prescriptive. This adjustment reflected the effects of the
reversal of the hedge accounting treatment under Korean GAAP.
5. Under U.S. GAAP, the transfer of loans was recorded
as a sale if specific and prescriptive criteria were met
relating to the transferor’s relinquishing control. If
these criteria were not met, the transfer would be treated as a
secured borrowing. Certain loan transfers (including those in
connection with asset securitization transactions) that
qualified for derecognition as sales under Korean GAAP did not
meet U.S. GAAP criteria for derecognition as sales.
6. Previously, we revalued certain fixed assets in
accordance with the Asset Revaluation Law of Korea. The
revaluation increment was credited to capital surplus in
accordance with Korean GAAP applicable during such period. As a
result of such revaluation, depreciation expenses on these
assets were adjusted to reflect the increased basis. In 2008,
Korean GAAP was changed to permit asset revaluation and as a
result, we opted to revalue our land. The accounting treatment
under Korean GAAP for asset revaluation has been changed since
the last time we revalued our fixed assets and, as a result,
gain on revaluation was credited to accumulated other
comprehensive income, net of tax. Under U.S. GAAP, such a
revaluation is not permitted and depreciation expense should be
based on historical cost. As part of our normal operations, we
occasionally dispose of fixed assets. Due to the difference in
carrying value under U.S. GAAP and Korean GAAP noted above,
there was an adjustment to reflect the difference in the gain or
loss on disposal of those fixed assets.
7. In accordance with Korean GAAP, the value of
consideration paid for Korea Long Term Credit Bank was based on
the price of our common stock on the date that the transaction
was consummated. In addition, the assets were recorded at their
carrying values. This transaction created negative goodwill
under Korean GAAP which was recorded in total equity. The
application of U.S. GAAP resulted in goodwill because of
differences in the measurement of the purchase price and
recording the related assets and liabilities at fair value. The
income statement adjustment represented the accretion to income
of the difference between book value and fair value on the net
assets acquired.
8. Under Korean GAAP, loans modified through troubled debt
restructurings were carried at the lower of (1) the book
value of the loan prior to restructuring and (2) the
present value of the restructured loan. If carried at present
value, the related present value discount was accreted to income
over the remaining term of the restructured loans. Under
U.S. GAAP, such trouble debt restructured loans were
treated as impaired loans and the related allowance for loan
losses were established based on (1) the present value of
expected future cash flows discounted, (2) the fair value
of the collateral if the loan is collateral dependent, or
(3) observable market prices if available. Accordingly,
this difference reflects the reversal of the present value
discount.
9. U.S. GAAP requires that all unrealized gains and
losses arising from available-for-sale securities be recorded in
accumulated other comprehensive income. Under Korean GAAP, the
portion of unrealized gains and losses on available-for-sale
securities arising from foreign currency translation were
recognized in earnings.
10. Under Korean GAAP, the value of consideration paid for
H&CB was measured based on our stock price on the
consummation date of the merger, whereas under U.S. GAAP,
the value of consideration was measured based on our average
closing stock price on the KRX KOSPI Market two days before and
after the date the merger was agreed to and announced. The
application of U.S. GAAP resulted in negative goodwill due
to the fact that the consideration paid was less than the fair
value of H&CB’s net assets acquired. Under Korean
GAAP, goodwill was created because the value of consideration
measured based on the consummation date was significantly
higher. The income statement adjustment primarily reflected the
following:
(a) Reversal of goodwill amortization that was recorded
under Korean GAAP.
(b) Costs that were directly related to the merger were
expensed under Korean GAAP, whereas such costs were included in
the cost of the merger under U.S. GAAP.
(c) Accretion to income or amortization to expense of the
difference between the fair value and book value of the assets
acquired and liabilities assumed.
(d) The amortization related to the core deposit and credit
card relationship intangible assets acquired in the merger based
on their estimated useful lives in proportion to the estimated
run-off of the related depositor and customer relationships,
respectively.
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11. Under Korean GAAP, the value of consideration paid for
the
step-up
acquisition of a subsidiary is measured based on book value of
the subsidiary’s net assets on the consummation date of the
merger. Accordingly the value of consideration paid for the
acquisition of Kookmin Credit Card (“KCC”) was
measured based on book value of KCC’s net assets. However,
under U.S. GAAP, the value of consideration was measured
based on our average closing stock price on the KRX KOSPI Market
two days before and after the date the merger was agreed to and
announced. The application of U.S. GAAP resulted in
goodwill due to the fact that the consideration paid was more
than the fair value of KCC’s net assets acquired. Under
Korean GAAP, goodwill was not recognized because the value of
consideration measured based on the consummation date was the
same as the book value of KCC’s net assets. The adjustment
primarily reflected the following:
(a) Costs that were directly related to the merger were
expensed under Korean GAAP, whereas such costs were included in
the cost of the merger under U.S. GAAP.
(b) The operating results of KCC was affected by the
conversion to U.S. GAAP from Korean GAAP. Consequently, the
allocation to minority of their shares of KCC was also affected
as a result of the conversion.
(c) Accretion to income or amortization to expense of the
difference between the fair value and book value of the assets
acquired and liabilities assumed.
(d) The amortization related to the credit card
relationship intangible asset acquired in the merger based on
their estimated useful lives in proportion to the estimated
run-off of customer relationships.
12. Under Korean GAAP, beneficiary certificates were
treated as trading and available-for-sale securities. Unrealized
gains or losses of beneficiary certificates classified as
available-for-sale securities were recorded in the other
comprehensive income of the total equity. When beneficiary
certificates were sold, related realized gains or losses were
recorded in net income. However, under U.S. GAAP, the
underlying funds represented by the wholly owned beneficiary
certificates were consolidated into our financial statements,
resulting in the net income or loss of the funds being reflected
in our annual net income. The difference in the total equity
mostly relates to the unrealized gains or losses on the
beneficiary certificates treated as available for sale
securities.
13. Under Korean GAAP, goodwill is amortized using the
straight-line method over its useful life, not to exceed
20 years. Under U.S. GAAP, goodwill is not amortized
but tested for impairment on an annual basis.
14. This adjustment reflects the effect of miscellaneous
items which were not individually material.
With respect to tax effect of adjustments, under U.S. GAAP,
we recognize the income tax effect of adjustments using the
marginal income tax rate. Also, under U.S. GAAP, a tax
position taken or expected to be taken in a tax return is
evaluated to determine whether it is more likely than not to be
sustained upon examination by the tax authorities, including
resolution of any related appeals or litigation processes, based
on the technical merits of the position. Only tax positions that
meet the more-likely-than-not criteria are measured to determine
the amount of benefit to recognize in the financial statements.
The tax position is measured as the largest amount of benefit
that has a greater than 50% likelihood of being realized upon
ultimate settlement with the tax authorities. Differences
between tax positions taken in a tax return and amounts
recognized are reflected in the financial statements as
adjustments of income tax expense or deferred tax assets
(liabilities). In addition, interest and penalties related to
tax positions are classified as a component of income tax
expense. Under Korean GAAP, there is no clear guideline on
recognizing and measuring the benefits of uncertain tax
positions. As a result, in practice, they are recognized as
adjustments to income tax expense when realized.
| Item 5C. | Research and Development, Patents and Licenses, etc. |
Not Applicable.
| Item 5D. | Trend Information |
These matters are discussed under Item 5A and Item 5B
above where relevant.
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| Item 5E. | Off-Balance Sheet Arrangements |
See “Item 5B. Liquidity and Capital
Resources — Financial Condition —
Contractual Cash Obligations” and “Item 5B.
Liquidity and Capital Resources — Financial
Condition — Commitments and Guarantees.”
| Item 5F. | Tabular Disclosure of Contractual Obligations |
See “Item 5B. Liquidity and Capital
Resources — Financial Condition —
Contractual Cash Obligations.”
| Item 6. | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES |
| Item 6A. | Directors and Senior Management |
Board of
Directors
Our board of directors, currently consisting of one executive
director, one non-standing director and nine non-executive
directors, has the ultimate responsibility for the management of
our affairs.
Our articles of incorporation provide that:
| • | we may have no more than 30 directors; | |
| • | the number of executive directors must be less than 50% of the total number of directors; and | |
| • | we have five or more non-executive directors. |
The term of office for each director is renewable and is subject
to the Korean Commercial Code, the Financial Holding Company Act
and related regulations.
Our board of directors meets on a regular basis to discuss and
resolve material corporate matters. Additional extraordinary
meetings may also be convened at the request of any director or
any committee that serves under the board of directors.
The names and positions of our directors are set forth below.
The business address of all of the directors is our registered
office at 9-1, 2-ga, Namdaemoon-ro, Jung-gu, Seoul
100-703,
Korea.
Executive
Director
The table below identifies our executive director as of the date
of this annual report:
|
End of
|
||||||||||
| Name | Date of Birth | Position | Director Since | Term (1) | ||||||
|
Chung Won Kang
|
December 19, 1950 | Vice Chairman and Chief Executive Officer; President and Chief Executive Officer of Kookmin Bank | September 29, 2008 | 2010 | (1) | |||||
| (1) | Term will end on October 31, 2010. |
Mr. Kang does not have any significant activities outside
KB Financial Group.
Chung Won Kang
is our vice chairman and chief executive
officer. He is also the president and chief executive officer of
Kookmin Bank. He was a senior advisor to Kim & Chang,
non-executive director of LG Investment & Securities
Co., Ltd., an advisor to World Bank Group, president and chief
executive officer of the former Seoul Bank, chief country
officer of Deutsche Bank Group, Korea and chief country officer
of Bankers Trust Group, Korea. He received a B.A. in
economics from Dartmouth College and an M.A. in law and
diplomacy from The Fletcher School of Law & Diplomacy.
On June 17, 2010, our board of directors passed a
resolution to nominate Mr. Yoon-Dae Euh as an executive
director to be appointed as our new chairman and chief executive
officer. Mr. Euh’s appointment is subject to
shareholder approval at the extraordinary general meeting of
shareholders scheduled to be held on July 13, 2010.
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Mr. Euh is 65 years of age and is currently the chairman of
the Presidential Council on Nation Branding. Previously, he was
the chairman of the steering committee of Korea Investment
Corporation, president of Korea University, a member of the
Public Fund Oversight Commission and a monetary board member of
the Bank of Korea. Mr. Euh received a B.A. in business
administration from Korea University, an M.A. in business
administration from Korea University, an M.A. in business
management from the Asian Institute of Management and a Ph.D. in
business administration from the University of Michigan at Ann
Arbor.
Non-standing
Director
The table below identifies our non-standing director as of the
date of this annual report:
|
End of
|
||||||||||
| Name | Date of Birth | Position | Director Since | Term (1) | ||||||
|
Jung Hoe Kim
|
September 19, 1949 | Non-standing director; Vice Chairman of KB Asset Management | September 29, 2008 | 2011 | ||||||
| (1) | Term will end on September 28, 2011. |
Jung Hoe Kim
has been a non-standing director since
January 2010. He has also served as the vice chairman of KB
Asset Management since January 2010. He was our president and
chief operating officer, and an executive director, from
September 2008 to January 2010, after which his status changed
to a non-standing director. Previously, he was a senior advisor
to Kim & Chang, non-executive director of National
Agricultural Cooperative Federation and deputy governor at the
Financial Supervisory Service. He received a B.A. in law from
Yonsei University.
Non-executive
Directors
Our non-executive directors are selected based on the
candidates’ talents and skills in diverse areas, such as
law, finance, economy, management and accounting. All nine
non-executive directors below were nominated by our
Non-executive Director Nominating Committee and approved by our
shareholders.
The table below identifies our non-executive directors as of the
date of this annual report:
|
Year
|
|||||||||||
| Name | Date of Birth | Position | Director Since | Term Ends (1) | |||||||
|
Kyung Jae Lee
|
January 30, 1939 | Non-executive Director | March 26, 2010 | 2012 | |||||||
|
Jacques P.M. Kemp
|
May 15, 1949 | Non-executive Director | September 29, 2008 | 2011 | |||||||
|
Suk Sig Lim
|
July 17, 1953 | Non-executive Director | September 29, 2008 | 2011 | |||||||
|
Sang Moon Hahm
|
February 2, 1954 | Non-executive Director | September 29, 2008 | 2011 | |||||||
|
Seung Hee Koh
|
June 26, 1955 | Non-executive Director | March 26, 2010 | 2012 | |||||||
|
Chee Joong Kim
|
December 11, 1955 | Non-executive Director | September 29, 2008 | 2010 | (2) | ||||||
|
Young Nam Lee
|
September 3, 1957 | Non-executive Director | March 26, 2010 | 2012 | |||||||
|
Jae Mok Cho
|
January 5, 1961 | Non-executive Director | March 27, 2009 | 2012 | (3) | ||||||
|
Chan Soo Kang
|
November 23, 1961 | Non-executive Director | September 29, 2008 | 2011 | |||||||
| (1) | The date on which each term will end will be the date of the general stockholders’ meeting in the relevant year unless otherwise specified. | |
| (2) | Term will end on October 30, 2010. | |
| (3) | Term will end on March 26, 2012. |
Kyung Jae Lee
has been a non-executive director and the
chairman of our board of directors since March 2010. He
previously served as the chief executive officer of the
Industrial Bank of Korea, the chief executive officer of the
Korea Financial Telecommunications & Clearings
Institute and director and statutory auditor of the Bank of
Korea. He received a B.A. in economics from Seoul National
University, an M.A. in economics from New York University and a
Ph.D. in economics from Kookmin University.
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Jacques P.M. Kemp
has been a non-executive director
since 2008. He was previously the Vice Chairman of
Insurance & Investment Management at ING Group, the
CEO of ING Insurance Asia/Pacific, a Global Head
e-Business
of ING Group and a Chairman of ING Bank International. He
received an M.B.A from the University of Chicago.
Suk Sig Lim
has been a non-executive director since 2008.
He is currently a professor at the University of Seoul. He was
Vice President of Korea Accounting Institute, a member of the
examination committee at the Financial Supervisory Service and
an assistant professor at the University of Alberta. He received
a B.A. in business administration from Seoul National
University, an M.S. in industrial engineering from KAIST, an
M.S. in business administration from Pennsylvania State
University and a Ph.D. in business administration from
University of Minnesota.
Sang Moon Hahm
has been a non-executive director since
2008. He is currently dean of KDI School of Public Policy and
Management. He was a chief researcher at the Korea Institute of
Finance and an assistance professor at Virginia Tech. He
received a B.A. in economics from Georgetown University, and an
M.A. and Ph.D. in economics from the University of Chicago.
Seung Hee Koh
has been a non-executive director since
March 2010. He is currently a professor at Sookmyung
Women’s University. He was previously an advisor at the
Fair Trade Commission of Korea and the chairman of the Finance
Accounting Department at the Korea Accounting Association. He
received a B.A. in business administration from Seoul National
University, an M.B.A. from Indiana University and a Ph.D. in
business administration from University of Oklahoma.
Chee Joong Kim
has been a non-executive director since
2008. He is currently a partner at Barun Law. He was a presiding
judge at Seoul Eastern District Court, Seoul Administrative
Court, Patent Court and Seoul High Court. He received a B.A. and
an M.A. in law from Seoul National University.
Young Nam Lee
has been a non-executive director since
March 2010. She is currently the chief executive officer of EZ
Digital Co., Ltd. She previously served as the chairman of Korea
Venture Business Women’s Association and the chief
executive officer of Seohyun Electronics Co., Ltd. She received
a diploma in management from Dong Busan University and completed
courses in business administration at Ajou University and the
Korea Advanced Institute of Science and Technology.
Jae Mok Cho
has been a non-executive director since March
2009. He is currently the Chief Executive Office of Ace Research
Center Co., Ltd. in Seoul and Daegu. He was a member of the
Seoul Advisory Committee and an adjunct professor of Hanyang
University. He received a B.A., M.A. and Ph.D. in psychology
from Keimyung University.
Chan Soo Kang
has been a non-executive director since
2008. He is currently President and Chairman of Kang &
Company Ltd. and a non-executive director at SK Holdings Co.,
Ltd. He was an executive director at BT Wolfensohn, a Chief
Executive Officer of Seoul Securities Co., Ltd. and an adjunct
professor at Ewha Womans University. He received a B.A. in
economics from Harvard University and an M.B.A. from Wharton
School, University of Pennsylvania.
Any director having an interest in a transaction that is subject
to approval by the board of directors may not vote at the
meeting during which the board approves the transaction.
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Executive
Officers
The table below identifies our senior executive officers who are
not executive directors as of the date of this annual report:
| Name | Date of Birth | Position | ||
|
In Gyu Choi
|
December 23, 1955 | Deputy President; Chief Strategy Officer | ||
|
Kap Shin
|
September 4, 1955 | Deputy President; Chief Financial Officer | ||
|
Heung Woon Kim
|
July 20, 1957 | Deputy President; Chief Information Officer | ||
|
Minho Lee
|
April 3, 1965 | Deputy President; Chief Compliance Officer | ||
|
Jong Chan Ryu
|
July 22, 1957 | Managing Director; Chief Human Resources Officer | ||
|
Young Yoon Kim
|
September 18, 1956 | Managing Director; Head of Public Relations |
None of the executive officers has any significant activities
outside KB Financial Group.
In Gyu Choi
is a deputy president and the chief strategy
officer. Prior to that, he was an executive director and a
senior executive vice president of the former
management & strategy group at Kookmin Bank. He
received a B.A. in business administration from Yonsei
University and an M.B.A. from the George Washington University.
Kap Shin
is a deputy president and the chief financial
officer. Prior to that, he was chief financial officer of
Kookmin Bank, chief financial officer of Korea Exchange Bank
Credit Service, chief executive officer of Kapco Inc. and chief
financial officer of Citibank Korea. He received a B.A. in
accounting and an M.B.A. from Northern Illinois University.
Heung Woon Kim
is a deputy president and the chief
information officer. Prior to that, he was an executive vice
president and the head of the IT Development Division and a
general manager of the IT Application Development Department and
the Gwangjangdong Branch. He received a B.A in Economics from
Korea National Open University.
Minho Lee
is a deputy president and the chief compliance
officer. Prior to that, he was a standing senior legal advisor
and the general manager of the legal department of Kookmin Bank.
He received a B.A. in economics and an M.B.A. from Seoul
National University and an LL.M. from Columbia Law School.
Jong Chan Ryu
is a managing director and the chief human
resources officer. Prior to that, he was an executive vice
president of the strategic planning division at Kookmin Bank,
the general manager of the retail sales department at Kookmin
Bank and the general manager of the Jukjeon
1-dong
branch of Kookmin Bank. He received a B.A. in Horticulture from
Yeungnam University and an M.B.A. from Sungkyunkwan University.
Young Yoon Kim
is a managing director and the head of
public relations. Prior to that, he was the general manager of
the public relations department at Kookmin Bank and the general
manager of the Seojamshil and DongaMedia branches of Kookmin
Bank. He received a B.A. in political science and diplomacy from
Dongguk University.
| Item 6B. | Compensation |
The aggregate remuneration paid and
benefits-in-kind
granted by us to our vice chairman and chief executive officer,
our other executive directors, our non-executive directors and
our executive officers for the year ended December 31, 2009
was
W
5,726 million. In addition, for the
year ended December 31, 2009, we set aside
W
442 million for allowances for severance
and retirement benefits for our vice chairman and chief
executive officer, the other executive directors and our
executive officers.
We do not have service contracts with any of our directors or
officers providing for benefits upon termination of their
employment with us.
Kookmin Bank granted stock options to its president and chief
executive officer, other directors and executive officers, as
well as employees. In connection with the comprehensive stock
transfer in September 2008 pursuant to which we were
established, such stock options were converted into stock
options with respect to our common stock. See
“Item 6E. Share Ownership — Stock
Options.” For all of the options granted, upon their
exercise, we are
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Table of Contents
required to pay in cash the difference between the exercise
price and the market price of our common stock at the date of
exercise. Generally, upon vesting, options may be exercised from
after three years from the grant date up to eight years after
such date, once restrictions on the exercise of options,
including continued employment for at least two years from the
grant date, lapse.
On November 1, 2004, Kookmin Bank granted 700,000 options
to its president and chief executive officer, Chung Won Kang,
who is one of our directors. On November 1, 2007, 610,000
of the 700,000 options granted to Chung Won Kang vested and
90,000 options expired without vesting. The 610,000 vested
options may be exercised up to eight years from the grant date.
The current exercise price is
W
50,600, which
reflects the increased rate of the KOSPI banking industry index,
and the exercised options can be settled through payment in cash
of the difference between the exercise price and the market
price of our common stock at the date of exercise.
In 2009, we recognized
W
17,514 million as
compensation expense for the stock options granted under our
stock option plan. For additional information regarding our
compensation expense in connection with our stock option plan,
see Note 28 to our consolidated financial statements.
In 2008, we also established a stock grant plan. Pursuant to
this plan, we have entered into performance share agreements
with certain of our directors, executive officers and other
senior management, whereby we may grant shares of our common
stock (or the equivalent monetary amount based on the market
value of such shares at the time of the grant) within specified
periods as long-term incentive performance shares in accordance
with pre-determined performance targets. See “Item 6E.
Share Ownership — Performance Share Agreements.”
In 2009, we recognized
W
5,525 million as
compensation expense for the disbursements made under such
agreements.
| Item 6C. | Board Practices |
See “Item 6A. Directors and Senior Management”
above for information concerning the terms of office and
contractual employment arrangements with our directors and
executive officers.
Committees
of the Board of Directors
We currently have the following committees that serve under the
board:
| • | the Audit Committee; | |
| • | the Board Steering Committee; | |
| • | the Management Strategy Committee; | |
| • | the Group Risk Management Committee; | |
| • | the Evaluation and Compensation Committee; | |
| • | the Non-executive Director Nominating Committee; | |
| • | the Audit Committee Member Nominating Committee; and | |
| • | the Chairman and CEO Nominating Committee. |
Each committee member is appointed by the board of directors,
except for members of the Audit Committee, who are elected at
the general meeting of stockholders.
Audit
Committee
The committee currently consists of five non-executive
directors, Kyung Jae Lee, Jacques Kemp, Sang Moon Hahm, Seung
Hee Koh and Chan Soo Kang. The chairperson of the Audit
Committee is Seung Hee Koh. The committee oversees our financial
reporting and approves the appointment of our independent
registered public accounting firm. The committee also reviews
our financial information, auditor’s examinations, key
financial statement issues, the plans and evaluation of internal
control and the administration of our financial affairs by the
board of directors. In connection with the general meetings of
stockholders, the committee examines the agenda for,
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and financial statements and other reports to be submitted by,
the board of directors to each general meeting of stockholders.
The committee holds regular meetings every quarter.
Board
Steering Committee
The committee currently consists of five non-executive
directors, Kyung Jae Lee, Suk Sig Lim, Sang Moon Hahm, Seung Hee
Koh and Jae Mok Cho, together with our vice chairman and chief
executive officer, Chung Won Kang. The chairperson of the Board
Steering Committee is Kyung Jae Lee. The committee is
responsible for ensuring the efficient operation of the board
and the facilitation of the board’s functions. The
committee is also responsible for discussion and review of
overall matters with respect to the governance of us and our
subsidiaries, promoting the efficiency and active function of
the board and each committee. The committee holds regular
meetings every quarter.
Management
Strategy Committee
The committee currently consists of four non-executive
directors, Jacques Kemp, Sang Moon Hahm, Chee Joong Kim and
Jae Mok Cho, together with our vice chairman and chief executive
officer, Chung Won Kang. The chairperson of the committee is
Sang Moon Hahm. The committee reviews vision and mid-long term
management strategy, the annual business plan, the annual budget
plan, new strategic businesses, major financial strategy and
major issues with respect to our management. The committee holds
regular meetings every quarter.
Group
Risk Management Committee
The committee currently consists of four non-executive
directors, Suk Sig Lim, Seung Hee Koh, Chee Joong Kim
and Young Nam Lee, together with our non-standing director, Jung
Hoe Kim. The chairperson of the Group Risk Management Committee
is Suk Sig Lim. The Group Risk Management Committee oversees and
makes determinations on all issues relating to our comprehensive
risk management function. In order to ensure our stable
financial condition and to maximize our profits, the committee
monitors our overall risk exposure and reviews our compliance
with risk policies and risk limits. In addition, the committee
reviews risk and control strategies and policies, evaluates
whether each risk is at an adequate level, establishes or
abolishes risk management divisions and reviews risk-based
capital allocations. The committee holds regular meetings every
quarter.
Evaluation
and Compensation Committee
The committee currently consists of five directors, Jae Mok Cho,
Kyung Jae Lee, Suk Sig Lim, Young Nam Lee and Chan Soo
Kang. The chairperson of the committee is Jae Mok Cho. The
Evaluation and Compensation Committee reviews compensation
schemes and compensation levels of us and our subsidiaries. The
committee is also responsible for deliberating and deciding
compensation of directors, evaluating management’s
performance and deciding the performance-based annual salary of
the president and the executive officers of us and our
subsidiaries. The committee holds regular meetings every six
months.
Non-executive
Director Nominating Committee
The committee currently has no members. The last
meeting of the committee was on March 3, 2010 to nominate
Kyung Jae Lee, Seung Hee Koh and Young Nam Lee as new
non-executive directors and Jacques Kemp for re-appointment as a
non-executive director. The committee oversees the selection of
non-executive director candidates and recommends them annually
sometime prior to the general stockholders meeting. The term of
office of its members is from the first meeting of the committee
held to nominate the non-executive directors until the nominated
non-executive directors are appointed.
Audit
Committee Member Nominating Committee
The committee currently has no members. The last
meeting of the committee was on March 3, 2010 to nominate
Kyung Jae Lee, Jacques Kemp, Sang Moon Hahm and Seung Hee Koh as
new Audit Committee members and Chan Soo Kang for re-appointment
as an Audit Committee member. The committee oversees the
selection of Audit Committee member candidates and recommends
them annually sometime prior to the general stockholders
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meeting. The term of office of its members is from the first
meeting of the committee held to nominate the Audit Committee
members until the Audit Committee members are appointed.
Chairman
and CEO Nominating Committee
The committee currently consists of nine non-executive
directors, Kyung Jae Lee, Jacques Kemp, Suk Sig Lim, Sang Moon
Hahm, Seung Hee Koh, Chee Joong Kim, Young Nam Lee, Jae Mok Cho
and Chan Soo Kang. The chairperson of the committee is Suk Sig
Lim. The last meeting of the committee was on June 17, 2010 to
recommend to our board of directors to nominate Yoon-Dae Euh as
an executive director to be appointed as our new chairman and
chief executive officer. The committee oversees the selection of
candidates to serve as our chairman and chief executive officer
and recommends them to our board of directors. The term of the
office of its members is from the first meeting of the committee
held to nominate the chairman and chief executive officer until
the nominated chairman and chief executive officer is appointed.
| Item 6D. | Employees |
As of December 31, 2009, we had a total of
100 full-time employees, excluding six executive officers,
at our financial holding company. The following table sets forth
information regarding our employees at both our financial
holding company and our subsidiaries as of the dates indicated:
| As of December 31, | ||||||||||||||
| 2007 (1) | 2008 | 2009 | ||||||||||||
|
KB Financial Group
|
Full-time employees (1) | — | 96 | 100 | ||||||||||
| Contractual employees | — | — | — | |||||||||||
| Managerial employees | — | 78 | 81 | |||||||||||
| Members of Korea Financial Industry Union | — | — | — | |||||||||||
|
Kookmin Bank
|
Full-time employees (1) | 18,159 | 17,847 | 18,299 | ||||||||||
| Contractual employees | 8,592 | 8,226 | 7,687 | |||||||||||
| Managerial employees | 11,442 | 11,463 | 11,929 | |||||||||||
| Members of Korea Financial Industry Union | 14,804 | 14,373 | 21,256 | |||||||||||
|
Other subsidiaries
|
Full-time employees (1) | 806 | 987 | 1,084 | ||||||||||
| Contractual employees | 178 | 153 | 124 | |||||||||||
| Managerial employees | 474 | 579 | 660 | |||||||||||
| Members of Korea Financial Industry Union | 82 | 101 | 100 | |||||||||||
| (1) | Excluding executive officers. |
We consider our relations with our employees to be satisfactory.
We and our subsidiaries each have a joint labor-management
council which serves as a forum for ongoing discussions between
our management and employees. At two of our subsidiaries,
Kookmin Bank and KB Real Estate Trust, our employees have a
labor union. Every year, the unions at Kookmin Bank and KB Real
Estate Trust and their respective managements negotiate and
enter into new collective bargaining agreements and negotiate
annual wage adjustments. Following the merger of former Kookmin
Bank and H&CB, Kookmin Bank had two union chapters of the
Korea Financial Industry Union and, following Kookmin
Bank’s merger with Kookmin Credit Card in 2003, Kookmin
Bank also had one labor union of the Korean Confederation of
Trade Unions. These three union bodies merged into the Kookmin
Bank Chapter of the Korea Financial Industry Union in January
2005.
Our compensation packages consist of base salary and base
bonuses. We also provide performance-based compensation to
employees and management officers, including those of our
subsidiaries, depending on level of responsibility of the
employee or officer and business of the relevant subsidiary.
Typically, executive officers, heads of regional headquarters
and employees in positions that require professional skills,
such as fund managers and dealers, are compensated depending on
their individual annual performance evaluation. Also, Kookmin
Bank has implemented a profit-sharing system in order to enhance
the performance of Kookmin Bank’s employees. Under this
system, Kookmin Bank pays bonuses to its employees, in addition
to the base salary and depending on Kookmin Bank’s annual
performance.
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We provide a wide range of benefits to our employees, including
our executive directors. Specific benefits provided may vary for
each of our subsidiaries but generally include medical
insurance, employment insurance, workers compensation, employee
and spouse life insurance, free medical examinations, child
tuition and fee reimbursement, disabled child financial
assistance and reimbursement for medical expenses, and other
benefits may be provided depending on the subsidiary.
Pursuant to the Korean National Pension Law, we prepay a portion
of our accrued severance liabilities to the National Pension
Corporation at the rate of 4.5% of each employee’s annual
wages. Our employees are also responsible for payment to the
National Pension Corporation of 4.5% of their wages. Our
employees are entitled to receive an annuity from the National
Pension Corporation following their retirement, commencing at
the age of 60.
Upon termination, our employees are entitled to receive
severance payments pursuant to the Labor Standards Act of Korea.
The amount received by any employee equals the amount equivalent
to (1) 30 days’ salary, calculated by averaging
the employee’s daily salary for the three months prior to
the date of the employee’s departure, multiplied by
(2) the number of continuous years during which the
employee worked. For information regarding our severance
payments, see Note 27 of the notes to our consolidated
financial statements.
In June 2009, we established an employee stock ownership plan.
All of our employees are eligible to participate in this plan.
We are not required to, and do not, make cash contributions to
this plan. Members of our employee stock ownership association
have pre-emptive rights to acquire up to 20% of our shares
issued in public offerings by us pursuant to the Financial
Investment Services and Capital Markets Act. In August 2009, we
offered to members of our employee stock ownership association
6,000,000 of the 30,000,000 new shares of common stock to be
issued in our rights offering to our existing shareholders, and
the entire amount was subscribed by members of our employee
stock ownership association. The employee stock ownership
association held 5,971,290 shares of our common stock as of
December 31, 2009.
Employees of Kookmin Bank have been eligible to participate in
its employee stock ownership plan, which will be terminated once
all of our common stock held by the plan (which the plan
received following the transfer of Kookmin Bank shares held by
it as a result of the comprehensive stock transfer pursuant to
which we were established) have been distributed to the relevant
Kookmin Bank employees at the requests of such employees
following the expiration of the required holding periods. As of
December 31, 2009, Kookmin Bank’s employee stock
ownership association held 1,538,332 shares of our common
stock.
In order to develop our next generation of leaders and enhance
the operational capability of our employees at each of our
subsidiaries, we operate various employee training programs.
These programs, which are aimed at cultivating financial
specialists with higher levels of management and business
skills, developing regional experts for increased global
capabilities and enhancing employee loyalty, comprise a number
of customized programs such as training courses for employees of
different positions, domestic and foreign MBA courses and
intensive human resources development programs for high
performers to cultivate future leaders. For example, Kookmin
Bank offers training programs at its employees’ worksites
to facilitate access to training, as well as a foreign regional
expert training program and a global language training course.
In 2008, Kookmin Bank established a “KB MBA in
Finance” program to train and develop next generation
leaders. We also provide financial and other support for our
employees to develop their finance-related knowledge and skills
by enrolling in training courses or engaging in self-study
programs. The broad spectrum of training programs, combined with
the state-of-the-art technologies such as cyber training,
satellite broadcasting and mobile-learning, maximizes the level
of exposure of the trainees to the contents of the programs. We
also believe that our training scheme based on classified
training courses and a development evaluation system has
facilitated systemic development of employee skills and a
spontaneous learning environment.
| Item 6E. | Share Ownership |
Common
Stock
As of March 31, 2010, the persons who are currently our
directors or executive officers, as a group, held an aggregate
of 11,515 shares of our common stock, representing
approximately 0.003% of the issued shares of our common stock as
of such date. None of these persons individually held more than
1% of the outstanding shares of
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our common stock as of such date. The following table presents
information regarding our directors and executive officers who
beneficially owned our shares as of March 31, 2010.
|
Number of Shares of
|
||||
| Name of Executive Officer or Director | Common Stock | |||
|
Jung Hoe Kim
|
1,754 | |||
|
Suk Sig Lim
|
2,897 | |||
|
Sang Moon Hahm
|
1,767 | |||
|
Chan Soo Kang
|
1,732 | |||
|
In Gyu Choi
|
117 | |||
|
Kap Shin
|
567 | |||
|
Heung Woon Kim
|
1,937 | |||
|
Jong Chan Ryu
|
627 | |||
|
Yong Yoon Kim
|
117 | |||
|
Total
|
11,515 | |||
Stock
Options
We have not, following our establishment pursuant to a
comprehensive stock transfer in September 2008, granted any
stock options with respect to our capital stock to our
directors, executive officers and employees. Prior to our
establishment, Kookmin Bank granted stock options with respect
to its common stock to its directors, executive officers and
employees. In connection with the comprehensive stock transfer,
in September 2008, such stock options with respect to Kookmin
Bank common stock were converted into stock options with respect
to our common stock. For all of the options granted, upon their
exercise, we are required to pay in cash the difference between
the exercise price and the market price of our common stock at
the date of exercise. The following table is the breakdown of
such stock options granted to Kookmin Bank’s directors,
executive officers and employees. It
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Table of Contents
describes the grant date, position, exercise period and price
and the number of options as of March 31, 2010 under Korean
GAAP, not including previously issued options which are no
longer exercisable as of such date.
|
Number of
|
Number of
|
Number of
|
||||||||||||||||||||
| Exercise Period |
Exercise
|
Granted
|
Exercised
|
Exercisable
|
||||||||||||||||||
| Grant Date | Position When Granted | From | To | Price | Options (1) | Options | Options | |||||||||||||||
|
22-Mar-01
|
Auditor (2) | 23-Mar-04 | 22-Mar-11 | 71,538 | 6,644 | 0 | 6,644 | |||||||||||||||
|
22-Mar-01
|
3 Vice Presidents (2) | 23-Mar-04 | 22-Mar-11 | 71,538 | 15,502 | 0 | 15,502 | |||||||||||||||
|
29-Mar-02
|
3 Non-executive Directors (2) | 30-Mar-04 | 29-Mar-11 | 129,100 | 9,990 | 0 | 9,990 | |||||||||||||||
|
26-Jul-02
|
Senior Executive Vice President | 27-Jul-05 | 26-Jul-10 | 58,800 | 23,899 | 0 | 23,899 | |||||||||||||||
|
21-Mar-03
|
6 Non-executive Directors | 22-Mar-06 | 21-Mar-11 | 47,360 | (3) | 40,063 | 0 | 40,063 | ||||||||||||||
|
21-Mar-03
|
Senior Executive Vice President | 22-Mar-06 | 21-Mar-11 | 35,500 | 9,443 | 4,443 | 5,000 | |||||||||||||||
|
21-Mar-03
|
6 Employees | 22-Mar-06 | 21-Mar-11 | 35,500 | 62,993 | 0 | 62,993 | |||||||||||||||
|
27-Aug-03
|
Senior Executive Vice President | 28-Aug-06 | 27-Aug-11 | 40,500 | 5,091 | 0 | 5,091 | |||||||||||||||
|
09-Feb-04
|
3 Senior Executive Vice Presidents | 10-Feb-07 | 09-Feb-12 | 46,100 | 19,250 | 0 | 19,250 | |||||||||||||||
|
09-Feb-04
|
7 Employees | 10-Feb-07 | 09-Feb-12 | 46,100 | 35,000 | 0 | 35,000 | |||||||||||||||
|
23-Mar-04
|
4 Non-executive Directors | 24-Mar-07 | 23-Mar-12 | 48,650 | (3) | 20,000 | 0 | 20,000 | ||||||||||||||
|
01-Nov-04
|
President and CEO | 02-Nov-07 | 01-Nov-12 | 50,600 | 610,000 | 0 | 610,000 | |||||||||||||||
|
18-Mar-05
|
Chief Audit Executive | 19-Mar-08 | 18-Mar-13 | 51,600 | 30,000 | 0 | 30,000 | |||||||||||||||
|
18-Mar-05
|
9 Non-executive Directors | 19-Mar-08 | 18-Mar-13 | 55,618 | (3) | 95,362 | 0 | 95,362 | ||||||||||||||
|
18-Mar-05
|
14 Senior Executive Vice Presidents | 19-Mar-08 | 18-Mar-13 | 46,800 | 275,789 | 28,330 | 247,459 | |||||||||||||||
|
18-Mar-05
|
22 Employees | 19-Mar-08 | 18-Mar-13 | 46,800 | 233,255 | 0 | 233,255 | |||||||||||||||
|
27-Apr-05
|
Employee | 28-Apr-08 | 27-Apr-13 | 45,700 | 8,827 | 0 | 8,827 | |||||||||||||||
|
22-Jul-05
|
Senior Executive Vice President | 23-Jul-08 | 22-Jul-13 | 49,200 | 29,441 | 0 | 29,441 | |||||||||||||||
|
23-Aug-05
|
Employee | 24-Aug-08 | 23-Aug-13 | 53,000 | 7,212 | 0 | 7,212 | |||||||||||||||
|
24-Mar-06
|
Chief Audit Executive | 25-Mar-09 | 24-Mar-14 | 77,900 | 19,917 | 0 | 19,917 | |||||||||||||||
|
24-Mar-06
|
8 Non-executive Directors | 25-Mar-09 | 24-Mar-14 | 77,779 | (3) | 126,710 | 0 | 126,710 | ||||||||||||||
|
24-Mar-06
|
5 Senior Executive Vice Presidents | 25-Mar-09 | 24-Mar-14 | 76,623 | (3) | 260,448 | 0 | 260,448 | ||||||||||||||
|
24-Mar-06
|
15 Employees | 25-Mar-09 | 24-Mar-14 | 77,072 | (3) | 344,576 | 0 | 344,576 | ||||||||||||||
|
28-Apr-06
|
Employee | 29-Apr-09 | 28-Apr-14 | 81,900 | 25,613 | 0 | 25,613 | |||||||||||||||
|
27-Oct-06
|
Employee | 28-Oct-09 | 27-Oct-14 | 76,600 | 18,987 | 0 | 18,987 | |||||||||||||||
|
8-Feb-07
|
4 Senior Executive Vice Presidents | 9-Feb-10 | 8-Feb-15 | (4) | 55,594 | 0 | 55,594 | |||||||||||||||
|
8-Feb-07
|
27 Employees | 9-Feb-10 | 8-Feb-15 | (4) | 629,799 | 0 | 629,799 | |||||||||||||||
|
23-Mar-07
|
Non-executive Director | 24-Mar-10 | 23-Mar-15 | 84,500 | 15,246 | 0 | 15,246 | |||||||||||||||
| 3,034,651 | 32,773 | 3,001,878 | ||||||||||||||||||||
| (1) | Some numbers of the granted options have been adjusted due to the merger and the early retirement of the grantees. | |
| (2) | Originally options with respect to common stock of Kookmin Credit Card, which have been converted into options with respect to our common stock. | |
| (3) | Weighted average of the exercise price of all granted options. | |
| (4) |
Exercise Price =
|
Performance
Share Agreements
In March 2009, our shareholders approved at the annual general
meeting of shareholders the disbursement of a maximum of
250,000 shares of our common stock (or the equivalent
monetary amount based on the market value of such shares at the
time of disbursement), between September 29, 2008 and
September 28, 2011, to our directors as
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Table of Contents
long-term incentive performance shares over the term of their
office in accordance with the performance targets set forth in
the performance share agreements between us and such directors.
In June 2009, we paid
W
24 million, the
equivalent monetary amount for 733 shares of our common
stock, to our former non-executive director, Kee Young Chung. In
March 2010, our shareholders approved at the annual general
meeting of shareholders the disbursement of a maximum of
250,000 shares of our common stock (or the equivalent
monetary amount based on the market value of such shares at the
time of disbursement), between September 29, 2009 and
September 28, 2012, to our directors as long-term incentive
performance shares over the term of their office in accordance
with the performance targets set forth in the performance share
agreements between us and such directors. In April 2010, we paid
an aggregate of
W
184 million, the
equivalent monetary amount for 3,563 shares of our common
stock, to our former non-executive directors, Dam Cho and Bo
Kyung Byun. Future disbursements of such shares or equivalent
monetary amount will be made to our directors upon the
completion of their terms based on their performance.
In addition, in connection with our establishment as a financial
holding company, we amended a performance share agreement
previously entered into between Kookmin Bank and Chung Won Kang,
its president and chief operating officer, to provide for the
disbursement of our shares (or the equivalent monetary amount)
in lieu of Kookmin Bank shares, and paid an aggregate amount of
W
221 million, the equivalent monetary
amount for 3,933 shares of Kookmin Bank common stock, to
other directors who had previously entered into performance
share agreements with Kookmin Bank pursuant to the completion of
their term of office as Kookmin Bank’s directors and the
termination of such performance share agreements upon our
establishment in September 2008.
We have also entered into performance share agreements with
certain of our executive officers and senior management who are
not directors, pursuant to which we may grant shares of our
common stock (or the equivalent monetary amount based on the
market value of such shares at the time of the grant) within
specified periods as long-term incentive performance shares in
accordance with pre-determined performance targets.
We expect that further actual disbursements under the
performance share agreements with our directors and senior
management will generally be in the form of cash disbursements
of equivalent monetary amounts based on the market value of our
shares at such time.
| Item 7. | MAJOR STOCKHOLDERS AND RELATED PARTY TRANSACTIONS |
| Item 7A. | Major Stockholders |
The following table presents information regarding the
beneficial ownership of our shares at December 31, 2009 by
each person or entity known to us to own beneficially more than
5% of our issued and outstanding shares.
Except as otherwise indicated, each stockholder identified by
name has:
| • | sole voting and investment power with respect to its shares; and | |
| • | record and beneficial ownership with respect to its shares. |
|
Percentage of
|
||||||||
|
Total Outstanding
|
||||||||
|
Number of Shares of
|
Shares of
|
|||||||
| Beneficial Owner (1) | Common Stock | Common Stock (%) (2) | ||||||
|
Citibank
N.A.
(3)
|
40,353,823 | 11.8% | ||||||
|
Korean National Pension
Service
(4)
|
20,046,217 | 5.8% | ||||||
|
ING Bank N.V.
|
19,401,044 | 5.7% | ||||||
| (1) | As of December 31, 2009, Kookmin Bank held 43,322,704 shares of our common stock with restricted voting rights under Korean law as a result of the comprehensive stock transfer pursuant to which we were established as a financial holding company. See “Item 4A. History and Development of the Company — The Establishment of KB Financial Group.” | |
| (2) | Calculated based on 343,028,989 shares of our common stock outstanding as of December 31, 2009. | |
| (3) | As depositary bank. | |
| (4) | As of January 27, 2010, Korean National Pension Service’s ownership of our shares was 19,248,845 shares, representing 5.6% of the total shares of our common stock outstanding as of such date. |
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Other than as set forth above, no other person or entity known
by us to be acting in concert, directly or indirectly, jointly
or separately, owned 5.0% or more of the issued shares of our
common stock or exercised control or could exercise control over
us as of December 31, 2009. None of our major stockholders
has different voting rights from our other stockholders.
| Item 7B. | Related Party Transactions |
As of December 31, 2007, we had an aggregate of
W
9,883 million in loans outstanding to
Kookmin Bank’s executive officers and directors. As of
December 31, 2008 and 2009, we had an aggregate of
W
2,581 million and
W
3,818 million, respectively, in loans
outstanding to our executive officers and directors and Kookmin
Bank’s executive officers and directors. In addition, as of
such dates, we had loans outstanding to various companies whose
directors or executive officers were serving concurrently as our
directors or executive officers. See Note 33 of the notes
to our consolidated financial statements. All of these loans
were made in the ordinary course of business, on substantially
the same terms, including interest rate and collateral, as those
prevailing at the time for comparable transactions with other
persons and did not involve more than the normal risk of
collectibility or present other unfavorable features.
None of our directors or officers have or had any interest in
any transactions effected by us that are or were unusual in
their nature or conditions or significant to our business which
were effected during the current or immediately preceding year
or were effected during an earlier year and remain in any
respect outstanding or unperformed.
In December 2002, we formally extended our strategic alliance
agreement with ING Bank N.V., replacing its prior investment
agreement with H&CB. In August 2003, our board approved and
ratified an amended and restated strategic alliance agreement
with ING Bank N.V. As a result:
| • | we are required to cause one nominee of ING Bank N.V. to be appointed as a non-executive director so long as ING Groep N.V. and its subsidiaries maintain a minimum shareholding in us as defined in the strategic alliance agreement, and to cause another nominee of ING Bank N.V. to be appointed as an executive director so long as ING Groep N.V. and its subsidiaries hold 6% or more of our issued and outstanding common shares; | |
| • | the exclusive alliance with respect to our bancassurance business was revised to a non-exclusive, commercial relationship-based alliance; | |
| • | ING Groep N.V. is required to maintain beneficial ownership of no less than 12,716,691 shares of our common stock, subject to adjustment for any share consolidations or share splits or, in the event of a merger with another entity, as adjusted accordingly pursuant to the merger ratio for the merger; and | |
| • | each of the parties agreed to maintain its level of investment in ING Life Insurance Company, Korea Ltd. (which was 20% owned by us and 80% owned by ING Insurance International B.V.) and KB Asset Management Co., Ltd. (which was 80% owned by us and 20% by ING Insurance International B.V.) until August 29, 2006. |
In August 2003, we amended and restated our joint venture
agreement with ING Insurance International B.V. and ING Life
Insurance Company, Korea, Ltd. This agreement established the
terms of the joint venture between us and ING Insurance
International with respect to ING Life Insurance Company, Korea.
In December 2008, we sold all of our remaining stake in ING Life
Insurance Company, Korea and our joint venture agreement with
ING Insurance International and ING Life Insurance Company,
Korea was terminated.
In August 2003, we also amended certain provisions in our joint
venture agreement with ING Insurance International B.V. and KB
Asset Management Co., Ltd. This agreement expanded and
established the terms of the joint venture between us and ING
Insurance International with respect to KB Asset Management.
In April 2004, we established a new wholly-owned insurance
subsidiary, KB Life Insurance Co., Ltd., to which we contributed
the acquired assets and liabilities of Hanil Life Insurance. KB
Life focuses on bancassurance, and offers life insurance and
wealth management products primarily through our branch network.
ING Insurance International B.V. purchased a 49% interest in KB
Life in January 2005.
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Table of Contents
In April 2008, Kookmin Bank and KB Asset Management Co., Ltd.
entered into an agreement with ING Bank B.V. and ING Insurance
International B.V. related to the planned establishment of KB
Financial Group through a comprehensive stock transfer. Pursuant
to this agreement and subject to certain conditions, ING Bank
and ING Insurance International approved and agreed to support
the stock transfer. The parties also agreed, among others, that
the stock transfer shall not constitute a change of control or
termination event for purposes of various agreements in effect
between the parties and that Kookmin Bank and ING Bank agree to
effect an assignment of Kookmin Bank’s rights and
obligations under the amended and restated strategic alliance
agreement to KB Financial Group. Such assignment was effected in
September 2008 pursuant to an assignment and assumption
agreement among Kookmin Bank, ING Bank and KB Financial Group.
In connection with the “comprehensive stock transfer”
under Korean law pursuant to which we were established, ING
Insurance International B.V., which previously held a 20% equity
interest in KB Asset Management Co., Ltd. transferred all of its
shares of KB Asset Management common stock to us in September
2008 and in return received 1,290,815 shares of our common
stock in accordance with a specified stock transfer ratio.
| Item 7C. | Interests of Experts and Counsel |
Not Applicable
| Item 8. | FINANCIAL INFORMATION |
| Item 8A. | Consolidated Statements and Other Financial Information |
See “Item 18. Financial Statements” and pages F-1
through F-90.
Legal
Proceedings
Excluding the legal proceedings discussed below, we and our
subsidiaries are not a party to any legal or administrative
proceedings and no proceedings are known by any of us or our
subsidiaries to be contemplated by governmental authorities or
third parties, which, if adversely determined, may have a
material adverse effect on our consolidated financial condition
or results of operations.
Kookmin
Bank
In February 2006, the Korean government indicted the former team
head of Kookmin Bank’s lottery department and several other
individuals in connection with excessive fees paid to a
subcontractor by the government. The subcontractor, Korea
Lottery Service Inc., was hired by Kookmin Bank with the Korean
government’s approval in connection with Kookmin
Bank’s lottery operations, and fees paid to such
subcontractor were deducted prior to transferring any profit
received by Kookmin Bank to the government. In December 2007,
the Seoul Central District Court found the former team head of
Kookmin Bank’s lottery department guilty but ruled in favor
of the other defendants. Both the former team head of Kookmin
Bank’s lottery department and the prosecutor’s office
appealed the case to the Seoul High Court. In January 2009, the
Seoul High Court ruled in favor of the former team head of
Kookmin Bank’s lottery department. In February 2009, the
prosecutor’s office appealed the case to the Supreme Court
of Korea, which dismissed the appeal.
In August 2006, the government filed a lawsuit seeking the
return of
W
321 billion of excessive fees
relating to the lottery operations against Kookmin Bank,
Ernst & Young Han Young, Korea Lottery Service Inc.
and Kookmin Bank’s and their relevant employees. In April
2009, the Seoul Central District Court dismissed the
government’s claim. In May 2009, the government appealed
the case to the Seoul High Court, where it is currently pending.
In April 2004, the Lottery Commission of the Korean government
revised the fee rate for fees payable to Korea Lottery Service
Inc. by reducing it from 9.523% to 3.144%. Korea Lottery Service
Inc. filed a lawsuit with the Seoul Central District Court
claiming that such reduction by the Lottery Commission was
invalid and demanding the payment of approximately
W
20 billion of unpaid fees by Kookmin
Bank, which is the difference between the fees payable by
Kookmin Bank under the previous rate and the revised rate in
respect of fees incurred in May 2004. In December 2006, the
Seoul Central District Court ruled in favor of Korea Lottery
Service Inc., and Kookmin Bank appealed to the Seoul High Court
in January 2007. In May 2008, the Seoul High Court ruled in
favor of Korea
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Table of Contents
Lottery Service Inc. in part but reduced the amount of damages
to
W
4.5 billion. In June 2008, both
Kookmin Bank and Korea Lottery Service Inc. appealed the case to
the Supreme Court of Korea, where it is currently pending.
In addition, in January 2007, Korea Lottery Service Inc. filed
another lawsuit with the Seoul Central District Court seeking
payment of unpaid fees in the aggregate amount of
W
446 billion, which is the difference
between the fees payable by Kookmin Bank under the previous rate
and the revised rate, for fees incurred from June 2004 to
December 2006. In July 2008, the Seoul Central District Court
ruled in favor of Kookmin Bank in part and reduced the amount of
damages to
W
123 billion. In August 2008,
both Kookmin Bank and Korea Lottery Service Inc. appealed the
case to the Seoul High Court, where it is currently pending.
Furthermore, in June 2008, Korea Lottery Service Inc. filed
another lawsuit with the Seoul Central District Court seeking
payment of unpaid fees in the aggregate amount of
W
134 billion, which is the difference
between the fees payable by Kookmin Bank under the previous rate
and the revised rate, for fees incurred from January 2007 to
December 1, 2007. The case is currently pending.
In September 2006, the Korea Fair Trade Commission ordered
Kookmin Bank to cease, and assessed an administrative fine
against Kookmin Bank in the aggregate amount of
W
6.4 billion in connection with, the
following practices:
| • | not reducing the interest rates on certain of its adjustable-rate home equity loans in prior years despite a decline in market interest rates; | |
| • | collecting unauthorized early repayment commissions from its customers in connection with certain of its housing loans; and | |
| • | paying KB Asset Management a management fee higher than that of other asset management companies with respect to certain money market fund products. |
In November 2006, Kookmin Bank paid the full amount of such
W
6.4 billion fine, after filing a lawsuit
with the Seoul High Court in October 2006 to revoke the order.
In January 2008, the Seoul High Court ruled in favor of the
Korea Fair Trade Commission regarding the orders with respect to
the first and third practices described above, and in favor of
Kookmin Bank regarding the order with respect to the second
practice described above. Furthermore, the Seoul High Court
ruled that the administrative fine imposed in connection with
the first practice described above was excessive and ordered a
reassessment. Kookmin Bank and the Korea Fair Trade Commission
both appealed the ruling to the Supreme Court, which ruled in
favor of the Korea Fair Trade Commission regarding the orders
with respect to the three practices described above but upheld
the Seoul High Court’s ruling that the administrative fine
imposed in connection with the first practice described above
was excessive.
Furthermore, in September 2006, the Korea Fair Trade Commission
announced that it would issue a formal warning to Kookmin Bank
for:
| • | canceling accumulated bonus points given to its credit card holders whose card transactions were suspended for more than a year; and | |
| • | not giving certain bonus points to its credit card holders who were in default on their payments. |
However, Kookmin Bank has not received any formal warning from
the Korea Fair Trade Commission on this matter to date.
In addition, in May 2006 the Korea Fair Trade Commission
commenced an investigation into whether various domestic banks
(including Kookmin Bank) engaged in collusive or
anti-competitive activity in connection with various commission
fees. As a result of such investigation, in March 2008, the
Korea Fair Trade Commission took the following actions:
| • |
The Korea Fair Trade Commission ordered seven credit card
issuers (including Kookmin Bank) to stop certain allegedly
collusive practices in reducing draft capture fees payable to
value-added network companies and to pay administrative fines in
an aggregate amount of
|
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Table of Contents
| appealed the Korea Fair Trade Commission’s decision to the Seoul High Court, which dismissed the appeal. In July 2009, Kookmin Bank appealed the case to the Supreme Court of Korea, which dismissed the appeal; and |
| • |
The Korea Fair Trade Commission ordered Kookmin Bank to stop
alleged price-fixing practices in charging certain new fees in
connection with export bills of exchange and banker’s
usance letters of credit and to pay administrative fines in the
amount of
|
Furthermore, in April 2008, the Korea Fair Trade Commission
ordered Kookmin Bank to stop alleged price-fixing practices in
connection with direct deposit fees, and to pay administrative
fines in the amount of
W
537 million for
such activities. In July 2008, Kookmin Bank appealed the Korea
Fair Trade Commission’s decision to the Seoul High Court,
which dismissed Kookmin Bank’s appeal in May 2009. In June
2009, Kookmin Bank appealed this case to the Supreme Court of
Korea, where it is currently pending.
During the first quarter of 2004, the National Tax Service of
Korea completed a tax audit in respect of Kookmin Bank for the
fiscal years 1998, 1999, 2000 and 2001, as a result of which
Kookmin Bank was assessed
W
124 billion
(including residence tax) for tax deficiencies. Kookmin Bank has
paid the entire amount, but appealed the assessment to the
National Tax Tribunal, which ruled in favor of the National Tax
Service of Korea in part. In 2005 and 2006, Kookmin Bank filed
various administrative lawsuits appealing the judgment of the
National Tax Tribunal. Kookmin Bank previously had one lawsuit
pending at the Seoul High Court, which was decided in its favor
in April 2008. In May 2008, the National Tax Service of Korea
appealed the case to the Supreme Court of Korea, which dismissed
the appeal in June 2009. Kookmin Bank previously had two
additional lawsuits on this matter pending at the Supreme Court
of Korea, one of which was decided in its favor in January 2010
and the other in favor of the National Tax Service of Korea in
March 2010.
During the first half of 2007, the National Tax Service of Korea
completed a tax audit in respect of Kookmin Bank for the fiscal
years 2002, 2003, 2004 and 2005, as a result of which Kookmin
Bank was assessed
W
190 billion (including
residence tax) for tax deficiencies. In addition, during the
second half of 2007, the National Tax Service of Korea assessed
additional income taxes for prior years amounting to
W
292 billion (including residence tax) for
tax deficiencies. Kookmin Bank paid the entire amount of such
additional assessments in 2007, but filed an appeal with the
National Tax Tribunal with respect to tax assessments made in
2007 amounting to
W
482 billion (including
residence tax), and we recorded
W
481 billion of such income taxes paid as
“Other Assets” in our consolidated financial
statements as of December 31, 2007 and 2008, which was
reduced to
W
401 billion as of
December 31, 2009. See “Item 3D. Risk
Factors — Other risks relating to our
business — We have been assessed additional income
taxes in respect of prior years as a result of a tax audit by
the National Tax Service of Korea, and our appeal with respect
to a portion of such assessment may not be successful.”
In June 2008, the Ministry of Land, Transport and Maritime
Affairs of the Korean government filed a suit against Kookmin
Bank in the Seoul Central District Court to recover
W
116 billion of ATM transaction fees that
were allegedly overcharged by Kookmin Bank during the period
from February 2003 to December 2006, by applying the higher bank
teller transaction fees to ATM transactions. In January 2009,
the Seoul Central District Court ruled in favor of Kookmin Bank,
and the Ministry of Land, Transport and Maritime Affairs
appealed the case to the Seoul High Court, which dismissed the
appeal. In September 2009, the Ministry of Land, Transport and
Maritime Affairs appealed the case to the Supreme Court of
Korea, which dismissed the appeal.
Since November 2008, certain of Kookmin Bank’s customers
have filed lawsuits against it in connection with its sales of
foreign currency derivatives products known as “KIKO”
(which stands for “knock-in knock-out”), which are
intended to operate as hedging instruments against fluctuations
in the exchange rate between the Won and the U.S. dollar.
Due to the significant depreciation of the Won against the
U.S. dollar in 2008 and 2009, customers who
169
Table of Contents
have purchased KIKO products from Kookmin Bank are required to
make large payments to it. Six companies have filed lawsuits
against Kookmin Bank alleging that the contracts under which the
relevant KIKO products were sold should be invalidated and that
Kookmin Bank should return payments received thereunder. The
aggregate amount of such claims, as of May 4, 2010, was
approximately
W
19 billion and may increase
in the event of future depreciation of the Won against
U.S. dollar. Additional lawsuits, as well as motions for
preliminary injunctions, may be filed against Kookmin Bank with
respect to KIKO products, and the final outcome of such
litigation remains uncertain.
Since November 2008, 392 of Kookmin Bank’s customers have
filed 11 lawsuits against it in connection with its sales of
offshore funds and currency future contracts, claiming damages
of
W
5,670 million. The customers allege
that the losses were caused by Kookmin Bank’s negligence in
inadequately explaining the risks of such investment to its
customers and in structuring funds with inappropriate currency
future hedging features. Four of the lawsuits were dismissed and
not appealed. One of the lawsuits was dismissed by the Seoul
Central District Court in July 2009 and the plaintiffs appealed
to the Seoul High Court, where it is currently pending. Five of
the remaining lawsuits are currently pending at the Seoul
Central District Court and one lawsuit is pending at the Daegu
District Court. Additional lawsuits may be filed against Kookmin
Bank with respect to its sales of such products, and the final
outcome of such litigation remains uncertain.
Dividends
Dividends must be approved by the stockholders at the annual
general meeting of stockholders. Cash dividends may be paid out
of retained earnings that have not been appropriated to
statutory reserves. See “Item 10B. Memorandum and
Articles of Association — Description of Capital
Stock — Dividends and Other Distributions.”
The table below sets forth, for the periods indicated, the
dividend per share of common stock and the total amount of
dividends declared and paid by Kookmin Bank in respect of each
of the three years ended December 31, 2007 and by us in
respect of the years ended December 31, 2008 and 2009. The
dividends set out for each of the years below were paid within
30 days after our annual stockholders meeting, which is
held no later than March of the following year.
|
Dividends per
|
Dividends per
|
Total Amount of Cash
|
||||||||||||||||||
| Fiscal Year | Common Share (1) | Preferred Share | Dividends Paid | |||||||||||||||||
| (In millions of Won) | ||||||||||||||||||||
|
2005
(2)
|
|
550 | US$ | 0.54 | — | — |
|
184,889 | ||||||||||||
|
2006
(3)
|
3,650 | 3.92 | — | — | 1,227,784 | |||||||||||||||
|
2007
(4)
|
2,450 | 2.62 | — | — | 824,129 | |||||||||||||||
|
2008
(5)
|
— | — | — | — | — | |||||||||||||||
|
2009
(6)
|
230 | 0.20 | — | — | 78,897 | |||||||||||||||
| (1) | Won amounts are expressed in U.S. dollars at the noon buying rate in effect at the end of the relevant periods as quoted by the Federal Reserve Bank of New York in the United States. | |
| (2) |
On February 8, 2006, Kookmin
Bank’s board of directors passed a board resolution
recommending a cash dividend of
|
|
| (3) |
On February 8, 2007, Kookmin
Bank’s board of directors passed a board resolution
recommending a cash dividend of
|
|
| (4) |
On February 4, 2008, Kookmin
Bank’s board of directors passed a board resolution
recommending a cash dividend of
|
|
| (5) | On February 11, 2009, our board of directors passed a board resolution recommending that no dividends be paid for the fiscal year ended December 31, 2008. This resolution was approved and ratified by our stockholders on March 27, 2009. | |
| (6) |
On February 10, 2010, our
board of directors passed a board resolution recommending a cash
dividend of
|
170
Table of Contents
Future dividends will depend upon our revenues, cash flow,
financial condition and other factors. As an owner of ADSs, you
will be entitled to receive dividends payable in respect of the
shares of common stock represented by such ADSs.
For a description of the tax consequences of dividends paid to
our stockholders, see “Item 10E. Taxation —
United States Taxation” and “— Korean
Taxation — Taxation of Dividends.”
| Item 8B. | Significant Changes |
Not Applicable.
| Item 9. | THE OFFER AND LISTING |
| Item 9A. | Offering and Listing Details |
Market
Price Information
The principal trading market for our common stock is the KRX
KOSPI Market. Our common stock has been listed on the KRX KOSPI
Market since October 10, 2008, and the ADSs have been
listed on the New York Stock Exchange under the symbol
“KB” since September 29, 2008. The ADSs are
identified by the CUSIP number 48241A105.
Kookmin Bank’s common stock was listed on the KRX KOSPI
Market on November 9, 2001, and was suspended from trading
from September 25, 2008 and de-listed on October 10,
2008 in connection with the comprehensive stock transfer
pursuant to which we were established. Kookmin Bank ADSs were
listed on the New York Stock Exchange from November 1, 2001
to September 26, 2008. The Kookmin Bank ADSs were
identified by the CUSIP number 50049M109.
171
Table of Contents
The table below sets forth, for the periods indicated, the high
and low closing prices and the average daily volume of trading
activity on the KRX KOSPI Market for Kookmin Bank common stock
with respect to the periods up to and including the third
quarter of 2008 and for our common stock with respect to the
subsequent periods, and the high and low closing prices and the
average daily volume of trading activity on the New York Stock
Exchange for Kookmin Bank ADSs with respect to the periods up to
and including the third quarter of 2008 and for our ADSs with
respect to the subsequent periods.
| KRX KOSPI Market (1) | New York Stock Exchange (2) | |||||||||||||||||||||||
|
Closing Price
|
Closing Price
|
|||||||||||||||||||||||
| Per Common Stock |
Average Daily
|
Per ADS |
Average Daily
|
|||||||||||||||||||||
| High | Low | Trading Volume | High | Low | Trading Volume | |||||||||||||||||||
|
(In thousands
|
(In thousands
|
|||||||||||||||||||||||
| of shares) | of shares) | |||||||||||||||||||||||
|
2005
|
|
77,800 |
|
40,000 | 1,176.4 | US$ | 75.67 | US$ | 37.70 | 316.2 | ||||||||||||||
|
2006
|
89,900 | 66,300 | 1,240.4 | 97.50 | 66.25 | 444.0 | ||||||||||||||||||
|
2007
|
89,500 | 61,600 | 1,527.1 | 96.57 | 64.57 | 523.8 | ||||||||||||||||||
|
2008
|
71,500 | 22,800 | 2,902.4 | 71.26 | 14.70 | 780.0 | ||||||||||||||||||
|
First Quarter
|
67,100 | 49,100 | 2,015.1 | 70.00 | 48.78 | 908.5 | ||||||||||||||||||
|
Second Quarter
|
71,500 | 57,800 | 1,969.7 | 71.26 | 58.36 | 649.7 | ||||||||||||||||||
|
Third Quarter
|
61,700 | 51,800 | 3,105.4 | 60.22 | 43.23 | 790.6 | ||||||||||||||||||
|
Fourth Quarter
|
53,100 | 22,800 | 4,620.2 | 46.00 | 14.70 | 777.5 | ||||||||||||||||||
|
2009
|
63,200 | 26,850 | 2,390.1 | 55.07 | 16.82 | 533.3 | ||||||||||||||||||
|
First Quarter
|
40,100 | 26,850 | 3,088.8 | 31.11 | 16.82 | 719.7 | ||||||||||||||||||
|
Second Quarter
|
47,800 | 34,450 | 2,922.7 | 39.23 | 25.63 | 733.7 | ||||||||||||||||||
|
Third Quarter
|
61,900 | 44,200 | 2,056.5 | 51.47 | 34.25 | 403.4 | ||||||||||||||||||
|
Fourth Quarter
|
63,200 | 56,400 | 1,530.5 | 55.07 | 47.44 | 288.4 | ||||||||||||||||||
|
2010 (through June 22)
|
59,400 | 45,900 | 1,896.1 | 52.62 | 37.81 | 368.7 | ||||||||||||||||||
|
January
|
59,400 | 49,650 | 2,022.1 | 52.62 | 42.74 | 269.3 | ||||||||||||||||||
|
February
|
52,500 | 45,900 | 1,846.9 | 45.73 | 38.69 | 404.8 | ||||||||||||||||||
|
March
|
54,600 | 49,100 | 1,433.4 | 47.96 | 42.65 | 354.5 | ||||||||||||||||||
|
April
|
57,500 | 52,300 | 1,987.1 | 51.88 | 46.90 | 290.0 | ||||||||||||||||||
|
May
|
54,700 | 46,750 | 1,924.4 | 49.50 | 37.81 | 435.5 | ||||||||||||||||||
|
June (through June 22)
|
52,800 | 49,200 | 2,299.8 | 44.13 | 39.25 | 461.5 | ||||||||||||||||||
Source: Global Stock Information
Financial Network and KRX KOSPI Market
| (1) | Trading of Kookmin Bank common shares on the KRX KOSPI Market commenced on November 9, 2001 and ended on September 24, 2008. Trading of our common shares on the KRX KOSPI Market commenced on October 10, 2008. | |
| (2) | Trading of Kookmin Bank ADSs on the New York Stock Exchange commenced on November 1, 2001 and ended on September 26, 2008. Trading of our ADSs on the New York Stock Exchange commenced on September 29, 2008. Each ADS represents the right to receive one share. |
| Item 9B. | Plan of Distribution |
Not Applicable.
| Item 9C. | Markets |
The KRX
KOSPI Market
The KRX KOSPI Market (formerly known as the Stock Market
Division of the Korea Exchange) began its operations in 1956. It
has a single trading floor located in Seoul. The KRX KOSPI
Market is a membership organization consisting of most of the
Korean financial investment companies with a dealing and/or
brokerage license and some Korean branches of foreign financial
investment companies with such license.
172
Table of Contents
As of December 31, 2009, the aggregate market value of
equity securities listed on the KRX KOSPI Market was
approximately
W
888 trillion. The average daily
trading volume of equity securities for 2009 was approximately
486 million shares with an average transaction value of
W
5,796 billion.
The KRX KOSPI Market has the power in some circumstances to
suspend trading in the shares of a given company or to de-list a
security pursuant to the Listing Regulation of the KRX KOSPI
Market. The KRX KOSPI Market also restricts share price
movements. All listed companies are required to file accounting
reports annually, semiannually and quarterly and to release
immediately all information that may affect trading in a
security.
The KRX KOSPI Market publishes the KOSPI, which is an index of
all equity securities listed on the KRX KOSPI Market, every ten
seconds. On January 1, 1983, the method of computing KOSPI
was changed from the Dow Jones method to the aggregate value
method. In the new method, the market capitalizations of all
listed companies are aggregated, subject to certain adjustments,
and this aggregate is expressed as a percentage of the aggregate
market capitalization of all listed companies as of the base
date, January 4, 1980.
The following table sets out movements in KOSPI:
| Opening | High | Low | Closing | |||||||||||||
|
1982
|
123.60 | 134.48 | 105.99 | 128.99 | ||||||||||||
|
1983
|
122.52 | 134.46 | 115.59 | 121.21 | ||||||||||||
|
1984
|
115.25 | 142.46 | 115.25 | 142.46 | ||||||||||||
|
1985
|
139.53 | 163.37 | 131.40 | 163.37 | ||||||||||||
|
1986
|
161.40 | 279.67 | 153.85 | 272.61 | ||||||||||||
|
1987
|
264.82 | 525.11 | 264.82 | 525.11 | ||||||||||||
|
1988
|
532.04 | 922.56 | 527.89 | 907.20 | ||||||||||||
|
1989
|
919.61 | 1,007.77 | 844.75 | 909.72 | ||||||||||||
|
1990
|
908.59 | 928.82 | 566.27 | 696.11 | ||||||||||||
|
1991
|
679.75 | 763.10 | 586.51 | 610.92 | ||||||||||||
|
1992
|
624.23 | 691.48 | 459.07 | 678.44 | ||||||||||||
|
1993
|
697.41 | 874.10 | 605.93 | 866.18 | ||||||||||||
|
1994
|
879.32 | 1,138.75 | 855.37 | 1,027.37 | ||||||||||||
|
1995
|
1,013.57 | 1,016.77 | 847.09 | 882.94 | ||||||||||||
|
1996
|
888.85 | 986.84 | 651.22 | 651.22 | ||||||||||||
|
1997
|
653.79 | 792.29 | 350.68 | 376.31 | ||||||||||||
|
1998
|
385.49 | 579.86 | 280.00 | 562.46 | ||||||||||||
|
1999
|
587.57 | 1,028.07 | 498.42 | 1,028.07 | ||||||||||||
|
2000
|
1,059.04 | 1,059.04 | 500.60 | 504.62 | ||||||||||||
|
2001
|
520.95 | 704.50 | 468.76 | 693.70 | ||||||||||||
|
2002
|
724.95 | 937.61 | 584.04 | 627.55 | ||||||||||||
|
2003
|
635.17 | 822.16 | 515.24 | 810.71 | ||||||||||||
|
2004
|
821.26 | 936.06 | 719.59 | 895.92 | ||||||||||||
|
2005
|
893.71 | 1,379.37 | 870.84 | 1,379.37 | ||||||||||||
|
2006
|
1,389.27 | 1,464.70 | 1,203.86 | 1,434.46 | ||||||||||||
|
2007
|
1,435.26 | 2,064.85 | 1,355.79 | 1,897.13 | ||||||||||||
|
2008
|
1,853.45 | 1,888.88 | 938.75 | 1,124.47 | ||||||||||||
|
2009
|
1,132.87 | 1,723.17 | 992.69 | 1,682.77 | ||||||||||||
|
2010 (through June 22)
|
1,696.14 | 1,752.20 | 1,552.79 | 1,731.48 | ||||||||||||
Source: The KRX KOSPI
Market
173
Table of Contents
Shares are quoted “ex-dividend” on the first trading
day of the relevant company’s accounting period. Since the
calendar year is the accounting period for the majority of
listed companies, this may account for the drop in KOSPI between
its closing level at the end of one calendar year and its
opening level at the beginning of the following calendar year.
With certain exceptions, principally to take account of a share
being quoted “ex-dividend” and “ex-rights,”
permitted upward and downward movements in share prices of any
category of shares on any day are limited under the rules of the
KRX KOSPI Market to 15% of the previous day’s closing price
of the shares, rounded down as set out below:
|
Previous Day’s Closing Price
|
Rounded Down to
|
|||
|
Less than 5,000
|
5 | |||
|
5,000 to less than 10,000
|
10 | |||
|
10,000 to less than 50,000
|
50 | |||
|
50,000 to less than 100,000
|
100 | |||
|
100,000 to less than 500,000
|
500 | |||
|
500,000 or more
|
1,000 | |||
As a consequence, if a particular closing price is the same as
the price set by the fluctuation limit, the closing price may
not reflect the price at which persons would have been prepared,
or would be prepared to continue, if so permitted, to buy and
sell shares. Orders are executed on an auction system with
priority rules to deal with competing bids and offers.
Due to the deregulation of restrictions on brokerage commission
rates, the brokerage commission rate on equity securities
transactions may be determined by the parties, subject to
commission schedules being filed with the KRX KOSPI Market by
the financial investment companies with a brokerage license. In
addition, a securities transaction tax will generally be imposed
on the transfer of shares or certain securities representing
rights to subscribe for shares. An agriculture and fishery
special surtax of 0.15% of the sales prices will also be imposed
on transfer of these shares and securities on the KRX KOSPI
Market. See “Item 10E. Taxation — Korean
Taxation.”
The following table sets forth the number of companies listed on
the KRX KOSPI Market, the corresponding total market
capitalization at the end of the periods indicated and the
average daily trading volume for those periods:
|
Market Capitalization on the
|
||||||||||||||||||||||||
| Last Day of Each Period | Average Daily Trading Volume, Value | |||||||||||||||||||||||
|
Number of
|
||||||||||||||||||||||||
|
Listed
|
(Billions of
|
(Millions of
|
Thousands of
|
(Millions of
|
(Thousands of
|
|||||||||||||||||||
| Year | Companies | Won) | US$) (1) | Shares | Won) | US$) (1) | ||||||||||||||||||
|
1982
|
334 |
|
3,001 | US$ | 4,279 | 9,704 |
|
6,667 | US$ | 9,507 | ||||||||||||||
|
1983
|
328 | 3,490 | 4,666 | 9,325 | 5,941 | 7,944 | ||||||||||||||||||
|
1984
|
336 | 5,149 | 6,434 | 14,847 | 10,642 | 13,301 | ||||||||||||||||||
|
1985
|
342 | 6,570 | 7,921 | 18,925 | 12,315 | 14,846 | ||||||||||||||||||
|
1986
|
355 | 11,994 | 13,439 | 31,755 | 32,870 | 36,830 | ||||||||||||||||||
|
1987
|
389 | 26,172 | 30,250 | 20,353 | 70,185 | 81,120 | ||||||||||||||||||
|
1988
|
502 | 64,544 | 81,177 | 10,367 | 198,364 | 249,483 | ||||||||||||||||||
|
1989
|
626 | 95,477 | 138,997 | 11,757 | 280,967 | 409,037 | ||||||||||||||||||
|
1990
|
669 | 79,020 | 115,610 | 10,866 | 183,692 | 268,753 | ||||||||||||||||||
|
1991
|
686 | 73,118 | 101,623 | 14,022 | 214,263 | 297,795 | ||||||||||||||||||
|
1992
|
688 | 84,712 | 110,691 | 24,028 | 308,246 | 402,779 | ||||||||||||||||||
|
1993
|
693 | 112,665 | 142,668 | 35,130 | 574,048 | 726,919 | ||||||||||||||||||
|
1994
|
699 | 151,217 | 185,657 | 36,862 | 776,257 | 953,047 | ||||||||||||||||||
|
1995
|
721 | 141,151 | 178,266 | 26,130 | 487,762 | 616,016 | ||||||||||||||||||
|
1996
|
760 | 117,370 | 151,289 | 26,571 | 486,834 | 627,525 | ||||||||||||||||||
|
1997
|
776 | 70,989 | 82,786 | 41,525 | 555,759 | 648,115 | ||||||||||||||||||
174
Table of Contents
|
Market Capitalization on the
|
||||||||||||||||||||||||
| Last Day of Each Period | Average Daily Trading Volume, Value | |||||||||||||||||||||||
|
Number of
|
||||||||||||||||||||||||
|
Listed
|
(Billions of
|
(Millions of
|
Thousands of
|
(Millions of
|
(Thousands of
|
|||||||||||||||||||
| Year | Companies | Won) | US$) (1) | Shares | Won) | US$) (1) | ||||||||||||||||||
|
1998
|
748 | 137,799 | 81,297 | 97,716 | 660,429 | 389,634 | ||||||||||||||||||
|
1999
|
725 | 349,504 | 294,319 | 278,551 | 3,481,620 | 2,931,891 | ||||||||||||||||||
|
2000
|
704 | 188,042 | 166,703 | 306,163 | 2,602,211 | 2,306,925 | ||||||||||||||||||
|
2001
|
689 | 255,850 | 200,039 | 473,241 | 1,997,420 | 1,561,705 | ||||||||||||||||||
|
2002
|
683 | 258,681 | 217,379 | 857,245 | 3,041,598 | 2,308,789 | ||||||||||||||||||
|
2003
|
684 | 355,363 | 298,123 | 542,010 | 2,216,636 | 1,859,594 | ||||||||||||||||||
|
2004
|
683 | 412,588 | 398,597 | 372,895 | 2,232,108 | 2,156,418 | ||||||||||||||||||
|
2005
|
702 | 655,075 | 648,589 | 467,629 | 3,157,662 | 3,126,398 | ||||||||||||||||||
|
2006
|
731 | 704,588 | 757,621 | 279,096 | 3,435,180 | 3,693,742 | ||||||||||||||||||
|
2007
|
745 | 951,900 | 1,017,205 | 363,732 | 5,539,588 | 5,919,628 | ||||||||||||||||||
|
2008
|
763 | 592,635 | 469,600 | 355,205 | 5,189,643 | 4,112,238 | ||||||||||||||||||
|
2009
|
770 | 887,935 | 763,027 | 485,657 | 5,795,426 | 4,980,172 | ||||||||||||||||||
|
2010 (through June 18)
|
771 | 943,747 | 784,788 | 406,445 | 5,268,861 | 4,381,407 | ||||||||||||||||||
Source: The KRX KOSPI
Market
| (1) | Converted at the noon buying rate of the Federal Reserve Bank of New York in effect on the last business day of the period indicated. |
The Korean securities markets are principally regulated by the
Financial Services Commission and the Financial Investment
Services and Capital Markets Act, which replaced the Korean
Securities and Exchange Act in February 2009. The Financial
Investment Services and Capital Markets Act imposes restrictions
on insider trading, price manipulation and deceptive action
(including unfair trading), requires specified information to be
made available by listed companies to investors and establishes
rules regarding margin trading, proxy solicitation, takeover
bids, acquisition of treasury shares and reporting requirements
for stockholders holding substantial interests.
Protection
of Customer’s Interest in Case of Insolvency of Financial
Investment Companies with a Brokerage License
Under Korean law, the relationship between a customer and a
financial investment company with a brokerage license in
connection with a securities sell or buy order is deemed to be
consignment and the securities acquired by a consignment agent
(i.e., the financial investment company with a brokerage
license) through such sell or buy order are regarded as
belonging to the customer in so far as the customer and the
consignment agent’s creditors are concerned. Therefore, in
the event of a bankruptcy or reorganization procedure involving
a financial investment company with a brokerage license, the
customer of such financial investment company is entitled to the
proceeds of the securities sold by such financial investment
company.
When a customer places a sell order with a financial investment
company with a brokerage license which is not a member of the
KRX KOSPI Market, and that financial investment company places a
sell order with another financial investment company with a
brokerage license, which is a member of the KRX KOSPI Market,
the customer is still entitled to the proceeds of the securities
sold and received by the non-member company from the member
company regardless of the bankruptcy or reorganization of the
non-member company.
Under the Financial Investment Services and Capital Markets Act,
the KRX KOSPI Market is obliged to indemnify any loss or damage
incurred by a counterparty as a result of a breach by its
members. If a financial investment company with a brokerage
license which is a member of the KRX KOSPI Market breaches its
obligation in connection with a buy order, the KRX KOSPI Market
is obliged to pay the purchase price on behalf of the breaching
member. Therefore, the customer can acquire the securities that
have been ordered to be purchased by the breaching member.
175
Table of Contents
When a customer places a buy order with a non-member company and
the non-member company places a buy order with a member company,
the customer has the legal right to the securities received by
the non-member company from the member company because the
purchased securities are regarded as belonging to the customer
in so far as the customer and the non-member company’s
creditors are concerned.
As the cash deposited with a financial investment company with a
brokerage license is regarded as belonging to such financial
investment company, which is liable to return the same at the
request of its customer, the customer cannot take back deposited
cash from such financial investment company if a bankruptcy or
reorganization procedure is instituted against such financial
investment company and, therefore, can suffer from loss or
damage as a result. However, the Depositor Protection Act
provides that the Korea Deposit Insurance Corporation will, upon
the request of the investors, pay investors an amount equal to
the full amount of cash deposited with a financial investment
company with a brokerage license prior to August 1, 1998 in
case of such financial investment company’s bankruptcy,
liquidation, cancellation of securities business license or
other insolvency events. However, this indemnification was
available only until the end of 2000. From 2001, the maximum
amount to be paid to each customer is limited to
W
50 million. Pursuant to the Financial
Investment Services and Capital Markets Act, financial
investment companies with a brokerage license are required to
deposit the cash received from its customers to the extent the
amount is not covered by the insurance with the Korea Securities
Finance Corporation, a special entity established pursuant to
the Financial Investment Services and Capital Markets Act.
Set-off or attachment of cash deposits by such financial
investment companies is prohibited. The premiums related to this
insurance are paid by such financial investment companies.
Reporting
Requirements for Holders of Substantial Interests
Any person whose direct or beneficial ownership of our common
stock with voting rights, whether in the form of shares of
common stock or ADSs, certificates representing the rights to
subscribe for shares or equity-related debt securities including
convertible bonds and bonds with warrants (which we refer to
collectively as “Equity Securities”), together with
the Equity Securities beneficially owned by certain related
persons or by any person acting in concert with the person,
accounts for 5% or more of the total issued and outstanding
shares (plus Equity Securities of us held by such persons) is
required to report the status and purpose (in terms of whether
the purpose of the shareholding is to exercise control over our
management) of the holdings to the Financial Services Commission
and the KRX KOSPI Market within five business days after
reaching the 5% ownership interest. In addition, any change in
(i) the ownership interest subsequent to the report that
equals or exceeds 1% of the total issued and outstanding Equity
Securities of us or (ii) the purpose of the shareholding is
required to be reported to the Financial Services Commission and
the KRX KOSPI Market within five business days from the date of
the change.
Violation of these reporting requirements may subject a person
to criminal sanctions such as fines or imprisonment
and/or
a
loss of voting rights with respect to the ownership of Equity
Securities exceeding 5% of the total issued and outstanding
Equity Securities with respect to which the reporting
requirements were violated. Furthermore, the Financial Services
Commission may order the disposal of the unreported Equity
Securities.
In addition to the reporting requirements described above, any
person whose direct or beneficial ownership of our stock
accounts for 10% or more of the total issued and outstanding
stock (which we refer to as a “major stockholder”)
must report the status of
his/her
shareholding to the Korea Securities and Futures Commission and
the KRX KOSPI Market within five days after
he/she
becomes a major stockholder. In addition, any change in the
ownership interest subsequent to the report must be reported to
the Korea Securities and Futures Commission and the KRX KOSPI
Market within the 5th day of the occurrence of the change.
Violation of these reporting requirements may subject a person
to criminal sanctions such as fines or imprisonment.
Any single stockholder and persons who stand in a special
relationship with that stockholder that acquire more than 4% of
the voting stock of a nationwide Korean bank pursuant to the
Bank Act will be subject to reporting requirements. In addition,
any single stockholder and persons who stand in a special
relationship with that stockholder that acquire in excess of 10%
of a nationwide bank’s total issued and outstanding shares
with voting rights must receive approval from the Financial
Services Commission to acquire shares in each instance where the
total shareholding would exceed 10%, 25% or 33%, respectively,
of the bank’s total issued and outstanding shares
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with voting rights. See “Item 4B. Business
Overview — Supervision and Regulation —
Principal Regulations Applicable to Banks —
Restrictions on Bank Ownership.”
Restrictions
Applicable to ADSs
No Korean governmental approval is necessary for the sale and
purchase of our ADSs in the secondary market outside Korea or
for the withdrawal of shares of our common stock underlying the
ADSs and the delivery inside Korea of shares in connection with
the withdrawal, provided that a foreigner who intends to acquire
the shares must obtain an investment registration card from the
Financial Supervisory Service as described below. The
acquisition of the shares by a foreigner must be immediately
reported to the governor of the Financial Supervisory Service,
either by the foreigner or by his standing proxy in Korea.
Persons who have acquired shares of our common stock as a result
of the withdrawal of shares underlying our ADSs may exercise
their preemptive rights for new shares, participate in free
distributions and receive dividends on shares without any
further Korean governmental approval.
Under current Korean laws and regulations, the depositary is
required to obtain the prior consent of us for the number of
shares of our common stock to be deposited in any given proposed
deposit that exceeds the difference between:
(1) the aggregate number of shares of our common stock
deposited by us for the issuance of our ADSs (including deposits
in connection with the initial issuance and all subsequent
offerings of our ADSs and stock dividends or other distributions
related to these ADSs); and
(2) the number of shares of our common stock on deposit
with the depositary at the time of such proposed deposit.
We have agreed to grant such consent to the extent that the
total number of shares on deposit with the depositary would not
exceed 116,583,985 at any time.
Restrictions
Applicable to Shares
As a result of amendments to the Foreign Exchange Transaction
Laws and Financial Services Commission regulations (which we
refer to collectively as the “Investment Rules”)
adopted in connection with the stock market opening from January
1992 and after that date, foreigners may invest, with limited
exceptions and subject to procedural requirements, in all shares
of Korean companies, whether listed on the KRX KOSPI Market or
on the KRX KOSDAQ Market, unless prohibited by specific laws.
Foreign investors may trade shares listed on the KRX KOSPI
Market or on the KRX KOSDAQ Market only through the KRX KOSPI
Market or the KRX KOSDAQ Market, except in limited
circumstances, including:
| • | odd-lot trading of shares; | |
| • | acquisition of shares (which we refer to as “Converted Shares”) by exercise of warrants, conversion rights or exchange rights under bonds with warrants, convertible bonds or exchangeable bonds or withdrawal rights under depositary receipts issued outside of Korea by a Korean company; | |
| • | acquisition of shares as a result of inheritance, donation, bequest or exercise of stockholders’ rights, including preemptive rights or rights to participate in free distributions and receive dividends; | |
| • | over-the-counter transactions between foreigners of a class of shares for which the ceiling on aggregate acquisition by foreigners, as explained below, has been reached or exceeded subject to certain exceptions; and | |
| • | sale and purchase of shares at fair value between foreigners who are part of an investor group comprised of foreign companies investing under the control of a common investment manager pursuant to applicable laws or contract. |
For over-the-counter transactions of shares between foreigners
outside the KRX KOSPI Market or the KRX KOSDAQ Market for shares
with respect to which the limit on aggregate foreign ownership
has been reached or
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exceeded, a financial investment company with a brokerage
license in Korea must act as an intermediary. Odd-lot trading of
shares outside the KRX KOSPI Market or the KRX KOSDAQ Market
must involve such a financial investment company as the other
party. Foreign investors are prohibited from engaging in margin
transactions with respect to shares that are subject to a
foreign ownership limit.
The Investment Rules require a foreign investor who wishes to
invest in shares on the KRX KOSPI Market or the KRX KOSDAQ
Market (including Converted Shares and shares being issued for
initial listing on the KRX KOSPI Market or on KRX KOSDAQ Market)
to register its identity with the Financial Supervisory Service
prior to making any such investment. The registration
requirement does not, however, apply to foreign investors who
acquire Converted Shares with the intention of selling such
Converted Shares within three months from the date of
acquisition. Upon registration, the Financial Supervisory
Service will issue to the foreign investor an investment
registration card, which must be presented each time the foreign
investor opens a brokerage account with a financial investment
company with a brokerage license. Foreigners eligible to obtain
an investment registration card include foreign nationals who
have not been residing in Korea for a consecutive period of six
months or more, foreign governments, foreign municipal
authorities, foreign public institutions, international
financial institutions or similar international organizations,
corporations incorporated under foreign laws and any person in
any additional category designated by decree of the Ministry of
Strategy and Finance under the Financial Investment Services and
Capital Markets Act. All Korean offices of a foreign corporation
as a group are treated as a separate foreigner from the offices
of the corporation outside Korea for the purpose of investment
registration. However, a foreign corporation or depositary
issuing depositary receipts may obtain one or more investment
registration cards in its name in certain circumstances as
described in the relevant regulations.
Upon a foreign investor’s purchase of shares through the
KRX KOSPI Market or the KRX KOSDAQ Market, no separate report by
the investor is required because the investment registration
card system is designed to control and oversee foreign
investment through a computer system. However, a foreign
investor’s acquisition or sale of shares outside the KRX
KOSPI Market or the KRX KOSDAQ Market (as discussed above) must
be reported by the foreign investor or his standing proxy to the
governor of the Financial Supervisory Service at the time of
each such acquisition or sale. A foreign investor must ensure
that any acquisition or sale by it of shares outside the KRX
KOSPI Market or the KRX KOSDAQ Market in the case of trades in
connection with a tender offer, odd-lot trading of shares,
trades of a class of shares for which the aggregate foreign
ownership limit has been reached or exceeded, is reported to the
governor of the Financial Supervisory Service by himself or his
standing proxy, or, in the case of sale and purchase of shares
at fair value between foreigners, who are part of an investor
group comprised of foreign companies investing under the control
of a common investment manager pursuant to applicable laws or
contract. A foreign investor may appoint a standing proxy from
among the Korea Securities Depository, foreign exchange banks
(including domestic branches of foreign banks), financial
investment companies with a dealing and/or brokerage license
(including domestic branches of foreign financial investment
companies with such license), financial investment companies
with a collective investment license (including domestic
branches of foreign financial investment companies with such
license) and internationally recognized custodians which will
act as a standing proxy to exercise stockholders’ rights or
perform any matters related to the foregoing activities if the
foreign investor does not perform these activities himself.
Generally, a foreign investor may not permit any person, other
than its standing proxy, to exercise rights relating to his
shares or perform any tasks related thereto on his behalf.
However, a foreign investor may be exempted from complying with
these standing proxy rules with the approval of the governor of
the Financial Supervisory Service in cases deemed inevitable by
reason of conflict between laws of Korea and the home country of
the foreign investor.
Certificates evidencing shares of Korean companies must be kept
in the custody of an eligible custodian in Korea. The same
entities eligible to act as a standing proxy are eligible to act
as a custodian of shares for a non-resident or foreign investor.
A foreign investor must ensure that its custodian deposits its
shares with the Korea Securities Depository. A foreign investor
may be exempted from complying with this deposit requirement
with the approval of the governor of the Financial Supervisory
Service in circumstances where compliance with that requirement
is made impracticable, including cases where compliance would
contravene the laws of the foreign investors’ home country.
Under the Investment Rules, with certain exceptions, foreign
investors may acquire shares of a Korean company without being
subject to any foreign investment ceiling. As one such
exception, designated public
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corporations are subject to a 40% ceiling on the acquisition of
shares by foreigners in the aggregate. Designated public
corporations may set a ceiling on the acquisition of shares by a
single person in their articles of incorporation. Currently,
Korea Electric Power Corporation is the only designated public
corporation that has set such a ceiling. Furthermore, an
investment by a foreign investor in 10% or more of the issued
and outstanding shares with voting rights of a Korean company is
defined as a foreign direct investment under the Foreign
Investment Promotion Act of Korea. Generally, a foreign direct
investment must be reported to the Ministry of Knowledge Economy
of Korea. The acquisition of shares of a Korean company by a
foreign investor may also be subject to certain foreign or other
shareholding restrictions in the event that the restrictions are
prescribed in a specific law that regulates the business of the
Korean company. For a description of such restrictions
applicable to Korean banks, see “Item 4B. Business
Overview — Supervision and Regulation —
Principal Regulations Applicable to Banks —
Restrictions on Bank Ownership.”
| Item 9D. | Selling Shareholders |
Not Applicable.
| Item 9E. | Dilution |
Not Applicable.
| Item 9F. | Expenses of the Issue |
Not Applicable.
| Item 10. | ADDITIONAL INFORMATION |
Not Applicable.
| Item 10A. | Share Capital |
Not Applicable.
| Item 10B. | Memorandum and Articles of Association |
Description
of Capital Stock
Set forth below is information relating to our capital stock,
including brief summaries of certain provisions of our articles
of incorporation, the Korean Commercial Code, Financial
Investment Services and Capital Markets Act and certain related
laws of Korea, all as currently in effect. The following
summaries do not purport to be complete and are subject to the
articles of incorporation and the applicable provisions of the
Financial Investment Services and Capital Markets Act, the
Korean Commercial Code, and certain other related laws of Korea.
As of December 31, 2009, our authorized share capital is
1,000,000,000 shares. Subject to applicable laws and
regulations, we are authorized to issue shares of preferred
stock up to one-half of all of the issued and outstanding shares
and shares of convertible stock up to 20% of all of the issued
and outstanding shares under our articles of incorporation.
Also, at the time of issuance of preferred shares, we may,
pursuant to a resolution of the board of directors, issue such
preferred shares as redeemable shares that can be redeemed at
our discretion using our profits. Furthermore, through an
amendment of the articles of incorporation, we may create new
classes of shares, which may be common shares or preferred
shares having additional features as prescribed under the Korean
Commercial Code. See “— Voting Rights.”
As of the date of this annual report, 386,351,693 shares of
common stock were issued and 343,028,989 shares of common
stock were outstanding. No preferred stock is currently
outstanding. All of the issued and outstanding shares are
fully-paid and non-assessable, and are in registered form. Our
authorized but unissued share capital consists of
613,648,307 shares. We may issue the unissued shares
without further stockholder approval, subject to a board
resolution as provided in the articles of incorporation. See
“— Preemptive Rights and Issuances of Additional
Shares” and “— Dividends and Other
Distributions — Distribution of Free Shares.”
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Our articles of incorporation provide that our stockholders may,
by special resolution, grant to our and our subsidiaries’
officers, directors and employees stock options exercisable for
up to 15% of the total number of our issued and outstanding
shares. Our board of directors may also grant stock options to
non-director
officers and employees exercisable for up to 1% of our issued
and outstanding shares, provided that such grant must be
approved by a resolution of the subsequent general meeting of
stockholders. As of March 31, 2010, our officers, directors
and employees held options to purchase 3,013,159 shares of
our common stock. Upon their exercise of such stock options, we
are required to pay in cash the difference between the exercise
price and the market price of our common stock at the date of
exercise. See “Item 6E. Share Ownership —
Stock Options.”
Share certificates are issued in denominations of one, five,
ten, 50, 100, 500, 1,000 and 10,000 shares.
Organization
and Register
We are a financial holding company established under the
Financial Holding Company Act. We are registered with the
commercial registry office of Seoul Central District Court.
Dividends
and Other Distributions
Dividends
Dividends are distributed to stockholders in proportion to the
number of shares of the relevant class of capital stock owned by
each stockholder following approval by the stockholders at an
annual general meeting of stockholders. Subject to the
requirements of the Korean Commercial Code and other applicable
laws and regulations, we expect to pay full annual dividends on
newly issued shares for the year in which the new shares are
issued.
We declare our dividend annually at the annual general meeting
of stockholders, which are held within three months after the
end of each fiscal year. Once declared, the annual dividend must
be paid to the stockholders of record as of the end of the
preceding fiscal year within one month after the annual general
meeting unless otherwise resolved thereby. Annual dividends may
be distributed either in cash or in shares provided that shares
must be distributed at par value and, if the market price of the
shares is less than their par value, dividends in shares may not
exceed one-half of the total annual dividend (including
dividends in shares). In addition to the annual dividend, we may
also distribute cash dividends to the stockholders of record as
of the end of March, June and September each year upon a
resolution by the board of directors.
Under the Korean Commercial Code and our articles of
incorporation, we do not have an obligation to pay any annual
dividend unclaimed for five years from the payment date.
The Financial Holding Company Act and related regulations
require that each time a Korean financial holding company pays
an annual dividend, it must set aside in its legal reserve to
stated capital an amount equal to at least one-tenth of its net
income after tax until the amount set aside reaches at least the
aggregate amount of its stated capital. Unless it sets aside
this amount, a Korean financial holding company may not pay an
annual dividend. We intend to set aside allowances for loan
losses and reserves for severance pay in addition to this legal
reserve.
For information regarding Korean taxes on dividends, see
“Item 10E. Taxation — Korean Taxation.”
Distribution
of Free Shares
In addition to permitting dividends in the form of shares to be
paid out of retained or current earnings, the Korean Commercial
Code permits a company to distribute to its stockholders, in the
form of free shares, an amount transferred from the capital
surplus or legal reserve to stated capital. These free shares
must be distributed pro rata to all stockholders. Our articles
of incorporation provide that the types of shares to be
distributed to the holders of preferred shares will be the same
type of preferred shares held by such holders.
Preemptive
Rights and Issuances of Additional Shares
Unless otherwise provided in the Korean Commercial Code, a
company may issue authorized but unissued shares at such times
and upon such terms as the board of directors of the company may
determine. The company
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must offer the new shares on uniform terms to all stockholders
who have preemptive rights and who are listed on the
stockholders’ register as of the applicable record date.
Our stockholders will be entitled to subscribe for any newly
issued shares in proportion to their existing shareholdings.
However, as provided in our articles of incorporation, new
shares may be issued to persons other than existing stockholders
if such shares are:
(1) publicly offered pursuant to the Financial Investment
Services and Capital Markets Act, (2) issued to an employee
stock ownership association, (3) issued upon exercise of
stock options pursuant to the Financial Investment Services and
Capital Markets Act, (4) issued for the issuance of our
depositary receipts, (5) issued to certain foreign or
domestic financial institutions or institutional investors to
raise funds to meet urgent needs for our management or
operations or (6) issued primarily to a third party who has
contributed to the management of our business, including by
providing financing, credit, advanced financing technique,
know-how or entering into close business alliances, except that,
in the case of issuances of new shares under (1), (4),
(5) and (6) above, the number of new shares issued to
persons other than existing stockholders may not exceed 50% of
our total issued and outstanding capital stock.
Public notice of the preemptive rights to new shares and the
transferability thereof must be given not less than two weeks
(excluding the period during which the stockholders’
register is closed) prior to the record date. We will notify the
stockholders who are entitled to subscribe for newly issued
shares of the deadline for subscription at least two weeks prior
to the deadline. If a stockholder fails to subscribe on or
before such deadline, the stockholder’s preemptive rights
will lapse. Our board of directors may determine how to
distribute shares in respect of which preemptive rights have not
been exercised or where fractions of shares occur.
Under the Financial Investment Services and Capital Markets Act,
members of a company’s employee stock ownership
association, whether or not they are stockholders, will have a
preemptive right, subject to certain exceptions, to subscribe
for up to 20% of the shares publicly offered pursuant to the
Financial Investment Services and Capital Markets Act. This
right is exercisable only to the extent that the total number of
shares so acquired and held by such members does not exceed 20%
of the total number of shares then issued and outstanding.
Voting
Rights
Each outstanding share of our common stock is entitled to one
vote per share. However, voting rights with respect to shares of
common stock that we or any of our subsidiaries holds may not be
exercised. Unless stated otherwise in a company’s articles
of incorporation, the Korean Commercial Code permits holders of
an aggregate of 1% or more of the issued and outstanding shares
with voting rights to request cumulative voting when electing
two or more directors. Our articles of incorporation do not
prohibit cumulative voting. The Korean Commercial Code and our
articles of incorporation provide that an ordinary resolution
may be adopted if approval is obtained from the holders of at
least a majority of those shares of common stock present or
represented at such meeting and such majority also represents at
least one-fourth of the total of our issued and outstanding
voting shares. Holders of non-voting shares (other than
enfranchised non-voting shares) will not be entitled to vote on
any resolution or to receive notice of any general meeting of
stockholders unless the agenda of the meeting includes
consideration of a resolution on which such holders are entitled
to vote. If our annual general stockholders’ meeting
resolves not to pay to holders of preferred shares the annual
dividend as determined by the board of directors at the time of
issuance of such shares, the holders of preferred shares will be
entitled to exercise voting rights from the general
stockholders’ meeting following the meeting adopting such
resolution to the end of a meeting to declare to pay such
dividend with respect to the preferred shares. Holders of such
enfranchised preferred shares will have the same rights as
holders of common stock to request, receive notice of, attend
and vote at a general meeting of stockholders.
The Korean Commercial Code provides that to amend the articles
of incorporation, which is also required for any change to the
authorized share capital of the company, and in certain other
instances, including removal of a director of a company,
dissolution, merger or consolidation of a company, transfer of
the whole or a significant part of the business of a company,
acquisition of all of the business of any other company,
acquisition of a part of the business of any other company
having a material effect on the business of the company or
issuance of new shares at a price lower than their par value, a
special resolution must be adopted by the approval of the
holders of at least two-thirds of those shares present or
represented at such meeting and such special majority also
represents at least one-third of the total issued and
outstanding shares with voting rights of the company.
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In addition, in the case of amendments to the articles of
incorporation or any merger or consolidation of a company or in
certain other cases, where the rights or interest of the holders
of the preferred shares are adversely affected, a resolution
must be adopted by a separate meeting of holders of the
preferred shares. Such a resolution may be adopted if the
approval is obtained from stockholders of at least two-thirds of
the preferred shares present or represented at such meeting and
such preferred shares also represent at least one-third of the
total issued and outstanding preferred shares of the company.
A stockholder may exercise his voting rights by proxy given to
another stockholder. The proxy must present the power of
attorney prior to the start of a meeting of stockholders.
Liquidation
Rights
In the event we are liquidated, the assets remaining after the
payment of all debts, liquidation expenses and taxes will first
be distributed to holders of preferred shares which have a
preference right in respect of the distribution of residual
properties as determined by our board of directors at the time
of their issuance, and the residue thereafter will be
distributed to the other stockholders in proportion to the
number of shares held by them.
General
Meetings of Stockholders
There are two types of general meetings of stockholders: annual
general meetings and extraordinary general meetings. We will be
required to convene our annual general meeting within three
months after the end of each fiscal year. Subject to a board
resolution or court approval, an extraordinary general meeting
of stockholders may be held when necessary or at the request of
the holders of an aggregate of 3% or more of our issued and
outstanding shares, or the holders of an aggregate of 1.5% or
more of our issued and outstanding stock with voting rights, who
have held those shares at least for six months. Under the Korean
Commercial Code, an extraordinary general meeting of
stockholders may also be convened at the request of our Audit
Committee, subject to a board resolution or court approval.
Holders of non-voting shares may be entitled to request a
general meeting of stockholders only to the extent the
non-voting shares have become enfranchised as described under
the section entitled “— Voting Rights”
above, hereinafter referred to as “enfranchised non-voting
shares.” Meeting agendas will be determined by the board of
directors or proposed by holders of an aggregate of 3% or more
of the issued and outstanding shares with voting rights, or by
holders of an aggregate of 0.5% or more of our issued and
outstanding shares with voting rights, who have held those
shares for at least six months, by way of a written proposal to
the board of directors at least six weeks prior to the meeting.
Written notices or
e-mail
notices stating the date, place and agenda of the meeting must
be given to the stockholders at least two weeks prior to the
date of the general meeting of stockholders. Notice may,
however, be given to holders of 1% or less of the total number
of issued and outstanding shares which are entitled to vote,
either by placing at least two public notices at least two weeks
in advance of the meeting in at least two daily newspapers or by
placing a notice through the electronic disclosure system
operated by the Financial Supervisory Service or the Korea
Exchange. Stockholders who are not on the stockholders’
register as of the record date will not be entitled to receive
notice of the general meeting of stockholders, and they will not
be entitled to attend or vote at such meeting. Holders of
enfranchised non-voting shares who are on the stockholders’
register as of the record date will be entitled to receive
notice of the general meeting of stockholders and they will be
entitled to attend and vote at such meeting. Otherwise, holders
of non-voting shares will not be entitled to receive notice of
or vote at general meetings of stockholders.
The general meeting of stockholders will be held at our head
office, which is our registered head office, or, if necessary,
may be held anywhere in the vicinity of our head office.
Rights
of Dissenting Stockholders
Pursuant to the Financial Investment Services and Capital
Markets Act and the Law on the Improvement of the Structure of
the Financial Industry, in certain limited circumstances
(including, without limitation, if we transfer all or any
significant part of our business, if we acquire a part of the
business of any other company and such acquisition has a
material effect on our business or if we merge or consolidate
with another company), dissenting holders of shares of our
common stock and our preferred stock who acquired such shares
prior to the announcement of the relevant resolution of the
board of directors (or up to one day after such announcement in
the event that such
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resolution is made by the board of directors pursuant to a
presidential decree) will have the right to require us to
purchase their shares by providing written notice to us. To
exercise such a right, stockholders must submit to us a written
notice of their intention to dissent prior to the general
meeting of stockholders. Within 20 days (10 days in
the case of a merger or consolidation under the Law on
Improvement of the Structure of the Financial Industry) after
the date on which the relevant resolution is passed at such
meeting, such dissenting stockholders must request in writing
that we purchase their shares. We are obligated to purchase the
shares from dissenting stockholders within one month after the
end of such request period (within two months after the receipt
of such request in the case of a merger or consolidation under
the Law on Improvement of the Structure of Financial Industry)
at a price to be determined by negotiation between the
stockholder and us. If we cannot agree on a price with the
stockholder through such negotiations, the purchase price will
be the arithmetic mean of:
| • | the weighted average of the daily stock prices on the KRX KOSPI Market for the two-month period prior to the date of the adoption of the relevant board of directors’ resolution; | |
| • | the weighted average of the daily stock prices on the KRX KOSPI Market for the one-month period prior to the date of the adoption of the relevant board of directors’ resolution; and | |
| • | the weighted average of the daily stock prices on the KRX KOSPI Market for the one-week period prior to the date of the adoption of the relevant board of directors’ resolution. |
However, any dissenting stockholder who wishes to contest the
purchase price may bring a claim in court.
Required
Disclosure of Ownership
Under Korean law, stockholders who beneficially hold more than a
certain percentage of our common stock, or who are related to or
are acting in concert with other holders of certain percentages
of our common stock or our other equity securities, must report
the status of their holdings to the Financial Services
Commission and other relevant governmental authorities. For a
description of such required disclosure of ownership, see
“Item 4B. Business Overview — Supervision
and Regulation — Principal Regulations Applicable to
Financial Holding Companies — Restrictions on
Ownership of a Financial Holding Company” and
“Item 9C. Markets — Reporting Requirements
for Holders of Substantial Interests.”
Other
Provisions
Register
of Stockholders and Record Dates
We maintain the register of our stockholders at our principal
office in Seoul, Korea. We register transfers of shares on the
register of stockholders upon presentation of the share
certificates.
The record date for annual dividends is December 31. For
the purpose of determining the holders of shares entitled to
annual dividends, the register of stockholders may be closed for
the period beginning from January 1 and ending on
January 31. Further, the Korean Commercial Code and our
articles of incorporation permit us upon at least two
weeks’ public notice to set a record date
and/or
close
the register of stockholders for not more than three months for
the purpose of determining the stockholders entitled to certain
rights pertaining to the shares. However, in the event that the
register of stockholders is closed for the period beginning from
January 1 and ending on January 31 for the purpose of
determining the holders of shares entitled to attend the annual
general meeting of stockholders, the Korean Commercial Code and
our articles of incorporation waive the requirement to provide
at least two weeks’ public notice. The trading of shares
and the delivery of certificates in respect thereof may continue
while the register of stockholders is closed. Also, we may
distribute dividends to stockholders on a quarterly basis, and
the record dates for these quarterly dividends are the end of
March, June and September of each year.
Annual
Reports
At least one week before the annual general meeting of
stockholders, we must make our management report to shareholders
and audited financial statements available for inspection at our
head office and at all of our branch offices. Copies of this
report, the audited financial statements and any resolutions
adopted at the general meeting of stockholders are available to
our stockholders.
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Under the Financial Investment Services and Capital Markets Act,
we must file with the Korean Financial Services Commission and
the KRX KOSPI Market an annual business report within
90 days after the end of each fiscal year, a half-year
business report within 45 days after the end of the first
six months of each fiscal year and quarterly business reports
within 45 days after the end of the first three months and
nine months of each fiscal year, respectively. Copies of such
business reports will be available for public inspection at the
Korean Financial Services Commission and the KRX KOSPI Market.
Transfer
of Shares
Under the Korean Commercial Code, the transfer of shares is
effected by the delivery of share certificates. The Financial
Investment Services and Capital Markets Act provides, however,
that in case of a company listed on the KRX KOSPI Market such as
us, share transfers can be effected by the book-entry method. In
order to assert stockholders’ rights against us, the
transferee must have his name and address registered on the
register of stockholders. For this purpose, stockholders are
required to file with us their name, address and seal.
Non-resident stockholders must notify us of the name of their
proxy in Korea to which our notice can be sent.
Under current Korean regulations, the following entities may act
as agents and provide related services for foreign stockholders:
| • | the Korea Securities Depository; | |
| • | internationally recognized foreign custodians; | |
| • | financial investment companies with a dealing license (including domestic branches of foreign financial investment companies with such license); | |
| • | financial investment companies with a brokerage license (including domestic branches of foreign financial investment companies with such license); | |
| • | foreign exchange banks (including domestic branches of foreign banks); and | |
| • | financial investment companies with a collective investment license (including domestic branches of foreign financial investment companies with such license). |
In addition, foreign stockholders may appoint a standing proxy
among the foregoing and generally may not allow any person other
than the standing proxy to exercise rights to the acquired
shares or perform any tasks related thereto on their behalf.
Certain foreign exchange controls and securities regulations
apply to the transfer of shares by non-residents or non-Koreans.
See “Item 9C. Markets” and “Item 10D.
Exchange Controls.” Except as provided in the Financial
Holding Company, the ceiling on the aggregate shareholdings of a
single stockholder and persons who stand in a special
relationship with such stockholder is 10% of our issued and
outstanding voting shares. See “Item 4B. Business
Overview — Supervision and Regulation —
Principal Regulations Applicable to Financial Holding
Companies — Restrictions on Ownership of a Financial
Holding Company.”
Acquisition
of Our Shares
We generally may not acquire our own shares except in certain
limited circumstances, including, without limitation, a
reduction in capital.
Notwithstanding the foregoing restrictions, pursuant to the
Financial Investment Services and Capital Markets Act and
regulations under the Financial Holding Company Act and after
submission of certain reports to the Korean Financial Services
Commission, we may purchase our own shares on the KRX KOSPI
Market or through a tender offer, subject to the restrictions
that:
| • | the aggregate purchase price of such shares may not exceed the total amount available for distribution of dividends at the end of the preceding fiscal year; and | |
| • | the purchase of such shares shall meet the risk-adjusted capital ratio requirements prescribed in the regulations under the Financial Holding Company Act based on Bank for International Settlements standards. |
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Subject to certain limited exceptions, our subsidiaries will not
be permitted to acquire our shares pursuant to the Financial
Holding Company Act.
| Item 10C. | Material Contracts |
In December 2002, we formally extended our strategic alliance
agreement with ING Bank N.V., pursuant to which we agreed to
replace the prior investment agreement entered into with the
affiliates of ING Bank and H&CB with this agreement and to
enter into joint venture agreements with its affiliates relating
to the bancassurance business and KB Asset Management. In August
2003, our board approved and ratified an amended and restated
strategic alliance agreement with ING Bank N.V. As a result:
| • | we are required to cause one nominee of ING Bank N.V. to be appointed as a non-executive director so long as ING Groep N.V. and its subsidiaries maintain a minimum shareholding in us as defined in the strategic alliance agreement, and to cause another nominee of ING Bank N.V. to be appointed as an executive director so long as ING Groep N.V. and its subsidiaries hold 6% or more of our issued and outstanding common shares; | |
| • | the exclusive alliance with respect to our bancassurance business was revised to a non-exclusive, commercial relationship-based alliance; and | |
| • | ING Groep N.V. is required to maintain beneficial ownership of no less than 12,716,691 shares of our common stock, subject to adjustment for any share consolidations or share splits or, in the event of a merger with another entity, as adjusted accordingly pursuant to the merger ratio for the merger. |
In April 2008, Kookmin Bank and KB Asset Management Co., Ltd.
entered into an agreement with ING Bank B.V. and ING Insurance
International B.V. related to the planned establishment of KB
Financial Group through a comprehensive stock transfer. Pursuant
to this agreement and subject to certain conditions, ING Bank
and ING Insurance International approved and agreed to support
the stock transfer. The parties also agreed, among others, that
the stock transfer shall not constitute a change of control or
termination event for purposes of various agreements in effect
between the parties and that Kookmin Bank and ING Bank agree to
effect an assignment of Kookmin Bank’s rights and
obligations under the amended and restated strategic alliance
agreement to KB Financial Group.
In connection with the “comprehensive stock transfer”
under Korean law pursuant to which we were established, ING
Insurance International B.V., which previously held a 20% equity
interest in KB Asset Management Co., Ltd. transferred all of its
shares of KB Asset Management common stock to us in September
2008 and in return received 1,290,815 shares of our common
stock in accordance with a specified stock transfer ratio.
For more details regarding our relationship with ING Groep N.V.,
see “Item 4A. History and Development of the
Company — History of H&CB,”
“Item 4B. Business Overview — Other
Businesses — Bancassurance,” and
“Item 7B. Related Party Transactions.”
| Item 10D. | Exchange Controls |
General
The Foreign Exchange Transaction Act of Korea and the
Presidential Decree and regulations under that Act and Decree,
which we refer to collectively as the “Foreign Exchange
Transaction Laws,” regulate investment in Korean securities
by non-residents and issuance of securities outside Korea by
Korean companies. Non-residents may invest in Korean securities
pursuant to the Foreign Exchange Transaction Laws. The Financial
Services Commission has also adopted, pursuant to its authority
under the Financial Investment Services and Capital Markets Act,
regulations that restrict investment by foreigners in Korean
securities and regulate issuance of securities outside Korea by
Korean companies.
Under the Foreign Exchange Transaction Laws, (1) if the
Korean government deems that it is inevitable due to the
outbreak of natural calamities, wars, conflict of arms or grave
and sudden changes in domestic or foreign economic circumstances
or other situations equivalent thereto, the Ministry of Strategy
and Finance may temporarily suspend payment, receipt or the
whole or part of transactions to which the Foreign Exchange
Transaction
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Laws apply, or impose an obligation to safe-keep, deposit or
sell means of payment in or to certain Korean governmental
agencies or financial institutions; and (2) if the Korean
government deems that international balance of payments and
international finance are confronted or are likely to be
confronted with serious difficulty or the movement of capital
between Korea and abroad brings or is likely to bring about
serious obstacles in carrying out its currency policies,
exchange rate policies and other macroeconomic policies, the
Ministry of Strategy and Finance may take measures to require
any person who intends to perform capital transactions to obtain
permission or to require any person who performs capital
transactions to deposit part of the payments received in such
transactions at certain Korean governmental agencies or
financial institutions, in each case subject to certain
limitations.
Restrictions
Applicable to Shares
Under the Foreign Exchange Transaction Laws, a foreign investor
who intends to acquire shares must designate a foreign exchange
bank at which he must open a foreign currency account and a Won
account exclusively for stock investments. No approval is
required for remittance into Korea and deposit of foreign
currency funds in the foreign currency account. Foreign currency
funds may be transferred from the foreign currency account at
the time required to place a deposit for, or settle the purchase
price of, a stock purchase transaction to a Won account opened
at a financial investment company with a dealing and/or
brokerage license. Funds in the foreign currency account may be
remitted abroad without any Korean governmental approval.
Dividends on shares of Korean companies are paid in Won. No
Korean governmental approval is required for foreign investors
to receive dividends on, or the Won proceeds of the sale of, any
shares to be paid, received and retained in Korea. Dividends
paid on, and the Won proceeds of the sale of, any shares held by
a non-resident of Korea must be deposited either in a Won
account with the investor’s financial investment company
with a dealing
and/or
brokerage license or in his Won account. Funds in the
investor’s Won account may be transferred to his foreign
currency account or withdrawn for local living expenses up to
certain limitations. Funds in the Won account may also be used
for future investment in shares or for payment of the
subscription price of new shares obtained through the exercise
of preemptive rights.
Financial investment companies with dealing
and/or
brokerage licenses are allowed to open foreign currency accounts
with foreign exchange banks exclusively for accommodating
foreign investors’ stock investments in Korea. Through
these accounts, such financial investment companies may enter
into foreign exchange transactions on a limited basis, such as
conversion of foreign currency funds and Won funds, either as a
counterparty to or on behalf of foreign investors, without the
investors having to open their own accounts with foreign
exchange banks.
| Item 10E. | Taxation |
United
States Taxation
This summary describes certain material U.S. federal income
tax consequences for a U.S. holder (as defined below) of
acquiring, owning, and disposing of common shares or ADSs. This
summary applies to you only if you hold the common shares or
ADSs as capital assets for tax purposes. This summary does not
apply to you if you are a member of a class of holders subject
to special rules, such as:
| • | a dealer in securities or currencies; | |
| • | a trader in securities that elects to use a mark-to-market method of accounting for securities holdings; | |
| • | a bank; | |
| • | a life insurance company; | |
| • | a tax-exempt organization; | |
| • | a person that holds common shares or ADSs that are a hedge or that are hedged against interest rate or currency risks; | |
| • | a person that holds common shares or ADSs as part of a straddle or conversion transaction for tax purposes; |
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| • | a person whose functional currency for tax purposes is not the U.S. dollar; or | |
| • | a person that owns or is deemed to own 5% or more of any class of our stock. |
This summary is based on the Internal Revenue Code of 1986, as
amended, its legislative history, existing and proposed
regulations promulgated thereunder, and published rulings and
court decisions, all as currently in effect. These laws are
subject to change, possibly on a retroactive basis.
Please consult your own tax advisers concerning the
U.S. federal, state, local, and other tax consequences of
purchasing, owning, and disposing of common shares or ADSs in
your particular circumstances.
For purposes of this summary, you are a
“U.S. holder” if you are the beneficial owner of
a common share or an ADS and are:
| • | a citizen or resident of the United States; | |
| • | a U.S. domestic corporation; or | |
| • | otherwise subject to U.S. federal income tax on a net income basis with respect to income from the common share or ADS. |
In general, if you are the beneficial owner of ADSs, you will be
treated as the beneficial owner of the common shares represented
by those ADSs for U.S. federal income tax purposes, and no
gain or loss will be recognized if you exchange an ADS for the
common share represented by that ADS.
Dividends
The gross amount of cash dividends that you receive (prior to
deduction of Korean taxes) generally will be subject to
U.S. federal income taxation as foreign source dividend
income and will not be eligible for the dividends received
deduction. Dividends paid in Won will be included in your income
in a U.S. dollar amount calculated by reference to the
exchange rate in effect on the date of your receipt of the
dividend, in the case of common shares, or the depositary’s
receipt, in the case of ADSs, regardless of whether the payment
is in fact converted into U.S. dollars. If such a dividend
is converted into U.S. dollars on the date of receipt, you
generally should not be required to recognize foreign currency
gain or loss in respect of the dividend income.
Subject to certain exceptions for short-term and hedged
positions, the U.S. dollar amount of dividends received by
an individual prior to January 1, 2011 with respect to the
ADSs will be subject to taxation at a maximum rate of 15% if the
dividends are “qualified dividends.” Dividends paid on
the ADSs will be treated as qualified dividends if (i) the
ADSs are readily tradable on an established securities market in
the United States and (ii) the Company was not, in the year
prior to the year in which the dividend was paid, and is not, in
the year in which the dividend is paid, a passive foreign
investment company as defined for U.S. federal income tax
purposes (“PFIC”). The ADSs are listed on the New York
Stock Exchange, and will qualify as readily tradable on an
established securities market in the United States so long as
they are so listed. Based on our audited financial statements,
we believe that we were not a PFIC in our 2008 or 2009 taxable
year. In addition, based on our audited financial statements and
current expectations regarding our income, assets and
activities, we do not anticipate becoming a PFIC for our 2010
taxable year.
Distributions of additional shares in respect of common shares
or ADSs that are made as part of a pro-rata distribution to all
of our stockholders generally will not be subject to
U.S. federal income tax.
Sale
or Other Disposition
For U.S. federal income tax purposes, gain or loss you
realize on a sale or other disposition of common shares or ADSs
generally will be treated as U.S. source capital gain or
loss, and will be long-term capital gain or loss if the common
shares or ADSs were held for more than one year. Your ability to
offset capital losses against ordinary income is limited.
Long-term capital gain recognized by an individual
U.S. holder generally is subject to taxation at reduced
rates.
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Foreign
Tax Credit Considerations
You should consult your own tax advisers to determine whether
you are subject to any special rules that limit your ability to
make effective use of foreign tax credits, including the
possible adverse impact of failing to take advantage of benefits
under the income tax treaty between the United States and Korea.
If no such rules apply, you may claim a credit against your
U.S. federal income tax liability for Korean taxes withheld
from dividends on the common shares or ADSs, so long as you have
owned the common shares or ADSs (and not entered into specified
kinds of hedging transactions) for at least a
16-day
period that includes the ex-dividend date. Instead of claiming a
credit, you may, if you so elect, deduct such Korean taxes in
computing your taxable income, subject to generally applicable
limitations under U.S. tax law. Korean taxes withheld from
a distribution of additional shares that is not subject to
U.S. tax may be treated for U.S. federal income tax
purposes as imposed on “general limitation” income.
Such treatment could affect your ability to utilize any
available foreign tax credit in respect of such taxes.
Any Korean securities transaction tax or agriculture and fishery
special surtax that you pay will not be creditable for foreign
tax credit purposes.
Foreign tax credits will not be allowed for withholding taxes
imposed in respect of certain short-term or hedged positions in
securities and may not be allowed in respect of arrangements in
which a U.S. holder’s expected economic profit is
insubstantial.
The calculation of foreign tax credits and, in the case of a
U.S. holder that elects to deduct foreign taxes, the
availability of deductions involve the application of complex
rules that depend on a U.S. holder’s particular
circumstances. You should consult your own tax advisers
regarding the creditability or deductibility of such taxes.
U.S.
Information Reporting and Backup Withholding Rules
Payments of dividends and sales proceeds that are made within
the United States or through certain
U.S.-related
financial intermediaries are subject to information reporting
and may be subject to backup withholding unless the holder
(i) is an exempt recipient and demonstrates this when
required or (ii) provides a taxpayer identification number
and certifies that no loss of exemption from backup withholding
has occurred. Holders that are not U.S. persons generally
are not subject to information reporting or backup withholding.
However, such a holder may be required to provide a
certification of its
non-U.S. status
in connection with payments received within the United States or
through a
U.S.-related
financial intermediary.
Korean
Taxation
The following summary of Korean tax considerations applies to
you so long as you are not:
| • | a resident of Korea; | |
| • | a corporation organized under Korean law; or | |
| • | engaged in a trade or business in Korea through a permanent establishment or a fixed base to which the relevant income is attributable or with which the relevant income is effectively connected. |
Taxation
of Dividends on Shares or ADSs
We will deduct Korean withholding tax from dividends paid to you
(whether payable in cash or in shares) at a rate of 22.0%
(inclusive of resident surtax). If you are a beneficial owner of
the dividends in a country that has entered into a tax treaty
with Korea, you may qualify for a reduced rate of Korean
withholding tax. See “— Tax Treaties” below
for a discussion on treaty benefits. If we distribute to you
shares representing a transfer of earning surplus or certain
capital reserves into paid-in capital, that distribution may be
subject to Korean withholding tax.
In order to obtain a reduced rate of withholding tax pursuant to
an applicable tax treaty, you must submit to us, prior to the
dividend payment date, such evidence of tax residence as the
Korean tax authorities may require in order to establish your
entitlement to the benefits of the applicable tax treaty (which
will include a certificate of your tax residency issued by a
competent authority of your country of tax residence).
If you hold ADSs, evidence of tax residence may be submitted to
us through the Depositary.
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Taxation
of Capital Gains From Transfer of Shares or ADSs
As a general rule, capital gains earned by non-residents upon
transfer of our common shares or ADSs are subject to Korean
withholding tax at the lower of (1) 11% (inclusive of
resident surtax) of the gross proceeds realized or
(2) subject to the production of satisfactory evidence of
acquisition costs and certain direct transaction costs of the
common shares or ADSs, 22.0% (inclusive of resident surtax) of
the net realized gain, unless exempt from Korean income taxation
under the applicable Korean tax treaty with the
non-resident’s country of tax residence. See
“— Tax Treaties” below for a discussion on
treaty benefits. Even if you do not qualify for an exemption
under a tax treaty, you will not be subject to the foregoing
withholding tax on capital gains if you qualify under the
relevant Korean domestic tax law exemptions discussed in the
following paragraphs.
In regards to the transfer of our common shares through the
Korea Stock Exchange, you will not be subject to the withholding
tax on capital gains (as described in the preceding paragraph)
if you (1) have no permanent establishment in Korea and
(2) did not own or have not owned (together with any shares
owned by any person with which you have a certain special
relationship) 25% or more of the total issued and outstanding
shares, which may include the common shares represented by the
ADSs, at any time during the calendar year in which the sale
occurs and during the five calendar years prior to the calendar
year in which the sale occurs.
Capital gains earned by you (regardless of whether you have a
permanent establishment in Korea) from the transfer of ADSs
outside Korea (except for transfer of ADSs which you received
upon the deposit of our shares represented by the ADSs) will be
exempt from Korean income taxation by virtue of the Special Tax
Treatment Control Law of Korea, or the STTCL, provided that the
issuance of the ADSs is deemed to be an overseas issuance under
the STTCL.
If you are subject to tax on capital gains with respect to the
sale of ADSs, or of our common shares you acquired as a result
of a withdrawal, the purchaser or, in the case of the sale of
the common shares on the Korea Stock Exchange or through a
financial investment company with a brokerage license in Korea,
such financial investment company, is required to withhold
Korean tax from the sales price in an amount equal to the lower
of (1) 11% (inclusive of resident surtax) of the gross
realization proceeds or (2) subject to the production of
satisfactory evidence of acquisition costs and certain direct
transaction costs of the common shares or ADSs, 22.0% (inclusive
of resident surtax) of the net realized gain, and to make
payment of these amounts to the Korean tax authority, unless you
establish your entitlement to an exemption under an applicable
tax treaty or domestic tax law or produce satisfactory evidence
of your acquisition cost and transaction costs for the common
shares or ADSs. To obtain the benefit of an exemption from tax
pursuant to an applicable tax treaty, you must submit to the
purchaser or the financial investment company, or through the
ADS depositary, as the case may be, prior to or at the time of
payment, such evidence of your tax residence as the Korean tax
authorities may require in support of your claim for treaty
benefits. See the discussion under “— Tax
Treaties” below for an additional explanation on claiming
treaty benefits.
Tax
Treaties
Korea has entered into a number of income tax treaties with
other countries (including the United States), which would
reduce or exempt Korean withholding tax on dividends on, and
capital gains on transfer of, the common shares or ADSs. For
example, under the
Korea-United
States income tax treaty, reduced rates of Korean withholding
tax of 16.5% or 11.0% (depending on your shareholding ratio and
inclusive of resident surtax) on dividends and an exemption from
Korean withholding tax on capital gains are available to
residents of the United States that are beneficial owners of the
relevant dividend income or capital gains, subject to certain
exceptions.
You should inquire for yourself whether you are entitled to the
benefit of a tax treaty between Korea and the country where you
are a resident. It is the responsibility of the party claiming
the benefits of an income tax treaty in respect of dividend
payments or capital gains to submit to us, the purchaser or the
financial investment company, as applicable, a certificate as to
his tax residence. In the absence of sufficient proof, we, the
purchaser or the financial investment company, as applicable,
must withhold tax at the normal rates. Furthermore, in order for
you to obtain the benefit of a tax exemption on certain Korean
source income (such as dividends or capital gains) under an
applicable tax treaty, Korean tax law requires you (or your
agent) to submit an application for tax exemption along with a
certificate of your tax residency issued by a competent
authority of your country of tax residence, subject to
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certain exceptions. Such application should be submitted to the
relevant district tax office by the ninth day of the month
following the date of the first payment of such income.
Inheritance
Tax and Gift Tax
If you die while holding an ADS or donate an ADS, it is unclear
whether, for Korean inheritance and gift tax purposes, you will
be treated as the owner of the common shares underlying the
ADSs. If the tax authority interprets depositary receipts as the
underlying share certificates, you may be treated as the owner
of the common shares and your heir or the donee (or in certain
circumstances, you as the donor) will be subject to Korean
inheritance or gift tax presently at the rate of 10% to 50%,
provided that the value of the ADSs or the common shares is
greater than a specified amount.
If you die while holding a common share or donate a common
share, your heir or donee (or in certain circumstances, you as
the donor) will be subject to Korean inheritance or gift tax at
the same rate as indicated above.
At present, Korea has not entered into any tax treaty relating
to inheritance or gift taxes.
Securities
Transaction Tax
If you transfer our common shares on the Korea Stock Exchange,
you will be subject to securities transaction tax at the rate of
0.15% and an agriculture and fishery special surtax at the rate
of 0.15% of the sale price of the common shares. If your
transfer of the common shares is not made on the Korea Stock
Exchange, subject to certain exceptions, you will be subject to
securities transaction tax at the rate of 0.5% and will not be
subject to an agriculture and fishery special surtax.
With respect to transfer of ADSs, a tax ruling issued in 2004 by
the Korean tax authority (“the 2004 tax ruling”)
appears to hold that depositary shares (such as the ADSs)
constitute share certificates subject to the securities
transaction tax; provided that, under the Securities Transaction
Tax Law, the transfer of depositary receipts listed on the New
York Stock Exchange, the Nasdaq National Market, or other
qualified foreign exchanges is exempt from the securities
transaction tax.
In principle, the securities transaction tax, if applicable,
must be paid by the transferor of the common shares or ADSs.
When the transfer is effected through a securities settlement
company, such settlement company is generally required to
withhold and pay the tax to the tax authorities. When such
transfer is made through a financial investment company only,
such financial investment company is required to withhold and
pay the tax. Where the transfer is effected by a non-resident
without a permanent establishment in Korea, other than through a
securities settlement company or a financial investment company,
the transferee is required to withhold the securities
transaction tax.
| Item 10F. | Dividends and Paying Agents |
Not Applicable.
| Item 10G. | Statements by Experts |
Not Applicable.
| Item 10H. | Documents on Display |
We are subject to the information requirements of the
U.S. Securities Exchange Act of 1934, as amended, and, in
accordance therewith, are required to file reports, including
annual reports on
Form 20-F,
and other information with the U.S. Securities and Exchange
Commission. These materials, including this annual report and
the exhibits thereto, may be inspected and copied at the
Commission’s public reference rooms in
Washington, D.C., New York, New York and Chicago, Illinois.
Please call the Commission at
1-800-SEC-0330
for further information on the public reference rooms. As a
foreign private issuer, we are also required to make filings
with the Commission by electronic means. Any filings we make
electronically will be available to the public over the Internet
at the Commission’s web site at
http://www.sec.gov.
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| Item 10I. | Subsidiary Information |
Not Applicable.
| Item 11. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Overview
As a financial services provider, we are exposed to various
risks related to our lending and trading businesses, our funding
activities and our operating environment, principally through
Kookmin Bank, our banking subsidiary. Our goal in risk
management is to ensure that we identify, measure, monitor and
control the various risks that arise, and that our organization
adheres strictly to the policies and procedures which we
establish to address these risks. Under our ICAAP and related
internal regulations pertaining to our consolidated capital
adequacy ratio and internal standards for risk appetite and
economic capital under Basel II, we identify the following eight
separate categories of risk inherent in our business activities:
credit risk, market risk, operational risk, interest rate risk,
liquidity risk, credit concentration risk, reputation risk and
strategic risk. Of these, the principal risks to which we are
exposed are credit risk, market risk, liquidity risk and
operational risk, and we strive to manage these and other risks
within acceptable limits.
Organization
We have a multi-tiered risk management governance structure. Our
Group Risk Management Committee is ultimately responsible for
group-wide risk management, and directs our various subordinate
risk management entities. The Group Risk Management Council
reports directly to the Group Risk Management Committee and
coordinates the implementation of directives set forth by the
Group Risk Management Committee with the relevant risk
management units of our subsidiaries. The Subsidiary Risk
Management Committee of each of our subsidiaries, based on the
Group Risk Management Committee’s directives, determines
risk management strategies and implements risk management
policies and guidelines for such subsidiary and directs the
activities of the subsidiary’s risk management units within
the risk guidelines set at the group level. Each Subsidiary Risk
Management Committees generally receive inputs from the
respective risk management units of such subsidiary, who also
report directly to the Group Risk Management Committee.
The following chart sets out our risk management governance
structure as of the date of this annual report:
Group
Risk Management Committee
Our Group Risk Management Committee is a board-level committee
that is responsible for overseeing all risks and advising the
board of directors with respect to risk management-related
issues. The committee consists of one
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non-standing director and four non-executive directors (one of
whom serves as the chairman of the committee), and its major
roles include:
| • | establishing risk management strategies in accordance with the directives of the board of directors; | |
| • | determining our target risk appetite; | |
| • | reviewing the level of risks we are exposed to and the appropriateness of our risk management policies, systems and operations; and | |
| • | allocating risk capital to each subsidiary and approving our subsidiaries’ risk limits. |
Group
Risk Management Council
Our Group Risk Management Council is responsible for
coordinating with the risk management units of our subsidiaries
to ensure that they implement the policies, guidelines and
limits established by the Group Risk Management Committee. Its
responsibilities include:
| • | analyzing our risk status by using information provided by our subsidiary-level risk management units; | |
| • | adjusting the integrated risk capital allocation plan and risk limits for each of our subsidiaries; and | |
| • | coordinating issues relating to the group-wide integration of our risk management functions. |
The Group Risk Management Council is comprised of our chief risk
management officer and the chief risk management officers of all
of our subsidiaries. It operates independently from all business
units, and reports directly the Group Risk Management Committee.
Our Group Risk Management Council convenes on a quarterly basis.
Subsidiary
Risk Management Committees
Each of our subsidiaries has delegated risk management authority
to its Subsidiary Risk Management Committee. Each Subsidiary
Risk Management Committee measures and monitors the various
risks faced by the relevant subsidiary and reports to that
subsidiary’s board of directors regarding decisions that it
makes on risk management issues. It also makes certain strategic
risk-related decisions regarding the operations of the relevant
subsidiary, such as allocating credit risk limits, setting total
exposure limits and market risk-related limits and determining
which market risk derivatives instruments the subsidiary can
trade. The major activities of each Subsidiary Risk Management
Committee include:
| • | determining and monitoring risk policies, guidelines, limits and tolerance levels and the level of subsidiary risk in accordance with group policy; | |
| • | reviewing and analyzing the subsidiary’s risk profile; | |
| • | setting limits for and adjusting the risk capital allocation plan and risk levels for each business unit within the subsidiary; and | |
| • | monitoring compliance with our group-wide risk management policies and practices at the business unit and subsidiary level. |
Each Subsidiary Risk Management Committee is comprised of the
subsidiary’s chief executive officer, the non-executive
directors on its board of directors and the director of its risk
management unit.
In the case of Kookmin Bank, our banking subsidiary, the risk
management activities of its Risk Management Committee is
supported by Kookmin Bank’s Risk Management Council, which
serves as the executive decision making body for Kookmin
Bank’s risk management operations. At the operational
level, Kookmin Bank’s Risk Management Department and the
Credit Group work closely with its business groups to implement
risk management strategies, policies and procedures in
accordance with the directives set forth by the Group Risk
Management Committee and the risk management strategies
determined by Kookmin Bank’s Risk Management Committee.
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Credit
Risk Management
Credit risk is the risk of expected and unexpected losses in the
event of borrower or counterparty defaults. Credit risk
management aims to improve asset quality and generate stable
profits while reducing risk through diversified and balanced
loan portfolios. We determine the creditworthiness of each type
of borrower or counterparty through reviews conducted by our
credit experts and through our credit rating systems, and we set
a credit limit for each borrower or counterparty.
We assess and manage all credit exposures, whether on- or
off-balance sheet. These exposures include loans to borrowers
and counterparties, investments in securities, letters of
credit, bankers’ acceptances, derivatives and commitments.
Our risk appetite, which is the ratio of our required economic
capital to our estimated available book capital, is approved by
the Group Risk Management Committee once a year. Thereafter,
Kookmin Bank calculates economic capital every month for its
business groups and bank-wide based on attributed economic
capital in accordance with the risk appetite as approved by the
Group Risk Management Committee, and measures and reports
profiles of credit risk on a bank-wide level and by business
group regularly to its relevant business groups and senior
management.
We use expected default rates and recovery rates to determine
the expected loss rate of a borrower or counterparty. We use the
expected loss rate to make credit related decisions, including
pricing, loan approval and establishment of standards to be
followed at each level of decision making. These rates are
calculated using information gathered from our internal
database. With respect to large corporate borrowers, we also use
information provided by external credit rating services to
calculate default rates and recovery rates.
Our credit risk management processes include:
| • | establishing credit policy; | |
| • | credit evaluation and approval; | |
| • | industry assessment; | |
| • | total exposure management; | |
| • | collateral evaluation and monitoring; | |
| • | credit risk assessment; | |
| • | early warning and credit review; and | |
| • | post-credit extension monitoring. |
Credit
Evaluation
Kookmin Bank evaluates the ability of all loan applicants to
repay their debts before it approves any loans, except for loans
guaranteed by letters of guarantee issued by the Credit
Guarantee Fund and the Korea Technology Credit Guarantee Fund,
and for loans fully secured by deposits. Kookmin Bank assigns
each borrower or guarantor a credit rating based on the judgment
of its experts or scores calculated using the appropriate credit
rating system. Factors that Kookmin Bank considers in assigning
credit ratings include both financial factors and non-financial
factors, such as its perception of a borrower’s
reliability, management and operational risk and risk relating
to the borrower’s industry. The credit rating process
differs according to the type, size and characteristics of a
borrower.
Kookmin Bank uses its internally developed credit rating systems
to rate potential borrowers. As the characteristics of each
customer segment differ, Kookmin Bank uses several credit rating
systems for its customers. The nature of the credit rating
system used for a particular borrower depends on whether the
borrower is an individual, a “small office/home
office” customer, a small- and medium-sized enterprise or a
large company. For large companies, Kookmin Bank has 17 credit
ratings, ranging from AAA to D. For small- and medium-sized
enterprises, it has 15 credit ratings ranging from AA to D. For
retail customers, it has 13 credit ratings ranging from grade 1
to grade 13.
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Based on the credit rating of a borrower, Kookmin Bank applies
different credit policies, which affect factors such as credit
limit, loan period, loan pricing, loan classification and
provisioning. Kookmin Bank also uses these credit ratings in
evaluating its bank-wide risk management strategy. Factors
Kookmin Bank considers in making this evaluation include the
profitability of each company or transaction, performance of
each business unit and portfolio management. Kookmin Bank
monitors the credit status of borrowers and collect information
to adjust its ratings appropriately. If Kookmin Bank changes a
borrower’s credit rating, it will also change the credit
policies relating to that borrower and may also change the
policies underlying its loan portfolio.
Retail
Loan Approval Process
Mortgage Loans and Secured Retail
Loans.
Kookmin Bank’s processing center
staff reviews mortgage loans and retail loans secured by real
estate or guarantees. Branch staff employees of Kookmin Bank
forward loan applications to processing centers. But in the case
of loans secured by deposits with Kookmin Bank, its branch staff
approves such loans. Kookmin Bank makes lending decisions based
on its assessment of the value of the collateral, debt service
capability and the borrower’s score generated from its
credit scoring systems.
For mortgage loans and loans secured by real estate, Kookmin
Bank evaluates the value of the real estate offered as
collateral using a database it has developed that contains
information about real estate values throughout Korea. Kookmin
Bank also uses information from a third party provider about the
real estate market in Korea, which gives it up-to-date market
value information for Korean real estate. In addition, Kookmin
Bank’s processing center staff employees review the value
of real estate provided by the evaluation system to ensure there
are no significant discrepancies. Kookmin Bank bases decisions
regarding the approval of such loans primarily on the results of
its credit scoring systems.
For loans secured by deposits, Kookmin Bank will generally grant
loans up to 95% of the deposit amount if it holds the deposit.
With respect to mortgage loans and secured retail loans, Kookmin
Bank screens customers based on various items on its checklist
that indicate whether the customer may have deteriorating credit
using internal information and rating information from credit
bureaus. Kookmin Bank also evaluates debt service capability for
eligible customers pursuant to certain checklist items, such as
type of residence, profession, family information, annual
income, age, credit card overdue information, transaction
history (with both it and other financial institutions) and
other relevant credit information.
Kookmin Bank generally decides whether to evaluate a loan
application within three to five days after recording the
relevant information in its credit scoring systems.
Unsecured Retail Loans.
Kookmin Bank reviews
applications for unsecured retail loans in accordance with its
credit scoring systems. These automated systems evaluate loan
applications and determine an appropriate pricing for the loan.
The major benefits of using a credit scoring system are that it
yields uniform results regardless of the user, that it can be
used effectively by employees who do not necessarily have
extensive experience in credit evaluation and that it can be
updated easily to reflect changing market conditions by
adjusting how each factor is weighted. The staff of Kookmin
Bank’s processing centers reviews the results of the credit
scoring system based on information input by its branch staff
and, if approved, issues the loan.
Kookmin Bank’s credit scoring systems take into account
factors including borrower’s income, assets, profession,
age, transaction history (with both it and other financial
institutions) and other relevant credit information. The systems
rank each borrower in an appropriate grade, and that grade is
used as a factor in deciding whether to approve loans as well as
to determine loan amounts.
Kookmin Bank generally bases its decisions on the results of its
credit scoring systems to evaluate applications. However, a
credit officer may overturn the results of the credit scoring
systems, in certain circumstances.
Corporate
Loan Approval Process
We approve corporate loans at different levels of our
organization depending on the size and type of the loan, the
credit risk level assessed by the credit rating system, whether
the loan is secured by collateral and, if secured, the
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value of the collateral. The lowest level of authority is the
branch staff employee of Kookmin Bank, who can approve small
loans and loans that have the lowest range of credit risk.
Larger loans and loans with higher credit risk are approved by
higher levels of authority depending on where they fall in a
matrix of loan size and credit risk. Depending on the size and
terms of any particular loan or the credit risk relating to a
particular borrower, more than one entity may review the
application, although generally loan applications are reviewed
only by the entity having corresponding authority to approve the
loan.
Kookmin Bank evaluates all of its corporate borrowers by using
credit rating systems, except for applicants whose borrowings
are fully secured by deposits or applicants who have obtained
third-party guarantees from the government or certain other very
highly rated guarantors. See “— Credit
Evaluation.”
For owner-operated enterprises (which we refer to as SOHOs) with
total outstanding loans of less than
W
1 billion, Kookmin Bank has put in place
a SOHO credit rating system, which adopts simplified credit
evaluation modeling procedures. This system consists of a
scoring model, a qualitative credit assessment (or QCA) model
and a preliminary examination checklist. The scoring model
analyzes information with respect to the customer’s
personal information and bank transaction history. The QCA model
analyzes information about business capability, operating
capability, management capability, transaction reliability,
documentary reliability and financial stability. The preliminary
examination checklist is based on information regarding the
customer’s credit delinquencies, loans and outstanding
credit card debt. This system classifies customers into 14
possible credit ratings.
For SOHOs with total outstanding loans of
W
1 billion or more, Kookmin Bank has put
in place a separate credit rating system known as “SOHO
CRS.” For other small- and medium-sized enterprises,
Kookmin Bank has put in place a similar credit rating system
known as CRS. For large corporations, Kookmin Bank has put in
place a similar credit rating system known as LCRS. For
financial institutions, certain non-profit organizations and
public institutions, Kookmin Bank has put in place a similar
credit rating system known as FNP CRS. The SOHO CRS, the CRS,
the LCRS and the FNP CRS models consist of the following three
parts:
| • | Financial Model. The financial model uses the borrower’s current status and trend of financial ratios calculated using its financial statements. The financial model classifies potential borrowers into one of three size categories and one of five types of industry. This model incorporates logistic regression and statistical methods, which use financial ratios such as stability ratio, cash flow ratio, profitability ratio and turnover ratio to make credit determinations. | |
| • | QCA Model. The QCA model uses various qualitative factors, such as future repayment capability, market prospects, management capability and business capability, to evaluate borrowers. The factors that are evaluated and the weighting given to each factor vary by type of industry and size of company. | |
| • | Default Signal Check Model. The default signal check model checks the consistency of the preliminary rating. This model checks various factors, including financial ratios with low scores, any non-quantitative factors that may cause a corporate default and any information arising from past experience, to determine the likelihood of a future default. The results of the default signal check model may be used to cap a borrower’s credit grade. |
In addition to the three parts outlined above, the SOHO CRS also
includes a “CEO Evaluation Model,” which analyzes
information with respect to personal information and bank
transaction history of the individual owner of such SOHO.
We often refer to corporate information gathered or ratings
assigned by external credit rating agencies, such as Korea
Information Service, National Information & Credit
Evaluation Inc. and Korea Management Consulting &
Credit Rating Corporation, in order to improve the accuracy of
our credit ratings.
Credit
Card Approval Process
We make decisions on all credit card approvals based on the
Financial Supervisory Service standard of review for payment
ability (such as the occupation and income of the applicant), as
well as a combination of Kookmin Bank’s internally
developed application scoring system and a credit scoring system
developed by independent credit bureaus.
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Kookmin Bank’s application scoring system reflects various
credit information, including basic customer information (such
as credit history), transaction history with it, if any,
delinquency and transaction history with other card companies
and financial institutions and credit information provided by
the Korea Federation of Banks and other credit bureaus. Kookmin
Bank also considers repayment ability, total assets and the
length of the applicant’s relationship, if any, and past
contribution to our profitability, if any.
The credit scoring system developed by credit bureaus, which
replaced Kookmin Bank’s card generic scoring system as of
March 2009, reflects various sources of information regarding
the credit risk of customers, including delinquency and
transaction history with other credit card companies and
financial institutions.
On the basis of the standard of review for payment ability and
the combination of the scores from our application scoring
system and the credit scoring system developed by independent
credit bureaus, Kookmin Bank establishes, among other things,
the term of any new approvals, initial limits and
differentiation of fee rates with respect to its credit cards.
Kookmin Bank’s systems allow it to differentiate applicants
into groups that receive immediate credit card approval or
rejection, or that may require it to further investigate that
applicant’s credit qualifications. The initial limits of
new applicants are based on their estimated monthly income,
which is based on their occupation and the value of their
personal assets. Kookmin Bank applies its fee rates to
applicants differently according to risk premium and
profitability.
Total
Exposure Management
We establish and manage total exposure limits for corporations,
chaebols
and industries, as well as certain small- and
medium-sized enterprises, in order to optimize the use of credit
availability and avoid excessive risk concentration. We
establish total exposure limits for large corporations to which
we have exposures (in the form of securities or loans) of over
W
5 billion, small- and medium-sized
enterprises to which we have exposures (in the form of
securities or loans) of over
W
30 billion
and
chaebols
designated by the Financial Supervisory
Service or by Kookmin Bank, by reviewing factors such as their
industry, size, cash flows, financial ratios and credit ratings,
while establishing exposure limits for industries by peer group,
as defined by us, by reviewing the “exposure at
default,” nonpayment ratio, sales growth ratio and share of
total exposure for each industry. The guidelines used to set
these total exposure limits are approved by Kookmin Bank’s
Risk Management Council after review by the Credit Risk
Management Subcommittee.
Kookmin Bank’s maximum exposure limit is within 20% of its
Tier I and Tier II capital for a single
chaebol
, and within 10% of its Tier I and
Tier II capital for an individual large corporation.
We manage and control exposure limits on a daily basis. The
principal system that we use for this purpose is the Total
Exposure Management System. This system allows us to monitor and
control our total exposure to large corporations,
chaebols
and industries. We monitor our exposure to large
corporations to which we have an exposure of
W
5 billion or more, individual
corporations to which we have an exposure of more than
W
30 billion, and also our exposure to the
45
chaebols
, which is comprised of the 41 largest
chaebols
in Korea designated as such by the Financial
Supervisory Service based on their outstanding exposures as well
as four
chaebols
selected for monitoring by the Senior
Executive Vice President of the Credit Group. We also monitor
our exposure to industries by peer groups. Our Total Exposure
Management System integrates all of our credit-related risk
including credit extended by our overseas branches and
affiliates. The assets subject to the system include all
Won-denominated and foreign currency-denominated loans, all
assets in trust accounts except specified money trusts,
guarantees, trade-related credits, commercial paper, corporate
bonds and other securities and derivatives.
Collateral
Evaluation and Monitoring System
Kookmin Bank uses the Collateral Evaluation and Monitoring
System to manage the liquidation value of collateral it holds.
The Collateral Evaluation and Monitoring System is a
computerized collateral management system that can be accessed
from Kookmin Bank’s headquarters and its branches. Using
this system, Kookmin Bank can more accurately assess the actual
liquidation value of collateral, determine the recovery rate on
its loans and use this information in setting its credit risk
management and loan policies. Kookmin Bank can monitor the value
of all the collateral a borrower provides and the value of that
collateral based on its liquidation value. When appraising the
value of real estate collateral, which makes up the largest part
of Kookmin Bank’s collateral, Kookmin Bank
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consults a regularly updated database provided by a third party
that tracks the prices at which various types of real estate in
various regions of Korea are sold. Kookmin Bank appraises the
value of collateral when it makes a loan, when the loan is due
for renewal and when events occur that may change the value of
the collateral.
Credit
Review and Monitoring
Kookmin Bank’s credit review function is independent of the
business groups which manage our assets. Its Credit Review
Department:
| • | reviews internal credit regulations, policies and systems; | |
| • | analyzes the credit status of selected loan assets and verifies the appropriateness of the credit evaluations/approvals made by branches and headquarters; | |
| • | evaluates the corporate credit risk of potentially insolvent companies; and | |
| • | operates its comprehensive portfolio monitoring system. |
More specifically, Kookmin Bank’s Credit Review Department
continuously reviews the financial condition of selected
borrowers with respect to their current debt, collateral,
business, transactions with related parties and debt service
capability. Based on such review, Kookmin Bank may adjust the
borrower’s credit rating, lending policy or asset quality
classification of the loan provided to the borrower, depending
on the applicable circumstances. Kookmin Bank also regularly
reviews other aspects of the lending process, including
industries and regions in which its borrowers operate and the
quality of its domestic and overseas assets. Kookmin Bank’s
industry reviews focus on growth, stability, competition and
ability to adapt to a changing environment. Based on the results
of a particular industry review, Kookmin Bank may revise the
total exposure limit assigned to that industry and lending
policy for each company within that industry. When a review
takes place, Kookmin Bank may adjust not only credit ratings of
its borrowers based on a variety of factors, but also asset
quality classification, credit limits and applied interest rates
or its credit policies. Credit review results are reported to
Kookmin Bank’s chief risk officer and its Risk Management
Committee on a quarterly basis.
Kookmin Bank’s Credit Review Department also conducts
on-site
reviews of selected branches and related credit analysis centers
which are experiencing increasing delinquency ratios and bad
debts. During these visits Kookmin Bank examines the loan
processes and recommend improvement plans and appropriate
follow-up
measures.
Also, based on guidelines provided by the Financial Supervisory
Service to all Korean banks, Kookmin Bank operates a corporate
credit risk assessment program to facilitate the identification
of weak companies and possible commencement of corporate
restructuring. Through this program, Kookmin Bank, together with
other banks, is able to detect symptoms of financially troubled
companies at an early stage, assess related credit risk and
support the normalization of companies that are likely to
turnaround through a workout process, or seek to liquidate those
companies that are not likely to recover.
Kookmin Bank also conducts portfolio monitoring on all credit
portfolios, focusing on asset quality status to provide
information necessary for the formulation of effective credit
policies and strategies and for effective credit risk management.
Market
Risk Management
The major risk to which we are exposed is interest rate risk on
debt instruments and interest-bearing securities and, to a
lesser extent, equity risk and foreign exchange risk. The
financial instruments that expose us to these risks are loans,
debentures, deposits, securities and financial derivatives. We
are not exposed to significant commodity risk, the other
recognized form of market risk, as we allow only back-to-back
transactions with respect to commodities. We are also exposed to
interest rate risk and liquidity risk in Kookmin Bank’s
banking book. We divide market risk into risks arising from
trading activities and risks arising from non-trading activities.
Kookmin Bank’s Risk Management Council establishes overall
market risk management principles. It has delegated the
responsibility for the market risk management for trading
activities to the Market Risk Management
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Subcommittee of Kookmin Bank, which is chaired by Kookmin
Bank’s chief risk officer. This subcommittee meets on a
regular basis each month and as required to respond to
developments in the market and the economy. Based on the
policies approved by Kookmin Bank’s Risk Management
Council, the Market Risk Management Subcommittee reviews and
approves reports as required that include trading profits and
losses, position reports, limit utilization, sensitivity
analysis and VaR results for our trading activities.
The Asset Liability Management Committee is responsible for
day-to-day interest rate and liquidity risk management of
non-trading activities. It meets on a regular basis and as
required to respond to developments in the market and the
economy. Members of the Asset Liability Management Committee,
acting through our Financial Management Department, review our
interest rate and liquidity gap position monthly, formulate a
view on interest rates, establishing strategies with respect to
deposit and lending rates and review the business profile and
its impact on asset and liability management.
To ensure adequate interest rate and liquidity risk management,
we have assigned the responsibilities for our asset and
liability management risk control to Kookmin Bank’s Risk
Management Department in Kookmin Bank’s Risk Management
Division, which monitors and reviews the asset and liability
management risk procedures and activities of Kookmin Bank’s
Financial Management Department, and independently reports to
the management on the related issues.
Market
Risk Management for Trading Activities
Our trading activities consist of:
| • | trading activities for our own account to realize short-term trading profits in Won-denominated debt and equities markets and foreign exchange markets based on our short-term forecast of changes in the market situation; and | |
| • | trading activities involving derivatives, such as swaps, forwards, futures and option transactions, to realize profits primarily from arbitrage transactions and, to a lesser extent, from selling derivative products to our customers and to hedge market risk incurred from those activities. In addition, certain derivative products that we use to hedge our own market risk are classified as trading activities as they do not qualify for hedge accounting treatment under U.S. GAAP. We believe, however, that certain of these products are effective as economic hedges. |
We use derivative instruments to hedge our market risk and, to a
limited extent, to make profits by trading derivative products
within acceptable risk limits. The principal objective of our
hedging strategy is to manage our market risk within established
limits. We use the following hedging instruments to manage
relevant risks:
| • | to hedge interest rate risk arising from its trading activities, the Trading Department of Kookmin Bank occasionally uses interest rate futures (Korea Treasury Bond Futures) and interest rate swaps; | |
| • | to hedge equity risk arising from its trading activities, the Trading Department of Kookmin Bank selectively uses stock index futures; | |
| • | to hedge interest rate risk and foreign exchange risk arising from our foreign currency-denominated asset and liability positions as well as our trading activities, the Trading Department, the Fund Management Department and Investment Banking Department of Kookmin Bank use interest rate swaps, cross-currency interest rate swaps, foreign exchange forwards and futures, Euro-dollar futures and currency options; and | |
| • | to change the interest rate characteristics of certain assets and liabilities after the original investment or funding, we use swaps. For example, depending on the market situation, we may choose to obtain fixed rate funding instead of floating rate funding if we believe that the terms are more favorable, which we can achieve by entering into interest rate swaps. |
We generally manage our market risk at the portfolio level. To
control our exposure to market risk, we use EC and VaR limits
set by Kookmin Bank’s Risk Management Council and position,
stop loss and sensitivity limits (PVBP, Delta, Gamma, Vega) set
by the Market Risk Management Subcommittee. We prepared our risk
control and
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management guidelines for derivative trading based on the
regulations and guidelines promulgated by the Financial
Supervisory Service.
In addition, in connection with our adoption of ASC 820-10,
we have implemented internal processes which include a number of
key controls designed to ensure that fair value is measured
appropriately, particularly where a fair value model is
internally developed and used to price a significant product.
See “Item 5A. Operating Results — Critical
Accounting Policies — Valuation of Securities and
Financial Instruments” and Notes 1 and 29 of the notes
to our consolidated financial statements. For example, each
year, Kookmin Bank’s Risk Management Department reviews the
existing pricing and valuation models, with a focus on their
underlying modeling assumptions and restrictions, to assess the
appropriateness of their continued use. In consultation with
Kookmin Bank’s Trading Department, the Risk Management
Department recommends potential valuation models to Kookmin
Bank’s Fair Value Evaluation Committee. Upon approval by
Kookmin Bank’s Fair Value Evaluation Committee, the
selected valuation models are reported to its Market Risk
Management Subcommittee.
We monitor market risk arising from trading activities of our
business groups and departments. The market risk measurement
model we use for both our Won-denominated trading operations and
foreign currency-denominated trading operations is implemented
through our integrated market risk management system called
Panorama, which enables us to generate consistent VaR numbers
for all trading activities.
Value at Risk analysis.
We use daily VaR to
measure market risk. Our daily VaR is a statistically estimated
maximum amount of loss that could occur in one day under normal
distribution of financial variables. We use a 99% single tail
confidence level to measure our daily VaR, which means the
actual amount of loss may exceed the VaR, on average, once out
of 100 business days.
VaR is a commonly used market risk management technique.
However, this approach does have some shortcomings. VaR
estimates possible losses over a certain period at a particular
confidence level using past market movement data. Past market
movement, however, is not necessarily a good indicator of future
events, as there may be conditions and circumstances in the
future that the model does not anticipate. As a result, the
timing and magnitude of the actual losses can be different
depending on the assumptions made at the time of calculation. In
addition, the time periods used for the model, generally one or
ten days, are assumed to be a sufficient holding period before
liquidating the relevant underlying positions. If these holding
periods are not sufficient, or too long, the VaR results may
understate or overstate the potential loss. VaR is most
appropriate as a risk measure for trading positions in liquid
capital markets and will understate the risk associated with
severe events, such as a period of extreme illiquidity.
In order to measure VaR, we use the “variance-covariance
method,” which takes into account the diversification
effects among different risk categories as well as within the
same risk category. Different VaR methodologies and
distributional assumptions could produce a materially different
VaR.
The following table shows Kookmin Bank’s daily VaRs as of
December 31, 2007, 2008 and 2009, at a 99% confidence level
for a
one-day
holding period, for interest risk, equity risk and foreign
exchange risk relating to our trading activities. The following
figures were calculated on a non-consolidated basis.
| As of December 31, | ||||||||||||
| 2007 | 2008 | 2009 | ||||||||||
| (In billions of Won) | ||||||||||||
|
Risk categories:
|
||||||||||||
|
Interest risk
|
|
5.0 |
|
7.5 |
|
8.9 | ||||||
|
Equity risk
|
1.9 | 2.1 | 3.6 | |||||||||
|
Foreign exchange risk
|
1.8 | 2.9 | 5.8 | |||||||||
|
Less: diversification
|
3.4 | 4.9 | 8.5 | |||||||||
|
Diversified VaR for overall trading activities
|
5.3 | 7.6 | 9.8 | |||||||||
Back-Testing.
We conduct back testing on a
daily basis to validate the adequacy of our market risk model.
In back testing, we compare both the actual and hypothetical
profit and loss with the VaR calculations and analyze any
results that fall outside our predetermined confidence interval
of 99%.
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Stress testing.
In addition to VaR, which
assumes normal market situations, we use stress testing to
assess our market risk exposure to abnormal market fluctuations.
Abnormal market fluctuations include significant declines in the
stock market and significant increases in the general level of
interest rates. This is an important way to supplement VaR, as
VaR is a statistical expression of possible loss under a given
confidence level and holding period. It does not cover potential
loss if the market moves in a manner that is outside our normal
expectations. Stress testing projects the anticipated change in
value of holding positions under certain scenarios assuming that
no action is taken during a stress event to change the risk
profile of a portfolio. According to Kookmin Bank’s stress
testing, we estimate that as of December 31, 2009, Kookmin
Bank’s trading securities portfolio, which represents most
of our trading risk, could have lost
W
123 billion for an assumed short-term
extreme decline of approximately 21% in the equity market and an
approximate 139 basis point increase in interest rates
under an abnormal stress environment.
We monitor the impact of market turmoil or any abnormality by
conducting stress tests and confirming that the results are
within our market risk limits. If the impact is large, Kookmin
Bank’s chief risk officer may request that our portfolio be
restructured or other appropriate action be taken.
Interest
Risk
Interest risk from trading activities arises mainly from our
trading of Won-denominated debt securities. Our trading strategy
is to benefit from short-term movements in the prices of debt
securities arising from changes in interest rates. As our
trading accounts are marked-to-market daily, we manage the
interest risk related to our trading accounts using market
value-based tools such as VaR and sensitivity analysis. As of
December 31, 2009, the VaR of Kookmin Bank’s interest
risk from trading was
W
9 billion and the
weighted average duration, or weighted average maturity, of its
Won-denominated trading debt securities was approximately one
year.
Foreign
Exchange Risk
Foreign exchange risk arises because we have assets and
liabilities that are denominated in currencies other than Won,
as well as off-balance sheet items such as foreign exchange
forwards and currency swaps.
Assets and liabilities denominated in U.S. dollars account
for the majority of our foreign currency assets and liabilities.
Those denominated in Japanese yen and the euro account for most
of the remainder.
The difference between our foreign currency assets and
liabilities is offset against forward foreign exchange
positions, currency options and currency swaps to obtain our net
foreign currency open position. The Market Risk Management
Subcommittee oversees our foreign exchange exposure for both
trading and non-trading purposes by establishing a limit for
this net foreign currency open position, together with stop loss
limits. VaR limits are established on a combined basis for our
domestic operations and foreign branches.
The following table shows Kookmin Bank’s non-consolidated
net open positions at the end of 2007, 2008 and 2009. Positive
amounts represent long positions and negative amounts represent
short positions. The net open positions held by subsidiaries
other than Kookmin Bank are not significant.
| As of December 31, (1) | ||||||||||||
| 2007 | 2008 | 2009 | ||||||||||
| (In millions of US$) | ||||||||||||
|
Currency:
|
||||||||||||
|
U.S. dollars
|
US$ | 134.3 | US$ | 13.9 | US$ | 71.5 | ||||||
|
Japanese yen
|
(11.6 | ) | 4.7 | 18.8 | ||||||||
|
Euro
|
(14.6 | ) | 3.0 | 45.9 | ||||||||
|
Others
|
117.3 | 32.7 | (3.2 | ) | ||||||||
|
Total
|
US$ | 225.4 | US$ | 54.3 | US$ | 133.0 | ||||||
| (1) | Amounts prepared on a non-consolidated basis. |
200
Table of Contents
Equity
Price Risk
Equity price risk results from our equity trading portfolio in
Won since we do not have any trading exposure to shares
denominated in foreign currencies.
The equity trading portfolio in Won consists of exchange-traded
stocks and nearest month or second nearest month futures
contracts under strict limits on diversification as well as
position limits and stop loss limits.
The Market Risk Management Subcommittee sets annual and monthly
stop loss limits that are monitored by the Risk Management
Department. In order to ensure timely action, the stop loss
limit of individual securities is monitored by the relevant
middle office.
As of December 31, 2009, Kookmin Bank’s equity trading
position was
W
71 billion.
Derivative
Market Risk
Our derivative trading includes interest rate and cross-currency
swaps, foreign exchange forwards, stock index and interest rate
futures and currency options. These activities consist primarily
of the following:
| • | arbitrage transactions to make profit from short-term discrepancies between the spot and forward derivative markets or within the derivative markets; | |
| • | sales of tailor-made derivative products that meet various needs of our corporate customers and related transactions to reduce our exposure resulting from those sales; | |
| • | taking positions in limited cases when we expect short-swing profits based on our market forecasts; and | |
| • | trading to hedge our interest rate and foreign currency risk exposure as described above. |
Market risk from trading derivatives is not significant since
our derivative trading activities are primarily driven by
arbitrage and customer deals with very limited open trading
positions.
Market
Risk Management for Non-Trading Activities
Interest
Rate Risk
Our principal market risk from non-trading activities is
interest rate risk. Interest rate risk arises due to mismatches
in the maturities or re-pricing periods of these rate-sensitive
assets and liabilities. We measure interest rate risk for Won
and foreign currency assets and liabilities in our bank accounts
(including derivatives) and our principal guaranteed trust
accounts. Most of our interest-earning assets and
interest-bearing liabilities are denominated in Won and our
foreign currency-denominated assets and liabilities are mostly
denominated in U.S. dollars.
Our principal interest rate risk management objectives are to
generate stable net interest revenues and to protect our asset
value against interest rate fluctuations. We principally manage
this risk for our non-trading activities by analyzing and
managing maturity and duration gaps between our interest-earning
assets and interest-bearing liabilities. Although we have used
hedging instruments only on a limited basis for interest rate
risk management for our non-trading assets and liabilities, to
date the Korean financial market has not been sufficiently
developed for this purpose. We expect to increase our use of
derivatives to hedge this risk in the near future as the Korean
financial market becomes more sophisticated.
Interest rate gap analysis measures expected changes in net
interest revenues by calculating the difference in the amounts
of interest-earning assets and interest-bearing liabilities at
each maturity and interest resetting date. We perform interest
rate gap analysis for Won-denominated and foreign
currency-denominated assets and trust assets on a monthly basis
or more frequently when deemed necessary.
201
Table of Contents
Interest Rate Gap Analysis.
We perform
interest rate gap analysis based on interest rate repricing
maturities of assets and liabilities. However, for some of our
assets and liabilities with either no maturities or unique
characteristics, we use or assume certain maturities, including
the following examples:
| • | With respect to asset maturities, we assume remaining maturities of prime rate-linked loans with remaining maturities of over one year to be one year and use the actual maturities for prime rate-linked loans with remaining maturities of less than one year. | |
| • | With respect to liability maturities, adapting the regression analysis using last 36 months’ average balance, we assume “non-core” and “rate sensitive core” demand deposits to have remaining maturities of three months or less; and we assume “rate insensitive core” demand deposits to have remaining maturities between one year and four years. |
202
Table of Contents
The following table shows Kookmin Bank’s non-consolidated
interest rate gap for Won-denominated accounts and foreign
currency-denominated accounts as of December 31, 2009,
based on our Korean GAAP accounts, which vary in certain
significant respects from our accounts prepared in accordance
with U.S. GAAP.
| As of December 31, 2009 (1) | ||||||||||||||||||||||||
| 0-3 Months | 3-6 Months | 6-12 Months | 1-3 Years | Over 3 Years | Total | |||||||||||||||||||
| (In billions of Won, except percentages) | ||||||||||||||||||||||||
|
Won-denominated
|
||||||||||||||||||||||||
|
Interest-earning assets:
|
||||||||||||||||||||||||
|
Loans
|
|
126,839 |
|
31,184 |
|
8,749 |
|
1,378 |
|
1,075 |
|
169,226 | ||||||||||||
|
Securities
|
5,298 | 2,189 | 3,968 | 10,880 | 7,472 | 29,808 | ||||||||||||||||||
|
Others
|
12,537 | 1,415 | 1,213 | 1,091 | 171 | 16,428 | ||||||||||||||||||
|
Total
|
|
144,675 |
|
34,789 |
|
13,930 |
|
13,350 |
|
8,719 |
|
215,462 | ||||||||||||
|
Interest-bearing liabilities:
|
||||||||||||||||||||||||
|
Deposits
|
|
74,382 |
|
18,844 |
|
41,266 |
|
24,618 |
|
10,695 |
|
169,805 | ||||||||||||
|
Borrowings
|
3,869 | — | — | — | — | 3,869 | ||||||||||||||||||
|
Others
|
10,420 | 2,973 | 7,931 | 8,707 | 6,630 | 36,661 | ||||||||||||||||||
|
Total
|
|
88,671 |
|
21,817 |
|
49,197 |
|
33,324 |
|
17,326 |
|
210,335 | ||||||||||||
|
Sensitivity gap
|
56,003 | 12,972 | (35,266 | ) | (19,974 | ) | (8,607 | ) | 5,127 | |||||||||||||||
|
Cumulative gap
|
56,003 | 68,975 | 33,708 | 13,734 | 5,127 | |||||||||||||||||||
|
% of total assets
|
26.0 | % | 32.0 | % | 15.6 | % | 6.4 | % | 2.4 | % | ||||||||||||||
|
Foreign currency-denominated
|
||||||||||||||||||||||||
|
Interest-earning assets:
|
||||||||||||||||||||||||
|
Due from banks
|
|
370 |
|
13 |
|
— |
|
— |
|
— |
|
383 | ||||||||||||
|
Loans
|
5,657 | 706 | 276 | 282 | 22 | 6,943 | ||||||||||||||||||
|
Securities
|
703 | 233 | 44 | 157 | 274 | 1,410 | ||||||||||||||||||
|
Others
|
3,262 | 883 | 110 | 107 | — | 4,362 | ||||||||||||||||||
|
Total
|
|
9,992 |
|
1,835 |
|
430 |
|
546 |
|
296 |
|
13,098 | ||||||||||||
|
Interest-bearing liabilities:
|
||||||||||||||||||||||||
|
Deposits
|
|
2,286 |
|
1,104 |
|
52 |
|
2 |
|
11 |
|
3,455 | ||||||||||||
|
Borrowings
|
3,838 | 1,479 | 679 | 145 | — | 6,142 | ||||||||||||||||||
|
Others
|
3,873 | 815 | 47 | — | — | 4,734 | ||||||||||||||||||
|
Total
|
|
9,997 |
|
3,398 |
|
778 |
|
147 |
|
11 |
|
14,331 | ||||||||||||
|
Sensitivity gap
|
(5 | ) | (1,563 | ) | (349 | ) | 400 | 284 | (1,233 | ) | ||||||||||||||
|
Cumulative gap
|
(5 | ) | (1,568 | ) | (1,917 | ) | (1,517 | ) | (1,233 | ) | ||||||||||||||
|
% of total assets
|
0.0 | % | (12.0 | )% | (14.6 | )% | (11.6 | )% | (9.4 | )% | ||||||||||||||
| (1) | The numbers are prepared on a non-consolidated basis in accordance with Korean GAAP for internal management purposes. |
Duration Gap Analysis.
We also perform
duration gap analysis to measure and manage interest rate risk.
Duration gap analysis is a more long-term risk indicator than
interest rate gap analysis, as interest rate gap analysis
focuses more on accounting income as opposed to the market value
of the assets and liabilities. We emphasize duration gap
analysis because, in the long run, our principal concern with
respect to interest rate fluctuations is the net asset value
rather than net interest revenue changes. In 2009, our asset and
liability duration gap was negative and it moved between
(-)0.343 years and (-)0.284 years. Accordingly, our
net asset value would have declined between
W
631 billion and
W
738 billion if interest rates had
decreased by one percentage point.
203
Table of Contents
For duration gap analysis we use or assume the same maturities
for different assets and liabilities that we use or assume for
our interest rate gap analysis.
The following table, which was prepared in accordance with
Korean GAAP, shows duration gaps and net asset value changes
when interest rates decrease by one percentage point as of the
specified dates on a non-consolidated basis.
|
Asset
|
Liability
|
Duration
|
Net Asset
|
|||||||||||||
| Date | Duration | Duration | Gap | Value Change | ||||||||||||
| (In years) | (In years) | (In years) |
(In billions
|
|||||||||||||
| of Won) | ||||||||||||||||
|
June 30, 2007
|
0.5820 | 0.8353 | (0.226 | ) | (396 | ) | ||||||||||
|
December 31, 2007
|
0.5253 | 0.8341 | (0.266 | ) | (498 | ) | ||||||||||
|
June 30, 2008
|
0.5249 | 0.7890 | (0.222 | ) | (459 | ) | ||||||||||
|
December 31, 2008
|
0.4923 | 0.8304 | (0.302 | ) | (648 | ) | ||||||||||
|
June 30, 2009
|
0.4801 | 0.7949 | (0.291 | ) | (643 | ) | ||||||||||
|
December 31, 2009
|
0.4556 | 0.7814 | (0.298 | ) | (647 | ) | ||||||||||
We set interest rate risk limits using historical interest rate
volatility of financial bonds and duration gaps with respect to
expected asset and liability positions based on our annual
business plans. The Financial Management Department in Kookmin
Bank’s Finance Group submits interest rate gap analysis
reports, duration gap analysis reports, sensitivity reports and
interest rate risk limit compliance reports monthly to Kookmin
Bank’s Asset Liability Management Committee and quarterly
to Kookmin Bank’s Risk Management Committee.
The following table, which was prepared in accordance with
Korean GAAP, summarizes Kookmin Bank’s interest rate risk
on a non-consolidated basis, taking into account asset and
liability durations as of December 31, 2009.
| As of December 31, 2009 | ||||||||||||||||||||||||
|
3 Months
|
3-6
|
6-12
|
1-3
|
Over
|
||||||||||||||||||||
| or Less | Months | Months | Years | 3 Years | Total | |||||||||||||||||||
| (In billions of Won, except percentages and maturities in years) | ||||||||||||||||||||||||
|
Won-denominated:
|
||||||||||||||||||||||||
|
Asset position
|
|
144,675 |
|
34,789 |
|
13,930 |
|
13,350 |
|
8,719 |
|
215,462 | ||||||||||||
|
Liability position
|
88,671 | 21,817 | 49,197 | 33,324 | 17,326 | 210,335 | ||||||||||||||||||
|
Gap
|
56,003 | 12,972 | (35,266 | ) | (19,974 | ) | (8,607 | ) | 5,127 | |||||||||||||||
|
Average maturity
|
0.188 | 0.376 | 0.726 | 2.083 | 2.957 | |||||||||||||||||||
|
Interest rate volatility
|
1.52 | % | 2.21 | % | 2.72 | % | 2.40 | % | 2.58 | % | ||||||||||||||
|
Amount at risk
|
160 | 108 | (698 | ) | (998 | ) | (657 | ) | (2,085 | ) | ||||||||||||||
|
Foreign currency-denominated:
|
||||||||||||||||||||||||
|
Asset position
|
|
9,992 |
|
1,835 |
|
430 |
|
546 |
|
296 |
|
13,098 | ||||||||||||
|
Liability position
|
9,997 | 3,398 | 778 | 147 | 11 | 14,331 | ||||||||||||||||||
|
Gap
|
(5 | ) | (1,563 | ) | (349 | ) | 400 | 284 | (1,233 | ) | ||||||||||||||
|
Average maturity
|
0.242 | 0.477 | 0.773 | 1.725 | 3.638 | |||||||||||||||||||
|
Interest rate volatility
|
1.94 | % | 1.95 | % | 2.02 | % | 2.31 | % | 2.56 | % | ||||||||||||||
|
Amount at risk
|
— | 15 | 5 | (16 | ) | (26 | ) | (22 | ) | |||||||||||||||
Foreign
Exchange Risk
We manage foreign exchange rate risk arising from our
non-trading operations together with such risks arising from our
trading operations. See “— Market Risk Management
for Trading Activities — Foreign Exchange Risk”
above.
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Table of Contents
Liquidity
Risk Management
Liquidity risk is the risk of insolvency or loss due to a
disparity between the inflow and outflow of funds resulting
from, for example, maturity mismatches, obtaining funds at a
high price or disposing of securities at an unfavorable price
due to lack of available funds. We manage our liquidity in order
to meet our financial liabilities from withdrawals of deposits,
redemption of matured debentures and repayments at maturity of
borrowed funds. We also require sufficient liquidity to fund
loans, to extend other credits and to invest in securities. Our
liquidity management goal is to meet all our liability
repayments on time and fund all investment opportunities even
under adverse conditions. To date, we have not experienced
significant liquidity risk.
We maintain liquidity by holding sufficient quantities of assets
that can be liquidated to meet actual or potential demands for
funds from depositors and others. We also manage liquidity by
ensuring that the excess of maturing liabilities over maturing
assets in any period is kept to manageable levels relative to
the amount of funds we believe we could raise by issuing
securities. We seek to minimize our liquidity costs by managing
our liquidity position on a daily basis and by limiting the
amount of cash at any time that is not invested in interest
earning assets or securities.
We maintain diverse sources of liquidity to facilitate
flexibility in meeting our funding requirements. We fund our
operations principally by accepting deposits from retail and
corporate depositors, accessing the call loan market (a
short-term market for loans with maturities of less than
90 days), issuing debentures and borrowing from the Bank of
Korea. We use the majority of funds we raise to extend loans or
purchase securities. Generally, deposits are of shorter average
maturity than loans or investments.
For Won-denominated assets and liabilities, we manage liquidity
using a cash flow structure based on holding short-term
liabilities and long-term assets. Generally, the average initial
contract maturity of our new Won-denominated time deposits was
about 11 months, while during the same period most of our
new loans and securities had maturities over one year.
We manage liquidity risk within the limits set on Won and
foreign currency accounts in accordance with the regulations of
the Financial Services Commission. The Financial Services
Commission requires Korean banks to maintain a Won liquidity
ratio of at least 100.0% and a foreign liquidity ratio of at
least 85.0%. The Financial Services Commission defines the Won
liquidity ratio as Won liquid assets (including marketable
securities) due within one month divided by Won liabilities due
within one month.
Kookmin Bank’s Fund Management Department is
responsible for daily liquidity risk management of its Won and
foreign currency exposure. It reports monthly plans for funding
and operations to the Asset Liability Management Committee of
Kookmin Bank, which discusses factors such as interest rate
movements, maturity structures of its deposits, loans and
securities, re-deposit ratios and loan roll-over ratios.
The following table shows Kookmin Bank’s liquidity status
and limits for Won and foreign currency accounts as of
December 31, 2009 in accordance with Financial Services
Commission regulations:
|
1 Month
|
||||
| Won Accounts: | or Less | |||
|
(In billions of Won,
|
||||
| except percentages) | ||||
|
Assets (A)
|
|
54,842 | ||
|
Liabilities (B)
|
45,317 | |||
|
Liquidity gap
|
9,525 | |||
|
Liquidity ratio (A/B)
|
121.02 | % | ||
|
Limit
|
100 | % | ||
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Table of Contents
|
7 Days
|
1 Month
|
3 Months
|
||||||||||
| or Less | or Less | or Less | ||||||||||
| (In millions of US$, except percentages) | ||||||||||||
|
Foreign currency assets
|
US$ | 4,601 | US$ | 10,724 | US$ | 17,067 | ||||||
|
Foreign currency liabilities
|
3,626 | 10,850 | 16,461 | |||||||||
|
Maturity gap
|
975 | (126 | ) | 605 | ||||||||
|
Cumulative gap (A)
|
975 | (126 | ) | 605 | ||||||||
|
Total assets (B)
|
35,941 | 35,941 | 35,941 | |||||||||
|
Liquidity gap ratio (A/B)
|
2.71 | % | (0.35 | )% | 103.68 | (1) % | ||||||
|
Limits
|
0.00 | % | (10.00 | )% | 85.00 | % | ||||||
| (1) | Liquidity ratio. |
The Financial Management Department in Kookmin Bank’s
Finance Group reports whether we are complying with these limits
monthly to Kookmin Bank’s Asset Liability Management
Committee and quarterly to Kookmin Bank’s Risk Management
Committee.
Operational
Risk Management
Overall
Status
Basel II currently defines operational risk as the
“risk of loss resulting from inadequate or failed internal
processes, people and systems or from external events.”
However, there is still no complete consensus on the definition
of operational risk in the banking industry. We define
operational risk broadly to include all financial and
non-financial risks, other than credit risk, market risk,
interest rate risk and liquidity risk, that may arise from our
operations that could negatively impact our capital, including
the risk of loss resulting from inadequate or failed internal
processes, people and systems or from external events as defined
under Basel II. Our operational risk management objectives
include not only satisfying regulatory requirements, but also
providing internal support through the growth of a strong risk
management culture, reinforcement of internal controls,
improvement of work processes and provision of timely feedback
to management members and staff throughout the bank.
We manage our operational risk primarily through Kookmin Bank,
our banking subsidiary. Kookmin Bank uses an operational risk
management framework meeting the Basel II Advanced
Measurement Approach, or AMA, under which Kookmin Bank:
| • | calculates its operational risk VaR on a quarterly basis using the “scenario based AMA” methodology, and monitors operational risk in terms of Key Risk Indicators, or KRI, using tolerance levels for each indicator; | |
| • | executes integrated compliance and operational risk Control Self Assessments, or CSAs, that enhance the effect on internal controls, which Kookmin Bank employees are able to access and use for process improvement; | |
| • | collects and analyzes internal and external loss data; | |
| • | conducts scenario analyses to evaluate exposure to high-severity events; | |
| • | manages certain insurance-related activities relating to insurance strategies established to mitigate operational risk; | |
| • | uses a detailed business continuity plan covering all of its operations and locations to prepare against unexpected events, including an alternate back-up site for use in disaster events as well as annual full-scale testing of such site. | |
| • | refines bank-wide operational risk policies and procedures; | |
| • | provides appropriate training and support to business line operational risk managers; and | |
| • | reports overall operational risk status to our senior management. |
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Table of Contents
Each of Kookmin Bank’s relevant business units has primary
responsibility for the management of its own operational risk.
In addition, the Operational Risk Unit, which is part of Kookmin
Bank’s Risk Management Department, monitors bank-wide
operational risk. Kookmin Bank also has internal control
managers in all of its subsidiaries, departments and branches
who periodically conduct CSAs and monitor KRIs. Through this
method, Kookmin Bank is able to ensure proper monitoring and
measurement of operational risk in each of its business groups.
Internal
Control
To monitor and control operational risks, we maintain a system
of comprehensive policies and have put in place a control
framework designed to provide a stable and well-managed
operational environment throughout our organization. Each of our
subsidiaries establishes its own internal control system in
accordance with the group-level internal control principles. Our
Audit Committee, Audit Department and Compliance Supporting
Department are responsible for monitoring and advising our
subsidiaries regarding their internal control systems. Our Audit
Committee, which consists of five non-executive directors, is an
independent authority that evaluates the effectiveness and
efficiency of our group-wide internal control systems and
business processes and monitors our subsidiaries’
compliance with such systems and processes, as well as reviews
the reliability of our financial statements to secure the
transparency and stability of our management (including through
the activities of our independent auditor). In particular, we
have established group-wide internal guidelines with respect to
our subsidiaries’ reporting requirements. Our subsidiaries
review their operations and their level of compliance with
internal control systems and business processes on a periodic
basis and, as part of this process, they are required to report
any problems discovered and any remedial actions taken to our
chief compliance officer and chief human resources officer, who
are responsible for reporting to our Audit Committee. Based on
the results of these reports, or on an ad hoc basis in response
to any problem or potential problem that it identifies, the
Audit Committee may direct a subsidiary to conduct an audit of
its operations or, if it chooses to do so, conduct its own audit
of those operations. The Audit Committee interacts on a regular
basis with our Audit Department, Compliance Supporting
Department and our independent auditors. In carrying out these
duties, the Audit Committee ultimately protects our property for
the benefit of our shareholders, investors and customers by
independently monitoring our management.
Our Audit Department supports our Audit Committee in monitoring
our accounting and business operations and overseeing the
management of our subsidiaries’ internal control systems by
performing the following activities:
| • | general audits, which include full-scale audits of the overall operations performed according to an annual audit plan, and sectional audits of selected operations; and | |
| • | special audits, performed when our Audit Committee deems it necessary or pursuant to requests by our chief executive officer, board or supervisory authorities, such as the Financial Supervisory Service. |
Kookmin Bank’s audit division consists of two departments,
Channel Audit Department and Management Audit Department, and
they are the execution bodies for its audit committee and
support our management objectives by auditing the operations of
its branches using a risk analysis system and reviewing the
operations of its headquarters and subsidiaries through the use
of “risk-based audit” in accordance with the
“business measurement process” audit methodology,
which requires that its Management Audit Department evaluate the
risk and process of its business units and concentrate their
audit capacity with respect to high risk areas.
The Financial Supervisory Service periodically conducts a
general examination of our operations. It also performs special
examination on particular aspects of our operations, such as
risk management, credit monitoring and liquidity, as the need
arises.
As a result of recent regulatory trends, Kookmin Bank’s
audit division is continuing its efforts to establish an
advanced audit system and value-added internal audit by
introducing risk-based audit techniques.
Kookmin Bank’s Compliance Supporting Department operates a
compliance system to ensure that all of our employees comply
with the relevant laws and regulations. This system’s main
function is to establish and manage our compliance program,
educate employees and management and improve our internal
control process.
207
Table of Contents
Legal
Risk
We consider legal risk as a part of our operational risk. The
uncertainty of the enforceability of the obligations of our
customers and counterparties creates legal risk. Changes in laws
and regulations could also adversely affect us. Legal risk is
higher in new areas of business where the law is often untested
in the courts, although legal risk can also increase in our
traditional business to the extent that the legal and regulatory
landscape in Korea is changing and many new laws and regulations
governing the financial industry remain untested. Our Compliance
Supporting Department seeks to minimize legal risk by using
stringent legal documentation, employing procedures designed to
ensure that transactions are properly authorized and consulting
legal advisers.
IT
System Operational Risk
The integrity of our IT systems, and their ability to withstand
potential catastrophic events, are crucial to our continuing
operations. Accordingly, we are continuing to strengthen our
disaster recovery capabilities. In order to minimize operational
risks relating to our IT systems, we have implemented a
multi-CPU system that runs multiple CPUs simultaneously
on-site
and
ensures system continuity in case any of the CPUs fails. This
system backs up our data systems at an off-site location on a
real-time basis to ensure that our operations can be carried out
normally and without material interruption in the event of CPU
failure. Also, in order to protect our Internet banking services
from system failures and cyber attacks, we process our Internet
transactions through three separate data processing centers.
We currently test our disaster recovery systems on a quarterly
basis, with the comprehensive testing including our branches and
the main IT center’s disaster recovery system. Our disaster
recovery capabilities involve a number of operations other than
our core banking operations, including credit card and call
center transactions. Internally, our IT Service Operations
Department monitors all of our computerized network processes
and IT systems. This department monitors and reports on any
unusual delays or irregularities reported by our branches. In
addition, our IT Planning Department is responsible for the
daily monitoring of its entire information security system.
| Item 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES |
Fees and
Charges
Under the terms of the deposit agreement, as a holder of our
ADSs, you are required to pay the following service fees to the
depositary:
| Services | Fees | |
|
Issuance of ADSs
|
Up to $0.05 per ADS issued | |
|
Cancellation of ADSs
|
Up to $0.05 per ADS canceled | |
|
Distribution of cash dividends or other cash distributions
|
Up to $0.02 per ADS held | |
|
Distribution of ADSs pursuant to stock dividends, free stock
distributions or exercise of rights
|
Up to $0.02 per ADS held | |
|
Distribution of securities other than ADSs or rights to purchase
additional ADSs
|
Up to $0.05 per ADS held | |
|
Depositary Services
|
Up to $0.02 per ADS held on the applicable record date(s) established by the depositary | |
|
Transfer of American depositary receipts
|
$1.50 per certificate presented for transfer |
As a holder of our ADSs, you are also responsible for paying
certain fees and expenses incurred by the depositary and certain
taxes and governmental charges such as:
| • | Fees for the transfer and registration of shares charged by the registrar and transfer agent for the shares in Korea ( i.e. , upon deposit and withdrawal of shares). | |
| • | Expenses incurred for converting foreign currency into U.S. dollars. | |
| • | Expenses for cable, telex and fax transmissions and for delivery of securities. |
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| • | Taxes and duties upon the transfer of securities ( i.e. , when shares are deposited or withdrawn from deposit). | |
| • | Fees and expenses incurred in connection with the delivery or servicing of shares on deposit. |
Depositary fees payable upon the issuance and cancellation of
ADSs are typically paid to the depositary by the brokers (on
behalf of their clients) receiving the newly issued ADSs from
the depositary and by the brokers (on behalf of their clients)
delivering the ADSs to the depositary for cancellation. The
brokers in turn charge these fees to their clients. Depositary
fees payable in connection with distributions of cash or
securities to ADS holders and the depositary services fee are
charged by the depositary to the holders of record of ADSs as of
the applicable ADS record date.
The depositary fees payable for cash distributions are generally
deducted from the cash being distributed. In the case of
distributions other than cash (i.e., stock dividend, rights),
the depositary charges the applicable fee to the ADS record date
holders concurrent with the distribution. In the case of ADSs
registered in the name of the investor (whether certificated or
uncertificated in direct registration), the depositary sends
invoices to the applicable record date ADS holders. In the case
of ADSs held in brokerage and custodian accounts (via the
Depository Trust Company, or DTC), the depositary generally
collects its fees through the systems provided by DTC (whose
nominee is the registered holder of the ADSs held in DTC) from
the brokers and custodians holding ADSs in their DTC accounts.
The brokers and custodians who hold their clients’ ADSs in
DTC accounts in turn charge their clients’ accounts the
amount of the fees paid to the depositary.
In the event of refusal to pay the depositary fees, the
depositary may, under the terms of the deposit agreement, refuse
the requested service until payment is received or may set off
the amount of the depositary fees from any distribution to be
made to such holder of ADSs.
Note that the fees and charges you may be required to pay may
vary over time and may be changed by us and by the depositary.
You will receive prior notice of such changes.
Fees and
Payments from the Depositary to Us
In 2009, we received the following payments from the depositary:
|
Reimbursement of listing fees:
|
$ | 16,360 | ||
|
Reimbursement of SEC filing fees:
|
$ | 174,244 | ||
|
Reimbursement of settlement infrastructure fees (including DTC
fees):
|
$ | 44,002 | ||
|
Reimbursement of expenses related to proxy process (printing,
postage and distribution) and ADS holders identification:
|
$ | 118,740 | ||
|
Reimbursement of legal fees:
|
$ | 26,071 | ||
|
Reimbursement of expenses related to our investor relations
activities (investor conferences and investor relations agency
fees, etc.):
|
$ | 404,256 |
In addition, as part of its service to us, the depositary waives
its fees for the standard costs and operating expenses
associated with the administration of the ADS facility.
| Item 13. | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES |
Not Applicable
| Item 14. | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |
Not Applicable
| Item 15. | CONTROLS AND PROCEDURES |
Disclosure
Controls and Procedures
We have evaluated, with the participation of our chief executive
officer and chief financial officer, the effectiveness of our
disclosure controls and procedures as of December 31, 2009.
There are inherent limitations to
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the effectiveness of any system of disclosure controls and
procedures, including the possibility of human error and the
circumvention or overriding of the controls and procedures.
Accordingly, even effective disclosure controls and procedures
can only provide reasonable assurance of achieving their control
objectives. Based upon our evaluation, our chief executive
officer and chief financial officer concluded that our
disclosure controls and procedures as of December 31, 2009
were effective to provide reasonable assurance that information
required to be disclosed by us in the reports that we file or
submit under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported, within the time
periods specified in the applicable rules and forms, and that it
is accumulated and communicated to our management, including our
chief executive officer and chief financial officer, as
appropriate to allow timely decisions regarding required
disclosure.
Management’s
Annual Report on Internal Control Over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act. Under the supervision and with the
participation of our management, including our chief executive
officer and chief financial officer, we conducted an evaluation
of the effectiveness of our internal control over financial
reporting based on the framework in Internal Control —
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Our internal control
over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with accounting principles
generally accepted in the United States of America. Our internal
control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of our assets; (2) provide
reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that our receipts
and expenditures are being made only in accordance with
authorizations of our management and directors; and
(3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition
of our assets that could have a material effect on the financial
statements. Because of its inherent limitations, internal
control over financial reporting is not intended to provide
absolute assurance that a misstatement of our financial
statements would be prevented or detected. Also, projections of
any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the
policies or procedures may deteriorate. Based on our evaluation,
our management concluded that our internal control over
financial reporting was effective as of December 31, 2009.
The effectiveness of our internal control over financial
reporting as of December 31, 2009 has been audited by Samil
PricewaterhouseCoopers, an independent registered public
accounting firm, which also audited our financial statements as
of and for the year ended December 31, 2009, as stated in
its report which is included herein.
Changes
in Internal Control Over Financial Reporting
There has been no change in our internal control over financial
reporting during 2009 that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.
| Item 16. | RESERVED |
| Item 16A. | Audit Committee Financial Expert |
Our board of directors has determined that each of Seung Hee
Koh, Sang Moon Hahm and Chan Soo Kang, our non-executive
directors and members of our Audit Committee, qualifies as an
“audit committee financial expert” and is independent
within the meaning of this Item 16A.
| Item 16B. | Code of Ethics |
We have adopted a code of ethics, as defined in Item 16B of
Form 20-F
under the Exchange Act. Our code of ethics applies to our chief
executive officer and chief financial officer, as well as to our
non-executive directors, non-standing director and other
officers and employees. Our code of ethics is available on our
website at
http://www.kbfng.com
.
If we amend the provisions of our code of ethics that apply to
our chief executive officer
210
Table of Contents
and chief financial officer and persons performing similar
functions, or if we grant any waiver of such provisions, we will
disclose such amendment or waiver on our website at the same
address.
| Item 16C. | Principal Accountant Fees and Services |
Audit and
Non-audit Fees
The following table sets forth the fees billed to us by
independent registered public accounting firms Deloitte Anjin
LLC and Samil PricewaterhouseCoopers during the fiscal years
ended December 31, 2008 and 2009, respectively:
| Year Ended December 31, | ||||||||
| 2008 | 2009 | |||||||
| (In millions of Won) | ||||||||
|
Audit fees
|
|
4,999 |
|
4,735 | ||||
|
Audit-related fees
|
— | — | ||||||
|
Tax fees
|
— | — | ||||||
|
All other fees
|
94 | 295 | ||||||
|
Total fees
|
|
5,093 |
|
5,030 | ||||
Audit fees in the above table are the aggregate fees billed by
Deloitte Anjin LLC and Samil PricewaterhouseCoopers, as
applicable, in connection with the audits of:
| • | our annual financial statements and the review of our interim financial statements; and | |
| • | our special purpose entities in connection with the Korean Securities and Exchange Act or the Financial Investment Services and Capital Markets Act. |
Other fees in the above table are fees billed by Deloitte Anjin
LLC and Samil PricewaterhouseCoopers, as applicable, in
connection with our financial debenture offering services and
issuance of common stock.
Audit
Committee Pre-Approval Policies and Procedures
Our Audit Committee pre-approves the engagement of our
independent auditors for audit services with respect to our
U.S. GAAP financial statements. Our Audit Committee has
implemented a policy regarding pre-approval of certain other
services provided by our independent auditors to our
subsidiaries that the Audit Committee has deemed as not
affecting their independence. Under this policy, pre-approvals
for the following services to our subsidiaries have been granted
by our Audit Committee to each of our subsidiaries’ audit
committees: (i) services related to the audit of financial
statements prepared in accordance with Korean GAAP and internal
controls under Korean laws and regulations; (ii) general
tax advisory services; (iii) due diligence services;
(iv) issuance of comfort letters in connection with
offering of securities; and (v) educational services
provided to employees.
Any other audit or permitted non-audit service must be
pre-approved by the Audit Committee on a
case-by-case
basis. Our Audit Committee did not pre-approve any non-audit
services under the
de minimis
exception of
Rule 2.01(c)(7)(i)(C) of
Regulation S-X
as promulgated by the Securities and Exchange Commission.
| Item 16D. | Exemptions from the Listing Standards for Audit Committees |
Not Applicable
| Item 16E. | Purchase of Equity Securities by the Issuer and Affiliated Purchasers |
Neither we nor any “affiliated purchaser,” as defined
in
Rule 10b-18(a)(3)
of the Exchange Act, purchased any of our equity securities
during the period covered by this annual report.
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Table of Contents
| Item 16F. | Change in Registrant’s Certifying Accountant |
On October 17, 2008, our Audit Committee approved the
appointment of Samil PricewaterhouseCoopers (“Samil”)
as our independent registered accounting firm to audit our
consolidated financial statements prepared in accordance with
U.S. GAAP for the fiscal years 2009 and 2010. Our previous
independent registered accounting firm, Deloitte Anjin LLC
(“Deloitte”), had been engaged by us pursuant to a
three-year contract to audit our consolidated financial
statements prepared in accordance with U.S. GAAP for the
fiscal years 2006, 2007 and 2008. In September and October 2008,
we conducted a competitive bid process among several registered
accounting firms, including Deloitte, to appoint an independent
registered accounting firm to audit our consolidated financial
statements prepared in accordance with U.S. GAAP for the
fiscal years subsequent to fiscal year 2008. Following this
competitive bid process, our Audit Committee approved the
appointment of Samil.
Deloitte’s audit reports on our consolidated financial
statements prepared in accordance with U.S. GAAP for the
fiscal years 2006 and 2007 did not contain an adverse opinion or
a disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles. Furthermore,
during the fiscal years 2006 and 2007 and in the subsequent
interim period ended October 17, 2008 (the
“Pre-Engagement Period”), there were no disagreements
with Deloitte on any matter of accounting principles or
practice, financial statement disclosure or auditing scope or
procedure that if not resolved to the satisfaction of Deloitte,
would have caused Deloitte to make reference to the subject
matter of the disagreement in its reports. In addition, during
the Pre-Engagement Period, there were no “reportable
events” requiring disclosure pursuant to
Item 16F(a)(1)(v) of
Form 20-F.
During the Pre-Engagement Period, neither we nor anyone on our
behalf consulted Samil regarding either (i) the application
of U.S. GAAP accounting principles to a specified
transaction, either completed or proposed, or the type of audit
opinion that might be rendered on our consolidated financial
statements (and neither a written report nor oral advice was
provided to us that Samil concluded was an important factor
considered by us in reaching a decision as to any U.S. GAAP
accounting, auditing or financial reporting issue) or
(ii) any matter that was either the subject of a
“disagreement” (as defined in Item 16F(a)(1)(iv)
of
Form 20-F
and the related instructions to Item 16F) or a
“reportable event” (as described in
Item 16F(a)(1)(v) of
Form 20-F).
We provided a copy of the disclosure in this Item to Deloitte
and requested that Deloitte furnish us with a letter addressed
to the Commission stating whether it agrees with such
disclosure, and if it does not agree, stating the respects in
which it does not agree. A copy of Deloitte’s letter dated
June 23, 2010 is filed as Exhibit 15.1 to this
Form 20-F.
| Item 16G. | Corporate Governance |
Differences
in Corporate Governance Practices
Pursuant to the rules of the New York Stock Exchange applicable
to foreign private issuers like us that are listed on the New
York Stock Exchange, we are required to disclose significant
differences between the New York Stock Exchange’s corporate
governance standards and those that we follow under Korean law
and in accordance with our own internal procedures. The
following is a summary of such significant differences:
| NYSE Corporate Governance Standards | KB Financial Group | |
|
Director independence
|
||
|
Listed companies must have a majority of independent directors
|
The majority of our board of directors is independent (as defined in accordance with the New York Stock Exchange’s standards), as 9 out of 11 directors are non-executive directors. | |
|
Executive Session
|
||
|
Listed companies must hold meetings solely attended by
non-management directors to more effectively check and balance
management directors
|
Our non-executive directors hold quarterly executive sessions in accordance with the Regulation of the Board of Directors. |
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| NYSE Corporate Governance Standards | KB Financial Group | |
|
Nomination/Corporate Governance Committee
|
||
|
Listed companies must have a nomination/corporate governance
committee composed entirely of independent directors
|
Our Non-executive Director Nominating Committee is generally composed of four non-executive directors and our chief executive officer. | |
|
Compensation Committee
|
||
|
Listed companies must have a compensation committee composed
entirely of independent directors
|
We maintain an Evaluation and Compensation Committee composed of four non-executive directors. | |
|
Audit Committee
|
||
|
Listed companies must have an audit committee that satisfies the
requirements of
Rule 10A-3
under the Exchange Act
|
We maintain an Audit Committee composed of five non-executive directors. Accordingly, we are in compliance with Rule 10A-3 under the Exchange Act. | |
|
Audit Committee Additional Requirements
|
||
|
Listed companies must have an audit committee that is composed
of more than three directors
|
Our Audit Committee has five members, as described above. | |
|
Shareholder Approval of Equity Compensation Plan
|
||
|
Listed companies must allow its shareholders to exercise their
voting rights with respect to any material revision to the
company’s equity compensation plan
|
We currently have three equity compensation plans: one providing for the grant of stock options to officers and directors; performance share agreements with certain of our directors; and an employee stock ownership plan, or ESOP. | |
| All material matters related to our stock option plan are provided in our Articles of Incorporation, and any amendments to the Articles of Incorporation are subject to shareholders’ approval. | ||
| Matters related to the performance share agreements or ESOP are not subject to shareholders’ approval under Korean law. | ||
|
Corporate Governance Guidelines
|
||
|
Listed companies must adopt and disclose corporate governance
guidelines
|
We have adopted, but have not disclosed, corporate governance guidelines. |
213
Table of Contents
| Item 17. | FINANCIAL STATEMENTS |
Not Applicable
| Item 18. | FINANCIAL STATEMENTS |
| Item 19. | EXHIBITS |
Reference is made to Item 19(a) for a list of all financial
statements filed as part of this annual report.
(a) List of Financial Statements:
| Page | ||||
|
Audited consolidated financial statements of KB Financial
Group and subsidiaries, prepared in accordance with U.S. GAAP
|
||||
| F-1 | ||||
| F-2 | ||||
| F-3 | ||||
| F-4 | ||||
| F-6 | ||||
| F-8 | ||||
| F-11 | ||||
214
Table of Contents
(b) Exhibits
Pursuant to the rules and regulations of the
U.S. Securities and Exchange Commission, KB Financial Group
has filed certain agreements as exhibits to this Annual Report
on
Form 20-F.
These agreements may contain representations and warranties made
by the parties. These representations and warranties have been
made solely for the benefit of the other party or parties to
such agreements and (i) may be intended not as statements
of fact, but rather as a way of allocating the risk to one of
the parties to such agreements if those statements turn out to
be inaccurate, (ii) may have been qualified by disclosures
that were made to such other party or parties and that either
have been reflected in the company’s filings or are not
required to be disclosed in those filings, (iii) may apply
materiality standards different from what may be viewed as
material to investors and (iv) were made only as of the
date of such agreements or such other date(s) as may be
specified in such agreements and are subject to more recent
developments. Accordingly, these representations and warranties
may not describe KB Financial Group’s actual state of
affairs at the date of this annual report.
| Number | Description | |||
| 1 | .1 | Articles of Incorporation of KB Financial Group (translation in English). | ||
| 2 | .1* |
Form of Share Certificate of KB Financial Group’s common
stock, par value
|
||
| 2 | .2** | Form of Third Amended and Restated Deposit Agreement among KB Financial Group, Citibank N.A., as depositary, and all holders and beneficial owners from time to time of American depositary shares evidenced by American depositary receipts issued thereunder, including the form of American depositary receipt. | ||
| 4 | .1* | Amended and Restated Strategic Alliance Agreement, dated as of August 27, 2003, between Kookmin Bank and ING Bank N.V. | ||
| 4 | .2* | Agreement Dealing with the Establishment of KB Financial Holding Company, dated as of April 30, 2008, among Kookmin Bank, KB Asset Management Co., Ltd., ING Bank B.V. and ING Insurance International B.V. | ||
| 4 | .3 | Assignment and Assumption Agreement, dated as of September 29, 2008, among Kookmin Bank, KB Financial Group and ING Bank N.V. | ||
| 8 | .1*** | List of subsidiaries of KB Financial Group. | ||
| 11 | .1 | Code of Ethics | ||
| 12 | .1 | Section 302 certifications. | ||
| 13 | .1 | Section 906 certifications. | ||
| 15 | .1 | Letter of Deloitte Anjin LLC dated June 23, 2010 | ||
| * | Incorporated by reference to the registrant’s filing on Form 20-F (No. 000-53445), filed on June 15, 2009. | |
| ** | Incorporated by reference to the registrant’s filing on Form F-6 (No. 333-153711), filed on September 29, 2008. | |
| *** | Incorporated by reference to Note 34 of the consolidated financial statements of the registrant included in this annual report. |
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Table of Contents
SIGNATURES
The registrant hereby certifies that it meets all of the
requirements for filing on
Form 20-F
and that it has duly caused and authorized the undersigned to
sign this annual report on its behalf.
KB FINANCIAL GROUP INC.
(Registrant)
/s/ Chung
Won Kang
(Signature)
Chung Won Kang
Vice Chairman and Chief Executive Officer
(Name and Title)
Date: June 23, 2010
216
Table of Contents
REPORT OF
INDEPENDENT REGISTERED ACCOUNTING FIRM
To the Board of Directors and Stockholders of
KB Financial Group Inc.:
In our opinion, the accompanying consolidated balance sheet and
the related consolidated statements of income, of changes in
total equity and of cash flows present fairly, in all material
respects, the financial position of KB Financial Group Inc. and
subsidiaries (the “Company”) as of December 31,
2009, and the results of their operations and their cash flows
for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.
Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2009, based on criteria established in
Internal Control - Integrated Framework
issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The Company’s management is responsible for these
financial statements, for maintaining effective internal control
over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting,
included in the accompanying “Management’s Annual
Report on Internal Control over Financial Reporting.” Our
responsibility is to express opinions on these financial
statements and on the Company’s internal control over
financial reporting based on our audit. We conducted our audit
in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement and whether effective internal control
over financial reporting was maintained in all material
respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinions.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
Company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of
management and directors of the Company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
Company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
We also have audited the adjustments to the 2008 and 2007
financial statements to retrospectively apply the adoption of
ASC 810-10-45-15, Noncontrolling Interest in Consolidated
Financial Statements, as described in Note 1. In our
opinion, such adjustments are appropriate and have been properly
applied. We were not engaged to audit, review, or apply any
procedures to the 2008 and 2007 financial statements of the
Company other than with respect to the adjustments and,
accordingly, we do not express an opinion or any other form of
assurance on the 2008 and 2007 financial statements taken as a
whole.
/s/ Samil
PricewaterhouseCoopers
Seoul, Korea
June 22, 2010
F-1
Table of Contents
To the Board of Directors and Stockholders of
KB Financial Group Inc.:
We have audited, before the effects of the adjustments to
retrospectively apply the adoption of SFAS 160, Noncontrolling
Interests in Consolidated Financial Statements
(ASC 810-10-45-15)
discussed in Note 1 to the consolidated financial
statements, the accompanying consolidated balance sheet of KB
Financial Group Inc. and its subsidiaries (collectively referred
to as the “Company”) as of December 31, 2008, and
the related consolidated statements of income and comprehensive
income, changes in total equity and cash flows for the years
ended December 31, 2007 and 2008, all expressed in Korean
Won, (the 2007 and 2008 consolidated financial statements before
the effects of the adjustments discussed in Note 1 to the
consolidated financial statements are not presented herein).
These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such 2007 and 2008 consolidated financial
statements, before the effects of the adjustments to
retrospectively apply the adoption of SFAS 160,
Noncontrolling Interests in Consolidated Financial Statements
(ASC 810-10-45-15)
discussed in Note 1 to the consolidated financial
statements, present fairly, in all material respects, the
financial position of KB Financial Group Inc. and its
subsidiaries as of December 31, 2008, and the results of
their operations, changes in total equity and their cash flows
for the years ended December 31, 2007 and 2008, in
conformity with accounting principles generally accepted in the
United States of America.
We were not engaged to audit, review, or apply any procedures to
the adjustments to retrospectively apply the adoption of
SFAS 160, Noncontrolling Interests in Consolidated
Financial Statements (ASC
810-10-45-15)
discussed in Note 1 to the consolidated financial
statements and, accordingly, we do not express an opinion or any
other form of assurance about whether such retrospective
adjustments are appropriate and have been properly applied.
Those retrospective adjustments were audited by other auditors.
/s/ DELOITTE
ANJIN LLC
Seoul, Korea
May 22, 2009
F-2
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
AS OF
DECEMBER 31, 2008 and 2009
| 2008 | 2009 | 2009 | ||||||||||
|
(In millions of
|
Translation into
|
|||||||||||
| Korean won) |
U.S. dollars
|
|||||||||||
|
(Note 1)
|
||||||||||||
| (In thousands) | ||||||||||||
|
ASSETS
|
||||||||||||
|
Cash and cash equivalents
|
3,073,410 | 2,695,569 | 2,316,478 | |||||||||
|
Restricted cash
|
4,793,948 | 6,050,241 | 5,199,365 | |||||||||
|
Interest-bearing deposits in other banks
|
234,534 | 466,890 | 401,229 | |||||||||
|
Call loans and securities purchased under resale agreements
|
1,407,474 | 2,036,142 | 1,749,789 | |||||||||
|
Trading assets
|
13,095,157 | 7,721,555 | 6,635,634 | |||||||||
|
Investments
|
29,209,460 | 33,245,391 | 28,569,923 | |||||||||
|
Loans (net of allowance for loan losses of
|
197,066,505 | 193,454,326 | 166,247,863 | |||||||||
|
Due from customers on acceptances
|
2,062,618 | 1,895,444 | 1,628,878 | |||||||||
|
Premises and equipment, net
|
1,774,900 | 1,617,151 | 1,389,723 | |||||||||
|
Accrued interest and dividends receivable
|
1,123,833 | 1,029,257 | 884,508 | |||||||||
|
Security deposits
|
1,427,624 | 1,405,638 | 1,207,956 | |||||||||
|
Goodwill
|
578,452 | 579,450 | 497,959 | |||||||||
|
Other intangible assets, net
|
208,486 | 190,715 | 163,893 | |||||||||
|
Other assets
|
2,270,510 | 1,467,663 | 1,261,258 | |||||||||
|
Total assets
|
258,326,911 | 253,855,432 | 218,154,456 | |||||||||
| LIABILITIES | ||||||||||||
|
Deposits:
|
||||||||||||
|
Interest bearing
|
155,263,206 | 166,078,921 | 142,722,400 | |||||||||
|
Non-interest bearing
|
3,438,269 | 3,104,147 | 2,667,595 | |||||||||
|
Call money
|
3,443,811 | 1,364,516 | 1,172,617 | |||||||||
|
Trading liabilities
|
8,191,081 | 4,246,104 | 3,648,953 | |||||||||
|
Acceptances outstanding
|
2,062,618 | 1,895,444 | 1,628,878 | |||||||||
|
Other borrowed funds
|
10,526,916 | 8,176,286 | 7,026,414 | |||||||||
|
Accrued interest payable
|
4,961,602 | 3,819,342 | 3,282,209 | |||||||||
|
Secured borrowings
|
5,879,653 | 4,669,728 | 4,013,000 | |||||||||
|
Long-term debt
|
45,147,962 | 39,569,909 | 34,004,992 | |||||||||
|
Other liabilities
|
3,817,005 | 3,354,760 | 2,882,963 | |||||||||
|
Total liabilities
|
242,732,123 | 236,279,157 | 203,050,021 | |||||||||
|
Commitments and contingencies (Note 31)
|
||||||||||||
| TOTAL EQUITY | ||||||||||||
|
Common stock (
|
1,781,758 | 1,931,758 | 1,660,085 | |||||||||
|
Additional paid-in capital
|
6,253,322 | 7,200,553 | 6,187,902 | |||||||||
|
Retained earnings
|
10,032,771 | 10,778,124 | 9,262,343 | |||||||||
|
Accumulated other comprehensive income net of tax
|
389,909 | 244,651 | 210,244 | |||||||||
|
Less: Treasury stock, at cost, 47,430,271 shares at 2008
and 43,322,704 shares at 2009
|
(2,863,053 | ) | (2,615,518 | ) | (2,247,684 | ) | ||||||
|
Total stockholders’ equity
|
15,594,707 | 17,539,568 | 15,072,890 | |||||||||
|
Noncontrolling interests
|
81 | 36,707 | 31,545 | |||||||||
|
Total equity
|
15,594,788 | 17,576,275 | 15,104,435 | |||||||||
|
Total liabilities and equity
|
258,326,911 | 253,855,432 | 218,154,456 | |||||||||
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
FOR THE
YEARS ENDED DECEMBER 31, 2007, 2008 and 2009
| 2007 | 2008 | 2009 | 2009 | |||||||||||||
|
(In millions of Korean won,
|
Translation into
|
|||||||||||||||
| except per share amounts) |
U.S. dollars
|
|||||||||||||||
|
(Note 1)
|
||||||||||||||||
|
(In thousands,
|
||||||||||||||||
|
except per share
|
||||||||||||||||
| amounts) | ||||||||||||||||
|
Interest and dividend income
|
||||||||||||||||
|
Deposits in other banks
|
18,649 | 106,265 | 24,240 | 20,831 | ||||||||||||
|
Loans, including fees
|
11,295,343 | 13,864,324 | 11,840,037 | 10,174,912 | ||||||||||||
|
Trading assets
|
247,376 | 281,970 | 190,925 | 164,075 | ||||||||||||
|
Investment securities
|
1,170,840 | 1,487,980 | 1,489,235 | 1,279,796 | ||||||||||||
|
Call loans and securities purchased under resale agreements
|
60,133 | 87,903 | 45,683 | 39,258 | ||||||||||||
|
Total interest and dividend income
|
12,792,341 | 15,828,442 | 13,590,120 | 11,678,872 | ||||||||||||
|
Interest expense
|
||||||||||||||||
|
Deposits
|
4,131,815 | 6,313,614 | 5,450,318 | 4,683,812 | ||||||||||||
|
Call money
|
101,327 | 121,099 | 67,251 | 57,793 | ||||||||||||
|
Other borrowed funds
|
478,446 | 417,315 | 281,841 | 242,205 | ||||||||||||
|
Secured borrowings
|
378,569 | 342,025 | 240,446 | 206,630 | ||||||||||||
|
Long-term debt
|
1,597,291 | 2,165,600 | 2,191,573 | 1,883,361 | ||||||||||||
|
Total interest expense
|
6,687,448 | 9,359,653 | 8,231,429 | 7,073,801 | ||||||||||||
|
Net interest income
|
6,104,893 | 6,468,789 | 5,358,691 | 4,605,071 | ||||||||||||
|
Provision for credit losses
|
18,374 | 2,313,454 | 2,203,993 | 1,894,035 | ||||||||||||
|
Net interest income after provision for credit losses
|
6,086,519 | 4,155,335 | 3,154,698 | 2,711,036 | ||||||||||||
|
Non-interest income
|
||||||||||||||||
|
Trust fees, net
|
159,175 | 165,459 | 188,980 | 162,403 | ||||||||||||
|
Other fees and commission income
|
2,424,072 | 2,380,691 | 2,349,892 | 2,019,415 | ||||||||||||
|
Net trading revenue
|
40,732 | 104,141 | 164,612 | 141,461 | ||||||||||||
|
Net gain on investments
|
1,017,314 | 90,391 | 267,922 | 230,243 | ||||||||||||
|
Other non-interest income
|
371,564 | 211,597 | 542,040 | 465,810 | ||||||||||||
|
Total non-interest income
|
4,012,857 | 2,952,279 | 3,513,446 | 3,019,332 | ||||||||||||
F-4
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME —
(Continued)
FOR THE
YEARS ENDED DECEMBER 31, 2007, 2008 and 2009
| 2007 | 2008 | 2009 | 2009 | |||||||||||||
|
(In millions of Korean won,
|
Translation into
|
|||||||||||||||
| except per share amounts) |
U.S. dollars
|
|||||||||||||||
|
(Note 1)
|
||||||||||||||||
|
(In thousands,
|
||||||||||||||||
|
except per share
|
||||||||||||||||
| amounts) | ||||||||||||||||
|
Non-interest expenses
|
||||||||||||||||
|
Salaries and employee benefits
|
2,279,827 | 2,334,983 | 2,217,554 | 1,905,689 | ||||||||||||
|
Depreciation and amortization
|
418,882 | 407,187 | 431,007 | 370,392 | ||||||||||||
|
Other administrative expenses
|
835,720 | 875,278 | 857,087 | 736,550 | ||||||||||||
|
Credit card fees
|
338,217 | 373,780 | 417,282 | 358,597 | ||||||||||||
|
Other fees and commissions
|
728,549 | 826,435 | 870,423 | 748,011 | ||||||||||||
|
Other non-interest expenses
|
532,379 | 503,166 | 948,738 | 815,312 | ||||||||||||
|
Total non-interest expenses
|
5,133,574 | 5,320,829 | 5,742,091 | 4,934,551 | ||||||||||||
|
Income before income tax expense
|
4,965,802 | 1,786,785 | 926,053 | 795,817 | ||||||||||||
|
Income tax expense
|
1,206,433 | 453,847 | 207,484 | 178,305 | ||||||||||||
|
Net income
|
3,759,369 | 1,332,938 | 718,569 | 617,512 | ||||||||||||
|
Net income(loss) attributable to noncontrolling interests,
net of tax
|
4,262 | 6,974 | (2,072 | ) | (1,781 | ) | ||||||||||
|
Net income(loss) attributable to stockholders
|
3,755,107 | 1,325,964 | 720,641 | 619,293 | ||||||||||||
|
Other comprehensive income (loss), net of tax
|
||||||||||||||||
|
Foreign currency translation adjustments
|
1,509 | 91,626 | (117,655 | ) | (101,108 | ) | ||||||||||
|
Net unrealized gains (losses) on investment securities
|
(558,978 | ) | 431,269 | (3,889 | ) | (3,342 | ) | |||||||||
|
Total other comprehensive income (loss), net of tax
|
(557,469 | ) | 522,895 | (121,544 | ) | (104,450 | ) | |||||||||
|
Comprehensive income
|
3,201,900 | 1,855,833 | 597,025 | 513,062 | ||||||||||||
|
Comprehensive income(loss) attributable to noncontrolling
interests
|
4,266 | 6,974 | (3,070 | ) | (2,638 | ) | ||||||||||
|
Comprehensive income attributable to stockholders
|
3,197,634 | 1,848,859 | 600,095 | 515,700 | ||||||||||||
|
Net income per common share
|
||||||||||||||||
|
Basic:
|
||||||||||||||||
|
Net income attributable to stockholders’ equity
|
10,898 | 4,012 | 2,215 | 1.903 | ||||||||||||
|
Diluted:
|
||||||||||||||||
|
Net income attributable to stockholders’ equity
|
10,898 | 4,012 | 2,215 | 1.903 | ||||||||||||
|
Weighted average basic common shares outstanding (In thousands)
|
344,570 | 330,498 | 325,397 | 325,397 | ||||||||||||
|
Weighted average diluted common shares outstanding (In thousands)
|
344,570 | 330,498 | 325,397 | 325,397 | ||||||||||||
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
FOR THE
YEARS ENDED DECEMBER 31, 2007, 2008 and 2009
|
Accumulated
|
||||||||||||||||||||||||||||||||
|
Other
|
||||||||||||||||||||||||||||||||
|
Additional
|
Comprehensive
|
Non-
|
||||||||||||||||||||||||||||||
| Common Stock |
Paid-in
|
Retained
|
Income (Loss),
|
Treasury
|
Controlling
|
Total
|
||||||||||||||||||||||||||
| Shares | Amount | Capital | Earnings | Net of Tax | Stock | Interest | Equity | |||||||||||||||||||||||||
| (In millions of Korean won, except share data) | ||||||||||||||||||||||||||||||||
|
Balance at January 1, 2007
|
336,327,773 | 1,681,896 | 5,403,650 | 7,266,004 | 424,487 | (3,861 | ) | 17,512 | 14,789,688 | |||||||||||||||||||||||
|
Cumulative adjustment for accounting change
|
— | — | — | 220,348 | — | — | — | 220,348 | ||||||||||||||||||||||||
|
Adjusted balance at January 1, 2007
|
336,327,773 | 1,681,896 | 5,403,650 | 7,486,352 | 424,487 | (3,861 | ) | 17,512 | 15,010,036 | |||||||||||||||||||||||
|
Purchase of treasury stock
|
(77,084 | ) | — | — | — | — | (6,247 | ) | — | (6,247 | ) | |||||||||||||||||||||
|
Reissuance of treasury stock
|
||||||||||||||||||||||||||||||||
|
Sale to market
|
102,345 | — | 60 | — | — | 8,152 | — | 8,212 | ||||||||||||||||||||||||
|
Stock-based compensation
|
— | — | 1,051 | — | — | — | — | 1,051 | ||||||||||||||||||||||||
|
Cash dividends declared (
|
— | — | — | (1,227,597 | ) | — | — | — | (1,227,597 | ) | ||||||||||||||||||||||
|
Other comprehensive income (loss), net of tax
|
||||||||||||||||||||||||||||||||
|
a. Foreign currency translation
|
— | — | — | — | 1,509 | — | — | 1,509 | ||||||||||||||||||||||||
|
b. Unrealized holding gains (losses) on investment securities
|
— | — | — | — | (558,982 | ) | — | 4 | (558,978 | ) | ||||||||||||||||||||||
|
Noncontrolling interest
|
— | — | — | — | — | — | (1,365 | ) | (1,365 | ) | ||||||||||||||||||||||
|
Net income
|
— | — | — | 3,755,107 | — | — | 4,262 | 3,759,369 | ||||||||||||||||||||||||
|
Balance at December 31, 2007
|
336,353,034 | 1,681,896 | 5,404,761 | 10,013,862 | (132,986 | ) | (1,956 | ) | 20,413 | 16,985,990 | ||||||||||||||||||||||
|
Issuance of common shares
|
19,972,577 | 99,862 | 856,529 | — | — | — | — | 956,391 | ||||||||||||||||||||||||
|
Purchase of treasury stock
|
(73,636,201 | ) | — | — | — | — | (4,445,041 | ) | — | (4,445,041 | ) | |||||||||||||||||||||
|
Reissuance of treasury stock
|
||||||||||||||||||||||||||||||||
|
Sale to market
|
26,232,012 | — | (28,245 | ) | (482,990 | ) | — | 1,583,944 | 1,072,709 | |||||||||||||||||||||||
|
Stock-based compensation
|
— | — | 20,277 | — | — | — | — | 20,277 | ||||||||||||||||||||||||
|
Cash dividends declared (
|
— | — | — | (824,065 | ) | — | — | — | (824,065 | ) | ||||||||||||||||||||||
|
Other comprehensive income , net of tax
|
||||||||||||||||||||||||||||||||
|
a. Foreign currency translation
|
— | — | — | — | 91,626 | — | — | 91,626 | ||||||||||||||||||||||||
|
b. Unrealized holding gains on investment securities
|
— | — | — | — | 431,269 | — | — | 431,269 | ||||||||||||||||||||||||
|
Noncontrolling interest
|
— | — | — | — | — | — | (27,306 | ) | (27,306 | ) | ||||||||||||||||||||||
|
Net income
|
— | — | — | 1,325,964 | — | — | 6,974 | 1,332,938 | ||||||||||||||||||||||||
|
Balance at December 31, 2008
|
308,921,422 | 1,781,758 | 6,253,322 | 10,032,771 | 389,909 | (2,863,053 | ) | 81 | 15,594,788 | |||||||||||||||||||||||
F-6
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN TOTAL EQUITY — (Continued)
FOR THE
YEARS ENDED DECEMBER 31, 2007, 2008 and 2009
|
Accumulated
|
||||||||||||||||||||||||||||||||
|
Other
|
||||||||||||||||||||||||||||||||
|
Additional
|
Comprehensive
|
Non-
|
||||||||||||||||||||||||||||||
| Common Stock |
Paid-in
|
Retained
|
Income (Loss),
|
Treasury
|
Controlling
|
Total
|
||||||||||||||||||||||||||
| Shares | Amount | Capital | Earnings | Net of Tax | Stock | Interest | Equity | |||||||||||||||||||||||||
| (In millions of Korean won, except share data) | ||||||||||||||||||||||||||||||||
|
Balance at January 1, 2009
|
308,921,422 | 1,781,758 | 6,253,322 | 10,032,771 | 389,909 | (2,863,053 | ) | 81 | 15,594,788 | |||||||||||||||||||||||
|
Cumulative adjustment for accounting change
|
— | — | — | 24,712 | (24,712 | ) | — | — | — | |||||||||||||||||||||||
|
Adjusted balance at January 1, 2009
|
308,921,422 | 1,781,758 | 6,253,322 | 10,057,483 | 365,197 | (2,863,053 | ) | 81 | 15,594,788 | |||||||||||||||||||||||
|
Issuance of common shares
|
30,000,000 | 150,000 | 953,883 | — | — | — | — | 1,103,883 | ||||||||||||||||||||||||
|
Purchase of treasury stock
|
(43,412 | ) | — | — | — | — | (2,294 | ) | — | (2,294 | ) | |||||||||||||||||||||
|
Reissuance of treasury stock
|
||||||||||||||||||||||||||||||||
|
Sale to market
|
4,150,979 | 8,133 | — | 249,829 | — | 257,962 | ||||||||||||||||||||||||||
|
Stock-based compensation
|
— | (14,785 | ) | — | — | — | — | (14,785 | ) | |||||||||||||||||||||||
|
Other comprehensive income (loss), net of tax
|
||||||||||||||||||||||||||||||||
|
a. Foreign currency translation
|
— | — | — | — | (116,657 | ) | — | (998 | ) | (117,655 | ) | |||||||||||||||||||||
|
b. Unrealized holding losses on investment securities
|
— | — | — | — | (3,889 | ) | — | — | (3,889 | ) | ||||||||||||||||||||||
|
Noncontrolling interest
|
39,696 | 39,696 | ||||||||||||||||||||||||||||||
|
Net income
|
— | — | — | 720,641 | — | — | (2,072 | ) | 718,569 | |||||||||||||||||||||||
|
Balance at December 31, 2009
|
343,028,989 | 1,931,758 | 7,200,553 | 10,778,124 | 244,651 | (2,615,518 | ) | 36,707 | 17,576,275 | |||||||||||||||||||||||
| Translation into U.S. dollars (Note 1) (In thousands, except share data) | ||||||||||||||||||||||||||||||||
|
Balance at January 1, 2009
|
308,921,422 | 1,531,179 | 5,373,886 | 8,621,813 | 335,074 | (2,460,407 | ) | 70 | 13,401,615 | |||||||||||||||||||||||
|
Cumulative adjustment for accounting change
|
— | — | — | 21,237 | (21,237 | ) | — | — | — | |||||||||||||||||||||||
|
Adjusted balance at January 1, 2009
|
308,921,422 | 1,531,179 | 5,373,886 | 8,643,050 | 313,837 | (2,460,407 | ) | 70 | 13,401,615 | |||||||||||||||||||||||
|
Issuance of common shares
|
30,000,000 | 128,906 | 819,734 | — | — | — | — | 948,640 | ||||||||||||||||||||||||
|
Purchase of treasury stock
|
(43,412 | ) | — | — | — | — | (1,971 | ) | — | (1,971 | ) | |||||||||||||||||||||
|
Reissuance of treasury stock
|
||||||||||||||||||||||||||||||||
|
Sale to market
|
4,150,979 | — | 6,989 | — | 214,694 | — | 221,683 | |||||||||||||||||||||||||
|
Stock-based compensation
|
— | — | (12,707 | ) | — | — | — | — | (12,707 | ) | ||||||||||||||||||||||
|
Other comprehensive income (loss), net of tax
|
||||||||||||||||||||||||||||||||
|
a. Foreign currency translation
|
— | — | — | — | (100,251 | ) | — | (857 | ) | (101,108 | ) | |||||||||||||||||||||
|
b. Unrealized holding losses on investment securities
|
— | — | — | — | (3,342 | ) | — | — | (3,342 | ) | ||||||||||||||||||||||
|
Noncontrolling interest
|
— | — | — | — | — | — | 34,113 | 34,113 | ||||||||||||||||||||||||
|
Net income
|
— | — | — | 619,293 | — | — | (1,781 | ) | 617,512 | |||||||||||||||||||||||
|
Balance at December 31, 2009
|
343,028,989 | 1,660,085 | 6,187,902 | 9,262,343 | 210,244 | (2,247,684 | ) | 31,545 | 15,104,435 | |||||||||||||||||||||||
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
FOR THE
YEARS ENDED DECEMBER 31, 2007, 2008 and 2009
| 2007 | 2008 | 2009 | 2009 | |||||||||||||
| (In millions of Korean won) |
Translation into
|
|||||||||||||||
|
U.S. dollars
|
||||||||||||||||
|
(Note 1)
|
||||||||||||||||
| (In thousands) | ||||||||||||||||
|
Cash flows from operating activities:
|
||||||||||||||||
|
Net income
|
3,759,369 | 1,332,938 | 718,569 | 617,512 | ||||||||||||
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
||||||||||||||||
|
Provision for credit losses
|
18,374 | 2,313,454 | 2,203,993 | 1,894,035 | ||||||||||||
|
Depreciation and amortization
|
418,882 | 407,187 | 431,007 | 370,392 | ||||||||||||
|
Accretion of discounts on finance debentures
|
272,511 | 155,458 | 139,967 | 120,282 | ||||||||||||
|
Net loss (gain) on valuation of trading securities
|
47,890 | (74,578 | ) | 37,405 | 32,144 | |||||||||||
|
Net loss (gain) on valuation of derivatives
|
205,628 | (652,909 | ) | (707,639 | ) | (608,120 | ) | |||||||||
|
Net loss (gain) on transaction of derivatives
|
(71,265 | ) | 473,307 | 624,822 | 536,950 | |||||||||||
|
Net gain on sales of
available-for-sale
securities
|
(726,845 | ) | (16,306 | ) | (165,251 | ) | (142,011 | ) | ||||||||
|
Impairment losses on
available-for-sale
securities
|
50,467 | 224,925 | 6,667 | 5,730 | ||||||||||||
|
Net gain on redemption of
available-for-sale
securities
|
(5,017 | ) | (43,254 | ) | (12,049 | ) | (10,354 | ) | ||||||||
|
Impairment losses on
held-to-maturities
securities
|
8,067 | 17,218 | 8,208 | 7,054 | ||||||||||||
|
Net gain on redemption of
held-to-maturities
securities
|
(6 | ) | — | — | — | |||||||||||
|
Income of equity method investments
|
(68,183 | ) | 8,673 | (10,181 | ) | (8,749 | ) | |||||||||
|
Loss (gain) on sales of equity method investments
|
(143,893 | ) | (343,660 | ) | 13,885 | 11,932 | ||||||||||
|
Loss on impairment of other securities
|
7,367 | 205,681 | 247 | 212 | ||||||||||||
|
Net gain on other securities
|
(139,271 | ) | (143,669 | ) | (109,448 | ) | (94,056 | ) | ||||||||
|
Net loss on fair value hedge accounting
|
224 | 27,032 | 17,168 | 14,754 | ||||||||||||
|
Net loss (gain) on sales of loans
|
455 | 3,293 | (48,969 | ) | (42,082 | ) | ||||||||||
|
Net gain on disposal of premises and equipment
|
(13,067 | ) | (3,538 | ) | (3,297 | ) | (2,833 | ) | ||||||||
|
Impairment loss on other assets
|
1,171 | 2,272 | 2,655 | 2,282 | ||||||||||||
|
Non-cash stock compensation expense
|
7,513 | (20,139 | ) | 23,039 | 19,799 | |||||||||||
|
Net change in:
|
||||||||||||||||
|
Trading assets
|
(3,032,170 | ) | (6,279,966 | ) | 5,418,467 | 4,656,441 | ||||||||||
|
Accrued interest and dividend receivable
|
(96,737 | ) | (223,467 | ) | 94,416 | 81,138 | ||||||||||
|
Deferred income tax assets
|
48,376 | — | (12,390 | ) | (10,648 | ) | ||||||||||
|
Income tax receivable
|
(471,317 | ) | (42,805 | ) | 179,358 | 154,134 | ||||||||||
|
Other assets
|
(285,181 | ) | (761,952 | ) | 768,519 | 660,439 | ||||||||||
|
Trading liabilities
|
588,721 | 6,506,002 | (3,944,966 | ) | (3,390,165 | ) | ||||||||||
|
Accrued interest payable
|
497,018 | 765,565 | (1,142,141 | ) | (981,516 | ) | ||||||||||
|
Deferred income tax liabilities
|
108,464 | (40,504 | ) | 25,153 | 21,615 | |||||||||||
|
Other liabilities
|
817,536 | (372,488 | ) | (677,230 | ) | (581,989 | ) | |||||||||
|
Net cash provided by operating activities
|
1,805,081 | 3,423,770 | 3,879,984 | 3,334,322 | ||||||||||||
F-8
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS — (Continued)
FOR THE
YEARS ENDED DECEMBER 31, 2007, 2008 and 2009
| 2007 | 2008 | 2009 | 2009 | |||||||||||||
| (In millions of Korean won) |
Translation into
|
|||||||||||||||
|
U.S. dollars
|
||||||||||||||||
|
(Note 1)
|
||||||||||||||||
| (In thousands) | ||||||||||||||||
|
Cash flows from investing activities:
|
||||||||||||||||
|
Net change in restricted cash
|
(719,352 | ) | (797,452 | ) | (1,256,294 | ) | (1,079,615 | ) | ||||||||
|
Net change in interest-bearing deposits in other banks
|
356,124 | (126,922 | ) | (230,643 | ) | (198,206 | ) | |||||||||
|
Net change in call loans and securities purchased under resale
agreements
|
110,869 | 211,951 | (625,426 | ) | (537,469 | ) | ||||||||||
|
Proceeds from sales of
available-for-sale
securities
|
10,571,122 | 8,510,135 | 3,627,220 | 3,117,106 | ||||||||||||
|
Proceeds from maturities of
available-for-sale
securities
|
4,026,451 | 13,206,773 | 29,437,945 | 25,297,937 | ||||||||||||
|
Purchases of
available-for-sale
securities
|
(13,672,668 | ) | (22,295,970 | ) | (36,743,215 | ) | (31,575,830 | ) | ||||||||
|
Proceeds from maturities, prepayments and calls of
held-to-maturity
securities
|
3,205,441 | 1,735,488 | 1,158,695 | 995,742 | ||||||||||||
|
Purchases of
held-to-maturity
securities
|
(3,332,823 | ) | (3,322,132 | ) | (1,181,732 | ) | (1,015,539 | ) | ||||||||
|
Net change in venture capital securities
|
(7,811 | ) | 9,949 | 5,172 | 4,445 | |||||||||||
|
Proceeds from sales of equity method investment
|
209,387 | 699,932 | 3,354 | 2,882 | ||||||||||||
|
Purchases of equity method investment
|
(128,088 | ) | (812,616 | ) | (20,672 | ) | (17,765 | ) | ||||||||
|
Net change in other securities
|
42,595 | (415,690 | ) | (137,305 | ) | (117,995 | ) | |||||||||
|
Acquisition of subsidiaries, net of cash acquired
|
— | (267,543 | ) | 5,501 | 4,727 | |||||||||||
|
Net originations and repayments of loans
|
(21,891,140 | ) | (28,957,933 | ) | (1,229,354 | ) | (1,056,464 | ) | ||||||||
|
Proceeds from sales of loans
|
282,690 | 529,769 | 2,652,508 | 2,279,472 | ||||||||||||
|
Proceeds from sales of premises and equipment
|
113,954 | 13,956 | 17,584 | 15,111 | ||||||||||||
|
Payments for purchases of premises and equipment
|
(492,379 | ) | (454,877 | ) | (187,103 | ) | (160,790 | ) | ||||||||
|
Net change in security deposits
|
(144,981 | ) | (91,356 | ) | (60,433 | ) | (51,934 | ) | ||||||||
|
Net cash used in investing activities
|
(21,470,609 | ) | (32,624,538 | ) | (4,764,198 | ) | (4,094,185 | ) | ||||||||
F-9
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS — (Continued)
FOR THE
YEARS ENDED DECEMBER 31, 2007, 2008 and 2009
| 2007 | 2008 | 2009 | 2009 | |||||||||||||
| (In millions of Korean won) |
Translation into
|
|||||||||||||||
|
U.S. dollars
|
||||||||||||||||
|
(Note 1)
|
||||||||||||||||
| (In thousands) | ||||||||||||||||
|
Cash flows from financing activities:
|
||||||||||||||||
|
Net decrease in non-interest bearing deposits
|
(667,229 | ) | (239,913 | ) | (334,414 | ) | (287,384 | ) | ||||||||
|
Net increase in interest-bearing deposits
|
9,555,948 | 20,494,149 | 10,802,342 | 9,283,154 | ||||||||||||
|
Net increase (decrease) in call money
|
625,945 | 2,581,415 | (2,084,586 | ) | (1,791,420 | ) | ||||||||||
|
Net decrease in secured borrowings
|
(1,147,732 | ) | (435,263 | ) | (1,209,926 | ) | (1,039,768 | ) | ||||||||
|
Net increase (decrease) in other borrowed funds
|
(3,123,966 | ) | 2,533,164 | (2,347,833 | ) | (2,017,645 | ) | |||||||||
|
Proceeds from issuance of long-term debt
|
16,176,552 | 15,981,200 | 9,852,296 | 8,466,718 | ||||||||||||
|
Repayment of long-term debt
|
(1,523,302 | ) | (7,255,854 | ) | (14,393,996 | ) | (12,369,695 | ) | ||||||||
|
Cash dividends paid to noncontrolling interests by subsidiaries
|
(1,534 | ) | (1,535 | ) | — | — | ||||||||||
|
Payment for stock option exercise
|
(5,308 | ) | (894 | ) | (1,363 | ) | (1,172 | ) | ||||||||
|
Proceeds from reissuance of treasury stock
|
8,212 | 1,595 | 257,962 | 221,683 | ||||||||||||
|
Purchases of treasury stock
|
(6,247 | ) | (3,411,293 | ) | (2,294 | ) | (1,971 | ) | ||||||||
|
Cash dividends paid on common stocks
|
(1,227,784 | ) | (824,065 | ) | — | — | ||||||||||
|
Increase in noncontrolling interests
|
— | 1,013 | 31,158 | 26,776 | ||||||||||||
|
Net cash provided by financing activities
|
18,663,555 | 29,423,719 | 569,346 | 489,276 | ||||||||||||
|
Effect of exchange rate changes on cash
|
(2,082 | ) | 79,996 | (62,973 | ) | (54,116 | ) | |||||||||
|
Net increase (decrease) in cash and cash equivalents
|
(1,004,055 | ) | 302,947 | (377,841 | ) | (324,703 | ) | |||||||||
|
Cash and cash equivalents, beginning of year
|
3,774,518 | 2,770,463 | 3,073,410 | 2,641,181 | ||||||||||||
|
Cash and cash equivalents, end of year
|
2,770,463 | 3,073,410 | 2,695,569 | 2,316,478 | ||||||||||||
|
Supplemental disclosure of cash flow information:
|
||||||||||||||||
|
Cash paid during the year for interest
|
6,190,345 | 8,593,635 | 9,373,680 | 8,055,412 | ||||||||||||
|
Cash paid during the year for income tax
|
1,277,979 | 1,114,677 | (130,031 | ) | (111,744 | ) | ||||||||||
|
Supplemental schedule of noncash investing and financing
activities:
|
||||||||||||||||
|
Bonds and securities received in connection with loan
restructuring
|
1,687 | 40 | 9,037 | 7,766 | ||||||||||||
|
Increase (decrease) in cumulative translation adjustments, net
of tax
|
1,509 | 91,626 | (117,655 | ) | (101,108 | ) | ||||||||||
|
Increase (decrease) in unrealized gains on investment
securities, net of tax
|
(558,978 | ) | 431,269 | (3,889 | ) | (3,342 | ) | |||||||||
|
Issuance of common stock-reorganization:
|
||||||||||||||||
|
Acquisition of treasury stock
|
— | 856,555 | — | — | ||||||||||||
|
Acquisition of noncontrolling interests
|
— | 33,459 | — | — | ||||||||||||
|
Goodwill-noncontrolling interests
|
— | 68,935 | — | — | ||||||||||||
The accompanying notes are an integral part of these
consolidated financial statements.
F-10
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
| 1. | General Information and Summary of Significant Accounting Policies |
KB Financial Group Inc. is a financial holding company whose
businesses provide a broad range of financial services to
consumer and corporate customers primarily in the Republic of
Korea. KB Financial Group Inc. was incorporated on
September 29, 2008 under the Financial Holding Company Act
in Korea.
KB Financial Group Inc. and its subsidiaries (collectively
referred to as the “Company”) derive substantially all
of their revenue and income from providing a broad range of
banking and related financial services to consumers and
corporations primarily in Korea and in selected international
markets. The Company’s principal business includes
ownership and management of subsidiaries and affiliate companies
that are engaged in financial services or activities.
As of December 31, 2009, the Company’s paid-in capital
amounted to
W
1,931,758 million. Out of
386,351,693 shares issued at December 31, 2009,
40,353,823 of shares (10.44% of total shares issued) were listed
on the New York Stock Exchange as American Depository Shares
(“ADS”).
Use of
estimates
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America (“U.S. GAAP”) requires
management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses,
and disclosure of contingent assets and liabilities as of the
date of the consolidated financial statements and the reported
amounts of income and expenses during the reporting period.
Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant
change in the near term primarily relate to the allowance for
credit losses on loans and off-balance sheet credit instruments,
fair value and impairment of investment securities, derivative
financial instruments, deferred tax assets and related valuation
allowances, financial instruments with no available market
prices, goodwill, other intangibles and share based compensation.
Accounting
standards codification
In July 2009, the Financial Accounting Standards Board
(“FASB”) implemented the FASB Accounting Standards
Codification (the “Codification”) as the single source
of authoritative U.S. generally accepted accounting
principles. The Codification simplifies the classification of
accounting standards into one online database under a common
referencing system, organized into eight areas, ranging from
industry-specific to general financial statement matters. Use of
the Codification is effective for interim and annual periods
ending after September 15, 2009. The Company began to use
the Codification on the effective date, and it had no impact on
the Company’s Consolidated Financial Statements. The
Company is providing references to the codification topics
alongside to the predecessor standards.
Basis
of presentation and consolidation
The consolidated financial statements include the accounts of KB
Financial Group Inc. and its subsidiaries which are generally
controlled through a majority voting interest. The Company also
includes in its consolidated financial statements the accounts
of the variable interest entities (“VIEs”) for which
the Company has been determined to be the primary beneficiary
pursuant to FASB Interpretation No. 46 (Revised in 2003)-
“Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51” (ASC
810-10
“Consolidation”).
The Company accounts for investments in companies in which it
owns a voting or economic interest of 20 to 50 percent and
is not the primary beneficiary but has the ability to exercise
significant influence over operating and financing decisions
using the equity method of accounting. These investments are
reported in “Other securities” under
“Investments” and the Company’s proportionate
share of income or loss of the equity method investees and gains
and losses realized on disposition of investments are reported
in “Net gain (loss) on investments.” The Company
evaluates variable interests in entities for which voting
interests are not effective means of identifying
F-11
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
controlling financial interests. Variable interests are those in
which the value of the interest changes with the fair value of
the net assets of the entity exclusive of variable interests.
When the Company first becomes involved with the VIE, the
Company evaluates the existence of a primary beneficiary. If the
results of the evaluation indicate that the Company is the
primary beneficiary, the Company consolidates that entity. The
Company reassesses this evaluation of the VIE and the primary
beneficiary when specified events and circumstances occur. If
the evaluation indicates that the requirements for consolidation
are not met, then the entity would be deconsolidated. The
Company has significant variable interest entities which are not
consolidated because the Company is not the primary beneficiary.
These include Special Purpose Entities (“SPEs”) where
the Company provides administration services and liquidity (See
Note 9).
Assets held in agency, fiduciary or trust management capacities
are not included in the consolidated financial statements.
The consolidated financial statements are presented in
accordance with U.S. GAAP. All material inter-company
transactions and balances have been eliminated in consolidation.
In December 2007, the FASB issued Statement No. 160,
Noncontrolling Interests in Consolidated Financial Statements
(ASC
810-10-45-15),
which establishes standards for the accounting and reporting of
noncontrolling interests in subsidiaries (previously called
minority interests) in consolidated financial statements and for
the loss of control of subsidiaries. Upon adoption,
SFAS No. 160 (ASC
810-10-45-15)
requires that the equity interest of noncontrolling
stockholders, partners, or other equity holders in subsidiaries
be presented as a separate item in the Company’s total
equity, rather than mezzanine item between the liabilities and
total equity. As such, no gain or loss related to these type
changes can be reflected in income. Furthermore, no change in
the carrying amount of subsidiary assets or liabilities can be
recognized. After the initial adoption, when a subsidiary is
deconsolidated, any retained noncontrolling equity investment in
the former subsidiary must be measured at fair value at the date
of deconsolidation. The gain or loss on the deconsolidation of
the subsidiary is measured using the fair value of the remaining
investment, rather than the previous carrying amount of that
retained investment. The presentation and disclosure
requirements shall be applied retrospectively for all periods
presented. The adoption of SFAS 160 resulted in a
reclassification of minority interests to a separate component
of total equity on the balance sheet and net income attributable
to noncontrolling interests is shown as a reduction from net
income in calculating net income available to common
stockholders on the statement of operations. All previous
references to “minority interests” in the consolidated
financial statements have been revised to “noncontrolling
interests.”
Business
combination
Since the adoption of Statement of Financial Accounting
Standards (“SFAS”)
No. 141-
“Business Combinations, (ASC
805-10)”
the Company accounts for business combinations using the
purchase method. Identifiable intangible assets acquired in a
business combination are separately valued and recognized on the
balance sheet if they meet certain requirements. The excess of
the cost of the acquired entity over the net amounts assigned to
assets acquired and liabilities assumed is recognized as an
asset referred to as “Goodwill”. Results of operations
of the acquired business are included in the consolidated
statements of income from the date of acquisition.
In December 2007, the FASB issued Statement
No. 141(revised), Business Combinations
(SFAS No. 141(R)/ASC
805-10),
which is designed to improve the relevance, representational
faithfulness, and comparability of the information that a
reporting entity provides in its financial reports about a
business combination and its effects. The Statement replaces
SFAS No. 141, Business Combinations.
SFAS No. 141(R) (ASC
805-10)
retains the fundamental requirements in SFAS No. 141
that the acquisition method of accounting (which Statement 141
called the purchase method) be used for all business
combinations and for an acquirer to be identified for each
business combination. SFAS No. 141(R) (ASC
805-10)
also
retains the guidance in SFAS No. 141 for identifying
and recognizing intangible assets separately from goodwill. The
most significant changes in SFAS No. 141(R)
(ASC 805-10)
are: (1) acquisition costs and restructuring costs will now
be expensed; (2) stock consideration will be measured based
on the quoted market price as of the acquisition date instead of
the date the
F-12
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
deal is announced; and (3) the acquirer will record a 100%
step-up
to
fair value for all assets and liabilities, including the
noncontrolling interest portion, and goodwill is recorded as if
a 100% interest was acquired. The Company adopted
SFAS No. 141(R) (ASC
805-10)
on
January 1, 2009, and the standard is applied prospectively.
Foreign
currency translation
Monetary assets and liabilities denominated in foreign
currencies are translated into Korean won at the exchange rate
prevailing on the balance sheet date, with resulting gains or
losses included in the consolidated statements of income.
Transactions in foreign currencies are recorded at the exchange
rate prevailing on the date of the transaction and the relating
gains or losses from the settlement of foreign currency
transactions are recognized in the consolidated statements of
income.
Assets, liabilities and operations of foreign branches and
subsidiaries are recorded based on the functional currency of
each entity. For certain foreign operations, the functional
currency is the local currency, in which case the assets,
liabilities and operations are translated, for consolidation
purposes, at current exchange rates from the local currency to
the reporting currency, the Korean won. Assets and liabilities
of foreign branches and subsidiaries are recorded and reported
in the accompanying consolidated balance sheets using the
period-end exchange rates. Income and expense of foreign
branches and subsidiaries are recorded and reported in the
consolidated statement of income using the average rates for the
relevant periods. The resulting unrealized gains or losses are
reported as a component of accumulated other comprehensive
income (loss), net of tax. Gains and losses arising from the
translation of
available-for-sale
securities denominated in foreign currencies are also recorded
as a component of accumulated other comprehensive income (loss),
net of tax.
Cash
and cash equivalents
Cash and cash equivalents are comprised of cash on hand, cash
items in the process of collection, highly liquid securities and
interest-earning deposits with original maturities at the time
of purchase of 90 days or less, other than those used for
trading purposes.
Securities
purchased under agreement to resell and securities sold under
agreement to repurchase
The Company enters into short-term purchases of securities under
agreements to resell (“Resale agreements”) and sales
of securities under agreements to repurchase (“Repurchase
agreements”) substantially identical securities. Resale
agreements and repurchase agreements are accounted for as
secured lending and secured borrowing transactions,
respectively, when control over the related securities has not
been surrendered by the transferor and are recorded at the
amount at which the securities were acquired or sold. When
control over the related securities has been surrendered by the
transferor, the Company accounts for its resale agreements as
purchases of securities with related forward commitments to
resell and accounts for its repurchase agreements as sales of
securities with related forward commitments to repurchase. It is
the Company’s policy to take possession of securities under
agreements to resell. The Company minimizes the credit risk
associated with these transactions by monitoring its aggregate
credit exposure to each counterparty and collateral value, and
requiring the counterparty to deposit additional collateral with
the Company when deemed necessary.
Trading
assets and liabilities, including derivatives
Trading assets include securities that are bought and held
principally for the purpose of selling them in the near term.
Trading liabilities include securities that are sold short, not
yet purchased. Trading positions are carried at fair value and
recorded on a trade date basis. The Company recognizes changes
in the fair value of trading positions as they occur in
“Net trading revenue”.
Trading assets and liabilities also include derivatives used for
trading purposes and for non-trading purposes that do not
qualify for hedge accounting treatment and foreign exchange
contracts that are recognized on the
F-13
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
consolidated financial statements at fair value. Trading and
non-trading derivatives include interest rate and foreign
currency swaps, credit indexed contracts, equity conversion
options, puts and calls, caps and floors, warrants, and futures
and forwards. The Company recognizes changes in the fair value
of trading and non-trading derivatives that do not qualify for
hedge accounting treatment and foreign exchange contracts as
they occur in “Net trading revenue”.
The fair value of trading securities, derivative financial
instruments and foreign exchange contracts is determined using
quoted market prices, including quotes from dealers trading
those securities or instruments, when available. If quoted
market prices are not available, the fair value is determined
based on pricing models, quoted prices of instruments with
similar characteristics or discounted cash flows.
Derivatives
used for hedging purposes
The Company uses various derivative instruments as part of its
asset and liability management process, including interest rate
and foreign currency swaps, to manage various interest rate and
foreign exchange exposure or modify interest rate
characteristics of various balance sheet accounts. Certain
derivative contracts are entered into for non-trading purposes
and are intended to serve as economic hedges of risk but do not
qualify for hedge accounting. Derivatives accounted for as
hedges must be highly effective at reducing the risk associated
with the exposure being hedged. Each derivative must be formally
designated as a hedge, with documentation of the risk management
objective and strategy for the hedge, identification of the
hedging instrument, the hedged item and risk exposure, and how
effectiveness is assessed prospectively and retrospectively at
inception and on a regular basis using quantitative measures of
correlation. The Company discontinues hedge accounting when it
is determined that a derivative is not expected to be or has
ceased to be highly effective as a hedge, and reflects changes
in fair value in earnings after termination of the hedge
relationship.
All derivatives, whether designated for hedging relationships or
not, are recorded on the consolidated balance sheets at fair
value. If the derivative is designated as a fair value hedge of
fixed rate assets or liabilities, all changes in the fair value
of the derivative and changes in the fair value of the hedged
item attributable to the hedged risk are recognized in other
non-interest income(expense). Hedge ineffectiveness is reflected
in the current earnings as well. Fair value hedges are used to
limit the Company’s exposure to total changes in the fair
value of its interest-bearing liabilities that are due to
interest rate or foreign exchange volatility. Fair value hedges
of the Company mainly include hedges of fixed rate debentures.
If the derivative is designated as a cash flow hedge of floating
rate assets, liabilities or forecasted transactions, the
effective portion of the change in the fair value of the
derivative is recorded in other comprehensive income and
recognized in the consolidated income statements when the hedged
item affects earnings. The ineffective portion of cash flow
hedges is immediately recognized in current earnings. Cash flow
hedges are used to minimize the variability in cash flows of
interest-earning assets or interest-bearing liabilities or
forecasted transactions caused by interest rate or foreign
exchange fluctuations.
If hedge relationships are terminated, hedge designations are
removed, or if forecasted transactions are no longer expected to
occur, hedge accounting treatment is not applied prospectively
and the related hedging derivatives would be transferred to
trading assets and liabilities. In such cases, the changes in
the fair value or cash flows of the hedged item that are
attributable to the risk being hedged will not be offset and the
fair value changes in the hedging derivatives are recognized
immediately in current earnings.
The Company’s designated fair value hedges consisted
primarily of interest rate swaps and cross currency rate swaps
designated as fair value hedges. When applying fair value hedge
accounting as prescribed by ASC 815
(SFAS No. 133-
“Accounting for Derivative Instruments and Hedging
Activities” as amended by
SFAS No. 137- “Accounting
for Derivative Instruments and Hedging Activities —
Deferral of the Effective Date of SFAS No. 133”),
and
SFAS No. 138-
“Accounting for Certain Derivative Instruments and Certain
Hedging Activities” (collectively referred to as
“SFAS No. 133”), the Company uses standard
statistical methods of
F-14
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
regression to determine if the results of the changes in value
of the hedging derivative and the hedged item meet ASC 815(
SFAS No. 133) criteria for a highly effective hedge
accounting relationship.
Investments
in equity securities and debt securities
Equity securities with readily determinable fair values are
recorded on a trade-date basis and are accounted for at fair
value. Dividend income on these securities is recorded in
“Interest and dividend income”. Securities purchased
with the intention of recognizing short-term profits are
included in “Trading assets” at fair value. Marketable
equity securities not classified as trading are designated as
available-for-sale
securities and are carried at fair value with unrealized gains
and losses, net of income tax, reflected in accumulated other
comprehensive income (loss). Realized gains and losses on the
sales of equity securities and other —
than — temporary impairment of equity securities are
determined using the moving average method.
Debt securities are recorded on a trade-date basis. Debt
securities for which the Company has the positive ability and
intent to hold until maturity are classified as held-
to-maturity securities and recorded at amortized cost and
adjusted for accretion or amortization of discounts and
premiums. Debt securities that the Company purchases for
short-term appreciation or other trading purposes are carried at
fair value and classified as short-term investments which are
included in “Trading assets.” Debt securities not
classified as
held-to-maturity
or trading are designated as
available-for-sale
and carried at fair value with unrealized gains and losses, net
of income tax, reflected in accumulated other comprehensive
income (loss). Interest earned on debt securities, including
amortization of premiums and accretion of discounts based on the
effective interest rate method, is included in “Interest
and dividend income” and realized gains and losses from the
sale of debt securities, which are included in “Net gain
(loss) on investments,” are determined on a specific
security basis.
Management regularly evaluates whether declines in fair value of
individual
available-for-sale
securities and
held-to-maturity
securities below their amortized cost are other-than- temporary.
Factors considered in determining whether such declines in value
are
other-than-temporary
include the length of time and extent to which fair value is
less than cost, the status, financial condition and near-term
prospects of the issuer and the status of the security as well
as whether the Company either plans to sell the security or it
is more-likely-than-not that it will be required to sell prior
to recovery of the amortized cost basis. Management continually
monitors and evaluates these securities for impairment that is
other-than -temporary.
In April 2009, the FASB issued FSP No.FAS
115-2
and
FAS 124-2,
“Recognition and Presentation of
Other-Than-Temporary
Impairments” (FSP
No. FAS 115-2/ASC
320-10-35),
which amends the recognition guidance for
other-than-temporary
impairments (OTTI) of debt securities and expands the financial
statement disclosures for OTTI on debt and equity securities.
The Company adopted the FSP on January 1, 2009. As a result
of the FSP, the Company’s Consolidated Statement of Income
reflects the full impairment (that is, the difference between
the security’s amortized cost basis and fair value) on debt
securities that the Company intends to sell or would
more-likely-than-not be required to sell before the expected
recovery of the amortized cost basis. For
available-for-sale
(AFS) and
held-to-maturity
(HTM) debt securities that management has no intent to sell and
believes that it more
likely-than-not
will not be required to sell prior to recovery, only the credit
loss component of the impairment is recognized in earnings,
while the rest of the fair value loss is recognized in
Accumulated Other Comprehensive Income (AOCI). The credit loss
component recognized in earnings is identified as the amount of
principal cash flows not expected to be received over the
remaining term of the security as projected using the
Company’s cash flow projections using its base assumptions.
As a result of the adoption of the FSP, the Company’s
income in 2009 was decreased by
W
5,297 million in available for sale
securities on a pretax basis
(
W
4,190 million on an after-tax basis).
The cumulative effect of the change included an increase in the
balance of retained earnings as of January 1, 2009 of
W
32,216 million on a pretax basis
(
W
24,712 million after-tax).
The disclosures related to the Company’s investment and
OTTI are detailed in Note 8.
F-15
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KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Venture
capital securities
KB Investment Co., Ltd., one of the Company’s subsidiaries,
engages exclusively in venture capital activities. Venture
capital investments are not within the scope of
SFAS No. 115-
“Accounting for Certain Investments in Debt and Equity
Securities” (ASC 320 “Investments Debt and Equity
Securities”) and are subject to specialized industry
accounting principles for investment companies (ASC 946
“Financial Services Investment Companies”). Venture
capital investments are recorded as “Venture capital
securities” under “Investments” and are carried
at fair value with net changes in fair value recognized in
“Net gain on investments.” The fair values of
publicly-traded securities held by this subsidiary are generally
based on quoted market prices. Securities that are held by this
subsidiary that are not publicly traded are initially recorded
at cost, which is deemed to approximate the fair value as of the
acquisition date. Subsequent to that date, management estimates
the fair value based on investee transactions with unaffiliated
parties, management’s review of the investee’s
financial results and condition and the latest obtainable net
asset value of the investees.
Non-marketable
or restricted equity securities
Certain equity securities that do not have readily determinable
fair values or have sales restrictions exceeding one year are
recorded using the cost method. The cost method is used for
those investments in which the Company does not have significant
influence over the investees, and under this method, there is no
change to the cost basis unless there is
other-than-temporary
decline in value. If the decline is determined to be
other-than-temporary,
the Company writes down the cost basis of the investment to a
new cost basis that represents realizable value. Non-marketable
or restricted equity securities are recorded as “Other
securities” under “Investments” and the amount of
write-down is included in earnings under “Net loss on
investments” and dividend income earned on these securities
is recorded in “Interest and dividend income”.
Loans
Loans are carried at their outstanding principal balances, net
of allowance for loan losses and unamortized deferred
nonrefundable loan origination fees and costs. Loan origination
fees, net of certain direct origination costs, are deferred and
recognized as an adjustment to the yield. Interest income on
loans that are not placed on non-accrual status is accrued at
the effective rate and credited to income as it is earned.
Loans are generally placed on non-accrual status when principal
or interest payments become contractually one day past due or
are classified as impaired loans, except where the loans are
fully collateralized by customer deposits or guaranteed by
sovereign or certain selected financial institutions. When a
loan is placed on non-accrual status, interest accrued
previously but unpaid is generally reversed against current year
interest income. Cash receipts on non-accrual loans, for which
the ultimate collectability of principal is uncertain, are
applied as principal reductions; otherwise, payments are applied
first to the delinquent interest, normal interest, and then to
the loan balance until paid in full. A non-accrual loan is
normally restored to accrual status when all the principal and
interest amounts contractually due are brought current and it is
believed that the financial condition of the borrower has
improved to the extent that the collection of future principal
and interest on a timely basis is reasonably assured.
Securities received by the Company under a debt restructuring or
settlement are recorded at the fair value of the security at the
date of restructuring or settlement. Any difference between the
fair value of the security and the net carrying amount of the
loan is recorded as a direct charge-off or recovery on the loan,
as appropriate, through the allowance for loan losses.
Loans
held for sale
Loans held for sale are loans that the Company has the intent to
sell in the foreseeable future. The Company’s loans held
for sale include residential mortgage loans and are carried at
the lower of aggregate cost or market value.
F-16
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KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Loans held for sale are included in “Other assets” and
gains and losses on the sales of loans are determined using the
specific-identification method and included in “Other
non-interest income (expenses)”.
Allowance
for loan losses
The allowance for loan losses is based on management’s
continuing review and evaluation of the loan portfolio and is
management’s best estimate of probable losses incurred as
of the balance sheet date. The determination of the adequacy of
the allowance for loan losses hinges on various judgments and
assumptions, including but not necessarily limited to,
management’s assessment of potential losses on individual
loans, domestic and international economic conditions, loan
portfolio composition, transfer risks and prior loan loss
experience. The allowance for loan losses is charged against
income as provision for loan losses. The aggregate allowance for
loan losses is increased by amounts charged to the provision for
loan losses, net of charge-offs, and recoveries as a result of
cash collections from charged-off accounts.
The Company’s allowance for loan losses consists of
(a) specific allowances for specifically identified
impaired borrowers, and (b) general allowances for
homogeneous pools of commercial and consumer loans, and other
loans which are not specifically identified as impaired.
A commercial loan is considered as impaired when, after
consideration of current information and events, it is probable
that the Company will be unable to collect all amounts due,
including principal and interest, according to the contractual
terms of the loan agreement. Generally, the Company considers
the following types of loans to be impaired:
| • | Loans classified as “substandard” or below according to the Financial Services Commission’s asset classification guidelines; | |
| • | Loans that are 30 days or more past due; | |
| • | Loans to companies that have received a warning from the Korean Federation of Banks, indicating that the Company has exhibited difficulties in making timely payments of principal and interest; | |
| • | Loans which are “troubled debt restructurings” under U.S. GAAP. |
Once a loan has been identified as individually impaired,
impairment is measured in accordance with
ASC 310-10-35
“Receivables-Subsequent measurement” (formerly
SFAS No. 114). The Company’s measurement of an
impairment of a loan, with the exception of large groups of
smaller-balance homogeneous loans that are collectively
evaluated for impairment, is based on the present value of
expected future cash flows discounted at the loan’s
effective interest rate or, as a practical expedient, at the
loan’s observable market price or the fair value of the
collateral if the loan is collateral dependent. If the recorded
investment in impaired loans exceeds the present value of
payments expected to be received, a specific allowance is
established as a component of allowance for loan losses.
The Company performs periodic and systematic detailed reviews of
its lending portfolio to identify credit risks and to assess the
overall collectability. The allowance for homogeneous pools of
commercial and consumer loans, and other loans, which are not
specifically identified as impaired, is established through a
process that begins with estimates of probable losses inherent
in the portfolio. These estimates are based on various analyses,
including the Company’s historical delinquency and loan
loss experience, and adjusted for qualitative factors, such as
the current economic conditions in which the Company operates as
well as current lending policies and procedures.
Non-performing loans include loans that are 90 days or more
past due on principal or interest, or where reasonable doubt
exists as to timely collection, including loans that are
individually identified as being impaired, and troubled debt
restructurings. The Company also classifies loans as
non-performing when the borrower enters into a status of
default, liquidation, bankruptcy or business discontinuance.
F-17
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KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Loans are charged off if they are deemed to be uncollectible.
Consumer and credit card loans are charged off at no more than
180 days past due.
Allowance
for off-balance sheet credit instruments
The Company maintains an allowance for credit losses on
off-balance sheet credit instruments, including commitments to
extend credit, guarantees, acceptances, standby and commercial
letters of credit and other financial instruments to absorb
estimated probable losses related to these unfunded credit
facilities. The allowance is estimated based on the assessment
of the probability of commitment usage and credit risk factors
for loans outstanding to these same customers. The allowance for
credit losses for off-balance sheet credit instruments is
included in “Other liabilities” in the consolidated
balance sheets.
Secured
borrowings
Transfers of loans and securities related to certain
securitizations, in which control over the loans and securities
has not been surrendered, are accounted for as collateralized
borrowings. The liability for funds received under the related
loan and securities sale agreements is included in “Secured
borrowings”. Also, the amounts borrowed based on collateral
and the amounts borrowed under repurchase agreements in which
control over the related securities has not been surrendered by
the transferor are included in “Secured borrowings”.
Loan
and securities provided as collateral
The Company pledges loans as collateral for certain borrowings.
These borrowings are structured as transfers of loans through
asset securitization, which are retained on the consolidated
balance sheets, as the Company retains control of the assets
transferred. The Company also pledges securities as collateral
for transactions on repurchase agreements, derivatives
contracts, borrowings from the Korean Federation of Banks and
other borrowings structured as a transfer of securities through
asset securitizations. The Company retains control of the
securities and retains them on the consolidated balance sheets.
Securities pledged cannot be sold or re-pledged by the Company.
However, the Company has the right to substitute the collateral
provided that this is not to the detriment of the counterparties.
Premises
and equipment
Premises, equipment and furniture, leasehold improvements and
leased property under capital leases are stated at cost less
accumulated depreciation. Depreciation of buildings is computed
on a straight-line basis over the estimated useful lives of the
assets. Depreciation of equipment and furniture and lease
property under capital leases is computed on a declining balance
basis over the useful lives of the assets, or the term of the
lease, if shorter, in the case of leasehold improvements. Gains
or losses on disposals of premises and equipment are determined
by reference to their carrying amount and are reported in
“Other non-interest income (expenses).” Maintenance
and repairs are charged to expense as incurred.
The estimated useful lives of premises and equipment are as
follows:
|
Buildings
|
40 years | |
|
Equipment and furniture
|
3-6 years | |
|
Leasehold improvements
|
1-5 years | |
|
Leased property under capital leases
|
4 years |
Goodwill
and other intangible assets
Under the provisions of
SFAS No. 142-
“Goodwill and Other Intangible Assets” (ASC
350-20
“Goodwill” and
ASC 350-30
“General Intangibles Other than Goodwill”), which sets
forth the accounting for goodwill and
F-18
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KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
intangible assets subsequent to their acquisition, goodwill is
no longer amortized. ASC
350-20-35
requires that goodwill be allocated to the reporting unit level,
which the Company defines as an operating segment or one level
below.
ASC 350-20-35
and
ASC 350-30-35
also requires that goodwill and other intangible assets be
tested for impairment at the reporting unit level at least
annually or more frequently, if events or circumstances indicate
a potential impairment.
The goodwill impairment test under SFAS No. 142(ASC
350-20)
is
performed in two phases. The first step of the impairment test,
used to identify potential impairment, compares the fair value
of the reporting unit with its carrying amount, including
goodwill. If the carrying amount of the reporting unit exceeds
its fair value, goodwill of the reporting unit is considered
impaired, and an additional procedure must be performed. The
second step of the impairment test quantifies the amount of the
impairment loss by comparing the carrying amount of goodwill to
its implied fair value. An impairment loss is recorded to the
extent the carrying amount of goodwill exceeds its implied fair
value.
The Company has finite-lived intangible assets including core
deposit intangibles, credit card relationship intangibles and
capitalized software. Core deposit intangibles reflect the
estimated fair value of the acquired demand deposits and savings
deposits, which the Company can expect to maintain for an
extended period of time because of generally stable customer
relationships. Credit card relationship intangibles reflect the
estimated fair value of the credit card relationships acquired
from which the Company expects to derive future benefits over
the estimated lives of such relationships. Both the core deposit
intangibles and the credit card relationship intangibles are
amortized on an accelerated basis over their useful lives in
proportion to the estimated run-off of depositors and credit
card customers, respectively. The estimated useful lives of the
core deposit intangibles and the credit card relationship
intangibles range from six to ten years. Capitalized software is
amortized over its estimated useful life ranging from four to
five years. The Company had no indefinite-lived intangible
assets as of December 31, 2008 and 2009.
Impairment
of long-lived assets and other intangible assets
The Company reviews its long-lived assets, including
identifiable intangibles with definite lives in accordance with
SFAS No. 144-
“Accounting for the Impairment or Disposal of Long-Lived
Assets” (ASC
360-10
“Property, Plant, and Equipment”) for impairment
whenever events or changes in business circumstances indicate
that the carrying amount of assets may not be fully recoverable.
Such circumstances include significant or sustained declines in
revenues or earnings and material adverse changes in the
economic climate. The carrying amount of an intangible asset is
considered not recoverable if it exceeds the sum of the
undiscounted cash flows expected to derive from the use of such
asset. For assets which the Company intends to hold for use, if
the total of the expected future undiscounted cash flows is less
than the carrying amount of the assets, a loss is recognized for
the difference between the fair value and carrying value of the
assets. For assets which the Company intends to sell, a loss is
recognized for the amount that the estimated fair value, less
cost to sell, is less than the carrying value of the assets.
Fair
value measurement
On January 1, 2008, the Company adopted
SFAS No. 157, “Fair Value Measurements” (ASC
820-10
“Fair Value Measurements and Disclosures”), which
defines fair value as the price that would be received to sell
an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date
and requires an entity to maximize the use of observable inputs
and minimize the use of unobservable inputs when measuring fair
value. The Company adopted certain provisions of this statement
related to nonfinancial assets and nonfinancial liabilities that
are not measured at fair value on a recurring basis since
January 1, 2009. In addition,
ASC 820-10
requires assets and liabilities measured at fair value to be
categorized into three-level hierarchy based on the inputs to
fair value measurement.
F-19
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KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Level 1:
Quoted prices in active markets
for identical assets or liabilities. Level 1 assets and
liabilities include debt and equity securities and derivative
contracts that are traded in an active exchange market, as well
as certain securities that are highly liquid and are actively
traded in
over-the-counter
markets.
Level 2:
Observable inputs other than
Level 1 prices, such as quoted prices for similar assets or
liabilities either directly or indirectly; quoted prices in
markets that are not active; or other inputs that are observable
or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
Level 3:
Unobservable inputs that are
supported by little or no market activity and that are
significant to the fair value of the assets or liabilities.
Level 3 assets and liabilities include financial
instruments whose value is determined using pricing models,
discounted cash flow methodologies, or similar techniques based
on significant unobservable inputs, as well as instruments for
which the determination of fair value requires significant
management judgment or estimation.
The fair value of financial instruments and the methods and
assumptions used in estimating fair value amounts are detailed
in Note 29.
Stock-based
compensation
The Company has various stock-based employee compensation plans,
which are described in detail in Note 28. On
January 1, 2006, the Company follows
SFAS No. 123(R) (revised 2004) —
“Share-Based Payment,” (ASC 718 “Stock
Compensation”) under the modified-prospective application.
The written terms of the Company’s share-based payments
allows the Company, at its option, to settle the awards in cash,
however, it is the Company’s past practice and its
intention to continue settling the awards in cash. Accordingly,
at grant date, the Company initially measures compensation
expense and liabilities for stock options and other share-based
payments based on the instruments’ grant date fair value.
Subsequently, the liabilities incurred under share-based payment
arrangements are remeasured at the end of each reporting period
until settlement.
Trust
fees and compensation to the trust accounts
The Company manages funds on behalf of its customers through the
operation of various trust accounts. The Company earns fees for
managing those funds, which are recognized when earned. In
certain cases, the Company guarantees (a) principal and a
fixed return on principal or (b) principal only to the
investors in those trust accounts. At each balance sheet date,
the Company accrues the liability that exists on account of such
guarantees where the Company does not consolidate the trust
accounts.
Other
fees and commission income
Other fees and commissions primarily consist of credit card
fees, fees on guarantees and import/export letters of credit,
and commissions received on remittance, lottery sales, cash
dispenser service, cash management services and others. Such
fees are recognized when earned.
Income
tax
The Company accounts for income taxes in accordance with
SFAS No. 109(ASC 740), which prescribe two components
of income tax expense: current and deferred. Current income tax
expense approximates taxes to be paid or refunded for the
current period and deferred income tax expense is provided on an
asset and liability method whereby deferred tax assets are
recognized for deductible temporary differences, including
operating loss and tax credit carryforwards, and deferred tax
liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the carrying
values of assets and liabilities for financial reporting
purposes and their tax bases. Deferred income tax benefit or
expense is then recognized for the change in deferred tax assets
or liabilities between periods. Deferred tax assets and
liabilities are adjusted for the effect of changes in tax laws
and rates on the date of enactment.
F-20
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KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Deferred tax assets, including the tax effect of carryforward
tax losses, are recognized to the extent it is more likely than
not that some portion or all of the deferred tax assets will be
realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during
the periods in which those temporary differences become
deductible. To the extent the deferred tax assets are not
realizable, a valuation allowance is recognized.
The Company adopted FASB Interpretation
No. 48-
“Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109‘(ASC 740), on
January 1, 2007, which set outs a consistent framework to
use to determine the appropriate level of tax reserve for
uncertain tax positions. The Company uses a two-step approach
wherein a tax benefit is recognized if a position is
more-likely-than-not to be sustained. The amount of the benefit
is then measured to be the highest tax benefit which is greater
than 50% likely to be realized. The difference between the
benefit recognized for a position in accordance with
FIN 48(ASC 740) and the tax benefit claimed on a tax
return is referred to as an unrecognized tax benefit.
Additionally, in connection with the adoption of FIN 48(ASC
740), the Company elected to classify interest and penalties
related to tax positions as a component of income tax expense.
See Note 25 to the consolidated financial statements for
further details of the Company’s provision and related
income tax assets and liabilities.
Earnings
per share
Basic earnings per share are computed by dividing net income
attributable to common stockholders by the weighted average
number of common shares outstanding in each period. Diluted
earnings per share reflect the potential dilution that could
occur if securities or other contracts to issue common stock
were exercised. Diluted earnings per share are computed on the
basis of the weighted average number of common shares
outstanding during each period and dilutive common equivalent
shares representing the weighted average dilutive effect of the
Company’s stock options outstanding during each period.
Dilutive potential common shares are calculated using the
“treasury stock” method.
Comprehensive
income
The Company records unrealized gains and losses on investment
securities and foreign currency translation adjustments in
“Accumulated other comprehensive income (loss), net of
tax.” Gains and losses on investment securities are
reclassified to net income or loss as the gains or losses are
realized upon sale of the securities.
Other-than-temporary
impairment charges are reclassified to net income or loss at the
time of the charge. Translation gains or losses on foreign
currencies translation adjustments are reclassified to net
income or loss upon the sale or liquidation of investment in
foreign operations.
United
States dollar amounts
The Company operates primarily in Korea and its official
accounting records are maintained in Korean won. The
U.S. dollar amounts are provided herein as supplementary
information solely for the convenience of the reader. Korean won
amounts are expressed in U.S. dollars at the rate of
W
1,163.65 to U.S.$1.00, the U.S. Federal
Reserve Bank of New York buying exchange rate in effect at noon,
December 31, 2009. Such convenience translation into US
dollars should not be construed as representations that the
Korean won amounts have been, could have been, or could in the
future be, converted at this or any other rate of exchange.
| 2. | Recently Issued Accounting Standards |
SFAS No. 141(R) —
Business Combinations(ASC 805)
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations (ASC 805). This statement applies to all
transactions or other events in which an entity obtains control
of one or more businesses, including those sometimes referred to
as “true mergers” or “mergers of equals” and
combinations achieved without the
F-21
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KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
transfer of consideration, for example, by contract alone or
through the lapse of minority veto rights.
SFAS No. 141(R)(ASC 805) modifies the accounting
for business combinations and requires, with limited exceptions,
the acquirer in a business combination to recognize
100 percent of the assets acquired, liabilities assumed,
and any noncontrolling interest in the acquiree at the
acquisition-date fair value. In addition,
SFAS No. 141(R)(ASC 805) requires the expensing
of acquisition-related transaction and restructuring costs, and
certain contingent assets and liabilities acquired, as well as
contingent consideration, to be recognized at fair value.
SFAS No. 141(R) (ASC 805) also modifies the
accounting for certain acquired income tax assets and
liabilities. The Company adopted this statement on
January 1, 2009 and the impact of adoption was not material
to its financial condition, results of operations or cash flows.
SFAS No. 160 —
Noncontrolling Interests in Consolidated Financial Statements
(ASC 810)
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial Statements
(ASC 810). This statement applies to all entities that prepare
consolidated financial statements, except
not-for-profit
organizations, but affects only those entities that have an
outstanding noncontrolling interest in one or more subsidiaries
or that deconsolidate a subsidiary. The Company adopted this
statement on January 1, 2009 and the impact of adoption was
not material to its financial condition, results of operations
or cash flows.
SFAS No. 161 —
Disclosures about Derivative Instruments and Hedging Activities
(ASC 815)
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging Activities
(ASC 815). This statement establishes, among other things, the
disclosure requirements for derivative instruments and hedging
activities. This statement is effective at the beginning of an
entity’s first interim period beginning after
November 15, 2008. Since these amended principles require
only additional disclosures concerning derivatives and hedging
activities, adoption did not affect the Company’s financial
condition, result of operations or cash flows.
FSP
No. FAS 140-3 — Accounting
for Transfers of Financial Assets and Repurchase Financing
Transactions (ASC 860)
In February 2008, the FASB issued FSP
No. FAS 140-3,
Accounting for Transfers of Financial Assets and Repurchase
Financing Transactions (ASC 860). FSP
No. FAS 140-3
(ASC 860) applies to repurchase agreements that relate to
previously transferred financial assets between the same
counterparties that are entered into contemporaneously with, or
in contemplation of, the initial transfer (“repurchase
financings”). The Company adopted FSP
No. FAS 140-3
(ASC 860) for new transactions entered into after
January 1, 2009 and the impact of adoption was not material
to its financial condition, result of operations or cash flows.
SFAS No. 166 —
Accounting for Transfers of Financial Assets (ASC
860)
In June 2009, the FASB issued SFAS No. 166,
“Accounting for Transfers of Financial Assets, an amendment
to FASB Statement No. 140”. This statement removed
(1) the concept of a qualifying special purpose entity
(“QSPE”) from SFAS No. 140 (ASC
860 — Transfers and Servicing) and (2) the
exceptions from applying FASB Interpretation No.
(“FIN”) 46 (R) (ASC 810 — Consolidation) to
QSPEs. This statement amends SFAS No. 140 (ASC
860) to revise and clarify the derecognition requirements
for transfers of financial assets and the initial measurement of
beneficial interests that are received as proceeds by a
transferor in connection with transfers of financial assets.
This statement also requires additional disclosure about
transfers of financial assets and a transferor’s continuing
involvement with such transferred financial assets.
This statement is effective January 1, 2010, at which time
any QSPEs will be evaluated for consolidation in accordance with
SFAS No. 167, which amends FIN 46 (R) (ASC 810).
However, the amendments on how to account for transfers of
financial assets will apply prospectively to transfers occurring
on or after the effective date. The
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FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Company is currently evaluating the impact of the adoption of
SFAS No. 166 (ASC 860) on its financial
condition, result of operations or cash flows.
SFAS No. 167 —
Amendments to FIN 46 (R) (ASC 810)
In June 2009, the FASB issued SFAS No. 167,
“Amendments to FASB Interpretation No. 46 (R).”
This statement amends FIN 46 (R) (ASC 810) to require
ongoing assessments to determine whether an entity is a variable
interest entity (“VIE”) and whether an enterprise is
the primary beneficiary of a VIE. This statement also amends the
guidance for determining which enterprise, if any, is the
primary beneficiary of a VIE by requiring the enterprise to
initially perform a qualitative analysis to determine if the
enterprise’s variable interest or interests give it a
controlling financial interest. Consolidation is based on a
company’s ability to direct the activities of the entity
that most significantly impact the entity’s economic
performance. If a company has control and the right to receive
benefits or the obligation to absorb losses which could
potentially be significant to the VIE, then consolidation is
required. This statement also requires additional disclosure
about transfers of financial assets and a transferor’s
continuing involvement with such transferred financial assets.
This statement is effective in the first annual period that
begins after November 15, 2009, and for interim or and
annual reporting periods thereafter with earlier application
being prohibited. This statement may be applied retrospectively
in previously issued financial statement, with cumulative effect
adjusted to retained earnings. The Company is currently
evaluating the impact of the adoption of
SFAS No. 167(ASC 810) on its financial condition,
results of operations and cash flows.
ASU
2009-12 —
Investments in Certain Entities that Calculate Net Asset Value
per Share (ASC 820)
In September 2009, the FASB issued ASU
2009-12,
“Fair Value Measurements and Disclosures: Investments in
Certain Entities That Calculate Net Asset Value per Share (or
Its Equivalent),” (ASC 820).
ASU 2009-12(ASC 820) offers
guidance on how to use a net asset value per share to estimate
the fair value on investments in investment vehicles such as
hedge funds, private equity funds, real estate funds, venture
capital funds, offshore fund vehicles and fund of funds.
Investors may use net asset value to estimate the fair value of
investments in investment companies that do not have a readily
determinable fair value if the investees have the attributes of
investment companies and the net asset values or their
equivalents are calculated consistent with the AICPA Audit and
Accounting Guide, Investment Companies, which generally requires
investments to be measured at fair value. This approach is
deemed to be a “practical expedient” for investors in
investment companies as the GAAP fair-value measurement
framework defines an asset’s fair value as its current exit
price. ASU
2009-12
(ASC 820) has limitations and disclosure requirements about
the nature and terms of the investments within the scope of the
new guidance. ASU
2009-12(ASC
820) was effective December 31, 2009. Note 8
reflects these disclosure requirements.
ASU
2010-06 —
Improving Disclosures about Fair Value Measurements (ASC
820)
In January 2010, the FASB issued ASU
2010-06,
“Improving Disclosures about Fair Value Measurements”
(ASC 820). The ASU
2010-06(ASC
820) requires disclosing the amounts of significant
transfers in and out of Level 1 and 2 fair value
measurements and to describe the reasons for the transfers. The
disclosures are effective for reporting periods beginning after
December 15, 2009. Additionally, disclosures of the gross
purchases, sales, issuances and settlements activity in
Level 3 fair value measurements will be required for fiscal
years beginning after December 15, 2010. The Company does
not expect the new accounting guidance to have material impact
on the Company’s consolidated financial condition, results
of operations and cash flows.
ASU
2010-11 —
Scope Exception Related to Embedded Credit Derivatives (ASC
815)
In March 2010, the FASB issued ASU
2010-11,
Scope Exception Related to Embedded Credit Derivatives(ASC 815).
The ASU
2010-11(ASC
815) clarifies that certain embedded derivatives, such as
those contained in certain securitizations, CDOs and structured
notes, should be considered embedded credit derivatives subject
to
F-23
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
potential bifurcation and separated fair value accounting. The
ASU
2010-11(ASC
815) allows any beneficial interest issued by a
securitization vehicle to be accounted for under the fair value
option at transition. The new accounting guidance is effective
July 1, 2010. The Company does not expect the new
accounting guidance to have material impact on the consolidated
financial statements.
| 3. | Business Development |
Reorganization
(Establishment of KB Financial Group Inc.)
The stockholders of Kookmin Bank approved a reorganization that
involved the formation of KB Financial Group Inc., a holding
company, and a stock transfer at its extraordinary stockholders
meeting on August 25, 2008 and received the final approval
from the Financial Services Commission on September 26,
2008. In accordance with the approval, KB Financial Group Inc.
was established on September 29, 2008 and the stockholders
of Kookmin Bank received one common share of KB Financial
Group Inc. for one common share of Kookmin Bank. As a result,
Kookmin Bank became a wholly-owned subsidiary of KB Financial
Group Inc., and, in addition, the shares of KB Financial
Group Inc. replaced the shares of Kookmin Bank on the Korea
Stock Exchange on October 10, 2008. The foregoing
reorganization was accounted for as a transaction between
entities under common control.
In addition, as part of the reorganization, KB Financial Group
Inc. acquired equity shares of subsidiaries of Kookmin bank. The
acquisition was accounted for using the purchase method in
accordance with SFAS No. 141.
Furthermore, Kookmin Bank acquired 73,607,601 shares of KB
Financial Group Inc. and had 47,407,671 shares as of
December 31, 2008, after disposing of
26,199,930 shares prior to December 31, 2008. In 2009,
the Company sold additional 4,084,967 shares and,
consequently, has 43,322,704 shares as of December 31,
2009. The Company classified these shares as treasury stock in
the consolidated financial statements as of December 31,
2009 and plans to dispose of them within three years from the
acquisition date pursuant to the Korean Commercial Law.
Acquisition
of KB Investment & Securities Co., Ltd
On March 11, 2008, Kookmin Bank acquired 9,580,000 common
shares of KB Investment & Securities Co., Ltd.,
formerly Hannuri Investment & Securities Co., Ltd.,
from J.D.K. Investment Co., Inc. for
W
267,554 million. Kookmin Bank acquired
95.8% of the voting rights of KB Investment &
Securities Co., Ltd. and participated in the subsequent capital
issuance of KB Investment & Securities Co., Ltd. KB
Investment & Securities Co., Ltd. became a
wholly-owned subsidiary of the Company as the Kookmin Bank
exchanged its shares of KB Investment & Securities
Co., Ltd. with the shares of the Company.
Acquisition
of shares of Joint Stock Company Bank CenterCredit (“JSC
Bank CenterCredit”), a Kazakhan bank.
In August 2008, Koomin Bank acquired 29,972,840 common shares of
JSC Bank CenterCredit, a Kazakhstan bank, and 14,163,836
additional common shares of JSC Bank CenterCredit in November
and December 2008. As a result, Kookmin Bank holds 30.5%
(44,136,676 shares) of the total outstanding shares as of
December 31, 2009.
In 2010, Kookmin Bank acquired additional common and convertible
preferred shares of JSC Bank CenterCredit. For further
discussion on the subsequent acquisition, refer to Note 37.
Acquisition
of Khmer Union Bank (renamed as Kookmin Bank Cambodia
PLC)
On May 4, 2009, Kookmin Bank acquired 132,600 common shares
of Khmer Union Bank for
W
9,969 million. As
a result, Kookmin Bank owns 51% of the voting rights of Khmer
Union Bank in Cambodia.
F-24
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Share
transfer of KB life Insurance Co., Ltd.
On June 22, 2009, KB life Insurance Co., Ltd. whose shares
of 51.0% were held by Kookmin Bank was transferred to KB
financial Group Inc. This share transfer was accounted for as a
transaction between entities under common control.
| 4. | Restricted Cash |
The following table presents restricted cash as of December 31:
| 2008 | 2009 | |||||||
| (In millions of Korean won) | ||||||||
|
Reserve deposits with the Bank of Korea
|
4,646,765 | 5,734,677 | ||||||
|
Other
|
147,183 | 315,564 | ||||||
|
Total restricted cash
|
4,793,948 | 6,050,241 | ||||||
Reserve deposits with the Bank of Korea (“BOK”)
represent amounts required under the Republic of Korea’s
General Banking Act for payment of deposits.
| 5. | Call Loans and Securities Purchased under Resale Agreements |
Call loans and securities purchased under agreements to resell,
at their respective carrying values, consisted of the following
as of December 31:
| 2008 | 2009 | |||||||
| (In millions of Korean won) | ||||||||
|
Call
loans
(1)
|
177,474 | 446,142 | ||||||
|
Securities purchased under resale or similar
arrangements
(2)
|
1,230,000 | 1,590,000 | ||||||
|
Total
|
1,407,474 | 2,036,142 | ||||||
| (1) | Call loans are short-term lending among banks and financial institutions, with maturities of 90 days or less for call loans in won currency and 30 days or less for call loans in foreign currencies. Typically, call loans have maturities of one day. | |
| (2) | The Company enters into short-term purchases of securities under agreements to resell substantially identical securities and classified these agreements as secured lending transactions. |
F-25
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 6. | Trading Assets and Liabilities |
The trading assets and liabilities, at fair value, consisted of
the following as of December 31:
| 2008 | 2009 | |||||||
| (In millions of Korean won) | ||||||||
|
Trading assets:
|
||||||||
|
Debt securities:
|
||||||||
|
Korean treasury and government agencies
|
1,780,008 | 1,358,812 | ||||||
|
Financial institutions
|
2,692,662 | 2,699,415 | ||||||
|
Corporate
|
98,730 | 31,216 | ||||||
|
Asset-backed securities
|
462,464 | 116,450 | ||||||
|
Equity securities
|
217,209 | 254,349 | ||||||
|
Total debt and equity securities
|
5,251,073 | 4,460,242 | ||||||
|
Foreign exchange spot contracts
|
2,908 | 2,878 | ||||||
|
Derivative instruments:
|
||||||||
|
Foreign exchange derivatives
|
6,579,374 | 2,592,510 | ||||||
|
Interest rate derivatives
|
1,152,562 | 573,309 | ||||||
|
Equity derivatives
|
84,054 | 86,267 | ||||||
|
Credit derivatives
|
— | 2,118 | ||||||
|
Commodity derivatives
|
18,222 | 2,410 | ||||||
|
Other
|
6,964 | 1,821 | ||||||
|
Total derivative instruments and foreign exchange spot contracts
|
7,844,084 | 3,261,313 | ||||||
|
Total trading assets
|
13,095,157 | 7,721,555 | ||||||
|
Trading liabilities:
|
||||||||
|
Foreign exchange spot contracts
|
3,273 | 2,812 | ||||||
|
Derivative instruments:
|
||||||||
|
Foreign exchange derivatives
|
5,785,437 | 1,751,492 | ||||||
|
Interest rate derivatives
|
1,401,510 | 814,637 | ||||||
|
Equity derivatives
|
638,107 | 321,803 | ||||||
|
Credit derivatives
|
9,489 | — | ||||||
|
Commodity derivatives
|
17,201 | 2,386 | ||||||
|
Other
|
9,389 | 5,306 | ||||||
|
Securities sold short, not yet purchased
|
326,675 | 1,347,668 | ||||||
|
Total trading liabilities
|
8,191,081 | 4,246,104 | ||||||
F-26
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 7. | Net Trading Revenue |
The following table presents net trading revenue for the years
ended December 31:
| 2007 | 2008 | 2009 | ||||||||||
| (In millions of Korean won) | ||||||||||||
|
Debt securities
|
(86,438 | ) | 134,163 | (12,538 | ) | |||||||
|
Equity securities
|
63,204 | (65,663 | ) | (3,768 | ) | |||||||
|
Foreign exchange spot contracts
|
198,329 | (143,961 | ) | 98,101 | ||||||||
|
Derivative instruments
|
(134,363 | ) | 179,602 | 82,817 | ||||||||
|
Total net trading revenue
|
40,732 | 104,141 | 164,612 | |||||||||
For the years ended December 31, 2007, 2008 and 2009, net
unrealized holding losses on trading securities of
W
47,890 million, net unrealized holding
gains on trading securities of
W
74,578 million, and net unrealized
holding losses on trading securities of
W
37,405 million, respectively, were
included in net trading revenue.
| 8. | Investments |
Investments consisted of the following as of December 31,
2008 and 2009:
| 2008 | 2009 | |||||||
| (In millions of Korean won) | ||||||||
|
Available-for-sale
securities
|
14,806,075 | 18,710,792 | ||||||
|
Held-to-maturity
securities
|
12,599,832 | 12,609,767 | ||||||
|
Venture capital
securities
(1)
|
87,902 | 79,228 | ||||||
|
Other
securities
(2)
|
1,715,651 | 1,845,604 | ||||||
|
Total investments
|
29,209,460 | 33,245,391 | ||||||
| (1) | Securities held by KB Investment Co., Ltd., a subsidiary engaged in venture capital activities. | |
| (2) | Other securities comprised of equity securities without readily determinable fair values or with sales restrictions exceeding one year, and investments accounted for under the equity method. |
F-27
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
As of December 31, 2008, the amortized cost and fair value
of the Company’s
available-for-sale
securities and
held-to-maturity
securities and the related gross unrealized gains and losses
were as follows:
|
Gross
|
Gross
|
|||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
||||||||||||||
| Cost | Gains | Losses | Fair Value | |||||||||||||
| (In millions of Korean won) | ||||||||||||||||
|
Available-for-sale
securities:
|
||||||||||||||||
|
Debt securities:
|
||||||||||||||||
|
Korean treasury and government agencies
|
6,757,246 | 222,137 | (756 | ) | 6,978,627 | |||||||||||
|
Corporate
|
998,141 | 126,785 | (7,427 | ) | 1,117,499 | |||||||||||
|
Financial institutions
|
6,038,332 | 133,933 | (12,068 | ) | 6,160,197 | |||||||||||
|
Asset-backed securities
|
144,981 | 1,278 | — | 146,259 | ||||||||||||
|
Sub-total
|
13,938,700 | 484,133 | (20,251 | ) | 14,402,582 | |||||||||||
|
Marketable equity securities
|
400,639 | 9,039 | (6,185 | ) | 403,493 | |||||||||||
|
Total
available-for-sale
securities
|
14,339,339 | 493,172 | (26,436 | ) | 14,806,075 | |||||||||||
|
Held-to-maturity
securities:
|
||||||||||||||||
|
Debt securities:
|
||||||||||||||||
|
Korean treasury and government agencies
|
9,138,352 | 244,539 | (15,411 | ) | 9,367,480 | |||||||||||
|
Corporate
|
249,057 | 3,767 | (1,411 | ) | 251,413 | |||||||||||
|
Financial institutions
|
2,980,130 | 43,297 | (14,418 | ) | 3,009,009 | |||||||||||
|
Asset-backed securities
|
232,293 | 4,395 | — | 236,688 | ||||||||||||
|
Total
held-to-maturity
securities
|
12,599,832 | 295,998 | (31,240 | ) | 12,864,590 | |||||||||||
F-28
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
As of December 31, 2009, the amortized cost and fair value
of the Company’s
available-for-sale
securities and
held-to-maturity
securities and the related gross unrealized gains and losses
were as follows:
|
Gross
|
Gross
|
|||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
||||||||||||||
| Cost | Gains | Losses | Fair Value | |||||||||||||
| (In millions of Korean won) | ||||||||||||||||
|
Available-for-sale
securities:
|
||||||||||||||||
|
Debt securities:
|
||||||||||||||||
|
Korean treasury and government agencies
|
7,854,735 | 67,843 | (30,976 | ) | 7,891,602 | |||||||||||
|
Corporate
|
1,182,982 | 104,782 | (6,247 | ) | 1,281,517 | |||||||||||
|
Financial institutions
|
6,335,659 | 84,398 | (15,294 | ) | 6,404,763 | |||||||||||
|
Asset-backed securities
|
1,998,573 | 1,082 | (1,372 | ) | 1,998,283 | |||||||||||
|
Sub-total
|
17,371,949 | 258,105 | (53,889 | ) | 17,576,165 | |||||||||||
|
Marketable equity securities
|
923,989 | 257,135 | (46,497 | ) | 1,134,627 | |||||||||||
|
Total
available-for-sale
securities
|
18,295,938 | 515,240 | (100,386 | ) | 18,710,792 | |||||||||||
|
Held-to-maturity
securities:
|
||||||||||||||||
|
Debt securities:
|
||||||||||||||||
|
Korean treasury and government agencies
|
8,991,806 | 106,419 | (34,254 | ) | 9,063,971 | |||||||||||
|
Corporate
|
379,607 | 3,783 | (1,448 | ) | 381,942 | |||||||||||
|
Financial institutions
|
2,994,994 | 47,537 | (2,828 | ) | 3,039,703 | |||||||||||
|
Asset-backed securities
|
243,360 | 3,302 | — | 246,662 | ||||||||||||
|
Total
held-to-maturity
securities
|
12,609,767 | 161,041 | (38,530 | ) | 12,732,278 | |||||||||||
The Bank of Korea and the Korea Development Bank
(“KDB”) are both financial institutions owned and
controlled by the Korean government. The fair value of
available-for-sale
debt securities from financial institutions included
W
2,289,433 million and
W
2,993,060 million as of December 31,
2008 and 2009, respectively, which were issued by BOK and KDB.
The amortized cost of
held-to-maturity
debt securities from financial institutions included
W
736,020 million and
W
772,661 million as of December 31,
2008 and 2009, respectively, which were issued by BOK and KDB.
Since 2007, there has been a decline in the fair value of the
Company’s asset-backed securities portfolio, specifically
asset-backed Collateralized Debt Obligations (“CDOs”)
as a result of deteriorating conditions in the
U.S. subprime credit market. The Company’s total
exposures to asset-backed CDOs at December 31, 2008 and
2009 were
W
43,493 million and
W
12,133 million, respectively. Due to the
deterioration of U.S. credit markets, the fair value of the
securities declined. Accordingly, the Company recorded
W
25,513 million and
W
10,138 million of impairment on
asset-backed CDOs in 2008 and 2009, respectively, as the Company
considered the losses to be
other-than-temporary.
The Company expects conditions in credit markets in the
U.S. to remain uncertain for the foreseeable future.
Therefore, continued deterioration in the U.S. credit
markets could adversely affect the fair value of the
asset-backed securities held by the Company.
As of January 1, 2009, the Company adopted FSP
No. FAS 115-2
and
FAS 124-2
(ASC
320-10-35,
Investment-Debt and Equity Securities: Recognition of an
Other-Than-Temporary
Impairment).
This guidance amends the impairment model for debt securities;
the impairment model for equity securities was not affected.
Under the new guidance for debt securities,
other-than-temporary
impairment is recognized in earnings for debt securities which
the Company has an intent to sell or which the Company believes
it is more-likely-than-not that it will be required to sell
prior to recovery of the amortized cost basis. For those
securities which the Company does not intend to sell or expect
to be required to sell, credit-related impairment is recognized
in
F-29
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
earnings, with the non-credit-related impairment recorded in
AOCI. As a result of the adoption of
ASC 320-10-35,
the Company’s retained earnings of
W
32,216 million on a pretax basis
(
W
24,712 million on a after-tax basis) was
increased as of January 1, 2009.
The following table presents the total impairment losses on debt
securities recognized earnings for the year ended
December 31, 2009
(In millions of Korean won)
:
|
Available-for-Sale
|
Held-to-Maturity
|
|||||||||||
| Securities: | Securities: | Total | ||||||||||
|
Total
other-than-temporary
impairment losses(unrealized and realized) that the Company does
not intend to sell nor will likely be required to sell
|
6,256 | 8,208 | 14,464 | |||||||||
|
Less : Unrealized
other-than-temporary
impairment losses recognized in OCI
|
— | — | — | |||||||||
|
Net impairment losses recognized in earnings that the Company
does not intend to sell nor will likely be required to sell
|
6,256 | 8,208 | 14,464 | |||||||||
|
OTTI losses recognized in earnings for securities that the
Company intends to sell or more-likely-than-not will be required
to sell before recovery
|
— | — | — | |||||||||
|
Total impairment losses recognized in earnings
|
6,256 | 8,208 | 14,464 | |||||||||
The following table presents a rollforward of the credit loss
component of OTTI losses that were recognized in income for the
year ended December 31, 2009
(In millions of Korean
won):
| 2009 | ||||
|
Balance, beginning of period
|
— | |||
|
Credit loss component on previously impaired
securities
(1)
|
75,734 | |||
|
Credit impairment recognized in earnings on securities
|
14,464 | |||
|
Reductions due to sales of credit impaired securities sold or
maturities
|
(18,757 | ) | ||
|
Balance, end of period
|
71,441 | |||
| (1) |
As of January 1, 2009, the Company had securities
|
For the years ended December 31, 2007, 2008 and 2009, the
total impairment losses recognized on
available-for-sale
securities were
W
50,467 million,
W
224,925 million and
W
6,667 million, respectively, where
decreases in fair value were deemed to be
other-than-temporary.
With respect to the
held-to-maturity
securities, the Company recognized
W
8,067 million,
W
17,218 million and
W
8,208 million of impairment losses for
the years ended December 31, 2007, 2008 and 2009,
respectively. For the years ended December 31, 2007, 2008
and 2009, the Company also recognized
W
7,367 million,
W
205,681 million and
W
247 million of impairment charges for
other securities as the Company considered the decrease in fair
value to be other-than-temporary.
F-30
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table summarizes the gross unrealized losses and
fair value of investment securities aggregated by investment
category and the length of time that individual securities have
been in a continuous unrealized loss position as of
December 31, 2008:
| December 31, 2008 | ||||||||||||||||||||||||
| Less Than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
|
Gross
|
Gross
|
Gross
|
||||||||||||||||||||||
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||||||||
| Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
| (In millions of Korean won) | ||||||||||||||||||||||||
|
Available-for-sale
securities
|
||||||||||||||||||||||||
|
Debt securities:
|
||||||||||||||||||||||||
|
Korean treasury and government agencies
|
36,468 | (756 | ) | — | — | 36,468 | (756 | ) | ||||||||||||||||
|
Corporate
|
150,957 | (7,427 | ) | — | — | 150,957 | (7,427 | ) | ||||||||||||||||
|
Financial institutions
|
135,374 | (12,068 | ) | — | — | 135,374 | (12,068 | ) | ||||||||||||||||
|
Marketable equity securities
|
293,844 | (6,185 | ) | — | — | 293,844 | (6,185 | ) | ||||||||||||||||
|
Total
available-for-sale
securities
|
616,643 | (26,436 | ) | — | — | 616,643 | (26,436 | ) | ||||||||||||||||
|
Held-to-maturity
securities
|
||||||||||||||||||||||||
|
Debt securities:
|
||||||||||||||||||||||||
|
Korean treasury and government agencies
|
278,187 | (2,174 | ) | 649,215 | (13,237 | ) | 927,402 | (15,411 | ) | |||||||||||||||
|
Corporate
|
9,242 | (162 | ) | 108,497 | (1,249 | ) | 117,739 | (1,411 | ) | |||||||||||||||
|
Financial institutions
|
229,119 | (1,950 | ) | 547,544 | (12,468 | ) | 776,663 | (14,418 | ) | |||||||||||||||
|
Total
held-to-maturity
securities
|
516,548 | (4,286 | ) | 1,305,256 | (26,954 | ) | 1,821,804 | (31,240 | ) | |||||||||||||||
|
Total temporarily impaired securities
|
1,133,191 | (30,722 | ) | 1,305,256 | (26,954 | ) | 2,438,447 | (57,676 | ) | |||||||||||||||
F-31
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table summarizes the gross unrealized losses and
fair value of investment securities aggregated by investment
category and the length of time that individual securities have
been in a continuous unrealized loss position as of
December 31, 2009:
| December 31, 2009 | ||||||||||||||||||||||||
| Less Than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
|
Gross
|
Gross
|
Gross
|
||||||||||||||||||||||
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||||||||
| Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
| (In millions of Korean won) | ||||||||||||||||||||||||
|
Available-for-sale
securities
|
||||||||||||||||||||||||
|
Debt securities:
|
||||||||||||||||||||||||
|
Korean treasury and government agencies
|
3,950,885 | (29,367 | ) | 66,864 | (1,609 | ) | 4,017,749 | (30,976 | ) | |||||||||||||||
|
Corporate
|
306,986 | (1,953 | ) | 99,433 | (4,294 | ) | 406,419 | (6,247 | ) | |||||||||||||||
|
Financial institutions
|
3,701,037 | (6,147 | ) | 141,471 | (9,147 | ) | 3,842,508 | (15,294 | ) | |||||||||||||||
|
Asset-backed securities
|
1,876,366 | (1,372 | ) | — | — | 1,876,366 | (1,372 | ) | ||||||||||||||||
|
Marketable equity securities
|
227,642 | (46,497 | ) | 30 | — | 227,672 | (46,497 | ) | ||||||||||||||||
|
Total
available-for-sale
securities
|
10,062,916 | (85,336 | ) | 307,798 | (15,050 | ) | 10,370,714 | (100,386 | ) | |||||||||||||||
|
Held-to-maturity
securities
|
||||||||||||||||||||||||
|
Debt securities:
|
||||||||||||||||||||||||
|
Korean treasury and government agencies
|
1,541,618 | (23,354 | ) | 721,816 | (10,900 | ) | 2,263,434 | (34,254 | ) | |||||||||||||||
|
Corporate
|
129,196 | (1,187 | ) | 29,714 | (261 | ) | 158,910 | (1,448 | ) | |||||||||||||||
|
Financial institutions
|
112,664 | (380 | ) | 177,605 | (2,448 | ) | 290,269 | (2,828 | ) | |||||||||||||||
|
Asset-backed securities
|
2,000 | — | — | — | 2,000 | — | ||||||||||||||||||
|
Total
held-to-maturity
securities
|
1,785,478 | (24,921 | ) | 929,135 | (13,609 | ) | 2,714,613 | (38,530 | ) | |||||||||||||||
|
Total temporarily impaired securities
|
11,848,394 | (110,257 | ) | 1,236,933 | (28,659 | ) | 13,085,327 | (138,916 | ) | |||||||||||||||
As of December 31, 2008 and 2009, the cost of debt and
equity securities exceeded their fair value by
W
57,676 million and
W
138,916 million, respectively. The
unrealized losses on these securities are not considered to be
other-than-temporary
because the unrealized losses resulted mainly from changes in
the current market conditions and do not affect the expected
cash flows of the underlying collateral or issuer. The Company
has the ability and intent to hold these securities for a period
of time sufficient to recover from the unrealized losses.
Accordingly, the Company’s management has determined that
the decline in fair value of the above investment securities is
considered temporary in nature.
For the years ended December 31, 2007, 2008 and 2009, the
Company recognized net gains on venture capital securities and
other securities of
W
275,797 million,
W
281,648 million, and
W
95,316 million, respectively.
For the years ended December 31, 2007, 2008 and 2009,
proceeds from sales and maturities of
available-for-sale
securities amounted to
W
14,597,573 million,
W
21,716,908 million, and
W
33,065,165 million, respectively. Gross
realized gains on
available-for-sale
securities amounted to
W
752,858 million,
W
97,930 million, and
W
191,945 million, and gross realized
losses on
available-for-sale
securities amounted to
W
20,996 million,
W
38,370 million, and
W
14,645 million for the years ended
December 31, 2007, 2008, and 2009, respectively.
F-32
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The expected maturity distribution of the amortized cost and
estimated fair value of the Company’s
available-for-sale
and
held-to-maturity
debt securities at December 31, 2009 by contractual
maturity are shown in the table below. The actual maturities may
differ from the expected maturities or contractual maturities
because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
| Available-for-Sale Debt Securities | Held-to-Maturity Debt Securities | |||||||||||||||
|
Amortized
|
Fair
|
Amortized
|
Fair
|
|||||||||||||
| Cost | Value | Cost | Value | |||||||||||||
| (In millions of Korean won) | ||||||||||||||||
|
Due in one year or less
|
6,905,892 | 7,040,671 | 3,109,312 | 3,145,045 | ||||||||||||
|
Due after one year through five years
|
8,336,922 | 8,402,900 | 7,008,118 | 7,074,966 | ||||||||||||
|
Due after five years through ten years
|
344,050 | 348,139 | 2,452,563 | 2,472,591 | ||||||||||||
|
Due after ten years
|
1,765,235 | 1,764,232 | 39,774 | 39,676 | ||||||||||||
|
Securities not due at a single maturity date
|
19,850 | 20,223 | — | — | ||||||||||||
|
Total
|
17,371,949 | 17,576,165 | 12,609,767 | 12,732,278 | ||||||||||||
The fair value of beneficiary certificates included in the other
securities determined using the net asset value
(“NAV”) per share of the Company’s ownership
interest in the funds.
|
Redemption
|
||||||||||||||||
|
Fair
|
Unfunded
|
Redemption
|
Notice
|
|||||||||||||
| Value | Commitments | Frequency | Period | |||||||||||||
| (In millions of Korean won) | ||||||||||||||||
|
Private equity fund
|
34,448 | 24,000 | — | — | ||||||||||||
There is no standard redemption frequency nor is a prior notice
period required.
| 9. | Variable Interest Entities |
In the normal course of its business, the Company is a party to
various entities which may be deemed to be variable interest
entities such as asset-backed securitizations of loans, various
investment funds, guaranteed trusts and SPEs created for
structured financing. The Company also, in the ordinary course
of its business, has involvement with certain VIEs through
various types of interests, including investments in
subordinated debt, the right to receive fees for acting as an
asset manager or a business trustee, and the right to receive
fees for providing liquidity facilities.
On December 31, 2008, the Company adopted FSP No.FAS
140-4
and
FIN 46(R)-8 (ASC 810) which require additional
disclosures about its involvement with consolidated and
unconsolidated VIEs and expanded the population of VIEs to be
disclosed. The FSP does not require retrospective application of
the new disclosure.
The Company consolidates VIEs in which the Company holds
variable interests that absorb a majority of the risks
and/or
receive a majority of the benefits and therefore are deemed to
be the primary beneficiary. The Company takes into account all
of its involvement with a VIE in identifying variable interests
(explicit or implicit) that individually or in the aggregate
could be significant enough to warrant its designation as the
primary beneficiary and hence require it to consolidate the VIE
or otherwise require it to make appropriate disclosures under
ASC 810.
The Company generally classifies its involvement in VIEs as
follows:
| • | Asset-backed securitization of loans | |
| • | VIEs created for structured financing | |
| • | Liquidity provided to VIEs |
F-33
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| • | Investment trusts | |
| • | Others |
In most cases, a qualitative analysis of the Company’s
involvement in the entity provides sufficient evidence to
determine whether it is the primary beneficiary. In rare cases,
a more detailed analysis to quantify the extent of variability
to be absorbed by each variable interest holder is required to
determine the primary beneficiary. The quantitative analysis
provides probability-weighted estimates of a range of potential
outcomes and management judgment is required in determining the
primary beneficiary.
Asset-backed
securitization of loans
The Company utilizes SPEs to securitize loans. The Company
transfers loans to the SPEs which in turn issue asset backed
securities collateralized by the transferred loans. In these
securitizations, various classes of debt securities are issued
to the Company or third parties, and the SPEs have mainly issued
subordinated notes to the Company, an assets transferor. The
subordinated notes are designed to absorb the expected
variability associated with the credit risk in the SPE’s
assets. These SPEs are deemed to be VIEs and are generally
consolidated as the Company is the primary beneficiary when the
Company holds the majority of the subordinated notes issued by
the VIEs. As a result, the assets of consolidated VIEs serve as
collateral for the obligations of the VIEs. The third party
holders of asset backed securities issued by consolidated VIEs
have recourse only to the asset of the VIEs and do not have
recourse to the Company. The Company does not consolidate the
VIEs when its expected loss analysis indicates that third
parties that hold the subordinated notes absorb the majority of
the variability of the SPE’s assets.
VIEs
created for structured financing
The Company enters into lending arrangements with VIEs for the
purpose of financing projects or the acquisition of assets. The
Company has determined that the majority of expected losses is
absorbed by third parties when there are credit enhancement
commitments, such as financial guarantees by third parties, and
therefore does not consolidate the VIEs. However, the Company
consolidates VIEs where there are no credit enhancement
commitments by third parties and the Company absorbs the
expected losses.
Liquidity
provided to VIEs
The Company provides liquidity facilities to VIEs which are
structured by third parties other than the Company. Liquidity
facilities to VIEs represent irrevocable commitments to provide
contingent liquidity credit lines to VIEs. The Company had
commitments to provide liquidity to consolidated VIEs up to
W
40,000 million as of December 31,
2009.
Investment
trusts
The Company has consolidated its guaranteed fixed rate money
trusts because the Company was deemed to be the primary
beneficiary. The Company would absorb the majority of the
expected losses of these trusts by providing a guarantee of the
principal and a fixed rate of return on the principal amount
invested. Other trusts such as performance based trusts or
guaranteed principal money trusts are deemed to be VIEs but are
not consolidated because the Company does not absorb the
majority of the expected future variability associated with the
trusts’ assets.
Others
The Company also has involvement in VIEs through investment in
CDOs, beneficiary interests and other investments. The Company
evaluates which party is expected to absorb the majority of the
expected losses. The VIEs are not consolidated when the Company
does not absorb the majority of the expected future variability
associated with the VIEs’ assets.
F-34
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In accordance with ASC 810, the Company has consolidated
all VIEs for which the Company was determined to be the primary
beneficiary. The following table represents the carrying amount
of assets and liabilities held by VIEs as of December 31,
2009, which have been consolidated by the Company.
|
Asset-Backed
|
Liquidity
|
|||||||||||||||||||
|
Securitization of
|
Provided to
|
Investment
|
||||||||||||||||||
| Loans | VIEs | Trusts | Others | Total | ||||||||||||||||
| (In millions of Korean won) | ||||||||||||||||||||
|
Assets held by VIEs
|
||||||||||||||||||||
|
Investments
|
23,252 | — | 27,601 | 216,760 | 267,613 | |||||||||||||||
|
Loans
|
904,605 | 88,266 | 436 | 14,906 | 1,008,213 | |||||||||||||||
|
Other assets
|
165,866 | 155 | 1,131 | 186 | 167,338 | |||||||||||||||
|
Total
|
1,093,723 | 88,421 | 29,168 | 231,852 | 1,443,164 | |||||||||||||||
|
Liabilities held by VIEs
|
||||||||||||||||||||
|
Long-term debt
|
— | 521 | — | 47,174 | 47,695 | |||||||||||||||
|
Secured borrowings
|
878,481 | 69,898 | — | — | 948,379 | |||||||||||||||
|
Other liabilities
|
4,350 | 2,543 | 1,248 | 9,525 | 17,666 | |||||||||||||||
|
Total
|
882,831 | 72,962 | 1,248 | 56,699 | 1,013,740 | |||||||||||||||
The following table represents the carrying amount of assets
held by VIEs as of December 31, 2008, which have been
consolidated by the Company:
|
Asset-Backed
|
Liquidity
|
|||||||||||||||||||
|
Securitization of
|
Provided to
|
Investment
|
||||||||||||||||||
| Loans | VIEs | Trusts | Others | Total | ||||||||||||||||
| (In millions of Korean won) | ||||||||||||||||||||
|
Assets held by VIEs
|
||||||||||||||||||||
|
Investments
|
62,965 | — | 49,145 | 97,380 | 209,490 | |||||||||||||||
|
Loans
|
886,930 | 99,569 | 645 | — | 987,144 | |||||||||||||||
|
Other assets
|
131,897 | 2,151 | 19,906 | — | 153,954 | |||||||||||||||
|
Total
|
1,081,792 | 101,720 | 69,696 | 97,380 | 1,350,588 | |||||||||||||||
|
Liabilities held by VIEs
|
||||||||||||||||||||
|
Other borrowed fund
|
— | 1,078 | — | — | 1,078 | |||||||||||||||
|
Secured borrowings
|
820,633 | 100,000 | — | — | 920,633 | |||||||||||||||
|
Other liabilities
|
4,770 | 1,858 | 1,608 | — | 8,236 | |||||||||||||||
|
Total
|
825,403 | 102,936 | 1,608 | — | 929,947 | |||||||||||||||
In addition to the VIEs that are consolidated in accordance with
ASC 810, the Company has significant variable interests in
certain other VIEs that are not consolidated because the Company
is not the primary beneficiary. These VIEs are structured by
other third parties and the Company does not absorb the majority
of the entities’ losses nor does it receive a majority of
the entities’ expected residual returns. These VIEs
facilitate client transactions, and the Company provides the
VIEs with administration services. The transactions with the
VIEs are conducted at arm’s length, and individual credit
decisions are based on the analysis of the specific VIEs, taking
into consideration the quality of the underlying assets. The
Company records and reports these transactions with the VIEs
similar to any other third party transactions. All liquidity
facilities provided to these VIEs are included in the
Company’s credit-related commitments described in more
detail in Note 31.
F-35
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following disclosures regarding the Company’s
significant continuing involvement with unconsolidated VIEs
exclude entities where the Company’s only involvement is in
the form of certain derivatives, such as interest rate swaps or
cross currency swaps that have customary terms, administrative
or trustee services and investments accounted for under the cost
method. The total assets, liabilities and maximum exposure to
loss as a result of the involvement in significant VIEs, which
have not been consolidated at December 31, 2009, are as
follows:
|
Total
|
Total
|
Total
|
||||||||||||||||||||||||||||||
|
Other
|
Assets
|
Other
|
Liabilities
|
Assets of
|
Maximum
|
|||||||||||||||||||||||||||
| Investments | Loans | Assets | Involvement | Liabilities | Involvement | VIE | Exposure (1) | |||||||||||||||||||||||||
| (In millions of Korean won) | ||||||||||||||||||||||||||||||||
|
Asset-backed securitization of loans
|
— | — | — | — | 117,368 | 117,368 | 501,713 | — | ||||||||||||||||||||||||
|
VIEs created for structured financing
|
24,227 | 4,239,641 | 1,095 | 4,264,963 | 398,801 | 398,801 | 24,144,455 | 6,272,058 | ||||||||||||||||||||||||
|
Liquidity provided to VIEs
|
9,387 | 54,767 | 23 | 64,177 | 3,002 | 3,002 | 2,761,518 | 1,667,999 | ||||||||||||||||||||||||
|
Investment trusts
|
861,217 | — | — | 861,217 | 280,667 | 280,667 | 10,210,958 | 4,643,434 | ||||||||||||||||||||||||
|
Others
|
70,168 | 36,344 | — | 106,512 | — | — | 5,473,333 | 109,212 | ||||||||||||||||||||||||
|
Total
|
964,999 | 4,330,752 | 1,118 | 5,296,869 | 799,838 | 799,838 | 43,091,977 | 12,692,703 | ||||||||||||||||||||||||
| (1) | Represents the carrying amount of equity interests and debt interests held by the Company or guarantees provided by the Company as of December 31, 2009. |
The following table presents, by type of VIE, the total assets ,
liabilities and maximum exposure to loss as a result of the
involvement in significant VIEs, which have not been
consolidated at December 31, 2008:
|
Total
|
Total
|
Total
|
||||||||||||||||||||||||||||||
|
Other
|
Assets
|
Other
|
Liabilities
|
Assets of
|
Maximum
|
|||||||||||||||||||||||||||
| Investments | Loans | Assets | Involvement | Liabilities | Involvement | VIE | Exposure (1) | |||||||||||||||||||||||||
| (In millions of Korean won) | ||||||||||||||||||||||||||||||||
|
Asset-backed securitization of loans
|
1,356 | — | — | 1,356 | 161,083 | 161,083 | 1,149,324 | 1,356 | ||||||||||||||||||||||||
|
VIEs created for structured financing
|
100 | 4,658,650 | — | 4,658,750 | 239,818 | 239,818 | 21,385,774 | 7,178,131 | ||||||||||||||||||||||||
|
Liquidity provided to VIEs
|
473,224 | 629,749 | — | 1,102,973 | 5,093 | 5,093 | 3,073,968 | 2,257,159 | ||||||||||||||||||||||||
|
Investment trusts
|
725,246 | — | — | 725,246 | 424,909 | 424,909 | 9,693,900 | 5,098,696 | ||||||||||||||||||||||||
|
Others
|
27,769 | 12,414 | — | 40,183 | — | — | 4,449,793 | 150,702 | ||||||||||||||||||||||||
|
Total
|
1,227,695 | 5,300,813 | — | 6,528,508 | 830,903 | 830,903 | 39,752,759 | 14,686,044 | ||||||||||||||||||||||||
| (1) | Represents the carrying amount of equity interests and debt interests held by the Company or guarantees provided by the Company as of December 31, 2008. |
The Company’s maximum exposure to loss is based on the
unlikely event that all of the assets in the VIEs become
worthless and incorporates not only potential losses associated
with assets recorded on the Company’s balance sheet but
also potential losses associated with off-balance sheet
commitments such as unfunded liquidity commitments and other
contractual arrangements.
F-36
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 10. | Loans |
The composition of the loan portfolio as of December 31,
2008 and 2009 was as follows:
| 2008 | 2009 | |||||||
| (In millions of Korean won) | ||||||||
|
Domestic
|
||||||||
|
Commercial:
|
||||||||
|
Commercial and
industrial
(1)
|
75,140,264 | 74,611,001 | ||||||
|
Construction
|
10,052,096 | 8,096,574 | ||||||
|
Other
commercial
(2)
|
2,950,577 | 2,178,037 | ||||||
|
Consumer:
|
||||||||
|
Mortgage and home equity
|
69,923,921 | 70,678,319 | ||||||
|
Credit cards
|
11,522,553 | 11,368,321 | ||||||
|
Other
consumer
(3)
|
27,592,649 | 26,949,582 | ||||||
|
Foreign
|
2,454,534 | 2,343,550 | ||||||
|
Gross
loans
(4)(5)
|
199,636,594 | 196,225,384 | ||||||
|
Deferred origination costs, net
|
473,446 | 569,988 | ||||||
|
Less: Allowance for loan losses
|
(3,043,535 | ) | (3,341,046 | ) | ||||
|
Total loans,
net
(6)
|
197,066,505 | 193,454,326 | ||||||
| (1) |
Commercial and industrial loans include
|
|
| (2) | Other commercial loans include bills bought in foreign currency and overdrafts. | |
| (3) | Other consumer loans include personal overdrafts and loans with principal due at maturity. | |
| (4) |
Total loans on non-accrual status amounted to
|
|
| (5) |
The total investment in loans past due one day or more still
accruing interest amounted to
|
|
| (6) |
Total pledged loans amounted to
|
For the years ended December 31, 2007, 2008 and 2009, the
Company received equity securities having a fair market value of
W
1,687 million,
W
40 million, and
W
10,716 million, respectively, through the
restructuring of 16, 13, and 51 loans, respectively, having an
aggregate book value of 15,670 million,
W
4,777 million, and
W
26,660 million, respectively. The Company
recognized aggregate charge-offs of
W
13,983 million,
W
4,737 million, and
W
15,944 million, in 2007, 2008 and 2009,
respectively, related to these transactions.
Korea Housing Finance Corporation (“KHFC”), a
government owned entity, which was established on March 1,
2004 in accordance with the Korea Housing Finance Corporation
Act, has developed a new mortgage loan sale scheme to provide
opportunity for long-term investment and to stimulate the
domestic housing market. Under the new scheme, the Company
entered into a mortgage loan sale and servicing agreement with
KHFC, and underwrites mortgage loans at fixed interest rates and
transfers them to KHFC within a short period of time after
origination. These loans are written with the intention of
transfer to KHFC and have an average contractual maturity of
20 years. These loans are transferred at their carrying
value and the Company retains no risk, but retains various
servicing responsibilities with regard to the collection and
administration of the loans, as well as servicing rights, and
receives servicing fees in return.
F-37
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Company sold mortgage loans with an aggregate principal
balance of
W
710,784 million and
W
471,960 million to KHFC and recognized
W
19,752 million and
W
16,465 million of servicing fee income
for the years ended December 31, 2008 and 2009,
respectively. In relation to these transactions, the Company
recorded loans held for sale as of December 31, 2008 and
2009 amounting to
W
212,057 million and
W
201,275 million, respectively, which are
included in “Other assets” (See Note 12).
The table below sets forth information on the Company’s
impaired loans as of December 31, 2007, 2008, and 2009.
Impaired loans are those on which the Company believes it is
probable that it will not be able to collect all amounts due
according to the contractual terms of the loan.
| 2007 | 2008 | 2009 | ||||||||||
| (In millions of Korean won) | ||||||||||||
|
Impaired loans with an allowance
|
1,712,769 | 2,998,726 | 2,781,599 | |||||||||
|
Impaired loans without an allowance
|
87,658 | 374,255 | 294,339 | |||||||||
|
Total impaired loans
|
1,800,427 | 3,372,981 | 3,075,938 | |||||||||
|
Allowance for impaired loans
|
953,825 | 1,522,668 | 1,459,873 | |||||||||
|
Average balance of impaired loans during the year
|
2,305,596 | 3,216,079 | 4,226,596 | |||||||||
|
Interest income recognized on impaired loans during the
year
(1)(2)
|
139,297 | 215,991 | 208,748 | |||||||||
| (1) |
Had the impaired loans performed in accordance with their
original terms, additional interest income of
|
|
| (2) |
Of these amounts,
|
The net carrying amount of foreclosed assets was nil as of
December 31, 2008 and 2009.
As discussed in Note 1, adverse economic conditions in the
Korean economy may continue to have a negative effect on debtors
of the Company. The Company owns investment securities of, and
has loans outstanding to, a number of Korean companies that have
experienced financial difficulties. The ultimate collectability
of these amounts is subject to a number of factors, including
the successful performance of the debtors under various
restructuring plans in place or in process of negotiation and
their ability to perform on loan and debt obligations given the
status of the Korean economy and the potential continuation of
adverse trends or other unfavorable developments. Consequently,
it is reasonably possible that adjustments could be made to the
reserve for impaired loans and to the carrying amount of
investments in the near term in amounts that may be material to
the Company’s consolidated financial statements.
F-38
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The table below summarizes the changes in the allowance for
credit losses for the years ended December 31:
| 2007 | 2008 | |||||||||||||||||||||||
|
Off-Balance
|
Off-Balance
|
|||||||||||||||||||||||
|
Sheet Credit
|
Sheet Credit
|
|||||||||||||||||||||||
| Loans | Instruments (1) | Total | Loans | Instruments (1) | Total | |||||||||||||||||||
| (In millions of Korean won) | ||||||||||||||||||||||||
|
Allowance at January 1,
|
2,468,378 | 333,678 | 2,802,056 | 1,864,029 | 243,385 | 2,107,414 | ||||||||||||||||||
|
Provision for (reversal of provision for) credit losses
|
108,764 | (90,390 | ) | 18,374 | 2,141,631 | 171,823 | 2,313,454 | |||||||||||||||||
|
Charge-offs
|
(1,346,570 | ) | — | (1,346,570 | ) | (1,564,778 | ) | — | (1,564,778 | ) | ||||||||||||||
|
Recoveries
|
632,694 | — | 632,694 | 598,399 | — | 598,399 | ||||||||||||||||||
|
Other
|
763 | 97 | 860 | 4,254 | 6,173 | 10,427 | ||||||||||||||||||
|
Allowance at December 31,
|
1,864,029 | 243,385 | 2,107,414 | 3,043,535 | 421,381 | 3,464,916 | ||||||||||||||||||
| 2009 | ||||||||||||
|
Off-Balance
|
||||||||||||
|
Sheet Credit
|
||||||||||||
| Loans | Instruments (1) | Total | ||||||||||
| (In millions of Korean won) | ||||||||||||
|
Allowance at January 1,
|
3,043,535 | 421,381 | 3,464,916 | |||||||||
|
Provision for (reversal of provision for) credit losses
|
2,216,169 | (12,176 | ) | 2,203,993 | ||||||||
|
Charge-offs
|
(2,383,566 | ) | — | (2,383,566 | ) | |||||||
|
Recoveries
|
457,893 | — | 457,893 | |||||||||
|
Other
|
7,015 | (6,003 | ) | 1,012 | ||||||||
|
Allowance at December 31,
|
3,341,046 | 403,202 | 3,744,248 | |||||||||
| (1) | The allowance for off-balance sheet credit instruments is included in “Other liabilities”. |
| 11. | Premises and Equipment |
Premises and equipment, net as of December 31, 2008 and
2009 consisted of the following:
| 2008 | 2009 | |||||||
| (In millions of Korean won) | ||||||||
|
Land
|
539,018 | 531,196 | ||||||
|
Buildings
|
1,033,128 | 1,041,861 | ||||||
|
Equipment and furniture
|
1,710,873 | 1,724,314 | ||||||
|
Leasehold improvements
|
357,338 | 395,437 | ||||||
|
Leased property under capital leases
|
15,110 | 33,045 | ||||||
|
Construction in progress
|
— | 350 | ||||||
|
Total
|
3,655,467 | 3,726,203 | ||||||
|
Less: Accumulated depreciation
|
(1,880,567 | ) | (2,109,052 | ) | ||||
|
Premises and equipment, net
|
1,774,900 | 1,617,151 | ||||||
The Company incurred depreciation expense on its buildings,
equipment and furniture, leasehold improvements and leased
property under capital leases of
W
341,039 million,
W
327,441 million, and
W
337,956 million, for the years ended
December 31, 2007, 2008 and 2009, respectively, which is
included in “Depreciation and amortization” in the
consolidated statements of income.
F-39
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 12. | Other Assets |
Other assets as of December 31, 2008 and 2009 consisted of
the following:
| 2008 | 2009 | |||||||
| (In millions of Korean won) | ||||||||
|
Accounts receivable
|
564,208 | 264,373 | ||||||
|
Payments in advance
|
96,979 | 118,163 | ||||||
|
Deferred tax assets, net
|
— | 30,232 | ||||||
|
Prepaid expenses
|
113,732 | 196,209 | ||||||
|
Prepaid income tax
|
540 | 622 | ||||||
|
Loans held for
sale
(1)
|
293,384 | 201,275 | ||||||
|
Fair value hedge derivatives
|
73,314 | 48,070 | ||||||
|
Income tax receivable
|
849,715 | 575,057 | ||||||
|
Others
|
278,638 | 33,662 | ||||||
|
Total
|
2,270,510 | 1,467,663 | ||||||
| (1) |
Included
|
| 13. | Goodwill and Other Intangible Assets |
The following table presents goodwill as of December 31,
2008 and 2009 allocated to each of the Company’s business
segments, as defined in Note 35:
| 2008 | 2009 | |||||||
|
(In millions of
|
||||||||
| Korean won) | ||||||||
|
Corporate Banking
|
145,985 | 145,985 | ||||||
|
Credit Card Operations
|
248,472 | 248,472 | ||||||
|
Others
|
183,995 | 184,993 | ||||||
|
Total
|
578,452 | 579,450 | ||||||
As of December 31, 2008 and 2009, the outstanding balances
of goodwill, which resulted from the respective mergers with
Korea Long Term Credit Bank and Kookmin Credit Card, were
W
162,205 million and
W
232,252 million, respectively. The amount
related to Korea Long Term Credit Bank was allocated to
Corporate Banking and Credit Card Operations, and the amount
related to Kookmin Credit Card was allocated to Credit Card
operations. In addition, the Company recognized
W
117,238 million with respect to the
acquisition of KB Investment and Securities Co., Ltd.
(formerly Hannuri Investment & Securities Co., Ltd.),
and
W
66,757 million for the acquisition of
the noncontrolling interests owned by KB Asset Management Co.,
Ltd. and allocated the combined amount to others. On May 4,
2009, Kookmin Bank acquired 132,600 common shares of Khmer Union
Bank for
W
9,969 million. As a result, the
Company recognized goodwill of
W
998 million for the acquisition of 51% of
voting rights of Khmer Bank in 2009.
F-40
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
There were no indefinite-lived intangible assets for any of the
periods presented. Other intangible assets, which are subject to
amortization, primarily include core deposit and credit card
relationship intangibles, as well as capitalized software costs.
The gross carrying amount and accumulated amortization related
to other intangible assets as of December 31, 2008 and 2009
are presented below.
| December 31, 2008 | December 31, 2009 | |||||||||||||||||||||||
|
Gross
|
Gross
|
|||||||||||||||||||||||
|
Carrying
|
Accumulated
|
Net Carrying
|
Carrying
|
Accumulated
|
Net Carrying
|
|||||||||||||||||||
| Amount | Amortization | Amount | Amount | Amortization | Amount | |||||||||||||||||||
| (In millions of Korean won) | ||||||||||||||||||||||||
|
Core deposit intangible
|
397,836 | (379,618 | ) | 18,218 | 397,836 | (397,836 | ) | — | ||||||||||||||||
|
Credit card relationship
intangible
(1)
|
131,876 | (131,876 | ) | — | 131,876 | (131,876 | ) | — | ||||||||||||||||
|
Credit card relationship
intangible
(2)
|
75,000 | (54,900 | ) | 20,100 | 75,000 | (60,525 | ) | 14,475 | ||||||||||||||||
|
Capitalized software costs
|
276,248 | (118,014 | ) | 158,234 | 353,020 | (198,868 | ) | 154,152 | ||||||||||||||||
|
Leased property under capital leases
|
8,281 | (173 | ) | 8,108 | 13,656 | (2,465 | ) | 11,191 | ||||||||||||||||
|
Others
|
29,248 | (25,422 | ) | 3,826 | 40,090 | (29,193 | ) | 10,897 | ||||||||||||||||
|
Total
|
918,489 | (710,003 | ) | 208,486 | 1,011,478 | (820,763 | ) | 190,715 | ||||||||||||||||
| (1) | Recognized with respect to the merger of H&CB | |
| (2) | Recognized with respect to the merger of KCC |
The aggregate amortization expenses of other intangible assets
in 2007, 2008, and 2009 were
W
77,843 million,
W
79,746 million, and
W
93,051 million respectively, and are
included in “Depreciation and amortization” in the
consolidated statements of income. The amortization expenses
related to other intangible assets over their remaining useful
lives are expected to be
W
70,793 million,
W
66,335 million,
W
40,827 million,
W
12,650 million, and
W
87 million for 2010, 2011, 2012, 2013,
and 2014, respectively.
| 14. | Deposits |
Deposits as of December 31, 2008 and 2009 were as follows:
|
Weighted
|
||||||||||||
|
Average Rate
|
||||||||||||
| 2008 | 2009 | Paid for 2009 | ||||||||||
| (In millions of Korean won) | ||||||||||||
|
Interest-bearing deposits:
|
||||||||||||
|
Time deposits
|
81,533,413 | 90,416,765 | 4.45 | % | ||||||||
|
Savings deposits
|
43,819,923 | 48,007,195 | 0.49 | % | ||||||||
|
Certificate of deposits
|
24,974,835 | 23,081,256 | 4.50 | % | ||||||||
|
Mutual installment deposits
|
4,198,869 | 3,690,582 | 2.99 | % | ||||||||
|
Interest-bearing demand deposits
|
736,166 | 883,123 | 1.18 | % | ||||||||
|
Total interest-bearing deposits
|
155,263,206 | 166,078,921 | 3.30 | % | ||||||||
|
Non-interest-bearing deposits:
|
||||||||||||
|
Demand deposits
|
3,438,269 | 3,104,147 | ||||||||||
|
Total deposits
|
158,701,475 | 169,183,068 | 3.24 | % | ||||||||
F-41
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In accordance with the Bank of Korea Act, banks are required to
maintain reserves of 0% to 7% of customer deposits with the Bank
of Korea, which is recorded as restricted cash in the
consolidated balance sheet (See Note 4).
The scheduled contractual maturities of time deposits,
certificates of deposit and mutual installment deposits as of
December 31, 2009 were as follows:
| (In millions of Korean won) | ||||
|
2010
|
109,309,129 | |||
|
2011
|
3,384,330 | |||
|
2012
|
1,175,821 | |||
|
2013
|
2,047,571 | |||
|
2014
|
369,919 | |||
|
Thereafter
|
901,833 | |||
|
Total
|
117,188,603 | |||
The Korea Deposit Insurance Corporation (“KDIC”)
provides deposit insurance up to a total of
W
50 million per depositor in each bank
pursuant to the Depositor Protection Act for deposits maturing
after January 1, 2001, regardless of the placement date of
the deposit. For the insurance covered by KDIC, the Company
recorded a premium of 0.18% of the average deposits which
amounted to
W
213,155 million,
W
207,264 million and
W
219,915 million in 2007, 2008 and 2009,
respectively.
| 15. | Other Borrowed Funds |
A summary of other borrowed funds as of December 31, 2008
and 2009 is presented below.
| 2008 | 2009 | |||||||||||||||
|
Weighted
|
Weighted
|
|||||||||||||||
|
Average
|
Average
|
|||||||||||||||
|
Outstanding
|
Interest
|
Outstanding
|
Interest
|
|||||||||||||
| Balance | Rate | Balance | Rate | |||||||||||||
| (In millions of Korean won) | ||||||||||||||||
|
Kookmin Bank
|
||||||||||||||||
|
Borrowings from the Bank of Korea
|
796,205 | 2.98 | % | 1,343,725 | 1.25 | % | ||||||||||
|
Borrowings in foreign currencies
|
3,873,399 | 3.77 | % | 2,771,349 | 2.85 | % | ||||||||||
|
Borrowings from trust accounts managed by the Bank
|
2,775,135 | 4.29 | % | 1,658,160 | 1.76 | % | ||||||||||
|
Debentures in Won
|
2,506,163 | 5.64 | % | 2,117,331 | 4.67 | % | ||||||||||
|
Other borrowings
|
191,436 | 5.09 | % | 64,839 | 3.80 | % | ||||||||||
|
Subtotal
|
10,142,338 | 4.34 | % | 7,955,404 | 2.84 | % | ||||||||||
|
Subsidiaries
|
||||||||||||||||
|
Borrowings from other financial Institutions
|
384,480 | 6.78 | % | 162,654 | 5.74 | % | ||||||||||
|
Borrowings in foreign currencies
|
— | 0.00 | % | 58,228 | 2.29 | % | ||||||||||
|
Debentures in Won
|
98 | 1.00 | % | — | — | |||||||||||
|
Subtotal
|
384,578 | 6.78 | % | 220,882 | 4.83 | % | ||||||||||
|
Total
|
10,526,916 | 4.53 | % | 8,176,286 | 2.82 | % | ||||||||||
Other borrowed funds are defined as borrowed funds with original
maturities of less than one year.
F-42
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 16. | Secured Borrowings |
The Company transferred certain loans and investment securities
to SPEs, which in turn issued beneficial interests
collateralized by such loans. These transactions did not meet
the conditions for a sale under SFAS No. 140 (ASC
860) and have been accounted for as secured borrowings. As
a result, the loans and securities collateralizing these
borrowings are included in “Loans” and
“Available-for-sale
securities” or
“Held-to-maturity
securities,” and the beneficial interests issued by the
SPEs, which paid interest at rates of 1.76% to 8.50% per annum
as of December 31, 2009, are included in “Secured
borrowings.”
In addition, the Company has sold securities under repurchase
agreement having maturities in excess of 90 days, which are
also classified as secured borrowings. Securities sold under
agreements to repurchase are reflected at the amount of cash
received in connection with the transaction. The Company may be
required to provide additional collateral based on the fair
value of the underlying securities.
The components of the secured borrowings and related collateral
as of December 31, 2008 were as follows:
| 2008 | ||||||||||||||
|
Secured
|
Collateral | |||||||||||||
| Maturity | Borrowings | Loans | Securities | |||||||||||
| (In millions of Korean won) | ||||||||||||||
|
KB 10th ABS Specialty Co., Ltd. 7.05%-7.76% senior
collateralized bond obligation
|
2009 ~ 2010 | 80,000 | 21,256 | — | ||||||||||
|
KB 11th ABS Specialty Co., Ltd. 5.99%-7.35% senior
collateralized bond obligation
|
2009 ~ 2010 | 77,000 | 51,131 | — | ||||||||||
|
KB 1st Mortgage Loan Specialty Co., Ltd. 4.03% senior
collateralized bond obligation
|
2039 | 663,807 | 664,191 | — | ||||||||||
|
Chungla Vivaldi Co., Ltd. 7.81% commercial papers
|
2009 | 100,000 | 99,149 | — | ||||||||||
|
Other 3.08%-7.40% securities sold under repurchase agreement
|
2009 ~ 2010 | 4,959,020 | — | 5,963,590 | ||||||||||
|
Gross secured borrowings
|
5,879,827 | 835,727 | 5,963,590 | |||||||||||
|
Discount
|
(174 | ) | — | — | ||||||||||
|
Total
|
5,879,653 | 835,727 | 5,963,590 | |||||||||||
F-43
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The components of the secured borrowings and related collateral
as of December 31, 2009 were as follows:
| 2009 | ||||||||||||||
|
Secured
|
Collateral | |||||||||||||
| Maturity | Borrowings | Loans | Securities | |||||||||||
| (In millions of Korean won) | ||||||||||||||
|
KB 1st Mortgage Loan Specialty Co., Ltd. 1.76% senior
collateralized bond obligation
|
2039 | 540,520 | 591,976 | — | ||||||||||
|
KB 12th ABS Specialty Co., Ltd. 7.00%-8.50% senior
collateralized bond obligation
|
2010 ~ 2011 | 70,000 | 22,330 | — | ||||||||||
|
KB 13th ABS Specialty Co., Ltd. 3.82%-6.41% senior
collateralized bond obligation
|
2010 ~ 2011 | 165,000 | 120,586 | — | ||||||||||
|
New Star 1st ABS Specialty Co., Ltd. 4.65%-5.05% commercial
papers
|
2010 | 100,000 | — | 99,285 | ||||||||||
|
Eubora ABS Specialty Co., Ltd. 4.05%-4.45% senior collateralized
bond obligation
|
2010 | 70,000 | 69,662 | — | ||||||||||
|
KAMCO Value Recreation 3rd ABS Specialty Co., Ltd. 6.27% senior
collateralized bond obligation
|
2012 | 3,258 | 3,346 | — | ||||||||||
|
Other 7.25% senior collateralized bond obligation
|
2014 | 1,141,845 | 4,148,828 | — | ||||||||||
|
Other 1.29%-7.40% securities sold under repurchase agreement
|
2010 | 2,605,262 | — | 4,325,842 | ||||||||||
|
Gross secured borrowings
|
4,695,885 | 4,956,728 | 4,425,127 | |||||||||||
|
Discount
|
(26,157 | ) | — | — | ||||||||||
|
Total
|
4,669,728 | 4,956,728 | 4,425,127 | |||||||||||
Secured
borrowings maturity schedule
The combined aggregate amounts of all secured borrowings by
contractual maturities as of December 31, 2009 were as
follows:
| (In millions of Korean won) | ||||
|
Due in 2010
|
2,910,262 | |||
|
Due in 2011
|
100,000 | |||
|
Due in 2012
|
3,258 | |||
|
Due in 2013
|
— | |||
|
Due in 2014
|
1,141,845 | |||
|
Thereafter
|
540,520 | |||
|
Gross secured borrowings
|
4,695,885 | |||
|
Discount
|
(26,157 | ) | ||
|
Total
|
4,669,728 | |||
F-44
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 17. | Long-term Debt |
The following table is a summary of long-term debt (net of
unamortized original issue discount) as of December 31,
2008 and 2009:
| Interest Rate | Maturity | 2008 | 2009 | |||||||||||
| (In millions of Korean won) | ||||||||||||||
|
Senior
|
||||||||||||||
|
Kookmin Bank
|
||||||||||||||
|
Won currency
|
||||||||||||||
|
Notes payable to Ministry of Finance and Economy
|
2.89% ~ 5.00% | 2010 ~ 2021 | 108,240 | 84,332 | ||||||||||
|
Notes payable to Korea Development Bank
|
2.00% ~ 3.77% | 2010 ~ 2018 | 35,471 | 47,406 | ||||||||||
|
Notes payable to other government funds
|
0.00% ~ 4.25% | 2010 ~ 2024 | 589,899 | 589,940 | ||||||||||
|
Notes payable to Industrial Bank of Korea
|
3.44% ~ 3.97% | 2010 ~ 2016 | 36,068 | 19,473 | ||||||||||
|
Floating rate finance
debentures
(1)
|
3.21% ~ 12.00% | 2010 ~ 2019 | 2,419,841 | 1,446,122 | ||||||||||
|
Finance debentures
|
3.10% ~ 8.62% | 2010 ~ 2027 | 24,764,322 | 21,218,836 | ||||||||||
|
Other notes payable
|
1.20% ~ 5.40% | 2010 ~ 2045 | 1,482,781 | 1,783,816 | ||||||||||
|
Subtotal
|
29,436,622 | 25,189,925 | ||||||||||||
|
Foreign currency
|
||||||||||||||
|
Floating rate finance
debentures
(1)
|
0.44% ~ 5.57% | 2010 ~ 2012 | 3,578,764 | 2,462,677 | ||||||||||
|
Finance debentures
|
2.05% ~ 6.84% | 2010 ~ 2013 | 132,745 | 591,376 | ||||||||||
|
Floating rate notes
payable
(1)
|
0.69% ~ 6.33% | 2010 ~ 2012 | 1,440,322 | 1,420,185 | ||||||||||
|
Other notes payable
|
— | — | 963,244 | — | ||||||||||
|
Subtotal
|
6,115,075 | 4,474,238 | ||||||||||||
|
Subsidiaries
|
||||||||||||||
|
Finance debentures
|
4.98% ~ 7.48% | 2011 ~ 2012 | 500,000 | 800,000 | ||||||||||
|
Borrowings from other financial institutions in Won
|
1.00% ~ 7.63% | 2011 ~ 2027 | 31,181 | 50,461 | ||||||||||
|
Borrowings from Small and Medium Company Promotion Fund
|
4.69% | 2017 | 2,036 | 17,692 | ||||||||||
|
Subtotal
|
533,217 | 868,153 | ||||||||||||
|
Subordinated
|
||||||||||||||
|
Kookmin Bank
|
||||||||||||||
|
Won currency
|
||||||||||||||
|
Finance debentures
|
4.19% ~ 9.65% | 2010 ~ 2039 | 9,090,775 | 9,042,350 | ||||||||||
|
Subsidiaries
|
||||||||||||||
|
Won Currency
|
||||||||||||||
|
Other borrowings
|
9.00% | 2011 ~ 2018 | — | 695 | ||||||||||
|
Gross long-term debt
|
45,175,689 | 39,575,361 | ||||||||||||
|
Discount
|
(27,727 | ) | (5,452 | ) | ||||||||||
|
Total long-term debt, net
|
45,147,962 | 39,569,909 | ||||||||||||
| (1) | Interest rates on floating rate debt are those rates in effect at December 31, 2009. |
F-45
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Long-term debt is predominately denominated in Won,
U.S. dollars and Japanese yen with both fixed and floating
interest rates. Floating rates are generally determined
periodically by formulas based on certain money market rates
tied to the three-month or six-month London Inter-bank Offered
Rate (“LIBOR”) and the monthly Public Fund Prime
Rate published by the Korean government and are reset on a
monthly, quarterly and semi-annual basis. The weighted-average
interest rates for long-term debt were 5.64% and 5.18% as of
December 31, 2008 and 2009, respectively.
Debt
maturity schedule
The combined aggregate amounts of all long-term debt by
contractual maturities as of December 31, 2009 were as
follows:
| (In millions of Korean won) | ||||
|
Due in 2010
|
13,933,190 | |||
|
Due in 2011
|
9,038,321 | |||
|
Due in 2012
|
5,099,570 | |||
|
Due in 2013
|
1,661,125 | |||
|
Due in 2014
|
4,709,661 | |||
|
Thereafter
|
5,133,494 | |||
|
Gross long-term debt
|
39,575,361 | |||
|
Discount
|
(5,452 | ) | ||
|
Total long-term debt, net
|
39,569,909 | |||
Certain borrowing agreements of the Company contain covenants
that limit the Company’s ability to pledge the assets to
secure indebtedness, to dispose, sell or transfer assets or to
enter into arrangements having a similar effect. As of
December 31, 2008, the Company had failed to comply with
the covenants due to financing activities undertaken in the
ordinary course of the Company’s business activities.
Consequently, during the first quarter of 2009, the Company
amended covenants contained in certain borrowings as of
December 31, 2008 and the Company repaid the borrowings
whose agreements were not amended. As of December 31, 2009,
the Company is in compliance with the covenants contained in the
borrowing agreements.
F-46
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 18. | Other Liabilities |
Other liabilities as of December 31, 2008 and 2009 were
comprised of the following:
| 2008 | 2009 | |||||||
| (In millions of Korean won) | ||||||||
|
Accrued severance benefits
|
280,201 | 175,987 | ||||||
|
Accrued expenses
|
297,410 | 301,134 | ||||||
|
Accounts payable
|
924,607 | 649,119 | ||||||
|
Unearned income
|
213,315 | 160,426 | ||||||
|
Tax withholdings and income tax payable
|
265,504 | 197,821 | ||||||
|
Guarantee deposits received
|
107,965 | 142,264 | ||||||
|
Deferred tax liabilities
|
191,269 | 102,285 | ||||||
|
Fair value hedge derivatives
|
1,850 | 209,929 | ||||||
|
Due to agencies
|
481,559 | 344,668 | ||||||
|
Allowance for losses on off-balance sheet credit instruments
|
421,381 | 403,202 | ||||||
|
Payments received on behalf of government and others
|
273,393 | 218,415 | ||||||
|
Others
|
358,551 | 449,510 | ||||||
|
Total
|
3,817,005 | 3,354,760 | ||||||
| 19. | Non-interest Income |
The components of non-interest income for the years ended
December 31, 2007, 2008 and 2009 were as follows:
| 2007 | 2008 | 2009 | ||||||||||
| (In millions of Korean won) | ||||||||||||
|
Trust fees, net
|
159,175 | 165,459 | 188,980 | |||||||||
|
Other fees and commission income:
|
||||||||||||
|
Commissions received on fund management
|
124,656 | 87,642 | 53,876 | |||||||||
|
Commissions and fees received for brokerage and agency activities
|
488,439 | 373,735 | 324,262 | |||||||||
|
Commissions received on credit cards
|
976,434 | 1,034,409 | 1,090,138 | |||||||||
|
Commissions received in remittance
|
14,168 | 11,945 | 9,832 | |||||||||
|
Commissions received on cash dispenser service
|
83,111 | 80,339 | 76,124 | |||||||||
|
Commissions received on letters of credit
|
45,578 | 54,020 | 54,484 | |||||||||
|
Bancassurance fees received
|
188,186 | 170,247 | 131,887 | |||||||||
|
Other
|
503,500 | 568,354 | 609,289 | |||||||||
|
Subtotal
|
2,424,072 | 2,380,691 | 2,349,892 | |||||||||
|
Net trading revenue
|
40,732 | 104,141 | 164,612 | |||||||||
|
Net gain (loss) on investments:
|
||||||||||||
|
Debt securities
|
(55,807 | ) | (13,954 | ) | 140,591 | |||||||
|
Equity securities
|
797,324 | (177,303 | ) | 32,014 | ||||||||
|
Other
|
275,797 | 281,648 | 95,317 | |||||||||
|
Subtotal
|
1,017,314 | 90,391 | 267,922 | |||||||||
|
Other non-interest income:
|
||||||||||||
|
Gain on sale of loans
|
3,485 | 13,329 | 80,211 | |||||||||
|
Other
|
368,079 | 198,268 | 461,829 | |||||||||
|
Subtotal
|
371,564 | 211,597 | 542,040 | |||||||||
|
Total non-interest income
|
4,012,857 | 2,952,279 | 3,513,446 | |||||||||
F-47
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 20. | Non-interest Expenses |
The components of non-interest expenses for the years ended
December 31, 2007, 2008 and 2009 were as follows:
| 2007 | 2008 | 2009 | ||||||||||
| (In millions of Korean won) | ||||||||||||
|
Salaries and employee benefits:
|
||||||||||||
|
Salaries and other benefits
|
2,096,258 | 2,161,635 | 2,062,838 | |||||||||
|
Provision for accrued severance benefits
|
183,569 | 173,348 | 154,716 | |||||||||
|
Subtotal
|
2,279,827 | 2,334,983 | 2,217,554 | |||||||||
|
Depreciation and amortization:
|
||||||||||||
|
Depreciation on premises and equipment
|
341,039 | 327,441 | 337,956 | |||||||||
|
Amortization of other intangible assets
|
77,843 | 79,746 | 93,051 | |||||||||
|
Subtotal
|
418,882 | 407,187 | 431,007 | |||||||||
|
Other administrative expenses
|
835,720 | 875,278 | 857,087 | |||||||||
|
Credit card fees:
|
||||||||||||
|
Commissions paid on credit cards
|
337,496 | 372,874 | 416,314 | |||||||||
|
Commissions paid on troubled credit cards
|
721 | 906 | 968 | |||||||||
|
Subtotal
|
338,217 | 373,780 | 417,282 | |||||||||
|
Other fees and commissions:
|
||||||||||||
|
Insurance fees on deposits to KDIC
|
213,155 | 207,264 | 219,915 | |||||||||
|
Contribution to guarantee funds
|
268,435 | 335,088 | 334,875 | |||||||||
|
Commissions on overdue loans
|
— | 2 | — | |||||||||
|
Other
|
246,959 | 284,081 | 315,633 | |||||||||
|
Subtotal
|
728,549 | 826,435 | 870,423 | |||||||||
|
Other non-interest expenses:
|
||||||||||||
|
Loss on sale of loans
|
3,940 | 16,622 | 31,242 | |||||||||
|
Loss on disposition of assets
|
1,697 | 1,094 | 3,284 | |||||||||
|
Tax expenses other than income tax
|
117,042 | 142,270 | 120,593 | |||||||||
|
Other
|
409,700 | 343,180 | 793,619 | |||||||||
|
Subtotal
|
532,379 | 503,166 | 948,738 | |||||||||
|
Total non-interest expenses
|
5,133,574 | 5,320,829 | 5,742,091 | |||||||||
| 21. | Common Stock |
Capital
stock
The Company has 1,000 million authorized shares of common
stock with
W
5,000 par value, of which
356,351,693 shares and 386,351,693 shares were issued
as of December 31, 2008 and 2009, and
308,921,422 shares(net of 47,430,271 treasury shares) and
343,028,989 shares(net of 43,322,704 treasury shares) were
outstanding as of December 31, 2008 and 2009, respectively.
F-48
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Treasury
stock
Treasury stock transactions are recorded at cost. The changes in
the treasury stock of the Company for the years ended
December 31, 2007, 2008 and 2009 were as follows:
| Description | Shares Increase | Shares Decrease | Net Changes | |||||||||
|
Shares at January 1, 2007
|
51,343 | |||||||||||
|
2007
|
77,084 | 102,345 | (25,261 | ) | ||||||||
|
2008
|
73,636,201 | 26,232,012 | 47,404,189 | |||||||||
|
2009
|
43,412 | 4,150,979 | (4,107,567 | ) | ||||||||
|
Shares at December 31, 2009
|
43,322,704 | |||||||||||
In 2007, the Company purchased 77,084 shares and sold
102,345 shares through a private equity fund.
In 2008, the Company purchased 28,600 shares and sold
32,082 shares through a private equity fund. Also, the
Company purchased 73,607,601 shares and sold
26,199,930 shares upon the stock transfer in connection
with the establishment of the financial holding company as more
fully described in Note 3.
In 2009, The Company purchased 43,412 shares and sold
66,012 shares through a private equity fund. Also, the
Company sold 4,084,967 shares upon the stock transfer in
connection with the establishment of the financial holding
company as more fully described in Note 3.
| 22. | Retained Earnings |
Korean regulations require the Company to appropriate retained
earnings for certain purposes. Appropriated and unappropriated
retained earnings as of December 31, 2008 and 2009 were as
follows:
| 2008 | 2009 | |||||||
| (In millions of Korean won) | ||||||||
|
Appropriated retained earnings:
|
||||||||
|
Legal reserve
|
1,351,340 | 1,502,440 | ||||||
|
Reserve for financial structure improvement
|
55,600 | 55,600 | ||||||
|
Other statutory reserves
|
8,244 | 5,021 | ||||||
|
Unappropriated retained earnings
|
8,617,587 | 9,215,063 | ||||||
|
Total
|
10,032,771 | 10,778,124 | ||||||
The Banking Act requires banks to appropriate as a legal reserve
an amount equal to a minimum of 10% of annual net income, as
reported in the Company’s unconsolidated financial
statements under generally accepted accounting principles in
Korea (Korean GAAP), until such reserve equals 100% of its
paid-in capital. This reserve is not available for payment of
cash dividends but may be transferred to capital stock or used
to reduce an accumulated deficit, if any, by an appropriate
resolution of the Company’s board of directors.
In 2002, the Finance Supervisory Service recommended that
companies in the Korean Federation of Banks appropriate at least
10 percent of their net income after deducting accumulated
deficit to a reserve for financial structure improvement, until
the simple capital ratio equals 5.5 percent. This reserve
is not available for payment of cash dividends; however, it can
be used to reduce a deficit or be transferred to capital.
The Kookmin Bank’s branch in Japan is required to
appropriate a legal reserve of up to 10% of annual income, as
reported in the Japan Branch of Kookmin Bank’s financial
statements under generally accepted accounting principles in
Japan, until such reserve equals two billion Japanese yen. This
reserve is used only to reduce any accumulated deficit related
to the branch in Japan and is recorded in “Other statutory
reserves”.
F-49
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
As of December 31, 2008 and 2009, total balances of
accumulated restricted retained earnings were
W
1,415,184 million and
W
1,563,061 million, respectively.
Dividends
Dividends payable to the equity stockholders are based on the
unappropriated retained earnings available for distribution,
which is defined in Korean Commercial Law, as reported in the
Company’s non-consolidated financial statements prepared in
accordance with Korean GAAP. Hence, the unappropriated retained
earnings available for dividend distribution in accordance with
U.S. GAAP may, in certain years, either not be fully
available or will be additionally available for distribution to
the equity stockholders. Further, dividends are declared and
paid in Korean won. Treasury shares are excluded from the
dividend distribution. The Company has reported unappropriated
retaining earnings of
W
630,941 million and
W
1,116,531 million in its Korean GAAP
non-consolidated financial statements as of December 31,
2008 and 2009. With respect to unappropriated retained earnings
available for the payment of dividends as of December 31,
2008, the stockholders of the Company approved no payment of a
cash dividend to stockholders on March 27, 2009. However,
with respect to unappropriated retained earnings available for
the payment of dividends as of December 31, 2009, at the
annual general meeting of stockholders on March 26, 2010,
the stockholders of the Company approved the payment of a cash
dividend of 4.60% to stockholders of record as of
December 31, 2009, and cash dividend amounting to
W
78,897 million was paid on March 28,
2010.
Kookmin Bank has reported unappropriated retained earnings of
W
7,058,314 million and
W
7,539,785 million, respectively, as of
December 31, 2008 and 2009, in its Korean GAAP
non-consolidated financial statements. With respect to
unappropriated retained earnings available for the payment of
dividends as of December 31, 2008, on March 25, 2009,
the Company, whose shares are owned Kookmin Bank since
September 29, 2008 approved no payment of a cash dividend
on March 25, 2009. However, with respect to unappropriated
retained earnings available for the payment of dividends as of
December 31, 2009, on March 25, 2010, the Company
approved the payment of a cash dividend of 3.84% to stockholders
of record as of December 31, 2009 and cash dividend
amounting to
W
95,305 million was paid on
March 26, 2010.
| 23. | Components of Accumulated Other Comprehensive Income (Loss) |
Comprehensive income includes net income plus transactions and
other occurrences that are the result of non-owner changes in
equity. For the years ended December 31, 2007,2008, and
2009, the non-owner equity changes were composed of foreign
currency translation adjustments and unrealized gains and losses
on investment securities, net of taxes. Below are the components
of accumulated other comprehensive income (loss) and the related
tax effects for the years ended December 31, 2007, 2008 and
2009.
|
Foreign
|
Net Unrealized
|
Accumulated
|
||||||||||
|
Currency
|
Gains (Losses) on
|
Other
|
||||||||||
|
Translation
|
Investment
|
Comprehensive
|
||||||||||
| Adjustments | Securities | Income (Loss), Net | ||||||||||
| (In millions of Korean won) | ||||||||||||
|
Balance, January 1, 2007
|
(43,481 | ) | 467,968 | 424,487 | ||||||||
|
Foreign currency translation adjustments, net of tax expense of
|
1,509 | — | 1,509 | |||||||||
|
Unrealized holding losses on investment securities, net of tax
benefit of
|
— | (63,890 | ) | (63,890 | ) | |||||||
|
Less: Reclassification adjustment for gains included in net
income, net of tax benefit of
|
— | (495,092 | ) | (495,092 | ) | |||||||
|
Current period change
|
1,509 | (558,982 | ) | (557,473 | ) | |||||||
F-50
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
Foreign
|
Net Unrealized
|
Accumulated
|
||||||||||
|
Currency
|
Gains (Losses) on
|
Other
|
||||||||||
|
Translation
|
Investment
|
Comprehensive
|
||||||||||
| Adjustments | Securities | Income (Loss), Net | ||||||||||
| (In millions of Korean won) | ||||||||||||
|
Balance, December 31, 2007
|
(41,972 | ) | (91,014 | ) | (132,986 | ) | ||||||
|
Foreign currency translation adjustments, net of tax expense of
|
91,626 | — | 91,626 | |||||||||
|
Unrealized holding gains on investment securities, net of tax
expense of
|
— | 389,479 | 389,479 | |||||||||
|
Less: Reclassification adjustment for losses included in net
income, net of tax expense of
|
— | 41,790 | 41,790 | |||||||||
|
Current period change
|
91,626 | 431,269 | 522,895 | |||||||||
|
Balance, December 31, 2008
|
49,654 | 340,255 | 389,909 | |||||||||
|
Foreign currency translation adjustments, net of tax benefit of
|
(116,657 | ) | — | (116,657 | ) | |||||||
|
Unrealized holding gains on investment securities, net of tax
expense of
|
— | 105,810 | 105,810 | |||||||||
|
Less: Reclassification adjustment for gains included in net
income, net of tax benefit of
|
— | (134,411 | ) | (134,411 | ) | |||||||
|
Current period change
|
(116,657 | ) | (28,601 | ) | (145,258 | ) | ||||||
|
Balance, December 31, 2009
|
(67,003 | ) | 311,654 | 244,651 | ||||||||
| 24. | Regulatory Requirements |
In conformity with the Financial Supervisory Service
(“FSS”) and the Basel Committee on Banking Regulations
and Supervisory Practice guidelines, Kookmin Bank, a subsidiary
of the Company, applies risk-adjusted capital ratios to evaluate
its capital adequacy. The capital adequacy guidelines adopt the
so called BASELII, the approach of risk-weighted capital measure
based on the framework developed and proposed by the Basel
Committee on Banking Supervision of the Bank for International
Settlements (“BIS”).
Under the capital adequacy guidelines, banking institutions with
international operations are required to maintain a minimum 8%
total risk-based capital ratio, the ratio of total risk-adjusted
capital divided by total risk-weighted assets, including a
Tier 1 capital ratio of at least 4%.
The capital ratios are calculated based on Kookmin Bank’s
consolidated balance sheets prepared in accordance with Korean
GAAP which may vary in certain significant respects from
U.S. GAAP. In the event Kookmin Bank does not maintain a
consolidated capital adequacy ratio of 8%, it is subject to
corrective actions recommended by the FSS based on the actual
financial position and capital ratio of Kookmin Bank. Management
of Kookmin Bank believes that Kookmin Bank met all capital
adequacy requirements to which it is subject as of
December 31, 2008 and 2009. However, events beyond
management’s control, such as fluctuations in interest
rates or a downturn in the economy could adversely affect future
earnings and consequently, Kookmin Bank’s ability to meet
its future capital requirements.
F-51
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following capital ratios are calculated in accordance with
and as defined by the FSS guideline, which is materially
consistent with BIS guidelines and Kookmin Bank’s
consolidated financial statements prepared in accordance with
Korean GAAP as of December 31:
| 2008 | 2009 | |||||||
| (In millions of Korean won, except capital ratios) | ||||||||
|
Tier 1 capital
|
15,302,560 | 16,734,532 | ||||||
|
Tier 2 capital
|
5,023,771 | 4,973,120 | ||||||
|
Total risk-adjusted capital
|
20,326,331 | 21,707,652 | ||||||
|
Risk-Weighted Assets
|
||||||||
|
Risk-weighted assets for credit
risk
(1)
|
139,036,329 | 139,926,727 | ||||||
|
Risk-weighted assets for market
risk
(2)
|
2,069,088 | 2,071,648 | ||||||
|
Risk-weighted assets for operating
risk
(3)
|
13,155,888 | 12,595,000 | ||||||
|
Total risk-weighted assets
|
154,261,305 | 154,593,375 | ||||||
|
Capital Adequacy Ratios(%)
|
||||||||
|
Tier 1 capital ratio(%)
|
9.92 | 10.82 | ||||||
|
Tier 2 capital ratio(%)
|
3.26 | 3.22 | ||||||
|
Capital adequacy ratio(%)
|
13.18 | 14.04 | ||||||
| (1) | Calculated by Foundation Internal Ratings-Based Approach | |
| (2) | Calculated by Internal Models Method | |
| (3) | Calculated by Advanced Measurement Approach |
In addition, the Company, as a bank holding company, is required
under the capital adequacy requirements of the Financial
Services Commission to maintain a minimum consolidated capital
adequacy ratio of 8.0%. “Consolidated capital adequacy
ratio” is defined as the ratio of equity capital as a
percentage of risk-weighted assets on a consolidated basis,
determined in accordance with Financial Services Commission
requirements that have been formulated based on Bank of
International Settlements. “Equity capital,” as
applicable to bank holding companies, is defined as the sum of
Tier I capital, Tier II capital and Tier III
capital less any deductible items (each as defined under the
Regulation on the Supervision of Financial Holding Companies).
“Risk-weighted assets” is defined as the sum of credit
risk-weighted assets and market risk-weighted assets.
The following table sets forth a summary of the Company’s
consolidated capital adequacy ratio as of December 31, 2008
and 2009, based on applicable Korean GAAP and regulatory
reporting standards:
| 2008 | 2009 | |||||||
| (In millions of Korean won) | ||||||||
|
Risk-weighted assets
|
|
187,086,336 |
|
182,664,075 | ||||
|
Equity capital
|
21,937,230 | 24,360,262 | ||||||
|
Consolidated capital adequacy ratio
|
11.73 | % | 13.34 | % | ||||
F-52
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 25. | Income Tax |
The components of income tax expense for the years ended
December 31, 2007, 2008 and 2009 were as follows:
| For the Years Ended December 31, | ||||||||||||
| 2007 | 2008 | 2009 | ||||||||||
| (In millions of Korean won) | ||||||||||||
|
National tax:
|
||||||||||||
|
Current
|
1,116,885 | 513,390 | 175,628 | |||||||||
|
Deferred
|
142,582 | (61,888 | ) | 26,765 | ||||||||
|
Tax benefits recognized under FIN 48(ASC 740)
|
(162,710 | ) | (38,914 | ) | (13,771 | ) | ||||||
|
Total national income tax expense
|
1,096,757 | 412,588 | 188,622 | |||||||||
|
Local tax:
|
||||||||||||
|
Current
|
111,689 | 51,339 | 17,562 | |||||||||
|
Deferred
|
14,258 | (6,189 | ) | 2,677 | ||||||||
|
Tax benefits recognized under FIN 48(ASC 740)
|
(16,271 | ) | (3,891 | ) | (1,377 | ) | ||||||
|
Total local income tax expense
|
109,676 | 41,259 | 18,862 | |||||||||
|
Total income tax expense
|
1,206,433 | 453,847 | 207,484 | |||||||||
The preceding table does not reflect the tax effects of
unrealized gains and losses on
available-for-sale
securities and foreign currency translation. The tax effects of
these items are recorded directly in Total equity.
Income tax is calculated for each individual entity in the
Company. As a result, losses incurred by subsidiaries cannot be
offset against profits earned by the parent company. Income tax
on the operating profit differs from the theoretical amount that
would arise at the statutory tax rate of the home country of the
parent as follows:
| 2007 | 2008 | 2009 | ||||||||||
| (In millions of Korean won) | ||||||||||||
|
Income from continuing operations for the years ended
December 31,
|
4,965,802 | 1,786,785 | 926,053 | |||||||||
|
Statutory tax rates
|
27.5 | % | 27.5 | % | 24.2 | % | ||||||
|
Prima facie tax calculated at a statutory tax rate
|
1,365,596 | 491,366 | 224,105 | |||||||||
|
Income not assessable for tax purposes
|
(16,288 | ) | (138,343 | ) | (59,999 | ) | ||||||
|
Expenses not deductible for tax purposes
|
22,142 | 168,944 | 35,184 | |||||||||
|
Taxation on outside basis
|
31,947 | 27,372 | 3,045 | |||||||||
|
Adjustment for overseas tax rates
|
3,962 | 24,925 | (5,980 | ) | ||||||||
|
Change in statutory tax rate
|
— | (53,524 | ) | 13,997 | ||||||||
|
Increase in valuation allowance
|
(16,991 | ) | (19,760 | ) | 6,484 | |||||||
|
Korean government tax assessment
|
(178,981 | ) | (42,805 | ) | (15,059 | ) | ||||||
|
Others
|
(4,954 | ) | (4,328 | ) | 5,707 | |||||||
|
Income tax expense
|
1,206,433 | 453,847 | 207,484 | |||||||||
|
Effective tax rate
|
24.3 | % | 25.4 | % | 22.4 | % | ||||||
Pursuant to amendments to the Corporation Income Tax Law in
2008, the statutory tax rates changed from 14.3% for the first
W
100 million and 27.5% for any excess
amount in 2007 to 12.1% for the first
W
200 million and
F-53
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
27.5% for any excess amount in 2008, 12.1% for the first
W
200 million and 24.2% for the excess
amount in 2009, and 11% for the first
W
200 million and 22.0% for the excess
amount in 2010 and thereafter.
Pursuant to amendments to the Corporation Income Tax Law in
2009, the statutory tax rates changed from 12.1% for the first
W
200 million and 24.2% for the excess
amount in 2010 and 2011, and 11% for the first
W
200 million and 22.0% for the excess
amount in 2012 and thereafter.
As a result of the changes in statutory tax rates, income tax
expenses decreased by
W
53,524 million and
deferred income tax liabilities related to temporary differences
and other comprehensive income decreased by
W
25,951 million and
W
27,573 million, respectively, in 2008 and
income tax expense increased by
W
13,997 million and deferred income tax
liabilities related to temporary differences and other
comprehensive income increased by
W
6,201 million and
W
7,796 million, respectively, in 2009.
The tax effects of temporary differences that give rise to
significant portions of the deferred income tax assets
(“DTA”) and deferred income tax liabilities
(“DTL”) as of December 31, 2008 and 2009 were as
follows:
| 2008 | 2009 | |||||||
|
(In millions of
|
||||||||
| Korean won) | ||||||||
|
Deferred income tax assets:
|
||||||||
|
Other liabilities
|
107,421 | 197,615 | ||||||
|
Valuation of trading assets
|
3,336 | 73 | ||||||
|
Valuation of investments
|
230,913 | 88,310 | ||||||
|
Valuation of
available-for-sale
securities
|
— | — | ||||||
|
Premises and equipment
|
145,945 | 143,750 | ||||||
|
Net operating loss
|
14,807 | 39,253 | ||||||
|
Total gross deferred income tax assets
|
502,422 | 469,001 | ||||||
|
Less: Valuation allowance
|
(78,262 | ) | (84,746 | ) | ||||
|
Deferred income tax assets
|
424,160 | 384,255 | ||||||
|
Deferred income tax liabilities:
|
||||||||
|
Allowance for loan losses
|
252,797 | 242,141 | ||||||
|
Valuation of
available-for-sale
securities
|
106,053 | 102,284 | ||||||
|
Accrued interest and dividend receivable
|
63,204 | 16,966 | ||||||
|
Other assets
|
88,892 | 43,964 | ||||||
|
Long-term debt
|
29,192 | (1,369 | ) | |||||
|
Other temporary differences
|
75,291 | 52,322 | ||||||
|
Total gross deferred income tax liabilities
|
615,429 | 456,308 | ||||||
|
Net deferred income tax liabilities, including other
comprehensive income (“OCI”) related DTA (DTL)
|
(191,269 | ) | (72,053 | ) | ||||
|
Less: Net OCI related DTA (DTL)
|
(121,121 | ) | (84,443 | ) | ||||
|
Net deferred income tax liabilities, excluding net OCI related
DTA (DTL)
|
(70,148 | ) | 12,390 | |||||
Deferred income tax assets are recognized only to the extent
that realization of the related tax benefit is more likely than
not. Management believes it is uncertain whether certain
subsidiaries will generate sufficient profits to offset their
tax losses in 2008 and 2009. Accordingly, a valuation allowance
totaling
W
78,262 million and
W
84,746 million as of December 2008 and
2009, respectively, was recognized for deferred income tax
assets related to net operating loss carryforwards
(“NOLs”) and temporary differences that may not be
realized.
F-54
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
As of December 31, 2009, the Company, including its
subsidiaries had
W
105,817 million of NOLs.
These losses are expected to expire in the periods from 2010 to
2019.
As the Company decided to adopt ‘Consolidated Tax return
System’ starting 2010, the tax expense or benefit is
calculated including its wholly-owned subsidiaries. NOL
calculated before applying the consolidated tax return system
can be deducted only from the relevant taxable income of
individual entity.
The beginning balance of unrecognized tax benefits reconciles to
the balance as of December 31, 2008 and 2009 in the
following table:
| 2008 | 2009 | |||||||
| (In millions of Korean won) | ||||||||
|
Total unrecognized tax benefits at January 1
|
26,269 | 41,750 | ||||||
|
Amount of increase for current year’s tax position
|
15,481 | 3,483 | ||||||
|
Gross amount of increases for prior years’ tax position
|
— | — | ||||||
|
Gross amount of decreases for prior years’ tax position
|
— | (13 | ) | |||||
|
Reductions due to lapse of statutes of limitation
|
— | (48 | ) | |||||
|
Total unrecognized tax benefits at December 31
|
41,750 | 45,172 | ||||||
Any changes in the amounts of unrecognized tax benefits related
to temporary differences would result in a reclassification to
deferred tax liability, and any changes in the amounts of
unrecognized tax benefits related to permanent differences would
result in an adjustment to income tax expense and effective tax
rate. As of December 31, 2008 and 2009, the unrecognized
tax benefits included above which would, if recognized, affect
the effective tax rate are
W
28,729 million
and
W
31,836 million, respectively.
In 2007, the National Tax Service completed their regular
examination of the Company’s income tax returns for the
years 2002 through 2005, and as a result of the tax audit, the
Company received
W
189,509 million of tax
assessments in May 2007 and received an additional tax
assessment of
W
292,337 million in July
2007. Most of these tax assessments related to disallowed tax
deductions for loan loss provisions of credit card receivables.
The Company’s management believes that the Company’s
tax deductions for the loan loss provision of credit card
receivables was appropriate and appealed the assessment to the
National Tax Tribunal. Final judgment of the appeals may result
in changes of future income tax expense and benefit. However,
the Company does not expect any changes in unrecognized tax
benefits would have a material impact on income tax expense
during the next 12 months. The Company’s major tax
jurisdiction is the Republic of Korea, and as of
December 31, 2009, all tax years subsequent to 2005 remain
open to examination.
In accordance with FIN 48(ASC 740) , the Company recorded
849,715 million and 575,057 million as of
December 31, 2008 and 2009, respectively as “Other
Assets” that the Company expects to receive through a court
appeal according to the more-likely-than-not recognition
criteria under the standard. (See Note 12).
The Company’s continuing practice is to recognize interest
and penalties, if any, related to income tax matters in income
tax expense. Pursuant to the adoption of FIN 48(ASC 740),
the Company recorded income tax benefits for penalties and
interest previously paid to the Korean tax authorities that it
expects to be refunded. The Company recorded income tax benefits
for penalties of
W
205,978 million and
W
111,686 million as of December 31,
2008 and 2009, respectively, and also recorded income tax
benefits for interest of
W
72,920 million
and
W
62,896 million as of
December 31, 2008 and 2009, respectively.
F-55
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 26. | Earnings Per Share (“EPS”) |
The following table is a summary of the computation of earnings
per share for the years ended December 31
| 2007 | 2008 | 2009 | ||||||||||
| (In millions of Korean won, except share data) | ||||||||||||
|
Net income
|
3,759,369 | 1,332,938 | 718,569 | |||||||||
|
Net income attributable to noncontrolling interests, net of tax
|
4,262 | 6,974 | (2,072 | ) | ||||||||
|
Net income attributable to stockholders for basic EPS
|
3,755,107 | 1,325,964 | 720,641 | |||||||||
|
Net income attributable to stockholders for diluted EPS
|
3,755,107 | 1,325,964 | 720,641 | |||||||||
|
Weighted average common shares outstanding applicable to basic
EPS (In thousands)
|
344,570 | 330,498 | 325,397 | |||||||||
|
Dilutive effect of stock options
|
— | — | — | |||||||||
|
Adjusted weighted average common shares outstanding applicable
to diluted EPS (In
thousands)
(*)
|
344,570 | 330,498 | 325,397 | |||||||||
|
Basic earnings per share:
|
||||||||||||
|
Net income attributable to stockholders
|
10,898 | 4,012 | 2,215 | |||||||||
|
Diluted earnings per share:
|
||||||||||||
|
Net income attributable to stockholders
|
10,898 | 4,012 | 2,215 | |||||||||
| (*) | The numbers of weighted average common shares outstanding in 2007, 2008 and 2009 were adjusted by the effect of stocks issuance in September 2009 whose exercise price at issuance was less than the fair value of the stock. Additionally, the stock issuance contains a bonus element that is somewhat similar to a stock dividend. Therefore, the basic EPS was adjusted retroactively for the bonus element for all periods presented. |
Stock options excluded from the computation of diluted earnings
per share, due to their anti-dilutive effect, totaled nil, nil,
and nil in 2007, 2008 and 2009, respectively.
| 27. | Employee Severance Plan |
Employees with one or more years of service are entitled to
receive a lump-sum payment upon termination of their employment
with the Company, based on their length of service and rates of
pay at the time of termination (the “severance plan”).
Under the Korean National Pension Fund Law, the Company was
required to pay a certain percentage of employee severance
benefits to the National Pension Fund prior to April 1999.
Additionally, the Company contributes voluntarily a certain
percentage of employee severance benefits to a severance
insurance deposit account (“Severance Insurance
Deposit”) maintained for the benefit of employees at an
insurance company. The Company has no additional liability once
the amount has been contributed; thus the Company deducts
contributions made to the National Pension Fund and the
Severance Insurance Deposit from its accrued employee severance
plan obligations. The compensation cost of employees’
severance benefit is recognized based on the vested benefits to
which the employees are entitled if they separate immediately.
Under limited circumstances, employees can withdraw their
accumulated unpaid severance amounts before their termination of
employment (“interim severance payment”). Severance
plan payments include the amount for such withdrawal. Total
interim severance payments made by the Company were
W
14,638 million,
W
14,078 million, and
W
409,605 million in 2007, 2008, and 2009,
respectively.
In addition to regular termination benefits, the Company
recognized special termination benefits of
W
8,735 million,
W
89,965 million, and
W
0 million to 61, 402 and
0 employees, respectively, who accepted early retirement
for the years ended December 31, 2007, 2008, and 2009,
respectively.
F-56
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Company accrued severance benefits of
W
183,569 million,
W
173,348 million and
W
154,716 million for the years ended
December 31, 2007, 2008 and 2009, respectively.
The amounts contributed to the severance insurance deposit
account were
W
141,386 million,
W
102,974 million and
W
157,032 million for the years ended
December 31, 2007, 2008 and 2009, respectively.
Accrued employee severance plan obligations included in
“Other liabilities” as of December 31 were as follows:
| 2008 | 2009 | |||||||
|
(In millions of
|
||||||||
| Korean won) | ||||||||
|
Balance at beginning of the year
|
716,189 | 849,414 | ||||||
|
Severance benefit
|
173,348 | 154,716 | ||||||
|
Plan payments
|
(40,123 | ) | (411,076 | ) | ||||
| 849,414 | 593,054 | |||||||
|
Less: Balance of payments remaining with National Pension Fund
and Severance Insurance Deposit
|
(569,213 | ) | (417,067 | ) | ||||
|
Balance at end of the year
|
280,201 | 175,987 | ||||||
The Company expects to pay the following future benefits to its
employees upon their normal retirement age of 58:
| (In millions of Korean won) | ||||
|
2010
|
2,296 | |||
|
2011
|
3,375 | |||
|
2012
|
8,245 | |||
|
2013
|
21,038 | |||
|
2014
|
29,752 | |||
|
2015 — 2019
|
237,899 | |||
The above amounts have been determined based on the
employees’ current salary rates and the number of service
years that will be accumulated upon their retirement date. These
amounts do not include amounts that might be paid to employees
that will cease working with the Company before their normal
retirement age.
| 28. | Employee Stock Option Plan |
Employee
stock-based compensation plan
In 2007, the Company granted 965,000 options, of which 30,000,
20,000, 885,000 and 30,000 options are subject to service
requirements and their exercise price is indexed to the sum of
the major 3 competitors’ total market capitalization, with
a minimum exercise price of
W
85,500,
W
79,700,
W
77,100 and
W
84,500, respectively, per option.
In 2008, the Company introduced stock grants as part of the
stock-based compensation plan. Stock grants are granted at no
cost upon the completion of a vesting period. The Company
granted 299,252 grants which are subject to service requirements
and the quantity is indexed to the sum of the major 3
competitors’ total market capitalization, return on asset,
and total asset size.
In 2009, the Company granted 268,882 stock grants which are
subject to service requirements and the quantity is indexed to
the sum of the major 3 competitors’ total market
capitalization, return on asset, and total asset size.
F-57
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The grants granted (a) are subject to service or
performance based requirements, (b) have an exercise price
of
W
0 and (c) the quantity is indexed to
the banking industry index. The grants vest over one to three
years from the date of grant. The grants will be exercised
immediately on vesting date.
The options granted (a) are subject to service or
performance based requirements and (b) have a fixed
exercise price or an exercise price that is indexed to the
banking industry index. Generally, the options granted vest over
three years from the date of grant. The exercise period ranges
from 5 years to 7 years post completion of the
three-year vesting period.
For options granted under all of the above plans, the Company
may elect either to issue common shares or allocate treasury
shares, or pay in cash or treasury shares the difference between
the market price and the exercise price. The market price is
determined by the arithmetic average of the weighted average of
every closing price for two months, one month and one week
immediately preceding the exercise of the option, published by
Korea Exchange.
The following table summarizes the information about stock
option activity under the Company’s stock-based
compensation plans for the years ended December 31, 2007,
2008 and 2009:
| 2007 | 2008 | 2009 | ||||||||||||||||||||||
|
Weighted
|
Weighted
|
Weighted
|
||||||||||||||||||||||
|
Number of
|
Average
|
Number of
|
Average
|
Number of
|
Average
|
|||||||||||||||||||
|
Stock
|
Exercise Price
|
Stock
|
Exercise Price
|
Stock
|
Exercise Price
|
|||||||||||||||||||
| Options | (Won) | Options | (Won) | Options | (Won) | |||||||||||||||||||
|
Outstanding, beginning of year
|
3,235,568 | 59,002 | 3,810,844 | 64,775 | 3,458,351 | 62,458 | ||||||||||||||||||
|
Granted
|
965,000 | 77,645 | — | — | — | — | ||||||||||||||||||
|
Exercised
|
(203,991 | ) | 49,078 | (29,550 | ) | 32,053 | (151,853 | ) | 43,932 | |||||||||||||||
|
Forfeited
|
(185,733 | ) | 51,644 | (322,943 | ) | 77,359 | (76,566 | ) | 75,341 | |||||||||||||||
|
Outstanding, end of year
|
3,810,844 | 64,775 | 3,458,351 | 62,458 | 3,229,932 | 64,314 | ||||||||||||||||||
|
Exercisable at year-end
|
1,226,249 | 50,471 | 1,876,585 | 50,012 | 2,667,395 | 61,617 | ||||||||||||||||||
The following table summarizes the information about the
Company’s stock grants for the years ended
December 31, 2008 and 2009:
| 2008 | 2009 | |||||||
|
(Number of Stock Grants)
|
||||||||
|
Outstanding, beginning of year
|
— | 194,108 | ||||||
|
Granted
|
299,252 | 268,882 | ||||||
|
Vested
|
(5,386 | ) | (15,914 | ) | ||||
|
Forfeited
|
(99,758 | ) | (134,437 | ) | ||||
|
Outstanding, end of year
|
194,108 | 312,639 | ||||||
In connection with the stock-based compensation plan, the
Company recognized
W
7,513 million of
expenses, an expenses reversal of
W
20,139 million, and
W
23,039 million of expenses for the years
ended December 31, 2007, 2008 and 2009, respectively.
Total fair value of shares vested during 2007, 2008 and 2009
were
W
16,207 million,
W
3,459 million and
W
1,143 million, respectively.
The fair value of each option award is estimated using a
Black-Scholes option pricing model based on the assumptions
noted in the table below. Expected volatility is based on the
historical volatility of the Company’s stock. The expected
term represents the period of time that options granted are
expected to be outstanding. The
F-58
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
expected term is estimated using employees’ actual
historical behavior and projected future behavior based on
expected exercise patterns. The risk-free interest rate is based
on the Korean government treasury bond rate where the remaining
term equals the expected term. Dividend yield is based on the
Company’s historical dividend payout ratio. The assumptions
that were used for the valuation of each option at the grant
date for the years ended December 31, 2007, 2008, and 2009
are as follows:
| For Options Granted During | 2007 | 2008 | 2009 | |||||||||
|
Expected annual dividend yield
|
2.35 | % | 3.03 | % | 2.79% | |||||||
|
Expected volatility
|
28.47 | % | 47.62 | % | 42.60% | |||||||
|
Risk-free interest rate
|
4.98 | % | 3.24 | % | 3.63% | |||||||
|
Expected option life
|
2.9 years | 2.2 years | 1.5 years | |||||||||
The fair value of each grant awarded is estimated using a
Monte-Carlo simulation model based on the assumptions noted in
the table below because Black-Scholes model cannot be used in
this case as exercisable number of stock grants changes when
market price changes. Expected volatility is based on the
historical volatility of the Company’s stock. The expected
term represents the period of time that grants’ requisite
period would end. The risk-free interest rate is based on the
Korean government treasury bond rate where the remaining term
equals the expected term. Dividend yield is based on the
Company’s historical dividend payout ratio. The assumptions
that were used for the valuation of each stock grant for the
years ended December 31, 2008, and 2009 are as follows:
| For Options Granted During | 2008 | 2009 | ||||||
|
Expected annual dividend yield
|
3.03 | % | 2.79 | % | ||||
|
Expected volatility
|
59.02 | % | 54.29 | % | ||||
|
Risk-free interest rate
|
3.31 | % | 3.56 | % | ||||
|
Expected option life
|
1.7 years | 1.1 years | ||||||
F-59
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table summarizes the information about stock
options outstanding as of December 31, 2009:
| Options Outstanding | ||||||||||||||||||||||||||||
|
Weighted
|
Options Exercisable | |||||||||||||||||||||||||||
|
Average
|
Weighted
|
Weighted
|
||||||||||||||||||||||||||
|
Number
|
Remaining
|
Average
|
Intrinsic
|
Number
|
Average
|
Intrinsic
|
||||||||||||||||||||||
|
Exercise Price
|
of Stock
|
Contractual
|
Exercise Price
|
Value
|
of Stock
|
Exercise Price
|
Value
|
|||||||||||||||||||||
| (Won) | Options (1) | Life (2) | (Won) | (Mil Won) | Options | (Won) | (Mil Won) | |||||||||||||||||||||
|
57,100
|
216,773 | 0.2 | 57,100 | 672 | 216,773 | 57,100 | 672 | |||||||||||||||||||||
|
58,800
|
23,899 | 0.6 | 58,800 | 33 | 23,899 | 58,800 | 33 | |||||||||||||||||||||
|
42,200
|
3,351 | 1.2 | 42,200 | 60 | 3,351 | 42,200 | 60 | |||||||||||||||||||||
|
43,800
|
26,712 | 1.2 | 43,800 | 438 | 26,712 | 43,800 | 438 | |||||||||||||||||||||
|
58,600
|
10,000 | 1.2 | 58,600 | 16 | 10,000 | 58,600 | 16 | |||||||||||||||||||||
|
35,500
|
67,993 | 1.2 | 35,500 | 1,679 | 67,993 | 35,500 | 1,679 | |||||||||||||||||||||
|
40,500
|
5,091 | 1.7 | 40,500 | 100 | 5,091 | 40,500 | 100 | |||||||||||||||||||||
|
46,100
|
54,250 | 2.1 | 46,100 | 765 | 54,250 | 46,100 | 765 | |||||||||||||||||||||
|
48,500
|
10,000 | 2.2 | 48,500 | 117 | 10,000 | 48,500 | 117 | |||||||||||||||||||||
|
48,800
|
10,000 | 2.2 | 48,800 | 114 | 10,000 | 48,800 | 114 | |||||||||||||||||||||
|
50,600
|
610,000 | 2.8 | 50,600 | 5,856 | 610,000 | 50,600 | 5,856 | |||||||||||||||||||||
|
46,800
|
480,714 | 3.2 | 46,800 | 6,442 | 480,714 | 46,800 | 6,442 | |||||||||||||||||||||
|
61,000
|
10,182 | 3.2 | 61,000 | — | 10,182 | 61,000 | — | |||||||||||||||||||||
|
60,300
|
5,077 | 3.2 | 60,300 | — | 5,077 | 60,300 | — | |||||||||||||||||||||
|
63,800
|
10,031 | 3.2 | 63,800 | — | 10,031 | 63,800 | — | |||||||||||||||||||||
|
63,600
|
10,072 | 3.2 | 63,600 | — | 10,072 | 63,600 | — | |||||||||||||||||||||
|
51,600
|
90,000 | 3.2 | 51,600 | 774 | 90,000 | 51,600 | 774 | |||||||||||||||||||||
|
45,700
|
8,827 | 3.3 | 45,700 | 128 | 8,827 | 45,700 | 128 | |||||||||||||||||||||
|
49,200
|
29,441 | 3.6 | 49,200 | 324 | 29,441 | 49,200 | 324 | |||||||||||||||||||||
|
53,000
|
7,212 | 3.7 | 53,000 | 52 | 7,212 | 53,000 | 52 | |||||||||||||||||||||
|
85,100
|
5,000 | 4.2 | 85,100 | — | 5,000 | 85,100 | — | |||||||||||||||||||||
|
75,200
|
444,237 | 4.2 | 75,200 | — | 444,237 | 75,200 | — | |||||||||||||||||||||
|
81,900
|
21,459 | 4.2 | 81,900 | — | 21,459 | 81,900 | — | |||||||||||||||||||||
|
77,900
|
59,750 | 4.2 | 77,900 | — | 59,750 | 77,900 | — | |||||||||||||||||||||
|
80,000
|
27,878 | 4.2 | 80,000 | — | 27,878 | 80,000 | — | |||||||||||||||||||||
|
77,800
|
29,770 | 4.2 | 77,800 | — | 29,770 | 77,800 | — | |||||||||||||||||||||
|
80,300
|
163,557 | 4.2 | 80,300 | — | 163,557 | 80,300 | — | |||||||||||||||||||||
|
81,900
|
25,613 | 4.3 | 81,900 | — | 25,613 | 81,900 | — | |||||||||||||||||||||
|
76,600
|
18,987 | 4.8 | 76,600 | — | 18,987 | 76,600 | — | |||||||||||||||||||||
|
77,100
|
696,674 | 5.1 | 77,100 | 4,426 | 134,137 | 77,100 | 1,983 | |||||||||||||||||||||
|
84,500
|
15,246 | 5.2 | 84,500 | 196 | 15,246 | 84,500 | 196 | |||||||||||||||||||||
|
71,538
|
22,146 | 1.2 | 71,538 | — | 22,146 | 71,538 | — | |||||||||||||||||||||
|
129,100
|
9,990 | 1.2 | 129,100 | — | 9,990 | 129,100 | — | |||||||||||||||||||||
| 3,229,932 | 2,667,395 | |||||||||||||||||||||||||||
| (1) | Number of stock options vested and expected to vest were 3,109,490. | |
| (2) | Contractual life indicates the sum of service (vesting) period and exercise period. |
F-60
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table summarizes the information about stock
grants outstanding as of December 31, 2009:
|
Weighted
|
||||||||||||
|
Average
|
||||||||||||
|
Remaining
|
Intrinsic
|
|||||||||||
|
Number of Stock
|
Contractual
|
Value
|
||||||||||
| Grant Date | Grants (1) | Life (2) | (Mil Won) | |||||||||
|
2008-03-28
|
89,704 | 0.28 | 5,400 | |||||||||
|
2008-06-23
|
3,547 | 0.48 | 214 | |||||||||
|
2008-09-11
|
9,553 | 0.70 | 575 | |||||||||
|
2008-09-20
|
4,801 | 0.72 | 289 | |||||||||
|
2008-10-18
|
7,630 | 1.80 | 459 | |||||||||
|
2008-09-29
|
41,360 | 1.69 | 2,490 | |||||||||
|
2009-07-30
|
20,002 | 1.26 | 1,204 | |||||||||
|
2009-08-24
|
3,370 | 2.00 | 203 | |||||||||
|
2009-09-22
|
21,408 | 0.84 | 1,289 | |||||||||
|
2009-09-28
|
102,223 | 1.02 | 6,154 | |||||||||
|
2009-11-18
|
9,041 | 1.36 | 544 | |||||||||
| 312,639 | ||||||||||||
| (1) | Number of stock grants vested and expected to vest were 201,718. | |
| (2) | Contractual life indicates the sum of service (vesting) period. |
The total intrinsic values of stock options and stock grants
exercised for the years ended December 31, 2008 and 2009
were
W
1,059 million and
W
1,650 million, respectively. The total
amount of cash received from the exercise of share options for
the years ended December 31, 2008 and 2009 was nil.
| 29. | Fair Value Measurement |
Effective January 1, 2008, the Company adopted
ASC 820(SFAS No. 157) which defines fair value as
the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date. The Company determines the
fair value of its financial instruments that are recognized or
disclosed at fair value in the financial statements on a
recurring basis in accordance with
ASC 820(SFAS No. 157). The Company adopted the
provisions of this statement on January 1, 2009 related to
nonfinancial assets and nonfinancial liabilities that are not
measured at fair value on a recurring basis.
The fair value hierarchy established in
ASC 820(SFAS No. 157) requires an entity to
maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. Fair value is a
market-based measure considered from the perspective of a market
participant. As such, even when market assumptions are not
readily available, the Company’s own assumptions reflect
those that market participants would use in pricing the asset or
liability at the measurement date.
The fair value for certain financial instruments is derived
using pricing models and other valuation techniques that involve
significant management judgment. The price transparency of
financial instruments is a key determinant of the degree of
judgment involved in measuring fair value of the Company’s
financial instruments. Financial instruments for which actively
quoted prices or pricing parameters are available will generally
have a higher degree of price transparency than those that are
thinly traded or not quoted. In accordance with
ASC 820(SFAS No. 157), the criteria used to
determine whether the market for a financial instrument is
active or inactive is based on the particular asset or liability.
F-61
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KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
As a result of the adoption of
ASC 820(SFAS No. 157), the Company has made some
amendments to the techniques used in measuring the fair value of
derivatives and other positions. These amendments change the way
that the probability of default of a counterparty is factored
into the valuation of derivative positions and include the
impact of the Company’s own credit risk on derivatives and
other liabilities measured at fair value.
In accordance with ASC 820(SFAS No. 157), the
Company maximizes the use of observable inputs and minimizes the
use of unobservable inputs when developing fair value
measurements. When market prices are available, the Company uses
quoted market prices to measure fair value. If market prices are
not available, fair value measurements are based upon models
that use primarily market-based or independently-sourced market
parameters, including interest rate yield curves, prepayment
speeds, option volatilities and currency rates. Most of
financial instruments use either of the foregoing methodologies,
collectively Level 1 and Level 2 measurements, to
determine fair value recorded in the Company’s financial
statements. However, in circumstances where market prices are
limited or unavailable, valuations may require significant
management judgments or adjustments that utilize significant
unobservable inputs, to determine fair value. In these cases,
the financial instruments are classified as Level 3.
The following are descriptions of valuation methodologies used
by the Company to measure various financial instruments at fair
value.
Trading and
available-for-sale
securities and securities sold short, not yet
purchased:
The fair values of the securities
included in trading assets and
available-for-sale
securities included in investments and securities in short
position included in trading liabilities are recognized in the
consolidated balance sheets based on quoted market prices, where
available. For the securities traded in the
over-the-counter
market, the Company generally determines fair value utilizing
internal valuation techniques or based on prices obtained from
independent pricing services or brokers. Trading securities and
available-for-sale
securities recorded by using valuation methods and prices
obtained from pricing services or brokers are generally
classified as Level 2, except in cases where such quoted
prices include unobservable inputs (i.e., estimates of cash
flows, correlations among factors, recovery rates etc.) to the
models, in which case such financial instruments are classified
as Level 3. The Company validates prices received from
pricing services or brokers using a variety of methods,
including, but not limited to, comparison to secondary pricing
services, corroboration of pricing by reference to other
independent market data such as secondary broker quotes and
relevant benchmark indices, and review of pricing by the
Company’s personnel familiar with market liquidity and
other market-related conditions. The Company has internal price
verification procedures and reviews fair value methodology
documentation provided by independent pricing services.
Other investments in venture capital
activities:
Other investments include venture
capital securities. The Company carries venture capital
investments traded publically at fair value based on quoted
market prices. If significant inputs such as estimates of cash
flows, yield curves and credit spreads to the fair value
measurement for these securities are unobservable in the market
due to limited activity, those securities are classified as
Level 3.
Derivatives assets and liabilities:
The
majority of derivatives entered into by the Company are traded
in
over-the-counter
markets and no quoted market prices exist for such instruments.
The fair values of those derivatives are determined using
internal valuation models that require the use of multiple
market inputs including interest rate, prices and indices to
generate continuous yield or pricing curves and volatility
factors, which are used to value the position. The derivatives
are placed as either Level 2 or Level 3 depending on
the observability of significant inputs to the applicable model.
Most of forwards, swaps and options are valued using internally
developed models that use as their basis readily observable
market parameters. However, some of the forwards, swaps and
options are valued using unobservable inputs such as
correlations and historical volatilities. Futures are
exchange-traded derivatives classified as Level 1. Credit
default swaps are valued based on models with significant
unobservable market parameters and normally traded less
actively, and are classified as Level 3.
F-62
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KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Valuation
Adjustments
Counterparty credit risk adjustments are applied to derivative
assets, such as
over-the-counter
derivative instruments, when the market inputs used in valuation
model may not be indicative of the creditworthiness of the
counterparty. Few of the Company’s derivatives are listed
on an exchange. The majority of derivative positions are valued
using internally developed models that use as their basis
observable market inputs. Therefore, an adjustment is necessary
to reflect the credit quality of each derivative counterparty to
arrive at fair value. The adjustment is based on market-based
measures of credit risk to the extent available. The adjustment
also takes into account contractual factors designed to reduce
the Company’s credit exposure to each counterparty.
Debt valuation adjustments are applied to reflect the
Company’s own credit risk when measuring derivative
liabilities at fair value in accordance with the requirements of
ASC 820(SFAS No. 157). The methodology to
determine the adjustment is consistent with counterparty credit
risk adjustment and incorporates the Company’s credit
spread as observed through the credit default swap market.
Items
measured at fair value on a recurring basis
As of December 31, 2009, 10.46% and 1.89% of the
Company’s total assets and total liabilities, respectively,
represented instruments measured at fair value on a recurring
basis. The following table presents assets and liabilities
measured at fair value on a recurring basis by fair-value
hierarchy levels as of December 31, 2009.
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| (In millions of Korean won) | ||||||||||||||||
|
Assets measured at fair value
|
||||||||||||||||
|
Trading assets
|
||||||||||||||||
|
Trading securities
|
2,284,545 | 2,175,697 | — | 4,460,242 | ||||||||||||
|
Foreign exchange spot contracts
|
— | 2,878 | — | 2,878 | ||||||||||||
|
Derivatives
|
79 | 3,177,419 | 80,937 | 3,258,435 | ||||||||||||
|
Investments
|
||||||||||||||||
|
Available-for-sale
securities
|
10,060,086 | 8,649,829 | 877 | 18,710,792 | ||||||||||||
|
Debt securities
|
8,926,968 | 8,648,320 | 877 | 17,576,165 | ||||||||||||
|
Korea treasury and government agencies
|
6,243,284 | 1,648,318 | — | 7,891,602 | ||||||||||||
|
Corporate
|
— | 1,281,470 | 47 | 1,281,517 | ||||||||||||
|
Financial institutions
|
2,683,684 | 3,721,079 | — | 6,404,763 | ||||||||||||
|
Asset- backed securities
|
— | 1,997,453 | 830 | 1,998,283 | ||||||||||||
|
Marketable equity securities
|
1,133,118 | 1,509 | — | 1,134,627 | ||||||||||||
|
Other investments
|
2,767 | — | 76,461 | 79,228 | ||||||||||||
|
Other assets-hedging derivatives
|
— | 47,787 | 283 | 48,070 | ||||||||||||
|
Liabilities measured at fair value
|
||||||||||||||||
|
Trading liabilities
|
||||||||||||||||
|
Securities sold short, not yet purchased
|
1,347,668 | — | — | 1,347,668 | ||||||||||||
|
Foreign exchange spot contracts
|
— | 2,812 | — | 2,812 | ||||||||||||
|
Derivatives
|
398 | 2,588,027 | 307,199 | 2,895,624 | ||||||||||||
|
Other liabilities-hedging derivatives
|
— | 173,013 | 36,916 | 209,929 | ||||||||||||
F-63
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KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
As of December 31, 2008, 10.86% and 3.38% of the
Company’s total assets and total liabilities, respectively,
represented instruments measured at fair value on a recurring
basis. The following table presents assets and liabilities
measured at fair value on a recurring basis by fair-value
hierarchy levels as of December 31, 2008.
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| (In millions of Korean won) | ||||||||||||||||
|
Assets measured at fair value
|
||||||||||||||||
|
Trading assets
|
||||||||||||||||
|
Trading securities
|
2,643,678 | 2,607,395 | — | 5,251,073 | ||||||||||||
|
Foreign exchange spot contracts
|
— | 2,908 | — | 2,908 | ||||||||||||
|
Derivatives
|
8 | 7,528,268 | 312,900 | 7,841,176 | ||||||||||||
|
Investments
|
||||||||||||||||
|
Available-for-sale
securities
|
7,164,872 | 7,637,495 | 3,708 | 14,806,075 | ||||||||||||
|
Debt securities
|
6,763,242 | 7,635,631 | 3,708 | 14,402,581 | ||||||||||||
|
Korea treasury and government agencies
|
5,017,706 | 1,960,921 | — | 6,978,627 | ||||||||||||
|
Corporate
|
— | 1,117,453 | 46 | 1,117,499 | ||||||||||||
|
Financial institutions
|
1,745,536 | 4,414,660 | — | 6,160,196 | ||||||||||||
|
Asset-backed securities
|
— | 142,597 | 3,662 | 146,259 | ||||||||||||
|
Marketable equity securities
|
401,630 | 1,864 | — | 403,494 | ||||||||||||
|
Other investment
|
887 | — | 87,015 | 87,902 | ||||||||||||
|
Other assets-hedging derivatives
|
— | 73,314 | — | 73,314 | ||||||||||||
|
Liabilities measured at fair value
|
||||||||||||||||
|
Trading liabilities
|
||||||||||||||||
|
Securities sold short, not yet purchased
|
326,675 | — | — | 326,675 | ||||||||||||
|
Foreign exchange spot contracts
|
— | 3,273 | — | 3,273 | ||||||||||||
|
Derivatives
|
16 | 7,194,234 | 666,883 | 7,861,133 | ||||||||||||
|
Other liabilities-hedging derivatives
|
— | 1,850 | — | 1,850 | ||||||||||||
Changes
in Level 3 items measured at fair value on a recurring
basis
In circumstances where market prices are limited or unavailable,
valuations may require significant unobservable inputs to
determine fair value. In these cases, the securities are
classified as Level 3. Instruments measured at fair value
categorized as Level 3 represented 0.6% and 7.72% as of
December 31, 2009 and 1.44% and 8.14% as of
December 31, 2008 of the Company’s total recurring
assets and total recurring liabilities measured at fair value.
Both observable and unobservable inputs may be used to determine
the fair value of positions that the Company has classified
within the Level 3 category. As a result, the realized and
unrealized gains and losses for assets and liabilities within
the Level 3 category presented in the tables below may
include changes in fair value that were attributable to both
observable and unobservable inputs.
F-64
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KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table presents additional information about
Level 3 assets and liabilities measured at fair value on a
recurring basis for the year ended December 31, 2009:
|
Total Realized/Unrealized
|
Transfers
|
Purchases,
|
Unrealized
|
|||||||||||||||||||||||||
|
December 31,
|
Gains (Losses) Recorded in |
into/out of
|
Issuances and
|
December 31,
|
Gains (Losses)
|
|||||||||||||||||||||||
| 2008 | Trading Revenues | Others | Level 3 (2) | Settlements | 2009 | Still Held (3) | ||||||||||||||||||||||
| (In millions of Korean won) | ||||||||||||||||||||||||||||
|
Investments
Available-for-sale
securities
|
3,708 | — | (1,926 | ) (1) | — | (905 | ) | 877 | 47 | |||||||||||||||||||
|
Other investments
|
87,015 | — | (4,529 | ) (1) | (2,375 | ) | (3,650 | ) | 76,461 | (5,576 | ) | |||||||||||||||||
|
Derivatives,
net
(4)
|
(353,983 | ) | 24,204 | — | (87,013 | ) | 153,897 | (262,895 | ) | 80,851 | ||||||||||||||||||
| (1) | Includes the change in fair value of available-for-sale securities and other investments, change in accumulated other comprehensive income (loss), gains (losses) from sales and impairment losses. | |
| (2) | Transfers into or out of Level 3 are made if the inputs used in the financial models measuring the fair values of the assets and liabilities became unobservable or observable, respectively. These transfers are effective as of the beginning of the year, and any gains or losses occurring on these assets and liabilities during the year are presented as Level 3. | |
| (3) | Represents the amount of total gains or losses for the year ended December 31, 2009, included in earnings (and accumulated other comprehensive income (loss) for changes in fair value of available-for-sale investments and other investments) attributable to the change in fair value relating to assets and liabilities classified as Level 3 are still held at December 31, 2009. | |
| (4) | Net derivatives liabilities at December 31, 2009 and 2008 include derivative assets, hedging derivative assets, derivative liabilities and hedging derivative liabilities. Total Level 3 derivative exposures have been netted in these tables for presentation purposes only. |
The significant changes in Level 3 assets and liabilities
for the year ended December 31, 2009 are as follows:
A net decrease in
available-for-sale
securities of
W
2,831 million was mainly
driven by recognition of
other-than-temporary
impairment of CDOs which are included in earnings and disposals.
The changes in the Level 3 net derivative liabilities
of
W
91,088 million were due to:
(i) The Company transferred
W
87,013 million of net derivatives
liabilities from the Level 3 into the Level 2 category
in the fair-value hierarchy during the year ended
December 31, 2009. The valuation of these derivatives is
affected by the credit valuation adjustments, which is based on
an internal valuation technique, and the extent of such
adjustment was determined to be significant enough to render the
fair-value hierarchy into the lower level.
(ii) The Company recognized realized and unrealized gains
of
W
24,204 million, relating to derivative
assets and liabilities, which were included in trading revenues
for the year ended December 31, 2009.
The decrease in Level 3 investment of
W
13,385 million was mainly due to the net
loss of
W
6,455 million which was recorded
in current earnings, a decrease of
W
4,555 million from net purchases,
issuances and settlements, and a
W
2,375 million of transfer of an
investment from Level 3 to Level 1 as the issuer of
the securities became a publicly traded company.
F-65
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table presents additional information about
Level 3 assets and liabilities measured at fair value on a
recurring basis for the year ended December 31, 2008:
|
Transfers
|
Purchases,
|
Unrealized
|
||||||||||||||||||||||||||
|
January 1,
|
Total Realized/Unrealized Gains(losses) Recorded in |
into/out of
|
Issuances and
|
December 31,
|
Gains (Losses)
|
|||||||||||||||||||||||
| 2008 | Trading Revenues | Others (1) | Level 3 (2) | Settlements | 2008 | Still Held (3) | ||||||||||||||||||||||
| (In millions of Korean won) | ||||||||||||||||||||||||||||
|
Investments
Available-for-sale
securities
|
11,705 | — | (7,997 | ) | — | — | 3,708 | 46 | ||||||||||||||||||||
|
Other investments
|
94,921 | — | 1,782 | (552 | ) | (9,136 | ) | 87,015 | (3,101 | ) | ||||||||||||||||||
|
Derivatives,
net
(4)
|
(98,404 | ) | 255,087 | — | 3,443 | (514,109 | ) | (353,983 | ) | 257,834 | ||||||||||||||||||
| (1) | Includes the change in fair value of available-for-sale securities and other investments, change in accumulated other comprehensive income (loss), gains (losses) from sales and impairment losses. | |
| (2) | Transfers into or out of Level 3 are made if the inputs used in the financial models measuring the fair values of the assets and liabilities became unobservable or observable, respectively. These transfers are effective as of the beginning of the year, and any gains or losses occurring on these assets and liabilities during the year are presented as Level 3. | |
| (3) | Represents the amount of total gains or losses for the year ended December 31, 2008, included in earnings (and accumulated other comprehensive income (loss) for changes in fair value of available-for-sale investments and other investments) attributable to the change in fair value relating to assets and liabilities classified as Level 3 are still held at December 31, 2008. | |
| (4) | Net derivatives liabilities at December 31, 2009 and 2008 include derivative assets, hedging derivative assets, derivative liabilities and hedging derivative liabilities. Total Level 3 derivative exposures have been netted in these tables for presentation purposes only. |
The significant changes in Level 3 assets and liabilities
for the year ended December 31, 2008 are as follows:
A net decrease in
available-for-sale
securities of
W
7,997 million was mainly
driven by recognition of
other-than-temporary
impairment of CDOs which are included in earnings.
The changes in the Level 3 net derivative liabilities
of
W
255,579 million were due to:
(i) The Company transferred
W
3,443 million of net derivatives
liabilities from the Level 2 into the Level 3 category
in the fair-value hierarchy during the year ended
December 31, 2008. The valuation of these derivatives is
affected by the credit valuation adjustments, which is based on
an internal valuation technique, and the extent of such
adjustment was determined to be significant enough to render the
fair-value hierarchy into the lower level.
(ii) The Company recognized realized and unrealized gains
of
W
255,087 million , relating to
derivative assets and liabilities, which were included in
trading revenues for the year ended December 31, 2008.
The decrease in Level 3 investment of
W
15,903 million was mainly due to the net
loss of
W
6,215 million which was recorded
in current earnings, a decrease of
W
9,136 million from net purchases,
issuances and settlements, and a
W
552 million of transfer of an investment
from Level 3 to Level 1 as the issuer of the
securities became a publicly traded company.
Items
measured at fair value on a nonrecurring basis
Certain assets and liabilities are measured at fair value on a
non-recurring basis and are not included in the tables above.
These assets and liabilities primarily include assets measured
at cost that have been written down to fair value during the
period as a result of an impairment.
F-66
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table presents only balances measured at fair
value during the period and still held by level within the
ASC 820(SFAS No. 157) fair-value hierarchy as of
December 31, 2009, for which a nonrecurring change in fair
value has been recorded during the year ended December 31,
2009.
| Level 1 | Level 2 | Level 3 | ||||||||||
| (In millions of Korean won) | ||||||||||||
|
Investments
|
— | — | 1,515 | |||||||||
|
Loans
(1)
|
— | — | 638,165 | |||||||||
|
Premises and equipment
|
— | 3,576 | — | |||||||||
| (1) | Represents carrying values net of allowances and cumulative impairment charges of related impaired loans which are collateral dependent and are evaluated based on the fair value of the underlying collateral. The fair value of the collateral for such impaired loans is based on the appraisal value of external valuation experts, as adjusted for significant inputs related to the foreclosure proceeding for such collateral, which inputs are deemed to be unobservable. The Company accordingly classified collateral dependent loans as Level 3. |
The following table presents only balances measured at fair
value during the period and still held by level within the
ASC 820 (SFAS No. 157) fair-value hierarchy as of
December 31, 2008, for which a nonrecurring change in fair
value has been recorded during the year ended December 31,
2008.
| Level 1 | Level 2 | Level 3 | ||||||||||
| (In millions of Korean won) | ||||||||||||
|
Investments
|
— | — | 668,458 | |||||||||
|
Loans
(1)
|
— | — | 784,323 | |||||||||
| (1) | Represents carrying values net of allowances and cumulative impairment charges of related impaired loans which are collateral dependent and are evaluated based on the fair value of the underlying collateral. The fair value of the collateral for such impaired loans is based on the appraisal value of external valuation experts, as adjusted for significant inputs related to the foreclosure proceeding for such collateral, which inputs are deemed to be unobservable. The Company accordingly classified collateral dependent loans as Level 3. |
Fair
Value Disclosure
SFAS No. 107 , Disclosures about Fair Value of
Financial Instruments (ASC
825-10-50),
requires the disclosure of the estimated fair value of financial
instruments, for which it is practicable to estimate fair value
with certain financial instruments excluded. The following
disclosure of the estimated fair value of financial instruments
and the methods and assumptions used by the Company, by type of
financial instrument, in estimating fair value, except for
trading assets and trading liabilities disclosed above pursuant
to ASC 820 (SFAS No. 157), is made by the Company
in accordance with ASC 820(SFAS No. 157). In
estimating fair values, different market assumptions and
estimation methodologies could significantly affect estimated
fair value amounts.
Assets and liabilities for which fair value approximates
carrying value:
The carrying values of certain
financial assets and liabilities are reported at cost, including
cash and cash equivalents, restricted cash, call loans,
securities purchased under resale agreements, due from customers
on acceptances, accrued interest and dividends receivable,
accrued interest payable, security deposits, loan
held-for-sale,
noninterest-bearing deposits, call money and acceptances
outstanding. The carrying values of these financial assets and
liabilities are considered to approximate their fair values due
to their short-term nature and negligible credit losses.
Interest-bearing deposits in other banks:
The
fair values of fixed interest-bearing deposits are estimated by
discounting cash flows based on current rates for similar types
of deposits. The fair values of variable rate interest-bearing
deposits are considered to approximate their carrying values.
F-67
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Held-to-maturity
securities:
Fair values of
held-to-maturity
securities are based on market prices, where available. If
quoted market prices are not available, fair values are based on
quoted market prices of comparable instruments, discounted cash
flows, counterparty quotes or external valuations performed by
qualified independent evaluators.
Other investments:
Other investments include
venture capital securities, non-marketable or restricted equity
securities and equity method investments, which are included in
“Investments” in the Company’s consolidated
balance sheets. The carrying values of the non-marketable equity
securities and equity method investments approximate fair value.
Loans receivable:
Loans receivable are
reported net of specific and general provisions for impairment.
The fair value of fixed rate loans is estimated by discounting
contractual cash flows based on current rates at which similar
loans would be made to borrowers for the same maturities. The
fair values of variable rate loans that reprice frequently with
no significant changes in credit risk are considered to
approximate their carrying values in the consolidated balance
sheets.
Interest-bearing deposits:
The fair values of
variable rate interest bearing deposits approximate their
carrying values in the consolidated balance sheets. Fair values
for fixed-rate interest bearing deposits are estimated using a
discounted cash flow calculation that applies interest rates
currently being offered for deposits with similar maturities.
Other borrowed funds:
The aggregate fair value
for other borrowed fund is based on quoted market prices, where
available. For other borrowed fund where quoted market prices
are not available, a discounted cash flow model is used based on
the current rates for debt with similar maturities.
Secured borrowings:
The fair values for
securities sold under agreements to repurchase are estimated
using discounted cash flow calculation that applies interests
currently being offered for securities sold under agreements to
repurchase with similar maturities. The fair values for
beneficial interests issued by the SPEs are estimated using
quoted market price.
Long-term debt:
The aggregate fair value for
long-term debt is based on quoted market prices, where
available. For long-term debt where quoted market prices are not
available, a discounted cash flow model is used based on the
current rates for the Company’s debt with similar
maturities.
Off-balance sheet instruments:
Fair value for
off-balance-sheet instruments are based on an estimate of the
difference between fees currently charged to enter into similar
agreements and fees paid to reduce or eliminate exposure to
those agreements, taking into account the remaining terms of the
agreements and the counterparties’ credit standing.
F-68
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The estimated fair values of the Company’s financial
instruments as of December 31, 2008 and 2009 were as
follows:
| 2008 | 2009 | |||||||||||||||
|
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
| Amount | Value | Amount | Value | |||||||||||||
| (In millions of Korean won) | ||||||||||||||||
|
Financial assets:
|
||||||||||||||||
|
Cash and cash equivalents
|
3,073,410 | 3,073,410 | 2,695,569 | 2,695,569 | ||||||||||||
|
Restricted cash
|
4,793,948 | 4,793,948 | 6,050,241 | 6,050,241 | ||||||||||||
|
Interest-bearing deposits in other banks
|
234,534 | 234,534 | 466,890 | 466,890 | ||||||||||||
|
Call loans and securities purchased under resale agreements
|
1,407,474 | 1,407,474 | 2,036,142 | 2,036,142 | ||||||||||||
|
Investments
|
29,209,460 | 30,008,984 | 33,245,391 | 34,020,413 | ||||||||||||
|
Loans, net
|
197,066,505 | 196,448,330 | 193,454,326 | 192,767,714 | ||||||||||||
|
Due from customers on acceptance
|
2,062,618 | 2,062,618 | 1,895,444 | 1,895,444 | ||||||||||||
|
Accrued interest and dividends receivable
|
1,123,833 | 1,123,833 | 1,029,257 | 1,029,257 | ||||||||||||
|
Security deposits
|
1,427,624 | 1,427,624 | 1,405,638 | 1,405,638 | ||||||||||||
|
Other assets-loans held for sale
|
293,384 | 293,384 | 201,275 | 201,275 | ||||||||||||
|
Other assets- off-balance sheet instruments
|
35,110 | 35,110 | 29,808 | 29,808 | ||||||||||||
|
Financial liabilities:
|
||||||||||||||||
|
Interest-bearing deposits
|
155,263,206 | 155,299,191 | 166,078,921 | 166,113,912 | ||||||||||||
|
Non-interest-bearing deposits
|
3,438,269 | 3,438,269 | 3,104,147 | 3,104,147 | ||||||||||||
|
Call money
|
3,443,811 | 3,443,811 | 1,364,516 | 1,364,516 | ||||||||||||
|
Acceptances outstanding
|
2,062,618 | 2,062,618 | 1,895,444 | 1,895,444 | ||||||||||||
|
Accrued interest payable
|
4,961,602 | 4,961,602 | 3,819,342 | 3,819,342 | ||||||||||||
|
Other borrowed funds
|
10,526,916 | 10,548,662 | 8,176,286 | 8,175,635 | ||||||||||||
|
Secured borrowings
|
5,879,653 | 5,881,243 | 4,669,728 | 4,883,609 | ||||||||||||
|
Long-term debt
|
45,147,962 | 45,991,245 | 39,569,909 | 40,441,451 | ||||||||||||
|
Other liabilities-off-balance sheet instruments
|
35,110 | 35,110 | 29,808 | 29,808 | ||||||||||||
| 30. | Derivative Instruments and Hedging Activities |
The Company applied fair value hedge accounting for derivative
transactions which qualified for hedge accounting. Fair values
of derivatives not qualifying for hedge accounting are reflected
in “Trading assets” or “Trading liabilities”
and any changes in fair values related to these derivatives
transactions are reflected in “Net Trading Revenue”.
The fair values of derivatives qualifying for hedge accounting
are included in “Other assets” or “Other
liabilities” and the earnings impact of these fair value
hedges and the change in fair value attributable to the risk
being hedged for the hedged item are included in “Other
non-interest income” or “Other non-interest
expenses.”
Through December 31, 2006, the Company’s hedge
accounting was applied exclusively to those interest rate swap
transactions that qualified for the short-cut method of hedge
accounting. In 2007, in respect of new qualifying hedge
relationships, the Company began using standard statistical
methods of regression analysis to perform an ongoing prospective
and retrospective assessment of the effectiveness of the hedging
relationships involving interest rate swaps (i.e., the Company
applied the “long-haul” method of hedge accounting)
while, at the same time, continuing to use the short-cut method
for qualifying hedge relationships existing as of
January 1, 2007.
In the normal course of business, the Company enters into
derivatives and foreign exchange contracts to manage the risk
exposures of its customers. The Company also uses derivative
instruments in reducing risk
F-69
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
exposures relating to fluctuations in its own trading accounts,
and assets and liabilities in response to interest rate and
foreign exchange risks.
The Company uses interest rate derivatives principally to manage
exposure to fluctuations in fair value in response to interest
rate risk. Pay-fixed receive-variable interest rate swaps are
used to convert fixed rate assets, principally debt securities,
into synthetic variable rate instruments. Receive-fixed
pay-variable interest rate swaps are used to convert fixed rate
funding sources, principally fixed rate debt, into synthetic
variable rate funding instruments. Cross-currency interest rate
swaps are contracts that generally involve the exchange of both
interest and principal amounts in two different currencies.
Cross-currency swaps are used by the Company to convert asset
and funding denominated from one currency into another currency.
Derivative instruments may expose the Company to market risk or
credit risk in excess of the amounts recorded on the balance
sheets. Market risk arises due to market price, interest rate
and foreign exchange rate fluctuations that may result in a
decrease in the market value of a financial instrument
and/or
an
increase in its funding cost. Exposure to market risk is managed
through position limits and other controls and by entering into
hedging transactions. Credit risk is the possibility that loss
may occur from counterparty failure to perform according to the
terms of the contract and if the value of collateral held, if
any, was not adequate to cover such losses. Credit risk is
controlled through credit approvals, limits and monitoring
procedures based on the same credit policies used for
on-balance-sheet instruments. Generally, collateral or other
security is not required. The amount of collateral obtained, if
any, is based on the nature of the financial instrument and
management’s credit evaluation of each counterparty.
The following table presents the notional amounts of the
Company’s derivative instruments as of December 31,
2009.
|
Hedging Instruments
|
Other Derivative Instruments | |||||||||||||||
|
Under ASC 815
|
Trading
|
Management
|
||||||||||||||
| (SFAS No. 133) | Derivatives | Hedges | Total | |||||||||||||
| (In millions of Korean won) | ||||||||||||||||
|
Foreign exchange spot contracts
|
— | 2,451,179 | — | 2,451,179 | ||||||||||||
|
Foreign exchange derivatives:
|
||||||||||||||||
|
Currency futures
|
— | 1,552,324 | — | 1,552,324 | ||||||||||||
|
Currency forwards
|
— | 35,506,815 | — | 35,506,815 | ||||||||||||
|
Currency swaps
|
1,167,600 | 18,800,976 | — | 19,968,576 | ||||||||||||
|
Currency options purchased
|
— | 1,479,661 | — | 1,479,661 | ||||||||||||
|
Currency options sold
|
— | 1,784,605 | — | 1,784,605 | ||||||||||||
|
Interest rate derivatives:
|
||||||||||||||||
|
Interest rate futures
|
— | 3,770,071 | — | 3,770,071 | ||||||||||||
|
Interest rate swaps
|
2,363,590 | 90,068,589 | — | 92,432,179 | ||||||||||||
|
Interest rate options purchased
|
— | 4,700,000 | — | 4,700,000 | ||||||||||||
|
Interest rate options sold
|
— | 3,453,481 | — | 3,453,481 | ||||||||||||
|
Equity derivatives:
|
||||||||||||||||
|
Stock futures
|
— | 75,043 | — | 75,043 | ||||||||||||
|
Stock options purchased
|
— | 3,607,076 | 21,574 | 3,628,650 | ||||||||||||
|
Stock options sold
|
— | 1,892,687 | 21,574 | 1,914,261 | ||||||||||||
|
Stock swaps
|
— | 154,197 | 17,203 | 171,400 | ||||||||||||
|
Credit derivatives:
|
||||||||||||||||
|
Protection sold
|
— | 200,000 | — | 200,000 | ||||||||||||
|
Commodity and other derivatives:
|
||||||||||||||||
|
Forwards
|
— | — | 41,727 | 41,727 | ||||||||||||
|
Others
|
190,000 | 121,851 | 60,000 | 371,851 | ||||||||||||
|
Total derivative notionals
|
3,721,190 | 169,618,555 | 162,078 | 173,501,823 | ||||||||||||
F-70
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table presents the derivative assets and
liabilities included in the Company’s consolidated balance
sheets as December 31, 2009.
| Derivatives Assets | Derivatives liabilities | |||||||||||||||||||||||
|
Qualifying
|
Qualifying
|
|||||||||||||||||||||||
|
Trading
|
Accounting
|
Trading
|
Accounting
|
|||||||||||||||||||||
| Derivatives | Hedge | Total | Derivatives | Hedge | Total | |||||||||||||||||||
| (In millions of Korean won) | ||||||||||||||||||||||||
|
Foreign exchange spot contracts
|
2,878 | — | 2,878 | 2,812 | — | 2,812 | ||||||||||||||||||
|
Foreign exchange derivatives
|
2,592,510 | — | 2,592,510 | 1,751,492 | 166,817 | 1,918,309 | ||||||||||||||||||
|
Interest rate derivatives
|
573,309 | 48,070 | 621,379 | 814,637 | 8,692 | 823,329 | ||||||||||||||||||
|
Equity derivatives
|
86,267 | — | 86,267 | 321,803 | — | 321,803 | ||||||||||||||||||
|
Credit derivatives
|
2,118 | — | 2,118 | — | — | — | ||||||||||||||||||
|
Commodity derivatives
|
2,410 | — | 2,410 | 2,386 | — | 2,386 | ||||||||||||||||||
|
Other derivatives
|
1,821 | — | 1,821 | 5,306 | 34,420 | 39,726 | ||||||||||||||||||
|
Total derivatives assets/liabilities
|
3,261,313 | 48,070 | 3,309,383 | 2,898,436 | 209,929 | 3,108,365 | ||||||||||||||||||
The following table presents the trading gains(losses) in the
Company’s consolidated income statements for the year ended
December 31, 2009.
| Trading Gains (Losses) (1) | ||||
|
(In millions of
|
||||
| Korean won) | ||||
|
Foreign exchange spot contracts
|
98,101 | |||
|
Foreign exchange derivatives
|
269,934 | |||
|
Interest rate derivatives
|
(206,435 | ) | ||
|
Equity derivatives
|
6,738 | |||
|
Credit derivatives
|
16,000 | |||
|
Commodity derivatives
|
(490 | ) | ||
|
Other derivative
|
(2,930 | ) | ||
|
Total
|
180,918 | |||
| (1) | Amounts are recorded in net trading revenue. |
The following table presents certain information related to the
Company’s derivatives designated as fair value hedges for
the years ended December 31, 2008 and 2009.
| 2008 | 2009 | |||||||||||||||||||||||
|
Hedged
|
Hedge
|
Hedged
|
Hedge
|
|||||||||||||||||||||
| Derivatives (1) | Items (1) | Ineffectiveness | Derivatives (1) | Items (1) | Ineffectiveness | |||||||||||||||||||
| (In millions of Korean won) | ||||||||||||||||||||||||
|
Foreign exchange derivatives
|
— | — | — | (165,271 | ) | 106,655 | (58,616 | ) | ||||||||||||||||
|
Interest rate derivatives
|
51,251 | (78,424 | ) | (27,173 | ) | (62,411 | ) | 68,813 | 6,402 | |||||||||||||||
|
Other derivatives
|
— | — | — | (33,203 | ) | 39,497 | 6,294 | |||||||||||||||||
|
Total
|
51,251 | (78,424 | ) | (27,173 | ) | (260,885 | ) | 214,965 | (45,920 | ) | ||||||||||||||
| (1) | Amounts are recorded in other non-interest income(expense). |
F-71
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Credit
Derivatives
The Company enters into credit derivatives primarily to
facilitate client transactions. Credit derivatives derive value
based on an underlying third party-referenced obligation and
generally require the Company as the seller of credit protection
to make payments to a buyer upon the occurrence of predefined
credit events. Such credit events generally include bankruptcy
of the referenced entity, debt restructuring and failure to pay
under the obligation, as well as acceleration of indebtedness
and payment repudiation or moratorium. For credit derivatives
based on a portfolio of referenced credits or credit indices,
the Company may not be required to make payment until a
specified amount of loss has occurred
and/or
may
only be required to make payment up to a specified amount . As
of December 31, 2009, all credit derivatives include only
credit default swaps (“CDS”), in which the Company is
the protection seller. Based on the credit quality of the
underlying reference entities, all investments have been
classified as investment grade and their expiration at
December 31, 2009 and 2008 are summarized as follows.
2008
|
Maximum
|
||||||||||||||||
|
Payout/
|
Less Than
|
Fair Value
|
||||||||||||||
| Notional | 1 Year | 1 to 3 Years | Liability | |||||||||||||
| (In millions of Korean won) | ||||||||||||||||
|
Credit default
swaps
(1)
|
454,500 | 2,017 | 7,472 | 9,489 | ||||||||||||
2009
|
Maximum
|
||||||||||||||||
|
Payout/
|
Less Than
|
Fair Value
|
||||||||||||||
| Notional | 1 Year | 1 to 3 Years | Asset | |||||||||||||
| (In millions of Korean won) | ||||||||||||||||
|
Credit default
swaps
(1)
|
200,000 | — | 2,118 | 2,118 | ||||||||||||
| (1) | The Company considers ratings of BBB- or higher to meet the definition of investment grade. |
The maximum potential amount of future payments under CDS
contracts presented in the table above is based on the notional
value of the derivatives. The Company believes that the maximum
potential amount of future payments for credit protection sold
is not representative of the actual loss exposure based on
historical experience. This maximum potential amount has not
been reduced by the Company’s rights to the underlying
assets and the related cash flows. In accordance with most CDS
contracts, should a credit event (or settlement trigger) occur,
the Company is usually liable for the difference between the
protection sold and the recourse it holds in the value of the
underlying assets. Thus, if the reference entity defaults, the
Company will generally have a right to collect on the underlying
reference credit and any related cash flows, while being liable
for the full notional amount of credit protection sold to the
buyer. As of December 31, 2009, the Company has not
purchased protection against the credit protection sold to
offset derivative contract positions.
Credit-Risk-Related
Contingent Features in Derivatives
Certain derivative instruments contain provisions that require
the Company to either post additional collateral or immediately
settle any outstanding liability balances upon the occurrence of
a specified credit-risk-related event. These events, which are
defined by the existing derivative contracts, are primarily
downgrades in the credit ratings of the Company and its
affiliates. The fair value of all derivative instruments with
credit-risk-related contingent features that are in a liability
position as of December 31, 2009 is
W
1,590,026 million. The Company has posted
W
257,852 million as collateral for this
exposure in the normal course of business as of
December 31, 2009. Each downgrade would trigger additional
collateral requirements for the Company and its affiliates. In
the event that each legal entity was downgraded a single notch
as of December 31, 2009, the Company would be required to
post additional collateral of
W
173,559 million.
F-72
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Counterparty
Credit Risk
By using derivatives, the Company is exposed to counterparty
credit risk if counterparties to the derivative contracts do not
perform as expected. If a counterparty fails to perform its
obligation, the Company’s counterparty credit risk is equal
to the amount of derivative assets balance net of derivative
liabilities and the related collateral, with the same
counterparty subject to master netting arrangements under the
guidance covering the offsetting of amounts related to certain
contracts. As of December 31, 2009, the Company’s
exposure to counterparty credit risk amounted to
W
1,453,925 million, which is composed of
W
93,797 million related to foreign
financial institutions,
W
5,990 million
related to foreign non-financial institutions,
W
47,628 million related to domestic
financial institutions and
W
1,306,510 million related to domestic
non-financial institutions. The amount of collateral netted
against derivative assets was
W
76,690 million, as of December 31,
2009. The Company minimizes counterparty credit risk through
credit approvals, limits, monitoring procedures, executing
master netting arrangements and obtaining collateral, where
appropriate.
| 31. | Commitments and Contingencies |
Legal
proceedings
The Company is a party to certain legal actions arising in the
normal course of its operations. Other than the legal
proceedings discussed below, management believes that these
actions are without merit and that the ultimate liability, if
any, will not materially affect the Company’s financial
position, liquidity or results of operations.
a) In February 2006, the Korean government indicted the
former team head of the Company’s lottery department and
several other individuals in connection with excessive fees paid
to a subcontractor by the government. The subcontractor, Korea
Lottery Service Inc., was hired by the Company with the Korean
government’s approval in connection with the Company’s
lottery operations, and fees paid to such subcontractor were
deducted prior to transferring any profit received by the
Company to the government. In December 2007, the Seoul Central
District Court found the former team head of the Company’s
lottery department guilty but ruled in favor of the other
defendants. Both the former team head of the Company’s
lottery department and the prosecutor’s office appealed the
case to the Seoul High Court. In January 2009, the Seoul High
Court ruled in favor of the former team head of the
Company’s lottery department. In February 2009, the
prosecutor’s office appealed the case to the Supreme Court
of Korea, which dismissed the appeal.
In August 2006, the government filed a lawsuit seeking the
return of
W
321 billion of excessive fees
relating to the lottery operations against the Company,
Ernst & Young Han Young, Korea Lottery Service Inc.
and the Company’s and their relevant employees. In April
2009, the Seoul Central District Court dismissed the
government’s claim. In May 2009, the government appealed
the case to the Seoul High Court, where it is currently pending.
In April 2004, the Lottery Commission of the Korean government
revised the fee rate for fees payable to Korea Lottery Service
Inc. by reducing it from 9.523% to 3.144%. Korea Lottery Service
Inc. filed a lawsuit with the Seoul Central District Court
claiming that such reduction by the Lottery Commission was
invalid and demanding the payment of approximately
W
20 billion of unpaid fees by the Company,
which is the difference between the fees payable by the Company
under the previous rate and the revised rate in respect of fees
incurred in May 2004. In December 2006, the Seoul Central
District Court ruled in favor of Korea Lottery Service Inc., and
the Company appealed to the Seoul High Court in January 2007. In
May 2008, the Seoul High Court ruled in favor of Korea Lottery
Service Inc. in part but reduced the amount of damages to
W
4.5 billion. In June 2008, both the
Company and Korea Lottery Service Inc. appealed the case to the
Supreme Court of Korea, where it is currently pending.
In addition, in January 2007, Korea Lottery Service Inc. filed
another lawsuit with the Seoul Central District Court seeking
payment of unpaid fees in the aggregate amount of
W
446 billion, which is the difference
between the fees payable by the Company under the previous rate
and the revised rate, for fees incurred from June 2004 to
December 2006. In July 2008, the Seoul Central District Court
ruled in favor of the Company in part and reduced the
F-73
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
amount of damages to
W
123 billion. In
August 2008, both the Company and Korea Lottery Service Inc.
appealed the case to the Seoul High Court, where it is currently
pending.
Furthermore, in June 2008, Korea Lottery Service Inc. filed
another lawsuit with the Seoul Central District Court seeking
payment of unpaid fees in the aggregate amount of
W
134 billion, which is the difference
between the fees payable by the Company under the previous rate
and the revised rate, for fees incurred from January 2007 to
December 1, 2007. The case is currently pending.
b) In September 2006, the Korea Fair Trade Commission
ordered the Company to cease, the following practices and
assessed an administrative fine against the Company in the
aggregate amount of
W
6.4 billion :
| • | not reducing the interest rates on certain of its adjustable-rate home equity loans in prior years despite a decline in market interest rates; | |
| • | collecting unauthorized early repayment commissions from its customers in connection with certain of its housing loans; and | |
| • | paying KB Asset Management a management fee higher than that of other asset management companies with respect to certain money market fund products. |
In November 2006, the Company paid the full amount of such
W
6.4 billion fine, after filing a lawsuit
with the Seoul High Court in October 2006 to revoke the order.
In January 2008, the Seoul High Court ruled in favor of the
Korea Fair Trade Commission regarding the orders with respect to
the first and third practices described above, and in favor of
the Company regarding the order with respect to the second
practice described above. Furthermore, the Seoul High Court
ruled that the administrative fine imposed in connection with
the first practice described above was excessive and ordered a
reassessment. The Company and the Korea Fair Trade Commission
both appealed the ruling to the Supreme Court, which ruled in
favor of the Korea Fair Trade Commission regarding the orders
with respect to the three practices described above but upheld
the Seoul High Court’s ruling that the administrative fine
imposed in connection with the first practice described above
was excessive.
Furthermore, in September 2006, the Korea Fair Trade Commission
announced that it would issue a formal warning to the Company
for:
| • | canceling accumulated bonus points given to its credit card holders whose card transactions were suspended for more than a year; and | |
| • | not giving certain bonus points to its credit card holders who were in default on their payments. |
However, the Company has not received any formal warning from
the Korea Fair Trade Commission on this matter to date.
In addition, in May 2006 the Korea Fair Trade Commission
commenced an investigation into whether various domestic banks
(including the Company) engaged in collusive or anti-competitive
activity in connection with various commission fees. As a result
of such investigation, in March 2008, the Korea Fair Trade
Commission took the following actions:
| • |
The Korea Fair Trade Commission ordered seven credit card
issuers (including the Company) to stop certain allegedly
collusive practices in reducing draft capture fees payable to
value-added network companies and to pay administrative fines in
an aggregate amount of
|
|
| • | The Korea Fair Trade Commission ordered the Company to stop alleged price-fixing practices in charging certain new fees in connection with export bills of exchange and banker’s usance letters of credit and to pay |
F-74
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
administrative fines in the amount of
|
Furthermore, in April 2008, the Korea Fair Trade Commission
ordered the Company to stop alleged price-fixing practices in
connection with direct deposit fees, and to pay administrative
fines in the amount of
W
537 million for
such activities. In July 2008, the Company appealed the Korea
Fair Trade Commission’s decision to the Seoul High Court,
which dismissed the Company’s appeal in May 2009. In June
2009, the Company appealed this case to the Supreme Court of
Korea, where it is currently pending.
c) During the first quarter of 2004, the National Tax
Service of Korea completed a tax audit in respect of the Company
for the fiscal years 1998, 1999, 2000 and 2001, as a result of
which the Company was assessed
W
124 billion (including residence tax) for
tax deficiencies. The Company has paid the entire amount, but
appealed the assessment to the National Tax Tribunal, which
ruled in favor of the National Tax Service of Korea in part. In
2005 and 2006, the Company filed various administrative lawsuits
appealing the judgment of the National Tax Tribunal. The Company
previously had one lawsuit pending at the Supreme Court of
Korea, which was decided in its favor in June 2009. The Company
previously had two additional lawsuits on this matter pending at
the Supreme Court of Korea, one of which was decided in its
favor in January 2010 and the other in favor of the National Tax
Service of Korea in March 2010.
d) During the first half of 2007, the National Tax Service
of Korea completed a tax audit in respect of the Company for the
fiscal years 2002, 2003, 2004 and 2005, as a result of which the
Company was assessed
W
190 billion
(including residence tax) for tax deficiencies. In addition,
during the second half of 2007, the National Tax Service of
Korea assessed additional income taxes for prior years amounting
to
W
292 billion (including residence tax)
for tax deficiencies. The Company paid the entire amount of such
additional assessments in 2007, but filed an appeal with the
National Tax Tribunal with respect to tax assessments made in
2007 amounting to
W
482 billion (including
residence tax), and the Company recorded
W
481 billion of such income taxes paid as
“Other Assets” in the Company’s consolidated
financial statements as of December 31, 2007 and 2008,
which was reduced to
W
401 billion as of
December 31, 2009.
e) In June 2008, the Ministry of Land, Transport and
Maritime Affairs of the Korean government filed a suit against
the Company in the Seoul Central District Court to recover
W
116 billion of ATM transaction fees that
were allegedly overcharged by the Company during the period from
February 2003 to December 2006, by applying the higher bank
teller transaction fees to ATM transactions. In January 2009,
the Seoul Central District Court ruled in favor of the Company,
and the Ministry of Land, Transport and Maritime Affairs
appealed the case to the Seoul High Court, which dismissed the
appeal. In September 2009, the Ministry of Land, Transport and
Maritime Affairs appealed the case to the Supreme Court of
Korea, which dismissed the appeal.
f) Since November 2008, certain customers of the Company
have filed lawsuits against it in connection with its sales of
foreign currency derivatives products known as “KIKO”
(which stands for “knock-in knock-out”), which are
intended to operate as hedging instruments against fluctuations
in the exchange rate between the Won and the U.S. dollar.
Due to the significant depreciation of the Won against the
U.S. dollar in 2008 and 2009, customers who have purchased
KIKO products from the Company are required to make large
payments to it. Six companies have filed lawsuits against the
Company alleging that the contracts under which the relevant
KIKO products were sold should be invalidated and that the
Company should return payments received thereunder. The
aggregate amount of such claims, as of May 4, 2010, was
approximately
W
19 billion and may increase
in the event of future depreciation
F-75
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
of the Won against U.S. dollar. Additional lawsuits, as
well as motions for preliminary injunctions, may be filed
against the Company with respect to KIKO products, and the final
outcome of such litigation remains uncertain.
g) Since November 2008, 392 of the Company’s customers
have filed 11 lawsuits against it in connection with its sales
of offshore funds and currency future contracts, claiming
damages of
W
5,670 million. The customers
allege that the losses were caused by the Company’s
negligence in inadequately explaining the risks of such
investment to its customers and in structuring funds with
inappropriate currency future hedging features. Four of the
lawsuits were dismissed and not appealed. One of the lawsuits
was dismissed by the Seoul Central District Court in July 2009
and the plaintiffs appealed to the Seoul High Court, where it is
currently pending. Five of the remaining lawsuits are currently
pending at the Seoul Central District Court and one lawsuit is
pending at the Daegu District Court. Additional lawsuits may be
filed against the Company with respect to its sales of such
products, and the final outcome of such litigation remains
uncertain.
Lease
commitments
The Company entered into capital leases in 2008, while all
leases entered into by the Company as lessee were operating
leases until 2007. Total rental expenses for the years ended
December 31, 2007, 2008 and 2009 were
W
129,538 million,
W
173,297 million, and
W
183,716 million, respectively. Pursuant
to the terms of lease agreements pertaining to premises and
equipment in effect at December 31, 2009, future minimum
rental payments under non-cancelable operating and capital lease
terms are as follows:
|
Operating
|
Capital
|
|||||||
| Lease | Lease | |||||||
|
(In millions of
|
||||||||
| Korean won) | ||||||||
|
2010
|
108,074 | 26,470 | ||||||
|
2011
|
57,414 | 183 | ||||||
|
2012
|
31,499 | 154 | ||||||
|
2013
|
9,714 | 210 | ||||||
|
2014
|
3,092 | 277 | ||||||
|
Thereafter
|
2,644 | — | ||||||
|
Total
|
212,437 | 27,294 | ||||||
In lieu of rent, certain lease agreements require the Company to
advance a non-interest bearing refundable deposit to the
landlord for the landlord’s use during the lease term. The
amount of the advance is determined by the prevailing market
rate and is recorded as a security deposit in the consolidated
balance sheets.
Credit-related
commitments
The Company is a party to credit related financial instruments
with off-balance sheet risk in the normal course of business.
The primary purpose of these instruments is to ensure that funds
are available to customers as required. Guarantees, which
represent irrevocable assurances that the Company will make
payments in the event that a customer cannot meet its
obligations to third parties, carry the same credit risk as
loans. Cash requirements under guarantees are considerably less
than those under commitments because the Company does not
generally expect the third party to draw funds under the
agreement.
Commercial letters of credit, which are written undertakings by
the Company on behalf of a customer authorizing a third party to
draw drafts on the Company up to a stipulated amount under
specific terms and conditions, are collateralized by the
underlying shipments of goods to which they relate and therefore
have significantly less risk than a loan.
F-76
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Commitments to extend credit represent unused portions of
authorizations to extend credit in the form of loans, guarantees
or letters of credit. With respect to credit risk on commitments
to extend credit, the Company is potentially exposed to loss in
an amount equal to the total unused commitments.
For credit related financial instruments, the contractual amount
of the financial instrument represents the maximum potential
credit risk if the counterparty does not perform according to
the terms of the contracts. A large majority of these
commitments expire without being drawn upon. As a result, total
contractual amounts are not representative of the Company’s
actual future credit exposure or liquidity requirements for
these commitments.
As of December 31, 2008 and 2009, the financial instruments
whose contract amounts represent credit risk to the Company were
as follows:
| Contract Amount | ||||||||
| 2008 | 2009 | |||||||
| (In millions of Korean won) | ||||||||
|
Guarantees
|
6,561,490 | 6,225,712 | ||||||
|
Commercial letters of
credit
(1)
|
9,949,069 | 8,350,739 | ||||||
|
Unused lines of credit:
|
||||||||
|
Commercial
|
25,895,687 | 28,560,694 | ||||||
|
Consumer
(2)
|
54,778,970 | 55,048,603 | ||||||
| (1) |
The above contains advance payment refund guarantees and others
which amount to
|
|
| (2) |
Of this amount,
|
Fund
contribution commitments
On December 17, 2008, the Company committed to contribute
W
1,043,826 million to the Bond Market
Stabilization Fund aimed at stabilizing the local debt market.
As of December 31, 2009, the Company’s total
contribution amounted to
W
521,913 million.
Bad
bank contribution commitment
On October 17, 2009, the Company committed to contribute
W
175,000 million to the UAMCO. As of
December 31, 2009, the Company’s total contribution
amounted to
W
162,750 million.
F-77
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Pledged
assets
The primary components of assets pledged as collateral for
borrowings and other purposes as of December 31, 2008 and
2009 were as follows:
| 2008 | 2009 | |||||||
| (In millions of Korean won) | ||||||||
|
Trading securities
|
1,055,706 | 1,309,212 | ||||||
|
Available-for-sale
securities
|
3,303,349 | 1,189,954 | ||||||
|
Held-to-maturity
securities
|
8,099,494 | 6,977,474 | ||||||
|
Other securities
|
258 | 278 | ||||||
|
Loans
|
835,727 | 4,956,728 | ||||||
|
Real estate
|
9,035 | 3,919 | ||||||
|
Cash
|
3,000 | 114,100 | ||||||
|
Total
|
13,306,569 | 14,551,665 | ||||||
Obligation
under guarantees
The Company provides a variety of guarantees to its customers to
enhance their credit standing and enable them to complete a wide
variety of business transactions. The maximum potential amount
of future payments represents the notional amounts that could be
lost under the guarantees if there were a total default by the
guaranteed parties, without consideration of possible recoveries
under recourse provisions or from collateral held or pledged.
Guarantee arrangements have been recorded on the Company’s
consolidated balance sheet at their fair value at inception as
“Other liabilities” with an offsetting entry in
“Other assets”. As cash is received under such
arrangements and applied to other assets, the liability recorded
at inception is amortized into fees and commissions over the
life of the contract. The table below summarizes all of the
Company’s guarantees under FIN 45 (ASC 460) as of
December 31, 2009.
|
Maximum
|
||||||||||||||||
|
Potential Amount
|
||||||||||||||||
|
of Future Payment
|
||||||||||||||||
|
Expire Within
|
Expire After
|
or Notional
|
||||||||||||||
| One Year | One Year | Total | Amounts | |||||||||||||
| (In millions of Korean won) | ||||||||||||||||
|
Financial guarantees
|
293,038 | 303,150 | 596,188 | 596,188 | ||||||||||||
|
Performance guarantees
|
3,682,165 | 1,947,359 | 5,629,524 | 5,629,524 | ||||||||||||
|
Liquidity facilities to SPEs
|
469,513 | 1,105,857 | 1,575,370 | 1,575,370 | ||||||||||||
|
Trust Fund Guarantees
|
506,323 | 2,362,189 | 2,868,512 | 2,868,512 | ||||||||||||
|
Total
|
4,951,039 | 5,718,555 | 10,669,594 | 10,669,594 | ||||||||||||
Financial guarantees are used in various transactions to enhance
the credit standing of the Company’s customers. They
represent irrevocable assurance, subject to satisfaction of
certain conditions, that the Company will make payments in the
event that the customers fail to fulfill their obligations to
third parties. Such financial obligations are principally
composed of standby letters of credit and credit enhancement for
debtors.
Performance guarantees are issued to guarantee customers’
tender bids on construction or similar projects or to guarantee
completion of such projects in accordance with contract terms.
They are also issued to support the customers’ obligation
to supply specified products, commodities, maintenance or other
services to third parties.
As of December 31, 2008 and 2009, the carrying amount of
the liabilities related to financial and performance guarantees
amounted to
W
32,525 million and
W
19,433 million, respectively.
F-78
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Liquidity facilities to SPEs represent irrevocable commitments
to provide contingent liquidity credit lines including
commercial paper purchase agreements to SPEs for which the
Company serves as the administrator. The SPEs are established by
clients to have access to funding from the commercial paper
market or the corporate debt market by transferring assets to
the SPEs. The Company had commitments to provide liquidity to
SPEs up to
W
1,129 billion and
W
1,575 billion as of December 31,
2008 and 2009, respectively. As of December 31, 2008 and
2009, the carrying amount of these liabilities amounted to
W
2,585 million and
W
10,375 million, respectively. Although
the Company does not sell assets to these SPEs, it would be
required to provide funding under the liquidity credit lines in
the event that the SPEs do not hold enough funds to make
scheduled payments on their outstanding senior debt securities.
Under the commercial paper purchase agreements, the Company is
required to purchase commercial paper issued by the SPEs when
enough funding is not available in the commercial paper market.
The Company has limited credit exposure to these SPEs because
the risk of first loss is borne by the clients or other third
parties, or the SPEs are over-collateralized.
In the normal course of the Company’s business,
indemnification clauses are often included in standard contracts
with an assessment that risk of loss is remote. In many cases,
there are no stated or notional amounts included in the
indemnification clauses and the contingencies triggering the
obligation to indemnify have not occurred and are not expected
to occur. No amounts were reflected in the consolidated balance
sheets as of December 31, 2008 and 2009 related to these
indemnifications.
The Company evaluates the performance risk of its guarantees
based on the assigned referenced counterparty internal or
external ratings. Where external ratings are used,
investment-grade ratings are considered to be BBB- and above,
while anything below is considered non-investment grade. The
Company’s internal ratings are in line with the related
external rating system. On certain underlying referenced credits
or entities, ratings are not available. Such referenced credits
are included in the “Not-rated” category. The maximum
potential amount of the future payments related to guarantees is
determined to be the notional amount of these contracts, which
is the par amount of the assets guaranteed.
Presented in the table below is the maximum potential amount of
future payments classified based upon internal and external
credit ratings as of December 31, 2009.
|
Investment
|
Non-Investment
|
|||||||||||||||
| Grade | Grade | Not Rated | Total | |||||||||||||
| (In millions of Korean won) | ||||||||||||||||
|
Financial guarantees
|
446,867 | 149,321 | — | 596,188 | ||||||||||||
|
Performance guarantees
|
3,395,785 | 2,231,415 | 2,324 | 5,629,524 | ||||||||||||
|
Liquidity facilities to SPEs
|
1,220,606 | 354,764 | — | 1,575,370 | ||||||||||||
|
Trust Fund Guarantees
|
— | — | 2,868,512 | 2,868,512 | ||||||||||||
|
Total
|
5,063,258 | 2,735,500 | 2,870,836 | 10,669,594 | ||||||||||||
| 32. | Concentrations of Geographic and Credit Risk |
Geographic
risk
Loans to borrowers based in Korea comprised 99% of the
Company’s loan portfolio as of December 31, 2008 and
2009. Investments in debt and equity securities of Korean
entities comprised 99% of the Company’s investment
portfolio, including investments held by the Company’s
venture capital subsidiaries, as of December 31, 2008 and
2009.
F-79
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Credit
risk
Concentrations of credit risk arise when a number of customers
are engaged in similar business activities, or activities in the
same geographic region, or have similar economic features that
would cause their ability to meet their contractual obligations
to be similarly affected by changes in economic conditions.
The Company regularly monitors various segments of its credit
risk portfolio to assess potential concentration risks and to
obtain collateral when deemed necessary. No entity was
responsible for 10% or more of the Company’s total interest
and dividend income for the years ended December 31, 2007,
2008 and 2009.
The table below indicates major products including exposures of
on-balance sheet loans and off-balance sheet credit instruments
(principally unused credit lines) as of December 31.
| 2008 | 2009 | |||||||||||||||||||||||
|
Total Credit
|
On-Balance
|
Off-Balance
|
Total Credit
|
On-Balance
|
Off-Balance
|
|||||||||||||||||||
| Exposure | Sheet | Sheet | Exposure | Sheet | Sheet | |||||||||||||||||||
| (In millions of Korean won) | ||||||||||||||||||||||||
|
Commercial and industrial loans
|
88,460,164 | 75,140,264 | 13,319,900 | 88,745,085 | 74,611,001 | 14,134,084 | ||||||||||||||||||
|
Construction loans
|
12,986,016 | 10,052,096 | 2,933,920 | 11,750,371 | 8,096,574 | 3,653,797 | ||||||||||||||||||
|
Other commercial loans
|
11,796,929 | 2,950,577 | 8,846,352 | 11,832,021 | 2,178,037 | 9,653,984 | ||||||||||||||||||
|
Mortgages and home equity loans
|
71,321,668 | 69,923,921 | 1,397,747 | 75,067,868 | 70,678,319 | 4,389,549 | ||||||||||||||||||
|
Credit card loans
|
53,809,964 | 11,522,553 | 42,287,411 | 53,153,116 | 11,368,321 | 41,784,795 | ||||||||||||||||||
|
Other consumer loans
|
38,685,584 | 27,592,649 | 11,092,935 | 35,822,547 | 26,949,582 | 8,872,965 | ||||||||||||||||||
|
Foreign loans
|
3,250,926 | 2,454,534 | 796,392 | 3,463,673 | 2,343,550 | 1,120,123 | ||||||||||||||||||
|
Total
|
280,311,251 | 199,636,594 | 80,674,657 | 279,834,681 | 196,225,384 | 83,609,297 | ||||||||||||||||||
| 33. | Related Party Transactions |
A number of banking transactions are entered into with related
parties in the normal course of business. These include loans,
borrowings, acceptances outstanding and receivables. These
transactions are carried out on commercial terms and conditions
and at market rates, and are disclosed below.
Associates
The Company has business relationships with a number of
companies in which the Company owns significant equity interests.
F-80
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Directors
with common relationship
It is common for the directors of the Company to have a
relationship with other entities due to their positions at those
entities. During this common relationship period, the Company
considers such entities to be related parties of the Company.
|
Relationship in
|
||||
| Related Party | Financial Years | Remark | ||
|
LG International Corp. (“LGInt.”)
|
Mar 2006 to Mar 2009 | In March 2009, the director resigned from the Company | ||
|
Aju Auto Rental (“Aju”)
|
Feb 2009 to Feb 2010 | May 2009 onwards | ||
|
Kolon I’Networks Corp. (“KolonINet”)
|
Mar 2006 to Mar 2010 | In March 2010, the director resigned from the Company | ||
|
SK Holdings Co., Ltd. (“SK”)
|
Mar 2008 onwards | Mar 2008 onwards | ||
|
Ace Technologies Corp. (“AceTech”)
|
Sep 2008 to Mar 2009 | In March 2010, the director resigned from the Company | ||
|
Uclick Co., Ltd.(“Uclick”)
|
Mar 2008 to Feb 2010 | In February 2010, the director resigned from the Company | ||
|
Kolon Benit Co., Ltd. (“KolonBenit”)
|
Mar 2006 to Dec 2009 | In March 2010, the director resigned from the Company |
Loans
to related parties
The table below summarizes the changes in the amount of loans to
directors, director nominees and executive officers.
| 2008 | 2009 | |||||||
| (In millions of Korean won) | ||||||||
|
Loans, January 1,
|
9,883 | 6,970 | ||||||
|
New loans
|
5,680 | 6,486 | ||||||
|
Repayments
|
8,593 | 1,211 | ||||||
|
Loans, December 31,
|
6,970 | 12,245 | ||||||
The outstanding balances as of December 31, 2007, 2008, and
2009 and the related expense and income for the years then ended
with respect to related party transactions were as follows:
| 2007 | ||||||||||||||||||||||||||||||||||||||||
|
Money
|
KB
|
ING
|
||||||||||||||||||||||||||||||||||||||
| Trusts (1) | DSME | Today | SK | HITE | LGInt | Uclick | Life | Life | Directors | |||||||||||||||||||||||||||||||
| (In millions of Korean won) | ||||||||||||||||||||||||||||||||||||||||
|
Loans
|
— | — | 217 | 150,000 | 20,000 | 36,103 | 652 | — | — | 9,883 | ||||||||||||||||||||||||||||||
|
Due from customers on acceptances
|
— | 18,011 | — | — | — | 5,765 | — | — | — | — | ||||||||||||||||||||||||||||||
|
Receivables
|
12,334 | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
|
Borrowings
|
1,411,089 | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
|
Interest income on loans
|
— | — | — | 8,295 | 1,079 | 1,200 | 35 | 5 | — | 565 | ||||||||||||||||||||||||||||||
|
Fees and commission income
|
113,246 | 110 | — | 92 | — | 24 | — | 43,452 | 8,814 | — | ||||||||||||||||||||||||||||||
|
Interest expense on borrowings
|
72,628 | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
|
Purchase of goods and services
|
— | — | — | — | — | — | 2,234 | — | — | — | ||||||||||||||||||||||||||||||
| (1) | See Note 36 |
F-81
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 2008 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Money
|
Ace
|
Kolon
|
Kolon
|
KB
|
ING
|
|||||||||||||||||||||||||||||||||||||||||||||||
| Trusts (1) | DSME (4) | Today (4) | SK (4) | HITE (5) | LGInt (4) | Tech (4) | INet (2) | Uclick (3) | Benit (2) | Life | Life | Directors (6) | ||||||||||||||||||||||||||||||||||||||||
| (In millions of Korean won) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Loans
|
— | — | — | 150,000 | — | 101,562 | 2,000 | 35,033 | — | — | — | — | 6,970 | |||||||||||||||||||||||||||||||||||||||
|
Due from customers on acceptances
|
— | — | — | — | — | 44,990 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
|
Receivables
|
14,743 | — | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
|
Borrowings
|
2,775,135 | — | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
|
Interest income on loans
|
— | — | 5 | 8,295 | 290 | 2,124 | 68 | 331 | 38 | — | 9 | — | 956 | |||||||||||||||||||||||||||||||||||||||
|
Fees and commission income
|
101,274 | 36 | — | — | — | 153 | — | 32 | — | — | 47,951 | 10,674 | — | |||||||||||||||||||||||||||||||||||||||
|
Interest expense on borrowings
|
72,001 | — | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
|
Purchase of goods and services
|
— | — | — | — | — | — | — | — | 3,006 | 182 | — | — | — | |||||||||||||||||||||||||||||||||||||||
| (1) | See Note 36 | |
| (2) | The non-executive director of the Company, is the CEO and non-executive director of Kolon INet and Kolon Benit, respectively. | |
| (3) | The non-executive director of the Company, is the majority stockholder of Uclick. | |
| (4) | The non-executive directors of the Company during the year were also non-executive directors of the entities above. | |
| (5) | The non-executive director of the Company during the year was the senior advisor of the entity. | |
| (6) | Represent directors, director nominees, executive officers (Deputy President or higher) and their immediate family members. |
| 2009 | ||||||||||||||||||||||||||||||||||||||||
|
Aju
|
||||||||||||||||||||||||||||||||||||||||
|
Auto
|
Kolon
|
Ace
|
KB
|
Kolon
|
||||||||||||||||||||||||||||||||||||
| Trusts (1) | LGInt (4) | Rental (5) | INet (2) | SK (4) | Tech (4) | Life | Uclick (3) | Benit (2) | Directors (6) | |||||||||||||||||||||||||||||||
| (In millions of Korean won) | ||||||||||||||||||||||||||||||||||||||||
|
Loans
|
— | — | 17,548 | 9,970 | 150,000 | — | — | — | — | 12,245 | ||||||||||||||||||||||||||||||
|
Due from customers on acceptances
|
— | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
|
Receivables
|
22,959 | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
|
Borrowings
|
1,658,160 | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
|
Interest income on loans
|
— | 826 | 1,312 | 1,054 | 8,295 | 20 | 1 | — | — | 646 | ||||||||||||||||||||||||||||||
|
Fees and commission income
|
126,785 | 12 | — | 2 | — | — | 34,636 | — | — | — | ||||||||||||||||||||||||||||||
|
Interest expense on borrowings
|
56,438 | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
|
Purchase of goods and services
|
— | — | — | — | — | — | — | 603 | 102 | — | ||||||||||||||||||||||||||||||
| (1) | See Note 36 | |
| (2) | The non-executive director of the Company, is the CEO and non-executive director of Kolon INet and Kolon Benit, respectively. | |
| (3) | The non-executive director of the Company, is the majority stockholder of Uclick. | |
| (4) | The non-executive directors of the Company during the year were also non-executive directors of the entities above. | |
| (5) | The non-executive director of the Company during the year was the senior advisor of the entity. | |
| (6) | Represent directors, director nominees, executive officers (Deputy President or higher) and their immediate family members. |
F-82
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 34. | Operating Subsidiaries |
Operating subsidiaries of the Company as of December 31,
2009 were as follows:
|
Country of
|
Percentage
|
|||||
| Incorporation | Ownership | |||||
|
Kookmin Bank
|
Korea | 100.00 | % | |||
|
KB Investment & Securities Co., Ltd.
|
Korea | 100.00 | % | |||
|
KB Asset Management Co., Ltd.
|
Korea | 100.00 | % | |||
|
KB Real Estate Trust Co., Ltd.
|
Korea | 100.00 | % | |||
|
KB Investment Co., Ltd.
|
Korea | 100.00 | % | |||
|
KB Futures Co., Ltd.
|
Korea | 100.00 | % | |||
|
KB Credit Information Co., Ltd.
|
Korea | 100.00 | % | |||
|
KB Data Systems Co., Ltd.
|
Korea | 100.00 | % | |||
|
Kookmin Bank Hong Kong
Ltd.
(2)
|
Hong Kong | 100.00 | % | |||
|
Kookmin Bank Int’l
Ltd.
(2)
|
United Kingdom | 100.00 | % | |||
|
Kookmin Bank Cambodia
PLC.
(1)(2)
|
Cambodia | 51.00 | % | |||
|
KB Investment & Securities Hong Kong
Ltd.
(3)
|
Hong Kong | 100.00 | % | |||
| (1) | Kookmin Bank Cambodia PLC. newly became a subsidiary of the Company in 2009. | |
| (2) | Indicates percentage of ownership by Kookmin Bank. | |
| (3) | Indicates percentage of ownership by KB Investment & Securities Co., Ltd. |
All holdings are in the common shares of the undertaking
concerned. Certain VIEs, which have been consolidated in
accordance with FIN 46(R) (ASC 810) as of
December 31, 2008 and 2009, are not included in the list of
operating subsidiaries.
| 35. | Segment Reporting |
For management reporting purposes, the Company’s business
segment results are reported to management under Korean GAAP.
The Company is organized into four major business segments:
Retail Banking, Corporate Banking, Capital Markets Activities
and Credit Card Operations. These business divisions are based
on the nature of the products and services provided, the type or
class of customer, and the Company’s management
organization, and provide the basis on which the Company reports
its primary segment information:
| • | Retail banking — The retail banking segment’s assets and liabilities are mainly with individuals and households. This segment handles private customer current accounts, savings, deposits, consumer loans and mortgage loans. | |
| • | Corporate banking — The corporate banking segment’s assets and liabilities are mainly with private and public enterprises. The activities within this segment include loans, overdrafts, other credit facilities, deposits in foreign currencies and other foreign currency activities. | |
| • | Capital markets activities — Activities within this segment include trading activities in securities and derivatives, activities involving investment security portfolios, and foreign currency funding through debentures and borrowings. | |
| • | Credit card operations — The credit card segment’s assets and liabilities are mainly with individuals or corporate cardholders and card merchants, and it handles domestic as well as overseas credit and debit card operations. |
F-83
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KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Other operations of the Company are comprised of activities of
its subsidiaries and other consolidated entities, activities of
trust account management activities, none of which constitute a
separately reportable segment.
Operating income and expenses and interest income and expense,
related to both third party and inter-segment transactions, are
included in determining the operating earnings of each segment.
The provision for income tax is comprised of corporate income
tax and resident tax surcharges. The income tax expenses are
allocated to the respective segment based on performance.
Transactions between the business segments are reflected on
terms established by management.
The segment results were prepared based on Korean GAAP and a
reconciliation to U.S. GAAP has been provided for certain
line items. Geographic segment disclosures have been excluded as
assets and revenues attributable to external customers in
foreign countries are not significant.
A summary of the business segment results is shown in the
following table:
|
Capital
|
Credit
|
U.S.
|
||||||||||||||||||||||||||||||||||
|
Retail
|
Corporate
|
Markets
|
Card
|
Total
|
Inter-Segment
|
GAAP
|
||||||||||||||||||||||||||||||
| Year Ended December 31, 2007 | Banking | Banking | Activities | Operations | Other | Segment | Transactions (1) | Adjustments | Total | |||||||||||||||||||||||||||
| (In millions of Korean won) | ||||||||||||||||||||||||||||||||||||
|
Operating income
|
11,465,514 | 7,048,300 | 9,019,943 | 2,238,803 | 3,482,028 | 33,254,588 | (10,727,867 | ) | (5,721,523 | ) | 16,805,198 | |||||||||||||||||||||||||
|
Operating expense
|
9,611,829 | 6,463,264 | 9,045,737 | 1,532,613 | 1,957,687 | 28,611,130 | (10,629,155 | ) | (6,142,579 | ) | 11,839,396 | |||||||||||||||||||||||||
|
Segment results
|
1,853,685 | 585,036 | (25,794 | ) | 706,190 | 1,524,341 | 4,643,458 | (98,712 | ) | 421,056 | 4,965,802 | |||||||||||||||||||||||||
|
Interest income
|
10,304,640 | 6,372,668 | 3,459,384 | 1,997,440 | 1,339,041 | 23,473,173 | (9,596,017 | ) | (1,084,815 | ) | 12,792,341 | |||||||||||||||||||||||||
|
Interest expense
|
7,350,859 | 5,280,951 | 3,516,996 | 449,045 | 342,331 | 16,940,182 | (10,142,560 | ) | (110,174 | ) | 6,687,448 | |||||||||||||||||||||||||
|
Net interest income(expense)
|
2,953,781 | 1,091,717 | (57,612 | ) | 1,548,395 | 996,710 | 6,532,991 | 546,543 | (974,641 | ) | 6,104,893 | |||||||||||||||||||||||||
|
Provision for credit losses
|
84,110 | 416,403 | 23 | 19,468 | 27,524 | 547,528 | (61 | ) | (529,093 | ) | 18,374 | |||||||||||||||||||||||||
|
Non-interest income
|
1,160,874 | 675,632 | 5,560,559 | 241,363 | 2,142,987 | 9,781,415 | (1,131,850 | ) | (4,636,708 | ) | 4,012,857 | |||||||||||||||||||||||||
|
Non-interest expenses
|
1,941,470 | 728,371 | 5,527,876 | 1,020,704 | 1,477,086 | 10,695,507 | (484,195 | ) | (5,496,620 | ) | 4,714,692 | |||||||||||||||||||||||||
|
Net non-interest income (expenses)
|
(780,596 | ) | (52,739 | ) | 32,683 | (779,341 | ) | 665,901 | (914,092 | ) | (647,655 | ) | 859,912 | (701,835 | ) | |||||||||||||||||||||
|
Depreciation and amortization
|
235,390 | 37,539 | 842 | 43,396 | 110,746 | 427,913 | (2,339 | ) | (6,692 | ) | 418,882 | |||||||||||||||||||||||||
|
Extraordinary gain
|
— | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
Net income (loss) before tax expense(benefits)
|
1,853,685 | 585,036 | (25,794 | ) | 706,190 | 1,524,341 | 4,643,458 | (98,712 | ) | 421,056 | 4,965,802 | |||||||||||||||||||||||||
|
Income tax expense (benefit)
|
515,511 | 170,853 | (6,915 | ) | 200,928 | 902,674 | 1,783,051 | (503 | ) | (576,115 | ) | 1,206,433 | ||||||||||||||||||||||||
|
Cumulative effect of a change in accounting principle
|
— | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
Net income (loss)
|
1,338,174 | 414,183 | (18,879 | ) | 505,262 | 621,667 | 2,860,407 | (98,209 | ) | 997,171 | 3,759,369 | |||||||||||||||||||||||||
|
Segments’ total assets
|
90,257,424 | 73,194,276 | 38,573,300 | 9,950,104 | 13,024,404 | 224,999,508 | (1,955,064 | ) | (5,361,676 | ) | 217,682,768 | |||||||||||||||||||||||||
| (1) | Includes eliminations for consolidation, inter-segment transactions and certain differences in classification under management’s reporting system. |
F-84
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
Capital
|
Credit
|
U.S.
|
||||||||||||||||||||||||||||||||||
|
Retail
|
Corporate
|
Markets
|
Card
|
Total
|
Inter-Segment
|
GAAP
|
||||||||||||||||||||||||||||||
| Year Ended December 31, 2008 | Banking | Banking | Activities | Operations | Other | Segment | Transactions (1) | Adjustments | Total | |||||||||||||||||||||||||||
| (In millions of Korean won) | ||||||||||||||||||||||||||||||||||||
|
Operating income
|
13,221,279 | 10,795,406 | 35,060,413 | 2,420,638 | 4,344,574 | 65,842,310 | (19,548,677 | ) | (27,512,912 | ) | 18,780,721 | |||||||||||||||||||||||||
|
Operating expense
|
11,501,353 | 10,996,918 | 34,941,864 | 1,938,147 | 3,581,537 | 62,959,819 | (19,381,568 | ) | (26,584,315 | ) | 16,993,936 | |||||||||||||||||||||||||
|
Segment results
|
1,719,926 | (201,512 | ) | 118,549 | 482,491 | 763,037 | 2,882,491 | (167,109 | ) | (928,597 | ) | 1,786,785 | ||||||||||||||||||||||||
|
Interest income
|
12,224,734 | 9,551,144 | 4,352,695 | 2,115,252 | 1,385,306 | 29,629,131 | (12,713,112 | ) | (1,087,577 | ) | 15,828,442 | |||||||||||||||||||||||||
|
Interest expense
|
9,256,727 | 8,206,760 | 4,204,987 | 614,730 | 564,010 | 22,847,214 | (13,337,045 | ) | (150,516 | ) | 9,359,653 | |||||||||||||||||||||||||
|
Net interest income(expense)
|
2,968,007 | 1,344,384 | 147,708 | 1,500,522 | 821,296 | 6,781,917 | 623,933 | (937,061 | ) | 6,468,789 | ||||||||||||||||||||||||||
|
Provision for credit losses
|
203,038 | 1,351,006 | 12,789 | 98,393 | 163,227 | 1,828,453 | (1,233 | ) | 486,234 | 2,313,454 | ||||||||||||||||||||||||||
|
Non-interest income
|
996,545 | 1,244,262 | 30,707,718 | 305,386 | 2,959,268 | 36,213,179 | (6,835,565 | ) | (26,425,335 | ) | 2,952,279 | |||||||||||||||||||||||||
|
Non-interest expenses
|
1,822,477 | 1,384,180 | 30,723,017 | 1,166,056 | 2,722,721 | 37,818,451 | (6,061,312 | ) | (26,843,497 | ) | 4,913,642 | |||||||||||||||||||||||||
|
Net non-interest income (expenses)
|
(825,932 | ) | (139,918 | ) | (15,299 | ) | (860,670 | ) | 236,547 | (1,605,272 | ) | (774,253 | ) | 418,162 | (1,961,363 | ) | ||||||||||||||||||||
|
Depreciation and amortization
|
219,111 | 54,972 | 1,071 | 58,968 | 131,579 | 465,701 | 18,022 | (76,536 | ) | 407,187 | ||||||||||||||||||||||||||
|
Extraordinary gain
|
— | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
Net income (loss) before tax expense(benefits)
|
1,719,926 | (201,512 | ) | 118,549 | 482,491 | 763,037 | 2,882,491 | (167,109 | ) | (928,597 | ) | 1,786,785 | ||||||||||||||||||||||||
|
Income tax expense (benefit)
|
472,980 | (55,416 | ) | 32,600 | 132,686 | 94,400 | 677,250 | 164,832 | (388,235 | ) | 453,847 | |||||||||||||||||||||||||
|
Cumulative effect of a change in accounting principle
|
— | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||
|
Net income (loss)
|
1,246,946 | (146,096 | ) | 85,949 | 349,805 | 668,637 | 2,205,241 | (331,941 | ) | (540,362 | ) | 1,332,938 | ||||||||||||||||||||||||
|
Segments’ total assets
|
98,796,601 | 91,525,828 | 51,037,945 | 11,225,114 | 35,429,231 | 288,014,719 | (20,465,928 | ) | (9,221,880 | ) | 258,326,911 | |||||||||||||||||||||||||
| (1) | Includes eliminations for consolidation, inter-segment transactions and certain differences in classification under management’s reporting system. | |
| (2) |
Figures shown in the above table for the year ended
December 31, 2008 represent the consolidated income
statement data of Kookmin Bank for the period between
January 1, 2008 and June 30, 2008 of
|
F-85
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
Capital
|
Credit
|
U.S.
|
||||||||||||||||||||||||||||||||||
|
Retail
|
Corporate
|
Markets
|
Card
|
Total
|
Inter-Segment
|
GAAP
|
||||||||||||||||||||||||||||||
| Year Ended December 31, 2009 | Banking | Banking | Activities | Operations | Other | Segment | Transactions (1) | Adjustments | Total | |||||||||||||||||||||||||||
| (In millions of Korean won) | ||||||||||||||||||||||||||||||||||||
|
Operating income
|
10,767,548 | 9,117,257 | 19,508,950 | 2,559,243 | 2,863,332 | 44,816,330 | (14,223,088 | ) | (13,489,676 | ) | 17,103,566 | |||||||||||||||||||||||||
|
Operating expense
|
9,603,133 | 9,165,844 | 19,394,967 | 1,932,273 | 3,471,157 | 43,567,374 | (13,526,540 | ) | (13,863,321 | ) | 16,177,513 | |||||||||||||||||||||||||
|
Segment results
|
1,164,415 | (48,587 | ) | 113,983 | 626,970 | (607,825 | ) | 1,248,956 | (696,548 | ) | 373,645 | 926,053 | ||||||||||||||||||||||||
|
Interest income
|
9,889,533 | 8,378,695 | 3,846,266 | 2,288,233 | 135,708 | 24,538,435 | (9,762,047 | ) | (1,186,268 | ) | 13,590,120 | |||||||||||||||||||||||||
|
Interest expense
|
7,449,611 | 6,556,592 | 3,701,876 | 463,649 | 593,218 | 18,764,946 | (10,413,325 | ) | (120,192 | ) | 8,231,429 | |||||||||||||||||||||||||
|
Net interest income(expense)
|
2,439,922 | 1,822,103 | 144,390 | 1,824,584 | (457,510 | ) | 5,773,489 | 651,278 | (1,066,076 | ) | 5,358,691 | |||||||||||||||||||||||||
|
Provision for credit losses
|
263,761 | 1,391,912 | 53,049 | 266,046 | 323,641 | 2,298,409 | 576 | (94,992 | ) | 2,203,993 | ||||||||||||||||||||||||||
|
Non-interest income
|
878,015 | 738,562 | 15,662,684 | 271,010 | 2,727,624 | 20,277,895 | (4,461,041 | ) | (12,303,408 | ) | 3,513,446 | |||||||||||||||||||||||||
|
Non-interest expenses
|
1,693,885 | 1,154,559 | 15,638,908 | 1,147,435 | 2,393,227 | 22,028,014 | (3,131,927 | ) | (13,585,003 | ) | 5,311,084 | |||||||||||||||||||||||||
|
Net non-interest income (expenses)
|
(815,870 | ) | (415,997 | ) | 23,776 | (876,425 | ) | 334,397 | (1,750,119 | ) | (1,329,114 | ) | 1,281,595 | (1,797,638 | ) | |||||||||||||||||||||
|
Depreciation and amortization
|
195,876 | 62,781 | 1,134 | 55,143 | 161,071 | 476,005 | 18,136 | (63,134 | ) | 431,007 | ||||||||||||||||||||||||||
|
Extraordinary gain
|
— | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
Net income (loss) before tax expense(benefits)
|
1,164,415 | (48,587 | ) | 113,983 | 626,970 | (607,825 | ) | 1,248,956 | (696,548 | ) | 373,645 | 926,053 | ||||||||||||||||||||||||
|
Income tax expense (benefit)
|
320,214 | (13,362 | ) | 31,346 | 172,416 | (464,782 | ) | 45,832 | (20,918 | ) | 182,570 | 207,484 | ||||||||||||||||||||||||
|
Cumulative effect of a change in accounting principle
|
— | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||
|
Net income (loss)
|
844,201 | (35,225 | ) | 82,637 | 454,554 | (143,043 | ) | 1,203,124 | (675,630 | ) | 191,075 | 718,569 | ||||||||||||||||||||||||
|
Segments’ total assets
|
100,871,142 | 89,113,715 | 45,348,512 | 11,991,434 | 37,685,520 | 285,010,323 | (22,841,873 | ) | (8,313,018 | ) | 253,855,432 | |||||||||||||||||||||||||
| (1) | Includes eliminations for consolidation, inter-segment transactions and certain differences in classification under management’s reporting system. |
The allowance for loan losses under U.S.GAAP for each segment is
as follows:
|
Capital
|
||||||||||||||||||||||||
|
Retail
|
Corporate
|
Markets
|
Credit Card
|
|||||||||||||||||||||
| Banking | Banking | Activities | Operations | Other | Total | |||||||||||||||||||
| (In millions of Korean won) | ||||||||||||||||||||||||
|
As of December 31, 2008
|
378,240 | 2,387,914 | 7,746 | 213,131 | 56,504 | 3,043,535 | ||||||||||||||||||
|
As of December 31, 2009
|
461,013 | 2,532,894 | 335 | 202,173 | 144,631 | 3,341,046 | ||||||||||||||||||
F-86
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following is a reconciliation of the business segments’
total assets under Korean GAAP as of December 31, 2007,
2008 and 2009 to the consolidated total assets under U.S.GAAP:
| 2007 | 2008 | 2009 | ||||||||||
| (In millions of Korean won) | ||||||||||||
|
Segments’ total assets
|
224,999,508 | 288,014,719 | 285,010,323 | |||||||||
|
U.S. GAAP adjustments
|
(5,361,676 | ) | (9,221,880 | ) | (8,313,018 | ) | ||||||
|
Cash and cash equivalents
|
293,389 | 604,598 | (129,864 | ) | ||||||||
|
Restricted cash
|
(108,624 | ) | 887,372 | 453,122 | ||||||||
|
Interest-bearing deposits in other banks
|
(76,214 | ) | (1,706,276 | ) | (879,692 | ) | ||||||
|
Call loans and securities purchased under resale agreements
|
7,576 | 19,491 | (447 | ) | ||||||||
|
Trading assets
|
(2,842,889 | ) | (2,933,946 | ) | (2,409,763 | ) | ||||||
|
Investment
|
(1,769,326 | ) | (2,132,307 | ) | (2,526,622 | ) | ||||||
|
Loans (net of allowance for loan losses)
|
1,810,489 | 1,798,977 | 2,189,741 | |||||||||
|
Premises and equipment, net
|
(642,257 | ) | (1,727,649 | ) | (1,728,172 | ) | ||||||
|
Accrued interest and dividends receivable
|
(342,282 | ) | (147,496 | ) | (124,553 | ) | ||||||
|
Security deposits
|
(7,435 | ) | (2,000 | ) | (103,477 | ) | ||||||
|
Goodwill
|
172,478 | 341,765 | 442,695 | |||||||||
|
Other intangible assets
|
66,766 | 34,474 | 11,027 | |||||||||
|
Other assets
|
(1,923,347 | ) | (4,258,883 | ) | (3,507,013 | ) | ||||||
|
Inter-segment transactions
|
(1,955,064 | ) | (20,465,928 | ) | (22,841,873 | ) | ||||||
|
Consolidated total assets
|
217,682,768 | 258,326,911 | 253,855,432 | |||||||||
The following is a reconciliation of the business segment’s
operating income under Korean GAAP for the years ended December,
31, 2007, 2008 and 2009 to the consolidated operating income
under U.S. GAAP:
| 2007 | 2008 | 2009 | ||||||||||
| (In millions of Korean won) | ||||||||||||
|
Segments’ operating income
|
33,254,588 | 65,842,310 | 44,816,330 | |||||||||
|
U.S. GAAP adjustments:
|
(5,721,523 | ) | (27,512,912 | ) | (13,489,676 | ) | ||||||
|
Interest and dividend income:
|
||||||||||||
|
Deposits in other banks
|
(22,759 | ) | (37,278 | ) | (48,354 | ) | ||||||
|
Loans, including fees
|
(859,455 | ) | (925,841 | ) | (1,004,779 | ) | ||||||
|
Trading assets
|
(134,357 | ) | (139,742 | ) | (96,340 | ) | ||||||
|
Investment securities
|
(70,591 | ) | 4,396 | (38,915 | ) | |||||||
|
Call loans and securities purchased under resale agreements
|
2,347 | 10,888 | 2,120 | |||||||||
| (1,084,815 | ) | (1,087,577 | ) | (1,186,268 | ) | |||||||
|
Non-interest income:
|
||||||||||||
|
Trust fees, nets
|
21,759 | 20,980 | 23,701 | |||||||||
|
Other fees and commission income
|
841,740 | 825,337 | 895,026 | |||||||||
|
Net trading revenue
|
(4,806,311 | ) | (25,837,632 | ) | (12,061,769 | ) | ||||||
|
Net gain on investments
|
(30,723 | ) | (625,070 | ) | (190,683 | ) | ||||||
|
Other non-interest income
|
(663,173 | ) | (808,950 | ) | (969,683 | ) | ||||||
| (4,636,708 | ) | (26,425,335 | ) | (12,303,408 | ) | |||||||
|
Inter-segment transactions
|
(10,727,867 | ) | (19,548,677 | ) | (14,223,088 | ) | ||||||
|
Consolidated operating income
|
16,805,198 | 18,780,721 | 17,103,566 | |||||||||
F-87
Table of Contents
KB
FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The adjustments presented in the tables above represent
consolidated assets and revenues not specifically allocated to
individual business segments.
Differences
between U.S. GAAP and Korean GAAP
The following is a summary of the significant adjustments made
to consolidated total assets and revenue to reconcile the
U.S. GAAP results with those under Korean GAAP.
Allowance for loan losses:
Under
U.S. GAAP, the allowance for loan losses for specifically
identified impaired non-homogeneous loans has been established
based on (1) the present value of expected future cash
flows discounted at the loan’s effective interest rate,
(2) the fair value of the collateral if the loan was
collateral dependent or (3) observable market prices if
available. For homogeneous corporate and consumer loans, the
allowance for the loan losses was established based on an
evaluation of the historical performance of the loan portfolios.
Under Korean GAAP, the allowance for loan losses has been
determined at the larger of the allowance based on historical
loss rates of loan portfolios or the one based on the loan
classification guidelines and prescribed loss ratio of the
Financial Service Commission. For the allowance for loan losses
as of December 31, 2008, the Company used allowance based
on the Financial Service Commission Guidelines as it was greater
than the one based on the historical loss rates.
Deferred loan costs:
Under U.S. GAAP,
certain employee and other costs associated with originating
loans are deferred and amortized over the life of the related
loans as an adjustment to the yield of the loans, net of any
related fees received. Under Korean GAAP, origination costs
related to wages and salaries are recognized as expense when
accrued.
Securities and hedging derivatives
accounting:
For 2007 and 2008, under
U.S. GAAP, decreases in fair value with respect to all
securities below the cost basis of an individual security and
deemed to be
other-than-temporary
must be written off through a charge to income. In determining
whether a decrease in fair value is other —
than-temporary, the following factors were considered: the
length of time and the extent to which the market value had been
less than cost; the financial condition and near-term prospects
of the issuer; and the intent and ability of the holder to
retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in market
value. Under Korean GAAP, when the recoverable value of
available-for-sale
or
held-to-maturity
securities is less than their amortized acquisition costs and
there is any objective evidence of impairment, then their book
value is adjusted to their recoverable amount, and the declines
in book value are reflected in current loss as impairment
losses. For 2009, under U.S. GAAP, decreases in fair value
with respect to equity securities below the cost basis of an
individual security and deemed to be
other-than-temporary
must be written off through a charge to income. For investment
debt securities that the Company does not intent to sell and it
more-likely-than-not will be required to sell before the
expected recovery of the amortized cost basis, only the credit
loss component of the impairment is recognized in earnings,
while the rest of the fair value loss is recognized in
accumulated comprehensive income. In determining whether a
credit loss exists and the period over which the debt security
is expected to recover, the following factors were considered:
the length of time and the extent to which the market value had
been less than cost; the financial condition and near-term
prospects of the issuer; and the intent and ability of the
holder to retain its investment in the issuer for a period of
time sufficient to allow for any anticipated recovery in market
value. Under Korean GAAP, when the recoverable value of
available-for-sale
or
held-to-maturity
securities is less than their amortized acquisition costs and
there is any objective evidence of impairment, then their book
value is adjusted to their recoverable amount, and the declines
in book value are reflected in current loss as impairment losses.
Under U.S. GAAP, to qualify for hedge accounting,
derivatives must be highly effective at reducing the risk
associated with the exposure being hedged. Each derivative must
be formally designated as a hedge, with documentation of the
risk management objective and strategy for the hedge,
identification of the hedging instrument, the hedged item and
risk exposure, and how effectiveness would be assessed
prospectively and retrospectively. Under Korean GAAP, the
criteria that must be met in order to apply hedge accounting are
less
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NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
prescriptive. Accordingly, the majority of the derivatives
accounted for as hedges under Korean GAAP do not qualify for
hedge accounting under U.S. GAAP. This adjustment reflects
the effects of the reversal of the hedge accounting treatment
under Korean GAAP.
Loan sale accounting:
Under U.S. GAAP,
the transfer of loans was recorded as a sale if specific and
prescriptive criteria were met relating to the transferor’s
relinquishing control. If these criteria were not met, the
transfer would be treated as a secured borrowing. Certain loan
transfers (including those in connection with asset
securitization transactions) that qualified for derecognition as
sales under Korean GAAP did not meet U.S. GAAP criteria for
derecognition as sales.
Fixed Assets:
Under Korean GAAP, certain fixed
assets were revalued upward in 1998 and 2008. As a result of
this revaluation, the revaluation gain is included in total
equity, and depreciation expense related to the revalued fixed
assets is determined based on the new cost basis. Under
U.S. GAAP, such a revaluation is not permitted and
depreciation expense is based on historical cost.
Goodwill:
Under Korean GAAP, goodwill is
amortized over its useful life during which future economic
benefits are expected to flow to the enterprise, not exceeding
twenty years. Under U.S. GAAP, goodwill is not amortized,
but rather it is tested for impairment at least annually.
Finite-lived Intangible Assets:
Under
U.S. GAAP, finite-lived intangible assets which meet
certain criteria are recognized in a business combination
transaction and amortized over their useful lives. Under Korean
GAAP, as the criteria that must be met in order to recognize
intangible assets is not clearly specified, in practice, they
are included as part of goodwill.
Foreign Currency Translation:
Under
U.S. GAAP, all unrealized gains and losses arising from
available-for-sale
securities are recorded in accumulated other comprehensive
income (loss); however under Korean GAAP, the portion of
unrealized gains and losses on
available-for-sale
securities arising from foreign currency translation were
recognized in earnings.
Stock-based Compensation:
Under
U.S. GAAP, compensation costs of stock options and grants
are recognized using the fair value method. Under Korean GAAP,
the compensation costs of stock options granted by 2006 were
recognized using the intrinsic value method and prospectively,
the costs of stock options and grants granted from 2007 are
recognized using the fair value method.
Consolidation of Variable Interest Entities
(“VIEs”):
Under U.S. GAAP, VIEs
for which the Company has been determined to be the primary
beneficiary are consolidated. Under Korean GAAP, certain VIEs
which are established in the course of assets-backed
securitizations of loans are deconsolidated under the Law of
Securitization, but the majority of the VIEs do not qualify for
deconsolidation under U.S. GAAP. This adjustment reflects
the effects of the reversal of the securitization accounting
treatment under Korean GAAP.
Income tax expense:
Under U.S. GAAP, a
tax position taken or expected to be taken in a tax return is
evaluated to determine whether it is more likely than not that a
tax position will be sustained upon examination, including
resolution of any related appeals or litigation processes, based
on the technical merits of the position, and then the tax
positions that meet the more -likely -than -not criteria is
measured to determine the amount of benefit to recognize in the
financial statements. The tax positions are measured at the
largest amount of benefit that is greater than 50 percent
likely of being realized upon ultimate settlement. Differences
between tax positions taken in a tax return and amounts
recognized are reflected in the financial statements as
adjustments of income tax expense, deferred tax
assets/liabilities. In addition, interest and penalties related
to tax positions are adjusted as a component of income tax
expense. Under Korean GAAP, as the guidelines to recognize and
measure the benefits of uncertain tax positions are not clearly
specified, in practice, they are adjusted in income tax expense
when realized.
Fair value:
Under Korean GAAP, fair value is
measured at the amount for which an asset can be exchanged
between knowledgeable willing parties in an arm’s length
transaction. Fair value measurements are not made for
liabilities. Under U.S. GAAP, fair value is the price that
would be received to sell an asset or paid to transfer a
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CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
liability in an orderly transaction between market participants
at the measurement date. U.S. GAAP requires an entity to
maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. Fair value is a
market-based measure considered from the perspective of a market
participant.
| 36. | Trust Accounts |
The Company offers a variety of asset management and
administration services under trust arrangements in accordance
with the Korean Trust Law and the Korean Capital Market and
Financial Investment Business Act. The trust accounts managed by
the Company are classified into performance based trusts and
guaranteed trusts in terms of the nature of the trusts, and the
guaranteed trusts consist of Guaranteed Principal Money Trusts
and Guaranteed Fixed Rate Money Trusts.
The Guaranteed Principal Money Trusts require the Company to
guarantee the return of the principal amount invested at the
termination of a fixed term deposit. Additionally, the Company
guarantees a specified rate of return on the principal amount
invested in Guaranteed Fixed Rate Money Trusts. Based on the
Company’s analysis of potential risk and reward generated
from the guaranteed trusts, the Guaranteed Fixed Rate Money
Trusts were consolidated in the Company’s financial
statements in accordance with FIN 46(R). For further
discussion on the consolidation scope of the trust accounts,
refer to Note 9.
With respect to the managing of the trust accounts, the Company
charges investment management fees on the Guaranteed Principal
Money Trusts and other performance based trusts, and receives
commission income, including penalty charges for early
withdrawal of fixed term deposits.
| 37. | Subsequent Event |
Kookmin Bank acquired 11,990,069 convertible preferred shares of
JSC Bank CenterCredit at
W
27,337 million
through the participation of capital injection in January 2010.
Additionally, in February 2010, Kookmin Bank acquired additional
24,571,396 convertible preferred shares and 3,886,574
outstanding common shares at
W
57,423 million and
W
48,442 million, respectively. Kookmin
Bank consequently owns 41.93% of common and convertible
preferred shares in JSC Bank CenterCredit as a result of the
additional acquisition.
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TABLE OF CONTENTS
Item 1. Identity Of Directors, Senior Managers and AdvisersItem 2. Offer Statistics and Expected TimetableItem 3. Key InformationItem 3A. Selected Financial DataItem 3B. Capitalization and IndebtednessItem 3C. Reasons For The Offer and Use Of ProceedsItem 3D. Risk FactorsItem 4. Information on The CompanyItem 4A. History and Development Of The CompanyItem 4B. Business OverviewItem 4C. Organizational StructureItem 4D. Property, Plants and EquipmentItem 4. A. Unresolved Staff CommentsItem 5. Operating and Financial Review and ProspectsItem 5A. Operating ResultsItem 5B. Liquidity and Capital ResourcesItem 5C. Research and Development, Patents and Licenses, EtcItem 5D. Trend InformationItem 5E. Off-balance Sheet ArrangementsItem 5F. Tabular Disclosure Of Contractual ObligationsItem 6. Directors, Senior Management and EmployeesItem 6A. Directors and Senior ManagementItem 6B. CompensationItem 6C. Board PracticesItem 6D. EmployeesItem 6E. Share OwnershipItem 7. Major Stockholders and Related Party TransactionsItem 7A. Major StockholdersItem 7B. Related Party TransactionsItem 7C. Interests Of Experts and CounselItem 8. Financial InformationItem 8A. Consolidated Statements and Other Financial InformationItem 8B. Significant ChangesItem 9. The Offer and ListingItem 9A. Offering and Listing DetailsItem 9B. Plan Of DistributionItem 9C. MarketsItem 9D. Selling ShareholdersItem 9E. DilutionItem 9F. Expenses Of The IssueItem 10. Additional InformationItem 10A. Share CapitalItem 10B. Memorandum and Articles Of AssociationItem 10C. Material ContractsItem 10D. Exchange ControlsItem 10E. TaxationItem 10F. Dividends and Paying AgentsItem 10G. Statements By ExpertsItem 10H. Documents on DisplayItem 10I. Subsidiary InformationItem 11. Quantitative and Qualitative Disclosures About Market RiskItem 12. Description Of Securities Other Than Equity SecuritiesItem 13. Defaults, Dividend Arrearages and DelinquenciesItem 14. Material Modifications To The Rights Of Security Holders and Use Of ProceedsItem 15. Controls and ProceduresItem 16. ReservedItem 16A. Audit Committee Financial ExpertItem 16B. Code Of EthicsItem 16C. Principal Accountant Fees and ServicesItem 16D. Exemptions From The Listing Standards For Audit CommitteesItem 16E. Purchase Of Equity Securities By The Issuer and Affiliated PurchasersItem 16F. Change in Registrant S Certifying AccountantItem 16G. Corporate GovernanceItem 17. Financial StatementsItem 18. Financial StatementsItem 19. Exhibits