KB 20-F DEF-14A Report Dec. 31, 2014 | Alphaminr
KB Financial Group Inc.
ALPHAMINR

KB 20-F Report ended Dec. 31, 2014

Balance Sheet
Cash Flow
Income Statement
Debt
20-F 1 d912082d20f.htm FORM 20-F Form 20-F
Table of Contents

As filed with the Securities and Exchange Commission on April 29, 2015

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

(Mark One)

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

OR

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

For the fiscal year ended December 31, 2014

OR

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

For the transition period from to .

OR

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

Date of event requiring this shell company report .

Commission file number 000-53445

KB Financial Group Inc.

(Exact name of Registrant as specified in its charter)

KB Financial Group Inc.

(Translation of Registrant’s name into English)

The Republic of Korea

(Jurisdiction of incorporation or organization)

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

(Address of principal executive offices)

Kyu Sul Choi

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

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

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

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

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

Title of each class

Name of each exchange on which registered

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

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

None

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

None

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

386,351,693 shares of Common Stock, par value ￦ 5,000 per share

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

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

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

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

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

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

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

¨ U.S. GAAP

x International Financial Reporting Standards as issued

by the International Accounting Standards Board

¨ Other

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

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

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

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

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

Table of Contents

TABLE OF CONTENTS

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

1

FORWARD-LOOKING STATEMENTS

2

Item 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 3

Item 2.

OFFER STATISTICS AND EXPECTED TIMETABLE 3

Item 3.

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

Item 4.

INFORMATION ON THE COMPANY 32
Item 4.A. History and Development of the Company 32
Item 4.B. Business Overview 35
Item 4.C. Organizational Structure 107
Item 4.D. Property, Plants and Equipment 109
Item 4A. UNRESOLVED STAFF COMMENTS 109

Item 5.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS 110
Item 5.A. Operating Results 110
Item 5.B. Liquidity and Capital Resources 140
Item 5.C. Research and Development, Patents and Licenses, etc. 145
Item 5.D. Trend Information 145
Item 5.E. Off-Balance Sheet Arrangements 145
Item 5.F. Tabular Disclosure of Contractual Obligations 145
Item 5.G. Safe Harbor 145

Item 6.

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 146
Item 6.A. Directors and Senior Management 146
Item 6.B. Compensation 149
Item 6.C. Board Practices 150
Item 6.D. Employees 151
Item 6.E. Share Ownership 153

Item 7.

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 155
Item 7.A. Major Shareholders 155
Item 7.B. Related Party Transactions 155
Item 7.C. Interests of Experts and Counsel 155

Item 8.

FINANCIAL INFORMATION 155
Item 8.A. Consolidated Statements and Other Financial Information 155
Item 8.B. Significant Changes 159

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Item 9.

THE OFFER AND LISTING 159
Item 9.A. Offering and Listing Details 159
Item 9.B. Plan of Distribution 160

Item 9.C.

Markets 160

Item 9.D.

Selling Shareholders 167

Item 9.E.

Dilution 167

Item 9.F.

Expenses of the Issue 167

Item 10.

ADDITIONAL INFORMATION 167

Item 10.A.

Share Capital 167

Item 10.B.

Memorandum and Articles of Association 167

Item 10.C.

Material Contracts 173

Item 10.D.

Exchange Controls 173

Item 10.E.

Taxation 174

Item 10.F.

Dividends and Paying Agents 179

Item 10.G.

Statement by Experts 179

Item 10.H.

Documents on Display 179

Item 10.I.

Subsidiary Information 179

Item 11.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 179

Item 12.

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 200

Item 13.

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 201

Item 14.

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 201

Item 15.

CONTROLS AND PROCEDURES 201

Item 16.

[RESERVED] 202
Item 16A. AUDIT COMMITTEE FINANCIAL EXPERT 202
Item 16B. CODE OF ETHICS 203
Item 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES 203
Item 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES 203
Item 16E. PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS 204
Item 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT 204
Item 16G. CORPORATE GOVERNANCE 204
Item 16H. MINE SAFETY DISCLOSURE 205

Item 17.

FINANCIAL STATEMENTS 205

Item 18.

FINANCIAL STATEMENTS 205

Item 19.

EXHIBITS 206

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PRESENTATION OF FINANCIAL AND OTHER INFORMATION

The financial statements included in this annual report are prepared in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or IASB. As such, we make an explicit and unreserved statement of compliance with IFRS as issued by the IASB with respect to our consolidated financial statements as of January 1, 2013, December 31, 2013 and 2014 and for the years ended December 31, 2012, 2013 and 2014 included in this annual report. Unless indicated otherwise, the financial information in this annual report as of and for the years ended December 31, 2010, 2011, 2012, 2013 and 2014 has been prepared in accordance with IFRS as issued by the IASB, which is not comparable to information prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP.

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

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

In this annual report:

•

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

•

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

•

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

•

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

•

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

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

For your convenience, this annual report contains translations of Won amounts into U.S. dollars at the noon buying rate of the Federal Reserve Bank of New York for Won in effect on December 31, 2014, which was ￦1,090.9 = US$1.00.

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FORWARD-LOOKING STATEMENTS

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

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

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

•

our ability to successfully implement our strategy;

•

future levels of non-performing loans;

•

our growth and expansion;

•

the adequacy of allowances for credit and investment losses;

•

technological changes;

•

interest rates;

•

investment income;

•

availability of funding and liquidity;

•

cash flow projections;

•

our exposure to market risks; and

•

adverse market and regulatory conditions.

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

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

•

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

•

the monetary and interest rate policies of Korea;

•

inflation or deflation;

•

unanticipated volatility in interest rates;

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•

foreign exchange rates;

•

prices and yields of equity and debt securities;

•

the performance of the financial markets in Korea and globally;

•

changes in domestic and foreign laws, regulations and taxes;

•

changes in competition and the pricing environments in Korea; and

•

regional or general changes in asset valuations.

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

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

Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

Item 3. KEY INFORMATION

Item 3.A. Selected Financial Data

The selected consolidated financial and operating data set forth below as of and for the years ended December 31, 2010, 2011, 2012, 2013 and 2014 have been derived from our audited consolidated financial statements, which have been prepared in accordance with IFRS as issued by the IASB. Our consolidated financial statements as of and for the years ended December 31, 2010, 2011, 2012, 2013 and 2014 have been audited by independent registered public accounting firm Samil PricewaterhouseCoopers.

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

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Consolidated statements of comprehensive income data

Year Ended December 31,
2010 (1) 2011 (1) 2012 (1)(2) 2013 (1)(2) 2014 (1)(2) 2014 (3)
(in billions of Won, except common share data) (in millions of US$,
except common
share data)

Interest income

￦ 13,052 ￦ 13,956 ￦ 14,210 ￦ 12,357 ￦ 11,635 US$ 10,666

Interest expense

(6,878 ) (6,852 ) (7,172 ) (5,834 ) (5,219 ) (4,785 )

Net interest income

6,174 7,104 7,038 6,523 6,416 5,881

Fee and commission income

2,482 2,830 2,754 2,657 2,666 2,444

Fee and commission expense

(777 ) (1,035 ) (1,187 ) (1,178 ) (1,283 ) (1,176 )

Net fee and commission income

1,705 1,795 1,567 1,479 1,383 1,268

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

815 1,036 812 757 439 403

Net other operating income (expenses)

(1,068 ) (1,092 ) (1,532 ) (1,305 ) (1,041 ) (954 )

General and administrative expenses

(4,380 ) (3,887 ) (3,846 ) (3,984 ) (4,010 ) (3,676 )

Operating profit before provision for credit losses

3,246 4,956 4,039 3,470 3,187 2,922

Provision for credit losses

(2,871 ) (1,513 ) (1,607 ) (1,443 ) (1,228 ) (1,126 )

Net operating profit

375 3,443 2,432 2,027 1,959 1,796

Share of profit (loss) of associates and joint ventures

(211 ) 5 (15 ) (199 ) 13 12

Net other non-operating income (expense)

(28 ) (142 ) (118 ) (12 ) (71 ) (65 )

Net non-operating profit (loss)

(239 ) (137 ) (133 ) (211 ) (58 ) (53 )

Profit before income tax

136 3,306 2,299 1,816 1,901 1,743

Tax income (expense) (4)

(254 ) (565 ) (520 ) (541 ) (486 ) (446 )

Profit for the year (4)

￦ (118 ) ￦ 2,741 ￦ 1,779 ￦ 1,275 ￦ 1,415 US$ 1,297

Items that will not be reclassified to profit or loss:

Actuarial gains (losses) on post defined benefit pension plans

9 (32 ) (30 ) 41 (100 ) (91 )

Items that may be reclassified subsequently to profit or loss:

Exchange differences on translating foreign operations

(7 ) 6 (26 ) (2 ) 17 16

Change in value of financial investments

108 (240 ) 246 (4 ) 249 228

Shares of other comprehensive loss of associates and joint ventures

(2 ) (1 ) (44 ) (10 ) (32 ) (29 )

Cash flow hedges

— (1 ) (1 ) 2 (10 ) (10 )

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

108 (268 ) 145 27 124 114

Total comprehensive income for the
year (4)

￦ (10 ) ￦ 2,473 ￦ 1,924 ￦ 1,302 ￦ 1,539 US$ 1,411

Profit attributable to:

Stockholders

￦ (191 ) ￦ 2,686 ￦ 1,770 ￦ 1,272 ￦ 1,401 US$ 1,284

Non-controlling interests

73 55 9 3 14 13

￦ (118 ) ￦ 2,741 ￦ 1,779 ￦ 1,275 ￦ 1,415 US$ 1,297

Total comprehensive income attributable to:

Stockholders

￦ (103 ) ￦ 2,414 ￦ 1,904 ￦ 1,313 ￦ 1,526 US$ 1,399

Non-controlling interests

93 59 20 (11 ) 13 12

￦ (10 ) ￦ 2,473 ￦ 1,924 ￦ 1,302 ￦ 1,539 US$ 1,411

Earnings per share (4)

Basic earnings per share

￦ (558 ) ￦ 7,310 ￦ 4,580 ￦ 3,291 ￦ 3,626 US$ 3.32

Diluted earnings per share

(558 ) 7,293 4,567 3,277 3,611 3.31

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(1)

Pursuant to amendments to International Accounting Standards 19, or IAS 19, Employee Benefits , which are effective beginning in 2013, our consolidated financial statements as of and for the years ended December 31, 2013 and 2014 reflect changes in the methodology for recognition and measurement of actuarial gains and losses and expected returns and service costs relating to our employee pension plans. Our consolidated financial statements as of and for the year ended December 31, 2012 have been restated to retroactively apply such changes. Amounts for 2012 reflect such restatement, and amounts for 2010 and 2011 have been correspondingly restated.

(2)

Pursuant to the adoption of IFRS 10, Consolidated Financial Statements , which is effective beginning in 2013, our consolidated financial statements as of and for the years ended December 31, 2013 and 2014 include trust accounts for which we guarantee only the repayment of principal, as well as certain other entities, which were not previously subject to consolidation, while excluding certain other entities that were previously consolidated. Our consolidated financial statements as of and for the year ended December 31, 2012 have been restated to retroactively apply this change. Amounts for 2012 reflect such restatement, while amounts for 2010 and 2011 have not been correspondingly restated.

(3)

Won amounts are expressed in U.S. dollars at the rate of ￦1,090.9 to US$1.00, the noon buying rate in effect on December 31, 2014 as quoted by the Federal Reserve Bank of New York in the United States.

(4)

The amounts for 2014 reflect a change in our accounting policy with respect to uncertain tax positions in 2014, based on the guidance in International Accounting Standards 12, or IAS 12, Income Taxes , which allows recognition of tax payments as current income tax assets to the extent it is probable that they will be recovered from the tax authorities. Corresponding amounts for 2010, 2011, 2012 and 2013 have been restated to retroactively apply this change. See “Item 5.A. Operating Results—Overview—Changes in Accounting Policies” and Note 2.1 of the notes to our consolidated financial statements included elsewhere in this annual report.

Consolidated statements of financial position data

Year Ended December 31,
2010 (1) 2011 (1) 2012 (1)(2) 2013 (1)(2) 2014 (1)(2) 2014 (3)
(in billions of Won)

(in millions

of US$)

Assets

Cash and due from financial institutions

￦ 6,830 ￦ 9,178 ￦ 10,593 ￦ 14,793 ￦ 15,424 US$ 14,139

Financial assets at fair value through profit or loss

4,014 6,326 9,560 9,329 10,758 9,862

Derivative financial assets

2,595 2,449 2,091 1,819 1,968 1,804

Loans

197,621 212,107 213,645 219,001 231,450 212,166

Financial investments

36,190 35,432 36,467 34,849 34,961 32,048

Investments in associates and joint ventures

723 892 935 755 670 614

Property and equipment

3,150 3,186 3,100 3,061 3,083 2,826

Investment property

53 52 53 166 378 346

Intangible assets

505 468 493 443 489 448

Current income tax assets (4)(5)

135 292 333 347 306 281

Deferred income tax assets

4 22 18 16 16 14

Assets held for sale

9 10 35 38 70 64

Other assets (5)

6,942 7,467 8,747 7,551 8,783 8,052

Total assets

￦ 258,771 ￦ 277,881 ￦ 286,070 ￦ 292,168 ￦ 308,356 US$ 282,664

Liabilities

Financial liabilities at fair value through profit or loss

￦ 1,295 ￦ 1,388 ￦ 1,851 ￦ 1,115 ￦ 1,819 US$ 1,667

Derivative financial liabilities

2,236 2,059 2,055 1,795 1,797 1,648

Deposits

179,862 190,337 197,346 200,882 211,549 193,923

Debts

11,745 16,824 15,965 14,101 15,865 14,543

Debentures

29,107 27,070 24,270 27,040 29,201 26,768

Provisions

1,020 798 670 678 614 563

Defined benefit liabilities

125 128 84 64 76 69

Current income tax liabilities

30 589 265 211 232 213

Deferred income tax liabilities

284 221 154 62 93 85

Other liabilities

13,401 15,087 18,328 20,237 19,597 17,965

Total liabilities

￦ 239,105 ￦ 254,501 ￦ 260,988 ￦ 266,185 ￦ 280,843 US$ 257,444

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Year Ended December 31,
2010 (1) 2011 (1) 2012 (1)(2) 2013 (1)(2) 2014 (1)(2) 2014 (3)
(in billions of Won)

(in millions

of US$)

Total Equity

Capital stock

￦ 1,932 ￦ 1,932 ￦ 1,932 ￦ 1,932 ￦ 1,932 US$ 1,771

Capital surplus

15,990 15,842 15,840 15,855 15,855 14,534

Accumulated other comprehensive income

440 168 295 336 461 422

Retained earnings (4)

2,612 5,256 6,820 7,860 9,067 8,312

Treasury shares

(2,477 ) — — — — —

Equity attributable to stockholders

18,497 23,198 24,887 25,983 27,315 25,039

Non-controlling interests

1,169 182 195 — 198 181

Total equity

￦ 19,666 ￦ 23,380 ￦ 25,082 ￦ 25,983 ￦ 27,513 US$ 25,220

Total liabilities and equity

￦ 258,771 ￦ 277,881 ￦ 286,070 ￦ 292,168 ￦ 308,356 US$ 282,664

(1)

Pursuant to amendments to IAS19, Employee Benefits , which are effective beginning in 2013, our consolidated financial statements as of and for the years ended December 31, 2013 and 2014 reflect changes in the methodology for recognition and measurement of actuarial gains and losses and expected returns and service costs relating to our employee pension plans. Our consolidated financial statements as of and for the year ended December 31, 2012 have been restated to retroactively apply such changes. Amounts as of December 31, 2012 reflect such restatement, and amounts as of December 31, 2010 and 2011 have been correspondingly restated.

(2)

Pursuant to the adoption of IFRS 10, Consolidated Financial Statements , which is effective beginning in 2013, our consolidated financial statements as of and for the years ended December 31, 2013 and 2014 include trust accounts for which we guarantee only the repayment of principal, as well as certain other entities, which were not previously subject to consolidation, while excluding certain other entities that were previously consolidated. Our consolidated financial statements as of and for the year ended December 31, 2012 have been restated to retroactively apply this change. Amounts as of December 31, 2012 reflect such restatement, while amounts as of December 31, 2010 and 2011 have not been correspondingly restated.

(3)

Won amounts are expressed in U.S. dollars at the rate of ￦1,090.9 to US$1.00, the noon buying rate in effect on December 31, 2014 as quoted by the Federal Reserve Bank of New York in the United States.

(4)

The amounts as of December 31, 2014 reflect a change in our accounting policy with respect to uncertain tax positions in 2014, based on the guidance in IAS 12, Income Taxes , which allows recognition of tax payments as current income tax assets to the extent it is probable that they will be recovered from the tax authorities. Corresponding amounts as of December 31, 2010, 2011, 2012 and 2013 have been restated to retroactively apply this change. See “Item 5.A. Operating Results—Overview—Changes in Accounting Policies” and Note 2.1 of the notes to our consolidated financial statements included elsewhere in this annual report.

(5)

Prepaid income tax expenses amounting to ￦135 billion, ￦12 billion, ￦15 billion and ￦18 billion as of December 31, 2010, 2011, 2012 and 2013, respectively, have been reclassified from other assets into current income tax assets. See Note 33 of the notes to our consolidated financial statements included elsewhere in this annual report.

Profitability ratios and other data

As of or for the year Ended December 31,
2010 2011 2012 2013 2014
(Percentages)

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

Average total assets (1)

(0.07 )% 0.99 % 0.60 % 0.44 % 0.47 %

Average stockholders’ equity (1)

(0.98 ) 11.47 7.13 5.00 5.30

Dividend payout ratio (2)

(21.47 ) 10.23 13.40 15.01 21.48

Net interest spread (3)

2.37 2.64 2.48 2.31 2.22

Net interest margin (4)

2.58 2.88 2.71 2.51 2.39

Efficiency ratio (5)

57.44 43.96 48.78 53.45 55.72

Cost-to-average assets ratio (6)

1.64 1.41 1.33 1.37 1.34

Won loans (gross) as a percentage of Won deposits

107.56 107.97 106.37 107.12 107.73

Total loans (gross) as a percentage of total deposits

111.96 113.25 109.92 110.44 110.57

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(1)

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

(2)

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

(3)

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

(4)

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

(5)

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

(6)

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

Capital ratios

As of or for the year Ended December 31,
2012 (1) 2013 2014
(Percentages)

Consolidated capital adequacy ratio of KB Financial Group (2)

13.90 % 15.38 % 15.53 %

Capital adequacy ratios of Kookmin Bank

Tier I capital adequacy ratio (3)

10.87 12.61 13.38

Common equity Tier I capital adequacy ratio (3)

— 12.61 13.38

Tier II capital adequacy ratio (3)

3.53 2.81 2.59

Average stockholders’ equity as a percentage of average total assets

8.47 8.87 8.83

(1)

With effect from December 1, 2013, the Financial Services Commission adopted amended guidelines that implemented capital adequacy requirements in Korea based on Basel III. Capital adequacy ratios as of December 31, 2012 were computed in accordance with previously applicable guidelines based on Basel I (for KB Financial Group) and Basel II (for Kookmin Bank) and therefore are not directly comparable to corresponding ratios as of December 31, 2013 and 2014.

(2)

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

(3)

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

Credit portfolio ratios and other data

As of December 31,
2010 2011 2012 2013 2014
(in billions of Won, except percentages)

Total loans (1)

￦ 201,377 ￦ 215,555 ￦ 216,914 ￦ 221,862 ￦ 233,902

Total non-performing loans (2)

1,612 1,180 1,606 1,421 1,068

Other impaired loans not included in non-performing loans

2,204 2,285 2,086 2,669 1,996

Total of non-performing loans and other impaired loans

3,816 3,465 3,692 4,090 3,064

Total allowances for loan losses

3,756 3,448 3,269 2,861 2,452

Non-performing loans as a percentage of total loans

0.80 % 0.55 % 0.74 % 0.64 % 0.46 %

Non-performing loans as a percentage of total assets

0.62 % 0.42 % 0.56 % 0.49 % 0.35 %

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

1.89 % 1.61 % 1.70 % 1.84 % 1.31 %

Allowances for loan losses as a percentage of total loans

1.87 % 1.60 % 1.51 % 1.29 % 1.05 %

(1)

Before deduction of allowances for loan losses.

(2)

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

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Selected Statistical Information

Average Balance Sheets and Related Interest

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

Year Ended December 31,
2012 2013 2014
Average
Balance (1) 		Interest
Income (2)(3) 		Average
Yield 		Average
Balance (1) 		Interest
Income (2)(3) 		Average
Yield 		Average
Balance (1) 		Interest
Income (2)(3) 		Average
Yield
(in billions of Won, except percentages)

Assets

Cash and interest earning deposits in other banks

￦ 4,808 ￦ 160 3.33 % ￦ 5,905 ￦ 146 2.47 % ￦ 7,811 ￦ 190 2.43 %

Financial investment (debt securities) (4)

33,382 1,426 4.27 33,339 1,269 3.81 31,530 1,120 3.55

Loans:

Corporate

102,773 5,328 5.18 100,614 4,526 4.50 101,875 4,145 4.07

Mortgage

44,444 2,161 4.86 44,514 1,826 4.10 48,160 1,746 3.63

Home equity

30,170 1,535 5.09 30,275 1,287 4.25 32,030 1,216 3.80

Other consumer

29,721 2,163 7.28 30,536 1,974 6.46 32,981 2,019 6.12

Credit cards (5)

12,078 1,345 11.14 11,611 1,242 10.70 11,312 1,123 9.93

Foreign

2,744 92 3.35 2,851 87 3.05 2,631 76 2.89

Loans (total)

221,930 12,624 5.69 220,401 10,942 4.96 228,989 10,325 4.51

Total average interest earning assets

￦ 260,120 ￦ 14,210 5.46 % ￦ 259,645 ￦ 12,357 4.76 % ￦ 268,330 ￦ 11,635 4.34 %

Cash and due from banks

7,622 — — 7,688 — — 7,978 — —

Financial assets at fair value through profit or loss:

Debt securities (3)

8,744 — — 8,091 — — 8,631 — —

Equity securities

1,026 — — 1,280 — — 847 — —

Other

36 — — 42 — — 47 — —

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

9,806 — — 9,413 — — 9,525 — —

Financial investment (equity securities)

2,444 — — 2,671 — — 2,999 — —

Investment in associates

934 — — 882 — — 698 — —

Derivative financial assets

2,040 — — 1,760 — — 1,791 — —

Premises and equipment

3,212 — — 3,191 — — 3,197 — —

Intangible assets

539 — — 475 — — 463 — —

Allowances for loan losses

(4,159 ) — — (4,108 ) — — (3,556 ) — —

Other non-interest earning assets

7,472 — — 8,555 — — 7,570 — —

Total average non-interest earning assets

29,910 — — 30,527 — — 30,665 — —

Total average assets

￦ 290,030 ￦ 14,210 4.90 % ￦ 290,172 ￦ 12,357 4.26 % ￦ 298,995 ￦ 11,635 3.89 %

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Year Ended December 31,
2012 2013 2014
Average
Balance (1) 		Interest
Expense 		Average
Cost 		Average
Balance (1) 		Interest
Expense 		Average
Cost 		Average
Balance (1) 		Interest
Expense 		Average
Cost
(in billions of Won, except percentages)

Liabilities

Deposits:

Demand deposits

￦ 56,154 ￦ 336 0.60 % ￦ 60,894 ￦ 285 0.47 % ￦ 67,612 ￦ 283 0.42 %

Time deposits

136,617 5,047 3.69 130,286 3,940 3.02 130,258 3,516 2.70

Certificates of deposit

1,735 67 3.86 1,780 54 3.03 1,689 46 2.72

Deposits (total)

194,506 5,450 2.80 192,960 4,279 2.22 199,559 3,845 1.93

Debts

21,773 460 2.11 20,173 365 1.81 19,085 342 1.79

Debentures

24,552 1,262 5.14 25,319 1,190 4.70 28,048 1,032 3.68

Total average interest bearing liabilities

￦ 240,831 ￦ 7,172 2.98 % ￦ 238,452 ￦ 5,834 2.45 % ￦ 246,692 ￦ 5,219 2.12 %

Non-interest bearing demand deposits

3,075 — — 3,252 — — 3,486 — —

Derivative financial liabilities

1,899 — — 1,789 — — 1,669 — —

Financial liabilities at fair value through profit or loss

1,724 — — 1,697 — — 1,497 — —

Other non-interest bearing liabilities

17,770 — — 19,157 — — 18,778 — —

Total average non-interest bearing liabilities

24,468 — — 25,895 — — 25,430 — —

Total average liabilities

265,299 7,172 2.70 264,347 5,834 2.21 272,122 5,219 1.92

Total equity

24,731 — — 25,825 — — 26,873 — —

Total average liabilities and equity

￦ 290,030 ￦ 7,172 2.48 % ￦ 290,172 ￦ 5,834 2.01 % ￦ 298,995 ￦ 5,219 1.75 %

(1)

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

(2)

We do not invest in any tax-exempt securities.

(3)

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

(4)

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

(5)

Interest income from credit cards includes principally cash advance fees of ￦447 billion, ￦353 billion and ￦276 billion and interest on credit card loans of ￦457 billion, ￦435 billion and ￦408 billion for the years ended December 31, 2012, 2013 and 2014, respectively, but does not include interchange fees.

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

Year Ended December 31,
2012 2013 2014
(percentages)

Net interest spread (1)

2.48 % 2.31 % 2.22 %

Net interest margin (2)

2.71 2.51 2.39

Average asset liability ratio (3)

108.01 108.89 108.77

(1)

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

(2)

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

(3)

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

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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 2012 compared to 2013 and 2013 compared to 2014. 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.

2013 vs. 2012
Increase/(Decrease)
Due to Change in 		2014 vs. 2013
Increase/(Decrease)
Due to Change in
Volume Rate Total Volume Rate Total
(in billions of Won)

Interest earning assets

Cash and interest earning deposits in other banks

￦ 32 ￦ (46 ) ￦ (14 ) ￦ 46 ￦ (2 ) ￦ 44

Financial investment (debt securities)

(2 ) (155 ) (157 ) (66 ) (83 ) (149 )

Loans:

Corporate

(110 ) (692 ) (802 ) 57 (438 ) (381 )

Mortgage

3 (338 ) (335 ) 141 (221 ) (80 )

Home equity

5 (253 ) (248 ) 71 (142 ) (71 )

Other consumer

58 (247 ) (189 ) 152 (107 ) 45

Credit cards

(51 ) (52 ) (103 ) (31 ) (88 ) (119 )

Foreign

3 (8 ) (5 ) (7 ) (4 ) (11 )

Total interest income

￦ (62 ) ￦ (1,791 ) ￦ (1,853 ) ￦ 363 ￦ (1,085 ) ￦ (722 )

2013 vs. 2012
Increase/(Decrease)
Due to Change in 		2014 vs. 2013
Increase/(Decrease)
Due to Change in
Volume Rate Total Volume Rate Total
(in billions of Won)

Interest bearing liabilities

Deposits:

Demand deposits

￦ 27 ￦ (78 ) ￦ (51 ) ￦ 30 ￦ (32 ) ￦ (2 )

Time deposits

(225 ) (882 ) (1,107 ) (1 ) (423 ) (424 )

Certificates of deposit

2 (15 ) (13 ) (3 ) (5 ) (8 )

Debts

(32 ) (63 ) (95 ) (19 ) (4 ) (23 )

Debentures

39 (111 ) (72 ) 119 (277 ) (158 )

Total interest expense

(189 ) (1,149 ) (1,338 ) 126 (741 ) (615 )

Total net interest income

￦ 127 ￦ (642 ) ￦ (515 ) ￦ 237 ￦ (344 ) ￦ (107 )

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Exchange Rates

The table below sets forth, for the periods and dates indicated, information concerning the noon buying rate for Won, expressed in Won per one U.S. dollar. The “noon buying rate” is the rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York. Unless otherwise stated, translations of Won amounts into U.S. dollars in this annual report were made at the noon buying rate in effect on December 31, 2014, which was ￦1,090.9 to US$1.00. We do not intend to imply that the Won or U.S. dollar amounts referred to herein could have been or could be converted into U.S. dollars or Won, as the case may be, at any particular rate, or at all. On April 24, 2015, the noon buying rate was ￦1,075.9 = US$1.00.

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

2010

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

2011

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

2012

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

2013

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

2014

1,008.9 1,117.7 1,052.3 1,090.9

October

1,043.9 1,074.4 1,060.3 1,073.1

November

1,077.0 1,114.7 1,097.9 1,112.1

December

1,080.8 1,117.7 1,102.6 1,090.9

2015 (through April 24)

1,075.9 1,100.4 1,088.1 1,075.9

January

1,075.3 1,109.1 1,088.1 1,104.3

February

1,086.8 1,112.8 1,101.5 1,100.7

March

1,095.7 1,135.7 1,112.9 1,107.7

April (through April 24)

1,075.3 1,135.7 1,098.2 1,075.9

Source :    Federal Reserve Bank of New York.

(1)

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

Item 3.B. Capitalization and Indebtedness

Not applicable.

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

Not applicable.

Item 3.D. Risk Factors

Risks relating to our retail credit portfolio

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

In recent years, consumer debt has increased significantly in Korea. Our portfolio of retail loans, including mortgage and home equity loans, decreased slightly from ￦103,855 billion as of December 31, 2011 to ￦103,432 billion as of December 31, 2012 but increased to ￦107,644 billion as of December 31, 2013 and ￦119,249 billion as of December 31, 2014. As of December 31, 2014, our retail loans represented 51.0% 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 ￦28,275 billion as of December 31, 2011 to ￦32,255 billion as of December 31, 2014; as a percentage of total outstanding retail loans, such balance has remained relatively stable at 27.2% as of December 31, 2011 and

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27.0% as of December 31, 2014. The growth of our retail lending business, which generally offers higher margins than other lending activities, contributed significantly to our interest income and profitability in recent years.

The growth of our retail loan portfolio, together with adverse economic conditions in Korea and globally in recent years, may lead to further increases in delinquency levels and a deterioration in asset quality. The amount of our non-performing retail loans (defined as those that are past due by 90 days or more) increased from ￦642 billion as of December 31, 2011 to ￦762 billion as of December 31, 2012 but decreased to ￦546 billion as of December 31, 2013 and ￦395 billion as of December 31, 2014. However, higher delinquencies in our retail loan portfolio in the future will require us to increase our loan loss provisions and charge-offs, which in turn will adversely affect our financial condition and results of operations.

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

In light of adverse conditions in the Korean economy affecting consumers, in March 2009, the Financial Services Commission requested Korean banks, including us, to establish a “pre-workout program,” including a credit counseling and recovery service, for retail borrowers with outstanding short-term debt. Under the pre-workout program, which has been in operation since April 2009, maturity extensions and/or interest reductions are provided for retail borrowers with total loans of ￦1.5 billion or less (consisting of no more than ￦500 million of unsecured loans and ￦1 billion of secured loans) who are in arrears on their payments for more than 30 days but less than 90 days or for retail borrowers with an annual income of ￦40 million or less who have been in arrears on their payments for more than 30 days on an aggregate basis for the 12 months prior to their application. In addition, in March 2015, in response to increasing levels of consumer debt and amid concerns over the debt-servicing capacity of retail borrowers if interest rates were to rise, the Korean government launched, and requested Korean banks to participate in, a mortgage loan refinancing program aimed at reducing the payment burden on and improving the asset quality of outstanding mortgage loans. Under such refinancing program, over 340,000 qualified retail borrowers converted their outstanding non-amortizing floating-rate mortgage loans from Korean commercial banks (including us) into amortizing fixed-rate mortgage loans with lower interest rates, amounting to an aggregate principal amount of ￦34 trillion for all commercial banks in 2015. Our participation in such refinancing program may lead to a decrease in our interest income on our outstanding mortgage loans, as well as in our overall net interest margin. More generally, our participation in such government-led initiatives to provide financial support to retail borrowers may lead us to offer credit terms for such borrowers that we would not otherwise offer, in the absence of such initiatives, which may have an adverse effect on our results of operations and financial condition.

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

With respect to our credit card portfolio, our delinquency ratio (which represents the ratio of amounts that are overdue by 30 days or more to total outstanding balances) decreased from 1.5% as of December 31, 2011 to 1.3% as of December 31, 2012, increased to 1.7% as of December 31, 2013 and decreased to 1.5% as of December 31, 2014. In line with industry practice, we have restructured a portion of delinquent credit card account balances (defined as balances overdue by 30 days or more) as loans. As of December 31, 2014, these restructured loans outstanding amounted to ￦45 billion. Because these loans are not treated as being delinquent

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at the time of conversion or for a period of time thereafter, our delinquency ratios may not fully reflect all delinquent amounts relating to our outstanding loans. Including all restructured loans, outstanding balances overdue by 30 days or more accounted for 1.9% of our credit card receivables (including credit card loans) as of December 31, 2014. Delinquencies may increase further in 2015 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.

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

•

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

•

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

•

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

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

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

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

One of our core businesses is lending to small- and medium-sized enterprises (as defined under “Item 4.B. Business Overview—Corporate Banking—Small- and Medium-sized Enterprise Banking”). Our loans to small- and medium-sized enterprises increased from ￦68,730 billion as of December 31, 2011 to ￦71,960 billion as of December 31, 2014. During that period, non-performing loans (defined as those loans that are past due by 90 days or more) to small- and medium-sized enterprises increased from ￦373 billion as of December 31, 2011 to ￦680 billion as of December 31, 2012 but decreased to ￦373 billion as of December 31, 2014, and the non-performing loan ratio for such loans increased from 0.5% as of December 31, 2011 to 0.8% as of December 31, 2013 but decreased to 0.5% as of December 31, 2014. However, our non-performing loans and non-performing loan ratio may increase in 2015. According to data compiled by the Financial Supervisory Service, the

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delinquency ratio for Won-currency loans by Korean commercial banks to small- and medium-sized enterprises was 0.8% as of December 31, 2014. 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 remained relatively stable at 1.0% as of December 31, 2011, 1.1% as of December 31, 2012 and 0.9% as of December 31, 2013, but decreased to 0.6% as of December 31, 2014. However, our delinquency ratio for such Won currency loans may increase in 2015. 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, lodging, retail and wholesale, restaurants and real estate. Despite such efforts, however, there is no assurance that delinquency levels for our loans to small- and medium-sized enterprises will not rise in the future. In particular, financial difficulties experienced by small- and medium-sized enterprises as a result of, among other things, adverse economic conditions in Korea and globally in recent years may lead to a deterioration in the asset quality of our loans to this segment. Any such deterioration would result in increased charge-offs and higher provisioning and reduced interest and fee income from this segment, which could have a material adverse impact on our financial condition and results of operations.

In addition, many small- and medium-sized enterprises have close business relationships with the largest Korean commercial conglomerates, known as “ chaebols ,” primarily as suppliers. Any difficulties encountered by 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 has been extended until December 31, 2015, we provide liquidity assistance to qualified small- and medium-sized enterprise borrowers applying for such assistance, in the form of new loans or maturity extensions or interest rate adjustments with respect to existing loans, after expedited credit review and approval by us. The overall prospects for the Korean economy in 2015 and beyond remain uncertain, and the Korean government may extend or renew existing or past policies and initiatives or introduce new policies or initiatives to encourage Korean banks to provide financial support to small- and medium-sized enterprises. Our participation in such government-led initiatives may lead us to extend credit to small- and medium-sized enterprise borrowers that we would not otherwise extend, or offer terms for such credit that we would not otherwise offer, in the absence of such initiatives. Furthermore, there is no

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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, 2014, we had loans outstanding to construction companies and shipbuilding companies (many of which are small- and medium-sized enterprises) in the amount of ￦3,778 billion and ￦820 billion, or 1.6% and 0.4% of our total loans, respectively. We also have other exposures to Korean construction and shipbuilding companies, including in the form of guarantees extended on behalf of such companies (which included ￦710 billion of confirmed guarantees for construction companies and ￦1,179 billion of confirmed guarantees for shipbuilding companies as of December 31, 2014) and debt and equity securities of such companies held by us. In the case of construction companies, such exposures include guarantees provided to us by general contractors with respect to financing extended by us for residential and commercial real estate development projects. In the case of shipbuilding companies, such exposures include refund guarantees extended by us on behalf of shipbuilding companies to cover their obligation to return a portion of the ship order contract amount to customers in the event of performance delays or defaults under shipbuilding contracts.

The construction industry in Korea has experienced a downturn in recent years, due to excessive investment in residential property development projects, stagnation of real property prices and reduced demand for residential property, especially in areas outside of Seoul, including as a result of the deterioration of the Korean economy. The shipbuilding industry in Korea has also experienced a severe downturn in recent years due to a significant decrease in ship orders, primarily due to adverse conditions in the global economy and the resulting slowdown in global trade. In response to the deteriorating financial condition and liquidity position of borrowers in the construction and shipbuilding industries, which were disproportionately impacted by adverse economic developments in Korea and globally, the Korean government implemented a program in 2009 to promote expedited restructuring of such borrowers by their Korean creditor financial institutions, under the supervision of major commercial banks. In accordance with such program, 24 construction companies and five shipbuilding companies became subject to workout in 2009, following review by their creditor financial institutions (including us) and the Korean government. In addition, in June 2010, the Financial Services Commission and the Financial Supervisory Service announced that, following credit risk evaluations conducted by creditor financial institutions (including us) of companies in Korea with outstanding debt of ￦50 billion or more, 65 companies had been selected by such financial institutions for restructuring in the form of workout, liquidation or court receivership. Of such 65 companies, 16 were construction companies and three were shipbuilding and shipping companies. Each year since June 2010, the Financial Services Commission and the Financial Supervisory Service has announced the results of subsequent credit risk evaluations conducted by creditor financial institutions (including us) of companies in Korea with outstanding debt of ￦50 billion or more and selected companies for restructuring in the form of workout, liquidation or court receivership. Most recently, in July 2014, 34 companies with outstanding debt of ￦50 billion or more (21 of which were construction companies and three of which were shipbuilding and shipping companies) were selected by such financial institutions for restructuring. 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

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“—Other risks relating to our business—A decline in the value of the collateral securing our loans and our inability to realize full collateral value may adversely affect our credit portfolio.”

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

Risks relating to our financial holding company structure and strategy

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

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

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

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

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, in March 2014, we acquired 52.02% of the outstanding shares of KB Capital Co., Ltd. (formerly named Woori Financial Co., Ltd.), a publicly listed Korean consumer finance company, from Woori Finance Holdings Co., Ltd. for ￦280 billion. Furthermore, in June 2014, we entered into a share purchase agreement, which was amended in March 2015, to acquire 19.47% of the outstanding shares of LIG Insurance Co., Ltd., a publicly listed Korean property and casualty insurance company, from a group of individual shareholders for ￦645 billion, and will be required under applicable Korean law to increase our shareholding in LIG Insurance to at least 30% within one year from the date of such acquisition. We may consider acquiring or merging with other financial institutions to achieve balanced growth and diversify our revenue base. The integration of our subsidiaries’ separate businesses and operations, as well as those of any companies we may acquire or merge with in the future, under our financial holding company structure could require a significant amount of time,

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financial resources and management attention. Moreover, that process could disrupt our operations (including our risk management operations) or information technology systems, reduce employee morale, produce unintended inconsistencies in our standards, controls, procedures or policies, and affect our relationships with customers and our ability to retain key personnel. The realization of the anticipated benefits of our financial holding company structure and any mergers or acquisitions we decide to pursue may be blocked, delayed or reduced as a result of many factors, some of which may be outside our control. These factors include:

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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;

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

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

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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;

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unexpected business disruptions;

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

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loss of customers; and

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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:

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

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

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

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

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

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

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

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

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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 and the general modernization of business practices in Korea will lead to increased competition among financial institutions in Korea. We also believe that foreign financial institutions, many of which have greater experience and resources than we do, will seek to compete with us in providing financial products and services either by themselves or in partnership with existing Korean financial institutions. Furthermore, a number of significant mergers and acquisitions in the industry have taken place in Korea over the past decade, including the acquisition of Koram Bank by an affiliate of Citibank in 2004, Standard Chartered Bank’s acquisition of Korea First Bank in 2005, Chohung Bank’s merger with Shinhan Bank in April 2006, Hana Financial Group’s acquisition of a controlling interest in Korea Exchange Bank in February 2012 and the proposed merger of Hana Bank into Korea Exchange Bank in the second half of 2015. Moreover, as part of the Korean government’s plans to privatize Woori Finance Holdings Co., Ltd. (the former financial holding company of Woori Bank), certain subsidiaries of Woori Finance Holdings were sold to other financial institutions and Woori Finance Holdings itself was merged into Woori Bank in 2014. We expect that consolidation in the financial industry will continue. The financial institutions resulting from such consolidation may, by virtue of their increased size and business scope, provide significantly greater competition for us. Increased competition and continuing consolidation may lead to decreased margins, resulting in a material adverse impact on our future profitability. Accordingly our results of operations and financial condition may suffer as a result of increasing competition in the Korean financial industry.

Risks relating to our large corporate loan portfolio

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

Of our 20 largest corporate exposures (including loans, debt and equity securities and guarantees and acceptances) as of December 31, 2014, 12 were to companies that were members of the 42 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 42 chaebols was ￦21,587 billion, or 7.5% 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 4.B. Business Overview—Assets and Liabilities—Loan Portfolio—Exposure to Chaebols.”

We cannot assure you that the allowances we have established against these exposures will be sufficient to cover all future losses arising from these exposures. In addition, with respect to those companies that are in or in

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the future enter into workout or liquidation proceedings, we may not be able to make any recoveries against such companies. We may, therefore, experience future losses with respect to those loans.

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

As of December 31, 2014, our loans and guarantees to companies that were in workout, restructuring or rehabilitation amounted to ￦773 billion or 0.3% of our total loans and guarantees, most of which was classified as impaired. As of the same date, our allowances for credit losses on these loans and guarantees amounted to ￦443 billion, or 57.4% 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, 2014 with respect to such securities of companies in workout, restructuring or rehabilitation amounted to ￦83 billion, or less than 0.2% of our total debt securities and equity securities, but may increase in the future. In addition, in the case of borrowers that are or become subject to workout, we may be forced to restructure our credits pursuant to restructuring plans approved by other creditor financial institutions of the borrower, or to dispose of our credits to other creditors on unfavorable terms.

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, 2014, our loans and guarantees to our 20 largest borrowers totaled ￦7,180 billion and accounted for 2.9% of our total loans and guarantees. As of that date, our single largest corporate credit exposure was to Daewoo Shipbuilding & Marine Engineering Co., Ltd., to which we had outstanding credit exposures (most of which was in the form of guarantees and acceptances) of ￦1,165 billion, representing 0.5% of our total loans and guarantees. Any further deterioration in the financial condition of our large corporate borrowers may require us to record substantial additional provisions and may have a material adverse impact on our results of operations and financial condition.

Other risks relating to our business

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

While the rate of deterioration of the global economy since the commencement of the global financial crisis in 2008 has slowed, with some signs of stabilization and improvement, the overall prospects for the Korean and global economy in 2015 and beyond remain uncertain. Starting in the second half of 2011, the global financial markets have experienced significant volatility as a result of, among other things:

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the financial difficulties affecting many governments worldwide, in particular in southern Europe and Latin America;

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

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interest rate fluctuations amid speculation that the U.S. Federal Reserve would raise interest rates, as well as reductions in policy rates by an increasing number of central banks, including the Bank of Korea; and

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political and social instability in various countries in the Middle East and Northern Africa, including Iraq, Syria and Yemen, as well as in the Ukraine and Russia.

In light of the high level of interdependence of the global economy, any of the foregoing developments could have a material adverse effect on the Korean economy and financial markets, and in turn on our business, financial condition and results of operations.

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

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

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

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

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

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In May 2014, the Financial Supervisory Service launched an investigation into a dispute between Kookmin Bank and us regarding the replacement of Kookmin Bank’s main computing system.

In August 2014, the Financial Supervisory Agency of Japan suspended Kookmin Bank from conducting new transactions at its branches in Japan for four months from September 2014 to January 2015. Furthermore, in August 2014, the Financial Supervisory Service imposed disciplinary sanctions on Kookmin Bank and a number of its officers, directors and employees, including the then chief executive officer of Kookmin Bank. In September 2014, the Financial Services Commission imposed a disciplinary sanction on our then chief executive officer. Both the chief executive officer of Kookmin Bank and our chief executive officer, as well as a number of our respective outside directors, subsequently resigned from their posts and have been replaced. In September 2014, the Financial Supervisory Service completed its investigation into Kookmin Bank and us with respect to such allegations.

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

In addition, in connection with certain amendments to standard loan policy conditions for mortgage loan agreements that were instituted by the Korea Fair Trade Commission in January 2008 (which require banks to be

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responsible for the payment of mortgage registration expenses when issuing mortgage loans and which were upheld by the Supreme Court of Korea in August 2010), a number of Kookmin Bank’s customers have filed lawsuits in recent years seeking the return of mortgage registration expenses paid by such customers. See “Item 8A. Consolidated Statements and Other Financial Information—Legal Proceedings.”

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

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

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

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

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

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

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

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real estate or other collateral securing our loans, or our inability to obtain additional collateral in the event of such declines, could result in a deterioration in our asset quality and may require us to take additional loan loss provisions.

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

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

As of December 31, 2014, we held debt securities issued by Korean companies and financial institutions (other than those issued by government-owned or -controlled enterprises or financial institutions, which include Korea Electric Power Corporation, the Bank of Korea, Korea Development Bank, Korea Finance Corporation and Industrial Bank of Korea) with a total carrying amount of ￦21,337 billion in our trading and investment securities portfolio. The market value of these securities could decline significantly due to various factors, including future increases in interest rates or a deterioration in the financial and economic condition of any particular issuer or of Korea in general. Any of these factors individually or a combination of these factors would require us to write down the fair value of these debt securities, resulting in impairment losses. Because the secondary market for corporate bonds in Korea is not fully developed, the market value of many of these securities as reflected on our statements of financial position is determined by references to suggested prices posted by Korean rating agencies or the Korea Securities Dealers Association. These valuations, however, may differ significantly from the actual value that we could realize in the event we elect to sell these securities. As a result, we may not be able to realize the full “marked-to-market” value at the time of any such sale of these securities and thus may incur losses.

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

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

If, at any time, the income from our guaranteed trust accounts is not sufficient to pay any guaranteed amount, we will have to cover the shortfall first from the special reserves maintained in these trust accounts, then from our fees from such trust accounts and finally from funds transferred from our general banking operations. As of December 31, 2014, we had ￦96 billion of special reserves in respect of trust accounts for which we provided guarantees of principal. There was no transfer from general banking operations to cover deficiencies in guaranteed trust accounts in 2012, 2013 and 2014. However, we may be required to make transfers from our general banking operations to cover shortfalls, if any, in our guaranteed trust accounts in the future. Such transfers may adversely impact our results of operations.

Our activities are subject to cybersecurity risk.

Our activities have been, and will continue to be, subject to an increasing risk of cyber attacks, the nature of which is continually evolving. For example, many of our customers increasingly rely on our Internet banking services as well as our mobile and smartphone banking services for various types of transactions and, while such

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transactions are protected by encryption and other security programs, they are not free from security breaches. We have made substantial and continuous investments to build systems and defenses to address threats from cyber attacks and our monitoring and protection systems have been able to detect and respond to such breaches to date. However, we may experience security breaches or unexpected disruptions in connection with our services in the future, which may result in liability to our customers and third parties and have an adverse effect on our business, reputation and results of operations.

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

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

Risks relating to liquidity and capital management

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

Interest rates in Korea have been subject to significant fluctuations in recent years. In late 2008 and early 2009, the Bank of Korea reduced its policy rate by a total of 325 basis points to support Korea’s economy amid the global financial crisis, and left such rate unchanged at 2.00% throughout 2009. In an effort to stem inflation amid improved growth prospects, the Bank of Korea gradually increased its policy rate in 2010 and 2011 by a total of 125 basis points to 3.25%. However, the Bank of Korea reduced its policy rate to 2.00% through a series of reductions from 2012 to 2014 to support Korea’s economy in light of the slowdown in Korea’s growth and uncertain global economic prospects. In March 2015, the Bank of Korea further reduced its policy rate to an unprecedented 1.75% amid deflationary concerns and interest rate cuts by central banks around the world. All else being equal, an increase in interest rates in the future could lead to a decline in the value of our portfolio of debt securities, which generally pay interest based on a fixed rate. A sustained increase in interest rates will also raise our funding costs, while reducing loan demand, especially among consumers. Rising interest rates may therefore require us to re-balance our asset portfolio and our liabilities in order to minimize the risk of potential mismatches and maintain our profitability.

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

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

We meet a significant amount of our funding requirements through short-term funding sources, which consist primarily of customer deposits. As of December 31, 2014, approximately 94.4% of our deposits had maturities of one year or less or were payable on demand. In the past, a substantial proportion of our customer deposits have been rolled over upon maturity. We cannot guarantee, however, that depositors will continue to roll over their deposits in the future. In the event that a substantial number of our short-term deposit customers withdraw their funds or fail to roll over their deposits as higher-yielding investment opportunities emerge, our liquidity position could be adversely affected. We may also be required to seek more expensive sources of short-term and long-term funding to finance our operations. See “Item 5.B. Liquidity and Capital Resources—Financial Condition—Liquidity.”

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

Under the capital adequacy requirements of the Financial Services Commission, both we and Kookmin Bank, our banking subsidiary, are required to maintain a minimum common equity Tier I capital adequacy ratio of 4.5%, Tier I capital adequacy ratio of 6.0% and combined Tier I and Tier II capital adequacy ratio of 8.0%, on a consolidated basis from, January 1, 2015. As of December 31, 2014, our common equity Tier I capital, Tier I capital and combined Tier I and Tier II capital adequacy ratios were 13.19%, 13.29% and 15.53%, respectively, and Kookmin Bank’s common equity Tier I capital, Tier I capital and combined Tier I and Tier II capital adequacy ratios were 13.38%, 13.38% and 15.97%, respectively, all of which exceeded the minimum levels required by the Financial Services Commission. However, our capital base and capital adequacy ratios may deteriorate in the future if our results of operations or financial condition deteriorates for any reason, including as a result of a deterioration in the asset quality of our retail loans (including credit card balances) and loans to small- and medium-sized enterprises, or if we are not able to deploy our funding into suitably low-risk assets.

The current capital adequacy requirements of the Financial Services Commission are derived from a new set of bank capital measures, referred to as Basel III, which the Basel Committee on Banking Supervision initially introduced in 2009 and began phasing in starting from 2013. In July 2013 and September 2013, the Financial Services Commission promulgated amended regulations implementing Basel III, pursuant to which Korean banks and bank holding companies were required to maintain a minimum ratio of common equity Tier I capital (which principally includes equity capital, capital surplus and retained earnings less reserve for credit losses) to risk-weighted assets of 3.5% and Tier I capital to risk-weighted assets of 4.5% from December 1, 2013, which minimum ratios were increased to 4.0% and 5.5%, respectively, from January 1, 2014 and increased further to 4.5% and 6.0%, respectively, from January 1, 2015. Such requirements are in addition to the pre-existing requirement for a minimum ratio of Tier I and Tier II capital (less any capital deductions) to risk-weighted assets of 8.0%, which remains unchanged. The amended regulations also contemplate an additional capital conservation buffer of 0.625% starting in 2016, with such buffer to increase in stages to 2.5% by 2019. The implementation of Basel III in Korea may have a significant effect on the capital requirements of Korean financial institutions, including us. See “Item 4.B. Business Overview—Supervision and Regulation—Principal Regulations Applicable to Financial Holding Companies—Capital Adequacy” and “—Principal Regulations Applicable to Banks—Capital Adequacy.”

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

Risks relating to government regulation and policy

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

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

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

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

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

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

•

capital increases or reductions;

•

stock cancellations or consolidations;

•

transfers of businesses;

•

sales of assets;

•

closures of subsidiaries or branch offices;

•

mergers with other financial institutions; and

•

suspensions of a part of our business operations.

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

Risks relating to Korea

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

Relations between Korea and North Korea have been tense throughout Korea’s modern history. The level of tension between the two Koreas has fluctuated and may increase abruptly as a result of future events. In particular, since the death of Kim Jong-il in December 2011, there has been increased uncertainty with respect to

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the future of North Korea’s political leadership and concern regarding its implications for political and economic stability in the region. Although Kim Jong-il’s third son, Kim Jong-eun, has assumed power as his father’s designated successor, the long-term outcome of such leadership transition remains uncertain.

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

•

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

•

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

•

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

•

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

North Korea’s economy also faces severe challenges, which may aggravate social and political pressures within North Korea. There can be no assurance that the level of tensions affecting the Korean peninsula will not escalate in the future. Any further increase in tensions, which may occur, for example, if North Korea experiences a leadership crisis, high-level contacts between Korea and North Korea break down or military hostilities occur, could have a material adverse effect on the Korean economy and on our business, financial condition and results of operations and the market value of our common stock and ADSs.

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

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

In recent years, adverse conditions and volatility in the worldwide financial markets, fluctuations in oil and commodity prices and the general weakness of the U.S. and global economy have contributed to the uncertainty of global economic prospects in general and have adversely affected, and may continue to adversely affect, the Korean economy. See “Other risks relating to our business—Difficult conditions in the global financial markets could adversely affect our results of operations and financial condition.” The value of the Won relative to major foreign currencies in general and the U.S. dollar in particular has also fluctuated widely. See “Item 3.A. Selected Financial Data—Exchange Rates.” Furthermore, as a result of adverse global and Korean economic conditions,

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there has been significant volatility in the stock prices of Korean companies in recent years. Future declines in the Korea Composite Stock Price Index (known as the “KOSPI”) and large amounts of sales of Korean securities by foreign investors and subsequent repatriation of the proceeds of such sales may adversely affect the value of the Won, the foreign currency reserves held by financial institutions in Korea, and the ability of Korean companies to raise capital. Any future deterioration of the Korean or global economy could adversely affect our business, financial condition and results of operations.

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

•

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

•

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

•

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

•

further decreases in the market prices of Korean real estate;

•

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

•

declines in consumer confidence and a slowdown in consumer spending;

•

increasing levels of household debt;

•

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

•

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

•

social and labor unrest;

•

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

•

financial problems or lack of progress in the restructuring 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 concerning certain chaebols ;

•

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

•

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

•

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

•

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

•

the occurrence of severe health epidemics in Korea or other parts of the world, including the recent Ebola outbreak;

•

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

•

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

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•

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

•

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

•

changes in financial regulations in Korea.

Labor unrest in Korea may adversely affect our operations.

Economic difficulties in Korea or increases in corporate reorganizations and bankruptcies could result in layoffs and higher unemployment. Such developments could lead to social unrest and substantially increase government expenditures for unemployment compensation and other costs for social programs. According to statistics from the Korea National Statistical Office, the unemployment rate was 3.2% in 2012 and decreased to 3.1% in 2013, but increased to 3.5% in 2014. Future increases in unemployment and any resulting labor unrest in the future could adversely affect our operations, as well as the operations of many of our customers and their ability to repay their loans, and could adversely affect the financial condition of Korean companies in general, depressing the price of their securities. These developments would likely have an adverse effect on our financial condition and results of operations.

Risks relating to our common stock and ADSs

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

In September 2009, we issued 30,000,000 new shares of our common stock (including 2,775,585 new shares in the form of ADSs) at a subscription price of ￦37,250 per share (and US$29.95 per ADS), pursuant to a rights offering to our existing shareholders. In July 2011, Kookmin Bank, our wholly-owned subsidiary, sold 34,966,962 shares of our common stock in a block sale. We have no current plans for any subsequent public offerings of our common stock, ADSs or securities exchangeable for or convertible into such securities. However, it is possible that we may decide to offer or sell such securities in the future. In addition, our major stockholder, the Korean National Pension Service, held approximately 9.42% of our total issued common stock as of December 31, 2014, which it may sell at any time.

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

Ownership of our common stock is restricted under Korean law.

Under the Financial Holding Company Act, a single stockholder, together with its affiliates, is generally prohibited from owning more than 10.0% of the issued and outstanding shares of voting stock of a bank holding company such as us that controls a nationwide bank, with the exception of certain stockholders that are non-financial business group companies, whose applicable limit has been reduced from 9.0% to 4.0% pursuant to an amendment of the Financial Holding Company Act which became effective from February 14, 2014. To the extent that the total number of shares of our common stock (including those represented by ADSs) that a holder and its affiliates own exceeds the applicable limits, that holder will not be entitled to exercise the voting rights for the excess shares, and the Financial Services Commission may order that holder to dispose of the excess shares within a period of up to six months. Failure to comply with such an order would result in an administrative fine of up to 0.03% of the book value of such shares per day until the date of disposal. Non-financial business group

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companies can no longer acquire more than 4.0% of the issued and outstanding shares of voting stock of a bank holding company pursuant to the amended Financial Holding Company Act, which grants an exception for non-financial business group companies which, at the time of the enactment of the amended provisions, held more than 4.0% of the shares thereof with the approval of the Financial Services Commission before the amendment. See “Item 4.B. Business Overview—Supervision and Regulation—Principal Regulations Applicable to Financial Holding Companies—Restrictions on Ownership of a Financial Holding Company.”

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

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

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

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

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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.

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 2,159.8 on April 24, 2015. 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

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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 10.D. Exchange Controls—General.”

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

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

Item 4. INFORMATION ON THE COMPANY

Item 4.A. History and Development of the Company

Overview

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

Our legal and commercial name is KB Financial Group Inc. Our registered office and principal executive offices are located at 84, Namdaemoon-ro, Jung-gu, Seoul 100-703, Korea. 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.

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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 ￦332 billion to acquire 9,914,777 new common shares of H&CB representing 9.99999% of H&CB’s outstanding common shares. As of December 31, 2012, ING Groep N.V. beneficially owned, through its consolidated subsidiary ING Bank N.V., 5.02% of our issued common stock. In February 2013, ING Bank N.V. sold all of its stake in our company in a block trade.

The Merger of the Former Kookmin Bank and H&CB

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

The Establishment of KB Financial Group

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

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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.

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

LOGO

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

LOGO

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

•

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

•

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

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•

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 ￦63,293 per share. Kookmin Bank repurchased 38,263,249 shares of its common stock as a result of the exercise of appraisal rights by dissenting stockholders. In addition, prior to the stock transfer, Kookmin Bank executed a share buy back program, pursuant to which it repurchased 16,840,000 shares of its common stock. Accordingly, as a result of the transfer by Kookmin Bank of such treasury shares and the shares it held in its subsidiaries to us, Kookmin Bank received 73,607,601 shares of our common stock in the stock transfer, all of which it subsequently sold.

Item 4.B. Business Overview

Business

We are one of the largest financial holding companies in Korea, in terms of consolidated total assets, and our operations include Kookmin Bank, the largest commercial bank in Korea in terms of total assets (including loans). Our subsidiaries collectively engage in a broad range of businesses, including commercial banking, credit cards, asset management, life insurance, capital markets activities and international banking. As of December 31, 2014, we had consolidated total assets of ￦308 trillion, consolidated total deposits of ￦212 trillion and consolidated stockholders’ equity of ￦28 trillion.

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

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

By their nature, our core consumer and small- and medium-sized enterprise operations place a high premium on customer access and convenience. Our combined banking network of 1,161 branches as of December 31, 2014, one of the most extensive in Korea, provides a solid foundation for our business and is a major source of our competitive strength. This network provides us with a large, stable and cost effective funding source, enables us to provide our customers convenient access and gives us the ability to provide the customer attention and service essential to conducting our business, particularly in an increasingly competitive environment. Our branch network is further enhanced by automated banking machines and fixed-line, mobile telephone and Internet banking. As of December 31, 2014, we had a customer base of approximately 29.2 million retail customers, which represented over one-half of the Korean population.

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The following table sets forth the principal components of our lending business as of the dates indicated. As of December 31, 2014, retail loans and credit card loans and receivables accounted for 56.0% of our total loan portfolio:

As of December 31,
2012 2013 2014
(in billions of Won, except percentages)

Retail

Mortgage and home equity (1)

￦ 74,463 34.3 % ￦ 77,969 35.1 % ￦ 86,994 37.2 %

Other consumer (2)

28,969 13.4 29,675 13.4 32,255 13.8

Total retail

103,432 47.7 107,644 48.5 119,249 51.0

Credit card

11,874 5.5 11,784 5.3 11,632 5.0

Corporate

99,683 45.9 100,534 45.3 100,878 43.1

Foreign

1,925 0.9 1,900 0.9 2,143 0.9

Total loans

￦ 216,914 100.0 % ￦ 221,862 100.0 % ￦ 233,902 100.0 %

(1)

Includes ￦942 billion, ￦945 billion and ￦1,035 billion of overdraft loans secured by real estate in connection with home equity loans as of December 31, 2012, 2013 and 2014, respectively.

(2)

Includes ￦7,978 billion, ￦7,181 billion and ￦6,941 billion of overdraft loans as of December 31, 2012, 2013 and 2014, respectively.

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

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

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

Since the former Kookmin Bank initiated the issuance of domestic credit cards in 1980, we have seen our credit card business grow rapidly over the past decade as the nationwide trend towards credit card use accelerated. In March 2011, we effected a horizontal spin-off of the credit card business from Kookmin Bank. As a result, our credit card business is operated by a separate wholly-owned subsidiary, KB Kookmin Card Co., Ltd. As of December 31, 2014, we had approximately 18.2 million holders of check cards or credit cards issued by KB Kookmin Card.

Strategy

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

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The key elements of our strategy are as follows:

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

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

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

•

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

•

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

•

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

•

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

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

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

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

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

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

•

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

•

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

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

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

•

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

•

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

•

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

•

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

•

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

•

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

Strengthening internal risk management capabilities

We believe that ensuring strong asset quality through effective credit risk management is critical to maintaining stable growth and profitability and risk management will continue to be one of our key focus areas. One of our highest priorities is to improve our asset quality and more effectively price our lending products to

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

•

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

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

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

Retail Banking

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

Lending Activities

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

As of December 31,
2012 2013 2014
(in billions of Won, except percentages)

Retail:

Mortgage and home equity loans

￦ 74,463 72.0 % ￦ 77,969 72.4 % ￦ 86,994 73.0 %

Other consumer loans (1)

28,969 28.0 29,675 27.6 32,255 27.0 %

Total

￦ 103,432 100.0 % ￦ 107,644 100.0 % ￦ 119,249 100.0 %

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(1)

Excludes credit card loans, but includes overdraft loans.

Our retail loans consist of:

•

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

•

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

For secured loans, including mortgage and home equity loans, our policy is to lend up to 100% of the adjusted collateral value (except in areas of high speculation designated by the government where we generally limit our lending to between 40% to 60% of the appraised value of collateral) minus the value of any lien or other security interests that are prior to our security interest. In calculating the adjusted collateral value for real estate, we use the appraisal value of the collateral multiplied by a factor, generally between 40% to 80% (40% to 70% in the case of mortgage and home equity loans). This factor varies depending upon the location and use of the real estate and is established in part by taking into account court-supervised auction prices for nearby properties.

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

Mortgage and Home Equity Lending

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

Private sector mortgage and home equity lending in Korea has expanded substantially in recent years. We provide customers with a number of mortgage and home equity loan products that have flexible features, including terms, repayment schedules, amounts and eligibility for loans, and we offer interest rates on a commercial basis. The maximum term of mortgage loans is 35 years and the majority of our mortgage loans have long-term maturities, which may be renewed. Non-amortizing home equity loans have an initial maturity of one year, which may be extended on an annual basis for a maximum of five years. Home equity loans subject to amortization of principal may have a maximum term of up to 35 years. As of December 31, 2014, we had ￦29,384 billion of amortizing home equity loans, representing 85.3% of our total home equity loans, and ￦5,079 billion of non-amortizing home equity loans, representing 14.7% of our total home equity loans. Any customer is eligible for a mortgage or an individual home equity loan regardless of whether it participates in one of our housing related savings programs and so long as that customer is not barred by regulation from obtaining a loan because of bad credit history. However, customers with whom we frequently transact business and provide us with significant revenue receive preferential interest rates on loans.

As of December 31, 2014, 71.1% of our mortgage loans were secured by residential property which is the subject of the loan, 17.8% of our mortgage loans were guaranteed by the Housing Finance Credit Guarantee

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Fund, a government housing-related entity, and the remaining 11.1% 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, 2014, the average initial loan-to-value ratio of our mortgage loans, which is a measure of the amount of loan exposure to the appraised value of the security collateralizing the loan, was approximately 50.8%. There are three reasons that our loan-to-value ratio is relatively lower (as is the case with other Korean banks) compared to similar ratios in other countries, such as the United States. The first reason is that housing prices are high in Korea relative to average income, so most people cannot afford to borrow an amount equal to the entire value of their collateral and make interest payments on such an amount. The second reason relates to the “ jeonsae ” system, through which people provide a key money deposit while residing in the property prior to its purchase. At the time of purchase, most people use the key money deposit as part of their payment and borrow the remaining amount from Korean banks, which results in a loan that will be for an amount smaller than the appraised value of the property for collateral and assessment purposes. The third reason is that Korean banks discount the appraised value of the borrower’s property for collateral and assessment purposes so that a portion of the appraised value is reserved in order to provide recourse to a renter who lives at the borrower’s property. This is in the event that the borrower’s property is seized by a creditor, and the renter is no longer able to reside at that property. See “Item 3.D. Risk Factors—Other risks relating to our business—A decline in the value of the collateral securing our loans and our inability to realize full collateral value may adversely affect our credit portfolio.”

The following table sets forth our unsecured and secured mortgage loans and home equity loans as of December 31, 2012, 2013 and 2014, based on their loan classification categories under IFRS and our internal credit ratings for loans (which are described in Note 4.2.4 of the notes to our consolidated financial statements):

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

Mortgage:

Secured (1)

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

Unsecured

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

Home Equity:

Secured

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

Unsecured

— — — — — — — — — —

Total

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

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

Mortgage:

Secured (1)

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

Unsecured

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

Home Equity:

Secured

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

Unsecured

— — — — — — — — — —

Total

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

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As of December 31, 2014
Non-impaired Impaired Total
Not Past Due Past Due
Grade 1 Grade 2 Grade 3 Grade 4 Grade 5 Past Due Up
to 89 Days 		Past Due 90 Days
to 179 Days 		Past Due
180 Days or
More
(in billions of Won)

Mortgage:

Secured (1)

￦ 44,315 ￦ 3,979 ￦ 309 ￦ 94 ￦ 74 ￦ 688 ￦ 61 ￦ 53 ￦ 62 ￦ 49,635

Unsecured

2,338 478 16 7 3 26 4 2 22 2,896

Home Equity:

Secured

31,088 2,412 244 80 77 434 58 34 36 34,463

Unsecured

— — — — — — — — — —

Total

￦ 77,741 ￦ 6,869 ￦ 569 ￦ 181 ￦ 154 ￦ 1,148 ￦ 123 ￦ 89 ￦ 120 ￦ 86,994

(1)

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

Our home equity loan portfolio includes loans that are in a second lien position. In addition to the underwriting procedures we perform when we issue home equity loans in general, we perform additional underwriting procedures with respect to home equity loans secured by a second lien to assess and confirm the value and status of any loans secured by security interests on the collateral which would be prior to our security interest under the second lien home equity loan. Under regulations implemented by the Financial Supervisory Service, our home equity loans are subject to maximum loan-to-value ratios (i.e., the ratio of the aggregate principal amount of loans, including first and second lien loans, secured by a particular item of collateral to the appraised value of such collateral) of between 40% and 70%. As such, for home equity loans, we do not lend more than an amount equal to the adjusted collateral value (i.e., the collateral value as discounted by the required loan-to-value ratio) minus the value of any loans secured by security interests on the collateral that are prior to our security interest. Accordingly, in order to ascertain the value of loans secured by security interests on the collateral which would be prior to our security interest and to confirm the status of such loans, we perform additional underwriting procedures including a review of the relevant title and security interest registration documents and bank documents and certificates regarding such loans. In addition, for purposes of calculating debt-to-income ratios applicable to loans secured by certain types of housing under regulations implemented by the Financial Supervisory Service (see “—Supervision and Regulation—Principal Regulations Applicable to Banks—Regulations Relating to Retail Household Loans”), which we apply on a nationwide basis for our home equity loans, we perform additional adjustments in our debt-to-income ratio calculations with respect to second lien home equity loans to account for the value of loans secured by security interests on the collateral that are prior to our security interest.

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

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principal amount of the relevant first lien loan is less than ￦15 million, we classify the entire amount of the second lien home equity loan as “precautionary” and closely monitor it as a loan that may potentially become problematic. If the outstanding principal amount of the relevant first lien loan is ￦15 million or above or the borrower is undergoing, or preparing to undergo, foreclosure proceedings with respect to the underlying collateral, we classify the estimated recoverable amount of the second lien home equity loan as “substandard” and the rest of such loan amount as “doubtful.”

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

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

As of December 31, 2014, our three-month, six-month and twelve-month base rates were 2.13%, 2.17% and 2.18%, respectively.

As of December 31, 2014, 75.7% of our outstanding mortgage and home equity loans were priced based on a floating rate.

Other Consumer Loans

Other consumer loans are primarily unsecured. However, such loans may be secured by real estate, deposits or securities. As of December 31, 2014, approximately ￦16,035 billion, or 49.7% 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, 2014 was approximately ￦6,941 billion.

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

As of December 31, 2014, 97.9% 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, 2014, we had the largest number of retail customers and retail deposits among Korean commercial banks. The balance of our deposits from retail customers was ￦126,581 billion, ￦132,733 billion and ￦138,246 billion as of December 31, 2012, 2013 and 2014, respectively, which constituted 64.1%, 66.1% and 65.3%, respectively, of the balance of our total deposits.

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

•

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

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are interest bearing, accrue interest at a variable rate depending on the amount of deposit. Retail and corporate demand deposits constituted 34.5% of our total deposits as of December 31, 2014 and paid average interest of 0.42% for 2014.

•

Time deposits , which generally require the customer to maintain a deposit for a fixed term, during which the deposit accrues interest at a fixed rate or a variable rate based on the KOSPI, or to deposit specified amounts on an installment basis. If the amount of the deposit is withdrawn prior to the end of the fixed term, the customer will be paid a lower interest rate than that originally offered. The term for time deposits typically ranges from one month to five years, and the term for installment savings deposits ranges from six months to ten years. Retail and corporate time deposits constituted 58.9% of our total deposits as of December 31, 2014 and paid average interest of 2.7% for 2014. Most installment savings deposits offer fixed interest rates.

•

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

•

Foreign currency deposits are available to Korean residents, non-residents and overseas immigrants. We offer foreign currency demand deposits and time deposits as well as checking accounts in eleven currencies. Foreign currency demand deposits , which accrue interest at a variable rate, allow customers to deposit and withdraw funds at any time. Foreign currency demand deposits accrue interest at a lower rate than foreign currency time deposits , which generally require customers to maintain the deposit for a fixed term, during which it accrues interest at a fixed rate.

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

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

•

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

•

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

In 2002, after significant research and planning, we launched private banking operations at Kookmin Bank’s headquarters. Shortly thereafter, we launched a comprehensive strategy with respect to customers with higher net worth, which included staffing appropriate representatives, marketing aggressively, establishing IT systems, selecting appropriate branch locations and readying such branches with the necessary facilities to service such customers. As of December 31, 2014, we operated 23 private banking centers through Kookmin Bank.

The Monetary Policy Committee of the Bank of Korea (the “Monetary Policy Committee”) imposes a reserve requirement on Won currency deposits of commercial banks based generally on the type of deposit

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instrument. The reserve requirement is currently up to 7%. See “—Supervision and Regulation—Principal Regulations Applicable to Banks—Liquidity.”

The Depositor Protection Act provides for a deposit insurance system where the Korea Deposit Insurance Corporation guarantees to depositors the repayment of their eligible bank deposits. The deposit insurance system insures up to a total of ￦50 million per depositor per bank. See “—Supervision and Regulation—Principal Regulations Applicable to Banks—Deposit Insurance System.” We paid ￦330 billion of premium for 2014.

Credit Cards

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

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

As of and for the Year Ended December 31,
2012 2013 2014
(in billions of Won, except number of
holders, accounts and percentages)

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

General accounts

10,112 8,987 8,487

Corporate accounts

424 435 416

Total

10,536 9,422 8,903

Number of merchants (at year end) (thousands)

2,024 2,058 2,178

Active ratio (at year end) (1)

81.0 % 88.6 % 87.7 %

Credit card fees

Merchant fees (2)

￦ 1,484 ￦ 1,480 ￦ 1,503

Installment and cash advance fees

683 578 475

Annual membership fees

66 68 63

Other fees

542 539 493

Total

￦ 2,775 ￦ 2,665 ￦ 2,534

Charge volume (3)

General purchase

￦ 45,768 ￦ 46,735 ￦ 45,295

Installment purchase

12,153 10,852 10,861

Cash advance

11,606 10,516 9,535

Card loan (4)

3,800 4,688 4,227

Total

￦ 73,327 ￦ 72,791 ￦ 69,918

Outstanding balance (at year end)

General purchase

￦ 4,533 ￦ 4,716 ￦ 4,496

Installment purchase

2,679 2,600 2,786

Cash advance

2,032 1,525 1,323

Card loan (4)

2,647 2,959 3,046

Total

￦ 11,891 ￦ 11,800 ￦ 11,651

Average outstanding balances

General purchase

￦ 4,461 ￦ 4,601 ￦ 4,533

Installment purchase

2,728 2,474 2,528

Cash advance

2,134 1,717 1,390

Card loan (4)

2,759 2,829 2,869

Total

￦ 12,082 ￦ 11,621 ￦ 11,320

Delinquency ratios (at year end) (5)

From 1 month to 3 months

0.94 % 0.81 % 0.64 %

From 3 months to 6 months

0.25 0.83 0.77

Over 6 months

0.13 0.07 0.08

Total

1.32 % 1.71 % 1.48 %

Non-performing loan ratio

0.40 % 0.91 % 0.85 %

Write-offs (gross)

￦ 541 ￦ 404 ￦ 427

Recoveries (6)

185 141 131

Net write-offs

￦ 356 ￦ 263 ￦ 296

Gross write-off ratio (7)

4.48 % 2.93 % 3.77 %

Net write-off ratio (8)

2.95 % 1.91 % 2.61 %

(1)

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

(2)

Merchant fees consist of maintenance fees and costs associated with prepayment by us (on behalf of customers) of sales proceeds to merchants, processing fees relating to sales and membership applications, costs relating to the management of delinquencies and

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recoveries, provision for loan losses, general variable expenses and other fixed costs that are charged to our member merchants. We typically charge our member merchants fees that range from 1.5% to 2.7%.
(3)

Represents the aggregate cumulative amount charged during the year.

(4)

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

(5)

Represents ratio of credit card balances overdue by one month or more to outstanding balance. In line with industry practice, we have restructured a portion of delinquent credit card account balances as loans. As of December 31, 2014, these restructured loans amounted to ￦45 billion. Because these restructured loans are not treated as being delinquent at the time of conversion or for a period of time thereafter, our delinquency ratios may not fully reflect all delinquent amounts relating to our outstanding balances.

(6)

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

(7)

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

(8)

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

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

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

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

As of December 31, 2014, we had approximately 8.9 million credit cardholders. Of the credit cards outstanding, approximately 87.7% were active, meaning that they had been used at least once during the previous six months.

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

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are generally required to pay for their purchases within 14 to 44 days after the date of purchase, depending on their payment cycle. Except in the case of installment purchases, accounts which remain unpaid after this period are deemed to be delinquent.

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

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

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

In the second half of 2012, we (through KB Kookmin Card) commenced accounts receivable factoring activities in partnership with SK Telecom Co., Ltd., a leading Korean mobile telecommunications company, pursuant to which we purchase accounts receivable arising from SK Telecom’s installment sale of mobile handsets to its customers. The outstanding balance of factored receivables amounted to ￦2,806 billion as of December 31, 2014.

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

Corporate Banking

We lend to and take deposits from small- and medium-sized enterprises and, to a lesser extent, large corporate customers. We had over 230,000 small- and medium-sized enterprise borrowers as of December 31, 2012, over 220,000 small- and medium-sized enterprise borrowers as of December 31, 2013 and over 220,000 small- and medium-sized enterprise borrowers as of December 31, 2014, for Won-currency loans. As of December 31, 2012, 2013 and 2014, we had 1,486, 1,654 and 1,784 large corporate borrowers, respectively, for Won-currency loans. For 2012, 2013 and 2014, 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 ￦115 billion, ￦117 billion and ￦119 billion, respectively. Of our branch network as of December 31, 2014, we had eight branches that primarily handled large corporate banking.

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

As of December 31,
2012 2013 2014
(in billions of Won, except percentages)

Corporate:

Small- and medium-sized enterprise loans

￦ 70,471 70.7 % ￦ 71,045 70.7 % ￦ 71,960 71.3 %

Large corporate loans

29,212 29.3 29,489 29.3 28,918 28.7

Total

￦ 99,683 100.0 % ￦ 100,534 100.0 % ￦ 100,878 100.0 %

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

The total amount of deposits from our corporate customers amounted to ￦66,389 billion as of December 31, 2014, or 31.4% of our total deposits.

Small- and Medium-sized Enterprise Banking

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

We use the term “small- and medium-sized enterprises” as defined in the Small and Medium Industry Basic Act and related regulations. Under the amended Small and Medium Industry Basic Act, which became effective on February 3, 2015, and related regulations, an enterprise must meet each of the following criteria in order to meet the definition of a small- and medium-sized enterprise: (i) total assets at the end of the immediately preceding fiscal year must be less than ￦500 billion, (ii) the average or annual sales revenue standards as prescribed by the Enforcement Decree of the Small and Medium Industry Basic Act that are applicable to the enterprise’s primary business must be met and (iii) the standards of management independence as prescribed by the Enforcement Decree of the Small and Medium Industry Basic Act must be met. However, even if an enterprise that qualified as a small- and medium-sized enterprise under the Small and Medium Industry Basic Act prior to the amendment thereof no longer meets the definition due to such amendments, such enterprise will continue to be deemed a small- and medium-sized enterprise until March 31, 2018. Further, certified social enterprises (as defined in the Social Enterprise Promotion Act of Korea), as well as cooperatives or federations of cooperatives (as defined in the Framework Act on Cooperatives) that satisfy the requirements prescribed by the Small and Medium Industry Basic Act, may also qualify as small- and medium-sized enterprises.

Industry-wide delinquency ratios for Won-denominated loans to small- and medium-sized enterprises decreased from 2012 to 2014. However, our delinquency ratio for loans to small- and medium-sized enterprises may increase in the future as a result of, among other things, adverse economic conditions in Korea and globally. See “Item 3.D. Risk Factors—Other risks relating to our business—Difficult conditions in the global financial markets could adversely affect our results of operations and financial condition.” In addition, in light of the deteriorating financial condition and liquidity position of small- and medium-sized enterprises in Korea, the Korean government has in recent years introduced measures intended to encourage Korean banks to provide financial support to small- and medium-sized enterprise borrowers. See “Item 3.D. Risk Factors—Risks relating to our small- and medium-sized enterprise loan portfolio—We have significant exposure to small- and medium-sized enterprises, and any financial difficulties experienced by these customers may result in a deterioration of our asset quality and have an adverse impact on us.”

Lending Activities

Our principal loan products for our small- and medium-sized enterprise customers are working capital loans and facilities loans. Working capital loans are provided to finance working capital requirements and include notes discounted and trade financing. Facilities loans are provided to finance the purchase of equipment and the establishment of manufacturing assembly plants. As of December 31, 2014, working capital loans and facilities

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loans accounted for 56.7% and 43.3%, respectively, of our total small- and medium-sized enterprise loans. As of December 31, 2014, we had over 220,000 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, 2014, secured loans and guaranteed loans accounted for, in the aggregate, 86.6% of our small- and medium-sized enterprise loans. Among the secured loans, 95.9% were secured by real estate and 4.1% were secured by deposits or securities. Working capital loans generally have a maturity of one year, but may be extended for additional terms of up to one year in length for an aggregate term of five years. Facilities loans have a maximum maturity of 15 years.

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

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

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

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

Pricing

We establish the price for our corporate loan products based principally on transaction risk, our cost of funding and market considerations. Transaction risk is measured by such factors as the credit rating assigned to a particular borrower, the size of the borrower and the value and type of collateral. Our loans are priced based on the Market Opportunity Rate system, which is a periodic floating rate system that takes into account the current market interest rate. As of December 31, 2014, the Market Opportunity Rate was 2.13% for three months, 2.17% for six months and 2.18% 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.

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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, 2014, working capital loans and facilities loans accounted for 79.6% and 20.4%, respectively, of our total large corporate loans. We also offer mortgage loans to large corporate clients who build or sell single- or multi-family housing units, as described above under “—Small- and Medium-sized Enterprise Banking—Lending Activities.”

As of December 31, 2014, secured loans and guaranteed loans accounted for, in the aggregate, 18.2% of our large corporate loans. Among the secured loans, 80.4% were secured by real estate and 19.6% were secured by deposits or securities. Working capital loans generally have a maturity of one year, but may be extended for additional terms ranging from three months to one year in length for an aggregate term of five years. Facilities loans have a maximum maturity of 15 years.

In our unsecured lending to large corporate customers, a critical consideration in our policy regarding the extension of such unsecured loans is the borrower’s creditworthiness. We assign each borrower a credit rating based on the judgment of our experts or scores calculated using the appropriate credit rating system, taking into account both financial factors and non-financial factors (such as our perception of a borrower’s reliability, management and operational risk and risk relating to the borrower’s industry). The credit ratings, along with such factors, are key determinants that inform our lending to large corporate customers. Large corporate customers generally have higher credit ratings due to their higher repayment capability compared to other types of borrowers, such as small- and medium-sized enterprise borrowers. In addition, large corporate borrowers generally are affected to a lesser extent than small- and medium-sized enterprise borrowers by fluctuations in the Korean economy and also maintain more sophisticated financial records. As of December 31, 2014, 85.4% of our large corporate customers had credit ratings or BBB- or above according to the internal credit rating system of Kookmin Bank, compared to 48.4% of our small- and medium-sized enterprise customers. A credit rating of BBB- is assigned to customers whose ability to repay the principal and interest on their outstanding loans is determined by us to be generally satisfactory but nonetheless subject to adverse effects under unfavorable economic conditions or during downturns in the business environment. Based on our internal analysis of historical data, we believe that the probability of default for loans extended to large corporate customers with a credit rating of BBB- or above is between 0.00% and 2.26%.

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

As of December 31, 2014, in terms of our outstanding loan balance, 32.5% was extended to borrowers in the manufacturing industry, 27.6% of our large corporate loans was extended to borrowers in the financial institutions industry, and 21.2% was extended to borrowers in the service industry.

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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, 2014, 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.

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, 2012, 2013 and 2014, our investment portfolio, which consists primarily of held-to-maturity financial assets and available-for-sale financial assets, and our trading portfolio had a combined total carrying amount of ￦46,962 billion, ￦44,933 billion and ￦46,389 billion and represented 16.4%, 15.4% and 15.0% 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, 2012, 2013 and 2014, we held debt securities with a total carrying amount of ￦42,285 billion, ￦39,776 billion and ￦41,642 billion, respectively, of which:

•

held-to-maturity debt securities accounted for ￦12,256 billion, ￦13,017 billion and ￦12,569 billion, or 29.0%, 32.7% and 30.2%, respectively;

•

available-for-sale debt securities accounted for ￦21,737 billion, ￦18,933 billion and ￦19,360 billion, or 51.4%, 47.6% and 46.5%, respectively; and

•

debt securities at fair value through profit or loss accounted for ￦8,292 billion, ￦7,826 billion and ￦9,713 billion, or 19.6%, 19.7% and 23.3%, respectively.

Of these amounts, debt securities issued by the Korean government and government agencies as of December 31, 2012, 2013 and 2014 amounted to:

•

￦4,449 billion, ￦4,357 billion and ￦3,557 billion, or 36.3%, 33.5% and 28.3%, respectively, of our held-to-maturity debt securities;

•

￦6,256 billion, ￦6,926 billion and ￦4,702 billion, or 28.8%, 36.6% and 24.3%, respectively, of our available-for-sale debt securities; and

•

￦2,376 billion, ￦2,085 billion and ￦3,067 billion, or 28.7%, 26.6% and 31.6%, respectively, of our debt securities at fair value through profit or loss.

From time to time we also purchase equity securities for our securities portfolios. Our equity securities consist primarily of marketable beneficiary certificates and equities listed on the KRX KOSPI Market or the KRX KOSDAQ Market. As of December 31, 2012, 2013 and 2014:

•

equity securities in our available-for-sale portfolio had a carrying amount of ￦2,474 billion, ￦2,899 billion and ￦3,032 billion, or 10.2%, 13.3% and 13.5% of our available-for-sale portfolio, respectively; and

•

equity securities in our trading portfolio had a carrying amount of ￦1,035 billion, ￦1,217 billion and ￦492 billion, or 10.8%, 13.0% and 4.6% of our debt and equity trading portfolio, respectively.

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

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

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

Available-for-sale financial assets:

Debt securities

Korean treasury securities and government agencies

￦ 6,171 ￦ 87 ￦ 2 ￦ 6,256

Financial institutions (1)

7,436 40 — 7,476

Corporate (2)

6,470 139 3 6,606

Asset-backed securities

1,396 4 1 1,399

Others

— — — —

Subtotal

21,473 270 6 21,737

Equity securities

1,825 659 10 2,474

Total available-for-sale financial assets

￦ 23,298 ￦ 929 ￦ 16 ￦ 24,211

Held-to-maturity financial assets:

Korean treasury securities and government agencies

￦ 4,449 ￦ 272 ￦ 1 ￦ 4,720

Financial institutions (3)

1,316 22 — 1,338

Corporate (4)

6,213 285 — 6,498

Asset-backed securities

278 3 — 281

Total held-to-maturity financial assets

￦ 12,256 ￦ 582 ￦ 1 ￦ 12,837

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

Available-for-sale financial assets:

Debt securities

Korean treasury securities and government agencies

￦ 6,910 ￦ 30 ￦ 14 ￦ 6,926

Financial institutions (1)

5,771 15 4 5,782

Corporate (2)

4,948 57 7 4,998

Asset-backed securities

1,208 2 2 1,208

Others

19 — — 19

Subtotal

18,856 104 27 18,933

Equity securities

2,092 823 16 2,899

Total available-for-sale financial assets

￦ 20,948 ￦ 927 ￦ 43 ￦ 21,832

Held-to-maturity financial assets:

Korean treasury securities and government agencies

￦ 4,357 ￦ 180 ￦ — ￦ 4,537

Financial institutions (3)

893 9 — 902

Corporate (4)

7,400 180 — 7,580

Asset-backed securities

367 1 — 368

Total held-to-maturity financial assets

￦ 13,017 ￦ 370 ￦ — ￦ 13,387

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As of December 31, 2014
Amortized
Cost 		Gross
Unrealized Gain 		Gross
Unrealized Loss 		Fair Value
(in billions of Won)

Available-for-sale financial assets:

Debt securities

Korean treasury securities and government agencies

￦ 4,651 ￦ 54 ￦ 3 ￦ 4,702

Financial institutions (1)

6,944 38 1 6,981

Corporate (2)

6,031 90 1 6,120

Asset-backed securities

1,210 4 3 1,211

Others

342 4 — 346

Subtotal

19,178 190 8 19,360

Equity securities

1,561 1,471 — 3,032

Total available-for-sale financial assets

￦ 20,739 ￦ 1,661 ￦ 8 ￦ 22,392

Held-to-maturity financial assets:

Korean treasury securities and government agencies

￦ 3,557 ￦ 215 ￦ — ￦ 3,772

Financial institutions (3)

1,262 18 — 1,280

Corporate (4)

7,278 247 — 7,525

Asset-backed securities

472 2 — 474

Total held-to-maturity financial assets

￦ 12,569 ￦ 482 ￦ — ￦ 13,051

(1)

Includes debt securities issued by the Bank of Korea, Korea Development Bank, Korea Finance Corporation and Industrial Bank of Korea in the aggregate amount of ￦5,702 billion as of December 31, 2012, ￦4,463 billion as of December 31, 2013 and ￦5,025 billion as of December 31, 2014. These financial institutions are controlled by the Korean government.

(2)

Includes debt securities issued by Korea Electric Power Corporation, which is controlled by the Korean government, in the amount of ￦393 billion as of December 31, 2012, ￦143 billion as of December 31, 2013 and ￦114 billion as of December 31, 2014.

(3)

Includes debt securities issued by the Bank of Korea, Korea Development Bank, Korea Finance Corporation and Industrial Bank of Korea in the aggregate amount of ￦986 billion as of December 31, 2012, ￦519 billion as of December 31, 2013 and ￦1,103 billion as of December 31, 2014. These financial institutions are controlled by the Korean government.

(4)

Includes debt securities issued by Korea Electric Power Corporation, which is controlled by the Korean government, in the amount of ￦432 billion as of December 31, 2012, ￦545 billion as of December 31, 2013 and ￦553 billion as of December 31, 2014.

Derivatives Trading

Until the full-scale launch of our derivatives operations in mid-1999, we had been engaged in limited volumes of derivatives trading, mostly on behalf of our customers. Since then, our trading volume significantly increased to ￦195,879 billion in 2012 but decreased to ￦194,307 billion in 2013 and ￦154,872 billion in 2014. Our net trading revenue from derivatives for the year ended December 31, 2012, 2013 and 2014 was ￦456 billion, ￦544 billion and ￦98 billion, respectively.

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

•

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

•

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

•

stock price index options linked to the KOSPI index.

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

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The following shows the estimated fair value of our derivatives as of December 31, 2012, 2013 and 2014:

As of December 31,
2012 2013 2014
Estimated
Fair Value
Assets 		Estimated
Fair Value
Liabilities 		Estimated
Fair Value
Assets 		Estimated
Fair Value
Liabilities 		Estimated
Fair Value
Assets 		Estimated
Fair Value
Liabilities
(in billions of Won)

Foreign exchange derivatives (1)

￦ 846 ￦ 943 ￦ 938 ￦ 996 ￦ 762 ￦ 668

Interest rate derivatives (1)

1,100 1,040 766 731 1,120 1,103

Equity derivatives

74 68 47 50 62 15

Credit derivatives

— — — — — —

Commodity derivatives

— — — — — —

Others (1)

71 4 68 18 24 11

Total

￦ 2,091 ￦ 2,055 ￦ 1,819 ￦ 1,795 ￦ 1,968 ￦ 1,797

(1)

Includes those for trading purposes and hedging purposes.

The following table shows certain information related to our derivatives designated as fair value hedges for the years ended December 31, 2012, 2013 and 2014:

Year Ended December 31,
2012 2013 2014
Derivatives Hedged
Items 		Hedge
Ineffectiveness 		Derivatives Hedged
Items 		Hedge
Ineffectiveness 		Derivatives Hedged
Items 		Hedge
Ineffectiveness
(in billions of Won)

Foreign exchange derivatives

￦ (58 ) ￦ 74 ￦ 16 ￦ (11 ) ￦ 36 ￦ 25 ￦ (29 ) ￦ 46 ￦ 17

Interest rate derivatives

32 (25 ) 7 (29 ) 37 8 (4 ) 13 9

Other derivatives

11 (11 ) — (8 ) 8 — 7 (7 ) —

Total

￦ (15 ) ￦ 38 ￦ 23 ￦ (48 ) ￦ 81 ￦ 33 ￦ (26 ) ￦ 52 ￦ 26

The following table shows certain information related to our derivatives designated as cash flow hedges for the years ended December 31, 2012, 2013 and 2014:

Year Ended December 31,
2012 2013 2014
Derivatives Effective
Portion 		Ineffective
Portion 		Derivatives Effective
Portion 		Ineffective
Portion 		Derivatives Effective
Portion 		Ineffective
Portion
(in billions of Won)

Foreign exchange derivatives

￦ (22 ) ￦ (22 ) ￦ — ￦ (5 ) ￦ (5 ) ￦ — ￦ 3 ￦ 4 ￦ (1 )

Interest rate derivatives

(5 ) (5 ) — 2 2 — (11 ) (11 ) —

Total

￦ (27 ) ￦ (27 ) ￦ — ￦ (3 ) ￦ (3 ) ￦ — ￦ (8 ) ￦ (7 ) ￦ (1 )

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

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aggregate issue amount of ￦5,040 billion in 2012, ￦7,296 billion in 2013 and ￦5,524 billion in 2014, all of which were public offerings of asset-backed securities. Most of these securities were sold to institutional investors through Korean securities houses.

Call Loans

We make call loans and borrow call money in the short-term money market. Call loans are defined as short-term lending among banks and financial institutions either in Won or in foreign currencies with maturities of 90 days or less. Typically, call loans have maturities of one day. As of December 31, 2014, we had made call loans of ￦2,032 billion and borrowed call money of ￦2,882 billion, compared to ￦3,206 billion and ￦2,648 billion, respectively, as of December 31, 2013 and ￦2,534 billion and ￦2,597 billion, respectively, as of December 31, 2012.

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 2014, we generated investment banking revenue of ￦203 billion, consisting of ￦32 billion of interest income and ￦171 billion of fee income.

International Banking

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

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

As of December 31,
2012 2013 2014
(in millions of US$)

Total foreign currency assets

US$ 14,459 US$ 14,989 US$ 15,171

Foreign currency borrowings:

Debts

7,087 6,637 6,531

Debentures

2,974 3,123 2,949

Total borrowings

US$ 10,061 US$ 9,760 US$ 9,480

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The table below sets forth our overseas subsidiaries, branches and representative offices currently in operation as of December 31, 2014:

Business Unit (1)

Location

Subsidiaries

Kookmin Bank Cambodia PLC

Cambodia

Kookmin Bank (China) Ltd.

China

Kookmin Bank Hong Kong Ltd.

Hong Kong

Kookmin Bank International Ltd.

United Kingdom

Branches

Kookmin Bank (China) Ltd., Beijing Branch

China

Kookmin Bank (China) Ltd., Guangzhou Branch

China

Kookmin Bank (China) Ltd., Harbin Branch

China

Kookmin Bank (China) Ltd., Suzhou Branch

China

Kookmin Bank, Osaka Branch

Japan

Kookmin Bank, Tokyo Branch

Japan

Kookmin Bank, Auckland Branch

New Zealand

Kookmin Bank, New York Branch

United States

Kookmin Bank, Ho Chi Minh City Branch

Vietnam

Kookmin Bank Cambodia PLC, Toul Kork Branch

Cambodia

Representative Office

Kookmin Bank, Mumbai Representative Office

India

Kookmin Bank, Yangon Representative Office

Myanmar

Kookmin Bank, Hanoi Representative Office

Vietnam

(1)

Does not include subsidiaries and branches in liquidation or dissolution.

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

In March 2008, we entered into agreements to acquire shares of JSC Bank CenterCredit, a Kazakhstan bank, and acquired an initial equity stake of 29,972,840 common shares (equal to 23.0% of the then-outstanding voting shares) for approximately ￦528 billion in August 2008. Pursuant to the terms of such agreements, we acquired an aggregate of 14,163,836 additional common shares of JSC Bank CenterCredit in November and December 2008. In addition, in September 2009, we entered into agreements with International Finance Corporation and certain shareholders of JSC Bank CenterCredit pursuant to which we acquired 3,886,574 additional common shares and 36,561,465 non-voting convertible preferred shares of JSC Bank CenterCredit in January and February 2010. As of December 31, 2014, we held 29.6% of the outstanding common shares of JSC Bank CenterCredit. Our investment in JSC Bank CenterCredit is accounted for under the equity method from the initial acquisition date and we applied the purchase method to account for each acquisition.

In May 2009, we acquired 132,600 common shares of Khmer Union Bank, a Cambodian bank, for approximately ￦10 billion. As a result, we acquired 51% of the voting rights in Khmer Union Bank, which was renamed Kookmin Bank Cambodia PLC. In December 2010, July 2012 and June 2013, we acquired additional 37,602 common shares, 125,592 common shares and 24,206 common shares of Kookmin Bank Cambodia PLC, respectively. As of December 31, 2014, we held 100.0% of the outstanding common shares of Kookmin Bank Cambodia PLC. We applied the purchase method to account for the initial acquisition of Kookmin Bank Cambodia PLC in May 2009. The subsequent acquisitions in December 2010, July 2012 and June 2013 were accounted for as equity transactions.

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Trustee and Custodian Services Relating to Investment Trusts and Other Functions

We act as a trustee for 66 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 141 financial institutions and as fund administrator for 44 financial institutions with respect to various investments, as well as acting as settlement agent in connection with such services. We receive a fee for acting in these capacities and generally perform the following functions:

•

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

•

receiving and making payments in respect of such investments;

•

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

•

providing reports on assets held in custody;

•

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

•

providing fund-related administration and accounting services.

For the year ended December 31, 2014, our fee income from our trustee and custodian services was ￦24 billion and revenue collected as a result of administration of the underlying investments was ￦6 billion.

Other Businesses

Trust Account Management Services

Money Trust Management Services

We provide trust account management services for both specified money trusts and unspecified money trusts. We receive fees for our trust account management services consisting of basic fees that are based upon a percentage of either the net asset value of the assets or the principal under management and, for certain types of trust account operations, performance fees that are based upon the performance of the trust account operations. In 2014, our basic fees ranged from 0.1% to 2.0% of total assets under management depending on the type of trust account. We also charge performance fees with respect to certain types of trust account products. We receive penalty payments when customers terminate their trust accounts prior to the original contract maturity.

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

Under Korean law, the assets of our trust accounts are segregated from our banking account assets and are not available to satisfy the claims of any of our potential creditors. We are, however, permitted to deposit surplus funds generated by trust assets into our banking accounts in certain circumstances as set forth under the Trust Act of Korea.

As of December 31, 2014, the total balance of our money trusts was ￦29,041 billion (as calculated in accordance with Statement of Korea Accounting Standard No. 5004, Trust Accounts , and the Enforcement Regulations of Financial Investment Services under the Financial Investment Services and Capital Markets Act, which we refer to as an “SKAS basis”). As for unspecified money trust accounts, we have investment discretion over all money trusts, which are pooled and managed jointly for each type of trust account. Specified money trust accounts are established on behalf of individual customers who direct our investment of trust assets.

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

As of December 31,
2012 2013 2014
(in billions of Won)

Principal and interest guaranteed trusts (1)

￦ 0.2 ￦ 0.2 ￦ 0.2

Principal guaranteed trusts (1)

2,919 3,070 3,187

Performance trusts (1)(2)

18,066 20,842 25,854

Total

￦ 20,985 ￦ 23,912 ￦ 29,041

(1)

Calculated on an SKAS basis.

(2)

Trusts which are primarily non-guaranteed.

The balance of our money trusts increased 38.4% between December 31, 2012 and December 31, 2014. As of December 31, 2014, the trust assets we managed consisted principally of securities investments and loans from the trust accounts. As of December 31, 2014, on an SKAS basis, our trust accounts had invested in securities in the aggregate amount of ￦15,906 billion, of which ￦13,972 billion was debt securities and derivative-linked securities. Securities investments consist of government-related debt securities, corporate debt securities, including bonds and commercial paper, equity securities, derivative-linked securities and other securities. Loans made by our trust account operations are similar in type to the loans made by our bank account operations. As of December 31, 2014, on an SKAS basis, our trust accounts had made loans in the principal amount of ￦152 billion (excluding loans from the trust accounts to our banking accounts of ￦948 billion), which accounted for 0.52% 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, 2014, substantially all loans from our money trust accounts were collateralized or guaranteed.

Our money trust accounts also invest, to a lesser extent, in equity securities, including beneficiary certificates issued by financial investment companies with a collective investment license. On an SKAS basis, as of December 31, 2014, equity securities in our money trust accounts amounted to ￦1,934 billion, which accounted for 6.6% of our total money trust assets. Of this amount, ￦1,883 billion was from specified money trusts and ￦51 billion was from unspecified money trusts.

We continue to offer pension-type money trusts that provide a guarantee of the principal amount of the investment. On an SKAS basis, as of December 31, 2014, the balance of the money trusts for which we guaranteed the principal was ￦3,187 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 2012, 2013 and 2014, we made no payment from our banking accounts to cover shortfalls in our guaranteed trusts. On an SKAS basis, we derived trust fees with regard to trust account management services (including those fees related to property trust management services) of ￦136 billion in 2012, ￦131 billion in 2013 and ￦198 billion in 2014.

Property Trust Management Services

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

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In 2014, our property trust fees ranged from 0.001% to 0.3% of total assets under management depending on the type of trust accounts. On an SKAS basis, as of December 31, 2014, the aggregate balance of our property trusts increased to ￦1,879 billion, compared to ￦1,377 billion as of December 31, 2013 and ￦1,171 billion as of December 2012.

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

Investment Trust Management

Through KB Asset Management, we offer investment trust products to customers and manage the funds invested by them in investment trusts. As of December 31, 2014, KB Asset Management had ￦27,780 billion of assets under management.

Management of the National Housing Fund

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

In February 2013, the Ministry of Land, Infrastructure and Transport (formerly the Ministry of Land, Transport and Maritime Affairs) designated us as one of the managers of the National Housing Fund. During the five years preceding such designation, we chose not to participate in the bidding process to become a designated manager of the National Housing Fund and only managed pre-existing Fund accounts. In return for managing such pre-existing Fund accounts, we received quarterly fund management fees, calculated based on activity levels for the relevant quarter. In 2014, we received total fees of ￦23 billion for managing the National Housing Fund, compared to ￦28 billion in each of 2013 and 2012.

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

Bancassurance

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

Currently, our bancassurance business has alliances with 17 life insurance companies (including our subsidiary, KB Life Insurance) and nine non-life insurance companies and offers 66 different products through our branch network. These products are composed of 43 types of life insurance policies such as annuities, savings insurance and variable life insurance, and 23 types of non-life insurance products. In 2014, our commission income from our bancassurance business amounted to ￦97 billion.

Insurance

Through KB Life Insurance Co., Ltd., we offer a variety of individual and group life insurance products, including annuities, savings insurance, variable life insurance, whole life insurance and term life insurance as well as health insurance. KB Life Insurance utilizes its multi-channel distribution platform to market these products, which includes sales through agents, financial consultants, telemarketers and bancassurance arrangements with commercial banks and other financial institutions.

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In June 2014, we entered into a share purchase agreement, which was amended in March 2015, to acquire a 19.47% stake in LIG Insurance Co., Ltd., a publicly listed Korean property and casualty insurance company, and will be required under applicable Korean law to increase our shareholding in LIG Insurance to at least 30% within one year from the date of such acquisition. LIG Insurance provides non-life insurance products, including automobile insurance, property insurance, marine insurance, fire insurance, accident insurance and casualty insurance, as well as long-term care insurance. We expect to achieve synergies between KB Life Insurance and LIG Insurance through cross-selling our life and non-life insurance products and expanding our customer base.

Consumer Finance

We provide consumer finance services through KB Capital Co., Ltd. We acquired 52.02% of the outstanding shares of KB Capital (formerly known as Woori Financial Co., Ltd.) in March 2014. KB Capital provides leasing services and installment finance services for various products, including automobiles, heavy machineries and medical equipment, as well as microlending services. We expect KB Capital to continue to expand our customer base by providing a variety of non-banking financial services to retail customers, as well as synergies through coordinated business operations with our other subsidiaries, including Kookmin Bank.

Distribution Channels

Banking Branch Network

As of December 31, 2014, Kookmin Bank operated a network of 1,161 branches and sub-branches in Korea, which was one of the largest branch networks 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 37.0% of our branches and sub-branches are located in Seoul, and approximately 23.4% of our branches are located in the six next largest cities. The following table presents the geographical distribution of our branch network in Korea as of December 31, 2014:

Area

Number of
Branches 		Percentage

Seoul

429 37.0 %

Six largest cities (other than Seoul)

272 23.4

Other

460 39.6

Total

1,161 100.0 %

In addition, we have continued to implement the specialization of our branch functions. Of our branch network as of December 31, 2014, we had eight branches that primarily handled large corporate banking.

In order to support our branch network, we have established an extensive network of ATMs, which are located in branches and in unmanned outlets known as “autobanks.” As of December 31, 2014, we had 9,265 ATMs.

We have actively promoted the use of these distribution outlets in order to provide convenient service to customers, as well as to maximize the marketing and sales functions at the branch level, reduce employee costs and improve profitability. The aggregate number of transactions conducted using our ATMs amounted to approximately 640 million in 2012, 606 million in 2013 and 573 million in 2014.

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Other Distribution Channels

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

For the Year Ended December 31,
2012 2013 2014

Internet banking:

Number of users (1)

14,049,444 15,634,113 16,767,588

Number of transactions (thousands) (2)

4,117,653 5,024,132 4,569,185

Phone banking:

Number of users (3)

4,766,251 4,870,204 4,914,616

Number of transactions (thousands) (2)

213,941 183,434 165,130

Smartphone banking:

Number of users (4)

5,460,955 8,002,176 9,484,234

Number of transactions (thousands) (2)

3,377,862 6,554,649 7,504,638

(1)

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

(2)

Number of transactions includes balance and transaction inquiries, fund transfers and other transactions.

(3)

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

(4)

Number of users is defined as the total cumulative number of retail customers who have registered through our branch offices, or the customers’ smartphones, to use our smartphone banking services.

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, pre-set automatic transfers, product inquiries, on-line bill payments and foreign exchange services;

•

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

•

processing of loan applications;

•

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

•

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

Phone Banking

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

•

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

•

allow our customers to conduct transactions with respect to their accounts, such as balance and transfer inquiries, transfers or payments and opening accounts; and

•

conduct telemarketing to our customers or potential customers to advertise products or services.

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Smartphone Banking

“KB Star Banking,” our mobile banking application for smartphones, allows our customers the flexibility to conduct a variety of financial transactions, including balance and transaction inquiries, fund transfers and asset management, anywhere at any time. Our smartphone banking services currently include:

•

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

•

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

•

processing of loan applications and bancassurance services.

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.

Competition

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

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

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

In addition, the Korean financial industry is undergoing significant consolidation. The number of nationwide commercial banks in Korea has decreased from 16 as of December 31, 1997, to seven banks and five financial holding companies as of December 31, 2014. Furthermore, a number of significant mergers and acquisitions in the industry have taken place in Korea over the past decade, including the acquisition of Koram Bank by an affiliate of Citibank in 2004, Standard Chartered Bank’s acquisition of Korea First Bank in April 2005, Chohung Bank’s merger with Shinhan Bank in April 2006, Hana Financial Group’s acquisition of a controlling interest in Korea Exchange Bank in February 2012 and the proposed merger of Hana Bank into Korea Exchange Bank in the second half of 2015. Moreover, as part of the Korean government’s plans to privatize Woori Finance Holdings Co., Ltd. (the financial holding company of Woori Bank), certain subsidiaries of Woori Finance Holdings Co., Ltd. were sold to other financial institutions and Woori Finance Holdings Co., Ltd. itself was merged into Woori Bank in 2014. We expect that consolidation in the financial industry will continue. The

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financial institutions resulting from such consolidation may, by virtue of their increased size and business scope, provide significantly greater competition for us. We intend to review potential acquisition opportunities as they arise. We cannot guarantee that we will not be involved in any future mergers or acquisitions.

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

Information Technology

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

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

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

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

In 2014, we spent approximately ￦478 billion for our IT systems, including expenses related to the construction of new IT systems, implementation of hardware and software technologies and other new systems. As of December 31, 2014, we employed a total of 973 full-time employees in our IT operations.

Assets and Liabilities

The tables below set out selected financial highlights regarding our banking operations and individual assets and liabilities. Except as otherwise indicated, amounts as of and for the years ended December 31, 2010, 2011, 2012, 2013 and 2014 are presented on a consolidated basis under IFRS.

Loan Portfolio

As of December 31, 2014, our total loan portfolio was ￦233,902 billion compared to ￦221,862 billion as of December 31, 2013 and ￦216,914 billion as of December 31, 2012. As of December 31, 2014, 94.8% of our total loans were Won-denominated loans compared to 94.6% as of December 31, 2013 and 94.4% as of December 31, 2012.

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Loan Types

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

As of December 31,
2010 2011 2012 2013 2014
(in billions of Won)

Domestic:

Corporate

Small- and medium-sized enterprise

￦ 65,132 ￦ 68,730 ￦ 70,471 ￦ 71,045 ￦ 71,960

Large corporate (1)

23,143 28,509 29,212 29,489 28,918

Retail

Mortgage and home equity

71,715 75,580 74,463 77,969 86,994

Other consumer

27,281 28,275 28,969 29,675 32,255

Credit cards

12,413 12,421 11,874 11,784 11,632

Total domestic

199,684 213,515 214,989 219,962 231,759

Foreign

1,693 2,040 1,925 1,900 2,143

Total gross loans

￦ 201,377 ￦ 215,555 ￦ 216,914 ￦ 221,862 ￦ 233,902

(1)

Large corporate loans include ￦53 billion, ￦35 billion, ￦33 billion, ￦132 billion and ￦191 billion of loans to the Korean government and government related agencies (including the Korea Deposit Insurance Corporation) as of December 31, 2010, 2011, 2012, 2013 and 2014, respectively.

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.

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20 Largest Exposures by Borrower

As of December 31, 2014, our 20 largest exposures totaled ￦11,309 billion and accounted for 3.9% of our total exposures. The following table sets forth, as of December 31, 2014, our total exposures to these top 20 borrowers or issuers:



Loans 		Guarantees
and
Acceptances 		Amounts
Classified
as
Impaired
Loans

Company (1)

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

Daewoo Shipbuilding & Marine Engineering Co., Ltd.

￦ 22 ￦ 180 ￦ — ￦ — ￦ 963 ￦ 1,165 ￦ —

Mizuho Bank, Ltd.

— 984 — — — 984 —

POSCO

— 77 489 205 — 771 —

Samsung Heavy Industries Co., Ltd.

— — — 10 715 725 —

Korea Securities Finance Corp.

— 500 154 30 — 684 —

Hyundai Capital Services Inc.

330 — — 294 — 624 —

Hyundai Steel Company

224 239 — 24 136 623 —

National Agricultural Cooperative Federation

— — — 616 — 616 —

Hyundai Heavy Industries Co., Ltd.

— 267 3 — 331 601 —

Daewoo International Corporation

— 255 1 35 215 506 —

Woori Bank

— 133 3 338 — 474 —

Shinhan Bank

— 102 — 353 — 455 —

SK C&C Co., Ltd.

— — 438 — — 438 —

Seoul Metropolitan Rapid Transit Corp.

— — — 430 — 430 —

NongHyup Bank

30 37 — 337 — 404 —

LG Electronics Inc.

390 — 3 6 — 399 —

SK Energy Co., Ltd.

— 111 — 91 178 380 —

Hyundai Securities Co., Ltd.

— 100 257 — — 357 —

Bank of China Limited

— 341 — — — 341 —

Korean Airlines Co., Ltd.

1 75 — 12 244 332 —

Total

￦ 997 ￦ 3,401 ￦ 1,348 ￦ 2,781 ￦ 2,782 ￦ 11,309 ￦ —

(1)

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

As of December 31, 2014, 12 of these top 20 borrowers or issuers were companies belonging to the 42 largest chaebols in Korea designated as such by the Financial Supervisory Service based on their outstanding exposures.

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Exposure to Chaebols

As of December 31, 2014, 7.5% of our total exposure was to the 42 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, 2014, our total exposures to the ten chaebol groups to which we have the largest exposure:

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

Chaebol

Won
Currency 		Foreign
Currency
(in billions of Won)

Hyundai Motor (1)

￦ 887 ￦ 521 ￦ 11 ￦ 766 ￦ 801 ￦ 2,986 ￦ —

Samsung (2)

307 645 119 581 1,157 2,809 —

SK (3)

237 654 449 417 498 2,255 —

POSCO (4)

173 331 525 261 236 1,526 —

Daewoo Shipbuilding & Marine Engineering (5)

45 178 — — 964 1,187 —

Hyundai Heavy Industries (6)

43 322 47 — 768 1,180 —

LG (7)

631 117 11 163 28 950 —

Hanwha (8)

595 40 144 6 111 896 —

GS (9)

89 128 2 288 327 834 —

Lotte (10)

255 48 25 399 84 811 —

Total

￦ 3,262 ￦ 2,984 ￦ 1,333 ￦ 2,881 ￦ 4,974 ￦ 15,434 ￦ —

(1)

Includes principally Hyundai Capital Services Inc., Hyundai Steel Company and Hyundai Engineering & Construction Co., Ltd.

(2)

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

(3)

Includes principally SK C&C Co., Ltd., SK Energy Co., Ltd. and SK Networks Co., Ltd.

(4)

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

(5)

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

(6)

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

(7)

Includes principally LG Electronics Inc., LG Chem, Ltd. and LG Uplus Corp.

(8)

Includes principally Hanwha Engineering & Construction Corp., Hanwha Corporation and Hanwha Advanced Materials Corporation.

(9)

Includes principally GS Engineering & Construction Corporation, GS Caltex Corporation, and GS Holdings Corp.

(10)

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

Loan Concentration by Industry

The following table presents the aggregate balance of our domestic and foreign corporate loans, by industry concentration, as of December 31, 2012, 2013 and 2014:

As of December 31,
2012 2013 2014

Industry

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

Services

￦ 38,650 38.1 % ￦ 38,375 37.5 % ￦ 39,385 38.2 %

Manufacturing

31,320 30.8 31,161 30.5 32,694 31.7

Wholesale and retail

15,124 14.9 13,874 13.6 13,287 12.9

Financial institutions

7,291 7.2 10,524 10.3 9,117 8.9

Construction

4,689 4.6 4,428 4.3 3,862 3.8

Public sector

520 0.5 655 0.6 755 0.7

Others

3,941 3.9 3,318 3.2 3,871 3.8

Total

￦ 101,535 100.0 % ￦ 102,335 100.0 % ￦ 102,971 100.0 %

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Maturity Analysis

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

The following table sets out the scheduled maturities (time remaining until maturity) of our loan portfolio as of December 31, 2014. The amounts disclosed are before deduction of allowances for loan losses:

1 Year or
Less 		Over 1 Year
But Not More
Than 5 Years 		Over 5 Years Total
(in billions of Won)

Domestic:

Corporate

Small- and medium-sized enterprises

￦ 52,276 ￦ 13,940 ￦ 5,744 ￦ 71,960

Large corporate

20,454 5,721 2,743 28,918

Total corporate

72,730 19,661 8,487 100,878

Retail

Mortgage and home equity

7,547 6,171 73,276 86,994

Other consumer

18,019 10,699 3,537 32,255

Total retail

25,566 16,870 76,813 119,249

Credit cards

10,249 1,181 202 11,632

Total domestic

108,545 37,712 85,502 231,759

Foreign:

1,789 264 90 2,143

Total gross loans

￦ 110,334 ￦ 37,976 ￦ 85,592 ￦ 233,902

Interest Rate Sensitivity

The following table shows, as of December 31, 2014, the total amount of loans due after one year, which have fixed interest rates and variable or adjustable interest rates:

As of
December 31, 2014
(in billions of Won)

Fixed rate (1)

￦ 19,207

Variable or adjustable rates (2)

104,361

Total gross loans

￦ 123,568

(1)

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

(2)

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

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

Credit Exposures to Companies in Workout, Restructuring or Rehabilitation

Workout is a voluntary procedure through which we, together with the borrower and other creditors, restore the borrower’s financial stability and viability. Previously, workouts were regulated under the prior Corporate

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Restructuring Promotion Act, which expired on December 31, 2013. In December 2013, the National Assembly of Korea adopted another Corporate Restructuring Promotion Act, or the New Corporate Restructuring Promotion Act, which became effective on January 1, 2014. Workouts that had been initiated under the Corporate Restructuring Promotion Act are also governed by the New Corporate Restructuring Promotion Act effective from January 1, 2014. Under the New Corporate Restructuring Promotion Act, which is similar to the Corporate Restructuring Promotion Act, all creditor financial institutions of a financially troubled borrower are required to participate in a creditors’ committee which is authorized to prohibit such creditor financial institutions from exercising their rights against the borrower, commencing workout procedures or approving a reorganization plan prepared by the borrower. Any decision of the creditors’ committee requires the approval of creditor financial institutions holding not less than 75% of the total debt outstanding of a borrower. An additional approval of creditor financial institutions holding not less than 75% of the secured debt is required with respect to the borrower’s debt restructuring. Once approved, any decision made by the creditors’ committee is binding on all the creditor financial institutions of the borrower. Creditor financial institutions that voted against commencement of workout, debt restructuring or granting of new credit have the right to request the creditor financial institutions that voted in favor of such matters to purchase their claims at a mutually agreed price. In the event that the parties are not able to agree on the terms of purchase, a coordination committee consisting of experts would determine the terms. The creditor financial institutions that oppose a decision made by the coordination committee may request a court to change such decision. The New Corporate Restructuring Promotion Act is scheduled to expire on December 31, 2015.

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

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

A portion of our loans to and debt securities of corporate customers are currently in workout, restructuring or rehabilitation. As of December 31, 2014, ￦683 billion or 0.2% of our total loans and debt securities were in workout, restructuring or rehabilitation. This included ￦309 billion of loans to and debt securities of large corporate borrowers and ￦374 billion of loans to and debt securities of small- and medium-sized enterprises.

The following table shows, as of December 31, 2014, our ten largest exposures that were in workout, restructuring or rehabilitation:

Loans Guarantees
and
Acceptances 		Amounts
Classified as
Impaired
Loans

Company

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

Orient Shipyard Co., Ltd.

￦ 53 ￦ 2 ￦ — ￦ — ￦ 65 ￦ 120 ￦ 56

Kumho Industrial Co., Ltd.

58 — 26 — 13 97 58

Dongmoon Construction Co., Ltd.

65 — — — — 65 65

Keangnam Enterprises, Ltd.

41 — 6 — 1 48 41

Samho International Co., Ltd.

31 — 12 5 — 48 31

Dongil Construction Co., Ltd.

42 — — — — 42 42

Hongwon Paper Mfg. Co., Ltd.

9 7 — — 1 17 15

Hyundai Cement Co., Ltd.

1 — 15 — — 16 1

Young Gwang Stainless Co., Ltd.

1 9 — — 3 13 9

SolarPark Korea Co., Ltd.

13 — — — — 13 13

Total

￦ 314 ￦ 18 ￦ 59 ￦ 5 ￦ 83 ￦ 479 ￦ 331

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Provisioning Policy

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

We generally consider the following loans to be impaired loans:

•

loans that are past due by 90 days or more;

•

loans that are subject to legal proceedings related to collection;

•

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

•

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

•

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

•

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

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

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

Loan Aging Schedule

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

As of December 31,

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

2010

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

2011

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

2012

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

2013

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

2014

232,159 99.2 675 0.3 385 0.2 683 0.3 233,902

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Non-Accrual Loans and Past Due Accruing Loans

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

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

Interest foregone is the interest due on non-accrual loans that has not been accrued in our books of account. For the year ended December 31, 2014, we would have recorded gross interest income of ￦275 billion compared to ￦332 billion for the year ended December 31, 2013, ￦309 billion for the year ended December 31, 2012, ￦336 billion for the year ended December 31, 2011 and ￦328 billion for the year ended December 31, 2010 on loans accounted for on a non-accrual basis throughout the year, or since origination for loans held for part of the year, had we not foregone interest on those loans. The amount of interest income on those loans that was included in our profit for the years ended December 31, 2010, 2011, 2012, 2013 and 2014 was ￦194 billion, ￦192 billion, ￦187 billion, ￦206 billion and ￦175 billion, respectively.

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

As of December 31,
2010 2011 2012 2013 2014
(in billions of Won)

Loans accounted for on a non-accrual basis

Corporate

￦ 2,466 ￦ 2,021 ￦ 1,851 ￦ 2,220 ￦ 1,673

Consumer

1,012 1,200 1,290 1,253 1,022

Sub-total

3,478 3,221 3,141 3,473 2,695

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

Corporate

5 4 84 98 39

Consumer

28 45 97 116 72

Sub-total

33 49 181 214 111

Total

￦ 3,511 ￦ 3,270 ￦ 3,322 ￦ 3,687 ￦ 2,806

Troubled Debt Restructurings

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

As of December 31,
2010 2011 2012 2013 2014
(in billions of Won)

Loans classified as “troubled debt restructurings”

￦ 573 ￦ 412 ￦ 465 ￦ 269 ￦ 256

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For 2014, interest income that would have been recorded under the original contract terms of restructured loans amounted to ￦30 billion, out of which ￦16 billion was reflected as interest income during 2014.

Potential Problem Loans

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

As of December 31, 2014, we had ￦2,490 billion of potential problem loans.

Other Problematic Interest Earning Assets

We have certain other interest earning assets received in connection with troubled debt restructurings that, if they were loans, would be required to be disclosed as part of the non-accrual, past due or restructuring or potential problem loan disclosures provided above. As of December 31, 2010, 2011, 2012, 2013 and 2014, we did not have any debt securities received in connection with troubled debt restructurings on which interest was past due.

Non-Performing Loans

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

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

As of December 31,
2010 2011 2012 2013 2014
(in billions of Won, except percentages)

Total non-performing loans

￦ 1,612 ￦ 1,180 ￦ 1,606 ￦ 1,421 ￦ 1,068

As a percentage of total loans

0.8 % 0.5 % 0.7 % 0.6 % 0.5 %

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Analysis of Non-Performing Loans

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

As of December 31,
2010 2011 2012 2013 2014
Amount % Amount % Amount % Amount % Amount %
(in billions of Won, except percentages)

Domestic:

Corporate

Small- and medium sized enterprise

￦ 686 42.5 % ￦ 373 31.6 % ￦ 680 42.4 % ￦ 568 40.0 % ￦ 373 34.9 %

Large corporate

241 15.0 84 7.1 97 6.0 158 11.1 137 12.8

Total corporate

927 57.5 457 38.7 777 48.4 726 51.1 510 47.7

Retail

Mortgage and home equity

478 29.7 510 43.2 625 38.9 394 27.7 209 19.6

Other consumer

163 10.1 132 11.2 137 8.5 152 10.7 186 17.4

Total retail

641 39.8 642 54.4 762 47.4 546 38.4 395 37.0

Credit cards

39 2.4 62 5.3 47 2.9 107 7.5 99 9.3

Total domestic

1,607 99.7 1,161 98.4 1,586 98.7 1,379 97.0 1,004 94.0

Foreign:

5 0.3 19 1.6 20 1.3 42 3.0 64 6.0

Total non-performing loans

￦ 1,612 100.0 % ￦ 1,180 100.0 % ￦ 1,606 100.0 % ￦ 1,421 100.0 % ￦ 1,068 100.0 %

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Top 20 Non-Performing Loans

As of December 31, 2014, our 20 largest non-performing loans accounted for 28.5% of our total non-performing loan portfolio. The following table shows, as of December 31, 2014, certain information regarding our 20 largest non-performing loans:

Industry Gross Principal
Outstanding 		Allowances for
Loan  Losses (1)
(in billions of Won)

Borrower A

Services ￦ 63 ￦ 7

Borrower B

Construction 37 23

Borrower C

Services 25 2

Borrower D

Services 24 8

Borrower E

Manufacturing 22 2

Borrower F

Manufacturing 18 —

Borrower G

Construction 17 4

Borrower H

Financial institutions 15 15

Borrower I

Manufacturing 10 1

Borrower J

Manufacturing 9 9

Borrower K

Others 9 —

Borrower L

Financial institutions 9 9

Borrower M

Others 8 —

Borrower N

Services 8 1

Borrower O

Others 7 1

Borrower P

Construction 7 —

Borrower Q

Construction 4 4

Borrower R

Manufacturing 4 4

Borrower S

Construction 4 —

Borrower T

Wholesale and retail 4 —

Total

￦ 304 ￦ 90

(1)

If the estimated recovery value of collateral for a non-performing loan is sufficient compared to the outstanding loan balance, we record no allowances for loan losses for such non-performing loan.

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;

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•

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 Division, actual recovery efforts on non-performing loans are handled at the operating branch level.

In addition, we use the services of our wholly-owned loan collection subsidiary, KB Credit Information Co., Ltd., which receives payments from recoveries made on charged-off loans and certain loans that are overdue for over three months (28 days on average in the case of credit card loans). KB Credit Information has over 140 employees, including legal experts and management employees. The fees that it receives are based on the amounts of non-performing and charged off loans that are recovered. In 2012, 2013 and 2014, the amount recovered was ￦589 billion, ￦473 billion and ￦443 billion, respectively.

Methods for resolving non-performing loans include the following:

•

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

•

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

•

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

•

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

•

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

•

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

•

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

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

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

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

•

selling our non-performing loans to third parties, including the Korea Asset Management Corporation; and

•

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

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

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Pursuant to a memorandum of understanding among the Financial Supervisory Service and seven banks, including Kookmin Bank, a private equity fund was established in June 2011 to acquire approximately ￦1.2 trillion of non-performing bank loans to construction companies in workout, restructuring or rehabilitation. The general partner of the fund is United Asset Management Corp. and the limited partners consist of the seven banks and other investors. The fund purchases non-performing bank loans at market price and the funds required to purchase such loans are contributed or lent by the same banks that sell such loans to the fund. In June 2011, we agreed to make a capital commitment of ￦148 billion and provide a ￦109 billion revolving loan facility to the fund. From June to December 2011, we contributed the entire amount of our capital commitment to the fund in connection with its purchase of ￦148 billion of non-performing loans from us. In September 2012, we agreed to increase our capital commitment to ￦241 billion. From September to December 2012, we contributed ￦44 billion to the fund. Our revolving loan facility to the fund was decreased to ￦55 billion in 2013 and terminated in 2014. We have made no additional capital commitments to the fund in 2013 or 2014.

Allocation and Analysis of Allowances for Loan Losses

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

As of December 31,
2010 2011 2012 2013 2014
Amount % Amount % Amount % Amount % Amount %
(in billions of Won, except percentages)

Domestic:

Corporate

Small- and medium sized enterprise

￦ 2,028 54.0 % ￦ 1,533 44.4 % ￦ 1,234 37.7 % ￦ 1,023 35.8 % ￦ 819 33.4 %

Large corporate

863 23.0 910 26.4 999 30.6 785 27.4 656 26.8

Total corporate

2,891 77.0 2,443 70.8 2,233 68.3 1,808 63.2 1,475 60.2 %

Retail

Mortgage and home equity

88 2.3 111 3.2 123 3.8 93 3.3 48 2.0

Other consumer

432 11.5 524 15.2 565 17.2 486 17.0 488 19.9

Total retail

520 13.8 635 18.4 688 21.0 579 20.3 536 21.9

Credit cards

328 8.7 350 10.2 329 10.1 410 14.3 390 15.9

Total domestic

3,739 99.5 3,428 99.4 3,250 99.4 2,797 97.8 2,401 97.9

Foreign (1) :

17 0.5 20 0.6 19 0.6 64 2.2 51 2.1

Total allowances for loan losses

￦ 3,756 100.0 % ￦ 3,448 100.0 % ￦ 3,269 100.0 % ￦ 2,861 100.0 % ￦ 2,452 100.0 %

(1)

Consists primarily of loans to corporations.

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

Year Ended December 31,
2010 2011 2012 2013 2014
(in billions of Won, except percentages)

Balance at the beginning of the period

￦ 3,269 ￦ 3,756 ￦ 3,448 ￦ 3,269 ￦ 2,861

Amounts charged against income

2,464 1,645 1,653 1,427 1,211

Sale

(193 ) (240 ) (105 ) (84 ) (72 )

Gross charge-offs:

Domestic:

Corporate

Small- and medium-sized enterprise

1,541 1,274 943 691 746

Large corporate

55 204 260 454 326

Retail

Mortgage and home equity

37 20 62 134 149

Other consumer

237 267 391 447 425

Credit cards

389 413 541 404 427

Foreign:

20 3 — 2 18

Total gross charge-offs

(2,279 ) (2,181 ) (2,197 ) (2,132 ) (2,091 )

Recoveries:

Domestic:

Corporate

Small-and medium-sized enterprise

133 162 149 145 259

Large corporate

1 6 9 — —

Retail

Mortgage and home equity

14 13 7 22 31

Other consumer

114 104 97 105 109

Credit cards

246 204 185 141 131

Foreign:

4 1 3 2 1

Total recoveries

512 490 450 415 531

Net charge-offs

(1,767 ) (1,691 ) (1,747 ) (1,717 ) (1,560 )

Other charges (1)

(17 ) (22 ) 20 (34 ) 12

Balance at the end of the period

￦ 3,756 ￦ 3,448 ￦ 3,269 ￦ 2,861 ￦ 2,452

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

0.9 % 0.8 % 0.8 % 0.8 % 0.7 %

(1)

The amount for 2014 reflects an increase in allowances for loan losses of ￦83 billion attributable to the addition of KB Capital Co., Ltd. as a consolidated subsidiary in March 2014.

R egulatory Reserve for Credit Losses

If our allowances for credit losses are deemed insufficient for regulatory purposes, we are required to compensate for the difference by recording a regulatory reserve for credit losses, which is segregated within our retained earnings. Regulatory reserve for credit losses are not available for distribution to shareholders as dividends. The level of regulatory reserve for credit losses required to be recorded is equal to the amount by which our allowances for credit losses under IFRS are less than the greater of (x) the amount of expected loss calculated using the internal ratings-based approach under Basel III and as approved by the Financial Supervisory Service and (y) the required amount of credit loss reserve calculated based on standards prescribed by the Financial Services Commission. As of December 31, 2014, our regulatory reserve for credit losses was ￦2,456 billion.

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The following tables set forth the Financial Services Commission’s guidelines for the classification of loans and the minimum percentages of the outstanding principal amount of the relevant loans or balances that the credit loss reserve must cover:

Loan Classification

Loan Characteristics

Normal Loans extended to customers that, based on our consideration of their business, financial position and future cash flows, do not raise concerns regarding their ability to repay the loans.
Precautionary Loans extended to customers that (i) based on our consideration of their business, financial position and future cash flows, show potential risks with respect to their ability to repay the loans, although showing no immediate default risk or (ii) are in arrears for one month or more but less than three months.
Substandard

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

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

Doubtful

Loans exceeding the amount that we expect to collect of total loans to customers that:

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

(ii) have been in arrears for three months or more but less than twelve months.

Estimated loss

Loans exceeding the amount that we expect to collect of total loans to customers that:

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

(ii) have been in arrears for twelve months or more; or

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

Loan Classifications

Corporate (1) Consumer Credit Card
Balances (2) 		Credit Card
Loans (3)

Normal

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

Precautionary

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

Substandard

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

Doubtful

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

Estimated loss

100% 100% 100% 100%

(1)

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

(2)

Applicable for credit card balances from general purchases.

(3)

Applicable for cash advances, card loans and revolving credit card assets.

Loan Charge-Offs

Basic Principles

We attempt to minimize loans to be charged off by adhering to a sound credit approval process based on credit risk analysis prior to extending loans and a systematic management of outstanding loans. However, if charge-offs are necessary, we charge off loans subject to our charge-off policy at an early stage in order to maximize accounting transparency, to minimize any waste of resources in managing loans which have a low probability of being collected and to reduce our non-performing loan ratio.

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Loans To Be Charged Off

Loans are charged off if they are deemed to be uncollectible by falling under any of the following categories:

•

loans for which collection is not foreseeable due to insolvency, bankruptcy, compulsory execution, disorganization, dissolution or the shutting down of the business of the debtor;

•

loans for which collection is not foreseeable due to the death or disappearance of the debtor;

•

loans for which expenses of collection exceed the collectable amount;

•

loans on which collection is not possible through legal or any other means;

•

payments in arrears in respect of credit cards that have been overdue for a period of six months or more and have been classified as expected loss (excluding instances where there has been partial payment of the overdue balance, where a related balance is not overdue or where a charge off is not possible due to Korean regulations); and

•

the portion of loans classified as “estimated loss,” net of any recovery from collateral, which is deemed to be uncollectible.

Procedure for Charge-off Approval

In order to charge off corporate loans, an application for a charge-off must be submitted to Kookmin Bank’s Credit Management Department promptly after the corporate loan is classified as estimated loss or deemed uncollectible. The Credit Management Department refers the charge-off application to Kookmin Bank’s Branch Audit Department for their review to ensure compliance with our internal procedures for charge-offs. Then, the Credit Management Department, after reviewing the application to confirm that it meets relevant requirements, seeks an approval from the Financial Supervisory Service for our charge-offs, which is typically granted. Once we receive approval from the Financial Supervisory Service, we must also obtain approval from our senior management to charge off those loans. For accounting purposes, we recognize charge-offs of corporate loans under IFRS prior to approval from the Financial Supervisory Service.

With respect to credit card balances and unsecured retail loans, we follow a different process to determine which credit card balances and unsecured retail loans should be charged off, based on the length of time those loans or balances are past due. We charge off unsecured retail loans deemed to be uncollectible and credit card balances which have been overdue for a period of six months or more or which have been deemed to be uncollectible under IFRS.

Treatment of Loans Charged Off

Once loans are charged off, we classify them as charged-off loans and remove them from our balance sheet. These loans are managed based on a different set of procedures. We continue our collection efforts in respect of these loans, including through our subsidiary, KB Credit Information, although loans may be charged off before we begin collection efforts in some circumstances.

If a collateralized loan is overdue, we will, typically within one year from the time that such loan became overdue (or after a longer period in certain circumstances), petition a court to foreclose and sell the collateral through a court-supervised auction. If a debtor ultimately fails to repay and the court grants its approval for foreclosure, we will sell the collateral, net of expenses incurred from the auction.

Credit Rehabilitation Programs for Delinquent Consumer Borrowers

In light of the rapid increase in delinquencies in credit card and other consumer credit in recent years, and concerns regarding potential social issues posed by the growing number of individuals with bad credit, the

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Korean government has implemented a number of measures intended to support the rehabilitation of the credit of delinquent consumer borrowers. These measures may affect the amount and timing of our collections and recoveries on our delinquent consumer credits.

For example, in March 2009, the Financial Services Commission requested Korean banks, including us, to establish a “pre-workout program,” including a credit counseling and recovery service, for retail borrowers with outstanding short-term debt. Under the pre-workout program, which has been in operation since April 2009, maturity extensions and/or interest reductions are provided for retail borrowers with total loans of ￦1.5 billion or less (consisting of no more than ￦500 million of unsecured loans and ￦1 billion of secured loans) who are in arrears on their payments for more than 30 days but less than 90 days or for retail borrowers with an annual income of ￦40 million or less who have been in arrears on their payments for more than 30 days on an aggregate basis for the 12 months prior to their application.

In March 2013, in order to support low income consumer borrowers experiencing difficulty in repaying their unsecured long-term debt, the Financial Services Commission announced the establishment of a “National Happiness Fund” to provide one-time relief to such borrowers by:

•

purchasing from creditors unsecured loans of individual borrowers not exceeding ￦100 million in principal amount in the aggregate, which loans have been in arrears for a period of six months or more as of February 28, 2013 and, if requested by the borrower, reducing the balance of such loans by up to 50% and/or extending the maturity of such loans to up to ten years based on the borrower’s expected ability to repay;

•

purchasing from certain creditors student loans of individual borrowers, which loans have been in arrears for a period of six months or more as of February 28, 2013 and, if requested by the borrower, restructuring the balance and/or extending the maturity of such loans based on the borrower’s expected ability to repay or extending the maturity of such loans until the borrower is employed; and

•

for individuals with annual income of ￦40 million or less with loans of a principal amount not exceeding ￦30 million in the aggregate and with an interest rate of 20% or higher, facilitating the refinancing of such loans at lower interest rates, provided that such loans have not been in default during the six months prior to the application for relief.

Over 4,000 Korean financial institutions and private lenders, including our subsidiaries, Kookmin Bank, KB Savings Bank and KB Kookmin Card, have signed a memorandum of understanding with the National Happiness Fund to sell eligible loans to the fund. The price and volume of such loans to be sold are subject to further negotiations between the National Happiness Fund and such financial institutions and lenders. The National Happiness Fund accepted applications from individual borrowers to participate in such relief programs until October 2013 and until January 2014 for individual borrowers of student loans from the Korea Student Aid Foundation.

Investment Portfolio

Investment Policy

We invest in and trade Won-denominated and, to a lesser extent, foreign currency-denominated securities for our own account to:

•

maintain the stability and diversification of our assets;

•

maintain adequate sources of back-up liquidity to match our funding requirements; and

•

supplement income from our core lending activities.

In making securities investments, we take into account a number of factors, including macroeconomic trends, industry analysis and credit evaluation in determining whether to make particular investments in securities.

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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 100.0% 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 four categories of securities we hold:

Category

Classification

Financial assets held for trading Financial assets bought and held for trading.
Financial assets designated at fair value through profit or loss Financial assets which were not bought and held for trading but are otherwise designated as at fair value through profit or loss.
Available-for-sale financial assets Non-derivative financial assets not classified as held-to-maturity, at fair value through profit or loss or loans and receivables.
Held-to-maturity financial assets Non-derivative financial assets with fixed or determinable payments and fixed maturity dates that the Bank has the positive intent and ability to hold to maturity.

See “Item 5.A. Operating Results—Critical Accounting Policies—Valuation of Securities and Financial Instruments.”

We also hold limited balances of venture capital securities, non-marketable and restricted equity securities and derivative instruments.

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Carrying Amount and Market Value

The following table sets out the carrying amount and market value of securities in our securities portfolio as of the dates indicated:

As of December 31,
2012 2013 2014
Carrying
Amount 		Market
Value 		Carrying
Amount 		Market
Value 		Carrying
Amount 		Market
Value
(in billions of Won)

Available-for-sale financial assets:

Equity securities

￦ 2,474 ￦ 2,474 ￦ 2,899 ￦ 2,899 ￦ 3,032 ￦ 3,032

Debt securities

Korean treasury securities and government agency securities

6,256 6,256 6,926 6,926 4,702 4,702

Debt securities issued by financial institutions

7,476 7,476 5,782 5,782 6,981 6,981

Corporate debt securities

6,606 6,606 4,998 4,998 6,120 6,120

Asset-backed securities

1,399 1,399 1,208 1,208 1,211 1,211

Others

— — 19 19 346 346

Total available-for-sale

24,211 24,211 21,832 21,832 22,392 22,392

Held-to-maturity financial assets:

Debt securities

Korean treasury securities and government agency securities

4,449 4,720 4,357 4,537 3,557 3,772

Debt securities issued by financial institutions

1,316 1,338 893 902 1,262 1,280

Corporate debt securities

6,213 6,498 7,400 7,580 7,278 7,525

Asset-backed securities

278 281 367 368 472 474

Total held-to-maturity

12,256 12,837 13,017 13,387 12,569 13,051

Financial assets at fair value through profit or loss:

Financial assets held for trading

Equity securities

876 876 1,101 1,101 358 358

Debt securities

Korean treasury securities and government agency securities

2,376 2,376 2,085 2,085 3,067 3,067

Debt securities issued by financial institutions

4,018 4,018 3,266 3,266 4,049 4,049

Corporate debt securities

1,679 1,679 1,760 1,760 1,827 1,827

Asset-backed securities

105 105 510 510 319 319

Others

114 114 205 205 451 451

Others

40 40 40 40 51 51

Sub-total

9,208 9,208 8,967 8,967 10,122 10,122

Financial assets designated at fair value through profit or loss

Equity securities

159 159 116 116 134 134

Debt securities

— — — — — —

Derivative-linked securities

193 193 246 246 502 502

Sub-total

352 352 362 362 636 636

Total financial assets at fair value through profit or loss

9,560 9,560 9,329 9,329 10,758 10,758

Total securities

￦ 46,027 ￦ 46,608 ￦ 44,178 ￦ 44,548 ￦ 45,719 ￦ 46,201

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Maturity Analysis

The following table categorizes our debt securities by maturity and weighted average yield as of December 31, 2014:

Within
1 Year 		Weighted
Average
Yield (1) 		Over 1
But
within 5
Years 		Weighted
Average
Yield (1) 		Over 5
But
within
10 Years 		Weighted
Average
Yield (1) 		Over 10
Years 		Weighted
Average
Yield (1) 		Total Weighted
Average
Yield (1)
(in billions of Won, except percentages)

Available-for-sale financial assets:

Korean treasury securities and government agencies

￦ 1,076 3.48 % ￦ 3,502 3.26 % ￦ 114 2.57 % ￦ 10 4.30 % ￦ 4,702 3.29 %

Debt securities issued by financial institutions

3,584 2.44 3,326 2.99 71 3.28 — — 6,981 2.71

Corporate debt securities

1,523 3.83 4,444 3.33 140 4.45 13 5.45 6,120 3.48

Asset-backed securities

321 2.76 466 2.68 — — 424 3.21 1,211 2.89

Others

153 3.18 — — 62 4.54 131 4.25 346 3.83

Total

￦ 6,657 2.96 % ￦ 11,738 3.18 % ￦ 387 3.70 % ￦ 578 3.51 % ￦ 19,360 3.13 %

Held-to-maturity financial assets:

Korean treasury securities and government agencies

￦ 989 4.63 % ￦ 2,293 4.39 % ￦ 163 3.81 % ￦ 112 5.38 % ￦ 3,557 4.46 %

Debt securities issued by financial institutions

636 2.54 573 3.59 53 3.67 — — 1,262 3.06

Corporate debt securities

2,221 4.59 4,337 4.12 581 4.51 139 3.46 7,278 4.28

Asset-backed securities

270 2.85 202 2.89 — — — — 472 2.87

Total

￦ 4,116 4.17 % ￦ 7,405 4.13 % ￦ 797 4.31 % ￦ 251 4.32 % ￦ 12,569 4.16 %

Financial assets at fair value through profit or loss:

Financial assets held for trading:

Korean treasury securities and government agency securities

￦ 1,088 3.35 % ￦ 927 3.45 % ￦ 814 3.43 % ￦ 238 2.71 % ￦ 3,067 3.35 %

Debt securities issued by financial institutions

1,671 2.83 2,069 2.79 269 3.48 40 3.51 4,049 2.86

Corporate debt securities

737 3.48 891 3.42 125 3.82 74 4.71 1,827 3.52

Asset-backed securities

144 3.32 165 2.94 10 3.71 — — 319 3.14

Others

451 1.75 — — — — — — 451 1.75

Sub-total

￦ 4,091 2.98 % ￦ 4,052 3.08 % ￦ 1,218 3.48 % ￦ 352 3.22 % ￦ 9,713 3.10 %

Financial assets designated at fair value through profit or loss

￦ — — ￦ — — ￦ — — ￦ — — ￦ — —

Total

￦ 4,091 2.98 % ￦ 4,052 3.08 % ￦ 1,218 3.48 % ￦ 352 3.22 % ￦ 9,713 3.10 %

(1)

The weighted average yield for the portfolio represents the yield to maturity for each individual security, weighted using its carrying amount (which is the amortized cost in the case of held-to-maturity financial assets and the fair value in the case of available-for-sale financial assets and financial assets at fair value through profit or loss).

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Concentrations of Risk

As of December 31, 2014, we held the following securities of individual issuers where the aggregate carrying amount of those securities exceeded 10% of our stockholders’ equity at such date. As of December 31, 2014, our stockholders’ equity was ￦27,315 billion.

Carrying
Amount 		Market
Value
(in billions of Won)

Name of issuer:

Korean government

￦ 10,192 ￦ 10,374

Bank of Korea

4,006 4,006

Total

￦ 14,198 ￦ 14,380

The Bank of Korea is controlled by the Korean government.

Funding

We obtain funding for our lending activities from a variety of sources, both domestic and foreign. Our principal source of funding is customer deposits. In addition, we acquire funding through long-term borrowings (comprising debentures and debts), short-term borrowings, including borrowings from the Bank of Korea, and call money.

Our primary funding strategy has been to achieve low-cost funding by increasing the average balances of low-cost retail deposits, in particular demand deposits and time deposits. We also have focused our marketing efforts on higher net worth individuals, who account for a significant portion of the assets in our retail deposit base. Customer deposits accounted for 83.1% of total funding as of December 31, 2012, 83.0% of total funding as of December 31, 2013 and 82.4% of total funding as of December 31, 2014.

Our borrowings consist of issuances of debentures and debt from financial institutions, the Korean government and government-affiliated funds. The majority of our debt is long-term, with maturities ranging from one year to 30 years.

Deposits

Although the majority of our deposits are short-term, it has been our experience that the majority of our depositors generally roll over their deposits at maturity, providing us with a stable source of funding.

The following table shows the average balances of our deposits and the average rates paid on our deposits for the periods indicated:

2012 2013 2014
Average
Balance (1) 		Average
Rate Paid 		Average
Balance (1) 		Average
Rate Paid 		Average
Balance (1) 		Average
Rate Paid
(in billions of Won, except percentages)

Demand deposits:

Non-interest bearing

￦ 3,075 — ￦ 3,252 — ￦ 3,486 —

Interest bearing

56,154 0.60 % 60,894 0.47 % 67,612 0.42 %

Time deposits

136,617 3.69 130,286 3.02 130,258 2.70

Certificates of deposit

1,735 3.86 1,780 3.03 1,689 2.72

Average total deposits

￦ 197,581 2.76 % ￦ 196,212 2.18 % ￦ 203,045 1.89 %

(1)

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

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For a description of our retail deposit products, see “—Business—Retail Banking—Lending Activities—Mortgage and Home Equity Lending” and “—Business—Retail Banking—Deposit-Taking Activities.”

Time Deposits and Certificates of Deposit

The following table presents the remaining maturities of our time deposits and certificates of deposit which had a fixed maturity in excess of ￦100 million as of December 31, 2014:

Time Deposits Certificates
of Deposit 		Total
(in billions of Won)

Maturing within three months

￦ 22,410 ￦ 613 ￦ 23,023

After three but within six months

16,775 363 17,138

After six but within 12 months

21,971 567 22,538

After 12 months

2,922 — 2,922

Total

￦ 64,078 ￦ 1,543 ￦ 65,621

Long-term borrowings

The aggregate amount of contractual maturities of all long-term borrowings (comprising debentures and debt) as of December 31, 2014 was as follows:

As of December 31, 2014
(in billions of Won)

Due in 2015

￦ 8,781

Due in 2016

10,343

Due in 2017

5,154

Due in 2018

2,080

Due in 2019

1,133

Thereafter

4,618

Gross long-term borrowings

32,109

Fair value adjustments

54

Deferred financing costs

(2 )

Discount

(5 )

Total long-term borrowings, net

￦ 32,156

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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,
2012 2013 2014
(in billions of Won, except percentages)

Call money:

Year-end balance

￦ 2,597 ￦ 2,648 ￦ 2,882

Average balance (1)

4,788 4,679 4,164

Maximum balance (2)

5,043 5,835 5,503

Average interest rate (3)

2.38 % 2.12 % 1.87 %

Year-end interest rate

0.15-2.72 % 0.17-5.23 % 0.10-3.61 %

Borrowings from the Bank of Korea: (4)

Year-end balance

￦ 782 ￦ 558 ￦ 1,003

Average balance (1)

745 649 763

Maximum balance (2)

953 917 1,048

Average interest rate (3)

1.48 % 1.08 % 0.92 %

Year-end interest rate

1.25 % 0.50-1.00 % 0.50-1.00 %

Other short-term borrowings: (5)

Year-end balance

￦ 7,382 ￦ 4,963 ￦ 9,025

Average balance (1)

9,766 6,166 7,460

Maximum balance (2)

12,340 7,064 9,164

Average interest rate (3)

2.11 % 1.25 % 1.41 %

Year-end interest rate

0.24-5.47 % 0.00-4.81 % 0.00-8.62 %

(1)

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

(2)

Maximum balances are based on month-end balances.

(3)

Average interest rates for the year are calculated by dividing the total interest expense by the average amount borrowed.

(4)

Borrowings from the Bank of Korea generally mature within one month for borrowings in Won and six months for borrowings in foreign currencies. These short-term borrowings were secured by securities totaling ￦990 billion as of December 31, 2014.

(5)

Other short-term borrowings include securities sold under repurchase agreement, bills sold, borrowings and debentures. Other short-term borrowings have maturities of one year or less. Securities sold under repurchase agreements were secured by securities totaling ￦2,412 billion as of December 31, 2014.

Supervision and Regulation

Principal Regulations Applicable to Financial Holding Companies

General

The Financial Holding Company Act, last amended on May 28, 2014, 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 Supervisory Service sets requirements relating to Korean financial holding companies’ liquidity and capital

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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;

•

providing data processing, legal, accounting and other resources and services that have been commissioned by its direct and indirect subsidiaries so as to support their operations; 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 ￦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

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of solvency. In addition, with respect to the allocation of net profit earned in a fiscal term, a financial holding company 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.

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 common equity Tier I capital, additional Tier I capital and Tier II 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.

Pursuant to the amended regulations promulgated by the Financial Services Commission in 2013 to implement Basel III, Korean bank holding companies were required to maintain a minimum ratio of common equity Tier I capital to risk-weighted assets of 3.5% and Tier I capital to risk-weighted assets of 4.5% from December 1, 2013, which minimum ratios were increased to 4.0% and 5.5%, respectively, from January 1, 2014 and increased further to 4.5% and 6.0%, respectively, from January 1, 2015. Such requirements are in addition to the pre-existing requirement for a minimum ratio of Tier I and Tier II capital (less any capital deductions) to risk-weighted assets of 8.0%, which remains unchanged. The amended regulations also contemplate an additional capital conservation buffer of 0.625% starting in 2016, with such buffer to increase in stages to 2.5% by 2019.

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 a financial holding company whose foreign currency liabilities constitute 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 (except that such requirement is not applicable to a financial holding company whose foreign currency liabilities constitute less than 1% of its total assets);

•

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 (except that such requirement is not applicable to a financial holding company whose foreign currency liabilities constitute less than 1% of its total assets); and

•

make quarterly reports regarding their Won liquidity and 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

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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

(4) in case of a financial investment company, the capital amount as defined in Article 37(3) of the Enforcement Decree of the Financial Investment Services and Capital Markets Act;

(5) in case of an insurance company, the capital amount as defined in Article 2, Item 15 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

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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, 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 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) ￦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.

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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;

(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

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•

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) ￦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.

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 4% 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 4% 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 bank holding company (other than a bank holding company controlling only regional banks), (ii) becomes the largest shareholder of such bank holding company in which such person has acquired in excess of 4% of the total issued and outstanding voting shares, (iii) changes its shareholding in such bank 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 bank holding company or (iv) is a private equity fund or an investment purpose company holding in excess of 4% of the total outstanding voting shares of a bank holding company and changes its members or shareholders, such person must

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file a report on such change with the Financial Services Commission (x) in case of (i) and (iii), within ten days after the end of the month in which such change occurred, or (y) in case of (ii) and (iv), within ten days after the end of the quarter in which such change occurred.

“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 ￦2 trillion;

(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 4% of the total issued and outstanding voting shares of that mutual fund;

(4) any private equity fund (a) where a person falling under any of items (1) through (3) above is a limited partner holding not less than 10% of the total amount of contributions to the private equity fund, or (b) where a person falling under any of items (1) through (3) above is a general partner, or (c) where the total equity of the private equity fund acquired by each affiliate belonging to several enterprise groups subject to the limitation on mutual investment is 30% or more of the total amount of contributions to the private equity fund; or

(5) the investment purpose company concerned, where a private equity fund falling under item (4) above acquires or holds stocks in excess of 4% of the stock or equity of such company or exercises de facto control over significant managerial matters of such company through appointment or dismissal of executives or in any other manner.

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 internal management purposes outlined in the Enforcement Decree of the Financial Holding Company Act (such as credit risk management, internal control and customer analysis), without the customers’ written consent, subject to the methods and procedures for provision of such information set forth therein. 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 internal management purposes outlined in the Enforcement Decree of the Financial Holding Company Act, subject to the methods and procedures for provision of such information set forth therein. Recent amendments to the Financial Holding Company Act, which became effective on November 29, 2014, limit the scope of credit information that may be shared without the customers’ prior consent and require certain procedures for provision of customer information as prescribed by the Financial Services Commission. Beginning in May 29, 2015, notice must be given to customers at least once a year regarding (i) the provider of customer information, (ii) the recipient of customer information, (iii) the purpose of providing the information and (iv) the categories of the information provided.

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 subject to the

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regulations and supervision of the Bank of Korea, the Monetary Policy Committee of the Bank of Korea, 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 promulgates 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 the prudent control of liquidity and for capital adequacy and establishes reporting requirements pursuant to 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, approval 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 demand 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 time deposits with maturities of at least one year, or the issuance of debentures or other bonds. A bank wishing to enter into any business other than commercial banking and long-term financing businesses, such as the trust business, must obtain approval from the Financial Services Commission. Approval 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 Financial Services Commission deems a bank’s financial condition to be unsound or if a bank fails to meet the applicable capital adequacy ratio set forth under Korean law, the Financial Services Commission may order:

•

admonitions, warnings or reprimands with respect to its officers and employees;

•

capital increases or reductions;

•

assignments of contractual rights and obligations relating to financial transactions;

•

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

•

stock cancellations or consolidations;

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•

disposals of property holdings;

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closures of subsidiaries or branch offices or downsizing;

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mergers with other financial institutions;

•

acquisition of such bank by a third party; or

•

suspensions of a part or all of its business operations.

Capital Adequacy

The Bank Act requires nationwide banks, such as us, to maintain a minimum paid-in capital of ￦100 billion and regional banks to maintain a minimum paid-in capital of ￦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 Detailed Regulation 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 (i) common equity Tier I capital, including paid-in capital, capital surplus and retained earnings related to common equity and accumulated other comprehensive gains and losses, and (ii) additional Tier I capital, including paid-in capital and capital surplus related to hybrid Tier I capital instruments that, among other things, qualify as contingent capital and are subordinated to subordinated debt. Tier II capital (supplementary capital) consists of, among other things, capital and capital surplus from the issuance of Tier II capital, allowances for loan losses on loans classified as “normal” or “precautionary,” subordinated debt and other capital securities which meet the standards prescribed by the governor of the Financial Supervisory Service under Article 26(2) of the Regulation on the Supervision of Banking Business.

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 requirements 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. Under such requirements, 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 July and September 2013, the Financial Services Commission promulgated amended regulations implementing Basel III in Korea, pursuant to which Korean banks and bank holding companies were required to maintain a minimum ratio of common equity Tier I capital to risk-weighted assets of 3.5% and Tier I capital to risk-weighted assets of 4.5% from December 1, 2013, which minimum ratios were increased to 4.0% and 5.5%, respectively, from January 1, 2014 and increased further to 4.5% and 6.0%, respectively, from January 1, 2015. Such requirements are in addition to the pre-existing requirement for a minimum ratio of Tier I and Tier II capital (less any capital deductions) to risk-weighted assets of 8.0%, which remains unchanged. The amended regulations also contemplate an additional capital conservation buffer of 0.625% starting in 2016, with such buffer to increase in stages to 2.5% by 2019.

Under the Detailed Regulation on the Supervision of the Banking Business, the following risk-weight ratios must be applied by Korean banks in respect of home mortgage loans:

(1) for those banks which adopted a standardized approach for calculating credit risk capital requirements, a risk-weight ratio of 35% (only in the case where the loan is fully secured by a first ranking mortgage) and, with respect to high-risk home mortgage loans, 50% or 70%; 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 Detailed Regulation on the Supervision of the Banking Business.

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Liquidity

All banks are required to ensure adequate liquidity by matching the maturities of their assets and liabilities in accordance with the Regulation on the Supervision of the Banking Business. Banks may not invest an amount exceeding 100% of their Tier I and Tier II capital (less any capital deductions) in equity securities and certain other securities with a redemption period of over three years. This stipulation does not apply to Korean government bonds, Monetary Stabilization Bonds issued by the Bank of Korea or debentures and stocks referred to in items 1 and 2, respectively, of paragraph (6) of Article 11 of the Act on the Improvement of the Structure of the Financial Industry. The Financial Services Commission also requires each Korean bank to:

•

maintain a liquidity coverage ratio (defined as the ratio of highly liquid assets to total net cash outflows over a one-month period) of not less than 80%, from January 1, 2015 until December 31, 2015, with such minimum liquidity coverage ratio to increase in increments of 5% per annum to 100% by 2019;

•

maintain a foreign currency liquidity ratio (defined as the ratio of foreign currency assets due within three months to foreign currency liabilities due within three months) of not less than 85%;

•

maintain a ratio of foreign currency 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 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 (with respect to employee-related deposits, only if such deposits were made prior to February 28, 2013); and

•

2% of average balances for Won currency time deposits, installment 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 other deposits. A 1% minimum reserve ratio applies to deposits in offshore accounts, immigrant accounts and resident accounts opened by foreign exchange banks as well as foreign currency certificates of deposit held by account holders of such offshore accounts, immigrant accounts and resident accounts opened by foreign exchange banks.

Furthermore, pursuant to the Regulation on the Supervision of the Banking Business, foreign exchange agencies, including our subsidiary, Kookmin Bank, are 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” 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 Regulation on the Supervision of Banking Business, foreign

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currency-denominated debt maturing in one year or less 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. Under the Regulation on the Supervision of Banking Business, Kookmin Bank is also required to maintain a minimum “mid- to long-term foreign exchange funding ratio” of 100%. “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, subject to certain exceptions, 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, subject to certain exceptions, 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 and outstanding voting shares; or

•

a shareholder holding (together with persons who have a special relationship with such shareholder) in excess of 4% in the aggregate of the bank’s (excluding regional banks) total issued and outstanding voting shares of a bank (excluding shares subject to the shareholding restrictions on “non-financial business group companies” as described below), where such 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 ￦2 trillion in aggregate; or (iii) any mutual fund of which any single shareholding group identified in (i) or (ii) above, owns more than 9% of the total issued and outstanding shares.

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

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may not exceed 34.9% 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 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 pursuant to the criteria under the Detailed Regulation on the Supervision of the Banking Business), unless the loan exposure to that group is not more than ￦4 billion;

(ii) the occurrence of any financial incident involving embezzlement, malfeasance or misappropriation of funds with respect to which damages are expected to exceed ￦1 billion, or any financial incident regarding which the governor of the Financial Supervisory Service has made a public announcement; 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 ￦1 billion.

Restrictions on Lending

Pursuant to the Bank Act, commercial banks may not provide:

•

loans directly or indirectly secured by a pledge of a bank’s own shares;

•

loans directly or indirectly to enable a natural or juridical person to buy the bank’s own shares;

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•

loans to any of the bank’s officers or employees, other than de minimis loans of up to (i) ￦20 million in the case of a general loan, (ii) ￦50 million in the case of a general loan plus a housing loan or (iii) ￦60 million in the aggregate for general loans, housing loans and loans to pay damages arising from wrongful acts of employees in financial transactions;

•

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 ￦20 million or general and housing loans of up to ￦50 million in the aggregate.

Regulations Relating to Retail Household Loans

The Financial Services Commission has implemented a number of changes in recent years to the regulations relating to retail household lending by banks. Under the currently applicable regulations:

•

as to loans secured by a collateral of housing (including apartments) 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 (including apartments) located in areas of excessive investment or housing (excluding apartments) located in areas of high speculation, in each case, 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 ￦600 million, and (b) 60%, if the price of such apartment is ￦600 million or lower;

•

as to loans secured by collateral of housing (regardless of housing type or location) to be amortized over a period of ten years, further requirements relating to which are set forth in the Regulation on the Supervision of Banking Business, the loan-to-value ratio should not exceed 70%;

•

as to loans secured by apartments with appraisal value of more than ￦600 million in areas of high speculation as designated by the government or certain metropolitan areas designated as areas of excessive investment by the government, the borrower’s debt-to-income ratio (calculated as (i) the aggregate annual 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%.

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Restrictions on Investments in Property

A bank may not invest in securities set forth below in excess of 100% of the sum of the bank’s Tier I and Tier II capital (less any capital deductions):

•

debt securities (within the meaning of paragraph (3) of Article 4 of the Financial Investment Services and Capital Markets Act) the maturity of which exceeds three years, but excluding government bonds, monetary stabilization bonds issued by the Bank of Korea and bonds within the meaning of item 2, paragraph (6) of Article 11 of the Act on the Improvement of the Structure of the Financial Industry;

•

equity securities, but excluding securities within the meaning of item 1, paragraph (6) of Article 11 of the Act on the Improvement of the Structure of the Financial Industry;

•

derivatives linked securities (within the meaning of paragraph (7) of Article 4 of the Financial Investment Services and Capital Markets Act) the maturity of which exceeds three years; and

•

beneficiary certificates, investment contracts and depositary receipts (within the meaning of paragraph (2) of Article 4 of the Financial Investment Services and Capital Markets Act) the maturity of which exceeds three years.

A bank may possess real estate property only to the extent necessary for the conduct of its business. The aggregate value of such property may 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 of shares by the bank is necessary for the corporate restructuring of such corporation and is approved by the Financial Services Commission.

•

In the above cases, the total investment in corporations in which the bank owns more than 15% of the outstanding shares with voting rights may not exceed (i) 15% of the sum of Tier I and Tier II capital (less any capital deductions) or (ii) 30% of the sum of Tier I and Tier II capital (less any capital deductions) where 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 is not permitted to acquire the shares issued by the major shareholder of such 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, pursuant to an amendment to the Bank Act which became effective on February 14, 2014, non-financial business group companies may not acquire beneficial ownership of shares of a nationwide bank in excess of 4% (or 15% in the

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case of a regional bank) of that bank’s outstanding voting shares, unless they satisfy certain requirements set forth by the Enforcement Decree of the Banking Act, obtain the approval of the Financial Services Commission and agree not to exercise voting rights in respect of shares in excess of the 4% limit (or the 15% limit in the case of a regional bank), in which case they may acquire beneficial ownership of up to 10% of a nationwide bank’s outstanding voting shares. Such amendment grants an exception for non-financial business group companies which, at the time of the enactment of the amended provisions, held more than 4% of the shares of a bank.

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 shares, non-financial business group companies may acquire beneficial ownership of up to 10% (or 15% in the case of a regional bank) of that bank’s outstanding voting shares, and in excess of 10% (or 15% in the case of a regional bank), 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 and the rate is determined under the Enforcement Decree to the Depositor Protection Act. 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 ￦50 million per individual for deposits and interest in a single financial institution, regardless of when the deposits were made and the size of the deposits.

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 Act of Korea. 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 Trust Act, assets accepted in trust by a bank in Korea must be segregated from other assets in the accounts of that bank; 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.

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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 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 company 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 January 20, 2015, 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. Credit card companies, including our wholly-owned subsidiary, KB Kookmin Card Co., Ltd., are regulated by the Financial Services Commission and the Financial Supervisory Service.

Disclosure and Reports

Under the Specialized Credit Financial Business Act and the regulations thereunder, a credit card company is required to disclose on a periodic and on-going basis certain material matters and events. In addition, a credit card company must submit its business 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.

Restrictions on Funding

Under the Specialized Credit Financial Business Act and the regulations thereunder, a credit card company must ensure that its total assets do not exceed an amount equal to six times its equity capital. However, if a credit card company is unable to comply with such limit upon the occurrence of unavoidable events, such as drastic changes in the domestic and global financial markets, such limit may be adjusted through a resolution of the Financial Services Commission.

Risk of Loss Due to Lost, Stolen, Forged or Altered Credit Cards

Under the Specialized Credit Financial Business Act, a credit card company 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 credit card company is also responsible for any losses resulting from the use of forged or altered credit cards, debit cards and pre-paid cards. A credit card company 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 credit card company 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

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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 credit card company 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 credit card company 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 credit card company.

Pursuant to the Specialized Credit Financial Business Act, the Financial Services Commission may either restrict the limit or take other necessary measures against the credit card company 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.

Lending Ratio in Ancillary Business

Pursuant to the Enforcement Decree to the Specialized Credit Financial Business Act, a credit card company 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 credit card company may issue new cards and solicit new members. New credit cards may be issued only to the following persons:

•

persons who are at least 19 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 credit card company; and

•

in the case of minors who are 18 years old, persons who submit documents evidencing employment as of the date of the credit card application, such as an employment certificate, or persons for whom the issuance of a credit card is necessitated by governmental policies, such as financial aid.

In addition, a credit card company 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;

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•

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 credit card company 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.

Regulations on Class Actions Regarding Securities

The Law on Class Actions Regarding Securities was enacted as of January 20, 2004 and last amended on May 28, 2013. 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.

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.

The following is a summary of the major changes introduced under the Financial Investment Services and Capital Markets Act.

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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 Korean Securities 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,

•

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

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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 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.

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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 Korean Securities Exchange Act. For example, the 5% and 10% reporting obligations under the Korean Securities 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.

Item 4.C. 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:

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Our largest subsidiary is Kookmin Bank, the assets of which represented approximately 89.3% of our total assets as of December 31, 2014. 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, 2014, including their consolidated total assets, operating revenue, profit (loss) and total equity:

Subsidiaries

Total Assets Operating Revenue Profit (Loss) Total Equity
(in millions of Won)

Kookmin Bank

￦ 275,453,664 ￦ 16,283,978 ￦ 1,029,041 ￦ 21,940,473

KB Kookmin Card Co., Ltd. .

15,886,769 2,864,957 332,701 3,480,455

KB Investment & Securities Co., Ltd.

4,131,568 578,345 25,624 576,740

KB Life Insurance Co., Ltd. .

7,680,184 1,453,057 6,537 583,725

KB Asset Management Co., Ltd. .

254,481 105,234 49,560 201,940

KB Real Estate Trust Co., Ltd.

204,888 50,283 14,818 183,958

KB Investment Co., Ltd. .

225,353 33,371 1,382 134,784

KB Credit Information Co., Ltd.

28,805 38,796 (1,605 ) 20,850

KB Data Systems Co., Ltd.

31,397 59,129 367 14,523

KB Savings Bank Co., Ltd. .

772,676 56,712 (15,079 ) 152,794

KB Capital Co., Ltd. (1)

4,023,965 250,042 29,990 411,815

(1)

KB Capital Co., Ltd. (formerly known as Woori Financial Co., Ltd.) was added as a subsidiary in March 2014 as a result of our purchase of 52.02% of its shares.

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, 2014, Kookmin Bank was one of the largest commercial banks in Korea based upon total assets (including loans) and deposits. As of December 31, 2014, Kookmin Bank had approximately 28.7 million customers, with 1,161 branches nationwide.

•

KB Kookmin Card Co., Ltd. was established in March 2011 as a separate entity upon the completion of a horizontal spin-off of Kookmin Bank’s credit card business, to provide credit card services.

•

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. In March 2011, KB Investment & Securities was merged with KB Futures Co., Ltd., with KB Investment & Securities as the surviving entity.

•

KB Life Insurance Co., Ltd. was established in Korea in April 2004 to provide life insurance and wealth management products primarily through our branch network.

•

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 Capital Co., Ltd. , which provides leasing services and installment finance services, was formerly known as Woori Financial Co., Ltd. and was acquired by us on March 20, 2014.

•

KB Savings Bank Co., Ltd. was established in Korea in January 2012 to provide small-loan finance services. KB Savings Bank was established in connection with our purchase of assets and assumption of liabilities of Jeil Savings Bank in January 2012. We acquired Yehansoul Savings Bank, which provided small-loan finance services, in September 2013 and merged it with KB Savings Bank in January 2014, with KB Savings Bank as the surviving entity.

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•

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 Credit Information Co., Ltd. was established in Korea in October 1999 to collect delinquent loans and to check credit history.

•

KB Data Systems Co., Ltd. was established in Korea in September 1991 to provide software services to us and other financial institutions.

Item 4.D. Property, Plants and Equipment

Our registered office and corporate headquarters are located at 84, 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

84, Namdaemoon-ro,

Jung-gu, Seoul 100-703

1,749

Kookmin Bank headquarters building

26, Gukjegeumyung-ro 8-gil,

Yeongdeungpo-gu, Seoul

150-758

5,354

KB Kookmin Card headquarters building

Jongro-gu, Seoul 3,797

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 support center

Seongbuk-gu, Seoul 4,748

As of December 31, 2014, we had a countrywide network of 1,161 banking branches and sub-branches, as well as 121 branches and sub-branches and 6 representative offices for our other operations including credit card, investment banking 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 Cambodia, China, Hong Kong and the United Kingdom and branches of Kookmin Bank in Osaka and Tokyo in Japan, Auckland in New Zealand, New York in the United States and Ho Chi Minh City in Vietnam, as well as a branch of Kookmin Bank Cambodia PLC in Phnom Penh and branches of Kookmin Bank (China) Ltd. in Beijing, Guangzhou, Harbin and Suzhou in China. We also have representative offices of Kookmin Bank in Mumbai in India, Yangon in Myanmar and Hanoi in Vietnam. We do not own any material properties outside of Korea.

The net carrying amount of all the properties owned by us at December 31, 2014 was ￦2,826 billion.

Item 4A. 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.

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Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Item 5.A. Operating Results

Overview

The following discussion is based on our consolidated financial statements, which have been prepared in accordance with IFRS as issued by the IASB. The consolidated financial statements include the accounts of subsidiaries over which substantive control is exercised through majority ownership of voting stock and/or other means. Investments in jointly controlled entities and associates (companies over which we have the ability to exercise significant influence) are accounted for by the equity method of accounting.

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 financial difficulties experienced by such enterprises as a result of, among other things, adverse economic conditions in Korea and globally, have generally 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 2014, we recorded charge-offs of ￦746 billion in respect of our loans to small- and medium-sized enterprises, compared to charge-offs of ￦691 billion in 2013 and charge-offs of ￦943 billion in 2012. In light of the difficult financial condition and liquidity position of small- and medium-sized enterprises in Korea since the second half of 2008, the Korean government introduced measures intended to encourage Korean banks to provide financial support to small- and medium-sized enterprise borrowers. See “Item 3.D. Risk Factors—Risks relating to our small- and medium-sized enterprise loan portfolio—We have significant exposure to small- and medium-sized enterprises, and any financial difficulties experienced by these customers may result in a deterioration of our asset quality and have an adverse impact on us.”

In recent years, commercial banks, 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. Furthermore, in 2014, the Korean government announced several measures to encourage consumer spending and revive the housing market in Korea, including loosening regulations on mortgage lending, which contributed to an increase in our portfolio of retail loans from ￦107,644 billion as of December 31, 2013 to ￦119,249 billion as of December 31, 2014. The rapid growth in retail lending, together with adverse economic conditions in recent years, may lead to increasing delinquencies and a deterioration in asset quality. In 2014, we recorded charge-offs of ￦574 billion and provision for loan losses of ￦340 billion in respect of our retail loan portfolio, compared to charge-offs of ￦581 billion and provision for loan losses of ￦361 billion in 2013 and charge-offs of ￦453 billion and provision for loan losses of ￦402 billion in 2012. See “Item 3.D. 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. While the rate of deterioration of the global economy since the commencement of the global financial crisis in 2008 has slowed, with some signs of stabilization and improvement, the overall prospects for the Korean and global economy in 2015 and beyond remain uncertain. Starting in the second half of 2011, the global financial markets have experienced significant volatility as a result of, among other things:

•

the financial difficulties affecting many governments worldwide, in particular in southern Europe and Latin America;

•

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

•

interest rate fluctuations amid speculation that the U.S. Federal Reserve would raise interest rates, as well as reductions in policy rates by an increasing number of central banks, including the Bank of Korea; and

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•

political and social instability in various countries in the Middle East and Northern Africa, including Iraq, Syria and Yemen, as well as in the Ukraine and Russia.

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

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, increased inflation volatility, potential tightening of fiscal and monetary policies and continued tensions with North Korea, the economic outlook for the financial services sector in Korea in 2015 and for the foreseeable future remains uncertain.

Acquisitions

In January 2012, we established KB Savings Bank to provide small-loan finance services to retail customers. KB Savings Bank was established in connection with our purchase of the assets of Jeil Savings Bank and assumption of its liabilities pursuant to a purchase and assumption agreement among Jeil Savings Bank, the Korea Deposit Insurance Corporation and us. In May 2012, pursuant to the purchase and assumption agreement, we transferred to the Korea Deposit Insurance Corporation a portion of the assets we purchased and related liabilities we assumed. In connection with such purchase and assumption (and after giving effect to the transfer to the Korea Deposit Insurance Corporation), we recognized an acquisition of ￦2,546 billion of assets and an assumption of ￦2,654 billion of liabilities and also ￦108 billion of goodwill.

In June 2013, we purchased ING Insurance International II B.V.’s 49% interest in KB Life Insurance Co., Ltd. for ￦167 billion, as a result of which KB Life Insurance Co., Ltd. became our wholly-owned subsidiary.

In September 2013, we purchased 100% of the shares of Yehansoul Savings Bank from the Korea Deposit Insurance Corporation for ￦38 billion. In connection with such purchase, we recognized an acquisition of ￦470 billion of assets and an assumption of ￦439 billion of liabilities and also ￦7 billion of goodwill. In January 2014, KB Savings Bank merged with Yehansoul Savings Bank, with KB Savings Bank as the surviving entity.

In March 2014, we acquired 52.02% of the outstanding shares of Woori Financial Co., Ltd., a publicly listed Korean consumer finance company, from Woori Finance Holdings Co., Ltd. for ￦280 billion, and subsequently renamed the entity KB Capital Co., Ltd.

In addition, in June 2014, we entered into a share purchase agreement, which was amended in March 2015, to acquire 19.47% of the outstanding shares of LIG Insurance Co., Ltd., a publicly listed Korean property and casualty insurance company, from a group of individual shareholders for ￦645 billion. Pursuant to applicable Korean law, we will be required to increase our shareholding in LIG Insurance to at least 30% within one year

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from the date of such acquisition. As of December 31, 2014, LIG Insurance had total assets of ￦23,929 billion and total equity of ￦1,785 billion, and in 2014, its total revenues amounted to ￦10,878 billion and its profit for the year amounted to ￦139 billion.

Changes in Accounting Policies

Pursuant to the adoption of IFRS 10, Consolidated Financial Statements , which is effective beginning in 2013, our consolidated financial statements as of and for the years ended December 31, 2013 and 2014 include trust accounts for which we guarantee only the repayment of principal, as well as certain other entities, which were not previously subject to consolidation, while excluding certain other entities that were previously consolidated. We included in our scope of consolidation those entities with respect to which (i) we had existing rights that gave us the current ability to direct the relevant activities of such entities, (ii) we had exposure or rights to variable returns from our investment in such entities and (iii) we had the ability to use our power over such entities to affect the amount of our returns. Our consolidated financial statements as of and for the year ended December 31, 2012 have been restated to retroactively apply this change.

Upon the adoption of IFRS 10, Consolidated Financial Statements , in 2013, we applied the standard described above and consolidated five asset-backed securitization specialty companies and seven funds (including a subsidiary of a fund), while excluding KB-Glenwood Private Equity Fund 1, NPS KBIC Private Equity No. 1 and KBIC Private Equity Fund No. 3 from our scope of consolidation. The asset-backed securitization specialty companies that were consolidated in 2013 are Samho Kyungwon Co., Ltd., Taejon Samho The First Co., Ltd., Prince DCM Co., Ltd. and KH First Co., Ltd. The funds that were consolidated in 2013 are KB Hope Sharing BTL Private Special Asset, Hanbando BTL Private Special Asset Fund 1, Global Logistics Infra Private Fund 1, Global Logistics Infra Private Fund 2, KB Mezzanine Private Securities Fund 1, KB Private Real Estate Securities Fund 1 (NPL), K Star KTB ETF (Bond) and Woori KA First Asset Securitization (a subsidiary of KB Private Real Estate Securities Fund 1 (NPL)). For further information regarding changes in our consolidated subsidiaries, see Note 40 of the notes to our consolidated financial statements included elsewhere in this annual report.

In addition, in 2014, we changed our accounting policy with respect to uncertain tax positions. Prior to January 1, 2014, we had recognized our uncertain tax positions in the financial statements based on the guidance in International Accounting Standards 37, or IAS 37, Provisions, Contingent Liabilities and Contingent Assets , which allows recognition of the best estimate of expenditures as tax expenses if the uncertain tax position is probable of resulting in an additional payment to the tax authorities. Under IAS 37, however, tax benefits are recognized only when it has become virtually certain that a tax refund from a claim for rectification or an appeal for refund of amounts claimed from the tax authorities will occur. Beginning in 2014, we recognize our uncertain tax positions in the financial statements based on the guidance in International Accounting Standards 12, or IAS 12, Income Taxes , which allows recognition of tax payments as current income tax assets to the extent it is probable that they will be recovered from the tax authorities. Our consolidated financial statements as of and for the years ended December 31, 2012 and 2013 have been restated to retroactively apply such change in our accounting policy.

For further information regarding these and other changes to our accounting policies and their effect on our consolidated financial statements, see Note 2.1 of the notes to our consolidated financial statements included elsewhere in this annual report.

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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,
2010 		Dec. 30,
2010 		June 30,
2011 		Dec. 29,
2011 		June 29,
2012 		Dec. 31,
2012 		June 28,
2013 		Dec. 31,
2013 		June 30,
2014 		Dec. 31,
2014

KOSPI

1,698.29 2,051.00 2,100.69 1,825.74 1,854.01 (4) 1,997.05 1,863.32 2,011.34 (5) 2,002.21 1,915.59 (6)

￦/US$ exchange rates (1)

￦ 1,220.9 ￦ 1,130.6 ￦ 1,066.3 ￦ 1,158.5 ￦ 1,141.2 ￦ 1,063.2 ￦ 1,141.5 ￦ 1,055.3 ￦ 1,011.6 ￦ 1,090.9

Corporate bond rates (2)

4.96 % 4.30 % 4.49 % 4.22 % 3.94 % 3.44 % 3.54 % 3.64 % 3.42 % 2.87 %

Treasury bond rates (3)

3.86 % 3.38 % 3.76 % 3.34 % 3.30 % 2.82 % 2.88 % 2.86 % 2.68 % 2.10 %

(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.

(4)

As of December 28, 2012, the last day of trading for the KRX KOSPI Market in 2012.

(5)

As of December 30, 2013, the last day of trading for the KRX KOSPI Market in 2013.

(6)

As of December 30, 2014, the last day of trading for the KRX KOSPI Market in 2014.

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.

Impairment of Loans and Allowances for Loan Losses

We evaluate our loan portfolio for impairment on an ongoing basis. We have established allowances for loan losses, which are available to absorb probable losses that have been incurred in our loan portfolio as of the balance sheet date. If we believe that additions or changes to the allowances for loan losses are required, we record a provision for loan losses (as part of our provision for credit losses), which is treated as a charge against current income. Loan exposures that we deem to be uncollectible, including actual loan losses, net of recoveries of previously written-off amounts, are charged directly against the allowances for loan losses.

Our accounting policies for losses arising from the impairment of loans and allowances for loan losses are described in Note 3.6 of the notes to our consolidated financial statements. We base the level of our allowances for loan losses on an evaluation of the risk characteristics of our loan portfolio. The evaluation considers factors such as historical loss experience, the financial condition of our borrowers and current economic conditions.

Allowances represent our management’s best estimate of losses incurred in the loan portfolio as of the balance sheet date. Our management is required to exercise judgment in making assumptions and estimates when calculating loan allowances on both individually and collectively assessed loans.

The determination of the allowances required for loans which are deemed to be individually significant often requires the use of considerable management judgment concerning such matters as economic conditions, the financial performance of the counterparty and the value of any collateral held for which there may not be a readily accessible market. 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. The actual amount of the future cash flows and their timing may differ from the estimates used by our management and consequently may cause actual losses to differ from the reported allowances.

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The allowances for portfolios of smaller-balance homogenous loans, such as those to individuals and small business customers, and for those loans which are individually significant but for which no objective evidence of impairment exists, are determined on a collective basis. The collective allowances are calculated on a portfolio basis using statistical models which incorporate numerous estimates and judgments. We perform a regular review of the models and underlying data and assumptions.

Our consolidated financial statements for the year ended December 31, 2014 included total allowances for loan losses of ￦2,452 billion as of that date. Our total loan charge-offs, net of recoveries, amounted to ￦1,560 billion and we recorded a provision for loan losses (which forms a part of the provision for credit losses, together with provisions for unused loan commitments, acceptances and guarantees, financial guarantee contracts and other financial assets) of ￦1,211 billion in 2014.

We believe that the accounting estimates related to our impairment of loans and allowances for loan losses are a “critical accounting policy” because: (1) they are highly susceptible to change from period to period because they require us to make assumptions about future default rates and losses relating to our loan portfolio; and (2) any significant difference between our estimated loan losses (as reflected in our allowances for loan losses) and actual loan losses could require us to take an additional provision which, if significant, could have a material impact on our profit. 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.

Valuation of Financial Instruments

Our accounting policy for determining the fair value of financial instruments is described in Notes 3.3 and 6 of the notes to our consolidated financial statements.

The best evidence of fair value is a quoted price in an actively traded market. In the event that the market for a financial instrument is not active, a valuation technique is used. The majority of valuation techniques employ only observable market data and, as such, the reliability of the fair value measurement is high. However, certain financial instruments are valued on the basis of valuation techniques that feature one or more significant market inputs that are unobservable. Valuation techniques that rely to a greater extent on unobservable inputs require a higher level of management judgment to calculate a fair value than those based wholly on observable inputs.

Valuation techniques used to calculate fair values are discussed in Note 6.1 of the notes to our consolidated financial statements. The main assumptions and estimates which our management considers when applying a model with valuation techniques are:

•

The likelihood and expected timing of future cash flows on the instrument. These cash flows are usually governed by the terms of the instrument, although judgment may be required when the ability of the counterparty to service the instrument in accordance with the contractual terms is in doubt. Future cash flows may be sensitive to changes in market rates.

•

Selecting an appropriate discount rate for the instrument. The determination of this rate is based on an assessment of what a market participant would regard as the appropriate spread of the rate for the instrument over the appropriate risk-free rate.

•

Judgment to determine what model to use to calculate fair value in areas where the choice of valuation model is particularly subjective (for example, valuation of complex derivative products).

The financial instruments carried at fair value have been categorized under the three levels of the IFRS fair value hierarchy as follows:

•

Level 1: Quoted prices in active markets for identical assets or liabilities.

•

Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar 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.

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The fair value hierarchy 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 are intended to reflect those that market participants would use in pricing the asset or liability at the measurement date.

For financial instruments traded in the over-the-counter market, we measure the fair value of such instruments as the arithmetic mean of prices obtained from Korea Asset Pricing (an affiliate of Fitch Ratings), KIS Pricing (an affiliate of Moody’s Investors Service) and NICE Pricing and Information, all three of which are recognized as major qualified independent pricing services in Korea. There are extremely rare cases where we do not receive price quotes from all three of the pricing services described above. In such cases, we contact the pricing service which did not submit a price quote to discuss the reason why it cannot provide a price and, following such discussion, we use the arithmetic mean of only the prices obtained from the other pricing services so long as there is no reason to believe that the prices that have been submitted are inadequate. We generally do not adjust the prices we obtain from these independent pricing services, as the variance among such prices is insignificant in most cases (primarily because most of the financial instruments we hold consist of government bonds and highly-rated corporate bonds, there is a high volume of transactions in the over-the-counter market and actual transaction prices are monitored and referenced by the pricing services).

Our consolidated financial statements for the year ended December 31, 2014 included financial assets measured at fair value using a valuation technique of ￦22,411 billion, representing 63.8% of total financial assets measured at fair value, and financial liabilities measured at fair value using a valuation technique of ￦2,778 billion, representing 76.9% of total financial liabilities measured at fair value. As used herein, the fair value using a valuation technique means the fair value at Level 2 and Level 3 in the fair value hierarchy.

We believe that the accounting estimates related to the determination of the fair value of financial instruments are 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 estimate of the fair value of these financial instruments 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 financial instruments could result in valuation losses or losses on disposal which may have a material impact on our profit. Our assumptions about the fair value of financial instruments we hold 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.

Deferred Income Tax Assets

Our accounting policy for the recognition of deferred income tax assets is described in Notes 3.21 and 16 of the notes to our consolidated financial statements. The recognition of deferred income tax assets relies on an assessment of the probability and sufficiency of future taxable profits, future reversals of existing taxable temporary differences and ongoing tax planning strategies.

We recognize deferred income tax assets and liabilities for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, unused tax losses and unused tax credits. Deferred income tax assets are recognized only to the extent it is probable that sufficient taxable profit will be available against which those deductible temporary differences, unused tax losses or unused tax credits can be utilized. This assessment requires significant management judgment and assumptions. In determining the amount of deferred income tax assets, we use historical tax capacity and profitability information and, if relevant, forecasted operating results, based upon approved business plans, including a review of the eligible carry-forward periods, available tax planning opportunities and other relevant considerations.

Our consolidated financial statements for the year ended December 31, 2014 included deferred income tax assets and liabilities of ￦16 billion and ￦93 billion, respectively, as of that date, after offsetting of ￦1,236 billion of deferred income tax liabilities and assets.

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We believe that the estimates related to our recognition and measurement of deferred income tax assets are a “critical accounting policy” because: (1) they may be highly susceptible to change from period to period based on our assumptions regarding our future profitability; and (2) any significant difference between our estimates of future profits on any particular date and estimates of such future profits on a different date could result in an income tax expense or benefit which may have a material impact on our profit from period to period. Our assumptions about 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, Percentage Change
2012 2013 2014 2013/2012 2014/2013
(in billions of Won, except percentages) (%)

Interest income

Cash and interest earning deposits in other banks

￦ 160 ￦ 146 ￦ 190 (8.8 )% 30.1 %

Loans

12,624 10,942 10,325 (13.3 ) (5.6 )

Financial investments (debt securities) (1)

1,426 1,269 1,120 (11.0 ) (11.7 )

Total interest income

14,210 12,357 11,635 (13.0 ) (5.8 )

Interest expense

Deposits

5,450 4,279 3,845 (21.5 ) (10.1 )

Debts

460 365 342 (20.7 ) (6.3 )

Debentures

1,262 1,190 1,032 (5.7 ) (13.3 )

Total interest expense

7,172 5,834 5,219 (18.7 ) (10.5 )

Net interest income

￦ 7,038 ￦ 6,523 ￦ 6,416 (7.3 ) (1.6 )

Net interest margin (2)

2.71 % 2.51 % 2.39 %

(1)

Consists of debt securities in our available-for-sale and held-to-maturity financial asset portfolios.

(2)

The ratio of net interest income to average interest earning assets. See “Item 3.A. Selected Financial Data—Profitability ratios and other data.”

Comparison of 2014 to 2013

Interest income . Interest income decreased 5.8% from ￦12,357 billion in 2013 to ￦11,635 billion in 2014, primarily as a result of a 5.6% decrease in interest on loans. Average yields on our interest earning assets decreased 42 basis points from 4.76% in 2013 to 4.34% in 2014, which reflected a decrease in the general level of interest rates in Korea in 2014 compared to 2013. The effect of this decrease was partially offset by a 3.3% increase in the average volume of our interest earning assets from ￦259,645 billion in 2013 to ￦268,330 billion in 2014, principally due to growth in our loan portfolio.

The 5.6% decrease in interest on loans from ￦10,942 billion in 2013 to ￦10,325 billion in 2014 was primarily the result of:

•

a 43 basis point decrease in the average yields on corporate loans from 4.50% in 2013 to 4.07% in 2014, which was partially offset by a 1.3% increase in the average volume of such loans from ￦100,614 billion in 2013 to ￦101,875 billion in 2014;

•

a 77 basis point decrease in the average yields on credit card receivables from 10.70% in 2013 to 9.93% in 2014, which was enhanced by a 2.6% decrease in the average volume of such receivables from ￦11,611 billion in 2013 to ￦11,312 billion in 2014;

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•

a 47 basis point decrease in the average yields on mortgage loans from 4.10% in 2013 to 3.63% in 2014, which was partially offset by an 8.2% increase in the average volume of such loans from ￦44,514 billion in 2013 to ￦48,160 billion in 2014; and

•

a 45 basis point decrease in the average yields on home equity loans from 4.25% in 2013 to 3.80% in 2014, which was partially offset by a 5.8% increase in the average volume of such loans from ￦30,275 billion in 2013 to ￦32,030 billion in 2014.

The average yields on corporate loans, credit card receivables, mortgage loans and home equity loans decreased mainly as a result of the decrease in the general level of interest rates in Korea applicable to such loans and receivables from 2013 to 2014. The increase in the average volume of corporate loans mainly reflected our increased marketing efforts as well as increased demand for such loans in Korea. The decrease in the average volume of credit card loans was principally due to initiatives by the Korean government to encourage the use of debit cards instead of credit cards. The increase in the average volume of mortgage loans was mainly a result of initiatives by the Korean government to revive the housing market in Korea by loosening regulations on mortgage lending in 2014. The increase in the average volume of home equity loans mainly reflected the loosening of the maximum loan-to-value ratios, to which our home equity loans are subject, by the Korean government in 2014.

Overall, the average yields on our loans decreased by 45 basis points from 4.96% in 2013 to 4.51% in 2014, while the average volume of our loans increased 3.9% from ￦220,401 billion in 2013 to ￦228,989 billion in 2014.

Debt securities in our financial investments portfolio consist of available-for-sale debt securities and held-to-maturity debt securities, including debt securities issued by government-owned or -controlled enterprises or financial institutions and debt securities issued by Korean banks and other financial institutions. Interest on debt securities in our financial investments portfolio decreased 11.7% from ￦1,269 billion in 2013 to ￦1,120 billion in 2014, primarily as a result of a 26 basis point decrease in average yields on such debt securities from 3.81% in 2013 to 3.55% in 2014, which was enhanced by a 5.4% decrease in the average volume of such debt securities from ￦33,339 billion in 2013 to ￦31,530 billion in 2014. The decrease in average yields on such debt securities was primarily due to a decrease in the general level of interest rates in Korea for debt securities from 2013 to 2014. The decrease in average volume of such debt securities primarily reflected our decreased purchases of such debt securities due to the lower interest rate environment in Korea in 2014.

Interest expense. Interest expense decreased 10.5% from ￦5,834 billion in 2013 to ￦5,219 billion in 2014 primarily due to a 10.1% decrease in interest expense on deposits, which was enhanced by a 13.3% decrease in interest expense on debentures. The average cost of interest bearing liabilities decreased by 33 basis points from 2.45% in 2013 to 2.12% in 2014, which was driven mainly by the lower interest rate environment in Korea in 2014. The effect of this decrease was offset in part by a 3.5% increase in the average volume of interest-bearing liabilities from ￦238,452 billion in 2013 to ￦246,692 billion in 2014, which mainly reflected an increase in the average volume of debentures.

The 10.1% decrease in interest expense on deposits from ￦4,279 billion in 2013 to ￦3,845 billion in 2014 was primarily due to a 32 basis point decrease in the average cost of time deposits from 3.02% in 2013 to 2.70% in 2014. The decrease in the average cost of time deposits mainly reflected a decrease in the general level of interest rates in Korea from 2013 to 2014. Overall, the average cost of our deposits decreased by 29 basis points from 2.22% in 2013 to 1.93% in 2014, while the average volume of our deposits increased 3.4% from ￦192,960 billion in 2013 to ￦199,559 billion in 2014.

The 13.3% decrease in interest expense on debentures from ￦1,190 billion in 2013 to ￦1,032 billion in 2014 was mainly due to a 102 basis point decrease in the average cost of debentures from 4.70% in 2013 to 3.68% in 2014, which was offset in part by a 10.8% increase in the average volume of debentures from ￦25,319 billion in 2013 to ￦28,048 billion in 2014. The decrease in the average cost of debentures mainly reflected the

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general decrease in market interest rates in Korea, including for long-term debentures, in 2014. The increase in the average volume of debentures was principally due to the addition of KB Capital as a consolidated subsidiary in March 2014.

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 2.51% in 2013 to 2.39% in 2014, as a 1.6% decrease in our net interest income from ￦6,523 billion in 2013 to ￦6,416 billion in 2014 was enhanced a 3.3% increase in the average volume of our interest earning assets from ￦259,645 billion in 2013 to ￦268,330 billion in 2014. The growth in average interest earning assets exceeded a 3.5% increase in average interest bearing liabilities from ￦238,452 billion in 2013 to ￦246,692 billion in 2014, while the decrease in interest income outpaced a decrease in interest expense, resulting in a decrease in net interest income. 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 2.31% in 2013 to 2.22% in 2014. The decline in our net interest spread reflected a larger decrease in the average yield of 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 2013 to 2012

Interest income. Interest income decreased 13.0% from ￦14,210 billion in 2012 to ￦12,357 billion in 2013, primarily as a result of a 13.3% decrease in interest on loans. The average balance of our interest earning assets decreased 0.2% from ￦260,120 billion in 2012 to ￦259,645 billion in 2013, principally due to a decrease in our loan portfolio. The effect of this decrease was enhanced by a 70 basis point decrease in average yields on our interest earning assets from 5.46% in 2012 to 4.76% in 2013, which reflected a decrease in the general level of interest rates in Korea in 2013.

The 13.3% decrease in interest on loans from ￦12,624 billion in 2012 to ￦10,942 billion in 2013 was primarily the result of:

•

a 68 basis point decrease in the average yields on corporate loans from 5.18% in 2012 to 4.50% in 2013, which was enhanced by a 2.1% decrease in the average volume of such loans from ￦102,773 billion in 2012 to ￦100,614 billion in 2013;

•

a 82 basis point decrease in the average yields on other consumer loans from 7.28% in 2012 to 6.46% in 2013, which was partially offset by a 2.7% increase in the average volume of such loans from ￦29,721 billion in 2012 to ￦30,536 billion in 2013;

•

a 76 basis point decrease in the average yields on mortgage loans from 4.86% in 2012 to 4.10% in 2013, which was partially offset by a 0.2% increase in the average volume of such loans from ￦44,444 billion in 2012 to ￦44,514 billion in 2013; and

•

an 84 basis point decrease in the average yields on home equity loans from 5.09% in 2012 to 4.25% in 2013, which was partially offset by a 0.3% increase in the average volume of such loans from ￦30,170 billion in 2012 to ￦30,275 billion in 2013.

The average yields for corporate loans, other consumer loans, mortgage loans and home equity loans decreased mainly as a result of the decrease in the general level of interest rates in Korea applicable to such loans from 2012 to 2013. The decrease in the average volume of corporate loans was primarily due to our efforts to improve the asset quality of our corporate loans by applying more stringent standards to the origination of new loans and renewal of existing loans to corporate customers. The increase in the average volume of other consumer loans was principally due to higher demand for such loans in Korea. The increase in the average volume of mortgage loans was primarily a result of an increase in loans relating to key money deposits. The increase in the average volume of home equity loans mainly reflected higher demand for such loans in Korea.

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Overall, the average volume of our loans decreased 0.7%, from ￦221,930 billion in 2012 to ￦220,401 billion in 2013, while the average yields on our loans decreased by 73 basis points, from 5.69% in 2012 to 4.96% in 2013.

Interest on debt securities in our financial investments portfolio decreased 11.0% from ￦1,426 billion in 2012 to ￦1,269 billion in 2013 primarily as a result of a 46 basis point decrease in average yields on such debt securities from 4.27% in 2012 to 3.81% in 2013, which was enhanced by a 0.1% decrease in the average volume of such debt securities from ￦33,382 billion in 2012 to ￦33,339 billion in 2013. The decrease in average yields on such debt securities was primarily due to the decrease in the general level of interest rates in Korea for debt securities from 2012 to 2013.

Interest expense. Interest expense decreased 18.7% from ￦7,172 billion in 2012 to ￦5,834 billion in 2013 primarily due to a 21.5% decrease in interest expense on deposits, which was enhanced by a 20.7% decrease in interest expense on debts. The average volume of interest bearing liabilities decreased 1.0% from ￦240,831 billion in 2012 to ￦238,452 billion in 2013, which mainly reflected a decrease in the average volume of deposits. The effect of this decrease was enhanced by a decrease of 53 basis points in the average cost of interest bearing liabilities from 2.98% in 2012 to 2.45% in 2013, which was driven mainly by the lower interest rate environment in Korea in 2013.

The 21.5% decrease in interest expense on deposits from ￦5,450 billion in 2012 to ￦4,279 billion in 2013 was primarily due to a 67 basis point decrease in the average cost of time deposits from 3.69% in 2012 to 3.02% in 2013, which was enhanced by a 4.6% decrease in the average volume of such deposits from ￦136,617 billion in 2012 to ￦130,286 billion in 2013. The decrease in the average cost of time deposits mainly reflected the decrease in the general level of interest rates in Korea from 2012 to 2013. The decrease in the average volume of time deposits was principally due to a decrease in time deposits for corporate customers. Overall, the average cost of our deposits decreased by 58 basis points from 2.80% in 2012 to 2.22% in 2013, while the average volume of our deposits decreased by 0.8% from ￦194,506 billion in 2012 to ￦192,960 billion in 2013.

The 20.7% decrease in interest expense on debts from ￦460 billion in 2012 to ￦365 billion in 2013 resulted from a 30 basis point decrease in the average cost of debts from 2.11% in 2012 to 1.81% in 2013, which was enhanced by a 7.3% decrease in the average volume of debts from ￦21,773 billion in 2012 to ￦20,173 billion in 2013. The decrease in the average cost of debts was primarily attributable to the general decrease in market interest rates in Korea, including for short-term borrowings and call money, in 2013, while the decrease in the average volume of debts mainly reflected a decrease in the use of short-term borrowings to meet our funding needs.

Net interest margin. Our overall net interest margin decreased from 2.71% in 2012 to 2.51% in 2013, as a 7.3% decrease in our net interest income from ￦7,038 billion in 2012 to ￦6,523 billion in 2013 outpaced a 0.2% decrease in the average volume of our interest earning assets from ￦260,120 billion in 2012 to ￦259,645 billion in 2013. The decrease in average interest earning assets was outpaced by a 1.0% decrease in average interest bearing liabilities from ￦240,831 billion in 2012 to ￦238,452 billion in 2013, while the decrease in interest expense was more than offset by a decrease in interest income, resulting in a decrease in net interest income. Our net interest spread declined from 2.48% in 2012 to 2.31% in 2013. The decline in our net interest spread reflected a larger decrease in the average yield of 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 loan products.

Provision for Credit Losses

Provision for credit losses includes provision for loan losses, provision for unused loan commitments, provision for acceptances and guarantees, provision for financial guarantee contracts and provision for other financial assets, in each case net of reversal of provisions. For a discussion of our loan loss provisioning policy, see “Item 4.B. Business Overview—Assets and Liabilities—Loan Portfolio—Provisioning Policy.”

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In accordance with the guidelines of the Financial Supervisory Service, if our provision for loan losses is deemed insufficient for regulatory purposes, we compensate for the difference by recording a regulatory reserve for credit losses, which is segregated within retained earnings. See “Item 4.B. Business Overview—Assets and Liabilities—Loan Portfolio—Regulatory Reserve for Credit Losses” and Note 26 of the notes to our consolidated financial statements included elsewhere in this annual report.

Comparison of 2014 to 2013

Our provision for credit losses decreased 14.9% from ￦1,443 billion in 2013 to ￦1,228 billion in 2014, primarily due to a decrease in provision for loan losses in respect of our corporate loans and credit card receivables. Such decrease resulted mainly from an improvement in the overall asset quality of such loans and receivables reflecting a decrease in delinquency rates.

Our write-offs, net of recoveries, decreased 9.1% from ￦1,717 billion in 2013 to ￦1,560 billion in 2014, primarily due to a an increase in recoveries from written-off corporate loans.

Our reversal of provision for acceptances and guarantees and unused loan commitments increased from ￦8 billion in 2013 to ￦21 billion in 2014, due mainly to an increase in reversal of provision for acceptances and guarantees issued on behalf of construction companies, as well as an increase in reversal of provision for unused loan commitments.

Comparison of 2013 to 2012

Our provision for credit losses decreased 10.2% from ￦1,607 billion in 2012 to ￦1,443 billion in 2013, primarily due to an improvement in the overall asset quality of our loans reflecting a decrease in delinquency rates.

Our loan write-offs, net of recoveries, decreased 1.7% from ￦1,747 billion in 2012 to ￦1,717 billion in 2013, primarily due to a decrease in write-offs of credit card receivables.

Our reversal of provision for acceptances and guarantees and unused loan commitments decreased from ￦91 billion in 2012 to ￦8 billion in 2013, due primarily to a decrease in reversal of provision for refund guarantees issued on behalf of shipbuilding companies.

Allowances for Loan Losses

We establish allowances for loan losses with respect to loans to absorb such losses. We assess individually significant loans on a case-by-case basis and other loans on a collective basis. In addition, if we determine that no objective evidence of impairment exists for a loan, we include such loan in a group of loans with similar credit risk characteristics and assess them collectively for impairment regardless of whether such loan is significant. For further information on allowances for loan losses, see “—Critical Accounting Policies—Impairment of Loans and Allowances for Loan Losses” and “Item 4.B. Business Overview—Assets and Liabilities—Loan Portfolio—Allocation and Analysis of Allowances for Loan Losses.”

Corporate Loans. The following table shows, for the periods indicated, certain information regarding our impaired corporate loans:

As of December 31,
2012 2013 2014

Impaired corporate loans as a percentage of total corporate loans

2.3 % 2.8 % 2.0 %

Allowances for loan losses for corporate loans as a percentage of total corporate loans

2.2 1.8 1.5

Allowances for loan losses for corporate loans as a percentage of impaired corporate loans

94.5 65.5 72.7

Net charge-offs of corporate loans as a percentage of total corporate loans

1.0 1.0 0.8

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During 2014, impaired corporate loans and allowances for loan losses for corporate loans, each as a percentage of total corporate loans, decreased primarily due to a decrease in our impaired corporate loans, which mainly reflected our efforts to improve the asset quality of our corporate loan portfolio. Such decrease in our impaired corporate loans outpaced a decrease in allowance for loan losses for corporate loans, which caused the level of allowances for loan losses for corporate loans as a percentage of impaired corporate loans to increase during 2014.

During 2013, impaired corporate loans as a percentage of total corporate loans increased due to a reclassification of impaired corporate loans to include all loans for which account-specific provisions have been made, while allowances for loan losses for corporate loans as a percentage of total corporate loans decreased primarily as a result of an improvement in the overall asset quality of our corporate loans, resulting in a decrease in allowance for loan losses for corporate loans as a percentage of impaired corporate loans.

During 2012, impaired corporate loans as a percentage of total corporate loans remained relatively constant. Allowances for loan losses for corporate loans, as a percentage of total corporate loans and as a percentage of impaired corporate loans, respectively, decreased during 2012 primarily as a result of a decrease in our allowances for loan losses for such loans, which mainly reflected an increase in the relative proportion of such loan amounts that are secured by collateral.

Retail Loans. The following table shows, for the periods indicated, certain information regarding our impaired retail loans:

As of December 31,
2012 2013 2014

Impaired retail loans as a percentage of total retail loans

1.1 % 1.0 % 0.6 %

Allowances for loan losses for retail loans as a percentage of total retail loans

0.7 0.5 0.5

Allowances for loan losses for retail loans as a percentage of impaired retail loans

58.1 56.7 70.1

Net charge-offs of retail loans as a percentage of total retail loans

0.3 0.4 0.4

During 2014, impaired retail loans as a percentage of total retail loans decreased as the effect of a decrease in our impaired retail loans, which reflected an improvement in the asset quality of our retail loan portfolio, was enhanced by an increase in the amount of our total retail loans. Such decrease in our impaired retail loans outpaced a decrease in allowance for loan losses for retail loans, which caused the level of allowances for loan losses for retail loans as a percentage of impaired retail loans to increase during 2014.

During 2013, impaired retail loans as a percentage of total retail loans remained relatively constant. However, an improvement in the asset quality of our existing impaired retail loans led to a better overall mix of impaired loans, which caused the level of allowances for loan losses as a percentage of both total retail loans and impaired retail loans to decrease.

During 2012, impaired retail loans as a percentage of total retail loans increased as the effect of an increase in our impaired retail loans, which reflected a deterioration in the asset quality of our retail loan portfolio due to adverse economic conditions in Korea in 2012, was enhanced by a slight decrease in the amount of our total retail loans. Allowances for loan losses for retail loans as a percentage of total retail loans similarly increased during 2012 as the effect of an increase in allowances for retail loans, reflecting the deterioration in the asset quality of our retail loan portfolio, was enhanced by the decrease in the amount of our total retail loans. However, an improvement in the asset quality of our existing impaired retail loans reflecting our increased charge-offs of such loans in 2012 led to a better overall mix of impaired retail loans, which caused the level of allowances for loan losses for retail loans as a percentage of impaired retail loans to decrease.

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Credit Card Balances. The following table shows, for the periods indicated, certain information regarding our impaired credit card balances:

As of December 31,
2012 2013 2014

Impaired credit card balances as a percentage of total credit card balances

1.0 % 1.8 % 1.7 %

Allowances for loan losses for credit card balances as a percentage of total credit card balances

2.8 3.5 3.4

Allowances for loan losses for credit card balances as a percentage of impaired credit card balances

272.9 196.4 195.3

Net charge-offs as a percentage of total credit card balances

3.0 2.2 2.5

During 2014, impaired credit card balances as a percentage of total credit card balances decreased slightly as the rate of decrease in our impaired credit card balances outpaced the rate of decrease in the amount of our total credit card balances. Allowances for loan losses for credit card balances as a percentage of both total credit card balances and impaired credit card balances similarly decreased slightly during 2014, primarily as a result of an improvement in the asset quality of our existing impaired credit card balances.

During 2013, impaired credit card balances as a percentage of total credit card balances increased primarily due to an increase in impaired credit card balances, which mainly reflected a decrease in charge-off of such balances due to a change in our charge-off policy in 2013 which increased the delinquency period for credit card balances before charge-off from three months to six months. Allowances for loan losses for credit card balances as a percentage of total credit card balances increased during 2013 mainly as a result of an increase in impaired credit card balances. Allowance for loan losses for credit card balances as a percentage of impaired credit card balances decreased during 2013 as the increase in impaired credit card balances outpaced the increase in allowance for loans losses for credit card balances.

During 2012, impaired credit card balances as a percentage of total credit card balances increased slightly primarily due to the effect of a decrease in our total credit card balances while the amount of our impaired credit card balances remained relatively steady. Allowances for loan losses for credit card balances, which decreased during 2012 mainly as a result of a decrease in our total credit card balances as well as increased charge-offs (which, in turn, principally reflected increased delinquencies in our credit card portfolio from the second half of 2011 becoming subject to charge off in 2012), remained relatively constant as a percentage of total credit card balances and decreased as a percentage of impaired credit card balances.

Net Fee and Commission Income

The following table shows, for the periods indicated, the components of our net fee and commission income:

Year Ended December 31, Percentage Change
2012 2013 2014 2013/2012 2014/2013
(in billions of Won) (%)

Fee and commission income

￦ 2,754 ￦ 2,657 ￦ 2,666 (3.5 )% 0.3 %

Fee and commission expense

(1,187 ) (1,178 ) (1,283 ) (0.8 ) 8.9

Net fee and commission income

￦ 1,567 ￦ 1,479 ￦ 1,383 (5.6 ) (6.5 )

Comparison of 2014 to 2013

Our net fee and commission income decreased 6.5% from ￦1,479 billion in 2013 to ￦1,383 billion in 2014, primarily due to an 8.9% increase in fee and commission expense from ￦1,178 in 2013 to ￦1,283 in 2014.

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Our fee and commission income remained relatively constant at ￦2,666 billion in 2014 compared to ￦2,657 billion in 2013, as increases in trust and other fiduciary fees and debit card related fees and commissions were offset by decreases in agent activity fees and commissions from transfer agent services. Trust and other fiduciary fees increased 43.5% from ￦161 billion in 2013 to ￦231 billion in 2014 primarily due to an increase in sales of equity linked securities. Debit card related fees and commissions increased 14.1% from ￦256 billion in 2013 to ￦292 billion in 2014, which mainly reflected the impact of the government initiative to encourage the use of debit cards instead of credit cards. Credit card related fees and commissions received decreased from ￦1,127 billion in 2013 to ￦1,107 billion in 2014. Agent activity fees decreased 23.7% from ￦207 billion in 2013 to ￦158 billion in 2014 principally as a result of reduced bancassurance activities, while commissions from transfer agent services decreased 16.3% from ￦178 billion in 2013 to ￦149 billion in 2014 primarily due to a decrease in sales of beneficiary certificates.

The 8.9% increase in fee and commission expense was primarily due to a 48.8% increase in other fees and commissions paid from ￦125 billion in 2013 to ￦186 billion in 2014 and a 4.9% increase in credit card and debit card related fees and commissions paid from ￦934 billion in 2013 to ￦980 billion in 2014. The increase in other fees and commissions paid resulted mainly from an increase in investment banking related fees and commissions. The increase in credit card and debit card related fees and commissions paid resulted primarily from an increase in debit card related fees and commissions, including fees paid to value-added network providers, reflecting the increased use of debit cards.

Comparison of 2013 to 2012

Our net fee and commission income decreased 5.6% from ￦1,567 billion in 2012 to ￦1,479 billion in 2013, primarily due to a 3.5% decrease in fee and commission income from ￦2,754 billion in 2012 to ￦2,657 billion in 2013, which was partially offset by a 0.8% decrease in fee and commission expense from ￦1,187 billion in 2012 to ￦1,178 billion in 2013. The 3.5% decrease in fee and commission income was mainly the result of decreases in agent activity fees, mostly related to bancassurance activities, from ￦285 billion in 2012 to ￦207 billion in 2013 and in credit card related fees and commissions received from ￦1,180 billion in 2012 to ￦1,127 billion in 2013, which mainly reflected the impact of the new government initiative to encourage the use of check cards instead of credit cards. Check card related fees and commissions increased from ￦218 billion in 2012 to ￦256 billion in 2013.

The 0.8% decrease in fee and commission expense was primarily due to a decrease in credit card and debit card related fees and commissions paid from ￦997 billion in 2012 to ￦934 billion in 2013. The effect of such decrease was partially offset by a 62.3% increase in other fee and commission expenses from ￦77 billion in 2012 to ￦125 billion in 2013, mainly resulting from an increase in fee and commission expenses from factored receivables.

For further information regarding our net fee and commission income, see Note 28 of the notes to our consolidated financial statements included elsewhere in this annual report.

Net Gain on Financial Assets and Liabilities at Fair Value through Profit or Loss

The following table shows, for the periods indicated, the components of our net gain on financial assets and liabilities at fair value through profit or loss:

Year Ended December 31, Percentage Change
2012 2013 2014 2013/2012 2014/2013
(in billions of Won) (%)

Net gain on financial assets held-for-trading

￦ 437 ￦ 250 ￦ 414 (42.8 )% 65.6 %

Net gain on derivatives held-for-trading

456 544 98 19.3 (82.0 )

Net loss on financial liabilities held-for-trading

(44 ) (15 ) (62 ) (65.9 ) 313.3

Net gain on financial instruments designated at fair value through profit or loss

(37 ) (22 ) (11 ) (40.5 ) (50.0 )

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

￦ 812 ￦ 757 ￦ 439 (6.8 ) (42.0 )

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Comparison of 2014 to 2013

Our net gain on financial assets and liabilities at fair value through profit or loss decreased 42.0% from ￦757 billion in 2013 to ￦439 billion in 2014, primarily as a result of an 82.0% decrease in net gain on derivatives held-for-trading from ￦544 billion in 2013 to ￦98 billion in 2014, which was offset in part by a 65.6% increase in net gain on financial assets held-for-trading from ￦250 billion in 2013 to ￦414 billion in 2014. The decrease in net gain on derivatives held-for-trading was principally due to a 76.2% decrease in net gain on currency derivatives held-for-trading from ￦517 billion in 2013 to ￦123 billion in 2014. The increase in net gain on financial assets held-for-trading mainly reflected a 94.6% increase net gain on debt securities held-for-trading from ￦222 billion in 2013 to ￦432 billion in 2014.

Comparison of 2013 to 2012

Our net gain on financial assets and liabilities at fair value through profit or loss decreased 6.8% from ￦812 billion in 2012 to ￦757 billion in 2013, primarily as a result of a 42.8% decrease in net gain on financial assets held-for-trading from ￦437 billion in 2012 to ￦250 billion in 2013, which was offset in part by a 19.3% increase in net gain on derivatives held-for-trading from ￦456 billion in 2012 to ￦544 billion in 2013. The decrease in net gain on financial assets held-for-trading was principally due to a 43.1% decrease in net gain on debt securities held-for-trading from ￦390 billion in 2012 to ￦222 billion in 2013. The increase in net gain on derivatives held-for-trading mainly reflected a 16.4% increase in net gain on currency derivatives held-for-trading from ￦444 billion in 2012 to ￦517 billion in 2013.

For further information regarding our net gain on financial assets and liabilities at fair value through profit or loss, see Note 29 of the notes to our consolidated financial statements included elsewhere in this annual report.

General and Administrative Expenses

The following table shows, for the periods indicated, the components of our general and administrative expenses:

Year Ended December 31, Percentage Change
2012 2013 2014 2013/2012 2014/2013
(in billions of Won) (%)

Employee compensation and benefits

￦ 2,442 ￦ 2,534 ￦ 2,593 3.8 % 2.3 %

Depreciation and amortization

328 287 261 (12.5 ) (9.1 )

Other general and administrative expenses

1,076 1,163 1,155 8.1 (0.7 )

General and administrative expenses

￦ 3,846 ￦ 3,984 ￦ 4,010 3.6 0.7

Comparison of 2014 to 2013

Our general and administrative expenses increased 0.7% from ￦3,984 billion in 2013 to ￦4,010 billion in 2014, primarily as a result of a 2.3% increase in employee compensation and benefits from ￦2,534 billion in 2013 to ￦2,593 billion in 2014, which was offset in part by a 9.1% decrease in depreciation and amortization from ￦287 billion in 2013 to ￦261 billion in 2014. The increase in employee compensation and benefits was principally due to a 3.6% increase in salaries and short-term employee benefits from ￦1,641 billion in 2013 to ￦1,700 billion in 2014, which mainly reflected an increase in the average wage of our employees. The 9.1% decrease in depreciation and amortization was principally due to a decrease in the depreciation and amortization of software.

Comparison of 2013 to 2012

Our general and administrative expenses increased 3.6% from ￦3,846 billion in 2012 to ￦3,984 billion in 2013, primarily as a result of a 3.8% increase in employee compensation and benefits from ￦2,442 billion in 2012 to ￦2,534 billion in 2013, which was enhanced by an 8.1% increase in other general and administrative

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expenses from ￦1,076 billion in 2012 to ￦1,163 billion in 2013. The increase in employee compensation and benefits was principally due to a 2.7% increase in salaries and short-term employee benefits from ￦1,598 billion in 2012 to ￦1,641 billion in 2013, which mainly reflected an increase in the average wage of our employees. The 8.1% increase in other general and administrative expenses was principally due to a 95.8% increase in tax and dues from ￦72 billion in 2012 to ￦141 billion in 2013, which primarily reflected refunds of previously levied education taxes in 2012 as a result of claims filed by Kookmin Bank which were not repeated in 2013.

Net Other Operating Expenses

The following table shows, for the periods indicated, the components of our net other operating expenses:

Year Ended December 31, Percentage Change
2012 2013 2014 2013/2012 2014/2013
(in billions of Won) (%)

Other operating income

￦ 3,286 ￦ 3,137 ￦ 3,100 (4.5 )% (1.2 )%

Other operating expenses

(4,818 ) (4,442 ) (4,141 ) (7.8 ) (6.8 )

Net other operating expenses

￦ (1,532 ) ￦ (1,305 ) ￦ (1,041 ) (14.8 ) (20.2 )

Comparison of 2014 to 2013

Our net other operating expenses decreased 20.2% from ￦1,305 billion in 2013 to ￦1,041 billion in 2014 as a 6.8% decrease in other operating expenses from ￦4,442 billion in 2013 to ￦4,141 billion in 2014 outpaced a 1.2% decrease in other operating income from ￦3,137 billion in 2013 to ￦3,100 billion in 2014.

Other operating income includes principally gain on foreign exchange transactions, income related to insurance, gain on sale of available-for-sale financial assets and other income. The 1.2% decrease in other operating income was attributable mainly to a 51.3% decrease in gain on sale of available-for-sale financial assets from ￦189 billion in 2013 to ￦92 billion in 2014 and a 15.3% decrease in other income from ￦262 billion in 2013 to ￦222 billion in 2014, the effect of which was partially offset by a 7.5% increase in gain on foreign exchange transactions from ￦1,387 billion in 2013 to ￦1,491 billion in 2014. The decrease in gain on sale of available-for-sale financial assets was principally due to gains realized in 2013 from sales of shares of Hyundai Merchant Co., Ltd. and Kumho Petrochemical Co., Ltd. held by us, which were not repeated in 2014. The decrease in other income was mainly due to a decrease in gain on sales of loans. The increase in gain on foreign exchange transactions, which was mainly the result of increased exchange rate volatility, was enhanced by a decrease in loss on foreign exchange transactions, which is recorded as part of other operating expenses. On a net basis, we recognized a net gain on foreign exchange transactions of ￦34 billion in 2014 compared to a net loss on foreign exchange transactions of ￦280 billion in 2013.

Other operating expenses include principally loss on foreign exchange transactions, expenses related to insurance, loss on sale of available-for-sale financial assets and other expenses. The 6.8% decrease in other operating expenses was primarily the result of a 12.6% decrease in loss on foreign exchange transactions from ￦1,667 billion in 2013 to ￦1,457 billion in 2014. The decrease in loss on foreign exchange transactions, which was mainly due to a decrease in the volume of our foreign currency transactions, was enhanced by an increase in gain on foreign exchange transactions, which is recorded as part of other operating income as discussed above.

Comparison of 2013 to 2012

Our net other operating expenses decreased 14.8% from ￦1,532 billion in 2012 to ￦1,305 billion in 2013, as a 7.8% decrease in other operating expenses from ￦4,818 billion in 2012 to ￦4,442 billion in 2013 outpaced a 4.5% decrease in other operating income from ￦3,286 billion in 2012 to ￦3,137 billion in 2013.

The 4.5% decrease in other operating income was attributable mainly to a 28.7% decrease in income related to insurance from ￦1,730 billion in 2012 to ￦1,234 billion in 2013, the effect of which was partially offset by a 26.8% increase in gains on foreign exchange transaction from ￦1,094 billion in 2012 to ￦1,387 billion in 2013.

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The decrease in income related to insurance was mainly the result of a decrease in demand for insurance products in 2013, which was substantially offset by a corresponding decrease in expense related to insurance, which is recorded as part of other operating expenses. On a net basis, our net expense related to insurance increased 35.9% from ￦92 billion in 2012 to ￦125 billion in 2013. The increase in gain on foreign exchange transactions, which was mainly the result of increased exchange rate volatility, was more than offset by a corresponding increase in loss on foreign exchange transactions, which is recorded as part of other operating expenses.

The 7.8% decrease in other operating expenses was primarily the result of a 25.4% decrease in expense related to insurance from ￦1,822 billion in 2012 to ￦1,359 billion in 2013, which was enhanced by a 36.6% decrease in expense related to available-for-sale financial assets from ￦298 billion in 2012 to ￦189 billion in 2013. The decrease in expense related to insurance reflected a decrease in policy reserves due to a decrease in insurance products sold. The decrease in expense related to available-for-sale financial assets, which was principally due to a decrease in impairment on available-for-sale financials assets, was partially offset by an increase in revenue related to available-for-sale financial assets, which is recorded as part of other operating income.

For further information regarding our net other operating expenses, see Note 30 of the notes to our consolidated financial statements included elsewhere in this annual report.

Income Tax Expense (Benefit)

Our income tax expense is calculated by adding or subtracting changes in deferred income tax liabilities and assets to income tax amounts payable for the period. Deferred income tax assets are recognized for deductible temporary differences, unused tax losses and unused tax credits, while deferred income tax liabilities are recognized for taxable temporary differences. Temporary differences are those between the carrying values of assets and liabilities for financial reporting purposes and their respective tax bases. Deferred income tax assets, including unused tax losses and credits, are recognized only to the extent it is probable that sufficient taxable profit will be available against which such deferred income tax assets can be utilized. See “—Critical Accounting Policies—Deferred Income Tax Assets.”

In 2014, we changed our accounting policy with respect to uncertain tax positions based on the guidance in IAS 12, Income Taxes , which allows recognition of tax payments as current income tax assets to the extent it is probable that they will be recovered from the tax authorities. Our consolidated financial statements as of and for the years ended December 31, 2012 and 2013 have been restated to reflect such change in accounting policy. See “—Overview—Changes in Accounting Policies” and Note 2.1 of the notes to our consolidated financial statements included elsewhere in this annual report.

Comparison of 2014 to 2013

Income tax expense decreased by 10.2% from ￦541 billion in 2013 to ￦486 billion in 2014, primarily due to a decrease in adjustments recognized in 2014 for current tax of prior years, as well as a change in income tax expense (benefit) recognized directly in equity relating to the value of available-for-sale financial assets from an income tax expense of ￦8 billion in 2013 to an income tax benefit of ￦79 billion in 2014. The statutory tax rate was 24.2% in 2013 and 2014. Our effective tax rate was 25.6% in 2014 compared to 29.8% in 2013.

Comparison of 2013 to 2012

Income tax expense increased 4.0% from ￦520 billion in 2012 to ￦541 billion in 2013, primarily due to an increase in adjustments recognized in 2013 for current tax of prior years. The statutory tax rate was 24.2% in 2012 and 2013. Our effective tax rate was 29.8% in 2013 compared to 22.6% in 2012.

See Note 33 of the notes to our consolidated financial statements included elsewhere in this annual report.

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Profit for the Year

As a result of the above, our profit for the year was ￦1,415 billion in 2014, compared to ￦1,275 billion in 2013 and ￦1,779 billion in 2012.

Results by Principal Business Segment

We compile and analyze financial information for our business segments based upon segment information used by our management for the purposes of resource allocation and performance evaluation. We are organized into six major business segments: retail banking operations, corporate banking operations, other banking operations, credit card operations, investment and securities operations and life insurance operations.

The following table shows, for the periods indicated, our results of operations by segment:

Profit (1)(2)
for the Year Ended December 31, 		Total Operating Revenue (3)
for the Year Ended December 31,
2012 2013 2014 2012 2013 2014
(in billions of Won)

Retail banking operations

￦ 686 ￦ 178 ￦ 110 ￦ 3,041 ￦ 2,454 ￦ 2,212

Corporate banking operations

238 157 383 1,953 1,732 1,710

Other banking operations

555 496 536 1,297 1,486 1,481

Credit card operations

291 384 333 1,287 1,421 1,281

Investment and securities operations

18 12 26 143 115 141

Life insurance operations

17 9 7 131 102 105

Other

48 61 115 33 144 266

Total (4)

￦ 1,853 ￦ 1,297 ￦ 1,510 ￦ 7,885 ￦ 7,454 ￦ 7,196

(1)

After deduction of income tax allocated to each segment.

(2)

The amounts for 2014 reflect a change in our accounting policies with respect to uncertain tax positions in 2014. Corresponding amounts for 2012 and 2013 have been restated to retroactively apply such change. See “—Overview—Changes in Accounting Policies.”

(3)

Represents operating revenue from external customers. See Note 5 of the notes to our consolidated financial statements.

(4)

Prior to adjustments for consolidation, inter-segment transactions and certain differences in classification under our management reporting system.

Retail Banking Operations

This segment consists of retail banking services provided by Kookmin Bank. The following table shows, for the periods indicated, our income statement data for this segment:

Year Ended December 31, Percentage Change
2012 2013 2014 2013/2012 2014/2013
(in billions of Won) (%)

Income statement data

Interest income

￦ 5,682 ￦ 4,786 ￦ 4,433 (15.8 )% (7.4 )%

Interest expense

(3,158 ) (2,773 ) (2,353 ) (12.2 ) (15.1 )

Net fee and commission income

696 612 525 (12.1 ) (14.2 )

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

(15 ) (2 ) (20 ) (86.7 ) 900.0

Net other operating expense

(235 ) (261 ) (421 ) 11.1 61.3

General and administrative expenses

(1,673 ) (1,740 ) (1,696 ) 4.0 (2.5 )

Provision for credit losses

(392 ) (358 ) (304 ) (8.7 ) (15.1 )

Profit before income tax

905 264 164 (70.8 ) (37.9 )

Tax expense

(219 ) (86 ) (54 ) (60.7 ) (37.2 )

Profit for the year

￦ 686 ￦ 178 ￦ 110 (74.1 ) (38.2 )

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Comparison of 2014 to 2013

Our profit before income tax for this segment decreased 37.9% from ￦264 billion in 2013 to ￦164 billion in 2014.

Interest income from our retail banking operations decreased 7.4% from ￦4,786 billion in 2013 to ￦4,433 billion in 2014. This decrease was principally due to decreases in the average yields on mortgage, home equity and other consumer loans, mainly reflecting a decrease in the general level of interest rates in Korea from 2013 to 2014, which were partially offset by increases in the average volume of such loans from 2013 to 2014.

Our largest and most important funding source is deposits from retail customers, which represent more than half of our total deposits. Interest expense for this segment decreased 15.1% from ￦2,773 billion in 2013 to ￦2,353 billion in 2014. This decrease was primarily due to a decrease in the average cost of time deposits held by retail customers, which mainly reflected a decrease in the general level of interest rates in Korea from 2013 to 2014.

Net fee and commission income attributable to this segment decreased 14.2% from ￦612 billion in 2013 to ￦525 billion in 2014, mainly due to decreases in fee and commission income from bancassurance operations and sales of beneficiary certificates as agents.

Net loss from financial assets and liabilities at fair value through profit or loss attributable to this segment increased tenfold from ￦2 billion in 2013 to ￦20 billion in 2014, principally as a result of an increase in valuation loss on derivatives.

Net other operating expense attributable to this segment increased 61.3% from ￦261 billion in 2013 to ￦421 billion in 2014, mainly as a result of an increase in expenses related to inter-segment borrowings.

General and administrative expenses attributable to this segment decreased 2.5% from ￦1,740 billion in 2013 to ￦1,696 billion in 2014, primarily due to a decrease in education taxes, reflecting a decrease in interest income. Education taxes are levied on revenues of financial institutions.

Provision for credit losses decreased 15.1% from ￦358 billion in 2013 to ￦304 billion in 2014, mainly due to an improvement in the asset quality of retail loans, reflecting a decrease in delinquency rates.

Comparison of 2013 to 2012

Our profit before income tax for this segment decreased 70.8% from ￦905 billion in 2012 to ￦264 billion in 2013.

Interest income from our retail banking operations decreased 15.8% from ￦5,682 billion in 2012 to ￦4,786 billion in 2013. This decrease was principally due to a decrease in the average yields on mortgage, home equity and other consumer loans, mainly reflecting a decrease in the general level of interest rates in Korea in 2013.

Interest expense for this segment decreased 12.2% from ￦3,158 billion in 2012 to ￦2,773 billion in 2013. This decrease was primarily due to a decrease in the average cost of time deposits held by retail customers, which mainly reflected a decrease in the general level of interest rates in Korea in 2013.

Net fee and commission income attributable to this segment decreased 12.1% from ￦696 billion in 2012 to ￦612 billion in 2013, mainly due to a decrease in fee and commission income from bancassurance operations.

Net loss from financial assets and liabilities at fair value through profit or loss attributable to this segment decreased 86.7% from ￦15 billion in 2012 to ￦2 billion in 2013, principally as a result of a decrease in valuation loss on derivatives.

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Net other operating expense attributable to this segment increased 11.1% from ￦235 billion in 2012 to ￦261 billion in 2013, mainly as a result of an increase in expenses related to inter-segment borrowings.

General and administrative expenses attributable to this segment increased 4.0% from ￦1,673 billion in 2012 to ￦1,740 billion in 2013, principally due to an increase in salary expense.

Provision for credit losses decreased 8.7% from ￦392 billion in 2012 to ￦358 billion in 2013, due mainly to an improvement in the asset quality of retail loans reflecting a decrease in delinquency rates for retail loans.

Corporate Banking Operations

This segment consists of corporate banking services provided by Kookmin Bank. The following table shows, for the periods indicated, our income statement data for this segment:

Year Ended December 31, Percentage Change
2012 2013 2014 2013/2012 2014/2013
(in billions of Won) (%)

Income statement data

Interest income

￦ 5,190 ￦ 4,391 ￦ 4,009 (15.4 )% (8.7 )%

Interest expense

(2,597 ) (1,840 ) (1,560 ) (29.1 ) (15.2 )

Net fee and commission income

233 241 237 3.4 (1.7 )

Net gain (loss) from financial assets and liabilities at fair value through profit or loss

(1 ) — — (100.0 ) —

Net other operating expense

(871 ) (1,055 ) (906 ) 21.1 (14.1 )

General and administrative expenses

(792 ) (822 ) (711 ) 3.8 (13.5 )

Provision for credit losses

(853 ) (706 ) (567 ) (17.2 ) (19.7 )

Net other non-operating revenue

6 1 2 (83.3 ) 100.0

Profit before income tax

315 210 504 (33.3 ) 140.0

Tax expense

(77 ) (53 ) (121 ) (31.2 ) 128.3

Profit for the year

￦ 238 ￦ 157 ￦ 383 (34.0 ) 143.9

Comparison of 2014 to 2013

Our profit before income tax for this segment increased 140.0% from ￦210 billion in 2013 to ￦504 billion in 2014.

Interest income from our corporate banking operations decreased 8.7% from ￦4,391 billion in 2013 to ￦4,009 billion in 2014. This decrease was principally due to a decrease in average yields on corporate loans, mainly reflecting the lower interest rate environment in Korea in 2014, which was offset in part by an increase in the average volume of such loans.

Interest expense for this segment decreased 15.2% from ￦1,840 billion in 2013 to ￦1,560 billion in 2014. This decrease was principally due to a decrease in the average cost of time deposits held by corporate customers, which mainly reflected a decrease in the general level of interest rates in Korea from 2013 to 2014.

Net fee and commission income attributable to this segment decreased 1.7% from ￦241 billion in 2013 to ￦237 billion in 2014, primarily due to decreases in foreign currency related fees and guarantee fees.

Net other operating expense attributable to this segment decreased 14.1% from ￦1,055 in 2013 to ￦906 billion in 2014, mainly as a result of a decrease in expenses related to inter-segment borrowings.

General and administrative expenses attributable to this segment decreased 13.5% from ￦822 billion in 2013 to ￦711 billion in 2014, principally due to a decrease in labor expenses allocated to this segment based on the relative volume of loans attributable to this segment.

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Provision for credit losses decreased 19.7% from ￦706 billion in 2013 to ￦567 billion in 2014, due mainly to an overall improvement in the asset quality of corporate loans, reflecting a decrease in delinquency rates.

Net other non-operating revenue attributable to this segment increased from ￦1 billion in 2013 and ￦2 billion in 2014.

Comparison of 2013 to 2012

Our profit before income tax for this segment decreased 33.3% from ￦315 billion in 2012 to ￦210 billion in 2013.

Interest income from our corporate banking operations decreased 15.4% from ￦5,190 billion in 2012 to ￦4,391 billion in 2013. This decrease was principally due to a decrease in the average yields on corporate loans, mainly reflecting the lower interest rate environment in Korea in 2013, which was enhanced by a decrease in the average volume of such loans.

Interest expense for this segment decreased 29.1% from ￦2,597 billion in 2012 to ￦1,840 billion in 2013. This decrease was principally due to a decrease in the average cost of time deposits held by corporate customers, which mainly reflected a decrease in the general level of interest rates in Korea in 2013.

Net fee and commission income attributable to this segment increased 3.4% from ￦233 billion in 2012 to ￦241 billion in 2013, due primarily to an increase in commissions on management of retirement annuity pensions.

Net loss from financial assets and liabilities at fair value through profit or loss attributable to this segment decreased by ￦1 billion from 2012 to 2013.

Net other operating expense attributable to this segment increased 21.1% from ￦871 billion in 2012 to ￦1,055 billion in 2013, mainly as a result of an increase in expenses related to inter-segment borrowings.

General and administrative expenses attributable to this segment increased 3.8% from ￦792 billion in 2012 to ￦822 billion in 2013, principally due to an increase in the average wages of our employees in this segment.

Provision for credit losses decreased 17.2% from ￦853 billion in 2012 to ￦706 billion in 2013, due mainly to an overall improvement in the asset quality of corporate loans reflecting a decrease in delinquency rates for corporate loans.

Net other non-operating revenue attributable to this segment decreased 83.3% from ￦6 billion in 2012 to ￦1 billion in 2013, primarily due to a decrease in net other non-operating revenue from Kookmin Bank (China) Ltd., a subsidiary of Kookmin Bank.

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Other Banking Operations

This segment primarily consists of Kookmin Bank’s banking operations other than retail and corporate banking operations, including treasury activities and Kookmin Bank’s “back office” administrative operations. The following table shows, for the periods indicated, our income statement data for this segment:

Year Ended December 31, Percentage Change
2012 2013 2014 2013/2012 2014/2013
(in billions of Won) (%)

Income statement data

Interest income

￦ 1,623 ￦ 1,418 ￦ 1,261 (12.6 )% (11.1 )%

Interest expense

(961 ) (822 ) (819 ) (14.5 ) (0.4 )

Net fee and commission income

324 252 316 (22.2 ) 25.4

Net gain from financial assets and liabilities at fair value through profit or loss

757 693 376 (8.5 ) (45.7 )

Net other operating income (expense)

(144 ) 261 558 N/M (1) 113.8

General and administrative expenses

(811 ) (835 ) (966 ) 3.0 15.7

Provision for credit losses

(49 ) (1 ) (17 ) (98.0 ) 1,600.0

Share of profit (loss) of associates

(6 ) (203 ) 18 3,283.3 N/M (1)

Net other non-operating expense

(71 ) (25 ) (35 ) (64.8 ) 40.0

Profit (loss) before income tax

662 738 692 11.5 (6.2 )

Tax expense (2)

(107 ) (242 ) (156 ) 126.2 (35.5 )

Profit for the year (2)

￦ 555 ￦ 496 ￦ 536 (10.6 ) 8.1

(1)

“N/M” means not meaningful.

(2)

The amounts for 2014 reflect a change in our accounting policies with respect to uncertain tax positions in 2014. Corresponding amounts for 2012 and 2013 have been restated to retroactively apply such change. See “—Overview—Changes in Accounting Policies.”

Comparison of 2014 to 2013

Our profit before income tax for this segment decreased 6.2% from ￦738 billion in 2013 to ￦692 billion in 2014.

Interest income from our other banking operations decreased 11.1% from ￦1,418 billion in 2013 to ￦1,261 billion in 2014. This decrease was attributable primarily to a decrease in the average yields on debt securities in Kookmin Bank’s financial investments portfolio, due mainly to the lower interest rate environment in Korea in 2014, as well as a decrease in the average volume of such debt securities.

Interest expense for this segment remained relatively constant at ￦819 billion in 2014 compared to ￦822 billion in 2013.

Net fee and commission income attributable to this segment increased 25.4% from ￦252 billion in 2013 to ￦316 billion in 2014, mainly due an increase other fees and commissions received, as well as an increase in fee and commission income from providing agency services to affiliates.

Net gain from financial assets and liabilities at fair value through profit or loss attributable to this segment decreased 45.7% from ￦693 billion in 2013 to ￦376 billion in 2014, principally as a result of a decrease in net gain on derivatives held-for-trading.

Net other operating income increased 113.8% from ￦261 billion in 2013 to ￦558 billion in 2014, mainly as a result of an increase in income from inter-segment lending.

General and administrative expenses attributable to this segment increased 15.7% from ￦835 billion in 2013 to ￦966 billion in 2014, principally due to an increase in salary expense.

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Provision for credit losses increased seventeen-fold from ￦1 billion in 2013 to ￦17 billion in 2014, mainly reflecting an increase in provision for receivables from derivatives transactions.

Share of profit (loss) of associates attributable to this segment changed from a loss of ￦203 billion in 2013 to a profit of ￦18 billion in 2014, principally as a result of a decrease in loss on equity method investments from Kookmin Bank’s investment in JSC Bank CenterCredit.

Net other non-operating expense attributable to this segment increased 40.0% from ￦25 billion in 2013 to ￦35 billion in 2014, primarily due to an increase other non-operating expense related to satisfaction of judgments in legal proceedings with respect to which the actual payments made were greater than the litigation allowances established.

Comparison of 2013 to 2012

Our profit before income tax for this segment increased 11.5% from ￦662 billion in 2012 to ￦738 billion in 2013.

Interest income from our other banking operations decreased 12.6% from ￦1,623 billion in 2012 to ￦1,418 billion in 2013. This decrease was attributable primarily to a decrease in the average yields on debt securities in Kookmin Bank’s financial investments portfolio, due mainly to the lower interest rate environment in Korea in 2013.

Interest expense for this segment decreased 14.5% from ￦961 billion in 2012 to ￦822 billion in 2013. This decrease was principally due to a decrease in the average cost of debentures, which mainly reflected the decrease in the general level of interest rates in Korea in 2013.

Net fee and commission income attributable to this segment decreased 22.2% from ￦324 billion in 2012 to ￦252 billion in 2013, mainly due to decreases in brokerage fees and participation fees.

Net gain from financial assets and liabilities at fair value through profit or loss attributable to this segment decreased 8.5% from ￦757 billion in 2012 to ￦693 billion in 2013, principally as a result of a decrease in net gains on financial instruments held-for-trading.

Net other operating income (expense) changed from a net expense of ￦144 billion in 2012 to a net income of ￦261 billion in 2013, mainly as a result of an increase in income from inter-segment lending.

General and administrative expenses attributable to this segment increased 3.0% from ￦811 billion in 2012 to ￦835 billion in 2013, principally due to an increase in special termination benefits in connection with Kookmin Bank’s voluntary early retirement program, as well as an increase in salary expense.

Provision for credit losses decreased by ￦48 billion from ￦49 billion in 2012 to ￦1 billion in 2013, mainly reflecting a decrease in provision for receivables from derivative transactions.

Share of loss of associates increased by ￦197 billion from ￦6 billion in 2012 to ￦203 billion in 2013, principally as a result of an increase in loss on equity method investments from Kookmin Bank’s investment in JSC Bank CenterCredit.

Net other non-operating expense attributable to this segment decreased 64.8% from ￦71 billion in 2012 to ￦25 billion in 2013, primarily due to an increase in net other non-operating income, including income from employment insurance support and interest on delinquent leasehold deposits.

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Credit Card Operations

This segment consists of credit card activities conducted by KB Kookmin Card. The following table shows, for the periods indicated, our income statement data for this segment:

Year Ended December 31, Percentage Change
2012 2013 2014 2013/2012 2014/2013
(in billions of Won) (%)

Income statement data

Interest income

￦ 1,388 ￦ 1,436 ￦ 1,354 3.5 % (5.7 )%

Interest expense

(414 ) (379 ) (360 ) (8.5 ) (5.0 )

Net fee and commission income

158 185 95 17.1 (48.6 )

Net other operating expense

(83 ) (39 ) (32 ) (53.0 ) (17.9 )

General and administrative expenses

(349 ) (354 ) (341 ) 1.4 (3.7 )

Provision for credit losses

(315 ) (345 ) (278 ) 9.5 (19.4 )

Net other non-operating expense

(4 ) (2 ) (5 ) (50.0 ) 150.0

Profit before income tax

381 502 433 31.8 (13.7 )

Tax expense

(90 ) (118 ) (100 ) 31.1 (15.3 )

Profit for the year

￦ 291 ￦ 384 ￦ 333 32.0 (13.3 )

Comparison of 2014 to 2013

Our profit before income tax for this segment decreased 13.7% from ￦502 billion in 2013 to ￦433 billion in 2014.

Interest income from our credit card operations decrease 5.7% from ￦1,436 billion in 2013 to ￦1,354 billion in 2014. This decrease was primarily due to a decrease in average yields on credit card receivables, mainly reflecting the lower interest rate environment in Korea in 2014, which was enhanced by a decrease in the average volume of such receivables.

Interest expense for this segment decreased 5.0% from ￦379 billion in 2013 to ￦360 billion in 2014. This decrease was primarily due to decreased funding costs for this segment in light of the lower interest rate environment in Korea in 2014.

Net fee and commission income attributable to this segment decreased 48.6% from ￦185 billion in 2013 to ￦95 billion in 2014, which resulted mainly from an increase in credit card and debit card related fee and commission expenses. Such increase was principally due to an increase in debit card related fee and commission expenses, including fees paid to value-added network providers, reflecting the increased use of debit cards.

Net other operating expense attributable to this segment decreased 17.9% from ￦39 billion in 2013 to ￦32 billion in 2014, primarily due to a decrease in accumulated reward points that are recognized as other operating expense, reflecting a change in our rewards program in 2014.

General and administrative expenses attributable to this segment decreased 3.7% from ￦354 billion in 2013 to ￦341 billion in 2014, mainly due to a decrease in other general and administrative expenses, including communication expenses and supplies expenses.

Provision for credit losses decreased 19.4% from ￦345 billion in 2013 to ￦278 billion in 2014, mainly due to an improvement in the overall asset quality of our credit card receivables, reflecting a decrease in delinquency rates.

Net other non-operating expense attributable to this segment increased 150.0% from ￦2 billion in 2013 to ￦5 billion in 2014, primarily due to an increase in miscellaneous other non-operating expense, which resulted mainly from an increase in expenses related to management of credit card receivables, as well as an increase in charitable donations by KB Kookmin Card.

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Comparison of 2013 to 2012

Our profit before income tax for this segment increased by 31.8% from ￦381 billion in 2012 to ￦502 billion in 2013.

Interest income from our credit card operations increased by 3.5% from ￦1,388 billion in 2012 to ￦1,436 billion in 2013. This increase was primarily due to an increase in interest income from factored receivables, reflecting an increase in the average volume of such receivables.

Interest expense for this segment decreased 8.5% from ￦414 billion in 2012 to ￦379 billion in 2013. This decrease was primarily due to decreased funding costs for this segment in light of the lower interest rate environment in Korea in 2013.

Net fee and commission income attributable to this segment increased 17.1% from ￦158 billion in 2012 to ￦185 billion in 2013, which resulted mainly from an increase in fee and commission income from check cards.

Net other operating expense attributable to this segment decreased 53.0% from ￦83 billion in 2012 to ￦39 billion in 2013, primarily due to an increase in other operating income resulting from proceeds from sales of written-off credit card loans to the National Happiness Fund.

General and administrative expenses attributable to this segment increased 1.4% from ￦349 billion in 2012 to ￦354 billion in 2013, mainly due to an increase in salary expense.

Provision for credit losses increased 9.5% from ￦315 billion in 2012 to ￦345 billion in 2013, mainly reflecting a decrease in reversal of provisions primarily due to our sale of written-off credit card loans to the National Happiness Fund and an increase in impaired credit card balances due to a change in our charge-off policy in 2013 which increased the delinquency period for credit card balances before charge-off from three months to six months.

Net other non-operating expense attributable to this segment decreased 50.0% from ￦4 billion in 2012 to ￦2 billion in 2013, primarily due to a decrease in charitable donations by KB Kookmin Card.

Investment and Securities Operations

This segment consists primarily of securities brokerage, investment banking, securities investment and trading and other capital markets services conducted by KB Investment & Securities. The following table shows, for the periods indicated, our income statement data for this segment:

Year Ended December 31, Percentage Change
2012 2013 2014 2013/2012 2014/2013
(in billions of Won) (%)

Income statement data

Interest income

￦ 38 ￦ 41 ￦ 45 7.9 % 9.8 %

Interest expense

(19 ) (17 ) (27 ) (10.5 ) 58.8

Net fee and commission income

86 76 76 (11.6 ) —

Net gain from financial assets and liabilities at fair value through profit or loss

39 19 47 (51.3 ) 147.4

Net other operating income

5 1 5 (80.0 ) 400.0

General and administrative expenses

(118 ) (96 ) (103 ) (18.6 ) 7.3

Provision for credit losses

(4 ) (5 ) (4 ) 25.0 (20.0 )

Net other non-operating expense

(3 ) (2 ) — (33.3 ) (100.0 )

Profit before income tax

24 17 39 (29.2 ) 129.4

Tax expense (1)

(6 ) (5 ) (13 ) (16.7 ) 160.0

Profit for the year

￦ 18 ￦ 12 ￦ 26 (33.3 ) 116.7

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(1)

Represents income tax attributable to KB Investment & Securities.

Comparison of 2014 to 2013

Our profit before income tax for this segment increased 129.4% from ￦17 billion in 2013 to ￦39 billion in 2014.

Interest income from this segment increased 9.8% from ￦41 billion in 2013 to ￦45 billion in 2014. This increase was primarily due to an increase in the average volume of loans secured by securities.

Interest expense for this segment increased 58.8% from ￦17 billion in 2013 to ￦27 billion in 2014, which mainly reflected an increase in the average volume of repurchase agreements.

Net fee and commission income attributable to this segment remained constant at ￦76 billion in 2013 and 2014.

Net gain from financial assets and liabilities at fair value through profit or loss attributable to this segment increased 147.4% from ￦19 billion in 2013 to ￦47 billion in 2014, principally as a result of an increase in net gain on financial assets held-for-trading and derivatives held-for-trading.

Net other operating income attributable to this segment increased five-fold from ￦1 billion in 2013 to ￦5 billion in 2014, principally as a result of an increase in net gain on foreign exchange transactions.

General and administrative expenses attributable to this segment increased 7.3% from ￦96 billion in 2013 to ￦103 billion in 2014, principally due to an increase in performance-based salary expense.

Provision for credit losses decreased 20.0% from ￦5 billion in 2013 to ￦4 billion in 2014.

Net other non-operating expense attributable to this segment decreased from ￦2 billion in 2013 to nil in 2014.

Comparison of 2013 to 2012

Our profit before income tax for this segment decreased 29.2% from ￦24 billion in 2012 to ￦17 billion in 2013.

Interest income from this segment increased 7.9% from ￦38 billion in 2012 to ￦41 billion in 2013. This increase was primarily due to an increase in the average volume of available-for-sale financial assets.

Interest expense for this segment decreased 10.5% from ￦19 billion in 2012 to ￦17 billion in 2013, which mainly reflected a general decrease in the average cost of our debts in light of the lower interest rate environment in Korea, which was enhanced by a decrease in the average volume of call money and customers’ deposits.

Net fee and commission income attributable to this segment decreased 11.6% from ￦86 billion in 2012 to ￦76 billion in 2013, principally as a result of a decrease in commissions relating to securities underwriting activities.

Net gain from financial assets and liabilities at fair value through profit or loss attributable to this segment decreased 51.3% from ￦39 billion in 2012 to ￦19 billion in 2013, principally as a result of a decrease in net gain on financial assets held-for-trading and derivatives held-for-trading.

Net other operating income attributable to this segment decreased 80.0% from ￦5 billion in 2012 to ￦1 billion in 2013, primarily as a result of a reversal of provisions for litigation in 2012 that was not repeated in 2013.

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General and administrative expenses attributable to this segment decreased by 18.6% from ￦118 billion in 2012 to ￦96 billion and 2013, principally due to a decrease in performance-based salary expense.

Provision for credit losses increased 25.0% from ￦4 billion in 2012 to ￦5 billion in 2013.

Net other non-operating expense attributable to this segment decreased 33.3% from ￦3 billion in 2012 to ￦2 billion in 2012.

Life Insurance Operations

This segment consists of life insurance and wealth management services provided by KB Life Insurance. The following table shows, for the periods indicated, our income statement data for this segment:

Year Ended December 31, Percentage Change
2012 2013 2014 2013/2012 2014/2013
(in billions of Won) (%)

Income statement data

Interest income

￦ 192 ￦ 200 ￦ 227 4.2 % 13.5 %

Interest expense

— — — — —

Net gain from financial assets and liabilities at fair value through profit or loss

8 18 10 125.0 (44.4 )

Net other operating expense

(132 ) (154 ) (163 ) 16.7 5.8

General and administrative expenses

(45 ) (51 ) (60 ) 13.3 17.6

Provision for credit losses

— (1 ) (1 ) N/M (1) —

Net other non-operating expense

(1 ) — (1 ) (100.0 ) N/M (1)

Profit before income tax

22 12 12 (45.5 ) —

Tax expense (2)

(5 ) (3 ) (5 ) (40.0 ) 66.7

Profit for the year

￦ 17 ￦ 9 ￦ 7 (47.1 ) (22.2 )

(1)

“N/M” means not meaningful.

(2)

Represents income tax attributable to KB Life Insurance.

Comparison of 2014 to 2013

Our profit before income tax for this segment remained constant at ￦12 billion in 2013 and 2014.

Interest income from this segment increased 13.5% from ￦200 billion in 2013 to ￦227 billion in 2014, primarily due to an increase in the average volume of held-to-maturity debt securities held by KB Life Insurance, particularly government agency debt securities.

Net gain from financial assets and liabilities at fair value through profit or loss attributable to this segment decreased 44.4% from ￦18 billion in 2013 to ￦10 billion in 2014, which mainly reflected a decrease in gains on sales of beneficiary certificates.

Net other operating expense attributable to this segment increased 5.8% from ￦154 billion in 2013 to ￦163 billion in 2014, principally due to a decrease in income related to insurance as the number of insurance policies cancelled or partially withdrawn increased, mainly reflecting a downturn in the economy.

General and administrative expenses attributable to this segment increased 17.6% from ￦51 billion in 2013 to ￦60 billion in 2014, primarily due to increases in rental expense and salary expense.

Provision for credit losses remained constant at ￦1 billion in 2013 and 2014.

Net other non-operating expense attributable to this segment changed from nil in 2013 to ￦1 billion in 2014.

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Comparison of 2013 to 2012

Our profit before income tax for this segment decreased 45.5% from ￦22 billion in 2012 to ￦12 billion in 2013.

Interest income for this segment increased 4.2% from ￦192 billion in 2012 to ￦200 billion in 2013, primarily due to an increase in the average volume of held-to-maturity debt securities held by KB Life Insurance, particularly government agency debt securities.

Net gain from financial assets and liabilities at fair value through profit or loss attributable to this segment increased 125.0% from ￦8 billion in 2012 to ￦18 billion in 2013, which mainly reflected an increase in gains on sales of beneficiary certificates.

Net other operating expense attributable to this segment increased 16.7% from ￦132 billion in 2012 to ￦154 billion in 2013, principally due to an increase in the amortization expense of deferred acquisition costs.

General and administrative expenses attributable to this segment increased 13.3% from ￦45 billion in 2012 to ￦51 billion in 2013, primarily due to an increase in expenses relating to tax and dues.

Provision for credit losses changed from nil in 2012 to ￦1 billion in 2013.

Net other non-operating expense attributable to this segment decreased from ￦1 billion in 2012 to nil in 2013.

Other

“Other” includes the operations of our holding company and all of our subsidiaries that were consolidated under IFRS as issued by the IASB as of December 31, 2014 except Kookmin Bank, KB Kookmin Card, KB Investment & Securities and KB Life Insurance, including principally KB Asset Management, KB Real Estate Trust, KB Investment, KB Credit Information, KB Data System, KB Savings Bank and KB Capital (commencing in 2014). See “—Overview—Acquisitions.” The following table shows, for the periods indicated, our income statement data for this segment:

Year Ended December 31, Percentage Change
2012 2013 2014 2013/2012 2014/2013
(in billions of Won) (%)

Income statement data

Interest income

￦ 123 ￦ 106 ￦ 326 (13.8 )% 207.5 %

Interest expense

(47 ) (25 ) (123 ) (46.8 ) 392.0

Net fee and commission income

97 118 134 21.6 13.6

Net gain from financial assets and liabilities at fair value through profit or loss

25 29 26 16.0 (10.3 )

Net other operating income

37 40 70 8.1 75.0

General and administrative expenses

(133 ) (142 ) (189 ) 6.8 33.1

Provision (reversal of provision) for credit losses

6 (28 ) (57 ) N/M (1) 103.6

Share of loss of associates

— (38 ) (14 ) N/M (1) (63.2 )

Net non-operating revenue (expense)

(45 ) 31 (25 ) N/M (1) N/M (1)

Profit before income tax

63 91 148 44.4 62.6

Tax expense (2)

(15 ) (30 ) (33 ) 100.0 10.0

Profit for the year

￦ 48 ￦ 61 ￦ 115 27.1 88.5

(1)

“N/M” means not meaningful.

(2)

Represents income tax attributable to our holding company and all of our subsidiaries that were consolidated under IFRS as issued by the IASB except Kookmin Bank, KB Kookmin Card, KB Investment & Securities and KB Life Insurance.

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Comparison of 2014 to 2013

Our profit before income tax for this segment increased 62.6% from ￦91 billion in 2013 to ￦148 billion in 2014.

Interest income attributable to this segment increased 207.5% from ￦106 billion in 2013 to ￦326 billion in 2014. This increase was primarily due to an increase in interest on loans, mainly reflecting the addition of KB Capital to this segment from 2014.

Interest expense attributable to this segment increased 392.0% from ￦25 billion in 2013 to ￦123 billion in 2014, principally reflecting the addition of KB Capital to this segment from 2014.

Net fee and commission income attributable to this segment increased 13.6% from ￦118 billion in 2013 to ￦134 billion in 2014, mainly as the result of increases in rental fees and lease fees, mainly reflecting the addition of KB Capital to this segment from 2014.

Net gain from financial assets and liabilities at fair value through profit or loss attributable to this segment decreased 10.3% from ￦29 billion in 2013 to ￦26 billion in 2014, principally due to a decrease in net gain on valuation of derivatives held by KB Mezzanine Private Securities Fund I, which was partially offset by an increase in net gain on valuation of financial assets held for trading by KStar KTB ETF (Bond).

Net other operating income attributable to this segment increased 75.0% from ￦40 billion in 2013 to ￦70 billion in 2014, primarily as a result of an increase in other operating income from sales of non-performing loans held by KB Capital and KB Savings Bank.

General and administrative expenses attributable to this segment increased 33.1% from ￦142 billion in 2013 to ￦189 billion in 2014, which mainly reflected the addition of KB Capital to this segment from 2014.

Provision for credit losses increased 103.6% from ￦28 billion in 2013 to ￦57 billion in 2014, principally reflecting the addition of KB Capital to this segment from 2014.

Share of loss of associates attributable to this segment decreased 63.2% from ￦38 billion in 2013 to ￦14 billion in 2014, primarily due to a decrease in impairment losses attributable to this segment.

Net other non-operating revenue (expense) attributable to this segment changed from a revenue of ￦31 billion in 2013 to an expense of ￦25 billion in 2014, primarily due to a decrease in other non-operating revenue from KB Asset Management, which was enhanced by an increase in impairment losses on goodwill recognized by KB Savings Bank.

Comparison of 2013 to 2012

Our profit before income tax for this segment increased 44.4% from ￦63 billion in 2012 to ￦91 billion in 2013.

Interest income attributable to this segment decreased 13.8% from ￦123 billion in 2012 to ￦106 billion in 2013. This decrease was primarily due to a decrease in the average volume of deposits attributable to KB Savings Bank.

Interest expense attributable to this segment decreased 46.8% from ￦47 billion in 2012 to ￦25 billion in 2013, principally reflecting a decrease in the average volume of time deposits attributable to KB Savings Bank.

Net fee and commission income attributable to this segment increased 21.6% from ￦97 billion in 2012 to ￦118 billion in 2013, mainly as the result of an increase in fees received by KB Asset Management.

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Net gain from financial assets and liabilities at fair value through profit or loss attributable to this segment increased 16.0% from ￦25 billion in 2012 to ￦29 billion in 2013, principally due to an increase in gain on valuation of derivatives held by KB Mezzanine Private Securities Fund 1.

Net other operating income attributable to this segment increased 8.1% from ￦37 billion in 2012 to ￦40 billion in 2013, primarily as a result of an increase in other operating income from sales of non-performing loans held by KB Savings Bank.

General and administrative expenses attributable to this segment increased 6.8% from ￦133 billion in 2012 to ￦142 billion in 2013, which mainly reflected an increase in salary expense for KB Asset Management and the inclusion of Yehansoul Savings Bank in this segment in 2013.

Provision for credit losses attributable to this segment changed from a reversal of provision of ￦6 billion in 2012 to a provision of ￦28 billion in 2013, principally due to an increase in provision for credit losses relating to the trust account lending activities of KB Real Estate Trust.

Share of profit of associates attributable to this segment changed from nil in 2012 to a loss of ￦38 billion in 2013, primarily due to an increase in impairment losses attributable to this segment.

Net other non-operating revenue (expense) attributable to this segment changed from an expense of ￦45 billion in 2012 to a revenue of ￦31 billion in 2013, primarily due to an increase in other non-operating revenue from KB Asset Management.

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Item 5.B. 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, Percentage Change
2012 2013 2014 2013/2012 2014/2013
(in billions of Won) (%)

Cash and due from financial institutions

￦ 10,593 ￦ 14,793 ￦ 15,424 39.6 % 4.3 %

Financial assets at fair value through profit or loss

9,560 9,329 10,758 (2.4 ) 15.3

Derivative financial assets

2,091 1,819 1,968 (13.0 ) 8.2

Financial investments

36,467 34,849 34,961 (4.4 ) 0.3

Loans:

Loans to banks

4,398 6,335 6,208 44.0 (2.0 )

Loans to customers other than banks:

Loans in Won

185,889 189,516 200,345 2.0 5.7

Loans in foreign currencies

3,538 3,055 2,624 (13.7 ) (14.1 )

Domestic import usance bills

3,595 2,978 3,694 (17.2 ) 24.0

Off-shore funding loans

754 670 665 (11.1 ) (0.7 )

Call loans

1,193 697 292 (41.6 ) (58.1 )

Bills bought in Won

30 14 7 (53.3 ) (50.0 )

Bills bought in foreign currencies

2,522 1,588 1,958 (37.0 ) 23.3

Guarantee payments under payment guarantee

45 38 13 (15.6 ) (65.8 )

Credit card receivables in Won

11,871 11,782 11,629 (0.7 ) (1.3 )

Credit card receivables in foreign currencies

3 2 3 (33.3 ) 50.0

Bonds purchased under repurchase agreements

1,251 1,683 1,082 34.5 (35.7 )

Privately placed bonds

604 732 743 21.2 1.5

Factored receivables

1,221 2,772 2,793 127.0 0.8

Lease receivables

— — 860 — N/M (1)

Loans for installment credit

— — 985 — N/M (1)

Total loans to customers other than banks

212,516 215,527 227,693 1.4 5.6

Less:

Allowances for loan losses

(3,269 ) (2,861 ) (2,451 ) (12.5 ) (14.3 )

Total loans, net

213,645 219,001 231,450 2.5 5.7

Property and equipment

3,100 3,061 3,083 (1.3 ) 0.7

Other assets (2)(3)

10,614 9,316 10,712 (12.2 ) 15.0

Total assets

￦ 286,070 ￦ 292,168 ￦ 308,356 2.1 5.5

(1)

“N/M” means not meaningful.

(2)

Includes investments in associates and joint ventures, investment properties, intangible assets, current income tax assets, deferred income tax assets, assets held for sale and other assets.

(3)

The amount as of December 31, 2014 reflects a change in our accounting policy with respect to uncertain tax positions in 2014. Corresponding amounts as of December 31, 2012 and 2013 have been restated to retroactively apply such change. See “—Overview—Changes in Accounting Policies” and Note 2.1 of the notes to our consolidated financial statements included elsewhere in this annual report.

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For further information on our assets, see “Item 4.B. Business Overview—Assets and Liabilities.”

Comparison of 2014 to 2013

Our total assets increased 5.5% from ￦292,168 billion as of December 31, 2013 to ￦308,356 billion as of December 31, 2014, principally due to a 5.7% increase in loans from ￦219,001 billion as of December 31, 2013 to ￦231,450 billion as of December 31, 2014. This increase in loans was mainly the result of a 5.7% increase in loans in Won from ￦189,516 billion as of December 31, 2013 to ￦200,345 billion as of December 31, 2014, which was offset in part by a 35.7% decrease in bonds purchased under repurchase from ￦1,683 billion as of December 31, 2013 to ￦1,082 billion as of December 31, 2014, a 14.1% decrease in loans in foreign currencies from ￦3,055 billion as of December 31, 2013 to ￦2,624 billion as of December 31, 2014 and a 58.1% decrease in call loans from ￦697 billion as of December 31, 2013 to ￦292 billion as of December 31, 2014.

Comparison of 2013 to 2012

Our total assets increased 2.1% from ￦286,070 billion as of December 31, 2012 to ￦292,168 billion as of December 31, 2013, principally due to a 2.5% increase in loans from ￦213,645 billion as of December 31, 2012 to ￦219,001 billion as of December 31, 2013 and a 39.6% increase in cash and due from financial institutions from ￦10,593 billion as of December 31, 2012 to ￦14,793 billion as of December 31, 2013. The effect of these increases was partially offset by a 4.4% decrease in financial investments from ￦36,467 billion as of December 31, 2012 to ￦34,849 billion as of December 31, 2013 and a 12.2% decrease in other assets from ￦10,604 billion as of December 31, 2012 to ￦9,316 billion as of December 31, 2013.

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, Percentage Change
2012 2013 2014 2013/2012 2014/2013
(in billions of Won) (%)

Liabilities:

Financial liabilities at fair value through profit or loss

￦ 1,851 ￦ 1,115 ￦ 1,819 (39.8 )% 63.1 %

Deposits

197,346 200,882 211,549 1.8 5.3

Debts

15,965 14,101 15,865 (11.7 ) 12.5

Debentures

24,270 27,040 29,201 11.4 8.0

Provisions

670 678 614 1.2 (9.4 )

Other liabilities (1)

20,886 22,369 21,795 7.1 (2.6 )

Total liabilities

260,988 266,185 280,843 2.0 5.5

Equity:

Capital stock

1,932 1,932 1,932 — —

Capital surplus

15,840 15,855 15,855 0.1 —

Accumulated other comprehensive income

295 336 461 13.9 37.2

Retained earnings (2)

6,820 7,860 9,067 15.2 15.4

Equity attributable to stockholders

24,887 25,983 27,315 4.4 5.1

Non-controlling interests

195 — 198 (100.0 ) N/M (3)

Total equity

25,082 25,983 27,513 3.6 5.9

Total liabilities and equity

￦ 286,070 ￦ 292,168 ￦ 308,356 2.1 5.5

(1)

Includes derivative financial liabilities, current income tax liabilities, deferred income tax liabilities, defined benefit liabilities and other liabilities.

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(2)

The amount as of December 31, 2014 reflects a change in our accounting policy with respect to uncertain tax positions in 2014. Corresponding amounts as of December 31, 2012 and 2013 have been restated to retroactively apply such change. See “—Overview—Changes in Accounting Policies” and Note 2.1 of the notes to our consolidated financial statements included elsewhere in this annual report.

(3)

“N/M” means not meaningful.

Comparison of 2014 to 2013

Our total liabilities increased 5.5% from ￦266,185 billion as of December 31, 2013 to ￦280,843 billion as of December 31, 2014. The increase was primarily due to a 5.3% increase in deposits from ￦200,882 billion as of December 31, 2013 to ￦211,549 billion as of December 31, 2014. Our deposits increased mainly as a result of an increase in demand deposits.

Our total equity increased 5.9% from ￦25,983 billion as of December 31, 2013 to ￦27,513 billion as of December 31, 2014. This increase resulted principally from an increase in our retained earnings, which was attributable to the profit we generated in 2014.

Comparison of 2013 to 2012

Our total liabilities increased 2.0% from ￦260,988 billion as of December 31, 2012 to ￦266,185 billion as of December 31, 2013. The increase was primarily due to increases in deposits and debentures. Our deposits increased 1.8% from ￦197,346 billion as of December 31, 2012 to ￦200,882 billion as of December 31, 2013, mainly as a result of an increase in demand deposits. Our debentures increased 11.4% from ￦24,270 billion as of December 31, 2012 to ￦27,040 billion as of December 31, 2013, principally due to an increase in our debentures in Won and an increase in discount or premium on debentures in Won.

Our total equity increased by 3.6% from ￦25,082 billion as of December 31, 2012 to ￦25,983 billion as of December 31, 2013. This increase resulted principally from an increase in our retained earnings, which was attributable to the profit we generated in 2013.

Liquidity

Our primary source of funding has historically been and continues to be deposits. Deposits amounted to ￦197,346 billion, ￦200,882 billion and ￦211,549 billion as of December 31, 2012, 2013 and 2014, which represented approximately 83.1%, 83.0% and 82.4% 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. Although the majority of deposits are short-term, it has been our experience that the majority of our depositors generally roll over their deposits at maturity, thus 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 3.D. 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 financial assets and using the proceeds to fund parts of our operations, as necessary.

We also obtain funding through debentures and debts to meet our liquidity needs. Debentures represented 10.2%, 11.2% and 11.4% of our total funding as of December 31, 2012, 2013 and 2014, respectively. Debts represented 6.7%, 5.8% and 6.2% of our total funding as of December 31, 2012, 2013 and 2014, respectively. For further information on our sources of funding, see “Item 4.B. Business Overview—Assets and Liabilities—Funding.”

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

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the ratio of liquid assets to liquid liabilities above certain minimum levels. For a description of these requirements, see “Item 4.B. Business Overview—Supervision and Regulation—Principal Regulations Applicable to Financial Holding Companies—Liquidity” and “Item 4.B. 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 debentures and debts, 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. We received aggregate dividends of ￦688 billion, ￦282 billion and ￦509 billion from our subsidiaries in 2012, 2013 and 2014, respectively. See “Item 3.D. 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, 2014.

Payments Due by Period
Total 1 Year or
Less 		1-3 Years 3-5
Years 		More
Than
5 Years
(in billions of Won)

Long-term borrowing obligations (1)(2)

￦ 34,756 ￦ 9,552 ￦ 16,776 ￦ 3,806 ￦ 4,622

Operating lease obligations (3)

262 124 82 22 34

Capital lease obligations

25 19 3 2 1

Pension obligations

195 195 — — —

Deposits (2)(4)

140,225 127,291 8,302 1,365 3,267

Total

￦ 175,463 ￦ 137,181 ￦ 25,163 ￦ 5,195 ￦ 7,924

(1)

Includes debt and debentures with original maturities of one year or more.

(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, 2014. In order to calculate future interest payments on debt with floating rates, we used contractual interest rates as of December 31, 2014.

(3)

This line item is not included within our consolidated statements of financial position.

(4)

Excluding demand deposits.

Commitments and Guarantees

The following table sets forth our commitments and guarantees as of December 31, 2014. These commitments and guarantees are not included within our consolidated statements of financial position.

Payments Due by Period
Total 1 Year or
Less 		1-3
Years 		3-5
Years 		More
Than
5 Years
(in billions of Won)

Financial guarantees (1)

￦ 4,460 ￦ 1,055 ￦ 3,283 ￦ 58 ￦ 64

Confirmed acceptances and guarantees

5,159 3,174 1,664 244 77

Commitments

96,317 94,399 1,117 431 370

Total

￦ 105,936 ￦ 98,628 ￦ 6,064 ￦ 733 ￦ 511

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(1)

Includes ￦3,883 billion of irrevocable commitments to provide contingent liquidity credit lines to special purpose entities for which we serve as the administrator. See Note 39 of the notes to our consolidated financial statements.

Capital Adequacy

Kookmin Bank is subject to capital adequacy requirements of the Financial Services Commission applicable to Korean banks. The requirements applicable prior to December 2013 were formulated based on Basel II, which was first published by the Basel Committee on Banking Supervision, Bank for International Settlements in 2004. The requirements applicable commencing in December 2013 pursuant to amended Financial Services Commission regulations promulgated in July 2013 were formulated based on Basel III, which was first introduced by the Basel Committee on Banking Supervision, Bank for International Settlements in December 2009. Under the amended Financial Services Commission regulations, all banks in Korea are required to maintain certain minimum ratios of common equity Tier I capital, total Tier I capital and total Tier I and Tier II capital to risk-weighted assets. See “Item 4.B. Business Overview—Supervision and Regulation—Principal Regulations Applicable to Banks—Capital Adequacy.”

As of December 31, 2014, Kookmin Bank’s total Tier I and Tier II capital adequacy ratio was 15.97%.

The following table sets forth a summary of Kookmin Bank’s capital and capital adequacy ratios as of December 31, 2012 based on Basel II and as of December 31, 2013 and 2014 based on Basel III.

As of December 31,
2012 (1) 2013 2014

(in billions of Won,

except percentages)

Tier I capital:

￦ 16,141 ￦ 18,502 ￦ 19,621

Common equity Tier I capital

— 18,502 19,621

Paid-in capital

2,022 2,022 2,022

Capital reserves

5,042 5,220 5,220

Retained earnings

9,622 11,237 12,260

Non-controlling interests in consolidated subsidiaries

1 — —

Others

(546 ) 23 119

Additional Tier I capital

— — —

Tier II capital:

5,250 4,122 3,801

Revaluation reserves

177 — —

Allowances for credit losses (2)

987 843 886

Hybrid debt

73 43 31

Subordinated debt

3,611 (3) 3,236 2,884

Valuation gain on investment securities

83 — —

Others

319 — —

Total core and supplementary capital

21,391 22,624 23,422

Risk-weighted assets

148,544 146,743 146,690

Credit risk:

On-balance sheet

127,462 125,044 124,325

Off-balance sheet

6,622 6,787 8,128

Market risk

4,693 4,012 3,445

Operational risk

9,767 10,900 10,792

Total Tier I and Tier II capital adequacy ratio

14.40 % 15.42 % 15.97 %

Tier I capital adequacy ratio

10.87 % 12.61 % 13.38 %

Common equity Tier I capital adequacy ratio

— 12.61 % 13.38 %

Tier II capital adequacy ratio

3.53 % 2.81 % 2.59 %

(1)

With effect from December 1, 2013, the Financial Services Commission adopted amended guidelines that implemented capital adequacy requirements in Korea based on Basel III. Amounts and ratios as of December 31, 2012 were computed in accordance with previously applicable guidelines based on Basel II and therefore are not directly comparable to corresponding amounts and ratios as of December 31, 2013 and 2014.

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(2)

Under the standardized approach, allowances for 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 credit risk-weighted assets. Under the internal ratings-based approach, allowances for credit losses, less estimated losses, are used to calculate Tier II capital only to the extent they represent up to 0.6% of credit 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.

In addition, we, as a bank holding company, are required to maintain certain minimum capital adequacy ratios pursuant to applicable regulations of the Financial Services Commission. See “Item 4.B. Business Overview—Supervision and Regulation—Principal Regulations Applicable to Financial Holding Companies—Capital Adequacy.”

The following table sets forth a summary of our consolidated capital adequacy ratio as of December 31, 2013 and 2014, based on IFRS and applicable regulatory reporting standards:

As of December 31,
2013 2014

(in billions of Won,

except percentages)

Tier I capital

Common equity Tier I capital

￦ 22,694 ￦ 24,062

Additional Tier I capital

— 186

Total Tier I capital

￦ 22,694 ￦ 24,248

Tier II capital

4,603 4,099

Risk-weighted assets

￦ 177,514 ￦ 182,486

Total Tier I and Tier II capital adequacy ratio

15.38 % 15.53 %

Tier I capital adequacy ratio

12.78 % 13.29 %

Common equity Tier I capital adequacy ratio

12.78 % 13.19 %

Tier II capital adequacy ratio

2.60 % 2.24 %

Recent Accounting Pronouncements

See Note 2 of the notes to our consolidated financial statements included elsewhere in this annual report for a description of recent accounting pronouncements under IFRS as issued by the IASB that have been issued but are not yet effective.

Item 5.C. Research and Development, Patents and Licenses, etc.

Not applicable.

Item 5.D. Trend Information

These matters are discussed under Item 5.A. and Item 5.B. above where relevant.

Item 5.E. 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 5.F. Tabular Disclosure of Contractual Obligations

See “Item 5B. Liquidity and Capital Resources—Financial Condition—Contractual Cash Obligations.”

Item 5.G. Safe Harbor

See “Forward-Looking Statements.”

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Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

Item 6.A. Directors and Senior Management

Board of Directors

Our board of directors, currently consisting of one executive director, one non-standing director and seven 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 84, 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:

Name

Date of Birth

Position

Director Since End of Term

Jong Kyoo Yoon

October 13, 1955 Chairman and Chief Executive Officer November 21, 2014 November 20, 2017

Our executive director does not have any significant activities outside KB Financial Group.

Jong Kyoo Yoon is our chairman and chief executive officer. He has been an executive director since November 2014. Mr. Yoon also serves as the president and chief executive officer of Kookmin Bank. He previously served as our deputy president, chief financial officer and chief risk officer, a senior advisor of Kim & Chang, a senior executive vice president, chief financial officer and chief strategic officer of Kookmin Bank and a senior partner of Samil PricewaterhouseCoopers Korea. Mr. Yoon received a B.A. in business administration from Sungkyunkwan University, an M.B.A. from Seoul National University and a Ph.D. in business administration from Sungkyunkwan University.

Non-standing Director

The table below identifies our non-standing director as of the date of this annual report:

Name

Date of Birth

Position

Director Since End of Term

Hong Lee

April 7, 1958 Non-standing director; Senior Executive Vice President of Kookmin Bank March 27, 2015 March 26, 2017

Hong Lee has been a non-standing director since March 2015. He has also served as a senior executive vice president and the head of the sales group at Kookmin Bank since 2015. Mr. Lee previously served as a senior executive vice president of the corporate banking division at Kookmin Bank. He received a B.A. in linguistics from Seoul National University and an M.B.A. from Helsinki School of Economics.

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Non-executive Directors

Our non-executive directors are selected based on the candidates’ knowledge and experience in diverse areas, such as financial services, accounting, finance, law and regulation, risk management, human resources and information technology. All seven 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:

Name

Date of Birth

Position

Director Since

Year Term Ends (1)

Young Hwi Choi

October 28, 1945 Non-executive Director March 27, 2015 2016

Woon Youl Choi

April 2, 1950 Non-executive Director March 27, 2015 2016

Suk Ryul Yoo

April 21, 1950 Non-executive Director March 27, 2015 2016

Michael Byungnam Lee

September 24, 1954 Non-executive Director March 27, 2015 2016

Jae Ha Park

November 25, 1957 Non-executive Director March 27, 2015 2016

Eunice Kyonghee Kim

March 29, 1959 Non-executive Director March 27, 2015 2016

Jong Soo Han

October 16, 1960 Non-executive Director March 27, 2015 2016

(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.

Young Hwi Choi has been a non-executive director since March 2015. He previously served as the president and chief executive officer of Shinhan Financial Group Co., Ltd., a deputy president of Shinhan Bank and a deputy director at the former Ministry of Finance. Mr. Choi received a B.A. in economics from Sungkyunkwan University.

Woon Youl Choi has been a non-executive director since March 2015. He is currently a professor at Sogang University. Mr. Choi previously served as an executive vice president of Sogang University, a member of the Korea Monetary Board, the president of the Korea Money and Finance Association and the president of the Korean Securities Association. He received a B.A. in business administration from Seoul National University and an M.B.A. and a Ph.D. in finance from the University of Georgia.

Suk Ryul Yoo has been a non-executive director since March 2015. He previously served as the chairman of the Credit Finance Association and the president and chief executive officer of Samsung Total Petrochemicals Co., Ltd., Samsung Card Co., Ltd., Samsung Life Insurance Co., Ltd., Samsung Securities Co., Ltd. and Samsung Capital Co., Ltd. Mr. Yoo received a B.A. in business administration from Seoul National University and an M.S. in industrial engineering from Korea Advanced Institute of Science and Technology.

Michael Byungnam Lee has been a non-executive director since March 2015. He is currently the president and chief executive officer of LG Academy. Mr. Lee previously served as an executive vice president of human resources at LG Corporation, a vice president of LG Academy and an assistant professor at Georgia State University and California State University. He received a B.A. in economics from Sogang University, an M.L.H.R. from Ohio Statement University and a Ph.D. in industrial relations from the University of Minnesota.

Jae Ha Park has been a non-executive director since March 2015. He is currently a senior research fellow at the Korea Institute of Finance. Mr. Park previously served as a deputy dean of the Asian Development Bank Institute, a vice president of the Korea Institute of Finance, a vice chairman of the Korea Money and Finance Association and a senior counselor to the Minister of the former Ministry of Finance and Economy. He has also served as a non-executive director of Shinhan Bank, Daewoo Securities Co., Ltd. and Jeonbuk Bank. Mr. Park received a B.A. in economics from Seoul National University and a Ph.D. in economics from Pennsylvania State University.

Eunice Kyonghee Kim has been a non-executive director since March 2015. She is currently a professor at Ewha Law School. Ms. Kim previously served as the deputy chief executive officer and chief compliance officer of Hana

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Financial Group Inc., a managing director and chief compliance officer of Citibank Japan Inc., an executive vice president and chief legal officer of Citibank Korea Inc. and a vice-chairperson of the International Association of Korean Lawyers. She received a B.A. in Chinese studies and administrative science from Yale University and a J.D. from Yale Law School.

Jongsoo Han has been a non-executive director since March 2015. He is currently a professor at Ewha Womans University. Mr. Han previously served as a member of the Korea Accounting Deliberating Council of the Financial Services Commission, a vice president of Korea Accounting Association and a member of the Korea Accounting Standards Board. Mr. Han received a B.A. in business administration and an M.B.A. from Yonsei University and a Ph.D. in accounting from Joseph M. Katz Graduate School of Business, University of Pittsburgh.

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.

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

Jong-Hee Yang

June 10,1961 Deputy President; Financial Planning Department, Investor Relations Department and Human Resources Department

Jeong Rim Park

November 27, 1963 Deputy President; Risk Management Department

Ki Heon Kim

October 17, 1955 Deputy President; Digital Finance Department

Jae Hong Park

April 10, 1967 Senior Managing Director; Marketing & Synergy Planning Department, Strategic Planning Department and KB Research

Ki Bum Lee

November 24, 1957 Senior Managing Director; Audit Department and Information Security Department

Young-Tae Park

December 24,1961 Managing Director; Marketing & Synergy Planning Department

Kyu Sul Choi

August 16, 1960 Managing Director; Investor Relations Department

Kyung Yup Cho

September 9, 1961 Managing Director; KB Research

Ki Hwan Kim

March 20, 1963 Managing Director; Public Relations Department

Minkyu Chung

February 7, 1970 Managing Director and Chief Compliance Officer

None of the executive officers has any significant activities outside KB Financial Group.

Jong-Hee Yang is a deputy president and oversees the Financial Planning Department, Investor Relations Department and Human Resources Department. He previously served as a managing director, the chief information security officer and the head of our Office of the Board of Directors and Strategic Planning Department. Mr. Yang received a B.A. in Korean history from Seoul National University.

Jeong Rim Park is a deputy president and oversees the Risk Management Department. She also serves as a senior executive vice president of Kookmin Bank and heads its risk management group. Ms. Park previously served as a senior managing director of Kookmin Bank and headed its wealth management division. She received a B.A. in business administration and an M.B.A. from Seoul National University.

Ki Heon Kim is a deputy president and oversees the Digital Finance Department. He also serves as a senior executive vice president of Kookmin Bank and heads its information technology group. Mr. Kim previously served as an expert for the financial services division of Samsung SDS Co., Ltd. and the head of branch offices of Peace Bank of Korea. He received a B.A. in accounting from Hanyang University.

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Jae Hong Park is a senior managing director and oversees the Marketing & Synergy Planning Department, Strategic Planning Department and KB Research. He previously served as the head of the future strategy department at Hanwha Life Insurance Co., Ltd., the head of the global business department at Samsung Fire & Marine Insurance Co., Ltd. and a partner at McKinsey & Company. He received a B.A. in economics from Seoul National University and a Ph.D. in economics from Princeton University.

Ki-Bum Lee is a senior managing director and oversees Audit Department and the Information Security Department. He also serves as a non-standing director of KB Kookmin Card Co., Ltd. Mr. Lee previously served as our chief risk officer, the head of Kookmin Bank’s audit department, the chief compliance officer of Kookmin Bank and the head of Gyeongseo and Bucheon regional offices of Kookmin Bank. He received a B.A. in German language and literature from Sogang University.

Young-Tae Park is a managing director and heads the Marketing & Synergy Planning Department. He previously served as the head of Kookmin Bank’s marketing department and the head of several branch offices of Kookmin Bank. He received a B.A. and an M.S. in economics from Korea University.

Kyu Sul Choi is a managing director and heads the Investor Relations Department. He previously served as the head of Kookmin Bank’s investor relations department and asset and liability management department and the head of Korea First Bank’s treasury department. He received a B.A. in business administration from Yonsei University.

Kyung Yup Cho is a managing director and heads KB Research. He previously served as a senior editor at MaeKyung Media Group and the head of financial news, political news, social affairs and international news at Maeil Business Newspaper. He received a B.A. in business administration and a Ph.D. in business administration from Yonsei University.

Ki Hwan Kim is a managing director and heads the Public Relations Department. He also serves as a senior managing director of Kookmin Bank and heads its consumer protection group. Mr. Kim previously served as the head of Kookmin Bank’s human resource department. He received a B.A. in economics from Seoul National University.

Minkyu Chung is a managing director and our chief compliance officer. He previously served as a vice chief public prosecutor at the Supreme Prosecutors’ Office of Korea and a managing partner at the law firm of The Firm. He received a B.A. in law from Seoul National University.

Item 6.B. Compensation

The aggregate remuneration paid and benefits-in-kind granted by us to our chairman and chief executive officer, our other executive and non-standing directors, our non-executive directors and our executive officers for the year ended December 31, 2014 was ￦3,578 million. In addition, for the year ended December 31, 2014, we set aside ￦183 million for allowances for severance and retirement benefits for our chairman and chief executive officer, the other executive directors and our executive officers.

The compensation of our directors who received total annual compensation exceeding ￦500 million in 2014 was as follows:

Name

Position

Total Compensation
in 2014 (1)

Long-term Incentive Compensation for
Payment Subsequent to 2014

(In millions of Won)

Young-Rok Lim

Former Chairman and Chief Executive Officer

￦ 766 None

(1)

Includes earned income and performance based short-term incentive payments made in the first quarter of 2014 with respect to services performed in 2013.

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Pursuant to a resolution of our board of directors, effective January 7, 2015, Woong-Won Yoon, our former deputy president and chief financial officer, was appointed a business management advisor for a term of one year. We do not have service contracts with any of our other 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 6.E. Share Ownership—Stock Options.” 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. 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.

In 2014, we did not recognize any 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 31 to our consolidated financial statements included elsewhere in this annual report.

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 6.E. Share Ownership—Performance Share Agreements.” In 2014, we recognized ￦11,422 million as compensation expense for the disbursements made under such agreements.

Item 6.C. Board Practices

See “Item 6.A. 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 Corporate Governance Committee;

•

the Risk Management Committee;

•

the Evaluation & Compensation Committee;

•

the Non-executive Director Nominating Committee; and

•

the Audit Committee Member 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 four non-executive directors, Young Hwi Choi, Woon Youl Choi, Eunice Kyonghee Kim and Jongsoo Han. The chairperson of the Audit Committee is Woon Youl Choi. 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

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board of directors. In connection with the general meetings of stockholders, the committee examines the agenda for, 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.

Corporate Governance Committee

The committee currently consists of one non-standing director, Hong Lee, and three non-executive directors, Young Hwi Choi, Woon Youl Choi and Michael Byungnam Lee, together with our chairman and chief executive officer, Jong Kyoo Yoon. The chairperson of the Corporate Governance Committee is Jong Kyoo Yoon. The committee is responsible for establishing and monitoring procedures for our chairman candidate cultivation and succession program, as well as for candidate cultivation and succession programs for chief executive officers of our subsidiaries. The committee holds regular meetings annually.

Risk Management Committee

The committee currently consists of one non-standing director, Hong Lee, and three non-executive directors, Suk Ryul Yoo, Jae Ha Park and Eunice Kyonghee Kim. The chairperson of the committee is Jae Ha Park. The 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 & Compensation Committee

The committee currently consists of four non-executive directors, Michael Byungnam Lee, Suk Ryul Yoo, Jae Ha Park and Jongsoo Han. The chairperson of the committee is Michael Byungnam Lee. 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 the compensation of directors, evaluating management’s performance and implementing management training programs, as well as deciding and supervising the performance-based annual salary of the president and the executive officers of us and our subsidiaries. The committee holds regular meetings every quarter.

Non-executive Director Nominating Committee

The committee currently consists of three non-executive directors, Suk Ryul Yoo, Young Hwi Choi and Woon Youl Choi, together with our chairman and chief executive officer, Jong Kyoo Yoon. The chairperson of the committee is Suk Ryul Yoo. The committee is responsible for the management and evaluation of a pool of non-executive director candidates and recommendation of the non-executive director candidates to be nominated at the annual general meeting of shareholders. The committee holds regular meetings semi-annually.

Audit Committee Member Nominating Committee

The committee currently has no members. The last meeting of the committee was on February 27, 2015 to nominate Young Hwi Choi, Woon Youl Choi, Eunice Kyonghee Kim and Jongsoo Han as new Audit Committee members. The committee oversees the selection of Audit Committee member 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 Audit Committee members until the Audit Committee members are appointed.

Item 6.D. Employees

As of December 31, 2014, we had a total of 168 full-time employees, excluding seven executive officers, at our financial holding company.

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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,
2012 2013 2014

KB Financial Group

Full-time employees (1) 157 151 168
Contractual employees — — —
Managerial employees 127 116 131
Members of Korea Financial Industry Union — — —

Kookmin Bank

Full-time employees (1) 16,358 16,617 20,758
Contractual employees 5,713 5,136 903
Managerial employees 11,383 11,539 11,561
Members of Korea Financial Industry Union 17,149 17,123 16,977

Other subsidiaries

Full-time employees (1) 2,724 2,786 3,186
Contractual employees 541 137 355
Managerial employees 1,554 1,554 1,765
Members of Korea Financial Industry Union 1,370 1,509 1,324

(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 five of our subsidiaries, Kookmin Bank, KB Kookmin Card, KB Capital, KB Real Estate Trust and KB Credit Information, our employees have a labor union. Every year, the unions at Kookmin Bank, KB Kookmin Card, KB Capital, KB Real Estate Trust and KB Credit Information and their respective managements negotiate and enter into new collective bargaining agreements and negotiate annual wage adjustments.

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.

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.

In accordance with the National Pension Act, we contribute an amount equal to 4.5% of employee wages, and each employee contributes 4.5% of his or her wages, into each employee’s personal pension account. In addition, in accordance with the Guarantee of Worker’s Retirement Benefits Act, we have adopted a retirement pension plan for our employees. Contributions under the retirement pension plan are deposited annually into a financial institution, and an employee may elect to receive a monthly pension or a lump-sum amount upon retirement. Our retirement pension plans are provided in the form of a defined benefit plan and a defined contribution plan. The defined benefit plan guarantees a certain payout at retirement, according to a fixed formula based on the employee’s average salary and the number of years for which the employee has been a plan member. The defined contribution plan, in which the employer’s contribution is determined in advance based on one twelfth of an employee’s total annual pay, is managed directly by the employees. Under Korean law, we may not terminate the employment of full-time employees except under certain limited circumstances.

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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 2,452,081 shares of our common stock as of December 31, 2014.

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, 2014, Kookmin Bank’s employee stock ownership association held 814,050 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. 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 6.E. Share Ownership

Common Stock

As of March 31, 2015, the persons who are currently our directors or executive officers, as a group, held an aggregate of 10,592 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 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, 2015.

Name of Executive Officer or Director (1)

Number of Shares of
Common Stock

Jong Kyoo Yoon

5,300

Hong Lee

459

Jong-Hee Yang

914

Jeong Rim Park

540

Ki Bum Lee

600

Young-Tae Park

450

Kyu Sul Choi

1,506

Kyung Yup Cho

500

Ki Hwan Kim

321

Minkyu Chung

2

Total

10,592

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(1)

On April 7, 2015, Michael Byungnam Lee, our non-executive director, acquired 1,020 share of our common stock on the Korea Exchange.

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. As of March 31, 2015, all of such stock options granted to Kookmin Bank’s directors, executive officers and employees have been exercised and there are no stock options outstanding as of such date. For all of such options granted, upon their exercise, we were required to pay in cash the difference between the exercise price and the market price of our common stock at the date of exercise.

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 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 ￦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 ￦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. In November 2010, we paid ￦110 million, the equivalent monetary amount for 2,149 shares of our common stock, to our former non-executive director, Chee Joong Kim. In January 2011, we paid ￦133 million, the equivalent monetary amount for 2,323 shares of our common stock, to our former non-executive director, Chan Soo Kang. In April 2011, we paid an aggregate of ￦229 million, the equivalent monetary amount for 4,056 shares of our common stock, to our former non-executive directors, Suk Sig Lim and Jacques Kemp. In April 2013, we paid an aggregate of ￦96 million, the equivalent monetary amount for 2,543 shares of our common stock, to our former non-executive director, Sang Moon Ham. In April 2014, we paid an aggregate of ￦115 million, the equivalent monetary amount for 3,090 shares of our common stock, to our former non-executive director, Jae Mok Cho. Since January 2010, in accordance with the best practice guidelines for outside directors of banking institutions announced by the Korea Federation of Banks, which have been replaced with the Financial Corporate Governance Code issued by the Financial Services Commission in December 2014, we have not entered into any performance share agreements with our non-executive directors.

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 senior management and directors other than non-executive directors will generally be in the form of cash disbursements of equivalent monetary amounts based on the market value of our shares at such time.

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Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

Item 7.A. Major Shareholders

The following table presents information regarding the beneficial ownership of our shares at December 31, 2014 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.

Beneficial Owner

Number of Shares of
Common Stock 		Percentage of
Total Outstanding
Shares of
Common
Stock (%) (1)

Korean National Pension Service

36,383,211 9.42 %

Bank of New York Mellon (2)

32,474,273 8.41 %

(1)

Calculated based on 386,351,693 shares of our common stock outstanding as of December 31, 2014.

(2)

As depositary bank.

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, 2014. None of our major stockholders has different voting rights from our other stockholders.

Item 7.B. Related Party Transactions

As of December 31, 2014, we had an aggregate of ￦2,530 million in loans outstanding to our executive officers and directors and Kookmin Bank’s executive officers and directors. In addition, as of such date, we had loans outstanding to various companies whose directors or executive officers were serving concurrently as our directors or executive officers. See Note 43 of the notes to our consolidated financial statements included elsewhere in this annual report. 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.

Item 7.C. Interests of Experts and Counsel

Not applicable.

Item 8. FINANCIAL INFORMATION

Item 8.A. Consolidated Statements and Other Financial Information

See “Item 18. Financial Statements” and pages F-1 through F-185.

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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.

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 ￦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 ￦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 ￦482 billion (including residence tax), which dismissed the appeal in March 2010. In June 2010, Kookmin Bank filed an appeal with the Seoul Administrative Court, which ruled in favor of Kookmin Bank on April 1, 2011. On April 19, 2011, the National Tax Service of Korea appealed this case to the Seoul High Court, which ruled in favor of Kookmin Bank on January 12, 2012. On January 30, 2012, the National Tax Service of Korea appealed this case to the Supreme Court, which ruled in favor of Kookmin Bank on January 15, 2015.

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 have purchased KIKO products from Kookmin Bank are required to make large payments to it. Twelve lawsuits were filed 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. Eight of the lawsuits were ruled in favour of Kookmin Bank by the Seoul Central District Court and not appealed. In two of the lawsuits, rulings were issued in favor of Kookmin Bank by the Seoul High Court in February 2013 and November 2014 and not appealed. In one of the lawsuits, the Supreme Court of Korea ruled in favor of Kookmin Bank in May 2014. As of April 3, 2015, the amount of the one remaining claim, which is pending at the Seoul High Court, was approximately ￦0.7 billion. 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.

In January 2008, the Korea Fair Trade Commission instituted certain amendments to standard loan policy conditions for mortgage loan agreements to require banks to be responsible for the payment of mortgage registration expenses when issuing mortgage loans. Subsequently, the Korea Federation of Banks and 16 banks, including Kookmin Bank, filed a lawsuit against the Korea Fair Trade Commission to prevent the implementation of such amendments. In August 2010, the Supreme Court ruled in favor of the Korea Fair Trade Commission. Since such ruling in August 2010, certain of Kookmin Bank’s customers have filed 133 lawsuits against Kookmin Bank, as of April 3, 2015, alleging that it should return the mortgage registration expenses paid by such customers under mortgage loan agreements that did not reflect the amendments instituted by the Korea Fair Trade Commission in January 2008. As of April 3, 2015, 132 such lawsuits had been concluded and one lawsuit was appealed and pending in the appellate court. The aggregate amount of claimed damages in the one remaining lawsuit, as of April 3, 2015, was approximately ￦0.7 billion. Additional lawsuits may be filed against Kookmin Bank with respect to its mortgage loans, and the final outcome of such litigation remains uncertain.

In July 2010, Fairfield Sentry Limited, or Fairfield, which is currently in liquidation and whose assets were directly or indirectly invested with Bernard L. Madoff Investment Securities LLC, or BLMIS, filed a lawsuit in the Supreme Court of the State of New York against Kookmin Bank, which acted as a trustee bank for its clients who invested in Fairfield. Fairfield seeks restitution of approximately US$42 million paid to Kookmin Bank in connection with share redemptions on the ground that such payments were made by mistake, based on inflated

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values resulting from BLMIS’ fraud. The case is currently pending at such court. Fairfield has filed similar actions against numerous other fund investors to seek recovery of redemption payments.

In May 2012, the trustee appointed for the liquidation of BLMIS filed a lawsuit against Kookmin Bank in the United States Bankruptcy Court for the Southern District of New York. The trustee seeks recovery of approximately US$42 million, which amount is alleged to be equal to the amount of funds that were redeemed from Fairfield between June 2004 and January 2006 by Kookmin Bank. The trustee alleges that Fairfield was a “feeder fund” that invested in BLMIS and redemptions from such BLMIS feeder fund are avoidable and recoverable under the U.S. Bankruptcy Code and New York law. The case is currently pending at such court. The trustee has filed similar clawback actions against numerous other institutions.

In November 2012, Kookmin Bank filed a lawsuit against the Export-Import Bank of Korea and other creditor financial institutions comprising the creditors’ committee of a Korean shipbuilding company which is a borrower of Kookmin Bank and is currently in workout. Kookmin Bank voted against extending new credit to such borrower and exercised its appraisal rights. Kookmin Bank is seeking ￦103 billion as compensation for damages and payment of the purchase price of debt held by Kookmin Bank. In November 2012, the Export-Import Bank of Korea and other creditor financial institutions of the borrower filed a counter lawsuit against Kookmin Bank seeking ￦46 billion in damages in connection with the borrower’s debt restructuring plan. In August 2014, the Seoul Central District Court ruled partially in favor of Kookmin Bank in its lawsuit against the Export-Import Bank of Korea and other creditor financial institutions of the borrower, but ruled against Kookmin Bank in the counter lawsuit brought against Kookmin Bank. Both cases have been appealed to the Seoul High Court, where they are currently pending.

Commencing in November 2013, Kookmin Bank was subject to a number of investigations by the Financial Supervisory Service and other governmental authorities concerning alleged issues with Kookmin Bank’s internal controls and possible legal violations by Kookmin Bank and its employees.

•

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

•

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

•

In May 2014, the Financial Supervisory Service launched an investigation into a dispute between Kookmin Bank and us regarding the replacement of Kookmin Bank’s main computing system.

In August 2014, the Financial Supervisory Agency of Japan suspended Kookmin Bank from conducting new transactions at its branches in Japan for four months from September 2014 to January 2015. Furthermore, in August 2014, the Financial Supervisory Service imposed disciplinary sanctions on Kookmin Bank and a number of its officers, directors and employees, including the then chief executive officer of Kookmin Bank. In September 2014, the Financial Services Commission imposed a disciplinary sanction on our then chief executive officer. Both the chief executive officer of Kookmin Bank and our chief executive officer, as well as a number of our respective outside directors, subsequently resigned from their posts and have been replaced. In September 2014, the Financial Supervisory Service completed its investigation into Kookmin Bank and us with respect to such allegations.

Furthermore, in February 2014, the Financial Services Commission suspended the new credit card issuance and other related activities of KB Kookmin Card for three months from February to May 2014, in response to an incident involving the misappropriation of the personal information of a large number of its customers by an employee of the Korea Credit Bureau in the first half of 2013. Specifically, during such suspension period, KB Kookmin Card was prohibited from engaging in the following activities:

•

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

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•

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

•

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

In connection with the misappropriation incident, as of February 28, 2015, certain of KB Kookmin Card’s customers have filed a total of 101 lawsuits against KB Kookmin Card with the aggregate amount of claimed damages amounting to approximately ￦52 billion. The final outcome of such lawsuits remains uncertain. In addition, KB Kookmin Card could become subject to additional litigation and regulatory sanctions, and may also incur significant costs relating to the compensation of customers for losses incurred as a result of the fraudulent use of the misappropriated personal information.

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 10.B. 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 us in respect of the years ended December 31, 2010, 2011, 2012, 2013 and 2014. 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.

Fiscal Year

Dividends per
Common Share (1) 		Dividends per
Preferred Share 		Total Amount of Cash
Dividends Paid
(in millions of Won)

2010 (2)

￦ 120 US$ 0.11 — — ￦ 41,163

2011 (3)

720 0.62 — — 278,173

2012 (4)

600 0.56 — — 231,811

2013 (5)

500 0.47 — — 193,176

2014 (6)

780 0.72 — — 301,354

(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 10, 2011, our board of directors passed a board resolution recommending a cash dividend of ￦120 per common share (before dividend tax), representing 2.4% of the par value of each share, for the fiscal year ended December 31, 2010. This resolution was approved and ratified by our stockholders on March 25, 2011 .

(3)

On February 9, 2012, our board of directors passed a board resolution recommending a cash dividend of ￦720 per common share (before dividend tax), representing 14.4% of the par value of each share, for the fiscal year ended December 31, 2011. This resolution was approved and ratified by our stockholders on March 23, 2012.

(4)

On February 7, 2013, our board of directors passed a board resolution recommending a cash dividend of ￦600 per common share (before dividend tax), representing 12.0% of the par value of each share, for the fiscal year ended December 31, 2012. This resolution was approved and ratified by our stockholders on March 22, 2013.

(5)

On February 7, 2014, our board of directors passed a board resolution recommending a cash dividend of ￦500 per common share (before dividend tax), representing 10.0% of the par value of each share, for the fiscal year ended December 31, 2013. This resolution was approved and ratified by our stockholders on March 28, 2014.

(6)

On February 5, 2015, our board of directors passed a board resolution recommending a cash dividend of ￦780 per common share (before dividend tax), representing 15.6% of the par value of each share, for the fiscal year ended December 31, 2014. This resolution was approved and ratified by our stockholders on March 27, 2015.

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 10.E. Taxation—United States Taxation” and “—Korean Taxation—Taxation of Dividends.”

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Item 8.B. Significant Changes

Not applicable.

Item 9. THE OFFER AND LISTING

Item 9.A. 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.

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 Per
Common Stock 		Average Daily
Trading
Volume (in
thousands of
shares) 		Closing Price Per ADS Average Daily
Trading
Volume (in
thousands of
shares)
High Low High Low

2010

￦ 60,400 ￦ 45,900 1,921.9 US$ 52.89 US$ 37.81 326.8

2011

62,100 34,600 2,385.3 55.00 29.64 202.3

2012

45,000 33,000 1,342.3 40.63 28.84 150.1

2013

43,950 32,600 1,236.0 41.26 28.85 144.3

First Quarter

40,750 36,150 1,629.3 37.45 32.16 188.4

Second Quarter

37,600 33,650 1,093.7 33.46 29.17 147.7

Third Quarter

38,800 32,600 1,155.2 35.72 28.85 124.0

Fourth Quarter

43,950 37,700 1,072.2 41.26 35.38 122.0

2014

43,000 34,200 1,068.9 42.00 32.34 118.2

First Quarter

42,100 35,900 1,215.4 39.33 32.34 143.7

Second Quarter

37,800 34,200 997.0 36.33 33.42 91.8

Third Quarter

43,000 34,650 1,191.1 42.00 34.63 93.1

Fourth Quarter

43,000 36,150 872.1 40.63 32.62 144.9

October

43,000 37,300 1,173.5 40.63 35.06 109.5

November

41,800 38,900 750.2 38.31 34.93 64.2

December

39,350 36,150 686.8 35.41 32.62 251.7

2015 (through April 24)

41,650 35,000 966.9 38.57 31.22 121.5

First Quarter

40,000 35,000 927.1 35.97 31.22 128.1

January

38,200 35,000 873.7 35.43 31.22 149.6

February

39,700 36,350 854.0 35.94 33.46 154.1

March

40,000 36,650 1,034.7 35.97 32.49 86.0

April (through April 24)

41,650 36,800 1,099.5 38.57 33.69 98.0

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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 9.B. Plan of Distribution

Not applicable.

Item 9.C. 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.

As of December 31, 2014, the aggregate market value of equity securities listed on the KRX KOSPI Market was approximately ￦1,192 trillion. The average daily trading volume of equity securities for 2014 was approximately 278 million shares and the average daily transaction value was ￦3,984 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.

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The following table sets out movements in KOSPI:

Year

Opening High Low Closing

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

1,157.40 1,723.17 992.69 1,682.77

2010

1,696.14 2,052.97 1,548.78 2,051.00

2011

2,070.08 2,228.96 1,652.71 1,825.74

2012

1,826.37 2,049.28 1,769.31 1,997.05

2013

2,031.10 2,059.58 1,780.63 2,011.34

2014

1,967.19 2,082.61 1,886.85 1,915.59

2015 (through April 24)

1,926.44 2,173.41 1,882.45 2,159.80

Source:     The KRX KOSPI Market

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 1,000

1

1,000 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

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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 10.E. 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

Year

Number of
Listed
Companies 		(Billions of
Won) 		(Millions of
US$) (1) 		Thousands
of Shares 		(Millions of
Won) 		(Thousands of
US$) (1)

1985

342 ￦ 6,570 US$ 7,921 18,925 ￦ 12,315 US$ 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

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

777 1,141,885 1,009,981 380,859 5,619,768 4,970,607

2011

791 1,041,999 899,438 353,759 6,863,146 5,924,166

2012

784 1,154,294 1,085,638 486,480 4,823,643 4,536,739

2013

777 1,185,974 1,123,879 328,325 3,993,422 3,784,337

2014

773 1,192,253 1,092,918 278,082 3,983,580 3,651,679

2015 (through April 24)

762 1,346,808 1,251,855 398,452 5,133,955 4,771,999

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.

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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 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.

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 ￦50 million. Pursuant to the Financial Investment Services and Capital Markets Act, financial investment companies with a dealing and/or 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.

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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, an administrative fine of up to 0.001% of the aggregate market value of the total issued and outstanding stock or ￦500 million, whichever is lower, 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 becoming 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 five days 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 with voting rights. See “Item 4.B. 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.

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Under current Korean laws and regulations, the depositary is required to obtain our prior consent 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 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 a financial investment company with a dealing license as the other party. Foreign investors are prohibited from engaging in margin transactions by borrowing shares from a financial investment company with a dealing and/or brokerage license 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

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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 the Enforcement Decree of 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. In particular, if a foreign investor acquires or sells his shares in connection with a tender offer, odd-lot trading of shares or trades of a class of shares for which the aggregate foreign ownership limit has been reached or exceeded, such foreign investor or his standing proxy must ensure that the financial investment company that was engaged to facilitate the transaction reports such transaction to the governor of the Financial Supervisory Service. 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, including 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 corporations are subject to a 40% ceiling on the acquisition of shares by foreigners in the aggregate. In addition, 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 Trade, Industry and Energy 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 4.B. Business Overview—Supervision and Regulation—Principal Regulations Applicable to Banks—Restrictions on Bank Ownership.”

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Item 9.D. Selling Shareholders

Not applicable.

Item 9.E. Dilution

Not applicable.

Item 9.F. Expenses of the Issue

Not applicable.

Item 10. ADDITIONAL INFORMATION

Item 10.A. Share Capital

Not applicable.

Item 10.B. 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, 2014, our authorized share capital is 1,000,000,000 shares. Pursuant to our articles of incorporation, we are authorized to issue shares with preferred dividend, non-voting shares, class shares with conversion rights, class shares with redemption rights and shares with a combination of all or any of the foregoing characteristics (collectively, “Class Shares”), as well as common shares. Subject to applicable laws and regulations, we are authorized to issue Class Shares up to one-half of all of our issued and outstanding shares.

Under our articles of incorporation, dividends on non-voting shares with preferred dividend are required to be at least 1% per annum of the par value and the board of directors must determine at the time of issuance of such shares the dividend rate, type of distributable properties, method of determining the value of distributable properties and conditions on payment of dividends. Also, we may, pursuant to a resolution of the board of directors, issue such non-voting shares with preferred dividend as redeemable shares that may be redeemed with profits at the relevant shareholder’s or our discretion, up to one-half of all of our issued and outstanding shares.

In addition, pursuant to a resolution of the board of directors, we may issue shares that are convertible into common shares or Class Shares at the request of the relevant shareholders, up to 20% of all of our issued and outstanding shares. The period during which a relevant shareholder may make a request for conversion may be determined by a resolution of the board of directors and must be a period between one and ten years from the issue date.

Furthermore, through an amendment of the articles of incorporation, we may create new classes of shares, which may be common shares or Class 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 386,351,693 shares of common stock were outstanding. No Class Shares are 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, 2015, none of our officers,

directors and employees held options to purchase 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 6.E. 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).

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 10.E. 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 non-voting shares with preferred dividend will be the same type of non-voting shares with preferred dividend held by such holders.

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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 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 or persons other than existing stockholders, who are entitled to subscribe for newly issued shares of the deadline for subscription at least two weeks prior to the deadline. If such stockholders or persons fail to subscribe on or before such deadline, their 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 hold 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. The Korean Commercial Code provides that a company’s articles of incorporation may prescribe conditions for the enfranchisement of non-voting shares. For example, if our annual general stockholders’ meeting resolves not to pay to holders of non-voting shares with preferred dividend the annual dividend as determined by the board of directors at the time of issuance of such shares, the holders of non-voting shares with preferred dividend 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 non-voting shares with

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preferred dividend. Holders of such enfranchised non-voting shares with preferred dividend 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.

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 Class Shares are adversely affected, a resolution must be adopted by a separate meeting of holders of Class Shares. Such a resolution may be adopted if the approval is obtained from stockholders of at least two-thirds of the Class Shares present or represented at such meeting and such shares also represent at least one-third of the total issued and outstanding Class 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 Class 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

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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 Act 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 stock with preferred dividend 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 resolution is made by the board of directors pursuant to an Enforcement 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 4.B. Business Overview—Supervision and Regulation—Principal Regulations Applicable to Financial Holding Companies—Restrictions on Ownership of a Financial Holding Company” and “Item 9.C. 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.

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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.

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

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of shares by non-residents or non-Koreans. See “Item 9.C. Markets” and “Item 10.D. 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 4.B. Business Overview—Supervision and Regulation—Principal Regulations Applicable to Financial Holding Companies—Restrictions on Ownership of a Financial Holding Company.”

Acquisition of Our Shares

Under the Korean Commercial Code, we may acquire our own shares upon a resolution of a general meeting of shareholders by either (i) purchasing them on a stock exchange or (ii) purchasing a number of shares, other than the redeemable shares as set forth in Article 345, Paragraph (1) of the Korean Commercial Code, from each shareholder in proportion to their existing shareholding ratio through the methods set forth in the Presidential Decree, provided that the total purchase price does not exceed the amount of our profit that may be distributed as dividends in respect of the immediately preceding fiscal year.

Additionally, 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.

Subject to certain limited exceptions, our subsidiaries will not be permitted to acquire our shares pursuant to the Financial Holding Company Act.

Item 10.C. Material Contracts

None.

Item 10.D. Exchange Controls

General

The Foreign Exchange Transaction Act of Korea and the Enforcement 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 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

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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 10.E. 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;

•

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.

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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 with respect to the ADSs will be subject to taxation at reduced rates 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) we were not, in the year prior to the year in which the dividend was paid, and are 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 2013 or 2014 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 2015 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 category” 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 a corporation or other 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 with its head office, principal place of business or place of effective management in Korea; 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 Common 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 local income surtax). If you are a qualified resident and 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 free shares representing a transfer of earning surplus or certain capital reserves into paid-in capital, that distribution may be subject to Korean withholding tax.

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Taxation of Capital Gains from Transfer of Common 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) 11.0% (inclusive of local income 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 local income 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 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 consecutive calendar years prior to the calendar year in which the sale occurs.

Under Korean tax law, ADSs are viewed as shares of common stock for capital gains tax purposes. Accordingly, capital gains from the sale or disposition of ADSs are taxed (if such sale or disposition constitutes a taxable event) as if such gains are from the sale or disposition of the underlying common shares. Capital gains that you earn (regardless of whether you have a permanent establishment in Korea) from a transfer of ADSs outside of Korea will generally 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. However, if you transfer ADSs after having converted the underlying common shares, such exemption under the STTCL will not apply and you will be required to file a corporate income tax return and pay tax in Korea with respect to any capital gains derived from such transfer unless the purchaser or a financial investment company with a brokerage license, as applicable, withholds and pays such tax.

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 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) 11.0% (inclusive of local income 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 local income 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. 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 local income 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. However, under Article 17 (Investment or Holding Companies) of the Korea-United States income tax treaty, such reduced rates and exemption do not apply if (i) you are a United States corporation, (ii) by reason of any special measures, the tax imposed on you by the United States with respect to such dividend income or capital gains is substantially less than the tax generally imposed by the United States on corporate profits and (iii) 25% or more of your capital is held of record or is otherwise determined, after consultation between

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competent authorities of the United States and Korea, to be owned directly or indirectly by one or more persons who are not individual residents of the United States. Also, under Article 16 (Capital Gains) of the Korea-United States income tax treaty, the exemption on capital gains does not apply if (a) you have a permanent establishment in Korea and any shares of common stock in which you hold an interest and which gives rise to capital gains are effectively connected with such permanent establishment, (b) you are an individual and you maintain a fixed base in Korea for an aggregate of 183 days or more during a given taxable year and your ADSs or common shares giving rise to capital gains are effectively connected with such fixed base or (c) you are an individual and you are present in Korea for an aggregate of 183 days or more during a given taxable year.

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 claim the benefit of a tax rate reduction or 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 reduced withholding tax rate, “application for entitlement to reduced tax rate,” and in the case of exemptions from withholding tax, “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 certain exceptions) as the beneficial owner of such Korean source income (“BO application”). For example, a U.S. resident would be required to provide Form 6166 as a certificate of tax residency together with the application for entitlement to reduced tax rate or the application for tax exemption. Such application should be submitted to the withholding agent prior to the payment date of the relevant income. Subject to certain exceptions, where the relevant income is paid to an overseas investment vehicle (which is not the beneficial owner of such income) (“OIV”), a beneficial owner claiming the benefit of an applicable tax treaty with respect to such income must submit its BO application to such OIV, which must submit an OIV report and a schedule of beneficial owners to the withholding agent prior to the payment date of such income. In the case of a tax exemption application, the withholding agent is required to submit such application (together with the applicable OIV report in the case of income paid to an OIV) to the relevant district tax office by the ninth day of the month following the date of the 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 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 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.

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Under the Securities Transaction Tax Law, depositary receipts (such as American depositary receipts) constitute share certificates subject to the securities transaction tax. However, the transfer of depositary receipts listed on the New York Stock Exchange, the Nasdaq Global 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.

Non-reporting or under-reporting of securities transaction tax will generally result in penalties equal to 20% to 60% of the non-reported tax amount or 10% to 60% of under-reported tax amount. Also, a failure to timely pay securities transaction tax will result in a penalty equal to 10.95% per annum of the due but unpaid tax amount. The penalties are imposed on the party responsible for paying the securities transaction tax or, if such tax is required to be withheld, on the party that has the obligation to withhold.

Item 10.F. Dividends and Paying Agents

Not applicable.

Item 10.G. Statement by Experts

Not applicable.

Item 10.H. Documents on Display

We are subject to the information requirements of the Exchange Act, 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.

Item 10.I. 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 internal regulations pertaining to our consolidated capital adequacy ratio and internal standards for risk appetite and economic capital under Basel III, we identify the following eight separate categories of risk inherent in our business activities: credit risk, market risk, operational risk, interest

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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 Risk Management Committee is ultimately responsible for group-wide risk management, and directs our various subordinate risk management entities. The Risk Management Council reports directly to the Risk Management Committee and coordinates the implementation of directives set forth by the 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 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 Risk Management Committee.

The following chart sets out our risk management governance structure as of the date of this annual report:

LOGO

Risk Management Committee

Our 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 non-standing director and three 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.

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Risk Management Council

Our 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 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 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 Risk Management Committee. Our 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.

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. We measure expected losses and economic capital on assets (whether on- or off-balance sheet) that are subject to credit risk management and use expected losses and economic capital as management indicators. We manage credit risk by allocating credit risk economic capital limits. In addition, we control credit concentration risk exposure by applying and managing total exposure limits to prevent excessive risk concentration to particular industries or borrowers. Credit exposures that we assess and manage 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 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 Risk Management

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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, including Kookmin Bank’s Risk Management Council and Risk Management Committee.

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 fully guaranteed by letters of guarantee issued by the Credit Guarantee Fund and the Korea Technology Credit Guarantee Fund, for loans fully secured by deposits and for other loans similarly guaranteed or secured. 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.

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

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loan applications to processing centers. However, 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 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.

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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 ￦1 billion or less, Kookmin Bank has put in place a retail SOHO credit rating system, which adopts simplified credit evaluation modeling procedures and has the same structure and process as the credit rating system for individual retail borrowers. This system consists of a scoring model and a preliminary examination checklist. The scoring model analyzes information with respect to the customer’s personal information and bank transaction history, as well as information from credit bureaus. The preliminary examination checklist is based on information regarding the customer’s credit delinquencies and history of write-offs. This system classifies customers into 13 possible credit ratings.

For SOHOs with total outstanding loans of more than ￦1 billion, 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.

•

Non-financial Model . The Non-financial model uses various qualitative and quantitative 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 KB Kookmin Card’s internal application scoring system and a credit scoring system developed by independent credit bureaus.

KB Kookmin Card’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

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Federation of Banks and other credit bureaus. KB Kookmin Card also considers repayment ability, total assets, total outstanding debts 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, 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, KB Kookmin Card establishes, among other things, the term of any new approvals, initial limits and differentiation of fee rates with respect to its credit cards. KB Kookmin Card’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 disposable income, which is based on their occupation and the value of their personal assets. KB Kookmin Card 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 ￦30 billion, small- and medium-sized enterprises to which we have exposures (in the form of securities or loans) of over ￦20 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 sales growth rate and risk concentration 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 25% 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 ￦30 billion or more, individual corporations to which we have an exposure of more than ￦20 billion, and also our exposure to the 65 chaebols , which are comprised of the 42 largest chaebols in Korea designated as such by the Financial Supervisory Service based on their outstanding exposures as well as 23 chaebols selected for monitoring by the Senior Executive Vice President of Kookmin Bank’s Risk Management Division. 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

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value. When appraising the value of real estate collateral, which makes up the largest part of Kookmin Bank’s collateral, Kookmin Bank 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 Risk Management and Monitoring

Kookmin Bank’s Credit Risk Department manages and regulates our loan portfolio policies. It also analyzes and monitors our loan portfolios and monitors our compliance with the applicable limits for credit risk. Moreover, it separately manages high-risk products, such as real estate project financing loans and over-the-counter derivative products, by setting appropriate limits.

Credit Review

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; and

•

evaluates the corporate credit risk of potentially insolvent companies.

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’s Credit Review Department also analyzes issues related to credit risk and provides information necessary for the formulation of effective credit policies and strategies and for effective credit risk management.

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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, stock price risk and foreign exchange risk. The financial instruments that expose us to these risks are securities and financial derivatives. We are not exposed to commodity risk, the other recognized form of market risk, as we currently do not engage in commodities trading. 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 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.

Kookmin Bank’s Risk Management Council is responsible for interest rate and liquidity risk management for its non-trading activities. The council meets on a regular basis and as required to respond to developments in the market and the economy. Members of the Risk Management Council, acting through Kookmin Bank’s Risk Management Department, review Kookmin Bank’s 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 risk management to Kookmin Bank’s Risk Management Department in Kookmin Bank’s Risk Management Group, which monitors and reviews the asset and liability operating procedures and activities of Kookmin Bank’s Financial Planning 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 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 IFRS. 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 stock price 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 and the Fund Management 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

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•

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 limits set by Kookmin Bank’s Risk Management Council for Kookmin Bank and at the group level within Kookmin Bank, VaR, position and stop loss limits set by Kookmin Bank’s Risk Management Council for Kookmin Bank and at the group level within Kookmin Bank, and VaR, position, stop loss and sensitivity limits (PVBP, Delta, Gamma, Vega) set by Kookmin Bank’s Market Risk Management Subcommittee at the department level within Kookmin Bank. We prepared our risk control and management guidelines for derivative trading based on the regulations and guidelines promulgated by the Financial Supervisory Service.

In addition, 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 5.A. Operating Results—Critical Accounting Policies—Valuation of Financial Instruments” and Notes 3.3 and 6 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 Adaptiv, which enables us to generate consistent VaR numbers for all trading activities.

Value at Risk analysis. We use VaR to measure market risk. VaR is a statistically estimated maximum amount of loss that could occur over a given period of time at a given level of confidence. 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. Different VaR methodologies and distributional assumptions could produce a materially different VaR. 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.

We use a 99% single tail confidence level to measure VaR, which means the actual amount of loss may exceed the VaR, on average, once out of 100 business days. Until 2011, we used the “variance-covariance method” or parametric VaR (“PVaR”) methodology to measure our daily VaR, which took into account the diversification effects among different risk categories as well as within the same risk category. In 2012, we received authorization from the Financial Services Commission to use a historical simulation VaR (“HSVaR”) methodology, which we believe to be more accurate and responsive in reflecting market volatilities, to measure market risk. Our ten-day HSVaR method, which is computed using a full valuation and is computationally intensive, uses an archive of historic price data and the VaR for a portfolio is estimated by creating a hypothetical time series of returns on that portfolio, obtained by running the portfolio through actual ten-day historical data and computing the changes that would have occurred in each ten-day period.

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The following table shows the volume and types of positions held by Kookmin Bank for which the VaR method is used to measure market risk as of December 31, 2012, 2013 and 2014.

As of December 31,
2012 2013 2014
(in millions of Won)

Securities—Bond (1)

￦ 6,181,712 ￦ 6,918,051 ￦ 7,393,643

Securities— Equity (1)

173,757 93,122 60,122

Spot exchanges (2)

271,500 1,569,768 1,192,918

Derivatives (3)

4,091,473 3,465,130 3,808,515

Total

￦ 10,718,442 ￦ 12,046,071 ￦ 12,455,198

(1)

Represents amounts marked to market.

(2)

Represents the overall net open currency position in each currency, which is the greater of (i) the sum of the absolute value of all short positions and (ii) the sum of the absolute value of all long positions.

(3)

For over-the-counter derivatives, represents the absolute value of over-the-counter derivatives measured at fair value at year end for monitoring purposes. For exchange-traded derivatives, includes the amount of deposits and the collateral posted for such derivatives.

The following table shows Kookmin Bank’s ten-day HSVaRs (at a 99% confidence level for a ten-day holding period) as of December 31, 2012, 2013 and 2014 for interest risk, stock price risk and foreign exchange risk relating to its trading activities. The following figures were calculated on a consolidated basis.

As of December 31,
2012 2013 2014
(in billions of Won)

Risk categories:

Interest risk

￦ 8.3 ￦ 17.0 ￦ 10.1

Stock price risk

4.9 1.1 0.9

Foreign exchange risk

11.2 5.3 10.8

Less: diversification

(12.7 ) (7.0 ) (8.8 )

Diversified VaR for overall trading activities

￦ 11.7 ￦ 16.4 ￦ 13.0

In 2014, the average, high, low and ending amounts of ten-day HSVaR (at a 99% confidence level for a ten-day holding period) for Kookmin Bank relating to its trading activities were as follows.

Trading activities VaR for 2014
Average Minimum Maximum As of December 31,
2014
(in billions of Won)

Interest risk

￦ 12.9 ￦ 7.7 ￦ 19.8 ￦ 10.1

Stock price risk

1.6 0.7 3.9 0.9

Foreign exchange risk

12.0 5.1 14.7 10.8

Less: diversification

(8.8 )

Diversified VaR for overall trading activities

15.4 10.1 23.6 ￦ 13.0

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In 2013, the average, high, low and ending amounts of ten-day HSVaR (at a 99% confidence level for a ten-day holding period) for Kookmin Bank relating to its trading activities were as follows.

Trading activities VaR for 2013
Average Minimum Maximum As of December 31,
2013
(in billions of Won)

Interest risk

￦ 16.3 ￦ 7.4 ￦ 24.9 ￦ 17.0

Stock price risk

3.5 0.9 7.1 1.1

Foreign exchange risk

9.3 5.3 13.6 5.3

Less: diversification

(7.0 )

Diversified VaR for overall trading activities

17.3 10.9 22.2 ￦ 16.4

In 2012, the average, high, low and ending amounts of ten-day HSVaR (at a 99% confidence level for a ten-day holding period) for Kookmin Bank relating to its trading activities were as follows.

Trading activities VaR for 2012
Average Minimum Maximum As of December 31,
2012
(in billions of Won)

Interest risk

￦ 20.1 ￦ 8.3 ￦ 29.3 ￦ 8.3

Stock price risk

4.2 0.5 8.7 4.9

Foreign exchange risk

26.6 9.6 39.2 11.2

Less: diversification

(12.7 )

Diversified VaR for overall trading activities

20.6 10.6 28.7 ￦ 11.7

Standardized Method . Market risk for positions not measured by VaR are measured using the standardized method for measuring market risk-based required equity capital specified by the Financial Supervisory Service, which takes into account certain risk factors. Under the standardized method, the required equity capital is measured using the risk-weighted values for each risk factor. The method used to measure the market risk-based required equity capital for each risk factor is as follows:

•

Interest rate risk:

•

General market risk: General market risk relates to the risk of losses from macroscopic events which could have an impact on interest rates, stock prices, exchange rates, and market prices of general commodities. General market interest rate risk of a debt security is calculated on its net position, taking into consideration the remaining maturity and coupon rate.

•

Specific risk: Specific risk relates to the risk of loss from changes in credit risk of issuers of debt securities or equities, excluding changes in general market prices. Specific interest rate risk of a debt security is measured by multiplying the interest rate position appraised based on the market price of such security by the risk-weighted value applicable to the type of debt security, credit rating and the remaining maturity.

•

Equity risk: General and specific equity risk are calculated by multiplying the bought or sold position by the relevant risk-weighted values.

•

Foreign exchange risk: Foreign exchange risk is measured by multiplying the larger of the absolute values among the net bought or sold positions of each currency by the relevant risk-weighted values.

•

Option risk: Option risk is measured using the delta, gamma and vega of the option.

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The standardized method is used to measure the market risk of the positions for which the Financial Supervisory Service has not approved the use of the VaR method. In addition, we use the standardized method for positions which are held by certain subsidiaries or for which measuring VaR is difficult due to the lack of daily position data. See Note 4.4.2 of the notes to our consolidated financial statements included elsewhere in this annual report.

The following table shows the volume and types of instruments held by Kookmin Bank for which the standardized method is used to measure its required equity capital as of December 31, 2012, 2013 and 2014.

As of December 31,
2012 2013 2014
(in millions of Won)

30-year government bonds (1)

￦ — ￦ — ￦ 7,913

Currency rate swaps and foreign exchange positions (2)

131,723 122,537 117,334

Options embedded in convertible bonds (3)

17,459 2,328 2,383

Total

￦ 149,182 ￦ 124,865 ￦ 127,630

(1)

Represents amounts marked to market.

(2)

Represents the overall net open currency position in each currency held by Kookmin Bank (China) Ltd. and a special purpose vehicle with respect to Kookmin Bank’s covered bond program. The overall net open currency position is the greater of (i) the sum of the absolute value of all short positions and (ii) the sum of the absolute value of all long positions.

(3)

Represents the absolute value of over-the-counter derivatives measured at fair value at year end for monitoring purposes.

The following table shows Kookmin Bank’s required equity capital measured using the standardized method as of December 31, 2012, 2013 and 2014.

As of December 31,
2012 2013 2014
(in millions of Won)

Risk categories:

Interest risk

￦ 1,673 ￦ 921 ￦ 792

Stock price risk

4,567 2 1,101

Foreign exchange risk

9,081 9,214 9,387

Total

￦ 15,321 ￦ 10,137 ￦ 11,280

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%. The number of times the actual changes in fair values, earnings or cash flows from the market risk sensitive instruments exceeded the VaR amounts in 2012, 2013 and 2014 was nil, 4 and 1, respectively.

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, 2014, Kookmin Bank’s trading portfolio could have lost ￦299 billion for an assumed short-term extreme decline of approximately 25% in the equity market and an approximate 77 basis point increase in the Korean treasury bond rates under an abnormal stress environment.

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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, 2014, the VaR of Kookmin Bank’s interest risk from trading was ￦10.1 billion and the weighted average duration, or weighted average maturity, of its Won-denominated debt securities at fair value through profit or loss was approximately 2.1 years.

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.

Prior to August 2010, assets and liabilities denominated in U.S. dollars, Japanese yen, and Euro typically accounted for the majority of our foreign currency assets and liabilities. Beginning in August 2010, the Kazakhstan tenge has accounted for a large portion of our foreign currency assets and liabilities, although its impact has decreased since 2013 due to impairment losses on our equity stake in JSC Bank CenterCredit, a Kazakhstan Bank. Until August 2010, our investment in JSC Bank CenterCredit was fully hedged against currency risk. See “Item 4.B. Business Overview—Capital Markets Activities and International Banking—International Banking.” However, in August 2010, we decided to discontinue such currency hedge as the value of the Won had remained relatively stable against the Kazakhstan tenge for a prolonged period of time.

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. Kookmin Bank’s Risk Management Council and Market Risk Management Subcommittee oversee Kookmin Bank’s 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 2012, 2013 and 2014. 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)
2012 2013 2014
(in millions of US$)

Currency:

U.S. dollars

US$ (72.0 ) US$ (135.0 ) US$ (174.7 )

Japanese yen

(8.3 ) (17.3 ) (1.8 )

Euro

(4.8 ) (5.5 ) (1.1 )

Kazakhstan tenge

314.5 82.5 56.5

Others

25.4 22.9 34.6

Total

US$ 254.8 US$ (52.4 ) US$ (86.5 )

(1)

Amounts prepared on a non-consolidated basis.

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Equity Price Risk

Equity price risk results from our equity derivatives trading portfolio in Won since we do not have any trading exposure to shares denominated in foreign currencies other than foreign equity index futures.

The equity derivatives trading portfolio in Won consists of exchange-traded stocks and equity derivatives under strict limits on diversification as well as position limits and stop loss limits.

Kookmin Bank’s Risk Management Council and Market Risk Management Subcommittee set annual and monthly stop loss limits that are monitored by Kookmin Bank’s 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, 2014, Kookmin Bank’s equity trading position was ￦60.1 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:

•

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 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.

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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, we use last 36 months’ average balance to segregate “non-core” and “core” demand deposits. We assume “non-core” deposits to have remaining maturities of one month or less, and we assume “core” demand deposits to have remaining maturities between one month and five years.

The following table shows Kookmin Bank’s interest rate gap for Won-denominated accounts and foreign currency-denominated accounts as of December 31, 2014.

As of December 31, 2014
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

￦ 68,691 ￦ 55,961 ￦ 43,967 ￦ 11,881 ￦ 12,885 ￦ 193,384

Securities

3,291 2,140 4,959 13,258 3,052 26,701

Others

9,429 262 275 703 105 10,774

Total

￦ 81,411 ￦ 58,363 ￦ 49,201 ￦ 25,842 ￦ 16,042 ￦ 230,859

Interest bearing liabilities:

Deposits

￦ 76,842 ￦ 37,206 ￦ 51,233 ￦ 21,161 ￦ 16,554 ￦ 202,995

Borrowings

5,050 0 2 0 150 5,202

Others

10,126 1,310 1,762 4,677 3,188 21,063

Total

￦ 92,018 ￦ 38,516 ￦ 52,996 ￦ 25,838 ￦ 19,892 ￦ 229,260

Sensitivity gap

(10,607 ) 19,847 (3,795 ) 3 (3,849 ) 1,599

Cumulative gap

(10,607 ) 9,240 5,445 5,448 1,599

% of total assets

(4.6 )% 4.0 % 2.4 % 2.4 % 0.7 %

Foreign currency-denominated Interest earning assets:

Due from banks

￦ 8,893 ￦ 1,925 ￦ 1,054 ￦ 260 ￦ 11 ￦ 12,144

Loans

212 33 79 367 107 797

Securities

870 330 335 879 0 2,415

Total

￦ 9,976 ￦ 2,287 ￦ 1,469 ￦ 1,506 ￦ 117 ￦ 15,356

Interest bearing liabilities:

Deposits

￦ 1,856 ￦ 2,400 ￦ 354 ￦ 124 ￦ 38 ￦ 4,772

Borrowings

3,995 1,311 824 83 13 6,226

Others

3,471 0 297 1,209 0 4,977

Total

￦ 9,322 ￦ 3,711 ￦ 1,476 ￦ 1,416 ￦ 51 ￦ 15,975

Sensitivity gap

654 (1,423 ) (7 ) 90 66 (620 )

Cumulative gap

654 (769 ) (776 ) (686 ) (620 )

% of total assets

4.3 % (5.0 )% (5.1 )% (4.5 )% (4.0 )%

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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 2014, our asset and liability duration gap was negative and it moved between (-)0.035 years and (-)0.044 years. Accordingly, our net asset value would have declined between ￦78 billion and ￦102 billion if interest rates had decreased by one percentage point.

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 shows Kookmin Bank’s 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.

Won-denominated Asset
Duration 		Liability
Duration 		Duration
Gap 		Net Asset
Value Change
Date (in years) (in years) (in years) (in billions of
Won)

June 30, 2014

0.733 0.801 (0.035 ) (78 )

December 31, 2014

0.762 0.838 (0.044 ) (102 )

Foreign currency-denominated Asset
Duration 		Liability
Duration 		Duration
Gap 		Net Asset
Value Change
Date (in years) (in years) (in years) (in billions of
Won)

June 30, 2014

0.298 0.341 (0.066 ) (9 )

December 31, 2014

0.303 0.307 (0.033 ) (4 )

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 Risk Management Department in Kookmin Bank’s Risk Management Group submits interest rate gap analysis reports, duration gap analysis reports and interest rate risk limit compliance reports monthly to Kookmin Bank’s Risk Management Council and quarterly to Kookmin Bank’s Risk Management Committee.

The following table summarizes Kookmin Bank’s interest rate risk, taking into account asset and liability durations as of December 31, 2014.

As of December 31, 2014
3 Months
or Less 		3-6
Months 		6-12
Months 		1-3
Years 		Over
3 Years 		Total
(in billions of Won, except percentages and maturities in years)

Won-denominated:

Asset position

￦ 81,411 ￦ 58,363 ￦ 49,201 ￦ 25,842 ￦ 16,042 ￦ 230,859

Liability position

92,018 38,516 52,996 25,838 19,892 229,260

Gap

(10,607 ) 19,847 (3,795 ) 3 (3,849 ) 1,599

Average maturity

0.242 0.482 0.956 2.753 5.123

Interest rate volatility

(0.97 )% (0.83 )% (0.47 )% 0.12 % 0.37 %

Amount at risk

3 66 (11 ) (8 ) 60 110

Foreign currency-denominated:

Asset position

￦ 9,976 ￦ 2,287 ￦ 1,469 ￦ 1,506 ￦ 117 ￦ 15,356

Liability position

9,322 3,711 1,476 1,416 51 15,975

Gap

654 (1,423 ) (7 ) 90 66 (620 )

Average maturity

0.249 0.496 0.982 2.859 5.445

Interest rate volatility

0.24 % 0.40 % 0.46 % 0.33 % 0.27 %

Amount at risk

(0 ) 3 (0 ) (0 ) (1 ) 2

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Interest Rate VaR Analysis . Interest rate VaR is the estimated maximum possible loss on net non-trading assets due to unfavorable changes in interest rates. We calculate interest rate VaR based on interest earning assets and interest bearing liabilities, excluding trading positions, at a 99.94% confidence level. In 2012, we changed our method of calculating the interest rate impact from the previous internal simulation method of applying probable interest rate scenarios to a historical simulation method which uses actual historical price, volatility and yield changes in comparison with the current position to generate hypothetical portfolios and calculate a distribution of position and portfolio market value changes. The previous internal simulation method used extreme values in applying hypothetical interest rates to each maturity period, which we believe may result in exaggerated interest rate VaR values. Accordingly, we believe that the change in our interest rate VaR methodology to a historical simulation method will allow us to benefit from more sophisticated risk measurements using practical scenarios. Using the historical simulation method, Kookmin Bank’s interest rate VaR was ￦203 billion as of December 31, 2013 and ￦112 billion as of December 31, 2014. See Note 4.4.3 of the notes to our consolidated financial statements included elsewhere in this annual report.

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.

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 less than one year, 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, including Kookmin Bank, to maintain a liquidity coverage ratio of not less than 80% from January 1, 2015 to December 31, 2015, with such minimum liquidity coverage ratio to increase in increments of 5% per annum to

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100% by 2019, and a foreign currency liquidity ratio of not less than 85%. The Financial Services Commission defines the liquidity coverage ratio as the ratio of highly liquid assets to total net cash outflows over a one-month period. The highly liquid assets and total net cash outflows included in the calculation of the liquid coverage ratio are determined in accordance with the “Standards for Calculation of Liquidity Coverage Ratio” under the “Detailed Regulations on Supervision of Banking Business.”

Kookmin Bank’s Treasury 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 and maturity structures of its deposits, loans and securities.

The following table shows Kookmin Bank’s liquidity status and limits for Won and foreign currency accounts as of December 31, 2014 in accordance with Financial Services Commission regulations:

Won accounts:

1 Month
or Less
(in billions of Won,
except percentages)

Assets (A)

￦ 54,476

Liabilities (B)

44,991

Liquidity gap

9,485

Liquidity ratio (A/B)

121.08 %

Limit

100 %

7 Days
or Less 		1 Month
or Less 		3 Months
or  Less
(in millions of US$, except percentages)

Foreign currency assets (A)

US$ 5,135 US$ 9,670 US$ 15,703

Foreign currency liabilities (B)

4,122 8,060 13,501

Maturity gap (C)

1,013 1,609 2,202

Cumulative gap

1,013 2,622 4,824

Total assets (D)

34,830 34,830 34,830

Liquidity gap ratio (C/D)

2.91 % 4.62 % 116.31 % (1)

Limits

(3.00 )% (10.00 )% 85.00 %

(1)

Liquidity ratio (A/B).

The Risk Management Department in Kookmin Bank’s Risk Management Group reports whether it is complying with these limits monthly to Kookmin Bank’s Risk Management Council and quarterly to Kookmin Bank’s Risk Management Committee.

Operational Risk Management

Overall Status

There is 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.

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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 “loss distribution approach VaR” and “scenario based VaR” 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;

•

examines operational risks arising in connection with the development of, changes in or discontinuance of products, policies or systems;

•

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.

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 Compliance Supporting Department is responsible for monitoring and advising our subsidiaries regarding their internal control systems. Our Audit Committee, which consists of four 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 auditors). 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, who is 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

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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 of troubled or weak operations, which are performed when our Audit Committee or executive officer responsible for audits deems it necessary or pursuant to requests by our board, executive officers or supervisory authorities, such as the Financial Supervisory Service.

The Financial Supervisory Service periodically conducts a general examination of our operations. It also performs specific audits on particular aspects of our operations, such as risk management, credit monitoring and liquidity, as the need arises.

Kookmin Bank’s audit division consists of two departments, the Channel Audit Department and the Management Audit Department, and they are the execution bodies for its audit committee and support Kookmin Bank’s 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.

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.

Our 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.

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.

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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 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, Kookmin Bank’s Information Security Department is responsible for the daily monitoring of its information security system. Our business operations, other than our core banking and credit card operations, regularly conduct joint IT security assessments with respect to such operations and have implemented measures to identify and respond collectively to security breach attempts, such as hacking attempts.

In 2009, Kookmin Bank obtained ISO 27001 certification, which relates to information security. In 2011, Kookmin Bank also obtained ISO 20000 certification, which relates to IT service management, and BS 25999 certification, which relates to business continuity management. Kookmin Bank is the first Korean bank to have obtained all three such international certifications.

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 $5.00 per 100 ADSs (or portion thereof) issued

Delivery of deposited shares against surrender of ADSs

Up to $5.00 per 100 ADSs (or portion thereof) surrendered

Distribution of cash dividends or other cash distributions

Up to $0.02 per ADS (or portion thereof) held

Distribution of ADSs pursuant to stock dividends, free stock distributions or exercise of rights.

Up to $5.00 per 100 ADSs (or portion thereof) held

Distribution of securities other than ADSs or rights to purchase additional ADSs

A fee equivalent to the fee that would be payable if securities distributed had been shares and such shares had been deposited for issuance of ADSs.

Depositary Services

Up to $0.02 per ADS (or portion thereof) held on the applicable record date(s) established by the depositary

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.

•

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 or other deposited securities.

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Depositary fees payable upon the issuance and surrender 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 surrender. 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 2014, we received the following payments from the depositary:

Reimbursement of listing fees:

$ 42,000

Reimbursement of SEC filing fees:

$ 34,430

Reimbursement of expenses related to proxy process (printing, postage and distribution) and ADS holders identification:

$ 45,648

Reimbursement of legal fees:

$ 345,154

Reimbursement of expenses related to our investor relations activities (investor conferences and investor relations agency fees, etc.):

$ 126,832

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, 2014. There are inherent limitations

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to 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, 2014 were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act 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 2013 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 IFRS as issued by the IASB. 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 IFRS as issued by the IASB, 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, 2014. The effectiveness of our internal control over financial reporting as of December 31, 2014 has been audited by Samil PricewaterhouseCoopers, an independent registered public accounting firm, as stated in its report included herein which expressed an unqualified opinion on the effectiveness of our internal control over financial reporting as of December 31, 2014.

Attestation Report of the Registered Public Accounting Firm

The attestation report of our independent registered public accounting firm is furnished in Item 18 of this Form 20-F.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting during 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 16. [RESERVED]

I tem 16A. AUDIT COMMITTEE FINANCIAL EXPERT

Our board of directors has determined that each of Woon Youl Choi and Jongsoo Han, 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.

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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 directors and other officers and employees. Our code of ethics is available on our website at http://www.kbfg.com . If we amend the provisions of our code of ethics that apply to our chief executive officer 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 firm Samil PricewaterhouseCoopers during the fiscal years ended December 31, 2013 and 2014:

Year Ended December 31,
2013 2014
(in millions of Won)

Audit fees

￦ 5,524 ￦ 5,517

Audit-related fees

35 —

Tax fees

16 —

Total fees

￦ 5,575 ￦ 5,517

Audit fees in the above table are the aggregate fees billed by Samil PricewaterhouseCoopers in connection with:

•

the audits of our annual financial statements and the review of our interim financial statements;

•

the audits of our special purpose entities in connection with the Korean Securities Exchange Act or the Financial Investment Services and Capital Markets Act; and

•

our financial debenture offering services.

Audit-related fees in the above table are fees billed by Samil PricewaterhouseCoopers in connection with attestation of our financial statements under IFRS. Tax fees in the above table are fees billed by Samil PricewaterhouseCoopers in connection with tax filing services for our subsidiaries.

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 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 IFRS as adopted by Korea 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.

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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.

Item 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

Not applicable.

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 seven out of nine directors are non-executive directors.

Executive Session

Non-management directors must meet in regularly scheduled executive sessions without management. Independent directors should meet alone in an executive session at least once a year. Our non-executive directors hold executive sessions as needed in accordance with the Regulation of the Board of Directors.

Nomination/Corporate Governance Committee

A nomination/corporate governance committee of independent directors is required. The committee must have a charter that addresses the purpose, responsibilities (including development of corporate governance guidelines) and annual performance evaluation of the committee.

We maintain a Non-executive Director Nominating Committee composed of three non-executive directors and our chief executive officer.

We maintain a Corporate Governance Committee composed of three non-executive directors, one non-standing director and our chief executive officer.

Compensation Committee

A compensation committee of independent directors is required. The committee must have a charter that addresses the purpose, responsibilities and annual performance evaluation of the committee. The charter must be made available on the company’s website. In addition, in accordance with the U.S. Securities and Exchange Commission rules adopted pursuant to Section 952 of the Dodd-Frank Act, the New York Stock Exchange listing standards were amended to expand the factors relevant in determining whether a committee member has a relationship with the company that will materially affect that member’s duties to the compensation committee. We maintain an Evaluation and Compensation Committee composed of four non-executive directors.

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NYSE Corporate Governance Standards

KB Financial Group

Additionally, the committee may obtain or retain the advice of a compensation adviser only after taking into consideration all factors relevant to determining that adviser’s independence from management.

Audit Committee

Listed companies must have an audit committee that satisfies the independence and other requirements of Rule 10A-3 under the Exchange Act. All members must be independent. The committee must have a charter addressing the committee’s purpose, an annual performance evaluation of the committee, and the duties and responsibilities of the committee. The charter must be made available on the company’s website. We maintain an Audit Committee composed of four 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 at least three directors. Our Audit Committee has four 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.

Item 16H. MINE SAFETY DISCLOSURE

Not applicable.

Item 17. FINANCIAL STATEMENTS

Not Applicable.

Item 18. FINANCIAL STATEMENTS

Reference is made to Item 19(a) for a list of all financial statements filed as part of this annual report.

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Item 19. EXHIBITS

(a) List of Financial Statements:

Page

Audited consolidated financial statements of KB Financial Group Inc. and subsidiaries, prepared in accordance with IFRS as issued by the IASB

Report of Samil PricewaterhouseCoopers, independent registered public accounting firm

F-1

Consolidated statements of financial position as of January 1, 2013 and December  31, 2013 and 2014

F-2

Consolidated statements of comprehensive income for the years ended December 31, 2012, 2013 and 2014

F-3

Consolidated statements of changes in equity for the years ended December 31, 2012, 2013 and 2014

F-5

Consolidated statements of cash flows for the years ended December 31, 2012, 2013 and 2014

F-9

Notes to consolidated financial statements

F-11

(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 ￦5,000 per share (translation in English).
2.2*** Form of Amended and Restated Deposit Agreement among KB Financial Group, The Bank of New York Mellon, as depositary, and all owners and holders from time to time of American depositary shares evidenced by American depositary receipts issued thereunder, including the form of American depositary receipt.
8.1**** List of subsidiaries of KB Financial Group.
11.1* Code of Ethics.
12.1 Section 302 certifications.
13.1 Section 906 certifications.

* Incorporated by reference to the registrant’s filing on Form 20-F (No. 000-53445), filed on 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. 333-184696), filed on November 1, 2012.
**** Incorporated by reference to Note 40 of the consolidated financial statements of the registrant included in this annual report.

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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/ Jong Kyoo Yoon
(Signature)
Jong Kyoo Yoon
Chairman and Chief Executive Officer
(Name and Title)

Date: April 29, 2015

207

Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of KB Financial Group Inc.:

In our opinion, the accompanying consolidated statements of financial position and the related consolidated statements of comprehensive income, of changes in equity and of cash flows present fairly, in all material respects, the financial position of KB Financial Group Inc. (the “Company”) and subsidiaries as of December 31, 2014 and 2013, and January 1, 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework 2013 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 integrated 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 audits 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 audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide 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.

/s/ Samil PricewaterhouseCoopers

Seoul, Korea

April 29, 2015

F-1

Table of Contents

KB FINANCIAL GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

AS OF JANUARY 1, 2013, DECEMBER 31, 2013 AND 2014

Jan. 1 2013 Dec. 31 2013 Dec. 31 2014 2014

Translation into

U.S. dollars(Note 3)

(In millions of Korean won) (In thousands)

ASSETS

Cash and due from financial institutions

￦ 10,592,605 ￦ 14,792,654 ￦ 15,423,847 US$ 14,138,774

Financial assets at fair value through profit and loss

9,559,719 9,328,742 10,757,910 9,861,590

Derivative financial assets

2,091,285 1,819,409 1,968,190 1,804,206

Loans

213,644,791 219,001,356 231,449,653 212,165,895

Financial investments

36,467,352 34,849,095 34,960,620 32,047,796

Investments in associates and joint ventures

934,641 755,390 670,332 614,482

Property and equipment

3,100,393 3,060,843 3,082,985 2,826,119

Investment property

52,974 166,259 377,544 346,088

Intangible assets

493,131 443,204 488,922 448,186

Current income tax assets

332,970 346,910 306,313 280,792

Deferred income tax assets

18,432 15,422 15,562 14,265

Assets held for sale

35,412 37,718 70,357 64,495

Other assets

8,745,799 7,550,596 8,783,473 8,051,658

Total assets

286,069,504 292,167,598 308,355,708 282,664,346

LIABILITIES

Financial liabilities at fair value through profit and loss

1,851,135 1,115,202 1,818,968 1,667,417

Derivative financial liabilities

2,054,742 1,795,339 1,797,390 1,647,636

Deposits

197,346,205 200,882,064 211,549,121 193,923,421

Debts

15,965,458 14,101,331 15,864,500 14,542,713

Debentures

24,270,212 27,039,534 29,200,706 26,767,782

Provisions

669,729 678,073 614,347 563,161

Defined benefit liabilities

83,723 64,473 75,684 69,378

Current income tax liabilities

264,666 211,263 231,907 212,585

Deferred income tax liabilities

154,303 61,816 93,211 85,445

Other liabilities

18,327,740 20,236,229 19,597,202 17,964,416

Total liabilities

260,987,913 266,185,324 280,843,036 257,443,955

TOTAL EQUITY

Capital stock

1,931,758 1,931,758 1,931,758 1,770,809

Capital surplus

15,840,300 15,854,605 15,854,510 14,533,555

Accumulated other comprehensive income

295,142 336,312 461,679 423,213

Retained earnings

6,819,869 7,859,599 9,067,145 8,311,695

Equity attributable to shareholders of the company

24,887,069 25,982,274 27,315,092 25,039,273

Non-controlling interests

194,522 — 197,580 181,118

Total equity

25,081,591 25,982,274 27,512,672 25,220,391

Total liabilities and equity

￦ 286,069,504 ￦ 292,167,598 ￦ 308,355,708 US$ 282,664,346

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

F-2

Table of Contents

KB FINANCIAL GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 and 2014

2012 2013 2014 2014

Translation into

U.S. dollars

(Note 3)

(In millions of Korean won,

except per share amounts)

(In thousands,

except per share

amounts)

Interest income

￦ 14,210,106 ￦ 12,356,930 ￦ 11,635,296 US$ 10,665,875

Interest expense

(7,172,323 ) (5,834,098 ) (5,219,521 ) (4,784,645 )

Net interest income

7,037,783 6,522,832 6,415,775 5,881,230

Fee and commission income

2,753,876 2,657,365 2,666,185 2,444,046

Fee and commission expense

(1,187,170 ) (1,178,126 ) (1,283,456 ) (1,176,522 )

Net fee and commission income

1,566,706 1,479,239 1,382,729 1,267,524

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

811,964 756,822 439,198 402,605

Net other operating income(expense)

(1,531,942 ) (1,304,765 ) (1,040,909 ) (954,183 )

General and administrative expenses

(3,845,610 ) (3,983,564 ) (4,009,694 ) (3,675,617 )

Operating profit before provision for credit losses

4,038,901 3,470,564 3,187,099 2,921,559

Provision for credit losses

(1,606,703 ) (1,443,572 ) (1,227,976 ) (1,125,664 )

Net operating profit

2,432,198 2,026,992 1,959,123 1,795,894

Share of profit(loss) of associates

(15,282 ) (199,392 ) 13,428 12,309

Net other non-operating income(expense)

(118,272 ) (12,309 ) (71,126 ) (65,200 )

Net non-operating profit (loss)

(133,554 ) (211,701 ) (57,698 ) (52,891 )

Profit before income tax

2,298,644 1,815,291 1,901,425 1,743,003

Tax income(expense)

(519,977 ) (540,593 ) (486,314 ) (445,796 )

Profit for the year

￦ 1,778,667 ￦ 1,274,698 ￦ 1,415,111 US$ 1,297,208

(Continued)

F-3

Table of Contents

KB FINANCIAL GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 and 2014

2012 2013 2014 2014

Translation into
U.S. dollars

(Note 3)

(In millions of Korean won,

except per share amounts)

(In thousands,
except per share
amounts)

Remeasurements of net defined benefit liabilities

￦ (30,272 ) ￦ 40,984 ￦ (99,594 ) US$ (91,296 )

Items that will not be reclassified to profit or loss

(30,272 ) 40,984 (99,594 ) (91,296 )

Exchange differences on translating foreign operations

(25,690 ) (2,298 ) 17,280 15,840

Change in value of financial investments

245,757 (3,591 ) 248,880 228,144

Shares of other comprehensive income of associates

(44,263 ) (9,811 ) (32,206 ) (29,523 )

Cash flow hedges

(813 ) 1,618 (10,497 ) (9,622 )

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

144,719 26,902 123,863 113,543

Total comprehensive income for the year

1,923,386 1,301,600 1,538,974 1,410,751

Profit attributable to:

Shareholders of the parent company

1,769,568 1,271,502 1,400,722 1,284,018

Non-controlling interests

9,099 3,196 14,389 13,190

1,778,667 1,274,698 1,415,111 1,297,208

Total comprehensive income for the year attributable to:

Shareholders of the parent company

1,903,671 1,312,672 1,526,089 1,398,939

Non-controlling interests

19,715 (11,072 ) 12,885 11,811

￦ 1,923,386 ￦ 1,301,600 ￦ 1,538,974 US$ 1,410,751

Earnings per share

Basic earnings per share

￦ 4,580 ￦ 3,291 ￦ 3,626 US$ 3.32

Diluted earnings per share

4,567 3,277 3,611 3.31

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

F-4

Table of Contents

KB FINANCIAL GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 and 2014

Equity attributable to shareholders of the parent company
Share
capital 		Capital
surplus 		Accumulated
other
comprehensive
income 		Retained
earnings 		Non-controlling
interest 		Total equity
(In millions of Korean won)

Balance at January 1, 2012

￦ 1,931,758 ￦ 15,841,824 ￦ 161,039 ￦ 5,048,558 ￦ 181,820 ￦ 23,164,999

Changes in accounting policy

— — — 279,916 — 279,916

Restated balance

1,931,758 15,841,824 161,039 5,328,474 181,820 23,444,915

Comprehensive income

Profit for the year

— — — 1,769,568 9,099 1,778,667

Remeasurements of net defined benefit liabilities

— — (30,253 ) — (19 ) (30,272 )

Exchange differences on translating foreign operations

— — (25,597 ) — (93 ) (25,690 )

Change in value of financial investments

— — 235,029 — 10,728 245,757

Shares of other comprehensive income of associates

— — (44,263 ) — — (44,263 )

Cash flow hedges

— — (813 ) — — (813 )

Total comprehensive income

134,103 1,769,568 19,715 1,923,386

Transactions with shareholders

Dividends paid to shareholders of the parent company

— — — (278,173 ) — (278,173 )

Changes in interest in subsidiaries

— (1,524 ) — — (7,013 ) (8,537 )

Total transactions with shareholders

— (1,524 ) — (278,173 ) (7,013 ) (286,710 )

Balance at December 31, 2012

￦ 1,931,758 ￦ 15,840,300 ￦ 295,142 ￦ 6,819,869 ￦ 194,522 ￦ 25,081,591

(Continued)

F-5

Table of Contents

KB FINANCIAL GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 and 2014

Equity attributable to shareholders of the parent company
Share
capital 		Capital
surplus 		Accumulated
other
comprehensive
income 		Retained
earnings 		Non-controlling
interest 		Total equity
(In millions of Korean won)

Balance at January 1, 2013

￦ 1,931,758 ￦ 15,840,300 ￦ 295,142 ￦ 6,819,869 ￦ 194,522 ￦ 25,081,591

Comprehensive income

Profit for the year

— — — 1,271,502 3,196 1,274,698

Remeasurements of net defined benefit liabilities

— — 40,984 — — 40,984

Exchange differences on translating foreign operations

— — (2,372 ) — 74 (2,298 )

Change in value of financial investments

— — 10,751 — (14,342 ) (3,591 )

Shares of other comprehensive income of associates

— — (9,811 ) — — (9,811 )

Cash flow hedges

— — 1,618 — — 1,618

Total comprehensive income

— — 41,170 1,271,502 (11,072 ) 1,301,600

Transactions with shareholders

Dividends paid to shareholders of the parent company

— — — (231,811 ) — (231,811 )

Changes in interest in subsidiaries

— 14,305 — 39 (183,450 ) (169,106 )

Total transactions with shareholders

— 14,305 — (231,772 ) (183,450 ) (400,917 )

Balance at December 31, 2013

￦ 1,931,758 ￦ 15,854,605 ￦ 336,312 ￦ 7,859,599 ￦ — ￦ 25,982,274

(Continued)

F-6

Table of Contents

KB FINANCIAL GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 and 2014

Equity attributable to shareholders of the parent company
Share
capital 		Capital
surplus 		Accumulated
other
comprehensive
income 		Retained
earnings 		Non-controlling
interest 		Total equity
(In millions of Korean won)

Balance at January 1, 2014

￦ 1,931,758 ￦ 15,854,605 ￦ 336,312 ￦ 7,859,599 ￦ — ￦ 25,982,274

Comprehensive income

Profit for the year

— — — 1,400,722 14,389 1,415,111

Remeasurements of net defined benefit liabilities

— — (98,291 ) — (1,303 ) (99,594 )

Exchange differences on translating foreign operations

— — 17,280 — — 17,280

Change in value of financial investments

— — 248,843 — 37 248,880

Shares of other comprehensive income of associates

— — (32,206 ) — — (32,206 )

Cash flow hedges

— — (10,259 ) — (238 ) (10,497 )

Total comprehensive income

— — 125,367 1,400,722 12,885 1,538,974

Transactions with shareholders

Dividends paid to shareholders of the parent company

— — — (193,176 ) — (193,176 )

Changes in interest in subsidiaries

— (95 ) — — 184,695 184,600

Total transactions with shareholders

— (95 ) — (193,176 ) 184,695 (8,576 )

Balance at December 31, 2014

￦ 1,931,758 ￦ 15,854,510 ￦ 461,679 ￦ 9,067,145 ￦ 197,580 ￦ 27,512,672

(Continued)

F-7

Table of Contents

KB FINANCIAL GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 and 2014

Equity attributable to shareholders of the parent company
Share
capital 		Capital
surplus 		Accumulated
other
comprehensive
income 		Retained
earnings 		Non-controlling
interest 		Total equity
(Translation into U.S. dollars(Note 3))(In thousands)

Balance at January 1, 2014

US$ 1,770,809 US$ 14,533,642 US$ 308,291 US$ 7,204,758 US$ — US$ 23,817,501

Comprehensive income

Profit for the year

— — — 1,284,018 13,190 1,297,208

Remeasurements of net defined benefit liabilities

— — (90,102 ) — (1,194 ) (91,296 )

Exchange differences on translating foreign operations

— — 15,840 — — 15,840

Change in value of financial investments

— — 228,110 — 34 228,144

Shares of other comprehensive income of associates

— — (29,523 ) — — (29,523 )

Cash flow hedges

— — (9,404 ) — (218 ) (9,622 )

Total comprehensive income

— — 114,922 1,284,018 11,811 1,410,751

Transactions with shareholders

Dividends paid to shareholders of the parent company

— — — (177,081 ) — (177,081 )

Others

— (87 ) — — 169,307 169,220

Total transactions with shareholders

— (87 ) — (177,081 ) 169,307 (7,861 )

Balance at December 31, 2014

US$ 1,770,809 US$ 14,533,555 US$ 423,213 US$ 8,311,695 US$ 181,118 US$ 25,220,391

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

F-8

Table of Contents

KB FINANCIAL GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 and 2014

2012 2013 2014 2014

Translation into
U.S. dollars

(Note 3)

(In millions of Korean won) (In thousands)

Cash flows from operating activities:

Profit for the year

￦ 1,778,667 ￦ 1,274,698 ￦ 1,415,111 US$ 1,297,208

Adjustment for non-cash items

Net loss(gain) on financial assets/liabilities at fair value through profit or loss

(247,854 ) (110,425 ) (151,483 ) (138,862 )

Net loss(gain) on derivative financial instruments for hedging purposes

15,165 48,787 27,088 24,831

Adjustment of fair value of derivative financial instruments

42 699 (2,040 ) (1,870 )

Provision for credit loss

1,606,703 1,443,572 1,227,976 1,125,664

Net loss(gain) on financial investments

148,211 (1,191 ) 109,461 100,341

Share of loss (profit) of associates

15,282 199,392 (13,428 ) (12,309 )

Depreciation and amortization expense

328,320 286,858 261,197 239,435

Other net losses on property and equipment/intangible assets

40,881 39,777 41,115 37,689

Share-based payments(reversal)

13,871 17,289 11,422 10,470

Policy reserve appropriation

1,305,730 761,877 666,155 610,653

Post-employment benefits

172,391 172,579 166,671 152,784

Net interest expense

229,691 314,866 360,500 330,464

Loss(gains) on foreign currency translation

(148,877 ) 17,082 116,035 106,367

Net other expense(income)

2,783 (24,981 ) (17,076 ) (15,653 )

3,482,339 3,166,181 2,803,593 2,570,005

Changes in operating assets and liabilities

Financial asset at fair value through profit or loss

(3,102,488 ) 214,181 (1,364,780 ) (1,251,070 )

Derivative financial instruments

193,373 116,660 104,333 95,640

Loans

(2,964,229 ) (7,335,434 ) (10,027,349 ) (9,191,897 )

Current income tax assets

(41,456 ) (13,940 ) 40,597 37,215

Deferred income tax assets

3,211 1,349 (140 ) (128 )

Other assets

2,204,202 (5,075,338 ) 427,501 391,883

Financial liabilities at fair value through profit or loss

357,825 (773,558 ) 704,389 645,701

Deposits

4,495,876 2,584,993 10,668,675 9,779,790

Deferred income tax liabilities

(138,374 ) (74,463 ) (27,242 ) (24,972 )

Other liabilities

1,375,612 (430,856 ) (1,467,942 ) (1,345,637 )

2,383,552 (10,786,406 ) (941,958 ) (863,477 )

Net cash generated from (used in) operating activities

￦ 7,644,558 ￦ (6,345,527 ) ￦ 3,276,746 US$ 3,003,736

(Continued)

F-9

Table of Contents

KB FINANCIAL GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 and 2014

2012 2013 2014 2014

Translation into
U.S. dollars

(Note 3)

(In millions of Korean won) (In thousands)

Cash flows from investing activities:

Disposal of financial investments

￦ 24,805,560 ￦ 25,655,149 ￦ 19,632,047 US$ 17,996,358

Acquisition of financial investments

(26,141,095 ) (23,020,912 ) (19,463,101 ) (17,841,488 )

Decrease in investments in associates

16,573 20,554 81,321 74,546

Acquisition of investments in associates

(217,081 ) (23,340 ) (17,650 ) (16,179 )

Disposal of property and equipment

16,912 1,070 223 204

Acquisition of property and equipment

(143,139 ) (153,469 ) (202,007 ) (185,176 )

Acquisition of investment property

— (114,609 ) (211,995 ) (194,332 )

Disposal of intangible assets

10,176 5,072 4,590 4,208

Acquisition of intangible assets

(81,899 ) (68,091 ) (30,755 ) (28,193 )

Business combination, net of cash acquired

40,575 322,641 (266,899 ) (244,662 )

Others

(838,816 ) 1,554,752 (1,210,071 ) (1,109,251 )

Net cash provided by (used in) investing activities

(2,532,234 ) 4,178,817 (1,684,297 ) (1,543,966 )

Cash flows from financing activities:

Net cash flows from derivative financial instrument for hedging purposes

75,761 10,977 (204,563 ) (187,519 )

Net increase (decrease) in debts

(796,842 ) (1,990,258 ) 1,129,837 1,035,702

Increase in debentures

10,282,920 10,758,948 43,135,390 39,541,466

Decrease in debentures

(12,945,650 ) (7,924,609 ) (43,816,790 ) (40,166,094 )

Increase in other payables to trust accounts

456,449 414,279 124,904 114,497

Dividends paid to shareholders of the parent company

(278,173 ) (231,811 ) (193,176 ) (177,081 )

Changes in interest in subsidiaries

(8,048 ) (168,293 ) (95 ) (87 )

Others

(38,680 ) 837,906 (930,573 ) (853,040 )

Net cash provided by (used in) financing activities

(3,252,263 ) 1,707,139 (755,066 ) (692,156 )

Effect of exchange rate changes on cash and cash equivalents

(13,560 ) 41,452 12,227 11,208

Net increase (decrease) in cash and cash equivalents

1,846,501 (418,119 ) 849,610 778,823

Cash and cash equivalents at the beginning of the year

4,740,804 6,587,305 6,169,186 5,655,186

Cash and cash equivalents at the end of the year

￦ 6,587,305 ￦ 6,169,186 ￦ 7,018,796 US$ 6,434,009

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

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KB FINANCIAL GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. The Parent Company

KB Financial Group Inc. (the “Parent Company”) was incorporated on September 29, 2008, under the Financial Holding Companies Act of Korea. KB Financial Group Inc. and its subsidiaries (the “Group”) 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 Parent Company’s principal business includes ownership and management of subsidiaries and associated companies that are engaged in financial services or activities. In 2011, Kookmin Bank spun off its credit card business segment and established a new separate credit card company, KB Kookmin Card Co., Ltd., and KB Investment & Securities Co., Ltd. merged with KB Futures Co., Ltd. The Group established KB Savings Bank Co., Ltd. in January 2012, acquired Yehansoul Savings Bank Co., Ltd. in September 2013 and KB Savings Bank Co., Ltd. merged with Yehansoul Savings Bank Co., Ltd. in January 2014. In addition, the Group acquired Woori Financial Co., Ltd. and changed the name to KB Capital Co., Ltd. in March 2014.

The Parent Company’s share capital as of December 31, 2014, is ￦1,931,758 million. The Parent Company is authorized to issue up to 1 billion shares. The Parent Company has been listed on the Korea Exchange (“KRX”) since October 10, 2008, and on the New York Stock Exchange (“NYSE”) for its American Depositary Shares (“ADS”) since September 29, 2008. Number of shares authorized on its Articles of Incorporation is 1,000 million.

2. Basis of Preparation

2.1 Application of IFRS

The Group’s consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). IFRS are the standards and related interpretations issued by the International Accounting Standards Board (“IASB”).

The preparation of consolidated financial statements requires the use of certain critical accounting estimates. It also requires management to exercise judgment in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 2.4.

The Group has applied the following accounting policy for the financial year beginning on January 1, 2014

Amendment to IAS 32, Financial Instruments: Presentation

According to Amendment to IAS 32, Financial Instruments: Presentation , provides that the right to offset must not be contingent on a future event and must be legally enforceable in all of circumstances; and if an entity can settle amounts in a manner such that outcome is, in effect, equivalent to net settlement, the entity will meet the net settlement criterion. The application of this amendment does not have a material impact on the consolidated financial statements.

Amendment to IAS 36, Impairment of Assets

Amendment to IAS 36, Impairment of Assets , removed certain disclosures of the recoverable amount of cash-generating units which had been included in this amendment by the issuance of IFRS 13. The application of this amendment does not have a material impact on the consolidated financial statements.

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Amendment to IAS 39, Financial Instruments: Recognition and Measurement

Amendment to IAS 39, Financial Instruments: Recognition and Measurement , allows the continuation of hedge accounting for a derivative that has been designated as a hedging instrument in a circumstance in which that derivative is novated to a central counterparty (CCP) as a consequence of laws or regulations. The application of this amendment does not have a material impact on the consolidated financial statements.

Amendment to IFRS 2 , Share-based payment

IFRS 2, Share-based payment , clarifies the definition of ‘vesting conditions’ such as ‘performance condition’, ‘service condition’ and others. This amendment is applied to share-based payment transactions for which the grant date is on or after July 1, 2014. The application of this amendment does not have a material impact on the consolidated financial statements.

Enactment of IFRIC 2121, Levies

IFRIC 2121, Levies , is applied to a liability to pay a levy imposed by a government in accordance with the legislation. The interpretation requires that the liability to pay a levy is recognized when the activity that triggers the payment of the levy occurs, as identified by the legislation (the obligating event). The interpretation does not have a significant impact on the consolidated financial statements.

Changes in accounting policy with respect to uncertain tax position

For the periods prior to the year ended December 31, 2014, pursuant to IAS 37 if an uncertain tax position satisfied the criteria for provisions, the Group measured the best estimate of expenditures for the uncertain tax position. Group’s claims of refund of the amounts levied by the tax authority were then treated as contingent assets. However, in 2014, the Group retrospectively applied the accounting policy in accordance with the IAS 12, which allows recognition of the tax payment as income tax assets when it is probable to receive a tax refund. The restated comparative consolidated financial statements reflect adjustments resulting from the retrospective application.

The effect of these changes in accounting policy to financial position as of January 1, 2013, December 31, 2013, 2014, and to comprehensive income for the years ended December 31, 2012, 2013 and 2014, are as follows:

Effect on Consolidated Statements of Financial Position

Jan. 1, 2013 Dec. 31, 2013 Dec. 31, 2014
(In millions of Korean won)

Increase in current income tax assets

￦ 318,450 ￦ 329,443 ￦ 306,313

Increase in retained earnings

318,450 329,443 306,313

Effect on Consolidated Statements of Comprehensive Income

2012 2013 2014
(In millions of Korean won)

Decrease(increase) in income tax

￦ 38,534 ￦ 10,993 ￦ (23,130 )
(In Korean won)

Increase(decrease) in earnings per share

100 28 (60 )

Increase(decrease) in diluted earnings per share

100 28 (60 )

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A number of new standards and amendments to standards and interpretations are effective for annual periods beginning after 1 January 2014, and have not been applied in preparing these consolidated financial statement. None of these is expected to have a significant effect on the consolidated financial statements of the Group, except the following set out below:

IFRS 9, ‘Financial instruments’, addresses the classification, measurement and recognition of financial assets and financial liabilities. The complete version of IFRS 9 was issued in July 2014. It replaces the guidance in IAS 39 that relates to the classification and measurement of financial instruments. IFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortised cost, fair value through OCI and fair value through P&L. The basis of classification depends on the entity’s business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are required to be measured at fair value through profit or loss with the irrevocable option at inception to present changes in fair value in OCI not recycling. There is now a new expected credit losses model that replaces the incurred loss impairment model used in IAS 39. For financial liabilities there were no changes to classification and measurement except for the recognition of changes in own credit risk in other comprehensive income, for liabilities designated at fair value through profit or loss. IFRS 9 relaxes the requirements for hedge effectiveness by replacing the bright line hedge effectiveness tests. It requires an economic relationship between the hedged item and hedging instrument and for the ‘hedged ratio’ to be the same as the one management actually use for risk management purposes. Contemporaneous documentation is still required but is different to that currently prepared under IAS 39. The standard is effective for accounting periods beginning on or after 1 January 2018. Early adoption is permitted. The group is yet to assess IFRS 9’s full impact.

IFRS 15, ‘Revenue from contracts with customers’ deals with revenue recognition and establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. Revenue is recognised when a customer obtains control of a good or service and thus has the ability to direct the use and obtain the benefits from the good or service. The standard replaces IAS 18 ‘Revenue’ and IAS 11 ‘Construction contracts’ and related interpretations. The standard is effective for annual periods beginning on or after 1 January 2017 and earlier application is permitted. The group is assessing the impact of IFRS 15.

2.2 Measurement Basis

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

2.3 Functional and Presentation Currency

Items included in the financial statements of each entity of the Group are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The consolidated financial statements are presented in Korean won, which is the Parent Company’s functional and presentation currency. Refer to Notes 3.2.1 and 3.2.2.

2.4 Significant Estimates

The preparation of consolidated financial statements requires the application of accounting policies, certain critical accounting estimates and assumptions that may have a significant impact on the assets (liabilities) and income (expenses). Management’s estimates of outcomes may differ from actual outcomes if management’s estimates and assumptions based on management’s best judgment at the reporting date are different from the actual environment.

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Estimates and assumptions are continually evaluated and any change in an accounting estimate is recognized prospectively by including it in profit or loss in the period of the change, if the change affects that period only. Alternatively if the change in accounting estimate affects both the period of change and future periods, that change is recognized in the profit or loss of all those periods.

Uncertainty in estimates and assumptions with significant risk that may result in material adjustment to the consolidated financial statements are as follows:

2.4.1 Deferred income taxes

The recognition of a deferred tax asset relies on an assessment of the probability and sufficiency of future taxable profits, future reversals of existing taxable temporary differences and ongoing tax planning strategies.

2.4.2 Fair value of financial instruments

The fair value of financial instruments where no active market exists or where quoted prices are not otherwise available is determined by using valuation techniques. Financial instruments, which are not actively traded in the market and those with less transparent market prices, will have less objective fair values and require broad judgment on liquidity, concentration, uncertainty in market factors and assumptions in price determination and other risks.

As described in the significant accounting policies in Note 3.3, ‘Recognition and Measurement of Financial Instruments’, diverse valuation techniques are used to determine the fair value of financial instruments, from generally accepted market valuation models to internally developed valuation models that incorporate various types of assumptions and variables.

2.4.3 Provisions for credit losses (allowances for loan losses, provisions for acceptances and guarantees, and unused loan commitments)

The Group determines and recognizes allowances for losses on loans through impairment testing and recognizes provisions for guarantees, and unused loan commitments. The accuracy of provisions for credit losses is determined by the methodology and assumptions used for estimating expected cash flows of the borrower for individually assessed allowances of loans, collectively assessed allowances for groups of loans, guarantees and unused loan commitments.

2.4.4 Measurements of net defined benefit liabilities

The present value of net defined benefit liability depends on a number of factors that are determined on an actuarial basis using a number of assumptions (Note 24).

2.4.5 Estimated impairment of goodwill

The Group tests annually whether goodwill has suffered any impairment. The recoverable amounts of cash-generating units have been determined based on value-in-use calculations (Note 15).

3. Significant Accounting Policies

The significant accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all years presented, unless otherwise stated.

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3.1 Consolidation

3.1.1 Subsidiaries

Subsidiaries are companies that are controlled by the Group. The Group controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The existence and effects of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date when control is transferred to the Group and de-consolidated from the date when control is lost.

If a subsidiary uses accounting policies other than those adopted in the consolidated financial statements for like transactions and events in similar circumstances, appropriate adjustments are made to make the subsidiary’s accounting policies conform to those of the Group when the subsidiary’s financial statements are used by the Group in preparing the consolidated financial statements.

Profit or loss and each component of other comprehensive income are attributed to the owners of the parent and to the non-controlling interests, if any. Total comprehensive income is attributed to the owners of the parent and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance.

Transactions with non-controlling interests that do not result in loss of control are accounted for as equity transactions; that is, as transactions with the owners in their capacity as owners. The difference between fair value of any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity.

When the Group ceases to have control, any retained interest in the entity is re-measured to its fair value at the date when control is lost, with the change in carrying amount recognized in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognized in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognized in other comprehensive income are reclassified to profit or loss.

The Group applies the acquisition method to account for business combinations. The consideration transferred is measured at the fair values of the assets transferred, and identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are initially measured at their fair values at the acquisition date. The Group recognizes any non-controlling interest in the acquiree on an acquisition-by-acquisition basis in the event of liquidation, either at fair value or at the non-controlling interest’s proportionate share of the recognized amounts of acquiree’s identifiable net assets. Acquisition-related costs are expensed as incurred.

3.1.2 Associates

Associates are entities over which the Group has significant influence in the financial and operating policy decisions. If the Group holds 20% or more of the voting power of the investee, it is presumed that the Group has significant influence.

Under the equity method, investments in associates are initially recognized at cost and the carrying amount is increased or decreased to recognize the Group’s share of the profit or loss of the investee and changes in the investee’s equity after the date of acquisition. The Group’s share of the profit or loss of the investee is recognized in the Group’s profit or loss. Distributions received from an investee reduce the carrying amount of the investment. Profit and losses resulting from ‘upstream’ and ‘downstream’ transactions between the Group and associates are eliminated to the extent of the Group’s interest in associates.

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If associates use accounting policies other than those adopted in the consolidated financial statements for like transactions and events in similar circumstances, appropriate adjustments are made to make the associate’s accounting policies conform to those of the Group when the associate’s financial statements are used by the Group in applying equity method.

After the carrying amount of the investment is reduced to zero, additional losses are provided for, and a liability is recognized, only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the investee.

The Group determines at each reporting date whether there is any objective evidence that the investments in the associates are impaired. If this is the case, the Group calculates the amount of impairment as the difference between the recoverable amount of the associates and its carrying value and recognizes the amount as ‘share of profit or loss of associates’ in the statements of comprehensive income.

3.1.3 Structured entity

A structured entity is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity. When the Group decides whether it has power to the structured entities in which the Group has interests, it considers factors such as the purpose, the form, the practical ability to direct the relevant activities of a structured entity, the nature of its relationship with a structured entity and the amount of exposure to variable returns.

3.1.4 Management of Funds

The Group provides management services for trust assets, collective investment and other funds. These trusts and funds are not consolidated in the Group’s consolidated financial statements, except for trusts and funds over which the Group has control.

3.1.5 Intra-group transactions

All intra-group balances and transactions, and any unrealized gains arising on intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealized losses are eliminated in the same way as unrealized gains except that they are only eliminated to the extent that there is no evidence of impairment.

3.2 Foreign Currency

3.2.1 Foreign currency transactions and balances

A foreign currency transaction is recorded, on initial recognition in the functional currency, by applying the spot exchange rate between the functional currency and the foreign currency at the date of the transaction. At the end of each reporting period foreign currency monetary items are translated using the closing rate which is the spot exchange rate at the end of the reporting period. Non-monetary items that are measured at fair value in a foreign currency are translated using the spot exchange rates at the date when the fair value was determined and non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the spot exchange rate at the date of the transaction.

Exchange differences arising on the settlement of monetary items or on translating monetary items at rates different from those at which they were translated on initial recognition during the period or in previous financial statements are recognized in profit or loss in the year in which they arise. When gains or losses on a non-monetary item are recognized in other comprehensive income, any exchange component of those gains or losses are also recognized in other comprehensive income. Conversely, when gains or losses on a non-monetary item are recognized in profit or loss, any exchange component of those gains or losses are also recognized in profit or loss.

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3.2.2 Foreign Operations

The financial performance and financial position of all foreign operations, whose functional currencies differ from the Group’s presentation currency, are translated into the Group’s presentation currency using the following procedures:

Assets and liabilities for each statement of financial position presented are translated at the closing rate at the end of the reporting period. Income and expenses in the statement of comprehensive income presented are translated at average exchange rates for the period. All resulting exchange differences are recognized in other comprehensive income.

Any goodwill arising from the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising from the acquisition of that foreign operation are treated as assets and liabilities of the foreign operation. Thus they are expressed in the functional currency of the foreign operation and are translated into the presentation currency at the closing rate.

On the disposal of a foreign operation, the cumulative amount of the exchange differences relating to that foreign operation, recognized in other comprehensive income and accumulated in the separate component of equity, are reclassified from equity to profit or loss (as a reclassification adjustment) when the gains or losses on disposal are recognized. On the partial disposal of a subsidiary that includes a foreign operation, the Group re-attributes the proportionate share of the cumulative amount of the exchange differences recognized in other comprehensive income to the non-controlling interests in that foreign operation. In any other partial disposal of a foreign operation, the Group reclassifies to profit or loss only the proportionate share of the cumulative amount of the exchange differences recognized in other comprehensive income.

3.3 Recognition and Measurement of Financial Instruments

3.3.1 Initial recognition

The Group recognizes a financial asset or a financial liability in its statement of financial position when, the Group becomes a party to the contractual provisions of the instrument. A regular way purchase or sale of financial assets (a purchase or sale of a financial asset under a contract whose terms require delivery of the financial instruments within the time frame established generally by market regulation or practice) is recognized and derecognized using trade date accounting.

The Group classifies financial assets as financial assets at fair value through profit or loss, held-to-maturity financial assets, available-for-sale financial assets, or loans and receivables. The Group classifies financial liabilities as financial liabilities at fair value through profit or loss or other financial liabilities. The classification depends on the nature and holding purpose of the financial instrument at initial recognition in the financial statements.

At initial recognition, a financial asset or financial liability is measured at its fair value plus or minus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability. The fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The fair value of a financial instrument on initial recognition is normally the transaction price (that is, the fair value of the consideration given or received) in an arm’s length transaction.

3.3.2 Subsequent measurement

After initial recognition, financial instruments are measured at amortized cost or fair value based on classification at initial recognition.

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Amortized cost

The amortized cost of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured at initial recognition and adjusted to reflect principal repayments, cumulative amortization using the effective interest method and any reduction (directly or through the use of an allowance account) for impairment or uncollectibility.

Fair value

Fair values, which the Group primarily uses for the measurement of financial instruments, are the published price quotations based on market prices or dealer price quotations of financial instruments traded in an active market where available. These are the best evidence of fair value. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, an entity in the same industry, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis.

If the market for a financial instrument is not active, fair value is determined either by using a valuation technique or independent third-party valuation service. Valuation techniques include using recent arm’s length market transactions between knowledgeable, willing parties, if available, referencing to the current fair value of another instrument that is substantially the same, discounted cash flow analysis and option pricing models.

The Group uses valuation models that are commonly used by market participants and customized for the Group to determine fair values of common over-the-counter (OTC) derivatives such as options, interest rate swaps and currency swaps which are based on the inputs observable in markets. For more complex instruments, the Group uses internally developed models, which are usually based on valuation methods and techniques generally recognized as standard within the industry, or a value measured by an independent external valuation institution as the fair values if all or some of the inputs to the valuation models are not market observable and therefore it is necessary to estimate fair value based on certain assumptions.

The Group’s Fair Value Evaluation Committee, which consists of the risk management department, trading department and accounting department, reviews the appropriateness of internally developed valuation models, and approves the selection and changing of the external valuation institution and other considerations related to fair value measurement. The review results on the fair valuation models are reported to the Market Risk Management subcommittee by the Fair Value Evaluation Committee on a regular basis.

If the valuation technique does not reflect all factors which market participants would consider in setting a price, the fair value is adjusted to reflect those factors. These factors include counterparty credit risk, bid-ask spread, liquidity risk and others.

The chosen valuation technique makes maximum use of market inputs and relies as little as possible on entity-specific inputs. It incorporates all factors that market participants would consider in setting a price and is consistent with accepted economic methodologies for pricing financial instruments. Periodically, the Group calibrates the valuation technique and tests it for validity using prices from observable current market transactions of the same instrument or based on other relevant observable market data.

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3.3.3 Derecognition

Derecognition is the removal of a previously recognized financial asset or financial liability from the statement of financial position. The Group derecognizes a financial asset or a financial liability when, and only when:

Derecognition of financial assets

Financial assets are derecognized when the contractual rights to the cash flows from the financial assets expire or the financial assets have been transferred and substantially all the risks and rewards of ownership of the financial assets are also transferred, or all the risks and rewards of ownership of the financial assets are neither substantially transferred nor retained and the Group has not retained control. If the Group neither transfers nor disposes of substantially all the risks and rewards of ownership of the financial assets, the Group continues to recognize the financial asset to the extent of its continuing involvement in the financial asset.

If the Group transfers the contractual rights to receive the cash flows of the financial asset, but retains substantially all the risks and rewards of ownership of the financial asset, the Group continues to recognize the transferred asset in its entirely and recognize a financial liability for the consideration received.

Derecognition of financial liabilities

Financial liabilities are derecognized from the statement of financial position when the obligation specified in the contract is discharged, cancelled or expires.

3.3.4 Offsetting

Financial assets and liabilities are offset and the net amount reported in the consolidated statements of financial position where there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or realize the assets and settle the liability simultaneously. The legally enforceable right must not be contingent on future events and must be enforceable in the normal course of business and in the event of default, insolvency or bankruptcy of the Group or the counterparty.

3.4 Cash and cash equivalents

Cash and cash equivalents include cash on hand, foreign currency, and short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

3.5 Non-derivative financial assets

3.5.1 Financial assets at fair value through profit or loss

This category comprises two sub-categories: financial assets classified as held for trading, and financial assets designated by the Group as at fair value through profit or loss upon initial recognition.

A non-derivative financial asset is classified as held for trading if either:

•

It is acquired for the purpose of selling in the near term, or

•

It is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking.

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The Group may designate certain financial assets, other than held for trading, upon initial recognition as at fair value through profit or loss when one of the following conditions is met:

•

It eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as ‘an accounting mismatch’) that would otherwise arise from measuring assets or liabilities or recognizing the gains and losses on them on different bases.

•

A group of financial assets is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided internally on that basis to the Group’s key management personnel.

•

A contract contains one or more embedded derivatives; the Group may designate the entire hybrid (combined) contract as a financial asset at fair value through profit or loss if allowed by IAS 39, Financial Instruments: Recognition and measurement.

After initial recognition, a financial asset at fair value through profit or loss is measured at fair value and gains or losses arising from a change in the fair value are recognized in profit or loss. Interest income, dividend income, and gains or losses from sale and repayment from financial assets at fair value through profit or loss are recognized in the statement of comprehensive income as net gains on financial instruments at fair value through profit or loss.

3.5.2 Financial Investments

Available-for-sale and held-to-maturity financial assets are presented as financial investments.

Available-for-sale financial assets

Profit or loss of financial assets classified as available for sale, except for impairment loss and foreign exchange gains and losses resulting from changes in amortized cost of debt securities, is recognized as other comprehensive income, and cumulative profit or loss is reclassified from equity to current profit or loss at the derecognition of the financial asset, and it is recognized as part of other operating profit or loss in the statement of comprehensive income.

However, interest revenue measured using the effective interest method is recognized in current profit or loss, and dividends of financial assets classified as available-for-sale are recognized when the right to receive payment is established.

Available-for-sale financial assets denominated in foreign currencies are translated at the closing rate. For available-for-sale debt securities denominated in foreign currency, exchange differences resulting from changes in amortized cost are recognized in profit or loss as part of other operating income and expenses. For available-for-sale equity securities denominated in foreign currency, the entire change in fair value including any exchange component is recognized in other comprehensive income.

Held-to-maturity financial assets

Held-to-maturity financial assets are non-derivative financial assets with fixed or determinable payments and fixed maturity that the Group’s management has the positive intention and ability to hold to maturity. Held-to-maturity financial assets are subsequently measured at amortized cost using the effective interest method after initial recognition and interest income is recognized using the effective interest method.

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3.5.3 Loans and receivables

Non-derivative financial assets which meet the following conditions are classified as loans and receivables:

•

Those with fixed or determinable payments.

•

Those that are not quoted in an active market.

•

Those that the Group does not intend to sell immediately or in the near term.

•

Those that the Group, upon initial recognition, does not designate as available-for-sale or as at fair value through profit or loss.

After initial recognition, these are subsequently measured at amortized cost using the effective interest method.

If the financial asset is purchased under an agreement to resale the asset at a fixed price or at a price that provides a lender’s return on the purchase price, the consideration paid is recognized as loans and receivables.

3.6 Impairment of financial assets

The Group assesses at the end of each reporting period whether there is any objective evidence that a financial asset or group of financial assets except for financial assets at fair value through profit or loss is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred, if and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. However, losses expected as a result of future events, no matter how likely, are not recognized.

Objective evidence that a financial asset or group of assets is impaired includes observable data that comes to the attention of the holder of the asset about the following loss events:

•

Significant financial difficulty of the issuer or obligor.

•

A breach of contract, such as a default or delinquency in interest or principal payments.

•

The lender, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider.

•

It becomes probable that the borrower will declare bankruptcy or undergo financial reorganization.

•

The disappearance of an active market for that financial asset because of financial difficulties.

•

Observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the portfolio.

In addition to the types of events in the preceding paragraphs, objective evidence of impairment for an investment in an equity instrument classified as an available-for-sale financial asset includes a significant or prolonged decline in the fair value below its cost. Accordingly, the Group considers the decline in the fair value of over 30% against the original cost as a “significant decline” and a six-month decline in the fair value below its cost for an equity instrument as a “prolonged decline”.

If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured and recognized in profit or loss as either provisions for credit loss or other operating income and expenses.

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3.6.1 Loans and receivables

If there is objective evidence that an impairment loss on loans and receivables carried at amortized cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate.

The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant (individual assessment of impairment), and individually or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment (collective assessment of impairment).

Individual assessment of impairment

Individual assessment of impairment losses are calculated by discounting the expected future cash flows of a loan at its original effective interest rate and comparing the resultant present value with the loan’s current carrying amount. This process normally encompasses management’s best estimate, such as operating cash flow of the borrower and net realizable value of any collateral held.

Collective assessment of impairment

A methodology based on historical loss experience is used to estimate inherent incurred loss on groups of assets for collective assessment of impairment. Such methodology incorporates factors such as type of collateral, product and borrowers, credit rating, loss emergence period, recovery period and applies probability of default on a group of assets and loss given default by type of recovery method. Also, consistent assumptions are applied to form a formula-based model in estimating inherent loss and to determine factors on the basis of historical loss experience and current condition. The methodology and assumptions used for collective assessment of impairment are reviewed regularly to reduce any differences between loss estimates and actual loss experience.

Impairment loss on loans reduces the carrying amount of the asset through use of an allowance account, and when a loan becomes uncollectable, it is written off against the related allowance account. If, in a subsequent period, the amount of the impairment loss decreases and is objectively related to the subsequent event after recognition of impairment, the previously recognized impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognized in profit or loss.

3.6.2 Available-for-sale financial assets

When a decline in the fair value of an available-for-sale financial asset has been recognized in other comprehensive income and there is objective evidence that the asset is impaired, the cumulative loss (the difference between the acquisition cost and current fair value, less any impairment loss on that financial asset previously recognized in profit or loss) that had been recognized in other comprehensive income is reclassified from equity to profit or loss as part of other operating income and expenses. The impairment loss on available-for-sale financial assets is directly deducted from the carrying amount.

If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, a portion of the impairment loss is reversed up to but not exceeding the previously recorded impairment loss, with the amount of the reversal recognized in profit or loss as part of other operating income and expenses in the statement of comprehensive income. However, impairment losses recognized in profit or loss for an available-for-sale equity instrument classified as available for sale are not reversed through profit or loss.

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3.6.3 Held-to-maturity financial assets

If there is objective evidence that an impairment loss on held-to-maturity financial assets carried at amortized cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the financial asset’s original effective interest rate. The amount of the loss is recognized in profit or loss as part of other operating income and expenses. The impairment loss on held-to-maturity financial assets is directly deducted from the carrying amount.

In the case of a financial asset classified as held to maturity, if, in a subsequent period, the amount of the impairment loss decreases and it is objectively related to an event occurring after the impairment is recognized, a portion of the previously recognized impairment loss is reversed up to but not exceeding the amortized cost at the date of recovery. The amount of reversal is recognized in profit or loss as part of other operating income and expenses in the statement of comprehensive income.

3.7 Derivative Financial Instruments

The Group enters into numerous derivative financial instrument contracts such as currency forwards, interest rate swaps, currency swaps and others for trading purposes or to manage its exposures to fluctuations in interest rates and currency exchange, amongst others. These derivative financial instruments are presented as derivative financial instruments within the financial statements irrespective of transaction purpose and subsequent measurement requirement.

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

At the inception of the hedge there is formal designation and documentation of the hedging relationship and the Group’s risk management objective and strategy for undertaking the hedge. That documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s fair value attributable to the hedged risk.

3.7.1 Derivative financial instruments held for trading

All derivative financial instruments, except for derivatives that are designated and qualify for hedge accounting, are classified as financial instruments held for trading and are measured at fair value. Gains or losses arising from a change in fair value are recognized in profit or loss as part of net gains or losses on financial instruments at fair value through profit or loss.

3.7.2 Fair value hedges

If derivatives qualify for a fair value hedge, the change in fair value of the hedging instrument and the change in fair value of the hedged item attributable to the hedged risk are recognized in profit or loss as part of other operating income and expenses. Fair value hedge accounting is discontinued prospectively if the hedging instrument expires or is sold, terminated or exercised, or the hedge no longer meets the criteria for hedge accounting or the Group revokes the designation. Once fair value hedge accounting is discontinued, the adjustment to the carrying amount of a hedged item is fully amortized to profit or loss by the maturity of the financial instrument using the effective interest method.

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3.7.3 Cash flow hedges

The portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognized directly in other comprehensive income and the ineffective portion of the gain or loss on the hedging instrument is recognized in profit or loss. The associated gains or losses that were previously recognized in other comprehensive income are reclassified from equity to profit or loss as a reclassification adjustment in the same period or periods during which the hedged forecast cash flows affects profit or loss. Cash flow hedge accounting is discontinued prospectively if the hedging instrument expires or is sold, terminated or exercised, or the hedge no longer meets the criteria for hedge accounting or the Group revokes the designation. When the cash flow hedge accounting is discontinued, the cumulative gains or losses on the hedging instrument that have been recognized in other comprehensive income are reclassified to profit or loss over the year in which the forecast transaction occurs. If the forecast transaction is no longer expected to occur, the cumulative gains or losses that had been recognized in other comprehensive income are immediately reclassified to profit or loss.

3.7.4 Embedded derivatives

An embedded derivative is separated from the host contract and accounted for as a derivative if, and only if the economic characteristics and risks of the embedded derivative are not closely related to those of the host contract and a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative and the hybrid (combined) instrument is not measured at fair value with changes in fair value recognized in profit or loss. Gains or losses arising from a change in the fair value of an embedded derivative separated from the host contract are recognized in profit or loss as part of net gains or losses on financial instruments at fair value through profit or loss.

3.7.5 Day one gain and loss

If the Group uses a valuation technique that incorporates data not obtained from observable markets for the fair value at initial recognition of the financial instrument, there may be a difference between the transaction price and the amount determined using that valuation technique. In these circumstances, the difference is deferred and not recognized in profit or loss, and is amortized by using the straight-line method over the life of the financial instrument. If the fair value of the financial instrument is subsequently determined using observable market inputs, the remaining deferred amount is recognized in profit or loss as part of net gains or losses on financial instruments at fair value through profit or loss or other operating income and expenses.

3.8 Property and equipment

3.8.1 Recognition and Measurement

All property and equipment that qualify for recognition as an asset are measured at cost and subsequently carried at cost less any accumulated depreciation and any accumulated impairment losses.

The cost of property and equipment includes any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management and the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located.

Subsequent expenditures are capitalized only when they prolong the useful life or enhance values of the assets but the costs of the day-to-day servicing of the assets such as repair and maintenance costs are recognized in profit or loss as incurred. When part of an item of an asset has a useful life different from that of the entire asset, it is recognized as a separate asset.

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3.8.2 Depreciation

Land is not depreciated, whereas other property and equipment are depreciated using the method that reflects the pattern in which the asset’s future economic benefits are expected to be consumed by the Group. The depreciable amount of an asset is determined after deducting its residual value. As for leased assets, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term, the asset is fully depreciated over the shorter of the lease term and its useful life.

Each part of an item of property and equipment with a cost that is significant in relation to the total cost of the item is depreciated separately.

The depreciation method and estimated useful lives of the assets are as follows:

Property and equipment

Depreciation method

Estimated useful lives

Buildings and structures

Straight-line 40 years

Leasehold improvements

Declining-balance 4 years

Equipment and vehicles

Declining-balance 4 years

Finance leased assets

Declining-balance

8 months ~ 5 years and

8 months

The residual value, the useful life and the depreciation method applied to an asset are reviewed at least at each financial year end, if expectations differ from previous estimates, the changes are accounted for as a change in an accounting estimate.

3.9 Investment properties

3.9.1 Recognition and Measurement

Properties held to earn rentals or for capital appreciation or both are classified as investment properties. Investment properties are measured initially at their cost and subsequently the cost model is used.

3.9.2 Depreciation

Land is not depreciated, whereas other investment properties are depreciated using the method that reflects the pattern in which the asset’s future economic benefits are expected to be consumed by the Group. The depreciable amount of an asset is determined after deducting its residual value.

The depreciation method and estimated useful lives of the assets are as follows:

Property and equipment

Depreciation method

Estimated useful lives

Buildings

Straight-line 40 years

The residual value, the useful life and the depreciation method applied to an asset are reviewed at least at each financial year end and, if expectations differ from previous estimates or if there has been a significant change in the expected pattern of consumption of the future economic benefits embodied in the asset, the changes are accounted for as a change in an accounting estimate.

3.10 Intangible assets

Intangible assets are measured initially at cost and subsequently carried at their cost less any accumulated amortization and any accumulated impairment losses.

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Intangible assets, except for goodwill and membership rights, are amortized using the straight-line method with no residual value over their estimated useful economic life since the asset is available for use.

Intangible assets

Amortization method

Estimated useful lives

Industrial property rights

Straight-line 3~10 years

Software

Straight-line 3~5 years

Finance leased assets

Straight-line 8 months ~ 5 years and 8 months

Others

Straight-line 4~30 years

The amortization period and the amortization method for intangible assets with a finite useful life are reviewed at least at each financial year end. Where an intangible asset is not being amortized because its useful life is considered to be indefinite, the Group carries out a review in each accounting period to confirm whether or not events and circumstances still support the assumption of an indefinite useful life. If they do not, the change from the indefinite to finite useful life is accounted for as a change in an accounting estimate.

3.10.1 Goodwill

Recognition and measurement

Goodwill acquired from business combinations before January 1, 2010, is stated at its carrying amount which was recognized under the Group’s previous accounting policy, prior to the transition to IFRS.

Goodwill acquired from business combinations is initially measured as the excess of the aggregate of the consideration transferred, fair value of non-controlling interest and the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree over the net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets of the business acquired, the difference is recognized in profit or loss.

For each business combination, the Group decides whether the non-controlling interest in the acquiree is initially measured at fair value or at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets at the acquisition date.

Acquisition-related costs incurred to effect a business combination are charged to expenses in the periods in which the costs are incurred and the services are received, except for the costs to issue debt or equity securities.

Additional acquisitions of non-controlling interest

Additional acquisitions of non-controlling interests are accounted for as equity transactions. Therefore, no additional goodwill is recognized.

Subsequent measurement

Goodwill is not amortized and is stated at cost less accumulated impairment losses. However, goodwill that forms part of the carrying amount of an investment in associates is not separately recognized and an impairment loss recognized is not allocated to any asset, including goodwill, which forms part of the carrying amount of the investment in the associates.

3.10.2 Subsequent expenditure

Subsequent expenditure is capitalized only when it enhances values of the assets. Internally generated intangible assets, such as goodwill and trade name, are not recognized as assets but expensed as incurred.

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3.11 Leases

3.11.1 Finance lease

A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership. At the commencement of the lease term, the Group recognizes finance leases as assets and liabilities in its statements of financial position at amounts equal to the fair value of the leased property or, if lower, the present value of the minimum lease payments, each determined at the inception of the lease. Any initial direct costs of the lessee are added to the amount recognized as an asset.

Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Contingent rents are charged as expenses in the periods in which they are incurred.

The depreciable amount of a leased asset is allocated to each accounting period during the period of expected use on a systematic basis consistent with the depreciation policy the Group adopts for depreciable assets that are owned. If there is reasonable certainty that the lessee will obtain ownership by the end of the lease term, the period of expected use is the useful life of the asset; otherwise, the asset is fully depreciated over the shorter of the lease term and its useful life.

3.11.2 Operating lease

A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership.

Leases in the financial statements of lessors

Lease income from operating leases are recognized in income on a straight-line basis over the lease term, unless another systematic basis is more representative of the time pattern in which use benefit derived from the leased asset is diminished. Initial direct costs incurred by lessors in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognized as an expense over the lease term on the same basis as the lease income.

Leases in the financial statements of lessees

Lease payments under an operating lease (net of any incentives received from the lessor) are recognized as an expense on a straight-line basis over the lease term unless another systematic basis is more representative of the time pattern of the asset’s benefit.

3.12 Impairment of non-financial assets

The Group assesses at the end of each reporting period whether there is any indication that a non-financial asset, except for (i) deferred income tax assets, (ii) assets arising from employee benefits and (iii) non-current assets (or group of assets to be sold) classified as held for sale, may be impaired. If any such indication exists, the Group estimates the recoverable amount of the asset. However, irrespective of whether there is any indication of impairment, the Group tests (i) goodwill acquired in a business combination, (ii) intangible assets with an indefinite useful life and (iii) intangible assets not yet available for use for impairment annually by comparing their carrying amount with their recoverable amount.

The recoverable amount is estimated for the individual asset. If it is not possible to estimate the recoverable amount of the individual asset, the Group determines the recoverable amount of the cash-generating unit to

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which the asset belongs (the asset’s cash-generating unit). A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. The recoverable amount of an asset is the higher of its fair value less costs to sell and its value in use. Value in use is the present value of the future cash flows expected to be derived from an asset or cash-generating unit that are discounted by a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the future cash flow estimates have not been adjusted.

If the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. That reduction is an impairment loss and recognized immediately in profit or loss. For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the cash-generating units that are expected to benefit from the synergies of the combination. The impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit and then to the other assets of the unit pro rata on the basis of the carrying amount of each asset in the unit.

An impairment loss recognized for goodwill is not reversed in a subsequent period. The Group assesses at the end of each reporting period whether there is any indication that an impairment loss recognized in prior periods for an asset, other than goodwill, may no longer exist or may have decreased, and an impairment loss recognized in prior periods for an asset other than goodwill shall be reversed if, and only if, there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognized. The increased carrying amount of an asset other than goodwill attributable to a reversal of an impairment loss cannot exceed the carrying amount that would have been determined (net of amortization or depreciation) had no impairment loss been recognized for the asset in prior years.

3.13 Non-current assets held for sale

A non-current asset or disposal group is classified as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. For this to be the case, the asset (or disposal group) must be available for immediate sale in its present condition and its sale must be highly probable. A non-current asset (or disposal group) classified as held for sale is measured at the lower of its carrying amount and fair value less costs to sell which is measured in accordance with the applicable IFRS, immediately before the initial classification of the asset (or disposal group) as held for sale.

A non-current asset while it is classified as held for sale or while it is part of a disposal group classified as held for sale is not depreciated (or amortized).

Impairment loss is recognized for any initial or subsequent write-down of the asset (or disposal group) to fair value less costs to sell. Gains are recognized for any subsequent increase in fair value less costs to sell of an asset, but not in excess of the cumulative impairment loss that has been recognized.

3.14 Financial liabilities at fair value through profit or loss

Financial liabilities at fair value through profit or loss are financial liabilities held for trading. After initial recognition, financial liabilities at fair value through profit or loss are measured at fair value and gains or losses arising from changes in the fair value, and gains or losses from sale and repayment of financial liabilities at fair value through profit or loss are recognized as net gains on financial instruments at fair value through profit or loss in the statement of comprehensive income.

3.15 Insurance Contracts

KB Life Insurance Co., Ltd., one of the subsidiaries of the Group, issues insurance contracts.

Insurance contracts are defined as “a contract under which one party (the insurer) accepts significant insurance risk from another party by agreeing to compensate the policyholder if a specified uncertain future event

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adversely affects the policyholder”. A contract that qualifies as an insurance contract remains an insurance contract until all rights and obligations are extinguished or expire. Such a contract that does not contain significant insurance risk is classified as an investment contract and is within the scope of IAS 39, Financial Instruments: Recognition and measurement to the extent that it gives rise to a financial asset or financial liability, except if the investment contract contains a Discretionary Participation Features (DPF). If the contract has a DPF, the contract is subject to IFRS 4, Insurance Contracts . The Group recognizes assets (liabilities) and gains (losses) relating to insurance contracts as other assets (liabilities) in the statements of financial position, and as other operating income (expenses) in the statements of comprehensive income, respectively.

3.15.1 Insurance premiums

The Group recognizes collected premiums as revenue when a due date of collection of premiums from insurance contracts comes and the collected premium which is unmatured at the end of the reporting period is recognized as unearned premium.

3.15.2 Insurance liabilities

The Group recognizes a liability for future claims, refunds, policyholders’ dividends and related expenses as follows:

Premium reserve

A premium reserve refers to an amount based on the net premium method for payment of future claims with respect to events covered by insurance policies which have not yet occurred as of the reporting date.

Reserve for outstanding claims

A reserve for outstanding claims refers to the amount not yet paid, out of an amount to be paid or expected to be paid with respect to the insured events which have arisen as of the end of each fiscal year.

Unearned premium reserve

Unearned premium refers to the portion of the premium that has been paid in advance for insurance that has not yet been provided. An unearned premium reserve refers to the amount maintained by the insurer to refund in the event of either party cancelling the contract.

Policyholders’ dividends reserve

Policyholders’ dividends reserve including an interest rate guarantee reserve, a mortality dividend reserve and an interest rate difference dividend reserve is recognized for the purpose of provisioning for policyholders’ dividends in the future in accordance with statutes or insurance terms and conditions.

3.15.3 Liability adequacy test

The Group assesses at each reporting date whether its insurance liabilities are adequate, using current estimates of all future contractual cash flows and related cash flow such as claims handling cost, as well as cash flows resulting from embedded options and guarantees under its insurance contracts in accordance with IFRS 4. If the assessment shows that the carrying amount of its insurance liabilities is inadequate in light of the estimated future cash flows, the entire deficiency is recognized in profit or loss and reserved as insurance liabilities. Future cash flows from long-term insurance are discounted at a future rate of return on operating assets, whereas future cash flows from general insurance are not discounted to present value. For liability adequacy tests of premium and unearned premium reserves, the Group considers all cash flow factors such as future insurance premium,

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deferred acquisition costs, operating expenses and operating premiums. In relation to the reserve for outstanding claims, the Group elects a model that best reflects the trend of paid claims among several statistical methods to perform the adequacy test.

3.15.4 Deferred acquisition costs

Acquisition cost is deferred in an amount actually spent for an insurance contract and equally amortized over the premium payment period or the period in which acquisition costs are charged for the relevant insurance contract. Acquisition costs are amortized over the shorter of seven years or premium payment period; if there is any unamortized acquisition costs remaining as of the date of surrender or lapse, such remainder shall be amortized in the period in which the contract is surrendered or lapsed.

3.16 Provisions

Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of a past event and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. The risks and uncertainties that inevitably surround many events and circumstances are taken into account in reaching the best estimate of provisions, and where the effect of the time value of money is material, the amount of provisions are the present value of the expenditures expected to be required to settle the obligation.

Provisions on confirmed and unconfirmed acceptances and guarantees, unfunded commitments of credit cards and unused credit lines of consumer and corporate loans are recognized using a valuation model that applies the credit conversion factor, probability of default, and loss given default.

Provisions are reviewed at the end of each reporting period and adjusted to reflect the current best estimate. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provisions are reversed.

If the Group has a contract that is onerous, the present obligation under the contract is recognized and measured as provisions. An onerous contract is a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. The unavoidable costs under a contract reflect the minimum net cost to exit from the contract, which is the lower of the cost of fulfilling it and any compensation or penalties arising from failure to fulfill it.

3.17 Financial guarantee contracts

A financial guarantee contract is a contract that requires the issuer (the Group) to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due in accordance with the original or modified terms of a debt instrument.

Financial guarantee contracts are initially recognized at fair value. After initial recognition, financial guarantee contracts are measured at the higher of:

•

The amount determined in accordance with IAS 37, Provisions, Contingent Liabilities and Contingent Assets and

•

The initial amount recognized, less, when appropriate, cumulative amortization recognized in accordance with IAS 18, Revenue

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3.18 Equity instruments issued by the Group

An equity instrument is any contract or agreement that evidences a residual interest in the assets of an entity after deducting all of its liabilities.

3.18.1 Ordinary shares

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

3.18.2 Treasury shares

If entities of the Group reacquire the Parent Company’s equity instruments, those instruments (‘treasury shares’) are deducted from equity. No gains or losses are recognized in profit or loss on the purchase, sale, issue or cancellation of own equity instruments.

3.19 Revenue recognition

3.19.1 Interest income and expense

Interest income and expense are recognized using the effective interest method. The effective interest method is a method of calculating the amortized cost of a financial asset or a financial liability (or groups of financial assets or financial liabilities) and of allocating the interest income or interest expense over the relevant period.

The effective interest rate is the rate that exactly discounts estimated future cash receipts or payments through the expected life of the financial instrument or, where appropriate, a shorter period, to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Group estimates cash flows considering all contractual terms of the financial instrument but does not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs, and all other premiums or discounts. In those rare cases when it is not possible to estimate reliably the cash flows or the expected life of a financial instrument (or group of financial instruments), the Group uses the contractual cash flows over the full contractual term of the financial instrument (or group of financial instruments).

Interest on impaired financial assets is recognized using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.

3.19.2 Fee and commission income

The Group recognizes financial service fees in accordance with the accounting standard of the financial instrument related to the fees earned.

Fees that are an integral part of the effective interest of a financial instrument

Such fees are generally treated as adjustments of effective interest. Such fees may include compensation for activities such as evaluating the borrower’s financial condition, evaluating and recording guarantees, collateral and other security arrangements, negotiating the terms of the instrument, preparing and processing documents and closing the transaction and origination fees received on issuing financial liabilities measured at amortized cost. However, fees relating to the creation or acquisition of a financial instrument at fair value through profit or loss are recognized as revenue immediately.

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Fees earned as services are provided

Such fees are recognized as revenue as the services are provided. The fees include fees charged for servicing a financial instrument and charged for managing investments.

Fees that are earned on the execution of a significant act

Such fees are recognized as revenue when the significant act has been completed.

Commission on the allotment of shares to a client is recognized as revenue when the shares have been allotted and placement fees for arranging a loan between a borrower and an investor is recognized as revenue when the loan has been arranged.

A syndication fee received by the Group that arranges a loan and retains no part of the loan package for itself (or retains a part at the same effective interest rate for comparable risk as other participants) is compensation for the service of syndication. Such a fee is recognized as revenue when the syndication has been completed.

3.19.3 Dividend income

Dividend income is recognized in profit or loss when the right to receive payment is established. Dividend income from financial assets at fair value through profit or loss and financial investment is recognized in profit or loss as part of net gains on financial assets at fair value through profit or loss and other operating income and expenses, respectively.

3.20 Employee compensation and benefits

3.20.1 Post-employment benefits:

Defined benefit plans

All post-employment benefits, other than defined contribution plans, are classified as defined benefit plans. The amount recognized as a defined benefit liability is the present value of the defined benefit obligation less the fair value of plan assets at the end of the reporting period.

The present value of the defined benefit obligation is calculated annually by independent actuaries using the Projected Unit Credit method. The rate used to discount post-employment benefit obligations is determined by reference to market yields at the end of the reporting period on high quality corporate bonds. The currency and term of the corporate bonds are consistent with the currency and estimated term of the post-employment benefit obligations. Actuarial gains and losses including experience adjustments and the effects of changes in actuarial assumptions are recognized in other comprehensive income (loss).

When the total of the present value of the defined benefit obligation minus the fair value of plan assets results in an asset, it is recognized to the extent of the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan.

Past service cost is the change in the present value of the defined benefit obligation, which arises when the Group introduces a defined benefit plan or changes the benefits of an existing defined benefit plan. Such past service cost is immediately recognized as an expense for the year.

Defined contribution plans

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

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3.20.2 Short-term employee benefits

Short-term employee benefits are employee benefits (other than termination benefits) that are due to be settled within 12 months after the end of the period in which the employees render the related service. The undiscounted amount of short-term employee benefits expected to be paid in exchange for that service is recognized as a liability (accrued expense), after deducting any amount already paid.

The expected cost of profit-sharing and bonus payments are recognized as liabilities when the Group has a present legal or constructive obligation to make such payments as a result of past events rendered by employees and a reliable estimate of the obligation can be made.

3.20.3 Share-based payment

The Group operates share-based payment arrangements granting awards to directors and employees of the Group. The Group has a choice of whether to settle the awards in cash or by issuing equity instruments of the parent company at the date of settlement.

For a share-based payment transaction in which the terms of the arrangement provide the Group with the choice of whether to settle in cash or by issuing equity instruments, the Group determined that it has a present obligation to settle in cash because the Group has a past practice and a stated policy of settling in cash. Therefore, the Group accounts for the transaction in accordance with the requirements of cash-settled share-based payment transactions.

The Group measures the services acquired and the liability incurred at fair value. Until the liability is settled, the Group remeasures the fair value of the liability at the end of each reporting period and at the date of settlement, with any changes in fair value recognized in profit or loss for the year.

3.20.4 Termination benefits

Termination benefits are payable when employment is terminated by the Group before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. An entity shall recognize a liability and expense for termination benefits at the earlier of the following dates: when the entity can no longer withdraw the offer of those benefits and when the entity recognizes costs for a restructuring that is within the scope of IAS 37 and involves the payment of termination benefits. Termination benefits are measured by considering the number of employees expected to accept the offer in the case of a voluntary early retirement. Termination benefits over 12 months after the reporting period are discounted to present value.

3.21 Income tax expenses

Income tax expense (tax income) comprises current tax expense (current tax income) and deferred income tax expense (deferred income tax income). Current and deferred income tax are recognized as income or expense and included in profit or loss for the year, except to the extent that the tax arises from (a) a transaction or an event which is recognized, in the same or a different period outside profit or loss, either in other comprehensive income or directly in equity and (b) a business combination.

3.21.1 Current income tax

Current income tax is the amount of income taxes payable (recoverable) in respect of the taxable profit (tax loss) for a period. A difference between the taxable profit and accounting profit may arise when income or expense is included in accounting profit in one period, but is included in taxable profit in a different period. Differences may also arise if there is revenue that is exempt from taxation, or expense that is not deductible in determining taxable profit (tax loss). Current income tax liabilities (assets) for the current and prior periods are measured at the amount expected to be paid to (recovered from) the taxation authorities, using the tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.

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The Group offsets current income tax assets and current income tax liabilities if, and only if, the Group (a) has a legally enforceable right to offset the recognized amounts and (b) intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously.

3.21.2 Deferred income tax

Deferred income tax is recognized, using the asset-liability method, on temporary differences arising between the tax based amount of assets and liabilities and their carrying amount in the financial statements. Deferred income tax liabilities are recognized for all taxable temporary differences and deferred income tax assets are recognized for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilized. However, deferred income tax liabilities are not recognized if they arise from the initial recognition of goodwill; deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss.

Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except for deferred income tax liabilities for which the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.

The carrying amount of a deferred income tax asset is reviewed at the end of each reporting period. The Group reduces the carrying amount of a deferred income tax asset to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred income tax asset to be utilized.

Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred income tax liabilities and deferred income tax assets reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

The Group offsets deferred income tax assets and deferred income tax liabilities when the Group has a legally enforceable right to offset current income tax assets against current income tax liabilities; and the deferred income tax assets and the deferred income tax liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity; or different taxable entities which intend either to settle current income tax liabilities and assets on a net basis, or to realize the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred income tax liabilities or assets are expected to be settled or recovered.

3.21.3 Uncertain tax positions

Uncertain tax positions arise from a claim for rectification brought by the Group, an appeal for a refund of tax levied by the tax authorities, or others due to different interpretation of tax laws or others. The Group recognizes its uncertain tax positions in the consolidated financial statements based on the guidance in IAS 12. The income tax asset is recognized if a tax refund is probable for taxes paid and levied by the tax authority. However, interest and penalties related to income tax are recognized in accordance with IAS 37.

3.22 Earnings per share

The Group calculates basic earnings per share amounts and diluted earnings per share amounts for profit or loss attributable to ordinary equity holders of the parent entity and presents them in the statement of

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comprehensive income. Basic earnings per share is calculated by dividing profit or loss attributable to ordinary equity holders of the Parent Company by the weighted average number of ordinary shares outstanding during the period. For the purpose of calculating diluted earnings per share, the Group adjusts profit or loss attributable to ordinary equity holders of the Parent Company and the weighted average number of shares outstanding for the effects of all dilutive potential ordinary shares including convertible bonds and share options.

3.23 Operating segments

Operating segments are components of the Group where separate financial information is available and is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.

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

3.24 United States dollar amounts

The Group 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 ￦1,090.89 to U.S. $1.00, the U.S. Federal Reserve Bank of New York buying exchange rate in effect at noon, December 31, 2014. 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.

4. Financial risk management

4.1 Summary

4.1.1 Overview of Financial Risk Management Policy

The financial risks that the Group is exposed to are credit risk, market risk, liquidity risk, operational risk and others.

The note regarding financial risk management provides information about the risks that the Group is exposed to, including the objectives, policies and processes for managing the risks, the methods used to measure the risks, and capital adequacy. Additional quantitative information is disclosed throughout the consolidated financial statements.

The Group’s risk management system focuses on increasing transparency, developing the risk management environment, preventing transmission of risk to other related subsidiaries, and the preemptive response to risk due to rapid changes in the financial environment to support the Group’s long-term strategy and business decisions efficiently. Credit risk, market risk, liquidity risk, and operational risk have been recognized as the Group’s key risks. These risks are measured in Economic Capital or VaR (Value at Risk) and are managed using a statistical method.

4.1.2 Risk Management Organization

Risk Management Committee

The Risk Management Committee establishes risk management strategies in accordance with the directives of the Board of Directors and determines the Group’s target risk appetite, approves significant risk matters and reviews the level of risks that the Group is exposed to and the appropriateness of the Group’s risk management operations as an ultimate decision-making authority.

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Risk Management Council

The Risk Management Council is a consultative group which reviews and makes decisions on matters delegated by the Risk Management Committee and discusses the detailed issues relating to the Group’s risk management.

Risk Management Department

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

4.2 Credit Risk

4.2.1 Overview of Credit Risk

Credit risk is the risk of possible losses in an asset portfolio in the event of a counterparty’s default, breach of contract and deterioration in the credit quality of the counterparty. For risk management reporting purposes, the individual borrower’s default risk, country risk, specific risks and other credit risk exposure components are considered as a whole.

4.2.2 Credit Risk Management

The Group measures expected losses and economic capital on assets that are subject to credit risk management whether on- or off-balance sheet and uses expected losses and economic capital as a management indicator. The Group manages credit risk by allocating credit risk economic capital limits.

In addition, the Group controls the credit concentration risk exposure by applying and managing total exposure limits to prevent an excessive risk concentration to each industry and borrower.

The Group has organized a credit risk management team that focuses on credit risk management in accordance with the Group’s credit risk management policy. For Kookmin Bank, which is the main subsidiary, its loan analysis department which is independent from the sales department is responsible for loan policy, loan limit, loan review, credit evaluation, restructuring and subsequent events. Kookmin Bank’s risk management group is also responsible for planning risk management policy, applying limits of credit lines, measuring the credit risk economic capital, adjusting credit limits, reviewing credit and verifying credit evaluation models.

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4.2.3 Maximum exposure to credit risk

The Group’s maximum exposures of financial instruments, excluding equity securities, to credit risk without consideration of collateral values as of December 31, 2013 and 2014, are as follows:

2013 2014
(In millions of Korean won)

Financial assets

Due from financial institutions

￦ 12,094,103 ￦ 12,878,430

Financial assets at fair value through profit or loss

Financial assets held for trading (1)

7,866,037 9,763,553

Financial assets designated at fair value through profit or loss

210,805 442,960

Derivatives

1,819,409 1,968,190

Loans (2)

219,001,356 231,449,653

Financial investments

Available-for-sale financial assets

18,933,288 19,359,822

Held-to-maturity financial assets

13,016,991 12,569,154

Other financial assets (2)

6,251,679 7,559,631

Total financial assets

279,193,668 295,991,393

Off-balance sheet items

Acceptances and guarantees contracts

9,804,692 9,045,824

Financial guarantee contracts

3,097,372 4,459,645

Commitments

95,422,032 96,316,581

Total off-balance sheet items

108,324,096 109,822,050

Total

￦ 387,517,764 ￦ 405,813,443

(1)

The amounts of ￦40,252 million and ￦51,345 million as of December 31, 2013 and 2014, respectively, related to financial instruments indexed to the price of gold are included.

(2)

Loans and other financial assets are net of allowance.

4.2.4 Credit risk of loans

The Group maintains an allowance for loan losses associated with credit risk on loans to manage its credit risk.

The Group recognizes an impairment loss on loans carried at amortized cost when there is any objective indication of impairment. Under IFRS, an impairment loss is based on losses incurred at the end of the reporting year. Therefore, the Group does not recognize losses expected as a result of future events. The Group measures inherent incurred losses on loans and presents them in the financial statements through the use of an allowance account which is offset against the related loans.

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Loans are classified as follows:

2013
Retail Corporate Credit card Total
Amount % Amount % Amount % Amount %
(In millions of Korean won)

Neither past due nor impaired

￦ 104,751,607 97.22 ￦ 98,939,364 96.68 ￦ 11,253,836 95.50 ￦ 214,944,807 96.88

Past due but not impaired

1,967,127 1.83 538,571 0.53 321,978 2.73 2,827,676 1.27

Impaired

1,024,480 0.95 2,856,933 2.79 208,644 1.77 4,090,057 1.85

Sub-total

107,743,214 100.00 102,334,868 100.00 11,784,458 100.00 221,862,540 100.00

Allowances (1)

(580,510 ) 0.54 (1,870,874 ) 1.83 (409,800 ) 3.48 (2,861,184 ) 1.29

Carrying amount

￦ 107,162,704 ￦ 100,463,994 ￦ 11,374,658 ￦ 219,001,356

2014
Retail Corporate Credit card Total
Amount % Amount % Amount % Amount %
(In millions of Korean won)

Neither past due nor impaired

￦ 116,956,042 98.04 ￦ 100,542,430 97.64 ￦ 11,155,710 95.90 ￦ 228,654,182 97.76

Past due but not impaired

1,576,365 1.32 331,780 0.32 276,875 2.38 2,185,020 0.93

Impaired

765,751 0.64 2,097,041 2.04 199,711 1.72 3,062,503 1.31

Sub-total

119,298,158 100.00 102,971,251 100.00 11,632,296 100.00 233,901,705 100.00

Allowances (1)

(536,959 ) 0.45 (1,525,152 ) 1.48 (389,941 ) 3.35 (2,452,052 ) 1.05

Carrying amount

￦ 118,761,199 ￦ 101,446,099 ￦ 11,242,355 ￦ 231,449,653

(1)

Collectively assessed allowances for loans are included as they are not impaired individually.

Credit quality of loans that are neither past due nor impaired are as follows:

2013
Retail Corporate Credit card Total
(In millions of Korean won)

Grade 1

￦ 88,331,532 ￦ 40,950,125 ￦ 5,670,689 ￦ 134,952,346

Grade 2

12,320,960 43,497,358 3,806,194 59,624,512

Grade 3

3,195,119 11,993,854 1,438,491 16,627,464

Grade 4

637,556 2,237,288 184,110 3,058,954

Grade 5

266,440 260,739 154,352 681,531

Total

￦ 104,751,607 ￦ 98,939,364 ￦ 11,253,836 ￦ 214,944,807

2014
Retail Corporate Credit card Total
(In millions of Korean won)

Grade 1

￦ 99,314,075 ￦ 43,166,076 ￦ 5,705,083 ￦ 148,185,234

Grade 2

12,557,654 43,913,621 3,788,572 60,259,847

Grade 3

4,057,239 11,014,410 1,342,891 16,414,540

Grade 4

775,407 1,984,073 163,279 2,922,759

Grade 5

251,667 464,250 155,885 871,802

Total

￦ 116,956,042 ￦ 100,542,430 ￦ 11,155,710 ￦ 228,654,182

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Credit quality of loans graded according to internal credit ratings are as follows:

Range of PD (%)
(Probability of Default) 		Retail Corporate

Grade 1

0.0  ~  1.0 1 ~5 grade AAA  ~  BBB+

Grade 2

1.0  ~  5.0 6 ~ 8 grade BBB ~  BB

Grade 3

5.0  ~  15.0 9  ~  10 grade BB-  ~  B

Grade 4

15.0  ~  30.0 11 grade B-  ~  CCC

Grade 5

30.0  ~ 12 grade or under CC or under

Loans that are past due but not impaired are as follows:

2013
1 ~ 29 days 30 ~ 59 days 60 ~ 89 days 90 days or more Total
(In millions of Korean won)

Retail

￦ 1,729,091 ￦ 169,341 ￦ 68,629 ￦ 66 ￦ 1,967,127

Corporate

435,700 54,900 47,971 — 538,571

Credit card

234,003 51,416 36,259 300 321,978

Total

￦ 2,398,794 ￦ 275,657 ￦ 152,859 ￦ 366 ￦ 2,827,676

2014
1 ~ 29 days 30 ~ 59 days 60 ~ 89 days 90 days or more Total
(In millions of Korean won)

Retail

￦ 1,271,327 ￦ 211,857 ￦ 93,125 ￦ 56 ￦ 1,576,365

Corporate

279,413 37,918 14,449 — 331,780

Credit card

201,652 41,428 32,839 956 276,875

Total

￦ 1,752,392 ￦ 291,203 ￦ 140,413 ￦ 1,012 ￦ 2,185,020

Impaired loans are as follows:

2013
Retail Corporate Credit card Total
(In millions of Korean won)

Loans

￦ 1,024,480 ￦ 2,856,933 ￦ 208,644 ￦ 4,090,057

Allowances

Individual assessment

(2 ) (1,126,249 ) — (1,126,251 )

Collective assessment

(381,739 ) (229,058 ) (133,616 ) (744,413 )

Total allowances

(381,741 ) (1,355,307 ) (133,616 ) (1,870,664 )

Carrying amount

￦ 642,739 ￦ 1,501,626 ￦ 75,028 ￦ 2,219,393

2014
Retail Corporate Credit card Total
(In millions of Korean won)

Loans

￦ 765,751 ￦ 2,097,041 ￦ 199,711 ￦ 3,062,503

Allowances

Individual assessment

— (827,386 ) — (827,386 )

Collective assessment

(287,548 ) (212,625 ) (129,518 ) (629,691 )

Total allowances

(287,548 ) (1,040,011 ) (129,518 ) (1,457,077 )

Carrying amount

￦ 478,203 ￦ 1,057,030 ￦ 70,193 ￦ 1,605,426

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A quantification of the extent to which collateral and other credit enhancements mitigate credit risk as of December 31, 2013 and 2014, are as follows:

2013
Impaired Loans Non-impaired Loans
Individual Collective Past due Not past due Total
(In millions of Korean won)

Guarantees

￦ 29,929 ￦ 226,721 ￦ 382,997 ￦ 32,102,952 ￦ 32,742,599

Deposits and savings

5,099 27,060 56,066 2,324,625 2,412,850

Property and equipment

11,843 1,959 1,281 1,676,443 1,691,526

Real estate

425,748 537,904 1,506,854 114,659,274 117,129,780

Total

￦ 472,619 ￦ 793,644 ￦ 1,947,198 ￦ 150,763,294 ￦ 153,976,755

2014
Impaired Loans Non-impaired Loans
Individual Collective Past due Not past due Total
(In millions of Korean won)

Guarantees

￦ 19,654 ￦ 190,491 ￦ 359,532 ￦ 37,754,080 ￦ 38,323,757

Deposits and savings

954 15,466 35,756 2,286,691 2,338,867

Property and equipment

7,772 4,921 2,449 2,769,360 2,784,502

Real estate

270,230 529,446 1,125,065 123,451,062 125,375,803

Total

￦ 298,610 ￦ 740,324 ￦ 1,522,802 ￦ 166,261,193 ￦ 168,822,929

4.2.5 Credit quality of securities

The financial assets at fair value through profit or loss and financial investments excluding equity securities that are exposed to credit risk are as follows:

2013 2014
(In millions of Korean won)

Securities that are neither past due nor impaired

￦ 39,977,309 ￦ 42,077,873

Impaired securities

9,560 6,271

Total

￦ 39,986,869 ￦ 42,084,144

The credit quality of securities (excluding equity securities) that are neither past due nor impaired as of December 31, 2013 and 2014, are as follows:

2013
Grade 1 Grade 2 Grade 3 Grade 4 Grade 5 Total
(In millions of Korean won)

Financial assets held for trading

￦ 6,634,168 ￦ 1,172,476 ￦ 19,141 ￦ — ￦ — ￦ 7,825,785

Financial assets designated at fair value through profit or loss

89,527 119,489 — 1,789 — 210,805

Available-for-sale financial assets

18,078,177 785,216 60,335 — — 18,923,728

Held-to-maturity financial assets

13,016,991 — — — — 13,016,991

Total

￦ 37,818,863 ￦ 2,077,181 ￦ 79,476 ￦ 1,789 ￦ — ￦ 39,977,309

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2014
Grade 1 Grade 2 Grade 3 Grade 4 Grade 5 Total
(In millions of Korean won)

Financial assets held for trading

￦ 8,464,038 ￦ 1,248,170 ￦ — ￦ — ￦ — ￦ 9,712,208

Financial assets designated at fair value through profit or loss

76,893 366,067 — — — 442,960

Available-for-sale financial assets

18,442,055 847,565 63,931 — — 19,353,551

Held-to-maturity financial assets

12,569,154 — — — — 12,569,154

Total

￦ 39,552,140 ￦ 2,461,802 ￦ 63,931 ￦ — ￦ — ￦ 42,077,873

The credit qualities of securities (excluding equity securities) according to the credit ratings by external rating agencies are as follows:

Domestic Foreign

Credit quality

KAP KIS NICE S&P Fitch-IBCA Moody’s

Grade 1

AA0 to AAA AA0 to AAA AA0 to AAA A- to AAA A- to AAA A3 to Aaa

Grade 2

A- to AA- A- to AA- A- to AA- BBB- to BBB+ BBB- to BBB+ Baa3 to Baa1

Grade 3

BBB0 to BBB+ BBB0 to BBB+ BBB0 to BBB+ BB to BB+ BB to BB+ Ba2 to Ba1

Grade 4

BB0 to BBB- BB0 to BBB- BB0 to BBB- B+ to BB- B+ to BB- B1 to Ba3

Grade 5

BB- or under BB- or under BB- or under B or under B or under B2 or under

Debt securities’ credit qualities denominated in Korean won are based on the lowest credit rating by the three domestic credit rating agencies above, and those denominated in foreign currencies are based on the lowest credit rating by the three foreign credit rating agencies above.

4.2.6 Credit risk mitigation of derivative financial instruments

A quantification of the extent to which collateral and other credit enhancements mitigate credit risk of derivative financial instruments as of December 31, 2013 and 2014, are as follows:

2013 2014
(In millions of Korean won)

Deposits and savings, securities and others

￦ 271,380 ￦ 329,482

Total

￦ 271,380 ￦ 329,482

4.2.7 Credit risk concentration analysis

The details of the Group’s loans by country as of December 31, 2013 and 2014, are as follows:

2013
Retail Corporate Credit card Total % Allowances Carrying
amount
(In millions of Korean won)

Korea

￦ 107,644,600 ￦ 100,533,577 ￦ 11,782,169 ￦ 219,960,346 99.14 ￦ (2,797,651 ) ￦ 217,162,695

Europe

9 98,752 406 99,167 0.04 (288 ) 98,879

China

227 583,176 315 583,718 0.26 (16,075 ) 567,643

Japan

5,708 475,242 350 481,300 0.22 (44,248 ) 437,052

U.S

— 448,868 578 449,446 0.20 (654 ) 448,792

Others

92,670 195,253 640 288,563 0.14 (2,268 ) 286,295

Total

￦ 107,743,214 ￦ 102,334,868 ￦ 11,784,458 ￦ 221,862,540 100.00 ￦ (2,861,184 ) ￦ 219,001,356

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2014
Retail Corporate Credit card Total % Allowances Carrying
amount
(In millions of Korean won)

Korea

￦ 119,248,111 ￦ 100,878,627 ￦ 11,629,337 ￦ 231,756,075 99.08 ￦ (2,401,417 ) ￦ 229,354,658

Europe

9 184,307 428 184,744 0.08 (390 ) 184,354

China

84 764,415 240 764,739 0.33 (15,544 ) 749,195

Japan

2,581 271,914 263 274,758 0.12 (31,394 ) 243,364

U.S

— 698,294 834 699,128 0.30 (631 ) 698,497

Others

47,373 173,694 1,194 222,261 0.09 (2,676 ) 219,585

Total

￦ 119,298,158 ￦ 102,971,251 ￦ 11,632,296 ￦ 233,901,705 100.00 ￦ (2,452,052 ) ￦ 231,449,653

The details of the Group’s corporate loans by industry as of December 31, 2013 and 2014, are as follows:

2013
Loans % Allowances Carrying
amount
(In millions of Korean won)

Financial institutions

￦ 10,524,203 10.28 ￦ (87,471 ) ￦ 10,436,732

Manufacturing

31,160,890 30.45 (611,257 ) 30,549,633

Service

38,375,826 37.50 (448,114 ) 37,927,712

Wholesale & Retail

13,873,681 13.56 (194,840 ) 13,678,841

Construction

4,427,615 4.33 (502,223 ) 3,925,392

Public sector

654,998 0.64 (8,469 ) 646,529

Others

3,317,655 3.24 (18,500 ) 3,299,155

Total

￦ 102,334,868 100.00 ￦ (1,870,874 ) ￦ 100,463,994

2014
Loans % Allowances Carrying
amount
(In millions of Korean won)

Financial institutions

￦ 9,117,333 8.85 ￦ (85,507 ) ￦ 9,031,826

Manufacturing

32,694,233 31.75 (524,868 ) 32,169,365

Service

39,384,520 38.25 (306,588 ) 39,077,932

Wholesale & Retail

13,286,775 12.90 (152,391 ) 13,134,384

Construction

3,862,457 3.75 (429,297 ) 3,433,160

Public sector

755,150 0.73 (6,740 ) 748,410

Others

3,870,783 3.77 (19,761 ) 3,851,022

Total

￦ 102,971,251 100.00 ￦ (1,525,152 ) ￦ 101,446,099

The details of the Group’s retail and credit card loans by type as of December 31, 2013 and 2014, are as follows:

2013
Loans % Allowances Carrying
amount
(In millions of Korean won)

Housing purpose

￦ 46,485,300 38.89 ￦ (77,985 ) ￦ 46,407,315

General purpose

61,257,914 51.25 (502,525 ) 60,755,389

Credit card

11,784,458 9.86 (409,800 ) 11,374,658

Total

￦ 119,527,672 100.00 ￦ (990,310 ) ￦ 118,537,362

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2014
Loans % Allowances Carrying
amount
(In millions of Korean won)

Housing purpose

￦ 52,530,611 40.12 ￦ (30,966 ) ￦ 52,499,645

General purpose

66,767,547 50.99 (505,993 ) 66,261,554

Credit card

11,632,296 8.89 (389,941 ) 11,242,355

Total

￦ 130,930,454 100.00 ￦ (926,900 ) ￦ 130,003,554

The details of the Group’s securities (excluding equity securities) and derivative financial instruments by industry as of December 31, 2013 and 2014, are as follows:

2013
Amount %
(In millions of Korean won)

Financial assets held for trading

Government and government funded institutions

￦ 3,057,633 39.07

Banking and Insurance

3,776,119 48.25

Others

992,033 12.68

Sub-total

7,825,785 100.00

Financial assets designated at fair value through profit or loss

Banking and Insurance

210,805 100.00

Sub-total

210,805 100.00

Derivative financial assets

Government and government funded institutions

18,248 1.00

Banking and Insurance

1,606,285 88.29

Others

194,876 10.71

Sub-total

1,819,409 100.00

Available-for-sale financial assets

Government and government funded institutions

9,966,361 52.64

Banking and Insurance

6,986,895 36.90

Others

1,980,032 10.46

Sub-total

18,933,288 100.00

Held-to-maturity financial assets

Government and government funded institutions

10,923,807 83.92

Banking and Insurance

1,259,282 9.67

Others

833,902 6.41

Sub-total

13,016,991 100.00

Total

￦ 41,806,278

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2014
Amount %
(In millions of Korean won)

Financial assets held for trading

Government and government funded institutions

￦ 4,003,061 41.22

Banking and Insurance

4,368,341 44.98

Others

1,340,806 13.80

Sub-total

9,712,208 100.00

Financial assets designated at fair value through profit or loss

Banking and Insurance

442,960 100.00

Sub-total

442,960 100.00

Derivative financial assets

Government and government funded institutions

19,732 1.00

Banking and Insurance

1,762,160 89.53

Others

186,298 9.47

Sub-total

1,968,190 100.00

Available-for-sale financial assets

Government and government funded institutions

8,274,026 42.74

Banking and Insurance

8,192,189 42.32

Others

2,893,607 14.95

Sub-total

19,359,822 100.00

Held-to-maturity financial assets

Government and government funded institutions

10,221,322 81.32

Banking and Insurance

1,734,462 13.80

Others

613,370 4.88

Sub-total

12,569,154 100.00

Total

￦ 44,052,334

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The details of the Group’s securities (excluding equity securities) and derivative financial instruments by country, as of December 31, 2013 and 2014, are as follows:

2013
Amount %
(In millions of Korean won)

Financial assets held for trading

Korea

￦ 7,809,495 99.79

India

3,194 0.04

Others

13,096 0.17

Sub-total

7,825,785 100.00

Financial assets designated at fair value through profit or loss

Korea

205,512 97.49

Others

5,293 2.51

Sub-total

210,805 100.00

Derivative financial assets

Korea

617,804 33.96

United States

284,795 15.65

Others

916,810 50.39

Sub-total

1,819,409 100.00

Available-for-sale financial assets

Korea

18,908,743 99.87

Others

24,545 0.13

Sub-total

18,933,288 100.00

Held-to-maturity financial assets

Korea

13,016,991 100.00

Sub-total

13,016,991 100.00

Total

￦ 41,806,278

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2014
Amount %
(In millions of Korean won)

Financial assets held for trading

Korea

￦ 9,653,123 99.39

Others

59,085 0.61

Sub-total

9,712,208 100.00

Financial assets designated at fair value through profit or loss

Korea

442,960 100.00

Sub-total

442,960 100.00

Derivative financial assets

Korea

791,704 40.22

United States

274,608 13.95

Others

901,878 45.83

Sub-total

1,968,190 100.00

Available-for-sale financial assets

Korea

19,307,222 99.73

United States

4,948 0.03

Others

47,652 0.24

Sub-total

19,359,822 100.00

Held-to-maturity financial assets

Korea

12,569,154 100.00

Sub-total

12,569,154 100.00

Total

￦ 44,052,334

The counterparties to the financial assets under due from financial institutions and financial instruments indexed to the price of gold within financial assets held for trading are in the banking and insurance industries and have high credit ratings.

4.3 Liquidity risk

4.3.1 Overview of liquidity risk

Liquidity risk is the risk of insolvency or loss due to a disparity between the inflow and outflow of funds, unexpected outflow of funds, and obtaining funds at a high price or disposing of securities at an unfavorable price due to lack of available funds. The Group manages its liquidity risk through analysis of the contractual maturity of interest-bearing assets and liabilities, assets and liabilities related to the other in and outflows, and off-balance sheet related to in and outflows of currency derivative instruments and others.

Cash flows disclosed for the maturity analysis are undiscounted contractual principal and interest to be received (paid) and, thus, differ from the amount in the financial statements which are based on the present value of expected cash flows in some cases. The amount of interest to be received or paid on floating rate assets and liabilities is measured on the assumption that the current interest rate would be the same through maturity.

4.3.2 Liquidity risk management and indicator

The liquidity risk is managed by ALM (‘Asset Liability Management’) and related guidelines which are applied to the risk management policies and procedures that address all the possible risks that arise from the overall business of the Group.

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For the purpose of liquidity management, the liquidity ratio and accumulated liquidity gap ratio on all transactions affecting the in and outflows of funds and transactions of off-balance items are measured, managed and reported to the Risk Planning Council and Risk Management Committee on a regular basis.

As the main subsidiary, Kookmin Bank regularly reports the liquidity gap ratio, liquidity ratio, maturity gap ratio and the results of the stress testing related to liquidity risk to the Asset-Liability Management Committee (‘ALCO’) which establishes and monitors the liquidity risk management strategy.

4.3.3 Analysis of remaining contractual maturity of financial assets and liabilities

Cash flows disclosed below are undiscounted contractual principal and interest to be received (paid) and, thus, differ from the amount in the consolidated financial statements which are based on the present value of expected cash flows. The amount of interest to be received or paid on floating rate assets and liabilities is measured on the assumption that the current interest rate would be the same through maturity.

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The remaining contractual maturity of financial assets and liabilities, excluding derivatives held for cash flow hedging, as of December 31, 2013 and 2014, are as follows:

2013
On
demand 		Up to
1 month 		1-3 months 3-12 months 1-5 years Over 5 years Total
(In millions of Korean won)

Financial assets

Cash and due from financial institutions (1)

￦ 5,672,570 ￦ 501,100 ￦ 183,931 ￦ 586,696 ￦ 49,314 ￦ 160,826 ￦ 7,154,437

Financial assets held for trading (2)

8,967,006 — — — — — 8,967,006

Financial assets designated at fair value through profit or loss (2)

326,583 — — — — 35,153 361,736

Derivatives held for trading (2)

1,680,880 — — — — — 1,680,880

Derivatives held for fair value hedging (3)

— 10,944 1,617 16,036 124,794 123,782 277,173

Loans

112,484 22,354,010 23,245,138 77,032,831 57,284,561 82,239,530 262,268,554

Available-for-sale financial assets (4)

2,496,486 571,796 1,542,912 4,891,859 12,313,615 1,977,317 23,793,985

Held-to-maturity financial assets

— 261,124 518,368 3,343,087 9,254,470 1,268,563 14,645,612

Other financial assets

27,788 4,262,763 22,473 1,526,228 6,554 2,382 5,848,188

Total

￦ 19,283,797 ￦ 27,961,737 ￦ 25,514,439 ￦ 87,396,737 ￦ 79,033,308 ￦ 85,807,553 ￦ 324,997,571

Financial liabilities

Financial liabilities held for trading (2)

￦ 236,637 ￦ — ￦ — ￦ — ￦ — ￦ — ￦ 236,637

Financial liabilities designated at fair value through profit or loss (2)

878,565 — — — — — 878,565

Derivatives held for trading (2)

1,580,029 — — — — — 1,580,029

Derivatives held for fair value hedging (3)

— — 25,411 179,000 8,959 — 213,370

Deposits (5)

74,110,641 14,193,153 28,638,089 77,181,179 8,603,695 2,677,536 205,404,293

Debts

270,987 3,279,051 1,711,622 4,733,173 4,038,514 356,424 14,389,771

Debentures

17,917 1,237,666 2,039,452 9,489,594 13,576,339 4,722,857 31,083,825

Other financial liabilities

141,041 8,372,426 13,101 63,409 198,068 509,412 9,297,457

Total

￦ 77,235,817 ￦ 27,082,296 ￦ 32,427,675 ￦ 91,646,355 ￦ 26,425,575 ￦ 8,266,229 ￦ 263,083,947

Off- balance sheet items

Commitments (6)

￦ 95,422,032 ￦ — ￦ — ￦ — ￦ — ￦ — ￦ 95,422,032

Financial guarantee contract (7)

3,097,372 — — — — — 3,097,372

Total

￦ 98,519,404 ￦ — ￦ — ￦ — ￦ — ￦ — ￦ 98,519,404

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2014
On
demand 		Up to
1 month 		1-3 months 3-12 months 1-5 years Over 5 years Total
(In millions of Korean won)

Financial assets

Cash and due from financial institutions (1)

￦ 6,397,552 ￦ 675,876 ￦ 544,520 ￦ 675,266 ￦ 57,441 ￦ — ￦ 8,350,655

Financial assets held for trading (2)

10,121,570 — — — — — 10,121,570

Financial assets designated at fair value through profit or loss (2)

636,340 — — — — — 636,340

Derivatives held for trading (2)

1,858,637 — — — — — 1,858,637

Derivatives held for fair value hedging (3)

— 7,742 (1,147 ) 20,804 77,968 118,804 224,171

Loans

95,437 21,432,048 24,040,500 79,199,603 60,798,143 88,936,816 274,502,547

Available-for-sale financial assets (4)

2,849,188 501,929 1,688,594 5,008,162 12,201,794 1,365,437 23,615,104

Held-to-maturity financial assets

— 276,462 665,030 3,618,565 8,174,038 1,184,433 13,918,528

Other financial assets

159,698 5,341,800 22,324 1,330,773 8,163 8,931 6,871,689

Total

￦ 22,118,422 ￦ 28,235,857 ￦ 26,959,821 ￦ 89,853,173 ￦ 81,317,547 ￦ 91,614,421 ￦ 340,099,241

Financial liabilities

Financial liabilities held for trading (2)

￦ 836,542 ￦ — ￦ — ￦ — ￦ — ￦ — ￦ 836,542

Financial liabilities designated at fair value through profit or loss (2)

982,426 — — — — — 982,426

Derivatives held for trading (2)

1,775,341 — — — — — 1,775,341

Derivatives held for fair value hedging (3)

— — 652 146 6,304 (15,580 ) (8,478 )

Deposits (5)

83,154,750 13,861,281 25,306,312 80,646,054 9,666,892 3,266,842 215,902,131

Debts

943,012 4,058,558 2,078,905 5,200,009 3,611,420 282,484 16,174,388

Debentures

159,620 1,112,986 1,812,861 6,894,122 16,971,344 4,339,194 31,290,127

Other financial liabilities

152,035 7,737,557 23,709 109,784 298,553 559,911 8,881,549

Total

￦ 88,003,726 ￦ 26,770,382 ￦ 29,222,439 ￦ 92,850,115 ￦ 30,554,513 ￦ 8,432,851 ￦ 275,834,026

Off- balance sheet items

Commitments (6)

￦ 96,316,581 ￦ — ￦ — ￦ — ￦ — ￦ — ￦ 96,316,581

Financial guarantee contract (7)

4,459,645 — — — — — 4,459,645

Total

￦ 100,776,226 ￦ — ￦ — ￦ — ￦ — ￦ — ￦ 100,776,226

(1)

The amounts of ￦7,671,914 million and ￦7,136,623 million which are restricted amounts due from the financial institutions as of December 31, 2013 and 2014, respectively, are excluded.

(2)

Financial instruments held for trading, financial instruments designated at fair value through profit or loss and derivatives held for trading are not managed by contractual maturity because they are expected to be traded or redeemed before maturity. Therefore, the carrying amounts of those financial instruments are classified as ‘On demand’ category. However, hybrid capital instruments classified as financial instruments designated at fair value through profit or loss are included in the ‘Over 5 years’ category which they can be redeemed, owing to uncertain point of sale.

(3)

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

(4)

In the case of equity investments restricted for sale, they are shown in the period in which the restriction is expected to be expired.

(5)

Deposits that are contractually repayable on demand or on short notice are classified under the ‘On demand’ cate

(6)

Commitments are included under the ‘On demand’ category because payments can be required upon request.

(7)

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

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The contractual cash flows of derivatives held for cash flow hedging as of December 31, 2013 and 2014, are as follows:

2013
Up to
1 month 		1-3 months 3-12 months 1-5 years Over 5 years Total
(In millions of Korean won)

Net cash flow of net settlement derivatives

￦ (449 ) ￦ (1,127 ) ￦ (3,815 ) ￦ 1,212 ￦ — ￦ (4,179 )

Cash flow to be received of total settlement derivatives

169 370 317,714 — — 318,253

Cash flow to be paid of total settlement derivatives

(617 ) (1,153 ) (326,160 ) — — (327,930 )

2014
Up to
1 month 		1-3 months 3-12 months 1-5 years Over 5 years Total
(In millions of Korean won)

Net cash flow of net settlement derivatives

￦ (688 ) ￦ (1,365 ) ￦ (5,203 ) ￦ (8,437 ) ￦ — ￦ (15,693 )

Cash flow to be received of total settlement derivatives

171 423 2,531 344,051 — 347,176

Cash flow to be paid of total settlement derivatives

(504 ) (1,062 ) (5,006 ) (343,149 ) — (349,721 )

4.4 Market risk

4.4.1 Overview of market risk

Definition of market risk

Market risk is the risk of possible losses which arise from changes in market factors, such as interest rate, stock price, foreign exchange rate and other market factors that affect the fair value or future cash flows of financial instruments, such as securities and derivatives amongst others. The most significant risks associated with trading positions are interest rate risks and currency risks and other risks include stock price risks. In addition, the Group is exposed to interest rate risks and currency risks associated with non-trading positions. The Group classifies exposures to market risk into either trading or non-trading positions. The Group measures and manages market risk separately for each subsidiary in the Group.

Market risk management group

The Group sets economic capital limits for market risk and interest rate risk and monitors the risks to manage the risk of trading and non-trading positions. The Group maintains risk management systems and procedures, such as trading policies and procedures, and market risk management guidelines for trading positions, and interest rate risk management guidelines for non-trading positions in order to manage market risk efficiently. The procedures mentioned are implemented with approval from the Risk Management Committee and Risk Management Council.

As the main subsidiary, Kookmin Bank establishes market risk management policy, sets position limits, loss limits and VaR limits of each business group and approves newly developed derivative instruments, through its Risk Management Council. The Risk Management Council has delegated the responsibility for market risk management of individual business departments to the Market Risk Management Committee which is chaired by a Chief Risk Officer (CRO). The Market Risk Management Committee sets position limits, loss limits, VaR limits, sensitivity limits and scenario loss limits for each division, at the level of each individual business department.

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The ALCO of Kookmin Bank determines the operational standards of interest and commission, the details of the establishment and prosecution of the Asset Liability Management (ALM) policies and enacts and amends relevant guidelines. The Risk Management Committee and Risk Management Council monitor the establishment and enforcement of ALM risk management policies and enact and amend ALM risk management guidelines. The interest rate risk limit is set based on the future assets/liabilities position and interest rate volatility estimation reflects the annual work plan. The Financial Planning Department and Risk Management Department measures and monitors the interest risk status and limits on a regular basis. The status and limits of interest rate risks, such as interest rate gap, duration gap and sensitivity, are reported to the ALCO and Risk Management Council on a monthly basis and to the Risk Management Committee on a quarterly basis. To ensure adequacy of interest rate and liquidity risk management, the Risk Management Department assigns the limits, monitors and reviews the risk management procedures and tasks conducted by the Financial Planning Department. Also, the Risk Management Department independently reports related information to management.

4.4.2 Trading Position

Definition of a trading position

Trading positions subject to market risk management are defined under the Trading Policy and Guideline, and the basic requirements are as follows:

•

The trading position is not restricted for sale, is measured daily at fair value, and its significant inherent risks are able to be hedged in the market.

•

The criteria for classification as a trading position are clearly defined in the Trading Policy and Guideline, and separately managed by the trading department.

•

The trading position is operated in accordance with the documented trading strategy and managed through position limits.

•

The operating department or professional dealers have an authority to enforce a deal on the trading position within predetermined limits without pre-approval.

•

The trading position is reported periodically to management for the purpose of the Group’s risk management.

Observation method on market risk arising from trading positions

The Group calculates VaR to measure the market risk by using market risk management systems on the entire trading portfolio. Generally, the Group manages market risk on the trading portfolio. In addition, the Group controls and manages the risk of derivative trading based on the regulations and guidelines formulated by the Financial Supervisory Service.

VaR (Value at Risk)

i. VaR (Value at Risk)

The Group uses the value-at-risk methodology to measure the market risk of trading positions. The Group uses the 10-day VaR, which estimates the maximum amount of loss that could occur in ten days under an historical simulation model which is considered to be a full valuation method. The distributions of portfolio’s value changes are estimated based on the data over the previous 250 business days, and ten-day VaR is calculated by subtracting net present market value from the value measured at a 99% confident level of portfolio’s value distribution results. However, the KB Investment & Securities Co., Ltd. calculates ten-day VaR using the variance-covariance method and a 99% single tail confidence level based on historical data for the previous 250 business days calculated by the equal-weighted average method. It means the maximum amount of loss for the 10 days that could occur under normal distribution of financial changes.

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VaR is a commonly used market risk measurement technique. However, the method has some shortcomings. VaR estimates possible losses over a certain period at a particular confidence level using past market movement data. Past market movements are, however, not necessarily a good indicator of future events, as there may be conditions and circumstances in the future that the model does not anticipate. As a result, the timing and magnitude of the actual losses may vary depending on the assumptions made at the time of the calculation. In addition, the time periods used for the model, generally one or ten days, are assumed to be a sufficient holding period before liquidating the relevant underlying positions. If these holding periods are not sufficient, or too long, the VaR results may understate or overstate the potential loss.

The Group uses an internal model (VaR) to measure general risk, and a standard method to measure each individual risk. Also, general and individual risks in some positions included in the consolidated financial statements in adoption of IFRS, are measured using a standard method. Therefore, the market risk VaR may not reflect the market risk of each individual risk and some specific positions.

ii. Back-Testing

Back-testing is conducted on a daily basis to validate the adequacy of the market risk model. In back-testing, the Group compares both the actual and hypothetical profit and loss with the VaR calculations.

iii. Stress Testing

Stress testing is carried out to analyze the impact of abnormal market situations on the trading and available-for-sale portfolio. It reflects changes in interest rates, stock prices, foreign exchange rates, implied volatilities of derivatives and other risk factors that have significant influence on the value of the portfolio. The Group mainly uses an historical scenario tool and also uses a hypothetical scenario tool for the analysis of abnormal market situations. Stress testing is performed at least once every quarter.

VaR at a 99% confidence level of interest rate, stock price and foreign exchange rate risk for trading positions with a ten-day holding period by a subsidiary as of December 31, 2013 and 2014, are as follows:

Kookmin Bank

2013
Average Minimum Maximum Ending
(In millions of Korean won)

Interest rate risk

￦ 16,270 ￦ 7,428 ￦ 24,979 ￦ 16,967

Stock price risk

3,480 932 7,114 1,049

Foreign exchange rate risk

9,264 5,287 13,589 5,287

Deduction of diversification effect

(6,928 )

Total VaR

￦ 17,316 ￦ 10,868 ￦ 22,249 ￦ 16,375

2014
Average Minimum Maximum Ending
(In millions of Korean won)

Interest rate risk

￦ 12,938 ￦ 7,657 ￦ 19,801 ￦ 10,148

Stock price risk

1,627 714 3,858 851

Foreign exchange rate risk

12,049 5,070 14,705 10,814

Deduction of diversification effect

(8,809 )

Total VaR

￦ 15,383 ￦ 10,089 ￦ 23,560 ￦ 13,004

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KB Investment & Securities Co., Ltd.

2013
Average Minimum Maximum Ending
(In millions of Korean won)

Interest rate risk

￦ 2,503 ￦ 160 ￦ 6,825 ￦ 1,825

Stock price risk

1,920 507 6,244 1,139

Foreign exchange rate risk

527 24 1,311 53

Deduction of diversification effect

(698 )

Total VaR

￦ 3,319 ￦ 589 ￦ 8,908 ￦ 2,318

2014
Average Minimum Maximum Ending
(In millions of Korean won)

Interest rate risk

￦ 1,334 ￦ 294 ￦ 2,971 ￦ 1,874

Stock price risk

1,154 480 3,054 1,414

Foreign exchange rate risk

12 1 125 55

Deduction of diversification effect

(878 )

Total VaR

￦ 1,773 ￦ 753 ￦ 3,098 ￦ 2,465

KB Life Insurance Co., Ltd.

2013
Average Minimum Maximum Ending
(In millions of Korean won)

Interest rate risk

￦ 279 ￦ 157 ￦ 441 ￦ 329

Deduction of diversification effect

—

Total VaR

￦ 279 ￦ 157 ￦ 441 ￦ 329

2014
Average Minimum Maximum Ending
(In millions of Korean won)

Interest rate risk

￦ 121 ￦ 33 ￦ 374 ￦ 33

Deduction of diversification effect

—

Total VaR

￦ 121 ￦ 33 ￦ 374 ￦ 33

KB Investment Co., Ltd.

2013
Average Minimum Maximum Ending
(In millions of Korean won)

Foreign exchange rate risk

￦ 40 ￦ 29 ￦ 53 ￦ 30

Deduction of diversification effect

—

Total VaR

￦ 40 ￦ 29 ￦ 53 ￦ 30

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2014
Average Minimum Maximum Ending
(In millions of Korean won)

Foreign exchange rate risk

￦ 30 ￦ 18 ￦ 37 ￦ 25

Deduction of diversification effect

—

Total VaR

￦ 30 ￦ 18 ￦ 37 ￦ 25

Meanwhile, the required equity capital using the standardized method related to the positions which are not measured by VaR as of December 31, 2013 and 2014, is as follows:

Kookmin Bank

2013 2014
(In millions of Korean won)

Interest rate risk

￦ 921 ￦ 792

Stock price risk

2 1,101

Foreign exchange rate risk

9,214 9,387

Total

￦ 10,137 ￦ 11,280

KB Investment & Securities Co., Ltd.

2013 2014
(In millions of Korean won)

Interest rate risk

￦ 5,081 ￦ 8,865

Stock price risk

3,602 2,590

Total

￦ 8,683 ￦ 11,455

KB Life Insurance Co., Ltd.

2013 2014
(In millions of Korean won)

Stock price risk

￦ 106 ￦ —

KB Investment Co., Ltd.

2013 2014
(In millions of Korean won)

Stock price risk

￦ 1,424 ￦ 1,979

Details of risk factors

i. Interest rate risk

Trading position interest rate risk usually arises from debt securities in Korean won. The Group’s trading strategy is to benefit from short-term movements in the prices of debt securities arising from changes in interest rates. The Group manages interest rate risk on trading positions using market value-based tools such as VaR and sensitivity analysis (Price Value of a Basis Point: PVBP).

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ii. Stock price risk

Stock price risk only arises from trading securities denominated in Korean won as the Group does not have any trading exposure to shares denominated in foreign currencies. The trading securities portfolio in Korean won are composed of exchange-traded stocks and derivative instruments linked to stock with strict limits on diversification.

iii. Foreign exchange rate risk

Foreign exchange rate risk arises from holding assets and liabilities denominated in foreign currency. Net foreign currency exposure mostly occurs from the foreign assets and liabilities which are denominated in US dollars and Kazakhstan Tenge, and the remainder in Japanese Yen or Euro. The Group sets both loss limits and net foreign currency exposure limits and manages comprehensive net foreign exchange exposures which consider both trading and non-trading portfolios.

4.4.3 Non-trading position

Definition of non-trading position

The most critical market risk that arises in non-trading portfolios is interest rate risk. Interest rate risk occurs due to mismatches on maturities and interest rate change periods between interest sensitive assets and liabilities. The Group measures interest rate risk arising from assets and liabilities denominated in Korean won and foreign currencies including derivative financial instruments held for hedging. Most interest-bearing assets and interest-bearing liabilities are denominated in Korean won. Most foreign currency assets and liabilities are denominated in US Dollars and the remainder in Japanese Yen or Euro.

Observation method on market risk arising from non-trading position

The main objective of interest rate risk management is to generate stable net interest income and to protect asset values against interest rate fluctuations. The Group manages the risk through interest rate gap analysis on interest rate maturities between interest-bearing assets and interest-bearing liabilities and measuring interest rate VaR.

Disclosure of results from each observation method

i. Interest rate gap analysis

Interest rate gap analysis is based on the interest rates repricing dates for interest-bearing assets and interest-bearing liabilities. It measures expected changes in net interest income by calculating the difference in the amounts of interest-bearing assets and interest-bearing liabilities in each maturity bucket. The Group conducts interest gap analysis on assets denominated in Korean won and foreign currencies on a monthly basis. However, where there is no contractual maturity for a particular instrument, then a maturity date is set according to internal liquidity risk management guidelines, determined by ALM.

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The results of the interest rate gap analysis by subsidiary as of December 31, 2013 and 2014, are as follows:

Kookmin Bank

2013
Up to
3 months 		3~6
months 		6~12
months 		1~3
years 		Over
3 years 		Total
(In millions of Korean won)

Interest-bearing assets in Korean won

￦ 83,935,439 ￦ 54,589,446 ￦ 46,832,862 ￦ 21,608,336 ￦ 14,297,239 ￦ 221,263,322

Interest-bearing liabilities in Korean won

91,505,923 37,966,586 50,647,954 20,948,789 18,244,867 219,314,119

Gap

￦ (7,570,484 ) ￦ 16,622,860 ￦ (3,815,092 ) ￦ 659,547 ￦ (3,947,628 ) ￦ 1,949,203

Accumulated gap

(7,570,484 ) 9,052,376 5,237,284 5,896,831 1,949,203

Percentage (%)

(3.42 ) 4.09 2.37 2.67 0.88

Interest-bearing assets in foreign currencies

￦ 10,112,905 ￦ 1,888,724 ￦ 607,499 ￦ 396,714 ￦ 257,419 ￦ 13,263,261

Interest-bearing liabilities in foreign currencies

9,500,565 2,631,393 1,527,154 225,300 124,357 14,008,769

Gap

￦ 612,340 ￦ (742,669 ) ￦ (919,655 ) ￦ 171,414 ￦ 133,062 ￦ (745,508 )

Accumulated gap

612,340 (130,329 ) (1,049,984 ) (878,570 ) (745,508 )

Percentage (%)

4.62 (0.98 ) (7.92 ) (6.62 ) (5.62 )

2014
Up to
3 months 		3~6
months 		6~12
months 		1~3
years 		Over
3 years 		Total
(In millions of Korean won)

Interest-bearing assets in Korean won

￦ 81,410,723 ￦ 58,363,078 ￦ 49,200,979 ￦ 25,841,692 ￦ 16,042,468 ￦ 230,858,940

Interest-bearing liabilities in Korean won

92,018,008 38,515,842 52,996,290 25,838,417 19,891,843 229,260,400

Gap

￦ (10,607,285 ) ￦ 19,847,236 ￦ (3,795,311 ) ￦ 3,275 ￦ (3,849,375 ) ￦ 1,598,540

Accumulated gap

(10,607,285 ) 9,239,951 5,444,640 5,447,915 1,598,540

Percentage (%)

(4.59 ) 4.00 2.36 2.36 0.69

Interest-bearing assets in foreign currencies

￦ 9,976,001 ￦ 2,287,466 ￦ 1,468,572 ￦ 1,506,339 ￦ 117,486 ￦ 15,355,864

Interest-bearing liabilities in foreign currencies

9,321,764 3,710,940 1,475,686 1,415,952 51,071 15,975,413

Gap

￦ 654,237 ￦ (1,423,474 ) ￦ (7,114 ) ￦ 90,387 ￦ 66,415 ￦ (619,549 )

Accumulated gap

654,237 (769,237 ) (776,351 ) (685,964 ) (619,549 )

Percentage (%)

4.26 (5.01 ) (5.06 ) (4.47 ) (4.03 )

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KB Kookmin Card Co., Ltd.

2013
Up to
3 months 		3~6
months 		6~12
months 		1~3
years 		Over
3 years 		Total
(In millions of Korean won)

Interest-bearing assets in Korean won

￦ 3,951,261 ￦ 1,212,736 ￦ 1,600,360 ￦ 5,010,999 ￦ 3,108,753 ￦ 14,884,109

Interest-bearing liabilities in Korean won

940,000 782,765 1,868,825 4,704,000 2,190,000 10,485,590

Gap

￦ 3,011,261 ￦ 429,971 ￦ (268,465 ) ￦ 306,999 ￦ 918,753 ￦ 4,398,519

Accumulated gap

3,011,261 3,441,232 3,172,767 3,479,766 4,398,519

Percentage (%)

20.23 23.12 21.32 23.38 29.55

2014
Up to
3 months 		3~6
months 		6~12
months 		1~3
years 		Over
3 years 		Total
(In millions of Korean won)

Interest-bearing assets in Korean won

￦ 4,116,795 ￦ 1,293,247 ￦ 1,695,695 ￦ 4,852,525 ￦ 3,143,092 ￦ 15,101,354

Interest-bearing liabilities in Korean won

1,060,000 988,000 1,461,000 4,604,840 2,104,920 10,218,760

Gap

￦ 3,056,795 ￦ 305,247 ￦ 234,695 ￦ 247,685 ￦ 1,038,172 ￦ 4,882,594

Accumulated gap

3,056,795 3,362,042 3,596,737 3,844,422 4,882,594

Percentage (%)

20.24 22.26 23.82 25.46 32.33

KB Investment & Securities Co., Ltd.

2013
Up to
3 months 		3~6
months 		6~12
months 		1~3
years 		Over
3 years 		Total
(In millions of Korean won)

Interest-bearing assets in Korean won

￦ 491,652 ￦ 14,000 ￦ 227,542 ￦ 169,990 ￦ 1,823 ￦ 905,007

Interest-bearing liabilities in Korean won

516,734 160,000 10,000 32,000 — 718,734

Gap

￦ (25,082 ) ￦ (146,000 ) ￦ 217,542 ￦ 137,990 ￦ 1,823 ￦ 186,273

Accumulated gap

(25,082 ) (171,082 ) 46,460 184,450 186,273

Percentage (%)

(2.77 ) (18.90 ) 5.13 20.38 20.58

Interest-bearing assets in foreign currencies

￦ 66,576 ￦ 6,162 ￦ 56,558 ￦ — ￦ — ￦ 129,296

Interest-bearing liabilities in foreign currencies

— — — — — —

Gap

￦ 66,576 ￦ 6,162 ￦ 56,558 ￦ — ￦ — ￦ 129,296

Accumulated gap

66,576 72,738 129,296 129,296 129,296

Percentage (%)

51.49 56.26 100.00 100.00 100.00

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2014
Up to
3 months 		3~6
months 		6~12
months 		1~3
years 		Over
3 years 		Total
(In millions of Korean won)

Interest-bearing assets in Korean won

￦ 490,113 ￦ 214,300 ￦ 212,351 ￦ 15,190 ￦ 19,211 ￦ 951,165

Interest-bearing liabilities in Korean won

1,365,885 125,000 36,997 — — 1,527,882

Gap

￦ (875,772 ) ￦ 89,300 ￦ 175,354 ￦ 15,190 ￦ 19,211 ￦ (576,717 )

Accumulated gap

(875,772 ) (786,472 ) (611,118 ) (595,928 ) (576,717 )

Percentage (%)

(92.07 ) (82.69 ) (64.25 ) (62.65 ) (60.63 )

Interest-bearing assets in foreign currencies

￦ 20,815 ￦ 10,419 ￦ 64,997 ￦ — ￦ — ￦ 96,231

Interest-bearing liabilities in foreign currencies

— — — — — —

Gap

￦ 20,815 ￦ 10,419 ￦ 64,997 ￦ — ￦ — ￦ 96,231

Accumulated gap

20,815 31,234 96,231 96,231 96,231

Percentage (%)

21.63 32.46 100.00 100.00 100.00

KB Life Insurance Co., Ltd.

2013
Up to
3 months 		3~6
months 		6~12
months 		1~3
years 		Over
3 years 		Total
(In millions of Korean won)

Interest-bearing assets in Korean won

￦ 249,863 ￦ 187,377 ￦ 630,846 ￦ 1,314,773 ￦ 2,502,573 ￦ 4,885,432

Interest-bearing liabilities in Korean won

27,836 72,309 4,862,687 36,488 528,861 5,528,181

Gap

￦ 222,027 ￦ 115,068 ￦ (4,231,841 ) ￦ 1,278,285 ￦ 1,973,712 ￦ (642,749 )

Accumulated gap

222,027 337,095 (3,894,746 ) (2,616,461 ) (642,749 )

Percentage (%)

4.54 6.90 (79.72 ) (53.56 ) (13.16 )

2014
Up to
3 months 		3~6
months 		6~12
months 		1~3
years 		Over
3 years 		Total
(In millions of Korean won)

Interest-bearing assets in Korean won

￦ 501,452 ￦ 317,004 ￦ 732,000 ￦ 1,883,395 ￦ 2,648,788 ￦ 6,082,639

Interest-bearing liabilities in Korean won

2,068 949 1,579,923 4,137,043 465,131 6,185,114

Gap

￦ 499,384 ￦ 316,055 ￦ (847,923 ) ￦ (2,253,648 ) ￦ 2,183,657 ￦ (102,475 )

Accumulated gap

499,384 815,439 (32,484 ) (2,286,132 ) (102,475 )

Percentage (%)

8.21 13.41 (0.53 ) (37.58 ) (1.68 )

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KB Savings Bank Co., Ltd.

2013
Up to
3 months 		3~6
months 		6~12
months 		1~3
years 		Over
3 years 		Total
(In millions of Korean won)

Interest-bearing assets in Korean won

￦ 160,377 ￦ 64,008 ￦ 90,405 ￦ 71,477 ￦ 43,765 ￦ 430,032

Interest-bearing liabilities in Korean won

88,608 108,965 212,012 26,693 1,271 437,549

Gap

￦ 71,769 ￦ (44,957 ) ￦ (121,607 ) ￦ 44,784 ￦ 42,494 ￦ (7,517 )

Accumulated gap

71,769 26,812 (94,795 ) (50,011 ) (7,517 )

Percentage (%)

16.69 6.23 (22.04 ) (11.63 ) (1.75 )

2014
Up to
3 months 		3~6
months 		6~12
months 		1~3
years 		Over
3 years 		Total
(In millions of Korean won)

Interest-bearing assets in Korean won

￦ 209,895 ￦ 109,368 ￦ 156,869 ￦ 53,424 ￦ 86,272 ￦ 615,828

Interest-bearing liabilities in Korean won

133,057 160,070 249,389 62,139 2,403 607,058

Gap

￦ 76,838 ￦ (50,702 ) ￦ (92,520 ) ￦ (8,715 ) ￦ 83,869 ￦ 8,770

Accumulated gap

76,838 26,136 (66,384 ) (75,099 ) 8,770

Percentage (%)

12.48 4.24 (10.78 ) (12.19 ) 1.42

Yehansoul Savings Bank Co., Ltd.

2013
Up to
3 months 		3~6
months 		6~12
months 		1~3
years 		Over
3 years 		Total
(In millions of Korean won)

Interest-bearing assets in Korean won

￦ 109,603 ￦ 11,149 ￦ 1,881 ￦ 4,515 ￦ 23,659 ￦ 150,807

Interest-bearing liabilities in Korean won

60,126 48,336 42,739 6,008 111 157,320

Gap

￦ 49,477 ￦ (37,187 ) ￦ (40,858 ) ￦ (1,493 ) ￦ 23,548 ￦ (6,513 )

Accumulated gap

49,477 12,290 (28,568 ) (30,061 ) (6,513 )

Percentage (%)

32.81 8.15 (18.94 ) (19.93 ) (4.32 )

KB Capital Co., Ltd.

2014
Up to
3 months 		3~6
months 		6~12
months 		1~3
years 		Over
3 years 		Total
(In millions of Korean won)

Interest-bearing assets in Korean won

￦ 574,781 ￦ 423,694 ￦ 694,273 ￦ 1,768,434 ￦ 498,480 ￦ 3,959,662

Interest-bearing liabilities in Korean won

414,253 36,399 66,512 1,841,011 254,094 2,612,269

Gap

￦ 160,528 ￦ 387,295 ￦ 627,761 ￦ (72,577 ) ￦ 244,386 ￦ 1,347,393

Accumulated gap

160,528 547,823 1,175,584 1,103,007 1,347,393

Percentage (%)

4.05 13.84 29.69 27.86 34.03

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ii. Interest Rate VaR

Interest rate VaR is the maximum possible loss due to interest rate risk at a 99.94% confidence level. The measurement results of risk as of December 31, 2013 and 2014, are as follows:

2013 2014
(In millions of Korean won)

Kookmin Bank

￦ 203,503 ￦ 112,500

KB Kookmin Card Co., Ltd.

73,135 55,101

KB Investment & Securities Co., Ltd.

7,503 3,489

KB Life Insurance Co., Ltd.

168,542 103,424

KB Savings Bank Co., Ltd.

3,870 4,649

Yehansoul Savings Bank Co., Ltd.

1,604 —

KB Capital Co.,Ltd

— 3,685

4.4.4 Financial instruments in foreign currencies

Financial instruments in foreign currencies as of December 31, 2013 and 2014, are as follows:

2013
USD JPY EUR GBP CNY Others Total
(In millions of Korean won)

Financial Assets

Cash and due from financial institutions

￦ 1,324,563 ￦ 123,527 ￦ 87,765 ￦ 5,495 ￦ 130,290 ￦ 216,250 ￦ 1,887,890

Financial assets held for trading

16,290 — — — — — 16,290

Financial assets designated at fair value through profit or loss

5,293 — — — — — 5,293

Derivatives held for trading

94,664 — 946 — — — 95,610

Derivatives held for hedging

16,094 — — — — — 16,094

Loans

10,061,929 1,235,187 381,415 51,677 456 190,827 11,921,491

Available-for-sale financial assets

777,081 10,052 — — — 3,747 790,880

Other financial assets

512,717 314,632 76,016 1,332 — 91,405 996,102

Total

￦ 12,808,631 ￦ 1,683,398 ￦ 546,142 ￦ 58,504 ￦ 130,746 ￦ 502,229 ￦ 15,729,650

Financial liabilities

Financial liabilities designated at fair value through profit or loss

￦ 5,287 ￦ — ￦ — ￦ — ￦ — ￦ — ￦ 5,287

Derivatives held for trading

127,308 — 1,333 — 15 — 128,656

Deposits

3,914,192 515,595 150,713 15,816 10,905 280,863 4,888,084

Debts

5,830,466 574,307 318,748 4,382 100,464 174,898 7,003,265

Debentures

2,717,876 236,020 193,062 — — 148,687 3,295,645

Other financial liabilities

1,475,826 59,820 150,815 51,678 913 42,241 1,781,293

Total

￦ 14,070,955 ￦ 1,385,742 ￦ 814,671 ￦ 71,876 ￦ 112,297 ￦ 646,689 ￦ 17,102,230

Off-balance sheet items

￦ 16,574,161 ￦ 3,486 ￦ 4,878 ￦ 4,787 ￦ 9,958 ￦ 60,221 ￦ 16,657,491

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2014
USD JPY EUR GBP CNY Others Total
(In millions of Korean won)

Financial Assets

Cash and due from financial institutions

￦ 1,554,219 ￦ 148,923 ￦ 104,932 ￦ 10,875 ￦ 47,653 ￦ 180,518 ￦ 2,047,120

Financial assets held for trading

43,753 — 15,333 — — — 59,086

Financial assets designated at fair value through profit or loss

11,000 — — — — — 11,000

Derivatives held for trading

55,895 83 694 — 37 6 56,715

Derivatives held for hedging

5,032 — — — — — 5,032

Loans

10,753,455 900,972 402,656 6,612 3,492 115,633 12,182,820

Available-for-sale financial assets

798,353 — — — — 1,914 800,267

Other financial assets

1,192,982 61,140 75,970 1,710 46,434 10,212 1,388,448

Total

￦ 14,414,689 ￦ 1,111,118 ￦ 599,585 ￦ 19,197 ￦ 97,616 ￦ 308,283 ￦ 16,550,488

Financial liabilities

Derivatives held for trading

￦ 86,046 ￦ — ￦ 921 ￦ — ￦ — ￦ 47 ￦ 87,014

Derivatives held for hedging

226 — — — — — 226

Deposits

4,611,932 389,071 188,431 19,924 21,297 273,357 5,504,012

Debts

6,382,288 258,483 303,866 880 3,577 168,908 7,118,002

Debentures

3,094,159 73,606 26,730 — — 22,671 3,217,166

Other financial liabilities

1,194,927 76,150 78,093 7,157 46,710 13,043 1,416,080

Total

￦ 15,369,578 ￦ 797,310 ￦ 598,041 ￦ 27,961 ￦ 71,584 ￦ 478,026 ￦ 17,342,500

Off-balance sheet items

￦ 17,850,878 ￦ 19,783 ￦ 6,549 ￦ 4,704 ￦ 18,898 ￦ 78,818 ￦ 17,979,630

4.5 Operational Risk

4.5.1 Concept

The Group defines operational risk broadly to include all financial and non-financial risks that may arise from operating activities and could cause a negative effect on capital.

4.5.2 Risk management

The purpose of operational risk management is not only to comply with supervisory and regulatory requirements but also to promote a risk management culture, strengthen internal controls, innovate processes and provide timely feedback to management and employees. In addition, Kookmin Bank established Business Continuity Plans (BCP) to ensure critical business functions can be maintained, or restored, in the event of material disruptions arising from internal or external events. It has constructed replacement facilities as well as has carried out exercise drills for head office and IT departments to test its BCPs.

4.6. Capital Adequacy

The Group complies with the capital adequacy standard established by the Financial Services Commission. The capital adequacy standard is based on Basel III published by Basel Committee on Banking Supervision in Bank of International Settlements in June 2011, and was implemented in Korea in December 2013. The Group is

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required to maintain a minimum Common Equity Tier 1 ratio of at least 4.0%(3.5%,2013), a minimum Tier 1 ratio of 5.5%(4.5%,2013) and a minimum Total Regulatory Capital of 8.0%(8.0%,2013) as of December 31, 2014.

The Group’s equity capital is classified into three categories in accordance with the Supervisory Regulations and Detailed Supervisory Regulations on Financial Holding Companies:

•

Common Equity Tier 1 Capital: Common equity Tier 1 Capital represents the issued capital that takes the first and proportionately greatest share of any losses and represents the most subordinated claim in liquidation of the Group, and not repaid outside of liquidation. It includes common shares issued, capital surplus, retained earnings, non-controlling interests of consolidated subsidiaries, accumulated other comprehensive income, other capital surplus and others.

•

Additional Tier 1 Capital: Additional Tier 1 Capital includes (i) perpetual instruments issued by the Group that meet the criteria for inclusion in Additional Tier 1 capital, and (ii) stock surplus resulting from the issue of instruments included in Additional Tier 1 capital and others.

•

Tier 2 Capital: Tier 2 Capital represents the capital that takes the proportionate share of losses in the liquidation of the Group. Tier 2 Capital includes a fund raised by issuing subordinated debentures maturing in not less than 5 years that meet the criteria for inclusion in Additional Tier 2 capital, and the allowance for loan losses which are accumulated for assets classified as normal or precautionary as a result of classification of asset soundness in accordance with Regulation on Supervision of Financial Holding Companies and others.

Risk weighted asset means the inherent risks in the total assets held by the Group. The Group calculates risk weighted asset by each risk (credit risk, market risk, and operational risk) based on the Supervisory Regulations and Detailed Supervisory Regulations on Financial Holding Companies and uses it for BIS ratio calculation.

The Group assesses and monitors its adequacy of capital by using the internal assessment and management policy of the capital adequacy. The assessment of the capital adequacy is conducted by comparing available capital (actual amount of available capital) and economic capital (amount of capital enough to cover all significant risks under target credit rate set by the Group). The Group monitors the soundness of finance and provides risk adjusted basis for performance review using the assessment of the capital adequacy.

Economic Capital is the amount of capital to prevent the inability of payment due to unexpected loss in the future. The Group measures, allocates and monitors economic capital by risk type and subsidiaries.

The Risk Management Council of the Group determines the Group’s risk appetite and allocates economic capital by risk type and subsidiary. Each subsidiary efficiently operates its capital within a range of allocated economic capital. The Risk Management Department of the Group monitors the limit on economic capital and reports the results to management and the Risk Management Council. The Group maintains the adequacy of capital through proactive review and approval of the Risk Management Committee when the economic capital is expected to exceed the limits due to new business or business expansion. The Group and its subsidiaries comply with external capital adequacy requirements as of December 31, 2013 and 2014.

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The details of the Group’s capital adequacy calculation in line with Basel III requirements as of December 31, 2013 and 2014, are as follows:

2013 2014
(In millions of Korean won)

Equity Capital:

￦ 27,296,535 ￦ 28,347,675

Tier 1 Capital

22,693,836 24,248,598

Common Equity Tier 1 Capital

22,693,836 24,062,475

Additional Tier 1 Capital

— 186,123

Tier 2 Capital

4,602,699 4,099,077

Risk-weighted assets:

177,514,060 182,485,957

Equity Capital (%):

15.38 15.53

Tier 1 Capital (%)

12.78 13.29

Common Equity Tier 1 Capital (%)

12.78 13.19

5. Segment Information

5.1 Overall Segment Information and Business Segments

The Group is organized into the following business segments. These business divisions are based on the nature of the products and services provided, the type or class of customer, and the Group’s management organization.

Banking business

Corporate Banking

The activities within this segment include providing credit, deposit products and other related financial services to large, small-and medium-sized enterprises and SOHOs.

Retail Banking

The activities within this segment include providing credit, deposit products and other related financial services to individuals and households.

Other Banking services

The activities within this segment include trading activities in securities and derivatives, funding and other supporting activities.

Credit Card business

The activities within this segment include credit sale, cash service, card loan and other supporting activities.

Investment & Securities business

The activities within this segment include investment banking and brokerage services and other supporting activities.

Life Insurance business

The activities within this segment include life insurance and other supporting activities.

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Financial information by business segment for the year ended December 31, 2012, is as follows:

Banking business
Corporate
Banking 		Retail
Banking 		Other
Banking
Services 		Sub-total Credit Card Investment
&
Securities 		Life
Insurance 		Others Intra-group
Adjustments 		Total
(In millions of Korean won)

Operating revenues from external customers

￦ 1,952,464 ￦ 3,041,135 ￦ 1,297,400 ￦ 6,290,999 ￦ 1,286,719 ￦ 142,617 ￦ 131,188 ￦ 32,988 ￦ — ￦ 7,884,511

Segment operating revenues (expenses)

2,289 (70,422 ) 300,356 232,223 (238,094 ) 5,971 (62,774 ) 201,566 (138,892 ) —

Sub-total

￦ 1,954,753 ￦ 2,970,713 ￦ 1,597,756 ￦ 6,523,222 ￦ 1,048,625 ￦ 148,588 ￦ 68,414 ￦ 234,554 ￦ (138,892 ) ￦ 7,884,511

Net interest income

2,593,646 2,524,163 661,666 5,779,475 974,419 19,059 192,011 75,971 (3,152 ) 7,037,783

Interest income

5,190,403 5,681,723 1,622,918 12,495,044 1,387,987 38,206 191,907 123,096 (26,134 ) 14,210,106

Interest expense

(2,596,757 ) (3,157,560 ) (961,252 ) (6,715,569 ) (413,568 ) (19,147 ) 104 (47,125 ) 22,982 (7,172,323 )

Net fee and commission income

232,981 696,311 324,120 1,253,412 157,788 85,610 211 96,899 (27,214 ) 1,566,706

Fee and commission income

274,794 760,802 401,892 1,437,488 1,427,271 96,247 211 117,008 (324,349 ) 2,753,876

Fee and commission expense

(41,813 ) (64,491 ) (77,772 ) (184,076 ) (1,269,483 ) (10,637 ) — (20,109 ) 297,135 (1,187,170 )

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

(501 ) (15,102 ) 756,103 740,500 — 39,137 7,703 24,617 7 811,964

Net other operating income (loss)

(871,373 ) (234,659 ) (144,133 ) (1,250,165 ) (83,582 ) 4,782 (131,511 ) 37,067 (108,533 ) (1,531,942 )

General and administrative expenses

(792,533 ) (1,672,741 ) (811,714 ) (3,276,988 ) (348,243 ) (117,861 ) (45,166 ) (133,069 ) 75,717 (3,845,610 )

Operating profit before provision for credit losses

1,162,220 1,297,972 786,042 3,246,234 700,382 30,727 23,248 101,485 (63,175 ) 4,038,901

Provision (reversal) for credit losses

(852,964 ) (392,354 ) (48,712 ) (1,294,030 ) (314,843 ) (3,244 ) (479 ) 5,842 51 (1,606,703 )

Net operating profit

309,256 905,618 737,330 1,952,204 385,539 27,483 22,769 107,327 (63,124 ) 2,432,198

Share of profit of associates

— — (5,712 ) (5,712 ) — — — (185 ) (9,385 ) (15,282 )

Net other non-operating revenue (expense)

5,522 — (69,537 ) (64,015 ) (4,334 ) (2,987 ) (856 ) (44,177 ) (1,903 ) (118,272 )

Segment profits before income tax

314,778 905,618 662,081 1,882,477 381,205 24,496 21,913 62,965 (74,412 ) 2,298,644

Income tax expense

(76,854 ) (219,173 ) (107,793 ) (403,820 ) (90,464 ) (6,604 ) (5,268 ) (14,894 ) 1,073 (519,977 )

Profit for the year

237,924 686,445 554,288 1,478,657 290,741 17,892 16,645 48,071 (73,339 ) 1,778,667

Profit attributable to Shareholders of the parent company

237,924 686,445 553,919 1,478,288 290,741 17,892 16,645 48,071 (82,069 ) 1,769,568

Profit attributable to Non-controlling interests

— — 369 369 — — — — 8,730 9,099

Total assets (1)

93,143,686 100,591,642 67,629,975 261,365,303 14,046,174 3,314,907 5,987,928 21,072,698 (19,717,506 ) 286,069,504

Total liabilities (1)

84,489,904 115,521,270 41,018,121 241,029,295 10,966,541 2,769,160 5,594,727 1,097,595 (469,405 ) 260,987,913

(1) Amounts before intra-group transaction adjustment.

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Financial information by business segment for the year ended December 31, 2013, is as follows:

Banking business
Corporate
Banking 		Retail
Banking 		Other
Banking
Services 		Sub-total Credit Card Investment
& Securities 		Life
Insurance 		Others Intra-group
Adjustments 		Total
(In millions of Korean won)

Operating revenues from external customers

￦ 1,731,770 ￦ 2,453,683 ￦ 1,486,647 ￦ 5,672,100 ￦ 1,420,937 ￦ 115,054 ￦ 102,226 ￦ 143,811 ￦ — ￦ 7,454,128

Segment operating revenues(expenses)

4,945 (91,800 ) 314,854 227,999 (218,231 ) 5,180 (38,327 ) 124,281 (100,902 ) —

Sub-total

￦ 1,736,715 ￦ 2,361,883 ￦ 1,801,501 ￦ 5,900,099 ￦ 1,202,706 ￦ 120,234 ￦ 63,899 ￦ 268,092 ￦ (100,902 ) ￦ 7,454,128

Net interest income 2,550,728 2,012,661 596,851 5,160,240 1,057,046 23,985 200,422 80,694 445 6,522,832

Interest income

4,390,623 4,785,526 1,419,231 10,595,380 1,435,952 40,567 200,422 106,336 (21,727 ) 12,356,930

Interest expense

(1,839,895 ) (2,772,865 ) (822,380 ) (5,435,140 ) (378,906 ) (16,582 ) — (25,642 ) 22,172 (5,834,098 )
Net fee and commission income 240,698 612,165 251,881 1,104,744 184,679 75,796 109 118,136 (4,225 ) 1,479,239

Fee and commission income

282,403 674,250 324,997 1,281,650 1,406,239 84,168 109 137,796 (252,597 ) 2,657,365

Fee and commission expense

(41,705 ) (62,085 ) (73,116 ) (176,906 ) (1,221,560 ) (8,372 ) — (19,660 ) 248,372 (1,178,126 )

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

184 (1,804 ) 692,121 690,501 — 19,422 18,051 28,898 (50 ) 756,822

Net other operating income(loss)

(1,054,895 ) (261,139 ) 260,648 (1,055,386 ) (39,019 ) 1,031 (154,683 ) 40,364 (97,072 ) (1,304,765 )

General and administrative expenses

(821,503 ) (1,739,768 ) (835,517 ) (3,396,788 ) (354,392 ) (96,345 ) (50,692 ) (141,668 ) 56,321 (3,983,564 )

Operating profit before provision for credit losses

915,212 622,115 965,984 2,503,311 848,314 23,889 13,207 126,424 (44,581 ) 3,470,564

Provision(reversal) for credit losses

(706,464 ) (358,150 ) (575 ) (1,065,189 ) (344,555 ) (5,425 ) (526 ) (28,235 ) 358 (1,443,572 )

Net operating profit

208,748 263,965 965,409 1,438,122 503,759 18,464 12,681 98,189 (44,223 ) 2,026,992

Share of profit of associates

— — (202,880 ) (202,880 ) — 7 — (38,134 ) 41,615 (199,392 )

Net other non-operating revenue (expense)

1,662 — (25,293 ) (23,631 ) (1,652 ) (1,728 ) (791 ) 31,256 (15,763 ) (12,309 )

Segment profits before income tax

210,410 263,965 737,236 1,211,611 502,107 16,743 11,890 91,311 (18,371 ) 1,815,291

Income tax expense

(53,195 ) (86,283 ) (241,421 ) (380,899 ) (117,696 ) (4,887 ) (2,792 ) (30,021 ) (4,298 ) (540,593 )

Profit for the year

157,215 177,682 495,815 830,712 384,411 11,856 9,098 61,290 (22,669 ) 1,274,698

Profit attributable to Shareholders of the parent company

157,215 177,682 495,731 830,628 384,411 11,856 6,231 61,290 (22,914 ) 1,271,502

Profit attributable to Non-controlling interests

— — 84 84 — — 2,867 — 245 3,196

Total assets (1)

92,498,513 103,202,391 69,887,481 265,588,385 15,854,992 2,525,070 6,945,605 21,504,989 (20,251,443 ) 292,167,598

Total liabilities (1)

81,008,201 122,206,712 41,426,715 244,641,628 12,385,131 1,973,888 6,396,477 1,414,111 (625,911 ) 266,185,324

(1)

Amounts before intra-group transaction adjustment.

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Financial information by business segment for the year ended December 31, 2014, is as follows:

Banking business
Corporate
Banking 		Retail
Banking 		Other
Banking
Services 		Sub-total Credit Card Investment
& Securities 		Life
Insurance 		Others Intra-group
Adjustments 		Total
(In millions of Korean won)

Operating revenues from external customers

￦ 1,710,416 ￦ 2,211,969 ￦ 1,480,838 ￦ 5,403,223 ￦ 1,280,628 ￦ 141,355 ￦ 105,255 ￦ 266,332 ￦ — ￦ 7,196,793

Segment operating revenues(expenses)

70,271 (48,256 ) 211,993 234,008 (223,878 ) 5,218 (30,498 ) 166,503 (151,353 ) —

Sub-total

￦ 1,780,687 ￦ 2,163,713 ￦ 1,692,831 ￦ 5,637,231 ￦ 1,056,750 ￦ 146,573 ￦ 74,757 ￦ 432,835 ￦ (151,353 ) ￦ 7,196,793

Net interest income

2,448,966 2,079,834 442,646 4,971,446 993,806 18,136 227,344 203,443 1,600 6,415,775

Interest income

4,008,584 4,432,760 1,261,283 9,702,627 1,353,704 45,404 227,372 326,366 (20,177 ) 11,635,296

Interest expense

(1,559,618 ) (2,352,926 ) (818,637 ) (4,731,181 ) (359,898 ) (27,268 ) (28 ) (122,923 ) 21,777 (5,219,521 )

Net fee and commission income

237,229 524,784 316,032 1,078,045 95,132 76,268 253 134,154 (1,123 ) 1,382,729

Fee and commission income

277,196 597,072 397,070 1,271,338 1,408,749 82,531 253 157,924 (254,610 ) 2,666,185

Fee and commission expense

(39,967 ) (72,288 ) (81,038 ) (193,293 ) (1,313,617 ) (6,263 ) — (23,770 ) 253,487 (1,283,456 )

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

179 (20,238 ) 376,350 356,291 — 46,999 10,338 25,595 (25 ) 439,198

Net other operating income(loss)

(905,687 ) (420,667 ) 557,803 (768,551 ) (32,188 ) 5,170 (163,178 ) 69,643 (151,805 ) (1,040,909 )

General and administrative expenses

(711,029 ) (1,695,563 ) (966,266 ) (3,372,858 ) (340,606 ) (102,526 ) (59,994 ) (188,510 ) 54,800 (4,009,694 )

Operating profit before provision for credit losses

1,069,658 468,150 726,565 2,264,373 716,144 44,047 14,763 244,325 (96,553 ) 3,187,099

Provision(reversal) for credit losses

(566,942 ) (304,116 ) (16,596 ) (887,654 ) (277,662 ) (4,422 ) (1,112 ) (57,350 ) 224 (1,227,976 )

Net operating profit

502,716 164,034 709,969 1,376,719 438,482 39,625 13,651 186,975 (96,329 ) 1,959,123

Share of profit of associates

— — 17,555 17,555 — 81 — (13,778 ) 9,570 13,428

Net other non-operating revenue (expense)

1,242 — (35,241 ) (33,999 ) (5,076 ) (1,025 ) (1,383 ) (24,877 ) (4,766 ) (71,126 )

Segment profits before income tax

503,958 164,034 692,283 1,360,275 433,406 38,681 12,268 148,320 (91,525 ) 1,901,425

Income tax expense

(120,504 ) (53,967 ) (156,763 ) (331,234 ) (100,705 ) (13,057 ) (5,731 ) (33,602 ) (1,985 ) (486,314 )

Profit for the year

383,454 110,067 535,520 1,029,041 332,701 25,624 6,537 114,718 (93,510 ) 1,415,111

Profit attributable to Shareholders of the parent company

383,454 110,067 535,520 1,029,041 332,701 25,624 6,537 100,329 (93,510 ) 1,400,722

Profit attributable to Non-controlling interests

— — — — — — — 14,389 — 14,389

Total assets (1)

94,313,469 111,074,156 70,066,039 275,453,664 15,886,769 4,131,568 7,680,184 25,965,518 (20,761,995 ) 308,355,708

Total liabilities (1)

83,780,834 123,792,699 45,939,658 253,513,191 12,406,314 3,554,828 7,096,459 5,347,261 (1,075,017 ) 280,843,036

(1)

Amounts before intra-group transaction adjustment.

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5.2 Services and Geographical Segments

5.2.1 Services information

Operating revenues from external customers by services for the years ended December 31, 2012, 2013 and 2014, are as follows:

2012 2013 2014
(In millions of Korean won)

Banking service

￦ 6,290,999 ￦ 5,672,100 ￦ 5,403,223

Credit card service

1,286,719 1,420,937 1,280,628

Investment & securities service

142,617 115,054 141,355

Life insurance service

131,188 102,226 105,255

Other service

32,988 143,811 266,332

Total

￦ 7,884,511 ￦ 7,454,128 ￦ 7,196,793

5.2.2 Geographical information

Geographical operating revenues from external customers for the years ended December 31, 2012, 2013 and 2014, and major non-current assets as of December 31, 2012, 2013 and 2014, are as follows:

2012 2013 2014
Revenues
from external
customers 		Major
non-current
assets 		Revenues
from external
customers 		Major
non-current
assets 		Revenues
from external
customers 		Major
non-current
assets
(In millions of Korean won)

Domestic

￦ 7,785,586 ￦ 3,574,205 ￦ 7,399,906 ￦ 3,600,424 ￦ 7,093,068 ￦ 3,807,792

United States

11,438 35 12,730 21 11,655 256

New Zealand

8,268 35 8,581 20 6,684 193

China

30,800 11,349 32,190 10,488 46,892 7,518

Japan

30,810 2,653 (17,182 ) 1,722 19,842 1,391

Argentina

10 — 6 — 573 —

Vietnam

1,172 429 3,268 316 3,130 287

Cambodia

4,151 546 5,741 898 5,364 564

United Kingdom

12,276 16 8,888 9 9,585 108

Intra-group adjustment

— 57,230 — 56,408 — 131,342

Total

￦ 7,884,511 ￦ 3,646,498 ￦ 7,454,128 ￦ 3,670,306 ￦ 7,196,793 ￦ 3,949,451

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6. Financial Assets and Financial Liabilities

6.1 Classification and Fair value of financial instruments

Carrying amount and fair value of financial assets and liabilities as of December 31, 2013 and 2014, are as follows:

2013 2014
Carrying
amount 		Fair value Carrying
amount 		Fair value
(In millions of Korean won)

Financial assets

Cash and due from financial institutions

￦ 14,792,654 ￦ 14,793,603 ￦ 15,423,847 ￦ 15,425,123

Financial assets held for trading

8,967,006 8,967,006 10,121,570 10,121,570

Debt securities

7,825,785 7,825,785 9,712,208 9,712,208

Equity securities

1,100,969 1,100,969 358,017 358,017

Others

40,252 40,252 51,345 51,345

Financial assets designated at fair value through profit or loss

361,736 361,736 636,340 636,340

Equity securities

115,778 115,778 134,172 134,172

Derivative linked securities

245,958 245,958 502,168 502,168

Derivatives held for trading

1,680,880 1,680,880 1,858,637 1,858,637

Derivatives held for hedging

138,529 138,529 109,553 109,553

Loans

219,001,356 219,319,406 231,449,653 232,084,413

Available-for-sale financial assets

21,832,104 21,832,104 22,391,466 22,391,466

Debt securities

18,933,288 18,933,288 19,359,822 19,359,822

Equity securities

2,898,816 2,898,816 3,031,644 3,031,644

Held-to-maturity financial assets

13,016,991 13,386,962 12,569,154 13,050,574

Other financial assets

6,251,679 6,251,679 7,559,631 7,559,631

Total

286,042,935 286,731,905 302,119,851 303,237,307

Financial liabilities

Financial liabilities held for trading

236,637 236,637 836,542 836,542

Financial liabilities designated at fair value through profit or loss

878,565 878,565 982,426 982,426

Derivatives held for trading

1,580,029 1,580,029 1,775,341 1,775,341

Derivatives held for hedging

215,310 215,310 22,049 22,049

Deposits

200,882,064 201,128,271 211,549,121 211,946,808

Debts

14,101,331 14,098,569 15,864,500 15,944,770

Debentures

27,039,534 28,221,196 29,200,706 29,752,202

Other financial liabilities

13,262,914 13,262,946 11,918,820 11,918,865

Total

￦ 258,196,384 ￦ 259,621,523 ￦ 272,149,505 ￦ 273,179,003

The fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. For each class of financial assets and financial liabilities, the Group discloses the fair value of that class of assets and liabilities in a way that permits it to be compared with its carrying amount at the end of each reporting period. The best evidence of fair value of financial instruments is a quoted price in an active market.

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Methods of determining fair value for financial instruments are as follows:

Cash and due from financial institutions

The carrying amounts of cash and demand due from financial institutions and payment due from financial institutions are a reasonable approximation of fair values. These financial instruments do not have a fixed maturity and are receivable on demand. Fair value of ordinary due from financial institutions is measured using a DCF model.

Investment securities

The fair value of financial instruments that are quoted in active markets is determined using the quoted prices. Fair value is determined through the use of independent third-party pricing services where quoted prices are not available. Pricing services use one or more of the following valuation techniques including Discounted Cash Flow (DCF) Model, Imputed Market Value Model, Free Cash Flow to Equity Model, Dividend Discount Model, Risk Adjusted Discount Rate Method, and Net Asset Value Method.

Loans

DCF model is used to determine the fair value of loans. Fair value is determined by discounting the expected cash flows, which are contractual cash flows adjusted by the expected prepayment rate, at appropriate discount rate.

Derivatives

For exchange traded derivatives, quoted price in an active market is used to determine fair value and for OTC derivatives, fair value is determined using valuation techniques. The Group uses internally developed valuation models that are widely used by market participants to determine fair values of plain vanilla OTC derivatives including options, interest rate swaps, and currency swaps, based on observable market parameters. However, some complex financial instruments are valued using appropriate models developed from generally accepted market valuation models including the Finite Difference Method and the Monte Carlo Simulation or independent third-party valuation service.

Deposits

Carrying amount of demand deposits is regarded as representative of fair value because they do not have a fixed maturity and are payable on demand. Fair value of time deposits is determined using a DCF model. Fair value is determined by discounting the expected cash flows, which are contractual cash flows adjusted by the expected prepayment rate, at an appropriate discount rate.

Debts

Carrying amount of overdraft in foreign currency is regarded as representative of fair value because they do not have a fixed maturity and are payable on demand. Fair value of other debts is determined using a DCF model discounting contractual future cash flows at an appropriate discount rate.

Debentures

Fair value is determined by using the valuations of independent third-party pricing services, which are calculated using market inputs.

Other financial assets and liabilities

The carrying amounts are reasonable approximation of fair values. These financial instruments are temporary accounts used for other various transactions and their maturities are relatively short or not defined. However, fair value of finance lease liabilities is measured using a DCF model.

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Fair value hierarchy

The Group believes that valuation methods used for measuring the fair values of financial instruments are reasonable and that the fair values recognized in the statements of financial position are appropriate. However, the fair values of the financial instruments recognized in the statements of financial position may be different if other valuation methods or assumptions are used. Additionally, as there is a variety of valuation techniques and assumptions used in measuring fair value, it may be difficult to reasonably compare the fair value with that of other financial institutions.

The Group classifies and discloses fair value of the financial instruments into the following three-level hierarchy:

•

Level 1: The fair values are based on quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date.

•

Level 2: The fair values are based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

•

Level 3: The fair values are based on unobservable inputs for the asset or liability.

The level in the fair value hierarchy within which the fair value measurement is categorized in its entirety shall be determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety. For this purpose, the significance of an input is assessed against the fair value measurement in its entirety. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a Level 3 measurement.

Fair value hierarchy of financial assets and liabilities measured at fair value

The fair value hierarchy of financial assets and liabilities measured at fair value in the statements of financial position as of December 31, 2013 and 2014, is as follows:

2013
Fair value hierarchy
Level 1 Level 2 Level 3 Total
(In millions of Korean won)

Financial assets

Financial assets held for trading

Debt securities

￦ 3,160,592 ￦ 4,665,193 ￦ — ￦ 7,825,785

Equity securities

327,260 773,709 — 1,100,969

Others

40,252 — — 40,252

Financial assets designated at fair value through profit or loss

Equity securities

— 115,778 — 115,778

Derivative linked securities

— 12,030 233,928 245,958

Derivatives held for trading

744 1,630,940 49,196 1,680,880

Derivatives held for hedging

— 138,077 452 138,529

Available-for-sale financial assets (1)

Debt securities

9,754,737 9,175,742 2,809 18,933,288

Equity securities

985,108 254,464 1,659,244 2,898,816

Total

￦ 14,268,693 ￦ 16,765,933 ￦ 1,945,629 ￦ 32,980,255

Financial liabilities

Financial liabilities held for trading

￦ 236,637 ￦ — ￦ — ￦ 236,637

Financial liabilities designated at fair value through profit or loss

— — 878,565 878,565

Derivatives held for trading

261 1,538,374 41,394 1,580,029

Derivatives held for hedging

— 206,468 8,842 215,310

Total

￦ 236,898 ￦ 1,744,842 ￦ 928,801 ￦ 2,910,541

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2014
Fair value hierarchy
Level 1 Level 2 Level 3 Total
(In millions of Korean won)

Financial assets

Financial assets held for trading

Debt securities

￦ 4,371,105 ￦ 5,341,103 ￦ — ￦ 9,712,208

Equity securities

248,689 109,328 — 358,017

Others

51,345 — — 51,345

Financial assets designated at fair value through profit or loss

Equity securities

— 134,172 — 134,172

Derivative linked securities

— — 502,168 502,168

Derivatives held for trading

348 1,793,894 64,395 1,858,637

Derivatives held for hedging

— 109,293 260 109,553

Available-for-sale financial assets (1)

Debt securities

6,982,339 12,377,142 341 19,359,822

Equity securities

1,052,269 178,377 1,800,998 3,031,644

Total

￦ 12,706,095 ￦ 20,043,309 ￦ 2,368,162 ￦ 35,117,566

Financial liabilities

Financial liabilities held for trading

￦ 836,542 ￦ — ￦ — ￦ 836,542

Financial liabilities designated at fair value through profit or loss

— — 982,426 982,426

Derivatives held for trading

1,146 1,751,617 22,578 1,775,341

Derivatives held for hedging

— 19,768 2,281 22,049

Total

￦ 837,688 ￦ 1,771,385 ￦ 1,007,285 ￦ 3,616,358

(1)

The amounts of equity securities carried at cost in “Level 3” which do not have a quoted market price in an active market and cannot be measured reliably at fair value are ￦117,750 million and ￦93,435 million as of December 31, 2013 and 2014, respectively. These equity securities are carried at cost because it is practically difficult to quantify the intrinsic values of the equity securities issued by unlisted public and non-profit entities. In addition, probabilities and range of estimated cash flows of the unlisted equity securities which are issued by project financing companies cannot be reasonably assessed. Therefore, these equity securities are carried at cost. The Group has no plan to sell these instruments in the near future.

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Valuation techniques and the inputs used in the fair value measurement classified as Level 2

Valuation techniques and inputs of financial assets and liabilities measured at fair value in the statement of financial position and classified as Level 2 as of December 31, 2013 and 2014, are as follows:

Fair value Valuation
techniques

Inputs

2013 2014
(In millions of Korean won)

Financial assets

Financial assets held for trading

￦ 5,438,902 ￦ 5,450,431

Debt securities

4,665,193 5,341,103 DCF Model Discount rate

Equity securities

773,709 109,328 DCF Model, Net
Asset Value

Discount rate, Fair value of underlying asset

Financial assets designated at fair value through profit or loss

127,808 134,172

Equity securities

115,778 134,172 DCF Model Discount rate

Derivative linked securities

12,030

— Monte Carlo
Simulation

Price of the underlying asset, Interest rates, Volatility of the underlying asset, Correlation of the underlying assets

Derivatives held for trading

1,630,940

1,793,894

DCF Model,
Closed Form,
FDM

Discount rate, Volatility, Foreign exchange rate, Stock price and others

Derivatives held for hedging

138,077

109,293

DCF Model,
Closed Form,
FDM

Discount rate, Volatility, Foreign exchange rate and others

Available-for-sale financial assets

9,430,206 12,555,519

Debt securities

9,175,742 12,377,142 DCF Model Discount rate

Equity securities

254,464 178,377 DCF Model, Net
Asset Value

Discount rate, Fair value of underlying asset

Total

￦ 16,765,933 ￦ 20,043,309

Financial liabilities

Derivatives held for trading

￦

1,538,374

￦

1,751,617

DCF Model,
Closed Form,
FDM

Discount rate, Volatility, Foreign exchange rate, Stock price and others

Derivatives held for hedging

206,468

19,768

DCF Model,
Closed Form,
FDM

Discount rate, Volatility, Foreign exchange rate and others

Total

￦ 1,744,842 ￦ 1,771,385

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Fair value hierarchy of financial assets and liabilities whose the fair values are disclosed

The fair value hierarchy of financial assets and liabilities which the fair value is disclosed as of December 31, 2013 and 2014, is as follows:

2013
Fair value hierarchy
Level 1 Level 2 Level 3 Total
(In millions of Korean won)

Financial assets

Cash and due from financial institutions (1)

￦ 2,698,018 ￦ 10,555,993 ￦ 1,539,592 ￦ 14,793,603

Loans

— — 219,319,406 219,319,406

Held-to-maturity financial assets

3,535,217 9,851,745 — 13,386,962

Other financial assets (2)

— — 6,251,679 6,251,679

Total

￦ 6,233,235 ￦ 20,407,738 ￦ 227,110,677 ￦ 253,751,650

Financial liabilities

Deposits (1)

￦ — ￦ 72,839,365 ￦ 128,288,906 ￦ 201,128,271

Debts (1)

— 156,349 13,942,220 14,098,569

Debentures

— 27,752,493 468,703 28,221,196

Other financial liabilities (3)

— — 13,262,946 13,262,946

Total

￦ — ￦ 100,748,207 ￦ 155,962,775 ￦ 256,710,982

2014
Fair value hierarchy
Level 1 Level 2 Level 3 Total
(In millions of Korean won)

Financial assets

Cash and due from financial institutions (1)

￦ 2,588,407 ￦ 10,879,916 ￦ 1,956,800 ￦ 15,425,123

Loans

— — 232,084,413 232,084,413

Held-to-maturity financial assets

2,639,552 10,411,022 — 13,050,574

Other financial assets (2)

— — 7,559,631 7,559,631

Total

￦ 5,227,959 ￦ 21,290,938 ￦ 241,600,844 ￦ 268,119,741

Financial liabilities

Deposits (1)

￦ — ￦ 82,709,205 ￦ 129,237,603 ￦ 211,946,808

Debts (1)

— 48,984 15,895,786 15,944,770

Debentures

— 29,256,810 495,392 29,752,202

Other financial liabilities (3)

— — 11,918,865 11,918,865

Total

￦ — ￦ 112,014,999 ￦ 157,547,646 ￦ 269,562,645

(1)

The amounts included in Level 2 are the carrying amounts which are reasonable approximation of the fair values.

(2)

The ￦6,251,679 million and ￦7,559,631 million of other financial assets included in Level 3 are the carrying amounts which are reasonable approximation of fair values as of December 31, 2013 and 2014.

(3)

The ￦13,261,041 million and ￦11,905,579 million of other financial liabilities included in Level 3 are the carrying amounts which are reasonable approximation of fair values as of December 31, 2013 and 2014.

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Valuation techniques and the inputs used in the fair value measurement

The valuation techniques and the inputs of financial assets and liabilities which are disclosed by the carrying amounts because it is a reasonable approximation of fair value are not subject to be disclosed.

The valuation techniques and the inputs of financial assets and liabilities whose the fair values are disclosed and classified as Level 2 as of December 31, 2013 and 2014, are as follows:

Fair value

Valuation
technique

Inputs

2013 2014
(In millions of Korean won)

Financial assets

Held-to-maturity financial assets

￦ 9,851,745 ￦ 10,411,022 DCF Model Discount rate

Financial liabilities

Debentures

￦ 27,752,493 ￦ 29,256,810 DCF Model Discount rate

The valuation techniques and the inputs of financial assets and liabilities whose the fair values are disclosed and classified as Level 3 as of December 31, 2013 and 2014, are as follows:

Fair value

Valuation
technique

Inputs

Unobservable
Inputs

2013 2014
(In millions of Korean won)

Financial assets

Cash and due from financial institutions

￦

1,539,592

￦

1,956,800

DCF Model

Credit spread, Other spread, Interest rate

Credit spread, Other spread

Loans

219,319,406 232,084,413 DCF Model

Credit spread, Other spread, Prepayment rate, Interest rate

Credit spread, Other spread, Prepayment rate

Total

￦ 220,858,998 ￦ 234,041,213

Financial liabilities

Deposits

￦ 128,288,906 ￦ 129,237,603 DCF Model

Other spread, Prepayment rate, Interest rate

Other spread, Prepayment rate

Debts

13,942,220 15,895,786 DCF Model

Other spread, Interest rate

Other spread

Debentures

468,703 495,392 DCF Model

Other spread, Implied default probability, Interest rate

Other spread, Implied default probability

Other financial liabilities

1,905 13,286 DCF Model

Other spread, Interest rate

Other spread

Total

￦ 142,701,734 ￦ 145,642,067

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6.2 Level 3 of the fair value hierarchy disclosure

6.2.1 Valuation policy and process of Level 3 Fair value

The Group uses external, independent and qualified independent third-party valuation service in addition to internal valuation models to determine the fair value of the Group’s assets at the end of every reporting period.

Where a reclassification between the levels of the fair value hierarchy occurs for a financial asset or liability, the Group’s policy is to recognize such transfers as having occurred at the beginning of the reporting period.

6.2.2 Changes in fair value (Level 3) measured using valuation technique based on unobservable in market

Changes in Level 3 of the fair value hierarchy for the years ended December 31, 2013 and 2014, are as follows:

2013
Financial assets
at  fair value
through profit or
loss 		Financial
investments 		Financial
liabilities  at
fair value
through profit
or loss 		Net derivatives
Designate at
fair value
through
profit or loss 		Available-for-sale
financial assets 		Designate at
fair value
through profit
or loss 		Derivatives
held for
trading 		Derivatives
held for
hedging
(In millions of Korean won)

Beginning balance

￦ 177,624 ￦ 1,478,339 ￦ (469,138 ) ￦ (1,158 ) ￦ (6,535 )

Total gains or losses

Profit or loss

7,138 (10,180 ) (31,379 ) (2,007 ) (1,229 )

Other comprehensive income

— 41,204 — — —

Purchases

415,876 519,140 — 96 —

Sales

(366,710 ) (85,191 ) — (2,058 ) —

Issues

— — (1,076,965 ) (4,080 ) —

Settlements

— — 698,917 17,009 (626 )

Transfers into Level 3

— 26,979 — — —

Transfers out of Level 3

— (308,238 ) — — —

Ending balance

￦ 233,928 ￦ 1,662,053 ￦ (878,565 ) ￦ 7,802 ￦ (8,390 )

2014
Financial assets
at  fair value
through profit or
loss 		Financial
investments 		Financial
liabilities at
fair value
through profit
or loss 		Net derivatives
Designate at
fair value
through
profit or loss 		Available-for-sale
financial assets 		Designate at
fair value
through profit
or loss 		Derivatives
held for
trading 		Derivatives
held for
hedging
(In millions of Korean won)

Beginning balance

￦ 233,928 ￦ 1,662,053 ￦ (878,565 ) ￦ 7,802 ￦ (8,390 )

Total gains or losses

Profit or loss

11,350 (131,057 ) (26,232 ) 27,124 6,579

Other comprehensive income

— 141,422 — — —

Purchases

678,750 225,272 — 7,130 —

Sales

(421,860 ) (116,194 ) — (3,771 ) —

Issues

— — (1,417,513 ) (4,829 ) —

Settlements

— — 1,339,884 (14,290 ) (210 )

Transfers into Level 3

— 25,146 — 22,651 —

Transfers out of Level 3

— (12,137 ) — — —

Business combination

— 6,834 — — —

Ending balance

￦ 502,168 ￦ 1,801,339 ￦ (982,426 ) ￦ 41,817 ￦ (2,021 )

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In relation to changes in Level 3 of the fair value hierarchy, total gains or losses recognized in profit or loss for the year, and total gains or losses for the year included in profit or loss for financial instruments held at the end of the reporting period in the statements of comprehensive income for the years ended December 31, 2012, 2013 and 2014, are as follows:

2012
Net income from financial
investments at fair value
through profit or loss 		Other operating
income
(In millions of Korean won)

Total losses included in profit or loss for the year

￦ (47,152 ) ￦ (80,259 )

Total losses for the year included in profit or loss for financial instruments held at the end of the reporting period

(18,063 ) (83,533 )

2013
Net income from financial
investments at fair value
through profit or loss 		Other operating
income
(In millions of Korean won)

Total gains or losses included in profit or loss for the year

￦ (26,248 ) ￦ (11,409 )

Total gains or losses for the year included in profit or loss for financial instruments held at the end of the reporting period

(3,285 ) (23,948 )

2014
Net income from financial
investments at fair value
through profit or loss 		Other operating
income 		Net Interest Income
(In millions of Korean won)

Total gains or losses included in profit or loss for the year

￦ 12,242 ￦ (124,559 ) ￦ 81

Total gains or losses for the year included in profit or loss for financial instruments held at the end of the reporting period

35,573 (119,657 ) 81

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6.2.3 Sensitivity analysis of changes in unobservable inputs

Information about fair value measurements using unobservable inputs

2013
Fair value

Valuation
technique

Inputs

Unobservable inputs

Range of
unobservable
inputs(%)

Relationship of unobservable inputs to
fair value

(In millions of
Korean won)

Financial assets

Financial assets designated at fair value through profit or loss

Derivative linked securities

￦

233,928

Monte Carlo Simulation, Closed Form, Hull and White model

Price of the underlying asset, Interest rates, Dividend yield, Volatility of the underlying asset, Correlation between underlying asset, Volatility of interest rate, Discount rate

Volatility of the underlying asset

10.99~40.28

The higher the volatility, the higher the fair value fluctuation

Correlation between underlying asset -3.28~57.89 The higher the correlation between underlying asset, the higher the fair value fluctuation
Volatility of interest rate 0.48 The higher the volatility, the higher the fair value fluctuation
Discount rate 2.54~5.32 The lower the discount rate, the higher the fair value

Derivatives held for trading

Stock and index

42,706 DCF Model, Closed Form, FDM, Monte Carlo Simulation Price of the underlying asset, Interest rates, Volatility of the underlying asset, Correlation between underlying asset, Dividend yield, Discount rate Volatility of the underlying asset 7.10~45.64

The higher the volatility, the higher the fair value fluctuation

Correlation between underlying asset 11.43~79.26 The higher the correlation between underlying asset, the higher the fair value fluctuation
Discount rate 3.46 The lower the discount rate, the higher the fair value

Currency

6,490 DCF Model Interest rates, Foreign exchange rate, Loss given default Loss given default 88.24~94.12 The higher the loss given default, the lower the fair value

Derivatives held for hedging

Interest rate

452 DCF Model, Closed Form, FDM, Monte Carlo Simulation Interest rates, Correlation between underlying asset (Interest rates), Foreign exchange rate Correlation between underlying asset(Interest rates) 0.03 The higher the correlation between underlying asset, the higher the fair value fluctuation

Available-for-sale financial assets

Debt securities

2,809 DCF Model Discount rate Discount rate 8.85 The lower the discount rate, the higher the fair value

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2013
Fair value

Valuation
technique

Inputs

Unobservable inputs

Range of
unobservable
inputs(%)

Relationship of unobservable inputs to
fair value

(In millions of
Korean won)

Equity securities

1,659,244 DCF Model, Comparable company analysis, Adjusted discount rate method, Binomial trees, Hull and White model, Net asset value method, Dividend discount model, Discounted cash flows to equity, Growth rate, Discount rate, Volatility of interest rate, Volatilities of real estate selling price, Liquidation value, Net asset value, Stock price index of the comparative company Growth rate 0.00~1.00 The higher the growth rate, the higher the fair value
Discount rate 2.86~58.69 The lower the discount rate, the higher the fair value
Volatility of interest rate 12.37~16.26 The higher the volatility, the higher the fair value fluctuation
Volatilities of real estate selling price 0.74~0.96 The higher the real estate selling price, the higher the fair value
Liquidation value 0.00 The higher the liquidation value, the higher the fair value

Total

￦ 1,945,629

Financial liabilities

Financial liabilities designated at fair value through profit or loss

Derivative linked securities

￦

878,565

Closed Form, Monte Carlo Simulation

Price of the underlying asset, Interest rates, Volatility of the underlying asset, Correlation between underlying asset, Dividend yield

Volatility of the underlying asset

10.99~44.71

The higher the volatility, the higher the fair value fluctuation

Correlation between underlying asset -3.28~58.28 The higher the correlation between underlying asset, the higher the fair value fluctuation

Derivatives held for trading

Stock and index

41,394 DCF Model, Closed Form, FDM, Monte Carlo Simulation Price of the underlying asset, Interest rates, Volatility of the underlying asset, Correlation between underlying asset, Dividend yield, Volatility of interest rate Volatility of the underlying asset 10.99~45.64 The higher the volatility, the higher the fair value fluctuation
Correlation between underlying asset 16.20~79.26 The higher the correlation between underlying asset, the higher the fair value fluctuation
Volatility of interest rate 12.37~16.26 The higher the volatility, the higher the fair value fluctuation

Derivatives held for hedging

Interest rate

8,842 DCF Model, Closed Form, FDM, Monte Carlo Simulation Price of the underlying asset, Interest rates, Volatility of the underlying asset Volatility of the underlying asset 3.00~5.28 The higher the volatility, the higher the fair value fluctuation

Total

￦ 928,801

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2014
Fair value

Valuation
technique

Inputs

Unobservable inputs

Range of
unobservable
inputs(%)

Relationship of unobservable inputs to
fair value

(In millions of
Korean won)

Financial assets

Financial assets designated at fair value through profit or loss

Derivative linked securities

￦

502,168

Monte Carlo Simulation, Closed Form, DCF Model, Black-Derman-Toy Model

Price of the underlying asset, Interest rates, Dividend yield, Discount rate, Volatility of the underlying asset, Correlation between underlying asset, Probability of Default, Volatility of interest rate

Volatility of the underlying asset

2.82~48.96

The higher the volatility, the higher the fair value fluctuation

Correlation between underlying asset -7.75~59.13 The higher the correlation between underlying asset, the higher the fair value fluctuation
Probability of Default 0.17~4.42 The higher the probability of default, the lower the fair value
Volatility of interest rate 4.48 The higher volatility of interest rate, the higher the fair value fluctuation

Derivatives held for trading

Stock and index

61,400 DCF Model, Closed Form, FDM, Monte Carlo Simulation, Binomial trees, Black-Scholes Model

Price of the underlying asset, Interest rates, Dividend yield, Discount rate, Volatility of the underlying asset, Correlation between underlying asset

Volatility of the underlying asset 4.80~45.82 The higher the volatility, the higher the fair value fluctuation
Correlation between underlying asset -3.27~59.13 The higher the correlation between underlying asset, the higher the fair value fluctuation

Currency

2,995 DCF Model, Interest rates, Foreign exchange rate, Loss given default Loss given default 6.78~90.56 The higher the loss given default, the lower the fair value

Derivatives held for hedging

Interest rate

260 DCF Model, Closed Form, FDM, MonteCarlo Simulation Price of the underlying asset, Interest rates, Volatility of the underlying asset Volatility of the underlying asset 3.91 The higher the volatility, the higher the fair value fluctuation

Available-for-sale financial assets

Debt securities

341 DCF Model Discount rate Discount rate 9.21 The lower the discount rate, the higher the fair value

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2014
Fair value

Valuation
technique

Inputs

Unobservable inputs

Range of
unobservable
inputs(%)

Relationship of unobservable inputs to
fair value

(In millions of
Korean won)

Equity securities

1,800,998 DCF Model, Comparable Company Analysis, Adjusted discount rate method, Binomial trees, Discounted cash flows to equity, Net asset value method, Dividend discount model Growth rate, Discount rate, Volatility of interest rate, Volatilities of real estate selling price, Liquidation value, Recovery rate of receivables’ acquisition cost Growth rate 0.00~3.00 The higher the growth rate, the higher the fair value
Discount rate 2.29~23.25 The lower the discount rate, the higher the fair value
Volatility of interest rate 16.25~21.45 The higher the volatility, the higher the fair value fluctuation
Volatilities of real estate selling price 1.10 The higher the real estate selling price, the higher the fair value
Liquidation value 0.00 The higher the liquidation value, the higher the fair value
Recovery rate of receivables’ acquisition cost 155.83 The higher the recovery rate of receivables’ acquisition cost, the higher the fair value

Total

￦ 2,368,162

Financial liabilities

Financial liabilities designated at fair value through profit or loss

Derivative linked securities

￦

982,426

Closed Form, MonteCarlo Simulation

Price of the underlying asset, Interest rates, Dividend yield, Volatility of the underlying asset, Correlation between underlying asset

Volatility of the underlying asset

3.42~48.89

The higher the volatility, the higher the fair value fluctuation

Correlation between underlying asset -7.75~59.13 The higher the correlation between underlying asset, the higher the fair value fluctuation

Derivatives held for trading

Stock and index

22,578 DCF Model, Closed Form, FDM, Monte Carlo Simulation, Hull and White Model, Black-Scholes Model Price of the underlying asset, Interest rates, Volatility of the underlying asset, Correlation between underlying asset, Dividend yield, Volatility of interest rate Volatility of the underlying asset 11.15~41.79 The higher the volatility, the higher the fair value fluctuation
Correlation between underlying asset -3.83~68.20 The higher the correlation between underlying asset, the higher the fair value fluctuation
Volatility of interest rate 16.25~21.45 The higher the volatility, the higher the fair value fluctuation

Derivatives held for hedging

Interest rate

2,281 DCF Model, Closed Form, FDM, Monte Carlo Simulation Price of the underlying asset, Interest rates, Volatility of the underlying asset Volatility of the underlying asset 2.35~3.91 The higher the volatility, the higher the fair value fluctuation

Total

￦ 1,007,285

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Sensitivity analysis of changes in unobservable inputs

Sensitivity analysis of financial instruments is performed, to measure favorable and unfavorable changes in the fair value of financial instruments which are affected by the unobservable parameters, using a statistical technique. When the fair value is affected by more than two input parameters, the amounts represent the most favorable or most unfavorable. Amongst Level 3 financial instruments subject to sensitivity analysis are equity-related derivatives, currency-related derivatives and interest rate-related derivatives whose fair value changes are recognized in profit or loss as well as debt securities and unlisted equity securities (including private equity funds) whose fair value changes are recognized in profit or loss or other comprehensive income and loss.

Sensitivity analyses by type of instrument as a result of varying input parameters are as follows:

2013
Recognition
in profit or loss 		Other comprehensive income
or loss
Favorable
changes 		Unfavorable
changes 		Favorable
changes 		Unfavorable
changes
(In millions of Korean won)

Financial assets

Financial assets designated at fair value through profit or loss

Derivative linked securities (1)

￦ 6,188 ￦ (8,834 ) ￦ — ￦ —

Derivatives held for trading (2)

6,653 (6,299 ) — —

Derivatives held for hedging (2)

— — — —

Available-for-sale financial assets

Debt securities (3)

— — 61 (58 )

Equity securities (4)

— — 322,444 (121,192 )

Total

￦ 12,841 ￦ (15,133 ) ￦ 322,505 ￦ (121,250 )

Financial liabilities

Financial liabilities designated at fair value through profit or loss (1)

￦ 15,467 ￦ (10,330 ) ￦ — ￦ —

Derivatives held for trading (2)

4,596 (4,968 ) — —

Derivatives held for hedging (2)

345 (333 ) — —

Total

￦ 20,408 ￦ (15,631 ) ￦ — ￦ —

2014
Recognition
in profit or loss 		Other comprehensive income
or loss
Favorable
changes 		Unfavorable
changes 		Favorable
changes 		Unfavorable
changes
(In millions of Korean won)

Financial assets

Financial assets designated at fair value through profit or loss

Derivative linked securities (1)

￦ 6,006 ￦ (10,768 ) ￦ — ￦ —

Derivatives held for trading (2)

9,851 (8,194 ) — —

Derivatives held for hedging (2)

17 (15 ) — —

Available-for-sale financial assets

Debt securities (3)

— — 20 (18 )

Equity securities (4)

— — 388,278 (147,164 )

Total

￦ 15,874 ￦ (18,977 ) ￦ 388,298 ￦ (147,182 )

Financial liabilities

Financial liabilities designated at fair value through profit or loss (1)

￦ 23,283 ￦ (15,248 ) ￦ — ￦ —

Derivatives held for trading (2)

4,211 (6,812 ) — —

Derivatives held for hedging (2)

86 (76 ) — —

Total

￦ 27,580 ￦ (22,136 ) ￦ — ￦ —

(1)

For financial assets designated at fair value through profit or loss, the changes in fair value are calculated by shifting principal unobservable input parameters such as stock price fluctuation range of underlying assets by +/- 10%.

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(2)

For equity-related derivatives, the changes in fair value are calculated by shifting principal unobservable input parameters such as correlation between the stock price and volatility by +/- 10%. For currency-related derivatives, the changes in fair value are calculated by shifting principal unobservable input parameters such as loss given default by ± 1%. For interest rate-related derivatives, coefficient of correlation between long-term and short-term interest rates or the volatilities of the underlying assets are shifted by +/- 10% to calculate the fair value changes.

(3)

For debt securities , the changes in fair value are calculated by shifting principal unobservable input parameters such as discount rate by +/- 1%.

(4)

For equity securities, the changes in fair value are calculated by shifting principal unobservable input parameters such as correlation between growth rate (0~0.5%) and discount rate, liquidation value (-1~1%) and discount rate, or recovery rate of receivables’ acquisition cost (-1~1%). Sensitivity of fair values to unobservable parameters of private equity fund is practically impossible, but in the case of equity fund composed of real estates, the changes in fair value are calculated by shifting correlation between discount rate (-1~1%) and volatilities of real estate price (-1~1%)

6.2.4 Day one gain or loss

If the Group uses a valuation technique that incorporates data not obtained from observable markets for the fair value at initial recognition of financial instruments, there could be a difference between the transaction price and the amount determined using that valuation technique. In these circumstances, the fair value of financial instruments is recognized as the transaction price and the difference is deferred and not recognized in profit or loss, and is amortized by using the straight-line method over the life of the financial instrument. If the fair value of the financial instruments is subsequently determined using observable market inputs, the remaining deferred amount is recognized in profit or loss.

The aggregate difference yet to be recognized in profit or loss at the beginning and end of the period and a reconciliation of changes in the balance of this difference, are as follows:

2013 2014
(In millions of Korean won)

Balance at the beginning of the year

￦ 8,652 ￦ 4,190

New transactions

3,449 (853 )

Amounts recognized in profit or loss during the year

Amortization

(3,484 ) (891 )

Settlement

(4,427 ) (1,070 )

Balance at the end of the year

￦ 4,190 ￦ 1,376

6.3 Carrying amounts of financial instruments by category

Financial assets and liabilities are measured at fair value or amortized cost. Measurement policies for each class of financial assets and liabilities are disclosed in Note 3, ‘Significant accounting policies’.

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The carrying amounts of financial assets and liabilities by category as of December 31, 2013 and 2014, are as follows:

2013
Financial assets at fair
value through profit or loss
Held for
trading 		Designated
at fair value
through
profit or loss 		Loans and
receivables 		Available-
for-sale
financial
assets 		Held-to-
Maturity
financial
assets 		Derivatives
held for
hedging 		Total
(In millions of Korean won)

Financial assets

Cash and due from financial institutions

￦ — ￦ — ￦ 14,792,654 ￦ — ￦ — ￦ — ￦ 14,792,654

Financial assets at fair value through profit or loss

8,967,006 361,736 — — — — 9,328,742

Derivatives

1,680,880 — — — — 138,529 1,819,409

Loans

— — 219,001,356 — — — 219,001,356

Financial investments

— — — 21,832,104 13,016,991 — 34,849,095

Other financial assets

— — 6,251,679 — — — 6,251,679

Total

￦ 10,647,886 ￦ 361,736 ￦ 240,045,689 ￦ 21,832,104 ￦ 13,016,991 ￦ 138,529 ￦ 286,042,935

2013
Financial liabilities at fair
value through profit or loss
Held for
trading 		Designated
at fair value
through
profit or loss 		Financial
liabilities at
amortized cost 		Derivatives
held for
hedging 		Total
(In millions of Korean won)

Financial liabilities

Financial liabilities at fair value through profit or loss

￦ 236,637 ￦ 878,565 ￦ — ￦ — ￦ 1,115,202

Derivatives

1,580,029 — — 215,310 1,795,339

Deposits

— — 200,882,064 — 200,882,064

Debts

— — 14,101,331 — 14,101,331

Debentures

— — 27,039,534 — 27,039,534

Other financial liabilities

— — 13,262,914 — 13,262,914

Total

￦ 1,816,666 ￦ 878,565 ￦ 255,285,843 ￦ 215,310 ￦ 258,196,384

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2014
Financial assets at fair
value through profit or  loss
Held for
trading 		Designated
at fair value
through
profit or loss 		Loans and
receivables 		Available-
for-sale
financial
assets 		Held-to-
Maturity
financial
assets 		Derivatives
held for
hedging 		Total
(In millions of Korean won)

Financial assets

Cash and due from financial institutions

￦ — ￦ — ￦ 15,423,847 ￦ — ￦ — ￦ — ￦ 15,423,847

Financial assets at fair value through profit or loss

10,121,570 636,340 — — — — 10,757,910

Derivatives

1,858,637 — — — — 109,553 1,968,190

Loans

— — 231,449,653 — — — 231,449,653

Financial investments

— — — 22,391,466 12,569,154 — 34,960,620

Other financial assets

— — 7,559,631 — — — 7,559,631

Total

￦ 11,980,207 ￦ 636,340 ￦ 254,433,131 ￦ 22,391,466 ￦ 12,569,154 ￦ 109,553 ￦ 302,119,851

2014
Financial liabilities at fair
value through profit or loss
Held for
trading 		Designated
at fair value
through
profit or loss 		Financial
liabilities at
amortized cost 		Derivatives
held for
hedging 		Total
(In millions of Korean won)

Financial liabilities

Financial liabilities at fair value through profit or loss

￦ 836,542 ￦ 982,426 ￦ — ￦ — ￦ 1,818,968

Derivatives

1,775,341 — — 22,049 1,797,390

Deposits

— — 211,549,121 — 211,549,121

Debts

— — 15,864,500 — 15,864,500

Debentures

— — 29,200,706 — 29,200,706

Other financial liabilities

— — 11,918,820 — 11,918,820

Total

￦ 2,611,883 ￦ 982,426 ￦ 268,533,147 ￦ 22,049 ￦ 272,149,505

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6.4 Transfer of financial assets

Transferred financial assets that are derecognized in their entirety

The Group transferred loans and other financial assets that are derecognized in their entirety to SPEs, while the maximum exposure to loss (carrying amount) from its continuing involvement in the derecognized financial assets as of December 31, 2013 and 2014, are as follows:

2013

Type of continuing
involvement

Classification of financial
instruments

Carrying amount
of continuing
involvement
in statement of
financial position 		Fair value  of
continuing
involvement
(In millions of Korean won)

KR ABS Co., Ltd.

Mezzanine/ subordinate debt

Available-for-sale financial assets

￦ 11,434 ￦ 11,434

KR ABS Second Co., Ltd. (1)

Senior debt

Loans and receivables

26,065 26,227

Subordinate debt

Available-for-sale financial assets

33,017 33,017

EAK ABS Co., Ltd. (2)

Subordinate debt

Available-for-sale financial assets

35,020 35,020

AP ABS First Co., Ltd. (3)

Senior debt

Loans and receivables

67,326 67,353

Subordinate debt

Available-for-sale financial assets

16,669 16,669

Discovery ABS First Co., Ltd. (4)

Senior debt

Loans and receivables

23,494 23,547

Subordinate debt

Available-for-sale financial assets

21,454 21,454

Total

￦ 234,479 ￦ 234,721

(1)

Recognized net loss from transferring loans to the SPEs amounts to ￦24,589 million.

(2)

Recognized net loss from transferring loans to the SPEs amounts to ￦2,480 million.

(3)

Recognized net loss from transferring loans to the SPEs amounts to ￦18,556 million.

(4)

Recognized net loss from transferring loans to the SPEs amounts to ￦37,975 million.

(5)

In addition to the above, there were gains from the transfer of non-performing loans to the National Happiness Fund (‘the Fund’) amounting to ￦57,826 million. According to the agreement with the Fund, where the recovered amounts exceed the consideration paid by the Fund for the non-performing loans, the excess amount is to be reimbursed to the Group.

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2014

Type of continuing
involvement

Classification of financial
instruments

Carrying amount
of continuing
involvement
in statement of
financial position 		Fair value of
continuing
involvement
(In millions of Korean won)

KR ABS Co., Ltd.

Subordinate debt

Available-for-sale financial assets

￦ 4,921 ￦ 4,921

KR ABS Second Co., Ltd.

Subordinate debt

Available-for-sale financial assets

22,219 22,219

EAK ABS Co., Ltd.

Subordinate debt

Available-for-sale financial assets

11,211 11,211

AP ABS First Co., Ltd.

Senior debt

Loans and receivables

9,762 9,842

Subordinate debt

Available-for-sale financial assets

17,346 17,346

Discovery ABS First Co., Ltd.

Senior debt

Loans and receivables

1,175 1,194

Subordinate debt

Available-for-sale financial assets

22,591 22,591

EAK ABS Second Co., Ltd. (1)

Senior debt

Loans and receivables

19,806 20,026

Subordinate debt

Available-for-sale financial assets

38,207 38,207

FK1411 Co., Ltd. (2)

Senior debt

Loans and receivables

44,966 44,917

Subordinate debt

Available-for-sale financial assets

47,600 47,600

Total

￦ 239,804 ￦ 240,074

(1)

Recognized net loss from transferring loans to the SPEs amounts to ￦6,924 million.

(2)

Recognized net loss from transferring loans to the SPEs amounts to ￦27,365 million.

(3)

In addition to the above, there were gains on sale of loans attributable to true-up adjustments based on the transfer agreement with the National Happiness Fund (‘the Fund’) amounting to ￦3,762 million.

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Transferred financial assets that are not derecognized in their entirety

The Group securitized the loans and received the subordinated debts as part of consideration related to the securitization to provide credit enhancements to other senior debtors, and this transaction was recognized by the Group as collateralized debts. The liabilities and related securitized assets as of December 31, 2013 and 2014, are as follows:

2013
Liabilities arising from asset-backed securities
Carrying amount
of assets (Underlying
assets) 		Carrying amount
of the associated
liabilities (Senior
debentures) 		Fair value of
assets (Underlying
assets) 		Fair value of the
associated
liabilities (Senior
debentures) 		Net Position
(In millions of Korean won)

KB Mortgage Loan First Securitization Specialty Co., Ltd.

￦ 295,679 ￦ 193,062 ￦ 295,679 ￦ 192,972 ￦ 102,707

KAMCO Value Recreation Third Securitization Specialty
Co., Ltd.

8,291 1,958 8,291 1,958 6,333

KH First Co., Ltd. (3)

99,763 100,900 — — —

KB Kookmin Card First Securitization Co., Ltd. (1)

568,916 315,845 — — —

Wise Mobile First Securitization Specialty (2)

339,222 329,785 — — —

Wise Mobile Second Securitization Specialty (2)

384,473 374,733 — — —

Wise Mobile Third Securitization Specialty (2)

350,822 343,736 — — —

Wise Mobile Fourth Securitization Specialty (2)

202,038 199,802 — — —

Wise Mobile Fifth Securitization Specialty (2)

344,047 339,631 — — —

Wise Mobile Sixth Securitization Specialty (2)

362,975 359,534 — — —

Wise Mobile Seventh Securitization Specialty (2)

351,905 349,486 — — —

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2014
Liabilities arising from asset-backed securities
Carrying amount
of assets (Underlying
assets) 		Carrying amount
of the associated
liabilities (Senior
debentures) 		Fair value of
assets (Underlying
assets) 		Fair value of the
associated
liabilities (Senior
debentures) 		Net Position
(In millions of Korean won)

KB Kookmin Card First Securitization Co., Ltd. (1)

￦ 546,770 ￦ — ￦ — ￦ — ￦ —

KB Kookmin Card Second Securitization Co., Ltd. (1)

622,573 327,553 — — —

Wise Mobile First Securitization Specialty (2)

122,528 109,972 — — —

Wise Mobile Second Securitization Specialty (2)

158,396 144,958 — — —

Wise Mobile Third Securitization Specialty (2)

169,609 158,957 — — —

Wise Mobile Fourth Securitization Specialty (2)

99,952 94,959 — — —

Wise Mobile Fifth Securitization Specialty (2)

179,703 169,926 — — —

Wise Mobile Sixth Securitization Specialty (2)

204,095 194,896 — — —

Wise Mobile Seventh Securitization Specialty (2)

207,387 199,878 — — —

Wise Mobile Eighth Securitization Specialty (2)

202,745 194,862 — — —

Wise Mobile Ninth Securitization Specialty (2)

143,666 139,889 — — —

Wise Mobile Tenth Securitization Specialty (2)

193,959 189,827 — — —

Wise Mobile Eleventh Securitization Specialty (2)

182,281 179,781 — — —

Wise Mobile Twelfth Securitization Specialty (2)

191,329 189,719 — — —

(1)

They have the obligation to early redeem the asset-backed debentures upon occurrence of an event specified in the agreement as trust type asset securitization. To avoid such early redemption, they entrust supplementary card accounts, deposits and others. Accordingly, as asset-backed debenture holders’ recourse is not limited to the underlying assets, the fair value is not disclosed.

(2)

If the Special Purpose Companies (SPC) could not redeem the senior debentures by collection of underlying assets, the SPC should be redeem by borrowings from the credit facilities. Accordingly, as senior debenture holders’ recourse is not limited to the underlying assets, the fair value is not disclosed.

(3)

Pursuant to the Purchase Agreement of the liabilities, the fair value is not disclosed as the counterparty has both a right of recourse for the securitized assets and a right to request to purchase the liabilities.

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Securities under repurchase agreements and loaned securities

The Group continues to recognize the financial assets related to repurchase agreements and securities lending transactions on the statements of financial position since those transactions are not qualified for derecognition even though the Group transfers the financial assets. A financial asset is sold under an agreement to repurchase the same asset at a fixed price, or loaned under a securities lending agreement to be returned as the same asset. Thus, the Group retains substantially all the risks and rewards of ownership of the financial asset. The amounts of transferred assets and related liabilities as of December 31, 2013 and 2014, are as follows:

2013
Carrying amount of
transferred assets 		Carrying amount of related
liabilities
(In millions of Korean won)

Securities under repurchase agreements

￦ 649,309 ￦ 608,156

Loaned securities

Government bond

527,427 —

Stock

14,296 —

Total

￦ 1,191,032 ￦ 608,156

2014
Carrying amount of
transferred assets 		Carrying amount of related
liabilities
(In millions of Korean won)

Securities under repurchase agreements

￦ 1,080,804 ￦ 1,019,071

Loaned securities

Government bond

162,408 —

Stock

2,378 —

Total

￦ 1,245,590 ￦ 1,019,071

6.5 Offsetting financial assets and financial liabilities

The Group enters into International Derivatives Swaps and Dealers Association (“ISDA”) master netting agreements and other arrangements with the Group’s derivative and spot exchange counterparties. Similar netting agreements are also entered into with the Group’s reverse repurchase, securities and others. Pursuant to these agreements, in the event of default by one party, contracts are to be terminated and receivables and payables are to be offset. Further, as the law allows for the right to offset, domestic uncollected receivables balances and domestic accrued liabilities balances are shown in its net settlement balance in the statement of consolidated financial position.

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The details of financial assets subject to offsetting, enforceable master netting arrangements or similar agreements as of December 31, 2013 and 2014, are as follows:

2013
Gross
amounts of
recognized
financial
assets 		Gross amounts of
recognized
financial liabilities
offset in the
statement of
financial position 		Net amounts of
financial assets
presented in the
statement of
financial
position 		Non-offsetting amount Net amount
Financial
instruments 		Cash
collateral
received
(In millions of Korean won)

Derivatives held for trading

￦ 1,593,909 ￦ — ￦ 1,593,909 ￦ (1,190,301 ) ￦ (1,850 ) ￦ 401,758

Derivatives held for hedging

138,028 — 138,028 (36,133 ) — 101,895

Receivable spot exchange

2,256,532 — 2,256,532 (2,255,085 ) — 1,447

Reverse repurchase, securities borrowing and similar agreements (1)

4,173,200 — 4,173,200 (4,173,200 ) — —

Other financial instruments

16,475,869 (15,637,526 ) 838,343 — — 838,343

Total

￦ 24,637,538 ￦ (15,637,526 ) ￦ 9,000,012 ￦ (7,654,719 ) ￦ (1,850 ) ￦ 1,343,443

2014
Gross
amounts of
recognized
financial
assets 		Gross amounts of
recognized
financial liabilities
offset in the
statement of
financial position 		Net amounts of
financial assets
presented in
the statement of
financial position 		Non-offsetting amount Net amount
Financial
instruments 		Cash
collateral
received
(In millions of Korean won)

Derivatives held for trading

￦ 1,806,087 ￦ — ￦ 1,806,087 ￦ (1,477,495 ) ￦ (1,635 ) ￦ 326,957

Derivatives held for hedging

109,553 — 109,553 (15,688 ) — 93,865

Receivable spot exchange

2,343,308 — 2,343,308 (2,342,116 ) — 1,192

Reverse repurchase, securities borrowing and similar agreements (1)

3,529,900 — 3,529,900 (3,529,900 ) — —

Other financial instruments

18,680,680 (16,483,341 ) 2,197,339 — — 2,197,339

Total

￦ 26,469,528 ￦ (16,483,341 ) ￦ 9,986,187 ￦ (7,365,199 ) ￦ (1,635 ) ￦ 2,619,353

(1)

Includes a portion of the securities loaned.

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The details of financial liabilities subject to offsetting, enforceable master netting arrangements or similar agreements as of December 31, 2013 and 2014, are as follows:

2013
Gross
amounts of
recognized
financial
liabilities 		Gross amounts of
recognized
financial assets
offset in the
statement of
financial position 		Net amounts of
financial liabilities
presented in the
statement of
financial
position 		Non-offsetting amount Net
amount
Financial
instruments 		Cash
collateral
received
(In millions of Korean won)

Derivatives held for trading

￦ 1,579,878 ￦ — ￦ 1,579,878 ￦ (992,164 ) ￦ — ￦ 587,714

Derivatives held for hedging

204,642 — 204,642 (16,320 ) — 188,322

Payable spot exchange

2,256,147 — 2,256,147 (2,255,085 ) — 1,062

Repurchase agreements, securities lending and similar
agreements (1),(2)

804,726 — 804,726 (804,726 ) — —

Other financial instruments

16,754,401 (15,637,526 ) 1,116,875 (946,800 ) — 170,075

Total

￦ 21,599,794 ￦ (15,637,526 ) ￦ 5,962,268 ￦ (5,015,095 ) ￦ — ￦ 947,173

2014
Gross
amounts of
recognized
financial
liabilities 		Gross amounts
of recognized
financial assets
offset in the
statement of
financial position 		Net amounts of
financial liabilities
presented in the
statement of
financial
position 		Non-offsetting amount Net
amount
Financial
instruments 		Cash
collateral
received
(In millions of Korean won)

Derivatives held for trading

￦ 1,765,781 ￦ — ￦ 1,765,781 ￦ (1,323,749 ) ￦ — ￦ 442,032

Derivatives held for hedging

21,147 — 21,147 (3,013 ) — 18,134

Payable spot exchange

2,343,234 — 2,343,234 (2,342,116 ) — 1,118

Repurchase agreements, securities lending and similar
agreements (1),(2)

1,803,963 — 1,803,963 (1,803,963 ) — —

Other financial instruments

16,724,449 (16,483,341 ) 241,108 (122,797 ) — 118,311

Total

￦ 22,658,574 ￦ (16,483,341 ) ￦ 6,175,233 ￦ (5,595,638 ) ￦ — ￦ 579,595

(1)

Includes repurchase agreements sold to customers.

(2)

Includes a portion of securities sold.

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7. Due from financial institutions

The details of due from financial institutions as of December 31, 2013 and 2014, are as follows:

Financial Institutions

Interest rate(%) 2013 2014
(In millions of Korean won)

Due from financial institutions in Korean won

Due from Bank of Korea

Bank of Korea

0.00~2.03 ￦ 6,717,697 ￦ 6,283,230

Due from banking institutions

Hana Bank and others

0.00~7.15 636,837 1,191,877

Due from others

DaiShin Investment & Securities Co., Ltd. and others

0.10~3.20 3,203,452 3,750,163

Sub-total

10,557,986 11,225,270

Due from financial institutions in foreign currencies

Due from banks in foreign currencies

Bank of Korea and others

— 855,388 899,080

Time deposits in foreign currencies

Bank of Communications and others

0.11~6.70 657,408 708,926

Due from others

Woori Investment & Securities Co., Ltd. and others

— 23,321 45,154

Sub-total

1,536,117 1,653,160

Total

￦ 12,094,103 ￦ 12,878,430

Due from financial institutions, classified by type of financial institution as of December 31, 2013 and 2014, are as follows:

2013
In Korean won In foreign currencies Total
(In millions of Korean won)

Bank of Korea

￦ 6,717,697 ￦ 410,328 ￦ 7,128,025

Other banking institutions

636,837 1,105,842 1,742,679

Other financial institutions

3,203,452 19,947 3,223,399

Total

￦ 10,557,986 ￦ 1,536,117 ￦ 12,094,103

2014
In Korean won In foreign currencies Total
(In millions of Korean won)

Bank of Korea

￦ 6,283,230 ￦ 225,393 ￦ 6,508,623

Other banking institutions

1,191,877 1,399,586 2,591,463

Other financial institutions

3,750,163 28,181 3,778,344

Total

￦ 11,225,270 ￦ 1,653,160 ￦ 12,878,430

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Restricted due from financial institutions as of December 31, 2013 and 2014, are as follows:

Financial Institutions

2013 2014

Reason for restriction

(in millions of Korean won)

Due from financial institutions in Korean won

Due from Bank of Korea

Bank of Korea ￦ 6,717,697 ￦ 6,283,230

Bank of Korea Act

Due from Banking institution

Hana Bank and others

342,469 393,824

Agreement for allocation of deposit

Due from others

The Korea Exchange and others

102,460 137,327

Market entry deposit and others

Sub-total

7,162,626 6,814,381

Due from financial institutions in foreign currencies

Due from banks in foreign currencies

Bank of Korea and others

482,296 293,067

Bank of Korea Act and others

Time deposit in foreign currencies

Bank of communications and others

10,553 16,488

Bank Act of the State of New York

Due from others

Woori Investment & Securities Co., Ltd. and others

10,428 8,158

Derivatives margin account and others

Sub-total

503,277 317,713

Total

￦ 7,665,903 ￦ 7,132,094

8. Assets pledged as collateral

The details of assets pledged as collateral as of December 31, 2013 and 2014, are as follows:

2013

Assets pledged

Pledgee

Carrying
amount 		Collateralized
amount

Reason of pledge

(In millions of Korean won)

Due from financial institutions

Korea Federation of Savings Banks and others

￦ 238,901 ￦ 238,901 Borrowings from Bank and others

Financial assets held for trading

Korea Securities Depository and others

336,154 329,391

Repurchase agreements and similar agreements

Korea Securities Depository and others

446,126 393,981

Securities lending transactions

Samsung Futures Inc. and others

15,570 14,589

Derivatives transactions

Sub-total

797,850 737,961

Available-for-sale financial assets

Korea Securities Depository and others

45,771 45,145

Securities lending transactions

Samsung Futures Inc. and others

33,317 31,746

Derivatives transactions

Others 15,100 14,370

Others

Sub-total

94,188 91,261

Held-to-maturity financial assets

Korea Securities Depository and others

3,577,052 3,572,000

Repurchase agreements and similar agreements

Bank of Korea

617,250 610,000 Borrowings from Bank of Korea

Bank of Korea

956,284 946,800 Settlement risk of Bank of Korea

Samsung Futures Inc. and others

325,616 325,521 Derivatives transactions
Others 258,615 258,500 Others

Sub-total

5,734,817 5,712,821

Mortgage loans

Others 846,000 843,127 Covered Bond

Total

￦ 7,711,756 ￦ 7,624,071

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2014

Assets pledged

Pledgee

Carrying
amount 		Collateralized
amount

Reason of pledge

(In millions of Korean won)

Due from financial institutions

Korea Federation of Savings Banks and others

￦ 166,344 ￦ 166,344 Borrowings from Bank and others

Financial assets held for trading

Korea Securities Depository and others

999,412 960,368

Repurchase agreements and similar agreements

Korea Securities Depository and others

959,858 869,279 Securities lending transactions

Samsung Futures Inc. and others

17,521 16,033 Derivatives transactions

Others

17,864 17,721 Others

Sub-total

1,994,655 1,863,401

Available-for-sale financial assets

Korea Securities Depository and others

120,081 90,576 Securities lending transactions

Samsung Futures Inc. and others

24,856 22,634 Derivatives transactions

Others

39,100 37,132 Others

Sub-total

184,037 150,342

Held-to-maturity financial assets

Korea Securities Depository and others

1,460,932 1,452,000

Repurchase agreements and similar agreements

Bank of Korea

993,853 990,000 Borrowings from Bank of Korea

Bank of Korea

1,440,821 1,416,800 Settlement risk of Bank of Korea

Samsung Futures Inc. and others

285,023 284,492 Derivatives transactions

Others

238,654 238,500 Others

Sub-total

4,419,283 4,381,792

Total

￦ 6,764,319 ￦ 6,561,879

The fair value of collateral available to sell or repledge, and collateral sold or repledged, regardless of debtor’s default, as of December 31, 2013 and 2014, are as follows:

2013
Fair value of collateral
held 		Fair value of collateral
sold or repledged 		Total
(In millions of Korean won)

Securities

￦ 4,258,909 ￦ — ￦ 4,258,909

Total

￦ 4,258,909 ￦ — ￦ 4,258,909

2014
Fair value of collateral
held 		Fair value of collateral
sold or repledged 		Total
(In millions of Korean won)

Securities

￦ 3,601,032 ￦ — ￦ 3,601,032

Total

￦ 3,601,032 ￦ — ￦ 3,601,032

9. Derivative financial instruments and hedge accounting

The Group’s derivative operations focus on addressing the needs of the Group’s corporate clients to hedge their risk exposure and to hedge the Group’s risk exposure that results from such client contracts. The Group also engages in derivative trading activities to hedge the interest rate and foreign currency risk exposures that arise from the Group’s own assets and liabilities. In addition, the Group engages in proprietary trading of derivatives within the Group’s regulated open position limits.

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The Group provides and trades a range of derivatives products, including:

•

Interest rate swaps, relating to interest rate risks in Korean won;

•

Cross-currency swaps, forwards and options relating to foreign exchange rate risks,

•

Stock price index options linked with the KOSPI index.

In particular, the Group uses cross currency swaps, interest rate swaps and others to hedge the risk of changes in fair values and in cash flows due to changes in interest rates and foreign exchange rates of subordinated debts in Korean won, structured debts and financial debentures in foreign currencies.

The details of derivative financial instruments for trading as of December 31, 2013 and 2014, are as follows:

2013
Notional amount Assets Liabilities
(In millions of Korean won)

Interest rate

Futures (1)

￦ 928,684 ￦ — ￦ —

Swaps

141,275,150 582,544 639,695

Options

8,285,091 45,063 85,906

Sub-total

150,488,925 627,607 725,601

Currency

Forwards

23,055,704 241,804 289,629

Futures (1)

415,560 219 15

Swaps

17,414,405 693,116 503,663

Options

273,745 2,428 1,492

Sub-total

41,159,414 937,567 794,799

Stock and index

Futures (1)

136,624 — 95

Swaps

477,143 17,565 15,168

Options

1,982,455 30,006 35,118

Sub-total

2,596,222 47,571 50,381

Commodity

Futures (1)

2,024 121 —

Sub-total

2,024 121 —

Other

60,000 68,014 9,248

Total

￦ 194,306,585 ￦ 1,680,880 ￦ 1,580,029

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2014
Notional amount Assets Liabilities
(In millions of Korean won)

Interest rate

Futures (1)

￦ 678,798 ￦ — ￦ —

Swaps

101,610,724 924,189 957,504

Options

8,398,000 86,277 128,185

Sub-total

110,687,522 1,010,466 1,085,689

Currency

Forwards

21,363,840 340,339 217,357

Futures (1)

632,430 46 289

Swaps

18,430,843 415,842 441,696

Options

616,977 6,057 6,078

Sub-total

41,044,090 762,284 665,420

Stock and index

Forwards

685,000 — —

Futures (1)

162,766 90 753

Swaps

431,709 30,091 6,222

Options

1,860,561 31,632 8,199

Sub-total

3,140,036 61,813 15,174

Commodity

Futures (1)

765 7 9

Sub-total

765 7 9

Other

— 24,067 9,049

Total

￦ 154,872,413 ￦ 1,858,637 ￦ 1,775,341

(1)

A gain or loss from daily mark-to-market futures is reflected in the margin accounts.

Fair value hedge

The details of derivatives designated as fair value hedging instruments as of December 31, 2013 and 2014, are as follows:

2013
Notional amount Assets Liabilities
(In millions of Korean won)

Interest rate

Swaps

￦ 1,951,013 ￦ 137,445 ￦ —

Currency

Forwards

42,048 502 —

Swaps

1,055,300 — 195,800

Other

140,000 — 8,842

Total

￦ 3,188,361 ￦ 137,947 ￦ 204,642

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2014
Notional amount Assets Liabilities
(In millions of Korean won)

Interest rate

Swaps

￦ 2,179,779 ￦ 109,293 ￦ 1,144

Other

140,000 260 2,281

Total

￦ 2,319,779 ￦ 109,553 ￦ 3,425

Gains and losses from fair value hedging instruments and hedged items attributable to the hedged risk for the years ended December 31, 2012, 2013 and 2014, are as follows:

2012 2013 2014
(In millions of Korean won)

Losses on hedging instruments

￦ (14,654 ) ￦ (48,545 ) ￦ (26,320 )

Gains on the hedged item attributable to the hedged risk

37,641 81,428 52,721

Total

￦ 22,987 ￦ 32,883 ￦ 26,401

Cash flow hedge

The details of derivatives designated as cash flow hedging instruments as of December 31, 2013 and 2014, are as follows:

2013
Notional amount Assets Liabilities
(In millions of Korean won)

Interest rate

Swaps

￦ 1,403,000 ￦ 582 ￦ 4,902

Currency

Swaps

316,590 — 5,766

Total

￦ 1,719,590 ￦ 582 ￦ 10,668

2014
Notional amount Assets Liabilities
(In millions of Korean won)

Interest rate

Swaps

￦ 1,033,000 ￦ — ￦ 16,073

Currency

Swaps

329,760 — 2,551

Total

￦ 1,362,760 ￦ — ￦ 18,624

Gains and losses from cash flow hedging instruments and hedged items attributable to the hedged risk for the years ended December 31, 2013 and 2014, are as follows:

2012 2013 2014
(In millions of Korean won)

Losses on hedging instruments

￦ (27,006 ) ￦ (3,068 ) ￦ (7,976 )

Losses on the hedged item attributable to the hedged risk

(26,838 ) (2,990 ) (7,452 )

Ineffectiveness recognized in loss

￦ (168 ) ￦ (78 ) ￦ (524 )

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Amounts recognized in other comprehensive income and reclassified from equity to profit or loss for the years ended December 31, 2012, 2013 and 2014, are as follows:

2012 2013 2014
(In millions of Korean won)

Amount recognized in other comprehensive income

￦ (26,838 ) ￦ (2,990 ) ￦ (7,452 )

Amount reclassified from equity to profit or loss

25,000 5,227 (5,426 )

Tax effect

1,025 (619 ) 2,619

Total

￦ (813 ) ￦ 1,618 ￦ (10,259 )

10. Loans

Loans as of December 31, 2013 and 2014, are as follows:

2013 2014
(In millions of Korean won)

Loans

￦ 221,439,295 ￦ 233,300,563

Deferred loan origination fees and costs

423,245 601,142

Less: Allowances for loan losses

(2,861,184 ) (2,452,052 )

Carrying amount

￦ 219,001,356 ￦ 231,449,653

Loans to banks as of December 31, 2013 and 2014, are as follows:

2013 2014
(In millions of Korean won)

Loans

￦ 6,335,056 ￦ 6,208,391

Less: Allowances for loan losses

(25 ) —

Carrying amount

￦ 6,335,031 ￦ 6,208,391

Loans to customers other than banks as of December 31, 2013 and 2014, consist of:

2013
Retail Corporate Credit card Total
(In millions of Korean won)

Loans in Korean won

￦ 104,920,187 ￦ 84,596,181 ￦ — ￦ 189,516,368

Loans in foreign currencies

98,614 2,956,418 — 3,055,032

Domestic import usance bills

— 2,978,478 — 2,978,478

Off-shore funding loans

— 669,603 — 669,603

Call loans

— 696,929 — 696,929

Bills bought in Korean won

— 14,243 — 14,243

Bills bought in foreign currencies

— 1,588,066 — 1,588,066

Guarantee payments under payment guarantee

— 38,318 — 38,318

Credit card receivables in Korean won

— — 11,782,005 11,782,005

Credit card receivables in foreign currencies

— — 2,453 2,453

Reverse repurchase agreements

— 1,683,200 — 1,683,200

Privately placed bonds

— 731,706 — 731,706

Factored receivables

2,724,413 46,670 — 2,771,083

Sub-total

107,743,214 95,999,812 11,784,458 215,527,484

Proportion (%)

49.99 44.54 5.47 100.00

Allowances

(580,510 ) (1,870,849 ) (409,800 ) (2,861,159 )

Total

￦ 107,162,704 ￦ 94,128,963 ￦ 11,374,658 ￦ 212,666,325

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2014
Retail Corporate Credit card Total
(In millions of Korean won)

Loans in Korean won

￦ 114,712,199 ￦ 85,633,171 ￦ — ￦ 200,345,370

Loans in foreign currencies

50,047 2,574,041 — 2,624,088

Domestic import usance bills

— 3,693,951 — 3,693,951

Off-shore funding loans

— 664,794 — 664,794

Call loans

— 292,043 — 292,043

Bills bought in Korean won

— 6,678 — 6,678

Bills bought in foreign currencies

— 1,958,251 — 1,958,251

Guarantee payments under payment guarantee

418 12,975 — 13,393

Credit card receivables in Korean won

— — 11,629,215 11,629,215

Credit card receivables in foreign currencies

— — 3,081 3,081

Reverse repurchase agreements

— 1,082,200 — 1,082,200

Privately placed bonds

— 743,348 — 743,348

Factored receivables

2,741,789 50,435 — 2,792,224

Lease receivables

808,866 50,973 — 859,839

Loans for installment credit

984,839 — — 984,839

Sub-total

119,298,158 96,762,860 11,632,296 227,693,314

Proportion (%)

52.39 42.50 5.11 100.00

Allowances

(536,959 ) (1,525,152 ) (389,941 ) (2,452,052 )

Total

￦ 118,761,199 ￦ 95,237,708 ￦ 11,242,355 ￦ 225,241,262

The changes in deferred loan origination fees and costs for the years ended December 31, 2013 and 2014, are as follows:

2013
Beginning Increase Decrease Others Ending
(In millions of Korean won)

Deferred loan origination costs

Loans in Korean won

￦ 502,512 ￦ 330,202 ￦ 288,683 ￦ (33,130 ) ￦ 510,901

Other origination costs

344 635 602 — 377

Sub-total

502,856 330,837 289,285 (33,130 ) 511,278

Deferred loan origination fees

Loans in Korean won

69,994 72,822 62,383 (70 ) 80,363

Other origination fees

6,526 3,872 2,709 (19 ) 7,670

Sub-total

76,520 76,694 65,092 (89 ) 88,033

Total

￦ 426,336 ￦ 254,143 ￦ 224,193 ￦ (33,041 ) ￦ 423,245

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2014

Beginning Increase Decrease Business
Combination 		Others Ending
(In millions of Korean won)

Deferred loan origination costs

Loans in Korean won

￦ 510,901 ￦ 402,415 ￦ 310,681 ￦ 24,656 ￦ — ￦ 627,291

Other origination costs

377 40,693 63,486 79,907 — 57,491

Sub-total

511,278 443,108 374,167 104,563 — 684,782

Deferred loan origination fees

Loans in Korean won

80,363 51,216 71,495 2,272 — 62,356

Other origination fees

7,670 10,526 25,564 28,645 7 21,284

Sub-total

88,033 61,742 97,059 30,917 7 83,640

Total

￦ 423,245 ￦ 381,366 ￦ 277,108 ￦ 73,646 ￦ (7 ) ￦ 601,142

11. Allowances for Loan Losses

The changes in the allowances for loan losses for the years ended December 31, 2013 and 2014, are as follows:

2013
Retail Corporate Credit card Total
(In millions of Korean won)

Beginning

￦ 687,851 ￦ 2,251,318 ￦ 329,490 ￦ 3,268,659

Written-off

(581,100 ) (1,146,767 ) (404,199 ) (2,132,066 )

Recoveries from written-off loans

126,651 147,110 141,452 415,213

Sale

(8,483 ) (76,413 ) 435 (84,461 )

Provision (1)

361,253 720,136 346,064 1,427,453

Other changes

(5,662 ) (24,510 ) (3,442 ) (33,614 )

Ending

￦ 580,510 ￦ 1,870,874 ￦ 409,800 ￦ 2,861,184

2014
Retail Corporate Credit card Total
(In millions of Korean won)

Beginning

￦ 580,510 ￦ 1,870,874 ￦ 409,800 ￦ 2,861,184

Written-off

(576,084 ) (1,087,897 ) (427,059 ) (2,091,040 )

Recoveries from written-off loans

139,131 260,574 131,046 530,751

Sale

(6,736 ) (65,163 ) — (71,899 )

Provision (1)

341,783 589,913 279,413 1,211,109

Business combination

58,346 24,294 — 82,640

Other changes

9 (67,443 ) (3,259 ) (70,693 )

Ending

￦ 536,959 ￦ 1,525,152 ￦ 389,941 ￦ 2,452,052

(1)

Provision for credit losses in statements of comprehensive income also include provision (reversal) for unused commitments and guarantees (Note 23), reversal for financial guarantees contracts (Note 23), and provision for other financial assets (Note 18).

The amounts of written-off loans, over which the Group still has a right to claim against the borrowers and guarantors due to unexpired statute of limitations, are ￦15,061,182 million and ￦16,686,972 million as of December 31, 2013 and 2014, respectively.

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The coverage ratio of allowances for loan losses as of December 31, 2013 and 2014, is as follows:

2013 2014
(In millions of Korean won)

Loans

￦ 221,862,540 ￦ 233,901,705

Allowances for loan losses

2,861,184 2,452,052

Ratio (%)

1.29 1.05

12. Financial assets at fair value through profit or loss and Financial investments

The details of financial assets at fair value through profit or loss and financial investments as of December 31, 2013 and 2014, are as follows:

2013 2014
(In millions of Korean won)

Financial assets held for trading

Debt securities:

Government and public bonds

￦ 2,085,450 ￦ 3,067,490

Financial bonds

3,265,960 4,049,449

Corporate bonds

1,759,993 1,826,682

Asset-backed securities

510,159 318,893

Others

204,223 449,694

Equity securities:

Stocks

145,163 69,736

Beneficiary certificates

955,806 288,281

Others

40,252 51,345

Sub-total

8,967,006 10,121,570

Financial assets designated at fair value through profit or loss

Equity securities:

Beneficiary certificates

115,778 134,172

Derivative linked securities

245,958 502,168

Sub-total

361,736 636,340

Total financial assets at fair value through profit or loss

￦ 9,328,742 ￦ 10,757,910

Available-for-sale financial assets

Debt securities:

Government and public bonds

￦ 6,925,617 ￦ 4,702,036

Financial bonds

5,782,234 6,980,846

Corporate bonds

4,997,788 6,119,889

Asset-backed securities

1,208,241 1,211,343

Others

19,408 345,708

Equity securities:

Stocks

2,366,887 2,402,675

Equity investments and others

97,937 74,596

Beneficiary certificates

433,992 554,373

Sub-total

21,832,104 22,391,466

Held-to-maturity financial assets

Debts securities:

Government and public bonds

4,357,623 3,556,913

Financial bonds

892,509 1,262,187

Corporate bonds

7,400,085 7,277,779

Asset-backed securities

366,774 472,275

Sub-total

13,016,991 12,569,154

Total financial investments

￦ 34,849,095 ￦ 34,960,620

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The impairment losses and the reversal of impairment losses in financial investments for the years ended December 31, 2012, 2013 and 2014, are as follows:

2012
Impairment Reversal Net
(In millions of Korean won)

Available-for-sale financial assets

￦ 280,610 ￦ — ￦ 280,610

Held-to-maturity financial assets

154 — 154

Total

￦ 280,764 ￦ — ￦ 280,764

2013
Impairment Reversal Net
(In millions of Korean won)

Available-for-sale financial assets

￦ 163,464 ￦ — ￦ 163,464

Held-to-maturity financial assets

5 — 5

Total

￦ 163,469 ￦ — ￦ 163,469

2014
Impairment Reversal Net
(In millions of Korean won)

Available-for-sale financial assets

￦ 195,929 ￦ 260 ￦ 195,669

Held-to-maturity financial assets

— — —

Total

￦ 195,929 ￦ 260 ￦ 195,669

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13. Investments in associates

Investments in associates as of December 31, 2013 and 2014, are as follows:

2013
Ownership
Acquisition
cost 		Share of
net asset
amount 		Carrying
amount

Industry

Location
(%) (in millions of Korean won)

Associates

Balhae Infrastructure Fund (1)

12.61 ￦ 121,817 ￦ 124,968 ￦ 124,968 Investment finance Korea

Korea Credit Bureau Co., Ltd. (1)

9.00 4,500 4,185 4,185 Credit Information Korea

UAMCO., Ltd. (1)

17.50 85,050 139,286 150,826 Other finance Korea

JSC Bank CenterCredit

Ordinary share (2),(3)

29.56 954,104 51,989 68,110 Banking Kazakhstan

Preference share (2)

93.15

KoFC KBIC Frontier Champ 2010-5(PEF)

50.00 47,580 46,496 45,393 Investment finance Korea

Semiland Co., Ltd

21.32 1,470 2,639 2,639 Manufacture Korea

United PF 1 st Recovery Private Equity Fund (1)

17.72 191,617 203,618 197,941 Other finance Korea

CH Engineering Co., Ltd

41.73 — 64 — Specialty construction Korea

Shinla Construction Co., Ltd

20.24 — — —

Specialty construction

Korea

Kores Co., Ltd. (8)

10.39 634 1,925 1,505

Manufacture of automobile parts

Korea

KB GwS Private Securities Investment Trust

26.74 113,880 126,556 123,085 Investment finance Korea

Incheon Bridge Co., Ltd. (1)

14.99 24,677 (429 ) —

Operation of Highways and Related facilities

Korea

Ssangyong Engineering & Construction Co., Ltd. (8)

15.64 28,779 2,490 —

Office and Commercial Building Construction

Korea

KB Star office Private real estate Investment Trust No.1

21.05 20,000 20,347 19,934

Investment finance

Korea

KoFC POSCO HANHWA KB shared growth Private Equity Fund

25.00 14,025 11,620 10,329 Investment finance Korea

NPS KBIC Private Equity Fund No. 1 (1)

2.56 3,393 4,238 4,238 Investment finance Korea

KBIC Private Equity Fund No.3 (1)

2.00 2,050 2,223 2,223 Investment finance Korea

KB-Glenwood Private Equity Fund (1)

0.03 10 10 10 Investment finance Korea

Terra Co., Ltd

24.06 — 20 4

Manufacture of Hand-Operated Kitchen Appliances and Metal Ware

Korea

Total

￦ 1,613,586 ￦ 742,245 ￦ 755,390

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2014
Ownership Acquisition
cost 		Share of
net asset
amount 		Carrying
amount

Industry

Location
(%) (in millions of Korean won)

Associates

Balhae Infrastructure Fund (1)

12.61 ￦ 122,623 ￦ 125,119 ￦ 125,119 Investment finance Korea

Korea Credit Bureau Co., Ltd. (1)

9.00 4,500 4,222 4,222 Credit Information Korea

UAMCO., Ltd. (1)

17.50 85,050 114,240 121,182 Other finance Korea

JSC Bank CenterCredit

Ordinary share (2),(3)

29.56 954,104 36,763 29,279 Banking Kazakhstan

Preference share (2)

93.15

KoFC KBIC Frontier Champ
2010-5(PEF)

50.00 31,635 26,176 23,559 Investment finance Korea

United PF 1 st Recovery Private
Equity Fund (1)

17.72 191,617 203,270 198,089 Other finance Korea

CH Engineering Co., Ltd

41.73 — 178 20 Specialty construction Korea

Shinla Construction Co., Ltd

20.24 — (504 ) — Specialty construction Korea

KB GwS Private Securities
Investment Trust

26.74 113,880 127,525 124,074 Investment finance Korea

Incheon Bridge Co., Ltd. (1)

14.99 24,677 (1,716 ) —

Operation of Highways and Related facilities

Korea

KB Star office Private real estate Investment Trust No.1

21.05 20,000 20,402 19,989

Investment finance

Korea

KoFC POSCO HANHWA KB shared growth Private Equity Fund

25.00 26,250 23,204 22,329 Investment finance Korea

NPS KBIC Private Equity Fund No. 1 (1)

2.56 3,393 — — Investment finance Korea

KBIC Private Equity Fund No. 3 (1)

2.00 2,050 2,287 2,287 Investment finance Korea

KB-Glenwood Private Equity Fund (1)

0.03 10 10 10 Investment finance Korea

Terra Co., Ltd

24.06 — (99 ) —

Manufacture of Hand-Operated Kitchen Appliances and Metal Ware

Korea

KB No.3 Special Purpose Acquition Company (1),(4)

0.19 20 39 39

SPAC

Korea

KB No.4 Special Purpose Acquition Company (1),(5)

0.19 30 38 38

SPAC

Korea

KB No.5 Special Purpose Acquition Company (1),(6)

0.19 10 19 19

SPAC

Korea

KB No.6 Special Purpose Acquition Company (1),(7)

0.25 40 77 77

SPAC

Korea

Total

￦ 1,579,889 ￦ 681,250 ￦ 670,332

(1)

As of December 31, 2013 and 2014, the Group is represented in the governing bodies of its associates. Therefore, the Group has significant influence over the decision-making process relating to their financial and business policies.

(2)

The Group determined that ordinary shares and convertible preference shares issued by JSC Bank CenterCredit are the same in economic substance except for the voting rights, and therefore, the equity method of accounting is applied on the basis of single ownership ratio of 41.93%, calculated based on ordinary and convertible preference shares held by the Group against the total outstanding ordinary and convertible preference shares issued by JSC Bank CenterCredit.

(3)

Fair value of ordinary shares of JSC Bank CenterCredit, reflecting the published market price, as of December 31, 2013 and 2014, are ￦57,476 million and ￦42,945 million.

(4)

The fair value of KB No.3 Special Purpose Acquisition Company, reflecting the quoted market price as of December 31, 2014, amounts to ￦40 million.

(5)

The fair value of KB No.4 Special Purpose Acquisition Company, reflecting the quoted market price as of December 31, 2014, amounts to ￦40 million.

(6)

The fair value of KB No.5 Special Purpose Acquisition Company, reflecting the quoted market price as of December 31, 2014, amounts to ￦20 million.

(7)

The fair value of KB No.6 Special Purpose Acquisition Company, reflecting the quoted market price as of December 31, 2014, amounts to ￦84 million.

(8)

Where the Group has acquired shares of entities through debt-for-equity swaps, the Group is represented in the creditor council. Therefore, the Group has significant influence over the decision-making process relating to their financial and business policies.

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Summarized financial information on associates:

2013 (1)
Total assets Total
liabilities 		Share
capital 		Equity Share of
net asset
amount 		Unrealized
gains 		Consolidated
carrying
amount
(In millions of Korean won)

Associates

Balhae Infrastructure Fund

￦ 993,571 ￦ 2,157 ￦ 993,030 ￦ 991,414 ￦ 124,968 ￦ — ￦ 124,968

Korea Credit Bureau Co., Ltd

63,043 16,542 10,000 46,501 4,185 — 4,185

UAMCO., Ltd

4,365,097 3,567,972 2,430 797,125 139,286 11,540 150,826

JSC Bank CenterCredit

7,083,662 6,903,416 546,794 180,246 51,989 16,121 68,110

KoFC KBIC Frontier Champ 2010-5(PEF)

93,367 375 95,160 92,992 46,496 (1,103 ) 45,393

Semiland Co., Ltd

20,753 14,608 1,970 6,145 2,639 — 2,639

United PF 1st Recovery Private Equity Fund

1,159,220 10,092 1,081,400 1,149,128 203,618 (5,677 ) 197,941

CH Engineering Co., Ltd. (2)

917 763 158 154 64 (64 ) —

Kores Co., Ltd. (3)

92,937 80,914 11,099 12,023 1,925 (420 ) 1,505

Terra Co., Ltd. (3)

1,659 1,576 254 83 20 (16 ) 4

KB GwS Private Securities Investment Trust

473,946 738 425,814 473,208 126,556 (3,471 ) 123,085

Incheon Bridge Co., Ltd.

740,321 743,182 164,621 (2,861 ) (429 ) 429 —

Ssangyong Engineering & Construction Co., Ltd. (3)

1,359,658 1,343,734 73,045 15,924 2,490 (2,490 ) —

KB Star office Private real estate Investment Trust No.1

217,557 120,910 95,000 96,647 20,347 (413 ) 19,934

KoFC POSCO HANHWA KB shared growth Private
Equity Fund

48,192 1,712 56,100 46,480 11,620 (1,291 ) 10,329

NPS KBIC Private Equity
Fund No. 1

174,469 8,911 132,541 165,558 4,238 — 4,238

KBIC Private Equity
Fund No. 3

111,270 79 102,500 111,191 2,223 — 2,223

KB-Glenwood Private
Equity Fund

30,558 1,794 31,100 28,764 10 — 10

Total

￦ 742,245 ￦ 13,145 ￦ 755,390

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Table of Contents
2013
Operating
income 		Profit
(Loss) 		Other
comprehensive
income(loss) 		Total
comprehensive
income(loss) 		Dividends
(In millions of Korean won)

Associates

Balhae Infrastructure Fund

￦ 57,754 ￦ 49,685 ￦ — ￦ 49,685 ￦ 6,299

Korea Credit Bureau Co., Ltd

51,571 4,909 — 4,909 —

UAMCO., Ltd

708,035 105,085 — 105,085 —

JSC Bank CenterCredit

532,768 (497,885 ) (5,732 ) (503,617 ) 3

KoFC KBIC Frontier Champ 2010-5(PEF)

3,368 (2,454 ) 7,064 4,610 —

Semiland Co., Ltd

11,513 649 — 649 11

United PF 1st Recovery Private Equity Fund

152,315 13,769 — 13,769 —

CH Engineering Co., Ltd. (2)

681 (102 ) — (102 ) —

Kores Co., Ltd. (3)

100,769 565 2,472 3,037 —

Terra Co., Ltd. (3)

1,422 17 — 17 —

KB GwS Private Securities Investment Trust

76,201 41,247 — 41,247 8,894

Incheon Bridge Co., Ltd

77,311 (13,533 ) — (13,533 ) —

Ssangyong Engineering & Construction Co., Ltd. (3)

1,724,742 (314,105 ) (8,615 ) (322,720 ) —

KB Star office Private real estate Investment Trust No.1

16,672 8,490 — 8,490 1,751

KoFC POSCO HANHWA KB shared growth Private Equity Fund

1,685 (8,803 ) 1,759 (7,044 ) —

NPS KBIC Private Equity Fund No. 1

10,206 9,301 (2,113 ) 7,188 106

KBIC Private Equity Fund No. 3

3,702 3,385 — 3,385 —

KB-Glenwood Private Equity Fund

— (627 ) — (627 ) —

(1)

The amounts included in the financial statements of the associates are adjusted to reflect adjustments made by the entity, such as fair value adjustments made at the time of acquisition and adjustments for differences in accounting policies.

(2)

As the financial statements as of December 31, 2013, were not available, the Group applied the equity method by using the financial statements as of November 30, 2013, and adjusted for the effects of significant transactions or events that occurred between the date of those financial statements and the date of the consolidated financial statements.

(3)

As the financial statements as of December 31, 2013 were not available, the Group applied the equity method by using the financial statements as of September 30, 2013, and adjusted for the effects of significant transactions or events that occurred between the date of those financial statements and the date of the consolidated financial statements.

F-106

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2014 (1)
Total assets Total
liabilities 		Share capital Equity Share of
net asset
amount 		Unrealized
gains 		Consolidated
carrying
amount
(In millions of Korean won)

Associates

Balhae Infrastructure Fund

￦ 994,768 ￦ 2,158 ￦ 999,430 ￦ 992,610 ￦ 125,119 ￦ — ￦ 125,119

Korea Credit Bureau
Co., Ltd

54,717 7,806 10,000 46,911 4,222 — 4,222

UAMCO., Ltd

4,357,490 3,688,589 2,430 668,901 114,240 6,942 121,182

JSC Bank CenterCredit

6,278,391 6,156,255 546,794 122,136 36,763 (7,484 ) 29,279

KoFC KBIC Frontier Champ 2010-5(PEF)

52,499 148 63,270 52,351 26,176 (2,617 ) 23,559

United PF 1st Recovery Private Equity Fund

1,187,406 40,240 1,081,400 1,147,166 203,270 (5,181 ) 198,089

CH Engineering
Co., Ltd. (2)

1,086 659 158 427 178 (158 ) 20

KB GwS Private Securities Investment Trust

477,646 738 425,814 476,908 127,525 (3,451 ) 124,074

Incheon Bridge Co., Ltd

727,659 739,105 164,621 (11,446 ) (1,716 ) 1,716 —

KB Star office Private real estate Investment Trust No.1

218,250 121,341 95,000 96,909 20,402 (413 ) 19,989

KoFC POSCO HANHWA KB shared growth Private Equity Fund

94,731 1,917 105,000 92,814 23,204 (875 ) 22,329

NPS KBIC Private Equity Fund No. 1

151 146 — 5 — — —

KBIC Private Equity Fund No. 3

114,575 162 102,500 114,413 2,287 — 2,287

KB-Glenwood Private Equity Fund

30,558 1,804 31,100 28,754 10 — 10

KB No.3 Special Purpose Acquition Company

21,904 1,531 1,052 20,373 39 — 39

KB No.4 Special Purpose Acquition Company

22,567 2,382 1,052 20,185 38 — 38

KB No.5 Special Purpose Acquition Company

12,399 2,382 522 10,017 19 — 19

KB No.6 Special Purpose Acquition Company

34,434 3,515 1,600 30,919 77 — 77

Total

￦ 681,853 ￦ (11,521 ) ￦ 670,332

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Table of Contents
2014
Operating
income 		Profit (Loss) Other
comprehensive
income(loss) 		Total
comprehensive
income(loss) 		Dividends
(In millions of Korean won)

Associates

Balhae Infrastructure Fund

￦ 53,100 ￦ 44,616 ￦ — ￦ 44,616 ￦ 6,280

Korea Credit Bureau Co., Ltd

46,111 114 — 114 —

UAMCO., Ltd

548,990 57,438 — 57,438 35,041

JSC Bank CenterCredit

425,506 (22,973 ) (26,987 ) (49,960 ) 2

KoFC KBIC Frontier Champ 2010-5(PEF)

16,942 957 (3,249 ) (2,292 ) 3,230

United PF 1st Recovery Private Equity Fund

105,369 (1,962 ) — (1,962 ) —

CH Engineering Co., Ltd. (2)

787 251 — 251 —

KB GwS Private Securities Investment Trust

39,207 38,207 — 38,207 9,229

Incheon Bridge Co., Ltd

83,578 (8,185 ) — (8,185 ) —

KB Star office Private real estate Investment Trust No.1

17,413 8,585 — 8,585 1,752

KoFC POSCO HANHWA KB shared growth Private Equity Fund

9,228 3,771 (6,337 ) (2,566 ) —

NPS KBIC Private Equity Fund No. 1

59,068 55,241 (53,847 ) 1,394 4,274

KBIC Private Equity Fund No. 3

3,539 3,222 — 3,222 —

KB-Glenwood Private Equity Fund

— (10 ) — (10 ) —

KB No.3 Special Purpose Acquition Company

— (392 ) — (392 ) —

KB No.4 Special Purpose Acquition Company

— (313 ) — (313 ) —

KB No.5 Special Purpose Acquition Company

— (193 ) — (193 ) —

KB No.6 Special Purpose Acquition Company

— (555 ) — (555 ) —

(1)

The amounts included in the financial statements of the associates are adjusted to reflect adjustments made by the entity, such as fair value adjustments made at the time of acquisition and adjustments for differences in accounting policies.

(2)

As the financial statements as of December 31, 2014, were not available, the Group applied the equity method by using the financial statements as of November 30, 2014, and adjusted for the effects of significant transactions or events that occurred between the date of those financial statements and the date of the consolidated financial statements.

As Shinla Construction Co., Ltd. is capital deficient as of December 31, 2014, its reliable financial information was not available. Therefore, financial information of this associate is not included in the summarized financial information.

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The changes in investments in associates for the years ended December 31, 2013 and 2014, are as follows:

2013
Beginning Acquisition Disposal Dividends Gains
(losses) 		Other
compre-
hensive
income 		Impairment Others Ending
(In millions of Korean won)

Associates

Balhae Infrastructure Fund

￦ 125,004 ￦ — ￦ — ￦ (6,299 ) ￦ 6,263 ￦ — ￦ — ￦ — ￦ 124,968

Korea Credit Bureau
Co., Ltd

3,790 — — — 395 — — — 4,185

UAMCO., Ltd

139,760 — — — 11,066 — — — 150,826

JSC Bank CenterCredit

281,889 — — (3 ) (204,312 ) (9,464 ) — — 68,110

KoFC KBIC Frontier Champ 2010-5(PEF)

25,539 15,565 (135 ) — 4,227 197 — — 45,393

KB Global Star Game & Apps SPAC

48 — — — 1 — — (49 ) —

Semiland Co., Ltd

2,513 — — (11 ) 137 — — — 2,639

Serit Platform Co., Ltd.

1,517 — (1,518 ) — 1 — — — —

Sehwa Electronics Co., Ltd

2,955 — (1,577 ) — (360 ) (71 ) — (947 ) —

Testian Co., Ltd

1,041 — (260 ) — (587 ) — — (194 ) —

United PF 1st Recovery Private Equity Fund

195,425 — — — 2,516 — — — 197,941

Kores Co., Ltd

1,384 — — — 91 450 (420 ) — 1,505

KB GwS Private Securities Investment Trust

120,939 — — (8,894 ) 11,040 — — — 123,085

Incheon Bridge Co., Ltd

1,630 — — — (1,630 ) — — — —

Ssangyong Engineering & Construction Co., Ltd. (1)

— 28,779 — — (8,200 ) (1,176 ) (19,403 ) — —

KB Star office Private real estate Investment Trust No.1

19,898 — — (1,751 ) 1,787 — — — 19,934

KoFC POSCO HANHWA KB shared growth Private Equity Fund

4,983 7,775 — — (2,703 ) 274 — — 10,329

NPS KBIC Private Equity Fund No. 1

4,160 — — (106 ) 238 (54 ) — — 4,238

KBIC Private Equity Fund No. 3

2,156 — — — 67 — — — 2,223

KB-Glenwood Private Equity Fund

10 — — — — — — — 10

Terra Co., Ltd

— — — — 4 — — — 4

Total

￦ 934,641 ￦ 52,119 ￦ (3,490 ) ￦ (17,064 ) ￦ (179,959 ) ￦ (9,844 ) ￦ (19,823 ) ￦ (1,190 ) ￦ 755,390

F-109

Table of Contents
2014
Beginning Acquisition Disposal Dividends Gains
(losses) 		Other
compre-
hensive
income 		Impairment Others Ending
(In millions of Korean won)

Associates

Balhae Infrastructure Fund

￦ 124,968 ￦ 807 ￦ — ￦ (6,280 ) ￦ 5,624 ￦ — ￦ — ￦ — ￦ 125,119

Korea Credit Bureau Co., Ltd

4,185 — — — 37 — — — 4,222

UAMCO., Ltd

150,826 — — (35,041 ) 5,397 — — — 121,182

JSC Bank CenterCredit

68,110 — — (2 ) (6,278 ) (32,551 ) — — 29,279

KoFC KBIC Frontier Champ 2010-5(PEF)

45,393 50 (15,995 ) (3,230 ) (5,877 ) 3,586 (368 ) — 23,559

Semiland Co., Ltd

2,639 — (1,638 ) (11 ) 104 — — (1,094 ) —

United PF 1st Recovery Private Equity Fund

197,941 — — — 148 — — — 198,089

CH Engineering Co., Ltd

— — — — 20 — — — 20

Kores Co., Ltd

1,505 — — — — — — (1,505 ) —

KB GwS Private Securities Investment Trust

123,085 — — (9,229 ) 10,218 — — — 124,074

KB Star office Private real estate Investment Trust No.1

19,934 — — (1,752 ) 1,807 — — — 19,989

KoFC POSCO HANHWA KB shared growth Private Equity Fund

10,329 12,225 — — 1,880 (2,105 ) — — 22,329

NPS KBIC Private Equity Fund No. 1

4,238 — — (4,274 ) 1,414 (1,378 ) — — —

KBIC Private Equity Fund No. 3

2,223 — — — 64 — — — 2,287

KB-Glenwood Private Equity Fund

10 — — — — — — — 10

Terra Co., Ltd

4 — — — (4 ) — — — —

KB No.2 Special Purpose Acquition Company

— 15 — — — — — (15 ) —

KB No.3 Special Purpose Acquition Company

— 20 — — 19 — — — 39

KB No.4 Special Purpose Acquition Company

— 4,483 (4,453 ) — 8 — — — 38

KB No.5 Special Purpose Acquition Company

— 10 — — 9 — — — 19

KB No.6 Special Purpose Acquition Company

— 40 — — 37 — — — 77

Total

￦ 755,390 ￦ 17,650 ￦ (22,086 ) ￦ (59,819 ) ￦ 14,627 ￦ (32,448 ) ￦ (368 ) ￦ (2,614 ) ￦ 670,332

(1)

Impairment recognized on reorganization proceedings filed on December 30, 2013.

Accumulated unrecognized share of losses in investments in associates due to discontinuation of applying the equity method as of December 31, 2013 and 2014, follows:

2013
Unrecognized loss Unrecognized change in equity
(In millions of Korean won)

Incheon Bridge Co., Ltd

￦ 429 ￦ 429

CH Engineering Co., Ltd

43 94

Shinla Construction Co., Ltd

41 101

2014
Unrecognized loss Unrecognized change in equity
(In millions of Korean won)

Incheon Bridge Co., Ltd

￦ 1,287 ￦ 1,716

Shinla Construction Co., Ltd

34 134

Terra Co., Ltd

115 115

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Table of Contents

14. Property and Equipment, and Investment Property

The details of property and equipment as of December 31, 2013 and 2014, are as follows:

2013
Acquisition
cost 		Accumulated
depreciation 		Accumulated
impairment
losses 		Carrying
amount
(In millions of Korean won)

Land

￦ 1,991,831 ￦ — ￦ — ￦ 1,991,831

Buildings

1,219,806 (353,140 ) (2,117 ) 864,549

Leasehold improvements

567,231 (511,207 ) — 56,024

Equipment and vehicles

1,642,796 (1,503,257 ) — 139,539

Financial lease assets

66,641 (57,741 ) — 8,900

Total

￦ 5,488,305 ￦ (2,425,345 ) ￦ (2,117 ) ￦ 3,060,843

2014
Acquisition
cost 		Accumulated
depreciation 		Accumulated
impairment
losses 		Carrying
amount
(In millions of Korean won)

Land

￦ 1,970,010 ￦ — ￦ — ￦ 1,970,010

Buildings

1,231,645 (373,306 ) (2,117 ) 856,222

Leasehold improvements

602,438 (549,942 ) — 52,496

Equipment and vehicles

1,725,901 (1,561,480 ) — 164,421

Construction in-progress

7,946 — — 7,946

Financial lease assets

32,965 (1,075 ) — 31,890

Total

￦ 5,570,905 ￦ (2,485,803 ) ￦ (2,117 ) ￦ 3,082,985

The changes in property and equipment for the years ended December 31, 2013 and 2014, are as follows:

2013
Beginning Acquisition Transfers (1) Disposal Depreciation (2) Business
Combination 		Others Ending
(In millions of Korean won)

Land

￦ 2,012,265 ￦ 1,405 ￦ (21,551 ) ￦ (214 ) ￦ — ￦ — ￦ (74 ) ￦ 1,991,831

Buildings

879,878 3,234 11,056 (281 ) (29,094 ) — (244 ) 864,549

Leasehold improvement

55,658 2,687 32,702 (332 ) (46,057 ) 299 11,067 56,024

Equipment and vehicles

141,932 94,875 — (434 ) (97,119 ) 247 38 139,539

Construction in-progress

893 51,268 (52,161 ) — — — — —

Financial lease assets

9,767 10,734 — — (11,601 ) — — 8,900

Total

￦ 3,100,393 ￦ 164,203 ￦ (29,954 ) ￦ (1,261 ) ￦ (183,871 ) ￦ 546 ￦ 10,787 ￦ 3,060,843

2014
Beginning Acquisition Transfers (1) Disposal Depreciation (2) Business
Combination 		Others Ending
(In millions of Korean won)

Land

￦ 1,991,831 ￦ 11,371 ￦ (37,017 ) ￦ — ￦ — ￦ 3,850 ￦ (25 ) ￦ 1,970,010

Buildings

864,549 12,884 2,044 — (29,335 ) 6,159 (79 ) 856,222

Leasehold improvement

56,024 3,854 30,420 (605 ) (40,570 ) 791 2,582 52,496

Equipment and vehicles

139,539 110,269 1,947 (333 ) (90,200 ) 2,285 914 164,421

Construction in-progress

— 63,629 (55,683 ) — — — — 7,946

Financial lease assets

8,900 40,873 (1,947 ) — (15,936 ) — — 31,890

Total

￦ 3,060,843 ￦ 242,880 ￦ (60,236 ) ￦ (938 ) ￦ (176,041 ) ￦ 13,085 ￦ 3,392 ￦ 3,082,985

(1)

Including transfers with investment property and assets held for sale.

(2)

Including depreciation cost ￦71 million and ￦82 million recorded in other operating expenses in the statements of comprehensive income for the years ended December 31, 2013 and 2014, respectively.

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The changes in accumulated impairment losses of property and equipment for the years ended December 31, 2013 and 2014, are as follows:

2013
Beginning Impairment Reversal Others Ending
(In millions of Korean won)
￦ (3,242) ￦ — ￦ — ￦ 1,125 ￦ (2,117 )

2014
Beginning Impairment Reversal Others Ending
(In millions of Korean won)
￦ (2,117) ￦ — ￦ — ￦ — ￦ (2,117)

The details of investment property as of December 31, 2013 and 2014, are as follows:

2013
Acquisition
cost 		Accumulated
depreciation 		Carrying
amount
(In millions of Korean won)

Land

￦ 94,708 ￦ — ￦ 94,708

Buildings

78,526 (6,975 ) 71,551

Total

￦ 173,234 ￦ (6,975 ) ￦ 166,259

2014
Acquisition
cost 		Accumulated
depreciation 		Accumulated
impairment
losses 		Carrying
amount
(In millions of Korean won)

Land

￦ 229,437 ￦ — ￦ (738 ) ￦ 228,699

Buildings

157,885 (9,040 ) — 148,845

Total

￦ 387,322 ￦ (9,040 ) ￦ (738 ) ￦ 377,544

The valuation technique and input variables that are used to measure the fair value of investment property as of December 31, 2014, are as follows:

2014
Fair value Valuation technique

Inputs

(In millions of Korean won)

Land and buildings

￦ 379,812 Cost Approach Method

- Price per square meter

- Replacement cost

As of December 31, 2013 and 2014, fair values of the investment properties amount to ￦189,534 million and ￦379,812 million, respectively. The investment properties were measured by qualified independent appraisers with experience in valuing similar properties in the same area. In addition, per the fair value hierarchy on Note 6.1, the fair value hierarchy of all investment properties has been categorized and classified as Level 3.

Rental income from the above investment properties for the years ended December 31, 2013 and 2014, amounts to ￦4,889 million and ￦7,107 million, respectively.

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The changes in investment property for the years ended December 31, 2013 and 2014, are as follows:

2013
Beginning Acquisition Transfers Depreciation Ending
(In millions of Korean won)

Land

￦ 38,653 ￦ 56,055 ￦ — ￦ — ￦ 94,708

Buildings

14,321 58,554 257 (1,581 ) 71,551

Total

￦ 52,974 ￦ 114,609 ￦ 257 ￦ (1,581 ) ￦ 166,259

2014
Beginning Acquisition Transfers Depreciation Business
combination 		Ending
(In millions of Korean won)

Land

￦ 94,708 ￦ 132,924 ￦ (262 ) ￦ — ￦ 1,329 ￦ 228,699

Buildings

71,551 79,071 288 (2,065 ) — 148,845

Total

￦ 166,259 ￦ 211,995 ￦ 26 ￦ (2,065 ) ￦ 1,329 ￦ 377,544

Property and equipment insured as of December 31, 2013 and 2014, are as follows:

Insurance coverage

Insurance company

Type

Assets insured

2013 2014
(In millions of Korean won)

General property insurance

Buildings (1) ￦ 1,027,420 ￦ 1,134,840

Samsung Fire & Marine Insurance Co., Ltd. and others

Leasehold improvements

121,188 142,163

Equipment and vehicles and others

139,544 164,106

Total

￦ 1,288,152 ￦ 1,441,109

(1)

Buildings include office buildings, investment properties and assets held for sale.

15. Intangible Assets

The details of intangible assets as of December 31, 2013 and 2014, are as follows:

2013
Acquisition
cost 		Accumulated
amortization 		Accumulated
impairment
losses 		Carrying
amount
(In millions of Korean won)

Goodwill

￦ 252,098 ￦ — ￦ (46,533 ) ￦ 205,565

Other intangible assets

851,406 (590,550 ) (23,217 ) 237,639

Total

￦ 1,103,504 ￦ (590,550 ) ￦ (69,750 ) ￦ 443,204

2014
Acquisition
cost 		Accumulated
amortization 		Accumulated
impairment
losses 		Carrying
amount
(In millions of Korean won)

Goodwill

￦ 331,707 ￦ — ￦ (69,315 ) ￦ 262,392

Other intangible assets

900,951 (649,723 ) (24,698 ) 226,530

Total

￦ 1,232,658 ￦ (649,723 ) ￦ (94,013 ) ￦ 488,922

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The details of goodwill as of December 31, 2013 and 2014, are as follows:

2013 2014
Acquisition
cost 		Carrying
amount 		Acquisition
cost 		Carrying
amount
(In millions of Korean won)

Housing & Commercial Bank

￦ 65,288 ￦ 65,288 ￦ 65,288 ￦ 65,288

KB Cambodia Bank

1,202 1,202 1,202 1,202

KB Investment Securities

70,265 58,889 70,265 58,889

KB Capital Co., Ltd

— — 79,609 79,609

KB Savings Bank Co., Ltd

108,000 72,843 115,343 57,404

Yehansoul Savings Bank Co., Ltd

7,343 7,343 — —

Total

￦ 252,098 ￦ 205,565 ￦ 331,707 ￦ 262,392

The changes in accumulated impairment losses of goodwill for the years ended December 31, 2013 and 2014, are as follows:

2013
Beginning Impairment Others Ending
(In millions of Korean won)
￦ 35,157 ￦ 11,376 ￦ — ￦ 46,533

2014
Beginning Impairment Others Ending
(In millions of Korean won)
￦ 46,533 ￦ 22,782 ￦ — ￦ 69,315

The details of allocating goodwill to cash-generating units and related information for impairment testing as of December 31, 2014, are as follows:

Housing & Commercial Bank
Retail
Banking 		Corporate
Banking 		KB
Cambodia
Bank 		KB
Investment
Securities 		KB Capital
Co., Ltd. 		KB Savings
Bank Co., Ltd.
and Yehansoul
Savings Bank
Co., Ltd. 		Total
(In millions of Korean won)

Carrying amounts

￦ 49,315 ￦ 15,973 ￦ 1,202 ￦ 58,889 ￦ 79,609 ￦ 57,404 ￦ 262,392

Recoverable amount exceeded carrying amount

1,090,789 1,058,505 735 38,772 210,379 — 2,399,180

Discount rate (%)

17.13 17.49 33.45 16.53 13.67 17.01

Permanent growth rate (%)

2.00 2.00 2.00 2.00 2.00 2.00

Goodwill is allocated to cash-generating units, based on management’s analysis, that are expected to benefit from the synergies of the combination for impairment testing, and cash-generating units consist of an operating segment or units which are not larger than an operating segment. The Group recognized the amount of ￦65,288 million related to goodwill acquired in the merger of Housing & Commercial Bank. Of those respective amounts, the amounts of ￦49,315 million and ￦15,973 million were allocated to the Retail Banking and Corporate Banking, respectively. Cash-generating units to which goodwill has been allocated is tested for impairment annually, and whenever there is an indication that the unit may be impaired, by comparing the carrying amount of the unit, including the goodwill, with the recoverable amount of the unit.

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The recoverable amount of a cash-generating unit is measured at the higher of its fair value less costs to sell and its value in use. The fair value less costs to sell is the amount obtainable from the sale in an arm’s length transaction between knowledgeable, willing parties, less the costs of disposal. If it is difficult to measure the amount obtainable from the sale, the Group measures the fair value less costs to sell by reflecting the characteristics of the measured cash-generating unit. If it is not possible to obtain reliable information to measure the fair value less costs to sell, the Group uses the asset’s value in use as its recoverable amount. Value in use is the present value of the future cash flows expected to be derived from an asset or cash-generating unit. The projections of the future cash flows are based on the most recent financial budget approved by management and generally cover a period of five years. The future cash flows after projection period are estimated on the assumption that the future cash flows will increase 2.0% for every year. The key assumptions used for the estimation of the future cash flows are the market size and the Group’s market share. The discount rate is a pre-tax rate that reflects assumptions regarding risk-free interest rate, market risk premium and the risks specific to the asset for which the future cash flow estimates have not been adjusted.

The details of intangible assets, excluding goodwill, as of December 31, 2013 and 2014, are as follows:

2013
Acquisition
cost 		Accumulated
amortization 		Accumulated
impairment
losses 		Carrying
amount
(In millions of Korean won)

Industrial property rights

￦ 1,405 ￦ (936 ) ￦ — ￦ 469

Software

614,124 (500,327 ) — 113,797

Other intangible assets

206,427 (67,892 ) (23,217 ) 115,318

Finance leases assets

29,450 (21,395 ) — 8,055

Total

￦ 851,406 ￦ (590,550 ) ￦ (23,217 ) ￦ 237,639

2014
Acquisition
cost 		Accumulated
amortization 		Accumulated
impairment
losses 		Carrying
amount
(In millions of Korean won)

Industrial property rights

￦ 1,470 ￦ (1,079 ) ￦ — ￦ 391

Software

644,485 (564,887 ) — 79,598

Other intangible assets

213,927 (83,190 ) (24,698 ) 106,039

Finance leases assets

41,069 (567 ) — 40,502

Total

￦ 900,951 ￦ (649,723 ) ￦ (24,698 ) ￦ 226,530

The changes in intangible assets, excluding goodwill, for the years ended December 31, 2013 and 2014, are as follows:

2013
Beginning Acquisition Disposal Amortization (1) Business
combination 		Others Ending
(In millions of Korean won)

Industrial property rights

￦ 418 ￦ 190 ￦ — ￦ (137 ) ￦ — ￦ (2 ) ￦ 469

Software

168,032 33,649 — (87,078 ) — (806 ) 113,797

Other intangible assets (2)

107,994 34,252 (5,177 ) (9,122 ) 38 (12,667 ) 115,318

Finance leases assets

7,089 6,036 — (5,070 ) — — 8,055

Total

￦ 283,533 ￦ 74,127 ￦ (5,177 ) ￦ (101,407 ) ￦ 38 ￦ (13,475 ) ￦ 237,639

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2014
Beginning Acquisition Disposal Transfer Amortization (1) Business
combination 		Others Ending
(In millions of Korean won)

Industrial property rights

￦ 469 ￦ 74 ￦ — ￦ — ￦ (151 ) ￦ — ￦ (1 ) ￦ 391

Software

113,797 24,516 — 4,528 (62,805 ) 364 (802 ) 79,598

Other intangible assets (2)

115,318 6,165 (4,455 ) — (11,805 ) 2,050 (1,234 ) 106,039

Finance leases assets

8,055 45,305 — (4,528 ) (8,330 ) — — 40,502

Total

￦ 237,639 ￦ 76,060 ￦ (4,455 ) ￦ — ￦ (83,091 ) ￦ 2,414 ￦ (2,037 ) ￦ 226,530

(1)

Including ￦31 million and ￦59 million recorded in other operating expenses in the statements of comprehensive income for the years ended December 31, 2013 and 2014.

(2)

Membership rights of other intangible assets with indefinite useful lives recognized impairment losses because their recoverable amount is lower than their carrying amount.

The changes in accumulated impairment losses on intangible assets, excluding goodwill, for the years ended December 31, 2013 and 2014, are as follows:

2013
Beginning Impairment Reversal Disposal
and
others 		Ending
(In millions of Korean won)

Accumulated impairment losses on intangible assets

￦ (17,845 ) ￦ (5,763 ) ￦ 24 ￦ 367 ￦ (23,217 )

2014
Beginning Impairment Reversal Disposal
and
others 		Ending
(In millions of Korean won)

Accumulated impairment losses on intangible assets

￦ (23,217 ) ￦ (1,888 ) ￦ 411 ￦ (4 ) ￦ (24,698 )

16. Deferred income tax assets and liabilities

The details of deferred income tax assets and liabilities as of December 31, 2013 and 2014, are as follows:

2013
Assets Liabilities Net amount
(In millions of Korean won)

Other provisions

￦ 113,685 ￦ — ￦ 113,685

Allowances for loan losses

171 (2,118 ) (1,947 )

Impairment losses on property and equipment

2,873 — 2,873

Interest on equity index-linked deposits

340 — 340

Share-based payments

8,512 — 8,512

Provisions for guarantees

50,463 — 50,463

Losses(gains) from valuation on derivative financial instruments

1,045 (15,119 ) (14,074 )

Present value discount

2,554 (6,812 ) (4,258 )

Losses(gains) from fair value hedged item

16,670 (111 ) 16,559

Accrued interest

— (79,656 ) (79,656 )

Deferred loan origination fees and costs

13,263 (97,532 ) (84,269 )

Gains from revaluation

— (276,057 ) (276,057 )

Investments in subsidiaries and others

74,324 (63,407 ) 10,917

Derivative linked securities

265,477 (264,024 ) 1,453

Others

546,499 (337,434 ) 209,065

Sub-total

1,095,876 (1,142,270 ) (46,394 )

Offsetting of deferred income tax assets and liabilities

(1,080,454 ) 1,080,454 —

Total

￦ 15,422 ￦ (61,816 ) ￦ (46,394 )

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2014
Assets Liabilities Net amount
(In millions of Korean won)

Other provisions

￦ 99,369 ￦ — ￦ 99,369

Allowances for loan losses

2,416 (1,900 ) 516

Impairment losses on property and equipment

5,590 (358 ) 5,232

Interest on equity index-linked deposits

183 — 183

Share-based payments

8,134 — 8,134

Provisions for guarantees

50,115 — 50,115

Losses(gains) from valuation on derivative financial instruments

3,714 (52,714 ) (49,000 )

Present value discount

8,078 (10,694 ) (2,616 )

Losses(gains) from fair value hedged item

12,834 — 12,834

Accrued interest

— (79,385 ) (79,385 )

Deferred loan origination fees and costs

9,265 (132,815 ) (123,550 )

Gains from revaluation

— (274,947 ) (274,947 )

Investments in subsidiaries and others

12,635 (74,504 ) (61,869 )

Derivative linked securities

336,025 (338,587 ) (2,562 )

Others

703,497 (363,600 ) 339,897

Sub-total

1,251,855 (1,329,504 ) (77,649 )

Offsetting of deferred income tax assets and liabilities

(1,236,293 ) 1,236,293 —

Total

￦ 15,562 ￦ (93,211 ) ￦ (77,649 )

Unrecognized deferred income tax assets

No deferred income tax assets have been recognized for the deductible temporary difference of ￦563,040 million associated with investments in subsidiaries and others as of December 31, 2014, because it is not probable that the temporary differences will be reversed in the foreseeable future.

No deferred income tax assets have been recognized for deductible temporary differences of ￦199 million, ￦80,204million and ￦172,199million associated with loss on other provisions, SPE repurchase and others, respectively, as of December 31, 2014, due to the uncertainty that these will be realized in the future.

Unrecognized deferred income tax liabilities

No deferred income tax liabilities have been recognized for the taxable temporary difference of ￦27,367 million associated with investment in subsidiaries and associates as of December 31, 2014, due to the following reasons:

•

The Group is able to control the timing of the reversal of the temporary difference.

•

It is probable that the temporary difference will not be reversed in the foreseeable future.

No deferred income tax liabilities have been recognized as of December 31, 2014, for the taxable temporary difference of ￦65,288 million arising from the initial recognition of goodwill from the merger of Housing and Commercial Bank.

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The changes in cumulative temporary differences for the years ended December 31, 2013 and 2014, are as follows:

2013
Beginning Decrease Increase Ending
(In millions of Korean won)

Deductible temporary differences

Losses(gains) from fair value hedged item

￦ 127,281 ￦ 127,281 ￦ 68,884 ￦ 68,884

Other provisions

576,999 553,376 446,706 470,329

Allowances for loan losses

4,727 4,221 199 705

Impairment losses on property and equipment

8,723 8,723 11,873 11,873

Deferred loan origination fees and costs

36,136 35,720 54,200 54,616

Interest on equity index-linked deposits

2,985 2,985 1,407 1,407

Share-based payments

25,591 25,591 35,174 35,174

Provisions for guarantees

208,255 208,255 208,524 208,524

Gains(losses) from valuation on derivative financial instruments

6,581 6,581 4,319 4,319

Present value discount

9,655 9,658 10,558 10,555

Loss on SPE repurchase

80,204 — — 80,204

Investments in subsidiaries and others

2,687,622 2,099,827 302,836 890,631

Derivative linked securities

667,942 667,942 1,097,012 1,097,012

Others

2,004,536 947,787 1,300,751 2,357,500

Sub-total

6,447,237 ￦ 4,697,947 ￦ 3,542,443 5,291,733

Unrecognized deferred income tax assets:

Share-based payments

10 —

Other provisions

817 250

Loss on SPE repurchase

80,204 80,204

Investments in subsidiaries and others

2,492,775 603,097

Others

87,342 94,786

Total

3,786,089 4,513,396

Tax rate (%)

24.2 24.2

Total deferred income tax assets from deductible temporary difference

￦ 919,214 ￦ 1,095,876

Taxable temporary differences

Losses(gains) from fair value hedged item

￦ — ￦ — ￦ (502 ) ￦ (502 )

Accrued interest

(339,126 ) (220,320 ) (217,970 ) (336,776 )

Allowances for loans losses

(10,654 ) (1,902 ) — (8,752 )

Deferred loan origination fees and costs

(389,017 ) (389,017 ) (403,026 ) (403,026 )

Gains(losses) from valuation on derivative financial instruments

(163,225 ) (162,935 ) (62,287 ) (62,577 )

Present value discount

(32,185 ) (1,221 ) — (30,964 )

Goodwill

(65,288 ) — — (65,288 )

Gains on revaluation

(1,142,234 ) (1,504 ) — (1,140,730 )

Investments in subsidiaries and others

(5,959,490 ) (5,644,900 ) (53,127 ) (367,717 )

Derivative linked securities

(661,700 ) (661,700 ) (1,091,009 ) (1,091,009 )

Others

(1,307,717 ) (581,961 ) (660,956 ) (1,386,712 )

Sub-total

(10,070,636 ) ￦ (7,665,460 ) ￦ (2,488,877 ) (4,894,053 )

Unrecognized deferred income tax assets:

Goodwill

(65,288 ) (65,288 )

Investments in subsidiaries and others

(83,745 ) (118,749 )

Total

(9,921,603 ) (4,710,016 )

Tax rate (%)

24.2 24.2

Total deferred income tax assets from deductible temporary differences

￦ (1,055,085 ) ￦ (1,142,270 )

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2014
Beginning Decrease Increase Ending
(In millions of Korean won)

Deductible temporary differences

Losses(gains) from fair value hedged item

￦ 68,884 ￦ 68,884 ￦ 53,033 ￦ 53,033

Other provisions

470,329 445,632 386,116 410,813

Allowances for loan losses

705 292 5,720 6,133

Impairment losses on property and equipment

11,873 11,873 22,363 22,363

Deferred loan origination fees and costs

54,616 54,772 37,529 37,373

Interest on equity index-linked deposits

1,407 1,325 676 758

Share-based payments

35,174 35,174 33,613 33,613

Provisions for guarantees

208,524 208,524 225,414 225,414

Gains(losses) from valuation on derivative financial instruments

4,319 4,319 15,171 15,171

Present value discount

10,555 10,555 11,762 11,762

Loss on SPE repurchase

80,204 — — 80,204

Investments in subsidiaries and others

890,631 310,123 18,691 599,199

Derivative linked securities

1,097,012 1,097,012 1,388,534 1,388,534

Others

2,357,500 1,349,309 2,099,534 3,107,725

Sub-total

5,291,733 ￦ 3,597,794 ￦ 4,298,156 5,992,095

Unrecognized deferred income tax assets:

Share-based payments

— —

Other provisions

250 199

Loss on SPE repurchase

80,204 80,204

Investments in subsidiaries and others

603,097 563,040

Others

94,786 172,199

Total

4,513,396 5,176,453

Tax rate (%)

24.2 24.2

Total deferred income tax assets from deductible temporary differences

￦ 1,095,876 ￦ 1,251,855

Taxable temporary differences

Losses(gains) from fair value hedged item

￦ (502 ) ￦ (502 ) ￦ — ￦ —

Accrued interest

(336,776 ) (220,808 ) (213,071 ) (329,039 )

Allowances for loans losses

(8,752 ) (902 ) — (7,850 )

Deferred loan origination fees and costs

(403,026 ) (403,026 ) (548,978 ) (548,978 )

Gains(losses) from valuation on derivative financial instruments

(62,577 ) (61,187 ) (216,436 ) (217,826 )

Present value discount

(30,964 ) — (13,226 ) (44,190 )

Goodwill

(65,288 ) — — (65,288 )

Gains on revaluation

(1,140,730 ) (4,587 ) — (1,136,143 )

Investments in subsidiaries and others

(367,717 ) (60,223 ) (15,199 ) (322,693 )

Derivative linked securities

(1,091,009 ) (1,091,009 ) (1,399,118 ) (1,399,118 )

Others

(1,386,712 ) (562,646 ) (677,763 ) (1,501,829 )

Sub-total

(4,894,053 ) ￦ (2,404,890 ) ￦ (3,083,791 ) (5,572,954 )

Unrecognized deferred income tax assets:

Goodwill

(65,288 ) (65,288 )

Investments in subsidiaries and others

(118,749 ) (27,367 )

Total

(4,710,016 ) (5,480,299 )

Tax rate (%)

24.2 24.2

Total deferred income tax assets from deductible temporary differences

￦ (1,142,270 ) ￦ (1,329,504 )

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17. Assets held for sale

The details of assets held for sale as of December 31, 2013 and 2014, are as follows:

2013
Acquisition
cost (1) 		Accumulated
impairment 		Carrying
amount 		Fair value less
costs to sell
(In millions of Korean won)

Land

￦ 21,380 ￦ (5,109 ) ￦ 16,271 ￦ 16,271

Buildings

39,777 (18,330 ) 21,447 21,447

Total

￦ 61,157 ￦ (23,439 ) ￦ 37,718 ￦ 37,718

2014
Acquisition
cost (1) 		Accumulated
impairment 		Carrying
amount 		Fair value less
costs to sell
(In millions of Korean won)

Land

￦ 47,418 ￦ (9,442 ) ￦ 37,976 ￦ 40,530

Buildings

57,005 (24,624 ) 32,381 33,752

Total

￦ 104,423 ￦ (34,066 ) ￦ 70,357 ￦ 74,282

(1)

Acquisition cost of buildings held for sale is net of accumulated depreciation.

The valuation technique and input variables that are used to measure the fair value of assets held for sale as of December 31, 2014, are as follows:

2014
Fair value

Valuation technique (1)

Unobservable input (2)

Range of

unobservable inputs

(%)

Relationship of
unobservable

inputs to fair

value

(In millions of Korean won)
￦ 57,982

Market comparison approach model

Adjustment index 0.17~2.00

Fair value increases as the adjustment index rises.

Adjustment ratio -20.00~0.00

Fair value decreases as the absolute value of adjustment index rises.

Land and buildings

16,323

Market comparison approach model

Unit price per area of exclusive possession, Time point adjustment, Individual factor and others

Unit price per area of exclusive possession: About ￦4.9 million

Time point adjustment: 0.9987

Individual factor: 0.85

Fair value increases as the unit price per area of exclusive possess and others rise.

Total

￦ 74,305

(1)

The Group adjusted the appraisal value by the adjustment ratio in the event the public sale is unsuccessful.

(2)

Adjustment index is calculated using the real estate index or the producer price index, or land price volatility.

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The fair values of assets held for sale were measured by qualified independent appraisers with experience in valuing similar properties in the same area. In addition, per the fair value hierarchy on Note 6.1, the fair value hierarchy of all investment properties has been categorized and classified as Level 3.

The changes in accumulated impairment losses of assets held for sale for the years ended December 31, 2013 and 2014, are as follows:

2013
Beginning Provision Reversal Others Ending
(In millions of Korean won)
￦ (5,759) ￦ (22,365 ) ￦ — ￦ 4,685 ￦ (23,439 )

2014
Beginning Provision Reversal Others Ending
(In millions of Korean won)
￦ (23,439) ￦ (16,592 ) ￦ — ￦ 5,965 ￦ (34,066 )

As of December 31, 2014, buildings and land classified as assets held for sale consist of 15 pieces of real estate of closed branches and KB Wellyan Private Equity Real Estate Fund No. 6 and 7, which were acquired from the litigation of KB Asset Management Co., Ltd. The management of the Group decided to sell the assets, and accordingly, the assets were classified as assets held for sale. As of December 31, 2014, three assets out of above assets held for sale are under negotiation for sale and the remaining assets are also being actively marketed.

18. Other Assets

The details of other assets as of December 31, 2013 and 2014, are as follows:

2013 2014
(In millions of Korean won)

Other financial assets

Other receivables

￦ 3,494,745 ￦ 3,185,783

Accrued income

1,018,907 1,166,555

Guarantee deposits

1,395,359 1,339,572

Domestic exchange settlement debits

735,807 2,096,804

Others

188,540 119,733

Allowances for loan losses

(580,651 ) (347,918 )

Present value discount

(1,028 ) (898 )

Sub-total

6,251,679 7,559,631

Other non-financial assets

Other receivables

663 1,469

Prepaid expenses (1)

379,854 327,633

Guarantee deposits

3,941 4,081

Insurance assets

157,154 127,493

Separate account assets

696,909 689,701

Others

76,798 96,759

Allowances on other asset

(16,402 ) (23,294 )

Sub-total

1,298,917 1,223,842

Total

￦ 7,550,596 ￦ 8,783,473

(1)

Prepaid income tax expenses amounting to ￦17,467 million for KB Life Insurance Co., Ltd as of December 31, 2013 were reclassified from other assets into deferred income tax assets.

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The changes in allowances for loan losses on other assets for the years ended December 31, 2013 and 2014, are as follows:

2013
Other financial
assets 		Other non-financial
assets 		Total
(In millions of Korean won)

Beginning

￦ 590,110 ￦ 7,988 ￦ 598,098

Written-off

(37,382 ) (6,715 ) (44,097 )

Provision

29,229 15,129 44,358

Others

(1,306 ) — (1,306 )

Ending

￦ 580,651 ￦ 16,402 ￦ 597,053

2014
Other financial
assets 		Other non-financial
assets 		Total
(In millions of Korean won)

Beginning

￦ 580,651 ￦ 16,402 ￦ 597,053

Written-off

(293,614 ) (2,436 ) (296,050 )

Provision

38,091 3,930 42,021

Business combination

1,085 — 1,085

Others

21,705 5,398 27,103

Ending

￦ 347,918 ￦ 23,294 ￦ 371,212

19. Financial liabilities at fair value through profit or loss

The details of financial liabilities at fair value through profit or loss as of December 31, 2013 and 2014, are as follows:

2013 2014
(In millions of Korean won)

Financial liabilities held for trading

Securities sold

￦ 196,570 ￦ 784,892

Other

40,067 51,650

Sub-total

236,637 836,542

Financial liabilities designated at fair value through profit or loss

Derivative linked securities

878,565 982,426

Sub-total

878,565 982,426

Total financial liabilities at fair value through profit or loss

￦ 1,115,202 ￦ 1,818,968

The details of credit risk of financial liabilities designated at fair value through profit or loss as of December 31, 2013 and 2014, are as follows:

2013 2014
(In millions of Korean won)

Financial liabilities designated at fair value through profit or loss

￦ 878,565 ￦ 982,426

Changes in fair value resulting from changes in the credit risk

(4,032 ) (4,848 )

Accumulated changes in fair value resulting from changes in the credit risk

(9,662 ) (14,510 )

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20. Deposits

The details of deposits as of December 31, 2013 and 2014, are as follows:

2013 2014
(In millions of Korean won)

Demand deposits

Demand deposits in Korean won

Checking deposits

￦ 122,296 ￦ 183,748

Household checking deposits

467,229 495,268

Special deposits

2,706,609 3,018,524

Ordinary deposits

24,533,701 28,049,893

Public fund deposits

75,127 81,899

Treasury deposits

5,148 5,012

General savings deposits

28,077,274 30,195,868

Corporate savings deposits

10,715,746 13,549,740

Nonresident’s deposit in Korean won

32,355 53,079

Nonresident’s free deposit in Korean won

15,001 16,761

Others

163,262 186,055

Sub-total

66,913,748 75,835,847

Demand deposits in foreign currencies

Checking deposits

251,072 114,531

Ordinary deposits

2,461,685 2,808,835

Special deposits

5,325 1,678

Others

14,142 94,019

Sub-total

2,732,224 3,019,063

Total demand deposits

69,645,972 78,854,910

Time deposits

Time deposits in Korean won

Time deposits

108,216,861 110,822,758

Installment savings deposits

11,097,205 10,133,900

Good-sum formation savings

425,090 846,172

Nonresident’s deposit in Korean won

186,966 137,578

Workers’ savings for housing

1,543 1,488

Nonresident’s free deposit in Korean won

41,085 26,361

Long-term housing savings deposits

2,061,129 1,429,659

Long-term savings for households

190 163

Preferential savings deposits for workers

245 143

Mutual installment deposits

1,478,299 1,265,869

Mutual installment for housing

853,392 755,764

Trust deposits

3,093,949 3,207,318

Fair value adjustments on valuation of fair value hedged items (current period portion)

— (958 )

Sub-total

127,455,954 128,626,215

Time deposits in foreign currencies

Time deposits

2,082,865 2,456,599

Installment savings deposits

4,035 3,053

Others

68,960 25,297

Sub-total

2,155,860 2,484,949

Total time deposits

129,611,814 131,111,164

Certificates of deposits

1,624,278 1,583,047

Total deposits

￦ 200,882,064 ￦ 211,549,121

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21. Debts

The details of debts as of December 31, 2013 and 2014, consist of:

2013 2014
(In millions of Korean won)

Borrowings

￦ 10,767,737 ￦ 11,908,698

Bonds sold under repurchase agreements and others

685,626 1,074,146

Call money

2,647,968 2,881,656

Total

￦ 14,101,331 ￦ 15,864,500

The details of borrowings as of December 31, 2013 and 2014, are as follows:

Lender

Annual
interest rate
(%) 		2013 2014
(In millions of Korean won)

Borrowings in Korean won

Borrowings from the Bank of Korea

Bank of Korea 0.50~1.00 ￦ 557,998 ￦ 1,002,796

Borrowings from the government

KEMCO and others 0.00~5.00 626,593 611,378

Borrowings from banking institutions

Industrial Bank of Korea and others

1.97~4.04 61,877 37,874

Borrowings from non-banking financial institutions

The Korea Development Bank and others

0.71~2.70 142,511 212,452

Other borrowings

The Korea Finance Corporation and others

0.00~7.50 3,527,292 3,980,812

Sub-total

4,916,271 5,845,312

Borrowings in foreign currencies

Due to banks

Royal Bank of Canada and others

— 158,180 3,313

Borrowings from banking institutions

Wells Fargo Securities. and others

0.21~1.70 3,831,929 3,522,159

Other borrowings

The Korea Finance Corporation

0.61~1.36 3,166 34,460
Other borrowings

JP Morgan Chase Bank N.A. and others

— 1,858,191 2,503,454

Sub-total

5,851,466 6,063,386

Total

￦ 10,767,737 ￦ 11,908,698

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The details of bonds sold under repurchase agreements and others as of December 31, 2013 and 2014, are as follows:

Lenders

Annual
interest rate
(%) 		2013 2014
(In millions of Korean won)

Bonds sold under repurchase agreements

Individuals, Groups and Corporations

1.25~3.63 ￦ 608,156 ￦ 1,019,071

Bills sold

Counter sale

1.09~2.62 77,470 55,075

Total

￦ 685,626 ￦ 1,074,146

The details of call money as of December 31, 2013 and 2014, are as follows:

Lenders

Annual
interest rate
(%) 		2013 2014
(In millions of Korean won)

Call money in Korean won

Woori Bank and others

1.83~2.15 ￦ 1,649,400 ￦ 1,882,000

Call money in foreign currencies

Central bank Uzbekistan and others

0.10~3.61 998,568 999,656

Total

￦ 2,647,968 ￦ 2,881,656

Call money and borrowings from financial institutions as of December 31, 2013 and 2014, are as follows:

2013
Bank of
Korea 		Other Banks Others Total
(In millions of Korean won)

Call money

￦ 1,001 ￦ 1,970,567 ￦ 676,400 ￦ 2,647,968

Borrowings

557,998 5,901,018 630,733 7,089,749

Total

￦ 558,999 ￦ 7,871,585 ￦ 1,307,133 ￦ 9,737,717

2014
Bank of
Korea 		Other Banks Others Total
(In millions of Korean won)

Call money

￦ — ￦ 1,983,656 ￦ 898,000 ￦ 2,881,656

Borrowings

1,277,596 6,131,496 867,674 8,276,766

Total

￦ 1,277,596 ￦ 8,115,152 ￦ 1,765,674 ￦ 11,158,422

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22. Debentures

The details of debentures as of December 31, 2013 and 2014, are as follows:

Annual
Interest rate
(%) 		2013 2014
(In millions of Korean won)

Debentures in Korean won

Structured debentures

0.40~8.62 ￦ 1,499,238 ￦ 1,239,238

Subordinated fixed rate debentures in Korean won

3.08~8.00 8,648,474 4,761,124

Fixed rate debentures in Korean won

2.11~5.04 12,057,142 18,839,553

Floating rate debentures in Korean won

2.17~2.93 1,505,858 1,133,000

Sub total

23,710,712 25,972,915

Fair value adjustments on fair value hedged financial debentures in Korean won

Fair value adjustments on valuation of fair value hedged items (current period portion)

(31,577 ) 5,733

Fair value adjustments on valuation of fair value hedged items (prior year portion)

81,369 48,183

Sub total

49,792 53,916

Discount or premium on debentures in Korean won

Discount on debentures

(16,615 ) (43,291 )

Sub total

23,743,889 25,983,540

Debentures in foreign currencies

Floating rate debentures

0.38~1.48 1,143,360 1,648,175

Fixed rate debentures

0.60~3.63 2,335,059 1,578,980

Sub total

3,478,419 3,227,155

Fair value adjustments on fair value hedged debentures in foreign currencies

Fair value adjustments on valuation of fair value hedged items (current period portion)

(42,195 ) (10,309 )

Fair value adjustments on valuation of fair value hedged items (prior year portion)

(130,011 ) 10,384

Sub total

(172,206 ) 75

Discount or premium on debentures in foreign currencies

Discount on debentures

(10,568 ) (10,064 )

Sub total

3,295,645 3,217,166

Total

￦ 27,039,534 ￦ 29,200,706

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The changes in debentures based on face value for the years ended December 31, 2013 and 2014, are as follows:

2013
Beginning Issues Repayments Others Ending
(In millions of Korean won)

Debentures in Korean won

Hybrid capital instrument

￦ 100,000 ￦ — ￦ (100,000 ) ￦ — ￦ —

Structured debentures

1,699,238 100,000 (300,000 ) — 1,499,238

Subordinated fixed rate debentures in Korean won

7,921,510 1,000,000 (248,286 ) (24,750 ) 8,648,474

Fixed rate debentures in Korean won

10,145,218 7,716,400 (5,791,683 ) (12,793 ) 12,057,142

Floating rate debentures in Korean won

1,169,158 760,600 (423,900 ) — 1,505,858

Sub-total

21,035,124 9,577,000 (6,863,869 ) (37,543 ) 23,710,712

Debentures in foreign currencies

Floating rate debentures

759,783 537,850 (176,050 ) 21,777 1,143,360

Fixed rate debentures

2,553,814 657,465 (772,364 ) (103,856 ) 2,335,059

Sub-total

3,313,597 1,195,315 (948,414 ) (82,079 ) 3,478,419

Total

￦ 24,348,721 ￦ 10,772,315 ￦ (7,812,283 ) ￦ (119,622 ) ￦ 27,189,131

2014
Beginning Issues Repayments Business
combination 		Others Ending
(In millions of Korean won)

Debentures in Korean won

Structured debentures

￦ 1,499,238 ￦ 80,000 ￦ (340,000 ) ￦ — ￦ — ￦ 1,239,238

Subordinated fixed rate debentures in Korean won

8,648,474 — (4,082,350 ) 195,000 — 4,761,124

Fixed rate debentures in Korean won

12,057,142 40,912,000 (36,674,589 ) 2,545,000 — 18,839,553

Floating rate debentures in Korean won

1,505,858 353,200 (726,058 ) — — 1,133,000

Sub-total

23,710,712 41,345,200 (41,822,997 ) 2,740,000 — 25,972,915

Debentures in foreign currencies

Floating rate debentures

1,143,360 1,084,303 (641,957 ) — 62,469 1,648,175

Fixed rate debentures

2,335,059 803,503 (1,633,588 ) — 74,006 1,578,980

Sub-total

3,478,419 1,887,806 (2,275,545 ) — 136,475 3,227,155

Total

￦ 27,189,131 ￦ 43,233,006 ￦ (44,098,542 ) ￦ 2,740,000 ￦ 136,475 ￦ 29,200,070

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23. Provisions

The details of provisions as of December 31, 2013 and 2014, are as follows:

2013 2014
(In millions of Korean won)

Provisions for unused loan commitments

￦ 226,110 ￦ 209,964

Provisions for acceptances and guarantees

209,118 207,927

Provisions for financial guarantee contracts

2,699 2,718

Provisions for asset retirement obligation

76,608 73,442

Other

163,538 120,296

Total

￦ 678,073 ￦ 614,347

Provisions for unused loan commitments as of December 31, 2013 and 2014, are as follows:

2013
Commitments
outstanding 		Provision Ratio
(%)
(In millions of Korean won)

Corporate loan commitments

￦ 42,446,365 ￦ 101,455 0.24

Retail loan commitments

13,976,426 38,385 0.27

Credit line on credit cards

37,112,333 86,270 0.23

Total

￦ 93,535,124 ￦ 226,110 0.24

2014
Commitments
outstanding 		Provision Ratio
(%)
(In millions of Korean won)

Corporate loan commitments

￦ 42,977,471 ￦ 90,315 0.21

Retail loan commitments

13,886,999 34,927 0.25

Credit line on credit cards

37,584,381 84,722 0.23

Total

￦ 94,448,851 ￦ 209,964 0.22

Provisions for acceptances and guarantees as of December 31, 2013 and 2014, are as follows:

2013
Acceptances and
guarantees 		Provision Ratio
(%)
(In millions of Korean won)

Confirmed acceptances and guarantees in Korean won

￦ 1,231,569 ￦ 42,604 3.46

Confirmed acceptances and guarantees in foreign currencies

4,532,036 96,077 2.12

Unconfirmed acceptances and guarantees

4,041,087 70,437 1.74

Total

￦ 9,804,692 ￦ 209,118 2.13

2014
Acceptances and
guarantees 		Provision Ratio
(%)
(In millions of Korean won)

Confirmed acceptances and guarantees in Korean won

￦ 1,098,048 ￦ 37,507 3.42

Confirmed acceptances and guarantees in foreign currencies

4,061,444 79,966 1.97

Unconfirmed acceptances and guarantees

3,886,332 90,454 2.33

Total

￦ 9,045,824 ￦ 207,927 2.30

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The changes in provisions for unused loan commitments, acceptances and guarantees for the years ended December 31, 2013 and 2014, are as follows:

2013
Provisions for
unused loan
commitments 		Provisions for
acceptances and
guarantees 		Total
(In millions of Korean won)

Beginning

￦ 236,026 ￦ 208,753 ￦ 444,779

Effects of changes in foreign exchange rate

(164 ) (961 ) (1,125 )

Provision(reversal)

(9,752 ) 1,326 (8,426 )

Ending

￦ 226,110 ￦ 209,118 ￦ 435,228

2014
Provisions for
unused loan
commitments 		Provisions for
acceptances and
guarantees 		Total
(In millions of Korean won)

Beginning

￦ 226,110 ￦ 209,118 ￦ 435,228

Effects of changes in foreign exchange rate

548 3,358 3,906

Provision(reversal)

(16,694 ) (4,549 ) (21,243 )

Ending

￦ 209,964 ￦ 207,927 ￦ 417,891

The changes in provisions for financial guarantee contracts for the years ended December 31, 2013 and 2014, are as follows:

2013 2014
(In millions of Korean won)

Beginning

￦ 7,383 ￦ 2,699

Provision(reversal)

(4,684 ) 19

Ending

￦ 2,699 ￦ 2,718

The changes in provisions for asset retirement obligation for the years ended December 31, 2013 and 2014, are as follows:

2013 2014
(In millions of Korean won)

Beginning

￦ 65,226 ￦ 76,608

Provision

3,334 5,231

Reversal

(226 ) (6,047 )

Used

(2,475 ) (5,701 )

Unwinding of discount

2,203 2,936

Effects of changes in discount rate

7,908 70

Business combination

638 345

Ending

￦ 76,608 ￦ 73,442

Provisions for asset retirement obligations are the present value of estimated costs to be incurred for the restoration of the leased properties. Actual expenses are expected to be incurred at the end of each lease contract. Three-year historical data of expired leases were used to estimate the average lease period. Also, the average restoration expense based on actual three-year historical data and the three-year historical average inflation rate were used to estimate the present value of estimated costs.

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The details of other provisions as of December 31, 2013 and 2014, are as follows:

2013 2014
(In millions of Korean won)

Membership rewards program

￦ 5,402 ￦ 11,274

Dormant accounts

16,839 33,996

Litigations

23,455 24,506

Others

117,842 50,520

Total

￦ 163,538 ￦ 120,296

The changes in other provisions for the years ended December 31, 2013 and 2014, are as follows:

2013
Membership
rewards
program 		Dormant
accounts 		Litigations Others Total
(In millions of Korean won)

Beginning

￦ 11,108 ￦ 16,028 ￦ 21,215 ￦ 103,990 ￦ 152,341

Increase

13,473 10,596 4,800 18,026 46,895

Decrease

(19,179 ) (9,785 ) (2,560 ) (4,174 ) (35,698 )

Ending

￦ 5,402 ￦ 16,839 ￦ 23,455 ￦ 117,842 ￦ 163,538

2014
Membership
rewards
program 		Dormant
accounts 		Litigations Others Total
(In millions of Korean won)

Beginning

￦ 5,402 ￦ 16,839 ￦ 23,455 ￦ 117,842 ￦ 163,538

Increase

21,442 49,040 2,965 3,352 76,799

Decrease

(15,570 ) (31,883 ) (1,914 ) (70,947 ) (120,314 )

Business combination

— — — 273 273

Ending

￦ 11,274 ￦ 33,996 ￦ 24,506 ￦ 50,520 ￦ 120,296

24. Net Defined benefit liabilities

Defined benefit plan

The Group operates defined benefit plans which have the following characteristics:

•

The Group has the obligation to pay the agreed benefits to all its current and former employees.

•

Actuarial risk (that benefits will cost more than expected) and investment risk fall, in substance, on the Group.

The defined benefit liability recognized in the statements of financial position is calculated annually by independent actuaries in accordance with actuarial valuation methods.

The defined benefit obligation is calculated using the Projected Unit Credit method (the ‘PUC’). Data used in the PUC such as interest rates, future salary increase rate, mortality rate and consumer price index are based on observable market data and historical data which are updated annually.

Actuarial assumptions may differ from actual results, due to changes in the market, economic trends and mortality trends which may impact defined benefit liabilities and future payments. Actuarial gains and losses arising from changes in actuarial assumptions are recognized in the period incurred through other comprehensive income (loss).

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The changes in the net defined benefit liabilities for the years ended December 31, 2013 and 2014, are as follows:

2013
Present value of
defined benefit
obligation 		Fair value of plan
assets 		Net defined benefit
liabilities
(In millions of Korean won)

Beginning

￦ 942,333 ￦ (858,610 ) ￦ 83,723

Current service cost

172,857 — 172,857

Interest cost(income)

33,282 (30,321 ) 2,961

Past service cost

1,005 — 1,005

Gain or loss on settlement

(4,244 ) — (4,244 )

Remeasurements

Actuarial gains and losses by changes in demographic assumptions

563 — 563

Actuarial gains and losses by changes in financial assumptions

(62,793 ) — (62,793 )

Actuarial gains and losses by experience adjustments

7,066 — 7,066

Return on plan assets (excluding amounts included in interest income)

— 1,096 1,096

Contributions

— (132,870 ) (132,870 )

Payments from plans (settlement)

(65,493 ) 65,212 (281 )

Payments from plans (benefit payments)

(34,814 ) 34,772 (42 )

Payments from the Group

(4,590 ) — (4,590 )

Transfer in

2,551 (2,315 ) 236

Transfers out

(2,551 ) 2,314 (237 )

Effect of exchange rate changes

(94 ) — (94 )

Business combination

117 — 117

Ending

￦ 985,195 ￦ (920,722 ) ￦ 64,473

2014
Present value of
defined benefit
obligation 		Fair value of plan
assets 		Net defined benefit
liabilities
(In millions of Korean won)

Beginning

￦ 985,195 ￦ (920,722 ) ￦ 64,473

Current service cost

163,997 — 163,997

Interest cost(income)

39,208 (36,545 ) 2,663

Past service cost

11 — 11

Remeasurements

Actuarial gains and losses by changes in demographic assumptions

(36 ) — (36 )

Actuarial gains and losses by changes in financial assumptions

112,550 — 112,550

Actuarial gains and losses by experience adjustments

6,303 — 6,303

Return on plan assets (excluding amounts included in interest income)

— 12,576 12,576

Contributions

— (288,212 ) (288,212 )

Payments from plans (settlement)

(43,108 ) 43,054 (54 )

Payments from the Group

(3,567 ) — (3,567 )

Transfer in

3,788 (3,788 ) —

Transfers out

(3,788 ) 3,661 (127 )

Effect of exchange rate changes

(27 ) — (27 )

Business combination

10,552 (5,418 ) 5,134

Ending

￦ 1,271,078 ￦ (1,195,394 ) ￦ 75,684

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The details of the net defined benefit liabilities as of December 31, 2013 and 2014, are as follows:

2013 2014
(In millions of Korean won)

Present value of defined benefit obligation

￦ 985,195 ￦ 1,271,078

Fair value of plan assets

(920,722 ) (1,195,394 )

Net Defined benefit liabilities

￦ 64,473 ￦ 75,684

The details of post-employment benefits recognized in profit or loss as employee compensation and benefits for the years ended December 31, 2012, 2013 and 2014, are as follows:

2012 2013 2014
(In millions of Korean won)

Current service cost

￦ 154,552 ￦ 172,857 ￦ 163,997

Past service cost

12,855 1,005 11

Gain or loss on settlement

(389 ) (4,244 ) —

Net interest expenses of net defined benefit liabilities

5,373 2,961 2,663

Post-employment benefits (1)

￦ 172,391 ￦ 172,579 ￦ 166,671

(1)

Post-employment benefits amounting to ￦883 million, ￦1,471 million and ￦971 million for the years ended December 31, 2012, 2013 and 2014, respectively, are recognized as other operating expense in the statements of comprehensive income.

Remeasurements of the net defined benefit liabilities recognized as other comprehensive income for the years ended December 31, 2012, 2013 and 2014, are as follows:

2012 2013 2014
(In millions of Korean won)

Remeasurements

Return on plan assets (excluding amounts included in interest income)

￦ 1,243 ￦ (1,096 ) ￦ (12,576 )

Actuarial gains and losses

(41,184 ) 55,165 (118,817 )

Income tax effects

9,669 (13,085 ) 31,799

Remeasurements after income tax

￦ (30,272 ) ￦ 40,984 ￦ (99,594 )

The details of fair value of plan assets as of December 31, 2013 and 2014, are as follows:

2013
Assets quoted
in an active
market 		Assets not
quoted in
an active
market 		Total
(In millions of Korean won)

Cash and due from financial institutions

￦ — ￦ 915,584 ￦ 915,584

Repurchase agreements

— 5,138 5,138

Total

￦ — ￦ 920,722 ￦ 920,722

2014
Assets quoted
in an active
market 		Assets not
quoted in
an active
market 		Total
(In millions of Korean won)

Cash and due from financial institutions

￦ — ￦ 1,195,394 ￦ 1,195,394

Total

￦ — ￦ 1,195,394 ￦ 1,195,394

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Key actuarial assumptions used as of December 31, 2013 and 2014, are as follows:

2013 2014

Discount rate (%)

2.90 ~ 4.00 2.20 ~ 3.10

Salary increase rate (%)

0.00 ~ 8.90 0.00 ~ 8.50

Turnover (%)

0.00 ~ 32.00 0.00 ~ 32.00

Mortality assumptions are based on the 7 th experience-based mortality table (retirement pension) of Korea Insurance Development Institute of 2012.

The sensitivity of the defined benefit obligation to changes in the weighted principal assumptions as of December 31, 2014, is as follows:

Changes in principal
assumption 		Effect on net defined benefit obligation
Increase in principal
assumption 		Decrease in principal
assumption

Discount rate (%)

0.5 p. 4.49 decrease 4.77 increase

Salary increase rate (%)

0.5 p. 4.39 increase 4.27 decrease

Turnover (%)

0.5 p. 0.53 decrease 0.42 increase

The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. The sensitivity of the defined benefit obligation to changes in principal actuarial assumptions is calculated using the projected unit credit method, the same method applied when calculating the defined benefit obligations recognized on the statement of financial position.

Expected maturity analysis of undiscounted pension benefits as of December 31, 2014, is as follows:

Up to 1 year

1~2 years 2~5 years 5~10 years Over
10 years 		Total
(In millions of Korean won)

Pension benefits

￦26,981 ￦87,525 ￦326,571 ￦902,146 ￦1,188,644 ￦2,531,867

The weighted average duration of the defined benefit obligation is 1.0 ~ 14.4 years.

Expected contribution to plan assets for periods after December 31, 2014, is estimated to be 195,236 million.

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25. Other liabilities

The details of other liabilities as of December 31, 2013 and 2014, are as follows:

2013 2014
(In millions of Korean won)

Other financial liabilities

Other payables

￦ 4,582,344 ￦ 4,712,587

Prepaid card and debit card

18,527 19,578

Accrued expenses

4,053,809 3,123,144

Financial guarantee liabilities

11,797 13,237

Deposits for letter of guarantees and others

108,786 351,041

Domestic exchange settlement credits

998,928 128,739

Foreign exchanges settlement credits

83,237 69,440

Borrowings from other business account

7,911 40,383

Other payables from trust accounts

2,423,675 2,548,577

Liability Incurred by agency relationship

532,157 505,664

Account for agency businesses

384,921 340,062

Dividend payables

485 477

Other payables from factored receivables

42,924 37,734

Others

13,413 28,157

Sub-total

13,262,914 11,918,820

Other non-financial liabilities

Other payables

44,982 72,370

Unearned revenue

123,033 154,066

Accrued expenses

191,513 208,226

Deferred revenue on credit card points

117,659 115,658

Withholding taxes

111,975 106,291

Insurance liabilities

5,599,043 6,265,198

Separate account liabilities

702,757 698,832

Others

82,353 57,741

Sub-total

6,973,315 7,678,382

Total

￦ 20,236,229 ￦ 19,597,202

26. Equity

26.1 Capital Stock

The details of outstanding shares of the Parent Company as of December 31, 2013 and 2014, are as follows:

Ordinary shares
2013 2014

Number of shares authorized

1,000,000,000 1,000,000,000

Number of shares

386,351,693 386,351,693

Par value per share

￦ 5,000 ￦ 5,000

Share capital stock (1)

￦ 1,931,758 ￦ 1,931,758

(1)

In millions of Korean won.

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26.2 Capital surplus

The details of capital surplus as of December 31, 2013 and 2014, are as follows:

2013 2014
(In millions of Korean won)

Share premium

￦ 12,226,596 ￦ 12,226,596

Loss on sale of treasury shares

(568,544 ) (568,544 )

Other capital surplus

4,196,553 4,196,458

Total

￦ 15,854,605 ￦ 15,854,510

26.3 Accumulated other comprehensive income

The details of accumulated other comprehensive income as of December 31, 2013 and 2014, are as follows:

2013 2014
(In millions of Korean won)

Remeasurements of net defined benefit liabilities

￦ (12,523 ) ￦ (110,814 )

Exchange differences on translating foreign operations

(29,433 ) (12,153 )

Change in value of available-for-sale financial assets

430,976 680,900

Change in value of held-to-maturity financial assets

4,904 3,823

Shares of other comprehensive income of associates

(57,097 ) (89,303 )

Cash flow hedges

(515 ) (10,774 )

Total

￦ 336,312 ￦ 461,679

26.4 Retained earnings

The details of retained earnings as of December 31, 2013 and 2014, consist of:

2013 2014
(In millions of Korean won)

Legal reserves (1)

￦ 188,638 ￦ 208,221

Voluntary reserves

982,000 982,000

Unappropriated retained earnings (2)

6,688,961 7,876,924

Total

￦ 7,859,599 ￦ 9,067,145

(1)

With respect to the allocation of net profit earned in a fiscal term, the Parent Company must set aside in its legal reserve an amount equal to at least 10% of its net income after tax as reported in the separate statement of comprehensive income each time it pays dividends on its net profits earned until its legal reserve reaches at least the aggregate amount of its share capital in accordance with Article 53 of the Financial Holding Company Act. The reserve is not available for the payment of cash dividends, but may be transferred to share capital, or used to reduce accumulated deficit.

(2)

Retained earnings restricted for dividend at subsidiaries level pursuant to law and regulations amounts to ￦2,456,352 million as of December 31, 2014.

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27. Net Interest Income

The details of interest income and interest expense for the years ended December 31, 2012, 2013 and 2014, are as follows:

2012 2013 2014
(In millions of Korean won)

Interest income

Due from financial institutions

￦ 160,400 ￦ 146,105 ￦ 190,302

Loans

12,310,713 10,778,258 10,168,304

Financial investments

Available-for-sale financial assets

799,020 694,218 571,755

Held-to-maturity financial assets

626,763 574,586 548,361

Other

313,210 163,763 156,574

Sub-total

14,210,106 12,356,930 11,635,296

Interest expenses

Deposits

5,450,781 4,279,153 3,845,468

Debts

394,812 289,652 265,773

Debentures

1,261,542 1,190,446 1,032,111

Other

65,188 74,847 76,169

Sub-total

7,172,323 5,834,098 5,219,521

Net interest income

￦ 7,037,783 ￦ 6,522,832 ￦ 6,415,775

Interest income recognized on impaired loans and financial investments amounts to ￦108,968 million (2013: ￦127,120 million, 2012: ￦124,183 million) and ￦242 million (2013: ￦569 million, 2012: ￦200 million), respectively, for the year ended December 31, 2012, 2013 and 2014.

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28. Net Fee and Commission income

The details of fee and commission income, and fee and commission expense for the years ended December 31, 2012, 2013 and 2014, are as follows:

2012 2013 2014
(In millions of Korean won)

Fee and commission income

Banking activity fees

￦ 169,244 ￦ 167,507 ￦ 167,452

Lending activity fees

89,964 90,413 74,133

Credit card related fees and commissions

1,179,618 1,126,944 1,106,601

Debit card related fees and commissions

217,870 255,742 291,723

Agent activity fees

285,183 207,036 158,022

Trust and other fiduciary fees

148,672 160,521 230,839

Fund management related fees

81,477 93,494 89,264

Guarantee fees

33,594 34,173 29,811

Foreign currency related fees

108,611 102,047 96,018

Commissions from transfer agent services

174,829 177,793 148,583

Other business account commission on consignment

30,354 29,799 25,311

Securities brokerage fees

67,858 68,158 68,249

Lease fee

— — 16,050

Other

166,602 143,738 164,129

Sub-total

2,753,876 2,657,365 2,666,185

Fee and commission expense

Trading activity related fees (1)

14,963 9,358 7,938

Lending activity fees

20,466 18,791 9,958

Credit card and debit card related fees and commissions

997,368 934,114 979,913

Outsourcing related fees

62,546 74,516 76,604

Foreign currency related fees

11,638 12,561 12,812

Management fees of written-off loans

3,284 4,065 9,853

Other

76,905 124,721 186,378

Sub-total

1,187,170 1,178,126 1,283,456

Net fee and commission income

￦ 1,566,706 ￦ 1,479,239 ￦ 1,382,729

(1)

The fees from financial assets/liabilities at fair value through profit or loss.

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

29.1 Net gains or losses on financial instruments held for trading

Net gain or loss from financial instruments held for trading includes interest income, dividend income and gains or losses arising from changes in the fair values, sales and redemptions. The details for the years ended December 31, 2012, 2013 and 2014, are as follows:

2012 2013 2014
(In millions of Korean won)

Gains related to financial instruments held for trading

Financial assets held for trading

Debt securities

￦ 462,456 ￦ 340,601 ￦ 471,048

Equity securities

117,103 109,698 68,024

Sub-total

579,559 450,299 539,072

Derivatives held for trading

Interest rate

948,426 1,090,262 1,327,839

Currency

2,718,568 2,524,173 1,919,287

Stock or stock index

685,454 218,509 153,863

Commodity

486 1,336 568

Other

20,668 20,825 6,894

Sub-total

4,373,602 3,855,105 3,408,451

Financial liabilities held for trading

69,866 95,382 35,645

Other financial instruments

48 70 47

Total

￦ 5,023,075 ￦ 4,400,856 ￦ 3,983,215

Losses related to financial instruments held for trading

Financial assets held for trading

Debt securities

￦ 72,078 ￦ 118,362 ￦ 38,888

Equity securities

70,852 81,733 85,808

Sub-total

142,930 200,095 124,696

Derivatives held for trading

Interest rate

962,738 1,076,647 1,411,540

Currency

2,274,799 2,007,454 1,796,605

Stock or stock index

665,037 224,019 101,267

Commodity

506 182 547

Other

14,651 2,343 841

Sub-total

3,917,731 3,310,645 3,310,800

Financial liabilities held for trading

113,929 110,114 97,621

Other financial instruments

35 29 50

Total

￦ 4,174,625 ￦ 3,620,883 ￦ 3,533,167

Net gains or losses on financial instruments held for trading

￦ 848,450 ￦ 779,973 ￦ 450,048

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

Net gain or loss from financial instruments designated at fair value through profit or loss includes interest income, dividend income and gains or losses arising from changes in the fair values, sales and redemptions. The details for the years ended December 31, 2012, 2013 and 2014, are as follows:

2012 2013 2014
(In millions of Korean won)

Gains related to financial instruments designated at fair value through profit or loss

Financial assets designated at fair value through profit or loss

￦ 117,213 ￦ 23,760 ￦ 28,496

Financial liabilities designated at fair value through profit or loss

5,230 20,846 34,468

Sub-total

122,443 44,606 62,964

Losses related to financial instruments designated at fair value through profit or loss

Financial assets designated at fair value through profit or loss

6,753 14,754 22,521

Financial liabilities designated at fair value through profit or loss

152,176 53,003 51,293

Sub-total

158,929 67,757 73,814

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

￦ (36,486 ) ￦ (23,151 ) ￦ (10,850 )

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30. Other operating income and expenses

The details of other operating income and expenses for the years ended December 31, 2012, 2013 and 2014, are as follows:

2012 2013 2014
(In millions of Korean won)

Other operating income

Revenue related to available-for-sale financial assets

Gains on redemption of available-for-sale financial assets

￦ 480 ￦ 867 ￦ —

Gains on sale of available-for-sale financial assets

149,925 189,011 91,925

Reversal for Impairment on available-for-sale financial assets

— — 260

Sub-total

150,405 189,878 92,185

Revenue related to available-for-sale held-to-maturity investments

Gains on sale of available-for- sale held-to-maturity investments

— — 1,668

Sub-total

— — 1,668

Gains on foreign exchange transactions

1,093,904 1,387,450 1,490,797

Income related to insurance

1,730,466 1,233,773 1,215,031

Dividend income

69,023 64,441 78,298

Others

242,169 261,886 221,745

Total other operating income

3,285,967 3,137,428 3,099,724

Other operating expenses

Expense related to available-for-sale financial assets

Loss on redemption of available-for-sale financial assets

11 65 7

Loss on sale of available-for-sale financial assets

16,884 25,157 7,381

Impairment on available-for-sale financial assets

280,610 163,464 195,929

Sub-total

297,505 188,686 203,317

Expense related to held-to-maturity financial assets

Impairment on held-to-maturity financial assets

154 5 —

Sub-total

154 5 —

Loss on foreign exchanges transactions

1,410,525 1,667,335 1,456,918

Expense related to insurance

1,822,178 1,358,830 1,352,384

Others

1,287,547 1,227,337 1,128,014

Total other operating expenses

4,817,909 4,442,193 4,140,633

Net other operating income (expenses)

￦ (1,531,942 ) ￦ (1,304,765 ) ￦ (1,040,909 )

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31. General and administrative expenses

31.1 General and administrative expenses

The details of general and administrative expenses for the years ended December 31, 2012, 2013 and 2014, are as follows:

2012 2013 2014
(In millions of Korean won)

Employee Benefits

Salaries and short-term employee benefits—salaries

￦ 1,598,045 ￦ 1,641,326 ￦ 1,700,120

Salaries and short-term employee benefits—others

657,473 677,107 706,309

Post-employment benefits—defined benefit plans

171,508 171,108 165,700

Post-employment benefits—defined contribution plans

5,463 7,094 8,821

Termination benefits

(3,960 ) 19,714 1,124

Share-based payments

13,871 17,289 11,422

Sub-total

2,442,400 2,533,638 2,593,496

Depreciation and amortization

328,152 286,756 261,056

Other general and administrative expenses

Rental expense

276,769 290,886 297,656

Tax and dues

72,111 141,274 150,443

Communication

53,549 55,549 38,661

Electricity and utilities

24,898 26,315 27,988

Publication

20,764 19,259 19,642

Repairs and maintenance

13,426 14,615 16,892

Vehicle

12,114 11,816 11,579

Travel

5,526 5,722 5,489

Training

22,443 19,498 17,362

Service fees

105,972 104,210 106,403

Others

467,486 474,026 463,027

Sub-total

1,075,058 1,163,170 1,155,142

Total

￦ 3,845,610 ￦ 3,983,564 ￦ 4,009,694

31.2 Share-based payments

31.2.1 Share options

The details of the share options as of December 31, 2014, are as follows:

Grant date Exercise period Granted shares (1) Vesting conditions
(Years) (In number of shares)

Series 22

2007.02.08 8 855,000 Service period: 1, 3 years

Series 23

2007.03.23 8 30,000 Service period: 3 years

Total

885,000

(1)

Granted shares represent the total number of shares initially granted to directors and employees whose options have not been exercised at the end of the reporting period.

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The changes in the number of granted share options and the weighted average exercise price for the years ended December 31, 2013 and 2014, are as follows:

2013
Number of granted shares Number of
exercisable
shares 		Exercise
price per
share 		Remaining
contractual
life(Years)
Beginning Expired Ending
(In Korean won, except shares)

Series 15-1

125,362 125,362 — — — —

Series 15-2

440,928 440,928 — — — —

Series 17

29,441 29,441 — — — —

Series 18

7,212 7,212 — — — —

Series 19

751,651 — 751,651 751,651 77,063 0.23

Series 20

25,613 — 25,613 25,613 81,900 0.32

Series 21

18,987 — 18,987 18,987 76,600 0.82

Series 22

657,498 — 657,498 657,498 77,100 1.11

Series 23

15,246 — 15,246 15,246 84,500 1.22

Total

2,071,938 602,943 1,468,995 1,468,995

Weighted average exercise price

￦ 68,909 ￦ 48,625 ￦ 77,235 ￦ 77,235

2014
Number of granted shares Number of
exercisable
shares 		Exercise
price per
share 		Remaining
contractual
life(Years)
Beginning Expired Ending
(In Korean won, except shares)

Series 19

751,651 751,651 — — — —

Series 20

25,613 25,613 — — — —

Series 21

18,987 18,987 — — — —

Series 22

657,498 — 657,498 657,498 77,100 0.11

Series 23

15,246 — 15,246 15,246 84,500 0.22

Total

1,468,995 796,251 672,744 672,744

Weighted average exercise price

￦ 77,235 ￦ 77,207 ￦ 77,268 ￦ 77,268

The fair value of each option granted is estimated using a Black-Scholes option pricing model based on the assumptions in the table below:

Share
price 		Weighted
average
exercise
price 		Expected
volatility
(%) 		Option’s
expected
life
(Years) 		Expected
dividends 		Risk free
interest
rate (%) 		Fair
value
(In Korean won)

Series 22 (Directors)

￦ 38,200 ￦ 77,100 11.15 0.05 ￦ 32 2.07 —

Series 22 (Employees)

38,200 77,100 11.15 0.05 32 2.07 —

Series 23 (Non-executive directors)

38,200 84,500 8.01 0.11 67 2.07 —

The option’s expected life is separately estimated for employees and directors using actual historical behavior and projected future behavior to reflect the effects of expected early exercise. Expected volatility is based on the historical volatility of the share price over the most recent period that is generally commensurate with the expected term of the option. To reflect the changes in exercise price which is indexed to the sum of the major competitors’ total market capitalization, cross volatility is used in calculating the expected volatility.

31.2.2 Share Grants

The Group changed the scheme of share-based payment from share options to share grants in November 2007. The share grant award program is an incentive plan that sets, on grant date, the maximum amount of shares that can be awarded. Actual shares granted at the end of the vesting period is determined in accordance with achievement of pre-specified targets over the vesting period.

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The details of the share grants as of December 31, 2014, are as follows:

Grant date Number of  granted
shares (1)

Vesting conditions

(In number of shares)

(KB Financial Group Inc.)

Series 4

2010.07.13 180,707 Services fulfillment, Achievements of targets on the basis of market and non-market performance (2),(3)

Series 8

2012.01.01 13,471

Services fulfillment, Achievements of targets on the basis of market and non-market performance (2),(4)

Series 9

2013.07.17 82,699

Services fulfillment, Achievements of targets on the basis of market and non-market performance (2),(4)

Series 10

2014.01.01 37,732

Services fulfillment, Achievements of targets on the basis of market and non-market performance (2),(4)

Series 11

2013.07.13 69,892

Services fulfillment, Achievements of targets on the basis of market and non-market performance (2),(3)

Deferred grant in 2010

— 6,583

Satisfied

Deferred grant in 2011

— 1,435

Satisfied

Deferred grant in 2012

— 7,975

Satisfied

Deferred grant in 2013

— 2,617 Satisfied

Sub-total

403,111

(Kookmin Bank)

Series 41

2012.08.02 23,521

Services fulfillment, Achievements of targets on the basis of market and non-market performance (2),(5)

Series 43

2012.11.26 13,918

Services fulfillment, Achievements of targets on the basis of market and non-market performance (2),(5)

Series 44

2013.01.01 17,242

Services fulfillment, Achievements of targets on the basis of market and non-market performance (2),(5)

Series 45...

2013.01.01 9,698

Services fulfillment, Achievements of targets on the basis of market and non-market performance (2),(5)

Series 46

2013.01.01 103,440

Services fulfillment, Achievements of targets on the basis of market and non-market performance (2),(5)

Series 48

2013.07.23 74,666

Services fulfillment, Achievements of targets on the basis of market and non-market performance (2),(6)

Series 49

2013.07.24 101,828

Services fulfillment, Achievements of targets on the basis of market and non-market performance (2),(6)

Series 50

2013.07.24 82,926

Services fulfillment, Achievements of targets on the basis of market and non-market performance (2),(6)

Series 51

2013.07.25 9,899

Services fulfillment, Achievements of targets on the basis of market and non-market performance (2),(6)

Series 52

2013.08.01 10,278

Services fulfillment, Achievements of targets on the basis of market and non-market performance (2),(6)

Series 53

2013.07.19 69,256

Services fulfillment, Achievements of targets on the basis of market and non-market performance (2),(7)

Series 54

2013.07.23 26,689

Services fulfillment, Achievements of targets on the basis of market and non-market performance (2),(7)

Series 55

2014.01.03 11,060

Services fulfillment, Achievements of targets on the basis of market and non-market performance (2),(8)

Series 56

2013.12.30 17,798

Services fulfillment, Achievements of targets on the basis of market and non-market performance (2),(6)

Series 57

2014.01.01 44,265

Services fulfillment, Achievements of targets on the basis of market and non-market performance (2),(6)

Series 58

2014.01.01 78,700

Services fulfillment, Achievements of targets on the basis of market and non-market performance (2),(6)

Series 59

2014.08.26 9,106

Services fulfillment, Achievements of targets on the basis of market and non-market performance (2),(6)

Deferred grant in 2010

— 171

Satisfied

Deferred grant in 2011

— 8,454

Satisfied

Deferred grant in 2012

— 31,348

Satisfied

Deferred grant in 2013

— 92,316 Satisfied

Sub-total

836,579

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Grant date Number of  granted
shares (1)

Vesting conditions

(In number of shares)

(Other subsidiaries)

Share granted in 2010

3,485

Services fulfillment, Achievements of targets on the basis of market and non-market performance (9)

Share granted in 2011

7,648

Services fulfillment, Achievements of targets on the basis of market and non-market performance (9)

Share granted in 2012

63,976

Services fulfillment, Achievements of targets on the basis of market and non-market performance (9)

Share granted in 2013

104,394

Services fulfillment, Achievements of targets on the basis of market and non-market performance (9)

Share granted in 2014

82,759

Services fulfillment, Achievements of targets on the basis of market and non-market performance (9)

Sub-total

262,262

Total

1,501,952

(1)

Granted shares represent the total number of shares initially granted to directors and employees at the end of reporting period.

(2)

Certain portion of the granted shares is compensated over a maximum period of three years.

(3)

The 37.5%, 37.5% and 25% of the number of certain granted shares to be compensated are determined based on the accomplishment of targeted relative TSR, targeted EPS and qualitative indicators, respectively. The 30%, 30% and 40% of the number of other granted shares to be compensated are determined based on the accomplishment of the targeted Value-up Index, targeted financial results of the Company and its subsidiaries (Group) and targeted relative TSR, respectively. The 40%, 40% and 20% of the number of the remaining granted shares to be compensated are determined based on the accomplishment of the targeted relative TSR, the targeted EPS and qualitative indicators, respectively.

(4)

The 30%, 30% and 40% of the number of granted shares to be compensated are determined upon the accomplishment of the targeted Value-up Index, targeted financial results of the Company and its subsidiaries (Group) and the targeted relative TSR, respectively. However, 50% and 50% of certain granted shares will be compensated based on the accomplishment of the targeted Value-up Index and the accomplishment of targeted relative TSR.

(5)

The 40%, 30% and 30% of the number of granted shares to be compensated are determined based on the accomplishment of the targeted relative TSR, the targeted Value-up Index and the targeted financial results of the Bank, respectively.

(6)

The 30%, 30% and 40% of the number of granted shares to be compensated are determined upon the accomplishment of the targeted financial results of the Bank, the targeted relative TSR and the targeted Value-up Index, respectively. However, as for certain number of shares, half of the number of granted shares to be compensated is determined based on the accomplishment of the targeted relative TSR, while the other half is determined by the targeted Value-up Index.

(7)

The 30%, 45% and 25% of the number of granted shares to be compensated are determined based on the accomplishment of the targeted relative TSR, the ROA and the growth rate of total assets, respectively.

(8)

The number of granted shares to be compensated is not linked to performance, but fixed.

(9)

The 30%, 30% and 40% of the number of granted shares to be compensated are determined based on the accomplishment of the targeted Value-up Index, the respective subsidiaries’ performance and the targeted relative TSR, respectively. The 60% and 40% of the number of certain granted shares to be compensated is determined based on the accomplishment of the respective subsidiaries’ performance and the accomplishment of the targeted relative TSR, respectively. The 40%, 30% and 30% of the number of certain granted shares to be compensated is determined based on the accomplishment of the targeted Value-up Index, the respective subsidiaries’ performance and the targeted relative TSR, respectively.

The share grant award program is an incentive plan that sets, on grant date, the maximum amount of shares that can be awarded. Actual shares granted at the end of the vesting period is determined in accordance with achievement of pre-specified targets over the vesting period.

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The details of share grants linked to short-term performance as of December 31, 2014, are as follows:

Grant date Number of  vested
shares (1)

Vesting Conditions

(KB Financial Group Inc.)

Share granted in 2010

2010.01.01 322 Satisfied

Share granted in 2011

2011.01.01 7,295 Satisfied

Share granted in 2012

2012.01.01 15,782 Satisfied

Share granted in 2013

2013.01.01 16,560 Satisfied

Share granted in 2014

2014.01.01 25,174 Proportion to service period

(Kookmin Bank)

Share granted in 2010

2010.01.01 363 Satisfied

Share granted in 2011

2011.01.01 46,845 Satisfied

Share granted in 2012

2012.01.01 103,177 Satisfied

Share granted in 2013

2013.01.01 102,343 Satisfied

Share granted in 2014

2014.01.01 173,132 Proportion to service period

(Other subsidiaries)

Share granted in 2013

2013.01.01 9,823 Satisfied

Share granted in 2014

2014.01.01 28,149 Proportion to service period

(1)

The number of shares, which are exercisable, is determined by the results of performance. The share grants are settled over three years.

Share grants are measured at fair value using the Monte Carlo Simulation Model and assumptions used in determining the fair value as of December 31, 2014, are as follows:

Expected
exercise
period
(Years) 		Risk free
rate (%) 		Fair value
(Market
performance
condition) 		Fair value
(Non-market
performance
condition)

Linked to long term performance

(KB Financial Group Inc.)

Series 4

0.00~1.53 2.07 — 35,315~36,425

Series 4-1

0.00~1.53 2.07 — 35,315~36,425

Series 4-2

0.00~1.00 2.07 — 36,389~40,662

Series 8

0.00~2.00 2.07 — 36,389~40,662

Series 9

0.00~3.00 2.07 38,617 36,389~38,111

Series 9-1

0.00~3.00 2.07 39,437 36,389~38,111

Series 9-2

1.00~4.00 2.07 33,363 35,653~36,835

Series 9-3

0.00~3.00 2.07 39,223 36,389~38,111

Series 9-4

0.00~3.00 2.07 37,036 36,389~38,111

Series 10

0.00~3.00 2.07 38,617 36,389~38,111

Series 10-1

1.00~4.00 2.07 32,645 35,653~36,835

Series 10-2

1.00~4.00 2.07 33,110 35,653~36,835

Series 11

1.53~4.53 2.08 35,335 36,639~36,858

Deferred grant in 2010

0.00~1.00 2.07 — 36,389~38,111

Deferred grant in 2011

0.00~2.00 2.07 — 36,389~38,111

Deferred grant in 2012

0.00~2.00 2.07 — 36,389~38,111

Deferred grant in 2013

0.00~2.00 2.07 — 36,389~38,111

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Expected
exercise
period
(Years) 		Risk free
rate (%) 		Fair value
(Market
performance
condition) 		Fair value
(Non-market
performance
condition)

(Kookmin Bank)

Series 41-1

0.00~3.00 2.07 — 36,389~38,111

Series 41-2

0.00~3.00 2.07 — 36,389~38,111

Series 43

0.00~3.00 2.07 — 36,389~38,111

Series 44

0.00~2.00 2.07 — 36,389~40,662

Series 45

0.00~3.00 2.07 — 36,389~38,111

Series 46

0.00~3.00 2.07 — 36,389~38,111

Series 48

0.56~4.00 2.07 35,029 36,389~36,835

Series 48-1

0.00~3.00 2.07 36,734 36,389~38,111

Series 48-2

0.00~3.00 2.07 38,617 36,389~38,111

Series 49

0.56~4.00 2.07 34,972 36,389~36,835

Series 49-1

0.65~4.00 2.07 34,906 36,389~36,835

Series 49-2

0.00~3.00 2.07 38,617 36,389~38,111

Series 50

0.56~4.00 2.07 34,972 36,389~36,835

Series 50-1

0.00~3.00 2.07 38,617 36,389~38,111

Series 51

0.00~3.00 2.07 38,617 36,389~38,111

Series 52

0.58~4.00 2.07 34,977 36,389~36,835

Series 53

0.00~2.68 2.07 38,284 36,317~40,991

Series 54

0.00~3.00 2.07 38,617 36,389~38,111

Series 55

2.01~5.01 2.08 — 36,551~37,053

Series 56

0.00~3.00 2.07 32,595 36,389~36,835

Series 56-1

0.00~3.00 2.07 36,854 36,389~38,111

Series 57

1.00~4.00 2.07 32,645 36,389~36,835

Series 57-1

0.00~3.00 2.07 38,617 36,389~38,111

Series 58

1.00~4.00 2.07 32,645 36,389~36,835

Series 59

0.00~3.00 2.07 38,617 36,389~38,111

Grant deferred in 2012

0.00~1.00 2.07 — 36,389~38,111

Grant deferred in 2013

0.00~2.00 2.07 — 36,205~38,111

(Other subsidiaries)

Share granted in 2012

0.00~0.54 2.07 0~21,928 35,968~38,617

Share granted in 2013

0.00~1.75 2.07~2.08 0~33,505 35,115~40,662

Share granted in 2014

1.00~2.67 2.07~2.10 30,801~33,312 34,676~36,835

Linked to short-term performance

(KB Financial Group Inc.)

Share granted in 2012

0.00~1.00 2.07 — 36,389~40,662

Share granted in 2013

0.00~2.00 2.07 — 36,389~38,111

Share granted in 2014

1.00~3.00 2.07 — 36,389~36,684

(Kookmin Bank)

Share granted in 2012

0.00~1.00 2.07 — 36,389~38,111

Share granted in 2013

0.00~2.00 2.07 — 36,389~38,111

Share granted in 2014

1.00~3.00 2.07 — 36,389~38,111

(Other subsidiaries)

Share granted in 2013

0.00~2.00 2.07 — 36,389~38,111

Share granted in 2014

2.00~4.00 2.07 — 36,498~36,835

Expected volatility is based on the historical volatility of the share price over the most recent period that is generally commensurate with the expected term of the grant. And the current stock price of December 31, 2014, was used for the underlying asset price. Additionally, the average three-year historical dividend rate was used as the expected dividend rate.

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As of December 31, 2013 and 2014, the accrued expenses related to share-based payments including share options and share grants amounted to ￦48,423 million and ￦48,734 million, respectively, and the compensation costs from share options and share grants amounting to ￦17,289 million and ￦11,422 million were incurred during the years ended December 31, 2013 and 2014, respectively. There is no intrinsic value of the vested share options as of December 31, 2013 and 2014.

32. Other non-operating income and expenses

The details of other non-operating income and expenses for the years ended December 31, 2012, 2013 and 2014, are as follows:

2012 2013 2014
(In millions of Korean won)

Other non-operating income

Gains of disposal in property and equipment

￦ 5,840 ￦ 819 ￦ 491

Rent received

4,349 8,615 10,035

Others

50,666 101,848 62,041

Sub-total

60,855 111,282 72,567

Other non-operating expenses

Losses of disposal in property and equipment

426 928 1,297

Donation

80,446 59,760 52,330

Restoration cost

945 909 2,242

Others

97,310 61,994 87,824

Sub-total

179,127 123,591 143,693

Net other non-operating income(expense)

￦ (118,272 ) ￦ (12,309 ) ￦ (71,126 )

33. Income tax expenses

Income tax expense for the years ended December 31, 2012, 2013 and 2014, consist of:

2012 2013 2014
(In millions of Korean won)

Tax payable

Current tax expense

￦ 695,135 ￦ 569,449 ￦ 512,536

Adjustments recognized in the period for current tax of prior years

(20,517 ) 75,938 (11,721 )

Changes in deferred income tax assets (liabilities)

(87,494 ) (89,477 ) 31,255

Income tax recognized directly in equity

Remeasurements of net defined benefit liabilities

9,663 (13,085 ) 31,386

Change in value of available-for-sale financial assets

(77,956 ) 7,942 (79,473 )

Change in value of held-to-maturity financial assets

(240 ) (1,787 ) 198

Share of other comprehensive income of associates

390 9 (6 )

Cash flow hedges

1,025 (618 ) 2,619

Others

(29 ) — —

Others

— (7,778 ) (480 )

Tax expense

￦ 519,977 ￦ 540,593 ￦ 486,314

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An analysis of the net profit before income tax and income tax expense for the years ended December 31, 2012, 2013 and 2014, follows:

2012 2013 2014
(In millions of Korean won)

Net profit before income tax

￦ 2,298,644 ￦ 1,815,291 ￦ 1,901,425

Tax at the applicable tax rate (1)

555,810 438,838 459,683

Non-taxable income

(6,291 ) (17,716 ) (11,171 )

Non-deductible expense

13,263 33,489 14,916

Tax credit and tax exemption

(187 ) (1,417 ) (1,192 )

Temporary difference for which no deferred tax is recognized

1,633 47,138 24,682

Deferred tax relating to changes in recognition and measurement

(7,289 ) 2,828 (1,593 )

Income tax refund for tax of prior years

(58,404 ) 30,329 (6,654 )

Income tax expense of overseas branch

16,929 4,796 6,202

Effects from change in tax rate

941 (871 ) 1,642

Others

3,572 3,179 (201 )

Tax expense

￦ 519,977 ￦ 540,593 ￦ 486,314

Average effective tax rate (Income tax expense / Profit before tax) (%)

22.62 29.78 25.58

(1)

Applicable income tax rate for ￦200 million and below is 11%, for ￦200 million to ￦20 billion is 22% and for over ￦20 billion is 24.2% as of December 31, 2012, 2013 and 2014.

The details of current tax assets (income tax refund receivables) and current tax liabilities (income tax payables), as of December 31, 2013 and 2014, are as follows:

2013
Tax payables
(receivables)
before offsetting 		Offsetting Tax payables
(receivables)
after offsetting
(In millions of Korean won)

Income tax refund receivables (1), (2)

￦ (99,524 ) ￦ 82,057 ￦ (17,467 )

Income tax payables

293,320 (82,057 ) 211,263

2014
Tax payables
(receivables)
before offsetting 		Offsetting Tax payables
(receivables)
after offsetting
(In millions of Korean won)

Income tax refund receivables (1)

￦ (693,018 ) ￦ 693,018 ￦ —

Income tax payables

924,925 (693,018 ) 231,907

(1)

Excludes current tax assets of ￦306,313 million (2013: ￦329,443 million) by uncertain tax position, which do not qualify for offsetting.

(2)

Prepaid income tax expenses amounting to ￦17,467 million for KB Life Insurance Co., Ltd, which separately paid tax in 2013, were reclassified from other assets into current income tax assets.

34. Dividends

The dividends paid to the shareholders of the Parent Company in 2013 and 2014 were ￦231,811 million (￦600 per share) and ￦193,176 million (￦500 per share), respectively. The dividends to the shareholders of the Parent Company in respect of the year ended December 31, 2014, of ￦780 per share, amounting to total

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dividends of ￦301,354 million, is to be proposed at the annual general shareholders’ meeting on March 27, 2015. The Group’s consolidated financial statements as of December 31, 2014, do not reflect this dividend payable.

35. Accumulated other comprehensive income

The details of accumulated other comprehensive income for the years ended December 31, 2013 and 2014, are as follows:

2013
Beginning Changes
except for
reclassification 		Reclassification
to profit or loss 		Tax effect Ending
(In millions of Korean won)

Remeasurements of net defined benefit liabilities

￦ (53,507 ) ￦ 54,069 ￦ — ￦ (13,085 ) ￦ (12,523 )

Exchange differences on translating foreign operations

(27,061 ) (2,372 ) — — (29,433 )

Change in value of available-for-sale financial assets

426,354 198,798 (202,118 ) 7,942 430,976

Change in value of held-to-maturity financial assets

(1,225 ) 1,005 6,911 (1,787 ) 4,904

Shares of other comprehensive income of associates

(47,286 ) (9,765 ) (55 ) 9 (57,097 )

Cash flow hedges

(2,133 ) (2,991 ) 5,227 (618 ) (515 )

Total

￦ 295,142 ￦ 238,744 ￦ (190,035 ) ￦ (7,539 ) ￦ 336,312

2014
Beginning Changes
except for
reclassification 		Reclassification
to profit or loss 		Tax effect Ending
(In millions of Korean won)

Remeasurements of net defined benefit liabilities

￦ (12,523 ) ￦ (129,677 ) ￦ — ￦ 31,386 ￦ (110,814 )

Exchange differences on translating foreign operations

(29,433 ) 17,280 — — (12,153 )

Change in value of available-for-sale financial assets

430,976 403,828 (74,431 ) (79,473 ) 680,900

Change in value of held-to-maturity financial assets

4,904 (1,276 ) (3 ) 198 3,823

Shares of other comprehensive income of associates

(57,097 ) (32,448 ) 248 (6 ) (89,303 )

Cash flow hedges

(515 ) (7,452 ) (5,426 ) 2,619 (10,774 )

Total

￦ 336,312 ￦ 250,255 ￦ (79,612 ) ￦ (45,276 ) ￦ 461,679

36. Earnings per share

36.1 Basic earnings per share

Basic earnings per share is calculated by dividing profit and loss attributable to ordinary equity holders of the Parent Company by the weighted average number of ordinary shares outstanding, during the years ended December 31, 2012, 2013 and 2014.

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Weighted average number of ordinary shares outstanding:

2012
Number of
shares (a) 		Days
outstanding (b) 		Total outstanding
shares [(a) x (b)]
(In number of shares)

Beginning (A)

386,351,693 366 141,404,719,638

Weighted average number of ordinary shares outstanding
[(B) =(A)/366]

386,351,693

2013
Number of
shares (a) 		Days
outstanding (b) 		Total outstanding
shares [(a) x (b)]
(In number of shares)

Beginning (A)

386,351,693 365 141,018,367,945

Weighted average number of ordinary shares outstanding
[(B) =(A)/365]

386,351,693

2014
Number of
shares (a) 		Days
outstanding (b) 		Total outstanding
shares [(a) x (b)]
(In number of shares)

Beginning (A)

386,351,693 365 141,018,367,945

Weighted average number of ordinary shares outstanding
[(B) =(A)/365]

386,351,693

Basic earnings per share:

2012
(in Korean won and in number of shares)

Profit attributable to ordinary shares (C)

￦ 1,769,566,917,759

Weighted average number of ordinary shares outstanding (D)

386,351,693

Basic earnings per share [(E)=(C)/(D)]

￦ 4,580

2013
(in Korean won and in number of shares)

Profit attributable to ordinary shares (C)

￦ 1,271,502,597,550

Weighted average number of ordinary shares outstanding (D)

386,351,693

Basic earnings per share [(E)=(C)/(D)]

￦ 3,291

2014
(in Korean won and in number of shares)

Profit attributable to ordinary shares (C)

￦ 1,400,722,065,239

Weighted average number of ordinary shares outstanding (D)

386,351,693

Basic earnings per share [(E)=(C)/(D)]

￦ 3,626

36.2 Diluted earnings per share

Diluted earnings per share is calculated using the weighted average number of ordinary shares outstanding which is adjusted by the weighted average number of additional ordinary shares that would have been outstanding assuming the conversion of all dilutive potential ordinary shares. The Group’s dilutive potential ordinary shares include share grants.

A calculation is done to determine the number of shares that could have been acquired at fair value (determined as the average market share price of the Group’s outstanding shares for the period) based on the monetary value of the subscription rights attached to the share options. The number of shares calculated above is compared with the number of shares that would have been issued assuming the exercise of share grants.

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Adjusted profit for diluted earnings per share:

2012
(In Korean won)

Profit attributable to ordinary shares

￦ 1,769,566,917,759

Adjustment

—

Adjusted profit for diluted earnings per share

￦ 1,769,566,917,759

2013
(In Korean won)

Profit attributable to ordinary shares

￦ 1,271,502,597,550

Adjustment

—

Adjusted profit for diluted earnings per share

￦ 1,271,502,597,550

2014
(In Korean won)

Profit attributable to ordinary shares

￦ 1,400,722,065,239

Adjustment

—

Adjusted profit for diluted earnings per share

￦ 1,400,722,065,239

Adjusted weighted average number of ordinary shares outstanding to calculate diluted earnings per share:

2012 2013 2014
(in number of shares)

Weighted average number of ordinary shares outstanding

386,351,693 386,351,693 386,351,693

Adjustment

Share grants

1,193,606 1,639,306 1,589,706

Adjusted weighted average number of ordinary shares outstanding for diluted earnings per share

387,545,299 387,990,999 387,941,399

Diluted earnings per share:

2012
(in Korean won and in number of shares)

Adjusted profit for diluted earnings per share

￦ 1,769,566,917,759

Adjusted weighted average number of ordinary shares outstanding for diluted earnings per share

387,545,299

Diluted earnings per share

￦ 4,567

2013
(in Korean won and in number of shares)

Adjusted profit for diluted earnings per share

￦ 1,271,502,597,550

Adjusted weighted average number of ordinary shares outstanding for diluted earnings per share

387,990,999

Diluted earnings per share

￦ 3,277

2014
(in Korean won and in number of shares)

Adjusted profit for diluted earnings per share

￦ 1,400,722,065,239

Adjusted weighted average number of ordinary shares outstanding for diluted earnings per share

387,941,399

Diluted earnings per share

￦ 3,611

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37. Insurance Contracts

37.1 Insurance liabilities

The details of insurance liabilities presented within other liabilities as of December 31, 2013 and 2014, are as follows:

2013 2014
(In millions of Korean won)

Individual insurance

Pure Endowment insurance

￦ 3,861,364 ￦ 4,334,823

Death insurance

85,123 112,858

Joint insurance

1,634,590 1,800,468
Group insurance 1,339 1,417
Other 16,627 15,632

Total

￦ 5,599,043 ￦ 6,265,198

The changes in insurance liabilities for the years ended December 31, 2013 and 2014, are as follows:

2013
Individual insurance Group
insurance 		Others (1) Total
Pure Endowment
insurance 		Death
insurance 		Joint
insurance
(In millions of Korean won)

Beginning

￦ 3,281,701 ￦ 63,821 ￦ 1,470,755 ￦ 1,285 ￦ 19,604 ￦ 4,837,166

Provision (Reversal)

579,663 21,302 163,835 54 (2,977 ) 761,877

Ending

￦ 3,861,364 ￦ 85,123 ￦ 1,634,590 ￦ 1,339 ￦ 16,627 ￦ 5,599,043

2014
Individual insurance Group
insurance 		Others (1) Total
Pure Endowment
insurance 		Death
insurance 		Joint
insurance
(In millions of Korean won)

Beginning

￦ 3,861,364 ￦ 85,123 ￦ 1,634,590 ￦ 1,339 ￦ 16,627 ￦ 5,599,043

Provision (Reversal)

473,459 27,735 165,878 78 (995 ) 666,155

Ending

￦ 4,334,823 ￦ 112,858 ￦ 1,800,468 ￦ 1,417 ￦ 15,632 ￦ 6,265,198

(1)

Consists of policyholders’ profit dividend reserve, reserve for compensation for losses on dividend-paying insurance contracts and others.

37.2 Insurance assets

The details of insurance assets presented within other assets as of December 31, 2013 and 2014, are as follows:

2013 2014
(In millions of Korean won)

Reinsurance assets

￦ 5,245 ￦ 4,482

Deferred acquisition costs

151,909 123,011

Total

￦ 157,154 ￦ 127,493

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The changes in reinsurance assets for the years ended December 31, 2013 and 2014, are as follows:

2013 2014
(In millions of Korean won)

Beginning

￦ 3,751 ￦ 5,245

Increase (decrease)

1,494 (763 )

Ending

￦ 5,245 ￦ 4,482

The changes in deferred acquisition costs for the years ended December 31, 2013 and 2014, are as follows:

2013 2014
(In millions of Korean won)

Beginning

￦ 151,925 ￦ 151,909

Increase

102,702 52,386

Amortization

(102,718 ) (81,284 )

Ending

￦ 151,909 ￦ 123,011

37.3 Insurance premiums and reinsurance

The details of insurance premiums for the years ended December 31, 2012, 2013 and 2014, are as follows:

2012
Pure endowment
insurance 		Death
insurance 		Joint
insurance 		Group
insurance 		Others Total
(In millions of Korean won)

Insurance premiums earned

￦ 1,307,974 ￦ 19,547 ￦ 352,482 ￦ 3,967 ￦ 39,081 ￦ 1,723,051

Reinsurance premiums paid

(196 ) (2,637 ) (133 ) (892 ) (8,354 ) (12,212 )

Net premiums earned

￦ 1,307,778 ￦ 16,910 ￦ 352,349 ￦ 3,075 ￦ 30,727 ￦ 1,710,839

2013
Pure endowment
insurance 		Death
insurance 		Joint
insurance 		Group
insurance 		Others Total
(In millions of Korean won)

Insurance premiums earned

￦ 795,031 ￦ 41,389 ￦ 336,540 ￦ 5,019 ￦ 42,474 ￦ 1,220,453

Reinsurance premiums paid

(480 ) (3,854 ) (278 ) (2,177 ) (7,302 ) (14,091 )

Net premiums earned

￦ 794,551 ￦ 37,535 ￦ 336,262 ￦ 2,842 ￦ 35,172 ￦ 1,206,362

2014
Pure endowment
insurance 		Death
insurance 		Joint
insurance 		Group
insurance 		Others Total
(In millions of Korean won)

Insurance premiums earned

￦ 756,697 ￦ 55,035 ￦ 350,076 ￦ 5,271 ￦ 37,481 ￦ 1,204,560

Reinsurance premiums paid

(502 ) (2,674 ) (306 ) (2,366 ) (7,072 ) (12,920 )

Net premiums earned

￦ 756,195 ￦ 52,361 ￦ 349,770 ￦ 2,905 ￦ 30,409 ￦ 1,191,640

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The details of reinsurance transactions for the years ended December 31, 2012, 2013 and 2014, are as follows:

2012
Reinsurance expense Reinsurance revenue
Reinsurance premium paid Reinsurance claims Reinsurance commission Total
(In millions of Korean won)

Individual

￦ 2,966 ￦ 1,150 ￦ 1,000 ￦ 2,150

Group

892 1,138 — 1,138

Others

8,354 4,127 — 4,127

Total

￦ 12,212 ￦ 6,415 ￦ 1,000 ￦ 7,415

2013
Reinsurance expense Reinsurance revenue
Reinsurance premium paid Reinsurance claims Reinsurance commission Total
(In millions of Korean won)

Individual

￦ 4,612 ￦ 3,850 ￦ 466 ￦ 4,316

Group

2,177 2,124 220 2,344

Others

7,302 6,660 — 6,660

Total

￦ 14,091 ￦ 12,634 ￦ 686 ￦ 13,320

2014
Reinsurance expense Reinsurance revenue
Reinsurance premium paid Reinsurance claims Reinsurance commission Total
(In millions of Korean won)

Individual

￦ 3,482 ￦ 2,461 ￦ 555 ￦ 3,016

Group

2,366 2,652 47 2,699

Others

7,072 4,756 — 4,756

Total

￦ 12,920 ￦ 9,869 ￦ 602 ￦ 10,471

Insurance expenses for the years ended December 31, 2012, 2013 and 2014, are as follows:

2012
Pure endowment
insurance 		Death
insurance 		Joint
insurance 		Group
insurance 		Others Total
(In millions of Korean won)

Insurance expense

￦ 2,659 ￦ 1,637 ￦ 6,232 ￦ 2,775 ￦ 2,423 ￦ 15,726

Dividend expense

154 12 — — — 166

Refund expense

202,965 4,043 183,061 215 — 390,284

Provision

1,122,167 9,813 169,616 1,019 3,115 1,305,730

Sub-total

1,327,945 15,505 358,909 4,009 5,538 1,711,906

Reinsurance claims

(184 ) (898 ) (68 ) (1,138 ) (4,127 ) (6,415 )

Net insurance expense

￦ 1,327,761 ￦ 14,607 ￦ 358,841 ￦ 2,871 ￦ 1,411 ￦ 1,705,491

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2013
Pure endowment
insurance 		Death
insurance 		Joint
insurance 		Group
insurance 		Others Total
(In millions of Korean won)

Insurance expense

￦ 6,557 ￦ 2,287 ￦ 1,085 ￦ 4,922 ￦ 5,645 ￦ 20,496

Dividend expense

295 13 — — — 308

Refund expense

259,710 5,257 185,286 351 — 450,604

Provision

579,663 21,302 163,835 54 (2,977 ) 761,877

Sub-total

846,225 28,859 350,206 5,327 2,668 1,233,285

Reinsurance claims

(204 ) (3,592 ) (54 ) (2,124 ) (6,660 ) (12,634 )

Net insurance expense

￦ 846,021 ￦ 25,267 ￦ 350,152 ￦ 3,203 ￦ (3,992 ) ￦ 1,220,651

2014
Pure endowment
insurance 		Death
insurance 		Joint
insurance 		Group
insurance 		Others Total
(In millions of Korean won)

Insurance expense

￦ 6,078 ￦ 3,006 ￦ 10,837 ￦ 5,006 ￦ 4,757 ￦ 29,684

Dividend expense

417 21 — — — 438

Refund expense

346,740 7,588 201,029 238 — 555,595

Provision(Reversal)

473,459 27,735 165,878 78 (995 ) 666,155

Sub-total

826,694 38,350 377,744 5,322 3,762 1,251,872

Reinsurance claims

(202 ) (2,205 ) (55 ) (2,651 ) (4,756 ) (9,869 )

Net insurance expense

￦ 826,492 ￦ 36,145 ￦ 377,689 ￦ 2,671 ￦ (994 ) ￦ 1,242,003

37.4 Insurance risk

Summary of insurance risk

Insurance risk is the risk of loss arising from the actual risk at the time of claims exceeding the estimated risk at the time of underwriting. Insurance risk is classified by insurance price risk and policy reserve risk.

Insurance price risk is the risk of loss arising from differences between premiums from policyholders and actual claims paid.

Policy reserve risk is the risk of loss arising from differences between policy reserves the Group holds and actual claims to be paid.

Concentration of insurance risk and reinsurance policy

The Group uses reinsurance with the intent to expand the ability of underwriting insurance contracts through mitigating the exposure to insurance risk, and generates synergy by joint development of products, management discipline and collecting information on foreign markets.

The Group cedes reinsurance for mortality, illness and other risks arising from insurance contracts where the Group has little experience for a necessary period of time required to accumulate experience.

The Group’s Reinsurance is ceded through the following process:

i. In the decision-making process of launching a new product, the Group makes a decision on ceding reinsurance. Subsequently, a reinsurer is selected through bidding, agreements with the relevant departments and final approval by the executive management.

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ii. The reinsurance department analyzes the object of reinsurance, the maximum limit of reinsurance and the loss ratio with the relevant departments.

The characteristic and exposure of insurance price risk

The insurance risk of a life insurance company is measured by insurance price risk. As the life insurance coverage is in the form of a fixed payment, the fluctuation of policy reserve is small and the period from insured event to claims payment is not long. The policy reserve risk is managed by assessments of adequacy of the policy reserve.

The Group measures the exposure of insurance price risk as the shortfall of the risk premiums received compared to the claims paid on all insurance contracts for the last one year preceding the reporting date.

The maximum exposure of premium risk as of December 31, 2013 and 2014, follows:

2013
Before
reinsurance
mitigation 		After
reinsurance
mitigation
(In millions of Korean won)

Mortality

￦ 10,969 ￦ 5,430

Disability

660 370

Hospitalization

861 600

Operation and diagnosis

1,731 1,164

Actual losses for medical expense

243 132

Others

89 21

Total

￦ 14,553 ￦ 7,717

2014
Before
reinsurance
mitigation 		After
reinsurance
mitigation
(In millions of Korean won)

Mortality

￦ 10,736 ￦ 6,321

Disability

950 545

Hospitalization

767 490

Operation and diagnosis

1,516 998

Actual losses for medical expense

279 89

Others

232 189

Total

￦ 14,480 ￦ 8,632

Average ratios of claims paid per risk premium received on the basis of exposure before mitigation for the past three years as of December 31, 2013 and 2014, were 69% and 70%, respectively.

The exposure of market risk arising from embedded derivatives included in host insurance contracts as of December 31, 2013 and 2014, are as follows:

2013 2014
Policy
holders
reserve 		Guarantee
reserve 		Policy
holders
reserve 		Guarantee
reserve
(In millions of Korean won)

Variable annuity

￦ 540,797 ￦ 4,058 ￦ 535,749 ￦ 5,153

Variable universal

132,413 135 110,766 458

Others

1,443 — 26,573 118

Total

￦ 674,653 ￦ 4,193 ￦ 673,088 ￦ 5,729

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Premium reserves and unearned premium reserves classified based on each residual maturity as of December 31, 2013 and 2014, are as follows:

2013
Less than
3 years 		3-5 years 5-10 years 10-15 years 15-20 years 20 years or
more 		Total
(In millions of Korean won)

Premium reserves

￦ 259,324 ￦ 324,305 ￦ 1,570,009 ￦ 294,058 ￦ 426,287 ￦ 2,653,510 ￦ 5,527,493

Unearned premium reserves

642 1 3 — 2 3 651

2014
Less than
3 years 		3-5 years 5-10 years 10-15 years 15-20 years 20 years or
more 		Total
(In millions of Korean won)

Premium reserves

￦ 381,413 ￦ 548,410 ￦ 1,385,847 ￦ 352,039 ￦ 440,581 ￦ 3,076,824 ￦ 6,185,114

Unearned premium reserves

690 1 2 1 1 3 698

38. Supplemental Cash Flow Information

Cash and cash equivalents as of December 31, 2013 and 2014, are as follows:

2013 2014
(In millions of Korean won)

Cash

￦ 1,963,977 ￦ 2,019,965

Checks with other banks

734,574 525,452

Due from Bank of Korea

7,128,025 6,508,623

Due from other financial institutions

4,966,078 6,369,807

Sub-total

14,792,654 15,423,847

Restricted due from financial institutions

(7,665,903 ) (7,132,094 )

Due from financial institutions with original maturities over three-months

(957,565 ) (1,272,957 )

Sub-total

(8,623,468 ) (8,405,051 )

Total

￦ 6,169,186 ￦ 7,018,796

Significant non-cash transactions for the years ended December 31, 2012, 2013 and 2014, are as follows:

2012 2013 2014
(In millions of Korean won)

Decrease in loans due to the write-offs

￦ 2,197,135 ￦ 2,132,066 ￦ 2,091,040

Changes in accumulated other comprehensive income due to valuation of financial investments

245,757 (3,591 ) 248,880

Increase in investment in associates due to debt-for-equity swap with Ssangyong Engineering & Construction Co., Ltd

— 28,779 —

Increase in financial investments due to debt-for-equity swap with Hyundai Cement Wire Co., Ltd

— — 25,178

Increase in financial investments due to debt-for-equity swap with Taihan Electric Wire Co., Ltd

— 115,716 —

Decrease in Accumulated other comprehensive income from measurement of investment securities in associates

(44,263 ) (9,811 ) (32,206 )

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Cash inflow and outflow from income tax, interests and dividends for the years ended December 31, 2012, 2013 and 2014, are as follows:

Activity 2012 2013 2014
(In millions of Korean won)

Income tax paid(refund)

Operating ￦ 838,073 ￦ 504,900 ￦ 205,130

Interest received

Operating 14,494,389 12,749,214 12,250,845

Interest paid

Operating 7,247,429 6,407,081 5,342,297

Dividends received

Operating 96,587 98,579 124,021

Dividends paid

Financing 278,173 231,811 193,176

39. Contingent liabilities and commitments

Acceptances and guarantees as of December 31, 2013 and 2014, are as follows:

2013 2014
(In millions of Korean won)

Confirmed acceptances and guarantees

Confirmed acceptances and guarantees in Korean won

Acceptances and guarantees for corporate purchasing card

￦ 17 ￦ —

Acceptances and guarantees for KB purchasing loan

448,906 428,815

Other acceptances and guarantees

782,646 669,233

Sub-total

1,231,569 1,098,048

Confirmed acceptances and guarantees in foreign currency

Acceptances of letter of credit

281,049 327,963

Letter of guarantees

57,596 61,081

Bid bond

24,212 43,362

Performance bond

999,872 1,175,330

Refund guarantees

2,263,202 1,494,023

Other acceptances and guarantees

906,105 959,685

Sub-total

4,532,036 4,061,444

Financial guarantees

Guarantees for Debenture-Issuing

20,200 51,200

Acceptances and guarantees for mortgage

43,272 75,651

Overseas debt guarantees

319,080 392,021

International financing guarantees in foreign currencies

41,896 35,949

Other financial guarantees

— 21,846

Sub-total

424,448 576,667

Total Confirmed acceptances and guarantees

6,188,053 5,736,159

Unconfirmed acceptances and guarantees

Guarantees of letter of credit

3,265,906 2,825,919

Refund guarantees

775,181 1,060,413

Total Unconfirmed acceptances and guarantees

4,041,087 3,886,332

Total

￦ 10,229,140 ￦ 9,622,491

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Acceptances and guarantees by counterparty as of December 31, 2013 and 2014, are as follows:

2013
Confirmed
guarantees 		Unconfirmed
guarantees 		Total Proportion
(%)
(In millions of Korean won)

Corporations

￦ 4,998,062 ￦ 2,723,162 ￦ 7,721,224 75.48

Small companies

1,029,039 623,803 1,652,842 16.16

Public and others

160,952 694,122 855,074 8.36

Total

￦ 6,188,053 ￦ 4,041,087 ￦ 10,229,140 100.00

2014
Confirmed
guarantees 		Unconfirmed
guarantees 		Total Proportion
(%)
(In millions of Korean won)

Corporations

￦ 4,699,777 ￦ 2,936,635 ￦ 7,636,412 79.36

Small companies

857,004 562,655 1,419,659 14.75

Public and others

179,378 387,042 566,420 5.89

Total

￦ 5,736,159 ￦ 3,886,332 ￦ 9,622,491 100.00

Acceptances and guarantees by industry as of December 31, 2013 and 2014, are as follows:

2013
Confirmed
guarantees 		Unconfirmed
guarantees 		Total Proportion
(%)
(In millions of Korean won)

Financial institutions

￦ 145,197 ￦ 3,924 ￦ 149,121 1.46

Manufacturing

3,867,870 2,270,254 6,138,124 60.01

Service

523,698 115,710 639,408 6.25

Whole sale & Retail

1,083,264 745,658 1,828,922 17.88

Construction

484,764 244,727 729,491 7.13

Public sector

72,583 635,326 707,909 6.92

Others

10,677 25,488 36,165 0.35

Total

￦ 6,188,053 ￦ 4,041,087 ￦ 10,229,140 100.00

2014
Confirmed
guarantees 		Unconfirmed
guarantees 		Total Proportion
(%)
(In millions of Korean won)

Financial institutions

￦ 229,086 ￦ 3,573 ￦ 232,659 2.42

Manufacturing

3,179,368 2,410,472 5,589,840 58.09

Service

583,302 114,645 697,947 7.25

Whole sale & Retail

932,283 788,804 1,721,087 17.89

Construction

709,582 215,382 924,964 9.61

Public sector

72,964 336,484 409,448 4.26

Others

29,574 16,972 46,546 0.48

Total

￦ 5,736,159 ￦ 3,886,332 ￦ 9,622,491 100.00

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Commitments as of December 31, 2013 and 2014, are as follows:

2013 2014
(In millions of Korean won)

Commitments

Corporate loan commitments

￦ 42,446,365 ￦ 42,977,471

Retail loan commitments

13,976,426 13,886,999

Credit line on credit cards

37,112,333 37,584,381

Private placement commitments

80,000 121,300

Purchase of other security investment

1,806,908 1,746,430

Sub-total

95,422,032 96,316,581

Financial Guarantees

Credit line

2,572,424 3,809,478

Purchase of security investment

100,500 73,500

Sub-total

2,672,924 3,882,978

Total

￦ 98,094,956 ￦ 100,199,559

Other Matters (including litigation)

a) The Group has filed 122 lawsuits (excluding minor lawsuits in relation to the collection or management of loans), involving aggregate claims of ￦834,440 million, and faces 374 lawsuits (as the defendant) (excluding minor lawsuits in relation to the collection or management of loans) involving aggregate damages of ￦523,099 million, which arose in the normal course of the business and are still pending as of December 31, 2014.

Meanwhile, certain customers of Kookmin Bank have filed lawsuits against Kookmin Bank in connection with fees paid for the registration of fixed collateral. The first and second trials are in progress as of December 31, 2014. The Court ruled in favor and partially in favor of Kookmin Bank in the first trial and ruled in favor of Kookmin Bank in the second and third trials. There is a low probability of potential losses related to the aforementioned lawsuits.

b) According to the shareholders’ agreement on September 25, 2009, between Kookmin Bank, the International Finance Corporation (“IFC”) and the remaining shareholders, Kookmin Bank granted a put option to IFC with the right to sell shares of JSC Bank Center Credit to itself or its designee. The exercise price is determined at its fair value by mutual agreement between Kookmin Bank and IFC. If the price is not agreed by the designated date, it is determined by the value measured by the selected independent external valuation institution. The put option may be exercised by IFC at any time from February 24, 2013, to February 24, 2017.

c) The face value of the securities which Kookmin Bank sold to general customers through tellers amounts to ￦57,159 million and ￦26,487 million as of December 31, 2013 and 2014, respectively.

d) Kookmin Bank underwent a tax investigation by the Seoul Regional Tax Office and in early 2007 was assessed additional corporate tax including local income tax of ￦482,755 million. Kookmin Bank paid this amount to the tax authorities. Subsequently, Kookmin Bank filed a claim for adjudication in August 2007 for repayment of the amount of ￦482,643 million. The case was closed with a favorable final judgment by the Supreme Court in January 2015.

e) For the year ended December 31, 2013, Kookmin Bank underwent a tax investigation for the fiscal years 2008 to 2012 by the Seoul Regional Tax Office. As a result, Kookmin Bank was fined a total of ￦124,357 million for income taxes (including local income taxes) and paid ￦123,330 million, excluding local income tax amounting to ￦1,027 million, and recognized as non-trade payable as of December 31, 2014. Meanwhile, the appeal to the tax tribunal over the ￦114,283 million is currently pending as of December 31, 2014.

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f) While setting up a fraud detection system, a computer contractor employed by the personal credit ratings firm Korea Credit Bureau caused a widespread data breach in June 2013, resulting in the theft of cardholders’ personal information. As a result of the leakage of customer personal information, the KB Kookmin Card received a notification from the Financial Services Commission that the KB Kookmin Card is subject to a temporary three-month operating suspension. In respect of the incident, the Group faces 101 legal claims filed as the defendant, with an aggregate claim of ￦52,421 million as of December 31, 2014. In addition, the Group may be subject to additional fines, penalties or judgments, reimbursement to affected clients. Meanwhile, the final outcome of the cases cannot be reasonably ascertained.

g) In relation to a tax credit for research and human resource development expenses, Kookmin Bank filed an administrative litigation (the aggregate amount in 2007 and 2008) and received a refund in the amount of ￦16,371 million from National Tax Service based on a recent Supreme Court precedent. However, the appeal to the tax tribunal (the aggregate amount in 2009 is ￦13,827 million) is currently pending as of December 31, 2014.

h) The Group entered into a purchase agreement to acquire 11,682,580 common shares of LIG Insurance Co., Ltd. (19.47% of outstanding shares with an expected price of ￦685,000 million) in June 2014. The Financial Services Commission approved LIG Insurance Co., Ltd. to be included as a subsidiary of the Group in December 2014.

40. Subsidiaries

The details of subsidiaries as of December 31, 2013, are as follows:

Investor

Investee

Ownership
interests(%) 		Location Date of
financial
information

Industry

KB Financial
Group Inc.

Kookmin Bank 100.00 Korea Dec. 31

Banking and domestic, foreign exchange transaction

KB Kookmin Card Co., Ltd.

100.00 Korea Dec. 31

Credit card

KB Investment & Securities Co., Ltd.

100.00 Korea Dec. 31

Financial investment

KB Life Insurance
Co., Ltd.

100.00 Korea Dec. 31

Life insurance

KB Asset Management Co., Ltd.

100.00 Korea Dec. 31

Security investment trust management and advisory

KB Real Estate Trust
Co., Ltd.

100.00 Korea Dec. 31

Real estate trust management

KB Investment Co., Ltd.

100.00 Korea Dec. 31

Capital Investment

KB Credit Information Co., Ltd.

100.00 Korea Dec. 31

Collection of receivables or credit investigation

KB Data System
Co., Ltd.

100.00 Korea Dec. 31

Software advisory, development, and supply

KB Savings Bank
Co., Ltd.

100.00 Korea Dec. 31

Savings banking

Yehansoul Savings Bank Co., Ltd.

100.00 Korea Dec. 31

Savings banking

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Investor

Investee

Ownership
interests(%) 		Location Date of
financial
information

Industry

Kookmin Bank

Kookmin Bank Int’l Ltd.(London)

100.00 United
Kingdom 		Dec. 31

Banking and foreign exchange transaction

Kookmin Bank Hong Kong Ltd.

100.00 Hong
Kong 		Dec. 31

Banking and foreign exchange transaction

Kookmin Bank Cambodia PLC.

100.00 Cambodia Dec. 31

Banking and foreign exchange transaction

Kookmin Bank (China) Ltd.

100.00 China Dec. 31

Banking and foreign exchange transaction

Personal pension trusts and 10 other trusts (1)

— Korea Dec. 31

Trust

KB Mortgage Loan First Securitization Specialty Co., Ltd. and 10 others (2)

— Korea Dec. 31

Asset-backed securitization and others

KB Evergreen Private Securities 82 and 28 others

100.00 Korea Dec. 31

Private equity fund

Kookmin Bank,
KB Investment Co., Ltd.

KB06-1 Venture Investment

75.00 Korea Dec. 31

Capital investment

KB08-1 Venture Investment

100.00 Korea Dec. 31

Capital investment

KB12-1 Venture Investment

100.00 Korea Dec. 31

Capital investment

KB Start-up Creation Fund

100.00 Korea Dec. 31

Capital investment

KB Asset Management Co., Ltd.

KB Wellyan Private Equity Real Estate Fund No. 6

95.67 Korea Dec. 31

Capital investment

KB Wellyan Private Equity Real Estate Fund No. 7 (3)

47.97 Korea Dec. 31

Capital investment

KB Wellyan Private Equity Real Estate Fund No. 6, 7

Boyoung construction (4)

— Korea Dec. 31

Construction

KB Investment Co., Ltd.

NPS 07-5 KB Venture Fund (5)

20.00 Korea Dec. 31

Capital investment

09-5 KB Venture Fund (5)

33.33 Korea Dec. 31

Capital investment

KoFC-KB Pioneer Champ No.2010-8 Investment Partnership

50.00 Korea Dec. 31

Capital investment

2011 KIF-KB IT Venture Fund (5)

43.33 Korea Dec. 31

Capital investment

KoFC-KB Young Pioneer 1st Fund (5)

33.33 Korea Dec. 31

Capital investment

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Investor

Investee

Ownership
interests(%) 		Location Date of
financial
information

Industry

KB Kookmin Card Co., Ltd

KB Kookmin Card First Securitization
Co., Ltd. (2)

0.90 Korea Dec. 31

Asset-backed securitization

Wise Mobile First Securitization Specialty (2)

— Korea Dec. 31

Asset-backed securitization

Wise Mobile Second Securitization Specialty (2)

— Korea Dec. 31

Asset-backed securitization

Wise Mobile third Securitization Specialty (2)

— Korea Dec. 31

Asset-backed securitization

Wise Mobile fourth Securitization Specialty (2)

— Korea Dec. 31

Asset-backed securitization

Wise Mobile fifth Securitization Specialty (2)

— Korea Dec. 31

Asset-backed securitization

Wise Mobile sixth Securitization Specialty (2)

— Korea Dec. 31

Asset-backed securitization

Wise Mobile seventh Securitization Specialty (2)

— Korea Dec. 31

Asset-backed securitization

KB Life Insurance Co., Ltd.

Dream Smart Turn Private Securities 3rd(Mixed) and 5 others

100.00 Korea Dec. 31

Private equity fund

Kookmin Bank, KB Investment & Securities, KB life Insurance, KB Real Estate Trust Co., Ltd

KB Wise Star Private Real Estate Feeder Fund 1st.

100.00 Korea Dec. 31

Investment trust

Kookmin Bank

Hanbando BTL Private Special Asset Fund 1st (3)

39.74 Korea Dec. 31

Capital investment

Kookmin Bank, KB life Insurance

KB Hope Sharing BTL Private Special Asset (3)

40.00 Korea Dec. 31

Capital investment

Kookmin Bank

KB Mezzanine Private Securities Fund 1st(Mixed) (3)

46.51 Korea Dec. 31

Capital investment

K Star KTB ETF(Bond) (3)

48.20 Korea Dec. 31

Capital investment

Global Logistics Infra Private
Fund 1 and 2 (3)

40.00 Korea Dec. 31

Capital investment

KB Wise Star Private Real Estate Feeder Fund 1st.

KB Star Retail Real Estate Feeder Fund 1st. (6)

48.98 Korea Dec. 31

Capital investment

(1)

The Group controls the trust because it has power that determines the management performance over the trust and is exposed to variable returns to absorb losses through the guarantees of payment of principal or payment of principal and fixed rate of return.

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(2)

The Group controls these investees because it is exposed to variable returns from its involvement with the investees and has ability to affect those returns through its power, even though it holds less than a majority of the voting rights of the investees.

(3)

Although the Group holds less than a majority of the investee’s voting rights, the Group controls the investee as it has power over relevant activities by managing the fund; has significant percentage of ownership that is over 40%; is significantly exposed to variable returns which is affected by the performance of the investees, and has ability to affect those performance through its power.

(4)

Boyoung Construction is included in the consolidation scope, since KB Wellyan Private Equity Real Estate Fund No. 7 is included in the consolidation scope.

(5)

Although the Group holds less than a majority of the investee’s voting rights, the Group controls the investee as it has power over relevant activities by taking the role of an operating manager and it is significantly exposed to variable returns which is affected by the performance of the investees, and has ability to affect those performance through its power.

(6)

KB Star Retail Real Estate Feeder Fund 1st is included in the consolidation scope, since KB Wise Star Private Real Estate Feeder Fund 1st is included in the consolidation scope.

(7)

Although the Group holds less than a majority of the investee’s voting rights, the Group controls KB Private Real Estate Securities Fund1 (NPL) and Woori KA First Asset Securitization Specialty Co., Ltd. as it has power over relevant activities by taking the role of an operating manager; has significant percentage of ownership that is over 40%; is significantly exposed to variable returns which is affected by the performance of the investees; and has ability to affect those performance through its power. In accordance with the IFRS 10, KB Private Real Estate Securities Fund1 (NPL) and Woori KA First Asset Securitization Specialty Co., Ltd. were included in the consolidation scope. However, KB Private Real Estate Securities Fund1 (NPL) and Woori KA First Asset Securitization Specialty Co., Ltd. have been excluded from the consolidation scope due to the loss of control from changes in terms of the contract as of December 31, 2013.

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The details of subsidiaries as of December 31, 2014, are as follows:

Investor

Investee

Ownership
interests(%) 		Location Date of
financial
information

Industry

KB Financial
Group Inc.

Kookmin Bank

100.00 Korea Dec. 31

Banking and domestic, foreign exchange transaction

KB Kookmin Card
Co., Ltd.

100.00 Korea Dec. 31

Credit card

KB Investment & Securities Co., Ltd.

100.00 Korea Dec. 31

Financial investment

KB Life Insurance
Co., Ltd.

100.00 Korea Dec. 31

Life insurance

KB Asset Management Co., Ltd.

100.00 Korea Dec. 31

Security investment trust management and advisory

KB Capital Co., Ltd.

52.02 Korea Dec. 31

Financial Leasing

KB Savings Bank
Co., Ltd.

100.00 Korea Dec. 31

Savings banking

KB Real Estate Trust
Co., Ltd.

100.00 Korea Dec. 31

Real estate trust management

KB Investment Co., Ltd.

100.00 Korea Dec. 31

Capital Investment

KB Credit Information Co., Ltd.

100.00 Korea Dec. 31

Collection of receivables or credit investigation

KB Data System
Co., Ltd.

100.00 Korea Dec. 31

Software advisory, development, and supply

Kookmin Bank

Kookmin Bank Int’l Ltd.(London)

100.00 United
Kingdom 		Dec. 31

Banking and foreign exchange transaction

Kookmin Bank Hong Kong Ltd.

100.00 Hong
Kong 		Dec. 31

Banking and foreign exchange transaction

Kookmin Bank Cambodia PLC.

100.00 Cambodia Dec. 31

Banking and foreign exchange transaction

Kookmin Bank (China) Ltd.

100.00 China Dec. 31

Banking and foreign exchange transaction

Personal pension trust and 10 others (1)

— Korea Dec. 31

Trust

KAMCO Value Recreation 3rd Securitization Specialty Co., Ltd. and 6 others (2)

— Korea and
others 		Dec. 31

Asset-backed securitization and others

Heungkuk Multi Private Securities H-19 and 37 others

100.00 Korea Dec. 31

Private equity fund

Kookmin Bank & KB Investment
Co., Ltd.

KB12-1 Venture Investment

100.00 Korea Dec. 31

Capital investment

KB Start-up Creation Fund

62.50 Korea Dec. 31

Capital investment

KB Investment & Securities

Ashley Investment First Co., Ltd. (2)

— Korea Dec. 31

Asset-backed securitization and others

Growth Investment First Co., Ltd. (2)

— Korea Dec. 31

Asset-backed securitization and others

KB Asset Management
Co., Ltd.

KB Wellyan Private Equity Real Estate Fund No. 6

95.67 Korea Dec. 31

Capital investment

KB Wellyan Private Equity Real Estate Fund No. 7 (3)

47.97 Korea Dec. 31

Capital investment

Boyoung construction (4)

— Korea Dec. 31

Construction

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Investor

Investee

Ownership
interests(%) 		Location Date of
financial
information

Industry

KB Investment
Co., Ltd.

09-5 KB Venture Fund (5)

33.33 Korea Dec. 31

Capital investment

KoFC-KB Pioneer Champ No.2010-8 Investment Partnership

50.00 Korea Dec. 31

Capital investment

2011 KIF-KB IT Venture Fund (5)

43.33 Korea Dec. 31

Capital investment

KoFC-KB Young Pioneer
1st Fund (5)

33.33 Korea Dec. 31

Capital investment

KB Kookmin Card Co., Ltd

KB Kookmin Card First Securitization
Co., Ltd. (2)

0.90 Korea Dec. 31

Asset-backed securitization

KB Kookmin Card Second Securitization Co., Ltd. (2)

0.50 Korea Dec. 31 Asset-backed securitization

Wise Mobile First Securitization Specialty (2)

— Korea Dec. 31 Asset-backed securitization

Wise Mobile Second Securitization Specialty (2)

— Korea Dec. 31 Asset-backed securitization

Wise Mobile third Securitization Specialty (2)

— Korea Dec. 31 Asset-backed securitization

Wise Mobile fourth Securitization Specialty (2)

— Korea Dec. 31 Asset-backed securitization

Wise Mobile fifth Securitization Specialty (2)

— Korea Dec. 31 Asset-backed securitization

Wise Mobile sixth Securitization Specialty (2)

— Korea Dec. 31 Asset-backed securitization

Wise Mobile seventh Securitization Specialty (2)

— Korea Dec. 31 Asset-backed securitization

Wise Mobile eighth Securitization Specialty (2)

— Korea Dec. 31 Asset-backed securitization

Wise Mobile ninth Securitization Specialty (2)

— Korea Dec. 31 Asset-backed securitization

Wise Mobile tenth Securitization Specialty (2)

— Korea Dec. 31 Asset-backed securitization

Wise Mobile eleventh Securitization Specialty (2)

— Korea Dec. 31 Asset-backed securitization

Wise Mobile twelfth Securitization Specialty (2)

— Korea Dec. 31 Asset-backed securitization

KB Life Insurance Co., Ltd.

KB Haeoreum Private Securities Investment Trust 1st and 7 others

100.00 Korea Dec. 31 Private equity fund

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Investor

Investee

Ownership
interests(%) 		Location Date of
financial
information

Industry

Kookmin Bank, KB Life Insurance Co., Ltd., KB Investment & Securities, KB Real Estate Trust Co., Ltd

KB Wise Star Private Real Estate Feeder Fund 1st.

100.00 Korea Dec. 31 Investment trust

Kookmin Bank

Hanbando BTL Private Special Asset Fund (3)

39.47 Korea Dec. 31 Capital investment

Kookmin Bank, KB Life Insurance Co., Ltd., KB

KB Hope Sharing BTL Private Special Asset (3)

40.00 Korea Dec. 31 Capital investment

Kookmin Bank

KB Mezzanine Private Securities Fund
1st(Mixed) (3)

46.51 Korea Dec. 31 Capital investment

Kookmin Bank, KB Life Insurance Co., Ltd., KB

KB Mezzanine Private Securities Fund
2nd(Mixed) (3)

40.74 Korea Dec. 31 Capital investment

Kookmin Bank

K-star KTB ETF(Bond) (3)

47.63 Korea Dec. 31 Capital investment

KB Wise Star Private Real Estate Feeder Fund 1st.

KB Star Retail Private Master Real Estate 1 (6)

48.98 Korea Dec. 31 Capital investment

KB Wise Star Private Real Estate Feeder Fund 1st.

KB Star Office Private Real Estate Investment Trust 2nd (6)

44.44 Korea Dec. 31

Capital investment

(1)

The Group controls the trust because it has power that determines the management performance over the trust and is exposed to variable returns to absorb losses through the guarantees of payment of principal or payment of principal and fixed rate of return.

(2)

The Group controls these investees because it is exposed to variable returns from its involvement with the investees and has ability to affect those returns through its power, even though it holds less than a majority of the voting rights of the investees.

(3)

Although the Group holds less than a majority of the investee’s voting rights, the Group controls the investee as it has power over relevant activities by managing the fund; has significant percentage of ownership that is over 40%; is significantly exposed to variable returns which is affected by the performance of the investees, and has ability to affect those performance through its power.

(4)

Boyoung Construction is included in the consolidation scope, since KB Wellyan Private Equity Real Estate Fund No. 7 is included in the consolidation scope.

(5)

Although the Group holds less than a majority of the investee’s voting rights, the Group controls the investee as it has power over relevant activities by taking the role of an operating manager and it is significantly exposed to variable returns which is affected by the performance of the investees, and has ability to affect those performance through its power.

(6)

KB Star Retail Private Master Real Estate 1 and KB Star Office Private Real Estate Investment Trust 2nd are included in the consolidation scope, since KB Wise Star Private Real Estate Feeder Fund 1st is included in the consolidation scope.

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The condensed financial information of major subsidiaries as of December 31, 2013 and 2014, and for the years ended December 31, 2013 and 2014, is as follows:

2013
Assets Liabilities Equity Operating
income
(revenue) 		Profit
attributable to
Shareholders
of the parent
company 		Total
comprehensive
income for the
year attributable
to Shareholders
of the parent
company
(In millions of Korean won)

Kookmin Bank (1)

￦ 265,588,385 ￦ 244,641,628 ￦ 20,946,757 ￦ 17,461,406 ￦ 830,628 ￦ 894,093

KB Kookmin Card
Co., Ltd. (1)

15,854,992 12,385,131 3,469,861 2,990,037 384,411 390,228

KB Investment & Securities Co., Ltd. (2)

2,525,070 1,973,888 551,182 577,649 11,856 5,436

KB Life Insurance
Co., Ltd. (1)

6,945,605 6,396,477 549,128 1,457,365 9,098 (23,209 )

KB Asset Management
Co., Ltd. (1)

237,907 36,335 201,572 103,401 74,685 74,560

KB Real Estate Trust
Co., Ltd.

182,657 13,612 169,045 46,524 2,110 2,835

KB Investment
Co., Ltd. (1)

241,227 110,640 130,587 34,497 6,078 7,145

KB Credit Information
Co., Ltd.

30,142 7,687 22,455 43,627 (336 ) (336 )

KB Data System
Co., Ltd.

21,753 6,880 14,873 50,440 19 115

KB Savings Bank
Co., Ltd.

584,025 449,087 134,938 47,865 (301 ) (1,482 )

Yehansoul Savings Bank Co., Ltd.

189,243 164,084 25,159 4,791 (5,331 ) (5,259 )

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Table of Contents
2014
Assets Liabilities Equity Operating
income
(revenue) 		Profit
attributable to
Shareholders
of the parent
company 		Total
comprehensive
income for the
year attributable
to Shareholders
of the parent
company
(In millions of Korean won)

Kookmin Bank (1)

￦ 275,453,664 ￦ 253,513,191 ￦ 21,940,473 ￦ 16,283,978 ￦ 1,029,041 ￦ 1,152,233

KB Kookmin Card
Co., Ltd. (1)

15,886,769 12,406,314 3,480,455 2,864,957 332,701 310,606

KB Investment & Securities
Co., Ltd. (1),(2)

4,131,568 3,554,828 576,740 578,345 25,624 25,558

KB Life Insurance
Co., Ltd. (1)

7,680,184 7,096,459 583,725 1,453,057 6,537 34,597

KB Asset Management
Co., Ltd. (1)

254,481 52,541 201,940 105,234 49,560 50,368

KB Capital Co., Ltd (2)

4,023,965 3,612,150 411,815 250,042 29,990 26,859

KB Savings Bank Co., Ltd.

772,676 619,882 152,794 56,712 (15,079 ) (14,645 )

KB Real Estate Trust Co., Ltd.

204,888 20,930 183,958 50,283 14,818 14,913

KB Investment Co., Ltd. (1)

225,353 90,569 134,784 33,371 1,382 4,197

KB Credit Information
Co., Ltd.

28,805 7,955 20,850 38,796 (1,605 ) (1,605 )

KB Data System Co., Ltd.

31,397 16,874 14,523 59,129 367 (350 )

(1)

Financial information is based on its consolidated financial statements.

(2)

The amount includes the fair value adjustments due to the merger.

Nature of the risks associated with interests in consolidated structured entities

The terms of contractual arrangements require to provide financial support to a consolidated structured entity

•

The Group has provided acceptances and guarantees obligation of ￦68,000 million to Ashley Investment First Co., Ltd. and Growth Investment First Co., Ltd., the Group’s subsidiary, that had issued debentures.

The Group provides capital commitment to KB Wise Star Private Real Estate Feeder Fund 1st. and nine other subsidiaries. The unexecuted amount of the investment agreement is ￦478,741 million. Based on the capital commitment, the Group is subject to increase its investment by the request from the asset management company or the additional agreement among investors.

•

The Group provides the guarantees of payment of principal or principal and fixed rate of return in case the operating results of the trusts are less than the guaranteed principal or principal and fixed rate of return.

Changes in subsidiaries

KB Capital Co., Ltd., Ashley Investment First Co., Ltd., Growth Investment First Co., Ltd., KB Mezzanine Private Securities Fund 2nd, KB Star Office Private Real Estate Investment Trust No.2, KB Evergreen Private Securities 99(Bond) and 106 other private equity funds, KB Kookmin Card Second Securitization Co., Ltd. and Wise Mobile 8th ~12th Securitization were newly consolidated during the year ended December 31, 2014. KB Evergreen Private Securities 82(Bond) and 95 other private equity funds, Global Logistics Infra Private Fund 1st, 2nd, KB Covered Bond 1st Trust, KH First Co., Ltd., KB Mortgage Loan First Securitization Specialty Co., Ltd., KB Covered Bond First Securitization Specialty Co., Ltd and KB07-5, KB06-1,KB08-1 Venture Partnership Fund have been excluded from consolidation due to their liquidation. Also, Yehansoul Savings Bank Co., Ltd. has been excluded from consolidation due to its merger with KB Savings Bank Co., Ltd.

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Yehansoul Savings Bank Co., Ltd., KB Startup Investment, KB Evergreen Private Securities 63 and 46 other private equity funds, and Wise Mobile Second, Third, Fourth, Fifth, Sixth, Seventh Securitization and KB Star Retail Private Real Estate Feeder Fund First were newly consolidated during the year ended December 31, 2013. Yurie Select Private Securities Investment Trust 32 and 44 other private equity funds, KB K-Alpha private equity trust and New Star First Ltd. have been excluded from consolidation due to their liquidation. Also, KB Private Real Estate Securities Fund1 (NPL) and Woori KA First Asset Securitization Specialty Co., Ltd. have been excluded from consolidation due to the loss of control.

In accordance with the enactment of IFRS 10, the activities of KB-Glenwood Private Equity Fund, NPS KBIC Private Equity Fund No. 1 and KBIC Private Equity Fund No. 3 represent management and performance services and the terms of the contracts are the same as those in the ordinary service contracts between independent parties. These entities have been excluded from the consolidation scope since interests held are not material and therefore were considered as agents. In addition, Chungkang Co., Ltd. and Powernet Technologies Co., Ltd. have been excluded from the consolidation scope, since KB-Glenwood Private Equity Fund, the Parent Company, have been excluded from the consolidation scope.

For the year ended December 31, 2014, the following table summarizes the information relating to the Group’s subsidiaries that have material non-controlling interests, before any intra-group eliminations, are as follows:

2014
(In millions of Korean won)

Non-controlling interests percentage (%)

47.98

Non-controlling interests

Assets of subsidiaries

￦ 4,023,965

Liabilities of subsidiaries

3,612,150

Equity of subsidiaries

411,815

Non-controlling interests

197,580

Profit attributable to non-controlling interests

Operating profit of subsidiaries

39,666

Profit of subsidiaries

29,990

Profit attributable to non-controlling interests

14,389

Cash flows of subsidiaries

Cash flows from operating activities

71,813

Cash flows from investing activities

(6,742 )

Cash flows from financing activities

(33,312 )

Net increase in cash and cash equivalents

￦ 31,759

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41. Unconsolidated Structured Entity

As of December 31, 2014, the nature, purpose and activities of the unconsolidated structured entities and how the structured entities are financed, are as follows:

Nature

Purpose

Activities

Methods of Financing

Asset-backed securitization

Early cash generation through transfer of securitization assets

Fees earned as services to SPC, such as providing lines of credit and ABCP purchase commitments

Fulfillment of Asset-backed securitization plan

Purchase and transfer of securitization assets

Issuance and repayment of ABS and ABCP

Issuance of ABS and ABCP based on securitization assets

Project financing

Granting PF loans to SOC and real estate

Granting loans to ships/aircrafts SPC

Construction of SOC and real estate

Building ships/ construction and purchase of aircrafts

Loan commitments through Credit Line, providing lines of credit and investment agreements

Trust

Management of financial trusts;

—Development trust

—Mortgage trust

—Management trust

—Disposal trust

—Distribution and management trust

—Other trusts

Development, management, and disposal of trusted real estate assets

Payment of trust fees and allocation of trust profits.

Distribution of trusted real estate assets and financing of trust company

Public auction of trusted real estate assets and financing of trust company

Investment funds

Investment in beneficiary certificates

Investment in PEF and partnerships

Management of fund assets

Payment of fund fees and allocation of fund profits

Sales of beneficiary certificate instruments

Investment of managing partners and limited partners

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As of December 31, 2013 and 2014, the size of the unconsolidated structured entities and the risks associated with its interests in unconsolidated structured entities, are as follows:

Dec. 31, 2013
Asset-backed
securitization 		Project
Financing 		Trusts Investment
funds 		Others Total
(In millions of Korean won)

Total assets of unconsolidated Structured Entity

￦ 12,631,056 ￦ 24,605,331 ￦ 2,261,415 ￦ 12,618,790 ￦ 3,502,834 ￦ 55,619,426

Carrying amount on financial statements

Assets

Loans

382,478 3,155,621 — — 291,599 3,829,698

Financial investments

1,121,676 97,754 — 525,680 — 1,745,110

Investment in associates

— — — 403,153 — 403,153

Other assets

— — 165,709 1,909 — 167,618

Sub-total

￦ 1,504,154 ￦ 3,253,375 ￦ 165,709 ￦ 930,742 ￦ 291,599 ￦ 6,145,579

Liabilities

Deposits

￦ 306,931 ￦ 487,818 ￦ — ￦ 8,142 ￦ 5,473 ￦ 808,364

Other liabilities

— 14 — 144 — 158

Sub-total

￦ 306,931 ￦ 487,832 ￦ — ￦ 8,286 ￦ 5,473 ￦ 808,522

Maximum exposure to loss (1)

￦ 4,672,378 ￦ 5,714,293 ￦ 294,043 ￦ 2,476,902 ￦ 386,000 ￦ 13,543,616

Methods of determining the maximum exposure to
loss




Providing lines
of credit and
purchase
commitments











Investments /
loans, loan
commitments
/investment
agreements /
purchase
commitments
and
acceptances
and guarantees













Dividends
by results
trust: Total
amount of
trust
explosure







Investments
/loans and
capital
commitments



Loan
commitments

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Table of Contents
Dec. 31, 2014
Asset-backed
securitization 		Project
Financing 		Trusts Investment
funds 		Others Total
(In millions of Korean won)

Total assets of unconsolidated Structured Entity

￦ 13,013,795 ￦ 21,102,639 ￦ 1,986,277 ￦ 17,919,480 ￦ 6,484,363 ￦ 60,506,554

Carrying amount on financial statements

Assets

Loans

223,771 2,965,239 — 1,609 252,195 3,442,814

Financial investments

716,462 93,505 — 627,554 66,943 1,504,464

Investment in associates

— — — 390,337 — 390,337

Other assets

47 27 92,678 8,324 — 101,076

Sub-total

￦ 940,280 ￦ 3,058,771 ￦ 92,678 ￦ 1,027,824 ￦ 319,138 ￦ 5,438,691

Liabilities

Deposits

￦ 300,015 ￦ 500,538 ￦ — ￦ 6,067 ￦ 32,986 ￦ 839,606

Other liabilities

12 — — — — 12

Sub-total

￦ 300,027 ￦ 500,538 ￦ — ￦ 6,067 ￦ 32,986 ￦ 839,618

Maximum exposure to loss (1)

￦ 5,338,975 ￦ 5,403,409 ￦ 206,911 ￦ 3,203,351 ￦ 590,257 ￦ 14,742,903

Methods of determining the maximum exposure to loss




Providing lines
of credit and
purchase
commitments










Loan
commitments
/investment
agreements /
purchase
commitments
and
acceptances
and guarantees












Dividends
by results
trust: Total
amount of
trust
explosure







Investments
/loans and
capital
commitments



Loan
commitments

(1)

Maximum exposure to loss includes the asset amounts, after deducting loss(provision for assets, impairment losses and others), recognized in the financial statements of the Group.

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42. Finance/Operating Lease

42.1 Finance lease

42.1.1 The Group as finance lessee

The future minimum lease payments arising as of December 31, 2013 and 2014, are as follows:

2013 2014
(In millions of Korean won)

Net carrying amount of finance lease assets

￦ 16,955 ￦ 72,392

Minimum lease payment

Within 1 year

1,927 18,765

1-5 years

— 5,472

Over 5 years

— 1,148

Total

1,927 25,385

Present value of minimum lease payment

Within 1 year

1,873 18,367

1-5 years

— 5,169

Over 5 years

— 996

Total

1,873 24,532

42.2.2 The Group as finance lessor

Total lease investment and the present value of minimum lease payments as of December 31, 2013 and 2014, are as follows:

2013 2014
Total lease
investment 		Present value of
minimum lease
payment 		Total lease
investment 		Present value of
minimum lease
payment
(In millions of Korean won)

Within 1 year

￦ — ￦ — ￦ 348,579 ￦ 294,643

1-5 years

— — 577,998 525,590

Total

￦ — ￦ — ￦ 926,577 ￦ 820,233

Unearned interest income of finance lease as of December 31, 2013 and 2014, is as follows:

2013 2014
(In millions of Korean won)

Total lease investment

￦ — ￦ 926,577

Net lease investment

Present value of minimum lease payment

— 820,233

Unearned interest income

￦ — ￦ 106,344

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Table of Contents

42.2 Operating lease

42.2.1 The Group as operating lessee

The future minimum lease payments arising from the non-cancellable lease contracts as of December 31, 2013 and 2014, are as follows:

2013 2014
(In millions of Korean won)

Minimum lease payment

Within 1 year

￦ 121,446 ￦ 124,183

1-5 years

108,962 103,595

Over 5 years

67 34,439

Total

￦ 230,475 ￦ 262,217

Minimum sublease payment

￦ (367 ) ￦ (382 )

The lease payment reflected in profit or loss for the years ended December 31, 2012, 2013 and 2014, are as follows:

2012 2013 2014
(In millions of Korean won)

Lease payment reflected in profit or loss

Minimum lease payment

￦ 201,450 ￦ 204,164 ￦ 218,635

Sublease payment

(165 ) (118 ) (156 )

Total

￦ 201,285 ￦ 204,046 ￦ 218,479

42.2.2 The Group as operating lessor

The future minimum lease receipts arising from the non-cancellable lease contracts as of December 31, 2013 and 2014, are as follows:

2013 2014
(In millions of Korean won)

Minimum lease receipts

Within 1 year

￦ 8,327 ￦ 27,613

1-5 years

22,280 52,621

Total

￦ 30,607 ￦ 80,234

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Table of Contents

43. Related Party Transactions

Income and expenses arising from transactions with related parties for the years ended December 31, 2012, 2013 and 2014, are as follows:

2012 2013 2014
(In millions of Korean won)

Associates

Balhae Infrastructure Fund

Fee and commission income ￦ — ￦ 7,908 ￦ 7,851

Korea Credit Bureau Co., Ltd.

Fee and commission income 3 3 3
Interest expense 143 139 66

UAMCO., Ltd.

Interest income 297 31 —
Fee and commission income — — 14
Reversal for credit loss 68 — —
Interest expense — — 12
Other operating expense 93,266 7,626 —

Incheon Bridge Co., Ltd.

Interest income — 14,592 13,226
Reversal for credit loss — 2 —
Interest expense — 909 543
Provision for credit loss — — 2

KB No.2 Special Purpose Acquisition Company (1)

Interest income — — 27
Fee and commission income — — 518
Gains on financial assets/liabilities at fair value through profit or loss — — 1,440
Other non-operating income — — 20
Interest expense — — 1

KB No.3 Special Purpose Acquisition Company

Interest income — — 30
Fee and commission income — — 350
Other non-operating income — — 10
Gains on financial assets/liabilities at fair value through profit or loss — — 1,462
Provision for credit loss — — 14
Interest expense — — 6

KB No.4 Special Purpose Acquisition Company

Interest income — — 24
Other non-operating income — — 11
Fee and commission income — — 350
Gains on financial assets/liabilities at fair value through profit or loss — — 1,751
Provision for credit loss — — 14
Interest expense — — 9

KB No.5 Special Purpose Acquisition Company

Interest income — — 13
Fee and commission income — — 175
Gains on financial assets/liabilities at fair value through profit or loss — — 1,780
Other non-operating income — — 5
Provision for credit loss — — 14
Interest expense — — 4

KB No.6 Special Purpose Acquisition Company

Interest income — — 9
Fee and commission income — — 525
Gains on financial assets/liabilities at fair value through profit or loss — — 1,556
Other non-operating income — — 39
Interest expense — — 4

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Table of Contents
2012 2013 2014
(In millions of Korean won)

United PF 1st Recovery Private Equity Fund

Interest income 500 91 —
Other operating income 1,900 — —
Interest expense 28 — —
Reversal for credit loss 7 83 —

KBIC Private Equity Fund No. 3

Fee and commission income 300 300 300
Interest expense — 91 38

NPS KBIC Private Equity Fund No. 1

Fee and commission income 474 474 236
Provision for credit loss — — 133

KoFC KBIC Frontier Champ
2010-5(PEF)

Fee and commission income 1,000 1,014 778
Other operating expense — — 534

KoFC POSCO HANHWA KB Shared Growth Private Equity Fund

Fee and commission income 303 569 634
Other operating income — — 3
Other operating expense — — 395

KB GwS Private Securities Investment Trust

Fee and commission income 12,978 917 926
Other operating income — 1,934 2,006

KB Star Office Private Real Estate Investment Trust No.1

Interest income — — 562
Fee and commission income — 435 435
Interest expense 9 75 50

Semiland Co., Ltd. (1)

Interest income 17 14 8
Reversal for credit loss 4 — 4
Other non-operating expense — — 613

Kores Co., Ltd. (1)

Interest income 317 386 —
Fee and commission income 9 — —
Reversal for credit loss — 36 —
Provision for credit loss 325 — —

PyungJeon Industries Co., Ltd. (1)

Reversal for credit loss — 1,055 —
Provision for credit loss 343 — —

Testian Co., Ltd. (1)

Interest income 104 10 —
Other operating income 15 — —

Sehwa Electronics Co., Ltd. (1)

Fee and commission income 33 — —
Gains on financial assets/liabilities at fair value through profit or loss 2 35 —
Fee and commission expense — 7 —
Interest expense 10 — —
Losses on financial assets/liabilities at fair value through profit or loss 143 — —

Serit Platform Co., Ltd. (1)

Interest income 78 58 —
Fee and commission income 27 17 —
Provision for credit loss 4 74 —

DS Plant Co., Ltd. (1)

Interest income 315 211 —
Fee and commission income — 4 —
Reversal for credit loss 3 10 —
Other operation income — 8 —
Interest expense 1 2 —
Fee and commission expense 2 — —
Losses on financial assets/liabilities at fair value through profit or loss — 26 —

DaiYang Metal Co., Ltd. (1)

Interest income — 3 —

Ssangyong Engineering & Construction Co., Ltd. (1)

Interest income — 2,007 —
Reversal for credit loss — 7,550 —

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Table of Contents
2012 2013 2014
(In millions of Korean won)

Sunoo Co., Ltd. (1)

Interest expense — 1 —

KB Global Star Game & Apps SPAC (1)

Interest income

77 81 —
Gains on financial assets/liabilities at fair value through profit or loss 158 1,210 1,215

Other operating income

3 7 —

Interest expense

430 10 —
Losses on financial assets/liabilities at fair value through profit or loss — — 691

Provision for credit loss

— 4 —

CH engineering Co., Ltd.

Reversal for credit loss 106 — —

Evalley Co., Ltd.

Reversal for credit loss 77 — —

Joam Housing Development Co., Ltd.

Interest expense 1 — —

Other

Retirement pension

Fee and commission income 415 386 448
Interest expense 1,699 1,971 788

(1)

Not considered to be the Group’s related party as at December 31, 2014.

The details of receivables and payables, and related allowances for loans losses arising from the related party transactions as of December 31, 2013 and 2014, are as follows:

2013 2014
(In millions of Korean won)

Associates

JSC Bank CenterCredit

Cash and due from financial institutions ￦ 353 ￦ 178

Balhae Infrastructure Fund

Other assets — 2,002

Korea Credit Bureau Co., Ltd.

Loans and receivables (Gross amount) — 19
Deposits 20,200 24,715
Other liabilities 64 17

UAMCO., Ltd.

Loans and receivables (Gross amount) — 2
Deposits 5 1,654
Provisions 192 —

Semiland Co., Ltd. (1)

Loans and receivables (Gross amount) 19 —
Deposits 1 —
Provisions 3 —

Incheon Bridge Co., Ltd.

Loans and receivables (Gross amount) 249,362 247,885
Allowances for loan losses 300 302
Other assets 1,343 1,144
Deposits 30,991 35,421
Other liabilities 240 249

Terra Co., Ltd.

Deposits 1 1

KB No.3 Special Purpose Acquisition Company

Derivative financial assets — 1,793

Loans and receivables (Gross amount)

— 1,465

Deposits

— 832

Other liabilities

— 6

KB No.4 Special Purpose Acquisition Company

Derivative financial assets

— 2,167

Loans and receivables (Gross amount)

— 1,876

Deposits

— 2,500

Other liabilities

— 1

KB No.5 Special Purpose Acquisition Company

Derivative financial assets

— 2,143

Loans and receivables (Gross amount)

— 1,816

Deposits

— 2,389

Other liabilities

— 1

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Table of Contents
2013 2014
(In millions of Korean won)

KB No.6 Special Purpose Acquisition Company

Derivative financial assets

— 1,837

Loans and receivables (Gross amount)

— 1,438

Deposits

— 4,406

Other liabilities

— 3

United PF 1st Recovery Private Equity Fund

Provisions

82 —

KB-Glenwood Private Equity Fund

Deposits

1 —

KBIC Private Equity Fund No. 3

Other assets

76 151

Deposits

1,400 1,400

Other liabilities

25 24

NPS KBIC Private Equity Fund No. 1

Other assets

65 9

Other liabilities

42 —

KoFC KBIC Frontier Champ 2010-5(PEF)

Other assets

266 139

Provisions

— 534

KoFC POSCO HANHWA KB Shared Growth Private Equity Fund

Other assets

569 634

Provisions

— 128

KB GwS Private Securities Investment Trust

Other assets

— 673

KB Star Office Private Real Estate Investment Trust No.1

Loans and receivables (Gross amount)

— 10,000

Other assets

— 155

Deposits

8,142 6,067

Other liabilities

31 —

Kores Co., Ltd. (1)

Loans and receivables (Gross amount)

7,854 —

Allowances for loan losses

3,836 —

Other liabilities

2 —

Ssangyong Engineering & Construction Co., Ltd. (1)

Loans and receivables (Gross amount)

47,104 —

Allowances for loan losses

38,784 —

Deposits

61 —

Other liabilities

14 —

Key management

Loans and receivables (Gross amount)

4,765 2,527

Allowances for loan losses

1 —

Other assets

6 3

Deposits

6,932 18,462

Insurance contract liability

770 1,292

Other liabilities

111 173

Provisions

2 —

Other

Retirement pension

Other assets

166 191

Deposits

48,840 41,412

Other liabilities

908 246

(1)

Not considered to be the Group’s related party as at December 31, 2014.

In accordance with IAS 24, the Group includes parent, parent’s subsidiaries, associates, associates of parent’s subsidiaries, key management (including family members), and post-employment benefit plans of the Group and entities regarded as its related parties in the scope of its related parties. Additionally, the Group discloses balances (receivables and payables) and other amounts arising from the related party transactions in the notes to the consolidated financial statements. Refer to Note 13 for details on investments in associates.

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Key management includes the directors of the parent company and the executive directors (vice-presidents and above) of Kookmin Bank and companies where the directors and /or their close family members have control or joint control.

Significant loan transactions with related parties for the years ended December 31, 2013 and 2014, are as follows:

2013 (1)
Beginning Loans Repayments Others Ending
(In millions of Korean won)

Associates

United PF 1st Recovery Private Equity Fund

￦ 2,805 ￦ 1,913 ￦ (4,718 ) ￦ — ￦ —

UAMCO., Ltd

— 47,181 (47,181 ) — —

Kores Co., Ltd. (2)

7,854 900 (900 ) — 7,854

Incheon Bridge Co., Ltd

263,080 8,777 (22,495 ) — 249,362

Ssangyong Engineering & Construction Co., Ltd. (2)

46,275 36,843 (36,014 ) — 47,104

Semiland Co., Ltd. (2)

— 86 (67 ) — 19

2014 (1)
Beginning Loans Repayments Others Ending
(In millions of Korean won)

Associates

Incheon Bridge Co., Ltd

￦ 249,362 ￦ 12,375 ￦ (13,852 ) ￦ — ￦ 247,885

KB Star Office Private Real Estate Investment Trust No.1

— 10,000 — — 10,000

KB No.2 Special Purpose Acquisition Company

— 1,085 (1,085 ) — —

KB No.3 Special Purpose Acquisition Company

— 1,780 — (315 ) 1,465

KB No.4 Special Purpose Acquisition Company

— 2,280 — (404 ) 1,876

KB No.5 Special Purpose Acquisition Company

— 2,180 — (364 ) 1,816

KB No.6 Special Purpose Acquisition Company

— 1,710 — (272 ) 1,438

Korea Credit Bureau Co., Ltd

— 19 — — 19

UAMCO., Ltd

— 2 — — 2

(1)

Transactions and balances arising from operating activities between related parties, such as payments, are excluded.

(2)

Not considered to be the Group’s related party as at December 31, 2014.

Unused commitments to related parties as of December 31, 2013 and 2014, are as follows:

2013 2014
(In millions of Korean won)

Balhae Infrastructure Fund

Purchase of security investment ￦ 21,744 ￦ 21,744

UAMCO., Ltd.

Loan commitments in Korean won 127,800 —
Purchase of security investment 89,950 89,950

United PF 1st Recovery Private Equity Fund

Loan commitments in Korean won 54,600 —
Purchase of security investment 49,383 49,383

KoFC KBIC Frontier Champ
2010-(PEF)

Purchase of security investment 2,200 2,150

KoFC POSCO HANHWA KB Shared Growth Private Equity Fund

Purchase of security investment 35,975 23,750

Incheon Bridge Co., Ltd.

Loan commitments in Korean won 42,088 33,163

KB GwS Private Securities Investment Trust and others

Loan commitments 757 372
Purchase of security investment 1,119 1,119

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Unused commitments received from related party entities as at December 31, 2013 and 2014, are as follows:

2013 2014
(In millions of Korean won)

Associates

Ssangyong Engineering & Construction Co., Ltd. (1)

Acceptances and Guarantees Outstanding in Won ￦ 293,500 ￦ —

(1)

Deemed not to be related as of December 31, 2014; therefore, 2014 balances are not presented.

Compensation to key management for the years ended December 31, 2012, 2013 and 2014, consists of:

2012
Short-term
employee
benefits 		Post-
employment
benefits 		Termination
benefits 		Share-based
payments 		Total
(In millions of Korean won)

Registered directors (executive)

￦ 4,075 ￦ 230 ￦ — ￦ 3,480 ￦ 7,785

Registered directors (non-executive)

1,107 — — 18 1,125

Non-registered directors

6,067 436 — 3,751 10,254

Total

￦ 11,249 ￦ 666 ￦ — ￦ 7,249 ￦ 19,164

2013
Short-term
employee
benefits 		Post-
employment
benefits 		Termination
benefits 		Share-based
payments 		Total
(In millions of Korean won)

Registered directors (executive)

￦ 3,270 ￦ 144 ￦ — ￦ (578 ) ￦ 2,836

Registered directors (non-executive)

1,199 — — 13 1,212

Non-registered directors

7,305 380 1,024 5,686 14,395

Total

￦ 11,774 ￦ 524 ￦ 1,024 ￦ 5,121 ￦ 18,443

2014
Short-term
employee
benefits 		Post-
employment
benefits 		Share-based
payments 		Total
(In millions of Korean won)

Registered directors (executive)

￦ 1,580 ￦ 136 ￦ (15 ) ￦ 1,701

Registered directors (non-executive)

1,203 — (15 ) 1,188

Non-registered directors

7,517 406 5,678 13,601

Total

￦ 10,300 ￦ 542 ￦ 5,648 ￦ 16,490

Collateral received from related party entities as of December 31, 2013 and 2014, follows:

2013 2014
(In millions of Korean won)

Associates

Kores Co., Ltd. (1)

Row house ￦ 24 ￦ —
Apartment 24 —
Factory/Forest land 15,000 —

Incheon Bridge Co., Ltd.

Fund management account for Standby loan commitment 65,000 65,000

KB Star office Private real estate Investment Trust No.1

Real estate — 13,000

Key management

Time deposits and others 207 296
Real estate 7,381 3,583

(1)

Deemed not to be related as of December 31, 2014; therefore, 2014 balances are not presented.

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As of December 31, 2014, Incheon Bridge Co., Ltd, a related party, provides fund management account, civil engineering completed risk insurance, shares and management rights as unsubordinated collaterals in respect to collateralized amount of ￦816,400 million to a financial syndicate consisting of the Group and four other institutions, and as subordinated collateral in respect to collateralized amount of ￦201,100 million to subordinated debt holders consisting of the Group and two other institutions.

44. Business combination

The Group obtained control of Woori Financial Co., Ltd. from the Woori Financial Group Inc. for ￦279,870 million (11,180,630 shares, 52.02%) on March 20, 2014. Woori Financial Co., Ltd. operates rental of facilities, installment financial business, factoring business and others. Woori Financial Co., Ltd. has changed its name to KB Capital Co., Ltd.

The Group expects synergies from diversification of business portfolio through reinforcement of non-banking services, diversification of profit structure through expansion of customer range, vitalization of connected business between financial subsidiaries, reinforcement of retail banking business marketing, financing cheap money through the financial group and others.

The goodwill of business combination consists of expected synergies through business combination, the value of unrecognized assets and others.

The consideration transferred and the assets and liabilities arising from the M&A deal are as follows:

Amounts
(In millions of Korean won)

Total consideration

￦ 279,870

Recognized amounts of identifiable assets acquired and liabilities assumed

Cash and due from financial institutions

17,572

Available-for-sale financial assets

6,872

Loans

3,888,468

Equipment / intangible assets

16,828

Other assets

59,055

Total assets

3,988,795

Debts

580,000

Debentures

2,751,344

Other liabilities

272,495

Total liabilities

3,603,839

Total identifiable net assets

￦ 384,956

Ratio of shareholding acquired (%)

52.02

Relevant amount of shares

￦ 200,261

Goodwill

79,609

Acquisition-related costs (1)

2,094

(1)

Recorded as fee and commission expense in the statement of comprehensive income.

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The receivables including loans from the M&A deal at the acquisition date are as follows:

Amounts
(In millions of Korean won)

Fair value

Due from financial institutions

￦ 4,601

Loans

3,893,069

Others

25,321

Total fair value

￦ 3,922,991

Contractual cash flow

Due from financial institutions

￦ 4,601

Loans

3,900,760

Others

26,478

Total contractual cash flow

￦ 3,931,839

Estimate of the contractual cash flows not expected to be collected

Loans

￦ 82,640

Others

1,085

Total estimate of the contractual cash flows not expected to be collected

￦ 83,725

The Group measured non-controlling interests in KB Capital Co., Ltd.’s net asset fair value as of the date of acquisition. As a result, non-controlling interest amounting to ￦184,695 million is recognized as of the date of acquisition.

Due to the business combination, the net operating income and profit for the period from March 20, 2014 to December 31, 2014, included in the consolidated statement of comprehensive income were ￦39,666 million and ￦29,990 million (profit attributable to shareholders of the parent company is ￦15,601 million), respectively.

Assuming the date of acquisition is the beginning of the reporting period, the income from operations and net profit for the period would have increased by ￦6,137 million and ￦4,649 million, respectively. In calculating the pro forma information, the operating results of the acquired companies for the period before acquisition have been adjusted to reflect the Group’s accounting policies and the fair value adjustments made upon acquisition.

45. Approval of Issuance of the Financial Statements

The issuance of the Group’s consolidated financial statements as of and for the year ended December 31, 2014, was approved by the Board of Directors on February 5, 2015.

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46. Parent Company Information

The following tables present the Parent Company Only financial information:

Condensed Statements of Financial Position

Dec. 31 2012 Dec. 31 2013 Dec. 31 2014
(In millions of Korean won)

Assets

Cash held at bank subsidiaries

￦ 96,234 ￦ 77,298 ￦ 30,739

Receivables from nonbanking subsidiaries

25,000 10,000 10,000

Investments in subsidiaries (1)

Banking subsidiaries

14,821,721 14,821,721 14,821,721

Nonbanking subsidiaries

3,123,127 3,470,722 3,735,845

Other assets

323,946 284,801 612,216

Total assets

￦ 18,390,028 ￦ 18,664,542 ￦ 19,210,521

Liabilities and shareholders’ equity

Debts

￦ — ￦ — ￦ —

Debentures

— 349,157 628,837

Other liabilities

305,686 266,963 295,010

Shareholders’ equity

18,084,342 18,048,422 18,286,674

Total liabilities and shareholders’ equity

￦ 18,390,028 ￦ 18,664,542 ￦ 19,210,521

(1)

Investments in subsidiaries were accounted at cost method in accordance with IAS 27.

Condensed Statements of Comprehensive Income

2012 2013 2014
(In millions of Korean won)

Income

Dividends from subsidiaries:

Dividends from banking subsidiaries

￦ 687,925 ￦ 245,044 ￦ 493,782

Interest from subsidiaries

6,018 3,859 2,391

Other income

— — —

Total income

693,943 248,903 496,173

Expense

Interest expense

3,025 5,227 19,149

Non-interest expense

44,901 48,273 43,473

Total expense

47,926 53,500 62,622

Profit(loss) before tax expense

646,017 195,403 433,551

Tax income(expense)

1,080 423 (600 )

Profit(loss) for the year

647,097 195,826 432,951

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

(862 ) 65 (1,523 )

Total comprehensive income for the year

￦ 646,235 ￦ 195,891 ￦ 431,428

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Condensed Statements of Cash Flows

2012 2013 2014
(In millions of Korean won)

Operating activities

Net income (loss)

￦ 647,097 ￦ 195,826 ￦ 432,951

Reconciliation of net income (loss) to net cash provided by operating activities:

Other operating activities, net

15,807 40,272 (286,554 )

Net cash provided by (used in) operating activities

662,904 236,098 146,397

Investing activities

Net payments from (to) subsidiaries

(136,526 ) (369,590 ) (279,870 )

Other investing activities, net

7,998 (2,710 ) 750

Net cash used in investing activities

(128,528 ) (372,300 ) (279,120 )

Financing activities

Increase in debts

170,000 315,000 —

Decreases in debts

(300,000 ) (315,000 ) —

Increases in debentures

— 349,077 279,340

Decreases in debentures

(50,000 ) — —

Cash dividends paid

(278,173 ) (231,811 ) (193,176 )

Net cash provided by (used in) financing activities

(458,173 ) 117,266 86,164

Net increase in cash held at bank subsidiaries

76,203 (18,936 ) (46,559 )

Cash held at bank subsidiaries at January 1

20,028 96,231 77,295

Cash held at bank subsidiaries at December 31

￦ 96,231 ￦ 77,295 ￦ 30,736

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TABLE OF CONTENTS
Item 1. Identity Of Directors, Senior Management and AdvisersItem 2. Offer Statistics and Expected TimetableItem 3. Key InformationItem 3. A. Selected Financial DataItem 3. B. Capitalization and IndebtednessItem 3. C. Reasons For The Offer and Use Of ProceedsItem 3. D. Risk FactorsItem 4. Information on The CompanyItem 4. A. History and Development Of The CompanyItem 4. B. Business OverviewItem 4. C. Organizational StructureItem 4. D. Property, Plants and EquipmentItem 4A. Unresolved Staff CommentsItem 5. Operating and Financial Review and ProspectsItem 5. A. Operating ResultsItem 5. B. Liquidity and Capital ResourcesItem 5. C. Research and Development, Patents and Licenses, EtcItem 5. D. Trend InformationItem 5. E. Off-balance Sheet ArrangementsItem 5. F. Tabular Disclosure Of Contractual ObligationsItem 5. G. Safe HarborItem 6. Directors, Senior Management and EmployeesItem 6. A. Directors and Senior ManagementItem 6. B. CompensationItem 6. C. Board PracticesItem 6. D. EmployeesItem 6. E. Share OwnershipItem 7. Major Shareholders and Related Party TransactionsItem 7. A. Major ShareholdersItem 7. B. Related Party TransactionsItem 7. C. Interests Of Experts and CounselItem 8. Financial InformationItem 8. A. Consolidated Statements and Other Financial InformationItem 8. B. Significant ChangesItem 9. The Offer and ListingItem 9. A. Offering and Listing DetailsItem 9. B. Plan Of DistributionItem 9. C. MarketsItem 9. D. Selling ShareholdersItem 9. E. DilutionItem 9. F. Expenses Of The IssueItem 10. Additional InformationItem 10. A. Share CapitalItem 10. AItem 10. B. Memorandum and Articles Of AssociationItem 10. BItem 10. C. Material ContractsItem 10. CItem 10. D. Exchange ControlsItem 10. DItem 10. E. TaxationItem 10. EItem 10. F. Dividends and Paying AgentsItem 10. FItem 10. G. Statement By ExpertsItem 10. GItem 10. H. Documents on DisplayItem 10. HItem 10. I. Subsidiary InformationItem 10. IItem 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. [reserved]Item 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 16H. Mine Safety DisclosureItem 17. Financial StatementsItem 18. Financial StatementsItem 19. Exhibits