Kookmin Bank Auckland Branch. Disclosure Statement

Transcription

1 KB Disclosure Statement For the twelve months ended 31 December 2013

2 General Disclosures Disclosure Statement Index General Disclosures Page 3 s Historical Summary of Financial Statements Statement of Comprehensive Income Statement of Changes in Head Office Account Statement of Financial Position Statement of Cash Flows Notes to the Financial Statements Directors' Statement Independent Auditors' Report An index to the Notes to the Financial Statements is contained on Page 2. The General Manager has been authorised to sign on behalf of each of the Directors, and on his own behalf has pleasure in presenting the Financial Statements and Disclosure Statement of for the twelve months ended 31 December Yong Bok SHIN The Financial Statements and Disclosure Statement has been signed on behalf of each of the Directors of Kookmin Bank by Yong Bok SHIN who also signs in his personal capacity as General Manager of. 28 March 2014

3 General Disclosures Disclosure Statement Notes to the Finnci.I ttements Index 1. Statement of accounting policies 2. Critical accounting estimates, assumptions and judgments 3. Net interest income 4. Net fee and commission revenue 5. Other operating income 6. Administrative expenses 7. Other operating expenses 8. Income tax expense 9. Cash and cash equivalents 10. Loans and advances to customers 11. Credit risk management and asset quality 12. Overseas Bank entities 13. Related parties 14. Property and equipment 15. Other assets 16. Deferred tax assets and liabilities 17. Deposits from customers 18. Due to other banks 19. Provisions 20. Other liabilities 21. Commitments 22. Contingencies 23. Subsequent event 24. Reconciliation of profit after income tax to net cash flow from operating activities 25. Financial assets and liabilities 26. Financial risk management 27. Loan to valuation ratio 28. Capital adequacy of the Overseas Bank and Overseas Banking Group 29. Overseas Bank's Overseas Banking Group profitability and size 30. Concentration of credit exposures to individual counterparties 31. Insurance Business and non-financial activities 32. Total liabilities net of amounts due to related parties 33. Priority of creditors 2

4 General Disclosures 1. Reporting Directive This Disclosure Statement has been prepared under the Registered Bank Disclosure Statements (Overseas Incorporated Registered Banks) Order (No 2) Registered Bank Name: Address for Service: Level 19, 135 Albert Street Auckland, New Zealand For the purposes of the Registered Bank Disclosure Statement (Overseas Incorporated Registered Banks) Order (No 2) 2013, the "Registered Bank" is currently the only entity within the "Overseas Banking Group" in New Zealand. 3. Overseas Bank Name: Address: Kookmin Bank 9-1, 2-Ga, Namdaemun-ro, Jung-Gu, Seoul , Republic of Korea Kookmin Bank was established in 1963 under the Citizens National Bank Act in the Republic of Korea. Pursuant to the repeal of the Citizens National Bank Act in January 1995, Kookmin Bank has conducted its operations in accordance with the provisions of the General Banking Act in the Republic of Korea. 4. Ultimate Parent Bank Name: Address of Head Office: Kookmin Bank 9-1, 2-Ga, Namdaemun-ro, Jung-Gu, Seoul , Republic of Korea 5. Ultimate Holding Company Name: Address: KB Financial Group Inc. 9-1, 2-Ga, Namdaemun-ro, Jung-Gu, Seoul , Republic of Korea 6. Ranking of local creditors in a winding up There are no material legislative or regulatory restrictions in the Overseas Bank's country of incorporation, the Republic of Korea, which subordinate any claims of any class of unsecured creditors of the Registered Bank on the assets of the Overseas Bank to those of any other class of unsecured creditors of the Overseas Bank, in a winding up of the Overseas Bank, other than as set out in section 8 below. 7. Holding excess of assets The Overseas Bank is not required by any statute to hold in New Zealand an excess of assets over deposit liabilities. 8. Reserves of deposit liabilities of Korea The Overseas Bank is required by Clause 2, Chapter 4 of the Korea Reserve Bank Act (Korea) to maintain reserves in an account with the Reserve Bank of Korea, to cover ongoing obligations to pay deposit liabilities in Korea, as follows: (a) reserves equivalent to at least 2 percent of the aggregate value of all term account deposits, installment savings account deposits and cheque account deposits in Korea; plus (b) reserves equivalent to at least 7 percent of the aggregate value of all other deposits in Korea. These requirements have the potential to impact on the management of the liquidity of the New Zealand business of the Overseas Bank. 9. Guarantee Arrangements No material obligations of the Registered Bank are guaranteed. 3

5 General Disclosures 10. Responsible Person of the Registered Bank Name: Occupation: Country of Residence: Technical or professional qualification: Yong Bok SHIN General Manager of New Zealand B.A in English Communication addressed to the Responsible Person may be sent to: Cl- P 0 Box 7506, Wellesley Street Auckland New Zealand 11. Directors of the Overseas Bank Communication addressed to the Directors and New Zealand Chief Executive Officer may be sent to: Cl- P 0 Box 7506 Wellesley Street Auckland New Zealand The General Manager has signed this Disclosure Statement on his behalf and on behalf of the Directors of Kookmin Bank, being: Executive Directors Name Byung Deok Min (resigned 12 June 2013) Kun Ho Lee (appointed 19 July 2013) Dong Soon Park Ok Chan Kim (resigned 12 June 2013) Ji Woo Park (appointed 19 August 2013) Occupation President & CEO President & CEO Chief Audit Executive Senior Executive Vice President 1 Executive Director I Qualification 1 B.A. in Business Administration Ph.D. in Finance I Ph.D. in Economics M.B.A M.B.A Independent Directors Name In June Kim (resigned 28 September 2013) Tae Jin Koo (resigned 28 September 2013) Yo Chan Park (resigned 22 March 2013) Kap Soo Oh Jae Hwan Park Joong Woong Kim (appointed 26 April 2013) Hee Bok Kang (appointed 27 September 2013) Myung Sub Song (appointed 27 September 2013) I Occupation 1 Professor of 1 University I Partner, Horwath Choongjung Accounting Group B.A. in Business Administration 1 I Lawyer, Law Office Jeong-Sang Economics, Seoul National President, Global Finance Society Non-Standing Advisior, Korea Money Brokerage I Corp. Qualification Ph.D. in Economics I Ph.D. in Tax Law I Ph.D. in Finance M.A. in Economics 1 Chairman of Financial Services Commission, I Ph.D. 'in Economics 1 Chamber of Commerce and Industry 1 Executive Director, market Economy Research 1! Ph.D. in Business Administration 1 Institute Foundation 1 Professor, College of Cultural Studies, Chung- 1 1 Ph.D. in Business Administration 1 Ang University. All Directors reside in the Republic of Korea. The Overseas Bank has an audit committee, which oversees the Registered Bank. The Committee is comprised of five members. Four of these are Independent Directors, one is an Executive Director. 4

6 General Disclosures 12. Directors' and General Manager's interests in transactions There has been no transaction, which any Director or any immediate relative or close business associate of any Director has had with the Overseas Bank or any member of the Overseas Bank's Banking Group which either has been entered into on terms other than those which would, in the ordinary course of business be given to any person of like circumstances or means, or which could be reasonably likely to influence materially the exercise of the Directors' duties. There has been no transaction, which any General Manager or any immediate relative or close business associate of the General Manager has had with the Overseas Bank or any number of the Overseas Bank's Banking Group which either has been entered into on terms other than those which would, in the ordinary course of business be given to any person of like circumstances or means, or which could be reasonably likely to influence materially the exercise of the General Managers' duties. Other than for companies which are members of the Overseas Bank's Banking Group, the Directors and General Manager hold no other offices as a Director. 13. Directors' policy on conflicts of interest Kookmin Bank's global policy requires that directors must at all times, in any dealings including those which may give rise to a conflict of interest, act in a manner which is consistent with their duties under law. Kookmin Bank policy as set out below to govern Directors' duties is therefore based around Korean Commercial Law. a. Any Director of a company shall not engage in any commercial transactions or other activity for or on behalf of any other company, commercial entity or other third party whilst he/she is representing the Bank. b. Should the Director violate the contract as stipulated in section (a) the Board of Directors reserves the right to instruct the Director to pay any financial gains derived from such transactions to the Bank. c. The rights outlined in section (b) are valid and enforceable for one year from when the transaction was made. 14. Auditors of the Disclosure Statement Name: PricewaterhouseCoopers Address for service: Private Bag Auckland 1142, New Zealand 15. Conditions of Registration for Kookmin Bank in New Zealand These conditions of registration apply on and after 1 October The registration of Kookmin Bank ("the registered bank") in New Zealand is subject to the following conditions: 1. That the banking group does not conduct any non-financial activities that in aggregate are material relative to its total activities. In this condition of registration, the meaning of "material" is based on generally accepted accounting practice. 2. That the banking group's insurance business is not greater than 1% of its total consolidated assets. For the purposes of this condition of registration, the banking group's insurance business is the sum of the following amounts for entities in the banking group: (a) if the business of an entity predominantly consists of insurance business and the entity is not a subsidiary of another entity in the banking group whose business predominantly consists of insurance business, the amount of the insurance business to sum is the total consolidated assets of the group headed by the entity; and (b) if the entity conducts insurance business and its business does not predominantly consists of insurance business and the entity is not a subsidiary of another entity in the banking group whose business predominantly consists of insurance business, the amount of the insurance business to sum is the total liabilities relating to the entity's insurance business plus the equity retained by the entity to meet the solvency or financial soundness needs of its insurance business. 5

7 General Disclosures In determining the total amount of the banking group's insurance business (a) all amounts must relate to on balance sheet items only, and must comply with generally accepted accounting practice; and (b) if products or assets of which an insurance business is comprised also contain a non-insurance component, the whole of such products or assets must be considered part of the insurance business. For the purposes of this condition of registration, "insurance business" means the undertaking or assumption of liability as an insurer under a contract of insurance: "insurer" and "contract of insurance" have the same meaning as provided in sections 6 and 7 of the Insurance (Prudential Supervision) Act That the business of the registered bank in New Zealand does not constitute a predominant proportion of the total business of the registered bank 4. That no appointment to the position of the New Zealand chief executive officer of the registered bank shall be made unless: (a) the Reserve Bank has been supplied with a copy of the curriculum vitae of the proposed appointee; and (b) the Reserve Bank has advised that it has no objection to that appointment 5. That Kookmin Bank complies with the requirements imposed on it by the Financial Supervisory Service of Korea. 6. That Kookmin Bank complies with the following minimum capital adequacy requirements, as administered by the Financial Supervisory Service of Korea: (a) tier one capital of Kookmin Bank is not less than 4 percent of risk weighted exposures; and (b) capital of Kookmin Bank is not less than 8 percent of risk weighted exposures. 7. That liabilities of the registered bank in New Zealand, net of amounts due to related parties (including amounts due to a subsidiary or affiliate of the registered bank), do not exceed NZ$15 billion. 8. That, for a loan-to-valuation measurement period, the total of the business of the registered bank in New Zealand's qualifying new mortgage lending amounts must not for residential properties with a loan-to-valuation ratio of more than 80%, exceed 10% of the total of the qualifying new mortgage lending amounts arising in the loan-to-valuation measurement period. 9. That the business of the registered bank in New Zealand must not make a residential mortgage loan unless the terms and conditions of the loan contract or the terms and conditions for an associated mortgage require that a borrower obtain the registered bank's agreement before the borrower can grant to another person a charge over the residential property used as security for the loan. 10. That the business of the registered bank in New Zealand must not permit a borrower to grant charge in favour of another person over a residential property used as security for residential mortgage loan unless the sum of the lending security by the charge and the loan value for the residential mortgage loan would not exceed 80% of the property value of the residential property when the lending secured by the charge is drawn down. 11. That the business of the registered bank in New Zealand must not provide a residential mortgage loan if the residential property to be mortgaged to the registered bank as security for the residential mortgage loan is subject to a charge in favour of another person unless the total amount of credit secured by the residential property would not exceed 80% of the property value when the residential mortgage loan is drawn down. 12. That the business of the registered bank in New Zealand must not (a) act as broker or arrange a residential mortgage loan for the business of the registered bank outside New Zealand or for an associated person of the registered bank outside New Zealand; or (b) facilitate the drawdown of a residential mortgage loan the registered bank originated as part of its business outside New Zealand or by an associated person of the registered bank outside New Zealand without notifying the Reserve Bank of this activity in the manner and form specified by the Reserve Bank. 6

8 General Disclosures In these conditions of registration, "banking group" means the New Zealand business of the registered bank and its subsidiaries as required to be reported in group financial statements for the group's New Zealand business under section 9(2) of the Financial Reporting Act 1993: "business of the registered bank in New Zealand" means the New Zealand business of the registered bank as required to be reported in financial statements under section 8(2) of the Financial Reporting Act 1993: "generally accepted accounting practice" has the same meaning as in section 2 of the Financial Reporting Act 1993: "liabilities of the registered bank in New Zealand" means the liabilities of the registered bank as required to be reported in financial statements under section 8(2) of the Financial Reporting Act In conditions of registration 8 to 12, "loan-to-valuation ratio", "loan Value", "property value", qualifying new mortgage lending amount" and "residential mortgage loan" have the same meaning as in the Reserve Bank of New Zealand document entitled "Framework for Restrictions on High-LVR Residential Mortgage Lending" (BS19) dated September 2013: "loan-to-valuation measurement period" means a period of six calendar months ending on the last day of the sixth calendar month, the first of which ends on the last day of March Changes of condition of registration Since 30 September 2013 the Condition of Registration have been amended by the Reserve Bank of New Zealand ("RBNZ") with effect from 1 October The main purpose of the amendments was to put into effect restrictions on high loan-to-valuation residential mortgage lending. 17. Pending Proceedings or Arbitration There is no pending proceeding or arbitration concerning any member of the Overseas Bank's Banking Group or, the Overseas Banking Group, whether in New Zealand or elsewhere, that may have a material adverse effect on the Overseas Bank or its Banking Group. 18. Credit Ratings Credit ratings of the Overseas Bank for long-term debt are as follows: Moody's Investor Service Inc. Standard & Poor's Rating Date A3 (Stable) A 21 Mar 2007 A2 (Stable) A 25 July 2007 Al (Stable) A 14 April 2010 Current credit rating of Moody's Investor Service Inc. and Standard & Poor's remain unchanged since last year. On 15 March 2010, Standard & Poor's announced that its rating has been given a 'stable' outlook from negative outlook. A stable outlook given by Moody's Investor Service Inc. in respect of its ratings remains unchanged. 7

9 General Disclosures The rating scales are described as follows: Moody's Investor Service Inc. Long-Term Debt Ratings `Aaa' - are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged". Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualised are most unlikely to impair the fundamentally strong position of such issues. `Aa' - are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present, which make the long-term risk, appear somewhat larger than the Aaa securities. - possesses many favourable investment attributes and is to be considered as upper-medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment some time in the future. Saa' - are considered as medium-grade obligations (i.e. they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. '13a' - are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterises bonds in this class. 'B' - generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of contracts' other terms over any long period of time may be small. 'Caa' - are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. `Ca' - represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. - are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. NOTE: Moody's Investor Service Inc. applies numerical modifiers 1, 2 and 3 in each generic rating classification from A through B. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category. 8

10 General Disclosures Standard & Poor's Long Term Ratings 'AAA' rated corporations, financial institutions, governments or asset-backed financing structures (entities) have an extremely strong capacity to pay interest and repay principal in a timely manner. 'AA' rated entities have a very strong capacity to pay interest and repay principal in a timely manner and differ from the highest rated entities only in small degree. 'A' rated entities have a strong capacity to pay interest and repay principal in a timely manner although they may be somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than those in higher rating categories. 'BBB' rated entities have an adequate capacity to pay interest and repay principal in a timely manner. Protection levels are more likely to be weakened by adverse changes in circumstances and economic conditions than for borrowers in higher rating categories. Entities rated 'BB', 'B', `CCC', 'CC', and 'C' are regarded as having predominantly speculative characteristics with respect to the capacity to pay interest and repay principal. `BB' indicates the least degree of speculation and 'C' the highest. While such entities will be likely to have some quality and protective characteristics, these are outweighed by large uncertainties or major exposures to adverse conditions. 'BB' rated entities have less near-term vulnerability to default than other speculative issues. However, rated entities face ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to an inadequate capacity to meet timely debt service commitments. 'B' rated entities are more vulnerable to adverse business, financial or economic conditions than entities in higher rating categories. Adverse business, financial or economic conditions are likely to impair the borrower's capacity or willingness to meet timely debt service commitments. `CCC' rated entities have a currently identifiable vulnerability to default and are dependent upon favorable business, financial, and economic conditions to meet timely debt service commitments. In the event of adverse business, financial or economic conditions, they are not likely to have the capacity to pay interest and repay principal. 'CC' is typically applied to debt subordinated to senior debt that is assigned an actual or implied `CCC' rating. 'C' rated entities have a high risk of default or are reliant on arrangements with third parties to prevent defaults. 'D' rated entities are in default. The rating is assigned when interest payments or principal payments are not made on the date due, even if the applicable grace period has not expired. The 'D' rating is also used upon the filing of an insolvency petition or a request to appoint a receiver if debt service payments are jeopardized. Plus (+) or minus (-): The ratings from 'AA' to `CCC' may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. 9

11 General Disclosures 19. Other Material Matters The financial information in the Disclosure Statement in regard to the Overseas Bank and its Overseas Banking Group has been prepared under generally accepted accounting practices of Republic of Korea, and in accordance with the requirements of the Financial Supervisory Service (FSS) of the Republic of Korea. The standards, procedures and practices utilised to audit the financial statements of the Overseas Bank and its Overseas Banking Group, are those generally accepted and applied in the Republic of Korea. The generally accepted accounting practice, requirements of the FSS and audit standards applied therein may differ to those applied in New Zealand. 20. Financial Statements of Registered Bank and Overseas Banking Group A copy of the most recent publicly available financial statements of the Registered Bank and its Overseas Banking Group will be provided immediately at no charge, to any person requesting a copy where the request is made at the Registered Bank's head office. The Disclosure Statement can be accessed through the Kookmin Bank website at DS.pdf 10

12 s Historical Summary of Financial Statements Registered Bank's Banking Group NZ!FRS NZ IFRS NZ IFRS NZ IFRS NZ IFRS 12 months 12 months 12 months 12 months 12 months ended ended ended ended ended 31 Dec Dec Dec Dec Dec 2009 (8) (8) (8) (S) Statement of Comprehensive Income Interest revenue Interest expense Net interest earnings 16,050,154 15,201,149 14,585,127 15,503,750 23,539,444 (8,282,994) (8,258,603) (7,933,184) (6,787,665) (13,167,836) 7,767,160 6,942,546 6,651,943 8,716,085 10,371,608 Fee and commission revenue Fee and commission expenses Net fee and commission income Other operating income Operating income Credit Impairment (losses)/recoveries charged to the income statement Administrative expenses Other operating expenses Net profit before income tax expenses Income tax expense 2,177,254 2,470,105 2,513,574 2,781,445 3,028,199 (191,984) (216,946) (247,428) (189,222) (414,276) 1,985,270 2,253,159 2,266,146 2,592,223 2,613, , ,425 92,431 93, ,799 10,082,105 9,431,130 9,010,520 11,401,934 13,092,330 (232,923) 870,646 (1,543,437) (55,899) (2,584,542) (2,446,450) (2,450,457) (2,722,763) (2,457,623) (192,683) (182,228) (31,606) (156,540) (21,331) 7,071,957 7,673,098 4,985,020 8,466,732 10,613,376 (2,001,218) (2,216,646) (1,417,921) (2,573,679) (3,336,065) Profit after income tax expense attributable to head office account of the Registered Bank 5,070,739 5,456,452 3,567,099 5,893,053 7,277,311 Amounts repatriated to head office Profit retained (4,381,861) (4,415,127) (6,017,197) (7,695,196) (4,389,695) 688,878 1,041,325 (2,450,098) (1,802,143) 2,887,616 The historical summary of Financial Statement have been taken from Audited Financial Statement of the respective years disclosed above. 11

13 s Historical Summary of Financial Statements Registered Bank's Banking Group (continued) Statement of Financial Position NZ IFRS as at 31 Dec NZ IFRS as at 31 Dec NZ IFRS as at 31 Dec NZ IFRS as at 31 Dec NZ!FRS as at 31 Dec (S) (S) (S) Total assets 418,607, ,691, ,052, ,997, ,694,768 Total individually impaired assets 110, , ,899 55,899 Total liabilities 412,698, ,471, ,873, ,368, ,264,041 Head office account 5,908,689 5,219,811 4,178,486 6,628,584 8,430,727 12

14 s Financial Statements of Statement of Comprehensive Income 12 months ended 12 months ended 31 December December 2012 Note Interest revenue 3 16,050,154 15,201,149 Interest expense 3 (8,282,994) (8,258,603) Net interest income 7,767,160 6,942,546 Fee and commission revenue 4 2,177,254 2,470,105 Fee and commission expense 4 (191,984) (216,946) Net fee and commission income 1,985,270 2,253,159 Other operating income 5 329, ,425 Operating income 10,082,105 9,431,130 Impairment (losses) / recoveries on loans and advances 11 (232,923) 870,646 Administrative expenses 6 (2,584,542) (2,446,450) Other operating expenses 7 (192,683) (182,228) Net profit before tax 7,071,957 7,673,098 Income tax expense 8 (2,001,218) (2,216,646) Profit for the year 5,070,739 5,456,452 Other comprehensive income Total comprehensive income attributable to Head Office 5,070,739 5,456,452 * The accompanying notes on pages 17 to 65 form part of these financial statements. 13?WC

15 s Financial Statements of Statement of changes in Head Office Account 12 months ended 12 months ended 31 December December 2012 (P Head office account at beginning of the year 5,219,811 4,178,486 Profit for the year 5,070,739 5,456,452 Other comprehensive income Total comprehensive income for the year 5,070,739 5,456,452 Other movements Amounts repatriated to head office (4,381,861) (4,415,127) Head office account at end of the year 5,908,689 5,219,811 * The accompanying notes on pages 17 to 65 form part of these financial statements. 14

16 s Financial Statements of Statement of Financial Position As at 31 December 2013 Note as at 31 December 2013 as at 31 December 2012 ASSETS Cash and cash equivalents 9 2,184,018 1,365,127 Loans and advances to customers ,757, ,525,699 Due from related parties ,275, ,400,975 Property and equipment , ,186 Other assets 15 35,915 12,599 Deferred tax assets , ,670 Total assets 418,607, ,691,256 LIABILITIES Due to other banks ,284, ,233,041 Deposits from customers ,613, ,479,218 Due to related parties 13 44,858,060 36,420,384 Current tax liabilities 507, ,957 Provisions 19 18,800 18,800 Other liabilities , ,045 Total liabilities 412,698, ,471,445 EQUITY Head office account 5,908,689 5,219,811 Total equity and liabilities 418,607, ,691,256 Additional disclosures Total interest earning and discount bearing assets 416,633, ,926,674 Total interest and discount bearing liabilities 411,755, ,132,643 Total liabilities net of amounts due to related parties 367,840, ,051,061 No assets presented in the Statement of Financial Position have been used to secure any obligations. * The accompanying notes on pages 17 to 65 form part of these financial statements 15

17 s Financial Statements of Statement of Cash Flows Note 12 months ended 31 December months ended 31 December 2012 Cash flows from operating activities Interest received 15,866,765 15,314,308 Other income received 2,106,350 2,522,816 Interest paid (7,459,869) (8,008,143) Payments to Suppliers and Employees (2,725,157) (2,597,151) Income tax paid (2,350,000) (1,692,390) Cash flows from operating profit before changes in operating assets and liabilities 5,438,089 5,539,440 Net increase in loans advanced to customers (37,315,786) (12,195,439) Net (decrease) / increase in due to other banks (8,976,727) 17,292,455 Net increase in deposits from customers 27,438,670 25,132,030 Cash flows from operating assets and liabilities (18,853,843) 30,229,046 Net cash flows from operating activities 24 (13,415,754) 35,768,486 Cash flows from investing activities Purchase of property and equipment (2,201) (3,975) Net cash flows from investing activities (2,201) (3,975) Cash flows from financing activities Advances from head office 10,159,946 49,329,613 Amount received from/(paid to) head office 8,330,109 (80,360,350) Repatriation to head office (4,381,861) (4,415,127) Net cash flows from financing activities 14,108,194 (35,445,864) Net increase in cash and cash equivalents 690, ,647 Cash and cash equivalents at the beginning of the year 1,365, ,784 Effect of exchange rate changes on cash and cash equivalents 128, ,696 Cash and cash equivalents at the end of the year 2,184,018 1,365,127 * The accompanying notes on page 17 to 65 form part of these financial statements. 16

18 Financial Statements of 1. Statement of Accounting Policies General Accounting Policies The reporting entity is (the "Registered Bank"), a Registered Bank of Kookmin Bank (the "Overseas Bank"). The Registered Bank is registered under the Companies Act These financial statements have been drawn up in accordance with the requirements of the Companies Act 1993, the Financial Reporting Act 1993, and the Registered Bank Disclosure Statement (Overseas Incorporated Registered Banks) Order (No 2) They were approved for issue by the Directors on 28 March The Registered Bank's Directors do not have the power to amend the financial statements once issued. The Registered Bank's financial statements have been prepared in accordance with New Zealand Generally Accepted Accounting Practice ("NZ GAAP"). They comply with New Zealand equivalents to International Financial Reporting Standards ("NZ IFRS") and other applicable Financial Reporting Standards, as appropriate for profit-oriented entities. These financial statements also comply with International Financial Reporting Standards. Basis of preparation The financial statements have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets, and financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss. The preparation of financial statements in conformity with NZ IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Registered Bank's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in note 2. Summary of significant accounting policies The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. Standards and interpretations issued but not yet effective (a) New and amended the standards adopted by the Registered Bank The Registered Bank has adopted External Reporting Board Standard Al Accounting Standards Framework (For-profit Entities Update) (XRB Al). XRB Al establishes a for-profit tier structure and outlines which suite of accounting standards entities in different tiers must follow. The Registered Bank is a tier 1 entity. There was no impact on the current or prior year financial statements. Amendments to NZ IFRS 7 Financial Instruments: Disclosures (effective 1 January 2013). The amendment provides for new disclosures for offsetting a recognised financial asset and a recognised financial liability when it has an unconditional and legally enforceable right of set-off and intends either to settle the asset and liability on a net basis or to realise the asset and settle the liability simultaneously. The adoption of the new disclosures has not affected any of the amounts recognised in the financial statements. NZ IFRS 13 Fair Value Measurement (effective from 1 January 2013). It establishes a single source of guidance under NZ IFRS for determining the fair value of assets and liabilities. NZ IFRS 13 does not change when an entity is required to use fair value, but rather, provides guidance on how to determine fair value under NZ IFRS when fair value is required or permitted by NZ IFRS. It also expands the disclosure requirements for all assets or liabilities carried at fair value. This includes information about the assumptions made and the qualitative impact of those assumptions on the fair value determined. The adoption of the new guidance has not affected any of the amounts recognised in the financial statements and appropriate disclosures have been made in note 25. (b) The following new standard and amendment to standards relevant to the Registered Bank are not yet effective and have not yet been applied in preparing the financial statements. NZ IFRS 9 Financial Instruments replaces part of NZ IAS 39 Financial Instruments: Recognition and Measurement and hedge accounting and will be mandatory for the Registered Bank's financial statements. It establishes two primary measurement categories for financial assets: amortised cost and fair value, with classification depending on an entity's business model and the contractual cash flow characteristics of the financial asset. It also amends the fair value option for financial liabilities to address the issue of credit risk. Changes to impairment provisioning and hedge accounting will also be incorporated in the final standard. The Registered Bank is yet to assess NZ IFRS 9's full impact. 17

19 Financial Statements of 1. Statement of Accounting Policies (continued) a) Foreign currency translations Functional and presentation currency Items included in the financial statements of the Registered Bank are measured using the currency of the primary economic environment in which the entity operates (`the functional currency'). The financial statements are presented in New Zealand dollars, which is also the functional currency. Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the date of the transaction or valuation where items are remeasured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of comprehensive income. b) Segment reporting The Registered Bank operates predominantly in the financial services industry within New Zealand. is classified as a single operating segment for purposes of NZ IFRS 8, therefore all revenues and expenses are allocated to the Registered Bank as one operating unit. c) Revenue recognition Revenue is recognised to the extent that it is probable that economic benefit will flow to the Registered Bank and that the revenue can be reliably measured. The principal sources of revenue are interest income, fees and commissions. Interest income and expense Financial instruments are classified in the manner described in the financial assets and liabilities sections below. These are measured by reference to amortised cost. For financial instruments measured at amortised cost, interest income and expense is recognised on a time-proportion basis using the effective interest method. When an instrument is impaired, the Registered Bank reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at the original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loans is recognised using the original effective interest rate. Fee and commission revenue Fee and commission relate to specific transactions or events, they are recognised in the statement of comprehensive income when the service is provided to the customer. When they are charged for services provided over a period, they are taken to Other operating income on an accruals basis as the service is provided. d) Expense recognition Fee and commission expense Fee and commission relate to specific transactions or events, they are recognised in the statement of comprehensive income on an accrual basis when the Registered Bank has received the service. Operating lease payments These are recognised in the statement of comprehensive income on a straight-line basis over the term of the lease, unless another systematic basis is more representative of the time pattern of the benefit received. All other expenses, excluding interest expense, are recognised in the statement of comprehensive income on an accrual basis. 18

20 Financial Statements of 1. Statement of Accounting Policies (continued) e) Other operating income/expense Gains and losses on foreign exchange are recorded in the statement of comprehensive income when the Registered Bank's right to receive the gains or losses is established. Realised and unrealised gains and losses from re-measurement of foreign denominated transactions are included in other operating income or expense. f) Financial assets Classification The Registered Bank classifies its financial assets in the following categories: at fair value through profit or loss; loans and receivables; available-for-sale and held-to-maturity. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition. Financial assets at fair value through profit or loss Assets in this category are either held for trading or designated at fair value through profit or loss at inception. A financial asset is classified in this category if acquired principally for the purpose of selling in the short-term, if it eliminates an accounting mismatch or if it is managed by the Registered Bank on a fair value basis. Derivatives are categorised as held for trading unless they are designated as hedges. The Registered Bank has no financial assets designated as at fair value through profit or loss. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. The Registered Bank's loans and receivables generally comprise loans and advances to customers, other receivables, amounts due from related parties and cash and cash equivalents in the statement of financial position. Available-for-sale financial assets Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. The Registered Bank has no financial assets designated as available-for-sale financial assets. Held-to-maturity Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Registered Bank's management has the positive intention and ability to hold to maturity. If the Registered Bank were to sell other than an insignificant amount of held-to-maturity assets, the entire category would be reclassified as available-for-sale. The Registered Bank has no financial assets designated as held-to-maturity. Recognition and measurement Regular purchases and sales of financial assets are recognised on the trade-date the date on which the Registered Bank commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognised at fair value and transaction costs are expensed in the statement of comprehensive income. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Registered Bank has transferred substantially all risks and rewards of ownership. Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables and held-to-maturity investments are carried at amortised cost using the effective interest method. Gains or losses arising from changes in the fair value of the 'financial assets at fair value through profit or loss' category are presented in the statement of comprehensive income within other income in the period in which they arise. Dividend income from financial assets at fair value through profit or loss is recognised in the statement of comprehensive income as part of other operating income when the Registered Bank's right to receive payments is established. Changes in the fair value of monetary securities denominated in a foreign currency and classified as available-for-sale are analysed between translation differences resulting from changes in amortised cost of the security and other changes in the carrying amount of the security. The translation differences on monetary securities are recognised in the statement of comprehensive income; translation differences on non-monetary securities are recognised in equity. Changes in the fair value of monetary and non-monetary securities classified as available-for-sale are recognised in equity. 19

21 Financial Statements of 1. Statement of Accounting Policies (continued) When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments recognised in equity are included in the statement of comprehensive income as other income. Interest on available-for-sale securities calculated using the effective interest method is recognised in the statement of comprehensive income as part of interest income. Dividends on available-for-sale equity instruments are recognised in the statement of comprehensive income as part of other operating income when the Registered Bank's right to receive payments is established. The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), the Registered Bank establishes fair value by using valuation techniques. These include the use of recent arm's length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, and option pricing models making maximum use of market inputs and relying as little as possible on entity-specific inputs. The Registered Bank assesses at each statement of financial position date whether there is objective evidence that a financial asset or a group of financial assets is impaired. The impairment testing of loans and receivables is described further below in the asset quality section. g) Financial liabilities The Registered Bank classifies its financial liabilities in the following categories: at fair value through profit or loss; or other financial liabilities. The classification depends on the purpose for which the financial liability was entered into. Management determines the classification of its financial liabilities at initial recognition. Financial liabilities at fair value through profit or loss Liabilities in this category are either held for trading or designated at fair value through profit or loss at inception. A financial liability is classified in this category if entered into principally for the purpose of selling in the short-term, if it eliminates an accounting mismatch or if it is managed by the Registered Bank on a fair value basis. Derivative liabilities that do not meet the criteria for hedge accounting are classified as held for trading and measured at fair value through profit or loss. The Registered Bank has no financial liabilities designated as at fair value through profit or loss. Other financial liabilities This category includes all financial liabilities other than those at fair value through profit or loss. Liabilities in this category are measured at amortised cost and include: Due from banks This represents amounts due from banks, apart from those designated as at fair value through profit or loss. Deposits from customers Deposits from Customers cover all forms of funding, apart from those classified as at fair value through profit or loss and include transactional and savings accounts and term deposits. Other financial liabilities Other financial liabilities accruals and fees payable. Amounts due to related parties This represents amounts due from related entities of the Registered Bank. Other financial liabilities are recognised initially at fair value net of transaction costs incurred. Other financial liabilities are subsequently stated at amortised cost; any difference between proceeds net of transaction costs and the redemption value is recognised in the statement of comprehensive income over the period of the borrowings using the effective interest method. 20

22 Financial Statements of 1. Statement of Accounting Policies (continued) h) Offsetting financial instruments The Registered Bank offsets financial assets and financial liabilities and reports the net balance in the statement of financial position where there is a legally enforceable right to set-off and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. i) Asset quality Individually impaired assets Individually impaired assets means any credit exposures against which an individually assessed provision has been recorded in accordance with "NZ IAS 39". Past due assets A past due asset is any credit exposure where a counterparty has failed to make a payment when contractually due, and which is not an impaired asset. Assets under administration An asset under administration is any credit exposure which is not an impaired asset or a past due asset, but which is to a counterparty: (a) who is in receivership, liquidation, registered bankruptcy, statutory management or any form of administration in New Zealand; or (b) who is in any other equivalent form of voluntary or involuntary administration in an overseas jurisdiction. j) Impairment of financial assets Assets carried at amortised cost An assessment is made at each balance date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or 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. Objective evidence that a financial asset or group of assets is impaired includes observable data that comes to the attention of the directors 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; a concession granted to the borrower that the lender would not otherwise consider for economic or legal reasons; relating to the borrower's financial difficulty; it becoming probable that the borrower will enter Registered Bankruptcy or other financial reorganisation; the disappearance of an active market for that financial asset because of financial difficulties; or 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 group; including adverse changes in the payment status of borrowers in the group. 21

23 Financial Statements of 1. Statement of Accounting Policies (continued) Firstly an assessment is made whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If it is determined that no objective evidence exists for an individually assessed financial asset, whether significant or not, the assets are included in a group of financial assets with similar credit risk characteristics and collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment. If there is objective evidence that an impairment loss on loans and receivables or held-to-maturity investments carried at amortised cost has been incurred, the amount of 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 carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the statement of comprehensive income. If a loan or held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. As a practical expedient impairment may be measured on the basis of an instrument's fair value using an observable market price. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling collateral, whether or not foreclosure is probable. For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics (i.e. on the basis of the Registered Bank's grading process that considers collateral type, past-due status and other relevant factors). Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors' ability to pay all amounts due according to the contractual terms of the assets being evaluated. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets and historical loss experience for assets with similar credit characteristics. Estimates of changes in future cash flows for groups of assets should reflect and be directionally consistent with changes in related observable data from period to period (for example, changes in payment status or other factors indicative of changes in probability of losses in the group and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. When a loan is uncollectible, it is written off to the statement of comprehensive income. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtors credit rating), the previously recognised impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognised in the statement of comprehensive income. 22

24 Financial Statements of 1. Statement of Accounting Policies (continued) k) Property and equipment Property and equipment are recognised in the statement of financial position at historical cost less accumulated depreciation and impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset's carrying amount or are recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Registered Bank and the cost of the item can be measured reliably. All other repairs and maintenance are charged to other operating expenses during the financial period in which they are incurred. The cost amount of property and equipment less the estimated residual value is depreciated over their useful lives on a straight line basis. The range of useful lives of the major assets is: Leasehold improvement 6-20 years Equipment 4-25 years The assets' residual values, useful lives and depreciation methods are reviewed and adjusted if appropriate at each balance date. Assets are reviewed for impairment at least annually and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount. The recoverable amount is the higher of the asset's fair value less costs to sell and value in use. Where the Registered Bank expects the carrying amount of assets held within property and equipment to be recovered principally through a sale transaction rather than through continuing use, these assets are classified as held for sale. Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in other operating expenses in the statement of comprehensive income. I) Taxation Income tax on the net profit for the year comprises current and deferred tax. Income tax is recognised in the statement of comprehensive income except to the extent that it relates to items recognised directly within equity, in which case it is recognised directly in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted as at balance date after taking advantage of all allowable deductions under current taxation legislation and any adjustment to tax payable in respect of previous financial years. Deferred tax is provided using the statement of financial position liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at balance date. In accordance with NZ IAS 12 Income Taxes, a deferred taxation asset is recognised only to the extent that it is probable (i.e. more likely than not) that a future taxable profit will be available against which the asset can be utilised. Deferred taxation assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Deferred tax related to fair value re-measurement of available-for-sale financial assets, cash flow hedges and the revaluation of noncurrent assets, which are charged or credited directly to equity, is also credited or charged directly to equity and is subsequently recognised in the statement of comprehensive income if and when the deferred gain or loss on the related asset or liability affects income. 23

25 Financial Statements of 1. Statement of Accounting Policies (continued) m) Provisions A provision is recognised in the statement of financial position when the Registered Bank has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and a reliable estimate can be made of the amount of the obligation. n) Contingent liabilities and credit commitments The Registered Bank is involved in a range of transactions that give rise to contingent and / or future liabilities. The Registered Bank discloses a contingent liability when it has a possible obligation arising from past events that will be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the Registered Bank's control. A contingent liability is disclosed when a present obligation is not recognised because it is not probable that an outflow of resources will be required to settle an obligation, or the amount of the obligation cannot be measured with sufficient reliability. The Registered Bank issues commitments to extend credit, letters of credit, guarantees and other credit facilities. These financial instruments attract fees in line with market prices for similar arrangements. They are not sold or traded. The items generally do not involve cash payments other than in the event of default. The fee pricing is set as part of the broader customer credit process and reflects the probability of default. They are disclosed as contingent liabilities at their face value. o) Leases The leases entered into by the Registered Bank are operating leases. The total payments made under operating leases are charged to other operating expenses in the statement of comprehensive income on a straight-line basis over the period of the lease. When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty is recognised as an expense in the period in which termination takes place. p) Cash and cash equivalents Cash and cash equivalents comprises cash, cash at Registered Bank, cash in transit and call deposits due from other Banks, all of which are used in the day-to-day cash management of the Registered Bank. These balances have a maturity of less than 3 months. q) Goods and Services Tax (GST) The financial statements have been prepared so that all components are stated exclusive of GST except where the GST is not recoverable from the IRD. In these circumstances the GST component is recognised as part of the underlying item. Trade and other receivables and payables are stated GST inclusive. The net amount of GST recoverable from or payable to the IRD is included within these categories. Cash flows in the cash flow statement include GST. r) Employee benefits Wages and salaries, annual leave and sick leave Liabilities for wages and salaries, annual leave and sick leave accruing to employees and expected to be settled within twelve months of the reporting date are recognised and measured at the amounts expected to be paid when the liabilities are settled. Profit-sharing and bonus plans The Registered Bank recognises a liability and an expense for bonuses and profit-sharing based on a formula that takes into consideration the profit attributable to the Registered Bank's shareholders after certain adjustments. A provision is recognised where there is a contractual obligation or where there is a past practice that has created a constructive obligation. 24 ii innu

26 Financial Statements of 1. Statement of Accounting Policies (continued) s) Head office account Head office account comprises funds provided by the Overseas Bank. It is non-interest bearing and there is no fixed date for repatriation. t) Statement of cash flows Basis of presentation The statement of cash flows has been presented in accordance with NZ IAS 7 Statement of Cash Flows with netting of certain items as disclosed below. Cash and cash equivalents Cash and cash equivalents comprises cash and cash equivalents, all of which are used in the day to day cash management of the Registered Bank and are subject to an insignificant risk of changes in value. Netting of cash flows Certain cash flows have been netted in order to provide more meaningful disclosure, as many of the cash flows are received and disbursed on behalf of customers and reflect the activities of those customers rather than the Registered Bank. u) Changes in accounting policies There have been no significant changes in accounting policies during the current year. Accounting policies have been applied on a basis consistent with prior years. 25 L k,

27 Financial Statements of 2. Critical accounting estimates, assumptions and judgments The preparation of these financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. Management discussed with the audit committee the development, selection and disclosure of the Registered Bank's critical accounting policies, judgments, assumptions, and estimates and the application of these policies, judgments, assumption, and estimates. a) Key assumptions and sources of estimation uncertainty Impairment losses on loans and advances The Registered Bank reviews its loan portfolios to assess impairment at least on an annual basis. In determining whether an impairment loss should be recorded in the statement of comprehensive income, the Registered Bank makes judgements as to whether there is any observable data indicating an impairment trigger followed by measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio. Refer to note 11 for more information. b) Critical accounting judgments in applying the Registered Bank's accounting policies Key judgments include the following: (i) Categorisation of financial assets and liabilities, and thus whether they should be recorded at fair value or amortised cost; (ii) The likelihood of recovery for deferred tax assets; and (iii) Credit risk management and basis of the Registered Bank's loan impairment provision. Management uses their knowledge of the related assets and historical experience to make these judgments. 26 jr)ii've

28 Financial Statements of 3. Net interest income 12 months ended 12 months ended 31 December December 2012 (S) Interest revenue Due from other banks Loans and advances 11,110,942 8,373,185 Other ,111,528 8,373,930 Amounts received from related parties 4,938,626 6,827,219 16,050,154 15,201,149 Interest expense Due to other banks Deposits from customers 1,570,687 1,641,528 6,151,571 5,367,504 7,722,258 7,009,032 Amounts paid to related parties 560,736 1,249,571 8,282,994 8,258, Net fee and commission revenue 12 months ended 12 months ended 31 December December 2012 Fee and commission revenue Retail banking customer fees 306, ,075 Commercial finance / investment banking fees 1,871,055 2,230,030 2,177,254 2,470,105 Fee and commission expense Inter bank transaction fees 191, , , , Other operating income.-"" , LIMPIP _. 12 months ended 12 months ended 31 December December 2012 (S) (S) Foreign exchange gain Other 321, ,702 8,340 2, , ,425 27

29 Financial Statements of 6. Administrative expenses 12 months ended 31 December months ended 31 December 2012 Employee benefit expenses 1,114,791 1,068,586 Depreciation Leasehold improvement 1,379 2,186 Equipment 60,476 96,692 61,855 98,878 Operating lease costs 491, ,111 Auditors' remuneration Audit and review of financial statements 110, ,000 Other assurance services 3,675 Other 805, ,200 2,584,542 2,446,450 No other fees have been paid to the Auditor other than detailed above. In accordance with Section 211(1)(g) of the New Zealand Companies Act 1993, remuneration and other benefits in excess of NZ $100,000 per annum paid to employees of not being Directors of the Registered Bank during the years are detailed below. The bandings below include retirement and redundancy payments and represent annualised amounts for 31 December 2013 and 31 December Number of employees NZD$100,000-$110,000 Number of employees NZD$110,000-$120,000 Number of employees NZD$120,000-$130,000 Number of employees NZD$130,000-$140,000 Number of employees NZD$140,000-$150,000 Number of employees NZD$150,000-$160,000 Number of employees NZD$160,000-$170,000 Number of employees NZD$170,000-$180,000 Number of employees NZD$180,000-$190,000 Number of employees NZD$190,000-$200,000 Number of employees NZD$200,000-$210,000 Number of employees NZD$210,000-$220,000 Number of employees NZD$220,000-$230,000 Number of employees NZD$230,000-$240,000 Number of employees NZD$240,000-$250,000 Number of employees NZD$250,000-$260,000 Number of employees NZD$260,000-$270,000 Number of employees NZD$270,000-$280,000 Number of employees NZD$280,000-$290, months ended 12 months ended 31 December December _ 1 _

30 Financial Statements of 7. Other operating expenses 12 months ended 12 months ended 31 December December 2012 Foreign exchange losses Other 192, ,006 60, , , Income tax expense Recognised in the statement of comprehensive income 12 months ended 12 months ended 31 December December 2012 Current taxation 2,028,408 1,969,277 Deferred taxation Origination and reversal of temporary differences Total income tax expense in statement of comprehensive income (27,190) 247,369 2,001,218 2,216, months ended 12 months ended 31 December December 2012 Reconciliation of effective tax rate Profit before tax 7,071,957 7,673,098 Income tax using the domestic corporation rate 1,980,148 2,148,467 Tax effect of non-deductible expenses 51,696 52,561 Prior year adjustment (30,626) 15,618 Total income tax expense in statement of comprehensive income 2,001,218 2,216,646 Effective tax rate 28.3% 28.9% The relevant domestic corporate rate is 28% (2012: 28%) 29

31 Financial Statements of 9. Cash and Cash equivalents As at 31 December 2013, Cash and cash equivalents are due for settlement within 12 months of balance date. These comprise of balances with less than three months' maturity from the date of acquisition, that includes cash in hand, deposits held at call with banks and other short term highly liquid investments with original maturities of three months or less. (2012: within 12 months of balance date) 10. Loans and advances to customers Loans and advances to customers at amortised cost 31 December 2013 Gross Impairment Carrying Amount Allowance Value Gross Amount 31 December 2012 Impairment Allowance Carrying Value (S) (S) Current assets Residential Mortgage 68,957,782 (237,121) 68,720,661 48,415,246 (98,251) 48,316,995 Corporate 107,386,951 (395,100) 106,991,850 91,097,145 (481,477) 90,615,668 Other retail 325,035 (1,239) 323, ,703 (4,918) 454, ,669,768 (633,460) 176,036, ,972,094 (584,646) 139,387,448 Non current assets Residential Mortgage 3,182,249 (11,585) 3,170,664 1,490,490 (1,917) 1,488,573 Corporate 17,565,969 (83,330) 17,482,639 18,735,906 (86,228) 18,649,678 Other retail 68,270 68,270 20,816,488 (94,915) 20,721,573 20,226,396 (88,145) 20,138,251 Total 197,486,256 (728,375) 196,757, ,198,490 (672,791) 159,525,699 30

32 Financial Statements of 11. Credit risk management and asset quality Credit risk is the risk of loss to the Registered Bank arising from the failure of a counterparty to repay principal and/or interest due at the required time. Credit risk in the Registered Bank arises primarily from the lending, trade and finance activities of the Registered Bank. (i) Credit approval standards The Overseas Bank's lending principles are set out in the Overseas Bank's philosophy on lending. All transactions between clients and the Registered Bank are guided by these principles. The Overseas Bank sets the Registered Bank's exposure limits to all counter-parties. These are documented and show, by category of loan, the delegated authorities, which have been given to Loan Officers, Loan Managers and the General Manager for approving loans. The Registered Bank has no specific exposure concentration limits in place for particular industries; however the Registered Bank monitors exposure to various industry sectors and adopts a general practice of ensuring there is no exposure concentration to any individual industry sector. A standard procedure is used to assess all credit applications. This includes ensuring all applications meet the Registered Bank's lending criteria. The Loan Officers evaluate applications in the first instance, with an independent review provided by the Loan Managers. (ii) Portfolio monitoring The General Manager reviews the status of all loans quarterly. The Loan Officers monitor repayment schedules regularly and maintain contact with all borrowers in order to ensure any potential problems are identified at any early stage and appropriate action is taken. The Registered Bank maintains a record of all borrowers' credit facilities, all indebtedness and any guarantees given or taken. All related borrowers and guarantors are identified. All principal and interest amounts, which are in default, are reported to the General Manager. Where such delinquencies are over 3 months these are reported to the Overseas Bank. The daily loan operations are subject to a review by a member of the Retail Banking department. These reviews are undertaken to ensure the Registered Bank's policies and procedures have been complied with. (iii) Credit risk mitigation The Registered Bank achieves credit risk mitigation through collateralisation, where the exposure is secured by eligible collateral. Collateral security in the form of real property or security interest in personal property is generally taken for business credit except for major government, bank and corporate counterparties of strong financial standing. Longer term consumer finance (e.g. household loans), is generally secured against real estate while short term revolving consumer credit is generally unsecured. The main types of collateral taken vary and include residential mortgages, charge over properties being financed, cash, deposits, bonds, commodities, equities and motor vehicles. Included in 'Loans and advances', are amounts held subject to guarantee arrangements whereby the Guarantor has deposited the amount guaranteed and this will be paid by the Registered Bank in the event of default by the Guarantor. The Registered Bank bears no credit risk in respect of these arrangements. (iv) Credit facility management Credit risk portfolios are regularly assessed for objective evidence of impairment. The Registered Bank creates portfolio impairment provisions where there is objective evidence that the portfolio contains probable losses that will be identified in future years. The Registered Bank also creates an individually assessed provision against specific credit exposures when there is objective evidence that it will not be able to collect all amounts due. The daily loan operations are subject to a review by a member of the Retail Banking department. These reviews are undertaken to ensure the Registered Bank's policies and procedures have been complied with. 31

33 Financial Statements of 11. Credit risk management and asset quality (continued) (v) Maximum exposure and effects of collateral and other credit enhancements Netting and set-off The Registered Bank has the contractual ability to set off asset and liability positions on default or bankruptcy of the borrower, where the Registered Bank holds collateral as the top priority to ensure that appropriate arrangements are made in the future to offset the associated risks. Moreover, the over-collateralised collaterals possessed by the Registered Bank significantly reduce the need for concern related to the net exposure amount on the table. Collateral The Registered Bank has the ability to call on collateral in the event of default of the borrower or other counterparty, comprising: Home loans: a fixed charge over residential property in the form of houses, flats and other dwellings; Wholesale lending: a fixed charge over commercial property and other physical assets, in various forms; and Financial guarantees and similar off-balance sheet commitments: cash collateral, mainly in terms of term deposits. The carrying value of non-cash collateral reflects the estimated fair value, being, in most instances, the Government Valuation of the physical assets limited to the carrying value of the asset where the exposure is over-collateralised on date of origination. For assets collateralised by residential or commercial property (and certain other physical assets), where it is not practicable to access current market valuations of each underlying property, values reflect the best measure of the current market valuations. The net realisable value from a distressed sale of collateral obtained by the Registered Bank upon default or insolvency of counterparty will in some cases be lower than the carrying value recognised above. Assets obtained are normally sold in the form of mortgage sale at the corresponding market value at the time for the maximum benefit of the Registered Bank, the borrower and the borrower's other creditors in accordance with the relevant insolvency regulations. Risk Transfer The Registered Bank in some cases holds guarantees, letters of credit and similar instruments from third parties which enable it to claim settlement from them in the event of default on the part of the counterparty. In addition, the Registered Bank obtains guarantees from customers in respect of personal loans and smaller business loans, where these are not quantified in the table. Credit risk mitigation, collateral and other credit enhancements The Registered Bank's net exposure to its credit risk is considerably low as over-collateralised collaterals held by the Registered Bank allow greater assurance and control over its collaterals. Moreover, the Registered Bank possesses full security over its loans as well as the cash held in the head office in Korea. Accordingly, cash collateral is also considered very important against financial guarantees approved. However, a large proportion of the unmitigated exposure relates to either cash or cash equivalent that cannot be collateralised, where it is also considered of low risk due to the nature of the counterparties. Balance Sheet components Cash and cash equivalents: These exposures are generally considered to be of low risk due to the nature of the counterparties. These balances are not collateralised. Loans and advanced customers: All of our housing and other loans for consumer purposes are fully secured. Moreover, security is typically taken by a fixed charge over property or other assets of the Registered Bank. Due from related parties: These refer to balances held with the Registered Bank's head office and are considered of low risk as it is securely accessible and flexibly utilised if necessary, however these balances are not collateralised. Other assets: Collateral is generally not sought on these balances. 32

34 Financial Statements of 11. Credit risk management and asset quality (continued) Maximum Exposure Collateral Net Exposure As at 31 December 2013 On-Balance Sheet: Cash and cash equivalents 2,184,018 2,184,018 Loans and advanced customers 196,757,881 (196,698,130) 59,751 Due to related parties 219,275, ,275,099 Other assets 8,565 8,565 Total on- Balance Sheet 418,225,563 (196,698,130) 221,527,433 Off- Balance Sheet: Lending commitments approved but not yet advanced 4,938,004 (4,938,004) Contingent related financial guarantees 659,563 (659,563) Total off- Balance Sheet 5,597,567 (5,597,567) Total 423,823,130 (202,295,697) 221,527,433 Maximum Exposure Collateral Net Exposure 1 As at 31 December 2012 On- Balance Sheet: Cash and cash equivalents 1,365,127-1,365,127 Loans and advanced customers 159,525,699 (159,465,316) 60,383 Due to related parties 229,400, ,400,975 Other assets 8,295 8,295 Total on- Balance Sheet 390,300,096 (159,465,316) 230,834,780 Off- Balance Sheet: Lending commitments approved but not yet advanced 3,289,877 (3,289,877) Contingent related financial guarantees 947,079 (947,079) Total off- Balance Sheet 4,236,956 (4,236,956) Total 394,537,052 (163,702,272) 230,834,780 33

35 Financial Statements of 11. Credit risk management and asset quality (continued) Credit quality of loans that are neither past due nor impaired are as follows Corporate 31 December 2013 Total Corporate(S) 31 December 2012 Total(S) Grade 1 7,313,955 7,313,955 9,648,670 9,648,670 Grade 2 28,485,842 28,485,842 56,847,738 56,847,738 Grade 3 87,949,314 87,949,314 41,286,643 41,286,643 Grade 4 Grade 5 1,203,809 1,203, ,952, ,952, ,783, ,783,051 Residential mortgage retail $459,703). Credit quality of loans graded according to internal credit ratings are as follows: Overall credit grade Grade 1 Grade 2 Grade 3 Grade 4 Grade 5 of $72,029,531 and other retail of $393,305 are ungraded (2012: Residential mortgage $49,680,236 and other Corporate grade AAA to BBB+ BBB to BB BB- to B B- to CCC CC or under Asset quality information for loans and advances to customers Classification Corporate facilities demonstrating financial condition and capacity to repay that are good to exceptional. Corporate facilities demonstrating financial condition and capacity to repay that are average to good. Corporate facilities demonstrating financial condition and capacity to repay that are stable to average. Corporate facilities demonstrating financial condition and capacity to repay that are unstable. Corporate facilities that are at a high risk of default Registered Bank Residential Past due but not impaired mortgages Corporate Other Retail Total As at 31 December 2013 (5) (5) Past due up to 30 days Past due days Past due days Past due 90+ days Total Registered Bank Residential Past due but not impaired mortgages Corporate Other Retail Total As at 31 December 2012 (5) (5) (5) Past due up to 30 days 115, ,000 Past due days 1,200,000 1,200,000 Past due days Past due 90+ days 110, ,500 Total 225,500 1,200,000 1,425,500 34

36 Financial Statements of 11. Credit risk management and asset quality (continued) Loan Reconciliation 31 December December 2012 Total loans and advances to customers 197,486, ,198,490 Less allowance for loan losses 728, ,791 Loans and advances to customers 196,757, ,525,699 Registered Bank Individually impaired assets For the 12 months ended 31 December 2013 Residential mortgages Corporate Other Retail Total Balance at beginning of period 850, ,000 Net additions 110, ,500 Deletions (672,661) (672,661) Amount written off (177,339) - (177,339) Balance at end of period 110, ,500 Aggregate amount of individual credit impairment allowance 70, ,000 Registered Bank Individual credit impairment allowances For the 12 months ended 31 December 2013 Residential mortgages Corporate Other Retail Total Opening balance 230, ,000 Charge/(credit) to statement of comprehensive income 70,000 (52,661) 17,339 Amounts written off (177,339) (177,339) Recoveries of previous write offs Reversals of previously recognised impairment losses - Other movements Closing balance 70,000 70,000 35

37 Financial Statements of 11. Credit risk management and asset quality (continued) Registered Bank Collective credit impairment allowances For the 12 months ended 31 December 2013 Residential mortgages Corporate Other Retail Total Opening Balance 100, ,705 4, ,791 Charge/(credit) to statement of comprehensive income 78, ,725 (3,679) 215,584 Other movements Closing Balance 178, ,430 1, ,375 Registered Bank Individually impaired assets For the 12 months ended 31 December 2012 Residential mortgages Corporate Other Retail Total Balance at beginning of period 55, , ,899 Net additions - - Deletions - - Amount written off 55,899-55,899 Balance at end of period - 850, ,000 Aggregate amount of individual credit impairment allowance - 230, ,000 36

38 Financial Statements of 11. Credit risk management and asset quality (continued) Registered Bank Individual credit impairment allowances For the 12 months ended 31 December 2012 Residential mortgages Corporate Other Retail Total Opening Balance 55, , ,899 Charge/(credit) to statement of comprehensive income Amounts written off 55, ,899 Recoveries of previous write offs Reversals of previously recognised impairment losses Other Movements Closing Balance 230, ,000 Registered Bank Collective credit impairment allowances For the 12 months ended 31 December 2012 Residential mortgages Corporate Other Retail Total Opening Balance 87,264 1,223,992 2,181 1,313,437 Charge/(credit) to statement of comprehensive income 12,904 (886,287) 2,737 (870,646) Other movements Closing Balance 100, ,705 4, ,791 The Registered Bank does not have any financial assets designated at fair value or assets under administration (2012: nil). The Registered Bank has acquired assets of $110,500 through security enforcements and is included in the loan and advances to customers balance (2012: nil). The Registered Bank does not have any undrawn balances on lending commitments to customers that are classified as individually impaired (2012: nil). Overseas Banking Group As at 31 December 2013 As at 31 December 2012 (Korea Won Billions) (Korea Won Billions) Total assets Individually impaired assets As a % of total assets Total individual credit impairment allowance As a % of total individually impaired assets Total collective credit impairment allowance 265, ,047 3,608 3, % 1.26% 1, % 21.35% 1,303 2, Overseas Bank entities The Overseas Bank is Kookmin Bank. The Overseas Bank's immediate and ultimate parent is KB Financial Group. 37

39 Financial Statements of 13. Related parties Identity of related parties The Registered Bank has related party transactions with its immediate parent, Kookmin Bank. During the year ended 31 December 2013, the Registered Bank has entered into, or had in place, various financial transactions with the Overseas Banking Group. The Overseas Banking Group provides administrative functions to the Registered Bank for which no payments have been made (31 December 2012: $ nil). In all other cases, arrangements with the Overseas Banking Group were conducted on an arm's length basis and on normal commercial terms. The Registered Bank uses the market rate of interest for similar banks for all loans with related parties. All loans and borrowings from related parties are not secured. Transactions with related entities The Registered Bank received interest revenue of $4,938,626 from Kookmin Bank for related party receivables (31 December 2012: $6,827,219). The Registered Bank paid interest expense of $560,736 to Kookmin Bank for related party payables (31 December 2012: $1,249,571). The Registered Bank received commissions on bankers acceptance transactions from Kookmin Bank of $1,206,667 (31 December 2012: $1,449,624). The Registered Bank repatriated profits of $4,381,861 to Kookmin Bank (31 December 2012: $4,415,127). During the year, no provisions for impairment losses have been recognised in respect of loans and other amounts due from related parties. No amounts owed by related parties have been written off or forgiven during the year. Balances with related entities At 31 December 2013, the Registered Bank had $219,275,099 due from Kookmin Bank for short term advances (31 December 2012: $229,400,975). At 31 December 2013, the Registered Bank has $44,858,060 due to Kookmin Bank for short term advances for funding purposes (31 December 2012: $36,420,384). All balances with related entities fall under the current assets and liabilities. Key management personnel compensation Key management personnel are those persons (including directors) having authority and responsibility for planning, directing and controlling the activities of the Registered Bank. All key management personnel are employed by Kookmin Bank. The Registered Bank made $854,532 (2012: $758,213) of short term employment benefits to key management personnel. No other benefits were paid to key management personnel. 38

40 Financial Statements of 14. Property and equipment As at 31 December 2013 Leasehold Improvements Equipment Total Opening cost 489,378 1,288,538 1,777,916 Accumulated depreciation and impairment losses (478,344) (1,118,385) (1,596,729) Opening net book value 11, , ,187 Additions 2,201 2,201 Disposals - Disposals: Accumulated depreciation Depreciation (1,379) (60,476) (61,855) Impairment losses - - Closing net book value 9, , ,533 Closing cost 489,378 1,290,739 1,780,117 Accumulated depreciation and impairment losses (479,723) (1,178,861) (1,658,584) Closing net book value 9, , ,533 As at 31 December 2012 Leasehold Improvements Equipment Total $ Opening cost 489,378 1,346,337 1,835,715 Accumulated depreciation and impairment losses (476,158) (1,076,180) (1,552,338) Opening net book value 13, , ,377 Additions 3,975 3,975 Disposals (61,774) (61,774) Disposals: Accumulated depreciation 54,486 54,486 Depreciation (2,186) (96,692) (98,878) Impairment losses Closing net book value 11, , ,186 Closing cost 489,378 1,288,538 1,777,916 Accumulated depreciation and impairment losses (478,344) (1,118,386) (1,596,730) Closing net book value 11, , ,186 Depreciation of property and equipment is recognised within administrative expenses. 39

41 Financial Statements of 15. Other assets As at 31 December 2013 As at 31 December 2012 (S) Accounts receivable and prepayments Leasehold deposits Current other assets Non current other assets 27,350 4,304 8,565 8,295 35,915 12,599 35,915 12, Deferred tax assets and liabilities 12 months ended 12 months ended 31 December December 2012 (S) The balance comprises temporary differences attributable to: Property and equipment 1,327 Loan loss provision 203,945 Sundry accruals 27,588 Net deferred tax assets 232,860 (5,682) 188,381 22, , MIMI I III

42 Financial Statements of 16. Deferred tax assets and liabilities (continued) Movements in temporary differences during the year Opening balance Recognised Prior Period Recognised in income Adjustment in equity Closing balance Year ended 31 December 2013 Depreciation (5,842) 7,009 1,167 Loss on disposal of property and equipment Sundry accruals 22,971 4,617-27,588 Adjustment for loan loss provision 188,381 15, ,945 Make good provision 205,670 27, ,860 Year ended 31 December 2012 Depreciation (16,444) 10,602 (5,842) Loss on disposal of property and equipment Sundry accruals 21,669 1,302 22,971 Adjustment for loan loss provision 447,814 (259,433) - 188,381 Make good provision 453,039 (247,369) 205,670 Expected settlement Net deferred tax asset / (liability) expected settlement 12 months ended 12 months ended 31 December December 2012 Within 12 months 27,588 22,971 In excess of 12 months 205, ,699 Net deferred tax assets 232, ,

43 Financial Statements of 17. Deposits from customers Current liabilities Retail customers As at 31 December 2013 (s) As at 31 December 2012 (S) - Term deposits 136,160, ,678,564 - Current deposits 11,316,106 7,707,337 Commercial customers - Term deposits 23,049,974 12,767,513 - Current deposits 6,543,874 5,860, ,070, ,013,714 Non current liabilities Retail customers - Term deposits 466,864 4,112,388 - Current deposits 76, ,249 Commercial customers - Term deposits 6,244,867 - Current deposits 542,923 10,465,504 Total Deposits 177,613, ,479, Due to other banks As at 31 December 2013 As at 31 December 2012 Within 12 months 189,284, ,233,041 In excess of 12 months - Total due to other banks 189,284, ,233,041 42

44 Financial Statements of 19. Provisions As at 31 December 2013 As at 31 December 2012 (S) Balance at beginning of the year ,800 Provisions made during the year Provisions used during the year Provisions reversed during the year Balance at end of the year 18,800 _ 18,800 The provision represents the Registered Bank's obligation to refit the New Zealand office at the expiration of the lease term. This provision is based on management best estimate to comply with lease make good obligation. The lease will expire on 30 June Other liabilities As at 31 December 2013 As at 31 December 2012 Withholding taxes payable 97, ,605 Accrued expenses 172, ,041 Fee income received in advance 147, , , ,045 Current other liabilities 417, ,045 Non current other liabilities 43

45 Financial Statements of 21. Commitments Operating lease commitments As at 31 December 2013 As at 31 December 2012 Non cancelable operating lease rentals are payable as follows: Less than one year 282, ,945 Between one and five years 159, ,183 More than five years 442, ,128 The Registered Bank leases the premises under operating leases. Lease payments are adjusted every three to five years to reflect market rentals. There are no material contingent rentals. During the year ended 31 December 2013, an expense of $491,876 (31 December 2012: $488,111) was recognised in the statement of comprehensive income as a component of administrative expenses in respect of operating lease rentals. Capital commitments As at 31 December 2013, the Registered Bank has no capital commitments (31 December 2012: nil). 22. Contingencies The Registered Bank has contingent liabilities in the form of guarantees. These guarantee the performance of customers by issuing standard guarantees to related party branches. The risk involved is essentially the same as the credit risk involved in extending loan facilities to customers. The maximum financial exposure to the Registered Bank in respect of these arrangements is as follows: As at 31 December 2013 As at 31 December 2012 Contingent financial guarantees 659, ,079 Lending commitments approved but not yet advanced 4,938,004 3,289, Subsequent event There have been no subsequent event materially affecting the financial accounts of Registered Bank for the year ended 31 December

46 Financial Statements of 24. Reconciliation of profit after income tax to net cash flow from operating activities 12 months ended 31 December months ended 31 December 2012 Profit after income tax for the year 5,070,739 5,456,452 Add: Non-cash items Unrealised foreign exchange (gain) / loss (128,652) (113,419) Other non-cash expenses (23,255) Loss on sale of property and equipment 7,288 Depreciation 61,855 98,878 Impaired assets (recovery) / expense 232,923 (870,646) 166,126 (901,154) Add : Movements in statement of financial position items Movement in interest accruals 560, ,128 Movement in operating expenses accruals (10,484) (6,094) Movement in income tax payable (321,592) 276,888 Movement in deferred tax (27,190) 247,369 Movement in other assets 9,851 Movement in loans and advances to customers (37,315,786) (12,195,439) Movement in amounts due to other banks (8,976,727) 17,292,455 Movement in deposits from customers 27,438,670 25,132,030 (18,652,619) 31,213,188 Net cash flows from operating activities (13,415,754) 35,768, or- NOM mom til:,

47 Financial Statements of 25. Financial assets and liabilities Accounting categorisation and fair values Cash and cash equivalents These assets are short term in nature and the related carrying value is equivalent to their fair value. Loans and advances to customers For variable rate loans and advances, the carrying amount is considered a reasonable estimate of fair value. For fixed rate loans and advances, fair values have been estimated using discounted cash flow models with reference to market interest rates. Due to/from related parties These assets and liabilities are short term in nature and the related carrying value is equivalent to their fair value. Other financial assets For other financial assets, the carrying amount is equal to fair value. Deposits from customers and due to other banks For fixed term deposits by banks and customers, fair values have been estimated using discounted cash flow models with reference to market interest rates. For other deposits, such as demand deposits and temporary deposits, the carrying amount is considered a reasonable estimate of fair value. Other financial liabilities There financial liabilities are short term in nature and the related carrying value is equivalent to their fair value. Fair value hierarchy NZ IFRS 13 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources; unobservable inputs reflect the Registered bank's market assumptions. These two types of inputs have created the following fair value hierarchy: Level 1: Fair values are determined using quoted market prices where an active market exists. Level 2: Where quoted market prices are not available, fair values have been estimated using present value or other valuation techniques based on market conditions existing at balance date. These valuation techniques rely on market observable inputs. Level 3: Inputs for the financial asset or liability that are based on unobservable inputs. The fair value of financial assets and liabilities that are not traded in an active market is determined using valuation techniques for which any significant inputs are based on unobservable inputs. This level includes loans and advances to customers and deposits from customers with significant unobservable components. 46

48 Financial Statements of 25. Financial assets and liabilities (continued) The table below sets out the Registered Bank's accounting categorisation of each class of financial assets and liabilities, and their fair values. Designated at Held-to- Loans and Available Financial Total Fair value 31 December 2013 fair value maturity receivables for sale liabilities at carrying through P/L amortised value cost Cash and cash equivalents 2,184,018 2,184,018 2,184,018 Loans and advances to customers* - 196,757, ,757, ,738,053 Due from related parties - 219,275, ,275, ,275,099 Other financial assets 8,565 8,565 8,565 Total financial assets - 418,225, ,225, ,205,735 Due to other banks - 189,284, ,284, ,284,266 Deposits from customers* - 177,613, ,613, ,662,228 Due to related parties 44,858,060 44,858,060 44,858,060 Other financial liabilities 73,500 73,500 73,500 Total financial liabilities 411,828, ,828, ,878,054 Designated at Held-to- Loans and Available Financial Total Fair value 31 December 2012 fair value maturity receivables for sale liabilities at carrying through P/L amortised value (S) cost Cash and cash equivalents 1,365,127 1,365,127 1,365,127 Loans and advances to customers* - 159,525, ,525, ,345,672 Due from related parties - 229,400, ,400, ,400,975 Other financial assets 8,295 8,295 8,295 Total financial assets - 390,300, ,300, ,120,069 Due to other banks 198,233, ,233, ,233,041 Deposits from customers* 149,479, ,479, ,469,456 Due to related parties 36,420,384 36,420,384 36,420,384 Other financial liabilities 45,000 45,000 45,000 Total financial liabilities 384,177, ,177, ,167,881 * The fair values are within level 3 of the fair value hierarchy. 47

49 Financial Statements of 26. Financial risk management Risk management framework The Board of Directors of Kookmin Bank has overall responsibility for the establishment and oversight of the Registered Bank's risk management framework. The risk management policies and procedures of the Registered Bank are consistent with those of the Overseas Bank. The Overseas Bank reviews the Registered Bank's risk management systems on an ongoing basis. The risk management systems have not been reviewed by a party external to the Registered Bank or the Overseas Banking Group. The key risks that the Registered Bank is subject to are specific banking risks and risks arising from the general business environment. The risk management framework identifies four broad categories of risk: Credit risk the risk of financial loss arising from the failure of a customer or counterparty to honour any financial or contractual obligation. Liquidity risk the risk that the Registered Bank will be unable to meet obligations as they fall due, without increasing unacceptable losses. Market risk the potential for losses arising from adverse movements in the level and volatility of market factors, such as interest rates and foreign exchange rates. Operational risk the risk of direct or indirect losses resulting from inadequate or failed internal processes, people, and systems, or from external events. This risk domain includes legal risks (i.e. losses resulting from the failure to comply with laws as well as prudent ethical standards and contractual obligations). It also includes exposure to litigation from all aspects of the Registered Bank's activities. This section presents information about the Registered Bank's exposure to each of the above risks, the Registered Bank's objectives, policies and processes for measuring and managing risk, and the Registered Bank's management of capital. Credit risk Refer to Note 11 for detailed disclosures on the Registered Bank's credit risk management policies. 48 Fpr3 IL-'111"

50 Financial Statements of 26. Financial risk management (continued) Concentration of credit exposures The following table presents the maximum credit risk of financial assets which is best represented by the carrying amount of the asset, net of any provision for credit impairment. The credit risk exposure does not take into account the fair value of any collateral, in the event of other parties failing to perform their obligations under financial instruments. As at 31 December 2013 As at 31 December 2012 On-balance sheet Cash and cash equivalents 2,184,018 1,365,127 Loans and advances to customers 196,757, ,525,699 Due from related parties 219,275, ,400,975 Other assets 8,565 8, ,225, ,300,096 Off-balance sheet Lending commitments approved but not yet advanced 4,938,004 3,289,877 Contingent related financial guarantees 659, ,079 Total 423,823, ,537,052 Customer's industry sectors Banks and financial institutions 221,467, ,774,397 Accommodation, cafes, restaurants 7,292,690 7,346,986 Wholesale and retail 3,703,867 3,633,930 Manufacturing 751, ,258 Property 80,179,533 68,379,784 Services 11,554,058 5,613,671 Transport and storage 18,596,674 23,375,763 Other corporate 4,691,803 2,436,086 Retail lending 75,585,567 52,525,177 Total 423,823, ,537,052 Geographical areas New Zealand 185,587, ,658,150 Republic of Korea 237,871, ,734,210 Australia 31,301 30,586 United States of America 88,027 83,926 Japan 2,966 18,104 Europe 241,692 12,076 Total 423,823, ,537,052 49

51 Financial Statements of 26. Financial risk management (continued) Liquidity risk Liquidity risk is the risk that the Registered Bank will encounter difficulty in meeting obligations from its financial liabilities. Management of liquidity risk is designed to ensure that the Registered Bank has the ability to generate or obtain sufficient cash in a timely manner and at a reasonable price to meet its financial commitments on a daily basis. (i) Management of liquidity risk The Overseas Bank supervises the Registered Bank's liquidity under its global liquidity management policy. The Registered Bank obtains funding from its Overseas Bank when necessary. Maturity reports are used to monitor the Registered Bank's capability in managing its day to day liquidity needs and to ensure it can meet its obligations when they fall due. This monitoring of liquidity risk is performed daily by product manager and reviewed weekly by the General Manager of the Registered Bank. (ii) Exposure to liquidity risk A key measure used by the Registered Bank for managing liquidity risk is the ratio of net liquid assets to deposits from customers. Generally, liquid assets include cash and cash equivalents, short term interbank deposits and highly rated debt securities available for immediate sale and for which there exists a deep and liquid market. Net liquid assets are liquid assets less any deposits from banks, debt securities issued and other borrowings maturing within the next 30 days. A similar, but not identical, calculation is used to measure the Registered Bank's compliance with the liquidity limit established by the Registered Bank's lead regulator. 50

52 Financial Statements of 26. Financial risk management (continued) Liquidity risk (continued) (iii) Maturity analysis for undiscounted contractual cash flow The tables below present the Registered Bank's cash flows by remaining contractual maturities as at balance date. The amounts disclosed in the tables are the contractual undiscounted cash flows and therefore will not agree to the carrying values on the Statement of Financial Position. The Registered Bank manages liquidity based on contractual basis and therefore expected maturity basis are not shown. As at 31 December 2013 On Demand Less than 1 to 3 3 months Between More than Total 1 Month Months to 1 year 1 5 years 5 years Contractual maturities of financial assets Cash and cash equivalents 2,184,018 2,184,018 Loans and advances to customers 6,031,621 8,317,164 21,606, ,538,872 13,810,970 8,872, ,176,952 Due from related parties 63,477,412 43,332,968 72,632,122 41,194, ,636,883 Other assets 71,693,051 8,565 8,565 51,650,132 94,238, ,741,818 13,810,970 8,872, ,006,418 Contractual maturities of financial liabilities Due to other banks 16,976 24,850,405 42,874, ,238, ,980,866 Deposit from customers 17,322,411 32,376,703 32,739,587 96,907, , ,957,869 Due to related parties 16,568,066 16,040,010 12,187,821 44,795,897 Other liabilities 73,500 33,980,953 73,500 73,267,118 87,802, ,145, , ,808,132 Total contingent liabilities and commitments Lending commitments approved but not yet advanced Other commitments to provide financial guarantees to external parties Total undiscounted contingent liabilities and commitment 4,938, ,563 5,597,567 4,938, ,563 5,597, TAPC

53 Financial Statements of 26. Financial risk management (continued) Liquidity risk (continued) (iii) Maturity analysis for undiscounted contractual cash flow (continued) As at 31 December 2012 On Demand Less than 1 Month 1 to 3 Months 3 months to 1 year Between 1 5 years More than 5 years Total Contractual maturities of financial assets Cash and cash equivalents 1,365,127 1,365,127 Loans and advances to customers 2,953,905 5,792,879 13,496, ,906,796 7,055,090 16,677, ,882,450 Due from related parties 21,748,556 59,823,148 89,995,602 59,531, ,098,603 Other asset - 8,295 26,067,588 65,616, ,492, ,446,388 7,055,090 8,295 16,677, ,354,475 Contractual maturities of financial liabilities Due to other banks 16,325 42,938, ,858,427 54,676, ,489,633 Deposit from customers 13,105,602 27,559,672 28,704,755 72,620,455 10,550, ,540,860 Due to related parties 12,138,869 17,945 28,806 24,317,405-36,503,025 Other liabilities 45,000 25,305,796 70,516, ,591, ,614,106 10,550,376-45, ,578,518 Total contingent liabilities and commitments Lending commitments approved but not yet advanced Other commitments to provide financial guarantees to external parties Total undiscounted contingent liabilities and commitment 3,289,877-3,289, , ,079 4,236,956 4,236,956 52

54 Financial Statements of 26. Financial risk management (continued) Liquidity risk (continued) (iv)concentration of funding The following tables present the Registered Bank's concentration of funding which are reported by product, industry and geographic region and is presented at carrying values. Concentration of funding As at 31 December 2013 As at 31 December 2012 a) Category of products Due to other banks 189,284, ,233,041 Customer current deposits 17,322,411 13,105,602 Customer savings and term deposits 160,290, ,373,616 Due to related parties 44,858,060 36,420,384 Other liabilities 172, ,041 Total 411,927, ,259,684 b) Customer's industry sectors Banks and financial institutions 234,142, ,780,466 Individuals 148,149, ,431,031 Property and retails trade 20,651,796 16,697,970 Accommodation and restaurants 65, ,685 Other 8,918,803 7,790,532 Total 411,927, ,259,684 c) Geographical areas New Zealand 177,802, ,622,584 Republic of Korea 126,591,966 36,420,384 Japan 79,370,869 - Germany 18,397,362 Philippines 9,765,156 - Hong Kong - 60,792,169 Singapore 72,961,345 Malaysia 34,112,608 Australia - 30,350,594 Total 411,927, ,259,684 53

55 Financial Statements of 26. Financial risk management (continued) Market risk Market risk is the risk that interest rates, foreign exchange rates or equity and commodity prices will move relative to positions taken, causing profits or losses to the Registered Bank. (i) Foreign currency risk Currency risk is the risk of earnings fluctuation arising from movements in foreign currency exchange rates. Foreign currency risks arise from the Registered Bank undertaking foreign exchange transactions with customers as well as from loans and deposits undertaken in foreign currencies. The Registered Bank has position and stop loss limits designed to trigger specific management action to control any potential adverse affects of foreign exchange movements in the Registered Bank's earnings. The foreign exchange trading performance and positions are regularly reported both to the General Manager of the Registered Bank and the General Manager of the International Planning Department (Overseas Bank). The Registered Bank take on exposure to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The table below summarises the Registered Bank's net open position in each foreign currency to foreign currency exchange rate risk as at year end. The amounts are stated in New Zealand dollar equivalents translated using the end of reporting period spot foreign exchange rates. As at 31 December 2013 AUD KRW JPY USD EUR Financial assets Cash and cash equivalents 91,801 1,040 25,828 94, ,692 Loans and advances to customers ,181,670 Due from related parties 199,737,484 Total financial assets 91,801 1,040 25, ,013, ,692 Financial liabilities Due to other banks - 189,267,291 Deposits from customers 21, ,403,267 36,628 Due to related parties 24,476,199 Total financial liabilities 21, ,146,757 36,628 Net Position 70,466 1,040 25,828 (133,300) 205,064 54

56 Financial Statements of 26. Financial risk management (continued) Market risk (continued) (i) Foreign currency risk (continued) As at 31 December 2012 AUD KRW JPY USD EUR Financial assets Cash and cash equivalents 30, ,457 91,186 12,076 Loans and advances to customers - 25,584,148 Due from related parties - 217,280,059 Total financial assets 30, , ,955,393 12,076 Financial liabilities Due to other banks 197,863,559 Deposits from customers 29,158 8,465,101 46,205 Due to related parties 36,416,606 Total financial liabilities 29, ,745,266 46,205 Net Position 1, , ,127 (34,129) 55

57 Financial Statements of 26. Financial risk management (continued) Market risk (continued) (i) Foreign currency risk (continued) Sensitivity analysis The tables below summarise the post-tax sensitivity of financial assets and liabilities to changes in currency risk. The market value of the assets and liabilities were used as the basis for the analysis and financial modeling was used to determine the impact on those values of changes in currency risk. The following table details the Registered Bank's sensitivity to a 10% increase and decrease in the New Zealand dollar against the relevant foreign currencies. 10% represents management's assessment of the possible change in foreign exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated items and adjusts their translation at the year end rate for a 10% change in foreign current rates. $NZD -10% +10% -10% +10% As at 31 December 2013 Foreign Currency Profit or Profit or Equity Equity Exposure Loss Loss Amounts Financial assets Cash and cash equivalents 454,664 36,373 (29,760) 36,373 (29,760) Loans and advances to customers 21,181,670 1,694,534 (1,386,437) 1,694,534 (1,386,437) Due from related parties 199,737,484 15,978,999 (13,073,726) 15,978,999 (13,073,726) Total 221,373,818 17,709,906 (14,489,923) 17,709,906 (14,489,923) Financial liabilities Due to other banks 189,267,291 (15,141,383) 12,388,405 (15,141,383) 12,388,405 Deposits from customers 7,461,230 (596,898) 488,371 (596,898) 488,371 Due to related parties 24,476,199 (1,958,096) 1,602,078 (1,958,096) 1,602,078 Total 221,204,720 (17,696,377) 14,478,854 (17,696,377) 14,478,854 56

58 Financial Statements of 26. Financial risk management (continued) Market risk (continued) (1) Foreign currency risk (continued) $NZD -10% -10% As at 31 December 2012 Foreign Profit or Profit or Currency Loss Loss Exposure Amounts Equity Equity Financial assets Cash and cash equivalents 185,247 10,106 (15,096) 10,106 (15,096) Loans and advances to customers 25,584,148 1,847,976 (2,760,557) 1,847,976 (2,760,557) Due from related parties 217,280,059 15,684,363 (23,429,727) 15,684,363 (23,429,727) Total 243,049,454 17,542,445 (26,205,380) 17,542,445 (26,205,380) Financial liabilities Due to other banks 197,863,559 (14,291,939) 21,349,687 (14,291,939) 21,349,687 Deposits from customers 8,540,464 (618,049) 923,259 (618,049) 923,259 Due to related parties 36,416,606 (2,630,418) 3,929,390 (2,630,418) 3,929,390 Total 242,820,629 (17,540,406) 26,202,336 (17,540,406) 26,202,336 57

59 Financial Statements of 26. Financial risk management (continued) Market risk (continued) (ii) Interest rate risk Interest rate risk is the risk of earnings fluctuation arising from movements in interest rates. Interest rate risk in the Registered Bank arises primarily from borrowing from and lending to customers, related parties and trade finance transactions. Procedures are in place to evaluate in advance the effect that large loans, investments, and other transactions will have on the interest rate risk of the Registered Bank. Exposure to interest rate risk is monitored on a weekly basis. The following tables include the Registered Bank's assets and liabilities at their carrying amounts, categorised by the earlier of contractual repricing or maturity dates. As at 31 December 2013 Weighted Average Non Effective Interest Interest rnths mths mills yrs Yrs bearing Total Rate (%) Cash and cash equivalents ,039 1,583,979 2,184,018 Loans and advances to customers ,531,089 58,237, ,392,826 7,286,908 38,279 (728,375) 196,757,881 Due from related parties ,202,732 41,029,048 43, ,275,099 Other financial assets N/A 8,565 8,565 Total financial assets 206,333,860 99,266, ,436,145 7,286,908 38, , ,225,563 Due to other banks ,105,107 73,195,345 48,966,838 16, ,284,266 Deposits from customers ,158,043 32,484,583 64,387, ,013 16,911 40, ,613,050 Due to related parties ,289,994 16,568,066 44,858,060 Other financial liabilities N/A 73,500 73,500 Total financial liabilities 175,553, ,679, ,922, ,013 16, , ,828,876 58

60 Financial Statements of 26. Financial risk management (continued) Market risk (continued) (ii) Interest rate risk (continued) As at 31 December 2012 Weighted Average Effective Interest mths mths Rate ( /e) Non Interest mths yrs yrs bearing Total Cash and cash equivalents N/A 1,365,127 1,365,127 Loans and advances to customers ,345,524 55,251,331 62,676,914 4,924,721 (672,791) 159,525,699 Due from related parties ,154,157 55,150,313 4,096, ,400,975 Other financial assets N/A 8,295 8,295 Total financial assets 207,499, ,401,644 66,773,419 4,924, , ,300,096 Due to other banks ,549,911 54,666,805 16, ,233,041 Deposits from customers ,108,717 20,092,020 51,637,471 10,441,388 24, , ,479,218 Due to related parties ,281,515 12,138,869 36,420,384 Other financial liabilities N/A 45,000 45,000 Total financial liabilities 210,658,628 99,040,340 63,776,340 10,441,388 24, , ,177,643 59

61 Financial Statements of 26. Financial risk management (continued) Market risk (continued) (ii) Interest rate risk (continued) Sensitivity analysis The tables below summarise the post-tax sensitivity of financial assets and liabilities to changes in interest rates. The market value of the assets and liabilities were used as the basis for the analysis and financial modeling was used to determine the impact on those values of changes in interest rates. The sensitivity analysis below has been determined based on the exposure to interest rates at the year end date. A 1% increase or decrease is used when analysing interest rate risk and this represents management's assessment of the possible change in interest rates. INTEREST RATE RISK -1% +1% -1% +1% As at 31 December 2013 Exposure Amounts Profit or loss Profit or loss Equity Equity Financial assets Cash and cash equivalents 600,039 (4,320) 4,320 (4,320) 4,320 Loans and advances to customers 197,486,255 (1,421,901) 1,421,901 (1,421,901) 1,421,901 Due from related parties 219,275,099 (1,578,782) 1,578,782 (1,578,782) 1,578,782 Total 417,361,393 (3,005,003) 3,005,003 (3,005,003) 3,005,003 Financial liabilities Due to other banks 189,284,266 1,362,847 (1,362,847) 1,362,847 (1,362,847) Deposits from customers 177,572,948 1,278,525 (1,278,525) 1,278,525 (1,278,525) Due to related parties 44,858, ,978 (322,978) 322,978 (322,978) Total 411,715,274 2,964,350 (2,964,350) 2,964,350 (2,964,350) INTEREST RATE RISK - 1 % + 1 % -1% +1% As at 31 December 2012 Exposure Profit or Profit or Equity Equity Amounts Loss Loss Financial assets Loans and advances to customers 160,198,490 (1,153,429) 1,153,429 (1,153,429) 1,153,429 Due from related parties 229,400,975 (1,651,687) 1,651,687 (1,651,687) 1,651,687 Total 389,599,465 (2,805,116) 2,805,116 (2,805,116) 2,805,116 Financial liabilities Due to other banks 198,216,716 1,427,160 (1,427,160) 1,427,160 (1,427,160) Deposits from customers 149,303,712 1,074,987 (1,074,987) 1,074,987 (1,074,987) Due to related parties 36,420, ,227 (262,227) 262,227 (262,227) Total 383,940,812 2,764,374 (2,764,374) 2,764,374 (2,764,374) 60

62 Financial Statements of 26. Financial risk management (continued) (iii) Equity risk Equity risk is the risk of loss arising from changes in the price of equity investments held by the Registered Bank. The Registered Bank does not undertake equity trading and therefore there are no significant exposures to equity instruments (iv) Market risk notional capital charges The Registered Bank's aggregate market risk exposure is derived in accordance with the Reserve Bank document 'Capital Adequacy Framework (Standardised Approach)' (BS2A). The peak-end-of-day exposures below have been calculated by determining the maximum end-of-day aggregate market risk exposure over the six months in accordance with BS2A. The following table provides a summary of notional capital charges by risk type for the Registered Bank as at 31 December End-of-period 31 December 2013 Implied Risk Notional weighted Capital Exposure Charge NZD($000) NZD($000) 31 December 2012 Implied Risk Notional weighted Capital Exposure Charge NZD($000) NZD($000) Interest rate risk 1, , Foreign currency risk Equity risk Peak end-of-day 31 December December 2012 Implied Risk Notional Implied Risk Notional weighted Capital weighted Capital Exposure Charge Exposure Charge NZD($000) NZD($000) NZD($000) NZD($000) Interest rate risk 7, , Foreign currency risk 1, Equity risk _ 61

63 Financial Statements of 26. Financial risk management (continued) Capital risk management The objectives of the registered bank's capital management are to maintain an optimal level of capital, which is adequate to support business growth and to commensurate with the registered bank's risk profiles. The management of the capital of the registered bank's is performed by the Head Office through the management of the Head Office account. Operational risk Operational risk is the risk of loss arising from fraud, unauthorised activities, error, omission, inefficiency, systems failure or external events. It arises from all the Registered Bank's activities, and is a risk faced by all business organisations. The Registered Bank's objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the Registered Bank's reputation with overall cost effectiveness and avoid control procedures which excessively restrict initiative and creativity. The primary responsibility for the development and implementation of controls to address operational risk is assigned to senior management within each business department. This responsibility is supported by the development of overall Overseas Bank standards for the management of operational risk which cover the following areas: - Requirements for appropriate segregation of duties, including the independent authorisation of transactions - Requirements for the reconciliation and monitoring of transactions - Compliance with regulatory and other legal requirements - Documentation of controls and procedures - Requirements for the periodic assessment of operational risks faced, and the adequacy of controls and procedures to address the risks identified - Requirements for the reporting of operational losses and proposed remedial action - Development of contingency plans - Training and professional development - Ethical and business standards - Risk mitigation, including insurance where this is effective Compliance with Overseas Bank standards is supported by a program of periodic reviews undertaken by internal audit. The results of Internal Audit reviews are discussed with the management of the business unit to which they relate, with summaries submitted to the Audit Committee and senior management of the Overseas Bank. Internal audit policy Internal audit is an integral part of the control environment of the Overseas Banking Group. It provides management and the Board with an independent and objective review of the business activities and support functions of the Overseas Banking Group. The Standing Auditor inspects independently from the Overseas Bank's legislative and executive organisation the Overseas Bank's accounts, their compliance with the subject matter of relevant laws and ordinance and the articles of incorporation, and carries out other duties entrusted to him by the Board of Directors. Internal audit visits occur at least every two years. The most recent internal audit was performed in March The Standing Auditor has the same status as the Directors & Deputy President. The Audit & Examination Department supports the work of the Standing Auditor. The Department carries out its duties to confirm compliance with relevant laws and ordinances, internal regulations and instructions to protect the Overseas Bank from damage caused by wrongdoing or mistakes, and to correct such wrongdoing and mistakes. The Overseas Bank has an audit committee which oversees the Registered Bank. The Overseas Bank will send internal auditors to the Registered Bank on every two year basis to review all operational procedures and IT recovery/back up systems. The internal auditors will then report directly to the Overseas Bank. 62

64 Financial Statements of 27. Loan to valuation ratio The information below has been derived in accordance with the definition of loan-to-valuation ratio specified in Capital Adequacy Framework(Standardised Approach) (BS2A). Residential mortgages by loan-to-valuation ratio at 31 December 2013 LVR range 0% - 80% 80% -90% Over 90% Value of exposure 75,222,351 Residential mortgages by loan-to-valuation ratio at 31 December 2012 LVR range 0% - 80% 80% -90% Over 90% Value of exposure 51,910,830 Reconciliation of residential mortgage-related amounts 31 December December 2012 Residential mortgage (as disclosed in note 10) 71,891,325 49,805,568 Residential lending commitments approved but not yet advanced 3,331,026 2,105,262 Residential Mortgages by loan-to-valuation ratio 75,222,351 51,910, Capital Adequacy of the Overseas Bank and Overseas Banking Group Overseas Bank Minimum Minimum Percentage Percentage 31 Dec required by FSS 31 Dec required by FSS Common Equity Tier One Capital as a percentage of risk weighted exposures" Tier One Capital as a percentage of risk weighted exposures Total Capital as a percentage of risk weighted exposures 12.61% 3.50% Not Applicable Not Applicable 12.61% 4.50% 10.87% 4.00% 15.42% 8.00% 14.40% 8.00% Overseas Banking Group Minimum Minimum Percentage Percentage 31 Dec required by FSS 31 Dec required by FSS Common Equity Tier One Capital as a percentage of risk weighted exposures* Tier One Capital as a percentage of risk weighted exposures Total Capital as a percentage of risk weighted exposures 12.61% 3.50% Not Applicable Not Applicable 12.61% 4.50% 10.87% 4.00% 15.42% 8.00% 14.40% 8.00% The information stated for the Overseas Banking Group is presented for the most recent period for which information is publicly available based on the consolidated Overseas Banking Group Figures. FSS stands for Financial Supervisory Service of the Republic of Korea. The ratios were calculated in accordance with the Bank of International Settlements (BIS) framework and meet its minimum requirements. The Overseas Bank is required by the FSS of Korea to hold minimum capital at least equal to that specified under the Foundation- Internal Ratings-Based Approach Basel III framework. The Overseas Bank meets the minimum capital requirements imposed by the FSS. * This is a capital adequacy requirement based on the Basel III framework implemented by the Overseas Bank in December 2013 (2012: Not applicable) 63

65 Financial Statements of 29. Overseas Bank's Overseas Banking Group Profitability and Size The most recent period for which information is publicly available is the 12 months ended 31 December 2013 Profitability Year ended Year ended 31 December December 2012 (Korea Won Billions) (Korea Won Billions) Net profit after tax 820 1,440 Net profit after tax as a percentage of average of total assets over the % 0.56% months ended on 31 December Size 31 December December 2012 (Korea Won Billions) (Korea Won Billions) Total assets 265, ,047 Percentage change in total assets over the 12 months ending on that date 1.61% 1.77% 30. Concentration of Credit Exposures to Individual Counterparties The number of individual bank counterparties (which are not members of a group of closely related counterparties) and groups of closely related counterparties of which a bank is the parent to which the Overseas Bank's banking group has an aggregate credit exposure that equals or exceeds 10% of the Overseas Banking Group's equity: - as at 31 December 2013 was nil (31 December 2012: nil); and - in respect of peak end-of-day aggregate credit exposure for the three months ended 31 December 2013 was nil (31 December 2012: nil). The number of individual non-bank counterparties (which are not members of a group of closely related counterparties) and groups of closely related counterparties of which a bank is not the parent to which the Overseas Bank's Banking group has an aggregate credit exposure that equals or exceeds 10% of the Overseas Banking Group's equity: - as at 31 December 2013 was nil (31 December 2012: nil); and - in respect of peak end-of-day aggregate credit exposure for the three months ended 31 December 2013 was nil (31 December 2012: nil). The peak end-of-day exposures have been calculated by determining the maximum end-of-day aggregate amount of credit exposure over the relevant three-month period, and then dividing that amount by the Overseas Banking Group's equity as at the end of the period. The information used for the Overseas Banking Group's equity is at the most recent period for which information is publicly available based on the consolidated Overseas Banking Group figures at 31 December 2013 (31 December 2012 for comparatives). Credit exposures used in the above calculations are determined with reference to actual credit exposures. Credit exposures to individual counterparties (not being members of a group of closely related counterparties) and to groups of closely related counterparties do not include exposures to those counterparties if they are recorded outside New Zealand nor exposures to the central government of any country with a long-term credit rating of A- or A3 or above, or its equivalent or a bank with a long-term credit rating of A- or A3 or above, or its equivalent. 64 *lb