FY2012 AnnuAl RepoRt

Transcription

1 FY2012 Annual Report

2 8 Korea Investment Holdings Co., Ltd. contents 02 Financial Highlights 04 Subsidiaries Ownership 05 Share Information 06 CEO s Message 10 Board of Directors 20 KIH Subsidiaries Overview 24 Risk Management 26 Management s Discussion and Analysis 46 Financial Review 129 Organization Chart 130 International Directory

3 FY2012 Annual Report 1 Forging Ahead Towards Global Top Financial Institution Korea Investment Holdings continues its unrivaled business performance based on its unique corporate philosophy amid mounting market uncertainties at home and abroad. Looking beyond its domestic market dominance, KIH is laying the groundwork for growing into an Asia Top Five. Since its founding in 2003 as Korea s first securities and investment-oriented financial holding company, KIH has been leading in investment banking, asset management, venture/pef investments, and savings banking. With its sights on becoming a global comprehensive financial investment company, KIH will continue its march forward.

4 2 Korea Investment Holdings Co., Ltd. Financial Highlights Consolidated Financial Statements (Unit: KRW billion) FY2011 FY2012 Amount Changed YoY (%) Operating Results Operating revenues 2, , Operating expenses 2, , SG&A expenses Operating income Net income before income tax Net income Financial Position Total assets 18, , , Total liabilities 16, , , Total shareholders equity 2, , *Prepared according to K-IFRS Operating Revenues (Unit: KRW billion) Net Income (Unit: KRW billion) Total Assets (Unit: KRW billion) Total Shareholders Equity (Unit: KRW billion) 3,500 3,000 2,500 2, , ,000 20,000 18,000 18, , ,800 2,700 2,600 2, , ,000 2,500 2, , ,000 2,400 1, ,000 2, ,000 2,200 fy11 fy12 fy11 fy12 fy11 fy12 fy11 fy12

5 FY2012 Annual Report 3 Separate Financial Statements (Unit: KRW billion) FY2011 FY2012 Amount Changed YoY (%) Operating Results Operating revenues Operating expenses SG&A expenses Operating income Net income before income tax Net income Financial Position Total assets 3, , Total liabilities 1, Total shareholders equity 2, , *Prepared according to K-IFRS Operating Revenues (Unit: KRW billion) Net Income (Unit: KRW billion) Total Assets (Unit: KRW billion) Total Shareholders Equity (Unit: KRW billion) ,000 3, ,500 3,000 2,500 3, , ,000 2,500 2,000 2, , ,000 1, ,500 1, , fy11 fy12 fy11 fy12 fy11 fy12 fy11 fy12

6 4 Korea Investment Holdings Co., Ltd. Subsidiaries Ownership Number of Shares Percentage (%) Korea Investment Holdings Co., Ltd. Subsidiaries Korea Investment & Securities Co., Ltd. (KIS) (Investor) 35,113, Second-Tier Subsidiaries Korea Investment Management Co., Ltd. (KIM) 13,200, Korea Investment Value Asset Management Co., Ltd. (KIVAM) 2,000, Korea Investment & Securities Asia, Ltd. (local corporation in Hong Kong) 5,000, Korea Investment & Securities Europe, Ltd. (local corporation in London) 2,000, Korea Investment & Securities America, Inc. (local corporation in New York) Korea Investment & Securities Singapore Pte. Ltd. (local corporation in Singapore) 10,000, KIS Vietnam Securities Corporation (local corporation in Vietnam) 12,864, Global Dynasty Natural Resources Private Equity Fund 998,413, Devonian Natural Resources Private Equity Fund 65,250, True Friend Investment Advisory Co., Ltd. 3,000, Korea Investment Partners Co., Ltd. (KIP) (Investor) 85,700, Second-Tier Subsidiaries KIP China Incorporation Korea Investment Savings Bank Co., Ltd. (KISB) 11,666, Cornerstone Equity Partners Co., Ltd. (CEP) (Investor) 150, Second-Tier Subsidiaries Cornerstone Private Equity Fund I CEP Private Equity Fund I Daesun Private Equity Fund Korea Investment Management Asia, Ltd. (KIM ASIA) 5,000, KIARA Capital Pte. Ltd. 1,000, KIARA Advisors Pte. Ltd. 100, * As of the end of March, 2013 * KIM Asia became a subsidiary of Korea Investment Management on April 13, * June 28, 2013, excluding the affiliates CEP Private Equity Fund I and Daesun Private Equity Fund

7 FY2012 Annual Report 5 Share Information FY2011 FY2012 Number of total outstanding shares 61,584,243 61,584,243 Number of common shares 55,725,992 55,725,992 Number of preferred shares 5,858,251 5,858,251 Total market capitalization (KRW trillion ) Foreign ownership (%) PER (H/L) (x) 10.1 / / 14.1 EPS (KRW) 4,638 3,202 KIH s Share Price and Trading Volume ( Trading Volume, Share Price ) Trading Volume (share) 1,000,000 Share Price (KRW) 50, , ,000 40, ,000 30, , ,000

8 6 Korea Investment Holdings Co., Ltd. CEO s Message While the majority of its competitors languished in difficult market conditions, KIH and its subsidiaries achieved meaningful results in their respective fields. Dear valued customers and shareholders, I would like to take this opportunity to express my sincere gratitude for the support and encouragement you gave Korea Investment Holdings in 2012, a year marked by many economic difficulties. It is also my great pleasure to report to you that KIH and its subsidiaries again achieved stable business results in FY2012, while most of our peers suffered setbacks in their performances. The year 2012 was a continuation of 2011 as far as financial environments and market situations were concerned at home and abroad. The Eurozone sovereign debt crisis, which had started two years ago, spread to Spain, Italy, and other EU economies. Although the European Central Bank managed to stop the crisis from driving market participants into the state of panic, the basics of market economics remained not only impaired but also precarious. Meanwhile, the U.S. maintained an expansionary monetary policy in hopes of riding out the global financial crisis; but as concerns began to surface over the fiscal cliff brinkmanship towards year-end and over a budget sequestration possibility at the outset of 2013, the growth of the world s largest economy started to loose momentum. These challenging circumstances had direct impact on the Korean economy and its financial market. As the global economy struggled to recover, Korean exports slowed and domestic consumption languished in the doldrums, limiting the growth of the economy to 2% and weakening the growth potential of major listed corporations as well as the nation. In addition, these led to contractions in the trading volume of the stock market and in the volatility of the index, leaving many financial investment institutions with profits below their previous year s figures. Despite such daunting circumstances, however, the subsidiaries of KIH achieved meaningful performances in their respective sectors. Korea Investment & Securities, the flag ship of KIH, turned in a net income of KRW billion and ranked No.1 in the industry, for second year in a row. Considering falling brokerage fees following dwindling trading volumes and investor protection-sided regulations from financial authorities, this feat takes on additional significance; the stellar performance provides a glimpse into the diversity and balanced growth of KIH s income structure which relies not only on brokerage fee, which is subjective to trading volumes, but also on investment banking and wealth management commission as well as margin & trading interest income.

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10 8 Korea Investment Holdings Co., Ltd. As an asset management company, Korea Investment Management manages the most number of funds with KRW 1 trillion or more in AUM, including Korea Samsung Group Equity Fund, Korea Navigator Equity Fund, and Power of Korea Equity Fund. With their superior performances, these funds continue to attract new investments. In addition, KIM introduced the industry s first Mainland China ETF in November 2012 setting in motion a new market trend for the industry to follow and in the following month was selected as a lead manager of the National Pension Investment Pool. Also in the area of venture capital/pef, Korea Investment Partners dominated the venture capital industry in terms of investment scale by bringing into its investment pool such diverse categories of investors as government agencies, government-funded banks, public funds, and overseas institutions. KIARA Capital, KIH s hedge fund subsidiary pursuing absolute return, continued to build up its investment competencies and inner values. Dear valued customers and shareholders, The year 2012 saw Korea Investment Value Asset Management put in the best performance in its corporate history. Founded in 2006 as Korea s first asset manager of long-term value investments, KIVAM outperformed its peers in the area of equity-type funds with its KIVAM 10-year Equity 1 recording the best-inclass rate of returns. As a result, the long-term value manager were awarded top prizes by various industry journals. Meanwhile, Korea Investment Savings Bank further fortified its stature as the industry leader in asset quality and profitability by steeling its focus on risk management amid the industry-wide turmoil of restructurings and other daunting developments. One consistent message underlying our FY2012 performance results is that KIH has what it takes to maintain a stable performance in the ever-evolving financial market supported by a diversified portfolio of businesses ranging from securities to fund management and venture capital/pef to savings banking. But fluid situations surrounding the financial market do not allow us to bask in the comfort of our hard-earned results. In particular, as the global economy sputters on, the low-growth-low-interestrate environment of Korea continues on. Lingering economic uncertainties are more than likely to continue to cut into corporate bottom lines.

11 FY2012 Annual Report 9 KIH has the experience and know-how it has accumulated achieving outstanding performances in the face of numerous global financial crises and challenging market conditions at home and abroad. Based on such breed-apart experience and know-how, in FY2013 we will continue pursuing our vision, Asia Top Five Investment Bank, along the path comprising the following three tasks: In FY2013, all of us at KIH and its subsidiaries will execute the aforementioned tasks to our best ability and try harder to carry out the role of a true industry leader that we are. On behalf of KIH, its member companies, and their employees, I would like to thank each and every one of you for your support and trust and at the same time, ask you to continue to help us become an Asia top investment bank and reach the Vision goal. First, we will develop market-leading products and services of our own that are beyond our peers reach, in an effort to grow assets for both customers and the Company. In particular, we will focus on enhancing return rates on customer assets so that they can enjoy stable income regardless of market situations. Secondly, we will step up efforts to develop new income sources to insure a stable return in the future. Thank you. Korea Investment Holdings CEO Nam - Goo Kim Thirdly, risk management will be further strengthened. With the increasing uncertainty of the financial market, risk management rises in importance; the fate of companies can be determined by how they manage their risks. KIH and its subsidiaries have been effectively dealing with unexpected market developments through vigilant risk management practices. By continuing to improve risk management in a systematic manner, we will prepare all of our business operations against any crises and minimize the effects of unexpected developments on our performance.

12 10 Korea Investment Holdings Co., Ltd. Board of Directors Nam-Goo Kim _ CEO (Standing Director) CEO of Korea Investment Holdings ( present) Vice Chairman of Korea Investment & Securities ( present) CEO of Dongwon Securities ( ) MBA, Keio University, Japan (1991) Joo-Won Kim _ President (Standing Director) President of Korea Investment Holdings ( present) Vice President of Korea Investment Holdings (2006 ~ 2010) CEO of Korea Investment Management Holdings ( ) CEO of Korea Investment Partners ( ) MBA, Korea University Business School, Korea (2008) Sung-Moon Yang (Head of Audit Committee, Non-standing Director) Executive Director, Business Support Office, Samsung Futures ( ) Director, Investment Business Division, Samsung Life Insurance ( ) Biology, Seoul National University, Korea (1979)

13 FY2012 Annual Report 11 Seung-Hee Park (Non-standing Director) Sang-Cheol Lee (Non-standing Director) Financial Managing Director of Woori Financial Group ( ) Director of Korea Deposit Insurance Corporation ( ) Ph.D. in Business Administration, Hansung University (2011) Professor, Business Administration, Dongguk University (2008 ~ present) Administrator, the Korea Management Accounting Association (2007 ~ present) Vice President, the School of Business, Dongguk University (2013 ~ present) Ph.D. in Business Administration, Yonsei University (2002) Kang-Heum Yon (Non-standing Director) Jong-Seok Bae (Non-standing Director) Professor of Business Administration, Yonsei University ( present) Head of the Ministry of Planning and Budget s Fund Evaluation Group ( ) Chairman of the Korea Derivatives Association ( ) Ph.D. in Business Administration, Wharton Business School, University of Pennsylvania, USA (1990) Professor of Business Administration, Korea University ( present) Standing director at the Korean Academy of Management ( present) Deputy Dean of Korea University Business School ( ) Ph.D. in Business Administration, University of Illinois, USA (1997)

14 12 Korea Investment Holdings Co., Ltd. Improving on Excellence Leading the industry based on a balanced business portfolio Korea Investment Holdings generates returns in a stable manner based on its specialized and diversified business portfolio of securities, asset management, venture capital, PEF, savings banking, and hedge fund. Korea Investment Securities, driving the growth of the Company, has achieved the industry s best net income performance for the past two fiscal years despite challenging market conditions, while the rest of the subsidiaries have held their top positions by consistently turning in stable income performances (Unit : KRW billion) FY 2011 FY 2012 Korea Investment Securities has recorded the industry s highest net income for two consecutive years

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16 14 Korea Investment Holdings Co., Ltd. Prospering Together with Customers Building wealth for both customers and the Company with differentiated products and services Korea Investment Holdings believes that customers form the basis of its business and constitute the reason for its existence. Based on this management philosophy, we define customer needs and expectations from a customer's perspective and develop products and services that meet both, all in an effort to grow and prosper together. With differentiated products and services, we will focus all our competencies on helping our customers reach their investment goals.

17 FY2012 Annual Report 15 FY (KRW trillion) FY (KRW trillion) Total Client Asset (KRW trillion) %

18 16 Korea Investment Holdings Co., Ltd. Focusing on Risk Management Further strengthening risk management to achieve the Asia Top Five vision Korea Investment Holdings has been able to make steady progress towards its mid/long-term vision because of the 24/7 systematic risk management it has built up.

19 FY2012 Annual Report 17 Vision Asia Top 5 Investment Bank Improving IB-AM Business Model

20 18 Korea Investment Holdings Co., Ltd. Sharing Values for All Building a better tomorrow for all through shared value All of us at Korea Investment Holdings and its subsidiaries are unified in our effort to grow together not only with customers but also with the communities we are part of. With a CSR goal thus defined, we carry out diverse social contribution programs, including those helping students from low-income families with materials and emotional support; so that, they could build better futures for themselves. Through these programs, we endeavor to share values that society needs and thus contribute to building a healthy society. Enhancing the corporate reputation with social contributions that stand out Matching grant system ( Children with Dreams ) - Education, art, and sports support Global Explorer, a project being promoted with the Dongwon Education Foundation Real Friends, an employee volunteer group of Korea Investment Securities Member of Dream Together as representative of the financial industry

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22 20 Korea Investment Holdings Co., Ltd. KIH Subsidiaries Overview All KIH subsidiaries are leading their respective markets with best-in-class business performances. ( : Holding company : Subsidiaries : Affiliates) * Net Income : Prepared according to K-IFRS Korea Investment Holdings KIH Korea Investment Holdings offers a wide variety of financial products and services through its subsidiaries, many of which are top performers in their respective fields. Taking full advantage of the benefits of being a holding company, KIH also focuses on creating synergies among its subsidiaries. As of March 2013, KIH has seven subsidiaries and 14 secondtier subsidiaries trillion Total Client Asset Net Income (Unit : KRW billion) fy11 fy12

23 FY2012 Annual Report 21 Korea Investment & Securities As the flagship subsidiary of KIH, Korea Investment Securities has a well-balanced revenue structure comprising asset management and investment banking. By turning into its advantage ongoing changes in the global financial market and a subsequent economic order taking shape, it endeavors to become Korea s best investment bank. In particular, KIS has made concrete progress towards improving profitability, as illustrated in the best net income performances it has turned in the past two years. Having included Korea Investment Management and Korea Investment Value Asset Management as subsidiaries in FY2012, KIS is forming and improving upon diverse strategies for creating synergies between securities and asset management. Client Asset 190.1billion KIS Net Income (Consolidated basis) Net Income (Unit : KRW billion) fy11 fy12 Total AUM (includes discretionary) 25.5trillion Net Income (Unit : KRW billion) 38.2 fy fy12 Korea Investment Management KIM Established as Korea s first investment trust company, Korea Investment Management has been leading the growth of Korea s asset management industry over the past 39 years. By building a close-knitted overseas network encompassing its subsidiaries and offices in China, Vietnam, and Hong Kong, KIM is laying a platform for growing into a global asset manager. In particular, in 2012 KIM became Korea s first to launch a Mainland China ETF, thereby setting an industry trend, and was selected as a lead manager of the National Pension Investment Pool. Looking forward, the Company will continue to fortify its market leadership position and pursue growth in profitability as well as in business scale.

24 22 Korea Investment Holdings Co., Ltd. Korea Investment Value Asset Management KIVAM Established in 2006 Korea Investment Value Asset Management specializes in longterm value investments. Practicing its investment philosophy of value investment with a long-term perspective, KIVAM pursues low-risk-middle-return. In FY2012 it reported the industry s highest return rate and a 101.3% increase in AUM, solidifying its position as a leading asset manager. Net Income (Unit : KRW billion) trillion 투자조합규모 Equity Fund AUM (includes discretionary) fy billion PEF AUM Net Income (Unit : KRW billion) Korea Investment Partners KIP Korea Investment Partners invests capital in small and medium-size enterprises (SMEs) and offers a variety of financial consulting services. KIP has effectively carried out its roles, recording an average IRR of 17.5% over the past 10 years, the best figure in the industry. In addition, KIP has maintained an A+ rating from Korea s Small and Medium Business Administration for the past nine consecutive years. fy11 fy12 fy12

25 FY2012 Annual Report 23 Cornerstone Equity Partners CEP Established in March 2006, Cornerstone Equity Partners specializes in private equity funds management, building a solid track record investing in various investment targets. PEF AUM 209.5billion Net Income (Unit : KRW billion) -2.9 fy fy12 Net Income (Unit : KRW billion) KIARA CAPITAL/ ADVISORS AUM 100 million USD KIARA CAPITAL/ ADVISORS Established in Singapore February 2008, KIARA Capital is Korea s first offshore hedge fund, an alternative investment company that pursues absolute return regardless of market direction. fy11 fy12 BIS ratio Korea Investment Savings Bank 18.6% KISB Korea Investment Savings Bank has been turning profits for 12 years since 2001 maintaining the industry s best income performance. KISB also enjoys the industry s highest asset soundness, recording 18.6% and 5.7% in BIS and substandard loan ratios, respectively. Net Income (Unit : KRW billion) 16.7 fy fy12

26 24 Korea Investment Holdings Co., Ltd. Risk Management KIH conducts risk management in line with its business objectives under the basic goal of maintaining capital adequacy. 1. Board of Directors Establishes or approves group risk management policies 2. Risk Management at KIH: Group-level Risk Control Oversees all subsidiaries risk control activities Convenes the Integrated Group Risk Management Subcommittee sessions and coordinates communication among different risk management departments Sets risk limits for subsidiaries and monitors their compliance Monitors risk parameters via IT system Cross-checks and reports risk management activities on daily/monthly/quarterly bases 3. Risk Management at KIS, KIM, KIVAM, and KIARA Capital Controls VaR, loss limits and trading positions Monitors liquidity daily Reviews the investment decision-making process 4. Risk Management at KISB Monitors risk exposure Monitors loan concentration, large loans, and problem loans Manages liquidity in accordance with net fund flows Establishes credit risk control policy in accordance with changes in the real estate market 5. Risk Management at KIP and CEP Manages invested assets Reviews the investment decision-making process

27 FY2012 Annual Report 25 Risk Management at KIH KIH covers all bases in assessing and managing all risks to its operations, practicing its belief that effective risk management is the key to stable business management. To effectively manage all risks, KIH has in place a well-thought-out risk management system with risk management guidelines and limits clearly defined and set, and thoroughly monitors and evaluates all risks associated with its business operations. Furthermore, KIH takes various steps and measures to ensure every one of its workforce fully understands the significance of risk management and adheres to all related processes and principles. Group Risk Management Structure KIH s Board of Directors and Group Risk Management Committee formulate group-wide risk management policies and strategies and make important decisions including setting risk limits and managing investment risks. KIH s risk management department oversees and manages all risks facing the entire Group. The department also monitors risks facing each subsidiary and provides appropriate guidelines. The Integrated Group Risk Management subcommittee comprised of risk officers of all subsidiaries coordinates seamless cooperation and communication among different risk management units, previews and shares current market situations and risk management issues facing the subsidiaries. Moreover, each subsidiary s risk management department supports the Risk Management Committee in maintaining risk exposure at prescribed levels, and assessing and monitoring risks. Risk management at KIS KIS has a comprehensive risk management structure comprised of the Board of Directors, Risk Management Committee, Risk Management Subcommittee, Chief Risk Office, Risk Management Department, and division risk managers. The structure is divided into front, middle, and back offices for interactive communication and effective check-and-balance purposes. To efficiently manage assets and risks, KIS utilizes an RAPM (EVA method) framework that evaluates product risks and calculates risk-related costs. KIS then sets limits for each business and product, and each business unit in turn makes investment decisions based on thus calculated risk-related costs and performance results. As such, KIS allocates its resources in an efficient manner and manages risks at the most optimum level. KIH assigns risk limits to its subsidiaries, and KIS allots the given risk limits to each of its business units. Using an integrated risk management system, KIS calculates market, credit, operation, and liquidity risks to its portfolio and monitors its risk limits. A risk management report containing detailed analysis of VaR, stress-test results, market, credit, and liquidity risks related to its operations is presented to management on a regular basis or whenever deemed necessary. In addition, KIS has enhanced its risk controls by clarifying the process, including types of punitive measures, to be taken in the event of violation in risk limits or any other guidelines set by the Risk Management Committee.

28 26 Korea Investment Holdings Co., Ltd. Management s Discussion & Analysis 27 OVERVIEW & BUSINESS ENVIRONMENT 29 Analysis of Consolidated Earnings (Audited) 30 Performance of Subsidiaries

29 FY2012 Annual Report 27 OVERVIEW & BUSINESS ENVIRONMENT In the Management s Discussion and Analysis section, KIH provides an analysis of its business performance and market environment to promote a better understanding among its clients and investors. This analysis describes the current states, products, services, business performances of KIH and its subsidiaries and includes KIH s business plans and other forwardlooking statements. These forward-looking statements are subject to risks and uncertainties which may lead to results different from those projected. KIH disclaims any obligation to publicly update these forward-looking statements. KIH s fiscal period begins on April 1st and ends on March 31st of the following year. KIH and its subsidiaries have prepared their financial statements in accordance with the Korean International Financial Reporting Standards (K-IFRS). Although the fiscal period of some subsidiaries differs from that of KIH, this Management s Discussion and Analysis has been prepared in accordance with KIH s accounting standards. Overview KIH is Korea s only securities-centered financial holding company that offers comprehensive investment and financial solutions. KIH s core business model is based on investment banking and asset management (IB-AM). KIH continues to diversify its revenue sources, expand its overseas operations, and improve its infrastructure to a level comparable to those of global financial institutions, all in an effort to establish a Korean-specific investment bank model. While providing diverse products and services through subsidiaries which are leading their markets in one way or another, KIH is creating synergies through close and efficient cooperation among its diversified business operations. 1. Business Environment The year 2012 continued to be a challenging time for financial service businesses at home and abroad. Circumstances surrounding the global financial market remained daunting as the Eurozone debt crisis spread to Spain, Italy, and other major economies of the EU. In response to the escalating Eurozone crisis, the ECB rolled out an all-out bond-purchase program and launched the Euro Stability Mechanism, thereby managing to contain the crisis. But such actions of the ECB proved inadequate to shore up the market fundamentals and thus had little lasting impact on the overall economic environment. The U.S. government, meanwhile, resorted to quantitative easing on two occasions, in September and December of 2012, thereby engineering the fastest economic recovery among advanced economies. But as the fiscal cliff scenario gained attraction towards year-end, growing fears of a budget sequestration cooled the growth momentum of just about all sectors but housing. Moreover, as France, Italy, the U.S., Korea, China, and other leading countries were to hold general elections in 2012, uncertainties over political and economic ramifications expected from the transfers of power further diminished appetites for consumption and investment. The protracted delay in global economic recovery hampered the growth of Korean exports throughout 2012, limiting the growth of the exports-dependent economy to 2%. The year 2013 is expected to bring no significant improvements to the nation s economy. Shrinking exports following a paradigm shift in the dynamics of global economic growth is casting concerns over the domestic economy. In particular, that Korea s exports inched up 0.5% in the first quarter of 2013, compared to China s 20% for the same period, is widely interpreted as a clear indication that the sluggish growth of Korean exports is not a bump on the road but a sign of a major structural shift taking place. The current sluggishness of exports is not temporary but indicative of a structural change taking place in the global economy. Accordingly, Korean government is likely to actively embrace a stimulus policy and thus to soften the landing of the economy initiated by falling exports. The Won reached 1,056 against the U.S. dollar in the early part of January, 2013, but went back up to the 1,140 range early April on the account of a fast-depreciating yen and of a nuclear threat by North Korea. Considering government concern about the impact of a weak yen on Korean exports and that a strong Won will be viewed undesirable as a means to stimulate the economy, the movement of the Won against the dollar is expected be limited in the future.

30 28 Korea Investment Holdings Co., Ltd. 2. Financial markets In 2012 the Korean stock market remained under the spell of uncertainties arising from the ongoing Eurozone crisis, QEs of the U.S. Fed, and other major developments abroad. The major stock index began the year at 2, points and ended it at 2,004.89, recording an uninspiring 0.5% decrease. But close-ups of the market tell a different story: the index dropped as much as 13% from May to July on fears that France might end its austerity policy and growing questions about Greece s ability to stay stable. The index soon recovered on the ECB s market intervention and the FED s QE3. The recovery did not last long as a global economic slowdown gained media attention and North Korea resorted to its bully tactic, leaving the index vacillate within a range of low volatility. By industry, those with low market sensitivity concentrated in the high growth category. In particular, medical precision, pharmaceuticals, and electric & gas soared 51%, 43%, and 42%, respectively. Telecommunications rose 22% despite a fierce competition, reflecting expectations on profit improvements, and electronics increased 14% on growing profits, both exceeding the benchmark by far. Industrial goods and materials on the other hand dropped, mirroring the shrinking domestic economy, a protracted delay in the recovery of China s economy, and spreading Eurozone-initiated concerns. Namely, construction (-23%), transportation & storage (-20%), machinery (-18%), and chemicals (-16%) were direct casualties of growing uncertainties at home and abroad. By investors, foreigners braved market fluctuations, buying 3 trillion won worth of stocks and increasing their share of the stock market (by market capitalization) by 0.8%p from 33.8% to 34.6% over the year. Pension funds continued to buy unfazed, resulting in a net purchase of 7.8 trillion won for the year and thereby playing a leading role in buttressing the market. In contrast, investment trusts, beset by persistent fund redemptions, sold a net 3.6 trillion won. Individual investors also reflected the overall market sentiment, dumping a net 9.8 trillion won. In FY2012, average daily trading volumes stood at KRW 6.3 trillion (KOSPI: KRW 4.3 trillion, KOSDAQ: KRW 2.0 trillion), which represented a 30% or so decrease from the previous fiscal year s KRW 9 trillion (KOSPI: KRW 6.6 trillion, KOSDAQ: KRW 2.4 trillion). The downward trend can be attributed to an uncertainty-influenced contraction in investment. This trend also could be witnessed in the U.S. and Europe. As uncertainty lingered across the economy and the market, trading volumes remained low as of this writing. The overall uncertainty of the stock market led to a contraction in the funding of corporate capital, with the amount raised through the market showing a big drop. During the FY2012 (a Bank of Korea figure as of the end of March, 2013, and the sum of KOSPI and KOSDAQ figures), IPOs numbered 26, less than half the previous fiscal year s 61 cases, amounting to about 0.5 trillion won, or 23% of the previous year s KRW 2.0 trillion. The amount of capital raised showed a similar trend: KRW 2.0 trillion raised through 61 cases versus KRW 8.5 trillion through 84 cases. In short, the total sum raised through the stock market in FY2012 was KRW 2.4 trillion, a far cry compared to KRW 10.5 trillion for the previous fiscal year. Meanwhile, corporate bonds issued in FY2012 amounted to KRW 94.8 trillion (1,967 cases), 11% less than KRW trillion (1,653 cases) in the previous fiscal year. Coming into 2013, the investment environment surrounding the stock market has increased in uncertainty. Growing household debts and shrinking household net income are more than likely to hurt the market for a long time to come. Although the new government is set to ease its monetary policy, anything short of a special measure far-reaching enough to enliven domestic investment is expected to be limited in its effect. The ongoing U.S. budget sequestration, the deepening economic slump in Europe, the slowing growth of the Chinese economy, and other global situations appear to have a stronger influence. Looking inwards, there is reason to be more optimistic: the robust growth of the health care and mobile-related device, services, and digital contents sectors are expected to continue on the account of ageing population and brisk developments and fast-changing trends in IT.

31 FY2012 Annual Report 29 Analysis of Consolidated Statements (Audited) In FY2012, KIH reported a net income of KRW billion based on a consolidated financial statement that had been audited. Net operating revenue decreased by 10.0% to KRW billion. In FY2012 KIH reported business results that were remarkable in light of difficult business circumstances ranging from a big drop in the overall trade volume of the stock market to skeptical uncertainties at home and abroad. Total shareholders equity rose by 5.9% over the year to KRW 2,653.4 billion as a result of a 10.5% year-on-year increase in retained earnings of KRW 1,532.4 billion. An unrivaled market leader, KIH is expected to continue its stellar performance in FY2013. * Key Financial Highlights (Unit: KRW billion) Change FY2011 FY2012 Amount YoY (%) Net commission income Net interest/trading income Others Net operating revenue SG&A expenses Operating income Net non-operating income Net income before income tax Net income Total assets 18, , , Cash and deposits 2, , Financial investments, etc. 12, , , Loans 2, , Property, equipment, intangible assets and investment assets Others 1, Total liabilities 16, , , Deposits 6, , Borrowings 8, , Others Total shareholders equity 2, , Capital stock ROA 1.4% 0.9% -0.5%p - ROE 10.9% 7.2% -3.7%p - BPS (KRW) 42,039 44,615 2,

32 30 Korea Investment Holdings Co., Ltd. Performance of Subsidiaries Korea Investment & Securities KIS is the flagship subsidiary of KIH, engaging in brokerage (BK), wealth management (WM), investment banking (IB), margin & trading, and prime brokerage (PB). In FY2013 under the slogan of Beyond No. 1 Together with Customers the Company plans to focus on enhancing customer satisfaction through management-by-principle and on playing the role of the de facto industry leader. To achieve these two objectives, it will establish a preemptive response system in dealing with change in the business environment and strengthen the sales competitiveness of its business operations and its organizational efficiencies. Income Analysis In FY2012 KIS realized a net income of KRW billion, a 9.5% year-on-year decrease, due mainly to the sluggish performance of the stock market. Net commissions decreased 3.0% to KRW billion owing to a big drop in market trading volumes and a contraction in wealth management product sales in the wake of the resurgence of the Eurozone crisis. Net trading income and net interest income increased 2.5% to KRW billion. Although its net income for FY2012 decreased reflecting the sluggish stock market, KIS maintained its market dominance in earnings for two consecutive years. This feat can be attributed to the successful establishment of its long-pursued IB-AM model which has allowed it to consistently generate a stable return in all financial investment sectors including brokerage, wealth management, investment banking, and margin & trading. Based on such a well-balanced income platform, KIS has been able to minimize the impact of worsening market environments. * Key Financial Highlights (Unit: KRW billion) Change FY2011 FY2012 Amount YoY (%) Net commissions Net interest/trading income Net revenue SG&A expenses Operating income Net non-operating income Net income before income tax Net income Total assets 16, , , Cash and deposits 1, , Securities 12, , , Loans 1, , Tangible/Intangible assets Others

33 FY2012 Annual Report 31 * Key Financial Highlights (Unit: KRW billion) Change FY2011 FY2012 Amount YoY (%) Total liabilities 13, , , Deposits 5, , Borrowings 7, , , Others Total shareholders equity 3, , Capital stock ROA 1.3% 1.0% -0.3%p - ROE 6.7% 5.9% -0.8%p - Net capital ratio 748.8% 451.2% %p - BPS (KRW) 89,384 91,858 2, * Net Commissions by Segment (Unit: KRW billion) FY2011 FY2012 Change Amount YoY (%) Brokerage Wealth management IB Others Total * Brokerage = Brokerage commissions commissions expenses * Wealth management = brokerage commissions on collective investment securities + management fees on wrap accounts + trust fees investment consultant fees consulting service fees * IB = Underwriting commissions +underwriting commissions on debentures + commissions on merger & acquisition + derivatives linked securities trading profit evaluation adjustments/reversal * Others = Other commission income other commissions expenses Financial Statement Analysis In FY2012 KIS total equity increased KRW 86.9 billion over the year to KRW 3,225.5 billion. Total assets also rose by KRW 2,582.1 billion to KRW 19,387.1 billion as bond holdings increased following robust RP sales, while total liabilities rose by KRW 2,496.4 billion over the year to KRW 16,161.6 billion.

34 32 Korea Investment Holdings Co., Ltd. Business Performance by Segment (1) Brokerage Brokerage is one of the main and stable revenue sources at KIS. The Company generates its brokerage fees from three businesses: equities, futures, and options trading services. * Brokerage Market Share & Revenue (Unit: KRW billion) Change FY2011 FY2012 Amount YoY (%) Market transaction (KRW trillion) 4, , , Equity Market* Market share 6.11% 6.08% -0.03%p - Commissions Futures Market share 5.31% 4.98% -0.33%p - Commissions Options Market share 9.59% 8.89% -0.70%p - Commissions Total revenue * KOSPI + KOSDAQ + ETF In FY2012 both stock markets saw big drops in trading volume, recording a total volume of KRW trillion, a 28.3% drop over the year. KIS was proved no exception to this development, posting KRW billion, a 26.3% decrease in brokerage. (2) Wealth Management Wealth management plays a pivotal role in KIS business portfolio. Wealth management revenue consists of sales commissions and management fees related to such financial products as funds, wraps, and trusts. Financial products sold by KIS in FY2012 amounted to KRW 38,217.4 billion, KRW 5,969.0 billion more than the previous fiscal year. The increase can be attributed to the huge popularity of alternative funds, trusts, bond wrap accounts, retail bonds, ELS, RP, and other mid-riskmid-return and short-term low-riks products as market interest rates stayed low throughout the year; in contrast, equity-type (hybrid) funds and advisory-type wrap accounts, which carried high risk for their returns, steadily lost their appeal. In FY2013 KIS plans to roll out domestic and overseas ETF Wrap, overseas bonds, asset-building savings funds, pension savings products in step with the low interest rate/low growth trend. In addition to growth in quantity, the Company will pursue growth in quality by fine-tuning its information dissemination service by customer segments.

35 FY2012 Annual Report 33 * Financial Product s Balance (Unit: KRW billion) Funds Other financial products FY2011 FY2012 Change Amount YoY (%) Market size 303, , , KIS total 11, , , Equity type 4, , Hybrid equity type 1, , Hybrid bond type Bond type 1, , MMF 1, , Alternative 1, , Offshore KIS total 21, , , RP 5, , , Trust 4, , , Retail bonds 6, , , ELS 2, , Others 1, , , Total AUM 32, , , (3) Investment Banking In investment banking, KIS generates revenues through underwriting equity, bond and derivatives (structured securities) issues, as well as financial advisory services. IB commissions and fees the Company earned during FY2012 totaled KRW billion, up 16.6% from the previous fiscal year. In FY2012 KIS ranked first in the corporate bond/real estate sector while its performance in IPOs and public offerings reflected the sluggish stock market. Commission income from derivatives amounted to KRW 54.9 billion, up 67.9%, as investor preference for mid-risk-mid-return led to a spike in ELS and DLS sales and an increase in early redemptions. * Investment Banking Commissions and Fees by Sector (Unit: KRW billion) Change FY2011 FY2012 Amount YoY (%) Commissions and Fees Underwriting Financial advisory Derivatives-combined securities

36 34 Korea Investment Holdings Co., Ltd. * IB Sector (Unit: KRW billion) IPO Corporate bond underwriting Public offering SF ELS/DLS Change FY2011 FY2012 Amount YoY (%) Total deals Market share 17.8% 11.7% -6.1% - Total deals 7, , Market share 8.1% 10.3% 2.2%p - Total deals Market share 12.4% 10.5% -2.0%p - Total deals 1, , Market share 5.5% 4.7% -0.8%p - Total trading amount 3, , , Market share 6.6% 7.0% 0.4%p - (4) Margin & Trading Margin & trading revenue is comprised of trading/valuation/interest gains and losses and dividend income related to stock, bond, and derivatives investments. In FY2012 KIS reported KRW273.1 billion in net interest income and net trading income, up 2.5% from the previous fiscal year. In 2013 KIS plans to focus on integrating units, upgrading the operation process, and strengthening risk controls with respect to low-risk assets, and on developing hybrid products based on a variety of underlying assets and improving the overall infrastructure with respect to high-risk assets such as equity and derivatives products, all in an effort to manage assets in a more stable manner and achieve consistent performances.

37 FY2012 Annual Report 35 Korea Investment Management Korea s first investment trust company, Korea Investment Management has been a market leader over the past 39 years with bold initiatives and outstanding investment systems. Focusing on safe and efficient asset management through management-by-principle, KIM practices rational investment strategies and by-the-book risk management as Korea s leading asset manager. In the face of a fast-evolving market environment, the Company has remained true to its management and operation philosophies. As a result, the Company was selected in December 2012 as a joint lead manager of the National Pension Investment Pool, thereby firmly establishing itself as Korea s foremost asset manager. In addition, the Company became Korea s first to launch a mainland China ETF, setting an industry trend with a huge media fanfare. In 2013 investors facing low interest rates and growing demographic changes are expected to continue to shift their attention from high-riskhigh-return products to those that guarantee modest returns at relatively low risk. This continuing shift of investor preference is likely to translate into an increase in investor demand for mid-risk-mid-return and income-generating products including overseas fixed income investments, and equity-type products such as ETFs which are high in risk but relatively low in cost. As such, these types of products are expected to appeal to institutional investors, including pension funds and HNW investors. Income Analysis In FY2012 KIM reported a net income of KRW 36.3 billion, a figure slightly less than the previous year s but, nevertheless, laudable given the daunting market environment: many of its peers suffered not only losses but capital impairments. Despite overwhelming challenges, the Company was able to turn a handsome profit thanks to its stable financial structure. * Financial Highlights (Unit: KRW billion) Change FY2011 FY2012 Amount YoY (%) Operating revenue Commissions Interest income Others Operating expenses Commissions SG&A expenses Operating income Net non-operating income Net income before income tax Net income Total assets Total liabilities Total shareholders equity Capital stock ROA 28.9% 27.9% -1.1%p - ROE 32.6% 30.4% -2.1%p - BPS (KRW) 8,882 9,

38 36 Korea Investment Holdings Co., Ltd. Business Performance by Segment As of the end of March 2013 AUM at KIM stood at KRW20.1 trillion, a little more than the figure a year before. By fund type, equity-type funds made up the largest share of the total as in the previous fiscal year. The Company saw its continued effort at bolstering its ETF operations pay off when it posted a 97% year-on-year increase in ETF AUM. Discretionary accounts grew by KRW 280 billion, mostly from equity types over the year, contributing to a KRW 330 billion increase in total AUM. Going forward, the Company plans to better respond to the fast-evolving market environment through diversifying the product line-up and business portfolio. * Assets Under Management and Fees Earned (Unit: KRW billion) FY2011 FY2012 Change Amount Portion (%) Amount Portion (%) Amount YoY (%) Equity type 9, , Domestic 9, , Overseas Hybrid type 1, , Fund Bond type 1, , MMF 1, Alternative funds 4, , ETF , Subtotal 20, , Discretionary account 5, , Total (Fund + Discretionary) 25, , * Fund types refer to the proportion of the type within the fund portfolio; Subtotal and discretionary account refer to their proportion of the total AUM. KIM manages three domestic equity-type funds with KRW 1 trillion and over in AUM-Korea Samsung Group Equity Fund (KRW 4.0 trillion), Korea Navigator Equity Fund (KRW 1.7 trillion), and Power of Korea Equity Fund (KRW 1.1 trillion). In fact, KIM has more funds that exceed the trillion won AUM mark than its peers. In addition to these three funds, KIM plans to foster next-generation flagship funds that can generate a stable return. Name Launch date Amount (KRW billion) Performance (%) Excess return rate against benchmark (%) 1Y 2Y 3Y 5Y 1Y 2Y 3Y 5Y Korea Navigator Equity Fund 1 (A) , Korea Samsung Group 1(Equity) (C1) , Korea Investment Power of Korea 1(Equity)(A) , Korea Samsung Group Leading Plus 1(Equity) (C1) Korea Investment Meister1(Equity)(A) * Benchmark(Equity): (0.9 * [KOSPI]) + (0.1 * [CD rate]) * Scale : Sum of Class

39 FY2012 Annual Report 37 Korea Investment Value Asset Management KIVAM s investment philosophy is long-term investment in intrinsic corporate values through fundamental analysis. It holds corporate securities until their values are sufficiently reflected in stock prices. It pays regular visits to its investment targets and conducts constant monitoring of their management developments and business performances. Based on such a philosophy, the Company pursues low-risk and middlereturn. In 2012 the Company reported KRW 2.98 trillion in AUM (funds plus discretionary investments), a whopping 101.3% increase from the previous year, despite the overall sluggish performance of the funds market. Based on such an impressive performance, the Company reached KRW 11.5 billion in management fees and KRW 1.9 billion in net income, topping its FY2011 results. KIVAM 10-year Equity 1, the Company s leading equity-type fund, ranked first among domestic equity-type funds in 1-year, 3-years, and rate of returns since inception. In particular, the fund outperformed KOSPI by 300% in 3-years rate (48.76% versus 18.47%) and since-inception return (131.70% versus 40.93%), recording the best earning performance in the history of the Company. The KIVAM 10-year Hybrid Bond 1, too, was in the top three percent in all three rate-of-return categories, thereby the two establishing themselves as industry-leading equity-type and hybrid bond-type funds. In recognitions for such outstanding performances, the Company received top awards at the 2012 Herald Economic Funds Awards, 21st Maeil Economic Korea Funds Awards and 2012 Zeroin Korea Funds Awards. * Financial Highlights (Unit: KRW billion) Change FY2011 FY2012 Amount YoY (%) Operating revenue Commissions Net interest income Operating expenses SG&A expenses Others Operating income Net income before income tax Net income Total assets Total liabilities Total shareholders equity Capital stock ROA 7.6% 11.2% 3.6%p - ROE 8.2% 13.2% 4.9%p - BPS (KRW) 6,958 7,

40 38 Korea Investment Holdings Co., Ltd. * Assets Under Management (Unit: KRW billion) Change FY2011 FY2012 Amount YoY (%) KIVAM 10-year equity Equity type KIVAM 10-year pension equity Others Subtotal 1, , KIVAM 10-year bond Hybrid bond type KIVAM 10-year hybrid bond Others Subtotal KIVAM 10-year pension bond Bond type Others Subtotal ,725.0 Funds subtotal 1, , , Investment discretionary/investment advisory Total (Fund + Discretionary) 1, , , * Fund Performance (Unit: %) Performance by period Since launch 1M 3M 6M 12M KIVAM 10-year equity KIVAM 10-year hybrid bond KIVAM 10-year pension equity KIVAM 10-year retirement pension hybrid bond KIVAM 10-year retirement equity KOSPI * Rates of returns since inception for KOSPI and KOSDAQ are based on the rate of returns since inception (April 1, 2006) of Equity 1 KIVAM pursues stringent risk management so as to effectively respond to all market developments. It maintains its risk management systems, including analysis of risk return profiles, at levels well above those recommended by government authorities as well as those of its peers. In selecting investment items, the Company focuses on growth potential, financial soundness, and value-related factors in line with its investment philosophy of long-term investment in intrinsic values. It monitors investees on its watch list on a daily basis, and in case of spotting any untoward signs, promptly deliberates the application of loss cut through the Risk Management Committee, thereby minimizing risk-related potential losses. Going forward the Company will continue to maintain the basic principles of its risk management practices while finetuning its risk management system according to the nature of market and other external factors.

41 FY2012 Annual Report 39 Korea Investment Partners Korea Investment Partners is a private equity management company specializing in identifying and helping promising small and mid-cap companies with capital investments. KIP comprises three divisions: Investment, Mainland China Division, and PE. The Investment Division generates income by identifying and investing in SMEs with high growth potential and profitability, the China Division operates RMB funds through a local subsidiary based in Shanghai and its Beijing office, and the PE Division focuses on growth-expansion investments, mezzanine investments, M&A investments, and overseas investments. Through these three investment arms, KIP carries out the role of a premier SMEspecialized PE manager with an eye towards becoming Asia s leading PE house. Income Analysis In FY2012 despite the sluggish stock market and other conditions that made divestiture challenging, KIP recorded a respectful level of investment profits thanks to its successful IPOs of Seojin Automotives (Shinhan Spec1) and Viatron (KOSDAQ). Its net income came to KRW 4.0 billion, a KRW 19.9 billion decrease from the previous year, reflecting a decrease in valuation gains based on equity method accounting following the sluggish stock market. The balance of venture investment assets grew from KRW billion over the year to KRW billion as a portion of the net capital was invested into the collective fund. * Financial Highlights (Unit: KRW billion) Change FY2011 FY2012 Amount YoY (%) Operating revenue Operating expenses Operating income Net non-operating income Net income before income tax Net income Total assets Venture investment assets Total liabilities Total shareholders equity Capital stock ROA 12.2% 2.1% -10.1%p - ROE 17.6% 2.7% -14.9%p - BPS (KRW) 2,439 1,

42 40 Korea Investment Holdings Co., Ltd. Business Performance by Segment As of March 2013, there are 104 venture funds in Korea with total investments of KRW 9.4 trillion. The total AUM of collective funds managed by KIP was KRW billion, equaling to 5.2% of the venture investment market. During the period from April 2012 to March 2013, the domestic venture investment industry invested about KRW 1,236.1 billion, of which KRW 92.1 billion or 7.5%, came from KIP s investments in 39 projects including growth capital, M&A, and mezzanine deals. * Venture Capital Market Investment Status (Unit: KRW billion) New investments New venture capital funds Change FY2011 FY2012 Amount YoY (%) Total 1, , KIP M/S 8.1% 7.5% -0.6%p - Total 2, , KIP M/S 5.4% KIP received an A+, the highest rating, from the Small and Medium Business Administration (SMBA) in the 2012 annual evaluation of domestic venture capital firms, thereby becoming the industry s only one to receive the top rating for nine consecutive years. In addition, in recognition for its industry-leading funding and investment activities, the Company received the Best Venture Capital House award, for second year in a row, and ranked first in the Best Execution House category also for second year in a row at the 2013 Korea Venture Capital Awards organized by Money Today The Bell. As of the end of March 2013, KIP operates a total of 10 funds including RMB funds, amounting to about KRW billion.

43 FY2012 Annual Report 41 * Fund Management Status as of March 2013 (Unit: KRW billion) Name Period Launch Maturity Size Korea Investment Partners Venture Capital Fund XI 7yrs National Pension 07-1 Korea Investment Venture Capital Fund XII 6 yrs Korea Investment Patent Fund XIII 7 yrs Korea Investment M&A Fund XIV 5 yrs Korea Investment Venture Capital Fund XV 6 yrs KoFC Korea Investment Pioneer Champ yrs Korea Investment Growth Capital Fund XVII 8 yrs Korea Investment Zhangjiagang Venture Capital Fund I 5 yrs KIF-Korea Investment IT-specialized Investment Fund 7 yrs Korea Investment Global Frontier Fund XX 8 yrs Total Looking forward KIP will continue to create more diverse and stable investment opportunities by bolstering its ties with world-renowned investment companies inside and outside Korea as well as with its KIH subsidiaries. In 2013 KIP plans to invest KRW billion in M&As, mezzanine deals, and domestic venture projects, including KRW 17.3 billion for overseas investment, and KRW 37.5 billion in PEF projects through PEF formation. The Company also aims to raise KRW billion for its collective fund. Furthermore KIP will diversify its investment platform into growth funds, structured deals, mezzanine investments, and project PEFs to secure new growth engines while expanding its presence in China and exploring new investment areas.

44 42 Korea Investment Holdings Co., Ltd. Cornerstone Equity Partners Since its founding in March 2006, Cornerstone Equity Partners has been building diverse investment track records with a focus on enhancing the values of its investees and on recouping its investments. As of the end of 2013, the Company manages PEFs amounting to about KRW billion. The domestic PEF market is expected to expand further as the amount of investment committed grows, the sales of assets acquired increase, and government carries out its pro-pef stance. In 2013 the PEF market is forecasted to continue to grow in terms investments committed and executed. KIARA Capital/Advisors Founded in Singapore in February 2008 as Korea s first offshore hedge fund, KIARA Capital/Advisors has since been growing into a multistrategy hedge fund specializing in long/short and other arbitrage strategies involving systematic and structured trades. In 2012 the aggressive financial policies of many countries led to huge increases in volatility and consequently in rate of return gap among different asset types and countries. As a result, joy and sorrow comingled in the global hedge fund industry. Despite this, however, demand for alternative investment tools arose in most countries, including Korea, as interest rates remained low and conventional investment vehicles underperformed expectations. Since January 2012 total assets under management of global hedge funds have grown a near 10%. In 2012 KIARA Capital/Advisors continued to focus on investment strategy development, manpower boosting, and pan-asia operation infrastructure strengthening in an effort to design alternative investment products that deliver a stable absolute return. As the domestic hedge fund continues to grow at a healthy pace, the Company is expected to see business opportunities to grow as well.

45 FY2012 Annual Report 43 Korea Investment Savings Bank Korea Investment Savings Bank has been consistently turning profits over the past 12 years. In FY2012 the Bank reported a net income of KRW16.7 billion, the largest in the industry. Since 2011 the domestic savings banking industry has been in turmoil, facing many difficulties. Following the public eruption of reckless lending practices, many big savings banks with impaired capital bases have been absorbed by financial holding companies. Concerned about the overall financial soundness of the industry, authorities have imposed tougher regulations on the remaining savings banks, including loan restrictions and capital requirements. Against such a backdrop, KISB turned in a ROA of 1.3% and a ROE of 9.1%, which are outstanding in comparison to the industry averages of minus 1.0% (ROA) and minus 12.2% (ROE). * Financial Highlights (Unit: KRW billion) Change FY2011 FY2012 Amount YoY (%) Operating revenue Interest income Other income Operating expenses Interest expenses SG&A expenses Other expenses Operating income Net non-operating income Net income Total assets 1, , Loans 1, , Total liabilities 1, , Deposits 1, Total shareholders equity Capital stock ROA 2.3% 1.3% -1.1%p - ROE 18.6% 9.1% -9.6%p - BPS (KRW) 115, ,352-7, * Prepared according to consolidated K-IFRS as of March 2013, except for all loans, which were prepared according to K-GAAP.

46 44 Korea Investment Holdings Co., Ltd. Deposit and Loans KISB maintains its deposit obligations at the industry s lowest interest rates on the strengths of its high brand recognition and the close relationships it has established with its customers. It also minimizes risks through diversifying its low-cost funding channels, which generated about KRW billion in FY2012, in cooperation with KIH subsidiaries. With thus raised low-cost funds, the Company practices prudence in selecting borrowers with a very low credit risk. * Net interest income (Unit: KRW billion) Change FY2011 FY2012 Amount YoY (%) Net interest income Total loans 1, , Total deposits 1, * Loans (Unit: KRW billion) Change FY2011 FY2012 Amount YoY (%) Outstanding loan balance 1, , Apartments Houses Land PF Buildings Stocks Others In 2012 other loans increased as a result of a focus on analysis of borrowers cash flows, instead of a traditional reliance on the appraisal value of real estate. In particular, the increase reflects the Company s pursuit of small project financing, which is safer than large-scale PFs, as demand from end-users remains strong for multi-family housing units and other small-scale housing projects. Aware of a major market trend in real estate shifting towards income-generating projects, KISB is accordingly expanding its loans to commercial buildings and other projects designed to generate income on a monthly basis and developing new loan products for movable assets in step with a recent government policy.

47 FY2012 Annual Report 45 Asset Soundness KISB maintains the industry s highest asset quality. As of March 2013 the Company s substandard loan ratio stood at 5.7% (5.6% as of December 2012), far lower than the industry average of 19.9% (as of December 2012). Although the depressed state of the real estate market, a major revenue source, heightened the overall risk to fixed assets-based loans amid the ongoing debt crisis in the Eurozone and an industrywide restructuring wave, KISB was able to effectively deal with the growing risk through preemptive measures. As a result, the delinquency ratio and the substandard loan ratio decreased while other major savings banks had their business operations suspended. * Key Asset Quality Ratio (Unit: %) FY2011 FY2012 Substandard loan ratio Delinquency rate KISB Industry average KISB Industry average * Delinquency rate refers to those loans deferred at least one month * As of the end of December 2012 for the sector average substandard loan ratio and delinquency rate Capital Adequacy In FY2012 KISB maintained its BIS ratio at 18.6%, well above industry authorities minimum 5% and recommended 8% as well as the industry average of 9.7% (as of December 2012), on the strengths of an expanding sales basis and growing loans. KISB will continue to increase loans as a way to improve profitability while maintaining the BIS ratio within an acceptable level. * BIS Ratio (Unit : KRW billion) Change FY2011 FY2012 Amount YoY (%) BIS capital BIS ratio 16.8% 18.6% 1.8%p - BIS ratio (industry average) 3.2% 9.7% 6.5%p - * Industry average is as of the end of December 2012

48 46 Korea Investment Holdings Co., Ltd. Financial Review 47 Report of Independent Auditors 48 Consolidated Statements of Financial Position 50 Consolidated Statements of Comprehensive Income 51 Consolidated Statements of Changes in Equity 52 Consolidated Statements of Cash Flows 54 Notes to Consolidated Financial Statements