Company Quick10K Filing
Woori Bank
20-F 2019-12-31 Filed 2020-04-29
20-F 2018-12-31 Filed 2019-04-30
20-F 2017-12-31 Filed 2018-04-30
20-F 2016-12-31 Filed 2017-04-27
20-F 2015-12-31 Filed 2016-04-29
20-F 2014-12-31 Filed 2015-04-30
20-F 2013-12-31 Filed 2014-04-30
20-F 2012-12-31 Filed 2013-04-30
20-F 2011-12-31 Filed 2012-04-30
20-F 2010-12-31 Filed 2011-06-27
20-F 2009-12-31 Filed 2010-06-25

WF 20F Annual Report

Item 1. Identity of Directors, Senior Management and Advisers
Item 2. Offer Statistics and Expected Timetable
Item 3. Key Information
Item 3A. Selected Financial Data
Item 3B. Capitalization and Indebtedness
Item 3C. Reasons for The Offer and Use of Proceeds
Item 3D. Risk Factors
Item 4. Information on The Company
Item 4A. History and Development of The Company
Item 4B. Business Overview
Item 4C. Organizational Structure
Item 4D. Property, Plants and Equipment
Item 4.A. Unresolved Staff Comments
Item 5. Operating and Financial Review and Prospects
Item 5A. Operating Results
Item 5B. Liquidity and Capital Resources
Item 5C. Research and Development, Patents and Licenses, Etc.
Item 5D. Trend Information
Item 5E. Off-Balance Sheet Arrangements
Item 5F. Tabular Disclosure of Contractual Obligations
Item 5.G. Safe Harbor
Item 6. Directors, Senior Management and Employees
Item 6A. Directors and Senior Management
Item 6B. Compensation
Item 6C. Board Practices
Item 6D. Employees
Item 6E. Share Ownership
Item 7. Major Stockholders and Related Party Transactions
Item 7A. Major Stockholders
Item 7B. Related Party Transactions
Item 7C. Interest of Experts and Counsel
Item 8. Financial Information
Item 8A. Consolidated Statements and Other Financial Information
Item 8B. Significant Changes
Item 9. The Offer and Listing
Item 9A. Offering and Listing Details
Item 9B. Plan of Distribution
Item 9C. Markets
Item 9D. Selling Shareholders
Item 9E. Dilution
Item 9F. Expenses of The Issuer
Item 10. Additional Information
Item 10A. Share Capital
Item 10B. Memorandum and Articles of Association
Item 10C. Material Contracts
Item 10D. Exchange Controls
Item 10E. Taxation
Item 10F. Dividends and Paying Agents
Item 10G. Statements By Experts
Item 10H. Documents on Display
Item 10I. Subsidiary Information
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Item 12. Description of Securities Other Than Equity Securities
Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications To The Rights of Security Holders and Use of Proceeds
Item 15. Controls and Procedures
Item 16. Reserved
Item 16A. Audit Committee Financial Expert
Item 16B. Code of Ethics
Item 16C. Principal Accountant Fees and Services
Item 16D. Exemptions From The Listing Standards for Audit Committees
Item 16E. Purchase of Equity Securities By The Issuer and Affiliated Purchasers
Item 16F. Change in Registrant's Certifying Accountant
Item 16G. Corporate Governance
Item 16H. Mine Safety Disclosure
Item 17. Financial Statements
Item 18. Financial Statements
Item 19. Exhibits
EX-1.1 d525939dex11.htm
EX-12.1 d525939dex121.htm
EX-13.1 d525939dex131.htm

Woori Bank Earnings 2012-12-31

Balance SheetIncome StatementCash Flow

20-F 1 d525939d20f.htm FORM 20-F Form 20-F
Table of Contents

As filed with the Securities and Exchange Commission on April 30, 2013

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 20-F

 

 

(Mark One)

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

OR

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

For the fiscal year ended December 31, 2012

OR

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

OR

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

Date of event requiring this shell company report

For the transition period from                     to                     

Commission file number 001-31811

 

 

Woori Finance Holdings Co., Ltd.

(Exact name of Registrant as specified in its charter)

 

 

Woori Finance Holdings Co., Ltd.

(Translation of Registrant’s name into English)

 

 

The Republic of Korea

(Jurisdiction of incorporation or organization)

203 Hoehyon-dong, 1-ga, Chung-gu, Seoul 100-792, Korea

(Address of principal executive offices)

Woo Seok Seong

203 Hoehyon-dong, 1-ga, Chung-gu, Seoul 100-792, Korea

Telephone No.: +82-2-2125-2110

Facsimile No.: +82-2-2125-2293

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

 

 

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

 

Title of each class

 

Name of each exchange on which registered

American Depositary Shares, each representing

three shares of Common Stock

  New York Stock Exchange

Common Stock, par value 5,000 per share

  New York Stock Exchange*

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

None

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

None

 

 

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

806,013,340 shares of Common Stock, par value 5,000 per share

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

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

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

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

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

 

x    Large accelerated filer

  

¨    Accelerated Filer

   ¨    Non-accelerated filer

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

 

¨    U.S. GAAP

  

x    International Financial Reporting Standards as issued
by the International Accounting Standards Board

   ¨    Other

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

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

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

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

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

 

 


Table of Contents

TABLE OF CONTENTS

 

             Page  

Presentation of Financial and Other Information

     1   

Forward-Looking Statements

     2   

Item 1.

 

Identity of Directors, Senior Management and Advisers

     3   

Item 2.

 

Offer Statistics and Expected Timetable

     3   

Item 3.

 

Key Information

     3   
 

Item 3A.

 

Selected Financial Data

     3   
 

Item 3B.

 

Capitalization and Indebtedness

     11   
 

Item 3C.

 

Reasons for the Offer and Use of Proceeds

     11   
 

Item 3D.

 

Risk Factors

     11   

Item 4.

 

Information on the Company

     37   
 

Item 4A.

 

History and Development of the Company

     37   
 

Item 4B.

 

Business Overview

     42   
 

Item 4C.

 

Organizational Structure

     130   
 

Item 4D.

 

Property, Plants and Equipment

     132   

Item 4.A.

 

Unresolved Staff Comments

     132   

Item 5.

 

Operating and Financial Review and Prospects

     132   
 

Item 5A.

 

Operating Results

     132   
 

Item 5B.

 

Liquidity and Capital Resources

     162   
 

Item 5C.

 

Research and Development, Patents and Licenses, etc.

     170   
 

Item 5D.

 

Trend Information

     170   
 

Item 5E.

 

Off-Balance Sheet Arrangements

     170   
 

Item 5F.

 

Tabular Disclosure of Contractual Obligations

     170   
 

Item 5.G.

 

Safe Harbor

     171   

Item 6.

 

Directors, Senior Management and Employees

     171   
 

Item 6A.

 

Directors and Senior Management

     171   
 

Item 6B.

 

Compensation

     173   
 

Item 6C.

 

Board Practices

     174   
 

Item 6D.

 

Employees

     176   
 

Item 6E.

 

Share Ownership

     178   

Item 7.

 

Major Stockholders and Related Party Transactions

     178   
 

Item 7A.

 

Major Stockholders

     178   
 

Item 7B.

 

Related Party Transactions

     178   
 

Item 7C.

 

Interest of Experts and Counsel

     179   

Item 8.

 

Financial Information

     179   
 

Item 8A.

 

Consolidated Statements and Other Financial Information

     179   
 

Item 8B.

 

Significant Changes

     183   

Item 9.

 

The Offer and Listing

     183   
 

Item 9A.

 

Offering and Listing Details

     183   
 

Item 9B.

 

Plan of Distribution

     184   
 

Item 9C.

 

Markets

     184   
 

Item 9D.

 

Selling Shareholders

     191   
 

Item 9E.

 

Dilution

     191   
 

Item 9F.

 

Expenses of the Issuer

     191   

Item 10.

 

Additional Information

     191   
 

Item 10A.

 

Share Capital

     191   
 

Item 10B.

 

Memorandum and Articles of Association

     191   
 

Item 10C.

 

Material Contracts

     197   
 

Item 10D.

 

Exchange Controls

     198   
 

Item 10E.

 

Taxation

     199   

 

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Table of Contents
             Page  
 

Item 10F.

 

Dividends and Paying Agents

     203   
 

Item 10G.

 

Statements by Experts

     203   
 

Item 10H.

 

Documents on Display

     203   
 

Item 10I.

 

Subsidiary Information

     203   

Item 11.

 

Quantitative and Qualitative Disclosures about Market Risk

     203   

Item 12.

 

Description of Securities other than Equity Securities

     232   

Item 13.

 

Defaults, Dividend Arrearages and Delinquencies

     233   

Item 14.

 

Material Modifications to the Rights of Security Holders and Use of Proceeds

     233   

Item 15.

 

Controls and Procedures

     233   

Item 16.

 

Reserved

     234   
 

Item 16A.

 

Audit Committee Financial Expert

     234   
 

Item 16B.

 

Code of Ethics

     234   
 

Item 16C.

 

Principal Accountant Fees and Services

     234   
 

Item 16D.

 

Exemptions from the Listing Standards for Audit Committees

     235   
 

Item 16E.

 

Purchase of Equity Securities by the Issuer and Affiliated Purchasers

     235   
 

Item 16F.

 

Change in Registrant’s Certifying Accountant

     235   
 

Item 16G.

 

Corporate Governance

     236   
 

Item 16H.

 

Mine Safety Disclosure

     237   

Item 17.

 

Financial Statements

     237   

Item 18.

 

Financial Statements

     237   

Item 19.

 

Exhibits

     237   

 

ii


Table of Contents

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

The financial statements included in this annual report are prepared in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or IASB. As such, we make an explicit and unreserved statement of compliance with IFRS as issued by the IASB with respect to our consolidated financial statements as of and for the years ended December 31, 2010, 2011 and 2012 included in this annual report. Unless indicated otherwise, the financial information in this annual report (i) as of and for the years ended December 31, 2010, 2011 and 2012 has been prepared in accordance with IFRS as issued by the IASB, and (ii) as of and for the years ended December 31, 2008 and 2009 has been prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP, which is not comparable to information prepared in accordance with IFRS.

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

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

In April 2008, we acquired a 51.0% interest in LIG Life Insurance, and entered into a joint venture agreement with Aviva International Holdings Limited in connection with this acquisition. LIG Life Insurance was subsequently renamed Woori Aviva Life Insurance and became an equity method investee under U.S. GAAP as of April 2008. Under IFRS, Woori Aviva Life Insurance is accounted for as part of our investments in jointly controlled entities and associates.

In March 2011, we acquired certain assets and assumed certain liabilities of Samhwa Mutual Savings Bank through our wholly-owned consolidated subsidiary, Woori FG Savings Bank Co., Ltd., which was established in connection with such transaction. In September 2012, we acquired certain assets and assumed certain liabilities of Solomon Mutual Savings Bank, also through Woori FG Savings Bank Co., Ltd.

In October 2012, we established Woori Finance Research Institute as a consolidated subsidiary.

In this annual report:

 

   

references to “we,” “us” or “Woori Finance Holdings” are to Woori Finance Holdings Co., Ltd. and, unless the context otherwise requires, its subsidiaries;

 

   

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

 

   

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

 

   

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

 

   

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

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

For your convenience, this annual report contains translations of Won amounts into U.S. dollars at the noon buying rate of the Federal Reserve Bank of New York for Won in effect on December 31, 2012, which was ₩1,063.2 = US$1.00.

 

1


Table of Contents

FORWARD-LOOKING STATEMENTS

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

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

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

 

   

our ability to successfully implement our strategy;

 

   

future levels of non-performing loans;

 

   

our growth and expansion;

 

   

the adequacy of allowances for credit and other losses;

 

   

technological changes;

 

   

interest rates;

 

   

investment income;

 

   

availability of funding and liquidity;

 

   

our exposure to market risks; and

 

   

adverse market and regulatory conditions.

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

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

 

   

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

 

   

the monetary and interest rate policies of Korea;

 

   

inflation or deflation;

 

   

unanticipated volatility in interest rates;

 

   

foreign exchange rates;

 

   

prices and yields of equity and debt securities;

 

2


Table of Contents
   

the performance of the financial markets in Korea and globally;

 

   

changes in domestic and foreign laws, regulations and taxes;

 

   

changes in competition and the pricing environment in Korea; and

 

   

regional or general changes in asset valuations.

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

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

 

Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not Applicable

 

Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not Applicable

 

Item 3. KEY INFORMATION

 

Item 3A. Selected Financial Data

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

Pursuant to the transitional relief granted by the U.S. Securities and Exchange Commission in respect of the first-time application of IFRS, financial and operating data as of and for the years ended December 31, 2008 and 2009 derived from our consolidated financial statements prepared in accordance with U.S. GAAP have not been included below.

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

 

3


Table of Contents

Consolidated Statement of Comprehensive Income Data

 

     Year ended December 31,  
     2010     2011     2012     2012(1)  
     (in billions of Won except per share data)     (in millions of
US$ except per
share data)
 

Interest income

   14,057      15,045      15,020      US$ 14,127   

Interest expense

     (7,630     (7,780     (7,753     (7,292
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     6,427        7,264        7,267        6,835   

Fees and commissions income

     1,688        1,774        1,667        1,568   

Fees and commissions expense

     (572     (579     (664     (624
  

 

 

   

 

 

   

 

 

   

 

 

 

Net fees and commissions income

     1,116        1,195        1,003        944   

Dividends

     201        203        163        153   

Net gain (loss) on financial assets at fair value through profit or loss

     39        119        (293     (276

Net gain on available-for-sale financial assets

     1,073        1,073        566        533   

Net gain on held-to-maturity financial assets

     0        0        0        0   

Impairment losses on credit loss

     (2,873     (2,269     (2,121     (1,995

Other net operating expenses(2)

     (3,835     (4,501     (4,357     (4,098
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     2,148        3,085        2,228        2,096   

Share of profits of jointly controlled entities and associates

     30        17        69        65   

Other non-operating income (expense)

     (79     75        (6     (6
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income before income tax expense

     2,099        3,177        2,291        2,155   

Income tax expense

     498        744        493        464   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   1,601      2,433      1,798      US$ 1,691   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss on available-for-sale financial assets

     (205     (375     (350     (329

Share of other comprehensive gain (loss) of jointly controlled entities and associates

     (21     (38     57        53   

Gain (loss) on overseas business translation

     (19     25        (108     (101

Gain on valuation of cash flow hedge

     9        3        13        12   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     (236     (385     (388     (365
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   1,365      2,048      1,410      US$ 1,326   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to owners

   1,289      2,137      1,584      US$ 1,489   

Net income attributable to the non-controlling interests

     312        296        214        200   

Comprehensive income attributable to owners

     1,052        1,730        1,178        1,108   

Comprehensive income attributable to non-controlling interests

     313        318        232        218   

Basic and diluted earnings per share

   1,599      2,649      1,931      US$ 1.82   

Per common share data:

        

Net income (loss) per share—basic

   1,599      2,649      1,931      US$ 1.82   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding—basic (in thousands)

     806,013        806,013        806,013        806,013   

Net income (loss) per share—diluted

   1,599      2,649      1,931      US$ 1.82   

Weighted average common shares outstanding—diluted (in thousands)

     806,013        806,013        806,013        806,013   

Cash dividends paid per share

   250      250      250      US$ 0.24   

 

(1) 

Won amounts are expressed in U.S. dollars at the rate of ₩1,063.2 to US$1.00, the noon buying rate in effect on December 31, 2012 as quoted by the Federal Reserve Bank of New York in the United States.

(2) 

For a description of “other net operating expenses,” see Note 39 of the notes to our consolidated financial statements.

 

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Table of Contents

Consolidated Statement of Financial Position Data

 

     As of December 31,  
     2010      2011      2012      2012(1)  
     (in billions of Won)     

(in millions

of US$)

 

Assets

           

Cash and cash equivalents

   4,871       6,417       5,778       US$ 5,434   

Financial assets at fair value through profit or loss

     22,184         25,600         26,147         24,592   

Available-for-sale financial assets

     21,998         19,672         18,870         17,748   

Held-to-maturity financial assets

     19,886         20,036         18,685         17,573   

Loans and receivables

     216,792         235,160         250,106         235,230   

Investments in jointly controlled entities and associates

     745         928         1,038         976   

Investment properties

     643         499         492         462   

Premises and equipment

     3,097         3,135         3,186         2,996   

Intangible assets and goodwill

     295         448         433         408   

Current tax assets

     9         57         38         36   

Deferred tax assets

     59         80         155         146   

Derivative assets

     131         327         281         264   

Assets held for sale

     88         56         83         78   

Other assets(2)

     379         377         414         390   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   291,177       312,792       325,706       US$ 306,333   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Financial liabilities at fair value through profit or loss

   8,838       9,622       10,986       US$ 10,332   

Deposits due to customers

     185,428         195,930         202,920         190,850   

Borrowings

     34,266         34,667         33,478         31,487   

Debentures

     29,111         29,266         27,960         26,297   

Provisions

     761         892         864         812   

Retirement benefit obligation

     70         120         166         156   

Current tax liabilities

     174         274         179         168   

Deferred tax liabilities

     213         260         125         118   

Derivative liabilities

     5         33         38         36   

Other financial liabilities(3)

     11,648         19,084         25,480         23,965   

Other liabilities(4)

     399         570         507         477   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   270,913       290,718       302,703       US$ 284,698   
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity

           

Owners’ Equity

   15,701       17,525       18,666       US$ 17,556   

Capital stock

     4,030         4,030         4,030         3,790   

Hybrid securities

             309         499         469   

Capital surplus

     180         176         174         164   

Other equity(5)

     1,002         587         186         175   

Retained earnings

     10,489         12,423         13,777         12,958   

Non-controlling interests

     4,563         4,549         4,337         4,079   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity

   20,264       22,074       23,003       US$ 21,635   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities and equity

   291,177       312,792       325,706       US$ 306,333   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Won amounts are expressed in U.S. dollars at the rate of ₩1,063.2 to US$1.00, the noon buying rate in effect on December 31, 2012 as quoted by the Federal Reserve Bank of New York in the United States.

(2) 

For a description of “other assets,” see Note 18 of the notes to our consolidated financial statements.

(3) 

For a description of “other financial liabilities,” see Note 24 of the notes to our consolidated financial statements.

(4) 

For a description of “other liabilities,” see Note 24 of the notes to our consolidated financial statements.

(5) 

For a description of “other equity,” see Note 29 of the notes to our consolidated financial statements.

 

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Table of Contents

Profitability Ratios and Other Data

 

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

Return on average assets(1)

     0.44     0.70     0.50

Return on average equity(2)

     6.45        9.95        6.78   

Net interest spread(3)

     2.12        2.31        2.16   

Net interest margin(4)

     2.29        2.50        2.38   

Cost-to-income ratio(5)

     46.75        48.69        53.58   

Average equity as a percentage of average total assets

     6.79        7.04        7.32   

Total revenue(6)

   17,058      18,214      17,123   

Operating expense(7)

     12,037        12,860        12,774   

Operating margin(8)

     5,021        5,354        4,349   

Operating margin as a percentage of total revenue

     29.43     29.39     25.40

 

(1) 

Represents net income attributable to owners as a percentage of average total assets. Average balances are based on daily balances for Woori Bank, Kyongnam Bank, Kwangju Bank and Woori Investment & Securities and on quarterly balances for all of our other subsidiaries and our special purpose companies.

(2) 

Represents net income attributable to owners as a percentage of average equity. Average balances are based on daily balances for Woori Bank, Kyongnam Bank, Kwangju Bank and Woori Investment &Securities and on quarterly balances for all of our other subsidiaries and our special purpose companies.

(3) 

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

(4) 

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

(5) 

Represents the ratio of non-interest expense (excluding impairment losses on credit loss) to the sum of net interest income and non-interest income.

(6) 

Represents the sum of interest income, dividend income, fees and commissions income, net gain (loss) on financial assets at fair value through profit or loss, net gain on available-for-sale financial assets and net gain on held-to-maturity financial assets.

The following table shows how total revenue is calculated:

 

     Year ended December 31,  
     2010      2011      2012  
     (in billions of Won)  

Interest income

   14,057       15,045       15,020   

Fees and commissions income

     1,688         1,774         1,667   

Dividends

     201         203         163   

Net gain (loss) on financial assets at fair value through profit or loss

     39         119         (293

Net gain on available-for-sale financial assets

     1,073         1,073         566   

Net gain on held-to-maturity financial assets

                       
  

 

 

    

 

 

    

 

 

 

Total revenue

   17,058       18,214       17,123   
  

 

 

    

 

 

    

 

 

 

 

(7) 

Represents interest expense, fees and commissions expense and other net operating expense, excluding impairment losses on credit loss of ₩2,873 billion, ₩2,269 billion and ₩2,121 billion for 2010, 2011 and 2012, respectively.

The following table shows how operating expense is calculated:

 

     Year ended December 31,  
     2010      2011      2012  
     (in billions of Won)  

Interest expense

   7,630       7,780       7,753   

Fees and commissions expense

     572         579         664   

Other net operating expenses

     3,835         4,501         4,357   
  

 

 

    

 

 

    

 

 

 

Operating expense

   12,037       12,860       12,774   
  

 

 

    

 

 

    

 

 

 

 

(8) 

Represents total revenue less operating expense.

 

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Table of Contents

Asset Quality Data

 

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

Total loans(1)

   201,235      212,492      220,883   

Total non-performing loans(2)

     6,550        3,780        3,766   

Other impaired loans not included in non-performing loans(3)

     475        238        698   

Total non-performing loans and other impaired loans(3)

     7,025        4,018        4,464   

Total allowance for credit losses

     4,718        3,759        3,564   

Non-performing loans as a percentage of total loans

     3.25     1.78     1.70

Non-performing loans as a percentage of total assets

     2.25        1.21        1.16   

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

     3.49        1.89        2.02   

Allowance for credit losses as a percentage of total loans

     2.34        1.77        1.61   

 

(1) 

Not including due from banks and other receivables, and prior to deducting allowance for credit losses (of ₩4,718 billion, ₩3,759 billion and ₩3,564 billion as of December 31, 2010, 2011 and 2012, respectively) and present value discount (of ₩16 billion, ₩31 billion and ₩25 billion as of December 31, 2010, 2011 and 2012, respectively) or reflecting deferred origination costs (of ₩74 billion, ₩178 billion as and ₩258 billion as of December 31, 2010, 2011 and 2012, respectively).

(2) 

Defined as those loans that are past due by 90 days or more or classified as substandard or below based on the Financial Services Commission’s asset classification criteria. See “Item 4B. Business Overview—Assets and Liabilities—Asset Quality of Loans—Loan Classifications.”

(3) 

Other impaired loans exclude loans that would otherwise be considered impaired but have been securitized and are held by Woori F&I, our wholly-owned subsidiary, in the aggregate amount of ₩664 billion, ₩980 billion and ₩1,207 billion as of December 31, 2010, 2011 and 2012, respectively.

Segment Information

The following table sets forth financial data as of or for the year ended December 31, 2012 for our business segments:

 

    Woori Bank     Kyongnam
Bank
    Kwangju
Bank
    Woori
Investment &
Securities
    Other     Intersegment
transactions(1)
    Total  
    (in billions of Won)  

Interest income

  11,436      1,390      980      718      566      (70   15,020   

Interest expense

    (5,824     (703     (487     (331     (489     81        (7,753
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

    5,612        687        493        387        77        11        7,267   

Non-interest income

    9,903        375        165        2,777        656        (451     13,425   

Non-interest expense

    (9,261     (389     (160     (2,443     (226     135        (12,343
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net non-interest income (loss)

    643        (14     5        334        430        (316     1,082   

Administrative expenses

    (2,728     (296     (231     (541     (470     309        (3,957

Impairment losses on credit loss and others(2)

    (1,828     (142     (83     (6     (118     13        (2,164
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expenses

    (4,556     (438     (314     (547     (588     322        (6,121
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    1,699        235        184        174        (81     17        2,228   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Share of profits of jointly controlled entities and associates

    28                      5        18        18        69   

Non-operating income

    49        (11     (7     (24     566        (579     (6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income before tax

    1,776        224        177        155        503        (544     2,291   

Income tax expense (benefit)

    327        46        41        33        34        12        493   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  1,449      178      136      122      469      (556   1,798   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Controlling interest

    1,448        178        136        123        490        (791     1,584   

Non-controlling interest

    1                      (1     (21     235        214   

Segments’ total assets

  247,248      28,902      18,617      24,822      27,321      (21,204   325,706   

 

(1) 

Includes eliminations for intersegment transactions and certain differences in classification under the management reporting system.

(2) 

Consist of impairment losses on credit loss, gain (loss) on loan sales and provisions (reversal of provisions).

 

7


Table of Contents

Selected Financial Information

Average Balances and Related Interest

The following tables show our average balances and interest rates for the past three years:

 

    Year ended December 31,  
    2010     2011     2012  
    Average
Balance(1)
    Interest
Income(2)
    Average
Yield
    Average
Balance(1)
    Interest
Income(2)
    Average
Yield
    Average
Balance(1)
    Interest
Income(2)
    Average
Yield
 
    (in billions of Won, except percentages)  

Assets

                 

Interest-earning assets

                 

Due from banks

  9,671      116        1.20   10,615      169        1.59   13,505      269        1.99

Loans(3)

                 

Commercial and industrial

    97,487        5,765        5.91        100,205        6,165        6.15        102,283        6,018        5.88   

Trade financing

    11,997        316        2.63        12,984        309        2.38        14,260        327        2.29   

Other commercial

    14,490        735        5.07        15,602        765        4.90        14,138        625        4.42   

Lease financing(4)

    1,399        146        10.44        1,956        199        10.17        2,289        206        9.00   

General purpose household(5)

    70,132        3,554        5.07        69,954        3,735        5.34        69,001        3,658        5.30   

Mortgage

    4,748        245        5.16        8,643        452        5.23        13,374        680        5.08   

Credit cards(2)

    4,607        1,116        24.22        4,788        1,100        22.97        4,751        1,080        22.73   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total loans

    204,860        11,877        5.80        214,132        12,725        5.94        220,096        12,594        5.72   

Securities

                 

Trading

    19,273        695        3.61        18,287        660        3.61        21,534        680        3.16   

Investment(6)

    37,466        1,237        3.30        37,359        1,360        3.64        35,553        1,371        3.86   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total securities

    56,739        1,932        3.41        55,646        2,020        3.63        57,087        2,051        3.59   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Other

    8,850        132        1.49        10,378        131        1.26        14,270        106        0.74   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total average interest earning assets

    280,120        14,057        5.02        290,771        15,045        5.17        304,958        15,020        4.93   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total average non-interest earning assets

    13,979                      14,456                      13,850                 
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total average assets

  294,099      14,057        4.78   305,227      15,045        4.93   318,808      15,020        4.71
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

 

 

8


Table of Contents
    Year ended December 31,  
    2010     2011     2012  
    Average
Balance(1)
    Interest
Expense
    Average
Cost
    Average
Balance(1)
    Interest
Expense
    Average
Cost
    Average
Balance(1)
    Interest
Expense
    Average
Cost
 
    (in billions of Won, except percentages)  

Liabilities

                 

Interest-bearing liabilities

                 

Deposits due to customers:

                 

Demand deposits

  7,407      20        0.27   10,728      28        0.26   12,836      36        0.28

Time and savings deposits

    150,317        4,320        2.87        160,952        4,835        3.00        167,503        5,013        2.99   

Certificates of deposit

    8,459        364        4.30        2,746        113        4.12        1,595        60        3.76   

Other deposits(7)

    17,583        272        1.55        18,217        322        1.77        18,507        321        1.73   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total deposits

    183,766        4,976        2.71        192,643        5,298        2.75        200,441        5,430        2.71   

Borrowings

    32,311        728        2.25        34,414        815        2.37        33,489        770        2.30   

Debentures

    33,523        1,808        5.39        30,433        1,551        5.10        28,581        1,424        4.98   

Other

    13,218        118        0.89        14,386        116        0.81        18,361        129        0.70   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total average interest- bearing liabilities

    262,818        7,630        2.90        271,876        7,780        2.86        280,872        7,753        2.76   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total average non-interest-bearing liabilities

    11,304                      11,869                      14,593                 
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total average liabilities

    274,122        7,630        2.78        283,745        7,780        2.74        295,465        7,753        2.62   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total average equity

    19,977                      21,482                      23,343                 
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total average liabilities and equity

  294,099      7,630        2.59   305,227      7,780        2.55   318,808      7,753        2.43
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

 

(1) 

Average balances are based on daily balances for Woori Bank, Kyongnam Bank, Kwangju Bank and Woori Investment & Securities and on quarterly balances for all of our other subsidiaries and our special purpose companies.

(2) 

Interest income from credit cards is derived from interest on credit card loans and credit card installment purchases, merchant fees and commission on cash advances and credit card installment purchases.

(3) 

Not including other receivables, and prior to deducting allowance for credit losses and present value discount or reflecting deferred origination costs.

(4) 

Includes automobile lease financing to consumer borrowers.

(5) 

Includes home equity loans.

(6) 

Includes available-for-sale financial assets and held-to-maturity financial assets.

(7) 

Includes foreign currency-denominated deposits, mutual installment deposits and funds deposited by securities brokerage customers of Woori Investment & Securities.

 

9


Table of Contents

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

The following table provides an analysis of changes in interest income, interest expense and net interest income based on changes in volume and changes in rate for 2011 compared to 2010 and 2012 compared to 2011. Information is provided with respect to: (1) effects attributable to changes in volume (changes in volume multiplied by prior rate) and (2) effects attributable to changes in rate (changes in rate multiplied by prior volume). Changes attributable to the combined impact of changes in rate and volume have been allocated proportionately to the changes due to volume changes and changes due to rate changes.

 

     2011 vs. 2010
Increase/(decrease)
due to changes in
    2012 vs. 2011
Increase/(decrease)
due to changes in
 
     Volume     Rate     Total     Volume     Rate     Total  
     (in billions of Won)  

Interest-earning assets

            

Due from banks

   11      42      53      46      54      100   

Loans(1)

            

Commercial and industrial

     161        239        400        128        (275     (147

Trade financing

     26        (33     (7     30        (12     18   

Other commercial

     56        (26     30        (72     (68     (140

Lease financing(2)

     58        (5     53        34        (27     7   

General purpose household(3)

     (9     190        181        (51     (26     (77

Mortgage

     201        6        207        247        (19     228   

Credit cards

     44        (60     (16     (9     (11     (20

Securities

            

Trading

     (36     1        (35     117        (97     20   

Investment(4)

     (4     127        123        (66     77        11   

Other

     23        (24     (1     49        (74     (25
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

   531      457      988      453      (478   (25
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities

            

Deposits due to customers

            

Demand deposits

   9      (1   8      6      2      8   

Time and savings deposits

     306        209        515        197        (19     178   

Certificate of deposit

     (246     (5     (251     (47     (6     (53

Other deposits(5)

     10        40        50        5        (6     (1

Borrowings

     47        40        87        (22     (23     (45

Debentures

     (167     (90     (257     (94     (33     (127

Other

     10        (12     (2     32        (19     13   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

   (31   181      150      77      (104   (27
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

   562      276      838      376      (374   2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Not including other receivables, and prior to deducting allowance for credit losses and present value discount or reflecting deferred origination costs.

(2) 

Includes automobile lease financing to consumer borrowers.

(3) 

Includes home equity loans.

(4) 

Includes available-for-sale financial assets and held-to-maturity financial assets.

(5) 

Includes foreign currency-denominated deposits, mutual installment deposits and funds deposited by securities brokerage customers of Woori Investment & Securities.

 

10


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Exchange Rates

The table below sets forth, for the periods and dates indicated, information concerning the noon buying rate for Won, expressed in Won per one U.S. dollar. The “noon buying rate” is the rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York. Unless otherwise stated, translations of Won amounts into U.S. dollars in this annual report were made at the noon buying rate in effect on December 31, 2012, which was ₩1,063.2 to US$1.00. We do not intend to imply that the Won or U.S. dollar amounts referred to herein could have been or could be converted into U.S. dollars or Won, as the case may be, at any particular rate, or at all. On April 26, 2013, the noon buying rate was ₩1,111.1= US$1.00.

 

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

2008

     935.2         1,507.9         1,098.7         1,262.0   

2009

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

2010

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

2011

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

2012

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

October

     1,090.2         1,114.6         1,105.4         1,090.2   

November

     1,081.8         1,091.8         1,087.0         1,081.8   

December

     1,063.2         1,083.7         1,075.2         1,063.2   

2013 (through April 26)

     1,056.0         1,140.3         1,094.7         1,111.1   

January

     1,056.0         1,091.2         1,066.5         1,087.5   

February

     1,078.2         1,095.7         1,087.3         1,083.9   

March

     1,083.9         1,119.2         1,102.9         1,112.5   

April (through April 26)

     1,111.1         1,140.3         1,122.7         1,111.1   

 

Source: Federal Reserve Bank of New York.
(1) 

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

 

Item 3B. Capitalization and Indebtedness

Not Applicable

 

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

Not Applicable

 

Item 3D. Risk Factors

Risks relating to our corporate credit portfolio

The largest portion of our exposure is to small- and medium-sized enterprises, and financial difficulties experienced by companies in this segment may result in a deterioration of our asset quality and have an adverse impact on us.

Our loans to small- and medium-sized enterprises amounted to ₩81,618 billion, or 40.6% of our total loans, as of December 31, 2010, ₩83,624 billion, or 39.4% of our total loans, as of December 31, 2011 and ₩80,506 billion, or 36.4% of our total loans, as of December 31, 2012. As of December 31, 2012, Won-denominated loans to small- and medium-sized enterprises that were classified as substandard or below were ₩1,838 billion, representing 2.3% of such loans to those enterprises. See “Item 4B. Business Overview—Corporate Banking—Small and Medium-Sized Enterprise Banking.” We recorded charge-offs of ₩821 billion in respect of our Won-denominated loans to small- and medium-sized enterprises in 2012, compared to charge-offs of ₩758 billion in 2011 and ₩614 billion in 2010. According to data compiled by the Financial Supervisory Service, the industry-wide delinquency ratios for Won-denominated loans to small- and medium-sized enterprises increased in 2011 but decreased in 2012. The delinquency ratio for small- and medium-sized enterprises is calculated as the ratio of (1) the outstanding balance of such loans in respect of which either

 

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principal or interest payments are over due by one month or more to (2) the aggregate outstanding balance of such loans. Our delinquency ratio for such loans denominated in Won was 1.5% as of December 31, 2010, 1.6% as of December 31, 2011 and 1.3% as of December 31, 2012. Our delinquency ratio may increase in 2013 as a result of, among other things, adverse economic conditions in Korea and globally. See “—Other risks relating to our business—Difficult conditions in the global financial markets could adversely affect our liquidity and performance.” Accordingly, we may be required to take measures to decrease our exposures to these customers.

In light of the deteriorating financial condition and liquidity position of small- and medium-sized enterprises in Korea as a result of the global financial crisis commencing in the second half of 2008, the Korean government introduced measures intended to encourage Korean banks to provide financial support to small- and medium-sized enterprise borrowers. For example, the Korean government requested Korean banks, including Woori Bank, Kyongnam Bank and Kwangju Bank, to establish a “fast track” program to provide liquidity assistance to small- and medium-sized enterprises on an expedited basis. Under the “fast track” programs established by Woori Bank, Kyongnam Bank and Kwangju Bank, which are currently expected to be effective through December 31, 2013, liquidity assistance is provided to small- and medium-sized enterprise borrowers applying for such assistance, in the form of new short term loans or maturity extensions or interest rate adjustments with respect to existing loans, after expedited credit review and approval by such banks. The overall prospects for the Korean economy in 2013 and beyond remain uncertain, and the Korean government may extend or renew existing or past policies and initiatives or introduce new policies or initiatives to encourage Korean banks to provide financial support to small- and medium-sized enterprises. We believe that, to date, our participation in such government-led initiatives (primarily through the “fast track” program) has not caused us to extend a material amount of credit that we would not have otherwise extended nor materially impacted our results of operations and financial condition in general. The aggregate amount of outstanding small- and medium-sized enterprise loans made by Woori Bank, Kyongnam Bank and Kwangju Bank under the “fast track” program was ₩290 billion as of December 31, 2012, which represented 0.4% of the total small- and medium-sized enterprise loan portfolio of such banks as of such date. Furthermore, loans made by us under the “fast track” program are partially guaranteed by the Korean government’s public financial institutions, including the Korea Credit Guarantee Fund and the Korea Technology Finance Corporation. However, there can be no assurance that our future participation in such government-led initiatives would not lead us to extend credit to small- and medium-sized enterprise borrowers that we would not otherwise extend, or offer terms for such credit that we would not otherwise offer, in the absence of such initiatives. Furthermore, there is no guarantee that the financial condition and liquidity position of our small- and medium-sized enterprise borrowers benefiting from such initiatives will improve sufficiently for them to service their debt on a timely basis, or at all. Accordingly, increases in our exposure to small- and medium-sized enterprises resulting from such government-led initiatives may have a material adverse effect on our results of operations and financial condition.

Many small- and medium-sized enterprises represent sole proprietorships or very small businesses dependent on a relatively limited number of suppliers or customers and tend to be affected to a greater extent than large corporate borrowers by fluctuations in the Korean and global economy. In addition, small- and medium-sized enterprises often maintain less sophisticated financial records than large corporate borrowers. Therefore, it is generally more difficult for us to judge the level of risk inherent in lending to these enterprises, as compared to large corporations.

In addition, many small- and medium-sized enterprises have close business relationships with large corporations in Korea, primarily as suppliers. Any difficulties encountered by those large corporations would likely hurt the liquidity and financial condition of related small- and medium-sized enterprises, including those to which we have exposure, also resulting in an impairment of their ability to repay loans.

Financial difficulties experienced by small- and medium-sized enterprises as a result of, among other things, adverse economic conditions in Korea and globally, as well as aggressive marketing and intense competition among banks to lend to this segment in recent years, have led to a deterioration in the asset quality of our loans to this segment in the past and such factors may lead to a deterioration of asset quality in the future. Any such deterioration would result in increased charge-offs and higher provisioning and reduced interest and fee income from this segment, which would have an adverse impact on our financial condition and results of operations.

 

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

As of December 31, 2012, the total amount of loans provided by us to construction and shipbuilding companies in Korea amounted to ₩8,570 billion and ₩2,916 billion, or 3.9% and 1.3% of our total loans, respectively. We also have other exposures to Korean construction and shipbuilding companies, including in the form of guarantees extended for the benefit of such companies and debt and equity securities of such companies held by us. In the case of shipbuilding companies, such exposures include refund guarantees extended by us on behalf of shipbuilding companies to cover their obligation to return a portion of the ship order contract amount to customers in the event of performance delays or defaults under shipbuilding contracts. In the case of construction companies, we also have potential exposures in the form of guarantees provided to us by general contractors with respect to financing extended by us for residential and commercial real estate development projects, as well as commitments to purchase asset-backed securities secured by the assets of companies in the construction industry and other commitments we enter into relating to project financing for such real estate projects which may effectively function as guarantees.

The construction industry in Korea has experienced a downturn in recent years, due to excessive investment in residential property development projects, stagnation of real property prices and reduced demand for residential property, especially in areas outside of Seoul, including as a result of the deterioration of the Korean economy commencing in the second half of 2008. In October 2008, the Korean government implemented a ₩9 trillion support package for the benefit of the Korean construction industry, including a program to buy unsold housing units and land from construction companies. The shipbuilding industry in Korea has also experienced a severe downturn in recent years due to a significant decrease in ship orders, primarily due to adverse conditions in the global economy and the resulting slowdown in global trade. In response to the deteriorating financial condition and liquidity position of borrowers in the construction and shipbuilding industries, which were disproportionately impacted by adverse economic developments in Korea and globally, the Korean government implemented a program in the first half of 2009 to promote expedited restructuring of such borrowers by their Korean creditor financial institutions, under the supervision of major commercial banks. In accordance with such program, 24 construction companies and five shipbuilding companies became subject to workout in 2009, following review by their creditor financial institutions (including us) and the Korean government. In addition, in June 2010, the Financial Services Commission and the Financial Supervisory Service announced that, following credit risk evaluations conducted by six creditor financial institutions (including us) of companies in Korea with outstanding debt of ₩50 billion or more, 65 companies were selected by such financial institutions for restructuring in the form of workout, liquidation or court receivership. Of such 65 companies, 16 were construction companies and three were shipbuilding companies. More recently, in July 2012, the Financial Services Commission and the Financial Supervisory Service announced the results of subsequent credit risk evaluations conducted by creditor financial institutions (including us) of companies in Korea, in which 36 companies with outstanding debt of ₩50 billion or more (17 of which were construction companies and one of which was a shipbuilding company) were selected by such financial institutions for restructuring in the form of workout, liquidation or court receivership. There is no assurance, however, that these measures will be successful in stabilizing the Korean construction and shipbuilding industries.

The allowance for credit losses that we have established against our credit exposures to Korean construction and shipbuilding companies may not be sufficient to cover all future losses arising from these and other exposures. If the credit quality of our exposures to Korean construction and shipbuilding companies declines, we may incur substantial additional bad debt expenses, which could adversely impact our results of operations and financial condition. Furthermore, although a portion of our loans to construction and shipbuilding companies are secured by collateral, such collateral may not be sufficient to cover uncollectible amounts in respect of such loans.

We also have construction-related credit exposures under our project financing loans for real estate development projects in Korea. In light of the general deterioration in the asset quality of real estate project financing loans in Korea in recent years, Korean banks, including Woori Bank, Kyongnam Bank and Kwangju Bank, implemented a uniform set of guidelines regarding the evaluation of real estate development projects and

 

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asset quality classification of project financing loans for such projects in September 2010. Under these guidelines, which became effective from the third quarter of 2010, Korean banks are generally required to apply more stringent criteria in evaluating the asset quality of real estate project financing loans. As a result, we may be required to establish additional allowances with respect to our outstanding real estate project financing loans, which could adversely affect our financial condition and results of operations.

We have exposure to the largest Korean commercial conglomerates, known as “chaebols,” and, as a result, financial difficulties of chaebols may have an adverse impact on us.

Of our 20 largest corporate exposures (including loans, debt and equity securities, credit-related commitments and other exposures) as of December 31, 2012, five were to companies that were members of the 30 largest chaebols in Korea. As of that date, the total amount of our exposures to the 30 largest chaebols was ₩29,592 billion, or 7.6% of our total exposures. If the credit quality of our exposures to chaebols declines, we could incur additional bad debt expenses, which would hurt our results of operations and financial condition. See “Item 4B. Business Overview—Assets and Liabilities—Loan Portfolio—Exposure to Chaebols.”

The allowances we have established against these exposures may not be sufficient to cover all future losses arising from these exposures. In addition, in the case of companies that are in or in the future enter into workout, restructuring, reorganization or liquidation proceedings, our recoveries from those companies may be limited. We may, therefore, experience future losses with respect to these exposures.

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

As of December 31, 2012, our 20 largest exposures to corporate borrowers totaled ₩47,345 billion, which represented 12.2% of our total exposures. As of that date, our single largest corporate exposure was to the Bank of Korea, to which we had outstanding credits in the form of debt securities of ₩8,622 billion and loans in Won of ₩3,280 billion, representing 3.0% of our total exposures in the aggregate. Aside from exposure to the Korean government and government-related agencies, our next largest exposure was to Hyundai Heavy Industries, to which we had outstanding exposure of ₩1,992 billion representing 0.5% of our total exposures. Any deterioration in the financial condition of our large corporate borrowers may require us to record substantial additional allowances and may have a material adverse impact on our results of operations and financial condition.

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

As of December 31, 2012, our credit exposures to companies that were in workout or corporate restructuring amounted to ₩3,179 billion or 0.9% of our total credit exposures, of which ₩1,776 billion or 55.9% was classified as substandard or below and substantially all of which was classified as impaired. As of the same date, our allowance for credit losses on these credit exposures amounted to ₩708 billion, or 22.3% of these exposures. These allowances may not be sufficient to cover all future losses arising from our credit exposure to these companies. Furthermore, we have other exposure to such companies, in the form of debt and equity securities of such companies held by us (including equity securities we acquired as a result of debt-to-equity conversions). Including such securities, our exposures as of December 31, 2012 to companies in workout or restructuring amounted to ₩3,340 billion, or 0.9% of our total exposures. Our exposures to such companies may also increase in the future, including as a result of adverse conditions in the Korean economy. In addition, in the case of borrowers that are or become subject to workout, we may be forced to restructure our credits pursuant to restructuring plans approved by other creditor financial institutions of the borrower, or to dispose of our credits to other creditors on unfavorable terms, which may adversely affect our results of operations and financial condition.

 

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

Several member companies of the Woongjin Group, one of Korea’s top-30 chaebols, have been experiencing financial difficulties, mainly as a result of the prolonged slowdown in the Korean real estate market since the global financial crisis commencing in the second half of 2008. In September 2012, Woongjin Holdings Co., Ltd., which is the holding company of the Woongjin Group, and its subsidiary Kukdong Engineering & Construction Co., Ltd., or Kukdong E&C, filed for court receivership with the Seoul Central District Court, and the court appointed new management for the two companies to begin an expedited restructuring process supervised by the court. Other member companies of the Woongjin Group may also file for court receivership, undergo out-of-court debt restructuring programs or otherwise default on their debt in the future as a result of financial or operational difficulties or otherwise. As of December 31, 2012, our aggregate credit exposures to the member companies of the Woongjin Group, consisting primarily of loans extended to such companies, amounted to ₩459 billion, including ₩165 billion of loans to Woongjin Holdings and Kukdong E&C. In 2012, we charged off ₩114 billion of loans extended to the member companies of the Woongjin Group (including ₩44 billion of loans to Kukdong E&C), and as of December 31, 2012, our allowance for credit losses with respect to our credit exposures to the Woongjin Group amounted to ₩10 billion (of which ₩1 billion were with respect to credit exposures to Woongjin Holdings and Kukdong E&C). We may set aside additional allowances in 2013 with respect to such exposures, which may have an adverse impact on our results of operations. Furthermore, such allowances may not be sufficient to cover all future losses arising from our exposures to these companies. In the event that the financial condition of these companies deteriorates further in the future, we may be required to record additional allowances for credit losses, as well as charge-offs and valuation or impairment losses, which may have a material adverse effect on our financial condition and results of operations.

Risks relating to our consumer credit portfolio

We may experience increases in delinquencies in our consumer loan and credit card portfolios.

In recent years, consumer debt has increased rapidly in Korea. Our portfolio of consumer loans amounted to ₩66,758 billion as of December 31, 2010, ₩72,914 billion as of December 31, 2011 and ₩78,785 billion as of December 31, 2012. Our credit card portfolio amounted to ₩4,357 billion as of December 31, 2010, ₩4,592 billion as of December 31, 2011 and ₩4,505 billion as of December 31, 2012. As of December 31, 2012, our consumer loans and credit card receivables represented 35.7% and 2.0% of our total lending, respectively. See “Item 4B. Business Overview—Consumer Banking—Lending Activities” and “Item 4B. Business Overview—Credit Cards—Products and Services.”

The growth in our consumer loan portfolio in recent years, together with adverse economic conditions in Korea and globally, may lead to increasing delinquencies and a deterioration in asset quality. The amount of our consumer loans classified as substandard or below was ₩343 billion (or 0.5% of our consumer loan portfolio) as of December 31, 2010, ₩396 billion (or 0.5% of our consumer loan portfolio) as of December 31, 2011 and ₩441 billion (or 0.6% of our consumer loan portfolio) as of December 31, 2012. We charged off consumer loans amounting to ₩190 billion in 2012, as compared to ₩89 billion in 2011 and ₩106 billion in 2010, and recorded bad debt expenses in respect of consumer loans of ₩242 billion in 2012, as compared to ₩158 billion in 2011 and ₩130 billion in 2010. Within our consumer loan portfolio, the outstanding balance of general purpose household loans, which, unlike mortgage or home equity loans, are often unsecured and therefore tend to carry a higher credit risk, amounted to ₩26,645 billion, or 39.9% of our total outstanding consumer loans, as of December 31, 2010, ₩27,940 billion, or 38.3% of our total outstanding consumer loans, as of December 31, 2011 and ₩22,785 billion, or 28.9% of our total outstanding consumer loans, as of December 31, 2012.

In our credit card segment, outstanding balances overdue by 30 days or more amounted to ₩103 billion, or 2.4% of our credit card receivables, as of December 31, 2010, ₩92 billion, or 2.0% of our credit card receivables, as of December 31, 2011 and ₩87 billion, or 1.9% of our credit card receivables, as of December 31, 2012. In line with industry practice, we have restructured a portion of our delinquent credit card account balances as loans. As of December 31, 2012, these restructured loans amounted to ₩74 billion, or 1.7% of our credit card balances. Because these restructured loans are not initially recorded as being delinquent, our delinquency ratios do not fully reflect all delinquent amounts relating to our credit card balances. Including all

 

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restructured loans, outstanding balances overdue by 30 days or more accounted for 3.4% of our credit card balances as of December 31, 2012. We charged off credit card balances amounting to ₩186 billion in 2012, as compared to ₩142 billion in 2011 and ₩128 billion in 2010, and recorded bad debt expenses in respect of credit card balances of ₩152 billion in 2012, as compared to ₩115 billion in 2011 and ₩47 billion in 2010. Delinquencies may increase in the future as a result of, among other things, adverse economic conditions in Korea, difficulties experienced by other credit card issuers that adversely affect our customers, additional government regulation or the inability of Korean consumers to manage increased household debt. In addition, as a part of our strategy to enhance our credit card operations and increase its synergies with our other businesses, in April 2013, we effected a horizontal spin-off of the credit card business of Woori Bank. As a result, the former credit card business of Woori Bank is operated by a newly established wholly-owned subsidiary of ours, Woori Card Co., Ltd. However, we may not be able to realize the anticipated benefits of this spin-off due to various factors, including increased expenses arising from the operation of a separate credit card company, unexpected business disruptions, difficulties in reorganizing personnel and administrative functions and potential loss of customers.

A deterioration of the asset quality of our consumer loan and credit card portfolios would require us to record increased bad debt expenses and charge-offs and will adversely affect our financial condition and results of operations. In addition, our large exposure to consumer debt means that we are exposed to changes in economic conditions affecting Korean consumers. Accordingly, economic difficulties in Korea that hurt those consumers could result in further deterioration in the credit quality of our consumer loan and credit card portfolios. For example, a rise in unemployment or an increase in interest rates in Korea could adversely affect the ability of consumers to make payments and increase the likelihood of potential defaults.

In light of adverse conditions in the Korean economy affecting consumers, in March 2009, the Financial Services Commission requested Korean banks, including Woori Bank, Kyongnam Bank and Kwangju Bank, to establish a “pre-workout program,” including a credit counseling and recovery service, for retail borrowers with outstanding short-term debt. The pre-workout program has been in operation since April 2009 and, following successive extensions by the Korean government, is expected to continue indefinitely. Under the pre-workout program, maturity extensions and/or interest reductions are provided for retail borrowers with total loans of less than ₩500 million who are in arrears on their payments for more than 30 days but less than 90 days. The aggregate amount of consumer credit (including credit card receivables) provided by Woori Bank, Kyongnam Bank and Kwangju Bank which became subject to the pre-workout program in 2012 was ₩44 billion. While we believe that our participation in such pre-workout program has not had a material impact on the overall credit quality of our consumer loan and credit card portfolio or on our results of operations and financial condition to date, our future participation in such government-led initiatives to provide financial support to retail borrowers may lead us to offer credit terms for such borrowers that we would not otherwise offer, in the absence of such initiatives, which may have an adverse effect on our results of operations and financial condition.

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

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

In Korea, foreclosure on collateral generally requires a written petition to a court. An application, when made, may be subject to delays and administrative requirements that may decrease the value of such collateral.

 

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We cannot guarantee that we will be able to realize the full value on our collateral as a result of, among other factors, delays in foreclosure proceedings and defects in the perfection of our security interest in collateral. Our failure to recover the expected value of collateral could expose us to potential losses.

Risks relating to our financial holding company structure and strategy

We may not be successful in taking advantage of our integrated financial holding company structure.

Our success under a financial holding company structure depends on our ability to take advantage of our large existing base of retail and corporate banking customers and to implement a strategy of developing and cross-selling diverse financial products and services to them. As part of this strategy, we continue to standardize and upgrade the risk management operations of our subsidiaries. We are also continuing our efforts to diversify our product offerings through, among other things, the expansion of our insurance business following the establishment of Woori Aviva Life Insurance in 2008 and increased marketing of insurance products through our bancassurance channels, as well as further expansion of our investment banking and investment trust operations. The implementation of these and other plans that we may pursue to take advantage of our integrated financial holding company structure may require additional investments of capital, infrastructure, human resources and management attention and entails certain risks, including the possibility that:

 

   

we may fail to further integrate and upgrade our diverse systems and operations as needed to maximize synergies among our operating subsidiaries;

 

   

we may lack required capital resources;

 

   

we may fail to attract, develop and retain personnel with necessary expertise;

 

   

we may face competition from other financial holding companies and more specialized financial institutions in particular segments; and

 

   

we may fail to leverage our financial holding company structure to continue realizing operational efficiencies and to cross-sell new products and services.

If we are not successful in implementing our current and future plans, we may incur losses on our investments and our results of operations and financial condition may suffer.

We may fail to realize the anticipated benefits relating to our reorganization and integration plan and any future mergers or acquisitions that we may pursue.

Our success under a financial holding company structure depends on our ability to implement our reorganization and integration plan and to realize the anticipated synergies, growth opportunities and cost savings from coordinating and, in certain cases, combining the businesses of our various subsidiaries. As part of this plan, between December 2001 and February 2002 we merged the commercial banking business of Peace Bank of Korea into Woori Bank, converted Peace Bank of Korea into a credit card subsidiary, Woori Credit Card, and transferred the credit card business of Woori Bank to Woori Credit Card. We also transferred the credit card business of Kwangju Bank to Woori Credit Card in March 2003. In light of the deteriorating business performance of Woori Investment Bank and with the objective of restructuring the group platform, we merged Woori Investment Bank with Woori Bank in August 2003. In March 2004, in response to the liquidity problems of Woori Credit Card stemming from the deteriorating asset quality of its credit card portfolio, we merged Woori Credit Card with Woori Bank. Although we currently intend for our commercial banking subsidiaries to continue to operate as separate legal entities within our financial holding company structure and to maintain separate loan origination and other functions, we have standardized our subsidiaries’ risk management operations (except with respect to operational risk), including with respect to credit risk management following systems upgrades completed in 2007. In October and December 2004, we also acquired a 27.3% voting interest in LGIS, a leading domestic securities firm. In March 2005, we merged Woori Securities into LGIS and renamed the surviving entity Woori Investment & Securities. See “Item 4B. Business Overview—Business—Capital Markets Activities—Securities Brokerage.” In May 2005, we purchased a 90.0% direct ownership interest in LG Investment Trust Management, or LGITM, from LGIS. We subsequently merged Woori Investment Trust

 

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Management, our wholly-owned asset management subsidiary, into LGITM and renamed the surviving entity Woori Asset Management, which remains a consolidated subsidiary. In July and September 2005, Woori Asset Management reacquired the remaining 10.0% interest from its minority shareholders. In May 2006, we transferred 30.0% of our interest in Woori Asset Management to Credit Suisse. Following this transfer, we renamed the entity Woori Credit Suisse Asset Management. In October 2009, we reacquired Credit Suisse’s 30.0% interest in Woori Credit Suisse Asset Management and renamed the entity Woori Asset Management. Furthermore, we acquired a 51.4% interest in Hanmi Capital in September 2007, which was subsequently renamed Woori Financial, and acquired a 51.0% interest in LIG Life Insurance in April 2008, which was subsequently renamed Woori Aviva Life Insurance. Woori Financial became a consolidated subsidiary, while we account for Woori Aviva Life Insurance as part of our investments in jointly controlled entities and associates under IFRS. In addition, in April 2013, we spun off the credit card business of Woori Bank into a newly established wholly-owned subsidiary, Woori Card.

Separately, in April 2012, the Korean government, through the Public Funds Oversight Committee of the Financial Services Commission, announced its latest plan to privatize us through a sale of up to the entire 56.97% equity stake (and a minimum 30% equity stake) held by the Korean government through the Korea Deposit Insurance Corporation, or the KDIC, through a competitive bidding process from April to July 2012. The April 2012 plan was similar to previous privatization plans, including those announced in May 2011. However, following a preliminary bidding process in which no bid was submitted, the Public Funds Oversight Committee announced the suspension of such sale process in August 2012. The implementation of the Korean government’s privatization plan may be further delayed or changed depending on a variety of factors, such as domestic and international economic conditions, and there can be no assurance that such privatization plan will be implemented as contemplated or at all.

In addition, we purchased certain assets and assumed certain liabilities of Samhwa Mutual Savings Bank in March 2011 and Solomon Savings Bank in September 2012 through our wholly-owned subsidiary, Woori FG Savings Bank Co., Ltd. In March 2013, we announced a plan to acquire a controlling interest in Kumho Investment Bank by purchasing unsubscribed shares of that entity issuable in a proposed rights offering, subject to the condition that we are able to become the largest shareholder of Kumho Investment Bank with an equity ownership of at least 30% by purchasing such unsubscribed shares. Such rights offering is expected to commence following the completion of a 3.3 to 1 reduction of capital of Kumho Investment Bank, which is currently in progress.

As part of our strategy, we also intend to continue to seek opportunities to expand our overseas operations, including potentially through acquisitions and investments in the U.S., Europe and Asia. The integration of our subsidiaries’ separate businesses and operations, as well as those of any companies we may merge with or acquire in the future, could require a significant amount of time, financial resources and management attention, and may result in increased capital requirements and greater credit and other exposures. Moreover, the integration process could disrupt our operations (including our risk management operations) or information technology systems, reduce employee morale, produce unintended inconsistencies in our standards, controls, procedures or policies, and affect our relationships with customers and our ability to retain key personnel.

The continued implementation of our reorganization and integration plan, as well as any future additional integration plans that we may adopt in connection with our mergers or acquisitions or otherwise, and the realization of the anticipated benefits of our financial holding company structure and any mergers or acquisitions we decide to pursue may be blocked, delayed or reduced as a result of many factors, some of which may be outside our control. These factors include:

 

   

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

 

   

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

 

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restrictions under the Financial Holding Company Act, the Financial Investment Services and Capital Markets Act and other regulations on transactions between our company and, or among, our subsidiaries;

 

   

unexpected business disruptions;

 

   

loss of customers; and

 

   

labor unrest.

Accordingly, we may not be able to realize the anticipated benefits of our current or any future reorganization and integration plan and any future mergers or acquisitions that we pursue or undergo, and our business, results of operations and financial condition may suffer as a result.

We may not generate sufficient additional fees to achieve our revenue diversification strategy.

An important element of our overall strategy is increasing our fee income in order to diversify our revenue base, in anticipation of greater competition and declining lending margins. Historically, our primary source of revenues has been net interest income from our banking operations. To date, except for credit card, trust management, bancassurance, brokerage and currency transfer fees (including foreign exchange-related commissions) and fees collected in connection with the operation of our investment funds, we have not generated substantial fee income. We intend to develop new sources of fee income as part of our business strategy, including through our investment banking and asset management businesses. Although we, like many other Korean financial institutions, have begun to charge fees to our customers more regularly, customers may prove unwilling to pay additional fees, even in exchange for more attractive value-added services, and their reluctance to do so would adversely affect the implementation of our strategy to increase our fee income. Furthermore, the fees that we charge to customers are subject to regulation by Korean financial regulatory authorities, which may seek to implement regulations or measures that may have an adverse impact on our ability to achieve this aspect of our strategy.

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

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

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

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

 

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

Since our principal assets at the holding company level are the shares of our subsidiaries, our ability to pay dividends on our common stock largely depends on dividend payments from those subsidiaries. Those dividend payments are subject to the Korean Commercial Code, the Bank Act and regulatory limitations, generally based on capital levels and retained earnings, imposed by the various regulatory agencies with authority over those entities. The ability of our banking subsidiaries to pay dividends is subject to regulatory restrictions to the extent that paying dividends would impair each of their nonconsolidated profitability, financial condition or other cash flow needs. For example:

 

   

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

 

   

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

 

   

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

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

In addition, we and our subsidiaries may not be able to pay dividends to the extent that such payments would result in a failure to meet any of the applicable financial targets under our respective memoranda of understanding with the KDIC. See “—Other risks relating to our business—Our failure to meet the financial and other business targets set forth in current terms of the memoranda of understanding among us, our subsidiaries and the KDIC may result in substantial harm to us or our subsidiaries.”

Risks relating to competition

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

Competition in the Korean financial market has been and is likely to remain intense. Some of the financial institutions that we compete with are larger in terms of asset size and customer base and have greater financial resources or more specialized capabilities than our subsidiaries. In addition, in the area of our core banking operations, most Korean banks have been focusing on retail customers and small- and medium-sized enterprises in recent years, although they have begun to generally increase their exposure to large corporate borrowers, and have been focusing on developing fee income businesses, including bancassurance and investment products, as increasingly important sources of revenue. In the area of credit cards, Korean banks and credit card companies have in the past engaged in aggressive marketing activities and made significant investments, contributing to some extent to lower profitability and asset quality problems previously experienced with respect to credit card receivables. The competition and market saturation resulting from this common focus may make it more difficult for us to secure retail and small- and medium-sized customers with the credit quality and on credit terms necessary to maintain or increase our income and profitability.

In addition, we believe that regulatory reforms and the general modernization of business practices in Korea will lead to increased competition among financial institutions in Korea. We also believe that foreign financial institutions, many of which have greater experience and resources than we do, will seek to compete with us in

 

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providing financial products and services either by themselves or in partnership with existing Korean financial institutions. Furthermore, a number of significant mergers and acquisitions in the industry have taken place in Korea over the past decade, including the acquisition of Koram Bank by an affiliate of Citibank in 2004, the acquisition of Korea First Bank by Standard Chartered Bank in April 2005, Chohung Bank’s merger with Shinhan Bank in April 2006 and Hana Financial Group’s acquisition of a controlling interest in Korea Exchange Bank in February 2012. We expect that consolidation in the financial industry will continue. Other financial institutions may seek to acquire or merge with other entities, and the financial institutions resulting from this consolidation may, by virtue of their increased size and business scope, provide significantly greater competition for us. Increased competition and continuing consolidation may lead to decreased margins, resulting in a material adverse impact on our future profitability. Accordingly, our results of operations and financial condition may suffer as a result of increasing competition in the Korean financial industry.

Competition for customer deposits may increase, resulting in a loss of our deposit customers or an increase in our funding costs.

In recent years, we have faced increasing pricing pressure on deposit products from our competitors. If we do not continue to offer competitive interest rates to our deposit customers, we may lose their business. In addition, even if we are able to match our competitors’ pricing, doing so may result in an increase in our funding costs, which may have an adverse impact on our results of operations.

Other risks relating to our business

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

The Korean economy is closely tied to, and is affected by developments in, the global economy. While the rate of deterioration of the global economy since the commencement of the global financial crisis in 2008 has slowed, with some signs of stabilization and improvement, the overall prospects for the Korean and global economy in 2013 and beyond remain uncertain. Starting in the second half of 2011, the global financial markets have experienced significant volatility as a result of, among other things, the financial difficulties affecting many governments worldwide, in particular in Cyprus, Greece, Spain, Italy and Portugal. In addition, recent political and social instability in various countries in the Middle East and Northern Africa, including in Egypt, Libya, Syria and Yemen, have resulted in volatility and uncertainty in the global energy markets. Any of these or other developments could potentially trigger another financial and economic crisis. Furthermore, in recent months, the Chinese economy has begun to show signs of a potential slowdown, including decreased gross domestic product growth rates in the first and second quarters of 2012 and falling real estate price levels in certain urban areas. In response, the Chinese government has implemented stimulus measures, including a decrease in the benchmark interest rate for deposits and loans as announced by the People’s Bank of China in June 2012, but the overall impact of such stimulus measures remains uncertain. Although China’s economy began to show signs of recovery in the fourth quarter of 2012, factors such as falling real estate price levels, excess liquidity and China’s reliance on investment-driven growth may lead to an economic correction. In light of the high level of interdependence of the global economy, any of the foregoing developments could have a material adverse effect on the Korean economy and financial markets, and in turn on our business, financial condition and results of operations.

We are also exposed to adverse changes and volatility in global and Korean financial markets as a result of our liabilities and assets denominated in foreign currencies and our holdings of trading and investment securities, including structured products (although we do not currently have material exposures to Cyprus, Greece, Spain, Italy and other countries in Europe which are facing financial difficulties, in the form of sovereign debt or otherwise). Since the second half of 2008, the value of the Won relative to major foreign currencies in general and the U.S. dollar in particular has fluctuated widely. See “Item 3A. Selected Financial Data—Exchange Rates.” A depreciation of the Won will increase our cost in Won of servicing our foreign currency-denominated debt, while continued exchange rate volatility may also result in foreign exchange losses for us. Furthermore, as a result of adverse global and Korean economic conditions, there has been significant volatility in securities prices,

 

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including the stock prices of Korean and foreign companies in which we hold an interest. Such volatility has resulted in and may lead to further trading and valuation losses on our trading and investment securit