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Korea Development Bank, et al. – ‘S-B’ on 4/30/15

On:  Thursday, 4/30/15, at 7:20am ET   ·   Accession #:  1193125-15-158816   ·   File #s:  333-197061, 333-203739, -01

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 4/30/15  Korea Development Bank            S-B                    4:6.3M                                   RR Donnelley/FA
          Republic of Korea

Document/Exhibit                   Description                      Pages   Size 

 1: S-B         Registration Statement Under Schedule B             HTML   4.10M 
 2: EX-99.(F)   Miscellaneous Exhibit                               HTML      6K 
 3: EX-99.(M)(1)  Miscellaneous Exhibit                             HTML     13K 
 4: EX-99.(M)(2)  Miscellaneous Exhibit                             HTML     15K 

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As filed with the Securities and Exchange Commission on April 30, 2015

Registration Statement No. 333-            

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.

REGISTRATION STATEMENT

UNDER

SCHEDULE B

OF

THE SECURITIES ACT OF 1933

THE KOREA DEVELOPMENT BANK

(Name of Registrant)

THE REPUBLIC OF KOREA

(Name of Co-Registrant and Guarantor)

Names and Addresses of Authorized Representatives:

Copies to:

Jinduk Han, Esq.

Cleary Gottlieb Steen & Hamilton LLP

c/o 37th Floor, Hysan Place

500 Hennessey Road, Causeway Bay

Hong Kong

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

The securities registered hereby will be offered on a delayed or continuous basis pursuant to the procedures set forth in Securities Act Release Nos. 33-6240 and 33-6424.

CALCULATION OF REGISTRATION FEE

Pursuant to Rule 429 under the Securities Act of 1933, the Prospectus contained in this Registration Statement and supplements to such Prospectus will also be used in connection with US$5,287,380,000 of debt securities with or without warrants to purchase debt securities registered under Registration Statement No. 333-197061.

The Registrants hereby amend this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrants shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

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EXPLANATORY NOTE

This registration statement relates to US$1,810,000,000 aggregate amount of (i) debt securities (with or without warrants) of The Korea Development Bank to be offered from time to time as separate issues on terms and in the manner to be specified in a prospectus supplement to be delivered in connection with each such offering, (ii) guarantees that may be issued by The Korea Development Bank in respect of obligations of other parties on terms and in the manner to be specified in a prospectus supplement to be delivered in connection with each such issuance and (iii) guarantees that may be issued by The Republic of Korea in respect of debt securities of The Korea Development Bank on terms and in the manner to be specified in a prospectus supplement to be delivered in connection with each such issuance. The prospectus constituting a part of this registration statement relates to (i) the debt securities (with or without warrants) and guarantees to be issued by The Korea Development Bank, registered hereunder, (ii) guarantees to be issued by The Republic of Korea, registered hereunder and (iii) US$5,287,380,000 aggregate principal amount of debt securities (with or without warrants) and guarantees registered under Registration Statement No. 333-197061 (including an aggregate principal amount of US$200,000,000 of debt securities that may be sold by us from time to time in a continuous offering designated Medium-Term Notes, Series C, Due Not Less Than Nine Months From Date of Issue (the “Series C Notes”)).

This registration statement contains a form of prospectus supplement filed as Exhibit K-1 to this registration statement, together with the supplement to that prospectus supplement filed as Exhibit K-2 to this registration statement, to be used in connection with the sale by us of the Series C Notes in a continuous offering.

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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED APRIL 30, 2015

PROSPECTUS

$7,097,380,000

The Korea Development Bank

Debt Securities

Warrants to Purchase Debt Securities

Guarantees

The Republic of Korea

Guarantees

We will provide the specific terms of these securities in supplements to this prospectus. You should read this prospectus and any prospectus supplement carefully before you invest.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

This prospectus is dated                     , 2015

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CERTAIN DEFINED TERMS AND CONVENTIONS

All references to the “Bank”, “we”, “our” or “us” mean The Korea Development Bank. All references to “Korea” or the “Republic” contained in this prospectus mean The Republic of Korea. All references to the “Government” mean the government of Korea.

Unless otherwise indicated, all references to “won”, “Won” or “W” contained in this prospectus are to the currency of Korea, references to “U.S. dollars”, “Dollars”, “$”, “USD” or “US$” are to the currency of the United States of America, references to “Euro”, “EUR” or “€” are to the currency of the European Union, references to “Japanese yen”, “JPY” or “¥” are to the currency of Japan, references to “Singapore dollar” or “SGD” are to the currency of Singapore, references to “Swiss franc” or “CHF” are to the currency of Switzerland, references to “pound sterling”, “GBP” or “£” are to the currency of the United Kingdom, references to “Chinese offshore renminbi” or “CNH” are to the currency of the People’s Republic of China traded outside of mainland China, references to “Hong Kong dollar” or “HKD” are to the currency of Hong Kong, S.A.R., references to “Malaysian ringgit” or “MYR” are to the currency of Malaysia, references to “Indian rupee” or “INR” are to the currency of India, references to “Thai baht” or “THB” are to the currency of Thailand, references to “Australian dollar” or “AUD” are to the currency of Australia, references to “Norwegian krone” or “NOK” are to the currency of Norway and references to “Brazilian real” or “BRL” are to the currency of the Federative Republic of Brazil.

All discrepancies in any table between totals and the sums of the amounts listed are due to rounding.

Our separate financial information as of and for the years ended December 31, 2013 and 2014 included in this prospectus has been prepared in accordance with International Financial Reporting Standards as adopted in Korea (“Korean IFRS” or “K-IFRS”). References in this prospectus to “separate” financial statements and information are to financial statements and information prepared on a non-consolidated basis. Unless specified otherwise, our financial and other information included in this prospectus is presented on a separate basis in accordance with Korean IFRS and does not include such information with respect to our subsidiaries. KDB Financial Group (or KDBFG), a financial holding company, and Korea Finance Corporation (or KoFC), a public policy financing vehicle and the parent company of KDBFG, both of which had originally been established by spinning off a portion of our assets, liabilities and equity in October 2009, merged with and into us on December 31, 2014. Note 47 of the notes to our separate financial statements as of and for the years ended December 31, 2013 and 2014 included in this prospectus provides information regarding the merger and the amounts of assets and liabilities acquired by us in connection with the merger.

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USE OF PROCEEDS

Unless otherwise specified in the applicable prospectus supplement, we will use the net proceeds from the sale of the securities for our general operations.

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THE KOREA DEVELOPMENT BANK

Overview

We were established in 1954 as a government-owned financial institution pursuant to The Korea Development Bank Act, as amended (the “KDB Act”). Since our establishment, we have been the leading bank in the Republic with respect to the provision of long-term financing for projects designed to assist the nation’s economic growth and development. The Government directly owns all of our paid-in capital. Our registered office is located at 14, Eunhaeng-ro, Youngdeungpo-gu, Seoul, The Republic of Korea.

In June 2008, the Financial Services Commission announced the Government’s preliminary plan for our privatization and, in May 2009, the KDB Act was amended to facilitate our privatization. The preliminary plan reflected the Government’s intention to nurture a more competitive corporate and investment banking sector and trigger reorganization and further advancement of the Korean financial industry.

To implement our privatization, the Government established KDB Financial Group, or KDBFG, a financial holding company, and Korea Finance Corporation, or KoFC, a public policy financing vehicle, in October 2009, by spinning off a portion of our assets, liabilities and equity. In the spin-off, our interests in Daewoo Securities Co., Ltd., KDB Asset Management Co., Ltd. and KDB Capital Corp. were transferred to KDBFG, and our equity holdings in certain government-controlled companies, including Korea Electric Power Corporation, or KEPCO, and certain companies under restructuring programs, including Hyundai Engineering & Construction Co., Ltd., were transferred to KoFC. The Government transferred its ownership interest in us to KDBFG in exchange for all of KDBFG’s share capital on November 24, 2009.

The following diagram shows our ownership structure before and after the spin-off and the share transfer.

In April 2013, in light of continued uncertainties surrounding the global economy and the prolonged effects of the global financial crisis that commenced in the second half of 2008 on the Korean economy, as well as certain overlap of financial policy roles among different Government-owned banks and financial corporations, the Government launched a task force (the “Task Force”) to consider the reorganization of the financial policy roles of Government-owned banks and financial corporations, including the Government’s plan for our privatization. The Task Force, composed of representatives from various government branches responsible for overseeing such Government-owned entities as well as members of the academia, held a series of closed meetings, considered various reorganization options with respect to policy financing functions and reported their findings to the Financial Services Commission. In August 2013, pursuant to the findings of the Task Force, the Financial Services Commission announced the Government’s plan to reorganize Government-owned policy banks and financial corporations in order to streamline their overlapping functions and reinforce their policy financing roles for start-ups and small- and medium-sized enterprises, new growth industries and overseas projects. The plan called for, among other things, (i) the merger of KoFC and KDBFG into us and the transfer of

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KoFC’s overseas assets of approximately W2 trillion to The Export-Import Bank of Korea, or KEXIM, (ii) the sale of our subsidiaries that do not have policy financing roles and (iii) the gradual reduction of our retail banking services.

In May 2014, the National Assembly amended the KDB Act to largely reflect the plan announced by the Financial Services Commission and halt our privatization and streamline the financial policy roles among Government-owned banks and financial corporations in order to better respond systematically to rapidly changing domestic and international economic conditions. Under the amended KDB Act, which was amended in May 2014, the public policy financing role was consolidated and strengthened, and KDBFG and KoFC (together with its subsidiaries) were merged into us on December 31, 2014 in order to utilize our rich experience and expertise in public policy financing, and we took over KoFC’s role of providing public policy financial support to Korean companies, including managing and operating the Financial Market Stabilization Fund established pursuant to the Act on the Structural Improvement of the Financial Industry enacted in 2009, while KoFC’s overseas assets of approximately W2 trillion were transferred to KEXIM. On December 31, 2014, the Government transferred all of its ownership interest in KoFC and KDBFG to us and in return received 3,036,079,768 new shares of us with an aggregate par value of W15,180.4 billion. As a newly merged entity, we have an authorized share capital of up to W30,000 billion and our paid-in capital was W15,180.4 billion. As of the date of this prospectus, the Government owns 100% of our share capital.

The following diagram shows our ownership structure before and after the merger was effected under the amended KDB Act. Our ownership structure returned to our original ownership structure that existed prior to the spin-off and reorganization in October 2009.

While the Government has halted its plan for our privatization, it has expressed its intention to privatize our subsidiaries that do not have policy financing roles, subject to market conditions.

Our primary purpose, as stated in the KDB Act, the KDB Decree and our Articles of Incorporation, is to “furnish funds in order to expedite the development of the national economy.” We make loans available to major industries for equipment, capital investment and the development of high technology, as well as for working capital.

As of December 31, 2014, we had W136,760.1 billion of loans outstanding (including loans, call loans, domestic usance, bills of exchange bought, local letters of credit negotiation and loan-type suspense accounts pursuant to the applicable guidelines without adjusting for allowance for possible loan losses, present value discounts and deferred loan fees), total assets of W217,833.2 billion and total equity of W25,412.6 billion, as compared to W98,119.8 billion of loans outstanding, W143,607.5 billion of total assets and W16,346.1 billion of total equity as of December 31, 2013. In 2014, we recorded interest income of W4,750.4 billion, interest expense of W2,761.9 billion and net income of W183.5 billion, as compared to W4,766.6 billion of interest income, W3,036.1 billion of interest expense and W1,447.4 billion of net loss in 2013. See “—Selected Financial Statement Data.”

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Currently, the Government directly holds all of our paid-in capital. In addition to contributions to our capital, the Government provides direct financial support for our financing activities, in the form of loans or guarantees. The Government has the power to elect or dismiss our Chairman and Chief Executive Officer, members of our Board of Directors and Auditor. Pursuant to the KDB Act, the Financial Services Commission has supervisory power and authority over matters relating to our general business including, but not limited to, capital adequacy and managerial soundness.

The Government supports our operations pursuant to Article 32 of the KDB Act. Article 32 provides that “the annual net losses of the Korea Development Bank shall be offset each year by the reserve, and if the reserve be insufficient, the deficit shall be replenished by the Government.” As a result of the KDB Act, the Government is generally responsible for our operations and is legally obligated to replenish any deficit that arises if our reserve, consisting of our surplus and capital surplus items, is insufficient to cover our annual net losses. In light of the above, if we had insufficient funds to make any payment under any of our obligations, including the debt securities and guarantees covered by this prospectus, the Government would take appropriate steps, such as by making a capital contribution, by allocating funds or by taking other action, to enable us to make such payment when due. The provisions of Article 32 do not, however, constitute a direct guarantee by the Government of our obligations under the debt securities or the guarantees, and the provisions of the KDB Act, including Article 32, may be amended at any time by action of the National Assembly.

In January 1998, the Government amended the KDB Act to:

The Government amended the KDB Act in May 1999 and the KDB Decree in March 2000, to allow the Financial Services Commission to supervise and regulate us in terms of capital adequacy and managerial soundness.

In March 2002, the Government amended the KDB Act to enable us, among other things, to:

In July 2005 and May 2009, the Government amended Article 43 of the KDB Act. The revised Article 43 provides that:

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In February 2008, the Government further amended the KDB Act, primarily to transfer most of the Government’s supervisory authority over us from the Ministry of Strategy and Finance (formerly the Ministry of Finance and Economy) to the Financial Services Commission.

In May 2009, the Government amended the KDB Act to facilitate our privatization. The amendment provided for, among others:

In May 2014, the Government and the National Assembly amended the KDB Act to streamline the financial policy roles among Government-owned banks and financial corporations in order to better respond systematically to rapidly changing domestic and international economic conditions by merging KDBFG and KoFC into us. The amended KDB Act provides, among others, that:

Under the amended KDB Act, each of Article 43 and Article 44 was restated as Article 31 and Article 32, respectively, without any amendment.

The Minister of Strategy and Finance of the Republic has, on behalf of the Republic, signed the registration statement of which this prospectus forms a part.

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Capitalization

As of December 31, 2014, our authorized capital was W30,000 billion and capitalization was as follows:

Business

Purpose and Authority

Since our establishment, we have been the leading bank in the Republic in providing long-term financing for projects designed to assist the nation’s economic growth and development.

Under the KDB Act, the KDB Decree and our Articles of Incorporation, our primary purpose is to “contribute to the sound development of the financial industry and the national economy by supplying and managing funds necessary for the development and promotion of industries, expansion of social infrastructure, development of regions, stabilization of the financial markets and facilitation of sustainable growth.” Since we serve the public policy objectives of the Government, we do not seek to maximize profits. We do, however, strive to maintain a level of profitability to strengthen our equity base and support growth in the volume of our business.

Under the KDB Act, we may:

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Government Support and Supervision

The Government owns directly all of our paid-in capital. On February 20, 2000, the Government contributed W100 billion in cash to our capital. On December 29, 2000, we reduced our paid-in capital by W959.8 billion to offset our expected net loss for the year. To compensate for the resulting deficit under the KDB Act, on June 20, 2001, the Government contributed W3 trillion in the form of shares of common stock of KEPCO to our capital. On December 29, 2001, the Government contributed W50 billion in cash to our capital. On August 13, 2003, the Government contributed W80 billion in cash to our capital to support our existing fund for facilitating the Republic’s regional economies. On April 30, 2004, the Government contributed W1 trillion in the form of shares of common stock of KEPCO and Korea Water Resources Corporation to our capital to support our lending to small-and medium-sized companies and to compensate for our contribution to LG Card Ltd. in the form of loans, cash injections and debt-for-equity swaps. On December 19, 2008, the Government contributed W500 billion in the form of shares of common stock of Korea Expressway Corporation to our capital and, in January 2009, the Government contributed W900 billion in cash to our capital, in each case to bolster our capital base in order to stabilize the Korean financial market by supporting small and medium-sized enterprises and providing increased liquidity to corporations. In October 2009, our paid-in capital decreased by W400.0 billion in connection with the establishment by the Government of KDBFG and KoFC by spinning off a portion of our assets, liabilities and equity (including paid-in capital). In March 2010, the Government, through KDBFG, made a further capital contribution of W10 billion in cash to our capital. In December 2013, the Government contributed W10 billion in cash to our capital. In December 2014, our paid-in capital increased by W5,918.5 billion in connection with the merger of KDBFG and KoFC into us as described under the heading “Overview” and “Selected Financial Statement Data” in this prospectus. Taking into account these capital contributions, reduction and merger, as of December 31, 2014, our total paid-in capital was W15,180.4 billion. See “—Financial Statements and the Auditors—Notes to Separate Financial Statements of December 31, 2014 and 2013—Note 22.” In April 2015, the Government further contributed W2 trillion in the form of shares of common stock of Korea Land & Housing Corporation and KEPCO to our capital to support our fund for infrastructure projects, new growth engine, high-tech and new renewable energy industries and business enterprises in general and as of April 30, 2015, our total paid-in capital was W17,180.4 billion.

In addition to capital contributions, the Government directly supports our financing activities by:

The Government also supports our operations pursuant to Articles 31 and 32 of the KDB Act. Article 31 provides that “40% or more of the annual net profit of the Korea Development Bank shall be transferred to

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reserve, until the reserve amounts equal the total amount of authorized capital” and that accumulated amounts in reserve may be capitalized. Article 32 provides that “the net losses of the Korea Development Bank shall be offset each fiscal year by the reserve, and if the reserve be insufficient, the deficit shall be replenished by the Government.”

As a result of the KDB Act, the Government is generally responsible for our operations and is legally obligated to replenish any deficit that arises if our reserve, consisting of our surplus and capital surplus items, is insufficient to cover our annual net losses. In light of the above, if we had insufficient funds to make any payment under any of our obligations, including the debt securities and the guarantees covered by this prospectus, the Government would take appropriate steps, such as by making a capital contribution, by allocating funds or by taking other action, to enable us to make such payment when due. The provisions of Article 32 do not, however, constitute a direct guarantee by the Government of our obligations under the debt securities or the guarantees, and the provisions of the KDB Act, including Article 32, may be amended at any time by action of the National Assembly.

The Government closely supervises our operations in the following ways:

In addition, the conditions of the IMF aid package stated that domestic banks in the Republic, including us, should undergo external audits from internationally recognized accounting firms. Accordingly, we have had our annual financial statements for years commencing 1998 audited by an external auditor. See “—Financial Statements and the Auditors” and “Experts.”

Pursuant to our most recently approved program of operations, we expect to support the reform and restructuring of the Republic’s economic and industrial structure, including financing of promising small and medium sized enterprises, providing export finance and encouraging investments in infrastructure necessary to promote consumer demand and industrial reorganization.

Selected Financial Statement Data

Unless specified otherwise, the information provided below is stated on a separate basis in accordance with Korean IFRS.

Merger of KDBFG and KoFC into KDB

In May 2014, the Government and the National Assembly amended the KDB Act, which came into effect on December 31, 2014, to streamline the financial policy roles among Government-owned banks and financial corporations in order to better respond systematically to rapidly changing domestic and international economic

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conditions by merging KDBFG and KoFC into us (the “Merger”). The Merger was effective on December 31, 2014. After the Merger, our ownership and organizational structure returned to our original ownership and organizational structure that existed prior to the establishment of KDBFG and KoFC through spin off and transfer of a portion of our assets, liabilities and equity in October 2009.

Consolidated Statements of Financial Position Data

The following table presents selected statements of financial position data regarding our assets, liabilities and shareholders’ equity on a consolidated basis as of December 31, 2013 (before the Merger) and December 31, 2014 (after the Merger), as well as selected statements of financial position data of KoFC, which was our ultimate parent company before the Merger, on a consolidated basis as of December 31, 2013 (before the Merger), and has been derived from our audited consolidated financial statements as of and for the years ended December 31, 2013 and 2014 and KoFC’s audited consolidated financial statements as of and for the year ended December 31, 2013.

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Consolidated Income Statement Data

The following income statement data show our selected income statement items on a consolidated basis for the years ended December 31, 2013 (before the Merger) and December 31, 2014 (after the Merger), as well as selected income statement items of KoFC, which was our ultimate parent company before the Merger, on a consolidated basis for the year ended December 31, 2013 (before the Merger), and has been derived from our consolidated financial statements as of and for the years ended December 31, 2013 and 2014 and KoFC’s audited consolidated financial statements as of and for the year ended December 31, 2013.

Separate Financial Statement Data

The following tables present selected separate financial information as of and for the years ended December 31, 2013 and 2014, which has been derived from our audited separate K-IFRS financial statements as of and for the years ended December 31, 2013 and 2014 included in this prospectus. You should read the following financial statement data together with the financial statements and notes included in this prospectus.

Our statements of financial position data included in the following table have been derived from our audited separate financial statements as of and for the years ended December 31, 2013 and 2014 included in this prospectus. Note 47 of the notes to our separate financial statements as of and for the years December 31, 2013 and 2014 included in this prospectus provides information regarding the Merger and the amounts of assets and liabilities acquired by us in connection with the Merger.

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As of December 31, 2014, our total assets increased by 51.7% to W217,833.2 billion from W143,607.5 billion as of December 31, 2013, primarily due to an increase in investments in subsidiaries and associates to W26,858.7 billion from W4,971.7 billion, an increase in available-for-sale financial assets to W38,160.0 billion from W25,534.2 billion and an increase in loans to W134,314.5 billion from W96,308.4 billion, which were attributable principally to the acquisition of equity and debt securities and loans from KoFC and KDBFG in connection with the Merger.

As of December 31, 2014, our total liabilities increased by 51.2% to W192,420.6 billion from W127,261.4 billion as of December 31, 2013, primarily due to an increase in bonds to W116,569.8 billion from W55,924.9 billion and an increase in deferred tax liabilities to W1,998.5 billion from W0 billion, which were attributable principally to the acquisition of borrowings and deferred tax liabilities from KoFC and KDBFG in connection with the Merger.

As of December 31, 2014, our total shareholders’ equity increased by 55.5% to W25,412.6 billion from W16,346.1 billion as of December 31, 2013, primarily due to an increase in paid-in capital to W15,180.4 billion from W9,261.9 billion as a result of the Merger.

Our income statement data included in the following table have been derived from our audited separate financial statements as of and for the years ended December 31, 2013 and 2014 included in this prospectus. As the Merger was effective on December 31,2014, our income statement data for the years ended December 31, 2013 and 2014 were not affected by the Merger.

2014

We had net income of W183.5 billion in 2014 compared to net loss of W1,447.4 billion in 2013, on a separate K-IFRS basis.

Principal factors for the net income of W183.5 billion in 2014 compared to the net loss of W1,447.4 billion in 2013 included:

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The above factors were partially offset by net loss on derivatives of W319.6 billion in 2014 compared to net gain of W251.3 billion in 2013, primarily due to valuation loss on derivative financial instruments.

2013

We had net loss of W1,447.4 billion in 2013 compared to net income of W946.9 billion in 2012, on a separate K-IFRS basis.

Principal factors for the net loss of W1,447.4 billion in 2013 compared to the net income of W946.9 billion in 2012 included:

The above factors were partially offset by net gain on financial instruments designated at fair value through profit or loss of W45.6 billion in 2013 compared to net loss of W64.1 billion in 2012, primarily due to an increase in valuation gains from financial liabilities designated at fair value through profit or loss.

Provisions for Possible Loan Losses and Loans in Arrears

We establish provisions for possible losses from problem loans, including guarantees and other extensions of credit, based on the length of the delinquent periods and the nature of the loans, including guarantees and other extensions of credit. As of December 31, 2014, we established provisions of W2,398.7 billion for possible loan losses, 35.3% higher than the provisions as of December 31, 2013 of W1,773.2 billion, primarily due to an increase in loans resulting from the Merger. The provisions for possible loan losses under Korean IFRS are recorded for those loans for which objective evidence of impairment exists as a result of one or more events that occurred after initial recognition and, if our provision for possible loan losses is deemed insufficient for

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regulatory purposes, we compensate for the difference by recording a regulatory reserve for possible loan losses, which will be deducted from retained earnings. See Note 22(6) of the notes to our separate financial statements included in this prospectus.

Certain of our customers have restructured loans with their creditor banks. As of December 31, 2014, we have provided loans of W2,511.8 billion for companies under workout, court receivership, court mediation and other restructuring procedures. In addition, as of such date, we held equity securities of such companies in the amount of W1,425.1 billion following debt-equity swaps. As of December 31, 2014, we had established provisions of W821.3 billion for possible loan losses. We cannot assure you that actual results of the credit loss from the loans to these customers will not exceed the provisions reserved.

The following table provides information on our loan loss provisions.

As of December 31, 2014, our non-performing loans totaled W2,836.2 billion, representing 2.1% of our outstanding loans as of such date. Non-performing loans are defined as loans that are classified as substandard or below. On December 31, 2014, our legal reserve was W5,400.5 billion, representing 3.9% of our outstanding loans as of such date.

Loans to Financially Troubled Companies

We have credit exposure (including loans, guarantees and equity investments) to a number of financially troubled Korean companies including STX Offshore & Shipbuilding, Dongbu Steel, Daehan Shipbuildng Co., Ltd., STX Heavy Industries and STX Engine. As of December 31, 2014, our credit extended to these companies totaled W7,063.6 billion, accounting for 3.2% of our total assets as of such date.

As of December 31, 2014, our exposure (including loans classified as substandard or below and equity investment classified as estimated loss or below) to STX Offshore & Shipbuilding increased to W3,898.8 billion from W2,554.5 billion as of December 31, 2013, primarily due to the Merger and extension of new loans. As of December 31, 2014, our exposure to Dongbu Steel was W1,551.9 billion, an increase from W922.5 billion as of December 31, 2013, primarily due to the extension of new loans. As of December 31, 2014, our exposure to Daehan Shipbuilding increased to W592.1 billion from W198.1 billion as of December 31, 2013, primarily due to an increase in revolving loans. As of December 31, 2014, our exposure to STX Heavy Industries increased to W550.1 billion from W445.9 billion as of December 31, 2013, primarily due to the Merger. As of December 31, 2014, our exposure to STX Engine increased to W470.7 billion from W293.7 billion as of December 31, 2013, primarily due to the Merger.

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As of December 31, 2014, we established provisions of W389.9 billion for our exposure to STX Offshore & Shipdbuiling, W305.1 billion for Dongbu Steel, W29.3 billion for Daehan Shipbuidling, W33.1 billion for STX Heavy Industries and W57.6 billion for STX Engine.

Companies in the STX Group, a large Korean conglomerate primarily engaged in shipbuilding and trading, have faced financial difficulties for the past several years due to prolonged slowdowns in the Korean construction and shipbuilding industries. STX Construction and STX Pan Ocean have been in court receivership since April and June 2013, respectively, and the remaining troubled companies (including STX Corporation, STX Engine and STX Heavy Industries) are in voluntary out-of-court debt restructuring programs with their creditors. Kang Duk-soo, former chairman of the STX Group, was indicted in May 2014 for accounting fraud, business malpractice and embezzlement. Companies in the Dongbu Group, a large Korean conglomerate providing industrial, chemical, shipping, insurance and financial products and services, have also been facing financial difficulties for the past several years due to the prolonged slowdown in the Korean construction industry and in the Korean economy in general. Certain troubled companies in the Dongbu Group are in voluntary out-of-court debt restructuring programs with their creditors, and recently, Dongbu Steel entered into a voluntary workout agreement with its creditors. We are the main creditor bank of STX Group and Dongbu Group.

In the event that the financial condition of these companies or other large corporations to which we extended credits deteriorate in the future, we may be required to record additional provisions for credit losses, as well as charge-offs and valuation or impairment losses or losses on disposal, which may have a material adverse effect on our financial condition and results of operations.

On July 14, 2014, according to press reports, the Financial Supervisory Service had decided to launch a special audit into KDB, as the lead creditor bank of the troubled STX Group and Dongbu Group, for alleged mismanagement and loose oversight of the two conglomerates, which allegedly contributed to further losses. Although we believe we have extended loans to both Groups in compliance with relevant guidelines and procedures, we cannot predict the outcome of such special audit. In addition, further investigations may be launched by governmental authorities with respect to the alleged legal violations by us and our employees and any adverse determination, decision or resolution in such matter could encourage other parties to bring related claims and actions against us. While our management is not able to estimate the possible penalties and losses that may result from this special audit at this time, an adverse determination by the Financial Supervisory Service or other governmental authorities in this special audit may result in regulatory sanctions and significant financial liability as well as reputational harm to us.

In 2014, we did not sell any non-performing loans to the Korea Asset Management Corporation, or KAMCO.

Operations

Loan Operations

We mainly provide equipment capital loans, project loans and working capital loans to private Korean enterprises that undertake major industrial projects either directly or indirectly through on-lending. The loans generally cover over 50%, and in some cases as much as 100%, of the total project cost. Equipment capital loans include loans to major industries for development of high technology and for acquisition, improvement or repair of machinery and equipment. We disburse loan proceeds in installments to ensure that the borrower uses the loan for its intended purpose.

Before approving a loan, we consider:

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We charge, on average, interest of 1.8% over our prime rate, although we provide a discount between 0.2% and 0.7% to small- and medium-sized companies. We adjust the prime rate monthly. The spread depends on the purpose of the loan, maturity date and the borrower’s credit ratings. Certain loans bear interest at below market rates. Equipment capital loans generally have original maturities of three to five years, although we occasionally make equipment capital loans with longer maturities. Working capital loans usually mature within two years.

The Business Planning Department functions as our centralized policy-making and planning division with respect to our lending activities. The Business Planning Department formulates and revises our internal regulations on loan programs as well as setting basic lending guidelines.

We have multiple levels of loan approval authority, depending on the loan amount and other factors such as the availability of collateral or guarantee, debt repayment ability and business prospects. The Credit Review Committee, Division Credit Review Committee, Division Credit Review Sub-Committee, General Manager each has authority to approve loans up to a specified amount. The amount differs depending on the type of loan and certain other factors, for example, whether a loan is collateralized or guaranteed.

Our overall risk management policy is set by the Risk Management Committee. For detailed information regarding our risk management policy and procedures, see “—Financial Statements and Auditors—Notes to Separate Financial Statements of December 31, 2014 and 2013—Note 48.”

The following table sets out, by currency and category of loan, our total outstanding loans:

Loans⁽¹⁾

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As of December 31, 2014, we had W136,760.1 billion in outstanding loans, which represents a 39.4% increase from W98,119.8 billion of outstanding loans as of December 31, 2013 principally as a result of the Merger.

Maturities of Outstanding Loans

The following table categorizes our outstanding equipment capital and working capital loans by their remaining maturities:

Outstanding Equipment Capital and Working Capital Loans by Remaining Maturities⁽¹⁾

Loans by Industrial Sector

The following table sets out the total amount of our outstanding equipment capital and working capital loans, categorized by industry sector:

Outstanding Equipment Capital and Working Capital Loans by Industry Sector⁽¹⁾

The manufacturing sector accounted for 47.8% of our outstanding equipment capital and working capital loans as of December 31, 2014. As of December 31, 2014, loans to the transportation equipment manufacturing businesses and chemical product manufacturing businesses accounted for 15.8% and 15.1%, respectively, of our outstanding equipment capital and working capital loans to the manufacturing sector.

Industrial Bank of Korea was our single largest borrower as of December 31, 2014, accounting for 4.0% of our outstanding equipment capital and working capital loans. As of December 31, 2014, our five largest borrowers and 20 largest borrowers accounted for 10.9% and 24.1%, respectively, of our outstanding equipment capital and working capital loans.

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The following table breaks down the equipment capital and working capital loans to our 20 largest borrowers outstanding as of December 31, 2014 by industry sector:

20 Largest Borrowers by Industry Sector

The following table categorizes the new loans made by us by industry sector:

New Loans by Industry Sector

Loans by Categories

In addition to dividing our loans into equipment capital and working capital loans, we classify loans into several groupings, the most important being:

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The following table sets out equipment capital and working capital loans by categories as of December 31, 2014:

Industrial Fund Loans. Industrial fund loans are equipment capital and working capital loans denominated in Won to borrowers in major industries to finance equipment and facilities.

We currently make equipment capital industrial fund loans at floating or fixed rates for terms of up to 10 years and for up to 100% of the equipment cost being financed. We make working capital industrial fund loans at floating or fixed rates and in amounts constituting up to 40% of the borrower’s estimated annual sales.

Foreign Currency Loans. We extend loans denominated in U.S. dollars, Japanese yen or other foreign currencies principally to finance the purchase of industrial equipment from abroad or the implementation of overseas industrial development projects by Korean companies. We make these loans at floating interest rates with original maturities, in the case of equipment capital foreign currency loans, of up to 10 years and, in the case of working capital foreign currency loans, of up to three years.

Local Currency Loans Denominated in Foreign Currencies. We make local currency loans denominated in foreign currencies for the same purposes, and to the same borrowers, as foreign currency loans. Although we denominate the loans in foreign currency, the borrower receives and repays the loans in Won based on foreign exchange rates at the time of receipt and repayment. We currently make loans of this type at floating interest rates, with original maturities, in the case of equipment capital loans, of up to 10 years and, in the case of working capital loans, of up to three years.

Offshore Loans in Foreign Currencies. We extend offshore loans in foreign currencies to finance:

We make these loans at floating interest rates with original maturities, in the form of equipment capital foreign currency loans, of up to 10 years and, working capital foreign currency loans, of up to three years.

Government Fund Loans. We make government fund loans primarily to finance:

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Government fund loans that are equipment capital loans require approval by the appropriate Government ministry. We currently make government fund loans in Won at floating interest rates with original maturities of 10 to 20 years.

Other Loans. We also make special purpose fund loans for particular industries or projects using funds lent to us by the Government and foreign financial institutions. The Government funds that finance these loans include, among others:

For further information relating to such loans, see “—Sources of Funds.”

Guarantee Operations

We extend guarantees to our clients to facilitate their other borrowings and to finance major industrial projects. We guarantee Won-denominated corporate debentures, local currency loans, and other Won liabilities and foreign currency loans from domestic and overseas Korean financial institutions and from foreign institutions. The KDB Act and our Articles of Incorporation limit the aggregate amount of our industrial finance bond obligations and guarantee obligations. See “—Sources of Funds.”

We generally obtain collateral valued in excess of the original guarantee. We appraise the value of our collateral at least once a year. Depending on the borrower, the collateral may be industrial plants, real estate and/or marketable securities.

The following table shows our outstanding guarantees:

Guarantees Outstanding

On November 13, 2002, we entered into a guarantee agreement with KEPCO with respect to certain of KEPCO’s debt securities in connection with KEPCO’s restructuring and privatization. Pursuant to the guarantee agreement, we issued in February 2003 our guarantee to holders of KEPCO’s Yankee and Global debt securities with final maturities ranging from 2003 to 2096 (although our guarantee obligations only run through 2016) in an aggregate principal amount of approximately W3.3 trillion, based on exchange rates prevailing on the guarantee issuance date, February 25, 2003. As of December 31, 2014, the aggregate outstanding principal amount of KEPCO’s debt securities that are covered by our guarantees was W198.7 billion. The guarantees described above

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constitute full, irrevocable and unconditional guarantees, on an unsecured and unsubordinated basis, in respect of the principal, interest and other payments due with respect to those debt obligations. KEPCO paid and will continue to pay us an annual guarantee fee of 0.05% of (i) the aggregate outstanding principal amount of all issues of debt securities that will be covered by the benefit of our guarantee and (ii) the sum of all interest payments due on such debt securities from the date of calculation until the earlier of their maturity or their stated redemption date.

We currently own approximately 32.9% of the outstanding shares of common stock of KEPCO, and the Government, which directly owns all of our paid-in capital, owns an additional 18.2% of such shares of KEPCO.

Investments

We invest in a range of Korean private and Government-owned enterprises but we will not take a controlling interest in a company unless the acquisition is necessary for the corporate restructuring of the company. Although generally a long-term investor, we sell investments from time to time. In recent years, sales resulted principally from the Government’s privatization program, and we expect to continue such sales in the future. The Government plans to sell its direct or indirect interest in certain private sector companies acquired during previous restructuring programs, including Daewoo Shipbuilding & Marine Engineering Co. Ltd., depending on market conditions. In accordance with such plan, we expect to sell our equity holdings in certain private sector companies if favorable opportunities for sale arise. Our equity investments increased to W32,737.2 billion as of December 31, 2014 from W7,241.2 billion as of December 31, 2013, principally due to the Merger.

The KDB Act and our Articles of Incorporation provide that the cost basis of our total equity investments may not exceed twice the sum of our paid-in capital and our reserve from profit. In addition, pursuant to the KDB Decree, we may not acquire equity securities of a single company in excess of 15% of its entire voting shares. The 15% limit, however, does not apply to certain investments, including those in Government-controlled companies financed by capital contributions from the Government. As of December 31, 2014, the cost basis of our equity investments subject to restriction under the KDB Act and our Articles of Incorporation totaled W32,737.2 billion, equal to 79.5% of our equity investment ceiling. For a discussion of Korean accounting principles relating to our equity investments, see “—Financial Statements and the Auditors.”

The following table sets out our equity investments by industry sector on a book value basis as of December 31, 2014:

Equity Investments