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Korea Development Bank, et al. – ‘S-B’ on 6/27/14

On:  Friday, 6/27/14, at 7:51am ET   ·   Accession #:  1193125-14-252206   ·   File #s:  333-189409, 333-197061, -01

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

 6/27/14  Korea Development Bank            S-B                    5:5.9M                                   RR Donnelley/FA
          Republic of Korea

Registration Statement for Securities of a Foreign Government or Political Subdivision   —   Schedule B
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: S-B         Schedule B Registration Statement                   HTML   3.91M 
 2: EX-99.(F)   Miscellaneous Exhibit                               HTML      7K 
 3: EX-99.(H)   Miscellaneous Exhibit                               HTML     95K 
 4: EX-99.(M)(1)  Miscellaneous Exhibit                             HTML     15K 
 5: EX-99.(M)(2)  Miscellaneous Exhibit                             HTML     16K 


S-B   —   Schedule B Registration Statement
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
"Table of Contents
"Certain Defined Terms and Conventions
"Use of Proceeds
"The Korea Development Bank
"Overview
"Capitalization
"Business
"Selected Financial Statement Data
"Operations
"Sources of Funds
"Debt
"Overseas Operations
"Property
"Directors and Management; Employees
"Tables and Supplementary Information
"Financial Statements and the Auditors
"The Republic of Korea
"Land and History
"Government and Politics
"The Economy
"Principal Sectors of the Economy
"The Financial System
"Monetary Policy
"Balance of Payments and Foreign Trade
"Government Finance
"Description of the Securities
"Description of Debt Securities
"Description of Warrants
"Terms Applicable to Debt Securities and Warrants
"Description of Guarantees to be Issued by Us
"Description of Guarantees to be Issued by The Republic of Korea
"Limitations on Issuance of Bearer Debt Securities and Bearer Warrants
"Taxation
"Korean Taxation
"United States Tax Considerations
"Plan of Distribution
"Legal Matters
"Authorized Representatives in the United States
"Official Statements and Documents
"Experts
"Forward-Looking Statements
"Further Information

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  SCHEDULE B REGISTRATION STATEMENT  
Table of Contents

As filed with the Securities and Exchange Commission on June 27, 2014

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:

 

Jae Ik Kim

or Jin Hwan Sah

  Suk-Kwon Na

Duly Authorized Representatives

in the United States of

The Korea Development Bank

320 Park Avenue, 32nd Floor

New York, New York 10022

 

Duly Authorized Representative

in the United States of

The Republic of Korea

335 East 45th Street

New York, New York 10017

 

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

 

 

Title of each class of securities being registered   

Amount to be

registered(2)

    

Amount of

registration fee

 

Debt securities, with or without warrants to purchase debt securities, and guarantees(1)

   US$  2,000,000,000       US$  257,600   

Guarantees of The Republic of Korea

     —   (3)       —   (3) 

 

 

(1) Consists of guarantees to be issued by The Korea Development Bank in respect of obligations of other parties.
(2) Or an equivalent amount in another currency or currencies or in composite currencies or as determined by reference to an index or, if the debt securities are to be offered at a discount, the approximate proceeds to The Korea Development Bank. Includes the maximum principal amount of the obligations to be guaranteed by the Registrants under the guarantees registered hereby.
(3) The Republic of Korea may irrevocably guarantee the debt securities being registered hereby. Pursuant to Rule 457(n) of the Securities Act of 1933, no registration fee is required with respect to the guarantees.

 

 

 

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$4,037,380,000 of debt securities with or without warrants to purchase debt securities registered under Registration Statement No. 333-189409.

 

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.

 

* This Registration Statement also constitutes Post-Effective Amendment No. 1 to Registration Statement No. 333-189409.

 

 


Table of Contents

EXPLANATORY NOTE

 

This registration statement relates to US$2,000,000,000 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$4,037,380,000 aggregate principal amount of debt securities (with or without warrants) and guarantees registered under Registration Statement No. 333-189409 (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.


Table of Contents

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 JUNE 27, 2014

 

PROSPECTUS

 

LOGO

 

 

$2,000,000,000

 

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                     , 2014


Table of Contents

TABLE OF CONTENTS

 

     Page  

CERTAIN DEFINED TERMS AND CONVENTIONS

     1   

USE OF PROCEEDS

     2   

THE KOREA DEVELOPMENT BANK

     3   

Overview

     3   

Capitalization

     7   

Business

     7   

Selected Financial Statement Data

     10   

Operations

     14   

Sources of Funds

     21   

Debt

     22   

Overseas Operations

     24   

Property

     24   

Directors and Management; Employees

     24   

Tables and Supplementary Information

     25   

Financial Statements and the Auditors

     30   

THE REPUBLIC OF KOREA

     147   

Land and History

     147   

Government and Politics

     149   

The Economy

     153   

Principal Sectors of the Economy

     159   

The Financial System

     165   

Monetary Policy

     170   

Balance of Payments and Foreign Trade

     174   

Government Finance

     181   

Debt

     182   

Tables and Supplementary Information

     184   

DESCRIPTION OF THE SECURITIES

     189   

Description of Debt Securities

     189   

Description of Warrants

     196   

Terms Applicable to Debt Securities and Warrants

     197   

Description of Guarantees to be Issued by Us

     198   

Description of Guarantees to be Issued by The Republic of Korea

     198   

LIMITATIONS ON ISSUANCE OF BEARER DEBT SECURITIES AND BEARER WARRANTS

     199   

TAXATION

     200   

Korean Taxation

     200   

United States Tax Considerations

     202   

PLAN OF DISTRIBUTION

     209   

LEGAL MATTERS

     210   

AUTHORIZED REPRESENTATIVES IN THE UNITED STATES

     210   

OFFICIAL STATEMENTS AND DOCUMENTS

     210   

EXPERTS

     210   

FORWARD-LOOKING STATEMENTS

     211   

FURTHER INFORMATION

     213   

 

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Table of Contents

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 “₩” 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.

 

Commencing in 2011, we prepare our financial statements in accordance with International Financial Reporting Standards as adopted in Korea (“Korean IFRS” or “K-IFRS”) and our separate financial information as of December 31, 2012 and 2013 and for the years ended December 31, 2012 and 2013 included in this prospectus has been prepared in accordance with Korean 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. Our separate financial statements as of and for the year ended December 31, 2012 have been restated due to changes in our accounting policies. See “—Financial Statements and the Auditors—Notes to Separate Financial Statements of December 31, 2013 and 2012—Note 3(26).”

 

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Table of Contents

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.

 

2


Table of Contents

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 indirectly 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. As of the date of this prospectus, KoFC, which is wholly owned by the Government, owns 90.26% of KDBFG’s share capital and the Government directly owns 9.74% of KDBFG’s share capital. KDBFG owns 100.0% of our share capital.

 

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

 

LOGO

 

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 to consider the reorganization of the financial policy roles of Government-owned banks and financial corporations, including the Government’s plan for our privatization. After considering the recommendations of the task force, the National Assembly amended the KDB Act in May 2014 to reflect the Government’s plan to 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 is expected to be effective on January 1, 2015, the public policy financing role will be consolidated and strengthened, and KDBFG and KoFC (together with its subsidiaries) will be merged into us in order to utilize our rich experience and expertise in public policy financing, and we will take over KoFC’s role of providing public policy financial support to Korean companies,

 

3


Table of Contents

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. As a newly merged entity, we will have an authorized share capital of up to ₩30 trillion.

 

The following diagram shows our ownership structure before and after the planned merger is effected under the amended KDB Act.

 

LOGO

 

While the Government has halted its plan for our privatization, it may consider privatization of our subsidiaries subject to market conditions. In addition, the implementation of the Government’s plans, including its merger plan, may be delayed or changed depending on a variety of factors, such as domestic and international economic conditions, and the timing discussed above is subject to change. There can be no assurance that such plans will be implemented as contemplated or that the contemplated merger will be implemented at all.

 

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, 2013, we had ₩98,119.8 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 ₩143,607.5 billion and total equity of ₩16,346.1 billion, as compared to ₩91,875.2 billion of loans outstanding, ₩142,997.3 billion of total assets and ₩18,218.4 billion of total equity as of December 31, 2012. In 2013, we recorded interest income of ₩4,766.6 billion, interest expense of ₩3,036.1 billion and net loss of ₩1,447.4 billion, as compared to ₩5,030.4 billion of interest income, ₩3,284.2 billion of interest expense and ₩946.9 billion of net income in 2012. See “—Selected Financial Statement Data.”

 

Currently, the Government indirectly 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, through KDBFG, our sole shareholder, 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 44 of the KDB Act. Article 44 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

 

4


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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 44 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 44, may be amended at any time by action of the National Assembly. Under the amended KDB Act, which is expected to come into effect on January 1, 2015, Article 44 under the current KDB Act will be restated as Article 32 without any amendment.

 

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

 

   

subordinate our borrowings from the Government to other indebtedness incurred in our operations;

 

   

allow the Government to offset any deficit that arises if our reserve fails to cover our annual net losses by transferring Government-owned property, including securities held by the Government, to us; and

 

   

allow direct injections of capital by the Government without prior National Assembly approval.

 

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:

 

   

obtain low-cost funds from The Bank of Korea and from the issuance of debt securities (in addition to already permitted Industrial Finance Bonds), which funds may be used for increased levels of lending to small and medium size enterprises;

 

   

broaden the scope of borrowers to which we may extend working capital loans to include companies in the manufacturing industry, enterprises which are “closely related” to enhancing the corporate competitiveness of the manufacturing industry and leading-edge high-tech companies; and

 

   

extend credits to mergers and acquisitions projects intended to facilitate corporate restructuring efforts.

 

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

 

  (1) our annual net profit, after adequate allowances are made for depreciation in assets, shall be distributed as follows:

 

  (i) forty percent or more of the net profit shall be credited to reserve, until the reserve amounts equal the total amount of paid-in capital; and

 

  (ii) any net profit remaining following the apportionment required under subparagraph (i) above shall be distributed in accordance with the resolution of our Board of Directors and the approval of our shareholders;

 

  (2) accumulated amounts in reserve may be capitalized; and

 

  (3) any distributions made in accordance with paragraph (1)(ii) above may be in the form of cash dividends or dividends in kind, provided that any distributions of dividends in kind must be made in accordance with applicable provisions of the KDB Decree.

 

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.

 

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

 

   

the preparation for the transformation of us from a special statutory entity into a corporation, including the application of the Banking Act as applicable;

 

   

the expansion of our operation scope that enables us to engage in commercial banking activities, including retail banking;

 

   

the provision of government guarantees for our mid-to-long term foreign currency debt outstanding at the time of initial sale of the Government’s stake in KDBFG (subject to the National Assembly’s authorization of the Government guarantee amount) and possible guarantees for our foreign currency debt incurred for the refinancing of such mid-to-long term foreign currency debt with the government guarantee during the period when the Government owns more than 50% of our shares; and

 

   

the establishment of KDBFG and KoFC and application of the Financial Holding Company Act to KDBFG.

 

In May 2014, the Government and the National Assembly amended the KDB Act, which will come into effect on January 1, 2015, 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:

 

   

the Government will halt its plan for our privatization;

 

   

public policy financing will be consolidated and strengthened through the newly merged entity;

 

   

we will comprehensively succeed to the properties, rights and obligations of KDBFG and KoFC upon the consummation of the merger;

 

   

the bonds issued by KDBFG and the policy bank bonds issued by the KoFC shall be deemed as the industrial financial bonds issued by us;

 

   

the business engaged in by KoFC in accordance with the Korea Finance Corporation Act or other laws and decrees will be continuously performed by us; and

 

   

the repayment of the principal of and interest on foreign currency debt (with an original maturity of one year or more at the time of issuance) incurred by KoFC and us before this amended KDB Act comes into force shall be guaranteed by the Government at the time of initial sale by the Government of its equity interest in us, subject to the approval by the National Assembly.

 

The amended KDB Act, which is filed as an exhibit to the registration statement of which this prospectus forms a part, is expected to be effective on January 1, 2015.

 

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, 2013, our authorized capital was ₩15,000 billion and capitalization was as follows:

 

     December  31,
2013
(1)
 
     (billions of won)
(unaudited)
 

Long-term debt:

  

Won currency borrowings

   4,277.7   

Industrial finance bonds

     37,230.3   

Foreign currency borrowings

     6,249.9   
  

 

 

 

Total long-term debt

     47,757.9 (2)(3) 
  

 

 

 

Capital:

  

Paid-in capital

     9,261.9   

Capital surplus

     44.4   

Capital adjustments

     (0.1

Retained earnings(4)

     6,707.4   

Accumulated other comprehensive income

     332.5   
  

 

 

 

Total capital

     16,346.1   
  

 

 

 

Total capitalization

   64,104.0   
  

 

 

 

 

(1) Except as disclosed in this prospectus, there has been no material adverse change in our capitalization since December 31, 2013.
(2) We have translated borrowings in foreign currencies into Won at the rate of ₩1,055.3 to US$1.00, which was the market average exchange rate, as announced by the Seoul Monetary Brokerage Services Ltd., on December 31, 2013.
(3) As of December 31, 2013, we had contingent liabilities totaling ₩7,579.4 billion under outstanding guarantees issued on behalf of our clients.
(4) Includes regulatory reserve for bad loans of ₩1,306.9 billion as of December 31, 2013. If our provision for bad loans is deemed insufficient for regulatory purposes, we compensate for the difference by recording a regulatory reserve for bad loans, which is shown as a separate item included in retained earnings.

 

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 “furnish funds for the expansion of the national economy.” 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:

 

   

carry out activities necessary to accomplish the expansion of the national economy, subject to the approval of the Financial Services Commission;

 

   

provide loans or discount notes;

 

   

subscribe to, underwrite or invest in securities;

 

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guarantee or assume indebtedness;

 

   

raise funds by accepting demand deposits and time and savings deposits from the general public, issuing securities, borrowing from the Government, The Bank of Korea or other financial institutions, and borrowing from overseas;

 

   

execute foreign exchange transactions, including currency and interest swap transactions;

 

   

provide planning, management, research and other support services at the request of the Government, public bodies, financial institutions or enterprises; and

 

   

carry out other businesses incidental to the foregoing (subject to the approval of the Financial Services Commission).

 

Government Support and Supervision

 

The Government owns indirectly all of our paid-in capital. On February 20, 2000, the Government contributed ₩100 billion in cash to our capital. On December 29, 2000, we reduced our paid-in capital by ₩959.8 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 ₩3 trillion in the form of shares of common stock of KEPCO to our capital. On December 29, 2001, the Government contributed ₩50 billion in cash to our capital. On August 13, 2003, the Government contributed ₩80 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 ₩1 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 ₩500 billion in the form of shares of common stock of Korea Expressway Corporation to our capital and, in January 2009, the Government contributed ₩900 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 ₩400.0 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) as described under the heading “Overview” and “Selected Financial Statement Data” in this prospectus. In March 2010, the Government, through KDBFG, made a further capital contribution of ₩10 billion in cash to our capital. In December 2013, the Government contributed ₩10 billion in cash to our capital. Taking into account these capital contributions and reduction, as of December 31, 2013, our total paid-in capital was ₩9,261.9 billion. See “—Financial Statements and the Auditors—Notes to Separate Financial Statements of December 31, 2013 and 2012—Note 22.”

 

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

 

   

lending us funds to on-lend;

 

   

allowing us to administer Government loans made from a range of special Government funds;

 

   

allowing us to administer some of The Bank of Korea’s surplus foreign exchange holdings; and

 

   

allowing us to receive credit from The Bank of Korea.

 

The Government also supports our operations pursuant to Articles 43 and 44 of the KDB Act. Article 43 provides that “40% or more of the annual net profit of the Korea Development Bank shall be transferred to reserve, until the reserve amounts equal the total amount of paid-in capital” and that accumulated amounts in reserve may be capitalized. Article 44 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.” Under the amended KDB Act, which will come into effect on January 1, 2015, Article 43 and Article 44 under the current KDB Act will be restated as Article 31 and Article 32, respectively, without any amendment.

 

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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 44 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 44, may be amended at any time by action of the National Assembly. Under the amended KDB Act, which will come into effect on January 1, 2015, Article 44 under the current KDB Act will be restated as Article 32 without any amendment.

 

The Government closely supervises our operations in the following ways:

 

   

the Government, through KDBFG, our sole shareholder, has the power to elect or dismiss our Chairman and Chief Executive Officer, members of our Board of Directors and Auditor;

 

   

within three months after the end of each fiscal year, we must submit our financial statements for the fiscal year to the Financial Services Commission;

 

   

the Financial Services Commission has broad authority to require reports from us on any matter and to examine our books, records and other documents. On the basis of the reports and examinations, the Financial Services Commission may issue any orders deemed necessary to enforce the KDB Act;

 

   

the Financial Services Commission must approve our operating manual, which sets out the guidelines for all principal operating matters;

 

   

the Financial Services Commission may supervise our operations to ensure managerial soundness based upon the KDB Decree and the Bank Supervisory Regulations of the Financial Services Commission and may issue orders deemed necessary for such supervision; and

 

   

we may amend our Articles of Incorporation only with the approval of the Financial Services Commission.

 

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.

 

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Selected Financial Statement Data

 

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

 

Consolidated Financial Statement Data

 

The following tables present selected consolidated financial information as of and for the years ended December 31, 2011, 2012 and 2013, which has been derived from our audited consolidated K-IFRS financial statements as of and for the years ended December 31, 2011, 2012 and 2013.

 

     As of December 31,  
     2011      2012      2013  
     (billions of won)  

Statements of Financial Position Data

        

Total Loans(1)

     83,668.9         93,991.7         99,976.0   

Total Borrowings(2)

     103,624.2         113,598.1         123,145.9   

Total Assets

     149,021.8         165,779.6         167,724.7   

Total Liabilities

     128,448.1         144,889.1         148,969.9   

Equity

     20,573.7         20,890.5         18,754.8   

 

(1) Gross amount, which includes loans for facility development, loans for working capital, inter-bank loans, private loans, off-shore loan receivables, loans borrowed from overseas financial institutions, bills bought in foreign currencies, advance payments on acceptances and guarantees and other loans without adjusting for allowance for loan losses, present value discounts and deferred loan fees.
(2) Total Borrowings include due to customers, financial liabilities designated at fair value through profit or loss (“FVTPL”), borrowings and debt issued.

 

     Year Ended
December 31,
 
     2011      2012      2013  
     (billions of won)  

Income Statement Data

        

Total Interest Income

     5,036.8         5,436.2         5,188.4   

Total Interest Expenses

     3,136.7         3,360.9         3,099.7   

Net Interest Income

     1,900.1         2,075.3         2,088.7   

Operating Income (Loss)

     1,642.8         1,109.9         (1,897.6

Net Income (Loss)

     1,340.3         901.8         (1,651.0

 

Separate Financial Statement Data

 

The following tables present selected separate financial information as of and for the years ended December 31, 2011, 2012 and 2013, which has been derived from our audited separate K-IFRS financial statements as of and for the years ended December 31, 2011, 2012 and 2013 included in this prospectus. You should read the following financial statement data together with the financial statements and notes included in this prospectus.

 

     As of December 31,  
     2011      2012      2013  
     (billions of won)  

Statements of Financial Position Data

        

Total Loans(1)

     81,380.7         91,875.2         98,119.8   

Total Borrowings(2)

     99,253.5         108,406.7         117,550.8   

Total Assets

     127,874.4         142,997.3         143,607.5   

Total Liabilities

     110,216.4         124,779.0         127,261.4   

Equity

     17,658.0         18,218.6         16,346.1   

 

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(1) Gross amount, which includes loans for facility development, loans for working capital, inter-bank loans, private loans, off-shore loan receivables, loans borrowed from overseas financial institutions, bills bought in foreign currencies, advance payments on acceptances and guarantees and other loans without adjusting for allowance for loan losses, present value discounts and deferred loan fees.
(2) Total Borrowings include due to customers, financial liabilities designated at FVTPL, borrowings and debt issued.

 

     Year Ended
December 31,
 
     2011      2012      2013  
     (billions of won)  

Income Statement Data

        

Total Interest Income

     4,574.4         5,030.4         4,766.6   

Total Interest Expenses

     2,996.7         3,284.2         3,036.1   

Net Interest Income

     1,577.7         1,746.2         1,730.5   

Operating Income (Loss)

     1,813.2         1,334.3         (858.1

Net Income (Loss)

     1,412.4         946.9         (1,447.4

 

2013

 

We had net loss of ₩1,447.4 billion in 2013 compared to net income of ₩946.9 billion in 2012, on a separate K-IFRS basis.

 

Principal factors for the net loss of ₩1,447.4 billion in 2013 compared to the net income of ₩946.9 billion in 2012 included:

 

   

an increase in provision for loan losses to ₩1,611.5 billion in 2013 from ₩455.4 billion in 2012, primarily due to an increase in non-performing loans;

 

   

an increase in impairment losses on investments in subsidiaries and associates to ₩1,095.4 billion in 2013 from ₩135.3 billion in 2012; the ₩1,095.4 billion of impairment losses on investments in subsidiaries and associates in 2013 reflected principally the impairment loss on investments in Daewoo Engineering & Constructions Co., Ltd. and the ₩135.3 billion of impairment losses on investments in subsidiaries and associates in 2012 reflected principally the impairment loss on investments in our subsidiaries providing banking and financial services;

 

   

net loss on available-for-sale financial assets of ₩200.9 billion in 2013 compared to net gain of ₩130.8 billion in 2012, primarily due to impairment losses on investments in equity securities of companies under restructuring procedures (including STX Pan Ocean Co., Ltd.) in 2013;

 

   

a decrease in net gain on derivatives to ₩251.3 billion in 2013 from ₩385.4 billion in 2012, primarily due to a decrease in valuation gain on derivative financial instruments; and

 

   

a decrease in net fees and commission income to ₩453.7 billion in 2013 from ₩573.7 billion in 2012, primarily due to a decrease in fees from financial advisory, syndication and underwriting.

 

The above factors were partially offset by net gain on financial instruments designated at fair value through profit or loss of ₩45.6 billion in 2013 compared to net loss of ₩64.1 billion in 2012, primarily due to an increase in valuation gains from financial liabilities designated at fair value through profit or loss.

 

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2012

 

We had net income of ₩946.9 billion in 2012 compared to net income of ₩1,412.4 billion in 2011, on a separate K-IFRS basis.

 

Principal factors for the decrease in net income in 2012 compared to 2011 included:

 

   

a decrease in net gain from foreign currency transactions and derivatives to ₩109.4 billion in 2012 from ₩502.6 billion in 2011; the ₩502.6 billion of net gain from foreign currency transactions and derivatives in 2011 principally reflected a one-time valuation gain on Kumho Petrochemical convertible bonds, as embedded derivative instruments (such as conversion rights) were treated as separate derivatives and recorded at fair value under Korean IFRS, commencing in 2011 compared to no such gain in 2012; and

 

   

an increase in provision for loan losses to ₩455.4 billion in 2012 from ₩208.1 billion in 2011, primarily due to an increase in provision for loans to small-and-medium sized enterprises as a result of weak domestic economic conditions.

 

The above factors were partially offset by an increase in net interest income to ₩1,746.2 billion in 2012 from ₩1,577.7 billion in 2011, primarily due to an increase in interest-bearing assets exceeding an increase in interest-bearing liabilities.

 

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, 2013, we established provisions of ₩1,773.2 billion for possible loan losses, 126.6% higher than the provisions as of December 31, 2012 of ₩782.5 billion. 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 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 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, 2013, we have provided loans of ₩3,106.4 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 ₩1,518.1 billion following debt-equity swaps. As of December 31, 2013, we had established provisions of ₩631.3 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, 2012(1)      As of December 31, 2013(1)  
          Loan
Amount
     Loan
Loss
Provisions
     Loan
Amount
     Loan
Loss
Provisions
 
          (billions of won)  

Loan Classification

   Normal(2)    88,282.4       177.5       91,696.7       208.0   
   Precautionary      2,136.4         211.6         3,546.8         509.4   
   Substandard      1,105.3         277.0         2,126.5         609.3   
   Doubtful      18.3         11.1         305.1         205.9   
   Expected Loss      332.8         105.3         444.7         240.7   
     

 

 

    

 

 

    

 

 

    

 

 

 
  

Total

   91,875.2       782.5       98,119.8       1,773.2   
     

 

 

    

 

 

    

 

 

    

 

 

 

 

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(1) These figures include loans for facility development, loans for working capital, inter-bank loans, private loans, off-shore loan receivables, loans borrowed from overseas financial institutions, bills bought in foreign currencies, advance payments on acceptances and guarantees and other loans.
(2) Includes loans guaranteed by the Government. Under Korean IFRS, we establish loan loss provisions for all loans including loans guaranteed by the Government.

 

As of December 31, 2013, our non-performing loans totaled ₩2,876.3 billion, representing 2.9% 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, 2013, our legal reserve was ₩6,022.3 billion, representing 6.1% 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 Kumho Tire Co., Inc., Daehan Shipbuilding Co., Ltd., Shina SB Yard Co., STX Pan Ocean Co., Ltd. and TongYang Cement & Energy. As of December 31, 2013, our credit extended to these companies totaled ₩1,973.1 billion, accounting for 1.4% of our total assets as of such date.

 

As of December 31, 2013, our exposure (including loans classified as substandard or below and equity investment classified as estimated loss or below) to Kumho Tires decreased to ₩1,160.8 billion from ₩1,174.5 billion as of December 31, 2012, primarily due to a decrease in revolving loans. As of December 31, 2013, our exposure to Daehan Shipbuilding was ₩198.1 billion, a slight increase from ₩195.7 billion as of December 31, 2012, primarily due to the extension of new loans. As of December 31, 2013, our exposure to Shina SB Yard decreased to ₩211.4 billion from ₩394.2 billion as of December 31, 2012, primarily due to a decrease in revolving loans. As of December 31, 2013, our exposure to STX Pan Ocean decreased to ₩182.0 billion from ₩358.8 billion as of December 31, 2012, primarily due to debt-to-equity swaps. As of December 31, 2013, our exposure to TongYang Cement & Energy decreased to ₩220.8 billion from ₩273.6 billion as of December 31, 2012, primarily due to the repayment of debt.

 

As of December 31, 2013, we established provisions of ₩26.1 billion for our exposure to Kumho Tires, ₩1.4 billion for Daehan Shipbuilding, ₩7.4 billion for Shina SB Yard, ₩30.6 billion for STX Pan Ocean and ₩8.6 billion for TongYang Cement & Energy.

 

In January 2010, Kumho Tires Co., Inc. and Kumho Industrial Co., Ltd. agreed with their creditors, including us, to begin an out-of-court debt restructuring program under the Corporate Restructuring Promotion Act. In March and May 2010, the creditors of these companies agreed on work-out plans, which included debt-to-equity swaps and extensions of additional credit. In connection with these work-out plans, we provided emergency loans of ₩100.0 billion and ₩280.0 billion to Kumho Tires and Kumho Industrial, respectively. We and other creditors of Kumho Tires and Kumho Industrial decided to freeze the repayment of both companies’ debt until December 31, 2014. In addition, we and other creditors of Kumho Petrochemical Co., Ltd. and Asiana Airlines decided to freeze the repayment of both companies’ debt until December 31, 2011, which was later extended to December 31, 2012. These four companies are members of Kumho Asiana Group, which has been undergoing financial difficulties resulting from its heavily leveraged purchase of Daewoo Engineering & Construction Co., Ltd. (“Daewoo E&C”) in 2006. We, a main creditor of Kumho Asiana Group, acquired 50.75% of Daewoo E&C by participating in a ₩1,000.0 billion rights issue in December 2010 and by acquiring ₩2,178.5 billion of additional equity shares through our private equity arm in January 2011. In addition, in December 2011, we converted convertible bonds of Kumho Petrochemical Co., Ltd. into 14.1% of the latter’s equity shares. In March 2012, we increased our equity interest in Kumho Industrial from 5.99% to 6.34% by participating in a debt-to-equity swap, but our equity interest decreased to 5.44% following a capital contribution by the former controlling shareholders in June 2012.

 

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As of December 31, 2013, our exposure to Kumho Tires, Kumho Industrial, Kumho Petrochemical and Asiana Airlines was ₩1,160.8 billion, ₩163.4 billion, ₩1,357.3 billion and ₩708.2 billion, respectively. As of December 31, 2013, we established provisions of ₩26.1 billion, ₩2.4 billion, ₩0.3 billion and ₩0.7 billion for our exposure to Kumho Tires, Kumho Industrial, Kumho Petrochemical and Asiana Airlines, respectively.

 

In 2013, 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 and working capital loans to private Korean enterprises that undertake major industrial projects. 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:

 

   

the economic benefits of the project to the Republic;

 

   

the extent to which the project serves priorities established by the Government’s industrial policy;

 

   

the project’s operational feasibility;

 

   

the loan’s and the project’s profitability; and

 

   

the quality of the borrower’s management.

 

We charge, on average, interest of 2.3% 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.

 

We generally obtain collateral valued in excess of the original loan from large companies and up to the value of the loan from small- and medium-sized companies. Depending on the type of borrower and loan, the collateral may be equipment purchased with the loan proceeds, industrial plants, real estate and marketable securities. We appraise the value of our collateral at least once a year.

 

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

 

Loans(1)

 

     December 31,  
     2012      2013  
     (billions of won)  

Equipment Capital Loans:

     

Domestic Currency

   31,787.1       33,839.6   

Foreign Currency(2)

     7,529.7         6,467.8   
  

 

 

    

 

 

 
     39,316.8         40,307.4   

Working Capital Loans:

     

Domestic Currency(3)

     25,239.1         29,761.2   

Foreign Currency(2)

     4,274.1         5,425.0   
  

 

 

    

 

 

 
     29,513.3         35,186.2   

Other Loans(4)

     23,045.1         22,626.2   
  

 

 

    

 

 

 

Total Loans

   91,875.2       98,119.8   
  

 

 

    

 

 

 

 

(1) Includes loans extended to affiliates.
(2) Includes loans disbursed and repayable in Won, the amounts of which are based upon an equivalent amount of foreign currency. This type of loan totaled ₩7,971.6 billion as of December 31, 2012 and ₩6,751.2 billion as of December 31, 2013. See “—Operations—Loan Operations—Loans by Categories—Local Currency Loans Denominated in Foreign Currencies.”
(3) Includes loans on households.
(4) Includes inter-bank loans, private loans, off-shore loan receivables, loans borrowed from overseas financial institutions, bills bought in foreign currencies, advance payments on acceptances and guarantees and other loans.

 

As of December 31, 2013, we had ₩98,119.8 billion in outstanding loans, which represents a 6.7% increase from ₩91,875.2 billion of outstanding loans as of December 31, 2012.

 

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)

 

     December 31,      As % of
December 31, 2013
Total
 
     2012      2013     
     (billions of won, except percentages)  

Loans with Remaining Maturities of One Year or Less

   28,788.7       34,820.8         46.1

Loans with Remaining Maturities of More Than One Year

     40,041.4         40,672.8         53.9
  

 

 

    

 

 

    

 

 

 

Total

   68,830.1       75,493.6         100.0
  

 

 

    

 

 

    

 

 

 

 

(1) Includes loans extended to affiliates.

 

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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)

 

     December 31,     As % of
December 31, 2013
Total
 
     2012     2013    
     (billions of won, except percentages)  

Manufacturing

   38,957.8      42,969.6        56.9

Banking and Insurance

     7,326.5        7,253.6        9.6   

Transportation and Communication

     5,808.5        5,768.5        7.6   

Public Administration

     414.5        30.6        0.1   

Electric, Gas and Water Supply Industry

     1,979.4        2,293.0        3.0   

Others

     14,343.3        17,178.3        22.8   
  

 

 

   

 

 

   

 

 

 

Total

   68,830.1      75,493.6        100.0
  

 

 

   

 

 

   

 

 

 

Percentage increase from previous period

     16.0     9.7  

 

(1) Includes loans extended to affiliates.

 

The manufacturing sector accounted for 56.9% of our outstanding equipment capital and working capital loans as of December 31, 2013. As of December 31, 2013, loans to the transportation equipment manufacturing businesses and chemical product manufacturing businesses accounted for 14.9% and 14.1%, respectively, of our outstanding equipment capital and working capital loans to the manufacturing sector.

 

Hyundai Steel was our single largest borrower as of December 31, 2013, accounting for 1.3% of our outstanding equipment capital and working capital loans. As of December 31, 2013, our five largest borrowers and 20 largest borrowers accounted for 6.1% and 15.9%, respectively, of our outstanding equipment capital and working capital loans. The following table breaks down the equipment capital and working capital loans to our 20 largest borrowers outstanding as of December 31, 2013 by industry sector:

 

20 Largest Borrowers by Industry Sector

 

     As % of December 31, 2013
Total Outstanding Equipment
Capital and Working Capital
Loans
 

Manufacturing

     51.6

Banking and Insurance

     18.4   

Transportation and Communication

     12.4   

Public Administration

     3.0   

Others

     14.6   
  

 

 

 

Total

     100.0
  

 

 

 

 

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

 

New Loans by Industry Sector

 

     Year Ended December 31,     As % of Year
Ended
December 31, 2013
Total
 
     2012     2013    
     (billions of won, except percentages)  

Manufacturing

   19,113.8      22,082.3        59.6

Banking and Insurance

     3,246.0        2,594.2        7.0   

Transportation and Communication

     2,071.1        2,386.7        6.4   

Electric, Gas and Water Supply Industry

     559.0        524.4        1.4   

Others

     8,046.0        9,488.7        25.6   
  

 

 

   

 

 

   

 

 

 

Total

   33,035.9      37,076.3        100.0
  

 

 

   

 

 

   

 

 

 

Percentage increase (decrease) from previous period

     21.0     12.2  

 

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:

 

   

industrial fund loans;

 

   

foreign currency loans;

 

   

local currency loans denominated in foreign currencies;

 

   

offshore loans in foreign countries; and

 

   

government fund loans.

 

See “—Financial Statements and the Auditors—Notes to Separate Financial Statements of December 31, 2013 and 2012—Note 8” for more information on the types of credit extended by us and the amounts of each type outstanding as of December 31, 2013.

 

The following table sets out equipment capital and working capital loans by categories as of December 31, 2013:

 

     Equipment
Capital Loans(1)
    Working
Capital Loans(1)
 
     December 31,
2013
     %     December 31,
2013
     %  
     (billions of won, except percentages)  

Industrial fund loans

   30,473.7         75.6   26,228.5         74.5

Foreign currency loans

     5,300.7         13.1        1,184.0         3.4   

Offshore loans in foreign currencies

     1,167.1         2.8        3,974.5         11.3   

Government fund loans

     564.7         1.4        —           —     

Overdraft

     —           —          760.7         2.2   

Others(1)

     2,801.2         6.9        3,038.5         8.6   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   40,307.4         100.0   35,186.2         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Includes loans on households and loans extended to affiliates.

 

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.

 

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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:

 

   

the purchase of industrial equipment and the implementation of overseas industrial projects by overseas subsidiaries and branches of Korean companies; and

 

   

the overseas industrial development projects of foreign government entities, international organizations and foreign companies.

 

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:

 

   

water supply and drainage facilities;

 

   

the Seoul subway system;

 

   

freight terminal facilities;

 

   

hospitals; and

 

   

other facilities.

 

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:

 

   

the Tourism Promotion Fund (hotel and resort projects);

 

   

the Rational Use of Energy Fund (energy conservation projects and collective energy supply projects); and

 

   

the Small- and Medium-sized Enterprises Promotion Fund (small- and medium-sized enterprises).

 

For further information relating to such loans, see “—Sources of Funds” and “—Financial Statements and the Auditors—Notes to Separate Financial Statements of December 31, 2013 and 2012—Note 8.”

 

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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

 

     As of December 31,  
     2012      2013  
     (billions of won)  

Acceptances

   723.5       766.1   

Guarantees on local borrowing

     784.3         821.3   

Guarantees on foreign borrowing

     6,699.3         5,949.6   

Letter of guarantee for importers

     46.7         42.4   
  

 

 

    

 

 

 

Total

   8,253.8       7,579.4   
  

 

 

    

 

 

 

 

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 ₩3.3 trillion, based on exchange rates prevailing on the guarantee issuance date, February 25, 2003. As of December 31, 2013, the aggregate outstanding principal amount of KEPCO’s debt securities that are covered by our guarantees was ₩186.5 billion. The guarantees described above 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.

 

KoFC, which indirectly owns 90.3% of our paid-in capital, currently owns approximately 29.9% of the outstanding shares of common stock of KEPCO, and the Government, which indirectly owns all of our paid-in capital, owns an additional 21.2% 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 Government specifically instructs us to do so. 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

 

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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 decreased to ₩7,241.2 billion as of December 31, 2013 from ₩8,439.6 billion as of December 31, 2012.

 

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, 2013, the cost basis of our equity investments subject to restriction under the KDB Act and our Articles of Incorporation totaled ₩7,241.2 billion, equal to 23.7% 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, 2013:

 

Equity Investments

 

     Book Value as of
December 31, 2013
 
     (billions of won)  

Electric, Gas and Water Supply Industry

   98.8   

Construction

     36.7   

Banking and Insurance

     3,804.2   

Real Estate Business

     114.3   

Manufacturing

     1,335.7   

Transportation and Communication

     1,620.8   

Others

     230.7   
  

 

 

 

Total

   7,241.2   
  

 

 

 

 

As of December 31, 2013, we held total equity investments, on a book value basis, of ₩1,566.0 million in two of our five largest borrowers and ₩2,380.7 billion in eight of our 20 largest borrowers. We have not established a policy addressing loans to enterprises in which we hold equity interests or equity interests in enterprises to which we have extended loans.

 

When possible, we use the prevailing market price of a security to determine the value of our interest. However, if no readily ascertainable market value exists for our holdings, we record these investments at the cost of acquisition. With respect to our equity interests in enterprises in which we hold more than 15% of interest, we value these investments annually, with certain exceptions, on a net asset value basis when the investee company releases its financial statements. As of December 31, 2013, the aggregate value of our equity investments accounted for approximately 86.2% of their aggregate cost basis.

 

As part of our investment activities, we underwrite straight and convertible bond issuances in Won for domestic corporations. We also invest in municipal bonds, extending funds to municipalities at subsidized interest rates, mostly to finance water supply and drainage infrastructure projects.

 

Other Activities

 

We engage in a range of industrial development activities in addition to providing loans and guarantees, including:

 

   

conducting economic and industrial research;

 

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performing engineering surveys;

 

   

providing business analyses and managerial assistance; and

 

   

offering trust services.

 

As of December 31, 2013, we held in trust cash and other assets totaling ₩30,723.9 billion, and we generated in 2013 trust fee income equaling ₩249.4 billion. As of December 31, 2012, we held in trust cash and other assets totaling ₩24,398.4 billion, and we generated in 2012 trust fee income equaling ₩506.9 billion. Pursuant to Korean law, we segregate trust assets from our other assets; trust assets are not available to satisfy claims of our depositors or other creditors. Accordingly, we account for our trust accounts separately from our banking accounts. However, if our trust operations fail to preserve the principal of our clients’ trust assets, we are responsible for covering the deficit either from previously established provisions in our trust accounts or by a transfer from our banking accounts. In 2012 and 2013, we did not transfer any funds from our banking accounts to cover deficits in our trust accounts. Surplus funds generated by the trust assets may be deposited into the clients’ accounts and earn interest. We reflect trust fees earned by us on our trust account management services as other operating revenues in the income statement of the banking accounts.

 

Sources of Funds

 

In addition to our capital and reserves, we obtain funds primarily from:

 

   

borrowings from the Government;

 

   

issuances of bonds in the domestic and international capital markets;

 

   

borrowings from international financial institutions or foreign banks; and

 

   

deposits.

 

All of our borrowings are unsecured.

 

Borrowings from the Government

 

We borrow from the Government’s general purpose funds and its special purpose funds. General purpose loans generally are in Won and have fixed interest rates and maturities ranging from five to 20 years. We incur special purpose loans, principally from the Tourism Promotion Fund, the Rational Use of Energy Fund and the Small- and Medium-sized Enterprises Promotion Fund, in connection with specific projects we finance. The Government links the interest rate and maturity of each special purpose borrowing to the terms of the financing we provide for the specific project.

 

The following table sets out our Government borrowings as of December 31, 2013:

 

Type of Funds Borrowed

   As of
December 31, 2013
 
     (billions of won)  

General Purpose

   564.3   

Special Purpose

     4,041.1   
  

 

 

 

Total

   4,605.4   
  

 

 

 

 

Domestic and International Capital Markets

 

We issue industrial finance bonds both in Korea and abroad, some of which the Government directly guarantees. We generally issue domestic bonds at fixed interest rates with original maturities of one to ten years.

 

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The following table sets out the outstanding balance of our industrial finance bonds as of December 31, 2013:

 

Outstanding Balance

   As of
December 31, 2013
 
     (billions of won)  

Denominated in Won

   37,236.8   

Denominated in Other Currencies

     19,495.4   
  

 

 

 

Total

   56,732.2   
  

 

 

 

 

The KDB Act provides that the aggregate outstanding principal amount of our industrial finance bonds, other than those directly guaranteed or purchased by the Government, plus the aggregate outstanding amount of our on-balance sheet and off-balance sheet guarantee obligations, other than those excepted by statute, may not exceed 30 times the sum of our paid-in capital and our reserve from profit. As of December 31, 2013, the aggregate amount of our industrial finance bonds and guarantee obligations (including guarantee obligations relating to loans that had not been borrowed as of December 31, 2013) was ₩68,645.2 billion, equal to 15.0% of our authorized amount under the KDB Act, which was ₩458,523.7 billion.

 

Foreign Currency Borrowings

 

We borrow money from institutions, principally syndicates of commercial banks, outside the Republic in foreign currencies. We frequently enter into related interest rate and currency swap transactions. The loans generally have original maturities of one to five years. As of December 31, 2013, the outstanding amount of our foreign currency borrowings was US$12.3 billion.

 

Our long term and short term foreign currency borrowings increased to ₩12,938.4 billion as of December 31, 2013 from ₩12,341.3 billion as of December 31, 2012.

 

Deposits

 

We take demand deposits and time and savings deposits from the general public. Time and savings deposits generally have maturities shorter than three years and bear interest at fixed rates. As of December 31, 2013, demand deposits held by us totaled ₩2,223.1 billion and time and savings deposits held by us totaled ₩33,805.9 billion.

 

Debt

 

Debt Repayment Schedule

 

The following table sets out our principal repayment schedule as of December 31, 2013:

 

Debt Principal Repayment Schedule(1)

 

     Maturing on or before December 31,  

Currency(2)(3)

   2014      2015      2016      2017      Thereafter  
     (billions of won)  

Won

   14,698.0       9,334.8       6,631.0       2,074.5       9,795.7   

Foreign

     16,321.2         4,629.1         4,130.7         2,787.9         4,863.9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Won Equivalent

   31,019.2       13,963.9       10,761.7       4,862.4       14,659.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Excludes bonds sold under repurchase agreements and call money.

 

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(2) Borrowings in foreign currencies have been translated into Won at the market average exchange rates on December 31, 2013, as announced by the Seoul Money Brokerage Services Ltd.
(3) We categorize debt with respect to which we have entered into currency swap agreements by our repayment currency under such agreements.

 

The following table summarizes, as of December 31 of the years indicated, the outstanding direct internal debt of KDB:

 

Direct Internal Debt of KDB

 

     (billions of Won)  

2010

   36,802.2   

2011

     39,185.4   

2012

     37,515.4   

2013

     46,237.4   

 

The following table summarizes, as of December 31 of the years indicated, the outstanding direct external debt of KDB:

 

Direct External Debt of KDB

 

     (billions of Won)  

2010

   26,476.2   

2011

     31,107.9   

2012

     29,780.4   

2013

     31,080.3   

 

The following table sets out, by currency and the equivalent amount in U.S. Dollars, the outstanding external bonds of KDB as of December 31, 2013:

 

External Bonds of KDB

 

     Amount in
Original
Currency
     Equivalent
Amount in
U.S. Dollars(1)
 
     (millions)  

US$

   US$ 11,375.0       US$  11,375.0   

Japanese yen (¥)

   ¥ 95,500.0         934.8   

Euro (EUR)

   EUR 1,585.0         2,079.4   

Singapore dollar (SGD)

   SGD 357.0         277.9   

Hong Kong dollar (HKD)

   HKD 3,744.0         481.5   

Chinese offshore renminbi (CNH)

   CNH 2,035.0         323.0   

Swiss franc (CHF)

   CHF 580.0         606.5   

Brazilian real (BRL)

   BRL 598.5         305.8   

Australian dollar (AUD)

   AUD 622.5         620.9   

Thai Baht (THB)

   THB 3,000.0         99.3   

Malaysian Ringgit (MYR)

   MYR 500.0         163.5   

Turkish Lira (TRY)

   TRY 443.9         240.9   

Indian Rupee (INR)

   INR 1,070.0         19.9   

Mexican Peso (MXN)

   MXN 144.0         10.8   

Norwegian Krone (NOK)

   NOK 300.0         50.0   

South African Rand (ZAR)

   ZAR 822.0         80.1   
     

 

 

 

Total

      US$ 17,669.3   
     

 

 

 

 

(1) Amounts expressed in currencies other than US$ are converted to US$ at the exchange rate announced by the Seoul Money Brokerage Services, Ltd. in effect on December 31, 2013.

 

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For further information on the outstanding indebtedness of KDB, see “—Tables and Supplementary Information.”

 

Debt Record

 

We have never defaulted in the payment of principal or interest on any of our obligations.

 

Overseas Operations

 

We operate overseas subsidiaries in Hong Kong, Dublin, Budapest, Sao Paulo and Tashkent. The subsidiaries engage in a variety of banking and merchant banking services, including:

 

   

managing and underwriting new securities issues;

 

   

syndicating medium and long-term loans;

 

   

trading securities;

 

   

trading in the money market; and

 

   

providing investment management and advisory services.

 

We currently maintain eight branches in Tokyo, Shanghai, Singapore, New York, London, Beijing, Guangzhou and Shenyang and six overseas representative offices in Frankfurt, Ho Chi Minh City, Abu Dhabi, Yangon, Moscow and Bangkok.

 

Property

 

Our head office is located at 14 Eunhaeng-ro Yeongdeungpo-gu, Seoul, Korea, a 35,996 square meter building completed in July 2001 and owned by us. In addition to the head office, we maintain 65 branches in major cities throughout the Republic, including 24 in Seoul. We generally own our domestic office space and lease our overseas offices under long-term leases.

 

Directors and Management; Employees

 

Our Board of Directors has ultimate responsibility for management of our affairs. Under the KDB Act and our Articles of Incorporation, our Board of Directors is to consist of not more than nine directors, including our Chief Executive Officer and Chairman of the Board of Directors. Under the KDB Act, we elect our directors, including our Chief Executive Officer and Chairman of the Board of Directors, at a general meeting of shareholders. Under our Articles of Incorporation, our executive directors serve for three-year terms and our independent non-executive directors serve for not more than two years as determined by the general meeting of shareholders, and they may be re-appointed. Currently, the members of our Board of Directors are:

 

Position

  

Name

   Expiration of Term

Chief Executive Officer and Chairman of the Board of Directors:

   Kyttack Hong    April 8, 2016

Chief Operating Officer and Vice Chairman of the Board of Directors

   Heui Kyoung Ryu    February 2, 2017

Independent Directors

   Sang Heon Kim    April 26, 2016
   Cheol-Joon Kang    April 26, 2016
   Hi-Taek Shin    August 1, 2015
   Hay-Young Chung    February 12, 2016

 

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As of December 31, 2013, we employed 2,891 persons with 1,641 located in our Seoul head office.

 

Tables and Supplementary Information

 

A. External Debt of KDB

 

(1) External Bonds of KDB

 

Currency

   Original
Principal
Amount
     Interest Rate
(%)
     Issue Date    Maturity Date    Principal Amount
Outstanding as of
December 31, 2013
 

USD

     300,000,000         8       January 23, 2009    January 23, 2014      300,000,000   

USD

     1,700,000,000         8       January 23, 2009    January 23, 2014      1,700,000,000   

USD

     50,000,000         3M USD Libor + 4.3       May 13, 2009    May 13, 2016      50,000,000   

USD

     550,000,000         4.375       February 10, 2010    August 10, 2015      550,000,000   

USD

     200,000,000         4.375       February 10, 2010    August 10, 2015      200,000,000   

USD

     450,000,000         3.250       September 9, 2010    March 9, 2016      450,000,000   

USD

     250,000,000         3.250       September 9, 2010    March 9, 2016      250,000,000   

USD

     200,000,000         3.250       September 9, 2010    March 9, 2016      200,000,000   

USD

     750,000,000         4.000       March 9, 2011    September 9, 2016      750,000,000   

USD

     20,000,000         3M USD Libor + 1.00       June 2, 2011    June 2, 2014      20,000,000   

USD

     700,000,000         3.875       November 4, 2011    May 4, 2017      700,000,000   

USD

     300,000,000         3.875       November 4, 2011    May 4, 2017      300,000,000   

USD

     150,000,000         3.50       February 22, 2012    August 22, 2017      150,000,000   

USD

     100,000,000         3.50       February 22, 2012    August 22, 2017      100,000,000   

USD

     250,000,000         3.50       February 22, 2012    August 22, 2017      250,000,000   

USD

     20,000,000         3M USD Libor + 1.25       May 2, 2012    May 2, 2014      20,000,000   

USD

     19,000,000         1.77       May 11, 2012    May 12, 2014      19,000,000   

USD

     20,000,000         3M USD Libor + 1.25       May 14, 2012    May 14, 2014      20,000,000   

USD

     15,000,000         3M USD Libor + 1.45       June 15, 2012    June 15, 2015      15,000,000   

USD

     20,000,000         3M USD Libor + 1.25       June 25, 2012    June 25, 2014      20,000,000   

USD

     500,000,000         3.50       July 5, 2012    August 22, 2017      500,000,000   

USD

     20,000,000         1.60       August 17, 2012    August 17, 2014      20,000,000   

USD

     300,000,000         3.00       September 14, 2012    September 14, 2022      300,000,000   

USD

     350,000,000         3.00       September 14, 2012    September 14, 2022      350,000,000   

USD

     100,000,000         3.00       September 14, 2012    September 14, 2022      100,000,000   

USD

     20,000,000         3M USD Libor + 0.95       September 27, 2012    September 29, 2015      20,000,000   

USD

     50,000,000         3M USD Libor + 0.80       October 17, 2012    October 17, 2014      50,000,000   

USD

     50,000,000         3M USD Libor + 0.70       December 3, 2012    December 3, 2014      50,000,000   

USD

     200,000,000         1.00       January 22, 2013    January 22, 2016      200,000,000   

USD

     300,000,000         1.00       January 22, 2013    January 22, 2016      300,000,000   

USD

     500,000,000         1.50       January 22, 2013    January 22, 2018      500,000,000   

USD

     50,000,000         3M USD Libor + 0.40       February 4, 2013    February 4, 2014      50,000,000   

USD

     50,000,000         3M USD Libor + 0.35       February 12, 2013    February 12, 2014      50,000,000   

USD

     25,000,000         3M USD Libor + 0.30       March 18, 2013    March 19, 2014      25,000,000   

USD

     30,000,000         3M USD Libor + 0.60       March 21, 2013    March 21, 2016      30,000,000   

USD

     96,000,000         0.96       April 25, 2013    April 25, 2014      96,000,000   

USD

     25,000,000         0.80       May 7, 2013    May 8, 2014      25,000,000   

USD

     30,000,000         3M USD Libor + 1.00       June 10, 2013    June 10, 2018      30,000,000   

USD

     45,000,000         0.87       July 5, 2013    July 7, 2014      45,000,000   

USD

     40,000,000         3M USD Libor + 0.45       August 20, 2013    August 20, 2014      40,000,000   

USD

     110,000,000         0.77       August 20, 2013    August 20, 2014      110,000,000   

USD

     150,000,000         0.90       August 20, 2013    February 20, 2015      150,000,000   

USD

     23,500,000         1.17       August 20, 2013    August 20, 2015      23,500,000   

USD

     76,500,000         3M USD Libor + 0.70       August 20, 2013    August 20, 2015      76,500,000   

USD

     250,000,000         4.00       August 27, 2013    September 9, 2016      250,000,000   

USD

     300,000,000         3.00       September 17, 2013    March 17, 2019      300,000,000   

USD

     450,000,000         3.00       September 17, 2013    March 17, 2019      450,000,000   

USD

     35,000,000         1.24       September 17, 2013    March 17, 2019      35,000,000   

USD

     25,000,000         1.10       October 7, 2013    October 2, 2015      25,000,000   

USD

     20,000,000         3M USD Libor + 0.40       October 25, 2013    October 27, 2014      20,000,000   

USD

     100,000,000         0.68       October 29, 2013    October 30, 2014      100,000,000   

USD

     40,000,000         3.81       October 30, 2013    October 30, 2023      40,000,000   

USD

     30,000,000         4.00       November 1, 2013    November 1, 2023      30,000,000   

 

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Currency

   Original
Principal
Amount
     Interest Rate
(%)
     Issue Date    Maturity Date    Principal Amount
Outstanding as of
December 31, 2013
 

USD

     50,000,000         3.74       November 5, 2013    November 5, 2023      50,000,000   

USD

     50,000,000         3.70       November 6, 2013    November 6, 2023      50,000,000   

USD

     100,000,000         3M USD Libor + 0.85       November 8, 2013    November 8, 2016      100,000,000   

USD

     30,000,000         3.79       November 13, 2013    November 13, 2023      30,000,000   

USD

     50,000,000         3.8       November 13, 2013    November 13, 2023      50,000,000   

USD

     50,000,000         3.75       November 15, 2013    November 15, 2023      50,000,000   

USD

     50,000,000         3M USD Libor + 0.34       November 18, 2013    November 19, 2014      50,000,000   

USD

     20,000,000         3.66       November 26, 2013    November 26, 2023      20,000,000   

USD

     60,000,000         3.68       November 26, 2013    November 26, 2023      60,000,000   

USD

     100,000,000         3M USD Libor + 0.45       December 11, 2013    June 11, 2015      100,000,000   

USD

     50,000,000         3.8       December 12, 2013    December 12, 2023      50,000,000   

USD

     20,000,000         3.8       December 18, 2013    December 18, 2023      20,000,000   

USD

     20,000,000         3.81       December 18, 2013    December 18, 2023      20,000,000   
              

 

 

 
        Subtotal in Original Currency    USD 11,375,000,000   
              

 

 

 
        Subtotal in Equivalent Amount of Won(1)    12,004,037,500   
              

 

 

 

THB

     3,000,000,000         3.880       May 27, 2011    May 27, 2014      3,000,000,000   
              

 

 

 
        Subtotal in Original Currency    THB 3,000,000,000   
              

 

 

 
        Subtotal in Equivalent Amount of Won(2)    96,420,000,000   
              

 

 

 

SGD

     30,000,000         5.65       May 18, 2009    May 18, 2014      30,000,000   

SGD

     40,000,000         5.65       May 18, 2009    May 18, 2014      40,000,000   

SGD

     15,000,000         5.02       May 29, 2009    May 29, 2014      15,000,000   

SGD

     30,000,000         1.73       June 16, 2011    June 16, 2014      30,000,000   

SGD

     30,000,000         1.68       July 6, 2011    July 6, 2014      30,000,000   

SGD

     30,000,000         1.70       July 12, 2011    July 14, 2014      30,000,000   

SGD

     30,000,000         3M SGD SOR + 0.30       January 31, 2013    January 31, 2014      30,000,000   

SGD

     60,000,000         0.57       February 22, 2013    February 24, 2014      60,000,000   

SGD

     36,000,000         0.88       March 21, 2013    March 21, 2016      36,000,000   

SGD

     30,000,000         0.90       April 24, 2013    April 25, 2014      30,000,000   

SGD

     26,000,000         0.78       July 16, 2013    July 17, 2014      26,000,000   
              

 

 

 
        Subtotal in Original Currency    SGD 357,000,000   
              

 

 

 
        Subtotal in Equivalent Amount of Won(3)    297,291,750,000   
              

 

 

 

JPY

     15,000,000,000         3.22       May 30, 2008    May 30, 2018      15,000,000,000   

JPY

     7,000,000,000         2.97       September 14, 2009    September 12, 2014      7,000,000,000   

JPY

     2,000,000,000         0.55       August 26, 2011    August 26, 2014      2,000,000,000   

JPY

     600,000,000         1.57       October 21, 2011    October 21, 2014      600,000,000   

JPY

     2,400,000,000         1.91       October 21, 2011    October 21, 2016      2,400,000,000   

JPY

     2,000,000,000         1.21       January 30, 2012    January 30, 2015      2,000,000,000   

JPY

     21,200,000,000         1.05       June 20, 2012    June 20, 2014      21,200,000,000   

JPY

     5,100,000,000         1.17       June 20, 2012    June 19, 2015      5,100,000,000   

JPY

     3,700,000,000         1.31       June 20, 2012    June 20, 2017      3,700,000,000   

JPY

     20,000,000,000         0.54       June 7, 2013    June 5, 2015      20,000,000,000   

JPY

     3,500,000,000         0.66       June 7, 2013    June 7, 2016      3,500,000,000   

JPY

     6,500,000,000         0.89       June 7, 2013    June 7, 2018      6,500,000,000   

JPY

     4,500,000,000         0.47       November 11, 2013    November 11, 2015      4,500,000,000   

JPY

     2,000,000,000         0.33       November 18, 2013    November 19, 2014      2,000,000,000   
              

 

 

 
        Subtotal in Original Currency    JPY 95,500,000,000   
              

 

 

 
        Subtotal in Equivalent Amount of Won(4)    959,450,300,000   
              

 

 

 

HKD

     150,000,000         5.00       November 20, 2007    November 20, 2017      150,000,000   

HKD

     80,000,000         4.71       December 18, 2007    December 18, 2017      80,000,000   

HKD

     300,000,000         3.25       July 20, 2010    July 20, 2015      300,000,000   

HKD

     200,000,000         2.33       April 14, 2011    April 14, 2014      200,000,000   

HKD

     133,000,000         2.12       September 29, 2011    September 29, 2014      133,000,000   

HKD

     144,000,000         3.30       October 20, 2011    October 20, 2016      144,000,000   

HKD

     303,000,000         4.30       October 21, 2011    October 21, 2021      303,000,000   

HKD

     320,000,000         2.37       February 18, 2011    February 18, 2014      320,000,000   

HKD

     150,000,000         2.37       May 3, 2011    November 3, 2014      150,000,000   

HKD

     170,000,000         2.07       July 9, 2011    December 9, 2014      170,000,000   

HKD

     200,000,000         1.70       September 6, 2011    September 6, 2014      200,000,000   

HKD

     219,000,000         2.40       September 6, 2011    September 6, 2016      219,000,000   

 

26


Table of Contents

Currency

   Original
Principal
Amount
     Interest Rate
(%)
     Issue Date    Maturity Date    Principal Amount
Outstanding as of
December 31, 2013
 

HKD

     89,000,000         3.60       September 16, 2011    September 16, 2021      89,000,000   

HKD

     500,000,000         2.80       April 3, 2012    April 3, 2017      500,000,000   

HKD

     326,000,000         1.40       November 23, 2012    November 23, 2015      326,000,000   

HKD

     300,000,000         1.82       April 26, 2013    April 26, 2018      300,000,000   

HKD

     160,000,000         2.28       October 31, 2013    October 31, 2018      160,000,000   
              

 

 

 
        Subtotal in Original Currency    HKD 3,744,000,000   
              

 

 

 
        Subtotal in Equivalent Amount of Won(5)    509,520,960,000   
              

 

 

 

CNH

     1,000,000,000         3.3       June 21, 2012    June 21, 2015      1,000,000,000   

CNH

     600,000,000         3.3       September 13, 2012    June 21, 2015      600,000,000   

CNH

     75,000,000         2.7       May 8, 2013    November 8, 2014      75,000,000   

CNH

     150,000,000         4.45       November 8, 2013    November 8, 2023      150,000,000   

CNH

     210,000,000         4.1       December 18, 2013    December 18, 2023      210,000,000   
              

 

 

 
        Subtotal in Original Currency    CNH 2,035,000,000   
              

 

 

 
        Subtotal in Equivalent Amount of Won(6)    353,967,900,000   
              

 

 

 

EUR

     300,000,000         3M Euribor + 0.24       April 3, 2007    April 3, 2014      300,000,000   

EUR

     50,000,000         1.015       November 6, 2012    November 6, 2015      50,000,000   

EUR

     20,000,000         1.17       December 24, 2012    December 15, 2017      20,000,000   

EUR

     35,000,000         3M Euribor + 0.15       February 4, 2013    February 4, 2014      35,000,000   

EUR

     40,000,000         3M Euribor + 0.40       April 30, 2013    April 30, 2014      40,000,000   

EUR

     260,000,000         3M Euribor + 0.40       April 30, 2013    April 30, 2014      260,000,000   

EUR

     200,000,000         1.50       May 30, 2013    May 30, 2018      200,000,000   

EUR

     300,000,000         1.50       May 30, 2013    May 30, 2018      300,000,000   

EUR

     200,000,000         1.50       July 23, 2013    May 30, 2018      200,000,000   

EUR

     35,000,000         3M Euribor + 0.30       October 28, 2013    October 29, 2014      35,000,000   

EUR

     35,000,000         3M Euribor + 0.30       October 29, 2013    October 30, 2014      35,000,000   

EUR

     20,000,000         3M Euribor + 0.30       November 8, 2013    November 10, 2014      20,000,000   

EUR

     30,000,000         3M Euribor + 0.30       November 8, 2013    November 10, 2014      30,000,000   

EUR

     25,000,000         3M Euribor + 0.29       November 26, 2013    November 28, 2014      25,000,000   

EUR

     35,000,000         3M Euribor + 0.31       November 26, 2013    December 29, 2014      35,000,000   
              

 

 

 
        Subtotal in Original Currency    EUR 1,585,000,000   
              

 

 

 
        Subtotal in Equivalent Amount of Won(7)    2,308,172,100,000   
              

 

 

 

CHF

     200,000,000         1.750       October 1, 2010    October 1, 2014      200,000,000   

CHF

     180,000,000         1.438       May 23, 2012    May 23, 2016      180,000,000   

CHF

     180,000,000         1.000       December 21, 2012    December 21, 2018      180,000,000   

CHF

     20,000,000         1.000       April 22, 2013    April 23, 2014      20,000,000   
              

 

 

 
        Subtotal in Original Currency    CHF 580,000,000   
              

 

 

 
        Subtotal in Equivalent Amount of Won(8)    689,428,600,000   
              

 

 

 

BRL

     150,000,000         7.35       February 27, 2012    February 27, 2015      150,000,000   

BRL

     45,500,000         7.02       June 19, 2012    June 21, 2017      45,500,000   

BRL

     403,000,000         5.81       July 3, 2012    July 2, 2015      403,000,000   
              

 

 

 
        Subtotal in Original Currency    BRL 598,500,000   
              

 

 

 
        Subtotal in Equivalent Amount of Won(9)    267,379,875,000   
              

 

 

 

AUD

     400,000,000         3M BBSW + 1.15       December 7, 2012    December 7, 2015      400,000,000   

AUD

     100,000,000         4.50       April 30, 2013    April 30, 2018      100,000,000   

AUD

     20,000,000         4.14       May 16, 2013    May 16, 2016      20,000,000   

AUD

     25,000,000         3M BBSW + 1.45       July 30, 2013    July 30, 2018      25,000,000   

AUD

     30,000,000         5.15       July 31, 2013    July 31, 2018      30,000,000   

AUD

     47,500,000         4.23       September 27, 2013    September 26, 2017      47,500,000   
              

 

 

 
        Subtotal in Original Currency    AUD 622,500,000   
              

 

 

 
        Subtotal in Equivalent Amount of Won(10)    585,125,100,000   
              

 

 

 

MYR

     300,000,000         4.05       February 24, 2012    February 24, 2016      300,000,000   

MYR

     200,000,000         4.10       February 24, 2012    February 24, 2017      200,000,000   
              

 

 

 
        Subtotal in Original Currency    MYR 500,000,000   
              

 

 

 
        Subtotal in Equivalent Amount of Won(11)    160,160,000   
              

 

 

 

 

27


Table of Contents

Currency

   Original
Principal
Amount
     Interest
Rate
(%)
     Issue Date    Maturity Date    Principal Amount
Outstanding as of
December 31, 2013
 

MXN

     144,000,000         4.78       September 27, 2013    September 26, 2017      144,000,000   
              

 

 

 
        Subtotal in Original Currency    MXN 144,000,000   
              

 

 

 
        Subtotal in Equivalent Amount of Won(12)    11,630,880,000   
              

 

 

 

NOK

     300,000,000         4.00       October 23, 2013    April 23, 2020      300,000,000   
              

 

 

 
        Subtotal in Original Currency    NOK 300,000,000   
              

 

 

 
        Subtotal in Equivalent Amount of Won(13)    52,062,000,000   
              

 

 

 

INR

     1,070,000,000         6.00       February 4, 2013    February 4, 2014      1,070,000,000   
              

 

 

 
        Subtotal in Original Currency    INR 1,070,000,000   
              

 

 

 
              
        Subtotal in Equivalent Amount of Won(14)    18,232,800,000   
              

 

 

 
              

ZAR

     822,000,000         7.76       September 27, 2013    September 26, 2017      822,000,000   
              

 

 

 
              
        Subtotal in Original Currency    ZAR 822,000,000   
              

 

 

 
              
        Subtotal in Equivalent Amount of Won(15)    78,858,410   
              

 

 

 
              

TRY

     120,000,000         8.50       March 1, 2012    March 3, 2014      120,000,000   

TRY

     323,900,000         8.35       June 19, 2012    June 18, 2015      323,900,000   
        

 

 

 
        Subtotal in Original Currency    TRY 443,900,000   
              

 

 

 
        Subtotal in Equivalent Amount of Won(16)    220,724,836,000   
              

 

 

 

Total External Bonds of KDB in Equivalent Amount of Won

   18,141,938,881,000   
              

 

 

 

 

(1) U.S. dollar amounts are converted to Won amounts at the rate of US$1.00 to Won 1,055.30, the market average exchange rate in effect on December 31, 2013, as announced by Seoul Money Brokerage Services, Ltd.
(2) Thai baht amounts are converted to Won amounts at the rate of THB 1.00 to Won 32.14, the market average exchange rate in effect on December 31, 2013, as announced by Seoul Money Brokerage Services, Ltd.
(3) Singapore dollar amounts are converted to Won amounts at the rate of SGD 1.00 to Won 832.75, the market average exchange rate in effect on December 31, 2013, as announced by Seoul Money Brokerage Services, Ltd.
(4) Japanese yen amounts are converted to Won amounts at the rate of JPY 100.00 to Won 1,004.66, the market average exchange rate in effect on December 31, 2013, as announced by Seoul Money Brokerage Services, Ltd.
(5) Hong Kong dollar amounts are converted to Won amounts at the rate of HKD 1.00 to Won 136.09, the market average exchange rate in effect on December 31, 2013, as announced by Seoul Money Brokerage Services, Ltd.
(6) Chinese offshore renminbi amounts are converted to Won amounts at the rate of CNH 1.00 to Won 174.09, the market average exchange rate in effect on December 31, 2013, as announced by Seoul Money Brokerage Services, Ltd.
(7) Euro amounts are converted to Won amounts at the rate of EUR 1.00 to Won 1,456.26, the market average exchange rate in effect on December 31, 2013, as announced by Seoul Money Brokerage Services, Ltd.
(8) Swiss franc amounts are converted to Won amounts at the rate of CHF 1.00 to Won 1,188.67, the market average exchange rate in effect on December 31, 2013, as announced by Seoul Money Brokerage Services, Ltd.
(9) Brazilian real amounts are converted to Won amounts at the rate of BRL 1.00 to Won 446.75, the prevailing market rate on December 31, 2013.
(10) Australian dollar amounts are converted to Won amounts at the rate of AUD 1.00 to Won 939.96, the market average exchange rate in effect on December 31, 2013, as announced by Seoul Money Brokerage Services, Ltd.
(11) Malaysian ringgit amounts are converted to Won amounts at the rate of MYR 1.00 to Won 320.32, the market average exchange rate in effect on December 31, 2013, as announced by Seoul Money Brokerage Services, Ltd.
(12) Mexican Peso amounts are converted to Won amounts at the rate of MXN 1.00 to Won 80.77, the market average exchange rate in effect on December 31, 2013, as announced by Seoul Money Brokerage Services, Ltd.
(13) Norwegian Krone amounts are converted to Won amounts at the rate of NOK 1.00 to Won 173.54, the market average exchange rate in effect on December 31, 2013, as announced by Seoul Money Brokerage Services, Ltd.
(14) Indian Rupee amounts are converted to Won amounts at the rate of INR 1.00 to Won 17.04, the market average exchange rate in effect on December 31, 2013, as announced by Seoul Money Brokerage Services, Ltd.
(15) South African Rand amounts are converted to Won amounts at the rate of ZAR 1.00 to Won 101.24, the market average exchange rate in effect on December 31, 2013, as announced by Seoul Money Brokerage Services, Ltd.
(16) Turkish lira amounts are converted to Won amounts at the rate of TRY 1.00 to Won 497.24, the market average exchange rate in effect on December 31, 2013, as announced by Seoul Money Brokerage Services, Ltd.

 

28


Table of Contents

(2) External Borrowings of KDB

 

Lender

 

Classifications

  Range of Interest Rates     Range of
Years of
Issue
    Range of
Years of
Maturity
    Principal Amount
Outstanding as of
December 31, 2013(1)
 
        (%)                 (millions of Won)  

JBIC

  Borrowings from JBIC     1.44~2.16        2009~2012        2014~2025        288,502   

Mizuho and others

  Borrowings from foreign banks     3M Libor + 0.45~3.80        2009~2013        2014~2016        2,307,530   

Citi Bank and others

  Off-shore short-term borrowings     0.19~0.87        2013        2014        1,268,153   

BNP Paribas and others

  Off-shore long-term borrowings     3MLibor~+1.05        2012~2013        2014~2016        868,303   

JBIC

  Off-shore borrowings from JBIC     1.79~6m Libor+1.20        2010~2012        2015~2022        125,732   

Others

  Short-term borrowings in foreign currency     0.01~5.40        2013        2014        6,007,762   
  Long-term borrowings in foreign currency     0.40~6.20        2011~2013        2014~2016        2,072,403  
         

 

 

 

Total External Borrowings of KDB

          12,938,385   
         

 

 

 

 

(1) Converted to Won amounts at the relevant market average exchange rates in effect on December 31, 2013 as announced by Seoul Money Brokerage Services, Ltd.

 

B. Internal Debt of KDB

 

Title

  Range of
Interest Rates
    Range of
Years of Issue
    Range of Years
of Original
Maturity
    Principal
Amounts
Outstanding as
of December 31,
2013
 
    (%)                 (millions of Won)  

1. Bonds

       

Short-term Industrial Finance Bonds

    3.38 ~ 4.38        2010~2012        2010~2012        11   

Long-term Industrial Finance Bonds

    2.48~12.00        2004~2013        2009~2032        37,230,283   
       

 

 

 

Total Bonds

    2.48~12.00        2004~2013        2009~2032        37,230,294   

2. Borrowings

       

Borrowings from the Ministry of Strategy and Finance

    1.92~5.00        1994~2012        2014~2032      564,288   

Borrowings from Industrial Bank of Korea

    1.83~2.42        2006~2008        2014~2016        2,425   

Borrowings from Small Business Corp.

    1.87~4.21        2004~2013        2014~2023        306,085   

Borrowings from the Ministry of Culture and Tourism

    0.38~2.50        2005~2013        2014~2023        1,222,208   

Borrowings from Korea Energy Management Corporation

    0.25~3.75        1999~2013        2014~2028        1,187,543   

Others

    0.22~5.30        1999~2013        2014~2044        1,322,824   
       

 

 

 

Total Borrowings(1)

          4,605,373   

3. Other Debt(2)

          4,401,730   
       

 

 

 

Total Internal Floating Debt(3)

          1,025,995   

Total Internal Funded Debt(4)

          45,211,402   
       

 

 

 

Total Internal Debt

        46,237,397   
       

 

 

 

 

29


Table of Contents

 

(1) Consist of short term borrowings in the amount of ₩327,684 million and long term borrowings in the amount of ₩4,277,689 million.
(2) Other debt includes bonds sold under repurchase agreements and call money.
(3) Floating debt is debt that has a maturity at issuance of less than one year.
(4) Funded debt is debt that has a maturity at issuance of one year or more.

 

Financial Statements and the Auditors

 

The Government, through KDBFG, our sole shareholder, elects our Auditor who is responsible for examining our financial operations and auditing our financial statements and records. The present Auditor is Hyung-Chul Shin, who was appointed by the Financial Services Commission for a three-year term on April 11, 2014.

 

We prepare our financial statements annually for submission to the Financial Services Commission, accompanied by an opinion of the Auditor. Although we are not legally required to have financial statements audited by external independent auditors, an independent public accounting firm has audited our separate and consolidated financial statements commencing with such financial statements as of and for the year ended December 31, 1998. As of the date of this prospectus, our external independent auditor is KPMG Samjong Accounting Corp., located at 10th Floor, Star Tower, 152, Teheran-ro, Gangnam-gu, Seoul, Korea, which has audited our separate financial statements as of and for the years ended December 31, 2013 and 2012 included in this prospectus.

 

Our separate financial statements appearing in this prospectus were prepared in conformity with Korean IFRS, as summarized in “—Financial Statements and the Auditors—Notes to Separate Financial Statements of December 31, 2013 and 2012—Note 2.” These principles and procedures differ in certain material respects from generally accepted accounting principles in the United States.

 

We generally record our debt securities investments, except for our trading portfolio of marketable debt securities, at the cost of acquisition (including incidental expenses related to purchase), computed on the specific identification method. We record our trading portfolio of marketable debt securities at market value. Starting in April 1999, we record all our debt securities investments at market value except for debt securities invested with the intention of holding until maturity, which we record at the cost of acquisition or amortized cost.

 

We record the value of our premises and equipment on our statements of financial position on the basis of a revaluation conducted as of July 1, 1998. The Minister of Strategy and Finance approved the revaluation in accordance with applicable Korean law. We value additions to premises and equipment since such date at cost.

 

30


Table of Contents

LOGO

 

 

KPMG SAMJONG Accounting Corp.

  Tel    +82(2) 2112 0100
 

152, Teheran-ro, Gangnam-gu, Seoul 135-984

  Fax    +82(2) 2112 0101
 

(Yeoksam-dong, Gangnam Finance Center 10th Floor)

  www.kr.kpmg.com
 

Republic of Korea

 

Independent Auditors’ Report

 

The Board of Directors and Shareholders

Korea Development Bank:

 

We have audited the accompanying separate statements of financial position of Korea Development Bank (the “Bank”) as of December 31, 2013 and 2012 and the related separate statements of comprehensive income (loss), changes in equity and cash flows for the years then ended. Management is responsible for the preparation and fair presentation of these separate financial statements in accordance with Korean International Financial Reporting Standards. Our responsibility is to express an opinion on these separate financial statements based on our audits. The accompanying separate statement of financial position of the Bank as of January 1, 2012, excluding the adjustments described in Note 3.(26) to the separate financial statements, was derived from the Bank’s separate financial statements as of and for the year ended December 31, 2011, which were audited by another auditor, whose report thereon dated March 29, 2012 expressed an unqualified opinion.

 

We conducted our audits in accordance with auditing standards generally accepted in the Republic of Korea. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the separate financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the separate financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

 

In our opinion, the separate financial statements referred to above present fairly, in all material respects, the financial position of the Bank as of December 31, 2013 and 2012 and its financial performance and its cash flows for the years then ended in accordance with Korean International Financial Reporting Standards.

 

Without qualifying our opinion, we draw attention to the following:

 

As discussed in note 3.(26) to the separate financial statements, the Bank changed its accounting for defined benefit plans upon adoption of K-IFRS No. 1019 Employee Benefits in 2013, which required the Bank to include the disclosure of the statement of financial position as of January 1, 2012. In accordance with K-IFRS No. 1019, the Bank restated the accompanying statements of financial position as of December 31, 2012 and January 1, 2012, and the related statements of comprehensive income, changes in equity and cash flows for the year ended December 31, 2012. We also have audited the adjustments to the separate statement of financial position as of January 1, 2012 to retrospectively apply this change in accounting, as described in note 3.(26) to the separate financial statements. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedure to the separate statements as of and for the year ended December 31, 2011 of the Bank, from which the January 1, 2012 statement of financial position was derived, other than with respect to the adjustments and, accordingly, we do not express an opinion or any other form of assurance on the separate financial statements as of and for the year ended December 31, 2011 taken as a whole.

 

The procedures and practices utilized in the Republic of Korea to audit such separate financial statements may differ from those generally accepted and applied in other countries. Accordingly, this report is for use by those knowledgeable about Korean auditing standards and their application in practice.

 

/s/ KPMG Samjong Accounting Corp.

Seoul, Korea

March 18, 2014

 

This report is effective as of March 18, 2014, the audit report date. Certain subsequent events or circumstances, which may occur between the audit report date and the time of reading this report, could have a material impact on the accompanying separate financial statements and notes thereto. Accordingly, the readers of the audit report should understand that the above audit report has not been updated to reflect the impact of such subsequent events or circumstances, if any.

 

31


Table of Contents

Korea Development Bank

 

Separate Statements of Financial Position

 

As of December 31, 2013, 2012 and January 1, 2012

 

(In millions of won)

   Notes      December 31,
2013
    December 31,
2012

(Restated)
     January 1,
2012

(Restated)
 

Assets

          

Cash and due from banks

     4,43,44,47       5,710,337        2,695,848         1,965,839   

Financial assets held for trading

     5,43,44,47         1,425,653        1,877,364         2,585,909   

Available-for-sale financial assets

     6,43,44,47         25,534,233        24,886,010         25,701,034   

Held-to-maturity financial assets

     7,43,44,47         27,109        88,690         110,844   

Loans

     8,43,44,47         96,308,413        91,034,405         80,414,794   

Derivative financial assets

     9,43,44,45,47         4,319,272        5,177,890         5,597,095   

Investments in subsidiaries and associates

     10,46         4,971,662        5,984,613         5,716,820   

Property and equipment, net

     11,46         439,760        439,773         439,726   

Investment property, net

     12,46         80,695        92,486         86,899   

Intangible assets, net

     13,46         85,651        71,503         58,969   

Deferred tax assets

     34         534,783        17,432         —     

Other assets

     14,43,44,47         4,169,902        10,631,333         5,204,055   
     

 

 

   

 

 

    

 

 

 

Total assets

      143,607,470        142,997,347         127,881,984   
     

 

 

   

 

 

    

 

 

 

Liabilities

          

Financial liabilities designated at fair value through profit or loss

     15,43,44,47       677,916        875,197         992,136   

Deposits

     16,43,44,47         37,727,270        38,652,332         25,222,278   

Borrowings

     17,43,44,47         23,220,773        21,977,467         25,842,421   

Bonds

     18,43,44,47         55,924,868        46,901,677         47,196,659   

Derivative financial liabilities

     9,43,44,45,47         3,880,101        4,086,856         4,289,264   

Defined benefit liabilities

     19         25,166        18,885         17,536   

Provisions

     20         540,085        89,143         261,855   

Deferred tax liabilities

     34         —          198,738         359,521   

Income taxes payable

        19,240        153,321         128,204   

Other liabilities

     21,43,44,47         5,245,951        11,825,334         5,908,341   
     

 

 

   

 

 

    

 

 

 

Total liabilities

        127,261,370        124,778,950         110,218,215   
     

 

 

   

 

 

    

 

 

 

Equity

          

Issued capital

     22         9,261,861        9,251,861         9,251,861   

Capital surplus

     22         44,373        44,373         44,373   

Capital adjustments

     22         (51     —           —     

Accumulated other comprehensive income

     22         332,473        534,181         578,557   

Retained earnings

     22         6,707,444        8,387,982         7,788,978   

(Regulatory reserve for loan losses of ₩1,306,925, ₩1,034,949 and ₩0 as of December 31, 2013, 2012 and January 1, 2012, respectively)

          

(Obligated amount of provision for regulatory reserve for loan losses of ₩17,152, ₩271,976 and ₩1,034,949 as of December 31, 2013, 2012 and January 1, 2012, respectively) (Planned regulatory reserve for loan losses of ₩0 and ₩271,976 and ₩1,034,949 as of December 31, 2013, 2012 and January 1, 2012, respectively)

          
     

 

 

   

 

 

    

 

 

 

Total equity

        16,346,100        18,218,397         17,663,769   
     

 

 

   

 

 

    

 

 

 

Total liabilities and equity

      143,607,470        142,997,347         127,881,984   
     

 

 

   

 

 

    

 

 

 

 

See accompanying notes to the separate financial statements.

 

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Table of Contents

Korea Development Bank

 

Separate Statements of Comprehensive Income (Loss)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won, except earnings per share information)

   Notes      2013     2012
(Restated)
 

Interest income

     23       4,766,552        5,030,370   

Interest expense

     23         (3,036,087     (3,284,200
     

 

 

   

 

 

 

Net interest income

        1,730,465        1,746,170   
     

 

 

   

 

 

 

Net fees and commission income

     24         453,734        573,739   

Dividend income

     25         137,869        250,282   

Net gain (loss) on financial instruments held-for-trading

     26         (14,351     6,828   

Net gain (loss) on financial instruments designated at fair value through profit and loss

     27         45,571        (64,095

Net gain (loss) on available-for-sale financial assets

     28         (200,851     130,834   

Net gain on derivatives

     29         251,279        385,379   

Net foreign currency transaction loss

     30         (252,881     (276,000

Other operating loss, net

     31         (850,583     (437,321
     

 

 

   

 

 

 

Non-interest income (loss), net

        (430,213     569,646   
     

 

 

   

 

 

 

Provision for loan losses

     8         1,611,502        455,392   
     

 

 

   

 

 

 

General and administrative expenses

     32         546,875        526,120   
     

 

 

   

 

 

 

Operating income (loss)

     46         (858,125     1,334,304   
     

 

 

   

 

 

 

Impairment loss on investments in subsidiaries and associates

     10         (1,095,391     (135,349

Other non-operating income

     33         7,953        4,454   

Other non-operating expense

     33         (17,722     (15,209
     

 

 

   

 

 

 

Non-operating expense, net

        (1,105,160     (146,104

Profit (loss) before income taxes

        (1,963,285     1,188,200   

Income tax expense (benefit)

     34         (515,894     241,326   
     

 

 

   

 

 

 

Profit (loss) for the year

        (1,447,391     946,874   
     

 

 

   

 

 

 

(Profit (loss) for the year adjusted for regulatory reserve for loan losses : (-)₩1,464,543 million and ₩674,898 million for the years ended December 31, 2013 and 2012)

       

Other comprehensive income (loss) for the year, net of tax Items that are or may be reclassified subsequently to profit or loss:

       

Valuation loss on available-for-sale financial assets, net

        (197,006     (6,234

Exchange differences on translation of foreign operations

        (12,282     (43,513

Items that will not be reclassified to profit or loss:

       

Remeasurements of defined benefit liabilities

        7,580        5,371   
     

 

 

   

 

 

 
        (201,708     (44,376
     

 

 

   

 

 

 

Total comprehensive income (loss) for the year

      (1,649,099     902,498   
     

 

 

   

 

 

 

Earnings (loss) per share

       

Basic and diluted earnings (loss) per share (in won)

     35       (782     512   
     

 

 

   

 

 

 

 

See accompanying notes to the separate financial statement.

 

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Table of Contents

Korea Development Bank

 

Separate Statements of Changes in Equity

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

  Issued
capital
    Capital
surplus
    Capital
adjustment
    Accumulated
other
comprehensive
income
    Retained
earnings
    Total
equity
 

Balance at January 1, 2012

  9,251,861        44,373        —          565,577        7,796,236        17,658,047   

Cumulative effect of changing accounting policies

    —          —          —          12,980        (7,258     5,722   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 1, 2012 (Restated)

    9,251,861        44,373        —          578,557        7,788,978        17,663,769   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit for the year

    —          —          —          —          946,874        946,874   

Changes in valuation gain on available-for-sale financial assets

    —          —          —          (6,234     —          (6,234

Changes in exchange differences on translation of foreign operations

    —          —          —          (43,513     —          (43,513

Changes in remeasurements of defined benefit liabilities

    —          —          —          5,371        —          5,371   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income for the year

    —          —          —          (44,376     946,874        902,498   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Dividends

    —          —          —          —          (347,870     (347,870
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Transaction with owners

    —          —          —          —          (347,870     (347,870
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2012 (Restated)

  9,251,861        44,373        —          534,181        8,387,982        18,218,397   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 1, 2013

  9,251,861        44,373        —          534,181        8,387,982        18,218,397   

Loss for the year

    —          —          —          —          (1,447,391     (1,447,391

Changes in valuation gain on available-for-sale financial assets

    —          —          —          (197,006     —          (197,006

Changes in exchange differences on translation of foreign operations

    —          —          —          (12,282     —          (12,282

Changes in remeasurements of defined benefit liabilities

    —          —          —          7,580        —          7,580   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive loss for the year

    —          —          —          (201,708     (1,447,391     (1,649,099
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Dividends

    —          —          —          —          (233,147     (233,147

Paid in capital increase

    10,000        —          (51     —          —          9,949   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Transaction with owners

    10,000        —          (51     —          (233,147     (223,198
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2013

  9,261,861        44,373        (51     332,473        6,707,444        16,346,100   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

See accompanying notes to the separate financial statements.

 

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Table of Contents

Korea Development Bank

 

Separate Statements of Cash Flows

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

   Notes      2013     2012
(Restated)
 

Cash flows from operating activities

       

Profit (loss) for the year

      (1,447,391     946,874   

Adjustments for:

       

Income tax expense (benefit)

     34         (515,894     241,326   

Interest income

     23         (4,766,552     (5,030,370

Interest expense

     23         3,036,087        3,284,200   

Dividend income

     25         (137,869     (250,282

Loss on valuation of financial assets held for trading

     26         2,130        1,291   

Loss (gain) on valuation of financial liabilities designated at fair value through profit or loss

     27         (43,084     65,056   

Gain on disposal of available-for-sale financial assets

     28         (414,712     (391,340

Impairment loss on available-for-sale financial assets

     28         615,563        260,506   

Loss (gain) on valuation of derivatives

        416,488        (82,828

Net gain on fair value hedged items

        (611,966     (797,008

Loss on foreign exchange translations

     30         223,343        221,361   

Loss (gain) on disposal of investments in subsidiaries and associates

     31         (237     1,151   

Impairment loss on investments in subsidiaries and associates

        1,095,391        135,349   

Provision for loan losses

     8         1,611,502        455,392   

Defined benefit costs

     19,32         36,755        28,711   

Depreciation of property and equipment

     11,32         26,987        20,707   

Gain on disposal of property and equipment

     33         (315     (13

Depreciation of investment property

     12,33         1,693        1,490   

Loss on disposal of investment property

     33         —          3,003   

Amortization of intangible assets

     13,32         19,347        16,446   

Gain on disposal of intangible assets

     33         —          (192

Impairment loss on intangible assets

     33         —          684   

Other operating income (loss), net

        453,167        (166,890

Loss (gain) on redemption of debentures

        (11     410   
     

 

 

   

 

 

 
        1,047,813        (1,981,840
     

 

 

   

 

 

 

Changes in operating assets and liabilities:

       

Due from banks

        (1,492,439     (453,646

Financial assets held for trading

        537,525        707,257   

Loans

        (8,088,537     (8,212,857

Derivative financial assets

        3,249,718        3,623,379   

Other assets

        6,029,923        (5,600,830

Financial liabilities designated at fair value through profit or loss

        (154,198     (181,995

Deposits

        (1,067,586     13,377,139   

Derivative financial liabilities

        (3,014,343     (3,310,236

Defined benefit liabilities

        (20,473     (20,276

Provisions

        —          (2,006

Other liabilities

        (6,467,782     5,792,607   
     

 

 

   

 

 

 
        (10,488,192     5,718,536   
     

 

 

   

 

 

 

Income taxes paid

        (94,708     (374,215

Interest received

        4,906,737        5,197,310   

Interest paid

        (3,232,464     (3,101,726

Dividends received

        195,210        205,363   
     

 

 

   

 

 

 

Net cash provided by (used in) operating activities

      (9,112,995     6,610,302   
     

 

 

   

 

 

 

 

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Table of Contents

Korea Development Bank

 

Separate Statements of Cash Flows—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

   Notes      2013     2012  

Cash flows from investing activities

       

Disposal of available-for-sale financial assets

     6       28,509,101        36,368,574   

Acquisition of available-for-sale financial assets

     6         (29,488,413     (35,749,826

Redemption of held-to-maturity financial assets

     7         62,375        24,176   

Acquisition of held-to-maturity financial assets

     7         (379     (1,642

Disposal of property and equipment

     11         1,316        106   

Acquisition of property and equipment

     11         (18,692     (36,681

Disposal of intangible assets

     13         5        487   

Acquisition of intangible assets

     13         (33,518     (30,029

Disposal of investment property

     12         —          3,569   

Disposal of investments in subsidiaries and associates

     10         105,316        100,920   

Acquisition of investments in subsidiaries and associates

     10         (184,486     (340,536
     

 

 

   

 

 

 

Net cash provided by (used in) investing activities

        (1,047,375     339,118   
     

 

 

   

 

 

 

Cash flows from financing activities

       

Proceeds from borrowings

        144,335,901        141,199,600   

Repayment of borrowings

        (142,424,194     (144,048,144

Proceeds from issuance of bonds

        26,779,601        23,614,851   

Repayment of bonds

        (16,944,191     (23,495,644

Paid in capital increase

        9,949        —     

Dividends paid

     22         (233,147     (347,870
     

 

 

   

 

 

 

Net cash provided by (used in) financing activities

        11,523,919        (3,077,207
     

 

 

   

 

 

 

Effects from changes in foreign currency exchange rate for cash and cash equivalents

        170,912        (266,484
     

 

 

   

 

 

 

Net increase in cash and cash equivalents

        1,534,461        3,605,729   
     

 

 

   

 

 

 

Cash and cash equivalents at beginning of period

        5,625,503        2,019,774   
     

 

 

   

 

 

 

Cash and cash equivalents at end of period

     41       7,159,964        5,625,503   
     

 

 

   

 

 

 

 

See accompanying notes to the separate financial statements.

 

36


Table of Contents

Korea Development Bank

 

Notes to the Separate Financial Statements

 

For the years ended December 31, 2013 and 2012

 

1. Reporting Entity

 

Korea Development Bank (the “Bank”) was established on April 1, 1954, in accordance with The Korea Development Bank Act to finance and manage major industrial projects, in order to expedite industrial development and enhance the national economy.

 

The Bank is engaged in the banking industry under The Korea Development Bank Act and other applicable statutes, and in the fiduciary in accordance with the Financial Investment Services and Capital Markets Act.

 

The Bank is a fully-owned subsidiary of the KDB Finance Group (“KDBFG”), which is owned by the Korean government and Korea Finance Corporation (“KoFC”), and its capital stocks amount to ₩9,251,861 million as of December 31, 2012. The capital amount is ₩9,261,861 due to the issuing of new stocks during the year ended December 31, 2013.

 

The Bank’s head office is located in Yeouido-dong, Yeongdeungpo-gu, Seoul and its service network as of December 31, 2013, is as follows:

 

     Head Office      Domestic
branches
     Overseas
branches
     Overseas
subsidiaries
     Overseas
representative
offices
     Total  

KDB

         1         82             8             5             6             102   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

2. Basis of Preparation

 

(1) Statement of compliance

 

The financial statements have been prepared in accordance with the Korean International Financial Reporting Standards (“K-IFRS”), as prescribed in the Act on External Audits of Corporations in the Republic of Korea.

 

These financial statements are separate financial statements prepared in accordance with K-IFRS No.1027 Separate Financial Statements presented by a parent, an investor in an associate or a venturer in a joint venture, in which the investments are accounted for at cost rather than on the basis of the reported results and net assets of the investees.

 

(2) Basis of measurement

 

The financial statements have been prepared on the historical cost basis except for the following material items in the statement of financial position:

 

   

Derivative financial instruments measured at fair value

 

   

Financial instruments measured at fair value through profit or loss

 

   

Available-for-sale financial instruments measured at fair value

 

   

Fair value hedged financial instruments with changes in fair value, due to hedged risks, recognized in profit or loss

 

   

Liabilities for defined benefit plans, which are recognized as net of the total present value of defined benefit obligations less the fair value of plan assets and unrecognized past service costs

 

37


Table of Contents

Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(3) Functional and presentation currency

 

These financial statements are presented in Korean won (“₩”), which is the Bank’s functional currency and the currency of the primary economic environment in which the Bank operates.

 

(4) Use of estimates and judgments

 

The preparation of the financial statements in conformity with K-IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

 

Estimates and underlying assumptions are evaluated on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.

 

Information about critical judgments made by management in applying the Bank’s accounting policies that have the most significant effect on the amounts recognized in the separate financial statements is included in the following notes:

 

   

Note 3.(6)—Impairment of financial assets

 

   

Note 3.(15)—Employee benefits

 

Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the next financial year is included in the following notes:

 

   

Note 8—Loans and allowance for loan losses

 

   

Note 19—Defined benefit liabilities

 

   

Note 20—Provisions

 

(5) Approval date for the separate financial statements

 

The separate financial statements were authorized for issue by the Board of Directors on March 18, 2014, which will be submitted for approval to the shareholders’ meeting to be held on March 28, 2014.

 

3. Significant Accounting Policies

 

The significant accounting policies applied by the Bank in preparation of its separate financial statements are included below. The accounting policies set out below have been applied consistently to all periods presented in these separate financial statements except for the changes explained in note 3 (26).

 

(1) Investments in subsidiaries and associates

 

The accompanying financial statements are separate financial statements in accordance with K-IFRS No.1027 Separate Financial Statements and e investments in subsidiaries and associates are accounted for at cost, not by performance and net asset reported by the investee. Dividends received from subsidiaries and associates are recognized as income as of the time the right to receive the dividends is established.

 

(2) Operating segments

 

The Bank makes decisions regarding allocation of resources to segments and categorizes segments, based on internal reports reviewed periodically by the chief operating decision maker, to assess performance. Information

 

38


Table of Contents

Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

on segments reported to the chief operating decision maker includes items directly attributable to segments as well as those that can be allocated on a reasonable basis. Unallocated items mainly comprise corporate assets (such as the Bank Headquarters), head office expenses, and income tax assets and liabilities. The Bank recognizes the CEO as the chief operating decision maker.

 

(3) Foreign currency

 

(i) Foreign currency transactions

 

Transactions in foreign currencies are translated to the respective functional currencies of the Bank, at exchange rates of the dates of transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortized cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortized cost in foreign currency translated at the exchange rate at the end of the reporting period. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are translated to the functional currency at the exchange rate at the date that the fair value was determined.

 

Foreign currency differences arising on translation are recognized in profit or loss, except for differences arising on the translation of available for sale equity instruments, a financial liability designated as a hedge of the net investment in a foreign operation, or in a qualifying cash flow hedge, which are recognized in other comprehensive income. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction.

 

(ii) Foreign operations

 

If the presentation currency of the Bank is different from a foreign operation’s functional currency, the financial statements of the foreign operation are translated into the presentation currency using the following methods:

 

Unless the functional currency of foreign operations is in a state of hyper inflation, assets and liabilities of foreign operations are translated at the closing exchange rate at the end of the reporting period. Revenues and expenses on the statement of comprehensive income are translated at the exchange rates of the date of transaction. Foreign currency differences that arise from translation are recognized as other comprehensive income, and the disposal of a foreign operation is re-categorized as profit or loss as of the moment the disposal profit or loss is recognized.

 

Any goodwill arising on the acquisition of a foreign operation, and any adjustments in fair value to the carrying amounts of assets and liabilities due to such acquisition, are treated as assets and liabilities of the foreign operation. Therefore, such are expressed in the functional currency of the foreign operations and, alongside other assets and liabilities of the foreign operation, translated at the closing exchange rate.

 

In the case of the disposal of a foreign operation, cumulative amounts of exchange difference regarding the foreign operation, recognized separately from other comprehensive income, are recategorized from assets to profit or loss as of the moment the disposal profit or loss is recognized.

 

39


Table of Contents

Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(iii) Foreign exchange of net investment in foreign operations

 

Monetary items receivable from or payable to a foreign operation, with none or little possibility of being settled in the foreseeable future, are considered a part of the net investment in the foreign operation. Therefore, the exchange difference is recognized as comprehensive profit or loss in the financial statement, and re-categorized to profit or loss as of the disposal of the related net investment.

 

(4) Cash and cash equivalents

 

Cash and cash equivalents comprise balances with original maturities of or less three months’ maturity from the date of acquisition that are subject to an insignificant risk of changes in their fair value, including cash on hand, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less.

 

(5) Non-derivative financial assets

 

The Bank recognizes and measures non-derivative financial assets by the following four categories: financial assets at fair value through profit or loss, held-to-maturity financial assets, loans and receivables, and available-for-sale financial assets. Moreover, the Bank recognizes financial assets in the statement of financial position as of the time the Bank becomes a party to the contractual provisions of the instruments.

 

Non-derivative financial assets are measured at fair value upon initial recognition and, unless designated at fair value through profit or loss, transaction costs directly regarding acquisition and issuance of such assets are summed to the initial fair value.

 

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

 

Any financial asset classified as held-for-trading or designated at fair value through profit or loss at initial recognition is categorized under financial assets at fair value through profit or loss. Financial assets at fair value through profit or loss (“FVTPL”) are measured at fair value upon initial recognition, and changes therein are recognized as profit or loss. Furthermore, transaction costs regarding acquisition upon initial recognition are recognized as profit or loss as incurred.

 

(ii) Held-to-maturity financial assets

 

If a non-derivative financial asset has a fixed maturity with a fixed or determinable payment, and the Bank has positive intent and ability to hold such an asset, it is classified as held-to-maturity financial assets. Subsequent to initial recognition, held-to-maturity financial assets are measured at amortized costs using the effective interest rate (“EIR”) method.

 

(iii) Loans and receivables

 

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Subsequent to initial recognition, loans and receivables are measured at amortized cost using the effective interest rate method. Furthermore, the effective interest rate method is applied to recognize interest incomes on financial investments, except short-term loans and receivables, in which case the impact of effective interest the method is immaterial.

 

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Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(iv) Available-for-sale financial assets

 

Any non-derivative financial asset, not classified as financial assets at fair value through profit or loss, held-to-maturity financial assets, or loans and receivables, is classified as available-for-sale financial assets. Subsequent to initial recognition, such assets are measured at fair value. However, equity instruments that do not have a quoted market price in an active market and cannot be reliably measured, and any derivatives that are linked to these instruments and need to be settled upon the delivery of such equity instruments are measured at cost. Accumulated other comprehensive income, reflected in equity as fair value changes, is recognized as profit or loss as of the time the related available-for-sale asset is disposed of or the impairment loss is recognized. Furthermore, dividends earned whilst holding available-for-sale financial assets are recognized in the statement of comprehensive income upon the establishment of the right to receive the payment.

 

(v) De-recognition of financial assets

 

The Bank de-recognizes a financial asset when the rights to receive cash flow from an asset expire, or when it transfers the rights to receive cash flow and substantially all the risks and rewards from the ownership of a financial asset. In the case that the Bank has neither transferred nor retained substantially all the risks and rewards of an asset, the Bank de-recognizes any assets if it does not have control, and recognizes any assets to the extent of the Bank’s continuing involvement if it does have control. In the latter case, any associated liabilities are recognized by the Bank. In the case the Bank retains substantially all the risks and rewards from the ownership of an asset it does not have control of, the Bank continues to recognize the financial asset, and recognizes consideration received as financial liabilities.

 

(vi) Offsetting between financial assets and financial liabilities

 

Financial assets and liabilities are set-off only under the conditions that the Bank has legal rights to set-off the recognized amounts, and the intention to settle on a net basis or to realize assets and settle liabilities at the same time.

 

(6) Impairment of financial assets

 

The Bank assesses the possibility of objective evidence that may indicate any impairment of financial assets, except those designated at fair value through profit or loss, at each reporting date. A financial asset is defined as impaired if, as a result of one or more events after initial recognition, the estimated future cash flow of the asset has been affected. However, expected impairments from future events are not recognized, regardless of their likelihood.

 

Upon the finding of objective evidence to believe an asset is impaired, the impairment is measured and recognized in profit or loss as follows, according to the asset category:

 

(i) Impairment of loans and receivables

 

The Bank assesses, at each reporting date, whether objective evidence that indicate impairment of loans and receivables exist. If objective evidence shows that believe impairment has occurred, the amount of the loss is measured as the difference between the carrying amount of the asset and the present value of estimated future cash flows, discounted using the initial effective interest rate (“EIR”). Furthermore, the carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognized in the statement of comprehensive income.

 

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Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

All individually significant loans and advances are assessed for specific impairment. Those found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Loans and advances that are not individually significant are collectively assessed for impairment by grouping together loans and advances with similar risk characteristics.

 

In individual assessment, allowances on losses are computed using the discounted expected recoverable value, estimated by operating cash flows or collateral cash flow; in collective assessment, allowances on losses are computed using statistical methods based on obtainable historical loss experience.

 

The present value of estimated future cash flows is measured using the asset’s initial EIR. If the loan has a floating interest rate, the Bank uses the current EIR for the measurement. Future cash flows from collateral are estimated at net cash flow from disposal of collateral (deducting transaction cost).

 

For the purpose of a collective assessment of impairment, assets are analyzed on the basis of the Bank’s internal credit rating system that considers credit risk characteristics such as asset type, industry, geographical location, collateral type, past-due status and other relevant factors.

 

Future cash flows of the assets collectively assessed are estimated on the basis of historical loss experience for loans with similar credit risk characteristics. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions on which the historical loss experience is based, and to remove the effects of conditions in the historical period that no longer exist. Estimates of changes in future cash flows reflect, and are directionally consistent with, changes in related observable data from year to year (such as changes in unemployment rates, property prices, commodity prices, payment status, or other factors that are indicative of incurred loss in the Bank and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience.

 

If the terms of a financial asset are renegotiated or modified or an existing financial asset is replaced with a new one due to financial difficulties of the borrower, then an assessment is made of whether the financial asset should be de recognised. If the cash flows of the renegotiated asset are substantially different, then the contractual rights to cash flows from the original financial asset are deemed to have expired. In this case, the original financial asset is derecognised and the new financial asset is recognised at fair value. The impairment loss before an expected restructuring is measured as follows

 

   

If the expected restructuring will not result in derecognition of the existing asset, then the estimated cash flows arising from the modified financial asset are included in the measurement of the existing asset based on their expected timing and amounts discounted at the original effective interest rate of the existing financial asset.

 

   

If the expected restructuring will result in derecognition of the existing asset, then the expected fair value of the new asset is treated as the final cash flow from the existing financial asset at the time of its derecognition. This amount is discounted from the expected date of derecognition to the reporting date using the original effective interest rate of the existing financial asset.

 

(ii) Impairment of available-for-sale financial assets

 

The Bank assesses, at each reporting date, whether objective evidence that indicate impairment of available-for-sale assets exist. If such objective evidence exists, the amount of the loss is measured as the difference between the acquisition cost and the current fair value.

 

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Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

An available-for-sale financial asset is considered to be impaired if there is a significant or prolonged decline in fair value of the asset below the acquisition cost. The Bank considers a 30% to be significant and a period of six months to be prolonged.

 

If, in a subsequent period, the fair value of a debt instrument increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in, the impairment loss is reversed through the statement of comprehensive income. Moreover, the impairment loss is directly reduced from the carrying amount of the available-for-sale financial asset.

 

(iii) Impairment of held-to-maturity financial assets

 

The Bank assesses individually, at each reporting date, whether there is objective evidence that a held-to-maturity financial asset is impaired. If any such evidence exists, the amount of loss is measured as the difference between the carrying amount and the present value of estimated future cash flows, which is discounted using the initial EIR, and recognized in the statement of comprehensive income. If, in a subsequent period, the fair value of a financial asset held to maturity increases and the increase can be objectively related to an event occurring after the impairment was recognized, the impairment loss is reversed through the statement of comprehensive income. Moreover, the impairment loss is directly reduced from the carrying amount of the held-to-maturity financial asset.

 

(iv) Loss events of financial assets

 

Objective evidences that a financial asset is impaired include the following loss events:

 

   

Significant financial difficulty of the issuer or obligor

 

   

A breach of contract, such as a default or delinquency in interest or principal payments

 

   

The granting of a concession to the borrower, for economic or legal reasons, that the lender would not otherwise consider

 

   

A state with high probability that the borrower will enter bankruptcy or other financial reorganization

 

   

The disappearance of an active market for that financial asset due to financial difficulties

 

   

The presence of observable data indicating a measurable decrease in the estimated future cash flows of a group of financial assets since the initial recognition of the group, although the decrease cannot yet be identified with the individual financial asset within the group

 

(7) Derivative financial instruments including hedge accounting

 

Derivative financial instruments are initially recognized at the fair value upon agreement of the contract, and re-estimated at fair value subsequently. The recognition of profit or loss due to changes in fair value of derivative instruments is as stated below.

 

(i) Hedge accounting

 

Derivative financial instruments are accounted differently depending on whether or not hedge accounting is applied, and therefore, are classified into trading purpose derivatives and hedging purpose derivatives.

 

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Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

Upon the transaction of hedging purpose derivatives, two different hedge accounting are applied; a fair value hedge, and a cash flow hedge. A fair value hedge is a hedge of the exposure to changes in fair value of a recognized asset or liability or an unrecognized firm commitment, or an identified portion of such an asset, liability or firm commitment, that is attributable to a particular risk and could affect profit or loss. A cash flow hedge is a hedge of the exposure to variability in cash flows that (i) is attributable to a particular risk associated with a recognized asset or liability (such as all or some future interest payments on variable rate debt) or a highly probable forecast transaction and (ii) could affect profit or loss. For trading purpose derivatives transaction, changes in the fair value of derivatives are recognized in net income.

 

At inception of the hedge relationship, the Bank formally documents the relationship between the hedged item and the hedging instrument, including the nature of the risk, the objective and strategy for undertaking the hedge, and the method that will be used to assess the effectiveness of the hedging relationship. Also, at the inception of the hedge relationship, a formal assessment is undertaken to ensure the hedging instrument is expected to be highly effective in offsetting the designated risk in the hedged item and actual result was so.

 

Fair value hedge

 

For designated and qualifying fair value hedges, the change in the fair value of a hedging derivative is recognized in profit or loss in the statement of comprehensive income. Meanwhile, the change in the fair value of the hedged item, attributable to the risk hedged, is recorded as part of the carrying value of the hedged item and is also recognized in profit or loss in the statement of comprehensive income. When the hedge no longer meets the criteria for hedge accounting, the hedge relationship is terminated. For hedged item recorded at amortized cost, the difference between the carrying value of the hedged item on termination and the face value is amortized over the remaining term of the original hedge using the EIR.

 

Cash flow hedge

 

For designated and qualifying cash flow hedges, the effective portion of gain or loss on the hedging instruments is initially recognized directly in equity. The ineffective portion of the gain or loss on the hedging instrument is recognized immediately in the statement of comprehensive income. When the hedged cash flow affects the profit or loss in statement of comprehensive income, the gain or loss on the hedging instrument is recorded in the corresponding income or expense line in profit or loss in the statement of comprehensive income. When a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognized when the hedged forecasted transaction is ultimately recognized in the statement of comprehensive income. When a forecasted transaction is no longer expected to occur, the cumulative gain and loss that was reported in equity is immediately transferred to profit or loss in the statement of comprehensive income.

 

(ii) Embedded derivative instruments

 

Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives. The Bank records embedded derivative instruments at fair value if their economic characteristics and risks are not clearly and closely related to those of the host contract. If the embedded derivative cannot be measured separately from the host contract, the Bank aggregately designates the host contract and embedded derivative as a financial instrument at fair value through profit or loss. Changes due to the fair value assessment of embedded derivative instruments are recognized in profit or loss.

 

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Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(iii) Other derivative financial instruments

 

Changes in the fair value of other derivative financial instrument, not designated as a hedging instrument, are recognized immediately in profit or loss.

 

(8) Fair value of financial instruments

 

The fair value of financial instruments that are traded in active markets is determined by referencing quoted market prices at each reporting date. For financial instruments not traded in an active market, the fair value is determined using appropriate valuation techniques. Such techniques may include discounted cash flow analysis or other valuation methods.

 

The Bank’s policies for measuring fair value of financial instruments at amortized costs are as follows:

 

   

Cash and due from banks: Fair value of cash is considered equivalent to the carrying amount. In the case of due from banks on demand, which do not have a set maturity and can be realized instantly, the carrying amount is considered to be a close estimate of the fair value and is assumed so. In the case of other ordinary due from banks, the cash flow discount method is used to estimate the fair value.

 

   

Loans: The fair value of loans is the expected future cash flows, reflecting premature redemption ratio, discounted by the market interest rate, adjusted by a spread sheet considering the probability of default. Exceptions to this method include loans with credit line facilities, loans with a maturity of three months or less left and impaired loans, which the Bank assumes the carrying amount as the fair value.

 

   

Held-to-maturity financial assets: The fair value of held-to-maturity financial assets is computed by widely-accepted appraisal agencies upon request.

 

   

Deposits: The fair value of deposits is computed using the discounted cash flow method. However for deposits, whose cash flows cannot be estimated reasonably, the Bank assumes the carrying amount as the fair value.

 

   

Borrowings: For borrowings in Korean won, the fair value is computed using the discounted cash flow method. For borrowings in foreign currency, the fair value is computed by widely-accepted appraisal agencies upon request.

 

   

Bonds: The fair value of industrial financial debentures in Korean won, except structured debentures in Korean won, is computed using the discounted cash flow method. For structured industrial financial debentures in Korean won and industrial financial debentures in foreign currency, the fair value is computed by widely-accepted appraisal agencies upon request.

 

   

Other financial assets and liabilities: The fair value of other financial assets and liabilities is computed using the discounted cash flow method. However, in cases cash flow cannot be estimated reasonably, the Bank assumes the carrying amount as the fair value.

 

(9) Day one profit or loss recognition

 

For financial instruments classified as level 3 on the fair value level hierarchy measured using assess variables not observable in the market, the difference between the fair value at initial recognition and the transaction price, which is equivalent to Day one profit or loss, is amortized by using the straight line method over time on an appropriate basis.

 

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Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(10) Property and equipment

 

The Bank’s property and equipment are recognized at the carrying amount as historical costs less accumulated depreciation and accumulated impairment in value. Historical costs include the expenditures directly related to the acquisition of assets.

 

Subsequent costs are recognized in the carrying amount of assets or, if appropriate, as separate assets if the probabilities future economic benefits associated with the assets will flow into the Bank and the costs can be measured reliably; the carrying amount of the replaced part is derecognized. Furthermore, any other repairs or maintenances are charge to profit or loss as incurred.

 

Land is not depreciated. Depreciation on other assets is calculated using the straight line method to the amount of residual value less acquisition cost over the following estimated useful lives:

 

Type

   Useful lives (years)  

Buildings

     20 ~ 50   

Structure

     10 ~ 40   

Leasehold improvements

     4   

Movable property

     4   

 

Property and equipment are impaired when its carrying amount exceeds the recoverable amount. The Bank assesses residual value and economic life of its assets at each reporting date and makes adjustments to its useful life when necessary. Any gain or loss arising from the disposal of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is recognized in non-operating income (expense) in the statement of comprehensive income.

 

(11) Investment property

 

The Bank classifies property held for the purpose of rental income or benefits from capital appreciation as investment property. Investment property is measured initially at cost, including transaction costs. Subsequent to initial recognition, the cost model is applied. Subsequent to initial recognition, an item of investment property is carried at its cost less any accumulated depreciation and any accumulated impairment loss.

 

Investment properties are derecognized either when they have been disposed of or when the investment property is permanently withdrawn from use and no future economic benefit is expected from its disposal. The difference between the net disposal proceeds and the carrying amount of the asset is recognized in the statement of comprehensive income in the period of de-recognition. Reclassification to other account is made if there is a change in use of corresponding investment property.

 

Depreciation of investment property is calculated using the straight line method over its estimated useful lives as follows:

 

Type

   Useful lives (years)  

Buildings

     20 ~ 50   

Structure

     10 ~ 40   

 

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Table of Contents

Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(12) Intangible assets

 

An intangible asset is recognized only when its cost can be measured reliably, and the probabilities future economic benefits from the asset will flow into the Bank are high. Separately acquired intangible assets are recognized at the acquisition cost, and subsequently, the cost less accumulated depreciation and accumulated impairment is recognized as the carrying amount.

 

Intangible assets with finite lives are amortized over the four-year to 30-year period of useful economic lives using the straight line method. At the end of each reporting period, the Bank reviews intangible assets for any evidence that indicate impairment, and upon the presence of such evidence, the Bank estimates the amount recoverable and recognizes the loss accordingly.

 

Intangible assets with indefinite useful lives are not amortized, but are tested for impairment annually. Furthermore, the Bank reviews such intangible assets as to determine whether or not it is appropriate to consider these assets to have indefinite useful lives. If in the case the Bank concludes an asset is not qualified to be classified as non-finite, prospective measures are taken to consider such an asset as finite.

 

(13) Impairment of non-financial assets

 

The Bank tests for any evidence of impairment in assets and reviews whether or not the impairment has taken place by estimating the recoverable amount, at the end of each reporting period. The recoverable amount is the higher of the fair value less cost and value in use of an asset.

 

Except for impairment losses in respect of goodwill which are never reversed, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceeds the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years.

 

(14) Non-derivative financial liabilities

 

The Bank classifies non-derivative financial liabilities into financial liabilities at fair value through profit or loss or other financial liabilities, in accordance with the substance of the contractual arrangement and the definitions of financial liability. The Bank recognizes these financial liabilities in the statement of financial position when the Bank becomes a party to the contractual provisions of the financial liability.

 

(i) Financial liabilities at fair value through profit or loss

 

Financial liabilities at fair value through profit or loss in the current year include financial liabilities held for trading and financial liabilities designated at FVTPL upon initial recognition. Financial liabilities and derivatives are classified as financial instruments held for trading if they are acquired for the purpose of repurchasing in the near future. Financial liabilities are classified as financial liabilities at FVTPL upon initial recognition, if the profit or loss from the liabilities indicates to be more purpose-appropriate to be recognized as profit or loss. Financial liabilities at FVTPL are designated at fair value in subsequent measurements, and any related un-realized profit or loss is recognized as profit or loss.

 

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Table of Contents

Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(ii) Financial liabilities measured at amortized cost

 

Financial liabilities measured at amortized cost are recognized at fair value less cost less transaction cost upon initial recognition, and subsequently at amortized costs. The difference between the proceeds (net of transaction cost) and the redemption value is recognized in the statement of comprehensive income over the periods of the liabilities using the EIR.

 

Fees paid on the establishment of a loan facility are recognized as transaction costs of the loan, if the probability that some or all of the facility will be drawn down is high. If, however, there is not enough evidence to conclude a draw-down of some or all of the facility will occur, the fee is capitalized as a pre-payment for liquidity services and amortized over the period of the facility to which it relates.

 

(iii) De-recognition of financial liabilities

 

A financial liability is de-recognized when the obligation under the liability is discharged or cancelled or expired. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a de-recognition of the original liability and the recognition of a new liability. The difference between the carrying value of the original financial liability and the consideration paid is recognized in profit or loss.

 

(15) Employee benefits

 

(i) Short-term employee benefits

 

Short-term employee benefits are employee benefits that are due to be settled wholly before 12 months after the end of the period in which the employees render the related service. When an employee has rendered service to the Bank during an accounting period, the Bank recognizes the undiscounted amount of short-term employee benefits expected to be paid in exchange for that service.

 

(ii) Retirement benefits: defined contribution plans

 

A defined contribution plan is a pension plan under which the Bank pays fixed contributions into a separate fund. A defined benefit plan defines the amount of pension benefit that an employee will receive on retirement and is usually dependent on one or more factors such as years of service and compensation.

 

The Bank is no longer responsible for any foreseeable future liability after a certain amount or percentage of money is set aside for defined contribution plans. If the pension plan allows for early retirement, payments are recognized as employee benefits. If the contribution already paid exceeds the contribution due for service before the end of the reporting period, the Bank recognizes that excess as an asset to the extent that the prepayment will lead to a reduction in future payments or a cash refund.

 

(iii) Retirement benefits: defined benefit plans

 

The Bank’s net obligation in respect of defined benefit plans is calculated by estimating the amount of future benefit that employees have earned in the current and prior periods, discounting that amount and deducting the fair value of any plan assets. The calculation of defined benefit obligations is performed annually by a qualified actuary using the projected unit credit method. The present value of the defined benefit obligation is

 

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Table of Contents

Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and have terms to maturity similar to the terms of the related pension liability.

 

Remeasurements of the net defined benefit liabilities (assets), which comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognised immediately in other comprehensive income.

 

(16) Provisions

 

Provisions are recognized when the Bank has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.

 

(17) Financial guarantees

 

Financial guarantee contracts are contracts that require the issuer (the Bank) to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due, in accordance with the original or changed terms of a debt instrument. Financial guarantees are initially recognized in the financial statements at fair value on the date the guarantee was given, and amortized over the period of the guarantee. Subsequent to initial recognition, the Bank’s liabilities under such guarantees are measured at the higher of:

 

   

The amount determined in accordance with K-IFRS No. 1037 Provisions, Contingent Liabilities and Contingent Assets and

 

   

The initial amount less amortization of fees recognized in accordance with K-IFRS No. 1018 Revenue

 

(18) Securities under resale or repurchase agreements

 

Securities purchased under agreements to resell are recorded as other loans and receivables and the related interest from these securities is recorded as interest income; securities sold under agreements to repurchase are recorded as other borrowings, and the related interest from these securities is recorded as interest expense.

 

(19) Interest income and expense

 

Interest income and expense are recognized in profit or loss using the effective interest method. The effective interest method measures the amortized costs of financial instruments and allocates the interest income or expense during the related period.

 

Upon the calculation of the effective interest rate, the Bank estimates future cash flows by taking into consideration all contractual terms of the financial instrument, but not future credit loss. The calculation also reflects any fees or points paid or received, transaction costs and any related premiums or discounts. In the case that the cash flow and expected duration of a financial instrument cannot be estimated reliably, the effective interest rate is calculated by the contractual cash flow during the contract period.

 

Once an impairment loss has been recognized on a financial asset or a group of similar assets, subsequent interest income is recognized on the interest rate that was used to discount future cash flow for the purpose of measuring the impairment loss.

 

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Table of Contents

Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(20) Fees and commission income

 

Fees and commission income and expense are classified as follows according to related regulations:

 

(i) Fees and commission from financial instruments

 

Fees and commission income and expense that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate. It includes those related to evaluation of the borrowers’ financial status, guarantee, collateral, other agreements and related evaluation as well as business transaction, rewards for activities, such as document preparation and recording and setup fees incurred during issuance of financial liabilities. However, when financial instruments are classified as financial instruments at fair value through profit or loss, fees and commission are recognized as revenue upon initial recognition.

 

(ii) Fees and commission from services

 

Fees and commission income charged in exchange for services to be performed during a certain period of time such as asset management fees, consignment fees and assurance service fees are recognized as the related services are performed. When a loan commitment is not expected to result in the draw-down of a loan and K-IFRS No. 1039 Financial instrument: Recognition and Measurement is not applied for the commitment, the related loan commitment fees are recognized as revenue proportionally to time over the commitment period.

 

(iii) Fees and commission from significant transaction

 

Fees and commission from significant transactions, such as trading stocks and other securities, negotiation and mediation activities for third parties, for instance business transfer and takeover, are recognized when transactions are completed.

 

(21) Dividend income

 

Dividend income is recognized upon the establishment of the Bank’s right to receive the payment.

 

(22) Income tax expense

 

Income tax expense comprises current and deferred income tax. Current income tax and deferred income tax are recognized in profit or loss except to the extent that the tax arises from a transaction or event, which is recognized in other comprehensive income or directly in equity, or a business combination.

 

The Bank recognizes deferred income tax liabilities for all taxable temporary differences associated with investments in subsidiaries, associates, except to the extent that the Bank is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The Bank recognizes deferred income tax assets for all deductible temporary differences arising from investments in associates, to the extent that it is probable that the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilized.

 

Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the reporting period when the assets are realized or the liabilities settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.

 

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Table of Contents

Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

The measurement of deferred income tax assets and liabilities reflects the income tax effects that would follow from the manner in which the Bank expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

 

The carrying amount of a deferred income tax asset is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred income tax asset to be utilized.

 

Deferred income tax assets and liabilities are off-set only if the Bank has a legally enforceable right to off-set the related current income tax assets and liabilities, and the assets and liabilities relate to income tax levied by the same tax authority and are intended to be settled on a net basis.

 

Additional income taxes arising from dividend payments are recognized when expenses related to dividend payments are recognized.

 

(23) Accounting for trust accounts

 

The Bank, for the purpose of financial reporting, differentiates trust assets from identifiable assets according to the Financial Investment Services and Capital Markets Act. Furthermore, the Bank receives trust fees from the application, management and disposal of trust assets, and appropriates such amounts for fees from trust accounts.

 

Meanwhile, in the case the fee from an unspecified principal and interests guaranteed money in trust does not meet the principal or interest amount, even after appropriating deficit with trust fees and special reserve, the Bank fills in the remaining deficit in the trust account and appropriates such amounts for losses on trust accounts

 

(24) Regulatory reserve for loan loss

 

In the case that the total sum of allowance for possible loan loss does not meet the amount prescribed in Article 29(1) of the Regulations on Supervision of Banking Business, the Bank, according to K-IFRS, records the difference at the end of each reporting period, and records the equal amount as a reserve for loan loss.

 

In the case that the existing total sum of reserve for possible loan loss exceeds the amount needed to be set aside as of the closing date, the surplus is to be reversed. Furthermore, in the case that undisposed deficit exists, reserves for loan loss is saved from the time the undisposed deficit is disposed.

 

(25) Earnings per share

 

The Bank represents its diluted and basic earnings per common share in the separate comprehensive statement of income. Basic earnings per share (“EPS”) is calculated by dividing net profit attributable to shareholders of the Bank by the weighted average number of common shares outstanding during the reporting period. Diluted earnings per share is calculated by adjusting net profit attributable to common shareholders of the Bank, considering dilution effects from all potential common shares, and the weighted average number of common shares outstanding.

 

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Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(26) Changes in accounting policies and the impact of changes

 

(i) Changes in accounting policies

 

Except for the following new standards and amendments, adopted annual period beginning January 1, 2013, to existing standards, the Bank applies its accounting policies consistently to which were used for preparing its financial statements for all periods presented.

 

   

K-IFRS No. 1113 Fair Value Measurement

 

   

K-IFRS No. 1019 Employee Benefits

 

   

Presentation of items in other comprehensive income. (Amendments to K-IFRS No. 1001 Presentation of Financial Statements)

 

   

Disclosure of offsetting financial assets and financial liabilities. (Amendments to K-IFRS No. 1107 Financial Instruments: Disclosures)

 

Followings are characteristics of the accounting policy changes, and the impact of changes in accounting policy is disclosed. In accordance with the amendments, the Bank retroactively restated the comparative information of the separate financial statements as of and for the year ended December 31, 2012, and the separate statement of financial position as of January 1, 2012.

 

Fair Value Measurement

 

K-IFRS No. 1113, ‘Fair Value Measurement’ defines the fair value and the single framework for the fair value, and replaces the requirement about fair value measurements contained in individual standards. The standard defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard includes requirements from K-IFRS No. 1107 and other standards, regarding fair value measurements and related disclosures. The Bank included the required disclosures in notes 43.

 

The Bank applies the application guidance for fair value measurement prospectively in accordance with the transition of K-IFRS No. 1113, and does not provide comparative information related to the new disclosures. The revised amounts of the fair values of assets and liabilities, measured under the standard, do not impact the financial statements significantly.

 

Defined benefit retirement plans

 

The Bank applied amendments to the recognition of actuarial gains and losses that are related to defined benefit retirement plans in accordance to K-IFRS No. 1019 Employee Benefits, and decided to apply the discount rate used to measure the defined benefit obligation at the beginning of the reporting period, to calculate the net interest expense (income) of the net defined benefit liability (asset). Changes to the net defined liabilities (assets) due to contributions and salaries paid during the reporting period are under consideration. Therefore, the net interest for the net defined benefit liability (asset) is comprised of the interest cost on the defined benefit obligation; the interest income on plan assets; and the effects of asset recognition. Prior to the amendment, the Bank determined the interest income on plan assets based on the long-term expected rate of return.

 

Presentation of items in other comprehensive income

 

The amendments to K-IFRS No. 1001 Presentation of Financial Statements require items in other comprehensive income to be grouped, according to character, under two categories: items that will not be

 

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Table of Contents

Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

reclassified subsequently to profit or loss, and items that may be reclassified subsequently to profit or loss upon satisfying specific conditions. Therefore, the statement of comprehensive income for the year ended December 31, 2012, presented for comparative purposes, has been restated.

 

Offsetting financial assets and financial liabilities

 

The bank included disclosures of offsetting financial assets and financial liabilities in accordance to K-IFRS No. 1107, as explained in notes 45.

 

(ii) Impact of changes in accounting policy

 

Amendments to K-IFRS No. 1019, ‘Employee Benefits’

 

Financial effects succeeding the amendments to K-IFRS No. 1019 Employee Benefits are as follows:

 

   

Statements of financial position

 

(In millions of won)

   December 31, 2013     December 31, 2012     January 1, 2012  

Increase effect on amount of accumulated other comprehensive income (*)

    20,209        12,461        12,980   

Decrease effect on retained earnings

     (20,209     (12,629     (7,258

 

(*) The amounts as of December 31, 2012 and January 1, 2012 include the effect of reclassification of available-for-sale financial assets to investments in associates considering the Bank had significant influence on the entities.

 

   

Statements of comprehensive income

 

(In millions of won)

   2013     2012  

Decrease effect on defined benefits

    10,000        7,086   

Increase effect on income tax expense

     (2,420     (1,715

Decrease effect on profit for the year

     (7,580     (5,371

Increase effect on other comprehensive income

     7,580        5,371   

 

(27) New standards and interpretations not yet adopted

 

The following new standards, interpretations and amendments to existing standards have been issued but are not yet effective for the annual period beginning January 1, 2013, and the Bank has not early adopted them. The impacts of adopting these new changes cannot be estimated as of December 31, 2013.

 

K-IFRS No. 1032 Financial Instruments: Presentation

 

The amendments clarified the application guidance related to offsetting a financial asset and a financial liability. The amendment is mandatorily effective for periods beginning on or after January 1, 2014, with earlier application permitted.

 

K-IFRS No. 2121 Levies

 

K-IFRS No. 2121 defines a levy as an outflow from an entity imposed by a government in accordance with legislation. K-IFRS No. 2121 Levies is effective for annual periods beginning on or after January 1, 2014.

 

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Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

4. Cash and Due from Banks

 

(1) Cash and due from banks as of December 31, 2013 and 2012 are as follows:

 

     December 31, 2013     December 31, 2012  

Cash

   153,965        134,413   

Due from banks in Korean won:

    

Due from Bank of Korea

     1,973,652        706,759   

Other due from banks in Korean won

     462        392   
  

 

 

   

 

 

 
     1,974,114        707,151   
  

 

 

   

 

 

 

Due from banks in foreign currencies/off-shores

     3,582,359        1,854,387   

Provisions

     (101     (103
  

 

 

   

 

 

 
   5,710,337        2,695,848   
  

 

 

   

 

 

 

 

(2) Restricted due from banks as of December 31, 2013 and 2012 are as follows:

 

     December 31, 2013      December 31, 2012  

Reserve deposit

   1,779,520         782,064   

Others

     94,012         83,910   
  

 

 

    

 

 

 
   1,873,532         865,974   
  

 

 

    

 

 

 

 

5. Financial Assets Held for Trading

 

(1) Financial assets held for trading as of December 31, 2013 and 2012 are as follows:

 

      December 31, 2013      December 31, 2012  

Financial assets held for trading denominated in Korean won:

     

Equity securities:

     

Stocks and equity investments

   21,432         7,117   

Debt securities:

     

Government and public bonds

     1,063,318         1,346,611   

Financial bonds

     320,009         482,696   
  

 

 

    

 

 

 
     1,383,327         1,829,307   
  

 

 

    

 

 

 
     1,404,759         1,836,424   
  

 

 

    

 

 

 

Financial assets held for trading denominated in foreign currencies/off-shores:

     

Equity securities

     —           2,741   

Debt securities

     20,894         28,101   
  

 

 

    

 

 

 
     20,894         30,842   
  

 

 

    

 

 

 

Loaned financial assets held for trading:

     

Debt securities

     —           10,098   
  

 

 

    

 

 

 
   1,425,653         1,877,364   
  

 

 

    

 

 

 

 

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Table of Contents

Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

(2) Details of debt securities in financial assets held for trading as of December 31, 2013 and 2012 are as follows:

 

     December 31, 2013  
     Face value      Acquisition
cost
     Fair value
(Carrying amounts)
 

Government and public bonds in Korean won

   1,058,000         1,075,699         1,063,318   

Financial bonds in Korean won

     320,000         320,772         320,009   

Debt securities in foreign currencies/off-shores

     21,106         21,173         20,894   
  

 

 

    

 

 

    

 

 

 
   1,399,106         1,417,644         1,404,221   
  

 

 

    

 

 

    

 

 

 

 

     December 31, 2012  
     Face value      Acquisition
cost
     Fair value
(Carrying amounts)
 

Government and public bonds in Korean won

   1,328,000         1,340,957         1,346,611   

Financial bonds in Korean won

     482,500         484,363         482,696   

Debt securities in foreign currencies/off-shores

     28,123         31,285         28,101   

Loaned debt securities

     10,000         10,166         10,098   
  

 

 

    

 

 

    

 

 

 
   1,848,623         1,866,771         1,867,506   
  

 

 

    

 

 

    

 

 

 

 

Debt securities in Korean won are measured at the lower of fair values provided by NICE Bonds Pricing Services Inc. and KIS Bonds Pricing Inc. Debt securities in foreign currencies are measured at the lower of the fair values provided by NICE Bonds Pricing Services Inc. and the Korea Asset Pricing Co.

 

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Table of Contents

Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

6. Available-for-Sale Financial Assets

 

(1) Available-for-sale financial assets as of December 31, 2013 and 2012 are as follows:

 

     December 31, 2013      December 31, 2012  

Available-for-sale financial assets denominated in Korean won:

     

Equity securities:

     

Stocks and equity investments

   2,254,628         2,459,652   

Beneficiary certificates

     3,967,455         3,548,949   
  

 

 

    

 

 

 
     6,222,083         6,008,601   

Debt securities:

     

Government and public bonds

     732,834         212,514   

Financial bonds

     2,030,408         3,009,245   

Corporate bonds

     12,594,249         11,616,007   

Others

     —           216,386   
  

 

 

    

 

 

 
     15,357,491         15,054,152   
  

 

 

    

 

 

 
     21,579,574         21,062,753   
  

 

 

    

 

 

 

Available-for-sale financial assets denominated in foreign currencies/off-shores:

     

Equity securities

     386,817         280,374   

Debt securities

     3,508,314         3,523,621   
  

 

 

    

 

 

 
     3,895,131         3,803,995   
  

 

 

    

 

 

 

Loaned available-for-sale financial assets:

     

Debt securities

     59,528         19,262   
  

 

 

    

 

 

 
   25,534,233         24,886,010   
  

 

 

    

 

 

 

 

Equity securities with no quoted market prices in active markets and for which the fair value cannot be measured reliably are recorded at cost in the amount of ₩200,287 million as of December 31, 2013 (₩217,248 million as of December 31, 2012). The Bank does not have the intention to dispose of these financial assets in the near future.

 

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Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

(2) Changes in available-for-sale financial assets for the years ended December 31, 2013 and 2012 are as follows:

 

     2013     2012  

Beginning balance

   24,886,010        25,701,034   

Acquisition

     29,488,413        35,749,826   

Disposal

     (28,094,389     (35,977,234

Change due to amortization

     20,804        31,670   

Unrealized change in fair value recorded in equity

     (259,860     (8,285

Impairment loss

     (637,701     (307,384

Reversal of impairment loss

     22,138        46,878   

Reclassification

     (3,033     (163,693

Foreign exchange differences

     (67,745     (303,634

Others(*)

     179,596        116,832   
  

 

 

   

 

 

 

Ending balance

   25,534,233        24,886,010   
  

 

 

   

 

 

 

 

(*) Represents the value increase in available-for-sale equity securities acquired from Ssangyong Engineering & Consturction Co., Ltd., Oriental Precision & Engineering Co., Ltd., Pan Ocean Co., Ltd. and Taihan Electric Wire Co., Ltd. during the year ended December 31, 2013 after debt-for-equity swap decision, of The Creditor Financial Institutions Committee, based upon Corporate Restructuring Promotion Act.

 

(3) Equity securities with disposal restrictions in available-for-sale financial assets as of December 31, 2013 and 2012 are as follows:

 

Company

   December 31, 2013
   Number of
shares
     Carrying
amount
     Restricted period

Oriental Precison & Engineering Co., Ltd.

     60,511,999       78,666       Until December 31, 2016

KUMHO Tire Co., Inc.

     27,357,555         314,612       Until December 31, 2014

Ssangyong Cement Industry Co., Ltd.

     11,090,842         75,972       Undecided

KUMHO Industrial Co., Ltd.

     1,272,921         14,957       Until December 31, 2014

Taesan LCD Co., Ltd.

     1,405,514         3,718       Until December 31, 2013

Hanchang Paper Co., Ltd.

     6,409,200         3,878       Until December 31, 2014

Jaeyoung Solutec Co., Ltd.

     1,962,000         2,659       Until December 31, 2013

Byucksan Engineering & Construction Co., Ltd.

     188,830         632       Until June 30, 2014

Hanil Engineering & Construction Co., Ltd.

     183,803         —         Until December 31, 2014

Ssangyong Engineering & Consturction Co., Ltd.

     4,347,327         —         Until July 31, 2014

Taihan Electric wire Co., Ltd.

     4,991,100         24,698       Until December 20, 2014
  

 

 

    

 

 

    
     119,721,091       519,792      
  

 

 

    

 

 

    

 

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Table of Contents

Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

     December 31, 2012  

Company

   Number of
shares
     Carrying
amount
     Restricted period  
           Subject to shareholders’   

Pantech Co., Ltd.

     249,427,382       109,499         committee’s decision   

Chinhung International Inc.

     37,516,000         15,307         Until March 31, 2013   

Oriental Precison & Engineering Co., Ltd.

     22,920,666         27,642         Until December 31, 2016   

KUMHO Tire Co., Inc.

     13,161,600         145,409         Until December 31, 2014   

Ssangyong Cement Industry Co., Ltd.

     11,090,842         61,321         Undecided   

KUMHO Industrial Co., Ltd.

     8,910,453         13,455         Until December 31, 2014   

Taesan LCD Co., Ltd.

     7,027,574         2,117         Until December 31, 2013   

Hanchang Paper Co., Ltd.

     6,409,200         3,339         Until December 31, 2012   

Kumho Petrochemical Co., Ltd.

     4,281,715         507,041         Until May 3, 2013   

Jaeyoung Solutec Co., Ltd.

     1,962,000         1,550         Until December 31, 2012   

Byucksan Engineering & Construction Co., Ltd.

     1,480,833         28,660         Until April 12, 2014   

Namkwang Engineering & Construction Co., Ltd.

     1,406,139         20,280         Until March 31, 2013   

Hanil Engineering & Construction Co., Ltd.

     909,600         635         Until December 31, 2014   
  

 

 

    

 

 

    
     366,504,004       936,255      
  

 

 

    

 

 

    

 

(4) Details of debt securities in available-for-sale financial assets as of December 31, 2013 and 2012 are as follows:

 

     December 31, 2013  
     Face value      Acquisition
cost
     Fair value
(Carrying amounts)
 

Government and public bonds in Korean won

   747,644         757,703         732,834   

Financial bonds in Korean won

     2,030,000         2,032,254         2,030,408   

Corporate bonds in Korean won

     12,729,304         12,722,855         12,594,249   

Debt securities denominated in foreign currencies/off shores

     3,452,166         3,557,521         3,508,314   

Loaned debt securities

     60,000         60,410         59,528   
  

 

 

    

 

 

    

 

 

 
   19,019,114         19,130,743         18,925,333   
  

 

 

    

 

 

    

 

 

 

 

     December 31, 2012  
     Face
value
     Acquisition
cost
     Fair value
(Carrying amounts)
 

Government and public bonds in Korean won

   208,645         214,341         212,514   

Financial bonds in Korean won

     3,000,000         3,010,092         3,009,245   

Corporate bonds in Korean won

     11,540,988         11,533,463         11,616,007   

Others debt securities in Korean won

     306,735         132,431         216,386   

Debt securities denominated in foreign currencies/off shores

     3,455,038         3,540,277         3,523,621   

Loaned debt securities

     20,000         19,749         19,262   
  

 

 

    

 

 

    

 

 

 
   18,531,406         18,450,353         18,597,035   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

Debt securities in Korean won are measured at the lower of fair values provided by NICE Bonds Pricing Services Inc. and KIS Pricing Inc. Debt securities in foreign currencies are measured at the lower of the fair values provided by NICE Bonds Pricing Services Inc. and the Korea Asset Pricing Co.

 

7. Held-to-Maturity Financial Assets

 

(1) Held-to-maturity financial assets as of December 31, 2013 and 2012 are as follows:

 

     December 31, 2013      December 31, 2012  
     Amortized
cost
     Fair value      Amortized
cost
     Fair value  

Held-to-maturity financial assets in Korean won:

           

Government and public bonds

   7,109         7,703         7,178         8,195   

Corporate bonds

     20,000         20,200         80,600         81,713   

Corporate papers

     —           —           379         379   

Others

     —           —           533         533   
  

 

 

    

 

 

    

 

 

    

 

 

 
   27,109         27,903         88,690         90,820   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) Changes in held-to-maturity financial assets for the years ended December 31, 2013 and 2012 are as follows:

 

     2013     2012  

Beginning balance

   88,690        110,844   

Acquisition

     379        1,642   

Redemption

     (62,375     (24,176

Change due to amortization

     415        380   
  

 

 

   

 

 

 

Ending balance

   27,109        88,690   
  

 

 

   

 

 

 

 

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Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

8. Loans and Allowance for loan losses

 

(1) Loans and allowance for loan losses as of December 31, 2013 and 2012 are as follows:

 

     December 31, 2013      December 31, 2012  
     Amortized
cost
    Fair value      Amortized
cost
    Fair value  

Loans in Korean won:

         

Loans for working capital

   27,862,944        27,073,271         24,196,948        23,961,755   

Loans for facility development

     33,839,619        33,888,705         31,787,122        32,066,639   

Loans for households

     1,898,211        1,908,753         1,042,170        1,066,849   

Inter-bank loans

     870,808        797,131         716,934        667,329   
  

 

 

   

 

 

    

 

 

   

 

 

 
     64,471,582        63,667,860         57,743,174        57,762,572   
  

 

 

   

 

 

    

 

 

   

 

 

 

Loans in foreign currencies:

         

Loans

     11,944,025        12,296,262         11,847,735        12,026,708   

Inter-bank loans

     650,349        650,407         928,339        928,666   

Loans borrowed from overseas financial institutions

     288,502        293,119         323,191        328,803   

Off-shore loans receivables

     7,570,030        7,827,279         5,846,209        6,036,169   
  

 

 

   

 

 

    

 

 

   

 

 

 
     20,452,906        21,067,067         18,945,474        19,320,346   
  

 

 

   

 

 

    

 

 

   

 

 

 

Other loans receivables:

         

Bills bought in foreign currency

     1,225,933        1,224,039         1,979,494        1,972,617   

Advance payments on acceptances and guarantees

     144,304        116,486         99,342        87,816   

Privately-placed corporate bonds

     3,847,056        3,651,106         4,915,016        4,998,176   

Others

     7,978,031        7,890,162         8,192,687        8,189,675   
  

 

 

   

 

 

    

 

 

   

 

 

 
     13,195,324        12,881,793         15,186,539        15,248,284   
  

 

 

   

 

 

    

 

 

   

 

 

 
     98,119,812        97,616,720         91,875,187        92,331,202   
  

 

 

   

 

 

    

 

 

   

 

 

 

Less:

         

Allowance for loan losses

     (1,773,150        (782,541  

Present value discount

     (43,577        (49,006  

Deferred loan origination costs and fees

     5,328           (9,235  
  

 

 

      

 

 

   
   96,308,413           91,034,405     
  

 

 

      

 

 

   

 

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Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

(2) Changes in allowance for loan losses for the years ended December 31, 2013 and 2012 are as follows:

 

     2013  
     Loans in Korean won      Loans in
foreign
currencies
    Other loans  
     Loans for
working
capital
    Loans for
facility
development
    Others        Private
placed
corporate
bonds
    Others     Total  

Beginning balance

   334,652        183,359        2,720         120,995        88,108        52,707        782,541   

Provision for loan losses

     926,149        118,371        5,406         14,809        426,688        120,079        1,611,502   

Write-offs

     (94,086     (40,391     —           (22,404     (173,149     (6,500     (336,530

Foreign exchange differences

     —          —          —           (496     —          —          (496

Others(*)

     (225,499     (32,162     —           8,972        (18,285     (16,893     (283,867
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   941,216        229,177        8,126         121,876        323,362        149,393        1,773,150   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

     2012  
     Loans in Korean won      Loans in
foreign
currencies
    Other loans  
     Loans for
working
capital
    Loans for
facility
development
    Others        Private
placed
corporate
bonds
    Others     Total  

Beginning balance

   306,430        177,551        722         146,126        180,906        53,519        865,254   

Provision for loan losses

     264,978        68,565        1,998         27,255        81,808        10,788        455,392   

Write-offs

     (187,170     (33,012     —           (42,301     (124,192     (5,757     (392,432

Foreign exchange differences

     —          —          —           (63     —          —          (63

Others(*)

     (49,586     (29,745     —           (10,022     (50,414     (5,843     (145,610
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   334,652        183,359        2,720         120,995        88,108        52,707        782,541   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

(*) Others consist of changes due to the sales of loans, debt-to-equity swap and unwinding effect, etc.

 

(3) Losses related to loans for the years ended December 31, 2013 and 2012 are as follows:

 

     2013     2012  

Provision for loan losses

   (1,611,502     (455,392

Losses on disposal of loan

     (148,286     (367,691
  

 

 

   

 

 

 
   (1,759,788     (823,083
  

 

 

   

 

 

 

 

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Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

(4) Changes in net deferred loan origination cost and fees for the years ended December 31, 2013 and 2012 are as follows:

 

     2013     2012  

Beginning balance

   (9,235     (30,661

New deferrals

     15,296        15,201   

Amortization

     (733     6,225   
  

 

 

   

 

 

 

Ending balance

   5,328        (9,235
  

 

 

   

 

 

 

 

9. Derivative Financial Instruments

 

The Bank’s derivative financial instruments consist of trading derivatives and hedging derivatives, depending on the nature of each transaction. The Bank enters into hedging derivative transactions mainly for the purpose of hedging fair value risk related to changes in fair value of the underlying assets and liabilities.

 

The Bank enters into trading derivative transactions such as futures, forwards, swaps and options for arbitrage transactions by speculating on the future value of the underlying asset. Derivatives held-for trading transactions include contracts with the Bank’s clients and its liquidation position.

 

For the purpose of hedging the exposure to the variability of fair values of funds in Korean won by changes in interest rate, the Bank mainly uses interest swaps or currency swaps. The main counterparties are foreign financial institutions and local banks. In addition, to hedge the exposure to the variability of fair values of bonds in foreign currencies by changing in interest rate or foreign exchange rate, the Bank mainly uses interest swaps or currency swaps.

 

The notional amounts outstanding for derivative contracts and the carrying amounts of the derivative financial instruments as of December 31, 2013 and 2012 are as follows:

 

     December 31, 2013  
     Notional amounts      Carrying amounts  
     Buy      Sell          Asset             Liability      

Trading purpose derivative financial instruments:

          

Interest rate

   266,390,480         267,034,987         1,490,043        1,451,269   

Currency

     52,285,925         50,541,850         2,167,852        2,068,589   

Stock

     14,807         66,362         1,375        79   

Commodities

     443,279         443,279         747        747   

Embedded derivatives

     365,975         —           38,790        —     

Allowance and other adjustment

     —           —           (9,857     2,683   
  

 

 

    

 

 

    

 

 

   

 

 

 
     319,500,466         318,086,478         3,688,950        3,523,367   
  

 

 

    

 

 

    

 

 

   

 

 

 

Hedging purpose derivative financial instruments:

          

Interest rate

     12,163,375         12,163,375         472,907        120,809   

Currency

     5,418,326         5,481,823         158,774        235,955   

Allowance and other adjustment

     —           —           (1,359     (30
  

 

 

    

 

 

    

 

 

   

 

 

 
     17,581,701         17,645,198         630,322        356,734   
  

 

 

    

 

 

    

 

 

   

 

 

 
   337,082,167         335,731,676         4,319,272        3,880,101   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

     December 31, 2012  
     Notional amounts      Carrying amounts  
     Buy      Sell          Asset             Liability      

Trading purpose derivative financial instruments:

          

Interest rate

   213,966,676         213,815,527         2,045,492        1,981,840   

Currency

     47,659,949         45,108,471         2,167,155        1,959,234   

Stock

     24,568         84,638         324        1,029   

Commodities

     575,854         575,854         13,353        13,353   

Embedded derivatives

     359,872         —           105,981        —     

Allowance and other adjustments

     —           —           (11,357     4,750   
  

 

 

    

 

 

    

 

 

   

 

 

 
     262,586,919         259,584,490         4,320,948        3,960,206   
  

 

 

    

 

 

    

 

 

   

 

 

 

Hedging purpose derivative financial instruments:

          

Interest rate

     10,812,917         10,812,917         605,683        49,616   

Currency

     5,924,299         5,824,391         252,528        77,034   

Allowance and other adjustments

     —           —           (1,269     —     
  

 

 

    

 

 

    

 

 

   

 

 

 
     16,737,216         16,637,308         856,942        126,650   
  

 

 

    

 

 

    

 

 

   

 

 

 
   279,324,135         276,221,798         5,177,890        4,086,856   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

10. Investments in Subsidiaries and Associates

 

(1) Investments in subsidiaries and associates as of December 31, 2013 and 2012 are as follows:

 

     December 31,
2013
     December 31,
2012
 

Subsidiaries:

     

KDB Asia Ltd.

   214,807         214,807   

KDB Ireland Ltd.

     62,389         62,389   

KDB Bank Uzbekistan

     47,937         —     

UzKDB Bank(*1)

     —           29,207   

RBS NB Uzbekistan(*1)

     —           18,730   

KDB Bank Europe Ltd.

     151,952         151,952   

Banco KDB Do Brazil S.A(*2)

     —           48,523   

Korea Infrastructure Fund

     30,861         33,294   

KDB Consus Value PEF(*3)

     191,801         258,297   

KDB Value PEF III(*4)

     —           44,286   

KDB Value PEF VI(*5)

     1,565,968         2,343,423   

KDB Turn Around(*6)

     3,981         14,445   

Components and Materials M&A PEF

     142,184         165,756   

KoFC-KDB Materials and Components Investment Fund No. 1

     27,500         37,500   

Busan Hi—technology Industrial Complex

     150         150   
  

 

 

    

 

 

 
     2,439,530         3,422,759   
  

 

 

    

 

 

 

 

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Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

     December 31,
2013
     December 31,
2012
 

Associates:

     

Daewoo Shipbuilding & Marine Engineering Co., Ltd.

     1,052,166         1,040,486   

GM Korea Company

     287,774         287,774   

Korea BTL Fund I

     239,227         252,512   

Korea Railroad Fund I

     200,895         200,430   

Korea Infrastructure Fund II

     162,835         141,315   

Troika Resources Investment PEF

     133,311         107,173   

KDB electronic power PEF

     92,278         96,724   

Korea Education Fund

     85,115         88,482   

Shinbundang Railroad Co., Ltd.

     30,999         30,999   

Others

     247,532         315,959   
  

 

 

    

 

 

 
     2,532,132         2,561,854   
  

 

 

    

 

 

 
   4,971,662         5,984,613   
  

 

 

    

 

 

 

 

(*1) KDB Bank Uzbekistan was established by the merger of UzKDB and RBS NB Uzbekistan during the year ended December 31, 2013.
(*2) The Bank recognized ₩48,523 million of impairment losses as a result of the deteriorating rate of return of funds held for the year ended December 31, 2013. The Bank recognized ₩51,008 million of impairment losses considering the deteriorating business circumstances in Brazil as an indication of impairment for the year ended December 31, 2012. Brazil has been in economic depression, and the continuous decline in consumption has led to a slowdown in the growth of both the economy and the financial market.
(*3) The Bank recognized ₩69,994 million of impairment losses considering the declined values of holding contracts and new contracts of the subsidiary, KDB Life Insurance Co., Ltd., due to reduced interest rates as an indication of impairment for the year ended December 31, 2013. The impairment loss represents the carrying value of the CGU (KDB Life Insurance Co., Ltd.) in excess of the recoverable amount of the CGU, which is based on valuation performed by an independent external appraiser using the significant input of discount rate (10.00%).
(*4) KDB Value PEF III is under liquidation procedures as of December 31, 2013
(*5) The Bank recognized ₩860,613 million of impairment losses considering the declined value in use for the subsidiary, Daewoo Engineering & Construction Co., Ltd., due to the contraction of the foreign and domestic construction markets as an indication of impairment for the year ended December 31, 2013. The impairment loss represents the carrying value of the CGU (Daewoo Engineering & Construction Co., Ltd.) in excess of the recoverable amount of the CGU, which is based on valuation performed by an independent external appraiser using the significant input of discount rate (9.92%).
(*6) The Bank recognized ₩10,464 million and ₩58,372 million of impairment losses due to financial troubles affected by management deterioration of SunStar Co., Ltd., subordinate company of KDB Turn Around, for the years ended December 31, 2013, and 2012, respectively.

 

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Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

(2) The market value of marketable investments in subsidiaries and associates as of December 31, 2013 and 2012 are as follows:

 

     Market value      Carrying amounts  
     December 31,
2013
     December 31,
2012
     December 31,
2013
     December 31,
2012
 

Daewoo Shipbuilding & Marine Engineering Co., Ltd.

   2,107,601         1,624,265         1,052,166         1,040,486   

STX Offshore & Shipbuilding Co., Ltd. (*1), (*2)

     68,487         —           10         —     

STX Engine Co,. Ltd.(*1), (*2)

     19,088         —           4         —     

STX Heavy Industries Co,. Ltd.(*2)

     58,773         —           18         —     

 

(*1) The active market for the equity investment disappeared because stock trading was suspended after December 31, 2013 due to deteriorating business circumstances.
(*2) The Bank was able to obtain significant influence due to The Creditor Financial Institutions Committee’s debt-for-equity swap decision based upon the Corporate Restructuring Promotion Act during the year ended December 31, 2013.

 

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Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

(3) The key financial information of subsidiaries and associates invested and ownership ratios as of and for the year ended December 31, 2013 and 2012 are as follows:

 

    December 31, 2013  
    Country   Fiscal
year end
  Industry   Assets     Liabilities     Equity     Operating
revenue
    Net
income
(loss)
    Total
Comprehe-
nsive

income
(loss)
    Ratio
(%)
 

Subsidiaries :

                   

KDB Asia Ltd.

  Hongkong   December   Finance   847,478        590,224        257,254        54,675        17,408        6,203        100.00   

KDB Ireland Ltd.

  Ireland   December   Finance     355,293        277,391        77,902        20,927        5,074        3,688        100.00   

KDB Bank Uzbekistan

  Uzbekistan   December   Finance     852,484        773,554        78,930        37,058        17,313        9,291        86.34   

KDB Bank Europe Ltd.

  Hungary   December   Finance     1,167,824        1,023,783        144,041        91,684        5,871        6,536        100.00   

Banco KDB Do Brazil S.A

  Brazil   December   Finance     232,742        249,126        (16,384     80,008        (47,828     (52,405     100.00   

Korea Infrastructure Fund

  Korea   December   Financial

investment

    32,998        13        32,985        2,376        2,038        2,038        85.00   

KDB Consus Value PEF(*1)

  Korea   December   Financial

investment

    12,480,110        12,014,285        465,825        3,485,533        (102,895     (174,390     40.71   

KDB Value PEF III

  Korea   December   Financial

investment

    107        7        100        194        (7,969     (1,761     100.00   

KDB Value PEF VI

  Korea   December   Financial

investment

    11,976,687        8,497,564        3,479,123        9,070,118        (532,624     (582,550     99.84   

KDB Turn Around

  Korea   December   Financial

investment

    5,535        296        5,239        135        (2,537     9,095        95.17   

Components and Materials M&A PEF

  Korea   December   Financial

investment

    154,865        6,175        148,690        23,781        (32,510     (43,462     83.33   

KoFC-KDB Materials and Components Investment Fund No.1

  Korea   December   Financial

investment

    52,697        —          52,697        1,873        (2,435     (2,435     50.00   

Associates :

                   

Daewoo Shipbuilding & Marine Engineering Co., Ltd.

  Korea   December   Manufacturing   18,488,879        13,709,509        4,779,370        15,305,281        241,893        303,528        31.26   

GM Korea Company(*2)

  Korea   December   Manufacturing     10,082,452        8,366,881        1,715,571        18,624,412        (695,856     (695,856     17.02   

Korea BTL Fund I

  Korea   December   Financial

investment

    583,292        398        582,894        29,016        27,216        27,216        41.67   

Korea Railroad Fund I

  Korea   December   Financial

investment

    408,373        15        408,358        18,947        17,915        17,915        50.00   

Korea Infrastructure Fund II

  Korea   December   Financial

investment

    666,116        50,832        615,284        44,253        33,133        33,133        26.67   

Troika Resources Investment PEF

  Korea   December   Financial

investment

    234,373        1,344        233,029        (10,814     (15,946     (15,946     45.93   

KDB electronic power PEF

  Korea   December   Financial

investment

    181,937        2,493        179,444        12,947        4,962        4,962        50.00   

Korea Education Fund

  Korea   December   Financial

investment

    172,704        9        172,695        9,000        8,544        8,544        50.00   

Shinbundang Railroad Co., Ltd.(*3)

  Korea   December   Other     838,124        838,763        (639     49,321        (77,381     (77,381     10.98   

 

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Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

    December 31, 2012  
    Country   Fiscal
year end
  Industry   Assets     Liabilities     Equity     Operating
revenue
    Net
income
(loss)
    Total
Comprehe-
nsive

Income
(loss)
    Ratio
(%)
 

Subsidiaries :

                   

KDB Asia Ltd.

  Hongkong   December   Finance   820,085        569,034        251,051        46,132        17,533        17,533        100.00   

KDB Ireland Ltd.

  Ireland   December   Finance     351,588        277,374        74,214        21,289        4,836        4,836        100.00   

UzKDB Bank

  Uzbekistan   December   Finance     425,398        383,820        41,578        20,156        9,922        9,922        88.89   

RBS NB Uzbekistan

  Uzbekistan   December   Finance     561,427        533,365        28,062        17,079        7,130        7,130        82.35   

KDB Bank Europe Ltd.

  Hungary   December   Finance     862,951        725,446        137,505        109,972        8,844        8,844        100.00   

Banco KDB Do Brazil S.A

  Brazil   December   Finance     341,961        305,940        36,021        61,877        2,429        2,429        100.00   

Korea Infrastructure Fund

  Korea   December   Financial

investment

    35,556        14        35,542        2,622        2,245        2,245        85.00   

KDB Consus Value PEF(*1)

  Korea   December   Financial

investment

    11,289,225        10,638,202        651,023        3,377,857        7,552        7,552        40.63   

KDB Value PEF III

  Korea   December   Financial

investment

    55,618        121        55,497        213        (75     (75     100.00   

KDB Value PEF VI

  Korea   December   Financial

investment

    12,328,691        7,934,723        4,393,968        8,390,285        (86,169     (86,169     99.84   

KDB Turn Around

  Korea   December   Financial

investment

    333,109        336,965        (3,856     354,019        (8,252     (8,252     95.17   

Components and Materials M&A PEF

  Korea   December   Financial

investment

    192,715        572        192,143        4,879        2,403        2,403        83.33   

KoFC-KDB Materials and Components Investment Fund No. 1

  Korea   December   Financial

investment

    75,132        —          75,132        1,081        316        316        50.00   

Associates :

                   

Daewoo Shipbuilding& Marine Engineering Co., Ltd.

  Korea   December   Manufactur

-ing

  16,113,671        11,559,543        4,554,128        14,057,819        175,720        148,592        31.26   

GM Korea Company(*2)

  Korea   December   Manufactur

-ing

    9,900,039        7,469,622        2,430,417        2,070,636        302,904        263,681        17.02   

Korea BTL Fund I

  Korea   December   Financial

investment

    620,514        420        620,094        37,342        35,440        35,440        41.67   

Korea Railroad Fund I

  Korea   December   Financial

investment

    407,356        11        407,345        19,149        18,214        18,214        50.00   

Korea Infrastructure Fund II

  Korea   December   Financial

investment

    650,319        118,429        531,890        42,581        29,457        29,457        26.67   

Troika Resources Investment PEF

  Korea   December   Financial

investment

    192,766        1,574        191,192        (38,720     (44,003     (44,003     45.93   

KDB electronic Power PEF

  Korea   December   Financial

investment

    190,713        2,623        188,090        21,638        30,844        30,844        50.00   

Korea Education Fund

  Korea   December   Financial

investment

    179,660        9        179,651        9,607        9,144        9,144        50.00   

Shinbundang Railroad Co., Ltd.(*3)

  Korea   December   Other     881,841        805,099        76,742        42,279        (87,429     (87,429     10.98   

 

(*1) Although the Bank holds less than half of all voting rights, it is considered to have significant control of KDB Consus Value PEF. The Bank is notably open to variable profit of the investee company’s performance and influences variable profit through the decision of performance.
(*2)

Although the Bank’s ownership of GM Korea Company is less than 20%, the equity method is applied as the Bank is considered to have significant influence over GM Korea Company by exercising rights to elect board

 

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Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

 

of directors, etc. The Bank used the financial statement of GM Korea Company as of September 30, 2013 in applying the equity method since the Bank was not able to obtain the financial statement as of December 31, 2013. The Bank made adjustments for the effects of any significant events or transactions that occurred between the date of the investee’s financial statement and the date of the Bank’s financial statement.

(*3) The ownership ratio of Shinbundang Railroad Co. Ltd. is above 20% upon the consideration of shares owned by the Bank’s subsidiaries. Therefore, the Bank practices significant influence over associate Shinbundang Railroad.

 

11. Property and Equipment

 

Changes in property and equipment for the years ended December 31, 2013 and 2012 are as follows:

 

    2013  
    January 1, 2013     Acquisition/
depreciation
    Disposal     Reclassification     Foreign  exchange
differences
    December 31, 2013  

Acquisition cost:

           

Land

  199,865        —          (82     6,568        (57     206,294   

Buildings and structures

    286,590        1,148        (1,401     7,872        (695     293,514   

Leasehold improvements

    26,346        651        (619     1,716        (573     27,521   

Vehicles

    1,136        262        (179     —          (46     1,173   

Equipment

    38,315        3,348        (1,142     —          (136     40,385   

Construction in progress

    100        3,778        —          (3,878     —          —     

Others

    83,748        9,505        (1,105     —          (80     92,068   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    636,100        18,692        (4,528     12,278        (1,587     660,955   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated depreciation:

           

Buildings and structures

    88,165        8,959        (632     2,180        (274     98,398   

Leasehold improvements

    13,441        5,773        (617     —          (302     18,295   

Vehicles

    832        129        (51     —          (30     880   

Equipment

    28,297        3,024        (1,124     —          (111     30,086   

Others

    60,208        9,102        (1,103     —          (55     68,152   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    190,943        26,987        (3,527     2,180        (772     215,811   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Impairment loss:

           

Land

    3,023        —          —          —          —          3,023   

Buildings and structures

    2,361        —          —          —          —          2,361   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    5,384        —          —          —          —          5,384   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  439,773        (8,295     (1,001     10,098        (815     439,760   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

68


Table of Contents

Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

    2012  
    January 1, 2012     Acquisition/
depreciation
    Disposal     Reclassification     Foreign  exchange
differences
    December 31, 2012  

Acquisition cost:

           

Land

  209,947        —          —          (10,026     (56     199,865   

Buildings and structures

    285,092        840        (3     929        (268     286,590   

Leasehold improvements

    19,119        —          —          7,596        (369     26,346   

Vehicles

    1,212        —          (22     —          (54     1,136   

Equipment

    35,784        5,315        (2,455     —          (329     38,315   

Construction in-progress

    1,065        14,163        —          (15,128     —          100   

Others

    74,332        16,363        (6,955     —          8        83,748   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    626,551        36,681        (9,435     (16,629     (1,068     636,100   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated depreciation:

           

Buildings and structures

    80,922        8,333        (1     (823     (266     88,165   

Leasehold improvements

    11,085        2,712        —          —          (356     13,441   

Vehicles

    769        120        (22     —          (35     832   

Equipment

    28,477        2,565        (2,444     —          (301     28,297   

Others

    60,188        6,977        (6,882     —          (75     60,208   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    181,441        20,707        (9,349     (823     (1,033     190,943   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Impairment loss:

           

Land

    3,023        —          —          —          —          3,023   

Buildings and structures

    2,361        —          —          —          —          2,361   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    5,384        —          —          —          —          5,384   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  439,726        15,974        (86     (15,806     (35     439,773   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

69


Table of Contents

Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

12. Investment Property

 

Changes in investment property for the years ended December 31, 2013 and 2012 are as follows:

 

     2013  
     January 1,
2013
     Acquisition/
depreciation
    Reclassification     December 31,
2013
 

Acquisition cost:

         

Land

   62,023         —          (6,568     55,455   

Buildings and structures

     48,862         —          (5,710     43,152   
  

 

 

    

 

 

   

 

 

   

 

 

 
     110,885         —          (12,278     98,607   
  

 

 

    

 

 

   

 

 

   

 

 

 

Accumulated depreciation:

         

Buildings and structures

     15,424         1,693        (2,180     14,937   

Accumulated impairment loss:

         

Land

     1,197         —          —          1,197   

Buildings and structures

     1,778         —          —          1,778   
  

 

 

    

 

 

   

 

 

   

 

 

 
     2,975         —          —          2,975   
  

 

 

    

 

 

   

 

 

   

 

 

 
   92,486         (1,693     (10,098     80,695   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

Fair value of the Bank’s investment property, as determined on the basis of valuation by an independent appraiser, amounts to ₩88,091 million as of December 31, 2013 (₩95,267 million as of December 31, 2012). Additionally, fair value of investment in property is classified as level 3 according to the fair value hierarchy in Note 43.

 

     2012  
     January 1,
2012
     Acquisition/
depreciation
    Disposal     Reclassification      December 31,
2012
 

Acquisition cost:

            

Land

   65,428         —          (13,431     10,026         62,023   

Buildings and structures

     44,981         —          (565     4,446         48,862   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 
     110,409         —          (13,996     14,472         110,885   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Accumulated depreciation:

            

Buildings and structures

     13,361         1,490        (251     824         15,424   

Accumulated impairment loss:

            

Land

     8,371         —          (7,174     —           1,197   

Buildings and structures

     1,778         —          —          —           1,778   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 
     10,149         —          (7,174     —           2,975   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 
   86,899         (1,490     (6,571     13,648         92,486   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

70


Table of Contents

Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

13. Intangible Assets

 

Changes in intangible assets for the years ended December 31, 2013 and 2012 are as follows:

 

     2013  
     January 1,
2013
     Acquisition      Disposal      Amortization     Foreign
exchange
differences
    December 31,
2013
 

Development expense

   44,259         24,706         —           (12,554     —          56,411   

Equipment usage right

     949         —           5         (63     (14     877   

Other deposits provided

     10,904         14         —           —          (12     10,906   

Others

     15,391         8,798         —           (6,730     (2     17,457   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
   71,503         33,518         5         (19,347     (28     85,651   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

    2012  
    January 1,
2012
    Acquisition     Reclassification     Disposal     Amortization     Impairment
loss
    Foreign
exchange
differences
    December 31,
2012
 

Development expense

  38,261        17,345        —          —          (11,347     —          —          44,259   

Equipment usage right

    335        —          650        —          (63     —          27        949   

Other deposits provided

    11,642        685        (650     —          —          (684     (89     10,904   

Others

    8,731        11,999        —          (298     (5,036     —          (5     15,391   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  58,969        30,029        —          (298     (16,446     (684     (67     71,503   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

14. Other Assets

 

Other assets as of December 31, 2013 and 2012 are as follows:

 

     December 31,
2013
    December 31,
2012
 

Accounts receivable

   2,720,714        7,634,651   

Unsettled domestic exchange receivables

     851,673        2,360,742   

Accrued income

     436,844        464,588   

Guarantee deposits

     160,619        150,649   

Financial guarantee asset

     40,711        62,851   

Prepaid expenses

     8,175        10,038   

Advance payments

     741        1,348   

Others

     28,558        33,620   
  

 

 

   

 

 

 
     4,248,035        10,718,487   

Allowance for possible losses

     (72,941     (80,845

Present value discount

     (5,192     (6,309
  

 

 

   

 

 

 
   4,169,902        10,631,333   
  

 

 

   

 

 

 

 

71


Table of Contents

Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

The carrying amount of financial assets included in other assets above amounted to ₩4,139,475 million as of December 31, 2013, (₩10,605,108 million as of December 31, 2012) and their fair value amounted to ₩4,144,727 million as of December 31, 2013 (₩10,605,259 million as of December 31, 2012).

 

15. Financial Liabilities Designated at Fair Value Through Profit or Loss

 

(1) Financial liabilities designated at fair value through profit or loss as of December 31, 2013 and 2012 are as follows:

 

     December 31, 2013      December 31, 2012  

Borrowings

   9,289         10,770   

Bonds

     668,627         864,427   
  

 

 

    

 

 

 
   677,916         875,197   
  

 

 

    

 

 

 

 

The borrowings designated at “Fair Value Through Profit or Loss” (FVTPL) consist of equity-index-linked securities, and others. Through designating embedded derivatives and host contracts as FVTPL items, changes in fair value of complex financial products are recognized in profit or loss. Changes in fair value of structured bonds which hedge accounting are applied, are recognized in profit or loss, but structured bonds with no hedge accounting applied, are measured at amortized costs. Therefore, such structured bonds, not applied by hedge accounting, have been designated at FVTPL in order to eliminate mismatch in measurements of accounting profit and loss.

 

(2) The difference between the carrying amount and contractual cash flow amount of financial liabilities designated at fair value through profit or loss as of December 31, 2013 and 2012 are as follows:

 

     December 31, 2013      December 31, 2012  

Carrying amount

   677,916         875,197   

Contractual cash flow amounts

     560,201         711,400   
  

 

 

    

 

 

 

Difference

   117,715         163,797   
  

 

 

    

 

 

 

 

72


Table of Contents

Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

16. Deposits

 

Deposits as of December 31, 2013 and 2012 are as follows:

 

     December 31, 2013      December 31, 2012  
     Amortized cost      Fair value      Amortized cost      Fair value  

Deposits in Korean won:

           

Demand deposits

   286,104         286,104         267,844         267,844   

Time and savings deposits

     31,408,611         31,423,333         33,612,346         33,664,474   

Certificates of deposit

     72,914         73,027         74,996         75,339   
  

 

 

    

 

 

    

 

 

    

 

 

 
     31,767,629         31,782,464         33,955,186         34,007,657   
  

 

 

    

 

 

    

 

 

    

 

 

 

Deposits in foreign currencies:

           

Demand deposits

     1,936,949         1,936,948         1,400,675         1,400,675   

Time and savings deposits

     2,397,261         2,398,323         2,595,635         2,598,006   

Certificates of deposit

     1,625,431         1,626,113         700,836         701,184   
  

 

 

    

 

 

    

 

 

    

 

 

 
     5,959,641         5,961,384         4,697,146         4,699,865   
  

 

 

    

 

 

    

 

 

    

 

 

 
   37,727,270         37,743,848         38,652,332         38,707,522   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

17. Borrowings

 

(1) Borrowings as of December 31, 2013 and 2012 are as follows:

 

     December 31, 2013  
     Minimum
interest rate  (%)
     Maximum
interest rate (%)
     Amortized cost     Fair value  

Borrowings in Korean won

     0.22         5.30       4,605,373        4,605,345   

Borrowings in foreign currencies

     0.01         6.20         10,676,197        10,699,495   

Off-shore borrowings in foreign currencies

     0.19         4.27         2,262,188        2,265,441   

Others

     0.05         8.90         5,685,391        5,686,032   
        

 

 

   

 

 

 
           23,229,149        23,256,313   
        

 

 

   

 

 

 

Deferred borrowing costs

           (8,376  
        

 

 

   
         23,220,773     
        

 

 

   

 

     December 31, 2012  
     Minimum
interest rate  (%)
     Maximum
interest rate  (%)
     Amortized cost     Fair value  

Borrowings in Korean won

     0.04         5.54       4,836,678        4,837,474   

Borrowings in foreign currencies

     0.79         7.19         10,132,654        10,240,754   

Off-shore borrowings in foreign currencies

     0.14         4.27         2,208,683        2,214,110   

Others

     0.01         6.55         4,810,255        4,810,849   
        

 

 

   

 

 

 
           21,988,270        22,103,187   
        

 

 

   

 

 

 

Deferred borrowing costs

           (10,803  
        

 

 

   
         21,977,467     
        

 

 

   

 

73


Table of Contents

Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

(2) Borrowings in Korean won before adjusting for gains and losses on deferred borrowing costs as of December 31, 2013 and 2012 are as follows:

 

Lender

  

Classification

   Annual
interest rate
(%)
     December 31,
2013
     December 31,
2012
 

Ministry of Strategy and Finance

   Borrowings from government fund(*)      1.92 ~ 5.00       564,288         641,195   

Industrial Bank of Korea

   Borrowings from industrial technology fund      1.83 ~ 2.42         2,425         5,816   

Small & Medium Business Corp.

   Borrowings from small and medium enterprise promotion fund      1.87 ~ 4.21         306,085         384,467   

Ministry of Culture and Tourism

   Borrowings from tourism promotion fund      0.38 ~ 2.50         1,222,208         1,168,333   

Korea Energy Management Corporation

   Borrowings from fund for rational use of energy      0.25 ~ 3.75         1,187,543         1,225,670   

Local governments

   Borrowings from local small and medium enterprise promotion fund      1.49 ~ 5.30         95,204         110,292   

Others

   Borrowings from environment improvement support fund      0.22 ~ 5.00         1,227,800         1,300,905   
        

 

 

    

 

 

 
         4,605,373         4,836,678   
        

 

 

    

 

 

 

 

(*) Borrowings from government fund are subordinated borrowings.

 

74


Table of Contents

Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

(3) Borrowings and off-shore borrowings in foreign currencies before adjusting for gains and losses on deferred borrowing costs as of December 31, 2013, and 2012 are as follows:

 

Lender

 

Classification

   Annual
interest rate
(%)
   December 31,
2013
     December 31,
2012
 

Japan Bank for International Cooperation (“JBIC”)

  Borrowings from JBIC    1.44 ~ 2.16    288,502         323,191   

Mizuho and others

  Bank loans from foreign funds    3M Libor+0.45 ~
3M Telerate+3.80
     2,307,530         2,906,302   

Citi Bank and others

 

Off-shore short term

borrowings

   0.19 ~ 0.87      1,109,858         1,766,783   
     3M Telerate+0.50      31,659         —     
     6M Telerate+0.27 ~
9M Telerete+0.35
     73,871         —     
     1Y Telerate+0.40      52,765         —     
     6M Libor+0.27 ~ 0.65      —           85,688   
       

 

 

    

 

 

 
          1,268,153         1,852,471   
       

 

 

    

 

 

 

BNP-Paribas and Others

  Off-shore long term borrowings    3M Libor+0.35 ~ 0.75
3M Libor ~
     551,713         246,353   
     3M Telerate+1.05      316,590         —     
       

 

 

    

 

 

 
          868,303         246,353   
       

 

 

    

 

 

 

Japan Bank for International Cooperation (“JBIC”)

  Off-shore borrowings from JBIC    1.79      83,526         60,902   
     4.27 ~ 6M Libor+1.20      42,206         48,957   
       

 

 

    

 

 

 
          125,732         109,859   
       

 

 

    

 

 

 

Others

  Short term borrowings in foreign currencies    0.01 ~ 5.40      6,007,762         5,389,648   
  Long term borrowings in foreign currencies    0.40 ~ 6.20      2,072,403         1,513,513   
       

 

 

    

 

 

 
        12,938,385         12,341,337   
       

 

 

    

 

 

 

 

75


Table of Contents

Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

18. Bonds

 

(1) Bonds as of December 31, 2013 and 2012 are as follows:

 

     December 31, 2013  
     Minimum
interest rate (%)
     Maximum
interest rate (%)
     Amortized
cost
    Fair value  

Bonds in Korean won:

          

Bonds

     2.42         8.05       37,230,294        37,236,767   

Discount on bonds

           (37,739  

Valuation adjustment for fair value hedges

           33,534     
        

 

 

   

 

 

 
           37,226,089        37,236,767   
        

 

 

   

 

 

 

Bonds in foreign currencies:

          

Bonds

     3M Libor+0.24         3M Libor+6.28         11,760,585        12,262,063   

Discount on bonds

           (32,036  

Premium on bonds

           14,098     

Valuation adjustment for fair value hedges

           (66,308  
        

 

 

   

 

 

 
           11,676,339        12,262,063   
        

 

 

   

 

 

 

Off-shore bonds:

          

Bonds

     3M Libor+0.005         3M Libor+6.18         7,283,719        7,233,416   

Discount on bonds

           (20,845  

Premium on bonds

           14,103     

Valuation adjustment for fair value hedges

           (254,537  
        

 

 

   

 

 

 
           7,022,440        7,233,416   
        

 

 

   

 

 

 
         55,924,868        56,732,246   
        

 

 

   

 

 

 

 

76


Table of Contents

Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

     December 31, 2012  
     Minimum
interest rate (%)
   Maximum
interest rate (%)
   Amortized cost     Fair value  

Bonds in Korean won:

          

Bonds

   2.54    10.00    29,150,751        29,633,040   

Discount on bonds

           (39,489  

Valuation adjustment for fair value hedges

           90,165     
        

 

 

   

 

 

 
           29,201,427        29,633,040   
        

 

 

   

 

 

 

Bonds in foreign currencies:

          

Bonds

   3M Libor+0.24    3M Libor+6.28      11,777,389        12,442,760   

Discount on bonds

           (26,552  

Premium on bonds

           18,849     

Valuation adjustment for fair value hedges

           275,343     
        

 

 

   

 

 

 
           12,045,029        12,442,760   
        

 

 

   

 

 

 

Off-shore bonds:

          

Bonds

   3M Libor+0.42    3M Libor+6.18      5,736,595        5,834,461   

Discount on bonds

           (16,844  

Valuation adjustment for fair value hedges

           (64,530  
        

 

 

   

 

 

 
           5,655,221        5,834,461   
        

 

 

   

 

 

 
         46,901,677        47,910,261   
        

 

 

   

 

 

 

 

19. Defined Benefit Liabilities

 

The Bank implements a defined benefit retirement pension plan based on employee compensation benefits and service periods. The plan assets are in trusts with Kookmin Bank, Samsung Life Insurance co., Ltd., etc.

 

(1) Details of defined benefit liabilities as of December 31, 2013 and 2012 are as follows:

 

     December 31, 2013     December 31, 2012  

Present value of defined benefit liabilities

   203,285        183,401   

Fair value of plan assets

     (178,119     (164,516
  

 

 

   

 

 

 
   25,166        18,885   
  

 

 

   

 

 

 

 

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Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

(2) Changes in defined benefit liabilities for the years ended December 31, 2013 and 2012 are as follows:

 

     2013  
     Present value of
defined benefit
liabilities
    Fair value  of
plan
assets
    Defined benefit
liabilities  (assets)
 

Beginning balance

   183,401        (164,516     18,885   

Current service costs

     36,225        —          36,225   

Interest expense (income)

     6,529        (5,999     530   

Remeasurements of defined benefit liabilities:

      

Demographic assumption

     (12,463     —          (12,463

Financial assumption

     1,697        —          1,697   

Return on plan assets

     —          766        766   
  

 

 

   

 

 

   

 

 

 
     (10,766     766        (10,000
  

 

 

   

 

 

   

 

 

 

Benefits paid by the plan

     (12,104     12,032        (72

Contribution

     —          (20,402     (20,402
  

 

 

   

 

 

   

 

 

 

Ending balance

   203,285        (178,119     25,166   
  

 

 

   

 

 

   

 

 

 

 

     2012  
     Present value of
defined benefit
liabilities
    Fair value  of
plan
assets
    Defined benefit
liabilities (assets)
 

Beginning balance

   162,471        (144,935     17,536   

Current service costs

     26,980        —          26,980   

Interest expense (income)

     7,048        (5,317     1,731   

Remeasurements of defined benefit liabilities:

      

Demographic assumption

     (21,917     —          (21,917

Financial assumption

     16,174        —          16,174   

Return on plan assets

     —          (1,343     (1,343
  

 

 

   

 

 

   

 

 

 
     (5,743     (1,343     (7,086
  

 

 

   

 

 

   

 

 

 

Benefits paid by the plan

     (7,355     7,321        (34

Contribution

     —          (20,242     (20,242
  

 

 

   

 

 

   

 

 

 

Ending balance

   183,401        (164,516     18,885   
  

 

 

   

 

 

   

 

 

 

 

(3) Fair value of plan assets for each type as of December 31, 2013 and 2012 is as follows:

 

     December 31, 2013      December 31, 2012  
      Quoted
market
prices
     Unquoted
market
prices
     Quoted
market
prices
     Unquoted
market
prices
 

Due from banks

   —           178,119         —           164,516   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

(4) Defined benefit costs recognized in profit or loss for the years ended December 31, 2013 and 2012 are as follows:

 

     December 31, 2013      December 31, 2012  

Current service costs

   36,225         26,980   

Interest expense (income), net

     530         1,731   
  

 

 

    

 

 

 
   36,755         28,711   
  

 

 

    

 

 

 

 

(5) The principal actuarial assumptions used as of December 31, 2013 and 2012 are as follows:

 

     December 31, 2013      December 31, 2012  

Discount rate (%)

     4.27         3.70   

Future salary increasing rate (%)

     5.60         5.60   

 

(6) The present value sensitivity of defined benefit liabilities as principal actuarial assumptions change as of December 31, 2013 is as follows:

 

     Sensitivity  
     1% increase  in
assumption
     1% decrease  in
assumption
 

Discount rate

     8.73% decrease         9.45% increase   

Future salary increasing rate

     9.54% increase         8.86% decrease   

 

(7) The weighted-average expected time to maturity of defined benefit liabilities is 13.2 years as of December 31, 2013 (11.2 years as of December 31, 2012), and the expected contributions to the plan until the upcoming annual report amount to ₩9,800 million (₩13,835 million as of December 31, 2012).

 

20. Provisions

 

(1) Changes in provisions for the years ended December 31, 2013 and 2012 are as follows:

 

     2013  
     Provision  for
payment
guarantees
     Provision  for
unused
commitments
    Lawsuit
provision
    Other
provision
     Total  

Beginning balance

   49,180         37,031        1,900        1,032         89,143   

Increase (Reversal) of provision

     461,859         (11,208     (19     —           450,632   

Foreign exchange differences

     286         24        —          —           310   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   511,325         25,847        1,881        1,032         540,085   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

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Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

     2012  
     Provision  for
payment
guarantees
    Provision  for
unused
commitments
    Lawsuit
provision
    Other
provision
     Total  

Beginning balance

   63,748        194,122        2,953        1,032         261,855   

Increase (Reversal) of provision

     (14,449     (156,878     953        —           (170,374

Foreign exchange differences

     (119     (213     —          —           (332

Others

     —          —          (2,006     —           (2,006
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   49,180        37,031        1,900        1,032         89,143   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

(2) Provision for payment guarantees

 

Confirmed acceptances and guarantees, unconfirmed acceptances and guarantees and bills endorsed are not recognized on the statement of financial position, but are disclosed as off-statement of financial position items in the notes to the financial statements. The Bank provides a provision for such off-statement of financial position items, applying a Credit Conversion Factor (“CCF”) and provision rates, and records the provision as a reserve for possible losses on acceptances and guarantees.

 

(3) Provision for unused commitments

 

The Bank records a provision for a certain portion of unused credit lines which is calculated using a CCF as provision for unused commitments applying provision rates.

 

(4) Provision for possible losses from lawsuits

 

As of December 31, 2013, the Bank is involved in 9 lawsuits as a plaintiff and 24 lawsuits as a defendant. The aggregate amount of claims as a plaintiff and a defendant amounted to ₩3,750,568 million and ₩511,898 million, respectively. The Bank provided a provision against contingent loss from pending lawsuits as of December 31, 2013, and additional losses may be incurred depending on the final result of pending lawsuits.

 

The financial institution creditors of Renault Samsung Motors (including KDB) filed a lawsuit against Kun-hee Lee and 28 Samsung affiliates (including Samsung Electronics), claiming compensation for delays in payment of liquidated damages and contract bills based on the agreement signed on August 24, 1999. In connection to the litigation, the financial institution creditors partially won the second trial at the Seoul High Court, but both parties filed an appeal to the Supreme Court judgment, and are waiting for the final decision as of December 31, 2013.

 

The performance deposit of Hanhwa Chemical Co., Ltd. (the “defendant”) was confiscated by Korea Development Bank on January 12, 2009 for not fulfilling the terms of contract in MOU on acquisition of Daewoo Shipbuilding & Marine Engineering Co., Ltd. The defendant filed a lawsuit against the Group and KAMCO for redemption of the performance deposit on June 19, 2009. Seoul High Court decided in favor of the plaintiff in the first and the second trials, and the Group is waiting for final decision.

 

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Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

Major lawsuits in progress as of December 31, 2013 and 2012 are as follows:

 

     December 31, 2013
     Contents    Amounts      Status of lawsuit

Plaintiff:

        

29 Samsung affiliates (including Samsung Electronics)

   Deposit contracts, etc.    3,711,586       1st,  2nd trials ruled in
part favor of the
Bank; Pending
appeals

Gyenggi Urban Innovation Corporation

   Claim for refund of
investments
     19,100       1st trials in progress

SH Corporation

   Claim for damages      9,720       1st trials in progress

Defendant:

        

Hanhwa Chemical Co., Ltd.

   Performance bonds    322,593       1st, 2nd trials ruled in
favor of the Bank;
Pending appeals

Simmtech Co., Ltd.

   Claim for damages      115,465       1st trials in progress

Cheonan city

   Delivery of stocks, etc.      29,292       1st trials in progress

Standard Chartered Bank Korea Ltd.

   Claim for sales billings      20,177       1st trial ruled
against the Bank;
Pending appeals

Plaintiff:

        

29 Samsung affiliates (including Samsung Electronics)

   Deposit contracts, etc.    3,711,586       1st, 2nd trials ruled in
part favor of the
Bank; Pending
appeals

Private Real Estate Investment Trust Fund 1st

   Loans, etc.      263,051       1st trials in progress

Defendant:

        

Hanhwa Chemical Co., Ltd.

   Performance bonds    322,593       1st, 2nd trials ruled in
favor of the Bank;
Pending appeals

Simmtech Co., Ltd.

   Claim for damages      115,465       1st trials in progress

Cheonan city

   Delivery of stocks, etc.      29,292       1st trials in progress

Standard Chartered Bank Korea Ltd.

   Claim for sales billings      20,177       1st trials in progress

 

In December 2013, the Supreme Court of Korea ruled that all fixed payments such as bonuses and allowances that have been uniformly provided to employees on a regular basis must now be included when calculating the employee’s ordinary wage. As of December 31, 2013, there is no lawsuit related with ordinary wage from the Bank’s employees and management cannot reliably estimate the potential impacts, if any, on the Bank’s financial position, financial performance and cash flows.

 

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Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

21. Other Liabilities

 

Other liabilities as of December 31, 2013 and 2012 are as follows:

 

     December 31, 2013     December 31, 2012  

Accounts payable

   2,674,054        7,596,780   

Accrued expense

     1,385,434        1,377,364   

Advance receipts

     1,311        463   

Unearned income

     37,994        44,753   

Deposits withholding tax

     25,926        31,016   

Guarantee money received

     101,319        302,617   

Foreign exchanges payable

     22,923        6,277   

Domestic exchanges payable

     285,965        1,931,584   

Borrowing from trust accounts

     487,220        287,073   

Financial guarantee liability

     59,083        69,256   

Suspense payable

     108,200        105,858   

Others

     56,956        72,897   
  

 

 

   

 

 

 
     5,246,385        11,825,938   

Present value discount

     (434     (604
  

 

 

   

 

 

 
   5,245,951        11,825,334   
  

 

 

   

 

 

 

 

The carrying amount of financial liabilities included in other liabilities above amounted to ₩4,982,513 million as of December 31, 2013 (₩11,617,104 million as of December 31, 2012) and their fair value amounted to ₩4,982,526 million as of December 31, 2013 (₩11,617,210 million as of December 31, 2012).

 

22. Equity

 

(1) Issued capital

 

The Bank is authorized to issue up to 3,000 million shares of common stock and has 1,852,372,235 shares issued as of December 31, 2013 (1,850,372,235 shares issued as of December 31, 2012), and outstanding with a total par value of ₩9,261,861 million as of December 31, 2013 (₩9,251,861 million as of December 31, 2012).

 

(2) Capital surplus

 

The Bank reduced ₩5,178,600 million of its issued capital in 1998 and 2000 to offset its accumulated deficit amounting to ₩5,134,227 million. As the result of the capital reduction, ₩44,373 million of surplus exceeding accumulated deficit was recorded in capital surplus in equity.

 

(3) Capital adjustments

 

Capital adjustments as of December 31, 2013 and 2012 are as follows:

 

     December 31, 2013     December 31, 2012  

Discount on stock issuance

   (51     —     

 

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Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

(4) Accumulated other comprehensive income

 

(i) Accumulated other comprehensive income (loss) as of December 31, 2013 and 2012 are as follows:

 

     December 31, 2013     December 31, 2012  

Valuation gain on available-for-sale financial assets:

    

Valuation gain on available-for-sale financial assets (before tax)

   477,463        737,323   

Income tax effect

     (115,532     (178,386
  

 

 

   

 

 

 
     361,931        558,937   
  

 

 

   

 

 

 

Exchange differences on translation of foreign operations:

    

Exchange differences on translation of foreign operations (before tax)

     (65,523     (49,320

Income tax effect

     15,856        11,935   
  

 

 

   

 

 

 
     (49,667     (37,385
  

 

 

   

 

 

 

Remeasurements of defined benefit liabilities:

    

Remeasurements of defined benefit liabilities (before tax)

     26,661        16,661   

Income tax effect

     (6,452     (4,032
  

 

 

   

 

 

 
     20,209        12,629   
  

 

 

   

 

 

 
   332,473        534,181   
  

 

 

   

 

 

 

 

(ii) Changes in accumulated other comprehensive income for the years ended December 31, 2013 and 2012 are as follows:

 

     2013  
     January 1,
2013
    Increase
(Decrease)
    Tax
Effect
    December 31,
2013
 

Valuation gain (loss) on available-for-sale financial assets

   558,937        (259,860     62,854        361,931   

Exchange differences on translation of foreign operations

     (37,385     (16,203     3,921        (49,667

Remeasurements of defined benefit liabilities

     12,629        10,000        (2,420     20,209   
  

 

 

   

 

 

   

 

 

   

 

 

 
   534,181        (266,063     64,355        332,473   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     2012  
     January 1,
2012
     Increase
(Decrease)
    Tax
Effect
    December 31,
2012
 

Valuation gain (loss) on available-for-sale financial assets

   565,171         (8,285     2,051        558,937   

Exchange differences on translation of foreign operations

     6,128         (57,404     13,891        (37,385

Remeasurements of defined benefit liabilities

     7,258         7,086        (1,715     12,629   
  

 

 

    

 

 

   

 

 

   

 

 

 
   578,557         (58,603     14,227        534,181   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

(5) Retained earnings

 

The Korea Development Bank Act requires the Bank to appropriate at least 40% of net income as a legal reserve. This reserve can be transferred to paid-in capital or offset an accumulated deficit. In accordance with the

 

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Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

Korea Development Bank Act, the Bank offsets an accumulated deficit with reserves. If the reserve is insufficient to offset the accumulated deficit, the Korean government is responsible for the deficit.

 

(i) Retained earnings as of December 31, 2013 and 2012 are as follows:

 

     December 31, 2013     December 31, 2012  

Legal reserve

   6,022,263        5,641,363   

Voluntary reserve

    

Regulatory reserve for loan losses

     1,306,925        1,034,949   

Unappropriated retained earnings (accumulated deficits)

     (621,744     1,711,670   
  

 

 

   

 

 

 
   6,707,444        8,387,982   
  

 

 

   

 

 

 

 

(ii) Changes in legal reserve for the years ended December 31, 2013 and 2012 are as follows:

 

     2013      2012  

Beginning balance

   5,641,363         5,076,393   

Transferred from unappropriated retained earnings

     380,900         564,970   
  

 

 

    

 

 

 

Ending balance

   6,022,263         5,641,363   
  

 

 

    

 

 

 

 

(iii) Changes in unappropriated retained earnings (accumulated deficits) for the years ended December 31, 2013 and 2012 are as follows:

 

     2013     2012(*)  

Beginning balance

   1,711,670        2,719,843   

Effects of accounting policy changes

     —          (7,258

Profit (loss) for the year

     (1,447,391     946,874   

Contribution to legal reserve

     (380,900     (564,970

Contribution to regulatory reserve for loan losses

     (271,976     (1,034,949

Dividends

     (233,147     (347,870
  

 

 

   

 

 

 

Ending balance

   (621,744     1,711,670   
  

 

 

   

 

 

 

 

(*) Restatement of the prior period reflects the effects of accounting policy changes, as described in note 3.(26).

 

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Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

(iv) Statements of appropriation of retained earnings (disposal of deficits) for the years ended December 31, 2013 and 2012 are as follows:

 

     2013     2012(*)  

I. Unappropriated retained earnings (accumulated deficits):

    

Unappropriated retained earning carried forward from the prior year

   825,647        772,054   

Effects of accounting policy changes

     —          (7,258

Profit (loss) for the year

     (1,447,391     946,874   
  

 

 

   

 

 

 
     (621,744     1,711,670   
  

 

 

   

 

 

 

II. Appropriation of retained earnings (disposal of deficits):

    

Legal reserve (transfer from legal reserve)

     (621,744     380,900   

Regulatory reserve for loan losses

     —          271,976   

Dividends

    

(Dividends per share ₩0 for 2013 and ₩126 for 2012)

     —          233,147   
  

 

 

   

 

 

 
     (621,744     886,023   
  

 

 

   

 

 

 

III. Unappropriated retained earnings (accumulated deficits) to be carried over to subsequent year

   —          825,647   
  

 

 

   

 

 

 

 

(*) Restatement of the prior period reflects the effects of accounting policy changes, as described in note 3.(26).

 

(6) Regulatory reserve for loan losses

 

The Bank is required to provide a regulatory reserve for loan losses in accordance with Regulations on Supervision of Banking Business 29(1) and (2). The details of regulatory reserve for loan losses are as follows:

 

(i) Regulatory reserve for loan losses as of December 31, 2013 and 2012 are as follows:

 

     December 31, 2013      December 31, 2012  

Beginning balance

   1,306,925         1,034,949   

Planned reserve for loan losses(*)

     —           271,976   
  

 

 

    

 

 

 

Ending balance

   1,306,925         1,306,925   
  

 

 

    

 

 

 

 

(*) With the occurrence of unappropriated deficits as of December 31, 2013, the regulatory reserve for loan losses will not be planned in accordance with Regulations on Supervision of Banking Business 29(2).

 

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Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

(ii) Obligated amount of provision for regulatory reserve for loan losses and profit (loss) after adjusting regulatory reserve for loan losses for the years ended December 31, 2013 and 2012 are as follows:

 

     2013     2012  

Profit (loss) for the year

   (1,447,391)        946,874   

Obligated amount of provision for regulatory reserve for loan losses(*)

     (17,152     (271,976
  

 

 

   

 

 

 

Profit (loss) after adjusting regulatory reserve for loan losses

   (1,464,543)        674,898   
  

 

 

   

 

 

 

Profit (loss) per share after adjusting regulatory reserve for loan losses (won)

   (791)        365   
  

 

 

   

 

 

 

 

(*) The Bank is required to reserve obligated amount of provision for regulatory reserve for loan losses according to the regulations and has been in compliance with the required minimum levels for the year ended December 31, 2013.

 

23. Net Interest Income

 

Net interest income for the years ended December 31, 2013 and 2012 are as follows:

 

     2013     2012  

Interest income:

    

Due from banks

   34,225        30,941   

Financial assets held for trading

     58,519        65,432   

Available-for-sale financial assets

     738,508        966,555   

Held-to-maturity financial assets

     3,144        5,309   

Loans

     3,932,156        3,962,133   
  

 

 

   

 

 

 
     4,766,552        5,030,370   
  

 

 

   

 

 

 

Interest expense:

    

Financial liabilities designated at fair value through profit or loss

     (45,267     (50,263

Deposits

     (1,091,342     (1,127,281

Borrowings

     (325,831     (441,374

Bonds

     (1,573,647     (1,665,282
  

 

 

   

 

 

 
     (3,036,087     (3,284,200
  

 

 

   

 

 

 

Net interest income

   1,730,465        1,746,170   
  

 

 

   

 

 

 

 

Interest received from impaired assets relating to loan receivables for the years ended December 31, 2013 and 2012 were ₩40,628 million and ₩19,766 million, respectively, and there was no interest received from impaired assets related to financial assets other than loans.

 

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Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

24. Net Fees and Commission Income

 

Net fees and commission income for the years ended December 31, 2013 and 2012 are as follows:

 

     2013     2012  

Fees and commission income:

    

Loan commissions

   189,704        232,400   

Underwriting and investment consulting commissions

     199,877        261,669   

Brokerage and agency commissions

     16,436        22,408   

Trust and retirement pension plan commissions

     29,799        33,529   

Fees on asset management commissions

     1,162        2,351   

Other fees(*)

     59,088        64,048   
  

 

 

   

 

 

 
     496,066        616,405   
  

 

 

   

 

 

 

Fees and commission expenses:

    

Brokerage and agency fees

     (8,510     (8,749

Other fees

     (33,822     (33,917
  

 

 

   

 

 

 
     (42,332     (42,666
  

 

 

   

 

 

 
   453,734        573,739   
  

 

 

   

 

 

 

 

(*) Other fees consist of agent fee, commitment fee, etc.

 

25. Dividend Income

 

Dividend income for the years ended December 31, 2013 and 2012 are as follows:

 

     2013      2012  

Financial assets held for trading

   191         167   

Available-for-sale financial assets

     66,061         62,024   

Investments in subsidiaries and associates

     71,617         188,091   
  

 

 

    

 

 

 
   137,869         250,282   
  

 

 

    

 

 

 

 

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Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

26. Net Gain (Loss) on Financial Assets Held for Trading

 

Net gain (loss) related to financial assets held for trading for the years ended December 31, 2013 and 2012 are as follows:

 

     2013     2012  

Gains on financial assets held for trading:

    

Gains on sale

   20,954        28,603   

Gains on valuation

     1,110        1,825   
  

 

 

   

 

 

 
     22,064        30,428   
  

 

 

   

 

 

 

Losses on financial assets held for trading:

    

Losses on sale

     (32,934     (20,201

Losses on valuation

     (3,240     (3,116

Purchase related expense

     (241     (283
  

 

 

   

 

 

 
     (36,415     (23,600
  

 

 

   

 

 

 
   (14,351     6,828   
  

 

 

   

 

 

 

 

27. Net Gain (Loss) on Financial Liabilities Designated at Fair Value Through Profit or Loss

 

Net gain (loss) related to financial liabilities designated at fair value through profit or loss for the years ended December 31, 2013 and 2012 are as follows:

 

     2013     2012  

Gains on financial liabilities designated at FVTPL:

    

Gains on redemption

   2,606        1,252   

Gains on valuation

     44,021        2,039   
  

 

 

   

 

 

 
     46,627        3,291   
  

 

 

   

 

 

 

Losses on financial liabilities designated at FVTPL:

    

Losses on redemption

     (119     (291

Losses on valuation

     (937     (67,095
  

 

 

   

 

 

 
     (1,056     (67,386
  

 

 

   

 

 

 
   45,571        (64,095
  

 

 

   

 

 

 

 

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Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

28. Net Gain (Loss) on Available-for-sale financial assets

 

Net gain (loss) on available-for-sale financial assets for the years ended December 31, 2013 and 2012 are as follows:

 

     2013     2012  

Gains on available-for-sale financial assets:

    

Gains on sale

   446,280        434,555   

Reversal of impairment losses

     22,138        46,878   
  

 

 

   

 

 

 
     468,418        481,433   
  

 

 

   

 

 

 

Losses on available-for-sale financial assets:

    

Losses on sale

     (31,568     (43,215

Impairment losses

     (637,701     (307,384
  

 

 

   

 

 

 
     (669,269     (350,599
  

 

 

   

 

 

 
   (200,851)        130,834   
  

 

 

   

 

 

 

 

29. Net Gain (Loss) on Derivatives

 

Net gain (loss) on derivatives for the years ended December 31, 2013 and 2012 are as follows:

 

     2013     2012  

Net gain (loss) on trading purpose derivatives:

    

Gains on trading purpose derivatives:

    

Interest

   1,858,925        1,696,417   

Currency

     4,703,321        4,707,670   

Stock

     6,013        45,433   

Commodity

     38,610        73,679   

Embedded derivatives

     22,260        61,023   

Gains on adjustment of derivatives

     6,158        4,687   
  

 

 

   

 

 

 
     6,635,287        6,588,909   
  

 

 

   

 

 

 

Losses on trading purpose derivatives:

    

Interest

     (1,972,484     (1,749,543

Currency

     (4,575,970     (4,838,268

Stock

     (4,713     (45,534

Commodity

     (38,528     (68,047

Embedded derivatives

     (13,529     (25,277

Losses on adjustment of derivatives

     (8,444     (11,614
  

 

 

   

 

 

 
     (6,613,668     (6,738,283
  

 

 

   

 

 

 
   21,619        (149,374
  

 

 

   

 

 

 

 

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Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

     2013     2012  

Net loss on hedging purpose derivatives:

    

Gains on hedging purpose derivatives:

    

Interest

   44,233        97,699   

Currency

     98,508        127,087   

Gains on adjustment of derivatives

     2,021        2,051   
  

 

 

   

 

 

 
     144,762        226,837   
  

 

 

   

 

 

 

Losses on hedging purpose derivatives:

    

Interest

     (228,126     (89,027

Currency

     (296,768     (151,090

Losses on adjustment of derivatives

     (2,174     (3,180
  

 

 

   

 

 

 
     (527,068     (243,297
  

 

 

   

 

 

 
     (382,306     (16,460
  

 

 

   

 

 

 

Net gain (loss) on fair value hedged items:

    

Gains on fair value hedged items:

    

Gains on valuation

     644,381        568,982   

Gains on redemption

     208,451        204,255   
  

 

 

   

 

 

 
     852,832        773,237   
  

 

 

   

 

 

 

Losses on fair value hedged items:

    

Losses on valuation

     (76,291     (124,062

Losses on redemption

     (164,575     (97,962
  

 

 

   

 

 

 
     (240,866     (222,024
  

 

 

   

 

 

 
     611,966        551,213   
  

 

 

   

 

 

 
   251,279        385,379   
  

 

 

   

 

 

 

 

30. Net Foreign Currency Transaction Gain (Loss)

 

Net foreign currency transaction gain (loss) for the years ended December 31, 2013 and 2012 are as follows:

 

     2013     2012  

Net gain (loss) on foreign exchange transactions:

    

Gains on sales

   813,930        556,057   

Losses on sales

     (843,468     (610,696
  

 

 

   

 

 

 
     (29,538     (54,639
  

 

 

   

 

 

 

Net gain (loss) on foreign exchange translations:

    

Gains on foreign exchange translations

     758,699        1,388,357   

Losses on foreign exchange translations

     (982,042     (1,609,718
  

 

 

   

 

 

 
     (223,343     (221,361
  

 

 

   

 

 

 
   (252,881)        (276,000
  

 

 

   

 

 

 

 

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Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

31. Other Operating Income (loss), net

 

Other operating income (loss) for the years ended December 31, 2013 and 2012 are as follows:

 

     2013     2012  

Other operating income:

    

Gains on sale of loans

   55,199        49,938   

Reversal of other provisions

     —          166   

Gains on disposal of investments in subsidiaries and associates

     6,268        708   

Reversal of provisions

     11,227        171,424   

Others

     7,918        10,409   
  

 

 

   

 

 

 
     80,612        232,645   
  

 

 

   

 

 

 

Other operating expenses:

    

Losses on sale of loans

     (203,485     (417,629

Contribution to provision for other assets

     (2,535     (6,865

Losses on disposal of investments in subsidiaries and associates

     (6,031     (1,859

Provision for other allowances

     (461,859     (1,050

Insurance expenses

     (62,140     (45,185

Credit guarantee fund salary

     (105,181     (93,722

Educational taxes

     (33,652     (30,552

Foreign security contributions

     (19,584     (19,566

Others

     (36,728     (53,538
  

 

 

   

 

 

 
     (931,195     (669,966
  

 

 

   

 

 

 
   (850,583     (437,321
  

 

 

   

 

 

 

 

32. General and Administrative Expenses

 

General and administrative expenses for the years ended December 31, 2013 and 2012 are as follows:

 

     2013      2012  

Payroll costs:

     

Short-term employee benefits

   262,650         263,656   

Defined benefit costs

     36,755         28,711   

Defined contribution costs

     273         —     

Termination benefits

     9,461         3,953   
  

 

 

    

 

 

 
     309,139         296,320   
  

 

 

    

 

 

 

Depreciation and amortization:

     

Depreciation of property and equipment

     26,987         20,707   

Amortization of intangible assets

     19,347         16,446   
  

 

 

    

 

 

 
     46,334         37,153   
  

 

 

    

 

 

 

 

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Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

     2013      2012  

Other:

     

Employee welfare benefits

     28,769         26,104   

Rent expenses

     24,057         22,105   

Taxes and dues

     17,011         16,645   

Advertising expenses

     18,220         32,810   

Electronic data processing expenses

     42,292         35,606   

Fees and charges

     23,048         20,376   

Others

     38,005         39,001   
  

 

 

    

 

 

 
     191,402         192,647   
  

 

 

    

 

 

 
   546,875         526,120   
  

 

 

    

 

 

 

 

33. Non-Operating Income and Expense

 

Non-operating income and expense for the years ended December 31, 2013 and 2012 are as follows:

 

     2013     2012  

Non-operating income:

    

Gain on disposal of property and equipment

   817        231   

Gain on disposal of intangible assets

     —          192   

Rental income on investment property

     1,230        1,721   

Others

     5,906        2,310   
  

 

 

   

 

 

 
     7,953        4,454   
  

 

 

   

 

 

 

Non-operating expenses:

    

Loss on disposal of property and equipment

     (502     (218

Depreciation of investment property

     (1,693     (1,490

Loss on disposal of investment property

     —          (3,003

Impairment losses on intangible assets

     —          (684

Donations

     (14,332     (9,255

Others

     (1,195     (559
  

 

 

   

 

 

 
     (17,722     (15,209
  

 

 

   

 

 

 
   (9,769     (10,755
  

 

 

   

 

 

 

 

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Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

34. Income Tax Expense (Benefit)

 

(1) Income tax expenses (benefit) for the years ended December 31, 2013 and 2012 are as follows:

 

     2013     2012  

Current income tax(*)

   202,113        404,756   

Changes in deferred income taxes on temporary differences

     (651,734     (143,779

Deferred income tax recognized directly to equity

     (64,355     (14,227

Changes in income taxes due to consolidated tax return

     (1,918     (5,424
  

 

 

   

 

 

 

Income tax expense (benefit)

   (515,894     241,326   
  

 

 

   

 

 

 

 

(*) Includes changes such as those that arise from final tax returns

 

(2) Profit (loss) before income taxes and income tax expense (benefit) for the years ended December 31, 2013 and 2012 are as follows:

 

     2013     2012  

Profit (loss) before income taxes

   (1,963,285     1,188,200   

Income taxes calculated using enacted tax rates (24.2%)

     (475,115     287,544   

Adjustments:

    

Non-deductible losses and tax free gains

     (16,871     34,898   

Non-recognition effect of deferred income taxes

     32,015        (29,921

Tax credit

     (20,926     (16,292

Changes in income taxes due to consolidated tax return

     (1,918     (5,424

Net adjustments for prior year

     (34,210     (66

Others

     1,131        (29,413
  

 

 

   

 

 

 
     (40,779     (46,218
  

 

 

   

 

 

 

Income tax expense (benefit)

   (515,894     241,326   
  

 

 

   

 

 

 

Effective tax rate

   % 26.28        20.31   

 

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Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

(3) Changes in temporary differences and deferred tax assets (liabilities) for the years ended December 31, 2013 and 2012 are as follows:

 

     2013  
     January 1,
2013
(*)
    Decrease     Increase     December 31,
2013
    Deferred tax
assets
(liabilities)
 

Derivative

   (1,108,677     (1,108,677     (455,982     (455,982     (110,348

Investments in subsidiaries and associates

     (663,003     10,124        1,095,391        422,264        102,188   

Gains on fair value hedged items valuation

     250,641        250,641        (233,536     (233,536     (56,516

Gains (losses) on foreign exchange translation for hedged liabilities

     87,228        87,228        244,343        244,343        59,131   

Impairment losses on investment bonds

     404,652        68,710        140,729        476,671        115,354   

Impairment losses on investment securities

     880,156        51,106        496,922        1,325,972        320,885   

Allowance for employee retirement benefits

     157,276        10,630        26,991        173,637        42,020   

Deposits for severance insurance

     (146,153     (10,630     (32,486     (168,009     (40,658

Held-for-trading securities

     (19,181     (19,177     2,126        2,122        513   

Available-for-sale bonds

     (257,601     (106,384     —          (151,217     (36,594

Bad debt charge

     460,140        54,839        300,152        705,453        170,720   

Other provisions

     (13,055     89,143        540,085        437,887        105,969   

Property impairment losses

     7,840        173        —          7,667        1,856   

Loan origination cost (fees)

     (1,569     (1,569     (13,703     (13,703     (3,316

Gains on sales of loans

     (437,953     (19,329     (74,668     (493,292     (119,377

Other

     (423,843     (75,111     278,305        (70,427     (17,044
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (823,102     (718,283     2,314,669        2,209,850        534,783   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Temporary differences from unrecognized deferred tax assets and liabilities:

          

Investments in subsidiaries and associates

     199,152        12,889        132,516        318,779        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   (623,950     (705,394     2,447,185        2,528,629        534,783   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

(*) Deferred income taxes as of January 1, 2013 reflected previous year’s additional tax adjustment after the financial statements were issued.

 

     2012  
     January 1,
2012
(*)
    Decrease     Increase     December 31,
2012
    Deferred tax
assets
(liabilities)
 

Derivative

   (1,329,182     (1,329,182     (1,108,677     (1,108,677     (268,300

Investments in subsidiaries and associates

     (855,580     (945     130,044        (724,591     (175,351

Gains on fair value hedged items valuation

     906,762        906,762        250,641        250,641        60,655   

Gains (losses) on foreign exchange translation for hedged liabilities

     (467,782     (467,782     87,228        87,228        21,109   

Impairment losses on investment bonds

     429,598        46,879        53,534        436,253        105,573   

Impairment losses on investment securities

     739,874        74,706        194,838        860,006        208,122   

Allowance for employee retirement benefits

     143,378        2,479        16,377        157,276        38,061   

Deposits for severance insurance

     (140,076     (2,479     (8,556     (146,153     (35,369

Held-for-trading securities

     (6,134     (5,792     (18,839     (19,181     (4,642

Available-for-sale bonds

     (383,702     (235,284     (141,385     (289,803     (70,132

Bad debt charge

     362,316        8,346        106,170        460,140        111,354   

Other provisions

     178,610        280,808        98,618        (3,580     (866

Property impairment losses

     15,187        7,347        —          7,840        1,897   

Loan origination cost (fees)

     20,622        20,622        (1,569     (1,569     (380

Gains on sales of loans

     (428,714     (9,557     (18,796     (437,953     (105,985

Other

     (600,891     (135,336     188,478        (277,077     (67,052
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (1,415,714     (838,408     (171,894     (749,200     (181,306
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Temporary differences from unrecognized deferred tax assets and liabilities:

          

Investments in subsidiaries and associates

     62,764        620        137,008        199,152        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   (1,352,950     (837,788     (34,886     (550,048     (181,306
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(*) Deferred income taxes as of January 1, 2012 reflected previous year’s additional tax adjustment after the financial statements were issued.

 

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Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

(4) Changes in deferred income taxes recognized directly to equity for the years ended December 31, 2013 and 2012 are as follows:

 

     2013  
     December 31,
2013
    Deferred tax
assets
(liabilities)
    December 31,
2012
    Deferred
tax assets
(liabilities)
    Changes in
deferred
tax assets
(liabilities)
 

Gains on valuation of available-for-sale financial assets

   361,931        (115,532     558,937        (178,386     62,854   

Exchange differences on translation of foreign operations

     (49,667     15,856        (37,385     11,935        3,921   

Remeasurements of defined benefit liabilities

     20,209        (6,452     12,629        (4,032     (2,420
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   332,473        (106,128     534,181        (170,483     64,355   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2012  
     December 31,
2012
    Deferred tax
assets
(liabilities)
    December 31,
2011
    Deferred
tax assets
(liabilities)
    Changes in
deferred
tax assets
(liabilities)
 

Gains on valuation of available-for-sale financial assets

   558,937        (178,386     565,171        (180,437     2,051   

Exchange differences on translation of foreign operations

     (37,385     11,935        6,128        (1,956     13,891   

Remeasurements of defined benefit liabilities

     12,629        (4,032     7,258        (2,317     (1,715
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   534,181        (170,483     578,557        (184,710     14,227   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

35. Earnings (loss) per Share

 

(1) Basic earnings (loss) per share

 

The Bank’s basic earnings (loss) per share for the years ended December 31, 2013 and 2012 are computed as follows:

 

(i) Basic earnings (loss) per share

 

     2013     2012  

Profit (loss) attributable to ordinary shareholders of the Bank (A)

   (1,447,391,046,665     946,873,545,560   

Weighted-average number of ordinary shares outstanding (B)

     1,850,454,427        1,850,372,235   
  

 

 

   

 

 

 

Basic earnings (loss) per share (A/B)

   (782     512   
  

 

 

   

 

 

 

 

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Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

(ii) Weighted-average number of shares of ordinary shares outstanding

 

     2013  
     Number of
ordinary shares
     Days      Cumulative
shares
 

Number of ordinary shares outstanding(A)

     1,850,372,235         365         675,385,865,775   

Increased paid-in capital(B)

     2,000,000         15         30,000,000   
        

 

 

 

Cumulative shares(C=A+B)

           675,415,865,775   
        

 

 

 

Weighted-average number of ordinary shares outstanding(C/365)

           1,850,454,427   
        

 

 

 
     2012  
     Number of
ordinary shares
     Days      Cumulative
shares
 

Number of ordinary shares outstanding

     1,850,372,235         366         677,236,238,010   
        

 

 

 

Cumulative shares(A)

           677,236,238,010   
        

 

 

 

Weighted-average number of ordinary shares outstanding(A/366)

           1,850,372,235   
        

 

 

 

 

(2) Diluted earnings (loss) per share

 

Diluted and basic earnings (loss) per share for the years ended December 31, 2013 and 2012 are equal because there is no potential dilutive instrument.

 

36. Pledged Assets

 

Assets pledged by the Bank as collateral as of December 31, 2013 and 2012 are as follows:

 

     December 31, 2013      December 31, 2012  
     Pledged assets      Related liabilities      Pledged assets      Related liabilities  

Available-for-sale financial assets(*)

   8,482,074         3,950,854         8,632,564         1,647,768   

 

(*) Pledged as collateral related to bonds sold under repurchase agreements and borrowings

 

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Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

37. Guarantees and Commitments

 

Guarantees and commitments as of December 31, 2013 and 2012 are as follows:

 

     December 31,
2013
     December 31,
2012
 

Confirmed acceptances and guarantees:

     

Acceptances in foreign currency

   763,968         720,522   

Guarantees for bond issuance

     989,822         682,447   

Guarantees for loans

     566,581         872,997   

Acceptances for foreign loans

     2,087         2,940   

Acceptances for letter of guarantee

     42,374         46,664   

Others

     5,214,558         5,928,214   
  

 

 

    

 

 

 
     7,579,390         8,253,784   
  

 

 

    

 

 

 

Unconfirmed acceptances and guarantees:

     

Letter of guarantee

     2,846,366         2,657,180   

Others

     1,352,302         1,874,333   
  

 

 

    

 

 

 
     4,198,668         4,531,513   
  

 

 

    

 

 

 

Commitments:

     

Commitments on loans

     5,965,549         8,403,055   

Securities purchase agreement

     20,709         20,709   

Others

     239,183         227,179   
  

 

 

    

 

 

 
     6,225,441         8,650,943   
  

 

 

    

 

 

 

Bills endorsed:

     

With recourse

     —           266   
  

 

 

    

 

 

 
   18,003,499         21,436,506   
  

 

 

    

 

 

 

 

38. Day One Profit or Loss

 

Changes in deferred day one profit or loss for the years ended December 31, 2013 and 2012 are as follows:

 

     2013     2012  

Beginning balance

   (5,999     (2,716

New deferrals

     (1,056     (2,634

Recognized in current profit or loss

     2,039        4,669   

Others (end of transaction, etc.)

     753        (5,318
  

 

 

   

 

 

 

Ending balance

   (4,263     (5,999
  

 

 

   

 

 

 

 

Deferred day one profit or loss arose from derivative financial instruments at level 3 on the fair value hierarchy.

 

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Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

39. Trust Accounts

 

(1) Trust accounts as of December 31, 2013 and 2012 are as follows:

 

     December 31, 2013      December 31, 2012  

Accrued trust management fee

   15,399         18,226   

Deposits

     1,592,582         2,004,818   

Trust accounts payable

     451,910         264,399   

Accrued interest on deposits

     20,367         30,284   

 

(2) Transactions with trust accounts for the years ended December 31, 2013 and 2012 are as follows:

 

     2013     2012  

Fees on trust accounts

   28,688        32,712   

Gains from trading of derivative instruments

     1,808        1,521   

Losses from trading of derivative instruments

     —          (8,321

Interest expenses on deposits

     (67,015     (90,004

Interest expenses of trust accounts payable

     (10,323     (9,164

 

(3) Principals guaranteed money trust and principals and interest guaranteed money trust

 

The carrying amounts of principals guaranteed money trust and principals and interest guaranteed money trust as of December 31, 2013 and 2012 are as follows:

 

     December 31, 2013      December 31, 2012  

Principals guaranteed money trust

   284,731         289,227   

Principals and interest guaranteed money trust and non-guaranteed trust

     208,201         202,343   
  

 

 

    

 

 

 
   492,932         491,570   
  

 

 

    

 

 

 

Principal of money trust

   464,661         466,225   

Income from trust deposits payable

     28,271         25,345   

 

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Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

40. Related Party Transactions

 

(1) The Bank’s related parties as of December 31, 2013 are as follows:

 

Classification

  

Corporate name

Ultimate controlling party

   KoFC

Controlling entities

   KDBFG Inc.

Entities under common control

   Daewoo Securities Co., Ltd., KDB Capital Corporation, KDB Asset Management Co., Ltd., KDB Infrastructure Investments Asset Management Co., Ltd

Subsidiaries

   KDB Asia Ltd., KDB Ireland Ltd., KDB Bank Europe Ltd., Banco KDB Do Brazil S.A, KDB Bank Uzbekistan, Korea Infrastructure Fund, KDB Value PEF II, KDB Value PEF III, KDB Value PEF VI, KDB Venture M&A PEF, KDB Consus Value PEF, KDB Turn Around, Components and Materials M&A PEF, KoFC-KDB Materials and Compo nents Investment Fund No.1, Principals guaranteed trust accounts of KDB, Principals and interests guaranteed interest trust accounts of KDB, KDB SPC I and 10 others, KDB Shipping Private Fund KL I and 15 others,

Associates

   Daewoo Shipbuilding & Marine Engineering Co., Ltd. GM Korea Company and 115 others, Troika Resource Investment PEF and 6 others, National Pension Service 06-2 Neoplux Corporate Restructuring Fund and 10 others

Others

   Key management personnel

 

(2) Significant balances with related parties as of December 31, 2013 and 2012 are as follows:

 

    

Account

   December 31, 2013      December 31, 2012  

Ultimate controlling party:

        

KoFC

   Loans    —           63,390   
   Derivative financial assets      106,760         13,079   
   Deposits      643,415         615,081   
   Borrowings      713,012         826,299   
   Derivative financial liabilities      26,031         44,625   
   Other liabilities      18,188         3,456   

Controlling entities:

        

KDBFG Inc.

   Deposits      4,992         28,074   
   Other liabilities      23,544         173,613   

Entities under common control:

        

Daewoo Securities Co., Ltd.

   Loans      —           78,496   
   Derivative financial assets      53,058         78,496   
   Other assets      5,089         4,522   
   Deposits      5,530         5,571   
   Bonds      380,069         431,936   
   Derivative financial liabilities      44,658         56,985   
   Other liabilities      4,185         3,060   

 

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Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

    

Account

   December 31, 2013     December 31, 2012  

KDB Capital Corporation

   Derivative financial assets    329        9   
   Deposits      11,248        27,850   
   Derivative financial liabilities      9,771        6,530   
   Other liabilities      535        561   

KDB Asset Management Co., Ltd.

   Deposits      41        608   
   Other liabilities      —          13   

KDB Infrastructure Investments Asset Management Co., Ltd.

   Loans      —          2,200   
   Deposits      2,254        6,378   

Subsidiaries:

       

KDB Ireland Ltd.

   Loans      268,326        283,209   
   Allowance for loan losses      (93     (133
   Derivative financial assets      7,112        10,681   
   Other assets      613        1,227   
   Allowance of other assets      —          (1
   Deposits      1,055        —     
   Bonds      36,075        36,075   
   Derivative financial liabilities      352        19   

KDB Bank Europe Ltd.

   Cash and due from banks      286,340        167,790   
   Loans      79,148        158,396   
   Allowance for loan losses      (87     (214
   Derivative financial assets      4,109        6,479   
   Other assets      751        1,371   
   Borrowings      —          12,853   
   Derivative financial liabilities      414        3,274   

Banco KDB Do Brazil S.A.

   Loans      183,220        192,516   
   Allowance for loan losses      (59     (118
   Other assets      3,554        5,866   
   Allowance of other assets      (1     (4

KDB Asia Ltd.

   Cash and due from banks      188,250        202,794   
   Loans      184,765        213,828   
   Allowance for loan losses      (23     (36
   Derivative financial assets      2,694        5,115   
   Other assets      547        1,468   
   Deposits      2        2   
   Borrowings      9,396        —     
   Bonds      126,282        126,282   
   Derivative financial liabilities      67        2   

 

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Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

    

Account

   December 31, 2013     December 31, 2012  

KDB Value PEF VI

   Securities    70,068        20,509   
   Loans      1,294,365        1,306,266   
   Allowance for loan losses      (944     (1,146
   Derivative financial assets      2,670        1,678   
   Other assets      35,177        31,976   
   Allowance of other assets      (22     (12
   Deposits      69,504        160,574   
   Borrowings      6,890        3,046   
   Bonds      50,000        —     
   Derivative financial liabilities      2,670        —     
   Other liabilities      3,644        67   

Others

   Securities      341,217        305,420   
   Loans      81,529        16,846   
   Allowance for loan losses      (185     (31
   Derivative financial assets      228        —     
   Other assets      6,433        4,493   
   Allowance of other assets      (2     (1
   Deposits      78,890        163,956   
   Borrowings      10,589        —     
   Bonds      40,000        —     
   Derivative financial liabilities      5,157        2,909   
   Other liabilities      3,076        3,065   

Associates:

       

Daewoo Shipbuilding & Marine Engineering Co., Ltd.

   Loans      1,365,249        1,510,475   
   Allowance for loan losses      (1,550     (2,335
   Derivative financial assets      —          2,506   
   Other assets      3,259        610   
   Deposits      204,097        7,124   
   Derivative financial liabilities      145,638        89,058   
   Other liabilities      363        136   

Others

   Securities      33,632        350,370   
   Loans      2,615,343        1,280,646   
   Allowance of other assets      (12,754     (12,012
   Derivative financial assets      20,212        28,236   
   Other assets      191        300   
   Deposits      197,844        —     
   Borrowings      1,000        —     
   Derivative financial liabilities      126,512        42,952   
   Other liabilities      396        781   
     

 

 

   

 

 

 
      10,235,904        9,218,035   
     

 

 

   

 

 

 

 

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Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

(3) Significant transactions with related parties for the years ended December 31, 2013 and 2012 are as follows:

 

    

Account

   2013     2012  

Ultimate controlling party:

       

KoFC

   Interest income    1,057        3,834   
   Fees and commission income, other income      132,284        35,573   
   Interest expenses      (35,830     (45,967
   Other operating expenses      (56,182     (49,948

Controlling entities:

       

KDBFG Inc.

   Fees and commission income, other income      7,165        5,670   
   Interest expenses      (634     (2,109
   Other operating expenses      (17,690     (17,690

Entities under common control:

       

Daewoo Securities Co., Ltd.

   Interest income      —          238   
   Fees and commission income, other income      4,902        80,511   
   Interest expenses      (10,306     (15,737
   Other operating expenses      (20,910     (81,208

KDB Capital Corporation

   Interest income      —          112   
   Reversal of allowance for loan losses        1   
   Fees and commission income, other income      1,560        1,257   
   Interest expenses      (114     —     
   Other operating expenses      (10,160     (6,824

KDB Asset Management Co., Ltd.

   Fees and commission income, other income      20        2   
   Interest expenses      (3     (49

KDB Infrastructure Investments Asset Management Co., Ltd.

   Fees and commission income, other income      —          13   
   Interest expenses      (106     (88
   General and administrative expenses      —          (21
   Other operating expenses      —          (19

Subsidiaries:

       

KDB Ireland Ltd.

   Interest income      3,192        4,421   
   Reversal of allowance for loan losses      90        160   
   Fees and commission income, other income      1        161   
   Interest expenses      —          (13
   Provision for loan losses      (5     (172
   Other operating expenses      (12     (81

 

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Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

    

Account

   2013     2012  

KDB Bank Europe Ltd.

   Interest income    4,436        4,416   
   Reversal of allowance for loan losses      514        162   
   Fees and commission income, other income      8,691        1,308   
   Interest expenses      (60     (8
   Provision for loan losses      (150     (348
   Other operating expenses      (3,364     (19,735

Banco KDB Do Brazil S.A.

   Interest income      11,371        18,404   
   Reversal of allowance for loan losses      34        44   
   Fees and commission income, other income      9        54   
   Provision for loan losses      (41     (47
   Other operating expenses      (70     (18

KDB Asia Ltd.

   Interest income      3,751        4,421   
   Reversal of allowance for loan losses      92        140   
   Fees and commission income, other income      1,378        2,782   
   Interest expenses      (5     (5
   Provision for loan losses      (79     (125
   Other operating expenses      (1,706     (578

KDB Bank Uzbekistan

   Interest income      —          34   

KDB Value PEF VI

   Interest income      1,071        62,161   
   Fees and commission income, other income      37,987        31,576   
   Interest expenses      (1,071     (1,285
   Other operating expenses      (4,103     (6,936

Others

   Interest income      72,252        1,792   
   Reversal of allowance for loan losses      129        51   
   Fees and commission income, other income      47,012        468,825   
   Interest expenses      (669     (817
   Provision for loan losses      (236     (1
   Other operating expenses      (7,625     (7,180

Associates:

       

Daewoo Shipbuilding & Marine Engineering Co., Ltd.

   Interest income      46,815        29,319   
   Reversal of allowance for loan losses      785        —     
   Fees and commission income, other income      22,212        6,951   
   Interest expense      (1,650     (1,193
   Provision for loan losses      —          (366
   Other operating expenses      (82,692     (141,146

 

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Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

    

Account

   2013     2012  

Others

   Interest income    119,624        67,483   
   Fees and commission income, other income      404,507        312,655   
   Interest expenses      (3,560     (6,892
   Provision for loan losses      (266,508     (2,013
   Other operating expenses      (517,223     (100,307

Key management personnel:

   General and administrative expenses      (1,444     (1,677
     

 

 

   

 

 

 
      (111,267     633,928   
     

 

 

   

 

 

 

 

(4) Details of guarantees and commitments to the related parties as of December 31, 2013 and 2012 are as follows:

 

    

Account

   2013      2012  

Subsidiaries:

        

KDB Value VI PEF

  

Unconfirmed acceptances and guarantees

   66,000         —     

Others

  

Loan commitments

     546,300         603,000   

Associates:

        

Daewoo Shipbuilding & Marine Engineering Co., Ltd.

  

Confirmed acceptances and guarantees

     729,560         501,672   
  

Unconfirmed acceptances and guarantees

     134,992         461,944   

Others

  

Confirmed acceptances and guarantees

     663,110         202,280   
  

Unconfirmed acceptances and guarantees

     616,920         —     
     

 

 

    

 

 

 
      2,756,882         1,768,896   
     

 

 

    

 

 

 

 

(5) Details of changes to commitments on loans to the related parties for the years ended December 31, 2013 and 2012 are as follows:

 

     2013  
     Ultimate
controlling
party
    Entities
under
common
control
    Subsidiaries     Associates     Total  

Beginning balance

   63,390        80,696        2,171,061        2,791,121        5,106,268   

Increase

     32,268        —          2,230,732        2,335,188        4,598,188   

Decrease

     (95,658     (80,696     (2,310,440     (1,145,717     (3,632,511
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   —          —          2,091,353        3,980,592        6,071,945   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

     2012  
     Ultimate
controlling
party
    Entities
under
common
control
     Subsidiaries     Associates     Total  

Beginning balance

   136,509        706         1,885,372        1,006,882        3,029,469   

Increase

     —          79,990         519,737        2,103,559        2,703,286   

Decrease

     (73,119     —           (234,048     (319,320     (626,487
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Ending balance

   63,390        80,696         2,171,061        2,791,121        5,106,268   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

(6) Details of changes to commitments on borrowings to the related parties for the years ended December 31, 2013 and 2012 are as follows:

 

     2013  
     Ultimate
controlling
party
    Subsidiaries     Associates      Total  

Beginning balance

   826,299        15,899        —           842,198   

Increase

     713,012        1,396,652        1,000         2,110,664   

Decrease Ending balance

     (826,299     (1,385,676     —           (2,211,975
  

 

 

   

 

 

   

 

 

    

 

 

 
   713,012        26,875        1,000         740,887   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

     2012  
     Ultimate
controlling
party
     Subsidiaries     Associates     Total  

Beginning balance

   —           245,505        2,051        247,556   

Increase

     826,299         —          —          826,299   

Decrease

     —           (229,606     (2,051     (231,657
  

 

 

    

 

 

   

 

 

   

 

 

 

Ending balance

   826,299         15,899        —          842,198   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

(7) Details of assets pledged as collaterals to the related parties as of December 31, 2013 and 2012 are as follows:

 

     December 31, 2013
     Carrying amounts      Amounts
collateralized
     Secured party

Available-for-sale debt securities

   16,064         16,000       Daewoo Securities
Co., Ltd.

 

     December 31, 2012
     Carrying amounts      Amounts
collateralized
     Secured party

Available-for-sale debt securities

   25,104         24,900       Daewoo Securities
Co., Ltd.

 

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Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

(8) Details of assets pledged as collaterals from the related parties as of December 31, 2013 and 2012 are as follows:

 

     December 31, 2013  
     Carrying
amounts
     Amounts
collateralized
     Secured party  

Securities denominated in foreign currencies

   55,637         61,207         KDB Ireland Ltd.   

 

     December 31, 2012  
     Carrying
amounts
     Amounts
collateralized
     Secured party  

Securities denominated in foreign currencies

   57,020         65,395         KDB Ireland Ltd.   

 

41. Statements of Cash Flows

 

(1) Cash and cash equivalents in the statements of cash flows as of December 31, 2013 and 2012 are as follows:

 

     December 31, 2013     December 31, 2012  

Cash and due from banks:

    

Cash and foreign currencies

   153,965        134,413   

Due from banks denominated in Korean won

     1,974,114        707,151   

Due from banks denominated in foreign currencies

     3,582,359        1,854,387   
  

 

 

   

 

 

 
     5,710,438        2,695,951   
  

 

 

   

 

 

 

Less: Restricted due from banks, others

     (2,850,446     (1,358,009

Add: Financial instruments reaching maturity within three months from date of acquisition

    

Financial assets held for trading:

    

Government and public bonds

     90,360        2,416   

Loans:

    

Call-loans

     3,980,568        4,060,214   

Inter-bank loans

     229,044        224,931   
  

 

 

   

 

 

 
     4,209,612        4,285,145   
  

 

 

   

 

 

 
     4,299,972        4,287,561   
  

 

 

   

 

 

 

Cash and cash equivalents

   7,159,964        5,625,503   
  

 

 

   

 

 

 

 

(2) Significant transactions not involving cash flows for the years ended December 31, 2013 and 2012 are as follows:

 

     2013     2012  

Decrease in loans due to write-offs

   (336,530     (367,717

Increase in available-for-sale financial assets due to debt-to-equity swap

     179,596        116,830   

Decrease in accumulated other comprehensive income due to securities valuation

     (259,860     (8,285

Deferred income tax effect due to securities valuation

     62,854        2,051   

Reclassification of available-for-sale financial assets to investments in subsidiaries and associates

     9,141        177,064   

Reclassification of investments in subsidiaries and associates to available-for-sale financial assets

     6,108        13,371   

Transfer from investment property to property and equipment

     (10,098     14,471   

 

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Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

42. Transfers of Financial Instruments

 

(1) Repurchase agreements sold and loaned debt securities

 

Details of financial assets and liabilities related to repurchase agreements sold and loaned debt securities that do not qualify for de-recognition as of December 31, 2013 and 2012 are as follows:

 

     December 31, 2013      December 31, 2012  

Characteristics of transactions

   Carrying
amounts for
transferred
assets
     Carrying
amounts for
related
liabilities
     Carrying
amounts for
transferred
assets
     Carrying
amounts for
related
liabilities
 

Repurchase agreements sold

   6,590,367         4,124,630         6,726,327         2,037,387   

Loaned debt securities

     59,527         —           29,359         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   6,649,894         4,124,630         6,755,686         2,037,387   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) Transfers of financial instruments that do not qualify for de-recognition

 

Details of financial assets and liabilities related to transfers of financial instruments that do not qualify for de-recognition as of December 31, 2013 and 2012 are as follows:

 

There is no transfer of financial assets and liabilities that do not qualify for de-recognition as of December 31, 2013.

 

     December 31, 2012  
     Date of sale      Carrying
amounts
of the assets
     Carrying
amounts
of the liabilities
     Reason
for not
qualifying  for
derecognition
 

KDB SOC securitization SPC

     December 7, 2010       15,923         6,000         ( *) 

 

(*) Most of the risks and rewards from ownership of the securitized financial assets have not been transferred to the Bank’s credit supports. Accordingly, the Bank does not derecognize the securitized financial assets.

 

43. Fair Value of Financial Assets and Liabilities

 

The Bank classifies and discloses fair value of the financial instruments into the following three-level hierarchy:

 

   

Level 1: Financial instruments measured at quoted prices from active markets are classified as fair value level 1.

 

   

Level 2: Financial instruments measured using valuation techniques where all significant inputs are observable market data are classified as level 2.

 

   

Level 3: Financial instruments measured using valuation techniques where one or more significant inputs are not based on observable market data are classified as level 3.

 

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Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

(1) Fair value hierarchy of financial instruments measured at fair value

 

  (i) The fair value hierarchy of financial instruments measured at fair value as of December 31, 2013 and 2012 are as follows:

 

     December 31, 2013  
     Level 1      Level 2      Level 3      Total  

Financial assets:

           

Financial assets held for trading

   1,083,683         341,970         —           1,425,653   

Available-for-sale financial assets

     1,991,068         21,694,312         1,848,853         25,534,233   

Derivative financial assets

     5         4,235,278         83,989         4,319,272   
  

 

 

    

 

 

    

 

 

    

 

 

 
   3,074,756         26,271,560         1,932,842         31,279,158   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities:

           

Financial liabilities designated at FVTPL

   —           668,627         9,289         677,916   

Derivative financial liabilities

     —           3,856,378         23,723         3,880,101   
  

 

 

    

 

 

    

 

 

    

 

 

 
   —           4,525,005         33,012         4,558,017   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2012  
     Level 1      Level 2      Level 3      Total  

Financial assets:

           

Financial assets held for trading

   1,346,544         530,820         —           1,877,364   

Available-for-sale financial assets

     1,524,035         21,509,242         1,852,733         24,886,010   

Derivative financial assets

     45         5,028,289         149,556         5,177,890   
  

 

 

    

 

 

    

 

 

    

 

 

 
   2,870,624         27,068,351         2,002,289         31,941,264   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities:

           

Financial liabilities designated at FVTPL

   —           864,427         10,770         875,197   

Derivative financial liabilities

     —           4,052,362         34,494         4,086,856   
  

 

 

    

 

 

    

 

 

    

 

 

 
   —           4,916,789         45,264         4,962,053   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

(ii) Changes in the fair value of level 3 financial instruments for the years ended December 31, 2013 and 2012 are as follows:

 

    2013  
    January 1,
2013
    Profit
or loss
    Other
comprehensive
income
    Acquisition/
Issue
    Sale/
Settlement
    Adjustments
in level(*)
    December 31,
2013
 

Financial assets:

             

Available-for-sale financial assets

  1,852,733        (71,448     (108,695     1,090,757        (364,341     (550,153     1,848,853   

Derivative financial assets

    149,556        1,138        —          37,920        (104,625     —          83,989   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  2,002,289        (70,310     (108,695     1,128,677        (468,966     (550,153     1,932,842   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial liabilities:

             

Financial liabilities designated at FVTPL

  10,770        230        —          5,788        (7,499     —          9,289   

Derivative financial liabilities

    34,494        (9,593     —          7,942        (9,120     —          23,723   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  45,264        (9,363     —          13,730        (16,619     —          33,012   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(*) Upon adoption of K-IFRS No. 1113 Fair Value Measurement during the year ended December 31, 2013, available-for-sale financial assets with restrictions on disposals of publicly traded stocks are measured by quoted prices in active markets, since the restrictions are applicable to characteristics of the entity’s holding, and therefore transfer levels occur.

 

     2012  
     January 1,
2012
     Profit
or loss
    Other
comprehensive
income
    Acquisition/
Issue
     Sale/
Settlement
    December 31,
2012
 

Financial assets:

              

Available-for-sale financial assets

   3,107,469         128,486        (93,789     397,828         (1,687,261     1,852,733   

Derivative financial assets

     159,974         35,602        —          21,883         (67,903     149,556   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
   3,267,443         164,088        (93,789     419,711         (1,755,164     2,002,289   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Financial liabilities:

              

Financial liabilities designated at FVTPL

   798         (1,006     —          13,569         (2,591     10,770   

Derivative financial liabilities

     83,309         56        —          11,269         (60,140     34,494   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
   84,107         (950     —          24,838         (62,731     45,264   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(iii) Details of valuation technique and inputs used in the fair value measurement categorized within level 2 of the fair value hierarchy of financial instruments measured at fair value as of December 31, 2013 are as follows:

 

    

December 31, 2013

    

Valuation technique

  

Input

Financial assets held for trading:

     

Equity securities

   Net asset value approach    Underlying asset price

Debt securities

   Discounted cash flow method    Discount rate

Available-for-sale financial assets:

     

Equity securities

   Net asset value approach    Underlying asset price

Debt securities

   Discounted cash flow method    Discount rate

Derivatives financial assets:

     

Interest rate swaps

   Discounted cash flow method,    Discount rate,

Currency forwards, swaps

   Black-Scholes model,    Volatility,

Currency options

   Modified Black model,    Exchange rate,

Commodities options

   Black-Scholes model    Commodity index

Financial liabilities designated at FVTPL:

     

Bonds

   Discounted cash flow method    Discount rate

 

(iv) Details of valuation technique and quantitative information about unobservable inputs used in the fair value measurement categorized within level 3 of the fair value hierarchy of financial instruments measured at fair value as of December 31, 2013 are as follows:

 

    

December 31, 2013

    

Valuation technique

  

Unobservable input

  

Range (%)

Available-for-sale financial assets:

        

Equity securities

   Discounted cash flow    Discount rate    5.05 ~ 27.10
   method,    Growth rate    0.00
   Risk- adjusted discount    Rate of increase in   
   rate method,    liquidation value    0.00
   Relative value    Discount rate of   
   approach    rent cash flow Rate of increase in property disposal price   

8.01

0.92

Derivatives financial assets:

        

Interest rate swaps

   Discounted cash flow    Volatility    9.50 ~ 16.00
   method    Correlation coefficient    (-)0.90 ~ 0.99

Interest rate options

   Modified Black model    Volatility    9.50 ~ 16.00

Stock index options

   Black-Scholes model    Volatility    15.40 ~ 57.00

Equity options

   Finite difference    Volatility    15.40 ~ 57.00
   method    Correlation coefficient    0.001 ~ 0.49

Financial liabilities designated at FVTPL:

        

Borrowings

   Finite difference    Volatility    15.40 ~ 57.00
   method    Correlation coefficient    0.001 ~ 0.49

 

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Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

(v) The sensitivity analysis on changes in unobservable inputs for financial instruments categorized within level 3 of the fair value hierarchy of financial instruments measured at fair value as of December 31, 2013 is as follows:

 

     Profit(loss) for the year     Comprehensive income(loss)  
     Favorable
change
     Unfavorable
change
    Favorable
change
     Unfavorable
change
 

Available-for-sale financial assets(*1)

   —           —          127,054         (64,840

Derivatives financial instruments(*2)

     8,471         (7,551     —           —     

Financial liabilities designated at FVTPL(*2)

     136         (132     —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 
   8,607         (7,683     127,054         (64,840
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(*1) Sensitivity amounts of equity securities are calculated by increasing and decreasing the correlations between the discount rates(-1~1%) and the growth rates(0~1 %) or the rate of increase in liquidation value(-1~1%) which are significant unobservable inputs. Sensitivity amounts for beneficiary certificates are calculated by increasing and decreasing the correlations between the discount rate of rent cash flow(-1~1 %) and the rate of increase in property disposal price(-1~1 %), only when it is consists of real property. Other than that, it is difficult to measure the sensitivity amounts of beneficiary certificates for practical reasons.
(*2) Sensitivity amounts of derivatives financial instruments and financial liabilities designated at FVTPL are calculated by increasing and decreasing the correlation coefficient and volatility(- 10~10%) which are significant unobservable inputs.

 

(2) Fair value hierarchy of financial instruments disclosed by fair value

 

(i) The fair value hierarchy of financial instruments disclosed by fair value as of December 31, 2013 is as follows:

 

     December 31, 2013  
     Level 1      Level 2      Level 3      Total  

Financial assets:

           

Cash and due from banks(*)

   2,859,992         2,850,345         —           5,710,337   

Loans(*)

     —           4,224,342         93,392,378         97,616,720   

Held-to-maturity financial assets

     7,703         20,200         —           27,903   

Other financial assets(*)

     —           3,488,431         656,296         4,144,727   
  

 

 

    

 

 

    

 

 

    

 

 

 
   2,867,695         10,583,318         94,048,674         107,499,687   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities:

           

Deposits(*)

   —           2,223,052         35,520,796         37,743,848   

Borrowings(*)

     —           1,560,347         21,695,966         23,256,313   

Bonds

     —           56,732,246         —           56,732,246   

Other financial liabilities(*)

     —           2,921,458         2,061,068         4,982,526   
  

 

 

    

 

 

    

 

 

    

 

 

 
   —           63,437,103         59,277,830         122,714,933   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(*) For financial instruments categorized as level 2, the carrying amount is considered a reasonable approximation of the fair value and is thus, disclosed as the fair value.

 

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Table of Contents

Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(ii) Details of valuation technique and inputs used in the fair value measurement categorized within level 2 and 3 of the fair value hierarchy of financial instruments disclosed by fair value as of December 31, 2013 are as follows:

 

    

December 31, 2013

    

Valuation technique

   Input

Level 2

     

Financial assets:

     

Held-to-maturity financial assets

   Discounted cash flow method    Discount rate

Financial liabilities:

     

Bonds

   Discounted cash flow method    Discount rate

Level 3

     

Financial assets:

     

Loans

   Discounted cash flow method    Credit spread, Other spread,
Prepayment rate

Other financial assets

   Discounted cash flow method    Other spread

Financial liabilities:

     

Deposits

   Discounted cash flow method    Other spread

Borrowings

   Discounted cash flow method    Other spread

Other financial liabilities

   Discounted cash flow method    Other spread

 

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Table of Contents

Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

 

44. Categories of Financial Assets and Liabilities

 

Categories of financial assets and liabilities as of December 31, 2013 and 2012 are as follows:

 

    December 31, 2013  
    Cash and cash
equivalents
    Financial
instruments
held for
trading
    Financial
instruments
designated
at FVTPL
    Available-
for-sale
financial
instruments
    Held-to-
maturity
financial
instruments
    Loan and
receivables
    Financial
liabilities
measured at
amortized cost
    Hedging
purpose
derivatives
instruments
    Total  

Financial assets:

                 

Cash and due from banks

  2,859,992        —          —          —          —          2,850,345        —          —          5,710,337   

Financial assets held for trading

    90,360        1,335,293        —          —          —          —          —          —          1,425,653   

Available-for- sale financial assets

    —          —          —          25,534,233        —          —          —          —          25,534,233   

Held-to- maturity financial assets

    —          —          —          —          27,109        —          —          —          27,109   

Loans

    4,209,612        —          —          —          —          92,098,801        —          —          96,308,413   

Derivative financial assets

    —          3,688,950        —          —          —          —          —          630,322        4,319,272   

Other financial assets

    —          —          —          —          —          4,139,475        —          —          4,139,475   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  7,159,964        5,024,243        —          25,534,233        27,109        99,088,621        —          630,322        137,464,492   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial liabilities:

                 

Financial liabilities designated at FVTPL

  —          —          677,916        —          —          —          —          —          677,916   

Deposits

    —          —          —          —          —          —          37,727,270        —          37,727,270   

Borrowings

    —          —          —          —          —          —          23,220,773        —          23,220,773   

Bonds

    —          —          —          —          —          —          55,924,868        —          55,924,868   

Derivative financial liabilities

    —          3,523,367        —          —          —          —          —          356,734        3,880,101   

Other financial liabilities

    —          —          —          —          —          —          4,982,513        —          4,982,513   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  —          3,523,367        677,916        —          —          —          121,855,424        356,734        126,413,441   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

 

    December 31, 2012  
    Cash and cash
equivalents
    Financial
instruments
held for
trading
    Financial
instruments
designated
at FVTPL
    Available-
for-sale
financial
instruments
    Held-to-
maturity
financial
instruments
    Loan and
receivables
    Financial
liabilities
measured at
amortized cost
    Hedging
purpose
derivatives
instruments
    Total  

Financial assets:

                 

Cash and due from banks

  1,337,942        —          —          —          —          1,357,906        —          —          2,695,848   

Financial assets held for trading

    2,416        1,874,948        —          —          —          —          —          —          1,877,364   

Available-for-sale financial assets

    —          —          —          24,886,010        —          —          —          —          24,886,010   

Held-to-maturity financial assets

    —          —          —          —          88,690        —          —          —          88,690   

Loans

    4,285,145        —          —          —          —          86,749,260        —          —          91,034,405   

Derivative financial assets

    —          4,320,948        —          —          —          —          —          856,942        5,177,890   

Other financial assets

    —          —          —          —          —          10,605,108        —          —          10,605,108   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  5,625,503        6,195,896        —          24,886,010        88,690        98,712,274        —          856,942        136,365,315   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial liabilities:

                 

Financial liabilities designated at FVTPL

  —            875,197        —          —          —          —          —          875,197   

Deposits

    —          —          —          —          —          —          38,652,332        —          38,652,332   

Borrowings

    —          —          —          —          —          —          21,977,467        —          21,977,467   

Bonds

    —          —          —          —          —          —          46,901,677        —          46,901,677   

Derivative financial liabilities

    —          3,960,206        —          —          —          —          —          126,650        4,086,856   

Other financial liabilities

    —          —          —          —          —          —          11,617,104        —          11,617,104   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  —          3,960,206        875,197        —          —          —          119,148,580        126,650        124,110,633   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

45. Offsetting of Financial Assets and Liabilities

 

Details of financial instruments subject to offsetting, enforceable master netting agreements or similar agreements as of December 31, 2013 and 2012 are as follows:

 

    December 31, 2013  
    Gross amounts
of recognized
financial asset
    Gross amounts of
recognized
financial liabilities
set off in the
statement of
financial position
    Net amounts of
financial assets
presented in the
statement of
financial position
    Related amounts not set off
in the statement of financial
position
    Net amount  
          Financial
instruments
    Cash collateral
received
   

Derivative financial assets(*)

  4,319,272        —          4,319,272        2,796,848        67,846        1,454,578   

Receivable spot exchange(*)

    2,636,758        —          2,636,758        2,629,396        —          7,362   

Security deposits for repurchase agreements sold

    6,590,367        —          6,590,367        4,124,630        —          2,465,737   

Repurchase agreements bought

    255,637        —          255,637        255,637        —          —     

Loaned debt securities

    59,527        —          59,527        59,527        —          —     

Receivables from securities transaction

    4,305        —          4,305        4,305        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  13,865,866        —          13,865,866        9,870,343        67,846        3,927,677   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    December 31, 2013  
    Gross amounts
of recognized
financial
liabilities
    Gross amounts of
recognized
financial assets set
off in the
statement of
financial position
    Net amounts of
financial liabilities
presented in the
statement of
financial position
    Related amounts not set off
in the statement of financial
position
    Net amount  
          Financial
instruments
    Cash collateral
received
   

Derivative financial liabilities(*)

  3,880,101        —          3,880,101        2,486,797        —          1,393,304   

Outstanding spot exchange(*)

    2,635,493        —          2,635,493        2,629,396        —          6,097   

Repurchase agreements sold

    4,124,630        —          4,124,630        4,124,630        —          —     

Payables from securities transaction

    3,020        —          3,020        3,020        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  10,643,244        —          10,643,244        9,243,843        —          1,399,401   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

    December 31, 2012  
    Gross amounts of
recognized
financial asset
    Gross amounts of
recognized financial
liabilities set off in
the statement of
financial position
    Net amounts of
financial assets
presented in the
statement of
financial position
    Related amounts not set off in the
statement of financial

position
    Net amount  
          Financial
instruments
    Cash collateral
received
   

Derivative financial assets(*)

  5,177,890        —          5,177,890        3,420,660        268,620        1,488,610   

Receivable spot exchange(*)

    7,435,915        —          7,435,915        7,435,031        —          884   

Security deposits for repurchase agreements sold

    6,726,327        —          6,726,327        2,037,387        —          4,688,940   

Repurchase agreements bought

    457,020        —          457,020        457,020        —          —     

Loaned debt securities

    29,359        —          29,359        29,359        —          —     

Receivables from securities transaction

    104,165        —          104,165        104,165        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  19,930,676        —          19,930,676        13,483,622        268,620        6,178,434   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    December 31, 2012  
    Gross amounts of
recognized
financial liabilities
    Gross amounts of
recognized financial
assets set off in the
statement of
financial position
    Net amounts of
financial liabilities
presented in the
statement of
financial position
    Related amounts not set off in the
statement of financial

position
    Net amount  
          Financial
instruments
    Cash collateral
received
   

Derivative financial liabilities(*)

  4,086,856        —          4,086,856        3,095,449        —          991,407   

Outstanding spot exchange(*)

    7,435,456        —          7,435,456        7,435,031        —          425   

Repurchase agreements sold

    2,037,387        —          2,037,387        2,037,387        —          —     

Payables from securities transaction

    109,008        —          109,008        109,008        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  13,668,707        —          13,668,707        12,676,875        —          991,832   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(*) For the derivatives covered by the ISDA derivative contracts, all contracts are settled and the net amount of derivative contracts is measured and paid based on the liquidation value if the counterparty files for bankruptcy or has any credit issues.

 

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For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

46. Operating Segments

 

(1) The Bank has four reportable segments, as described below, which are the Bank’s strategic business units. The following summary describes the operations in each of the Bank’s reportable segments:

 

Industry

  

General information

Corporate finance

   Provides trading services, and loans to corporate customers

Investment finance

   Provides consulting services to corporate such as capital finance, restructuring, etc.

Asset management

   Provides asset management services to individual and corporate customers

Others

   Any other segment not mentioned above

 

(2) Details of segment results for the Bank’s reportable segments for the years ended December 31, 2013 and 2012 are as follows:

 

     December 31, 2013  
     Corporate
finance
    Investment
finance
    Asset
management
    Others     Total  

Operating revenues:

Net interest income

   1,434,723        (31,083     2,208        324,617        1,730,465   

Non-interest income (loss), net

     298,971        248,007        30,399        (190,982     386,395   

Income (loss) related to securities(*1)

     (137,023     (163,523     —          85,344        (215,202
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     1,596,671        53,401        32,607        218,979        1,901,658   

General administrative expenses

     (345,912     (81,225     (11,098     (108,640     (546,875

Provision for loan losses and others(*2)

     (1,719,409     (490,549     —          (2,950     (2,212,908
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

   (468,650     (518,373     21,509        107,389        (858,125
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     December 31, 2012(*3)  
     Corporate
finance
    Investment
finance
    Asset
management
    Others     Total  

Operating revenues: Net interest income

   1,517,933        39,342        1,126        187,769        1,746,170   

Non-interest income (expense), net

     319,071        412,237        34,144        (122,653     642,799   

Income (loss) related to securities(*1)

     (114,185     86,636        —          165,212        137,663   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     1,722,819        538,215        35,270        230,328        2,526,632   

General administrative expenses

     (326,165     (83,771     (11,685     (104,500     (526,121

Provision for loan losses and others(*2)

     (647,810     (15,885     —          (2,512     (666,207
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

   748,844        438,559        23,585        123,316        1,334,304   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(*1) Income related to securities is composed of losses (gains) related to financial assets held for trading and available-for-sale financial assets.
(*2) Provision for loan losses and others comprises provision for loan losses, provision for derivative credit risks, losses (gains) on sales of loans, and provision for other losses.
(*3) The prior period amounts reflect the effects of accounting policy changes, as described in note 3.(26).

 

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For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

(3) Geographical revenue information about the Bank’s operating segments for the years ended December 31, 2013 and 2012 and the geographical non-current asset information as of December 31, 2013 and 2012, are as follows:

 

     Revenues(*1 )      Non-current assets(*2)  
     December 31,
2013
     December 31,
2012
(*3)
     December 31,
2013
     December 31,
2012
(*3)
 

Domestic

   12,832,760         15,050,640         5,574,413         6,584,961   

Overseas

     795,166         696,915         3,355         3,414   
  

 

 

    

 

 

    

 

 

    

 

 

 
   13,627,926         15,747,555         5,577,768         6,588,375   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(*1) Revenues consist of interest income, fees and commission income, income related to securities, foreign currency transaction gain, gain on derivative, other operating income and provision for loan losses. Operating revenues are not reconciled to the income statement which discloses net amounts of some accounts.
(*2) Non-current assets consist of investments in subsidiaries and associates, property and equipments, investment properties, and intangible assets.
(*3) The prior period amounts reflect the effects of accounting policy changes, as described in note 3.(26).

 

47. Risk Management

 

(1) Introduction

 

(i) Objectives and principles

 

The Bank’s risk management aims to maintain financial soundness and effectively manage various risks pertinent to the nature of the Bank’s business. The Bank has set up and fulfilled policies to manage risks timely and effectively. Pursuant to the policies, the Bank’s risks shall be

 

   

managed comprehensively and independently,

 

   

recognized timely, evaluated exactly and managed effectively,

 

   

maintained to the extent that the risks balance with profit,

 

   

diversified appropriately to avoid concentration on specific segments,

 

   

managed to prevent excessive exposure by the setting up and managing of tolerance limits and guidelines.

 

(ii) Risk management strategy and process

 

The Bank’s risk management business is separated into two different stages; the ‘metrification stage,’ in which risks are estimated and monitored, and the ‘integration stage,’ in which information gained during the risk management process is integrated and used in management strategies. Risk management is recognized as a key component of the Bank’s management, and seeks to change from its previously adaptive and limited role to more leading and comprehensive role.

 

Furthermore, the Bank focuses on consistent communication among different departments in order to establish a progressive consensus on risk management.

 

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For the years ended December 31, 2013 and 2012

 

(iii) Risk management governance

 

Risk Management Committee

 

The Bank’s Risk Management Commitee (the “Committee”) is composed of the President of the committee (an outside director), and four other commissioners including the CEO of the Bank. The Committee functions to establish policies of risk management, evaluate the capital adequacy of the Bank, discuss material issues relating to risk management, and present preliminary decisions on such matters.

 

The CEO of the Bank and the head of Risk Management Department

 

The CEO of the Bank, according to the policies of risk management, performs his or her role to manage and direct risk management in order to sustain efficiency and internal control. The head of the Risk Management Department is responsible for supervising the overall administration of the Bank’s risk management business and providing risk-related information to members of the board of directors and the Bank’s management.

 

Risk Management Practice Committee

 

The Bank’s Risk Management Practice Committee is composed of the main leaders of business segments, and exercises its role to review matters for decision on allocation by segment of internal capital limits and other material risk-related matters.

 

(iv) Performance of Risk Management Committee

 

The Risk Management Committee performs comprehensive reviews of all the affairs related to risk management and deliberates the decisions of the board of directors. For the year ended December 31, 2013 the key activities of the Risk Management Committee are as follows:

 

   

Major deliberation and resolution

 

   

Issuance plan and planning of subordinated Industrial Financial Debentures

 

   

Emergency funding plan for 2014

 

   

BIS capital ratio management objectives and internal capital planning for 2014

 

   

Major reporting

 

   

Report on simulation of Business Continuity Planning (BCP)

 

   

Assessment and approval standards of franchise loans

 

   

Credit Committee’s · Investment Committee’s quarterly decisions

 

   

Allocation and management standards of internal capital limits for 2013

 

   

Issuance and amendments to assessment and approval standards of household loans by instruments

 

   

Integrated crisis analysis on first half-year for 2013

 

   

Corporate credit ratings for 2013

 

   

Strengthening risk management capabilities for large exposures

 

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For the years ended December 31, 2013 and 2012

 

   

Changes in credit risk premiums for household loans

 

   

Compatibility evaluation for the credit rating model and default rates for 2013

 

(v) Improvement of risk management system

 

For the continuous improvement of risk management, financial soundness and capital adequacy, the Bank performs the following:

 

   

Continuous improvement of Basel

 

   

Improvements in the internal capital adequacy assessment system, in line with the guidelines set by

 

   

the Financial Supervisory Service (“FSS”) in 2008, to manage capital adequacy more effectively

 

   

Improvements in the credit assessment system on Low Default Portfolio (“LDP”)

 

   

Elaboration of risk measuring criteria including credit risk parameters and measurement logics

 

   

Pre-operation of the Advanced Measurement Approach (“AMA”) since 2009, in arrangement with the FSS, to apply the risk management AMA

 

   

Expansion of risk management infrastructure to the global IB level

 

   

Establishment of the RAPM system in order to reflect risks to the Bank’s business and support decision-making upon management, and application of performance assessment at the branch level since 2010

 

   

Enforcement of risk management related to irregular compound derivatives and validation of the derivative pricing model developed by the Bank’s Front Office

 

   

Risk management of retail banking

 

   

On-going planning of asset expansion in the retail banking risk management operations sector of the department of risk management since the introduction of retail loan business in 2010

 

   

Establishment and application of assessment and approval standards by retail loan instruments, and expansion of retail banking risk management infrastructure such as accumulating databases in order to support analytic decision-making and develop a personal credit assessment model through the establishment of a “retail banking Data Mart”

 

   

To supplement the limit of a evaluation process with computerized system, the group adopted ‘underwriter’ which compensate the evaluation system in sophisticated level

 

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Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(vi) Risk management reporting and measuring system

 

The Bank endeavours consistently to objectively and rationally measure and manage all significant risks considering the characteristics of operational areas, assets and risks. In relation to reporting and measurement, the Bank has developed application systems as follows:

 

Application system    Approach   

Completion

date

   Major function

Corporate Credit Rating

System

   Logit Model   

Jun. 2004

Mar. 2008

Mar. 2010

   Calculate corporate credit rating

Credit Risk

Measurement System

  

Credit Risk+

Credit Metrics

  

Jul. 2003

Nov. 2007

   Summarize exposures, manage exposure limits and calculate Credit VaR

Market Risk

Management System

   Risk Watch    Jun. 2002    Summarize position, manage exposure limits and calculate Market VaR

Interest/Liquidity Risk

Management System

   OFSA    Feb. 2006    Calculate repricing gap, duration gap, VaR and EaR

Operational Risk

Management System

  

Standardized

Approach

AMA

  

May 2006

May 2009

   Manage process and calculate CSA, KRI, OP and VaR Pre-operate the AMA

 

(vii) Response to Basel

 

The Korean authority implemented Basel II as of January 2008, and adopted the Standardized Approach and the Foundation Internal Ratings-Based Approach. The Advanced Approaches were adopted later in 2009.

 

In conformity with the implementation roadmap of Basel II, the Bank obtained the approval to use the Foundation Internal Ratings-Based Approach on credit risk from the FSS in July 2008 and has applied the approach since late June 2008. The Bank applies the Standardized Approach on market risks and operational risks.

 

To establish credibility and maintain financial soundness, the Bank plans to adopt the Advanced Approaches (Credit risk: Advanced Internal Ratings-Based Approach, Operational risk: Advanced Measurement Approach etc) by continuously improving related systems and policies. Furthermore, the Bank completed the “Basel III standard risk management system” in preparation of the adoption of the Basel III regulations announced on December 1, 2013. Starting from 2013 year-end, the BIS capital adequacy ratio was measured in accordance to the Basel III regulations.

 

(viii) Internal capital adequacy assessment process

 

Internal capital adequacy assessment process is defined as the process that the Bank aggregates significant risks, calculates its internal capital, compares the internal capital with the available capital and assesses its internal capital adequacy.

 

   

Internal capital adequacy assessment

 

For the purpose of the internal capital adequacy assessment, the Bank calculates its aggregated internal capital and available capital by evaluating all significant risks and taking into account the quality and

 

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For the years ended December 31, 2013 and 2012

 

components of capital, and then assesses the internal capital adequacy by comparing the aggregated internal capital with the available capital.

 

   

Goal setting of internal capital management

 

The Bank sets up and manages an internal capital limit on an annual basis, through the approval of the Risk Management Committee, in order to maintain internal capital adequacy by managing internal capital (integrated risks) within the extent of available capital.

 

The prior year’s internal capital, analysis of domestic and foreign environment changes in the current year, and the direction and size of operations are all reflected in the goal setting of internal capital management to calculate the integrated internal capital scale. Moreover, Bank for International Settlements(“BIS”) capital adequacy ratio and risk appetite are taken into consideration in the goal setting of internal capital management

 

   

Allocation of internal capital

 

The Bank’s entire internal capital is allocated to each headquarter and department, according to the extent of possible risk faced and size of operations, after the Risk Management Committee’s deliberation and the board of directors’ approval. The allocated internal capital is monitored regularly and managed using various management methods. The results of monitoring and managing the allocated internal capital are reported to the Risk Management Committee. In case of any material changes in the Bank’s business plan or risk operation strategy, the Bank adjusts the allocations elastically.

 

   

Composition of internal capital

 

Internal capital comprises all the significant risks of the Bank and is composed of quantifiable and non- quantifiable risks. Quantifiable risks are composed of credit risk, market risk, interest rate risk, operational risk and credit concentration risk, and are risks measured quantitatively by applying reasonable methodology using objective data. Non-quantifiable risks are composed of strategy risk, reputation risk, residual risk on asset securitization and furthermore. Non-quantifiable risks are those risks that cannot be measured quantitatively because of lack of data or the absence of appropriate measuring methologies.

 

(2) Credit Risk

 

(i) Concept

 

Credit risk can be defined as potential loss resulting from the refusal to perform obligations or default of counterparties. More generally, it is used to refer to the possibility of loss from engaged bonds that cannot be redeemed properly or from substitute payments.

 

(ii) Approach to credit risk management

 

Summary of credit risk management

 

The Bank regards credit risk as the most important risk area in its business operations, and accordingly, closely monitors its credit risk exposure. The Bank manages both credit risks at portfolio level and at individual credit level. At portfolio level, the Bank reduces credit concentration and restructures the portfolio in such a way to maximize profitability considering the risk level. To avoid credit concentration on a particular sector, the Bank

 

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For the years ended December 31, 2013 and 2012

 

manages credit limits by client, group, and industry. The Bank also resets exposure management directives for each industry by conducting an industry credit evaluation twice a year.

 

At the individual credit level, the relationship manager (“RM”), the credit officer (“CO”) and the Credit Review Committee manage each borrower’s credit risk.

 

Post management and insolvent borrower management

 

The Bank monitors the borrower’s credit rating from the date of the loan to the date of the final collection of debt consistently, and inspects the borrower’s status regularly and frequently in order to prevent the generation of new bad debts and to stabilize the number of debt recoveries.

 

In addition, an early warning system is operated to spot borrowers that are highly likely to be insolvent. The early warning system provides financial information, financial transaction information, public information and market information of the borrower, and such information is used by the RM and the CO to monitor and manage changes in the borrower’s credit rating.

 

Under the early warning system, a borrower that is highly likely to be insolvent is classified as an early warning borrower or a precautionary borrower The Bank sets up a specific and applicable stabilization plan for such a borrower considering the borrower’s characteristics. Furthermore, sub-standard borrowers are classified as insolvent borrowers, and are managed intensively by the Bank, which takes legal proceedings, disposals or corporate turnaround measures if necessary.

 

Classification of asset soundness and provision of allowance for loss

 

Classification of asset soundness is fulfilled by the analysis and assessment of credit risk. The classification is used in order to provision an appropriate allowance, prevent further occurrences of insolvent assets and promote the normalization of existing insolvent assets to enhance the stabilization of asset operations.

 

Based on the Financial Supervisory Regulations of the Republic of Korea, the Bank has established standards and guidelines on the classification of asset soundness, according to the Forward Looking Criteria (“FLC”), which reflects not only the borrower’s past records of repayment but also their future debt repayment capability.

 

In conformity with these standards, the Bank classifies the soundness of its assets as “normal”, “precautionary”, “substandard”, “doubtful”, or “estimated loss” and differentiates the coverage ratio by the level of classification.

 

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Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

Loans

 

Details of loans as of December 31, 2013 and 2012 are as follows:

 

     December 31, 2013     December 31, 2012  

Neither past due nor impaired

   93,616,632        89,892,960   

Past due but not impaired

     142,150        113,921   

Impaired

     4,361,030        1,868,306   
  

 

 

   

 

 

 
     98,119,812        91,875,187   

Allowance for loan losses

     (1,773,150     (782,541

Present value discount

     (43,577     (49,006

Deferred loan origination costs and fees

     5,328        (9,235
  

 

 

   

 

 

 

Net value

   96,308,413        91,034,405   
  

 

 

   

 

 

 

Ratio of allowance for loan losses to total loans

   % 1.81        0.85   

 

Loans that are neither past due nor impaired

 

Loans that are neither past due nor impaired as of December 31, 2013 and 2012 are as follows:

 

    December 31, 2013  
    Loans in Korean won           Other loans     Total  
    Loans for
working capital
    Loans for
facility
developments
    Others     Loans in
foreign
currencies
    Private  placed
corporate
bonds
    Others    

AAA ~ B- (Normal)

  24,327,659        32,669,282        2,765,568        19,941,319        2,993,711        8,585,850        91,283,389   

CCC (Precautionary)

    889,345        420,820        —          351,995        26,493        201,321        1,889,974   

CC (Substandard)

    190,426        70,222        —          37,560        104,296        40,765        443,269   

C (Doubtful)

    —          —          —          —          —          —          —     

D (Estimated loss)

    —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  25,407,430        33,160,324        2,765,568        20,330,874        3,124,500        8,827,936        93,616,632   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    December 31, 2012  
    Loans in Korean won           Other loans     Total  
    Loans for
working capital
    Loans for
facility
developments
    Others     Loans in
foreign
currencies
    Private  placed
corporate
bonds
    Others    

AAA ~ B- (Normal)

  22,485,377        31,009,479        1,758,924        18,413,199        4,385,189        9,824,481        87,876,649   

CCC (Precautionary)

    774,545        291,950        —          404,803        76,078        283,689        1,831,065   

CC (Substandard)

    43,365        14,323        —          —          95,036        32,522        185,246   

C (Doubtful)

    —          —          —          —          —          —          —     

D (Estimated loss)

    —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  23,303,287        31,315,752        1,758,924        18,818,002        4,556,303        10,140,692        89,892,960   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

Loans that are past due but not impaired

 

Loans that are past due but not impaired as of December 31, 2013 and 2012 are as follows:

 

     December 31, 2013  
     Loans in Korean won             Other loans         
     Loans for
working
capital
     Loans for
facility
developments
     Others      Loans in
foreign
currencies
     Private  placed
corporate
bonds
     Others      Total  

Within 30 days

   47,318         35,477         2,947         29,249         12,200         11,326         138,517   

Within 30 ~ 60 days

     250         —           198         —           —           —           448   

Within 60 ~ 90 days

     1,170         991         —           1,024         —           —           3,185   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   48,738         36,468         3,145         30,273         12,200         11,326         142,150   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2012  
     Loans in Korean won             Other loans         
     Loans for
working
capital
     Loans for
facility
developments
     Others      Loans in
foreign
currencies
     Private  placed
corporate
bonds
     Others      Total  

Within 30 days

   50,028         24,718         180         19,010         3,000         7,068         104,004   

Within 30 ~ 60 days

     5,025         183         —           —           —           —           5,208   

Within 60 ~ 90 days

     2,739         1,970         —           —           —           —           4,709   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   57,792         26,871         180         19,010         3,000         7,068         113,921   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Impaired loans

 

Impaired loans as of December 31, 2013 and 2012 are as follows:

 

     December 31, 2013  
     Loans in Korean won             Other loans         
     Loans for
working
capital
     Loans for
facility
developments
     Others      Loans in
foreign
currencies
     Private  placed
corporate
bonds
     Others      Total  

Impaired Loans:

                    

Individual

   2,316,343         583,176         —           73,123         706,576         491,821         4,171,039   

Collective

     90,433         59,652         305         18,636         3,780         17,185         189,991   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   2,406,776         642,828         305         91,759         710,356         509,006         4,361,030   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2012  
     Loans in Korean won             Other loans         
     Loans for
working
capital
     Loans for
facility
developments
     Loans in
foreign
currencies
     Private  placed
corporate
bonds
     Others      Total  

Impaired Loans:

                 

Individual

   793,612         428,059         68,646         351,433         120,547         1,762,297   

Collective

     42,258         16,439         39,816         4,280         3,216         106,009   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   835,870         444,498         108,462         355,713         123,763         1,868,306   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

126


Table of Contents

Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(iii) Measurement methodology of credit risk

 

Pursuant to Basel II, the Bank selects the measurement methodology of credit risk considering the complexity of measurement, measurement factors, estimating methods and others. Measurement approaches are divided into Standardized Approach and Internal Ratings-Based Approach.

 

Standardized Approach (“SA”)

 

In the case of the Standardized Approach, the risk weights are applied according to the credit rating assessed by External Credit Assessment Institution (“ECAI”). Risk weights in each credit rating are as follows:

 

Credit rating(*)

       Corporate           Country           Bank      

    Asset securitization    

AAA ~ AA-

   20.00%   0.00%   20.00%   20.00%

A+ ~ A-

   50.00%   20.00%   50.00%   50.00%

BBB+ ~ BBB-

   100.00%   50.00%   100.00%   100.00%

BB+ ~ BB-

   100.00%   100.00%   100.00%   350.00%

B+ ~ B-

   150.00%   100.00%   100.00%   Deducted from Equity (1,250%)

Below B-

   150.00%   150.00%   150.00%  

Unrated

   100.00%   100.00%   100.00%  

 

(*) Credit rating refer to those evaluated by global credit rating agencies such as S&P or Moody’s

 

The OECD, S&P, Moody’s and Fitch are designated as foreign ECAI and Korea Investors Service Co., Ltd., NICE Investors Services Co., Ltd. and the Korea Ratings Co., Ltd. are designated as domestic ECAI.

 

The Bank applies the credit rating based on the corresponding loan and same borrower’s unsecured senior loans. In the case the borrower’s risk weight is higher than the unrated exposure’s risk weight (100%), the higher weight is applied. In the case the borrower has more than one rating, the higher weight of the two lowest weights (second best criteria) is applied.

 

Internal Ratings-Based Approach (“IRB”)

 

To use the Internal Ratings-Based Approach, a bank must be approved by the FSS and should also meet the requirement pre-set by the FSS.

 

In relation to Basel II that has been adopted domestically as of January 2008, the Bank gained approval from the FSS to use the Foundation Internal Ratings-Based Approach in July 2008. The Bank has calculated credit risk-weighted assets using the approach since late June 2008.

 

Measurement method of credit risk-weighted asset

 

The Bank calculates credit risk-weighted assets of corporate exposures and asset securitization exposures using the Foundation Internal Ratings-Based Approach as of December 31, 2013.

 

The Standardized Approach is applied to country exposures, public institution exposures and bank exposures according to the interpretation of the FSS permanently, and applied to overseas subsidiary and the Bank’s branch pursuant to prior consultation with the FSS.

 

127


Table of Contents

Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

The Standard Approach is applied to special finance, non-residents, non-banking financial institutions currently, and will be replaced by the Internal Ratings-Based Approach in the future.

 

<Approved measurement method>

Measurement method

  

Exposure

Standardized

Approach

   Permanent   
   SA(*1)   

—Countries, public institutions and banks

   SA(*2)   

—Overseas subsidiaries and branches, and other assets

Foundation Internal
Ratings-Based Approach

  

—Corporate and small and medium enterprises and asset securitization (at each credit level)

Application of IRB by phase

  

—Special lending, non-residence, non-bank financial institutions

 

(*1) Pursuant to the interpretation of the FSS, the Standardized Approach is applied to the exposures of governments, banks and other public institutions.
(*2) The Standardized Approach is applied, pursuant to prior consultation with the FSS, in the case the credit risk-weighted assets of a specific business segment is less than 15% of the entire credit risk-weighted assets.

 

The mitigated effect of credit risks reflects the related policies which consider eligible collateral and guarantees. The Bank calculates the credit risk-weighted assets using the capital adequacy ratio.

 

Upon the calculation of credit risk-weighted assets for derivatives, the Bank takes into consideration the set-off effects of transactions under legally enforceable rights to set-off to calculate exposures.

 

Exposure less credit risk mitigation by asset type as of December 31, 2013 and 2012 are as follows:

 

     December 31, 2013  
     Exposure      Credit risk
mitigation
    Exposure less
credit risk
mitigation
 

Government

   6,316,470         —          6,316,470   

Bank

     8,659,586         —          8,659,586   

Corporate

     113,859,492         (89,316     113,770,176   

Stock

     7,928,776         —          7,928,776   

Indirect investments

     4,405,870         —          4,405,870   

Asset securitization

     5,451,596         (4     5,451,592   

Over-the-counter derivatives

     7,486,854         (4,101,399     3,385,455   

Retail assets

     1,950,113         (41,619     1,908,494   

Others

     22,153,386         (4,433,933     17,719,453   
  

 

 

    

 

 

   

 

 

 
   178,212,143         (8,666,271     169,545,872   
  

 

 

    

 

 

   

 

 

 

 

128


Table of Contents

Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

     December 31, 2012  
     Exposure      Credit risk
mitigation
    Exposure less
credit risk
mitigation
 

Government

   5,932,290         —          5,932,290   

Bank

     8,204,972         —          8,204,972   

Corporate

     108,002,924         (98,347     107,904,577   

Stock

     8,523,869         —          8,523,869   

Indirect investments

     3,864,830         —          3,864,830   

Asset securitization

     8,117,135         —          8,117,135   

Over-the-counter derivatives

     8,181,229         (3,925,954     4,255,275   

Others

     22,466,698         (170,509     22,296,189   
  

 

 

    

 

 

   

 

 

 
   173,293,947         (4,194,810     169,099,137   
  

 

 

    

 

 

   

 

 

 

 

Credit rating model

 

The results of credit rating are presented as grades through an assessment of the debt repayment capacity that the principal and interest of debt securities or loans are redeemed while complying with contractual redemption schedule.

 

Using the Bank’s internal credit rating model, the Bank classifies debtors’ credit rating into 10 grades (AAA~D). Plus sign (+) and minus sign (-) are attached to the grades (AA~B) to distinguish the difference between credits in the same grade. As a result, the Bank’s credit rating model uses 20 grades.

 

The Bank’s regular credit rating process is carried out once a year and in the case of the change of debtor’s credit condition, the credit rating is frequently adjusted as necessary to retain the adequacy of credit rating.

 

The results of credit rating is applied to various areas such as discrimination of loan processes, loan limit, loan interest rate, post loan management standard process, credit risk measurement, and allowance for loan losses assessment.

 

Credit process control structure

 

According to the Principle of Checks and Balances the Bank has established the credit process control structure by which the credit rating system operates appropriately.

 

   

Independent assessment of credit rating: The Bank’s business segment (RM) and credit rating assessment segment (CO) are independently operated.

 

   

Independent control of credit rating system: The control of credit rating system including the development of credit rating model is independently implemented by the Bank’s Risk Management Department.

 

   

Independent verification of credit rating system: Credit rating system is independently verified by the validation team of the Consulting Service Department.

 

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Table of Contents

Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

   

Internal audit of credit rating process: Credit rating process is audited by the Bank’s internal audit department.

 

   

Role of the Board of Directors and the Bank’s management: Major issues relating to credit process are approved by the Board of Directors and are regularly monitored by the Bank’s top management.

 

The Bank reviews debt serviceability based on a credit analysis when handling loans. Depending on the results, credit loan preservation is adjusted as necessary using such methods as interest rate preservation due to credit risk.

 

The Bank evaluates the value of the collateral, performing ability and legal validity of the guarantee at the initial acquisition. The Bank re-evaluates the provided collateral and guarantees regularly for them to be reasonably preserved.

 

For guarantees, the Bank demands a corresponding written guarantee according to loan handling standards and the guarantor’s credit rating is independently calculated when in conformance with the credit rating endowment method

 

(iv) Credit exposure

 

Geographical information of credit exposure

 

Geographical information of credit exposure as of December 31, 2013 and 2012 are as follows:

 

     December 31, 2013  
     Korea      UK      USA      Others      Total  

Due from banks (excluding due from BOK)

   2,723,248         89,746         77,600         697,309         3,587,903   

Available-for-sale financial assets:

              

Bonds (excluding government bonds)

     13,796,914         615,908         502,198         433,866         15,348,886   

Held-to-maturity financial assets:

              

Bonds (excluding government bonds)

     20,000         —           —           —           20,000   

Loans

     130,786,722         212,432         363,786         3,517,216         134,880,156   

Derivative financial assets

     623,473         2,670         —           150         626,293   

Other assets

     3,870,697         7,489         1,516         10,025         3,889,727   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     151,821,054         928,245         945,100         4,658,566         158,352,965   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial guarantees

     32,039,012         —           16,773         301,854         32,357,639   

Credit related commitment (Commitments on loans and others)

     6,219,899         228,875         759,216         3,162,384         10,370,374   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     38,258,911         228,875         775,989         3,464,238         42,728,013   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   190,079,965         1,157,120         1,721,089         8,122,804         201,080,978   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

130


Table of Contents

Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

     December 31, 2012  
     Korea      UK      USA      Others      Total  

Due from banks (excluding due from BOK)

   1,247,477         48,518         103,460         455,322         1,854,777   

Available-for-sale financial assets:

              

Bonds (excluding government bonds)

     13,093,877         616,525         446,087         389,799         14,546,288   

Held-to-maturity financial assets:

              

Bonds (excluding government bonds)

     80,979         —           —           —           80,979   

Loans

     120,016,827         332,480         310,503         2,915,243         123,575,053   

Derivative financial assets

     856,936         6         —           —           856,942   

Other assets

     10,629,322         3,536         2,398         13,511         10,648,767   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     145,925,418         1,001,065         862,448         3,773,875         151,562,806   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial guarantees

     47,530,780         —           36,302         324,785         47,891,867   

Credit related commitment (Commitments on loans and others)

     8,888,424         148,123         702,982         2,676,264         12,415,793   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     56,419,204         148,123         739,284         3,001,049         60,307,660   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   202,344,622         1,149,188         1,601,732         6,774,924         211,870,466   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Industry information of credit exposure

 

Industry information of credit exposure as of December 31, 2013 and 2012 are as follows:

 

     December 31, 2013  
     Manufacturing      Service      Others      Total  

Due from banks (excluding due from BOK)

   —           906,468         2,681,435         3,587,903   

Available-for-sale financial assets:

           

Bonds (excluding government bonds)

     3,594,458         9,516,201         2,238,227         15,348,886   

Held-to-maturity financial assets:

           

Bonds (excluding government bonds)

     —           20,000         —           20,000   

Loans

     68,029,275         55,442,757         11,408,124         134,880,156   

Derivative financial assets

     —           619,937         6,356         626,293   

Other assets

     1,497         35,883         3,852,347         3,889,727   
  

 

 

    

 

 

    

 

 

    

 

 

 
     71,625,230         66,541,246         20,186,489         158,352,965   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial guarantees

     23,175,529         3,719,758         5,462,352         32,357,639   

Credit related commitment (Commitments on loans and others)

     2,556,736         7,175,084         638,554         10,370,374   
  

 

 

    

 

 

    

 

 

    

 

 

 
     25,732,265         10,894,842         6,100,906         42,728,013   
  

 

 

    

 

 

    

 

 

    

 

 

 
   97,357,495         77,436,088         26,287,395         201,080,978   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

131


Table of Contents

Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

     December 31, 2012  
     Manufacturing      Service      Others      Total  

Due from banks (excluding due from BOK)

   —           716,223         1,138,554         1,854,777   

Available-for-sale financial assets:

           

Bonds (excluding government bonds)

     3,570,141         9,180,716         1,795,431         14,546,288   

Held-to-maturity financial assets:

           

Bonds (excluding government bonds)

     20,000         60,979         —           80,979   

Loans

     63,659,216         49,753,630         10,162,207         123,575,053   

Derivative financial assets

     —           848,042         8,900         856,942   

Other assets

     1,480         35,885         10,611,402         10,648,767   
  

 

 

    

 

 

    

 

 

    

 

 

 
     67,250,837         60,595,475         23,716,494         151,562,806   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial guarantees

     37,287,897         3,647,415         6,956,555         47,891,867   

Credit related commitment (Commitments on loans and others)

     2,317,677         9,412,911         685,205         12,415,793   
  

 

 

    

 

 

    

 

 

    

 

 

 
     39,605,574         13,060,326         7,641,760         60,307,660   
  

 

 

    

 

 

    

 

 

    

 

 

 
   106,856,411         73,655,801         31,358,254         211,870,466   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Credit rating information of credit exposure

 

Credit rating information of credit exposure as of December 31, 2013 and 2012 are as follows:

 

     December 31, 2013  
     Due from
banks
     Available-for-sale
financial assets
     Held-to-maturity
financial assets
     Total  

AAA ~ AA-

   82,722         2,808,254         —           2,890,976   

A+ ~ A-

     197,251         3,920,254         20,000         4,137,505   

BBB+ ~ BB-

     628,927         7,280,183         —           7,909,110   

Less than BB-

     —           335,455         —           335,455   

Unrated

     2,679,003         1,004,740         —           3,683,743   
  

 

 

    

 

 

    

 

 

    

 

 

 
   3,587,903         15,348,886         20,000         18,956,789   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2012  
     Due from
banks
     Available-for-sale
financial assets
     Held-to-maturity
financial assets
     Total  

AAA ~ AA-

   171,077         3,095,310         600         3,266,987   

A+ ~ A-

     335,305         1,209,179         —           1,544,484   

BBB+ ~ BB-

     187,532         5,273,528         20,000         5,481,060   

Less than BB-

     —           323,879         —           323,879   

Unrated

     1,160,863         4,644,392         60,379         5,865,634   
  

 

 

    

 

 

    

 

 

    

 

 

 
   1,854,777         14,546,288         80,979         16,482,044   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

132


Table of Contents

Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(3) Capital management activities

 

(i) Capital adequacy

 

The FSS approved the Bank’s use of the Foundation Internal Ratings-Based Approach in July 2008. The Bank has been using the same approach when calculating credit risk-weighted assets since the end of June, 2008. The equity capital ratio and equity capital according to the standards of the Bank for International Settlements are calculated for the purpose of such disclosure. The equity capital ratio and equity capital are calculated on a consolidated basis. The equity capital ratio and equity capital are calculated on a consolidated basis. In conformity with the Banking Act, which is based on the implementation of Basel III on December 1, 2013, the regulatory capital is divided into the following two categories.

 

Tier 1 capital

 

- Common Equity Tier 1

 

Regulatory capital that represents the most subordinated claim in liquidation of the Bank, takes the first and proportionately greatest share of any losses as they occur, and which principal is never repaid outside of liquidation meets the criteria for classification as common equity, including capital stock, capital surplus, retained earnings, qualifying noncontrolling interest in subsidiaries, and accumulated other comprehensive income as common equity Tier 1.

 

- Additional Tier 1 Capital

 

Capital stock and capital surplus related to issuance of capital securities that are subordinated, have non-cumulative and conditional dividends or interests, and have no maturity or step-up conditions.

 

Tier 2 Capital (Supplementary Tier 2 Capital)

 

Regulatory capital that fulfills supplementary capital adequacy requirements, and includes subordinated debt with maturities over 5 years and allowance for loan losses in conformity with external regulatory standards and internal standards.

 

133


Table of Contents

Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

The BIS capital adequacy ratio and capital in accordance to Basel III standards as of December 31, 2013 are as follows:

 

BIS capital adequacy ratio

 

     December 31, 2013  

Equity capital based on BIS (A):

  

Tier 1 capital

  

Common Equity Tier 1

   15,300,310   

Additional Tier 1 Capital

     14,679   
  

 

 

 
     15,314,989   

Tier 2 capital

     2,890,445   
  

 

 

 
     18,205,434   
  

 

 

 

Risk-weighted assets (B):

  

Credit risk-weighted assets

     119,304,037   

Market risk-weighted assets

     523,154   

Operational risk-weighted assets

     4,515,292   
  

 

 

 
   124,342,483   
  

 

 

 

BIS capital adequacy ratio (A/B):

   % 14.64   

Tier 1 capital ratio

     12.32   

Common Equity Tier 1 ratio

     12.30   

Additional Tier 1 Capital ratio

     0.02   

Tier 2 capital ratio

     2.32   

 

134


Table of Contents

Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

Equity capital based on BIS

 

     December 31, 2013  

Equity capital (A+B)

   18,205,434   

Tier 1 capital (A=C+D):

  

Common Equity Tier 1 (C)

  

Capital stock

     9,261,811   

Capital surplus

     46,977   

Retained earnings

     5,687,488   

Non-controlling interest

     1,030   

Other comprehensive income

     446,657   

Other capital adjustments

     (1,238

Common stock deductibles

     (142,415
  

 

 

 
     15,300,310   

Additional Tier 1 Capital (D)

  

Non-controlling interest

     14,679   
  

 

 

 
     15,314,989   
  

 

 

 

Tier 2 capital (B):

  

Allowance for doubtful accounts, etc.

     567,543   

Nonqualified capital securities

     2,322,537   

Non-controlling interest

     365   
  

 

 

 
   2,890,445   
  

 

 

 

 

The BIS capital adequacy ratio and capital in accordance to Basel II standards as of December 31, 2012 are as follows:

 

BIS capital adequacy ratio

 

     December 31, 2012  

Equity capital based on BIS (A):

  

Tier 1 capital

   15,347,588   

Tier 2 capital

     1,648,534   
  

 

 

 
     16,996,122   
  

 

 

 

Risk-weighted assets (B):

  

Credit risk-weighted assets

     107,681,202   

Market risk-weighted assets

     938,405   

Operational risk-weighted assets

     4,581,928   
  

 

 

 
   113,201,535   
  

 

 

 

BIS capital adequacy ratio (A/B):

   % 15.01   

Tier 1 capital ratio

     13.55   

Tier 2 capital ratio

     1.46   

 

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Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

Equity capital based on BIS

 

     December 31, 2012  

Equity capital (A+B)

   16,996,122   

Tier 1 capital (A):

  

Capital stock

     9,251,861   

Capital surplus

     44,859   

Retained earnings

     8,584,659   

Non-controlling interest

     15,247   

Deductions

     (2,549,038
  

 

 

 
     15,347,588   
  

 

 

 

Tier 2 capital (B):

  

45% of unrealized gain on financial assets available for sale

     285,310   

Term subordinated liabilities

     1,134,812   

Others

     775,700   

Deductions

     (547,288
  

 

 

 
   1,648,534   
  

 

 

 

 

(4) Market risk

 

(i) Concept

 

Market risk is defined as the possibility of potential loss on a trading position resulting from fluctuations in interest rates, foreign exchange rates and the price of stocks and derivatives. Trading position is exposed to risks, such as interest rate, stock price, and foreign exchange rate, etc. Non-trading position is mostly exposed to interest rates. Accordingly, the Bank classifies market risks into those exposed from trading position or those exposed from non-trading position.

 

(ii) Market risks of trading positions

 

Management method on market risks arising from trading positions

 

Trading position includes securities, foreign exchange position, and derivatives which are traded for short-term profits.

 

Market risk is managed using VaR limit and loss limit. VaR limit is calculated in the view of entire bank and the calculated VaR limit is distributed into each department and each type (stock price, interest rate, foreign exchange rate and option). The trading department regulates and operates terms of stop loss and investment limits.

 

Using the Standardized Approach and internal model of VaR, the Bank’s VaR is measured daily and the measured VaR is used for risk monitoring and limit management. In the estimation of VaR, the historical simulation and two other supplemental procedures are used: variance-covariance matrix and Monte Carlo simulation. Through the stress test and back test, the estimation of VaR is validated daily.

 

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Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

In estimating market risk, the Standardized Approach and the internal model are used. The Standardized Approach is used in order to calculate the required capital from market risk and the internal model is used in order to manage risks internally.

 

Since July 2007 the Bank has measured one-day VaR through the historical simulation method using the time series data of past 250 days under a 99% confidence level. The calculated VaR is monitored on a daily basis.

 

In the implementation of the stress test, the Bank applies three scenarios based on the fluctuation of market index that occurred at the time of the historical events that resulted in the significant shock such as the IMF crisis and the 9/11 attacks. The stress test is implemented by the system daily in order to provide for crisis occurrences. Furthermore, the Bank is conducting a contingency plan for market risk management. The plan distinguishes the crisis condition into three stages—precautious stage, precrisis stage and crisis stage—through the measurement of the market volatility.

 

For the validation of the market risk measurement methodology, the Bank daily implements the back testing that compares the simulated loss, the actual loss and the previous day’s VaR. In addition, the Bank enforces the market risk management relating to irregular compound derivatives through the validation of the derivative pricing model developed by the Bank’s Front Office.

 

VaR of trading position

 

The Bank’s VaR of trading position as of December 31, 2013 and 2012 are as follows:

 

     December 31, 2013  
     Average     Max     Min     December 31,
2013
 

Interest rate

   2,701        4,483        1,079        3,937   

Stock price

     541        1,123        174        302   

Foreign exchange rate

     591        5,375        202        841   

Option

     156        614        50        147   

Diversification effect

     (1,146     (4,557     (93     (1,163
  

 

 

   

 

 

   

 

 

   

 

 

 
   2,843        7,038        1,412        4,064   
  

 

 

   

 

 

   

 

 

   

 

 

 
     December 31, 2012  
     Average     Max     Min     December 31,
2012
 

Interest rate

   3,322        4,251        2,364        3,229   

Stock price

     778        3,219        53        263   

Foreign exchange rate

     687        4,789        167        573   

Option

     217        927        40        361   

Diversification effect

     (1,607     (7,017     (470     (1,041
  

 

 

   

 

 

   

 

 

   

 

 

 
   3,397        6,169        2,154        3,385   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

(iii) Market risks of non-trading positions

 

Management method on market risks arising from non-trading positions

 

The most critical market risk that arises in non-trading position is the interest rate risk. Interest rate risk is defined as the likely loss resulting from the unfavorable fluctuation of interest rate in the Bank’s financial condition and is measured by interest rate VaR and interest rate EaR.

 

Interest rate VaR is the maximum amount of decrease in net asset value resulting from the unfavorable fluctuation of interest rate. Interest rate EaR is the maximum amount of decrease in net interest income resulting from the unfavorable fluctuation of interest rate for a year.

 

The Bank’s interest rate VaR and interest rate EaR are measured through the simulation of conclusive interest rate scenario with the Oracle Financial Services Application (OFSA) and are reported on a monthly basis to the Risk Management Committee. The Management’s target of interest rate VaR and interest rate EaR are approved at the beginning of the year. Additionally, the interest rate VaR and interest rate EaR on consolidated basis are calculated using the Standardized Approach in order to retain the consistency in the methods used by the Bank and its subsidiaries.

 

EaR/VaR of non-trading positions

 

The Bank’s EaR and VaR of non-trading positions as of December 31, 2013 and 2012 are as follows:

 

   

December 31, 2013

   

Interest rate shock

  

Interest rate VaR

  

Interest rate EaR

  2.00%    ₩2,875    112,001
   

December 31, 2012

   

Interest rate shock

  

Interest rate VaR

  

Interest rate EaR

  2.00%    ₩269,006    46,927

 

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Table of Contents

Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

 

(iv) Foreign currency risk

 

Outstanding balances by currency with significant exposure as of December 31, 2013 and 2012 are as follows:

 

    December 31, 2013  
    KRW     USD     EUR     JPY     GBP     Others     Total  

Financial assets:

             

Cash and due from banks

  2,119,233        3,529,451        1,607        35,384        1,124        23,538        5,710,337   

Financial assets held for trading

    1,404,759        20,894        —          —          —          —          1,425,653   

Available-for-sale financial assets

    21,639,102        3,465,472        138,337        205,708        —          85,614        25,534,233   

Held-to-maturity financial assets

    27,109        —          —          —          —          —          27,109   

Loans

    66,851,650        26,240,730        528,628        2,415,978        19,424        252,003        96,308,413   

Derivative financial assets

    3,584,242        669,708        55,189        8,697        —          1,436        4,319,272   

Other assets

    2,190,361        1,735,274        62,896        138,133        —          12,811        4,139,475   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total financial assets

  97,816,456        35,661,529        786,657        2,803,900        20,548        375,402        137,464,492   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial liabilities:

             

Financial liabilities designated at FVTPL

  677,916        —          —          —          —          —          677,916   

Deposits

    31,767,629        5,347,742        31,449        580,214        23        213        37,727,270   

Borrowings

    9,007,826        11,937,635        335,076        1,936,532        —          3,704        23,220,773   

Bonds

    36,876,366        12,133,924        2,236,678        1,003,595        —          3,674,305        55,924,868   

Derivative financial liabilities

    3,215,329        605,391        46,867        12,355        —          159        3,880,101   

Other liabilities

    3,128,124        1,254,518        34,999        524,533        3,481        36,858        4,982,513   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total financial liabilities

    84,673,190        31,279,210        2,685,069        4,057,229        3,504        3,715,239        126,413,441   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net financial position

  13,143,266        4,382,319        (1,898,412     (1,253,329     17,044        (3,339,837     11,051,051   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

 

    December 31, 2012  
    KRW     USD     EUR     JPY     GBP     Others     Total  

Financial assets:

             

Cash and due from banks

  832,377        1,775,148        9,862        55,951        —          22,510        2,695,848   

Financial assets held for trading

    1,846,521        18,181        9,920        —          —          2,742        1,877,364   

Available-for-sale financial assets

    21,082,015        3,298,030        128,280        289,087        —          88,598        24,886,010   

Held-to-maturity financial assets

    88,690        —          —          —          —          —          88,690   

Loans

    63,322,712        23,783,430        428,325        3,154,232        64,380        281,326        91,034,405   

Derivative financial assets

    3,613,255        1,445,046        94,201        25,388        —          —          5,177,890   

Other assets

    6,496,755        3,841,387        28,177        225,267        —          13,522        10,605,108   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total financial assets

  97,282,325        34,161,222        698,765        3,749,925        64,380        408,698        136,365,315   

Financial liabilities:

             

Financial liabilities designated at FVTPL

  875,197        —          —          —          —          —          875,197   

Deposits

    33,955,187        3,849,986        386,370        459,379        64        1,346        38,652,332   

Borrowings

    8,339,318        11,284,692        207,331        1,999,235        83,958        62,933        21,977,467   

Bonds

    29,152,307        11,360,239        808,152        1,009,564        —          4,571,415        46,901,677   

Derivative financial liabilities

    2,706,621        1,284,487        74,767        20,981        —          —          4,086,856   

Other liabilities

    7,055,176        4,229,599        153,030        122,024        407        56,868        11,617,104   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total financial liabilities

    82,083,806        32,009,003        1,629,650        3,611,183        84,429        4,692,562        124,110,633   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net financial position

  15,198,519        2,152,219        (930,885     138,742        (20,049     (4,283,864     12,254,682   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(5) Liquidity risk management

 

(i) Concept

 

Liquidity risk is defined as the possibility of potential loss due to a temporary shortage in funds caused by a maturity mismatch or an unexpected capital outlay. Liquidity risk soars when funding rates rise, assets are sold below a normal price, or a good investment opportunity is missed.

 

(ii) Approach to liquidity risk management

 

Since the methodology to quantifiably measure liquidity risk does not formally exist, the Bank manages its liquidity risks as follows:

 

Allowable limit for liquidity risk

 

   

The allowable limit for liquidity risk sets liquidity ratio and remaining maturity gap.

 

   

The management standards with regards to the allowable limit for liquidity risk should be set using separate and stringent set ratios in accordance with the FSS guidelines.

 

<Measurement Methodology>

 

   

Liquidity ratio : (Maturing liquidity asset in the interval / Maturing liquidity liability in the interval) X 100

 

   

Remaining maturity gap : (Maturing liquidity asset in the interval—Maturing liquidity liability in the interval) / total assets X 100

 

Early Warning Indicator

 

In order to identify prematurely and cope with worsening liquidity risk trends, the Bank has set up 13 indexes such as the “Foreign Exchange Stabilization Bond CDS Premium,” and measures the trend monthly, weekly and daily as a means for establishing the allowable liquidity risk limit complementary measures.

 

Stress-Test analysis and contingency plan

 

The Bank evaluates the effects on the liquidity risk and identifies the inherent flaws. In the case where an unpredictable and significant liquidity crisis occurs, the Bank executes risk situation analysis quarterly based on crisis specific to the Bank, market risk and complex emergency, and reports to the Risk Management Committee for the purpose of the Bank’s solvency securitization.

 

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Table of Contents

Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

(iii) Analysis on remaining contractual maturity of financial instruments

 

Remaining contractual maturity risks of non-derivative financial instruments including interest payment as of December 31, 2013 and 2012 are as follows:

 

     December 31, 2013  
     Within 1 month      1 ~ 3 months      3 ~ 12 months      1 ~ 5 years      Over 5 years      Total  

Financial assets:

                 

Cash and due from banks

   4,958,851         206,795         255,254         304,808         379         5,726,087   

Financial assets held for trading

     1,436,395         —           —           —           —           1,436,395   

Available-for-sale financial assets

     187,690         4,375,759         6,280,637         12,725,473         3,455,035         27,024,594   

Held-to-maturity financial assets

     290         17         21,886         9,069         —           31,262   

Loans

     10,165,962         10,578,681         31,023,490         41,609,722         10,246,540         103,624,395   

Other assets

     3,488,432         —           1,295         11,560         1,236,880         4,738,167   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total financial asset

   20,237,620         15,161,252         37,582,562         54,660,632         14,938,834         142,580,900   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities:

                 

Financial liabilities designated at FVTPL

   —           —           5,155         215,120         1,024,216         1,244,491   

Deposits

     12,728,291         6,311,823         19,004,697         726,971         97,323         38,869,105   

Borrowings

     4,782,025         3,551,858         8,544,509         5,429,467         1,459,190         23,767,049   

Bonds

     3,082,781         2,582,567         14,851,710         32,099,514         10,094,139         62,710,711   

Other liabilities

     3,412,590         310         9,019         35,875         2,346,279         5,804,073   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   24,005,687         12,446,558         42,415,090         38,506,947         15,021,147         132,395,429   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

     December 31, 2012  
     Within 1 month      1 ~ 3 months      3 ~ 12 months      1 ~ 5 years      Over 5 years      Total  

Financial assets:

                 

Cash and due from banks

   2,137,432         64,871         266,749         177,528         —           2,646,580   

Financial assets held for trading

     1,884,607         —           434         10,589         —           1,895,630   

Available-for-sale financial assets

     155,717         4,187,777         5,582,788         13,570,932         3,069,601         26,566,815   

Held-to-maturity financial assets

     1,101         569         62,581         30,937         727         95,915   

Loans

     10,340,760         8,827,969         29,634,064         41,193,941         9,739,209         99,735,943   

Other assets

     9,796,657         17         11,573         18,601         837,235         10,664,083   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total financial asset

   24,316,274         13,081,203         35,558,189         55,002,528         13,646,772         141,604,966   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities:

                 

Financial liabilities designated at FVTPL

   —           2,081         160,483         225,910         1,102,915         1,491,389   

Deposits

     12,225,615         5,487,976         21,630,828         412,034         1,692         39,758,145   

Borrowings

     5,932,615         2,759,943         7,031,195         5,243,919         1,580,937         22,548,609   

Bonds

     1,755,209         3,105,797         13,405,597         27,860,046         6,765,133         52,891,782   

Other liabilities

     9,654,121         82         15,051         43,013         2,522,612         12,234,879   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   29,567,560         11,355,879         42,243,154         33,784,922         11,973,289         128,924,804   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

Remaining contractual maturity risks of derivative financial instruments as of December 31, 2013 and 2012 are as follows:

 

Net settlement of derivative financial instruments

 

     December 31, 2013  
     Within 1
month
    1 ~ 3 months     3 ~ 12 months     1 ~ 5 years     Over 5 years     Total  

Trading purpose derivatives:

            

Currency

   (36,151     (72,308     (11,277     —          —          (119,736

Interest rate

     2,193        185,839        146,451        369,453        1,543,637        2,247,573   

Stock

     —          (5,541     (3,225     (12,016     —          (20,782

Hedging purpose derivatives:

            

Interest rate

     —          177,537        (10,651     (708,914     (111,157     (653,185
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   (33,958     285,527        121,298        (351,477     1,432,480        1,453,870   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     December 31, 2012  
     Within 1
month
     1 ~ 3 months     3 ~ 12 months     1 ~ 5 years     Over 5 years     Total  

Trading purpose derivatives:

             

Currency

   —           (403,844     (860,736     (10,794     —          (1,275,374

Interest rate

     264         (369,218     1,041,549        218,111        1,531,877        2,422,583   

Stock

     —           8,271        1,611        (8,959     —          923   

Hedging purpose derivatives:

             

Interest rate

     —           906,839        —          (818,134     (34,443     54,262   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   264         142,048        182,424        (619,776     1,497,434        1,202,394   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

Gross settlement of derivative instruments

 

     December 31, 2013  
     Within 1
month
     1 ~ 3 months      3 ~ 12 months      1 ~ 5 years      Over 5 years      Total  

Trading purpose derivatives:

                 

Currency

                 

Inflow

   10,176,000         7,606,397         15,909,252         9,917,810         245,199         43,854,658   

Outflow

     10,186,032         7,559,472         16,062,327         10,243,482         247,038         44,298,351   

Hedging purpose derivatives:

                 

Currency

                 

Inflow

     94,184         471,653         1,309,717         3,374,745         168,028         5,418,327   

Outflow

     96,143         471,782         1,283,639         3,461,882         168,377         5,481,823   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total inflow

   10,270,184         8,078,050         17,218,969         13,292,555         413,227         49,272,985   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total outflow

   10,282,175         8,031,254         17,345,966         13,705,364         415,415         49,780,174   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2012  
     Within 1
month
     1 ~ 3 months      3 ~ 12 months      1 ~ 5 years      Over 5 years      Total  

Trading purpose derivatives:

                 

Currency

                 

Inflow

   1,000,135         8,501,828         14,808,039         9,406,311         659,643         34,375,956   

Outflow

     994,579         8,496,906         14,814,296         9,720,509         645,799         34,672,089   

Hedging purpose derivatives:

                 

Currency

                 

Inflow

     587,715         83,793         1,904,595         2,954,402         393,795         5,924,300   

Outflow

     628,831         79,563         1,823,168         2,930,400         362,428         5,824,390   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total inflow

   1,587,850         8,585,621         16,712,634         12,360,713         1,053,438         40,300,256   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total outflow

   1,623,410         8,576,469         16,637,464         12,650,909         1,008,227         40,496,479   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Korea Development Bank

 

Notes to the Separate Financial Statements—(Continued)

 

For the years ended December 31, 2013 and 2012

 

(In millions of won)

 

Remaining contractual maturity risks of guarantees and commitments as of December 31, 2013 and 2012 are as follows:

 

     December 31, 2013  
     Within
1 month
     1 ~ 3 months      3 ~ 12 months      1 ~ 5 years      Over 5 years      Total  

Off-Balance:

                 

Guarantees

   564,006         1,177,969         2,443,375         3,059,609         4,533,099         11,778,058   

Commitments

     24,039         141,659         2,188,537         3,233,299         637,907         6,225,441   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   588,045         1,319,628         4,631,912         6,292,908         5,171,006         18,003,499   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2012  
     Within
1 month
     1 ~ 3 months      3 ~ 12 months      1 ~ 5 years      Over 5 years      Total  

Off-Balance:

                 

Guarantees

   589,145         829,795         3,320,574         3,317,502         4,728,281         12,785,297   

Commitments

     16,002         357,133         2,666,716         4,951,842         659,250         8,650,943   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   605,147         1,186,928         5,987,290         8,269,344         5,387,531         21,436,240   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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THE REPUBLIC OF KOREA

 

Land and History

 

Territory and Population

 

Located generally south of the 38th parallel on the Korean peninsula, The Republic of Korea covers about 38,000 square miles, approximately one-fourth of which is arable. The Republic has a population of approximately 51 million people. The country’s largest city and capital, Seoul, has a population of about 10 million people.

 

Map of the Republic of Korea

 

LOGO

 

Political History

 

Dr. Rhee Seungman, who was elected President in each of 1948, 1952, 1956 and 1960, dominated the years after the Republic’s founding in 1948. Shortly after President Rhee’s resignation in 1960 in response to student-led demonstrations, a group of military leaders headed by Park Chung Hee assumed power by coup. The military leaders established a civilian government, and the country elected Mr. Park as President in October 1963. President Park served as President until his assassination in 1979 following a period of increasing strife between the Government and its critics. The Government declared martial law and formed an interim government under

 

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Prime Minister Choi Kyu Hah, who became the next President. After clashes between the Government and its critics, President Choi resigned, and General Chun Doo Hwan, who took control of the Korean army, became President in 1980.

 

In late 1980, the country approved, by national referendum, a new Constitution, providing for indirect election of the President by an electoral college and for certain democratic reforms, and shortly thereafter, in early 1981, re-elected President Chun.

 

Responding to public demonstrations in 1987, the legislature revised the Constitution to provide for direct election of the President. In December 1987, Roh Tae Woo won the Presidency by a narrow plurality, after opposition parties led by Kim Young Sam and Kim Dae Jung failed to unite behind a single candidate. In February 1990, two opposition political parties, including the one led by Kim Young Sam, merged into President Roh’s ruling Democratic Liberal Party.

 

In December 1992, the country elected Kim Young Sam as President. The election of a civilian and former opposition party leader considerably lessened the controversy concerning the legitimacy of the political regime. President Kim’s administration reformed the political sector and deregulated and internationalized the Korean economy.

 

In December 1997, the country elected Kim Dae Jung as President. President Kim’s party, the Millennium Democratic Party (formerly known as the National Congress for New Politics), formed a coalition with the United Liberal Democrats led by Kim Jong Pil, with Kim Jong Pil becoming the first prime minister in President Kim’s administration. The coalition, which temporarily ended before the election held in April 2000, continued with the appointment of Lee Han Dong of the United Liberal Democrats as the Prime Minister in June 2000. The coalition again ended in September 2001.

 

In December 2002, the country elected Roh Moo Hyun as President. President Roh and his supporters left the Millennium Democratic Party in 2003 and formed a new party, the Uri Party, in November 2003. On August 15, 2007, 85 members of the National Assembly, previously belonging to the Uri Party, or the Democratic Party, formed the United New Democratic Party (the “UNDP”). The Uri Party merged into the UNDP in August 20, 2007. In February 2008, the UNDP merged back into the Democratic Party. In December 2011, the Democratic Party merged with the Citizens Unity Party to form the Democratic United Party, which changed its name to the Democratic Party in May 2013.

 

In December 2007, the country elected Lee Myung-Bak as President. He commenced his term on February 25, 2008. The Lee administration pursued a lively market economy through deregulation, free trade and the attraction of foreign investment.

 

In December 2012, the country elected Park Geun-hye as President. She commenced her term on February 25, 2013. The Park administration’s key policy priorities include:

 

   

facilitating the growth of small and medium-enterprises and job creation;

 

   

seeking a productive welfare system based on customized welfare benefits and job training;

 

   

promoting clean and renewable energy technologies;

 

   

facilitating new growth engine industries;

 

   

taking initiatives on the denuclearization of North Korea; and

 

   

establishing an efficient government by reorganizing government functions.

 

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Government and Politics

 

Government and Administrative Structure

 

Governmental authority in the Republic is centralized and concentrated in a strong Presidency. The President is elected by popular vote and can only serve one term of five years. The President chairs the State Council, which consists of the prime minister, the deputy prime ministers, the respective heads of Government ministries and the ministers of state. The President can select the members of the State Council and appoint or remove all other Government officials, except for elected local officials.

 

The President can veto new legislation and take emergency measures in cases of natural disaster, serious fiscal or economic crisis, state of war or other similar circumstances. The President must promptly seek the concurrence of the National Assembly for any emergency measures taken and failing to do so automatically invalidates the emergency measures. In the case of martial law, the President may declare martial law without the consent of the National Assembly; provided, however, that the National Assembly may request the President to rescind such martial law.

 

The National Assembly exercises the country’s legislative power. The Constitution and the Election for Public Offices Act provide for the direct election of about 82% of the members of the National Assembly and the distribution of the remaining seats proportionately among parties winning more than 5 seats in the direct election or receiving over 3% of the popular vote. National Assembly members serve four-year terms. The National Assembly enacts laws, ratifies treaties and approves the national budget. The executive branch drafts most legislation and submits it to the National Assembly for approval.

 

The country’s judicial branch comprises the Supreme Court, the Constitutional Court and lower courts of various levels. The President appoints the Chief Justice of the Supreme Court and appoints the other Justices of the Supreme Court upon the recommendation of the Chief Justice. All appointments to the Supreme Court require the consent of the National Assembly. The Chief Justice, with the consent of the conference of Supreme Court Justices, appoints all the other judges in Korea. Supreme Court Justices serve for six years and all other judges serve for ten years. Other than the Chief Justice, justices and judges may be reappointed to successive terms.

 

The President formally appoints all nine judges of the Constitutional Court, but three judges must be designated by the National Assembly and three by the Chief Justice of the Supreme Court. Constitutional Court judges serve for six years and may be reappointed to successive terms.

 

Administratively, the Republic comprises eight provinces, one special autonomous province (Jeju), one special city (Seoul), six metropolitan cities (Busan, Daegu, Incheon, Gwangju, Daejon and Ulsan) and one special autonomous city (Sejong). From 1961 to 1995, the national government controlled the provinces and the President appointed provincial officials. Local autonomy, including the election of provincial officials, was reintroduced in June 1995.

 

Political Organizations

 

The 19th legislative general election was held on April 11, 2012 and the term of the National Assembly members elected in the 19th legislative general election commenced on May 30, 2012. In March 2014, the Democratic Party merged with the New Politics Alliance and changed its name to the New Politics Alliance for Democracy, or the NPAD. Currently, there are two major political parties, the Saenuri Party (formerly known as the Grand National Party), or SP, to which President Park Geun-hye belongs, and the NPAD.

 

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As of May 31, 2014, the parties control the following number of seats in the National Assembly:

 

     SP      NPAD      Others      Total  

Number of Seats

     156         130         12         298   

 

Relations with North Korea

 

Relations between the Republic and North Korea have been tense over most of the Republic’s history. The Korean War, which took place between 1950 and 1953 began with the invasion of the Republic by communist forces from North Korea and, following a military stalemate, an armistice was reached establishing a demilitarized zone monitored by the United Nations in the vicinity of the 38th parallel.

 

North Korea maintains a regular military force estimated at more than 1,000,000 troops, mostly concentrated near the northern border of the demilitarized zone. The Republic’s military forces, composed of approximately 650,000 regular troops and almost 3.0 million reserves, maintain a state of military preparedness along the southern border of the demilitarized zone. In addition, the United States has historically maintained its military presence in the Republic. In October 2004, the United States and the Republic agreed to a three-phase withdrawal of approximately one-third of the 37,500 troops stationed in the Republic by the end of 2008. By the end of 2004, 5,000 U.S. troops departed the Republic in the first phase of such withdrawal and in the plan’s second phase, the United States removed 5,000 troops by the end of 2006. In the final phase, another 2,500 U.S. troops were scheduled to depart by the end of 2008. In April 2008, however, the United States and the Republic decided not to proceed with the final phase of withdrawal and agreed to maintain 28,500 U.S. troops in the Republic. In February 2007, the United States and the Republic agreed to dissolve their joint command structure by 2012, which would allow the Republic to assume the command of its own armed forces in the event of war on the Korean peninsula. In June 2010, however, the United States and the Republic agreed to delay the dissolution of their joint command structure to 2015.

 

The level of tension between the two Koreas has fluctuated and may increase abruptly as a result of current and future events. In recent years, there have been heightened security concerns stemming from North Korea’s nuclear weapons and long-range missile programs and increased uncertainty regarding North Korea’s actions and possible responses from the international community. In December 2002, North Korea removed the seals and surveillance equipment from its Yongbyon nuclear power plant and evicted inspectors from the United Nations International Atomic Energy Agency. In January 2003, North Korea renounced its obligations under the Nuclear Non-Proliferation Treaty. Since the renouncement, the Republic, the United States, North Korea, China, Japan and Russia have held numerous rounds of six party multi-lateral talks in an effort to resolve issues relating to North Korea’s nuclear weapons program.

 

In addition to conducting test flights of long-range missiles, North Korea announced in October 2006 that it had successfully conducted a nuclear test, which increased tensions in the region and elicited strong objections worldwide. In response, the United Nations Security Council passed a resolution that prohibits any United Nations member state from conducting transactions with North Korea in connection with any large scale arms and material or technology related to missile development or weapons of mass destruction and from providing luxury goods to North Korea, imposes an asset freeze and travel ban on persons associated with North Korea’s weapons program, and calls upon all United Nations member states to take cooperative action, including thorough inspection of cargo to or from North Korea. In response, North Korea agreed in February 2007 at the six-party talks to shut down and seal the Yongbyon nuclear facility, including the reprocessing facility, and readmit international inspectors to conduct all necessary monitoring and verifications.

 

In April 2009, North Korea launched a long-range rocket over the Pacific Ocean. The Republic, Japan and the United States responded that the launch poses a threat to neighboring nations and that it was in violation of the United Nations Security Council resolution adopted in 2006 against nuclear tests by North Korea, and the United Nations Security Council unanimously passed a resolution that condemned North Korea for the launch

 

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and decided to tighten sanctions against North Korea. Subsequently, North Korea announced that it would permanently pull out of the six-party talks and restart its nuclear program, and the International Atomic Energy Agency reported that its inspectors had been ordered to remove surveillance devices and other equipment at the Yongbyon nuclear power plant and to leave North Korea. In May 2009, North Korea announced that it had successfully conducted a second nuclear test and test-fired three short-range, surface-to-air missiles. In response, the United Nations Security Council unanimously passed a resolution that condemned North Korea for the nuclear test and decided to expand and tighten sanctions against North Korea. In March 2010, a Korean warship was destroyed by an underwater explosion, killing many of the crewmen on board. The Government formally accused North Korea of causing the sinking in May 2010. North Korea has denied responsibility for the sinking and has threatened retaliation for any attempt to punish it for the act. In November 2010, North Korean forces fired more than one hundred artillery shells targeting Yeonpyeong Island located near the maritime border between the Republic and North Korea on the west coast of the Korean peninsula, killing two Korean soldiers and two civilians as well as causing substantial property damage. The Republic responded by firing approximately 80 artillery shells and putting the military on its highest alert level. The Government condemned North Korea for the act and vowed stern retaliation should there be further provocation. In April 2012, North Korea launched a long-range rocket over the Yellow Sea. The Republic, Japan and the United States condemned the launch and the United Nations Security Council adopted a chairman’s statement condemning North Korea for the launch. In December 2012, North Korea successfully launched a satellite into orbit using a long-range rocket after an unsuccessful attempt in April 2012, despite concerns in the international community that such a launch would be in violation of the recent agreement with the United States as well as United Nations Security Council resolutions that prohibit North Korea from conducting launches that use ballistic missile technology. In February 2013, North Korea announced that it had successfully conducted a third nuclear test, which increased tensions in the region. In response, the United Nations Security Council strongly condemned North Korea for the nuclear test. In late March 2013, North Korea stated that it had entered “a state of war” with the Republic, declaring the 1953 armistice invalid, and put its artillery at the highest level of combat readiness to protest the Republic-United States allies’ military drills and additional sanctions imposed on North Korea for its missile and nuclear tests. In early April 2013, North Korea blocked access to the inter-Korean industrial complex in its border city of Gaeseong to South Koreans, while the U.S. deployed nuclear-capable stealth bombers and destroyers to Korean air and sea space. In May 2013, North Korea launched several short-range projectiles into waters off its east coast over a three-day period. The Government declared the launches a provocation and urged North Korea to take responsible actions. In February and March of 2014, North Korea test fired a number of short-range and medium-range missiles from the east coast of the Korean peninsula into the East Sea in apparent protest of annual joint military exercises being held by the Republic and the United States.

 

There recently has been increased uncertainty with respect to the future of North Korea’s political leadership and concern regarding its implications for economic and political stability in the region. In June 2009, U.S. and Korean officials announced that Kim Jong-il, the North Korean ruler who reportedly suffered a stroke in August 2008, designated his third son, Kim Jong-eun, who is reportedly in his twenties, to become his successor. In September 2010, Kim Jong-eun was made a general in the North Korean army, named the vice chairman of the Central Military Commission and appointed to the Central Committee of the Workers’ Party in a series of measures widely believed to be part of the succession plan. In addition, North Korea’s economy faces severe challenges. For example, in November 2009, the North Korean government redenominated its currency at a ratio of 100 to 1 as part of a currency reform undertaken in an attempt to control inflation and reduce income gaps. In tandem with the currency redenomination, the North Korean government banned the use or possession of foreign currency by its residents and closed down privately run markets, which led to severe inflation and food shortages. Such developments may further aggravate social and political tensions within North Korea.

 

Since the death of Kim Jong-il, the former North Korean ruler, in mid-December 2011, there has been increased uncertainty with respect to the future of North Korea’s political leadership and concern regarding its implications for political and economic stability in the region. Although Kim Jong-eun, Kim Jong-il’s third son, assumed power as North Korea’s new ruler, the eventual outcome of the leadership transition remains uncertain. Furthermore, as only limited information is available outside of North Korea about Kim Jong-eun, and it is

 

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unclear which individuals or factions, if any, will share political power with Kim Jong-eun or assume the leadership if the transition is not successful, there is significant uncertainty regarding the policies, actions and initiatives that North Korea might pursue in the future.

 

There can be no assurance that the level of tension on the Korean peninsula will not escalate in the future or that such escalation will not have a material adverse impact on the Republic’s economy or its ability to obtain future funding. Any further increase in tension, which may occur, for example, if North Korea experiences a leadership crisis, high-level contacts between the Republic and North Korea break down or military hostilities occur, could have a material adverse effect on the Republic’s economy.

 

Over the longer term, reunification of the two Koreas could occur. Reunification may entail a significant economic commitment by the Republic. In former President Lee’s national address on August 15, 2010, he suggested the possible adoption of a reunification tax as a potential means of alleviating the potential long-term economic burden associated with reunification. Such discussions on reunification are very preliminary, and it has not been decided whether or when such a reunification tax would be implemented. If a reunification tax is implemented, depending on how it is structured, it may lead to a decrease in domestic consumption, which in turn may have a material adverse effect on the Republic’s economy.

 

Foreign Relations and International Organizations

 

The Republic maintains diplomatic relations with most nations of the world, most importantly with the United States with which it entered into a mutual defense treaty and several economic agreements. The Republic also has important relationships with Japan and China, its largest trading partners together with the United States.

 

The Republic belongs to a number of supranational organizations, including:

 

   

the International Monetary Fund, or the IMF;

 

   

the World Bank;

 

   

the Asian Development Bank, or ADB;

 

   

the Multilateral Investment Guarantee Agency;

 

   

the International Finance Corporation;

 

   

the International Development Association;

 

   

the African Development Bank;

 

   

the European Bank for Reconstruction and Development;

 

   

the Bank for International Settlements;

 

   

the World Trade Organization, or WTO; and

 

   

the Inter-American Development Bank, or IDB.

 

In September 1991, the Republic and North Korea became members of the United Nations. During the 1996 and 1997 sessions, the Republic served as a non-permanent member of the United Nations Security Council.

 

In March 1995, the Republic applied for admission to the Organization for Economic Cooperation and Development, or the OECD, which the Republic officially joined as the twenty-ninth regular member in December 1996.

 

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The Economy

 

Current Worldwide Economic and Financial Difficulties

 

In recent years, adverse conditions and volatility in the worldwide financial markets, fluctuations in oil and commodity prices and the general weakness of the U.S. and global economy have contributed to the uncertainty of global economic prospects in general and have adversely affected, and may continue to adversely affect, the Korean economy.

 

As liquidity and credit concerns and volatility in the global financial markets increased significantly since September 2008, the value of the Won relative to the U.S. dollar depreciated at an accelerated rate during the fourth quarter of 2008 and first half of 2009. See “Monetary Policy—Foreign Exchange.” Such depreciation of the Won increased the cost of imported goods and services and the Won revenue needed by Korean companies to service foreign currency-denominated debt. Furthermore, as a result of adverse global and Korean economic conditions, there was a significant overall decline and continuing volatility in the stock prices of Korean companies. The Korea Composite Stock Price Index declined by 27.8% from 1,852.0 on May 30, 2008 to 1,336.7 on April 16, 2009. See “The Financial System—Securities Markets”. Moreover, gross domestic product, or GDP, in the first quarter of 2009 contracted by 4.3% at chained 2005 year prices compared with the same period in 2008, and exports in the first quarter of 2009 decreased by 24.8% to US$74.7 billion from US$99.4 billion in the same period in 2008. In addition, increases in credit spreads, as well as limitations on the availability of credit resulting from heightened concerns about the stability of the markets generally and the strength of counterparties specifically that led many lenders and institutional investors to reduce or cease funding to borrowers, adversely affected Korean banks’ ability to borrow, particularly with respect to foreign currency funding, in the fourth quarter of 2008 and first half of 2009.

 

In response to these developments, legislators and financial regulators in the United States and other jurisdictions, including Korea, implemented a number of policy measures designed to add stability to the financial markets, including the provision of direct and indirect assistance to distressed financial institutions. In particular, the Government implemented, among other things, the following measures in the fourth quarter of 2008 and in 2009:

 

   

in October 2008, the Government implemented a guarantee program to guarantee foreign currency-denominated debt incurred by Korean banks and their overseas branches between October 20, 2008 and June 30, 2009 (subsequently extended to December 31, 2009), up to an aggregate amount of US$100 billion, for a period of three years (subsequently extended to five years) from the date such debt was incurred;

 

   

in October 2008, The Bank of Korea established a temporary reciprocal currency swap arrangement with the Federal Reserve Board of the United States for up to US$30 billion, effective until April 30, 2009 (subsequently extended to October 30, 2009). The Bank of Korea provided U.S. dollar liquidity, through competitive auction facilities, to financial institutions established in Korea, using funds from the swap line;

 

   

in December 2008, a ₩10 trillion bond market stabilization fund was established to purchase financial and corporate bonds and debentures in order to provide liquidity to companies and financial institutions;

 

   

in December 2008, The Bank of Korea agreed with the People’s Bank of China to establish a bilateral currency swap arrangement for up to ₩38 trillion, effective for three years, and agreed with the Bank of Japan to increase the maximum amount of their bilateral swap arrangement from US$3 billion to US$20 billion, effective until April 30, 2009;

 

   

in December 2008 and March 2009, the Government, through Korea Asset Management Corporation, purchased approximately ₩1.7 trillion of non-performing loans held by savings banks;

 

   

during the first quarter of 2009, the Government, through the Bank of Korea and the Korea Development Bank, purchased from Korean banks approximately ₩4 trillion of hybrid securities and subordinated bonds;

 

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during the fourth quarter of 2008 and the first quarter of 2009, The Bank of Korea decreased the policy rate by a total of 3.25% points to 2.00% in order to address financial market instability and to help combat the slowdown of the domestic economy;

 

   

in April 2009, the National Assembly authorized the expansion of the 2009 national budget by ₩28.4 trillion to provide stimulus for the Korean economy; and

 

   

in December 2009, the Government, together with the member countries of the Association of Southeast Asian Nations, China and Japan, signed the Chiang Mai Initiative Multilateralization Agreement to address balance-of-payments and short-term liquidity difficulties in the region and to supplement the existing international financial arrangements.

 

The global financial markets have experienced significant volatility in recent years as a result of, among other things, the downgrading by Standard & Poor’s Rating Services of the long-term sovereign credit rating of the United States to “AA+” from “AAA” in August 2011, as well as the continuing financial difficulties affecting many other governments worldwide, including Greece, Spain, Italy and Portugal. In November 2009, the Dubai government announced a moratorium on the outstanding debt of Dubai World, a government-affiliated investment company. In November 2008, the Icelandic government, facing mounting debt problems, reached an agreement with the IMF to receive loans in the amount of US$2.1 billion over a two-year period, and in May 2010 and March 2012, the Greek government reached an agreement with the IMF and the European Union to receive loans in the amount of Euro 110 billion over a three-year period and to receive additional loans in the amount of Euro 130 billion over a four-year period, respectively. In July 2012, the Spanish government reached an agreement with the European Union under the European Stability Mechanism, or ESM, to receive up to Euro 100 billion to cover the capitalization needs of the Spanish banking sector. In connection with the agreement with the Spanish government, the ESM disbursed Euro 37 billion and Euro 1.9 billion in December 2012 and February 2013, respectively, for the recapitalization of certain Spanish banks. Any of these or other developments could potentially trigger another financial and economic crisis, which could have a material adverse effect on the Korean economy and financial markets (including depreciation of the value of the Won, decline and volatility in the stock prices of Korean companies, increases in credit spreads and funding costs and decreases in exports).

 

There have been significant volatility in the Korea Composite Stock Index in recent years, due to adverse global financial and economic conditions. See “—The Financial System—Securities Markets”. There is no guarantee that the stock prices of Korean companies will not decline again in the future. Future declines in the index and large amounts of sales of Korean securities by foreign investors and subsequent repatriation of the proceeds of such sales may continue to adversely affect the value of the Won, the foreign currency reserves held by financial institutions in Korea, and the ability of Korean companies and banks to raise capital. In the event that such difficult conditions in the global credit markets continue or the global economy deteriorates in the future, the Korean economy could be adversely affected and Korean banks may be forced to fund their operations at a higher cost or may be unable to raise as much funding as they need to support their lending and other activities.

 

Furthermore, while many governments worldwide are considering or are in the process of implementing “exit strategies”, in the form of reduced government spending, higher interest rates or otherwise, with respect to the economic stimulus measures adopted in response to the global financial crisis, such strategies may, for reasons related to timing, magnitude or other factors, have the unintended consequence of prolonging or worsening global economic and financial difficulties. 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.

 

Gross Domestic Product

 

GDP measures the market value of all final goods and services produced within a country for a given period and reveals whether a country’s productive output rises or falls over time. Economists present GDP in both

 

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current market prices and “real” or “inflation-adjusted” terms. In March 2009, the Republic adopted a method known as the “chain-linked” measure of GDP, replacing the previous fixed-base, or “constant” measure of GDP, to show the real growth of the aggregate economic activity, as recommended by the System of National Accounts 1993. GDP at current market prices values a country’s output using the actual prices of each year, whereas the “chain-linked” measure of GDP is compiled by using “chained indices” linking volume growth between consecutive time periods. In March 2014, the Republic published a revised GDP calculation method by implementing the System of National Accounts 2008 and updating the reference year from 2005 to 2010 to align Korean national accounts statistics with the recommendations of the new international standards for compiling national economic accounts and to maintain comparability with other nations’ accounts. The main components of these revisions include, among other things, (i) recognizing expenditures for research and development and creative activity for the products of entertainment, literary and artistic originals as fixed investment, (ii) incorporating a wide array of new and revised source data such as the economic census, the population and housing census and 2010 benchmark input-output tables, which provide thorough and detailed information on the structure of the Korean economy, (iii) developing supply-use tables, which provide a statistical tool for ensuring consistency among the production, expenditure and income approaches to measuring GDP and (iv) recording merchandise trade transactions based on ownership changes rather than movements of goods across the national frontier.

 

The following table sets out the composition of the Republic’s GDP at current market and chained 2010 year prices and the annual average increase in the Republic’s GDP.

 

Gross Domestic Product

 

    2009     2010     2011     2012     2013(1)     As % of
GDP
2013(1)
 

Gross Domestic Product at Current Market Prices:

           

Private

    594,882.6        636,712.7        679,141.5        707,614.0        728,910.1        51.0   

Government

    174,706.0        183,108.5        194,381.2        204,324.2        213,199.0        14.9   

Gross Capital Formation

    327,841.2        405,188.0        439,236.1        427,028.5        414,042.6        29.0   

Exports of Goods and Services

    547,634.3        625,308.8        742,936.0        776,062.4        770,202.6        53.9   

Less Imports of Goods and Services

    (493,655.1     (585,010.0     (723,013.8     (737,572.4     (697,888.7     48.9   

Statistical Discrepancy

    298.8        —          —           —           (171.0     0.0   

Expenditures on Gross Domestic Product

    1,151,707.8        1,265,308.0        1,332,681.0        1,377,456.7        1,428,294.6        100.0   

Net Factor Income from the Rest of the World

    (2,726.0     1,271.9        7,848.8        14,138.8        12,768.9        0.9   

Gross National Income(2)

    1,148,981.8        1,266,579.8        1,340,529.8        1,391,595.5        1,441,063.5        100.9   

Gross Domestic Product at Chained 2010 Year Prices:

           

Private

    609,997.3        636,712.7        655,181.1        667,781.2        681,325.0        49.3   

Government

    176,323.4        183,108.5        187,158.2        193,473.5        198,701.8        14.4   

Gross Capital Formation

    343,840.2        405,188.0        419,282.7        409,639.9        409,570.5        29.6   

Exports of Goods and Services

    554,856.2        625,308.8        719,943.2        756,558.4        788,828.7        57.1   

Less Imports of Goods and Services

    (498,917.0     (585,010.0     (668,931.5     (685,009.4     (695,928.2     (50.4

Statistical Discrepancy

    789.5        —           (740.9     (142.1     (361.4     (0.0

Expenditures on Gross Domestic Product(3)

    1,188,118.4        1,265,308.0        1,311,892.7        1,341,966.5        1,381,837.7        100.0   

Net Factor Income from the Rest of the World in the Terms of Trade

    (2,604.7     1,271.9        7,573.1        13,577.8        12,545.4        0.9   

Trading Gains and Losses from Changes in the Terms of Trade

    (1,397.1     —           (32,183.6     (33,075.1     (18,837.5     (1.4

Gross National Income(4)

    1,184,103.8        1,266,579.8        1,287,282.2        1,322,449.9        1,375,534.0        99.5   

Percentage Increase (Decrease) of GDP over Previous Year At Current Prices

    4.3        9.9        5.3        3.4        3.7     

At Chained 2010 Year Prices

    0.7        6.5        3.7        2.3        3.0     

 

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(1) Preliminary.
(2) GDP plus net factor income from the rest of the world is equal to the Republic’s gross national product.
(3) Under the “chain-linked” measure of GDP, the components of GDP will not necessarily add to the total GDP.
(4) Under the “chain-linked” measure of Gross National Income, the components of Gross National Income will not necessarily add to the total Gross National Income.

 

Source: The Bank of Korea.

 

The following table sets out the Republic’s GDP by economic sector at current market prices:

 

Gross Domestic Product by Economic Sector

(at current market prices)

 

    2009     2010     2011     2012     2013(1)     As % of GDP
2013(1)
 
    (billions of Won)  

Industrial Sectors:

           

Agriculture, Forestry and Fisheries

    27,033.4        28,297.4        30,454.0        30,775.1        30,563.3        2.1   

Mining and Manufacturing

    302,274.2        353,969.9        381,808.0        390,288.6        407,991.8        28.6   

Mining and Quarrying

    2,237.7        2,199.3        2,287.0        2,278.5        2,465.3        0.2   

Manufacturing

    300,036.5        351,770.6        379,521.0        388,010.1        405,526.5        28.4   

Electricity, Gas and Water Supply

    21,245.6        25,632.3        23,994.1        26,178.2        30,037.2        2.1   

Construction

    59,610.0        58,633.7        58,587.3        59,959.4        64,644.4        4.5   

Services:

    634,402.2        678,590.8        715,112.9        744,253.9        770,698.3        54.0   

Wholesale and Retail Trade, Restaurants and Hotels

    118,140.5        130,351.2        140,705.3        146,807.7        150,275.0        10.5   

Transportation and Storage

    40,520.3        44,539.1        42,458.7        43,570.7        46,748.6        3.3   

Finance and Insurance

    65,351.7        71,669.6        77,872.6        75,808.5        71,374.0        5.0   

Real Estate and Leasing

    88,208.4        91,042.0        94,716.1        98,923.6        103,256.7        7.2   

Information and Communication

    43,988.5        45,364.1        46,827.0        48,774.2        50,313.1        3.5   

Business Activities

    70,187.6        77,950.1        83,277.4        88,828.1        95,207.8        6.7   

Public Administration and Defense

    76,178.0        78,885.9        83,290.8        88,654.6        93,562.9        6.6   

Education

    61,915.1        63,749.4        66,559.6        68,546.3        71,029.1        5.0   

Health and Social Work

    40,625.9        43,925.1        46,656.1        50,031.3        53,494.6        3.7   

Cultural and Other Services

    29,286.3        31,114.5        32,749.4        34,309.0        35,436.5        2.5   

Taxes Less Subsidies on Products

    107,142.3        120,183.9        122,724.8        126,001.4        124,359.7        8.7   

Gross Domestic Product at Current Market Prices

    1,151,707.8        1,265,308.0        1,332,681.0        1,357,456.7        1,428,294.6        100.0   

Net Factor Income from the Rest of the World

    (2,726.0     1,271.9        7,848.8        14,138.8        12,768.9        0.9   

Gross National Income at Current Market Prices

    1,148,981.8        1,266,579.8        1,340,529.8        1,391,595.5        1,441,063.5        100.9   

 

(1) Preliminary.

 

Source: The Bank of Korea.

 

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The following table sets out the Republic’s GDP per capita:

 

Gross Domestic Product per capita

(at current market prices)

 

     2009      2010      2011      2012      2013(1)  

GDP per capita (thousands of Won)

     23,417         25,608         26,772         27,547         28,441   

GDP per capita (U.S. dollar)

     18,346         22,147         24,160         24,445         25,973   

Average Exchange Rate (in Won per U.S. dollar)

     1,276.4         1,156.3         1,108.1         1,126.9         1,095.0   

 

(1) Preliminary.

 

Source: The Bank of Korea.

 

The following table sets out the Republic’s Gross National Income, or GNI, per capita:

 

Gross National Income per capita

(at current market prices)

 

     2009      2010      2011      2012      2013(1)  

GNI per capita (thousands of Won)

     23,362         25,634         26,929         27,829         28,695   

GNI per capita (U.S. dollar)

     18,303         22,170         24,302         24,696         26,205   

Average Exchange Rate (in Won per U.S. dollar)

     1,276.4         1,156.3         1,108.1         1,126.9         1,095.0   

 

(1) Preliminary.

 

Source: The Bank of Korea.

 

The following table sets out the Republic’s GDP by economic sector at chained 2010 year prices:

 

Gross Domestic Product by Economic Sector

(at chained 2010 year prices)

 

     2009      2010      2011      2012      2013(1)      As % of GDP
2013(1)
 
     (billions of Won)  

Industrial Sectors:

                 

Agriculture, Forestry and Fisheries

     29,575.7         28,297.4         27,744.6         27,506.9         29,089.7         2.1   

Mining and Manufacturing

     311,903.7         353,969.9         376,958.3         385,853.1         398,570.4         28.8   

Mining and Quarrying

     2,399.1         2,199.3         2,176.3         2,170.5         2,334.7         0.2   

Manufacturing

     309,504.6         351,770.6         374,782.0         383,682.6         396,235.7         28.7   

Electricity, Gas and Water Supply

     24,211.1         25,632.3         25,687.4         26,710.3         27,097.5         2.0   

Construction

     60,877.8         58,633.7         55,432.2         54,430.5         56,390.4         4.1   

Services:

     649,913.5         678,590.8         699,580.8         718,851.2         739,501.2         53.5   

Wholesale and Retail Trade, Restaurants and Hotels

     122,252.4         130,351.2         137,058.1         141,698.2         146,355.2         10.6   

Transportation and Storage

     39,545.2         44,539.1         46,157.9         46,877.6         47,434.3         3.4   

Finance and Insurance

     70,201.1         71,669.6         72,741.3         75,547.3         78,366.6         5.7   

Real Estate and Leasing

     89,033.3         91,042.0         93,383.7         93,182.9         93,905.0         6.8   

Information and Communication

     43,953.2         45,364.1         47,931.6         50,199.3         52,082.3         3.8   

Business Activities

     73,951.0         77,950.1         80,913.7         83,352.8         87,613.1         6.3   

Public Administration and Defense

     76,846.7         78,885.9         80,639.1         82,940.5         85,088.5         6.2   

Education

     63,002.1         63,749.4         63,806.6         64,386.6         64,512.7         4.7   

Health and Social Work

     41,285.4         43,925.1         45,483.3         48,693.4         51,634.4         3.7   

Cultural and Other Services

     29,957.2         31,114.5         31,465.5         31,972.6         32,509.1         2.4   

Taxes Less Subsidies on Products

     111,675.3         120,183.9         126,489.5         128,708.4         131,174.2         9.5   

Gross Domestic Product at Chained 2010 Year Prices(2)

     1,188,118.4         1,265,308.0         1,311,892.7         1,341,966.5         1,381,837.7         100.0   

 

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(1) Preliminary.
(2) Under the “chain-linked” measure of GDP, the components of GDP will not necessarily add to the total GDP.

 

Source: The Bank of Korea.

 

GDP growth in 2009 was 0.7% at chained 2010 year prices, as aggregate private and general government consumption expenditures increased by 1.3% and gross domestic fixed capital formation increased by 0.3%, which more than offset a decrease in exports of goods and services by 0.3%, each compared with 2008.

 

GDP growth in 2010 was 6.5% at chained 2010 year prices, as aggregate private and general government consumption expenditures increased by 4.3%, exports of goods and services increased by 12.7% and gross domestic fixed capital formation increased by 5.5%, each compared with 2009.

 

GDP growth in 2011 was 3.7% at chained 2010 year prices, as aggregate private and general government consumption expenditures increased by 2.7%, exports of goods and services increased by 15.1% and gross domestic fixed capital formation increased by 0.8%, each compared with 2010.

 

GDP growth in 2012 was 2.3% at chained 2010 year prices, as aggregate private and general government consumption expenditures increased by 2.2% and exports of goods and services increased by 5.1%, which more than offset a decrease in gross domestic fixed capital formation by 0.5%, each compared with 2011.

 

Based on preliminary data, GDP growth in 2013 was 3.0% at chained 2010 year prices, as aggregate private and general government consumption expenditures increased by 2.2%, exports of goods and services increased by 4.3% and gross domestic fixed capital formation increased by 4.2%, each compared with 2012.

 

Based on preliminary data, GDP growth in the first quarter of 2014 was 3.9% at chained 2010 year prices, as aggregate private and general government consumption expenditures increased by 2.6%, exports of goods and services increased by 4.5% and gross domestic fixed capital formation increased by 5.9%, each compared with the corresponding period of 2013.

 

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Principal Sectors of the Economy

 

Industrial Sectors

 

The following table sets out production indices for the principal industrial products of the Republic and their relative contribution to total industrial production:

 

Industrial Production

(2010 = 100)

 

     Index
Weight(1)
     2009      2010      2011      2012      2013(2)  

All Industries

     10,000.0         86.0         100.0         106.0         107.4         107.8   

Mining and Manufacturing

     9,611.6         85.7         100.0         106.0         107.5         107.8   

Mining

     33.9         107.8         100.0         104.5         99.8         104.1   

Petroleum, Crude Petroleum and Natural Gas

     8.7         102.1         100.0         91.6         90.2         86.2   

Metal Ores

     0.9         55.2         100.0         124.9         108.5         98.4   

Non-metallic Minerals

     24.3         112.6         100.0         108.4         102.9         110.7   

Manufacturing

     9,577.7         85.7         100.0         106.0         107.5         107.8   

Food Products

     434.4         94.3         100.0         101.9         103.4         103.4   

Beverage Products

     82.4         95.1         100.0         103.5         108.2         108.3   

Tobacco Products

     43.2         103.6         100.0         101.6         105.6         96.5   

Textiles

     160.6         89.2         100.0         101.5         99.1         97.4   

Wearing Apparel, Clothing Accessories and Fur Articles

     145.2         95.2         100.0         100.6         97.9         93.2   

Tanning and Dressing of Leather, Luggage and Footwear

     42.1         105.3         100.0         101.1         98.2         108.4   

Wood and Products of Wood and Cork (Except Furniture)

     31.7         101.1         100.0         97.5         87.9         93.5   

Pulp, Paper and Paper Products

     126.8         93.7         100.0         102.3         102.7         104.6   

Printing and Reproduction of Recorded Media

     50.2         87.5         100.0         91.8         90.5         86.5   

Coke, hard-coal and lignite fuel briquettes and Refined Petroleum Products

     471.0         96.7         100.0         106.9         109.1         104.6   

Chemicals and Chemical Products

     847.5         92.5         100.0         102.7         106.6         110.5   

Pharmaceuticals, Medicinal Chemicals and Botanical Products

     144.1         95.9         100.0         100.3         101.2         104.2   

Rubber and Plastic Products

     421.1         89.1         100.0         105.1         106.4         108.8   

Non-metallic Minerals

     271.7         94.8         100.0         100.3         95.2         98.6   

Basic Metals

     827.6         83.3         100.0         106.2         106.8         105.9   

Fabricated Metal Products

     557.8         92.2         100.0         108.9         117.9         116.1   

Electronic Components, Computer, Radio, Television and Communication Equipment and Apparatuses

     1,794.3         79.9         100.0         107.1         109.7         113.5   

Medical, Precision and Optical Instruments, Watches and Clocks

     148.1         89.4         100.0         105.6         111.6         123.5   

Electrical Equipment

     479.5         90.9         100.0         100.8         98.8         96.4   

Other Machinery and Equipment

     803.6         72.2         100.0         109.3         107.0         102.2   

Motor Vehicles, Trailers and Semitrailers

     1,076.4         81.2         100.0         114.7         114.5         115.9   

Other Transport Equipment

     506.5         107.4         100.0         101.7         107.1         101.6   

Furniture

     69.5         94.7         100.0         105.4         98.2         96.9   

Other Products

     42.4         86.7         100.0         102.2         103.8         102.9   

Electricity, Gas

     388.4         91.3         100.0         104.5         106.4         106.9   

Total Index

     10,000.0         86.0         100.0         106.0         107.4         107.8   

 

(1) Index weights were established on the basis of an industrial census in 2010 and reflect the average annual value added by production in each of the classifications shown, expressed as a percentage of total value added in the mining, manufacturing and electricity and gas industries in that year.
(2) Preliminary.

 

Source: The Bank of Korea; Korea National Statistical Office.

 

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Industrial production decreased by 0.1% in 2009, primarily due to decreased exports as a result of adverse global economic conditions beginning in the second half of 2008. Industrial production increased by 16.3% in 2010, primarily due to increased exports and domestic consumption. Industrial production increased by 6.0% in 2011, primarily due to increased exports and domestic consumption. Industrial production increased by 1.3% in 2012, primarily due to increased domestic consumption and exports. Based on preliminary data, industrial production increased by 0.4% in 2013, primarily due to increased exports.

 

Manufacturing

 

In 2009, the manufacturing sector decreased production by 0.2%. The manufacturing sector increased production by 16.7% in 2010, 6.0% in 2011 and 1.4% in 2012. Based on preliminary data, the manufacturing sector increased production by 0.3% in 2013.

 

Automobiles. In 2009, automobile production decreased by 8.2%, domestic sales volume recorded an increase of 20.7% and export sales volume recorded a decrease of 19.9%, compared with 2008, primarily due to the continued decrease in global demand for automobiles. In 2009, export sales of automobiles constituted approximately 6.2% of the Republic’s total exports. The automobile stimulus programs of a number of governments, including those in the United States and Europe, encouraged demand for automobiles in the relevant countries for the first nine months of 2009, the effect of which partially offset the decrease in global demand for Korean automobiles during the duration of such stimulus programs. In the fourth quarter of 2009, export sales of automobiles increased compared to previous quarters of 2009, primarily due to the recovery of global demand for automobiles, the effect of which more than offset the negative impact of termination of most of such governments’ automobile stimulus programs in the second half of 2009. In 2010, automobile production increased by 21.6%, domestic sales volume recorded an increase of 5.1% and export sales volume recorded an increase of 29.0%, compared with 2009. In 2011, automobile production increased by 9.0%, domestic sales volume recorded an increase of 0.6% and export sales volume recorded an increase of 13.7%, compared with 2010. In 2012, automobile production decreased by 2.1%, domestic sales volume recorded a decrease of 4.3% and export sales volume recorded an increase of 0.6%, compared with 2011. Based on preliminary data, in 2013, automobile production decreased by 0.9%, domestic sales volume recorded a decrease of 1.9% and export sales volume recorded a decrease of 2.6%, compared with 2012.

 

Electronics. In 2009, electronics production amounted to ₩338,558 billion, an increase of 6.8% from the previous year, and exports amounted to US$120.9 billion, a decrease of 7.8% from the previous year. In 2009, export sales of semiconductor memory chips constituted approximately 8.5% of the Republic’s total exports. In 2010, electronics production amounted to ₩400,092 billion, an increase of 18.1% from the previous year, and exports amounted to US$153.9 billion, an increase of 27.3% from the previous year. In 2010, export sales of semiconductor memory chips constituted approximately 10.9% of the Republic’s total exports. In 2011, electronics production amounted to ₩409,699 billion, an increase of 2.4% from the previous year, and exports amounted to US$156.6 billion, an increase of 1.8% from the previous year. In 2011, export sales of semiconductor memory chips constituted approximately 9.0% of the Republic’s total exports. In 2012, electronics production amounted to ₩415,984 billion, an increase of 1.5% from the previous year, and exports amounted to US$155.2 billion, a decrease of 0.9% from the previous year. In 2012, export sales of semiconductor memory chips constituted approximately 9.2% of the Republic’s total exports. Based on preliminary data, in 2013, electronics production amounted to ₩442,396 billion, an increase of 6.3% from the previous year, and exports amounted to US$169.4 billion, an increase of 9.1% from the previous year. In 2013, export sales of semiconductor memory chips constituted approximately 10.2% of the Republic’s total exports.

 

Iron and Steel. In 2009, crude steel production totaled 48.6 million tons, a decrease of 8.9% from 2008. Domestic sales volume and export sales volume decreased by 21.4% and 1.2%, respectively. In 2010, crude steel production totaled 58.9 million tons, an increase of 20.2% from 2009. Domestic sales volume and export sales volume increased by 21.6% and 21.1%, respectively. In 2011, crude steel production totaled 68.5 million tons, an increase of 16.3% from 2010. Domestic sales volume and export sales volume increased by 5.8% and 16.9%,

 

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respectively. In 2012, crude steel production totaled 69.1 million tons, an increase of 0.9% from 2011. Domestic sales volume decreased by 5.1% but export sales volume increased by 4.8%. Based on preliminary data, in 2013, crude steel production totaled 66.1 million tons, a decrease of 4.4% from 2012. Export sales volume decreased by 4.2%.

 

Shipbuilding. In 2009, the Republic’s shipbuilding orders amounted to approximately 2 million compensated gross tons, a decrease of 85.7% compared to 2008 as a result of a decrease in ship orders due to adverse global economic conditions. In 2010, the Republic’s shipbuilding orders amounted to approximately 8 million compensated gross tons, an increase of 300.0% compared to 2009. In 2011, the Republic’s shipbuilding orders amounted to approximately 12 million compensated gross tons, an increase of 50.0% compared to 2010. In 2012, the Republic’s shipbuilding orders amounted to approximately 7 million compensated gross tons, a decrease of 41.7% compared to 2011. Based on preliminary data, in 2013, the Republic’s shipbuilding orders amounted to approximately 17 million compensated gross tons, an increase of 142.8% compared to 2012.

 

Agriculture, Forestry and Fisheries

 

The Government’s agricultural policy has traditionally focused on:

 

   

grain production;

 

   

development of irrigation systems;

 

   

land consolidation and reclamation;

 

   

seed improvement;

 

   

mechanization measures to combat drought and flood damage; and

 

   

increasing agricultural incomes.

 

Recently, however, the Government has increased emphasis on cultivating profitable crops and strengthening international competitiveness in anticipation of opening the domestic agricultural market.

 

In 2009, rice production increased 2.0% from 2008 to 4.9 million tons. In 2010, rice production decreased 12.2% from 2009 to 4.3 million tons. In 2011, rice production decreased 2.3% from 2010 to 4.2 million tons. In 2012, rice production decreased 4.7% from 2011 to 4.0 million tons. In 2013, rice production increased 5.0% from 2012 to 4.2 million tons. Due to limited crop yields resulting from geographical and physical constraints, the Republic depends on imports for certain basic foodstuffs.

 

The Government is seeking to develop the fishing industry by encouraging the building of large fishing vessels and modernizing fishing equipment, marketing techniques and distribution outlets.

 

In 2009, the agriculture, forestry and fisheries industry increased by 3.2% compared to 2008. In 2010, the agriculture, forestry and fisheries industry decreased by 4.4% compared to 2009. In 2011, the agriculture, forestry and fisheries industry decreased by 2.1% compared to 2010. In 2012, the agriculture, forestry and fisheries industry decreased by 0.6% compared to 2011. Based on preliminary data, in 2013, the agriculture, forestry and fisheries industry increased by 5.6% compared to 2012.

 

Construction

 

In 2009, the construction industry increased by 1.8% compared to 2008. In 2010, the construction industry decreased by 2.7% compared to 2009. In 2011, the construction industry decreased by 4.3% compared to 2010. In 2012, the construction industry decreased by 1.6% compared to 2011. Based on preliminary data, in 2013, the construction industry increased by 3.7% compared to 2012. The construction industry has experienced a significant downturn since the second half of 2009, due to excessive investment in recent years in residential

 

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property development projects, stagnation of real property prices and reduced demand for residential property, especially in areas outside of Seoul, as a result of deteriorating conditions in the Korean economy in the second half of 2009 and into 2010. The Government has taken measures to support the Korean construction industry, including a ₩5 trillion program to buy unsold housing units and land from construction companies, the exemption of acquisition tax for first-time homebuyers, the reduction of acquisition tax for homebuyers and the reduction of transfer income tax for multiple home owners. However, the effect of these measures is uncertain and the construction industry may continue to experience adverse conditions.

 

Electricity and Gas

 

The following table sets out the Republic’s dependence on imports for energy consumption:

 

Dependence on Imports for Energy Consumption

 

     Total Energy
Consumption
     Imports      Imports
Dependence Ratio
 
     (millions of tons of oil equivalents, except ratios)  

2009

     243.3         234.7         96.5   

2010

     263.8         254.6         96.5   

2011

     276.6         266.8         96.4   

2012

     278.7         267.6         96.0   

2013

     280.5         268.4         95.7   

 

Source: Korea Energy Economics Institute; Korea National Statistical Office.

 

Korea has almost no domestic oil or gas production and depends on imported oil and gas to meet its energy requirements. Accordingly, the international prices of oil and gas significantly affect the Korean economy. Any significant long-term increase in the prices of oil and gas will increase inflationary pressures in Korea and adversely affect the Republic’s balance of trade.

 

To reduce its dependence on oil and gas imports, the Government has encouraged energy conservation and energy source diversification emphasizing nuclear energy. The following table sets out the principal primary sources of energy consumed in the Republic, expressed in oil equivalents and as a percentage of total energy consumption.

 

Consumption of Energy by Source

 

     Coal      Petroleum      Nuclear      Others(1)      Total  
     Quantity      %      Quantity      %      Quantity      %      Quantity      %      Quantity      %  
     (millions of tons of oil equivalents, except percentages)  

2009

     68.6         28.2         102.3         42.0         31.8         13.1         40.6         16.7         243.3         100.0   

2010

     77.1         29.2         104.3         39.5         31.9         12.1         50.5         19.1         263.8         100.0   

2011

     83.5         30.2         105.1         38.0         33.2         12.0         54.8         19.8         276.6         100.0   

2012

     81.1         29.1         106.2         38.1         31.8         11.4         59.6         21.4         278.7         100.0   

2013

     81.9         29.2         106.1         37.8         29.3         10.4         63.2         22.6         280.5         100.0   

 

(1) Includes natural gas, hydroelectric power and renewable energy.

 

Source: Korea Energy Economics Institute; The Bank of Korea.

 

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The Republic’s first nuclear power plant went into full operation in 1978 with a rated generating capacity of 587 megawatts. Construction of an additional 18 nuclear power plants was completed by July 2004, adding 16,129 megawatts of generating capacity. The Republic’s total nuclear power generating capacity is estimated to be 20,716 megawatts as of December 31, 2013.

 

Services Sector

 

In 2009, the transportation and storage sector decreased by 5.8%, the financial intermediation sector increased by 4.4% and the real estate and renting sector decreased by 0.2%, each compared with 2008. In 2010, the transportation and storage sector increased by 9.6%, the financial intermediation sector increased by 2.5% and the real estate and renting sector increased by 0.3%, each compared with 2009. In 2011, the transportation and storage sector increased by 3.8%, the financial intermediation sector increased by 1.6% and the real estate and renting sector increased by 2.2%, each compared with 2010. In 2012, the transportation and storage sector increased by 1.3%, the financial intermediation sector increased by 3.6% and the real estate and renting sector increased by 0.1%, each compared with 2011. Based on preliminary data, in 2013, the transportation and storage sector increased by 1.2%, the financial intermediation sector increased by 3.6% and the real estate and renting sector increased by 0.8%, each compared with 2012.

 

Prices, Wages and Employment

 

The following table shows selected price and wage indices and unemployment rates:

 

     Producer
Price
Index(1)
     Increase
(Decrease)
Over
Previous
Year
    Consumer
Price
Index(1)
     Increase
(Decrease)
Over
Previous
Year
     Wage
Index(1)(2)
    Increase
(Decrease)
Over
Previous
Year
    Unemployment
Rate(1)(3)
 
     (2010=100)      (%)     (2010=100)      (%)      (2008=100)     (%)     (%)  

2009

     96.3         (0.2     97.1         2.8         102.2        2.2        3.6   

2010

     100.0         3.8        100.0         3.0         111.5        9.1        3.7   

2011

     106.7         6.7        104.0         4.0         113.3        1.6        3.4   

2012

     107.5         0.7        106.3         2.2         120.2        6.1        3.2   

2013

     105.7         (1.6     107.7         1.3         N/A (4)      N/A (4)      3.1   

 

(1) Average for year.
(2) Nominal wage index of average earnings in manufacturing industry.
(3) Expressed as a percentage of the economically active population.
(4) Not available.

 

Source: The Bank of Korea; Korea National Statistical Office.

 

The inflation rate was 2.8% in 2009, 3.0% in 2010, 4.0% in 2011, 2.2% in 2012 and 1.3% in 2013. The inflation rate was 1.1% in the first quarter of 2014.

 

The unemployment rate was 3.6% in 2009, 3.7% in 2010, 3.4% in 2011, 3.2% in 2012 and 3.1% in 2013. The unemployment rate was 4.0% in the first quarter of 2014.

 

From 1992 to 2009, the economically active population of the Republic increased by approximately 24.8% to 24.3 million, while the number of employees increased by approximately 23.7% to 23.5 million. The economically active population over 15 years old as a percentage of the total over-15 population has remained between 60% and 63% over the past decade. Literacy among workers under 50 is almost universal. As of December 31, 2013, the economically active population of the Republic was 25.9 million and the number of employees was 25.1 million.

 

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As of July 1, 2004, the Republic adopted a five-day workweek for large corporations with over 1,000 employees, publicly-owned (state-run) companies, banks and insurance companies, reducing working hours from 44 to 40 hours a week. The adoption of the five-day workweek has been extended to companies with over 300 employees and to government employees as of July 1, 2005 and to companies with over 100 employees as of July 1, 2006. Companies with more than 50 employees adopted the five-day workweek as of July 1, 2007 and those with over 20 adopted the five-day workweek as of July 1, 2008. Companies with less than 20 employees also adopted the five-day workweek on July 1, 2011.

 

Approximately 10.3% of the Republic’s workers were unionized as of December 31, 2012. Labor unrest in connection with demands by unionized workers for better wages and working conditions and greater job security occur from time to time in the Republic. Some of the significant incidents in recent years include the following:

 

   

In May 2009, unionized workers of Ssangyong Motor Company went on full-scale strike and illegally occupied the company’s factory premises in Pyungtaek opposing the company’s reorganization plan.

 

   

In December 2010, unionized workers at Hanjin Heavy Industries went on strike when the company laid-off workers. While the company reached an agreement with the majority of workers in June 2011, one worker continued her protest by occupying a shipyard crane until November 2011.

 

   

In July 2011, unionized employees at Standard Chartered Korea (formerly, SC First Bank) engaged in a two-month strike, the longest in the Republic’s banking sector, demanding that the bank scrap performance-related pay reforms.

 

   

In June 2012, unionized taxi drivers went on their first nationwide strike demanding fare increases and protesting against increased fuel costs.

 

   

In August 2012, unionized workers of Hyundai Motor Company went on a series of partial strikes demanding a higher bonus increase and the end of overnight shifts.

 

   

In August 2013, unionized workers at Hyundai Motor Company and Kia Motors Corporation went on partial strikes demanding higher wages.

 

   

In December 2013, unionized workers at the state owned Korea Railroad Corporation (“Korail”) went on strike against Korail’s plan to establish a separate company to operate a new bullet train line fearing that such plan would eventually lead to privatization of Korail and layoffs of existing workers.

 

Actions such as these by labor unions may hinder implementation of the labor reform measures and disrupt the Government’s plans to create a more flexible labor market. Although much effort is being expended to resolve labor disputes in a peaceful manner, there can be no assurance that further labor unrest will not occur in the future. Continued labor unrest in key industries of the Republic may have an adverse effect on the economy.

 

In 1997, the Korean Confederation of Trade Unions organized a political alliance, which led to the formation of the Democratic Labor Party in January 2000. The Democratic Labor Party, which seeks to represent the interests of workers, controlled five seats in the National Assembly from May 30, 2008 as a result of the 18th legislative general election held on April 9, 2008. The Democratic Labor Party merged with The New People’s Participation Party and changed its name to The Unified Progressive Party in December 2011. The Unified Progressive Party controlled 13 seats in the National Assembly after the 19th legislative general election held on April 11, 2012. On October 21, 2012, seven members of the National Assembly, previously belonging to the United Progressive Party, and their supporters formed a new party, the Progressive Justice Party, which changed its name to the Justice Party in July 2013.

 

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The Financial System

 

Structure of the Financial Sector

 

The Republic’s financial sector includes the following categories of financial institutions:

 

   

The Bank of Korea;

 

   

banking institutions;

 

   

non-bank financial institutions; and

 

   

other financial entities, including:

 

   

financial investment companies;

 

   

credit guarantee institutions;

 

   

venture capital companies; and

 

   

miscellaneous others.

 

To increase transparency in financial transactions and enhance the integrity and efficiency of the financial markets, Korean law requires that financial institutions confirm that their clients use their real names when transacting business. To ease the liquidity crisis, the Government altered the real-name financial transactions system during 1998, to allow the sale or deposit of foreign currencies through domestic financial institutions and the purchase of certain bonds, including Government bonds, without identification. The Government also strengthened confidentiality protection for private financial transactions.

 

In July 2007, the Korean National Assembly passed the Financial Investment Services and Capital Markets Act or FSCMA, under which various industry-based capital markets regulatory systems currently were consolidated into a single regulatory system. The FSCMA, which became effective in February 2009, expands the scope of permitted investment-related financial products and activities through expansive definitions of financial instruments and function-based regulations that allow financial investment companies to offer a wider range of financial services, as well as strengthening investor protection and disclosure requirements. The Enforcement Decree of the FSCMA classifies the financial investment companies into a total of 78 categories depending on the types of (i) financial investment services, (ii) financial investment products, and (iii) investors.

 

Prior to the effective date of the Financial Investment Services and Capital Markets Act, separate laws regulated various types of financial institutions depending on the type of the financial institution (for example, securities companies, futures companies, trust business companies and asset management companies) and subjected financial institutions to different licensing and ongoing regulatory requirements (for example, under the Securities and Exchange Act, the Futures Business Act and the Indirect Investment Asset Management Business Act). By applying one uniform set of rules to financial businesses having the same economic function, the Financial Investment Services and Capital Markets Act attempts to improve and address issues caused by the previous regulatory system under which the same economic function relating to capital markets-related business were governed by multiple regulations. To this end, the Financial Investment Services and Capital Markets Act categorizes capital markets-related businesses into six different functions, as follows:

 

   

investment dealing (trading and underwriting of financial investment products);

 

   

investment brokerage (brokerage of financial investment products);

 

   

collective investment (establishment of collective investment schemes and the management thereof);

 

   

investment advice;

 

   

discretionary investment management; and

 

   

trusts (together with the five businesses set forth above, “Financial Investment Businesses”).

 

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Accordingly, all financial businesses relating to financial investment products are reclassified as one or more of the Financial Investment Businesses described above, and financial institutions are subject to the regulations applicable to their relevant Financial Investment Businesses, irrespective of what type of financial institution it is. For example, under the Financial Investment Services and Capital Markets Act, derivative businesses conducted by securities companies and future companies will be subject to the same regulations under the Financial Investment Services and Capital Markets Act, at least in principle.

 

The banking business and the insurance business are not subject to the Financial Investment Services and Capital Markets Act and will continue to be regulated under separate laws; provided, however, that they are subject to the Financial Investment Services and Capital Markets Act if their activities involve any Financial Investment Businesses requiring a license based on the Financial Investment Services and Capital Markets Act.

 

Banking Industry

 

The banking industry comprises commercial banks and specialized banks. Commercial banks serve the general public and corporate sectors. They include nationwide banks, regional banks and branches of foreign banks. Regional banks provide services similar to nationwide banks, but operate in a geographically restricted region. Branches of foreign banks have operated in the Republic since 1967 but provide a relatively small proportion of the country’s banking services. As of December 31, 2013, commercial banks consisted of seven nationwide banks, all of which have branch networks throughout the Republic, six regional banks and 55 branches of 39 foreign banks operating in the country. Nationwide and regional banks had, in the aggregate, 5,616 domestic branches and offices, 49 overseas branches, 21 overseas representative offices and 31 overseas subsidiaries as of December 31, 2013.

 

Specialized banks meet the needs of specific sectors of the economy in accordance with Government policy; they are organized under, or chartered by, special laws. Specialized banks include:

 

   

The Korea Development Bank;

 

   

The Export-Import Bank of Korea;

 

   

The Industrial Bank of Korea;

 

   

National Federation of Fisheries Cooperatives; and

 

   

NH Bank (which was established by a spin-off of the credit and banking unit from the National Agricultural Cooperative Federation in March 2012).

 

The economic difficulties in 1997 and 1998 caused an increase in Korean banks’ non-performing assets and a decline in capital adequacy ratios of Korean banks. From 1998 through 2002, the Financial Services Commission amended banking regulations several times to adopt more stringent criteria for non-performing assets that more closely followed international standards. Non-performing assets are assets classified as doubtful or estimated loss under Korean banking regulations.

 

The following table sets out the total loans (including loans in Won and loans in foreign currencies) and non-performing assets of Korean banks.

 

     Total Loans      Non-Performing
Assets
     Percentage
of Total
 
     (trillions of won)      (percentage)  

December 31, 2009

     1,285.8         10.4         0.8   

December 31, 2010

     1,308.9         24.8         1.9   

December 31, 2011

     1,387.6         18.8         1.4   

December 31, 2012

     1,390.9         18.3         1.3   

December 31, 2013

     1,441.6         25.5         1.8   

 

Source: Financial Supervisory Service.

 

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As of December 31, 2012, loans denominated in Won held by these banks increased by 3.5% to ₩1,106.4 trillion from ₩1,068.5 trillion as of December 31, 2011, primarily due to (i) an increase in loans to large corporations by 19.9% to ₩156.7 trillion as of December 31, 2012 from ₩130.7 trillion as of December 31, 2011 and (ii) an increase in household loans by 2.7% to ₩464.5 trillion as of December 31, 2012 from ₩452.5 trillion as of December 31, 2011. As of December 31, 2013, loans denominated in Won held by these banks increased by 5.1% to ₩1,162.8 trillion from ₩1,106.4 trillion as of December 31, 2012, primarily due to (i) an increase in loans to small and medium-enterprises by 6.0% to ₩489.0 trillion as of December 31, 2013 from ₩461.3 trillion as of December 31, 2012 and (ii) an increase in household loans by 3.1% to ₩479.0 trillion as of December 31, 2013 from ₩464.5 trillion as of December 31, 2012.

 

In 2009, these banks posted an aggregate net profit of ₩6.9 trillion, compared to an aggregate net profit of ₩7.7 trillion in 2008, primarily due to increased non-performing loans. In 2010, these banks posted an aggregate net profit of ₩9.3 trillion, primarily due to increased net interest income. In 2011, these banks posted an aggregate net profit of ₩11.8 trillion, primarily due to decreased non-performing loans. In 2012, these banks posted an aggregate net profit of ₩8.7 trillion, primarily due to a decrease in gain on sale of equity securities and an increase in impairment loss on available-for-sale securities. Based on preliminary data, in 2013, these banks posted an aggregate net profit of ₩4.0 trillion, primarily due to decreased net interest income and increased loan loss provisions.

 

Non-Bank Financial Institutions

 

Non-bank financial institutions include:

 

   

savings institutions, including trust accounts of banks, mutual savings banks, credit unions, mutual credit facilities, community credit cooperatives and postal savings;

 

   

life insurance institutions; and

 

   

credit card companies.

 

The country had 89 mutual savings banks as of December 31, 2013, with assets totaling ₩39.0 trillion.

 

As of December 31, 2013, 14 domestic life insurance institutions, two joint venture life insurance institutions and nine wholly-owned subsidiaries of foreign life insurance companies, with assets totaling approximately ₩597.3 trillion as of December 31, 2013, were operating in the Republic.

 

As of December 31, 2013, eight credit card companies operated in the country with loans totaling approximately ₩86.5 trillion.

 

Money Markets

 

In the Republic, the money markets consist of the call market and markets for a wide range of other short- term financial instruments, including treasury bills, monetary stabilization bonds, negotiable certificates of deposits, repurchase agreements and commercial paper.

 

Securities Markets

 

On January 27, 2005, the Korea Exchange was established pursuant to the now repealed Korea Securities and Futures Exchange Act by consolidating the Korea Stock Exchange, the Korea Futures Exchange, the KOSDAQ Stock Market, Inc., or the KOSDAQ, and the KOSDAQ Committee of the Korea Securities Dealers Association, which had formerly managed the KOSDAQ. There are three different markets operated by the Korea Exchange: the KRX KOSPI Market, the KRX KOSDAQ Market, and the KRX Derivatives Market. The Korea Exchange has two trading floors located in Seoul, one for the KRX KOSPI Market and one for the KRX

 

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KOSDAQ Market, and one trading floor in Busan for the KRX Derivatives Market. The Korea Exchange is a joint stock company with limited liability, the shares of which are held by (i) financial investment companies that were formerly members of the Korea Futures Exchange or the Korea Stock Exchange and (ii) the stockholders of the KOSDAQ. Currently, the Korea Exchange is the only stock exchange in Korea and is operated by membership, having as its members Korean financial investment companies and some Korean branches of foreign financial investment companies.

 

The Korea Exchange publishes the Korea Composite Stock Price Index every ten seconds, which is an index of all equity securities listed on the Korea Exchange. The Korea Composite Stock Price Index is computed using the aggregate value method, whereby the market capitalizations of all listed companies are aggregated, subject to certain adjustments, and this aggregate is expressed as a percentage of the aggregate market capitalization of all listed companies as of the base date, January 4, 1980.

 

The following table shows the value of the Korea Composite Stock Price Index as of the dates indicated:

 

December 31, 2008

     1,124.5   

January 30, 2009

     1,162.1   

February 27, 2009

     1,063.0   

March 31, 2009

     1,206.3   

April 30, 2009

     1,369.4   

May 29, 2009

     1,395.9   

June 30, 2009

     1,390.1   

July 31, 2009

     1,557.3   

August 31, 2009

     1,591.9   

September 30, 2009

     1,673.1   

October 31, 2009

     1,580.7   

November 30, 2009

     1,555.6   

December 31, 2009

     1,682.8   

January 29, 2010

     1,602.4   

February 26, 2010

     1,594.6   

March 31, 2010

     1,692.9   

April 30, 2010

     1,741.6   

May 31, 2010

     1,641.3   

June 30, 2010

     1,698.3   

July 30, 2010

     1,759.3   

August 31, 2010

     1,742.8   

September 30, 2010

     1,872.8   

October 29, 2010

     1,883.0   

November 30, 2010

     1,904.6   

December 31, 2010

     2,051.0   

January 31, 2011

     2,069.7   

February 28, 2011

     1,939.3   

March 31, 2011

     2,106.7   

April 30, 2011

     2,192.4   

May 29, 2011

     2,142.5   

June 30, 2011

     2,100.7   

July 31, 2011

     2,133.2   

August 31, 2011

     1,880.1   

September 30, 2011

     1,769.7   

October 31, 2011

     1,909.0   

November 30, 2011

     1,847.5   

 

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December 31, 2011

     1,825.7   

January 31, 2012

     1,955.8   

February 29, 2012

     2,030.3   

March 31, 2012

     2,014.0   

April 30, 2012

     1,982.0   

May 31, 2012

     1,843.5   

June 29, 2012

     1,854.0   

July 31, 2012

     1,882.0   

August 31, 2012

     1,905.1   

September 28, 2012

     1,996.2   

October 31, 2012

     1,912.1   

November 30, 2012

     1,932.9   

December 31, 2012

     1,997.1   

January 31, 2013

     1,961.9   

February 28, 2013

     2,026.5   

March 29, 2013

     2,004.9   

April 30, 2013

     1,964.0   

May 31, 2013

     2,001.1   

June 28, 2013

     1,863.3   

July 31, 2013

     1,914.0   

August 30, 2013

     1,926.4   

September 30, 2013

     1,997.0   

October 31, 2013

     2,030.1   

November 29, 2013

     2,044.9   

December 31, 2013

     2,011.3   

January 29, 2014

     1,941.2   

February 28, 2014

     1,980.0   

March 31, 2014

     1,985.6   

April 30, 2014

     1,961.8   

May 30, 2014

     1,995.0   

 

On December 27, 1997, the last day of trading in 1997, the index stood at 376.3, a sharp decline from 647.1 on September 30, 1997. The fall resulted from growing concerns about the Republic’s weakening financial and corporate sectors, the Republic’s falling foreign currency reserves, the sharp depreciation of the Won against the U.S. Dollar and other external factors, such as a sharp decline in stock prices in Hong Kong on October 24, 1997 and financial turmoil in Southeast Asian countries. The Korea Composite Stock Price Index recovered to reach 2,064.9 in late 2007 but since then the index declined. As liquidity and credit concerns and volatility in the global financial markets increased significantly since September 2008, there was a significant overall decline in the stock prices of Korean companies during the fourth quarter of 2008 and first half of 2009 and continuing volatility since then. The index was 1,988.5 on June 27, 2014.

 

Supervision System

 

The Office of Bank Supervision, the Securities Supervisory Board, the Insurance Supervisory Board and all other financial sector regulatory bodies merged in January 1999 to form the Financial Services Commission. The Financial Services Commission acts as the executive body over the Financial Supervisory Service. The Financial Services Commission reports to, but operates independently of, the Prime Minister’s office.

 

The Ministry of Strategy and Finance focuses on financial policy and foreign currency regulations. The Bank of Korea manages monetary policy focusing on price stabilization.

 

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Deposit Insurance System

 

The Republic’s deposit insurance system insures amounts on deposit with banks, non-bank financial institutions, securities companies and life insurance companies.

 

Since January 2001, deposits at any single financial institution are insured only up to ₩50 million per person regardless of the amount deposited.

 

The Government excluded certain deposits, such as repurchase agreements, from the insurance scheme, expanded the definition of unsound financial institutions to which the insurance scheme would apply and gradually increased the insurance premiums payable by insured financial institutions.

 

Monetary Policy

 

The Bank of Korea

 

The Bank of Korea was established in 1950 as Korea’s central bank and the country’s sole currency issuing bank. A seven-member Monetary Policy Committee, chaired by the Governor of The Bank of Korea, formulates and controls monetary and credit policies.

 

Inflation targeting is the basic system of operation for Korean monetary policy. The consumer price index is used as The Bank of Korea’s target indicator. To achieve its established inflation target, the Monetary Policy Committee of The Bank of Korea determines and announces the “Bank of Korea Base Rate,” the reference rate applied in transactions such as repurchase agreements between The Bank of Korea and its financial institution counterparts. The Bank of Korea uses open market operations as its primary instrument to keep the call rate in line with the Monetary Policy Committee’s target rate. In addition, The Bank of Korea is able to establish policies regarding its lending to banks in Korea and their reserve requirements.

 

Interest Rates

 

On July 12, 2007, The Bank of Korea raised the policy rate to 4.75% from 4.5%, and raised it further to 5.0% on August 9, 2007. The rationale for this change was the concern that the ample market liquidity might put upside pressure on inflation in the medium to long term as the economic upswing continued. On August 7, 2008, The Bank of Korea raised the policy rate to 5.25% from 5.0%, taking the view that inflation in consumer prices had picked up its pace, due to the direct and indirect effects of high oil prices, at a time when domestic economic activity had slackened. On October 9, 2008, The Bank of Korea cut its policy rate to 5.0% from 5.25%, and continued to lower it further to 4.25% on October 27, 2008, 4.0% on November 7, 2008, 3.0% on December 11, 2008, 2.5% on January 9, 2009 and 2.0% on February 12, 2009, in order to address financial market instability and to help combat the slowdown of the domestic economy. On July 9, 2010, The Bank of Korea raised the policy rate to 2.25% from 2.0%, which was further raised to 2.5% on November 16, 2010, in response to signs of inflationary pressures and the continued growth of domestic economy. On January 13, 2011, The Bank of Korea raised the policy rate to 2.75%, which was further increased to 3.0% on March 10, 2011 and to 3.25% on June 10, 2011, in response to inflationary pressures driven mainly by rises in the prices of petroleum products and farm products. The Bank of Korea lowered its policy rate to 3.0% from 3.25% on July 12, 2012, which was further lowered to 2.75% on October 11, 2012 and to 2.5% on May 9, 2013, in order to address the sluggishness of the global and domestic economy. The Bank of Korea’s policy rate remained at 2.5% as of the date of this prospectus.

 

With the deregulation of interest rates on banks’ demand deposits on February 2, 2004, The Bank of Korea completed the interest rate deregulation based upon the “Four-Stage Interest Rate Liberalization Plan” announced in 1991. The prohibition on the payment of interest on ordinary checking accounts was, however, maintained.

 

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Money Supply

 

The following table shows the volume of the Republic’s money supply:

 

     December 31,  
     2009     2010     2011     2012     2013  
     (billions of Won)  

Money Supply (M1)(1)

     389,394.5        427,791.6        442,077.5        470,010.6        515,643.4   

Quasi-money(2)

     1,177,455.5        1,232,738.4        1,309,380.9        1,365,631.0        1,405,151.6   

Money Supply (M2)(3)

     1,566,850.0        1,660,530.0        1,751,458.4        1,835,641.6        1,920,795.0   

Percentage Increase Over Previous Year

     9.9     6.0     5.5     4.8     4.6

 

(1) Consists of currency in circulation and demand and instant access savings deposits at financial institutions.
(2) Includes time and installment savings deposits, marketable instruments, yield-based dividend instruments and financial debentures, excluding financial instruments with a maturity of more than two years.
(3) Money Supply (M2) is the sum of Money Supply (M1) and quasi-money.

 

Source: The Bank of Korea.

 

Exchange Controls

 

Authorized foreign exchange banks, as registered with the Ministry of Strategy and Finance, handle foreign exchange transactions. The ministry has designated other types of financial institutions to handle foreign exchange transactions on a limited basis.

 

Korean laws and regulations generally require a report to either the Ministry of Strategy and Finance, The Bank of Korea or authorized foreign exchange banks, as applicable, for issuances of international bonds and other instruments, overseas investments and certain other transactions involving foreign exchange payments.

 

In 1994 and 1995, the Government relaxed regulations of foreign exchange position ceilings and foreign exchange transaction documentation and created free Won accounts which may be opened by non-residents at Korean foreign exchange banks. The Won funds deposited into the free Won accounts may be converted into foreign currencies and remitted outside Korea without any governmental approval. In December 1996, after joining the OECD, the Republic freed the repatriation of investment funds, dividends and profits, as well as loan repayments and interest payments. The Government continues to reduce exchange controls in response to changes in the world economy, including the new trade regime under the WTO, anticipating that such foreign exchange reform will improve the Republic’s competitiveness and encourage strategic alliances between domestic and foreign entities.

 

In September 1998, the National Assembly passed the Foreign Exchange Transactions Act, which became effective in April 1999 and has subsequently been amended numerous times. In principle, most currency and capital transactions, including, among others, the following transactions, have been liberalized:

 

   

the investment in real property located overseas by Korean companies and financial institutions;

 

   

the establishment of overseas branches and subsidiaries by Korean companies and financial institutions;

 

   

the investment by non-residents in deposits and trust products having more than one year maturities; and

 

   

the issuance of debentures by non-residents in the Korean market.

 

To minimize the adverse effects from further opening of the Korean capital markets, the Ministry of Strategy and Finance is authorized to introduce a variable deposit requirement system to restrict the influx of short-term speculative funds.

 

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The Government has also embarked on a second set of liberalization initiatives starting in January 2001, under which ceilings on international payments for Korean residents have been eliminated, including overseas travel expenses, overseas inheritance remittances and emigration expenses. Overseas deposits, trusts, acquisitions of foreign securities and other foreign capital transactions made by residents and the making of deposits in Korean currency by non-residents have also been liberalized. In line with the foregoing liberalization, measures will also be adopted to curb illegal foreign exchange transactions and to stabilize the foreign exchange market.

 

Effective as of January 1, 2006, the Government liberalized the regulations governing “capital transactions.” The regulations provide that no regulatory approvals are required for any capital transactions. The capital transactions previously subject to approval requirements are now subject only to reporting requirements.

 

In January 2010, the Financial Supervisory Services released FX Derivative Transactions Risk Management Guideline to prevent over-hedging of foreign exchange risk by corporate investors. According to the guideline as amended in July 2010, if a corporate investor, other than a financial institution or a public enterprise, wishes to enter into a foreign exchange forward, option or swap agreement with a bank, the bank is required to verify whether the corporate investor’s assets, liabilities or contracts face foreign exchange risks that could be mitigated by a foreign exchange forward, option or swap agreement. In addition, the bank is required to ensure that the corporate investor’s risk hedge ratio, which is the ratio of the aggregate notional amount to the aggregate amount of risk, does not exceed 100%.

 

Foreign Exchange

 

The following table shows the exchange rate between the Won and the U.S. Dollar (in Won per U.S. Dollar) as announced by the Seoul Money Brokerage Services, Ltd. as of the dates indicated:

 

     Won/U.S. Dollar
Exchange Rate
 

December 31, 2008

     1,257.5   

January 31, 2009

     1,368.5   

February 27, 2009

     1,516.4   

March 31, 2009

     1,377.1   

April 30, 2009

     1,348.0   

May 29, 2009

     1,272.9   

June 30, 2009

     1,284.7   

July 31, 2009

     1,240.5   

August 31, 2009

     1,244.9   

September 30, 2009

     1,188.7   

October 31, 2009

     1,200.6   

November 30, 2009

     1,167.4   

December 31, 2009

     1,167.6   

January 29, 2010

     1,156.5   

February 26, 2010

     1,158.4   

March 31, 2010

     1,130.8   

April 30, 2010

     1,115.5   

May 31, 2010

     1,200.2   

June 30, 2010

     1,210.3   

July 30, 2010

     1,187.2   

August 31, 2010

     1,189.1   

September 30, 2010

     1,142.0   

October 29, 2010

     1,126.6   

November 30, 2010

     1,157.3   

 

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     Won/U.S. Dollar
Exchange Rate
 

December 31, 2010

     1,138.9   

January 31, 2011

     1,114.3   

February 28, 2011

     1,127.9   

March 31, 2011

     1,107.2   

April 30, 2011

     1,072.3   

May 31, 2011

     1,080.6   

June 30, 2011

     1,078.1   

July 30, 2011

     1,052.6   

August 31, 2011

     1,071.7   

September 30, 2011

     1,179.5   

October 31, 2011

     1,104.9   

November 30, 2011

     1,150.3   

December 31, 2011

     1,153.3   

January 31, 2012

     1,125.0   

February 29, 2012

     1,126.5   

March 31, 2012

     1,137.8   

April 30, 2012

     1,134.2   

May 31, 2012

     1,177.8   

June 29, 2012

     1,153.8   

July 31, 2012

     1,136.2   

August 31, 2012

     1,134.6   

September 28, 2012

     1,118.6   

October 31, 2012

     1,094.1   

November 30, 2012

     1,084.7   

December 31, 2012

     1,071.1   

January 31, 2013

     1,082.7   

February 28, 2013

     1,085.4   

March 29, 2013

     1,112.1   

April 30, 2013

     1,108.1   

May 31, 2013

     1,128.3   

June 28, 2013

     1,149.7   

July 31, 2013

     1,113.6   

August 30, 2013

     1,110.9   

September 30, 2013

     1,075.6   

October 31, 2013

     1,061.4   

November 29, 2013

     1,062.1   

December 31, 2013

     1,055.3   

January 29, 2014

     1,079.2   

February 28, 2014

     1,067.7   

March 31, 2014

     1,068.8   

April 30, 2014

     1,031.7   

May 30, 2014

     1,021.6   

 

Prior to November 1997, the Government had permitted exchange rates to float within a daily range of 2.25%. In response to the substantial downward pressures on the Won caused by the Republic’s economic difficulties in late 1997, in November 1997, the Government expanded the range of permitted daily exchange rate fluctuations to 10%. The Government eliminated the daily exchange rate band in December 1997, and the Won now floats according to market forces. The value of the Won relative to the U.S. dollar depreciated from ₩888.1 to US$1.00 on June 30, 1997 to ₩1,964.8 to US$1.00 on December 24, 1997. Due to improved economic conditions and increases in trade surplus, the Won has generally appreciated against the U.S. dollar,

 

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although the trend reversed in March 2008. During the period from January 2, 2008 through April 16, 2009, the value of the Won relative to the U.S. dollar declined by approximately 29.9%, due primarily to adverse economic conditions resulting from liquidity and credit concerns and volatility in the global credit and financial markets and repatriations by foreign investors of their investments in the Korean stock market. The market average exchange rate was ₩1,017.0 to US$1.00 on June 27, 2014.

 

Balance of Payments and Foreign Trade

 

Balance of Payments

 

Balance of payments figures measure the relative flow of goods, services and capital into and out of the country as represented in the current balance and the capital balance. The current balance tracks a country’s trade in goods and services and transfer payments and measures whether a country is living within its income from trading and investments. The capital balance covers all transactions involving the transfer of capital into and out of the country, including loans and investments. The overall balance represents the sum of the current and capital balances. An overall balance surplus indicates a net inflow of foreign currencies, thereby increasing demand for and strengthening the local currency. An overall balance deficit indicates a net outflow of foreign currencies, thereby decreasing demand for and weakening the local currency. The financial account mirrors the overall balance. If the overall balance is positive, the surplus, which represents the nation’s savings, finances the overall deficit of the country’s trading partners. Accordingly, the financial account will indicate cash outflows equal to the overall surplus. If, however, the overall balance is negative, the nation has an international deficit which must be financed. Accordingly, the financial account will indicate cash inflows equal to the overall deficit.

 

The following table sets out certain information with respect to the Republic’s balance of payments:

 

Balance of Payments(1)

 

Classification

   2009     2010     2011     2012     2013(4)  
     (millions of dollars)  

Current Account

     33,593.3        28,850.4        18,655.8        50,835.0        79,883.6   

Goods

     47,814.0        47,915.4        29,089.9        49,406.0        80,568.6   

Exports(2)

     363,900.9        463,769.6        587,099.7        603,509.2        617,127.6   

Imports(2)

     316,086.9        415,854.2        558,009.8        554,103.2        536,559.0   

Services

     (9,589.9     (14,238.4     (12,279.1     (5,213.6     (7,927.4

Income

     (2,436.2     489.9        6,560.6        12,116.7        11,424.8   

Current Transfers

     (2,194.6     (5,316.5     (4,715.6     (5,474.1     (4,182.3

Capital and Financial Account

     (28,953.6     (23,253.2     (24,427.8     (51,624.1     (76,908.9

Capital Account

     (69.6     (63.2     (112.0     (41.7     (27.8

Financial Account(3)

     (28,884.0     (23,190.0     (24,315.8     (51,582.4     (76,881.1

Net Errors and Omissions

     (4,639.7     (5,597.2     5,772.0        789.1        (2,974.7

 

(1) Figures are prepared based on the sixth edition of Balance of Payment Manual, or BPM6, published by International Monetary Fund in December 2010 and implemented by the Government in December 2013.
(2) These entries are derived from trade statistics and are valued on a free on board basis, meaning that the insurance and freight costs are not included.
(3) Includes borrowings from the IMF, syndicated bank loans and short-term borrowings.
(4) Preliminary.

 

Source: The Bank of Korea.

 

The Republic recorded a current account surplus of approximately US$50.8 billion in 2012. The current account surplus in 2012 increased from US$18.7 billion in 2011, primarily due to (i) an increase in surplus from the goods account and (ii) a decrease in deficit from the services account.

 

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Based on preliminary data, the Republic recorded a current account surplus of approximately US$79.9 billion in 2013. The current account surplus in 2013 increased from the current account surplus of US$50.8 billion in 2012, primarily due to an increase in surplus from the goods account.

 

Foreign Direct Investment

 

Since 1960, the Government has adopted a broad range of related laws, administrative rules and regulations, providing a framework for the conduct and regulation of foreign investment activities. In September 1998, the Government promulgated the Foreign Investment Promotion Act, or the FIPA, which replaced previous foreign direct investment related laws, rules and regulations, to promote inbound foreign investments by providing incentives to, and facilitating investment activities in the Republic by, foreign nationals. The FIPA prescribes, among others, procedural requirements for inbound foreign investments, incentives for foreign investments such as tax reductions, and requirements relating to designation and development of foreign investment target regions. The Government believes that providing a stable and receptive environment for foreign direct investment will accelerate the inflow of foreign capital, technology and management techniques.

 

The following table sets forth information regarding annual foreign direct investment in the Republic for the periods indicated.

 

Foreign Direct Investment

 

     2009      2010      2011      2012      2013  
     (billions of dollars)  

Contracted and Reported Investment

              

Greenfield Investment(1)

     8.1         11.1         11.7         12.5         9.6   

Merger & Acquisition

     3.4         2.0         2.0         3.8         5.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     11.5         13.1         13.7         16.3         14.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Actual Investment

     6.8         5.4         6.6         10.7         9.7   

 

(1) Includes building new factories and operational facilities.

 

Source: Ministry of Trade, Industry and Energy

 

In 2013, the contracted and reported amount of foreign direct investment in the Republic decreased to US$14.6 billion from US$16.3 billion in 2012, primarily due to a decrease in foreign investment in the manufacturing sector to US$4.6 billion in 2013 from US$6.1 billion in 2012.

 

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The following table sets forth information regarding the source of foreign direct investment by region and country for the periods indicated:

 

Foreign Direct Investment by Region and Country

 

     2009      2010      2011      2012      2013  
     (billions of dollars)  

North America

              

U.S.A

     1.5         2.0         2.4         3.7         3.5   

Others

     0.7         0.7         1.3         0.7         1.1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     2.2         2.7         3.7         4.4         4.6   

Asia

              

Japan

     1.9         2.1         2.3         4.5         2.7   

Hong Kong

     0.8         0.1         0.6         1.7         1.0   

Singapore

     0.4         0.8         0.6         1.4         0.4   

China

     0.2         0.4         0.7         0.7         0.5   

Others

     0.4         3.5         0.2         0.5         0.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     3.7         6.9         4.4         8.8         5.0   

European Union

              

England

     2.0         0.6         0.9         0.4         0.1   

Netherlands

     1.9         1.2         1.0         0.6         0.6   

Germany

     0.6         0.3         1.5         0.4         0.4   

France

     0.1         0.2         0.2         0.2         0.5   

Luxembourg

     0.0         0.1         0.1         0.2         0.7   

Others

     0.8         0.9         1.7         1.2         2.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     5.4         3.3         5.4         3.0         4.9   

Others regions and countries

     0.2         0.2         0.2         0.1         0.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     11.5         13.1         13.7         16.3         14.5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Source: Ministry of Trade, Industry and Energy

 

Trade Balance

 

Trade balance figures measure the difference between a country’s exports and imports. If exports exceed imports the country has a trade balance surplus while if imports exceed exports the country has a deficit. A deficit, indicating that a country’s receipts from abroad fall short of its payments to foreigners, must be financed, rendering the country a debtor nation. A surplus, indicating that a country’s receipts exceed its payments to foreigners, allows the country to finance its trading partners’ net deficit to the extent of the surplus, rendering the country a creditor nation.

 

The following table summarizes the Republic’s trade balance for the periods indicated:

 

Trade Balance

 

     Exports(1)      Imports(2)      Balance of
Trade
     Exports as %
of Imports
 
     (billions of dollars, except percentages)  

2009

     363.5         323.1         40.4         112.5   

2010

     466.4         425.2         41.2         109.6   

2011

     555.2         524.4         30.8         105.8   

2012

     547.9         519.6         28.3         105.4   

2013(3)

     559.7         515.6         44.1         108.5   

 

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(1) These entries are derived from customs clearance statistics on a C.I.F. basis, meaning that the price of goods include insurance and freight cost.
(2) These entries are derived from customs clearance statistics on a C.I.F. basis, meaning that the price of goods include insurance and freight cost.
(3) Preliminary.

 

Source: The Bank of Korea.

 

The Republic, due to its lack of natural resources, relies on extensive trading activity for growth. The country meets virtually all domestic requirements for petroleum, wood and rubber with imports, as well as much of its coal and iron needs. Exports consistently represent a high percentage of GDP and, accordingly, the international economic environment is of crucial importance to the Republic’s economy.

 

The following tables give information regarding the Republic’s exports and imports by major commodity groups:

 

Exports by Major Commodity Groups (C.I.F.)(1)

 

    2009     As % of
2009
Total
    2010     As %
of 2010
Total
    2011     As %
of 2011
Total
    2012     As %
of 2012
Total
    2013(2)     As %
of 2013
Total(2)
 
    (billions of dollars, except percentages)  

Foods & Consumer Goods

    4.3        1.2        5.3        1.2        6.5        1.2        6.8        1.2        6.7        1.1   

Raw Materials and Fuels

    27.9        7.7        38.5        8.3        61.7        11.1        65.4        11.9        61.2        10.9   

Petroleum & Derivatives

    23.2        6.4        31.9        6.8        52.0        9.4        56.6        10.3        53.2        9.5   

Light Industrial Products

    27.5        7.6        32.7        7.0        38.9        7.0        40.5        7.4        39.0        6.9   

Heavy & Chemical Industrial Products

    303.9        83.6        389.9        83.6        448.0        80.7        435.2        79.3        435.2        77.8   

Electronic & Electronic Products

    121.2        33.3        154.2        33.1        156.9        28.3        156.0        28.5        171.2        30.6   

Chemicals & Chemical Products

    36.6        10.1        47.5        10.2        59.1        10.6        59.6        10.9        64.4        11.5   

Metal Goods

    29.9        8.2        37.7        8.1        48.6        8.8        47.2        8.6        43.6        7.8   

Machinery & Precision Equipment

    32.8        9.0        44.0        9.4        54.5        9.8        55.7        10.2        55.3        9.9   

Passenger Cars

    22.4        6.2        31.8        6.8        40.9        7.4        42.4        7.7        44.3        7.9   

Ship & Boat

    42.8        11.8        47.1        10.1        54.6        9.8        38.2        7.0        36.2        6.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    363.5        100.0        466.4        100.0        555.2        100.0        547.9        100.0        559.7        100.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) These entries are derived from customs clearance statistics. C.I.F. means that the price of goods includes insurance and freight costs.
(2) Preliminary

 

Source: The Bank of Korea.

 

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Imports by Major Commodity Groups (C.I.F.)(1)

 

    2009     As %
of 2009
Total
    2010     As %
of 2010
Total
    2011     As %
of 2011
Total
    2012     As %
of 2012
Total
    2013(2)     As %
of 2013
Total(2)
 
    (billions of dollars, except percentages)  

Industrial Materials and Fuels

    184.4        57.1        247.2        58.1        324.8        61.9        325.1        62.6        313.8        60.9   

Crude Petroleum

    50.8        15.7        68.7        16.2        100.8        19.2        108.3        20.8        99.4        19.3   

Mineral

    13.7        4.2        21.4        5.0        31.1        5.9        28.3        5.4        24.7        4.8   

Chemicals

    28.7        8.9        37.7        8.9        44.2        8.4        43.8        8.4        43.2        8.4   

Iron & Steel Products

    21.6        6.7        27.3        6.4        30.4        5.8        26.4        5.1        24.6        4.8   

Non-ferrous Metal

    9.1        2.8        12.6        3.0        15.1        2.9        12.6        2.4        12.5        2.4   

Capital Goods

    104.5        32.4        135.7        31.9        146.5        27.9        140.3        27.0        144.2        28.0   

Machinery & Precision Equipment

    33.6        10.4        47.7        11.2        50.5        9.6        49.8        9.6        50.1        9.7   

Electric & Electronic Machines

    59.8        18.5        73.3        17.2        80.1        15.3        76.3        14.7        80.9        15.7   

Transport Equipment

    9.5        3.0        12.9        3.0        13.9        2.7        12.1        2.3        11.3        2.2   

Consumer Goods

    34.1        10.6        42.3        9.9        53.1        10.1        54.2        10.4        58.2        11.3   

Cereals

    5.3        1.6        5.9        1.4        7.5        1.4        7.9        1.5        8.5        1.6   

Goods for Direct Consumption

    8.9        2.7        11.0        2.6        15.0        2.9        14.3        2.8        14.5        2.8   

Consumer Durable Goods

    12.9        4.0        16.2        3.8        18.6        3.5        19.4        3.7        21.0        4.1   

Consumer Nondurable Goods

    7.1        2.2        9.2        2.2        12.1        2.3        12.6        2.4        14.3        2.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    323.1        100.0        425.2        100.0        524.4        100.0        519.6        100.0        515.6        100.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) These entries are derived from customs clearance statistics. C.I.F. means that the price of goods includes insurance and freight costs.
(2) Preliminary

 

Source: The Bank of Korea.

 

In 2009, the Republic recorded a trade surplus of US$40.4 billion. Exports decreased by 13.9% to US$363.5 billion and imports decreased by 25.8% to US$323.1 billion from US$422.0 billion of exports and US$435.3 billion of imports, respectively, in 2008.

 

In 2010, the Republic recorded a trade surplus of US$41.2 billion. Exports increased by 28.3% to US$466.4 billion and imports increased by 31.6% to US$425.2 billion from US$363.5 billion of exports and US$323.1 billion of imports, respectively, in 2009.

 

In 2011, the Republic recorded a trade surplus of US$30.8 billion. Exports increased by 19.0% to US$555.2 billion and imports increased by 23.3% to US$524.4 billion from US$466.4 billion of exports and US$425.2 billion of imports, respectively, in 2010.

 

In 2012, the Republic recorded a trade surplus of US$28.3 billion. Exports decreased by 1.3% to US$547.9 billion and imports decreased by 0.9% to US$519.6 billion from US$555.2 billion of exports and US$524.4 billion of imports, respectively, in 2011.

 

Based on preliminary data, the Republic recorded a trade surplus of US$44.1 billion in 2013. Exports increased by 2.1% to US$559.7 billion and imports decreased by 0.8% to US$515.6 billion from US$547.9 billion of exports and US$519.6 billion of imports, respectively, in 2012.

 

Based on preliminary data, the Republic recorded a current account surplus of approximately US$15.1 billion in the first quarter of 2014. The current account surplus in the first quarter of 2014 increased from the current account surplus of US$10.5 billion in the first quarter of 2013, primarily due to an increase in surplus from the goods account.

 

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The following table sets forth the Republic’s exports trading partners:

 

Exports

 

    2009     As % of
2009
Total
    2010     As % of
2010
Total
    2011     As % of
2011
Total
    2012     As % of
2012
Total
    2013(1)     As %
of 2013
Total(1)
 
    (millions of dollars, except percentages)  

China

    86,703.2        23.9        116,837.8        25.1        134,185.0        24.2        134,322.6        24.5        145,869.5        26.1   

United States

    37,649.9        10.4        49,816.1        10.7        56,207.7        10.1        58,524.6        10.7        62,052.5        11.1   

Japan

    21,770.8        6.0        28,176.3        6.0        39,679.7        7.1        38,796.1        7.1        34,662.3        6.2   

Hong Kong

    19,661.1        5.4        25,294.3        5.4        30,968.4        5.6        32,606.2        6.0        27,756.3        5.0   

Singapore

    13,617.0        3.7        15,244.2        3.3        20,839.0        3.8        22,887.9        4.2        22,289.0        4.0   

Taiwan

    9,501.1        2.6        14,830.5        3.2        18,206.0        3.3        14,814.9        2.7        15,699.1        2.8   

Germany

    8,820.9        2.4        10,702.2        2.3        9,500.9        1.7        7,509.7        1.4        7,907.9        1.4   

India

    8,013.3        2.2        11,434.6        2.5        12,654.1        2.3        11,922.0        2.2        11,375.8        2.0   

Russia

    4,194.1        1.2        7,759.8        1.7        10,304.9        1.9        11,097.1        2.0        11,149.1        2.0   

Indonesia

    5,999.9        1.7        8,897.3        1.9        13,564.5        2.4        13,955.0        2.5        11,568.2        2.1   

Others(2)

    147,602.3        40.6        177,390.7        38.0        209,103.5        37.7        201,433.7        36.8        209,931.9        37.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    363,533.6        100.0        466,383.8        100.0        555,213.7        100.0        547,869.8        100.0        559,648.7        100.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Preliminary
(2) Includes more than 200 countries and regions with lower exports levels than those shown above.

 

Source: The Bank of Korea.

 

The following table sets forth the Republic’s imports trading partners:

 

Imports

 

    2009     As % of
2009
Total
    2010     As % of
2010
Total
    2011     As % of
2011
Total
    2012     As % of
2012
Total
    2013(1)     As % of
2013
Total(1)
 
    (millions of dollars, except percentages)  

China

    54,246.1        16.8        71,573.6        16.8        86,432.2        16.5        80,784.6        15.5        83,052.9        16.1   

Japan

    49,427.5        15.3        64,296.1        15.1        68,320.2        13.0        64,363.1        12.4        60,029.4        11.6   

United States

    29,039.5        9.0        40,402.7        9.5        44,569.0        8.5        43,341.0        8.3        41,511.9        8.1   

Saudi Arabia

    19,736.8        6.1        26,820.0        6.3        36,972.6        7.1        39,707.1        7.6        37,665.2        7.3   

Australia

    14,756.1        4.6        20,456.2        4.8        26,316.3        5.0        22,987.9        4.4        20,784.6        4.0   

Germany

    12,298.5        3.8        14,304.9        3.4        16,962.6        3.2        17,645.4        3.4        19,336.0        3.8   

Taiwan

    9,851.4        3.0        13,647.1        3.2        14,693.6        2.8        14,012.0        2.7        14,632.6        2.8   

United Arab Emirates

    9,310.0        2.9        12,170.1        2.9        14,759.4        2.8        15,115.3        2.9        18,122.9        3.5   

Indonesia

    9,264.1        2.9        13,985.8        3.3        17,216.4        3.3        15,676.3        3.0        13,190.0        2.6   

Malaysia

    7,574.1        2.3        9,531.0        2.2        10,467.8        2.0        9,796.4        1.9        11,095.8        2.2   

Others(2)

    107,580.4        33.3        138,024.7        32.5        187,703.0        35.8        196,155.4        37.8        196,164.3        38.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    323,084.5        100.0        425,212.2        100.0        524,413.1        100.0        519,584.5        100.0        515,585.5        100.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Preliminary
(2) Includes more than 200 countries and regions with lower imports levels than those shown above.

 

Source: The Bank of Korea.

 

In 2003, the outbreak of severe acute respiratory syndrome, or SARS, and the avian influenza in Asia (including China) and other parts of the world increased uncertainty about prospects for international trade and

 

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economic growth for affected countries, as well as world economic prospects in general. The avian influenza carried by migrating wild birds spread to several Asian countries, Russia, Romania and Turkey. In response to these outbreaks of avian influenza, the Government issued an advisory on disease prevention as of October 14, 2005 and conducted special monitoring of poultry farms. In addition, the Government continued to cooperate with regional and international efforts to develop and implement additional measures to contain and prevent SARS, the avian influenza and other diseases. Another outbreak of SARS, the avian influenza or similar incidents in the future may have an adverse effect on Korean and world economies and on international trade.

 

On October 6, 2010, the Republic and the European Union, or EU, signed an agreement on a bilateral free trade agreement, or FTA, which provisionally came into effect on July 1, 2011 after approval of the EU parliament and ratification by the Republic and EU member states. In April 2007, the Republic and the United States reached an FTA, which was subsequently renegotiated and signed by both nations in December 2010. The FTA was ratified by the U.S. Congress in October 2011 and the Korean National Assembly in November 2011 and came into effect on March 15, 2012.

 

Non-Commodities Trade Balance

 

The non-commodities trade deficit was US$14.2 billion in 2009, US$19.1 billion in 2010 and US$10.4 billion in 2011. The Republic had a non-commodities trade surplus of US$1.4 billion in 2012. Based on preliminary data, the Republic had a non-commodities trade deficit of US$0.7 billion in 2013.

 

Foreign Currency Reserves

 

The following table shows the Republic’s total official foreign currency reserves:

 

Total Official Reserves

 

     December 31,  
     2009      2010      2011      2012      2013  
     (millions of dollars)  

Gold(1)

   $ 79.0       $ 79.6       $ 2,166.6       $ 3,761.4       $ 4,794.5   

Foreign Exchange

     265,202.3         286,926.4         298,232.9         316,897.7         335,647.5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Gold and Foreign Exchange

     265,281.3         287,006.0         300,399.5         320,659.1         340,442.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Reserve Position at IMF.

     981.6         1,024.7         2,556.2         2,783.6         2,527.7   

Special Drawing Rights

     3,731.8         3,539.9         3,446.7         3,525.6         3,489.9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Official Reserves

   $ 269,994.7       $ 291,570.7       $ 306,402.5       $ 326,968.4       $ 346,459.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) For this purpose, domestically-owned gold is valued at US$42.22 per troy ounce (31.1035 grams) and gold deposited overseas is calculated at cost of purchase.

 

Source: The Bank of Korea.

 

The Government’s foreign currency reserves increased to US$262.2 billion as of December 31, 2007 from US$8.9 billion as of December 31, 1997, primarily due to continued balance of trade surpluses and capital inflows. In 2008, the Government’s foreign currency reserves decreased, falling to US$201.2 billion as of December 31, 2008, partially as a result of the Government’s use of the foreign currency reserve to provide foreign currency liquidity to Korean financial institutions. The amount of the Government’s foreign currency reserve was US$360.9 billion as of May 30, 2014.

 

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Government Finance

 

The Ministry of Strategy and Finance prepares the Government budget and administers the Government’s finances.

 

The Government’s fiscal year commences on January 1. The Government must submit the budget, which is drafted by the Minister of Strategy and Finance and approved by the President of the Republic, to the National Assembly not later than 90 days prior to the start of the fiscal year and may submit supplementary budgets revising the original budget at any time during the fiscal year.

 

The following table shows consolidated Government revenues and expenditures:

 

Consolidated Central Government Revenues and Expenditures

 

    December 31,  
    2009     2010     2011     2012     2013  
    (billions of Won)  

Total Revenues

    250,810        270,923        292,323        311,456        314,438   

Current Revenues

    248,278        268,540        289,797        307,754        311,136   

Total Tax Revenues(1)

    198,438        213,319        231,273        246,918        N/A (2) 

Non-Tax Revenues

    49,840        55,221        58,524        60,836        N/A (2) 

Capital Revenues

    2,532        2,383        2,527        3,702        3,302   

Total Expenditures and Net Lending

    268,431        254,231        273,694        292,977        300,238   

Total Expenditures

    250,382        251,146        269,768        286,921        302,036   

Current Expenditures

    215,134        216,937        235,458        252,620        268,019   

Capital Expenditures

    35,248        34,209        34,310        34,301        34,017   

Net Lending

    18,049        3,084        3,926        6,056        (1,798

 

(1) Includes social security contribution.
(2) Not available.

 

Source: Ministry of Strategy and Finance; Korea National Statistical Office.

 

The consolidated Government account consists of a General Account, Special Accounts (including a non-financial public enterprise special account) and Public Funds. The Government segregates the accounts of certain functions of the Government into Special Accounts and Public Funds for more effective administration and fiscal control. The Special Accounts and Public Funds relate to business type activities, such as economic development, road and railway construction and maintenance, monopolies, and communications developments and the administration of loans received from official international financial organizations and foreign governments.

 

Revenues derive mainly from national taxes and non-tax revenues. Taxes in Korea can be roughly classified into the following types:

 

   

income tax and capital gains tax,

 

   

property tax,

 

   

value-added tax,

 

   

customs duty tax, and

 

   

other taxes.

 

Income tax and capital gains tax are imposed on income derived from labor, business operation and ownership of assets and profits derived from capital appreciation. Income tax and capital gains tax, depending on

 

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the type of taxpayer, can be further classified into corporate income tax and individual income tax. Property tax is imposed on exchange or ownership of property and includes inheritance tax and gift tax. Value-added tax is imposed on value added to goods and services. Customs duty tax is imposed on imported goods. Other taxes include tax on certain securities transactions and a stamp tax for certain documents.

 

Expenditures include general administration, national defense, community service, education, health, social security, certain annuities and pensions and local finance, which involves the transfer of tax revenues to local governments.

 

For 2008, revenues increased by approximately 2.9% principally due to higher tax revenues. Tax revenues increased principally as a result of the country’s export growth and the accompanying increase in corporate income. The Republic had a fiscal surplus of ₩15.9 trillion in 2008.

 

For 2009, the Republic recorded total revenues of ₩250.8 trillion and total expenditures and net lending of ₩272.9 trillion in 2009. The Republic had a fiscal deficit of ₩17.6 trillion in 2009.

 

For 2010, the Republic recorded total revenues of ₩270.9 trillion and total expenditures and net lending of ₩254.2 trillion in 2010. The Republic had a fiscal surplus of ₩16.7 trillion in 2010.

 

For 2011, the Republic recorded total revenues of ₩292.3 trillion and total expenditures and net lending of ₩273.7 trillion in 2011. The Republic had a fiscal surplus of ₩18.6 trillion in 2011.

 

For 2012, the Republic recorded total revenues of ₩311.5 trillion and total expenditures and net lending of ₩293.0 trillion. The Republic had a fiscal surplus of ₩18.5 trillion in 2012.

 

Based on preliminary data, the Republic recorded total revenues of ₩314.4 trillion and total expenditures and net lending of ₩300.2 trillion in 2013. The Republic had a fiscal surplus of ₩14.2 trillion in 2013.

 

Debt

 

The Government estimates that the total outstanding debt of the Government (including guarantees by the Government) as of December 31, 2012 amounted to approximately ₩457.9 trillion, an increase of 4.5% over the previous year. The Government estimates that the total outstanding debt of the Government (including guarantees by the Government) as of December 31, 2013 amounted to approximately ₩497.0 trillion, an increase of 8.5% over the previous year.

 

External and Internal Debt of the Government

 

The following table sets out, by currency and the equivalent amount in U.S. Dollars, the estimated outstanding direct external debt of the Government as of December 31, 2013:

 

Direct External Debt of the Government

 

     Amount in
Original
Currency
     Equivalent
Amount in
U.S. Dollars(1)
 
     (millions)  

US$

   US$  6,029.5       US$  6,029.5   

Japanese Yen (¥)

   ¥ 923.5         8.8   

Euro (EUR)

   EUR 875.2         1,207.7   
     

 

 

 

Total

      US$ 7,246.0   
     

 

 

 

 

(1) Amounts expressed in currencies other than US$ are converted to US$ at the arbitrage rate announced by the Seoul Money Brokerage Services, Ltd. in effect on December 31, 2013.

 

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The following table summarizes, as of December 31 of the years indicated, the outstanding direct internal debt of the Republic:

 

Direct Internal Debt of the Government

 

     (billions of Won)  

2009

     331,904.1   

2010

     360,804.5   

2011

     390,249.4   

2012

     414,213.5   

2013

     453,674.0   

 

The following table sets out all guarantees by the Government of indebtedness of others:

 

Guarantees by the Government

 

     December 31,  
     2009      2010      2011      2012      2013  
     (billions of Won)  

Domestic

     28,292.4         33,291.7         33,799.1         32,783.6         32,978.5   

External(1)

     1,508.4         1,508.3         1,258.6         —            —      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     29,800.8         34,800.0         35,057.7         32,783.6         32,978.5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Converted to Won at foreign exchange banks’ telegraphed transfer selling rates to customers or the market average exchange rates in effect on December 31 of each year.

 

For further information on the outstanding indebtedness, including guarantees, of the Republic, see “—Tables and Supplementary Information”.

 

External Debt

 

The following tables set out certain information regarding the Republic’s external debt calculated under the criteria based on the sixth edition of Balance of Payment Manual, or BPM6, published by the International Monetary Fund in December 2010 and implemented by the Government in December 2013. Under BPM6, in particular, prepayments received in connection with the construction of ships are excluded from the external debt.

 

     December 31,  
     2009      2010      2011      2012      2013  
     (billions of dollars)  

Long-term Debt

     195.9         219.5         260.3         281.0         300.8   

General Government

     34.2         50.5         59.8         60.8         63.0   

Monetary Authorities

     21.3         18.4         14.2         21.2         29.2   

Banks

     64.6         71.0         93.4         97.8         101.8   

Other Sectors

     75.8         79.6         92.9         101.2         106.8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Short-term Debt

     148.7         136.5         139.8         128.0         115.3   

General Government

     0.0         0.2         0.5         0.0         0.0   

Monetary Authorities

     11.7         10.3         8.9         14.9         10.8   

Banks

     115.2         101.9         102.9         85.4         76.4   

Other Sectors

     21.8         24.0         27.5         27.7         28.1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total External Liabilities

     344.6         355.9         400.0         408.9         416.1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Debt Record

 

The Government has always paid when due the full amount of principal of, interest on, and amortization of sinking fund requirements of, all of its indebtedness.

 

Tables and Supplementary Information

 

A. External Debt of the Government

 

(1) External Bonds of the Government

 

Series

  Issue Date   Maturity Date   Interest
Rate (%)
    Currency     Original
Principal
Amount
    Principal Amount
Outstanding as of
December 31, 2013
 

2004-001

  September 22, 2004   September 22, 2014     4.875        USD        1,000,000,000        1,000,000,000   

2005-001

  November 2, 2005   November 3, 2025     5.625        USD        400,000,000        400,000,000   

2005-002

  November 2, 2005   November 2, 2015     3.625        EUR        500,000,000        500,000,000   

2006-001

  December 7, 2006   December 7, 2016     5.125        USD        500,000,000        500,000,000   

2006-002

  December 7, 2006   December 7, 2021     4.25        EUR        375,000,000        375,000,000   

2009-001

  April 16, 2009   April 16, 2014     5.75        USD        1,500,000,000        1,500,000,000   

2009-002

  April 16, 2009   April 16, 2019     7.125        USD        1,500,000,000        1,500,000,000   

2013-001

  September 11, 2013   September 11, 2023     3.875        USD        1,000,000,000        1,000,000,000   
           

 

 

 

Total External Bonds in Original Currencies

  

  USD 5,900,000,000   
  EUR 875,000,000   
           

 

 

 

Total External Bonds in Equivalent Amount of Won(1)

  

  7,500,497,500,000   
           

 

 

 

 

(1) U.S. dollar amounts are converted to Won amounts at the rate of US$1.00 to ₩1,055.3, the market average exchange rate in effect on December 31, 2013, as announced by Seoul Money Brokerage Services, Ltd. Euro amounts are converted to Won amounts at the rate of EUR1.00 to ₩1,456.26, the market average exchange rate in effect on December 31, 2013, as announced by Seoul Money Brokerage Services, Ltd.

 

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(2) External Borrowings of the Government

 

a. Borrowings in U.S. Dollars

 

Date of Borrowing

   Original Maturity
(Years)
     Interest
Rate (%)
     Original
Principal
Amount (USD)
     Principal Amount
Outstanding as of
December 31, 2013 (USD)
 

April 12, 1973

     42         3         96,300,000         6,017,132   

April 12, 1973

     43         3         5,300,000         495,625   

January 28, 1974

     40         3         5,000,000         162,377   

April 19, 1974

     40         3         2,800,000         123,762   

September 11, 1974

     41         3         25,700,000         1,881,271   

September 13, 1975

     41         3         5,000,000         491,472   

September 13, 1975

     41         3         5,000,000         490,934   

September 13, 1975

     41         3         5,000,000         709,618   

February 18, 1976

     40         3         11,900,000         1,064,310   

February 18, 1976

     40         3         27,900,000         2,322,044   

February 18, 1976

     40         3         23,400,000         3,331,028   

February 18, 1976

     40         3         90,800,000         8,264,485   

July 21, 1977

     41         3         59,500,000         8,968,362   

July 21, 1977

     40         3         43,800,000         5,296,487   

June 7, 1979

     30         3         40,000,000         7,254,852   

January 25, 1980

     40         3         30,000,000         6,348,176   

May 18, 1981

     40         3         27,000,000         6,392,174   

October 12, 1994

     20         6.25         1,640,370,000         69,872,617   
           

 

 

 

Subtotal in Original Currency

            USD 129,486,726   
           

 

 

 

Subtotal in Equivalent Amount of Won(1)

            136,647,341,680   
           

 

 

 

 

(1) U.S. dollar amounts are converted to Won amounts at the rate of US$1.00 to ₩1,055.3, the market average exchange rate in effect on December 31, 2013, as announced by Seoul Money Brokerage Services, Ltd.

 

b. Borrowings in Euro

 

Date of Borrowing

  Original Maturity
(Years)
    Interest
Rate (%)
    Original Principal
Amount (EUR)
    Principal Amount
Outstanding as
of December 31,
2013

(EUR)
 

March 27, 1985

    30        2.2        6,000,000        219,399   
       

 

 

 

Subtotal in Original Currency

        EUR 219,399   
       

 

 

 

Subtotal in Equivalent Amount of Won(1)

        319,502,410   
       

 

 

 

 

(1) Euro amounts are converted to Won amounts at the rate of EUR1.00 to ₩1,456.26, the market average exchange rate in effect on December 31, 2013, as announced by Seoul Money Brokerage Services, Ltd.

 

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c. Borrowings in Japanese Yen

 

Date of Borrowing

   Original Maturity
(Years)
     Interest
Rate (%)
     Original
Principal
Amount (JPY)
     Principal Amount
Outstanding as of
December 31,
2013

(JPY)
 

October 31, 1990

     25         4         4,320,000,000         450,644,000   

October 31, 1990

     25         4         5,414,000,000         239,496,000   

October 31, 1990

     25         4         2,160,000,000         233,356,000   
           

 

 

 

Subtotal in Original Currency

            JPY 923,496,000   
           

 

 

 

Subtotal in Equivalent Amount of Won(1)

            9,277,994,920   
           

 

 

 

Total External Borrowings in Equivalent Amount of Won

            146,244,839,010   
           

 

 

 

 

(1) Japanese yen amounts are converted to Won amounts at the rate of JPY100.00 to ₩1,004.66, the market average exchange rate in effect on December 31, 2013, as announced by Seoul Money Brokerage Services, Ltd.

 

B. External Guaranteed Debt of the Government

 

None.

 

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C. Internal Debt of the Government

 

Title

   Range of
Interest Rates
     Range of
Years of Issue
     Range of Years
of Original
Maturity
     Principal
Amounts
Outstanding as
of December 31,
2013
 
     (%)                    (billions of Won)  

1. Bonds

           

Interest-Bearing Treasury Bond for Treasury Bond Management Fund

     1.125-5.75         2004-2013         2014-2042         400,693.0   

Interest-Bearing Treasury Bond for National Housing I

     2.25-3.0         2004-2013         2009-2018         47,792.6   

Interest-Bearing Treasury Bond for National Housing II

     0.0-3.0         1989-2012         2009-2030         2,865.7   

Interest-Bearing Treasury Bond for National Housing III

     0         2005         2015         594.2   

Non-interest-Bearing Treasury Bond for Contribution to International Organizations(1)

     —          1967-1985         —          11.3   
           

 

 

 

Total Bonds

              451,956.8   
           

 

 

 

2. Borrowings

           

Borrowings from The Bank of Korea

     2.68         2013         2014         1,117.2   

Borrowings from the Sports Promotion Fund

     3.36         2011         2014         20.0   

Borrowings from the Korea Credit Guarantee Fund

     2.74-2.8         2012         2014         350.0   

Borrowings from Korea Technology Finance Corporation

     2.74-3.33         2012         2014         150.0   

Borrowings from the Government Employees’ Pension Fund

     2.74-3.88         2011-2012         2014-2015         60.0   

Borrowings from the Film Industry Development Fund

     3.41         2011         2014         2.0   
           

 

 

 

Total Borrowings

              1,717.2   
           

 

 

 

Total Internal Funded Debt

              453,674.0   
           

 

 

 

 

(1) Interest Rates and Years of Maturity not applicable.

 

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D. Internal Guaranteed Debt of the Government

 

Title

   Range of
Interest Rates
     Range of
Years of Issue
     Range of Years
of Original
Maturity
     Principal
Amounts
Outstanding as
of December 31,
2013
 
     (%)                    (billions of Won)  

1. Bonds of Government-Affiliated Corporations

           

Korea Deposit Insurance Corporation

     2.84-6.32         2009-2013         2014-2018         22,520.0   

KAMCO

     Floating-5.27         2009-2011         2014         2,114.4   

Korea Student Aid Foundation

     Floating-5.26         2010-2013         2014-2032         8,270.0   
           

 

 

 

Total Bonds

              32,904.4   
           

 

 

 

2. Borrowings of Government-Affiliated Corporations

           

Rural Development Corporation and Federation of Farmland

     5.5         1989         2023         74.1   

Total Borrowings

              74.1   
           

 

 

 

Total Internal Guaranteed Debt

              32,978.5   
           

 

 

 

 

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DESCRIPTION OF THE SECURITIES

 

Description of Debt Securities

 

We will issue debt securities under a fiscal agency agreement or agreements. The description below summarizes the material provisions of the debt securities and the fiscal agency agreement. Since it is only a summary, the description may not contain all of the information that may be important to you as a potential investor in the debt securities. Therefore, we urge you to read the form of fiscal agency agreement and the form of global debt security before deciding whether to invest in the debt securities. We have filed a copy of these documents with the Securities and Exchange Commission as exhibits to the registration statement of which this prospectus is a part. You should refer to such exhibits for more complete information.

 

The financial terms and other specific terms of your debt securities will be described in the prospectus supplement relating to your debt securities. The description in the prospectus supplement will supplement this description or, to the extent inconsistent with this description, replace it.

 

We will appoint a fiscal agent or agents in connection with debt securities whose duties will be governed by the fiscal agency agreement. We may replace the fiscal agent or appoint different fiscal agents for different series of debt securities.

 

General Terms of the Debt Securities

 

We may issue debt securities in separate series at various times. The Republic may irrevocably guarantee the payment of principal of, and interest on, one or more series of debt securities. The prospectus supplement that relates to your debt securities will specify some or all of the following terms:

 

   

the aggregate principal amount;

 

   

the currency of denomination and payment;

 

   

any limitation on principal amount and authorized denominations;

 

   

the percentage of their principal amount at which the debt securities will be issued;

 

   

the maturity date or dates;

 

   

the interest rate for the debt securities and, if variable, the method by which the interest rate will be calculated;

 

   

whether any amount payable in respect of the debt securities will be determined based on an index or formula, and how any such amount will be determined;

 

   

the dates from which interest, if any, will accrue for payment of interest and the record dates for any such interest payments;

 

   

where and how we will pay principal and interest;

 

   

whether and in what circumstances the debt securities may be redeemed before maturity;

 

   

any sinking fund or similar provision;

 

   

whether any part or all of the debt securities will be in the form of a global security and the circumstances in which a global security is exchangeable for certificated securities;

 

   

if issued in certificated form, whether the debt securities will be in bearer form with interest coupons, if any, or in registered form without interest coupons, or both forms, and any restrictions on exchanges from one form to the other;

 

   

whether any of the terms set out herein will differ for the debt securities;

 

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whether the Republic will irrevocably guarantee the payment of principal of, and interest on, the debt securities; and

 

   

other specific provisions.

 

Depending on the terms of the debt securities we issue, the prospectus supplement relating to the debt securities may also describe applicable U.S. federal income tax and other considerations additional to the disclosure in this prospectus.

 

Unless otherwise specified in the applicable prospectus supplement, we will maintain at an office in the Borough of Manhattan, The City of New York, a register for the registration of transfers of debt securities issued in registered form.

 

Payments of Principal, Premium and Interest

 

On every payment date specified in the relevant prospectus supplement, we will pay the principal, premium and/or interest due on that date to the registered holder of the relevant debt security at the close of business on the related record date. We will make all payments at the place and in the currency set out in the prospectus supplement. Unless otherwise specified in the relevant prospectus supplement or the debt securities, we will make payments in U.S. dollars at the New York office of the fiscal agent or, outside the United States, at the office of any paying agent. Unless otherwise specified in the applicable prospectus supplement or debt securities, we will pay interest by check, payable to the registered holder.

 

We will make any payments on debt securities in bearer form at the offices and agencies of the fiscal agent or any other paying agent outside the United States as we may designate. At the option of the holder of the bearer debt securities, we will make such payments by check or by transfer to an account maintained by the holder with a bank located outside of the United States. We will not make payments on bearer debt securities at the corporate trust office of the fiscal agent in the United States or at any other paying agency in the United States. In addition, we will not make any payment by mail to an address in the United States or by transfer to an account maintained by a holder of bearer debt securities with a bank in the United States. Nevertheless, we will make payments on a bearer debt security denominated and payable in U.S. dollars at an office or agency in the United States if:

 

   

payment outside the United States is illegal or effectively precluded by exchange controls or other similar restrictions; and

 

   

the payment is then permitted under United States law, without material adverse consequences to us.

 

If we issue bearer debt securities, we will designate the offices of at least one paying agent outside the United States as the location for payment.

 

Repayment of Funds; Prescription

 

If no one claims money paid by us to the fiscal agent for the payment of principal or interest in respect of any series of debt securities for two years after the payment was due and payable, the fiscal agent or paying agent will repay the money to us. After such repayment, the fiscal agent or paying agent will not be liable with respect to the amounts so repaid, and you may look only to us for any payment under the debt securities.

 

Under Korean law, you will not be permitted to file a claim against us for payment of principal or interest on any series of debt securities unless you do so within five years, in the case of principal, and two years, in the case of interest, from the date on which payment was due.

 

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Global Securities

 

The prospectus supplement relating to a series of debt securities will indicate whether any of that series of debt securities will be represented by a global security. The prospectus supplement will also describe any unique specific terms of the depositary arrangement with respect to that series. Unless otherwise specified in the prospectus supplement, we anticipate that the following provisions will apply to depositary arrangements.

 

Registered Ownership of the Global Security

 

The global security will be registered in the name of a depositary identified in the prospectus supplement, or its nominee, and will be deposited with the depositary, its nominee or a custodian. The depositary, or its nominee, will therefore be considered the sole owner or holder of debt securities represented by the global security for all purposes under the fiscal agency agreement. Except as specified below or in the applicable prospectus supplement, beneficial owners:

 

   

will not be entitled to have any of the debt securities represented by the global security registered in their names;

 

   

will not receive physical delivery of any debt securities in definitive form;

 

   

will not be considered the owners or holders of the debt securities;

 

   

must rely on the procedures of the depositary and, if applicable, any participants (institutions that have accounts with the depositary or a nominee of the depositary, such as securities brokers and dealers) to exercise any rights of a holder; and

 

   

will receive payments of principal and interest from the depositary or its participants rather than directly from us.

 

We understand that, under existing industry practice, the depositary and participants will allow beneficial owners to take all actions required of, and exercise all rights granted to, the registered holders of the debt securities.

 

We will register debt securities in the name of a person other than the depositary or its nominee only if:

 

   

the depositary for a series of debt securities is unwilling or unable to continue as depositary; or

 

   

we determine, in our sole discretion, not to have a series of debt securities represented by a global security.

 

In either such instance, an owner of a beneficial interest in a global security will be entitled to registration of a principal amount of debt securities equal to its beneficial interest in its name and to physical delivery of the debt securities in definitive form.

 

Beneficial Interests in and Payments on a Global Security

 

Only participants, and persons that may hold beneficial interests through participants, can own a beneficial interest in the global security. The depositary keeps records of the ownership and transfer of beneficial interests in the global security by its participants. In turn, participants keep records of the ownership and transfer of beneficial interests in the global security by other persons (such as their customers). No other records of the ownership and transfer of beneficial interests in the global security will be kept.

 

All payments on a global security will be made to the depositary or its nominee. When the depositary receives payment of principal or interest on the global security, we expect the depositary to credit its participants’ accounts with amounts that correspond to their respective beneficial interests in the global security. We also expect that, after the participants’ accounts are credited, the participants will credit the accounts of the owners of beneficial interests in the global security with amounts that correspond to the owners’ respective beneficial interests in the global security.

 

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The depositary and its participants establish policies and procedures governing payments, transfers, exchanges and other important matters that affect owners of beneficial interests in a global security. The depositary and its participants may change these policies and procedures from time to time. We have no responsibility or liability for the records of ownership of beneficial interests in the global security, or for payments made or not made to owners of such beneficial interests. We also have no responsibility or liability for any aspect of the relationship between the depositary and its participants or for any aspect of the relationship between participants and owners of beneficial interests in the global security.

 

Bearer Securities

 

We may issue debt securities in a series in the form of one or more bearer global debt securities deposited with a common depositary for the Euroclear and Clearstream, or with a nominee identified in the applicable prospectus supplement. The specific terms and procedures, including the specific terms of the depositary arrangement, with respect to any portion of a series of debt securities to be represented by a global security will be described in the applicable prospectus supplement.

 

Additional Amounts

 

We will make all payments of principal of, and premium and interest, if any, on the debt securities without withholding or deducting any present or future taxes imposed by the Republic or any of its political subdivisions, unless required by law. If Korean law requires us to deduct or withhold taxes, we will pay additional amounts as necessary to ensure that you receive the same amount as you would have received without such withholding or deduction.

 

We will not pay, however, any additional amounts if you are liable for Korean tax because:

 

   

you are connected with the Republic other than by merely owning the debt security or receiving income or payments on the debt security;

 

   

you failed to complete and submit a declaration of your status as a non-resident of the Republic after we or the relevant tax authority requested you to do so; or

 

   

you failed to present your debt security for payment within 30 days of when the payment is due or, if the fiscal agent did not receive the money prior to the due date, the date notice is given to holders that the fiscal agent has received the full amount due to holders. Nevertheless, we will pay additional amounts to the extent you would have been entitled to such amounts had you presented your debt security for payment on the last day of the 30-day period.

 

We will not pay any additional amounts for taxes on the debt securities except for taxes payable through deduction or withholding from payments of principal, premium or interest. Examples of the types of taxes for which we will not pay additional amounts include the following: estate or inheritance taxes, gift taxes, sales or transfer taxes, personal property or related taxes, assessments or other governmental charges. We will also not pay any additional amounts for taxes imposed pursuant to Sections 1471 through 1474 of the U.S. Internal Revenue Code of 1986, as amended, U.S. Treasury regulations or administrative guidance promulgated thereunder or any law implementing an intergovernmental approach thereto (“FATCA”). We will pay stamp or other similar taxes that may be imposed by the Republic, the United States or any political subdivision or taxing authority in one of those two countries on the fiscal agency agreement or be payable in connection with the issuance of the debt securities.

 

Status of Debt Securities

 

The debt securities will:

 

   

constitute our direct, unconditional, unsecured and unsubordinated obligations;

 

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rank at least equally in right of payment among themselves, regardless of when issued or currency of payment; and

 

   

rank at least equally in right of payment with all of our other unsecured and unsubordinated obligations, subject to certain statutory exceptions under Korean law.

 

Negative Pledge Covenant

 

If any debt securities are outstanding, we will not create or permit any security interests on our assets as security for any of our indebtedness or guarantees issued by us, unless the security interest also secures our obligations under the debt securities.

 

We may, however, create or permit a security interest:

 

   

on any promissory debt securities or commercial paper discounted or otherwise provided as security to or issued or held by us created in favor of The Bank of Korea in the normal operation of The Bank of Korea’s discount facilities or facilities for the funding of loans by us to our customers; or

 

   

on any asset (or documents of title to such asset) incurred when the asset was purchased or improved to secure payment of the cost of the activity; or

 

   

of a statutory nature arising in the ordinary course of our business but unrelated to our activities of borrowing or raising money; or

 

   

on any real estate owned by us imposed by a tenant of such real estate as security for repayment of any key money paid by the tenant; or

 

   

arising by operation of Korean law or given preference by law following our failure to meet an obligation, although we will not permit such a security interest to exist for more than 30 days.

 

Events of Default

 

Unless otherwise specified in the applicable prospectus supplement in connection with a particular offering of debt securities, each of the following constitutes an event of default with respect to any series of debt securities:

 

  1. Non-Payment: we do not pay principal or interest or premium or deposit any sinking fund payment on any debt securities of the series when due and such failure to pay continues for 30 days.

 

  2. Breach of Other Obligations: we fail to observe or perform any of the covenants in the series of debt securities (other than non-payment) for 60 days after written notice of the default is delivered to us at the corporate trust office of the fiscal agent in New York City by holders representing at least 10% of the aggregate principal amount of the debt securities of the series.

 

  3. Cross Default and Cross Acceleration:

 

   

we default on any External Indebtedness, and, as a result, becomes obligated to pay an amount equal to or greater than US$10,000,000 in aggregate principal amount prior to its due date; or

 

   

we fail to pay when due, including any grace period, any of our External Indebtedness in aggregate principal amount equal to or greater than US$10,000,000 or we fail to pay when requested and required by the terms thereof any guarantee for External Indebtedness of another person equal to or greater than US$10,000,000 in aggregate principal amount.

 

  4, Moratorium/Default:

 

   

the Republic declares a general moratorium on the payment of its External Indebtedness, including obligations under guarantees;

 

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the Republic becomes liable to repay prior to maturity any amount of External Indebtedness, including obligations under guarantees, as a result of a default under such External Indebtedness or obligations; or

 

   

the international monetary reserves of the Republic become subject to a security interest or segregation or other preferential arrangement for the benefit of any creditors.

 

  5. Bankruptcy:

 

   

we are declared bankrupt or insolvent by any court or administrative agency with jurisdiction over us;

 

   

we pass a resolution to apply for bankruptcy or to request the appointment of a receiver or trustee or similar official in insolvency;

 

   

a substantial part of our assets are liquidated; or

 

   

we cease to conduct the banking business.

 

  6. Cessation of Government Control or Failure of Support: the Republic ceases to (directly or indirectly) control us or fails to provide financial support for us as required under Article 44 of the KDB Act as of the issue date of the debt securities of such series, provided, however, that neither such event will constitute an event of default if, at such time, the debt securities of such series shall have the benefit of a Government Guarantee (as defined below).

 

For purposes of the foregoing, “External Indebtedness” means any obligation for the payment or repayment of money borrowed that is denominated in a currency other than the currency of the Republic.

 

As used in paragraph 6 above, “Government Guarantee” means a direct and irrevocable obligation by the Republic to guarantee or repay in full, or otherwise protect against any losses on any amount due under, or to purchase, the debt securities of such series, including principal of, premium, if any, and interest on the debt securities of such series, provided that:

 

  a) the Republic shall have expressly assumed the payment obligations in respect of the debt securities of such series under such Government Guarantee by way of agreement, deed, statute or any other instrument or law or regulation having a similar effect;

 

  b) the Government Guarantee shall be subject to the obligation to make all payments of principal of, premium, if any, and interest on the debt securities of such series without withholding or deducting any present or future taxes imposed by the Republic or any of its political subdivisions; any obligation to pay additional amounts as described in “—Additional Amounts” above shall apply to the Government Guarantee and the Republic, as guarantor; and

 

  c) we shall have obtained an opinion of independent legal advisers that the Government Guarantee is binding upon and enforceable against the Republic, and that the debt securities of such series shall remain our valid, binding and enforceable obligations.

 

We will notify holders of the debt securities of the occurrence of the cessation of government control or failure of support described under paragraph 6 above as soon as practicable thereafter setting out details of the event, cessation or failure described above and the establishment of the Government Guarantee, and shall make available for inspection by the holders copies of the documentation or statute, law or regulation, as the case may be, evidencing the Government Guarantee and the opinion described in paragraph (c) of the definition of “Government Guarantee” above, during normal business hours at the office of the fiscal agent.

 

As used in paragraph 6 above, “control” means the acquisition or control of a majority of our voting share capital or the right to appoint and/or remove all or the majority of the members of our board of directors or other governing body, whether obtained directly or indirectly, and whether obtained by ownership of share capital, the possession of voting rights, contract or otherwise.

 

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If an event of default occurs, any holder may declare the principal amount of debt securities that it holds to be immediately due and payable by written notice to us and the fiscal agent.

 

You should note that:

 

   

despite the procedure described above, no debt securities may be declared due and payable if we cure the applicable event of default before we receive the written notice from the debt security holder;

 

   

we are not required to provide periodic evidence of the absence of defaults; and

 

   

the fiscal agency agreement does not require us to notify holders of the debt securities of an event of default or grant any debt security holder a right to examine the security register.

 

Modifications and Amendments; Debt Securityholders’ Meetings

 

Each holder of a series of debt securities must consent to any amendment or modification of the terms of that series of debt securities or the fiscal agency agreement that would, among other things:

 

   

change the stated maturity of the principal of the debt securities or any installment of interest;

 

   

reduce the principal amount of such series of debt securities or the portion of the principal amount payable upon acceleration of such debt securities;

 

   

change the debt security’s interest rate or premium payable;

 

   

change the currency of payment of principal, interest or premium;

 

   

amend either the procedures provided for a redemption event or the definition of a redemption event;

 

   

shorten the period during which we are not allowed to redeem the debt securities or grant us a right to redeem the debt securities which we previously did not have; or

 

   

reduce the percentage of the outstanding principal amount needed to modify or amend the fiscal agency agreement or the terms of such series of debt securities.

 

We may, with the exception of the above changes, with the consent of the holders of at least 66 2/3% in principal amount of the debt securities of a series that are outstanding, modify and amend other terms of that series of debt securities.

 

We may at any time call a meeting of the holders of a series of debt securities to seek the holders of the debt securities’ approval of the modification, or amendment, or obtain a waiver, of any provision of that series of debt securities. The meeting will be held at the time and place in the Borough of Manhattan in New York City as determined by the fiscal agent. The notice calling the meeting must be given at least 30 days and not more than 60 days prior to the meeting.

 

While an event of default with respect to a series of debt securities is continuing, holders of at least 10% of the aggregate principal amount of that series of debt securities may compel the fiscal agent to call a meeting of all holders of debt securities of that series.

 

Holders of debt securities who hold, in the aggregate, a majority in principal amount of the debt securities of the series that are outstanding at the time will constitute a quorum at a meeting. At the reconvening of any meeting adjourned for a lack of a quorum, the persons entitled to vote 25% in principal amount of the debt securities of the series that are outstanding at the time will constitute a quorum for taking any action set out in the original notice. To vote at a meeting, a person must either hold outstanding debt securities of the relevant series or be duly appointed as a proxy for a debt securityholder. The fiscal agent will make all rules governing the conduct of any meeting.

 

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The fiscal agency agreement and a series of debt securities may be modified or amended, without the consent of the holders of the debt securities, to:

 

   

add covenants made by us that benefit holders of the debt securities;

 

   

surrender any right or power given to us;

 

   

secure the debt securities;

 

   

permit registered securities to be exchanged for bearer securities or relax or eliminate restrictions on the payment of principal, premium or interest on bearer securities to the extent permitted under United States Department of Treasury regulations, provided that holders of the debt securities do not suffer any adverse tax consequences as a result; and

 

   

cure any ambiguity or correct or supplement any defective provision in the fiscal agency agreement or the debt securities, without materially and adversely affecting the interests of the holders of the debt securities.

 

Fiscal Agent

 

The fiscal agency agreement governs the duties of each fiscal agent. We may maintain bank accounts and a banking relationship with each fiscal agent. The fiscal agent is our agent and does not act as a trustee for the holders of the debt securities.

 

Further Issues of Debt Securities

 

We may, without the consent of the holders of the debt securities, create and issue additional debt securities with the same terms and conditions as any series of debt securities (or that are the same except for the amount of the first interest payment and for the interest paid on the series of debt securities prior to the issuance of the additional debt securities). We may consolidate such additional debt securities with the outstanding debt securities to form a single series.

 

Description of Warrants

 

The description below summarizes some of the provisions of warrants for the purchase of debt securities that we may issue from time to time and of the warrant agreement. Copies of the forms of warrants and the warrant agreement are or will be filed as exhibits to the registration statement of which this prospectus is a part. Since it is only a summary, the description may not contain all of the information that is important to you as a potential investor in the warrants.

 

The description of the warrants that will be contained in the prospectus supplement will supplement this description and, to the extent inconsistent with this description, replace it.

 

General Terms of the Warrants

 

Each series of warrants will be issued under a warrant agreement to be entered into between us and a bank or trust company, as warrant agent. The prospectus supplement relating to the series of warrants will describe:

 

   

the terms of the debt securities purchasable upon exercise of the warrants, as described above under “—Description of Debt Securities—General Terms of the Debt Securities”;

 

   

the principal amount of debt securities purchasable upon exercise of one warrant and the exercise price;

 

   

the procedures and conditions for the exercise of the warrants;

 

   

the dates on which the right to exercise the warrants begins and expires;

 

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whether and under what conditions the warrants may be terminated or canceled by us;

 

   

whether and under what conditions the warrants and any debt securities issued with the warrants will be separately transferable;

 

   

whether the warrants will be issued in bearer or registered form;

 

   

whether the warrants will be exchangeable between registered and bearer form, and, if issued in registered form, where they may be transferred and registered; and

 

   

other specific provisions.

 

Terms Applicable to Debt Securities and Warrants

 

Governing Law

 

The fiscal agency agreement, any warrant agreement and the debt securities and any warrants will be governed by the laws of the State of New York without regard to any principles of New York law requiring the application of the laws of another jurisdiction. Nevertheless, all matters governing our authorization, execution and delivery of the debt securities and the fiscal agency agreement and any warrants and warrant agreement by us will be governed by the laws of the Republic.

 

Jurisdiction and Consent to Service

 

We are owned by a foreign sovereign government and all of our directors and executive officers and some of the experts named in this prospectus are residents of Korea. In addition, all or most of our assets and the assets of the people named in the preceding sentence are located outside of the United States. For that reason, you may have difficultly serving process on us or the individuals described above in the United States or enforcing in a U.S. court a U.S.-court judgment based on the U.S. federal securities laws. Our Korean counsel has informed us that there would be certain conditions to be met under Korean law regarding the enforceability in Korea, either in original actions or in actions for the enforcement of U.S.-court judgments, of civil liabilities based on the U.S. federal securities laws.

 

We have appointed the General Manager of our New York Branch, Mr. Jae Ik Kim, and the Senior Deputy General Manager of our New York Branch, Mr. Jin Hwan Sah, and each of their successors in the future, as our authorized agents to receive service of process in any suit which a holder of any series of debt securities or warrants may bring in any state or federal court in New York City and we have accepted the jurisdiction of those courts for those actions. Our New York Branch is located at 320 Park Avenue, 32nd Floor, New York, New York 10022. These appointments are irrevocable as long as any amounts of principal, premium or interest remain payable by us to the Fiscal Agent under any series of debt securities or any warrants have not expired or otherwise terminated under their terms. If for any reason either of these two men ceases to act as our authorized agent or ceases to have an address in Manhattan, we shall appoint a replacement. The appointment of agents for receipt of service of process and the acceptance of jurisdiction of state or federal courts in New York City do not, however, apply to actions brought under the United States federal securities laws. We may also be sued in courts having jurisdiction over us located in the Republic.

 

We will irrevocably consent to any relief and process in connection with a suit against us in relation to the debt securities or warrants, including the enforcement or execution of any order or judgment of the court. To the extent permitted by law, we will waive irrevocably any immunity from jurisdiction to which we might otherwise be entitled in any suit based on any series of debt securities or warrants.

 

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Foreign Exchange Controls

 

Before we may issue debt securities outside the Republic, the Minister of Strategy and Finance of Korea must receive a report with respect to the issuance by us of debt securities in accordance with the Foreign Exchange Transaction Act and Regulation of Korea. After issuance of debt securities outside the Republic, we are required to notify the Minister of Strategy and Finance of such issuance. No further approval or authorization is required for us to pay principal of or interest on the debt securities.

 

Description of Guarantees to be Issued by Us

 

The description below summarizes some of the provisions of the guarantees that we may issue from time to time. Copies of the forms of guarantees are or will be filed as exhibits to the registration statement of which this prospectus is a part. Since it is only a summary, the description may not contain all of the information that is important to you as a potential beneficiary of a guarantee.

 

The description of a guarantee that will be contained in the prospectus supplement will supplement this description and, to the extent inconsistent with this description, replace it.

 

General Terms of the Guarantees

 

Each guarantee will be issued by us as guarantor. The prospectus supplement relating to a guarantee will specify:

 

   

the relevant obligor and the obligations guaranteed under the guarantee;

 

   

the nature and scope of the guarantee, including whether or not it is irrevocable and unconditional;

 

   

the status of the guarantee in relation to our other obligations;

 

   

the governing law of the guarantee; and

 

   

other relevant provisions of the guarantee.

 

Description of Guarantees to be Issued by The Republic of Korea

 

The description below summarizes some of the provisions of the guarantees that the Republic may issue from time to time to guarantee our debt securities. Since it is only a summary, the description may not contain all of the information that is important to you as a potential beneficiary of a guarantee.

 

The prospectus supplement relating to a guarantee to be issued by the Republic will specify other specific provisions. The description of a guarantee to be issued by the Republic that will be contained in the prospectus supplement will supplement this description and, to the extent inconsistent with this description, replace it.

 

General Terms of the Guarantees

 

Each guarantee will be issued by the Republic as guarantor. The prospectus supplement relating to a guarantee will specify:

 

   

the relevant obligor and the obligations guaranteed under the guarantee;

 

   

the nature and scope of the guarantee, including whether or not it is irrevocable and unconditional;

 

   

the status of the guarantee in relation to the Republic’s other obligations;

 

   

the governing law of the guarantee; and

 

   

other relevant provisions of the guarantee.

 

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LIMITATIONS ON ISSUANCE OF BEARER DEBT SECURITIES AND BEARER WARRANTS

 

Bearer securities will not be offered, sold or delivered in the United States or its possessions or to a United States person; except in certain circumstances permitted by United States tax regulations. Bearer securities will initially be represented by temporary global securities, without interest coupons, deposited with a common depositary in London for Euroclear and Clearstream for credit to designated accounts. Unless otherwise indicated in the prospectus supplement:

 

   

each temporary global security will be exchangeable for definitive bearer securities on or after the date that is 40 days after issuance only upon receipt of certification of non-United States beneficial ownership of the temporary global security as provided for in United States tax regulations, provided that no bearer security will be mailed or otherwise delivered to any location in the United States in connection with the exchange; and

 

   

any interest payable on any portion of a temporary global security with respect to any interest payment date occurring prior to the issuance of definitive bearer securities will be paid only upon receipt of certification of non-United States beneficial ownership of the temporary global security as provided for in United States tax regulations.

 

Bearer securities, other than temporary global debt securities, and any related coupons will bear the following legend: “Any United States person who holds this obligation will be subject to limitations under the United States federal income tax laws, including the limitations provided in Section 165(j) and 1287(a) of the Internal Revenue Code.” The sections referred to in the legend provide that, with certain exceptions, a United States person who holds a bearer security or coupon will not be allowed to deduct any loss realized on the disposition of the bearer security, and any gain, which might otherwise be characterized as capital gain, recognized on the disposition will be treated as ordinary income.

 

For purposes of this section, “United States person” means:

 

   

a citizen or resident of the United States;

 

   

a corporation, partnership or other entity created or organized in or under the laws of the United States or any political subdivision thereof; or

 

   

an estate or trust the income of which is subject to United States federal income taxation regardless of its source.

 

For purposes of this section, “United States” means the United States of America, including each state and the District of Columbia, its territories, possessions and other areas subject to its jurisdiction.

 

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TAXATION

 

The following discussion summarizes certain Korean and U.S. federal income tax considerations that may be relevant to you if you invest in debt securities. This summary is based on laws, regulations, rulings and decisions in effect as of the date of this Prospectus. These laws, regulations, rulings and/or decisions may change; any such change could apply retroactively and could affect the continued validity of this summary.

 

This summary does not describe all of the tax considerations that may be relevant to you or your situation, particularly if you are subject to special tax rules. You should consult your tax adviser about the tax consequences of holding the debt securities, including the relevance to your particular situation of the considerations discussed below, as well as of state, local or other tax laws.

 

Korean Taxation

 

The following summary of Korean tax consideration applies to you so long as you are not:

 

   

a resident of Korea;

 

   

a corporation with registered head office or main office located in Korea;

 

   

a corporation of which the place of effective management is located in Korea; or

 

   

engaged in a trade or business in Korea through a permanent establishment or a fixed base to which the relevant income is attributable or with which the relevant income is effectively connected.

 

Tax on Interest Payments

 

Under current Korean tax laws, when we make payments of interest to you (excluding payments to your permanent establishment in Korea) on the debt securities denominated in a foreign currency, no amount will be withheld from such payments for, or on account of, taxes of any kind imposed, levied, withheld or assessed by Korea or any political subdivision or taxing authority thereof or therein, provided that the offering of the debt securities is deemed to be an overseas issuance under Korean tax law.

 

Tax on Capital Gains

 

You will not be subject to any Korean income or withholding taxes in connection with the sale, exchange or other disposition of the debt securities, if (i) such sale, exchange or disposition is made to other non-residents or non-Korean corporations (other than their permanent establishments in Korea) or (ii) such sale, exchange or disposition takes place outside Korea, provided that the issuance of the debt securities is deemed to be an overseas issuance under Korean tax law. If you sell, exchange or otherwise dispose of the debt securities to a Korean resident or a Korean corporation (or the Korean permanent establishment of a non-resident or a non-Korean corporation) and such sale, exchange or disposition is made within Korea, any gain realized on the transaction will be taxable at ordinary Korean withholding tax rates (the lower of (subject to the production of satisfactory evidence of the acquisition costs and certain direct transaction costs) 22% of net gain or 11% of the gross sale proceeds with respect to such transaction), unless an exemption is available under an applicable income tax treaty. For example, if you are a resident of the United States for the purposes of the income tax treaty currently in force between Korea and the United States, you are generally entitled to an exemption from Korean taxation in respect of any gain realized on a disposition of the debt securities, regardless of whether the disposition is to a Korean resident. For more information regarding tax treaties, please refer to the heading “—Tax Treaties” below.

 

Inheritance Tax and Gift Tax

 

If you die while you are the holder of the debt security, the subsequent transfer of the debt security by way of succession will be subject to Korean inheritance tax. Similarly, if you transfer the debt security as a gift, the donee will be subject to Korean gift tax and you may be required to pay the gift tax if the donee fails to do so or the donee is a non-resident.

 

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Stamp Duty

 

You will not be subject to any Korean securities transaction tax, stamp duty, registration tax or similar documentary tax in respect of or in connection with a transfer of any debt securities or in connection with the exercise of exchange rights or conversion rights that may be acquired with the debt securities.

 

Guarantees

 

Although there are no Korean tax laws, regulations or rulings specific to the payment under the guarantee herein, we believe any payments of interest on and principal amount of the debt securities (or the issue price if the debt securities were originally issued at a discount) by the Republic under the Republic’s guarantee on the debt securities denominated in a foreign currency and issued by us or any payments of interest on and principal amount of the debt securities (or the issue price if the debt securities were originally issued at a discount) by us under our guarantee on the debt securities denominated in a foreign currency and issued by a third-party Korean issuer are not subject to withholding tax. Further details of the tax consequences of the holders of our debt securities guaranteed by the Republic or third-party debt securities guaranteed by us may be provided in the relevant prospectus supplement.

 

Tax Treaties

 

At the date of this prospectus, Korea has tax treaties with, among others, Australia, Austria, Bangladesh, Belgium, Brazil, Bulgaria, Canada, China, Czech Republic, Denmark, Egypt, Finland, France, Germany, Hungary, India, Indonesia, Ireland, Italy, Japan, Luxembourg, Malaysia, Mexico, Mongolia, the Netherlands, New Zealand, Norway, Pakistan, Philippines, Poland, Republic of Fiji, Romania, Singapore, Spain, Sri Lanka, Sweden, Switzerland, Thailand, Tunisia, Turkey, the United Kingdom, the United States of America and Vietnam under which the rate of withholding tax on interest and dividends is reduced, generally to between 5% and 15%, and the tax on capital gains is often eliminated.

 

With respect to any gains subject to Korean withholding tax, as described under “—Tax on Capital Gains” above, you should inquire for yourself whether you are entitled to the benefit of a tax treaty with Korea. It will be your responsibility to claim the benefits of any tax treaty that may exist between your country and Korea in respect of capital gains, and to provide to the purchaser of the debt securities, or the relevant securities company handling the debt securities, as applicable, a certificate as to your country of tax residence. In the absence of sufficient proof, the purchaser, or the relevant securities company, as the case may be, must withhold tax at the normal rates.

 

Furthermore, in order to claim the benefit of a tax exemption available under the applicable tax treaty, you should submit to the payer an application for exemption under the tax treaty along with a certificate of the non-resident holder’s tax residence issued by a competent authority of your residence country as the beneficial owner (“BO Application”). Such application should be submitted to the withholding agent prior to the payment date of the relevant income. Subject to certain exceptions, where the relevant income is paid to an overseas investment vehicle (which is not the beneficial owner of such income) (“OIV”), a beneficial owner claiming the benefit of an applicable tax treaty with respect to such income must submit its BO Application to such OIV, which must submit an OIV report and a schedule of beneficial owners to the withholding agent prior to the payment date of such income. The withholding agent is required to submit such application (together with the applicable OIV report in the case of income paid to an OIV) to the relevant district tax office by the ninth day of the month following the date of the payment of such income.

 

At present, Korea has not entered into tax treaties regarding inheritance or gift tax.

 

Warrants

 

A description of the tax consequences of an investment in warrants will be provided in the applicable prospectus supplement.

 

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United States Tax Considerations

 

The following discussion summarizes certain U.S. federal income tax considerations that may be relevant to you if you invest in debt securities and are a U.S. holder, and, to a limited extent, if you are a non-U.S. holder. You will be a U.S. holder if you are an individual who is a citizen or resident of the United States, a U.S. domestic corporation, or any other person that is subject to U.S. federal income tax on a net income basis in respect of its investment in a debt security. This summary deals only with U.S. holders that hold debt securities as capital assets for tax purposes. This summary does not apply to you if you are an investor that is subject to special tax rules, such as:

 

   

a bank or thrift;

 

   

a real estate investment trust;

 

   

a regulated investment company;

 

   

an insurance company;

 

   

a dealer in securities or currencies;

 

   

a trader in securities or commodities that elects mark-to-market treatment;

 

   

a person that will hold debt securities as a hedge against currency risk or as a position in a straddle or conversion transaction for tax purposes;

 

   

an entity taxed as a partnership and partners therein;

 

   

a tax exempt organization; or

 

   

a person whose functional currency for tax purposes is not the U.S. dollar.

 

A non-U.S. holder is a beneficial owner of a debt security that is not a U.S. holder.

 

This summary is based on the Internal Revenue Code of 1986, as amended (the “Code”), its legislative history, existing and proposed regulations promulgated thereunder, and published rulings and court decisions, all as currently in effect. These laws are subject to change, possibly on a retroactive basis.

 

This summary deals only with debt securities that are properly treated as indebtedness for U.S. federal income tax purposes. Any special U.S. federal income tax considerations relevant to a particular issuance of debt securities will be discussed in the applicable prospectus supplement. You should consult your tax adviser about the tax consequences of holding debt securities, including the relevance to your particular situation of the considerations discussed below, as well as of state, local or other tax laws.

 

Payments or Accruals of Interest

 

Payments or accruals of “qualified stated interest” (as defined below) on a debt security will be taxable to you as ordinary interest income at the time that you receive or accrue such amounts, in accordance with your regular method of tax accounting. If you use the cash method of tax accounting and you receive payments of interest pursuant to the terms of a debt security in a currency other than U.S. dollars, a “foreign currency”, the amount of interest income you will realize will be the U.S. dollar value of the foreign currency payment based on the exchange rate in effect on the date you receive the payment regardless of whether you convert the payment into U.S. dollars. If you are an accrual-basis U.S. holder, the amount of interest income you will realize will be based on the average exchange rate in effect during the interest accrual period or, with respect to an interest accrual period that spans two taxable years, at the average exchange rate for the partial period within the taxable year. Alternatively, as an accrual-basis U.S. holder you may elect to translate all interest income on foreign currency-denominated debt securities at the spot rate on the last day of the accrual period (or the last day of the taxable year, in the case of an accrual period that spans more than one taxable year), or on the date that you

 

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receive the interest payment if that date is within five business days of the end of the accrual period. If you make this election you must apply it consistently to all debt instruments from year to year and you cannot change the election without the consent of the Internal Revenue Service. If you use the accrual method of accounting for tax purposes you will recognize foreign currency gain or loss on the receipt of a foreign currency interest payment if the exchange rate in effect on the date the payment is received differs from the rate applicable to a previous accrual of that interest income. This foreign currency gain or loss will be treated as ordinary income or loss, but generally will not be treated as an adjustment to interest income received on the debt security.

 

Purchase, Sale and Retirement of Notes

 

Initially, your tax basis in a debt security generally will equal the cost of the debt security to you. Your basis will increase by any amounts that you are required to include in income under the rules governing original issue discount and market discount, and will decrease by the amount of any amortized premium and any payments other than qualified stated interest made on the debt security. The rules for determining these amounts are discussed below. If you purchase a debt security that is denominated in a foreign currency, the cost to you, and therefore generally your initial tax basis, will be the U.S. dollar value of the foreign currency purchase price on the date of purchase calculated at the exchange rate in effect on that date. If the foreign currency-denominated debt security is traded on an established securities market and you are a cash-basis taxpayer, or if you are an accrual-basis taxpayer that makes a special election, then you will determine the U.S. dollar value of the cost of the debt security by translating the amount of the foreign currency that you paid for the debt security at the spot rate of exchange on the settlement date of your purchase. The amount of any subsequent adjustments to your tax basis in a foreign currency-denominated debt security in respect of original issue discount, market discount and premium will be determined in the manner described below. If you convert U.S. dollars into a foreign currency and then immediately use that foreign currency to purchase a debt security, you generally will not have any taxable gain or loss as a result of the purchase.

 

When you sell or exchange a debt security, or if a debt security is retired, you generally will recognize gain or loss equal to the difference between the amount you realize on the transaction, less any accrued qualified stated interest, which will be subject to tax in the manner described above, and your tax basis in the debt security. If you sell or exchange a debt security for a foreign currency, or receive foreign currency on the retirement of a debt security, the amount you will realize for U.S. tax purposes generally will be the dollar value of the foreign currency that you receive calculated at the exchange rate in effect on the date the foreign currency debt security is disposed of or retired. If you dispose of a foreign currency debt security that is traded on an established securities market and you are a cash-basis U.S. holder, or if you are an accrual-basis holder that makes a special election, then you will determine the U.S. dollar value of the amount realized by translating the amount at the spot rate of exchange on the settlement date of the sale, exchange or retirement.

 

The special election available to you if you are an accrual-basis taxpayer in respect of the purchase and sale of foreign currency debt securities traded on an established securities market, which is discussed in the two preceding paragraphs, must be applied consistently to all debt instruments from year to year and cannot be changed without the consent of the Internal Revenue Service.

 

Except as discussed below with respect to market discount, short-term debt securities and foreign currency gain or loss, the gain or loss that you recognize on the sale, exchange or retirement of a debt security generally will be long-term capital gain or loss if you have held the debt security for more than one year. The Code provides preferential treatment under certain circumstances for net long-term capital gains recognized by individual investors. The ability of U.S. holders to offset capital losses against ordinary income is limited.

 

The gain or loss that you recognize on the sale, exchange or retirement of a foreign currency debt security generally will be treated as ordinary income or loss to the extent that the gain or loss is attributable to changes in exchange rates during the period in which you held the debt security. This foreign currency gain or loss will not be treated as an adjustment to interest income that you receive on the debt security.

 

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Original Issue Discount

 

If we issue debt securities at a discount from their stated redemption price at maturity, and the discount is equal to or more than the product of one-fourth of one percent (0.25%) of the stated redemption price at maturity of the debt securities multiplied by the number of whole years to their maturity, the debt securities will be “Original Issue Discount Debt Securities.” The difference between the issue price and their stated redemption price at maturity will be the “original issue discount.” The “issue price” of the debt securities will be the first price at which a substantial amount of the debt securities are sold to the public (i.e., excluding sales of debt securities to underwriters, placement agents, wholesalers, or similar persons). The “stated redemption price at maturity” will include all payments under the debt securities other than payments of qualified stated interest. The term “qualified stated interest” generally means stated interest that is unconditionally payable in cash or property, other than debt instruments issued by the Company, at least annually during the entire term of a debt security at a single fixed interest rate or, subject to certain conditions, based on one or more interest indices.

 

If you invest in Original Issue Discount Debt Securities you generally will be subject to the special tax accounting rules for original issue discount obligations provided by the Internal Revenue Code and certain Treasury regulations (the “OID regulations”). You should be aware that, as described in greater detail below, if you invest in an Original Issue Discount Debt Security you generally will be required to include original issue discount in ordinary gross income for U.S. federal income tax purposes as it accrues, before you receive the cash attributable to that income.

 

In general, and regardless of whether you use the cash or the accrual method of tax accounting, if you are the holder of an Original Issue Discount Debt Security with a maturity greater than one year, you will be required to include in ordinary gross income the sum of the “daily portions” of original issue discount on that debt security for all days during the taxable year that you own the debt security. The daily portions of original issue discount on an Original Issue Discount Debt Security are determined by allocating to each day in any accrual period a ratable portion of the original issue discount allocable to that period. Accrual periods may be any length and may vary in length over the term of an Original Issue Discount Debt Security, so long as no accrual period is longer than one year and each scheduled payment of principal or interest occurs on the first or last day of an accrual period. If you are the initial holder of the debt security, the amount of original issue discount on an Original Issue Discount Debt Security allocable to each accrual period is determined by:

 

  (i) multiplying the “adjusted issue price” (as defined below) of the debt security at the beginning of the accrual period by a fraction, the numerator of which is the annual yield to maturity of the debt security and the denominator of which is the number of accrual periods in a year; and

 

  (ii) subtracting from that product the amount, if any, payable as qualified stated interest allocable to that accrual period.

 

In the case of an Original Issue Discount Debt Security that is a floating rate debt security, both the “annual yield to maturity” and the qualified stated interest will be determined for these purposes as though the debt security had borne interest in all periods at a fixed rate generally equal to the rate that would be applicable to interest payments on the debt security on its date of issue or, in the case of some floating rate debt securities, the rate that reflects the yield that is reasonably expected for the debt security. Additional rules may apply if interest on a floating rate debt security is based on more than one interest index. The “adjusted issue price” of an Original Issue Discount Debt Security at the beginning of any accrual period will generally be the sum of its issue price, including any accrued interest, and the amount of original issue discount allocable to all prior accrual periods, reduced by the amount of all payments other than any qualified stated interest payments on the debt security in all prior accrual periods. All payments on an Original Issue Discount Debt Security, other than qualified stated interest, will generally be viewed first as payments of previously accrued original issue discount, to the extent of the previously accrued discount, with payments considered made from the earliest accrual periods first, and then as a payment of principal. The “annual yield to maturity” of a debt security is the discount rate, appropriately adjusted to reflect the length of accrual periods, that causes the present value on the issue date of all payments on

 

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the debt security to equal the issue price. As a result of this “constant yield” method of including original issue discount income, the amounts you will be required to include in your gross income if you invest in an Original Issue Discount Debt Security denominated in U.S. dollars will generally be less in the early years and greater in the later years than amounts that would be includible on a straight-line basis.

 

You generally may make an irrevocable election to include in income your entire return on a debt security (i.e., the excess of all remaining payments to be received on the debt security, including payments of qualified stated interest, over the amount you paid for the debt security) under the constant yield method described above. For debt securities purchased at a premium or bearing market discount in your hands, if you make this election you will also be deemed to have made the election (discussed below under “Premium and Market Discount”) to amortize premium or to accrue market discount in income currently on a constant yield basis.

 

In the case of an Original Issue Discount Debt Security that is also a foreign currency-denominated debt security, you should determine the U.S. dollar amount includible as original issue discount for each accrual period by (i) calculating the amount of original issue discount allocable to each accrual period in the foreign currency using the constant yield method, and (ii) translating the foreign currency amount so determined at the average exchange rate in effect during that accrual period (or, with respect to an interest accrual period that spans two taxable years, at the average exchange rate for each partial period). Alternatively, you may translate the foreign currency amount so determined at the spot rate of exchange on the last day of the accrual period (or the last day of the taxable year, for an accrual period that spans two taxable years), or at the spot rate of exchange on the date of receipt, if that date is within five business days of the last day of the accrual period, provided that you have made the election described under “—Payments or Accruals of Interest” above. Because exchange rates may fluctuate, if you are the holder of an Original Issue Discount Debt Security that is also a foreign currency debt security you may recognize a different amount of original issue discount income in each accrual period than would be the case if you were the holder of an otherwise similar Original Issue Discount Debt Security denominated in U.S. dollars. Upon the receipt of an amount attributable to original issue discount, whether in connection with a payment of an amount that is not qualified stated interest or the sale or retirement of the Original Issue Discount Debt Security, you will recognize ordinary income or loss measured by the difference between the amount received, translated into U.S. dollars at the exchange rate in effect on the date of receipt or on the date of disposition of the Original Issue Discount Debt Security, as the case may be, and the amount accrued, using the exchange rate applicable to such previous accrual.

 

If you purchase an Original Issue Discount Debt Security outside of the initial offering at a cost less than its “remaining redemption amount”, or if you purchase an Original Issue Discount Debt Security in the initial offering at a price other than the debt security’s issue price, you will also generally be required to include in gross income the daily portions of original issue discount, calculated as described above. However, if you acquire an Original Issue Discount Debt Security at a price greater than its adjusted issue price, you will be entitled to reduce your periodic inclusions of original issue discount to reflect the premium paid over the adjusted issue price. The remaining redemption amount for an Original Issue Discount Debt Security is the total of all future payments to be made on the debt security other than qualified stated interest.

 

Floating rate debt securities generally will be treated as “variable rate debt instruments” under the OID regulations. Accordingly, the stated interest on a floating rate debt security generally will be treated as qualified stated interest, and such a debt security will not have original issue discount solely as a result of the fact that it provides for interest at a variable rate. A floating rate debt security that does not qualify as a variable rate debt instrument will be subject to special rules (the “contingent payment regulations”) that govern the tax treatment of debt obligations that provide for contingent payments (“contingent debt obligations”). A detailed description of the tax considerations relevant to U.S. holders of any such debt securities will be provided in the applicable prospectus supplement.

 

Certain debt securities may be redeemed prior to maturity, either at our option or at the option of the holder, or may have special repayment or interest rate reset features as indicated in the prospectus supplement. Original

 

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Issue Discount Debt Securities containing these features may be subject to rules that differ from the general rules discussed above. If you purchase Original Issue Discount Debt Securities with these features, you should carefully examine the prospectus supplement and consult your tax adviser about their treatment since the tax consequences with respect to original issue discount will depend, in part, on the particular terms and features of the debt securities.

 

Short-Term Debt Securities

 

The rules described above will also generally apply to Original Issue Discount Debt Securities with maturities of one year or less (“short-term debt securities”), but with some modifications.

 

First, the original issue discount rules treat none of the interest on a short-term debt security as qualified stated interest, but treat a short-term debt security as having original issue discount. Thus, all short-term debt securities will be Original Issue Discount Debt Securities. Except as noted below, if you are a cash-basis holder of a short-term debt security and you do not identify the short-term debt security as part of a hedging transaction you will generally not be required to accrue original issue discount currently, but you will be required to treat any gain realized on a sale, exchange or retirement of the debt security as ordinary income to the extent such gain does not exceed the original issue discount accrued with respect to the debt security during the period you held the debt security. You may not be allowed to deduct all of the interest paid or accrued on any indebtedness incurred or maintained to purchase or carry a short-term debt security until the maturity of the debt security or its earlier disposition in a taxable transaction. Notwithstanding the foregoing, if you are a cash-basis U.S. holder of a short-term debt security you may elect to accrue original issue discount on a current basis, in which case the limitation on the deductibility of interest described above will not apply. A U.S. holder using the accrual method of tax accounting and some cash method holders, including banks, securities dealers, regulated investment companies and certain trust funds, generally will be required to include original issue discount on a short-term debt security in gross income on a current basis. Original issue discount will be treated as accruing for these purposes on a ratable basis or, at the election of the holder, on a constant yield basis based on daily compounding.

 

Second, regardless of whether you are a cash- or accrual-basis holder, if you are the holder of a short-term debt security you can elect to accrue any “acquisition discount” with respect to the debt security on a current basis. Acquisition discount is the excess of the remaining redemption amount of the debt security at the time of acquisition over the purchase price. Acquisition discount will be treated as accruing ratably or, at the election of the holder, under a constant yield method based on daily compounding. If you elect to accrue acquisition discount, the original issue discount rules will not apply.

 

Finally, the market discount rules described below will not apply to short-term debt securities.

 

As described above, certain of the debt securities may be subject to special redemption features. These features may affect the determination of whether a debt security has a maturity of one year or less and thus is a short-term debt security. If you purchase debt securities with these features, you should carefully examine the prospectus supplement and consult your tax adviser about these features.

 

Premium and Market Discount

 

If you purchase a debt security at a cost greater than the debt security’s remaining redemption amount, you will be considered to have purchased the debt security at a premium, and you may elect to amortize the premium as an offset to interest income, using a constant yield method, over the remaining term of the debt security. If you make this election, it generally will apply to all debt instruments that you hold at the time of the election, as well as any debt instruments that you subsequently acquire. In addition, you may not revoke the election without the consent of the Internal Revenue Service. If you elect to amortize the premium you will be required to reduce your tax basis in the debt security by the amount of the premium amortized during your holding period. Original Issue

 

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Discount Debt Securities purchased at a premium will not be subject to the original issue discount rules described above. In the case of premium on a foreign currency debt security, you should calculate the amortization of the premium in the foreign currency. Amortization deductions attributable to a period reduce interest payments in respect of that period, and therefore are translated into U.S. dollars at the rate that you use for those interest payments. Exchange gain or loss will be realized with respect to amortized premium on a foreign currency debt security based on the difference between the exchange rate computed on the date or dates the premium is amortized against interest payments on the debt security and the exchange rate on the date when the holder acquired the debt security. For a U.S. holder that does not elect to amortize premium, the amount of premium will be included in your tax basis when the debt security matures or is disposed of. Therefore, if you do not elect to amortize premium and you hold the debt security to maturity, you generally will be required to treat the premium as capital loss when the debt security matures.

 

If you purchase a debt security at a price that is lower than the debt security’s remaining redemption amount, or in the case of an Original Issue Discount Debt Security, the debt security’s adjusted issue price, by 0.25% or more of the remaining redemption amount, or adjusted issue price, multiplied by the number of remaining whole years to maturity, the debt security will be considered to bear “market discount” in your hands. In this case, any gain that you realize on the disposition of the debt security generally will be treated as ordinary interest income to the extent of the market discount that accrued on the debt security during your holding period. In addition, you could be required to defer the deduction of a portion of the interest paid on any indebtedness that you incurred or continued to purchase or carry the debt security. In general, market discount will be treated as accruing ratably over the term of the debt security, or, at your election, under a constant yield method. You must accrue market discount on a foreign currency debt security in the specified currency. The amount that you will be required to include in income in respect of accrued market discount will be the U.S. dollar value of the accrued amount, generally calculated at the exchange rate in effect on the date that you dispose of the debt security.

 

You may elect to include market discount in gross income currently as it accrues (on either a ratable or constant yield basis), in lieu of treating a portion of any gain realized on a sale of the debt security as ordinary income. If you elect to include market discount on a current basis, the interest deduction deferral rule described above will not apply. If you do make such an election, it will apply to all market discount debt instruments that you acquire on or after the first day of the first taxable year to which the election applies. The election may not be revoked without the consent of the Internal Revenue Service. Any accrued market discount on a foreign currency debt security that is currently includible in income will be translated into U.S. dollars at the average exchange rate for the accrual period (or portion thereof within the holder’s taxable year).

 

Indexed Notes and Other Notes Providing for Contingent Payments

 

The contingent payment regulations generally require accrual of interest income on a constant yield basis in respect of contingent debt obligations at a yield determined at the time of issuance of the obligation, and may require adjustments to these accruals when any contingent payments are made. In addition, special rules may apply to floating rate debt securities if the interest payable on the debt securities is based on more than one interest index. We will provide a detailed description of the tax considerations relevant to U.S. holders of any debt securities that are subject to the special rules discussed in this paragraph in the relevant prospectus supplement.

 

Information Reporting and Backup Withholding

 

The paying agent must file information returns with the United States Internal Revenue Service in connection with debt security payments made to certain United States persons. If you are a United States person, you generally will not be subject to United States backup withholding tax on such payments if you provide your taxpayer identification number to the paying agent. You may also be subject to information reporting and backup withholding tax requirements with respect to the proceeds from a sale of the debt securities. If you are not a United States person, in order to avoid information reporting and backup withholding tax requirements you may have to comply with certification procedures to establish that you are not a United States person.

 

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In addition, a U.S. holder may be subject to certain reporting requirements with respect to the holding of certain foreign financial assets, including debt of foreign issuers, if the aggregate value of all of such assets exceeds US$50,000. A U.S. holder should consult its own tax advisor regarding the application of the information reporting rules to our debt securities and to its particular situation.

 

Foreign Account Tax Compliance Act

 

We or a non-U.S. financial institution through which payments are made may be required pursuant to FATCA to collect and provide to the U.S. Internal Revenue Service or another tax authority substantial information regarding investors in debt securities. As such, holders may be required to provide information and tax documentation regarding their tax identities as well as that of their direct and indirect owners. Additionally, starting at the earliest on January 1, 2017, “foreign passthru payments” (a term not yet defined) may be subject to withholding under FATCA. Withholding on such payments under FATCA will not apply to debt securities issued before the date that is six months after the publication of final regulations defining “foreign passthru payment,” unless the debt securities are materially modified on or after such date.

 

By purchasing the Notes, U.S. holders agree to provide an IRS form W-9, and whatever other information may be necessary for us to comply with these reporting obligations. If an amount of, or in respect of, U.S. withholding tax were to be deducted or withheld from payments on the debt securities as a result of an investor’s failure to comply with these rules, neither we nor any paying agent nor any other person would be required to pay additional amounts with respect to any debt securities as a result of the deduction or withholding of such tax. You should consult your tax advisors on how FATCA may apply to payments you receive under the debt securities.

 

Warrants

 

A description of the tax consequences of an investment in warrants will be provided in the applicable prospectus supplement.

 

Guarantees

 

A description of the tax consequences of an investment in guarantees will be provided in the applicable prospectus supplement.

 

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PLAN OF DISTRIBUTION

 

We and the Republic, if a guarantee by the Republic is furnished, may sell or issue the debt securities, warrants or guarantees in any of three ways:

 

   

through underwriters or dealers;

 

   

directly to one or more purchasers; or

 

   

through agents.

 

The prospectus supplement relating to a particular series of debt securities, warrants or guarantees will state:

 

   

the names of any underwriters;

 

   

the purchase price of the securities;

 

   

the proceeds to us from the sale;

 

   

any underwriting discounts and other compensation;

 

   

the initial public offering price;

 

   

any discounts or concessions allowed or paid to dealers; and

 

   

any securities exchanges on which the securities will be listed.

 

Any underwriter involved in the sale of securities will acquire the securities for its own account. The underwriters may resell the securities from time to time in one or more transactions, including negotiated transactions, at a fixed public offering price or at varying prices to be determined at the time of sale. The securities may be offered to the public either by underwriting syndicates represented by managing underwriters or by underwriters without a syndicate. Unless the prospectus supplement states otherwise, certain conditions must be satisfied before the underwriters become obligated to purchase securities from us and the Republic, if applicable, and they will be obligated to purchase all of the securities if any are purchased. The underwriters may change any initial public offering price and any discounts or concessions allowed or reallowed or paid to dealers.

 

If we and the Republic, if a guarantee by the Republic is furnished, sell any securities through agents, the prospectus supplement will identify the agent and indicate any commissions payable by us and the Republic, if applicable. Unless the prospectus supplement states otherwise, all agents will act on a best efforts basis and will not acquire the securities for their own account.

 

We and the Republic, if a guarantee by the Republic is furnished, may authorize agents, underwriters or dealers to solicit offers by certain specified entities to purchase the securities from us and the Republic, if applicable, at the public offering price set forth in a prospectus supplement pursuant to delayed delivery contracts. The prospectus supplement will set out the conditions of the delayed delivery contracts and the commission receivable by the agents, underwriters or dealers for soliciting the contracts.

 

We and the Republic, if a guarantee by the Republic is furnished, may offer debt securities as consideration for the purchase of other of our debt securities, either in connection with a publicly announced tender offer or in privately negotiated transactions. The offer may be in addition to or in lieu of sales of debt securities directly or through underwriters or agents. We may offer guarantees as consideration for transactions involving securities of other issuers.

 

Agents and underwriters may be entitled to indemnification by us against certain liabilities, including liabilities under the Securities Act of 1933, as amended, or to contribution from us with respect to certain payments which the agents or underwriters may be required to make. Agents and underwriters may be customers of, engage in transactions with, or perform services (including commercial and investment banking services) for us and the Republic in the ordinary course of business.

 

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LEGAL MATTERS

 

The validity of any particular series of debt securities or warrants issued with debt securities or any guarantees will be passed upon for us and any underwriters or agents by United States and Korean counsel identified in the related prospectus supplement.

 

AUTHORIZED REPRESENTATIVES IN THE UNITED STATES

 

Our authorized agents in the United States are Mr. Jae Ik Kim, General Manager of our New York Branch, or Mr. Jin Hwan Sah, Senior Deputy General Manager of our New York Branch. The address of our New York Branch is 320 Park Avenue, 32nd Floor, New York, New York 10022. The authorized representative of the Republic in the United States is Mr. Suk-Kwon Na, Financial Attache, Korean Consulate General in New York, located at 335 East 45th Street, New York, New York 10017.

 

OFFICIAL STATEMENTS AND DOCUMENTS

 

Our President and Chairman of the Board of Directors, in his official capacity, has supplied the information set forth under “The Korea Development Bank” (except for the information set out under “The Korea Development Bank—Business—Government Support and Supervision”). Such information is stated on his authority.

 

The Minister of Strategy and Finance of The Republic of Korea, in his official capacity, has supplied the information set out under “The Korea Development Bank—Business—Government Support and Supervision” and “The Republic of Korea.” Such information is stated on his authority. The documents identified in the portion of this prospectus captioned “The Republic of Korea” as the sources of financial or statistical data are official public documents of the Republic or its agencies and instrumentalities.

 

EXPERTS

 

Our separate financial statements as of and for the years ended December 31, 2012 and 2013 have been included in this prospectus in reliance upon the report of KPMG Samjong Accounting Corp., independent auditors, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The audit report covering the December 31, 2013 separate financial statements refers to a change in accounting policy for employment benefits.

 

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FORWARD-LOOKING STATEMENTS

 

This prospectus includes future expectations, projections or “forward-looking statements”, as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words “believe”, “expect”, “anticipate”, “estimate”, “project” and similar words identify forward-looking statements. In addition, all statements other than statements of historical facts included in this prospectus are forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we can give no assurance that such expectations will prove correct. This prospectus discloses important factors that could cause actual results to differ materially from our expectations (“Cautionary Statements”). All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the Cautionary Statements.

 

Factors that could adversely affect the future performance of the Korean economy include:

 

   

difficulties in the housing and financial sectors in the United States and elsewhere and increased sovereign default risks in selected countries and the resulting adverse effects on the global financial markets;

 

   

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

 

   

substantial decreases in the market prices of Korean real estate;

 

   

increasing delinquencies and credit defaults by consumer and small and medium sized enterprise borrowers;

 

   

declines in consumer confidence and a slowdown in consumer spending;

 

   

adverse developments in the economies of countries that are important export markets for the Republic, such as the United States, Japan and China, or in emerging market economies in Asia or elsewhere;

 

   

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

 

   

social and labor unrest;

 

   

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

 

   

financial problems or lack of progress in the restructuring of Korean conglomerates, other large troubled companies, their suppliers or the financial sector;

 

   

loss of investor confidence arising from corporate accounting irregularities and corporate governance issues at certain Korean conglomerates;

 

   

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

 

   

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

 

   

the recurrence of severe acute respiratory syndrome, or SARS, or an outbreak of swine or avian flu in Asia and other parts of the world;

 

   

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

 

   

political uncertainty or increasing strife among or within political parties in the Republic;

 

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hostilities or unrest involving oil producing countries in the Middle East and Northern Africa and any material disruption in the supply of oil or increase in the price of oil;

 

   

the occurrence of severe earthquakes, tsunamis or other natural disasters in Korea and other parts of the world, particularly in trading partners (such as the March 2011 earthquake in Japan, which also resulted in the release of radioactive materials from a nuclear plant that had been damaged by the earthquake); and

 

   

an increase in the level of tension or an outbreak of hostilities between North Korea and the Republic or the United States.

 

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FURTHER INFORMATION

 

We filed a registration statement with respect to the securities with the Securities and Exchange Commission under the Securities Act of 1933, as amended, and its related rules and regulations. You can find additional information concerning ourselves and the securities in the registration statement and any pre- or post-effective amendment, including its various exhibits, which may be inspected at the public reference facilities maintained by the Securities and Exchange Commission at 100 F Street, N.E., Washington, D.C. 20549. These filings are also available to the public from the Securities and Exchange Commission’s website at http://www.sec.gov.

 

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PART II

 

INFORMATION NOT REQUIRED IN THE PROSPECTUS

 

Item 11. Estimated Expenses.*

 

It is estimated that our expenses in connection with the sale of the debt securities, warrants and guarantees hereunder, exclusive of compensation payable to underwriters and agents, will be as follows:

 

SEC Registration Fee

   US$ 573,000   

Printing Costs

     250,000   

Legal Fees and Expenses

     450,000   

Fiscal Agent Fees and Expenses

     50,000   

Blue Sky Fees and Expenses

     50,000   

Rating Agencies’ Fees

     350,000   

Miscellaneous (including amounts to be paid to underwriters in lieu of reimbursement of certain expenses)

     600,000   
  

 

 

 

Total

   US$  2,323,000   
  

 

 

 

 

* Based on three underwritten offerings of the debt securities.

 

UNDERTAKINGS

 

The Registrants hereby undertake:

 

  (a) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement:

 

  (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;

 

  (ii) To reflect in the prospectus any facts or events arising after the effective date of this Registration Statement (or the most recent post-effective amendment thereto) which, individually or in the aggregate, represent a fundamental change in the information set forth in this Registration Statement; and

 

  (iii) To include any material information with respect to the plan of distribution not previously disclosed in this Registration Statement or any material change to such information in this Registration Statement;

 

  (b) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; and

 

  (c) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

 

  (d) That, for purposes of determining liability under the Securities Act of 1933 to any purchaser:

 

each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration

 

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statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.

 

  (e) That, for the purpose of determining any liability under the Securities Act of 1933 to any purchaser in the initial distribution of the securities:

 

The undersigned registrants undertake that in a primary offering of securities of the undersigned registrants pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrants will be sellers to the purchaser and will be considered to offer or sell such securities to such purchaser;

 

  (i) Any preliminary prospectus or prospectus of the undersigned registrants relating to the offering required to be filed pursuant to Rule 424;

 

  (ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrants or used or referred to by the undersigned registrants;

 

  (iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrants or their securities provided by or on behalf of the undersigned registrants; and

 

  (iv) Any other communication that is an offer in the offering made by the undersigned registrants to the purchaser.

 

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CONTENTS

 

This Registration Statement is comprised of:

 

  (1) Facing Sheet.

 

  (2) Explanatory Note.

 

  (3) Part I, consisting of the Prospectus.

 

  (4) Part II, consisting of pages II-1 to II-9

 

  (5) The following Exhibits:

 

  A-1       -    Form of Underwriting Agreement Standard Terms, incorporated herein by reference to Exhibit A to the Registration Statement of The Korea Development Bank (No. 33-38873).
  B-1       -    Form of Fiscal Agency Agreement, including forms of Debt Securities, incorporated herein by reference to Exhibit B-1 to the Registration Statement of The Korea Development Bank (No. 33-44818).
  B-2       -    Form of global Debt Security that bears interest at a fixed rate, incorporated herein by reference to Exhibit B-2 to the Registration Statement of The Korea Development Bank (No. 33-156305).
  B-3       -    Form of Amendment No. 1 to Fiscal Agency Agreement, incorporated herein by reference to Exhibit B-3 to the Registration Statement of The Korea Development Bank (No. 333-111608).
  C-1       -    Form of Warrant Agreement, including form of Warrants.*
  C-2       -    Form of Guarantee Agreement, including form of Guarantees, incorporated herein by reference to Exhibit C-2 to the Registration Statement of The Korea Development Bank (No. 333-97299).
  C-3       -    Form of Solicitation Indemnification Agreement, incorporated herein by reference to Exhibit C-3 to the Registration Statement of The Korea Development Bank (No. 333-97299).
  D-1       -    Consent of the Chief Executive Officer & Chairman of The Korea Development Bank (included on page II-5).
  D-2       -    Power of Attorney of the Chief Executive Officer & Chairman of The Korea Development Bank, incorporated herein by reference to Exhibit D-2 to the Registration Statement of The Korea Development Bank (No. 333-189409).
  E-1       -    Consent of the Minister of Strategy and Finance of The Republic of Korea (included on Page II-6).
  E-2       -    Power of Attorney of the Minister of Strategy and Finance of The Republic of Korea, incorporated herein by reference to Exhibit E-2 to the Registration Statement of The Korea Development Bank (No. 333-156305).
  F         -    Consent of KPMG Samjong Accounting Corp.
  G-1       -    Letter appointing certain persons as authorized agents of The Korea Development Bank in the United States, incorporated herein by reference to Exhibit G-1 to the Registration Statement of The Korea Development Bank (No. 333-189409).
  G-2       -    Letter appointing Authorized Agents of The Republic of Korea in the United States (included in Exhibit E-2), incorporated herein by reference to Exhibit G-2 to the Registration Statement of The Korea Development Bank (No. 333-189409).
  H         -    The Korea Development Bank Act.
  I          -    The Enforcement Decree of The Korea Development Bank Act, incorporated herein by reference to Exhibit E-2 to the Registration Statement of The Korea Development Bank (No. 333-180821).

 

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  J          -    The Articles of Incorporation of The Korea Development Bank, incorporated herein by reference to Exhibit E-2 to the Registration Statement of The Korea Development Bank (No. 333-180821).
  K-1       -    Form of Prospectus Supplement relating to The Korea Development Bank’s Medium-Term Notes, Series C, Due Not Less Than Nine Months From Date of Issue (the “Series C Notes”), incorporated herein by reference to Exhibit K-1 to the Registration Statement of The Korea Development Bank (No. 333-6866).
  K-2       -    Form of Supplement to the Prospectus Supplement relating to the Korea Development Bank’s Series C Notes, incorporated herein by reference to Exhibit K-2 to the Registration Statement of The Korea Development Bank (No. 333-6866).
  L          -    Form of Distribution Agreement between The Korea Development Bank and the Agents named therein relating to the offer or sale from time to time of the Series C Notes, incorporated herein by reference to Exhibit L to the Registration Statement of The Korea Development Bank (No. 333-6866).
  M-1       -    Opinion (including consent) of Cleary Gottlieb Steen & Hamilton LLP, c/o 39th Floor, Bank of China Tower, One Garden Road, Hong Kong, United States counsel to The Korea Development Bank, in respect of the legality of the Debt Securities (with or without Warrants).
  M-2       -    Opinion (including consent) of Kim & Chang, 39, Sajik-ro 8-gil, Jongno-gu, Seoul, Korea, Korean counsel to The Korea Development Bank, in respect of the legality of the Debt Securities (with or without Warrants) and the Guarantees to be issued by The Republic of Korea.
  N-1       -    Form of the Series C Note that bears interest at a fixed rate, incorporated herein by reference to Exhibit N-1 to the Registration Statement of The Korea Development Bank (No. 333-6866).
  N-2       -    Form of the Series C Note that bears interest at a floating rate, incorporated herein by reference to Exhibit N-2 to the Registration Statement of The Korea Development Bank (No. 333-6866).
  O          -    Form of Calculation Agency Agreement between The Korea Development Bank and the calculation agent named therein relating to the Series C Notes that bear interest at a floating rate, incorporated herein by reference to Exhibit O to the Registration Statement of The Korea Development Bank (No. 333-6866).

 

* May be filed by amendment.

 

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SIGNATURE OF THE KOREA DEVELOPMENT BANK

 

Pursuant to the requirements of the Securities Act of 1933, as amended, The Korea Development Bank has duly caused this Registration Statement or amendment thereto to be signed on its behalf by the undersigned, thereunto duly authorized, in Seoul, The Republic of Korea, on the 27th day of June, 2014.

 

THE KOREA DEVELOPMENT BANK

By:

 

    KYTTACK HONG*†        

  Chief Executive Officer & Chairman

†By:

 

/S/    HO GUK LEE        

  Ho Guk Lee
  (Attorney-in-fact)

 

 

* Consent is hereby given to use of his name in connection with the information specified in this Registration Statement or amendment thereto to have been supplied by him and stated on his authority.

 

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SIGNATURE OF THE REPUBLIC OF KOREA

 

Pursuant to the requirements of the Securities Act of 1933, as amended, The Republic of Korea has duly caused this Registration Statement or amendment thereto to be signed on its behalf by the undersigned, thereunto duly authorized, in The City of New York, New York, on the 27th day of June, 2014.

 

THE REPUBLIC OF KOREA

By:

 

    OH-SEOK HYUN*†        

  Minister of Strategy and Finance

†By:

 

/S/    SUK-KWON NA        

  Suk-Kwon Na
  (Attorney-in-fact)

 

 

* Consent is hereby given to use of his name in connection with the information specified in this Registration Statement or amendment thereto to have been supplied by him and stated on his authority.

 

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SIGNATURE OF AUTHORIZED REPRESENTATIVE

OF THE KOREA DEVELOPMENT BANK

 

Pursuant to the Securities Act of 1933, as amended, the undersigned, a duly authorized representative in the United States of The Korea Development Bank, has signed this Registration Statement or amendment thereto in The City of New York, New York, on the 27th day of June, 2014.

 

†By:

 

/S/    Jae Ik Kim        

  Jae Ik Kim
  New York Branch
  The Korea Development Bank

 

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SIGNATURE OF AUTHORIZED REPRESENTATIVE

OF THE KOREA DEVELOPMENT BANK

 

Pursuant to the Securities Act of 1933, as amended, the undersigned, a duly authorized representative in the United States of The Korea Development Bank, has signed this Registration Statement or amendment thereto in The City of New York, New York, on the 27th day of June, 2014.

 

†By:

 

/S/    Jin Hwan Sah        

  Jin Hwan Sah
  New York Branch
  The Korea Development Bank

 

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SIGNATURE OF AUTHORIZED REPRESENTATIVE

OF THE REPUBLIC OF KOREA

 

Pursuant to the Securities Act of 1933, as amended, the undersigned, a duly authorized representative in the United States of The Republic of Korea, has signed this Registration Statement or amendment thereto in The City of New York, New York, on the 27th day of June, 2014.

 

†By:

 

/S/    SUK-KWON NA        

  Suk-Kwon Na
  Financial Attaché
  Korean Consulate General in New York

 

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EXHIBIT INDEX

 

A-1    -    Form of Underwriting Agreement Standard Terms, incorporated herein by reference to Exhibit A to the Registration Statement of The Korea Development Bank (No. 33-38873).
B-1    -    Form of Fiscal Agency Agreement, including forms of Debt Securities, incorporated herein by reference to Exhibit B-1 to the Registration Statement of The Korea Development Bank (No. 33-44818).
B-2    -    Form of global Debt Security that bears interest at a fixed rate, incorporated herein by reference to Exhibit B-2 to the Registration Statement of The Korea Development Bank (No. 33-156305).
B-3    -    Form of Amendment No. 1 to Fiscal Agency Agreement, incorporated herein by reference to Exhibit B-3 to the Registration Statement of The Korea Development Bank (No. 333-111608).
C-1    -    Form of Warrant Agreement, including form of Warrants.*
C-2    -    Form of Guarantee Agreement, including form of Guarantees, incorporated herein by reference to Exhibit C-2 to the Registration Statement of The Korea Development Bank (No. 333-97299).
C-3    -    Form of Solicitation Indemnification Agreement, incorporated herein by reference to Exhibit C-3 to the Registration Statement of The Korea Development Bank (No. 333-97299).
D-1    -    Consent of the Chief Executive Officer & Chairman of The Korea Development Bank (included on page II-5).
D-2    -    Power of Attorney of the Chief Executive Officer & Chairman of The Korea Development Bank, incorporated herein by reference to Exhibit D-2 to the Registration Statement of The Korea Development Bank (No. 333-189409).
E-1    -    Consent of the Minister of Strategy and Finance of The Republic of Korea (included on Page II-6).
E-2    -    Power of Attorney of the Minister of Strategy and Finance of The Republic of Korea, incorporated herein by reference to Exhibit E-2 to the Registration Statement of The Korea Development Bank (No. 333-156305).
F    -    Consent of KPMG Samjong Accounting Corp.
G-1    -    Letter appointing certain persons as authorized agents of The Korea Development Bank in the United States, incorporated herein by reference to Exhibit G-1 to the Registration Statement of The Korea Development Bank (No. 333-189409).
G-2    -    Letter appointing Authorized Agents of The Republic of Korea in the United States (included in Exhibit E-2).
H    -    The Korea Development Bank Act.
I    -    The Enforcement Decree of The Korea Development Bank Act, incorporated herein by reference to Exhibit E-2 to the Registration Statement of The Korea Development Bank (No. 333-180821).
J    -    The Articles of Incorporation of The Korea Development Bank, incorporated herein by reference to Exhibit E-2 to the Registration Statement of The Korea Development Bank (No. 333-180821).
K-1    -    Form of Prospectus Supplement relating to The Korea Development Bank’s Medium-Term Notes, Series C, Due Not Less Than Nine Months From Date of Issue (the “Series C Notes”), incorporated herein by reference to Exhibit K-1 to the Registration Statement of The Korea Development Bank (No. 333-6866).
K-2    -    Form of Supplement to the Prospectus Supplement relating to the Korea Development Bank’s Series C Notes, incorporated herein by reference to Exhibit K-2 to the Registration Statement of The Korea Development Bank (No. 333-6866).


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L    -    Form of Distribution Agreement between The Korea Development Bank and the Agents named therein relating to the offer or sale from time to time of the Series C Notes, incorporated herein by reference to Exhibit L to the Registration Statement of The Korea Development Bank (No. 333-6866).
M-1    -    Opinion (including consent) of Cleary Gottlieb Steen & Hamilton LLP, c/o 39th Floor, Bank of China Tower, One Garden Road, Hong Kong, United States counsel to The Korea Development Bank, in respect of the legality of the Debt Securities (with or without Warrants).
M-2    -    Opinion (including consent) of Kim & Chang, Sajik-ro 8-gil, Jongno-gu, Seoul, Korea, Korean counsel to The Korea Development Bank, in respect of the legality of the Debt Securities (with or without Warrants) and the Guarantees to be issued by The Republic of Korea.
N-1    -    Form of the Series C Note that bears interest at a fixed rate, incorporated herein by reference to Exhibit N-1 to the Registration Statement of The Korea Development Bank (No. 333-6866).
N-2    -    Form of the Series C Note that bears interest at a floating rate, incorporated herein by reference to Exhibit N-2 to the Registration Statement of The Korea Development Bank (No. 333-6866).
O    -    Form of Calculation Agency Agreement between The Korea Development Bank and the calculation agent named therein relating to the Series C Notes that bear interest at a floating rate, incorporated herein by reference to Exhibit O to the Registration Statement of The Korea Development Bank (No. 333-6866).

 

* May be filed by amendment.

Dates Referenced Herein   and   Documents Incorporated by Reference

This ‘S-B’ Filing    Date    Other Filings
11/3/25
12/18/23
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12/31/14
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7/31/14
7/17/14
7/14/14
7/7/14
7/6/14
6/30/14
Filed on:6/27/14F-N
6/25/14
6/20/14
6/16/14
6/2/14
5/31/14
5/30/14
5/29/14
5/27/14
5/18/14
5/14/14
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1/29/14
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10/29/13
10/28/13
10/25/13
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9/27/13
9/17/13
9/11/13FWP
8/30/13
8/27/13
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7/31/13
7/30/13
7/23/13
7/16/13
7/5/13
6/28/13
6/10/13POS AM
6/7/13
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7/31/12
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7/3/12
6/29/12424B2
6/25/12POS AM
6/21/12F-N,  POS AM
6/20/12
6/19/12
6/15/12
5/31/12
5/30/12
5/23/12
5/14/12
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2/27/12
2/24/12
2/22/12
1/31/12
1/30/12
1/1/12
12/31/11
11/30/11
11/4/11
10/31/11424B2
10/21/11
10/20/11
9/30/11
9/29/11
9/16/11POS AM
9/6/11
8/31/11
8/26/11
7/31/11
7/30/11
7/12/11
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7/1/11
6/30/11
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8/15/10
7/30/10POS AM
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1/29/10
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7/31/09
6/30/09
6/19/09
5/29/09
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4/16/09
3/31/09S-B/A
2/27/09
2/12/09
1/31/09
1/30/09
1/23/09
1/12/09
1/9/09
12/31/08
12/19/08F-N,  S-B
12/11/08
11/7/08
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10/9/08
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7/1/08
5/30/08
4/9/08
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1/2/08
12/31/07
12/18/07
11/20/07
8/20/07
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7/12/07
7/1/07
4/3/07POS AM
12/7/06
7/1/06
1/1/06
11/2/05
10/14/05POS AM
7/1/05
1/27/05
9/22/04
7/1/04
4/30/04
2/2/04
8/13/03
2/25/03
11/13/02POS AM
12/29/01
6/20/01
12/29/00
2/20/00
8/24/99
12/31/98
7/1/98
12/31/97
12/27/97
12/24/97
10/24/97
9/30/97
6/30/97
10/12/94
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1 Subsequent Filing that References this Filing

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

 7/21/14  SEC                               UPLOAD10/06/17    1:147K Republic of Korea
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Filing Submission 0001193125-14-252206   –   Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)

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