FORM 6-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 6-K

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16 UNDER

THE SECURITIES EXCHANGE ACT OF 1934

For the month of March 2006

Kookmin Bank

(Translation of registrant’s name into English)

9-1, 2-Ga, Namdaemun-Ro, Jung-Gu, Seoul, Korea 100-703

(Address of principal executive office)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F  x    Form 40-F  ¨

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):  ¨

Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of a Form 6-K if submitted solely to provide an attached annual report to security holders.

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):  ¨

Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper of a Form 6-K if submission to furnish a report or other document that the registration foreign private issuer must furnish and make public under the laws of the jurisdiction in which the registrant is incorporated, domiciled or legally organized (the registrant’s “home country”), or under the rules of the home country exchange on which the registrant’s securities are traded, as long as the report or other document is not a press release, is not required to be and has not been distributed to the registrant’s security holders, and if discussing a material event, has already been the subject of a Form 6-K submission or other Commission filing on EDGAR.

Indicate by check mark whether by furnishing the information contained in this Form, the registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Yes  ¨    No  x

 


 

1


TABLE OF CONTENTS

 

Summary of Business Report for the fiscal year 2005    4
1.    Introduction to the Bank    5
1.1.    Business Purposes    5
1.2.    History    5
1.3.    Capital Structure    7
1.4.    Employee Stock Ownership Association    13
1.5.    Dividend    13
2.    Business    14
2.1.    Sources and Uses of Fund    14
2.2.    Principal Banking Activities    17
2.3.    Branch Networks    21
2.4.    Other Information for Investment Decision    22
3.    Financial Information    24
3.1.    Non-Consolidated Condensed Financial Statements    24
3.2.    Other Financial Information    24
4.    Independent Accountant Fees and Services    25
4.1.    Audit & Review Fees    25
4.2.    Non-Audit Services    25
5.    Corporate Governance and Affiliated Companies    26
5.1.    Board of Directors & Committees under the Board    26
5.2.    Audit Committee    26
5.3.    Compensation to Directors    27
5.4.    Voting Rights of Shareholders    27
5.5.    Share Ownership    27
5.6.    Affiliated Companies    28
6.    Directors, Senior Management and Employees    29
6.1.    Executive Directors    29
6.2.    Non-Executive Directors    29
6.3.    Senior Management    30
6.4.    Employees    30
7.    Related Party Transactions    31
7.1.    Transactions with the Largest Shareholders or Affiliates    31
7.2.    Transactions with related parties other than the Largest Shareholders or Affiliates    32

 

2


Index

1. Summary of Business Report for the fiscal year 2005

2. Exhibit 99.1_Kookmin Bank Audit Report for the fiscal year 2005

 

3


Summary of Business Report for the fiscal year 2005

On March 31, 2006, pursuant to the Securities and Exchange Act of Korea, Kookmin Bank filed its business report for the fiscal year 2005 (the “Business Report”) to the Financial Supervisory Commission of Korea and the Korea Exchange. This is the summary of the Business Report translated into English.

All references to “Kookmin Bank” mean Kookmin Bank on a non-consolidated basis, and all references to “we”, “us” or “the Bank” mean Kookmin Bank and, as the context may require, its subsidiaries. In addition, all references to “Won” or “W” in this document are to the currency of the Republic of Korea.

 

4


1. Introduction to the Bank

 

1.1. Business Purposes

The business purpose of the Bank is to engage in the following business activities:

 

    The banking business as prescribed by the Bank Act,

 

    The trust business as prescribed by the Banking Trust Act,

 

    The credit card business as prescribed by the Non-Banking Financing Act, and

 

    Other businesses permitted by the Bank Act or other relevant Korea laws and regulations

 

1.2. History

 

    November 1, 2001

Incorporated and listed on the New York Stock Exchange

 

    November 9, 2001

Listed on the Korea Stock Exchange

 

    September 23, 2002

Integrated IT platforms of old Kookmin Bank and H&CB

 

    December 4, 2002

Entered into a strategic alliance agreement with ING Bank N.V., which replaced the prior investment agreement with H&CB

 

    May 30, 2003

Entered into a merger agreement with Kookmin Credit Card, one of our major subsidiaries, and officially submitted Merger Statement to Financial Supervisory Commission

 

    September 30, 2003

Completed small-scale merger with Kookmin Credit Card

 

    December 16, 2003

Completed strategic investment in Bank International Indonesia (BII) by investing in 25% stake of the Consortium of Sorak Financial Holdings

 

    December 19, 2003

Fully privatized through the entire disposition of Korean government’s stake in Kookmin Bank

 

    April 29, 2004

Established a subsidiary, KB Life Co. Ltd., to engage in insurance business

 

    July 22, 2004

Made an alliance with China Construction Bank for the foreign currency business

 

5


    August 31, 2004

ING Bank N.V. made a contract with KB for the strategic investment in KB Life

 

    October 29, 2004

Appointed Mr. Chung Won Kang as the President & CEO in Extraordinary General Shareholders’ Meeting

 

    November 09, 2004

Declared Integration of three labor unions (former Kookmin Bank, former H&CB, former Kookmin Credit Card) into a single KB labor union

 

    December 31, 2004

The largest shareholder of Kookmin Bank changed from ING Bank N.V. Amsterdam to Euro-Pacific Growth Fund

 

    March 02, 2005

Open KB Satellite Broad Casting System for the first time in the world

 

    March 21, 2005

The largest shareholder of Kookmin Bank changed from Euro-Pacific Growth Fund to ING Bank N.V. Amsterdam

 

    June 16, 2005

Disposed 27,423,761 shares of treasury stock by means of the combination of domestic over-the-counter-sales and an international issuance of depository receipts

 

    July 26, 2005

Obtained an approval from FSS to use Market Risk Internal Model for the first time among domestic financial institutions

 

    October 14, 2005

The largest shareholder of Kookmin Bank changed from ING Bank N.V. Amsterdam to Euro-Pacific Growth Fund

 

    February 2, 2006

Established “Basel II system to calculate credit risk weighted asset and New BIS Capital adequacy ratio” for the first time in Korea

 

6


1.3. Capital Structure

 

1.3.1. Common Shares

Kookmin Bank has authority to issue a total of 1,000,000,000 shares of capital stock according to its Articles of Incorporation. Kookmin Bank’s Articles of Incorporation also provide that it is authorized to issue shares of preferred stock up to one-half of all of the issued and outstanding shares of common stock. On completion of the merger between Former Kookmin Bank and H&CB, Kookmin Bank issued 299,697,462 common shares.

Upon the resolution of shareholders’ meeting held on March 22, 2002, Kookmin Bank issued additional 17,979,954 common shares in connection with stock dividend of 6 percent.

On November 25, 2002 Goldman Sachs Capital Koryo, L.P. converted all of its convertible bonds into common shares. According to this conversion on November 30, 2002, Kookmin Bank issued 10,581,269 common shares and distributed them to Goldman Sachs Capital Koryo, L.P.

With regard to the merger between Kookmin Bank and Kookmin Credit Card on September 30, 2003, Kookmin Bank issued additional 8,120,431 shares on October 1, 2003. Accordingly, as of September 30, 2005, total 336,379,116 shares were issued with 1,681,896 million Won of paid-in capital.

 

7


1.3.2. Treasury Stock

The following table shows the acquisition and disposition of our treasury stock as of January 13, 2006. (Units: in thousand of Won unless indicated otherwise)

 

Date

  

Transaction

  

Number of

share

  

Acquisition/

Disposition
amount

  

Average
cost

per one
share (Won)

November 15, 2001

  

Acquisition of fractional shares in the course of the merger

   41,548    1,794,885    43,200

December 24, 2001

  

Disposition due to exercise of stock option by a grantee

   10,000    432,003    43,200

April 3, 2002

  

Acquisition of fractional shares due to stock dividend

   36,089    2,071,557    57,400

May 14, 2002

  

Disposition pursuant to the Bank Act of Korea

   31,548    1,601,944    50,788

July 30 - October 23, 2002

  

Acquisition pursuant to the Securities and Exchange Act of Korea

   3,000,000    147,632,489    49,210

December 24, 2002

  

Disposition due to exercise of stock option by a grantee

   10,000    492,294    49,229

January 15, 2003

  

Disposition due to exercise of stock option by a grantee

   10,000    492,294    49,229

September 4 - 9, 2003

  

Acquisition pursuant to the Securities and Exchange Act of Korea

   650,000    29,094,064    44,760

October 16, 2003

  

Acquisition of fractional shares due to the Merger with Kookmin Credit Card

   5,095    214,254    42,050

4th quarter, 2003

  

Disposition due to exercise of stock option by grantees

   78,322    3,792,977    48,428

December 17, 2003

  

Acquisition from the sale of Korean government shares of the Bank

   27,423,761    1,198,568,158    43,700

December 26, 2003

  

Disposition due to contribution to ESOP account

   1,000,000    44,252,000    44,252

1st quarter, 2004

  

Disposition due to exercise of stock option by grantees

   30,855    1,365,396    44,252

2nd quarter, 2004

  

Disposition due to exercise of stock option by grantees

   55,593    2,460,101    44,252

3rd quarter, 2004

  

Disposition due to exercise of stock option by grantees

   592    26,197    44,252

4th quarter, 2004

  

Disposition due to exercise of stock option by grantees

   48,374    2,140,646    44,252

1st quarter, 20051

  

Disposition due to contribution to ESOP account and exercise of stock option by grantees

   1,095,038    48,457,622    44,252

2nd quarter, 20052

  

Disposition due to domestic over the counter sales and an international issuance of depository receipts and exercise of stock option by grantees

   28,473,662    1,260,016,491    44,252

3rd quarter, 2005

  

Disposition due to exercise of stock option by grantees

   42,771    1,892,702    44,252

4th quarter, 2005

  

Disposition due to exercise of stock option by grantees

   51,803    2,292,386    44,252

January 13, 2006

  

Disposition due to exercise of stock option by grantees

   217,935    9,644,060    44,252

Total

  

-

   0    0    —  

1 Disposed 2,000,000 shares of Treasury stock for the purpose of contribution to ESOP on February 23, 2005 and April 12, 2005.

 

2 On June 16, 2005, KB disposed 27,423,761 shares of Treasury Stock pursuant to the decision of BOD on April 27, 2005 for the purpose of the improvement of capital structure.

 

8


1.3.3. Stock Option

The following table is the breakdown of stock options Kookmin Bank has granted to the directors and employees as of December 31, 2005.

(Units: in Won, shares)

 

Grant date

  

Name of the grantee

  

Position when granted

   Exercise period    Exercise
price
   Number
of granted
options1
   Number of
exercised
options
   Number of
exercisable
options
         From    To            

28-Feb-00

   Jan Op de Beeck    Director&Executive Vice President    01-Mar-03    28-Feb-06    27,600    22,490    0    22,490

28-Feb-00

   Sung Chul Kim    Executive Vice President    01-Mar-03    28-Feb-06    27,600    30,000    30,000    0

28-Feb-00

   Woo Jung Lee    Executive Vice President    01-Mar-03    28-Feb-06    27,600    30,000    30,000    0

28-Feb-00

   Kuk Ju Kwon    Non Executive Director    01-Mar-03    28-Feb-06    27,600    4,800    0    4,800

28-Feb-00

   Sun Jin Kim    Non Executive Director    01-Mar-03    28-Feb-06    27,600    7,000    7,000    0

28-Feb-00

   Joon Park    Non Executive Director    01-Mar-03    28-Feb-06    27,600    4,800    0    4,800

28-Feb-00

   Moon Soul Chung    Non Executive Director    01-Mar-03    28-Feb-06    27,600    7,000    0    7,000

28-Feb-00

   Heung Soon Chang    Non Executive Director    01-Mar-03    28-Feb-06    27,600    2,486    0    2,486

28-Feb-00

   In Joon Kang    Non Executive Director    01-Mar-03    28-Feb-06    27,600    2,486    2,486    0

28-Feb-00

   Sung Hee Jwa    Non Executive Director    01-Mar-03    28-Feb-06    27,600    4,800    1,093    3,707

28-Feb-00

   Seung Woo Nam    Non Executive Director    01-Mar-03    28-Feb-06    27,600    1,928    1,928    0

28-Feb-00

   Kyung Hee Yoon    Non Executive Director    01-Mar-03    28-Feb-06    27,600    7,000    7,000    0

28-Feb-00

   Sung Cheon Hong & 9 others    Employees    01-Mar-03    28-Feb-06    27,600    67,283    51,812    15,471

24-Mar-01

   Young II Kim    Executive Vice President    25-Mar-04    24-Mar-07    25,100    30,000    13,000    17,000

24-Mar-01

   Jong In Park    Executive Vice President    25-Mar-04    24-Mar-07    25,100    19,333    3,500    15,833

24-Mar-01

   Won Bae Yoon    Non Executive Director    25-Mar-04    24-Mar-07    25,100    2,318    2,318    0

24-Mar-01

   Jae Kyu Lee    Non Executive Director    25-Mar-04    24-Mar-07    25,100    2,318    0    2,318

24-Mar-01

   Chul Soo Ahn    Non Executive Director    25-Mar-04    24-Mar-07    25,100    1,916    1,916    0

24-Mar-01

   Jae Han Kim & 2 others    Employees    25-Mar-04    24-Mar-07    25,100    16,491    14,916    1,575

18-Mar-00

   Sang Hoon Kim    Chairman&CEO    19-Mar-03    18-Mar-05    23,469    41,460    41,460    0

18-Mar-00

   In Kie Kim    Non Executive Director    19-Mar-03    18-Mar-05    23,469    2,961    2,961    0

18-Mar-00

   Jin Ho Hwang    Non Executive Director    19-Mar-03    18-Mar-05    23,469    2,961    2,961    0

18-Mar-00

   Bong Ho Paick    Non Executive Director    19-Mar-03    18-Mar-05    23,469    2,961    2,961    0

18-Mar-00

   Yoo Hwan Kim    Executive Vice President    19-Mar-03    18-Mar-05    23,469    11,845    11,845    0

18-Mar-00

   Duk Hyun Kim    Executive Vice President    19-Mar-03    18-Mar-05    23,469    11,845    11,845    0

15-Mar-01

   Sang Hoon Kim    Chairman&CEO    16-Mar-04    15-Mar-09    28,027    29,614    1,000    28,614

15-Mar-01

   Jong Min Lee    Chief Audit Executive    16-Mar-04    15-Mar-09    28,027    14,807    2,807    12,000

15-Mar-01

   In Kie Kim    Non Executive Director    16-Mar-04    15-Mar-09    28,027    2,961    0    2,961

15-Mar-01

   Ji Hong Kim    Non Executive Director    16-Mar-04    15-Mar-09    28,027    2,961    0    2,961

15-Mar-01

   Bong Ho Paick    Non Executive Director    16-Mar-04    15-Mar-09    28,027    1,870    1,870    0

15-Mar-01

   Ik Rae Kim    Non Executive Director    16-Mar-04    15-Mar-09    28,027    2,961    2,961    0

15-Mar-01

   Seung Heon Han    Non Executive Director    16-Mar-04    15-Mar-09    28,027    1,870    0    1,870

15-Mar-01

   Young Seok Kim    Non Executive Director    16-Mar-04    15-Mar-09    28,027    1,870    0    1,870

15-Mar-01

   Se Woong Lee    Non Executive Director    16-Mar-04    15-Mar-09    28,027    2,961    0    2,961

15-Mar-01

   Bock Woan Kim    Executive Vice President    16-Mar-04    15-Mar-09    28,027    11,845    0    11,845

15-Mar-01

   Yoo Hwan Kim    Executive Vice President    16-Mar-04    15-Mar-09    28,027    11,845    0    11,845

15-Mar-01

   Duk Hyun Kim    Executive Vice President    16-Mar-04    15-Mar-09    28,027    11,845    2,845    9,000

15-Mar-01

   Ok Hyun Yoon    Executive Vice President    16-Mar-04    15-Mar-09    28,027    11,845    2,845    9,000

15-Mar-01

   Tai Gon Kim    Executive Vice President    16-Mar-04    15-Mar-09    28,027    11,845    11,845    0

15-Mar-01

   Byung Sang Kim    Executive Vice President    16-Mar-04    15-Mar-09    28,027    11,845    5,845    6,000

15-Mar-01

   Byung Jin Kim    Executive Vice President    16-Mar-04    15-Mar-09    28,027    11,845    3,845    8,000

1 Some numbers of the granted options have been adjusted due to the merger and the early retirement of the grantees.

 

9


Grant date

  

Name of the grantee

  

Position when granted

   Exercise period    Exercise
price
    Number of
granted
options1
   Number of
exercised
options
   Number of
exercisable
options
         From    To           

15-Mar-01

   Han Koo Ji & 36 others    Employees    16-Mar-04    15-Mar-09    28,027     39,092    14,324    24,768

16-Nov-01

   Jung Tae Kim    President & CEO    17-Nov-04    16-Nov-09    51,200     500,000    0    500,000

16-Nov-01

   Sang Hoon Kim    Chairman    17-Nov-04    16-Nov-09    51,200     150,000    0    150,000

22-Mar-02

   Choul Ju Lee    Chief Audit Executive    23-Mar-05    22-Mar-10    57,100     9,963    0    9,963

22-Mar-02

   Henry Cornell    Non Executive Director    23-Mar-05    22-Mar-10    57,100     3,321    0    3,321

22-Mar-02

   Keun Shik Oh    Non Executive Director    23-Mar-05    22-Mar-10    57,100     3,321    200    3,121

22-Mar-02

   Dong Soo Chung    Non Executive Director    23-Mar-05    22-Mar-10    57,100     10,000    0    10,000

22-Mar-02

   Ji Hong Kim    Non Executive Director    23-Mar-05    22-Mar-10    57,100     3,321    0    3,321

22-Mar-02

   Timothy Hartman    Non Executive Director    23-Mar-05    22-Mar-10    57,100     3,321    0    3,321

22-Mar-02

   Sun Jin Kim    Non Executive Director    23-Mar-05    22-Mar-10    57,100     3,000    0    3,000

22-Mar-02

   Moon Soul Chung    Non Executive Director    23-Mar-05    22-Mar-10    57,100     3,000    0    3,000

22-Mar-02

   Kyung Hee Yoon    Non Executive Director    23-Mar-05    22-Mar-10    57,100     3,000    0    3,000

22-Mar-02

   Jong Kyoo Yoon    Executive Vice President    23-Mar-05    22-Mar-10    57,100     20,522    0    20,522

22-Mar-02

   Bong Hwan Cho    Executive Vice President    23-Mar-05    22-Mar-10    57,100     9,498    0    9,498

22-Mar-02

   Bum Soo Choi    Executive Vice President    23-Mar-05    22-Mar-10    57,100     13,339    0    13,339

22-Mar-02

   Bock Woan Kim    Executive Vice President    23-Mar-05    22-Mar-10    57,100     13,339    0    13,339

22-Mar-02

   Ki Taek Hong    Executive Vice President    23-Mar-05    22-Mar-10    57,100     19,525    0    19,525

22-Mar-02

   Sung Hyun Chung    Executive Vice President    23-Mar-05    22-Mar-10    57,100     19,525    0    19,525

22-Mar-02

   Ki Sup Shin    Executive Vice President    23-Mar-05    22-Mar-10    57,100     26,405    2,405    24,000

22-Mar-02

   Seong Kyu Lee    Executive Vice President    23-Mar-05    22-Mar-10    57,100     30,000    30,000    0

22-Mar-02

   Byung Sang Kim    Executive Vice President    23-Mar-05    22-Mar-10    57,100     9,498    0    9,498

22-Mar-02

   Jong Young Yoon & 15 others    Employees    23-Mar-05    22-Mar-10    57,100     147,658    0    147,658

26-Jul-02

   Donald H. MacKenzie    Executive Vice President    27-Jul-05    26-Jul-10    58,800     23,899    0    23,899

21-Mar-03

   Suk Yong Cha    Non Executive director    22-Mar-06    21-Mar-11    Y 2   10,000    0    10,000

21-Mar-03

   Ki Hong Kim    Non Executive director    22-Mar-06    21-Mar-11      10,000    0    10,000

21-Mar-03

   Moon Soul Chung    Non Executive director    22-Mar-06    21-Mar-11    43,800     6,678    0    6,678

21-Mar-03

   Sun Jin Kim    Non Executive director    22-Mar-06    21-Mar-11    43,800     6,678    0    6,678

21-Mar-03

   Richard Elliott Lint    Non Executive director    22-Mar-06    21-Mar-11    43,800     6,678    0    6,678

21-Mar-03

   Kyung Hee Yoon    Non Executive director    22-Mar-06    21-Mar-11    43,800     6,678    0    6,678

21-Mar-03

   Bernard S. Black    Non Executive director    22-Mar-06    21-Mar-11    43,800     6,678    0    6,678

21-Mar-03

   Eun Joo Park    Non Executive director    22-Mar-06    21-Mar-11    42,200     3,351    0    3,351

21-Mar-03

   Cheol Soo Ahn    Non Executive director    22-Mar-06    21-Mar-11    42,200     3,351    0    3,351

21-Mar-03

   Kyung Bae Suh    Non Executive director    22-Mar-06    21-Mar-11    42,200     3,351    0    3,351

21-Mar-03

   Sung Chul Kim    Executive Vice President    22-Mar-06    21-Mar-11    35,500     9,443    0    9,443

21-Mar-03

   Woo Jung Lee    Executive Vice President    22-Mar-06    21-Mar-11    35,500     9,443    0    9,443

21-Mar-03

   See Young Lee    Executive Vice President    22-Mar-06    21-Mar-11    35,000     7,024    0    7,024

21-Mar-03

   Won Suk Oh & 5 others    Employees    22-Mar-06    21-Mar-11    35,500     63,650    0    63,650

27-Aug-03

   Jin Baek Cheong    Executive Vice President    28-Aug-03    27-Aug-11    40,500     5,091    0    5,091

22-Mar-01

   Han Kyoung Lee    Former KCC Officer    23-Mar-04    22-Mar-11    71,538     6,644    0    6,644

22-Mar-01

   Jun Chae Song    Former KCC Officer    23-Mar-04    22-Mar-11    71,538     6,644    0    6,644

22-Mar-01

   Cheol Ho Kim    Former KCC Officer    23-Mar-04    22-Mar-11    71,538     4,429    0    4,429

22-Mar-01

   Myoung Woo Lee    Former KCC Officer    23-Mar-04    22-Mar-11    71,538     4,429    0    4,429

29-Mar-02

   Boung Hak Kim    Former KCC Officer    30-Mar-04    29-Mar-11    129,100     3,330    0    3,330

29-Mar-02

   Sun Lee    Former KCC Officer    30-Mar-04    29-Mar-11    129,100     3,330    0    3,330

29-Mar-02

   Jang Ok Kim    Former KCC Officer    30-Mar-04    29-Mar-11    129,100     3,330    0    3,330

2 Exercise price = 35,500 Won x (1 + the increase rate of KOSPI Banking Industry Index x 0.4). The increase rate of KOSPI Banking Industry Index = (KOSPI Banking Industry Index as of the starting date of exercise period - KOSPI Banking Industry Index as of the grant date) / KOSPI Banking Industry Index as of the grant date.

 

10


Grant date

  

Name of the grantee

  

Position when granted

   Exercise period    Exercise
price
    Number of
granted
options1
   Number of
exercised
options
   Number of
exercisable
options
         From    To           

09-Feb-04

   Young II Kim    Senior Executive Vice President    10-Feb-07    09-Feb-12    46,100     7,125    0    7,125

09-Feb-04

   Jeung Lak Lee    Senior Executive Vice President    10-Feb-07    09-Feb-12    46,100     7,452    0    7,452

09-Feb-04

   Sang Jin Lee    Senior Executive Vice President    10-Feb-07    09-Feb-12    46,100     7,125    0    7,125

09-Feb-04

   Yun Keun Jung    Senior Executive Vice President    10-Feb-07    09-Feb-12    46,100     5,000    0    5,000

09-Feb-04

   Kuk Shin Kang & 9 others    Employees    10-Feb-07    09-Feb-12    46,100     48,837    0    48,837

23-Mar-04

   Dong Soo Chung    Non Executive Director    24-Mar-07    23-Mar-12    48,500     5,000    0    5,000

23-Mar-04

   Woon Youl Choi    Non Executive Director    24-Mar-07    23-Mar-12    48,800     5,000    0    5,000

23-Mar-04

   Wang Ha Cho    Non Executive Director    24-Mar-07    23-Mar-12    48,800     5,000    0    5,000

23-Mar-04

   Young Soon Cheon    Non Executive Director    24-Mar-07    23-Mar-12    48,500     5,000    0    5,000

23-Mar-04

   Jung Young Kang    Senior Executive Vice President    24-Mar-07    23-Mar-12    47,200     10,000    0    10,000

01-Nov-04

   Chung Won Kang    President & CEO    02-Nov-07    01-Nov-12    X 3   700,000    0    700,000

18-Mar-05

   Hyung Duk Chang    Chief Audit Executive    19-Mar-08    18-Mar-13    X 4   30,000    0    30,000

18-Mar-05

   Kap Shin    Senior Executive Vice President    19-Mar-08    18-Mar-13    46,800     30,000    0    30,000

18-Mar-05

   Dong Won Kim    Senior Executive Vice President    19-Mar-08    18-Mar-13    46,800     30,000    0    30,000

18-Mar-05

   Yun Keun Jung    Senior Executive Vice President    19-Mar-08    18-Mar-13    46,800     30,000    0    30,000

18-Mar-05

   Nam Sik Yang    Senior Executive Vice President    19-Mar-08    18-Mar-13    46,800     30,000    0    30,000

18-Mar-05

   Hyo Sung Won    Senior Executive Vice President    19-Mar-08    18-Mar-13    46,800     30,000    0    30,000

18-Mar-05

   Yong Kook Oh    Senior Executive Vice President    19-Mar-08    18-Mar-13    46,800     30,000    0    30,000

18-Mar-05

   Sang Jin Lee    Senior Executive Vice President    19-Mar-08    18-Mar-13    46,800     30,000    0    30,000

18-Mar-05

   Ahn Sook Koo    Senior Executive Vice President    19-Mar-08    18-Mar-13    46,800     30,000    0    30,000

18-Mar-05

   Jung Young Kang    Senior Executive Vice President    19-Mar-08    18-Mar-13    46,800     30,000    0    30,000

18-Mar-05

   Young Han Choi    Senior Executive Vice President    19-Mar-08    18-Mar-13    46,800     30,000    0    30,000

18-Mar-05

   Dong Soo Choe    Senior Executive Vice President    19-Mar-08    18-Mar-13    46,800     30,000    0    30,000

18-Mar-05

   Seong Kyu Lee    Senior Executive Vice President    19-Mar-08    18-Mar-13    46,800     30,000    0    30,000

18-Mar-05

   Jun Bo Cho    Senior Executive Vice President    19-Mar-08    18-Mar-13    46,800     30,000    0    30,000

18-Mar-05

   Jeong Min Kim    Senior Executive Vice President    19-Mar-08    18-Mar-13    46,800     30,000    0    30,000

3 Exercise price = 37,600 Won x (1 + the increase rate of KOSPI Banking Industry Index x 0.4). The increase rate of KOSPI Banking Industry Index = (KOSPI Banking Industry Index as of the starting date of exercise period - KOSPI Banking Industry Index as of the grant date) / KOSPI Banking Industry Index as of the grant date.

 

4 Exercise price = 46,800 Won x (1 + the increase rate of KOSPI Banking Industry Index x 0.4). The increase rate of KOSPI Banking Industry Index = (KOSPI Banking Industry Index as of the starting date of exercise period - KOSPI Banking Industry Index as of the grant date) / KOSPI Banking Industry Index as of the grant date.

 

11


Grant date  

Name of the grantee

 

Position when granted

  Exercise period   Exercise
price
   

Number

of

granted

options1

 

Number

of

exercised

options

  Number of
exercisable
options
      From   To        
18-Mar-05   Sung Soo Jung & 21 others   Employees   19-Mar-08   18-Mar-13   46,800     345,000   0   345,000
18-Mar-05   Suk Yong Cha   Non Executive director   19-Mar-08   18-Mar-13     15,000   0   15,000
18-Mar-05   Ki Hong Kim   Non Executive director   19-Mar-08   18-Mar-13     15,000   0   15,000
18-Mar-05   Young Soon Cheon   Non Executive director   19-Mar-08   18-Mar-13     15,000   0   15,000
18-Mar-05   Dong Soo Chung   Non Executive director   19-Mar-08   18-Mar-13     15,000   0   15,000
18-Mar-05   Chang Kyu Lee   Non Executive director   19-Mar-08   18-Mar-13   X 5   15,000   0   15,000
18-Mar-05   Hun Namkoong   Non Executive director   19-Mar-08   18-Mar-13     15,000   0   15,000
18-Mar-05   Doo Hwan Song   Non Executive director   19-Mar-08   18-Mar-13     15,000   0   15,000
18-Mar-05   Dam Cho   Non Executive director   19-Mar-08   18-Mar-13     15,000   0   15,000
18-Mar-05   Nobuya Takasugi   Non Executive director   19-Mar-08   18-Mar-13     15,000   0   15,000
27-Apr-05   Kyung Wook Kang   Employee   28-Apr-08   27-Apr-13   45,700     15,000   0   15,000
22-Jul-05   Donald H. MacKenzie   Senior Executive Vice President   23-Jul-08   22-Jul-13   49,200     30,000   0   30,000
23-Aug-05   Youn Soo Kim   Executive Vice President   24-Aug-08   23-Aug-13   53,000     15,000   0   15,000
                     
   

Total

        3,533,588   271,991   3,261,597
                     

5 Exercise price = 46,800 Won x (1 + the increase rate of KOSPI Banking Industry Index x 0.4). The increase rate of KOSPI Banking Industry Index = (KOSPI Banking Industry Index as of the starting date of exercise period - KOSPI Banking Industry Index as of the grant date) / KOSPI Banking Industry Index as of the grant date.

 

    The number of stock options granted on February 9, 2004 and March 23, 2004 are the stock options granted over 1 year.

 

    The number of stock options granted on November 11, 2004, March 18, 2005, July 22, 2005 and August 23, 2005 are the stock options granted over 3 years.

 

12


1.4.  Employee Stock Ownership Association1

 

    

Beginning
balance

(January 1, 2005)

   Increase    Decrease   

Ending

Balance

(December 31,

2005)

   Remarks

Registered common stock

   1,944,211    1,562,906    638,611    2,868,506    —  
                        

Total

   1,944,211    1,562,906    638,611    2,868,506    —  
                        

 

1.5. Dividend

The following table shows dividend policy and the related information for the last three years. The Board of Directors of Kookmin Bank made a resolution to pay dividend for the fiscal year of 2005, and shareholders of Kookmin Bank approved of the dividend payout for the year at the general shareholders’ meeting held on March 24, 2006.

(Units: in millions of Won unless indicated otherwise)

 

     2005     2004    2003  

Net (loss) income for the period

   2,252,218     360,454    (930,356 )

Diluted (loss) earnings per share (Won)

   6,977 2   1,176    (2,854 )

Total dividend amount

   184,889     168,574    —    

Dividend payout ratio (%)

   8.21 3   46.77    —    

Cash dividend per common share (Won)

   550     550    —    

Stock dividend per common share (%)

   —       —      —    

Dividend per preferred share (Won)

   —       —      —    

Dividend yield ratio (%)

   0.72 4   1.42    —    

1 Disposed 2,000,000 shares of Treasury stock for the purpose of contribution to ESOP on February 23, 2005 and April 12, 2005.

 

2 Earnings per share = net income (2,252,218,097,725 Won) / weighted average number of shares (322,785,751 shares).

 

3 Dividend payout ratio = total dividend amount for common shares (184,888,649,550 Won) / net income (2,252,218,097,725 Won).

 

4 Dividend yield ratio = dividend per share (550 Won) / average closing price for a week based on business day prior to market closing date of December 31, 2005 (76,000 Won).

 

13


2. Business

 

2.1. Sources and Uses of Fund

 

2.1.1. Sources of Fund

 

(Unit: in millions of Won)

   December 31, 2005    December 31, 2004    December 31, 2003
   Average
balance
  

Interest

rate
(%)

   Average
balance
  

Interest

rate
(%)

   Average
balance
   Interest
rate (%)

Won currency

   Deposits    114,394,983    2.82    118,017,849    3.29    117,045,837    3.69
   Certificate of deposit    5,008,378    3.69    6,108,179    4.06    4,068,327    4.45
   Borrowings    2,674,268    3.02    3,053,890    3.43    3,625,926    3.89
   Call money    931,968    3.24    1,117,576    3.55    1,315,639    3.93
   Other    24,315,388    5.08    23,376,439    5.61    23,311,299    5.91
                                

Subtotal

      147,324,985    3.23    151,673,933    3.68    149,367,028    4.06
                                

Foreign currency

   Deposits    1,473,811    1.61    1,777,402    0.61    1,276,952    0.84
   Borrowings    3,231,480    2.06    2,796,300    0.94    3,462,883    1.01
   Call money    285,573    3.48    145,809    1.43    150,609    1.07
   Finance debentures issued    765,723    4.09    824,745    2.28    773,840    2.11
   Other    52,592    —      40,383    —      26,491    —  
                                

Subtotal

      5,809,179    2.26    5,584,639    1.04    5,690,775    1.12
                                

Other

   Total Shareholders Equity    11,369,246    —      9,284,477    —      12,053,112    —  
   Allowances    677,036    —      459,124    —      98,422    —  
   Other    12,041,392    —      12,773,040    —      9,509,287    —  
                                

Subtotal

      24,087,674    —      22,516,641    —      21,660,821    —  
                                

Total

      177,221,838    2.76    179,775,213    3.14    176,718,624    3.47
                                

 

14


2.1.2. Uses of Fund

 

(Unit: in millions of Won)

   December 31, 2005    December 31, 2004    December 31, 2003
   Average
balance
   Interest
rate
(%)
   Average
balance
   Interest
rate
(%)
   Average
balance
   Interest
rate
(%)

Won

   Due from banks       304,662    2.97    184,593    0.83    165,358    1.37

currency

   Securities       27,676,964    4.58    23,930,678    5.14    30,069,922    6.58
   Loans       120,539,476    6.24    125,504,672    6.64    121,725,298    7.10
   Advances for customers       23,947    8.64    71,213    2.01    96,547    5.79
   Call loan       1,473,725    3.43    1,661,772    3.78    685,953    3.92
   Private placement corporate bonds       1,887,514    6.95    1,322,470    6.58    1,287,623    10.26
   Credit card accounts       7,321,906    27.46    9,581,330    26.80    6,698,954    22.73
   Other       267,061    —      172,783    —      298,858    —  
   Allowance for credit losses ( - )       3,034,841    —      3,844,940    —      1,823,976    —  
                                   

Subtotal

         156,460,414    7.08    158,584,571    7.81    159,204,537    7.79
                                   

Foreign

   Due from banks       598,015    2.88    632,526    1.34    612,862    1.33

currency

   Securities       858,565    6.15    1,208,124    3.88    1,269,538    5.23
   Loans       4,745,013    2.97    4,011,351    2.73    4,160,185    2.35
   Call loan       132,210    3.24    114,606    1.63    84,803    1.28
   Bills bought       1,037,144    4.64    568,502    4.07    608,274    4.14
   Other       2,209    —      4,812    —      12,391    26.32
   Allowance for credit losses ( - )       64,209    —      94,501    —      132,105    —  
                                   

Subtotal

         7,308,866    3.68    6,445,420    3.03    6,615,948    3.05
                                   

Other

   Cash       956,471    —      965,852    —      968,815    —  
   Fixed assets held for business       2,508,879    —      3,084,589    —      3,210,463    —  
   Other       9,987,209    —      10,694,781    —      6,718,861    —  
                                   

Subtotal

         13,452,558    —      14,745,222    —      10,898,139    —  
                                   

Total

         177,221,838    6.40    179,775,213    7.00    176,718,624    7.14
                                   

 

15


2.1.3. Fee Transactions

(Unit: in millions of Won)

 

          December 31, 2005    December 31, 2004    December 31, 2003
Fee Revenue (A)         
Won    Guarantees    5,336    4,957    4,727
currency    Commissions received    804,934    776,852    638,380
   Credit card    66,484    64,724    128,270
   NHF    179,540    160,874    174,910
                 
Foreign    Guarantees    4,227    2,593    3,310
currency    Others    78,715    75,016    65,010
                 
Subtotal       1,139,236    1,085,016    1,014,607
                 
Fee Expense (B)            
Won &    Commissions paid in Won    119,539    98,392    80,499
foreign    Credit card    210,315    352,194    181,622
currency    Others    22,692    20,169    24,383
                 
Subtotal       352,546    470,755    286,504
                 
Fee Income (A-B)    786,690    614,261    728,103
                 

 

16


2.2. Principal Banking Activities

 

2.2.1. Deposits

The following table shows the average balances of our deposits for the periods ended and ending balances as of the dates indicated.

(Unit: in millions of Won)

 

          December 31, 2005    December 31, 2004    December 31, 2003
         

Average

balance

   Ending
balance
  

Average

balance

   Ending
balance
  

Average

balance

   Ending
balance

Deposits in Won

   Demand
deposits
   14,985,812    17,946,067    12,994,946    14,338,784    12,192,971    14,110,288
   Time &
savings
deposits
   92,463,027    91,863,790    96,637,551    94,723,601    96,668,084    97,616,747
   Mutual
installment
deposits
   5,674,807    5,120,668    6,682,928    6,306,923    6,958,043    7,054,753
   Mutual
installment
for housing
   4,942,334    4,582,031    5,453,713    5,295,274    5,161,535    5,423,853
   Certificates
of deposits
   5,008,378    5,389,543    6,108,179    4,911,891    4,068,327    6,499,258
                                

Subtotal

      123,074,358    124,902,099    127,877,317    125,576,473    125,048,960    130,704,899
                                

Deposits in foreign currency

      1,473,811    1,379,133    1,769,828    1,434,061    1,276,952    1,475,373
                                

Trust deposits

   Money
trust
   7,114,352    7,405,675    7,701,447    7,028,835    13,064,749    10,278,357
   Property
trust
   11,032,320    9,854,012    16,297,382    12,534,329    24,512,746    21,453,761
                                

Subtotal

      18,146,672    17,259,687    23,998,829    19,563,164    37,577,495    31,732,118
                                

Total

      142,694,841    143,540,919    153,645,974    146,573,698    163,903,407    163,912,390
                                

 

2.2.2. Average Deposit per Domestic Branch

The following table shows the average balances of our deposits per domestic branch as of the dates indicated.

(Unit: in millions of Won)

 

     December 31, 2005    December 31, 2004    December 31, 2003

Deposits

   123,532    123,945    119,593

Deposits in Won

   122,358    122,585    118,756

 

17


2.2.3. Average Deposit per Employee

The following table shows the average balances of our deposits per employee as of the dates indicated.

(Unit: in millions of Won)

 

     December 31, 2005    December 31, 2004    December 31, 2003

Deposits

   7,725    7,232    7,487

Deposits in Won

   7,652    7,152    7,434

 

2.2.4. Loan Balances

The following table shows the average balances of our loans for the periods ended and ending balances as of the dates indicated.

(Unit: in millions of Won)

 

     December 31, 2005    December 31, 2004    December 31, 2003
    

Average

balance

   Ending
balance
  

Average

balance

   Ending
balance
  

Average

balance

   Ending
balance

Loans in Won

   120,532,216    118,565,341    125,496,237    122,721,898    121,705,493    123,715,244

Loans in foreign currency

   4,745,013    5,314,883    4,011,351    3,860,828    4,160,185    4,019,929

Advances to customers

   23,947    11,321    73,801    32,120    107,091    89,665
                             

Subtotal

   125,301,176    123,891,545    129,581,389    126,614,846    125,972,769    127,824,838
                             

Trust account loans

   334,404    328,127    429,054    361,906    531,500    489,788
                             

Total

   125,635,580    124,219,672    130,010,443    126,976,752    126,504,269    128,314,626
                             

 

2.2.5. Loan Balances as of December 31, 2005 by Maturity

(Unit: in millions of Won)

 

     1 year & Less    More than 1 year-
3 years
   More than 3 years~
5 years
   More than 5 years    Total

Loans in Won

   65,815,706    23,920,419    9,568,859    19,260,357    118,565,341

Loans in foreign currency

   4,144,673    564,587    311,578    294,045    5,314,883

 

18


2.2.6. Loan Balances by Types

The following table shows the banking account balances of our loans in Won by uses as of the dates indicated.

(Unit: in millions of Won)

 

          December 31, 2005    December 31, 2004    December 31, 2003

Loans to enterprise

   Loans for
operations
   30,498,328    31,678,117    35,351,506
   Loans for facility    5,073,050    6,286,747    6,631,703

Loans to households

      42,771,264    42,790,337    42,884,305

Loans to public sector & others

   Loans for
operations
   643,141    673,456    526,227
   Loans for facility    34,157    40,383    42,473

Loans on property formation savings

      6,748    9,719    62,963

Loans for housing

      39,535,441    41,234,086    38,199,290

Inter-bank loans

      1,274    6,114    12,815

Others

      1,938    2,939    3,962
                 

Total

      118,565,341    122,721,898    123,715,244
                 

 

2.2.7. Loan to Deposit Ratio1

The following table shows loan to deposit ratio as of indicated dates.

(Units: in millions of Won, %)

 

     December 31, 2005    December 31, 2004    December 31, 2003

Loans (A)

   120,532,216    125,496,237    121,705,493

Deposits (B)

   123,074,358    127,877,317    125,048,960
              

Loan to deposit ratio (A/B)

   97.93    98.14    97.33
              

 

2.2.8. Acceptances and Guarantees

(Unit: in millions of Won)

 

     December 31, 2005    December 31, 2004    December 31, 2003

Determined

   1,789,560    975,788    800,297

Contingent

   1,972,192    1,311,774    1,281,518
              

Total

   3,761,752    2,287,562    2,081,815
              

 


1 Average balance of loans in Won / (average balance of deposits in Won + average balance of certificate of deposits)

 

19


2.2.9. Breakdown of Securities Investment

The following table shows the average balances of our securities for the periods ended and ending balances as of the indicated dates.

(Unit: in Won)

 

          December 31, 2005    December 31, 2004    December 31, 2003
         

Average

balance

   Ending
balance
  

Average

balance

   Ending
balance
  

Average

balance

   Ending
balance

Securities in Won (Banking account)

   Monetary
stabilization
bonds
   10,667,229    11,570,306    7,150,535    10,524,835    4,343,978    5,540,598
   Government
and public
bonds
   6,950,886    8,933,401    4,753,135    4,675,093    5,630,422    5,885,595
   Debentures    7,334,555    9,184,403    7,013,765    6,152,749    12,315,840    8,936,220
   Stocks    1,243,781    1,707,816    1,003,131    1,282,050    1,380,254    877,013
   Others    3,368,027    2,105,353    5,332,583    5,583,539    7,687,052    6,106,021

Subtotal

      29,564,478    33,501,279    25,253,149    28,218,266    31,357,546    27,345,447

Securities in Won (Trust account)

   Monetary
stabilization
bonds
   999,522    981,949    1,222,004    1,152,621    984,380    878,077
   Government
and public
bonds
   993,450    1,013,355    922,790    837,080    1,182,165    1,252,419
   Debentures    1,979,588    2,017,298    2,363,630    2,312,459    5,876,064    4,080,362
   Stocks    514,568    542,731    564,538    510,650    763,277    592,379
   Others    2,745,143    3,311,235    2,101,832    2,324,393    3,208,160    2,106,262

Securities in foreign currency (Trust Account)

      289,665    184,115    662,549    449,415    868,819    767,675

Subtotal

      7,521,936    8,050,683    7,837,343    7,586,618    12,882,865    9,677,174

Securities in foreign currency (Banking account)

   Foreign
securities
   579,561    525,892    894,722    745,352    999,806    1,072,483
   Off-shore
foreign
securities
   279,003    252,994    313,402    205,455    269,732    277,663
                                

Subtotal

      858,564    778,886    1,208,124    950,807    1,269,538    1,350,146
                                

Total

      37,944,978    42,546,746    34,298,616    36,755,691    45,509,949    38,372,767
                                

 

2.2.10. Trust Account

(Unit: in millions of Won)

 

     December 31, 2005    December 31, 2004    December 31, 2003
   Average
amount trusted
   Trust
fees
   Average
amount trusted
   Trust
fees
   Average
amount trusted
   Trust
fees

Return-guaranteed trust

   335    43,088    369    8,365    559    45,682

Performance trust

   18,146,337    77,756    23,998,460    93,856    37,576,936    186,851
                             

Total

   18,146,672    120,844    23,998,829    102,221    37,577,495    232,533
                             

 

20


2.2.11. Credit Card

(Unit: in millions of Won unless indicated otherwise)

 

     As of or for the years ended of indicated dates
   December 31, 2005    December 31, 2004    December 31, 2003

Number of card holders (Person)

   Corporate    159,047    182,109    147,813
   Individual    9,342,552    11,362,173    10,990,703

Number of merchants

      1,506,979    1,491,730    1,528,872

Sales volume1

      62,475,085    66,918,805    92,643,700

Fee revenue

      2,085,866    2,807,557    4,013,938

 

2.3. Branch Networks

As of December 31, 2005, we have 1,051 branches and 47 sub-branches in Korea, the largest number of branches among Korean commercial banks. Approximately 41% of our branches and sub-branches are located in Seoul.

We also have three overseas branches in Tokyo, New York and Auckland, and 1 overseas office in Guangzhou in China.


1. Includes lump-sum & installment purchase, cash advances & check card

 

21


2.4. Other Information for Investment Decision

 

2.4.1. BIS Risk-adjusted Capital Ratios

(Units: in millions of Won, %)

 

     December 31, 2005    December 31, 2004    December 31, 2003

Risk-adjusted capital (A)

   15,682,535    13,334,531    12,499,543

Risk-weighted assets (B)

   121,072,676    121,081,735    127,370,180

BIS ratios (A/B)

   12.95    11.01    9.81

 

2.4.2. Non-Performing Loans1

(Units: in millions of Won unless indicated otherwise)

 

December 31, 2005     December 31, 2004     Change  
Amount    NPL to total loans     Amount    NPL to total loans     Amount    NPL to total loans  
1,946,362    1.42 %   3,207,190    2.35 %   -1,260,828    -0.93 %p

 

2.4.3. Loan Loss Allowances

The following table shows the balance of our loan loss allowances as of the dates indicated.

(Units: in millions of Won)

 

     December 31, 2005    December 31, 2004    December 31, 2003

Loan losses allowance

   Loans in Won    2,496,655    3,181,433    3,946,059
   Loans in
foreign
currencies
   4,122    4,662    2,677
                 
   Total    2,500,777    3,186,095    3,948,736
                 

Provision for loan losses

   2,014,834    3,382,130    1,161,857
                 

1. Non-performing loans are defined as those loans that are past due more than 90 days or that are placed non-accrual status according to the Financial Supervisory Service’s guidelines.

 

22


2.4.4. Changes of Loan Loss Allowances for Recent Three Years

(Unit: in millions of Won)

 

     December 31, 20051     December 31, 20042     December 31, 20033  

Beginning balance

   3,186,095     3,948,736     2,420,410  

Net Write-Off

   (1,738,406 )   (3,830,889 )   92,314  

Write-Off

   (2,014,834 )   (3,382,130 )   (1,161,857 )

Recovery

   452,959     286,464     270,422  

Other

   (176,531 )   (725,223 )   983,749  

Provision for loan losses

   1,053,088     3,068,248     1,436,012  
                  

Ending balance

   2,500,777     3,186,095     3,948,736  
                  

1 Includes present value discounts and allowance for other assets amounting to 20,015 million Won and 47,502 million Won, respectively as of December 31, 2005

 

2 Includes present value discounts and allowances for other assets amounting to 22,111 million Won and 67,320 million Won, respectively that had been recorded as of December 31, 2004

 

3 Includes present value discounts and allowance for other assets amounting to 22,780 million Won and 38,692 million Won, respectively, that had been recorded as of December 31, 2003 and includes present discounts and allowance for other assets amounting to 30,442 million Won and 24,252 million Won, respectively that had been recorded as of January 1, 2003

 

23


3. Financial Information

 

3.1. Non-Consolidated Condensed Financial Statements

(Unit: in millions of Won)

 

     As of or for the years ended of indicated dates  
   December 31, 2005    December 31, 20041  

Cash and due from banks

   5,867,417    5,139,604  

Securities

   30,550,229    27,965,441  

Loans

   135,738,407    135,769,326  

Fixed assets

   2,436,702    2,633,218  

Other assets

   5,000,824    8,133,541  

Total assets

   179,593,649    179,641,130  

Deposits

   126,281,232    127,010,534  

Borrowings

   13,737,336    9,634,296  

Debentures

   16,547,987    21,874,695  

Other liabilities

   10,653,494    11,943,063  

Total liabilities

   167,220,049    170,462,588  

Capital stocks

   1,681,896    1,681,896  

Capital surplus

   6,254,786    6,230,738  

Retained earnings

   3,929,948    1,846,895  

Capital adjustments

   506,970    (580,987 )

Total shareholders’ equity

   12,373,600    9,178,542  

Liabilities and Shareholders’ Equity

   179,593,649    179,641,130  

Operating revenue

   17,855,258    20,518,018  

Operating income

   3,015,822    1,726,218  

Continuing (loss) income before income taxes

   3,228,253    629,911  
           

Net (loss) income

   2,252,218    360,454  
           

 

3.2. Other Financial Information

See the Exhibit 99.1 Kookmin Bank Audit Report by our independent auditors for our full- financial statements and relevant notes. The Report is also available at our website www.kbstar.com.

 


1 Restated due to the change in accounting treatment for Wholly Owned Beneficiary Certificates by FSS

 

24


4. Independent Accountant Fees and Services

 

4.1. Audit & Review Fees

Deloitte Anjin LLC has reviewed and audited our financial statements for the fiscal year of 2005. The aggregate contract fee for the audit and review fees for the fiscal year 2005 is 1,350 million Won.

 

4.2. Non-Audit Services

The following is a description of non-audit services rendered by our independent auditor for the recent three years.

(Units: in millions of Won unless indicated otherwise)

 

Year

  

Service description

  

Amount of payment

2005

   -     LOC (Letter of Comfort)    30

2004

   -     Refinancing    230
   -     Due Diligence regarding the possible acquisition of DITC/ KITC    300
   -     US GAAP calculation of provision for the third quarter of 2004    100
   -     US GAAP conversion for 2004    USD 3,600 thousand

2003

   -     US GAAP conversion for 2003    USD 3,950 thousand
   -     Refinancing    275
   -     Due Diligence on Bank International Indonesia    SGD 313 thousand
   -     US GAAP conversion for 2002    USD 3,800 thousand
   -     Due Diligence on Kookmin Credit Card    250
   -     SEC Filing regarding the proposed merger with Kookmin Credit Card    USD 30 thousand

 

25


5. Corporate Governance and Affiliated Companies

 

5.1. Board of Directors & Committees under the Board

The board of directors holds regular meetings every quarter. The board of directors consists of directors and resolves each following matter:

 

    Matters relating to business objectives and performance evaluation;

 

    Matters relating to amendments of the Articles of Incorporation;

 

    Matters relating to budget and accounting including salaries of directors and employees;

 

    Matters relating to major organizational changes such as dissolution, business transfer and merger;

 

    Matters relating to internal control standards; or

 

    Other matters determined by law and the board of directors regulations.

We currently have six management committees that serve under the board:

 

    The Board Steering Committee;

 

    The Management Strategy Committee;

 

    The Risk Management Committee;

 

    The Audit Committee;

 

    The Evaluation & Compensation Committee; and

 

    The Non Executive Director Nominating Committee.

Each committee member is appointed by the board of directors, except for members of the Audit Committee, who are elected at the general shareholders’ meeting. For the list of our directors, see 6. Directors, Senior Management and Employees / 6.1. Executive Directors and 6.2. Non-Executive Directors.

 

5.2. Audit Committee

Audit Committee oversees our financial reporting and approves the appointment of and interaction with our independent auditors, compliance officers, management personnel and other committee advisors. The committee also reviews our financial information, auditor’s examinations, key financial statement issues and the administration of our financial affairs by the board of directors. In connection with the general shareholders’ meeting, the committee examines the agenda for, and financial statements and other reports to be submitted by, the board of directors to each general shareholders’ meeting. The committee holds regular meetings every quarter and as-needed basis.

 

26


5.3. Compensation to Directors

The following table shows information regarding the remuneration paid to the Directors in 2005.

(Units: in millions of Won)

 

    

The aggregate

remuneration paid

(From Jan to Dec)

  

Limit for the remuneration

resolved by shareholders’

meeting

  

Average amount of the

payment per person

(From Jan to Dec)

1) Executive Directors

        

(Except chief audit executive and non-executive directors)

   1,772       590

2) Non Executive Directors

      8,000   

(Except members of audit committee)

   363       62

3) Members of Audit Committee

   552       106
              

Total

   2,687    8,000    192
              

As part of remuneration, Kookmin Bank also granted stock options to directors. See 1.3.3. Stock Option.

 

5.4. Voting Rights of Shareholders

Each outstanding share of our common stock is entitled to one vote per share. If the method of written resolution at the general shareholders’ meeting is adopted by resolution of the board of directors, at which the convening of the general shareholders’ meeting is determined, the shareholders may exercise their voting rights in writing without participating the meeting in person. In this case, the Bank is required to send the documents and references necessary for exercise of voting rights, together with the convening notice. If a shareholder intends to exercise his/her voting rights in writing, the shareholder is required to fill in a certain form and submit it to the Bank one day before the date set for the general shareholders’ meeting.

 

5.5. Share Ownership

The following table presents information regarding the selected major ownership of our shares as of December 31, 2005.

(Unit: Shares, %)

 

Name

   Number of Shares of Common Stock    Percentage of Total Issued Shares

The Bank of New York1

   51,175,814    15.21

Euro-Pacific Growth Fund

   16,659,610    4.95

1 Depositary of ADRs

 

27


5.6. Affiliated Companies

 

5.6.1. List of Affiliates1

As of December 31, 2005, we have following affiliates.

 

    KB Investment Co., Ltd.

 

    KB Asset Management Co., Ltd.

 

    KB Real Estate Trust Co., Ltd.

 

    KB Credit Information Co., Ltd.

 

    KB Data Systems Corporation

 

    KB Futures Co., Ltd.

 

    KB Life Co., Ltd.

 

    ING Life Korea Ltd.

 

    Kookmin Bank International (London) Ltd.

 

    Kookmin Hong Kong Ltd.

 

    Sorak Financial Holdings

 

5.6.2. Operating Results of Affiliates

(Unit: in millions of Won)

 

Company name

   Closing date    Operating results  
      Total
Assets
   Total
Liabilities
   Total
Equities
   Sales   

Net

Income

 

KB Investment

   December 31, 2005    88,090    2,639    85,451    19,724    7,649  

KB Asset Management2

   March 31, 2006    69,929    6,372    63,557    31,948    13,881  

KB Real Estate Trust

   December 31, 2005    188,998    108,022    80,976    56,444    22,905  

KB Credit Information

   December 31, 2005    39,966    11,260    28,706    77,723    8,246  

KB Data Systems Corp.

   December 31, 2005    24,615    6,888    17,727    46,817    2,533  

KB Futures2

   March 31, 2006    37,358    10,740    26,618    8,638    1,199  

ING Life Korea2

   March 31, 2006    5,624,538    5,174,566    449,972    2,637,377    145,773  

KB Life Co.,Ltd. 2

   March 31, 2006    183,793    157,843    25,950    94,267    (4,245 )

Kookmin Bank International (London)

   December 31, 2005    345,126    294,604    50,522    14,322    2,213  

Kookmin Hong Kong Ltd.

   December 31, 2005    380,132    310,225    69,907    19,598    7,339  

Sorak Financial Holdings

   December 31, 2005    302,508    11,575    290,933    14,949    1,805  

1 Excluding Jooeun Industry and Jangeun Securities which have been under liquidation procedures. Also excluded as follows; Kookmin Bank Luxembourg.S.A has been completed liquidation procedures on November 2004. Kookmin Singapore Ltd. and Kookmin Finance Asia Limited have been under liquidation procedures.

 

2 Operating results based on March 31, 2005

 

28


6. Directors, Senior Management and Employees

As of March 31, 2006, our board of directors, which consists of 4 executive directors and 9 non-executive directors, has the ultimate responsibility for the management of our affairs.

 

6.1. Executive Directors1

Our 4 executive directors consist of the President & CEO, Chief Audit Executive, Chief Executive Vice President and Senior Executive Vice President.

The names and positions of our directors with Kookmin Bank’s common stocks owned are set forth below as of March 31, 2006.

 

Name   

Date of Birth

  

Position

  

Common Stocks Owned

Chung Won Kang    12/19/1950    President & CEO    —  
Hyung Duk Chang    08/13/1950    Chief Audit Executive    —  
Ki Hong Kim    01/10/1957    Chief Executive Vice President    —  
Kap Shin    09/04/1955    CFO & SEVP    —  

 

6.2.  Non-Executive Directors2

 

Our non-executive directors are selected based on the candidates’ talents and skills in diverse areas, such as law, finance, economy,
management and accounting. As of March 31, 2005, 9 non-executive directors are in office.

 

Our current non-executive directors with Kookmin Bank’s shares owned are as follows.

 

Name   

Date of Birth

  

Position

  

Common Stocks Owned

Dong Soo Chung    09/24/1945    Non-Executive Director    1,750
Nobuya Takasugi    09/03/1942    Non-Executive Director    —  
Kee Young Chung    09/07/1948    Non-Executive Director    —  
Doo Hwan Song    05/29/1949    Non-Executive Director    —  
Chang Kyu Lee    05/20/1950    Non-Executive Director    —  
Dam Cho    08/01/1952    Non-Executive Director    —  
Bo Kyung Byun    08/09/1953    Non-Executive Director    —  
Baek In Cha    05/20/1950    Non-Executive Director    —  
Young Soon Cheon    02/01/1961    Non-Executive Director    1,730

1 On March 24, 2006, Ki Hong Kim was newly appointed as an executive director at the general shareholders’ meeting. Also, Donald H. MacKenzie resigned due to the completion of his term of office.

 

2 On March 24, 2006, Hoon Namkoong & Suk Yong Cha resigned due to the completion of their terms of office and Baek In Cha, Kee Young Chung & Bo Kyung Byun were newly appointed as non-executive directors.

 

29


6.3. Senior Management1

In addition to the executive directors who are also our executive officers, we currently have the following 13 executive officers as of March 31, 2006.

 

Name

   Date of Birth   

Position

   Common Shares Owned

Nam Sik Yang

   05/08/1954    Senior Executive Vice President    582

Won Sik Yeo

   01/30/1953    Senior Executive Vice President    —  

Dal Soo Lee

   02/15/1952    Senior Executive Vice President    —  

Yong Kook Oh

   09/30/1949    Senior Executive Vice President    —  

Hyo Sung Won

   07/29/1960    Senior Executive Vice President    —  

De Oak Shin

   01/09/1951    Senior Executive Vice President    8,618

Jung Young Kang

   01/29/1951    Senior Executive Vice President    —  

Young Han Choi

   09/24/1958    Senior Executive Vice President    —  

Dong Soo Choe

   03/10/1955    Senior Executive Vice President    —  

Jeong Min Kim

   05/08/1951    Senior Executive Vice President    94

Donald H. MacKenzie

   12/20/1948    Senior Executive Vice President    —  

Kap Joe Song

   07/20/1947    Senior Executive Vice President    —  

Dong Won Kim

   03/01/1953    Senior Executive Vice President    —  

 

6.4. Employees

The following table shows the breakdown of our employees as of December 31, 2005.

(Unit: in millions of Won)

 

     Number of Employees2    Average Tenure of
the Full-time
Employees (years)3
   Total Payment
for the fiscal
year 20054
  

Average Monthly
Payment

per Person

   Full-time    Contractual    Total         

Male

   12,809    1,236    14,045    16.9    1,082,146    6.4

Female

   4,232    6,310    10,542    14.1    512,143    4.0
                             

Total

   17,041    7,546    24,587    16.1    1,594,289    5.4
                             

1 On January 31, 2006, Yun Keun Jung, Sang Jin Lee, Ahn Sook Koo, Jun Bo Cho resigned due to the completion of their terms of office.

 

2 Number of employees are calculated based on an arithmetic mean from January 31, 2005 to December 31, 2005 and local employees in overseas branches are excluded

 

3 Only based on full-time employees as of December 31, 2005

 

4 Based on personnel expense and welfare cost as of December 31, 2005

 

30


7. Related Party Transactions

A number of banking transactions are entered into with related parties in the ordinary course of business. Generally, these transactions include loans, deposits, debt securities and other arms-length transactions relating to our banking business. These transactions are carried out on commercial terms and conditions and at market rates.

 

7.1. Transactions with the Largest Shareholders or Affiliates

 

7.1.1. Investments in Affiliates1

(Unit: in millions of Won)

 

Name

   Relation
with the
Bank
   Account    Beginning
Balance
(January 1, 2005)
   Increase    Decrease   

Ending

Balance
(December 31, 2005)

KB Real Estate Trust

   Affiliate    Equity
Securities
of Affiliate
   79,999    —      —      79,999

KB Investment

   Affiliate    Equity
Securities
of Affiliate
   44,708    48    —      44,756

KB Asset Management

   Affiliate    Equity
Securities
of Affiliate
   30,670    —      —      30,670

KB Futures

   Affiliate    Equity
Securities
of Affiliate
   19,996    —      —      19,996

KB Data Systems Corp.

   Affiliate    Equity
Securities
of Affiliate
   7,998    2    —      8,000

KB Credit Information

   Affiliate    Equity
Securities
of Affiliate
   5,868    377    —      6,245

KB Life

   Affiliate    Equity
Securities
of Affiliate
   30,000    —      14,700    15,300

ING Life Korea

   Affiliate    Equity
Securities
of Affiliate
   14,000    —      —      14,000

Kookmin Hong Kong Ltd.

   Affiliate    Equity
Securities
of Affiliate
   20,876    —      116    20,760

Kookmin Bank International (London) Ltd.

   Affiliate    Equity
Securities
of Affiliate
   40,180    —      3,688    36,492
                         

Total

         294,295    427    18,504    276,218
                         

1 Excluding Jooeun Industry and Jangeun Securities which have been under liquidation procedures

 

31


7.2. Transactions with related parties other than the Largest Shareholders or Affiliates

 

7.2.1. Loans and Guarantees

(Unit: in millions of Won)

 

Name

  

Relation

with the

Bank

   Account   

Beginning

Balance

(January
1, 2005)

   Ending Balance
(December 31, 2005)
   Increase /
(Decrease) for the
period
 

Kyung Namkoong

  

Related party of

Non-executive director, Hoon Namkoong

   Housing loans    170    255    85  

Samsung Electro-Mechanics

  

Related party of

Non-executive director,

Hoon Namkoong

   Loans for working capital    0    50,000    50,000  

Hyun Duk Shin

  

Related party of

Executive director and Senior executive Vice President,

Kap Shin

   Household loans    50    50    0  

Young Sin Yoon

  

Related party of

Executive director and Senior executive Vice President,

Kap Shin

   Household loans    2    0    (2 )

Chan Jung Lee

  

Related party of

Non-executive director, Dong Soo Chung

   Household loans    93    0    (93 )

Yong Jin Kim

  

Related Party of Chief Executive Director,

Hyung Duk Chang

   Household loans    0    140    140  

Seo Young Chung

  

Related Party of

Non-executive director,

Dong Soo Chung

   Household loans    0    30    30  
                      

Total

         315    50,475    50,160  
                      

 

7.2.2. Securities Transactions

(Units: in millions of Won unless indicated otherwise)

 

Name

  

Relation

with

the

Bank

   Transactions  
      Account    Purchase    Disposal    Volume    Gains
/ Losses
 

DSME Co.

  

Related party of

Non-executive director, Dong Soo Chung

   Equity
securities
   6,587    9,667    16,254    925  

Samsung Electro-Mechanics

  

Related party of

Non-executive director,

Hoon Namkoong

   Equity
securities
   7,332    5,199    12,531    (32 )
                           

Total

      13,919    14,866    28,785    893  
                           

 

32


Exhibit 99.1

KOOKMIN BANK AND ITS SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED DECEMBER 31, 2005

AND INDEPENDENT AUDITORS’ REPORT


Independent Auditors’ Report

English Translation of a Report Originally Issued in Korean

To the Shareholders and Board of Directors of

Kookmin Bank:

We have audited the accompanying consolidated balance sheet of Kookmin Bank(the “Bank”) and its subsidiaries as of December 31, 2005, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for the year ended December 31, 2005, all expressed in Korean Won. These consolidated financial statements are the responsibility of the Bank’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We did not audit the financial statements of certain trust accounts whose principal or fixed rate of return is guaranteed by the Bank, KB Investment Co., Ltd., KB Data System Co., Ltd., KB Credit Information, NPC02-4 Kookmin Venture Fund and Kookmin Bank Int’l Ltd., which statements reflect total assets constituting 2.11 percent of consolidated total assets as of December 31, 2005 and total revenues constituting 1.63 percent of consolidated total revenues for the year then ended. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for those entities, is based solely on the reports of such other auditors. The consolidated financial statements as of December 31, 2004, which are presented for comparative purposes, were audited by other auditors, and in their report dated February 18, 2005, they expressed an unqualified opinion on those consolidated financial statements. As explained in Note 3, the consolidated financial statements for the year ended December 31, 2004 presented for comparative purpose were restated to reflect the changes in accounting principles made in 2005.

We conducted our audit in accordance with auditing standards generally accepted in Republic of Korea. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 our audit and reports of other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audit and the reports of other auditors, the consolidated financial statements referred to above present fairy, in all material respects, the financial position of the Bank and its subsidiaries as of December 31, 2005 and the results of their operations, changes in their shareholders’ equity and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the Republic of Korea.

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

As explained in Note 3 to the consolidated financial statements, the Bank recorded individual assets and liabilities comprised in private beneficiary certificates in their respective bank accounts, and net operating results from the private beneficiary certificates were recorded as one line item of income or loss from beneficiary certificates in the income statements by the end of 2004. However, in accordance with the new interpretation on the accounting of private beneficiary certificates by the Financial Supervisory Service, a private beneficiary certificate on which management, as an investor, agrees to have no interference and is not managing, is regarded as an ordinary beneficiary certificate and recorded as securities. As a result of the change of accounting principle, the Bank restated the accompanying financial statements as of December 31, 2004, which increased total assets, total liabilities and capital adjustments by (Won)76,568 million, (Won)2,668 million and (Won)268,696 million, respectively, and decreased retained earnings before appropriations by (Won)194,796 million. Moreover, total assets and total liabilities increased by (Won)27,486 million, capital adjustments decreased by (Won)101,676 million as of December 31, 2005, and net income for the year then ended increased by (Won)101,676 million due to the above accounting change.


As explained in Notes 3, 14, and 16 to the consolidated financial statements, until 2004, the Bank provided allowance for possible losses on confirmed acceptances and guarantees, which were classified as substandard or less than substandard. However, pursuant to the amended Supervisory Regulation of Banking Business, the Bank has extended the scope of allowance for possible losses on acceptances and guarantees to note endorsed, unconfirmed acceptances and guarantees, and confirmed acceptances and guarantees classified as normal and precautionary, and provided allowance for possible losses based on the credit classification and minimum rate of loss provision prescribed by Financial Supervisory Service and the cash conversion factor of the respective exposures as of December 31, 2005. In connection with the amendment of Supervisory Regulation of Banking Business, the Bank has also extended the scope of other allowance for the unused line of credit from the unused cash advance facility of active credit card accounts with transaction records during the recent one year to the unused credit limit for purchase of credit card and unused credit line of consumer and corporate loans, and provided other allowance based on the cash conversion factor and minimum rate of loss provision prescribed by Financial Supervisory Service as of December 31, 2005. Due to these changes, allowance for acceptances and guarantees and other allowances increased by (Won)7,645 million and (Won)296,469 million as of December 31, 2005, respectively, and net income for the year then ended decreased by (Won)220,483 million.

As explained in Note 2 to the consolidated financial statements, the Pacific IT Investment Partnership was deconsolidated since it went into the process of liquidation during the current year.

Accounting principles and auditing standards and their application in practice vary among countries. The accompanying financial statements are not intended to present the financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in countries other than the Republic of Korea. In addition, the procedures and practices utilized in the Republic of Korea to audit such financial statements may differ from those generally accepted and applied in other countries. Accordingly, this report and the accompanying financial statements are for use by those knowledgeable about Korean accounting procedures and auditing standards and their application in practice.

February 24, 2006

/s/ Deloitte Anjin LLC

Notice to Readers

This report is effective as of February 24, 2006, the auditors’ report date. Certain subsequent events or circumstances may have occurred between the auditors’ report date and the time the auditors’ report is read. Such events or circumstances could significantly affect the accompanying financial statements and may result in modifications to the auditors’ report.


KOOKMIN BANK AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2005 AND 2004

 

     Korean Won  
     2005   

(Restated)

2004

 
     (In millions)  

ASSETS

     

Cash and due from banks (Notes 4 and 20)

   (Won) 5,942,996    (Won) 5,213,063  

Securities (Notes 5 and 20)

     33,479,132      30,669,919  

Loans (Notes 6, 7 and 20)

     135,821,846      135,837,704  

Fixed assets (Note 8)

     2,441,612      2,637,118  

Other assets (Note 9)

     5,217,136      8,331,123  
               
   (Won) 182,902,722    (Won) 182,688,927  
               

LIABILITIES AND SHAREHOLDERS’ EQUITY

     

LIABILITIES:

     

Deposits (Notes 10 and 20)

   (Won) 129,615,589    (Won) 130,133,873  

Borrowings (Notes 11 and 20)

     13,328,397      9,359,595  

Debentures (Notes 12 and 20)

     16,547,987      21,874,695  

Other liabilities (Notes 13, 14, 15 and 16)

     10,960,517      12,059,563  
               
     170,452,490      173,427,726  
               

SHAREHOLDERS’ EQUITY (Notes 17 and 18):

     

Common stock

     1,681,896      1,681,896  

Capital surplus

     6,269,599      6,238,284  

Retained earnings
(Net income of (Won)2,241,055 million for the year ended December 31, 2005 and (Won)355,936 million for the year ended December 31, 2004)

     3,967,535      1,897,164  

Capital adjustments

     492,589      (583,783 )

Minority interests

     38,613      27,640  
               
     12,450,232      9,261,201  
               
   (Won) 182,902,722    (Won) 182,688,927  
               

See accompanying notes to consolidated financial statements.


KOOKMIN BANK AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

 

     Korean Won
     2005   

(Restated)

2004

     (In millions except per share
amounts)

OPERATING REVENUE:

     

Interest income:

     

Interest on due from banks

   (Won) 28,977    (Won) 12,693

Interest on securities

     1,260,527      1,194,445

Interest on loans

     10,160,065      11,020,057

Other interest income

     41,641      56,555
             
     11,491,210      12,283,750
             

Commission income

     1,163,695      1,549,478
             

Other operating income:

     

Gain on disposal of trading securities

     103,953      237,688

Gain on valuation of trading securities

     —        23,543

Dividends on trading securities

     4,998      3,378

Dividends on available-for-sale securities

     3,431      1,266

Gain on foreign exchange trading

     253,907      245,694

Fees and commissions from trust accounts

     110,507      119,908

Gain on financial derivatives trading

     3,655,079      4,060,338

Gain on valuation of financial derivatives (Note 19)

     1,153,294      2,196,112

Gain on valuation of fair value hedged items (Note 19)

     56,144      6,065

Other operating income

     46,739      45,787
             
     5,388,052      6,939,779
             

Insurance revenue

     244,001      58,385
             

Total operating revenue

     18,286,958      20,831,392
             

OPERATING EXPENSES:

     

Interest expenses:

     

Interest on deposits

     3,281,112      4,044,051

Interest on borrowings

     384,892      330,690

Interest on debentures

     1,034,472      1,116,557

Other interest expenses

     30,650      49,680
             
     4,731,126      5,540,978
             

Commission expense

     349,379      460,930
             

Other operating expenses:

     

Loss on disposal of trading securities

     99,142      89,315

Loss on valuation of trading securities

     13,536      —  

Provision for possible loan losses (Note 6)

     1,029,445      3,064,528

Provision for acceptance and guarantee losses

     9,008      206

Loss on foreign exchange trading

     237,443      294,135

Loss on financial derivatives trading

     3,577,462      3,991,366

Loss on valuation of financial derivatives (Note 19)

     1,096,714      2,050,630

Other operating expenses

     801,676      790,398
             
     6,864,426      10,280,578
             

General and administrative expenses (Note 21)

     3,031,958      2,825,527
             

Insurance expense

     221,483      43,672
             

Total operating expenses

     15,198,372      19,151,685
             

(Continued)


KOOKMIN BANK AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

 

     Korean Won
     2005    (Restated)
2004
     (In millions except per share
amounts)

OPERATING INCOME

   (Won) 3,088,586    (Won) 1,679,707

NON-OPERATING INCOME (Note 22)

     697,038      459,499

NON-OPERATING EXPENSES (Note 22)

     526,598      1,515,925
             

ORDINARY INCOME

     3,259,026      623,281

EXTRAORDINARY ITEM

     —        —  
             

INCOME BEFORE INCOME TAX

     3,259,026      623,281

INCOME TAX EXPENSE (Note 23)

     1,006,052      264,213
             

NET INCOME BEFORE MINORITY INTERESTS

     2,252,974      359,068

MINORITY INTERESTS, GAIN

     11,919      3,132
             

NET INCOME

   (Won) 2,241,055    (Won) 355,936
             

ORDINARY INCOME PER SHARE (In currency units) (Note 24)

   (Won) 6,943    (Won) 1,162
             

NET INCOME PER SHARE (In currency units) (Note 24)

   (Won) 6,943    (Won) 1,162
             

DILUTED ORDINARY INCOME PER SHARE (In currency units) (Note 24)

   (Won) 6,938    (Won) 1,161
             

DILUTED NET INCOME PER SHARE (In currency units) (Note 24)

   (Won) 6,938    (Won) 1,161
             

See accompanying notes to consolidated financial statements.


KOOKMIN BANK AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

 

     Capital stock    Capital
surplus
    Retained
earnings
    Capital
adjustments
    Minority
interests
    Total  

January 1, 2004

   (Won) 1,681,896    (Won) 6,237,528     (Won) 1,535,656     (Won) (1,160,814 )   (Won) 16,770     (Won) 8,311,036  

Net income

     —        —         355,936       —         —         355,936  

Dividends

     —        —         —         —         (1,929 )     (1,929 )

Change in treasury stock

     —        —         —         5,282       —         5,282  

Loss on valuation of available-for-sale securities

     —        —         —         570,142       —         570,142  

Change due to the equity method

     —        —         —         (1,795 )     —         (1,795 )

Stock options

     —        —         —         3,402       —         3,402  

Minority interests, gain

     —        —         —         —         3,132       3,132  

Change in subsidiaries

     —        756       —         —         9,667       10,423  

Change in the scope of consolidation

     —        —         5,856       —         —         5,856  

Others

     —        —         (284 )     —         —         (284 )
                                               

December 31, 2004

   (Won) 1,681,896    (Won) 6,238,284     (Won) 1,897,164     (Won) (583,783 )   (Won) 27,640     (Won) 9,261,201  
                                               

January 1, 2005

   (Won) 1,681,896    (Won) 6,238,284     (Won) 1,897,164     (Won) (583,783 )   (Won) 27,640     (Won) 9,261,201  

Net income

     —        —         2,241,055       —         —         2,241,055  

Dividends

     —        —         (168,574 )     —         (1,872 )     (170,446 )

Change in treasury stock

     —        25,075       —         1,314,119       —         1,339,194  

Loss on valuation of available-for-sale securities

     —        —         —         (201,484 )     —         (201,484 )

Loss on valuation of held-to-maturity securities

     —        —         —         426       —         426  

Change due to the equity method

     —        —         —         (10,964 )     —         (10,964 )

Stock options

     —        —         —         (25,725 )     —         (25,725 )

Minority interests, gain

     —        —         —         —         11,919       11,919  

Sales of subsidiaries’ equity securities

     —        10,966       —         —         4,200       15,166  

Change in retained earnings of subsidiaries

     —        —         (88 )     —         —         (88 )

Change in retained earnings of the trust account

     —        —         (2,024 )     —         —         (2,024 )

Change in subsidiaries

     —        10       —         —         (3,296 )     (3,286 )

Others

     —        (4,736 )     2       —         22       (4,712 )
                                               

December 31, 2005

   (Won) 1,681,896    (Won) 6,269,599     (Won) 3,967,535     (Won) 492,589     (Won) 38,613     (Won) 12,450,232  
                                               

See accompanying notes to consolidated financial statements


KOOKMIN BANK AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

 

     Korean Won  
     2005    

(Restated)

2004

 
     (In millions)  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   (Won) 2,241,055     (Won) 355,936  
                

Adjustments to reconcile net income to net cash provided by operating activities:

    

Loss on disposal of trading securities

     99,142       89,315  

Provision for possible loan losses

     1,029,445       3,064,528  

Loss on financial derivatives trading

     3,577,462       3,991,366  

Loss on valuation of financial derivatives

     1,096,714       2,050,630  

Loss on valuation of securities accounted for using the equity method

     2,674       1,475  

Provision for severance benefits

     133,325       127,676  

Depreciation and amortization

     351,641       438,184  

Loss on disposal of available-for-sale securities

     20,240       29,451  

Loss on impairment of available-for-sale securities

     103,305       91,312  

Loss on disposal of tangible assets

     4,293       16,753  

Loss on sale of loans

     16,397       1,183,332  

Minority interests, gain

     11,919       3,132  

Gain on disposal of trading securities

     (103,953 )     (237,688 )

Loss (gain) on valuation of trading securities

     13,536       (23,543 )

Gain on financial derivatives trading

     (3,655,079 )     (4,060,338 )

Gain on valuation of financial derivatives

     (1,153,294 )     (2,196,112 )

Gain on valuation of fair value hedged items

     (56,144 )     (6,065 )

Gain on valuation of securities accounted for using the equity method

     (35,858 )     (33,982 )

Gain on disposal of available-for-sale securities

     (342,549 )     (175,981 )

Gain on disposal of tangible assets

     (11,433 )     (29,562 )

Gain on sale of loans

     (81,866 )     (24,428 )

Others, net

     602,166       310,885  
                
     1,622,083       4,610,340  
                

(Continued)


KOOKMIN BANK AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

 

     Korean Won  
     2005    

(Restated)

2004

 
     (In millions)  

Changes in assets and liabilities resulting from operations:

    

Net decrease in trading securities

   (Won) 51,676     (Won) 1,211,581  

Net decrease (increase) in accounts receivable

     1,884,330       (568,365 )

Net decrease (increase) in accrued income

     (32,607 )     112,205  

Net decrease (increase) in prepaid expenses

     (3,058 )     97,610  

Net decrease (increase) in deferred income tax assets

     (2,637 )     95,688  

Net increase (decrease) in other payables

     (1,883,649 )     838,154  

Net increase (decrease) in accrued expenses

     669,744       (126,123 )

Net increase in advances from customers

     167,836       83,458  

Payment of severance benefits

     (65,002 )     (41,525 )

Increase in severance insurance deposits

     (43,251 )     (30,097 )

Others, net

     (12,496 )     (366,644 )
                
     730,886       1,305,942  
                

Net cash provided by operating activities

     4,594,024       6,272,218  
                

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Net decrease (increase) in restricted due from banks

     (429,288 )     952,804  

Net decrease (increase) in available-for-sale securities

     1,314,010       (1,300,128 )

Net increase in held-to-maturity securities

     (3,939,145 )     (246,271 )

Net decrease (increase) in securities accounted for using the equity method

     (714 )     33,315  

Net decrease (increase) in loans

     (1,176,240 )     564,809  

Disposal of fixed assets

     28,525       188,418  

Purchase of fixed assets

     (172,000 )     (218,990 )

Net decrease in other assets

     1,338,376       263,893  
                

Net cash provided by (used in) investing activities

     (3,036,476 )     237,850  
                

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net decrease in deposits

     (515,019 )     (5,239,412 )

Net increase (decrease) in debentures

     (5,304,797 )     2,692,119  

Net increase (decrease) in borrowings

     4,079,434       (1,391,226 )

Net increase (decrease) in other liabilities

     480,300       (2,969,286 )
                

Net cash used in financing activities

     (1,260,082 )     (6,907,805 )
                

DECREASE IN CASH DUE TO CHANGE IN SCOPE OF CONSOLIDATION

     (572 )     (6,107 )
                

NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS

     296,894       (403,844 )

CASH AND DUE FROM BANKS, BEGINNING OF YEAR

     3,386,921       3,790,765  
                

CASH AND DUE FROM BANKS, END OF YEAR (Note 27)

   (Won) 3,683,815     (Won) 3,386,921  
                

See accompanying notes to consolidated financial statements.


KOOKMIN BANK AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

 

1. GENERAL:

Kookmin Bank (“the Bank”) was established in 1963 under the Citizens National Bank Act to provide and administer funds for financing to the general public and small businesses. Pursuant to the repeal of the Citizens National Bank Act, effective January 5, 1995, the Bank has conducted its operations in accordance with the provisions of the General Banking Act.

The Bank merged with Korea Long Term Credit Bank on December 31, 1998 and with Daegu, Busan, Jeonnam Kookmin Mutual Savings & Finance Co., Ltd. on August 22, 1999. Also, under the decision of the Financial Supervisory Commission in accordance with the Structural Improvement of the Financial Industry Act, the Bank purchased certain assets, including loans classified as normal or precautionary, and assumed most of the liabilities of Daedong Bank on June 29, 1998. Also, the Bank completed the legal consolidation with Housing and Commercial Bank (“H&CB”) on October 31, 2001 and merged with Kookmin Credit Card Co., Ltd., a majority-owned subsidiary, on September 30, 2003.

The Bank’s shares have been listed on the Korea Stock Exchange since September 1994. As a result of the business combination with H&CB, the former shareholders of the Bank and H&CB received new common shares of the Bank on the basis of a pre-determined ratio. The new common shares of the Bank were listed on the Korea Stock Exchange on November 9, 2001. As of December 31, 2005, the Bank’s paid-in capital amounts to (Won)1,681,896 million. The Bank’s 51,175,814 shares are listed on the New York Stock Exchange as American Depositary Shares (“ADS”).

The Bank is engaged in the banking and trust businesses according to the provisions of the General Banking Act and the Trust Business Act, and operates through 1,097 domestic branches and offices (excluding 200 automated teller machines) and three overseas branches (excluding 2 subsidiaries and 1 office) as of December 31, 2005.

 

2. SCOPE OF CONSOLIDATION AND EQUITY METHOD ACCOUNTING:

The consolidated financial statements include the bank accounts and the trust accounts whose principal or fixed of return is guaranteed by the Bank and its wholly or partially owned subsidiaries.

Subsidiaries included in the consolidation and accounted for using the equity method as of December 31, 2005 were as follows:

 

Subsidiaries

   Closing date   

No. of

shares

  

Percentage

of
ownership

(%)

  

Business

Consolidated:

           

KB Investment Co., Ltd.

   December 31    8,951,293    99.99   

Investing and financing to small and medium-sized enterprises

KB Futures Co., Ltd.

   March 31    3,999,200    99.98   

Deals with and brokerage services for futures transactions

KB Data System Co., Ltd.

   December 31    799,960    99.99   

Software services for the Bank and other companies

KB Real Estate Trust Co., Ltd.

   December 31    15,999,930    99.99   

Development, management and brokerage services with regards to real estate and trust

KB Asset Management Co., Ltd.

   March 31    6,134,040    80.00   

Providing security investment trust services and investment consulting services


Subsidiaries

   Closing date   

No. of

shares

  

Percentage

of
ownership

(%)

  

Business

KB Credit Information Co., Ltd.

   December 31    1,249,040    99.73   

Delinquent loan collection service and credit checking services

KB Life Insurance Co., Ltd.

   March 31    3,060,000    51.00   

Insurance service

Kookmin Bank Int’l Ltd. (London)

   December 31    20,000,000    100.00   

Commercial banking business and foreign exchange operation

Kookmin Bank Hong Kong Ltd.

   December 31    2,000,000    100.00   

Commercial banking business and foreign exchange operation

NPC 02-4 Kookmin Venture Fund

   December 31    150    50.00   

Investing and financing to small and medium-sized enterprises

Accounted for using the equity method:

           

ING Life Insurance Korea

   March 31    1,400,000    20.00   

Insurance service

KLB Securities Co., Ltd. (*1)

   December 31    4,854,713    36.41   

Securities related business

Jooeun Industrial Co., Ltd. (*1)

   December 31    1,999,910    99.99   

House construction

Jeio Co., Ltd. (*3)

   December 31    88,572    21.14   

Inspection of materials & manufacturing of measuring instruments

Kookmin Singapore Ltd. (*1)

   December 31    30,000,000    100.00   

Commercial banking business and foreign exchange operation

Kookmin Finance Asia Ltd. (HK) (*1)

   December 31    700,000    100.00   

Commercial banking business and foreign exchange operation

Sorak Financial Holdings PTE Ltd. (*1)

   December 31    1,422,216    25.00   

Investment

Pacific IT Investment Partnership (*1)

   December 31    840    60.00   

Investing and financing to small and medium-sized enterprises

KIKO No.2 Venture Investment (*1)

   June 30    6,200    68.89   

Investment in venture business

KIKO No.3 Venture Investment (*1)

   June 30    10,450    80.38   

Investment in venture business

Kookmin China Fund No.1 (*2 & *4)

   December 31    300    50.00   

Investment in venture business

KTTC Kookmin Venture Fund (*4)

   December 31    200    20.00   

Investment in venture business

Kookmin Investment Partnership No.15 (*2 & *4)

   June 30    17    34.00   

Investment in venture business

Kookmin Investment Partnership No.16 (*4)

   July 31    400    20.00   

Investment in venture business

KB 03-1 Venture Investment Fund (*4)

   December 31    250    16.67   

Investment in venture business

KB 03-1 Corporate Restructuring Fund (*4)

   December 31    116    29.00   

Investment in venture business

NPC 05-6 Kookmin Venture Fund (*4)

   December 31    125    20.00   

Investment in venture business


(*1) Excluded from consolidation since it is in the process of liquidation
(*2) Excluded from consolidation because total assets were less than (Won) 7 billion as of December 31, 2004
(*3) Investment held by KB Investment Co., Ltd., a subsidiary of the Bank
(*4) Investment funds held by KB Investment Co., Ltd., a subsidiary of the Bank

The Bank disposed of 49 percent shares of KB Life Insurance Co., Ltd. to ING Insurance International B.V. In addition, the Pacific IT Investment Partnership was deconsolidated since it went into the process of liquidation during the current year.

 

- 2 -


Subsidiaries included in the consolidation and accounted for using the equity method as of December 31, 2004 were as follows:

 

Subsidiaries

   Closing date   

No. of

shares

  

Percentage

of
ownership

(%)

  

Business

Consolidated:

           

KB Investment Co., Ltd.

   December 31    8,941,587    99.89   

Investing and financing to small and medium-sized enterprises

KB Futures Co., Ltd.

   March 31    3,999,200    99.98   

Deals with and brokerage services for futures transactions

KB Data System Co., Ltd.

   December 31    799,800    99.98   

Software services for the Bank and other companies

KB Real Estate Trust Co., Ltd.

   December 31    15,999,930    99.99   

Development, management and brokerage services with regards to real estate and trust

KB Asset Management Co., Ltd.

   March 31    6,134,040    80.00   

Providing security investment trust services and investment consulting services

KB Credit Information Co., Ltd.

   December 31    1,249,040    99.73   

Delinquent loan collection service and credit checking services

KB Life Insurance Co., Ltd.

   March 31    6,000,000    100.00   

Insurance service

Kookmin Bank Int’l Ltd. (London)

   December 31    20,000,000    100.00   

Commercial banking business and foreign exchange operation

Kookmin Bank Hong Kong Ltd.

   December 31    2,000,000    100.00   

Commercial banking business and foreign exchange operation

Pacific IT Investment Partnership

   December 31    840    60.00   

Investing and financing to small and medium-sized enterprises

NPC 02-4 Kookmin Venture Fund

   December 31    150    50.00   

Investing and financing to small and medium-sized enterprises

Accounted for using the equity method:

           

ING Life Insurance Korea

   March 31    1,400,000    20.00   

Insurance service

KLB Securities Co., Ltd. (*1)

   December 31    4,854,713    36.41   

Securities related business

Jooeun Industrial Co., Ltd. (*1)

   December 31    1,999,910    99.99   

House construction

Jeio Co., Ltd. (*3)

   December 31    88,572    21.14   

Inspection of materials & manufacturing of measuring instruments

Kookmin Singapore Ltd. (*1)

   December 31    30,000,000    100.00   

Commercial banking business and foreign exchange operation

Kookmin Finance Asia Ltd. (HK) (*1)

   December 31    700,000    100.00   

Commercial banking business and foreign exchange operation

Sorak Financial Holdings PTE Ltd.

   December 31    1,422,216    25.00   

Investment

KIKO No.2 Venture Investment (*1)

   June 30    6,200    68.89   

Investment in venture business

KIKO No.3 Venture Investment (*1)

   June 30    10,450    80.38   

Investment in venture business

Kookmin China Fund No.1 (*2 & *4)

   December 31    300    50.00   

Investment in venture business

KTTC Kookmin Venture Fund (*4)

   December 31    200    20.00   

Investment in venture business

Kookmin Investment Partnership No.15 (*2 &*4)

   June 30    17    34.00   

Investment in venture business

Kookmin Investment Partnership No.16 (*4)

   July 31    400    20.00   

Investment in venture business

KB 03-1 Venture Investment Fund (*4)

   December 31    250    16.67   

Investment in venture business

KB 03-1 Corporate Restructuring Fund (*4)

   December 31    58    29.00   

Investment in venture business


(*1) Excluded from consolidation since it is in the process of liquidation
(*2) Excluded from consolidation because total assets were less than (Won) 7 billion as of December 31, 2003
(*3) Investment held by KB Investment Co., Ltd., a subsidiary of the Bank
(*4) Investment funds held by KB Investment Co., Ltd., a subsidiary of the Bank

 

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Certain trust accounts whose principal or fixed rate of return is guaranteed by the Bank are included in the consolidated financial statements in accordance with the accounting guidelines of the Financial Supervisory Commission in the Republic of Korea. The trust accounts as of December 31, 2005 and 2004 are as follows (Unit: In millions):

 

     2005    2004
     Total assets    Operating
revenue
   Total assets    Operating
revenue

Consolidation

   (Won) 3,358,976    (Won) 193,398    (Won) 3,315,294    (Won) 236,586

Non-consolidation

     14,718,793      1,047,214      16,850,751      2,188,132
                           
   (Won) 18,077,769    (Won) 1,240,612    (Won) 20,166,045    (Won) 2,424,718
                           

A summary of significant financial data of the Bank’s subsidiaries, included in the consolidated financial statements, is as follows (Unit: In millions):

 

     Total assets    Capital    Shareholders’
equity
   Operating
revenue
   Net income

Trust accounts

   (Won) 3,358,976    (Won) —      (Won) 55,829    (Won) 194,793    (Won) —  

KB Investment Co., Ltd.

     88,105      44,759      85,466      19,206      7,665

KB Futures Co., Ltd.

     43,207      20,000      27,318      10,231      1,646

KB Data System Co., Ltd.

     24,615      8,000      17,727      46,817      2,533

KB Real Estate Trust Co., Ltd.

     188,998      80,000      80,976      56,444      22,905

KB Asset Management Co., Ltd.

     70,377      38,338      65,607      32,196      13,931

KB Credit Information Co., Ltd.

     39,966      6,262      28,706      77,723      8,246

KB Life Insurance Co., Ltd.

     361,811      30,000      24,590      253,269      6,939

Kookmin Bank Int’l Ltd. (London)

     345,126      34,935      50,523      14,284      2,213

Kookmin Bank Hong Kong Ltd.

     380,132      20,260      69,907      19,600      7,339

NPC 02-4 Kookmin Venture Fund

     36,690      30,000      36,386      9,553      6,387

 

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis of Consolidated Financial Statement Presentation

The Bank and its subsidiaries maintain its official accounting records in Korean Won (only domestic subsidiaries) and prepare statutory consolidated financial statements in the Korean language (Hangul) in conformity with the accounting principles and banking accounting standards generally accepted in the Republic of Korea. Certain accounting principles and banking accounting standards applied by the Bank and its subsidiaries that conform with financial accounting standards and accounting principles in the Republic of Korea may not conform with generally accepted accounting principles and banking accounting practices in other countries. Accordingly, these consolidated financial statements are intended for use by those who are informed about Korean accounting principles and practices. The accompanying consolidated financial statements have been condensed, restructured and translated into English (with certain expanded descriptions) from the Korean language consolidated financial statements. Certain information included in the Korean language consolidated financial statements, but not required for a fair presentation of the Bank and its subsidiaries’ financial position, results of operations or cash flows, is not presented in the accompanying consolidated financial statements.

The significant accounting policies followed by the Bank and its subsidiaries in preparing the accompanying consolidated financial statements are summarized below.

Basis of Consolidated Financial Statements Preparation

 

(1) Offset of Investments and Equity Accounts of Subsidiaries

Investments in subsidiaries and equity accounts of subsidiaries were eliminated at the date when the Bank obtained control over the subsidiaries. The differences between the amounts of investment and the equity accounts are recorded as goodwill or negative goodwill, which is amortized or reversed using the straight-line method over 5 years. If additional shares are purchased after acquiring control, the difference between

 

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the additional acquisition cost and the portion of net assets acquired is credited or charged to capital surplus. If the acquisition date does not agree with the year-end balance sheet date of the subsidiary, the closest closing date to the acquisition date is regarded as the acquisition date.

 

(2) Inter-company Transactions and Balances

All inter-company transactions are eliminated in the consolidated financial statements.

 

(3) Disposition of Subsidiaries’ Shares

If a subsidiary of the Bank is still subject to the scope of consolidation even after certain portions of shares are disposed to minority interests, gain/loss on disposal of investment securities is recognized as capital surplus. If a subsidiary of the Bank is subject to the equity method due to the disposition of securities, the investment account is recorded at net assets of subsidiaries at the time of disposition, net of unamortized goodwill or negative goodwill in the consolidated financial statements.

 

(4) Equity Method

For investments in affiliates accounted for using the equity method, the difference between acquisition cost and net assets acquired at the acquisition date is added to or deducted from the carrying amount of investments and is amortized in equal annual amounts for five years from the year incurred. Changes in the Bank’s portion of net assets of affiliates accounted for using the equity method are added to or deducted from the carrying amount of investments.

 

(5) Balance Sheet Date for the Consolidated Financial Statements

Balance sheet date for the consolidated financial statements is the closing date of the Bank, the parent company. The accounts of consolidated subsidiaries whose fiscal years are different from that of the Bank have been adjusted to reflect balances as of the closing date of the Bank.

 

(6) Special Reserve in Trust Accounts

A special reserve provided for possible future losses on certain trust accounts under the arrangement of guaranteed fixed rate of return and/or repayment of the principal each year is included in retained earnings in the consolidated financial statements.

 

(7) Minority Interests

Non-controlling, outside ownership interests in a subsidiary’s shareholders’ equity are presented as minority interests. Gain (loss) attributable to minority interests is presented as deduction from (addition to) consolidated net income.

Accounting Policies of Consolidated Entities

The relevant laws and regulations applied to the consolidated entities are as follows:

 

    

Relevant laws and regulations

The Bank

  

Accounting standards of banking industry, general banking act and trust business act

Trust accounts

  

Trust business act

KB Investment Co., Ltd.

  

Act on support for foundation of small and medium-sized companies & loan specialization financial business act

KB Futures Co., Ltd.

  

Supervisory guidelines on futures trading

KB Real Estate Trust Co., Ltd.

  

Trust business act

KB Asset Management Co., Ltd.

  

Act on business of operating indirect investments and assets

KB Credit Information Co., Ltd.

  

Act on the use and protection of credit information

KB Life Insurance Co., Ltd.

  

Accounting standards of the insurance business & general insurance business act

Kookmin Bank Int’l Ltd. (London)

  

Financial accounting standards in UK

Kookmin Bank Hong Kong Ltd.

  

Financial accounting standards in Hong Kong

 

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Interest Income Recognition

The Bank applies the accrual basis in recognizing interest income related to deposits, loans and securities, except for non-secured uncollectible receivables. Interest on loans, whose principal or interest is past due at the balance sheet date, is generally not accrued, with the exception of interest on certain loans secured by guarantee of governments or government agencies, or collateralized by bank deposits. When a loan is placed on non-accrual status, previously accrued interest is generally reversed and deducted from current interest income; and future interest income is recognized on cash basis in accordance with the accounting standards of the banking industry. As of December 31, 2005 and 2004, the principal amount of loans and securities of which the accrued interest income was not recorded in the accompanying consolidated financial statements based on the above criteria amounted to (Won)7,875,123 million and (Won)8,600,175 million, respectively, and the related accrued interest income not recognized amounted to (Won)462,799 million and (Won)551,683 million, respectively.

Classification of Securities

At acquisition, the Bank and its subsidiaries classify securities into one of the following categories: trading, available-for-sale, held-to-maturity and securities accounted for using the equity method, depending on marketability, purpose of acquisition and ability to hold. Debt and equity securities that are bought and held for the purpose of selling them in the near term and actively traded are classified as trading securities. Debt securities with fixed and determinable payments and fixed maturity that the Bank and its subsidiaries have the positive intent and ability to hold to maturity are classified as held-to-maturity securities. Securities that should be accounted for under the equity method are classified as securities accounted for using the equity method. Debt and equity securities not classified as the above are categorized as available-for-sale securities.

If the objective and ability to hold securities of the Bank and its subsidiaries change, available-for-sale securities can be reclassified to held-to-maturity securities and held-to-maturity securities can be reclassified to available-for-sale securities. Whereas, if the Bank and its subsidiaries sell held-to-maturity securities or exercise early redemption right of securities to issuer in the current year or the preceding two years, and if it reclassify held-to-maturity securities to available-for-sale securities, all debt securities that are owned or purchased cannot be classified as held-to-maturity securities. On the other hand, trading securities cannot be recategorized to available-for-sale securities or held-to-maturity securities and vice versa. Nevertheless, trading securities are reclassified to available-for-sale securities only when the trading securities lose their marketability.

Valuation of Securities

 

(1) Valuation of Trading Securities

Trading equity and debt securities are initially recognized at acquisition cost plus incidental expenses determined by the individual moving average method (the specified identification method for debt securities). When the face value of trading debt securities differs from their acquisition cost, the effective interest method is applied to amortize the difference over the remaining term of the securities. After initial recognition, if the fair value of trading securities differs from the book value, trading securities are stated at fair value and the resulting valuation gain or loss is included in current operations.

 

(2) Valuation of Available-for-sale Securities

Available-for-sale securities are initially recognized at acquisition cost plus incidental expenses, determined by the individual moving average method (the specified identification method for debt securities). The effective interest method is applied to amortize the difference between the face value and the acquisition cost over the remaining term of the debt security. After initial recognition, available-for-sale securities are stated at fair value, with the net unrealized gain or loss presented as gain or loss on valuation of available-for-sale securities in capital adjustments. Accumulated capital adjustments of securities are charged to current operations in a lump sum at the time of disposal or impairment recognition. Non-marketable equity securities are stated at acquisition cost on the financial statements if the fair value of the securities is not reliably determinable.

If the fair value of equity securities (net asset fair value in case of non-marketable equity securities stated at

 

- 6 -


acquisition cost) is below the acquisition cost and the pervasive evidence of impairment exists, the carrying value is adjusted to fair value and the resulting valuation loss is charged to current operations. If the collectible value of debt securities is below the amortized cost and the pervasive evidence of impairment exists, the carrying value is adjusted to collectible value and the resulting valuation loss is charged to current operations. With respect to impaired securities, any unrealized valuation gain or loss of securities previously included in the capital adjustment account is reversed.

 

(3) Valuation of Held-to-maturity Securities

Held-to-maturity securities are stated at acquisition cost plus incidental expenses, determined by the specific identification method. When the face value of held-to-maturity securities differs from its acquisition cost, the effective interest method is applied to amortize the difference over the remaining term of the securities. If collectible value is below the amortized cost and the pervasive evidence of impairment exists, the carrying value is adjusted to collectible value and the resulting valuation loss is charged to current operations.

 

(4) Valuation of Securities Accounted for Using the Equity Method

Equity securities held for investment in companies in which the Bank and its subsidiaries are able to exercise significant influence over the investees (in accordance with the Banking Act, if the Bank holds 15 percent or more of the issued shares, the Bank and its subsidiaries are considered being able to exercise significant influence) are accounted for using the equity method. The Bank and its subsidiaries’ share in net income or net loss of investees are included in current operations. Changes in the retained earnings of investee are reflected in the retained earnings. Changes in the capital surplus or other capital accounts of investee are reflected as gain or loss on valuation of securities accounted for using the equity method in capital adjustments.

When the book value of equity securities accounted for using the equity method is less than zero due to the cumulative losses of the investees, the Bank and its subsidiaries discontinue applying the equity method and do not provide for additional losses. If the investee subsequently reports net income, the Bank and its subsidiaries resume applying the equity method only after its share of that net income equals the share of net losses not recognized during the period that the equity method was suspended.

 

(5) Reversal of Loss on Impairment of Available-for-sale Securities and Held-to-maturity Securities

If the reasons for impairment losses of available-for-sale securities no longer exist, the recovery is recorded in current operations under non-operating income up to amount of the previously recognized impairment loss as reversal of loss on impairment of available-for-sale securities and any excess is included in capital adjustments as gain on valuation of available-for-sale securities. However, if the increases in the fair value of the impaired securities are not regarded as the recovery of the impairment, the increases in the fair value are recorded as gain on valuation of available-for-sale securities in capital adjustments. For non-marketable equity securities, which were impaired based on the net asset fair value, the recovery is recorded up to their acquisition cost.

For held-to-maturity securities, the recovery is recorded in current operations under non-operating income within the amount of amortized cost that would have been recorded according to the original schedule if the impairment losses had not been recognized as reversal of loss on impairment of held-to-maturity securities.

 

(6) Reclassification of Securities

When held-to-maturity securities are reclassified to available-for-sale securities, those securities are accounted for at fair value on the reclassification date and the difference between the fair value and book value is reported in capital adjustment as gain or loss on valuation of available-for-sale securities. When available-for-sale securities are reclassified to held-to-maturity securities, gain or loss on valuation of available-for-sale securities, which had been recorded until the reclassification date, continue to be included in capital adjustments and be amortized using the effective interest rate method and the amortized amount is charged to interest income or expense until maturity. The difference between the fair value at the reclassification date and face value of the reclassified securities to held-to-maturity securities is amortized using effective interest rate method and the amortized amount is charged to interest income or expense. In addition, when certain trading securities lose their marketability, such securities are reclassified as available-for-sale securities at fair market value as of reclassification date.

 

- 7 -


Transfer of Securities

When the realization, expiration or sale of the right to obtain the economic benefits arises and the control of securities is lost from the sale of the securities, the unrealized valuation gain or loss of securities included in the capital adjustment account is added to or deducted from the gain or loss on disposal of securities. The gain or loss is the difference between the net proceeds receivable or received and its carrying value. When securities are transferred without losing the control, the transaction is recorded as secured borrowing transaction.

Allowance for Possible Losses on Credits

The Supervisory Regulation of Banking Business (the “Supervisory Regulation”) legislated by the Financial Supervisory Commission (FSC) requires the Bank to classify all credits into five categories as normal, precautionary, substandard, doubtful, or estimated loss based on borrowers’ repayment capability and historical financial transaction records. The Supervisory Regulation also requires the Bank to provide the minimum rate of loss provision for each category balance using the prescribed minimum percentages as described below.

As required by the Supervisory Regulation, the Bank classifies corporate credits (loans, confirmed acceptances and guarantees) based on borrowers’ capability to repay in consideration of borrowers’ business operation, financial position and future cash flows (Forward Looking Criteria) as well as past due period and status of any bankruptcy proceedings (Historical Repayment Criteria). However, credits to small companies and to households are classified not by evaluating the debt repayment capability of a borrower or customer but by past due period and status of bankruptcy proceedings. The Bank generally classifies all credits to a single borrower in the same category of classification but credits guaranteed or credits collateralized by bank deposits, real estate and other assets may be classified differently based on the guarantor’s capability to service such guarantee or based on the value of collateral securing such credits.

Based on the Bank’s corporate credit evaluation model, credits to a borrower are classified into 12 grades from AAA to D (AAA, AA, A, A -, BBB, BB, B, B -, CCC, CC, C and D). Credits of grades of AAA to B are classified as normal, credits of grade B - to CCC as precautionary, credits of grade CC as substandard, credits of grade C as doubtful and credits of grade D as estimated loss. Credits are finally classified reflecting past due period and bankruptcy considerations. An allowance is then calculated on the category balances using the prescribed percentages of 0.5 ~ 1.9 percent for normal, 2 ~ 19.9 percent for precautionary, 20 ~ 49.9 percent for substandard, 50 ~ 99.9 percent for doubtful and 100 percent for estimated loss. However, the Bank does not provide allowances for call loans, bonds bought under resale agreements and inter-bank loans that are classified as normal, as it is not required by the Accounting Standards for the Banking Industry.

In addition, as required by the Supervisory Regulation, based on the classification of household loans and credit card receivables by past due period and status of bankruptcy proceedings, allowance for household loans and credit card receivables are calculated on the category balances using the prescribed percentages of 0.75 ~ 7.9 percent and 1 ~ 11.9 percent for normal, 8 ~19.9 percent and 12 ~ 19.9 percent for precautionary, 20 ~ 54.9 and 20 ~ 59.9 percent for substandard, 55 ~ 99.9 percent and 60 ~99.9 percent for doubtful, and 100 percent for estimated loss. Furthermore, as required by the Financial Supervisory Service, for the secured household loans newly placed after September 9, 2002, if the ratio of loans to collateral value (loan to value; LTV) exceeds 70 percent, the Bank provides an allowance for possible loan losses of 1 percent for normal and 10 percent for precautionary, instead of providing 0.75 percent for normal and 8 percent for precautionary.

The Bank partially changed the accounting estimation in providing allowance for household loans in accordance with the Supervisory Regulation during the current year. The Bank extended the scope of borrowers classified as normal and precautionary for the secured household loans and applied the same overdue principle for general consumer loans to the secured household loans. Additionally, the Bank newly applied the economic recovery value method in estimating the expected recovery value of the collateral assets pledged as secured loans. The change in accounting estimate above is to reflect economic substantiality based on historical experience, and the effect of changes has been applied prospectively.

In addition, when an allowance for possible loan losses required by the Supervisory Regulation is less than the amount calculated based on the historical loss rate, which is estimated through objective and reasonable method in accordance with the accounting principle in the Republic of Korea, historical loss rate is reflected in the provision for possible loan losses since 2004.

 

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The method and data used for determining the allowances for loan losses based on historical loss rate by the Bank’s lending portfolios are determined as follows:

 

Lending portfolios

 

Methodology

 

Period of historical

loss rate

 

Period of

recovery ratio

Impaired corporate loans

 

DCF & Migration

 

N/A

 

N/A

Non-impaired corporate loans

 

Migration analysis

 

1 year

 

5 years

Consumer loans

 

Migration analysis

 

1 year

 

5 years

Credit card loans

 

Roll-rate analysis

 

1 year

 

5 years

Based on the loan portfolios’ nature, lending period, recovery period and other economic factors, the Bank determines the appropriate data period used in assessing its historical loss rate and recovery ratio.

Until 2004, the Bank provided allowance for possible losses on confirmed acceptances and guarantees, which were classified as substandard or less than substandard. However, pursuant to the amended Supervisory Regulation of Banking Business, the Bank has extended the scope of allowance for possible losses on acceptances and guarantees to note endorsed, unconfirmed acceptances and guarantees, and confirmed acceptances and guarantees classified as normal and precautionary, and provided allowance for possible losses based on the credit classification and minimum rate of loss provision prescribed by Financial Supervisory Service and the cash conversion factor of the respective exposures as of December 31, 2005. In connection with the amendment of Supervisory Regulation of Banking Business, the Bank has also extended the scope of other allowance for the unused line of credit from the unused cash advance facility of active credit card accounts with transaction records during the recent one year to the unused credit limit for purchase of credit card and unused credit line of consumer and corporate loans, and provided other allowance based on the cash conversion factor and minimum rate of loss provision prescribed by Financial Supervisory Service as of December 31, 2005. Due to these changes, allowance for acceptances and guarantees and other allowances increased by (Won)7,645 million and (Won)296,469 million as of December 31, 2005, respectively, and net income for the year then ended decreased by (Won)220,483 million. Since it is impractical to determine the accumulated effect of applying the changes in accounting policies to any prior periods, the new accounting principles were applied prospectively during the current year and the effect of the changes is recognized in the current year operations.

Restructuring of Loans

The equity interest in the debtors, net of real estates and/or other assets received as full or partial satisfaction of the Bank’s loans, collected through reorganization proceedings, court mediation or debt restructuring agreements of parties concerned, is recorded at fair value at the time of the restructuring. In cases where the fair value of the assets received are less than the book value of the loan (book value before allowances), the Bank offsets first the book value against allowances for loan losses and then recognizes provisions for loan losses. Impairment losses for loans that were restructured in a troubled debt restructuring involving a modification of terms are computed by the difference between the present value of future cash flows under debt restructuring agreements discounted at effective interest rates at the time when loans are originated and the book value before allowances for loan losses. If the amount of allowances already established is less than the impairment losses, the Bank establishes additional allowances for the difference. Otherwise, the Bank reverses the allowances for loan losses.

Deferred Loan Origination Fees and Costs

The Bank defers loan origination fees associated with originating loans and loan origination costs that have future economic benefits. Loan balances are reported net of these loan origination fees and costs. The deferred loan origination fees and costs are amortized using the effective interest method with the amortization recognized as adjustments to other interest income.

Valuation of Receivables and Payables at Present Value

Receivables and payables incurred through long-term installment transactions, long-term borrowing and lending transactions, and other similar transactions are stated at the present value of expected future cash flows, and the gain or loss on valuation of related receivables and payables is reflected in current operations, unless the difference between nominal value and present value is immaterial. Present value discount or premium is amortized using the effective interest rate method and credited or charged to interest income or interest expense.

 

- 9 -


Tangible Assets and Related Depreciation

Tangible assets included in fixed assets are recorded at cost or production cost including the incidental expenses. Routine maintenance and repairs are expensed as incurred. Expenditures that result in the enhancement of the value or the extension of the useful lives of the facilities involved are capitalized as additions to tangible assets.

Depreciation is computed by using the declining-balance method (Straight-line method for building and structures) based on the estimated useful lives of the assets as follows:

 

Tangible assets

 

Depreciation method

 

Estimated useful life

Buildings and structures

  Straight-line   40 years

Leasehold improvements

  Declining balance   4-5 years

Equipment and vehicles

  Declining balance   4-5 years

Intangible Assets and Related Amortization

Intangible assets included in fixed assets are recorded at the production costs or purchase costs plus incidental expenses less accumulated amortization. Intangible assets are amortized using the straight-line method over the estimated economic useful lives of the related assets or the activity method as follows:

 

Intangible assets

   Estimated useful life

Goodwill

   9 years

Negative goodwill

   5 years

Trademarks

   5-20 years

Others

   3-30 years

The Bank recorded goodwill as a result of the merger with H&CB, as the cost of the merger exceeded the fair value of the net assets acquired. Expenditures incurred in conjunction with the development of new products or technology and others, in which the elements of costs can be individually identified and future economic benefits are probably exerted, are capitalized as development costs. The Bank estimates the useful lives of endowment assets that are beneficial upon usage based on the term of the contract and are classified under other intangible assets.

Valuation Allowance for Non-Business Use Property

Non-business use property included in fixed assets is recorded when the Bank acquires collateral by foreclosure on the mortgage for loans. If the latest auction price is lower than book value, the difference is provided as a valuation allowance and the valuation loss is charged to current operations. In addition, the difference between the selling price and book value is recorded as a disposition gain or loss.

Recognition of Impairment of Assets

When the book value of assets (other than securities and assets valued at present value) exceeds the recoverable value of the assets due to obsolescence, physical damage or a sharp decrease in market value and the difference is material, the book value are adjusted to recoverable value in the balance sheet and the resulting impairment loss is charged to current operations. If the recoverable value of the assets increases in subsequent years, the increase in value is credited to operations as gain until the recoverable value equals the book value of assets that would have been determined had no impairment loss been recognized. The Bank and its subsidiaries assess the recoverable value based on expected selling price or appraisal value.

Amortization of Discounts (Premiums) on Debentures

Discounts or premiums on debentures issued are amortized over the period from issuance to maturity using the effective interest rate method. Amortization of discounts or premiums is recognized as interest expense or interest income on the debentures.

 

- 10 -


Bonds under Resale or Repurchase Agreements

Bonds purchased under resale agreements are recorded as loans and bonds sold under repurchase agreements are recorded as borrowings when the Bank purchases or sells securities under resale or repurchase agreements.

Contingent Liabilities

A possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Bank and its subsidiaries is recognized as contingent liabilities when it is probable that an outflow of resources embodying economic benefits required and the amount of the obligation can be measured with sufficient reliability. Where the effect of the time value of money is material, the amount of the liabilities is the present value of the expenditures expected to be required to settle the obligation. In addition, as some or all expenditures required to settle a provision is expected to be reimbursed by another party, the reimbursement is recognized as separate assets in the balance sheet and related income may be offset against expense in the income statement.

Accrued Severance Benefits

Employees and directors and temporary employees with at least one year of service as of December 31, 2005 are entitled to receive a lump-sum payment upon termination of their employment with the Bank and its subsidiaries, based on their length of service and rate of pay at the time of termination. The accrued severance benefits that would be payable assuming all eligible employees and directors were to resign are included in other liabilities.

The Bank and its subsidiaries have purchased severance benefits insurance, which meets the funding requirement for tax purposes, and made deposits with Kyobo Life Insurance Co., Ltd and others. Withdrawal of these deposits is restricted to the payment of severance benefits. These are presented as a deduction from the accrued severance benefits.

Accounting for Derivative Instruments

The Bank and its subsidiaries account for derivative instruments pursuant to the Interpretations on Financial Accounting Standards 53-70 on accounting for derivative instruments. Derivative instruments are classified as used for trading activities or for hedging activities according to their transaction purpose. All derivative instruments are accounted for at fair value with the valuation gain or loss recorded as an asset or liability. If the derivative instrument is not part of a transaction qualifying as a hedge, the adjustment to fair value is reflected in current operations.

The accounting for derivative transactions that are part of a qualified hedge based both on the purpose of the transaction and on meeting the specified criteria for hedge accounting differs depending on whether the transaction is a fair value hedge or a cash flow hedge. Fair value hedge accounting is applied to a derivative instrument designated as hedging the exposure to changes in the fair value of an asset or a liability or a firm commitment (hedged item) that is attributable to a particular risk. The gain or loss both on the hedging derivative instruments and on the hedged item attributable to the hedged risk is reflected in current operations. Cash flow hedge accounting is applied to a derivative instrument designated as hedging the exposure to variability in expected future cash flows of an asset or a liability or a forecasted transaction that is attributable to a particular risk. The effective portion of gain or loss on a derivative instrument designated as a cash flow hedge is recorded as a capital adjustment and the ineffective portion is recorded in current operations. The effective portion of gain or loss recorded as a capital adjustment is reclassified to current earnings in the same period during which the hedged forecasted transaction affects earnings. If the hedged transaction results in the acquisition of an asset or the incurrence of a liability, the gain or loss in capital adjustment is added to or deducted from the asset or the liability.

Accounting for Stock Options

In accordance with the Interpretations on Financial Accounting Standards 39-35 on the accounting for the stock option, the Bank records stock compensation costs as a capital adjustment in case that the Bank can choose to settle the vested stock option by issuing new shares or treasury stock, or payment of cash equivalent to the difference between the market price and the exercise price at the exercise date. However, the compensation cost of certain options that is certain to be settled by cash payment is recorded in other liabilities (accrued expenses).

 

- 11 -


National Housing Fund

The Bank, as designated by the Korean government under the Housing Law (former Housing Construction Promotion Law), manages the sources and uses of funds of the National Housing Fund (the “NHF”) and records the related NHF account in other liabilities. In addition, the Bank pays interest to NHF, which is computed by multiplying the average balance of the NHF account by the passbook deposit interest rate.

Income Tax Expense

Income tax expense is the amount currently payable for the period added to or deducted from the changes in deferred income taxes. However, deferred income tax assets are recognized only if the future tax benefits from accumulated temporary differences and any tax loss carryforwards are realizable. The difference between the amount currently payable for the period and income tax expense is accounted for as deferred income tax assets or liabilities, which will be charged or credited to income tax expense in the period each temporary difference reverses in the future. Deferred income tax assets or liabilities are calculated based on the expected tax rate to be applied at the reversal period of the related assets or liabilities. Tax payable and deferred income tax assets or liabilities regarding to certain items are charged or credited directly to related components of shareholders’ equity.

Accounting for Foreign Currency Transactions and Translation

The Bank and its domestic subsidiaries maintain their accounts in Korean Won. Transactions in foreign currencies are recorded in Korean Won based on the prevailing rate of exchange on the transaction date. The Korean Won equivalent of assets and liabilities denominated in foreign currencies are translated in these financial statements based on the basic rate ((Won)1,013.00 and (Won)1,043.80 to US$ 1.00 at December 31, 2005 and 2004, respectively) announced by Seoul Money Brokerage Service, Ltd. or cross rates for other currencies other than U.S. Dollars at the balance sheet dates. Translation gains and losses are credited or charged to operations. Financial statements of overseas branches are translated based on the basic rate at balance sheet dates.

Summary of Accounting Policies for the Bank’s Trust Accounts

 

(1) Valuation of Debt Securities

Debt securities included in performance-based trust accounts are generally recorded at acquisition costs, which include additional costs and deduct accrued interest income for the period before acquisition, and are classified into five categories to provide allowance for possible credit losses in accordance with the credit rates of bonds issued by each company. Debt securities included in base price-based trust accounts are estimated by applying the average of base prices per bond closing on recent trading day announced by Korea Bond Pricing Co., Ltd. and KIS Pricing, Inc.

 

(2) Allowance for Possible Credit Losses

An allowance for possible credit losses is provided for the assets, which were not marked to market, pursuant to the asset classification criteria promulgated by the FSC. Loans are classified as of the balance sheet date into normal, precautionary, substandard, doubtful or estimated loss. Allowance rate is as follows:

 

     Household loans (%)    Corporate loans (%)

Normal

   0.75    0.50

Precautionary

   8.00    2.00

Substandard

   20.00    20.00

Doubtful

   55.00    50.00

Loss

   100.00    100.00

 

(3) Special Reserve

Special reserve refers to the reserve accumulated upon acquisition of trust fee at 25 percent or more until the

 

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balance of special reserve reaches 5 percent of the trust accounts for the purpose of reserving unspecific trust accounts whose principle or income should be guaranteed. In cases where the principle of trust accounts needs to recover or the special reserve exceeds the limit, reversal of special reserve is recognized as income. When the purpose of special reserve no longer exists, it is recorded as trust fee.

Insurance Reserve of KB Life Insurance

KB Life Insurance provides various insurance reserves for payments, refunds, participating policyholders’ dividends and related cost in the future as follows:

 

(1) Premium reserve is a net level premium reserve using interest and mortality assumptions used in computing cash surrender values.

 

(2) Reserve for outstanding claims represents refunds, dividends and claims reported and unpaid as of the balance sheet date.

 

(3) Unearned premium reserve represents the unearned portion of quarterly, semi-annual and annual premiums as of the balance sheet date.

 

(4) Dividends held on deposit for policyholders represent amounts payable to policyholders due to interest rate difference guarantee, mortality gains, excess interest, expense gains and long-term contracts in accordance with the regulations or agreements.

Application of the Statements of Korea Accounting Standards

The Korea Accounting Standard Board (KASB) under the Korea Accounting Institute (KAI) issued the Statements of Korea Accounting Standards (SKAS) for achieving a set of Korean accounting standards that should be internationally acceptable and comparable. The Statements supersede the relative articles of existing accounting standards and constitute generally accepted accounting standards of the Republic of Korea. The Bank and its subsidiaries have implemented SKAS No.1 (Accounting Changes and Correction of Errors) since January 1, 2002 and adopted SKAS from No.2 (Interim Financial Statements) through No.9 (Convertible Securities), since January 1, 2003. Also, the Bank and its subsidiaries have implemented SKAS No.13 (Troubled Debt Restructurings), since January 1, 2004 and adopted SKAS No.15 (Investment in Associates), No. 16 (Income Taxes) and No. 17 (Provisions, Contingent Liabilities and Contingent Assets), since January 1, 2005.

Restatement of Prior Period Financial Statements

The Bank recorded individual assets and liabilities comprised in private beneficiary certificates in their respective bank accounts, and net operating results from the private beneficiary certificates were recorded as one line item of income or loss from beneficiary certificates in the income statements by the end of 2004. However, in accordance with the new interpretation on the accounting of private beneficiary certificates by the Financial Supervisory Service, a private beneficiary certificate on which management, as an investor, agrees to have no interference and is not managing, is regarded as an ordinary beneficiary certificate and recorded as securities. As a result of the change of accounting principle, the Bank restated the accompanying financial statements as of December 31, 2004, which increased total assets, total liabilities and capital adjustments by (Won)76,568 million, (Won)2,668 million and (Won)268,696 million, respectively, and decreased retained earnings before appropriations by (Won)194,796 million. Moreover, total assets and total liabilities increased by (Won)27,486 million, capital adjustments decreased by (Won)101,676 million as of December 31, 2005, and net income for the year then ended increased by (Won)101,676 million due to the above accounting change.

In addition, the Bank recorded the commission and fees from credit card receivables from lump sum payment and installment payment and other credit card commission and fees as commission income until 2004. However, pursuant to the amended Supervisory Regulation of Banking Business, those commission and fees from credit card receivables have been reclassified as interest income during the current year. Due to this change, interest income increased by (Won)1,015,115 million and (Won)1,131,358 million, and commission and fee income decreased by the same amount for the years ended December 31, 2005 and 2004, respectively. However, the reclassification has no effect on net income or shareholders’ equity for the years ended and as of December 31, 2005 and 2004.

 

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Reclassification

Certain accounts of the prior year were reclassified to conform to the current year’s presentation for comparative purposes; however, reclassifications had no effect on the previously reported prior year’s net income or shareholders’ equity of the Bank and its subsidiaries.

 

4. CASH AND DUE FROM BANKS:

 

(1) Cash and due from banks in Won and foreign currencies as of December 31, 2005 and 2004 consisted of (Unit: In millions):

 

     2005    2004  

Cash and checks

   (Won) 2,683,480    (Won) 2,380,580  

Foreign currencies

     150,403      124,736  

Due from banks in Won

     2,519,991      2,063,971  

Less: Present value discount

     —        (3,751 )

Due from banks in foreign currencies

     589,122      647,527  
               
   (Won) 5,942,996    (Won) 5,213,063  
               

 

(2) Due from banks as of December 31, 2005 and 2004 consisted of (Unit: In millions):

 

Financial institution

  

Annual

Interest rate (%)

   2005    2004  

Due from banks in Won:

        

BOK

      (Won) 2,189,339    (Won) 1,685,105  

Woori Bank and others

   0.10~4.06      312,128      254,864  

Hansol Mutual Savings

        —        90,005  

Korea Exchange and others

   0.10~3.15      18,524      33,997  
                  
        2,519,991      2,063,971  

Present value discounts

        —        (3,751 )
                  
      (Won) 2,519,991    (Won) 2,060,220  
                  

Due from banks in foreign currencies:

        

BOK

      (Won) 46,501    (Won) 43,631  

Korea Exchange Bank and others

   0.00~4.87      129,318      114,354  

Woori Bank and others

   4.05~4.86      413,303