ontents - KB 국민은행img2.kbstar.com/obj/eng/Kookmin1998.pdf · Credit Bank. Following the merger, we have integrated retail and corporate banking know-how from both sides, combining

Annual Report

1998 Vision for the 21stCentury

1

To our Shareholdersand Investors

2

56

Merger &Acquisition

10

1998-Changes in KoreanEconomy & FinancialEnvironment

12

14

Performance for Shareholders

Financial Highlights

19 Management’s Discussion &

Analysis of Financial Conditions

86 Organization Chart

27 Financial Statements

87 Management and Auditor

88899091

Brief History of the Bank

International Banking Directory

Domestic Network / Subsidiaries

Corporate Data

1998 at a Glance

7

C o n t e n t s

1999 Economy Outlook& Changes in theFinancial Environment

16The Bank’s Strategyin 1999

The Mission Statement

The Bank’s ultimate mission is to become a “Premier Global

Financial Group”. We will achieve this aim by continuing to

fortify our leading position in the domestic financial industry

with a management emphasis on “Customer Satisfaction, Human

Resource Development and Community Prosperity”.

As part of our mission, the “Mission Statement” and the “Code of

Conduct” have been implemented to serve and guide all of our

employees.

As our commitment to “Customer Satisfaction” is the Bank’s

paramount priority, we aim to provide superior financial

products and services and maximize the interests of our

shareholders with consistent profitability and transparent and

efficient management.

To achieve our aim, the Bank respects the “Individuality” and

“Creativity” of each and every employee and his valuable

contribution in fulfilling our leadership role in the Korean

financial industry.

In order to achieve our stated aims and contribute to the

prosperity of our customers, shareholders and community, we

will provide leadership in the preservation of our environment

and cultural heritage and maintain the highest ethical standards

of “Honesty” and “Trust” as cornerstones of the Bank’s reputation.

The Code of Conduct

We, the employees of Kookmin Bank, shall:

Think and act in consideration of our customers and fulfill our

commitment to them.

Dedicate ourselves to protecting and maximizing shareholders’

value.

Assume leadership in the globalization of the domestic

financial market by strengthening our international finance

capability.

Strengthen professionalism by planning and preparing for the

future through continuous self-development and self-

improvement.

Project and embody the spirit of “Banker’s Integrity” by

rejecting any impropriety or appearance of impropriety.

Participate and contribute to the communities we serve, and

provide leadership in the protection of our environment and

the preservation of our cultural heritage.

Honor and embrace Kookmin Bank’s tradition and regard

“Kookmin” with pride and dignity.

V i s i o n f o r t h e 2 1 s t C e n t u r y

The “Super Leading Bank” in the 21st century is our long-term goal. Meanwhile, joining the

ranks of Top 100 banks in the world is our short-term goal. To this end, we will do our utmost

to maintain ROA at 1.0% or higher, ROE at 15.0% or higher, BIS capital adequacy ratio at

12.0% or higher, non-performing loan ratio at 2.5% or below, and operating expense ratio at

50.0% or below. We are confident in reaching these goals, and the Bank will secure its positions

in profitability, service quality, soundness, and potentials.

The Mission Statement

The Bank’s ultimate mission is to become a “Premier Global

Financial Group”. We will achieve this aim by continuing to

fortify our leading position in the domestic financial industry

with a management emphasis on “Customer Satisfaction, Human

Resource Development and Community Prosperity”.

As part of our mission, the “Mission Statement” and the “Code of

Conduct” have been implemented to serve and guide all of our

employees.

As our commitment to “Customer Satisfaction” is the Bank’s

paramount priority, we aim to provide superior financial

products and services and maximize the interests of our

shareholders with consistent profitability and transparent and

efficient management.

To achieve our aim, the Bank respects the “Individuality” and

“Creativity” of each and every employee and his valuable

contribution in fulfilling our leadership role in the Korean

financial industry.

In order to achieve our stated aims and contribute to the

prosperity of our customers, shareholders and community, we

will provide leadership in the preservation of our environment

and cultural heritage and maintain the highest ethical standards

of “Honesty” and “Trust” as cornerstones of the Bank’s reputation.

The Code of Conduct

We, the employees of Kookmin Bank, shall:

Think and act in consideration of our customers and fulfill our

commitment to them.

Dedicate ourselves to protecting and maximizing shareholders’

value.

Assume leadership in the globalization of the domestic

financial market by strengthening our international finance

capability.

Strengthen professionalism by planning and preparing for the

future through continuous self-development and self-

improvement.

Project and embody the spirit of “Banker’s Integrity” by

rejecting any impropriety or appearance of impropriety.

Participate and contribute to the communities we serve, and

provide leadership in the protection of our environment and

the preservation of our cultural heritage.

Honor and embrace Kookmin Bank’s tradition and regard

“Kookmin” with pride and dignity.

Vision for the 21stCentury

1

To our Shareholdersand Investors

2

56

Merger &Acquisition

10

1998-Changes in KoreanEconomy & FinancialEnvironment

12

14


Financial Highlights

19 Management’s Discussion &

Analysis of Financial Conditions

86 Organization Chart

27 Financial Statements

87 Management and Auditor

88899091

Brief History of the Bank

International Banking Directory

Domestic Network / Subsidiaries

Corporate Data

1998 at a Glance

7

C o n t e n t s

1999 Economy Outlook& Changes in theFinancial Environment

16The Bank’s Strategyin 1999

V i s i o n f o r t h e 2 1 s t C e n t u r y

The “Super Leading Bank” in the 21st century is our long-term goal. Meanwhile, joining the

ranks of Top 100 banks in the world is our short-term goal. To this end, we will do our utmost

to maintain ROA at 1.0% or higher, ROE at 15.0% or higher, BIS capital adequacy ratio at

12.0% or higher, non-performing loan ratio at 2.5% or below, and operating expense ratio at

50.0% or below. We are confident in reaching these goals, and the Bank will secure its positions

in profitability, service quality, soundness, and potentials.

Stockholders

maximization of Shareholders’ Value

Employees

satisfaction & respect

Customers

the Best Financial Service

1 9 9 8 K o o k m i n B a n kAnnual Report

1

Financial Goals

Business Vision (repositioning) Organizational Vision (restructuring) Cultural Vision (revitalizing)

Organization with clear responsibility and authorityInformation-oriented Prompt & rational decision makingPerformance-oriented promotion& reward system

Best in retail banking

Leading in corporate banking

Expansion of securities business

Expansion of fee-based income

Expansion of integrated risk management systems

Creative and innovative corporate cultureCustomer-oriented thoughts and actsActive and pleasant organizational atmosphereSelf-motivated organization

“Super Leading Bank in the 21st Century”“Super Leading Bank in the 21st Century”

“Super Leading Bank in the 21st Century”Among the Top 100 banks in the World

Year 2001 Year 2005

ROA 1.0% 1.5%

ROE 15.0% 20.0%

BIS capital adequacy ratio 12.0% 12.0%

Non-performing loan ratio 2.5% 1.0%

Operating expense ratio 50.0% 45.0%

Shareholders

Maximization of Shareholders’ Value

Employees

Job Satisfaction & Fulfillment

Customers

Best Financial Services

Looking Back on 1998

I would like to extend my deepest gratitude to our shareholders and investors for their unwavering support andassistance in the growth of the Bank during a very difficult and trying year.

The past year has been one of severe economic upheaval in which the world economy showed signs of an impendingrecession, the Asian financial crisis needed to be resolved and the Korean economy was rescued from the verge ofcollapse. Moreover, it was a year in which the entire nation was subject to a stringent round of restructuring, with thefinancial industry bearing the brunt of major structural readjustment and reform.

Banks that once stood as pillars of success, went from forerunners in the domestic financial industry to the verge ofliquidation, overnight. Also, the mergers of financial institutions and the liquidations of non-viable banks took place inunprecedented numbers. Meanwhile, international credit rating agencies downgraded many unsound financialinstitutions.

Moreover, a chain of bankruptcies among businesses and snowballing unemployment have left domestic financialinstitutions with huge non-performing loans. The result was the strengthening of provisioning standards, in order tobring them in line with international accounting standards, which made the business conditions of 1998 one of theharshest on record.

More Reputable Image in the Turmoil

In the midst of the difficult business conditions, the Bank’s performance was exceptional among the domestic financialinstitutions. And, in recognition of this effort, the Bank received the prestigious Korea’s “Commercial Bank of the Year”award and was recognized as one of the “Top 100 Best-Managed Companies in the Asia-Pacific Region” by theinternational financial magazine, Asiamoney. Moreover, world-renowned investment banks, including Goldman Sachsand Nomura Securities, assessed the Bank as having the highest investment value in Korea.

To our Shareholdersa n d I n v e s t o r s


3

Even local economic periodicals identified us as the country’s “Most Credible Bank” during the financial crisis. Thus,Kookmin Bank has earned industry-wide recognition for its management excellence and performance.

Merger and Acquisition

During 1998, the assets and liabilities of Daedong Bank were acquired under a purchase and assumption scheme. Also,in line with our goal of becoming the “Super Leading Bank” we strategically decided the merger of Korea Long TermCredit Bank. Following the merger, we have integrated retail and corporate banking know-how from both sides,combining low cost funding with high profitable fund operations. The synergy effects resulting from the merger in itsdepth and scale have been and will be maximized. The merger has helped to strengthen the foundations of the Bankand will enable it to join the ranks of the world’s leading financial institutions.

Business Performance

Despite the difficult environment, our executives and employees achieved remarkable results with their strongcommitment to the Bank and a fast-paced restructuring process.

In terms of operating results, as of the end of September 1998, the Bank became the first financial institution in Korea tobreak the 50 trillion mark in total deposits and reached 56.5 trillion as of the end of December 1998, a feat neverachieved before in Korea. In respect of equity capital enhancement, the capital base was strengthened through rightsofferings and bonus issues of 395 billion and issuance of preferred stocks worth 200 billion. In addition, the BIScapital adequacy ratio was maintained at above 10.0%.

As for loan operations, total loans, which are comprised of banking and trust accounts, recorded 36.7 trillion, anincrease of 11.8 trillion compared to last year. This helped to ease the cash flow of households and small andmedium-sized enterprises that were caught in economic difficulties.

In terms of earnings results, in compliance with international accounting standards now applicable in Korea, 100.0% ofthe newly required provisions were set aside. Despite the application of more stringent provisioning standards, 73.4billion in net income was recorded for the period and 683.7 billion in net business income, marking the largest netbusiness income result since the Bank’s establishment. As a result, the Bank solidified its image as a competitiveinstitution, both at home and abroad in 1998.

New Management Paradigm

The key to success as a “Super Leading Bank” lies in maintaining and strengthening core competencies, securingsufficient human resources with expert knowledge and reinforcing cooperation with shareholders. To this end, four keymanagement principles have been developed as the basis of a new management paradigm for 1999; “Maximization ofShareholders’ Value”, “Customer-First principle”, “Risk Management” and “Knowledge-Based Management”.

First, we will focus our efforts to increase the corporate value and maximize “Shareholders’ Value”. As the success of themerger can be evaluated by the post-merger stock performance, we will strive to outperform the shareholders’expectations.

To our Shareholders and Investors

Second, we will enhance our “Customer-First principle”, sincethinking and acting from the customer’s perspective is our ultimateservice principle.

Third, we intend to reinforce risk management systems by adoptingmore advanced methods of risk assessment and elaborating the earlywarning system.

And fourth, we are committed to developing a new management systembased on our knowledge and experience which allows the entire workforceto share and utilize information.

Based on this new paradigm, we pledge to pool our best enterpriseresources plans to make Kookmin a “Super Leading Bank”.

Y2K Compliance

Our computer systems have been designed with full awareness of Y2K. Whenwe introduced the new comprehensive on-line system in February 1991, annualdeclarations in all of the basic programs and databases were designed in fourdigits. Therefore, we are fully prepared to cope with Y2K. Nonetheless, we haveconducted comprehensive tests, including job-specific tests as well as connectiontests with other agencies. In 1999, we plan to conduct comprehensive tests inconjunction with other financial institutions, obtain official certificates ofcompliance from the government, and check links with social infrastructures.

A Bank You Can Trust and Invest In

Business environment in the 21st century will be more challenging than ever due toborderless economic activities, intensive competition in the financial industry, and

stricter application of international accounting standards. In such a rapidly changing environment, we pledge to do ourutmost to make Kookmin Bank a financial institution that you can trust and invest in.

With your continued encouragement and support, we can build a “Stronger & Better Bank” that will represent theKorean financial industry in the new Millennium.

Thank you.

In such a rapidly changing

environment, we pledge to

do our utmost to build a

“Stronger & Better Bank”

that will represent the

Korean financial industry

in the new Millennium.

Dal-Ho SongPresident & Chief Executive Officer

During 1998, the Bank experienced several changes in its operationalenvironment. The major changes were : acquisition of Daedong Bank,

merger of Korea Long Term Credit Bank(“KLB”), adoption of stricterinternational accounting standards, and nation’s economic turmoil that

required the Bank to set aside more reserves, consequently, recording lessnet income. The Bank, however, has used these hardships as an opportunity

to increase the capital base, to improve the asset quality, to downsize theorganization, and to develop a more accurate and sophisticated credit

evaluation system. The Bank believes that these efforts will strengthen its performance in 1999 and

coming years.

Return on Equity

ROE for 1998 was 2.46%. It is 1.66% pointsless than 4.12% of the previous year,

resulting from an increase of capital and a decrease of net income. Last year, paid-incapital increased significantly due to rights and bonus offerings of 395 billion,

preferred stock issuance of 200 billion, and 249 billion from the merger of KLB.The Bank also recorded a net business income of 683.7 billion, the largest since the Bank’s establishment. In the meantime, theBank has set aside 100.0% full reserves for possible loan losses of 1,297.2 billion and severance benefits allocated for twoearly retirement programs of 254.2 billion in line with newly adopted international accounting standards.

Dividends

Dividend paid to shareholders during the year were hurt by global economic events, particularly in Asia. However, the Bank paid a4.0% cash dividend for common stocks and a 1.0% cash dividend for preferred stocks. Considering last year’s businessenvironment, these dividend ratios clearly show the investor-oriented management that the Bank has been adopting since itsestablishment. In 1999, the Bank will strive to continue its goal to sustain high dividend rates to meet the shareholders’ interest.

Earnings per Share

EPS went from 1997’s 1,054 to 445 in 1998. This is the result of an increase in the number of shares and a decline in netincome. The Bank, however, had fully reserved for possible non-performing loan losses required by government regulations.Therefore, 1999 will be a more productive year for shareholders.

Book Value

As of the end of 1998, the book value of the Bank’s stock was 11,509 compared to last year’s 18,446. The significant dropof book value was due mainly to the increase of outstanding shares. During the year, common stocks issued increased by131,659,127, as a result, outstanding common stocks issued at the year end totalled 236,299,363.


5


Performancef o r S h a r e h o l d e r s

To maximize the shareholders’ value, the Bank has been aiming

to deliver high dividend rates to shareholders.

In 1998, we :

Paid 4.0% cash dividend for common stocks and 1.0% cash

dividend for preferred stocks.

Sustained ROE at 2.46%.

And, maintained capital adequacy ratio at 10.09%.

Financial Statements

Banking Accounts 28

Trust Accounts 32

Note to Financial Statements 34

Report of Independent Accountants 58

Consolidated Financial Statements 60

Note to Consolidated Financial Statements 64

Report of Independent Accountants 84

Non-Consolidated Balance SheetsBanking Accounts

December 31, 1998 and 1997

In Millions of In Thousands ofKorean Won U.S. Dollars (Note 3)

1998 1997 1998 1997

ASSETSCash and due from banks (Note 4)Loans (Note 5)Call loansSecurities (Note 6)Foreign exchangeCustomers' liabilities on guarantees (Note 11)Premises and equipment (Note 7)Other assets (Note 8)

Total assetsLIABILITIES

Deposits (Note 9)Call moneyBorrowings (Note 10)Guarantees outstanding (Note 11)Provisions (Note 12)Other liabilities (Note 13)

Total liabilities

Commitments and contingencies (Note 14)

SHAREHOLDERS EQUITYCapital stock, par value : 5,000 ; authorized

1,000,000,000 shares in 1998 and 200,000,000 shares in 1997 (Notes 1 and 15) ;

Common Stock ; issued and outstanding 236,299,363 shares in 1998 and 104,640,236 shares in 1997

Preferred stock ; issued and outstanding 40,000,000 shares in 1998

Capital surplus (Note 7 and 16)Retained earnings (Note 17)Capital adjustment (Note 18)

Total shareholders' equityTotal liabilities and shareholders' equity

5,546,14433,014,3691,304,212

20,517,731763,532

2,791,5872,440,5834,117,525

70,495,683

37,396,563383,042

20,089,9112,791,5872,275,6804,378,938

67,315,721

1,181,497

200,0001,182,166

744,001(127,702)3,179,962

70,495,683

4,622,17421,503,627

556,2246,843,527

849,7101,055,5262,053,2322,164,880

39,648,900

25,736,482307,053

5,626,6221,055,5261,487,8193,505,193

37,718,695

523,201

—804,045588,30914,650

1,930,20539,648,900

3,826,93717,803,963

460,5275,666,109

703,519873,924

1,699,9771,792,416

32,827,372

21,308,563254,225

4,658,571873,924

1,231,8422,902,131

31,229,256

433,185

—665,710487,09112,130

1,598,11632,827,372

4,591,93927,334,3011,079,824

16,987,689632,168

2,311,2992,020,6853,409,112

58,367,017

30,962,546317,140

16,633,4752,311,2991,884,1533,625,549

55,734,162

978,222

165,590978,777615,997

(105,731)2,632,855

58,367,017

The accompanying notes are an integral part of these statements.


29

Non-Consolidated Statements of IncomeBanking Accounts

For the years ended December 31, 1998 and 1997


1998 1997 1998 1997

Revenue :Interest on loansInterest on due from banksInterest on call loansInterest and dividends on securitiesOther interest incomeFees and commissionsOther operating income (Note 19)Non-operating income

Expenses :Interest on depositsInterest on call moneyInterest on borrowingsOther interest expensesFees and commissionsGeneral and administrativeexpenses (Note 20)Other operating expenses (Note 21)Non-operating expenses(Note 5)

Income before income taxesIncome taxes (Note 22)Net incomeEarnings per common share(in Korean Won and U.S. Dollars)

3,055,166385,87992,821

1,214,692333,368259,237

1,264,47839,630

6,645,271

2,607,768146,847540,065267,68921,027

639,4571,843,181

505,8426,571,876

73,395—

73,395

445

2,157,032168,25576,802

600,652147,434237,046813,44819,604

4,220,273

1,675,31921,771

195,706105,59015,932

680,6981,257,814

162,2904,115,120

105,153754

104,399

1,054

1,785,918139,30763,588

497,311122,068196,263673,49616,231

3,494,182

1,387,08318,026

162,03587,42413,191

563,5851,041,409

134,3683,407,121

87,061624

86,437

0.87

2,529,530319,48976,851

1,005,706276,013214,636

1,046,92732,812

5,501,964

2,159,106121,582447,147221,63417,409

529,4401,526,065

418,8135,441,196

60,768—

60,768

0.37


Non-Consolidated Statements of Approprlations of Retained EarningsBanking Accounts

For the years ended December 31, 1998 and 1997 Dates of appropriations: February 27, 1999 for 1998 and February 28, 1998 for 1997


1998 1997 1998 1997

Unappropriated retained earningsat the end of the year :Unappropriated retained earningscarried over from prior yearNet income

Transfer from voluntary reserve :Reserve for overseas investment lossesReserve for technology developmentReserve for dividends

Appropriations (Note 17) :Legal reserveBusiness rationalization reserve

General purpose contingency reserveReserve for technology developmentOther statutory reserve

Cash dividends (4.0% for common stock and 1% for preferred stock in 1998)Stock dividends (2.8% in 1997)

Unappropriated retained earningscarried over to subsequent year

1573,39573,410

6,2004,100

— 10,300

10,000300

10,000——

47,273—

67,573

16,137

67104,399104,466

4,3006,400

14,65025,350

15,000—

83,20016,700

251

—14,650

129,801

15

5686,43786,493

3,5605,298

12,13020,988

12,419—

68,88513,827

208

—12,130

107,469

12

1260,76860,780

5,1333,395

— 8,528

8,280248

8,280——

39,139—

55,947

13,361



31

Non-Consolidated Statements of Cash FlowsBanking Accounts



1998 1997 1998 1997

Cash flows from operating activities :Net incomeItems not involving cash flows :

Depreciation expensesBad debt expensesAccrued severance benefitsUnrealized losses on securitiesLosses on disposal of loans, net (Note 5)Unrealized gains on securitiesOthers

Cash provided by (used in) operating activitiesLoans Accrued interest incomeDepositsAccrued expensesOthers

Cash flows from investing activities :Acquisition of securitiesAcquisition of premises and equipmentDisposal of premises and equipmentIncrease due to merger (Note 26)Increase due to purchase and assumption

(Note 27)Others

Cash flows from financing activities :Increase in borrowingsDecrease in call moneyIncrease(decrease) in securities sold with recourseIncrease (decrease) in agenciesIssuance of capital stock for cashCash dividendsOthers, net

Net increase in cashCash and cash equivalents at beginningof the year (Note 24)

Cash and cash equivalents at end of the year (Note 24)

73,395

74,898494,858254,25538,006

446,389(110,731)

(6,721)

(64,199)(625,833)7,568,4921,054,430

(1,670,675)7,526,564

(7,979,920)(414,675)

89,6741,258,072

1,506,88272,376

(5,467,591)

198,165(31,650)

(1,159,250)(261,811)

578,688(47,273)

(137,662)(860,793)1,198,180

6,415,708

7,613,888

104,399

79,797153,916142,845128,931151,392(31,457)

2,384

(4,127,335)(265,664)1,668,271

177,30327,798

(1,787,420)

(1,424,352)(205,992)

91,237—

—58,397

(1,480,710)

2,397,926(216,544)1,466,038

397,054111,765(50,575)

80,5064,186,170

918,040

5,497,668

6,415,708

86,437

66,068127,435118,269106,749125,345(26,045)

1,974

(3,417,234)(219,957)1,381,248

146,79823,016

(1,479,897)

(1,179,295)(170,551)

75,540—

—48,350

(1,225,956)

1,985,367(179,288)1,213,809

328,74192,536

(41,874)66,655

3,465,946760,093

4,551,803

5,311,896

60,768

62,012409,718210,51131,467

369,589(91,680)(5,565)

(53,154)(518,159)6,266,345

873,017(1,383,238)

6,231,631

(6,606,988)(343,331)

74,2461,041,623

1,247,62559,924

(4,526,901)

164,071(26,204)

(959,803)(216,767)479,125(39,140)

(113,976)(712,694)992,036

5,311,896

6,303,932


Non-Consolidated Balance SheetsTrust Accounts



1998 1997 1998 1997

ASSETSLoans (Note 25)Call loansSecurities purchased with recourseTraded securities (Note 25)Cash and due from banksDue from banking accountsAccrued incomeOther assets

Total assetsLIABILITIES

Money trusts (Note 25)Security trusts (Note 25)Security investment trusts (Note 25)Provision for future trust lossesProvision for possible loan losses (Note 2)Unrealized losses on securities (Note 2)Accrued trust dividendsOther liabilities

Total liabilities

3,718,5721,677,6881,365,680

32,608,748945,002391,852

1,474,507656,721

42,838,770

19,128,16584,910

20,029,36913,025

147,073—

2,724,215712,013

42,838,770

3,419,297377,09857,109

13,719,361985

158,450763,11628,361

18,523,777

15,284,809—

2,163,93062,59224,692

110,500718,963158,291

18,523,777

2,831,012312,21947,283

11,358,968816

131,189631,82323,482

15,336,792

12,655,083—

1,791,62951,82320,44491,489

595,267131,057

15,336,792

3,078,7981,389,0451,130,717

26,998,467782,416324,434

1,220,820543,733

35,468,430

15,837,19670,301

16,583,34910,784

121,769—

2,255,518589,513

35,468,430



33

Non-Consolidated Statements of OperationsTrust Accounts




1998 1997 1998 1997

Revenue :Interest on loansInterest and dividends on securitiesGains on securities transactionsOther interest incomeOther income

Expenses :Trust fees to the bank (Note 25)Commissions paidLosses on securities transactionsProvision for loan lossesOther expenses

Dividend of trust profit to beneficiaries (Note 25)

532,3812,467,823

397,377170,895

1,050,4304,618,906

213,727673,543275,515112,78758,976

1,334,548

3,284,358

409,4981,240,906

97,83143,276

183,9521,975,463

113,50990,304

122,2015,426

14,785346,225

1,629,238

339,0451,027,410

80,99935,830

152,3041,635,588

93,98074,767

101,1774,493

12,241286,658

1,348,930

440,7862,043,238

329,009141,493869,705

3,824,231

176,956557,661228,11393,38248,829

1,104,941

2,719,290

1. The Bank :

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

The Bank merged with Korea Long Term Credit Bank on December 31, 1998 and made a registration of its merger on January 5, 1999 (see Note26). Under the decision of the Financial Supervisory Commission in accordance with the Act concerning the Structural Improvement of the FinancialIndustry, the Bank took over certain assets including the loans classified as normal or precautionary and most liabilities of Daedong Bank by themethod of purchase and assumption as of June 29, 1998 (see Note 27).

The Bank is engaged in the banking and trust business according to the provisions of the General Banking Act and the Trust Business Act andoperates through 545 local branches and 8 overseas networks as of December 31, 1998.

Since September 30, 1994, the Bank s issued and outstanding shares have been listed on the Korean Stock Exchange. In accordance with theGeneral Banking Act, if one person, other than the Government, owns more than 4% of total outstanding voting shares, the ability to exercise thevoting rights of the shares held is limited to the voting rights of 4% of total outstanding shares. The Korean Government owns 8.2% of the issuedand outstanding shares at December 31, 1998.

2. Summary of Significant Accounting Policies :

Basis of Non-Consolidated Financial Statement Presentation -The official accounting records of the Bank are maintained in Korean Won in accordance with the relevant laws and regulations and accountingprinciples generally accepted in the Republic of Korea as modified by the accounting and reporting guidelines prescribed by the banking regulatoryauthorities.

For the convenience of the reader, the accompanying non-consolidated financial statements have been condensed, restructured and translated intoEnglish from the statutory Korean language non-consolidated financial statements. Certain information included in the statutory Korean languagenon-consolidated financial statements, not required for a fair presentation of the Bank s non-consolidated financial position or results of operationsand cash flows, is not presented in the accompanying non-consolidated financial statements. These non-consolidated financial statements are notintended to present the non-consolidated financial position and results of operations and cash flows in accordance with accounting principles andpractices generally accepted in countries and jurisdictions other than the Republic of Korea.

The Bank operates both a commercial banking business and a trust business in which the Bank, as a fiduciary, holds and manages the property ofothers. Under the Trust Business Act, the trust funds are accounted for and reported separately from the Bank s own commercial banking business.

According to the accounting and reporting guidelines by banking regulatory authorities, the Bank reported acceptances and guarantees outstandingin the liability section and the same amount for customers liabilities for these acceptances and guarantees in the asset section of the accompanyingnon-consolidated balance sheet. The Bank also presented a reserve for doubtful accounts and accumulated depreciation in the liability section of theaccompanying non-consolidated balance sheet rather than deducting them from the relevant assets in accordance with the above guidelines.

Under the accounting and reporting guidelines prescribed by the banking regulatory authorities and accounting principles generally accepted in theRepublic of Korea, the consolidation method for majority owned subsidiaries has not been applied in the accompanying non-consolidated financialstatements. The consolidated financial statements of the Bank and its subsidiaries are prepared and filed separately.

The preparation of non-consolidated financial statements in conformity with the banking regulatory guidelines requires management to makeestimates and assumptions that affect amounts reported therein. Due to the inherent uncertainty involved in making estimates, actual resultsreported in future periods may differ from those estimates.

The accompanying non-consolidated financial statements for the year ended December 31, 1998 include only the balance sheet of Korea Long TermCredit Bank ( KLB ), merged on December 31, 1998. The income or loss of KLB for the year 1998 was reflected in gains on business combination ofcapital surplus, which do not affect the net income of the Bank (see Note 26). The assets and liabilities of Daedong Bank which were acquiredthrough the purchase and assumption were reflected and accounted in the accompanying non-consolidated financial statements under theprescription of the Financial Supervisory Commission (see Note 27).

Revision of Accounting Policies -In accordance with the revised accounting and reporting guidelines prescribed by the banking regulatory authorities effective January 1, 1998, theBank adopted certain amended presentation and accounting policies regarding provisions for possible loan losses, the valuation of securities and

Note to Non-Consolidated Financial StatementsDecember 31, 1998 and 1997


35

accrued severance benefits (see below Provision for Possible Loan Losses , Securities , Trust Accounts and Accrued Severance Benefits ). Asresults of these changes, net income for the year ended December 31, 1998 is approximately 83,137 million less than that which would havebeen reported using the prior methods.

Additionally, in December 1998, significant changes were announced to the financial accounting standards in Korea that will change accountingprinciples generally accepted in Korea to be more consistent with International Accounting Standards. These changes, including accounting forinvestment securities, foreign currency translation, impairment of long lived assets, deferred assets, goodwill, and prior period adjustments areeffective for years beginning on or after January 1, 1999. The cumulative effect on prior years of these changes in accounting policies will becharged or credited to retained earnings, and disclosure made on the effect of the change on prior years net income.

Recognition of Interest Income -Interest income on loans and investments is recognized on an accrual basis, while interest income on overdue and dishonored loans, except for thosesecured and guaranteed by financial institutions, is recognized on a cash basis in accordance with the accounting and reporting guidelines prescribedby the banking regulatory authorities. At December 31, 1998, unaccrued interest income receivable, except for the unaccrued interest income onthe purchased assets from Daedong Bank, approximates 373,166 million.

Foreign Currency Translation -Assets and liabilities denominated in foreign currencies are translated into Korean Won at the exchange rates prevailing at the non-consolidatedbalance sheet date, except for spot and forward exchange contracts which are valued at the rates specified in the contracts. Resulting exchange gainsor losses are reflected in other operating income or expenses on a current basis.

The exchange rates used to translate foreign currency denominated assets and liabilities at December 31, 1998 and 1997 are 1,207.8 : US$1 and1,415.2 : US$1, respectively.

Provision for Possible Loan Losses -The Bank provides an allowance for possible loan losses based on a credit risk classification of the loan balances outstanding as of December 31,1998 under the accounting and reporting guidelines prescribed by the banking regulatory authorities. Estimated possible loan losses aredetermined by applying the following percentages to each credit risk classification.

Under the previous accounting and reporting guidelines prescribed by the banking regulatory authorities, the Bank applied the credit riskclassification on the loan balances outstanding as of November 30, the end of the month before the non-consolidated balance sheet date.

In accordance with the revised accounting and reporting guidelines prescribed by the banking regulatory authorities, effective July 1, 1998, the Bankchanged its loan loss provision ratio for precautionary loans from 1% to 2% and its classification standards for sub-standard loans by delinquencyperiods from over six-months to over three-months, and additionally provided an allowance for possible loan losses on collections of commercialpaper and privately offered debentures and notes with guarantee.

Under the revised guidelines, the provision for possible loan losses for the banking accounts before the merger for the year ended December 31,1998 was 839,418 million (including 170,267 million of Daedong Bank), which resulted in an increase of 110,500 million from that whichwould have been reported using the prior methods.

Securities -In accordance with the revised accounting and reporting guidelines prescribed by the banking regulatory authorities, effective January 1, 1998,securities are classified as traded securities and investment securities by the possession purpose, which are offset by the previous provisions forunrealized valuation losses, and are stated at cost, computed on a moving average basis, unless market value or equity method accounting is appliedas described below.

Traded securities held for sale are stated at market value as of December 31, 1998, and resulting unrealized valuation gains or losses are reflected ona current basis.

Among investment securities, securities which have a quoted market value and equity investments whose ownership is 15% or more are stated atmarket value and under the equity method, respectively, as of December 31, 1998, and resulting unrealized valuation gains or losses are recordedas a capital adjustment.

Normal 0.5%Precautionary 2%Sub-standard 20%Doubtful 75%Estimated loss 100%

Among investment securities, unmarketable securities whose issuer is at bankruptcy or whose estimated value has declined significantly are revaluedby applying the same credit risk classification and percentage ( credit risk classification method ) as applied in providing an allowance for possibleloan losses, and the resulting differences between the acquisition costs and revalued amounts are charged to current operations.

Under the previous accounting and reporting guidelines prescribed by the banking regulatory authorities, the Bank stated securities at cost unless thelower of cost or market method was applied to certain securities and resulted in allowances for unrealized valuation losses on marketable equityinvestments in amounts equal to 55% of the estimated losses.

As results of the changes in valuation methods as described above, including the change in reflecting unrealized valuation losses from partialprovision to full provision, unrealized valuation losses on securities in the accompanying non-consolidated statement of income for the year endedDecember 31, 1998 have been decreased by 141,785 million, and capital adjustment as of December 31, 1998, has been decreased by

127,642 million, from those which would have been reported using the prior methods (see Note 6).

Premises and Equipment and Related Depreciation -Premises and equipment are recorded at cost, except for upward revaluation of certain assets, in accordance with Korean Asset Revaluation Law.Routine maintenance and repairs are recorded as expense at the time they are incurred. Expenditures which enhance the value or extend the usefullife of the facilities involved are treated as additions to premises and equipment.

Depreciation is computed using the declining-balance method, except for buildings and structures acquired after January 1, 1995 which aredepreciated on the straight-line method. Depreciation is calculated over the estimated average useful lives of the assets and is presented as a liabilityin the non-consolidated financial statements.

Foreclosed assets are classified as other assets, are stated at cost and are not depreciated. Any deficit between the book value and the final publicauction price of the foreclosed assets is reflected in other operating expenses and accrued in liability provisions according to the accounting andreporting guidelines of the banking regulatory authorities (see Note 12). Gains or losses on disposal of foreclosed assets sold on an installmentpayment basis are deferred and amortized in proportion to subsequent cash collections of the receivables.

Accrued Severance Benefits -Employees, directors and statutory auditors with more than one year of service are entitled to receive a lump-sum payment upon termination of theiremployment with the Bank, based on their length of service and rate of payment at the time of termination.

The severance benefits are accrued in an amount which would be payable assuming all eligible employees, directors and statutory auditors terminatetheir employment as of the non-consolidated balance sheet date. In accordance with the revised accounting and reporting guidelines prescribed bythe banking regulatory authorities, effective 1, 1998, the Bank fully accrued all the underaccrued severance benefits which have been paid toemployees during the years 1997 and 1998 under an early retirement program including 123,470 million of additional payments made duringthe year 1998, which would be accrued ratably over three years under the previous method. As a result of these changes, net income for the yearended December 31, 1998 has been decreased by 97,657 million from that which would have been reported using the previous method.

Translation of Foreign Currency Financial Statements of Overseas Branches -The financial statements of overseas branches expressed in foreign currencies are translated at the exchange rates prevailing on the non-consolidatedbalance sheet date and are included in the accompanying non-consolidated financial statements.

Prior Period Adjustments -In accordance with generally accepted accounting principles, prior period adjustments, including refinement of prior year estimates and resolution ofmatters outstanding from prior years, are charged to current income.

Income Taxes -The provision for income taxes is comprised of corporate tax and resident tax surcharges payable for the current year. In conformity with accountingpractices prevailing in the Republic of Korea, the Bank does not recognize deferred income taxes arising from temporary differences betweenamounts reported for financial accounting and income tax reporting purposes.

Earnings per Common Share -Earnings per common share are computed using the weighted average number of common shares outstanding during the period.

Derivative Financial Instruments -Derivative financial instruments include futures, forwards and swap contracts, and are principally linked to interest rates, foreign exchange rates orequity indices.


37

Derivative financial instruments entered into for trading purposes are valued at current market prices. Resulting unrealized valuation gains or lossesare reflected in other revenues and expenses. Derivative financial instruments used for hedging purposes are accounted for in a manner consistentwith the accounting treatment appropriate for the transactions hedged or associated with such contracts.

The instruments are valued at fair value when the underlying transactions are valued at market, and resulting unrealized valuation gains or losses arerecognized currently. The instruments are not marked-to-market when the underlying transactions are not required to be valued at market. Theunrealized gains or losses on hedging transactions arising from different rates between derivatives and underlying transactions are amortized throughthe term of the underlying transactions.

Trust Accounts -Under the Trust Business Act, the trust funds held as fiduciary are accounted for and reported separately from the Bank s own commercial bankingbusiness.

Certain money trust agreements provide that the Bank guarantee principal or a minimum rate of return ( principal or dividends guarantee ). If theincome from these guaranteed trust operations exceeds the minimum rate of return to beneficiaries, a provision for future trust losses is providedfrom the excess earnings. If the income from the guaranteed trust operations is insufficient to generate the principal or the required rate of return,such deficiency may be either recovered from previously established provisions for future trust losses or from funds transferred from the Bank scommercial banking business. During the years ended December 31, 1998 and 1997, 241,531 million and 93,025 million, respectively, of suchdeficiencies were recovered from funds transferred from the Banking accounts.

In accordance with the revised accounting and reporting guidelines prescribed by the banking regulatory authorities, effective January 1, 1998, anallowance for possible loan losses on the principal or dividends guarantee trusts is required to be provided based on a credit risk classification of theloan balances outstanding as of December 31, 1998. The allowance for possible loan losses at December 31, 1998 amounted to 46,988 million(including 1,984 million of Daedong Bank) in the trust accounts which were subject to principal or dividends guarantee and 31,813 million inthe trust accounts which were subject to no guarantee. In 1998, the Bank changed its accounting policy for provision for possible loan losses (seeabove Provision for Possible Loan Losses ). These changes resulted in an increase of 13,639 million in the allowance for possible loan losses, fromthose which would have been reported using the prior methods.

In accordance with the revised accounting and reporting guidelines prescribed by the banking regulatory authorities, effective January 1, 1999, theBank is scheduled to provide an allowance for possible loan losses on non guaranteed trusts. If the Bank were to apply the revised guidelines onloan balances outstanding as of December 31, 1998, additional provision for possible loan losses on non guaranteed trusts would be 113,934million, including 15,088 million of provision for non guaranteed trusts from Korea Long Term Credit Bank. As the rate of return for these trustsis not guaranteed by the Bank, the Bank is not required to transfer funds from its banking accounts to make up for these loan losses.

Securities held by the Bank s trust accounts which are subject to principal or dividends guarantee are stated at market value using the same methodas the banking accounts, in accordance with the revised accounting and reporting guidelines prescribed by the banking regulatory authorities,effective January 1, 1998. Under the previous accounting and reporting guidelines, the Bank s trust accounts did not provide an allowance forunrealized valuation losses on securities held by principal guarantee trusts and reflected unrealized valuation losses in amounts equal to 60% of theestimated losses on marketable equity investments held by dividends guarantee trusts. These changes resulted in a decrease of 9,483 million inthe unrealized valuation losses on securities for the year ended December 31, 1998.

Trust fund operating income, net of the provisions for future trust losses as described above, is distributed to beneficiaries as a dividend of trust profit.

Interest on the balance due to the trust funds by the Bank s commercial banking business is computed and recorded on each account daily.

3. United States Dollar Amounts :

The Bank operates primarily in Korean Won and its official accounting records are maintained in Korean Won. The U.S. Dollar amounts are providedherein as supplementary information solely for the convenience of the reader. All Won amounts are expressed in U.S. Dollars at the rate of

1,207.8 : US$1, the rate in effect on December 31, 1998. This presentation is not in accordance with accounting principles generally accepted ineither the Republic of Korea or the United States, and should not be construed as a representation that the Won amounts shown could be converted,realized or settled in U.S. Dollars at this rate.

The 1997 U.S. Dollar amounts, which were previously expressed at 1,415.2 : US$1, the rate prevailing on December 31, 1997, have beenrestated to reflect the exchange rate in effect on December 31, 1998.

4. Cash and Due from Banks :

Cash and due from banks at December 31, 1998 and 1997 comprise the following :

Checking accounts deposited with the Bank of Korea represent reserves required under the General Banking Act for the payment of deposits. AtDecember 31, 1998, 435,600 million included in other deposits represent group severance deposits made under a group severance insuranceplan. The withdrawal of these deposits is restricted to the actual payment of severance benefits (see Note 12).

At December 31, 1998, 218,344 million (excluding 20,709 million of interest receivable) of other deposits represent Cash ManagementAccounts in support of four merchant banks whose operations have been suspended.

5. Loans :

Loans at December 31, 1998 and 1997 are summarized as follows :

A substantial portion of loans are collateralized by mortgages on property and equipment and/or payment guarantees from Korean financialinstitutions.

At December 31, 1998, business loans in the banking accounts include 6,196,519 million of loans transferred from Korea Long Term Credit Bankand 178,694 million ( 326,968 million in trust accounts) of loans to Korea Credit Guarantee Fund in support of some merchant banks whoseoperations had been suspended.

During 1997, the Bank sold certain troubled loans amounting to 233,754 million to Korean Asset Management Company ( KAMCO ) andreflected losses of 151,392 million. The ultimate sales price of these loans is contingent upon the actual amounts realized by KAMCO on itsdisposal of the loans. In 1998, the Bank recognized additional gains and losses of 3,094 million and 22,752 million, respectively, based onKAMCO s disposal of a portion of these loans. In addition, 33,306 million of loans sold to KAMCO in 1997 were returned to the Bank in 1998and are recorded as loans in the accompanying non-consolidated balance sheet.

Millions of Won

1998 1997Cash on hand 1,318,604 1,178,866Checking accounts in Bank of Korea 139,412 35,791Other deposits 2,778,779 2,697,169Foreign currency and deposits 1,309,349 710,348

5,546,144 4,622,174

Annual Millions of WonInterest Rate (%)

1998 1997Loans in Won currency :

Business loans 3.4-40.0 18,301,039 9,778,025Household loans 8.5-16.5 9,817,258 9,871,062

28,118,297 19,649,087Loans in foreign currency :

OECF and IBRD sub-loans 6.0-7.11 42,160 75,011Offshore loans Libor+0.4-3.0 1,449,730 613,699Other loans Libor+1.3-4.75 3,072,916 1,023,418

4,564,806 1,712,128Advances to customers 22.0 285,070 115,766Local L/C bills bought Prime rate+4.5 45,305 23,587Domestic import usance bills 8.08-10.52 891 3,059

33,014,369 21,503,627


39

During 1998, the Bank sold certain troubled loans amounting to 755, 032 million to KAMCO, and reflected related losses of 426,731 million.The ultimate sales price is contingent upon the actual amounts realized by KAMCO on its disposal of the loans. Apart from the above, before themerger, Korea Long Term Credit Bank sold certain troubled loans amounting to 700,137 million to KAMCO, Rothschild Inc., and others, andreflected the related losses of 205,010 million in gains on business combination of capital surplus in the accompanying non-consolidated balancesheet as of December 31, 1998.

During 1998 before the merger, Korea Long Term Credit Bank exempted certain loans to the companies of Kia Group including Kia Motors Co., Ltd.and its loans amounting to 44, 452 million was converted into 2,963, 503 shares of common stock of Kia Motors Co., Ltd.

The maturities of the loans at December 31, 1998 are as follows :

6. Securities :

Securities at December 31, 1998 and 1997 comprise the following :

1998 1997

Government and public bonds and monetary stabilization bonds sold to customers under repurchase agreements amounted to 587,191 million atDecember 31, 1998 (see Note 13). These agreements provide repurchase dates of three to twelve months and bear interests at predetermined ratesthat approximate the current money market rate.

As of December 31, 1998, traded securities in foreign currencies consist of Euro Commercial Papers issued by Industrial Bank of Korea, CommercialBank of Korea and Hanil Bank, which are due within 6 months.

Millions of Won

Loans in Loans in

Won Currency Foreign TotalCurrency

1999 17,229,367 930,680 18,160,0472000 3,319,283 733,643 4,052,9262001 2,693,843 963,842 3,657,6852002 1,289,742 545,410 1,835,152Thereafter 3,586,062 1,391,231 4,977,293

28,118,297 4,564,806 32,683,103

Millions of Won

1998 1997Traded Securities :

Equity investments in listed companies 108,254 440,001Beneficial certificates 1,764,663 —Securities in foreign currencies 105,823 81,395Other securities 441,037 —

2,419,777 521,396Investment Securities :

Monetary stabilization bonds 3,045,165 1,818,649Government and public bonds 4,700,197 2,237,451Corporate debentures 7,416,579 481,889Equity investment in listed companies 141,164 20,000Equity investments in unlisted companies 554,397 332,727Securities in foreign currencies 1,488,559 755,560Other securities 751,893 675,855

18,097,954 6,322,13120,517,731 6,843,527

In accordance with the revised accounting and reporting guidelines prescribed by the banking regulatory authorities, effective January 1, 1998,among traded securities, the equity investments in listed companies of the Bank before the merger had a quoted market value of 93,961 million( 86,785 million by previous method) at December 31, 1998. Out of the differences between the market value and the acquisition costs,

164,000 million of the previous provisions for unrealized losses directly reduced securities and the remaining 117,322 million of unrealizedgains are recorded on a current basis in the accompanying non-consolidated statement of income for the year ended December 31, 1998. As resultsof the change in valuation method from the lower of aggregate cost or market to individual market value and the change in reflection of unrealizedvaluation losses from partial provision(55%) to full provision(see Note 2), unrealized valuation losses on the equity investments in listed companies inthe accompanying non-consolidated statement of income for the year ended December 31, 1998 have been increased by 17,058 million fromthose which would have been reported using the prior methods.

Beneficial certificates of traded securities were stated at cost under the previous accounting guidelines for the prior years, but are revalued at marketvalue as of December 31, 1998, which results in 22,005 million of unrealized valuation gains in the accompanying non-consolidated statement ofincome for the year ended December 31, 1998.

As a result of the changes in the presentation and valuation methods for investment securities as of December 31, 1998, under the revisedaccounting and reporting guidelines prescribed by the banking regulatory authorities, effective January 1, 1998(see Note 2), 122,235 million ofunrealized valuation losses on the investments in affiliated companies and foreign subsidiaries accounted for by the equity method and 5,407million of unrealized valuation losses on marketable investment securities accounted for by the market value method are recorded as a capitaladjustment in the accompanying non-consolidated balance sheet as of December 31, 1998. In addition, 38,509 million of valuation losses onunmarketable investment securities in foreign currencies accounted for by the credit risk classification method are charged to current operations inthe accompanying non-consolidated statement of income for the year ended December 31, 1998. These changes of evaluation of the investmentsecurities resulted in an increase of 136,838 million in net income for the year ended December 31, 1998.

As of December 31, 1998, the investment securities taken over from Daedong Bank were stated at the value determined in accordance with theaccounting guidelines of Financial Supervisory Commission (see Note 27).

Among investment securities, equity investments in listed companies at December 31, 1998 and 1997 are as follows :

KLB Securities Co., Ltd. is in course of liquidation by the cancellation of operating permission by the supervisory authorities. Before the merger, 121,294 million of losses on the assets amounting to 151,325 million which were held by Korea Long Term Credit Bank in KLB Securities Co.,

Ltd. were recognized (reflected in gains on business combination in the accompanying non-consolidated balance sheet) by Korea Long Term CreditBank.

Percentage Millions of Wonof Ownership

1998 1998 1997Affiliated companies :

KLB Securities Co., Ltd. 36.4% 10,316 —Other Companies :

Hana Bank 5.8% 53,567 —Kia Motors — % 44,452 —Korea Zinc Company Inc. 3.6% 17,170 —Korea Development Leasing Corporation 14.9% 3,807 —Peace Bank of Korea 5.0% 5,209 20,000Others — % 6,643 —

141,164 20,000

Equity investments in unlisted companies at December 31, 1998 and 1997 are as follows :

Among 4 mutual savings & finance companies, Taegu Kookmin Mutual Savings & Finance Co., Ltd( Taegu ) and Youngnam Kookmin MutualSavings & Finance Co., Ltd( Youngnam ) were merged on March 22, 1998, exchanging one share of Taegu for 0.3022 shares of Youngnam.

7. Premises and Equipment :

In accordance with the Asset Revaluation Law of Korea, the Bank revalued a substantial portion of its land, buildings and certain securities on January1, 1997 based primarily on current replacement costs. The revaluation increment of 326,142 million, net of revaluation tax and otheradjustments, was credited to revaluation surplus, and subsequently 148,913 million of the revaluation surplus was transferred to common stock onMay 16, 1998 (see Note 15). The remaining balance of the revaluation surplus as of December 31, 1998 is 177,229 million.


Percentage Millions of Wonof Ownership

1998 1998 1997Affiliated companies :Kookmin Credit Card Co., Ltd. 93.0% 226,748 111,893Kookmin Venture Capital Co., Ltd. 94.1% 33,848 44,275Kookmin Leasing Co., Ltd. 89.61% 45,346 35,439Kookmin Economic Research Institute — % — 1,559Kookmin Data System Corporation 99.9% 8,482 7,998Kookmin Futures Co., Ltd. 99.9% 10,004 9,998Kookmin Bank Venture Capital Co., Ltd. (*) 100% 43,099 —KLB Economic Research Institute Co., Ltd. (*) 70% 1,722 —Kookmin Bank Investment Trust Management Co., Ltd.(*) 43% 14,488 —4 mutual savings & finance companies 99.1-99.9% 1,054 100,565

384,791 311,727Other companies :LG Telecom 4.7% 29,020 —Investments in Mutual Fund (**) 6.3% 100,000 —Others 0-11% 40,586 21,000

169,606 21,000554,397 332,727

Foreign subsidiaries :Kookmin Bank Luxembourg S.A. 100% 30,145 26,831Kookmin Bank Singapore (Merchant Bank) Ltd. 100% 10,708 28,371Kookmin Finance Asia Ltd. (H.K.) 100% 15,616 28,304KLB Asia Fiance Ltd.(*) 100% 23,297 —Kookmin Bank International Ltd. (*) 100% 51,023 —

130,789 83,506

(*) Subsidiaries of Korea Long Term Credit Bank before merger(**) Investments in Mutual Fund are comprised of 4 mutual funds established to provide funds for restructuring companies.

Effective July 1, 1998, Korea Long Term Credit Bank before merger revalued a substantial portion of land and buildings in accordance with the AssetRevaluation Law of Korea. The revaluation report was approved by the government and the Bank recorded relevant assets and capital surplus basedon the revaluation report as follows :

Premises and equipment at December 31, 1998 and 1997 comprise the following :

At December 31, 1998, the value of land as determined by the tax authorities for property tax assessment amounts to 691,920 million.

The Bank s premises and equipment, other than land and construction in progress, are covered by insurance policies against fire and other casualtylosses in accordance with the Bank s regulations. Automotive equipment is covered by a legal and general insurance policy.

8. Other Assets :

Other assets at December 31, 1998 and 1997 comprise the following :

Millions of Won

1998 1997Land 746,049 533,027Buildings and structures 492,298 339,573Equipment and vehicles 415,617 361,833Construction in progress 31,969 138,212Intangible assets 7,072 3,740Guarantee deposits on leases 747,578 676,847

2,440,583 2,053,232Accumulated depreciation (see Note 12) (397,032) (306,953)

2,043,551 1,746,279

Millions of Won

1998 1997

Credit card accounts (see Note 23)) 692,733 669,531Securities purchased with recourse — 387,600Agencies 273 399Accrued interest income 1,411,755 785,861Prepaid expenses 72,086 2,344Prepaid income taxes 209,331 88,548Other accounts receivable 592,525 101,693Unamortized discount on debentures 561,051 —Domestic exchange settlement credit 288,919 26,124Foreclosed assets 5,623 2,035Others 283,229 100,745

4,117,525 2,164,880

Millions of Won

Book ValueAppraised Revaluation

Value IncrementLand 52,946 90,911 37,965Buildings 104,161 109,471 5,310

157,107 200,382 43,275Plus : other adjustments, net 1,503Less : revaluation tax (1,207)Revaluation surplus(reflected in gains on business combination) 43,571


43

9. Deposits :Deposits at December 31, 1998 and 1997 comprise the following :

10. Borrowings :Borrowings at December 31, 1998 and 1997 comprise the following :

Annual Interest Millions of WonRate (%)

1998 1998 1997Deposits in Won currency :

Demand deposits 0.0-3.0 4,020,063 3,264,128Time and savings deposits 1.0-12.0 27,608,842 14,639,388Mutual installments 9.0-10.5 3,310,033 5,227,640Certificates of deposit 6.4-20.4 531,522 1,866,025Notes sold 6.4-18.5 45,591 13,670

35,516,051 25,010,851Deposits in foreign currencies 0.0-8.0 1,880,512 725,631

37,396,563 25,736,482

Annual Interest Millions of WonRate (%)

1998 1998 1997Borrowings from Bank of Korea :

Revolving credit lines 3.0 535,423 254,743Others 5.0 792,030 333,701

1,327,453 588,444Borrowings from the Government :

Borrowings from government funds 5.0-9.0 66,271 56,257Others 0.0-9.0 420,837 158,179

487,108 214.436National Investment Fund 8.5 933 904

Borrowings from the monetary institutions :Debenture funds for small and medium industrial development 8.55-9.55 388,843 194,421

Others 4.0-9.5 232,200 135,314621,043 329,735

Borrowings from non-bank financial institutions :Borrowings from the government 4.0 574 —Subordinated borrowings 9.3 - 11.84 425,000 400,000

Others 4.0 - 8.0 296,583 173,171722,157 573,171

Other borrowings :Developmental funds for regional small and medium-size industries 4.95-9.2 380,767 159,878Promotional funds for small and —medium-size industries 5.75 - 11.0 401,260 278,535

Others 0.5 - 9.5 173,031 16,446955,058 454,859

Borrowings in foreign currencies :IBRD loans Libor + 0.25, 1,042,300 41,949

5.93-8.06Offshore borrowings Libor + 0.3-2.75 1,140,943 445,075Other borrowings Libor + 0.0-3.05 1,698,288 1,468,299

3,881,531 1,955,323Finance debentures issued :

Finance debentures in Won currency 6.28-17.69 10,003,316 240,000Finance debentures in foreign currencies Libor + 0.0-0.19 2,091,312 1,269,750

12,094,628 1,509,75020,089,911 5,626,622

Revolving credit lines and a substantial portion of other borrowings from Bank of Korea mature within one year. Borrowings from the Governmentand lines of credit with the National Investment Fund of Bank of Korea are payable in semi-annual installments within 10 years, including amaximum of seven and a half-year grace periods. Borrowings from others are payable in quarterly installments within 15 years, including maximumof five-year grace periods.

IBRD loans in foreign currencies are payable in equal semi-annual installments within 15 years, including maximum of five year grace periods.

At December 31, 1998, finance debentures issued by Kookmin Bank before merger comprise the following (in billions of Korean Won, in millions ofU.S. Dollars, DEM and H.K. Dollars) :

The 2nd series Won currency finance debentures are Kookmin bank debentures to be sold over the counter under the authorization by the bankingsupervisory regulation, which are payable in full after three years.

The third, fourth, fifth and sixth series foreign currency finance debentures were issued pursuant to a US$ 700 million Euro Medium Term NoteProgram, and the tenth series foreign currency finance debentures were issued pursuant to a US$ 1,500 million Euro Medium Term Note Program.Among the foreign currency finance debentures, call redemption options can be executed on or after 3 years from the issuance date for the secondseries foreign currency finance debentures, on or after 5 years from the issuance date for the seventh series foreign currency finance debentures andUS$ 50 million of foreign currency finance debentures assumed from Daedong Bank and listed on the Luxembourg Stock Exchange.

Annual Interest

Series Issue Date Amounts Rate(%) Due Date Listing(Won Currency)1st (*) Dec. 24, 1997 240 12.43 Mar. 31, 2003 —2nd During 1998 76.6 6.87-16.01 During 2001 sold over the counter3rd(*) Dec. 29, 1998 100 11.43 Mar. 31, 2004 —4th(*) Dec. 29, 1998 53.6 12.43 Mar. 31, 2004 —Daedong Bank (*) Dec. 24, 1997 25.3 13.43 Mar. 31, 2003 —(Foreign Currencies)1st Dec. 9, 1994 US$ 12 Libor+0.3 Dec. 9, 1999 Hong Kong, Singapore2nd Jun. 15, 1995 US$ 17 Libor+0.275 Jun. 15, 2000 Luxembourg3rd May 21, 1996 US$ 100 Libor+0.3 May 21, 1999 London4th Jul. 8, 1996 US$ 50 Libor+0.35 Jul. 8, 2001 Hong Kong5th Oct. 29, 1996 DEM 150 Libor+0.3 Oct. 29, 1999 Frankfurt6th Oct. 29, 1996 HK$ 1,000 Libor+0.4 Oct. 29, 1999 Hong Kong7th(*) Dec. 30, 1996 US$ 200 Libor+0.6 Dec. 30, 2006 Luxembourg10th Sep. 19, 1997 US$ 100 Libor+0.79 Sep. 19, 2002 London11th Nov. 12, 1998 US$ 10 Libor+0.5 Nov. 12, 2000 —12th Nov. 16, 1998 US$ 10 Libor+0.5 Nov. 16, 2000 —13th Dec. 21, 1998 US$ 10 Libor+0.5 Dec. 21, 2000 —Daedong Bank May 28, 1996 US$ 28 Libor+0.42 May 28, 1999 —Daedong Bank(*) Nov. 21, 1996 US$ 50 Libor+0.85 Nov. 21, 2006 LuxembourgDaedong Bank Jun. 20, 1997 US$ 35 Libor+0.5 Jun. 21, 1999 —

(*) Subordinated finance debentures


45

As of December 31, 1998, finance debentures issued by Korea Long Term Credit Bank before its merger comprise the following (in billions of KoreanWon, in millions of U.S. Dollars and A.U. Dollars) :

Korea Long Term Credit Bank, before its merger, was authorized by law to sell long-term bank debentures up to an amount of 20 times of itsshareholders equity. Put redemption options were executed during 1997 and 1998 for US$ 128 million of the first series foreign currency financedebentures and US$ 147 million of the eighth series foreign currency finance debentures, respectively. The second put redemption option can beexecuted in July 1999 for the remaining eighth series foreign currency finance debentures.

Korea Long Term Credit Bank acquired its treasury bonds amounting to US$ 31 million (US$ 11 million for the third series, US$ 20 million for theforth series) and directly offset finance debentures with them.

The eleventh series foreign currency finance debentures are subordinated convertible debentures whose details are as follows :Purchaser : International Finance CorporationConversion stock : common stock of Korea Long Term Credit BankConvertible period : September 30, 1998-June 14, 2004Conversion price : 5,000Conversion exchange rate : US$1: 1,420Disbursement at due date : 100% of par value

The Bank is authorized by the banking supervisory regulation to issue Won currency finance debentures up to an amount of 100% of itsshareholders equity. Under the authorization in accordance with the revised banking supervisory regulation effective January 15, 1999, however,the Bank can exceed the limit only if additional debentures are issued to refund the Won currency finance debentures which Korea Long Term CreditBank issued before the merger.

The maturities of borrowings at December 31, 1998 comprise the following :

Annual Interest

Series Issue Date Amounts Rate(%) Due Date Listing(Won Currency)Subordinated debentures 379.8 15.66 after 5years from the issuance date —Coupon debentures 256.4 7.35-17.63 after 1 to 5years from the issuance date —Discounted debentures 5,681.1 6.28-15.18 after 1 to 3years from the issuance date —Compound interest debentures 3,190.5 7.39-17.69 after 1 to 5years from the issuance date —(Foreign Currencies)1st Jul. 5, 1994 US$ 22 Libor+0.3 Jul. 5, 1999 H.K., Singapore2nd Feb. 27, 1995 US$ 200 Libor+0.3 Feb. 27, 2000 Hong Kong 3rd Mar. 28, 1996 US$ 200 Libor+0.3 Mar. 28, 1999 London4th Jun. 25, 1996 US$ 200 Libor+0.25 Jun. 25, 1999 London5th Oct. 1, 1996 US$ 100 Libor+0.31 Oct. 1, 2001 —6th Dec. 17, 1996 AU$ 125 Libor+0.2475 Dec. 17, 1999 —7th Jul. 7, 1997 US$ 5 Libor+0.45 Jul. 19, 2000 London8th Jul. 25, 1997 US$ 3 Libor+0.47 Jul. 25, 2000 London9th Oct. 30, 1997 US$ 100 Libor+1.2 Oct. 30, 2002 —10th Dec. 3, 1997 US$ 50 Libor+1.9 May 10, 1999 —11th Jun. 29, 1998 US$ 25 Libor Flat Jun. 15, 2004 —

Millions of Won

Won Currency Borrowings Foreign Currency Borrowings Finance Debentures Issued Total

1999 1,695,142 1,237,322 6,322,019 9,254,4832000 538,421 1,251,403 3,756,399 5,546,2232001 397,622 798,878 725,921 1,922,4212002 340,305 61,997 184,069 586,371Thereafter 1,142,262 531,931 1,106,220 2,780,413

4,113,752 3,881,531 12,094,628 20,089,911

11. Guarantees Outstanding :

Guarantees outstanding at December 31, 1998 and 1997 comprise the following :

As permitted by the accounting and reporting guidelines of the banking regulatory authorities, the Bank has not provided an allowance for possiblelosses that may result from credit risk exposures on outstanding guarantees. If the Bank were to recognize a provision for anticipated losses on theoutstanding guarantees by credit risk classification, the additional provision for losses would be 53,889 million (including 11,089 million for theoutstanding guarantees of Korea Long Term Credit Bank) at December 31, 1998.

12. Provisions :

Provisions at December 31, 1998 and 1997 comprise the following :

Provisions for accrued severance benefits are funded approximately 75.1% at December 31, 1998 through a group severance deposit plan with fivefinancial companies. Subsequent accruals are to be funded at the discretion of the Bank (see Note 4).

13. Other Liabilities :

Other liabilities at December 31, 1998 and 1997 comprise the following :

Millions of Won

1998 1997Guarantees in Won currency 522,237 230,478Guarantees in foreign currencies 1,588,026 531,764Acceptances in foreign currencies 681,324 293,284

2,791,587 1,055,526

Millions of Won

1998 1997

Accrued severance benefits (see Note 2) 580,245 676,400Possible loan losses (see Note 2) 1,297,243 273,778Unrealized losses on securities (see Note 2) — 230,428Accumulated depreciation (see Note 7) 397,032 306,953Foreclosed assets (see Note 2) 1,160 260

2,275,680 1,487,819

Millions of Won

1998 1997

Securities sold under repurchase agreement (see Note 6) 587,191 1,466,841Agencies 136,747 397,054Guarantee money received 57,040 43,471Accrued expenses 2,192,237 1,137,809Due to trust account (see Note 2) 391,852 158,450Giro account 53,557 47,948Other accounts Payable 393,780 20,445Suspense payable 95,188 24,859Unearned income 103,856 78,535Withholding taxes 234,037 90,917Others 133,453 38,864

4,378,938 3,505,193


47

14. Commitments and Contingencies :

In the normal course of business, the Bank makes various commitments and incurs certain contingent liabilities, consisting primarily of commitmentsto extend credit and letters of credit which are not recorded in the accompanying non-consolidated financial statements. At December 31, 1998,commitments under letters of credit, unpaid spot exchange and endorsed notes aggregated 1,056,912 million, 1,013,160 million and

34,871 million, respectively. The Bank does not anticipate any material losses from these commitments and contingent liabilities.

The Bank has entered into various agreements to exchange different currencies at predetermined future dates and rates. The Bank has also enteredinto various interest related agreements with customers including Chase Manhattan Bank, including interest swap contracts, interest rate optioncontracts and contracts for interest rate futures. At December 31, 1998, the Bank s derivatives contracts comprise the following (in millions of Wonand thousands of US$) :

During the year ended December 31, 1998, 496,928 million of gains and 482,621 million of losses on derivative contracts were recorded inother operating income and expenses, respectively (see Notes 19 and 21).

The Bank has been named as the defendant in 43 legal actions amounting to 9,065 million, which have arisen from normal business activities.Management believes that these actions are without merit and that the ultimate liability, if any, will not materially affect the Bank s non-consolidated financial position.

The Bank s operations will be affected for the foreseeable future by the adverse economic conditions of Thailand, Indonesia, Philippine, Mexico,Brazil and Argentina whose economies have entered into a period of significant financial volatility arising from unbalanced exchange demands andsupplies. The ultimate effect that these significant uncertainties will have on the stated value of the Bank s assets and liabilities at the non-consolidated balance sheet date cannot presently be determined. Accordingly, the accompanying non-consolidated financial statements do notcontain adjustments related to these uncertainties. At December 31, 1998, total loans provided to entities located in those countries approximate

216,331 million (U.S. Dollars equivalent of US$ 179 million), and the Bank s investments in securities issued by entities in those countriesapproximate 300,200 million (U.S. Dollars equivalent of US$ 249 million).

Under the decision of the Financial Supervisory Commission, the Bank took over certain assets and liabilities of Daedong Bank by the method ofpurchase and assumption. The deficiency of the purchased assets against the assumed liabilities can be recovered from Korea Deposit InsuranceCorporation. In addition, the Bank retains a put-back option, a right to transfer the purchased assets to Korea Asset Management Corporation or tobe compensated for the losses from Korea Deposit Insurance Corporation, for non-performing assets within September 30, 1999 without the Bank sfault.

The operations of the Bank have been affected, and may continue to be affected, for the foreseeable future by the unstable economic conditions inthe Republic of Korea and the Asia Pacific region. Specific factors that impact the Bank include high interest rates, increased unemployment inKorea, limited availability of credit, significant numbers of corporate bankruptcies, etc. and the general deterioration of the economies of countriesin the Asia Pacific region. The ultimate effect of these uncertainties on the stated amounts of assets and liabilities at the non-consolidated balancesheet date cannot presently be determined, and accordingly the non-consolidated financial statements do not include any adjustments that mightresult from these uncertainties. Related effects will be reported in the non-consolidated financial statements as they become known and estimable.

FX Forwards Interest Rate Swap Currency Swap

Commitments Korean Won USD Korean Won USD Korean Won USD

Purchase 1,554,960 $ 1,287,432 2,861,330 $2,369,043 576,477 $ 477,295Sell 2,220,850 1,838,756 2,863,963 2,371,222 615,771 509,829

15. Stock Issuance :

The Bank issued 236,299,636 shares of common stock and 40,000,000 shares of preferred stock as of December 31, 1998.

The Bank s common stocks which were issued as Global Depositary shares and listed on London Stock Exchange are 11,707,665 shares as ofDecember 31, 1998.

During the year 1998, the changes of stock issuance comprise the following (in millions of Won) :

The preferred stock is non-participating and non-cumulative preferred stock issued to Korea Deposit Insurance Corporation ( KDIC ) (dividend rate :1%). The Bank has the priority right to purchase from KDIC 28,000,000 shares and 12,000,000 shares of the preferred stock after 3 years and 3month from the issuance date and after 5 year and 3 month from the issuance date, respectively.

The Bank can issue convertible bond and bond with warranty to grant stock right to common stock or preferred stock within 2,500 billion and500 billion of total par value, respectively, to other than shareholders. At December 31, 1998, the Bank has subordinated foreign currency

convertible bond of 30,195 million (equivalent of US$ 25 million) (see Note 10).

16. Capital Surplus :

The changes in capital surplus for the year ended December 31, 1998 comprise the following :

During the year ended December 31, 1998, revaluation surplus decreased due to the transfer of 148,913 million to capital stock and the paymentof 4,132 million of revaluation tax. The Bank recorded 711 million of gains on disposal of odd-lots and stock acquired in conjunction with stockdividends and merger as other capital surplus.

Date Description Shares Amount

Common StockAs of January 1, 1998 Carried over 104,640,236 523,201February 28, 1998 Stock dividend 2,929,926 14,650May 15, 1998 Issuance for cash(*) 49,180,328 245,902May 16, 1998 Revaluation surplus

transferred into stock 29,782,593 148,913December 31, 1998 Merger (see Note 26) 49,766,280 248,831As of December 31, 1998 236,299,363 1,181,497Preferred StockDecember 28, 1998 Issuance for cash 40,000,000 200,000

276,299,363 1,381,497

(*) The cash received in excess of par value amounting to 132,786 million was credited to capital surplus (see Note 16)

Millions of Won

Beginning Balance Increase Decrease Ending Balance

Paid-in capital in excess ofpar value (see Note 15) 472,924 132,786 — 605,710

Gain on business combination (see Note 26) — 397,669 — 397,669

Revaluation surplus (see Note 7) 330,274 153,045 177,229Other capital surplus 847 711 — 1,558

804,045 531,166 153,045 1,182,166

17. Retained Earnings :Retained earnings at December 31, 1998 and 1997 comprise the following :

The General Banking Act requires the Bank to appropriate as a legal reserve a minimum of 10% of annual income before income taxes, until thelegal reserve equals paid-in capital. This reserve is available only to offset accumulated deficit, if any, or may be transferred to paid-in capital inconjunction with a stock dividend. As of December 31, the legal reserve includes 96,840 million of the merged Korea Long Term Credit Bank.

Prior to 1995, the Bank appropriated as a general purpose contingency reserve a certain portion of retained earnings in accordance with theaccounting and reporting guidelines of the banking regulatory authorities then in effect. The Bank is no longer required to do so.

By approval at the annual shareholders meeting for the fiscal year 1996, the Bank appropriated, as a reserve for dividends, 15,000 million ofretained earning which was within distributable amounts (50% of net income) less actual dividends in accordance with the accounting and reportingguidelines of the banking regulatory authorities. This reserve is available for payment of dividends only if the dividend rate is below that of theprevious year. 14,650 million of this reserve was used for stock dividends in 1997.

The reserve for business rationalization is appropriated in accordance with Korean tax law in an amount determined by related deductions fromtaxable income. This reserve is not available for payment of cash dividends, but may be transferred to capital stock or used to reduce accumulateddeficit, if any. As of December 31, the reserve for business rationalization includes 32,760 million of reserve transferred from Korea Long TermCredit Bank.

Pursuant to the Korean tax laws, the Bank is allowed to claim the amount of retained earnings appropriated for reserves for overseas investmentlosses and technology development as deductions from taxable income for the current year. These reserves are not available for payment ofdividends until used for the specified purpose or reversed.

Relevant Japanese regulations require the Bank s overseas branches located in Japan to appropriate a minimum of 10% of annual income beforeincome taxes as a Japanese legal reserve, until such reserve equals 2,000 million. This reserve is not available for the payment of cash dividends,and may be utilized upon liquidation of the Japanese branches. The Bank recorded this reserve in other reserves including 30 million of decreasedue to the devaluation of Korean Won currency.

Dividend information for the years ended December 31, 1998 and 1997 is as follows :


Millions of Won

1998 1997Appropriated :

Legal reserve 256,840 150,000General purpose contingency reserve 398,600 388,600Reserve for dividends 350 350Reserve for business rationalization 33,960 900Reserve for technology development 4,100 8,200Reserve for overseas investment loss 33,100 39,300Other 914 944

727,864 588,294Unappropriated 16,137 15

744,001 588,309

1998 1997

Common Stock Preferred Stock Common Stock

Number of shares for dividend(*) 236,283,480 40,000,000 104,640,236Par value (in Won) 5,000 5,000 5,000Dividend ratio 0

- Cash dividends 4% 1% —- Stock dividends — 2.8%

Dividend (in million Won) 47,257 16 14,650Dividend payout ratio (**) 64.4% — 14.03%Dividend yield ratio (***) 2.04% — 1.49%

(*) Shares of common stock dividend in 1998 are calculated by 236,299,363 shares of total shares issued less 15,883 shares of treasury stock.(**) Dividend payout ratio Dividend Net Income(***) Dividend yield ratio Dividend per share Market price as of December 31, 1998 and 1997.

18. Capital Adjustment :

At December 31, 1998, the Bank records 60 million of treasury stock (15,883 shares) of Korea Long Term Credit Bank acquired in conjunctionwith its merger and 127,642 million of unrealized valuation losses of investment securities as a capital adjustment.

19. Other Operating Income :

Other operating income for the years ended December 31, 1998 and 1997 is comprises of the following :

20. General and Administrative Expenses :

General and administrative expenses for the years ended December 31, 1998 and 1997 are summarized as follows :

21. Other Operating Expenses :

Other operating expenses for the years ended December 31, 1998 and 1997 are comprised of the following :

Millions of Won

1998 1997

Trust fees (see Note 25) 213,727 113,509Gains on securities transactions 265,084 41,589Gains on derivatives contracts (see Note 14) 496,928 447,222Gains on foreign exchange and other 288,739 211,128

1,264,478 813,448

Millions of Won

1998 1997

Salaries and wages 332,379 351,200Overhead expenses :

Employee benefits 150,291 170,013Development costs 20,433 19,545Other 136,354 139,940

307,078 329,498639,457 680,698

Millions of Won

1998 1997

Losses on securities transactions 180,691 139,376Losses on derivatives contracts (see Note 14) 482,621 436,967Losses on foreign exchange 111,183 156,338Contributions to Korea Credit Guarantee Fund 32,083 26,196Provision for possible loan losses 494,858 153,916Provision for accrued severance benefits 254,255 142,845Depreciation 74,898 79,830Interests on due to trust account 13,646 832Other 198,946 121,514

1,843,181 1,257,814


51

22. Income Taxes :

The statutory income tax rate, including resident tax surcharges, applicable to the Bank is approximately 30.8% in 1998 and 1997. The effectiveincome tax rate for 1998 and 1997 varied from the statutory income tax rate as follows :

Accrued interest on securities is to be excluded from taxable income until realized on a cash basis according to revised tax laws in 1995.

23. Related Party Transactions :

Significant transactions with related parties for the years ended December 31, 1998 and 1997, and the related account balances at December 31,1998 and 1997 are as follows (in millions of Won) :

Tax Rate (%)

1998 1997Statutory income tax rate 30.8 30.8Temporary differences between amounts for accounting and for tax purposes :

Accrued interest on securities (64.8) (47.8)Unrealized losses on securities 24.1 27.4Other 10.7 (10.4)

Others, net (0.8) 0.7Effective income tax rate — 0.7

Account Balances Transactions

1998 1997 1998 1997

Kookmin Credit Card Co., Ltd.Loans 214,710 — Interest income 107,387 80,445Call loans 100,000 — Income on commissions 57,072 68,199Credit card accounts 670,726 669,531Deposits 1,279 — —Other liabilities 2,020

Kookmin Leasing Co., Ltd.Loans 143,946 241,617 Interest on loans 18,117 16,012Call loans 74,000 — Interest on call loans 4,408 —Deposits 3,768 4,553 Interest on deposits 308 53

Kookmin Venture Capital Co., Ltd.Loans 130,000 110,595 Interest on loans 17,907 11,454Deposits — 792 Interest on deposits — 40Guarantees outstanding 26,875 — Income on commissions 317 —

Other affiliated companies :Loans 244,326 219,514 Interest on loans 17,267 15,697Due from banks 651,899 681,087 Interest on due from banks 52,869 33,905Deposits 406,807 37,736

The significant account balances with related parties of Korea Long Term Credit Bank before its merger at December 31, 1998 are as follows (inmillions of Won) :

24. Cash Flow Information :

Cash and cash equivalents at December 31, 1998 and 1997 as presented in the statements of cash flows comprise the following :

Transactions not affecting cash flows for the years ended December 31, 1998 and 1997 are as follows :

Account Balances

Kookmin Bank Venture Capital Co., Ltd. Loans 5,556Kookmin Bank Investment Trust Management Co., Ltd. Deposits 19,922KLB Asia Finance Ltd. Loans 3,623

Call loans 157,772Due from banks 6,601Borrowings 1,181Deposits 29,697Guarantees outstanding 20,893

Koomin Bank International Ltd. Loans 60,708Due from banks 1,313Borrowings 5,962Call money 39,360Guarantees outstanding 71,818

Millions of Won

1998 1997

Cash and due from banks (see Note 4) 5,546,144 4,622,174Call loans 1,304,212 556,224Foreign exchange 763,532 849,710Securities purchased with recourse (see Note 8) — 387,600

7,613,888 6,415,708

Millions of Won

1998 1997

Increase due to merger 18,260,803 —Increase due to purchase and assumption 3,114,235 —Increase due to transferring no guarantee trust accounts to banking accounts 181,267 —Loans charged off 100,506 60,368Acquisition of securities and foreclosed assets by the settlement of loans 2,754 64,090Stock dividends — 14,650Asset revaluation — 335,006Translation of foreign currency assets and liabilities, net 345 962

25. Trust Accounts :

The trust funds managed by the Bank consist primarily of money trusts. Money trusts, except for specified money trusts, are not subject toinvestment restrictions and are commingled and managed jointly.

Trust funds managed by the Bank at December 31, 1998 and 1997 and dividends of trust profit to beneficiaries by trust types for the years endedDecember 31, 1998 and 1997 are as follows (in millions of Won) :

Key conditions of trusts are as follows :


53

Trust Funds Dividends of Trust Profit

1998 1997 1998 1997Money trusts :Unspecified money trusts 5,122 172,893 12,624 80,140Installment money trusts 2,724,560 3,976,287 398,852 371,031Development trusts 2,086,374 1,212,961 206,528 182,399Household money long-term trusts 924,019 2,714,942 139,108 358,438Retirement trusts 39,600 193,800 8,085 21,427Old-age living pension trusts 186,249 428,821 68,157 87,053Individual pension trusts 665,622 532,944 101,589 65,154Corporation money trusts 95,392 371,230 11,676 50,780Tax exempt household money trusts 1,417,005 549,291 140,723 38,588Employee preferential trusts 293,472 38,544 25,010 841New installment trusts 8,117,946 2,504,019 1,060,332 13,077Specified money trusts 2,563,850 2,572,656 375,015 233,784National stock trusts 8,954 16,421 1,002 —

19,128,165 15,284,809 2,548,701 1,502,712Security trusts 84,910 — — —Security investment trusts 20,029,369 2,163,930 735,657 126,526

39,242,444 17,448,739 3,284,358 1,629,238

Period of Trusts Type of Dividends

Money Trusts :Unspecified money trusts 1.5 years or more Dividends guaranteeInstallment money trusts 1.5 years or more No guaranteeDevelopment trusts 2, 3 years Dividends guaranteeHousehold money long-term trusts 1.5 - 3 years No guaranteeRetirement trusts 1 year or more Principal guaranteeOld-age living pension trusts 5 years or more Principal guaranteeIndividual pension trusts 15 - 35 years Principal guarantee Corporation money trusts 1.5 years No guaranteeTax exempt household money trusts 3 - 5 years No guaranteeEmployee preferential trusts 3 - 5 years No guaranteeNew installment trusts 1 year or more No guaranteeNational stock trusts 3 years or more No guaranteeSpecified money trusts 1.5 - 5years No guarantee

Security trusts 1 years No guaranteeSecurity investment trusts 5 years No guarantee

Assets and liabilities of the trust accounts at December 31, 1998 are classified as principal or dividends guarantee trusts, mixed guarantee trusts, noguarantee trusts, and security investment trusts as follows (excluding the purchased assets and assumed liabilities from Daedong Bank) (in millions of Won) :

The Bank took over the certain assets and liabilities of principal or dividends guarantee trusts from Daedong Bank by the method of purchase andassumption (see Note 27).

The Bank as a custodian holds security investment trusts to be invested and operated by investment trust companies, trustees.

Loans from trust funds at December 31, 1998 and 1997 comprise the following :

Loans from trust funds bear interest at various fixed rates ranging from 10.5% to 18.0% per annum.

During 1998 , the Bank sold certain troubled loans of the trust accounts amounting to 157,180 million (including 63,339 million of troubledloans of Korea Long Term Credit Bank) to Korea Asset Management Corporation and recognized related losses of 48,740 million (except for

18,734 million of related losses of Korea Long Term Credit Bank to be reflected in gains on business combination of capital surplus).

Traded securities held by the trust funds at December 31, 1998 and 1997 comprise the following :

Debentures held by the trust funds bear interest from 5.0% to 25.0% per annum and other debt securities bear interest from 6.89% to 21.71% per annum.

Interest income on loans and investments on debt is recognized using the same method as the banking accounts of the Bank (see Note 2), and atDecember 31, 1998, unrecorded interest income receivable on loans and investments on debt approximated 90,933 million.

Principal or Dividends Mixed No Security TotalGuarantee Guarantee(*) Guarantee(**) Investment

Loans 630,681 1,441,183 1,503,680 — 3,575,544Call loans 33,740 14,000 137,260 1,492,688 1,677,688Traded securities 1,964,332 2,035,854 9,732,361 18,555,548 32,288,095Due from banking accounts 202,363 50,900 86,425 40,566 380,254Other assets 228,117 330,509 1,556,231 2,276,092 4,390,949

3,059,233 3,872,446 13,015,957 22,364,894 42,312,530Money trust 2,644,143 3,652,403 12,486,137 18,782,683Security investment trust — — — 20,029,369 20,029,369Provision for future trust losses 7,136 5,769 — — 12,905Provision for possible loan losses 99,278 33,792 9,995 — 143,065Other liabilities 308,676 180,482 519,825 2,335,525 3,344,508

3,059,233 3,872,446 13,015,957 22,364,894 42,312,530

(*) Mixed guarantee trusts represent no guarantee trusts with certain portions of principal or dividends guaranteed, which are household moneylong-term trusts, corporation money trusts and certain installment money trusts.

(**) Assets and liabilities of security trusts transferred from Korea Long Term Credit Bank before merger are included in no guarantee trusts.

Millions of Won

1998 1997

Collateralized loans 2,301,187 2,014,817Unsecured loans 1,417,385 1,404,480

3,718,572 3,419,297

Millions of Won

1998 1997

Government and public bonds 1,426,348 191,318Government guaranteed bonds 2,537,419 925,180Monetary stabilization bonds 1,344,892 110,204Corporate debentures 14,564,743 4,191,368Stocks 452,398 368,901Beneficial certificates and other securities 12,282,876 7,932,390

32,608,748 13,719,361

At December 31, 1998, stocks held by money trusts which are subject to principal or dividends guarantee (book value : 53,643 million) had aquoted market value of 40,287 million and 13,356 million of unrealized losses are recognized. As results of the same changes in valuationmethods as banking accounts including reflection of unrealized valuation losses on marketable equity investments from partial provision 60% to fullprovision, the Bank s unrealized valuation losses on securities of trust accounts have been increased by 2,813 million from those which have beenreported using the prior methods.

At December 31, 1998, benefical certificates held by money trusts which are subject to principal or dividends guarantee had a quoted market valueof 151,380 million, and so the Bank recorded the unrealized valuation gain of 12,296 million in the accompanying statement of operations forthe year ended December 31, 1998, according to the revised accounting and reporting guidelines.

The Bank receives trust management fees from the trust accounts which consist of basic fees within 0.2% to 4.0% of invested-capital and special feeswithin 2.0% to 15.0% including basic fees.

26. Business Combination :

Under the contract of merger with Korea Long Term Credit Bank ( KLB ) dated at September 29, 1998 and the approval of the shareholdersmeeting dated at October 31, 1998, the Bank merged with KLB on December 31, 1998.

KLB was incorporated in 1967 under the laws of the Republic of Korea and is engaged in the banking and trust business according to the provisions ofthe Long Term Credit Bank Law and the Trust Business Act and operates through 45 local branches and 4 overseas networks as of December 31, 1998.

The Bank issued 49,766,280 shares of common stock under the merger agreement, exchanging 0.5425 shares of the Bank s common stock for eachshare of KLB. As of December 31, 1998, the Bank has 15,883 shares of treasury stock acquired due to the execution of stock put option by certainshareholders of KLB before merger (see Note 18).

Summary of financial information of KLB for the year ended December 31, 1998 is as follows (in millions of Won) :

(Banking Accounts)-Summary of Balance sheet

-Summary of Statement of Income

(Trust Accounts)-Summary of Balance sheet


55

Assets Liabilities and Shareholder s Equity

Cash and due from Banks 431,933 Deposits 1,849,381Loans 9,500,911 Borrowings 12,725,888Call loans 680,462 Guarantees outstanding 1,662,892Securities 5,518,719 Others 2,504,674Customers liabilities on guarantees 1,662,892 Total liabilities 18,742,835Others 1,723,958 Shareholders equity 776,040

19,518,875 19,518,875

Expenses RevenueOperating expenses 2,732,238 Operating income 2,686,057Non-operating expenses 229,723 Trust fees to the bank 13,365Income taxes 1,685 Non-operating income 8,252Net loss (255,972)

2,707,674 2,707,674

Assets Liabilities

Cash and due from banks 46,705 Money trusts 2,306,563Loans 671,032 Security trusts 84,910Call loans 880,888 Security investment trusts 8,492,044Securities 10,290,033 Other liabilities 2,084,251Other assets 979,819 Provisions for future trusts 313Due from banking accounts 132,998 Provisions for possible loan losses 33,394

13,001,475 13,001,475

-Summary of Statements of operations

The Bank included only the balance sheet of KLB in the accompanying non-consolidated financial statements for the year ended December 31, 1998.The non-consolidated statement of income of KLB was not included in the accompanying non-consolidated financial statements. Certain accounts inthe non-consolidated balance sheets of KLB were changed and reclassified according to the accounting and reporting guidelines of the Bank.

The assets and liabilities of KLB were accounted for its book value as of December 31, 1998 in accordance with the accounting standards for businesscombination.

As of December 31, 1998, the details of the gains on business combination are as follows :

27. P&A Contract :

Under the decision of the Financial Supervisory Commission in accordance with the Act concerning the Structural Improvement of the FinancialIndustry, the Bank took over certain assets including the loans classified as normal or precautionary and most liabilities of Daedong Bank dated atJune 29, 1998, by the method of purchase and assumption, and the deficiency of the purchased assets against the assumed liabilities is to becompensated by Korea Deposit Insurance Corporation ( KDIC ).

At June 29, 1998 the assets, liabilities and commitments and contingencies purchased or assumed from Daedong Bank were as follows (in millions of Won) :(Banking Accounts)

Expenses Revenue

Dividend of trust profit to beneficiaries 2,019,784 Interest on loans 116,995Commission paid 657,388 Interest and dividends on securities 1,712,266Losses on securities transactions 840,813 Interest on call loans 245,294Trust fees to the bank 108,070 Gain on securities transactions 517,985Other expenses 52,600 Other income 1,086,115

3,678,655 3,678,655

Description MMillions of Won

Assets 19,518,875Liabilities 18,742,835Net assets 776,040Less; stock delivered due to merger (common stock: 49,766,280 shares) (248,831)Adjustments (*) (129,540)Gains on business combination 397,669

(*) The adjustments are legal reserve of 96,840 million and business rationalization reserve of 32,760 million deducted by treasury bond of60 million.

Assets LiabilitiesCash and due from banks 158,468 Deposits 1,928,282Loans 2,065,123 Borrowings 1,170,573Securities 354,766 Guarantees outstanding 390,527Customers liabilities on guarantees 390,527 Other liabilities 1,131,735Other assets 392,961

3,361,845 4,621,117


57

(Trust Accounts)

At December 31, 1998, debentures received and receivable from the purchase and assumption arrangements of KDIC are as follows :

Debentures received from KDIC will mature in five years with interest rates of 10% to 15%. In addition, the Bank retains a put-back option, a rightto transfer the assumed assets to Korea Asset Management Corporation or to be compensated for the losses from KDIC, for non-performing assetswithin a year after the assumption.

In accordance with the P&A accounting guidelines of the Financial Supervisory Commission, the Bank classified the troubled loans as precautionary ina credit risk classification for provision for possible loan losses, and recorded losses on securities transactions, advances to customers, accrued interestincome related to KDIC and others as other accounts receivable, accrued income or accounts payable considering 10% of interest rate. The Bankissued 200,000 million of the preferred stock to KDIC in relation to the contract of purchase and assumption (see Note 15).

No guarantee trusts of Daedong Bank were transferred to banking accounts to compensate for the deficiency of the purchased assets against theassumed liabilities. The transferred assets and liabilities of no guarantee trusts of Daedong Bank were as follows (in millions of Korean Won) :

Commitments and Contingencies

Letters of Credit 69,371Unpaid spot exchange 13,566Derivatives contracts 107,172

Assets LiabilitiesLoans 179,732 Money trusts 617,705Securities 142,979 Provisions for future trusts 121Other assets 4,936 Provisions for possible loan losses 2,416Due from banking accounts 243,565 Other liabilities 80,285

571,212 700,527

Assets LiabilitiesLoans 132,215 Other liabilities 284,147Securities 39,876 Provisions for possible loan losses 13,081Due from banking accounts 115,961Other assets 9,176

297,228 297,228

Description Millions of Won

Liabilities over assets (banking accounts and trust accounts) 1,388,587Expenses related to the assumption 359,735Core deposit value of Daedong Bank (18,801)Accrued interest on this receivable 49,729Debentures received from Korea Asset Management Corporation (144,831) 1,634,419Valuation adjustments (294,102)Debentures from KDIC; Received 1,065,00

Receivable 275,217 1,340,317

To the Board of Directors and Shareholders of Kookmin Bank

We have audited the accompanying non-consolidated balance sheet of the banking accounts of Kookmin Bank ("the Bank") as of December31, 1998 and the related non-consolidated statements of income, appropriations of retained earnings and cash flows for the year then ended,expressed in Korean Won, and we have audited the accompanying non-consolidated balance sheet of the trust accounts of Kookmin Bank asof December 31, 1998 and the related non-consolidated statement of operations for the year then ended, expressed in Korean Won. Thesenon-consolidated financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion, as inde-pendent auditors, on these non-consolidated financial statements, as to whether they have been prepared in conformity with financial account-ing standards generally accepted in the Republic of Korea as modified by the accounting and reporting guidelines prescribed by the bankingregulatory authorities. For this purpose, we conducted our audit in accordance with auditing standards generally accepted in the Republicof Korea.

In our opinion, the non-consolidated financial statements referred to above present fairly the non-consolidated financial position of the bank-ing accounts of Kookmin Bank as of December 31, 1998 and the results of its operations, the changes in its retained earnings, and its cashflows for the year then ended, and the financial position of the trust accounts of Kookmin Bank as of December 31, 1998 and the results ofits operations for the year then ended, in conformity with financial accounting standards generally accepted in the Republic of Korea as mod-ified by the accounting and reporting guidelines prescribed by the banking regulatory authorities.

The non-consolidated financial statements of the Bank for the year ended December 31, 1997 presented herein for comparative purposes,were audited by us. In our report dated January 21, 1998, we expressed an unqualified opinion thereon.

As discussed in Note 2 to the non-consolidated financial statements, pursuant to the revised accounting and reporting guidelines prescribedby the banking regulatory authorities, effective January 1, 1998, the Bank changed its accounting policy for provision for possible loan loss-es, with which we concur. As a result of these changes, net income for the year ended December 31, 1998 has been decreased by 136,748million ( 110,500 million and 26,248 million of provisions for possible loan losses for banking accounts and trust accounts, respectively)from that which would have been reported using the prior methods.

As discussed in Notes 2 and 6 to the non-consolidated financial statements, pursuant to the revised accounting and reporting guidelines pre-scribed by the banking regulatory authorities, effective January 1, 1998, the Bank changed its accounting policy for the presentation and clas-sification of securities on the non-consolidated balance sheet, and for the valuation methods for certain securities, with which we concur. Asa result of these changes, net income for the year ended December 31, 1998 has been increased by 151,268 million ( 141,785 millionand 9,483 million of unrealized valuation losses on securities for banking accounts and trust accounts, respectively) and capital adjustmentas of December 31, 1998 has been decreased by 127,642 million, from those which would have been reported using the prior methods.

As discussed in Note 2 to the non-consolidated financial statements, pursuant to the revised accounting and reporting guidelines prescribedby the banking regulatory authorities, effective January 1, 1998, the Bank fully accrued all the underaccrued severance benefits which havebeen paid to employees during the years 1997 and 1998 under an early retirement program, with which we concur. This change resultedin an increase of 97,657 million in provision for accrued severance benefits and a corresponding decrease in net income for the year endedDecember 31, 1998.

Report of Independent Accountants

Hanil Group Building 21st Flr.

191 Hangangro 2 ga, Yongsanku

Seoul 140-702, KOREA

(C.P.O. Box 2170, 100-621)

Telephone +82 2 709-0800

Facsimile +82 2 792-7001

?O2@@@6K?O26K?e?O@K ?O2@@@@@@@@@@@6K

@@@@@@@@@@@@@@@@@@6K W2@@@@@@@@@@@@@@@@6K@@@@@@@@@@@@@@@@@@@@@6X? ?W&@@@@@@@@@@@@@@@@@@@6K

?J@@@@@@@@@@@@@@@@@@@@@@)K O&@@@@@@@@@@@@@@@@@@@@@@@??7@@@@@@@@@@@@@@@@@@@@@@@@@? W2@@@@@@@@@@@@@@@@@@@@@@@@@??@@@@@@@(MfI4@@@@@@@@@@@L ?W&@@@@@@@@(M?gI4@@@@@@@??@@@@@@@H?g?I'@@@@@@@@1 @@@@@@@@@@@@@@@@@@@@@? O2@@6XeW&@@@@@@@@(YheI'@@@@5??@@@@@@@heV'@@@@@@@@ @@@@@@@@@@@@@@@@@@@@@? ?W2@@@@@@@@@@@@@@1?W&@@@@@@@@0Y?he?V'@@(Y??@@@@@@@he?N@@@@@@@@ @@@@@6X?heW2@@@@hf?@@@@@g@@@@@@@@@@@@@@@@@@@@@? ?7@@@@@@@@@@@@@@@@?7@@@@@@@(M? N@@H ?W2@@@@@@@@@@@@@@@@@@@@6K?h?@@@@@@@hf3@@@@@@@ @@@@@@1?he7@@@@@hfJ@@@@@g@@@@@@@@@@@@@@@@@@@@@? ?@@@@@@@@@@@@@@@@@X@@@@@@@@H ?@@? W&@@@@@@@@@@@@@@@@@@@@@@@@h?@@@@@@@hfN@@@@@@@ @@@@@@@?h?J@@@@@@L?he7@@@@5hf?@@@@@@? ?@@@@@@@@@@@@@@@@>@@@@@@@@5? 7@@@@@@@@@@@@@@@@@@@@@@@@@L?gJ@@@@@@5hf?@@@@@@@@@@@@@@@@6K?f?@@@@@@@h?O2@@@@6K?eW2@@@@@@@@@@@@@@@@@?h?7@@@@@@1?h?J@@@@@H?W2@6Xg?@@@@@@? O2@@@@6KhW&K?O)X? ?@@@@@@?hB@@@@@@@@(Y?hf?O2@@@@@@6K?heO2@@@@6Kh?@@@@@@@@@@@6KgW2@@@@6Ke?O2@@@@?@@@@@@@@@@6KheO2@@@@@6K? ?J@@@@@@@@@@@@@@@@@@@@@@@@@@1?g7@@@@@@Hhf?@@@@@@@@@@@@@@@@@@@6Xe?@@@@@@@gO2@@@@@@@@@@6?&@@@@@@@@@@@@@@@@@@?h?@@@@@@@@?h?7@@@@5?W&@@@1g?@@@@@@? @@@@@@@@@@@@@6X? ?O2@@@@@@@@@6Xg7@@@@@1?hW2@@@@ ?@@@@@@?hJ@@@@@@@(Yhf?O2@@@@@@@@@@6K?f?O2@@@@@@@@@6Kg?@@@@@@@@@@@@@@6K?e7@@@@@@@@@@@@@@@@?@@@@@@@@@@@@6KgW2@@@@@@@@@@6Xhf?7@@@@@@@@@@@@@@@@@@@@@@@@@@@?g@@@@@@@?hf?@@@@@@@@@@@@@@@@@@@@)X??@@@@@@@fO2@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@?hJ@@@@@@@@?hJ@@@@@H?7@@@@@L?fJ@@@@@5? @@@@@@@@@@@@@@)X ?W2@@@@@@@@@@@@)K?f@@@@@@@?h7@@@@@ ?@@@@@@?g?W&@@@@@@@H?he?W2@@@@@@@@@@@@@@@e?W2@@@@@@@@@@@@@6Xf?@@@@@@@@@@@@@@@@6X?@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@6Xe?W&@@@@@@@@@@@@1hf?@@@@@@@@@@@@@@@@@@@@@@@@@@@@?g@@@@@@@?hf?@@@@@@@@@@@@@@@@@@@@@)X?@@@@@@5e?@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@?h7@@@@@@@@?h7@@@@5?J@@@@@@1?f7@@@@@H? @@@@@@@@@@@@@@@)X? W&@@@@@@@@@@@@@@@@f@@@@@@5?h@@@@@@ J@@@@@@?g?7@@@@@@@5hfW&@@@@@@@@@@@@@@@@L?W&@@@@@@@@@@@@@@@)X?e?@@@@@@@@@@@@@@@@@1?@@@@@@@@@@@@@@@@?@@@@@@@@@@@@@@@@1eW&@@@@@@@@@@@@@5hf?@@@@@@@@@@@@@@@@@@@@@@@@@@@@?g@@@@@@@?hfJ@@@@@@@@@@@(MI4@@@@@@@1?@@@@@@HeJ@@@@@@@@0?4@@@@@@@@@@@@eI@?4@@@@@@@?g?J@@@@@@@@@?g?J@@@@@H?7@@@@@@@?f@@@@@@ @@@@@@?I4@@@@@@@1?@@@@@@h@@@@@@e?W&@@@@@@@0?4@@@@@@@L??J@@@@@@H?h@@@@@5 7@@@@@5?gJ@@@@@@@@Hhe?W&@@@@@@@0M?I'@@@@@)?&@@@@@@0M?I'@@@@@@1?e?@@@@@@?eI'@@@@@@@?@@@@@@@@@@@@@@@@?@@@@@@??I'@@@@@@@L?7@@@@@(M?I'@@@@Hhf?@@@@@@@@@@@@@@@@@@@@@@@@@@@@?g@@@@@@@?hf7@@@@@@@@@@@H?e?@@@@@@@?@@@@@@??W&@@@@@@(M?eI'@@@?@@@@@@g?@@@@@@?g?7@@@@@@@@@?g?7@@@@5?J@@@@@@@@?f@@@@@@ @@@@@@f@@@@@@@?@@@@@@h@@@@@@eW&@@@@@@0Me?I'@@@@@1??7@@@@@@he@@@@@HfO2@@@@6Kf@@@@@@H?g7@@@@@@@5?he?7@@@@@@(MfV'@@@@@@@@@@@(M?e?V'@@@@@@Le?@@@@@@?e?V'@@@@@@?@@@@@@he?@@@@@5?eV'@@@@@@)X@@@@@(Y?eV'@@@?hf?@@@@@@@@@@@@@@@@@@@@@@@@@@@@?g@@@@@@5?he?J@@@@@@@@@@@@f?@@@@@@@?@@@@@@?W&@@@@@@(Yf?V'@@?@@@@@@g?@@@@@@?gJ@@@@@@@@@@?gJ@@@@@H?7@@@@@@@@?f@@@@@@?@@@@@@@@@@@@@@@@@@@@@@5f3@@@@@@@@@@@@5h@@@@@@?W&@@@@@@?gN@@@@@@L?@@@@@@@he@@@@@?eO2@@@@@@@@@6X?@@@@@@h@@@@@@@@H?heJ@@@@@@(Y?f?N@@@@@@@@@@(Y N@@@@@@1eJ@@@@@5?fN@@@@@@?@@@@@5he?@@@@@H?e?N@@@@@@@@@@@@@Hf?V4@@?hf?@@@@@@@?@@@@@@?e@@@@e@@@@@?g

?J@@@@@@H?heW&@@@@@@@@@@@@f?@@@@@@@@@@@@@@?7@@@@@@(Y?gV4@X@@@@@@g?@@@@@@?g7@@@@@@@@@@?g7@@@@5?J@@@@@@@@@?f@@@@@5?@@@@@@@@@@@@@@@@@@@@@@Hf?@@@@@@@@@@@@Hh@@@@@@?7@@@@@@5?g?3@@@@@1?@@@@@@5he@@@@@?W2@@@@@@@@@@@@1?@@@@@@@@@@@@6X@@@@@@@5hf7@@@@@@Hh3@@@@@@@@@H?g?3@@@@@@e7@@@@@H?fJ@@@@@@@@@@@@Hhe?@@@@@g@@@@@@?@@@@@@? ?@@@@@@@?@@@@@@T2@@@@@@@@@@@@?g?7@@@@@@hf7@@@@@@@@@@@@5fJ@@@@@@@@@@@@@5?@@@@@@(YheB@@@@@@5g?3@@@@@Lg@@@@@@@@@@@?f?J@@@@@H?7@@@@@@@@@?f@@@@@H?@@@@@@@@@@@@@@@@@@@@@@?f7@@@@@@@@@@@@?g?J@@@@@@?@@@@@@(Y?g?N@@@@@@?@@@@@@Hh?J@@@@@?7@@@@@@@@@@@@@@?@@@@@@@@@@@@@@@@@@@@@Hhe?J@@@@@@5?hN@@@@@@@@5h?N@@@@@@e@@@@@@g7@@@@@@@@@@@@?heJ@@@@@f?J@@@@@@?@@@@@@? ?@@@@@@@?@@@@@>@@@@@@@@@@@@@@?g?@@@@@@@he?J@@@@@@@@@@@@@He?W&@@@@@@@@@@@@@HJ@@@@@@H?he?@@@@@@Hg?N@@@@@1f?J@@@@@@@@@@@?f?7@@@@5?J@@@@@@@@@@Le?J@@@@@??@@@@@@@@@@@@@@@@@@@@@@?e?J@@@@@@@@@@@@@?g?7@@@@@@X@@@@@@Hhe@@@@@@?@@@@@@?h?7@@@@@X@@@@@(M??I'@@@@?@@@@@@@@@@@@@@@@@@@@@?he?7@@@@@@H?h?@@@@@@@@Hhe@@@@@@e@@@@@@f?J@@@@@@?@@@@@@?he7@@@@@fW&@@@@@@?@@@@@@L ?@@@@@@5?@@@@V@@e@@@@@@@@@@@?g?@@@@@@@heO&@@@@@@@@@@@@@?eW&@@@@@@@?@@@@@@?7@@@@@@hf?@@@@@@?h@@@@@@f?7@@@@e@@@@@?fJ@@@@@HW&@@@@?@@@@@1e?7@@@@@?J@@@@@@?h?@@@@@@?eW&@@@@@@?@@@@@@?g?@@@@@@V@@@@@@5?he@@@@@@?@@@@@@?h?@@@@@V@@@@@(YfV'@@@@@@@@@@@@@@@@@@@@@@@@5?heJ@@@@@@5he?@@@@@@@5?he@@@@@@L?@@@@@@fW&@@@@@@?@@@@@@?he@@@@@@e?W&@@@@@@5?@@@@@@)K? ?@@@@@@H?@@@@@@@?J@@@@@@@@@@@?g?@@@@@@5hO2@@@@@@@@@@@@@@@??O&@@@@@@@5?@@@@@@?@@@@@@5hf?@@@@@@?h@@@@@@fJ@@@@@e@@@@@?f7@@@@5?7@@@@5?@@@@@@e?@@@@@@?7@@@@@@?h?@@@@@@??O&@@@@@@5?@@@@@5?g?@@@@@@?@@@@@@H?he@@@@@@?@@@@@@?h?@@@@@?@@@@@H?f?V40Y@@@@@@?gW@@@@@@@H?he7@@@@@@Hhe?@@@@@@@H?he@@@@@@1?@@@@@@e?O&@@@@@@5?@@@@@@?he@@@@@@eO&@@@@@@(Y?@@@@@@@@6K? ?@@@@@@?J@@@?@@@?7@@@@@@@@@@@?g?@@@@@@YgO2@@@@@@@@(M?@@@@@@@@@@@@@@@@0Y?@@@@@@?@@@@@@Hhf?@@@@@@@@@@@@@@@@@@@@@f7@@@@5e@@@@@?e?J@@@@@HJ@@@@@H?@@@@@@e?@@@@@@?@@@@@@5?h?@@@@@@@@@@@@@@@(Y?@@@@@H?g?@@@@@@@@@@@@5hf@@@@@@@@@@@@5?h?@@@@@?@@@@@he?@@@@@@?g7@@@@@@@hf@@@@@@5?he?@@@@@@@he?J@@@@@@5?@@@@@@W2@@@@@@@@(Y?@@@@@@@@@@@@@@?e@@@@@@@@@@@@@@@(Y??3@@@@@@@@@6X? ?@@@@@@?7@@@@@@@X@@@@@@@@@@@@?g?@@@@@@@@@@@@@@@@@@@@@@(Y?J@@@@@@@@@@@@@@(M??J@@@@@@@@@@@@@?hf?@@@@@@@@@@@@@@@@@@@@@f@@@@@He@@@@@?e?7@@@@5?7@@@@5e@@@@@@e?@@@@@@?@@@@@@H?hJ@@@@@@@@@@@@@@0Y?J@@@@@hJ@@@@@@@@@@@@Hhf@@@@@@@@@@@@H?h?@@@@@@@@@@@he?@@@@@@?g@@@@@@@@hf@@@@@@H?he?@@@@@@@he?7@@@@@@HJ@@@@@@@@@@@@@@@(Y?J@@@@@@@@@@@@@@?e@@@@@@@@@@@@@@(Ye?V'@@@@@@@@@)X ?@@@@@@?@@@?@@@>@@@?@@@@?@@@@?gJ@@@@@@@@@@@@@@@@@@@@@(Ye7@@@@@@@@@@@@@0Ye?7@@@@@@@@@@@@@?hf?@@@@@@@@@@@@@@@@@@@@@e?J@@@@5?e@@@@@?e?@@@@@HJ@@@@@Ye@@@@@@e?@@@@@5?@@@@@@he7@@@@@@@@@@@@0M?e7@@@@@f?O@?&@@@@@@@@@@@@?he?J@@@@@@@@@@@@he?@@@@@@@@@@@heJ@@@@@@?g@@@@@@@5hf@@@@@@hf?@@@@@@5he?@@@@@@@?7@@@@@@@@@@@@@@0Ye7@@@@@@@@@@@@@@??J@@@@@@@@@@@@@0Y?fV'@@@@@@@@@)X? ?@@@@@@?@@5?3@V@@@@?@@@@@@@@@?g7@@@@@@@@@@@@@@@@@@@@0Y?e@@@@@@@@@@@@@?f?@@@@@@?@@@@@@5?hfJ@@@@@@@@@@@@@0Y@@@@@@e?7@@@@H?e@@@@@LeJ@@@@@T&@@@@@@@@@@@@@@L??@@@@@HJ@@@@@@he@@@@@@@@@@@@g@@@@@@@@@@@@@@@@@@@@?@@@@@@?he?7@@@@@@@@@@@@heJ@@@@??@@@@@@6X?g7@@@@@5?g@@@@@@@Hhf@@@@@@hfJ@@@@@@Hhe?@@@@@@@?@@@@@@@@@@@@0M?f@@@@@@@@@@@@@@@??7@@@@@@@@@@@@h?V'@@@@@@@@@)X ?@@@@@5?@@Y?V@@@@@@@@@@@@@@@@?g@@@@@@@@@@@@@@@@@@0Mg@@@@@@?@@@@@@Lf?@@@@@@?@@@@@@H?hf7@@@@@he@@@@@@eJ@@@@5f@@@@@1e7@@@@V@@@@@@@@@@@@@@@@1?J@@@@@?7@@@@@@he@@@@@@@@@@@@L?f@@@@@@@@@@@@@@@@@@@@?@@@@@@?he?@@@@@@@@@@@@@he7@@@@??@@@@@@@)Kg@@@@@@H?g@@@@@@@?he?J@@@@@5hf7@@@@@@?he?@@@@@@@?@@@@@@?hf@@@@@@he?@@@@@@@@@@@@@L?hV4@@@@@@@@@1 ?@@@@@HJ@@@@@@@@@@@@@@@@@@@@@?g@@@@@@@@@@@@@@@0M?h@@@@@@?3@@@@@1f?@@@@@@?@@@@@@ @@@@@@he@@@@@@e7@@@@Hf@@@@@@?J@@@@@X@@@@@@@@@@@@@@@@@?7@@@@@?@@@@@@@he@@@@@@@@@@@@1?f@@@@@@@@@@@@@@@@@@@@?@@@@@@?he?@@@@@@?@@@@@@he@@@@@??@@@@@@@@@6Kf@@@@@@h@@@@@@@?he?7@@@@@Hhf@@@@@@@?heJ@@@@@@@?@@@@@5?hf@@@@@@he?@@@@@@V'@@@@@1?heI'@@@@@@@@ ?@@@@@?7@@@@@@@?@@@@?@@@@@@@@?g@@@@@@(M @@@@@@?N@@@@@@L?e?@@@@@@?@@@@@@ @@@@@@he3@@@@@e@@@@5?f@@@@@@?7@@@@V@@@@@@@@@@@@@@@@@@?@@@@@@?@@@@@@@@@@@@@@@e@@@@@(Y@@@@@@Lf@@@@@@@@@@@@@@@@@@@@?@@@@@@?heJ@@@@@@?@@@@@@he@@@@@??3@@@@@@@@@@6Xe@@@@@@h@@@@@@@?he?3@@@@@Lhe?J@@@@@@@?he7@@@@@@@@@@@@@H?hf@@@@@@he?@@@@@5?N@@@@@@Lhe?V'@@@@@@@ ?@@@@@?@@@?@@@@?3@@@W@@@@@@@@?g@@@@@@H? @@@@@@e3@@@@@1?eJ@@@@@@?@@@@@@ @@@@@@heN@@@@@@@@@@@H?f@@@@@@?@@@@@X@@@@@g?@@@@@@?@@@@@@?@@@@@@@@@@@@@@@?J@@@@@H?3@@@@@)X??J@@@@@?h@@@@@@?@@@@@@?he7@@@@@@@@@@@@@h?J@@@@5??V4@@@@@@@@@@)X?@@@@@@h@@@@@@@?he?N@@@@@1he?7@@@@@@@?h?J@@@@@@@?@@@@@@hf?J@@@@@5heJ@@@@@H??3@@@@@)X?heV'@@@@@@ ?@@@@@?@@@@@@@@??@@@@Y@@@@@@@?g

?J@@@@@@ ?J@@@@@@eN@@@@@@Le7@@@@@@?@@@@@@L?hf@@@@@5he?@@@@@@@@@@5g@@@@@@@@@@@V@@@@@5g?@@@@@@?@@@@@@?@@@@@@@@@@@@@@5?7@@@@@??N@@@@@@1??7@@@@@?g?J@@@@@5?@@@@@@?h?J@@@@@@@@@@@@@@h?7@@@@H?e?I'@@@@@@@@@1?@@@@@@@@@@@@@@@@@@@@@?hf@@@@@@heJ@@@@@@@@?h?7@@@@@@5?@@@@@@hf?7@@@@@Hhe7@@@@@e?N@@@@@@)Xhe?N@@@@@@ ?@@@@@?@@@@?@@@W&@@@@@@@@@@@@?g?7@@@@@@ ?7@@@@@5e?3@@@@@)X?@@@@@@5?3@@@@@1?he?J@@@@@Hhe?@@@@@@@@@@Hg@@@@@@@@@@@X@@@@@Hg?3@@@@@@@@@@@@?@@@@@@?f?I(Y?@@@@@@?e3@@@@@@L?@@@@@@?g?7@@@@@H?@@@@@@?h?7@@@@@@?@@@@@@@hJ@@@@@gV4@@@@@@@@@?@@@@@@@@@@@@@@@@@@@@@?hf@@@@@@he7@@@@@@@@LhJ@@@@@@@H?@@@@@@hf?@@@@@@?he@@@@@@f3@@@@@@)X?he@@@@@@ ?@@@@5?@@@@?@@@@@@@@@@@@@@@@@?g?@@@@@@@ ?@@@@@@He?N@@@@@@1?@@@@@@H?N@@@@@@?hW&?7@@@@@?he?@@@@@@@@@@?g@@@@@@@@@@V@@@@@5?g?N@@@@@@@@@@@@?@@@@@@?h?@@@@@@?eN@@@@@@1?@@@@@@?g?@@@@@@??3@@@@@LhJ@@@@@@5?@@@@@@@h7@@@@5hI'@@@@@@@@@@@@@@@@@@@@@@@@@@@@@?hf@@@@@@L?g?J@@@@@@@@@1h7@@@@@@5?J@@@@@@hf?@@@@@@? @@@@@@fV'@@@@@@)Xh?J@@@@@5 ?@@@@HJ@@@@W@@@@@@@@@@@@@@@@@?g?@@@@@@@ ?@@@@@@?f3@@@@@@?@@@@@@e?@@@@@@Lg?O&@?@@@@@@?he?@@@@@@@@@5?g@@@@@@@@@@X@@@@(Y?h@@@@@@gJ@@@@@@?hJ@@@@@@?e?3@@@@@@?@@@@@@?g?@@@@@@??N@@@@@)X?f?W&@@@@@(Y?3@@@@@@L?f?J@@@@@Hh?V'@@@@@@@@@@@@@@@@@@@@@@@@@@@@?hf3@@@@@1?gW&@@@@@@@@@@L?g@@@@@@(Y?7@@@@@@hfJ@@@@@@?he@@@@@@f?N@@@@@@@)X?gW&@@@@@H ?@@@@?7@@@@@>@@@@@@@@@@@@@@@@?g?@@@@@@@ ?@@@@@@?fN@@@@@@@@@@@@@e?3@@@@@)K?e?O2@@@@@@@@@@?g?O@??@@@@@@@@@H?g@@@@@@@@@V@@@@@Hhe@@@@@@g7@@@@@5?h7@@@@@@?e?N@@@@@@@@@@@@@?g?@@@@@@?e3@@@@@)XfO&@@@@@@H??N@@@@@@)XfO&@@@@5?heN@@@@@@(M?hf@@@@@@@LhfN@@@@@@?f?O&@@@@@?@@@@@)Ke?O2@@@@@@(Y??@@@@@@@hf7@@@@@@?e?O2@@@?J@@@@@@g3@@@@@@@)Kf?O&@@@@@5? ?@@@@?@@@@@@@Y@@@@@Xe@@@@@@@?g?@@@@@@5 J@@@@@@?f?@@@@@@@@@@@@@e?N@@@@@@@6KO2@@@@@@@@@@@@@@@@@@@@@@??@@@@@@@@5h@@@@@@@@@@@@@@@?he@@@@@@g@@@@@@H?h@@@@@@5?f3@@@@@@@@@@@5?g?@@@@@@?eN@@@@@@)K?O2@@@@@@@@f3@@@@@@)K?O2@@@@@(Y?he?@@@@@@H @@@@@@@1hf?3@@@@@@@@@@@@@@@@@5?3@@@@@@6?2@@@@@@@(Ye?@@@@@@5hf@@@@@@@@@@@@@@@@?7@@@@@@gV'@@@@@@@@6K?O2@@@@@@(Y? ?@@@@@@@@@@@@@@?eV@@@@@@@@@@?g?@@@@@@H 7@@@@@@?f?3@@@@@@@@@@@@f3@@@@@@@@@@@@@@@?@@@@@@@@@@@@@@@@??@@@@@@@@Hh@@@@@@@@?@@@@@5?he@@@@@@g@@@@@@he@@@@@@H?fN@@@@@@@@@@@H?g?@@@@@5?e?3@@@@@@@@@@@@@@@(M?fN@@@@@@@@@@@@@@@@Hhf?@@@@@@? 3@@@@@@@hf?V'@@@@@@@@@@@@@@@(Y?N@@@@@@@@@@@@@@@(Y?e?@@@@@@Hhf@@@@@@@@@@@@@@@@?@@@@@@5g?V4@@@@@@@@@@@@@@@@@(Y ?@@@@@@@@@@@@@@@@@@@@@@@@@@@@?gJ@@@@@@? 3@@@@@5?f?V'@@@@@@@@@@5fV4@@@@@@@@@@@@@@?@@@@@@@@@@@@@@@@??@@@@@@@@?h3@@@@@@@@@@@@(Y?he3@@@@@g@@@@@@he@@@@@@g?3@@@@@@@@@@hJ@@@@@H?e?V4@@@@@@@@@@@@@(Yg?@@@@@@@@@@@@@@@@?e@6X?g?@@@@@@? N@@@@@@@L?hfV'@@@@@@@@@@@@@0Y?e@@@@@@@@@@@@@@(Yf?@@@@@@?hf@@@@@@@@@@@@@@@@?@@@@@@Hh?I4@@@@@@@@@@@@@@(Y? ?@@@@@@@@@@@@@@@@@@@@@@@@@@@@?g7@@@@@@? V4@@@0Y?gV4@@@@@@@@0YgI4@@@@@@@@@0M??@@@@@@@@@@@@@@@@??3@@@@@@5?hN@@@@@@V4@@@0YhfV4@@@@g@@@@@@he@@@@@@g?V4@@@@@@@@@h7@@@@@g?I4@@@@@@@@@@0Y?hI4@@@@@@@@@@0Me?J@@)XgJ@@@@@5? ?@@@@@@@1?hf?V4@@@@@@@@@@0M?f?I4@@@@@@@@@@0Y?f?@@@@@@?hf@@@@@@@@@@@@@@@@?@@@@@@?he?I4@@@@@@@@@@@0Y ?3@@@@@@@@@@@@@@@@@@@@@@@@@@@?g@@@@@@@? I4@@@@0M ?N@@@@@@H?h?@@@@@5? ?J@@@@@@ @@@@@@h@@@@@@h?I4@@@@@0M I4@@@@@@0Mf?7@@@)K?e?O&@@@@@H? ?3@@@@@@@? I4@@@@0Mhe?I4@@@@@0M ?I4@@@@@@0M? ?V'@@@@@@@@@@@@@@@@@@@@@@@@@5?g@@@@@@@? @@@@@5he?@@@@@H? ?7@@@@@@@@@@@@@@6X @@@@@@h@@@@@@ ?@@@@@@6KO2@@@@@@5 ?N@@@@@@@L N@@@@@@@@@@@@@@@@@@@@@@@@(Y?g@@@@@@@? @@@@0Yhe?@@@@@ ?@@@@@@@@@@@@@@@@) @@@@@@h@@@@@@ ?@@@@@@@@@@@@@@@(Y 3@@@@@@)X? O2@@ ?@@@@@@@@@@@@@@@@@@@@@@@0Yh

?J@@@@@@5? ?@@@@@@@@@@@@@@@@H ?3@@@@@@@@@@@@@0Y? N@@@@@@@)X W2@@@5 I@MI4@@@@@@@0MI40Mhf?7@@@@@@H? ?@@@@@@@@@@@@@@@@? ?V4@@@@@@@@@@0M? ?3@@@@@@@)X?he?O&@@@@H?@@@@@@@ I4@@@@@0M? ?V'@@@@@@@)Kh?O2@@@@@@??@@@@@@@ V'@@@@@@@@6KfO2@@@@@@@@5??@@@@@@@ ?V'@@@@@@@@@@@@@@@@@@@@@@(Y?J@@@@@@@ V'@@@@@@@@@@@@@@@@@@@@0Y@@@@@@@5 ?V4@@@@@@@@@@@@@@@@0M??I4@0Y ?I4@@@@@@@@@@@@0M?

?I4@@@0M


59

As discussed in Notes 15 and 26 to the non-consolidated financial statements, the Bank merged with Korea Long Term Credit Bank ("KLB")on December 31, 1998. KLB's assets of 19,518,875 million, its liabilities of 18,742,835 million, and the shareholder's equity of

776,040 million are included in the accompanying non-consolidated balance sheet as of December 31, 1998.

As discussed in Note 27 to the non-consolidated financial statements, under the decision of the Financial Supervisory Commission in accor-dance with the Act concerning the Structural Improvement of the Financial Industry, the Bank took over certain assets including the loans clas-sified as normal or precautionary and most liabilities of Daedong Bank as of June 29, 1998 by the method of purchase and assumption. Theexcess of the assumed liabilities over the purchased assets is to be compensated by Korea Deposit Insurance Corporation. In addition, theBank retains a put-back option, a right to transfer the purchased assets to Korea Asset Management Corporation or to be compensated forthe losses from Korea Deposit Insurance Corporation, for non-performing assets on or before September 30, 1999..

As discussed in Note 15 to the non-consolidated financial statements, the Bank issued 2,929,926 shares of common stock as a stock dividendon February 28, 1998 and 29,782,593 shares of common stock in connection with the revaluation surplus transferred to common stock onMay 16, 1998. Additionally, the Bank issued 49,180,328 shares of common stock for cash at 7,700 per share, issued 40,000,000 sharesof preferred stock (dividend rate : 1%) at 5,000 per share to Korea Deposit Insurance Corporation in relation to the purchase and assump-tion of Daedong Bank, and issued 49,766,280 shares of common stock due to the merger with Korea Long Term Credit Bank on December31, 1998.

As discussed in Note 14 to the non-consolidated financial statements, the operations of the Bank, and those of similar companies in the Repub-lic of Korea have been significantly affected, and will continue to be affected for the foreseeable future, by the country's unstable economycaused in part by the currency volatility in the Asia Pacific region. The ultimate effect of these uncertainties cannot presently be determined.

The accompanying non-consolidated financial statements are not intended to present the financial position, results of operations and cashflows in accordance with accounting principles and practices generally accepted in countries and jurisdictions other than the Republic of Korea.The standards, procedures and practices utilized to audit such non-consolidated financial statements are those generally accepted and appliedin the Republic of Korea.

The amounts expressed in U.S. Dollars, provided solely for the convenience of the reader, have been translated on the basis set forth in Note3 to the accompanying non-consolidated financial statements.

Seoul, Korea

January 20, 1999

Consolidated Balance Sheets



1998 1997 1998 1997

ASSETSCash and due from banks (Note 4)Loans (Note 5)Call loansSecurities (Note 6)Foreign exchangeCustomers liabilities on guarantees (Note 11)Premises and equipment (Note 7)Other assets (Note 8)Consolidation adjustment debit (Note 21)

Total assetsLIABILITIES AND

SHAREHOLDERS EQUITYDeposits (Note 9)Call moneyBorrowings (Note 10)Guarantees outstanding (Note 11)Provisions (Note 12)Other liabilities (Note 13)

Total liabilitiesCommitments and contingencies (Note 14)Minority interest in consolidated subsidiariesShareholders equity: Captial stock, par value: 5,000 ; authorized

1,000,000,000 shares in 1998 and 200,000,000 shares in 1997 (Notes 1 and 15) ;

Common stock ; issued and outstanding236,299,363 shares in 1998 and 104,640,236shares in 1997

Preferred stock ; issued and outstanding 40,000,000 shares in 1998Capital surplus (Note 16)Retained earnings (Note 17)Capital adjustment (Note 17)Consolidation adjustment credit (Note 21)

Total shareholders equityTotal liabilities and shareholders equity

5,765,61137,659,2451,020,835

23,636,877764,159

2,641,3442,846,6317,584,535

55,54781,974,784

42,547,596465,641

24,272,9262,641,3443,808,6275,239,750

78,975,884

31,978

1,181,497

200,0001,186,093

408,839(14,370)

4,8632,966,922

81,974,784

4,343,04428,971,361

483,81513,727,131

849,715907,846

2,341,6416,520,668

— 58,145,221

37,233,697324,953

10,678,661907,846

2,316,7174,554,825

56,016,699

47,840

523,201

—800,180734,37014,6508,281

2,080,68258,145,221

3,595,83023,986,886

400,57511,365,401

703,523751,653

1,938,7665,398,798

— 48,141,432

30,827,701269,045

8,841,415751,653

1,918,1303,771,175

46,379,119

39,609

433,185

—662,510608,02312,1306,856

1,722,70448,141,432

4,773,64731,180,034

845,20219,570,191

632,6872,186,9052,356,8736,279,628

45,99067,871,157

35,227,352385,528

20,096,8092,186,9053,153,3594,338,260

65,388,213

26,476

978,222

165,590982,028338,499(11,898)

4,0272,456,468

67,871,157



61

Consolidated Statements of Income



1998 1997 1998 1997

Revenue :Interest in Won currencyInterest in foreign currenciesInterest and dividends on securitiesFees and commissionsOther operating income (Note 18)Non-operating income

Expenses :Interest in Won currencyInterest in foreign currencies Fees and commissionsGeneral and administrative expenses (Note 19)Other operating expenses (Note 20)Non-operating expenses (Note 5)

Net income (loss) before income taxes and consolidation adjustments

Income taxesNet income (loss) before consolidation adjustmentsMinority interest in losses (earnings) ofconsolidated subsidiariesAmortization of consolidationadjustments, net(Note 21)Losses on investment in equity-method investeesNet income (losses)Earnings (losses) per common share (in Korean Won and U.S. Dollars)

4,173,623355,020

1,533,4111,120,9191,232,165

191,3898,606,527

4,308,050454,60571,461

761,6312,921,288

535,2529,052,287

(445,760)1,028

(446,788)

135,446

(10,463)

(81)(321,886)

(1,952)

3,225,734252,782

1,463,720877,166944,72462,455

6,826,581

3,600,856337,06263,806

816,6621,682,205

185,4356,686,026

140,55519,951

120,604

(7,681)

3,443

(3,588)112,778

1,139

2,670,752209,291

1,211,889726,251782,18651,710

5,652,079

2,981,335279,07152,828

676,1571,392,784

153,5315,535,706

116,37316,519

99,854

(6,359)

2,851

(2,971)93,375

0.94

3,455,558293,939

1,269,590928,067

1,020,173158,461

7,125,788

3,566,857376,39159,166

630,5942,418,685

443,1637,494,856

(369,068)851

(369,919)

112,143

(8,663)

(67)(266,506)

(1.62)


Consolidated Statements of Changes in Capital Surplus andRetained Earnings



1998 1997 1998 1997

Consolidated capital surplus :Carried over from prior yearPaid-in capital in excess of par value (Note 16)Gains on business combination (Note 16)Revaluation surplus (Note 16)Increase in other capital surplus (Note 16)Revaluation surplus transferred to common stockDecrease in revaluation surplusCarried over to subsequent year

Consolidated retained earnings :Carried over from prior yearLosses on prior period adjustments, netCarried over from prior year, adjustedNet income (loss)Retained earnings transferred due to mergerChange of investment in subsidiariesChange of reporting entitiesCash dividendsStock dividendsReversal of provision for future trust lossesExcess losses on minority interest by negativeequities of subsidiariesCarried over to subsequent year

Consolidated capital surplus and retainedearnings carried over to subsequent year

800,180132,786397,66915,695

796

(148,913)(12,120)

1,186,093

734,370(5)

734,365(321,886)129,600(10,774)(6,987)

(47,273)—

(55,381)

(12,825)408,839

1,594,932

416,11752,941

—330,274

848

— —

800,180

671,480(32)

671,448112,778

—10,8234,546

(50,575)(14,650)

—

— 734,370

1,534,550

344,52543,832

—273,451

702

——

662,510

555,953(26)

555,92793,375

—8,9613,764

(41,874)(12,130)

—

— 608,023

1,270,533

662,510109,940329,25112,995

659

(123,293)(10,034)982,028

608,023(4)

608,019(266,506)107,303(8,920)(5,785)

(39,140)—

(45,853)

(10,619)338,499

1,320,527



63

Consolidated Statements of Cash Flows



1998 1997 1998 1997

Cash flows from operating activities :Net income (loss)Items not involving cash flows :Depreciation of premises and equipmentAccrued severance benefitsBad debt expensesUnrealized losses (gains) on securities, netDepreciation of operating lease andrental assetsLosses on disposal of loans, net (Note 5)Amortization of consolidation adjustment, netMinority interests in earnings(losses) of consolidation subsidiariesOthers, net

Cash provided by (used in) operating accounts :LoansDepositsOthers, net

Cash flows from investing activities :Acquisition of securitiesAcquisition of premises and equipmentIncrease due to merger (Note 24)Increase due to purchase and assumption(Note 25)Increase due to the change of reporting entitiesOthers

Cash flows from financing activities :Increase (decrease) in borrowingsDecrease in call moneyIncrease (decrease) in securities sold with recourseIssuance of capital stock for cashCash dividends (including dividends paidto minority interest)Increase in minority subsidiariesOthers, net

Net increase in cashCash and cash equivalents

at beginning of the year (Note 23)Cash and cash equivalents

at end of the year (Note 23)

(321,886)

100,338281,284

1,274,049(119,866)

126,382454,13310,463

(135,446)65,930

1,993,0201,110,626

(1,011,211)3,827,816

(3,703,083)(400,392)1,128,7261,506,882

59,067464,561

(944,239)

(118,560)(15,314)

(1,159,250)578,689

(47,273)32,303

(561,740)(1,291,145)

1,592,432

6,104,174

7,696,606

112,778

95,837158,252265,326170,138

155,526151,820(3,443)

7,68169,728

(5,037,460)2,568,650(366,619)

(1,651,786)

(2,282,684)(188,274)

———

(248,483)(2,719,441)

3,074,152(184,260)1,466,038

111,765

(52,653)1,937

436,1204,853,099

481,872

5,622,302

6,104,174

93,375

79,348131,025219,677140,866

128,768125,700(2,851)

6,36057,732

(4,170,773)2,126,718(303,544)

(1,367,599)

(1,889,952)(155,881)

———

(205,732)(2,251,565)

2,545,249(152,558)1,213,808

92,536

(43,594)1,604

361,0864,018,131

398,967

4,654,994

5,053,961

(266,506)

83,075232,890

1,054,851(99,243)

104,638376,000

8,663

(112,143)54,587

1,650,124919,545

(837,234)3,169,247

(3,065,974)(331,505)934,531

1,247,62548,905

384,634(781,784)

(98,162)(12,679)

(959,803)479,127

(39,140)26,745

(465,094)(1,069,006)1,318,457

5,053,961

6,372,418


1. The Consolidated Companies :

The accompanying consolidated financial statements include the banking and trust accounts of Kookmin Bank ( the Bank ) and its controlledsubsidiaries. General information on the Bank, its controlled subsidiaries, and equity-method investees is described below.

The Bank -Kookmin Bank was established in 1963 under the Citizens National Bank Act to provide and administer funds for financing the general public andsmall businesses. Pursuant to the repeal of the Citizens National Bank Act effective January 5, 1995, the Bank has conducted its operations inaccordance with the provisions of the General Banking Act.

The Bank merged with Korea Long Term Credit Bank on December 31, 1998 and made a registration of its merger on January 5, 1999 (see Note24). Under the decision of the Financial Supervisory Commission in accordance with the Act concerning the Structural Improvement of the FinancialIndustry, the Bank took over certain assets including the loans classified as normal or precautionary and most liabilities of Daedong Bank by themethod of purchase and assumption as of June 29, 1998 (see Note 25).

The Bank is engaged in the banking and trust business according to the provisions of the General Banking Act and the Trust Business Act andoperates through 545 local branches and 8 overseas networks as of December 31, 1998.

Since September 30, 1994, the Bank s issued and outstanding shares have been listed on the Korean Stock Exchange. In accordance with theGeneral Banking Act, if one person, other than the Government, owns more than 4% of total outstanding voting shares, the ability to exercise thevoting rights of the shares held is limited to the voting rights of 4% of total outstanding shares. The Korean Government owns 8.2% of the issuedand outstanding shares at December 31, 1998.

Controlled Subsidiaries-A summary of investment and financial data of controlled subsidiaries which are consolidated in the accompanying consolidated financial statementsas of December 31, 1998 is as follows :

Notes to Consolidated Financial StatementsDecember 31, 1998 and 1997

Millions of Won

SubsidiariesNumber of Invested Percentage of Total Operating Shareholders

Shares Ownership Assets Revenue EquityTrust Accounts — — 3,236,870 507,023 7,211Kookmin Credit Card Co., Ltd. 22,534,318 92.96 4,589,143 749,444 242,932Kookmin Leasing Co., Ltd. 12,276,547 89.61 2,361,407 407,804 11,232Kookmin Venture Capital Co., Ltd. 8,855,024 94.11 443,770 70,046 36,091Bukook Mutual Savings & Finance Co., Ltd. 6,409,039 99.99 1,156,685 152,347 1,054Taegu Kookmin Mutual Savings & Finance Co., Ltd. 3,145,709 99.05 498,918 60,740 (45,307)Pusan Kookmin Mutual Savings & Finance Co., Ltd. 2,298,390 99.93 240,446 29,738 (30,034)Chonnam Kookmin Mutual Savings & Finance Co., Ltd. 2,059,690 99.92 98,983 9,465 (17,258)Kookmin Rental Co., Ltd.(**) 1,200,000 100.00 440,985 80,681 (73,068)Kookmin Data System Corp. 799,800 99.98 14,772 9,219 8,484Kookmin Futures Co., Ltd. 1,999,600 99.98 10,816 1,444 10,464Kookmin Bank Venture Capital Co., Ltd. (***) 4,999,940 99.99 60,378 16,549 45,819Kookmin Bank Investment Trust Management Co., Ltd. (***) 2,580,000 43.00 35,215 5,361 33,231Kookmin Bank Luxembourg S.A. 70,000 100.00 411,952 44,981 30,160Kookmin Bank Singapore (Merchant Bank) Ltd. 30,000,000 100.00 353,218 29,224 10,729Kookmin Finance Asia Ltd.(H.K.) 3,000,000 100.00 205,563 17,512 15,616Kookmin Leasing & Finance (Hong Kong) Ltd. ( ) 2,999 99.97 232,089 22,565 (60,162)KLB Asia Finance Ltd. (***) 20,000,000 100.00 282,717 29,155 18,387Kookmin Bank International Ltd.(***) 20,000,000 100.00 250,746 28,040 50,111

( ) Investments in Kookmin Leasing & Finance (Hong Kong) Ltd. are held by Kookmin Leasing Co., Ltd.(**) Investments in Kookmin Rental Co., Ltd. are held by Kookmin Credit Card Co., Ltd. and Kookmin Leasing Co., Ltd.(***) The companies were subsidiaries of Korea Long Term Credit Bank before merger.


65

The Bank operates a trust business in which the Bank, as a fiduciary, holds and manages the property of beneficiaries. Under the Trust Business Act,the trust accounts are accounted for and reported separately from the Bank s own commercial banking business. Among the trust accounts,dividends guarantee trust accounts whose minimum rates of return are guaranteed by the Bank are consolidated in accordance with accounting andreporting guidelines prescribed by the banking regulatory authorities.

Kookmin Credit Card Co., Ltd. was established on September 25, 1987 and has conducted credit card operations, including consumer installmentfinancing, factoring and payment guarantees under the Law for Financing Business specialized in Lending. A significant portion of credit cardservices are provided through the Bank s national network. Kookmin Credit Card Co., Ltd. merged with Kookmin Finance Co., Ltd. on August 22,1998 and KLB Credit Card Co., Ltd. on December 30 1998, and so additionally engages in providing installment financing for the purchase of goodsand services and in rental of industrial tools and fixtures. As of December 31, 1998, its capital stock is 242.4 billion.

Kookmin Leasing Co., Ltd. was incorporated on October 20, 1984 to engage in leasing industrial equipment. As of December 31, 1998, its capitalstock is 68.5 billion.

Kookmin Venture Capital Co., Ltd. was established on November 1, 1986 to engage in investing and financing small and medium-sized enterprisesunder the Start-Up Promotion Act for Small and Medium-Sized Companies. As of December 31, 1998, its capital stock is 47 billion.

The four mutual savings & finance subsidiaries listed above engage in mutual credit and finance business. Among these subsidiaries, Taegu KookminMutual Savings & Finance Co., Ltd. and Youngnam Kookmin Mutual Savings & Finance Co., Ltd. were merged on March 22, 1998, exchanging oneshare of Taegu Kookmin Mutual Savings & Finance Co., Ltd. for 0.3022 shares of Youngnam Kookmin Mutual Savings & Finance Co., Ltd.

Kookmin Rental Co., Ltd. was established on March 6, 1992 to engage in rental of industrial tools and fixtures. Its capital stock at December 31,1998 is 12 billion of which Kookmin Credit Card Co., Ltd. and Kookmin Leasing Co., Ltd. own 25% and 75%, respectively.

Kookmin Data System Corp. was established on September 6, 1991 to engage in providing software services to the Bank and other companies. As ofDecember 31, 1998, its capital stock is 8 billion.

Kookmin Futures Co., Ltd. was established on March 18, 1997 to engage in dealing and brokerge business for the domestic and overseas futurestransaction. As of December 31, 1998, its capital stock is 10 billion.

Kookmin Bank Venture Capital Co., Ltd., the subsidiary of Korea Long Term Credit Bank before merger, was established on March 27, 1990 underthe Start-Up Promotion Act for Small and Medium-Sized Companies. As of December 31, 1998, its capital stock is 25 billion.

Kookmin Bank Investment Trust Management Co., Ltd., the subsidiary of Korea Long Term Credit Bank before merger, was established on October 5,1989 to engage in securities investment trust business. As of December 31, 1998, its capital stock is 30 billion.

Kookmin Bank Luxembourg S.A. was established in Luxembourg in October 1991 to engage in financing activities in the international financialmarkets. As of December 31, 1998, its capital stock is LFR 700 million ( 24,563 million equivalent).

Kookmin Bank Singapore (Merchant Bank) Ltd. was established in Singapore in March 1994 to engage in providing financial services for southeastAsian countries. Its capital stock at December 31, 1998 is SG$30 million ( 21,864 million equivalent).

Kookmin Finance Asia Ltd. (H.K.) was established in Hong Kong in February 1997 to engage in financing activities. Its capital stock at December 31,1998 is US$20 million ( 24,156 million equivalent).

Kookmin Leasing & Finance (Hong Kong) Ltd. was established in Hong Kong in May 1991 to invest in and finance foreign subsidiaries of Korean andforeign companies. As of December 31, 1998, its capital stock is US$3 million ( 3,623 million equivalent) and is owned by Kookmin Leasing Co., Ltd.

KLB Asia Finance Ltd., the subsidiary of Korea Long Term Credit Bank before merger, was established in Hong Kong on October 2, 1989 to engagein financing activities. As of December 31, 1998, its capital stock is US$ 2 million ( 2,416 million equivalent).

Kookmin Bank International Ltd., the subsidiary of Korea Long Term Credit Bank before merger, was established in England on November 1, 1991to engage in financing activities. As of December 31, 1998, its capital stock is GBP 2 million ( 4,010 million equivalent).

Kookmin Mutual Savings & Finance Co., Ltd. to be sold on January 22, 1999 and Kookmin Leasing Singapore Pte. Ltd. undergoing liquidation atthe consolidated balance sheet date, which were consolidated in the accompanying 1997 consolidated financial statements, are excluded in theaccompanying 1998 consolidated financial statements in accordance with financial accounting standards for consolidated financial statements.

Equity-Method Investees -The following investments are recorded in the accompanying consolidated financial statements using the equity method of accounting.

Investors Investees Number of Percentage ofInvested Shares Ownership

Kookmin Venture Capital Co., Ltd. Shin Han Spinning Co. and four other companies 1,106,760 23.89 35.45

In accordance with financial accounting standards for consolidated financial statements, Shin Han Spinning Co. and four other companies, whichengage in non-financing businesses, are excluded from consolidation and are recorded using the equity method of accounting.

Kookmin Economic Research Institute which was liquidated during 1998 and KLB Economic Research Institute Co., Ltd., the subsidiary of Korea LongTerm Credit Bank before merger, which are the small-sized companies were excluded from consolidation or equity-method investees in theaccompanying consolidated financial statements pursuant to financial accounting standards for consolidated financial statements.

2. Summary of Significant Accounting Policies :

The significant accounting policies followed by the Bank in the preparation of the accompanying consolidated financial statements are summarized below.

Basis of Consolidated Financial Statement Presentation -The official accounting records of the Bank and its controlled subsidiaries, except for foreign subsidiaries, are maintained in Korean Won inaccordance with the relevant laws and regulations of the Republic of Korea. Moreover, the accompanying consolidated financial statements areprepared in conformity with financial accounting standards for consolidated financial statements generally accepted in the Republic of Korea asmodified by the accounting reporting guidelines prescribed by the banking regulatory authorities.

For the convenience of the reader, the accompanying consolidated financial statements have been condensed, restructured and translated intoEnglish from the statutory Korean language consolidated financial statements. Certain information included in the statutory Korean languageconsolidated financial statements, not required for a fair presentation of the Bank s financial position or results of operations and cash flows, is notpresented in the accompanying consolidated financial statements. These consolidated financial statements are not intended to present the financialposition and results of operations and cash flows in accordance with accounting principles and practices generally accepted in countries andjurisdictions other than the Republic of Korea.

The preparation of consolidated financial statements in conformity with the banking regulatory guidelines requires management to make estimatesand assumptions that affect amounts reported therein. Due to the inherent uncertainty involved in making estimates, actual results reported in futureperiods may differ from those estimates.

Principles of Consolidation -The Bank records differences between the investment account and corresponding capital account of subsidiaries as a consolidation adjustment whichis amortized over five years using the straight-line method.

Under the equity method, the original investment is recorded at cost and adjusted by the Bank s share of undistributed earnings or losses of thesecompanies. Differences between the investment account and corresponding capital account for equity-method investee companies at the date ofacquisition of the investment are amortized over five years using the straight-line method.

All significant intercompany transactions and account balances among the consolidated companies have been eliminated in consolidation (see Note 22).

For consolidated subsidiaries whose fiscal year end is different from that of the Bank, the accompanying consolidated financial statements are basedon proforma financial statements of the subsidiaries prepared for consolidation purpose.

The foreign currency financial statements of foreign subsidiaries are translated into Korean Won at exchange rates prevailing at the balance sheetdate in accordance with the accounting and reporting guidelines prescribed by the banking regulatory authorities.

The financial statements of consolidated companies are prepared in conformity with generally accepted financial accounting standards in theRepublic of Korea as modified by the relevant laws and regulations. Such relevant laws and regulations which differ from generally acceptedfinancial accounting standards are as follows ;

According to the accounting and reporting guidelines by banking regulatory authorities, the Bank reported acceptances and guarantees outstandingin the liability section and the same amount for customers liabilities for these acceptances and guarantees in the asset section of the accompanying

Consolidated Companies Relevant Laws and Regulations

The Banking and Trust Accounts General Banking ActAccounting and Reporting Guidelines Prescribed by the Banking Regulatory AuthoritiesTrust Business Act

Kookmin Credit Card Co., Ltd. Law for Financing Business Specialized in LendingKookmin Venture Capital Co., LtdKookmin Bank Venture Capital Co., Ltd.Kookmin Leasing Co., Ltd. Financial Standards for Leasing TransactionsKookmin Rental Co., Ltd.Four mutual savings & finance companies Accounting and Reporting Regulations for Mutual Savings & Finance CompanyKookmin Bank Investment Trust Management Co., Ltd. Securities Investment Trust Business Act


67

consolidated balance sheet. The Bank also presented a reserve for doubtful accounts and accumulated depreciation in the liability section of theaccompanying consolidated balance sheet rather than deducting them from the relevant assets in accordance with the above guidelines.

The accompanying consolidated financial statements for the year ended December 31, 1998 include only the balance sheets of Korea Long TermCredit Bank ( KLB ) merged on December 31, 1998 and the subsidiaries of KLB before merger. The income or loss of KLB and its subsidiaries beforemerger for the year 1998 was reflected in gains on business combination of capital surplus for KLB or consolidated retained earnings for itssubsidiaries, which do not affect the net income of the Bank (see Note 24). The assets and liabilities of Daedong Bank which were acquired throughpurchase and assumption were reflected and accounted in the accompanying consolidated financial statements under the prescription of theFinancial Supervisory Commission (see Note 25).

Revision of Accounting Policies -In accordance with revised accounting and reporting regulations for mutual savings & finance companies and other subsidiaries and the accountingand reporting guidelines prescribed by the banking regulatory authorities effective January 1, 1998, the Bank and its subsidiaries adopted certainamended presentation and accounting policies regarding provisions for possible loan losses, presentation and valuation methods for securities,recognition of interest income and accrued severance benefits (see below Provision for Possible Loan Losses , Securities , Recognition of InterestIncome and Accrued Severance Benefits ). As results of these changes, net income for the year ended December 31, 1998 is approximately

723,302 million less than that which would have been reported using the prior methods.

Additionally, in December 1998, significant changes were announced to the financial accounting standards in Korea that will change accountingprinciples generally accepted in Korea to be more consistent with International Accounting Standards. These changes, including accounting forinvestment securities, foreign currency translation, impairment of long lived assets, deferred assets, goodwill, and prior period adjustments areeffective for years beginning on or after January 1, 1999. The cumulative effect on prior years of these changes in accounting policies will becharged or credited to retained earnings, and disclosure made on the effect of the change on prior years’ net income.

Recognition of Interest Income -Interest income on loans and investments is recognized on an accrual basis, while interest income on overdue and dishonoured loans of bankingaccounts, trust accounts, and mutual savings & finance companies, other than those secured and guaranteed by financial institutions, is recognizedon a cash basis. At December 31, 1998, unaccrued interest receivable of the banking accounts, trust accounts, and mutual savings & financecompanies approximated 578,127 million.

Kookmin Credit Card Co., Ltd., the subsidiary of the Bank, changed its accounting policy for the recognition method of interest income on certainloans from on a cash basis to on an accrual basis. As a result of this change, net income for the year ended December 31, 1998 has been increasedby 33,557 million from that which would have been reported using the prior methods.

Foreign Currency Translation -Assets and liabilities denominated in foreign currencies are translated into Korean Won at exchange rates prevailing at the balance sheet date, exceptfor spot and forward exchange contracts which are valued at the rates specified in the contracts. Resulting exchange gains or losses are reflected inother operating income or expenses on a current basis.

The exchange rates used to translate foreign currency denominated assets and liabilities as at December 31, 1998 and 1997 are 1,207.8 : US$ 1and 1,415.2 : US$ 1, respectively.

Foreign exchange gains and losses incurred by Kookmin Leasing Co., Ltd. to finance equipment under leases are deferred and amortized over thefuture payment term of the leases. During the year 1997, in addition, Kookmin Leasing Co., Ltd. and Kookmin Rental Co., Ltd. recorded exchangegains and losses on long-term foreign currency monetary assets and liabilities as a foreign exchange credit and debit, a component of deferredcredits and charges, and amortized them over the remaining term of the assets and liabilities. As of December 31, 1998, the unamortized foreignexchange credit and debit are approximately 82,290 million and 95,444 million, respectively.

Provision for Possible Loan Losses -The Bank provides an allowance for possible loan losses based on a credit risk classification of the loan balances outstanding as of December 31,under the accounting and reporting guidelines prescribed by the banking regulatory authorities. Estimated possible loan losses are determined byapplying the following percentages to each credit risk classification.

Under the previous accounting and reporting guidelines prescribed by the banking regulatory authorities, the Bank applied the credit riskclassification on the loan balances outstanding as of November 30, the end of the month before the consolidated balance sheet date.

Normal 0.5%Precautionary 2%Sub-standard 20%Doubtful 75%Estimated loss 100%

In accordance with the revised accounting and reporting guidelines prescribed by the banking regulatory authorities, effective July 1, 1998, the Bankchanged its loan loss provision ratio for precautionary loans from 1% to 2% and its classification standards for sub-standards loans by overdueperiods from over six-months to over three-months, and additionally provided an allowance for anticipated losses on collections of commercial paperand consolidated privately offered debentures and notes with guarantee.

As a result of these changes, the provision for possible loan losses for the Bank (including trust accounts) before the merger for the year endedDecember 31, 1998 was increased by 136,748 million from that which would have been reported using the prior methods.

Kookmin Credit Card Co., Ltd., Kookmin Leasing Co., Ltd., Kookmin Rental Co., Ltd. and four mutual savings & finance companies, the subsidiariesof the Bank, changed the method for provision for possible loan losses from the method based on the aggregate estimated collectibility or certainceiling rate to the method based on a credit risk classification (however, the percentage to the loans classified as precautionary: 1%) of the loans andreceivables outstanding as of December 31, 1998 in accordance with revised relevant laws and regulations effective January 1, 1998. As a result ofthis change, the provision for loan losses was increased by 523,925 million from that which would have been reported using the prior method.

Securities -In accordance with the revised accounting and reporting guidelines prescribed by the banking regulatory authorities, effective January 1, 1998,securities are classified as traded securities and investment securities by the possession purpose, which are offset by the previous provisions forunrealized valuation losses, and are stated at cost, computed on a moving average basis, unless market value or equity method accounting is appliedas described below.

Traded securities held for sale are stated at market value as of December 31, 1998, and resulting unrealized valuation gains or losses are reflected ona current basis.

Among investment securities, securities which have a quoted market value and equity investments whose ownership is 15% or more are stated atmarket value and under the equity method, respectively, as of December 31, 1998, and resulting unrealized valuation gains or losses are recordedas a capital adjustment.

Among investment securities, unmarketable securities whose issuer is at bankruptcy or whose estimated value has declined significantly are revaluedby applying the same credit risk classification and percentage( credit risk classification method ) as applied in providing an allowance for possibleloan losses, and the resulting differences between the acquisition costs and revalued amounts are charged to current operations.

Under the previous accounting and reporting guidelines prescribed by the banking regulatory authorities, the Bank stated securities at cost unless thelower of cost or market method was applied to certain securities and resulted in allowances for unrealized valuation losses on marketable equityinvestments in amounts equal to 55% of the estimated losses.

As results of the changes in valuation methods as described above, including the change in reflecting unrealized valuation losses from partialprovision to full provision, unrealized valuation losses on securities in the accompanying consolidated statement of income for the year endedDecember 31, 1998 have been decreased by 1,471 million, and capital adjustment as of December 31, 1998 has been decreased by 14,310million, from those which would have been reported using the prior methods.

Premises and Equipment and Related Depreciation -Premises and equipment are recorded at cost, except for upward revaluation of certain assets in accordance with the Korean Asset Revaluation Law.Routine maintenance and repairs are recorded as expense at the time they are incurred. Expenditures which enhance the value or extend the usefullife of the facilities involved are treated as additions to premises and equipment.

Depreciation is computed using the declining-balance method, except for buildings and structures acquired after January 1, 1995 and premises andequipment of Kookmin Leasing Co., Ltd., Kookmin Rental Co., Ltd. and certain foreign subsidiaries which are depreciated on the straight-linemethod. Depreciation is calculated over the estimated average useful lives of the assets and is presented as a liability in the accompanyingconsolidated financial statements. However, operating lease assets and rental assets are depreciated using the straight-line method, and theoperating lease assets and the rental assets and related depreciation are presented as other assets and other provisions, respectively, in theaccompanying consolidated financial statements (see Notes 8 and 12).

The operating lease assets and the rental assets and related depreciation of subsidiaries at December 31, 1998 are as follows:

Millions of Won

Assets DepreciationKookmin Leasing Co., Ltd. (operating lease assets) 568,526 332,528Kookmin Rental Co., Ltd. (rental assets) 145,219 103,518Kookmin Credit Card Co., Ltd. (rental assets) 25,576 13,578

739,321 449,624


69

Foreclosed assets classified as other assets are stated at cost and are not depreciated. Any deficit between the book value and the final public auctionprice of the foreclosed assets, is reflected in other operating expenses and other provisions according to the accounting and reporting guidelines ofthe banking regulatory authorities. Gains or losses on disposal of foreclosed assets sold on an installment payment basis are deferred and amortizedin proportion to subsequent cash collections of the receivable.

Intangible assets are stated at cost, net of accumulated amortization which is computed using the straight-line method.

Deferred Charges -Debenture and stock issuance costs, research and development costs, organization costs, and pre-operating costs are deferred and amortized over 3-5years using the straight-line method.

Relevant Laws and Regulations of Mutual Savings & Finance Companies -In accordance with the relevant laws and regulations, at December 31, 1998, unaccrued liabilities and deferred assets of mutual savings & financecompanies of the subsidiaries of the Bank are as follows:

Accrued Severance Benefits -Employees, directors and statutory auditors with more than one year of service are entitled to receive a lump-sum payment upon termination of theiremployment with the Bank and consolidated subsidiaries based on their length of service and rate of payment at the time of termination.

The severance benefits are accrued in an amount which would be payable assuming all eligible employees, directors and statutory auditors terminatetheir employment as of the consolidated balance sheet date. In accordance with the revised accounting and reporting guidelines prescribed by thebanking regulatory authorities, effective 1, 1998, the Bank fully accrued all the underaccrued severance benefits which have been paid to employeesduring the years 1997 and 1998 under an early retirement program including 123,470 million of additional payments made during the year1998, which would be accrued ratably over three years under the previous method. As a result of these changes, net income for the year endedDecember 31, 1998 has been decreased by 97,657 million from that which would have been reported using the previous method.

Translation of Foreign Currency Financial Statements of Overseas Branches -The financial statements of overseas branches expressed in foreign currencies are translated at the exchange rates prevailing at the balance sheetdate, and are included in the accompanying consolidated financial statements.

Income Taxes -The provision for income taxes is comprised of corporate tax and resident tax surcharges payable for the current year. In conformity with accountingpractices prevailing in the Republic of Korea, the Bank does not recognize deferred income taxes arsing from temporary differences betweenamounts reported for financial accounting and income tax reporting purposes.

Earnings Per Common Share -Earnings per common share are computed using the weighted average number of common shares outstanding during the period.

Derivative Financial Instruments -Derivative financial instruments include futures, forwards and swap contracts, and are principally linked to interest rates, foreign exchange rates orequity indices.

Derivative financial instruments entered into for trading purposes are valued at current market prices. Resulting unrealized valuation gains or lossesare reflected in other revenues and expenses. Derivative financial instruments used for hedging purposes are accounted for in a manner consistentwith the accounting treatment appropriate for the transactions hedged or associated with such contracts.

The instruments are valued at fair value when the underlying transactions are valued at market, and resulting unrealized valuation gains or losses arerecognized currently. The instruments are not marked-to-market when the underlying transactions are not required to be valued at market. Theunrealized gains or losses on hedging transactions arising from different rates between derivatives and underlying transactions are amortized throughthe term of the underlying transactions.

Accounts Millions of Won

Premises and equipment (goodwill) and Loans (compensated credit) 20,420Underaccrued unrealized valuation losses on listed stocks (50% of total unrealized losses) 792Underaccrued severance benefits paid under an early retirement program 1,118

22,330

3. United States Dollar Amounts :The Bank and consolidated subsidiaries operate primarily in Korean Won and their official accounting records are maintained in Korean Won. TheU.S. Dollar amounts are provided herein as supplementary information solely for the convenience of the reader. All Won amounts are expressed inU.S. Dollars at the rate of 1,207.8 : US$1, the prevailing rate on December 31, 1998. This presentation is not required by or in accordance withKorean or United States generally accepted accounting principles, and should not be construed as a representation that the Won amounts showncould be converted, realized or settled in U.S. Dollars at this rate.

The 1997 U.S. Dollar amounts, which were previously expressed at 1,415.2 : US$ 1, the rate prevailing on December 31, 1997, have beenrestated to reflect the exchange rate in effect on December 31, 1998.

4. Cash and Due from Banks :At December 31, 1998, 218,344 million (excluding 20,709 million of interest receivable) of cash and due from Banks represent CashManagement Accounts in support of four merchant banks whose operations have been suspended.

Bank deposits which are restricted as to withdrawal at December 31, 1998 and 1997 comprise the following :

Checking accounts deposited with the Bank of Korea represent reserves required under the General Banking Act for the payment of deposits. Groupseverance deposits represent prepayments made under a group severance insurance plan and are restricted to the actual payment of severancebenefits (see Note 12)

5. Loans :Loans at December 31, 1998 and 1997 are summarized as follows

Millions of Won

1998 1997Checking accounts in Bank of Korea 206,016 117,322National Investment Fund in Bank of Korea 12,600 20,900Group severance deposits 456,876 603,003Foreign currency deposits and Others 155,706 17,733

831,198 758,958

Millions of Won

Annual Interest Rate(%) 1998 1997Won Currency Lonas :

Banking accounts ;Business loans 5.0-16.5 16,740,718 9,180,223Household loans 8.5-16.5 9,615,190 9,489,101Other loans 3.4-13.5 898,592 592,483Trust accounts ;Mortgage and collateralized loans 10.5-16.0 318,489 1,278,799Loans collateralized by trust benefits 10.4-15.2 36,194 189,112Loans by promissory notes and other 10.5-16.0 572,491 1,377,663Subsidiaries ;Consumer financing and factoring loans 12.3-25.0 1,875,627 1,290,805Financing lease receivables 10.5-25.0 391,329 443,122Loans to start-up venture business 15.0 160,762 117,814Discounted notes 11.9-25.0 160,985 298,466Mutual installment payments due 13.0-23.0 1,299,451 1,698,501Small unsecured loans and other 1.0-25.0 224,576 215,711

32,294,404 26,171,800FOREIGN CURRENCY LOANS :

Foreign currency loans LIBOR+1.3-6.0 3,852,959 2,167,813Offshore loans LIBOR+0.4-6.0 1,449,731 556,737IBRD, OECF sub-loans 6.0-7.1 62,151 75,011

5,364,841 2,799,56137,659,245 28,971,361


71

A substantial portion of loans are collateralized by mortgages on property and equipment and/or payment guarantees from Korean financialinstitutions.

At December 31, 1998, business loans in the banking accounts include 6,196,519 million of loans transferred from Korea Long Term Credit Bankand 178,694 million ( 326,968 million in trust accounts) of loans to Korea Credit Guarantee Fund in support of some merchant banks whoseoperations had been suspended.

During 1997, the Bank sold certain troubled loans amounting to 233,754 million to Korean Asset Management Company ( KAMCO ) andreflected losses of 151,392 million. The ultimate sales price of these loans is contingent upon the actual amounts realized by KAMCO on itsdisposal of the loans. In 1998, the Bank recognized additional gains and losses of 3,094 million and 22,752 million, respectively, based onKAMCO s disposal of a portion of these loans. In addition, 33,306 million of loans sold to KAMCO in 1997 were returned to the Bank in 1998and are recorded as loans in the accompanying non-consolidated balance sheet.

During 1998, the Bank sold certain troubled loans amounting to 755, 032 million to KAMCO, and reflected related losses of 426,731 million.The ultimate sales price is contingent upon the actual amounts realized by KAMCO on its disposal of the loans. Apart from the above, before themerger, Korea Long Term Credit Bank sold certain troubled loans amounting to 700,137 million to KAMCO, Rothschild Inc., and others, andreflected the related losses of 205,010 million in gains on business combination of capital surplus in the accompanying consolidated balance sheetas of December 31, 1998.

The maturities of loans at December 31, 1998 are as follows :

6. Securities :Securities at December 31, 1998 and 1997 comprise the following :

Millions of Won

Won Currency Loans Foreign Currency Loans Total1999 18,580,525 1,137,428 19,717,9532000 4,062,033 872,523 4,934,5562001 3,832,300 1,073,781 4,906,0812002 1,643,111 652,554 2,295,665Thereafter 4,176,435 1,628,555 5,804,990

32,294,404 5,364,841 37,659,245

Millions of Won

Annual Interest Rate(%) 1998 1997Traded Securities :

Monetary stabilization bonds 6.7-9.3 401,018 1,876,677Government and public bonds 5.0-17.0 242,450 728,370Corporate debentures 8.0-20.0 536,082 1,321,399Equity investments in listed companies — 154,041 724,429Securities in foreign currencies 9.39-11.69 105,823 81,395Other securities 9.0-19.9 3,263,780 3,909,609

4,703,194 8,641,879Investment Securities :

Monetary stabilization bonds 7.27-13.3 3,045,165 12,977Government and public bonds 3.0-20.0 4,711,874 2,250,616Corporate debentures 1.0-20.0 7,444,400 361,591Equity investments in listed companies — 142,802 20,000Equity investments in unlisted companies — 267,226 36,234Securities in foreign currencies Libor+0.25-5.50, 0.25 2,097,814 1,706,983OTC securities sold 9.09-19.90 61,751 551,969Other securities 5.99-20.0 1,162,651 144,882

18,933,683 5,085,25223,636,877 13,727,131

Government and public bonds and monetary stabilization bonds sold to customers under repurchase agreements amounted to 587,191 million atDecember 31, 1998 (see Note 13). These agreements provide repurchase dates of three to twelve months and bear interests at predetermined ratesthat approximate the current money market rate.

Equity investments in listed companies had a quoted market value of 296,051 million at December 31, 1998.

7. Premises and Equipment :

Premises and equipment at December 31, 1998 and 1997 comprise the following :

Premises and equipment are covered by insurance policies against fire and other casualty losses in accordance with the respective regulationsapplicable to the Bank and its subsidiaries.

8. Other Assets :Other Assets at December 31, 1998 and 1997 are comprised of the following :

Millions of Won

1998 1997Land 840,722 588,502Buildings and structures 576,027 410,082Equipment and vehicles 512,963 432,903Construction in progress 32,586 138,771Intangible assets 85,293 27,785Guarantee deposits on leases 799,040 743,598

2,846,631 2,341,641Accumulated depreciation (see Note 12) (470,652) (372,675)

2,375,979 1,968,966

Millions of Won

1998 1997Prepaid expenses 307,107 150,603Accrued income 1,532,840 1,579,724Operating lease assets 568,526 753,247Rental assets 170,795 217,812Credit card 1,813,399 2,204,740Securities purchased with recourse 146,001 427,600Other accounts receivable 905,290 229,925Deferred charges 200,180 398,486Unamortized discount on debentures 569,113 16,114Domestic exchange settlement Credit 92,764 40,503Receivables on disposal of assets 288,919 26,124Forclosed assets 116,673 49,033Other 872,928 426,757

7,584,535 6,520,668


73

9. Deposits :Deposits at December 31, 1998 and 1997 comprise the following :

The trust accounts managed by the Bank consist primarily of money trusts. Money trusts are not subject to investment restrictions and arecommingled and managed jointly.

10. Borrowings :Borrowings at December 31, 1998 and 1997 comprise the following :

A substantial portion of other borrowings from the Bank of Korea mature within one year. Borrowings from the Government and lines of credit withthe National Investment Fund of the Bank of Korea are payable in quarterly installments within 15 years, including a maximum of seven and a half-year grace periods.

IBRD loans in foreign currencies are payable in equal semi-annual installments within 15 years, including maximum of five year grace periods.

Millions of Won

Annual Interest Rate(%) 1998 1997Banking accounts :

Demand deposits 1.0-3.0 3,955,990 3,219,137Time and savings deposits 1.0-12.6 27,588,992 14,639,113Mutual installments 9.0-10.5 3,307,336 5,226,041Certificates of deposit 6.4-20.4 531,522 1,865,976Foreign currency deposits 0.0-8.0 2,003,171 680,518Notes sold 6.4-18.45 114,752 119,066

37,501,763 25,749,851Trust accounts 8.73-10.7 3,413,366 9,586,864Mutual installments of subsidiaries 5.5-18.0 1,632,467 1,896,982

42,547,596 37,233,697

Millions of Won

Annual Interest Rate(%) 1998 1997Borrowings in foreign currencies:

IBRD loans 5.13-8.06 1,042,300 41,949Offshore borrowings Libor+0.0-2.75 1,158,943 445,075Other borrowings Libor+0.0-3.15 2,727,574 3,505,847

4,928,817 3,992,871Finance debentures issued :

Finance debentures in Won currency 6.28-17.69 9,989,002 240,000Finance debentures in foreign currencies Libor+0.0-1.9 2,091,313 1,269,750

12,080,315 1,509,75024,272,926 10,678,661

Millions of Won

Annual Interest Rate(%) 1998 1997Borrowings in Won currency :

Borrowings from Bank of Korea 3.0-5.0 1,327,453 591,297Borrowings from the government 0.0-9.0 487,108 214,436National Investment Fund 8.5 933 959Borrowings from the monetary institutions 5.0-19.95 639,845 1,213,100Borrowings from the non-bank financial institutions 7.0-16.85 973,630 1,161,525Debentures 5.0-19.95 2,806,600 1,339,454Other borrowings 0.5-13.43 1,028,225 655,269

7,263,794 5,176,040

At December 31, 1998, finance debentures issued by Kookmin Bank before merger comprise the following (in billions of Korean Won, in millions ofU.S. Dollars, DEM and H.K. Dollars) :

The 2nd series Won currency finance debentures are Kookmin bank debentures to be sold over the counter under the authorization by the bankingsupervisory regulation, which are payable in full after three years.

The third, fourth, fifth and sixth series foreign currency finance debentures were issued pursuant to a US$ 700 million Euro Medium Term NoteProgram, and the tenth series foreign currency finance debentures were issued pursuant to a US$ 1,500 million Euro Medium Term Note Program.Among the foreign currency finance debentures, call redemption options can be executed on or after 3 years from the issuance date for the secondseries foreign currency finance debentures, on or after 5 years from the issuance date for the seventh series foreign currency finance debentures andUS$ 50 million of foreign currency finance debentures assumed from Daedong Bank and listed on the Luxembourg Stock Exchange.

As of December 31, 1998, finance debentures issued by Korea Long Term Credit Bank before its merger comprise the following (in billions of KoreanWon, in millions of U.S. Dollars and A.U. Dollars) :

Annual Interest

Series Issue Date Amounts Rate(%) Due Date Listing

(Won Currency)1st (*) Dec. 24, 1997 240 12.43 Mar. 31, 2003 —2nd During 1998 76.6 6.87-16.01 During 2001 sold over the counter-3rd(*) Dec. 29, 1998 100 11.43 Mar. 31, 2004 —4th(*) Dec. 29, 1998 53.6 12.43 Mar. 31, 2004 —Daedong Bank (*) Dec. 24, 1997 25.3 13.43 Mar. 31, 2003 —

(Foreign Currencies)1st Dec. 9, 1994 US$ 12 Libor+0.3 Dec. 9, 1999 Hong Kong, Singapore2nd Jun. 15, 1995 US$ 17 Libor+0.275 Jun. 15, 2000 Luxembourg3rd May 21, 1996 US$ 100 Libor+0.3 May 21, 1999 London4th Jul. 8, 1996 US$ 50 Libor+0.35 Jul. 8, 2001 Hong Kong5th Oct. 29, 1996 DEM 150 Libor+0.3 Oct. 29, 1999 Frankfurt6th Oct. 29, 1996 HK$1,000 Libor+0.4 Oct. 29, 1999 Hong Kong7th(*) Dec. 30, 1996 US$ 200 Libor+0.6 Dec. 30, 2006 Luxembourg10th Sep. 19, 1997 US$ 100 Libor+0.79 Sep. 19, 2002 London11th Nov. 12, 1998 US$ 10 Libor+0.5 Nov. 12, 2000 —12th Nov. 16, 1998 US$ 10 Libor+0.5 Nov. 16, 2000 —13th Dec. 21, 1998 US$ 10 Libor+0.5 Dec. 21, 2000 —Daedong Bank May 28, 1996 US$ 28 Libor+0.42 May 28, 1999 —Daedong Bank(*) Nov. 21, 1996 US$ 50 Libor+0.85 Nov. 21, 2006 LuxembourgDaedong Bank Jun. 20, 1997 US$ 35 Libor+0.5 Jun. 21, 1999 —

(*) Subordinated finance debentures

Annual Interest

Series Issue Date Amounts Rate(%) Due Date Listing(Won Currency)

Subordinated debentures 379.8 15.66 after 5years from the issuance date —Coupon debentures 256.4 7.35-17.63 after 1 to 5years from the issuance date —Discounted debentures 5,668.8 6.28-15.18 after 1 to 3years from the issuance date —Compound interest debentures 3,190.5 7.39-17.69 after 1 to 5years from the issuance date —

(Foreign Currencies)1st Jul. 5, 1994 US$ 22 Libor+0.3 Jul. 5, 1999 H.K., Singapore2nd Feb. 27, 1995 US$ 200 Libor+0.3 Feb. 27, 2000 Hong Kong3rd Mar. 28, 1996 US$ 200 Libor+0.3 Mar. 28, 1999 London4th Jun. 25, 1996 US$ 200 Libor+0.25 Jun. 25, 1999 London5th Oct. 1, 1996 US$ 100 Libor+0.31 Oct. 1, 2001 —6th Dec. 17, 1996 AU$ 125 Libor+0.2475 Dec. 17, 1999 —7th Jul. 7, 1997 US$ 5 Libor+0.45 Jul. 19, 2000 London8th Jul. 25, 1997 US$ 3 Libor+0.47 Jul. 25, 2000 London9th Oct. 30, 1997 US$ 100 Libor+1.2 Oct. 30, 2002 —10th Dec. 3, 1997 US$ 50 Libor+1.9 May 10, 1999 —11th Jun. 29, 1998 US$ 25 Libor Flat Jun. 15, 2004 —


75

Korea Long Term Credit Bank, before its merger, was authorized by law to sell long-term bank debentures up to an amount of 20 times of itsshareholders equity. Put redemption options were executed during 1997 and 1998 for US$ 128 million of the first series foreign currency financedebentures and US$ 147 million of the eighth series foreign currency finance debentures, respectively. The second put redemption option can beexecuted in July 1999 for the remaining eighth series foreign currency finance debentures.The eleventh series foreign currency finance debentures are subordinated convertible debentures whose details are as follows :Purchaser : International Finance CorporationConversion stock : common stock of Korea Long Term Credit BankConvertible period : September 30, 1998-June 14, 2004Conversion price : 5,000Conversion exchange rate : US$1: 1,420Disbursement at due date : 100% of par value

The Bank is authorized by the banking supervisory regulation to issue Won currency finance debentures up to an amount of 100% of itsshareholders equity. Under the authorization in accordance with the revised banking supervisory regulation effective January 15, 1999, however,the Bank can exceed the limit only if additional debentures are issued to refund the Won currency finance debentures which Korea Long Term CreditBank issued before the merger.

The maturities of borrowings at December 31, 1998 are as follows :

11. Guarantees Outstanding :Guarantees outstanding at December 1998 and 1997 comprise the following :

As permitted by the accounting and reporting guidelines of the banking regulatory authorities, the Bank has not provided an allowance for possiblelosses which may result from credit risk exposures on outstanding guarantees. If the Bank were to recognize a provision for anticipated losses on theoutstanding guarantees for which the credit risk classification, the additional provision for losses would be 53,138 million at December 31, 1998.

12. Provisions :Provisions at December 31, 1998 and 1997 comprise the following :

Millions of Won

1998 1997Guarantees in Won currency 455,776 206,572Guarantees and acceptances in foreign currencies 2,185,568 701,274

2,641,344 907,846

Millions of Won

1998 1997Accrued severance benefits (see Note 2) 614,065 733,821Possible loan losses (see Note 2) 2,273,075 429,287 Unrealized losses on securities (see Note 6) — 316,946Accumulated depreciation (see Note 7) 470,652 372,675Other (see Note 2) 450,835 463,988

3,808,627 2,316,717

Millions of Won

Won Currency Foreign Currency Finance Debentures TotalBorrowings Borrowings Issued

1999 3,707,568 1,479,934 6,335,866 11,523,3682000 1,301,733 1,515,240 3,756,400 6,573,3732001 626,617 996,108 709,011 2,331,7362002 397,414 225,236 184,069 806,719Thereafter 1,230,462 712,299 1,094,969 3,037,730

7,263,794 4,928,817 12,080,315 24,272,926

Provisions for accrued severance benefits are funded approximately 74.4% at December 31, 1998 through a group severance deposit plan (see Note4). As of December 31, 1998, other provisions of 449,624 million represent accumulated depreciation of assets held and leased to third partiesunder operating lease and rental agreements (see Note 2).

13. Other liabilities :

Other liabilities at December 31, 1998 and 1997 are comprised of the following :

14. Commitments and Contingencies :

In the normal course of business, the Bank and its controlled subsidiaries make various commitments and incur certain contingent liabilities,consisting primarily of commitments to extend credit and letters of credit which are not recorded in the accompanying consolidated financialstatements. At December 31, 1998, commitments under letters of credit, unpaid spot exchange and endorsed notes aggregated 1,066,666million, 1,013,160 million and 38,185 million, respectively. The Bank and its controlled subsidiaries do not anticipate any material losses fromthese commitments and contingent liabilities.

The Bank and its controlled subsidiaries have entered into various agreements to exchange different currencies at predetermined future dates andrates. The Bank and its controlled subsidiaries have also entered into various interest related agreements with customers, including interest swapcontracts, interest rate option contracts and contracts for interest rate futures. At December 31, 1998, those derivatives contracts aggregated

11,579,982 million. During the year ended December 31, 1998, 496,928 million of gains and 482,621 million of losses on derivativescontracts of the Bank were recorded in other operating income and expenses, respectively (see Notes 18 and 20).

The Bank s operations will be affected for the foreseeable future by the adverse economic conditions of Thailand, Indonesia, Malaysia, Philippines,Brazil and Argentina, whose economies have entered into a period of significant financial volatility arising from unbalanced exchange demands andsupplies. The ultimate effect that these significant uncertainties will have on the stated value of the Bank s assets and liabilities at the balance sheetdate cannot presently be determined.

Accordingly, the accompanying consolidated financial statements do not contain adjustments related to these uncertainties. At December 31, 1998,total loans provided to entities located in those countries approximate 216,331 million (U.S. Dollar equivalent of US$ 179 million) and the Bank sinvestments in securities issued by entities in those countries approximate 300,200 million (U.S. Dollar equivalent of US$ 249million).Additionally, at December 31, 1998, the total assets of Kookmin Bank Singapore (Merchant Bank) Ltd., Kookmin Finance Asia Ltd., Kookmin Leasing& Finance (Hong Kong) Ltd. and KLB Asia Finance Ltd., the consolidated subsidiaries established in Singapore and Hong Kong, amount to

1,073,587 million.

The Bank and its subsidiaries have been named as the defendant in 63 legal actions amounting to 12,431 million, which have arisen from normalbusiness activities. Management believes that these actions are without merit and that the ultimate liability, if any, will not materially affect theBank s consolidated financial position.

Under the decision of the Financial Supervisory Commission, the Bank took over certain assets and liabilities of Daedong Bank by the method ofpurchase and assumption. The deficiency of the purchased assets against the assumed liabilities can be recovered from Korea Deposit InsuranceCorporation. In addition, the Bank retains a put-back option, a right to transfer the purchased assets to Korea Asset Management Corporation or tobe compensated for the losses from Korea Deposit Insurance Corporation, for non-performing assets within September 30, 1999 without the Bank sfault.

Millions of Won

1998 1997Accrued expenses 2,616,812 1,465,891Accrual trust dividends 364,850 420,783Unearned income 128,749 108,746Securities sold with recourse (see Note6) 587,191 1,466,841Agencies 136,747 397,054Deferred credit 122,813 216,475Due to trust account 176,934 22,017Other accounts payable 400,056 26,866Other 705,598 430,152

5,239,750 4,554,825


77

The operations of the Bank and its subsidiaries have been affected, and may continue to be affected, for the foreseeable future by the unstableeconomic conditions in the Republic of Korea and the Asia Pacific region. Specific factors that impact the Bank and its subsidiaries include highinterest rates, increased unemployment in Korea, limited availability of credit, significant numbers of corporate bankruptcies, etc. and the generaldeterioration of the economies of countries in the Asia Pacific region. The ultimate effect of these uncertainties on the stated amounts of assets andliabilities at the balance sheet date cannot presently be determined, and accordingly the consolidated financial statements do not include anyadjustments that might result from these uncertainties. Related effects will be reported in the consolidated financial statements as they becomeknown and estimable.

As of December 31, 1998, the BIS capital ratio of the Bank to be reported to the banking regulatory authorities, as reported by the Bank based onthe accompanying consolidated financial statements is 10.09%.

15. Stock Issuance :

The Bank issued 236,299,636 shares of common stock and 40,000,000 shares of preferred stock as of December 31, 1998

The Bank s common stocks which were issued as Global Depositary shares and listed on London Stock Exchange are 11,707,665 shares as ofDecember 31, 1998.

During the year 1998, the changes of stock issuance comprise the following (in millions of Won) :

The preferred stock is non-participating and non-cumulative preferred stock issued to Korea Deposit Insurance Corporation ( KDIC ) (dividend rate :1%). The Bank has the priority right to purchase from KDIC 28,000,000 shares and 12,000,000 shares of the preferred stock after 3 years and 3month from the issuance date and after 5 year and 3 month from the issuance date, respectively.

The Bank can issue convertible bond and bond with warranty to grant stock right to common stock or preferred stock within 2,500 billion and500 billion of total par value, respectively, to other than shareholders. At December 31, 1998, the Bank has subordinated foreign currency

convertible bond of 30, 195 million (equivalent of US$ 25 million) (see Note 10).

16. Capital Surplus :

The changes in capital surplus for the year ended December 31, 1998 comprise the following :

Date Description Shares Amount

Common StockAs of January 1, 1998 Carried over 104,640,236 523,201February 28, 1998 Stock dividend 2,929,926 14,650May 15, 1998 Issuance for cash (*) 49,180,328 245,90May 16, 1998 Revaluation surplus transferred into stock 29,782,593 148,913December 31, 1998 Merger (see Note 24) 49,766,280 248,831As of December 31, 1998 236,299,363 1,181,497Preferred StockDecember 28, 1998 Issuance for cash 40,000,000 200,000

276,299,363 1,381,497

(*) The cash received in excess of par value amounting to 132,786 million was credited to capital surplus (see Note 16)

Millions of Won

Beginning Balance Increase Decrease Ending Balance

Paid-in capital in excess of par value (see Note 15) 472,924 132,786 — 605,710Gains on business combination (see Note 24) — 397,669 — 397,669Revaluation surplus (see Note 15) 330,274 15,695 161,033 184,936Other capital surplus (3,018) 796 — (2,222)

800,180 546,946 161,033 1,186,093

During the year ended December 31, 1998, revaluation surplus increased due to asset revaluation of Bukook Mutual Savings & Finance Co., Ltd. anddecreased due to the transfer of 148,913 million to common stock, the 4,132 million payment of revaluation tax and the 7,988 million recoveryof accumulated deficit. The Bank recorded 711 million of gains on disposal of odd-lots and stock acquired in conjunction with stock dividends andmerger with Korea Long Term Credit Bank and 85 million to be incurred due to the merger among subsidiaries as other capital surplus.

17. Retained Earnings and Capital Adjustment :

Retained earnings at December 31, 1998 and 1997 comprises the following :

The General Banking Act requires the Bank to appropriate as a legal reserve a minimum of 10% of annual income before income taxes, until thelegal reserve equals paid-in capital. This reserve is only available to offset accumulated deficit, if any, or to be transferred to paid-in capital inconjunction with a stock dividend. As of December 31, the legal reserve includes 96,840 million of the merged Korea Long Term Credit Bank.

Prior to 1995, the Bank appropriated as a general purpose contingency reserve a certain portion of retained earnings by the accounting andreporting guidelines of the banking regulatory authorities then in effect. The Bank is no longer required to do so.

By approval at the annual shareholders meeting for the fiscal year 1996, the Bank appropriated, as a reserve for dividends, 15,000 million ofretained earning which was within distributable amounts (50% of net income) less actual dividends in accordance with the accounting and reportingguidelines of the banking regulatory authorities. This reserve is available for payment of dividends only if the dividend rate is below that of theprevious year. 14,650 million of this reserve was used for stock dividends in 1997.

The reserve for business rationalization is appropriated in accordance with Korean tax law in an amount determined by related deductions fromtaxable income. This reserve is not available for payment of cash dividends, but may be transferred to capital stock or used to reduce accumulateddeficit, if any. As of December 31, the reserve for business rationalization includes 32,760 million of reserve transferred from Korea Long TermCredit Bank.

Pursuant to the Korean tax laws, the Bank is allowed to claim amounts of retained earnings appropriated for reserves for overseas investment lossesand technology development as deductions from taxable income for the current year. These reserves are not available for the payment of dividendsuntil used for the specified purpose or reversed.

Relevant Japanese regulations require the Bank s overseas branches located in Japan to appropriate a minimum of 10% of annual income beforeincome taxes as a Japanese legal reserve, until such reserve equals 2,000 million. This reserve is not available for the payment of cash dividends,and may be utilized upon liquidation of the Japanese branches. The Bank recorded this reserve in other reserves including 30 million of decreasedue to the devaluation of Korean Won currency.

The trust accounts provision for future trust losses amounting to 7,211 million is included in retained earnings carried over to the subsequentyear as of December 31, 1998.

Capital adjustment at December 31, 1998 and 1997 is summarized as follows:

Millions of Won

1998 1997Legal reserve 256,840 150,000General purpose contingency reserve 398,600 388,600Reserve for dividends 350 350Reserve for business rationalization 33,838 900Reserve for technology development 4,100 8,200Reserve for overseas investment losses 33,100 39,300Other reserves 913 944Unappropriated accumulated earnings (deficit) (318,902) 146,076

408,839 734,370

Millions of Won

1998 1997Stock dividends — 14,650Treasury stock (60) —Unrealized valuation losses on investment securities (14,310) —

(14,370) 14,650


79

18. Other Operating Income :

Other operating income for the years ended December 31, 1998 and 1997 is comprised of the following :

19. General and Administrative Expenses :

General and administrative expenses for the years ended December 31, 1998 and 1997 are summarized as follows :

20. Other Operating Expenses :Other operating expenses for the years ended December 31, 1998 and 1997 are comprised of the following :

Millions of Won

1998 1997Gains on foreign exchange 289,687 245,769Gains on derivatives contracts 496,928 447,222Gains on securities transactions 318,467 109,338Other 127,083 142,395

1,232,165 944,724

Millions of Won

1998 1997Salaries and wages 382,794 411,497Overhead expenses :

Employee benefits 172,059 197,355Development costs 24,756 21,178Other 182,022 186,632

378,837 405,165761,631 816,662

Millions of Won

1998 1997Provision for possible loan losses 1,274,049 265,326Provision for accrued severance benefits 281,284 158,252Depreciation of premises and equipment 100,338 95,837Depreciation of operating lease and rental assets 126,382 155,526Losses on foreign exchange 111,313 195,006Losses on derivatives contracts 482,621 436,967Losses on securities transactions 414,739 217,242Other 130,562 158,049

2,921,288 1,682,205

21. Consolidation Adjustment Credit and Debit :The changes in consolidation adjustment debit are as follows :

The changes in consolidation adjustment credit are as follows :

22. Related Party Transactions :Significant transactions, eliminated from the accompanying consolidated financial statements, between the Bank and its controlled subsidiaries for theyear ended December 31, 1998 and the related account balances at December 31, 1998 are as follows :

1) Account Balances

2) Transactions

As of December 31, 1998, the Bank had 61,942 million of loans, 651,899 million of due from banks, 966 million of call loans, 42,264million of call money, 34,756 million of the borrowings with foreign subsidiaries. Additionally, the Bank had 30,575 million of the customer sliabilities on guarantees provided for its subsidiaries. Kookmin Leasing Co., Ltd. had 1,111 million and US$134,496 thousand of the customer sliabilities on guarantees provided for Kookmin Rental Co., Ltd. and Kookmin Leasing & Finance (Hong Kong) Ltd. , respectively.

Millions of Won

SubsidiariesInitial Amortization Balance as of

Balance Prior years 1998 Dec 31, 1998Kookmin Credit Card Co., Ltd. 451 — 90 361Kookmin Leasing Co., Ltd. 44,055 — 8,811 35,244Kookmin Rental Co., Ltd. 24,927 — 4,985 19,942

69,433 — 13,886 55,547

Millions of Won

SubsidiariesInitial Amortization Balance as of

Balance Prior years 1998 Dec 31, 1998Kookmin Credit Card Co., Ltd. 15,095 7,876 3,019 4,200Kookmin Venture Capital Co., Ltd. 1,770 967 354 449Kookmin Rental Co., Ltd. 251 50 50 151Kookmin Bank Venture Capital Co., Ltd. 63 — 63

17,179 8,893 3,423 4,863

Millions of Won

Subsidiaries Credit Card Account Loans Deposits

Kookmin Credit Card Co., Ltd. 670,726 214,710 1,982Kookmin Leasing Co., Ltd. — 143,946 3,768Kookmin Venture Capital Co., Ltd. — 130,000 491Kookmin Rental Co., Ltd. — 130,000 301,672Four mutual savings & finance companies — 52,384 55,392

670,726 671,040 363,305

Millions of Won

Subsidiaries Commissions Interest Income Interest Expenses

Kookmin Credit Card Co., Ltd. 57,072 112,764 128Kookmin Leasing Co., Ltd. — 22,525 374Kookmin Venture Capital Co., Ltd. 317 17,907 52Kookmin Rental Co., Ltd. — 17,267 5Four mutual savings & finance companies 49 8,176 2,879

57,438 178,639 3,438


81

23. Consolidated Cash Flow Information :Cash and cash equivalents at December 31, 1998 and 1997 as presented in the consolidated statements of cash flows comprise the following :

Transactions not affecting cash flows for the years ended December 31, 1998 and 1997 are as follows :

24. Business Combination :Under the contract of merger with Korea Long Term Credit Bank ( KLB ) dated at September 29, 1998 and the approval of the shareholdersmeeting dated at October 31, 1998, the Bank merged with KLB on December 31, 1998.

KLB was incorporated in 1967 under the laws of the Republic of Korea and is engaged in the banking and trust business according to the provisions ofthe Long Term Credit Bank Law and the Trust Business Act and operates through 45 local branches and 4 overseas networks as of December 31, 1998.

The Bank issued 49,766,280 shares of common stock under the merger agreement, exchanging 0.5425 shares of the Bank s common stock for eachshare of KLB. As of December 31, 1998, the Bank has 15,883 shares of treasury stock acquired due to the execution of stock put option by certainshareholders of KLB before merger (see Note 18).

Summary of financial information of KLB for the year ended December 31, 1998 is as follows (in millions of Won) :

(Banking Accounts)-Summary of Balance Sheet

-Summary of Statement of Income

Millions of Won

1998 1997Cash and due from banks 5,765,611 4,343,044Call loans 1,020,835 483,815Foreign exchange 764,159 849,715Securities purchased with recourse 146,001 427,600

7,696,606 6,104,174

Millions of Won

1998 1997Loans charged off 100,506 135,251Asset revaluation 16,166 335,006Acquisition of foreclosed assets by the settlement of loans 82,033 —Capital adjustment by unrealized valuation losses 14,310 —Decrease of borrowings by foreign exchange credit 128,216Stock dividends and transferred to commonstock 14,650 14,650Increase of assets due to merger 18,260,803 —Increase of assets due to purchase and assumption 3,114,235 —Change of reporting entities 58,331 76,324

Assets Liabilities and Shareholder s EquityCash and due from Banks 431,933 Deposits 1,849,381Loans 9,500,911 Borrowings 12,725,888Call loans 680,462 Guarantees outstanding 1,662,892Securities 5,518,719 Others 2,504,674Customers liabilities on guarantees 1,662,892 Total liabilities 18,742,835Others 1,723,958 Shareholders equity 776,040

19,518,875 19,518,875

Expenses Revenue

Operating expenses 2,732,238 Operating income 2,686,057Non-operating expenses 229,723 Trust fees to the bank 13,365Income taxes 1,685 Non-operating income 8,252Net loss (255,972)

2,707,674 2,707,674

(Trust Accounts)-Summary of Balance sheet

-Summary of Statements of operations

The Bank included only the balance sheet of KLB in the accompanying consolidated financial statements for the year ended December 31, 1998.The statement of income of KLB was not included in the accompanying consolidated financial statements. Certain accounts in the balance sheets ofKLB were changed and reclassified according to the accounting and reporting guidelines of the Bank.

The assets and liabilities of KLB were accounted for its book value as of December 31, 1998 in accordance with the accounting standards for businesscombination.

As of December 31, 1998, the details of the gains on business combination are as follows :

25. P&A Contract :Under the decision of the Financial Supervisory Commission in accordance with the Act concerning the Structural Improvement of the FinancialIndustry, the Bank took over certain assets including the loans classified as normal or precautionary and most liabilities of Daedong Bank dated atJune 29, 1998, by the method of purchase and assumption, and the deficiency of the purchased assets against the assumed liabilities is to becompensated by Korea Deposit Insurance Corporation ( KDIC ).

At June 29, 1998, the assets, liabilities and commitments and contingencies purchased or assumed from Daedong Bank were as follows (in millions of Won) :

(Banking Accounts)

Assets Liabilities

Cash and due from banks 46,705 Money trusts 2,306,563Loans 671,032 Security trusts 84,910Call loans 880,888 Security investment trusts 8,492,044Securities 10,290,033 Other liabilities 2,084,251Other assets 979,819 Provisions for future trusts 313Due from banking accounts 132,998 Provisions for possible loan losses 33,394

13,001,475 13,001,475

Expenses Revenue

Dividend of trust profit to beneficiaries 2,019,784 Interest on loans 116,995 Commission paid 657,388 Interest and dividends on securities 1,712,266Losses on securities transactions 840,813 Interest on call loans 245,294Trust fees to the bank 108,070 Gains on securities transactions 517,985Other expenses 52,600 Other income 1,086,115

3,678,655 3,678,655

Description Millions of Won

Assets 19,518,875Liabilities 18,742,835Net assets 776,040Less; stock delivered due to merger (common stock: 49,766,280 shares) (248,831)Adjustments (*) (129,540)Gains on business combination 397,669

(*) The adjustments are legal reserve of 96,840 million and business rationalization reserve of 32,760 million deducted by treasury bond of60 million.

Assets Liabilities

Cash and due from banks 158,468 Deposits 1,928,282Loans 2,065,123 Borrowings 1,170,573Securities 354,766 Guarantees outstanding 390,527Customers liabilities on guarantees 390,517 Other liabilities 1,131,735Other assets 392,961

3,361,845 4,621,117


83

(Trust Accounts)

At December 31, 1998, debentures received and receivable from the purchase and assumption arrangements of KDIC are as follows :

Debentures received from KDIC will mature in five years with interest rates of 10% to 15%. In addition, the Bank retains a put-back option, a rightto transfer the assumed assets to Korea Asset Management Corporation or to be compensated for the losses from KDIC, and for non-performingassets within a year after the assumption.

In accordance with the P&A accounting guidelines of the Financial Supervisory Commission, the Bank classified the troubled loans as precautionary ina credit risk classification for provision for possible loan losses, and recorded losses on securities transactions, advances to customers, accrued interestincome related to KDIC and others as other accounts receivable, accrued income or accounts payable considering 10% of interest rate. The Bankissued 200,000 million of the preferred stock to KDIC in relation to the contract of purchase and assumption (see Note 15).

No guarantee trusts of Daedong Bank were transferred to banking accounts to compensate for the deficiency of the purchased assets against theassumed liabilities. The transferred assets and liabilities of no guarantee trusts of Daedong Bank were as follows (in millions of Korean Won):

Assets Liabilities

Loans 179,732 Money trusts 617,705Securities 142,979 Provisions for future trusts 121Other assets 4,936 Provisions for possible loan losses 2,416Due from banking accounts 243,565 Other liabilities 80,285

571,212 700,527

Commitments and Contingencie

Letters of Credit 69,371Unpaid spot exchange 13,566Derivatives contracts 107,172

Description Millions of WonLiabilities over assets (banking Accounts and trust accounts) 1,388,587Expenses related to the assumption 359,735Core deposit value of Daedong Bank (18,801)Accrued interest on this receivable 49,729Debentures received from Korea Asset Management Corporation (144,831) 1,634,419Valuation adjustments (294,102)Debentures from KDIC ;

Received 1,065,100Receivable 275,217 1,340,317

Assets Liabilities

Loans 132,215 Other liabilities 284,147Securities 39,876 Provisions for possible loan losses 13,081Due from banking accounts 115,961Other assets 9,176

297,228 297,228

Documents

ontents - KB 국민은행img2.kbstar.com/obj/eng/Kookmin1998.pdf · Credit Bank. Following the merger, we have integrated retail and corporate banking know-how from both sides, combining