Disclosure of risk management | 4. RISK MANAGEMENT The Group’s operating activity is exposed to various financial risks. The Group is required to analyze and assess the level of complex risks, and determine the permissible level of risks and manage such risks. The Group’s risk management procedures have been established to improve the quality of assets for holding or investment purposes by making decisions as how to avoid or mitigate risks through the identification of the source of the potential risks and their impact. The Group has established an approach to manage the acceptable level of risks and reduce the excessive risks in financial instruments in order to maximize the profit given risks present, for which the Group has implemented processes for risk identification, assessment, control, and monitoring and reporting. The risk is managed by the risk management department in accordance with the Group’s risk management policy. The Risk Management Committee makes decisions on the risk strategies such as the allocation of risk capital and the establishment of acceptable level of risk. (1) Credit risk Credit risk represents the possibility of financial losses incurred when the counterparty fails to fulfill its contractual obligations. The goal of credit risk management is to maintain the Group’s credit risk exposure to a permissible degree and to optimize its rate of return considering such credit risk. 1) Credit risk management The Group considers the probability of failure in performing the obligation of its counterparties, credit exposure to the counterparty, the related default risk and the rate of default loss. The Group uses the credit rating model to assess the possibility of counterparty’s default risk; and when assessing the obligor’s credit grade, the Group utilizes credit grades derived using statistical methods. In order to manage credit risk limit, the Group establishes the appropriate credit line per obligor, company or industry. It monitors obligor’s credit line, total exposures and loan portfolios when approving the loan. The Group mitigates credit risk resulting from the obligor’s credit condition by using financial and physical collateral, guarantees, netting agreements and credit derivatives. The Group has adopted the entrapment method to mitigate its credit risk. Credit risk mitigation is reflected in qualifying financial collateral, trade receivables, guarantees, residential and commercial real estate and other collaterals. The Group regularly performs a revaluation of collateral reflecting such credit risk mitigation. 2) Maximum exposure to credit risk The Group’s maximum exposure to credit risk refers to net book value of financial assets net of allowances, which shows the uncertainties of maximum changes of net value of financial assets attributable to a particular risk without considering collateral and other credit enhancements obtained. However, the maximum exposure is the fair value amount (recorded on the books) for derivatives, maximum contractual obligation for payment guarantees and unused commitment. The maximum exposure to credit risk is as follows (Unit: Korean Won in millions): June 30, 2018 December 31, 2017 Loans and other financial assets at amortized cost Korean treasury and government agencies 17,912,135 — Banks 21,942,788 — Corporates 92,333,155 — Consumers 145,531,925 — Subtotal 277,720,003 — Loans and receivables Korean treasury and government agencies — 8,823,584 Banks — 26,845,309 Corporates — 90,570,551 Consumers — 140,866,760 Subtotal — 267,106,204 Financial assets at FVTPL (IFRS 9) Deposit 24,921 — Debt securities 1,993,851 — Loans and receivables 336,967 — Derivative assets 2,391,211 — Subtotal 4,746,950 — Financial assets at FVTPL (IAS 39) Deposit — 25,972 Debt securities — 2,644,333 Financial assets designated at FVTPL — 9,694 Derivative assets — 3,115,775 Subtotal — 5,795,774 Financial assets at FVTOCI Debt securities 13,738,829 — AFS financial assets Debt securities — 13,229,244 Securities at amortized cost Debt securities 17,702,129 — HTM financial assets Debt securities — 16,749,296 Derivative assets Derivative assets (hedging) 12,395 59,272 Off-balance Guarantees 12,372,573 12,859,715 Loan commitments 98,251,006 80,760,325 Subtotal 110,623,579 93,620,040 total 424,543,885 396,559,830 a) Credit risk exposure by geographical areas The following tables analyze credit risk exposure by geographical areas (Unit: Korean Won in millions): June 30, 2018 Korea China USA UK Japan Others (*) Total Loans and other financial assets at amortized cost 258,023,468 4,589,930 4,514,541 1,268,461 400,907 8,922,696 277,720,003 Securities at amortized cost 17,531,402 — 64,856 — — 105,871 17,702,129 Financial assets at FVTPL 4,493,256 6,077 — 147,242 — 100,375 4,746,950 Financial assets at FVTOCI 12,749,695 50,874 43,352 78,485 2,274 814,149 13,738,829 Derivative assets 7,450 — — 4,945 — — 12,395 Off-balance 108,052,029 928,841 175,050 70,503 31,216 1,365,940 110,623,579 Total 400,857,300 5,575,722 4,797,799 1,569,636 434,397 11,309,031 424,543,885 December 31, 2017 Korea China USA UK Japan Others (*) Total Loans and receivables 250,678,479 4,104,912 2,823,247 1,094,988 381,890 8,022,688 267,106,204 Financial assets at FVTPL 5,551,870 2,937 — 148,955 — 92,012 5,795,774 AFS debt securities 12,407,602 52,259 151,131 — — 618,252 13,229,244 HTM securities 16,606,692 — 63,732 — — 78,872 16,749,296 Derivative assets 16,590 — — 42,682 — — 59,272 Off-balance 91,603,852 529,193 172,570 66,974 25,039 1,222,412 93,620,040 Total 376,865,085 4,689,301 3,210,680 1,353,599 406,929 10,034,236 396,559,830 (*) Others consist of financial assets in Indonesia, Hong Kong, Singapore, and other countries. b) Credit risk exposure by industries The following tables analyze credit risk exposure by industries, which are service, manufacturing, finance and insurance, construction, individuals and others in accordance with the Korea Standard Industrial Classification Code (Unit: Korean Won in millions): June 30, 2018 Service Manufacturing Finance and Construction Individuals Others Total Loans and other financial assets at amortized cost 48,025,922 35,583,702 42,207,115 3,657,220 138,906,711 9,339,333 277,720,003 Securities at amortized cost 1,142,178 — 11,516,407 313,936 — 4,729,608 17,702,129 Financial assets at FVTPL 97,529 166,054 3,404,674 43,899 3,019 1,031,775 4,746,950 Financial assets at FVTOCI 434,389 54,445 9,020,012 214,549 — 4,015,434 13,738,829 Derivative assets — — 12,395 — — — 12,395 Off-balance 18,236,857 22,675,034 9,503,718 4,052,757 49,105,163 7,050,050 110,623,579 Total 67,936,875 58,479,235 75,664,321 8,282,361 188,014,893 26,166,200 424,543,885 December 31, 2017 Service Manufacturing Finance and Construction Individuals Others Total Loans and receivables 47,192,641 34,502,509 38,260,051 3,574,746 133,094,287 10,481,970 267,106,204 Financial assets at FVTPL 100,766 83,239 4,640,068 15,073 1,040 955,588 5,795,774 AFS debt securities 707,737 37,719 7,331,774 153,534 — 4,998,480 13,229,244 HTM securities 1,348,754 — 10,962,149 296,214 — 4,142,179 16,749,296 Derivative assets — — 59,272 — — — 59,272 Off-balance 16,892,926 21,427,378 9,841,379 3,842,479 36,928,554 4,687,324 93,620,040 Total 66,242,824 56,050,845 71,094,693 7,882,046 170,023,881 25,265,541 396,559,830 3) Credit risk exposure The allowance to be recognized under IFRS 9 is the amount of expected 12-month Stage 1 Stage 2 Stage 3 Credit risk has not significantly Credit risk has Credit has been Allowance for expected credit losses Expected 12-month credit losses: Expected lifetime credit losses: Expected credit losses due to 12-month Expected credit losses from all possible defaults during the expected lifetime of the financial instruments. (*) Credit risk may be considered to not have been significantly increased when credit risk is low at the reporting date. The Group has estimated the allowance for credit losses based on experience losses with taken account of forward-looking information. The probability of default and loss at given default per financial assets considering account type of borrowers, credit rate grade, portfolio are used in estimation of allowance for expected credit losses and those factors are reviewed periodically to reduce the difference of expected losses and actual losses. The Group also measures expected credit losses using supportive and reasonable macroeconomic indicators, such as economic growth rates, interest rates, and composite stock indices. The methods for the estimation of forward-looking are also regularly reviewed. The Group undertakes the following procedures in order to predict and apply the forward-looking economic information: - Development of a prediction model by analyzing the correlation between macroeconomic data and yearly default rate of corporate and retail exposures. - Calculation of predicted annual default rate by applying forward-looking economic information, which includes estimated macroeconomic indices provided by verified institutions such as Bank of Korea and National Assembly Budget Office, to the prediction model developed. - If the predicted default rate is above the applicable default rate of the current period, application of the increase in default rate as a form of adjustment coefficient to the forward-looking economic information, thereby adjusting the current period estimation. At the end of each period the Group evaluates whether there has been a significant increase in the credit risk since initial recognition. The Group is assessing the change in the risk of a default occurring over the expected life of the financial instruments instead of the change in the amount of expected credit losses. The Group distinguishes corporates/consumers exposures when determining significant increase in credit risk, and the applied methodology is as follows: Corporates exposure Consumers exposure Under precautionary in assets quality More than 30 days past due Watch grade in early warning system Significant change of borrower financial situation (Working capital deficiencies, Adverse opinion, Disclaimer of opinion) Significant decreases in credit ratings Under precautionary in assets quality More than 30 days past due Significant decreases in credit ratings At the end of each reporting period, the Group assesses whether there is a significant increase in credit risk at the end of the reporting period compared to its initial recognition. The Group uses credit ratings, asset soundness, early warning systems, and delinquency days to determine whether the credit risk has significantly increased. The financial assets are impaired if the following conditions are met; - The principal and interest of the loan has been overdue for more than 90 days due to the serious deterioration of the credit condition, - It is deemed that the borrowers will not pay any portion of the debts without actions of recourse such as the disposition of the collateral is not taken - Objective evidence of impairment of financial assets are identified The Group writes off assets when it is determined that the receivables are virtually impossible to collect. The Group determines which receivable to write-off a) Financial assets The maximum exposure to credit risk, except for financial assets at FVTPL and derivative asset is as follows (Unit: Korean Won in millions): June 30, 2018 Stage 1 Stage 2 Stage 3 Total Loss Total, net Collateral Above Less than a Above Less than a Loans and other financial assets at amortized cost 246,719,865 18,794,529 6,195,331 5,772,369 2,068,664 279,550,758 (1,830,755 ) 277,720,003 789,660 Korean treasury and government agencies 17,916,231 — — — — 17,916,231 (4,096 ) 17,912,135 — Banks 21,599,560 83,471 269,742 — 10,905 21,963,678 (20,890 ) 21,942,788 — Corporates 72,113,414 15,745,380 582,857 3,618,576 1,482,948 93,543,175 (1,210,020 ) 92,333,155 555,228 General business 42,620,870 6,674,237 510,663 1,681,120 1,231,634 52,718,524 (843,365 ) 51,875,159 405,304 Small- and medium-sized 25,012,286 8,491,759 72,194 1,766,232 222,804 35,565,275 (327,323 ) 35,237,952 130,181 Project financing and others 4,480,258 579,384 — 171,224 28,510 5,259,376 (39,332 ) 5,220,044 19,743 June 30, 2018 Stage 1 Stage 2 Stage 3 Total Loss Total, net Collateral Above Less than a Above Less than a Consumers 135,090,660 2,965,678 5,342,732 2,153,793 574,811 146,127,674 (595,749 ) 145,531,925 234,432 Securities at amortized cost 17,707,379 — — — — 17,707,379 (5,250 ) 17,702,129 — Financial assets at FVTOCI (*3) 13,675,528 48,126 15,175 — — 13,738,829 (4,670 ) 13,738,829 — Total 278,102,772 18,842,655 6,210,506 5,772,369 2,068,664 310,996,966 (1,840,675 ) 309,160,961 789,660 (*1) Credit grade of corporates are AAA ~ BBB, and consumers are grades 1 ~ 6. (*2) Credit grade of corporates are BBB- (*3) Financial assets at FVTOCI have not been disclosed as the amount before deducting provisions because the carrying amount does not decrease. - Loans and receivables December 31, 2017 Corporates Korean Banks General Small and Project Subtotal Consumers Total Loans and receivables neither overdue nor impaired 8,825,767 26,861,286 50,463,112 34,107,547 5,547,950 90,118,609 139,886,407 265,692,069 Loans and receivables overdue but not impaired 8 — 65,616 63,067 — 128,683 878,406 1,007,097 Impaired loans and receivables — — 1,402,131 251,431 46,717 1,700,279 537,001 2,237,280 Total 8,825,775 26,861,286 51,930,859 34,422,045 5,594,667 91,947,571 141,301,814 268,936,446 Allowance for credit losses 2,191 15,977 1,078,733 267,162 31,125 1,377,020 435,054 1,830,242 Total, net 8,823,584 26,845,309 50,852,126 34,154,883 5,563,542 90,570,551 140,866,760 267,106,204 - Debt securities The Group manages debt securities based on the external credit rating. Credit soundness of debt securities on the basis of External Credit Assessment Institution (ECAI)’s rating is as follows (Unit: Korean Won in millions): December 31, 2017 Financial assets at AFS debt HTM securities Total AAA 1,685,099 9,897,689 15,806,327 27,389,115 AA- 722,923 2,386,567 888,547 3,998,037 BBB- 236,311 876,482 52,188 1,164,981 Below BBB- 9,694 68,506 2,234 80,434 Total 2,654,027 13,229,244 16,749,296 32,632,567 (*) Financial assets at FVTPL comprise debt securities held for trading and financial assets designated at FVTPL b) Guarantees and loan commitments The credit quality of the guarantees and loan commitments as of June 30, 2018 as follows (Unit: Korean Won in millions): June 30, 2018 Financial assets Stage 1 Stage 2 Stage 3 Total Above Less than a Above Less than a Off-balance 10,684,154 1,104,097 12,464 390,253 181,605 12,372,573 Loan commitments 92,335,107 3,717,790 1,455,884 740,283 1,942 98,251,006 Total 103,019,261 4,821,887 1,468,348 1,130,536 183,547 110,623,579 (*1) Credit grade of corporates are AAA ~ BBB, and consumers are grades 1 ~ 6. (*2) Credit grade of corporate are BBB- 4) Collateral and other credit enhancements There have been no significant changes in the value of collateral or other credit enhancements held by the Group during the current quarter, changes in collateral or other credit enhancements due to changes in the collateral policy of the Group. As of June 30, 2018, there are no financial assets that do not recognize the allowance for losses due to collateral. (2) Market risk Market risk is the possible risk of loss arising from trading activities and non-trading 1) Market risk management For trading activities and non-trading On a yearly basis, the Risk Management Committee establishes a Value at Risk (“VaR”, maximum losses) limit, loss limit and risk capital limit by subsidiaries for its management purposes. The limit by investment desk/dealer is independently managed to the extent of the limit given to subsidiaries and the limit by investment and loss cut is managed by the risk management personnel within the department. The Group uses both a standard-based and an internal model-based approach to measure market risk. The standard-based approach is used to calculate individual market risk of owned capital while the internal model-based approach is used to calculate general capital market risk and it is used to measure internal risk management measure. For the trading activities, the Risk Management department measures the VaR limit by department, risk factor and loss limit on a daily basis and reports regularly to the Risk Management Committee. 2) Sensitivity analysis of market risk The Group performs the sensitivity analyses both for trading and for non-trading For trading activities, the Group uses a VaR model that uses certain assumptions of possible fluctuations in market condition and, by conducting simulations of gains and losses, under which the model estimates the maximum losses that may occur. A VaR model predicts based on statistics of possible losses on the portfolio at a certain period currently or in the future. It indicates the maximum expected loss with at least 99% confidence level. In short, there exists a one percent possibility that the actual loss might exceed the predicted loss generated from the VaR calculation. The actual results are periodically monitored to examine the validity of the assumptions, variables, and factors that are used in VaR calculations. However, this approach cannot prevent the loss when the market fluctuation exceeds expectation. For the non-trading NII is a profit-based indicator for displaying the profit changes in short term due to the short-term interest changes. It will be estimated as subtracting interest expenses of liabilities from the interest income of assets. NPV is an indicator for displaying risks in economic view according to unfavorable changes related to interest rate. It will be estimated as subtracting the present value of liabilities from the present value of assets. EaR shows the maximum profit-loss amount, which indicates the maximum deduction amount caused by the unfavorable changes related to the interest rate of a certain period (i.e. 1 year). Interest rate VaR shows the potential maximum loss generated by the unfavorable changes during a certain period of time in the present or future. a) Trading activities The minimum, maximum and average VaR for the six months ended June 30, 2018 and for the year ended December 31, 2017, respectively, and the VaR as of June 30, 2018 and December 31, 2017, respectively, are as follows (Unit: Korean Won in millions): As of For the six months ended As of For the year ended Risk factor Average Maximum Minimum Average Maximum Minimum Interest rate 2,179 3,787 4,992 1,730 4,183 3,799 4,918 2,467 Stock price 2,872 2,524 4,618 1,138 909 2,863 4,419 909 Foreign currencies 4,224 4,853 6,136 3,695 4,750 5,051 6,636 4,061 Commodity price 2 1 4 — — 31 188 — Diversification (4,095 ) (4,745 ) (7,136 ) (1,749 ) (4,472 ) (4,621 ) (6,798 ) (2,067 ) Total VaR(*) 5,182 6,420 8,614 4,814 5,370 7,123 9,363 5,370 (*) VaR : Maximum losses b) Non-trading The NII and NPV are calculated for the assets and liabilities owned by the Bank and consolidated trusts, respectively, by using the simulation method. The scenario responding to interest rate (“IR”) changes are as follows (Unit: Korean Won in millions): June 30, 2018 December 31, 2017 NII(*1) NPV(*2) NII(*1) NPV(*2) Base case 4,497,407 23,856,916 4,916,138 23,472,792 Base case (Prepay) 4,491,363 23,546,002 4,916,015 23,163,942 IR 100bp up 5,022,303 23,803,250 5,361,546 22,886,122 IR 100bp down 4,051,601 23,933,844 4,386,437 24,127,559 IR 200bp up 5,992,145 23,766,488 5,806,723 22,372,208 IR 200bp down 3,672,050 24,043,703 3,452,590 24,830,482 IR 300bp up 6,848,435 23,742,304 6,251,897 21,929,189 IR 300bp down 3,527,210 24,201,770 2,254,609 26,633,807 (*1) NII: Net Interest Income (*2) NPV: Net Portfolio Value The interest EaR and VaR calculated based on the BIS Framework of subsidiaries other than the Bank and consolidated trusts are as follows (Unit: Korean Won in millions): June 30, 2018 December 31, 2017 EaR (*1) VaR (*2) EaR (*1) VaR (*2) 209,621 148,818 255,679 130,821 (*1) EaR: Earning at Risk (*2) VaR: Value at Risk The Group estimates and manages risks related to changes in interest rate due to the difference in the maturities of interest-bearing assets and liabilities and discrepancies in the terms of interest rates. Cash flows (both principal and interest) from non-trading, re-pricing June 30, 2018 Within 3 4 to 6 7 to 9 10 to 12 1 to 5 Over 5 Total Asset: Loans and other financial assets at amortized cost 148,324,408 41,273,662 9,372,945 8,650,081 47,212,644 4,314,787 259,148,527 Financial assets at FVTOCI 6,771,707 3,243,204 1,902,718 1,637,346 5,246,163 180,998 18,982,136 Securities at amortized cost 2,350,831 1,983,421 1,725,286 2,005,103 9,955,809 350,744 18,371,194 Total 157,446,946 46,500,287 13,000,949 12,292,530 62,414,616 4,846,529 296,501,857 Liability: Deposits due to customers 101,367,145 48,458,377 29,955,015 19,029,698 38,912,199 296,042 238,018,476 Borrowings 9,390,749 2,020,828 859,698 513,068 2,823,334 523,418 16,131,095 Debentures 979,221 1,801,149 2,183,459 2,407,879 18,625,611 2,727,547 28,724,866 Total 111,737,115 52,280,354 32,998,172 21,950,645 60,361,144 3,547,007 282,874,437 December 31, 2017 Within 3 4 to 6 7 to 9 10 to 12 1 to 5 Over 5 Total Asset: Loans and receivables 161,653,892 41,671,530 7,614,159 6,411,841 54,150,998 26,272,958 297,775,378 AFS financial assets 2,150,708 2,500,103 2,016,711 2,367,762 4,229,000 601,735 13,866,019 HTM financial assets 2,286,179 2,161,467 1,433,425 1,687,362 9,369,794 345,868 17,284,095 Total 166,090,779 46,333,100 11,064,295 10,466,965 67,749,792 27,220,561 328,925,492 Liability: Deposits due to customers 106,815,564 37,750,367 25,117,556 27,585,458 37,518,878 91,246 234,879,069 Borrowings 9,865,249 1,056,579 412,966 437,431 2,709,010 479,827 14,961,062 Debentures 1,955,902 2,452,240 1,018,563 1,752,847 19,770,538 2,869,766 29,819,856 Total 118,636,715 41,259,186 26,549,085 29,775,736 59,998,426 3,440,839 279,659,987 3) Currency risk Currency risk arises from the financial instruments denominated in foreign currencies other than the functional currency. Therefore, no currency risk arises from non-monetary Financial instruments in foreign currencies exposed to currency risk are as follows (Unit: USD in millions, JPY in millions, CNY in millions, EUR in millions, and Korean Won in millions): June 30, 2018 USD JPY CNY EUR Others Total Foreign Korean Foreign Korean Foreign Korean Foreign Korean Korean Korean Asset Loans and other financial assets at amortized cost 24,664 27,694,163 135,138 1,371,362 31,972 5,416,294 1,172 1,520,044 4,472,890 40,474,753 Financial assets at FVTPL 84 94,261 359 3,645 — — 36 46,488 75,122 219,516 Financial assets at FVTOCI 1,726 1,936,385 — — 300 50,874 — — 338,214 2,325,473 Securities at amortized cost 115 129,245 — — — — — — 105,949 235,194 Total 26,589 29,854,054 135,497 1,375,007 32,272 5,467,168 1,208 1,566,532 4,992,175 43,254,936 Liability Financial liabilities at FVTPL 63 70,963 505 5,127 — — 33 43,070 102,226 221,386 Deposits due to customer 11,160 12,517,349 145,058 1,472,035 21,633 3,664,842 1,230 1,595,651 2,700,164 21,950,041 Borrowings 6,417 7,201,536 2,211 22,438 — — 232 303,001 476,871 8,003,846 Debentures 3,708 4,159,175 — — — — — — 284,293 4,443,468 Other financial liabilities 3,240 3,633,942 23,541 238,890 5,568 943,321 140 182,002 4,602 5,002,757 Total 24,588 27,582,965 171,315 1,738,490 27,201 4,608,163 1,635 2,123,724 3,568,156 39,621,498 Off-balance 6,374 7,149,273 32,887 333,730 4,804 813,812 453 587,615 827,004 9,711,434 December 31, 2017 USD JPY CNY EUR Others Total Foreign Korean Foreign Korean Foreign Korean Foreign Korean Korean Korean Asset Loans and receivables 23,000 24,642,900 126,944 1,204,843 25,224 4,127,936 1,156 1,479,351 3,937,733 35,392,763 Financial assets at FVTPL 32 34,303 25 238 — — 27 34,583 104,892 174,016 AFS financial assets 1,966 2,105,972 — — 319 52,259 — 590 302,801 2,461,622 HTM financial assets 111 118,868 — — — — — — 78,175 197,043 Total 25,109 26,902,043 126,969 1,205,081 25,543 4,180,195 1,183 1,514,524 4,423,601 38,225,444 Liability Financial liabilities at FVTPL 41 43,423 79 752 — — 19 24,878 69,977 139,030 Deposits due to customer 13,744 14,725,686 195,176 1,852,440 21,865 3,578,142 883 1,129,802 2,396,826 23,682,896 Borrowings 6,604 7,080,118 2,218 21,056 — — 247 315,685 242,874 7,659,733 Debentures 3,467 3,714,411 — — 700 114,555 — — 375,749 4,204,715 Other financial liabilities 2,392 2,562,740 16,125 153,043 1,802 294,950 129 165,189 588,625 3,764,547 Total 26,248 28,126,378 213,598 2,027,291 24,367 3,987,647 1,278 1,635,554 3,674,051 39,450,921 Off-balance 8,108 8,687,009 33,624 319,127 1,199 196,261 406 519,843 176,886 9,899,126 (3) Liquidity risk Liquidity risk refers to the risk that the Group may encounter difficulties in meeting obligations from its financial liabilities. 1) Liquidity risk management Liquidity risk management is to prevent potential cash shortages as a result of mismatching the use of funds (assets) and sources of funds (liabilities) or unexpected cash outflows. The financial liabilities that are relevant to liquidity risk are incorporated within the scope of risk management. Derivatives instruments are excluded from those financial liabilities as they reflect expected cash flows for a pre-determined Assets and liabilities are grouped by account under Asset Liability Management (“ALM”) in accordance with the characteristics of the account. The Group manages liquidity risk by identifying the maturity gap and such gap ratio through various cash flows analysis (i.e. based on remaining maturity and contract period, etc.), while maintaining the gap ratio at or below the target limit. 2) Maturity analysis of non-derivative a) Cash flows of principals and interests by remaining contractual maturities of non-derivative June 30, 2018 Within 3 4 to 6 7 to 9 10 to 12 1 to 5 Over Total Financial liabilities at FVTPL 176,097 — — — — — 176,097 Deposits due to customers 145,033,422 38,505,386 22,976,591 24,574,059 7,487,432 2,144,802 240,721,692 Borrowings 6,407,137 2,639,064 1,876,893 1,478,115 3,238,353 545,403 16,184,965 Debentures 979,221 1,801,149 2,183,459 2,407,879 18,626,696 2,726,462 28,724,866 Other financial liabilities 14,098,508 216,627 3,644 908 621,127 1,955,992 16,896,806 Total 166,694,385 43,162,226 27,040,587 28,460,961 29,973,608 7,372,659 302,704,426 December 31, 2017 Within 3 4 to 6 7 to 9 10 to 12 1 to 5 Over Total Financial liabilities at FVTPL 168,442 155,984 1,717 512 375 — 327,030 Deposits due to customers 148,008,777 29,563,310 18,175,348 32,468,110 7,409,118 2,624,594 238,249,257 Borrowings 6,115,732 1,893,173 1,489,272 1,178,107 3,924,681 479,568 15,080,533 Debentures 1,955,255 2,452,565 1,018,714 1,744,731 19,770,380 2,869,699 29,811,344 Other financial liabilities 7,121,342 162,871 825 1,003 128,940 2,730,001 10,144,982 Total 163,369,548 34,227,903 20,685,876 35,392,463 31,233,494 8,703,862 293,613,146 b) Cash flows of principals and interests by expected maturities of non-derivative June 30, 2018 Within 3 4 to 6 7 to 9 10 to 12 1 to 5 Over 5 Total Financial liabilities at FVTPL 176,097 — — — — — 176,097 Deposits due to customers 154,934,637 40,340,567 20,220,152 18,154,029 6,115,894 348,774 240,114,053 Borrowings 6,407,137 2,639,064 1,876,893 1,478,115 3,242,839 540,917 16,184,965 Debentures 979,221 1,801,149 2,183,459 2,407,879 18,626,696 2,726,462 28,724,866 Other financial liabilities 14,098,508 216,627 3,644 908 621,127 1,955,992 16,896,806 Total 176,595,600 44,997,407 24,284,148 22,040,931 28,606,556 5,572,145 302,096,787 December 31, 2017 Within 3 4 to 6 7 to 9 10 to 12 1 to 5 Over 5 Total Financial liabilities at FVTPL 168,442 155,984 1,717 512 375 — 327,030 Deposits due to customers 159,146,602 31,298,562 16,667,130 21,995,294 6,487,047 2,278,756 237,873,391 Borrowings 6,115,732 1,893,173 1,489,272 1,178,107 3,924,681 479,568 15,080,533 Debentures 1,955,255 2,452,565 1,018,714 1,744,731 19,770,380 2,869,699 29,811,344 Other financial liabilities 7,121,342 162,871 825 1,003 128,940 2,730,001 10,144,982 Total 174,507,373 35,963,155 19,177,658 24,919,647 30,311,423 8,358,024 293,237,280 3) Maturity analysis of derivative financial liabilities Derivatives held for trading purpose are not managed in accordance with their contractual maturity, since the Group holds such financial instruments with the purpose of disposing or redemption before their maturity. As such, those derivatives are incorporated as “within 3 months” in the table below. Derivatives held for hedging purpose are estimated by offsetting cash inflows and cash outflows. The cash flow by the maturity of derivative financial liabilities as of June 30, 2018 and December 31, 2017 is as follows (Unit: Korean Won in millions): Remaining maturity Within 3 4 to 6 7 to 9 10 to 12 1 to 5 Over 5 Total June 30, 2018 2,377,750 2,130 — — 59,820 5,555 2,445,255 December 31, 2017 3,150,149 — — 381 67,373 — 3,217,903 4) Maturity analysis of off-balance The Group provides guarantees on behalf of customers. A financial guarantee represents an irrevocable undertaking that the Group should meet a customer’s obligations to third parties if the customer fails to do so. Under a loan commitment, the Group agrees to make funds available to a customer in the future. Loan commitments that are usually for a specified term may persist or may be unconditionally cancellable, provided all conditions in the loan facility are satisfied or waived. Commitments to lend include commercial standby facilities and credit lines, liquidity facilities to commercial paper conduits and utilized overdraft facilities. The maximum limit to be paid by the Group in accordance with guarantees and loan commitment only applies to principal amounts. There are contractual maturities for financial guarantees, such as guarantees for debentures issued or loans, loan commitments, and other guarantees, however, under the terms of the guarantees and loan commitments, funds should be paid upon demand from the counterparty. Details of off-balance June 30, 2018 December 31, 2017 Guarantees 12,372,573 12,859,715 Loan commitments 98,251,005 80,760,325 (4) Operational risk The Group defines the operational risk that could cause a negative effect on capital resulting from inadequate internal process, labor work and systematic problem or external factors. 1) Operational risk management The Group has been running the operational risk management system under Basel II. The Group developed Advanced Measurement Approaches (“AMA”) to quantify required capital for operational risk. This system is used for reinforcement in foreign competitions, reducing the amount of risk capitals, managing the risk, and precaution for any unexpected occasions. This system has been tested by an independent third party, and this system approved by the Financial Supervisory Service. 2) Operational risk measurement To quantify required capital for operational risk, the Group applies AMA using internal and external loss data, business environment and internal control factors, and scenario analysis. For the operational risk management for its subsidiaries, the Group adopted the Basic Indicator Approach. (5) Capital management The Group complies with the standard of capital adequacy provided by financial regulatory authorities. The capital adequacy standard is based on Basel III of Basel Committee on Banking Supervision and Basel III was applied from the end of December, 2013. The capital adequacy ratio is calculated by dividing own capital by asset (weighted with a risk premium – risk weighted assets) based on the consolidated financial statements of the Group. According to the above regulations, the Group is required to meet the following new minimum requirements: Common Equity Tier 1 capital ratio of 7.13% and 6.25%, a minimum Tier 1 ratio of 8.63% and 7.75% and a minimum total regulatory capital of 10.63% and 9.75% as of June 30, 2018 and December 31, 2017, respectively. Details of the Group’s capital adequacy ratio as of June 30, 2018 and December 31, 2017 are as follows (Unit: Korean Won in millions): June 30, 2018 (*) December 31, 2017 Tier 1 capital 16,952,436 16,074,987 Other Tier 1 capital 2,748,005 3,041,664 Tier 2 capital 3,499,122 3,486,555 Total risk-adjusted capital 23,199,563 22,603,206 Risk-weighted assets for credit risk 139,868,803 134,767,711 Risk-weighted assets for market risk 2,292,979 2,316,938 Risk-weighted assets for operational risk 9,826,809 9,677,559 Total risk-weighted assets 151,988,591 146,762,208 Common Equity Tier 1 ratio 11.15 % 10.95 % Tier 1 capital ratio 12.96 % 13.03 % Total capital ratio 15.26 % 15.40 % (*) Capital adequacy ratio as of June 30, 2018 is t |