Kookmin Bank (NYSE: KB) is the largest commercial lending organization in South Korea by assets. The company provides financial services to individuals and small-to-medium-sized enterprises in South Korea and through branches in other parts of the world, including Hong Kong, Luxembourg, New Zealand, Japan, the United Kingdom, and the U.S. KB suffered a net income decline in the past fiscal year, partially due to credit and lending faults in the construction sector. In the current fiscal year, the bank may experience difficulties recovering to previous income levels due to South Korean government regulations on derivatives trading.
In the past fiscal year, KB incurred a net income decline due to faulty construction loans. For the current fiscal year, the bank expects to return to previous income levels. Although, the South Korean government plans to smooth Won (South Korean currency) volatility in the current fiscal year,, which may cut KB's lending and investment risks and costs.
A number of KB's products expose it to credit risk, including loans, leases and lending commitments, derivatives, trading account assets and assets held-for-sale. KB relies heavily on accurately predicting how well its customers will repay their loans. The corporation must constantly weigh ongoing economic factors and should they overestimate its customers' ability to repay loans, the bank's overall performance will suffer.
Similarly to U.S. government regulation on U.S. banks, the South Korean government installs constraints on budget constrains on its banks to avoid a financial crisis. For example, the South Korean government has capped the amount of currency derivatives, securities that KB invests in to hedge risk and speculate growth, each of its banks can hold.